Employee unions in the insurance and banking sectors have written to the Finance Ministry protesting LIC's investment in IDBI Bank, arguing that a stake increase will not give any returns to the insurance company because of the high proportion of bad loans in the lender's portfolio.
On 29 June, the IRDAI permitted LIC to increase its stake in the ailing state-owned IDBI Bank from the current 10.8% to up to 51%.
“We are opposing (the stake buy) because the kind of non-performing assets (NPAs) the bank has, LIC will be using policyholders’ money to clean that up. More so, it may not be able to use IDBI Bank’s real estate,” said Rajesh Kumar, General Secretary, All India LIC Employees Federation.
Vithal Koteswara Rao, General Secretary of the All India IDBI Officers' Association, said, “On 14 July, we plan a dharna (demonstration) at several state capitals organised by the coordination committee of various unions of banking and insurance sector…Also, in the next 30 days, we would see more strike and non-strike actions.”
According to him, “This is an indirect privatisation. For now, LIC will invest the capital, later its stake will be sold to a private player and in between, there is a threat that LIC may lose money given the huge bad loans of the bank. There is every possibility of not getting returns.”
IDBI Bank's total non-performing assets (NPAs) deteriorated at the end of March to 27.95% of its total loans as compared to 21.25% a year earlier, reports Moneycontrol.
Last May, IDBI Bank became the first lender to be put under the Reserve Bank of India's revised prompt corrective action (PCA) for its high non-performing assets and negative return on assets. Further, the lender has made losses for three consecutive fiscal years.
Mr CH Venkatachalam General Secretary of All India Bank Employees’ Association, said, “Though this will be huge savings for the government, policyholders will bear the cost. It is a bad investment for LIC."
While the timeline of the deal has not been announced, sources close to the development told Moneycontrol the process will be completed in six to eight months. After IRDAI approval, the deal also needs a nod from Reserve Bank of India, and IDBI Bank an exemption from Securities and Exchanges Board of India for the open offer.
The life insurance company will stay invested for at least 8-10 years before cutting its shareholding to 15% which is the maximum permissible shareholding limit in a single company by an insurer. Though it is unclear how IDBI Bank will function with LIC as its largest shareholder, sources said the LIC network could be used for selling the products and services of the bank.