NBFCs in Insurance Business

Narendra Kumar

03 Nov, 2020

The Non-Banking Financial Companies (NBFCs) are considered almost similar to the conventional banks except a few differences which make them their counterparts. As per latest developments in the financial markets, the NBFCs are entering into the insurance sector also. The Reserve Bank of India has laid down the guidelines for NBFC Registration in India in the Insurance sector. In this article we will look at NBFCs in Insurance Business.

The Basic Requirement for Entry of NBFCs in Insurance

Any Non-Banking Financial Company (NBFC) which has obtained NBFC registration with RBI for carrying out its operations and having a net owned fund (NOF) of Rs. 500 lakhs as per the last audited balance sheet shall be permitted to undertake insurance business as an agent of insurance companies on a fee basis, without any risk participation.

Prior to this, the concerned NBFCs shall also take approval from Insurance Regulatory and Development Authority (IRDA)^[1].

Few Exceptions

Under the following conditions, the approval of RBI is not required and the NBFCs can straightaway take the entry into the insurance business:

1. Requisite permission by the concerned NBFCs shall be obtained from IRDA and the IRDA regulations shall also be compiled with or acting as ‘composite corporate agent’ with insurance companies.
2. Any restrictive policies shall not be adopted by NBFCs which forces its customers to only prefer a particular insurance company. Customer’s choice shall be given priority.
3. All the public disclosure material distributed by the concerned NBFC shall state very clearly that the subject of participation by an NBFC’s customer in insurance products is purely on a voluntary basis. The NBFCs shall not link, either directly or indirectly, the provision of the financial services provided by it and the use of the insurance products offered by it.
4. The premium to be payable on the insurance shall be made directly to the insurance company without taking the NBFC into the picture.
5. The risks associated with the business of insurance conducted by the NBFC shall not be transferred into the business of NBFC.

NBFCs in Insurance Business: Application for Approval

The desired NBFC shall make an application to the Reserve Bank of India along with the necessary documents and particulars duly certified by their statutory auditors to the Regional Office of Department of Non-Banking Supervision under whose jurisdiction the registered office of the NBFCs is situated.

NBFCs in Insurance Business: Requirements of Equity Contribution

The NBFCs planning to step into the business of insurance sector is required to hold the maximum equity contribution of 50 % of the paid-up equity capital of the Insurance Company with whom it has entered into the joint venture. In some cases, the Reserve Bank can allow a higher equity contribution by a promoter NBFC.

Eligibility Criteria for NBFCs getting into the Joint Venture

• The NBFC should have the Net Worth of not less than 500 crores;
• The CRAR of the NBFCs engaged in the activities of loan and investments and holding the public deposits of not less than 15 % and for other NBFCs, it shall be 12 %, whether they hold public deposits or not;
• The non-performing assets shall not be more than 5% of total outstanding assets on  lease, hire-purchase basis and advance taken together;
• The NBFC must have earned profits for the three last continuous years;
• The performances of the subsidiary of NBFCs, if any, shall be satisfactory;
• Adherence to the regulatory compliances is mandatory.

NBFCs in Insurance Business: Other Provisions

• Where a foreign partner contributes 26 percent of the equity with the approval of IRDA/FIPB, the participation of more than one NBFC in the equity of the insurance joint venture shall be allowed.
• Such business shall not be conducted departmentally by any NBFC. Neither any subsidiary 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, shall be allowed to join the insurance company on the basis of their risk participation.

Conclusion

The Indian Insurance Industry is blooming gradually and so is the demand and supply cycle for all type of insurance in the country. This has added to the growth meter of NBFCs heading into this sector. The growth of interest towards insurance among Indians, innovative product designs and easy to access distribution channels are further accelerating the scale of the insurance sector. Also, the government has liberalized various policies for private players like NBFCs. The recent decision by the Indian parliament has further cleared the path for raising FDI (foreign direct investment) in the insurance sector thereby generating more employment opportunities, improved customer services, and competitive premiums rates.

Read our article:Surrendering the NBFC license: Reasons and procedure