Growth of Financial Institutions India notes-CSEET
Growth of Financial Institutions India:
ICSI CSEET: The Council of the ICSI has released a notice regarding CSEET on the day of the inauguration of ICSI Golden Jubilee Celebrations on 4th Oct 2017.
The Gazette Notification on the Company Secretaries (Amendment) Regulations, 2020 has been published on 3rd February 2020 in the Official Gazette of India and the same shall be applicable from the said date of publication.
Now ICSI Published a notice regarding CSEET Test which going to start from 2020 May.
We are now going to discuss the details of CSEET Paper-3 Economics and Business Environment notes – Growth of Financial Institutions India
Growth of Financial Institutions India notes:
(1) Banking Sector
The banking industry handles finances in a country including cash and credit. Banks are the institutional bodies that accept deposits and grant credit to the entities and play a major role in maintaining the economic stature of a country. Given their importance in the economy, banks are kept under strict regulation in most of the countries. In India, the Reserve Bank of India (RBI) is the apex banking institution that regulates the monetary policy in the country. Banks are classified into classified into four categories –
(i) Commercial Banks
(ii) Small Finance Banks
(iii) Payments Banks
(iv) Co-operative Banks
A brief description of the aforesaid forms of banks is as under:
(i) Commercial Banks : Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural. Apart from these, a fairly new addition to the structure is payments bank. Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business model is designed to make profit. Their primary function is to accept deposits and grant loans to the general public, corporate and government.
Public sector banks are the nationalised banks and account for more than 75 per cent of the total banking business in the country. Majority of stakes in these banks are held by the government.
Private sector banks are those in which major stake or equity is held by private shareholders. All the banking rules and regulations laid down by the RBI will be applicable on private sector banks as well.
A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity. These banks are under the obligation to follow the regulations of its home country as well as the country in which they are operating.
Regional Rural Banks (RRBs) are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises. They usually operate at regional levels in different states of India and may have branches in selected urban areas as well. Other important functions carried out by RRBs include-
- Providing banking and financial services to rural and semi-urban areas.
- Government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc.
- Para-Banking facilities like debit cards, credit cards and locker facilities
(ii) Small Finance Banks : This is a niche banking segment in the country and is aimed to provide financial inclusion to sections of the society that are not served by other banks. The main customers of small finance banks include micro industries, small and marginal farmers, unorganized sector entities and small business units. These are licensed under Section 22 of the Banking Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934 and FEMA.
(iii) Payments Bank : This is a relatively new model of bank in the Indian Banking industry. It was conceptualised by the RBI and is allowed to accept a restricted deposit. they also offer services like ATM cards, debit cards, net-banking and mobile-banking.The following are the payments bank in India:
- India Post Payments Bank
- Fino Payments Bank
- Paytm Payments Bank
- Airtel Payments Banks
Comparison between Traditional Banks and Payment Banks
|Features||Traditional Banks||Payment Banks|
|Pay Interest on Deposits||Yes||Yes|
|Withdrawal facility for customers||Yes||Yes|
|Provide loans or involve in lending activities||Yes||No|
|Issue credit cards||Yes||No|
|Maximum Deposit limit||No limit||Rs.1 lakh only per individual customer.|
(iv) Urban Co-operative Banks : Urban Co-operative Banks refer to the primary cooperative banks located in urban and semi-urban areas. These banks essentially lent to small borrowers and businesses centered around communities, localities work place groups.
(v) State Co-operative Banks : A State Cooperative Bank is a federation of the central cooperative bank which acts as custodian of the cooperative banking structure in the State.
The major developments of Indian banking sector is captured in the following table-
|1921||• Closed market|
• State-owned Imperial Bank of India was the only bank existing.
|1935||• RBI was established as the central bank of country.|
• Quasi central banking role of Imperial Bank came to an end.
|1936-1955||• Imperial Bank expanded its network to 480 branches.|
• In order to increase penetration in rural areas, Imperial Bank was converted into State Bank of India.
|1956-2000||• Nationalisation of 14 large commercial banks in 1969 & 6 more banks in 1980.|
• Entry of private players such as ICICI intensifying the competition.
