2. Financial Markets
Role of Intermediaries in BFSI sector
History, growth, current position and
challenges for Banking, Financial
Services and Insurance sectors
Topics to be covered
4. A financial system is the set of global,regional, or
firm-specificinstitutions and practices used to
facilitate the exchange of funds.
Financial markets refer to a centre that provides the
facilitiesof sale or purchase of financial claims and
services.
Individuals,financial institutions, corporations and
government trade in this market either directly or
indirectly through brokers and dealers.
Activities in financial markets lead to direct effectson
behaviourof individual,business and consumers
Financial Markets
6. Money Markets
Market for short term debt instruments
Organised and unorganized
Call money 1-14 days – commercial banks, primary
dealers
Commercial bills
Treasury bills 91, 182, 364 days
Commercial paper7 days to 1 year issued bycompanies
Certificateof Deposit 15 days to 1 year issued by banks
Repo and Reverse Repo: borrowing from and lending to
RBI, overnight or term repo (usually 7, 14, 28 days), open
or flexible.
8. Products are Equities, Mutual Funds, ETFs, Securities
borrowing and lending schemes, Debts-Corporate
debts and securitised assets
In bond market, long term trading of government
securities, Bonds issued by PSU
Undertakings/Corporates/Bankslike floating rate
bonds, Zero coupon Bonds, Corporate debentures,
state government loans, securitised assets of banks, FIs
, corporates and others
Capital Markets
9. Foreign Exchange Markets
Market for buying and selling foreign
currencies
International in nature
Round the clock operation
Large volumes
Very liquid
High transparency
Large players
Low trading costs
11. Derivativesare financial securities and are financial
contracts that obtain value from something else,
known as underlyingsecurities. Underlying securities
may be stocks, currency, commodities or bonds, etc.
Formal derivativetrading started in year 2001 after
electronic trading mechanisms were introduced in
India
Examples: Forwards, Futures, Options, Swaps
https://rmoneyindia.com/research-blog-
traders/indian-derivatives-market-investing/
Derivatives Market
14. Fund based financial services
Provide finance
Reduce risk
Examples: Insurance, Lease financing, Factoring , Hire
purchase, Venture capital, House financing, Discounting
Entities: Insurance companies, Banks, Housing finance
institutions
Fee based financial services
Specialised services
Professional fees charged to clients
Examples: Portfolio management, Investment banking,
Capital restructuring
Entities: Investment bankers, Portfolio Managers
Types of Financial services
15. Major Sectors in the BFSI space
Insurance
Mutual Funds
NBFCs
Banking
16.
17. What is Insurance?
Purpose - Sharing of losses
- Pooling of risks
-Transfer of risks
Basic Principle – random, accidental, not a
deliberate act
Types – Life Insurance
- General Insurance
18. History and growth
Oldest insurer is over a century old
Currently 54 insurance companies in life
and non-life
24 life insurers and 30 general insurers and
9 reinsurers (including foreign re-insurers’
branches)
Entry of many players due to
untapped/undertapped potential
19. Key facts
India’s share in global insurance market is
around less than 2%
Insurance density is $ 73 per capita in 2017
and is ranked 73 in the world Insurance
penetration is 3.69% against world average of
over 6% (% of GDP)
Life Insurance premiums are > 80% of total
in FY18
20. Types of Life Insurance Products
Term Insurance
Endowment Policy
Whole Life Insurance
Children's Policies
Annuity Plans
Many others
24. Share of private sector life insurers
increasing…
Source: IBEF
INCREASING PRIVATE SECTOR ACTIVITY IN LIFE
INSURANCE SEGMENT
Note: Figures are as per latest data available, share based on new business premium collection
Over the years, share of private sector in life insurance segment grew from around 2% in FY03 to over 31.3% in FY20.
