B.B.A.LL.B / B.A.LL.B.

(Integrated Law degree course)

Banking Law (VIII Semester)

STATUS OF BANKS AND THE INSURANCE BUSINESS IN INDIA

Project Submission as the Partial Fulfillment of Periodic Evaluation

Of Banking Law

Submission To: Submitted By:

Ms Pratima Soni Abhishek Wadhwa L/147

Faculty of Banking Law Manishi Chouhan L/130

Designation: Assistant Professor Ashish Chouhan L/74

NakulMonga L/133

Raffles University
School of Law

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 TABLE OF CONTENTS

Page No.
1. Acknowledgment........................................................................................ ...3
2. Research Methodology................................................................................ ..4
3. Abstract..... .5
4. Introduction.................................................................................................. ..6
5. History of Bank and Insurance business in India........................................... 7
6. Status of Bank................................................................................................ 10
7. The Insurance Business in India......................................................................16
8. Conclusion.......................................................................................................21

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 ACKNOWLEDGEMENT

I take this opportunity to express our humble gratitude and personal regards to
Ms.Pratima Soni for inspiring me and guiding me during the course of this project work and
also for his cooperation and guidance from time to time during the course of this project work
on the topic.

Neemrana

Date of Submission: 17-04-17

Name of Student : Abhishek Wadhwa, Manishi Chouhan, Ashish Chouhan, Nakul Monga

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 RESEARCH METHODOLOGY

Aims and Objectives:

The aim of the project is to present a detailed study of the topic Status of banks and The
Insurance business in India forming a concrete informative capsule of the same with an
insight into its relevance in the Banking law and Insurance policies.

Research Plan
The researchers have followed Research Assignment.

Scope and Limitations:

In this project the researcher has tried to include different aspects pertaining to the concept of
Banking law, the laws that are relating to it and present scenario related to Insurance
business in India.
.
Sources of Data:
The following secondary sources of data have been used in the project-
Article
Websites
Books

Method of Writing and Mode of Citation:

The method of writing followed in the course of this research project is primarily
analytical. The researcher has followed Uniform method of citation throughout the course of
this research project.

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 Abstract

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 has recently witnessed the roll out of innovative banking models like
payments and small finance banks. The central bank granted in-principle approval to 11
payments banks and 10 small finance banks in FY 2015-16. RBIs new measures may go a
long way in helping the restructuring of the domestic banking industry.

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.

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 INTRODUCTION

What is Banking Company and Insurance business in India?

As per Section 5(c) of the Banking Regulation Act, 1949 a "Banking Company"
means any company which transacts the business of banking in India.
Explanation: Any company which is engaged in the manufacture of goods or carries
on any trade and which accepts the deposits of money from public merely for the
purpose of financing its business as such manufacturer or trader shall not be deemed
to transact the business of banking within the meaning of this clause."
As per Section 5(b) of the Banking Regulation Act, 1949 , "banking" means the
accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdraw able by cheque, draft, order
or otherwise.

According to section 2(6b) of Insurance act, 1938 "general insurance business" means fire,
marine or miscellaneous insurance business, whether carried on singly or in combination with
one or more of them.

According to section 2(7A) of Insurance act, 1938 Indian insurance company means any
insurer being a company-
(a) Which is formed and registered under the Companies Act, 1956 (1 of 1956);
(b) in which the aggregate holdings of equity shares by a foreign company, either by itself or
through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-up
equity capital of such Indian insurance company;
(c) Whose sole purpose is to carry on life insurance business or general insurance business or
re-insurance business.
Explanation- For the purpose of this clause, the expression foreign company
Shall have the meaning assigned to it under clause (23A) of section 2 of the Income-tax Act,
1961 (43 of 1961)

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 History of Banks and Insurance Business in India

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian
Banking. The banking industry has moved gradually from a regulated environment to a
deregulated market economy. The market developments kindled by liberalization and
globalization have resulted in changes in the intermediation role of banks. The pace of
transformation has been more significant in recent times with technology acting as a catalyst.

