The Insurance Regulatory and Development Authority of India (Irdai) on Friday approved a proposal by Life Insurance Corporation of India (LIC) to raise its stake in IDBI Bank up to 51% from the current 10.82%, giving the country’s largest insurer special relaxation from its 15% holding cap for insurers in a single firm. The deal will save the government from having to infuse more funds into IDBI Bank, which had received as much as Rs 10,610 crore last fiscal, the most by any public-sector bank (PSB). However, analysts said it will test the resolve of regulators who may have to extend a series of such special waivers for LIC for the deal to go through. Also, analysts feel the deal to acquire the stressed bank could also cast clouds on LIC’s fiduciary duty to its millions of policyholders.
The IRDAI board, which met in Hyderabad on Friday, cleared the proposal put forward by the LIC. It will now have to be cleared by the state-owned insurer’s board. The corporation believes that having a bank within the group will help increase its share of business through the Bancassurance route. An official said, “Private life insurers with a bank within the group generate nearly half their business through the bancassurance channel. In the case of LIC, it is less than 3 per cent.”
Shares of the company jumped 10.02% on news of LIC taking over the majority shareholding in the bank
On the other hand, the government cannot bring down its stake below 51 per cent in nationalized banks without amending the Bank Nationalization Act
LIC-IDBI Bank deal will lead to a series of exemptions to be given by three regulators — Irdai, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI).LIC needed an exemption from relevant provisions in the Insurance Laws (Amendment) Act, 2015, and the Life Insurance Corporation Act, 1956, that bar insurers from holding more than 15% in any company. Even Section 35 of the Insurance Act restricts a life insurer from acquiring control in a non-insurance entity
“If the bank recovery happens in the next 4-6 quarters, then policyholders will benefit, else the money is going down the drain. LIC will have to provide more capital in the next few quarters” said Ashvin Parekh an independent industry analyst and a former consultant at EY.
LIC, which holds stakes in several banks, will also need the Reserve Bank of India’s (RBI’s) approval to own such a large stake in IDBI Bank. Both IDBI Bank and LIC own mutual fund arms, which too are not allowed under the SEBI rules. LIC will also end up owning a stake in IDBI Federal Life Insurance after this purchase, which will be a breach of Irdai’s regulations. Irdai may already have considered this issue before giving the clearance.Earlier, LIC had picked up a 28 per cent strategic stake in Corporation Bank, which is now currently down to 13 per cent. Although this is in the nature of a strategic investment, the money will come from policyholders’ funds
Ironically The LIC’s move to buy IDBI Bank has come at a time when the insurance major was seen as aggressively reducing its stake in 11 public sector banks (PSBs) which are under the RBI’s Prompt Corrective Action (PCA) framework. These include Dena Bank, Corporation Bank, Oriental Bank of Commerce (OBC) and Bank of Maharashtra.
IDBI Bank’s stressed assets from the state, far higher than any other bank. If the past capital investments did not help it much, it is doubtful whether LIC’s investment alone can bring the bank out of the slump.
IDBI Bank, which the government has been trying to privatise in the past couple of years, has been the worst performer among public sector banks owing to mounting losses and rising bad loans.
For the year ended March 31 2018, IDBI Bank’s gross NPA rose to 27.95 per cent, up from 21.25 per cent as on March 31, 2017.
The bank reported a net loss of Rs 8,238 crore in 2017-18, up from Rs 5,158 crore in 2016-17. Most of its bad loans are in steel, textiles and construction sectors.
