LIC IPO : Should you invest in it ?

Summary of the Article recently published in the Economic Times 

Well, i am not a market expert, not a tax expert or a Chartered Accountant who can make you understand in detail but I am a retail investor who look after the other means to grow money value other than the old age conventional idea of parking the funds in banks for Fixed Deposit or Recurring Deposit or Ulip Plans etc which actually erodes its value over the period of time due to inflation. 

For this, I invest sometimes according to the risk capacity and the size of my pocket. 

Recently, the euphoria was going on about the incoming LIC IPO and it surely is the mother of all the IPOs which have been launched in 2021.

I spoke to several people regarding this ( who are not experts but small retail investors like me ) and all of them were so excited about this IPO given the trust, loyalty and brand image LIC commands over the last 65 years. So most of them were like ready to invest by the brand image and trust of LIC. But as a cautious investor one has to look after the data which a company writes in its DHRP at the time of making its application for the IPO. 

 

Here I am not recommending anyone to invest or not to invest in this IPO. It will solely be your decision. All I am doing is writing all the points one has to look before he/she makes any decision.

Pros & Cons :- 

Pros:- 

1. LIC still sell over 70% of the life insurance policies sold in the country and receives 65% of the new premium.

2. Its AUM ( Asset Under Management ) are nearly 16 times that of the next largest insurer and more than the AUM of the entire mutual fund industry. 

3. Lower Cost – LIC’s Expense ratio is lower than it private Peers. Operating expense ratio as a percentage of total premium for 2020-21 ( 8.7%) and Six month of 2021-22 – ( 10.1% ) are less than the median of the top five private players.

Cons:- 

1. Interference from Government :- We have seen in the past that LIC money was used to recapitalize PSUs. Example – IDBI Bank. LIC has to remove its image of rescuer of Government’s financial Troubles.

2. High NPA Ratio of 7.78% for the year 2020-21 – highest among all listed insurers.

3. Dwindling market Share – LIC’s market share for the new business premium has dropped from 56% in 2015-16 to 44% in the first half of 2021-22.

4. High dependency on Agents -  Well to get a LIC policy you need to contact agent . This is what every 90s kid will tell. Now in this era, everything is digital. Private insurers offers various policies which can buy with the click of a button and without an agent. Number of agents in LIC has been shrinking year after year. LIC’s gross commission ratio which is gross commission paid to gross premium is 5.2% as on September 2021 as compared to 4.2% for HDFC Life % 3.6% for SBI Life.

5. Low Persistency Ratio :- In simple language, persistency ratio is the proportion of policy holders who continue to pay their renewal premium. In LIC’s case it is 78.8% which means every fifth policy it sells is terminated after the first year. Private Insurers maintain this ratio at 84-85%.

6. LIC’s assets mix is skewed towards debt while its rivals take major exposure to the equity market which results in lower yields for LIC in 2020-21.

Question of the Hour – Should you invest in it or not ?

Given the brand image, scale, reach, loyalty & trust LIC commands its offer is very unique. But on several metrics LIC lags behind its peers. How many  you have seen buying LIC policy online?  When it comes to Customer satisfaction, number of products private players are much ahead than LIC. Private Players have been introducing products according to the customers and market cycles but LIC has been failing to understand this. Its non-linked products accounts 99.7% in its portfolio in 2020-21 where its closest peer, HDFC Life accounts 71% of its premium through non-linked products. Government is coming up with just 5% of this divestment scheme and will keep throwing many more stake in market for the coming future. 

So think before you go ahead with this IPO. Choice will always be yours. 

Happy Reading!

You are “NOT” doing OK if…….you haven’t read this book!

Simple tips to work on your money, Monika Halan’s book is an eye opener.

