Ill-advised

After the Centre’s mega bank recapitalisation plan came a cropper, India’s largest domestic institution, the Life Insurance Corporation of India (LIC), has now been asked once again to step in as the knight in shining armour. The life insurer is understood to be weighing the option of subscribing to shares issued by IDBI Bank in order to infuse funds into it. Superficially, given the sheer size of LIC — a balance sheet of about ₹28-lakh crore as of December 2017 — infusing a couple of thousand crore into the ailing IDBI Bank may appear unlikely to cause any serious harm to the behemoth. But this misses the big picture. For starters, taxpayers should be concerned that the Centre’s massive ₹10,600 crore capital infusion into the bank (over and above the ₹2,200 crore added between FY15 and FY17) has not been enough to meet the capital requirements of the bank. Post capital infusion, the bank’s Tier I capital ratio (from September levels) should have jumped by about 400 basis points. Instead, because of the sharp rise in provisioning for bad loans, the bank’s core Tier 1 capital at 7.4 per cent as of March 2018 barely meets the mandated requirement of 7.37 per cent.

Throwing good taxpayers’ money after bad, by arm-twisting LIC to perform the rescue act is an ill-conceived solution to tackle a deeper structural issue at hand, not just in IDBI, but the entire banking sector. This is also not the first time that LIC has been used to rescue capital-starved PSU banks. LIC has been subscribing to banks’ risky Basel-compliant bonds over the years, which come with a loss-absorbency clause. It has also been bailing out the Centre time and again by mopping up shares of public sector enterprises even in moribund markets. LIC pledging its support to the Centre’s disinvestment of New India Assurance and General Insurance Corporation of India last year, is already costing it dear.

The string of investments by the country’s largest life insurer that has about 29 crore policies in force, begs the question: Is LIC a prudent money manager for its policyholders? It also raises questions over the existing internal investment policies, if any, overall risk to the insurer’s portfolio and its aggregate exposure to sectors and stocks — all of which are difficult to answer given the lack of disclosures and opacity in LIC’s investment portfolio. Adding the burden of salvaging PSU banks, whose dud asset problem is by no means over, can bleed the life insurer, putting the entire system at risk. LIC, though still a market leader in the life insurance space, has been steadily losing market share to its private counterparts. Given that LIC’s competitive pressures are rising, and IDBI Bank’s capital needs are going to be huge going forward, the Centre should think twice before using the linchpin of India’s financial system for its rescue acts.

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