LIC drops plan to issue infra bonds worth 5,000 crore

LIC drops plan to issue infra bonds worth 5,000 crore

Mumbai: Life Insurance Corp. of India (LIC) has dropped plans to issue 5,000 crore worth of infrastructure bonds, a move that won’t help the government’s infrastructure push.

The state-owned insurer, also India’s largest financial institution and which already has a huge exposure to the infrastructure sector, is concerned that any more exposure could result in bad assets and put pressure on it as it tries to meet obligations towards policyholders.

Two persons familiar with the development said that the insurer recently decided to cancel its infra bond programme and has already informed the government. LIC, too, confirmed that it would not be going ahead with the issue.

The government has allowed several companies, including LIC, to issue tax-free infra bonds and raise money to invest in infrastructure projects. These bonds have a tenure of 10 years with a minimum lock-in period of five years and offer returns of 7-8%.

The government has made annual investments up to 20,000 in these instruments tax-free to make them attractive.

LIC’s plan was to issue bonds worth 5,000 crore, 25% of its investment in infrastructure in the preceding fiscal year. It invested around 20,000 crore in the sector in 2009-10.

Though regulations do not permit an insurer to raise capital through bonds or debt, LIC had sought special approval from the Insurance Regulatory and Development Authority to launch such tax-free bonds in the form of an insurance-cum-debt investment product.

The original plan of LIC was to offer a term insurance benefit to buyers of the tax-free infra bonds.

It planned to offer a single premium policy and for every 100 paid as premium , at least 10 would have gone towards risk premium and 90 towards infrastructure investments.

Traditional risk-cover projects typically invest 15% of the premium to be invested in infrastructure-related instruments. This product would have been an exception, with 90% of the premium going towards infrastructure.

If the money collected under LIC’s infra bonds isn’t invested in projects with good quality ratings, there’s the chance that more bad assets will be created, which would affect the sum assured under such insurance-cum-infra bond products, possibly even the benefits of other products.

In case of any shortfall in the amount to be paid as claims settlement towards such traditional products, LIC can utilize its surplus funds, but this in turn may affect the benefit of policyholders under other existing products.

“As a prudential measure, it is better to avoid such bonds. There could be NPAs (non-performing assets) from investments done via infra bonds, which in turn would have put pressure on LIC’s single premium policies," said one of the persons mentioned earlier.

Neither of the two persons wanted to be identified, given the sensitivity of the issue.

“There aren’t many tangible projects adequately rated for low-risk investments. So, the chances of accumulating NPAs from infrastructure investments are higher. The risks for an insurer could be even higher as almost the entire premium money collected from policyholders would be invested in infra projects under such infra bonds and the risk cover component would become very low," said S.B. Mathur, secretary, Life Insurance Council, a representative body of domestic life insurers.

LIC manages assets of close to 12 trillion. There are 23 life insurers in India and the total book value of their investments in infrastructure sector is around 1.45 trillion. Of this, LIC accounts for around 80%. It has invested in projects over the past three decades through equities of infrastructure related companies, bonds, debentures and term loans.

LIC’s overall NPAs are only 0.35% of its total assets, one of the officials said, but its NPAs in infrastructure loans are not known.

In an email response, LIC said: “ LIC of India is primarily engaged in the business of providing life insurance to the public. The government announcement granting eligibility for issuing infrastructure bonds to the extent of 25% of previous year’s investment in the sector (Rs 5,125 crore approximately) had opened up a new window of opportunity to the corporation."

“We made a serious effort to develop a life insurance product fulfilling all the conditions of the infrastructure bonds, as well as remain within our core business of selling life insurance. However, it has not been found feasible to come out with such a product and, hence, the corporation is not in a position to go forward with the option," the email added.

Banks and other financial institutions are relatively new to infrastructure lending and they have not witnessed any rise in NPAs as yet.

Banks started lending to this sector about five years ago and typically, there is a moratorium on loan repayments in the first few years.

“We are yet to see the full circle. So far, it has been a good experience for us," said a banker with a large state-owned bank, who did not want to be identified.

According to this banker, there could be some cases of “evergreening" in the infrastructure sector—a phenomenon where borrowers raise money from one bank to service loans taken from other banks.

According to three other bankers Mint spoke to, LIC and the erstwhile Industrial Development Bank of India (which subsequently got merged with IDBI Bank Ltd) have been in the space for much longer than banks, and have seen several projects from start to finish. IDBI had accumulated substantial NPAs.

Budget 2012 has suggested creating special infrastructure debt funds and significantly raising the limit on overseas investment in infrastructure-related corporate bonds to attract money to finance infrastructure projects.