FINANCIAL SERVICES

Introduction

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system.The financial services sector has been an important contributor to the country gross domestic product (GDP) accounting for nearly 6 per cent share in 2014-15.The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by both government and private sector, India is undoubtedly one of the world's most vibrant capital markets.

Classification

Market Size

The size of banking assets in India reached US$ 1.46 trillion as on November 13, 2015 and is expected to touch US$ 28.5 trillion by FY25. Banks total credit stood at US$ 1.02 trillion as on November 13, 2015. The Association of Mutual Funds in India (AMFI) data show that assets of the mutual fund industry have reached a size of Rs 12.95 trillion (US$ 194 billion) as of November 2015. During April 2015 to September 2015 period, the life insurance industry recorded a new premium income of Rs 562.86 billion (US$ 8.4 billion), indicating a growth rate of 14.45 per cent. The general insurance industry recorded a 12.6 per cent growth in Gross Direct Premium underwritten in FY2016 upto the month of October 2015 at Rs 550 billion (US$ 8.23 billion).

India’s life insurance sector is the biggest in the world with about 360 million policies, which are expected to increase at a compounded annual growth rate (CAGR) of 12-15 per cent over the next five years. The insurance industry is planning to hike penetration levels to five per cent by 2020, and could top the US$ 1 trillion mark in the next seven years. The total market size of India's insurance sector is projected to touch US$ 350-400 billion by 2020.India is the fifteenth largest insurance market in the world in terms of premium volume, and has the potential to grow exponentially in the coming years. Life insurance penetration in India is just 3.9 per cent of GDP, more than doubled from 2000. A fast growing economy, rising income levels and improving life expectancy rates are some of the many favorable factors that are likely to boost growth in the sector in the coming years.Investment corpus in India’s pension sector is expected to cross US$ 1 trillion by 2025, following the passage of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013.

Investments/Developments

Foreign Direct Investment in the insurance sector stood at US$ 341 million in March-September, 2015, showing a growth of 152 per cent compared to the same period last year.

Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life Insurance Co Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per cent to 49 per cent.

Canada-based Sun Life Financial Inc plans to increase its stake from 26 per cent to 49 per cent in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo Ltd, through buying of shares worth Rs 1,664 crore (US$ 249 million).

>Nippon Life Insurance, Japan’s second largest life insurance company, has signed definitive agreements to invest Rs 2,265 crore (US$ 348 million) in order to increase its stake in Reliance Life Insurance from 26 per cent to 49 per cent.

The Securities and Exchange Board of India (SEBI) plans to gradually introduce more commodity products and allow more participants in the commodity derivatives market in India.

The Reserve Bank of India (RBI) has granted in-principle licenses to 10 applicants to open small finance banks, which will help expanding access to financial services in rural and semi-urban areas, thereby giving fillip to Prime Minister's financial inclusion initiative.

The Reserve Bank of India (RBI) has also given in-principle approval to 11 entities to open payment banks which is expected to result in widening the reach of banking services and thereby improve the extent of financial inclusion as envisaged by the government. The setting up of 11 new payments banks can potentially free up Rs 1,400,000 crore (US$ 210 billion) per annum to fund the infrastructure sector, as per a study by the State Bank of India.

A Reserve Bank of India (RBI) committee headed by Deputy Governor Mr Gandhi has recommended granting commercial banking license to multi-state urban cooperative banks(UCB) having business of more than Rs 20,000 crore (US$ 3 billion).

India’s largest microfinance company Bandhan has set up Bandhan Bank Ltd, banking and financial services company, post the receipt of license from RBI.

India has moved a step closer to having a Singapore- or Dubai-like financial hub, with the Securities and Exchange Board of India (SEBI) approving a framework for international financial centres (IFCs).

The RBI has allowed bonds issued by multilateral financial institutions like World Bank Group, the Asian Development Bank and the African Development Bank in India as eligible securities for interbank borrowing. The move will further develop the corporate bonds market, RBI said in a notification.

