India’s top insurance firm has $4bn in bad loans

India’s largest insurance company is now saddled with a chronic bad debt problem. In the last five years the non-performing assets of state-owned Life Insurance Corporation (LIC) has doubled to 300 billion rupees (US$4.22 billion).

As of September 2019, the life insurer’s bad debts were 6.1%. This was comparable to the bad loans of many of the stressed banks, including YES Bank (7.39%) and ICICI Bank (6.37%).

Apart from selling insurance and buying safe-haven government securities, LIC has been used by governments to bail out struggling state-owned enterprises. LIC dominates the life insurance segment with a market share of 76.28% in the number of policies and 71% in first-year premiums.

But of late its exposure to toxic loans in the private sector has also increased. The insurance behemoth, with total assets of more than 36 trillion rupees ($506 billion), lends to the corporate sector by way of term loans and non-convertible debentures.

The big defaulters include many who also owe huge sums to the banks. The names include Deccan Chronicle, Essar Port, Gammon, IL&FS, Bhushan Power, Videocon Industries, Alok Industries, Amtrak Auto, ABG Shipyard, Unitech, GVK Power, GTL, etc.

In many of these default cases, the LIC is not expected to recover much of its capital. In fact, the insurer, which earns profits of more than 26 billion rupees annually, has already made provisions in the books. The provisioning is more than 90% in these defaulting cases.

There are some bankruptcy cases where the amount not received will have to be written off, as restructuring would result in massive haircuts.

The bulk of the NPAs are in traditional businesses. The book value of outstanding loans under default is about 250 billion rupees. This is followed by the pension business with 50 billion rupees and unit-linked insurance plans with nearly 5 billion rupees.

The crisis in India’s shadow banking sector has also taken a toll as the insurer had exposure to stressed entities such as Dewan Housing Finance Corp Ltd and Infrastructure Leasing and Financial Services.

Nearly one year ago the insurer took a majority share in the stressed state-owned IDBI Bank Ltd and it is turning out to be a sinkhole requiring capital infusion at regular intervals just to stay alive. LIC’s infusions mainly went towards provisioning for toxic loans, which have since then only increased.

Last January LIC had raised its stake to 51% and the government’s shareholding dropped to 46%. IDBI Bank continues to be under the Prompt Corrective Action scheme introduced by the Reserve Bank of India to improve the asset quality of stressed lenders. However, once a bank comes under this scheme, it faces restrictions in lending.

Set in 1956 with the merger of more than 245 insurance companies and provident societies, LIC had remained a trusted brand among millions of middle-class Indians.

But successive governments – earlier the Congress-led United Progressive Alliance and now the BJP-led National Democratic Alliance – have used LIC as a cash cow to bail out stressed enterprises. It paid a dividend of 26 billion rupees to the government for FY19.

In the past four years, LIC has been used by the Modi government as ‘the lender of last resort.’ It has been asked to give soft loans to the railways, it has subscribed to the power sector’s Ujwal Discom Assurance Yojana bonds and was made to invest in the National Investment and Infrastructure Fund. Two years ago, LIC’s cash piles were used to buy 10-14% equity of several public sector banks.