RBI not game for LIC's play in state-owned banks

However, the insurance behemoth, which holds 12-15% stake across PSBs, has Irda support

At a time when public sector banks (PSBs) again set to approach Life Insurance Corporation of India (LIC) for a capital infusion before the end of this financial year, the Reserve Bank of India (RBI) is understood to be uncomfortable with the insurance behemoth’s exposure to the banking sector.

LIC holds 12-15 per cent equity in all PSBs put together. According to the latest data, the insurer’s stake in banks such as United Bank, Dena Bank, Central Bank of India, Punjab & Sind Bank and Indian Overseas Bank increased substantially between September 2013 and September 2014.

Senior central banking sources said if a company had high exposure to a particular sector, it posed a risk of contagion. “Since we regulate banks, we have to ensure the kind of investments made in these entities,” said a source.

With the finance ministry indicating banks won’t raise capital from the market due to valuation issues, lenders might once again have to resort to LIC for capital.

While the banking regulator is not comfortable with this, the insurance behemoth has the support of the Insurance Regulatory and Development Authority of India. According to sources at the insurance regulator, as long as LIC remains healthy, there is no cause for concern. “RBI could review the health of the insurance company periodically,” sources said.

Last year, when the Indian stock market fared the best since the global financial crisis, banks had approached LIC for capital. Many private banks have raised equity capital, primarily through qualified institutional placements (QIPs). But PSBs were unable to do so, due to subdued valuations. A host of such banks had planned to raise money through QIPs but had postponed such issuances.

Last year, LIC had infused capital in lenders such as Central Bank of India and Dena Bank by way of preferential allotment of equity shares. The insurer had also participated in a State Bank of India QIP.

In its financial stability report, published at the end of December, RBI had hinted at discomfort with such a practice. According to the central bank, apart from the cost implications of raising additional capital, banks faced 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, a few select investor categories and institutional investors, primarily 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 RBI, while capital adequacy ratios of banks are above the regulatory requirement of nine per cent (12.8 per cent, as of September-end), the banking sector, primarily PSBs, would need “substantial” capital to meet requirements relating 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
4318	Oriental Bank	10.61	8.22
5433	IDBI Bank	8.63	7.00
5445	Corporation Bank	24.69	22.54
5456	Bank of Baroda	12.01	10.57
5471	Canara Bank	5.48	6.04
5475	UCO Bank	10.20	7.91
5481	United Bank (I)	4.60	14.19
5493	Union Bank (I)	10.85	8.78
5533	Dena Bank	5.92	13.12
5539	Central Bank	7.03	10.04
5607	Bank of Maha	7.82	13.41
5638	Syndicate Bank	11.03	8.18
5654	Bank of India	12.67	11.81
5675	Allahabad Bank	10.76	9.94
5814	Pun. & Sind Bank	4.56	10.49
5859	Andhra Bank	7.98	6.74
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
6025	Vijaya Bank	12.09	6.00
6061	Indian Bank	2.42	2.60
7855	Punjab Natl.Bank	13.15	11.78
Source: Capitaline
Compiled by BS Research Bureau