‘RBI plan to turn banks into insurance brokers bad idea’

Several RBI officials privately question the wisdom to allow banks to act as insurance brokers.

Written by George Mathew | Mumbai | Published: February 24, 2014 1:58 am

The Reserve Bank of India (RBI) is in a bind over the move to allow banks to work as insurance brokers. After unveiling the draft norms for banks’ entry into insurance broking, the RBI has been facing opposition from public sector banks, and with differences of opinion within the RBI on the issue, the proposal is as good as stuck, a top source said.

The latest entity to join the opposition chorus is Life Insurance Corporation — the largest insurance company in the country.

Expressing the LIC’s position, a senior LIC official said, “We are not comfortable with the idea. We had earlier written to the government on this issue.”

Once a bank becomes an insurance broker, it will need registration from Insurance Regulatory and Development Authority (Irda) and it also remains to be seen how inter-regulatory issues pan out.

Several RBI officials privately question the wisdom to allow banks to act as insurance brokers.

“It’s wrong on the part of banks to become brokers and charge high commission from customers. Why are they charging high commission? Also, the RBI doesn’t allow stock market intermediaries to get a banking licence or get involved in a banking initiative. So why should banks get into broking business,” said a senior RBI official on condition of anonymity.

“The whole exercise is in a mess. I don’t understand why the government is getting involved in the issue. It’s for the regulators to decide,” the RBI official said.
Banks, on the other hand, are opposing the diktat from the finance ministry that all PSU banks should take the broking route instead of the corporate agent model.
As per the existing guidelines, a bank can act as a corporate agent and sell products of one life insurance company, one general insurance company and one standalone health insurer.

“Mis-selling can take place when banks get involved in insurance broking. There’s no guarantee that banks will stop promoting some products where commission will be more,” the senior RBI official said.

Even as the debate continues, the Irda had sent out a subtle message that it could ban banks from entering into exclusive tie-ups for selling a single insurers products instead of multiple insurers. The RBI had, in principle, allowed banks to undertake insurance broking business in November, 2013.

However, the draft guidelines stipulated that not more than 25 per cent of insurance handled by the insurance broker in any financial year be placed with the insurance company within the promoter group, separately for life and general insurance business.

Meanwhile, private insurance agents have started getting the jitters. “If banks get into broking business what will we do. We will be thrown out of the business. There are several lakhs of insurance agents in both life and non-life in the country,” said a general insurance broker.

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