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Financial Services Industry In India

By 2025, AMFI is expecting five- fold growth in assets under management to reach US$ 1.47 trillion and three times growth in investor accounts to 130 million.

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Definition / Scope

Financial services industry refers to the companies that are involved in managing money of individuals and companies. This industry comprises of financial industries such as banks, investment companies, insurance companies, stock exchange, real estate firms, mutual funds, credit unions, etc.

  • Banks: The function of bank includes safe keeping of deposits, lending of money, overdraft, issuance of credit and debit cards and others.
  • Investment Bank: Investment banks advise companies on mergers and acquisitions, facilitate in buying and selling of stocks, underwrite deals and provides wealth management and tax planning services.
  • Insurance: Insurance companies provide insurance coverage for insured in exchange of premiums. Insurance brokerage buys insurance on behalf of customers.
  • Stock Exchange: A stock exchange is market where securities such as stocks and bonds are bought and sold.
  • Mutual Funds: Mutual Funds pool money from multiple investors and is managed by professionals and fund manager.

Market Overview

  • The finance industry is dominated by a banking sector with commercial banks accounting for over 64 per cent of the total assets held by the financial system.
  • In 2017, India’s gross national savings as a percentage of GDP was about 30 per cent.
  • The financial services industry includes capital markets, insurance sector and non-banking financial companies.
    • Capital Markets – It includes Asset management, broking, wealth management and investment banking.
    • Insurance – It includes life and non-life insurance.
    • NBFCs – It includes asset finance company, Investment Company and Loan Company.
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Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Top Market Opportunities

  • The number of HNWIs in India grew at a CAGR of 13.52 per cent between 2011 and 2017. The number of HNWIs reached 263,000 by the end of 2017 in India. High net worth households is expected to grow at a CAGR of 21.5 per cent till 2019.
  • There is a big opportunity for the insurance sector. Only one per cent population is covered with health insurance. There is a large market yet to be tapped. Health insurance accounts for 1.2 per cent of total healthcare spend. Further, with rise in India’s infrastructure growth plans, insurance for passenger cars and construction activities will also increase. Passenger car sales grew at a y-o-y of 3.33 per cent in FY18.
  • There is significant untapped potential at the ‘Bottom of the Pyramid’. Two-thirds of India’s population resides in rural areas where financial services are still not available. Credit segment can be tapped by ensuring timely loans to agriculture sector. Cross utilization of Self-help groups, NGO’s and Micro finance institutions can help a faster penetration of financial services in rural India.
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Market Drivers

Growing Demand

The rising income is increasing the demand for financial services in India. The investment corpus in insurance sector of India is expected to increase to US$ 1 trillion by 2025. The number of HNWI increased to 263,000 in 2017. This number is expected to double by 2020. India’s HNWI wealth is expected to grow at a CAGR of 19.7 per cent and touch US$ 3 trillion by 2020.

Growing Penetration

Mutual fund penetration is only around 5-6 per cent which represents opportunities. The GOI has launched India Post Payments Bank to provide every district with one branch. A total of 1,896,410 accounts are opened till December 24, 2018. This will help to increase rural penetration.

Policy Support

Government has allowed new banking license and increased FDI limit in insurance sector. Government has introduced various schemes like Gold Monetization Scheme, 2015, Atal Pension Sceheme, Pradhan Mantri Jeevan Jyoti Bima Yojana, etc.

Investments

The Financial Inclusion Lab selected 11 fin-tech innovators with an investment of US$ 9.5 million promoted by the IIM-Ahmedabad’s Bharat Inclusion Initiative along with JP Morgan, Michael and Susan Dell Foundation, and the Bill and Melinda Gates Foundation as of October 2018. In Indian capital markets, investments by Foreign Portfolio Investors stood at US$ 899.12 million up to November 22, 2018.

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Industry Challenges

  • One of the challenges faced by Indian financial sector is rising non-performing assets in the banking system. Around 37 per cent of the total debt in India is at risk, as per International Monetary Fund.
  • The penetration of mutual funds in India is very low. Less than 10 per cent of Indian households have investment made in mutual fund. Investors resist to pour their money into mutual funds as they consider it very risky.
  • Two third of the Indian population lives in rural areas, where there is still no financial services available. Further, financial inclusion level is among the world's worst, lower than sub-Saharan Africa. Internet penetration is also quite low in rural areas. 65 per cent of urban population had an internet connection as opposed to 20 per cent in rural India.

Technology Trends

  • The National Stock Exchange in India is putting effort to use machine learning to identify market patterns that will aid in improving monitoring efforts on the exchanges.
  • The Bombay Stock Exchange introduced data analytics solution that will help exchange to track the shared news on the social media related to the companies listed on the exchange. This will help to know the reactions of investors to news media and accordingly human security officials at stock exchange can compare rumors.
  • Payment banks such as Paytm, Vodafone, M-Pesa, National Securities Depository are redefining traditional banking by reaching out to rural areas where there is no formal banking services available.
  • Unified Payments Interface is a real-time payment system that is developed by National Payments Corporation of India and regulated by RBI. The system helps in inter-bank transaction with the use of mobile phone available 24 hours and 365 days.
  • NitiAyog is creating India's largest blockchain network, IndiaChain, which is supposed to revolutionize several industries. The blockchain network is expected to reduce the chances of fraud, impact clearance and settlements system, trade finance and enhance speed and transparency.

