Banks, insurance firms hold back investments in equity

Lenders’ exposure in equity market down to Rs 37,510 crore. Faced with uncertainty, domestic financial institutions, particularly banks and insurance companies are holding back investments in the capital markets. Banks investments in the equity markets have been shrinking since the beginning of this financial year. Outstanding investments in shares of public and private sector companies as on August 24 this year were Rs 37,510 crore. For the corresponding period of last year, investments amounted to Rs 38,830 crore.

The shrinking of investments was entirely confined to shares of private sector companies. Investments in private sector equities were brought down to Rs 29,800 crore from the previous year’s Rs 31,000 crore. But shrinking of investments in equities was largely triggered by fears of depreciation.

Presently banks are permitted to hold up to 40 per cent of their net worth in capital market instruments that included, debentures, equities, mutual funds and venture capital funds. But exposure limits in debentures and equities are restricted to five per cent of the incremental deposits. A public sector bank official said, “At this moment of time, investing depositors’ funds in equities is not even under consideration. There is too much of uncertainty.”

In addition there were also fears that banks would come under pressure to capitalise loans made to infrastructure companies as part of the corporate debt restructuring. This kind of restructuring already has a precedent in the case of Kingfisher Airlines, where banks converted part of the outstanding loans into equity. The reluctance to invest in equities also stemmed from fears of asset depreciation. Unlike in the case of the debt, where valuations were done only on a quarterly basis, equity investments were expected to be valued on a daily or at least on a weekly basis under Reserve Bank of India guidelines.

The only equity holdings that have remained constant in bank assets books were investments in subsidiary companies, crossholdings in other banks and public sector entities. In fact in the case of public sector companies investments have remained constant at Rs 7,660 crore.

As far as insurance companies concerned, non-life insurers have made it clear that they would not be in position to make investments in the equity markets. This was in view of the Irda’s stiff guidelines provisioning of liabilities under motor insurance. A top official of the public sector Oriental Insurance said, “We have to comply with the provisions of the Insurance Regulator and at the moment cash is tight for the non-life insurers.”

A senior official of United India Insurance said, “We invest only in large cap stocks. With the current economic environment, the number of companies doing financially well has fallen. Many companies are not performing well. So, we are being cautious and investing in good companies in IT sector, banking sector, infrastructure and engineering sector.”

Instead insurance companies have preferred to invest cash surpluses only in short-term high liquidity instruments. The reluctance to invest in equities was also driven by solvency concerns. Solvency is the excess of capital and value of investments over the insured liabilities. This year insurers are expected to reach a solvency margin of 1.4 per cent. Solvency however is not of concern on existing investments, since they were acquired during the early of the 90s. Those holdings are valued at historical costs. At current market prices it gave insurers a cushion in the form of hidden reserves.

Insurers are permitted to invest up to 35 per cent of their corpus in equities. But most private sector life insurers are concerned they have opted to be cautious, in view of capital constraints. Only LIC is investing in the equity markets though has preferred to cherry pick the investments, with preference mostly for public sector banks and other public sector companies. Private sector insurers have also preferred to follow the LIC, giving priority to investment security instead of returns.

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