Mumbai: State Bank of India (SBI), India’s largest commercial bank, may soon follow the footsteps of its private sector rival ICICI Bank Ltd and set up a holding company for its non-banking subsidiaries in businesses such as insurance and asset management. ICICI Bank has already floated a subsidiary, ICICI Financial Services Ltd, to hold its investments in the insurance and mutual funds (MF) business.
Speaking at a press conference here on Thursday, SBI chairman Om Prakash Bhatt said: “The proposed holding company will enable the bank to capture the value available in these businesses. The life insurance business has been valued at $7 billion (Rs28,700 crore).”
SBI’s stake in its asset management and insurance subsidiaries will be transferred to the holding company. The bank holds a 74% stake in the life insurance firm and 63% in the asset management company. Its foreign partner for the life insurance business is Cardiff of France and for asset management, Societe Generale Bank.
The asset management arm of SBI is among the topfive players in the MF industry and manages assets of more than Rs19,600crore. And the bank’s life insurance arm was the first among private insurance firms to post a net profit. SBI plans to list the holding company at a later date. Experts in the banking industry say that this move will help SBI raise capital for its non-bank businesses. The bank has been infusing capital into its insurance business; under current laws, no overseas entity can hold more than 26% stake in an insurance company in India.
“Once the holding company is formed, the bank will find it relatively easy to serve the requirements of fast growing business segments such as insurance and asset management,” said a banking analyst at a domestic brokerage who did not wish to be identified.
ICICI Financial Services, the holding company for ICICI Bank’s insurance and MF business, plans to sell a 24% stake to foreign investors. It has already identified overseas investors to sell a 5% stake in the outfit. However, the Foreign Investment Promotion Board, the government body that clears foreign investments in Indian firms, has not yet cleared this proposal. The holding company is valued at Rs40,000 crore.
SBI will need about Rs50,000 crore in capital in the next three years to meet the demand for loans in Asia’s second fastest growing major economy. Credit offtake in India has slowed down to 26% this year after growing around 30% for three successive years. “There are a number of factors that will lead to additional capital requirements such as continuing strong credit growth, migration to Basel II framework and consolidation in the domestic banking industry as well as acquisitions overseas,” Bhatt said. However, in the current scheme of things, where the government holds 59.73% controlling stake in the bank, SBI says that its “capital raising needs are being hampered”. Bhatt is hopeful that the amendment of the SBI Act will allow it to raise capital from the equity markets by the end of 2007.
SBI, which roughly accounts for one-fifth of the Indian banking industry, is also planning forays into new businesses such as general insurance and pension funds. “The bank has been shortlisted by the pension industry regulator as one of the four players to set up funds,” Bhatt said. Besides, the public sector lender has also launched financial planning and advisory services in an effort to increase its market share among the rising number of affluent households in the country.
Currently, this segment accounts for only 2% of its total customer base. SBI has close to 500 relationship managers already in this division.
According to Bhatt, SBI is also focusing on two more business segments—treasury and rural banking.
The bank’s treasury business has plans to tap the global derivative market while the rural banking division has ambitions of providing banking services to rural customers by the end of 2008.