Banks can run new pension plans

MUMBAI: The government has thrown open a new business line for banks by allowing them to run its new pension scheme. A recent government notification amending the Banking Regulation Act lists “acting as pension fund manager” as a form of business banks can engage in.

However, banks will have to float a separate subsidiaries for this new line of business, as RBI has barred bank departments from pension management. Insurance and asset management companies also will have to float separate subsidiaries since the Pension Fund Regulatory Authority has said it will not give licences to existing companies.
The government notification comes on the back of the pension regulator’s invitation for bids to run the government’s new pension business. While LIC has already decided to form a separate company, the State Bank of India and IDBI are seen as the front-runners among banks.

According to Reserve Bank’s guidelines, banks with a minimum net worth of Rs 500 crore and a capital adequacy of 11% for the last three years are eligible to operate pension plans. The bank should also have a three-year profit record and return on assets of at least 0.6%. The other key criterion is that they cannot have net non performing assets of more than 3%. In addition, banks that attracted adverse remarks on their investment portfolio in RBI’s inspection reports may also be denied permission.

RBI has capped banks’ contribution to the equity capital of their pension subsidiaries at 10% of their net worth. Banks are also barred from investing more than 20% of their net worth in all their subsidiaries put together. On pension subsidiaries, RBI has said that they cannot float any new subsidiary or company, or invest in a new venture without its prior permission.

Banks that wish to enter the pension management business have been told to submit their five-year business plan with RBI.

The last time the Banking Regulation Act was amended in 1999 to enable banks get into insurance business. Then, too, RBI had issued stringent guidelines with regard to banks’ net worth and asset quality.