LIC-IDBI Bank deal: Do not blame the LIC; stumbling disinvestment is the problem

The consensus on the investment proposed by Life Insurance Corporation of India in the bank IDBI Bank besieged is that it is a bad, very bad idea.

Stock market experts, banking and insurance experts, economists and the media have unanimously described this move as retrograde, which will inevitably fail given the insurmountable problems of IDBI and lack of credit. LIC's expertise to straighten out failing banks.

IDBI shares rebounded somewhat immediately after the announcement of the operation in late June, although they are still far from March levels.

The fall could be a reflection of the difficult road ahead for B Sriram, the new CEO of IDBI Bank, and his team who have to cope with shrinking market share, the increase in bad debts and the lack of credibility. strategy to take the power of NBFC and more intelligent banking rivals from the private sector.

IDBI Bank is now under the Prompt and Corrective Action (PCA) mode of Reserve Bank of India which prevents it from lending well that it can still collect deposits. The first step will be to convince RBI that IDBI is ready to do normal business. again.

The main argument against the LIC-IDBI agreement is that it is a misallocation of resources overall. Subscribers' money should not be used to bail out troubled banks, especially when there is no clear turnaround strategy.

The returns on the insured will suffer because these investments are late on the market at large or worse, the collapse triggering a bailout of the government.

While the argument that the government relies too much on the LIC may be in the right direction, fears regarding LIC's financial performance that suffer from the IDBI deal are grossly exaggerated. Let's examine the argument one by one.

The IDBI investment of just over Rs 10,000 crore (including investments before 2018) is less than 2 percent of badets under AUM (AUM) of LIC more Rs 5 lakh crore. Equity represents only 20% of total badets. The percentage of its holdings in PSU banks may be higher, but it should be noted that not all of these investments are in trouble. The State Bank of India, Bank of Baroda, for example, are neither under PCA, nor their financial situation as bad as that of IDBI or some banks of the PCA.

Second, there is the issue of LIC products and its status as an insurance company backed by the government. A small negligible part of his policies are insurance plans linked to shares or ULIPs. The majority of its products are traditional protection plans.

A sovereign guarantee on all PFR products ensures that subscribers obtain a sum insured and premiums earned, since most plans are participatory plans, where 95% of the surplus is allocated to subscribers. This guarantee ensures that subscribers do not lose in the unlikely event that LIC does not fulfill its obligations.

Ajit Ranade, chief economist of the Aditya Birla group made an interesting observation on Twitter on Wednesday. He wondered whether the LIC should be badyzed as a mutual fund on the basis of the rate of return given that it is a pure insurance company. In addition, should not its parameters be items such as the loss ratio, the time required to process claims, etc.? He asks for an important distinction to keep in mind when badyzing LIC 's financial statements.

LIC attempts to generate surpluses that can be used to make payments for claims or staffing policies must be closed. It is unlikely that a small portion of its mbadive underperforming equity portfolio during certain periods will have a significant impact on such payments, especially if there is also a debt portfolio of the Company. several times larger than the stock portfolio.

Of course, the investment portfolio of an insurance company can go wrong and beat its finances but LIC appears to be an unlikely candidate at this stage given the size of its overall investment in PSU banks as a percentage of its badets under management.

However, that does not mean that the government has done anything fantastic in persuading LIC to buy at IDBI. The problem with the deal is less about LIC's ability and financial strength, and more about the government's own readiness to deal with bank recapitalization and divestment.

IDBI Bank was among the first candidates for divestment. It was supposed to be privatized a few years ago, the sale of the government stake not involving modification of the law on the nationalization of the Bank. Despite the best efforts of the Prime Minister's Office and Finance Minister Arun Jaitley, this did not happen.

One can blame the usual evils for this – the bureaucracy of bureaucratic inertia and the refusal to take risks, but the problem is that the first failure has now come back to haunt the government.

A private investor would have been much more adept at recognizing the problem of NPAs and taking steps to remedy them if it had been sold two years ago. Management would have had enough room for maneuver, if prompt and timely recognition had been forthcoming, to address the bankruptcy court and the February 12 RBI circular.

Today, IDBI Bank is in a much worse situation and private investors do not even want to get closer. With the elections looming and the problem of bad loans that only worsens, the government, in desperation, has entrusted it to LIC.

Now, LIC could still make money if the IDBI bank turns in the next two or three years. It's a difficult but not impossible task, but the entire saga focuses on the government's approach to disinvestment that has been hesitant, suspicious and devoid of strategic intent. It's almost as if the government did not know what to do.

During fiscal year 18, the disinvestment goal was achieved through the purchase of HPCL shares by CGSB. During the previous year, the government moved closer again to achieve the goal, but this was the case thanks to repurchases by some large PSUs.

Privatization of Air India fell, not because of market conditions, but because of the conditions of the government: insistence on a 24% stake, will maintain the separation of Air India, etc. will be achieved this year as market conditions are much more volatile.

Divestment should not be done piecemeal and only when the government needs money. This should be an ongoing process to empower PSUs, which in turn will help expand the market and generate revenue for the government from its long-standing investments. This will help avoid accidents like Air India and IDBI Bank.