The IDBI Bank – a public sector bank [PSB] in which the Government of India [GOI] holds 80.96% shareholding – is in deep financial trouble with non-performing assets [NPAs] as a percentage of the borrowings reaching a high of 28% as on March 2018. Despite infusion of Rs 10,600 crore in 2017-18 for its recapitalization, the capital adequacy ratio [CAR] is barely close to the minimum required 9%.
In the budget for 2016-17, the government had announced its intent to divest majority stake and transfer control to a private promoter. After dilly dallying on this for over two years, the government has now taken a U-turn and decided to let Life Insurance Corporation [LIC] hike its stake in IDBI Bank from existing 10.82% to 51%. The decision which will involve the LIC having to shell out about Rs 10,500 crore for buying the extra 40% has raised many hackles.
LIC is in the business of providing insurance cover to millions of policy holders. It must keep sufficient funds to settle claims [maturity and death] and meet expenses. While, it may invest the corpus in various avenues [including banks] for generating good returns and rewarding policy holders, it is not expected to assume the role of an owner and manager of the entity it is investing in.
That apart, keeping in mind the vulnerabilities/risks associated with individual businesses, the extant regulations prescribe certain thresholds beyond which the LIC cannot invest in a particular company. Thus, it cannot hold more than 15% shares of any entity though the requirement can be relaxed in specific cases with prior approval of the Insurance Regulatory and Development Authority [IRDA].
The government’s direction to LIC pick up 51% stake in IDBI Bank is in gross violation of these basic principles. By increasing the holding in a single entity [read: IDBI Bank] beyond the threshold, it would have ended up exposing its policy holders to greater risks. Even worse, its holding is being increased to a point [read: 51%] whereby it assumes the role of running the bank.
How could the LIC even think of sailing in territorial waters that are alien? How could it ever plan to run a bank? Why should it be forced to take charge of bank which is sinking? What has prompted the government to give diktats that defy logic?
The government is well aware of the anomalies/contradictions in its approach. To avoid the embarrassment, it has argued that the voting rights of LIC in IDBI Bank will be capped at 15% notwithstanding former’s majority holding at 51% in the latter. This defies logic. How can the voting right [or control over management and its decisions] be out of sync with its share-holding?
Contemplate a scenario whereby 51% of the shares in IDBI Bank were held by a private person/company [instead of LIC which is wholly owned by union government who can dictate terms]. Would it ever accept anyone other than itself or person authorized by it to manage the affairs of the bank? An overarching principle that shareholding and controls over management go together cannot be brushed aside.
The government has alluded to LIC reducing its shareholding to 15% over a period of time. This is a tacit admission that the proposed arrangement is anomalous. The fact that the former will continue to be in the drivers’ seat during the transition despite 51% shareholding by the latter gives a clear indication that the sole objective is to garner resources of LIC to bail out IDBI Bank. This brings us to the much bigger question of what prompted issue of such a diktat.
The high NPAs of PSBs has forced the government to infuse funds to prevent capital erosion. On October 24, 2017, finance minister, Arun Jaitely had announced a massive recapitalization of Rs 211,000 crores. Of this, Rs 135,000 crores was to come from the so called ‘recapitalization bonds’, Rs 58,000 crores via divestment of equity holding and Rs 18,000 crores as budgetary support.
Raising Rs 193,000 crore from the market [bond plus sale of shares] is a daunting task considering the weak balance sheets of banks. In fact, abandonment of the earlier plan to sell IDBI Bank shares to strategic investor was due to lack of interest among buyers. Now, even as the government is looking to bank on state-run institutions such as LIC to subscribe to ‘recapitalization bonds’, in case of IDBI Bank [a bank under deep distress] it has taken the route of direct buy-out.
It has ruled out taking recourse to increase in budgetary support for recapitalization [sans a meager Rs 18,000 crore] in view of the huge slippage in fiscal deficit. This concern is valid as its fallout would have been catastrophic by way of increase in borrowings, higher interest rate, lowering of ratings and spurt in inflation. But, making LIC pay for it is an equally dangerous proposition.
This will tantamount to putting at serious risk thousands of crore premium money contributed by millions of policy holders. Already, the ‘solvency ratio’ [the ratio of net assets to net liabilities such as maturity claims, death claims, expenses] has plummeted from a high of 2.27 in October 2008 to barely above the minimum requirement of 1.5 in September, 2017. The use of funds to bail out PSBs will result in further deterioration. Besides, this will set a wrong precedent.
Instead of handing over an easy option to banks [read: pumping public money – be it tax payers or policy holders], the government should use the stringent laws such as the Fugitive Economic Offenders bill to get back the money from the defaulters by seizing all their assets or using IBC [Insolvency and Bankruptcy Code] to realize a good value entailing minimal haircut.
While, this might mean some waiting period as the law takes its own course yet, it would be much less painful and burdensome on the economy and people at large.