While the banking system has done fairly well in adjusting to the new market dynamics,
greater challenges lie ahead. Financial sector would be opened up for greater international
competition under WTO. Banks will have to gear up to meet stringent prudential capital
adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements
(FTAs) such as with Singapore, may have an impact on the shape of the banking industry.
Banks will also have to cope with challenges posed by technological innovations in banking.
Banks need to prepare for the changes. The need for an efficient financial sector for the
overall development of an economy has long been recognized argued that scarcity of finance
is a severe problem for economic development. Cross country experience suggests that
development of the economy necessarily requires the existence of healthy, efficient and
competitive financial sector. This is because, in an economy with an underdeveloped
financial market, the opportunity cost of capital is more. As a consequence, financing of
projects in such an economy is more expensive. Therefore, an efficient and enduring financial
sector is an important factor for overall economic development. The Indian banking sector is
the largest in South Asia with its various financial instruments. It is distinguished by the
coexistence of different ownership groups, such as public, private, domestic and foreign.

Prior to 1969, all the banks, except the state bank of India (SBI) and its seven associates were
privately owned. However, as India increasingly became a planned economy, there was a
perception among the policy makers that it would be difficult to undertake credit planning
unless the industry and banks are linked. Keeping in view its financial linkage with the rest of
the economy, the government of India nationalized14largest privately owned domestic banks
in 1969 and six more in 1980, in order to meet the socioeconomic objectives of economic
development. Several regulatory measures on banks were adopted by Reserve bank of India
after nationalization. Apart from changing the sectoral composition of credit, The RBI
stipulated lending targets to priority sectors. Set up credit guarantee schemes and asked banks

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to open branches in rural and semi urban areas. The RBI also fixed minimum deposit rates on
both savings and time deposits of all maturities. Having identified the rising aliments in the
Indian banking sector, RBI launched major banking reforms based on the recommendation of
Narasimhan Committee on financial sector reforms in 1992 aiming at creating a more
profitable efficient and sound banking system. The reforms sought to improve bank
efficiency by opening banking industry to foreign ownership, by de-licensing, deregulation of
Interest rates and by promoting strong public sector banks to go to the capital market to raise
funds.

Additionally, new norms like income recognition, asset classification and provisioning were
introduced to reflect the quality of the loan 3 portfolios more accurately and to obtain a true
picture of the financial situation of each bank. These measures are expected to enable and
encourage banks to enhance their efficiency i.e. their ability to transform inputs into output,
which in turn, is expected to enhance` economic growth by increasing the volume of funds
intermediated in the economy. The ability of the financial system in its present structure to
make available investible resources to the potential investors in the forms and tenors that will
be required by them in the coming years, that is, as equity, long term debt and medium and
short-term debt would be critical to the achievement of plan objectives. The gap in demand
and supply of resources in different segments of the financial markets has to be met and for
this, smooth flow of funds between various types of financial institutions and instruments
would need to be facilitated.

The insurance has its origin way back in the days of early civilization when people thought of
evolving a distributive manner of bearing losses whereby the society collectively bears the
loss/damage to one person/family and minimize the adverse effect that loss. There are several
stories where the King provides monetary help to the persons who suffered loss due to natural
calamities and this was nothing but an assurance that the State will look after you at the time
of any adversity and this assurance is a form of insurance where the money collected from
several tax payers has been used to minimize the losses of specific group which suffered loss.
With the passing time the concept of insurance had been refined and lead to the introduction
of documentation to get the assurance of loss bearing for specified purposes.

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 The History and Evolution of Insurance in India

In Indian scenario the roots of Insurance in India has their origin in the era of Sage Manu
(Rishi Manu) and later in Maurya Dynasty in the era of Kautilya ( i.e. Chanakya) who has
written the rules of Arthshastra (Economics). Manav Dharma Shastra (Laws of Manu) of
Manu contained rules for Sea-Form contracts which were practised for doing international
trade. In Kautilyas Arthshastra one of the chapters has mentioned about the protection of
State to the people against the any natural calamity, theft or any act of Anti-Social-Elements.
So, in this way India has the origin of Insurance thousands of years back and later it has
evolved in present codified form in the Influence of English Rule which was prevailing all
over the world at one point of time.

