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LIC drops plan for bank; to opt for alliance

Sarbajeet K. Sen

NEW DELHI, May 27

DROPPING its earlier proposal to set up a separate bank of its own, the Life Insurance Corporation (LIC) is currently working on a plan to enter into a strategic alliance with an existing bank in which the corporation would hold a minimum 26 per cent sta ke.

Though the corporation would prefer to enter into a strategic tie-up with a public sector bank, it is also open to the idea of a possible tie-up with a private sector bank.

``We are in the process of making up our mind on the entry into the banking sector,'' the LIC Chairman, Mr G.N. Bajpai, told Business Line recently.

He said LIC was thinking of the 26 per cent holding as the minimum that it would like to hold as a strategic partner since that would provide the corporation a definite say in the decisions of the board of directors by providing the veto power.

However, the proposal for the tie-up would be dependent on the necessary regulatory clearances. Moreover, it might also entail the need for certain minor legislative amendments to allow the corporation to take up the new activity.

Mr Bajpai said that the strategic alliance route was selected out of three possible options that the life insurance giant had been working on during the recent past for a foray into the banking sector, with the others being to acquire a bank or to set up a completely new entity of its own.

Explaining the rationale behind LIC's desire to dabble into banking, the Chairman said that routing the transactions of the insurance company through the bank would provide a ready business of several thousand crores annually to the banking entity.

``The total flow of LIC's money up and down the banking channel during the past year (2000-01) was nearly Rs 80,000-85,000 crore,'' Mr Bajpai said. This consisted of premium income (renewal plus new policies) of Rs 40,000 crore, investments of Rs 20,000 crore and another Rs 24,000 crore as payouts of earlier policies.

Mr Bajpai felt that routing the monies through LIC's own bank would substantially add value to the entity with which it would have a tie-up.

Other than this, he said another benefit that LIC would derive from the tie-up would be of expanding its distribution channel. It would also enable the corporation to devise new products which could be distributed effectively through the banking network.

``A tie-up of this nature would help in building new products by merging our life products with banking products,'' Mr Bajpai said.

Moreover, he said that the corporation would also be able to utilise the bank's available skills in treasury and cash-flow management. ``Banks and insurance companies are natural partners,'' the LIC Chairman said.