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RBI frowns at banks free-mixing with insurance firms

Calcutta, Oct. 7: The Reserve Bank of India (RBI) has asked commercial banks to transfer the risk involved in insurance business to their profit and loss accounts. Post liberalisation, most public sector banks are now going in for bancassurance and referral agreements with private insurance companies.

A senior RBI official said, “Most of the private insurance companies which have tied up with banks are new in the field. We have asked the banks to be careful about the risk they have to share if these insurance companies fail to run their operations.”

“They should be alert while entering into referral arrangement or corporate agency with the insurance companies. In a referral arrangement, the bank shares data with insurance companies. They should be cautious in sharing the data,” the official added.

The risks involved in the tie-ups should not get transferred to the business of the bank, RBI said.

Many public sector banks have tied up with insurance companies for bancassurance. ICICI Prudential, for instance, has tied up with Allahabad Bank, South Indian Bank, Federal Bank, Lord Krishna Bank and Bank of India for distributing its policies.

Life Insurance Corporation of India has tied up with Central Bank of India and Uco Bank for selling its products.

RBI has also asked banks to comply with the IRDA regulations in their tie-ups with insurance companies.

The bank should not adopt any restrictive practice of forcing its customers to go in for a particular insurance company in respect of assets financed by the bank. Customers should be allowed to exercise their own choice.

In a referral arrangement, banks should allow insurance companies to use their premises and the existing infrastructure.

The agreement should be for a period not exceeding three years at the first instance and the bank should have the discretion to renegotiate the terms or replace it by another agreement after the initial period.

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