MUMBAI: The Insurance Regulatory and Development Authority (Irda) has asked life insurers to stop selling highest net asset value (NAV)-guaranteed products.
In a recent communication to all life insurers, the regulator has said, “The marketing of products labelled as highest NAV product shall not be allowed”. These products contribute almost 20 per cent to the total premium collection of life insurers.
Irda, in the past eight months, had informally expressed its discomfiture with such products at several fora. The regulator’s argument was that such products led to systemic risks associated with the way funds were managed and posed the risk of a heavy sell-off in equities when stock markets fell.
Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, say, five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively. That could lead to undue risks.
These products had become the largest selling unit-linked life insurance policies (Ulips), after the new guidelines on Ulips came in September 2010.
In another move, the Irda has mandated a minimum death benefit of at least 10 times of the annualised premiums in case of traditional products, as there were some products offering a limited death benefit. The regulator has also discouraged the use of single premium or limited premium payment term polices as these could impact the cash flow management of companies. Accordingly, Irda has proposed all polices have a regular payment option equivalent to the term of the policy.
Single-premium polices might be issued only under special categories.
“In most of these products, customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death), the benefits or the amounts are sometimes lower than the premiums. The basic underlying principle of a life insurance policy is it should have sufficient life risk cover,” said an Irda official.
The regulator has expressed reservations on policies offering “low” or “insignificant” life risk covers. Irda has pointed out three types of traditional plans on such grounds — products where the death benefit is defined as the return of premiums (with or without interest), products in which the initial death benefit is significantly high and reduces subsequently during the currency of the contract and products in which the insurance cover is insufficient/insignificant in relation to the premium i.e. products which are mostly meant for savings. “We would not allow such products. It was clearly a marketing gimmick from the insurers,” said a senior Irda official. In case of unit-linked policies, the Irda mandates a minimum sum assured guarantee of roughly 10 times of the annual premiums (in case of death). However, for traditional plans, there was no such mandate. The Irda is likely to come out with the final guidelines on product design soon, which would include all such details. It is not approving any products until life insurers design products according to the framework suggested.
“Lately more complex products are being designed and filed for F&U (file and use) clearance with the Irda. In the process of clearing these products, the Irda has noticed that features of several products are not in alignment with the best practices and, frequently, lack clarity. The efficiency of product clearance has been constrained by such features,” the Irda said in its communication.
SHORT-TERM RATES BACK TO DOUBLE DIGITS ON TIGHT LIQUIDITY
MUMBAI: After some relief, rates on short-term debt instruments have crossed 10 per cent levels within a month as liquidity pressures have not eased despite inflows. Heavy weekly government borrowing and central bank’s foreign exchange market intervention continue to weigh on liquidity in the system. Last week, Indian banks raised Rs 450-500 crore via certificates of deposits (CDs). Rates on one-year CDs are at 10 per cent and three-month CDs at 9.8 per cent. After the year-end pressure, rates for one-year CDs had eased to 9.5 per cent and three-months to nine per cent in mid-April. Rates on commercial papers (CPs) have also increased to more than 10 per cent from 9.7 per cent levels in the same period. CDs are debt instruments issued to raise funds for tenures of up to one year, while CPs are issued by companies for similar maturities. Mutual funds and banks are the major investors in both these instruments. Liquidity for the week remained in the range of a negative Rs 1.12-1.25 lakh crore, as reflected by bank borrowings from the liquidity adjustment facility window of the Reserve Bank of India (RBI). Banks also borrowed Rs 800 crore from the marginal standing facility (MSF), at a penal rate of nine per cent. The overnight call money rate hovered close to the MSF rate during the week. (For details log on to : http://www.business-standard.com/india/news/short-term-rates-back-to-double-digitstight-liquidity/474249/)
LIFE INSURANCE FIRMS GET RELIEF; TO BE OUT OF MAT REGIME
