Mumbai, Dec. 16: Seven commercial banks are in danger of being tripped up by a tough Reserve Bank of India guideline that stipulates only those lenders with net bad loans below 3 per cent will be eligible to become insurance brokers.
The central bank had recently come out with its draft guidelines relating to banks looking to enter the lucrative insurance broking business.
If a lender opts to become an insurance broker, it can market the products of multiple insurance companies. The other option is to follow the corporate agency model.
However, under this route, the lenders can sell policies of only one life insurer and one standalone health insurer.
Many of the insurance companies are keen that banks assume the role of a broker since they can use the 100,000 branch network of these lenders in the country to sell their policies.
Bancassurance (the sale of insurance via banks) has been a successful model in developed and other emerging economies with banks contributing between 16 per cent and 63 per cent to the premium of insurance industry in various countries.
In India, this figure was at an abysmal 9.4 per cent in 2011-12.
The sale of multiple insurance products is seen as beneficial for banks as it can boost their fee-based incomes.
A report from CARE Ratings today said seven banks (six PSU and one private) would be ineligible to carry out the insurance broking business. This is because their net NPAs (amount of bad loans after making provisions) are higher than 3 per cent.
The nationalised banks are United Bank of India, Allahabad Bank, Central Bank of India, Andhra Bank, Punjab National Bank and Uco Bank. As of the second quarter of this fiscal, these banks had net NPAs ranging from 3.05 per cent to 5.39 per cent.
According to CARE Research, these banks have a cumulative branch strength of 23,010 as on June 30, accounting for 20.8 per cent of total banking sector branches.
Two PSU banks — Union Bank and United Bank of India — do not meet the criteria that they should have a minimum capital adequacy ratio of 10 per cent.
The ratio of both these banks were lower at 9.7 per cent and 9.5 per cent, respectively.
Six state-run lenders that do not meet the Reserve Bank criteria
• United Bank of India
• Allahabad Bank
• Central Bank of India
• Andhra Bank
• Punjab National Bank
• Uco Bank