Introduction

The Non-banking financial companies (NBFCs) are very similar to the conventional Banks to the most extent apart from few differences that make them their counterparts. The latest development in the financial markets has made the entrance of NBFC in the insurance sector possible. Guidelines provided by the Reserve bank of India has laid down the entry process and working of NBFCs in the Insurance sector. In this article, we will focus on the NBFC participation in the insurance business.

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Requirements for NBFC participation in Insurance Business

NBFCs which are registered under Reserve bank of India for carrying out its operations with the net owned fund (NOF) of Rs. 500 lakhs according to the last audited balance sheet must be permitted to undertake insurance business as an agent of insurance companies on a fee basis, without having any participation of risk. Before this, NBFC must take approval from Insurance regulatory and development authority (IRDA).

Approval Application for NBFC participation in Insurance Business

An application with the necessary documents must be made to the Reserve bank of India by the desired NBFC. Besides, particulars duly certified by the statutory auditors to the Regional Office of the Department of Non-Banking Supervision must also be attached.

Requirements of Equity Contribution

The NBFCs who are planning to step into the business of insurance sector must have the maximum equity contribution of 50% of the paid-up equity capital of the Insurance Company with whom it has entered into the joint venture. In most of the cases, the Reserve Bank of India may allow a higher equity contribution by a promoter NBFC.

Eligibility Criteria for NBFCs getting into the Joint Venture

1. The NBFC should have the Net Worth of not less than 500 crores;
2. The CRAR of the NBFCs engaged in the activities of loan and investments and holding the public deposits of not less than 15 % and for other NBFCs, it shall be 12 %, whether they hold public deposits or not;
3. The non-performing assets shall not be more than 5% of total outstanding assets on  lease, hire-purchase basis and advance taken together;
4. The NBFC must have earned profits for the three last continuous years;
5. The performances of the subsidiary of NBFCs, if any, shall be satisfactory;
6. Adherence to the regulatory compliances is mandatory.

Some other provisions

• When the contribution of a foreign partner is 26% of the equity with the approval of IRDA/FIPB then the participation of more than one NBFC in the joint venture is allowed.
• No NBFC will conduct such business departmentally. It is not allowed even for the subsidiary or company of the same group of an NBFC engaged in the business of a non-banking financial institution or banking shall be allowed to join the insurance company on the basis of their risk participation.

Exemptions

• Requisite permission by the concerned NBFCs shall be obtained from IRDA and the IRDA.
• Any restrictive policies shall not be adopted by NBFCs.
• All the public disclosure material distributed by the concerned NBFC shall state very clearly that the subject of participation by an NBFC’s customer in insurance products is purely on a voluntary basis.
• The premium to be payable on the insurance shall be made directly to the insurance company without taking the NBFC into the picture.
• The risks associated with the business of insurance conducted by the NBFC shall not be transferred into the business of NBFC.

 

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