In the first month of my first job, my father called our family LIC agent in order to open a life insurance scheme on my name. As per the scheme, I'd have to make quarterly deposits of a little over Rs 4,000 for a period of 15 years. I have religiously made these payments the past 10 years, but never on time. After the 15-year period, I am supposed to get a few lakhs, I am not aware of the exact figure. Usually, the LIC agent, a Bengali man with a thick accent, calls me to remind me of the payments. He tells me the amount due and checks if I am available at home for him to visit and collect the money. I meet him on a weekend, express my frustration over the scheme not getting over and pay him the money. Also, every few months, my father reprimands me for missing the LIC payments. Quite obviously, the LIC agent's loyalties lie with my father.
For middle class Indian families, LIC is more than just a savings scheme, it's a way of life. It's almost symbolic of discipline, austerity, patience and growth. My father and his friends were able to build their houses thanks to years of savings in the LIC. As for my generation, at the end of every financial year, my friends and I rue over the hassle of making investment declaration to save taxes. The tax exemption that the LIC schemes get under Section 80 C is a sword of defiance that the salaried class can wield against the government as they take away our money every month before it hits our account. So, it's not surprising that the middle class is suspicious when the government considers to use the LIC money to rescue a bank - which finds itself in trouble due to unchecked lending to the business class.
It can be argued that the the Life Insurance Corporation (LIC) is strong enough to be able to absorb IDBI's losses as it prepares to buy majority stake in the state-run bank. LIC has seen strong profit booking in recent years from its equity investments. In fact, it already owns 10 per cent in the IDBI bank. To acquire another 41 per cent it will have to shell out Rs 9,408 crore. But, it's the bad debts of the IDBI that can hurt LIC. IDBI has gross non-performing assets of Rs 55,588 crore and outstanding loans of close to Rs 2 lakh crore. A significant amount of the outstanding loans can also turn into NPAs in the coming months. Earlier this year, the RBI had put IDBI under Prompt Corrective Action (PCA) stopping it from further expansion and restricting loan disbursements. The government is desperately looking at the LIC to clean the mess in IDBI Bank. It's essentially a case of an elder brother in the family looking out for the younger one. In business parlance, it's picking the eggs from one basket and putting it in another.
Bigger companies buy poor-performing entities when they see merit. Tata Steel and Vedanta's recent acquisition of Bhushan Steel and Electrosteel Steel respectively under the Insolvency and Bankruptcy Code (IBC) are the latest examples. It's possible LIC may be able to turnaround IDBI from a debt-laden bank to a highly profitable financial institution in the years ahead. But, fortunately or unfortunately, in the case of LIC, there's a huge public sentiment attached. There's a growing curiosity and fear if the deal with IDBI Bank is going to put the public's money at risk. This also comes in the heels of the Financial Resolution and Deposit Insurance (FRDI) Bill which stoked fear in the public that their deposits wouldn't be safe in banks in future. Public distrust in financial institutions is at an all time high. Moreover, as the spotlight falls on the mess in IDBI Bank, the deal may become difficult for the government to execute.
The top willful defaulters of the IDBI include fugitive liquor barron Vijay Mallya who owes the bank Rs 900 crore. If IDBI gets enough attention, the narrative could very easily change to the public's money getting utilised on a bank that was careless in giving loans to Vijay Mallya's Kingfisher Airlines. Even though Mallya can't be blamed alone for the total NPAs, yet his name can be enough provocation for the Indian middle class and good fodder for the opposition to criticise the government. In the case of LIC, the debate may not stay limited to economics and business. It's going to be seen as the government using middle class' hard-earned money to rescue a bank that helps crony capitalists.
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