PSB-merged banks may get time till FY22 end to cut stake in insurance JVs

Public sector banks (PSBs), which were part of the mega merger plan, may get time till March 31, 2022, (FY22) to reduce their stake to below 10 percent in their insurance joint ventures.

PSBs were looking to pare down their stake by the end of FY21, in line with the regulatory guidelines and deadlines. It applies to banks that had been merged and then became part of two joint ventures in life or general insurance.

Sources told Moneycontrol that the decision had been taken, keeping in mind the Coronavirus outbreak and the difficulties surrounding stake sale. As per Insurance Regulatory and Development (IRDA) rules, one bank cannot hold promoter status in more than one insurance company. Public sector banks, which are part of insurance joint ventures, are regulated by IRDA and the Reserve Bank of India (RBI).

“There is a consensus among the regulators that banks need at least one more year to reduce their stakes in the insurance joint ventures. Further extensions could be given based on market conditions,” said an official. In 2019, Finance Minister Nirmala Sitharaman had announced the merger of 10 public sector banks -- Oriental Bank of Commerce (OBC) and United Bank of India into Punjab National Bank (PNB); Andhra Bank and Corporation Bank into Union Bank; Syndicate Bank with Canara Bank; and Allahabad Bank into Indian Bank. This came into effect from April 1, 2020.

Of these, OBC, PNB, Canara Bank, Union Bank and Andhra Bank are promoters in life insurance companies. OBC and Canara Bank are promoters in Canara HSBC OBC Life Insurance; PNB is promoter of PNB MetLife Insurance, Union Bank backs Star Union Dai-ichi Life, while Andhra Bank is a promoter in IndiaFirst Life Insurance. “It has been tough to undertake stake sale operations because of the economic situation in the country due to COVID-19. An extension will help get buyers," said a general manager-insurance at a merged bank.

Among the banks, Union Bank and PNB have stated earlier that they will be cutting their stakes in the insurance ventures, post the merger. However, COVID-19 and the subsequent lockdown have played dampener to these plans.

Lookout for buyers

Sources told Moneycontrol that while PSU banks had begun talks with private equity (PE) players in March 2020, the pandemic had led to disruption. Insurance sources said that while a few PEs showed interest in buying a bank stake, they wanted to do so at a lower valuation and were non-committal on the five-year lock-in mandate.

Said the Chief Financial Officer of a bank-led insurer that is looking for buyers: "For traditional life and general insurance companies, you need a long-term vision. But considering the challenging business environment for the sector between April and December 2020, it has been tough to get stake buyers."

IRDA allows PE and venture capital (VC) firms to become promoters of insurance companies, but these firms cannot exit the project until five years. Also, PE/VCs have to abide by the Indian-owned and controlled guidelines. This means that the ownership should be majority Indian and any board decision would also need to have the go-ahead from Indian shareholders.

FDI hike could help merged banks

A proposal to hike insurance foreign direct investment (FDI) to 74 percent presented by finance minister Nirmala Sitharman in the Budget 2021, could help banks sell their stake to existing foreign partners. However, this FDI hike would require a legislative change requiring an amendment of the Insurance Laws (Amendment) Act 2015 and the Insurance Act 1938.

An added concern is that Indian management control will be retained even after the 74 percent insurance FDI. This is expected to be a bone of contention for new entrants, though sources said that existing partners with capital will be ready to buy out the banks' stake.

Bancassurance partnerships may get extension too

While bancassurance partnerships of these merged banks are valid till April 2021, it is likely that these agreements could also get a further extension till year end. This is to ensure continuity of business and more distribution options for insurers.

In April 2020, regulator IRDA had said that even if the number of bancassurance tie-ups exceed three each in life, non-life and standalone health category, banks can continue with the partnerships for one more year.

Current insurance laws prohibit banks from tying up with more than three insurers in each category - life, non-life and health - to sell policies.

Since the merged banks sell insurance products, these partnerships will automatically pass on to the acquirer bank. For customers, this means status quo and they would be able to buy policies from their regular bank branches.