Financial Services in India

Last Updated: January 2013 Brief Overview Indian financial markets, broadly comprising of segments like asset management, banking, insurance, foreign direct investments (FDI) and foreign institutional investors (FII), effectively promote the savings of the economy by directing them towards suitable investment options. The Indian financial sector is well developed, competitive and integrated to face all traumas (like the recent financial turmoil). World Economic Forums latest report Financial Development Report 2012 has named India as the world's top-ranked country in terms of life insurance density. Life insurance density is the ratio of direct domestic premiums for life insurance to per capita gross domestic product (GDP) of a country. India has been ranked 40th in terms of overall financial development of a country, but is much ahead of larger economies like the US, UK, Japan and China for life insurance density. Insurance Sector Premium collection by general insurance companies increased by 24.7 per cent year-on-year (yo-y) in September 2012 at Rs 6, 059.02 crore (US$ 1.1 billion), according to the data compiled by the sector regulator Insurance Regulatory and Development Authority (IRDA). The total premium stood at Rs 34,001.09 crore (US$ 6.32 billion) for April-September 2012. In terms of premium collections for life insurance segment, private players collected Rs 7, 095 crore (US$ 1.32 billion) in April-September 2012 period while state-owned Life Insurance Corp of India (LIC) recorded a remarkable 24 per cent y-o-y growth in premium collections at Rs 15, 532.7 crore (US$ 2.88 billion) during the period. LICs support helped the industry post a 15 per cent y-o-y growth in premium collected in the first half of 2012-13. Banking Services Key recent statistics pertaining to the Indian banking industry are discussed below:

According to the Reserve Bank of India (RBI)s Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, March 2012, Nationalised Banks accounted for 53.0 per cent of the aggregate deposits, while the State Bank of India (SBI) and its Associates accounted for 21.8 per cent. The share of New Private Sector Banks, Old Private Sector Banks, Foreign Banks, and Regional Rural Banks in aggregate deposits was 13.0 per cent, 4.8 per cent, 4.4 per cent and 3.0 per cent, respectively. Nationalised Banks accounted for the highest share of 52.0 per cent in gross bank credit followed by State Bank of India and its Associates (22.5 per cent) and New Private Sector Banks (13.5 per cent). Foreign Banks, Old Private Sector Banks and Regional Rural Banks had shares of around 4.8 per cent, 4.8 per cent and 2.4 per cent, respectively.

Another statement issued by the RBI revealed that foreign exchange reserves stood at, US$ 294.99 billion for the week ended January 4, 2013 wherein the value of gold reserves was recorded at US$ 27.21 billion and that of foreign currency assets (FCAs) was at US$ 261.06 billion. The value of special drawing rights (SDRs) was US$ 4.40 billion and the countrys reserve position with the IMF was at US$ 2.30 billion.

Mutual Funds Industry in India Indian mutual funds' average assets under management (AUM) increased by 5.3 per cent or Rs 392 billion (US$ 7.39 billion) to Rs 7.87 trillion (US$ 146.31 billion) in the October-December 2012 quarter from Rs 7.47 trillion (US$ 139 billion) in the previous quarter, as per the latest data released by the Association of Mutual Funds in India (AMFI). The growth in assets was majorly driven by inflows into income and gilt funds. Further, assets recorded a stupendous growth rate of 15 per cent or Rs 1.05 trillion (US$ 19.52 billion) in the calendar year 2012 as against 1 per cent growth in 2011. Private Equity, Mergers & Acquisitions (M&A) in India

Private Equity (PE) companies invested around US$ 8.85 billion in 2012, according to consultancy firm Price Waterhouse Coopers (PwC). Information technology (IT) and healthcare seemed to have witness the highest number of deals on the PE canvas wherein there were 162 deals worth US$ 3.25 billion in IT and healthcare witnessed 48 deals worth US$ 1.23 billion. Similarly, the pace intensified on the merger and acquisition (M&A) front. There were as many as 268 deals (involving Indian entities) that amounted to about US$ 36.3 billion in 2012; up 22.6 per cent over the 2011 tally, reported the global deal tracking firm Mergermarket.

Foreign Institutional Investors in India

Investments into Indian shares through participatory notes (PNotes) were recorded at US$ 32.4 billion in November 2012, according to the latest data released by the Securities and Exchange Board of India (SEBI). PNotes, allow entities like overseas High Net-worth Individuals (HNIs), hedge funds and other foreign institutions, to invest in Indian markets through registered FIIs , while saving on time and costs associated with direct registrations. Overseas investors infused a hefty sum of Rs 4, 500 crore (US$ 836.64 million) in the first week of January 2013; wherein during January 1- 4, 2013, FIIs were gross buyers of shares worth Rs 8, 350 crore (US$ 1.55 billion), while they sold equities amounting to Rs 3, 830 crore (US$ 712.09 million). As on January 4, the number of registered FIIs in India stood at 1, 760 and total number of sub-accounts were 6, 357.

Financial Services in India: Recent Developments

The Ergo Insurance Group (part of worlds leading reinsurer Munich Re) and the Avantha Group, India's leading business conglomerate, have entered into a joint venture agreement in the space of life insurance. The new company, to be named Avantha Ergo Life Insurance Company Ltd, is expected to commence operations at the beginning of 2014, subject to regulatory approval. The Small Industries Development Bank of India (SIDBI) has partnered with eight regional rural banks (RRBs) and urban co-operative banks in West Bengal. The scope of agreements includes training the staff of RRBs and co-operative banks in project appraisal, monitoring and collection as also providing free access to software on a downscaling methodology developed for lending to micro enterprises.

Financial Services: Government Initiatives The Indian Government has re-affirmed its efforts to push economic growth by increasing the FDI limit from 26 per cent to 49 per cent in insurance. The reform is expected to please international players who had been waiting to venture into India and also encourage existing players to increase their stakes in strategic alliances. The Indian insurance sector needs US$ 10-12 billion capital infusion in the next five years. Furthermore, in a bid to attract higher foreign inflows, the Government of India (GoI) has opened up an opportunity for FIIs of all jurisdictions to earn tax-free interest by investing in debt instruments of a state-owned enterprise. Owing to this landmark move, FIIs and non-resident Indian (NRIs) have been allowed to invest in the public issue of tax-free bonds by Housing and Urban Development Corporation (Hudco) that opened up on January 9, 2013. The GoI has also approved the establishment of a Credit Risk Guarantee Fund Trust (CRGFT) for low income housing, with an initial outlay of Rs.1000 crore (US$ 185.92 million). The CRGFT, registered on May 1, 2012 and launched on October 31, 2012 would administer and operate the Scheme, which is demand-driven, as stated by Ajay Maken, Union Minister of Housing & Urban Poverty Alleviation (HUPA). Road Ahead Both the Houses of the Parliament have recently passed the much awaited Banking Laws Amendment Bill to give a face-lift to the Indian banking industry as the initiative has paved way for more banks (domestic as well as international) in the market. This will not only create a healthy competition among the players in the industry, but will also escalate the style of operation and technology. Also, the Indian mutual fund industry is expected to grow to Rs 2, 000 billion (US$ 37.19 billion) by 2020 owing to regulatory changes and shift in investors' savings pattern, according to Reliance Capital Asset Management.

Exchange Rate Used: INR 1 = US$ 0.01859 as on January 23, 2013