The slowdown in the banking and non-banking financial companies (NBFCs) has now impacted the insurance sector.
While NBFCs are finding it difficult to raise funds, loan disbursal has been slow for banks.
These two are a major source of insurance distribution. With both these sectors taking a cautious approach towards lending, this has in-turn impacted the insurance sales.
In the post earnings call, Vibha Padalkar, MD & CEO - HDFC Life Insurance, said that disbursal of loans has taken a dent even though the attachment rates (proportion of insurance products with loans) are going up. This has, in turn, impacted the insurance business. She added that the growth in this segment would be muted due to the uncertainty in the banking/NBFC sector.
"We have little control over what they are disbursing considering a lot of uncertainty and cash conservation approach that people are taken," she added.
Among the financial institutions, NBFCs are reeling under a liquidity crisis and have also not been able to raise funds because of a cautious approach of investors like mutual funds. This, in turn, has impacted their disbursal.
In the last financial year, the Reserve Bank of India (RBI) bought government debt paper worth Rs 3 lakh crore from the market. Basically, this meant that that much of money was given to the banking system to on-lend. This is the only way for the RBI to help NBFCs since the central bank can’t lend directly to the latter as they don’t hold government paper for use as collateral.
But, the cost of borrowing for NBFCs is still high as banks are risk-averse or have reached exposure limits.
The insurers have, thus, taken a partial hit. For example, ICICI Lombard General Insurance's retail health net premium fell to Rs 168.55 crore in Q1FY20, from Rs 187.40 crore a year ago. Its underwriting profit in retail health also dropped to Rs 34.91 crore, compared to Rs 93.89 crore a year ago.
In his earnings statement, Bhargav Dasgupta, MD & CEO – ICICI Lombard General Insurance said that, apart from the factor of reclassification of products under the retail health segment, the business from certain banks and NBFCs had come down.
"Our retail health performance is also linked to the disbursement volumes of the NBFCs. If the disbursement comes down, our numbers also get hit," he added.
NBFCs don’t have money to lend or are facing enormous difficulties in raising funds. NBFCs typically borrow money from banks or sell commercial papers to mutual funds to raise money. They on-lend these money to small and medium enterprises, retail customers and so on. When NBFCs don’t have money to lend, it reduces the credit flow to the economy, hits economic growth and causes many borrowers to default on loans.