FINANCIAL SERVICES

Introduction

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

Classification

Market Size

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

Indias life insurance sector is the biggest in the world with about 360 million policies, which are
expected to increase at a compounded annual growth rate (CAGR) of 12-15 per cent over the
next five years. The insurance industry is planning to hike penetration levels to five per cent by

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

Investments/Developments

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

Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life
Insurance Co Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per
cent to 49 per cent.
Canada-based Sun Life Financial Inc plans to increase its stake from 26 per cent to 49 per
cent in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo Ltd,
through buying of shares worth Rs 1,664 crore (US$ 249 million).
>Nippon Life Insurance, Japans second largest life insurance company, has signed
definitive agreements to invest Rs 2,265 crore (US$ 348 million) in order to increase its
stake in Reliance Life Insurance from 26 per cent to 49 per cent.
The Securities and Exchange Board of India (SEBI) plans to gradually introduce more
commodity products and allow more participants in the commodity derivatives market in
India.
The Reserve Bank of India (RBI) has granted in-principle licenses to 10 applicants to
open small finance banks, which will help expanding access to financial services in rural
and semi-urban areas, thereby giving fillip to Prime Minister's financial inclusion
initiative.
The Reserve Bank of India (RBI) has also given in-principle approval to 11 entities to
open payment banks which is expected to result in widening the reach of banking
services and thereby improve the extent of financial inclusion as envisaged by the
government. The setting up of 11 new payments banks can potentially free up Rs
1,400,000 crore (US$ 210 billion) per annum to fund the infrastructure sector, as per a
study by the State Bank of India.
A Reserve Bank of India (RBI) committee headed by Deputy Governor Mr Gandhi has
recommended granting commercial banking license to multi-state urban cooperative
banks(UCB) having business of more than Rs 20,000 crore (US$ 3 billion).
Indias largest microfinance company Bandhan has set up Bandhan Bank Ltd, banking
and financial services company, post the receipt of license from RBI.
India has moved a step closer to having a Singapore- or Dubai-like financial hub, with the
Securities and Exchange Board of India (SEBI) approving a framework for international
financial centres (IFCs).
The RBI has allowed bonds issued by multilateral financial institutions like World Bank
Group, the Asian Development Bank and the African Development Bank in India as
eligible securities for interbank borrowing. The move will further develop the corporate
bonds market, RBI said in a notification.

Government Initiatives

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

The Insurance Regulatory and Development Authority of India (IRDA), as part of its endeavour
to increase insurance sector growth, has allowed a new distribution avenue called the point of
sale person, who will be allowed to sell simple standardised insurance products in the non-life
and health insurance segments, which are largely pre-underwritten.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and
insurance sectors. The country is projected to become the fifth largest banking sector globally by
2020, as per a joint report by KPMG-Confederation of Indian Industry (CII). The report also
expects bank credit to grow at a compound annual growth rate (CAGR) of 17 per cent in the
medium term leading to better credit penetration. Life Insurance Council, the industry body of
life insurers in the country also projects a CAGR of 1215 per cent over the next few years for
the financial services segment.
Also, the relaxation of foreign investment rules has received a positive response from the
insurance sector, with many companies announcing plans to increase their stakes in joint
ventures with Indian companies. Over the coming quarters there could be a series of joint venture
deals between global insurance giants and local players. The relaxation in the foreign direct
investment (FDI) limit to 49 per cent can result in additional investments up to Rs 60,000 crore
(US$9 billion).
Exchange Rate Used: INR 1 = US$ 0.0150 as on December 08, 2015

