Lending activities of insurance companies require to be monitored, to avert the possibility of any regulatory arbitrage, said the Reserve Bank of India (RBI) in its financial stability report. This, it said, should be under a prudential framework, closely aligned with that for banks.
The Insurance Act, 1938, defines the various ways in which insurance companies can deploy their funds, which includes various varieties of loans (for instance, against policies and against mortgage of property in India and abroad). The Act says insurers can deploy funds in instruments such as loans on life interests or on policies of life insurance within their surrender values. Immovable property can also be an approved instrument.
Currently, a policyholder can get a loan against only traditional policies, as against the earlier rules where unit-linked plans were also eligible for being considered. For traditional or endowment plans, companies extend loans up to 90 per cent of the fund value. The rate of interest varies from 9.5 to 12 per cent per annum, benchmarked against the base rates of public sector banks. The loan tenure can be as high as the policy term.
With respect to insurance against property, banks or housing finance companies will help a family to get financial support if anything untoward happens to the individual taking the loan. Insurance companies usually offer insurance policies that cover only the loan amount. If the loan declines on an annual basis, there are covers where the amount declines in line with this.
RBI said the lending activity of insurance companies, mainly life insurance ones, while not very large in comparison to total banking sector lending, is nevertheless significant. The amount was Rs 88,870 crore as at end-March, less than five per cent of the assets under management of insurance companies. A significant portion of these are secured against the surrender values of life insurance policies. “While the risk management framework and exposure limits (single issuer, group, and industry) are in place for insurance companies, there is a need to plug the possibility of any regulatory arbitrage by closely aligning the practices and regulations applicable to lending by insurance companies with those by banks,” said RBI in its report.
It said a coordinated approach and sharing of information, being facilitated by the Financial Stability and Development Council, will enhance the efficiency of monitoring of exposure details of large borrowers and functioning of the Joint Lending Forum, under RBI’s framework for revitalising stressed assets.