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Financial Services

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Financial Services

July, 2011

The financial services sector in India has witnessed a fundamental transformation since the country was liberalised. India, in the last few years, has emerged as the one of the most rapidly growing economies across the globe. The financial services market is growing rapidly, and there is significant potential for further growth.

The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market

Financial Services in India - Key Drivers

  • India’s high savings rate offers significant opportunity to put resources into the financial markets. The country has a favourable demographic profile with a large segment of the population under 30 years. The Census 2011 shows that 56.9 per cent of India’s total population comes in the age group 15-59 years. The country will witness a sharp decline in the dependency ratio over the next thirty years – which will be a great dividend. As the dividend begins to pay off, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further, according to Mr Pranab Mukherjee, Union Finance Minister
  • A large, untapped domestic market, with a huge growth potential
  • Presence of financial and capital market mechanisms
  • A large and continuously growing intellectual capital
  • Healthy rate of economic growth

Banking Services

The banking sector has undergone a lot of positive developments in the last decade. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made significant attempts to improve regulation, besides framing policies that are conducive to the growth of the sector.

The banking industry in India is expected to grow by 20 per cent a year, with return on equity being more than 18 per cent, according to a survey by consulting firm, McKinsey, done for the Indian Banks' Association. The growth in the sector is specifically being driven by rising aspirations of corporate India , strong regulatory thrust, technological breakthrough, innovations, rising productivities and economies of scale. The sector carries a value creation opportunity of almost Rs 2.5 lakh crore (US$ 56.38 billion) in incremental revenue by 2015, according to Ranjit Tinaikar, Partner at McKinsey.

In the financial year 2010-11, Public Sector Banks (PSBs) recorded a significant credit growth of 22.44 per cent. Net Profits of PSBs have gone up from approximately Rs 39,000 crore (US$ 8.8 billion) to approximately Rs 45,000 crore (US$ 10.15 billion) in the year 2010-11. The banks achieved 35 per cent growth in credit to Micro, Small and Medium Enterprises (SMEs) sector against the target of 20 per cent.

Nationalised banks accounted for 52.2 per cent of the aggregate deposits, with State Bank of India (SBI) and its Associates accounting for 22.1 per cent. The share of new private sector banks, foreign banks, old private sector banks, and regional rural banks in aggregate deposits was 13.3 per cent, 4.8 per cent, 4.6 per cent and 3.0 per cent, respectively, according to RBI’s Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, December 2010.

With respect to gross bank credit, nationalised banks had the highest share of 51.6 per cent in the total bank credit. They were followed by SBI and its associates at 22.7 per cent and new private sector banks at 13.7 per cent. Foreign banks, old private sector banks and regional rural banks had shares in the total bank credit at 5.1 per cent, 4.5 per cent and 2.5 per cent, respectively.

India's foreign exchange reserves were US$ 314.6 billion as on July 8, 2011, according to the data in the weekly statistical supplement (WSS) released by RBI.

Indian bank loans increased by 19.9 per cent year-on- year (y-o-y) as of July 1, 2011, according to the central bank's WSS. Deposits rose by 18.4 per cent from a year earlier.

Mutual Funds in India

The Indian mutual fund industry has witnessed significant growth in the last few years. Besides the demographic factors, growth has been driven by the increasing reach of Asset Management Companies (AMCs) and distributors. Further, relatively low penetration levels coupled with rapid growth in the assets under management (AUM) in recent years signifies a high growth potential of the Indian mutual fund industry.

India's mutual fund industry's average AUM increased by 6 per cent to Rs 7.43 trillion (US$ 167.57 billion) in the first quarter (April-June) of the current financial year (2011-12), from Rs 7 trillion (US$ 157.87 billion) in the fourth quarter (January-March) of the last financial year (2010-11), according to the data released by industry body Association of Mutual Fund Industry (AMFI). The mutual fund industry, which comprises 43 fund houses, witnessed an increase of 6.07 per cent to Rs 425.46 billion (US$ 9.6 billion) on average AUM.

The Indian mutual fund industry is expected to register robust growth, given the growing aspirations of retail customers. KPMG in India is of the view that the industry AUM is likely to continue to grow in the range of 15 to 25 per cent from the period 2010 to 2015 based on the pace of economic growth.

Indian Insurance Sector

The insurance industry in India has a big opportunity for national as well as foreign investors.

As Indians are getting richer, the desire to save for retirement is growing. India ranks at number 11, in terms of ranking by premium volume in 2010, according to Swiss Re’s sigma study , “World insurance in 2010”. India has surpassed Spain to become the 11th largest insurance market in the world, according to the study. In the life insurance business itself, India has surpassed ten major markets in the last ten years.

The total gross premium of 23 players in the non-life insurance market increased by 27 per cent in May 2011, from Rs 3,151.41 crore (US$ 710.73 million) in May 2010, according to the Insurance Regulatory and Development Authority (IRDA). The four Public Sector Units (PSUs), which account for about 59 per cent of the total general insurance industry, had their gross premium collections rise by 23 per cent to Rs 2,358.60 crore (US$ 531.9 million) in the same period.