Basel-III bonds see tepid response from insurers

 

With the Insurance Regulatory and Development Authority (Irda) yet to clarify whether insurers can invest in tier-I capital instruments, insurance companies are staying away from Basel-III bonds.

On Friday, a large public sector bank had concluded its private placement of Basel-III bonds. Insurers said only a few of them were keen on buying these papers.

In March, Irda had allowed insurers to invest in new instruments issued by domestic banks, including debt capital instruments, redeemable non-cumulative preference shares and redeemable cumulative preference shares, under tier-II capital.

While tier-I is banks’ core capital and primarily includes equity, tier-II capital is subordinate debt. Recently, Bank of India had raised Rs 2,500 crore through Basel-III bonds, part of tier-I capital.

“Only two insurance companies took these bonds. We stayed away from the issue. If we want to invest in tier-I capital, it is better to opt for equity. For these bonds, the coupon rate was 11 per cent. If we invest in equities, the returns could be far higher if market conditions are good,” said a fund manager of a large insurance company.

Also, insurers feel these instruments are risky. “We are at a loss. This is because if a bank makes losses, they won’t make any payments towards interests. As the policyholder’s funds are at stake, we cannot afford to take such risks,” said the chief investment officer of a private life insurance company.

Basel-III bonds are issued at a higher coupon compared to other instruments of a similar tenure, owing to the risks involved.

Regulatory officials say they are examining the issue of investing in tier-I capital. An official said while some insurers had sought clarifications, as regulations didn’t mention investment in tier-I, no immediate decision had been taken to issue new norms.

A senior Bank of India official said of quite a few investors had shown interest in their bonds. “There were a spectrum of investors; insurance companies were also into this. We feel eventually, more insurance companies will come for these issuances.”
NOT A HOT CAKE?

• On Friday, a large PSB concluded its private placement of Basel-III bonds
• Insurers say only a few of them were keen on buying these papers
• In March, Irda had allowed insurers to invest in new instruments issued by domestic banks under tier-II capital
• While tier-I is banks’ core capital and primarily includes equity, tier-II capital is subordinate debt
• Recently, Bank of India had raised Rs 2,500 crore through Basel-III bonds, part of tier-I capital
• Basel-III bonds are issued at a higher coupon compared to other instruments of a similar tenure, owing to the risks involved