Finance Ministry wants banks to switch over to broking model by month end

RBI Governor Raghuram Rajan will meet chief executives of select public sector banks on Monday to discuss the controversial issue of banks becoming insurance brokers.

The Finance Ministry wants banks to dispense with the existing corporate agency structure for distribution of insurance products and switch over to the broking model by this month end.

Present norms

Under the existing bancassurance guidelines, a bank can act as a corporate agent and sell products of one life insurance company, one general insurance company and one standalone health insurer.

Rajan’s meeting with chief executives of select PSBs assumes importance as the central bank is yet to come up with final guidelines.

It also comes a day before Financial Services Secretary Rajiv Takru meets the chief executives of all public sector banks at Mumbai on the same issue.

Many chief executives of public sector banks are in a fix with the Finance Ministry asking them to wind up their corporate agency and convert themselves to brokers and report compliance of the new structure by January 31.

The problem is serious for those banks that already have insurance joint ventures and hold corporate agency licence to distribute the products devised by the joint venture company.

The insurance regulator IRDA also wants banks to convert themselves into brokers so that bank branch network could be leveraged and insurance penetration could be increased.

The real question is whether the choice of business model should be left to the bank boards and insurance companies to decide or should the Government and regulator mandate a particular model.

The central bank is not averse to allowing banks to act as brokers and sell insurance policies of multiple companies. But the unresolved point is whether the RBI too will mandate it.

RBI guidelines

In the draft guidelines issued in November 2013, RBI had allowed banks to undertake insurance broking business departmentally.

But the draft guidelines stipulated that not more than 25 per cent of insurance handled by the insurance broker in any financial year be placed with the insurance company within the promoter group, separately for life and general insurance business.

(This article was published on January 26, 2014)
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