LIC-IDBI Bank puzzle: It's the government, stupid!
IDBI Bank will be a burden on LIC. Out of its total outstanding loans of Rs 1.99 lakh crore, it has already recognised gross NPAs worth Rs 55,588 crore while it has also provisioned for bad loans worth Rs 26,902 crore.
Life Insurance Corporation's talks to acquire the ailing IDBI Bank amounts to throwing good money after bad. The nation's largest insurer has decided to acquire a majority stake in the hugely loss-making IDBI Bank, possibly under government pressure.
While LIC already owns 10.82 pc of IDBI Bank, acquiring another 41 pc equity for majority 51 pc equity will cost another Rs 9,408 crore. But that's not the only bill for acquisition. Its eventual cost of acquisition may be 5-7 times higher.
But consider what LIC will be taking on: The bank has the highest gross non-performing assets (27.95 pc) as a percentage of total loans among all public sector banks. It has accumulated losses of over Rs 17,000 crore. IDBI Bank has reported losses of Rs 8,237.92 crore in FY 18, Rs 5,158.14 crore in FY 17 and Rs 3,664.80 crore FY16.
IDBI Bank is already under banking regulator RBI's prompt corrective action (PCA), which restricts the bank's ability to expand loan business; requires it to shed non-core business and focus on returning to profitability by cutting expenses.
IDBI Bank will be a burden on LIC for other reasons as well. Out of its total outstanding loans of Rs 1.99 lakh crore, it already has recognised gross NPAs worth Rs 55,588 crore while it has already provisioned for NPAs worth Rs 26,902 crore. With such high NPAs, the health of its other loan outstanding is also being questioned.
Recovery rate in NPAs is between 15-50 pc only, a majority of them on the lower side of the spectrum. More NPAs will be bigger headache for LIC, which will have to provide for capital erosion as its majority shareholder.
Hence, LIC will not just bear the brunt of funding its accumulated losses and its capital requirements but will also have to absorb any other loans turning NPAs in the future.
LIC's own ambition to acquire a bank is hardly a secret. But a bill of between Rs 75,000 crore and Rs 1-lakh crore is a huge price to pay to fulfil the dream of owning a bank.
There is a silver lining in the clouds though. If it manages to turn around the ailing bank, it can hope to reap the benefits when it dilutes its stake to 15 pc in future in line with the IRDA-imposed cap.
Logically, LIC could have asked the RBI for a new bank licence of its own. If India Post can be given a full bank licence, why not LIC? After all, one of the biggest attractions in banks is their loan book and branches. Both of which are a disadvantage as far as IDBI Bank is concerned. LIC has 2,048 branches and 1,381 satellite offices of its own. IDBI Bank has 1995 branches. And its loan book hardly inspires any confidence.
That raises the question: Why did LIC need IDBI Bank at all? The answer is: It's the government, stupid!