In a deft move, the government has found the beleaguered IDBI Bank a new owner. Life Insurance Corporation of India (LIC) is all set to become the majority owner of what was one among the few haloed institutions entrusted with fostering industrial development in the country. What this does is spare the government from contributing towards the present and future capital needs of the bank. This now becomes the responsibility of the country’s largest and state-owned life insurer.
While we don’t know if IDBI Bank will remain listed following this acquisition (given that public holding is down to about 5.5 percent), and therefore available for public scrutiny, concerns remain that the bank may end up like IL&FS and prove a drain on the assets and finances of LIC.
Lest We Forget
The life insurer has clearly not covered itself in glory in the case of IL&FS, where its oversight through the board has clearly been found lacking. Else, why would IL&FS be where it is today?
The infrastructure financier had a professional management team to run the day-to-day operations. But were they being held accountable by the board and was the board supervision strong enough? Clearly not.
One doesn’t know whether board members were complicit (if irregularities are revealed), ignorant or clearly incapable of supervising an institution of this nature. Either way, this doesn’t inspire much confidence when looking at the future of IDBI Bank.
For those who might argue that IDBI Bank unlike IL&FS will be a subsidiary, the point to note is that even a subsidiary of the insurer—though not struggling with liquidity issues or bad assets—has clearly not delivered to potential. While its loan book size is 45 percent of HDFC’s, its annual profits are only 16 percent of the private home financiers—clearly captured in NIMs of 2.5 percent vs 4 percent and RoAAs of 1.3 percent vs 2.4 percent.
Drawing lessons from the approach to IL&FS being undertaken by the government today, one would suggest using an approach that will ensure a different outcome for all stakeholders of the bank: constitute a new board of eminent independent professionals (some with banking sector experience) to provide adequate supervision along the nominees of the life insurer.
Deliverables With Deadlines
Next, set a clear agenda on deliverables with timelines for the new management team—to be selected by the board with professionals from the private and public sector eligible to apply—and offer incentives in terms of monetary rewards or stock options to key members for meeting or beating the targets.
In the age of private equity and venture financing, LIC should see its role as that of an investor and custodian that is providing oversight through the board of the bank with a view to exiting the business with gains in 5-7 years through the public or private route. This will not just give confidence to the market in IDBI Bank but also give confidence to the policyholders of the life insurer—who do take some comfort from the sovereign backing.
If we don’t wish history should repeat itself, we should do now what we might need to do again in the future. That will clearly demonstrate that we are learning from past lessons.
First Published: Oct 8, 2018 9:22 AM IST
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