Public sector banks may have to set up insurance broking arms by February

The Finance Ministry is planning to make it mandatory for public sector banks to float insurance broking arms by February and sell policies of multiple insurance companies, a top Finance Ministry official said.

At present, banks are allowed to tie up with only one insurance company and sell products of only that insurer under the corporate agency (bancassurance) channel.

“We will ensure that all insurance products are available through the one-lakh-plus bank branches. No renewals will be granted to existing corporate agency tie-ups of public sector banks and insurance companies,” said Financial Services Secretary Rajiv Takru.

The Finance Ministry, Takru said, will also urge private sector banks to become insurance brokers. “According to our assessment, chances of mis-selling will be less if banks become brokers…”

According to the guidelines finalised by the Insurance Regulatory and Development Authority, as brokers, banks will have to cap business from their own group companies at 25 per cent for life insurance and a similar cap for non-life insurance business.

What this means is that banks cannot push products of their own group insurance companies beyond 25 per cent of the total annual sales.

Most major public sector and private sector banks, such as State Bank of India, Union Bank of India, Bank of Baroda, Canara Bank, Bank of India, Punjab National Bank, Andhra Bank, ICICI Bank and IDBI Bank, have promoted insurance companies.

The Reserve Bank of India has also released stringent draft guidelines on banks becoming brokers. It stipulated that their net non-performing assets (NPA) should be below 3 per cent.

In Budget 2013 Finance Minister P. Chidambaram had announced that banks would be allowed to become insurance brokers. However, according to industry officials, most banks were not in favour of this as many of them had promoted insurance companies. Also, they will have fiduciary responsibility towards the customer while selling insurance products under the broking regulation.

More competition P. Nandagopal, Managing Director and Chief Executive Officer of IndiaFirst Life Insurance, which is promoted by two large public sector banks (Bank of Baroda and Andhra Bank), said, “We feel that overall the universe (of bank branches) will be much bigger than the loss (of having to restrict the business originated by the promoters’ branches).

“It will also bring in more competition as insurance companies will not be able to take up the tied relationship with banks for granted.”

S.S. Mundra, Chairman and Managing Director, Bank of Baroda said, “It (insurance broking) is not a very attractive proposition, particularly for a bank like ours. The concept is good as it will address the issue of under-penetration of the insurance segment but when it comes to implementation, we need to look at it.”

deepa.nair@thehindu.co.in

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