RBI Dy Guv warns LIC may feel pain of banking NPA woes: BS

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Moneycontrol Bureau

RBI Deputy Governor SS Mundra has warned of a contagion risk because of the Life Insurance Corporation’s high exposure to public sector banks. In an interview to Business Standard, he said rising bad loans in state-owned banks will erode the value of LIC’s stake in them and hurt the insurer’s ability to serve its policy holders. And because of its large holdings, any distress sale could unsettle the market as a whole.

Mundra has been quoted in the interview as saying that LIC on an average holds 9.21 percent across public sector and private sector banks.

The RBI had flagged this concern in its financial stability report in December last year as well.

LIC has been buying stakes in PSU banks through private placements to help then raise capital as few other investors were willing to put money given asset quality concerns.

In March this year, LIC invested Rs 576 crore in Bank of India by picking up 2 crore shares through a preferential allotment.

According to a Financial Express report, LIC doubled its stakes in four PSU banks — United Bank, Punjab and Sind Bank, Central Bank of India and Bank of Maharashtra — in FY15 by investing almost Rs 1500 crore.

In January 2014, LIC had invested close to Rs 3000 crore in State Bank of India’s Qualified Institutional Placement (QIP). Without LIC’s support, SBI would not have been able to raise the Rs 8000-odd crore it wanted to.

Experts have warned that over-reliance on LIC will make the government complacent in pushing for PSU bank reforms, which are critical to the banks’ ability to raise capital on their own.

According to estimates by broking firms and rating agencies, state-owned banks need anywhere between Rs 2-3 lakh crore of capital over the next 4 years for growth.

Mundhra’s warning comes barely a week after his boss and RBI Governor Raghruram Rajan cautioned that banks non-performing assets could rise further in the coming days.

Similarly dire predictions have been made by some of the rating agencies as well. CRISIL last week said it expected gross NPAs of the banking industry to touch Rs 4 lakh crore this fiscal. Moody’s mentioned the banking sector’s asset quality as a major hurdle to an upgrade in India’s sovereign rating.

The fourth quarter earnings of most public sector banks and even some private sector banks like ICICI reflected the pressure from increased NPAs.

“Not withstanding (the positive surprise on NPA levels) there is considerable pain still left in the economy,” Bank of Baroda’s Managing Director and Chief Executive Officer Ranjan Dhawan told CNBC-TV18 post the bank’s fourth quarter earnings.

“Most of our major clients are still not out of the woods. They have serious liquidity issues,” he said.

The Economic Times today has reported that close to Rs 57,000 crore of restructured loans have turned bad at the end of the March quarter, compared to around Rs 30,000 crore in the year-ago period.

Restructuring of loans refers to original terms (such as interest rates and repayment schedule) being relaxed when borrowers have difficulty in repaying.