A Comprehensive Overview of NBFCs' Insurance Business Participation

NBFCs has an aid insurance business

It is common knowledge that the RBI has granted NBFCs freedom to diversify their operation into the insurance sector. NBFCs have been granted this authorization as a result of their long-term success in the Indian financial markets. NBFCs, on the other hand, have yet to be granted authority to function in their own right. Instead, they must conduct their operations in the insurance industry in accordance with the RBI's present criteria. The emergence of non-bank financial corporations (NBFCs) has aided insurance businesses in stabilizing their capital and meeting ancillary criteria under the IRDAI. In this article, we will discuss the role of non-bank financial companies (NBFCs) in India the insurance industry.

Prerequisites for NBFCs to Participate in the Insurance Business

NBFCs and other private lender businesses are not permitted to operate outside of the regulatory framework. However, in order to operate smoothly in the insurance market, NBFCs must seek approval from the RBI and the Insurance Regulatory and Development Authority of India (IRDAI).

The Insurance Agency Industry

RBI-approved NBFCs are permitted to enter the insurance agency business on the basis of a fee and risk participation agreement, which covers the following parameters:

  • The consent of the RBI is not necessary in this case.
  • In this instance, NBFCs must obtain IRDAI approval before acting as a "composite corporate agent" with insurance companies.
  • In the context of funded assets, NBFCs should not limit the customer's interest to cooperate with alternative agencies.
  • Because insurance product acceptance is voluntary, it should be indicated in the NBFC's promotional materials.
  • The provision of financial services by an NBFC should not be linked to the provision of other financial services by the NBFC.
  • Instead of going to the NBFC, the insurance premium should go to the insurance company.
  • NBFCs are not required to share risk with insurance companies.
  • Insurance is a type of protection

Insurance Joint Ventures

NBFCs that have completed all of the requirements and want to form a joint venture with an equity contribution based on risk participation must obtain RBI authorization in order to keep their operations going. Similarly, NBFCs seeking major participation in the insurance company are subject to the same conditions.

The NBFC has the authority to hold 50 percent of the insurance firm's paid-up capital (in the form of equity shares) in a Joint Venture.


A subsidiary branch of an NBFC or another company with a similar area of interest is not permitted to take a risk-based investment in an insurance firm.

Criteria for Eligibility

  • A minimum of Rs. 500 crore in Owned Fund must be held by an NBFC.
  • NBFCs that hold public deposits are prohibited from pursuing or entering the insurance sector unless their CRAR (Capital to Risk Assets Ratio) is more than 15%. Similarly, traditional NBFCs that do not hold public deposits should keep their CRAR over 12%.
  • Non-performing assets, such as leased/hire purchases and loans, are limited to no more than 5% of the total outstanding assets in the NBFC.
  • For the last three years, an NBFC should not have been affected by financial loss.
  • The subsidiaries of the NBFC in question must have a stellar track record of service delivery.
  • The calculation of NBFCs net owned funds looks for investments that fall under the Reserve Bank of India's guidelines.
  • If you hold public deposits, you'll be responsible for servicing them as well as regulatory compliance.

What if the NBFC does not match the eligibility requirements?

RBI-approved NBFCs that are not eligible to participate in joint ventures can invest 10% of their owned funds or Rs 50 in the insurance company, whichever is lower. The NBFC should take such funds as an investment with no risk of contingent liability.

Criteria for such an NBFC's eligibility

  • The CRAR of an NBFC that holds public deposits and provides services such as equipment leasing/hire purchase must be at least 12 percent.
  • The NBFC that deals with loan/credit services, on the other hand, should have a CRAR of 15%.
  • In such instances, the maximum net NPA should be 5% of total outstanding assets and loans.

Deposits are accepted

The regulations on Acceptance of Public Deposits for NBFCs allow for an exemption on the director's relative's deposit. However, unless a depositor submits an application, the funds cannot be sent directly to the NBFC. To preserve openness, NBFCs are required by law to reveal extensive details of each incoming deposit.

However, if the relationship between directors and depositors is proven to be tainted on the date of acceptance of such notice, the foregoing rule would be considered breached.

Other Insurance Company Provisions:

When the foreign partner accounts for 26% of the equity contribution allowed by the Foreign Investment Promotion Board/Regulatory and Development Authority, numerous NBFCs become eligible to participate in the equity of the insurance joint venture.

In this situation, the eligibility conditions will be assumed to have been broken if the participants are unable to afford the insurance risk. If a group of companies (similar to NBFC) seeks to buy an interest in an insurance company, each firm's contribution in the same group will be credited for a maximum of 50%, which will be allotted to NBFC in a joint venture.


The involvement of NBFCs in the insurance business has provided insurance companies with a plethora of new opportunities. NBFCs may be able to assist insurance businesses in operating more quickly and meeting their auxiliary needs. NBFCs and similar organizations seeking a quick start in the insurance sector, whether through an independent undertaking or a joint venture, must carefully observe RBI and IRDAI standards.

Shradha Shukla

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