Financial Services

Study of Financial services
CHAPTER 1 INTRODUCTION FINANCE is the lifeblood of any economy. As such it is essential to know finance sector or financial system of a country before we understand the financial services provided by them. The financial system or the financial sector of any country is a complex matrix of Institutions, markets and financial instruments. It consists of specialized and non-specialized financial institutions, of organised and unorganized financial markets, of financial instruments and financial services. All of these items have one thing in common. They facilitate transfer of funds. The financial companies, through their activities, channelize the money in different layers of the economy and therefore play a crucial role in influencing the domestic as well as global economic scenario. The term Financial services in a broad sense means mobilizing and allocating savings. Thus it includes all activities involved in the transformation of savings into investment. As such financial services could also be called as financial intermediation financial intermediation is a process by which funds are mobilized from a large number of savers and make them available to all those who are in need of it and particularly to corporate customers. Thus financial services sector is an important area and vital for industrial development of a country. The word system, in the term financial system, implies a set of complex and closely connected or inter-linked Institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance--the three terms are intimately related yet are somewhat different from each other. Money refers to the current medium of exchange or means of payment. Credit or loans is a sum of money to be returned, normally with interest; it refers to a debt of economic unit. Finance is monetary resources comprising debt and ownership funds of the state, company or person.
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The Indian financial market is characterized by its two major segments - a traditional sector that is also known as informal credit market and an organized sector. The informal credit market is operational largely in the rural area where the moneylenders are still a major source of loans. Malpractices on the side of these moneylenders who lend to farmers is the biggest reason as to why traditional unorganized sector is on a decline especially after the emergence of credit co-operatives. Financial markets in the organized sector is conducted by a large number of financial institutions which are business organizations providing financial services to the community. Financial institutions can be divided into two types of Institutions: Regulators Intermediaries
Regulatory Institutions are statutory bodies assigned with the job of monitoring and controlling different segments of the Indian Financial System (IFS). These Institutions have been given adequate powers through the vehicle of their respective Acts to enable them to supervise the segments assigned to them. It is the job of the regulator to ensure that the players in the segment work within recognized business parameters maintain sufficient level of disclosure and transparency of operations and do not act against the national interests. At present, there are three regulators directly connected to IFS: Reserve Bank of India (RBI) Security and Exchange Board of India (SEBI) Association of Mutual funds (AMFI) Insurance regulatory and development body (IRDA)
Intermediary Financial Institutions are essentially of two types: Capital market intermediaries - The capital market intermediaries consist of term lending institutions and investing institutions which mainly provide long term loans. Money market intermediaries - It consists of commercial banks co-operative banks and other Non-banking financial companies which supply only short term funds
Non-Banking Financial Companies A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
NBFCs are doing functions akin to that of banks , however there are a few differences:
(i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)
(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
The NBFCs that are registered with RBI are:

(i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company.
With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as

(i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating. v) The deposits with NBFCs are not insured. vi) The repayment of deposits by NBFCs is not guaranteed by RBI. vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
CHAPTER 2 KEY CONCEPTS Financial markets - In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis Types of financial markets The financial markets can be divided into different subtypes:
Capital markets which consist of:

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Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk.
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Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.
Lenders Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares
Borrowers Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities .Governments borrow by issuing bonds. Investor An investor is any party that makes an Investment. However, the term has taken on a specific meaning in finance to describe the particular types of people and companies that regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company. Less frequently the term is applied to parties who purchase real estate, currency, commodity derivatives, personal property, or other assets.
Financial instruments A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example. Financial instruments can be thought of as easily tradeable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.
Treasury bill A treasury bill is also money market instrument issued by central government.
Convertible bond - A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder either fully or partially. Commercial paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
Deep discount bonds - A bond that sells at a significant discount from par value. A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile.
Index linked guilt bonds -These are instruments having a fixed maturity. Their maturity value is linked to the index prevailing as on the date of maturity.
Variable rate debentures -They are debt instruments. They carry a compound rate of interest but this rate of interest is not a fixed one. It varies time to time in accordance with some predetermined formula as we adopt in case of calculation of dearness allowance.
Option bonds - These bonds may be cumulative or non-cumulative as per the option of the bond holder.
Dual currency bonds - bonds that are denominated and pay interest in one currency and redeemable in another currency come under this category.
Secured premium notes- these are instruments which carry no interest for a period of 3 years Yankee bonds if bonds are raised in USA, they are called Yankee bonds and if the raised in Japan they are called samurai bonds.
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There are many other types of financial instruments which have been introduced. These include certificate of deposits, inter-bank participations, easy exit bonds, infrastructure bonds, debt with equity warranty, convertible bonds with premium put, flip-flop notes, loyalty coupons, etc
CHAPETR 3: BANKING SECTOR Banks are the most prominent and very important part of the financial economy of India. The performance of banks is completely linked to the growth of the economy while the nature and quantum of growth is in turn linked to the availability of bank credit. Successive governments to achieve their social, political and economic goals have recognized banks as their major contributor to financial services. The structure of the Government Banking system has undergone numerous changes since independence. Two phases of nationalization, introduction of Regional Rural Banks in 1975 (to focus on rural spread on banking) and permission to new private banks to set up operations since 1993-94 are some of the major changes undergone. Most of the banks have now been trying to function on the concept of a Universal Bank. Apart from the traditional functions of a commercial bank, they are taking steps to build themselves into a one stop financial centre wherein all the financial products would be available. Banks have started catering to the retail segment to improve their deposit portfolio. In order to have a maximum share in this segment, most of the banks have been introducing new products. The delivery channels have also been shifted from branches to ATMs, phone banking, net banking etc. With the advancement of technology and the birth of competition, banks are in the race of becoming the best in the country. With an eye upon customer satisfaction policy they are providing best of the best services with the minimum hazards.
Banks like ABN AMRO introduced banking with a coffee. It made a tie-up with one of the best coffee bar in the country, Barista and remained open till late evening for customers with a setup of a coffee bar in the premises.
Technology has become an important medium of not only attracting new customers but also in retaining them. The new generation private sector banks have made a strong presence in the most lucrative business areas in the country because of technology upgradation. While, their operating expenses have been falling as compared to the PSU banks, their efficiency ratios (employees productivity and profitability ratios) have also improved significantly.
CHAPTER 3.1 STRUCTURE OF THE INDIAN BANKING SECTOR
Banking Segment in India functions under the umbrella of Reserve Bank of India - the regulatory, central bank. This segment broadly consists of: 1. Commercial Banks 2. Co-operative Banks 3. Development banks
Reserve Bank of India
Commercial Banks
Co-operative Banks
Development Banks
Public
Private
Short-term credit
Long-term credit
Agricultural Credit
EXIM Urban Credit
Industrial
Agricultural
COMMERCIAL BANKS The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks
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Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. There are about 67,000 branches of Scheduled banks spread across India. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60)of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Unscheduled banks: For the purpose of assessment of performance of banks, the Reserve Bank of India categorized the unscheduled commercial banks as under 1. Public sector 2. Private sector 3. Foreign banks 1. Public sector banks- They have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of: State Bank of India (SBI) and its Subsidiaries Other Nationalized Banks Regional rural banks mainly sponsored by public sector banks
2. Private sector banks - Private banking in India was practiced since the beginning of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest development bank in the world as Private Banks in India and has promoted a world class institutions in India. A few private sector banks in India are as follows

