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Throwing good money after bad
Handing over IDBI Bank to the LIC is a bad idea which will short-change the life insurer’s policy-holders
Going against the grain of advice offered by experts in governance and the financial sector, the government seems ready to hand over the effective control and ownership of IDBI Bank to the Life Insurance Corporation of India. With the insurance regulator approving LIC’s request to up its holding in the bank to 51 per cent, it is only a matter of time before the LIC board approves the proposal and the banking regulator Reserve Bank of India adds its consent.
With this fait accompli (a thing that has already happened or been decided before those affected hear about it, leaving them with no option but to accept it) before us, it is important to gauge (estimate or determine) what has made the government go for an action that flies against good sense. This will help understand not just the compulsions that come into play in an election year but the way the government works.
IDBI Bank, with the highest level of gross NPAs (non-performing assets) at 28 per cent among all public sector banks and under the “prompt and corrective action” regimen of the RBI, is an entity that can be said to be in intensive care. It is a dud (not working or meeting the standards) asset which will make its new owner, LIC, bleed by having to recapitalise it so as to provide for the bad loans, let it meet capital adequacy norms and let it have enough capital to undertake new lending as and when the RBI allows it.
Investing in IDBI Bank will mean throwing good money after bad (to spend more money on something problematic that one has already spent money on, in the hope of fixing it or recouping one’s original investment) and made worse by the fact that the money (thousands of crores) will come not from LIC’s minuscule (extremely small) share capital but ultimately the premium paid by policy holders. This will result in lowering the surplus that LIC would have otherwise generated and end up in lower bonus being distributed to policy holders. If policy holders had any voice they would have surely opposed it.
Not to speak of the intrinsic (essential) rights of policy holders, LIC is also not a listed company. Hence shareholders, particularly minority shareholders, have no role in influencing governance practices in the company. Naturally, the role played by proxy advisory firms in the case of listed companies to ensure that minority shareholders are not duped (deceived) goes by default.
Looking after policy-holders
There is thus no institutional set-up to specifically look after the interests of policy holders. This is doubly regrettable because in India the middle class and those graduating into it look at a life assurance policy not just to cover life risk but also as a means of compulsory savings. The clear aim of LIC should be to maximise the bonus which comes out of the income from the investments LIC makes from the surplus funds at its disposal after providing for liabilities.
The one and only reason why the government is going in for transferring control of IDBI Bank to LIC is a purely short-term one — reducing the recapitalising bill that the government has to foot as the mountainous bad loans of public sector banks are provided for, their capital adequacy restored and enough capital is available for them to resume lending and grow healthily. Though not having to fend for (take care of) IDBI Bank will reduce the fiscal burden on the government only marginally – the attitude seems to be that “every bit helps”.
This government attitude is particularly intriguing (fascinating) as the fiscal situation in the current financial year is running along correct lines. The fiscal deficit in relation to the target laid down in the Budget for the whole year is lower than what is was at this time (end May) last year, capital investment is up and revenue expenditure is down. Thus the government is not under any acutefiscal pressure.
If there is no immediate and serious fiscal problem in sight what is the need for an action which does no good to the key LIC stakeholder, the policy holder? At the present juncture (a particular point in events or time) the ruling political leadership seems to be preoccupied in key electoral issues. Hence we see a logical focus on areas like support price for farmers, a muscular stand towards Pakistan and a similar tough approach in Kashmir which eschews (to avoid something intentionally) the path of dialogue. The rest of the business is presumably left in the hands of the mandarins (someone who has an important job in the Civil Service) — civil servants and government economists.
Source – The Hindu BusinessLine
1. Fait Accompli (Noun) – A thing that has already happened or been decided before those affected hear about it, leaving them with no option but to accept it (किया हुआ बात)
Synonyms – Done Deal, Done Deed
2. Gauge (Noun) – Estimate or determine (अनुमान)
Synonyms – Measure, Calculate, Compute, Ascertain, Count, Weigh, Quantify, Appraise, Assess, Calibrate, Guess, Quantify
3. Dud (Adjective) – Not working or meeting the standards (
Synonyms – Debacle, Flop
Antonyms – Success
4. Throwing good money after bad (Phrase) – To spend more money on something problematic that one has already spent money on, in the hope of fixing it or recouping one’s original investment
5. Minuscule (Adjective) – Extremely small
Synonyms – Tiny, Insignificant, Microscopic, Diminutive, Minute
Antonyms – Big, Enormous, Huge, Important, Large
6. Intrinsic (Adjective) – Essential
Synonyms – Elemental, Innate, Peculiar, Central, Congenital, Connate, Constitutional, Constitutive, Fundamental, Genuine, Indwelling
Antonyms – Auxiliary, Extrinsic, Inessential, Insignificant, Learned, Least, Lesser
7. Dupe (Verb) – Deceive
Synonyms – Baffle, Bamboozle, Betray, Cheat, Defraud, Delude, Hoodwink, Mislead, Swindle, Victimize
Antonyms – Aid, Assist, Honest, Help, Protect, Support, Serious
8. Fend for (Phrase) – Take care of something
9. Intriguing (Adjective) – Fascinating
Synonyms – Absorbing, Alluring, Appealing, Beguiling, Captivating, Compelling, Curious, Enthralling, Exciting, Fascinating, Gripping, Provocative, Puzzling, Riveting, Stimulating, Stirring
Antonyms – Boring, Unexciting, Unstimulating
10. Juncture (Noun) – A particular point in events or time
Synonyms – Circumstance, Condition, Contingency, Crisis, Crux, Emergency, Exigency, Instant, Moment, Occasion
Antonyms – Advantage, Blessing, Calm, Certainty, Good fortune, Peace, Solution
11. Eschews (to avoid something intentionally)
12. Mandarins (Noun) – Someone who has an important job in the Civil Service