Government Initiatives

Several measures have been outlined in the Union Budget 2015-16 that aim at reviving and accelerating investment which, inter alia, include fiscal consolidation with emphasis on expenditure reforms and continuation of fiscal reforms with rationalization of tax structure.The Government has also announced several schemes to improve the extent of financial inclusion. The Prime Minister of India has launched the Micro Unit Development and Refinance Agency (MUDRA) to fund and promote microfinance institutions (MFIs), which would in turn provide loans to small and vulnerable sections of the business community. Financial Services Secretary Mr Hasmukh Adhia has announced that the ministry will launch a campaign for loans under Pradhan Mantri Mudra Yojana (PMMY) in order to double loan disbursement to the small business sector to over Rs 100,000 crore (US$ 15 billion).Government of India’s ‘Jan Dhan’ initiative for financial inclusion is gaining momentum, as the number of bank accounts opened by July 15, 2015 has more than doubled to 169 million from 68.7 million at end of October 2014, Government of India aims to extend insurance, pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY). The Union Cabinet Minister has also approved the Pradhan Mantri Suraksha Bima Yojana which will provide affordable personal accident and life cover to a vast population.The Union Cabinet has approved 100 per cent Foreign Direct Investment (FDI) under the automatic route for non-bank entities that operate White Label Automated Teller Machine (WLA), subject to certain conditions.Minister of Finance Mr Arun Jaitley has formally declared the merger of Forward Markets Commission (FMC) with Securities and Exchange Board of India (SEBI), which help convergence of regulations in the commodities and equity derivatives markets.The Insurance Regulatory and Development Authority of India (IRDA), as part of its endeavour to increase insurance sector growth, has allowed a new distribution avenue called the ‘point of sale’ person, who will be allowed to sell simple standardised insurance products in the non-life and health insurance segments, which are largely pre-underwritten.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMG-Confederation of Indian Industry (CII). The report also expects bank credit to grow at a compound annual growth rate (CAGR) of 17 per cent in the medium term leading to better credit penetration. Life Insurance Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.Also, the relaxation of foreign investment rules has received a positive response from the insurance sector, with many companies announcing plans to increase their stakes in joint ventures with Indian companies. Over the coming quarters there could be a series of joint venture deals between global insurance giants and local players. The relaxation in the foreign direct investment (FDI) limit to 49 per cent can result in additional investments up to Rs 60,000 crore (US$9 billion).Exchange Rate Used: INR 1 = US$ 0.0150 as on December 08, 2015

Current Status of Financial Service Sector in India

India’s gross domestic savings (GDS) as a percentage of Gross Domestic Product (GDP) has remained above 30 per cent since 2004.It is projected that national savings in India will reach US$ 1,272 billion by 2019. Over 95 per cent of household savings in India are invested in bank deposits and only 5 per cent in other financial asset classes. The asset management industry in India is among the fastest growing in the world. Total asset under management (AUM) of the mutual fund industry clocked a Compound Annual Growth Rate (CAGR) of 12.05 per cent over FY07-15 to reach US$ 179.6 billion. Corporate investors accounted for around 45.9 per cent of total AUM in India, while High Net Worth Individuals (HNWI) and retail investors account for 28.6 per cent and 22.9 per cent, respectivelyIndia’s equity market turnover has increased significantly in recent years. The annual turnover value in the National Stock Exchange (NSE) witnessed a CAGR of 20.7 per cent between FY96 and FY15 to reach US$ 718 billion. 

The Government of India has taken various steps to deepen the reforms in the capital markets, includes simplification of the Initial Public Offer (IPO) process which allows qualified foreign investors (QFIs) to access the Indian bond markets.

Insurance Sector

IntroductionThe insurance industry of India consists of 53 insurance companies of which 24 are in life insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers. In addition to these, there is sole national re-insurer, namely, General Insurance Corporation of India (GIC Re). Other stakeholders in Indian Insurance market include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance claims.Out of 29 non-life insurance companies, five private sector insurers are registered to underwrite policies exclusively in health, personal accident and travel insurance segments. They are Star Health and Allied Insurance Company Ltd, Apollo Munich Health Insurance Company Ltd, Max Bupa Health Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna TTK Health Insurance Company Ltd. There are two more specialised insurers belonging to public sector, namely, Export Credit Guarantee Corporation of India for Credit Insurance and Agriculture Insurance Company Ltd for crop insurance.

