RBI does not have to impose a limit on the ownership of banks in insurance companies, being in the insurance business is beneficial for each other
If the RBI is thinking of putting a limit on the ownership of banks in insurance companies, then it needs to revisit this opinion, that is the opinion of Kotak Institutional Equities. The brokerage firm mentioned a news article in its recent report, according to which the RBI wants banks to limit their stake in insurance companies to 20%.
The brokerage firm says that the relationship between banks and their promoted insurance companies is beneficial for everyone, insurance companies and policyholders. According to it, banks’ investment in insurance companies is not harmful to their deposit holders.
RBI feeling uneasy with increasing share of banks in insurance companies
According to the news article quoted by Kotak Institutional Equities, RBI is feeling uneasy about the increasing shareholding of banks in insurance companies. There is a lot of capital in the insurance business, so RBI would like to focus on main business like bank loans and deposits.
The recent deal between Max and Axis suggests that RBI may allow banks to hold a maximum of 20% stake in insurance companies. It can make the same arrangement with regard to the limit of its investment in the insurance companies promoted by banks.
Shares of insurance companies will increase in the market if holding is upper limit
If the RBI sets the upper limit of banks’ investment in insurance companies, then the number of insurance shares for trading in the stock market will increase. The limit of investment of banks and NBFCs in the top listed life and general insurance companies will bring additional 1.2 lakh crore shares in the market. Kotak believes that the RBI should consider the positive impact of its relationships before putting limits on banks’ investment in insurance companies.
Provisioning helps insurance subsidiaries in challenging situations
According to the brokerage firm, banks have been assisted by insurance subsidiaries in raising capital for provisioning for NPA coverage under challenging circumstances. In FY 2016-18, HDFC used more than 40% of the proceeds from the sale of stake in an insurance subsidiary to provision the estimated loss of the loan. ICICI Bank likewise covered 30–40% annual provisioning.
Banks pay 2-3% of the fees for distribution of income insurance products. According to Kotak data, the distribution of the policy to the big banks is equivalent to 5-15% of their PBT income.
Insurance companies save on distribution costs through the network of banks
With the support of the network of banks, insurance companies save a lot in distribution costs. Common brands also benefit from marketing by being associated with banks. Bancassurance’s share in the business of private insurance companies increased from 21% in FY 2009 to 53% in FY 2020.
As far as policyholders are concerned, these strong promoters prefer insurance companies with banks. According to the data, insurance companies of banks and big promoters get higher premiums than others. It is because of their big promoters that they have built their trust and dominance in the market.
Insurance subsidiaries of banks need not worry about capital
According to the news article, the RBI is worried because this business invests a lot of capital. But Kotak believes that this will not harm the depositor’s interests. Banks have separate minimum capital requirements and regulator permission is required to invest in insurance companies. With this, banks’ investment in insurance subsidiaries will be kept under control and the depositor’s interests will also be protected.
In the last five years, there has been a marginal investment of banks in insurance subsidiaries
Life insurance companies require most of the capital in the initial years. This is due to higher reserve requirements and lower profits on each sale. With the release of reserves over time, the company stands on its feet on the capital front. This is confirmed by the modest investment of banks in insurance subsidiaries in the last five years.
Insurance is attractive for investment given the potential of long term growth
Given the potential for long-term growth, insurance remains an attractive sector for investors. This will not hurt the insurance companies to raise capital from the secondary market or primary market. Investment opportunities in insurance companies will be increased by increasing the FDI limit to 74% in the insurance sector.
