CHAPTER 1

BANKING

INTRODUCTION
1.1 BANKING:Banking has become a part and parcel of our day-to-day life. Today, banks offer an
easy access to a common man. They carry out variety of functions apart from their main
functions of accepting deposits and lending. Banking is a service industry. Banks provide
financial services to the people, business and industries. Merchant banking, money transfer,
credit cards, ATM's are some of the important financial services provided by the modern banks.
Indian banking system, over the years has gone through various phrases after
establishment of RBI in 1935 according to RBI Act,1934 , during British rule, to function as
Central Bank of the country. Earlier Central Bank's functions were being looked after by the
Imperial Bank of India.
The development of 'Banking is evolutionary in nature. There is no single answer to
the question of what is Banking. Because a bank performs a multitude of functions and
services which cannot be comprehended into a single definition. For a common man, a bank is
1

a storehouse of money, for a businessman it is an institution of finance and for a worker it may
be a depository for his saving.
It may be explained in brief as "Banking is what a bank does". But it is not clear
enough to understand the subject in full The Oxford dictionary defines a bank as "an
establishment for the custody of money which it pays out on a customer's order'. But this
definition is also not enough, because it considers the deposit lending and redeveloped
functions only. The meaning of a bank can be understood only by its functions just as a tree is
known by its fruits, As any other subjects, it has its own origin, growth and development

Development of Banking in India:Banking in India is indeed as old as Himalayas, but the banking functions became an

effective force only after the first decades of 20th century. To understand of the history of
modem banking in India. One has to refer to the English "Agency Houses" established by the
East India Company, These Agency Houses, were basically trading firms and carrying on
banking business as part of their main business. Because of this dual functions and lack of
their own capital they failed and vanished from the scene during the third decade of
18th century.

 Meaning and Definition of banks:A bank is an institution which deals in money and credit. Thus, bank is an
intermediary which handles other people's money both for their advantage and to its own
profit. But banks are not merely a trader in money but also an important manufacturer of
money. In other words, a bank is a factory of credit.
According to 5(b) defines banking as "accepting for the purpose of lending or
investment of deposits of money from the public, repayable on demand or otherwise and
withdrawals by cheque, draft and order or otherwise". Section 5 (1) (c) defines banking
company as "Any company which transacts the business of banking in India".
The Oxford Dictionary defines a bank as "an establishment for the custody of
money, which it pays out on a customer's order".
Section 5(c) of Banking Regulation Act,1949 has been defined banking as, "One
which transacts the business of banking which means the accepting for the purpose of lending
or investment of deposits of money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise.
Banking activities:
A bank usually provides the following services:

Checking account

Cheque books

Savings account

Money market account

Certificate of deposit (CD)

Individual retirement account (IRA)

Credit card

Debit card

Mortgage

Mutual fund

Personal loan

Time deposit

2.3:- HISTORY OF BANK

It is interesting to trace the origin of the word Bank in the modern sense to the
German word "Banck" which means, heap or mound or joint stock fund. From this, the
Italian word "Banco" meaning heap of money was coined.
Some people have the opinion that the words "bank is derived from the French
words, "bancus" or "banque" which means a "bench". Initially the bankers, the Jews in
Lombardy, transacted their business on benches in the market place and bench resembled the
banking counter.

Elementary financial records are known from the beginning of

history, Baked clay records

were done before the invention of writing.

In the 17th century, merchants started storing their gold with goldsmiths in London.
The goldsmiths had their own vaults, and charged a fee for storing the merchant's gold. The
goldsmiths eventually started loaning money using the gold left to them, and also
paid interest on the gold.
The Bank of England began issuing banknotes in 1695. The oldest bank still in existence
is Monte dei Paschi di Siena in Siena, Italy, which started in 1472.

 Types of banks:-

The focus of banking is varied, the needs diverse and methods different. Thus, we need
distinctive kinds of banks to cater to the above-mentioned complexities. Deposit-taking
institutions take the form of commercial banks, which accept deposits and make commercial,
real estate, and other loans. There are also mutual savings banks, which accept deposits and
make mortgage and other types of loans. Another type is credit unions, which are cooperative
organizations that issue share certificates and make member (consumer) and other loans.
5

The banking industry can be divided into following sectors, based on the clientele served and
products and services offered:

Retail Banks:

Retail banks provide basic banking services to individual consumers. Examples include
savings banks, savings and loan associations, and recurring and fixed deposits. Products and
services include safe deposit boxes, checking and savings accounting, certificates of deposit
(CDs), mortgages, personal, consumer and car loans.

Commercial Banks:

Banking means accepting deposits of money from the public for the purpose of lending or
investment. Commercial Banks provide financial services to businesses, including credit and
debit cards, bank accounts, deposits and loans, and secured and unsecured loans. Due to
deregulation, commercial banks are also competing more with investment banks in money
market operations, bond underwriting, and financial advisory work. Commercial banks in
modern capitalist societies act as financial intermediaries, raising funds from depositors and
lending the same funds to borrowers. The depositors claims against the bank, their deposits,
are liquid, meaning banks are expected to redeem deposits on demand, instantly.
Banks claims against their borrowers are much less liquid, giving borrowers a much longer
span of time to repay money owed banks. Because a bank cannot immediately reclaim money
lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to
withdraw all their money.
There are two types of commercial banks, public sector and private sector banks.

Public Sector Banks:

Public sectors banks are those in which the government has a major stake and they usually
need to emphasize on social objectives than on profitability.

Private sector banks:

Private sector banks are owned, managed and controlled by private promoters and they are
free to operate as per market forces.

Investment Banks:

An investment bank is a financial institution that assists individuals, corporations and

governments in raising capital by underwriting and/or acting as the client's agent in the
issuance of securities. An investment bank may also assist companies involved in mergers
and acquisitions, and provide ancillary services such as market making, trading of
derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.
Investment banks aid companies in acquiring funds and they provide advice for a wide range
of transactions. These banks also offer financial consulting services to companies and give
advice on mergers and acquisitions and management of public assets.

Cooperative Banks:

Cooperative Banks are governed by the provisions of State Cooperative Societies Act and
meant essentially for providing cheap credit to their members. It is an important source of
rural credit i.e., agricultural financing in India.

Specialized Banks:

Specialized banks are foreign exchange banks, industrial banks, development banks, exportimport banks catering to specific needs of these unique activities. These banks provide
financial aid to industries, heavy turnkey projects and foreign trade.

Central Banks:

Central banks are bankers banks, and these banks trace their history from the Bank of
England. They guarantee stable monetary and financial policy from country to country and
play an important role in the economy of the country. Typical functions include implementing
monetary policy, managing foreign exchange and gold reserves, making decisions regarding
official interest rates, acting as banker to the government and other banks, and regulating and
supervising the banking industry.

These banks buy government debt, have a monopoly on the issuance of paper money, and
often act as a lender of last resort to commercial banks. The term bank nowadays refers to
these commercial banks. The Central bank of any country supervises controls and regulates
the activities of all the commercial banks of that country. It also acts as a government banker.
It controls and coordinates currency and credit policies of any country. The Reserve Bank of
India is the central bank of India.

1.2:-FEATURE OF BANKING

Dealing in money:
The banks accept deposits from the public and advancing them as loans to the needy
people. The deposits may be of different types current, fixed, savings, etc. accounts. The
deposits are accepted on various terms and conditions.

Deposits must be withdrawn able:

The deposits (other than fixed deposits) made by the public can be withdraw able by
cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually
withdrawn able on demand.

Deposits with credit:

The banks are the institutions that can create credit i.e., creation of additional money for
lending. Thus, "creation of credit' is the unique feature of banking.

Commercial in nature:
Since all the banking functions are carried on with the aim of making profit, it is regarded
as a commercial institution.

Nature of agent:
Besides the basic functions of accepting deposits and lending money as loans, banks
possess the character of an agent because of its various agency services.

Individual or companies:
Bank can be of any type it can be a company or firm or also an person which are
involved in the business of money. This is also how banks are defined.

Various branches:
An bank can also have multiple branches for the facility of there customers as every
person can not be able to go to the main branch of the an Bank so banks further grows
there own branches so that they can reach to each n every person.

Functions increasing:
BANKS always believe in developing of facilities for the customers so that they always
increase there functions for working like developing latest ATM machines for the
transactions of money and also net banking by which will be able to buy & sell any item
from the sitting in our comfort zone.

Business in banking:
BANKS do the business of money without any subsidiary business. There only
responsibility is to satisfy there customers. this is also how banks define as they do the
business of money interchanging from 1 hand to other.

Identification
Each bank has a unique name but having BANK name as common in all. which
identifies the banks existence. people deals with different banks having different names
but bank word in common in all of them.

Facility of advance:
BANKS ALSO LED/GAVE money to the people in a form of LOAN with minimum
amount of interest. people which are not able to full fill there requirements at an instance
of time which required a large amount of money at that time banks led money to them so
that they full fill there requiments and returns back in small installment which are known
as EMIs.

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INSURANCE
Introduction:

Insurance is a means of protection from financial loss. It is a form of risk

management primarily used to hedge against the risk of a contingent, uncertain loss.

Insurance is actually a contract between 2 parties whereby one party called insurer
undertakes in exchange for a fixed sum called premium to pay the other party
happening of a certain event. Insurance is a federal subject in India Life and general
insurance in India is still a nascent sector with huge potential for various global
players.

An entity which provides insurance is known as an insurer, insurance company, or

insurance carrier. A person or entity who buys insurance is known as an insured or
policyholder. The insurance transaction involves the insured assuming a guaranteed
and known relatively small loss in the form of payment to the insurer in exchange for
the insurer's promise to compensate the insured in the event of a covered loss. The
loss may or may not be financial, but it must be reducible to financial terms, and
must involve something in which the insured has an insurable interest established
by ownership, possession, or preexisting relationship. The insured receives
a contract, called the insurance policy, which details the conditions and
circumstances under which the insured will be financially compensated. The amount
of money charged by the insurer to the insured for the coverage set forth in the
insurance policy is called the premium. If the insured experiences a loss which is
potentially covered by the insurance policy, the insured submits a claim to the insurer
for processing by a claims adjuster.
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12

1.3:- HISTORY OF INSURANCE

History of insurance Insurance in India has its history dating back till 1818, when Oriental
Life Insurance Company was started Europeans in Kolkata cater needs of European
community.
The oldest existing insurance company in India is National Insurance Company Ltd, which
was founded in 1906 and is doing business even today.
Insurance industry, earlier comprised of only two state Insurer.
Life Insurance Corporation of India (LIC)
General Insurance Corporation of India (LIC)
In the recent years when the Govt. of India in 1999 opened up the insurance sector by
allowing private insurance companies to work in the market by depositing 100 crores rupees
in the reserve of government and allowing FDI up to 26%.
This has encouraged many overseas insurance companies, having a required amount in their
reserve, to open their branch in our country.
WHY INSURANCE ?

To provide security
Old age pensions
As an investment/ or saving mechanism
As a collateral for loans
For tax benefits

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2.4:- PRINCIPAL OF INSURANCE:1) Principal of utmost good faith

Both parties, insurer and insured should enter into contract in good faith
Insured should provide all the information that impacts the subject matter
Insurer should provide all the details regarding insurance contract
For example - John took a health insurance policy. At the time of taking policy,
he was a smoker and he didn't disclose this fact. He got cancer. Insurance
company won't pay anything as John didn't reveal the important facts.
2) Principal of insurable interest

Insured must have the insurable interest on the subject matter

In case of life insurance spouse and dependents have insurable interest in the life
of a person. Corporations also have insurable interests in the life of it's employees

In case of life or marine insurance, insured must be the owner both at the time of
entering of entering into the insurance contract and at the time of accident.

