The Hindu Business Line : Farm insurer bets on more business after loan waiver

Bangalore, March 6 The Finance Minister’s bonanza to the farm sector is likely to benefit the public sector Agricultural Insurance Corporation of India (AICL).

The waiver and one-time debt settlement scheme of Rs 60,000 crore would result in increasing business, AICL officials said. This was because more farmers were now expected to become eligible for credit after the waiver/OTS is completed by the middle of this year.

AICL is the exclusive farm insurer in the country and covers agriculture loans extended by banks. But many banks had failed to avail farm insurance covers from AICL. The sources said that absence of the risk cover was one major reason for some farm loans becoming sub-standard assets or non-performing due to crop failures. Insurance coverage would have averted loans from becoming sub-standard assets, due to crop failures.

Seeking support

The write-downs and the OTS, the officials said, would allow more farmers to be brought within the ambit of risk cover. Already about 11 lakh farmers have sought AICL support from Jharkand region alone, the officials said.

Besides, with the write-downs, AICL’s retentions were likely to improve. This was because once the waivers become effective, AICL would no longer have any liabilities on the waived loans, where risk cover has already been extended. In any case, claims of AICL were currently limited under the National Agriculture Insurance Scheme (NAIS).

NAIS covers all farmers who have availed of crop loans from the banks. Claims payouts in this scheme are borne by the Centre and the State governments, on loans where banks had taken risk covers. Claims are at least about 10 times the premiums collected from the farmers currently. The total claims paid out last year were Rs 550.75 crore. The Government support has so far defended AICL’s solvency margin, which is currently 2 times the insured liabilities.

Capital pressures

However, the officials said, as banks now begin expanding the farm loan, in line with the Government’s policy direction, AICL was likely to face capital pressures. AICL is currently capitalised at close to Rs 500 crore.

The increase in premium flow implied that AICL would require additional capital to comply with the regulatory solvency margin of 1.5 times. Already this year, on a year-on-year basis, AICL’s premium accretions have grown 45 per cent. For the first ten months of the current financial year, premium collections were in excess of Rs 700 crore.

Methods of capitalisation and risk mitigation were still under discussion, the officials said. AICL currently has a paid-up capital of Rs 200 crore and an authorised capital of Rs 1,500 crore. This gives flexibility for further increases in capital by the equity partners --GIC, NABARD and the four public sector insurance companies.

GIC and NABARD currently hold about 35 and 30 per cent stake in AICL. The 4 PSU insurers have a stake of 8.75 per cent each in AICL.

Actuarial method

Besides, the Government was intent on migrating the AICL to an actuarial method of assessing premiums. This was to reduce fiscal support and make AICL a stand-alone entity, the officials said. The officials said that the migration was likely to push up premiums from the current levels.

The Government was also pushing AICL to set up a catastrophe pool for meeting claims payouts. But even for such a pool, support would still be required to build up a corpus.

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