Private sector lender ICICI Bank on Friday sold 3.96 per cent stake in its general insurance arm ICICI Lombard for Rs 2,250 crore. This was done to strengthen the bank’s balance sheet in light of the pandemic that is expected to worsen the bad loans problem of the banks.
In a statement to the exchanges, the bank said, pursuant to the approval granted by the board of the bank, it divested 18 million shares of face value of Rs 10 each of ICICI Lombard General Insurance, representing 3.96 per cent of its equity share capital on the stock exchange for an approximate total consideration of Rs. 2,250 crore”.
Post the transaction, the ICICI Bank’s stake in its general insurance subsidiary stood at 51.9 per cent and the rest is publicly held.
ICICI Bank also holds promoter stake of 52.87 per cent in its life insurance arm ICICI Prudential.
Shares of ICICI Bank were trading 0.81 per cent higher on the BSE post the announcement while shares of Lombard were trading 1.57 per cent lower than the previous close on the BSE.
The private lender had a capital adequacy ratio of 16.11 per cent at the end of March, 2020, which is well above the regulatory requirements. But the bank had indicated that due to the uncertainties arising out of the pandemic, it would strengthen its balance sheet further.
For bad loans and coronavirus-related disruptions, the bank made provisions of Rs 5,967 crore, up 9 per cent from Rs 5,451 crore in Q4FY19. Compared to the previous quarter’s figure of Rs 2,083 crore, provisions were up almost 186 per cent.
Analysts have said many banks have been monetizing part of stake in subsidiaries and some strategic holding to enhance capacity to absorb shocks from the economic disruption caused by COVID19 pandemic. Banks will face heightened stress due to bad loans.
On the base case scenario, ratings agency ICRA sees gross NPAs rising to 11.3-11.6 per cent by March 2021.
The stress emerging from severe economic shock caused by steps to contain Covid-19 pandemic may drive total slippages of up to Rs 5.5 trillion in the country in FY21. The corporates side may see slippages to the tune of Rs 3.4 trillion and non-corporates comprising – retail, farming and MSME – may account for about Rs 2.1 trillion stressed loans, according to India Ratings.
Banks in India faced elevated provision pressure (amount set aside for stressed loans) resulting from the corporate stress cycle over FY16-FY20. And they had made substantial provisions and were moving to a moderated credit cost cycle.
Recently, State Bank of India also divested some part of its stake in its listed life insurance arm SBI Life Insurance for Rs 1,522 crore.