Development of Laws of Insurance in India

Since its a necessity and compulsion on Business Doers to evolve-conceptualize-amend their

policies/strategies in accordance with the Law of the Land to do hassle-free business.
In the following manner the Indian Insurance Scenario has changed gradually-1938 This is
the year when a comprehensive Act called The Insurance Act, 1938 has been introduced.

1939 In this year the Insurance Rules were framed for effectuating the Insurance Act.

1956 This year has witnessed a huge change in the Indian Insurance Sector since the
Government of India took over all life insurance companies.

1968 In 1968 The Insurance Act, 1938 was amended to provide for social control,
minimum solvency margin and a Tariff Advisory Committee (TAC) has also been
established.

1972 This year witnessed the Nationalization of General Insurance Companies and for this
General Insurance Business (Nationalization) Act, 1972 was passed.

1973 The General Insurance Corporation of India (GIC) came into existence as a
Government Company.

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1974 A year later 107 insurers practising General Insurance business were grouped and
merged to form four subsidiaries of GICs namely National Insurance Co. Ltd. The New
India Assurance Co. Ltd. The Oriental Insurance Co. Ltd. United India Insurance Co. Ltd.

1991 The Public Liability Insurance Act 1991 and Public Liability Insurance Rules 1991
were introduced as another milestone in the series of Public Welfare Laws in India.1994
The Malhotra Committee submitted its report in January 1994 (set up by Govt. in 1993 under
Chairmanship of Shri R.N. Malhotra, former Governor of RBI, to examine potential reforms
that could be undertaken in the insurance sector and complement them with reforms initiated
in the other sectors) submitted its report in January 1994 and recommended establishment of
a strong and effective insurance regulatory authority.

1998 Insurance Ombudsman Redressal of Public Grievances Rules, 1998 were issued to
provide Consumers a Forum with minimal formalities to get their grievances resolved.
1999 This year has the great relevance in the history of Indian Insurance Sector since based
on the Malhotra Committee Report the Insurance Regulatory and Development Authority
(IRDA) was established to regulate, promote and ensure orderly growth of the insurance and
reinsurance business in India.

2001 The year of 2001 brought another transformation in the Insurance Business of India
because in addition to the existing Government insurance companies, Private Sector
Companies were also licensed by IRDA to conduct general insurance business in India.

2002 General Insurance Business (Nationalization) Amendment Act, 2002 was passed in
which the important amendment was that the subsidiaries of GIC were restructured as
independent companies and GIC was converted into National Re-insurer.

2003 This year witnessed the introduction of Broker for first time in Indian Insurance
Market to boost up the business in more widened manner.

2015 The Insurance Laws (Amendment) Act, 2015 was passed toincrease theCeiling of
26% FDI to 49% and in this manner the InsuranceBusiness in India has been widely opened
for Foreign Giants of Insurance.

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 Status of bank in India

The Indian Banking Sector is quite different from the banking system in the rest of
Asia, because of the distinctive geographic, social and economic characteristics of the
country. India is the second most populated nation in the world; it has marked
economic disparities and high levels of illiteracy. The country followed a socialist
approach for well over four decades after independence till the government initiated the
economic reforms through the policy of liberalization. The banking structure in India is
therefore a reflection of the countries socialistic set up. It had to meet the goals set by the five
year plans, especially with regard to equitable distribution of wealth, balanced regional
economic growth and removing private sector monopolies in trade and industry.

The government nationalized the banks in two different phases (1969 and 1980). On July
19, 1969, 14 major banks of the country were nationalized and on 15 th April 1980,
six more commercial private sector banks were taken over by the government. As a
consequence the banking system in India concentrated on the domestic sector; very
few banks in India had a presence internationally. The nationalized banks had a social
obligation of taking the banking sector to the people by expanding the branches and by
getting more people to open an account. It also had to play a supportive role to other
sectors of the economy like agriculture, small scale industries and exports.

