Public sector banks look to pare stake in insurance ventures to unlock capital, focus on core business

PNB wants to dilute its stake in the insurance company as part of a debt reduction plan. The bank reported a net loss of Rs 13,416.91 crore for the fourth quarter ending March 2018.

These are not the only banks. Indian Overseas Bank and Allahabad Bank are also reportedly looking to exit Universal Sompo General Insurance, a joint venture in the non-life sector.

Capital woes of banks

According to Finance Ministry estimates last year, PSBs will require Rs 1.8 lakh crore additional capital in the next four financial years. Of this, they will have to raise Rs 1.1 lakh crore from the market or via the sale of non-core assets.

In May last year, at a briefing on the banking ordinance empowering the central bank to speed up the NPA resolution process, Finance Minister Arun Jaitley indicated that weaker banks will have to sell assets, reduce overheads, shut loss-making domestic and foreign branches and temporarily stop employee benefits, if necessary, in order to independently raise capital to meet the shortage.

Almost 11 of the 21 banks are under Prompt Corrective Action (PCA) framework restricting their expansion and business activities due to higher non-performing asset (NPA) ratios, weak capital and subpar or negative return on assets.

Analysts say bankers are being asked to focus on mobilisation of deposits and growing a good quality lending business, which is their core job.

“Government has been asking banks to focus on core business and hence, these JVs can help them unlock money for funding growth and also regulatory capital. Some banks may sell partially as they will look at valuations. Also, customers look at better product offering, so it is in the bank's favour to offer more products than just their own. This may also lead to not having a substantial stake in their insurance arms,” said Siddharth Purohit, a banking analyst at SMC Institutional Equities.

Insurers not scaling up

Another factor driving the stake sale by banks could be the inability of insurance companies to scale up in proportion to the investments made. Large private bank-led life and general insurers have outpaced others and grabbed a large market share.

Insurance company executives pointed out the average gestation period for an insurer to be profitable ranges between 10-12 years.

“Apart from the top three to four players in the private sector, other insurers have seen a marginal to nil growth. At a time when the banks are already battling a non-performing asset (NPA) war, further investments in insurance are not on top of their mind. Rather, they are looking to monetise these assets,” said the chief executive of a large private life insurance company.

While banks want to pare their stake, getting both a buyer or partner and the right valuation is not an easy task. IDBI Bank which was looking to sell its stake in IDBI Federal Life Insurance for almost 15 months finally put the plan on the back-burner after an agreement with Life Insurance Corporation (LIC). As part of this deal, LIC will hold 51 percent in IDBI Bank.

A senior public sector banker said, “With bancassurance model coming into play, it is better to shed the holding in a particular insurance entity. We also require capital for our core business, which will now be the focus given the bad loan situation."

Bancassurance refers to banks selling insurance through their branches. The insurance regulator has allowed banks to tie-up with up to three life insurers, three non-life and three standalone health insurers.