1. INTRODUCTION
INTRODUCTION
The business of banking around the globe is changing due to
integration of global financial markets, development of new
technologies, universalization of banking operations and
diversification in non-banking activities. Due to all these movements,
the boundaries that have kept various financial services separate from
each other have vanished. The coming together of different financial
services has provided synergies in operations and development of new
concepts. One of these is bancassurance.
Bancassurance simply means selling of insurance products by
banks. In this arrangement, insurance companies and banks undergo a
tie-up, thereby allowing banks to sell the insurance products to its
customers. This is a system in which a bank has a corporate agency
with one insurance company to sell its products. By selling insurance
policies bank earns a revenue stream apart from interest. It is called as
fee-based income. This income is purely risk free for the bank since
the bank simply plays the role of an intermediary for sourcing
business to the insurance company.
It has its genesis decades ago in France, where this channel
today is the predominant source of insurance business. It has grown at
different places and taken shapes and forms in different countries
depending upon demography, economic and legislative prescription in
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2. INTRODUCTION
that country. In some countries, bancassurance is still largely
prohibited, but it was recently legalized in countries such as the
United States, when the Glass-Steagall Act was repealed after the
passage of the Gramm-Leach-Bliley Act.
Bancassurance is a new buzzword. It originated in India in the year
2000. Following the recommendations of First Narasimham
Committee, the contemporary financial landscape has been reshaped.
Thus, present-day banks have become far more diversified than ever
before. Therefore, their entering into insurance business is only a
natural corollary and is fully justified too as ‘insurance’ is another
financial product required by the bank customers.
From the view point of insurance industry also the importance of
bancassurance was felt necessary. With the increased pressures in
combating competition, companies are forced to come up with
innovative techniques to market their products and services. At this
juncture, banking sector with it's far and wide reach, was thought of as
a potential distribution channel, useful for the insurance companies.
That’s where the bancassurance came into existence. Thus,
bancassurance is poised to become a key determinator / differentiating
factor in the Insurance industry as well.
Given India’s size as a continent it has, however, a very low
insurance penetration and low insurance density. The penetration level
of life insurance in the Indian market is abysmally low at 2.3% of
GDP with only 8% of the total population currently insured. As
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3. INTRODUCTION
opposed to this, India has a well-entrenched wide branch network of
banking system, which only few countries in the world could match
with. It is predicted by experts also that in future 90% of share of
premium will come from Bancassurance business only. And almost
half of the population likely to be in the 'wage earner' bracket by 2010
that there is every reason to be optimistic that bancassurance in India
will play a long inning.
Currently there are more and more exchange of wedding rings
between banks and Insurance Company for better business prospect in
future. With the enoromous benefits for banks like increase in
revenue, return on asset, customer retention, better reputation etc., the
bancassurance is going to be a big revolution in the banking industry.
It is against this backdrop an attempt is made to analyse the financial
performance of the HDFC bank in bancassurance so far and to find
out the areas where they can make use of and still need to focus in
order to make HDFC bank to play a vital role in the bancassurance
industry.
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4. INTRODUCTION
1.1 MEANING, DEFINITION AND
CONCEPT
MEANING:
Bancassurance is a combination of two words ‘Banc’ and
‘assurance’ signifying that both banking and insurance products and
service are provided by one common corporate entity or by banking
company with collaboration with any particular Insurance company.
In concrete terms bancassurance, which is also known as Allfinanz -
describes a package of financial services that can fulfill both banking
and insurance needs at the same time.
It is the provision of insurance (assurance) products by a
bank. The usage of the word picked up as banks and insurance
companies merged and banks sought to provide insurance, especially
in markets that have been liberalized recently. In its simplest form,
Bancassurance is the distribution of insurance products through the
Bank’s distribution network.. It is a phenomenon wherein insurance
products are offered through the distribution channels of the banking
services along with a complete range of banking and investment
products and services. Bancassurance tries to exploit synergies
between both the insurance companies and banks.
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5. INTRODUCTION
DEFINITION:
The term first appeared in France in 1980, to define the sale
of insurance products through banks’distribution channels (SCOR
2003).
The Life Insurance Marketing and Research Association’s
(LIMRA’s) insurance dictionary defines bancassurance as “the
provision of Life insurance services by banks and building
societies”.
Alan Leach, in his book, “European Bancassurance –
Problems and prospects for 2000”, describes bancassurance as
“the involvement of banks, savings banks and building societies in the
manufacturing, marketing or distribution of insurance products”.
According to IRDA, ‘bancassurance’ refers to banks acting as
corporate agents for insurers to distribute insurance products.”
Literature on bancassurance does not differentiate if the
bancassurance refers to selling of life insurance products or non-life
insurance products.Accordingly, ‘bancassurance’ is defined to mean
banks dealing in insurance products of both life and non-life type in
any forms.But in this research the focus is entirely concentrated
towards life insurance. It is also important to clarify that the term
bancassurance does not just refer specifically to distribution alone.
Other features, such as legal, fiscal, cultural and/or behavioural
aspects also form an integral part of the concept of bancassurance
(SCOR 2003).
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6. INTRODUCTION
There are many definitions of bancassurance and, in essence it
does depend upon the model used, and the stage of development.
However, the definition of a fully developed model that is most
commonly used is: “'Manufacturing and distributing cost effectively
banking and insurance products to a common customer base”.
CONCEPT:
This concept gained importance in the growing global insurance
industry and its search for new channels of distribution.However, the
evolution of bancassurance as a concept and its practical
implementation in various parts of the world, have thrown up a
number of opportunities and challenges.
Bancassurance is a relatively new concept in the global
stage.unlike banks and insurerswhich have been around in one form or
the another for centuries,bancassurance has only been around for a
few decades. The concept of bancassurance was emerged in the
western world when banks began to get involved in marketing of
insurance business. From a purely historical perspective, many regard
Barclay’s Life, set up in 1965 in the UK as an insurance subsidiary of
the eponymous bank, as the pioneer of bancassurance. But the term
bancassurance came into existence in France after 1980 to define the
sale of insurance through an intermediary bank.
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7. INTRODUCTION
It has reared its head in France in the late 1970’s,motivated by
among other things changing customer needs due to an inadequate
pension scheme that existed at that time. As the governments can no
longer maintain the funding that people have begun to take a more
active role in their future entitlements by looking at alternatives to
pensions. Bancassurance provides not only provides an alternative to
pensions but also caters to the current taste of customers, which is no
longer satisfied by the traditional products offered by the insurers. As
bancassurance allowed the banks to move away from income
generated by the interest spreads it is viewed as a solution to alleviate
the problem of poor consumer savings, squeezed margins. Thus
lackluster pension schemes, poor consumer savings, squeezed
margins, the need for one stop shop delivery for all financial services
among the consumers, increasing importance of strategic alliance has
all led to the growth of bancassurance in Europe. With the success of
bancassurance model in Europe, the bancassurance, which was only a
European phenomenon, is becoming popular in other continents also
Bancassurance seems to have made the greatest impact in
France. Almost 100% of the banks in France are selling insurance
products. It is claimed that the 55% to 60% of the life insurance
business in France had come through banks. In Portugal and Spain it
was over 70%. In U.K it is about 30%. In Argentina, Brazil, Chile,
Colombia and Mexico also the bancassurance is becoming popular.
Hardly 20 % of the United states banks are selling insurance products
as only recently the Glass steagell act was repealed which has
prohibited the banks from entering into the financial services. In Asia:
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8. INTRODUCTION
Singapore, Taiwan and Hong Kong have surged ahead in
Bancassurance then that with India and China taking tentative step
forward towards it. In Middle East, only Saudi Arabia has made some
feeble attempts that even failed to really take off or make any change
in the system.
RELEVANCE OF BANCASSURANCE IN THE INDIAN
FINANCIAL SECTOR
i)) Integration of the financial service industry in terms of banking,
securities business and insurance is a growing worldwide
phenomenon. The Universal Banking concept is evolving on these
lines in India.
ii) Banks are the key pillars of India’s financial system. Public have
immense faith in banks.
iii) Share of bank deposits in the total financial assets of households
has been steadily rising.
iv) Indian Banks have immense reach to households. Total of 65700
branches of commercial banks, each branch serving an average of
15,000 people.
v) Banks enjoy considerable goodwill and access in the rural
regions.There are 32600 branches in rural India (about 50% of total),
and 14400 semi-urban branches, where insurance growth has been
most buoyant.196 exclusive Regional Rural Banks in deep hinterland.
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9. INTRODUCTION
vi) Banks have enormous retail customer base.Share of ‘individuals’
as a category in bank accounts is steadily increasing.Rural and semi
urban bank accounts constitiute close to 60% in terms of number of
accounts,indicating the number of potential lives that could be
covered by insurance with the upfront involvement of banks.
vii) Banks world over have realized that offering value-added services
such as insurance, helps to meet client expectations. Competition in
the Personal Financial Services area is getting `hot’ in India that
Banks can retain customer loyalty by offering them a vastly expanded
and more sophisticated range of products. Insurance distribution can
also help the bank to increase the fee-based earnings to a large
extent.
viii) Fee-based selling helps to enhance the levels of staff productivity
in banks.
This is vitally important to bring higher motivation levels in banks in
India.
ix) Banks can put their energies into the small-commission customers’
that insurance agents would tend to avoid. Banks’ entry in distribution
can help to enlarge the insurance customer base rapidly. This helps to
popularize insurance as an important financial protection product.
x) Bancassurance helps to lower the distribution costs of insurers.
Acquisition cost of insurance customer through bank is low. Selling
insurance to existing mass market banking customers is far less
expensive than selling to a group of unknown customers. Experience
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10. INTRODUCTION
in Europe has shown that bancassurance firms have a lower expense
ratio. This benefit could go to the insured public by way of lower
premiums.
xi) Banks have an important role to play in the pension sector when
deregulated.Low cost of collecting pension contributions is the key
element in the success of developing the pension sector. Money
transfer costs in Indian banking is low by international
standards.Portability of pension accounts is a vital requirement which
banks can fulfill, in a credible framework.
REASONS FOR BANKS TO ENTER INTO BANCASSURANCE
The main reasons why banks have decided to enter the
insurance industry area are the following:
 Intense competition between banks, against a
background of shrinking interest margins, has led to an
increase in the administrative and marketing costs and
limited the profit margins of the traditional banking
products. New products could substantially enhance
the profitability andincrease productivity.
 Financial benefits to a bank performance can flow in
a number of ways, as briefly outlined below:
- Increased income generated, in the form of
commissions and/or profits from the business
(depending upon the relationship)
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11. INTRODUCTION
- Reduction of the effect of the bank fixed
costs, as they are now also spread over the life
insurance relationship.
- Opportunity to increase the productivity of
staff, as they now have the chance to offer a
wider range of services to clients
 Customer preferences regarding investments are
changing. For medium-term and long-term
investments there is a trend away from deposits and
toward insurance products and mutual funds where
the return is usually higher than the return on
traditional deposit accounts.This shift in investment
preferences has led to a reduction in the share of
personal savings held as deposits, traditionally the
core element of profitability for a bank which
manages clients money. Banks have sought to offset
some of the losses by entering life insurance
business.Life insurance is also frequently supported
by favourable tax treatment to encourage private
provision for protection or retirement planning. This
preferential treatment makes insurance products
more attractive to customers and banks see an
opportunity for profitable sales of such products.
 Analysis of available information on the customer
financial and social situation can be of great help in
discovering customer needs and promoting or
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12. INTRODUCTION
manufacturing new products or services.Banks
believe that the quality of their client information
gives them an advantage in distributing products
profitably, compared with other distributors (e.g.
insurance companies).
 The realization that joint bank and insurance
products can be better for the customer as they
provide more complete solutions than traditional
standalone banking or insurance products.
 Banks are experiencing the increased mobility of
their customers, who to a great extent tend to have
accounts with more than one bank. Therefore there
is a strong need for customer loyalty to an
organization to be enhanced.
 Client relationship management has become a key
strategy. To build and maintain client
relationships,banks and insurers are forming
partnerships to provide their clients with a wide
range of bank and insurance products from one
source.
 It is believed that as the number of products that a
customer purchases from an organization increases
the chance of losing that specific customer to a
competitor decreases.
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13. INTRODUCTION
WHY IS BANCASSURANCE MORE SUITED TO LIFE
INSURANCE PRODUCTS?
Traditionally, much fewer non-life insurance products are
distributed through bancassurance than life insurance products. There
are several reasons for this:
✔ The main reason may be the complementary nature of life
insurance and banking products: bank employees are already familiar
with financial products and quickly adapt to selling insurance-based
savings or pension products;
✔ On the other hand, the non-life market requires special
management and selling skills, which are not necessarily prevalent in
bancassurance. In addition, such competencies require significant
investment in training and motivation, and therefore additional costs;
✔ Life insurance products are generally long-term products, which
require customers to have complete confidence in the institution that
invests their money. And we now know that, in many countries, banks
have a better image and are more trusted than insurance companies;
✔ Bank advisers can use their knowledge of their customers’ finances
to target their advice towards specific needs. This is a major
advantage in life insurance and less important in personal injury
insurance;
✔ Some professionals also refer to the claims management aspect of
personal injury insurance, which could have a negative impact on
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14. INTRODUCTION
brand image. This would seem to explain why for a long time
bancassurance operators hesitated to offer these types of product.
ADVANTAGES OF BANCASSURANCE:
Everybody is a winner in bancassurance. For banks it mainly
acts as a means of product diversification and additional fee income;
for insurance company it acts as a tool for increasing their market
penetration and premium turnover and for customer it acts as a
bonanza in terms of reduced price, high quality products and delivery
to doorsteps. Hence it is a win-win solution for everyone who
involved.
To the bankers:
 In a situation of constant asset base the bank can increases
Return on Assets (ROA)by increasing their income, by
selling insurance products through their own channel. It can
cover operating expenses and make operating expenses
profitable by leveraging their distribution and processing
capabilities
 Can leverage on face-to-face contacts and awareness about
the financial conditions of customers to sell insurance
products.
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15. INTRODUCTION
 By acting as a one stop shop for all financial services,
they can improve overall customer satisfaction
resulting in higher customer retention levels
 Banks enjoy significant brand awareness within their
geographical region providing for a lower per lead cost when
advertising through print, radio and television. The advantage
of a bank over traditional distributors is the lower cost per
sales lead made possible by their sizeable loyal customer
base.
 Can establish sales oriented culture among the
employees
To the customers:
 Comprehensive financial advisory services under one roof.
i.e., insurance services along with other financial services
such as banking, mutual funds, personal loans etc.
 Enhanced convenience on the part of the insured
 Easy access for claims, as banks is a regular go.
 Innovative and better product ranges
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16. INTRODUCTION
To the insurers:
 Insurers can exploit the banks' wide network of branches for
distribution of products. The penetration of banks' branches
into the rural areas can be utilized to sell products in those
areas.
 Customer database like customers' financial standing,
spending habits, investment and purchase capability can be
used to customize products and sell accordingly.
 Since banks have already established relationship with
customers, conversion ratio of leads to sales is likely to be
high. Further service aspect can also be tackled easily.
Factors that appear to be critical for the success of bancassurance
are
 Strategies consistent with the bank's vision, knowledge
of target customers' needs, defined sales process for
introducing insurance services, simple yet complete
product offerings, strong service delivery mechanism,
quality administration, synchronized planning across
all business lines and subsidiaries, complete
integration of insurance with other bank products and
services
 Another point is the handling of customers. With customer
awareness levels increasing, they are demanding greater
convenience in financial services.
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17. INTRODUCTION
 The emergence of remote distribution channels, such as PC-
banking and Internet-banking, would hamper the distribution
of insurance products through banks.
 The emergence of newer distribution channels seeking a
market share in the network.
Bancassurance training for bank employees:
The bank employees will need to be trained in the following aspects of the
insurance business:
 Features of the insurance products sold
 How to identify and approach a potential customer
 Basic insurance needs
 Handling basic objections
 Other distribution channels and products
 Expected roles
 Procedures
 Remuneration and incentive schemes
 Cultures
 Customer service
Continuous training and supervision:
Apart from initial training, there should be further training to
support the development of the agent or employee. Some ways in which this can
be done are:
 Agency meetings
 Bank branch meetings
 Area banking meetings
 In-house magazine
 Training circulars
 Area sales seminars
 Company library
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18. INTRODUCTION
 Video tapes
 Certified courses
 Lectures
 Training material booklets
Remuneration of bank employees:
Any commission payable by the insurance company is, as a principle, to
be credited to the bank profit center for the bancassurance operation. The bank
management sets the commission level for each manager and employee engaged
in the bancassurance operation.
 Selling in the bank branches (by employees or by financial
advisers): For simple packaged products: employees could be
rewarded with gifts and/or salary increments based on their selling
performance in promoting both banking and insurance products.
Such performance could be quantified via the use of a points
system where by the various products are allocated as a number of
points.
 Warm leads: In return for providing warm leads, the bank will get
a share, say 50%, of the normal first year commissions.
A basis is needed for allocating this amount between branch staff (who
provide the warm leads) and the bank owners. A possible basis would be:
25% 25% 50%.
The structure shown above generates benefits as follows:
 Financial rewards for employees who generate warm leads
 Financial rewards for managers and other staff of the bank branch
who have supported bank activities while the assurance business
was being generated.
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19. INTRODUCTION
Group awards or bonuses are more desirable when the contribution of
the individual employee is either difficult to distinguish or depends on group
cooperation.
1.2 A) NEED FOR THE STUDY
Today’s banking business is not the one we have seen in the past. It has
become much more diversified. With the shift in the customer preferences from
deposits to investments, intense competition etc., the banks saw their profit
margin declining. Thus it has become imperative for the banks to retain the
customer by providing more value added services under one roof as well as to
find alternative ways to generate more income. As bancassurance provides the
best possible solution to all these, most of the banks nowadays have started selling
insurance products to its customers. HDFC bank is also having a tie up with its
subsidiary company HDFC Standard Life Insurance for selling Life insurance
products to its retail customers. Hence there is a need for the study to know
whether HDFC bank has been benefited out of bancassurance by way of financial
analysis and to suggest the areas where they can make use of and converge the
attention of the bank if any, is required.
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20. INTRODUCTION
20

