Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Industry / Banking/  PSU banks push back at finance ministry circular
BackBack

PSU banks push back at finance ministry circular

Banks fear being pulled up for mis-selling insurance, express concern about additional costs

Punjab National Bank chairman and managing director and Indian Banks Association chairman K.R. Kamath said banks are yet to take a call as the finance ministry’s circular will have to be evaluated and given to the department that looks into the matter to study the implications. Photo: MintPremium
Punjab National Bank chairman and managing director and Indian Banks Association chairman K.R. Kamath said banks are yet to take a call as the finance ministry’s circular will have to be evaluated and given to the department that looks into the matter to study the implications. Photo: Mint

Mumbai/New Delhi: State-run banks may not be able to meet the finance ministry’s directive to set up insurance broking units that would force them to relinquish exclusive tie-ups with insurance firms and instead sell products offered by multiple insurers.

A meeting of the Indian Banks’ Association (IBA), the banking industry lobby group, on Monday discussed the Reserve Bank of India’s (RBI’s) draft rules issued on 29 November that the ministry has asked banks to comply with and expressed their reservations about them, according to minutes of the meeting. Mint has a copy of the minutes.

Banks are concerned about additional costs and fear being held responsible for mis-selling insurance products—a risk they are protected from under the corporate agency model they follow currently. On 20 December, the finance ministry asked government-run banks to comply with the RBI draft rules by 15 January.

“Concerns, such as risks in banking system, staffing and operational challenges and other clarification, make a strong case for negotiating issues, create infrastructure, resources and an enabling architecture to take this onerous responsibility as an unprepared entry could only negate the work done in the area of insurance penetration," according to the minutes.

The finance ministry’s directive is aimed at increasing insurance coverage in the country of 1.2 billion people where insurance penetration is among the lowest in the world. Insurance penetration is 4.1% in India, and that compares with a global average of 6.6% in 2011, according to the latest annual report of the Insurance Regulatory and Development Authority (Irda). The government also aims to prevent mis-selling of products by banks acting as corporate agents.

As corporate agents, banks can sell insurance products offered by only one partner, but as brokers they can sell products of multiple insurers. Insurance brokers would have a fiduciary responsibility towards their customers and can be held liable for giving them wrong advice or following wrong sales practices. The finance ministry circular also sought to dispense with the current corporate agent model.

“The finance ministry’s circular will have to be evaluated and given to the department that looks into the matter to see the implications. We are yet to take a call," said K.R. Kamath, chairman and managing director, Punjab National Bank, and chairman of IBA.

Punjab National Bank holds a 30% stake in PNB Metlife India Insurance Co. and acts as a corporate agent for the company’s products.

Union Bank of India (UBI) and Oriental Bank of Commerce (OBC) are also among government-controlled banks that may have to let go of exclusive tie-ups with partners to comply with finance ministry rules. UBI has a joint venture with Star Union Dai-ichi Life Insurance Co. Ltd and OBC has a joint venture with Canara Bank and HSBC Insurance (Asia Pacific) Ltd.

The new rules will have a significant impact on insurance joint ventures of banks, including lower valuations for insurance units, said R.K. Bansal, executive director, IDBI Bank Ltd.

“There are a lot of issues, especially when it comes to promoted (insurance) companies. Banks having promoted companies will have to re-look at some of the clauses and there could be a change in valuations," said Bansal, referring to the Reserve Bank of India’s (RBI) draft norms on insurance broking.

The circular also asked banks to train their employees to set up insurance broking businesses. Banks were asked to report progress in implementing the directive by 31 January.

RBI has sought feedback from stakeholders, including banks and insurance firms, by 31 December on the draft norms.

As insurance brokers, banks will have to analyze and recommend products based on the consumers’ needs, and this makes little business sense for state-run lenders.

“To become a broker, a bank needs to have resources, understanding of product, and there will be additional costs," said a senior life insurance executive who declined to be named. “If banks are forced to become brokers, mis-selling will go up. This may not be deliberate but due to ignorance. If they feel the risk is too much, they may just decide to stop the insurance business."

The new rules may lead to the exit of joint venture partners and cause disputes over compensation, according to minutes of the meeting. “By restricting business opportunities for joint venture, a Pandora’s Box will be opened relating to exit of JV (joint venture) partner, compensation to be given to them and loss of credibility of Indian partner in attracting further investment and JV opportunities," the minutes said.

Vishal Narnolia, a Mumbai-based analyst with SMC Global Securities Ltd, agreed that there were problems with the finance ministry directive.

“Firstly, this circular is only for PSU (public sector unit) banks which don’t give them a level-playing field. Sooner or later, private banks will to have to join the broking business," Narnolia said. “Secondly, if we look at it practically, PSU banks don’t have trained staff who can act as brokers and sell insurance. Lastly, PSU banks have promoted insurance companies. Hence, even if they become brokers, there will still be a tendency to sell promoted company product."

Banks will need to deploy higher resources both in terms of posting insurance-specific staff in each of the branches as well as training them, insurance industry experts said. The increased cost may force banks to only look at urban areas to justify the cost. This will defeat the purpose of increasing penetration, they said.

Banks earn a commission of 35% as corporate agents, but that would come down to 30% in the broking model. With reduced commission and increased expenditure, banks will find it difficult to break even, bankers say.

The insurers are more enthusiastic. Says P. Nandagopal, managing director and CEO, IndiaFirst Life Insurance Co. Ltd, “From a trustworthiness point of view, in the long-term, the insurance broking business is desirable. However, doing it in a hurry will turn out to be counter-productive. For customers, obviously if they are unbiased to all products, it will be good. But to be neutral may be difficult, considering there is an arbitrage."

The circular is causing those in the financial planning industry to cheer because banks mis-selling insurance is a key reason for lack of trust among investors.

“From a consumer perceptive, (a) broker will be better than (an) agent," says Ranjeet S. Mudholkar, vice-chairman and chief executive officer, Financial Planning Standards Board India. “There are three benefits: First, there will the multiple product option. Second, from a business point of view, insurance firms can increase penetration and banks can reach out to multiple customers and, lastly, now there will be a principal-agent relation, where the consumer will become the principal," he said.

Financial planner Mukesh D. Dedhia said: “Bankers will have to first get qualified staff to sell the products as brokers. Currently, they are not equipped. But if they become brokers, it means better service for customers and lesser remuneration for banks. People generally don’t want to go to multiple channels for financial services. If going to a bank gives you multiple insurance products options as well, it is definitely in favour of the customers."

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 24 Dec 2013, 10:51 PM IST
Next Story footLogo
Recommended For You
Banking Stocks
₹1,053.6-0.5%
₹1,440.70.52%
₹1,0841.08%
₹122.751.3%
₹734.052.53%
Switch to the Mint app for fast and personalized news - Get App