Financial and Insurance Sector in India

The financial sector in India has become stronger in terms of capital and number of customers. It has become globally competitive and diverse aims at higher productivity and efficiency.

Exposure to global competition and deregulation in the Indian financial sector has led to the emergence of better quality products and services. Reforms have changed the face of Indian banking and finance. The banking sector has improved manifolds in terms of capital adequacy, asset classification, profitability, income recognition, provisioning, exposure limits, investment fluctuation reserve, risk management etc.

Diversification in investment banking, insurance, credit cards, depository services, housing finance, securitization has increased revenues. As a large number of players in different areas into the market, competition would be intensified by mutual funds, Non Banking Finance Corporations (NBFCs), post offices, etc. from both domestic and foreign players. All this will lead to increasingly sophisticated and technology in the industry. Corporate governance will come into the picture and other financial institutions would have to meet global standards. Also the limit for FDI in private banks has increased to 74% and the limit for FII is 49%. There are many challenges ahead for the banking sector, such as technology, customer satisfaction, corporate governance, risk management etc and they are redefining their priorities, which now focuses on cost reduction, product differentiation and customer-centered services. Some of the major players in this sector are HDFC, ICICI, HSBC, State Bank of India, Punjab National Bank, Ing Vysya, ABN Amro Bank, Centurion Bank, City Bank, etc.

Insurance sector has opened up for private insurance companies with the adoption of IRDA Act, 1999. A large number of companies competing in both life and general insurance. The FDI cap / equity in this sector is 26%, and proposals must be approved by the Insurance Regulatory and Development Authority (IRDA) was established to protect the interests of the holder of the insurance and acting as a regulator and facilitator in the industry. Some of the major players in this sector are LIC, Max New York Life Insurance, Bajaj Allianz, ICICI Prudential, HDFC Standard Life, Metlife Insurance, Birla Sun Life Insurance, etc. Different types of policies and instruments come onto the market to attract more customers. The majority of people in India are not insured, so there is a lot of opportunities in this sector and several companies have plans to enter the sector. Each futuristic individual wants to get insured.

Capital markets have a long tradition for over 100 years in India. Bombay Stock Exchange was more than a hundred years ago to eliminate direct government control. Indian companies are now allowed to raise capital from abroad and foreign institutional investors are allowed to enter the market because of an important policy initiative in 1993. Depository and share dematerialization has improved the performance of capital markets reduce processing times and increase yields. The major players are India Bulls Securities, Kotak, and many more. Many new instruments have been introduced to the market, such as index futures, index options, derivatives, including futures and options. Even commodity markets is gaining pace. There is great potential that exists in the marketplace and to realize the venture capitalists come up with lots of funding. To make use of human capital, technical skills, cost competitive workforce, research and entrepreneurship Venture capital and VCCS are ready to invest in potential projects.

For a stronger and resilient financial system, India is to move beyond peripheral issues and act mature by increasing profitability and efficiency, provide better solutions to customers.

INSURANCE - market efficiency:

This is good news for the insurance industry. For an industry that lives by capital, is the proposed hike in FDI cap insurance joint ventures to 49 percent blessing.

Foreign players, whose games are now limited to 24 percent, can now bring more money, and most of them would love to own a larger stake if not the entire venture.

Aviva Life Insurance:

As Stuart Purdy, managing director, Aviva Life Insurance, has indicated to Aviva Plc's stake in the Indian venture to 49 percent.

Transactions will be eagerly followed, because for the first time we will have some valuation benchmarks for private sector players. That should give investors a better idea of the opportunities within the sector, which they can play through the Indian parents.

That private life insurance players will grow at a faster pace is not in doubt. They should race ahead like their colleagues in the banking and mutual fund industry who left their public sector competitors far behind.

The record is impressive: in FY04, while life insurance grew 18 percent to Rs 1,800 crore (R 18 billion), the share of private players in total new business premiums increased to 13 percent from 6 percent in FY03.

The percentage of total annualized premium equivalents of Rs 1,400 crore (R 14 billion) was 15 percent. APE is considered to be the most appropriate indicator of sales and therefore the market size and shares of life insurers. At the top of the heap is ICICI Prudential, which has gained a retail market share of 36 percent of new business premium.

In an under-insured market like India where the premium to GDP and energy is abysmally low, the market is there to take.

Moreover, in India, life insurance products have been bought for the wrong reasons - more to save tax rather than as a long-term savings product.

This trend is not yet showing any major reversal because even in FY04, 60 percent of sales occurred in the last quarter. With guaranteed return policies dying out. The platform for selling products is changing as we have seen in the phenomenal popularity of linked products

Awareness is higher and this is reflected to some extent in the higher ticket sizes; last year these were as high as Rs 24,000.

The league table for FY04 indicate that some players forged ahead primarily on the back of the unit-linked insurance, which accounted for around 65 percent of the activities of the private sector (for Birla Sunlife it was as high as 97 per cent).

Birla Sunlife Insurance:

According to Nani B Javeri, Chief Executive Officer, Birla Sunlife Insurance, the strategy of using a ULIP platform has worked well for the company and Birla Sunlife will continue to focus on these market-linked products, which are considered to be more transparent than traditional policies .

"ULIPs are capital-efficient, i.e. they use relatively less capital and deliver more or less similar margins as other products," he says. ICICI Prudential is the other player for whom linked policies contributed a high percentage - as much as 84 percent of total business

HDFC Life Insurance:

HDFC Standard Life, which moved down last year possibly because it did not push ULIPs aggressively, also plans to focus on these.

According to Deepak Satwalekar, managing director and chief executive officer, HDFC Standard Life, the company chose to launch these products later than others because they are relatively sophisticated and harder for customers to understand.

"We ask customers to make choices they might not fully understand," he says.

But as HDFC Standard launched ULIPs in January this year, 20 percent of the company in the last quarter of FY03 came from linked policies. For this year expects Satwalekar that 50 percent of HDFC Standard business will come from these products.

CONCLUSION:

In case of group policies, Birla Sunlife's share was significantly high at 37 per cent while SBI's was higher at 44 percent.

Even assuming that the group policies in general command low margins, Javeri points out that what the company focuses on is not group term products, which typically offer lower returns, but fund-management products that serve the management fees in the region 0, 6-2 per cent.

Apart from using agents as the main distribution channel, bancassurance seems to be working well also. For HDFC, which has relationships with four banks, 20 percent of business came from this channel while for Birla Sunlife, which has tie-ups with eleven banks, the percentage was at similar levels.

To improve its reach, HDFC will double the number of cities where it is present from 55 to around 100 this year, which will allow access to around 500 cities. Birla Sunlife will be in 33 cities in August.

As of today, which meet the requirements imposed by IRDA are linked to solvency rather than risk, but internationally, with risk-based system is more popular.

Satwalekar, however, points out that stiff norms for solvency prescribed at 150 percent of risk necessary for an industry still in its nascent stages though this may use capital that can be otherwise used to grow the business.

While capital may not prove to be a constraint for some players beyond a point unless more capital is infused, growth could slow. Which is why the FDI limit should be raised. Only if the foreign players to invest further will they feel committed to venture