Insurers to keep away from perpetual bonds issued by public sector banks

The insurance regulator plans to stick to it’s stand of not allowing insurers to invest in perpetual bonds issued by public sector banks to shore up their tier-1 capital.

In the past, the RBI had pitched for insurers such as Life Insurance Corporation (LIC), which are large domestic institutional investors, to subscribe to these bonds arguing that it could be an important source for raising the Basel-III compliant tier-1 capital.

A perpetual bond is a financial instrument with no maturity date. These bonds are not redeemable but pay a steady stream of interest forever. Incidentally, some public sector banks have reportedly approached cash-rich PSUs to subscribe to these bonds.

In January, Dena Bank raised ₹1,000 crore and last month Andhra Bank raised ₹800 crore through private placement of non-convertible Basel-III compliant perpetual bonds at a coupon rate of 10.95 per cent.

EPFO’s limitations According to industry experts, some other public sector banks are also discussing the possibility of issuing perpetual bonds to improve their tier-1 capital. One factor that has affected the issuance of such instruments is the investment limitations faced by the Employees’ Provident Fund Organisation (EPFO), a big investor in the debt market.

According to the notification issued last year, investments in tier-I bonds for the EPFO cannot exceed 2 per cent of the total portfolio of the fund.

The Finance Ministry had also made a pitch to the insurance regulator to allow insurance companies as currently EPFO and insurers cannot invest in these bonds, which have forced public sector banks to offer higher coupon rates.

A senior official from the Insurance Regulatory and Development Authority of India said that the issue of allowing insurers to invest in perpetual bonds was discussed recently and the regulator had decided against allowing it.

A senior LIC official also said that they were not in favour of investing in these bonds as they are not listed which will entail lack of liquidity and under the Basel-III norms, perpetual bonds carry loss-absorbency features, which mean that in case of stress, banks can write off such capital or convert it into common equity.

Rising stress With many public sector banks reporting losses in the recent quarters, these bonds are perceived to be risky investments for insurance companies, the official added. However, most public sector banks have turned to LIC for equity capital infusion through private placements. The insurance behemoth has invested ₹1.5-lakh crore in government securities and ₹50,000 crore in equities this year.

At a time when most public sector banks are battling rising stressed assets in their portfolio, they have announced plans to raise equity capital from LIC on a preferential basis.

These banks include Oriental Bank of Commerce of ₹178 crore and Vijaya Bank (₹226 crore) and Andhra Bank (₹136.48 crore).

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