JNANA VARDHINI
SIBSTC MONTHLY NEWSLETTER -COVERING
CONTEMPORARY BANKING RELATED TOPICS
54TH ISSUE
JANUARY 2015
SOUTHERN INDIA BANKS’ STAFF
TRAINING COLLEGE
No.9, Shankara Math Road, Shankarapuram,
BANGALORE-560 004
Website: www.sibstc.edu.in
Email:
[email protected]
[email protected]
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WISH YOU ALL A
HAPPY AND
PROSPEROUS
NEW YEAR
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2015.
ENTRY OF BANKS INTO INSURANCE BUSINESS
RBI CIRCULAR: DBR.No.FSD.BC.62/24.01.018/2014-15 DT 15.01.2015
Background:
Presently, RBI has permitted banks to set up insurance joint ventures on risk participation
basis and also to undertake insurance business as agents of insurance companies on fee
basis, without any risk participation by banks and their subsidiaries and also permitted to
undertake referral activities.
With the objective of increasing insurance penetration using the entire network of bank
branches, the Finance Minister in the budget speech 2013-14 announced that banks will
be permitted to act as insurance brokers. Consequent to the announcement, IRDA
formulated and notified the IRDA (Licensing of Banks as Insurance Brokers)
Regulations, 2013 to enable banks to take up the business of insurance broking
departmentally.
Accordingly, the extant instructions on conduct of insurance business by banks have been
reviewed. It is advised that banks may undertake insurance business by setting up a
subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either
departmentally or through a subsidiary subject to the conditions given in the Annex.
However, it may be noted that if a bank or its group entities, including subsidiaries,
undertake insurance distribution through either broking or corporate agency mode, the
bank/other group entities would not be permitted to undertake insurance distribution
activities, ie, only one entity in the group can undertake insurance distribution by either
one of the two modes mentioned above.
Banks setting up a subsidiary/JV for undertaking insurance business with risk
participation
Banks are not allowed to undertake insurance business with risk participation
departmentally and may do so only through a subsidiary/JV set up for the purpose. Banks
which satisfy the eligibility criteria (as on March 31 of the previous year) given below
may approach Reserve Bank of India to set up a subsidiary/joint venture company for
undertaking insurance business with risk participation:
a) The net worth of the bank should not be less than Rs.1000 crore;
b) The CRAR of the bank should not be less than 10 per cent;
c) The level of net non-performing assets should be not more than 3 percent.
d) The bank should have made a net profit for the last three continuous years;
e) The track record of the performance of the subsidiaries, if any, of the concerned bank
should be satisfactory.
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RBI approval would factor in regulatory and supervisory comfort on various aspects of
the bank’s functioning such as corporate governance, risk management, etc.
It may be noted that a subsidiary of a bank and another bank will not normally be allowed
to contribute to the equity of the insurance company on risk participation basis.
It should be also be ensured that risks involved in insurance business do not get
transferred to the bank and that the banking business does not get contaminated by any
risks which may arise from insurance business. There should be an ‘arms length’
relationship between the bank and the insurance outfit.
Banks undertaking insurance broking/corporate agency through a subsidiary/JV
Banks require prior approval of RBI for setting up a subsidiary/JV. Accordingly, banks
desirous of setting up a subsidiary for undertaking insurance broking/corporate agency
and which satisfy the eligibility criteria (as on March 31 of the previous year) given
below may approach Reserve Bank of India for approval to set up such subsidiary/JV:
a) The net worth of the bank should not be less than Rs.500 crore after investing in the
equity of such company;
b) The CRAR of the bank should not be less than 10 per cent;
c) The level of net non-performing assets should be not more than 3 per cent.
d) The bank should have made a net profit for the last three continuous years;
e) The track record of the performance of the subsidiaries, if any, of the concerned bank
should be satisfactory.
As hitherto, RBI approval would also factor in regulatory and supervisory comfort on
various aspects of the bank’s functioning such as corporate governance, risk
management, etc.
Banks undertaking corporate agency functions/broking functions departmentally
Banks need not obtain prior approval of the RBI to act as corporate agents on fee basis,
without risk participation/undertake insurance broking activities departmentally, subject
to IRDA Regulations.
Banks undertaking referral services
In terms of IRDA (Sharing of Database for Distribution of Insurance Products)
Regulations 2010, no bank is presently eligible to conduct insurance referral business.
