As it is expected that interest rates in the country have peaked and they will start retreating from the beginning of next fiscal; insurers are taking complete advantage of this situation by parking their saving in the bank’s term deposits so that they can lock-in their funds at the current high interest rates for longer tenure.
Public sector banks are offering bulk depositors rates above the card rates or above the schedule of interest rates. Though both private and public sector insurers are taking advantage of it but especially public sector insurers are taking full advantage of it.
For the quarter ended on September 2011 Oriental insurance has parked cash balances of Rs 1,200 crore in bank deposits in 12 months deposits. National insurance has parked Rs 543 crore in bank deposits. In the second quarter of current fiscal itself all four public sector insurers together parked approximately Rs 3,500 crore.
Insurers prefer to park their savings in bulk long term deposits because at the moment they are offering best returns. Banks are offering over 10% return on bulk long term deposits. Banks that is offering these high returns includes public sector banks such as Syndicate bank and Dena bank; they have even picked Certificate of Deposits (CDS) even at 10.5% for three months resources.
High yield is not the only reason why insurers are parking their savings in bank’s bulk long term deposits another reason is that corporate debt issuers have ducked from the market due to high interest rates. The last time when corporate debt issuers came in the market was in December last year. Then IDBI bank and Central bank of India made tier II capital bond issued for 10 years at 9.45% and 9.33% respectively. And since then there has been no issues in the private placement bond markets. Banks deposits are also less volatile and insurers can also unlock them when corporate bond issuers return to the market to raise funds.
Insurers also prefer banks fix deposits over CDS because of longer tenure. Bulk deposits are accepted by banks for longer term or for more than one year while banks take in CDS resources for maximum of one year. Hence, insurers prefer bulk bank deposits as they can lock-in their funds for longer term at higher rates to ensure that they realise the maximum yield on their investments. General insurers, at present, have a minimum yield expectation of at least 9.5% on their investments.
Besides unlike CDS resources this fix deposits have less probability of mark-to-market variations. This implied that valuation could become more volatile in the event of cash tightening in the domestic markets. Although, insurers still value debt investments on the basis of book value, assuming it to be held till maturity. There was apprehension that marked-to-market valuation would be imposed in the future as in the case of banks.
