The RBI is planning to ask the banks to cut their stakes in insurers to 30%, as it want to shield banks from risks arising out of their non-banking businesses and steer focus to boosting credit growth in a slowing economy.

RBI is stated to have informed the bankers in a meeting last week that it will soon introduce rules The holding limit will be 50% for non-banking financial companies such as Housing Development Finance Corp. that have insurance units.

The rule if enforced is likely to have far-reaching impact not only on banks, which derive significant income from their insurance units, but also on the insurers themselves as their parent banks are major capital providers and distributors of insurance products. State Bank of India, ICICI Bank Ltd and Kotak Mahindra Bank will be among the lenders to be affected by the decision.

Among general insurers, HDFC holds 50.49% in HDFC Ergo General Insurance Co.; ICICI Bank holds a 55.86% stake in ICICI Lombard General Insurance Co. Ltd; Kotak Mahindra Bank holds 100% in Kotak Mahindra General Insurance; and State Bank of India holds 57.13% in SBI General Insurance Co. Ltd.

“Banks are the major distributors of financial products especially life insurance. Any reduction of stake by sponsor banks in these institutions may have negative impact on the distribution capabilities as well as general public perception about these institutions they enjoy because of parentage. On the other side IRDA, has proposed an increase in FDI in insurance from 49% to 74%. If this proposal is enacted in the Parliament, foreign joint venture partners in insurance will be able to infuse more capital in the company whenever growth plans are drafted.

RBI however has been attempting to recalibrate banks’ holding norms to safeguard them from external risks for some time.

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