3) Principal of Indemnity

Insured can't make any profit from the insurance contract. Insurance contract is
meant for coverage of losses only

Indemnity means a guarantee to put the insured in the position as he was before
accident

This principle doesn't apply to life insurance contracts.

4) Principal of contribution
In case the insured took more than one insurance policy for same subject matter,
he/she can't make profit by making claim for same loss more than once.

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For example - Raj has a property worth Rs.5,00,000. He took insurance from
Company A worth Rs.3,00,000 and from Company B - Rs.1,00,000.In case of
accident, he incurred a loss of Rs.3,00,000 to the property. Raj can claim Rs.
Rs.3,00,000 from A but after that he can't make profit by making a claim from
Company B. Now Company A can make a claim from Company B to for
proportional loss claim value.

5) Principal of subrogation
After the insured gets the claim money, the insurer steps into the shoes of
insured. After making the payment insurance claim, the insurer becomes the

owner of subject matter.

For example :- Ram took a insurance policy for his Car. In an accident his car
totally damaged. Insurer paid the full policy value to insured. Now Ram can't sell
the scrap remained after the scrap.

6) Principal of Loss Minimisation

This principle states that the insured must take all the necessary steps to

minimize the losses to inured assets.

For example - Ram took insurance policy of his house. In an cylinder blast, his
house burnt. He should have called nearest fire station so that the loss could be

minimized.
7) Principal of causa proxima

Word "Cause Proxima" means "Nearest Cause"

An accident may be caused by more than one cause. In case property insured for
only one cause. In such case nearest cause of the accident is found out.

Insurer pays the claim money only if the nearest cause is insured.

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CHAPTER 2
BANCASSURANE

2:-BANCASSURANCE
2.1:-INTRODUCTION
What is bancassurance?***
Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products.
Official definition of Bancassurance: According to IRDA, Bancassurance refers to
banks acting as corporate agents for insurers to distribute insurance products. Insurance
Products include Life or Non-Life products
Bancassurance in India is defined as those banks which are dealing in
insurance products of both life and non-life type in any forms.
The term "bancassurance" was coined in the 1980"s in France. Bancassurance is
defined as the distribution of insurance products through banks. In addition to the branches of
banks, this medium of distribution also includes new distribution systems. Such as electric
banking operation, ATM's etc. Although the term bancassurance may also be used for
distribution of banking products through insurance companies, this is sometimes termed
"assurbanking" in some countries. Bancassurance has been most successful in Europe, mainly
due to the regulatory and tax environment.
In France alone, banks conduct more than 60% of the insurance business. In the rest
of Europe, business through bancassurance amounts to 45% of the total insurance business

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while, in the US where bancassurance began only a decade back, it amounts 5% of the total
insurance transactions.
Both insurers as well as bankers view the cross selling relationship involved in
bancassurance as part of a long term strategy. Accordingly, they are adapting themselves
organizationally. So, as achieve the long term bancassurance goals in the best possible
manner. In some countries, banks have either acquired or set up their own insurance product
manufacturing capacity. In some cases, insurance companies have acquired smaller banks.
Bancassurance in its simplest form is the distribution of insurance products through a
banks distribution channels. It is the provision of insurance and services through a common
distribution channel or through a common base.
Banks with their geographical spreading penetration in terms of customer reach of all
segments, have emerged as viable sources for the distribution of insurance products, It takes
various forms in various countries depending upon the demography and economic and
legislative climate of that country. This concept gained importance in the growing global
insurance industry and its search for new channels of distribution.

Birth of Bancassurance in India:

As per March 2008, the number of Insurance companies in India,
Life Insurance Companies
Non- life Insurance Companies

15 Private Insurance Companies

1 Public Insurance Company (LIC)
9 Private Insurance Companies
4 Public Insurance Company

As regarding the present size of the insurance market in India, it is stated that India accounts
not even one per cent of the global insurance market. However, studies have pointed out that
Indias insurance market is expected to grow rapidly in the next 10 years. Insurance industry
in India for fairly a longer period relied heavily on traditional agency (individual agents)
distribution network, Therefore, the zeal for discovering new channels of distribution and the
aggressive marketing strategies were totally absent and to an extent it was not felt necessary.

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As the insurance sector is poised for a rapid growth, in terms of business as well as
number of new entrants tough competition has become inevitable. Consequently, addition of
new and number of distribution channels would become necessary.
Origin:The banks taking over insurance is particularly well-documented with reference to the
experience in Europe. Across Europe in countries like Spain and UK, banks started the
process of selling life insurance decades ago and customers found the concept appealing for
various reasons. Germany took the lead and it was called ALLFINANZ. The system of
bancassurance was well received in Europe. France taking the lead, followed by Germany,
UK, Spain etc. In USA the practice was late to start (in 90s). It is also developing in Canada,
Mexico, and Australia. In India, the concept of Bancassurance is very new. With the
liberalization and deregulation of the insurance industry, bancassurance evolved in India
around 2002.
Definition:Bancassurance in its simplest form is the distribution of insurance products through
the banks distribution channels. In concrete terms, bancassurance which is known as All
finance constitutes a package of financial services that can fulfill both banking and insurance
needs, at the same time. The motives behind bancassurance also vary. For banks, it is the
means of product diversification and source of additional fee income while Insurance
companies see it, as a tool for increasing their market penetration and premium turnover. The
customer sees bancassurance as a bonanza in terms of reduced price, high- quality product
and delivery at the doorsteps.
Objectives:Banking and insurance have more commonality in the basic nature of their business.
Banking and insurance relay on pulling on resources to protect financial security (Banking)
or to protect against adverse events (Insurance), Banking and Insurance are often
complimentary, as it the case of mortgages, that require both finance and property insurance.
In Insurance, the initial expenses because of distribution costs are high and regulatory
disclosure requirements are applying additional pressure, on the insurers to reduce the costs.
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Distribution expenses being a major of initial expense, insurers are focused to think on
alternate channels of distribution and banks have a lot of common practices to integrate to
achieve economies of scale

2.2:- REALTION BETWEEN BANK & INSURANCE COMPANIES

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Banks and insurance companies are both financial financial institutions, but they dont have
as much in common as you might think. Although they do have some similarities, their
operations are based on different models that lead to some notable contrasts between them.
While banks are subject to federal and state oversight, and have come under greater scrutiny
since the 2007 financial crisis that led to the Dodd-Frank Act, insurance companies are
subject only to state-level regulation. Various parties have called for greater federal regulation
of insurance companies, particularly considering that American International Group,
Inc., (AIG) an insurance company, played a major role in the crisis.

Both Are Financial Intermediaries

One similarity between banks and insurance companies is that they are both financial

intermediaries. A bank takes your deposits and pays you interest for their use, and then turns
around and lends out the money to borrowers who typically pay for it a higher interest rate.
Thus, the bank makes money on the difference between the interest rate it pays you and the
interest rate that it charges those who borrow money from it. It effectively acts as a financial
intermediary between savers who deposit their money with the bank and investors who need
this money.
An insurance company, on the other hand, insures its customers against certain risks, such as
the risk of having a car accident, or the risk that a house catches on fire. In return for this
insurance, their customers pay them regular insurance premiums. Insurance companies
manage these premiums by making suitable investments, thereby also functioning as financial
intermediaries between customers and the channels that receive their money. For instance,
insurance companies may channel the money into investments such as commercial real
estate and bonds.

Subject to Interest Rate Risk

Changes in interest rates affect all sorts of financial institutions. Banks and

insurance companies are no exceptions. Considering that a bank pays its depositors an
interest rate that is competitive, it might have to hike up its rates if economic
conditions warrant. Generally, this risk is mitigated since the bank can also charge a higher

20

interest rate on its loans. And changes in interest rates could also adversely impact the value
of a banks investments.
Insurance

companies

are

also

subject

to interest

rate

risk.

Since

they

invest

their premium monies in various investments, such as bonds and real estate, they could see a
decline in the value of their investments when interest rates go up. And during times of low
interest rates, they face the risk of not getting a sufficient return from their investments to pay
their policy holders when claims come due

Banks Face an Asset-Liability Mismatch

Banks accept short-term deposits and make long-term loans. This means that

there is a mismatch between their liabilities and their assets. In case a large number of their
depositors want their money back, for example in a bank run scenario, they might have to
come up with the money in a hurry.
For an insurance company, however, its liabilities are based on certain insured events
happening. Their customers can get a payout if the event they are insured against, such as
their house burning down, does happen. They dont have a claim on the insurance company
otherwise. Insurance companies tend to invest the premium money they receive for the longterm so that they are in a position to meet their liabilities as they arise. While it is possible to
cash in certain insurance policies prematurely, this is done based on an individuals needs. It
is unlikely that a very large number of people will want their money at the same time, as
happens in the case of a run on the bank. This means that insurance companies are in a better
position to manage their risk.

Systemic Interconnection
Another difference between banks and insurance companies is in the nature of

their systemic ties. Banks operate as part of a wider banking system and have access to a
centralized payment and clearing organization that ties them together. This means that it is
possible for systemic contagion to spread from one bank to another because of this sort of
interconnection. U.S. banks also have access to a central bank system, through the Federal
Reserve, and its facilities and support.

21

Insurance companies, however, are not part of a centralized clearing and payment system.
This means that they are not as susceptible to systemic contagion as are banks. However, they
dont have any lender of last resort, in the sort of role that the Federal Reserve serves for the
banking system.

Banks Create Money

Banks use the monies that their customers deposit to make a larger base of

loans and thereby create money. Since their depositors demand only a portion of their
deposits every day, banks keep only a portion of these deposits in reserve and lend out the
rest of their deposits to others.
Insurance companies invest and manage the monies they receive from their customers for
their own benefit. Their enterprise does not create money in the financial system.

Regulatory Authority
In the United States, banks and insurance companies are subject to different

regulatory authorities. National banks and their subsidiaries are regulated by the Office of the
Comptroller of the Currency, or the OCC. In the case of state-chartered banks, they are
regulated by the Federal Reserve Board for banks that are members of the Federal Reserve
system. As for other state-chartered banks, they fall under the purview of the Federal Deposit
Insurance Corporation, which insures them. Various state banking regulators also supervise
the state banks.
Insurance companies, however, are not subject to a federal regulatory authority. Instead, they
fall under the purview of various state guaranty associations in the 50 states. In case an
insurance company fails, the state guaranty company collects money from other insurance
companies in the state to pay the failed companys policy holders.

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The Bottom Line

Banks and insurance companies are both financial institutions, but they have

different business models and face different risks. While both are subject to interest rate risk,
banks have more of a systemic linkage and are more susceptible to runs by depositors. While
insurance companies liabilities are more long term, and they dont tend to face the risk of a
run on their funds, they have been taking on more risk in recent years, for example by
expanding into products such as annuities, leading to calls for greater regulation of insurance
companies.

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2.3:-Ways of entering into bancassurance :

There is no single way of entering into bancassurance which is best for every insurer and
every bank. As in all business situations, a proper strategic plan drafted according to the
companys internal and external environmental analysis and the objectives of the organization
is necessary before any decision is taken.
There are many ways of entering into bancassurance. The main scenarios are the following:

One partys distribution channels gain access to the client base of the other
party. This is the simplest form of bancassurance, but can be a missed opportunity. If
the two parties do not work together to make the most of the deal, Then there will be at
best only minimum results and low protability for both parties.
If, however, the bank and the insurance company enter into a distribution agreement,
according to which the bank automatically passes on to a friendly insurance company all
warm leads emanating from the banks client base, this can generate very protable
income for both partners. The insurance company sales force, in particular usually only
the most competent members of the sales force, sells its normal products to the banks
clients. The cooperation has to be close to have a chance of success. For the bank the

costs involved besides those for basic training of branch employees are relatively low.
A bank signs a distribution agreement with an insurance company, under which the bank
will act as their appointed representative. With proper implementation this arrangement
can lead to satisfactory results for both partners, while the nancial investment required

by the bank is relatively low. The products offered by the bank can be branded.
A bank and an insurance company agree to have cross shareholdings between them. A
member from each company might join the board of directors of the other company. The
amount of interest aroused at board level and senior management level in each
organization can inuence substantially the success of a bancassurance venture, especially

under distribution agreements using multi distribution channels.

