By Elton Gomes
The board of Life Insurance Corporation of India (LIC) approved the acquisition of a 51% majority stake in government-owned IDBI Bank. After several approvals are confirmed by the Reserve Bank of India, the Securities and Exchange Board of India, the government, and the banks board, LIC will acquire 51% shares in IDBI Bank, Department of Economic Affairs Secretary Subhash Chandra Garg said. Garg is a director on the board of LIC, which owned only 7.9% shares in IDBI Bank towards the end of June.
IDBI Bank has been in poor shape for some time now, and the deal with LIC might just rescue it. IDBI Bank needs capital, so they will issue preferential shares. The other way is that they (LIC) can buy from the government but that does not provide capital to IDBI Bank. Thats why this (issuing of preferential shares) is the preferable mode to do it, Garg said, Business Standard reported. Additional sources claim that through the acquisition of stakes, IDBI Bank is expected to get Rs 100-130 billion from LIC.
How will the deal help IDBI
A government official was confident that LIC would be beneficial to IDBI Bank. The official opined that LIC will be able to lower operating costs and enhance distribution, thereby fulfilling the objective of providing both insurance and banking solutions. In addition, LIC will have an opportunity to sell its products via 2,000 IDBI branches. In return, the bank will able to use the insurances funds, as per Business Standard.
Furthermore, IDBI Bank has been struggling with an increasing number of toxic loans and non-performing assets which rose to around Rs 55,600 crore at the end of the quarter in March. The bank will gain some much-needed capital support to revive its health. LIC has been eyeing the banking space, and believes that acquiring a majority stake in IDBI will lead to favourable outcomes. If the deal goes through, the bank could also gain access to roughly 22 crore LIC policyholders and subsequent flow of funds.
However, LICs objective of making more money via the deal may not be fulfilled. Analysts claim that LIC is merely being used as the governments preferred destination for rescue missions. Moreover, LIC holds stakes in all troubled public sector lenders. LIC has more than 10% stake in six banks that account for a quarter of the systems non-performing assets (NPA) stock. In other words, the insurer is exposed to a significant portion of the banking systems bad assets, which is why the deal was not welcome by employees in the banking and insurance sectors.
Rajesh Kumar, general secretary of the All India LIC Employees Federation, said, Now as a concerned and a responsible trade union in LIC, it is morally worth questioning whether IDBI Bank, a lender with humongous bad loans close to a third of its book, makes for a good investment for LIC,” Business Today reported. Kumar added that no private investor has shown interest in the bank.
The LIC-IDBI Bank deal
An article in Firstpost claims that the deal is a perfect shortcut to kick off the government’s privatisation agenda that has been stuck for long. It further states that the deal might not send a favourable signal to investors as there wont be any fresh private money coming in.
The deal also comes at a time where banking institutions in India are struggling to find financial stability, and while it might be a saviour for government-owned IDBI Bank, it could turn out to be a big gamble for LIC.
Elton Gomes is a staff writer at Qrius