This article is written by Shivam Gupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
Life Insurance Corporation of India (LIC) is a state-owned insurance group, life insurance being the major sphere of operation among other investment plans. It is also one of the prime institutional investors in India. Industrial Development Bank of India (IDBI Bank Limited or IDBI Bank or IDBI) functions majorly for providing credit, and other financial avenues for the development of burgeoning industrial industries. The sanction to increase its stake in IDBI to 51%, LIC got the requisite sanctions on January 21, 2019 by Insurance Regulatory and Development Authority of India (IRDAI), taking into account the deteriorating condition of IDBI bank. On January 21, 2019 LIC completed the acquisition of 51% in IDBI bank, making it majority shareholder of IDBI Bank. Owing to this Reserve Bank of India (RBI) re-classified IDBI bank as a Private Sector Bank for regulatory purposes with effect from January 21, 2019, vide a Press Release dated March 14, 2019. This came out as an ideal solution to deal with the twin problem of divestments and fiscal deficit and at the same time exiting some loss-making PSU.
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IDBI bank in losses and LIC to the rescue
IDBI, along with numerous other banks, is burdened by rapidly increasing losses and surmounting bad debts. It suffered net loss of 3,602.49 crore during the September quarter of 2018-19. Its gross non-performing assets hit 31.78 per cent (Rs 60,875.49 crore) of the gross advances as on September 30, 2018, as compared with 24.98 per cent in the year-ago period as per the Economic Times. Ensued by this, IDBI got labelled “WEAK BANK” by the RBI and was put under Prompt Corrective Action (PCA) framework planking restriction on the bank’s lending. Until and unless the bank shows sign of improvement in its performance or exhibits furtherance in the asset quality, it will be allowed only safe retail landing.
LIC pitches in to save the loss-laden bank by providing it with an opportunity of a turnaround. LIC being the majority stakeholder of IDBI, gives IDBI a ground for turnaround and a sigh of relief for investors and stakeholders. The stock which was once trading around Rs.200 mark in November 2010, plummeted to around Rs.53 in August 2018, when the bank was confronted for the asset quality. As a response to the deteriorating conditions, LIC was sanctioned to acquire a controlling stake through a combination of preferential allotment and open offer of equity. LIC’s entry brought in a sentiment of confidence within the market resulting in soaring the stock price.
LIC IDBI Deal
The LIC IDBI deal is imperative for correction of IDBI’s financial health. It intends to proliferate the retail portfolio to about 50% of overall lending by F.Y. 2019-20, insinuating detraction in corporate lending and enhanced focus towards the retail market in coming times. The deal is also aimed at soaring investments in the sphere of data analytics that can assist in analysing the customer behaviour in both the entities. This deal would bring about numerous leads like expanding product offering, reduced distribution cost, de-risking portfolio, build support for retail business.
This deal is of great importance to LIC as well. It would enable LIC to tap the significant bancassurance channel with help IDBI, thereby increasing its productivity and lessening the distribution costs. Also, LIC policies will be endorsed more with the assistance of IDBI’s 1.5 crore retail customers, about 18,000 employees and over 1,800 branches. In addition, IDBI will also be proffering its cash management facility to heighten LIC’s current account balances and reduce its cost of funds. Conversely, LIC will be proving IDBI with its 11 lakh agents and more than 1 lakh employees. The deal also proposes to facilitate NEFT or National Electronic Funds Transfer (an instant money transfer system maintained by RBI) as on option for payment in 900 IDBI branches. All in all, it’s a positive sum for both the parties involved in the deal in one way or other.
Assistance
Limited and restricted support from the government was not of much use to IDBI to tackle and cope with the crisis. Adding to the stress, IDBI could also not raise help from the market because of the restrictions, forbidding it regarding the same, imposed on it due to its poor performance and valuations. In this grieve situation, LIC lent a hand for assistance, attributable to its deep pockets. LIC pumped Rs. 21,624 crore capital ensuing improvement in capital adequacy from a low of 8.14 per cent to 11.58 per cent by March 2019 as against 9 per cent mandated by RBI.
In addition, variable pay system was put forward with a view that it would urge employees to ameliorate their performance and working. Moreover, management now will also have the liberty to appoint and decide on it. “It is public money and not government money. But in spirit, there is no difference between LIC and the government,” says Abizer Diwanji, Partner and National Leader (Financial Services), EY India.
Contrary to the general norms, LIC was conferred with a certainly a very crucial right to nominate Chairman, MD&CEO and also two other Deputy MDs offering much required solidity in the top management and put into effect a long-term strategy.
LIC is also deliberating on the idea of progressing on board LIC agents as the home loan agents as well, in order to give a lift to the bank’s retail business, in conjunction with bringing the policyholders, network, and premium collection system in concert with that of the bank. Retail segment, including SME and agriculture, amounts to better part of the bank’s lending book at this point in time. Rakesh Sharma, MD&CEO, after resuming office in October 2018, put forth his vision of expanding the retail contribution form current 51% to 55% by next year. Bank’s future targets also includes induction of novel and up to date systems and processes to credit assessment and risk management. IDBI also envisions to increase the CASA ratio from the current 42%. CASA stands for Current Account and Saving Account which are characteristically low-cost and helps to maintain low cost of funds thereby increasing net interest margins of the bank.
One facet that should be dealt with priority, at any cost, is the asset quality. IDBI Bank’s gross NPAs are the highest among Indian banks at 27.47 per cent. ICRA, Investment Information and Credit Rating Agency relegated the bank’s rating two months back and also insinuated regarding the surmounting losses in consequence to high level slippages and credit provisioning. In order to bolster the asset portfolio IDBI bank is contemplating more on the aspects of recovery, credit policies and risk management.
In addition to maintaining profitability, it will also contribute in generating liquidity which is more so required owing to the stringent provisioning requirements pertaining to bad loans. The bank has proposed to sell its stake in 19 unlisted companies and it also has 19% stake in ARCIL (asset reconstruction company), IDBI Federal Life Insurance Company (Life Insurance player). High level revamping and refurbishing is required for by IDBI for it to come back to normalcy. For this IDBI ought to ascertain its niche areas and start working on it. Nevertheless, IDBI Bank has a competitive advantage owing to its manageable size and new PSB landscape and so it needs to get its act together and start moving.
As much as capital infusion is concerned, IDBI is not likely into the government’s grip therefore away from government’s control and substantial interference. But the more important concern is for long will it be able to enjoy this position, as adequately evident from the past instances, LIC is more often than not used by government for turning around other public sector companies, including banks. For all reasons, LIC is known as the government’s cash cow. This is something that can hinder value creation for both LIC and IDBI Bank’s shareholders.
Conclusion
The money that has been accumulated from the policyholders’ gets invested as per the regulations laid by the insurance regulator – Insurance Regulatory and Development Authority of India (IRDAI) amid a number of schemes and instruments. Policyholders of LIC enjoy quite a safe place because they are protected by sovereign guarantee, that is to say, in times of distress government will bail out the company, providing immunity to them. For the holders of non-participating policies, the returns are secured but this is not true for holders of participating policies owing to the fact that their bonuses are dependent on the full year profits.
If LIC is successful in utilising the combined synergy effectively, this deal will prove to be a win-win for both the parties. This involves effective utilisation of IDBI’s network and human resource and apt exploitation of the huge cash flows generated on daily basis by LIC.
Even though the deal is criticised on several fronts, one of it being employees of the insurance and banking sectors, it will be thrilling to watch the implementation of the deal in support of LIC and IDBI both. The synergies of the two combined can put forth an example of a momentous turnaround.
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