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Jayashree Bose
Amidst all the political melee that has delayed the passing of the Insurance Regulatory Authority (IRA) Bill, one of the various segments of potential entrants who are quietly--and confidently--doing their homework are the banks.
ts not only the ones who have made their entry known, like the State Bank of India, Bank of India, Bank of Baroda, Development Credit Bank or Vysya Bank, but also those like Oriental Bank of Commerce and others which have kept their plans under wraps and are chalking out their strategies feverishly.
Perhaps it has to do with the fact that unlike other entrants, they are gearing up to initially contend with grey areas of dual regulatory authority--of the Reserve Bank of India first which will give the initial green signal and then the IRA. There is also very little clarity yet about whether they would be allowed to develop products and underwrite risks,or, merely be allowed to distribute products, not to speak of the debate about whether public sector banks should be allowed toenter a privatised industry.
So what does this uncertain scenario hold out for banks? Much, as their vicarious overseas experiences seem to tell them. Bancassurance, or the joint offering by a bank and an insurance company of their products within a single organisation has flourished for decades in the global markets. Actually, a fact that many do not know is that bancassurance existed in a rather limited form in India, as well, before the general insurance industry was nationalised in 1972, and even more so before the nationalisation of banks in 1969. Before this, a large number of banks used their then-growing network to distribute products (Section 6 of the Banking Regulations Act prohibits them from taking up full-fledged insurance business), though these were mainly general insurance products. The product development and risk underwriting was done by their group insurance companies (most of these banks were the old private sector banks where the industry group they belonged to also had insurancecompanies in their fold). And though bankers say that its too much in the remote past to quantify how lucrative this fee-based business actually was for them,its not too difficult to hazard a guess. Many of these products were sold on the lines of a sort of captive business, insuring assets in companies that were primarily financed by the banks themselves. It was only after the non-life business was nationalised in 1972 and general insurance became the sole prerogative of the General Insurance Corporation and its four subsidiaries, that banks were no longer allowed into the monopolistic sector.
Life has its attractions
So, for many banks who have been waiting in the wings to enter insurance after liberalisation now, it will be a second coming --a little different from the first. For starters, most banks like State Bank of India, Bank of Baroda, Vysya Bank, Development Credit Bank, and even financial institutions like ICICI and IDBI, or housing finance majors like HDFC are reportedly submittingapplications to enter the life sector. The rationale: not only would banks and financial institutions be able to tap long term funds through this route, the greater credibility they had would also command better response from long term life insurance-takers.
Another difference is that some banks may want to go the whole hog now, and actually develop insurance products rather than just distribute them as before.
But why only life, to begin with, and not general insurance--after all, who would understand corporate insurability better than the lenders themselves? Points out a senior Mumbai-based banker: "No, there's just too much synergy for comfort; not only could that lead to a lot of armtwisting by banks, it could, on the other hand, also trigger off an unhealthy nexus in some cases and generate more non performing assets."
The network advantage
But right now, after decades of insurance nationalisation, Indian banks are having to look offshore to do their homework: globally, especially wherethe trend has continued unchecked, bancassurance has actually grown from strength to strength. The symbiosis is good: banks get to distribute high-margin insurance products along with their core banking ones, while insurance companies get to supplement their agent network with a banking infrastructure. Consider this: in India, it is only the banking system with its network (49, 810 as on March 31, 1998), which can match GIC's 5200 and LIC's 2000-odd branch network--in fact, more than match it.
The new regulations may not allow all banks and finance companies to develop insurance products and take on insurance risk. Even so, many will eventually tie up as correspondent banks with leading corporate houses entering insurance, to provide them with a network and enhance their own fee-based income.
In the process--it becomes a win-win situation for the customer in a liberalised regime, who can then issue instructions to his bank to debit his premium directly from his account, or, drop the premium cheque at aconveniently located collected collection box at a bank branch instead of having to go to a far-off insurance company branch to or risk postal uncertainties to do that.
But couldn't E-Commerce and the Internet do the distribution job just as well? Evidently not-- there is going to be a snag, for some time, at least: while E- Commerce is picking up and the potential is immense,people have to be willing to put their credit card numbers on the Internet--and not too many are willing to do that today. Also, laws have to change. Since there can be no signatures on electronic transactions, there are apprehensions how tenable these will be in a court of law in the event of a dispute, especially since there is no proper legislation governing this.
The reason why
In spite of the delay in opening up the sector, the mood is upbeat. There's a reason too. The upside of a late re-entry is that (thanks to the Net and greater globalisation) banks in India now have greater access --than they would have had inpre-1972 insular India--to many more vicarious experiences of global banks teaming up successfully with insurance companies. These have been either through mergers and acquisitions (M&A), or by launching subsidiaries the world over, specially in European countries. And if anything, these experiences have been more often favourable than not except for casualties such as when The Insurance Company of Ireland--a subsidiary of the Allied Irish Bank--went under, and some other similar examples.