Banking as an Industry

Emerging Economic Scene

The financial system is the lifeline of the economy. The changes in the economy get
mirrored in the performance of the financial system, more so of the banking industry.
The Committee, therefore felt, it would be desirable to look at the direction of growth
of the economy while drawing the emerging contours of the financial system. The
Committee has taken into consideration the economic profile drawn in India Vision
2020 document while attempting to visualize the future landscape of banking Industry.
India envisages improving the ranking of India from the present 11th to 4th among 207
countries given in the World Development Report in terms of the Gross Domestic

11
Product (GDP). It also envisages moving the country from a low- income nation to an upper
middle - income country. To achieve this objective, the India should have an annual growth
in the GDP of 8.5 per cent to 9 per cent over the next 20 years. Economic Development of
this magnitude would see quadrupling of real per capita income. When compared with the
average growth in GDP of 4 -6% in the recent past, this is an ambitious target. This would
call for considerable investments in the infrastructure and meeting the funding requirements
of a high magnitude would be a challenge to the banking and financial system. India
sees a nation of 1.3 billion people who are better educated, healthier, and more prosperous.
Urban India would encompass 40% of the population as against 28 % now. With more urban
conglomerations coming up, only 40% of population would be engaged in agricultural
sector as against nearly two thirds of people 18 depending on this sector for livelihood.
Share of agriculture in the GDP will come down to 6% (down from 28%). Services sector
would assume greater prominence in our economy. The shift in demographic profile and
composition of GDP are significant for strategy planners in the banking sector. The
demographics of India indicate that by 2010 more than 30 % of Indian population are in the
category of children, and will enter the bankable population by 2015.This young population
will demand for different services of banks including wealth management. It is the larger
interests of banks that they have to create their brand name of putting enough
marketing efforts. Small and Medium Enterprises (SME) sector would emerge as a major
contributor to employment generation in the country. Small Scale Sector had received policy
support from the Government in the past considering the employment generation and
favourable capital - output ratio. This segment had, however, remained vulnerable in many
ways. Globalization and opening up of the economy to international competition has
added to the woes of this sector making bankers vary of supporting the sector. It is
expected that the SME sector will emerge as a vibrant sector, contributing significantly to the
GDP growth and exports. India being not an export led economy (exports remaining
below 15% of the GDP), India has remained rather insulated from global economic
shocks. This profile will undergo a change, as we plan for 8-9% growth in GDP.
Planning Commission report visualizes a more globalised economy. Our international trade
is expected to constitute 35% of the GDP. The Vision of India in 2020 is of a nation bustling
with energy, entrepreneurship and innovation.

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In other words, we hope to see a market- driven, productive and highly competitive
economy. To realize the above objective, we need a financial system, which is inherently
strong, functionally diverse and displays efficiency and flexibility.
The banking system is, the most dominant segment of the financial sector, accounting for as
it does, over 80% of the funds flowing through the financial sector. It should, therefore,
be our endeavour to develop a more resilient, competitive and dynamic financial system
with best practices that supports and contributes positively to the growth of the economy.

The ability of the financial system in its present structure to make available investible
resources to the potential investors in the forms and tenors that will be required by them in
the coming years, that is, as equity, long term debt and medium and short - term debt
would be critical to the achievement of plan objectives. The gap in demand and
supply of resources in different segments of the financial markets has to be met and
for this, smooth flow of funds between various types of financial institutions and
instruments would need to be facilitated. Governments policy documents list investment in
infrastructure as a major area which needs to be focused. Financing the infrastructure projects
is a specialized activity and would continue to be of critical importance in the future. After
all, a sound and efficient infrastructure is very important for sustainable economic
development. Infrastructure services have generally been provided by the public sector all
over the world in the past as these services have an element of public good in them. In the
recent past, this picture has changed and private financing of infrastructure has made
substantial progress. This shift towards greater role of commercial funding in infrastructure
projects is expected to become more prominent in coming years.

