Leave LIC alone

The insurer's purchase of IDBI Bank is a bad proposal

One of the options on the table for the revival of the troubled IDBI Bank is reportedly its purchase by the Life Insurance Corporation of India Limited, or LIC. Currently, India’s largest, and publicly-owned, insurance company has a stake in IDBI Bank that is just less than 11 per cent. IDBI Bank is not covered by the Bank Nationalisation Act and thus the government sees it as a politically easier target for a change of control. Then Finance Minister Arun Jaitley had, in his 2016-17 Budget speech, said that reduction of the government stake in IDBI Bank below 50 per cent was under consideration. However, it is hard to sell a purchase by LIC of IDBI Bank as any sort of privatisation. After all, LIC is itself in the public sector. The government has insisted that the decision on a purchase by LIC will be taken by the IDBI Bank and LIC boards, but this assurance is not credible. The government has too often used LIC to bail out its disinvestment programme. It is now seeking to use LIC as a shortcut to bank reform and privatisation as well. A purchase by LIC will serve none of the ends that would be achieved by genuine privatisation.

Certainly, there are good reasons for LIC to have a presence in the banking sector. But, if so, it should have been permitted a banking licence. Forcing it to buy one of India's most beleaguered banks is prudentially a very dangerous step; in fact it doesn’t make sense for LIC to even consider increasing its stake in the bank. For, IDBI Bank has a non-performing asset (NPA) ratio of nearly 28 per cent, which is the second-highest ratio ever seen in Indian banking. It made a net loss of over Rs 82 billion in the last financial year. This is not a suitable target for as systemically important an institution as LIC. In essence, the government is seeking to use insurance policy-holders' money to bail out a troubled bank. It is also putting policy-holders on the line for constant recapitalisation of a bank that has demonstrated an inability to lend properly. This cavalier disregard for the insurer's duty to its customers is indeed worrying. In all this, the only party that will benefit is the government, which is struggling with its disinvestment targets and its broader fiscal deficit problem. 

Recent moves by the government to deal with the crisis in the banking sector have all been deeply retrogressive. Interim Finance Minister Piyush Goyal announced the formation of a committee led by Punjab National Bank head Sunil Mehta to consider the formation of a “bad bank”. This is not an appropriate method, as it would simply further postpone the hard decisions involved in resolving the NPA crisis. Now, instead of governance reform of even the one bank that it is possible to privatise, the government wishes to misuse money entrusted to the public sector by hopeful policy-holders. It has also indicated it intends to push regulators to make the appropriate exemptions. If the regulators and the LIC board are truly independent, they will demonstrate it by rejecting government pressure in this instance.