India’s largest insurer is bailing out a dying bank at the behest of the government

• LIC’s board has approved a transaction wherein the state-owned insurer will take a 51% stake in IDBI Bank.
  
• The deal spares the cash-strapped government from bearing the expense of a bailout.
  
• IDBI is one of the worst-performing banks in India with a NPA ratio of nearly 28% and a net loss of ₹82.4 billion at the end of fiscal 2018.

On July 16th, the board of the state-owned Life Insurance Corporation of India, the country’s largest insurer, approved the purchase of a 43.5% stake in the debt-ridden IDBI Bank, in a move that will give the former a majority stake of 51% in the latter. The deal is expected to cost LIC around ₹120 billion, sparing the cash-strapped government from bearing the expense of a fund infusion and cleaning up IDBI’s balance sheet.

The insurer is buying the shares in IDBI from the Indian government, which owns a 86% stake in the bank. In the process, it is putting the investments of its policyholders on the line and endangering their claims to prop up a dying bank. It is also circumventing regulations imposed by the Insurance Regulatory and Development Authority of India (IRDAI), which limits insurers from owning more than 15% of any company. It received a one-time exemption from the regulator for doing so.

An ill-advised move

IDBI Bank is the worst-performing bank in India in terms of non-performing assets (NPA), with a NPA ratio ballooning to nearly 28% at the end of fiscal 2018, compared to 21% in the previous year. For the year ended March 2018, its loss widened by 60% to ₹82.4 billion.

Given its large capital base, bolstered by the funds of 220 million clients, and market dominance LIC is the perfect ATM through which the government can infuse capital into failing state-owned companies. Despite pressuring LIC into the deal, the government has been sure to tout the possible “synergies” of such a combination, with some officials even going so far as to say that LIC is getting a deal at a good valuation.

LIC, which has lost significant ground to private-sector insurers in the recent past, is expected to take advantage of the IDBI’s 2,000-odd branches to distribute its insurance products, forgoing the agent model as a result.

But at what cost? IDBI has one of the weakest balance sheets in India’s banking sector and will require repeated infusions over the next couple of years. It was one of the main benefactors of the government’s recapitalisation plan, receiving ₹106 billion worth of taxpayer funds in late 2017, but has failed to do anything with it. It is also unclear how LIC will turn IDBI’s operations around.

Most importantly, the deal sets a bad precedent. It says that no matter how bad a state-owned company performs, no matter how many loans it extends without adequate due diligence, it will always have a way out.

A government exit would have been more desirable, but interest from the private sector would have been muted as was the case with Air India. As a result, the government moved to avert a shutdown of the bank, avoiding any bad press before the upcoming national elections in 2019.