CHAPTER I

INTRODUCTION
 Financial services are the economic services provided by the finance industry, which encompasses
a broad range of businesses that manage money, including credit unions, banks, credit-
card companies, insurance companies, accountancy companies, consumer
finance companies, stock brokerages, investment funds, individual managers and
some government-sponsored enterprises Financial services companies are present in all
economically developed geographic locations and tend to cluster in local, national, regional and
international financial centers such as London, New York City, and Tokyo.

Financial institutions are corporations which provide services as intermediaries of financial

markets. Broadly speaking, there are three major types of financial institutions.

1. Depository institutions – deposit-taking institutions that accept and manage deposits and
make loans, including banks, building societies, credit unions, trust companies,
and mortgage loan companies;
2. Contractual institutions – insurance companies and pension funds
3. Investment institutions – investment banks, underwriters, brokerage firms.

Some experts see a trend toward homogenization of financial institutions, meaning a tendency to
invest in similar areas and have similar business strategies. A consequence of this might be fewer
banks serving specific target groups, and small-scale producers may be under-served.

Financial System of any country consists of financial markets, financial intermediation and
financial instruments or financial products

Flow of funds (savings)

Seekers of funds
(Mainly business firms Suppliers of funds
and government) (Mainly households)
Flow of financial services(Incomes)
 THE E-FINANCE SERVICES

The internet has made life easier and has remodeled the way anyone and everyone live, shop,
socialize and entertain oneself. Therefore, it has also come up as a resource people save and invest.

To differentiate their services and gain advantage over the raising competition, the financial
service providers are trying to provide their services in all materialistic pleasures to the customer.
The internet is emerging as the greatest helping hand to these service providers. Service Sector
contributes 57% in the GDP, and so plays a vital role in Indian Economy.

With a growth rate of 8.5% every year, there are many ways in which Internet has affected
Financial Services sector in India:

1. Internet Banking
2. Bill Payment
3. E-Brokerage
4. E-Delivery of Financial Services

Internet Banking

Two different necks of the woods have come up in the context of Internet Banking. One is that the
banks and the NBFCs are trying their hands on the entire market of financial services. On the flip
side, new Internet Sites are coming up and challenging the banks and the NBFCs. Banks are trying
new schemes and melding moves to stronghold their customers while the dot-coms are
fragmenting the market by providing first-rate aid.

The value of banking industry in India is $ 270 Billion by the total asset value, and the total deposits
account for $ 220 Billion according to the report by IBEF. So, with such a great potential, this
industry is becoming a milepost of opportunities. The rural penetration of Internet in India is 29%
that will become 48% in 2018. So, they are in the limelight for the banks to take hold from products
like Agricultural Loan.
All characters share the same objective: take possession of the customers, provide them the
knowledge about the domain with services and competitive products and increasing the value
proposition of their brands.

Earlier, when the banking was offline, the customers had a gap between the content and the reach.
So, this discontinuity has been filled up by internet banking. Institutions can now cover the wider
audience, shifting the competition from products to services. The most benefitted through E-
Banking are the private sector banks that have introduced the concept of Telephone Banking and
Home banking.

Also, the e-Banking has worked for the customers who can now apply for products like loans and
insurance without getting into long queues. Instead of making an attempt of visiting individual
websites of various banks and getting the charges like the Interest rates, they can use the power of
technology and access Online Financial Services Comparison platforms which will help them
understand the hidden charges and make their journey of availing services like loans and insurance
smooth. The time has shifted from the basic Net Banking like NEFT and RTGS to the very
economical E-Wallets.

Bill Payment

The EBP (Electronic Bill Payment) have been proved a significant tool to attract customers by
making the transactions more efficient and accessing the chapter and verse of their financial health
more easily. Although the CMS (Cash Management Services) and the revenue generated by
processing in the physical form have been affected by EBP but still banks take it as an integral and
most vital part of services to the customers. Banks have consolidated platforms to pay the bills or
recharge online which gives the customers relaxation from the hassles of late payments and issuing
cheques, and also add-ons like real-time SMS alerts, etc. This has facilitated the customer to check
their account balance while paying the bills. The upper hand of EBP in the market has facilitated
the sale of Debit and Credit cards and also has given advantage to payment gateways.
E-Brokerage

E-Brokerage is one of the fields where the online financial websites are giving a tough competition
to the traditional service providers. The local DSAs and the brokers are facing threats by the online
DSAs because of the value and the intelligent services these E- brokers provide to the customers.
Banks and the NBFCs have also played a smart move, and they are getting into a tie-up with these
e-brokers to expand their customer base and gain more on client acquisition. Banks have recorded
the E- trading business and have sourced the e-traders so that the customer can buy or sell the
stocks online and can also pay via the net. For example, ICICI has its trading podium
icicidirect.com and HDFC have its platform called hdfcsec.com with features to integrate the
Trading, Banking and Demat accounts of the customers and provide them a single solution to
Internet trading.

