LIC - PERSONAL PIGGY BANK OF GOVT?

By Ruma Dubey

Life Insurance Corporation (LIC) is one of the best managed organisations of India. Consistently profit making, it has proven time and again that it has probably got the investment acumen than all the FIIs and all investment analysts put together.

Yet, there is now a worry creeping up slowly. Looking at the way in which LIC is now being made to pick up the tab everywhere, be it the railway or roads, and not to mention its stake in PSU banks, one cannot help wonder if LIC will soon be forced to go the Air India or HMT way. It is probably the only goose in the Indian Govt’s stable which is laying golden eggs. And the Govt seems to be keen on getting all the golden eggs at one go, threatening to kill the goose itself! This is not happening just now, under the BJP, even the UPA treated the LIC like its personal piggy bank.

Take a look at these numbers:

• LIC will be ‘investing’ Rs.1.15 lakh crore in Indian Railways over the next 5 years -  to be made through Rs 30,000 crore of bonds issued annually 
• Arun Jaitley in the Union Budget allocated the biggest chunk of money this fiscal for making roads’ yet that does not seem to be enough for Nitin Gadkari who is now seeking a loan of more than Rs 50, 000 crore from LIC.
• These big tabs apart, LIC has to constantly pick up stake in PSU banks. The latest in March’16 – Vijaya Bank to raise Rs 226 crore from allotment of equity shares to LIC; Central Bank of India is planning to raise Rs.165 crore from LIC via equity investment.
• LIC had more than 1% shareholding in 27 banks as of December 2015. Of these, 21 were public sector banks in which the value of LIC's stake stood at Rs 36,037 crore as of December-end. Last week, the value of these shares dipped to Rs 24,920 crore — down by Rs 11,107 crore or 31%.
• As against this, the value of LIC investments in three private banks ICICI Bank (9.61%), Axis Bank (14.5%) and HDFC Bank (2.16%) at Rs 29,606 crore outstrips the value of its total investments in PSU banks.

Given the current turmoil in PSU banks, if LIC had the freedom, it would have most certainly dumped the PSU bank shares!

The Govt as such always treats LIC as its personal ATM – any crisis, bank on good ole’ LIC to bail them out. That is what LIC has always done – be the knight in the shining armour. But the Govt has probably over extended this armour and now LIC could get hurt.

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 of these shares. And that, will not be good for the markets.

Over and above all this, what one needs to question is the capability of the banks. Why the need to always tap into LIC for funds? Because of poor valuations or the knowledge that no one will bite the bait even if they go for a QIP? So if they know this, banks should ideally work on improving the balance sheet but what they do – they create more NPAs knowing fully well that LIC will bail them out. This is a bad habit created by the Govt and it would be very difficult to break it, unless of course, LIC for once, puts its foot down and says, “NO!” And if at all LIC says no, won’t that affect the financial stability of the banks?

For FY17, the Govt in the Union Budget had allocated Rs.25,000 crore for recapitalization of banks. This, many bankers say is too little – how were they going to fund growth while keeping the asset quality good if money was not coming? As mentioned earlier, poor asset quality is not allowing them to get good valuations, hence they fail on raising enough money by themselves. Thus the fall back, or should we say, the fall guy will continue to remain LIC?