Budget 2021

Budget allocates close to ₹7,000 crore for recapitalisation of three PSU general insurers

Surabhi Mumbai | Updated on February 02, 2020

Lack of recap for PSBs raises eyebrows

Finance Minister Nirmala Sitharaman seems to have set her eyes firmly on state-run insurance companies in Union Budget 2020-21.

While state-run banks did not get any allocation for capital infusion, the Budget presented on February 1 has set aside ₹6,950 crore for recapitalisation of the three public sector general insurance companies — National Insurance, Oriental Insurance and United India Insurance.

“Provision is for higher requirement for maintaining the requisite minimum solvency ratio by each of the three public sector general insurance companies,” the Budget documents said, adding that partial budgetary support has been provided in the Revised Estimate of 2019-20 through the first batch of supplementary demands for grants and provision for further capital infusion is included.

“The provision is met from the National Investment Fund,” it added.

The Centre had infused ₹2,500 crore in the three insurers — National Insurance, Oriental Insurance and United India Insurance — through the first supplementary demand for grants for 2019-20, in December last year, and there have been expectations of more capital infusions to improve their solvency ratio.

Experts welcomed the move, even while they remained concerned about the lack of allocation of capital for public sector banks in the Budget.

“The recapitalisation capital outlay for the public sector insurance companies would be credit positive for the three public sector general insurance companies (all of them are undercapitalised),” said Karthik Srinivasan, SVP and Group Head, Financial Sector Ratings, ICRA Ltd.

The move will not only help improve their solvency ratio but is also expected to help fast-track their merger process. In Union Budget 2018-19, former finance minister late Arun Jaitley had announced that the three companies would be merged into a single insurance entity. It is expected to be listed thereafter.

IRDAI data had also revealed that state-run general insurance companies, barring Oriental Insurance, have ceded market share to their private sector peers in 2018-19.

However, the lack of any funds for public sector banks could pose a challenge. “The worry is that there is no specific mention for bank recapitalisation, which when read with RBI’s Financial Stability Report that NPLs could still haunt Banks in India, could raise concerns and cripple the ability of banks to lend,” said RK Gurumurthy — Head Treasury, Lakshmi Vilas Bank.

Noting that the government has infused over ₹3.5 lakh crore in public sector banks over the last few years, Sitharaman announced that a few of them would now be encouraged to approach the capital market to raise additional funds.

According to Srinivasan of ICRA, the move is in line with the agency’s estimate of limited capital requirements of PSBs during the next fiscal year as most are likely to turn profitable. “We expect most of the PSBs to turn profitable in FY2021 and raise capital from the markets for their growth requirements,” he said.

Published on February 02, 2020

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