Present Trends ofFinancial Sector in India

Group Members Aashish Yadav Suresh Mahala Vivek Sethiya Nitin Kirnapure Nikhil Mayur Rupam Kumar Singh

About Financial Sector• Financial Sector is the backbone of the economy

and it is indeed critical to nurture the growth of this important sector in order to ensure sustained growth rate. When the Indian economy was liberalized in the year 1991, a road map was also set forth for financial sector reforms.

• The financial services sector contributed 15 % to India's GDP in FY09

• 2nd largest component after trade, hotels, transport and communication all combined together in GDP.

Financial Sector Continued…Financial Sector Includes• Financial Services :

1. Capital Market2. Forex Market3. Asset Management4. NBFCs (Non-Banking Financial Institutions)5. MFIs (Microfinance Institutions)

• Banking Sector• Insurance Sector

Governing & Regulatory Bodies• Ministry of Finance• Ministry of Corporate Affairs• RBI (Reserve Bank of India)• SEBI (Security & Exchange Board of India)• IRDA (Insurance Regulatory and Development

Authority)• AMFI (Association of Mutual Funds in India)• IDRBT (Institute for Development and Research in

Banking Technology)• IBA (Indian Banks’ Association)

Insurance Sector

What is INSURANCE?

• Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss.

• Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium.

General insurance

• Health insurance• Motor insurance• Travel insurance• Home insurance• Property (building risk insurance)• Aviation (private aircraft insurance)

Indian Insurance SectorLIFE INSURANCE

• The US$ 41-billion Indian life insurance industry is considered the • 5th largest life insurance market, and • Growing at 32-34%• The government is likely to reintroduce the Insurance Bill which

proposes to increase the FDI cap in private sector insurance companies from 26 % to 49%.

• LIC posted 50% growth in new premium collection in the first nine months of the 2010 fiscal, increasing its market share to 65%.

• LIC’s new premium collection touched US$ 9.58 billion in the April-December 2009 period while the combined business of the 22 private insurers grew to US$ 5.07 billion from the previous year

• Overall the industry grew at 29% in the April-December period of the fiscal year 2010.

LIC

SBI Life

ICICI Prudential

Bajaj Allianz

HDFC Standard

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

52,954

5,386

6,813

4,492

2,644

70,891

7,041

6,334

4,451

3,261

2009-102008-09

In Rs. Cr.

2008-09 2009-10 Growth %

LIC 52,954 70,891 34

SBI Life 5,386 7,041 31

ICICI Prudential 6,813 6,334 -7

Bajaj Allianz 4,492 4,451 -1

HDFC Standard 2,644 3,261 23

15

Indian Insurance SectorGeneral Insurance

• India is the fifth largest general insurance market in Asia with annual premiums of $6.3 billion in FY09

21 companies operating in India: 13 private sector companies – multiline (JV with foreign insurer) 4 public sector companies – multiline 2 private sector companies – health 2 public sector specialty companies• market share of 40% was contributed by the private players

and remaining 60% came from the four public sector players — New India, Oriental Insurance, National Insurance and United India.

• Premium Grew at 19.5% per annum

Indian Insurance Sector Project Insurance

• Insurance companies are also witnessing increasing demand for project insurance in the last few months. Corporates are beginning to demand project insurance across sectors such as power generation with the cover beginning right from the start of the project till it is declared ready for commercial use.

• Premiums collected from project insurance will be around US$ 216.2 million

• Oriental Insurance Company Ltd will be offering comprehensive project insurance for the Tata Power Project at Mundra in Gujarat.

Health Insurance

• 2nd largest contributor to general insurance premiums after motor insurance

• The health insurance market stood at around us $ 1.5 billion in 2008-09 and is expected to grow to us $ 9 billion by 2016-17. While health insurance policies are mostly provided by general insurance companies, life insurers contribute about five per cent to the overall health insurance business.

• During April-September 2008 (latest provisional figures), it again shows 47% growth over the corresponding period in the previous year.

