Sieving the Substance

The LIC–IDBI Deal

In the context of the recent deal between the Life Insurance Corporation of India and Industrial Development Bank of India, is this proposed investment prudent from its impact onLIC’s balance sheet and income prospects as well as from an average premium payers’ standpoint? A possible alternative in whichIDBI’s retail assets could have been sold to a commercial bank and the remaining project finance portfolio turned into a wholesale and long-term finance bank is discussed.

Over the last few years, the Indian financial sector had been attracting newspaper headlines perhaps for the wrong reasons. As stressed assets, that is, gross non-performing advances plus restructured standard advances, began to pile up since 2009, the government tried to initiate a number of corrective measures to rescue public sector banks. In due course of time, a number of corporates with non-performing loans approached the National Company Law Tribunal, the government infused capital into banks with stressed assets, the Insolvency and Bankruptcy Board of India (IBBI) was established, and the Central Bureau of Investigation (CBI) registered cases of corruption against some senior bankers. But, irrespective of these measures, the stressed assets to advances ratio increased from 23.9% in September 2017 to 24.8% in March 2018; and the future looks gloomy. The gross non-reforming advance of scheduled commercial banks is projected to rise from 11.6% of total advances in March 2018 to 12.2% by March 2019, as per the macro-stress tests of the Reserve Bank of India (RBI) Financial Stability Report of June 2018.

Against this background, the situation in the Industrial Development Bank of India (IDBI) had become a matter of concern in recent years. During two consecutive years, 2016–17 and 2017–18, the IDBI Bank had recorded losses of ∝51.58 billion and ∝82.38 billion, respectively. As of March 2018, the non-performing assets (NPAs) of the IDBI Bank were nearly 28% (of which 20.4% comprised of substandard assets, 75.4% doubtful assets and 4.2% loss assets).

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Updated On : 24th Aug, 2018

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