I have come to know about Monika Halan mam from her famous column “Expense Account “ in Mint. I have been reading this paper over the last four years. When it comes to personal finance, she is a well know and trust worthy face among Indian masses.  She has been working in this “Personal Finance” industry over the last two decades and this time she has come up with a book “Let’s talk money”

When I was reading this book, I was completely stunned and with each page I was questioning myself, “What am I doing with my money for all these years”?  This book is a powerhouse for beginners, salaried employees and those who have their own businesses. She has come up with simple formula to have three separate bank accounts for every individual and they are: - 1. Income account 2. Spend-it account 3. Invest-it account.  She also said that each product which we buy should serve some purpose; otherwise it’s wastage of our hard earned money.  She has focused on savings no matter what our age and what is the amount we are able to save. She claims that this book will not make you rich overnight. It’s all about financial freedom or precisely I would say “financial empowerment”.

Her style of recommending tips right from having emergency funds to building our own protection to having retirement kitty with the completion of will is absolutely commendable. Simple calculation of all the funds like your emergency fund, medical cover, life cover etc  with how much do you need to keep does make you little worried about your money but at the end you will be winner who will be aware about all the mistakes which we all common people have been doing in our lives.

Her book also covers topics like investing, equity, debt, mutual funds, Mr. Sensex etc. Thanks to her book, I will never ever have ULIPS in my money box. She simply says that “if a 30 year old guy wants a life insurance policy of let’s say 1.5-2Lakhs then he has to pay premium between 9-12k annually where the risk the cover is just 2 lakhs( maximum) and if the same guy switch to term plans then he will get a sum assured of 1 crore in the same price with added cover benefits of critical illness”.
 

Her famous yet simple rule of thumb “never invest in a product which you don’t know” is a real eye opener which stuck with me throughout this book.  She also talked about the existing system/belief in our country where in an insurance agent comes and start pitching his products with dummy benefits in front of our parents and they end up buying it and getting churned again by the same agent just because the agent should get his commission on a timely basis.

After reading this book, I have certainly moved on in my journey from being an FD hugger to money yogi (My mother made sure that I should never become an ostrich when It comes to managing cash flow ) I would recommend this book to everyone who should know how to take care of our hard earned money and how not to fall in the dirty traps of insurance agents.  As far as ratings is concerned, I would suggest – don’t miss this book for any reason!

5 Steps for filing theft claim of your vehicle

A comprehensive two wheeler insurance policy consists of two sections which covers third party liability ( TP ) as well as own damage ( OD ) where third party covers your third party damages . It kicks in if your vehicle causes damages to third person. It can be injury, property or death. While own damage ( OD ) covers your vehicle against theft and damages. But having a policy is not enough. We should know how to file a claim to the insurer. Any wrong step by you can lead to rejection of your claim. Here are five steps that you need to do after you come to know about theft of your vehicle.

File an FIR within 24 Hours

You need to file an FIR in your nearest police station within 24 hours from the time of incident. Now a days you can easily make an FIR online regarding theft of your vehicle and If there is no police station or cyber café in nearby your area then at least make call on 100 number. The control room of police will tell you your nearest police station.

Intimate Insurer

After getting FIR, inform your insurer about the whole incident by calling on their customer care number or visiting their branch and get a claim number which is a proof that you have intimated the insurer in a prescribed time limit.

Complete formalities with Surveyor

Your next task is to record your statement with the surveyor who will be appointed by your insurer to investigate your claim and he will make a report on the basis of your statement as well as proofs. You need to submit few documents of your vehicle to your surveyor like invoice , original insurance policy, service book, your identity proof, your bank statement, your bank account’s cancelled cheque, your driving license, RC particular, Letter of custody and last but not least Non reposition letter ( In case your vehicle is financed by any bank or NBFC )

Submit Final Report to Insurer

After submitting all the formalities of surveyor, your surveyor then prepares a report and will submit it to your insurer. Now you have to take final report which is the investigation report of your FIR submitted by the police before the magistrate under section 173 of the Criminal Procedure Code. It is the result of the investigation. You need to submit this to your insurer. This generally gets available within 45-60 days from the date of FIR.

Deposit discharge Voucher & Letter of Indemnity Bond

After submitting final report, your last job is to submit discharge voucher (it is a voucher in which you need put a revenue stamp of Rs 1 which you can easily get in any post office) and indemnity bond to the insurer. After doing all this within one-two weeks you will get your IDV (Insurance declared Value) amount of your vehicle in your bank account. 

