RBI Defaulters List: The curious case of LIC

The insurer has become the lender of the last resort

ByAman Malik
RBI Defaulters List: The curious case of LIC
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A curious feature of the Reserve Bank of India’s Willful Defaulters and Defaulting Borrowers List is that it features Life Insurance Corporation of India (LIC) as the largest lender. According to RBI’s list, till the end of the September-December quarter last year, borrowers defaulted on as much as Rs 65,700 crore that LIC had lent them. In effect, a substantial amount of the Rs 5 lakh crore that is under default as of December 25, 2015, was actually lent not by public or private sector banks, but by this government-owned insurer.

The list shows that Usha Ispat, the top corporate defaulter, owed Rs 8,619 crore to LIC as of the end of December last year. Another major defaulter Prakash Industries owed the public sector insurer more than Rs 2,171 crore.

To be sure, unlike banks and other lending institutions, LIC does not typically give loans. The government-owned insurer normally buys debt instruments — bonds or debentures — from companies that typically want to raise money for long-term needs.

When a corporation or the government wants to raise money for the long term, they typically issue debt instruments called ‘bonds,’ which are then bought either by institutions or by individual investors, as the case may be. Bonds are backed by physical assets, which can be liquidated by the buyers, if the seller fails to return the principal amount at the end of the tenure of the bond. A debenture is also a debt instrument, but slightly different and riskier than a bond. Unlike bonds, debentures are not backed by physical securities and are therefore riskier assets to buy.

Interestingly, though, LIC, like all other insurers, is governed by the Hyderabad-based Insurance Regulatory and Development Authority (IRDA). It is therefore unclear why the RBI would monitor LIC’s lending activity. One plausible reason could be the fact that LIC has significant stakes in public sector banks, which have all been terribly hit by the bad loan crisis.

J Hari Narayan, a former IRDA chief told Newslaundry over the phone that while he was unaware of the RBI tracking LIC’s lending activity in the past, his presumption was that “since the RBI is looking at the health of financial institutions, and how loan portfolios are behaving generally, [the RBI] probably would have got information from the LIC.”

Narayan said that the LIC works “under very tightly guarded investment rules” and that he therefore suspected that “these were investments made prior to IRDA.” The IRDA was set up in April 2000. The RBI list notes defaults triggered from 2005 to 2013.

Narayan said the investment regulations for insurers came into being from 2001, and “since then they have been more and more vigorously enforced.” He added that apart from tough investment rules, the LIC also had very stringent audit regulations.

Not only is the LIC the second-largest shareholder in government banks, after the government itself, it has, of late, been on a share buying spree. Just last month, it was reported that the insurer had been mopping up shares in several banks, including IDBI Bank and Dena Bank.

In fact, since the beginning of 2016, LIC has upped its stakes in several other public sector banks via what is called ‘preferential allotment’ of shares. Apart from IDBI Bank and Dena Bank, it has bought shares in Allahabad Bank, Indian Overseas Bank, Corporation Bank, Bank of India and Oriental Bank of Commerce.

This way, it has also helped these banks raise much-needed funds. This even as share prices of government banks declined by more than 11% between January and March this year.

To be sure, although insurance companies are not allowed to invest in unlisted entities, there is a small window that allows them to invest in what are typically called ‘junk shares.’ Also called ‘penny stocks’, these are shares of small companies that trade at low prices and are therefore considered extremely risky. Up to three per cent of their investment portfolio may be invested in such shares.

By a conservative estimate, LIC has a total investment portfolio of the order of Rs 25 trillion, which would mean that it might have invested up to Rs 75,000 crore into such penny stocks.

Since LIC is not listed, it is extremely tough to arrive at its valuation. A report in 2014 had said if it were to list, LIC would be the largest Indian company with a market capitalisation of Rs 5 trillion. At current prices, this would compare with Tata Consultancy Services, which at Rs 4.97 trillion is India’s most valuable company by market capitalisation.

Two financial sector analysts who spoke to Newslaundry said the government has, on many occasions, informally asked LIC to take such contrarian calls, to bail itself or institutions owned by it, out. “LIC has virtually become a sort of lender of last resort to the government. It can afford to do it since it has deep pockets,” one of the two analysts said.

In the last few years, the government has struggled to meet its disinvestment targets, mainly because adverse market conditions have ensured that there have been few takers for shares of government companies.

In almost all such cases, the LIC has been pushed forth to buy up shares on the day of the stake sale. A classic case was the share sale of Indian Oil Corp. Ltd in August last year, when LIC was indirectly forced to buy up almost nine-tenths of the refiners shares on offer just to salvage its Rs. 9,000 crore share sale. Earlier in January 2015, LIC had mopped up nearly half the Rs. 22,500 crore worth of shares put on the block by Coal India Ltd. In fact, as this report points out, a third of the government’s disinvestment receipts since 2012-13 have come from LIC.

In fact, as this report points out, a third of the government’s disinvestment receipts since 2012-13 have come from LIC.

Newslaundry reached out LIC with a detailed questionnaire on its presence on an RBI list and the nature of these loan defaults to corporations. We have not received a response yet. The story will be update if and when we receive a response.

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