Insurers’ Entry to Boost Stock Lending Market It could get a . 34,000-cr fillip if Irda’s proposal to let insurers join the sytem is implemented

India's fledgling stock lending and borrowing market could receive a nearly . 34,000-crore shot in the arm if insurance companies are allowed to lend their shareholding to private borrowers. In draft norms published on its website on Friday, the Insurance Regulatory Development Authority, or Irda, said insurers could begin participating in the stock lending and borrowing mechanism (or SLBM) and lend up to 10% of their stock holdings. Insurance companies have 15 days to respond to the guidelines. Insurance companies own shares worth . 3.4 lakh crore in mostly blue-chip companies, and could be enticed by the nearly risk-free interest they can earn from this idle stock. Also, the huge supply of shares into the SLBM may depress interest rates, attracting more borrowers. "Most of our equity assets are held for long periods as insurance policies are meant for long term. Based on the current rates, the interest earned by lending stock would be between 80-200 basis points. That is a decent amount of incremental income for policyholders," said Sudhakar Shanbhag, chief investment officer at Kotak Mahindra Old Mutual Life Insurance. But, a revival in SLBM may not be easy, analysts said. Approval from trustees and a pick-up in demand for borrowed shares are key for the mechanism to take off. The SLBM market allows stocks to be lent for as long as 12 months. The segment has received a lacklustre response from both borrowers and lenders. In 2012, BSE had an average of about 3,795 stocks traded in SLBM, while NSE had 5.5 lakh. Borrowed shares are mostly used to execute bearish strategies such as shortselling. In this, a trader expecting a stock's price to fall borrows the shares at, say, 1% rate of interest. The trader then sells the shares in the market, and buys them back when the price falls and returns them to the lender, pocketing the profit minus the interest. While the borrower earns from the trade, the lender earns the interest rate. "We would like to lend stocks, but there needs to be an active borrowing need in the system. But, SLB can be used actively in the F&O segment where liquidity is not available or where traders want to capture spreads in reverse arbitrage," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance. "Borrowing interest may also arise from investors who want to execute their longer period short-selling bets. Since life insurers can lend for a longer period, especially in situations when there is poor liquidity in long-term derivatives market, insurance companies can become active players in this market," he said  Mutual funds are allowed to participate in the segment, but their contribution is minimal. Most lending has been limited to high net worth individuals. Recently, the segment saw an uptick after several high HNIs started offering their idle stock holdings. However, borrowers have found the rates high. But, with a huge number of shares in supply, interest rates would fall. "Yes, the rates may halve to 40-100 basis points if insurers start lending. But, even then, insurers may not mind as the interest income continues to be an incremental earning," Kotak's Shanbhag said.  Even with the pros and cons, insurance companies' participation in SLBM may not be immediate, analysts said. For one, incorporating risk strategies and getting board approvals may take time. Similarly, SLBM's revival may take some time as companies may wait for the borrowing to pick up first, while borrowers may wait for supply to pick up.  "It's like a chicken-and-egg situation. I'd imagine insurers to behave like other institutions like mutual funds, which have not been active in SLBM because of issues either with the mandate from their trustees or because they are waiting for an initial pickup in the market," said Vineet Bhatnagar, MD at MF Global. "Also, borrowers will invariably continue to be private investors as institutions are not allowed to borrow shares. If the demand is low, maybe some institutions won't prefer lending less number of shares," he said.  nihar.gokhale@timesgroup.com