SUBJECT: insurance law

Project topic:
Comparative analysis of insurance savings
and bank savings

Submitted By
Shikhar Neelkanth
Roll no. 1233
th th
4 Year, 8 Semester, B.B.A. LL.B.(Hons.)

Submitted to
(Dr.) s.c. roy
Faculty of insurance law
 TABLE OF CONTENTS

ACKNOWLEDGEMENT.........................................................................................3

RESEARCH METHODOLOGY..............................................................................4

INTRODUCTION......................................................................................................5

MEANING AND CONCEPT OF BANK SAVINGS AND INSURANCE

SAVINGS.....................................................................................................................7

COMPARATIVE ANALYSIS OF BANK SAVINGS AND INSURANCE

SAVINGS...................................................................................................................10

CONCLUSION.........................................................................................................15

BIBLIOGRAPHY.....................................................................................................16

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 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although

prepared by me, is a culmination of efforts of a lot of people.

Firstly, I would like to thank my faculty for Insurance Law Dr. S.C Roy for his
valuable suggestions without which this wouldn’t have been possible.

Moving further, I would also like to express my gratitude to my seniors, the library
staff and my friends who were always there for me when I needed any sort of help
regarding this project.

Lastly, I would like to thank the almighty for making this happen.

-Shikhar Neelkanth

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 RESEARCH METHODOLOGY

Method of research

The researcher has adopted a purely doctrinal method of research. The researcher has
made extensive use of the library at the Chanakya National Law University and also
the internet sources.

Aims and Objectives

The aim of this project is to present an overview of the savings in the Banking sector
and Insurance sector and elucidating it with a comparative analysis between the two
sectors.

Sources of Data

The following sources of data has been used in this project-

 Books
 Journals
 Internet

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 INTRODUCTION

India’s financial sector is diversified and expanding rapidly. It comprises commercial banks,
insurance companies, non-banking financial companies, cooperatives, pensions funds, mutual
1
funds and other smaller financial entities.

Ours is a bank dominated financial sector and commercial banks account for over 60 per cent of
the total assets of the financial system followed by the Insurance. Other bank intermediaries
include regional rural banks and cooperative banks that target under serviced rural and urban
populations. Many non-banking finance companies (NBFC) operate in specialized segments
(leasing, factoring, micro finance, infrastructure finance), though some can accept deposits.
Pension provision covers 12 percent of the working population and consists of civil service
arrangements, a compulsory scheme for formal private sector employees, and private scheme
2
offered through insurance companies.

This project topic assesses the strengths and weaknesses of reforms in the banking and
insurance industries. Banking and insurance sector plays very significant role for the
development of the society. Banking sector performance is analysed by means of various
indicators as well as Principle Component Analysis techniques. The study concludes with
important conclusions and policy implications for future reforms based on the findings.

Bank and insurance companies have played a vital role in advancing the economic and social
condition of India. They have developed a climate favourable to capital formation. Bank and
insurance companies in India now constitute the core of the countries organized financial
system.

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DEFINITION OF THE BANKING AND INSURANCE SECTORS

Financial services usually include banking, insurance, securities, asset management, pension
3
funds, financial advisory, information and other services . These services are commonly
associated with the supply of

India.RBI, Perspective on Banking in India, speech by Shri Deepak Mohanty, dated 18.5.2013

IMF. India: Financial System Stability Assessment update, January 2013

For the definition see WTO Document, TN/S/W/43.

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 4
financial instruments . Based on the nature of this study, financial services are divided into
banking and non-banking services. Banking institutions provide banking and other financial
services to their customers. They render services to the customers in terms of both deposits and
lending by performing the role of intermediating between savers and borrowers. There are
several types of banks in India, which differ in the number of services they provide and the
clientele they serve. Global banks are involved in international lending and foreign currency
trading, in addition to the more typical banking services. Regional banks have numerous
branches and automated teller machine (ATM) locations throughout areas that provide banking
services to individuals. Banks have become more oriented toward marketing and sales.
Community banks are based locally and offer more personal attention. In recent years, online
banks which provide all services entirely over the Internet have entered the market, and some
formerly Internet-only banks are opting to open branches.

Non-banking financial institutions include insurance and other fund management services.
Insurance companies are the most important non-banking financial institutions. An insurance
5
company operates as an insurer. Insurance companies collect premiums and compensate those
who suffer loss. Insurance is the best medium of security to both property and human life. It
operates basically on three principles—the sharing of losses, the participation of a large number
of clients, and the quality of risk. Insurance companies not only shift the risks but also collect
small scattered capital and invest it in various activities of a long-term nature.

