It’s still early stages, but the reported plan to have Life Insurance Corporation of India (LIC) infuse fresh capital in bad debt-laden IDBI Bank to clean up its books is a bad idea.
LIC is a commercial entity, and cannot be treated as an off-balance sheet war chest of the government.
The stateowned insurer must provide its policyholders competitive returns. This means the shares that IDBI issues to LIC must be priced at a level that makes commercial sense for LIC. If it makes sense for LIC, it will make sense for other investors, too. In other words, if the government, which owns close to 81% stake in IDBI Bank, cannot find the funds to recapitalise it, the best course is for IDBI to offer new shares to the public at whatever price the market would bear. India Ratings estimates that the bank, with bad loans close to a third of its book, will need capital infusion of more than Rs 10,000 crore in 2018-19. Once capitalised, it should thrive in a healthier banking regime.
LIC already holds about 10.82% stake in IDBI Bank, and acquisition of additional shares would raise LIC’s stake. The insurance regulator Irda’s rules allow LIC to have an equity exposure up to 15% in a single company. Regulatory clearances will be needed if the limit is breached. It diminishes the authority of the Irda that has set limits — of 10%, 12% and 15% — on equity exposure in one company, based on the assets under management of the insurer. The idea is to diversify risk, and prevent investment managers from getting carried away by the prospect of gains from any opportunity at the cost of prudence. Changing rules to revert to a special dispensation for LIC, and tilting the playing field in insurance, is wholly avoidable.
LIC’s Rs 30 trillion balance-sheet dwarfs that of IDBI Bank, true. But the state-owned insurer has a capital base of Rs 100 crore, implying that the rest of the money is from the premium paid by policyholders on life insurance. It would be imprudent for LIC to make investments betting on hope. That leaves just one option: IDBI Bank’s shares must be priced right for LIC to buy more of them. And commercial sense for LIC is commercial sense for others.