21. INTRODUCTION
1.2 B) STATEMENT OF THE PROBLEM
To understand the financial impact of bancassurance in HDFC bank
and to suggest the ways and means to improve the existing performance by way
of collecting responses from the customers.
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22. INTRODUCTION
1.2 C) BENEFITS TO THE ORGANIZATION
• Through the study the bank can know its financial performance in
bancassurance and whether it is contributing to the overall progress
of the bank or not.
• The study would enable HDFC bank to know the general opinion
of customers about insurance and bancassurance so as to know
whether any awareness need to be created about the same.
• The study would enable HDFC bank to know how far their
initiatives in promoting HDFC standard life Insurance products
have reached its customers.
• It would also enable the bank to know whether they have
established a strong relationship with the customers, as it is
important for bancassurance.
• It would also enable the bank to know the number of persons who
are planning to take a life insurance policy in their near future so
that it can take the advantage of the same.
• The bank can also know the willingness of the customers in
accepting HDFC bank as their distribution channel in case of
obtaining HDFC standard Life Insurance policy in future.
• Finally, it provides the opportunity for the bank to know the areas
where they need to give much emphasis and uplift themselves in
order to occupy a key role in the area of bancassurance.
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23. INTRODUCTION
1.2 D) SCOPE OF THE STUDY
 The study focuses on the financial performance of HDFC bank in
bancassurance and its contribution to the overall progress of the bank with
respect to life insurance alone.
 The study analyses the awareness of the customer and the viewpoints of the
customer about insurance as well as bancassurance.
 The study also measures the initiatives taken by HDFC bank in endorsing
HDFC Standard Life insurance products.
 The study also throws light on the relationship building by HDFC bank with
its customers, as it is the deciding factor for considering the bank as a one-
stop shop for all their financial solutions.
 It also indicates the persons who are willing to take life insurance policy in the
immediate future and the reasons for taking the same.
 It also pinpoints the willingness of the customer in accepting HDFC Bank, as
their distribution channel, in case of their choice is HDFC standard Life
Insurance for obtaining a policy
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24. INTRODUCTION
1.3 OBJECTIVES OF THE STUDY
Primary objective:
It is to make an analysis on the financial performance of
HDFC bank in bancassurance with specific reference to life insurance and to
suggest the ways and means to improve the existing performance by way of
collecting responses from the customers.
Secondary Objectives:
.
 To analyze the financial performance of HDFC bank in bancassurance and
its contribution to the overall progress of the bank using ratio analysis.
 To analyze the initiatives taken by the HDFC bank in endorsing the HDFC
Standard Life Insurance products.
 To assess the relationship building factors of HDFC bank, which is
significant for bancassurance.
 To know the customer preferences in selecting HDFC bank as a
distribution channel in case of their willingness to obtain HDFC Standard
Life Insurance policy in future.
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25. INTRODUCTION
1 .4 LIMITATIONS OF THE STUDY
 Time has played a biggest constraint that the research could not be carried
out comprehensively as the duration of the study was only 4 months.
 As the research contains the Secondary data for making a financial
analysis the accuracy and reliability of the analysis depends on reliability
of figures derived from financial statements.
 The sample size for collecting the primary data was meager as it includes
only 100 respondents, hence the conclusion would not be a universal one.
 Personal biases and prejudices of the customers may also affect the study.
Inspite of the limitations, the study was effective in analyzing the
performance of HDFC bank in bancassurance with specific reference to life
insurance.
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26. INTRODUCTION
1.5 A) INDUSTRY PROFILE
Banks are among the main participants of the financial system in India.
Banks in India can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks.
In terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and
private sector banks (the old/ new domestic and foreign).
During the first phase of financial reforms, there was a nationalization of
14 major banks in 1969. This crucial step led to a shift from Class banking to
Mass banking. Since then the growth of the banking industry in India has been
a continuous process. It has become an important tool to facilitate the
development of the Indian economy.
During the second phase of reforms, in the early 1990s, the then
Narasimha Rao government embarked on a policy of liberalisation and gave
licences to a small number of private banks, which came to be known as New
Generation tech-savvy banks, which included banks such as UTI Bank(now re-
named as Axis Bank) (the first of such new generation banks to be set up), HDFC
Bank andICICI Bank. This move, along with the rapid growth in the economy of
India, kickstarted the banking sector in India, which has seen rapid growth with
strong contribution from private banks and foreign banks.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public
sector banks (that is with the Government of India holding a stake), 29 private
banks (these do not have government stake; they may be publicly listed and
traded on stock exchanges) and 31 foreign banks. They have a combined network
of over 53,000 branches and 17,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total
26

