The government has asked public sector banks to concentrate on “core banking activities” and delay their the plans of floating insurance or other businesses, which are capital-intensive, at least till the end of the current financial year.
The move comes at a time when the government is facing a cash crunch, and has increased its market borrowing plan by Rs 53,000 crore in the second half of the current financial year.
The move would impact banks like Syndicate Bank, Indian Bank, Central Bank of India and Indian Overseas Bank (IOB), which had expressed interest to float either insurance or asset management businesses, since these would now have to put their plans on hold.
“In view of the current market conditions, banks are asked to conserve their capital and use the resources efficiently. Hence, banks are advised to stay away from any new business initiatives which would require substantial capital,” said a source, on the condition of anonymity.
The government advisory follows rating agency Moody's downgrading State Bank of India (SBI), the country's largest lender earlier this month. Moody's had downgraded SBI's rating from 'C-' to 'D+', citing lower capital adequacy ratio and the possibility of further deterioration of asset quality. With interest rates high, banks are seeing pressure on their asset quality.
“We are yet to receive any written communication. We are currently concentrating on the core business. The plan to enter the life insurance business has been put on hold, for the time being,” said a senior official at Central Bank of India.
After floating the initial request for proposal (RFP), Syndicate Bank is also going slow on its plans to foray into the life insurance business. In June, the public sector lender had floated a RFP for its life insurance venture. It had then shortlisted a dozen life insurance companies, and the names include both existing, as well as new players.
Indian Bank, which was in the process of appointing a consultant for advising it on its foray into the life insurance and asset management businesses, has also preferred to stay put. Another public sector lender, IOB, has also put its plans to enter the life insurance business on the back burner.
Most big public sector banks like SBI, Punjab National Bank, Bank of India, Union Bank of India, Bank of Baroda and Canara Bank, are present in the life insurance business, which entails a considerable amount of investment, besides having a long gestation period.