Global Health Expenditure

Performance in half year periodGross Premium (April-September) 2008-09 v/s 2007-08

2007-08 2008-09 Growth %Non-life insurer Excluding Standalone Health Insurer 2,243 3,107 39

Standalone Health Insurer 45 247 455

Total 2,287 3,354 47

MOTOR INSURANCETwo coverage:• Own Damage (OD) policies cover physical damage to own

vehicle and is an optional coverage• Third party (TP) policies cover bodily injury and collision and is

mandated by law• Comprehensive policies cover both OD and TP

Future of Indian Insurance MarketIndian Insurance Sector ready to tap Rural India• A large part of rural India is still untapped due to poor

distribution, large distances & high costs relative to returns• the study had revealed that rural & semi-urban India would

contribute 35 billion $ to the Indian insurance industry by 2010. • Assocham stated that semi-urban areas would have a share of

US$ 35 Billion and urban areas would account for US$ 25 Billion in the US$ 60 Billion industry.

• Life insurance market in semi-urban and rural territories is expected to rise to US$ 20 Billion mark in the upcoming four years from the existing value of less than US$ five Billion.

• Non-life insurance business in semi-urban and rural regions would reach to US$ 15 Billion by 2010 while the corresponding value for the urban area is US$ 10 Billion.

Banking Sector

Introduction

Banks :- Financial institutions whose current operations consist of accepting deposits from the public and issuing loans.

One of India's key economic strengthsis a dynamic financial sector, whichhas played a vital role in partnering

growth

India Banking 2010Towards a High-performing Sector

• Rising literacy rate, specially in rural India, has increased the need for banking.

Growth Drivers for Banking System

• Large number of micro, small and medium enterprises (MSMEs) with significant growth opportunities in their respective sectors.

• Large amount of money is remitted by NRI.• Stringent regulatory framework like RBI• Adoption of best practices from other countries• Retail Banking• Technological Development for Core Banking

Growth Drivers for Banking System

Percentage Share in Total Assets (as at March end)

Bank Group 2007 2008 2009 2010

Public Sector 70.5 69.9 71.9 73.7

New Private sector 16.9 17.2 15.2 14.6

Old Private Sector 4.6 4.5 4.4 4.5

Foreign Banks 7.9 8.4 8.5 7.2

Recent Trends in Banking Sector cont…

• India has a well diversified financial system which is dominated by banking industry and it’s a well regulated sector.

• In India, the banking sector has largely influenced the growth of the financial markets.

• Banking industry growth rate is 15-20% in 2009-10 and it is expected that this sector will grow by @20% growth rate till 2014-15.

• Bank credit grew by 16.7% in 2009-10.• Till 2010 market penetration by Banking sector is

37% of population. Less penetration in Rural Area.

Trends in Banking Sector in 2009-10

CREDIT FLOW FROM SCHEDULED COMMERCIAL BANKS (Rs CR)

As on Oct 9, ’09 As on Oct 8, ’10

Amount In % Amount In %

Public sector banks 2,83,483 15.20 4,24,171 19.80

Foreign banks -29,770 -15.90 17,979 11.40

Private banks 12,076 2.40 1,24,213 24.10

All scheduledcommercial banks*

2,79,305 10.70 5,80,005 20.10

Source: RBI

Recent Trends in Banking Sector cont…

• Reserve Bank of India hiked its key policy rates.

• Cibil Detect – a nationwide database of reported fraudulent and suspect activities

• Instant interbank mobile payment service (IMPS) - that will enable retail customers of seven banks to enjoy 24X7 funds transfer.

CRR and Interest Rates(Source: RBI) (% per annum

Key rates July, 27th 2010 Sep, 16th 2010 Nov, 2nd 2010

Bank Rate 6 6 6

Repo Rate 5.75 6 6.25

Reverse Repo Rate 4.5 5 5.25

CRR 6 6 6

Some Major steps taken by Govt.

• 169 ‘scheduled commercial banks’ (SCBs), with a network of 82,511 branches.

• 14000 Branches and 41000 ATM’s were added in last decade.

