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C. Shivkumar

BANGALORE, March 20

PUBLIC sector general insurance companies have sought to exit from some of the term loans in which corporate debt restructuring is under way.

Sources said the insurers have made this preference in view of the solvency pressures, which have been created partly by the need for enhanced provisioning of some of their potential liabilities.

The sources said the insurers preferred to exit and park the funds realised in Government securities as this would allow them to have a better solvency margin and help meet their provisioning requirements. Normally, only standard assets are taken into account for ascertaining solvency margins. Further, the sources added that the switching to Government securities made sense, especially since they were more liquid unlike term loans.

The existing CDR guidelines provide for an exit so long as other institutional participants are prepared to buy out these loans. According to the sources, once the CDR package was finalised, the takeout of the loans would also be done. However, in all these loan takeouts, the sources admitted, they would have to suffer some losses as the discounting for such takeout was likely to be high, especially since the assets are actually non-performing. However, these losses are likely to be offset with the pick-up in the markets and yields resuming their fall, leading to an appreciation in insurers' assets with a concomitant impact on the solvency margins.

Already in some of the term loans classified as non-performing, the sources added, the insurers have stopped booking income. This in turn has already resulted in shrinking their investment income.

All these loans were made when the insurers were part of the consortium financing, where the lead arrangers are usually financial institutions such as IDBI or ICICI or some of the large public sector banks.

Besides, the sources said, in a situation where large provisions would be required for their balance sheets, taking part in these rescheduling had few benefits for the insurer either in the form of higher interests or a bullet recoveries. In fact, as part of the CDR initiated by the financial institutions like the IDBI, the interest rates are, in fact, being brought down. None of the general insurers find this reduction acceptable since some of the original consortium lending was done at rates upwards of 15 per cent.

Besides, the insurers believe such a reduction would imply a shrinkage in their investment income stream, which was already under pressure due to low yields on Government securities. Average yield on investments for insurers is under 9 per cent.

The sources said as a result, the public sector insurers have indicated their preference to exit from the term loans. The exit would also obviate any losses from such assets in future, they added.

In fact, it was this circumspection that has prevented the insurers from even exercising the conversion option in some of the loans. This option allows for conversion of some of the term loans in to equity.

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