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See www.fin.gc.ca/hst/hstglo-e.html

See www.alwarrantysolution.com/glossary.htm

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 MEANING AND CONCEPT OF BANK SAVINGS AND INSURANCE SAVINGS

MEANING AND CONCEPT OF BANK SAVINGS

A bank is a financial intermediary and money creator that create money by lending money to a
borrower, thereby creating a corresponding deposit on the bank's balance sheet. Lending
activities can be performed directly by loaning or indirectly through capital markets. Due to
their importance in the financial system and influence on national economies, banks are
highly regulated in most countries. Most nations have institutionalized a system known as
fractional reserve banking, central banking, under which banks hold liquid assets equal to only
a portion of their current liabilities. In addition to other regulations intended to ensure liquidity,
banks are generally subject to minimum capital requirements based on an international set of
capital standards, known as the Basel Accords.X

A savings bank is a financial institution whose primary purpose is accepting savings deposits
and paying interest on those deposits.X

They originated in Europe during the 18th century with the aim of providing access to savings
products to all levels in the population. Often associated with social good these early banks
were often designed to encourage low income people to save money and have access to banking
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services. They were set up by governments or by or socially committed groups or organizations
such as with credit unions. The structure and legislation took many different forms in different
countries over the 20th century.X

The advent of internet banking at the end of the 20th century saw a new phase in savings banks
with the online savings bank that paid higher levels of interest in return for clients only having
access over the web.X

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MEANING AND CONCEPT OF INSURANCE SAVINGS

The Indian insurance industry for a long time was dominated by public sector players, viz., Life
Insurance Corporation (LIC) and General Insurance Corporation (GIC). LIC was formed in
1956 by nationalizing 256 domestic and foreign players operating in India.

Over the next 40 years, LIC, which operates in the life segment, significantly increased in
presence across the country by building an extensive network of branches and offices offering
employment to a large number of agents. The non-life insurance sector was overwhelmingly
dominated by GIC along with its subsidiaries, which were formed with the nationalization and
amalgamation of over 100 domestic and foreign insurance companies under the General
6
Insurance Business Nationalization Act of 1972. While the Malhotra Committee emphasized
the introduction of competition from domestic private and foreign players to improve customer
services and increase the coverage of insurance policies, it was also aware of the need for
exercising caution as any failure on the part of new players could ruin public confidence in the
industry. Hence, it was decided to allow competition in a limited way by stipulating a minimum
capital requirement of Rs.100 crore. To ensure greater autonomy to insurance companies in
order to improve their performance and enable them to act as independent companies with
economic motives, it proposed setting up an independent regulatory body the Insurance
Regulatory and Development Authority (IRDA).

One of the challenges with these products is meeting the cost of the insurance cover the death
benefit while committing to the result of the savings effort the maturity benefit for those who
survive until the end of the policy term. In terms of product design, results show different
options to balance savings and insurance benefits. Some insurers do not provide a guaranteed
maturity benefit and instead focus on the death benefit fixed at a multiple of total premiums
paid. Others provide a guaranteed maturity benefit that equals premiums less cost of insurance
cover and administration fees. This is the easiest guarantee to provide for the insurer as risks are
low. However, value is also low for the customer, which sometimes leads the insurer to
compensate by offering additional value elsewhere in the product (for instance in the surrender
terms). Other insurers also provide a maturity benefit that is guaranteed to be no less than the
value of total

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The four subsidiary companies were National Insurance Company Limited, New India Assurance Company
Limited, Oriental Insurance Company Limited, and United India Insurance Company Limited.

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premiums paid. In this case, costs have to be covered on the return on the accumulated assets
and the insurer, though providing good value for the clients, runs the risk of financial losses.
The solution to manage the risk is to impose a higher minimum premium and relatively long
policy term. Balancing savings versus death coverage is not straightforward. A way for the
insurer to integrate the different components efficiently is to prioritise the most important needs
of its customers and incorporate them in the product design.

Financial sector liberalization has made a positive contribution to the economy of India in the
form of financial deepening, reduction in the gap between deposit and lending rates over time,
increased competition and quality services through foreign equity participation and expansion
in the international trade, and structural changes in the economy through growing contribution
to value added and employment.

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 COMPARATIVE ANALYSIS OF BANK SAVINGS AND INSURANCE SAVINGS

The role of the financial system in India, until the early 1990s, was primarily restricted to the
function of channeling resources from the surplus to deficit sectors. Whereas the financial
system performed this role reasonably well, its operations came to be marked by some serious
deficiencies over the years. The banking sector suffered from lack of competition, low capital
base, low productivity and high intermediation cost.

