Banking and Insurance sector

Growth in the Indian context

ACKNOWLEDGEMENT We would like to express our gratitude to RIZVI college who gave us the opportunity to undertake this project. We would like to thank our colleagues to help in our research work. I want to thank them for all their help, support, interest and valuable hints. Especially, we would like to give our special thanks to our parents who supported us morally and financially.

INDIAN BANKING SECTOR

WHAT IS BANK?
A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. An institution where one can place and borrow money and take care of financial affairs; A branch office of such an institution. The first modern bank was founded in Italy in Genoa in 1406, its name was (Bank of St. George).

FUNCTIONS OF BANKS
Accepting Deposits from public/others (Deposits). Lending money to public (Loans). Transferring money from one place to another (Remittances). Acting as trustees. Keeping valuables in safe custody. Government business.

TYPES OF BANKS
Public sector Banks
Private sector Banks Co-operative Banks Development Bank/Financial institutions

Public sector Banks

Some Public Sector Banks in India: Central Bank of India Corporation Bank Dena Bank Bank of India Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank

Private sectors Banks

Old generation private banks

New generation private banks

ICICI Bank IDBI Bank Axis bank

Foreign banks operating in India

HSBC BANK CITI BANK ABN-AMRO BANK

STANDARD CHARTED BANK

Upcoming foreign bank in India

RBS(ROYAL BANK OF SCOTLAND GROUP) INDUSTRIAL AND COMMERCIAL BANK OF CHINA

Scheduled co-operative banks Non-scheduled bank

CO-OPERATIVE BANKS
The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System.They are setup to provide easy loans to farmers or other persons to set up his buisness. They are non profitable banks. Cooperative banks in India finance rural areas under: Farming Cattle Milk Hatchery Personal finance Some example of co-operative banks in IndiaIDBI BANK(INDUSTRIAL DEVELOPMENT BANK OF INDIA) IFCI BANK(INDUSTRIAL FINANCE COOPERATION OF INDIA) APEX BANK

Development Banks/Financial Institutions

These banks are mainly used for devoloping industries and countries Some ExamplesFederal Bank HDFC Bank HSBC ICICI Bank Indian Overseas Bank ING Vysya Bank

The Reserve Bank of India (RBI)

History: Become operational on April 1,1935 Nationalized in the Year 1949.

Major objectives: Regulate the issue of banknote. Maintain reserves with a view to securing monetary stability. To operate the credit and currency system of the country to its advantage.

Functions of RBI
The fuctions are classified into three heads:Traditional functions Promotional functions

Supervisory functions

Traditional functions
Monopoly of currency notes issue Banker to the Government (both the central and state) Fight against economic crisis and ensures stability of Indian economy. Controller of ForEx and credit Maintaining the external value of domestic currency

Promotional functions
Extension of the facilities for the small scale industries Innovating the new banking business transactions. Extension of the facilities for the provision of the agricultural credit through NABARD

Supervisory functions
Granting licence to Banks. Periodical review of the work of the commercial banks. Control the non-banking finance corporation.

HOW IT CONTROLS BANK & ECONOMY

TOOLS: CRR( CASH RESERVE RATIO): 5.5% REPO RATES(RR):7.5% REVERSE REPO RATE(RRR): 6.0%

STATUTORY LIQUIDTY RATIO (SLR):24%

BANK RATE: 6.0%

A Glimpse of Banking sector

Phase-1 Early phase from 1786 to 1969 of Indian Banks Phase-2 Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms Phase-3 New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991

Challenges faced by Indian banks

Lack of product expertise
Traditionally focused on limited range of products Primarily for corporate clients Need for acquiring skills in Retail, structured finance

Lack of distribution expertise

Reliance on branch channel and human intervention Relatively high unit cost of delivery given small transaction sizes

Limited use of technology

Across both customer-facing and internal functions

Continued
Inefficient capital allocation Competition in market
Post office Insurance Financial Institution Foreign Banks

Ways Ahead
Technological Advancement Rural Banking Improving Risk Management

Developing a flexible model for rapid scale-up at optimal cost

FACTS AND FIGURES

Indian banking sector has 6th rank in all over the world. SBI has 6500+ ATMs all over the country. ICICI bank has 3500+ ATMs all over the country. RBI had printed 6,39,948 lakhs crore notes till 6TH Nov 2008. IN Indore SBI has 45+ ATMs . SBI provides the facility and it is tie with 9200+ banks to use their ATMs. Acc. To business magazine survey the no. of ATMs grew 28% yearly. Inspite of it India has 23+ ATMs per million people, China has 55+ ATMs and South Korea has 1600+ ATMs per million people. Transaction done through ATMs is around 70,000 crore in a year. ICICI bank has largest no. branches in foreign also.

Present scenario
Banking industry has been undergoing a rapid transformation. Banks today are market driven and market responsive. With the entry of new players and multiple channels, customers (both corporate and retail) have become more discerning and less "loyal" to banks. This makes it imperative that banks provide best possible products and services to ensure customer satisfaction. They have been managing a world of information about customers - their profiles, location, needs, requirements, cash positions, etc.

Furthermore, banks have very strong in-house research and market intelligence units in order to face the future challenges of competition, especially customer retention.

INTRODUCTION:
Insurance = Collective bearing of Risk. Basic Human trait is to be averse to the idea of risk taking.

ORIGIN AND GROWTH OF INSURANCE SECTOR:

Insurance in modern form originated in the Mediterranean during the 13th century. (The earliest references to insurance- found in Babylonia, the Greeks and the Romans). Marine insurance is the oldest form of insurance followed by life insurance and fire insurance. The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. A higher premium was charged for Indian lives than the non-Indian lives (considering to be more riskier for coverage).

