Troubled public sector lender IDBI Bank got a fresh lease of life this weak from the country's largest life insurer Life Insurance Corporation of India (LIC).
In an unprecedented move, the Insurance Regulatory and Development Authority of India's board on Friday approved a proposal for LIC to own up to 51 percent stake (as against the 15 percent limit) in the PSU bank.
The move has been hailed by many as the "most workable" solution for rescuing the ailing bank from the mountain of bad loans it is currently sitting on, which is just short of 30 percent of its entire loan book.
This is not the first time the government has come to the rescue of a public sector bank. What is different is that in IDBI Bank's case, the responsibility of a bailout has shifted from taxpayers to insurance policyholders.
Also Read: Will LIC be able to turnaround IDBI Bank?
After finding no takers among private players, the Finance Ministry had to ask LIC to buy an additional stake in IDBI Bank, over and above the 10.8 percent that it already owns.
The purchase of the stake will be done using funds from the insurer's policyholder account.
While LIC is yet to provide clarity on how much capital it will be infusing in IDBI Bank or its strategy for the move, experts suggest that the insurer will take at least 7-10 years to recover its investment.
After the investment goes through, optimists see the bank's performance turning around in as early as one year. Others believe it will take 3-4 years for LIC to affect a proper turnaround.
But infusing capital alone will not be enough.
"IDBI has a lot of legacy issues on the infra funding that they have done. It needs to be seen how much more capital would it need and moreover what is the turnaround strategy. Of course, it requires capital but profitability is weak, asset quality is weak which is eroding its capital and that has to be corrected before a turnaround takes place," Karthik Srinivasan, Senior Vice President at ICRA, told Moneycontrol.
Just to put things in perspective, IDBI Bank has not reported an annual profit in the last three years. Its bad loans now stand at Rs 55,588 crore, 27.9 percent of the Rs 1.70 lakh crore of loans on its books.
According to a report by India Ratings & Research, if all of the lender's distressed loans that are currently classified as standard assets have to be marked down, its NPAs would rise to around 36 percent.
Also, the state-owned lender's capital ratios are just about meeting regulatory requirements. As at the end of March, its common equity tier-1 capital ratio stood at 7.42 percent, marginally higher than the RBI-prescribed 7.375 percent.
According to a report by ICRA, given the bank's expected losses for FY19, it will need CET- 1 capital of Rs 6,000-11,000 crore during the year just to meet regulatory requirements (including counter-cyclical buffers).
So while the amount of capital that LIC will invest is yet to be ascertained, it is clear that the insurer will have to do more than just give away easy money if it wants to make any returns on its investment.