Late last week, the government hinted at selling part of its stake in IDBI Bank to LIC. To be fair, this is not the first time that LIC has bailed out the government by dipping into its reserves. During the last 1 year, the government has dipped into the LIC for bailing out most of the large PSU IPOs including the grossly overpriced insurance IPOs. It is in the light of these developments in the last few years that the decision to sell the stake to LIC must be seen.
IDBI Bank has huge NPAs…
The problem with the government decision is that IDB has been beset with a plethora of problems in the last few months. The government had wanted to make a test case out of stake sale in IDBI to marquee investors, but had to retract after the asset quality worsened. As of last count, IDBI Bank had gross NPAs in excess of 25% of its total assets. This is surely an unsustainable situation and it is hard to fathom what LIC will do with that kind of stake. Like in the case of the stake sale of HPCL to ONGC, it surely helps the government monetize its stake and get closer to its annual divestment target. But it really does not achieve much beyond that. A better way would have been to complete the process of cleaning up of bank balance sheets and then take a view on what is to be done with stressed banks. Selling the stake at this point of time will neither help LIC nor help IDBI Bank.
Can we do this to LIC?
In the past, the government would rely on LIC to support the markets on days of market tumult. That not only helped maintain sanity in the markets but also enabled LIC to build a quality portfolio over a longer period of time. The investment portfolio of LIC was one of the reasons it had managed to sustain solid returns to its policy holders. But the big question is whether such a move is justified now. Let us look at the recent months. The government has already loaded a huge commitment on the LIC to finance the Indian Railways. Most of the overpriced government IPOs in the last year was bailed out by LIC. In most cases, LIC may have to wait really long to get returns on the investment. If the government manages to sell its stake in IDBI Bank to LIC, it could become a template for the government to dilute its stake in most PSU banks by placing shares with the LIC. That is unfair to the policy holders who have committed their earnings hoping for genuine and honest returns.
Not the UTI way please…
This is what happened to UTI 20 years back and finally it had to be bailed out in 2002. LIC is much bigger and much more systemically important to the Indian economy. It is also about trust. During UTI, India did put trust on trial and today UTI is nowhere in the Top-5. Let us not repeat that mistake!