Going against the grain of advice offered by experts in governance and the financial sector, the government seems ready to hand over the effective control and ownership of IDBI Bank to the Life Insurance Corporation of India. With the insurance regulator approving LIC’s request to up its holding in the bank to 51 per cent, it is only a matter of time before the LIC board approves the proposal and the banking regulator Reserve Bank of India adds its consent.

With this fait accompli before us, it is important to gauge what has made the government go for an action that flies against good sense. This will help understand not just the compulsions that come into play in an election year but the way the government works.

IDBI Bank, with the highest level of gross NPAs (non-performing assets) at 28 per cent among all public sector banks and under the “prompt and corrective action” regimen of the RBI, is an entity that can be said to be in intensive care. It is a dud asset which will make its new owner, LIC, bleed by having to recapitalise it so as to provide for the bad loans, let it meet capital adequacy norms and let it have enough capital to undertake new lending as and when the RBI allows it.

Investing in IDBI Bank will mean throwing good money after bad and made worse by the fact that the money (thousands of crores) will come not from LIC’s minuscule share capital but ultimately the premium paid by policy holders. This will result in lowering the surplus that LIC would have otherwise generated and end up in lower bonus being distributed to policy holders. If policy holders had any voice they would have surely opposed it.

Not to speak of the intrinsic rights of policy holders, LIC is also not a listed company. Hence shareholders, particularly minority shareholders, have no role in influencing governance practices in the company. Naturally, the role played by proxy advisory firms in the case of listed companies to ensure that minority shareholders are not duped goes by default.

Looking after policy-holders

There is thus no institutional set-up to specifically look after the interests of policy holders. This is doubly regrettable because in India the middle class and those graduating into it look at a life assurance policy not just to cover life risk but also as a means of compulsory savings. The clear aim of LIC should be to maximise the bonus which comes out of the income from the investments LIC makes from the surplus funds at its disposal after providing for liabilities.

The one and only reason why the government is going in for transferring control of IDBI Bank to LIC is a purely short-term one — reducing the recapitalising bill that the government has to foot as the mountainous bad loans of public sector banks are provided for, their capital adequacy restored and enough capital is available for them to resume lending and grow healthily. Though not having to fend for IDBI Bank will reduce the fiscal burden on the government only marginally – the attitude seems to be that “every bit helps”.

This government attitude is particularly intriguing as the fiscal situation in the current financial year is running along correct lines. The fiscal deficit in relation to the target laid down in the Budget for the whole year is lower than what is was at this time (end May) last year, capital investment is up and revenue expenditure is down. Thus the government is not under any acute fiscal pressure.

If there is no immediate and serious fiscal problem in sight what is the need for an action which does no good to the key LIC stakeholder, the policy holder? At the present juncture the ruling political leadership seems to be preoccupied in key electoral issues. Hence we see a logical focus on areas like support price for farmers, a muscular stand towards Pakistan and a similar tough approach in Kashmir which eschews the path of dialogue. The rest of the business is presumably left in the hands of the mandarins — civil servants and government economists.

Their approach is essentially short term — a need to keep the fiscal balance right, that is their own copybook unblotted, with their conceptual orthodoxy as guide to action. Hence, restricting the government’s bailout bill is important, irrespective of whether actions like the present are desirable in the long run. The leadership thus seems to have gone with the IDBI Bank decision by default. Or maybe, the health of banks is not considered an electoral issue. At this juncture the Finance Ministry is headless — two incumbent ministers being worse than one.

PSU banks’ governance

As for the long run, the paramount task is to set right the way public sector banks run so that a mixture of poor management and governance plus continued political interference does not end up in astronomical non-performing assets. Putting IDBI Bank under the control of LIC will make no difference on this account. An SBI managing director is moving to head IDBI Bank but an individual cannot be a game changer when the problem is systemic.

This is particularly unfortunate as the move sends wrong signals on matters of governance. The Banks Board Bureau under Vinod Rai had, among its recommendations on improving governance practices in public sector banks, said that the provisions of the Companies Act rather than the bank nationalisation statute should prevail when the two are in conflict so that even while the government continues to hold 51 per cent, the governance regime should be like that prevailing in the corporate sector as a whole.

In the case of IDBI Bank which is neither fish not fowl — neither public not private — it recommended that the articles of association be reworked to reflect the above change. But, as we know only too well, the government had no time for Rai’s recommendations.

The writer is a senior journalist.

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Published on July 2, 2018