The interest swap mechanism will allow exchange of short- and long-term loans between insurers and bankers. Insurers with long-term resources can buy out long-term exposures of banks and in turn, sell their short-term exposures to banks, which have more of short-term liabilities.
Commenting on the move by Irda, SB Mathur, chairman of the Life Insurance Corporation of India (LIC), which has long-term resources of over Rs 2,30,000 crore, said that it was a positive move and would strengthen asset-liability management of both banks and life insurance companies.
We are very keen on undertaking swaps after Irda allows it, he said. LIC has the largest portfolio of government securities the majority of which are 10-year papers. In this regard, the company is next only to the largest commercial bank, the State Bank of India.
Long-term papers would help us execute interest rate swaps with banks, said Mr Mathur. The proposed move by Irda further deepens the secondary market for securitisation of assets with more players and resources.
During last weeks meeting with life insurers in Hyderabad, Irda had extensively discussed different avenues for the safe launch of derivatives trading for insurers.
To minimise the risk, the discussion between insurers and the regulator focussed on the safety aspect of derivative transactions considering the recent crisis in international and domestic stock markets.