RBI pricks Indian banks’ insurance dreams

MUMBAI, JANUARY 11: Draft guidelines issued by India's central bank will stop most banks and financial institutions from making an early e...

MUMBAI, JANUARY 11: Draft guidelines issued by India’s central bank will stop most banks and financial institutions from making an early entry into the country’s liberalised insurance sector, bankers and insurance officials said on Tuesday.

RBI wants to ensure that only sound banks and financial institutions to enter the insurance arena. "We want banks to develop sophisticated asset management tools to tackle risks in the insurance business. Insurance is not their core competency, banking is… so they need the expertise to enter this business which is why we capped their investements," a senior RBI official said.

The central bank on Monday said, banks and financial institutions cannot invest over 10 per cent of their networth in an insurance joint venture apart from investments in all their subsidiaries and joint ventures not exceeding 20 per cent of their networth. It also said the participation in the joint venture could not exceed 30 per cent of the new company’s paid up capital.

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According to bankers, this critical rule is emerging as a major hurdle for banks and institutions entry into the insurance joint venture as none of the founders will have a majority stake. This is expected to force every bank and financial institution to look out at for least two more domestic partners, besides the foreign partner in any joint venture.

The Insurance Regulatory Authority (IRA) has capped foreign participation at 26 per cent in the insurance company while prescribing the minimum paid up capital of the insurance company at Rs 100 crore. "This means the decision making process at the board level will be very complicated with four-way participation," a chairman of a bank which has a tie up with an European insurance major said.

The RBI draft guidelines say the banks and financial institution should have a net NPA level of one per cent below industry average. Housing Development and Finance Corporation will have a relatively easy passage as it has far lower levels of NPAs, analysts said.

But big players like State bank of India (SBI) and ICICI will find it harder, and IDBI, India’s largest term lending institution, can virtually forget making an early entry if the draft guidelines are adopted, they said. SBI (excluding associates) has a net NPA level of 7.1 per cent as against banks’ average of 8.1 per cent as on March, 1999, while ICICI has a net NPA level of 7.8 per cent against the institutions average of 8.6 per cent.

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IDBI’s NPAs as of end-March, 1999 stood at 12 per cent against the industry average of 8.6 per cent. Among other tough conditions laid out by the RBI are the minimum networth of Rs 500 crore and three years of continuous profits. "This effectively means the small banks especially in the private sector will be left out," a bank chairman said.

The central bank’s draft guidelines require banks and financial institutions to fulfil these parameters by March 31, 2000 for them to qualify for doing insurance business.