After the nationalization of large banks in 1969 and 1980, public ownership dominated the
banking sector. The role of technology was minimal and the quality of service was not given
adequate importance. Banks also did not follow proper risk management system and the
prudential standards were weak. All these resulted in poor asset quality and low profitability.

Among non-banking financial intermediaries, development finance institutions (DFIs) operated

in an over-protected environment with most of the funding coming from assured sources at
concessional terms. In the insurance sector, there was little competition. The mutual fund
industry also suffered from lack of competition and was dominated for long by one institution,
viz., the Unit Trust of India. Non-banking Financial Companies (NBFCs) grew rapidly, but
there was no regulation of their asset side. Financial markets were characterized by control over
pricing of financial assets, barriers to entry, high transaction costs and restrictions on movement
of funds/participants between the market segments. Apart from inhibiting the development of
the markets, this also affected their efficiency.

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Against this backdrop, wide-ranging financial sector reforms in India were introduced as an
integral part of the economic reforms initiated in the early 1990s. Financial sector reforms in
India were grounded in the belief that competitive efficiency in the real sectors of the economy
will not be realized to its full potential unless the financial sector was reformed as well. Thus,
the principal objective of financial sector reformwas to improve the allocative efficiency of
resources and accelerate the growth process of the real sector by removing structural
7
deficiencies affecting the performance of financial institutions and financial markets.

The main thrust of reforms in the financial sector was on the creation of efficient and stable
financial institutions and markets. Reforms in respect of the banking as well as non-banking
financial institutions focused on creating a deregulated environment and enabling free play of
market forces while at the same time strengthening the prudential norms and the supervisory
system. In the banking sector, the focus was on imparting operational flexibility and functional
autonomy with a view to enhancing efficiency, productivity and profitability, imparting strength
to the system and ensuring accountability and financial soundness. The restrictions on activities
undertaken by the existing institutions were gradually relaxed and barriers to entry in the
banking sector were removed.

In the case of non-banking financial intermediaries, reforms focused on removing sector-

specific deficiencies. Thus, while reforms in respect of DFIs focused on imparting market
orientation to their operations by withdrawing assured sources of funds, in the case of NBFCs,
the reform measures brought their asset side also under the regulation of the Reserve Bank. In
the case of the insurance sector and mutual funds, reforms attempted to create a competitive
environment by allowing private sector participation.

Reforms in financial markets focused on removal of structural bottlenecks, introduction of new

players/instruments, free pricing of financial assets, relaxation of quantitative restrictions
improvement in trading, clearing and settlement practices, more transparency, etc. Reforms
encompassed regulatory and legal changes, building of institutional infrastructure, refinement
of market microstructure and technological up gradation. In the various financial market
segments, reforms aimed at creating liquidity and depth and an efficient price discovery
process.

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Reforms in the commercial banking sector had two distinct phases. The first phase of reforms,
introduced subsequent to the release of the Report of the Committee on Financial System, 1992
(Chairman: Shri M. Narasimham), focused mainly on enabling and strengthening measures.
The second phase of reforms, introduced subsequent to the recommendations of the Committee
on Banking Sector Reforms, 1998

7
India. RBI, Working Paper on Financial Structure and Economic Development in India; An Empirical Evolution
by S. Sahoo, February 2013

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(Chairman: Shri M. Narasimham) placed greater emphasis on structural measures and
improvement in standards of disclosure and levels of transparency in order to align the Indian
8
standards with international best practices

India has been a late starter in the process of reforming financial markets. Nevertheless,
beginning the 1990s, a package of reforms comprising measures to liberalize, regulate, and
develop the country's financial sector by adopting best international practices has been initiated.
The results of these reforms have been encouraging and the country now has one of the most
vibrant and transparent capital markets in terms of market efficiency, transparency, and price
discovery process. However, there are still certain challenges in the development of the Indian
financial sector which need to be addressed to make it an important avenue for productive
channelization of savings by domestic investors and a preferred investment destination for
international investors.

A reasonably well-developed corporate bond market is very much required in any economy to
supplement banking credit and the equity market and to facilitate the long-term funding
requirement of corporate sector as well as infrastructure development in the country. Some of
the issues that need to be addressed in this regard include drawing up a road map for a structural
shift from a bank-dominated financial system to a more diverse financial system where top-
rated corporate access finance from capital markets strengthening of the legal frame work for
regulation of corporate debt by necessary amendments in rules/regulations, and relaxation of
investment guidelines for pension, provident, and insurance funds to enable the participation of
long term investors in the corporate bond market. The need for long-term finance for
infrastructure projects is another issue that needs to be looked into in the context of the
limitation of banks to finance such projects. Infrastructure projects, given their long pay-back
period, require long-term financing in order to be sustainable and cost effective.

