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Permission to Invest in Insurance Companies by NBFC

Narendra Kumar

| Updated: Nov 17, 2017 | Category: NBFC

Insurance Companies

Considering the contribution of NBFCs in development in financial markets in India, RBI has given green signal to NBFC to enter into Insurance companies Business. The Reserve Bank of India has laid down the guidelines for the entry and workings of the NBFCs in the insurance sector. With the participation of NBFC’s in Insurance Sector, the Insurance companies can meet their capital and other ancillary requirements as per IRDAI and carry on its activities smooth

Entry of NBFC in Insurance Business:

Prior requirements:

NBFCs are required to obtain prior approval of the Insurance companies Regulatory and Development Authority of India (IRDAI[1]) and Reserve Bank of India before entering into the insurance business.

Insurance Agency Business:

NBFCs registered with Reserve Bank of India may take up insurance agency business on the fee basis and without risk participation subject to the following conditions:

  • No RBI approval required for such agency.
  • Obtain permission from IRDAI and comply with IRDAI regulations for acting as `composite corporate agent’ with insurance companies.
  • The NBFCs should not force its customers to go in only for a particular insurance company in respect of assets financed by the NBFC.
  • As the participation by an NBFC’s customer in insurance products is purely on a voluntary basis, it should be stated in all publicity material distributed by the NBFC in a prominent way.
  • No `linkage’ either direct or indirect among the provisions of financial services offered by the NBFC to its customers and users of the insurance products.
  • The premium should be paid by the insured directly to the insurance company without routing through the NBFC.
  • The risks in insurance agency cannot transfer to the business of the NBFC.

Insurance Joint Ventures:

  • NBFCs which satisfies the eligibility criteria and intends to set up insurance joint ventures with equity contribution on risk participation basis or making investments in the insurance companies shall obtain the prior approval of the Reserve Bank.
  • The maximum equity contribution of NBFC can hold in a joint venture (JV) company is 50 percent of the paid-up capital of the insurance company.
  • A subsidiary of NBFC or company in the same group of an NBFC or of another NBFC engaged in the business of a non-banking financial institution or banking business are not allowed to join the insurance company on risk participation basis.

Eligibility Criteria:

  • NBFC should have at least Rs. 500 crore of Owned Fund.
  • NBFC holding public deposit should have CRAR not less than 15% and other NBFC should have 12% CRAR.
  • The level of net non-performing assets should be not more than 5% of the total outstanding leased/hire purchase assets and advances taken together.
  • NBFC should be profit making company for last three continuous years.
  • There should be the sound and satisfactory track record of the performance of the subsidiaries of the concerned NBFC.
  • The provisions of the RBI Act would be applicable for such investments while computing the net owned funds of the NBFC.
  • Regulatory compliance and servicing public deposits, if held.

If NBFC not eligible as stated above:

  • NBFCs which are registered with RBI and not eligible as joint venture participant, as above can make investments lower of up to 10 percent of the owned fund of the NBFC or Rs.50 crore, in the insurance company.
  • Such participation shall be treated as an investment and should be without any contingent liability for the NBFC.

Eligible criteria for such NBFC:

  • The NBFC Registration (applicable only to those holding public deposits) should maintain at least 12 percent CRAR if engaged in equipment leasing/hire purchase finance activities and 15 percent CRAR if it is a loan or investment company.
  • Maximum net NPA should be 5 percent of total outstanding leased/hire purchase assets and advances.
  • Maximum net NPA should be 5 percent of total outstanding leased/hire purchase assets and advances.

Acceptance of Deposits:

The provisions of NBFC Directions on Acceptance of Public Deposits exempts the deposits from a relative of a director within the purview of Public Deposits. NBFCs shall take a separate application form from such depositors with suitable notice to their attention that such deposits would be treated as deposits from relatives. NBFCs are vested with the burden to prove that the deposits have been received from the relative of directors. It also requires that the relationship between the depositor and the specific directors of the company would be material on the date of acceptance of such notice.

Other Provisions of Insurance Companies:

  • In case of where a foreign partner contributes 26 percent of the equity with the approval of insurance companies Regulatory and Development Authority/Foreign Investment Promotion Board, more than one NBFC may be permissible to participate in the equity of the insurance joint venture. The participants will also assume insurance risk, only those NBFCs which satisfies the above criteria would be eligible

In case more than one company in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all Insurance companies in the same group shall be counted for the limit of 50 percent prescribed for the NBFC in an insurance Joint Venture.

Read our article:Major challenges faced by NBFCs & their solutions

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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