ORIGIN AND GROWTH OF INSURANCE SECTOR:

Oriental life Insurance Company was incorporated at Calcutta in 1818, followed by Bombay Life Assurance Company in 1823 and Triton Insurance Company for General Insurance in 1850. By 1938 there were 176 insurance companies. Insurance regulation formally began in India through the passing of two acts the Life Insurance companies Act of 1912 and the Provident Fund Act of 1912. However the first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict state control over insurance business in the country.

ORIGIN AND GROWTH OF INSURANCE SECTOR:

The business of India Insurance grew at a faster place as competition amongst the Indian companies intensified. The decision of nationalization of life insurance business took place in 1956 when 245 Indian and foreign insurance provident societies were first merged and then nationalized. It paved the way towards the establishment of one nationalized monopoly corporation called Life Insurance Corporation (LIC)

ORIGIN AND GROWTH OF INSURANCE SECTOR:

Nationalization was justified on the grounds that it would create the much needed funds for rapid industrialization and self-reliance in heavy industries. General Insurance followed suit and 1968; The Insurance Act was amended to allow for social control over the general insurance business. Subsequently in 1973, non-life insurance business was nationalized and the General Insurance Business (Nationalization) Act, 1972 was promulgated.

ORIGIN AND GROWTH OF INSURANCE SECTOR:

Till end of FY 1999-2000, two state-run insurance companies, namely, Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) were the monopoly insurance providers in India. Under GIC there were four subsidiaries National Insurance Company Ltd. Oriental Insurance Company Ltd. New India Assurance Company Ltd. United India Assurance Company Ltd.

ORIGIN AND GROWTH OF INSURANCE SECTOR:

In fiscal 2000-01, the Indian federal government lifted all entry restrictions for private sector investors. Foreign investment insurance market was also allowed with 26 percent cap. GIC was converted into India's national reinsure from December, 2000 All the subsidiaries working under the GIC umbrella were restructured as independent insurance companies.

INSURANCE SECTOR REFORMS

In 1993, Malhotra Committee- headed by former Finance Secretary and RBI Governor R.N. Malhotrawas formed To evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector.

INSURANCE SECTOR REFORMS

The reforms were aimed at: Creating a more efficient and competitive financial system suitable for the requirements of the economy Keeping in mind the structural changes currently underway and Recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms.

 Competition Private Companies with a min paid up capital of Rs.1bn should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Structure Government should take over the holdings of GIC and its subsidiaries. All the insurance companies should be given greater freedom to operate. Only one State Level Life Insurance Company

RECOMMENDATIONS

 Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance- a part of the Finance Ministry- should be made independent.

RECOMMENDATIONS

Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company

Customer Service

RECOMMENDATIONS

The Committee: Emphasized that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. Felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. Proposed setting up an independent regulatory bodyThe Insurance Regulatory and Development Authority.

MILESTONES IN LIC

1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928 - The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938 - Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956 - 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

MILESTONES IN GIC

1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957 - General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 - The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 - The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973.

MILESTONES IN GIC
107 insurers amalgamated and grouped into four companies viz.: The National Insurance Company Ltd. The New India Assurance Company Ltd. The Oriental Insurance Company Ltd. The United India Insurance Company Ltd.

CONTRIBUTORS

Life Insurers: Allianz Bajaj Life Insurance Co. Ltd. AMP Sanmar Assurance Co. Ltd. Birla Sun Life Insurance Co. Ltd. Dabur CGU Life Insurance Company Pvt. Ltd. HDFC Standard Life Insurance Co. Ltd. ICICI Prudential Life Insurance Co. Ltd. ING Vysya Life Insurance Co. Pvt. Ltd. Life Insurance Corporation of India. Max New York Life Insurance Co. Ltd. Metlife India Insurance Co. Pvt. Ltd. Om Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Co. Ltd. Tata AIG Life Insurance Co. Ltd.

CONTRIBUTORS

Non-Life Insurers: Bajaj Allianz General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO Tokyo General Insurance Co. Ltd. National Insurance Co. Ltd. New India Assurance Co. Ltd. Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Royal Sundaram Alliance Insurance Co. Ltd. Tata AIG Life Insurance Co. Ltd. United India Insurance Co. Ltd Reinsurers: General Insurance Corporation of India.

CONTRIBUTION TO GROWTH:
Currently, the insurance sector size is estimated at Rs.500 billion. On account of intense marketing strategies adopted by private insurance players, the market share of state owned insurance companies like GIC, LIC and others have come down to 70% in last 4-5 years from over 97%. The private insurance players despite the sector is still regulated has been offering rate of return (RoR) to its policy holders which is estimated at about 35% as against 20% of domestic insurance companies.

CONTRIBUTION TO GROWTH:
LIC and GIC have limited number of policies to offer to their subscribers Private insurance companies offer many policies and the premium amount as well as the maturity period is much competitive as against those of government insurance companies. The private sector insurance players have started exploring the rural markets in which until recently, the state owned companies had the monopoly. Indias life insurance premium, as a percentage of GDP is 1.8%

FUTURE OF THE SECTOR:

Indian insurance sector is likely to register unprecedented growth of 200% and attain a size of Rs. 2000 billion by 2009-10 A private sector insurance business will achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by them against 35-40% growth rate of state owned insurance companies. In rural markets, the share of private insurance players would increase substantially as these have been able to generate a faith among their rural consumers.

INSURANCE SECTOR EMERGING AREAS:

Demand for Pension Plans Two relatively modern trends affect life insurance business in India significantly: Joint Family System and elderly are increasingly having to fend for themselves Separateness of Banking and Insurance Bancassurance Role of Information Techno-logy Using Postal Network Creating Insurance awareness Innovative Products