27. INTRODUCTION
assets of the banking industry, with the private and foreign banks holding 18.2%
and 6.5% respectively. There are 70324 bank offices in India and each bank
office serves around 16000 people. It’s a huge banking infrastructure and
among best banking network in world.
Current scenario:
As far as the present scenario is concerned the banking industry is in a
transition phase. The Public Sector Banks, which are the mainstay of the Indian
Banking system account, are unfortunately burdened with excessive Non
Performing assets massive manpower and lack of modern technology. while on
the other hand the private sector banks are consolidating themselves through
mergers and acquisitions.
On the other hand the Private Sector Banks in India are witnessing
immense progress They have pioneered Internet banking, mobile banking, phone
banking, ATMs. etc., They are forging ahead and rewriting the traditional banking
business model by way of their sheer innovation and service.
The banks today are more market driven and market responsive. The
top concern in the mind of every bank's CEO is increasing or at least
maintaining the market share in every line of business against the backdrop of
heightened competition. With the entry of new players and multiple channels,
customers have become more discerning and less "loyal" to banks. This makes
it imperative that banks provide best possible products and services to ensure
customer satisfaction. To address the challenge of retention of customers, there
have been active efforts in the banking circles to switch over to customer-
centric business model. The success of such a model depends upon the approach
adopted by banks with respect to customer data management and customer
relationship management.
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28. INTRODUCTION
There has been an increase in the bank focus on retail segment with the
economic slow down. Retail banking has become the new mantra for banking
industry. Banks are now realizing that one of their best assets for building
profitable customer relationships especially in a developing country like India is
the branch. Branches are in fact a key channel for customer retention and profit
growth in rural and semi-urban set up.. Branches could also be used to inform and
educate customers about other, more efficient channels, to advise on and sell new
financial instruments like consumer loans, insurance products, mutual fund
products, etc.
Thus, all the above led to the practice of bancassurance. The Reserve
Bank of India being the regulatory authority of the banking system, with the
reorganization of the need for banks to diversify their activities at the right time,
permitted them to enter into insurance sector as well. It has issued a set of
detailed guidelines setting out various ways for a bank in India to enter into
insurance sector.
IRDA has also felt the necessity of introducing an additional channel of
distribution, which is the Bancassurance to reach out more people. It started
picking up after Insurance Regulatory and Development Authority (IRDA) passed
a notification in October 2002 on 'Corporate Agency' regulations.
Legal Requirements: In India, the banking and insurance sectors are regulated
by two different entities (banking by RBI and insurance by IRDA) and
bancassurance being the combinations of two sectors comes under the purview of
both the regulators. Each of the regulators has given out detailed guidelines for
banks getting into insurance sector. Highlights of the guidelines are reproduced
below:
RBI guideline for banks entering into insurance sector provides three options for
banks. They are:
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29. INTRODUCTION
 Joint ventures will be allowed for financially strong banks wishing to
undertake insurance business with risk participation;
 For banks which are not eligible for this joint-venture option, an
investment option of up to 10% of the net worth of the bank or Rs.50
crores, whichever is lower, is available;
 Finally, any commercial bank will be allowed to undertake insurance
business as agent of insurance companies. This will be on a fee basis with
no-risk participation.
The Insurance Regulatory and Development Authority (IRDA) guidelines for the
bancassurance are:
 Each bank that sells insurance must have a chief insurance executive to
handle all the insurance activities.
 All the people involved in selling should under-go mandatory training at
an institute accredited by IRDA and pass the examination conducted by
the authority.
 Commercial banks, including cooperative banks and regional rural banks,
may become corporate agents for one insurance company.
 Banks cannot become insurance brokers.
Currently there has been an increase in the number of tie-ups with banks and
insurance companies. Some of the models practiced by the banks in India are I)
Referral model ii) Corporate agency model iii) Insurance as a fully integrated
model etc.,
Some of the Bancassurance tie-ups in India are as follows:
29

