Increase in Exposure of the life insurer to the Government
Economics textbooks may tell you that the Reserve Bank of India is known as the lender of the last resort but off 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 or subscribing to the power sector UDAY or Ujwal Discom Assurance Yojana bonds or investing in the National Investment and Infrastructure fund or capitalising state run banks, besides actively participating in the government’s disinvestment agenda.
With assets of Rs.20 trillion and long term funds from policy holders, it is among the best equipped to lend long term, and hence not surprisingly the government’s preferred lender.
Last month, reported that the government asked LIC to invest 10% in the National Infrastructure and Investment fund(NIIF)—a quasi sovereign fund envisaged to fund India’s infrastructure requirements. With the total corpus pegged at Rs. 40,000 crore, LIC’s investment would be around Rs. 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 policy holders. 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 memorandum of understanding—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 Rs. 4,200 crore last fiscal, as per government data.
Similarly, last year, LIC also committed to invest upto Rs.1.5 trillion in Railways over a period of 5 years till 2020 by subscribing to bonds issued by the Railways. Railways minister 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 Rs.29,165 crore of which LIC bought bonds of at least Rs.8,000 crore. Further, LIC invested close to Rs.5,000 crore in banking equity in 2015-16, and part of this borrowing happened in the January-March quarter, when public sector banks were scrambling to raise capital.
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.
But is this a good or a bad thing? Especially since the exposure of the life insurer to the government and other state owned undertakings is increasing rapidly.