InvestorQ : How will the new plan to restrict stake of banks in insurers to 30% impact groups like HDFC, ICICI and SBI?
sara Kunju made post

How will the new plan to restrict stake of banks in insurers to 30% impact groups like HDFC, ICICI and SBI?

2 years ago

RBI has asked banks / lenders to cut their stakes in insurers to 30%, as RBI is keen that banks and other lenders focus more on boosting credit growth in a slowing economy. In this light, the RBI has informed banks that they intend to cap their holdings in an insurer to 30%. However, a NBFC like HDFC would be able to hold 50% in the insurance business. Let us look at the likely impact.

· The move will certainly impact banks, which derive significant income from their insurance units. SBI, ICICI Bank and Kotak Bank are examples where such an arrangement exists.

· The second impact will be that the banking parents are the capital providers to the insurance business and also manage their overall capital allocation risk. These banks and insurers also leverage heavily on the bancassurance distribution model.

· This rule will come into effect from April 2020 and will create a huge supply of equities in the market when the banks cut their stakes in insurers. Such liquidity overhang could depress the price of insurers.

· ICICI Bank owns 52.8% in ICICI Prudential Life; Kotak Bank holds 77% stake in Kotak Mahindra Life Insurance; and SBI holds 57.6% in SBI Life. Home financier HDFC holds 51.47% in HDFC Standard Life but they may not really be impacted as HDFC is an NBFC.

· Among general insurers, HDFC holds 50.49% in HDFC Ergo; ICICI Bank holds a 55.86% in ICICI Lombard; Kotak Bank holds 100% in Kotak General Insurance; and SBI holds 57.13% in SBI General Insurance.

· The real impact will be on the other banks mentioned above but the impact could be managed by shifting the stake either to a holding company or to an NBFC floated for the purpose to allow 51% holdings in the insurance subsidiary.

The major impact will be if there is an overhang of stock selling in the market, which could depress the price of insurers. Typically, ownership issues can be managed, although how the bancassurance arrangement works in future remains to be seen.