BackHas LIC become the lender of last resort?
LIC is now the most sought-after lender by the govt across sectors, but is its increasing exposure a good thing?
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Economics textbooks may tell you that the Reserve Bank of India is known as the lender of last resort, but of late it is the Life Insurance Corporation of India (LIC) that is assuming this role.
With its huge corpus of funds, state-owned LIC is the most sought-after lender by the government across sectors—be it for extending soft loans to the railways, subscribing to the power sector’s Ujwal Discom Assurance Yojana (UDAY) bonds, investing in the National Investment and Infrastructure Fund (NIIF) or capitalizing state-run banks, besides actively participating in the government’s disinvestment agenda.
With assets of ₹ 20 trillion and long-term funds from policyholders, it is among the best equipped to lend long term, and hence, not surprisingly, the government’s preferred lender.
But is this a good or a bad thing? Especially since the exposure of the life insurer to government and other state-owned undertakings is increasing rapidly.
Last month, Mint reported that the government asked LIC to invest 10% in the NIIF—a quasi-sovereign fund envisaged to fund India’s infrastructure requirements. With the total corpus pegged at ₹ 40,000 crore, LIC’s investment would be around ₹ 4,000 crore.
This, despite the fact that the government had initially ruled out LIC to ensure its portfolio remains balanced. In an interview in April, Shaktikanta Das, secretary, department of economic affairs, said as much.
“LIC has already committed to railways. We don’t want to create an excess government-related liability for LIC. LIC also has a commitment to its policyholders. They should do a good mix of investments," he had said.
What explains the rethink? A logical explanation is tepid response from foreign investors. More than a year after announcing this fund, the government has received only few expressions of interest, signing three memorandums of understanding (MoUs)—with Qatar Investment Authority, Abu Dhabi Investment Authority and Rusnano—so far.
The life insurer also bought part of the UDAY bonds issued by state governments as part of the bailout package for debt-ridden state power utilities designed by the central government. LIC bought bonds amounting to ₹ 4,200 crore last fiscal, as per government data.
Similarly, last year, LIC also committed to invest upto ₹ 1.5 trillion in the railways over a period of five years, till 2020, by subscribing to bonds issued by the railways.
Railways minister Suresh Prabhu had termed the arrangement ‘attractive’, as the interest rates will be around the prevailing government security rates and the loan will available in tranches.
The roads ministry is also seeking a similar arrangement with LIC to fund its highway development programme.
LIC has also stepped up its fiscal relations with state-run banks. In 2015-16, state-owned banks launched 26 bond issues, raising ₹ 29,165 crore, of which LIC bought bonds worth at least ₹ 8,000 crore. Further, LIC invested close to ₹ 5,000 crore in banking equity in 2015-16. Part of this borrowing happened in the January-March quarter, when public sector banks were scrambling to raise capital, Mint reported in April.
It has also been one of the major subscriber of shares in the government’s divestment programme, picking up more than 50% of the shares offered in most of the issuances last fiscal.
Officially LIC is mum, not responding till Wednesday to an email sent on 30 May.
However, a person familiar with LIC’s decisions who did not wish to be identified denied it was doing the government’s bidding.
“This still could have held true in some sense when LIC was not under a regulatory regime. But now LIC is under IRDAI (Insurance Regulatory and Development Authority of India), it conducts required audits and regulatory inspections. So, the factual story of LIC is quite different and all of LIC’s activities are within the regulations."
“As far as UDAY bond is concerned, it is like a state development loan and nothing else. Additionally, such issuances are done in accordance with the new regime of FRBM Act, which state that the budget deficit of any state cannot exceed 3.5% if they are raising money through such bonds. So for LIC, this investment is nothing but a state development loan, which falls within the regulatory norms that allow LIC a 25% net accretion to the fund," the person said.
FRBM Act refers to the Fiscal Responsibility and Budget Management Act.
The person also defended the life insurer’s investment commitment in railways.
“LIC has just signed an MoU with the railway ministry that LIC may invest up to a maximum of ₹ 1.5 trillion in five years on the condition that the investment fits into the existing exposure norms of IRDAI and if the securities issued carry good credit ratings and are sufficiently capable of generating good returns."
The same person clarified that in any one year, LIC’s investments in the railways will not exceed ₹ 30,000 crore and its investments would take place if it is convinced after vetting the risks.
J.N. Gupta, managing director, Stakeholders Empowerment Services, a proxy advisory firm, said that protecting policyholders’ interests should be the main priority.
“Where is the independence of LIC? If it is independent, why does it bail out the government through investments in bonds, equity or infra funds? Interest of the policyholders is key. They should get the best returns for their money. The functioning and investment decisions should be independent and not prompted by the government. But as long as LIC’s investments are in the interest of the policyholders, one cannot question those investments," he said.
“For instance, LIC picking up non-voting shares in banks at a price which was not discounted is not fair to the policyholders. In state-run banks, the voting rights are capped at 10%. So, in instances where LIC picked up more than 10% stake in state-run banks and is not getting voting rights, one can question why LIC did not purchase these shares at a discounted price," he added.
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