<p class="title rtejustify">It is difficult to justify the government’s decision to ask LIC to buy a controlling stake in IDBI Bank. All that it will do for the government is marginally lower the massive recapitalisation bill it has to foot for troubled public sector banks. As against this, the government will not just set a bad precedent in terms of short-termism, the move will do nothing to address the fundamental problems afflicting the banks. Without that, bad debts will return to haunt them and the government will have a fresh recapitalisation bill slapped on it before too long.</p>.<p class="bodytext rtejustify">LIC’s foremost stakeholders are its policyholders, and its primary concern should be their interest. LIC, like any life assurance company, covers life risk, but citizens have also looked at taking out an LIC policy as a means of compulsory saving. LIC has thus helped the government raise the national savings rate. It is therefore almost a sacred duty of the government to ensure that LIC maximises the return that policyholders get on their implicit savings. This, it does through ‘with profit’ and ‘endowment’ policies which LIC has marketed aggressively all along. After balancing assets and liabilities (the cost of covering life risk), LIC is left with a surplus which it invests judiciously in order to maximise returns. Bonus is declared for payment out of this return. To get LIC to invest in a virtual lost cause like IBDI Bank is to lower the bonus that policyholders would otherwise get. </p>.<p class="bodytext rtejustify">It would have been another matter if there was a reasonable chance of IDBI Bank turning the corner and becoming profitable one day. With its non-performing assets standing at a colossal 28%, the highest among public sector banks, it is really the sickest among them. Even if a miracle is achieved in turning it around, the chances of LIC ever earning a reasonable return on its investment are remote. What is worse, neither LIC nor the government has a clear idea on how to run public sector banks professionally so that they cease to be loss-making. The NDA government in its early days had set up the Banks Board Bureau under former CAG Vinod Rai to lay down a roadmap for just this. But the government failed to heed its recommendations. LIC is not a cash cow for the government to milk to take care of troubled public sector banks while minimising the burden that this will impose on the fiscal balance. Getting LIC to buy junk in the form of IDBI Bank with policyholders’ money is short-sighted and worse. LIC must be allowed to function autonomously and make the best investments with policyholders’ money.</p>
<p class="title rtejustify">It is difficult to justify the government’s decision to ask LIC to buy a controlling stake in IDBI Bank. All that it will do for the government is marginally lower the massive recapitalisation bill it has to foot for troubled public sector banks. As against this, the government will not just set a bad precedent in terms of short-termism, the move will do nothing to address the fundamental problems afflicting the banks. Without that, bad debts will return to haunt them and the government will have a fresh recapitalisation bill slapped on it before too long.</p>.<p class="bodytext rtejustify">LIC’s foremost stakeholders are its policyholders, and its primary concern should be their interest. LIC, like any life assurance company, covers life risk, but citizens have also looked at taking out an LIC policy as a means of compulsory saving. LIC has thus helped the government raise the national savings rate. It is therefore almost a sacred duty of the government to ensure that LIC maximises the return that policyholders get on their implicit savings. This, it does through ‘with profit’ and ‘endowment’ policies which LIC has marketed aggressively all along. After balancing assets and liabilities (the cost of covering life risk), LIC is left with a surplus which it invests judiciously in order to maximise returns. Bonus is declared for payment out of this return. To get LIC to invest in a virtual lost cause like IBDI Bank is to lower the bonus that policyholders would otherwise get. </p>.<p class="bodytext rtejustify">It would have been another matter if there was a reasonable chance of IDBI Bank turning the corner and becoming profitable one day. With its non-performing assets standing at a colossal 28%, the highest among public sector banks, it is really the sickest among them. Even if a miracle is achieved in turning it around, the chances of LIC ever earning a reasonable return on its investment are remote. What is worse, neither LIC nor the government has a clear idea on how to run public sector banks professionally so that they cease to be loss-making. The NDA government in its early days had set up the Banks Board Bureau under former CAG Vinod Rai to lay down a roadmap for just this. But the government failed to heed its recommendations. LIC is not a cash cow for the government to milk to take care of troubled public sector banks while minimising the burden that this will impose on the fiscal balance. Getting LIC to buy junk in the form of IDBI Bank with policyholders’ money is short-sighted and worse. LIC must be allowed to function autonomously and make the best investments with policyholders’ money.</p>
