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An Assessment on NBFCs’ Insurance Business Participation

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An Assessment on NBFCs' Insurance Business Participation

An Assessment on NBFCs’ Insurance Business Participation

The RBI has granted the NBFCs their authorization to broaden its footsteps for participation in the insurance sector or related businesses. NBFCs have not yet been authorised to act in an autonomous framework. The launch of NBFCs in insurance business helps insurers stabilise their capital and satisfy extra needs provided by IRDAI.

The non-banking finance companies are financial institutions that lend money and provides financial assistance to lower-income groups and small businesses, but they are not banks. They are approved by RBI, through the NBFC Registration process. NBFC Registration is mandatory and they must adhere to the provided RBI guidelines. NBFCs are significant for the infrastructural development projects in India, and they contribute largely to the Indian economy. The government of India provides them additional benefits and relaxation to work efficiently.

In this article, we will enlighten you, on the topic of NBFC Incorporation in the insurance sector, eligibility criteria, and intent of new NBFCs to enter the insurance sector business.

What Are the Major Requirements For NBFCs To Enter In Insurance Businesses?

The NBFCs or any other private lender are not allowed to operate outside the authoritarian regime. In order to operate the insurance business smoothly, NBFCs are necessary to obtain mandatory consent of RBI and IRDAI.

Insurance Agency Business

RBI approved NBFCs can get into business as insurance agencies on the basis of a fee and risk involvement, which covers the following conditions:

  • In that situation, NBFCs need IRDAI’s obligatory authorisation to serve as an insurance company composite agent;
  • There is no need for RBI permission;
  • In the area of funded assets, NBFCs shall not constrain customers’ interests to work with alternative agencies;
  • Since the acceptance of insurance products is voluntary, advertising material should be indicated in the NBFCs;
  • NBFCs are not supposed to associate clients with financial services provided;
  • The insurance premium must go to the insurance company instead of NBFC;
  • NBFCs are not accountable to share risk in the insurance business.

Insurance Joint Ventures

  • Those NBFCs which comply with all the requirements and are committed to establishing a joint venture based on risk participation should use RBI authorization to ensure continuance. 
  • The same applies to those NBFCs seeking major insurance company investments.
  • NBFCs may own up to 50 per cent of the paid-up capital from the insurance company in the Joint Venture, but no engagement in the insurance company is possible as a subsidiary of the NBFC or a different company in the same area of interest.

What are the Eligibility Criteria for the Participation of NBFCs in the Insurance Business?

The below listed eligibility criteria must be met by NBFCs for participation in the insurance sector:

  • The NBFC shall have under its own control at least 500 crore rupees fund;
  • The insurance company cannot enter an NBFC with public deposits unless its CRARs (Risk Capital Assets Ratio) are greater than 15%. 
  • The conventional NBFCs with no public deposit ownership should maintain more than 12 per cent CRAR (Risk Capital Assets Ratio);
  • The NBFC restriction on NPA’s non-recurring total assets such as loans, recruitment, etc. shall not be more than 5%;
  • Net owned funds subordinate NBFCs are seeking certain investment under RBI;
  • For the last three years, NBFC shall not be subject to any financial loss;
  • Public deposits and conformity with regulations, when kept.

Failure to meet the eligibility criteria, What’s Next?

If NBFC is not eligible as per the above listed eligibility criteria, then NBFC can make ten per cent of the owned fund of fifty rupees investment, whichever is less in the insurance company.

Such financing should be considered as a non-contingent NBFC liability investment.

The eligibility criteria for these groups of NBFC are as follows:

  • CRARs (Risk Asset Capital Ratio) of a minimum of 12 per cent should be available to NBFCs with public deposits and involving the purchase of equipment such as leasing and renting services.
  • On the other hand, a CRAR of 15% must be available for NBFC dealing with loan/credit service; 
  • Maximum net NPA should amount to 5% of the total outstanding assets and loans.

Deposits Acceptance Rule

The laws concerning acceptance for NBFC of public deposits provide for exemption from the relative deposit of the director. The financing cannot, however, be directly redirected to the NBFC unless a depositor requests it. In order to ensure transparency, non-Banking financial companies subject to authority provision should provide crucial data on each incoming deposit.

The aforementioned provisions would be considered violated, in the situation of an infringement on the date of acceptance of the notice of such relationship between directors and depositors.

Scope for Participation of smaller NBFCs in Insurance Business Sector

The Reserve Bank wants to add as many NBFCs to the insurance company. Should the NBFC not be substantial enough, it can still be an insurance agent for the insurance companies. This also allows smaller NBFCs to enter the market without any risk. This is also possible. It protects small NBFCs and enables them to work in the insurance market at the same time.

End Note

The Indian Insurance industry is progressively flourishing, with all insurance types in the nation being subject to the demand and supply cycles. This has contributed to NBFCs’ growth metre for this industry.

Their growing interest in the Indian insurance sector will ensure new product designs and simple access to distribution channels further speed up the expansion of the insurance industry. In addition, government policy for private operators has been liberalised, such as NBFCs.  The Indian Parliament’s recent resolution opened the way to raise FDIs in the insurance business and therefore generate more employment opportunities, enhance customer service and compete.

There are more than enough reasons to migrate into the insurance industry for non banking finance companies newcomers. As NBFCs participate in the insurance industry, they are able to maximise their growth graph in a short period. The bulk of new firms are thus trying to enter the insurance market through NBFC registration

It is interesting to watch, how NBFCs will take this opportunity to raise their business and how they will convert this situation into a win-win condition.

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