{"id":7112,"date":"2018-07-05T11:02:37","date_gmt":"2018-07-05T11:02:37","guid":{"rendered":"https:\/\/securenow.in\/blog\/?p=7112"},"modified":"2023-03-20T08:06:49","modified_gmt":"2023-03-20T08:06:49","slug":"lic-idbi-bank-deal-the-good-the-bad-the-ugly","status":"publish","type":"post","link":"https:\/\/securenow.in\/insuropedia\/lic-idbi-bank-deal-the-good-the-bad-the-ugly\/","title":{"rendered":"LIC-IDBI Bank deal: The good, the bad, the ugly"},"content":{"rendered":"
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Published in Mint on 4th July 2018.<\/p>\n

Through special permission from the Insurance Regulatory and Development Authority of India (IRDAI), the Life Insurance Corp. of India (LIC) has been allowed to pick an estimated, additional 43% stake in IDBI Bank Ltd that will make\u00a0LIC the largest shareholder of the bank. This made headlines for two reasons: the move is seen as LIC rescuing the government yet again in its disinvestment programme, and the fact that LIC has chosen to pick up one of the worst performing banks with policyholders\u2019 money is seen as a bad investment choice with the insurance regulator\u2019s blessing.<\/p>\n

We spoke to experts to get the good, the bad and the ugly of this deal.
\nThe good<\/b>
\nLIC is likely to put up to \u20b9 13,000 crore to buy up to 51% stake in\u00a0IDBI Bank\u00a0and this money will largely come from policyholders\u2019 funds. Insurance rules don\u2019t allow insurers to invest more than 15% in one company in order to avoid concentration risk and so LIC needed the regulator\u2019s approval to increase its stake.
\nBut the good news is that for a giant like LIC, whose size is about \u20b923 trillion of policyholder funds, the exposure of \u20b913,000 crore is small. So the impact of the deal is limited.
\n\u201cThe bank can benefit hugely from a bancassurance tie-up with LIC as the ability to push products will increase manifold. This could be the growth driver and could contribute to the bank\u2019s revenues,\u201d said Abizer Diwanji, partner, national leader, financial services, EY India.
\nAnd this could be beneficial for LIC. \u201cAny investor who enters when the worst is behind tends to make the maximum return post a turnaround. For LIC, this is a moderate level of risk as IDBI Bank is towards the fag end of its problem. LIC bringing in capital, government also providing capital under the recapitalization scheme and the bank making recoveries will be sufficient for the bank to be sustainable,\u201d said Asutosh Mishra, lead analyst, institutional equity, banking and NBFC, Reliance Securities Ltd.
\nAccording to Kapil Mehta, co-founder, SecureNow.in, an insurer acquiring a distressed asset is nothing new and is a common global practice. \u201cInsurers are able to buy assets cheap and sell at a premium. So this may not be a bad deal if the bank is able to turn around. In any case, the capital required to buy the stake constitutes a small portion of LIC money,\u201d he said.
\nThe bad<\/b>
\nFor LIC, the investment decision depends on the turnaround story of IDBI Bank that will make the investment more liquid and also ensure that when LIC sells off the stake, it makes money. It\u2019s understood that LIC will reduce the stake in 6-7 years. However, the\u00a0turnaround of the bank\u00a0is a big if. \u201cIDBI Bank has the highest gross NPA (non-performing asset) of around 28% of its loan book, as on March 2018. Moreover, it\u2019s capital adequacy ratio remains below regulatory requirements in the same period. So capital infusion by LIC is needed to make the bank regulatory complaint,\u201d said Kuntal Sur, partner, financial risk and regulation leader, PwC India.
\n\u201cFurther, the bank will need to make recoveries of its NPAs to clean up the balance sheet. In order to come back on a growth path, it may need more capital infusion from its shareholders including LIC. The bank\u2019s asset book, which depends heavily on corporate lending is not showing any signs of recovery. As a result, the short- to medium-term outlook is not very encouraging,\u201d he added.
\nThis, for the policyholders, is a cause for worry. \u201cLIC pays dividends to its shareholders, that is the government, to the tune of \u20b92,000 crore every year and it\u2019s unlikely that this will get disrupted if the bank turnaround doesn\u2019t work out, which means the entity to take a hit from poor investment returns will ultimately be the policyholders,\u201d said Sanket Kawatkar, principal and consulting actuary – life insurance, India, Milliman India Pvt. Ltd.
\nFor policyholders, poor investment return will reflect in the form of suppressed bonuses that they get on their participating product portfolio.
\nThe ugly<\/b>
\nWhile this is a bet that LIC is taking, it\u2019s the manner in which it has happened that is a huge problem area, because it\u2019s unclear if LIC wanted to buy the additional stakes because it sees the deal as commercially viable or is merely following shareholders\u2019 orders.
\nGiven that investments are made using public money, the rationale needs to be well explained. \u201cIf LIC was a listed company, it would have had to give an explanation to its public shareholders about the rationale behind the decision. In this case although LIC is using policyholder\u2019s money we don\u2019t know the motivating factor behind the decision,\u201dsaid Mehta.
\n\u201cAlso rules should be common across insurers, so the regulator could consider detailing out the situations where insurers may increase their stake in a company. This will help make the policy uniform and transparent,\u201d he added.
\nWhile the exposure that LIC plans to take may be insignificant, ultimately it is the policyholders\u2019 money that will be impacted, so transparency is important.<\/p>\n","protected":false},"excerpt":{"rendered":"

Published in Mint on 4th July 2018. Through special permission from the Insurance Regulatory and Development Authority of India (IRDAI), the Life Insurance Corp. of India (LIC) has been allowed to pick an estimated, additional 43% stake in IDBI Bank Ltd that will make\u00a0LIC the largest shareholder of the bank. This made headlines for two […]<\/p>\n","protected":false},"author":4,"featured_media":5881,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_lmt_disableupdate":"","_lmt_disable":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[410,319],"tags":[415],"class_list":["post-7112","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-media-coverage","category-media","tag-irdai"],"acf":[],"modified_by":"Aishwary Mishra","_links":{"self":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/7112","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/comments?post=7112"}],"version-history":[{"count":1,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/7112\/revisions"}],"predecessor-version":[{"id":14871,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/7112\/revisions\/14871"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/media?parent=7112"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/categories?post=7112"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/tags?post=7112"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}