The Life Insurance Corporation headquarters in South Mumbai, India. (Photographer: Vijay Sartape/BloombergQuint) 

The Liabilities Insurance Corporation Of India

BloombergQuintOpinion

The Life Insurance Corporation has a tagline that says everything about its business – ‘zindagi ke saath bhi, zindagi ke baad bhi’, which loosely translated means ‘in life, and after life’. Whoever coined the tagline was perhaps prescient. The tag fits the profile of an insurer of assets just as well as it does its latest avatar as an insurer of sovereign liabilities.

Traditionally India’s largest insurer is called upon to rescue or revive sick state enterprises. It dons the robes of the white knight with deep pockets to help the government to swing over the moats of losses and deficit caused by sloth and profligacy. Of late it is expected to rescue dying enterprises – LIC as the Liabilities Insurance Corporation of India.

This year the saga is about two enterprises enveloped in a near-death experience. One which borrowed too much for the wrong reasons and another which didn’t know who not to lend to or when to stop lending – Air India and IDBI Bank.

Take Air India first. The government seems to have come to the conclusion, advised by the cognoscenti in the deals bazaar, that its insistence of holding on to 24 percent is a deal-breaker. Plan B, apparently, is to get LIC to buy 24 percent of Air India – an institution which has a debt of over Rs 48,000 crore and has been in the red all of this decade.

The second institution that must be rescued from the labyrinth of loss, debt, and decimation, is IDBI Bank. Its loan book is bleeding red – gross non-performing assets are estimated to be around Rs 55,000 crore and by some accounts, another Rs 60,000 crore is stressed. Losses for six quarters have wiped out the capital infused by the government. The bright idea is to get LIC, which already has around a 10 percent stake, to buy an additional 40 percent stake in IDBI Bank as a ‘strategic investor’.

It is a piquant situation.

A company with a share capital of Rs 100 crore is to bail out a bank with a paid-up capital of Rs 4,181 crore and an ailing airline with a paid-up capital of Rs 26,753 crore. 

Also read: Only Capital, No Control In The LIC-IDBI Bank Deal: Exclusive

History Of Bailouts

The history of bailouts dates back to the 1990s. Just in this decade on multiple occasions governments have dialled Yogakshema on Jeevan Bima Marg in Mumbai.

  • In 2009 it bought shares of public sector banks to enable infusion of capital.
  • In 2010 it forked out around Rs 11,500 crore to bail out the government in the disinvestment of shares of REC, NMDC, and NTPC.
  • In 2012, the UPA government dialled LIC at virtually the last hour, as its offer of ONGC shares was failing. LIC picked up over 40 crore shares of ONGC, around 84 percent of shares auctioned paying Rs 12,749 crore – and lost Rs 900 crore in two days as the stock tanked.
The BJP, then in the opposition, called it “daylight robbery” and misappropriation of policyholders’ money.

In fact, the Standing Committee on Finance then chaired by Yashwant Sinha said “owing to risk factors associated with the recent acquisition of shares of ONGC by the Life Insurance Corporation of India (LIC), 29 crore policy holders of LIC are likely to be adversely affected” and recommended that the Insurance Regulatory and Development Authority of India look into the transaction.

Also read: LIC Gets Regulator’s Nod To Increase Stake In IDBI Bank Up To 51% 

The tradition continued with the new regime.

  • In 2014 the insurance giant bailed out the government buying the bulk of BHEL shares.
  • In 2015 LIC forked out over Rs 7,000 crore and its insurance siblings paid out an additional Rs 4,000 crore to help the government push through the Rs 22,557 crore target in the disinvestment of Coal India shares.
  • In 2016 as the disinvestment of Indian Oil Corporation was flailing LIC stepped in and paid over Rs 8,000 crore.
  • In 2017 LIC invested nearly Rs 13,000 crore of the Rs 17,357 crore raised in the disinvestment of General Insurance Corporation of India and New India Assurance.
  • In March 2018 it bailed out the government in disinvestment of shares of Hindustan Aeronautics Ltd., forking out Rs 2,900 crore to subscribe to 70 percent of the offering.

The value of LIC’s equity holding in 39 central public sector enterprises – many of them loss-making, like MTNL and SAIL – is over Rs 89,200 crore. So it really should not be a surprise if the LIC donned the role of white knight once again and answered the May Day call of Air India and/or picked up 40 percent of IDBI Bank.

