Almost all the non-banking finance companies (NBFCs) are window dressing their front offices to enter insurance broking in a big way. The fact that most of these non-banking entities have off-late gone through a rough patch, atleast 95% of them are not in a position to enter the sector by way of partnership as they do not suffice the eligibility criteria vis-à-vis banks. The only option the low networth NBFCs have before them is to turn themselves into distributing agents or brokers.

The Reserve Bank of India (RBI) announced the guidelines pertaining to the entry norms for non- banking finance companies (NBFCs) into the insurance sector in May 2000. The move is aimed at widening and deepening the insurance market. According to the RBI notification, any NBFC registered with the central bank having a net worth of Rs 5 bn, net owned fund of Rs 500 m and capital adequacy ratio of 15 per cent engaging in loan and investment activities and 12% for other NBFC will be able to able to enter the insurance sector.

The NBFCs are also required to limit the level of their non-performing assets to a maximum of 5% of the total outstanding leased/hire purchase assets and advances taken together and make profit for three preceding years.

The central bank has further pulled the strings by pegging the capital adequacy ratio of NBFCs indulging in the business of loans and investment at 15 per cent and companies raising public deposits at 12 per cent.

The stringent norms for non-banking finance company’s (NBFC) entry into the insurance sector issued by the central bank will practically kill the ambition of almost all the non-banking entities, planning a foray into the insurance sector.

Says A C Shah, chairman, Gujarat Lease Financing Limited, “Most of the NBFCs are currently struggling to maintain their capital adequacy ratio between 10 to 12 per cent. Moreover, NBFCs raising public deposit do not have a networth of Rs 5 bn. This will weed out almost all the NBFCs except institutions and the ones promoted by the nationalized banks like SBI and Corporation Bank.”

According to industry sources, currently only HDFC and ICICI have a net worth of over Rs 5 bn, as specified by the central bank for entering the sector. The two corporate bigwigs Aditya Birla Group and Tata Group will just be able to board the bus. Aditya Birla Group has signed a MoU with SunLife and Tata Group has tied up with American Intl Group for setting up insurance shop in the country.

This central bank’s move will further mean that the memorandum of understanding between Choamandalam --Guardian Royal Exchange and Sundaram Finance--Winterhur Ins will break up unless both the top line insurance major enhance their capital base. Kotak Mahindra Finance Limited, one of the most aggressive non-banking finance entity has already broken-up with Chubb and is currently working hard to push up its networth to Rs 5 bn.

According to industry sources, most of the NBFCs will be eligible to act as an agent. The risk free earnings will definitely find a few takers. For customers, the scenario looks bright as professionalism and world-class service standards will creep into the insurance sector.

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