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Business Commentary/ R C Murthy

Banking reforms hold precedents for insurance regulator

Now that Parliament has passed the Insurance Regulatory and Development Authority Bill, the focus shifts to implementation of partial privatisation.

A similar situation prevailed four years ago when banking reforms were being carried out at the behest of World Bank.

There was an air of uncertainty. Would banks be handed back to business tycoons? The same tycoons were accused of mismanagement prior to the banks' takeover in July 1969. Was the World Bank aware of the circumstances that prevailed then?

The way events took shape, I believe the World Bank influenced India's banking policy. At least, the World Bank had not insisted on handing back Indian banks lock, stock and barrel to the same tycoons.

Obviously, the World Bank agreed to a step-by-step approach. Firstly, the Reserve Bank of India fixed the minimum capital for new banks (at Rs 1 billion) in such a way that all and sundry would not be tempted to get in.

Secondly, it allowed top financial institutions like the IDBI, ICICI and the UTI to float banks in the first round. That was followed by private sector organisations like HDFC that had a track record in public funds management.

Business tycoons were disheartened. The late Aditya Birla threatened to go to court unless the banking regulator, the RBI, gave reasons for the "rejection" of his application for a banking licence.

Technically, Birla's application was not rejected. But he deemed a 'no response' is rejection.

Of course, there were a couple of exceptions. The RBI allowed Ramesh Gelli, a professional manager, to set up Global Trust Bank with equity support from the Asian Development Bank and International Finance Corporation of Washington.

The other exception was a licence to Bennett, Coleman and Company to float TimesBank. TB is now merging with HDFC Bank.

The first phase of banking reforms saw the emergence of a new breed of professional managers.

It appears insurance reforms will be on the banking sector pattern. The minimum equity capital for floating an insurance company will be Rs 1 billion.

The insurance regulator will now frame the rules and regulations for all domestic insurers, their brokers, agents and spell out rules for pension funds.

With his bureaucratic background, the IRA chairman N Rangachary will not depart from the precedent set in the banking sector. When the applications are processed, the first priority will naturally go to financial institutions, followed by private institutions with a clean track record.

The acid test for Rangachary will be selection of private entrepreneurs. Although the Rs 1 billion minimum equity will keep out many, Rangachary will have enough applications to put him in a dilemma.

Among the applicants would be the Birla, the Tatas, the Ambanis and other bigwigs of Corporate India. To be on the safe side, the IRA chairman may keep all these in cold storage for some time.

The extent of foreign equity, which the legislation pegs at 26 per cent, is likely to stir a debate. Will the stake of internatioinal financial institutions like the Asian Development Bank and International Finance Corporation be reckoned with? Or, will it be excluded?

The understanding some six months ago was to keep this component (upto a maximum 14 per cent) out of the 26 per cent foreign equity. Will the regulator go by the letter of law or would he seek a ruling from the government?

Left parties will certainly object to such liberal interpretation while the Congress may fall in line. After all, this exclusion principle was evolved earlier during the Congress regime.

As in banking, the regulator has considerable liverage in moulding the industry to national needs. Licences will be issued based on their business plans which have to be adhered to. He has the authority to adjust the percentage of investible funds in social sectors.

Several other amendments proposed by the Congress are incorporated. Priority has to be given to health insurance. The regulator will fix the business to be mobilised in rural areas as in banking.

But the insurance legislation is stringent in one respect. Failure to fulfil social sector obligations will attract Rs.2.5 million penalty on the first occasion. The licence itself will be cancelled for a subsequent default.

Probably, flexibility would be built into the "obligation" definition by giving powers to the regulator to vary and avoid an ugly situation.

Parliament approves insurance bill

R C Murthy

Business