The role of the Government would become more and more of that of a facilitator and the
development of infrastructure would really become an exercise in public -private partnership.
India Infrastructure Report placed financing of infrastructure as a major responsibility of
banks and financial institutions in the years to come. The report estimated the funding
requirements of various sectors in the infrastructure area at Rs 12,00,000 crore by the year
2005 - 06. Since the estimated availability of financing from Indian financial institutions and
banks was expected at only Rs1,20,000 crore, a large gap is left which needs to be filled
through bilateral/multilateral/government funding. It has been observed globally that project
finance to developing economies flows in where there is relatively stable macro-economic
environment. These include regulatory reforms and opening of market to competition and

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private investment. Liberalized financial markets, promoting and deepening of domestic
markets, wider use of risk management tools and other financial derivative products,
improved legal framework, accounting and disclosure standards etc are some of the
other aspects which would impact commercial funding of infrastructure projects. The
Planning Commission envisages Foreign Direct Investments (FDI) to contribute
35% (21% now) to gross capital formation of the country by 2020.Government has
announced a policy to encourage greater flow of FDI into the banking sector. The
recent amendment bill introduced in Parliament to remove the 10% ceiling on the voting
rights of shareholders of banking companies is a move in this direction. The working group
expects this to have an impact on the capital structure of the banks in India in the coming
years. Consequent to opening up of the economy for greater trade and investment
relations with the outside world, which is imperative if the growth projections of India Vision
2020 were to materialize, we expect the banking Industrys business also to be driven by
forces of globalization. This may be further accentuated with the realization of full
convertibility of the rupee on capital account and consequent free flow of capital across the
borders. An increase in the income levels of the people would naturally lead to changes
in the spending pattern also. This could result in larger investments in the areas like
entertainment and leisure, education, healthcare etc. and naturally, these would attract greater
participation of the banking system. On the basis of the projection made by the 10th Five Year
Plan on relevant macro indicators such as GDP and extending the trend for a further period of
three years, it is estimated that GDP at current market prices during 2009 -10 would be
Rs.61,40,000 crore. Taking into account the on - going reform measures, expected Basel
II needs, and financial dis-intermediation, the pace of expansion in the balance sheets of
banks is likely to decelerate. Thus, total assets of all scheduled commercial banks by end
March 2010 is around as Rs.40,90,000 crore as a working estimate. At that level, the annual
composite rate of growth in total assets of Scheduled Commercial Banks would be about
13.4 per cent to be over 2002-03 as compared to 16.7 per cent between 1994-95 and 2002-
03. It will form about 65 per cent of GDP at current market prices as compared to 67 per cent
in 2002-03. On the liability side, there may be large augmentation to capital base. Reserves
are likely to increase substantially. Banks will rely more on borrowed funds. Hence, the pace
of accretion to deposits may slow down. On the asset side, the pace of growth in both
advances and investment may slacken. However, under advances, the share of bills may
increase. Similarly, under investment the share of others may increase.

