The apex body, Reserve Bank of India (RBI) has refused to relax the ceiling on investment that banks can make in their insurance joint ventures. The regulator has taken the move to discourage banks from spending more money on the insurance JVs promoted by them.

As a result, private lender Jammu & Kashmir Bank has been disallowed to invest more money in MetLife India.

According to the guidelines made in 2000, banks are only allowed to invest up to 10% of their net worth in their insurance JVs. Also the norms require the total amount invested by a bank in all its subsidiaries and joint ventures should not go over 20% of its net worth.

RBI's move is expected to affect the life insurers in which banks have equity share. Some of such insurers include ING Vysya Life, ICICI Prudential Life and Kotak Mahindra Life. However there are many other banks promoted insurance companies that will not be affected by the RBI's decision. This is because these companies are far behind from the 10% ceiling only.

When the guidelines were laid down by the RBI, they did not appear strict as most insurance companies had started with a base capital of Rs 100 crore but there has been a rapid growth in the past three years. Until October when the financial crisis attacked the globe, most banks had invested over Rs 1,000 crore in their life insurance companies.

Asked about the RBI's denial to allow J&K bank to increase stake in MetLife India, a spokesperson from the bank said, "We are interested in maintaining our stake. The current regulations allow us to invest up to 10% of our net worth. We are at that level."

Managing Director of MetLife India, Rajesh Relan said, "MetLife India is a well-capitalized company with strong shareholders, who have made timely capital contributions. We are not in the know of any such constraints and any comment in this regard would be merely reacting to a speculation."

This joint venture originally had 25% stake held by J&K Bank and 26% by MetLife. But in FY 09, the share of MetLife increased rapidly and J&K's share declined inducing the bank to invest more.