Public sector insurer Life Insurance Corporation has sold equities worth Rs 12,000 crore in the past month amid reports that it plans to raise stake in the ailing lender IDBI Bank. LIC already owns 10.82% of IDBI Bank and plans to buy another 41% equity for Rs 9,408 crore.
The Rs 12,000-crore share sale was aimed at arranging funds for the acquisition of the public sector lender, according to an Economic Times report.
Share sale and purchase of beaten down stocks such as that of IDBI Bank by the insurer is a part of long-term strategy to reap huge gains when the fortunes of public sector banks revive in the future, the report added.
The insurer mostly puts money in blue chip stocks.
Anticipating correction in the equity market, the insurer has earned profit by selling large parts of its holdings.
It may use monthly premium inflows to invest either in high-yield debt papers or value buying in stocks when it anticipates a rise in market.
LIC normally holds securities for not less than 10 years as it is a long-term investor.
Its profits have been rising. In last financial year, the institutional investor earned Rs 25,000 crore profit through sale of equities.
In 2016-17, its profit stood at Rs 19,000 crore compared with Rs 11,000 crore in 2015-16.
But LIC's move to acquire controlling stake in IDBI Bank could dent the insurer's profitability.
The bank has the highest gross non-performing assets (27.95 pc) as a percentage of total loans among all public sector banks. It has accumulated losses of over Rs 17,000 crore. IDBI Bank has reported losses of Rs 8,237.92 crore in FY 18, Rs 5,158.14 crore in FY 17 and Rs 3,664.80 crore FY16.
IDBI Bank is already under banking regulator RBI's prompt corrective action (PCA), which restricts the bank's ability to expand loan business; requires it to shed non-core business and focus on returning to profitability by cutting expenses.
IDBI Bank will be a burden on LIC for other reasons as well. Out of its total outstanding loans of Rs 1.99 lakh crore, it already has recognised gross NPAs worth Rs 55,588 crore while it has already provisioned for NPAs worth Rs 26,902 crore. With such high NPAs, the health of its other loan outstanding is also being questioned.
Recovery rate in NPAs is between 15-50% only, a majority of them on the lower side of the spectrum. More NPAs will be bigger headache for LIC, which will have to provide for capital erosion as its majority shareholder.