Bank of Punjab Bank of Rajasthan Catholic Syrian Bank Centurion Bank Federal Bank HDFC Bank
ICICI Bank IDBI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank
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3. Foreign banks: By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India. Among them is the world's best private bank by Euro-Money magazine, Switzerland's UBS. The following are the list of foreign banks going to set up business in India
a) Royal Bank of Scotland b) Switzerland's UBS c) US-based GE Capital d) Credit Suisse Group e) Industrial and Commercial Bank of China Merrill Lynch is having a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms. CO-OPERATIVE BANKS There are two main categories of the co-operative banks. Short term lending oriented co-operative Banks - within this category there are three sub categories of banks viz state co-operative banks, District co-operative banks and Primary Agricultural co-operative societies. Long term lending oriented co-operative Banks - within the second category there are land development banks at three levels state level, district level and village level. Development banks - It includes institutions such as Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI) Export - Import Bank of India (Exim Bank) Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India) National Bank for Agriculture and Rural Development (NABARD) Small Industries Development Bank of India (SIDBI) National Housing Bank (NHB), etc
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CHAPETR 3.2 HISTORY OF BANKING IN INDIA Banking in India originated in the first decade of 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the "The Bank of Bengal" in Calcutta in June 1806. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras They merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. The first fully Indian owned bank was the Allahabad Bank, established in 1865. However, at the end of late-18th century, there were hardly any banks in India in the modern sense of the term By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. Punjab National Bank is the first Swadeshi Bank founded by the leaders like Lala Lajpat Rai, Sardar Dyal Singh Majithia. The Swadeshi movement in particular inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
Regulation of banking activities The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation,. This resulted into greater involvement of the state in different segments of the economy including banking and finance.
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The major steps to regulate banking included:
In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a license from the RBI, and no two banks could have common directors.
Period of nationalization: Despite the above mentioned provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19th July, 1969.
The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, one of the nationalised banks, namely, New Bank of India was merged with Punjab National Bank. It was the first and only merger of a Nationalised Bank into a Nationalised Bank, resulting in the reducing the number of Nationalised Banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
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Liberalization and privatization In the early 1990s the then Narsimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as Global Trust Bank (the first of such new generation banks to be set up)which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kickstarted the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
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CHAPTER 3.3 CURRENT SCENARIO OF THE BANKING SECTOR The Indian banking system has a large geographic and functional coverage. Presently the total asset size of the Indian banking sector is US$ 270 billion while the total deposits amount to US$ 220 billion with a branch network exceeding 66,000 branches across the country. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 30 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 40 foreign banks. Revenues of the banking sector have grown at 6 per cent CAGR over the past few years to reach a size of US$ 15 billion. While commercial banks cater to short and medium term financing requirements, national level and state level financial institutions meet longer-term requirements. This distinction is getting blurred with commercial banks extending project finance. The contribution of banking and insurance to the aggregated service sector revenues tripled from 4.6% in FY71 - FY75 to 12.3% in FY00 - FY04. Also, the contribution of the same to the country's GDP increased nearly four folds from 1.8% of GDP in FY71 - FY75 to 6.7% of GDP in FY00 - FY04 (source: RBI). Juxtaposed with the financial sector reforms, this suggests that the enhanced freedom of banks since the liberalization process has provided them with the flexibility in resource mobilization and deployment, which has manifested itself in the uptrend in these ratios. As far as the present scenario is concerned the banking industry is in a transition phase. The Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for nearly three-fourths of total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.
On the other hand Private Sector Banks in India are witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20 percent in the employee strength of the private sector in the wake of the Voluntary Retirement
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Schemes (VRS). As far as foreign banks are concerned they are likely to succeed in India.
IndusInd Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank etc.
Indian federal government has opened up the banking sector for foreign investors raising the ceiling of foreign direct investment in the Indian private sector banks to 74 percent. Foreign banks having branches in India are also entitled to acquire stakes upto 74% through "automatic routes". ANZ Grindlays Bank, ABN-AMRO Bank, Barclays, American Express Bank Ltd, Citibank etc are some foreign banks operating in India.
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CHAPTER 3.4 UNION BUDGET ( 2008-09) INDIAN BANKING SECTOR The Union Budget of India for the year 2008-2009 was announced by the Indian Finance Minister, Mr. P Chidambaram, on 29th February 2008. The policies and initiatives taken in the Union Budget of India 2008-2009 on the Indian Banking sector were in tandem with the requirements of the Indian economy.
Small and marginal farmers have been relieved of all farm loans, disbursed till March 2007 and also all loans, which are due till December 2007 and was unpaid till February 2008. These farm loan waivers would be facilitated by all the concerned Public Sector Banks and Regional Rural Banks of India. A total of Rs 60,000 crores would be waived-off under such scheme. The settlement of these loan-waivers will be offered through special type of scheme. Further, the Public Sector Banks and Regional Rural Banks of India were also suggested, to bring within their fold, a minimum of 250 rural household accounts at every branch every year.
The Indira Awas Yojana was brought under the ambit of Public Sector Banks. Loan limit up to Rs 20,000 per unit at 4% interest was fixed under differential rate of interest (DRI) scheme. The Finance Minister also advised the Indian PSU Banks to open 288 branches in minority districts of India. Further, he also asked the Indian banking industry to embrace total financial inclusion. In another landmark decision, the Finance Minister, Mr. P. Chidambaram said that the Exbanking servicemen in India would be offered employment opportunities in the banking sector.
Another major announcement was that, the much talked-about 'Banking Cash Transaction Tax (BCTT)' would be withdrawn from the financial year 2009-2010.
Experts believe the impact of the decisions and policies taken during the Union Budget of India 2008-2009 on the Indian Banking sector would be mixed. It is expected that the Indian PSU banks will face pressure on their net interest margins due to the waiving-off of agricultural loans. Further, the cumulative cost that will be incurred for opening up of new Regional Rural Banks in India may substantially increase the operating cost for the banks. The inclusion of the Indira
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Awas Yojana houses under the differential rate of interest scheme and at 4% interest will increase the proportion of sub-PLR lending for the concerned banks.
The major Public Sector Banks of India like the State Bank of India, Bank of Baroda, Punjab National Bank may see their net interest margins shrinking till the subsidy for waiver of agricultural loans is being completely released. Moreover, experts are skeptical about the long term benefit of such agricultural loan waiver as offered through the Union Budget of India 20082009.
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CHAPTER 3.5 NEW TECHNOLOGICAL ADVANCEMENTS IN BANKING INDUSTRY Banks in India have traditionally offered mass banking products. Most common deposit products being Savings Bank, Current Account, Term deposit Account and lending products being Cash Credit and Term Loans. Due to Reserve Bank of India guidelines, Banks have had little to do besides accepting deposits at rates fixed by Reserve Bank of India and lend amount arrived by the formula stipulated by Reserve Bank of India at rates prescribed by the latter. PLR (Prime lending rate) was the benchmark for interest on the lending products. But PLR itself was, more often than not, dictated by RBI. Further, remittance products were limited to issuance of Drafts, Telegraphic Transfers, Bankers Cheque and Internal Transfer of funds. In view of several developments in the 1990s, the entire banking products structure has undergone a major change. As part of the economic reforms, banking industry has been deregulated and made competitive. At the start of the century India was just one of the many outposts for most of the global banks. Asia was recovering from the crisis and most MNCs were viewing their options and India hardly registered in their options. Eight years later India is among the top 10 markets for the 3 top foreign banks- Citigroup, Standard chartered and HSBC. These new players have added to the competition. Other than these 3 the opening of the banking sector would see big players like Royal bank of Scotland, BNP Paribas and ING among other coming to India. A host of foreign banks have picked up stakes in private banks as a part of the foot in door policy in spite of the subprime crises rage going on across the world. IT revolution has made it possible to provide ease and flexibility in operations to customers. Rapid strides in information technology have, in fact, redefined the role and structure of banking in India. Further, due to exposure to global trends after Information explosion led by Internet, customers - both Individuals and Corporate - are now demanding better services with more products from their banks. Financial market has turned into a buyer's market. Banks are also changing with time and are trying to become one-stop financial supermarkets. Market focus is shifting from mass banking products to class banking with introduction of value added and customised products.
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A few foreign & private sector banks have already introduced customized banking products like Investment Advisory Services, Photo-credit cards, Cash Management services, Investment products and Tax Advisory services. Private Banks as well as public sector banks are now offering insurance products, mutual fund schemes, etc. Thus they have become true conglomerates. Banks also offer advisory services termed as 'private banking' - to "high
relationship - value" clients The bank of today is essentially a marketing organisation that persuades and lures its customer to buy its banking solutions. New distribution channels are being used; more & more banks are outsourcing services like disbursement and servicing of consumer loans, Credit card business. Direct Selling Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the application form filled in properly and also take your passport-sized photo. Home banking has already become common, where you can order a draft or cash over phone/internet and have it delivered home. ICICI bank was the first among the new private banks to launch its net banking service, called Infinity. It allows the user to access account information over a secure line, request cheque books and stop payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering net banking to its Suvidha program to customers. Corporates are also deriving benefit from the increased variety of products and competition among the banks. Certificates of deposit, Commercial papers, Non-convertible Debentures (NCDs) that can be traded in the secondary market are gaining popularity. Recently, market has also seen major developments in treasury advisory services. With the introduction of Rupee floating rates for deposits as well as advances, products like interest rate swaps and forward rate agreements for foreign exchange, risk management products like forward contract, option contract, and currency swap are offered by almost every authorised dealer bank in the market. The list is growing. Public Sector Banks like SBI have also started focusing on this area. SBI has newly opened 100 new branches called Personal Banking Branches (PBB) which has Customer friendly knowledgeable staff who will cater to your financial requirements with speed and efficiency.. The PBBs will also market SBI's entire spectrum of loan products: housing loans, car loans, personal loans, consumer durable loans, education loans, loans against share, financing against gold. It also has the widest network of more than 5000 ATMS across India.
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CHAPTER 3.6 GLOBAL SLOWDOWN, INFLATION AND ECONOMY. As we understand financial services provided by various public sector and private sector banks it is essential to understand the present scenario in which banks across the globe banks have written down huge losses on account of US sub-prime crises, in which major economies have shown recession and the scenario in which India has recorded a 10 year high inflation of 13%. It is essential to understand how these external forces affect the Indian banking industry and what steps have been taken by the RBI to combat it. The ICICI Bank had been hit by the International subprime mortgage crisis. ICICI Bank has lost nearly US$ 264, till the end of January 2008. As per the banks statement, the loss was not due to investments in the US subprime loan market, but due to the fall in the value of securities in the global market. The rise in the international interest rates due to the subprime mortgage crisis was the main cause for the fall in the value of securities in the global market, which forced ICICI bank to make up the difference from its turnover.
The loss, though, is speculative, as the bank has not sold out these securities. The bank holds securities worth face value of US$ 1.6 billion and one of its divisions holds securities worth US$ 0.5 billion. ICICI bank is the first Indian Bank to report such kind of loss. However, other public sector banks are expected to report similar losses in the recent future. The bank expects that the loss due to the subprime crisis would take away nearly 9% of the yearly turnover. The main cause of the subprime crisis is expected to be the huge amount of loans given to the domestic borrowers in United States with bad credit history, i.e. low repayment power called subprime borrowers in United States. These borrowers were unable to repay the loans due to the slowdown of the US economy, which affected the accounts of these banks, thereby starting the chain reaction of the fall in the value of the securities in the international market.
As per the estimated losses, banks like the Merrill Lynch, Citibank and Deutsche Bank have lost out nearly US$ 180 billion due to the subprime mortgage crisis.
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CHAPTER 3.7 TYPES OF BANKING ON THE BASIS OF FUNCTIONS Wholesale banking is the provision of services by banks to the like of large corporate clients, mid-sized companies, real estate developers and investors, international trade finance businesses and institutional customers, such as pension funds and government entities/agencies. Also included is banking services offered to other financial institutions. In essence, wholesale banking services usually involve high value transactions. Services include access to commercial banking products, including working capital facilities such as domestic and international trade operations and funding, channel financing, and overdrafts, as well as domestic and international payments, INR term loans (including external commercial borrowings in foreign currency), letters of guarantee etc. Retail banking refers to banking in which banks undergo transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth. Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds). The Investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Asset management. Asset Management deals with institutional investors, while Private Wealth Management manages the funds of high net-worth individuals. Merchant banking is a private equity activity of investment banks. Merchant banking may be defined as the which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counseling, etc
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The economic liberalization in India has witnessed increased economic activities of the foreign investors in India through investment banks in India. India has become one of the most preferred destination for the global investors. And as a matter of fact huge number of investment banks has opened their shops in India to encash on the bullish market scenario. The Indian companies are now more research oriented than ever before." Investment Banks in India like Citigroup, Morgan Stanley, Merrill Lynch, and Deutsche Bank are selling the India story to their global clients. Investment Banks in India has posted over 50% a year returns from the equity markets in the last few years. Recent weeks have seen over 500 clients of these Investment Banks in India, including pension fund, hedge fund, and mutual fund managers from across the globe; descend on India to explore further investment opportunities. AGRICULTURE - To give special focus to agriculture lending Bank has set up agri business unit. Bank has also agri specialists in various disciplines to handle projects/ guide farmers in their agri ventures. Advances are given for very small activity covering poorest of the poor to hitech activities involving large fund outlays.
State Bank of India
Caters to the needs of agriculturists and landless agricultural labourers
through a network of 6600 rural and semi-urban branches. There are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment. These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hi-tech commercial agricultural projects. They are the leaders in agri-finance in the country with a portfolio of Rs. 18,000 crores in agri advances to around 50 lakh farmers
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CHAPTER 3.8 PRODUCTS AND SERVICES OFFERED BY BANKS
PERSONAL BANKING
1) DEPOSITS type of accounts i. ii. iii. iv. Savings account Current account Fixed deposits Salary account
2) LOANS type of loans

i. ii. iii. iv. v.
Personal Loan Car Loan or Auto Loan Loan against Shares Home Loan Education Loan or Student Loan
3) ADVANCES i. FUND ORIENTED (a) Term loan (b) Clean loan (c) Bills discounting (d) Advances (e) Pre-shipment finance (f) Post shipment finance (g) Secured and unsecured lines of credit ii. NON FUND ORIENTED (a) Guarantees (b) Letter of credit
4) INVESTMENTS
i.
Tax Saving Bonds

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ii. iii. iv. v. vi. vii.
Government of India Bonds Investment in Mutual Funds Initial Public Offers by Corporates Investment in "Pure Gold" Foreign Exchange Services Senior Citizens Savings Scheme, 2004
5) CARDS i. ii. Debit card Credit card
6) DEMAT SERVICES Dematerialize the physical shares in various holding patterns and consolidate all such scattered holdings into the primary Demat account at reduced cost.
7) ONLINE SERVICES- No more hassles of personally visiting the Biller to pay the bills. Pay your bills for Utility Companies (Electricity and Telephone), Bank Credit Card, Mobile bills, Insurance Premiums and lot more. Avail our free bill payment services through the Internet Banking Account.
8) WEALTH MANAGEMENT - it basically includes all the functions related to investment. Banks provide a number of solutions, few of which are stated below. i. ii. iii. iv. Online Trading and Mutual Funds Customised Products Life and General Insurance Fixed Deposits
9) CONSULTANCY i. ii. iii. Investment counseling Project counseling Tax consultancy

