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Clear Way Ahead for Insurance Companies To Invest in Banks

Government has asked IRDA to raise the exposure limit of insurance companies to allow the insurance sector to invest their funds more in banks and financial institutions. Next government will take decision regarding this. 

NEW DELHI, 11th March 2014: The exposure limit of insurance companies may get raised from 25% to 30% as government has asked the insurance sector regulator- IRDA to allow insurance companies to invest more of their funds in banks and financial institutions. The government has explored ways to infuse additional capital into state-run lenders. 

According to a senior government official, soon a decision will be taken as IRDA has some concerns that are being looked into. Life Insurance Corporation (LIC), the country's largest insurer has already touched 22% of the exposure limit. 

According to the Reserve Bank of India, to meet the Basel-lll norms, state-run banks will need about Rs 4.15 lakh crore. Non-equity capital shall be around 2.75 lakh crore and equity capital will be about Rs 1.5 lakh crore. 

By March 31, 2018, the adequacy ratios of Basel-lll capital will be fully phased. 

P Chidambaram had said last week that some of the regulations should be revisited by pension and insurance regulators as suggested by banks to allow additional investment in tier-l capital of banks. There are certain changes that PFRDA has made but there will also be discussion with IRDA. 

In 2013-14, Rs 14,000 crore was allocated by government towards capital infusion. In 2014-15, Rs 11,200 crore is allocated. The time to look for innovative and new ways to raise more capital for banks has come according to the finance minister and a decision regarding this will be taken by the next government. 

The sector-specific exposure limit had been increased by IRDA in 2013 for investments by insurers in pharmaceutical and information technology sectors from 15% to 20% of their total investment. An official with IRDA said that a balancing act needs to be achieved as concentration of risk is an issue. He also added that the changes in debt and equity structure can be concerned. 

If LIC alone will be asked to bear the burden of offering capital support to banks that it may create issues for the insurer in the longer run according to some experts. 

According to the CMD of CNI Research, Kishor Ostwal, some changes like allowing 49% foreign institutional investment in public sector banks (PSBs) by government can offer a great value to LIC in the long run. The valuation of PSBs will improve when economy stabilises though they are underperforming for various reasons. 

The government has committed to maintain the capital adequacy ratio (CAR) of PSBs at 8% and keep 51% stakes in them.