30. INTRODUCTION
TABLE 1.1: SOME OF THE BANCASSURANCE TIE-UPS IN INDIA
Insurance Company Bank
Bank of Rajasthan, Andhra Bank, Bank of Muscat,
Birla Sun Life Insurance Co. Ltd. Development Credit Bank, Deutsche Bank and Catholic
Syrian Bank
Dabur CGU Life Insurance Canara Bank, Lakshmi Vilas Bank, American Express
Company Pvt. Ltd Bank and ABN AMRO Bank
HDFC Standard Life Insurance Co. HDFC bank, Union Bank of India, Indian bank, saraswat
Ltd. bank.
Lord Krishna Bank, ICICI Bank, Bank of India,
ICICI Prudential Life Insurance Co
Citibank, Allahabad Bank, Federal Bank, South Indian
Ltd.
Bank, and Punjab and Maharashtra Co-operative Bank.
Corporation Bank, Indian Overseas Bank, Centurion
Bank, Satara District Central Co-operative Bank, Janata
Life Insurance Corporation of India
Urban Co-operative Bank, Yeotmal Mahila Sahkari
Bank, Vijaya Bank, Oriental Bank of commerce.
Met Life India Insurance Co. Ltd. Karnataka Bank, Dhanalakshmi Bank and J&K Bank
SBI Life Insurance Company Ltd. State Bank of India
Bajaj Allianz General Insurance Co.
Karur Vysya Bank and Lord Krishna Bank
Ltd.
Royal Sundaram General Insurance Standard Chartered Bank, ABN AMRO Bank, Citibank,
Company Amex and Repco Bank.
United India Insurance Co. Ltd. South Indian Bank
Thus, the present day banks are more diversified than ever before. They
cannot restrict themselves to traditional banking. As bancassurance prospects in
India are brighter that banks in India can make use of the situation to gain
profitable business venture.
1.5 (B) COMPANY PROFILE
About HDFC BANK:
30

31. INTRODUCTION
HDFC bank was incorporated in August 1994 in the name of 'HDFC
Bank Limited', with its registered office in Mumbai, India. The Housing
Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a
bank in the private sector, as part of the RBI's liberalization of the Indian Banking
Industry in 1994.It commenced operations as a Scheduled Commercial Bank on
16th January 1995. The bank has grown consistently and is now amongst the
leading players in the industry.
In a milestone transaction in the Indian banking industry, Times
Bank Limited (another new private sector bank promoted by Bennett, Coleman &
Co./Times Group) was merged with HDFC Bank Ltd., effective February 26,
2000. The acquisition added significant value to HDFC Bank in terms of
increased branch network, expanded geographic reach, enhanced customer base,
skilled manpower and the opportunity to cross-sell and leverage alternative
delivery channels. The Bank at present has an enviable network of over 746
branches spread over 329 cities across India. All branches are linked on an online
real-time basis. Customers in over 120 locations are also serviced through
Telephone Banking. The Bank's expansion plans take into account the need to
have a presence in all major industrial and commercial centers where its corporate
customers are located as well as the need to build a strong retail customer base for
both deposits and loan products. The Bank also has a network of about over1647-
networked ATMs across these cities. Moreover, all domestic and international
Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express
Credit/Charge cardholders can access HDFC Bank’s ATM network.
Vision:
To build a World-Class Indian Bank.
Mission:
31

32. INTRODUCTION
Use Enabling Technology to provide value added products and
services to customers. The objective is to build sound customer franchises across
distinct businesses so as to be the preferred provider of banking services for target
retail and wholesale customer segments, and to achieve healthy growth in
profitability, consistent with the bank’s risk appetite. The bank is committed to
maintain the highest level of ethical standards, professional integrity, corporate
governance and regulatory compliance.
Values:
HDFC Bank’s business philosophy is based on four core values –
 Operational Excellence
 Customer Focus
 Product Leadership
 People
Capital:
The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion).
The paid-up capital is Rs.311.9 crore (Rs.3.1 billion). The HDFC Group holds
22.1% of the bank's equity and about 19.4% of the equity is held by the ADS
Depository (in respect of the bank's American Depository Shares (ADS)
Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors
(FIIs) and the bank has about 190,000 shareholders. The shares are listed on
the Stock Exchange, Mumbai and the National Stock Exchange. The bank's
American Depository Shares are listed on the New York Stock Exchange
(NYSE) under the symbol "HDB".
Management:
32

33. INTRODUCTION
Mr. Jadish Capoor took over as the bank's Chairman in July 2001. Prior
to this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The
Managing Director, Mr. Aditya Puri, has been a professional banker for over
25 years, and before joining HDFC Bank in 1994 was heading Citibank's
operations in Malaysia
The Bank's Board of Directors is composed of eminent individuals with
a wealth of experience in public policy, administration, industry and
commercial banking. Senior executives representing HDFC are also on the
Board. Senior banking professionals with substantial experience in India
and abroad head various businesses and functions and report to the
Managing Director. Given the professional expertise of the management team
and the overall focus on recruiting and retaining the best talent in the industry,
the bank believes that its people are a significant competitive strength.
Awards received: The bank has received many awards to its credit, 'Best
Local Bank in India - 2003' by Finance Asia, 'Best Domestic Bank in India
Region' in The Asset Triple A Country Awards 2003. Apart from this, the bank
has rated 'Best Bank in India in 2003' by Business Today, 'Best Bank in the
Private Sector' for the year 2003 in the Outlook Express Awards, 'Best New
Private Sector Bank 2003' by the Financial Express in the FE-Ernst &
Young Best Bank's survey 2003. It was also figured in the 'Best Under a
Billion, 200 Best Small Companies for 2003' by Forbes Global. For use of
information technology the bank was awarded with 'Best IT user in
Banking' at the IT User Awards 2003 conferred by Economictimes.com
&Nasscom. The bank has also been poured by several awards during the FY
2005-06, which includes one received from ‘Business Today’, which rated the
bank as ‘Best Bank in India’. Asia money awards selected the Bank as 'Best
Domestic Commercial Bank', 'Best Domestic Provider for Local Currency
Products' and 'Best Cash Management Bank-India'. Hong Kong-based Finance
Asia Magazine selected the Bank as 'Best Bank in India'. The Asset Magazine
33

34. INTRODUCTION
named the Bank 'Best Cash Management Bank' and 'Best Trade Finance
Bank' in India, in 2006. The Economic Times - Avaya Global Connect
Customer Responsiveness Awards 2005 named the Bank 'Most Customer
Responsive Company - Banking and Financial Services'. The Bank has also
been named 'Best Domestic Bank in India' in The Asset Triple A Country
Awards 2005. During 2006-07, the Bank was selected as the 'Best Bank in
India' by the Business Today Magazine for the Fourth consecutive year.
Forbes magazine named the Bank as 'One of Asia Pacific's Best 50
companies'. The Bank was named as the 'Best Listed Bank of India' by the
Business world magazine. The Bank was named as the 'Best Listed Bank of
India' by the Businessworld magazine. The Bank was selected as the Best
Domestic Bank at The Asset Magazine's Triple A Country Awards.
Business Areas:
The bank has three key business areas:
1. Wholesale Banking Services: Here, the bank’s target market is primarily
large, blue chip companies and to a lesser extent, emerging mid-sized corporate.
For these corporates, HDFC bank provide a wide range of services, including
working capital finance, trade services, transactional services, cash
management, etc. They are a leading provider of structured solutions, which
combine cash management services with vendor and distributor finance, for
facilitating superior supply chain management for our corporate customers. They
are also recognized as a leading provider of cash management and
transactional banking solutions to mutual funds, stock exchange members and
banks.
2. Retail Banking Services: The objective of the Retail Bank is to provide the
target market customers a full range of financial products and banking
services, giving the customer a one-stop window for all his/her banking
requirements. The products are backed by world-class service and delivered to
34

35. INTRODUCTION
the customers through the growing branch network, as well as through
alternative delivery channels like ATMs, Phone Banking, Net Banking and
Mobile Banking. The HDFC Bank Preferred program for high net worth
individuals, the HDFC Bank Plus and the Investment Advisory Services programs
have been designed keeping in mind needs of customers who seek distinct
financial solutions, information and advice on various investment avenues. They
have a wide array of retail loan products including Auto Loans, Loans Against
Securities, Personal Loans and Loans for Two-wheelers. HDFC bank are also a
leading provider of Depository Services to retail customers. Further HDFC
bank are one of the leading players in the “merchant acquiring” business with a
large number of Point-of-sale (POS) terminals for debit / credit cards acceptance
at merchant establishments.
3.Treasury Operations: Within this business, the bank has three main product
areas viz., Foreign Exchange and Derivatives, Local Currency Money Market
& Debt Securities and Equities. With the liberalization of the financial markets
in India, corporates need more sophisticated risk management information,
advice and product structures. These are provided through the bank's
Treasury team. The Treasury business is responsible for managing the returns
and market risk on the bank's investment portfolio.
The above business groups are supported by the following groups:
 Audit & Compliance
 Credit & Market Risk
 Finance, Administration & Legal
 Human Resources
 Information Technology
 Operations
35