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10) MISCELLANEOUS i. ii. iii. iv. v. Traveller cheques Sale of drafts Remittances Trusteeship Standing instruction
INTERNATIONAL BANKING
The services include corporate lending, loan syndications, merchant banking, handling Letters of Credit and Guarantees, short-term financing, collection of clean and documentary credits and remittances. 1) TRADE FINANCE i) Issuing and confirming of letter of credit. ii) Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.
2) MERCHANT BANKING- A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Their knowledge in international finances make merchant banks specialists in dealing with multinational corporations
3) CORRESPONDENT BANKING - The Correspondent Banking Division develops and maintains relationship with Banks and Financial Institutions across the Globe. This network of Correspondent Banks form the foundation for all international operations. 4) TREASURY Treasury involves the following functions i) Buying and selling of bullion. Foreign exchange
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ii) iii)
Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents.
5) OFFSHORE BANKING: It is involved mainly in raising funds in convertible foreign currency as deposits and borrowings from Non Residents sources, helping in establishing joint ventures, financing exports and imports and foreign collaboration arrangements. SERVICES ATM- An electronic banking outlet, which allows customers to complete basic transactions without the aid of a branch representative or teller.
There are two primary types of automated teller machines, or ATMs. The basic units allow the customer to only withdraw cash and receive a report of the account's balance. The more complex machines will accept deposits, facilitate credit card payments and report account information. To access the advanced features of the complex units, you will usually need to be a member of the bank that operates the machine. ATMs are scattered throughout cities, allowing customers easier access to their accounts. Anyone with a debit or credit card will be able to access most ATMs. Using a machine operated by your bank is usually free, but accessing funds through a unit owned by a competing bank will usually incur a small fee.
Internet
banking-
The
performance
of
banking
activities
via
the
internet.
Also known as internet or web banking. A good online banking system will offer just about every traditional service available through a local branch Phone banking phone banking or telebanking is a banking service offered by banks to enable to access their account for information or transaction. Similar to ATM pin a telephone pin is provided to each account holder.
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Branchless banking When ATMs were introduced, we thought that why do we need ATMs when we have good old branches? Today, using ATMs is a globally accepted practice with millions of transactions taking place everyday. Then came Phone Banking which gave users opportunities to query their bank anytime of the day or night. Then there was Internet Banking and Mobile Banking that allowed customers access on-the-move. These are all commoditized, value-added facilities that 99% of Banks offer their customers. b2 is the next step towards future of banking. It's a bank, where everything is done online and since you don't need branches, we don't offer them. It brings the convenience of banking at your finger-tips and makes your money earn harder. b2 understands that today's banking is beyond payments & transfers and so it offers not only these but also offers bill payments & mobile recharge.
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CHAPTER 4: INSURANCE
Whenever there is uncertainty there is risk. We do not have any control over uncertainties which involves financial losses. The risk may be certain events like death, pension, retirement or uncertain events like theft, fire, accident, etc. Uncertainty and risk work hand in hand. Uncertainty is difficult to avoid in many circumstances but the risk arising can be avoided through various means. Insurance is one these means; it is also good mode to spread losses. Insurance may be described as a social device to reduce or eliminate risk of life and property. Under the plan of insurance, a large number of people associate themselves by sharing risk, attached to individual. The risk, which can be insured against include fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may be insured against at a premium commensurate with the risk involved. Insurance is a contract between 2 parties whereby one party called insurer undertakes in exchange for a fixed sum called premium to pay the other party happening of a certain event.
Definition of Insurance Insurance is a contract whereby, in return for the payment of premium by the insured, the insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen events. With the help of insurance, large number of people exposed to a similar risk make contributions to a common fund out of which the losses suffered by the unfortunate few, due to accidental events, are made good.
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CHAPTER 4.1 INSURANCE SECTOR IN INDIA
Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts.
The origin of life insurance in India can be traced back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English Widows. In those days a higher premium was charged for Indian lives than the nonIndian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that started its business in 1870 was the first company to charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.
By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that provided strict State Control over insurance business.
Insurance sector in India grew at a faster pace after independence. In 1956, Government of India brought together 245 Indian and foreign insurers and provident societies under one nationalised monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crores.
The (non-life) insurance business/general insurance remained with the private sector till 1972. There were 107 private companies involved in the business of general operations and their operations were restricted to organised trade and industry in large cities. The General Insurance
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Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from January 1, 1973. The 107 private insurance companies were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).
In 1993, the first step towards insurance sector reforms was initiated with the formation of Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra. The committee was formed to evaluate the Indian insurance industry and recommend its future direction with the objective of complementing the reforms initiated in the financial sector.
Key Recommendations of Malhotra Committee