Delivery of Financial Services

The banks have come up with the delivery of services like checking your account status on fund
transfer, writing the cheques and demand drafts through the internet. They are also trying to get
into the B2C and B2B E-commerce by providing the value-added services to the customer online.
Banks have also approached features like having a tie-up with the corporate so as to enter their
supply chain by facilitating the electronic transfer of funds. The application process for a Personal
Loan, Car loan and even mortgages have shifted Online and other products like bonds, and mutual
funds are offered through their service portals. Banks have also planned their online shopping
portals like HDFC has a way-in called easy2buy.com and Federal bank has a similar concept with
Rediff.com and Fabmart. ICICI also has its e-tailing site called magiccart.com.

The time is not far when the customer will scan and upload his documents to avail any financial
service in the comfort of his home. This will reduce the turnaround time of any product
significantly, making India stand in the array of countries with highest growth rate through
technology and financial knowledge.
Financial services is been revolutionized by disruptive technologies and fintechs upending
workflow and processes. Days are gone where banks were operated with paper money, bulky
computers and human interaction, organizations are moving entirely towards digital interfaces.

Financial Technology have developed algorithm based products and solutions to track customer’s
online pattern and create personalized experiences. The idea of augmenting human interactions
and intelligence with AI doesn’t end with consumer-facing products.

AI could power technologies that overlay humans to provide an oversight and tracking mechanism
to employee actions, helping with compliance, security, and the monitoring of actions.

The implications for the financial sector is that by tracking customers habits, activities,
interactions, events and behavioral characteristics, products and data can be personalized to meet
each and every customer needs, identify frauds and recommend financial investments .
1. Customer service delivered by AI Digital Assistants
o Financial Advisors through combining multiple data points and provide visual insights
o Digital assistants in channels like ATM, Mobile.

2. Delivering better and personalized customer experiences

o Customer acquisition through Digital channels
o Creating personalized customer profiles
o New connected products

3. Fight fraud with Artificial Intelligence

o Enhanced fraud and authentication
o Device identification, behavior analysis, anomaly detection

4. Credit Scoring
o Gather customer data from non-traditional sources
o Quantify qualitative aspects
o Customize scoring models

While the benefits of AI are increasing enormously the challenges faced by adopting it is also
growing as days goes by:

 Governance – The growing regulatory and compliance requirements are making effective data
governance a must have for industries like financial services and healthcare. The demanding
around data privacy, personal information protection, data security, data lineage, and historical
data regulatory requirements are now more
 Security and Privacy concern – Privacy could become an even bigger deal in the future. The
data used to make advice and recommendations more relevant can also be used for purposes that
could be considered an invasion of a person’s privacy
o When things fail and access is denied, or resulting recommendations tampered with, the
consequences could be shattering.
o Similarly, if the applications can’t identify their users accurately, hackers could successfully
impersonate the real user and convince the program to turn over sensitive data, or to take
instructions from the wrong person.

 Federal Regulations – Fed is yet to approve pre-defined set of machine learning algorithms to
be used for deriving Insights and respond to customer needs and leverage the information/insight
for regulatory reporting hence it is challenge for the organization to meet both customer needs
and align to regulations.
FINANCIAL SERVICES IN INDIA

Introduction

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth
of existing financial services firms and new entities entering the market. The sector comprises
commercial banks, insurance companies, non-banking financial companies, co-operatives, pension
funds, mutual funds and other smaller financial entities. The banking regulator has allowed new
entities such as payments banks to be created recently thereby adding to the types of entities
operating in the sector. However, the financial sector in India is predominantly a banking sector
with commercial banks accounting for more than 64 per cent of the total assets held by the financial
system.

The Government of India has introduced several reforms to liberalize, 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. In 2017,a new
portal named 'Udyami Mitra' has been launched by the Small Industries Development Bank of
India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium
Enterprises' (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders'
rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Market Size

