The finance ministry is set to restructure the Life Insurance Corporation of India, admitting that the organisation is not in good shape.

In an exclusive interview with Business Standard, Anandrao Vithoba Adsul, Union Minister of State for Finance (banking, insurance and expenditure), said LIC could face problems in the next three years.

Commenting on LIC's standing in terms of capital, Adsul said, "It is a fact that it will be difficult to run LIC, and the time has come to undertake its restructuring."

He referred to the Unit Trust of India restructuring, where the government had to inject capital of around Rs 14,000 crore (Rs 140 billion).

"It is important that the government does not lose the trust of the people," the minister said.

Controversy has surfaced over LIC's solvency, with the Insurance Regulatory and Development Authority questioning the lack of capital while the organisation is pushing the issue of government guarantees. All LIC policies have a sovereign guarantee.

Adsul, however, said: "The guarantee is on paper. Every day there are transactions with the public. Guarantees will not help because this is the condition of all state government entities."

According to reports, LIC needs an additional capital infusion of up to Rs 20,000 crore (Rs 200 billion) to maintain the solvency criterion stipulated by the IRDA.

The state corporation has a share capital of a measly Rs 5 crore (Rs 50 million), but has managed to remain in business on the strength of sovereign guarantees backing its commitments.

LIC has already proposed to the Centre to further augment the share capital since it inducted Rs 100 crore (Rs 1 billion) into reserves in 2001-02. The corporation also highlights its hidden reserves well in excess of Rs 50,000 crore (Rs 500 billion).

Adsul pointed out that the poor performance of LIC was partially because of the entry of private players into the industry.

"Today, things have become difficult for LIC because of private players capturing market share. There is a need to restructure the organisation in order to protect its future," he added.

On the subject of the state general insurance companies, Adsul said they needed to look into their loss-making motor portfolios which they had shunned till date.