After retail, MSME -The New Golden Bird!

The International Monetary Fund ( IMF ) in its latest World Economic Outlook ( WEO) update has projected growth rate of India to 7.3% in 2018 and 7.5% in 2019as against 6.7% in 2017. This makes India one of the fastest growing country among major economies in the world.
Currently, we are living in a very turbulent time. Global outlook has been positive till now despite we have been facing issues of US fiscal policy ( two more fed hikes in the cards ), rising oil prices ( impacting twin deficits of current account & fiscal )etc. On the domestic side, our GDP is projected to grow at 7.3% in 2018 in which bank credit plays a crucial role.  This year our Government and RBI has taken many steps to bring in more transparency & greater superior levels in our Banks by introducing IBC ( Insolvency & Bankruptcy Code ), AQR ( Asset Quality Review )  that helps in greater credit culture among banks which have been grappling with whopping NPAs of around 10 Lakh Crores.

Now after liberalization of Indian economy in 1991, corporate credit has been a major driver of bank credit growth. But after the introduction of AQR by RBI to cap unwanted risky exposures of Indian Banks, the corporate sector has now saddled with huge chunks of NPAs. It has been losing its own glory days and its ability to grow. Due to this risky factor in corporate credit, much of the banks especially private SCBs (Scheduled Commercial Banks) have shied away from this. They are now absolutely reluctant to lend on some of the large projects. For example – Real Estate Projects.  Due to this, growth in corporate credit has slowed down. Now to drive growth, banks need to look into other segments like retail, MSMEs, consumer durables etc.

Retail has always been the best bet after Indian banks recovered from the Lehman episode in 2008.  From 2010 to present, retail has been the best bet by Indian Banks & NBFCs which we can easily witness by looking at the number of NBFCs, Banks, Fintechs having loan book of more than 50% in retail. More & more NBFCs have entered into this segment to revive their sluggish growth in terms of absolute numbers. Currently more than 1500 Fintechs have already been mushroomed on our Indian soil which leads to more cut throat competition and availability of more supply as compare to demand. After Retail – What next? Who will be the new golden bird for Indian banks? The answer to this question is MSMEs. MSMEs are the second largest employer in India. As per the latest annual report by the ministry of MSMEs for 2017-2018, more than 39.85 Lakh UAM ( Udhyog Aadhaar Memorandum) have been filed since September 2015 to December 2017 which generates lots of employment, entrepreneurship in India. As per the national sample survey ( NSS) 73^rd round conducted during the period 2015-16, MSME sector has been creating 11.10 crore jobs ( 360.41 lakhs in Manufacturing, 387.18 lakh in Trade & 362.82 lakh in the services & 0.07 lakh in Non captive electricity generation & transmission in the rural and the urban areas across the country.

Before 2010, MSME was not given that much importance by the banks as compare to large corporate loans. Due to this, their contribution in the overall banking credit was very low and it was hampering the GDP growth of India. Main reason behind this was high rate of interest, high cost of customer acquisition and lack of collaterals provided to the banks against their loans.  As compare to large corporate loans, the cost of small loans is very high because of small cycle of loan tenure and we can easily judge by the ROI they charge from customers. For instance, a home loan from a Bank & HFC would cost a customer between 8-12% on a reducing rate where in a two-wheeler loan would cost the same customer between 12-16% and sometimes it may cost around 18% and that too on a flat rate. If the cost is high in MSMEs as compare to corporate loans, then the asset quality is very robust in MSMEs in comparison to large corporate loans.