• Gradual technology upgradation in PSU banks .
|• In 2003, Kotak Mahindra Finance Ltd received a banking license from RBI and became the first NBFC to be converted into a bank|
• In 2009, the government removed the Banking Cash Transaction Tax which had been introduced in 2005.
|• As per Union Budget 2019-2020, Provision coverage ratio of banks reached highest in 7 years.|
• As per RBI, as of November 30, 2018, India recorded foreign exchange reserves of approximately US$ 393.72 billion.
As of May 29,2019, there are 20 Public Sector Banks, 22 Private Sector Banks, 44 Foreign Banks, 56 Regional Rural Banks (RRBs), 1542 Urban Co-operative Banks and 94,384 Rural Cooperative Banks. However, after the mergers, the county will have 12 public sector banks including State Bank of India and Bank of Baroda . Bank of India and Central Bank of India will continue to remain independent. It is interesting to note that credit off-take has been surging ahead over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism & easier access to credit. During FY07-18, credit off-take grew at a CAGR of 10.94 per cent. As of Q3 FY19, total credit extended surged to Rs 93,751.17 billion (US$ 1,299.39 billion). Demand has grown for both corporate & retail loans; particularly the services, real estate, consumer durables & agriculture allied sectors have led the growth in credit. Credit to non-food industries increased by 12.3 per cent year-on-year reaching Rs 86,334 billion (US$ 1.24 trillion) in March 29, 2019.
To capture the rural areas Indian banks are expanding their businesses. According to RBI, Under Financial Inclusion Plan, 598,093 banking outlets were provided in villages as on March 2017. As of September 2018, Ministry of Finance, Government of India launched the Financial Inclusion Index. This index will measure access, usage and quality to financial services.
As of September 2018, Department of Financial Services (DFS), Ministry of Finance and National Informatics Centre (NIC) launched Jan Dhan Darshak as a part of financial inclusion initiative. It is a mobile app to help people locate financial services in India.
The increasingly dynamic business scenario & financial sophistication has increased the need for customised exotic financial products. Banks are developing innovative financial products & advanced risk management methods to capture the market share. Bank of Maharashtra tied up with Cigna TTK, to market their insurance products across India.
With entry of foreign banks, competition in the Indian banking sector has intensified.Banks are increasingly looking at consolidation to derive greater benefits such as enhanced synergy cost take-outs from economies of scale, organisational efficiency & diversification of risks.
(2) Mutual Funds
A mutual fund is an investment security that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash or a combination of those assets.
|First Phase (1964-1987)||The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of Parliament and functioned under the Regulatory and administrative control of the Reserve Bank of India (RBI). In 1978, UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. Unit Scheme 1964 (US ’64) was the first scheme launched by UTI. At the end of 1988, UTI had Rs. 6,700 crores of Assets Under Management (AUM).|
|Second Phase (1987-1993)||The year 1987 marked the entry of public sector mutual funds set up by Public Sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first ‘non-UTI’ mutual fund established in June 1987, followed by Canbank Mutual Fund (Dec. 1987), Punjab National Bank Mutual Fund (Aug. 1989), Indian Bank Mutual Fund (Nov 1989), Bank of India (Jun 1990), Bank of Baroda Mutual Fund (Oct. 1992). LIC established its mutual fund in June 1989, while GIC had set up its mutual fund in December 1990. At the end of 1993, the MF industry had assets under management of Rs. 47,004 crores.|
|Third Phase (1993-2003)||The Indian securities market gained greater importance with the establishment of SEBI in April 1992 to protect the interests of the investors in securities market and to promote the development of, and to regulate, the securities market.|
In the year 1993, the first set of SEBI Mutual Fund Regulations came into being for all mutual funds, except UTI. The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF) was the first private sector MF registered in July 1993. With the entry of private sector funds in 1993, a new era began in the Indian MF industry, giving the Indian investors a wider choice of MF products. The initial SEBI MF Regulations were revised and replaced in 1996 with a comprehensive set of regulations, viz., SEBI (Mutual Fund) Regulations, 1996 which is currently applicable.
