In India, ever since espousing of financial reforms following the recommendations of First Narasimham Committee, the contemporary financial landscape has been reshaped steadily.
Banks have been striding into several new areas and offer innovative products, viz., merchant banking, lease and term finance, capital market / equity market related activities, hire purchase, real estate finance and so on.
So, banking business has become far more diversified than ever before. Therefore, their entering into insurance business is only a natural corollary and is fully justified too as 'insurance' is another financial product required by the bank customers.
Bancassurance or Bank Insurance Model refers to the distribution of the insurance and related financial products by the Banks whose main business is NOT insurance. So, simply Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products. Bancassurance term first appeared in France in 1980, to define the sale of insurance products through banks' distribution channels.
It helps both the banks and Insurance Companies as follows:
This is a referral business in which the banks tend to leverage the existing clientele.
Insurance companies get the benefit because they can have distribution relationships with multiple insurers.
For Bancassurance, the Banks need to obtain a prior license from the IrDA or Insurance Regulatory and Development Authority, so that they can work as "Composite Corporate Agent" or may have "Referral Arrangement" with the Insurance Companies.
As per the Government of India Notification dated August 3, 2000, specifying 'Insurance' as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act, 1949. The RBI, in line with this issued its guidelines for the Bancassurance as follows:
Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation.
The subsidiaries of banks will also be allowed to undertake distribution of insurance product on agency basis.
Only the Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the joint venture company will normally be 50 per cent of the paid cup capital of the insurance company. On a selective basis the Reserve Bank of India may permit a higher equity contribution by a promoter bank initially, pending divestment of equity within the prescribed period:
The net worth of the bank should not be less than Rs.500 crore;
The CRAR of the bank should not be less than 10 per cent;
The level of non-performing assets should be reasonable;
The bank should have net profit for the last three consecutive years;
The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.
JV with Foreign partners:
In cases where a foreign partner contributes 26 per cent of the equity with the approval of Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given above, would be eligible.
A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. Subsidiaries would include bank subsidiaries undertaking merchant banking, securities, mutual fund, leasing finance, housing finance business, etc.
Investment in Insurance:
Banks which are not eligible for 'joint venture' participant as above, can make investments up to 10% of the net worth of the bank or Rs.50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.
The eligibility criteria for these banks will be as under:
The CRAR of the bank should not be less than 10%;
The level of NPAs should be reasonable;
The bank should have net profit for the last three consecutive years.
All banks entering into insurance business will be required to obtain prior approval of the Reserve Bank and have to be compliant with IrDA regulations. The Reserve Bank 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 so as to ensure that non-performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz., insurance business.
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. There should be 'arms length' relationship between the bank and the insurance outfit.
Current Issue with Bancassurance:
Now, we know that Banks have to follow RBI as well as IrDA regulations for Bancassurance Business. The present regulations do not allow banks to sell insurance products of more than one insurance company.
The current issue is that the Banks might get to tie up with multiple insurance companies to distribute their products if a panel set up by the industry regulator comes to a consensus on the issue. Following requests from various life and general insurance companies asking Insurance Regulatory and Development Authority (IRDA) to allow banks to have distribution relationships with multiple insurers, the regulator had formed a seven-member committee in Mid of 2009 to look into the matter.
These 7 members are the veterans of the market viz. Deepak Satwalekar, G V Rao, S V Mony, Sandeep Bakshi, R Krinshnamurthy, N M Govardhan and A Giridhar. The committee was given the job to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with international best practices and modified suitably to meet domestic regulatory requirements.
In September 2010, speaking at an insurance summit organized by industry body Assocham, Mr Harinarayan said IrDA would be coming up with new regulations on Bancassurance. Most insurers expect the regulators to break the exclusive deals that insurers have with banks for selling insurance. It is also expected that the regulator will put in place norms to ensure that banks continue to service policyholders even if they decide to discontinue their insurance partnerships.