Banks want more sops for entry into insurance - Views on News from Equitymaster

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Banks want more sops for entry into insurance

Mar 18, 2000

The Reserve Bank of India has recently announced the easing of norms for banks entry into the insurance sector, however these are not enough for the banks. The recent revision of the maximum equity contribution of banks from 30% to 50% does not suffice. The banks are keen that RBI raises this limit further to 74%. As foreign insurance companies are able to contribute upto 26% into these joint ventures, an individual PSU bank wants to bring in the rest. They are not keen to rope in other investors or banks into the ventures as they feel that it would be difficult to rope in other investors in start up joint ventures which will take atleast five years to break even and would hence lead to delays.

The RBI has recently eased regulations and made it possible for all the large PSU banks who were earlier not qualifying, to gain entry into this sector. Hence it is likely that the demands of the PSU banks for increasing the stake to 74% may not be met and if at all the RBI turns more lenient it may take some time before this happens.

The biggest change made to the earlier guidelines for banks is on non-performing assets. Majority of the PSU banks did not qualify at all on the earlier norms which stated that banks whose NPAs were at one percent below the industry average would be eligible. However this has now been changed to banks having NPAs of "reasonable levels". As this NPA eligibility is unclear, banks are not sure whether they will eventually step foot into the insurance market.

As the large PSU banks in the past have not been very efficient in managing their assets, it is a cause of concern that RBI has not specified the regulations for NPAs in clear terms.

Also on the other hand the RBI has added a stipulation that the eligibility will be cleared by them on a case to case basis. This adds uncertainty from the banks' point of view. However as the RBI has been so lenient on the NPA front (on which majority of PSU banks already have a bad track record) there should not be any reason for them not to allow the hiking of the equity stake in the insurance joint ventures by banks.

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