WHO WILL INSURE LIC FROM GOVT RISKS?

While we Indians were busy celebrating Independence Day, LIC would have been ruing its lack of any freedom. It would have beaten his forehead in disgust, after looking at the dismal number announced by its latest “forced” acquisition – IDBI Bank.

For Q1FY19, IDBI Bank, for the seventh straight time, posted a net loss of Rs.2410 crore and this loss would have been higher but for the tax write back of Rs.1745 crore. Its asset quality is so pathetic – as a percentage of total loans, gross NPAs stood at 30.78% v/s 27.95% (QoQ) while Net NPAs were at 18.76% v/s 16.69%.

The numbers do not surprise anyone as it was as such under the prompt corrective action (PCA) since May 2017 due to which lot of banking activities as such are restricted.

But given the fact that it was a stock which no one even in a state of stupor would ever consider buying, its truly sad that LIC was forced to become the owner of this bank. It is forking out Rs.13,000 crore for a 51% stake in one of the most toxic banks of India. This stake is without management control and also with differential voting rights. 

Three years ago, way back in 2015, warning had come from none other than one of the Deputy Governors of RBI that there is a contagion risk because of LIC’s high exposure to public sector banks (PSUs). And  three years later, as we look at one PSU bank after the other, reporting dismal performance, posting life-time losses with gargantuan provisions for NPAs, we cannot help but wonder about the logic behind LIC’s such exposure to PSU banks.

And we are not talking about small stake here. After the Government of India, LIC is the second largest shareholder in these PSU banks. LIC, on an average holds around 8% stake in the toxic PSU banks

The same warning in different tones had come from CRISIL and Moody’s too. This is what the Deputy Governor was trying to do – connect the dots and the picture which emerged, was not just a bad state of the already beleaguered banking sector but LIC, the Govt’s mulch cow also facing consequences. And what was its fault? It poured money into banks, surely at the behest of the Govt even when it knew that things were not good. The Govt as such always treats LIC as its personal ATM – any crisis, bank on good ole’ LIC to bail them out. That is what LIC has always done – be the knight in the shining armour. But the Govt has probably over extended this armour with IDBI Bank and now LIC could get hurt.

And if LIC gets hurt, the ramifications go right down to the lakhs of policy holders of LIC. How? When the investment it has made in these PSU banks runs into a loss, there will be erosion in the NAV of LIC. The money it uses to buy all this equity is obviously what it gets from the policy holders and this means, the capability of LIC to serve the policy holders will be compromised.

The contagion does not end there. It could have ramifications on the markets too. Suppose LIC see’s that its investment is making losses, to cut the losses, it could go on a selling spree on these shares. And that, will not be good for the markets. 

Over and above all this, what one needs to question is the capability of the banks. Why the need to always tap into LIC for funds? Obviously, because of poor valuations or the knowledge that no one else will bite the bait.

So if they know this, banks should ideally work on improving the balance sheet but what they do – they create more NPAs knowing fully well that LIC will bail them out. This is a bad habit created by the Govt and it would be very difficult to break it, unless of course, LIC for once, puts its foot down and says, “NO!” And if at all LIC says no, won’t that affect the financial stability of the banks?

Well, LIC does not have that prerogative to choose – it has to invest when the order comes. What is scary is that if IDBI Bank works, the Govt will not think twice before palming off Air India also to LIC! Seriously, who needs a BIG Bank when the Govt already has LIC?