• In the annual international ranking, 20 Indian Banks are in Top 500.• SBI is in Top 50 and ICICI in Top 100.

Progress of Banks 2001 2010

Total Asset Size 250 bn $ 1.3 tri $Return on Assets 0.6% 1.1%Non Performing Assets (NPA)

11.4% 2.5%

Capital Adequacy Ratio

11.4% 14.6%

Progress of Banks in India: At A Glance

Progress of Banks in India: At A Glance cont…..

• Regulatory systems of Indian banks were rated better than China, Brazil, Russia, UK; at par with Japan, Singapore and Hong Kong and at par with USA.

• Risk management systems more advanced than China, Brazil and Russia.

• Credit quality of banks has been rated above par than China, Brazil, Russia, UK and USA but at par with Hong Kong and Singapore.

• Technology systems of Indian banks have been rated more advanced than Brazil and Russia but below par with China, Japan, Hong Kong, Singapore, UK and USA.

Technological Changes in Banking Sector

With the advancement of technology2001-2010•ATMs, •Mobile Banking, •SMS Banking and •Net Banking •Core Banking

A poor legal system for recovery

Intense International Competition

Increased Bank Rate

Fluctuating Market

Major challenge

Problem In Banking Sector

Financial Services

Capital Market• A Capital Market is a market for Securities (debt or

equity), where business enterprises (companies) and governments can raise long-term funds.

Capital market

Primary Market

IPO FPO

Secondary Market

Stock

Bonds

Futures

Options

Primary Market• The Primary Market is that part of the capital

markets that deals with the issue of new securities• Companies, governments or public sector

institutions can obtain funding through the sale of a new stock or bond issue for Growth & Expansion

• IPO (Initial Public Offering)• FPO (Follow-on Public offering)• Rights Issue (existing shareholders have the

privilege to buy a specified number of new shares from the firm at a specified price within a specified time)

• PCD – Partially Convertible Debenture• FCD – Fully Convertible Debenture• NCD – Non-Convertible Debenture

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

20

40

60

80

100

120

46.6

19.8

60.7

73.8

94.7

77.3

100

45.9

53.4

80.2

39.3

26.2

5.3

22.7

0

54.1 Public Sector

Private Sector

Primary Market Continued…• The largest mega issue during 2009-10 was of a

Public Sector Undertaking (PSU)• NMDC (National Mineral Development Corporation)

Limited FPO (Rs.9,967.3 crore)• NTPC Ltd FPO (Rs.8,478.8 crore)• NHPC Ltd IPO (Rs.6,038.6 crore)• Coal India Limited IPO (15,475.09 crore)• Power Grid Corporation of India Ltd FPO (7442.34)• For FPO in PSU was part of Government of India’s

Disinvestment Plan to reduce fiscal deficit.

Secondary Market• The Secondary Market, also known as the

Aftermarket, is the financial market where previously issued securities and financial instruments such as Stock, Bonds, Options, and Futures are bought and sold.

Equity Market in India• Equity markets witnessed significant uptrend during

2009-10 as compared to downward and volatile trend in 2008-09.

• Uptrend in 2009-10 is driven by higher growth rate, positive sentiments in market, better global environment, and FII inflows.

Turnover at BSE and NSE: Cash Segment

2005-06 2006-07 2007-08 2008-09 2009-100

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

816,074956,185

1,578,857

1,100,075

1,378,8091,569,558

1,945,285

3,551,037

2,752,023

4,138,023

BSE (In Cr.)NSE (In Cr.)

Capitalization Trend at NSE & BSE

2005-06 2006-07 2007-08 2008-09 2009-100

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

3,022,190

3,545,041

5,138,014

3,086,075

6,165,619

2,813,201

3,367,350

4,858,122

2,896,194

6,009,173

BSE (In Cr.)NSE (In Cr.)