A joint venture: this is the creation of a new insurance company by an existing bank and

an existing insurance company.

A bank wholly or partially acquires an insurance company. This is a major undertaking.
The bank must carefully dene in detail the ideal prole of the targeted insurance
company and make sure that the added benet it seeks will materialize.

24

A bank starts from scratch by establishing a new insurance company wholly owned by the
bank. For a bank to create an insurance subsidiary from scratch is a major undertaking as
it involves a whole range of knowledge and skills which will need to be acquired. This

approach can however be very protable for the bank, if it makes underwriting prots.
A group owns a bank and an insurance company which agree to cooperate in a
bancassurance venture. A key ingredient of the success of the bancassurance operation
here is that the group management demonstrate strong commitment to achieving the

benet.
The acquisition (establishment) of a bank that is wholly or partially owned by an
insurance company is also possible. In this case the main objective is usually to open the
way for the insurance company to use the banks retail banking branches and gain access
to valuable client information as well as to corporate clients, allowing the insurance
company to tap into the lucrative market for company pension plans. Finally, it offers the
insurance companys sales force bank product diversication (and vice versa). This form
is used in many cases as a strategy by insurance companies in their effort not to lose their
market share to bancassurers.
The best way of entering bancassurance depends on the strengths and weaknesses of the
organization and on the availability of a suitable partner if the organization decides to
involve a partner. Whatever the form of ownership, a very important factor for the success
of a bancassurance venture is the inuence that one partys management has on that of the
other. An empowered liaison between respective managements, with regular senior
management contacts, as well as sufficient authority to take operational and marketing
decisions, is vital. Regular senior management meetings are also a vital element for a
successful operation. There must be a strong commitment from the top management to
achieving the aims in the business plan.

2.4:-MAJOR NEED IN THE SUCCESS OF BANCASSURANCE

There are several reasons why banks should seriously consider Bancassurance, the most
important of which is increased return on assets (ROA).One of the best ways to increase
25

ROA ,assuming a constant asset base, is through fee income

can cover more of their

operating expenses, and one way to build fee income is through the sale of insurance
products. Banks those effectively cross-sell financial products can leverage their distribution
and processing capabilities for profitable operating expense ratios.
By leveraging their strengths and finding ways to overcome their weaknesses, banks could
change the face of insurance distribution. Sale of personal line insurance products through
banks meets an important set of consumer needs. Most large retail banks engender a great
deal of trust in broad segments of consumers, which they can leverage in selling then them
personal line insurance products, In addition, a banks branch network allows the face to face
contact that is so important in the Sale of personal insurance.
Another advantage banks have over traditional insurance distributors is the lower cost per
sales lead made possible by their sizable, loyal customer base.
Banks also enjoy significant brand awareness within their geographic regions, again
providing for a lower per-lead cost when advertising through print, radio and\or television.
Bank that make thee most of these advantages are able to penetrate their customer base and
markets for above-average market share.
Other bank strengths are their marketing and processing capabilities. Banks have extensive
experience in marketing to both existing customers (for retention and cross selling) and noncustomers (for acquisition and awareness). They also have access to multiple
communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc.
Banks proficiency in using technology has resulted in improvements in transaction
processing and customer service.
By

successfully

mining

their customer database, leveraging their reputation and

distribution systems (branch, phone, and mail) to make appointments, and utilizing sales
techniques and products tailored to the middle market, European banks have more than
doubled the conversion rates of insurance leads into sales and have increased sales
productivity to a ratio which is more than enough to make Bancassurance a highly profitable
proposition.

2.5:-BANK AND INSURANCE CO.TIE-UP UNDER BANCASSURANCE

1) Life Insurance Corporation of India with:26

Corporation Bank, Indian Overseas Bank, Centurion Bank, Satara District

Central Cooperative Bank, Janata Urban Co operative Bank, Yeotmal Manila Sahkari Bank,
Vijaya Bank, Oriental Bank of Commerce.
2) Birla Sum Life Insurance Co Ltd With:
The Bank of Rajasthan,

Andhra Bank, Bank of Muscat, Development

Credit Bank, Deutsche Bank and Catholic Syrian Bank.

3) Dabur CGU Life Insurance Company Private Ltd:Canara Bank Lashmi Vilas Bank, American Express Bank, and ABN Amro
Bank.
4) HDFC standard Life Insurance Co. Ltd. With:Union Bank of India.
5) ICICI Prudential Life Insurance Co Ltd. With:Lord Krishna Bank, ICICI Bank, Bank of India, Citibank, Allahabad Bank,
Federal Bank, South Indian Bank, and Punjab and Maharashtra Co-operative Bank.
6) Met Life India Co. Ltd. With:Karnataka Bank, The Dhanalakshmi Bank and Jammu & Kashmir Bank.
7) SBI Insurance Co. Ltd. With:State Bank of India and Associate Banks.
8) Bajaj Allianz General Insurance with:Krur Vysya Bank and Lord Krishna Bank
9) National Insurance Co Ltd With:City Union Bank,
10) Royal Sundaram General Insurance Company with:Standard Chartered Bank, ABN Amro Bank, Citibank Amex and Repco Bank.

27

11)United India insurance Co. Ltd. With:South Indian Bank.

2.6:-MODEL OF BANCASSURANCE

28

RPBJCBSSM
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BPOEAA
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SRB
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I.

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structural Classification:

Referral Model:
Banks intending not to take risk could adopt referral model wherein they merely
part with their client data base for business lead for commission. The actual
transaction with the prospective client in referral model is done by the staff of the
insurance company either at the premise of the bank or elsewhere. Referral model is
nothing but a simple arrangement, wherein the bank, while controlling access to the
clients data base, parts with only the business leads to the agents/ sales staff insurance
company for a referral fee or commission for every business lead that was passed on.
In fact a number of banks in India have already resorted to this strategy to begin with.
This model would be suitable for almost all types of banks including the RRBs
/cooperative banks and even cooperative societies both in rural and urban. There is
greater scope in the medium term for this model. For, banks to begin with resorts to
this model and then move on to the other models.

Corporate Agency
29

The other form of non-risk participatory distribution channel is that of corporate

agency, wherein the bank staff is trained to appraise and sell the products to the
customers. Here the bank as an institution acts as corporate agent for the insurance
products for a fee/ commission. This seems to be more viable and appropriate
for most of the mid-sized banks in India as also the rate of commission would be
relatively higher than the referral arrangement. This, 144 RESERVE BANK OF
INDIA OCCASIONAL PAPERS however, is prone to reputational risk of the
marketing bank.
There are also practical difficulties in the form of professional knowledge about the
insurance

products.

Besides,

resistance

from

staff

to handle

totally

new

service/product could not be ruled out. This could, however, be overcome by intensive
training to chosen staff packaged with proper incentives in the banks coupled with
selling of simple insurance products in the initial stage. This model is best suited for
majority of banks including some major urban cooperative banks because neither
there is sharing of risk nor does it require huge investment in the form of
infrastructure and yet could be a good source of income.
Bajaj Allianz stated to have established a growth of 325 per cent during
April September 2004, mainly due to bancassurance strategy and around 40% of its
new premiums business (Economic Times, October 8, 2004). Interestingly, even in a
developed country like US, banks stated to have preferred to focus on the distribution
channel akin to corporate agency rather than underwriting business. Several major US
banks including WellsFargo, Wachovia and BB &T built a large distribution network
by acquiring insurance brokerage business. This model of bancassurance worked well
in the US, because consumers generally prefer to purchase policies through broker
banks that offer a wide range of products from competing insurers (Sigma, 2006).

Insurance as Fully Integrated Financial Service/ Joint ventures:

Apart from the above two, the fully integrated financial service involves
much more comprehensive and intricate relationship between insurer and bank, where
the bank functions as fully universal in its operation and selling of insurance products
is just one more function within. Where banks will have a counter within sell/market
the insurance products as an internal part of its rest of the activities. This includes
banks having a wholly owned insurance subsidiary

30

With or without foreign participation. In Indian case, ICICI bank and HDFC banks in
private sector and State Bank of India in the public sector, have already taken a lead in
resorting to this type of bancassurance model and have acquired sizeable share in the
insurance market, also made a big stride within a short span of time.
II. Product-based Classification

Stand-alone Insurance Product:

In this case bancassurance involves marketing of the insurance products through
either referral arrangement or corporate agency without mixing the insurance products
with any of the banks own products/ services. Insurance is sold as one more item in
the menu of products offered to the banks customer, however, the products of banks
and insurance will have their respective brands too, e.g., Karur Vysya Bank Ltd
selling of life insurance products of Birla Sun Insurance or non-life insurance
products of Bajaj Allianz General Insurance company.

Blend of Insurance with Bank Product:

With the financial integration both within the country and globally, insurance is
increasingly being viewed not just as a stand alone product but as an important item
on a menu of financial products that helps consumers to blend and create a portfolio
of financial assets, manage their financial risks and plan for their financial security
and well being (Olson 2004). This strategy aims at blending of insurance products as
a value addition while promoting its own products. Thus, banks could sell the
insurance products without any additional efforts. In most times, giving insurance
cover at a nominal premium/ fee or sometimes without explicit premium does act as
an added attraction to sell the banks own products, e.g., credit card, housing loans,
education loans, etc. Many banks in India, in recent years, has been aggressively
marketing credit and debit card business, whereas the cardholders get the insurance
cover for a nominal fee or (implicitly included in the annual fee) free from explicit
charges/ premium. Similarly the home loans / vehicle loans, etc., have also been
packaged with the insurance cover as an additional incentive.

III) Banks Referrals

31

There is also another method called 'Bank Referral'. Here the banks do not issue the
policies; they only give the database to the insurance companies. The companies issue the
policies and pay the commission to them. That is called referral basis. In this method also
there is a win-win situation everywhere as the banks get commission, the insurance
companies get databases of the customers and the customers get the benefit
As already discussed, warm leads can provide a strong competitive advantage for a
bancassurance operation. An efficient system for managing referrals of warm leads is
therefore vital. This section describes a process for managing referrals.

CHAPTER 3
32

BENEFITS OF BANCASSURANCE

CU S TO M ER

IN S U RA N C E

BA NC AS SU RA NC E

BA N K

Benefits of Bancassurance
The company is targeting around 10%of the business during its startup phase.
Bancassurance makes use of various distribution channels like salaried agents, bank
employees, brokerage firms. Direct response, Interest etc. Insurance Companies have
complementary strengths. In their natural and traditional roles Bancassurance if of great
benefit to the customer. It leads to the creation of one- stop where a customer can apply for
mortgages, pensions, savings and insurance products. The customer gains from both sides as
costs get reduced. Bancassurance for the customer is abonanza in terms of reducing charges,
a high quality product and delivery at the doorstep.
Both insurance companies and banks have certain competitive advantages.

3.1:-To Banks From

33

The banks point of view:

By selling the insurance product by their own channel, the banker can increase their

income .
Banks have face-to-face contract with their customers. They can directly ask them to

take a policy. And the banks need not to go any where for customers.
The Bankers have extensive experience in marketing. They can easily attract
customers & non-customers because the customer & non-customers also bank on

banks.
Banks are using different value added services life E-Banking, telebanking, direct
mail & so on. they can also use all the above- mentioned facility for Bankassurance

purpose with customers & non- customers.

