Public sector banks, like SBI, PNB, BoB and Canara Bank should review their exposure to non-core operations like insurance ventures to conserve capital and promote banking operations, feels the Finance Ministry
New Delhi: The Finance Ministry has asked public sector banks to review their exposure to non-core operations like insurance ventures to conserve capital and promote banking operations, reports PTI.
"We also want banks to look at their non-core area operation. Some of the banks have gone into non-core areas," a senior Finance Ministry official said.
"They (banks) should look at non-core area investment when big global banks are exiting from their non-core areas and conserving capital," he said.
Many banks, including State Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank, have many joint ventures in non-core business like life insurance, non-life insurance, mutual funds, etc.
This assumes significance as government is in the process of infusing Rs12,000 crore into about 12 public sector banks to enhance their capital base.
At the same, there is huge requirement of capital to meet Basel III, the global capital norms for banks. The global norms scheduled to kick in from 1st January this year has been deferred by another three month.
RBI, however, did not provide reasons behind the rescheduling.
RBI had issued guidelines on the implementation of Basel III capital regulation in India in May last year. These guidelines were to be implemented from 1 January 2013 in a phased manner and were to be fully implemented by March 2018.
As per the new global norms, banks will have to hold core capital of at least 7% of risk weighted assets by 2018.
Last year, RBI Governor D Subbarao had said Indian banks will require an additional capital of Rs 5 lakh crore to meet the new global banking norms, Basel III.
Of the total Rs5 lakh crore, equity capital will be Rs1.75 lakh crore, while Rs3.25 lakh crore will have to come as the non-equity portion.
The government, which owns 70% of the banking system, alone will have to pump in Rs 90,000 crore equity to retain its shareholding in the public sector banks at the current level to meet the norms.
Reserve Bank may release its final guidelines for new bank licenses by January-end or early next month
New Delhi/Mumbai: The Reserve Bank of India (RBI) is likely to issue final guidelines for grant of banking licences to new players within the next four-six weeks, while those interested in setting up new banks, including giants like Reliance, Religare and L&T groups, have begun doing the groundwork, reports PTI.
According to sources in Finance Ministry, the Reserve Bank may release its final guidelines for new bank licenses by January-end or early next month.
The Finance Ministry is currently in the process of sending its final comments to the RBI on the draft guidelines issued by the central bank on the matter, after which the final guidelines should be announced.
The RBI is already in the process of collating the comments received from various stakeholders on the draft guidelines.
RBI Deputy Governor Anand Sinha, who is incharge of the Department of Banking Operations and Development at the central bank, is scheduled to retire next month and RBI should finalise the norms before his retirement, sources said.
A number of large corporate houses, including Anil Ambani-led Reliance Group, financial conglomerates Religare and Shriram groups, engineering-to-technology major L&T group and Aditya Birla group, are said to be interested in entering the banking business depending on the regulatory framework.
Industry sources said that most of the banking aspirants have begun doing their groundwork and quite a few large corporate houses are confident of meeting the regulatory framework despite some voices being raised in certain quarters about concerns of possible conflict of interest in case of industrial houses being given banking permits.
Last week itself, noted economist and Nobel laureate Joseph Stiglitz said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests.
However, experts back in India dismiss the concerns and say that bank licenses should be given to those who can safeguard the interest of consumers and ensure liquidity, irrespective of them being a corporate house or anything else.
"Bank licence should be given to promoters with strong track record and credence irrespective of being a corporate house or an NBFC, as depositors interest is paramount. RBI has guidelines in place which is best across the globe and is testified by the fact that very few banks have failed in the country," said eminent Chartered Accountant S Ravi, who is on board of various public companies.
Noted economist and former Secretary General of apex industry body FICCI, Rajiv Kumar, also said a strong regulatory framework can take care of the conflict of interest issue.
"As long as there is high quality regulation, the apparent conflict between corporate interest and banking interest can be resolved and, I think, if corporates willing to get into banking sector can create a firewall between their corporate interest and financial interest it should be fine," he said. .
After delivering a lecture organised by the Reserve Bank of India in Mumbai last week, Stiglitz said the real problem in the financial sector were issues of conflict of interests.
"And when you have corporates opening their own banks, you are opening a venue for conflict of interests," he said.
SMC Capitals' Equity Head Jagannadham Thunuguntla said even the draft guidelines and discussion papers have enough safeguards.
"I believe RBI is one of the best regulator in the world. So in that sense corporates getting a licence is fine. Earlier Kotak had got banking license and they did well. So there is no problem with corporates getting into banking," he said.
Stiglitz also praised the RBI for doing a commendable job in its management of banking regulations and said the need of the hour is not over-regulation but right regulation.
He, however, said the argument of bringing 'economies of scale' by giving licences to corporates did not hold water as the "dangers of conflict of interest outweigh any economies of scale that it can bring up."
Drawing parallel between the debate in the western world regarding the conflict of interest with respect to separation of investment banking and pure banking operations, he said that a Chinese wall can not be created between the two.
Rajiv Kumar said the "criteria for eligibility should be a good track record and some minimum networth that they have and their some demonstrative ability to run a financial institution."
"So if they have done something in the insurance sector or the NBFC sector etc then they should be given a preference," he said.
