As government officials, bankers and the Reserve Bank of India (RBI) dither over how to resolve the colossal stock of Rs7 trillion worth of bad loans that banks have piled up, it would do well to take a closer look at the books of the largest insurer, Life Insurance Corporation of India (LIC).
Though LIC may not be in the lending business, it sure is a big source of funds for private sector companies because the insurance behemoth picks up debentures and bonds from the corporate bond market, besides holding equity stakes in many firms. It has an investible surplus that could potentially finance the government’s market borrowing for a year.
LIC had a debt portfolio of over Rs3.7 trillion as of March 2016 that includes investments in bonds, debentures as well as loans against policies. The insurer has a loan book amounting to Rs1.04 trillion of which a lion’s share is secured loans against policies.
Recall that banks’ bad loan stock as well as provisions saw the biggest jump in the March quarter after RBI’s asset quality review mandated lenders to recognize every possible errant borrower and provide for the same. The rise in LIC’s bad assets began thereafter.
Firstly, LIC’s public disclosures of non-performing debt under its various funds that invest the money collected from linked, non-linked and pension schemes show that non-performing assets (NPAs) stood at Rs19,904.49 crore as of end-December. LIC’s non-performing debt has increased 40% in the three quarters following the massive NPA recognition exercise by banks that RBI mandated.
Secondly, the insurer’s gross bad loans as a percentage of its debt portfolio stand at 5.19%, a sharp increase from 3.76% as of March 2016.
At first glance, LIC’s NPAs don’t look large compared to a similar large balance sheet sized State Bank of India’s toxic loan pile. Further, the source of the insurer’s stress is from the same companies that are NPAs in banks’ books. What is worrisome is that the increase in LIC’s bad assets follows that of banks.
One explanation could be that in distressed times, companies tend to skip loan repayments first. Given that instances of companies defaulting on coupon payments is rare and more difficult than missing out on loan instalments, the insurer has escaped a heavy toll on its bond book.
LIC has to make mandatory investments in the infrastructure sector, the largest contributor to bad loans of banks in fiscal year 2016. The stress from here continues to rise in the current fiscal year and so do the bad loans of banks. The jury is still out as to whether LIC’s bad debts will also rise.