The Hindu Business Line : Insurers moving to corporate, bank bonds

The declining interest in bulk deposits was evident from the sharp drop in the rates on certificates of deposits (CD) rates. CD rates are currently below the one year retail deposit rates. Last weekend, large public sector banks such as Canara Bank managed to drive down CD rates to 8.5 per cent. But bankers said, “This is still not the bottom.”

Consequently, public sector insurers, among the largest investors in bulk bank deposits and CDs have quietly begun looking for alternative avenues of investment. The Oriental Insurance Company Ltd Chairman and Managing Director, Mr M. Ramadoss, confirmed the shift and said, “We are looking at all these investment possibilities since yields have to be protected.” Insurers have targeted mean yields in excess of 9.5 per cent this fiscal.

But with the yields on government securities slumping to five year lows and bulk deposit rates, few see the possibility of reaching the mean yield targets without shifting the investments portfolio. Banks’ bonds currently generate yields of close to 10.5 per cent, especially the PSU bonds. In fact, most of the Tier-II bonds floated during the last few weeks were lifted by the insurers. Corporation Bank raised Rs 200 crore towards the last week of last month at a coupon of 10.8 per cent. Corporation Bank is likely to revisit the market for a further Rs 200 crore with a ten year issue priced at 10.10 per cent.

Insurers’ interest in bank bonds was partly in view of their public sector status, which gives an implicit sovereign guarantee cover along with high yields. Under the current investment regulations prescribed by the Insurance Regulatory and Development Authority, general insurers are permitted to invest up to 55 per cent of their investible corpus in approved securities. The approved category of securities included bank capital bonds and Triple “A” rated corporate bonds.

Price expectations

But some banks are also now planning to tap insurers for Tier-I capital. Some banks, such as Vijaya Bank and Dena Bank, have little room for raising Tier-I capital, through equity resources. This was because they are already very close to the government stake of 51 per cent. Consequently some options now mulled include using the instruments such as Innovative Perpetual Debt Instruments for augmenting Tier-I capital.

But bankers said that though insurers, both life and non- life, were willing to invest in such instruments, price expectations were on the high side. Insurers’ minimum price expectation for perpetual debt instrument is in excess of 11 per cent. Besides, there were also issues relating to early exit options. Banks want an exit option at the end of 10 years. Insurers are unwilling to concede such options at this juncture.

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