Life Insurance Corporation(LIC) - Institutional Financing in India, Indian Financial System | Indian Financial System - B Com PDF Download

Life Insurance Corporation of India (LIC) was established in 1956 to spread the message of life insurance in the country and to mobilise people's savings for nation-building activities.

The main features of LIC are given below:

1. Saving Institution:

Life insurance both promotes and mobilises saving in the country. The income tax concession provides further incentive to higher income persons to save through LIC policies. The total volume of insurance business has also been growing with the spread of insurance-consciousness in the country. The total new business of LIC during 1995-96 was Rs. 51815 crore sum assured under 10.20 lakh policies.

The LIC business can grow at still faster speed if the following improvements are made:

The organisational and operational efficiency of the LIC should be increased.

(i) New types of insurance covers should be introduced.

(ii) The services of LIC should be extended to smaller places.

(iii) The message of life insurance should be made more popular.

(iv) The general price level should be kept stable so that the insuring public does not get cheated of a large amount of the real value of its long-term saving through inflation.

2. Term Financing Institution:

LIC also functions as a large term financing institution (or a capital market) in the country. The annual net accrual of investible funds from life insurance business (after making all kinds of payments liabilities to the policy holders) and net income from its vast investment are quite large. During 1994-95, LIC's total income was Rs. 18,102.92crore, consisting of premium income of Rs. 1152,80crore investment income of Rs. 6336.19crore, and miscellaneous income of Rs. 238.33crore.

3. Investment Institutions:

LIC is a big investor of funds in government securities. Under the law, LIC is required to invest at least 50% of its accruals in the form of premium income in government and other approved securities.

LIC funds are also made available directly to the private sector through investment in shares, debentures, and loans. LIC also plays a significant role in developing the business of underwriting of new issues.

4. Stabiliser in Share Market:

LIC acts as a downward stabiliser in the share market. The continuous inflow of new funds enables LIC to buy shares when the market is weak. However, the LIC does not usually sell shares when the market is overshot. This is partly due to the continuous pressure for investing new funds and partly due to the disincentive of the capital gains tax.

Defects

The development banks in India suffers from a number of defects as discussed below:

1. Dependence on Institutional Sources of Finance:

The capital resources of development banks mainly come from institutional sources. They have not been able to raise funds directly from public as is done by the banks, insurance companies, etc. Dependence on the institutional sources has enabled the development banks to get funds at low yield rates. But, the low yield structure has come in the way of the popularly of development banks. They could not make their bonds and debentures popular in the market and raise sufficient funds from the public.

2. Defects of Loan Finance:

The development banks mostly provide assistance in the form of debt capital, particularly in term loans. No doubt, loan financing assures a stable return on funds and do not involve such managerial problems as are faced during equity participation.

But the loan financing has its own drawbacks:

(a) Loan financing has distorted the capital structure of the borrowing industrial concerns in favour of loan capital. The burden of fixed interest payments is too*heavy and is one of the reasons for the industrial sickness in the country,

(b) The government loses potential corporation tax because for the tax purposes, interest is considered as a cost item while estimating corporate profits,

(c) The industrial concerns also prefer loans to debentures because default on loans are not made public and can be negotiable with the lending agency,

(d) Loan financing has limited the development of the corporate bond market.

3. Small Industries Ignored:

An important objective of the development banks in India is to provide financial assistance to new enterprises, small arid medium industrial units on priority basis. But in reality, the major part of the assistance has been granted to the large and established industrial concerns. New and small entrepreneurs are generally ignored by these banks.

4. Cheap Finance to Big Industries:

The big industrial houses not only receive large and growing, but also organised, assured and cheap amounts of finance from development banks. In fact, the big industry sector has become over-dependent on the development banks for meeting their financial needs. Organised nature of financial resources of the development banks enable them to grant cheap credit.

5. More Loans to Developed Areas:

The development banks are expected to reduce regional disparities by extending greater financial assistance to the backward areas. But, experience has shown that these banks have contributed more to the industrial concerns in the developed regions. About half of the total assistance has been sanctioned for the four industrially advanced states of Maharashtra, Gujarat, Tamil Nadu and West Bengal.

6. Problem of Overdoes:

The development banks, particularly, the State Finance Corporations are facing serious problem of over dues. The over dues restrict the recycling of funds of the financial institutions and limit their capacity to lend. The development banks also suffer from the defect of procedural delays in sanctioning and disbursing loans.