36. 2.0 REVIEW OF LITERATURE
2.1 Bancassurance - A Global Breakdown:
It is important to outline the impact that bancassurance has had on
differing regions around the world, as well as looking at the major regulations that
impact the further growth of bancassurance. Below, is provided with a brief
synopsis of bancassurance markets in certain key areas.
EUROPE:
Bancassurance is a construct of Europe (France in particular) and this
perhaps helps explain why it is such a phenomenal success within certain
European markets. Largely the 1989 Second Banking Coordination Directive
motivated the large influx of banks into insurance within Europe in recent years.
Currently, the penetration levels are fairly stable in Europe, since bancassurance
in the majority of Western European countries (France, Netherlands, Portugal and
Spain) has reached what studies such as Swiss Re. (2002) argue to be maturity.
These penetration levels will only pick up once bancassurance manages to fully
infiltrate Central and Eastern European countries such as Hungary and Poland,
and the Baltic nations. Currently, the final major hurdle for bancassurance in
Western Europe seems to lie in the U.K. where a predominantly strong insurance
board still attempts to resist the bancassurance trend even in the face of
widespread deregulations.
FRANCE:
In France, the success of bancassurance is mitigated by a favorable tax
treatment on life insurance products, lack of competition within the insurance
industry, and an inadequate pension scheme (Bonnet and Arnal (2000). The
pioneer of bancassurance in France is argued to be Credit Mutual, which created
its own life and non-life subsidiaries in the early 1970’s (Sakr (2001)).
36

37. REVIEW OF LITERATURE
Bancassurance has seen the most success in the life insurance market, something
that is true for every nation, increasing from 52% in 1995 to account for 69% of
life insurance business n 2000 (Durand (2003), and Turner (1998)). However, as
of late, the banking networks market share of the life insurance market has
remained fairly stagnant, actually dropping over the years to 66% market share in
2001 and 61% in 2003 (Falautona and Marsiglia (2003), Datamonitor (2003)).
This resulted from a combination of falling stock market prices and the banking
network bearing the brunt of lower transfer prices according to Benoist (2002).
This means that banking and insurance companies are overseen separately
within the country. For a conglomerate, the regulator will depend on who is the
parent of the two. for example, if the bank is dominant, then it is the job of the
banking regulator to oversee the company. There are no separates regulators for
financial conglomerates, merely a strong cooperation between different
regulators.
UNITED KINGDOM:
Bancassurers have faced a tougher time in trying to penetrate the U.K.
market, thanks in large to a combination of restrictive regulations and a powerful
insurance governing body. The first move for bancassurers came in 1985 when
Standard Life purchased a stake in the Bank of Scotland. Changes in legislation
soon followed in 1986 and 1988, which made it legal for banks to market
insurance products and set up their own insurance subsidiaries (Sakr (2001)).
Even then, the main type of union between the two was a joint venture, since the
banks placed an emphasis on maintaining the knowledge of the insurer. Twenty
years later, researchers argue that bancassurance is still in its infancy within the
U.K., currently accounting for 15% of new insurance premiums issued (Benoist
(2002),
It is argued that restrictive regulations were detrimental to the growth of
bancassurance within the country and that due to the lack of experience the
37

38. REVIEW OF LITERATURE
correct model for the U.K. is still to be found (Hubbard (spring 2001)). Two
benefits of the regulatory system in the U.K. are firstly, that it is based on one
almighty regulator that overseas the different factors of the financial services
industry (the financial Services Authority). This leads to more streamlined
regulations than in other countries that employ functional form regulatory
systems.
SPAIN:
Spain has one of the most developed markets in bancassurance
(Datamonitor (2003)). Current penetration of bancassurers is over 75% of life
insurance business and an ever-increasing proportion of the non-life business. In
Spain, the evolution of the bancassurance market is fostered by the phenomenal
growth within the insurance services industry (life insurance alone has seen 30%
growth per annum over the past 15 years (Durand (2003)). The development of
bancassurance in the Spanish market was facilitated by the well-established
network of regional building societies, and also the cultural mentality that it is
correct to take on risks (Goddard (1999)).
BRAZIL:
In Brazil the laws are in the bancassurers favor, and the banks within the
country control more than 65% of the insurance market (Nigh and Saunders
(2003)), a size that rivals the leading bancassurers in Europe. Furthermore, in
Brazil, bancassurers are assisted by regulations that ban the development of agent
networks (Benoist (2002)).
NORTH AMERICA:
The North American financial services market is the largest in the world
and bancassurance has developed in a differing manner in this region depending
on the country in question. In Canada, there has been consolidated regulation for
more than 15 years and banks are legally allowed to own insurance companies,
but limitations are placed on the products that can be provided (Dorval (2002)).
38

39. REVIEW OF LITERATURE
While in Mexico, bancassurance has been a flourishing industry due largely to the
role played by banks in the creation of pension funds since the 1997 pension
reforms.
Bancassurance in the U.S. has, in contrast, faced a very tight regulatory
and legislative environment for many decades. The formation of financial
conglomerates was greatly hindered by the Banking Act of 1933 (Glass-Stegall
Act) and the Bank Holding Company Act of 1956. Only in 1999 did laws become
more favorable to banks offering insurance products, with the passing of the
Gramm-Leach Bliely Act. However, due to the divergence between the state and
federal laws regarding banks offering insurance products, bancassurers still face a
hard time ahead in relation to regulations and attempting to overcome powerful
lobbies that aim to maintain existing hierarchies (Boot (2003)). Currently, only
around 7% of Americans purchase their insurance products through bank
branches (Thomson (summer 2002b)). However, with the ever-continuing
regulatory changes such as the demutualization of insurance companies coupled
with an ageing population, it is widely believed that there will be strong growth
potentials for bancassurers in a mature market such as the U.S.
ASIA AND THE PACIFIC:
Bancassurance in the Asian region has been relatively slow to take off,
with the exception of countries such as Australia, Hong Kong and Singapore
where regulations have been considerable lenient (Swiss Re. (2002)). The trend in
the majority of mainland Asian countries has been for a bank to form ties with a
foreign insurer in order to begin bancassurance operations with around 80% of
these being life insurers, and the financial structure of the operation tends to be in
the form of a distributional agreement. Since bancassurance is still in its infancy
in most Asian countries, it is very susceptible to global changes. The Swiss Re.
(2001) study argues that one of the major threats to the growth of bancassurance
in the region is a U.S. or EURO economic slowdown.
39

40. REVIEW OF LITERATURE
Most countries within Asia have only recently begun allowing the
formation of bancassurance operations with the main players listed below. Certain
countries within the region are still holding out against the onslaught of the
bancassurance trend. Vietnam still restricts banks from offering life insurance
products, while South Korea has made certain rules that make it difficult to begin
a bancassurance operation within the country. Nevertheless, bancassurers have
made considerable advancements within the Asian region, having a positive
outlook for future growth. The Swiss Re. (2002) study believes that in few years
from now bancassurers could account for 13% of total premiums collected in
Asia’s life insurance sector.
40

41. REVIEW OF LITERATURE
2.2 Quantitative works of major Researchers related to
bancassurance
Compared to the vast amount of descriptive work that has been published
in the field of bancassurance, there is only a limited amount of empirical
studies conducted on the effects that bancassurance actually has on the
company once implemented. This was largely due to the lack of information that
resulted from poor company disclosure statements and inadequate collections of
national statistics. As these problems are being rectified, researchers into the
bancassurance practice are making more and more empirical research;
nevertheless, it is still in its early stages. The following aims at highlighting the
major quantitative findings of certain researchers that have performed
research into the union of banks and insurers.
The majority of past studies have focused mainly on the risk and
profitability effects resulting from the union of a banking and non-banking
firm. One of the earliest studies in this area was performed by Boyd and Graham
(1986). They conducted a risk-of-failure analysis and looked at two periods
around a new Federal Reserve policy (1974s go-slow policy). they found that
bank holding companies (BHCs) involvement in non-banking activities is
significantly positively correlated with the risk of failure over the period
1971-1977, while the period 1978-1983 showed no significance, thus indicating
that the new policy had a considerable impact on bank holding company
(BHC) expansion into non-banking activities. Boyd and Graham (1988)
followed their 1986 study with a paper that used a simulation approach, whereby
they simulated possible mergers between banking and non-banking companies
which were then compared to existing BHCs in order to determine whether the
risk of bankruptcy will increase of decrease should expansion be allowed in to the
non-banking industry, and also to determine the concurrent effect on company
profitability. Their main finding was that the risk of bankruptcy only declined
should the BHC expand into the life insurance practice. Brewers (1989) study
41