Productivity of the employees increases. 207.
By providing customers with both the services under one roof, they can improve

overall customer satisfaction resulting in higher customer retention levels.

Increase in return on assets by building fee income through the sale of insurance

products.
Can leverage on face-to-face contacts and awareness about the financial conditions of
customers to sell insurance products.
Banks can cross sell insurance products E.g.: Term insurance products with loans.

3.2:-To Insurers From

The Insurer Point of view:

The Insurance Company can increase their business through the banking distribution

channels because the banks have so many customers.

By cutting cost Insurers can serve better to customers in terms lower premium rate

and better risk coverage through product diversification.

Insurers can exploit the banks' wide network of branches for distribution of products.
The penetration of banks' branches into the rural areas can be utilized to sell products

in those areas.
Customer database like customer standing, spending habits, investment and purchase

capability can be used to customize products and sell accordingly. 208

Since banks have already established relationship with customers, conversion ratio of

leads to sales is likely to be high. Further service aspect can also be tackled easily.
The insurance companies can also get access to ATMs and other technology being
used by the banks.
34

The selling can be structured properly by selling insurance products through banks
The product can be customized as per the needs of the customers.

3.3:-To Customers From

The customers' point of view:

Product innovation and distribution activities are directed towards the satisfaction of

needs of the customer.

Bancassurance model assists customers in terms of reduction price, diversified

product quality in time and at their doorstep service by banks.

Comprehensive financial advisory services under one roof. i.e., insurance services

along with other financial services such as banking, mutual funds, personal loans etc.
Easy access for claims, as banks are a regular visiting place for customers.
Innovative and better product ranges and products designed as per the needs of

customers. 209
Any new insurance product routed through the bancassurance Channel would be well

received by customers.
Customers could also get a share in the cost savings in the form of reduced premium
rate because of economies of scope, besides getting better financial counseling at
single point.

3.5:-OBSTSCLES IN THE SUCCESS OF BANCASSURANCE

Banking and insurance have strong similarities that might have contributed to their
rapprochement, LIC and other insurance companies have developed a range of products, that
have direct conflict with traditional bank offering or products.
New companies in Life Insurance sector would be looking for cost effective
channels for distribution which provide long reach. Because of the existing extensive
35

obviously emerged as the preferred low cost distribution channel. This would also give the
hold to, insurance companies in the rural areas, thus providing an opportunity to tab the
virgin market.
Banks have large client base and cross selling surely provides with an opportunity
for optimum utilization of their existing customer relationship thus effectively creating a winwin situation company and the operational difficulties at ground level have to be managed
and one of the suggested ways is to re- structure the bank compensation structure on the lines
of insurance companies.
Last but not the least, the issue of consumer protection will have to be suitably
addressed by Regulators and consumers themselves. Consumers though have consumer
Protection Act to inhibit banks and insurance companies to show monopolistic properties or
use them as an arm twisting techniques. Though all said and done, Regulators both IRDA and
RBI should jointly formulate a policy and process not to avoid the conflict of interest.

Measures to Improve Bancassurance in India:

Factors that are critical for success include strategies consistent with Banks vision,
knowledge of target customer's defined sales process for introducing insurance
services, simplest yet complete product offerings, strong service delivery mechanism,
quality administration, synchronized planning, all business lines and subsidiaries,
complete integration of insurance with other business products and services,
expensive and high-quality training of sales personnel.
36

Another critical point to be tackled is customer service(CRM). Bank should

implement Customer Relationship Management(CRM) strategies to handle the
customers tactfully.

Bank should act as financial adviser to the customers in the portfolio decisions and
also assist them in early claim settlement.

Bank and insurance company should work jointly towards a model global retail
financial institution offering a wide array of products which leads to creation of onestop shop for mortgages, pensions, and insurance products.

3.6:-NEED FOR BANK EMPOYEE TRAINING

Employee training is an important factor in each and every industry, as it helps the workers to
stay aligned with the organizational goals. It also serves as an extra layer of security for the
financial sector, which has suffered from a major budget reduction within most companies
due to the economic recession. Furthermore, having a document proof for employee training
certification is required in any regulated industry. However, employee training in the banking
industry features some unique elements which make it stand out from the crowd.
37

First of all, most banks offers a full program of training and development, which is addressed
to those who want to specialize in banking, both graduates and people with practical work
experience. This is the main gateway to a job in a bank, but it is also required for the workers
to stay in line with the latest industry standards.
Banks usually offer an intensive introductory course which lasts for over six months, but also
several training courses throughout the employees working period. These courses are
specialized in the theory and practice of financing and banking from a responsible
perspective, teaching the employees all they need to know about working with customers and
managing difficult tasks. The practical training is usually organized in within the banks
branches or agencies, and while most workers will do the training within the working
program, some of the newly employed people might have to travel to other agency locations
for individual study.
Employee training in the banking industry offers participants a unique opportunity to bank
and realize which the skills and personal qualities of a successful candidate are. Banks also
offer consistent training methods which helps them in providing exceptional quality services
for their customers. The main themes of a banks training program cover the following topics:

Principles of banking, financial and economic foundation.

Key Concepts of economic development, environmental management and

globalization.

Explanation of customer care and banking.

Mathematics and Accounting.

Tasks and projects designed to develop skills and personal qualities, both individually
and as team members.

Business philosophy and history of the bank which allow candidates to reveal
corporate culture and ethics of the banks code and to apply it in their daily
operations.

38

Although these topics are mainly included in the theoretical part of the training program,
participation in it involves not just the inert absorbing information. Instead, participants are
encouraged to participate actively in discussions and debates, and they will often receive
specific tasks and projects to develop help them develop their professional and personal
qualities both individually and as team members. This reflects the expectations that they
have from the employees, regarding their involvement, open communication and proactiveness in the daily work.
Also, the theoretical part of the program is supported by practical training means.
The benefits of employee training program involves first understanding the application of
their business philosophy about responsible banking and building lasting relationships based
on trust with customers. During visits to branches and agencies, a banking training program
offers participants the opportunity to get to know their customers better, to find out which
their needs and expectations are. In addition, the practical training shows them how to
develop and maintain a successful business relationship.

CHAPTER 4

39

DISTRIBUTION CHANNEL OF BANCASSURANCE

This chapter deals with the various aspects related to emergence of different distribution
channels after privatization of life insurance sector with a major focus on the role of
traditional distribution channels in insurance, emerging distribution channels which are
already in the adoption stream and ones to be adopted. Distribution channels are the drivers
which extends services to satisfy the demands of thousands of customers. This chapter also
looks at channel-wise performance of these in order to create a platform of success for life
insurance companies. When trying to achieve the objective of this research, growth and
financial analysis of distribution channels on life insurance companies perspective was done
and it was discovered that both public sector insurer and private sector life insurance
companies have adopted different channels of distribution to deliver products and services to
customers and it was revealed that growth of channels is upwards which shows prospects of
distribution channels success in future.
4.1 Distribution Scenario in the Indian Market
In todays Indian Insurance market, the challenge to insurers and intermediaries is twopronged:

Building faith about the company in the mind of the client

Intermediaries being able to build personal credibility with the clients

Prior to privatization, the only public sector insurer LIC was having the monopoly in
insurance sector.LIC was having its branches in almost all parts of the country and it attracted
people local people to become their agents..Traditionally, tied agents had been the primary
channel of insurance distribution in the Indian market. The agents are from various segments
in society and collectively cover the entire spectrum of society. of course, the profile of the
people who acted as agents, may not have been sufficiently knowledgeable about the
different products offered and may not have sold the best possible product to the client.
Nonetheless, the customer trusted the agent and company. This arrangement worked
adequately in the absence of competition.
todays scenario, life insurance companies have adopted different channels for distributing
their products. A broad categorization of channels currently being used in the distribution of
life insurance products is presented in (1)
40

Distribution Channels of Life Insurance (1)

C
O
I
NW R
TO O
ER R
T
RK
S I
N
T E

E
T

B
AR
E
O
K
E
R

D I
S T
R I
B A
U G
T E
I
O N
N

C
Y

D
BI A
NR C
AE S S
UC R
AT N
C

Life Insurance companies have to provide servicing capabilities for the process of sale, kind
of products and demand of the customers as it differs significantly among different
distribution channels. This phenomena is explained in (2) Which shows that internet
marketing does not involve direct interaction with the customer and simple product will be
suitable for the mass market segment. (2) further indicates that agency channel helps
customers to plan their financial requirements by personally interacting with them.

Role of Distribution Channels in Purchase of Life Insurance Products

41

Bancassurance channel provides the same platform for banking and insurance services. The
customers are provided with well trained staff to access and plan their financial security. It is
further indicated that brokers play the role of one stop shop by providing choice to the
customers to make comparative analysis of insurance policies of different life insurance
companies and they provide the best suitable plan according to the demand of the customer.
However, there is great excitement in the industry over the impending regulations and
companies are planning possible channels in their network to increase volumes. The new
companies have attempted appealing only to the middle, upper middle and elite classes in the
major cities. Contrasted with Life Insurance Corporation of India and its offices across the
country, the new companies have miles to go before they reach anywhere. Both Life
Insurance Corporation and private sector companies are fighting their own battles from the
perspective of customer perception management.

Present Position of Distribution Network

42

Public Sector Company

Private Sector Companies
Identity is well established, but the perception Have to build their identity in a market where
of poor service providers is a stigma.
the public should distinguish them.
Products are not attractive and flexible enough Remove the perception that anything that looks
but expensive.

good is expensive

To retain their creamy layer clientele who are most

Work against the peoples mindset that they are not

likely to be wooed by the new companies

Retain and attract good intermediaries

here for the long term

Attract intermediaries especially agents with the
requisite qualifications and attributes who can
market the company and the product.

(1) shows that LIC is well-established insurer which is the reward of its monopoly in public
sector. It is having a strong intermediary base, especially agents extending satisfactory
services to the customers. In this process, all private companies are targeting are the same
market but no attempt is being made to increase the size of the pie. For example, attempts are
made to complete the quota of rural insurance in percentage terms, the rural market potential
is yet to be tapped. The new insurers are trying to attract the right kind of talent into their
distribution force.

