REF. DBS.FID No. C-8 /01.02.00/2001-02

28 November, 2001

To the CEOs of The all-India Term lending and Refinancing Institutions

Dear Sir,

Norms for entry of the all-India financial institutions into insurance business

As you are aware, the Insurance Regulatory and Development Authority has issued Regulations on registration of Indian insurance companies and some of the financial intermediaries in the system have also since made an entry into the insurance business. The guidelines for the NBFCs and the banks for entry into insurance business were prescribed by RBI vide Circular No. DNBS.(PD).CC.No.13/02.01/99-2000 dated June 30, 2000 and DBOD. No. FSC.BC/16/24.01.018/2000-2001 dated August 9, 2000.

2. In view of the interest evinced by some of the all-India financial institutions (FIs), falling within the regulatory and supervisory domain of RBI, in entering the insurance business, the guidelines for entry of the financial institutions into insurance business have since been formulated and are furnished in the Annexure. The FIs desirous of entering into insurance business, and meeting the criteria enumerated in the Annexure, may make an application to this Division alongwith the necessary particulars duly certified by their statutory auditors.

3. Please acknowledge receipt.

Yours faithfully,

(K. C. Bandyopadhyay)
Chief General Manager

Encls.: As above

ANNEXURE

Guidelines for Entry of all-India financial institutions within the regulatory and supervisory domain of RBI ("FI") into Insurance business

A. Insurance business without risk participation

1. A FI having net owned fund of Rs. 2 crore would be permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation.

B. Insurance business with risk participation

2. The FIs, which satisfy the eligibility criteria given below, will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution that the FI can hold in the joint venture company will normally be 50 per cent of the paid-up capital of the insurance company. On a selective basis, the Reserve Bank of India may permit a higher equity contribution by a promoter FI initially, pending divestment of equity within the prescribed period [see Note (1) below]. The eligibility criteria for joint venture participant will be as under, as per the latest available audited balance sheet:

1. The owned fund of the FI should not be less than Rs. 500 crore. The owned fund for the purpose should be computed as per the definition of ‘net owned fund’ under Section 45-IA of the RBI Act, 1934;
2. The CRAR of the FI should be not less than 15%;
3. The level of net non-performing assets should be not more than 5% of the total outstanding loans and advances;
4. The FI should have earned net profit for the last three continuous years;
5. The track record of the performance of the subsidiaries, if any, of the concerned FI should be satisfactory;
6. Regulatory compliance with the RBI guidelines for raising of resources by the FIs should be demonstrated.

3. In case where a foreign partner contributes 26 per cent of the equity with the approval of Insurance Regulatory and Development Authority / Foreign Investment Promotion Board, more than one FI may be allowed to participate in the equity of the insurance joint venture. Since such participants will also assume insurance risk, only those FIs which satisfy the criteria given in paragraph 2 above, would be eligible.

4. No FI would be allowed to conduct insurance business with risk participation, departmentally. A subsidiary or a company in the same group of the FI or of another FI engaged in non-banking or banking business, will not normally be allowed to join the insurance company on risk participation basis.

5. FIs, falling within the regulatory and supervisory domain of RBI, which are not eligible as joint venture participant, as per the foregoing criteria, can make investments up to 10 per cent of the owned fund of the FI or Rs.50 crore, whichever is lower, in the insurance company. Such participation shall be treated as an investment and should be without any contingent liability for the FI. The eligibility criteria for these FIs will be as under:

1. The CRAR of the FI should not be less than 15 per cent;
2. The level of net NPA should be not more than 5 per cent of total outstanding loans and advances;
3. The FI should have earned net profit for the last three continuous years.

6. All FIs entering into insurance business as agents or investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank. The Reserve Bank will give permission to the FIs on a case to case basis keeping in view all relevant factors. It should be ensured that risks involved in insurance business do not get transferred to the FI and that its business does not get contaminated by any risks which may arise from insurance business.

Note :

(1) Holding of equity by a promoter FI in an insurance company or participation in any form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/ Central Government. This will include compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time.