Government stake in the insurance Companies to be brought down to 50%. All the insurance companies should be given greater freedom to operate. Private Companies with a minimum paid up capital of Rs.1billion should be allowed to enter the industry.
No Company should deal in both Life and General Insurance through a single Entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies.
LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension plans.
Malhotra Committee also proposed setting up an independent regulatory body - The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.
Insurance sector in India was liberalized in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign
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ownership. There is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent
The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again.
Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost 190 years.
LATEST FACTS AND FIGURES
Only 24 % of the Indian households own life insurance. Among rural households only 18% have a life insurance protection. Only 14% of the policy owners are women. Of the 321 paid million workers in India only 105 million workers are covered. Among the 216 million uncovered workers about two thirds are highly unlikely to buy an insurance plan because they feel they cannot afford it(64%) or they are disinclined for various other reasons like no one has explained its benefits to me no interested, etc (36%) On the bright side of the remaining one-third , 18% are willing to buy in the near future. Further the demand for life insurance continues to expand among the existing policy holders (repeat purchase). Other things being equal, the present $40 billion market is expected to grow to $100 billion in the future according to a recent McKinsey report. The 40 odd insurance companies have accounted for an equity exposure of Rs 70,000 crore in the last fiscal. The current fiscal will see 10-15% surge. LIC is a mega player with its 6,50,000 crores in investible financial assets. LIC had Rs 90000 crores mark-to-market investible funds purely out of ULIPS LICs net investment in equity is in FY08 is estimated to be Rs 6000 crores. If the life insurance companies are offered greater relaxation we would reach the $100 bn size much sooner than expected.
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CHAPTER 4.2 BASIC FUNCTIONS OF THE INSURANCE INDUSTRY
1. Risk Perception and Evaluation:
The fundamental function of an insurer is to provide a cover against the detriment caused to the insured due to the happening of certain specified and agreed events. Thus, prior to providing such umbrella through a product, the insurer has to assess the risk involved in the transaction. The insurer has to identify the element of risk prevalent in the concerned industry or a particular unit. The perception of risk requires the study of variables through various methods including the application of scientific and statistical techniques and correlation thereof with the industry or unit under study in light of their basic environmental and infra-structural characteristics. After the identification and categorization of the risks perceived, the probability of happening of the losscausing events and the severity of the loss has to be assessed.
2. Designing the Insurance Product:
On the basis of the risks perceived, the insurer develops a product to cover the stipulated risks. While designing an insurance product, an insurer decides its cost to be charged from the insured in the form of premium, reduction thereof in certain cases like not lodging any claim during the previous covered period(s), suggesting the implementation of risk-mitigating measures, etc. The features of a product should be flexible enough to provide for the determination of premiums, rebates, additional premiums, etc. depending upon the risk benchmarks as determined.
3. Marketing of the Product:
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The core function of the marketing force of an insurance company is to generate awareness about the insurance products among the target market. But in the Indian scenario, where the insurance penetration is too low as compared to the other nations, the marketing force needs to perform the pro-active role in developing an insurance culture. It is through the efficiency of the sales force of an insurance company that the desirability and the success of a product are determined.
In Indian insurance market, the function is, basically performed by the agents. The persons desiring to function as insurance agents have to obtain license to act as such from the IRDA or an officer authorized by the Authority in this behalf. The agents approach the prospective buyers and apprise them of the basic features of the products. In order to dispense with the functions, the agents need to possess adequate knowledge of the insurance industry, products and the modalities attached therewith. Further, the marketing personnels should be adequately backed by the back-office setup.
4. Selling of the Products:
The term selling in the context of insurance industry connotes the issuance of policies to the applicant proposer. The non-life insurance policy basically embodies the covenant between the insurer and the insured wherein the former agrees to indemnify the latter for the loss caused to him on the happening of the certain agreed events up to a specified limit. The life insurance policy generally contains the agreement whereby the insurer agrees to pay to the insured or the beneficiary of the policy an agreed amount on the expiry of the term of the policy or in the event of the death of the insured respectively. The additional benefits in the shape of Riders viz. Accidental Death Benefit, Double Sum Assured, Critical Illness benefits, Waiver of Premiums, etc. can also be appended with the policy on the payment of an additional premium. In Indian industry, the function is, generally performed by the insurer. In addition, the insurance companies depute their Direct Selling Representatives to look after the function. They receive the proposal documents, vet them and issue policies to the proposers.
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5. Management of Portfolio:
The management of the portfolio includes the assessment of requirement of funds, identification of various sources of finance, the evaluation of the sources in the light of their cost, availability, timing, etc., reconciling the features of various sources with the needs of the company and the selection of appropriate conjunction of sources. The insurer possesses huge amount of funds, which need proper management. The management of the portfolio of an insurance company requires the identification of investment avenues, evaluation thereof and the selection of the most appropriate mix of alternatives where the funds of the company can be invested. The selection requires the knowledge of finance related functions and techniques apart from the in-depth know of the patterns of requirement of funds in the company as well as in the industry as a whole.
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CHAPTER 4.3 ROLE OF INSURANCE SECTOR I Protective role Insurance has been playing protective role towards the development of industry and commercial institutions. The major protective measures have been : i) Protection from risks arising out of natural calamities Insurance has also been playing important role in protecting the industry and commercial activities from natural calamities like fire, marine losses, floods, earth quakes, cyclones etc.
ii) Protection from the risks caused by human beings Insurance provides protection against risks caused by human beings such as strikes by workers, their negligence in carrying out work, theft and dacoit, evil disturbances and many other such acts. In addition to the issue of policies against such causes, insurance also issues policies to protect the industry and commercial institutions from the loss of money in transit.
iii) Protection against statutory liabilities Insurance also plays the role of protecting the industry and commerce in fulfilling statutory liabilities towards the workers, arising out of industrial accidents. The employer is bound to compensate such workers under the provision of Workers' Compensation Act. in case the employer obtains an accidental policy in favor of employees; the money to be paid as compensation to the accident victims, can be collected from the insurance company.
iv) Financial security Insurance provides financial security also to industry and commerce. Exports of goods to other countries by sea, storage of goods in safe godowns and various other kinds of financial losses are secured by insurance policies.
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v) Protection from loss of profits Insurance' also has extended its role of prot6cting different industrial and commercial activities, it provides protection against losses arising from shops or factories. It also undertakes to indemnity the loss of profits from business functions. This way, the loss of profits and property / both are protected. vi) Protection of debts A trader can protect himself by taking appropriate policy against the credit sales or property kept on security against goods or property. Thus, the insurance protests the trader even in case the debtor dies or of damages to the goods. vii) Protection to the business institution due to sudden death of the key man The successful operation and development of a business largely depends on its directors, managers and administrative personnel. Sudden and untimely death of such person may badly affect the functioning of the business and many problems may also arise in day-to-day functioning of business. Insurance plays important role by insuring the life of key man in the business so that the future can be protected safely from uncertainties.
viii) Provides stability in commercial and industrial activities Insurance companies extend various kinds of assistance to business enterprise to run the business regularly and continuously. It plays important role in partnership business by insuring the life of partners so that in case of death of any partner, the claim received from the insurance company can be used for meeting payment to the dependents of deceased partner.
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II Promotional role of insurance Insurance plays important role in setting up industrial and commercial units; by way of capital formation, new investment, industrial entrepreneurship, under-writing of shares and investment in capital market. In addition to protective measures, it plays promotional role also, which are briefly described below:
i) Extension of credit facilities Insurance extends credits to industrial and commercial institutions. An entrepreneur can get insurance of unit, plant and machinery, or permanent assets purchased by him and get them mortgaged with the financial institutions for getting credit.
ii) Facilitates industrialization and commercialization Insurance contributes for the development of various commercial activities like buying-selling, transportation, communication, warehousing, packaging, advertising and publicity, and agricultural marketing etc. It is due to the insurance facility that the businessmen concentrate on their activities without having any apprehensions regarding loss in transit.
iii) Increases business and industrial efficiency The efficient management of industrial and commercial activities become possible due reductions in business risks. Insurance provides protection from various risks and thus it increases the business efficiency.
iv) Investment in shares and debentures Insurance companies extends its support for the development and expansion industrial and commercial activities by investing in shares and debentures issued by the industrial units.
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v) Contribution towards the development of basic industries Insurance has contributed much towards the development and expansion of basic industries like iron and steel cement, engineering, chemicals, petro-chemicals, electric goods, fertilizers, etc. by investing in shares and debentures.
vi) Contribution towards fulfillment of social and statutory obligations Insurance institutions in the country also have been contributing much in fulfillment of social and statutory obligations by contributing well in social welfare schemes operated by industrial establishments, social security, schemes, workers compensation plan, payment of gratuity etc.
vii) Contribution towards development of international trade The various policies issued by marine insurance companies help for the development of international trade by protecting the exporters/ importers from marine losses and risks. This role of insurance companies has been helpful in earning more foreign exchange by increased participation by traders in international trader
viii) Extension of export credit Export Credit and Guarantee Corporation (ECGC) extends export credit to the exporters and in cases where the importers commit defaults in making payment to the exporter, the ECGC compensate the exporter through its policy issued for this purpose.
ix)
Increase competing ability among small and medium-scale units
Insurance acts as a source among the small and medium scale industrial units to compete with larger industrial units. Large-scale industries can bear the expenses for protection against risks and uncertainties by getting insurance against such losses.
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Study of Financial services CHAPTER 4.4 GROWTH OF INSURANCE SECTOR IN INDIA According to K N Bhandari, the Secretary General of General Insurance Council, India's general insurance sector is slated to grow at 18% rate in 2008. The comparable figure for 2007 was 13%. As per Mr. Bhandari, the present market value of the Indian general insurance sector is Rs 30,000-crore. The Indian urban sector is a significant contributor to the general insurance market. In comparison, contribution from rural India is small. Efforts are afoot to capture the dormant rural market via strategies like awareness generation, institutional marketing and e-marketing. The Indian insurance sector collected a premium of about Rs. 75,000 crores in the segments of non- life and life insurance, during the first nine months of 2007- 2008. Further, the business of insurance in the country is expected to increase due to the growth in the categories of semi- urban and rural insurance and is expected to be worth about US$ 60 billion by 2010.
According to the Insurance Regulatory and Development Authority (IRDA), the private insurers had collected premium income from new business of about Rs. 18,980 crores, in 2007. The major Indian Banks that are planning to enter the Insurance sector of the country are Union Bank, Federal Bank, Allahabad Bank, Bank of India, Karnataka Bank, Indian Overseas Bank and Bank of Maharashtra. Further, there are a number of banks that are planning to set up their own companies for insurance such as Bank of Baroda, Punjab National Bank, and Dena Bank.
Brokers battle out House Promoters, in Indian insurance market Brokers in the Indian insurance market fear a price war from a new type of operating entity in the Indian insurance market. These are promoter houses, which are owed by different insurance companies. IRDA has allowed insurance companies to establish own broking operations. This permission has been granted from April, 2008. Presently there exist 275 insurance brokers in India.
Insurance brokers are not generally affiliated to any particular insurer. Non-affiliated insurance brokers have asked IRDA to set up a regulatory system to diffuse any possible market crisis arising from a fierce 'price war' or 'rate discounting'.
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Study of Financial services Investment portfolio of insurance
The total aggregate of the assets under the life insurance companies is Rs 699,375 crores At present the insurance companies may invest about 10% of its investment funds to a particular sector. As per the banking sector is concerned, up to 10% of the investment can be done in the bonds and equity shares issued by banks, 2 % on the fixed deposits and certificates of the banks. The IRDA's green signal to Insurance companies for investments in venture capital funds would provide a boost in growth pertaining to the infrastructure segment. The Insurance companies would be allowed to invest about 5% of the total investment that it can undertake, in the venture capital funds pertaining to infrastructure based projects.. This move would allow the constant direct flow of long-term savings pertaining to the infrastructure development.
Investment Strategies from LIC, India
Life Insurance Corporation (LIC) is India's biggest domestic institutional investor. It is also the largest life insurance company in India. The company has outlined a new investment strategy. LIC envisages to augment its equity investment by one third in 2008. However the company may allocate more funds for the debt market, particularly if the stock market volatility exists. LIC plans to buy equities worth Rs 450 billion for the year 2008-09. The comparable figure for 2007-08 was Rs 340 billion. Thomas Mathew, LIC Managing Director expects the volatility in the stock markets to continue till October-November. As per Mr. Mathew, at present the debt market is an attractive and relatively safe investment option. The prime objective of the company is to ensure the safety of the resources invested by the company's shareholders. LIC is slated to buy up bonds worth Rs1.15 trillion in the current fiscal year. LIC expects to earn a gross investment income ranging from Rs 400 billion to Rs 450 billion in the current year, depending upon the prevalent market conditions.
It may be noted that, LIC manages total assets worth around US$175 billion.
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CHAPTER 4.5 INSURANCE REGULATORY AND DEVELOPMENT AU THORITY ACT (IRDA) Indian parliament passed IRDA in the year 1999. It was setup on interim IRA for monitoring &controlling of the insurance business. IRDA was sole authority responsible for awarding of licenses. There is no restriction for new licenses &no composite licenses for life &non life business. IRDA has some restriction for new licenses such as new players should commence its business within 15-18 month. Shares are not allowed to transfer without approval. This Act was passed by Parliament in December 1999 and it received presidential assent in January 2000. This Act provides for the establishment of the Authority to protect the interest of holders of insurance policies, to regulate, promote and ensure orderly growth of insurance industry and for matters connected therewith or incidental thereto. It amended the Insurance Act, 1938, which has been noted above. It also amended the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, 1972, thus opening up the insurance sector to private participation.
Under this Act, an authority called IRDA has been established. This is a corporate body established for the purpose and objects as set out in the explanation to the title. The Authority" replaces "Controller" under Insurance Act 1938. The first schedule amends Insurance Act 1938. It states that if "Authority" is superseded by the Central Government, the "Controller of Insurance" may be appointed till such time as Authority" is reconstituted. In line with the economic reforms that were ushered in India in early nineties, the Government set up a Committee on Reforms (popularly called the Malhotra Committee) in April 1993 to suggest reforms in the insurance sector. The Committee recommended throwing open the sector to private players to usher in competition and bring more choice to the consumer. The objective was to improve the penetration of insurance as a percentage of GDP, which remains low in India even compared to some developing countries in Asia except china.
Reforms were initiated with the passage of Insurance Regulatory and Development Authority (IRDA) Bill in 1999. IRDA was set up as an independent regulatory authority, which has put in place regulations in line with global norms. So far 40 life insurance companies and general insurance companies have been registered.
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CHAPTER 4.6 REASONS THAT ARE HOLDING BACK GROWTH OF INSURANCE SECTOR
Lack of suitable products: insurance companies are ordained by the IRDA to fulfill a certain percentage of its business from the rural areas. However a lot of ground still needs to be covered by the rural insurance. The rural citizen who is dissatisfied by the one-size-fits all products offered by the companies is on the lookout for the products to suit his specific needs. The advent of micro-insurance and framing of regulations in this regard have helped address this problem but real progress is yet to be seen Solvency requirements- the present stipulation of keeping 150% assets to match liabilities is seen to be too onerous by many insurance companies and experts. If the ratio is brought down to 100% a sizeable amount of capital will be released for expansion of business activities. This is important as life insurance is highly captive business. Labour reforms LIC is the titan among life companies with about 70% market share. It is however hobbled by a huge unionized workforce in its class 2 and class 3 cadres who often hold up operational reforms and prevent the corporation from realizing economies of scale and scope. LIC can give better returns to its policy holders if the management is given freehand to rationalize its workforce. Legal reforms- many of the legal provisions emanating from the insurance act 1938 are in a great need of change. If the government is able to push the proposed amendments it will impart a great dynamism in the way business is done. Agents compensation- while the mutual fund industry has reduced its transaction costs the same cannot be said of the life insurance industry in India the agent here gets a really huge commission of nearly 40% on the first premium they generate and 5% on subsequent. premiums. The regulator should downsize the compensation thereby making life insurance less expensive and more attractive.
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Regulatory issues - The IRDA bill proposes tough solvency margins for private insurance firms, a 26% cap on foreign equity and a minimum capital of Rs 100crores for life and general insurance and Rs 200crores for reinsurance firms section 27A of insurance Act stipulates that LIC is required to invest 75% of its accretions through a controlled fund in mandated government securities LIC may invest the remaining 25% in private corporate sector, construction and acquisition of immovable assets besides sanctioning of loans to policy holder. These stipulations imposed on the insurance companies had resulted in lack of
flexibility in the optimization of risk and profit portfolio. If this inflexibility continues the insurance companies will have very little leverage to earn more on their investments and they might not be able to offer as flexible products as offered abroad. The government might provide more autonomy to ;insurance companies by allowing them to invest 50% of their funds as per their own discretions. Recently RBI has issued stiff guidelines which had a severe blow to the plans of banks and financial institutions to enter the insurance sector. It says that non performing assets ( NPA) levels of the prospective players will have to be 1% point lower than the industry average (presently 7.5%). RBI has also stipulated that all prospective entrants need to have a net worth of Rs 500crores. These guidelines have made it virtually
impossible for many banks to get into the insurance business. Also banks who are planning to enter the business cannot float subsidiaries for insurance.
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CHAPTER 4.7
LIFE INSURANCE PLANS FOR INDIVIDUAL:
Whole life Schemes. Endowment Schemes. Term assurance plan. Periodic money back plans. Plan for high-worth individuals & key men. Medical Benefits linked Insurance. Plans for Benefit of handicapped. Joint life plan. Plans for children needs. Investment plans.
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Group insurance It offers life insurance protection under group policies to various groups such as employersemployees, professionals, co-operatives, weaker sections of society, etc. It also provides insurance coverage for people in certain approved occupations at the lowest possible premium cost. Group insurance plans have low premiums. Such plans are particularly beneficial to those for whom other regular policies are a costlier proposition. Group insurance plans extend cover to large segments of the population including those who cannot afford individual insurance. A number of group insurance schemes have been designed for various groups. These include employer-employee groups, associations of professionals (such as doctors, lawyers, chartered accountants etc.), members of cooperative banks, welfare funds, credit societies and weaker sections of society.
Endowment policy
An endowment policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. An endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy.
Endowment life insurance pays the face value of the policy either at the insured's death or at a certain age or after a number of years of premium payment. Endowment policy is an instrument of accumulating capital for a specific purpose and protecting this savings program against the saver's premature death.
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Joint life insurance policies They are similar to endowment policies as they too offer maturity benefits to the policyholders, apart form covering risks like all life insurance policies. But joint life policies are categorized separately as they cover two lives simultaneously, thus offering a unique advantage in some cases, notably, for a married couple or for partners in a business firm.
Under a joint life policy the sum assured is payable on the first death and again on the death of the survivor during the term of the policy. Vested bonuses would also be paid besides the sum assured after the death of the survivor. If one or both the lives survive to the maturity date, the sum assured as well as the vested bonuses are payable on the maturity date. The premiums payable cease on the first death or on the expiry of the selected term, whichever is earlier.
Money back policy It provides for periodic payments of partial survival benefits during the term of the policy, as long as the policyholder is alive. They differ from endowment policy in the sense that in endowment policy survival benefits are payable only at the end of the endowment period.
An important feature of money back policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money-back components. The bonus is also calculated on the full sum assured.
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A pension plan A pension plan an annuity is an investment that is made either in a single lump sum payment or through installments paid over a certain number of years, in return for a specific sum that is received every year, every half-year or every month, either for life or for a fixed number of years.
Annuities differ from all the other forms of life insurance in that an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period.
Typically annuities are bought to generate income during one's retired life, which is why they are also called pension plans. By buying an annuity or a pension plan the annuitant receives guaranteed income throughout his life. He also receives lump sum benefits for the annuitant's estate in addition to the payments during the annuitant's lifetime.
Term life insurance policy It covers risk only during the selected term period. If the policyholder survives the term, the risk cover comes to an end. Term life policies are primarily designed to meet the needs of those people who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy.
No surrender, loan or paid-up values are granted under term life policies because reserves are not accumulated. If the premium is not paid within the grace period, the policy lapses without acquiring any paid-up value.
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Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time.
ULIP provides multiple benefits to the consumer. The benefits include:

Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident Disability Critical Illness Surgeries Liquidity Tax planning
A whole life policy runs as long as the policyholder is alive. As risk is covered for the entire life of the policyholder, therefore, such policies are known as whole life policies. A simple whole life policy requires the insurer to pay regular premiums throughout the life. In a whole life policy, the insured amount and the bonus is payable only to the nominee of the beneficiary upon the death of the policyholder. There is no survival benefit as the policyholder is not entitled to any money during his / her own lifetime.
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Loan cover term assurance policy is an insurance policy, which covers a home loan. Such a policy covers the individual's home loan amount in case of an eventuality. The cover on such a policy keeps reducing with the passage of time as individuals keep paying their EMIs (equated monthly installments) regularly, which reduces the loan amount.
This plan provides a lump sum in case of death of the life assured during the term of the plan. The lump sum will be a decreasing percentage of the initial sum assured as per the policy schedule. Since this is a non-participating (without profits) pure risk cover plan, no benefits are payable on survival to the end of the term of the policy.
Various insurance companies offering loan repayment protection insurance policy are

HDFC Standard Life Insurance Tata AIG ING Vysya LIC
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CHAPTER 4.8 GENERAL INSURANCE PLANS General Insurance provides much-needed protection against unforeseen events such as accidents, illness, fire, burglary et al. Unlike Life Insurance, General Insurance is not meant to offer returns but is a protection against contingencies. Almost everything that has a financial value in life and has a probability of getting lost, stolen or damaged, can be covered through General Insurance policy.
Property (both movable and immovable), vehicle, cash, household goods, health, dishonesty and also one's liability towards others can be covered under general insurance policy. Under certain Acts of Parliament, some types of insurance like Motor Insurance and Public Liability Insurance have been made compulsory.
Major insurance policies that are covered under General Insurance are:
1- Home Insurance 2- Health Insurance 3- Motor Insurance 4- Travel Insurance
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Home Insurance
Every man has a dream to own a house one day. For an ordinary person it takes a whole lifetime of savings to build a house. And one cannot predict a natural calamity like earthquake. In recent times we have seen what havoc an earthquake or any other natural calamity such as floods, landslides and torrential rains can wreck. Hence home insurance is very important.
Home insurance policy also protects against other hazards like gas cylinder explosion, fire due to electric short circuit as well as man-made disaster like burglary.
Home insurance policy available in the market covers broadly two things:

Building structure Contents inside the home
Insurance Covers for a Building Structure are:
1. The Fire and Special Perils Cover
This is a comprehensive packaged cover that covers damages to the structure of home due to Fire ,Storm, tempest, flood & inundation ,Riot, strike & malicious damage, Lightning, Explosion & implosion, Aircraft damage ,Damage due to impact by vehicles ,Subsidence, landslides and rockslides ,Bursting and/or overflowing of water tanks, apparatus and pipes ,Missile testing operation ,Leakage from automatic Sprinkler installations ,Bush fire
2. Earthquake Cover: Covers damages to the structure of your house due to earthquake
3. Terrorism Cover: Covers damages to the structure of your house due to acts of terrorism
A home insurance does not cover the market value of the home. The price of the home includes
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the cost of the land and the cost of constructing the building structure on this land and the land cannot be insured. The insurance cover is only for the cost of constructing the building. The sum insured is calculated by multiplying your home area by the construction rate per sq. feet.
Insurance Cover for Contents Inside the Home
This cover is only for damages or loss of the contents inside the home -electronic and electrical goods, furniture and fixtures, clothing, jewelry and any other contents inside the home.
The covers that can be taken for the contents are as follows:

