A coin is dropped into a piggy bank in this arranged photograph taken with a tilt-shift lens to illustrate the theme of risk in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)  

Insurance Firms Asked To Provision Against IL&FS, Reliance Capital Defaults

Like banks, insurance firms will also have to make full provisions for their defaulting exposure to crisis-hit IL&FS Group and the two Reliance Capital Ltd. arms, which were downgraded recently, the insurance regulator said on Friday.

The Insurance Regulatory Authority of India said insurers with exposure to Anil Ambani-run Reliance Capital's subsidiaries--Reliance Home Finance Ltd. and Reliance Commercial Finance Ltd.--will have to make provisions for debt of these companies which were downgraded by Care Ratings last month.

On Thursday, the National Company Law Appellate Tribunal allowed banks to declare their defaulting accounts of IL&FS and its subsidiaries as NPAs.

In April, the Reserve Bank of India asked banks to disclosure their exposure to IL&FS and its subsidiaries as the NCLAT verdict was pending.

“Yes, insurance companies will have to make full provisions for the defaulting accounts of IL&FS,” IRDAI chairman SC Khuntia told reporters after a FICCI event in Mumbai on Friday. Some insurers have already made adequate provisions for all non-standard accounts of IL&FS, he added.

Khuntia flagged concerns on corporate governance at insurance companies and asked them to look into such issues to ensure fairness and transparency.

“I have asked insurers to be careful about related party transactions. It has to be at arm's length,” Khuntia said.

We have seen what kind of turmoil has happened in the NBFC sector, but I am confident that insurance industry will not have that kind of a problem. In fact, insurers are meant to provide stability in times of economic turmoil
SC Khuntia, chairman, IRDAI

On the downgrade of Reliance Home Finance and Reliance Commercial Finance, Khuntia said “those insurers with exposure to debt instruments of these companies will have to make provisions”.

“Earlier IL&FS was downgraded and now two more companies have been downgraded. Insurers with exposure to the debt instrument of these two firms will have to give a similar treatment as they treat their IL&FS accounts,” he said.

Care downgraded the long term debt program of Reliance Home Finance from BBB+ to D and that Reliance Commercial Finance to C from BBB+.

Khuntia also asked insurers to focus more on growth and not on market share. “If your growth is high then you don't have to bother about market share. All of us should put our heads together so that the market grows.”