Trends in Bond Market• BSE – Increase in volume of trade is 42.9%• NSE – Increase in volume of trade is 206.9%

BSE (No of Trades) Rs. Cr. NSE (No of Trades) Rs. Cr.0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

8,327

37,320

4,902

49,505

7,408

53,323

12,522

151,920

2008-092009-10

Wholesale Debt Market

2005-06 2006-07 2007-08 2008-09 2009-100

100,000

200,000

300,000

400,000

500,000

600,000

61,8

91

19,5

75

16,1

79

16,1

29

24,0

69

475,523

219,106

282,317

335,950

563,816

1755

899

1129

1419

2359

No. of Trades

Net Traded Value (In Cr.)

Avg. Daily Traded Value (In Cr.)

WDM deals in Fixed income securities like G-Sec, T-Bills, PSU Bond, Commercial Papers, etc.

2005-06 2006-07 2007-08 2008-09 2009-100

10

20

30

40

50

60

70

80

72.6770 68.84 69.74

58.15

22.1

3

23.7

1

23.4

16.9

1

16.4

9

2.56

2.01 3.27

8.92

15.4

2.64 4.

28

4.49

4.43

9.96

Govt. Sec %T-Bills %PSU/Inst. Bond %others %

Instrument-wise Share of Securities Traded in the Wholesale Debt Market Segment of NSE

Trends in Equity Derivative market

• Derivative is dominated by NSE, which has a share of more than 99% of the total turnover.

• During 09-10, turnover of derivative market was 4.6 times of the cash turnover on all India equity exchanges.

• The average daily turnover at NSE in 09-10 increased by 59.1% compare to 08-09.

• The open interest in derivative segment increased by 68.9% in 09-10.

Continued…• Earlier derivative segment is used to dominate by

Futures in general and single stock Futures with 86% share, but now in last couple of years picture has been changing in favour of Index Options.

Product wise share• Currently product wise share in the open interest

shows that the notional value of outstanding contracts was the highest for the Index options, followed by single stock future, Index futures and stock options.

Trends in Currency Derivative market• Currency Future trading commenced in India on Aug

29, 2008 at NSE. Later MCX-SX and BSE were also granted permission.

• During 09-10, total turnover was the highest at MCX-SX, followed by NSE and BSE (negligible).

Continued…• At NSE, the share of top 10 members in volume of

currency derivative segment increased to 72.1% at the march 2010 from 56.8% at the march 2009.

• Their share in open interest is registered growth of 1%, i.e. it is stable.

• In BSE, the share of top 10 members in volume and open interest fell to zero after being 100% in May 2009.

Bid-Ask spread

• A narrow Bid Ask means that the cost of entering and exiting a trade are low, a liquid market requires the Bid ask spread to be narrow.

• 95% of trading at NSE and 99% of MCX-SX in USD-INR futures takes place at narrow bid ask spread of less than or equal to half a paisa as against 7 paisa for OTC currency forward market.

Currency Options

• The RBI-SEBI Standing Technical Committee is working on the operational framework for introduction of exchange traded currency options on USD-INR currency pair.

• Currently currency options are traded in the OTC Market. Where banks are playing role as market player.

Trend in Interest Rate Derivatives• Trading in 10 year Notional coupon bearing GoI

(Govt. Of India) security Futures started at NSE on Aug 31, 2009.

• It shows the trend of volatility.

Mutual Funds• A Mutual Fund is a professionally managed type of

collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals)

• The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective.

• Mutual funds play an important role in mobilising the household savings for deployment in capital markets.

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

149554

231862

326388

505152

417300

796800

Asset Under Management (In Rs. cr.)

Asset Under Management (In Rs. cr.)

Microfinance Institutions (MFIs)• In India, most microfinance loans are between US$ 100 (INR 4,800)

and US$ 415 (INR 20,000).• In 2009, about 230 microfinance institutions added 8.5 million

borrowers, taking the total number to 22.6 million.• Microfinance institutions exist in many legal forms such as trusts,

societies, non-profit companies and NBFCs.

Opportunities

References• RBI Report• India Brand Equity Foundation• SEBI Report• IRDA Report• FICCI Report• AMFI Report• Ministry of Finance Website• Wikipedia• Economic Times

Thank You