Timing crucial as pressure builds on insurers to invest in tier-I bonds of banks
The Insurance Regulatory and Development Authority (IRDA) is likely to come out with new investment guidelines for insurance companies next month, giving more clarity on the instruments and procedures.
According to a senior IRDA official, the regulator’s board will discuss the guidelines in December. This comes at a time when pressure is mounting on insurers to invest in Tier-I bonds of banks and some insurers are sitting on huge losses arising from their equity investments in banks.
The bone of contention is whether IRDA should allow insurers to invest in additional Tier-I (T-1) bonds of banks. “We have not allowed insurers to invest in additional Tier-I bonds. Still, we can look at it once the insurers get some kind of guarantee for their investment in Tier-I bonds,” an official said.
IRDA has asked the insurers to invest in corporate bonds only after ensuring that those bonds are having good credit ratings. The RBI has allowed insurers to invest in T-1 bonds of banks in view of their huge capital requirements under Basel-III plan.
“Forcing IRDA’s hands to permit insurers to subscribe to T-1 capital bonds is not such a smart idea. It will just be shifting the solvency issues of banks to insurers. It may be true that banks, more particularly PSU banks who are reportedly saddled with huge NPAs, will require huge capital to comply with Basel-III (solvency) norms,” said KK Srinivasan, former Member, IRDA.
If the banks can write off such capital (T-1 bonds) or convert them into equity when they are in stress as reported, all that the insurers will be left with in their hands will be junk investments. “It is useful to remember that what insurers are largely investing is not their funds but the funds of the policy holders,” he said. “Why should insurers take up the risk of banks?” While providing export and trade credit guarantees in favour of banks, insurers got into trouble in recent years. Banks lost some Rs 3,000 crore and insurers reportedly repudiated the claim of the banks as not in compliance with policy terms. IRDA then moved in to prohibit granting of credit guarantees in favour of banks.
According to Srinivasan, irony of NPAs of PSU banks is that they have happened right under the nose of RBI officers who are in the boards of PSU banks. “Thus in a way RBI becomes directly responsible for the banks decisions on credits that became NPAs. A regulator should not be part of the apex business decision making body (board of directors) of regulated entities,” Srinivasan said.