4.2 Growth of Distribution Channels.

43

A major contributor to the growth story of life insurance companies is the distribution
network. Indian regulations allow distribution by insurance companies throughout India.
There are close to three million licensed life insurance agents, split almost equally between
the state-owned LIC and the private players. Agents generate 80% of LICs new business and
about half for private companies. There are also about Chapter 4 42 3,000 corporate
insurance agents, mostly banks, brokers and firms engaged in personal loans. Bancassurance
is now emerging as a key distribution channel through a network of more than 70,000
branches of banks. Last year, banks generated about 20% of new business for private life
companies. Banks are the primary sales channel for a few insurers such as HDFC Standard
Life and SBI Life. They contribute about 40% of their new business.
The insurance market place is undergoing a transformation that may eventually lead to
significant changes in how consumers purchase insurance products. A variety of distribution
channels are currently used in this market place and some insurers utilize a combination of
distribution channels. These include the internet-led channels, company-led channels, bankled channels, and agent-led channels.
Although less frequently used, company-led distribution channels through mediums
such as direct mail or telephone call centers have seen increasing growth. While an agent is
still required in this setting, this person typically does not meet with the insured. While it is
true that insurance purchasers today have more options available than they did five years ago,
it is unclear if and when these channels will dominate existing insurance distribution
channels. Several obvious factors that impact on a channels adoption are consumer attitudes
and preferences (Trembly, 2001).
In India, the structure of economic development has undergone a considerable change
in the last decade with the service sector becoming a major part of the economy contributing
to more than 60% of real GDP in the last five years (RBI, 2010; IMF, 2010). Growth in the
services sector has been substantive and has resulted in the emergence of a new breed of
larger more sophisticated service companies. Services cover a wide gamut of activities like
insurance, trading, banking & finance, infotainment, real estate, transportation, security,
management & technical consultancy (Riddle, 1986).
Marketing of life insurance service is critical and complex for various obvious reasons
that include time span, periodicity and potentiality of claims and higher brand switching costs
affecting the buying behavior. In the present scenario, insurance companies are facing
problem of transiting from a perceived selling activity to a structured strategic marketing
activity. Insurance marketing is basically just the marketing of life insurance products.
44

Insurance marketing emphasizes the importance of the customer preferences and priorities.
Major objectives of life insurance distribution channels are to increase customer awareness,
successful distribution of insurance products, developing corporate image, improving
customer service and improving customer base. It is necessary to change the whole
organizational management structure of an insurance company, the channels of technologies
of communication with clients. Insurer has to analyze the nature of the customers needs and
plan their products and services in such a way that they can give satisfaction to the customers
and face the competitors. Planning needs analysis of the insurance market to take a decision,
prediction, and forecasting as to future needs of customers. All these programs involve a
number of functions (7Ps), which are to be planned carefully. The combination of these
functions is known as insurance service marketing mix (Kotler,Bloom,1984).
Marketing mix is the planned package of elements, which will support the organization
in reaching its target markets and specific objectives. The marketing mix has its origin in
marketing of goods for consumer markets and consists of the well known 4Ps: Price,
Promotion, Place and Product. Numerous modifications to the 4 Ps have been proposed, the
most concerted criticism came from the services marketing area (Chakraborty, 2011).

4.3 Analysis of Distribution Channels

45

Distribution is a key determinant of success of all insurance companies. Section 4.3 states
that in life insurance markets various insurance covers are provided either directly or through
various distribution channels individual agents, corporate agents including bancassurance and
brokers. These are generally called the traditional channels. In todays scenario agents
continue as the prime channel for insurance distribution in India and almost all the players
follow this model primarily.
However, with new developments in consumer behavior, evaluation of technology and
deregulation, new distribution channels have been developed successfully and rapidly in
recent years. (Chakraborty, 2011).
To maximize reach in the market place, many insurers are aiming to derive channel
advantage because each channel has unique strengths. For example, a direct Chapter 4 44
sales force is usually optimal for complex, high cost transactions where face-to-face
interaction is expected and required. Brokers and corporate agents can dramatically expand
market reach through local access and penetration. The internet can be used to get the
message out to untold millions, at an extremely low cost. The companies that choose and
cleverly integrate the right mix of channels can build go-to-market systems that respond
optimally to each of the requirements of the products and markets. They can, for example,
use expensive sales force representatives only to acquire and grow the most important key
accounts. They can then use brokers to reach dispersed groups of smaller customers and to
provide local sales support. They can use call centers to close simple sales, generate sales
leads for other channels and follow up on direct mail campaigns. They can use the internet to
reach customers who prefer to serve themselves and want to save money. These efforts add
up to a huge competitive advantage in terms of revenue growth, market reach, customer
loyalty and higher productivity. (Rao, 2004).

CHAPTER 5

46

OPPORTUNITIES AND CHALLENGES OF BANCASSURANCE

Opportunities

The first and foremost objective indicators of insurance potential in a country are (a)
insurance penetration, i.e., premium as percentage of GDP and (b) insurance density,
i.e., premium per capita. India, with an insurance penetration of 2.3 percent and
insurance density of $8 belongs to one of the lower rungs. These indicate that a lot of
potential does exist in both life and non-life
Areas for the insurance industry as a whole and bancassurance too.

Today, life in general, has become more uncertain and risky. Not only are man-made
dangers (burglary, accidents, terrorist activities, hijacking, etc.) on the rise but natural
catastrophes (earthquake, flood, cyclone, etc.) are also becoming more frequent. One
certainly does not welcome such uncertain times, but these uncertain times create
opportunities for insurance business.

The financial environment has become equally uncertain due to liberalization

measures and financial scams. Interest rate deregulation, combined with pursuance of
bringing in a soft interest rate regime, has resulted in rates of interest on all financial
instruments coming down substantially. In India, where no good old age pension
scheme, public healthcare system or unemployment welfare scheme exists, where will
the public, particularly the middle class, which no doubt wants return but safety and
liquidity first and foremost, save money? The stock markets have become highly
unreliable and are tainted with scams, and mutual funds have moved in tandem with
stock markets. Money market instruments are still undeveloped. Many urban banks in
various parts of the country have failed or become fragile. Against this backdrop, life
products, at least, give tax benefits and future security. In fact, taking tax benefits into
account, the return on certain life products are more than on bank savings products, as
interest earned on the latter, beyond a certain stipulated sum, is taxed at source, like
dividends earned on shares. Thus, the moral of the story is that life products still have
a bright future even though there are several competing products from banks and

47

other financial intermediaries. Further, the gap between bank savings products and
certain life products is fast narrowing.

The joint family system, which functioned like an insurance system, is gradually
collapsing due to several reasons. More and more nuclear families are coming up, and
with this, the demand
For life-cover for the head of the family and family members is also rising.

An outcome of the above-mentioned phenomenon is that the elderly members in

families are being gradually required to manage themselves either out of their own
volition of not becoming dependent on their children or being compelled in one way
or the other by their children. Thus, the future older generation has to plan for their
financial safety and security in their old age, and the awareness is also increasing in
this regard. This speaks well for life insurance products.

With economic growth, per capita disposable income is also rising. The biggest force
to reckon with here is the middle class population, which, according to various
objective and subjective estimates, varies between 250 million and 500 million.

Improving economic conditions, coupled with higher education and small family
concept, has resulted in savings orientation in the economy. The process has been
catalyzed by higher awareness about savings culture being spread through various
media by financial institutions.

Today, as bank branches are the origins for financial needs of any productive venture,
these branches can simultaneously sell insurance products to borrowers, particularly
non-life products, instead of obtaining the same non-life cover from other insurers.
Such a one-stop mechanism may also save the borrower many headaches.

Bancassurance provides a good opportunity for Indian banks to increase their feebased income. The Indian banks' net interest margin or spread has come down
substantially, whereas their operating cost has been increasing. The trend is expected
to continue in the near future. Increased fee-based income through distribution of
insurance products will compensate for the loss in spread. Moreover, in cases where
insurance business is carried out as a subsidiary, the dividend income from the
subsidiary will also add to the parent bank's profitability and return on asset
48

Recently, the Central Government has approved a voluntary retirement scheme for the
insurance sector. This would provide an opportunity to bancassurers to hire such
retired insurance employees, i.e., readymade talent, into their business.

During the last couple of years, banks have been flush with deposits, whereas credit
deployment has been slow - both due to several socio-economic reasons. Banks are
investing in government and approved securities, overshooting the SLR ceiling.
Therefore, banks now get an opportunity to focus on selling insurance products
instead.

Some areas with good potential for bancassurers are health insurance, credit
insurance, deposit insurance, travel insurance, capital market-related insurance and
pension.

It is one of the basic ways to increase return on assets because they can increase their
fee income through sale of insurance products. Banks that effectively cross-sell
financial products

can leverage their distribution and processing capabilities for

profitable operating expense ratio

Banks with their wide branch network spread all over the country (66,700 branches)
can have a very good opportunity to enter the insurance business. Indias 27 public
sector banks account for close to 92 per cent of total network. The network has among
other things 33,000 rural branches and 14,000 semi-urban branches, where insurance
penetration remains largely untapped. Huge manpower (8,74,170 staff) of all public
sector banks will help in effective distribution of Insurance products.

In today's competitive environment offering more and more services under one roof
would also help banks to improve their market share.

Huge customer database containing the names, profiles and contact numbers of banks
can be of great use to insurance companies, since minimum average conversion from
the bank database into sales will mean a higher productivity than their agencies. They
also have access to multiple communication channels such as direct mail, ATMs,
telemarketing, Internet banking etc.

49

This new venture would also help banks in better Asset Liability Management. Banks
convert liquid short-term liabilities into long-term assets. It exposes them to default
rate risk, liquidity risk and interest rate risk.

Challenges:
Bancassurance products, being "push" products, require a totally different mindset
and work culture. Whether the existing staff of banks can achieve this is a big
question. Have the Indian banks, which have Mutual Fund subsidiaries, succeeded in
selling mutual fund products through their bank branches? Certainly not. The issue of
cultural incompatibility can impede bancassurance business to a great extent.
Alternatively, if the insurance subsidiary of the bank has to maintain the entire
paraphernalia, comprising research, administrative, distribution and other staff, it
would be too costly, and in some cases, the cost restrictions would not permit it to
indulge in this.

Further, since life products and banking products are similar, efforts to market the
former will be less cumbersome for the bancassurance company. However, non-life
products are entirely different from life or banking products and are far too complex,
with high counter-party and reinsurance risks, and hence, it would be difficult for
bancassurance companies to enter into general insurance business immediately, until
and unless they develop and retain the required skill.

The manner in which insurance profits develop poses a threat to successful operation
of bancassurance. An analysis of profit signatures, i.e., the time pattern over which
profits of the insurance sector develop, shows that worldwide, the breakeven period of
time before profits ranges between 6 and 8 years (unless the company is captive). For
life insurance business, this works out to 8-10 years. This is because initial
procurement costs are high. In some countries, commissions and expenses required to
earn first year's premium are much higher than 100 percent. In India, these stand at 90
percent for the first year's premium. On the other hand, distribution of profits is
tightly regulated. In India, only 5 percent of the actuarial surpluses can be distributed
as dividend. Does this bode well for bancassurance?
50

LIC and the four subsidiaries of GIC are well established in their respective lines of
businesses. Opening up the insurance sector has also awakened them, and being old
players, they would like to take their competitors, who are new, by the horns. Thus,
they will strive to become more competitive, and will be buttressed by their financial
and non-financial strength, including the lobbying power. This would pose a threat to
the new bancassurers. Too much of competition may lead to accentuation of the
adverse selection and moral hazard problems, which may ultimately prove detrimental
to the insurance industry as a whole.

Success of bancassurance would also depend on the extent to which and how fast the
technology being used for banking operations can be used for meeting the technology
requirements for insurance business. Otherwise, banks will have to incur large
investments for putting in place the technological infrastructure for bancassurance
operations.

In case of failure of the bancassurance operation, the bank runs the threat of image
risk and cannibalizing deposits (i.e. there may be a fear among the staff that
investment oriented life insurance products may eat into the deposit base of the
branches)

Insurance sales being commission/incentive driven, banks selling insurance products

may be required to provide incentive packages in addition to the regular remuneration
to drive the sales.

Maintaining the same service levels for insurance business as that for the banking
services may be one of the biggest challenge.

Private players in the insurance industry being new entrants are technology-savvy.
Banks, especially PSBs, have to rise up to the challenge and be willing to invest in
technology.