Current Status of Financial Service Sector in India

Indias gross domestic savings (GDS) as a percentage of Gross Domestic Product (GDP) has
remained above 30 per cent since 2004.It is projected that national savings in India will reach
US$ 1,272 billion by 2019. Over 95 per cent of household savings in India are invested in bank
deposits and only 5 per cent in other financial asset classes.
The asset management industry in India is among the fastest growing in the world. Total asset
under management (AUM) of the mutual fund industry clocked a Compound Annual Growth
Rate (CAGR) of 12.05 per cent over FY07-15 to reach US$ 179.6 billion. Corporate investors
accounted for around 45.9 per cent of total AUM in India, while High Net Worth Individuals
(HNWI) and retail investors account for 28.6 per cent and 22.9 per cent, respectively
Indias equity market turnover has increased significantly in recent years. The annual turnover
value in the National Stock Exchange (NSE) witnessed a CAGR of 20.7 per cent between FY96
and FY15 to reach US$ 718 billion.
The Government of India has taken various steps to deepen the reforms in the capital markets,
includes simplification of the Initial Public Offer (IPO) process which allows qualified foreign
investors (QFIs) to access the Indian bond markets.
Insurance Sector
Introduction
The insurance industry of India consists of 53 insurance companies of which 24 are in life
insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance
Corporation (LIC) is the sole public sector company. Apart from that, among the non-life
insurers there are six public sector insurers. In addition to these, there is sole national re-insurer,
namely, General Insurance Corporation of India (GIC Re). Other stakeholders in Indian
Insurance market include agents (individual and corporate), brokers, surveyors and third party
administrators servicing health insurance claims.
Out of 29 non-life insurance companies, five private sector insurers are registered to underwrite
policies exclusively in health, personal accident and travel insurance segments. They are Star
Health and Allied Insurance Company Ltd, Apollo Munich Health Insurance Company Ltd, Max
Bupa Health Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna TTK
Health Insurance Company Ltd. There are two more specialised insurers belonging to public
sector, namely, Export Credit Guarantee Corporation of India for Credit Insurance and
Agriculture Insurance Company Ltd for crop insurance.

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

Investments
The following are some of the major investments and developments in the Indian insurance
sector.
Foreign Direct Investment in the insurance sector stood at US$ 341 million in MarchSeptember, 2015, showing a growth of 152 per cent compared to the same period last
year.
Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life
Insurance Co Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per
cent to 49 per cent.
Canada-based Sun Life Financial Inc plans to increase its stake from 26 per cent to 49 per
cent in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo Ltd,
through buying of shares worth Rs 1,664 crore (US$ 249 million).
Nippon Life Insurance, Japan's second largest life insurance company, has signed
definitive agreements to invest Rs 2,265 crore (US$ 348 million) in order to increase its
stake in Reliance Life Insurance from 26 per cent to 49 per cent.
The Central Government is planning to launch an all-in-one insurance scheme for farmers
called the Unified Package Insurance Scheme (Bhartiya Krishi Bima Yojana). The
proposed scheme will have various features like crop insurance, health cover, personal
accident insurance, live stock insurance, insurance cover for agriculture implements like
tractors and pump sets, student safety insurance and life insurance.
Government launched a special enrolment drive, Suraksha Bandhan Drive comprising of
sale of gift cheques and launch of deposit schemes in bank branches, to facilitate
enrolment under Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri
Jeevan Jyoti Bima Yojana (PMJJBY).
To increase the subscriber base and ensure wider reach, the Central Government has
eased several norms for its flagship insurance scheme Atal Pension Yojana (APY),in
terms of more options for periodical contributions, voluntary and premature exits and
simplified penalty for payment delays.
Bennett Coleman and Co. Ltd (BCCL), the media conglomerate with multiple
publications in several languages across India, is set to buy Religare Enterprises Ltds

entire 44 per cent stake in life insurance joint venture Aegon Religare Life Insurance Co.
Ltd. The foreign partner Aegon is set to increase its stake in the joint venture from 26 per
cent to 49 per cent, following governments reform measure allowing the increase in
stake holding by foreign companies in the insurance sector.
GIC Re and 11 other non-life insurers have jointly formed the India Nuclear Insurance
Pool with a capacity of Rs 1,500 crore (US$ 226 million) and will provide the risk
transfer mechanism to the operators and suppliers under the CLND Act.
State Bank of India has announced that BNP Paribas Cardif is keen to increase its stake in
SBI Life Insurance from 26 per cent to 36 per cent. Once the foreign joint venture partner
increases its stake to 36 per cent, SBIs stake in SBI Life will get diluted to 64 per cent.
Bangladesh has granted permission to the Life Insurance Corporation of India (LIC) to
run its business, making it the second foreign insurance company to operate in the
country.
Reliance Life Insurance Company (RLIC) today said it will add 20,000 agents across
India in this financial year as part of its expansion plans. It will increase their agency
force by 20 per cent which now stands at 100,000.

