Why Government Move To Sell IDBI Bank To LIC May Be The Least Bad Idea Of Them All

Not all dubious intentions result in poor outcomes. Faced with a serious problem of finding enough funds from disinvestment to keep the fisc in reasonable shape, the Narendra Modi government has been floating one bad idea after another; last year, it exceeded the disinvestment target by asking ONGC to buy out Hindustan Petroleum for cash; it also asked LIC to bail out initial public offers (IPOs) that did not garner enough subscriptions from the public (like GIC and New India Assurance); in the years before, LIC came to the rescue again by investing in the capital of some weak banks; this year the government is mulling the possible “sale” of IDBI Bank – a bank with gross bad loans of 28 per cent – to LIC, both to raise money and to get the bank off its own books.

IDBI Bank is the only one the government can privatise, since it was not created through the various bank nationalisation acts. It was set up under the Companies Act, and there is no need for legislation to sell a majority stake to a non-government entity.

If you look at the idea from the government’s point of it, this is plain and simple wrong: sale to LIC is not disinvestment. IDBI Bank needs to be privatised, and selling it to LIC does not make it any less of a government company than it is now. Worse, the government probably expects to be paid a prince’s ransom by LIC for selling IDBI shares whose net worth is probably very low or negative when adjusted for its bad loans. As at the end of March 2018, IDBI Bank had gross non-performing assets (NPAs) worth Rs 55,588 crore. The net worth is currently being held up by capital infusions of over Rs 10,600 crore from the government towards the end of the last fiscal.

In short, anyone offering to pay Re 1 for the bank ought to be given a warm hug and the bank’s controlling interest, with a holiday in the Bahamas thrown in for free.

But LIC being LIC, it will probably be asked to fork out a “market-related” price – IDBI Bank’s current market value is around Rs 24,500 crore – for the share the government will sell it. This market-related price is itself a bit of a stage-managed price, since it is the result of rumours of the LIC’s entry into the bank.

However, what appears like dubious logic on the part of the government in hawking IDBI to LIC does not look so bad when you look at the purchase from the LIC’s point of view. In fact, this sale is perhaps the least bad option available to the government short of privatisation.

Four reasons why.

First, LIC always wanted to operationally own a bank as part of its business diversification. That it was never given a licence despite owning over 10 per cent stakes in many public sector banks is a bit odd. There is no reason why LIC should not own a bank when the big banks (SBI, HDFC Bank, ICICI Bank) own not one, but two, insurance companies each, one in life and another in general insurance.

Second, owning a bank brings huge synergies for LIC. Reason, with over 29 crore policies in force, the insurer has a long-term relationship with crores of customers who pay monthly, half-yearly and annual premia to the corporation, and, when those policies involve payouts, lumpsums are credited to the beneficiaries – where a bank can play a role.

Third, LIC already owns a housing finance company (LIC Housing Finance) with a market capitalisation of around Rs 25,000 crore (as on 25 June). Logically, if this housing finance company were to be merged with an IDBI Bank, or even converted into a retail bank, it would have huge synergies with the parent insurer. From selling insurance to managing the banking requirements of millions of home loan borrowers and future insurance beneficiaries, LIC would have one of the biggest retail portfolios in the country. If mobile services companies and e-wallet companies can become banks, one wonders why a housing finance company can’t become one just because it is owned by India’s largest insurer. What a merger with IDBI Bank will do is enable the housing finance business to scale up faster than before, and also enable the resultant bank to raise more short-term deposits to balance the deposit portfolio.

Another fallout of a merger: IDBI’s high NPAs will come down when the overall book of the bank plus the housing finance company (HFC) is taken into account. Also, given the healthier balance-sheet of the HFC, it will be the acquiring entity and be in the driver’s seat. of the merged bank.

Fourth, as an insurer with long-term financial inflows and outflows (through annuities), and lumpsum one-time inflows and outflows (in pension plans and insurance payouts), LIC needs a bank to channel balance its short-term and long-term funds. Adding a bank to its repertoire means that a large part of its investments can be routed through a retail bank with a large housing finance portfolio.

It is possible that LIC may overpay for its purchase of an operating bank, especially if it happens to be the loss-making IDBI Bank, but there is no denying the potential of a future LIC bank. It would have huge brand equity, and could be a rival to the SBI, HDFC and ICICI Banks of the world in terms of retail franchise.

The bad idea is government using the LIC to do its disinvestment; the good idea is LIC creating a bank with huge synergies with its core insurance operations. What sends out a bad signal for the government is actually what LIC may well want for its own growth.

The Insurance Regulatory and Development Authority (IRDA), and also the Reserve Bank of India, have never been comfortable with the idea of LIC owning a big bank. Both may be worried about how they will regulate another big Godzilla where the government owns 100 per cent in the controlling entity.

But this problem can be solved by giving both regulators greater powers to regulate LIC and its proposed bank appropriately. What does not make sense is to deny LIC its bank.

To be sure, the government as sovereign can issue a banking licence to LIC anyway. It is best if this is done with the concurrence of both the Reserve Bank and IRDA.