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CHAPTER 6
UTILITIES OF BANCASSURANCE

6.1:-FOR BANKING SECTOR

I) As a source of fee income:
Banks traditional sources of fee income have been the fixed charges levied on
loans and advances, credit cards, merchant fee on point of sale transactions for debit and
credit cards, letter of credits and other operations. This kind of revenue stream has been more
or less steady over a period of time and growth has been fairly predictable. However
shrinking interest rate, growing competition and increased horizontal mobility of customers
have forced bankers to look
elsewhere to compensate for the declining profit margins and Bancassurance has come in
handy for them. Fee income from the distribution of insurance products has opened new
horizons for the banks and they seem to love it.
52

From the banks point of view, opportunities and possibilities to earn fee income
via Bancassurance route are endless. Atypical commercial bank has the potential of
maximizing fee income from Bancassurance up to 50% of their total fee income from all
sources combined. Fee Income from Bancassurance also reduces the overall customer
acquisition cost from the banks point of view. At the end of the day, it is easy money for the
banks as there are no risks and only gains.
II) Product Diversification:
In terms of products, there are endless opportunities for the banks. Simple term
life insurance, endowment policies, annuities, education plans, depositors insurance and
credit shield are the policies conventionally sold through the Bancassurance channels.
Medical insurance, car insurance, home and contents insurance and travel insurance are also
the products which are being distributed by the banks. However, quite a lot of innovations
have taken place in the insurance market recently to provide more and more Bancassurancecentric products to satisfy the increasing appetite of the banks for such products. Insurers who
are generally accused of being inflexible in the pricing and structuring of the products have
been responding too well to the challenges (say opportunities) thrown open by the spread of
Bancassurance. They are ready to innovate and experiment and have setup specialized
Bancassurance units within their fold. Examples of some new and innovative Bancassurance
products are income builder plan, critical illness cover, return of premium and Takaful
products which are doing well in the market. The traditional products that the
III)Building close relations with the customers:
Increased competition also makes it difficult for banks to retain their customers.
Banassurance comes as a help in this direction also. Providing multiple services at one place
to the customers means enhanced customer satisfaction. For example, through bancassurance
a customer gets home loans along with insurance at one single place as a combined product.
Another important advantage that bancassurance brings about in banks is development of
sales culture in their employees. Also, banking in India is mainly done in the 'brick and
mortar' model, which means that most of the customers still walk into the bank branches.This
enables the bank staff to have a personal contact with their customers. In a typical

53

Bancassurance model, the consumer will have access to a wider product mix - a rather
comprehensive financial services package, encompassing banking and insurance products.

6.2:-FOR INSURANCE SECTOR

I)Stiff Competition:
At present there are 15 life insurance companies and 14general insurance
companies in India. Because of the Liberalization of the economy it became easy for the
private insurance companies to enter into the battle field which resulted in an urgent need to
outwit one another. Even the oldest public insurance companies started facing thorough
competition. Hence in order to compete with each other and to stay a step ahead there was a
need for a new strategy in the form of Bancassurance. It would also benefit the customers in
terms of wide product diversification.
II)High cost of agents:
Insurers have been tuning into different modes of distribution because of the
high cost of the agencies services provided by the insurance companies. These costs became
too much of a burden for many insurers compared to the returns they generate from the
business. Henc ethere was a need felt for a Cost-Effective Distribution channel. This gave
rise to Bancassurance as a channel for distribution of the insurance products.
III)Rural Penetration:
54

Insurance industry has not been much successful in rural penetration of

insurance so far. People there are still unaware about the insurance as a tool to insure their
life. However this gap can be bridged with the help of Bancassurance. The branch network of
banks can help make the rural people aware about insurance and there is also a wide scope of
business for the insurers. In order to fulfill all the needs bancassurance is needed.
IV)Multi channel Distribution:
Now a days the insurance companies are trying to exploit each and every way
to sell the insurance products. For this they are usingvarious distribution channels. The
insurance is sold through agents, brokers through subsidiaries etc. In order to make the most
out of Indias large population base and reach out to a worthwhile number of customers there
was a need for Bancassurance as a distribution model.

V)Targeting Middle income Customers:

In previous there was lack of awareness about insurance. The agents sold
insurance policies to a more upscale client base. The middle income group people got very
less attention from the agents. So through the venture with banks, the insurance companies
canre capture much of the under served market. So in order to utilize the database of the
banks middle income customers, there was a need felt for Bancassurance.

55

CHAPTER 7
PRODUCT AND SERVICES OF BANCASSURANCE

State bank of India Life Insurance

SBI Life Insurance is a joint venture between the State Bank of India and
Card if SA of France. SBI Life Insurance is registered with an authorized capital of Rs 1000
56

crore and a paid up capital of Rs 500crores. SBI owns 74% of the total capital and Card if the
remaining 26%.
State Bank of India enjoys the largest banking franchise in India. Along with
its 7 Associate Banks, SBI Group has the unrivalled strength of over 14,500 branches across
the country, arguably the largest in the world. Card if is a wholly owned subsidiary of BNP
Paribas, which is the Euro Zones leading Bank. BNP Paribas is one of the oldest foreign
banks with a presence in India dating back to 1860. Card if is ranked 2ndworldwide in
creditors insurance offering protection to over 35 million policyholders and net income in
excess of Euro 1 billion. Card if has also been a pioneer in the art of selling insurance
products through commercial banks in France and in 35 more countries.
SBI Life Insurances mission is to emerge as the leading company offering a
comprehensive range of Life Insurance and pension products at competitive prices, ensuring
high standards of customer service and world class operating efficiency.SBI Life has a unique
multi-distribution model encompassing Bancassurance, Agency and Group Corporate.
SBI Life extensively leverages the SBI Group as a platform for cross-selling
insurance products along with its numerous banking product packages such as housing loans
and personal loans. SBIs access to over 100 million accounts across the country provides a
vibrant base for insurance penetration across every region and economic strata in the country
ensuring true financial inclusion. Agency Channel, comprising of the most productive force
of more than 25,000 Insurance Advisors, offers door to door insurance solutions to customers.

57

7.1 Products Offered by SBI

Individual Products:
A)Unit Linked products:

SBI Life - Horizon II :

SBI Life-Horizon II is a unique, non participating Unit Linked Insurance

Plan in Indian Insurance Industry, where you need to be a financial market expert. This plan
offers the flexibility of Unit Linked Plan along with Automatic Asset Allocation which
provides relatively higher returns on your money where as increasing death benefits provide
higher security to your family.

SBI Life - Unit Plus II :

This is a non participating individual unit linked product. It provides

unmatched flexibility to match the changing requirements. It provides choice of 5

investments funds in a single policy

SBI life- unit plus child plan:

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SBI LIFE understand you better and hence have developed SBI Life Unit Plus Child Plan to suit you and your needs best. This Plan is meant for parents in the age
group of 18-57 having a child between the age group of 0-15 years.
B. Pension Products;
SBI Life - Horizon II Pension:
A unique Unit Linked Pension Plan that will enable the customers to build a
kitty good enough to enable them to spend a peaceful and financially sound, retired life.
SBI Life - Horizon II Pension is a safe and hassle free way to get high
returns. It comes with the unique feature of Automatic Asset Allocation by means of which
you truly, dont need to be an expert to grow your money.

SBI Life - Unit Plus II Pension:

SBI Life understands the basic needs for pension plan and give the

customers financial strength to maintain the life style even after the retirement.
This is a unit linked pension plan wherein the policyholder chooses an
investment period from 5 to 52 years for a vesting age between 50 to 70 years. They can
choose to pay either single premium or pay regular premium for the entire policy term. Their
contributions are invested into 4 fund options as per their choice.

SBI Life - Lifelong Pensions:

It is a pension plan wherein the policyholder gets the flexibility to meet

the post retirement financial needs. It also provides tax benefits. The policyholder also has the
option of withdrawing a lump sum amount up to particular limit.

SBI Life - Immediate Annuity:

SBI Life - Immediate Annuity Plan is introduced for Pension Policyholders.

This product provides annuity payments immediately from payment of purchase price. It has
59

been specially designed to cater to the annuity needs of existing policyholders (SBI Life Lifelong Pensions, SBI Life - Horizon II Pension, SBI Life -Unit Plus II Pension) at the
vesting age.

Pure Protection Products

SBI Life Swadhan;

This is a Traditional Term Assurance Policy with guaranteed refund of basic

premium .Life cover is provided at no cost. Tax benefits also provided. There is also a rebate
on high sum assured. There is also flexible benefit premium paying mode.

SBI Life Shield:

It offers the customers with the life insurance cover at the lowest cost for a

selected term. Tax benefit is also provided. There is also rebate on modes of premium
payment.

SBI Life Shield as a Key man Insurance Policy:

A Key man insurance policy is taken to protect the organization against the

reduction in profit resulting from the death of the Key man. As per IRDA circular only Pure
Term Assurance Products may be used as a Key man Insurance. The SBI Life Insurance
provides SBI Life Shield as a Key man Insurance Policy.
D)Protection cum Savings Products

SBI Life Sudarshan:

SBI Life - Sudarshan is an Endowment Policy designed to provide savings

and protection to the policyholder and their family. They can save regularly for the future.
Thus at the end of the plan, he will receive a substantial amount of savings along with the
accumulated bonuses declared. At the same time, his family will be protected for death risk
for the full Sum Assured.

SBI Life - Scholar II;

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Twin benefit of saving for the child's education and securing a bright future
despite the uncertainties of life. Option to receive the installments in lump sum at the due
date of first installment of Survival benefit.
C)Money back scheme products

SBI Life - Money Back :

It is a Traditional Saving Plan with added advantage of life cover and

guaranteed cash inflow at regular intervals. The plan has a number of money back options
specially suited to the customers needs. The cover is available at competitive premium rates.

SBI Life - Sanjeevan Supreme:

It is a Traditional Saving Plan which offers a life cover for the term of the

customers choice at the same time does not burden him with liability to pay premiums for
the entire term and also provides cash flows at regular intervals.
SBI Life Insurance Company (perspective)
SBI Life insurance, a joint venture between State Bank of India, the largest bank
in the country and bancassurance major Cardiff of France. SBIs stake in the venture is 74%
whereas Cardiff has 26% share. They have launched many products so far incorporating
certain features that are introduced for the first time in the country. SBI -Life is banking on
the bancassurance model on the strength of the SBI Groups 10000 plus bank branches and its
vast customer base. In addition it is also tapping other. banks corporate agents and the
traditional agency route to penetrate the insurance market SBI Life is planning to introduce
more novel and user friendly products to cater to the requirements of the consumers in
different segments.
SBI has the largest banking network in the county. The bank is looking for
business from every customer segment of the bank rural an urban segments, upper, middle
and lower income segments /groups and corporate segment. Besides their own channels they
are planning to distribute products through other interested banking channels also. It is
expected that 2/3 rd of the premium income in expected to come by way of bancassurance
and the rest from the traditional agency channel as well as ties up with corporate agents

61

(Sundaram Finance). SBI has alsointroduced group insurance to some well managed
corporate staffs.
Technology is an integral part of this operation. Cardiff provided the
technology required. The project was initiated in April 2004,and the initial roll-out was
completed by August 2004.SBI Life has implemented an Internet-centric IT system with
browser-based front-office and back-office systems, channel management, policy product
details, online premium calculator and facility for group insurance customers to view their
individual savings status on the Web. The organization has the facility to pay premiums
through credit cards, Net banking, standing instructions, etc. This is fully integrated with the
core systems through industry standards such as XML, EDI, etc.

Even as it plans to scale up operations shortly, SBI Life Insurance Company Ltd is looking at
tripling its gross premium income in the new financial year. In 2007-08, SBI Life earned a
total premium income of Rs 5,622 crore, of which income from new policy sales was
Rs4,800 crore. For the current financial year, their target is to achieve a total premium income
of Rs 10,500 crore and a first year premium income of Rs 8,500 crore. The SBI Life ranks
second in terms of market share among private life insurers in the country.
SBI Life Insurance Company is the first among the 14 life insurance companies in
the private sector to post a net profit in 2005-06.There are life insurance players much more
aggressive than SBI and they have still not been able to break the record of SBI. Their
success is largely on the channel strategy and product strategy. The another aspect is their
superior investment performance. They have consistently, over the last two years, generated
11-12 per cent earnings from the investments.SBI Life Insurance is uniquely placed as a
pioneer to usher bancassurance into India. The company hopes to extensively utilize the SBI
Group as a platform for cross-selling insurance products along with its numerous banking
product packages such as housing loans, personal loans and credit cards. SBIs access to over
100 million accounts provides vibrant base to build insurance selling across every regional
economic strata in the country.

