The Life Insurance Corporation headquarters in South Mumbai, India. (Source: BloombergQuint)

Please Welcome The LIC (IDBI) Bank

LIC — Life Insurance Corporation of India — is among a handful of brands ubiquitous to India. It has more than 11,000 branch offices. About 2 lakh employees and more than 20 lakh agents. It has consistently been ranked as one of India’s most valuable brands.

And now LIC has a bank, which may bear its name.

On Monday, IDBI Bank Ltd. said that it has sought approval from the Reserve Bank of India for a name change. This, after LIC completed the acquisition of majority equity in the erstwhile development lender.

The bank has suggested two options to the regulator: LIC IDBI Bank or LIC Bank. The bank is hopeful that its first preference of ‘LIC IDBI Bank’ is accepted, unless there is a conflict issue, said Rakesh Sharma, chief executive officer of IDBI Bank.

The bank may also shed its tag of a public sector bank and has sought regulatory guidance on whether it would be classified as a private bank from here on.

Classification as a private bank could mean some compliance changes and may also mean revision in employee compensation. We have also started on the second part and have ensured that the employee performance determines their compensation and growth in the bank.
Rakesh Sharma, MD & CEO, IDBI Bank

LIC, which is now the promoter of the bank, currently holds 51 percent stake. Over time, it will have to pare this down to meet both banking and insurance regulations which restrict the amount a single entity can hold. A timeline for this is yet to be determined, the bank’s management said on Monday.

Also read: Timeline For LIC To Reduce Stake In IDBI Bank Will Depend On Business Model: IRDAI

The name change is just a start. Any attempt to breathe new life into the organisation, which has been weighed down by bad loans and large losses, will mean large amounts of capital and a reworked strategy.

IDBI Bank reported a loss for the ninth straight quarter in the three months ended December. The net loss widened to Rs 4,185 crore in the third quarter of the current year compared to Rs 1,524.3 crore a year ago, according to an exchange filing by the lender. The net interest income, or core income, also fell 18.5 percent to Rs 1,356.80 crore. The gross non-performing assets ratio improved marginally to 29.67 percent.

It’s capital adequacy ratio post capital infusion from LIC stands at 12.51 percent. So far, LIC has infused a total of Rs 21,624 crore into the bank. Any further capital will need to be infused through preference shares to avoid breach of insurance guidelines, the bank said.

“The aim is that in the future there are no negative surprises on provisioning . But LIC, with their ample capital can provide any future capital needed by way of preference shares. That option is open for us," said KP Nair, deputy managing director, IDBI Bank.

The bank is also under the RBI’s prompt corrective action framework, which it hopes to exit by September.

We have already seen some funds being recovered through the NCLT route in the December quarter. We are expecting another Rs 4,500 crore to be recovered through the insolvency route by March and an additional Rs 10,000-12,000 crore through the next financial year. We are also implementing special resolution and recovery schemes for medium and small borrowers. This will help us bring down our net NPA ratio to below 12 percent by March and further below 6 percent by the second quarter next year.
Rakesh Sharma, MD & CEO, IDBI Bank

Alongside the clean-up, the bank intends to begin shifting strategy. Even before LIC was reclassified as a promoter of the bank, IDBI had halted large corporate lending in order to re-balance towards retail loans. By joining the LIC fold, IDBI will also get a jump-start on the retail transactions business.

LIC will appoint IDBI Bank as the primary bank for extending banking services such deposits, current account facilities and cash management services. The cash management services alone could give the bank access to deposits worth Rs 4,000-5,000 crore, said the bank’s management.

“We have a small portion of LIC's cash management business already, since we are a public sector bank. But with this deal, we will become the sole banker for all these needs, including employee salaries. This will give us considerable float income,” said Sharma. He added that IDBI Bank will also target LIC's employees and insurance agents for retail products like personal loans and auto loans. That will help us improve the portion of retail loans on our book, beyond 48 percent now," Sharma said.

Both IDBI and LIC will use each other’s networks to extend their reach. LIC will use IDBI Bank's 1,800 branches to cross sell insurance products. IDBI Bank will use the more than 10 lakh LIC insurance agents to cross sell banking products and services.

We are hopeful of returning to profitability by December 2019. That is our endeavor right now. We are hopeful that the bank will be able to turn itself around to a strong retail and SME lender with a large presence across India.
Rakesh Sharma, MD & CEO, IDBI Bank