`Bancassurance’ in EMEs: Assessing its Impact on the Financial System with Specific Reference to India

The ongoing wave of financial deregulation, changing client demands and technological progress is paving the way for emergence of giant financial conglomerates and one such resulting phenomenon is ‘bancassurance’. The conventional wisdom states that coming together of banking and insurance helps banks capitalize on ‘operation-leverage’ but ignores the embedded concentration, contagion and regulatory risks. This paper highlights the potency of the contagion-effect of insurance business on parent banks citing the September 11th attacks and its financial consequences. It argues that such banking crisis entails significant costs for the real economy not only by way of crisis resolution cost but also by way of tightening domestic credit conditions. The paper also traces the present risk-profile of banks in EMEs with a specific focus on India, in terms of tangled laws, deeply biased credit systems, risk management practices; and assesses the impact of “risk-concentration”, “contagion effect” and “regulatory-risks” resulting from the convergence on the stability of the financial system.