Insurance companies have to make provisions for IL&FS defaults: Regulator

Insurers have to declare their exposure to IL&FS as non-performing assets (NPAs) if the beleaguered business group has defaulted on payments, said the insurance regulator Friday.

Insurance companies will have to take a hit in their shareholders’ profit—similar to what the Reserve Bank of India asked last week banks to do about their IL&FS exposure.

“Now, it has to be treated as NPA like what RBI has suggested. The insurance companies will automatically do it. There is method of treating the NPA, same method which is used by banks under RBI guidelines, similar treatment has to be done here,” said Shubash Chandra Khuntia, chairman of Insurance Regulatory and Development Authority of India (Irdai).

The National Company Law Tribunal (NCLAT) allowed on Thursday banks to declare their IL&FS exposure as NPAs, but restricted them from initiating recoveries process till the moratorium period.

Khuntia spoke about the risk from the rating downgrade of Reliance Capital subsidiaries -- Reliance Home Finance and Reliance Commercial Finance. "There is a set procedure which will be followed. From the initial glance I find there is not too much of exposure to these two companies", he said.

Khuntia, who was speaking at the sidelines of a FICCI event in Mumbai, expressed concern about corporate governance standards in insurance companies.

“We have seen what kind of turmoil has happened in the NBFC sector but I am confident that insurance industry will not have that kind of a problem. In fact, insurance industry should provide stability in times of economic turmoil”, Khuntia said.

He also outlined a number of initiatives that the insurance regulator is planning to undertake. 

The Irdai plans to move to a risk-based capital regime, dropping current solvency-based rules that do not assess whether the capital held is adequate enough for the risks inherent in the insurance business.

“This will be a good self-regulating mechanism so that insurance companies manage their risk well and use their capital productively,” he said.