SBanks may have to cut their stakes in insurance companies if the Reserve Bank of India (RBI) decides to go ahead with the proposal of limiting banks' ownership stake in non-core businesses.
In fact, the proposed rule will have a far-reaching impact on lenders such as SBI, HDFC, ICICI and Kotak Mahindra Bank, which own large stakes in their insurance arms, deriving lump sum income from their insurance subsidiaries. While an official communication on the new rule is awaited, experts point out that the proposal may warrant a rethink given the symbiotic relationship between banks and bank-promoted insurance companies.
“We expect RBI to consider the positives of banks ownerships in insurance companies before making a final decision on imposing ownership restrictions,” noted analysts at Kotak Institutional Equities.
So far, insurance stake sales have supported banks earnings in challenging times and provided buffers against non-performing assets. HDFC and ICICI Bank, for instance, have recognized large gains from stake sales in their life and general insurance businesses and these gains have been utilised to create provisioning buffers.
During FY16-18, HDFC used over 40 per cent of such gains to create provisions. Similarly, such capital gains contributed 30-40 per cent of annual provision for ICICI Bank. HDFC has since 2016 sold a stake in life and non-life arms for Rs 10,900 crore, while ICICI Bank gained Rs 15,300 crore and SBI made Rs 12,670 crore so far.
Secondly, fee income from distribution of life insurance products for banks is nearly 2-3 per cent of revenues and 5-15 per cent of profit before tax --- which for Axis Bank stood at 15.7 per cent, 6.7 per cent for HDFC Bank, 7.3 per cent for ICICI and 5.7 per cent for SBI in FY20.
Thirdly, bancassurance has emerged as a strong channel for distribution of insurance products. “The banking franchise is large and insurance savings products are a natural fit in its wealth management offering. While bancassurance models can be successfully run even without ownership, historic experience suggests that insurance companies with bank ownerships have been more successful than others,” the analysts added. To be sure, the share of bancassurance for private players rose to 53 per cent in FY20 from 21 per cent in FY09.
The top four players have gained market share in individual market share for private players to 63 per cent from 44 per cent during the period, largely driven by their banking partner. Policyholders also tend to prefer insurers with strong promoters; as such, insurance companies promoted by large banks command higher trust.
The current regulation permits banks to hold up to 50 per cent stakes in insurers and on a selective basis equity holdings can be higher but must eventually be brought down within a certain period. While the proposal stems from the fact that the RBI is concerned that insurance is a capital guzzling sector, experts beg to differ.
Apart from minimum capital requirements for the banking business, prior regulatory approval for investments in insurance companies can keep capital flow to subsidiaries in check and not jeopardize interest of the depositors they said. Insurers usually need the most capital during the initial years when they can experience stress due to low operating leverage and higher reserving requirements However, the business can be self-supportive on the capital front as reserves release over the years.
A cursory look at the data shows banks have made negligible investments in insurance subsidiaries over the past five years. SBI has infused just Rs. 167 crore in SBI General between FY16 and FY20, which comprised just 0.12 per cent of the bank's opening net worth. Similarly, Kotak Mahindra Bank has infused Rs. 304 crore in Kotak General or just 0.32 per cent of its operating net worth during the period under review.