RBI asks banks to trim stake in insurance companies to 30%

  • With an intention to reduce non-banks business risks and focus on boosting credit growth, Reserve Bank of India (RBI) has asked banks to reduce their stake in insurance companies to 30%. The limit is 50% for NBFCs holding stakes in the insurance companies.
  • Banks may get 3-5 years to implement this rule

As per the news reports, RBI communicated this to banks in a meeting last week (RBI has not officially communicated this so far).

Among the large private sector insurance companies, HDFC group holds stake in insurance companies through a non-bank (HDFC Limited) and also its current shareholding is very close to the speculated levels of 50%.

ICICI, SBI, Kotak hold stakes (52-100%) through the bank and hence may be more impacted.

Many experts expect the above to be negative especially for the insurance companies –

  • There may not be sufficient investor appetite for so many insurance companies’ stocks putting pressure on the prices (for the whole sector).
  • Parent banks are important distributors for respective insurance companies. With their reduced skin in the game, they may reduce focus impacting overall business growth of the insurance companies.

Personally, I believe the concerns may not play out as significantly as many expect. Main reason is my long term positiveness for insurance sector in general and life insurance in particular. Insurance is an highly under penetrated sector in India with a very long runway ahead. Lot of things have started playing out in favor of this sector. Sometime back I had written a related post – Life Insurance – a sector unlike any other.

In terms of appetite, I know and believe there are many long term institutional investors accumulating Indian insurance stocks and they would continue to look for opportunities to buy more. In terms of bank distribution related concerns, again it seems to be overdone. Banks have a mutual interest of continue growing insurance products both from revenue (fee, commissions) and capital growth (share price appreciation) perspective.

Yes, there might be short term pressure on the stock prices (sentiment driven) but I will consider that to be an opportunity to accumulate. And I would not be surprised if many other as well !

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.