In Shakespeare’s Merchant of Venice, Bassanio tells his friend Antonio that if, in his school days, he lost an arrow, he would shoot another on the same path, and sometimes find both. The Centre seems to have been practising this philosophy with PSU banks and airlines, sending more arrows (money) in pursuit of lost money by the banks and airlines, hoping, like Bassanio, to recover it.

It doesn’t work the same for money today, as it did for arrows in medieval England.

The worst-performing PSU bank is IDBI Bank, which, like failing airline Air India, constantly needs more funds from the government. The Centre holds 81 per cent of this unhappy asset, and LIC holds 10.8 per cent. LIC is, of course, wholly owned by the government, although it really belongs to its customers who have trustingly bought its life policies. Now, most probably under pressure from its owner, LIC is seeking to raise its stake in IDBI Bank to 51 per cent by subscribing to additional shares issued in its favour, paying ₹10,000-13,000 crore. Insurance regulator, IRDAI, has given LIC permission.

Flip side of revolution

Last week, this column had mentioned the good policy decisions taken, which were leading to a silent revolution.

This week we see the flip side of the coin, in bad decisions, illustrated by the decision to allow LIC to pump money into a failed bank.

This is a huge dereliction of duty by all parties. By the Centre, in instructing LIC to pump capital into a failed bank, to avoid pumping its own capital, and thus, avoid fiscal deficit blues. By the Directors of LIC whose primary job is to safeguard the interest of its policy-holders. We will see why this duty is being shirked.

By IRDAI, whose duty, as a regulator, is also, as spelt out: “protection of the interest of policyholders” and “regulating investment of funds by insurance companies”.

Now do the math.

In the past five years, the Sensex has risen 1.75 times from below 20,000 to over 35,000. That is a compound rate of 12 per cent a year.

Unbridgeable cap

IDBI, incorporated in 1964, has a black hole in its balance sheet. According to an article in Bloomberg Quint , 36 per cent of its loan book is seen as stressed, by India Ratings. If, over a 54-year period, the bank has succeeded in losing 36 per cent of its funds, what makes one believe it will grow faster than the market over the next 5-10 years?

Even given the fact that a competent new MD has been appointed (transferred from SBI), is it reasonable to expect that he would be able to not only clean up the mess but also ensure a CAGR of over 12 per cent achieved by the market? And if not, would not the policy-holders of LIC, the general public, be served better by investing prudently?

Governments’ record of running businesses is a poor one. Banks were nationalised, and, today, have a seemingly insurmountable NPA problem. In fact, the next round of cases to be referred to the NCLT would include stalled power projects, which would see the NPA situation further worsen. Horribly.

Yes, a silent revolution is taking place in several areas, and that is commendable. Yet, the cancer of corruption and the malaise of poor bureaucratic decisions are not being tackled, as they ought to. Therein lies the danger.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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