Indian insurers await classification of HDFC bonds post-merger; assess impact on holdings

Housing Development Finance

28/06/2023 11:05

By Bhakti Tambe and Dharamraj Dhutia
       MUMBAI, June 28 (Reuters) - Indian insurers are awaiting
clarity on how Housing Development Finance Corp's  HDFC.NS 
bonds will be categorised after the lender is folded into HDFC
Bank  HDBK.NS , as they assess the impact of the merger on their
debt portfolios.
    There is uncertainty whether HDFC's bonds will be classified
under housing and infrastructure after the merger, and we are
awaiting clarification from regulators, Arun Srinivasan, head of
fixed income at ICICI Prudential Life Insurance, told Reuters.
    "In case it does not get classified as housing and infra,
insurance companies will have to classify their entire exposure
to the HDFC group as investments in the BFSI sector within the
permissible limits, which stands at 30%."
    The Reserve Bank of India (RBI) will issue a clarification
on HDFC's bonds' classification, and the Insurance Regulatory
and Development Authority (IRDAI) of India will follow,
according to fund managers.
    The IRDAI stipulates insurers can invest a maximum of 30% of
their assets under management in banking, financial services and
insurance (BFSI) firms, while there is a 15% limit for investing
in bonds of housing and infrastructure companies.
    HDFC's outstanding bonds are estimated to be worth 2.64
trillion rupees ($32.18 billion), while HDFC Bank has
outstanding bonds worth around 487 billion rupees, according to
Crisil and Reuters data.
    "Once the merger is effective, HDFC bonds will be converted
into bank bonds and be counted in the 30% BFSI investment
limit," said Aneesh Srivastava, chief investment officer of Star
Health and Allied Insurance.
    "We may see crowding in BFSI sector, and hence spreads for
bank and NBFC bonds may harden with lower incremental demand."
    According to market participants, around 40% of HDFC's
bonds, amounting to around one trillion rupees, are held by
insurance companies and these bonds are currently classified
under housing and infrastructure category.
    A change in classification could also impact demand for bank
bonds at a time when lenders are looking to raise capital to
spur growth.
    Some fund managers, requesting anonymity as they are not
authorised to speak to the media, told Reuters that they have
requested IRDAI to allow "grandfathering" their current exposure
to HDFC bonds for around two years, which would allow them to
absorb the impact.
    Grandfathering refers to a provision that will allow
insurance companies to hold the bonds over and above the
stipulated norms for a certain period, which will be defined by
the RBI.
    Insurers have also suggested that some bonds of longer
duration could be classified as infrastructure bonds, which will
allow them to keep their holdings under housing and infra
category.
    IRDAI did not immediately reply to a Reuters email for
comment.

($1 = 82.0347 Indian rupees)

 (Reporting by Bhakti Tambe and Dharamraj Dhutia; Editing by
Varun H K)
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