Mumbai:

In India, too, after the insurance sector opened up, the regulatory authority, the Reserve Bank of India (RBI), decided in the late nineties to permit banks to sell insurance products.

The criteria for banks getting into insurance in joint venture participation with foreign insurers were:

1. The net worth of the bank should not be less than Rs 500 crore
2. The capital adequacy ratio (CAR) of the bank should not be less than 10 per cent
3. The level of non-performing assets (NPAs) should be reasonable
4. The bank should have net profits for the previous three continuous years
5. The track-record of the performance of subsidiaries, if any, of the bank concerned should be satisfactory

Banks that are not eligible as joint venture participants can make investments up to 10 per cent of the net worth of the bank or Rs 50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.

The eligibility criteria for these banks were:

1. The CAR of the bank should not be less than 10 per cent
2. The level of NPAs should be reasonable
3. The bank should have net profits for the previous three continuous years

Finally, any scheduled commercial bank is allowed to undertake insurance business as an agent of insurance companies on a fee basis, without any risk participation. Further, subsidiaries of banks will also be allowed to undertake distribution of insurance products on an agency basis.

Thus, there are basically three options available to banks to enter the insurance sector: as a promoter, as a strategic investor and as a corporate agent for selling insurance policies.

State Bank of India (SBI) took the lead in floating a subsidiary, SBI Life Insurance Ltd, which began operations last year. It is the only bank that has entered the insurance sector as a promoter. However, all other banks that satisfy the RBI’s criteria for bancassurance are entering, or planning to enter, the sector either as a strategic investor or as a corporate agent.

In a couple of years from now it is expected that an individual will be able to pick up an insurance product from a branch of any bank just as he deals with other banking products.

Will the idea work? Firstly, although banks do not have the operational experience, they see the potential in utilising their assets, which are the customer, employees and a vast distribution network, to tap the market. Presently, the network in India is about 85,000 branches, of which 50 per cent are in rural areas.

For the new players entering the insurance market, tapping the banks’ distribution network will be the key driver for them attaining critical mass and taking on the might of the existing giants, Life Insurance Corporation and General Insurance Corporation. Bancassurance would also facilitate these insurance companies to shift focus from highly competitive markets to markets where the competition has not yet caught up.

But the road is not at all smooth since an extensive net worth is not the only tool for selling insurance. Bank employees need to be specially trained and the insurance culture needs to be inculcated. Also, they need to understand the rationale behind various insurance products, and this would require extensive training.

Further, bank employees are not aggressive when it comes to selling loans and this attitude has to change for insurance. For the new insurance players, which are basically multinationals, their ability to blend and work culture alongside the somewhat laid-back Indian bank employees will be a challenge.

At the end of the day, the success of bancassurance would depend on banks and the insurance companies adapting to each other’s work culture and style. As far as regulatory issues are concerned, banks and insurance companies have to be clear that there are no conflicts of interests that could lead to a bad marriage between them.

Let us recall that when the opening up the insurance sector was announced, many memorandums of understanding (MoUs) were signed between foreign and Indian players. Many of these MoUs have just remained just that, as they failed to understand each other’s motives and interests.