What the Downfall of IL&FS Means for Pensions and Public Trust

Almost 10 per cent of the shadow bank's debt lies with the pension and insurance sector.

There have been at least 56 reported ‘starvation deaths’ or ‘hunger deaths’ in the last four years. Of these deaths, 42  happened in 2017 and 2018, most critically due to lack of pensions, ration, and Aadhaar.

In Jharkhand, nearly half of the elderly, widows and differently-abled persons in the state who qualified for social security pensions were still deprived of their entitlements.

These are numbers that are directly on our conscience. It is sad then that the demise of Infrastructure Leasing & Financial Services Limited (IL&FS) has sparked a debate only on the way we regulate our most important financial companies.

Missing from the discourse is the hidden narrative of failing social security in India, because the collapse of IL&FS revealed the enormous extent of exposure of pension funds, and the general apathy we show towards our poor, and the old; often in the same bracket.

IL&FS describes itself as one of India’s leading infrastructure development and finance companies. By their own admission, their influence has been sectorally and geographically diverse, and they have had strategic relations with governments in multiple states, and across multiple governments. It must also be remembered, that the company is registered as a ‘Systemically Important Non Deposit Accepting Core Investment Company’ with the RBI.

Also read: Why Govt Employees Are Up in Arms About the New Pension Scheme

Therefore, the fact that the sudden demise of IL&FS affected the entire economy, and in ways we are still trying to fathom, is hardly surprising. For this reason, the 2017-18 annual report for IL&FS is an interesting read. It notes with immense pleasure, how the Il&FS Financial Services Ltd, a key part of the group, had strengthened its relationship with mutual funds, private banks, NBFCs, and pension funds for raising resources, revealing how systemic the problem is.

Therefore, almost without exception, financial institutions across all sectors, tumbled with the company. However, the impact on the country’s elderly population, particularly the elderly poor has been profound.

How significant is the impact on pension funds?

The importance of pension funds in India is immense, considering the proportion of elderly population is set to go upto 19% by 2050. To get a sense of the actual exposure of pension systems to this crisis, consider this. The exposure of pension fund managers in the IL&FS group is in the region of Rs 1,200 crore. This prompted the pension fund regulator, the PFRDA to announce that it would be revising its investment norms soon. This is important considering the bonds of IL&FS just before the crisis were rated ‘AAA’, indicating excellent credit worthiness.

With regards to India’s National Pension System, in which 90% of the contribution is by government employees, the risk exposure has been estimated to be around Rs 1,500 crore. If this number has you worrying, consider the exposure of some of India’s biggest pension funds, including LIC, which has its exposure pegged at almost Rs. 335 crores and Rs. 215 crores, in the pension fund schemes for state governments and the central government respectively.

Other pension funds are not far behind, with the SBI pension fund having an exposure of Rs. 91 crores, and HDFC and Kotak with Rs. 6 crores, and Rs. 5 crores respectively.

It is poignant to note that out of the Rs 90,000 crore debt of IL&FS, almost Rs 10,000 crore has been with the pension and insurance sector.

Why is this information important?

A report on social safety nets (SSN) in 2018 found that in India the total budget of social safety net programs was far lesser than similar budgets in Pakistan, Sri Lanka, South Africa, and most other countries in Europe and Central Asia.

In a country where there is no universal social security scheme, the exposure of the few available pension funds, particularly state funds becomes even more stark. It points to a systemic lack of sensitivity and inclusivity in our public policies. It is not surprising then that the ILO found the difference in effective social protection coverage between Australia and India, the highest and lowest in the region, to be more than 70 percentage points. So far as covering contingencies for populations was concerned, India far fell below Mongolia, Vietnam, Sri Lanka, and Bangladesh.

From the data available, in terms of total SSN budgets, India’s budget was 0.53, compared to 0.61 of Pakistan, and 0.68 of Sri Lanka. In terms of active coverage, India again fell behind with 10.3%, far below Sri Lanka and Maldives’ 24.1%. The percentage of beneficiaries covered was also far less in India with 0.9%, when compared to Sri Lanka’s 2.3%, Bangladesh’s 3.2%, and Maldives’ 5%.

Also read: 10,000 Elderly People From Across India Come Together to Demand a Universal Pension

The state of social security pensions in India is so dire, that in 2017, around sixty economists, and public intellectuals wrote an open letter to the Finance Minister, imploring the Government to “urgently” increase its contribution towards some of India’s biggest pension programmes, including the National Old Age Pension Scheme, and widow pensions. The finance ministry never responded, with either comments, or its own data. The lack of data is of course another major issue in all policy debates.

This information is critical to understanding how little importance we give to social protection programmes like pensions and insurance, both in our conversations, and in government budgeting. In fact, the impact of IL&FS upon most pension funds in India has neither been sufficiently documented, nor have any public advisories been issued for subscribers.

What needs to change?

This has perhaps been our single most take-away from last year – the demise of public trust, in our state owned banks, financial institutions, regulators, and credit rating agencies; frequently collectively.

More than a third of the shares of IL&FS are owned by state owned entities. LIC, India’s biggest state insurance company which has bailed out both IDBI Bank and now IL&FC, has seen its gross NPA rising to 6.23%. In fact, the NPAs for the life insurance segment has gone up by 26% in the last year, in spite of which the IRDA has not come out with any regulatory guidance.

Out of the 12 banks under RBI’s PCA framework, 11 are public sector banks. Entrenched in the spectacular fall of IL&FS has been the subtext of governance failure of India. As a system, we need to shift the attention from sectoral problems of banks, pensions, and insurance companies to the collective issue of a lack of an effective social net for our people. We need more prudent regulators, a more responsive state, increased state capacity, and more on ground accountability.

Shohini Sengupta is a Delhi-based policy lawyer.