Banks and non-banking finance companies which are going all out to build a retail portfolio can now take a cover against the possibility of creating non-performing assets as a fallout of the death of a borrower.
Come January, 2002, OM Kotak Mahindra Life Insurance Company Ltd is introducing a novel credit insurance product -- Kotak credit term group plan.
This cover, approved by the Insurance Regulatory and Development Authority (IRDA), provides life cover for borrowers up to a limit of Rs 50 lakh per borrower.
A bank or an NBFC can buy this cover paying a lumpsum premium towards the repayment of the loan amount on the death of a borrower. However, the financial intermediaries need to buy the cover for at least a group of 5,000 borrowers.
In case the person for whom the cover is bought dies, the insurance company will step in to pay up the loan. When the cover is offered on a compulsory basis, the cost of the same is borne by the lending institute. "This cost varies between 0.2 to 0.4 per cent of the loan amount," said OM Kotak managing director Shivaji Dam.
Banks and NBFCs have reportedly shown interest in the product as it is seen in a means to control the rising NPA level in auto, personal and housing loan products. Dam added: "We have been very keen to launch such a product in the country. In the field of retail lending a lot of NPAs are created arising out of the death of the borrowers."
The credit institution is not faced with the risk of the borrower defaulting in the event of death, and hence can provide more competitive rates on the loan products, said Dam. "In a competitive market, this credit shield could serve as a differentiator from the competition, and help retain customers," he added.
It is a win-win situation for all the parties concerned. The borrower equally stands to gain from the plan at no additional cost. The estate of the borrower remains intact and the family is not required to pay the outstanding loan amount.
The cost of the credit term cover will vary depending upon the size of the group (the minimum size being 5,000) and the state of the health of the individual members (aged between 18 to 50).
In the case the credit institution chooses to offer the product on a voluntary basis, the premium would be paid by the borrower. This cover is available with some of the new life insurance companies.
Premium paid by the borrower would be eligible for tax rebate under Section 88 of the Income Tax Act, 1961. Unlike the competition, OM Kotak also offers riders on this group plan including accidental death benefit, accidental disability benefit, accidental dismemberment benefit and critical illness benefit.
