A handful of banks will opt to bring down their stake to below 10 percent but not completely exit the venture.
Public sector banks, which are merger candidates in the second round of PSU consolidation, are required to pare their stakes in insurance companies to meet regulatory norms.
An entity holding over 10 percent in an insurance company is categorised as a promoter while one holding below that limit is termed as an investor.
But to ensure that they don't lose out completely on the fee income from the insurance business, a handful of banks will opt to bring down their stake to below 10 percent, but will not completely exit the venture, sources said.
“Being an insurance company promoter, we get at least 30-35 percent of fee income from this segment. While we wouldn’t want to completely let go of insurance, the attempt is to reduce the stake below 10 percent so that we are compliant,” said the executive director with a merger candidate bank.
On August 30, Finance Minister Nirmala Sitharaman announced the merger of 10 public sector banks (PSBs) -- Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and United Bank of India; Union Bank, Andhra Bank and Corporation Bank; Canara Bank and Syndicate Bank; Indian Bank and Allahabad Bank; under four separate entities.
Under existing rules, one bank cannot be a promoter in multiple insurance companies of the same segment. However, they can sell products of three life, non-life and standalone health insurers each.
“We can still leverage the distribution network to sell insurance. While being a promoter is barred, nothing stops a bank from being invested in multiple insurers. This way the existing insurance distribution arrangement in bank branches will also not get hampered,” said the general manager at a mid-sized PSU bank.
The insurance regulator will take a decision once these banks present the exit proposal. Here, it will only be a partial exit and they will just cease to be promoters.
Easier said than done
Selling stakes is not easier either.
A source also pointed out that a few banks have taken this decision because they have been unable to sell their stake in the insurance venture.
"Stake sales have taken more than a year and are still to be completed. Valuations have been a cause of concern and rather than exiting at a loss, staying as an investor makes business sense," said the person quoted above.
Andhra Bank, Allahabad Bank, IDBI Bank and Indian Overseas Bank are among many others who have tried to sell stakes in insurance businesses, but have not yet finalised a buyer.With the merger proposals underway, their woes have been eased. As per regulations, a promoter cannot exit an insurance company without finding an alternative partner.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.