Bank, Insurance Companies Should Keep Arm-Length Gap

THE RESERVE Bank of India (RBI) today said that there should be 'arms length' relationship between the bank and the insurance outfit.

While releasing the modified guidelines for diversification by banks into insurance business for feedback, the apex bank has stated that it should 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.

The Reserve Bank of India will give permission to banks on case to case basis keeping in view all relevant factors including the position in regard to the level of non performing assets of the applicant bank.

 

This is to ensure that the non performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz insurance business.

The subsidiaries of any bank which have been set up with the approval of the RBI will also be allowed to undertake distribution of insurance product on agency basis.

The maximum equity criteria for banks setting up insurance outfit as joint venture has been pegged at 50 per cent of the paid up capital of the insurance company.

Banks which are not eligible as joint participant can invest up to 10 per cent of the networth of the bank or Rs 50 crore whichever is lower, in the insurance company for providing infrastructure and services support.

Such investment will be on one time basis and without any contingent liability for the bank. Such contribution will be treated as an investment, the Reserve Bank of India latest guidelines for diversification pointed out.