98.00%
2.00%
Public sector
Private sector
Share of public and private sector in life insurance segment (%)
FY03
Share of public and private sector in life insurance segment (%)
FY20
68.7%
31.3%
Public sector
Private sector
25. New business share in life insurance
Source: IBEF
Visakhapatnam port traffic (million tonnes)
Premiums Market Share in First Year Life Insurance (FY20)
players in
FY20, Life
insurer in
rance was
e of over
Prudential
52.78%
14.25%
9.15%
6.35%
17.48%
LIC
HDFC Standard Life
SBI Life Insurance
ICICI Prudential Life
Insurance
Others
26. Motor insurance accountedfor 36.6% of non-life insurance
premiums earned followed by 27.3% share by health insurance in
FY20.
The market share of private sector companies in the non-life
insurance market rose from 13.12% in FY03 to 55.8% in FY21 (till
April 2020).
LIFE INSURANCE MARKET: MOTOR
DS
Non-Life Insurance Gross Direct Premiums (FY20)
s, standalone health
of non-life insurance
by health insurance in
anies in the non-life
to 55.8% in FY21 (till
Bajaj Allianz, IFFCO
holamandalam, Royal 36.6%
27.3%
2.7%
8.4%
1.9%
Motor Total
Health
Personal Accidents
Fire
Marine Total
27. Insurance market – attractive?
Growing middle class
Young insurable population
Growing awareness of the need for
insurance
Retirement planning a big opportunity
Growth in premia expected at 12-15% over
next 3-5 years
28. Recent Trends
New distribution channels – bancassurance, online
distribution have increased reach and reduced costs
NGOs helping tap rural markets
Differentiated Banks – non-exclusivetie-ups for
distribution
Traditional products are being customised to meet
specific needs
Private sector share of premium increasing:
Life premium up from 2.0% in FY03 to 25% in new
business in FY19 and non-life premium up from 13% in
FY03 to 55.7% in FY20
29. Opportunities
New distribution channels
B15 cities and other non-metros are a large
potential market
Scope for increasing client base
Foreign players bringing expertise and
capital
IPOs
30.
31. Mutual fund is a mechanismfor pooling the
resources by issuing units to the investors and
investing funds in securitiesin accordance with
objectivesas disclosed in offerdocument.
Investments in securities are spread across a wide
cross-section of industries and sectors and thus the
risk is reduced.
Regulated by SEBI
What are Mutual Funds?
32. Provides expert advice for management of financial
assets
Risk diversification
Economies of scale
Transparency and accountability led by regulatory
oversight
Flexibilitybased on investor preference and risk
appetite
Key features and significance
33. What is a Mutual Fund
Investment vehicle
Pool of money
Many investors
Investment in securities
Professional Manager
Diversificationof risk
Economies of scale
Investment can be based on risk profileof investor
35. Key facts – Mutual Funds.
As of August 2021, AUM managed by the mutual funds industry stood at Rs.
36.59 trillion (US$ 492.77 billion) and the total number of accounts stood at
108.5 million.
In May2021, the mutual fund industry crossedover 10 crore folios.
Inflow in India's mutual fund schemesviasystematic investmentplan (SIP)
were Rs. 96,080 crore (US$ 13.12 billion) in FY21.
Equity mutual funds registereda net inflow of Rs. 8.04 trillion (US$ 114.06
billion) by end of December 2019.
The Association of Mutual Funds in India (AMFI) is targeting nearlyfive-fold
growth in AUM to Rs. 95 lakh crore (US$ 1.47 trillion) and more than three
times growth in investoraccounts to 130 million by 2025.
The total number of accounts (or folios as per mutual fund parlance)as on
November 30, 2021 stood at 11.70 crore (117 million), while the number of folios
under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum
investmentis from retail segmentstood at about 9.52 crore (95.2 million).
