RBI To Banks: Limit Ownership Stake In Insurers At 20%!

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The Reserve Bank of India wants banks to limit their ownership in insurance companies!

According to three sources in the know, RBI has unofficially directed Indian banks to cap their maximum threshold limit for holding ownership in capital intensive insurance companies at 20%.

Currently, RBI rules allow banks to hold up to a whopping 50% stake in insurance companies – something which can be higher on a selective basis but must be brought down within a certain time period.

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The sources who are privy to RBI’s internal discussions said that the Indian central bank, back in 2019, unofficially advised banks wanting to acquire stakes in insures to limit it to 30%. And now, more recently has asked banks to cap their stake purchase in insurance companies at 20% only.

The RBI is apparently not comfortable with lenders increasing stakes in insurers because it, unofficially, is of the opinion that the insurance business is a ‘money guzzler’, revealed one of the sources. The central bank wants banks to focus on main areas of business instead of putting away capital in non-core sectors.

This unofficial push from RBI suggests that India’s banking regulator is very keen on implementing the suggestions by an internal group’s working paper which was released in November 2020.

According to the paper, lenders who have more than a 20% stake in an insurance firm should follow a non-operative financial holding company aka NOFHC structure which will have a ring-fence ownership model. This will apply to banks such as the Kotak Mahindra Bank and State Bank of Inda as these lenders have wholly-owned or majority-owned insurance subsidiaries.

The sources said most banks do not wish to adopt such a structure as it will lead to diminishing the shareholder value and furthermore limit their ability to raise capital as well.

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As of now, the recommendations made by the working paper are under the observation of RBI for consideration and it is not exactly clear if and when the central bank will act or implement them. However, the central bank is highly likely to stall any more requests from banks to boost new stakes in insurers post the recent unofficial directive.

All in all, this move by the Reserve Bank of India comes at a time when the country is keen on attracting foreign investment in the insurance sector. Last month, the GOI announced that it will be allowing FDI of up to 74% in insurance companies – raising the previously allowed benchmark which stood at 49%.

In light of the same, it is being expected that several foreign insurers will want to explore this newfound opportunity as India’s insurance penetration continues to be low.

Thus, now fearing that the bad loans of lenders might double amid the COVID-19 pandemic, as mentioned earlier, the RBI does not want banks to lock up a huge chunk of capital in what it believes to be ‘non-core’ sectors. 

We will keep you updated on all future developments. Until then, stay tuned.

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