RBI Asked to Vet the Way Banks Raise Tier-II Funds Govt wants to address concerns raised by IRDA over use of questionable instruments The government has asked the Reserve Bank (RBI) to set up a committee to look into the insurance regulator’s concerns that some of the instruments issued by banks to raise tier-II capital were perpetual and illiquid. The Insurance Regulatory & Development Authority (IRDA) has also said that some of these instruments are flouting its investment norms. The committee will look into issue of and subscription to tier-II instruments under the new Basel-III capitalisation guidelines, a finance ministry official said. “The insurance regulator has raised concerns over certain instruments. We have asked RBI to take up those issues,” the official said, requesting anonymity. As per Basel-III norms, banks can cancel interest or dividends on instruments raised under tier-II capital or write off such investments in times of stress. Life Insurance Corporation (LIC), the country’s biggest insurer, has invested around . 10,000 crore in Tier-II bonds of public sector banks, which are typically unsecured and cannot be converted into equity. In February, the insurance regulator had allowed insurers to invest in debt capital instruments and redeemable noncumulative and cumulative preference shares. An IRDA official said there are also issues with the credit ratings of some instruments that do not meet investment guidelines prescribed for insurance companies. “In view of the substantial need for raising additional capital by banks to meet the new regulatory norms, we had allowed certain instruments but it was observed that some of them are flouting our investment norms,” the IRDA official added. According to RBI’s estimate, public and private sector banks will together need an additional capital of . 5 lakh crore to comply with the Basel-III regulations. Of this, equity capital requirement will be of . 1.75 lakh crore and non-equity capital of . 3.25 lakh crore. “Both the regulators will be able to work out a mechanism,” said the finance ministry official quoted earlier. The government is hoping to channelise pension and insurance funds in banks to meet the huge capital requirements. Additionally, IRDA is also examining a proposal to raise insurance companies’ exposure limit to the banking sector to 30% from 25%. Financial services secretary GS Sandhu had earlier told ET that the government cannot bank on LIC alone to capitalise banks and that it will review how much further exposure the insurer can have in banks. The government has allocated just . 11,200 crore towards bank capitalisation this fiscal, which is substantially less than the amount infused in the last few years.
Posted on: Tue, 06 May 2014 11:22:55 +0000
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