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Guidelines for Banks undertaking Insurance Broking and Agency Business
Banks may undertake insurance agency or broking business departmentally and/or
through subsidiary, subject to the following stipulations:
Board Approved Policy
A comprehensive Board approved policy regarding undertaking insurance distribution,
whether under the agency or the broking model should be formulated and services should
be offered to customers in accordance with this policy. The policy will also encompass
issues of customer appropriateness and suitability as well as grievance redressal. It may
be noted that as IRDA Guidelines do not permit group entities to take up both corporate
agency and broking in the same group even through separate entities, banks or their
group entities may undertake either insurance broking or corporate agency business.
Compliance with IRDA guidelines
a) The IRDA (Licensing of Corporate Agents) Regulations, 2002/ IRDA (Licensing of
Banks as Insurance Brokers) Regulations, 2013 and the code of conduct prescribed by
IRDA, as amended from time to time, as applicable, should be complied with by banks
undertaking these activities.
b) The deposit to be maintained by an insurance broker as per the IRDA (Licensing of
Banks as Insurance Brokers) Regulations, 2013, as amended from time to time, should be
maintained with a scheduled commercial bank other than itself.
Ensuring Customer Appropriateness and Suitability
While undertaking insurance distribution business, either under the corporate agency or
broking model under the relevant IRDA Regulations, banks must keep the following in
view:
a) All employees dealing with insurance agency/ broking business should possess the
requisite qualification prescribed by IRDA.
b) There should be a system of assessment of the suitability of products for customers.
Pure risk term products with no investment or growth components that are simple and
easy for the customer to understand will be deemed universally suitable products. More
complex products with investment components will require the bank to necessarily
undertake a customer need assessment prior to sale. It should be ensured that there is a
standardized system of assessing the needs of the customer and that
initiation/transactional and approval processes are segregated.
c) Banks should treat their customers fairly, honestly and transparently, with regard to
suitability and appropriateness of the insurance product sold.
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Prohibition on Payment of Commission/Incentive directly to Bank Staff
There should be no violation of the guidelines issued by IRDA in payment of
commissions/brokerage/incentives. This may be factored in while formulating a suitable
performance assessment and incentive structure for staff. Further, it must be ensured that
no incentive (cash or non-cash) should be paid to the staff engaged in insurance broking
services by the insurance company.
Adherence to KYC Guidelines
The instructions/ guidelines on KYC/AML/CFT applicable to banks, issued by RBI from
time to time, may be adhered to, in respect of customers (both existing and walk-in) to
whom the services of insurance broking are being provided.
Transparency and Disclosures
a) The bank should not follow any restrictive practices of forcing a customer to either opt
for products of a specific insurance company or link sale of such products to any banking
product. It should be prominently stated in all publicity material distributed by the bank
that the purchase by a bank’s customer of any insurance products is purely voluntary, and
is not linked to availment of any other facility from the bank.
b) Further, the details of fees/ brokerage received in respect of insurance broking business
undertaken by them should be disclosed in the ‘Notes to Accounts’ to their Balance
Sheet.
Customer Grievance Redressal Mechanism
A robust internal grievance redressal mechanism should be put in place along with a
Board approved customer compensation policy for resolving issues related to services
offered. It must also ensure that the insurance companies whose products are being sold
have robust customer grievance redressal arrangements in place. Further, the bank must
facilitate the redressal of grievances.
Penal Action for Violation of Guidelines
Violation of the above instructions will be viewed seriously and will invite deterrent
penal action against the banks.
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REVISION IN REPO RATE
Since July 2014, inflationary pressures have been easing. To some extent, lower than
expected inflation has been enabled by the sharper than expected decline in prices of
vegetables and fruits since September, ebbing price pressures in respect of cereals and the
large fall in international commodity prices, particularly crude oil. Crude prices, barring
geo-political shocks, are expected to remain low over the year. Weak demand conditions
have also moderated inflation excluding food and fuel, especially in the reading for
December. Finally, the government has reiterated its commitment to adhering to its fiscal
deficit target.
These factors have significantly reduced the momentum of inflation, compensating for
the widely anticipated ending of favourable base effects. On current policy settings,
inflation is likely to be below 6 per cent by January 2016.
These developments have provided headroom for a shift in the monetary policy stance.
