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LIC to give Rs 120 bn loans for big projects at floating rate
New Delhi, Apr 18: In a bid to guard itself against market risks, Life Insurance Corporation (LIC) has decided to give credit to infrastructure projects estimated at about Rs 12,000 crore in 2004-05, at a floating interest rate.
New Delhi, Apr 18: In a bid to guard itself against
market risks, Life Insurance Corporation (LIC) has decided to give credit to infrastructure projects estimated at about Rs 12,000 crore in 2004-05, at a floating interest rate.
"Most loans to infrastructure projects will now be linked to yields on G-sec. We would like to be flexible in our lending rates to cover any future risks," LIC chairman S B Mathur said.
"LIC invests 15 per cent of its accruals in infrastructure sector every year. Last fiscal (2003-04), we had a target of Rs 11,000 crore for the sector," he said.
This fiscal, LIC is slated to invest about Rs 12,000 crore in infrastructure from its total investible fund worth about Rs 80,000 crore.
LIC started the fiscal with a 20-year loan to National Hydro Power Corporation worth Rs 6,500 crore at a floating rate. The interest rate on this loan is linked to the yield on 13-year government paper and works out to 6.5 per cent.
Others in the fray for LIC loans include national highway authority of India, National Thermal Power Corporation, Power Finance Corporation, Rural Electricity Corporation, Powergrid and Konkan Railway, he said.
Explaining the rationale for giving loans at a floating rate linked to yields on government securities, Mathur said. When LIC sells an insurance policy, it promises an assured return for a period ranging upto 25 years based on the prevailing yields on government papers but lending rates for infrastructure projects are not linked to G-sec yields.
If the cost of funds exceeds the cost of lending, it can create an asset-liability mismatch as seen in some FIs engaged in long term financing. The move assumes significance in the wake of interest rate volatility in recent times that has taken a heavy toll on the asset-liability profile of some of the FIs.
Although banks have started offering floating rates in the last few years to hedge risks, LIC was exposed to the vagaries of the debt market as it offered fixed lending rates till March 2004.
The floating rate would also make credit cheaper to corporates coming up with mega projects.
LIC, for instance, restructured the interest rates on its previous Rs 2,500 crore loans to NHPC and assisted the hydro-power company to save about Rs 250 crore.
A floating rate would automatically adjust the lending rate every year to the prevailing interest rates and help corporates to save on interest payment.
Bureau Report
"LIC invests 15 per cent of its accruals in infrastructure sector every year. Last fiscal (2003-04), we had a target of Rs 11,000 crore for the sector," he said.
This fiscal, LIC is slated to invest about Rs 12,000 crore in infrastructure from its total investible fund worth about Rs 80,000 crore.
LIC started the fiscal with a 20-year loan to National Hydro Power Corporation worth Rs 6,500 crore at a floating rate. The interest rate on this loan is linked to the yield on 13-year government paper and works out to 6.5 per cent.
Others in the fray for LIC loans include national highway authority of India, National Thermal Power Corporation, Power Finance Corporation, Rural Electricity Corporation, Powergrid and Konkan Railway, he said.
Explaining the rationale for giving loans at a floating rate linked to yields on government securities, Mathur said. When LIC sells an insurance policy, it promises an assured return for a period ranging upto 25 years based on the prevailing yields on government papers but lending rates for infrastructure projects are not linked to G-sec yields.
If the cost of funds exceeds the cost of lending, it can create an asset-liability mismatch as seen in some FIs engaged in long term financing. The move assumes significance in the wake of interest rate volatility in recent times that has taken a heavy toll on the asset-liability profile of some of the FIs.
Although banks have started offering floating rates in the last few years to hedge risks, LIC was exposed to the vagaries of the debt market as it offered fixed lending rates till March 2004.
The floating rate would also make credit cheaper to corporates coming up with mega projects.
LIC, for instance, restructured the interest rates on its previous Rs 2,500 crore loans to NHPC and assisted the hydro-power company to save about Rs 250 crore.
A floating rate would automatically adjust the lending rate every year to the prevailing interest rates and help corporates to save on interest payment.
Bureau Report