In the second of this two-part series, Naveena Israni traverses the hills of Sri Lanka and...
Private sector entities or groups owned and controlled by Indian promoters with diversified ownership, sound credentials and integrity, and having a successful track record of at least 10 years, would be eligible for opening new banks
The Reserve Bank of India (RBI) on Friday released guidelines for licensing new banks. Accordingly, private entities with sound credentials and a track record of 10 years of successful business would be eligible to get new bank licenses.
RBI said, there would a cap of 49% on foreign holding in new banks and it must have a minimum paid up capital of Rs500 crore. Entities or groups in private sector, public sector and non-banking financial companies (NBFCs) are eligible for obtaining a new bank licence, the central bank said.
Religare Enterprises, in a release said the new guidelines issues by the RBI are in line with its business.”We welcome the final guidelines from the RBI; Banking is a logical extension of Religare’s diverse India financial services platform and we will certainly apply for a license.
We are studying the guidelines and will take appropriate steps to apply for the license accordingly,” it said. Religare is one of the front runners to apply for a banking license from the RBI.
Here are the key features of the guidelines for a new banking licence...
(i) Eligible Promoters: Entities/groups in the private sector, entities in public sector and NBFCs shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).
(ii) “Fit and Proper” criteria: Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.
(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly-owned by the promoter/promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.
(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be Rs5 billion. The NOFHC shall initially hold a minimum of 40% of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15% within 12 years. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business.
(v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other guidelines/instructions issued by the RBI and other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.
(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first five years after which it will be as per the extant policy.
(vii) Corporate governance of NOFHC: At least 50% of the directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.
(viii) Prudential norms for the NOFHC: The prudential norms will be applied to the NOFHC both on a stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.
(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the promoter Group. The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC.
(x) Business plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
(xi) Other conditions for the bank:
(xii) Additional conditions for NBFCs promoting/converting into a bank: Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.
Third-party (TP) claims are undoubtedly a drain on insurance companies, primarily due to unlimited liability amounts, but should IRDA base the TP premium pricing on more than just engine cc? Your TP premium may be subsidising the commercial vehicles responsible for insurance companies’ losses
The Insurance Regulatory and Development Authority (IRDA) has proposed an increase of nearly 40% in third party (TP) motor insurance for private cars in its draft on revision of premium. If you drive a car that’s below 1000cc (Tata Nano and Maruti Alto, for example), your TP premium may increase by 85%, come April 2013. High increase in premium for entry-level cars may be because these cars are purchased by those who have just acquired their driving skills and the possibility of higher TP claims arising from them. Surprisingly, the hike will be only 1.4% for cars such as Hyundai Santro and Maruti Swift, whose engines are between 1000cc and 1500cc. For cars over 1500cc, including Fiat Punto and Ford Ikon, the hike will be of 43%.
According to Mukesh Kumar, Head-HR, marketing and strategy planning at HDFC ERGO, “The vehicles in the private car segment with engine capacity exceeding 1500cc are extensively used, usually for longer distances and, therefore, result in higher risk exposure. This leads to relatively high TP losses due to which the hike in premium is justified.”
For goods-carrying vehicles, there is a proposed decrease in TP premium for those not exceeding 12,000 kg. There is hike of 107% for those vehicles in the 12,000-20,000 kg range. Mukesh Kumar says, “The proposed hike is still inadequate for this class, judging from the loss experience. Vehicles with higher tonnage are used for longer distances, mostly inter-state. Therefore, the risk exposure is higher.”
According to Dr Amarnath Ananthanarayanan, CEO and MD, Bharti AXA General, “The TP business is long-tailed, with no upper limit on the claim amount and no limit for when the claim can be filed. This makes risk evaluation and therefore, pricing extremely complicated. Overall industry data may be able to throw light on whether the pricing is adequate to cover the risk. The rate increase is high, but necessary, given the unlimited claim amount for TP. We hope the Motor Vehicle Act is changed to limit the claim amount so that the industry can pass on lower TP premiums to customers.”
Own Damage premiums are based on numerous parameters like car model, location, fuel option, security system and even consider personal data like age, marital status and occupation. The question that one may have is whether engine cc is a good enough parameter to decide the TP premium? There may a need to look beyond the car engine cc to decide the TP premium.
For example, geographical area of a private car will have different TP claims experience. For commercial vehicles, there will be more TP claims for those with an all-India permit than those plying in specific areas. Vehicles used 24x7 may have more TP claims. There are specific car makes that may be registered as private vehicles, but are used for commercial purposes and hence have more TP claims. Is it true that going by engine cc is too simplistic?
According to Avadhoot Mavlankar, principal officer, Shinrai Insurance Broking Services, “Use of the vehicle and geographical area can help to underwrite the TP risk properly. Some of my clients’ loaders/excavators and goods-carrying vehicles are registered as public carriers, but ply only within a certain vicinity such as New Mumbai. There is hardly any TP claim. The black-yellow taxis and auto rickshaws have the lowest claim experience in the TP segment.” The proposed hike for auto rickshaw and taxi insurance is 11% and 13%, respectively.
According to an industry source, “Many TP claims from commercial vehicles arise from accidents with trucks and tempos with all-India permits. With such vehicles, the risk is higher than with commercial vehicles restricted to a city. The transportation lobby is strong and they are able to keep the TP premium low.”
Many insurance companies are keen to underwrite specific commercial vehicles that are “good risk” for their business. Third-party motor insurance is the only segment where the tariffs are set by IRDA. The Authority has made use of the data available with the Insurance Information Bureau for the experience period of the Underwriting Years (i.e. Policy Years) 2007-08 and 2008-09 in respect of number of policies, claims reported and amount of claims paid up to 31 March 2012.
The TP liability cover, which is mandatory in India, does not provide any benefit to the insured; however, it covers the insured’s legal liability for death/disability of third party loss or damage to third party property.
All stakeholders are invited to provide their comments on this draft proposal so as to reach the Authority, also by e-mail addressed to [email protected], on or before 1 March 2013.