The Fire and Specials Perils Cover Earthquake Cover Burglary Loss / damage to contents due to burglary or an attempted burglary Loss of jewelry, gold ornaments, silver articles and precious stones kept under lock & key
All the contents are covered on the market value of the items. This means that if there is a loss, the claim would be paid on the value of purchasing a similar new item, minus depreciation.
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Health Insurance It is said that a healthy mind resides in a healthy body. Hence it is very important to stay healthy. These days life is very fast and stressful. No matter how much you care one can always fall ill.
Health treatment nowadays is very costly. More than the disease it is the cost of treatment that takes its toll. To get rid of health worries health / medical insurance is the answer. Health insurance policy not only covers expenses incurred during hospitalization but also during the pre as well as post hospitalization stages like money spent for conducting medical tests and buying medicines. The cover will be to the extent of the sum insured.
An added attraction of Mediclaim policies is the tax benefits which they attract under Section 80D. The maximum amount of deduction available under this section is Rs 10,000. In case of senior citizens, the maximum limit is Rs 15,000.
Individuals also have the option of covering themselves for medical expenses by opting for the 'Critical Illness (CI)' rider available with life insurance policies. Life insurance companies have their own list of critical illnesses as defined by them. In case of a CI rider, on the occurrence of a 'critical illness' during the policy tenure, an amount as proposed in the policy will be paid out to the individual. This is irrespective of the expenses incurred by the individual on hospitalisation, medicines and other such costs.
Health insurance companies are offering innovative products to their customers these days. The latest product in this line is 'cashless hospitalisation'. Here individuals do not have to pay for their hospital bills in case of hospitalisation; the insurance company settles the bill directly. But certain conditions like the hospital needs to have a tie-up with the insurance company, the documents need to be in order etc. have to be met.
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Motor Insurance Legally, no motor vehicle is allowed to be driven on the road without valid insurance. Hence, it is obligatory to get the vehicle insured.
Motor insurance policies cover against any loss or damage caused to the vehicle or its accessories due to the following natural and man made calamities.
Natural Calamities: Fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide.
Man made Calamities: Burglary, theft, riot, strike, malicious act, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air.
Motor insurance provides compulsory personal accident cover for individual owners of the vehicle while driving. One can also opt for a personal accident cover for passengers and third party legal liability.
Third party legal liability protects against legal liability arising due to accidental damages. It includes any permanent injury / death of a person and damage caused to the property. Travel Insurance Travel and tourism is one of the most fast growing sectors around the world. With rise in standards of living, more and more people are embarking on journeys and exploring new places. Before going on a trip you need to address all your travel worries Travel insurance policy takes care of all your travel worries. Travel insurance plans offer host of benefits such as medical expenses, loss or delay of baggage or passport, personal accident, financial emergency assistance and hijack distress allowance.
Travel insurance plans cover expenses incurred due to delayed flight, cancellation of trip, and also take care of valued assets left at home.
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CHAPTER 4.9 RECENT TRENDS & OPPURTUNITIES IN THE INSURANCE INDUSTRY NEW RISK HORIZONS Business is becoming increasingly vulnerable due to wide variety of risk particularly after September 11, 2001 disaster in which twin towers located in the hearts of New York city were crashed by terrorist attack resulting in loss of 6,000 human lives as well as financial loss to the extent of $45 billion. The impact of this terrorist attack has created new horizon of risk to the business world today.
However, rapid changes in the global economy, development of technology and e- business already gathered momentum. Increased dependency on technology has originated new risks that have resulted in well-published incidents.
Computer hackers obtaining credit card information from Visa and Power Gen, the love Bug Virus, cyber extortion, web content liability, professional errors and omission, computers and other crimes and activities such as terrorism, kidnapping and companys executive and extortion of money, commercial liability etc have significant impact on business resulting in extreme financial loss, commercial embarrassment or regulatory implications.
Corporate insurance/risk managers, under the circumstances, have to demand increasingly complex insurance products. They have to be more attentive and knowledgeable about emerging risks, how those risks are managed effectively and efficiently, and how they could ultimately affect a companys financial situation and therefore its position in the marketplace. In short , how such risks are managed and can give to an insured a competitive advantage.
In the changing times, adoption of e- commerce into business models, the integration of web based communication and data transfer capabilities into the business operations, and leveraging of advanced network and technology architecture for maximum benefit are the new horizons of
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the risks. For the corporate insurance/risks manager, these new exposures cyber risks can lead to cyber losses, widening the interpretation of what constitutes insure property damage, particularly as it relates to information technology and data.
All the while, organizations are under tremendous pressure to reduce expenses and increase profit margin, and cannot afford to suffer a property loss of business interruption due to any cause (risk). How a company identifies, quantifies, qualifies and manages these new risks exposures, in addition to the well known traditional risks, is becoming an important factor in creating shareholders value. This often means changing the way. Everyone in the organization have to think about risk. Insurance managers are seeing price levels (premium) continue to rise albeit modestly- in todays primary commercial property and reinsurance markets. They are demanding that insurers improve their risk assessment and quantification offerings so that an insured may avail the benefit in cost (premium rate) on account of well managed risk. The good news for insurance managers is that as the economy evolves, insurers are increasingly matching that evaluation with new products, service and capabilities due to opening up the insurance market to the private players. Insurers who are truly listening to their customers and striving to be more in tune with their needs are responding to the fast changing corporate insurance and risk management landscape. They are listening to their customers. They are making fresh approaches to address the new challenges faced by insured organization by designing the new products as per the need. Insurers are providing value-added services to insured to protect the value created by the business. Insurers are increasingly required to develop and expand their information technology platforms to ensure that the vast amount of data they collect about their customers. Insurance/risk portfolio can easily and seamlessly be transformed into valuable risk management information. To help their customers, insurers should make better-informed decisions. They must be able to swiftly deliver this data to their customers (insured) anywhere in the world. Insurers are also discovering that risk assessment have to be customized to meet policyholders new exposures and needs. The insurance industry is stepping up and addressing these challenges in several different ways.
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CHAPTER 4.10 LOOKING AHEAD Relative to other countries in Asia, it is at present a relatively unattractive insurance market for foreign insurers. While nobody doubts the long-term potential, the current rating is adversely impacted by low scores for country structure (principally due to the very low GDP per capita) and regulatory framework (principally due to the dominance in both the life and non-life sectors of state owned insurers and the glacial pace of change). Over the forecast period, it is anticipated that non-life premiums will grow by 13% annually in local currency terms and by 16% in US dollar terms. Life premiums are expected to increase by 2% annually in local currency terms and by 5% in US dollar terms. The key drivers of growth in the non-life segment in 2007-2012 are the anticipated rise in nominal GDP from around US$831bn to US$1,404bn and an expected increase in non-life penetration from 0.81% of GDP to 1.00%. The driver of growth in the life segment is the envisaged small rise in life density from US$29.70 per capita in 2007 to US$35.00 per capita in 2012. India's population over the same period is expected to increase from 1,124mn to 1,203mn. The competitive environment in the life insurance market is absolutely dominated by the stateowned Life Insurance Corporation of India (LIC), which accounts for about 90% of premium income. It is expected that the government's role in the market will eventually be moderated, but there are no immediate signs of change. The non-life sector is dominated by four state-owned insurers. Seven of the top ten insurers are state-owned. ICICI Lombard is the largest of the foreign joint venture groups that are active in India's non-life market. Its market share, in 2004, was measured at 2%. India is a market said to be 'simply too big to ignore'. This may well be true in the long term, but at present, the insurance sector is relatively small and the barriers to entry are huge.
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There is presently building in India an upsurge in consumer awareness, putting immense and unavoidable pressure on the insurance industry. A lifting of the bar on composite insurance, where companies are allowed to do only life or non-life business today, can also be expected. Instead of categorizing insurance by class, the focus may shift more to the period for which the cover was offered and the risk underwritten. Already there is demand for permitting the industry to underwrite pure risk and leaving investment decisions to policyholders.
With the entry of competition, the rules of the game are set to change. The market is already beginning to witness a wide array of products from players whose number is set to grow. In such a scenario, the differentiators among the different players are the products, pricing, and service. Meanwhile, the profile of the Indian consumer is also evolving. Consumers are increasingly more aware and are actively managing their financial affairs. Today, while boundaries between various financial products are blurring, people are increasingly looking not just at products, but also at integrated financial solutions that can offer stability of returns along with total protection.
To satisfy these myriad needs of customers, insurance products will need to be customized. Insurance today has emerged as an attractive and stable investment alternative that offers total protection Life, Health and Wealth. In terms of returns, insurance products today offer competitive returns ranging between 7% and 9%. Besides returns, what really increases the appeal of insurance is the benefit of life protection from insurance products along with health cover benefits.
Consumers today also seek products that offering flexible options, preferring products with benefits unbundled and customizable to suit their diverse needs. The trend in developed economies where people not only live longer and retire earlier are now emerging in India. Where once the fear was one of dying too early, now, with increasing longevity, the fear also is one of living too long and outliving one's assets. With the breakdown of traditional forms of social security like the joint family system, consumers are now concerning themselves with the need to provide for a comfortable retirement.
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This trend has been further driven by the long-term decline in interest rates, which makes it all the more necessary to start saving early to ensure long term wealth creation. Today's consumers are increasingly interested in products to help build wealth and provide for retirement income.
This all adds up to major change in demand for insurance products. While sales of traditional life insurance products like individual, whole life and term will remain popular, sales of new products like single premium, investment linked, retirement products, variable life and annuity products are also set to rise. Firms will need to constantly innovate in terms of product development to meet ever-changing consumer needs. However, product innovations are quickly and easily cloned. Pricing will also not vary significantly, with most product premiums hovering around a narrow band. In this competitive scenario, a key difference will be the customer experience that each life insurance player can offer in terms of quality of advice on product choice, along with policy servicing, and settlement of claims. Service should focus on enhancing the customer experience and maximizing customer convenience. Long-term growth in the business will depend greatly on the distribution network, where the emphasis must evolve from merely selling insurance to acting as financial advisors, helping customers plan their finances depending on life stage and personal requirements. This calls for a strong focus on training of the distribution force to act as financial consultants and build a long lasting relationship with customer. This would help create sustainable competitive advantage not easily matched.
Banking on global assets of India Inc. After banking, it is now the turn of the Indian general insurance industry to strike business opportunities by way of the overseas M&A deals of India Inc. Some of the major domestic general insurers, particularly private sector insurers with foreign collaboration and international reinsurers, are currently targeting these extended assets of India Inc located overseas through their international insurance programmes. Such a programme would provide cover to the international operations of Indian companies under one master policy issued in the country. The advantage to the Indian conglomerate is that they have to deal with one insurance company for their global entities.
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Bajaj Allianz General Insurance is working on plans to provide cover to the newly acquired overseas properties of Indian Corporates, confirmed Kamesh Goyal, managing director & CEO, Bajaj Allianz General Insurance. Earlier, Tata AIG General Insurance issued such a policy for VSNL's overseas operations. According to a senior official of Swiss Re, the largest international reinsurer, the rising M&A activities of Indian Corporates have opened up substantial business opportunities for Indian general insurance companies. Such a policy can be designed with the active involvement of the reinsurer which has better knowledge about the overseas market. "To put it in simple terms, the client would get one master cover for all insurance needs even if their risks are diversified in multiple locations. International insurance programmes can be undertaken for clients who have global manufacturing locations or offer products/services globally," said Swaraj Krishnan, general manager, Bajaj Allianz General Insurance. Normally, some countries do not allow outside insurers that do not have operations locally to provide cover to local assets. In these cases, the concerned insurer--much like a corresponding banking relationship--strikes an alliance with a local insurer, which has operations in the concerned country to provide cover to the company, which is the customer of the Indian general insurer.
Rural-urban mix
It must be borne in mind that India is a predominantly rural country and will continue to be so in the near future. New players may tend to favor the "creamy" layer of the urban population. But, in doing so, they may well miss a large chunk of the insurable population. A strong case in point is the current business composition of predominant market leader the Life Insurance Corporation of India. The lion's share of its new business comes from the rural and semi-rural markets. In a country of 1 billion people, mass marketing is always a profitable and costeffective option for gaining market share. The rural sector is a perfect case for mass marketing. Competition in rural areas tends to be "kinder and gentler" than that in urban areas, which can easily be termed cutthroat And the generally smaller policy amounts in rural areas would be more than offset by the higher volume potential in these areas in contrast with urban areas.
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Identifying the right agents to harness the full potential of the vibrant and dynamic rural markets will be imperative. Rural insurance should be looked upon as an opportunity and not an obligation. A smaller bundle of innovative products in sync with rural needs and perception and an efficient delivery system are the two aspects that have to be developed in order to penetrate the rural markets.
India leads china in insurance penetration

