Financial and Insurance Sector in India

                          The financial sector in India has become stronger in terms of capital and the number of customers. It has become globally competitive and diverse aiming, at higher productivity and efficiency.

                          Exposure to worldwide competition and deregulation in Indian financial sector has led to the emergence of better quality products and services. Reforms have changed the face of Indian banking and finance. The banking sector has improved manifolds in terms of capital adequacy, asset classification, profitability, income recognition, provisioning, exposure limits, investment fluctuation reserve, risk management, etc.

                          Diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitization has increased revenues. As large number of players in various fields enters the market, competition would be intensified by mutual funds, Non Banking Finance Corporations (NBFCs), post offices, etc. from both domestic and foreign players. All this would lead to increased sophistication and technology in the sector. Corporate governance would come into the picture and other financial institutions would have to reach global standards. Also the limit for FDI in private banks is increased to 74% and the limit for FII is 49%. There are many challenges ahead for the banking sector such as technology, consumer satisfaction, corporate governance, risk management, etc. and they are redefining their priorities, which are now focused on cost reduction, product differentiation and customer centric services. Some of the major players in this sector are HDFC, ICICI, HSBC, State Bank of India, Punjab National Bank, Ing Vysya, ABN Amro Bank, Centurion Bank, City Bank, etc.



    The insurance sector has opened up for private insurance companies with the enactment of IRDA Act, 1999. A large number of companies are competing under both life and general Insurance. The FDI cap/equity in this sector is 26% and the proposals have to be cleared by Insurance Regulatory and Development Authority (IRDA) established to protect the interest of holder of Insurance policy and act as a regulator and facilitator in the industry. Some of the major players in this sector are LIC, Max New York Life Insurance, Bajaj Allianz, ICICI Prudential, HDFC Standard Life, Metlife Insurance, Birla Sun Life Insurance, etc. Various types of policies and instruments are coming up in the market to attract more customers. Most of the population of India is not insured, hence there is a lot of scope in this sector and a number of companies are planning to enter the sector. Every futuristic individual would want himself to get insured.

                              Capital markets have a long history of over 100 years in India. Bombay Stock Exchange came into existence more than a hundred years ago to remove direct government control. Indian companies are now allowed to raise capital from abroad and Foreign Institutional Investors are allowed to enter the market due to an important policy initiative in 1993. The depository and share dematerialization has enhanced the performance of the capital market reducing processing time and increasing returns. The major players are India Bulls Securities, Kotak, and many more. Many new instruments have been introduced in the market such as index futures, index options, derivatives, including futures and options. Also commodities market is gaining pace. There is a huge potential available in the market and to realize it venture capitalists are coming up with lots of finance. To make use of the human capital, technical skills, cost competitive workforce, research and entrepreneurship VCFs and VCCs are ready to invest in potential projects.


                                 For a stronger and resilient financial system, India needs to move beyond peripheral issues and act maturely by increasing profitability and efficiency, providing better solutions to the customers.


                        It’s good news for the insurance industry. For a sector that feeds on capital, the proposed hike in the foreign direct investment limit in insurance JVs to 49 per cent is a boon.

                                            Foreign players, whose stake is now capped at 24 per cent, can now bring in more money; most of them would love to own a larger stake if not the whole venture.


                                             As Stuart Purdy, managing director, Aviva Life Insurance, has indicated, Aviva Plc will up its stake in the Indian venture to 49 per cent.

The transactions will be keenly watched because, for the first time, we will have some valuation benchmarks for private-sector players. That should give investors a better idea of the opportunities in the sector, which they can play through the Indian parent.

That private life insurance players will grow at a faster pace is not in doubt. They should race ahead like their counterparts in the banking and mutual fund industry, who left their public-sector competitors far behind.

The record is impressive: in FY04, while the life insurance industry grew at 18 per cent to Rs 1,800 crore (Rs 18 billion), the share of private-sector players in the total new business premiums jumped to 13 per cent from 6 per cent in FY03.

The share of the total annualised premium equivalents of Rs 1,400 crore (Rs 14 billion) stood at 15 per cent. APEs are considered to be the most appropriate proxy for sales and, therefore, for market size and shares of life insurance companies. At the top of the heap is ICICI Prudential, which has garnered a retail market share of 36 per cent of the new business premium.

In an under-insured market like India where the premium to GDP and the penetration are abysmally low, the market is there for the taking.

Moreover, in India, life insurance products have been bought for the wrong reasons – more to save tax rather than as a long-term savings product.

This trend is yet to show any major reversal because even in FY04, 60 per cent of the sales happened in the last quarter. With assured return policies dying out, the platform for selling products is changing as has been seen in the phenomenal popularity of linked products.

Awareness levels are higher and this is reflected to some extent in the higher ticket sizes; last year these were as high as Rs 24,000.

The league table for FY04 shows that some players forged ahead primarily on the back of unit-linked insurance policies, which accounted for around 65 per cent of the business of the private sector (for Birla Sunlife it was as high as 97 per cent).


                                   According to Nani B Javeri, chief executive officer, Birla Sunlife Insurance, the strategy of using a ULIP platform has worked well for the company and Birla Sunlife will continue to focus on these market-linked products, which are considered to be more transparent than traditional policies.

                                  “ULIPs are capital-efficient, that is, they use relatively less capital and deliver more or less similar margins as other products,” he says. ICICI Prudential is the other player for whom linked policies contributed a high percentage – as much as 84 per cent of total business


                                   HDFC Standard Life, which moved down the order last year possibly because it did not push ULIPs aggressively, also plans to focus on these.

                                   According to Deepak Satwalekar, managing director and chief executive officer, HDFC Standard Life, the company chose to launch these products later than others since they are relatively sophisticated and harder for customers to understand.

“We are asking customers to make choices which they may not fully understand,” he says.

However, since HDFC Standard launched ULIPs in January this year, 20 per cent of the business in the last quarter of FY03 came from linked policies. For the current year, Satwalekar expects that 50 percent of the HDFC Standard’s business will come from these products.

Ø             CONCLUSION:

In the case of group policies, Birla Sunlife’s share was significantly high at 37 per cent while SBI’s was higher at 44 per cent.

While it is believed that group policies in general command low margins, Javeri points out that what the company is focusing on is not group term products, which typically offer lower returns, but fund-management products, which earn it management fees in the region of 0.6 to 2 per cent.

Apart from using agents as the main distribution channel, bancassurance seems to be working well, too. For HDFC, which has relationships with four banks, 20 per cent of the business came from this channel while for Birla Sunlife, which has tie-ups with eleven banks, the percentage was at similar levels.

To improve its reach, HDFC will double the number of cities where it is present from 55 to about 100 this year, which will allow it to access to about 500 towns. Birla Sunlife will be in 33 cities by August.

As of today, the capital requirements as laid out by IRDA are linked to solvency rather than risk, though internationally, the risk-based system is more popular.

Satwalekar, however, points out that stiff norms for solvency prescribed at 150 per cent of the risk are needed for an industry still in the nascent stages though this might use up capital that could be otherwise used to grow the business.

While capital might not prove to be a constraint for some players beyond a point unless more capital is infused, growth could slow down. Which is why the FDI limit needs to be raised. Only if the foreign players are allowed to invest further will they feel committed to the venture

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