With the misery caused by COVID-19, many families are becoming cautious of their health and also looking at mediums to insure their assets. This has led to a surge in the insurance sector. Many new NBFCs with healthy capital are looking to enter the insurance sector through insurance company registration process to take advantage of this booming sector.

Non-Banking Financial Companies (NBFCs) have been trying to enter the markets of insurance business for a long time. In 2000, the Central Bank of Indian Government, i.e. RBI gave a green light to them and the NBFCs since then are operating in the Insurance sector. However, they still have not got permission to work as an independent sector. They have to strictly adhere to the guidelines laid down by the Reserve Bank of India (“RBI”). The guidelines have been issued under Circular DNBS (PD)CC No.13/02.01/99-2000 dated June 30, 2000.

In this blog, we are going to understand the criteria which the NBFCs have to fulfil to enter the markets of the insurance business.

NBFC Registration

Guidelines Laid down in the Circular

The NBFCs need prior approval of the Insurance Regulatory and Development Authority of India (“IRDAI”) and RBI to enter the business of insurance.

Eligibility Criteria to act as Insurance Agent

  • Not all NBFCs are required to get registered with the RBI as per Section 45 of the RBI Act, 1934. However, if an NBFC wants to enter the market of the insurance business, then it has to get itself registered with the RBI.
  • It should have a net worth of Rs. 5 Crores as per the latest audited balance sheet. Fulfilling these two criteria allows the NBFC to undertake insurance business, on a fee basis, as an agent of the insurance companies without any risk participation.

Eligibility Criteria to set up Joint Venture (“JV”)

Fulfilling the criteria below will allow the NBFCs to set up a joint venture company for undertaking insurance business with risk participation.

  • It should be registered with the RBI.
  • It should have a net worth of Rs. 500 Crores.
  • The ‘Capital Adequacy Ratio’ of the NBFC, engaged in loan and investment activities, should be more than 15% and for other NBFCs should be more than 12%.
  • NPAs should not be more than 5% of the total outstanding leased/hire purchase assets and advances.
  • NBFC should have a net profit for the last 3 consecutive years.

Note: The NBFC is allowed to contribute to the maximum of 50% capital in the JV. The RBI, on a selective basis, may allow an NBFC to go beyond 50%.

Other Provisions

  • If a foreign company contributes 26% with the approval of IRDAI or Foreign Investment Promotion Board (“FIPB”), then more than one NBFC will be allowed to participate in the said venture, provided that all the participating NBFCs fulfill the criteria of setting up the JV.
  • NBFCs are not allowed to conduct the insurance business departmentally. For example, a subsidiary of the same group of NBFC conducting the business of a non-banking financial institution or banking business will not be allowed to join the insurance business on a risk participation basis. Such subsidiaries can enter into the business only as an agent to the insurance companies which is risk-free in nature.
  • NBFCs not qualified to enter the JV set-up can still make investments in the JV up to 10% of the owned fund of the NBFC or Rs.50 crore, whichever is lower, provided that it fulfils the following criteria:
    • The ‘Capital Adequacy Ratio’ of the NBFC (applicable only to those holding public deposits), engaged in loan and investment activities, should be more than 15% and for NBFCs, engaged in equipment leasing/hire purchase finance activities, should be more than 12%.
    • NPAs should not be more than 5% of the total outstanding leased/hire purchase assets and advances.
    • NBFC should have a net profit for the last 3 consecutive years. 
    • The promoters should have a clean record in the business market.

Is Legal Help Needed?

The RBI is trying to incorporate as many NBFCs to enter the markets of insurance. If the NBFCs are not big enough, they can still enter the market by acting as agents to the insurance companies. This allows the relatively smaller NBFCs to enter the market risk-free. This protects the smaller NBFCs while at the same time allow them to operate in the insurance markets. On the other hand, the larger NBFCs have pockets deep enough to take such risks and thus, they are allowed to set up JV undertaking insurance business. The RBI here also tries to protect them by limiting the cap of their investment.

All these reasons should prompt any newcomer in the NBFC sector to move towards the insurance sector to take advantage of the booming growth. Therefore, many new companies are looking for ways to start their business through NBFC registration. The process of getting an NBFC license is a bit complex and would require experts to deal with it. Hence, most new ventures are preferring to partner with legal firms who can help them in the process of NBFC registration and subsequently entering into the insurance sector in future. Collaborating with legal firms for new company registration is preferred by an entrepreneur as it saves time and makes the whole process hasslefree. 

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Company: Muds Management
Location: New Delhi, IN
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