Market Size

India's life insurance sector is the biggest in the world with about 360 million policies which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 per cent over the next five years. The insurance industry plans to hike penetration levels to five per cent by 2020.The country’s insurance market is expected to quadruple in size over the next 10 years from its current size of US$ 60 billion. During this period, the life insurance market is slated to cross US$ 160 billion.The general insurance business in India is currently at Rs 78,000 crore (US$ 11.7 billion) premium per annum industry and is growing at a healthy rate of 17 per cent.The Indian insurance market is a huge business opportunity waiting to be harnessed. India currently accounts for less than 1.5 per cent of the world’s total insurance premiums and about 2 per cent of the world’s life insurance premiums despite being the second most populous nation. The country is the fifteenth largest insurance market in the world in terms of premium volume, and has the potential to grow exponentially in the coming years.

Investments

The following are some of the major investments and developments in the Indian insurance sector.

Foreign Direct Investment in the insurance sector stood at US$ 341 million in March-September, 2015, showing a growth of 152 per cent compared to the same period last year.

Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life Insurance Co Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per cent to 49 per cent.

Canada-based Sun Life Financial Inc plans to increase its stake from 26 per cent to 49 per cent in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo Ltd, through buying of shares worth Rs 1,664 crore (US$ 249 million).

Nippon Life Insurance, Japan's second largest life insurance company, has signed definitive agreements to invest Rs 2,265 crore (US$ 348 million) in order to increase its stake in Reliance Life Insurance from 26 per cent to 49 per cent.

The Central Government is planning to launch an all-in-one insurance scheme for farmers called the Unified Package Insurance Scheme (Bhartiya Krishi Bima Yojana). The proposed scheme will have various features like crop insurance, health cover, personal accident insurance, live stock insurance, insurance cover for agriculture implements like tractors and pump sets, student safety insurance and life insurance.

Government launched a special enrolment drive, Suraksha Bandhan Drive comprising of sale of gift cheques and launch of deposit schemes in bank branches, to facilitate enrolment under Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).

To increase the subscriber base and ensure wider reach, the Central Government has eased several norms for its flagship insurance scheme Atal Pension Yojana (APY),in terms of more options for periodical contributions, voluntary and premature exits and simplified penalty for payment delays.

Bennett Coleman and Co. Ltd (BCCL), the media conglomerate with multiple publications in several languages across India, is set to buy Religare Enterprises Ltd’s entire 44 per cent stake in life insurance joint venture Aegon Religare Life Insurance Co.

Ltd. The foreign partner Aegon is set to increase its stake in the joint venture from 26 per cent to 49 per cent, following government’s reform measure allowing the increase in stake holding by foreign companies in the insurance sector.

GIC Re and 11 other non-life insurers have jointly formed the India Nuclear Insurance Pool with a capacity of Rs 1,500 crore (US$ 226 million) and will provide the risk transfer mechanism to the operators and suppliers under the CLND Act.

State Bank of India has announced that BNP Paribas Cardif is keen to increase its stake in SBI Life Insurance from 26 per cent to 36 per cent. Once the foreign joint venture partner increases its stake to 36 per cent, SBI’s stake in SBI Life will get diluted to 64 per cent.

Bangladesh has granted permission to the Life Insurance Corporation of India (LIC) to run its business, making it the second foreign insurance company to operate in the country.

Reliance Life Insurance Company (RLIC) today said it will add 20,000 agents across India in this financial year as part of its expansion plans. It will increase their agency force by 20 per cent which now stands at 100,000.

Government InitiativesThe Government of India has taken a number of initiatives to boost the insurance industry. Some of them are as follows:

The Insurance Regulatory and Development Authority (IRDA) of India has formed two committees to explore and suggest ways to promote e-commerce in the sector in order to increase insurance penetration and bring financial inclusion.

IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and Social Sectors) Regulations, 2015, in pursuance of the amendments brought about under section 32 B of the Insurance Laws (Amendment) Act, 2015. These regulations impose obligations on insurers towards providing insurance cover to the rural and economically weaker sections of the population.

The Government of India has launched two insurance schemes as announced in Union Budget 2015-16. The first is Pradhan Mantri Suraksha Bima Yojana (PMSBY), which is a Personal Accident Insurance Scheme. The second is Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), which is the government’s Life Insurance Scheme. Both the schemes

offer basic insurance at minimal rates and can be easily availed of through various government agencies and private sector outlets.

The Uttar Pradesh government has launched a first of its kind banking and insurance services helpline for farmers where individuals can lodge their complaints on a toll free number.

The select committee of the Rajya Sabha gave its approval to increase stake of foreign investors to 49 per cent equity investment in insurance companies.

Government of India has launched an insurance pool to the tune of Rs 1,500 crore (US$ 226 million) which is mandatory under the Civil Liability for Nuclear Damage Act (CLND) in a bid to offset financial burden of foreign nuclear suppliers.

Road Ahead

India's insurable population is anticipated to touch 750 million in 2020, with life expectancy reaching 74 years. Furthermore, life insurance is projected to comprise 35 per cent of total savings by the end of this decade, as against 26 per cent in 2009-10.The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers.Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of Indian life insurance.Exchange Rate Used: INR 1 = US$ 0.015 as on December 17, 2015

Banking Sector

IntroductionAs per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.Indian banking industry is expected to witness better growth prospects in 2015 as a sense of optimism stems from the Government’s measures towards revitalizing the industrial growth in the country. In addition, RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

Market SizeThe Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its private peers.As of November 11, 2015, 192.1 million accounts had been opened under Pradhan Mantri Jan Dhan Yojna (PMJDY) and 165.1 million RuPay debit cards were issued. These new accounts have mustered deposits worth Rs 26,819 crore (US$ 4 billion).Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 12-13 per cent in FY16 from less than 10 per cent in the second half of CY14.Investments/developmentsIn the past few months, there have been many investments and developments in the Indian banking sector

Global rating agency Moody's has upgraded its outlook for the Indian banking system to stable from negative based on its assessment of five drivers including improvement in operating environment and stable asset risk and capital scenario.

Lok Capital, a private equity investor backed by US-based non-profit organisation Rockefeller Foundation, plans to invest up to US$ 15 million in two proposed small finance banks in India over the next one year.

The Reserve Bank of India (RBI) has granted in-principle licences to 10 applicants to open small finance banks, which will help expanding access to financial services in rural and semi-urban areas.

IDFC Bank has become the latest new bank to start operations with 23 branches, including 15 branches in rural areas of Madhya Pradesh.

The RBI has given in-principle approval to 11 applicants to establish payment banks. These banks can accept deposits and remittances, but are not allowed to extend any loans.

The Bank of Tokyo-Mitsubishi (BTMU), a Japanese financial services group, aims to double its branch count in India to 10 over the next three years and also target a 10 per cent credit growth during FY16.

State Bank of India has tied up with e-commerce portal Snapdeal and payment gateway Paypal to finance MSME businesses.

The United Economic Forum (UEF), an organisation that works to improve socio-economic status of the minority community in India, has signed a memorandum of understanding (MoU) with Indian Overseas Bank (IOB) for financing entrepreneurs from backward communities to set up businesses in Tamil Nadu

The RBI has allowed third-party white label automated teller machines (ATM) to accept international cards, including international prepaid cards, and said white label ATMs can now tie up with any commercial bank for cash supply.

The RBI has allowed Indian alternative investment funds (AIFs), to invest abroad, in order to increase the investment opportunities for these funds.

In order to boost the infrastructure sector and the banks financing long gestation projects, the RBI has extended its flexible refinancing and repayment option for long-term infrastructure projects to existing ones where the total exposure of lenders is more than Rs 500 crore (US$ 75.1 million).

