IRDA stops insurers from providing credit default insurance

New Delhi: The Insurance Regulatory and Development Authority (IRDA) has asked the general insurers to stop giving credit default insurance, a cover which is provided to banks against payment default by borrowers, reports PTI.

IRDA has ordered "all general insurers to stop selling these policies (credit default insurance) till such time the authority comes with detailed guideline in this regard."

The sector regulator has sought details of the total exposure of the insurer under the credit insurance policies issued by them to banks offering credit facilities to debtors.

The IRDA has found that the credit insurance cover being marketed by general insurers to banks appears to be in the nature of credit default insurance.

A credit insurance cover provides for a cover against losses resulting from the inability to repay a loan. A credit insurance policy usually provides a security cover for a specific reason for which a borrower defaults.

"The authority, after examining the credit default insurance contracts has come to the conclusion that the insurers are underwriting risks which do not have proper regulatory framework or sanction," IRDA said in a circular to all general insurance companies.

Therefore, such covers necessarily need to have a different regulatory treatment, it added.


Microfin entities may come under tighter regulations: Report

New Delhi: Microfinance institutions (MFIs) in the country may be subject to stricter regulations considering the "socio-political sensitivity" involved in rural lending activities, reports PTI quoting a brokerage house report.

At a time when the government is looking at ways to increase rural lending, MFIs have attracted criticism from various quarters for charging high interest rates on loans.

In a report on MFIs, domestic brokerage Indiabulls Securities said the "the business of MFIs is likely to come under regulatory or judicial intervention considering the socio-political sensitivity to rural lending."
This trend has already been seen in Andhra Pradesh and Kerala where governments have mandated non-banking finance companies (NBFCs) and MFIs to register under local money-lending laws, which means that the government has the right to cap or monitor the interest rates charged to borrowers.
The report, done by two analysts, Saikiran Pulavarthi and Deepak Agrawal, comes at a time when the government is of the view that MFIs should not lend funds at usurious rates and the finance ministry has asked public sector banks to ensure that these institutions do not charge a loan rate of above 24%.
Compared to urban lending, MFI lending rates in the rural areas are much higher.
If MFI lending grows on a mass scale, one would have to wait to see how the local leadership views the popularity of such lendings and the lenders, the report said.
Analysts are of view that considerable socio-political sensitivity can be associated with lending at high interest rates to the poor.
"The entry of an 'apolitical' Messiah providing cheap loans will have ramifications (threat of erosion of vote banks, dilution of leadership of the panchayats, zamindars, etc). In such a scenario, MFIs will face instant ostracisation due to obvious reasons," Mr Pulavarthi said.
"Also, farm loan waivers have always been a vote-bank tool. We have seen such instances occurring in Karnataka last year. Any similar moves of this kind could hamper the business of MFIs," the report said.
The number of MFIs has increased manifold in the last few years and therefore analysts believe the risk of multiple MFI lending to same individual is pretty high going forward.
Since microfinanciers take loans from banks and lend it to customers at rates as high as 36%, the government is now insisting that public sector lenders should ask MFIs to cap their lending rates in the range of 20%-24% as a pre-condition to access bank finance.

On its comment over SKS Microfinance, the only listed MFI in the country, Indiabulls analysts said they believe that the execution risk on a pan-India basis is quite high.
SKS' loan book is primarily concentrated in five states, which contribute 71% of total loans.
"The new states where SKS is now expanding offer great opportunity; however that comes with high execution risk, especially because consumer behaviour, social and religious dynamics are different from region to region, and competition is already strong in states where SKS will enter," they added.


Core infrastructure industries grow by 3.7% in August

New Delhi: Growth of core infrastructure industries slowed to 3.7% in August, as compared to 6.4% in the same month last year, reports PTI quoting data released by the government.

Expansion of the six core industries - crude oil, petroleum refinery products, coal, electricity, cement and finished steel - aggregated 4.1% during the first five months of this fiscal as against 4.8% in April-August 2009-10, the data of commerce and industry ministry said.

These six segments account for 26.7% of the country's total industrial output.

Growth in the petroleum refinery production contracted by 2.3% against a positive growth of 3% August 2009.

As per the data, the crude oil output growth was 15% while it had contracted by 2.5% in August 2009.

Production of both coal and electricity slowed to mere 1% each, as against robust growth of 13.3% and 10.2% in August 2009, respectively.

Similarly, cement production too slowed to 1.6% from 17.5% in the year ago period.

However, finished steel output grew by 7.7% in August this year. It was 0.3% in the same month last year.

Meanwhile, the growth of the core infrastructure sector has been revised upwards to 4% for July from the earlier provisional estimate of 3.9%.


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