A joint report of World Bank and IMF on financial sector titled Financial Sector Assessment Program (FSAP) has highlighted some of the risks faced by financial subsectors such as insurance and mutual funds. Among these risks, FSAP has raised concerns over increasing exposure of mutual funds and insurance in bonds issued by Non Banking Financial Corporations (NBFCs).
Many mutual funds and insurance companies have increased their holding in the debt papers issued by NBFCs resulting in growing concentration risk, finds the report. The report says that the debt financing to NBFCs mainly from mutual funds and insurance companies has risen to 38% of total liabilities.
It says that the concentration and growing reliance on debt financing by the NBFCs should be closely monitored as half of the total NBFC credit is in infrastructure sector that may lead to an increase in non-performing assets (NPAs).
On insurance, the report found that the risk associated with life insurance are well diversified while the risks in non-life are mainly short-term. The major risks in life insurance are market risk and mortality.
The report pointed out that one major risk that non-life insurance business face is motor third-party insurance. It is making losses as the premiums are fixed by the regulator coupled with poor underwriting that reduces returns for them.
