RBI lowers bar for urban co-operatives: Bancassurance

The Reserve Bank of India (RBI) has brought down the minimum eligibility criteria of urban cooperative banks (UCBs) wishing to entry the insurance business.

It has halved the minimum net worth of UCBs wanting to undertake insurance business as a corporate agent without any risk participation. It has reduced the required net worth of UCBs from Rs 100 crore to Rs 50 crore.

Even then, very few UCBs will be eligible as most operate on a very low single-digit net worth. UCBs will also be allowed to undertake insurance business on a referral basis, where it would not need RBI approval.

Many UCBs had shown interest to enter the insurance business. Many of the new private insurance companies are equally keen to tap UCBs on referral basis since they have a specific industry clientele base. However, the central bank's dictat in August 2003 on their having a minimum net worth of Rs 100 crore resulted in UCBs not being eligible.

The RBI was keen to ensure that only financially strong UCBs participated in the business even though there was no question of them taking on any risks.

The banking regulator however, reiterated that all other terms and conditions would remain unchanged and that no UCBs should undertake insurance agency business without obtaining prior permission of the RBI.

Under the referral arrangement, banks provide physical infrastructure within their select branch premises to insurance companies for selling their insurance products to the bank's customers with adequate disclosure and transparency.

In turn the bank earns referral fees on the basis of premia collected. UCBs will also need to comply with the regulations laid down by the Insurance Regulatory and Development Authority (IRDA) for undertaking referral business with insurance companies.

RBI also added that no UCB should adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. Customers should be allowed to exercise their own choice, it stated.

The agreement to be entered into with an insurance company should be for a period not exceeding three years at the first instance and the bank should have the discretion to renegotiate the terms depending on its satisfaction with the service or replace it by another agreement after the initial period.

Thereafter, the bank will be free to sign a longer term contract with the approval of its board.

Se settlement is made payable in this fiscal banks will have no option but to provision for the entire amount in FY05. Whereas if 50 per cent of the arrears are made payable in this fiscal and 50 per cent in the coming fiscal, the pressure on bottomlines will ease," said bank officials.

Bank employees were earlier demanding a minimum increase of 12.25 per cent in the wage bill while IBA had proposed a 9.5 per cent increase over the previous wage bill.