Articles from General Knowledge Today

Bancassurance
2011- 04- 22 07:04:00 GKToday
In India, ever since espousing of f inancial ref orms f ollowing t he
recommendat ions of First Narasimham Commit t ee, t he cont emporary
f inancial landscape has been reshaped st eadily.
Banks have been st riding int o several new areas and of f er innovat ive
product s, viz., merchant banking, lease and t erm f inance, capit al market /
equit y market relat ed act ivit ies, hire purchase, real est at e f inance and so on.
So, banking business has become f ar more diversif ied t han ever bef ore.
Theref ore, t heir ent ering int o insurance business is only a nat ural corollary and
is f ully just if ied t oo as 'insurance' is anot her f inancial product required by t he
bank cust omers.
Def inition:
Bancassurance or Bank Insurance Model ref ers t o t he dist ribut ion of t he
insurance and relat ed f inancial product s by t he Banks whose main business is
NOT insurance. So, simply Bancassurance, i.e., banc + assurance, ref ers t o
banks selling t he insurance product s. Bancassurance t erm f irst appeared in
France in 1980, t o def ine t he sale of insurance product s t hrough banks'
dist ribut ion channels.
Benef its:
It helps bot h t he banks and Insurance Companies as f ollows:
This is a ref erral business in which t he banks t end t o leverage t he
exist ing client ele.
Insurance companies get t he benef it because t hey can have dist ribut ion
relat ionships wit h mult iple insurers.
Business Model:
For Bancassurance, t he Banks need t o obt ain a prior license f rom t he IrDA or
Insurance Regulat ory and Development Aut horit y, so t hat t hey can work as
"Composit e Corporat e Agent " or may have "Ref erral Arrangement " wit h t he
Insurance Companies.
RBI Guidelines:
As per t he Government of India Not if icat ion dat ed August 3, 2000, specif ying
'Insurance' as a permissible f orm of business t hat could be undert aken by
banks under Sect ion 6(1)(o) of t he Banking Regulat ion Act , 1949. The RBI, in
line wit h t his issued it s guidelines f or t he Bancassurance as f ollows:
Agent Business
1. Any scheduled commercial bank would be permit t ed t o undert ake
insurance business as agent of insurance companies on f ee basis,
wit hout any risk part icipat ion.
2. The subsidiaries of banks will also be allowed t o undert ake dist ribut ion
of insurance product on agency basis.
Joint venture:
Only t he Banks which sat isf y t he eligibilit y crit eria given below will be
permit t ed t o set up a joint vent ure company f or undert aking insurance
business wit h risk part icipat ion, subject t o saf eguards. The maximum equit y
cont ribut ion such a bank can hold in t he joint vent ure company will normally be
50 per cent of t he paid cup capit al of t he insurance company. On a select ive
basis t he Reserve Bank of India may permit a higher equit y cont ribut ion by a
promot er bank init ially, pending divest ment of equit y wit hin t he prescribed
period:
1. The net wort h of t he bank should not be less t han
Rs.500 crore;
2. The CRAR of t he bank should not be less t han 10 per
cent ;
3. The level of non-perf orming asset s should be
reasonable;
4. The bank should have net prof it f or t he last t hree
consecut ive years;
5. The t rack record of t he perf ormance of t he
subsidiaries, if any, of t he concerned bank should be
sat isf act ory.

JV with Foreign partners:
In cases where a f oreign part ner cont ribut es 26 per cent of t he equit y wit h t he
approval of Insurance Regulat ory and Development Aut horit y/Foreign
Invest ment Promot ion Board, more t han one public sect or bank or privat e
sect or bank may be allowed t o part icipat e in t he equit y of t he insurance joint
vent ure. As such part icipant s will also assume insurance risk, only t hose banks
which sat isf y t he crit eria given above, would be eligible.
A subsidiary of a bank or of anot her bank will not normally be allowed t o join
t he insurance company on risk part icipat ion basis. Subsidiaries would include
bank subsidiaries undert aking merchant banking, securit ies, mut ual f und,
leasing f inance, housing f inance business, et c.
Investment in Insurance:
Banks which are not eligible f or 'joint vent ure' part icipant as above, can make
invest ment s up t o 10% of t he net wort h of t he bank or Rs.50 crore, whichever
is lower, in t he insurance company f or providing inf rast ruct ure and services
support . Such part icipat ion shall be t reat ed as an invest ment and should be
wit hout any cont ingent liabilit y f or t he bank.
The eligibilit y crit eria f or t hese banks will be as under:
The CRAR of t he bank should not be less t han 10%;
The level of NPAs should be reasonable;
The bank should have net prof it f or t he last t hree
consecut ive years.

Prior Approval:
All banks ent ering int o insurance business will be required t o obt ain prior
approval of t he Reserve Bank and have t o be compliant wit h IrDA regulat ions.
The Reserve Bank will give permission t o banks on case t o case basis keeping
in view all relevant f act ors including t he posit ion in regard t o t he level of non-
perf orming asset s of t he applicant bank so as t o ensure t hat non-perf orming
asset s do not pose any f ut ure t hreat t o t he bank in it s present or t he
proposed line of act ivit y, viz., insurance business.
It should be ensured t hat risks involved in insurance business do not get
t ransf erred t o t he bank and t hat t he banking business does not get
cont aminat ed by any risks which may arise f rom insurance business. There
should be 'arms lengt h' relat ionship bet ween t he bank and t he insurance out f it .
Current Issue with Bancassurance:
Now, we know t hat Banks have to f ollow RBI as well as IrDA regulations
f or Bancassurance Business. The present regulat ions do not allow banks t o
sell insurance product s of more t han one insurance company.
The current issue is t hat t he Banks might get t o t ie up wit h mult iple insurance
companies t o dist ribut e t heir product s if a panel set up by t he indust ry
regulat or comes t o a consensus on t he issue. Following request s f rom various
lif e and general insurance companies asking Insurance Regulat ory and
Development Aut horit y (IRDA) t o allow banks t o have dist ribut ion relat ionships
wit h mult iple insurers, t he regulat or had f ormed a seven-member commit t ee
in Mid of 2009 t o look int o t he mat t er.
These 7 members are t he vet erans of t he market viz. Deepak Sat walekar, G
V Rao, S V Mony, Sandeep Bakshi, R Krinshnamurt hy, N M Govardhan and A
Giridhar. The commit t ee was given t he job t o examine t he desirabilit y f or a
dif f erent ial t reat ment of insurance int ermediat ion by banks under t he
Bancassurance model consist ent wit h int ernat ional best pract ices and
modif ied suit ably t o meet domest ic regulat ory requirement s.
In September 2010, speaking at an insurance summit organized by indust ry
body Assocham, Mr Harinarayan said IrDA would be coming up wit h new
regulat ions on Bancassurance. Most insurers expect t he regulat ors t o break
t he exclusive deals t hat insurers have wit h banks f or selling insurance. It is also
expect ed t hat t he regulat or will put in place norms t o ensure t hat banks
cont inue t o service policyholders even if t hey decide t o discont inue t heir
insurance part nerships.