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Indian Financial Services Industry: an overview

October, 2013

Brief Overview

Indian financial services industry has been through the toughest of the times and yet stands strong and robust among the world economies. Having a deep impact of the far-reaching changes in the Indian economy since liberalization, the new face of this industry is evolving in a strong, transparent and resilient system.

Over the last few years, financial markets have witnessed a significant broadening and deepening of service baskets with the introduction of several new instruments and products in banking, insurance and capital markets space. The sector was opened up to new private players including foreign companies who embraced international best practices and modern technology to offer a more sophisticated range of financial services to corporate, retail and institutional customers. Financial sector regulators too have been visionaries to ensure that new regulations and guidelines are in tandem with global norms. These developments have given a robust boost to the development and modernisation of the financial services sector in India.

Insurance Sector

  • Indian life insurance sector collected new business premiums worth Rs 11,742.7 crore (US$ 1.92 billion) for April-May 2013, according to data from the Insurance Regulatory and Development Authority (IRDA). Life insurers collected Rs 1, 07, 010.7 crore (US$ 17.47 billion) worth of new premiums for the financial year ended March 31, 2013.
  • Meanwhile, the general insurance industry grew by 19.6 per cent in April-May period of FY14, wherein the non-life insurers collected premium worth Rs 13,552.46 crore (US$ 2.21 billion).

Banking Services

  • According to the Reserve Bank of India (RBI)'s 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks', March 2013, Nationalised Banks accounted for 52.4 per cent of the aggregate deposits, while the State Bank of India (SBI) and its Associates accounted for 22 per cent. The share of New Private Sector Banks, Old Private Sector Banks, Foreign Banks, and Regional Rural Banks in aggregate deposits was 13.6 per cent, 5.1 per cent, 4 per cent and 2.9 per cent, respectively.
  • Nationalised Banks accounted for the highest share of 51 per cent in gross bank credit followed by State Bank of India and its Associates (22.7 per cent) and New Private Sector Banks (14 per cent). Foreign Banks, Old Private Sector Banks and Regional Rural Banks had shares of around 4.9 per cent, 5 per cent and 2.5 per cent, respectively.

  • Banks' credit (loan) growth increased to 18 per cent for the fortnight ended September 6, 2013, while deposits grew by 13.37 per cent showed the data by RBI.
  • India's foreign exchange reserves increased to US$ 277.73 billion as of October 4, 2013.

Mutual Funds Industry in India

India's asset management companies (AMCs) have witnessed growth of 0.7 per cent in August 2013 wherein their average assets under management (AUM) stood at Rs 7.66 lakh crore (US$ 125.10 billion).

Private Equity, Mergers & Acquisitions in India

  • Private equity (PE) and venture capital (VC) firms remained bullish about India's consumer goods and services sector. PE and VC investments increased by more than 46 per cent in the first half of FY14, with consumer companies in retail, e-commerce, consumer packaged goods and quick service restaurants raising US$ 609.39 million through 51 deals.
  • Meanwhile, Indian merger and acquisition (M&A) space witnessed substantial levels of deal activity in the first nine months of 2013. There happened 377 deals amounting to US$ 23.9 billion, according to a survey by tax advisory firm Grant Thornton.

Foreign Institutional Investors (FIIs) in India

  • Investments in Indian markets (equity, debt and derivatives) through participatory notes (P-Notes) increased to US$ 23.74 billion by the end of July 2013, according to the data released by Securities and Exchange Board of India (SEBI).
  • P-Notes allow high net-worth individuals (HNI), hedge funds and other foreign institutions to invest in Indian markets through registered FIIs.

    The FIIs investments through P-Notes registered a growth of 11.45 per cent in July 2013 as compared to 10.93 per cent in June 2013.

  • Overseas investors infused more than US$ 2 billion in the Indian stock market in the month of September 2013. Since the beginning of 2013, they have pumped a net US$ 13.7 billion in equities.
  • Moreover, given the higher yields offered by Government and corporate debt, the FIIs have been aggressively buying bonds since the beginning of 2013. The debt market attracted a net inflow of about Rs 25,000 crore (US$ 4.08 billion) in January-May 2013.
  • As of October 4, the number of registered FIIs in the country stood at 1, 744 and the total number of sub-accounts at 6, 358.

Financial Services in India: Recent Developments

  • Bangalore-based online retailer Flipkart has raised US$ 200 million from its existing investors including South African technology company Naspers Group and private equity (PE) firms Accel Partners and Tiger Global. The investors have already placed investments to the tune of US$ 181 million in the Indian e-commerce company and this fifth round of funding has marked the single-largest round of investment infusion.
  • The funds would be used to build technology and will help the company strengthen its supply chain and human resource base.

  • Private lender HDFC Bank is planning to launch 500 mini branches, to be handled by one to three people, across India by the end of FY14. The bank has added about 219 mini branches pan-India since 2012.
  • The basic motive behind such a initiative by the bank is to take the formal banking experience to people in unbanked and under-banked areas. A mini branch, manned by one, two or three persons, offers the entire range of products and services including savings and current accounts, fixed deposits, recurring deposits, credit card, instant debit card and also ATM facility. Products such as two wheeler loan, tractor loan, commercial vehicle loan, agricultural and commodities loan among others are also offered.

Financial Services: Government Initiatives

In order to attract more of foreign capital to Indian markets, SEBI has eased norms for overseas investors in the debt category. As per the new rulings, FIIs will be allowed to buy Government securities (Gilts) directly from the market, rather than from the monthly auction conducted by the regulator to allocate these papers.

The move is expected to facilitate more dollar inflows into the country besides making the cost of acquisition of gilts cheaper for foreign investors. In a similar initiative taken earlier in 2013, SEBI had allowed FIIs to buy corporate debt (which were also allocated through auction previously).

Road Ahead

A report prepared by KPMG prepared in association with the Confederation of Indian Industry (CII) states that the Indian banking sector is expected to become fifth largest in the world by 2020. The report highlights that India is one of the top 10 economies of the world and with relatively lower domestic credit to gross domestic product (GDP) percentage, their lies a huge scope of growth for the banking sector. Bank credit is expected to grow at a compounded annual growth rate (CAGR) of 17 per cent in the medium term, eventually leading to higher credit penetration in the economy.

Meanwhile, IRDA estimates that the insurance business in India would touch Rs 4 lakh crore (US$ 65.32 billion) by the end of FY14. The regulator is considering bringing out norms for sub-brokers of insurance products as well.

Exchange Rate Used: INR 1 = US$ 0.01633 as on October 18, 2013

References: Media Reports, Press Releases, RBI Document.