The Reserve Bank of India (RBI) on May 15th announced the norms for entry of non-banking finance company’s (NBFCs) into the insurance sector. The move aims at widening and deepening the insurance market, as and when the sector opens up. According to the RBI notification, any NBFC registered with the central bank having:
- Net worth of Rs 5 bn
- Net owned fund of Rs 500 m
- Capital adequacy ratio of 15 per cent engaging in loan and investment activities and 12% for other NBFC.
The NBFCs are also required to limit the level of their non-performing assets to a maximum of 5 per cent of the total outstanding lease/hire purchase assets and advances taken together and make profit for three preceding years.
The central bank has further pulled the strings by pegging the capital adequacy ratio of NBFCs indulging in the business of loans and investment at 15 per cent and companies raising public deposits at 12 per cent.
The stringent norms for non-banking finance company’s (NBFC) entry into the insurance sector issued by the central bank will practically kill the ambition of almost all the non-banking entities, planning a foray into the insurance sector.
Says A C Shah, Chairman, Gujarat Lease Financing Limited, “Most of the NBFCs are currently struggling to maintain their capital adequacy ratio between 10 to 12 per cent. Moreover, NBFCs raising public deposit do not have a net worth of Rs 5 bn. This will weed out almost all the NBFCs except institutions and the ones promoted by the nationalized banks like SBI and Corporation Bank.”
According to industry sources, currently only HDFC and ICICI have a net worth of over Rs 5 bn, as specified by the central bank for entering the sector. The two corporate bigwigs Aditya Birla Group and Tata Group will just be able to board the bus. Aditya Birla Group has signed a MoU with SunLife and Tata Group has tied up with American Intl Group for setting up insurance shop in the country.
This central bank’s move will further mean that the memorandum of understanding between Choamandalam --Guardian Royal Exchange and Sundaram Finance--Winterhur Ins will break up unless both the topline insurance major enhance their capital base. Kotak Mahindra Finance Limited, one of the most aggressive non-banking finance entity has already broken-up with Chubb and is currently working hard to push up its networth to Rs 5 bn.
According to industry experts, most of the NBFCs will be eligible to act as agents. However, the commission-based service will not find many takers, as margins are quite to be quite low. “Most of the NBFCs would not like to take on the dirty work. However for some, it will be risk free earning.