The number of MFs increased over the years, with many foreign sponsors setting up mutual funds in India. Also the MF industry witnessed several mergers and acquisitions during this phase. As at the end of January 2003, there were 33 MFs with total AUM of Rs. 1,21,805 crores, out of which UTI alone had AUM of Rs. 44,541 crores.
|Fourth Phase (Since February 2003 – April 2014)||In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into two separate entities, viz., the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI Mutual Fund which functions under the SEBI MF Regulations. With the bifurcation of the erstwhile UTI and several mergers taking place among different private sector funds, the MF industry entered its fourth phase of consolidation.|
Following the global melt-down in the year 2009, securities markets all over the world had tanked and so was the case in India. Most investors who had entered the capital market during the peak, had lost money and their faith in MF products was shaken greatly. The abolition of Entry Load by SEBI, coupled with the after-effects of the global financial crisis, deepened the adverse impact on the Indian MF Industry, which struggled to recover and remodel itself for over two years, in an attempt to maintain its economic viability which is evident from the sluggish growth in MF Industry AUM between 2010 to 2013.
|Fifth (Current Phase)- Since May 2014||Taking cognisance of the lack of penetration of MFs, especially in tier II and tier III cities, and the need for greater alignment of the interest of various stakeholders, SEBI introduced several progressive measures in September 2012 to “re-energize” the Indian Mutual Fund industry and increase MFs’ penetration.|
In due course, the measures did succeed in reversing the negative trend that had set in after the global melt-down and improved significantly after the new Government was formed at the Center.
Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well as the number of investor folios (accounts).
|The Industry’s AUM crossed the milestone of Rs. 10 Trillion (Rs. 10 Lakh Crore) for the first time as on 31st May 2014 and in a short span of two years the AUM size has crossed Rs. 15 lakh crore in July 2016.|
The overall size of the Indian MF Industry has grown from Rs. 3.26 trillion as on 31st March 2007 to Rs. 15.63 trillion as on 31st August 2016, the highest AUM ever and a five-fold increase in a span of less than 10 years !!
In fact, the MF Industry has more doubled its AUM in the last 4 years from Rs. 5.87 trillion as on 31st March, 2012 to Rs. 12.33 trillion as on 31st March, 2016 and further grown to Rs. 15.63 trillion as on 31st August 2016.
The no. of investor folios has gone up from 3.95 crore folios as on 31 -03-2014 to 4.98 crore as on 31 -08-2016.
On an average 3.38 lakh new folios are added every month in the last 2 years since Jun 2014.
The growth in the size of the Industry has been possible due to the twin effects of the regulatory measures taken by SEBI in reenergising the MF Industry in September 2012 and the support from mutual fund distributors in expanding the retail base.
MF Distributors have been providing the much needed last mile connect with investors, particularly in smaller towns and this is not limited to just enabling investors to invest in appropriate schemes, but also in helping investors stay on course through bouts of market volatility and thus experience the benefit of investing in mutual funds.
In fact, even though FY 2015-16 was not a very good year for the Indian securities market, the MF Industry witnessed steady positive net inflows month after month, even when the FIIs were pulling out in a big way. This was largely because of the ‘hand-holding’ of the investors by the MF distributors and convincing them to stay invested and/or invest at lower NAVs when the market had fallen.
MF distributors have also had a major role in popularising Systematic Investment Plans (SIP) over the years. In April 2016, the no. of SIP accounts has crossed 1 crore mark and currently each month retail investorscontribute around Rs. 3,500 crore via SIPs.
(3) Insurance Sector
The insurance industry of India consists of 57 insurance companies of which 24 are in life insurance business and 33 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers. In addition to these, there is sole national reinsurer, namely, General Insurance Corporation of India (GIC Re). Other stakeholders in Indian Insurance market include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance claims.
Government’s policy of insuring the uninsured has gradually pushed insurance penetration in the country and proliferation of insurance schemes.