So, even the fact that bancassurance has seen a relatively stymied growth in US and Japan, two of the world's biggest insurance markets, is not acting as much of a dampener. Development Credit Bank chairman Naushad Padamsee shrugs off the need for India to draw conclusions from the US and Japanese experiences: "They're not comparable at all. Branch networks have for long been on the decline in the US, because of the explosive growth of electronic banking there. In Japan, on the other hand, the popularity of directmarketing of insurance has whittled down the importance of bancassurance. Here, direct marketing will have to be coupled with branch networks."
On the other hand, there are many favourable examples to fall back upon, such as Netherlands, Spain and France where a large chunk of the insurance business is conducted through banks.
The universal experience
While the experience in each country has been slightly different, there are some more generic factors which have fostered the growth of bancassurance the world over: when the insurance sector first opens up in a country, or when there is a regime of low interest rates in the banking sector, financial analysts say that the first tendency for household savings is to move from bank deposits to insurance products more than from other assets parked in, say, equity, gold, real estate, or even other debt instruments, since a part of funds parked in banks are sometimes those which are there in absence of better investment options. Insurance and banking,therefore, often act like catchment areas for funds moving out of one option to another. For example, in times of deep economic crises, once again funds tend to move back to banks which are the world over generally considered the safest avenue to park funds in. This provides bancassurers with a captive catchment.
Healthy synergies
But, although product-network symbiosis brings these partners together-- as the examples above suggest-- there is much more to it that keeps these alliances going for the most part. Ask any insurer about the attractions of joining up with a bank and chances are that he would point at their huge customer databases as much as at their network-- the total number of accounts in the banking system which was 397 million as on March 31, 1997 gives an indication. SBI has one of two crore customers, while Padamsee also talks of DCB's 55,000 shareholders and 18-20,000 loan accounts in addition to a depositor base of four lakh as forming a composite database.
Secondly, thegreatest competitive edge banks have over insurance companies apart from large databases is the personal contact they have with their clients--not to speak of first hand knowledge of their financial profile which can be used to leverage the bancassurance business. For example, knowledge about a housing loan taken from a bank or its housing finance subsidiary can trigger off a mortgage insurance, which is also the case in, say, an auto loan. So, with such major strengths as these, storming the insurance sector should be a walkover for banks.
But will it? Many feel it will work, even if banks seem to have a lot right now on their plates. For example, banks the world over have rarely been able to utilise their databases in their original form, but have had to modify them before they could use them profitably for bancassurance. India can be no exception since most domestic banks here emphasise only the identification aspect in the form when the customer opens his account, except when a loan account is opened.And that truncates a database severely, since it is financial profile of the customer such as savings and loan distribution which will actually give important leads to his insurance potential, have got to be tediously analysed from details of his account transactions. Foreign and even new private sector banks, on the other hand, ask for details such as educational background, number of earning members in the family, assets such as houses, cars, etc, even from customers who have not availed of a loan. Banks, who are planning to enter insurance are working overtime to get over this weak link.
Of course, the mere fact that banks are in personal contact with their clients and can access them, unlike insurance companies who typically interact through intermediaries, is no doubt a major strength. But that's going to require an incredible degree of pro-active marketing--its naive to expect that bank customers are inevitably going to walk up to the insurance desk and ask for life covers themselves.
Then, thereare the hazards of cannibalisation, especially when banks enter the savings-linked life segment, since these are in direct competition to conventional banking products. A Price Waterhouse Coopers survey showed that there was considerable resistance on the part of bank personnel to bancassurance precisely because they thought that they would become redundant if savings were diverted from banks to their insurance subsidiaries. For example, in Sweden, a change in regulations allowed banks to offer a savings account linked to individual pensions, which was, in effect, an insurance product. Since this came under the purview of the insurance subsidiaries, banks there had to expand their product profile to compensate for the revenue lost to them.
Cashing in on their biggest USP and using the network to the optimum itself would require strategic thinking. For example, Indian bancassurers would probably have to take a leaf out of the French bancassurance book and confine themselves to simple products, oftensavings-related, initially, before graduating to more complex ones. These are easily understood by most bank employees themselves, so, even if 50 per cent of a bank's branches are to be harnessed initially, it could be possible to keep employee costs down by training and re-deploying existing bank personnel to the in house insurance desk to market such products. Bali also feels there is a need for banks to draw up plans at the very outset about whether underwriting and processing of claims are to be centralised, and if so, at which level, ie, zonal or otherwise, since this is what will decide the technology-spend of bancassurers.
So, if bank techies have put their heads close together, there is also a flurry of activity amongst insurance project heads to plan for better co-ordination between the product division, marketing and treasury--- than banks by themselves have ever shown. That's since its a universally known fact that insurance companies rake in their profits not from premium, but from investment.For example, if a bancassurer is coming out with a 10 year product, not only would the product division have to analyse the premium expected over a 10 year period in co-ordination with marketing; the treasury would also have to know about cash flows, too--a major challenge for Indian banks. But they seem game for any challenge now. The prospects of metamorphosing into financial conglomerates, or, even of raking in good fee-based incomes makes the game seem worth much more than the candle.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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