Shotgun marriage

The coerced takeover of the publicly owned IDBI Bank by LIC, the country’s largest insurer, will neither protect the interests of the beleaguered bank nor further the interests of the insurer or its policyholders.

The IDBI Towers, the bank’s head office, in Mumbai. A file picture.

MARRIAGES may be made in heaven, but the hastily arranged one between IDBI Bank Ltd and the Life Insurance Corporation of India (LIC), the country’s biggest insurance company, has all the trappings of a hustled wedding commandeered by a khap panchayat in the badlands of northern India.

The Union government’s recent decision to allow the publicly owned LIC to take a 51 per cent stake in IDBI Bank without giving the insurer the privilege of enjoying the managerial control that majority ownership normally confers signals a travesty of the rules of conduct that capitalism swears by. In effect, one is asked to believe that LIC is only “investing” in the bank without taking the long-range view that ownership, especially of a bank, demands. In the process, the government appears to have started rolling out the first case of the privatisation of a public sector bank (PSB). That the means the government has adopted threaten not only the public presence in banking but also the interests of the giant in Indian insurance and its millions of policyholders is just incidental to the cynical game that is privatisation.

Once upon a time, since 1964 to be precise, what we now know as IDBI Bank was born as the Industrial Development Bank of India, a subsidiary of the Reserve Bank of India (RBI). As the name suggests, it was to perform a specialised banking function: lending to industry. Typically, given the very nature of industrial finance with the longer gestation periods of projects, the financial institution was to provide finance on a long-term basis. It was a child of an era in which there was something that went by the name of developmental banking. In fact, it was the same ethos behind the nationalisation of banks that nurtured it at birth. In accordance with this view of finance, its ownership was transferred to the Government of India in 1976. This world view of finance was what set it apart from other financial institutions, especially bread-and-butter banking, which primarily focusses on the activity of mobilising deposits and extending advances.

To cut a long story short, with the changed world view after the onset of the liberalisation programme, IDBI was forced to become a full-fledged commercial bank, ostensibly because the wall between developmental banking and commercial banking was proving to be a hindrance to the expansion of banking in India. Thus, in 2003, it became a limited company, IDBI Bank Ltd, and, the following year, the RBI recognised it as a scheduled bank.

There is much irony in the story of IDBI’s transformation. Industry captains, experts in finance and those in government continuously moan about the lack of appropriate mechanisms and instruments for long-term finance. This is especially pertinent in the case of large industrial projects, especially infrastructure projects such as road and airport construction and power generation or even the metro projects that are being built in many Indian cities. Everybody in the world of Indian finance now agrees that no financial options are available for funding such projects. The mismatch between the lending horizon of lenders and the gestation period and life cycle of such projects forces investors to price their services high.

The high fares on Indian metro trains is a classic example of what results from this mismatch. Even though everyone understands that the metro is a better option from an ecological and economic standpoint, the high fares remain a deterrent for large sections of people, which results in lower efficiency or higher costs, or both.

But, instead of setting up more specialised financial institutions like IDBI, which would reflect a variegated approach to finance in a large and diverse country, the state has been butchering them at the altar of the idiocy of finance; in effect, this reduces choice and stymies specialisation. Indeed, there is much irony in the shotgun wedding. Well before LIC became the institution that would, upon a not-so-discreet nudge from the government, bail out companies or institutions in distress, IDBI was used to play that role. Institutions such as the National Stock Exchange, National Securities Depository Services Ltd and the Stock Holding Corporation of India have all been incubated by IDBI. However, the mounting burden of the bank’s non-performing assets (NPAs) has caught up with it.

The NPA millstone

IDBI Bank is a middle-rung bank within the space of PSBswhose problems have aggravated significantly in the last few years. Although all PSBs have suffered a calamitous decline in their business in the last three to four years, primarily on account of the mounting provisions they have had to make for the escalating levels of NPAs, the plight of IDBI Bank is significantly more serious. For instance, between 2014-15 and 2017-18, while the growth of bank deposits in PSBs has grown at an average of 4.75 per cent, net advances (which is the primary means of income for banks) have increased by just 1.29 per cent. But even within this universe of PSBs, IDBI has fared worse. The net advances of IDBI declined by an annual average of 6 per cent in this period even as deposits increased at an anaemic pace.

