Case study- “Entry of LIC into banking: Is it a wise decision?”

LIC is a long-term player with long-term resources garnered at a low cost. It has chosen Corporation Bank and Oriental Bank of Commerce, for investments in their equity shares. These two public sector banks have the distinction of turning out superlative performance. The business per employee and intermediation costs for these two banks are the lowest in the industry. So are there Non Performing Assets. Corporation bank incidentally, is the only public sector bank, where the recent voluntary retirement schemes has not been implemented, as it does not have any excess staff to be sent out.

In the Mangalore based Corporation bank are perhaps the biggest gambles over undertaken by the two giants. That, despite the state banks status as one of the best-managed bank in the country. Competition is intense in both domence at last count there were 19 public sectors, 34 private sectors, and 45 foreign banks operating in the country, and at the time of going to press, 6 companies have secured license from the IRDA to start operations (four of these already had).

The State Bank of India’s decision may have something to do with the state of the banking business. Indian banks have seen there interest speared- the difference between the rate at which they lend money and the rate at which they borrow it squeezed over the last 5 years. From a healthy 4% in 1996, this has come down to around 2.7% now.

The Life Insurance Corporations belated attempt to leverage its consideration financial and distribution muscle could have stemmed from a desire to become more ten a insurance company. It is highly likely that the immediate motivation was the entry of aggressive private sector player into its home-turf, insurance. Bajpai believes the Corporation Bank deal is a win-win one. “ The proposed synergy between the two efficient public sector organizations will be mutually rewarding and help LIC in marketing, servicing, and cash flow management.”

Ads Ashwin Parekh, the managing partner at consulting major author Andersen,” The ongoing convergence in (Indian) financial markets will result in the emergence of three or four large universal banks. Both LIC and SBI WANT to be serious contenders for the post”.

It is logical for the two companies to want to be universal banks.” The marriage of banking and insurance”, explains Ravi Trivedi, an Executive director with consulting firm PricewaterhouseCoopers,”will provide banks with a source of long-term funds to manage their short-term liabilities.” That both companies are serious about their universal-banking ambitions is evident. Says Bajapai: “We have put in a place a very wide array of products and today we are truly financial supermarket”.

Today 65 per cent of SBI’s revenues come from banking, and almost all of LIC’s revenues come form insurance. Both are seeking to reduce this proportion over the next five years. Only, SBI is seeking to become a universal bank through organic means, while LIC has started its campaign with the acquisition of a significant stake in corporation bank.

The Same Ends:

The Life Insurance Corporation’s acquisition of a 27 percent stake in corporation bank for Rs.470.40 crore does make great business sense: Corporation Bank is among the better banks in the country; and a green-filed banking entity will find it difficult to establish itself in these trying times. Bajpai has already articulated his desire to up LIC’s stake in the banks once the government amends the banking companies Act, allowing private holdings in nationalized banks to exceed 49 per cent.

Thanks to the acquisition of this stake, India’s largest insurance company now benefit from Corporation Bank’s expertise in money management. LIC boasts an annual cash flow of around rs.85000 crore. The bank can help it manage this money. Managing a sum of this magnitude will not only enable Corporation Bank earn a large management fee, it will also help it acquire a significant clout in the money market.

By acquiring a 33% stake in corpbank securities, LIC acquires an almost in house fund manager for all the Rs.25, 000 crore it needs to invest in government securities. And by gradually increasing its stake in the profit making Oriental Bank of Commerce (2001 deposits, Rs. 24,680 crore; net profit, Rs.202.8 crore) to 11%, LIC has made its intent clear; to restructure itself into what Bajpa terms “a transnational competitive financial conglomerate of significance to societies”.

Who’s Better?

Discounting the overlap that must exist between the two, both companies on their existing customer base to help them make the transformation to universal bank. SBI, for instance, can sell a clutch of offering to its account-holders; LIC, to its policyholders. Then there are operational efficiencies to be gained.

Despite SBI’s strong brand, sizeable network, and huge customer base, it does look second best (to LIC) in the first lap of what must certainly be a long-distance race.

One reason is its decision to link the fortunes of its insurance subsidiaries, SBI-life, to the ability of its banking-branches to sell insurance policies-the classic BANCASSURANCE model. The decision is a result of its desire to augment its fee-based income through commission from the sale of policies.

The strategy has imposed several limitations on SBI. Its progress in the insurance business has been slow simply because the parliament has yet to clear a bill allowing banks to sale insurance.

Worse, the bank faces the unsavory prospect of working with not one, but two regulators, RBI and IRDA. It isn’t just externalities that are queering the pitch for SBI, several people are raising questions about whether or not it posses the skill relevant for the insurance business. “LIC can easily leverage the expertise of corporation bank to become a major banking player. SBI, cant’ do the same thing in insurance” ‘says a mumbai-based investment banker. SBI’s vagueness about its plans for the insurance segment hasn’t helped its cause, but fact is, the bank had enjoyed some success in its prior diversification.

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