"The vast branch network and the depositor base of commercial banks are expected to play an important role in marketing insurance products over the counter. The most important source of complementarity arises due to the critical role that banks could play in disbursing and marketing of insurance products. So far, direct branch network of Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and its subsidiaries together with their agents have been instrumental in marketing of insurance products in the country", said the Reserve Bank of India (RBI) in its Report on Currency and Finance in India (1999-2000).

The RBI points out that in developing countries, one important feature of insurance business, and of long-term life insurance in particular, is that insurance policies are generally a combination of risk coverage and savings."

"The savings component in the insurance policies is seen as a possible source of competition for the banking sector, as the insurance industry develops on a competitive basis. There are, however, other considerations, that point to the possible complementarities and synergies between the insurance nad banking business", the RBI noted.

The present interest of banks to enter into insurance business also mirrors global trends. In Europe, the synergy between banking and insurance has given rise to the concept of `bancassurance' - a package of financial services that can fullfil both banking and insurance needs. The institutional overlaps taking place has been varied - flotation of separate insurance companies by bank; banks' buying stakes in existing insurance companies, and swap of shares and mergers. Insurance companies have also sought to acquire stakes in some banks.

In India, the RBI has identified three routes for banks' participation in the insurance business: one is to provide fee-based insurance services without risk participation; secondly, to invest in an insurance company for providing infrastructure and service-support; and thirdly, to set up a separate joint venture insurance company with risk participation.

The third route, due to its risk aspects, involves compliance to stringent entry norms. Further, banks have to maintain an `arms length' relationship between its banking business and its insurance outfit. For banks entering into insurance business with risk participation, the prescribed entity also enables to avoid possible regulatory overlaps between the RBI and the Insurance RegulatoryDevelopment Authority (IRDA). The joint-venture insurance company would be subjected entirely to the IRDA regulations.