BackInsurance companies pip banks as biggest lenders to NBFCs
Insurance firms gave loans of Rs1.76 trillion to the NBFC sector, while banks provided loans of Rs1.595 trillion in FY15
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Mumbai: Insurance companies have replaced banks as the largest lenders to non-banking financial companies (NBFCs), the Reserve Bank of India’s (RBI’s) Financial Stability Report (FSR) 2015 shows, but market participants say that could be because of the deluge of longer-dated paper being issued by infrastructure finance companies, including some quasi-government entities, that get absorbed by the insurance sector looking for longer-period fixed-income products.
Most NBFCs raise money from the markets by issuing bonds maturing in three years or less. But infrastructure finance companies not only issue papers maturing in 10 years, some of the bonds are also tax-free. Insurance companies and asset management companies (AMCs) buy these papers to maintain their asset-liability balance.
Interestingly, the report shows that even banks are relying on insurance and mutual fund companies to raise funds.
This points to a coming of age of the Indian financial system that was heavily dependent on local banks for almost all kinds of funding.
According to the report, in fiscal year 2014-15, insurance companies gave loans of ₹ 1.76 trillion to the NBFC sector. Banks, in comparison, extended loans of ₹ 1.595 trillion. In fiscal 2013-14, insurance companies gave loans of ₹ 96,500 crore, while banks accounted for loans worth ₹ 2.919 trillion to the NBFC sector. AMCs gave out loans worth ₹ 1.008 trillion and ₹ 75,600 crore to the NBFC sector in fiscal years 2014-15 and 2013-14, respectively.
“Insurance companies lend mostly to infrastructure NBFCs because of the long-dated papers, whereas banks lend mostly to the asset-financing space. Since infra papers get issued for a larger amount, insurance companies are emerging as larger lenders than banks," said Vimal Bhandari, managing director and CEO of IndoStar Capital Finance Ltd, an NBFC.
Although the report did not mention names of the insurance firms, market participants said Life Insurance Corporation of India (LIC) is very aggressive in picking up debt instruments of any infrastructure company.
For example, in the last fiscal year, LIC alone picked up ₹ 5,000 crore of papers issued by Power Finance Corp. Ltd (PFC) and an equal amount from Rural Electrification Corp. Ltd (REC), said bond market dealers.
“A lot of electricity boards do not get money from banks. So they come to REC and PFC to raise money which, in turn, raise money by issuing bonds to LIC and other insurance companies," said a senior corporate bond arranger in the market. He did not want to be named because he arranges funds for these companies.
LIC’s top officials were not immediately available for comment.
According to a report dated 12 September 2014 in The Economic Times, LIC is also the biggest lender of secured personal loans in India. In June 2014, LIC’s secured personal loan outstanding was ₹ 60,000 crore, compared with scheduled commercial banks’ (SCBs’) ₹ 58,000 crore in the same period, the paper reported.
Insurance and AMCs are also big buyers of papers issued by banks, according to FSR.
Public sector banks, which as a group were net lenders in the overall inter-bank market, emerged as big net borrowers in the inter-bank certificate of deposit (CD) market.
“As of March 2015, PSBs (public sector banks) had a negative net position of ₹ 313 billion in the inter-bank CD market while having a positive net position of ₹ 1,053 billion in overall inter-bank market," the report said.
The inter-bank CD market accounted for about one-third of the total short-term inter-bank fund-based market as of end March 2015.
Typically, CDs issued by one bank are bought by another. But because of the latest capital adequacy norms, banks have to keep a portion of their deposits invested in highly rated liquid assets. Hence banks, instead of investing in CDs, are investing in short-term treasury bills issued by the government, bond dealers said.
“Besides banks, the other big institutional investors in the CDs issued by the banking sector were asset management companies and insurance companies," the report said.
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