NBFC

An Outlook on Participation of NBFCs in Insurance Business

It’s a fact that the RBI has provided its permission to the NBFCs to expand its footsteps to the insurance-related business. However, NBFCs haven’t got any authorization to work in a self-governing framework yet. The beginning of NBFCs in insurance business aids insurance companies to stabilise their capital and meet additional necessities under the provision of IRDAI.

Requirements for participation of NBFCs in Insurance Business

It may be noted that the NBFCs or any other private lender entities are not permitted to work outside the regime of authorities. The NBFCs are required to procure compulsory consent from the RBI and IRDAI in order to run the insurance business smoothly.

Insurance Agency Business

RBI approved NBFCs^[1] can enter insurance agency business based on a fee and risk participation, which deals with the conditions as mentioned below:

• In that case, NBFCs need a mandatory approval from the IRDAI to act as a composite corporate agent with the insurance companies;
• No RBI approval is needed here;
• NBFCs should not confine the interests of the customers to work with alternative agencies in the context of financed assets;
• As the insurance products acceptance is made voluntarily, it should be mentioned in the NBFCs publicity material;
• NBFCs should not render any linkage to the customers about the provisions of financial services;
• The insurance premium must go to the insurance company instead of NBFC;
•  NBFCs are not accountable to share risk in the insurance business.

Insurance Joint Ventures

• Those NBFCs that meet all the required provisions and seeks to establish a joint venture with equity contribution based upon risk participation should avail RBI approval to ensure continuation. The same condition is also applied to those NBFCs that seek significant investment in the insurance company.
• In Joint Venture, NBFCs can hold up 50% paid-up capital of the insurance firm;
• A subsidiary branch of the NBFC or another company that is engaged in the same area of interest cannot take any involvement in the insurance company on a risk basis.

Participation of NBFCs in Insurance Business: Eligibility Criteria

The following eligibility criteria should be met by NBFCs for participation in the insurance business:

• An NBFC must have minimum 500 crore rupees of owned fund under its possession;
• An NBFC that holds public deposits can’t enter the insurance business unless its CRAR is more than 15%. The conventional NBFCs who don’t have any proprietorship of the public deposit should maintain their CRAR (Capital to Risk Assets Ratio) more than 12%;
• The NPAs limit for NBFC is not more than 5 % of its total outstanding assets such as loans, hire purchases etc.;
• The subordinates of the NBFCs net owned funds seek some investments that fall under the RBI provisions;
• The NBFC should not be under any financial loss for the last three years period;
• Servicing public deposits & regulatory compliance, if held.

Failure to meet the eligibility criteria

In case NBFC fails to meet the eligibility criteria, then the NBFC can make 10% of the owned fund of 50 rupees investment, whichever is less in the insurance company. Such funding should be accepted as investment that is free from contingent liability for the NBFC.

The eligibility criteria for such NBFC are as follows:

• NBFCs, which have public deposits and are involved in service such as equipment leasing/hire purchase, should have a CRAR of minimum 12%. On the other hand, the NBFC that deals with loan/credit service must have a CRAR of 15%;
• Maximum net NPA should be 5% of total outstanding assets and loans.

Deposits Acceptance

The provisions regarding acceptance of public deposits for NBFC permit exemption on the deposit from the director’s relative. However, the funding can’t be routed to the NBFC directly unless an application is submitted from a depositor. Non-Banking Financial Companies under the provision of authorities should provide essential details of every incoming deposit to maintain transparency.

However, it is worth mentioning here that the above provision would be considered violated in case relationship between directors and depositors is found to be compromised on the date of acceptance of such notice.

Participation of smaller NBFCs in Insurance Business

The Reserve Bank is looking to incorporate as many NBFCs to enter the insurance business. In case the NBFC is not big enough still they can enter the insurance market by acting as agents to the insurance companies. Thus, smaller NBFCs can also enter the market and that too risk-free. It ensures protection for small NBFCs and, at the same time, allows them to function in the insurance market.

Conclusion

There are enough reasons for any newcomer in the NBFC to move into the insurance sector. As participation of NBFCs in insurance business will allow them to make most of the booming growth. Thus, majority of new companies are looking to start their business by NBFC registration and subsequently enter into the insurance sector.

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