As per the recent financial stability report released by RBI on June 26, 2018, it says that GNPA ratio of SCBs soured to 11.6% in March 2018 and it will further rise to 12.2% by March 2019.  Eleven banks are under PCA (Prompt Corrective Action), two PSBs have been asked to stop lending and taking fresh exposures and the overall industry GNPA was hovering around 21% in March 2018. Due to higher NPAs, tighter norms by RBI like AQR, Introduction of PCA framework, small amount of capital infusion by government in sick PSUs, banks now focus on other segment to drive growth and for this they are focusing on MSMEs in which they have to lend small loans to lots of customers unlikely in large corporate loans. It is the new growth engine or precisely I would say the new golden bird which can lay eggs in the form of growth to Indian banks. It is becoming attractive for the private banks & Non-banking financial companies (NBFCs) for a profitability and Priority Sector Lending (PSL) perspective. Private Banks & NBFCs have aggressively stepped up acquisition efforts through branch expansion and digital initiatives which help in lower turn-around-time (TAT) there by gaining market share from 34% in December 2015 to 40% in December 2017.  Micro & SME Segment constituting 11.7 Lakh Crores exposure out of 51.3 Lakh crores of the total commercial lending exposure as of December 2017 which is 23% of commercial credit outstanding. Micro loans (less than 1 crore) & SME loans ( 1 to 25 crores ) showing YOY growth of 20% & 9% respectively.

PSBs are busy in financial inclusion, entering into small loan segment is not cup of tea for any other bank. There has to be proper due diligence, proper credit guidelines, proper credit underwriting, proper rules & regulations from sourcing to disbursement and after disbursement, proper service to grievances of the customers.  This segment is already heated up with the introduction of newer banks in the form of SFBs (Small finance Banks) , Fintechs which wants every slice of the new cheese in the form of MSMEs. Newer models are coming every other day. For lending to this segment, banks need to check their cost and they have to rely heavily on technology to bring down their cost of acquisition. For example – Earlier  a bank used to take between 4-7 days to open a normal saving account that would’ve costed the bank around Rs 1200-1500. Now with the introduction of E-KYC (technology) it takes few minutes to on board a customer via saving account.  Likewise, in lending, earlier it used to take between 10-20 days to assess a potential home loan application thoroughly by a bank now with presence of data and technology; it takes only few hours to get a home loan from a bank in India irrespective of whichever area you are living currently. Even some private banks offer instant loans which can be disbursed in seconds after the application submitted by the typical borrower. This sector looks promising which can generate more & more employment for our country and can bring back lost glory of Indian banks. After 2010, banks & NBFCs have been banking on retail to drive their growth. Now it is the time for MSMEs to become the golden bird for Indian Banks.

LIC’s bet on IDBI Bank, Wrong Move!!

With already 55000 crore of toxic assets and cumulative loss of Rs13396 crore for FY17 & FY18, IDBI Bank’s bailout plan via LIC by the government is completely a wrong move. 

LIC, the largest insurance company in India has been continuously investing in various stocks over the years. Be it consumption stocks like Gillette India, Asian Paints, Castrol India & Indraprastha Gas. LIC has invested in almost every divestment programme of the government and it also holds stake in every major PSU bank. Now out of 21 Public sector banks, 11 are under PCA (Prompt Corrective Action) framework. Out of which two banks (Dena Bank & Allahabad bank) have been asked by the RBI to stop lending & taking fresh exposures.

With almost 10 Lakh crore NPA cumulatively of all banks, 8.9 Lakh crore reported by PSU banks.Do you think LIC who will be the promoter of the IDBI Bank after getting approval from government and various other stake holders will bring IDBI Bank back to its glory days?

The government wants LIC to become the promoter of IDBI Bank, the bank in which 55000 crore loans are toxic and another 60000 crore are on the verge of being stressed. It will be no easy task for the government and the RBI to bailout IDBI Bank especially government’s recent divestment programme of Air India which found no buyers and the all the efforts by the government went in vain.

How many times and by how much amount LIC will infuse capital into IDBI? LIC, which has almost a balance sheet of 30 Trillion outstrip that of IDBI but it doesn’t mean government can use that money to bail out a sick bank which has been handled by unstable top management who has been facing corruption and money laundering charges.

Undoubtedly, it has the largest market share in its domain but still it has been losing market share to all the incumbents and the new entrants who have been coming wooing young aspirational youths by bringing out new plans every month or might be every fortnightly. For Example – ICICI Prudential has been selling one of its term plan of Rs 1 crore for just Rs 490 per month or Rs17 approx. per day.

