The central government has asked the Reserve Bank to set up a committee to look into the insurance regulator’s concerns that some of the instruments issued by banks to raise tier-II capital were perpetual and illiquid. The Insurance Regulatory & Development Authority (IRDA) has also said that some of these instruments are flouting its investment norms. The committee will look into issue of and subscription to tier-II instruments under the new Basel-III capitalisation guidelines. An official of the finance ministry said the insurance regulator has raised concerns over certain instruments and the ministry has asked RBI to take up those issues. As per Basel-III norms, banks can cancel interest or dividends on instruments raised under tier-II capital or write off such investments in times of stress. Life Insurance Corporation has invested around Rs 10,000 crore in tier-II bonds of public sector banks, which are typically unsecured and cannot be converted into equity. An IRDA official said there are also issues with the credit ratings of some instruments that do not meet investment guidelines prescribed for insurance companies. According to RBI’s estimate, public and private sector banks will together need an additional capital of Rs 5 lakh crore to comply with the Basel-III regulations. Of this, equity capital requirement will be of Rs 1.75 lakh crore and non-equity capital of Rs 3.25 lakh crore. The government has allocated just Rs 11,200 crore towards bank capitalisation this fiscal, which is substantially less than the amount infused in the last few years.
