In RBI's court

LIC-IDBI Bank deal raises many questions

The Insurance Regulatory and Development Authority of India (Irdai) has allowed the Life Insurance Corporation of India (LIC) to raise its stake in IDBI Bank to 51 per cent. The decision was not easy for Irdai, which reportedly struggled to find the legal point that could allow LIC, which has promoter status in Axis Bank because of its over 14 per cent stake, to take a controlling stake in IDBI Bank. However, the Irdai decision is subject to the approval from the Reserve Bank of India (RBI). The ball is now in the court of the RBI, which has to figure out whether it would be prudent to allow LIC to buy such a high stake in IDBI Bank.  If approved, LIC will be the only institution to have a substantial stake in two banks, though the government is reportedly of the view that this is not a problem, as LIC will not step into the promoter’s shoe in IDBI Bank, unlike in the case of Axis Bank. Besides, the agreement is that even with 51 per cent, LIC’s voting rights will be capped at 15 per cent. But this logic does not wash because there is no doubt that LIC will be in the driver’s seat in IDBI Bank.

There is no real reason why LIC would rush to pick up stake in IDBI Bank. At 28 per cent, the bank has the highest proportion of non-performing assets (NPAs) on its books. Between March 2017 and March 2018, its losses have gone up from Rs 32 billion to Rs 56.63 billion. Despite capital infusion of Rs 100 billion by the government, its capital adequacy ratio is perilously close to breaching the minimum regulatory requirement and the bank has already been placed under the RBI’s prompt corrective action. There is a broad consensus that IDBI Bank will not be able to turn around in the near future. The bank’s obvious weakness is matched by LIC’s uncertain finances. On the face of it, LIC has a large corpus of almost Rs 30 trillion and, as such, an argument can be made that even an outgo of Rs 130 billion is not all that significant. But the reality is that for an insurance company, the key metric is its solvency ratio — the percentage of net assets over the net liabilities such as maturity claims, death claims and expenses. LIC’s insolvency ratio has fallen from an all-time high of 2.27 in October 2008 to barely above the minimum requirement of 1.5 in September 2017, as has been reported elsewhere.

Further complicating the RBI's decision is the fact that LIC already has varying stakes in 21 public sector banks and has lost money in 18 of them in the last two and a half years. Given that IDBI Bank’s NPAs have been projected to rise to 36 per cent if all of its distressed loans, which are currently classified as standard assets, are marked down, the acquisition is an unnecessary burden for LIC. By exempting LIC from the 15 per cent cap on the extent of equity holding an insurer can have in a single company, Irda has arguably put at risk the interests of the premium-paying customers of the insurer. But the RBI should not ignore the contagion risks the proposed transaction could expose the financial system to.