42. REVIEW OF LITERATURE
finds similar risk reduction benefits existing however cannot specify whether
they originate as a result of diversification, regulation or efficiency gains. Boyd,
Graham and Hewitt (1993) build on Boyd et al. (1988) by conducting a
simulation study. They once again conclude that mergers of BHCs with
insurance companies may reduce risk, whereas those with securities or real-
estate firms will not. Saunders and Walter (1994) and Lown, Osler, Strahan
and Sufi (2000) use a similar method to Boyd and Graham (1988) and obtain
similar results with more current data. Estrella (2001) examines diversification
benefits for banks by using proforma mergers. In contrast to previous studies
that incorporate accounting data, Estrella uses market data and a measure of the
likelihood of failure that is derived through the application of option pricing
theory to the valuation of the firm. the findings indicate that banking and
insurance companies are likely to experience gains on both sides in the
majority of the cases.
The other major series of studies on banks expansion into non-banking
activities focus on the wealth effects of such a move. Cybo-Ottone and Murgia
(2000) analyzed the stock market valuations of mergers and acquisitions in the
European banking industry over the period 1988-1997, and found the existence
of significant positive abnormal returns associated with the announcement of
product diversification of banks into insurance. Furthermore, they found that
country effects do not significantly affect their overall results, suggesting a
homogeneous stock market valuation and institutional framework across Europe.
Carow (2001) looked at the abnormal returns of bank and insurance companies
following the changing legislation brought about as a result of the Citicorp-
Travelers Group merger, and discovered that investors expect large banks and
insurance companies to gain significantly from the legislation removing
barriers to bancassurance. In an event study released later in the same year,
Carow (Mar 2001) found in support the contestable market theory that insurance
companies became worse off and banks had no long-term gains following
legislations further supporting bancassurance within the U.S.Cowan, Howell and
42

43. REVIEW OF LITERATURE
Power (2002) conducted a similar event study surrounding four separate court
rulings and discovered that on average only larger, riskier BHCs with fee-based
income gain the most, while smaller, riskier insurers sustain the highest wealth
losses. Fields, Fraser and Kolari (2005) find that bancassurance mergers are
positive wealth creating events by examining abnormal return data. They
further deduced that scale and scope economies were a contributing factor in
these results.
As always, the opponents are there. Amel, Barnes, Panetta and Salleo
(2004) and Strioh (2004) found that consolidation in the financial sector is
beneficial up to a relatively small size in order to reap economies of sale, and that
there is no clear evidence supporting cost reductions stemming from
improvements in managerial efficiencies. Strioh (2004) finds non-banking income
volatile and that there is little evidence of diversification benefits existing. But,
the majority of the past studies have found risk reduction and wealth creating
benefits associated with the expansion of banks into the insurance industry.
43

44. REVIEW OF LITERATURE
Article 2.3
Title: INSURERS UPBEAT ON BANCASSURANCE CHANNEL
Bancassurance is likely to generate approximately 35% of private
insurers’ premium income by 2008, according to an analysis of India’s
bancassurance sector by Watson Wyatt Worldwide, a leading global
insurance consulting firm.
‘India Bancassurance Benchmarking Study- 2006/7’ is the first of its kind
survey in the Indian market, and part of an Asia-wide analysis focused on
bancassurance distribution. It sets out to define bancassurance performance
standards and benchmarks against a cross section of industry practices, processes
and productivity indicators. Watson Wyatt has analyzed the bancassurance
channel from the perspective of banks, life insurers and non-life insurers
separately in the report.
Mr. Graham Morris, Director, Watson Wyatt Worldwide said: “the purpose
of the survey was to focus and understand how banks and insurers develop
strategies for selling life and non-life insurance products through the vast
network of bank branches in India and the practical issues they face in
implementing the sales process”. Watson Wyatt had chosen India as the first
country in Asia to do the Benchmarking Survey considering the vibrant growth
of this alternative channel in the country compared to the other Asian markets.
A total of 25 banks covering PSU, Private, and Foreign banks had
participated in the Survey, along with almost all private life and general insurers
licensed in the country.
Nearly 90% of interviewed life insurers are expecting an increase of over
75% in new business premium income for the current financial year from the
40

45. REVIEW OF LITERATURE
bancassurance channel, despite the fact that they consider lack of sales culture on
the part of bank’s branch staff as a key issue in the success of bancassurance.
The lack of a clear bancassurance vision on the part of the bank partner is the
most visible reason for the slow progress in cross selling of insurance, despite the
bank partners having impressive branch networks or large customer bases.
The quality of bank customer data is frequently poor and the absence of
simple CRM tools in most banks makes it difficult to launch specific initiatives
to cross sell insurance products. Public sector banks in the country, which control
more than 90% of the total customers, are seem to be inefficient in recording
basic data about customers and managing available information.
“Growth in bancassurance in India will fall short of its potential unless the
perceived lack of sales culture and vision begin to get addressed by the banks.
An understanding of theses differences will facilitate the mutual goal of
increasing bancassurance as the leading channel in insurance distribution in
India,” said Mr. R.Krishnamurthy, Managing Director, Distribution Practice,
Watson Wyatt Insurance Consulting of the India office.
Banks’ have overwhelmingly expressed a leaning towards insurers with
bancassurance expertise and showing evidence of their commitment. On product
design and development, they seem to demand more attention from insurers to
involve the bank management team.
The brand image of the bank partner, its willingness to bring about a cultural
change and involving the entire branch network are the vital factors that life
insurers consider when entering into a bancassurance tie-up. While developing
their bancassurance strategy, general insurers consider increasing new business
and tapping new markets as the key factors. 100% of respondents ranked gaining
support and commitment from the bank’s management as the critical factor in
building successful bancassurance operations.
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46. REVIEW OF LITERATURE
Both bankers and insurers are bullish about the future outlook of
bancassurance with nearly a quarter of respondents predicting that the overall
share of bancassurance would be about 50% or more in the life segment in the
year 2010.
About 30% of the life insurers have indicated that by the year 2010, rural
insurance business would constitute between 16-20% of their total bancassurance
new business premium.
Life insurers have also expressed overwhelming support to innovative
changes in the bancassurance channel, such as banks having multiple insurer
relationships, exclusive bancassurance products for deepening insurance
penetration and simpler training requirements for the bank staff to qualify as
insurance salespersons.
There is no doubt that bancassurance in India will play a major role as the
insurance sector develops. India has the unique experience of drawing strong
regulatory support for this channel. Coupled with the growing awareness of
banks to leverage on their branch network and customer strengths, the insurance
selling opportunities would get widely tapped at bank branches in the years
ahead.
Source: “Business line” dated Wednesday, 19 December 2007,
42

47. 3.0 RESEARCH METHODOLOGY
INTRODUCTION:
Research is an academic activity and as such the term should be used
in technical sense. According to Clifford Woody research comprises defining and
redefining problems, formulating hypothesis or suggested solutions, collecting,
organizing and evaluating data; making deduction and reaching conclusion; and at
last care fully testing the conclusions to determine whether they fit the
formulating hypothesis.
The main aim of the research is to find out the truth which is hidden
and which has not been discovered as yet.
OBJECTIVES OF RESEARCH:
1. To gain familiarity with a phenomenon or to achieve new insights into it.
2. To portray accurately the characteristics of a particular individual,
situation or group
3. To determine the frequency with which something occurs or with which it
is associated with something else
4. To test a hypothesis of a casual relationship between variables
RESEARCH DESIGN:
Research design is the arrangement of conditions for collection and
analysis of data in manner that aims to combine relevance to the research purpose
with economy in procedure of data. It is a blue print specifying every stage of
action in the course of research.
The research design adopted in this study for secondary data, is
exploratory and analytical in nature. Exploratory research aims to gain familiarity
and new insights into any phenomenon while analytical research aims at
analyzing the current scenario and thereby using that to project the future
43

48. RESEARCH METHODLOGY
performance. This research aims at studying the historical performance of the
company in bancassurance and it also evaluates the future prospects of the
company
Descriptive research design is used for collecting primary data.
It is concerned with the research studies with a focus on the portrayal of the
characteristics of a group or individual or a situation. The main objective of such
studies is to acquire knowledge. The major purpose of Descriptive research is
description of the state of affairs, as it exists at present.
SAMPLING:
Sampling may be defined as a selection of some part of an aggregate
or totality on the basis of which a judgment or inference about the aggregate or
totality is made.
SAMPLING DESIGN:
A sampling design is a definite plan for obtaining a sample given
population. There are different methods of sampling. Here Convenience
sampling technique has been used.
CONVENIENCE SAMPLING:
This method of sampling involves selecting the sample elements using
some convenient method without going through the rigor of sampling method.
The researcher may make use of any convenient base to select the required
number of samples.Accordingly, the area selected for the study was kilpauk,
chennai.
44

49. RESEARCH METHODLOGY
SAMPLE SIZE:
Sample size refers to the number of items to be selected for the universe
to constitute a sample. The total sample size was taken to be 100.
METHODS OF DATA COLLECTION:
NATURE OF DATA: There are two types of data namely primary and secondary
data.
PRIMARY DATA: Primary data is the data collected for the first time through
field survey. This has been used to collect the data for the purpose of this study.
METHOD OF PRIMARY DATA COLLECTION
The method followed in obtaining the primary data was through the
structured questionnaire.
The researcher had used a Questionnaire for obtaining the primary
data for analysis. A questionnaire is a form prepared and distributed to secure
responses to certain questions. Here a well-structured questionnaire has been
prepared with all the important details regarding bancassurance. It has both open
ended and close-ended questions.
PILOT STUDY:
Before a questionnaire is finalized it should be field-tested. As such, pilot
study has been done. That is after the questionnaire was drafted, to decide
whether it is comprehensive or not, it is used with a few (10) respondents Their
responses are studied and it has been helpful in changing the questionnaire like
giving more instructions to the respondents for filling up, re-sequencing the
questions, addition and deletion of questions etc.,
45