Source: AMFI & IBEF October 2021
38. Opportunities and Challenges
Distribution of MF products can result in
non-interest income for other players
Mutual funds are an alternative to bank
deposits - sophisticated customers may look
at MFs as higher yielding investments vis-à-
vis bank FDs
39. Low penetration
Rising middleclass incomes
Reduction in interest rates may induce investors to
invest in Mutual funds rather than in Fixed deposits
Trend is clearlyseen in peopleinvesting in financial
assets rather than physical assets
Millennialsand Retirees : two ends of the spectrum –
needing customized solutions
Leverage technology & greater dependenceon
financial advisors
Opportunities and Challenges –
Mutual Funds
40.
41. Key facts
Integral part of the financial system
Helps in financial inclusion
Services to MSME segment
Retail segment focus
42. Key features
Technology to help in providing better service
and innovative products
Cost efficiency
Customised products
Customer service
Partnerships with fintechs
Use of big data analytics
Social media engagement for faster lead
generation
44. a company registered under the CompaniesAct, 1956
engaged in the business of loans and advances,
acquisition of shares/ stocks/ bonds/ debentures/
securities issued by Government or local authority
or other marketablesecurities of a like nature, leasing,
hire-purchase, insurance business, chit business
financial assets constitute more than 50 per cent of the
total assets & income from financial assets constitute
more than 50 per cent of the gross income
What is an NBFC?
45. NBFC cannot accept demand deposits
NBFC not part of payment and settlement
system
Cannot issue cheques drawn on self
Depositors not covered by DICGC insurance
Difference between bank and NBFC
46. Asset Liability
structure
• Deposit taking
• Non Deposit taking
Non Deposit taking-
size
• Systematicallyimp
• Other
Kind of activities
• Asset Finance
• InvestmentCompany
• Loan company
• Infrastructure
Finance
• NBFC-MI
• Infrastructure Debt
Fund-NBFC
• NBFC –Factors
• Mortgage Guarantee
Companies
• NBFC-Non operative
Financial Holding Co
Types of NBFCs
47. High dependence on banks for finance
Withdrawal of investments by mutual funds due to confidence
issue post IL&FS causing Liquidity issues
Rating downgrades post IL & FS issue
High proportion of low rated or unrated advances
Low demand due to pandemic
Tough competition by Fintechs
https://economictimes.indiatimes.com/industry/banking/finance/rbi-comes-
out-with-pca-framework-for-nbfcs/articleshow/88277487.cms
Challenges -NBFCs
48.
49. A bank is a financial intermediary that receives
deposits from the general public(including demand
deposits ) and lends it
Forms part of payment and settlement system
Deposit insurance facility availableto depositors upto
Rs 5 lakhs per depositor
Other functions
What is a Bank?
50. Public Sector (21) Private Sector (12) Foreign (44)
Small Finance (11) Payments (6)
Others including
Regional Rural
(43) , Local Area
(3) , Cooperative
Types of Banks
51. Types of Banks : differentiated by nature of allowable
activities, level of regulation.
21 Private sector banks,3 Local area banks,11 small finance
banks,6 payments banks, 12 Public sector banks, 4 financial
institutions,43 Regional rural banks,44 Foreign banks with
branches in India
Co-operative banks : Multi state Cooperative banks under
direct control of RBI. District central co-operative banks
and state cooperative banks under dual regulators. Primary
agricultural credit society(PACS) not under RBI purview.
List of scheduled banks (other than co-operative) available
on https://www.rbi.org.in/scripts/banklinks.asp
Banking Sector
52. Public sector banks hold around 66% of the total assets of
the banking sector
Private sector banks have better profitability than Public
sector banks
Profitability under pressure due to tough competition from
fintech; especially in retail segment
Increase in bank branches and ATMs (of private sector
banks)
Exposure of private sector banks to sensitive sectors like
Real estate is lowering but still higher than that of Public
sector banks
Key Trends
53. Deposits have grown at a higher pace than advances(PSBs
gathering more deposits than PVBs); excessive profitability.
Low economic activity and risk aversion causing low credit
growth.
