LIC is one of the financial institutions to be established in India after independence. The full form of LIC is life insurance corporation and it was established in 1956. The main aim behind the establishment was to spread the message of life insurance in the country. Also, it was required to mobilize people’s savings. This was done particularly for various nation-building activities.
Features of LIC
There are various features that stand out from their competitors. These areas below:
As a Savings Institution
Life insurance mobilizes as well as promotes the savings in the country. Furthermore, income tax concession provides more incentives to people with higher income. This is done when it is saved through various its schemes.
In recent years, business for insurance has been on rising. This is because the country is becoming more insurance conscious.
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Institution for term Financing
Another function of LIC can also be termed as a large term financing institution. Also, the net annual business through ingestible funds is very high. Furthermore, net income obtained through large investments is also very high for it.
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A large part of an investment by LIC is in government securities. Also, it stated in the law that it has to invest at least 50% of its accrual. This is done in the form of premium income in government as well as other approved securities.
Also, it’s funds are made available to the private sector. This is possible through investment in loans, shares, and debentures. Furthermore, it plays a significant role in developing the business of underwriting of new issues.
Stabilizes the Share Market
LIC plays the role of downward stabilizer for the share market. This is because of the inflows of the new funds. Thus, these new funds help LIC buy shares from the weak. Particularly when the market is weak.
Also, LIC does not sell the shares when the market overshoots. This is done because of the pressure of investment in new funds. Also, it is partly due to disincentivizing the capital gains tax.
Defects of LIC
Loan finance defects
Mostly, development banks provide assistance in the form of debt capital for term loans. Although the loan financing ensures stable returns there are some drawbacks. Because of loans, the government loses out on potential corporation tax.
Furthermore, the development of corporate bonds is limited due to financing. Also, the industry prefers loans to debentures. This is simply because the default on loans is not made public. Also, it can be negotiated with the lending agency.
Dependency on institutional sources
The capital resources of any development bank are obtained from institutional sources. Because they cannot raise the funds from the public unlike insurance companies and banks. Also, institutional sources have enabled the development banks getting funds at a very low yield.
But this low yield is now not possible because of the popularity of the banks. Thus, they are not able to make their loans and debentures raise funds in the public.
Practice Questions on LIC
Q. When was LIC established in India?
Answer: C. 1956
Q. Which of the following are the features of LIC?
A. Savings institution
B. Term financing institution
C. Investment institution
D. All of the above
Answer: D. All of the above