Home >market >mark-to-market >The banking elephant and the insurance whale

Newslaundry.com, which claims to have sourced a secret Reserve Bank of India (RBI) list of top corporate loan defaulters, had one interesting statistic (among others) in its report: Life Insurance Corporation of India (LIC) is owed 65,700 crore by these defaulters.

If State Bank of India (SBI) is the elephant in the Indian financial system, then LIC would be a whale with a balance sheet size of 21.24 trillion, almost equivalent to that of the largest lender. It is not far behind in one asset quality yardstick as well. At the end of December, LIC’s gross non-performing assets (NPAs) as a percentage of its debt portfolio stood at 4.23% compared with SBI’s 5.1%.

Now, LIC is not in the business of lending. However, it has a loan portfolio of 1 trillion, and held corporate debentures and bonds worth at least 2.7 trillion at the end of March 2015. Thus, at the end of the last fiscal year, gross bad loans were 12,213 crore and constituted 3.3% of its debt portfolio.

Back of an envelope calculations using its latest NPA ratio of 4.23% and assuming a 10% growth in its debt portfolio since March suggest a gross bad loan number of close to 17,000 crore at the end of December.

While that is nowhere close to SBI’s gross NPAs of 72,791 crore, or Newslaundry.com’s number, it is enough to place it in the top 10 lenders with the largest bad loans.

Note also the sharp rise in the NPA ratio in the last five years from the chart.

But the problem with LIC is that its debt investments are a black box, apart from the suspicion that successive governments have used its balance sheet to bail out disinvestment programmes and prop up equity markets.

Moreover, it has to deploy 15% of funds raised from traditional plans in infrastructure. Now that’s an industry which is responsible for close to 30% of banking NPAs, almost double its share of advances. This scenario can also lead to massive conflict of interest—one example is LIC agreeing to lend some 1.5 trillion to Indian Railways over five years.

To be sure, there are prudential norms that insurance companies have to follow—like how they recognize NPAs, what kind of instruments they can invest in, etc. But then, banks too had such norms and still showed a 28% sequential spurt in NPAs in the December quarter after RBI’s asset quality review.

Thus, leave alone its investments in shares of public sector banks, which RBI had raised concerns about, LIC’s loans and infrastructure investments merit a closer look because of the systemic implications it has on financial stability.

“LIC’s financials are worth scrutinizing," says Saurabh Mukherjea, chief executive officer of institutional equities at Ambit Capital. “Especially interesting to look at would be its investment behaviour, how it will impact policyholders and taxpayers in the long run."

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