NBFCs in Insurance Business

NBFCs can also participate in the insurance business as per the directions of the Reserve Bank. RBI has provided Guidelines to be followed by the NBFCs where they are willing to participate in the Insurance business.

The guidelines provide that NBFC registered with RBI, having Net Owned Fund (NoF) of rupees five crores as per the last audited balance sheet shall be permitted to undertake insurance business as an agent of insurance companies. Such business can be undertaken on a fee basis, and where no risk participation is involved.

In this article, the focus is directed on the RBI guidelines applicable to NBFC for participating in the insurance business.

How can NBFCs participate in the Insurance business?

NBFCs shall follow the following steps to participate in the Insurance business:

  • The NBFCs willing to indulge in the insurance business shall obtain prior approval of the RBI. 
  • After considering all the relevant factors RBI shall give permission to NBFCs on case to case basis.
  • The risks involved in the insurance business shall not get transferred to the NBFC. 

Can NBFCs permitted to set up a Joint Venture Company to start Insurance business?

The NBFCs must fulfill the following criteria to set up a joint venture for insurance business with risk participation:

Criteria for equity contribution:

  • The NBFC can hold a maximum of 50% of the paid-up capital of the insurance company in such a joint venture.
  • RBI may permit higher equity contribution in some selective cases

Other eligibility Criteria

  • The minimum Net worth should be Rs. 500 crores,
  • The minimum CRAR of NBFCs in loan and investment activities holding public deposits should be 15%, and for other NBFCs, it should be 12% whether they are holding public deposits or not.
  • NPA should not exceed 5% of total outstanding leased/hire purchase assets and advances,
  • NBFC must have a net profit for the previous three years (it must be three continuous previous years),
  • Subsidiaries performance (if any) must be satisfactory,
  • Regulatory compliance must be adhered to.

Can the NBFCs registered with RBI not eligible to set up Joint Ventures and invest in Insurance Companies?

Yes, such NBFCs can invest in the insurance company up to 10% of the owned fund of the NBFC or Rs.50 crores, whichever is lower.

Such NBFCs must fulfill the below criteria:

  • CRAR (for NBFC holding public deposits) must not exceed 12% where NBFC is indulged in equipment leasing/hire purchase finance activities. And where NBFC is indulged in loan or investment activity it must be 15%.
  • NPA must be 5% of total outstanding leased/hire purchase assets and advances;
  • NBFC must have a net profit for the previous three years (it must be three continuous previous years).

Such investment by NBFC in an insurance company must be without any contingent liability.

It is also pertinent to note that no NBFC can do such business departmentally. Also, no subsidiary of NBFC/company in the same NBFC group/ another NBFC engaged in the business of the non-banking financial institution or banking business is permitted to join the insurance company on a risk participation basis.

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