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Public sector banks may opt out of becoming insurance brokers, even as the finance ministry's deadline for taking up this model has expired. The senior officials of these banks are expected to express their concerns about this model to financial services secretary Rajiv Takru in a meeting today.
In December 2013, the finance ministry had sent a circular to the heads of the public sector banks to become insurance brokers, in order to boost penetration of products through their branch networks.
Senior officials said that banks are expected to convey their displeasure to Takru over the immediate nature of the circular. They would also ask for a longer period to implement these reforms, if at all they were mandatory.
“Though we understand that some insurers do not have banks to sell insurance, we also have agreements with our partners to enable exclusive access to the branch network. There could be an impact, both on our business and the existing partnerships, if insurance broking is made mandatory,” said the head of a public sector bank, who is a promoter of an insurance company.
Finance Minister P Chidambaram in his budget speech in 2013 had said that banks could become insurance brokers. Post this, Insurance Regulatory and Development Authority (Irda) and Reserve Bank of India (RBI) bought out enabling legislations facilitating the same.
Irda had earlier brought out regulations that said banks could become insurance brokers, once their individual proposal to do so was approved by the RBI. Now, the regulator is looking to make insurance broking model compulsory for banks.
Bancassurance, which refers to banks selling insurance products, currently follows a corporate agency structure. This means that banks sell insurance as a corporate agent and these regulations allow each bank to sell insurance products of one life, one general and one standalone health insurance company each.
The central bank, on the other hand, came out with stringent norms on this model. RBI said that only banks with strong capital base can become brokers. Further, their net Non-Performing Assets (NPA) should be below 3%.
"You are requested to implement the spirit of the budget announcement within the framework of guidelines by Irda and RBI in this regard under intimation to this department (department of financial services) by January 15, 2014," said the circular by department of financial services.
The stringent deadline and mandatory nature of the circular has created some discontent among public sector banks, especially those who have shareholder agreements in insurance joint-ventures.
They have already expressed displeasure in implementing this regulation. In a recent interview to Business Standard, Vijayalakshmi Iyer, chairperson and managing director, Bank of India said, "We have said banks that have an insurance subsidiary have the obligation to honour the MoU signed among various partners.”
The Indian Banks’ Association (IBA) — the banking industry lobby group — in an internal meeting had earlier decided that each PSB’s board will discuss the finance ministry circular on becoming such brokers. Officials had felt that given the differences in the structure and the size of the banks, it is difficult to take a collective view on this issue.
As an insurance broker, a bank will be liable for each policy sold to a customer. Under current bancassurance norms, the banks are not responsible for policies sold.
At present, bank-promoted insurers have almost 55-60% business coming from the bancassurance channel. If these banks become brokers, these insurers have to look towards other channels. Also, the bank executives fear that misselling would become rampant, since each bank would sell multiple insurance products.