The Mutual Fund (MF) industry in India has seen rapid growth in Assets under Management
(AUM). Total AUM of the industry increased 25.79 per cent year-on-year to hit a record of 22
lakh crore rupees (US$ 342.91 billion) at the end of February 2018. At the same time the number
of Mutual fund (MF) equity portfolios reached a record high of 2.27 billion in February 2018.
On account of rise in investments in the Mutual Funds and other financial instruments, the revenues
of the brokerage industry in India are forecasted to grow by 15-20 per cent to reach 18,000-19,000
crore rupees(US$ 2.80-2.96 billion) in FY2017-18, backed by healthy volumes and a rise in the
share of the cash segment.
Another crucial component of India’s financial industry is the insurance industry. The insurance
industry has been expanding at a fast pace. The total first year premium of life insurance companies
grew 17.35 per cent year-on-year to reach US$ 25.44 billion during April 2017-February 2018.
Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed
rapid expansion. A total of 153 initial public offers (IPOs) were issued in the Indian stock markets
in 2017, which raised a total of US$ 11.6 billion.
Furthermore, India’s leading bourse Bombay Stock Exchange (BSE) will set up a joint venture
with Ebix Inc to build a robust insurance distribution network in the country through a new
distribution exchange platform.

Investments &Developments

 Global payments solution giant MasterCard has launched its first technology lab in Pune,
which will enable India to move towards digital economy and financial inclusion.
 Four metro cities of Delhi, Mumbai, Bangalore and Chennai can reap benefits of US$ 7.2
billion annually by increasing payments through digital means##.
 BankBazaar, a financial marketplace start-up in India, raised US$ 30 million in a funding
round led by Experian Plc, a credit rating agency based in UK, taking the company's total
funding to US$ 110 million.
 Private equity (PE) investments in India increased 59 per cent to US$ 24.4 billion in 2017,
with average deal size of US$ 42.8 million, according to data provided by Venture
Intelligence.
Government Initiatives

 The Ministry of Finance has launched the Operation Clean Money Portal, in an attempt to
create a tax compliant society as well as a transparent tax administration.
 The Government of India is likely to allow 100 per cent foreign direct investment (FDI) in
cash and ATM management companies, since they are not required to comply with the
Private Securities Agencies Regulations Act (PSARA).
 Securities Exchange Board of India (SEBI) has permitted the security exchanges to launch
options contracts in the commodity market, which would provide a new cost effective
hedging tool to the farmers and others market participants.
 The Securities and Exchange Board of India (SEBI) has allowed exchanges in India to
operate in equity and commodity segments simultaneously, starting from October 2018.
 SEBI has relaxed norms for registered foreign portfolio investors (FPIs) in India, allowing
them to operate through the International Financial Services Centre (IFSC) without
undergoing any additional documentation or prior approval process.
 The RBI has introduced trading in interest rate options (IRO), effective from January 31,
2017, which will provide another avenue to market participants to hedge and speculate on
interest rate risk.
 SEBI plans to allow investors to make mutual funds transactions worth up to Rs 50,000
(US$ 750) a month through digital wallets, as part of its efforts to digitise the distribution
processes for all financial products. It also plans to allow immediate credit to customer’s
bank accounts on liquid mutual funds redemption to attract retail customers as well as boost
inflows.
 Mr Ravi Shankar Prasad, Union Minister of Law & Justice and Information Technology,
has launched a free Doordarshan DTH channel called DigiShala, which will help people
understand the use of unified payments interface (UPI), USSD, aadhaar-enabled payments
system, electronic wallets, debit and credit cards, thereby promoting various modes of
digital payments.
  The Government of India has relaxed norms for small merchants with a turnover of up to
2 crore rupees (US$ 300,000), allowing them to pay 6 per cent of deemed profit in tax
instead of 8 per cent of total turnover or gross receipts received through banking channels
or digital means for FY 2016-17, in a bid to encourage cashless transactions in the country.
 The lending target has been fixed at 244,000 crore rupees (US$ 36.46 billion) for 2017-18.
 The Government of India launched the 'Bharat 22' exchange traded fund (ETF), which will
be managed by ICICI Prudential Mutual Fund, and is looking to raise 8,000 rupees crore
(US$ 1.22 billion) initially.
 The subscriber base under the Atal Pension Yojana (APY) scheme reached 80 lakh. Of the
total subscribers 26.54 per cent are in the age group 26 to 30 years, 24.13 per cent are in
the age group of 21 to 25 years, 23.52 per cent are in the age group of 31 to 35 years and
10.87 percent are in the age group of 18 to 20 years.

Road Ahead

 India is today one of the most vibrant global economies, on the back of robust banking and
insurance sectors. 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 Association of Mutual Funds in India (AMFI) is targeting nearly fivefold growth in
assets under management (AUM) to 95 lakh crore rupees (US$ 1.47 trillion) and a more
than three times growth in investor accounts to 130 million by 2025.
 India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate
(CAGR) of 150 per cent to reach US$ 4.4 billion by 2022 while mobile wallet transactions
to touch Rs 32 trillion (USD $ 492.6 billion) by 2022.