The government has sought Reserve Bank (RBI)’s assistance to form a committee to look into the insurance regulator's concerns of some instruments issued by banks for raising tier-II capital being perpetual and illiquid in nature. The Insurance Regulatory & Development Authority (IRDA) has alleged that some of these instruments are breaching its investment norms.
As per Basel-III norms, banks can cancel interest or dividends on instruments raised under tier-II capital or write off such investments in times of stress. So, the committee being formed by Apex Bank would look into issue of and subscription to tier-II instruments under the new Basel-III capitalization guidelines.
Life Insurance Corporation (LIC), the country's biggest insurer, has invested around Rs 10,000 crore in Tier-II bonds of public sector banks, which are typically unsecured and cannot be converted into equity. In view of the substantial need for raising additional capital by banks to meet the new regulatory norms, insurance regulator though allowed certain instruments, but found them violating investment norms.
According to RBI's estimate, public and private sector banks will together need an additional capital of Rs 5 lakh crore to comply with the Basel-III regulations. Of this, equity capital requirement will be of Rs 1.75 lakh crore and non-equity capital of Rs 3.25 lakh crore. However, the government is backing significantly on the insurers and is hoping to channelize pension and insurance funds in banks to meet the huge capital requirements. Meanwhile, government has allocated Rs 11,200 crore towards bank capitalization this fiscal, which is substantially less than the amount infused in the last few years.