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India's Government Encourages Banks to Enter Insurance Business

 

Tuesday, Apr 06,2010, 6:09:42 PM   Click:

Despite the strains of recent economic trends, India's public banks are being encouraged to diversify into noncore financial services areas including insurance and mutual funds, according to the Ministry of Finance.

The government has "no intention" of preventing public (state-owned) banks from entering those financial services areas, said R Gopalan, the ministry's financial services secretary, at an event of the Federation of Indian Chambers of Commerce and Industry.

"In fact, banks have to diversify into various financial product activities," said Gopalan. "In that case, how can one put restrictions on banks on getting into activities which are not core banking activities?"

India's banking sector has been concentrated on its core business, said Shweta Mane, a banking and financial services analyst with Centrum Broking in India. But a few banks are under-capitalized, bringing up the issue of re-capitalization as the government has to infuse capital into the banks.

The finance ministry has asked state-owned banks to look into their capital positions with a focus on capital adequacy and asset quality, according to Mane. On March 19, the Reserve Bank of India raised its interest rate as inflation surged to nearly 10% in India.

But there are no new restrictions on noncore business for these banks, Mane told BestWeek Asia/Pacific. The finance ministry is now more concerned about the liquidity of the banking system in view of inflationary pressure and tightening monetary policy.

In India, more than half a dozen of state-owned banks operate insurance businesses and many of them are in foreign joint ventures. Public banks such as State Bank of India, Andhra Bank, Union Bank Of Bank, Oriental Bank of Commerce and Canara Bank formed insurance ventures with foreign players, according to the Life Insurance Council of India. Non-interest income has risen for these banks from the sale of insurance and other financial products.

Most of these public banks with insurance ventures have an adequate capital position and perform well in their core banking business, said Mane. The insurance ventures enable them to gain premium income for better business performance.

The biggest advantage of a well-capitalized bank in the insurance business is its already-established branch network across India, said Mane. In India, some of largest life insurers are joint ventures between local public banks and foreign insurance groups.

The public banks' insurance ventures tend to operate quietly, noted Mane. India still has an unclear path in terms of regulatory development, as a long-awaiting foreign direct investment reform measure has bogged down in Parliament.

Mane said public banks see the reform as a positive development for the quality of insurance management and potential for overseas business with stronger foreign alliances.

In India, Bank of Baroda, Andhra Bank, Canara Bank and Oriental Bank of Commerce are some of the new entrants into insurance ventures. Recently, state-run lenders Bank of Baroda and Andhra Bank and U.K.-based Legal and General Group plc [086120] launched a three-way life venture, IndiaFirst Insurance Co. Ltd.

Last year, Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd. was formed as a life venture among Canara Bank, Oriental Bank of Commerce and HSBC Insurance (Asia Pacific) Holdings Ltd. [084722]. Star Union Dai-ichi Life Insurance Co. Ltd. was launched as a life venture between Union Bank of India and Japan's Dai-ichi Mutual Life Insurance Co. Ltd. [085255] (BestWire, March 16, 2010).

SBI Life Insurance Co. Ltd. [090253], a life venture between State Bank of India and French BNP Paribas Assurance [086317], is among India's top three life insurers. The life insurer reported life premium income of 72 billion rupees (US$1.6 billion) in the 2009 fiscal year, according to the Insurance Regulatory and Development Authority. The largest private life insurer, ICICI Prudential Life Insurance Co. Ltd. [089580], a joint venture between private lender ICICI Bank and Prudential plc [085925], had life premium income of 154 billion rupees.

India's life insurance industry is highly capital-intensive and it can take up to 10 years for an operation to be profitable. An insurance venture requires minimum start-up capital of 1 billion rupees, according to IRDA.

The life industry posted a total net loss of 48.8 billion rupees in the fiscal year ended March 31, 2009, according to IRDA. Only four life insurers reported profit out of the total 22 life insurers.

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