Any impact of the investment by LIC in IDBI Bank, if approved, will be only on participating policies. In case of non-participating policies, the bonuses are guaranteed. Given LIC’s asset base, the dent of IDBI Bank’s NPAs will be minuscule.
Reports of Life Insurance Corporation (LIC) of India picking up a majority stake in the troubled IDBI Bank have been met with raised eyebrows. Commentators and political parties have lambasted the government for planning to unload one of the worst performing public sector banks (in terms of bad loans) to the trusted state-owned insurance biggie.
All this has led to the obvious question: How bad will the hit be on millions of LIC policyholders? While it is true that the money LIC invests in domestic markets belongs to investors who pay premiums, it is also correct that the IDBI Bank deal, when it materialises, will be a drop in the ocean for LIC. With an incredibly long track-record of hits and hardly any misses, humongous amount of financial resources at its disposal and the government backing it all the way, LIC and its policyholders are insulated, for now, experts told DNA Money.
The deal and the help
LIC may use Rs 10,00-13,000 crore of policyholders' money to buy up to a 51% stake in IDBI Bank. While LIC already owns a 10.8% stake in the bank, the financial behemoth is seen helping the government if it does this deal. Here is how the government benefits: One, the government will get some money from LIC for IDBI Bank shares. Two, by letting LIC be the majority stakeholder the government virtually reduces the need to provide higher amounts of capital to the embattled bank in the future. So far, there is no official word on this matter from IDBI Bank or LIC.
It is true that IDBI Bank needs help. Among all public sector banks, IDBI Bank is in the worst situation with Rs 28 out of every Rs 100 the bank has given out as a loan, turning into a non-performing one. Saddled with over Rs 50,000 crore worth of bad loans and a huge bucket of stressed loans, IDBI Bank needs help. Desperately.
According to rating agencies, the lender suffers from an impaired ability to sustain its current position of systemic importance. The eighth-largest government-owned bank continues to grapple with a weak capital profile. In short, it needs a transformation strategy and needs strategic investors coming on board. This is where LIC steps in. With assets of over Rs 22 lakh crore, LIC can provide a big help to the bank without pressing for short-term results, unlike any other financial investor.
What's in it for policyholders
Will the IDBI Bank deal negatively affect the policyholders of LIC? Accordng to experts, there is a negligible chance of such a thing happening.
According to Nilanjan Dey, director, Wishlist Capital, there have been no failures in the past, not even when the insurer was called upon to stand by the government during crises. "There is no specific reason to believe that IDBI would present the first-ever deadlock for LIC," he added.
If you are an LIC policyholder, ask yourself three questions. Will IDBI's inclusion anyway disrupt the process of insurance and indemnification? Will premia paid by customers not go towards the funding of policies? Will claims be rejected simply because IDBI has walked in? No.
According to Neil Borate, personal finance analyst, RupeeIq, any LIC investment in IDBI Bank will at best have an impact on the holders of ‘participating policies', which get a share of the insurer's profits, usually in the form of bonuses. Holders of non-participating policies are guaranteed their returns. "IDBI Bank's gross NPAs of around Rs 55,000 crore are minuscule compared to LIC's asset base of Rs 22.4 lakh crore and can only make a small dent in policyholder returns," Borate reasoned.
However, seen in conjunction with other investments made to fulfill government targets, LIC policyholders seem to be paying 'bailout premiums' in addition to their actual premiums, Borate noted.
LIC hardly fails
A banking analyst with a top brokerage said that LIC has always benefited from being a contrarian investor. "The likely investment in IDBI Bank will be less than 1% of policyholders’ account. This would also reduce the planned investment amount by LIC in the equity markets in FY19. There will not be any near-term impact on policyholders’ account," he said.
While LIC is the white knight when it comes to rescuing government's plans, so far there is little data to suggest that LIC's investment decisions have back-fired. LIC has a stake in no less than 29 banks. In the past, it has bought stakes in Initial Public Offerings (IPO), follow-on public offers, and share-sales of many PSU firms. LIC had invested a good chunk of money in NTPC stake sale, the SBI Rs 15,000-crore Qualified Institutional Placement in 2014, and state-owned entity IPOs like that of Hindustan Aeronautics Ltd, General Insurance Corporation of India and New India Assurance.
While in the short-term such buys have looked bad, LIC's long holding periods have ensured it seldom makes a loss. LIC reported a 33% rise in profit from the sale of investments at Rs 28,527 crore in 2017-18, much higher than the profit of Rs 21,503 crore during 2016-17. Interim bonuses paid to policyholders during the year rose 67% to Rs 1,554.79 FY18, crore compared to Rs 929.49 crore in FY17.
Insurers are the perfect long-term investors. The CEO of a new private-sector life insurer said, “There is no one in India as big as LIC. It has almost unlimited resources compared to others. Plus, LIC can never be allowed to fail by the government. For all you know, taking a majority stake in IDBI Bank may be a three-to-four-year-old financial arrangement. LIC policyholders should just watch out if this becomes a trend. If LIC is expected to regularly rescue the government and its bad PSU banks, then that will be a problem."
FOR & AGAINST
- Given the several investments made by LIC to fulfil government targets, LIC policyholders do seem to be paying ‘bailout premiums’ in addition to their actual premiums
- Even if such bailouts by LIC have looked bad in the short-term, LIC’s long holding periods have ensured it seldom makes a loss
- If LIC is expected to regularly rescue the government and its bad PSU banks, then that will be a problem
Rs 22.4 lakh crore
LIC’s asset base
Rs 55,000 crore
IDBI Bank’s NPA
29
Banks that LIC has stake in
33%
Rise in profit from LIC’s sale of investments in FY18
67%
Rise in interim bonuses paid to policyholders in FY18
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "FOR & AGAINST")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}