Regulatory changes are structurally positive for general insurance sector in the long term: CRISIL
Ratings agency CRISIL said it believes that the latest regulatory developments in the motor third-party (TP) segment are likely to pose challenges for the general insurance industry in the near to medium term, but are structurally positive for the sector over the long term.
In March 2012, Insurance Regulatory Development Authority of India (IRDA) increased provisioning rates for the motor TP pool segment. The additional provisioning of Rs65 billion that this hike will necessitate will weaken the insurance industry’s underwriting performance in the interim.
Rupali Shanker, director – CRISIL Ratings, said, “We estimate the additional provisioning at Rs65 billion this time—more than twice the provisioning increase that followed IRDA’s rate hike of March 2011.”
CRISIL expects the annual hike in premium rates for the motor TP segment to benefit the industry over the long term. Consequently, the underwriting losses in motor TP segment, which has the most adverse claims performance, are likely to reduce over time. The second round of provisioning increase announced by IRDA in March 2012 takes into account the motor TP segment’s consistently adverse performance on claims, and is for each of the five years between 2007-08 and 2011-12.
While the additional provisioning for 2007-08 and 2008-09 has to be absorbed in 2011-12, IRDA has allowed companies to apportion the additional provisioning for the remaining years over three years, beginning 2011-12.
“The additional provisioning in the motor TP pool segment, and the already high claims in the motor TP and health insurance segments may impact the industry’s underwriting performance in the interim. We expect the industry’s overall underwriting losses to exceed Rs.100 billion each in 2011-12 and 2012-13,” she added.
Motor TP, the only segment that has regulated tariffs, accounts for nearly a third of the insurance industry’s overall claims. To address the issue of adverse claims performance, IRDA announced annual rate hikes in motor TP in April 2011 and again, in March 2012. The latest revision hikes premium rates for private vehicles by 5% to 8% (10% in April 2011) and those for commercial vehicles by 10% to 30% (68% in 2011), from 1 April 2012.
The country's largest lender, State Bank of India, has refrained from cutting its base rate but has cut lending rates in select products
Mumbai: State-run lenders Canara Bank and Bank of India cut their base rate or minimum rate of lending by 0.25% to 10.50% following the Reserve Bank of India's move to cut rates, reports PTI.
Both the banks also cut rates on loans under the older benchmark prime lending rate by a similar 0.25% to 14.75%, they said in separate filings to the exchanges.
The revisions are applicable from 1 May 2012, they said.
Their peer Oriental Bank of Commerce (OBC) also cut lending rates by 0.25% to 14.75% only under the BPLR, leaving the base rate untouched.
The announcements by banks come exactly a fortnight after the RBI cut its short term lending rate, the repo rate, by 0.50% to 8% prompted by lower inflation and intended at giving a boost to the sagging growth.
All the bankers had opined that the RBI move would lead to reduction in lending rates. Among those who have announced rate reductions till now are ICICI Bank, Corporation Bank and Central Bank of India.
The country's largest lender, State Bank of India, has till now refrained from cutting its base rate but it has cut lending rates in select products.
Export growth has crashed (probably last year their were a lot fake exports) and capital inflows are weak leading to a vicious cycle
Indian exports in March declined to $28.68 billion from $30.41 billion in March 2011. This is the first time since 2009 that exports have fallen. It has led to a spurt in trade deficit to an all time high of $185 billion in the last fiscal. Exports had touched $303.7 billion for the previous fiscal, registering 21% expansion. Imports for the month aggregated $42.6 billion leaving a trade gap of $13.9 billion, according to the data released by the commerce ministry. Import bill in 2011-12 touched $488.6 billion on account of rise in imports of crude oil and gold. Both items alone accounted for over 44% of total import bill. Commerce secretary Rahul Khullar had said the trade deficit situation can worsen in the current fiscal.
Is the market underestimating the seriousness of India’s exports having declined by 5.71% in March? After all, there is no sign that things are going to improve anytime soon. “If balance of trade (BoT) is to stay exactly where it was, my exports need to grow by 28% and that is impossible, we cannot do that...where are we going to drum up 25%-30% growth?” Mr Khullar asked. The highest ever BoT remains an area of concern for the Reserve Bank of India (RBI) and the exporters’ community. “The financing of the current account deficit will continue to pose a major challenge,” RBI has said in its credit policy.
Financial services firm Nomura, while analysing India’s current account deficit in its recent report, said that the deficit deteriorated because imports remained relatively robust while export growth slowed during the global slowdown. Import demand was fuelled by four factors: strong consumption demand was boosted by consumption-biased fiscal policies; high inflation led to demand for gold imports; inelastic oil demand due to subsidized fuel prices ; and higher coal imports caused by delays in domestic production from slow environmental clearances. The national income identity suggests that a wider current account deficit reflects gross domestic saving falling much more than investment.
Crude oil imports went up by 46.9% to $155.6 billion in 2011-12. The other reason was higher imports of gold and silver which grew by 44.4% year-on-year to $61.5 billion. Oil and non-oil imports during the month have increased by 32.45% and 19.91% to $15.83 billion and $26.75 billion respectively.
Federation of Indian Export Organisations (FIEO) president M Rafeeque Ahmed said the growing trade deficit, which is highest in the history of India’s trade, is a cause for concern. He too sounded pessimistic about the future. “Looking at the profile of imports, very little manoeuvring is possible since increasing trade deficit is on account of large imports of petroleum, gold, silver, and coal,” he said.
Mr Khullar has cautioned that 2012-13 would again be a difficult year and early policy decisions on coal, fertiliser and edible oil are needed in the wake of rising import bill on these heads.
During 2011-12, coal, fertiliser and edible oil imports grew by 80.3%, 59% and 47.5% to $17.6 billion, $11 billion and $9.7 billion respectively.
“Coal imports expanded significantly. Now it requires a decision on the domestic policy front in terms of coal production. Similarly, edible oil and fertiliser imports have expanded significantly and these require domestic policy decisions,” Mr Khullar said.
From a peak of 82% in July, export growth slipped to 44.25% in August, 36.36% in September, 10.8% in October and 3.8% in November 2011. However, exports grew 6.7% in December, over 10% in January and 4.3% in February.
What are the implications of the trade and current account deficit? The current account deficit in India can be controlled by FDI (foreign direct investment) and FII (foreign institutional investors) fund inflows in the equity market. FDI inflows are in a current low because of uncertainty in the Indian government policy. After the Vodafone court case and the government retrospective tax amendment, multinationals are adopting a wait and watch attitude. FIIs have been cautious in the Indian stock market and there has been a net outflow of funds in April after a robust inflow in the first quarter. The combined effect of these factors could lead to a weakening of the rupee against the dollar, which can further worsen the trade deficit in a vicious cycle.