LIC hikes interest rates on loans against policies

MUMBAI: Life Insurance Corporation has increased interest rates on loans against policies thereby shutting an arbitrage opportunity for policyholders. The corporation has also increased interest rates on delayed payments. Until recently the corporation charged 9% on loans against policies. This provided policyholders an opportunity to earn a spread by borrowing from LIC and parking funds in fixed deposits of triple A rate companies such as HDFC, which offers returns of 9.5% on 15 month deposits. To avoid this, the corporation has raised interest rates to 10%.

Explaining the reason why LIC had not revised rates for several years, a senior official said that interest rates have been largely steady in recent years. However , now volatility has compelled LIC to realign rates with the market. "The policy condition states that interest rates on loans would be revised from time to time," the official said. Unlike the EPFO , which allows employees to tap their retirement savings only for specific events, LIC freely grants loans to policyholders for up to 90% of the surrender value of the policy, including cash value of bonus. The only requirement is that the policy should be assigned in favour of the corporation.

In the private sector, Bajaj Allianz Life Insurance has already been charging interest at the rate of 10% on loans against policies. According to Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life Insurance, this is cheaper than other personal loans. "Life insurance policies can be used as a collateral security for raising loans for some emergency funding that can be leveraged without losing the life cover. It is observed that self employed people prefer this mode for their working capital needs," he said.



Some other private life insurers charge higher rates of interest which goes up to 12.5%. Private life insurers promoted by banks, direct their policyholders to their parent banks for loans against policies. Similarly in the case of interest of delayed payments, LIC has hiked interest charges to 10%. Earlier the corporation was charging 8% interest.

The interest rates charged by LIC are lower than the interest rates charged on loan against public provident fund scheme. Under the PPF scheme loans are available at 2% over the prevailing rate, which at present is 8.8%. Also under PPF the maximum loan amount is 25% of the balance two years earlier.

Meanwhile, the All-India Bank Depositors Association and former deputy governor S S Tarapore have suggested to the Reserve Bank of India that premature termination of fixed deposits should be allowed for survivors in a joint fixed deposit account. "The logic behind this is that the joint holder has to usually face a lot of expenses and should not be further penalized through imposition of an early withdrawal penalty," said Ashok Ravat, secretary of the association.