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Scope of New Entrants

81.25% of the population also felt that there was further scope for new entrants in the market,
in spite of capital management and human resource constraints, as there continue to remain
opportunities in unbanked areas. With only 30-35% of the population financially included,
and the Indian banking industry unsaturated with CAGR of well above 20%, participants in
our survey felt that the market definitely has scope to accommodate new players. While there
has been prior debate, we questioned banks on NBFCs and Industrial houses being
established as banking institutions and find opinion to be marginally against the notion, with
35.71% in favour while 42.86% were against them being established as banks. However, on
further questioning, 57.14% of respondents feel that the above may be allowed but only if it
is along with specific regulatory limitations. Banks felt that limitations regarding track
record, ensuring adequate capitalization levels, a tiered license that enables new entrants to
enter into specific areas of the business only after satisfactorily achieving set milestones for
the prior stages, cap on promoters holdings and wider public holding in addition to a
common banking regulator on a level playing field are essential before they may set
themselves up as banks.
Banking Activities Over the last three decades, there has been a remarkable increase in the
size, spread and scope of activities of banks in India. The business profile of banks has
transformed dramatically to include non-traditional activities like merchant banking, mutual
funds, new financial services and products and the human resource development. Within
retail operations, banks rate product development and differentiation; innovation and
customization; cost reduction; cross selling and technological upgradation as equally
important to the growth of their retail operations. Additionally a few respondents also find
pro-active financial inclusion, credit discipline and income growth of individuals and
customer orientation to be significant factors for their retail growth. There is, at the same
time, an urgent need for Indian banks to move beyond retail banking, and further grow and
expand their fee-based operations, which has globally remained one of the key drivers of
growth and profitability. In fact, over 80% of banks in our survey have only up to 15% of
their total incomes constituted by fee - based income; and barely 13% have 20 -30% of their
total income constituted by fee-based income.

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Human Resources

PSU banks which are a dominating force in the Indian banking system have lacked a
proactive HR environment. However, much has changed with the opening of other sectors
and increased competition from newer banks in the system. Banks are increasingly beginning
to recognize Human resources as a possible area of core competence, and seek to pursue and
retain the best talent in the industry. There is a realization that skill development that is
extremely important for staff retention as well as the quality of manpower, and all
respondents to our survey had in places a system of continuous professional learning. A few
respondents were in the process of revamping their training processes and emphasis is being
laid on hard as well as soft skills. Banks are keen to tie up with external training agencies for
In - house training. Some have even roped in top universities and business schools to help
them in their initiative, while others have their own staff colleges for training employees.

A survey conducted by IBA shows that 81.25% feel that the current economic situation is in
fact advantageous for them, as it provides them with access to quality manpower. 62.50% of
banks in our survey also feel that they have sufficient autonomy to offer attractive incentive
packages to employees to ensure their commitment levels. Credit Flow and Industry India Inc
is completely dependent on the Banking System for meeting its funding requirement. One of
the major complaints from the industry has in fact been high lending rates in spite of massive
cuts in policy rates by the RBI. We asked the banks what they felt were major factors
responsible for rigid prime lending rates. None of the banks in our survey considered the cap
on bank deposit rates to be one of the causes of inflexible lending rates. Due to long-term
maturity, the trend seems to be changing. However, there are other factors which have led to
the stickiness of lending rates such as wariness of corporate credit risk (33.33%), competition
from government small savings schemes (26.67%). Benchmarking of SME and export loans
against PLR (20.00%) on the other hand, do not seem to have as significant an influence over
lending rates according to banks. The great Indian industrial engine has nevertheless
continued to hum its way through most of the year long crisis. We asked banks about the
sectors that they consider it to be most profitable in the coming years. All respondents were
confident in the infrastructure sector leading the profitability for the industry, followed by
retail loans (73.33%) and others SMEs, Cement, and the IT and Telecom sector were viewed
as equally profitable in the near future by banks. Not surprisingly, the Real estate and housing

16
sector were ranked the lowest in terms of future profitability. Loan Disbursement and
Lending Practices We further went on to question prevalent lending practices in the industry.
Around 60% of respondents felt that there is an umbrella effect for credit disbursements for
individual companies, wherein companies are graded on the basis of the overall performance
of the group as a whole, and further 60% of the opinion that there a need to revise the group
exposure limits imposed by the regulator. When quizzed on farm lending practices, 87.50%
disagreed with the notion that banks view lending to SMEs and farm sector as an avenue for
forced lending rather than a profitable avenue. However, 75% of them agreed that a lack of
sufficient support systems to farmers such as inputs, irrigation, marketing facilities, etc is a
hindering factor for the farm sector lending, followed by 50% stressing on the cost of
reaching end user as a deterrent. A poor legal system for recovery was another barrier to farm
sector lending. With regards to loan disbursement, 71.43% felt that there was no need for
standardized credit appraisal across the industry. But at the same time, 73.33% of respondents
felt that there is scope for a further reduction in turnaround times for loan sanctioning. Steps
undertaken by participant banks to this effect include effectively implementing the concept of
single level appraisal and mechanizing the entire loans sanction process, Establishing Central
Processing Units for Retail and SMEs, as increased discretionary powers across all levels.

