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The regulator of the insurance sector, the Indian Regulatory Authority and Insurance Development (Irdai), has given the go-ahead to the LIC-IDBI Bank agreement, which should allow the l 39; Public insurer to participate predominantly in one of the worst executions of state-owned banks in India in terms of bad debt rates.
After the agreement, LIC will treat the lender as a subsidiary, but it is not clear whether the insurer will go for management control. Without doubt, LIC has been forced to bail out IDBI just as the insurer has recovered many stock sale programs from state lenders. He has become the Center's favorite cash cow over the years.
Image of representation. Reuters
There are not many badysts who consider the LIC-IDBI agreement as a wise decision of LIC. The insurer embarks on a market where it becomes the promoter of a bank, without prior experience in the banking sector, and at the time when even some of the largest banking institutions are struggling to find stability because of rising bad loans or NPAs. Already, LIC holds stakes in the 21 public sector banks (PSB), and in at least six of them, the insurer holds a stake of more than 10%.
As a promoter of IDBI Bank, he can consider selling his client products and managing IDBI just as he deals with LIC Housing Finance. But, unlike the housing finance industry, it faces multiple problems in choosing a majority stake in one of the most problematic banks in India. The bank is already under the prompt corrective action plan (PCA) of the Reserve Bank of India (RBI) due to poor financial health.
In the fourth quarter of fiscal year 2017-2018, IDBI Bank's net loss was widened to Rs 5,662.76 crore as a higher provisioning for non-performing badets (NPAs) adversely affect its net result. Gross NPAs reached 27.95% of its loans at the end of March 2018 compared to 21.25% at the end of March 2017. In absolute terms, bad loans amounted to Rs 55,588.26 crore against Rs 44,752.59 crore as of March 31, 2017. The provisioning of the NPAs was increased to Rs 10,773.30 crore in the fourth quarter of the fiscal year ended in March 2018, up from the crore of Rs 6,054.39 parked in the gap one year ago.
Thus, as this author indicated in a previous column, there is no clear logic as to why the LIC targets the IDBI of all banks, to Apart from the fact that he follows the orders of the government.
LIC already holds a 10.83% interest in IDBI; he will actually own a white elephant with an insatiable hunger for the taxpayer's money.
A one-time investment will not be enough to fill the capital gap in the bank. The lender will need huge pieces of capital infusion every year. This is evident from the "beggar bowl syndrome" of state banks; each year, these entities lodge in front of the North Block for life-sustaining capital and can never manage on their own, as do their counterparts in the private sector.
At present, the burden falls on the government (the majority owner short-term banks), which is struggling to meet the capital requirements of the 21 PSBs. The demand for capital is so huge that even the capital injection of Rs 2.11 lakh crore announced for PSB at the end of last year is not enough to fill the capital void State banks, the neck deep dubious loans.
The LIC-IDBI agreement will set a negative precedent for other public institutions obliged to acquire loss-making public banks, which runs counter to the very idea of privatization, where private investors should ideally invest fresh money to make losses. Remember that the bailout will see LIC use the money it has collected from its clients in the form of premium insurance, and if the experience was to go wrong, it will have to first respond to customers.
(Part of this work was published earlier on Firstpost)
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