Gross premiums written in India reached Rs 5.53 trillion (US$ 94.48 billion) in FY18, with Rs 4.58 trillion (US$ 71.1 billion) from life insurance and Rs 1.51 trillion (US$ 23.38 billion) from non-life insurance. Overall insurance penetration (premiums as % of GDP) in India reached 3.69 per cent in 2017 from 2.71 per cent in 2001.
In FY19 (up to October 2018), premium from new life insurance business increased 3.66 per cent year-on-year to Rs 1.09 trillion (US$ 15.46 billion). In FY19 (up to October 2018), gross direct premiums of non-life insurers reached Rs 962.05 billion (US$ 13.71 billion), showing a year-on-year growth rate of 12.40 per cent.
The Government of India has taken a number of initiatives to boost the insurance industry. Some of them are as follows:
- In September 2018, National Health Protection Scheme was launched under Ayushman Bharat to provide coverage of up to Rs 500,000 (US$ 7,723) to more than 100 million vulnerable families. The scheme is expected to increase penetration of health insurance in India from 34 per cent to 50 per cent.
- Over 47.9 million famers were benefitted under Pradhan Mantri Fasal Bima Yojana (PMFBY) in 2017-18.
- The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue redesigned initial public offering (IPO) guidelines for insurance companies in India, which are to looking to divest equity through the IPO route.
- IRDAI has allowed insurers to invest up to 10 per cent in additional tier 1 (AT1) bonds that are issued by banks to augment their tier 1 capital, in order to expand the pool of eligible investors for the banks.
Major Events in the Journey of Indian Insurance Sector
|1956-72||All life insurance companies were nationalised to form LIC in 1956 to increase penetration and protect policy holders from mismanagement.|
The non-life insurance business was nationalised to form GIC in 1972.
|1993-99||Malhotra Committee recommended opening up the insurance sector to private players.|
IRDA, LIC and GIC Acts were passed in 1999, making IRDA the statutory regulatory body for insurance and ending the monopoly of LIC and GIC.
|2000-2014||Post liberalisation, the insurance industry recorded significant growth; the number of private players increased to 46 in 2017.|
|2015||In 2015, Government introduced Pradhan Mantri Suraksha Bima Yojna and Pradhan Mantri Jeevan Jyoti Bima Yojana.|
Government introduced Atal Pension Yojana and Health insurance in 2015.
|2017 onwards||National Health Protection Scheme was proposed to be launched under Ayushman Bharat, as per Union Budget 2018-19.|
Insurance companies raised more than US$ 6 billion from public issues in 2017.
(i) New distribution channels like bancassurance, online distribution and NBFCs have widened the reach and reduced costs.
(ii) Firms have tied up with local NGOs to target lucrative rural markets.
(iii) In October 2018, Indian e-commerce major Flipkart entered the insurance space in partnership with Bajaj Allianz to offer mobile insurance.
(iv) Amazon India is also expected to enter the insurance market as an agent.
(v) In September 2018, India Post Payments Bank (IPPB) also partnered with Bajaj Allianz to distribute their products.
(vi) Over the years, share of private sector in life insurance segment has grown from around 2 per cent in FY03 to 31.8 per cent in FY19 (up to September 2018).
(vii) In the non-life insurance segment, share of private sector increased to 55.70 per cent in FY20 (up to April 2019) from 14.5 per cent in FY04.
(viii) The life insurance sector has witnessed the launch of innovative products such as Unit Linked Insurance Plans (ULIPs).
(ix) Other traditional products have also been customised to meet specific needs of Indian consumers.
(x) In September 2018, HDFC Ergo launched ‘E@Secure’ a cyber insurance policy for individuals.
(xi) Large insurers continue to expand, focusing on cost rationalisation and aligning business models to realise reported Embedded Value (EV), and generate value from future business rather than focus on present profits.
(xii) In January 2019, online insurance distribution platform, Turtlemint raised US$ 25 million in funding.
(xiii) As of November 2018, HDFC Ergo is in advanced talks to acquire Apollo Munich Health Insurance at a valuation of around Rs 2,600 crore (US$ 370.05 million).