Behind LIC’s plan to pull IDBI out of a banking mess


New Delhi: India’s insurance regulator on Friday gave an unprecedented go-ahead to the Life Insurance Corporation of India’s proposal to take over IDBI NSE 10.13 % Bank and rescue it from a crippling crisis caused by massive rise in bad loans.

The board of Insurance Regulatory and Development Authority of India (Irdai), which met in Hyderabad on Friday, okayed LIC’s investment proposal as a special case due to IDBI Bank’s precarious financial position. The Mumbai-based lender has the highest bad loans in the industry at nearly 28% of total advances and posted aloss of Rs 5,663 crore last year. IDBI Bank’s shares jumped on the news and the impending capital infusion, which may be worth more than Rs 9,000 crore in one or more tranches. This will provide a breather to the bank and give it the means to address some of its biggest problems.“The Irdai board on Friday allowed LIC to buy out 51% stake in IDBI Bank,” said a member of the board who did not want to be identified.

“LIC will have to sell it in the future and bring it down to the regulatory requirement of 15%.” This could mean LIC would have to start cutting its stake from 51% in the next few years and bring it on par with norms for other insurers. This is the first time that the insurance regulator has eased its investment rules to such an extent. The Insurance Regulatory and Development Authority (Investment) (Fifth Amendment) Regulations, 2013 allows insurers with assets of over Rs 2.5 lakh crore to buy up to 15% equity in a company.

Under special provisions, LIC can hold up to 30% with the approval of the government, investment committee and the regulator. The proposal also goes against LIC’s own investment mandates, which prevents it from taking over any business. The fact that it went through could be due to IDBI Bank’s desperate financial situation and the government’s desire to make LIC provide funds so that it doesn’t have to do so.