Banks may have to cut stake in insurance firms to below 30%

Banks may now find it difficult to hold on to their big stakes in insurance companies. Sources told Moneycontrol that the banking and insurance regulators may bring out a clarification on how much stake banks can hold in insurance companies and who will qualify.

It is also likely that a bank's stake in an insurance venture could be capped below 30 percent. However, it is not yet clear as to what happens to existing ventures. The Reserve Bank of India (RBI) has raised concerns about banks having more than 15 percent exposure in insurance companies and due to the central bank's view on the subject, a private sector bank has decided to put its stake purchase in a life insurer on the backburner.

Sources told Moneycontrol that the insurance regulator and banking regulator will clarify their position within the next three months. "The idea is to ensure that the existing joint ventures do not get impacted. However, future JVs could have an impact," said an official.

Large insurers like ICICI Prudential Life Insurance, SBI Life Insurance, Universal Sompo General Insurance and Canara HSBC OBC Life Insurance have banks as promoters. Allahabad Bank, Indian Overseas Bank and Karnataka Bank are shareholders in Universal Sampo.

In the past as well, RBI had expressed concerns about heavy cross-holding between the insurance and banking sectors. The belief was that large institutions in these sectors should not buy into each other due to the volatility in these two financial sectors. A majority of the insurance companies in the life and general insurance sectors have banks having the status of promoters. Any entity holding more than 10 percent stake in an insurance company is classified as a promoter.

Sources said that for all future joint ventures or stake hikes by a bank in an insurance company, a closer review will be held. This will include a review of the bank’s balance sheet and bad loan levels. It is also likely that entry and exit of banks from the insurance sector will also be monitored. This is amidst talks of several public sector banks like Andhra Bank, Allahabad Bank and Indian Overseas Bank looking to monetise their stake in the insurance sector.

However, for new players this will mean tougher conditions to find an appropriate Indian partner. Apart from banks, private equity players are the only ones interested in entering the insurance sector. But, PEs usually follow a quick-entry-and-exit strategy across their investments.

Source: Money Control