'Bancassurance': The new buzzword - I

IN THE financial sector in India, commercial banks have huge distribution networks unmatched by other financial services organisations in India. With the opening up of the insurance sector, commercial banks have been eyeing bancassurance as a logical extension of their business.

This article and the next explore some of the important aspects of this diversification being considered by a number of commercial banks. As public sector banks form the major component of the commercial banking segment, most of the discussions are applicable to them in the Indian context. However, foreign banks are also keen to distribute insurance products.

Guidelines for entry of banks into insurance

As a response to this desire of commercial banks for entering the insurance sector, the Reserve Bank of India (RBI) has come out with detailed guidelines on the entry norms of commercial banks for diversifying into insurance.

According to the RBI norms, there are three options open to banks wanting to enter the insurance arena. Financially strong banks, subject to eligibility norms, will be permitted to set up joint ventures for undertaking insurance business with risk participation. The maximum equity contribution such a bank would hold in the joint venture would normally be 50 per cent of the paid-up capital of the insurance company. However, a higher level of equity contribution may be permitted, subject to divestment of equity within the prescribed period. As per present indications, the largest public sector bank, State Bank of India, will be allowed to hold more than 50 per cent of the equity of an insurance venture, while other public sector banks like Bank of Baroda and Corporation Bank can hold up to 50 per cent of the equity.

The eligibility criteria for joint venture participation will be as under, as on March 31, 2000:

* The net worth of the bank should not be less than Rs. 500 crores,

* The CRAR of the bank should not be less than 10 per cent,

* The level of Non Performing Assets (NPAs) should be reasonable,

* The bank should have net profit for the last three continuous years,

* The track record of the performance of subsidiaries, if any, of the bank concerned should be satisfactory.

Banks that are not eligible as joint venture participants, can make investments up to 10 per cent of the net worth of the bank or Rs. 50 crores, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under:

* The CRAR of the bank should not be less than 10 per cent,

* The level of Non Performing Assets (NPAs) should be reasonable,

* The bank should have net profit for the last three continuous years.

Finally, any scheduled commercial bank will be permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation. Further, subsidiaries of banks will also be allowed to undertake distribution of insurance products on agency basis. Several public sector banks like Bank of India, Punjab National Bank and Syndicate Bank have expressed a desire to enter the business of distribution of insurance products. Private sector banks such as HDFC Bank and ICICI Bank will be involved in insurance selling as their associate companies are involved in promoting insurance ventures. Foreign banks are also keyed up to become involved in the distribution of insurance products.

To conclude, the guidelines issued by RBI on bank participation in insurance ventures are quite comprehensive and make a great deal of sense. There are basically three options available to banks to enter the insurance sector, namely, as a promoter, as a strategic investor and as a corporate agent for selling insurance policies.

It may be added here that the RBI has also come out with detailed guidelines for diversification into the insurance area in the case of non-banking finance companies (NBFCs). All NBFCs registered with RBI that satisfy the eligibility criteria will be permitted to set up a joint venture company for undertaking insurance business with risk participation. NBFCs like Sundaram Finance, Kotak Mahindra Finance and HDFC have become promoters of insurance ventures. Further, any NBFC registered with RBI having net owned funds of Rs. 2 crores would be permitted to undertake insurance business as agents of insurance companies on fee basis, without any risk participation.

Marketing and selling of insurance products

Liberalisation of the insurance industry will only make sense if the customer gains. However, marketing/ selling of insurance products is different from banking products, hence the selling techniques will be different. Are our banks, specially public sector banks, geared to deliver insurance products to customers?

Till now, in the Indian insurance industry, the individual agent has been the main channel through whom insurance products have been sold. In the life insurance sector, individual agents are the only distributors of insurance products today. In the non- life sector, however, company executives have been directly selling products to the corporate sector, while individual agents sell personal general insurance products.

As the Indian insurance market evolves, various additional channels including brokers, banks, corporate agents and the Internet will be used by insurance companies in order to reach the customer. Both the law and the regulator will have to take into account new developments in distribution channels so that the customer gains.

Abhijit Roy

(To be concluded)

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