The enactment of the Banking Laws Amendment Act 2012 is expected to make the regulatory
and supervisory powers of the RBI more effective and facilitate banks in raising funds from the
capital market required for expansion of banking business. It will also facilitate finalization of
guidelines by the RBI for
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8
Ibid

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providing licenses for new banks, which is essential for achieving the objective of financial
inclusion in the current perspective. This needs to be expedited accordingly.

Pension reforms in India have generated widespread interest internationally. They will not only
facilitate the flow of long-term savings for development but also help establish a credible and
sustainable social security system in the country. Lower levels of financial literacy, particularly
among workers in the unorganized sector, non-availability of even moderate surplus, and
lukewarm response so far from most of the state / UT governments to a co-contributory
Swavalamban Scheme are the major challenges to universal inclusion of poorer sections of
Indian society into the pension network. On the supply side, the lack of awareness about the
NPS and of access points for people to open their accounts individually have been major
inhibiting factors which should be addressed by the pension regulator immediately. As far as the
insurance products are concerned, limited choice and high cost of providing covers and
assessing claims are some of the issues that need to be suitably addressed to make insurance
funds an effective means of channelizing savings to investments.

The recent global financial crises have raised certain issues relating to governance of financial
intermediaries and awareness of investors. As investors' awareness is a pre-condition for their
protection, attempts are being made to address this issue through the financial literacy
campaign. The ongoing efforts need to be scaled up in a coordinated way for spearheading
9
financial literacy and promoting investors' protection.

The need of the hour is to ensure that our unbanked population gains access to formal sources
of finance, their reliance on informal channels and on the shadow banking system subsides,
and, in the process, consumer exploitation is curbed. A glaring example is the recent case of a
chit fund defrauding poor people of their hard earned savings. The fact that people have to rely
on such entities for their saving needs indicates a failure on the part of the formal financial
system to reach out to such groups and earn their trust and confidence through a transparent and
responsive customer service regime. Hence, the financial sector architecture that we aspire for
should be one that is most conducive to meeting the objectives of financial

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9
India. Ministry of Finance, Economic Survey 2012-2013, pp.128-129

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 10
inclusion and financial literacy, besides meeting the goals of customer service. . Keeping in
view India's growing integration with global financial markets, external-sector vulnerabilities
have an increasingly large impact on India through the trade and capital account channels. It is
therefore important that the development of an efficient and healthy financial market should
also be accompanied by an effective regulatory mechanism that keeps track of external
11
vulnerabilities.

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India. RBI, speech on Regulation for Financial Consumer Protection, by Shri K.C. Chakrabarty, dated 29.4.2013

op.cit., Economic Survey 2012-2013, p.105

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 CONCLUSION

Concluding we find that The need of the hour is to ensure that our unbanked population gains
access to formal sources of finance, their reliance on informal channels and on the shadow
banking system subsides, and, in the process, consumer exploitation is curbed. A glaring
example is the recent case of a chit fund defrauding poor people of their hard earned savings.
The fact that people have to rely on such entities for their saving needs indicates a failure on the
part of the formal financial system to reach out to such groups and earn their trust and
confidence through a transparent and responsive customer service regime. Hence, the financial
sector architecture that we aspire for should be one that is most conducive to meeting the
objectives of financial inclusion and financial literacy, besides meeting the goals of customer
service. . Keeping in view India's growing integration with global financial markets, external-
sector vulnerabilities have an increasingly large impact on India through the trade and capital
account channels. It is therefore important that the development of an efficient and healthy
financial market should also be accompanied by an effective regulatory mechanism that keeps
track of external vulnerabilities.

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 BIBLIOGRAPHY

BOOKS

TAXMANN; RBI'S INSTRUCTION FOR BANKS & BANKING OPERATIONS; EIGHTH

EDITION

TANNAN, M.L; BANKING LAW; FIRST EDITION; 2014

K.V.S, SARMA; MODERN LAW OF INSURANCE IN INDIA; FIFTH EDITION

SETHI JYOTSANA, BHATIA NISHWAN; ELEMENTS OF BANKING AND

INSURANCE; FIRST EDITION; 2012

RASTOGI SACHIN; INSURANCE LAW AND PRINCIPLES; FOURTH EDITION; 2012

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