Jaws, the 1975 Steven Spielberg movie, a team goes hunting for the infamous white shark in the hunting vessel named “The Ocra”, with no real estimation of the size of the shark. When the character played by Roy Schneider sights the shark, he delivered one of the iconic one-liners in movies: “ You’re Gonna Need a Bigger Boat”.
This line pretty much can be applicable to any situation where there is lack of estimation of the problem being sought to be solved. Going on road trip and the family has overpacked? “You’re gonna need a bigger boat”. Trying to solve a problem of repeated higher NPAs and constant erosion of statutory ratios by one of the largest financial institutions in India – namely IDBI - “You’re gonna need a bigger boat”!
The central government is presently contemplating, and most probably will proceed on the basis that the Life Insurance Corporation (LIC) would be the boat that can carry IDBI by undertaking a one-time infusion presently estimated at Rs 100 billion (i.e. Rs. 1 lakh crore) on the assumption that a 40% equity stake would solve the problem.
Absorbing An Illness Called NPA
Apart from the basic flaw in treating the LIC as a piggybank, the idea has wider repercussions of spreading the contagion of NPAs into the largest life insurance company. LIC’s funds are insurance for vast majority of Indians. This is not dealing with the money of taxpayers. This is dealing with insurance cover and life savings aggregating to a one-time full risk equity infusion of Rs 1 lakh crore obtained from the majority of Indians. It’s a gamble that should not be permitted.
There are supposed to be regulatory checks to prevent such type of actions, which presently rests with Insurance Regulatory Development Authority (IRDA). It is assumed that IRDA would approve an exemption to the single entity exposure for this infusion.
IRDA must not approve the exposure.
Although LIC has a balance sheet (as of March 31, 2017) of Rs 2529146,66,90,000, and that certainly looks like a googolplex level of figure, it is not when this is seen in light of the fact that this entire amount represents policy holders’ funds. LIC has no borrowings — it is just that vast numbers Indians have trusted their savings with it.
Compared with the size of the single equity infusion being considered, namely Rs 1 lakh crore (i.e. Rs. 1,00,000,00,00,000), LIC’s net current assets were only Rs 94,618,32,88,000 (as of March 31, 2017), which is a reduction from Rs 106265,25,46,000 as of March 31, 2016. Net current assets is a rough and ready indication of the short-term financial health of an entity.
An injection of Rs 1 lakh crore into IDBI, which is an entity that has an unquantifiable level of NPAs, will not be advisable. It was only in March 2018 that IDBI was fined Rs 3 crore by the RBI for not reporting NPAs. This is after reporting a staggering increase in level of NPAs from last year. Thus, the entire equity funding being provided only by raiding the LIC coffers, is not advisable. Not that it cannot be done, but that it should not be done.
IDBI is a black box. Its balance sheet had been cleaned by government intervention just about twenty years ago and the government completed the capital infusion of Rs 10,610 crore in FY-18 aimed at meeting the minimum common equity tier (CET) 1 and Tier 1 capital norms. The declared gross NPA provisioning as of March 31, 2018 of IDBI stood at Rs. 2,69,02,08,00,000 and was provided with a gross NPA to gross advances ratio of 27.95%. Gross NPAs are at Rs. 5,55,88,24,00,000.
The reported road map for recovery trickling down seems to indicate a heavy reliance on the real estate holdings of IDBI in Mumbai. However, that cannot be a long-term plan as such large volume of real estate being made available immediately will only supress the value, and) real estate holdings can support a wider restructuring.
Options Left Regarding IDBI – Building the Bigger Boat Viewing IDBI’s problem as one that can be absorbed and covered by LIC alone will be equivalent to knowingly injecting a virus into an otherwise reasonably stable body. The contagion will only spread into LIC, which should not be done.
A quick look at its March 31, 2018 disclosures indicate that IDBI has 24.78% gross credit exposure to the Infrastructure Sector, its largest to an industry. The next industry to which IDBI has exposure is the comparatively stable housing loans sector amounting to 9.75%, followed by basic metals and metal products amounting to 7.94%.
The instinct to raid IDBI for its real estate assets has to be avoided.
The housing loan portfolio should be valued and assigned to other institutions and securitsation of loan portfolios should be immediately undertaken.
Instead of seeking the fund infusion only from LIC, the government should consider the option of government guaranteed tax-free bonds that are subscribed by entities across the spectrum of profitable PSUs. Such government guaranteed tax-free bonds will incite interest across the financial sector and attract a raft of investors. This will provide a bigger boat to carry the required infusion.
IDBI then should be immediately de-merged and restructured and its various loan exposures sold and pared down. Restructuring of loan portfolio and its immediate monetisation through issuance of securitised instruments by undertaking specific securitisation transactions whereby suitable portfolios of stable and weak loans are bundled and transferred to some trust/securitisation entities should be immediately undertaken.
Need to Revive Infrastructure Sector to Bring IDBI into long-term health
The exposure to the infrastructure sector of 24.78% and the state of IDBI has an obvious co-relation. There has been no major policy push in the infrastructure sector other than the extremely limited sector of solar energy and roads. The government needs to necessarily review the policies needed to revive various stagnant structures to enable better value to be obtained through the IBC process for NPAs in infrastructure sector. The energy sector, long neglected by the present government, must be revived and supported with the required policy initiatives.
Piyush Joshi, Partner, Clarus Law Associates, specialises in Energy, Infrastructure Projects and Project Financing.