Last week, the finance minister came out in complete support to have banks set up broking arms to sell products from multiple insurance companies to put the onus on the banks to have properly trained personnel that can possibly reduce mis-selling. Will it really happen
The Insurance Regulatory and Development Authority (IRDA) revised exposure draft on bancassurance has done away with the confusing zonal tie-up, but has left door open for banks to remain as corporate agent or to go with broking route. It will bring cheer to bank-sponsored insurance companies as the zonal tie-up was intended to benefit insurance companies lacking bancassurance alliance. Industry feedback on the earlier exposure draft may have led to the newly proposed guidelines. Bank-backed insurance companies may have influenced IRDA to go back to the status quo.
The revised draft also gives banks option to avoid finance minister P Chidambaram’s diktat on broking license to sell products of multiple insurance companies. Bank-backed insurance companies like ICICI Pru Life, SBI Life, HDFC Life, IDBI Federal, Star Union Dai-ichi, Kotak Life and IndiaFirst will benefit as banks like SBI, HDFC, ICICI, IDBI, Bank of Baroda, etc, can continue the existing tie-ups across the country. It will leave less scope for insurance companies like Bharti AXA Life and General, Aegon Religare, Aviva, etc, to find banking partners for their selling products.
According to GV Nageswara Rao, MD & CEO, IDBI Federal Life, “The new draft guidelines give choices to the bank on how it would like to structure its bancassurance distribution and it is a welcome move. The earlier draft made it mandatory for a bank to tie-up with a minimum of two insurance companies, which has been dispensed with in the new draft. A bank can choose to work with only one insurer on pan-India basis, which is positive and in the interest of customers.”
Amitabh Chaudhry, MD & CEO, HDFC Life said, “Instead of mandating zonal restrictions, the new exposure draft gives the bank a choice of becoming a broker or staying as a corporate agent. As a broker, the bank has no limit on the number of tie-ups whereas as a corporate agent it can decide to stick to one insurer or choose to tie up with multiple insurers. Broadly, a bank would need to make a choice of investing in one strong symbiotic relationship or fragmented relationships across multiple insurers. What the regulator has done is provide different options to banks to choose based on their risk profile and their long-term strategy for fee-based income. This option didn't exist earlier and now it does. So, it is good for banks. How banks will exercise this option is difficult to answer at a generic level.”
The new change in the revised draft is as follows—“A bancassurance agent desirous of a tie up with more than one class of insurer shall be allowed to do so under these regulations to a maximum of 20 states/Union Territories and a minimum of 10 states/Union Territories.” The guidelines has retained the following—“One bancassurance agent should not tie up with more than one life, one non-life, one standalone health insurance company and one each specialised insurance company in any of the state or Union Territories.”
It means that banks can go with same life, non-life, standalone and specialised insurance company across the country. In case they want to open up with another insurance company from one sector, they have to do it in minimum 10 regions (states/Union Territories/major cities) and maximum 20 regions. The country is divided into 40 regions. In short, one bank can tie-up with one to four insurance companies from same sector. It gives the bank complete freedom to make decisions and hence nothing major will change than what is present today.
Mr Rao adds: “Whether a bank which has promoted an insurance company would tie up with more insurers is a choice for the bank to make, although normally you would not expect the bank to work with other insurers. The exception can be when the insurer is not present in certain geographies or in certain product segments. A broker license allows a bank to choose the best set of products from all insurers to offer to its customers. However, it is also more complex to operate and it would require sophistication on part of the bank to handle on its own training as well as operational processes.”
Mr Chaudhry says, “The key question to consider for any bank is will an additional tie-up increase the insurance penetration and bring in additional new business or will it merely mean splitting of the existing business between two insurers at additional costs of managing the relationships? Banks will have to weigh the option of providing the choice to the customer with the benefits of having their own promoted insurance company getting full access to their network.”
It will have to be seen if the FM’s talk about banks setting up broking arms gets anywhere. The Reserve Bank of India (RBI) is not in favour of allowing banks to set up broking arms as their performance will affect the balance sheet of the bank itself, which will not be in the interest of the depositors. Moneylife is of the opinion that making banks accountable has not been successful till now and going for an open architecture can further complicate the matter.
Standalone insurance companies are Max Bupa, Apollo Munich, Star Health and Religare. Specialized insurance companies are ECGC (Export Credit Guarantee Corporation), ESIC (Employees’ State Insurance Corporation) and AIC (Agriculture Insurance Company).