Keeping this commitment in mind, it has been decided to:




reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25
basis points from 8.0 per cent to 7.75 per cent with immediate effect;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent
of net demand and time liabilities (NDTL);
continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise
NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up
to 0.75 per cent of NDTL of the banking system through auctions; and
continue with daily variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per cent, and
the marginal standing facility (MSF) rate and the Bank Rate to 8.75 per cent with
immediate effect.
PUBLIC SECTOR BANKS AT CROSS ROAD
(Speech delivered by Shri R. Gandhi, Deputy Governor at the “Indian PSU Banking
Industry: Road Ahead” Summit organized by Bengal Chamber of Commerce and
Industry on January 10, 2015 at Kolkata)
The public sector banking commenced in India with the nationalization of the then
Imperial Bank as State Bank of India in 1955. One of the defining moments of Indian
banking industry is the bank nationalization in 1969, when 14 private sector commercial
banks were nationalized. In the aftermath of a balance of payment crisis situation in
1991and with the advent of economic reforms India embarked upon financial sector
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liberalization in a phased manner. Banking industry was deregulated by way of allowing
entry of new private sector banks; ten new private Indian banks were set up in 1993,
followed by two banks in 2003. Other notable features towards deregulation of banking
sector included allowing 74% foreign investment in private sector banks, doing away
with licensing of branches of domestic scheduled commercial banks in a phased manner,
Deregulation of interest rates, widening and deepening of financial markets, etc
In India, the universal banking model is followed. As regards the structure of universal
banks, the conglomerate structure is bank-led, i.e., banks themselves are holding
companies which operate certain businesses through Subsidiaries, Joint Ventures and
Affiliates. The general principle in this regard is that para-banking activities, such as
credit cards, primary dealer, leasing, hire purchase, factoring etc., can be conducted either
inside the bank departmentally or outside the bank through subsidiary/ joint venture
/associate. Activities such as insurance, stock broking, asset management, asset
reconstruction, venture capital funding and infrastructure financing can be undertaken
only outside the bank. Lending activities must be conducted from inside the bank.
Investment banking services are provided by the banks as an in-house departmental
activity or through subsidiary.
The Indian banking system has grown phenomenally over the years.
( Rs in crore)
YEAR
DEPOSITS
ADVANCES
1951
800
500
1961
1700
1300
1971
5900
4700
1981
38,000
25,400
1991
1,92,500
1,16,400
2001
9,62,900
5,11,400
2011
52,08,000
39,42,000
2014
85,33,100
67,35,200
The branches which stood at 8262 in 1969 expanded to 1,16,450 by March 2014.The
other types of touch-points numbered 3,37,678 as at end March 2014.The number of
ATMs were 1,60,055 as on that date.
The major share of this growth story belongs to the public sector banks. PSBs dominated
the banking system with a market share of 72.1% as at end March 2014 distantly
followed by NPBs (15.9%), FBs (7.2%) and OPBs (4.9%). As at end of March 2014, the
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total capital of the PSBs stood at Rs 5652 billion; their share in total deposits was
77.22%, share in total advances was 75.74%. However, their CRAR was 11.40%, against
13.01% of all banks. Their gross NPA was 4.36% vs 3.83% of all banks: their total
stressed assets were 10.67% vs 9.03% of all banks. If we look at the corresponding
figures for the New Private Sector Banks at CRAR of 16.59%, gross NPA of 1.73% and
total stressed assets of 3.28%, we get a feeling of the tight spot that the PSBs find
themselves in today. If we look at their performance ratios, a deep despondency sets in.
2012
2013
2014
2012
2013
2014
Private sector
Banks
2012 2013 2014
Return on Equity 15.50
15.30
11.70
15.55 15.31
9.71
15.38 16.81 17.06
Return on Assets
1.08
1.05
0.80
0.90
0.80
0.50
1.63
Net Profit
11.02
10.58
8.34
9.25
8.27
5.40
15.34 15.80 16.68
11.57
11.35
11.78
9.41
9.28
9.50
17.24 16.85 17.66
10.52
10.13
10.41
10.74 10.48 10.99
All Banks
PSBs
1.76
1.83
Margin
NII/Total
Income
Staff Expenses
/Total Income
8.97
8.39
7.96
The PSBs need a hard relook on their structure, functioning methods and financial and
risk management.