Credit Quality

The global financial meltdown which has its origins in the sub-prime mortgage crisis
originating in the United States has led banks to be more conservative in their lending
practices, and consequently a rise in capital costs for corporates. The Reserve Bank of India
has however played a key role is assisting the banking sector in managing its liquidity and
despite recent events, the medium-to-long-term India growth story remains intact. Capital
adequacy is seen as important to the stability of the banking system. The minimum Capital to
Risk-weighted Asset Ratio (CRAR) in India as required by the RBI is placed at 9%, one
percentage point above the Basel II requirement. Public sector banks are further required to
maintain a CRAR of 12% by the Government of India. In fact, over 92% of the participants
firmly concur with recent stress test results that Indian banks have the ability to absorb twice
the amount of their current NPA levels. However, the current crisis has exposed certain
vulnerabilities and weaknesses within the system that banks continue to remain wary of.
NBFCs Non-banking financial companies (NBFCs) are fast emerging as an important

17
segment of Indian financial system. Gradually, they are being recognized as complementary
to the banking sector due to their customer-oriented services; simplified procedures;
attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of
specified sectors; etc. Nevertheless, opinion of our respondents was strictly divided over
whether NBFCs have led the way for banks into unchartered territory. Nevertheless, an
overwhelming 80% of respondents admitted that the primary strength of NBFCs over banks
lies in their ability to provide reach to the last mile.

The Insurance Business in India

Insurance Regulatory & Development Authority (IRDA) is regulatory and development

authority under Government of India in order to protect the interests of the policyholders and
to regulate, promote and ensure orderly growth of the insurance industry. It is basically a ten
members' team comprising of a Chairman, five full time members and four part-time
members, all appointed by Government of India. This organization came into being in 1999
after the bill of IRDA was passed in the Indian parliament.
The creation of IRDA has brought revolutionary changes in the Insurance sector. In the last
10 years of its establishment the insurance sector has seen tremendous growth. When IRDA
came into being; the only players in the insurance industry were Life Insurance Corporation
of India (LIC) and General Insurance Corporation of India (GIC), however in last decade 23
new players have emerged in the field of insurance. The IRDA also successfully deals with
any discrepancy in the insurance sector.

Opportunities for New entrants

There are various opportunities for the new entrants in the field of general insurance:

1. They can introduce innovative products offering a right mix of flexibility/risk/return

depending which will suit the appetite of the customers

2. They can target specific niches, which are poorly served or are not served at all.

18
3. Being the agrarian economy again there are immense opportunities for the new entrants to
provide the liability and risks associated in this sector like weather insurance, rainfall
insurance, cyclone insurance, crop insurance etc.

4. The financial sector is aggressively targeting retail investors. Housing finance, auto
finance, credit cards and consumer loans all offer an opportunity for insurance companies to
introduce new products like creditor insurance etc. Similarly, organized sector sales of TVs,
refrigerators, washing machines and audio systems. Only a negligible portion of these
purchases is insured. Potential buyers for most of this insurance lie in the middle class. This
is a huge market for new private entrants.

5. The lack of a comprehensive social security system combined with a willingness to save in
India will lead to a large demand for pension products. However, current penetration is poor.
Making pension products into attractive saving instruments would require only simple
innovations already prevalent in other markets. For example, their returns might be tied to
index-linked funds or a specific basket of equities. Buyers could be allowed to switch funds
before the annuities begin and to invest different amounts at different times

6. Health insurance is another segment with great potential because existing Indian products
are insufficient. Indian products do not cover disability arising out of illness or disability for
over 100 weeks due to accident. Neither do they cover a potential loss of earnings through
disability.

