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The Mangalore-based Corporation Bank Ltd firmed up ties with state owned Life Insurance Corporation, by agreeing to offer an additional 14.68 percent of its equity to LIC. The move marks the beginning of what is called in the financial parlance as Bankassurance, cross-selling of bank and insurance products. The initial euphoria apart, on the flip side, there is a insurance monolith known for its lethargic ways of functioning, on one hand, while on the other, there is a government-owned bank, but as nimble as a private genre player. Would one expect the marriage to have a happy ending?

The idea of Bankassurance caught the fancy of European and American financial services providers in the 90s. The success of global financial giants like Citigroup have no doubt driven others to follow the suit. The LIC-Corporation bank association could just be a beginning in that direction on the local turf. As per the arrangement between the two partners, the bank will be appointed as the corporate insurance agent for LIC, distributing LIC’s policies and also be involved in cash management. Another significant aspect of the deal is that LIC has allowed the bank to open extension counters and ATMs on its 2,048 branches across the country (can be used for payment of insurance premium). Apart from this LIC would utilise the bank branches for various purposes like payment of dividend on securities, payment of annuity and pension claims, and for collection of interest. Both the parties have also agreed to share technical expertise and know-how to work in coordination with each other in respect of investments on a private placement basis so as to improve yield on such investments.

The reaction at the bourses were quite interesting as the news of deal hit the market. Earlier, the Corporation Bank had been ruling firm following the initial stake picked up by LIC through the market. The expectations that any move to hike stake would be through the market and lead to an open offer kept the sentiments up. However the deal was structured in a way to avoid the open offer under the Sebi takeover code and the allotment of equity was decided on a private placement basis. This came as a hard news for the market. Despite this, the bank counter was in great demand leading the other banking scrips to surge as well.

The possibility of the good business volumes of LIC being routed to the bank and the generally sound fundamentals of the bank would have interested investors. Besides, there were other long term positives like the LIC could enhance Corporation's Bank reach and give it a footing in regions other than the south, where its spread is not as good. This could open up business opportunities and risks. 

A key factor for the success would be, for this fundamentally sound bank, to retain its present status as a separate entity and not suffer any detrimental change in the working culture and performance parameters following the now stronger bond with LIC. And more importantly how this combine, cope with the pressure from competitors on their individual turfs could be decisive for the marriage to have any great success.

Karthik Raj

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