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Financial Services in India

May, 2014

Brief Overview

The services sector has been a great stimulus to the Indian economy accounting for 56.9 per cent of the gross domestic product (GDP), wherein the financial services segment has been a major contributor. The growth of the financial sector in India at present is nearly 8.5 per cent per year.

Dominated by commercial banks which have over 60 per cent share of the total assets, India’s financial sector comprises commercial banks, insurance firms, non-banking institutions, mutual funds, cooperatives and pension funds, among other financial entities.

The last two decades have seen the sector developing a more contemporary outlook. The Government of India has helped in this development, introducing reforms to liberalise, regulate and enhance the country’s financial services. Today, India is recognised as one of the world’s most vibrant capital markets. Notwithstanding challenges, the sector’s future seems to be in good hands.

Insurance Sector

Digital channels will influence nearly 75 per cent of the insurance policies sold by 2020 during the pre-purchase, purchase or renewal stages, according to a report titled ‘Digital@Insurance-20X By 2020’ by Boston Consulting Group (BCG) and Google India. According to the report, insurance sales from online channels will be 20 times what it is today by 2020, with overall internet influenced sales expected to be around Rs 300,000–400,000 crore (US$ 50.31–67.06 billion).

Indian insurance companies will spend Rs 12,100 crore (US$ 2.01 billion) on information technology (IT) products and services in the current year, a 12 per cent increase over 2013, according to Gartner Inc. This forecast takes into account spending by insurers on internal and external IT services, software, hardware and telecommunications. The software segment is predicted to be the fastest developing external segment, which is increasing at 18 per cent in 2014 overall, driven by the growth of insurance-specific software.

Banking Services

Indian banks operating overseas saw higher credit growth in comparison to their foreign counterparts operating in India, according to Reserve Bank of India’s (RBI) survey on international trade in banking services. The survey for 2012–13 showed growth of credit extended by Indian banks’ branches operating overseas to have increased by 31.7 per cent to Rs 585,570 crore (US$ 98.18 billion).

Increased growth in agriculture and services sectors as well as in the personal loans segment, helped bank credit grow during the April–November period of 2013 by 7.2 per cent; during the same period of 2012, bank credit growth stood at 6.6 per cent. "Higher growth in credit to agriculture may be attributed to the expected better kharif crop which has been announced by the Ministry of Agriculture," stated the report by credit rating agency CARE Ratings.

Mutual Funds Industry in India

More than 80 per cent of Indian investors are satisfied with their mutual fund schemes, according to a survey by Financial Intermediaries Association of India (FIAI). The survey also stated that 60 per cent of the mutual fund investors were satisfied with services of advisers and distributors of investment schemes.

Private Equity, Mergers & Acquisitions in India

Mergers and acquisitions (M&A) activity between India and the European Union is poised to grow in FY 2014–15, according to Mumbai-based investment bank Avendus Capital. The IT and business process outsourcing (BPO) industry are expected to lead the way in scouting for acquisitions in Europe.

Private equity (PE) firms invested US$ 2.27 billion in the period of January–March 2014, a 93 per cent increase from the investments (US$ 1.18 million) made during the same quarter of 2013. There were five investments of US$ 100 million or more in the quarter against one in the corresponding period of 2013.

Foreign Institutional Investors (FIIs) in India

Non-resident Indians (NRIs) and FIIs will now be allowed to invest in the insurance sector, within the overall 26 per cent cap on foreign direct investment (FDI). The department of industrial policy and promotion (DIPP) in a press note confirmed that apart from insurance companies, the relaxation would also cover insurance brokers, third-party administrators (TPAs), surveyors and loss assessors.

FIIs were gross buyers of debt securities valued at Rs 30,266 crore (US$ 5.07 billion) and sellers of bonds worth Rs 11,450 crore (US$ 1.91 billion) in the period January 1–24, 2014, which resulted in a net inflow of Rs 18,816 crore (US$ 3.15 billion), according to data released by the Securities and Exchange Board of India (SEBI). Also, during the same period, FIIs invested Rs 3,473 crore (US$ 582.21 million) into the equity market, making their total investment in debt and stocks to be around Rs 22,289 crore (US$ 3.73 billion).

Foreign investors invested about Rs 371,342 crore (US$ 62.25 billion) into India’s stock market in the four years ended December 2013. This figure surpasses the investments in the boom years of 2005–08.

Investments by FIIs in the Indian stock market crossed the Rs 1 trillion (US$ 16.77 billion) mark in December 2013 – the third time this has been achieved since FIIs’ entry into the capital market in 1992–93.

Financial Services in India: Recent Developments

American Express Co. has bought a minority stake in Bengaluru-based payment device maker Ezetap Mobile Solutions. In February 2014, Ezetap had received venture funding of Rs 49.8 crore (US$ 8.34 million) from a group of investors headed by venture fund Helion Venture Partners. "This investment is a validation about what we are doing and the potential of the market," said Mr Abhijit Bose, cofounder of Ezetap.

Non-banking financial company (NBFC) Manappuram Finance Ltd (MFL) has entered into an agreement to acquire Milestone Home Finance Company from Jaypee Hotels. The transaction is MFL's strategy to broaden its business by venturing into the profitable lucrative housing finance space, as per a press statement released by the company.

Financial Services: Government Initiatives

Given the growth of the Indian film industry, Third Eye Cinema Fund (TCEF), a SEBI-registered alternative investment fund, is set to enter the Indian market. Those not connected with the Hindi film segment will now soon be able to reap the benefits of the sector’s growth. TCEF aims to generate about 25 per cent returns.

In an effort to give impetus to bilateral ties, India and South Korea have decided to strengthen cooperation in many key sectors, including trade, investment and defence. Nine pacts in different fields, including one in cyber space cooperation, were inked following talks between the Indian prime minister and the South Korean president.

Road Ahead

India is one of the top 10 economies in the world, helped in no small part by its strong banking and insurance sectors. It is expected to become the fifth largest banking sector in the world by 2020 and the third largest by 2025, according to a joint report by KPMG–CII. The report expects bank credit to grow at a compound annual growth rate (CAGR) of 17 per cent in the medium term leading to better credit penetration.

The insurance sector also has bright times ahead. Life Insurance Council, the industry body of life insurers in India, has estimated a CAGR of 12–15 per cent over the next few years for the segment, with the country’s insurable population projected to touch 750 million by FY 2020.

Exchange Rate Used: INR 1 = US$ 0.01676 as on April 2, 2014

References: Media Reports, Press Releases, RBI Document