Centre stares at IDBI flashpoint as losses increase and hit LIC
North Block is worried the continued losses suffered by IDBI Bank and the erosion of LIC’s investment in the lender, made at its insistence, may force it to eventually step in with rescue capital or allow the bank to be sold off.
“The Life Insurance Corporation invested around Rs 21,624 crore in IDBI, including buying a 26 per cent stake at a price of Rs 61.73 a share. That share price has now dropped to Rs 43.10, around a 30 per cent fall in price. This is a worrying phenomenon, especially as IDBI Bank does not look like turning around anytime soon,” said officials.
IDBI Bank’s loss widened nearly three-fold to Rs 4,185.48 crore for the third quarter ended December 31, 2018, as bad loans surged.
Gross non-performing assets (NPAs) shot up to 29.67 per cent of the gross advances during the quarter against 24.72 per cent in the year-ago period.
The bigger worry is this may not be the end of the woes at the bank as its losses may mount unless infrastructure projects to which it lent take off.
“Under the circumstances, the LIC is balking against pushing more money into IDBI,” officials said.
The LIC’s investments are from the corpus built through insurance premium, and the losses it suffers on its investments will impact bonus payouts to policy-holders.
IDBI Bank, which the LIC wants to rename LIC Bank or LIC-IDBI Bank, has a current gross NPA of 29.67 per cent.
Officials say there is another 25 per cent of its loan portfolio, which is “suspect”, an euphemism for potential bad loans.
North Block officials said they had no desire to add to the government’s debt burden by paying IDBI’s recapitalisation. However, continued reliance on a reluctant LIC may be difficult.
Though the LIC has officially stated that it bought IDBI as it wanted to expand into banking, it’s well known the state-run insurer was investing in IDBI at the prodding of the finance ministry which did not want to be saddled with the huge investment needed and wanted to keep the expenditure off budget by getting the LIC to foot the bill.
Many analysts had termed the Life Insurance Corporation’s purchase of the sick bank as a case of throwing good money after the bad when the proposal came up in June last year.
In a dilemma
“Saving such a bank was always going to be a long-drawn and costly proposition which is why the rescue act has been an off-budget one. If the government had chosen to do this, it would have had to get budgetary allocations for several years. Selling it off was always the better option but that would have been a fire sale and depositors with IDBI Bank would have faced hardships,” said Amit Bannerjee, an independent merchant banker specialising in East Asian Funds.
Officials said the fire sale option may well be brought out of the closet if IDBI Bank continues to bleed for a long time.
However, right now the LIC and the government will have to take into account the fact that banking regulations insist that non-state promoters — in this case the LIC — have to reduce their stake to 15 per cent over a period of time.
Recently, Subhash Khuntia, chairman of the Insurance Regulatory and Development Authority of India, had said the regulator will fix a timeline for the LIC to bring down its stake in IDBI Bank.
A stock offering by the LIC would at the current juncture or even in the next few years find few, if any, takers. The only way to reduce the stake would be to sell it to other PSU banks and financial institutions at the nudging of the government.