Ever since banks were liberalised, they got into new lines of business, looking at their fully digitised European and other Western counterparts, and embraced universal banking. This is the genesis of banks selling third-party products like insurance, mutual funds (MFs), pension funds and the like. Another interesting dimension is the argument over lowest penetration of insurance in India and with banks’ entry, there is a claim that the penetration improved to around 4% from 1%-1.2% in 2000. This question still begs a satisfactory response: Have the customers of the banks benefited or have banks benefited?
In India, the process of bancassurance began in 2000. Insurance regulatory development authority of India (IRDAI) came up with regulation on registration of Indian insurance companies. Government of India also issued a notification specifying ‘insurance’ as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act, 1949. However, it was clarified that any bank intending to take up the business would have to take specific approval from Reserve Bank of India (RBI).
Insurance was one sector that attracted most public sector banks (PSBs) and leading private sector lenders like ICICI Bank, HDFC Bank, and Axis Bank. They even opened associated companies to do insurance business collaterally with banking.
IRDAI facilitated the intervention, but with a cap of Rs5 crore for banks to function as insurance brokers, imposed when P Chidambaram was the finance minister. This would mean that banks cannot legally insure assets worth more than Rs5 crore. Most banks floated bancassurance schemes. To get the best of both worlds, banks opened insurance arms as joint ventures.
What Is Bancassurance?
Bancassurance is a strategic alliance between an insurance company and a bank where the insurer will be able to leverage the bank’s infrastructure and data. A bank can use only two insurance companies for the purpose in order to provide all financial services under one roof and, in effect, it acts as a broker for the insurance company.
Banks have been able to source fee income and help integrate their product development and channel management. In the process, they share the customer’s database as if it is their right.
The initial reluctance of banks to sell insurance products was overcome with the bank staff at all levels, from the chairman down to the field staff, receiving commission for doing insurance business. Banks started monitoring third-party products like insurance, in particular, in their regular monthly reviews, giving precedence over the regular banking business of deposits, credit, recoveries.
Performance of staff and incentive system moved from banking to sale of third-party products. From sale of laddus in temples to sale of insurance and MFs, banks consider them as banking business!
All that they are looking at is how to compensate their credit risk inefficiency, resulting in huge NPAs, with anything that fetches those revenues. They may have alliances with institutions like Amazon or Flipkart for selling books to bran and creams to oils, if it adds to their profit book. This will be called another channel in banking.
No wonder that the non-performing assets (NPA) book of the banks keep growing and the life of National Asset Reconstruction Co Ltd (NARCL; euphemistically known as Bad Bank) will be sustainable.
Taxpayers’ money goes for guaranteeing these NARCL transfers, because banks would do less and less of responsible banking with proper due diligence. Banks engage more machines than men as they are more wedded to data than proper measurement of credit and market risk. Their operational risks are bound to increase with increased channel funding.
In the name of speed, accuracy is sacrificed and the quantum of cybercrimes and staff indulgence is on a phenomenal increase. Is this what we want from banking?
McKinsey, in an interview with prominent insurers post-pandemic in April 2021, epitomises the issues as follows: “For many banks in Europe and Latin America, insurance is now 'the need' to expand relationships with customers. Over the past few years, many bancassurance partnerships have successfully developed their positioning, reputations, and customer bases.
“Insurance fee income has gained relevance in light of a continued low-interest environment and, more recently, the outbreak of COVID-19, which heightened stress on credit products, such as consumer loans.”
Are Indian banks sailing in the same boat?
In this process of insurance joint ventures, the insurer lost his control over distribution. Licensed insurance brokers lost their business, although insurance companies, through a low-cost model, got insurance business. In the EY commissioned survey, 52% of insurance customers from banks stated their willingness to renew their policies. This was against a dismal 19% of insurance customers from non-bank channels, willing to renew. Also, with new tech and data access for the bancassurance channel, tracking the renewals is extremely easy.
With bancassurance, insurance is added to the banks’ product-mix, diversifying their customer portfolio, and increasing their penetration in the market. But the experience narrated by many micro and small enterprises, that were forced to engage with the banks for insurance business, have a different tale to tell.
One of my good friends, running a small industry, narrated his harrowing experience with the banks on insurance. Prior to 2000, he was in full knowledge of his insurance policy jointly held with his bank. He knew that his plant, machinery, stocks both in the bins and in process and his dispatches were insured under the policy. He had to give a standing instruction to debit the premium annually to his cash credit account.
During the past 15 years, he has been unaware of his insurance. When the floods spoiled his machines and stocks, he thought of laying a claim against the insurance he held with the bank.
Then he realised that the policy did not exist! He could not anger the bank, as his future depends on the loan enhancement he immediately required. Once the loan was disbursed and back into business, he forgot all about insurance. There are many like him today.
Another recent occurrence is of a Rs1,000 crore company originally engaged by a broker for insurance business. However, the company retracted as the financing PSB insisted on doing insurance business with the bank’s joint venture. The company did not choose to anger his lender for easily discernible reasons and its necessity to do frictionless business.
There was another instance of a leading private sector bank pressurising its borrower when the insurance policy lapsed through sheer neglect of the bank. The norm of Rs5 crore lost its sanctity since 15 years.
All this is not without the knowledge of IRDAI.
Government of India, through a number of schemes, promoted insurance, Jan Dhan Aadhar Mobile (JAM) accounts that issue an insurance policy to the depositor at a low premium of Rs12pa (per annum) (PM Jandhan Yojana), PM Suraksha Bima Yojana, Atal Bima Yojana (under Atal Pension Scheme), and Ayushman Bharat Health Insurance Scheme. All these are life insurance products.
There are schemes meant for farmers, from states and Union government. There are general insurance schemes covering a variety of assets like vehicles of different varieties, household articles against theft and damage, plant and machinery, insurance against natural disasters, health insurance with a variety of protections, etc.
The key persons responsible for penetration are brokers and agents governed by IRDAI's regulations and oversight. A new toolkit 5G, says Economic Times (ET) in a blog post, is likely to make insurance products more customer-friendly.
It is a different matter that the improved technologies also bring with them new threats of serious nature, endangering the very existence of the person who is supposed to experience the benefits of insurance penetration. IRDAI is also contemplating new thresholds of capital that may give rise to new firms to enlarge the scope of insurance.
Going by the bancassurance experience, the new low-capital-intensive firms will find it difficult to manage the procurement, protection, underwriting and claim settlement. It is this context that makes it imperative for IRDAI to facilitate the age-old system of brokers and agents as instruments of business growth under a transparent and accountable framework.
Government of India has some fundamental questions to answer while undertaking reforms to banking and insurance. Does it want customer service with due protection of the interests of customers or does it want digitisation at any cost? Responsible and high level stakeholder consultations are necessary.
(The author is founder Director of Telangana Industrial Health Clinic Ltd, and an economist with three decades of experience as banker. He is thankful to Ramya Bhavani for the statistical support.)