INSUBCONTINENT EXCLUSIVE:
Rescuing a dying bank with taxpayers' money is often the only way to prevent a costlier contagion
But nursing a deposit-taking institution by tapping life-insurance premiums of policyholders That's like allowing a localized infection to
spread all over, hoping the natural immunity of an otherwise healthy body will help beat back the germs.India's plan to sell a majority
of India is not modern medicine
It's bureaucratic quackery
New Delhi hasn't found a genuine private-sector buyer for the ailing IDBI for more than two years
Hence, the stage is being cleared for state-owned LIC, the government's preferred buyer of stuff nobody wants.If LIC cares about its
fiduciary responsibility to policyholders, it will pass this one up
But then, it can never say no to New Delhi
LIC already owns about 11 percent of IDBI, thanks to its previous participation in rescue missions
The new proposal is for it to take roughly half of the government's 81 percent interest to become the majority shareholder
It could cost LIC around $3 billion to pay the government and top up IDBI's capital for one year.That's money down the drain.At more
than $8 billion, the bank's gross nonperforming assets are nearing 28 percent of the total
If all IDBI's distressed loans currently classified as standard assets have to be marked down, NPAs would rise to almost 36 percent, in
India Ratings Research Pvt.'s assessment.Suppose NPAs do go up, but only to the halfway mark of 32 percent
The math is still stark: A 70 percent loss on 32 percent of the bank's $29 billion loan book would translate to a $6.5 billion hit, of
which only about $4 billion could be absorbed by existing loan-loss provisions
The remaining $2.5 billion would wipe out IDBI's Tier 1 capital
Whatever price LIC pays for IDBI shares would be too much
Instead of buying from the government, LIC could purchase new stock in IDBI
However, that would dilute minority investors while generating zero cash for the government's stretched budget.It's hard to see how the
transaction could bolster the reputation of any of India's three financial regulators.Under pressure from the government, the insurance
regulator would have to relax the 15 percent cap on a single investment by an insurer; doing so makes sense only when there's a strong
In this case, there is none.The stock-market regulator would have to exempt LIC from making an open offer to minority shareholders -
something it has done before when it allowed state-owned Oil Natural Gas Corp
to buy New Delhi's 51 percent interest in Hindustan Petroleum Corp
But overdoing such side deals will make special situations in listed state firms worthless for minority investors, reducing the value of
future privatization transactions.The Reserve Bank of India, the banking regulator, would worry about transmitting the strain of $210
billion in soured corporate loans to the insurance industry's biggest player
The central bank would also fret about moral hazard.Alongside IDBI, 10 more Indian state-run banks (out of 21) are facing lending
restrictions under the RBI's so-called "prompt and corrective action" framework; more lenders will likely be forced to shrink
Can all of them hope to be bailed out by LIC And if after a few decades of growth, demand for life insurance in India declines as it has in
the United States , an eager-to-please LIC might itself need state funds.It's doubtful whether IDBI is even worth saving.The government
plowed $1.8 billion of taxpayers' money into the bank last fiscal year
Yet the lender's capital position is hovering alarmingly close to the minimum requirement of 7.375 percent
With losses accelerating, IDBI will need plenty more capital just to go on from one day to next
Rather than throw more good money after bad, the central bank should have been allowed to wind up IDBI
If nothing else, it would have set a good precedent
columnist covering industrial companies and financial services
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.(Except for the headline, this story has not been edited by TheIndianSubcontinent staff and is
published from a syndicated feed.)
