The exposure of insurance behemoth LIC to stressed firms such as DHFL, IL&FS, ADAG companies and YES Bank has not only meant downgraded investments, but also the need to make additional provisions. Its bad loans, too, have been on the rise.
According to IRDAI regulations, life insurers need to invest at least 75 per cent of their investment in debt instruments in sovereign debt, AAA or equivalent rating for long-term and sovereign debt, A1+ or equivalent for short-term instruments.
There are no prescribed guidelines for the extent of provisions to be made in case of downgrades, according to insurance players, though they prudently make provisions immediately upon the downgrade of the debt instruments.
According to IRDAI regulations, approved investments, which are downgraded below the minimum rating prescribed or not continuing to satisfy dividend criteria, should be automatically re-classified under ‘other investments’ and identified under a category, which shall be valued at marked-to-market on a quarterly basis. Investments in debt instruments rated AA- or below for the long-term and below A1 or equivalent for the short-term form ‘other investments’.
As of June, the balance-sheet value of investments in the ‘other investments’ category for LIC stood at ₹1.24-lakh crore (market value ₹1.06-lakh crore), out of its total ₹23-lakh-crore investments in the non-linked portfolio.
NPAs rise, too
LIC has seen its bad loans rise over the past three to four years.
As of June, its gross non-performing assets (NPAs) stood at 6.4 per cent of its debt portfolio, up from about 3 per cent five years ago.
Aside from its investments in debentures and bonds, LIC also extends loans to the Centre and State governments, banks and financial institutions and companies.
Amtek Auto, Jaiprakash Power Ventures, Videocon Telecommunications, IL&FS Tamilnadu Power, Jaypee Infratech and Essel Infraprojects are some of LIC’s borrowers that turned into NPAs. Based on the classification of the account — substandard, doubtful, or loss — the provisions on these accounts have varied between 20 and 100 per cent.