Lending to Retail sector increasing while that to Industry
and agriculture is showing a dip
GNPA ratio of industries is highest with large accounts
going bad from FY 17-18.
Increasing Co-lending arrangements
Issuance of green bonds & Foreign currency bonds by
Banks
Key trends
54. IBC proceedings a dominant source of recovery from
NPAs
Increase in number of frauds (around 8,700 cases) and
valueof frauds (around RS 180,000 lakh crores)
Consolidationoccurring in the sector in Public sector
banks as well as Private sector banks
Key trends
55. Increase in technology enabled solutions
Customer centric approaches
Mobile penetration with low cost internet – a boost to use
of telecom for banking services- driving financial inclusion
Expected increase in NPAs given the rolling back of policy
measures and the standstill in asset classification allowed
to banks
Notable increase in digital payments like UPI,NEFT,IMPS
India's mobile wallet industry is estimated to grow at a
Compound Annual Growth Rate (CAGR) of 150% to reach
US$ 4.4 billion by 2022,while mobile wallet transactions
will touch Rs. 32 trillion (USD$ 492.6 billion) during the
same period.
Key trends
Source: IBEF
October 2021
56. Increasing collaborationand competition between
banks and fintechs
Use of technology to reduce costs and provide
transparency, flexibilityand last mile financial services
to hinterland driving fintechs
Digital lending, use of blockchain, applicationof AI
and ML are the emerging areas of influence for
fintechs
Regulatory sandbox mechanism (recently for use of
mobile banking on feature phones ) will be a path
breaking initiative.
Banks and fintechs
59. Value of digital lending market in India from 2012 to 2018, with forecasts until 2023 (in
billion U.S. dollars)
Digital lendingvaluein India 2012-2023
9 14 23 33
46
58
75
110
150
200
270
350
0
50
100
150
200
250
300
350
400
Digital
lending
in
billion
U.S.
dollars
Fastest growing segment of
Fintech in India that grew from
nine billion dollars in 2012 to
110 billion dollars in 2019. It is
expected to grow to 350
billion dollars in 2023.
This area is extensively used
by fintech startups and
NBFCs.
Source(s): Inc42; BCG; TransUnion CIBIL Limited; ID 1202533, Statista
Increase in digital Lending
60. Neo Banking: Digital Banks with no physical presence,
reducing infrastructure and administrative costs and
fostering innovation. In India, they are not allowed to
function in solo, they rely on bank partners to provide
services For eg: Razorpay X,Jupiter, Niyo, Open. Challenges
include lack of trust, limited services, regulatory hurdles.
Open banking: banking practice that will allow third party
financial providers access to financial data across the
banking sector by use of application programming
interfaces(APIs). Account aggregator service allowed in
India is a step in this direction.
Some new terms related to
Banking
61. Latest trends in scheduled commercial banks
Stiff competition from Fintech
Covid induced higher risks- NPA expected to rise to around
9% -CRISIL
Expected to need more capital to face adversity
Issuance of green bonds by AXIS bank
Co-lending agreements
Excessive Liquidity
Latest trends for Small finance Banks
High proportion of unsecured loans
Collection efforts under stress due to COVID pandemic
Lower CASA base, dependent on borrowings and refinance
In need to increase Provision coverage ratios
Banking sector – latest trends
62. Payment banks
Many are yet to break even
Lower interest rates and high initial infrastructure costs
impacting profitability
Generation of capital flows an issue
Co-operativebanks
Absence of secondary market for trading shares and one
person –one vote making mobilization of share capital
an issue.
Loan defaults and low capital base is the problem faced
Banking sector – latest trends
63. Stiff competition from fintech
Cybersecurityrisks increasing
Steeper NPAs post pandemic
Highercapital requirements to meet higher risks
Costs of technologyadoption and compliance
increasing
AI/Robots – What happens to human capital?
Challenges ahead
