Podcast | What the likely IDBI Bank-LIC deal entails

Moneycontrol News
We’ve been following the news that LIC may enter the banking sector by picking up a majority stake in IDBI Bank. The government wants to sell a big part of its stake in IDBI to Life Insurance Corporation of India. This deal will grant LIC promoter status in IDBI. This is essentially an effort by the central government to revive the bank.

As a Firstpost report put it, the govt’s milch cow was back in action. The Centre has an 80.96 percent stake in IDBI while LIC holds a 10.82 percent stake in IDBI Bank. The deal with LIC could involve both real estate and non-core entities of IDBI Bank,  valued at around Rs 14,000 crore. This will be an additional 30 percent stake in the stressed PSU bank, primarily via fresh equity shares.

The bank had an abysmal fourth quarter, the worst among PSU banks. It reported a net loss of Rs 5,662.76 crore during Q4, much higher than the Rs3,199.8 crore loss in the Q4 of the previous fiscal year. This was due to an 80 percent year-on-year jump in provisions. Provisions for NPAs stood at Rs 10,773.3 crore in the March quarter, 78 percent higher than what IDBI had reported in Q4FY17. The net NPA ratio rose to 16.69 percent.

The bank was profitable on an operating profit level with pre-provisioning operating profit of Rs 2,361.92 crore, up 126 percent YoY. Most of this was a result of a 277 percent spurt in non-interest income to Rs 2,699.68 crore as the bank earned Rs 4,408 crore from the sale of non-core assets.

But overall, it was a bad year for IDBI Bank. The bad loans piled up, forcing it to provide for potential losses. NPAs make up 27.95 percent of the bank’s loans. The bank said it will put a massive 21,397 crore rupees of bad loans from large companies on the block in order to speed up recovery.

The Centre infused 10,610 crore rupees into IDBI last fiscal to help the state-owned lender maintain the regulatory minimum in capital adequacy. The government has also been talking about banking reforms by reducing its stake in lenders progressively. IDBI Bank could prove to be the easiest option as it is not under the Bank Nationalization Act and does not depend on legislative changes.

Enter LIC. As a Firstpost report observed, the government’s milch cow was back in action. The insurance company has a huge corpus built upon insurance premiums and ULIP funds. Its business model goes something like this - collect an insurance premium from the common public and deploy that money in investments, the profits of which will enable the insurer to meet its commitments to customers and keep the organisation’s financial health intact.

The government has been digging into these funds, at its discretion, to make its asset sales (public sector IPOs, FPOs, and bond sales) a success. ANd this has been going on for a while. Back in 2013, LIC was the largest investor for equity stake sales by the government. Of a total of Rs 46,700 crores raised by the government in that year, LIC provided Rs 11000 crores or 21.4 percent of the total figure.

In 2015, LIC had agreed to invest 1.5 lakh crores in Indian Railways by the year 2019. This year, 5000 crore rupees of that amount was cleared by the government.

But LIC’s white-knighting habit faces a regulatory hurdle. Under current norms, an insurance company can buy only up to a 15 percent stake in a bank, beyond which it requires special permission from the regulator.

One report observed that LIC holds stakes in all 21 public sector banks and, in at least six of them, it has stakes over 10 percent. So the question everyone is asking is, why is LIC, whose operations hinge on collecting public money, investing in a loss-making bank? If it becomes the majority shareholder in IDBI, it will own what is basically a white elephant - one that has an insatiable appetite for taxpayer money.

Analysts have remarked that a one-time investment might not suffice to fill the capital void in the bank. IDBI Bank could require large capital infusion every year. This is pretty evident - the state-run banks are said to line up before the PMO for survival capital nearly every year. Some media reports claim these banks are never able to fend for themselves from the market, which their private sector counterparts do fairly well.

Also, not to forget, the govt’s recapitalization plan isn’t a huge success. The demand for capital is so huge that even the Rs 2.11 lakh crore capital infusion announced last year isn’t adequate to fill the capital void of PSU banks that are just about treading water, bad loans-wise.

The grumbling over this deal is not without reason. First, there’s the conflict in LIC itself. LIC is an insurance company, whose loyalty should first rest with its policyholders. As one analyst notes, LIC is not a bailout institution as the government has been treating it. Then, there’s the regulatory obstacle. The Insurance Regulatory and Development Authority of India, or IRDA, has capped LIC’s equity investment in other firms at 15 percent, but the insurer has some leeway as it is under the LIC Act 1956, which precedes the IRDA Act 1999. As per this act, the Insurance Regulatory and Development Authority is the supreme authority in India for the purpose of framing and implementing laws and guidelines for companies operating in the insurance sector. This includes LIC as well as private insurers.

The government has reportedly approached the regulator to approve the stake sale. LIC is a big player in the loan market. The insurer’s FY17 data it gave over Rs 1 trillion in loans. The RBI has been less than happy about LIC’s links with banks and flagged the risk of contagion should things go awry at the insurer.

Now comes news that the IRDA will meet on Friday to discuss a possible easing of rules to facilitate this deal. Sources told Mint that the government is keen to sell a 43 percent stake in IDBI Bank under the provisions of the LIC Act. They added that “The Insurance Act does not allow an insurer to take more than 15 percent in a company; so, an exemption may be required from IRDA for the stake sale to go through.” According to the Insurance Act, insurers with assets of Rs 50,000 crore to Rs 2.5 lakh crore can buy 12 percent equity, while a company with assets of less than Rs 50,000 crore can buy 10 percent equity in a company.

LIC had total assets under management of more than Rs 30 lakh crore, including equity and debt. Of the total investment, around Rs 5.74 lakh crore is in equities and Rs 19 lakh crore in debt, which includes central government securities, state government securities and corporate bonds. Of the total debt investments, Rs 4 lakh crore is in corporate bonds. LIC has gross NPAs of 5.75 percent and net NPAs of 1.6 percent. The insurer has made adequate provisions.

LIC has already exceeded the 15 percent investment cap in a few companies and has called them legacy investments. The insurer has been given time till December 2018 to scale down its stake in these companies to under 15 percent, a deadline that will most likely get extended. LIC has also been asked to not make fresh purchases that will take its stake in a company to over 15 percent.

In 2013, a special request was sent to the IRDAI from the finance ministry to allow LIC an investment cap of 30 percent. However, the regulator refused to negotiate and capped the equity exposure of all insurance companies, including LIC, at 15 percent.

IDBI bank has a market capitalisation of nearly Rs 23,000 crore while its real estate assets, as well as its investment portfolio, are estimated to be worth over Rs 20,000 crore. Among its non-core assets are investments in the National Stock Exchange, IDBI Federal Life Insurance IDBI Mutual Fund, IDBI Capital Markets and National Securities Depository Ltd.

Taking into consideration these factors, the sources said the current valuation of the bank does not reflect its "inherent fundamentals" and, at this juncture, it would be a better proposition to rope in a state-owned entity as a strategic investor. In his Budget speech for 2016-17, then Finance Minister Arun Jaitley had said the process of transformation of IDBI Bank had already begun. "Government will take it forward and also consider the option of reducing its stake to below 50 percent," he had announced. Jaitley has also said India is not ready for privatisation of public sector banks and their present characteristics would continue, except for IDBI Bank.

Analysts are of the opinion that, henceforth, IDBI Bank investors are likely to see a healthy appreciation of their investments due to various factors including resolution of bad loans.