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History of Banking in India

History of Banking in India

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Published by: honeygoel13 on Oct 20, 2010
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History of Banking in India.1. Definition2. History History of Insurance in India1. Definition2. History3
Introduction to Banking
Banking as per the Banking Regulation Act, Banking is defined as: -³accepting for the purposeof lending of deposits of money from the public for the purpose of lending or investment,repayable on demand throughcheques, drafts or order.´A sound and effective banking system is necessary for a healthy economy. The banking systemof India should not only be hassle free but it should be able to meet new challenges posed by thetechnology and any other external and internal factors. Many new things have come up in the banking sector in the recent years. Banks have adopted the new technology because banking hasnot remained up to accepting and lending but now it is all about satisfying the needs of thecustomers.The development of the Indian banking sector has been accompanied by the introduction of newnorms. New services are the order of the day, in order to stay ahead in the rat race. Banks arenow foraying into net banking, securities, and consumer finance, housing finance, treasurymarket, merchant banking etc.They are trying to provide every kind of service which can satisfyor rather we should say that it can delight the customers. Entry of private and foreign banks inthe segment has provided healthy competition and is likely to bring more operational efficiencyinto the sector. Banks are also coping and adapting with time and are trying to become one-stopfinancial supermarkets. The market focus is shifting from mass banking products to class banking with the introduction of value added and customized products.
Introduction to Insurance Sector
: -³It is a contract between two parties where by one party undertakes to compensate the another  party for the loss arising due to an uncertain events for which the another party agrees to pay acertain amount regularly.´In India, insurance has a deep-rooted history. Insurance in India has evolved over time heavilydrawing from other countries, England in particular. The insurance sector in India has come afull circle from being an open competitive market to nationalization and back to a liberalizedmarket again. The business of life insurance in India in its existing form started in India in theyear 1818 with the establishment of the Oriental Life Insurance Company in Calcutta.The Insurance Act, 1938 was the first legislation governing all forms of insurance to providestrict state control over insurance business. Today there are 14 general insurance companies and14 life insurance companies operating in the country. But today also the insurance companies aretrying to capture Indian markets as not many people are aware of it.
insurance sector is a colossal one
and is growing at a speedy rate of 15-20%. Together with banking services, insurance. services add about 7% to the country¶s GDP. A well-developed andevolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
With the opening up of the insurance sector and with so many players entering the Indianinsurance industry, it is required by the insurance companies to come up with innovative products, create more consumer awareness about their products and offer them at a competitive price. Since the banking services, insurance and fund management are all interrelated activitiesand have inherent synergies, selling of insurance by banks would be mutually beneficial for  banks and insurance companies. With these developments and increased pressures in combatingcompetition, 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 thoughtof as a potential distribution channel, useful for the insurance companies. This union of the twosectors is what is known as Bancassurance.
Bancassurance is the distribution of insurance products through the bank's distribution channel. Itis 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.To put it simply, Bancassurance, tries to exploit synergies between both the insurance companiesand banks.Bancassurance can be important source of revenue. With the increased competition andsqueezing of interest rates spread, profits are likely to be under pressure. Fee based income can be increased through hawking of risk products like insurance.Bancassurance if taken in right spirit and implemented properly can be win-win situation for theall the participants' viz., banks, insurers and the customer.
The banks taking over insurance is particularly well-documented with reference to theexperience in Europe. Across Europe in countries like Spain and UK, banks started the processof selling life insurance decades ago and customers found the concept appealing for variousreasons. Germany took the lead and it was called ³ALLFINANZ´. The system of bancassurancewas well received in Europe. France taking the lead, followed by Germany, UK, Spain etc. InUSA the practice was late to start (in 90s). It is also developing in Canada, Mexico, andAustralia.In India, the concept of Bancassurance is very new. With the liberalization and deregulation of the insurance industry, bancassurance evolved in India around 2002.
Models of BancassuranceI. Structural Classificationa) Referral Model
Banks intending not to take risk could adopt µreferral model¶ wherein they merely part with their client data base for business lead of commission. The actual transaction with the prospectiveclient in referral model is done by the staff of the insurance company either at the premises of the ban0k or elsewhere. Referral model is nothing but a simple arrangement, whereinthe bank, while controlling access to the clients data base, parts with only the business leads tothe agents/ sales staff of insurance company for a µreferral fee¶ or commission for every business lead that was passed on. In fact a number of banks in India have already resorted to thisstrategy to begin with. This model would be suitable for almost all types of banks including theRRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater scope in the medium term for this model. For, banks to begin with can resort to this model andthen move on to the other models.
b) Corporate Agency
The other form of non-sick participatory distribution channel is that of µCorporate Agency¶,wherein the bank staff as an institution acts as corporate agent for the insurance product for afee/commission. This seems to be more viable and appropriate for most of the mid-sized banks inIndia as also the rate of commission would be relatively higher than the referral arrangement.This, however, is prone to reputational risk of the marketing bank. There are also practicaldifficulties in the form of professional knowledge about the insurance products. This could,however, be overcome by intensive training to chosen staff, packaged with proper incentives inthe banks coupled with selling of simple insurance products in the initial stage. This model is best suited for majority of banks including some major urban cooperative banks because neither there is sharing of risk nor does it require huge investment in the form of infrastructure and yetcould be a good source of income. This model of bancassurance worked well in the US, becauseconsumers generally prefer to purchase policies through broker banks that offer a wide range o products from competing insurers.
c) Insurance as Fully Integrated Financial Service/ Joint ventures
Apart from the above two, the fully integrated financial service involves much morecomprehensive and intricate relationship between insurer and bank, where the bank functions asfully universal in its operation and selling of insurance products is just one more function within.This includes banks having wholly owned insurance subsidiaries with or without foreign participation. The great advantage of this strategy being that the bank could make use of its full potential to reap the benefit of synergy and therefore the economies of scope. This may besuitable to relatively larger banks with sound financials and has better infrastructure. As per theextant regulation of insurance sector the foreign insurance company could enter the Indianinsurance market only in the form of joint venture, therefore, this type of bancassurance seems tohave emerged out of necessity in India to an extent. There is great scope for further growth bothin life and non-life insurance segments as GOI is reported have been actively considering toincrease the FDI¶s participation up to 49 per cent.
II. Product based classification
Stand-alone Insurance Products

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