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Financial Services in India

August, 2014


India's services sector has always served the Indian economy well, accounting for nearly 57 per cent of the gross domestic product (GDP). Here, the financial services segment has been a significant contributor.

The financial services sector in India is dominated by commercial banks which have more than 60 per cent share of the total assets; other segments include mutual funds, insurance firms, non-banking institutions, cooperatives and pension funds.

The Government of India has introduced reforms to liberalise, regulate and enhance the country's financial services industry. Presently, the country can claim to be one of the world's most vibrant capital markets. In spite of the challenges that are still there, the sector's future looks good.

Market size

The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 25.

Information technology (IT) services, the largest spending segment of India's insurance industry at Rs 4,000 crore (US$ 665.78 million) in 2014, is anticipated to continue enjoying strong growth at 16 per cent. Category leaders are business process outsourcing (BPO) at 25 per cent and consulting at 21 per cent.


During FY 14, foreign institutional investors (FIIs) invested a net amount of about Rs 80,000 crore (US$ 13.31 billion) in India's equity market, according to data by Securities and Exchange Board of India (SEBI).

Insurance companies in India will spend about Rs 12,100 crore (US$ 2.01 billion) on IT products and services in 2014, a 12 per cent increase over the previous year, according to Gartner Inc. The forecast includes spending by insurers on segments such as internal IT (including personnel), telecommunications, hardware, software, and external IT services. The Rs 1200 crore (US$ 202.47 million) software segment is predicted to be the fastest growing external segment, with overall growth of 18 per cent in 2014.

The following are some of the key developments and investmentsin the Indian financial services sector:

  • About 75 per cent of the insurance policies sold by 2020 would be in one way or another influenced by digital channels during the pre-purchase, purchase or renewal stages, according to a report by Boston Consulting Group (BCG) and Google India. This report, Digital@Insurance-20X By 2020, predicts that insurance sales from online channels will increase 20 times from present-day sales by 2020, and overall internet influenced sales will reach Rs 300,000-400,000 crore (US$ 49.9-66.54 billion).
  • Export-Import Bank of India (Exim Bank) will focus more on supporting project exports from India to South Asia, Africa and Latin America, as per Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved up the value chain by lending support to project exports so that India earns foreign exchange. In 2012-13, Exim Bank had supported 85 project export contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47 companies in 23 countries.
  • Private-sector lender IndusInd Bank will soon begin its asset reconstruction business. It plans to partner asset reconstruction companies (ARCs) for this venture. "I think our new initiative, which is going to launch in the next two months, is about asset reconstruction. We will do asset reconstruction within the bank but in tie-ups with ARCs. The business plan is ready. We believe a huge stock of assets is coming into the ARCs as a business area that we need to look at and we will exploit," said Mr Romesh Sobti, CEO and MD, IndusInd Bank.
  • Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry's assets under management (AUM) have gone past the Rs 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs 10.11 trillion (US$ 168.19 billion) in May from Rs 9.45 trillion (US$ 157.21 billion) in April.

Government Initiatives

In an effort to enable banks to provide greater choice in insurance products through their branches, a proposal could be made which will allow banks to act as corporate agents and tie up with multiple insurers. A committee set up by the Finance Ministry of India is likely to suggest this model as an alternative to the broking model.

The Reserve Bank of India (RBI) has simplified the rules for credit to exporters. Exporters can now receive long-term advance credit from banks for up to 10 years to service their contracts. They have to have a satisfactory record of three years to get payments from banks, who can adjust the payments against future exports.

The RBI has enabled foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in insurance and related activities via the automatic route. "Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector," as per the RBI.

Road Ahead

India is among the world's top 10 economies, driven by its strong banking and insurance sectors. The country is expected to become the fifth largest banking sector in the world by 2020, as per a joint report by KPMG-CII. The report anticipates bank credit to increase at a compound annual growth rate (CAGR) of 17 per cent in the medium term which will lead to better credit penetration.Life Insurance Council, the industry body of life insurers in India, has also estimated a CAGR of 12-15 per cent over the next few years for the segment.

Exchange Rate Used: INR 1 = US$ 0.0166 as on July25, 2014

References: Media Reports, Press Releases, RBI Document, KPMG-CII Report