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Abhrajit Gangopadhyay

BANGALORE, April 1

THE US-based Principal Financial Group will foray into local life insurance business partnering state-owned Vijaya Bank and Punjab National Bank, top banking sources said.

"We are awaiting clearances from the Reserve Bank of India for such a venture and we wish to start operations as soon as possible," the sources added. However, full-fledged operations of the new company are likely to commence from the second quarter of the current financial year.

While Principal is likely to hold 26 per cent in the new insurance venture, Vijaya Bank is likely to hold 12.5 per cent, Punjab National Bank 26-35 per cent and a privately-held associate company of the Apollo Group will hold anywhere between 35 per cent and 26 per cent in the proposed life insurance venture, the sources said.

Principal comes in as a new partner to this much-delayed venture following the decision of its erstwhile partner, Zurich Financial Services, to defer its investment in insurance business in India. Zurich, Europe's third-largest insurer, is refocusing its insurance business and is in the midst of an 18-month, $5-billion plan to improve its finances, including job cuts and divestments.

Earlier, the Reserve Bank of India had turned down a proposed venture with the DCM Shriram group, as it was a customer of PNB.

Prior to that, Hero Cycles was chosen as the corporate partner, but that deal fell through as Hero sought management control.

Principal was searching for an Indian partner to expand its business in the country after it bought out IDBI's 50 per cent stake in its mutual fund joint venture for Rs 94 crore. The group recently stated its intention to partner with Punjab National Bank in the mutual fund business.

Principal had originally acquired a 50 per cent stake in the unit from IDBI in February 2000 for Rs 45 crore in an attempt to tap the rising popularity of mutual funds.

The private insurance market seems crowded, already with seven general insurance companies and about 10 players in the life sector. Besides, two more non-life insurers - HDFC-Chubb and Cholamandalam - have started operations in recent past. Both these companies have already obtained the R3 licence from the Insurance Regulatory and Development Authority (IRDA) and are awaiting product portfolio approval from the regulator.

The focus on insurance business stems from the perception that margins in the banking industry is expected to shrink in the coming years.

Banks are increasingly seeking new revenue streams through the insurance business which is expected to expand 10-fold to $80 billion by 2010.

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