CA Dipesh Parasrampuria
With the objective of increasing insurance penetration using the entire network of bank branches, the Finance Minister in the budget speech 2013-14 announced that banks will be permitted to act as insurance brokers. Consequent to the announcement, IRDA formulated and notified the IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013 to enable banks to take up the business of insurance broking departmentally. Reserve Bank of India had also issued Draft Guidelines on Entry of Banks into Insurance Business- Insurance Broking Business on November 29, 2013 for public comments.
Taking into account the comments received from various stakeholders in response to the draft guidelines, the guidelines have now been finalized & On 15th January 2015, RBI has issued a notification DBR.No.FSD.BC.62/24.01.018/2014-15 regarding the Entry of Banks into Insurance Business. Earlier, Circular DBOD.No. FSC.BC.16/24.01.018/2000-2001 dated August 9, 2000 permitted banks to set up insurance joint ventures on risk participation basis and also to undertake insurance business as agents of insurance companies on fee basis, without any risk participation by banks and their subsidiaries, consequent to the notification of Government of India specifying “Insurance” as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act,1949. Subsequently, banks were also permitted to undertake referral activities vide RBI circular DBOD.No.FSC.BC.27/24.01.018/2003-04 dated September 22, 2003.
Accordingly, banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either departmentally or through a subsidiary subject to the conditions. However, it may be noted that if a bank or its group entities, including subsidiaries, undertake insurance distribution through either broking or corporate agency mode, the bank/other group entities would not be permitted to undertake insurance distribution activities, ie, only one entity in the group can undertake insurance distribution by either one of the two modes mentioned above.
- Banks setting up a subsidiary/JV for undertaking insurance business with risk participation
Banks are not allowed to undertake insurance business with risk participation departmentally and may do so only through a subsidiary/JV set up for the purpose. Banks which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India to set up a subsidiary/joint venture company for undertaking insurance business with risk participation:
a) The net worth of the bank should not be less than Rs.1000 crore;
b) The CRAR of the bank should not be less than 10 per cent;
c) The level of net non-performing assets should be not more than 3 percent.
d) The bank should have made a net profit for the last three continuous years;
e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.
RBI approval would factor in regulatory and supervisory comfort on various aspects of the bank’s functioning such as corporate governance, risk management, etc.
It may be noted that a subsidiary of a bank and another bank will not normally be allowed to contribute to the equity of the insurance company on risk participation basis.
It should be also be ensured that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business. There should be an ‘arms length’ relationship between the bank and the insurance outfit.
♣ Banks undertaking Insurance broking/corporate agency through a subsidiary/JV
Banks desirous of setting up a subsidiary for undertaking insurance broking/corporate agency and which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India for approval to set up such subsidiary/JV:
a) The net worth of the bank should not be less than 500 crore after investing in the equity of such company;
Other conditions are same as in case of setting up a subsidiary/JV with Risk Participation as discussed above.
♣ Banks undertaking corporate agency functions/broking functions departmentally
Banks need not obtain prior approval of the RBI to act as corporate agents on fee basis, without risk participation/undertake insurance broking activities departmentally, subject to IRDA Regulations, and compliance with the other conditions.
♣ Banks undertaking referral services
In terms of IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010, no bank is presently eligible to conduct insurance referral business.
(Author can be reached at [email protected])