NEW DELHI: The Finance Ministry has withdrawn its proposal to bring life insurance companies under the Minimum Alternative Tax (MAT) regime. Had this provision been adopted by Parliament, life insurance companies would have had to pay MAT at the rate of 18.5 per cent. However, the existing provision prescribes income-tax to be payable at the rate of 12.5 per cent and that too after accumulated loss is wiped out. This, with the amendment in the Finance Bill 2102, will continue. The Finance Minister, Mr Pranab Mukherjee, in a list of amendments to the Finance Bill, said that the provision (amendment to section 115JB of the Income-Tax Act) will not apply to any income accruing or arising to a company from life insurance business. Mr Sunil Jain, Partner, J Sagar Associates, says, “Removal of MAT on income from life insurance business will help players plan their cash flows better given that MAT does impact their cash flows. A positive news for a sector awaiting increase in limits of FDI for years.” (For details log on to : http://www.thehindubusinessline.com/todays-paper/article3416147.ece)
SBI EYES 50 PER CENT GROWTH IN HOME LOANS
KOLKATA/BHUBANESWAR: State Bank of India (SBI), the country’s biggest lender, eyes 50 per cent growth in home loans in 2012-13. The bank had lent Rs 2,214.30 crore in this segment in the previous fiscal in the Odisha circle, riding mainly on the boom in the realty market in the city that has not seen any slump despite sagging property sales in metros. “We want to grow at 50 per cent over last fiscal. In Bhubaneswar, the housing market is still doing very well compared to other cities that have seen a slowdown. Home loans are currently contributing 15 per cent to our total loan portfolio,” said Praveen Gupta, chief general manager of SBI’s Odisha circle. “We have a dedicated home loan sales team and our loan rates are the lowest and the most attractive in the market,” he added. The home loan size for Bhubaneswarand peripheral regions alone stood at Rs 716.73 crore which marks 32.36 per cent of SBI’s total home loans for the circle. On a pan-India basis, Gupta said, SBI’s home loan portfolio has exceeded Rs one lakh crore and the PSU bank has already pipped HDFC Ltd as the largest home loan lender. (For details log on to : http://www.business-standard.com/india/news/sbi-eyes-50-growth-in-home-loans/474238/)
CENTRAL BANK OF INDIA SAYS IT NEEDS OVER RS 14,000 CRORE FOR BASEL III
MUMBAI: State-run Central Bank of Indiahas said it will be requiring over Rs 14,000 crore of fresh capital to meet the Basel-III guidelines which will kick in from next fiscal. “Our bank will require Rs 14,067 crore by March 2018 in order to meet the Basel-III requirements,” the city-headquartered bank’s chairman and managing director M V Tanksale said. When asked how the bank, which posted a net loss of Rs 105 crore for the March quarter due to a jump in stressed assets, will fund it, Tanksale said it will depend a lot on the proposed follow-on offer. As of March 31, the government had a 79.15 percent stake in the bank. An FPO will require the government to participate equally in the offering. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/central-bank-of-india-says-it-needs-over-rs-14000-crore-for-basel-iii/articleshow/13119286.cms)
ORIENTAL BANK HIKES FCNR INTEREST RATES
NEW DELHI: Public sector lender Oriental Bank of Commerce (OBC) has hiked its offered interest rates on foreign currency non-resident (banks) deposits. The deposit rates have been revised on all maturities from one to five years for US dollars, British pounds, Euros, Australian dollars, Canadian dollars and Japanese Yen. The interest rate hike ranges from 75-175 basis points and took effect from May 8. The OBC move comes close on the heels of the Reserve Bank of Indiaraising the interest rate ceiling on such deposits from 125 basis points above Londoninter-bank offered rate (LIBOR) to 200 basis points for maturity periods of one year to less than three years, and to 300 basis points for maturity periods of 3 to 5 years. (For details log onto : http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article3416164.ece)
MF INDUSTRY COME OUT OF WOODS, AUM UP 16 PC IN APRIL: CRISIL
MUMBAI: The mutual fund industry posted a nearly 16 percent growth in its average assets under management (AUM) at Rs 6.8 trillion in April on the back of higher inflows to the money market funds, a Crisil Research report has said. The industry had AUM of Rs 5.87 trillion in March. The rise in AUM was mainly due to inflows of around Rs 75,700 crore into liquid funds, comprising around 82 percent of the total inflows. “Historical trend shows that quarter-end outflows in the category are reversed in the subsequent month (March witnessed outflows while April saw inflows) as corporates re-invest their surplus funds that were withdrawn to pay advance tax,” the report said, adding that total assets in liquid funds rose to Rs 1.6 trillion in April, against Rs 80,350 crore in March. Similarly, income funds also witnessed inflows for the first time in the last six months. “Income funds (including ultra short-term debt funds), which saw outflows for the last five consecutive months witnessed inflows of Rs 179,00 crore (highest in the last one year) in April,” the report said, adding that AUM in this category rose by 6.5 percent to Rs 3.09 trillion in April. (For details log on to : http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/mf-industry-come-out-of-woods-aum-up-16-pc-in-april-crisil/articleshow/13119573.cms)