China may be ahead of India on many fronts, but it still lags behind its counterpart in insurance penetration, says a recent research report. To be more precise, while insurance penetration in India is about 4 percent, China still has a penetration of 2.7 per cent, much below the world average of 7.52 per cent and farther below Taiwan's enviable 14.8 per cent.
The only consoling fact is that with their potential to dominate the industry's growth rates over the next decade, both India and China are now being viewed as the two awakening giants in the Asia-pacific region, the insurance sector's biggest emerging market. Their low insurance penetration levels and expanding economies also support the two countries' insurance industry.
However, despite opening up at approximately at the same time in the late nineties, the insurance sector in China has raced ahead of India, says the Batlivala & Karani (B&K) Research report.
Chinese markets, for instance, are well ahead of India owing to a more positive regulatory environment and better performing companies. There are 79 insurance companies in China compared to the 30-odd companies in India. Although regulations have been proactive, they have been less effective in India, especially on issues like solvency requirements. As a result, insurance companies in China have better underwriting and capitalization levels than India.
Still India is a much favored destination because the entire country was made available for business right from the time the insurance sector was opened. On the other hand, despite ongoing economic and market reforms, China remains a socialist country with centralized administrative controls. Expansion requires separate approvals for each city there. India opened up all at once,
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which
will
ultimately
benefit
both
customers
and
companies.
One common factor between the two countries is that many Chinese and Indians still do not see insurance as a necessity and, of course, many can't afford to buy it. According to traditional culture, they would rather save money for the benefit of the next generation. The lack or reliable social welfare and the rising cost of education and housing encourage further saving and, therefore, constrained consumer spending, the report says.
CHART COMPARABLE VALUATION FACTORS (CY07) UNIT OF CHINA INDIA
MEASUREMENT Population Per capita income Life expectancy Investment Penetration insurance GDP (PPP) (CY06) $ Bn 10,210 4,164 Million $ per annum/person Years % of GDP of % of GDP 1,318 1,498 74 44 2.7 1,132 658 64 29 4
Source: World Bank, ADB, CIO, B&K Research
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CHAPTER 5: MUTUAL FUNDS
Mutual Funds: An overview A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.
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A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations. A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes
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CHAPTER 5.1 WHY INVEST IN MUTUAL FUNDS? Convenience As an investor, you have to keep track of your investment, which takes time and effort. When you invest in a Mutual Fund scheme, you pass on this function to a Fund Manager. Moreover, you are relieved of nagging problems associated with capital market investing, like bad deliveries, and non-receipt of share certificates and dividend warrants. Expertise Mutual Funds employ experienced professionals to research investment options. As industry players, they have access to information that may not be available to you. Returns Over the medium and long-term, Mutual Funds have the potential to provide favorable returns within the same risk category. After a brief period in the doldrums, the Mutual Fund industry in India has performed credibly over the past year. According to a study conducted by the Association of Mutual Funds in India, of the 118 equity schemes in the market, 91 outperformed the benchmark Bombay Stock Exchange Sensex. Lower expenses You have to bear several costs if you invest directly in the market. These include brokerage, stamp duty and custodial charges, in addition to the expenses incurred in tracking your share portfolio. Mutual Funds too have to bear these costs, but economies of scale enable them to reduce procedural expenses like these. Reduced risk It's not possible for investors having a small capital outlay to maintain a diversified portfolio. However, Mutual Funds, with the advantage of pooling of resources, can. This reduces the risk, as not all stocks go through a downtrend at the same time.
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Variety Mutual Funds offer schemes to suit specific investment needs. For instance, there are growth schemes for investors who are willing to bear a greater risk, gilt schemes for investors who are risk-averse and retirement plans for those with an eye on the future. Flexibility Some Mutual Funds offer products such as systematic investment plans, regular withdrawal plans, monthly income plans and dividend reinvestment plans, which are appropriate for retirement planning. These allow you to invest and withdraw funds as per your needs. Liquidity In case of open-ended schemes, a majority of Mutual Funds provide investors easy entry and exit at prices related to the scheme's net asset value (NAV). They are also prompt in meeting redemption demands. In case of close-ended schemes, unit holders can sell their units on the stock exchange. Some Mutual Funds also repurchase units at NAV-linked prices during certain periods. Timely Decisions and Safety against Loss The Fund Managers, being experienced and armed with the market scenario, can take timely decisions about when to sell or buy the units. Timely buying or selling of units reduces the loss that could have been incurred. Transparency Mutual Funds send out periodic newsletters to unit holders, detailing the scheme's portfolio, performance, investment strategy, and the outlook of the scheme and the fund manager. You can also find information on websites and in newspapers or magazines. Regulation All Mutual Funds in India have to be registered with the Securities and Exchange Board of India (SEBI), and comply with its regulations.
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CHAPTER 5.2 MUTUAL FUNDS SCHEMES There are mainly two types of Mutual Funds on the basis of interval. They are, Open-ended schemes are sold at the NAV based prices, generally calculated on every business day. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity - i.e. there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Open-ended funds are bringing in a revival of the mutual fund industry owing to increased liquidity, transparency and performance in the new open-ended funds promoted by the private sector and foreign players. Close ended schemes have a stipulated maturity period, limited capitalization and the units are listed on the stock exchange are called close-ended schemes. These schemes have historically seen a lot of subscription. This popularity is estimated to be on account of firstly, public sector MFs having floated a lot of close-ended income schemes with guaranteed returns and secondly easy liquidity on account of listing on the stock exchanges.
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Schemes according to investment objectives are EQUITY SCHEMES EQUITY DIVERSIFIED SCHEMES These schemes invest 90% or less of the funds collected, into equity. Selection of companies, whose equities are invested in, is left to the discretion of the Fund Manager of the scheme. EQUITY TAX-SAVING SCHEMES These schemes work on similar lines as diversified equity funds. The only difference between these funds & equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits. SECTOR SCHEMES These schemes invest in equity & related securities of companies specific to a particular sector such as IT, banking, etc. INDEX SCHEMES It invests in shares forming part of an index such as BSE sensex, NSE, Nifty, etc., in the same proportion as the weight age these shares have in the index. Such schemes seek to provide returns that closely correspond to the return of the index being mirrored. EXCHANGE TRADED FUNDS (ETFs) These are the same as index schemes with one crucial difference. An ETF is listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund. DYNAMIC FUNDS These schemes alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity.
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DEBT SCHEMES MEDIUM-TERM DEBT FUNDS They have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of five to seven years. Such funds seek to optimize returns while maintaining a balance of safety, yield and liquidity. SHORT-TERM DEBT FUNDS They have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of one to two years. Such funds seek to generate higher returns with greater stability. MONEY MARKET DEBT FUNDS: Enhancement of income with a high level of liquidity is the objective of these funds with a judicious portfolio mix of money market and debt instruments. Under normal circumstances, the fund will have a 50-90 per cent exposure to money market instruments while holding 10-50 per cent in debt instruments. MEDIUM-TERM GILT FUNDS These aim to provide steady returns with low risk and highest possible safety by investing primarily in Government Securities. The average maturity of the securities in the portfolio would be over three years. SHORT-TERM GILT FUNDS They are dedicated gilt schemes, which seek to generate reasonable returns with investments in Government Securities. The securities invested in are of short to medium term residual maturities. FLOATING RATE FUNDS These funds invest in securities with floating interest rates, which are generally linked to some benchmark rate like Prime Landing Rate. Floating Rate Funds have a high relevance when the
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debt markets are volatile and investors can effectively make use of these funds to hedge their debt fund investments against the interest rate fluctuations. MONTHLY INCOME PLANS (MIPs) These are basically debt schemes, which make marginal investments in the range of 10-25 % in equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly higher return than pure long-term debt schemes at marginally higher risk. BALANCED SCHEMES These schemes invest approximately half the funds in equities and the other half in debt. They seek to balance risk while aiming to offer better returns than pure debt schemes. FUND OF FUNDS Fund of funds (FoFs), as the name suggests, are mutual fund schemes, which invest in other mutual fund schemes. There have been a few such FoF schemes in the past and recently too some new FoFs have been launched Diversification Just as a mutual fund scheme offers diversification by investing in various equity scrips, a FoF offers diversification by investing in various MF schemes. Secondly, you get a chance to diversify across various fund managers and investing styles. Thirdly, even if a fund manager quits one AMC and joins another whose fund you already own in the FoF, you are not affected by this constant movement of the fund managers. Convenience By choosing a suitable FoF, you get a chance to invest across different class of funds with just one investment. Thus, it becomes very convenient for investing and monitoring. Suppose you
wanted to invest in 5 equity funds and 5 debt funds. Assuming each fund has a minimum stipulated investment of Rs.5000, you would need Rs.50,000. In a FoF, Rs.5000 would do the job.
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CHAPTER 5.3 VARIOUS PRICES INVOLVED IN MUTUAL FUNDS Net Asset Value (NAV) Fund administrators add up the market value of the fund's investments at the end of each business day. The fund company then subtracts the value of the fund's debts or other liabilities. The difference equals the fund's net asset value. The fund company next divides the net asset value by the number of shares the fund has issued to investors. The result equals the price of each share.
Sale Price- Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load Repurchase price- Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price - Is the price at which open-ended schemes repurchase their units and closeended schemes redeem their units on maturity. Such prices are NAV related Sales Load Or entry load - Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes. Repurchase or Back-end Load or exit load - Is a charge collected by a scheme when it buys back the units from the unit holders SEBI has stipulated that the maximum exit load cannot be higher than 7%. And for closed ended funds the maximum exit load cannot be higher than 5%.
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CHAPTER 5.4 INDIAN MUTUAL FUND INDUSTRY History of Mutual Fund in India: The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management
Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
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Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
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Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years. As at the end of October 31, 2003, there were totally 31 funds in India, with assets under management of about Rs. 12, 67,260 million. Performance of mutual funds in India Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund.
For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position.
The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization.
The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.
The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.
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The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value.
The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds to launch pension schemes.
The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered, the quantitative will be investors.
At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds.
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CHAPTER5.5 RECENT TRENDS IN MUTUAL FUND INDUSTRY
As on July 31st 2008, assets under management (AUM) by 34 fund houses, released by Association of Mutual Funds in India (AMFI), were pegged at Rs 5.30 lakh crores in July compared to 5.64 lakh crores in June. Fund flows into equity mutual funds were down by 20% .the dip in the overall fund flows was due to a 97% fall in the amounts raised by NFOs and to the dismay of fund houses many schemes have even failed to mobilize decent NFO money needed to make worthwhile investments. People are not buying NFOs these days because they are wary of the market conditions. According to fund analysts the sharp drop in AUMS is due to heavy redemption from investors during the month because of the volatility in the stock markets. A glance at the past performance of the mutual funds shows that a good portion of thematic, equity, sectoral, and offshore investment funds have ended in the negative zone. However the domestic mutual fund industry (IMFI) which grew at a healthy pace of 18-19% in the last eight years against its worldwide growth rate of 13%, is all set to beat past time records and now poised for achieving 22-23% rate of growth by end of current fiscal. Despite domestic MF growing at substantially higher rate in last 3 years, it is still many times behind US MF industry, the size of which is estimated at over US$ 12 trillion as against about Rs.5 lakh crores of India with its market penetration of 4% of total population, compared to 49% in the US and 20% in UK. In India, MF industry manages nearly 700 schemes while US MF industry has more than 12,000 MF schemes.
The public sector share in current MF industry size will go up from nearly 20% from less than 10% now and that of joint sector to about 10% from 8% now.
The emerging trends in the MF would be that the Commodity funds will invest in commodities such as metals, food grains, and crude oil, commodity companies, or commodity futures contracts.
Likewise, Real estate funds will invest in real estate directly. As the competition in the Indian
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MF industry will further intensify and go forward. Fund managers will, therefore, need to deliver products that are relevant to investors. As the Indian markets and investors mature, financial advice, product diversification, and multi-distribution channels will become critical for long-term success. The pivotal factor here is that at the fund house level, Reliance MF maintained its position at the top of the AUM league table with Rs 59,143 crores under management. In august 2008, Reliance MF's AUM grew by a whopping 10,315 crores (21%). ICICI Prudential MF and UTI MF too retained their places in the AUM pecking order. With an AUM of Rs 50,703 crores Pru-I MF was at the second position and with Rs 40,070 crores, UTI MF was at the third position. Fund houses may soon get to sell insurance cover and also to collect the insurance premium from the investors thus coming to level-playing field with the insurance sector. The current regulations bar the fund houses from collecting the insurance premium from investors. currently the fund houses have to tie up with the insurance companies for offering an insurance cover. Only two fund houses reliance mutual fund and Birla sunlife give insurance cover and pay the insurance premium. According to industry officials only large fund houses who have the financial muscle to pay premiums offer insurance plans. Now with the recent move all mutual funds can offer insurance products and thus compete with ULIPS. The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of
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continuing the activity in a major way. The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on. The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.
