The Cabinet on Wednesday approved a proposal to infuse Rs 9,950 crore this fiscal into three state-run general insurers—National, Oriental and United— to shore up their precarious capital base, and formally called off a proposed merger of these firms in the wake of the Covid-19 outbreak.
The Cabinet also approved the broad contours of a proposed central sector scheme – Agriculture Infrastructure Fund – under which Rs 1 lakh crore will be provided by banks and financial institutions as loans to primary agricultural credit societies, marketing cooperative societies, farmer producers organisations (FPOs), self-help groups, farmers and various other stakeholders. This was part of the Rs 21-lakh-crore relief package announced by the government in May to tide over the pandemic.
Since the Centre already provided Rs 2,500 crore to the insurers in FY20, the total official infusion into them since last fiscal would be Rs 12,450 crore. The proposed infusion in FY21 is larger than the budgetary allocation of Rs 6,950 crore, as the government wants to enable them to at least maintain the lowest solvency requirement ratio of 1.5 in times of the pandemic and also use improved solvency to boost revenue.
“Further, the process of merger has been ceased so far in view of the current scenario and instead, the focus shall be on their profitable growth,” the finance ministry said in a statement.
As much as Rs 3,475 crore will be released immediately, while the rest (`6475 crore) will be infused later this fiscal in one or more tranches, according to the statement. The Cabinet also approved a hike in the authorised share capital of National Insurance Company to Rs 7,500 crore and that of United India Insurance Company and Oriental Insurance Company to `5,000 crore each, to “give effect to the capital infusion”.
The merger of the insurers, announced in the Budget for 2018-19, had been inordinately delayed, as it was to be wrapped up in that fiscal itself. The government initially wanted to list the broader entity after the merger.
As for infusion, FE had earlier reported that apart from the department of financial services, even Irdai chairman Subhash Khuntia had flagged the issue of low solvency levels of these insurance companies. The expected higher outgo in times of the Covid-19 outbreak has also weighed on the decision to raise the amount beyond the budgetary level, said a senior government official.
Against the minimum stipulated level of 1.5, National Insurance’s solvency ratio dropped to just 1.04 at the end of FY19, while United India’s hit 1.05 in the second quarter of the current fiscal. Oriental Insurance’s ratio stood at 1.56 in the first quarter of this fiscal.
Unlike the infusion into public sector banks in recent years through recapitalisation bonds, which are off-Budget items, funds for the insurers are being provided from the Budget.
Meanwhile, loans under the agri infra fund will be disbursed in four years, starting with the sanction of Rs 10,000 crore in the current fiscal and Rs 30,000 crore each in next three financial years, according to an official release. The total budgetary support from the Centre will be Rs 10,736 crore. A repayment moratorium under this financing facility may vary from six months to two years.
The idea is to fund projects at farm-gate and aggregation points for efficient post-harvest management of crops.
All loans will have an interest subvention of 3% per annum up to a limit of Rs 2 crore. This subvention will be available for a maximum period of seven years. Further, credit guarantee coverage will be available for eligible borrowers from this financing facility under Credit Guarantee Fund Trust for Micro and Small Enterprises scheme for a loan up to Rs 2 crore. The fee for this coverage will be paid by the government.