Govt may dip into its LIC kitty again to bail out IDBI Bank

This means that LIC’s customers will have to share the burden of the worst performing public sector bank.

LIC, which has invested in almost every major divestment programme of the government, and has invested in several state-run enterprises, will be channeling funds raised from its policyholders to rectify the losses that IDBI suffered by reckless lending.

While LIC has invested in every divestment programme of the government and holds stakes in almost every public sector bank, this time the government wants LIC to become the promoter of the public sector lender, a third of whose assets are already toxic.

Commentators say LIC, by its very nature, has an appetite for investment, but how long will it continue investing in loss-making enterprises without itself becoming a toxic asset?

The alternative could be going for a public float, which would then depend on the market mood – there may not be may interested in investing in a loss-hit bank either in the private sector or among the larger public.

According to commentators, looking at the fate of Air India’s divestment plan, the government is unable to ask for private equity for another poorly run entity. So, what better way to wash its hands off by palming IDBI Bank to another company it owns? 

Considering that LIC has a balance sheet of Rs30,00,000 crore, absorbing IDBI with NPAs of about Rs55,000 crore and stressed assets of nearly 60,000 crore may seem possible. But, with no clear revival plan and no management long-term plan for disaster management makes the proposition bad in financial terms.

Also, with every investment in the government’s divestment programme LIC’s solvency ratio has continued to deteriorate and is now far lower than its private counterparts. LIC has also started losing market share to private insurers.

IDBI Bank, meanwhile, is reported to be looking at selling off some of its physical assets, including buildings and office space to lose some flab and stay trim.

With a cumulative loss of Rs13,396 crore for FY17 and FY18, IDBI Bank’s assets are under huge strain and the bank would need huge capital infusion in the next 2-3 years, if it is to make any significant improvement in operations.

IDBI Bank has put or is in the process of putting on the block its stake in most subsidiaries and other non-core assets.

IDBI Bank has some valuable properties, including in Cuffe Parade, Bandra-Kurla Complex and Worli, in Mumbai LIC could cash on these if it is offered a controlling stake in the debt-laden bank. At the end of March, IDBI Bank had fixed assets of Rs6,771 crore.

The state-owned insurer may also have the option of acquiring the properties separately or get a stake in the entity that will hold the physical assets proportionate to the holding it purchases in the lender.

The IDBI Bank story is a repeat of its predecessor IDBI, a domestic financial institution, which was converted into a bank in 2003 through the IDBI Repeal Act. 

IDBI Bank, unlike the other state-run banks, is governed by a separate law — the IDBI Act. In the case of other state-run banks, the government has said it will not bring its stake to below 52 per cent, but there is no such restriction in the case of IDBI Bank.