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What does Life Insurance Corporation of India (LIC) gain from taking a majority stake in IDBI Bank Nothing, say analysts.
It has just helped the government provide much-needed capital to the beleaguered lender.
“IDBI is a bank which is in tatters.
This is nothing but a bail-out for the lender without any gains for LIC.
As things stand now, it will take at least three years for IDBI to attain some stability which means LIC has to bear the losses for this investment and potentially provide more for the years to come.
It is difficult to find any logic for this investment,” said Udit Kariwala, senior analyst, financial institutions, IndiaRatings.
On Friday, in an uncharacteristically swift move, the Insurance Regulatory and Development Authority of India (IRDAI) approved LIC’s plan to buy a 51 per cent stake in IDBI Bank, exempting it from the regulatory investment cap of 15 per cent in a company.
The plan was to have LIC invest Rs 10,000-13,000 crore in tranches in the state-run lender mired in NPAs, to increase its stake to 51 per cent from the current 10.82 per cent.
Analysts are at pains to find any advantage for LIC in a deal which forces it to put more money into a bank which is under Reserve Bank of India’s (RBI) watchlist due to its deteriorating financial health.
All this without any management control for the insurance company.
“This deal looks like a bail-out for IDBI Bank without taking into consideration millions of policy holders who have invested their hard-earned money to seek insurance protection.
LIC can support the market but owning majority stake in a bank with high NPAs without management control and cross holdings with other banks do not set high standards of governance,” said Kuntal Sur, financial services partner and head of risk at PwC.
IDBI Bank is among the worst performing public sector lenders over the past two years.
In the quarter ended March, the bank posted a loss of Rs 5,662.76 crore, higher than the Rs 3,199.77 crore loss posted in the quarter ended March last year.
The percentage of net NPAs have jumped to 16.69 per cent in March quarter of 2018 from 13.21 per cent in the fourth quarter of March 2017.
Gross non-performing assets have jumped to Rs 55,588.26 crore against Rs 44,752.59 crore on year-on-year basis.
LIC has a stake in no less than 29 public and private sector banks ranging from as low as 1.32 per cent in Indian Bank to 14.26 per cent in Axis Bank.
“Clearly, there are other considerations at play for LIC to make this investment.
It is like the government removing money from another pocket to invest in this bank.
There are many conflicts in this deal because LIC is now the parent of a bank in which it may have debt investments.
And it is not as if this gives LIC a superb network, great CASA franchise, access to retail or corporate clients.
It is difficult to find anything positive in this deal,” Kariwala said.
RBI norms state that a bank cannot own more than one life insurance business.
This rule seems to have been challenged due to this deal as LIC could now also own IDBI Federal Life Insurance.
There are questions on what will happen to the insurance company’s stake in other banks.
“One could argue that LIC could use a banking partner to penetrate the growing insurance market better.
But if you look at the sheer scale and size of LIC’s network even that logic does not work.
There are simply no synergies in this deal.
At best, this is a stop-gap arrangement to save government coffers before a possible consolidation of public sector lenders,” said Kalpesh Mehta, partner at Deloitte India.
IDBI Bank stock rose 10.02 per cent to end at Rs 54.90 on the BSE on Friday.
The government together with LIC owns a
round 92 per cent in the bank which means the floating stock is just above 8 per cent, preventing fair valuations for the stock.
Analysts say the only saving grace in this transaction is the fact that Rs 10,000-13,000 crore for LIC is a small amount compared to the lakhs of crores it rolls in the equity markets.
“LIC controls close to 80 per cent of the insurance market.
Rs 10,000 crore for it is peanuts.
This deal fills up what was possibly the biggest hole among public sector banks and frees up money to invest in other lenders.
The government will also never allow LIC to go under, that is the only saving grace,” Kariwala said.
