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C. Shivkumar

Fall-out of insurers mopping up heavy ULIP premiums

Bangalore , Aug. 11

Short-term bank deposits have surged powered by large inflows into Unit Linked Insurance Plans (ULIPs) of life insurance companies.

Bank deposits have surged by about 21.3 per cent for the week ended July 21. During the current financial year, the

Year on year growth in deposits till July 2006 is of the order of Rs 3.86 crore. The aggregate deposits is nearly Rs 22 lakh crore.

However, bankers said that the accretions were short-term time deposits for maturities up to a year.

They also said that substantial volumes of deposit flows were in the form of bulk deposits. These were largely from insurance companies, from inflows into ULIPs. Life insurers were parking their ULIP inflows in bulk deposits for periods up to 46 days or till such time as the resources are deployed in the equity markets. Bankers said that the rates on these deposits were upwards of 5 per cent.

But bankers said that insurers' preference was more for public and AAA rated private sector banks, in view of the IRDA's investment guidelines, despite the short-term rates being lower.

Indications are that the collections by ULIP funds have swelled despite the downturn in the equity markets since May this year.

Inflows at 139 pc

According to industry figures available, inflows into ULIP products were at close to 139 per cent for the first two months of the current year. Gross premium accretions for this period was Rs 2,457 crore for the period as against Rs 1,026.65 crore for the corresponding period of the last financial year. Most of the accretions were to ULIP growth plans, where the bulk of investible funds are deployed in equities. These accretions were continuing till early this month, sources said.

Bankers said that the short-term deposit accretions from life insurers and large domestic corporates had resulted in pushing banks to the reverse repurchase window of the RBI. Parking funds in this window earned banks six per cent currently. The preference for the reverse repo window was largely driven by the fear of premature redemption by some of the life insurers/corporates.

Rolled over

Some of the bulk deposits were for tenures up to 15 days and rolled over. Consequently, bankers said that such funds could be redeemed by the depositors at the time of deployment.

However, some of the banks were also parking the funds in 91-day Treasury bills where the yields currently are close to 6.36 per cent. This was also one of the major reasons ensuring full subscription at the 91-day T-Bill auction, inclusive of market stabilisation fund.

In fact, at the last auctions both the cut-off and the weighted yields have dropped indicating the accumulation of short-term liquidity among the banks. Bankers said that the preference for the 91-day T-bills was driven by their high liquidity and for meeting banks' own reserve requirements.

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