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Some of the drivers that are shaping the industry, which are likely to have substantial influence on the marketing strategies of the future are as follows: Consider this. The average projected life span of an Indian after retirement (that is, after 60) is expected to go up from 15 years to 20 years. And the number of the elderly (those over 60) is expected to increase significantly from 6.8 per cent of the population in 1991 to 8.9 percent in 2016.One in every 6 people over the age of 60 in the world lives in India The aged of today have no choice but to depend on their own lifetime savings to survive for nearly 20 years if they stop working at age 60 We are likely to have nearly 20 crores elderly in India within the next 2 decades Of the 36 crores paid workers in India today, only 11% belong to the organized sector Workers in the unorganized sector live in the fear of working throughout their lives, thus a formal pension scheme is a must At present, only Unit Trust of India and Kothari Pioneer Mutual Fund offer retirement schemes. So there is wide scope for mutual funds to target this sector with government liberalizing the pension reforms. Advisory services are becoming more critical to investors and independent financial advisors and planners are gaining ground. The US accreditation body for Financial Planners was set up in Delhi in the name of Association of Financial Planners (AFP) and soon professional Certified Financial Planners (CFPs) will be available to investors to assist them in their financial planning needs. Banks are planning to enter into advisory services in a big way. An entirely new distribution channel will be created consisting professional advisors who will exert substantial influence on what products customers will buy. As investors turn more aware, either by themselves or with the help of financial planners, there will be demand for more specialized products; for example, based on different styles of fund management on the Value-Growth spectrum as well as on the Focused-Diversified Investing spectrum. In other words, two equity schemes will be distinguished based on the fund management style - either the value investing style or growth investing style. Digital marketing: E-commerce is gradually showing signs of gaining acceptance and electronic sale of financial products is especially gaining volumes. There is a likelihood of the volumes reaching a significant size, thereby spawning a new distribution paradigm.
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As Indian markets mature, regulatory restrictions are easing, paving the way for introduction of innumerable specialized products hitherto not introduced in India such as hedge funds and derivative-based products. Size of Schemes A study of the schemes launched by all mutual funds excluding UTI reveals the following: Of the total number of schemes launched 84% are from Public sector mutual funds, while remaking 16% are from Private sector mutual funds. No. of schemes 27 28 23 12 05 Investor Profile Investor profile of Indian Mutual Fund Industry shows dominance of individual investors followed by Corporate. Trust and other investors respectively. Investors Individual Corporate Trusts Others Resources Mobilized in 2003-04 % age 61 27 04 08 Corpus size > - 50 Cr 50 100 Cr 100 200 Cr 200 500 Cr < - 500 Cr
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CHAPTER 6 OTHER FINANCIAL SERVICES The term financial services is a wide concept encompassing the following sectors in the service sector. Intermediation or advisory services Stock brokers (private client services) and discount brokers Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients Private equity In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries. Private equity investments can be divided into the following categories: Leveraged buyout, LBO or simply Buyout refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically more mature and generate operating cash flows.
Venture capital: A broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth. The Indian corporate companies must equally know that venture capital involves the development of project idea, implementation, fledging or additional financing, and establishment
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The main importance of venture capital to Indian corporate companies is the reduction of risk, easy to analyze the business prospects and to assume the investors on affairs of the business. The Indian methods of venture financing are equity participation, income notes, the conventional loans and even the conditional loans. In order to promote the venture capital growth in India, there must be tax concessions for capital gains, high level development of capital market, giving of fiscal incentives to Indian corporate companies, high level participation of the private sectors the improving and reviewing of the existing laws and limited partnership and many more.
Growth capital: refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.
Infrastructure financing Infrastructure Development is certain to turn into a growth Driver for future Development. With the concept of universal Banking taking roots in the system and relaxations permitted by RBI from time to time, Commercial Banks have shown enthusiasm in participating in this specialized field of financing. SBI has established a Project Finance Strategic Business Unit. Specialized domain knowledge in power, roads, ports, telecom etc is required
Example: The Infrastructure Leasing and Financial Services (ILFS), established in 1989, is coming up as an important financial institution in recent years. It is a private sector financial intermediary wherein the Government of India owns a small equity share. Its activities have more or less remained confined to development of industrial-townships, roads and highways where risksare comparatively less. It basically undertakes project feasibility studies and provides a variety of financial as well as engineering services. Its role, therefore, is that of a merchant banker rather than of a mere loan provider so far as infrastructure financing is considered and its share in the total infrastructural finance in the country remains limited
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Consumer financing Consumer financing provides individuals the necessary financing for personal purchases ranging from buying a car, shopping purchases to buying a house. Most people dont normally get access of capital through equity markets so they would normally get access to debt finance through the established financial institutions including banks, credit union, insurance companies etc. This debt is usually in the form of a credit card or loan. Consumer finance opportunity in India is one of the best available anywhere in the world. Sixtyfour per cent of our GDP is domestic consumption-based. We have the youngest population in the world, demographics are changing, types of jobs are changing, and now we are talking about reforms, which will lead to further impetus to consumer dynamics. In addition, our loan to GDP for consumer loan is 6 per cent; in most developed countries it is 100 per cent and in marginally developed countries it is 40 per cent. So consumer finance will continue to be a major growth area.
Conglomerates A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time.
Foreign institutional investor FIIS affect the investment scenario of the country, performance of the stock markets and so forms an important part of finance providers. An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.
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INVESTMENT SCENARIO IN INDIA India is thought to be a first-rate investment. India has a vast potential for foreign investment and foreign players find it their next investment destination.
As rightly said by Sukomal C Basu, Chairman & Managing Director, Bank of Maharashtra; India is the fourth largest economy in the world and has the second largest GDP among developing countries, in purchasing power terms. It is experiencing growth with macro economic stability and is in the process of integrating with the global economy. Far-reaching economic reforms initiated in July 1991 generated numerous business opportunities, leading to degeneration with removal of most licensing procedures.
Economics authorities and various research studies carried out across the globe confirm the fact that India and China will rule the world in the 21st century. For over a century the United States has been the leading economy in the world but key developments have taken place in the world economy since then, leading to the change in focus from the US and the rich countries of Europe to the two Asian giantsIndia and China.
The wealthy countries of Europe have seen the supreme decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each. Within Asia, the rising share of China and India has more than made up the moribund global share of Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP.
According to some experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.
By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely
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to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years.
Any company or firm irrespective of its size, which aspires to be a global player cannot for long ignore India which is expected to become one of the best emerging economies. However the million-dollar question here for foreign players is What is the success -failure ratio?
Success in investing in India will depend on four factors like:
Accurate estimation or at least feasible estimation of the India's potential Proper Risk Assessment while investing in India Proper understanding of the Indian Financial System Careful strategic planning backed by thorough research on investment industry
Failure in investing in India can depend on three factors like:
Underestimation of Indian investment intricacies Overestimation of investment potential in India Complexities & reservations of Indian System
One point that investors should understand about investing in India is that India is an investment goldmine for long-term growth. While short term profits may be churned out from time to time but they are not of a pennys worth in the long run.
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CHAPTER 7 SWOT ANALYSIS OF FINANCIAL SERVICES SECTOR STRENGHTS India's financial services sector is expected to enjoy generally strong growth during coming years, driven by rising personal incomes, corporate restructuring, financial sector liberalization and the growth of a more consumer-oriented, credit-oriented culture. This is expected to lead to increasing demand for financial products, including consumer loans (especially for cars and homes), as well as for insurance and pension products. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. The Finance Ministry continuously formulated major policies in the field of financial sector of the country after liberalization which helped in attracting foreign investors, foreign conglomerates, foreign technology etc. With new innovations in insurance and mutual funds there is vast variety of products available for the customer to choose from. Mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. The penetration of insurance sector is 4 whereas that of china is 2. So the insurance sector is gaining importance. The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years.
Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009.
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WEAKNNESSES Although India witnessed a growth rate of almost 9% in the fiscal 2007-08, a vast majority is still below the poverty line who do not have enough resources for essential commodities, forget developing an insurance or banking culture among them. The insurance penetration in India is 4 % whereas the world average is 7.52% which is quite low. The government interventions have been a major obstacle in the path of development of private players. Also in India till today a vast majority of non-performing assets belong to the public sector undertakings. To add to weaknesses the Indian economy is filled with corruption, black money, bureaucracy, political intervention and social back-drops- illiteracy, poverty, unemployment, etc. This hinders the growth and development of private players. Regulatory issues, Lack of suitable products, Solvency requirements, Labour reforms, Legal reforms, Agents compensation are the various reasons that are holding back growth in insurance product as explained in previous chapter. OPPORTUNITIES Large rural population which has the potential but were ignored till date are now opening up new arenas of business for many conglomerates who have a wide rural reach. Only 24 % of the Indian households own life insurance. The remaining 76% are still to be tapped. By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The growing literacy rates, declining mortality rate, rising income, huge population in the middle age section are all indicators of opportunities aplenty lying in India. With new technological advancements the whole financial structure would be transformed in the near future. According to K. V. KAMATH India has just started to witness the development and professionalization of banking and other financial services in its true sense.
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The concept of financial planners will come soon to India providing complete financial solutions even to person with limited financial means. Also in near future financial products will be fully customized to suit customer requirements. Such flexible products will require utmost regulations and right people mix who understand consumer needs. Also with so many players in the market it has created stiff competition which will lead to improved efficiency among these players to attract a small pie of market share. THREATS As such financial sector is a booming sector and there are quite a few threats as such but the Indian companies are facing the following two major threats With the Indian economy opening up since 1991 and deregulation of various activities Indian players in the financial services sector have a huge threat from their foreign competitors as they have advanced technology, huge resources to invest and expertise in handling finances. These companies make huge profits out of Indian markets and drain away the wealth of India to their land. With increasing use of internet banking and mobile banking there is an increase in internet piracy, hacking and such other threats which would leak confidential information and affect the goodwill of the company. Change is a continuous process and in order to accommodate the changes and challenges that are taking place in the present globalization scenario this industry has to re-orient its marketing strategy and compete not jus for survival but growth and profits.
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CHAPTER 8 CONCLUSION Financial services in India have evolved over the years but the years but there is a vast scope of development in this sector. The challenges facing the financial services sector are lack of qualified personal having financial creativity, lack of specialization in one service, lack of investor awareness and no initiative taken for research and development. Also the whole financial system is undergoing a phenomenal change in accordance with national and global requirements so it is high time that we become transparent in our operations. But at the same time we cannot ignore the opportunities available to us such as the large talent pool which is the new age tech-oriented youth who are ready to take-off and help India realize its dream of being a superpower. Although the global economy has slowed down due to US sub-prime crises and it has affected ours financial services sector too, the future ahead will be bright with all economies overcoming the recession phase. Not to forget with opportunities knocking the door there will also be cutthroat competition wherein the best player would win. Indian consumers are increasingly becoming more aware and are actively managing their financial affairs. To woo such consumers marketers have to create a customized product suiting their requirements. Firms will have to constantly innovate in terms of product development to meet ever-changing consumer needs. To conclude financial services are vital for any economy. If industries and agriculture are the growth drivers then banks, insurance, mutual funds are catalysts. The term Finance with its varied connotations has evolved over a period of time. The complex matrix of financial system, financial services and financial intermediaries are closely linked to each other and are lifeblood of any economy without which we cannot operate.
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BIBLIOGRAPHY Internet i. ii. iii. iv. www.wikipedia.com www.investopedia.com www.google.com www.moneycontol.com
Newspaper i. ii. Books i. Service Sector Management by:- Romeo Mascarenhas Times Of India Economic Times
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The NBFCs that are registered with RBI are:

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Capital markets which consist of:

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CHAPTER 3.1 STRUCTURE OF THE INDIAN BANKING SECTOR

Reserve Bank of India

EXIM Urban Credit

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The major steps to regulate banking included:

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Caters to the needs of agriculturists and landless agricultural labourers

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CHAPTER 3.8 PRODUCTS AND SERVICES OFFERED BY BANKS

2) LOANS type of loans

Tax Saving Bonds

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5) CARDS i. ii. Debit card Credit card

9) CONSULTANCY i. ii. iii. Investment counseling Project counseling Tax consultancy

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CHAPTER 4.1 INSURANCE SECTOR IN INDIA

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Key Recommendations of Malhotra Committee

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LATEST FACTS AND FIGURES

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CHAPTER 4.2 BASIC FUNCTIONS OF THE INSURANCE INDUSTRY

1. Risk Perception and Evaluation:

2. Designing the Insurance Product:

3. Marketing of the Product:

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4. Selling of the Products:

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Increase competing ability among small and medium-scale units

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Investment Strategies from LIC, India

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