50. RESEARCH METHODLOGY
SECONDARY DATA: It refers to the information or facts already collected.
Such data are collected with the objective of understanding the past status of any
variable. Here, secondary data has been used for making a financial analysis.
METHOD OF SECONDARY DATA COLLECTION:
 Annual reports
 Journals and Magazines
 Internet
Annual reports of HDFC bank have been used for making an analysis
on the financial performance of HDFC bank in bancassurance. And the data
pertinent to bancassurance like articles, previous researches, etc., has been
collected from journals & magazines as well as Internet.
RATING SCALES:
Summated rating scale: In this method, the attitude of people is classified into
specific points with approximately equal attitude value. The respondents to
questions indicate the degree of agreement or disagreement through their
response. Based on the response of all the questions, the attitude of the
respondents is determined. This scale has been used for the following question no:
10,15,17,18,21.
TOOLS USED: As the research contains both primary and secondary data it
includes both financial statement analysis and statistical analysis.
1. FINANCIAL STATEMENT ANALYSIS: Financial statements refer to
the formal and original statements prepared by a business concern to
disclose its financial information. They are useful only when they are
analyzed and interpreted. The basis for financial planning, analysis and
46

51. RESEARCH METHODLOGY
decision-making is the financial information. Financial information is
needed to predict, compare and evaluate the firm’s earnings ability. In this
research, financial statements like annual reports of HDFC bank from the
year 2003-2006 has been used for making an analysis on the financial
performance of HDFC bank in bancassurance and its contribution to the
overall progress of the bank.
Ratio analysis, one of the most important techniques of financial
statement analysis has been used in this research.
 RATIO ANALYSIS: An analysis of financial statements based
on ratios is known as ratio analysis. Ratio analysis is the process
of computing, determining and presenting the relationship of
items. Some of the ratios used in this research are:
Business ratios: They are used for comparing changes in the business from
period to period. With the help of this, one can pinpoint improvements in
performance or developing business areas. Some of the ratios used in this study
are:
 Non-interest income as a percentage of total revenue: Non
interest income is the revenue earned by the bank apart from the
interest income. Hence, calculation of this ratio would reveal the
contribution of non-interest income to the total revenue of the
bank. It can be find out by using the formula:
Non-interest income
Total revenue
 Non-interest income as a percentage of operating profit: This
would reveal the percentage of non-interest income contribution
to the operating profit.It can be find out by using the formula:
Non-interest income
Operating profit
47

52. RESEARCH METHODLOGY
 Non-interest income as a percentage of working funds: This
would indicate the percentage of non-interest income
contribution to the working funds. It can be calculated by using
the formula:
Non-interest income
Working funds
 Return On Assets (Average): This ratio is calculated to
measure the productivity of assets. A comparison of net income
and average total assets, the ROA ratio reveals how much
income management has been able to squeeze from each rupee’s
worth of a company's assets
Return On Assets (Average) = Net Income
Average total assets
 Business per employee: This is used to find out the productivity
of the employees. This is calculated based on the average
employee numbers. And business is the total of net advances and
deposits. (Net of inter bank deposits)
Business per employee = Total of net advances and deposits
Average employee numbers
 Profit per employee: This is also used to find out the
productivity of the employees in terms of profit. This is also
calculated based on the average employee numbers.
 Percentage of net non-performing assets to customer assets:
This is used to find out the percentage of net non-performing
assets to customer assets. This can be obtained by using the
formula:
Net Non Performing Assets
Customer Assets
48

53. RESEARCH METHODLOGY
 Percentage of net non-performing assets to gross advances:
This is used to find out the percentage of net NPA’s to gross
advances. This can be obtained by using the formula:
Net Non Performing Assets
Gross advances
Capital Adequacy Ratio: Capital adequacy ratios are a measure of the amount of
a bank's capital expressed as a percentage of its risk weighted credit exposures. It
is also called as Capital to Risk Weighted Assets Ratio (CRAR) .It determines the
capacity of the bank in terms of meeting the time liabilities and other risk such as
credit risk, operational risk, etc. In the most simple formulation, a bank's capital is
the "cushion" for potential losses, which protect the bank's depositors or other
lenders..
Capital Adequacy Ratio = Total capital funds
Risk weighted assets and contingents
STATISTICAL TOOLS USED:
This constitutes an integral part of research analysis. Hence any analysis of
data compiled should be subjected to relevant analysis so that meaningful
conclusions could be arrived at.
The statistical tools applied in this research are:
 Correlation co-efficient
 Chi-square test
 Percentage analysis.
CORRELATION COEFFICIENT In a bivariate study distribution we may be
interested to find out if there is any correlation or co-variance between the two
variables under study. If the change in one variable affects a change in the other
variable, the variables are said to be correlated. If the two variables deviate in the
same direction i.e. if the increase (or decrease) in one results in a corresponding
increase (or decrease) in the other, correlation is said to be direct or positive. But
49

54. RESEARCH METHODLOGY
if they constantly deviate in opposite directions i.e., if increase (or decrease in one
results in corresponding decrease (or increase) in the other, correlation is said to
be negative.
∑xy/n - (∑x/n) (∑y/n)
Correlation coefficient = ……………………………………..
√∑x²/n-(∑x/n)² √∑y²/n-(∑y/n)²
CHI-SQUARE TEST:
When certain observed values of a variable are to be compared with the expected
value the test static,
Ψ² = (O - E) 2
E
Where Oi = observed frequency
Ei = Expected frequency
For more accuracy, Yates correction is used and the formula used is given below:
Ψ² = (O - E) 2
E
Power of association test: When the calculated value in the test is greater than
the tabulated value, we accept the alternative hypothesis Hi. In this case, power of
association test is applied in order to show the strength of association, where N =
sample size. Based on the power of Association Test, the value indicates the fair
relationship between the variable.
PERCENTAGE ANALYSIS: These are the measures of central tendency. It is
used to describe relationships. It can be used to compare the relative terms, the
distribution of 2 or more series of data, since the percentage reduces everything to
a common base and thereby to allow meaningful comparison to be made.
Percentage Analysis = No. Of respondents * 100
Total No. Of respondents
50

55. DATA ANALYSIS AND INTERPRETATION
4.0 DATAANALYSIS AND INTERPRETATION
4.1 Secondary data analysis: Secondary data analysis, the imperative part of this
study has been undertaken to analyse the performance of HDFC bank in
bancassurance so far and the contribution of bancassurance to the progress of the
bank in the form of increase in ROA, revenue etc., using ratio analysis. Since
HDFC bank has started earning revenue for the sale of insurance policies from
2004 that the analysis includes from the year 2004-2006.
TABLE 4.1.1
HDFC BANK’S EARNINGS FOR THE SALE OF HDFC STANDARD LIFE
INSURANCE POLICIES FROM 2004-2006
Year 2004 –05 2005 -06 2006- 07
Revenue earned 16,99 lacs 88,14 lacs 112,09 lacs
for the sale of
insurance policies
CHART 4.1.1
Revenue earned for the sale of insurance policies
120
112.09
100 88.14
80
60 Revenue (in lacs)
40
16.99
20
0
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be seen that there has been an impressive
growth in the revenue over the years for the sale of HDFC standard life insurance
policies by HDFC bank.
51

56. DATA ANALYSIS AND INTERPRETATION
TABLE 4.1.2
RETAIL SEGMENT PROFIT FROM THE YEAR 2004 TO 2006: Retail
banking segment is undertaking bancassurance. And it is the fastest growing
banking business segment. One of the reasons being the bank’s dealing with the
sale of insurance policies to its retail customers. It has been mentioned even in the
director report of HDFC bank. Thus a glimpse at its profit would be imperative.
Year 2004-05 2005-06 2006-07
Profit earned by 520,64 lacs 701,67 lacs 875,71 lacs
the retail segment
of HDFC bank
CHART 4.1.2:
Profit earned by the Retail Segment
1000 875.71
800 701.67
Revenue Earned
600 520.64
(in Lacs)
400
200
0
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that there has been a
phenomenal increase in the profit of retail segment from 2004-2006, which
symbolizes the bancassurance contribution.
52

57. DATA ANALYSIS AND INTERPRETATION
TABLE 4.1.3
RETAIL SEGMENT ASSETS FROM THE YEAR 2004 TO 2006: Retail
segment asset can also be increased by way of bancassurance operation. Let us take
a look at its asset position from the year 2004-05 to 2006-07.
Year 2004 –05 2005 -06 2006- 07
Retail assets 24,469,93 38,571,09 50,100,34
CHART 4.1.3
Growth of Retail Assets
6000000
5010034
5000000
3857109
4000000
Retail Assets Value(in
3000000 2446993 Lakhs)
2000000
1000000
0
2004-05 2005-06 2006-07
INFERENCE: From the above, we can infer that there has been a phenomenal
increase in the growth of retail assets over the years that it indicates the
contribution of bancassurance to it.
53

