RBI draft restricts banks, FIs entry into insurance

RBI draft restricts banks, FIs entry into insurance
AGENCIES

MUMBAI, JANUARY 10: Reserve Bank of India's (RBI) draft guidelines on direct entry of banks and Financial Institutions (FIs) into insurance have stated that these entities should not be allowed to undertake insurance business both departmentally as well as through the subsidiary route.

Banks and FIs should maintain an arms length relationship with their proposed insurance outfit, the draft guidelines being circulated for suggestions from market participants said.

The guidelines have also sought to restrict banks/FIs' equity stake in their proposed insurance entity to 30 per cent, subject to a ceiling of 10 per cent of their networth and to an overall ceiling of investments upto 20 per cent of the networth in all subsidiaries and joint ventures.

The guidelines stated that the suggestion to disallow entry into insurance both departmentally as well as through a subsidiary has been promoted by the various risks involved in the business.

With a view to ensuring that only sound banks/financial institutionsenter insurance business, the guidelines have suggested that the networth of the concerned bank/FI should not be less than Rs 500 crore, the capital adequacy ratio should not be less than 10 per cent, the bank/FI should have track record of at least three continuous years of profits, the level of net NPAs should be at least one per cent below the industry average and the track record of performance of existing subsidiaries should be satisfactory.

The draft guidelines said insurance business could be undertaken in the form of joint ventures by banks/FI, subject to fulfilment of the parameters sought to be laid down.

It has also noted that necessary modifications in the legal framework governing various enactments will have to be carried out by the government before permitting banks/FIs to enter insurance business.

Banks and fis are also required to take necessaryapprovals from appropriate authorities before entering into any memorandum of understanding with any insurance partner.

RBI said onlyfinancially sound banks/fis with good trackrecord would be permitted on a case to case basis for providing fee-based services as agents of insurance companies.