KILLING THE HEN AND GOLDEN EGGS

LIC was being used like a wealthy father. He works hard, makes lots of money but the undeserving relatives around him put on a poor face due their own irresponsible behavior, and the ‘father’ is forced by the ruling grandparents to hand out so much dole that the father himself is having an existential issue.

That in a nutshell is the story of LIC today – the Govt is driving it to the bottom, drawing endlessly as though it’s a perennial supply.

A recent report by Business Today really put LIC in the spotlight, drawing a lot of ire for the Govt. The report stated that LIC has reported total gross non-performing assets (NPAs) at around Rs 30,000 crore as of September 2019. At end of 6MFY20, its Net NPA was at 6.10%, more than doubling over past five years – this is huge given that its NPA used to be historically around 1.5 to 2%. This means it is today no different from the private banks whose NPAs also range at the same levels.

And it is India Inc which is responsible. Corporate loan default, the usual bandwagon of IL&FS, Videocon Inds, Essar Port, Bhushan Power, Unitech, Deccan Chronicle … the same ones which dragged the banking sector down have infected LIC too. Lending to companies via terms loans and non-convertible debentures has led to this mounting NPAs.

Not just these companies, even the Govt, be it the UPA or the BJP, all along, historically, they have been asking LIC to be the knight in shinning armor every time a PSU offer for sale threatens to sink or when companies (IDBI Bank) on the verge of bankruptcy are forced to be taken over.

Three years ago, way back in 2015, warning had come from none other than one of the Deputy Governors of RBI that there is a contagion risk because of LIC’s high exposure to public sector banks (PSUs). And  five years later, as we look at one PSU bank after the other, reporting dismal performance, posting life-time losses with gargantuan provisions for NPAs, we cannot help but wonder about the logic behind LIC’s such exposure to PSU banks.

And we are not talking about small stake here. After the Government of India, LIC is the second largest shareholder in these PSU banks. LIC, on an average holds around 8% stake in the toxic PSU banks

The same warning in different tones had come from CRISIL and Moody’s too. This is what the Deputy Governor was trying to do – connect the dots and the picture which emerged, was not just a bad state of the already beleaguered banking sector but LIC, the Govt’s mulch cow also facing consequences. And what was its fault? It poured money into banks, surely at the behest of the Govt even when it knew that things were not good. The Govt as such always treats LIC as its personal ATM – any crisis, bank on good ole’ LIC to bail them out.

And if LIC gets hurt, the ramifications go right down to the lakhs of policy holders of LIC. How? When the investment it has made in these PSU banks runs into a loss, there will be erosion in the NAV of LIC. The money it uses to buy all this equity is obviously what it gets from the policy holders and this means, the capability of LIC to serve the policy holders will be compromised.

The contagion does not end there. It could have ramifications on the markets too. Suppose LIC see’s that its investment is making losses, to cut the losses, it could go on a selling spree on these shares. And that, will not be good for the markets.