Banks entry into insurance to be made easier - Views on News from Equitymaster

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Banks entry into insurance to be made easier

Mar 11, 2000

The Reserve Bank of India is reviewing its guidelines for banks entry into the insurance sector. In the earlier draft guidelines of the insurance sector RBI had stipulated a 30% investment limit on the paid up capital of banks. Also it put up stringent norms on non-performing assets of these banks. However now the RBI has decided to review these strict norms and has decided to make it easier for banks to gain entry into the insurance sector. Banks would be permitted to invest upto 50% of their paid up capital in insurance joint ventures and also three way tie-ups by banks would be permitted. The NPA norms would be relaxed to allow more public sector banks like State Bank of India and Bank of Baroda to participate in these joint ventures. The foreign equity ceiling in insurance joint ventures would continue to stand at 26%.

The previous guidelines issued for banks were very strict and this resulted in keeping the big players in the banking sector out, hence RBI has decided to relax these norms. The only bank which met the NPA norms was HDFC Bank. However with the decision to relax NPA norms the bigger players like SBI, Bank of Baroda, IDBI, ICICI etc. will be able to enter the sector.

The main reason for changing RBI's stance would be that the big daddies of the banking sector would be left out. As they want strong players in the insurance sector they cannot afford to leave out these large banks due to their wide branch networks and large balance sheet size. Also to encourage fair competition in the insurance sector they require a larger number of players in the sector. Hence it needs to reduce its stringent guidelines to encourage more players and have a level playing field.

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