Government Initiatives
The Government of India has taken a number of initiatives to boost the insurance industry. Some
of them are as follows:
The Insurance Regulatory and Development Authority (IRDA) of India has formed two
committees to explore and suggest ways to promote e-commerce in the sector in order to
increase insurance penetration and bring financial inclusion.
IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and
Social Sectors) Regulations, 2015, in pursuance of the amendments brought about under
section 32 B of the Insurance Laws (Amendment) Act, 2015. These regulations impose
obligations on insurers towards providing insurance cover to the rural and economically
weaker sections of the population.
The Government of India has launched two insurance schemes as announced in Union
Budget 2015-16. The first is Pradhan Mantri Suraksha Bima Yojana (PMSBY), which is a
Personal Accident Insurance Scheme. The second is Pradhan Mantri Jeevan Jyoti Bima

Yojana (PMJJBY), which is the governments Life Insurance Scheme. Both the schemes
offer basic insurance at minimal rates and can be easily availed of through various
government agencies and private sector outlets.
The Uttar Pradesh government has launched a first of its kind banking and insurance
services helpline for farmers where individuals can lodge their complaints on a toll free
number.
The select committee of the Rajya Sabha gave its approval to increase stake of foreign
investors to 49 per cent equity investment in insurance companies.
Government of India has launched an insurance pool to the tune of Rs 1,500 crore (US$
226 million) which is mandatory under the Civil Liability for Nuclear Damage Act
(CLND) in a bid to offset financial burden of foreign nuclear suppliers.

Road Ahead
India's insurable population is anticipated to touch 750 million in 2020, with life expectancy
reaching 74 years. Furthermore, life insurance is projected to comprise 35 per cent of total
savings by the end of this decade, as against 26 per cent in 2009-10.
The future looks promising for the life insurance industry with several changes in regulatory
framework which will lead to further change in the way the industry conducts its business and
engages with its customers.
Demographic factors such as growing middle class, young insurable population and growing
awareness of the need for protection and retirement planning will support the growth of Indian
life insurance.
Exchange Rate Used: INR 1 = US$ 0.015 as on December 17, 2015
Banking Sector
Introduction
As per the Reserve Bank of India (RBI), Indias banking sector is sufficiently capitalised and
well-regulated. The financial and economic conditions in the country are far superior to any other
country in the world. Credit, market and liquidity risk studies suggest that Indian banks are
generally resilient and have withstood the global downturn well.
Indian banking industry is expected to witness better growth prospects in 2015 as a sense of
optimism stems from the Governments measures towards revitalizing the industrial growth in
the country. In addition, RBIs new measures may go a long way in helping the restructuring of
the domestic banking industry.

Market Size
The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign
banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative
banks, in addition to cooperative credit institutions. Public-sector banks control nearly 80 percent
of the market, thereby leaving comparatively much smaller shares for its private peers.
As of November 11, 2015, 192.1 million accounts had been opened under Pradhan Mantri Jan
Dhan Yojna (PMJDY) and 165.1 million RuPay debit cards were issued. These new accounts
have mustered deposits worth Rs 26,819 crore (US$ 4 billion).
Standard & Poors estimates that credit growth in Indias banking sector would improve to 12-13
per cent in FY16 from less than 10 per cent in the second half of CY14.
Investments/developments
In the past few months, there have been many investments and developments in the Indian
banking sector
Global rating agency Moody's has upgraded its outlook for the Indian banking system to
stable from negative based on its assessment of five drivers including improvement in
operating environment and stable asset risk and capital scenario.
Lok Capital, a private equity investor backed by US-based non-profit organisation
Rockefeller Foundation, plans to invest up to US$ 15 million in two proposed small
finance banks in India over the next one year.
The Reserve Bank of India (RBI) has granted in-principle licences to 10 applicants to
open small finance banks, which will help expanding access to financial services in rural
and semi-urban areas.
IDFC Bank has become the latest new bank to start operations with 23 branches,
including 15 branches in rural areas of Madhya Pradesh.
The RBI has given in-principle approval to 11 applicants to establish payment banks.
These banks can accept deposits and remittances, but are not allowed to extend any loans.
The Bank of Tokyo-Mitsubishi (BTMU), a Japanese financial services group, aims to
double its branch count in India to 10 over the next three years and also target a 10 per
cent credit growth during FY16.

