Foreign Banks With Insurance Plans Face Stricter Guidelines In India

Vanessa Doctor

22 August 2010

The Reserve Bank of India is implementing stricter rules over the business presence of foreign financial institutions in the country.

To protect domestic businesses, the FDI has proposed that foreign direct investment proposals of private banks with insurance joint ventures or subsidiaries should get the approval of two regulators before they can operate: the RBI and the Insurance Regulatory and Development Authority. The new guidelines are designed to make sure the 26 per cent FDI cap is not violated even indirectly by firms entering the insurance sector in addition to their banking operations.

"The new rules will ensure that there is no violation of the current guidelines for future players," the RBI said in a statement. "Some of the banks have not yet made a foray in the insurance sector. In any case, entrants have to seek permission from the respective regulators."

The regulator has yet to decide what to do with the existing insurance businesses of banks that have considerable foreign investments. In a statement, the RBI said that since the objective is to create strong domestic banking entities and a diversified banking sector, the aggregate non-resident investment, including FDI, NRI and FII, could be capped at a suitable level below 50 per cent and locked at that level for the initial 10 years.