At a time when public sector banks will once again make a beeline to Life Insurance Corp (LIC) of India for capital infusion before the end of the financial year, the Reserve Bank of India (RBI) has expressed its discomfort with the insurance behemoth exposure in the banking sector.
LIC holds 12-15% equity in all public sector banks put together. According to latest available data, LIC’s stake in banks like United Bank, Dena Bank, Central Bank of India, Punjab & Sind Bank, and Indian Overseas Bank has increased substantially between September 2013 and September 2014.
According to top central banking sources, there is issue of contagion effect if one company has a high exposure to one sector.
“Since we regulate banks, we have to ensure the kind of investments that are made in these entities,” said a source.
With the finance ministry indicating that banks will not raise capital from the markets due to valuation issues, the lenders may once again have to resort to LIC for capital.
While the banking regulator is not comfortable on the issue, the insurance behemoth has got the support of Irda – the insurance regulator. According to Irda sources, as long as LIC’s remains healthy, there should not be any issue. “RBI could review the health of the insurance company periodically,” sources said.
Banks has been knocking to door of LIC despite a favourable market conditions during 2014. The performance of the Indian stock market was best in 2014 since the global financial crisis. Many private sector banks have raised equity capital, mainly by qualified institutional placement, but public sector banks were unable to do so mainly due to subdued valuations. A host of public sector banks were planning to raise money via QIP, postponed such issuances.
Last year, LIC has infused capital in lenders like Central Bank of India and Dena Bank by way of preferential allotment of equity shares. LIC had also participated in the QIP issue of State Bank of India.
In its financial stability report, published on the end of December, RBI has hinted its discomfort with such an issue.
According to the central bank, apart from the cost implications of raising additional capital, banks will face challenges in terms of depth, liquidity and sufficient appetite in India’s capital markets for such risk bearing Additional Tier I (AT1) capital instruments.
“In the absence of a wider retail market, few select investor categories and institutional investors, mainly insurance companies might end up holding much of the AT1 instruments issued by banks.
Since such institutional investors mostly hold such securities till maturity, feedback for pricing of such instruments through secondary market trades are conspicuously absent,” RBI said.
As a result, banks will have to bear higher costs for issue of such instruments relative to their international peers.
According to the central bank, while capital adequacy ratio of banks are above the regulatory requirement of 9% (12.8% as on September end), the banking sector, mainly public sector banks, would require ‘substantial’ capital to meet regulatory requirements with respect to additional capital buffers.
|LIC Stake in PSU Banks|
|Company code||Company name||Sep-13||Sep-14|
|1375||St Bk of India||13.43||13.50|
|5456||Bank of Baroda||12.01||10.57|
|5481||United Bank (I)||4.60||14.19|
|5493||Union Bank (I)||10.85||8.78|
|5607||Bank of Maha||7.82||13.41|
|5654||Bank of India||12.67||11.81|
|5814||Pun. & Sind Bank||4.56||10.49|
|5947||St Bk of Mysore||1.47||1.47|
|5955||I O B||8.91||14.23|
|5961||St Bk of Bikaner||2.22||2.02|
|Compiled by BS Research Bureau|