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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.
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.
RBI approved NBFCs[1] can enter insurance agency business based on a fee and risk participation, which deals with the conditions as mentioned below:
The following eligibility criteria should be met by NBFCs for participation in the insurance business:
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:
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.
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.
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.
Read our article: NBFCs urge RBI for Restructuring Loans and Fresh Liquidity Support amidst Covid-19
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