LIC Opens Improves its Asset Quality Ahead of Proposed IPO

Over the last few years, one of the questions that was constantly raised was about LIC’s debt portfolio. The concern was that too many of LIC’s bond purchases and loans in the recent past were in long gestation infrastructure projects with little revenue visibility. There was pressure on LIC to clean up its debt portfolio ahead of the IPO.

LIC has surely cleaned up its debt portfolio or at least it has made adequate provisions for the gross NPAs in its debt portfolio. Let us first look at the macro numbers and start off with the gross NPA picture. 

Out of LIC’s total debt portfolio of Rs.451,303 crore, debt worth Rs.35,130 crore were classified as non-performing assets (NPAs). That translates into a gross NPA ratio of 7.78% as of FY21, a good 39 bps lower than 8.17% gross NPAs in FY20.

It needs to be remembered that under the IRDA Act, all insurers are required to make full provisions for NPAs in the books. Accordingly, against the gross NPAs in the debt portfolio to the tune of Rs.35,130 crore, LIC has already made provisions to the tune of Rs.34,935 crore. 

As a result of aggressive provisioning by LIC, its net NPAs have fallen to just 0.05% as of the end of FY21 as against 0.79% net NPAs as of FY20. The problem of gross NPAs is still there, just that they have been almost entirely provided for.

While the LIC continues to be governed by the separate LIC Act, it is also regulated by IRDA for many of the reporting and provisioning requirements. The LIC Act was amended to enable the government to reduce its stake up to 75%. 

In the forthcoming IPO, the government of India plans to divest between 5% and 10% to investors. The actuarial valuation of LIC has been pegged at $150 billion as per Milliman Advisors. The stock of an insurer is normally priced at a premium to the actuarial valuation.

Check - LIC to File for IPO in 2021

The listing of LIC and the entry of QIB investors will open up the debt portfolio of LIC to greater scrutiny and call for transparency with respect to decision making. The robust bull market has given fantastic returns on the equity portfolio, which glossed over losses in the debt portfolio. 

Post the listing, LIC will have to address the asset quality issue in its debt portfolio on priority. After all, gross NPAs of around 8% on the debt portfolio is rather high. But for now, the government focus would be on meeting its disinvestment targets.