India changes bank insurance rules

India changes bank insurance rules

The Reserve Bank of India (RBI) has changed the rules for banks and their involvement in the insurance sector. Banks will now be allowed to provide customers with a choice of insurers, effectively permitting the banks to act as insurance brokers. The banks will be given a choice; either choose to be a corporate agent of a single insurer, or to become an independent insurance broker. The RBI has also stated that banks will not be allowed to wash their hands of responsibility for the quality of products sold. They will be required to ensure that the insurance products they sell are suitable and sound.

Banks will be permitted to take up insurance distribution through a corporate agency or broking structure without obtaining prior permission.

Currently most banks act as a corporate agent, a system which has proved popular with established insurers (those with a tie-up in place) but not with those who do not have a distribution agreement with any major banks. Those insurers alleged that the system as it stood worked against innovation and development.

The RBI has also tightened the requirements for banks wishing to enter insurance joint ventures. A minimum capital adequacy of 10%, equity capital of INR10bn. and non-performing assets of less than 3%. Banks wishing to float a broking subsidiary or a joint venture will need RBI clearance. Observers noted that RBI's stiff capital requirements are likely to deter many public banks, which tend not to be overly strong on capital adequacy.

The RBI changes follow an earlier announcement by finance minister Arun Jaitley that the law would be changed.

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