Finance ministry to resolve RBI-Irda spat over T-1 capital bonds

04 Nov 2015 Evaluate

The finance Ministry has stepped in to resolve differences between Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (Irda) over whether the insurance companies should invest in the additional tier-1 (AT-1) capital instruments issued by banks. The Ministry further stated that 'It is being examined. We are looking to bring both regulators on board given the burgeoning capital needs of PSBs to be compliant with Basel III norms'.

Public sector banks (PSBs) will need to raise Rs 1.10 lakh crore from the markets to meet more than half of their Rs 1.8 lakh crore capital requirement over for the next four years. RBI stated that, under the proposal of infusion of capital in PSBs, investors will have greater appetite for those banks' AT1 bonds and favoured the proposal, arguing that it could be an important source for raising the Basel-III compliant tier-1 capital. However, IRDA has strongly opposed a proposal to provide capital to state run banks backed by the banking regulator, Reserve Bank of India.

IRDA stated that there are various issues with these instruments and that is why it has not permitted insurers to invest in them as these instruments do not favour the investor. The tenor reduction from 10 years to five years and call option in favour of issuer is also a big impediment. On the other side, RBI has argued that although there is a minimum period of five years before the issuer can exercise a call option, there is no upper limit and issuers can tailor the date of call option according to the investor's preference through mutual agreement.

AT-1 capital is essentially funds raised through bonds. Under the Basel-III norms, such capital has some loss absorbency features, which means that in case of stress, banks can write off such capital or convert it into common equity, something perceived risky for insurance companies. Banks feel if insurance companies participate, the market will become deeper and they will get capital at competitive rates.

Earlier this year, the finance ministry had issued a directive to state-run banks to raise money through AT-1 bonds at lower cost and only when the market conditions are favourable.

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