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Faced with a spate of rating downgrades of non-banking financial companies (NBFCs), insurers seem to be in for difficult times.
Downgraded paper
Insurers are finding it difficult to offload downgraded paper of NBFCs and said it is unlikely the Insurance Regulatory and Development Authority of India (IRDAI) will give a special exemption for holding on to it.
“It’s bad news. Insurance companies are big buyers of such paper. Everyone wants to exit but no one wants to buy it,” said the CEO of an insurance company, adding that the IRDAI is very clear about its investment norms.
“If the rating does not meet the norms, then it does not qualify. So, insurers have to basically exit them and make provisions,” he said.
An executive with another insurance company said that as of now many insurers are still holding on to the downgraded paper. “There is no market for the paper. Insurers may have to hold them to maturity,” he said, pointing out that even in the case of Tata Sons, which turned into a private firm, many insurers are still holding on to the company’s paper as they find it difficult to sell it.
“But how much provision can we make,” he noted. IRDAI norms stipulate that insurers must invest at least 95 per cent of the funds in A+ rated instruments.
For ULIP funds, at least 75 per cent has to be invested in AAA-rated papers. Rating agency ICRA had said the aggregate volume of debt it downgraded last fiscal stood at ₹3.2-lakh crore in 2018-19.
Turmoil in sector
This has been followed by further downgrades of Reliance Home Finance, Reliance Commercial Finance, and PNB Housing Finance in recent weeks. Rating agencies have also warned of continuing turmoil in the sector.
However, while insurers have been closely monitoring their investments in NBFCs, there have been only a few cases of defaults. “Even in cases where the ratings of NBFCs have been downgraded such as DHFL, redemptions have been happening on time,” noted the first executive.
IL&FS defaults
IRDAI has already asked insurers to make provisions for defaults by debt-ridden Infrastructure Leasing and Financial Services and its entities, as well as the two Reliance Capital arms that were downgraded recently.
IRDAI Chairman Subhash Chandra Khuntia had, in March this year, urged insurers to use their judgment while making investments and not go by ratings alone.
He had also asked them to keep in mind the interest of policyholders and not pull out of investments because of a change in ratings.
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