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Financial Services in India

November 30, -0001

Introduction

India's services sector has always served the country’s economy well, accounting for about 57 per cent of the gross domestic product (GDP). In this regard, the financial services sector has been an important contributor. Commercial banks with over 60 per cent share of the total assets dominate India’s financial services industry; other segments include insurance firms, non-banking institutions, mutual funds, cooperatives and pension funds.

The Government of India has introduced reforms to liberalise, regulate and enhance this industry. At present, India is undoubtedly one of the world's most vibrant capital markets. Challenges remain, but the future of the sector looks good. The advent of technology has also aided the growth of the industry. About 75 per cent of the insurance policies sold by 2020 would, in one way or another, be influenced by digital channels during the pre-purchase, purchase or renewal stages, as per a report by Boston Consulting Group (BCG) and Google India.

Market size

The size of banking assets in India reached US$ 1.8 trillion in FY13 and is expected to touch US$ 28.5 trillion by FY25.

Information technology (IT) services, the largest spending segment of India's insurance industry at Rs 4,000 crore (US$ 653.71 million) in 2014, is projected to continue strong growth at 16 per cent.

The total market size of the insurance sector in India was US$ 66.4 billion in FY13 and is expected to breach the US$ 350–400 billion mark by 2020.

Investment corpus in India's pension sector could cross US$ 1 trillion by 2025, following the passage of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013, according to a joint report by CII–EY on Pensions Business in India.

India’s foreign exchange (Forex) reserves touched US$ 320.56 billion on July 25, 2014, which was just US$ 23 million less than the all-time high of US$ 320.79 billion achieved on September 2, 2011.

Investments

Finance company IFCI plans to raise up to Rs 2,000 crore (US$ 326.65 million) through 10-year bonds to fund medium and long-term projects. The company’s ability to raise funds at competitive cost through capital market instruments is deemed to be vital for its competitiveness.

L Capital Asia, the private equity (PE) fund sponsored by the LVMH Group and Groupe Arnault, could use as much as US$ 250 million from its recently-raised US$ 1-billion fund, in India. The fund, which focuses on investing in aspirational brands in the Asian market, is understood to be targeting as much as four significant opportunities for investment in the near future, as per investment bankers.

Microfinance companies have committed to open a minimum of 30 million bank accounts within a year through tie-ups with banks, as part of the Government of India’s financial inclusion plan. The commitment was made at a meeting between the representatives of 25 large microfinance companies and banks and government representatives including financial services secretary Mr GS Sandhu.

Singapore government-owned sovereign fund Temasek expects more deals in Indian in FY15. Temasek is in discussions to acquire ChrysCapital’s stake in Intas Pharmaceuticals. “We have increased our public market investments in India while our private market investment pipeline is strong,” as per Mr Ravi Lambah, co-head of Temasek India.

Reliance Industries Ltd's venture capital arm GenNext Ventures and Microsoft Ventures have agreed on a three-year partnership to establish innovation hubs across India to incubate start-up companies.

International Finance Corporation (IFC), the World Bank Group arm that lends to the private sector, will invest up to US$ 250 million in a unit of Ballarpur Industries Ltd through equity and long-term debt.

Indian banking and securities companies will spend Rs 47,000 crore (US$ 7.67 billion) on IT products and services in 2014, a more than 10 per cent increase over 2013, as per IT advisory firm Gartner. This forecast includes spending by financial institutions on internal IT (largely personnel), software, hardware, telecommunications and external IT services.

Sovereign wealth fund Government of Singapore Investment Corp Pte Ltd (GIC) has entered into a Rs 1,500 crore (US$ 244.95 million) joint venture (JV) agreement with Brigade Enterprises Ltd to invest in projects in South India.

Government Initiatives

The Reserve Bank of India (RBI) has eased norms for mortgage guarantee companies (MGC) enabling these firms to use contingency reserves to cover for the losses suffered by the mortgage guarantee holders, without having to take approval of the apex bank. However, such a measure can only be initiated if there is no single option left to recoup the losses.

Financial inclusion is among the topmost priorities of the Indian government. Exclusion of a large number of people from access to financial services affects the growth of the country. Prime Minister Mr Narendra Modi launched the Pradhan Mantri Jan DhanYojana in August 2014. He said that that the objective to cover 75,000,000 households with at least one account under the Yojana will be achieved by January 26, 2015.

Retirement fund manager EPFO will launch its project to provide portable universal PF account numbers (UAN) to its subscribers on October 16, 2014. Also, the government will launch unified web portal LIN (Labour Identification Number) to simplify business regulations and bring in transparency and accountability in labour inspections by agencies and bodies under the control of the labour ministry.

The RBI has simplified the rules for credit to exporters. Now, exporters can get long-term advance credit from banks for up to 10 years to service their contracts. The requirement is that they have a satisfactory record of three years in order to get payments from the banks, which can adjust the payments against future exports.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMG-CII. The report also 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. Life Insurance Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.

Exchange Rate Used: INR 1 = US$ 0.0163 as on October 28, 2014

References: Media Reports, Press Releases, RBI Document, KPMG-CII Report