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C. Shivkumar

Bangalore , Oct.15

FACED with Life Insurance Corporation of India's refusal to reset interest rates and permit prepayments, a clutch of States have threatened to stop taking loans from it.

Sources said here that almost all the States in the country had sought either interest rate resets or refinance some of the loans. States want the interest rates to be reset to about 6 per cent plus in line with the rates at which resources have been raised in the last SDL loan issues or at slightly higher rate.

LIC and the General Insurance Corporation of India have so far not permitted any of the States to either prepay or reset any of the interest rates. LIC' s outstanding loans to all the States are currently in the region of about Rs 45,000 crore. These outstanding include borrowings by State-owned corporations, utilities and local bodies supported by State government guarantees.

The bulk of these loans were taken at rates above 12 per cent, mostly for capital expenditure. Loans to State Government undertakings are backed by sub-sovereign guarantees and also simultaneously backed by physical asset cover. The sources said while LIC was prepared to consider a reduction in the lending rates for fresh borrowings, the corporation has declined to entertain any requests for reduction in the rates on past borrowings.

All the funds provided by LIC are usually long-term in nature. Some of them could extend beyond 2010, the sources added.

The States that have threatened not to avail of LIC/GIC loans include almost all the southern, western and eastern States if the lending rate were not reset. States have been seeking a reset of the lending rates in a bid to reduce their revenue deficits and meet more of their committed plan expenditures.

Sources said that the States wanted the interest reset on the same lines as the debt swaps permitted by the Centre for its high-cost loans.

These debt swaps allowed State's interest expenditure to come down from about 14 per cent to the current level of around 6 per cent plus.

Sources said LIC's stand that any premature redemption would adversely impact the policyholders' interests and this was not acceptable to it. Both LIC and GIC have been severely hit by the sharply falling yields on investments during the last two years. .

In the case of LIC, the sources said, such drops would impact its ability to meet the return expectations of policyholders especially in policies that were savings-linked.

In the case of GIC a drop in investment incomes would imply that flexibility to balance between investment income and premium would become even more tenuous.

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