Recent Trends in Indian Financial Services Industry

R.Neelamegam

Emeritus Professor- AICTE, Department of Management Studies, V.H.N.S.N. College, Virudhunagar

Abstract - 'Finance is the life blood of business' and

'Finance is the wheel of industry' - go the rhetoric

emphasizing the key role of finance. In fact, finance

pervades into other areas of business like production and

marketing - to keep the business going: such is the

importance of finance. Amid this backdrop, the present

paper brings to focus recent trends in financial services

sector in India.

1. INTRODUCTION

In India, the onset of globalization in

July1991, changed the financial scenes in the

realms of banking, insurance and Mutual fund.

1.1 Commercial banks

A landmark was registered in the Indian

banking sector when the major banks were

nationalized in 1969.Though nationalization was

enforced as a flashy political gimmickry by the

then government at the centre, its real gain was

reaped by the citizens of India only in 2009-when

the banks of developed nations tumbled down,

the Indian banks stood strong- there was no

public panic at all at the time of global financial

crisis which shook the world during 2008-2009.

1.2 Banks' technology driven services

Marketing is an essential economic factor

not only for production but also for research and

development. Peter Drucker has aptly remarked a

business firm has really two functions only,

namely, marketing and innovation. It is very

relevant for banking industry, which in India has

undergone sea changes, thanks to the advent of

technology, competition brought through foreign

banks, emergence of new private banks and

changes in regulations.

With more and more players expected in

the field, banks have to adapt to the new trend.

Concerted efforts have been made by banks to

improve customer service. The most important

196

ones relate to the advent of technology - ATMS,

telebanking, internet banking- banks have

adopted latest information technology to cater to

the needs of customers. For example, in a shared

payment network system (SPNS), a customer of

one bank can use hisATM card at another bank's

ATM, both being in the same network. Banks

have opened specialized branches like industrial

finance, MSME and NRI branches in order to

provide personalized services. Besides, they

have set up grievance redressal cells at major

centers to redress customers' grievances.

1.3 Cross Selling

Recently, in retail banking business, the

concept of cross selling has been introduced. If a

bank sells an asset product (housing/car/

educational loan) to its account holder, it is cross

selling. The cross selling enhances customer's

loyalty. Banks have entered into the field of

housing loan. Housing loan rates are being

slashed. The aggression by the banks in this field

is noticeable. The rate war triggered by SBI has

prompted other banks to lower their rates.SBI,

UBI, PSB along with LIC and HFC have special

offer of loan at 8% to 8.5%

1.4 Educational Loan

Asalient feature in recent trend in bank

finance is education loan. Education loans

amounting to Rs24,000 crore had been disbursed

to 16 lakh students across the country till march,

2009; and it is expected that the education loan

may touch Rs50,000 crore by 2015. The Central

Government has decided not to charge interest on

education loan granted to those whose family

income is less than Rs4.5 lakh per annum. This

will come into force during the current academic

year.197

2. REGIONAL RURAL BANKS (RRBS)

Ours is an agricultural economy .The

Father of the Nation rightly said that India lives in

villages. Still there are lakhs of villages where 60

crore people live. Against this backdrop, the

establishment of Regional Rural Bank in India is

a landmark in the Indian Banking History. The

main objective of RRB is to provide credit

especially to small and marginal farmers,

agricultural labourers, small entrepreneurs and

artisans in rural areas who need funds. At the

beginning, in 1975, five RRBS were setup. Today, we have 104 RRBS Sponsored by 29 banks.

These RRBS function in 484 districts with more

than 14,400 branches and employing about

70,200 persons. Realizing the importance of the

RRBS, Government of India has recently said

that it intends to strengthen the financial

resources of RRBS.

3. INSURANCE SECTOR

The life insurance business has come a

long way since independence, and Indian

consumers till recently had been dealing with one

life insurance player, i.e., the LIC in the public

sector. After the liberalization of the insurance

sector, a dozen companies have entered the

insurance business. The insurance sector had the

reforms with the passing of IRDA bill in

December, 1999. The privatization process

commenced by forming the Insurance Reforms

Committee. The 12 private life insurers have

already grabbed 9% of the market in terms of

premium income. The insurance premiums of

these 12 players have crossed Rs 1000 crore over

the last year. Innovative products, smart

marketing and aggressive distributition, that is,

the triple whammy combination has enabled

fledgling private insurers to sign up Indian

consumers. While the state owned companies

still dominate segments like endowment and

money back policies, the private companies have

a virtual monopoly in the unit linked insurance

schemes.

