Insurers can take over loans of only govt-guaranteed projects

Irda worried over long gestation periods of infrastructure projects

Life insurance companies may be allowed to take over banks’ long-term infrastructure loans. However, their exposure will be restricted to public sector projects backed by sovereign guarantee.

This has been told by the Insurance Regulatory and Development Authority (Irda) to the government and the Planning Commission. “Insurance companies will be allowed to give long-term finance for infrastructure projects only if they are backed by sovereign guarantee. A number of national highway projects, airports and ports carry sovereign guarantee,” said a senior Irda official.

Since infrastructure projects need arrangements in which these can be initially financed by short-term debt and later by long-term debt, long-term investors like insurance and pension funds are required to play a significant role. In order to meet the huge requirement for infrastructure funding, a report by Housing Development Finance Corporation Chairman Deepak Parekh had suggested allowing pension and insurance funds to invest in the infrastructure debt market.

According to Irda’s investment guidelines, insurance companies have to invest 15 per cent in infrastructure, 50 per cent in government securities and 35 per cent in other approved securities. The infrastructure investment includes papers issued by power, roads, ports, dams, housing and construction companies or projects.

In addition, insurers can invest only in AA rated infrastructure papers. They can invest in A+ paper of other companies. At present, insurance companies are mandated to invest up to 15 per cent of their investible corpus of traditional plans in infrastructure.

In a proposal to the insurance regulator, the Planning Commission had suggested that insurance companies invest Rs 25,000 crore over the next five years in infrastructure. But Irda’s main concern is that infrastructure investments are illiquid and involve tenures of 10-12 years, as infrastructure projects have long gestation periods. The returns are also lower compared to other asset classes.

In 2009-10, life insurers’ total business premium income was over Rs 2,50,000 crore, including both renewal and new business premium. Since around 80 per cent of the money collected by the 23 life insurance companies comes under unit-linked insurance plans, less money is flowing into the infrastructure sector.