RBI asks Banks to cut stake in insurance arm

In a bid to boost credit growth and guard against non-bank exposure, India’s banking sector regulator Reserve Bank (RBI) has mandated lenders to limit their stakes in insurers to 30%.

This means, lenders having stake in insurance subsidiary or joint venture will have to bring down their stake within permissible limits.

The holding limit will be 50% for non-banking financial companies such as Housing Development Finance Corp. that have insurance units.

State Bank of India, ICICI Bank Ltd and Kotak Mahindra Bank will be among the lenders to be affected by the decision.

Although, the decision aims to help lenders to focus on their core activity but is likely to be negative for both – banks and insurance companies.

While the banks will experience a far reaching impact on their earnings (banks receive significant income from their insurance business), insurance companies would lose their source of capital besides the distributor of insurance products.

In response to above regulatory changes, the lenders have sought five years to implement the rule but they may get just three years.

The new RBI rule is likely to come into effect some time in fiscal 2021.

Post implication it will create a huge supply of equities in the market when the banks slash their stakes.

It is to be seen if the market has an appetite to absorb such large amount of liquidity.

Current regulatory norms mandate that a bank can hold a maximum of 50% in an insurance venture but the regulator may allow them to hold more on a case-to-case basis.

In the life insurance space, ICICI Bank owns 52.87% in ICICI Prudential Life Insurance Co, Kotak Mahindra Bank holds a 77% stake in Kotak Mahindra Life Insurance Co, SBI owns 57.6% in SBI Life Insurance Co, HDFC holds 51.47% in HDFC Standard Life Insurance Co.

Among general insurers, HDFC holds 50.49% in HDFC Ergo General Insurance Co.; ICICI Bank holds a 55.86% stake in ICICI Lombard General Insurance Co; Kotak Mahindra Bank holds 100% in Kotak Mahindra General Insurance; and State Bank of India holds 57.13% in SBI General Insurance Co.

Therefore in the short term we believe if this new rule gets implemented from FY21 onwards we could see huge selling pressure across all these stocks purely from regulatory reasons and not due to any fundamental negative reasons which means this is good news for long term fundamental investors as any short term dip here in these stocks can be used as a good buying opportunity by investors here as long term prospects here continue to be bright.

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