RBI governor Mr Raghuram Rajan and European Central Bank President Mr Mario Draghi have signed an MoU on cooperation in central banking. “The memorandum of understanding provides a framework for regular exchange of information, policy dialogue and technical cooperation between the two institutions. Technical cooperation may take the form of joint seminars and workshops in areas of mutual interest in the field of central banking,” RBI said on its website.

RBL Bank informed that it would be the anchor investor in Trifecta Capital’s Venture Debt Fund, the first alternative investment fund (AIF) in India with a commitment of Rs 50 crore (US$ 7.51 million). This move provides RBL Bank the opportunity to support the emerging venture debt market in India.

Bandhan Financial Services raised Rs 1,600 crore (US$ 240.2 million) from two international institutional investors to help convert its microfinance business into a full service bank. Bandhan, one of the two entities to get a banking licence along with IDFC, launched its banking operations in August 2015.

Government InitiativesThe government and the regulator have undertaken several measures to strengthen the Indian banking sector.

The Government of India is looking to set up a special fund, as a part of National Investment and Infrastructure Fund (NIIF), to deal with stressed assets of banks. The special fund will potentially take over assets which are viable but don’t have additional fresh equity from promoters coming in to complete the project.

The Reserve Bank of India (RBI) plans to soon come out with guidelines, such as common risk-based know-your-customer (KYC) norms, to reinforce protection for consumers, especially since a large number of Indians have now been financially included post the government’s massive drive to open a bank account for each household.

To provide relief to the state electricity distribution companies, Government of India has proposed to their lenders that 75 per cent of their loans be converted to state government bonds in two phases by March 2017. This will help several banks, especially public sector banks, to offload credit to state electricity distribution companies from their loan book, thereby improving their asset quality.

The Reserve Bank of India (RBI), the Department of Industrial Policy & Promotion (DIPP) and the Finance Ministry are planning to raise the Foreign Direct Investment (FDI) limit in private banks sector to 100 per cent from 74 per cent.

Government of India aims to extend insurance, pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY).<

The Government of India announced a capital infusion of Rs 6,990 crore (US$ 1.05 billion) in nine state run banks, including State Bank of India (SBI) and Punjab National Bank (PNB). However, the new efficiency parameters would include return on assets and return on equity. According to the finance ministry, “This year, the Government of India has adopted new criteria in which the banks which are more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position."

To facilitate an easy access to finance by Micro and Small Enterprises (MSEs), the Government/RBI has launched Credit Guarantee Fund Scheme to provide guarantee cover for collateral free credit facilities extended to MSEs upto Rs 1 Crore (US$ 0.15 million). Moreover, Micro Units Development & Refinance Agency (MUDRA) Ltd. was also established to refinance all Micro-finance Institutions (MFIs), which are in the business of lending to micro / small business entities engaged in manufacturing, trading and services activities upto Rs 10 lakh (US$ 0.015 million).

The central government has come out with draft proposals to encourage electronic transactions, including income tax benefits for payments made through debit or credit cards.

The Union cabinet has approved the establishment of the US$ 100 billion New Development Bank (NDB) envisaged by the five-member BRICS group as well as the BRICS “contingent reserve arrangement” (CRA).

The government has plans to set up a fund that will provide surety to banks against loans given to students for higher education.

Road AheadThe Indian economy is on the brink of a major transformation, with several policy initiatives set to be implemented shortly. Positive business sentiments, improved consumer confidence and more controlled inflation are likely to prop-up the country’s the economic growth. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth. All these factors suggest that India’s banking sector is also poised for robust growth as the rapidly growing business would turn to banks for their credit needs.Also, the advancements in technology have brought the mobile and internet banking services to the fore. The banking sector is laying greater emphasis on providing improved services to their clients and also upgrading their technology infrastructure, in order to enhance the customer’s overall experience as well as give banks a competitive edge.Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit and debit cards in the market shortly. The cards, which use near field communication (NFC) mechanism, will allow customers to transact without having to insert or swipe.Exchange Rate Used: INR 1 = US$ 0.0151 as on November 15, 2015