By Ruma Dubey
Last year, the Deputy Governor of RBI had warned that there is a contagion risk because of Life Insurance Corporation’s (LIC) high exposure to public sector banks (PSUs). And a year later as we look at one PSU bank after the other, reporting dismal performance, posting life-time losses with gargantuan provisions for NPAs, we cannot help but wonder about the logic behind LIC’s such exposure to PSU banks.
And we are not talking about small stake here. After the Government of India, LIC is the second largest shareholder in these PSU banks. The Deputy Governor said that LIC, on an average holds 9.21% stake in Indian banks, including private sector banks. The same warning in different tones had come from CRISIL and Moody’s too. This is what the Deputy Governor was trying to do – connect the dots and the picture which emerged, was not just a bad state of the already beleaguered banking sector but LIC, the Govt’s mulch cow also facing consequences. And what was its fault? It poured money into banks, surely at the behest of the Govt even when it knew that things were not good. The Govt as such always treats LIC as its personal ATM – any crisis, bank on good ole’ LIC to bail them out. That is what LIC has always done – be the knight in the shining armour. But the Govt has probably over extended this armour and now LIC could get hurt. Take a look at the table given below – despite knowing the state of these banks, LIC has hiked stakes in some of the banks. At a time when even those with basic common sense were keeping away from these banks, LIC went ahead and increased its exposure. Is that prudent?
And if LIC gets hurt, the ramifications go right down to the lakhs of policy holders of LIC. How? When the investment it has made in these PSU banks runs into a loss, there will be erosion in the NAV of LIC. The money it uses to buy all this equity is obviously what it gets from the policy holders and this means, the capability of LIC to serve the policy holders will be compromised.
The contagion does not end there. It could have ramifications on the markets too. Suppose LIC see’s that its investment is making losses, to cut the losses, it could go on a selling spree on these shares. And that, will not be good for the markets.
Over and above all this, what one needs to question is the capability of the banks. Why the need to always tap into LIC for funds? Because of poor valuations or the knowledge that no one else will bite the bait.
So if they know this, banks should ideally work on improving the balance sheet but what they do – they create more NPAs knowing fully well that LIC will bail them out. This is a bad habit created by the Govt and it would be very difficult to break it, unless of course, LIC for once, puts its foot down and says, “NO!” And if at all LIC says no, won’t that affect the financial stability of the banks?
Well, LIC does not have that prerogative to choose – it has to invest when the order comes. Maybe LIC will use this opportunity when the chips are down to hike its stake further? Banks are clearing up their books and surely by the end of this fiscal, FY17, we could see leaner and much better banks. Is that LIC is banking upon – buy when others are selling?