State Bank of India has tied up with e-commerce portal Snapdeal and payment gateway
Paypal to finance MSME businesses.
The United Economic Forum (UEF), an organisation that works to improve socioeconomic status of the minority community in India, has signed a memorandum of
understanding (MoU) with Indian Overseas Bank (IOB) for financing entrepreneurs from
backward communities to set up businesses in Tamil Nadu
The RBI has allowed third-party white label automated teller machines (ATM) to accept
international cards, including international prepaid cards, and said white label ATMs can
now tie up with any commercial bank for cash supply.
The RBI has allowed Indian alternative investment funds (AIFs), to invest abroad, in
order to increase the investment opportunities for these funds.
In order to boost the infrastructure sector and the banks financing long gestation projects,
the RBI has extended its flexible refinancing and repayment option for long-term
infrastructure projects to existing ones where the total exposure of lenders is more than
Rs 500 crore (US$ 75.1 million).
RBI governor Mr Raghuram Rajan and European Central Bank President Mr Mario
Draghi have signed an MoU on cooperation in central banking. The memorandum of
understanding provides a framework for regular exchange of information, policy dialogue
and technical cooperation between the two institutions. Technical cooperation may take
the form of joint seminars and workshops in areas of mutual interest in the field of central
banking, RBI said on its website.
RBL Bank informed that it would be the anchor investor in Trifecta Capitals Venture
Debt Fund, the first alternative investment fund (AIF) in India with a commitment of Rs
50 crore (US$ 7.51 million). This move provides RBL Bank the opportunity to support
the emerging venture debt market in India.
Bandhan Financial Services raised Rs 1,600 crore (US$ 240.2 million) from two
international institutional investors to help convert its microfinance business into a full
service bank. Bandhan, one of the two entities to get a banking licence along with IDFC,
launched its banking operations in August 2015.

Government Initiatives
The government and the regulator have undertaken several measures to strengthen the Indian
banking sector.
The Government of India is looking to set up a special fund, as a part of National
Investment and Infrastructure Fund (NIIF), to deal with stressed assets of banks. The
special fund will potentially take over assets which are viable but dont have additional
fresh equity from promoters coming in to complete the project.
The Reserve Bank of India (RBI) plans to soon come out with guidelines, such as
common risk-based know-your-customer (KYC) norms, to reinforce protection for
consumers, especially since a large number of Indians have now been financially
included post the governments massive drive to open a bank account for each household.
To provide relief to the state electricity distribution companies, Government of India has
proposed to their lenders that 75 per cent of their loans be converted to state government
bonds in two phases by March 2017. This will help several banks, especially public
sector banks, to offload credit to state electricity distribution companies from their loan
book, thereby improving their asset quality.
The Reserve Bank of India (RBI), the Department of Industrial Policy & Promotion
(DIPP) and the Finance Ministry are planning to raise the Foreign Direct Investment
(FDI) limit in private banks sector to 100 per cent from 74 per cent.
Government of India aims to extend insurance, pension and credit facilities to those
excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY).<
The Government of India announced a capital infusion of Rs 6,990 crore (US$ 1.05
billion) in nine state run banks, including State Bank of India (SBI) and Punjab National
Bank (PNB). However, the new efficiency parameters would include return on assets and
return on equity. According to the finance ministry, This year, the Government of India
has adopted new criteria in which the banks which are more efficient would only be

rewarded with extra capital for their equity so that they can further strengthen their
position."
To facilitate an easy access to finance by Micro and Small Enterprises (MSEs), the
Government/RBI has launched Credit Guarantee Fund Scheme to provide guarantee
cover for collateral free credit facilities extended to MSEs upto Rs 1 Crore (US$ 0.15
million). Moreover, Micro Units Development & Refinance Agency (MUDRA) Ltd. was
also established to refinance all Micro-finance Institutions (MFIs), which are in the
business of lending to micro / small business entities engaged in manufacturing, trading
and services activities upto Rs 10 lakh (US$ 0.015 million).
The central government has come out with draft proposals to encourage electronic
transactions, including income tax benefits for payments made through debit or credit
cards.
The Union cabinet has approved the establishment of the US$ 100 billion New
Development Bank (NDB) envisaged by the five-member BRICS group as well as the
BRICS contingent reserve arrangement (CRA).
The government has plans to set up a fund that will provide surety to banks against loans
given to students for higher education.
Road Ahead
The Indian economy is on the brink of a major transformation, with several policy initiatives set
to be implemented shortly. Positive business sentiments, improved consumer confidence and
more controlled inflation are likely to prop-up the countrys the economic growth. Enhanced
spending on infrastructure, speedy implementation of projects and continuation of reforms are
expected to provide further impetus to growth. All these factors suggest that Indias banking
sector is also poised for robust growth as the rapidly growing business would turn to banks for
their credit needs.
Also, the advancements in technology have brought the mobile and internet banking services to
the fore. The banking sector is laying greater emphasis on providing improved services to their
clients and also upgrading their technology infrastructure, in order to enhance the customers
overall experience as well as give banks a competitive edge.
Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less
credit and debit cards in the market shortly. The cards, which use near field communication
(NFC) mechanism, will allow customers to transact without having to insert or swipe.
Exchange Rate Used: INR 1 = US$ 0.0151 as on November 15, 2015