The reason for this spectacular collapse in lending can be traced to the millstone of NPAs around its neck. Gross NPAs of IDBI increased from 5.88 per cent in 2014-15 to 27.95 per cent in 2017-18. Within the PSB universe, average gross NPAs increased from 4.93 per cent to 14.54 per cent during this period. What these figures mean is that in 2017-18 more than one-fourth of IDBI’s loan portfolio was not giving it anything in return. And, spurred on by the RBI and the government, which were hell-bent on “cleaning up the balance sheets” of banks, these banks were forced to aggressively make provisions to cover these possible losses. The provisions made by IDBI increased from Rs.4,855 crore in 2014-15 to Rs.16,143 crore in 2017-18—an increase of 233 per cent. It was but natural that the bank, which made a net profit of Rs.873 crore in 2014-15, made a net loss of Rs.8,238 crore in 2017-18. How can any bank—irrespective of the nature of ownership—that makes provisions which amount to almost a tenth of its net advances hope to make a profit?

This is exactly the plight of IDBI. While the relentless pressure to make provisions has blown a hole in the banks’ business, the RBI and the government (through the Insolvency and Bankruptcy Code, 2016) have coerced the banks to reach a settlement with the very same borrowers who gypped them and brought them grief. This is called asking the banks to “take a haircut”; what they have undergone in the last few months is more like a crew cut.

Privatising on the sly

If what has happened to IDBI has been calamitous, one shudders to think what may be in store for LIC with this forced marriage. The country’s pioneering insurer has been handed an asset that it cannot call its own. Although LIC would have majority “ownership”, it would have no managerial say. In keeping with the Narendra Modi government’s penchant for getting its way come what may without let or hindrance, the Insurance Regulatory and Development Authority of India, the insurance industry regulator, has obliged the government by readily removing key regulatory hurdles that would have prevented LIC from taking over the bank. Provisions in the regulatory regime prevent an insurance entity from holding more than 15 per cent of the equity in any single company; LIC has been allowed to jump way beyond this cap, which is meant to ensure that an insurer’s focus in a company does not jeopardise the interest of policyholders. Moreover, LIC has already announced its plans to make an open offer to other IDBI shareholders, which enables the government to achieve its twin objective of privatising the bank on the sly without having to infuse capital into IDBI.

While this may be a termed a win-win situation for investors (who have already witnessed a spectacular gyration of the IDBI stock price in recent days), how this will benefit the LIC and its millions of policyholders is anybody’s guess. LIC already owns about 11 per cent of the bank. It is estimated that LIC would need to pay about Rs.10,000 crore to increase its stake to 51 per cent (the government currently holds about 74 per cent of the equity). Meanwhile, the rating agency ICRA Ltd has said that the change in ownership would not materially affect IDBI’s rating. Although LIC has an asset base of Rs.22.4 lakh crore, that does not justify throwing good money after bad.

LIC operates virtually as a non-profit trust, implying that any excess money with it belongs to policyholders, which must be returned to them after deducting expenses and other provisions. Its acquisition of a known loss-making bank thus raises serious ethical questions. Why should LIC’s policyholders to whom its surplus belongs be asked to part with their fund for a dud asset? How come the surplus that actually belongs to them is being diverted instead of being returned to them? If one gets an honest answer to both questions, one cannot avoid the obvious conclusion that the big loser in this so-called “win-win” deal is LIC’s policyholders.

Apologists for the coerced union have said the acquisition of the bank would increase LIC’s reach by giving it the bank’s network for distributing and servicing its policies. This is laughable. LIC is a pioneer in the Indian insurance scene, having single-handedly developed and nurtured the concept and standards of service for life insurance in India. The two key ingredients for its success are the countrywide network of agents with whom it has built a relationship over many years and the high standards of service it demonstrates that explains its unique stature as a credible life insurer.

The argument that LIC needs a bank in order to establish its own bancassurance channel, a partnership between a bank and an insurer that enables cross-selling, demonstrates an appalling ignorance of the history of the Indian insurance industry. Worse, it ignores the reality of Indian private insurance in which the bancassurance model is synonymous with racketeering in which the gullible (and the not so gullible too) customers of banks have been peddled insurance that they either do not need or cannot afford. The reality is that even senior managers at PSBs have been peddling such policies under duress to their customers. “If you want a loan, you need to take this insurance policy” is their refrain with customers. A senior officer in State Bank of India told Frontline that the coerced cross-selling of insurance products of private insurers in PSBs has become so serious that some senior personnel in banks earn more from the commissions paid by private insurers than from their own banks as salary.

This forced marriage is clearly meant to start the process of privatising PSBs. By roping in LIC as a short-term “investor”, rather than as the eventual owner of IDBI, the government has signalled that LIC is only a temporary custodian of the bank that is to be sacrificed at the altar of privatisation later. Then, a relatively small bank will, in the Modi government’s scheme of things, pave the way for a much bigger flood. As financial shenanigans take centre stage and as India’s banking system totters, some cronies may well be laughing all the way to a bank, any one they can grab.