Challenges/Problems faced by Public Sector General Insurance Companies in Todays

scenario.

The prospects of Indian Public Sector General Insurance Industries are very bright, however,
at the same time, the industry is facing various challenges and these could be summarized as
under:
Private insurance companies are entering the market every year. Therefore, the
companies should carve out niche areas such that the threat of new entrants might not
be an obstacle for them. There is also a chance that the big players might squeeze the
small new entrants.

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 Power of Suppliers
Those who are supplying the capital are not that big a threat. For instance, if someone
as a very talented insurance underwriter is presently working for a small insurance
company, there exists a chance that any big player willing to enter the insurance
industry might attract that person off.

Power of Buyers
No individual is a big threat to the insurance industry and big corporate houses have a
lot more negotiating capability with the insurance companies. Big corporate clients
like airlines and pharmaceutical companies pay millions of dollars every year in
premiums.

Availability of Substitutes
There exist a lot of substitutes in the insurance industry. The large insurance
companies provide similar kinds of services be it auto, home, commercial, health or
life insurance.
Besides this, other areas can be focused to grow and survive in the Indian Market

Understanding Customer needs

Understanding the customer better will allow insurance companies to design
appropriate and-customized products, determine pricing correctly and increase
profitability.

High-level Training and Development

Ensure high levels of training and development not just for staff but also for agents
and distribution organizations. Existing organizations will have to train staff for better
service and flexibility, while all companies will have to train employees to cope with
new products and an intensive use of information technology.

Agent Relationship
Build strong relationships with intermediaries such as agents.

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 Market Segmentation
They must segment the market carefully to arrive at the appropriate products and
pricing and should cater the needs of every individual.

Revamped Marketing Strategy

Worldwide, insurance products move along a continuum from pure service products
to pure commodity products then they could be sold through the medical shops,
groceries, novelty stores etc. Once commodization, popularity and awareness of the
products are attained then the products can move to remote channels such as the
telephone or direct mail. Brand loyalty could shift from the insurer to the seller.
Despite innumerable delays the sector has finally opened up for private competition.
The threat of private players shaking up and giving the run for incremental market
share for the Public Sector mammoths has been overplayed. The number of potential
buyers of insurance is certainly attractive but much of this population might not be
accessible for the new insurers. Since distribution will be a key determinant of success
for all insurance companies regardless of age or ownership, Indian Insurance
companies should broaden the distribution network. As the product moves towards
the mature stages of commodization (increased awareness and popularity) they could
then use a host of new channels like grocery stores, direct mails. Regulators must
formulate strong and fair guidelines and ensure that old and new players are subject to
the same rules and at the same time the government should ensure that the IRDA does
not become yet another toothless tiger. In a reopened Indian insurance market,
regulators must formulate strong fair and transparent guidelines and make sure that
old and new players are subject to the same rules.

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 CONCLUSION

The future of banking in India looks not only exciting but also transformative. Despite the
somewhat difficult current operating environment, banks remain the largest financial sector
intermediary in India. In future, technology will make the engagement with banks more
multi-dimensional even as other entities, markets and instruments for credit and financial
services continue to develop and expand.

The current weakness in economic activity has muted credit demand from banks. Part of this
slowdown is due to excess capacities in many sectors, together with the increase in leverage
on corporate balance sheets, impeding their ability to absorb credit. In addition, alternative
sources of financing, both domestic and offshore, have also emerged.

Stressed assets in banks credit portfolios have also constrained credit delivery, but the
situation is gradually improving. While banks have taken measures to clean their portfolios,
with write-offs and provisions, the Reserve Bank of India has also facilitated rectification
through a number of well-thought-out initiatives. Restricting incremental non-performing
assets through early detection, monitoring, corrective action plans, shared information and
disclosures is also likely to keep a future recurrence in check. Proposed mechanisms for asset
resolution, including the Bankruptcy Code, will help speedier recovery.

Indias 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.

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