Insurance companies can now make full provisions for defaults by debt-ridden Infrastructure Leasing and Financial Services (IL&FS) and its entities, as well as the two Reliance Capital arms that were downgraded recently

“Insurers can make full provisions for bad debts of IL&FS,” said Subhash Chandra Khuntia, Chairman, Insurance Regulatory and Development Authority of India (IRDAI), on the sidelines of an insurance conference by FICCI on Friday.

This means these will now be classified as non-performing assets by insurers. Banks are also now free to classify defaults by the infrastructure conglomerate as NPAs in their books of accounts, following the ruling by the National Company Law Appellate Tribunal on May 2.

When asked about the downgrade of Reliance Home Finance and Reliance Commercial Finance by Care Ratings last month, Khuntia said insurers with exposure to debt instruments of these companies will have to make provisions.

“Earlier, IL&FS was downgraded, and now two more companies have been downgraded. Insurers with exposure to the debt instruments of these two firms will have to give a similar treatment as they treat their IL&FS accounts,” said Khuntia.

He also stressed that insurers must use their own judgment and not just depend on credit rating agencies while making investments.

The IRDAI chief further said he has asked insurers to be careful about related-party transactions following the crisis in the NBFC sector. “We have seen the turmoil in the NBFC sector, but I am confident that the insurance industry will not have that kind of a problem. In fact, insurers are meant to provide stability in times of economic turmoil,” he added. Meanwhile, addressing the conference, Khuntia said IRDAI will be working on risk-based capital and supervisory framework and introduction of IFRS 17.

He also sought industry feedback on the regulatory sandbox guidelines and said the final notification would be issued soon.

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