The Reserve Bank of India does not want banks to hold more than 30% equity in any insurance company. On the face of it, this decision by the RBI is aimed at putting more capital in the hands of the prime lenders and increase the credit flow in the economy. The necessary orders for this will be formally notified by the banking regulator soon, according to Livemint.
The other important reason behind RBI’s decision is to reduce the risk exposure of banks due to investments in non-banking activities, including insurance.
The association of banks with the insurance companies has been a win-win arrangement for both. Banks could sell the insurance products through their branches, thereby increasing their revenue. For the insurance companies, the banks were able to pump in funds whenever they are in dire need. The most-affected banks due to this decision by RBI will be State Bank of India, ICICI Bank and Kotak Mahindra Bank, according to reports.
Banks have been given till March 2021 to reach this 30% cap. This will throw up a different problem in the market, when all the banks holding equities higher than 30% in insurance companies will start offloading them. Those interested in buying the stocks of the insurance companies have to be ready to pay the price the companies or banks will be expecting.
For this, RBI may consider phasing out the exercise to ease the situation, but some clarity is still needed on the issue.
For the record, the current levels of holdings of some the banks in the life insurance companies are like this: ICICI Bank owns 52.87% in ICICI Prudential Life Insurance Co. Ltd; Kotak Mahindra Bank holds a 77% stake in Kotak Mahindra Life Insurance Co. Ltd; and State Bank of India owns 57.6% in SBI Life Insurance Co. Ltd. Home financier HDFC holds 51.47% in HDFC Standard Life Insurance Co. Ltd.
When it comes to the general insurance companies, HDFC holds 50.49% in HDFC Ergo General Insurance Co; ICICI Bank holds a 55.86% stake in ICICI Lombard General Insurance Co. Ltd; Kotak Mahindra Bank holds 100% in Kotak Mahindra General Insurance; and State Bank of India holds 57.13% in SBI General Insurance Co. Ltd.
As per current norms, the cap is 50%. It is important to note that right around this time, the Insurance Regulatory Authority of India has made a proposal to the government that the existing cap of 49% equity in Indian insurance companies be enhanced to 74%. If the government accepts this recommendation, this process of liquidating the holdings can materialize more easily.