What does LIC’s bid to take a majority stake in IDBI mean? The clear answer is the ideological bankruptcy of the ruling party. The BJP was a party which prided itself as a right-wing economic precursor in India that believed in greater privatisation of the economy and minimal role of the state in economic matters.
But here is the same party, which in its bid to hold aloft a sinking public sector bank, is now pushing a public sector insurer to take a majority stake in it!
IDBI is a completely gone case. It is the worst performing bank, even by the dismal public sector banking standards. Its non-performing assets (NPAs) stand at a whopping 36 per cent. In the last one financial year itself (2017-18), the bank posted a loss of ₹5600 crore. As it stands today, the bank’s net NPA stands at 1.4 times of its book value (as of March, 2018). The NPAs are even higher than the bank’s market capitalisation (it is 1.2 times as on June 29, 2018). It means that if the entire NPAs were to be written off, the shareholding documents would be reduced to junk.
This sorry state of affairs is on account of a complex set of factors that show both the government’s incompetence and its myriad corrupt practices. The heads of those in the government who have been micro-managing the affairs of the bank should have rolled. But nothing of the kind has happened.
What should an economic right-wing party have done in the current circumstances? It should have taken steps to privatise the bank, whatever its worth. If there were no takers, it should have allowed the bank to die. Well, the government would have had to take up the onus to pay off the stakeholders. It could have done so by monetising the bank’s assets and taking a haircut.
But what did the BJP government do? It undertook a bank recapitalisation plan. And what took the cake was that the worst performing bank received the biggest part of the recapitalisation money. Out of the ₹10,000 crore tax payers’ money that was handed down to 20 public sector banks (that had drained public money worth ₹10 lakh crore), the IDBI Bank (which had indulged in reckless lending to several willful defaulters) received the highest chunk at over ₹10,600 crore.
What was the outcome of this government largesse (of course, at tax-payer’s expense)? Instead of turning green, the bank’s finances continued to deteriorate. The bank cried hoarse for more infusion of money so that it could survive longer and swallow more of public money.
The government wanted to oblige. But it was in a dilemma – in an election year, it did not want to directly advance more money to a dying institution lest it would show up in its fiscal deficit and that might invite a rating down by the international agencies. It knew the beating it would get internationally if that happened.
So the government hit upon a clever plan. It asked the Life Insurance Corporation (LIC), the premier public sector insurance company, to invest another ₹10000 crore to tide over the immediate crisis. The government clearly wanted to postpone the crisis emanating from the impending shutdown of the bank and the consequences thereof till after the 2019 election.
So LIC has been pressed into service to save the government’s face till the next election. What are its consequences for the LIC, which obediently represented to the Insurance Regulatory & Development Authority to allow it to take a 51% stake in the IDBI Bank? By its own Act, LIC cannot hold more than 15% stake in another company. LIC already held almost 11% stake in the IDBI Bank and it has been nursing big losses as the stock market price has nosedived in the last year since Vijay Mallya scandal broke.
As a matter of fact, LIC has been facing recurrent losses because of its largescale investment – some up to 14 per cent – to bolster a number of public sector banks, 18 to be precise. Despite the losses, the government has forced LIC’s hand to make periodic incremental investments in these public sector entities.
Where does the LIC’s money come from? From millions of insurance policy-holders. Because the LIC is losing a lot of money in the government-mandated investments, it is often trying to save money by going slow in the payment of the genuine insurance claims. Series of complaints against LIC regarding denial or delay in payment are reported every other day.
The way the government is forcing the LIC to do a command performance, the policy holders of the LIC are likely to face worse conditions in the days to come.
It is an irony that this situation has come about in the BJP regime which was supposed to be ideologically attuned to the idea - the government’s job is to manage business, not do business. Accordingly, the BJP’s economic reforms plank was to disinvest in the public sector.
What has it done in the last four years? Well, virtually none. It made a farcical effort to sell Air India and that turned out to be a fiasco.
The Atal Bihari Vajpayee government, in keeping with the party’s ideology, had created a divestment ministry under the able stewardship of Arun Shourie and several privatisation projects were successfully executed then. The Narendra Modi government has completely squandered the ideological goodwill that Vajpayee government had earned in five years at the turn of the century. If anything, the current government has come to symblolise the ideological bankruptcy of the BJP.