In a major step to reform India's banking sector, the Lok Sabha last month passed the Banking Laws (Amendment) Bill, 2011, paving the way for establishment of new private banks among other measures.
The RBI had issued draft guidelines in August 2011 for issuance of new banking licences, while in July 2012 it released the comments and suggestions received by it. However, it wanted the government to amend the banking laws before starting the process towards issuance of new banking licences.
Among the major groups interested in seeking new banking licenses, Religare Enterprises' chief Shachindra Nath said, "It is important that new banks are brought in to contribute towards the overall financial inclusion and development agenda."
Nath said Religare was waiting for RBI to come out with its final guidelines post which it would evaluate how to align its banking business model with the regulatory intent.
Another banking aspirant L&T Finance's President and Wholetime Director N Sivaraman as also said that his company has a vision of being a comprehensive financial services provider and the banking license has a potential to enable it provide all products and services. .
"Currently we are a lender with some other services, but with deposits and other banking services, we shall get to interact with all customers on all grounds and would wait for the final guidelines of RBI," Sivaraman said.
Reliance group is another entity to have shown its interest in starting new banks ever since a proposal was floated about two years ago to issue new licences.
Addressing the shareholders of the group's financial services arm Reliance Capital in 2011, Anil Ambani had went on to say that the group's banking entity could be called 'Reliance Bank' depending on the regulatory framework.
Reliance Capital CEO Sam Ghosh also recently said the group is full-prepared from its side for banking foray and it has been working on this for quite some time.
Insurance policyholders trapped in toxic ULIP products are still paying the price for products approved by IRDA and then banned in September 2010. Where do the policyholders of these inherently flawed insurance products go after losing up to 100% of their investment? Is IRDA listening?
Anuj Sharma (name changed) wrote to Moneylife last year. He says, “I have been mis-sold a ULIP (unit linked insurance plan) for which I am paying a premium of Rs25 lakh a year to Metlife India Insurance through Axis bank. I was told I will get a 10% return on paying three premiums and withdrawing my Rs75 lakhs after three years. However, just before I paid my third premium, when I checked the value of the policy, it was only Rs21 lakh against Rs50 lakh that I had paid. I could not believe that the first premium was totally taken away as cost by the insurance company. The plan is called Met Growth and the fund option is 100% in debt. All communication with insurance company is with me on email, but the company has simply refused to refund me the money. IRDA (Insurance Regulatory and Development Authority) got back saying I need to file with the insurance ombudsman first, but the ombudsman replied saying that it will not take up the case.”
While Anuj has to blame himself for buying a product without understanding it, how can IRDA approve a product wherein the first year premium just vanishes in thin air? Met Growth ULIP eats 100% of the first year premium. The money comes back in terms of guaranteed loyalty additions (50% of first year premium at end of 10 years, 70% of the first year premium at end of 15 years). It means that you will get 120% of the first year premium by end of 15 years, if you have paid all the premiums and the policy is in-force. Anuj will have to pay Rs25 lakh every year for 15 years to ensure that his first year premium comes back to him!
IRDA came out with new ULIP regulations in September 2010. But, what about toxic old ULIP policies that are still in force and cleared by the regulator? Where do these people like Anuj Sharma go? Why are they paying for mistakes of the regulator approving such toxic products? If IRDA can have new regulations protecting the insured for getting back the funds of a discontinued policy after earning bank savings interest rate (4% p.a.) till the lock-in period of five years, why can’t it be made applicable to customers trapped in old ULIPs? Levying charges without proper justification is like a day-light robbery done by old ULIPs under the approval of IRDA.
Another Moneylife reader has written the following, “In January 2008, then bank manager of Centurian Bank of Punjab and a couple of Aviva reps deceitfully sold Aviva Life Saver Plus policy to one of my relative, who is a widow. She thought her money (Rs15 lakh) is being invested in a scheme where she will get a steady income of about Rs15k - 20k monthly to look after her two minor kids’ educational and other household expenses. She trusted the bank manager as she has been banking at the same location for a number of years. She was advised to sign the back page of the application and the rest formalities will be filled by them. She will start getting her investment return in a month or so.”
“Not aware of the application contents, the annual premiums and the administration charges for ULIP, she was shocked to know that her annual premiums are Rs15 lakh for the next 10 years (instead of only one year). In addition her investment is being depleted through various charges levied by Aviva as well as due to the market fluctuation. Needless to say that the bank manager and others are no longer with the bank and Aviva customer service is playing to its own tune.”
The problem is that in many old ULIPs, customers almost lost everything if they did not pay the three premiums. Aviva Life Saver Plus policy has surrender charge of 90% if only one premium was paid; 75% if only two premiums paid and 50% if only three premiums paid. The surrender charge goes to zero only when more than five premiums have been paid. Many old ULIPs had such customer unfriendly surrender charges.
What relief can IRDA bring to customers who lost almost their full investment due to toxic products and intermediaries fooling customers by trapping them with regular premium payment option to earn higher commission? Surely, some kind of negotiated settlement should be forced by IRDA onto insurance companies in these rare cases of extraordinary hardships faced by policyholders based on the quantum of money they lost just as “charges”.
In the third part of the article we will talk about how lapsed policies of Anuj Sharma and others significantly add to the insurance company’s profits.