Do you think that it is fair on the part of the government to use public money to flow into toxic assets? Does government take guarantee that after capital infusion in IDBI Bank by LIC, the bank will cut down its losses and will report profits every quarter? It is like government is asking elder brother (LIC) to take care of its offending sibling (IDBI).

IDBI stake sale to LIC is like sanctioning loans despite knowing that all amounts which we are sanctioning currently will get write off from our balance sheet completely after 2-3 quarters. Too much exposure of this will hurt in its own balance sheet and it will be a new and bigger problem for the government as compare to the current problem of IDBI Bank.  What is the better solution then?  Perhaps, transferring its core stressed assets to a bad bank (which government is planning to introduce ) or private run ARCs ( Asset restructuring Company ) can be the answer.

Privatize PSBs else be ready for another Choksi & Modi!

Another Mehul & modi episode will strike if our government will continue with 21 PSUs.

Over the last one week, PNB fraud by diamontaire Nirav Modi & Mehul Choksi is trending above all hash tags across media. More & more people are coming out with their own methods/recommendations of how we could’ve prevented this massive scam. No doubt, finding out the cause is the need of the hour but the main problem lies somewhere else. PNB is not the first public sector bank who got a whole of Rs 11000 Crore in its pockets and it’s certainly not the only one.

Now there are few problems which engulfed PSBs over the last few decades and due to this they are grappling with never ending issues and they are:-

1. No Authority/ Responsibility/ Incentive:

In PSBs, employees are rarely gets promotion. Take example of GokulNath Shetty, the main accused in the PNB Scan who offered fake LOUs to the Nirav Modi’s group companies.  He had retired from PNB after 36 years of service. In those 36 years only once he got promoted.  In PSBs, employees rarely gets promoted based on their promotion. Even they do not have fear of getting fired for non performance. As a result, lack of motivation plays a pivotal role in putting a barricade on the minds of employees which eventually stops thinking and that result in lack of innovation. They do not bring up news ideas on the table. Due to lack of innovation & creative thinking, there is little chance for employees to make good decisions. On the other hand, in a privately run bank, lack of not doing new things is itself a crime and overstepping lending parameters would lead to losing a job.  In case of PSBs, both the stick and carrot ( in the form of punishment & reward) have been missing.

2. Rising number of Frauds:-

In a recent report of willful defaulters compiled from CIBIL database says that the total amount of outstanding on the loans which are above 25 lakhs in which law suit have been filed have grown exponentially from Rs 28416.93 crore as of September 2013 to Rs 1.11 trillion as of 30 september 2017. Within four years, the amount has been growing at a CAGR ( Compound annual growth rate ) of more than 40%.

Till September 2013, nationalized banks had a share of 32.8% of the total amount outstanding in the willful defaulters list. After four years, this share had gone up to 58.7% The CAGR of the amounts in these accounts with nationalized banks was a eye popping figure i.e. 62.92%. For PNB its CAGR was 95.13%

3. Lack of systems & Low Pay Scale:-

The main cause behind the PNB Scam was the breach of three levels of security & checks which every bank does to prevent frauds. Many PSBs are depriving themselves to get latest technology & implement them to prevent wrongdoings & scams. They have no incentive linked to this. In this case, SWIFT ( Society for Worldwide Interbank Financial Telecommunication code) system was not linked to the CBS ( Core Banking system ) of the PNB. That’s why the entries of the LOUs which were issues by those two officials of PNB were not entered into the system and due to this it went unnoticed over the last six years. Other than SBI and Private Banks, I don’t know whether all PSUs had integrated their SWIFT system into their CBS. The management of the  PSB does not get paid well as compare to their private peers. You can easily find out the salary figures of top CEOs of PSBs & private Banks  and you will witness that it’s a gigantic difference in terms of pay scale. These poorly paid bureaucrats with no incentive failed to install a system to check links & balances. PSBs systems are more vulnerable to frauds as they are not updated with the latest technology. For instance, Kotak 811 account, it is a fully digital zero balance account which any one can open within two minutes by having one aadhaar number and a pan card. How many of the PSBs offers such kind of offerings to its customers? They don’t pay heed to their customers. A simple request for debit card change would take weeks to solve & deliver it to the customer’s registered address. Private banks are more responsible for their depositors, investors, owners while on the other hand PSBs are just guzzling tax payer’s money which is like a limitless resource for them to cover all mistakes.