58. DATA ANALYSIS AND INTERPRETATION
TABLE 4.1.4:
OPERATING EXPENSES FROM THE YEAR 2004 TO 2006: Bancassurance
will lead to a reduction in the operating expenses of the bank as it can have the
opportunity of economies of scale. Thus let us took a look at the operating expenses
of HDFC bank from the year 2004-05 to 2006-07.
Year 2004 –05 2005 -06 2006- 07
Operating 1,085,40 1,691,09 2,420,80
expenses
CHART 4.1.4:
Operating Expenses - An overview
3000000
2,420,80
2500000
Operating
2000000 1,691,09 Expenses (in
1500000 Lakhs)
1,085,40
1000000
500000
0
2004-05 2005-06 2006-07
INFERENCE: From the chart, we can observe that there has been an increase in
the operating expenses of the bank. Since, HDFC bank is only in its infant stage in
bancassurance, it can perform more to reduce the same in the long run.
54

59. DATA ANALYSIS AND INTERPRETATION
TABLE 4.1.5:
NON-INTEREST INCOME AS A PERCENTAGE OF TOTAL REVENUE:
As bancassurance revenue leads to an increase in the non-interest income, the non-
interest income as a % of total revenue from the year 2004-2006 is as follows:
Year 2004-05 2005-06 2006-07
Non interest 651,34 1,123,98 1,516,23
income
Total revenue 3,744,83 5,599,32 8,405,25
Ratio 17.39 20.07 18.03
Chart 4.1.5:
Non-interest income as a percentage of total revenue
21
20
19
Ratio
18
17
16
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that non-interest income as a
% of total revenue though increased in the year 2005,it has been decreased in the
year 2006.
55

60. DATA ANALYSIS AND INTERPRETATION
TABLE 4.1.6:
NON-INTEREST INCOME AS A % OF OPERATING PROFIT: Non-
interest income as a contribution to the % of operating profit from the year
2004-2006 is shown as below:
Year 2004-05 2005-06 2006-07
Non-interest 651,34 1,123,98 1,516,23
income
Operating 1,156,02 1,733,84 2,562,86
profit
Ratio 56.34% 64.82% 59.16%
Chart 4.1.6:
Non-interest income as a % of operating profit
66%
64%
62%
60%
Ratio
58%
56%
54%
52%
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that non-interest income as a
% percentage of operating profit has been increasing from 2004 to 2005.But it has
been decreased in the year 2006-07.
Note: Operating profit = (interest income + other income – interest expense –
operating expense –amortization of premia on investments - profit/(loss) on sale
of fixed assets).
56

61. DATA ANALYSIS AND INTERPRETATION
Business ratios (As per the director’s report of HDFC bank)
TABLE 4.1.7:
NON – INTEREST INCOME AS A % OF WORKING FUNDS: Non-interest
income as a % of working funds is shown as below:
Year 2004-05 2005-06 2006-07
Non interest income 1.44% 1.79% 1.76%
as a % of working
funds
Chart 4.1.7:
Non interest income as a % of working funds
2.00%
1.50%
`
1.00%
Ratio
0.50%
0.00%
2004-05 2005-06 2006-07
INFERENCE: From the chart it can be observed that non-interest income as a%
percentage of working funds though increased in the year 2005,it has been
decreased in the year 2006.
TABLE 4.1.8:
RETURN ON ASSETS (AVERAGE): The best opportunity for the banks, which
undertakes bancassurance operation is that, it can increase its return on assets.
Hence, the return on assets of the bank from 2004-2006 is as follows:
57

62. DATA ANALYSIS AND INTERPRETATION
Year 2004-05 2005-06 2006-07
Return on 1.47% 1.38% 1.33%
Assets
(Average)
Chart 4.1.8:
Return on assets
1.50%
1.45%
1.40%
Ratio
1.35%
1.30%
1.25%
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that the return on assets of the
bank has been decreased from the year 2004 – 2006.
TABLE 4.1.9;
BUSINESS PER EMPLOYEE: The business per employee from 2003-2006 is as
follows:
Year 2004-05 2005-06 2006-07
Business Per 806 758 607
58

63. DATA ANALYSIS AND INTERPRETATION
Employee
Chart 4.1.9:
Business per Employee
900
800
700
600
500
Ratio
400
300
200
100
0
2004-05 2005-06 2006-07
INFERENCE: From the above, it is clear that the business per employee of the
bank over the years has been on the decreasing trend.
TABLE 4.1.10
PROFIT PER EMPLOYEE: Profit per employee from 2004-2006 is as follows:
Year 2004-05 2005-06 2006-07
59

64. DATA ANALYSIS AND INTERPRETATION
Profit per 8.80 7.39 6.13
employee
Chart 4.1.10:
Profit per Employee
10
8
6 Profit per
4 employee
2
0
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that profit per employee of the
bank over the years has been on the decreasing trend.
RBI guidelines: As per the RBI guidelines for the banks to enter into the
insurance sector, The CRAR of the bank should not be less than 10 per cent,
and the level of Non Performing Assets (NPAs) should be reasonable. Hence,
analysis of such ratios is also important.
Capital adequacy ratio: Capital adequacy ratio from the year 2004-2006 can
be shown as follows: (As the total capital includes tier-1 and tier-2, it can be
viewed separately.)
TABLE 4.1.11 Tier 1 capital:
Year 2004-05 2005-06 2006-07
60

65. DATA ANALYSIS AND INTERPRETATION
Tier 1 capital 3,96,216 5,149,91 6,352,71
Risk weighted assets
and contingents 41,27,103 60,217,62 74,081,92
Ratio 9.60% 8.55% 8.57%
TABLE 4.1.12 Tier 2 capital:
Year 2004-05 2005-06 2006-07
Tier 2 capital 1,054,73 1,720,71 3,339,99
Risk weighted assets
and contingents 41,27,103 60,217,62 74,081,92
Ratio 2.56% 2.86% 4.51%
Where,
Tier –1 capital includes paid up capital, statutory reserve, general reserve,
balance in profit and loss account and amalgamation reserve. From this,
outstanding deferred tax asset, if any, is deducted.
Tier– 2 capital includes general loan loss reserves, investment fluctuation
reserve and subordinated debt.
TABLE 4.1.13 Total Capital:
Year 2004-05 2005-06 2006-07
Total capital 5,016,89 6,870,62 9,692,70
Risk weighted
assets and 41,27,103 60,217,62 74,081,92
contingents
61

66. DATA ANALYSIS AND INTERPRETATION
Ratio 12.16% 11.41% 13.08%
Chart 4.1.11:
Capital Adequacy Ratio
13.5%
13.0%
12.5%
Ratio
12.0%
11.5%
11.0%
10.5%
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be seen that the capital adequacy ratio
though decreased in the year 2005,it has been increased in the year 2006-07.
TABLE 4.1.14:
PERCENTAGE OF NET NON PERFORMING ASSETS TO CUSTOMER
ASSETS: The percentage of net non-performing assets to customer assets is
shown as below from the year 2004-2006:
Year 2004-05 2005-06 2006-07
Percentage of net 0.20% 0.36% 0.38%
non performing
62

67. DATA ANALYSIS AND INTERPRETATION
assets to customer
assets
Chart 4.1.12:
Percentage of Net Non-performing assets to
Customer assets
0.40%
0.30%
0.20% Ratio
0.10%
0.00%
2004-05 2005-06 2006-07
INFERENCE: From the above, it is clear that the percentage of net non-
performing assets to customer assets has been increasing from the year 2004-2006
TABLE 4.1.15
PERCENTAGE OF NET NON-PERFORMING ASSETS TO NET
ADVANCES: The percentage of net non-performing assets to net advances from
the year 2004-2006 are shown as follows:
63

68. DATA ANALYSIS AND INTERPRETATION
Year 2004-05 2005-06 2006-07
Percentage of net 0.24% 0.44% 0.43%
non performing
assets to net
advances
Chart 4.1.13:
Percentage of Net Non-performing assets to net
advances
0.50%
0.40%
0.30%
0.20% Ratio
0.10%
0.00%
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that the percentage of net
non-performing assets to net advances has been increased from the year 2004 to
2005 and it has been decreased in the year 2006.
TABLE 4.1.16
PERCENTAGE OF GROSS NON-PERFORMING ASSETS TO GROSS
ADVANCES: The percentage of gross non-performing assets to gross advances
from the year 2004- 2006 are shown as follows:
64

69. DATA ANALYSIS AND INTERPRETATION
Year 2004-05 2005-06 2006-07
Percentage of 1.69% 1.32% 1.32%
gross non
performing assets
to gross advances
Chart 4.1.14:
Percentage of gross non performing assets to gross
advances
2.00%
1.50%
1.00%
Ratio
0.50%
0.00%
2004-05 2005-06 2006-07
INFERENCE: From the above, it can be observed that the percentage of gross
non-performing assets to gross advances has been decreasing from the year 2004
–2006.
65