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7.2:-INSURANCE PRODUCT OFFERED BY HSBC BANK

Tata AIG, HSBC launch 1st bancassurance product
MUMBAI, TNN Feb 23, 2002, 02.09am IST

Tata aig life insurance has launched its first bancassurance product with HSBC bank. the
products will be sold by HSBC insurance services India an associate of HSBC bank set up
exclusively for the purpose of insurance distribution. "this is for the first time that a life
insurance product is being directly marketed to prospects" said mr raj raman, sr vice
president, Tata aig life insurance. unlike other life insurance policies which are sold by
agents, HSBC insurance services will be mass marketing the term insurance cover to the one
million customers of HSBC bank. the customers include account holders and credit card
holders of the bank. what makes it possible for the product to be sold directly is the fact that
policy is a fixed pre-packaged one with fixed benefits there is not much explaining to do. the
cover which has a term of 15-years is available for customers within the age group of 18 to
50 years without any medical examination. "convenience is the factor that we are focusing
on. HSBC bank customers can either pay by cheque, opt for direct debit of their accounts or
pay by credit card" said Mr raman. the product that Tata aig is offering to HSBC customers is
a term insurance cover with return of premium. term insurance policies typically are pure
protection plans without any savings element. however, Tata aig's term product offered to

63

HSBC customers has been structured in such a manner that the insured will receive 125 per
cent of the premium paid towards life insurance if he survives until the maturity of the policy.
for instance a 30-year old will have to pay a premium of Rs 307 per month for a Rs 2 lakh
insurance cover for a 15-year period. in addition to life cover the premium includes payment
for accident disability. if he survives the 15-year period he will receive rs 61,200 on maturity
of the policy. "with an aim of providing complete financial services to its customers,
including insurance services, HSBC has set up a subsidiary called HSBC insurance services
(India) pvt. ltd (hins). Tata aig has tied-up with hins wherein they are the corporate agent for
distribution of tata aig's insurance products" a statement issued by Tata aig said. hsbc has
been the first bank to obtain permission from the reserve bank of India to receive permission
to set up an insurance distribution subsidiary. hsbc insurance services is a corporate agent of
Tata aig life insurance and Tata aig general insurance and receives commission for all policies
sold to the banks customers.

Group secure plan:-

The Canara HSBC Oriental Bank of commerce Life Insurance Group Secure Plan
is a comprehensive loan protection plan that provides insurance cover to home
Loan and Loan Against Property borrowers.
The plan not only helps you meet your Home Loan Commitments but also assures
that your family continues to enjoy the assets you have gathered for them in case
of any eventuality.
With is limited premium payment term of just 5 years, you can easily pay your
premiums in small amounts while guaranteeing your family a home for a lifetime.

Future smart plan:-

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 Canara HSBC Oriental Bank Of Commerce Life Insurance Future Smart Plan is a
unit linked endowment insurance plan that provides a long-term investment
opportunity, to support you to build a bright future for your child. Its
comprehensive insurance cover (Sum Assured on death and Premium Funding on
death or disability)
assists you in securing their financial future in case of any unfortunate event.
It can be customized with a choice of policy and premium payment term to link
benefits of the plan with your childs financial requirement e.g. higher education
needs or marriage.
With optional features like Auto Funds Rebalancing and Safety Switch Option,
you can systematically manage your funds without compromising on the security
that you want to provide your child. Thats why policy as cover both the things
safety and life insurance.
Grow smart plan:

Canara HSBC Oriental Bank Of Commerce Life Insurance Grow Smart Plan is a
whole life unit linked insurance plan that provides you the flexibility of choosing
your investment and providing to your family for the rest of your life.

Premiums are payable for 10 years or [up ton99 less Age at entry]. Benefits of
the policy are payable in the event of the insureds demise. This plan provides the
twin benefit of securing your life as well as investing in the underlying funds,
giving you the opportunity to make potential market returns. At the same time, it
does not compromise on the security that you want to provide to your loved ones.

65

Insure secure plan:

Canara HSBC Oriental Bank Of Commerce Life Insurance companys Insure

Smart Plan is a unit linked endowment insurance plan that helps you generate

wealth by investing in a mix of debt and equity along with providing life cover.
The product gives you the freedom to invest in the 5 investment funds. A unit
linked insurance plan , it helps you specific dreams with the flexibility of paying
premiums for 5 years and getting life cover for 10 years.

Above are the different insurance product offered by SBI BANK & HSBC BANK to serve
the customer through the channel of bancassurance also offer range of product according the
requirement to fulfil their needs.

66

CHAPTER 8
Problems Associated with the Implementation of Bancassurance in India
Problems Associated with the Implementation of Bancassurance in India Bancassurance is a
new concept in India. It is seen from above discussion that tie-ups between banks and
insurance companies are growing successfully in India. But to implement bancassurance
properly they are still facing problems. The problems identified in informal discussions were
asked to be ranked by the two partners in bancassurance tie-up according to their preferences.
These problems have been depicted graphically in the Figure 1. The Bancassurance
Opportunity Banks are major players in the Indian financial system: 66,000 branches (32,000
rural and 14,700 semi urban). Enormous retail account base of 440 mn deposit accounts.
Total deposit base of Rs. 14 trillion (USD 300 bn). Large structure governed through
regulations: Four categories of banks foreign banks, nationalized banks, private sector
banks and co-operative banks catering to distinct customer segments. Over 2500 banks
spread nationally and geographically. Banking habits of customers Propensity to visit bank
branches. 51 Vol. 15, No. 1 (January - June 2014)Delhi Business Review High trust in
the banking system.

Bank managers looked upon as Financial Advisors. Findings

Insurance industry has been growing at a commendable rate. Bancassurance has grown
rapidly during the last 10 years.

Private sector banks and private sector insurance

companies have been more active and therefore, beneficiaries of bancassurance. Private
sectors (banks and insurers) performance has been better than public sector (banks and
insurers). Further research is needed to investigate the reasons of relative failure of public
sector with regard to bancassurance. Bancassurance offer huge business potential for banks

67

and insurance companies because of growing banking and insurance sector, and growing
economy.

Recommendations
In Indian context, bancassurance also need to be viewed from societal perspective and if
successful, can be a long lasting solution for the prevalent problem of financial exclusion.
The growth in insurance business on account of bancassurance can also result in reduced cost
of insurance, of course, in the long-run. Hence, it should be treated as a tool for financial
inclusion. Policy makers, regulators and players themselves must make concerted efforts for
the success of bancassurance.

68

CHAPTER 9
RULES & REGULATIONS

REGULATION

OF

BANKING

COMPANIES

INDULGING

IN

INSURANCE SERVICES

The Banking and Insurance sectors are regulated by two different entities in India:

Banking sector is regulated by Reserve Bank of India; and

69

Insurance Sector is regulated by the Insurance Regulatory and Development Authority

(hereinafter IRDA).
In India, the Government of India through its Notification dated August 3, 2000,
specified Insurance as a permissible form of business that could be undertaken by
banks under section 6(1)(o) of the Banking Regulation Act, 1949. The notification
declared that any bank intending to undertake insurance business has to follow
guidelines issued under the master circular set out in Annex-3 of the said circular. In
addition, the bank has to obtain prior approval of Reserve Bank of India before
entering such a business. Paragraph 12 of the said master circular provides the further
formalities to be followed by the bank . Further, the circular provides that banks need
not obtain prior approval of the RBI for engaging in insurance agency business or
referral arrangement without any risk participation, subject to certain conditions

The above master circular provides three options for banks to enter the insurance Sector.
They are as follows:

Permission with Risk participation A bank which wishes to undertake insurance

business can be permitted provided joint ventures must be allowed for financially
strong banks with risk participation . Provided that such bank further satisfy the
following conditions : The minimum net worth of the bank must not be less than Rs.500 crore.
The minimum level of Capital Adequacy Ratio must not be less than 10% in

the bank.
Non Performing Assets (NPA) should be reasonable in the bank.
The bank should have been earning a net profit continuously for last three

years.
In case of any subsidiary, the performance of subsidiary should be
satisfactory . For example in India, ICICI Bank and HDFC Bank in private
sector and State Bank of India in the public sector has taken its shape by
following this model . The main benefit of this model is that the foreign
insurance company can enter into the Indian market through a joint venture.

Permission without Risk Participation A bank which is not eligible for joint
venture participation can make investment upto
70

10% of the net worth of bank or

Rs.50 crores, whichever is lower, in the insurance company for providing
infrastructure services support. Such participation is treated as investment and

does not hold any contingent liability of the bank.

Referral Model This model of Bancassurance India is regulated by Insurance
Regulatory and Development Authority (Sharing of Database for Distribution of
Insurance Products) Regulations, 2010 . Any commercial bank can undertake
insurance business as an agent of insurance company on fee basis . The bank does not
participate in risk under this category. This is also known as referral model. In this
model, a referral arrangement is done between referral company and insurer for
selling of insurance products. The referral company only shares the database of its
customers and does not directly indulge in soliciting or selling of insurance product
through agent or corporate agent or insurance intermediaries. In other words, the
actual transaction is done by the staff of the insurance company either at the bank
premise or elsewhere. The bank charges only fees or commission for every business
from their customers.

71

9.1: REGULATING GUIDELINES OF IRDA

Insurance Regulation and Development Authority Act 1999 provides the entry norms for any
new company for operation in insurance sector. Any such new company must have:I)Minimum paid up capital of Rs. 100 crores;
II)Investment of policy holders fund only in India;
III)Restriction of foreign companies to minority equity holding of 26%.
Following are Bancassurance Models approved for business:

Insurance business carried out by banks

It allows any scheduled bank to undertake life or non-life insurance business on
specified fee bases but without any risk participation.

Joint venture by Bank

Banks after satisfying required criteria are allowed to set up a joint venture company
for undertaking insurance business with risk participation subject to certain
safeguards. The maximum equity which a bank is allowed to hold in such joint
venture is 52% of the paid up capital of the insurance company on a selective basis.
However, in certain cases with the permission of RBI the bank can initially invest
more than 52% but there must be reduction of equity to the statutory level. Eg: ICICI Prudential Life Insurance company does nearly 20% of the life insurance sale
through the Bancassurance channel. SBI, HDFC, ICICI Banks are the subscribers of
their respective holding companies. Banks are also tying up with regional rural banks
to make the benefit out of rural and semi-urban region . Similarly, AVIVA Indsurance
has its tie-up with more than 21 banking companies which includes private, public
and foreign sector banks.

72

Restriction on subsidiaries
A subsidiary of a bank or another bank shall not normally be allowed to join the
insurance company on risk participation basis . Subsidiaries means and includes here
bank subsidiaries undertaking merchant banking securities, mutual fund, leasing
finance and housing finance business, etc

Investing in an Insurance company

Banks which are not eligible for joint venture can invest in an Insurance company
without risk participation. Currently, banks can invest up to 10% of the net worth of

the bank, or Rs. 50 crores, whichever is lower.

Merger & Acquisition
This model is not very popular in India due to various national laws forbidding
mergers between banks and insurance sectors. In this model either a bank acquires the
insurance company or merges with it or vice versa.

Organic start up
Under this model instead of merger or acquisition of the bank or insurance company
believe in building skills organically . The advantage of this model is that it reduces
the chance of cultural differences between the Bank and insurance company.