4. Political parties:-

Have we ever asked anyone why several governments like Vajpayee, UPA, NDA didn’t reverse bank nationalization decision which was taken in 1969 despite being heavily relied on private sector banks for steel & power projects?  We have witnessed decisions regarding sale of Air India, Bharat Earth movers Ltd ( BEML ), HAL ( Hindustan Aeronautics Limited ) but not banks. These governments are not willing  to give up their control over PSUs.

One of the reason behind this is that PSBs are like a cheap credit facility for netas to run their risky businesses in exchange for campaign finance. They use this resource & later on pass that bill to the tax payers and this will keep on continuing till the time another government comes to the power. If in case any PSU hit with a scam then recapitalization will take place in which they inject tax payers money into the coffers of PSBs. Recently, ace investor Mr. Rakesh Jhunjhunwala also said that we only 3 PSUs. We simply do not require 21 PSUs. Today if you look at the combine M-Cap of all 21 PSBs together it is less than that of HDFC, India’s largest private bank.

This scam is a wake up call for the government to take a radical decision by reversing bank nationalization policy by selling the government stake & exit the business.

An open Letter to Mr. Nitin Gadkari!

Oil demand will keep on rising regardless of how many electric cars are plying on our roads!

In a recent public meeting, our honorable minister for Road Transport & highways, Mr. Nitin Gadkari had issued warning to all the automobile company’s CEOs that adopt cleaner fuel till 2020 otherwise they will be bulldozed by the government. According to him, it will eventually help in curtailing the pollution from petrol & diesel vehicles. Recently, Bloomberg news energy released a report which says that the five biggest oil companies – Exxon Mobil Corp., Royal dutch shell Plc, Chevron Corp., BP Plc& Total SA collectively curbed their pollution at an average of 13% between 2010 & 2015.

Now, one of the hottest debate over the developing as well as developed countries is demand of oil. If we adopt greener fuel then it will help in reducing our dependence on crude oil.
No doubt the recent announcement by Mr. Gadkari will grab more headlines over the coming few years for the adoption of electric vehicles and industry experts will join as panelists on news channels to discuss how it could be the crucial beginning of the end for crude oil and we are assuming that it will help in reducing the oil demand but at the same time we are neglecting the role of heavy trucks & freight play in driving demand.We need fuel efficient vehicles across the developing as well as developed countries that are currently not using required fuel efficient standards. If we will not use this then no matter what policies our government will announce, oil demand will keep on rising. 

Economist look at the increase or decrease in the movement of heavy trucks & freight before predicting anything about the economy as both are the indicators of economic growth and both of them are correlated to the GDP. Recently, an international agency published a report that out of 40 countries, only four (US, CHINA, CANADA, JAPAN) have fuel efficiency standards for heavy trucks that means only one-tenth out of the total. Heavy trucks alone contribute 40 percent of the total growth in oil demand. Trucks burn about 17 million barrels of oil per day (mb/d ) or about one fifth of the total global demand. Much of the growth in consumption of oil will come from India & China in the coming few years where 90 percent of the additional barrels for freight will be consumed.

Now, given the circumstances, our government should encourage & adopt cleaner fuel efficiency standards so that the heavy trucks emit fewer pollutants.
There are three possible areas for improvement:-
First, Heavy trucks should have GPS enabled  to optimize trucks routing so that it can reduce empty trips. Second, Zero Emission/fuel efficient engines, it will help in emission of fewer pollutants. Third, adoption of bio fuels.

No matter how much you or any other minister put out schemes in the automobile sector to curb pollution, if we do not look into the segment which is contributing 40 percent of total global oil demand then regardless of every car which is plying on our roads is electric, oil demand will keep on rising!