Irda Plans to Trim Insurers’ Exposure to BFSI

Plans to include fixed deposits & bonds into the overall cap of 25% for the sector, but cos lobby against move, say it may hit investor returns

India’s insurance regulator plans to include fixed deposits and bonds issued by housing finance companies and non-banking finance companies in the overall cap of 25% for banking, financial services and insurance (BFSI) sector, restricting further flow and trimming insurers’ exposure to the sector.

With its newfound power after the passage of the Insurance Bill recently, the Insurance Regulatory and Development Authority has taken up the issue of linkage of financial services sector, something that the Reserve Bank of India has also been pointing out in its half yearly stability reports.

Insurance companies are, however, lobbying against the move, say ing that it may reduce returns for investors when the sector is expected to revive economic growth.

“Overexposure to one particular sector is not good,“ said an Irda official, who did not wish to be identified. “If companies are investing in FDs or bonds of finance companies, they are taking exposure to the sector.“

As per the plan, insurance companies will be allowed to invest up to a quarter of the total investible corpus in BFSI sector. This will mean that insurers will have to freeze their investment in the sector or begin realigning their sectoral exposure.

Life insurance industry manages assets worth .`23 lakh crore. Of this, state-owned Life Insurance Corporation manages . `18.5 lakh crore. Insurers are struggling to match the return offered on taxfree bonds and fixed deposits.

LIC, which has been a major buyer of stocks and bonds of staterun banks, may be among the worst hit given that it already owns huge chunks of shares. It owns 25% share in Corporation Bank, 11.82% in State Bank of India, an undisclosed amount of bonds and also deposits in many banks.

In 2013, LIC was given an exemp tion to increase equity exposure in a single company to 25%. Life insurance companies can buy 1215% in listed stocks depending on the size of their assets under management. “If banking does well, all insurance funds will be underperforming,“ said AK Sridhar, chief investment officer at Indiafirst Life Insurance. “Banking index in Nifty has 29% weightage. It will further worsen the situation.“ Whenever banking stock prices move up, insurance companies sell banking shares to fall within the regulatory restrictions.

“There will be challenges in investment,“ said the chief investment officer of a large private sector life insurance company. “In any case we have to sell bank shares if the share price moves up as our exposure is on the brink.“

At present investment in fixed deposits, bonds issued by non-baking finance companies and housing finance companies are not consid ered as exposure to the BFSI sector.

Bonds issued by infrastructure finance companies are taken as exposure to infrastructure. In infrastructure, insurers need to maintain a minimum 10% investment, but there is no ceiling.

Earlier this year, the regulator had directed insurance companies to treat investment in IDFC as banking exposure instead of banking two years after the lender turns into a bank.

RBI in its financial stability report had said that insurance companies’ investments in the banking sector as a percentage of their respective assets under management were sizeable and the interconnectedness that exists between different sectors in the financial system does expose the system to contagion risks in the event of stress scenarios.

Source: Economic Times

Date: 30-04-2015

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