Regulatory Trends

  • Securities and Exchange Board of India recommended direct overseas listing of Indian companies in December 2018.
  • From October 26, 2018 onwards, Bombay Stock Exchange introduced weekly futures and options contracts on Sensex 50 index.
  • The GOI launched India Post Payments Banks to provide every district with one branch. Out of 650 branches, 2 branched are already operational as of August 2018.
  • The government has allocated US$ 650.03 million towards the Department of Financial Services under the Union Budget 2019-20. The government has also allocated US$ 340.40 million for supporting financial institutions as per the Union Budget 2019-20.
  • The GST on financial services transactions like mutual funds, banking transaction, stock market and insurance has been increased to 18 per cent from 15 per cent. The GOI is aiming to discount 2 per cent in GST on business-to-consumer transactions made via digital payments.
  • The GOI has issued minimum FDI capital requirement of US$ 20 million for unregistered financial entities involved in ‘fund based activities’ and US$ 2 million for unregistered financial entities involved in ’non-fund based activities’ in April 2018.

Other Key Market Trends

  • Digital transactions in India reached an all-time high of US$ 1.11 billion in January 2018 and are expected to increase to US$ 1 trillion by 2023.
  • NBFCs are serving the unbanked customers by entering into retail asset backed lending, lending against securities and microfinance.
  • Few foreign companies such as Tokio Marine, Aviva, Allianz, New York Life, Sun Life, AMP have entered the insurance industry.

Market Size and Forecast

  • The IPO amount increased to US$ 13,089 million by the end of 2017-18. The total number of IPO’s reached and amounted to US$ 5.52 billion between January-November 2018.
  • Inflows in India’s mutual fund schemes via the Systematic Investment Plan increased from US$ 6.55 billion in FY17 to US$ 10.43 billion during FY18.
  • Equity mutual funds witnessed a net inflow of US$ 11.94 billion in April 2018 to January 2019.
  • Corporate investors AUM reached US$ 127.65 billion, HNWIs and retail investors reached US$ 99.05 billion and US$ 82.03 billion respectively at the end of December 2018.
  • The total AUM of the mutual fund industry in India stood at US$ 342.01 billion between April-November 2018. The number of mutual fund equity portfolios reached 74.6 million as of June 2018.
  • The total first year life insurance premium stood at US$ 30.10 billion during FY18. Life insurance premium observed growth at a CAGR of 0.24 per cent over FY11-17.
  • The non-life insurance premium stood at US$ 23.27 billion during FY18 and witnessed growth at a CAGR of 16.65 per cent during FY02-18.
  • The number of companies listed on NSE increased to 1,926 by the end of January 2019 from 135 in 1985. Indian stocks market rose 10-11 per cent in FY18.
  • The public deposit of NBFCs increased to US$ 4.95 billion in FY18 from US$ 0.29 in FY09, growing at a CAGR of 36.86 per cent.
  • Individual wealth in India grew at the rate of 14 per cent reaching to US$ 6.08 billion in FY18.
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Market Outlook

  • By 2025, AMFI is expecting five- fold growth in assets under management to reach US$ 1.47 trillion and three times growth in investor accounts to 130 million.
  • By 2022, India’s mobile wallet industry is projected to expand at a CAGR of 150 per cent to touch US$ 4.4 billion. In the same period, mobile wallet transactions are to reach US$ 492.6 billion.
  • The insurance industry is expected to reach US$ 280 billion by 2020.
  • India’s personal wealth is expected to touch US$ 5 trillion at a CAGR of 13 per cent by 2022.

Competitive Factors

  • India is among the top five countries in Asia Pacific in terms of HNWIs.
  • India is ranked 28 out of 73 countries in 2018, in adoption of e-payments by the government.
  • India is one of the fastest growing wealth management markets in the world.
  • India has the youngest HNWI population, hence receptive towards sophisticated financial products.

Key Market Players

Muthoot Finance Ltd

Muthoot Finance Ltd. is a non-banking financial company which is involved in providing loan against gold as collateral. The company offers foreign exchange services, gold loans, personal loans, insurance broking and others. The company has over six million customer portfolios. The total income of the company was US$ 693 million between April 2018 and December 2019.

Bajaj Finserv Ltd

It is a holding company for various financial services businesses that is involved in promoting financial services through its investments in subsidiaries and joint ventures. The primary focuses of the company are on consumer lending, rural lending, fixed deposits, SME lending, fixed deposits and value added services. The income of the company was US$ 583.22 million in H1 FY19.

ICICI Prudential Life Insurance Company

The company is engaged in providing life insurance, pensions and health insurance to individuals and groups. It has 26 million customers and total income stood at US$ 3.55 billion between April 2018 and December 2019. The company was ranked as one of the best brands in BFSI sector as per “BrandZ top 50 most valuable Indian brands 2015”.

Strategic Conclusion

India’s financial services industry includes insurance sector, capital markets and non-banking financial companies. The Mutual fund industry, insurance industry and secondary market have seen robust growth and expanding at a fast pace. The Government of India and Reserve Bank of India have taken various measures to regulate and enhance the financial services industry in India.

Further Reading

Appendix

  • AUM – Assets Under Management
  • BSE – Bombay Stock Exchange
  • CAGR – Compound Annual Growth Rate
  • FII’s – Foreign Institutional Investors
  • GDP – Gross Domestic Product
  • HCV – Heavy Commercial Vehicle
  • HNWIs – High-Net-Worth Individuals
  • IRDA – Insurance Regulatory and Development Authority
  • LIC – Life Insurance Corporation
  • NBFCs – Non Banking Financial Company
  • NSE – National Stock Exchange
  • RBI – Reserve Bank of India
  • SEBI – Securities and Exchange Board of India
  • US$ - US Dollar


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