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RBI Guidelines for the Insurance Business

RBI has come out with Draft Guidelines for diversification into Insurance business by banks/financial institutions. A gist of these guidelines is as follows:

1(a) Necessary modifications in the legal framework governing various enactments will have to be carried out by the Government before permitting the banks/financial institutions to undertake insurance business.
(b) Necessary approvals from appropriate authorities are required to be taken by banks/financial institutions before entering into MOU with any insurance partner.

2.Only financially sound banks/financial institutions with good track record would be permitted on case to case basis for providing fee-based services as agents of insurance companies by undertaking marketing/selling various insurance products and ancillary services thereof, without assuming the underwriting risks. However, for risk participation, only a few banks on highly selective basis who fulfil the criteria mentioned in Paragraph 4 below will be considered to undertake insurance business.

3.Participation in insurance business could be undertaken in the form of joint ventures by banks/financial institutions which fulfil the criteria laid down in Paragraph 4, provided the share participation in such joint ventures does not exceed 10 per cent of the net worth of the bank/financial institution and the total amount invested by the bank/financial institution in all its subsidiaries and joint ventures in which it has equity participation does not exceed 20 per cent of the net worth of the bank/financial institution. Participation in the joint venture should also not exceed 30 per cent of the paid up capital of the company.

4.With a view to ensuring that only sound banks/financial institutions are allowed to enter insurance business, the following parameters will be taken into account as at 31st March 2000: The net worth of the bank/financial institution should not be less than Rs.500 crore. The CRAR of the bank/financial institution should be not less than 10%. The bank/financial institution should have track record of at least three continuous years of profits. The level of net NPAs should be 1% below the industry average. The track record of performance of existing subsidiaries of banks/financial institutions should be satisfactory.

5.It should, however, be ensured that risks involved in insurance business do not get transferred to the banks/financial institutions, 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 banks/financial institutions and the insurance outfit.

6.Considering the various risks involved in insurance business, the activity should not be undertaken either departmentally or by forming a subsidiary.

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