Month: January 2021

Soon, life insurance companies will offer a standard pension plan with two annuity options.

Continuing its drive to ensure standardisation across all product segments, the Insurance Regulatory and Development Authority of India (IRDAI) has directed life insurers to offer ‘Saral’, a standard individual immediate annuity product from April 1.

In view of the many immediate annuity products in the market, it was necessary to introduce a standard individual immediate annuity product with simple features and standard terms and conditions suitable to an average customer, said the IRDAI.

As per the guidelines issued by the regulator, Saral Pension will offer two annuity options – life annuity with 100 per cent return of purchase price and joint life annuity with a provision of 100 per cent annuity to the secondary annuitant on the death of the primary annuitant, and return of 100 per cent purchase price on death of the last survivor.

No maturity benefit

The minimum annuity will be ₹1,000 per month, ₹3,000 per quarter, ₹6,000 per half-year and ₹12,000 per annum. There will be a limit for maximum annuity. There will be no maturity benefit under the product.

Industry players feel the proposed Saral Pension will auger well for post-retirement plans. According to Tarun Chugh, MD and CEO, Bajaj Allianz Life, post-retirement income is an important customer need that is mostly unplanned for in India.

“Annuities from life insurers meet the need of a life-long guaranteed income, and offering a standard product with simplified features is a great step in that direction from the IRDAI,” he said.

Lenders to infrastructure projects should be brought in as parties to the concession agreements, and any such move would help bolster their confidence in lending, PR Jaishankar, Managing Director, India Infrastructure Finance Company Ltd (IIFCL), has said.

India should also take steps to set up a secondary market at scale for infrastructure loans so that lenders can, when required, offload their exposures to institutional investors such as pension funds and life insurance companies, he told BusinessLine in an interview.

On the issue of bringing in lenders as a party in concession agreements, Jaishankar noted that any such move would ensure equitable allocation and distribution of risks.

“Today, a bilateral arrangement is between the concessioning authority and the concessionaire. This leaves out lenders, and lot of issues remain to be addressed. If we can have tripartite arrangements including lenders, problems such as termination payments (pertaining to lenders) will get resolved. Most lenders have large (nearly 70 per cent) exposure to a project, and they must have a skin in the game. The kind of risks perceived by lenders will get addressed if this kind of tripartite arrangements are introduced; this will help build confidence of lenders also,” he said.

If India has to get more private investments in infrastructure, this kind of confidence-building measures are more important, he said, adding that confidence begets investments. “If lenders form part of concession agreement, sizeable issues on finance and lending can be addressed.”

Jaishankar’s remarks are significant as it comes days before the Budget on February 1. The upcoming Budget — which is expected to give a healthy dose of impetus to public-private partnerships, especially in the health sector — could also be a platform where the Centre throws more light on the financing of ₹110-lakh-crore National Infrastructure Pipeline projects for next five years.

Reforms

The IIFCL chief felt more structural reforms are needed on the concessioning front and for certain bottlenecks like de-logging the payments system of the concessioning authorities.

He also stressed the need dedicated redress institution mechanisms (for arbitration, etc) to solve sectoral issues. At the same time, more teeth need to be provided for existing mechanisms as well.

Jaishankar also expressed hope that a conducive regulatory regime for Infrastructure Investment Trusts (InVITs) — which he believes have great potential in India — would get evolved in days to come, and players like State-owned IIFCL would be allowed to invest in such structures. Currently, RBI regulations do not permit NBFC-IFCs such as IIFCL to invest in InVITs, while scheduled commercial banks can do so, he pointed out.

The IIFCL chief has been advocating a “relay race” type system for infrastructure financing where the baton keeps passing from a set of banks to another set of lenders for long-term financing of infrastructure projects.

Meanwhile, speculation is rife that the Budget will see the announcement of a new development finance institution to take care of the long-term infrastructure financing needs of the country and provide an alternative to banks, which are already stretched. Such as proposal could go along with the much-talked-about investment holding company for public sector banks besides the introduction of a ‘bad bank’ to address the NPA worries of banks.

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Public Sector Banks (PSBs) may require up to ₹43,000-crore capital during FY22 not only for growth but also to replace Additional Tier I (AT-I) bonds where a call option would fall due, according to credit rating agency ICRA.

The agency expects PSBs to break even in a worst-case scenario as well with the possibility of a return on equity (RoE) of about 5 per cent in a favourable scenario during FY22, which means their capital requirements will be lower because of the losses.

“The capital requirements would, however, arise on account of the estimated ₹23,000-crore Additional Tier I (AT-I) bonds where a call option would fall due next year.

“Hence, public banks will require capital not only for growth but also to replace these bonds to maintain their capital profiles,” ICRA said in a note on ‘Union Budget 2021-22 Expectations’.

Factoring in the aforementioned two requirements, ICRA estimates the capital requirements for public banks to be negligible in a favourable scenario (RoE of 5 per cent), but up to ₹43,000 crore in a worst-case scenario.

ICRA observed that the appetite of investors towards the AT-I bonds of public banks has improved recently with more public banks issuing AT-I bonds in FY21 compared to FY20.

Recapitalisation burden

If the banks can raise a part of the ₹43,000-crore capital through AT-Is and market sources, it could reduce the Government of India’s (GoI) recapitalisation burden for the coming fiscal, it added.

Though clarity is likely to emerge on this front only in H2 (October 2021-March 2022) FY22, ICRA expects GoI to allocate some quantum to the PSBs in the Budget itself (unlike last year when they made the announcement later) to provide some additional comfort to the markets.

As per the Reserve Bank of India’s (RBI) ‘Report on Trend and Progress of Banking in India 2019-20’, preliminary estimates suggest potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points (bps) of the common equity tier I (CET I) ratio for the banking system.

According to the report, 15 PSBs collectively raised ₹36,439 crore in FY21 (up to November 2020). Three private sector banks collectively raised ₹32,443 crore.

NBFCs

The agency opined that for the Non-Banking Finance Companies/ NBFCs (non-infra), extension of the Reserve Bank of India (RBI) and GoI-backed funding and guarantee schemes, which were rolled-out in the current fiscal, are likely to be the keys for the sector’s near-term liquidity.

“Considering the moderate growth expectation of 7-9 per cent in FY22, it would also be critical to provide guidance on the medium-term support framework for the sector to boost investor confidence and for sustainable growth revival,”the note said.

The expected boost to infrastructure spending would kindle demand for infra-focussed NBFCs, however, most of these are public sector undertakings (PSUs).

The agency is of the view that establishment of institutions, which can extend long-term funding to these infra-NFBCs and also banks for infrastructure development, would ensure adequate sectoral liquidity.

ICRA said benefits and additional incentives for MSMEs and tax-breaks to home-buyers and builders in the housing sector, especially affordable housing, would also augur well for the sector, which is expected to be faced with asset quality headwind.