India is prepared to move to the T+1 settlement cycle as the country’s banks now offer online settlement for funds. It will substantially improve liquidity and remove the need for transactions like “Buy Today, Sell Tomorrow”
The stock market in India is one of the best in the world. This may come as a surprise to many. The reasons are obvious. India has rarely contributed to financial innovations in recent times. Also traditionally India has been one of the late starters in stock market and stock market continued to follow primitive practices till the time two major changes happened, which are: 1) starting of screen-based trading, and 2) dematerialization of securities.
We have often been accused of aping practices of the US and European securities market. Whatever be the fact, today India seems to have left behind some of the advanced economies in managing settlement cycle. If you do not believe it, you just need to look at the table below:
Source: CISI, London (India also has T+1 and T+0 settlement cycle for debt and Germany has T+ 2 for equity if both parties are German)
The table clearly shows that countries like USA, Australia, France and UK still continue to follow T+3 settlement cycle in stocks. These so-called advanced countries have not been able to move to T+2 settlement cycle as yet while a country like India with relatively less advanced banking system managed to move to T+2 settlement cycle in 2003. Benefits of shorter settlement cycle (SSC) have already been reaped by investors in India.
Longer settlement cycles have several negative aspects like higher capital required, increases in operational risks and liquidity issues, while it has some limited benefits as well. In order to overcome shortcoming of T+3 settlement cycles, The Depository Trust and Clearing Corporation (DTCC),USA, appointed Boston Consultancy Group (BCG) to study the cost benefit analysis of shortening of settlement cycle. BCG has submitted its report earlier this month to DTCC on the subject ( http://www.dtcc.com/downloads/leadership/whitepapers/BCG_2012.pdf). While India is already operating in T+2 settlement cycle, there are some interesting aspects in the study which can be used in India as well. Let us look at some of the interesting findings from the reports, which are as follows:
Shorter the settlement cycle, more the cost benefits
Analysis done by BCG shows that shorter the settlement cycle, more is the benefit in terms of costs and risk reduction. The summary of cost benefit analysis is as follows:
The data above shows that initial investments of $550 million will have to be done for moving to the T+2 settlement cycle, while $1770 million will be required to move to the T+1 settlement cycle. The costs are high but there is a substantial saving in annual recurring cost which can very well compensate the costs. The BCG study says, “T+2 would result in $170 million in annual operational savings and $25 million in annual return on reinvested capital from Clearing Fund reductions, whereas T+1 would result in $175 million in operational savings and $35 million in return on reinvested capital. The assumed cost of capital in the above numbers is 3.5% and assumes firms are investing the proceeds in Fed Funds. 3.5% was the average Fed Fund rate for the 10-year period prior to the 2008 financial crises. If these funds were invested in alternative ways to Fed Funds, that yielded a 5% or 10% return, annual returns would be $30 million and $60million for T+2, and $50 million and $100 million for T+1, respectively.” The study also shows that there is a substantial reduction in risk exposure on unguaranteed buy-side trades which is $200 million and $410 million. Since this is unique to US market, drawing a parallel in India won’t be fair.
The study has also calculated payback period of the investments. On payback period the report says, “The payback period range is still quite favorable for most segments, considering only operations cost savings for the T+2 model. The longest payback period is 5.2 years for the buy side and other constituent groups have comparatively short payback periods ranging from 2.1 to 2.6 years. The segment-level payback periods for the T+1 operating model have a somewhat higher range. Excluding the buy side, these payback periods range from three to 3.7 years, assuming adherence to a “trade date” environment. The buy side payback period is 10.9 years, but this is based on relatively low operations savings only and does not take into account the significant additional upside due to risk reduction, which would shorten the payback period for the buy side to less than one year for either operating model.”
Challenges in moving to shorter settlement cycle (SSC)
A shorter settlement cycle has its own challenges. BCG has identified some of such challenges in the US context and has list the following as main challenges:
These challenges are more or less the same in India. However, like in the past we should be able to smoothly overcome these challenges.
Lessons for India
The study has brought out the details of cost benefit analysis of a shorter settlement cycle in USA. Is there any lesson for India in this? Can we move to the T+1 settlement cycle now? India moved to T+2 settlement cycle in 2003. At that time it was thought that since banking system does not have RTGS (Real Time Gross Settlement) it would have been challenging to move to settlement cycle of T+1. But now things have changed significantly. Today banks have online settlement systems for funds. Money movement is very smooth and RTGS is working fine.
Moving to T+1 settlement will have many benefits for stock exchanges. It will substantially improve liquidity and remove the need for transactions like BTST (Buy today, sell tomorrow). Also mark to market margin requirement will get reduced. More than anything else, it will help bring more funds from outside to India. It is high to analyse cost benefit of moving to T+1 settlement cycle in India.