The RBI governor is expecting more insurance companies to invest in government securities to reduce the pre-emption of bank resources. But it may be a long time away given how LIC does its investments

Pipavav Defence and Offshore Engineering has been locked in the lower circuit for the past eight trading days. Life Insurance Corporation holds a 7.94% stake in the company amounting to nearly 5.85 lakh shares. Last year, in April and May, LIC bought nearly 2.30 crore shares when the stock was around Rs80. The stock has now fallen 43% to Rs44.95. Raghuram Rajan, after taking over as governor of the Reserve Bank of India, announced several measures to liberalise the banking system. One of his hopes is to reduce the pre-emption of bank resources for investment in government securities as he expects penetration of other financial institutions such as pension funds and insurance companies to increase their investment, thus reducing the need for banks to invest in government securities.
 

The new RBI governor mentioned that, “Finally, our banks have a number of obligations that pre-empt lending, and in fact, allow what Dr Rakesh Mohan, an illustrious former deputy-governor, called “lazy banking”. One of the mandates for the RBI in the Act is to ensure the flow of credit to the productive sectors of the economy. In this context, we need to reduce the requirement for banks to invest in government securities in a calibrated way, to what is strictly needed from a prudential perspective.”
 

“This cannot be done overnight, of course. As government finances improve, the scope for such reduction will increase. Furthermore, as the penetration of other financial institutions such as pension funds and insurance companies increases, we can reduce the need for regular commercial banks to invest in government securities,” he mentioned further.
 

Well, this may be a long way off given frequent stories of LIC’s bad investments. LIC’s equity portfolio consists of many blue-chip stocks but a host of public sector companies and dubious investments in beleaguered private companies in the aviation, power generation, infrastructure sectors, which are seeking restructuring of their loans even as their share prices have sagged. The exact details of LIC’s investments are hidden but given the way capital-intensive stocks that populate LIC’s portfolio have performed so far, LIC has not been doing too well with its equity investments. For a bunch of laidback public sectors officials whose jobs are rotated from PR to business to HR and so on and end with a peaceful retirement, to be able to invest smartly seems a bit far-fetched.