NBFC Entry into Insurance Business
Nowadays, NBFC is playing an important role in the development of financial market by taking it into the consideration RBI has allowed the NBFC to enter into the business of insurance companies. In this NBFCs as per the norms of RBI helps the insurance companies to meet their capital deficiency and other requirements as per IRDAI which help them in performing their activities smoothly. Therefore before entering into Insurance Business NBFC has to take prior approval from the RBI and IRDAI.
But when registered NBFC take up insurance business on the fee basis and without risk participation then they need not require the RBI approval but has to take permission from IRDA and also has to follow their prescribed regulations for acting as a composite corporate agent with insurance companies. These NBFCs cannot force their customer in respect of assets financed to take any particular insurance company as it is wholly only voluntary decision of customer while participating in insurance products and it is also stated in all publicity material distributed by NBFC in a prominent way. The premium of the insured person should be directly paid to the insurance company no involvement of NBFC is required.
Whereas, the NBFCs has to take prior approval of RBI in the case when they want to set up insurance joint venture by participating on a risk basis in the equity capital of the company or at the time of making an investment in insurance companies. In Joint Venture Company the NBFC can hold up to 50% of the paid-up capital of the insurance company in the form of equity shares. Further a subsidiary company or company of the same group of NBFC or of another but engaged in the business of non-banking financial institution or banking are not allowed to participate in insurance company on a risk basis. The eligibility criteria for NBFC s a joint venture participant as per latest available audited balance sheet is that its owned fund should not be less than Rs. 500 crore and CRAR of public deposit NBFC should not be less than 15%and for other NBFC it should be 12%. Level of Non –performing assets should not be more than 5% of total outstanding leased/ hire purchase assets and advances taken together. It should be profit making company for last three continuous years as well as has sound and satisfactory track record of the performance of its subsidiaries. RBI compliances need to be compiled for such investment at the time of calculating net owned funds of NBFC. Regulatory compliance and servicing public deposits, if held.
In this case, if a foreign partner contributes 26% of the equity with the approval of IRDAI /FIPB then more than one NBFCs are allowed to participate in the equity of the insurance joint venture. In such participants who satisfy the eligibility criteria as required for becoming NBFC s a joint venture participant will also assume the risk.
In case of NBFC Registration with RBI which are not eligible to participate as joint venture can make an investment into insurance company up to 10% of the owned fund of the NBFC or Rs. 50 crore whichever is lower it should be treated as an investment and NBFC also has no contingent liability in this regard. Only those registered NBFCs can make investment which has profit for the last three continuous years, level of NPA should also be not more than 5% of total outstanding leased/ hire purchase assets and advances taken together and in case of CRAR NBFCs engaged equipment leasing/hire purchase finance activities should not be less than 12% whereas it should be 15 percent if engaged in a loan or investment company. In regard to acceptance of public deposits as per the provisions of NBFCs directions exempts the deposits from the relative of director from the purview of public deposits. From such depositors, NBFCs are taking separate application forms with suitable notice to their attention that these deposits will be treated as deposits from the director relatives. NBFCs are also under the burden of proving that these deposits are from the relatives of the director. As well as required there should be a material relation between the depositor and director as on the date of the acceptance of notice.
In case if there is more than one company whether doing financial activity or not in the same group of the NBFC want to take a stake in the insurance business, then the contribution by all companies in the same group shall be counted for the limit of 50 percent prescribed for the NBFC in an insurance Joint Venture.