Irdai may allow insurers to invest in banks’ AT-1 bonds

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Mumbai | Published: May 6, 2016 5:25:11 AM

The additional tier-1 (AT-1) bond market, which has been witnessing subdued demand, is likely to see some activity with the possibility of the Insurance Regulatory Development Authority of India (Irdai) allowing insurers to invest in this category of bonds issued by banks.

The additional tier-1 (AT-1) bond market, which has been witnessing subdued demand, is likely to see some activity with the possibility of the Insurance Regulatory Development Authority of India (Irdai) allowing insurers to invest in this category of bonds issued by banks.

The regulator is considering allowing insurers to buy hybrid AT-1 bonds issued by banks, senior Irdai official VR Iyer was quoted on Thursday by Reuters as saying.

AT-1 bonds do not have a fixed maturity date, and investors demand for a higher yield because of their perpetual nature and risk associated with the instrument.

If the rules change, banks will find this as a positive since insurers are big players in the debt market. “The regulator would take a final decision in a month,” Iyer said on the sidelines of the Thomson Reuters Risk Summit,” the agency reported.

NS Venkatesh, chief financial officer at IDBI Bank, said this would be a welcome development for the AT-1 bond market. “This would be a win-win situation for both banks and insurance companies as insurers often tend to look for long-term investments which is the nature of AT-1 bonds as well. Moreover, this will help banks raise capital domestically rather than looking for overseas funding which has additional costs attached to it.”

Banks have witnessed a hard time finding investors for AT-1 issuances as the yield demand often shoots up above banks’ expectations. AT-1 bonds also have special provisions where the bank can choose not to pay coupon payments if their capital falls below a certain level. As a result, there is a certain risk element attached to this instrument.

Towards the end of the previous fiscal year, many banks had issued AT-1 bonds, with some public sector units having put money in their bonds. Rural Electrification Corporation (REC) had invested Rs1,500 crore in the AT-1 bonds of Indian Bank, Syndicate Bank and Vijaya Bank. Power Finance Corporation (PFC) had invested a total of Rs1,800 crore in the AT-1 bonds of Dena Bank and Andhra Bank.

Even if insurers are allowed to invest in these instruments, experts say investor interest will be based on a case to case basis. “If Irdai allows insurers to invest in AT-1 bonds issued by banks, it will be a positive for them as this opens a wider investor spectrum for this category of bonds. The interest will, however, be driven on a case to case basis — companies will like to have a look at the capital ratio movement of banks before investing in their AT-1 bonds. Banks will then find it comparatively easier to raise capital as they will have access to some of the biggest players in debt market,” said Badrish Kulhalli, fund manager at HDFC Standard Life Insurance.

Reuters also reported Iyer having said that the regulator had no plan to ease an existing rule that restricts insurance companies from buying bonds of companies rated below ‘AA’. This may delay the low-rated players’ entry into the debt market as such companies will still have to look towards bank borrowing.

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