RBI dilutes insurance entry norms

MUMBAI, MARCH 16: Bowing to sustained pressure from commercial banks, the Reserve Bank of India (RBI) on Thursday relaxed banks' entry nor...

MUMBAI, MARCH 16: Bowing to sustained pressure from commercial banks, the Reserve Bank of India (RBI) on Thursday relaxed banks’ entry norms into the insurance sector by diluting the proposed non-performing assets (NPA) criterion from "one per cent below the industry average" to "reasonable" level.

It has also raised the ceiling on the sponsor bank’s equity stake to 50 per cent of the insurance venture from 30 per cent, suggested in the draft guidelines released in December last year. The proposed modified guidelines also allows relatively "smaller" banks, which do not have the net worth of Rs 500 crore, to participate in the insurance venture as "investors". However, it has barred subsidiaries of sponsor banks, including seven State Bank of India (SBI) associates, to pick up stakes in insurance ventures floated by the parent banks.

Had the RBI insisted on the previous norms, many leading banks would not have been able to enter into the insurance sector as they carry huge NPAs. The central bank will finalise the new guidelines in a week’s time after receiving the feedback from the industry, an RBI release said. The RBI has also removed the earlier stipulation that capped the equity participation of a bank or financial institution in the insurance venture at 10 per cent of the net worth. The suggestion that the total investment of the sponsor banks and institutions in all their subsidiaries and joint ventures should not exceed 20 per cent of net worth has also been dropped.

Except for the change in the NPA norms, the modified guidelines have retained the stipulation on net worth (Rs 500 crore), capital adequacy ratio (minimum 10 per cent), three-year profit record and the track record of subsidiaries for eligible banks as joint venture participants.

However, those banks which do not have the high net worth are allowed to invest up to 10 per cent of net worth or Rs 50 crore–whichever is lower–in the insurance company for providing infrastructure and services support.

"Such investments will be on one-time basis and without any contingent liability for the bank. Such contribution will be treated as investments," the RBI release said.

The central bank has barred subsidiaries of joint-venture banks from picking up equity stakes even though they are permitted to sell the insurance products. The list of subsidiaries includes the outfits undertaking merchant banking, securities, mutual funds, leasing finance and housing finance activities.

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"For this purpose, the associate banks of the State Bank will be reckoned as a subsidiary where the SBI is a partner," the release said. This effectively means that the State Bank of India will be required to rope in smaller banks as "investors" in its proposed insurance venture as none of the SBI arms including the SBI Caps and SBIMF can share the risk as equity partners.

The dilution of NPA norms will also benefit the Industrial Development Bank of India (IDBI) to float an insurance subsidiary. If the central bank maintained its earlier "one per cent below the industry average" NPA stipulation, the IDBI would not have qualified for the insurance venture. The ambiguity in the revised NPA norm will also facilitate the entry of a large number of banks into the insurance sector either as a joint venture partner or an investor.