State Bank of India (SBI) has announced a general insurance joint venture with Australia's Insurance Australia Group (IAG), which will commence business in the current financial year.

The two financial groups had been holding talks for over 18 months.

India's largest bank said that it had signed a memorandum of understanding (MOU) yesterday to form this non-life venture in which it would hold a majority 74-per cent stake.

SBI expects both companies to finalise a shareholders' agreement and obtain regulatory approvals. Once approvals are granted, the joint venture is expected to commence writing business in 2009.

''Establishing a general insurance joint venture is a key element of SBI's strategy to pursue emerging, high growth opportunities to build on our position as a pre-eminent financial services group in India,'' said Deepak Chawla, deputy managing director, SBI.

IAG chief executive officer Michael Hawker said he was pleased IAG had been selected by SBI ahead of a number of major international insurers.

''SBI one of the most trusted brands in India, and a heritage dating back over 200 years," Hawker said.

''We identified India four years ago as a market we wanted to enter as part of our stated strategy to diversify into fast growing general insurance markets in Asia. India has a large, high growth economy. Its general insurance sector is predicted to grow 15 per cent - 20 per cent per annum over the next ten years,'' Hawker said.

SBI already has an insurance venture SBI Life, a partnership with French insurer Cardif, which is part of the BNP Paribas group. This is the third largest of its kind in the country, and after teething problems at launch, has carved out a decent market share.

Although non-life insurance has been growing at only 12 per cent, a much slower pace compared to life insurance, it brings in profits much faster. Moreover, it is also easier to sell, as most of the non-life insurance policies that are bought are mandatory, while life insurance is bought when a consumer feels like it.

For instance, bank-financed property, motor third-party liability, and vehicles purchased under finance schemes all have to be insured as a matter of law.

IAG intends to fund its stake in the joint venture using internal resources.

SBI has 100 million customers and more than 10,000 branches in India. It is the largest bank in India in terms of its asset base of $126 billion. It reported net profit of Rs.8,960 crore ($2.24 billion) last year.

IAG is an Australian publicly listed company with its shares traded on the Australian Stock Exchange as ASX:IAG. On 31 August 2006, IAG was placed on the Dow Jones Sustainability Index, the first Australian insurance company to achieve this recognition. It reported revenue of $7.4 billion last year but had losses of around half a billion dollars.

This is not its first major investment in an Asian economy. Its assets in the continent include 96 per cent stake in Safety Insurance, Thailand, and full ownerships of NZI Thailand and AmAssurance, Malaysia. In China, IAG owns CAA, the China Automobile Association, the largest roadside assistance provider in the country. IAG held a stake in CAA since 1999, increasing to full ownership in 2003.