Also read: India's Life-Saving Plan for IDBI Makes No Sense

LIC The Bank

That there is public outrage this year stems from the fact that LIC is now expected to rescue dying enterprises – including some, where rigor mortis could set in. Effectively the implicit is being made explicit as cash-rich public owned entities are called upon to bail out politically managed state enterprises.

There is much consternation about LIC investing Rs 13,000 crore to up its stake to 40 percent or Rs 21,000 crore for a 51 percent 'strategic' stake in a bank, one that is wallowing in losses and debt. Again this is par for the course – in 2015 even as the stench from the rot of bad loans was wafting across PSBs, LIC upped its stake in six of them.

LIC owns a stake in 21 public sector banks – 11 of which are under Prompt Corrective Action, 19 of which declared losses this year.

Together they account for over Rs 9 lakh crore-going-on-Rs 11 lakh crore of stressed loans. The total value of LIC’s holdings in the 21 public sector banks is over Rs 41,000 crore, larger than the market capitalisation of India’s second most-valued and third-largest lender, Bank of Baroda.

In 2016-17 the LIC’s Annual Report says the “Corporation subscribed an amount of Rs 1, 24,174.25 crore and Rs 1, 40,714.30 crore” (both book value) of securities issued by the Government of India and loan issues of the various state governments. If for the reasons of poor investments LIC loses the ability to buy this paper, who would?

Also read: LIC: Should India’s Insurance Behemoth Be Welcomed Into Banking?

Expediency Of Merit

There is much debate about merits. The convenience of political expediency is that merit is often manufactured along the way. It is a fertile field of imagination propagated with unrelated and illogical theories.

One delectable lemon being peddled by unnamed government sources is the “bancassurance thesis” need for a bank to expand LIC’s operations. LIC which has operated uniquely since 1956 has discovered the advantages of owning IDBI Bank.

The theory is tragi-comic.

The LIC website tells you that it has 2,048 fully computerised branch offices besides 1,381 satellite offices. The IDBI Bank website says it has 1,899 branches. Clearly, LIC has more branches and a better network.

Where was this match made – on Tinder or marriage.com? Must LIC buy the smallest bank with the worst performance? Surely it could have aligned with one with a better network – mind you, they all need money.

The other citrus package being hawked is that private banks own insurance companies and it gives them an advantage. IDBI Bank, it has been said, will be a subsidiary much like the mutual funds and housing finance companies.

First, the banks own the insurance companies, not the other way round. 

Secondly, the structure is a creation of a policy muddle born out of scarce investible resources and the cap on foreign investment.

More importantly, if there is merit to the insurance companies need banks thesis then it would be interesting to know how many of the top insurers of the world – AXA, Zurich, Berkshire, Prudential, Munich Re – own banks.

Also read: LIC-IDBI Bank: A Stop-Gap Solution

A Slippery Slope

For starters, it is imperative that the government dismiss the many fallacious theories being peddled – including one that suggests LIC buying into IDBI Bank is akin to ONGC buying HPCL.

The former is taxpayer money the latter is policyholders’ money. 

These theories suggest a mindlessness that has consequences in the global financial sector.

There is no disputing the fact that the government needs to address the issue of bleeding balance sheets of public sector enterprises. It needs to find ways to recapitalise banks and keep Air India flying. It is not just a question of finding the money. The critical issue is long-term strategy. The cohabitation of the public sector alongside private sector in non-monopolistic segments of the economy leads to rent-seeking and will continue to generate losses. The question is about the role of government in the economy.

At a systemic level, it is vital to remember lessons from history.

The 2008 global financial crisis taught the world that the impact on insurance companies was through its portfolio of investments.

Ergo it is critical to be mindful of burdening LIC with the cost of every virus afflicting the public sector.

The money with LIC is a premium paid by over 29 crore policyholders and LIC is legally liable to service these obligations. LIC is also the agency executing a number of social security programmes including the Prime Minister’s pet project, the Aam Admi Bima Yojana for the poorest of the poor. Most importantly LIC is the largest aggregator of savings so critical to the government’s financial health.

As the owner of LIC, the government may want to revisit the objectives laid down for the corporation. It says “Bear in mind, in the investment of funds, the primary obligation to its policy holders whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return.”

Finally, it pays to remember that short-term tactics impose strategic costs.

Shankkar Aiyar, political-economy analyst and Visiting Fellow at IDFC Institute, is the author of Aadhaar: A Biometric History of India’s 12-Digit Revolution; and Accidental India.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.