9.2: RECOMMENDATIONS OF COMMITTEE CONSTITUTED BY

IRDA ON BANCASSURANCE
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As we have discussed earlier that banks are not allowed to sell insurance products of more
than one insurance company. But due to persistent request from the side of various life and
general insurance companies from the IRDA led to formation of a seven-member committee
in the mid of 2009 to look after the matter . The committee had to submit its report and to
examine the desirability for a differential treatment of insurance intermediation by banks
under the Bancassurance model consistent with intermediation best practices and modified
suitably to meet domestic regulatory requirements . The committee submitted its
recommendation on 26th May, 2011.

Following are some of the recommendations of the Committee :channel and therefore there is need to enact a comprehensive legislation to cover all aspects
of the working of the bancassurance activities.
Banks should be allowed to tie up with any of the following two sets of insurers:

Two in life insurance sector The committee admitted that at present there is ambiguity
on the organization and practices of the Bancassurance.

Two in non-life insurance sector excluding health

Two in health insurance sector

ECGC and AIC.

Efforts should be made to more use of information technology which would reduce
the manpower requirement and would increased more structured, transparent and
efficient organization.

The tenure of the agreement between the banker and insurer is normally one to three
year at present. This makes the relationship between the two unstable, therefore the
minimum period of the agreement between the banker and the insurer shall not be less
than five years. Here, the committee also made a very significant point that the
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responsibility of servicing of the policies issued already through the bank or

subsidiary or special purpose vehicle shall remain with the bancassurance partner
even if the tie-up ends and the said partner shall receive the renewal commission on
per renewed policy basis. For all this purpose there is need of proforma for
memorandum of agreement between bank and insurer with minimum requirement.

As far as inspection and supervision is concerned, the proposed regulation must

contain separate provision which empowers IRDA and RBI to inspect any of the
Bancassurance partner.

The regulation must have provisions of maintaining accounts and certification which
should be furnished in periodicals returns to the authority. Corporate governance
norms regarding disclosure should be complied by the banks treating bancassurance
as integral part of banks business operation.

Regulations should made it mandatory that the bank staff be fully trained in handling
insurance products so that the sale process is transparent and the policyholder gets full
disclosure of the features of the product.

The committee gave the green light for multiple insurers but only if a bank fulfills all
other conditions specified in the committees recommendations.

The Committee recommended abolition of the referral system of bancassurance

because it is costlier than corporate agent model. The reason behind the high cost is
that the insurer has not only to pay the higher amount of first year premium as referral
fee but also has to deploy staff and infrastructure in the bank premises.

CHAPTER 10
Bancassurance in - A SWOT Analysis

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T h
rea
ts

O pp
o r tu
n itie
s

S W
O T

ST
R E
N G
T H

W E
A K
N E
SS
Strength :

Bancassurance can be a of fire way to reach a wider customer base, provide it is

made use of sensibly. In India there is an extensive bank network established over the years.
Insurance companies will have to take advantage of the customer's longstanding trust and
relationship with banks. This is mutually beneficial situation as Banks can expand the range
of their products on offer to customers and earn more, while the insurance company profits
from the exposure at the bank branches, and the security of receiving timely payments.
There are several untapped potential waiting to be mined particularly for life
insurance products in rural areas. Banks with their network in rural areas, help to fulfill rural
and social obligations as stipulated by the Insurance Regulatory and Development Authority.
There are several reasons why bank should seriously consider bancassurance.,
the most important of which is increase Return on Assets(ROA).It offers fee-based non
-interest income to the banks without involving in any amount does not

require any

additional capital.

Weakness :
The bancassurance calls for a paradigm shift in the behavior of the banks,
which have to develop marketing skills. Most of the banks lack adequate marketing skills to
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perform these additional responsibilities. At the same time, there is a need for banks to be
sensitive to customers of preferences.
Bancassurance could turn out be an example channel as it requires huge investments
in Wide Area Network (WAN) and Vast Area Network (VAN) to meet customer's needs on
order to finalize a sale. Another drawback is the inflexibility of the products that is it cannot
be tailor- made to the requirements of the customers. For bank assurance venture to success,
it is extremely essential to have in -built flexibility of the products that is it cannot tailormade to the requirements of the customers. For a bank assurance venture to succeed, it is
extremely essential to have an in-built flexibility so as to make the product attractive to the
customer.
Opportunities :
Banks database is enormous and they have a wide branch network.
Millions of customer become accessible to insurance companies through bank branches. This
database has to be dissected variously and various homogeneous groups are to be churned in
order to position the bank assurance products.
New private sector insurance companies are yet to become popular. They
are in existence for less than five years. In a short period, to appoint agents all over the
country and effectively follow them would be an uphill task. They are in the process of
building brand equity. Tie up with Bank will help them to boost their image and provide great
opportunity for insurance as in as Bank, In this process is bank will also benefits.
Customers have more faith in Banks and they view those Banks as more
responsible than individual agents. Moreover, agents may not be available for further
services, But customers can approach the bank at any time and paying the premium is easier
with Bank because of standing instructions.

Threats:
Even insurance and Bank that seem ideally suited for a bank assurance
partnership can run into problems during implementation. Success of a bancassurance venture
requires change in approach, thinking and work culture on the part of everybody involved.

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The most common obstacles to success are manpower management, lack of

sales culture within the bank, non-involvement by managers, insufficient product promotions,
failure to integrate marketing plans, marginal database expertise, inadequate incentives, a
definite threat of resistance to change, negative attitudes towards insurance and unwieldy
marketing strategy.

10: Research Methodology

Research Type:
It is a project type
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Sources of Data:
In this report all necessary information to prepare are collected from both sources of
data. These are:
Primary Data:
Consist of information collected for the specific purpose at hand.
Secondary Data:
This source of data contains all the information & data that already existing
somewhere.
Data Collection Procedure:
Secondary Data:
The secondary data comes from:

www.google.com
www.indiainfoline.com

Primary Data:
The primary data collection process includes:

Direct Observation
Conversation with Officials/ Clients

11:CONCLUSION
The life Insurance Industry in India has been progressing at a rapid growth
since opening up of the sector. The size of country, adverse set of people combined with
problems of connectivity in rural areas, makes insurance selling in India a very difficult task.
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Life Insurance Companies require good distribution strength and tremendous man power to
reach out such a huge customer base. The concept of Bancassurance in India is still in its
nascent stage, but the tremendous growth and the potential reflects a very bright future for
bancassurance in India.
With the coming up of various products and services tailored as per the customers needs
there is every reason to be optimistic that bancassurance in India will play a long inning. But
the proper implementation of bancassurance is still facing so many hurdles because of poor
manpower management, lack of call centers, no personal contact with customers, inadequate
incentives to agents and un full filment of other essential requirements.
I had just a simple idea about Bancassurance. But after a detailed research in this topic, I
have found how important bancassurance can be for bankers, insurers as well as the
customers. I am contented that all my objectives have been met to its fullest. I have also
experienced that though Bancassurance is not being utilized to its fullest but it surely has a
bright future ahead. India is at the threshold of a significant change in the way insurance is
perceived in the country. Bancassurance will definitely play a defining role as alternative
distribution channel and will change the way insurance is sold in India. The bridge has been
reached and many are beginning to walk those cautious steps across it. Bancassurance in
India has just taken a flying start. It has a long way to go .. after all The SKY IS THE
LIMIT!

12 QUESTIONNAIRE
Q.1. Do bank employees treat insurance policies as their primary product?

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primary product
Secondary product
INFERENCE: Only 35% employees said that they
sell insurance products as their primary product,
they give same preference like their other products and 65% employees say they does treat
insurance product as secondary product.
Q.2. Do banking structures support insurance policies

Yes

INFERENCE:

No

95% employees agree that Banks data base stricter and confidence of

customers towards Banking Sector and diversification Strategy support insurance policies
and 5% Employees does not agree with this statement.
Q.3.Key factors for the success of Bancassurance

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Top Management
Involvement of bank Staff
Distribution Strategies
Target Customer Segments & Products
INFERENCE: 20% Employess said that it is from Commitment from the Top Management
and 50% Empolyess said that Involvement of Bank Branch Staff and 15% employess said it
is due to Distribution Strategies and remaining 15% employees said it is due to Target
Customer Segments & Products.

Q.4. Reasons for entry of banks into Bancassurance

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Competition
Increased income
Reduction of cost
Increased the productivity
INFERENCE: 45% employess answer this question as Intense competition between banks
and 25% employess replied its due to Increased income generated and 20% employees said
it also Reduction of the bank fixed costs, and remaining 10% employees said it helps in
Opportunity to increase the productivity of staff.

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Q.5. Do Banks provide Bancassurance training for bank employees?

Yes
No
Slice 3
Slice 4
INFERENCE: 95% Employees agree that banks provide bancassurance training and 5%
bank employees does not agree with this statement.
Q.6. Requirement level of Training or Bank Employees

Selling techniques
Basic Features
Procedures and for Customer service

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INFERENCE: 30% employees demanded training about features of the insurance products,
50% employees required training for the selling techniques and remaining 20% employees
required training for Procedures and for Customer service.
Q.7.Advantages of Bancassurace to the bank

Sales Oriented Culture

Increase Return on Assets (ROA)
Increase Customer Satisfaction
Reduce Expenses
INFERENCE : 40% employees said bancassurance helps increase Return on Assets (ROA)
by increasing their income and 20% employees said It can cover operating expenses and
also reduce its fixed cost. Remaining 30% employees said it helps to improve overall
customer satisfaction and also increase in brand awareness and remaining 10% employees
said it Can establish sales oriented culture among the employees

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Q.8. Reason for buying the Insurance policies through Banks?

ADVANTAGES
Expert advice
Convenience
Trust

Strongly Agree
17
20
12

Agree
28
44
41

Neutral
26
24
35

Disagree
22
12
8

Strongly Disagree
7
0
4

INFERENCE
A)17% of the respondents strongly agree with the advantage of expert advice in buying
through banks and the same is agreed by 28 %. 26% of the respondents remained neutral and
22%, 7% of the respondents strongly disagree and disagree respectively
B) 20% of the respondents felt convenience in buying insurance policies through
banks and they strongly agree to that. Also 44% agree the same. But 24% stayed neutral
whereas 12% disagreed this point. No one strongly disagreed the same.
C) 12% of the respondents strongly agree and 41% agree with the advantage of
easy accessibility.35% remains neutral. Only 8% disagree and 4% strongly disagree to this
view. Thus, majority of the respondents agree with the advantages in buying the
insurance policies through banks.

Q.9. Bancassurance, a recent addition to the distribution channels of insurance is

gaining importance. What in your opinion are the reasons for the same?
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Not in Favour
Favour

INFERENCE
90% Employees are in favour that bancassurance is an additional fee based income as
commission, improved resource utilization, protection against NPA, additional cash-flow
through premium deposits, and potential for getting new customers by offering special deals,
to insurance companies- greater geographical reach through banks network, financial gain
through banks database, gaining credibility in customers, introduction of co-branded
products, ease of operations etc. and 10% Employees are not in favour that bancassurance
doesnt help to the distribution channels.

Q.10. Regulatory changes for success of Bancassurance

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Not Favour
Favour
INFERENCE:
90% Employees said Regulatory changes should be kept separate from the life insurance
industry. Although bancassurance may trigger this restructuring much earlier than

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BIBLOOGRAPHY
1. Innovations in Banking and Insurance -Romeo. S. Mascarenhas
2. Indian Banking -R. Parameswaran
3. Insurance Marketing
4. Insurance watch.
5. Business world.
6.Business today.
7.Theories and Practices in Insurance.

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WIBLIOGRAPHY
www.insuremagic.om
www.google.com
www.sbilife.com
www.indianfoline.com
WWW.HSBCINSURANCE.COM
Wikipedia

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