Life Insurance Corporation of India (LIC), the country’s largest insurance entity, has come to the rescue on numerous occasions when banks were in need of capital. In the last four years, LIC has invested nearly Rs.13,600 crore in Indian banks, mostly government-owned, by way of preferential allotment of equity shares, data collated by Prime Database show.
Public Sector Banks (PSBs) often knock on LIC’s door for funds when facing huge capital needs due to the mounting pressure of bad loans as well as to comply with the Basel-III requirements (a global regulatory framework for banks’ capital adequacy). Banks have to set aside more capital if loans turn non-performing.
Data show that some government-owned banks like Bank of India, Bank of Baroda, Punjab National Bank (PNB) and Canara Bank have raised more than Rs.1,000 crore in a single tranche by allotting shares to LIC.
In March 2012, Bank of Baroda raised Rs.1,644.69 crore by allotting 1.96 crore shares at Rs.840.10 per share. Its shares are currently trading at Rs.152.90.
Similarly, PNB raised Rs.1,589.91 crore from LIC in March 2012 by issuing shares on a preferential basis at a price of Rs 1,003.69. PNB shares are currently trading at Rs.82.85.
Market participants say that LIC is often referred to as the ‘white knight’ of the government and has come to the rescue on various occasions, including helping the government meet its divestment target in the past.
Long-term returns are what LIC typically looks at while investing, they say. “The government is concerned with the asset quality of banks and wants to capitalise them but cannot do it alone and hence, LIC’s help is sought,” says Sanjiv Bhasin, executive vice-president, Markets & Corporate Affairs, IIFL, a leading domestic brokerage. “One may feel that these are not good bets given the current environment. But LIC is a long-term investor in a true sense and is not looking at returns in the next few quarters. Once the asset quality improves, these bets would yield good returns.”
While the government has committed to infuse Rs 70,000 crore in PSBs over four years (2015-16 to 2018-19) that sum is seen as inadequate. Government estimates suggest these banks will need Rs. 2.4 lakh crore by 2018 to meet the Basel-III norms.
Incidentally, the Reserve Bank of India (RBI) is not comfortable with LIC having high stakes in several banks, as it is concerned about contagion risk. The insurance behemoth, however, has maintained that its investments are within the norms prescribed by law. Corporation Bank, in its latest shareholding information disclosed to BSE, pegs LIC’s stake at 21.22 per cent.
