Reminding banks about a 2011 guideline, the central bank has asked banks not to force borrowers to open an insurance policy with a specific insurance company.
The central bank's Banking Regulation and Policy Division (BRPD) issued a circular in this regard Monday.
When borrowers want to take out insurance against a loan, many banks force their customers to open it with the banks' favorite insurers. In this case, the borrowers have to do so no matter how poor-performing the insurance company is.
According to a 2011 central bank circular, the credit ratings of the insurance companies will have to be considered when scheduled banks receive insurance or cover notes from their customers.
The circular further said that no bank can attract its borrowers to any particular insurance company, and the borrower can be insured with any company approved by the Insurance Development & Regulatory Authority against the loan.
The central bank in the 2011 circular said banks dumping their favorite company on customers is "an unsolicited intervention," which is not desirable. Besides, considering the credit rating of the insurance company, the banks will not be able to give any condition to the companies to keep term deposits.
But recently the central bank has received complaints that some banks are not complying with the directives. Those banks have been asked in the Monday circular to follow the instructions properly.
According to central bank sources, many banks have been assigning insurance companies for lending and the banks have been reminded of the previous instructions to stop doing so.