Firstly, Capital Planning for PSBs needs to be considered over a long term horizon.
Approximately, as high a sum of Rs 4.50 lakh crore in Tier 1 capital (which includes
Rs 2.40 lakh crore equity capitals) will be needed.
Recently, it has been reported that the GOI is contemplating scaling down their holdings
in PSBs to 52%. This may not be sufficient to fully meet the capital needs of the PSBs
under Basel III norms particularly since the projections are based on minimum
requirements. We also have to remember that Pillar II assessment has not taken off
effectively/ fully as of now. The PSBs will have to chart out a clear capital raising plan
over the next five years. The PSBs should actively consider several options including,
non-voting rights share capital, differential voting rights share capital, golden voting
rights share capital, etc.
Secondly, there is a need to reflect on the Holding Company Structure in respect of the
PSBs. The Nayak Committee recommendations in the matter look at the Bank Investment
Company Structure from the limited perspective / single angle of separating the GOI
investments from the PSBs. There are deeper ramifications on this aspect and the whole
issue must be looked at from multiple dimensions including that of the financial stability
perspective. The suggestions made in the Shyamala Gopinath Report on the Bank
Holding Company structure need to be given a serious consideration. The objective must
be threefold
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i) Help reduce capital requirement impact on the GOI
ii) Financial stability perspective, and
iii) Strengthening corporate governance by reducing government influence and
interference;
Thirdly, the Performance Appraisal System (PAS) needs a complete revamp. Currently
the PAS makes no meaningful distinction between individuals for identifying or
deploying talent, skills and / or specialization; nor does it guide determining
compensation. The system needs reshaping so as to serve as the mainstay for evaluating
employees’ performance, assessing compensation and developing leadership.
Fourthly, the Public Sector Banks (PSBs) have hardly any meaningful participation in the
financial markets, i.e in the BCD instruments. This restricts / curtails the financial market
development. A selected set of foreign banks and the new Private Sector Banks dominate
the financial markets in India. PSBs need to engage proactively, especially, in the
derivative instruments for hedging their risks. Treasury function is relatively weak in
PSBs. Well established and robust Treasury is a must for the purpose; they must build up
specialisation and should have sufficient number of specialists. The vigilance aspect on
treasury losses/ losses from transactions will need to be rationalised just as in other areas
of PSB operations.
Fifthly, the PSBs should have a relook on their portfolios. Currently, their portfolio share
in advances to agriculture, industries, services, retail and other services account for
13.90%, 46.32%, 20.93%, 15.74% and 3.11%. They will need to rebalance this, from the
perspective of diversification.
Sixthly, the Retail Banking in PSBs needs a complete overhaul in terms of products,
instruments and methods for deployment. As India is poised for re-entering high growth
period, and as greater number of individuals will have higher income and higher financial
needs, PSBs should be ready to meet these needs.
Seventhly, the PSBs should look at financial inclusion as a profitable business
proposition and not as a matter of compliance with the RBI and government
requirements. Extensive and smart use of ICT, mobile and internet banking as well as the
Aadhaar linkage for customer identification and authentication can make this truly
possible. Banks need to come out of the brick and mortar branch set-up mindset, and
reorient the business models in accordance with changing times and requirements as well
as improve profitability. We must not distrust the ability of the rural and/ or poor, small
and marginal businesses/ operators/ farmers to understand and use basic / simple
technology. The mobile and internet revolution in India has proved that already.
Eighthly, the PSBs should grab the opportunity offered to them during the Gyan Sangam,
the retreat for the PSB chiefs at Pune. Now that Government has clearly articulated that
the PSBs will take their own commercial decisions, the PSBs will have no excuse
hereafter for any poor performance.
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Ninethly, level playing field is on the cards. Already banking regulations and priority
sector norms are increasingly owner agnostic. Now government also desires that the
PSBs are professionally managed and operated. This augurs well for the PSBs. To
conclude, we can easily agree that the PSBs are at the cross road. They are now being
increasingly enabled to compete on professional basis. They are being assured of
autonomy for their commercial decision making. Given these changed environment, it is
time that they deliver value for the nation which provides its capital.
RBI POLICY RATES (25.01.2015)
Bank Rate
SLR
CRR
Repo
Reverse Repo
Marginal Standing
Facility Rate
8.75 %
22%
4%
7.75%
6.75%
8.75%
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