RBI norms may dissuade smaller banks from becoming insurance brokers

Life insurers say RBI's stringent capital requirements will make it tougher for smaller banks to enter broking space

Even as the Reserve Bank of India (RBI) has brought out guidelines for banks to become brokers, insurers are not very optimistic. With stringent capital requirements, life insurers said that banks will not see broking as an attractive proposition.

RBI has issued draft guidelines for banks, who are willing to become insurance brokers. As per these norms, only banks with strong capital base can become brokers. Further, their net Non-Performing Assets (NPA) should be below 3%.

Insurers are of the view that this could prove to be a hindrance for the smaller banks to enter the broking space. “The industry was not too hopeful of the large private and public sector banks to enter the insurance broking segment. However, we had thought that the smaller public and private sector banks would have seen business opportunity here. But, with RBI putting stringent norms, these banks too, will be dissuaded,” said the chief executive of a new-age life insurance company.

Hence, the official informed that they would have to tap into other areas of distribution like agency force and online segment.

Another official from a general insurance company said that they were awaiting RBI's views before taking any step on their distribution strategy and model. "Though some smaller banks had expressed interest in exploring the broking channel, RBI norms will make it tougher for them," the official said.

In its draft norms on the criteria for banks to step into the insurance broking segment released on Friday, the central bank added that such lenders must have a capital adequacy ratio of at least 10%, compared with the regulatory mandate of 9%. Also, these banks should have recorded profits for three consecutive years. The net worth of such banks should be at least Rs 500 crore, RBI said.

Apart from stringent guidelines by RBI, industry players explained that it may not be viable for the largest private and public sector banks to become insurance brokers, since they are promoters of insurance companies.

“While RBI has not said anything against banks promoting insurance companies to become brokers, their boards may not give a nod to this arrangement. This clearly accounts for conflict of interest,” said senior official of a non-bank promoted private life insurance company.

RBI’s norms follow the regulation by Insurance Regulatory and Development Authority (Irda) on banks becoming insurance brokers. In its regulations on licensing banks as insurance brokers, Irda said each applicant (scheduled bank) should have obtained prior approval of RBI before applying for a license to act as an insurance broker. The license, once granted, would be valid for a period of three years after which it would be renewed.

The banking regulator has also said that banks will be allowed to conduct insurance broking departmentally; there is no need to form a subsidiary or a joint venture. According to a senior executive of a mid-size bank-promoted private life insurer, a large part of their business comes from the bancassurance channel.

“If this is opened up to other companies when the Bank becomes a broker, this would mean serious competition from others. Hence, insurers with large banks partners may not favour it, but the final decision will have to be taken by the Bank,” said the official.

While RBI approval is required for banks to become brokers, Irda has maintained in any dispute arising out of insurance transactions, the jurisdiction of the authority (Irda) shall prevail.

The finance ministry has been in favour of banks becoming insurance brokers. In his budget speech this year, Finance Minister P Chidambaram said banks would be so permitted. According to data for 2012-13, as much as 65-70% of new premium of bank-led life insurers was generated from their bank partners.

For the life insurance sector as a whole, the bancassurance (corporate agency-bank) channel accounts for 30% of total new business premium collection.