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Insurance companies are loading up on government securities (G-Secs) due to increase in premium collections even as banks relatively seem to be going slow on this front due to excess investment in these securities.
As at September-end 2022, insurance companies’ holding of G-Secs rose at a faster clip (176 basis points/bps or 1.76 percentage points) year-on-year (yoy) vis-a-vis 46 bps yoy growth for commercial banks.
Insurance companies’ holding of G-Secs in overall issuances rose to 25.94 per cent as at September-end 2022 against 24.18 per cent as at September-end 2021.
Commercial banks’ holding of G-Secs in overall issuances was up at 38.28 per cent as at September-end 2022 against 37.82 per cent as at September-end 2021.
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that to meet the robust demand for credit, public sector banks are whittling down (selling) excess statutory liquidity ratio (SLR) securities, including G-Secs, in their investment portfolio whenever the yield comes down. But when the yield is up, these banks buy.
“For example, whenever the yield on the 10-year G-Sec softens to 7.25 per cent or lower, public sector banks sell. If the yield rises to 7.30-7.35 per cent, they buy,” he said.
Retail inflation
Since retail inflation has softened to 11-month low in November, Irani expects these banks to sell a portion of their excess SLR holdings (G-Secs) on Tuesday as yields could thaw in the secondary market and buy securities in the next auction.
Excess holdings of SLR securities of scheduled commercial banks were at 8.8 per cent of their deposits as at September-end 2022, according to RBI’s monetary policy report.
‘The appetite of insurance companies for G-Secs is increasing day by day. Ever since Covid struck, people have realised the importance of medical and life insurance. So, insurance penetration levels are increasing.
“If insurance companies become bigger, we will not need foreign investment in government securities. Domestic financial institutions such as banks, insurance companies, and provident funds collectively can support the government borrowing programme,” said a senior insurance company executive.
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