3.1 Detariffing

Recently, the IRDA has requested the

general insurance companies to initiate steps to

ensure transition from tariff regime to detariff

regime from January, 2007; accordingly, there is

full detariffing of the general insurance business

from April 1, 2008. Tariff means rigidity. It

means that not only rates are fixed, but also the

terms and conditions of policies are to be laid

down in tariff. Detariffing makes insurers free to

decide the premium rates based on their own

guidelines of pricing.

3.2 Bancassurance

The concept bancassurance is French

origin. It is an emerging concept in India .Life

assurance companies need immense distribution

strength. This distribution will undergo a vast

change when the insurance policies are available

from local bank branch through bancassurance

In India, the sign of initial success is already.

there and the success of the scheme depends on

banks ensuring excellent customer relationship.

3.3 Micro Insurance

LIC launched its first micro insurance

product, captioned “Jeevan Madhur” in

September, 2006. It launched its second micro

insurance product, under the caption “Jeevan

Mangal” in September, 2009. The policy is

targeted at factory workers, self help group

members, domestic servants, rickshaw pullers

and other low income people. The salient feature

is a low minimum premium of Rs15 per week and

the risk cover ranged from Rs 15, 000 to a

Maximum of Rs 50, 000.

4. MUTUAL FUND

In India, mutual funds play a dominant

role by mobilizing savings and investing them in

the capital market, thus establishing a link

between savings and capital market. The main

objective of investing in mutual fund scheme is to

diversify risk. Mutual funds made an opening in

1963 under the enactment of Unit Trust of India

R.Neelamegam - Recent Trends in Indian Financial Services Industry198

which launched its first scheme named US 1964,

which is continuing even to-day. In1986, the

Government amended the Banking Regulation

Act and permitted public sector commercial

banks like SBI, PNB, Canara bank and so forth to

set up mutual funds. Government allowed

insurance companies in the public sector- GIC in

1989 and LIC in 1991, to set up mutual funds. In

1993, under its New Economic policy of

liberalization opened the gates to the private

sector to set up mutual funds. In March 1991, the

government entrusted the function of regulating

mutual funds to Securities and Exchange Board

of India (SEBI) which issued guidelines in

October, 1991 for regulating the Indian capital

market.

4.1 Sectorwise Mobilization of Funds by

Mutual Funds

Mutual funds have become an important

segment of institutional investors. The total

mobilization of funds by private sector MFs

during 2007-2008 was Rs.37, 80,753 crores,

followed by UTI MFs Rs.3, 46,126 crores, and

public sector MFs Rs.3, 37,498 crores. As in the

preceding years, the private sector MFs

continued to dominate resource mobilization in

2007-2008

Now there is SIP (systematic investment

plan) method of investing in the mutual fund.

Before starting a SIP, an investor has to decide on

which fund scheme he wants to invest in dividend

or growth option? How much one wants to

invest? How long one wants SIP to go on? and so

forth.

Interest rate future was launched in

National Stock Exchange on 31st August, 2009.

It is a contract to buy or sell a debt security (10

year government bond bearing interest rate of 7%

payable half yearly) at a price decided in advance

for delivery at a future date .The contract helps to

eliminate the interest rate risk.

5. CONCLUSION

It is clear that many aspects of financial

services industry in India have changed since the

1990's. With the reforms of financial services

industry, the economy has been opened up and

several significant developments have been

taking place in all the segments of the financial

services sector. As per the survey of Central

Statistical Organization, the Indian economy has

grown at 6.1% in the first quarter of 2009-2010

against 5.8% growth in the previous quarter

despite the global financial crisis impacting

manufacturing and services sectors like trade,

hotels and communication. It is heartening to

note that finance, insurance and real estate

expanded by 8.1% against 6.9% in the previous