Editorial.
State owned Life insurer LIC is on its way to buying a majority
stake in public sector IDBI Bank. Insurance regulator IRDA has stepped in line, waiving a regulatory ceiling of 15% investment in a company
by a life insurer. IDBI is perhaps the worst affected of the banks
struggling to deal with mounting bad loans. But LIC's decision to pick up majority stake by buying out government holdings is hardly the best way to deal with the situation.
LIC is a behemoth, the dominant life insurer with extensive
financial investments. It holds a stake in over 20 banks and has board positions in some. By increasing its stake in IDBI, where total bad loans as a percentage of advances are 27.95% ( compared to an average of 15.6% for public sector banks ), it raises many questions.
One,this leads to a concentration of risk in the system.
Two, it is unclear how LIC is going to contribute to the betterment of IDBI Bank's governance which is a prerequisite for better performance.
Three, this and similar investments could undermine bonuses for LIC's
policyholders.
Even if LIC claims its decisions are taken independently, there is
abiding suspicion that government's fiscal constraints influence it.
This leads to the likelihood that LIC's decisions add to the crowding
out effect , particularly when there are signs that private investment
demand may have begun to revive. Therefore, LIC buying a majority
stake has notable downsides, including undermining credibility of
regulators on account of the need to provide exemptions. The current
situation stems from conflicts of interest at play when government is an owner, law maker and also overseer of regulators. There needs to be a road map for government to exit banks.
( The Times of India, Chennai, Tuesday, July 3, 2018 )
Courtesy : MPS
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