Insurers have to provide for IL&FS, RCap exposure

Mumbai: Just like banks, insurance companies too will have to provide for their impaired exposure to IL&FS group companies and the two downgraded Reliance Capital subsidiaries—Reliance Home Finance and Reliance Commercial Fin-ance—the insurance regulator said on Friday.

Speaking at the Ficci Annual Insurance Conference here, Subhash Kuntia, Chairman, Insurance Regulatory and Development Authority of India (IRDAI),  said, “Yes, insurance companies will have to make full provisions for the defaulting accounts of IL&FS…Now it has to be treated as NPA like what the RBI has suggested. There is a method of treating the NPA, the same method which is used by banks under RBI guidelines, similar treatment has to be done by insurers.”

However, Kuntia said some insurers have already made adequate provisions for all non-standard accounts of IL&FS, adding that insurance companies do not have substantial exposure to the two downgraded subsidiaries of Reliance Capital.

“From the initial glance, I find that there is not too much of exposure to these two (Reliance Capital) companies,” said Kuntia.

On Thursday, the National Company Law Appellate Tribunal (NCLAT) had allowed lenders to declare as non-performing assets (NPA) the accounts of IL&FS and its group companies that have defaulted on payments. A bench headed by Chairman Justice S J Mukhopadhaya lifted the embargo on the banks to declare the accounts of the debt-ridden IL&FS and its 300 group entities as NPAs.

An insurance expert said, “Based on prudence and there being no certainty in relation to how much would be recovered from IL&FS exposure, it is recommended that insurance companies provide 100 per cent or a substantial amount of their exposure to IL&FS and others.”

IL&FS has a collective debt of around Rs 94,000 crore.

Reliance Home Finance and Reliance Commercial Finance were downgraded by Care Ratings last month.

Khuntia flagged concerns on corporate governance at insurance companies and asked them to look into such issues to ensure fairness and transparency.

"I have asked insurers to be careful about related party transactions. It has to be at arm's length," he said.

He called upon the non-profitable insurance companies to introspect. “Those struggling will have to change course and see that long-term sustainability is ensured,” he said.

He said that in the first year of liberalisation, India had just five life and nine non-life insurance companies. The numbers rose to 15 during the next four years. There are 24 life and 34 non-life insurance companies today. Last year the overall rate of growth of premium was 13 per cent, higher than the economic growth of the country. “India being a young population,” this demographic characteristic is expected to continue for the next several years, offering insurers a very good atmosphere to operate. Of the life insurance companies, 21 are reporting operational profit compared to 25 in the non-life sector,” he said.

The chairman announced three initiatives that IRDAI will be taking up soon. They include (i) establishment of a risk-based capital system---a self-regulating mechanism where those who manage risk better will be allowed to operate with lower capital; (ii) risk-based supervision; and (iii) introduction of IFRS (International Financial Reporting Standard) 17.

IFRS 17, he said, has been postponed to 2022 globally and India has also postponed its introduction.