Banks' fee income may come down

The imminent cap on Unit-linked insurance plan charges and the recently instituted ban on entry load fees levied by mutual funds is likely to adversely impact fee-based income of banks.

Income from distribution of third-party products such as insurance policies and mutual fund schemes is already under pressure because of the unfavourable economic climate.

The Insurance Regulatory and Development Authority said in a July 22 circular that for policies with tenure of 10 years or less, the difference between gross and net yields should not exceed 300 basis points within which fund management charges were capped at 1.5 per cent.

For banks, a major chunk of revenues from sale of third-party products comprises income from selling insurance policies and the move will put a squeeze on commissions paid to banks as distribution charges.

"In the short term, there will not be any effect on fee income as contracts with the insurance partner are already in place. But, it is likely that the insurance partner will ask us to rework the terms of the contract since they have to bear the added expenses," said an executive of a private sector bank who declined to be named.

Sonu Bhasin, president, retail financial services at Axis Bank said, "We have discussed the issue with our insurance partner Metlife. It is too early to say how it will affect us, but this is a forever changing environment and it is up to us to
have a business plan that keeps up with it."

Income from distribution of third-party products is already under strain with new business premia for the insurance industry falling 6 per cent on a year-on-year basis in 2008-09.

In addition, from August 1, 2009, mutual funds have been barred from charging entry load fees of about 2.5 per cent to customers, a bulk of which was used to pay distributor commissions.

Now, banks which distribute MF schemes will have to independently negotiate commissions from customers.

Bank of India executive director M Narendra said there might be some reduction in the income from services. However, since banks cannot provide its branch network free of charge for third-party products, MFs will have to provide clarity on arrangements in light of the regulatory changes on charges.

"There will be some customers who are not ready to pay either for MF advisory services or for execution.

But the feedback from the ground is that customers, by and large, are willing to pay," said Axis Bank's Bhasin.

An executive from a private sector bank said banks would be less affected than the standalone MF distributors because they could offer customers a variety of products and cross-subsidise fees.

Revati Kasture, head of industry research, CARE, said while it was not possible to estimate the extent of income bank earnings through cross-selling MF and insurance policies, banks may forgo some of the income  which they earned by hawking these products.

Banks have focussed on hawking mutual fund and insurance products to increase their non-interest income and bring stability to income flows.

They have been working on different business models, while dealing with these products.

Image: The Bombay Stock Exchange