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Financial Services in India

January, 2014

Financial Services in India: Brief Overview

India’s financial services sector is diversifying and growing at a good rate. The sector is bank dominated with commercial banks holding over 60 per cent of the total assets, followed by the insurance industry. The sector comprises commercial banks, insurance firms, cooperatives, non-banking institutions, mutual funds, pension funds and other financial entities.

Over the last 20 years, the sector has developed a more modern outlook. The government introduced several reforms to liberalise, regulate and enhance the country's financial services by embracing best international practices. The results have been encouraging, with India today globally recognised as among the most vibrant and transparent capital markets regarding market efficiency and transparency.

While challenges still remain for the future, the prospects for India’s financial services are brighter than ever before.

Insurance Sector

Insurance companies will now have greater freedom to invest in sectors such as IT and pharma. The Insurance Regulatory and Development Authority (IRDA) has increased the sector specific exposure limit for investments by insurers to 20 per cent of the total investment, from 15 per cent. Up till now, life and non-life insurers were allowed to take an exposure in a specific sector – excluding banking, financial services and infrastructure sectors – to 15 per cent of total investments (which included debt and equity).

Investment corpus in the Indian pension sector is projected to go beyond US$ 1 trillion by 2025 following the passing of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013, according to an industry report.

Banking Services

India's foreign exchange (FOREX) reserves rose by US $204.9 million to US$ 295.71 billion in the week ended December 27, according to the Reserve Bank of India (RBI). Foreign currency assets (FCAs), which comprise a major part of the overall reserves, increased by US$ 164.3 million to US$ 268.634 billion in the same week.

Private sector banks will soon be offering customers a choice of insurance products from different companies rather than from one company. The finance ministry has asked public sector banks to become insurance brokers.

Mutual Funds Industry in India

The mutual fund industry grew its assets by 11 per cent (Rs 85,000 crore), to Rs 8.78 trillion (US$ 141.13 billion) in 2013 from Rs 7.93 trillion (US$ 127.46 billion) in 2012, with large fund houses leading the growth in average assets under management (AUM). HDFC Mutual Fund, with AUM of Rs 1.09 trillion (US$ 17.52 billion) at the end of 2013 and a 7.5 per cent growth from 2012, led among 44 fund houses, according to data from Association of Mutual Funds in India (AMFI).

Securities and Exchange Board of India (SEBI) has earmarked nearly 85 districts for likely adoption by fund houses; these areas have high bank deposits but limited investment opportunities. SEBI has made necessary provisions to cater to the sector’s demands.