'LIC needs capital infusion'

Q&A/ S B Mathur

took over the reins of the country's largest insurance company, Life Insurance Corporation of India (LIC), the job in hand was not to push for growth but to rein in the growth in new business income because it was unsustainable. At that time, LIC was growing in excess of 130 per cent.

Mathur retires from office next week after laying down the building blocks and helping the organisation regain lost marketshare. Indeed, if the performance of LIC in the first half of 2004 is anything to go by, the corporation has already regained 0.4 per cent share. Any regrets? No, says Mathur, as he sets sail for a post-retirement life in Delhi. Excerpts from an interview with Business Standard:

What have been the key challenges you have faced as the chairman of the organisation?

It has been an eventful and satisfying 37 years since I joined LIC. When I took over as the chairman, I faced three key challenges "" restructuring of product range, modification in investment operations, and improvement in policyholders' returns in a falling interest rate environment.

The fall in interest rates saw a decline in new business income and, consequently, resulted in our losing the marketshare. This was because we had to do away with guarantees and high-yielding products. Though it took us two years to come out of this, the current year's performance has borne fruit.

On the investment front, there was no increase in demand for funds despite the widely-publicised India Shining story. This forced us to restructure our investment operations and regain some of our old borrowers such as ICICI Bank and HDFC. We revised the high coupon debt that had not been revisited despite a change in the investment environment.

We signed fresh MoUs with long-term fund users such as National Hydro Power Corporation, National Thermal Power Corporation and National Highway Authority of India, among others. This gave us an assurance that in the future, too, these institutions will come to us for funds for at least a part of their incremental borrowings.

They, in turn, were assured of continuous supply of funds to meet capital expenditure at interest rates linked to government security rates prevailing at the time of disbursal of funds.

To compensate our policyholders who faced falling rates of returns, we set an internal target of ensuring an additional 1 per cent return through secondary market operations and debt swaps with banks.

Was not having to meet the solvency margin an equally formidable task? How have you tackled the issue?

The solvency margin issue has been taken care of for now. We put aside Rs 14,000 crore on March 31, 2004, though the total sum as per the Insurance Regulatory and Development Authority (IRDA) amounts to Rs 16,800 crore, which constitutes 110 per cent of the solvency margin.

We will be able to meet the required solvency margin of 150 per cent by March 2005, which should amount to about Rs 6,000 crore. Next year, we will be able to re-value our real estate portfolio, which will give us a benefit of about Rs 1,000 to Rs 2,000 crore.

The IRDA allows revaluation of real estate once in three years, which is due in March 2005. With the rise in rentals, we expect a good revision in our real estate portfolio.

So the solvency margin issue is behind you?

It is, for now. But the government will either need to infuse capital into LIC or allow for an initial public offer (IPO) if the corporation is to meet the regulatory requirement. One does not need to be unduly worried because of LIC's inherent strength.

At the same time, there is a limit to which policyholders' money can be used to meet the solvency margin. Based on the volume of business we are doing, there will be a need for capital infusion.

The actual quantum of funds required will depend on how fast we can grow the unit-linked business. If the non-unit-linked business grows more, LIC will need about Rs 2,000 to 3,000 crore a year.

What's your unfinished agenda?

A greater part of the first stage of the data warehousing project ought to have been completed, but for the delay in implementation. The project will add strength to our marketing activities and enable us to leverage our huge customer base on a scientific basis.

Second, some of our IT initiatives on internal housekeeping ought to be completed at the earliest. This will ease the pressure of routine, daily transactions. We want to make all our branches fully computer-supported for every routine transaction.

We have 15.6 crore policies in force. As a result of this, the routine work is multiplying. Last year, we added 1.4 crore policies "" about 4 crore cash transactions. In the current financial year, we estimate an additional 6 crore cash transactions. We need to visualise and prepare for this scenario for the next four to five years.

We wish to do away with manual intervention for routine programmes. We do not wish to prepare any cheques; we prefer to directly credit agents' and pensioners' accounts through an electronic clearing system.

The finance ministry interviewed 21 LIC executives for the post of the next chairman. What are the key challenges before the next chief?

The most important challenge will be to regain market share. LIC is poised to do so and has in the past couple of months regained about 0.4 per cent market share. Structural changes have already taken place and the necessary building blocks are in place for us to stabilise our market share. So, this will not be a daunting task.

Investment will be another key challenge. The new chief will need to do a lot on hedging of interest rates and even look into the aspect of options, when these are introduced in the market place.

LIC's market share was slipping on account of the drop in interest rates. What could LIC have done to curb this fall in market share?

If we had taken up restructuring of our products a year earlier, it would have helped. Opening up of the insurance sector coincided with the fall in interest rates. It would have been more effective had we started restructuring our product line back in mid-2002, since interest rates started to fall from April 2001.

In many south-east Asian markets, the fall in the market share of the incumbent has been far higher than in our case. In fact, our loss in market share would not have been as steep had it not been for the fall in interest rates.

What role will LIC play in the bank consolidation game, considering it holds stakes in a number of banks?

There was a time when LIC was asked to open a bank, but we felt we should not get into the direct banking business. We do not intend to take over banks but as and when occasion permits, we may facilitate the consolidation process.

We have significant shareholding in a number of banks like Corporation Bank, UTI Bank and ICICI Bank. The government has recognised the need for stronger and bigger banks. Business cycles are becoming shorter and any downside will prove difficult for some of the smaller banks.

So, what's the road ahead of LIC?

LIC is at the crossroads but it has decided the road it wants to take. Before I took over the reins at LIC, for one year I did nothing but explain to outsiders why LIC would not go the UTI way and how it was different.

LIC is respected by industry in general, as well as its competitors. The key point is that the market is deep and big enough for all concerned. It does not help if we keep on pulling each other down. Even if one player were to get hit, it would bring down the entire industry.

Post-retirement, do you have any plans to join the private sector?

I am grateful and highly obliged to LIC. I would not like to do anything that would be in direct competition with the state organisation.

For the next two to three years, I intend to settle in Delhi. I have a small office space there where I propose to spend four to five hours daily, reading and talking to people.

I have also accepted two interesting offers for the post of director. One at the Delhi Management Institute and the other at the Indian Railway Catering.