The Indian Economy and The Financial

Sector Opportunity

July 12, 2005

 Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

SG-2005-0042 2
 India : Overview

Country Country
Population 1,055m 3 year CAGR of GDP 6.5%
GDP (03-04) $ 579 Bn Inflation 5%
Savings rate (03-04) 25%
Life insurance market
Insurance penetration* 2.3%
MF Penetration 0.5%

Characteristics

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* Insurance Premiums as % of GDP
** April 2003 – March 2004
 Size and Distribution of Savings

HH Savings Share of Financial Savings

(Rs Mn)
600,000 Gross Physical Savings 100%
5 Year 20.2% 90%
500,000 80%
70%
400,000
60%
50%
300,000
40%
200,000 30%
20%
Financial Savings
100,000 10%
5 Year 11.6%
0%
0

1993-94

1995-96

1997-98

1999-00

2001-02
1993-94

1995-96

1997-98

1999-00

2001-02

Mutual Fund Life Insurance Government Small Savings

Currency & Deposit PF & Govt Pension

Sources: RBI
SG-2005-0042 4
 Opportunities in life insurance

Life in s u ra n c e p re m iu m a s % o f GDP
12.0%
10.7%

10.0% 8.9% 8.7%

8.0%
5.7%
6.0%
4.4%
4.0% 3 .4 %
2 .3 % 2.3%
2.0%

0.0%
UK Jap an Ko re a Aus trlia US Ma la y s ia Ind ia China

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 Opportunities in non-life insurance

N o n -life in s u ran c e p re m iu m as % o f GDP

5 .0 % 4 .6 %

4 .0 % 3 .5 % 3 .4 % 3 .4 %

3 .0 %
2 .2 %
1 .8 %
2 .0 %
0 .9 %
1 .0 % 0 .6 %

0 .0 %
US UK Aus tra lia Ko re a Japan Ma la y s ia China Ind ia

SG-2005-0042 6
 Retail credit opportunity…
Co ns u m e r lo an s / GDP (%)
60
55
52
50

40
33
30

20 18

10 8

0
Ko re a Taiw an Malay s ia Thailand India

Net retail NPA levels are low at about 1.6% for the Indian
banking sector as a whole and even lower for many of the
leading players

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 Opportunities in asset management

A U M as % o f GD P
100% 87%

80% 72%

60%

40% 30%
23% 21%
20%
6%
0%
Aus tra lia US Bra zil UK Ko re a Ind ia

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 Opportunities in Credit Card

SG-2005-0042 9
 Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

SG-2005-0042 10
 Twin Growth Drivers

Demographic Transition

Economic Surge

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 Lowering Dependency Ratio …

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…leading to growth in Household Financial Savings

Reducing dependency could trigger a self-reinforcing savings growth dynamic in the next decade

• Expected demographic trends suggest,

in light of experience elsewhere, in the
next decade India’s national savings
could rise to 30% or more

• Bulk of the savings contributed by

Households

• Decline in share of financial savings a

negative – however expected to
increase with development of financial
system and higher awareness

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 Rising Income levels Increases Target Market

Income CAGR (%)

210
27.8
15.7 >140k 10.1%
180
48
72
150 70k-140k 7.06%

No. of
HH (M)
120

90
141 <70k -2.31%
60 123

30

0
'03-'04 '09-'10(E)
Income range based on 1998-1999 prices
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Source:Based on NCAER & Govt Of India estimates
 ... Insurance Is Poised For Growth

Insurance premium
as % GDP
12

10

4
INDIA
2

0
100 1,000 10,000 100,000
0 1 2 3
GDP per capita in USD (log scale)

(1) PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shown
Source: Swiss Re; NCAER
SG-2005-0042 15
 Twin Growth Drivers

Demographic Transition

Economic Surge

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 Drivers of resurgence…

Services sector driving momentum

• Established leadership in information technology
• Successful forays across knowledge-based sectors

Renewed industrial growth

• Operational efficiency and quality focus
• Supported by financial restructuring

Progress in infrastructure development

• Significant achievements in telecom and roads
• Focus on power sector and urban rejuvenation

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 Services sector driving momentum
Leveraging rich pool of human capital
• Quality educational institutions
• Large English speaking population

Globally-positioned IT sector
• Software exports of US$ 12.2 bn in FY2004 and US$ 7.1 bn in
H1-2005

International services hub

• Commenced with IT-enabled services : voice & data
• Expanded to all knowledge sectors: pharmaceuticals,
biotechnology, engineering design

Growth in financial services, travel & hospitality

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 Impact of the resurgence

Sectoral share of Growth

Sector
GDP(%) FY2004(%)

Services 56.2 9.1

Industry 21.7 6.6

Agriculture 22.1 9.6

GDP 8.5

One of the fastest growing economies in the world with 7.0%

growth rate in H1-2005

Source: NAS
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 Renewed industrial growth
After a prolonged period of restructuring and repositioning
growing competitiveness
• Increasing deployment of technology
• Deleveraging and organic capital generation
• Constantly improving quality standards

 Emergence of Indian multinationals

• Setting up production capacities overseas
• Setting up international distribution
• Consolidating supply chain

 India’s emergence as a global manufacturing hub

– Second-most favoured destination for FDI in manufacturing

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 Progress in infrastructure development

 Construction of Golden Quadrilateral and North-

Construction of Golden Quadrilateral and North-
South,
South,East-West
East-Westcorridors
corridors
 13,000 km long - world’s largest single highway
13,000 km long - world’s largest single highway
Roads project
project
 Boosting demand for steel, cement, commercial
Boosting demand for steel, cement, commercial
vehicles
vehicles

 Cellular subscriber base of 49 million, growing at

Cellular subscriber base of 49 million, growing at
over
over150%
150%
Telecom
 Positive impact on efficiency of firms & services
Positive impact on efficiency of firms & services
exports
exports

…missteps in power and urban infrastructure being addressed

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 India has just started on the journey

S -c u rv e fo r in c o m e g ro w th in As ia

25,000
GD P p e r c a p ita in 2 0 0 3 (U S $ )

Ho ng Ko ng
20,000 S ing a p o r
Jap an

15,000 Ta iw a n
Ko re a

10,000
Ma la y s ia
P hilip p ine s
5,000 Tha ila nd
Ind ia China
0
0 10 20 30 40 50 60
Ye a rs fro m s ta rt o f re fo rm s
S o u rc e : M o rg a n S t a n le y

SG-2005-0042 22
 Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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 Challenges of Intermediation in India
Size of the country and dispersed affluent population

Lack of Data – specially the area of Health

Attracting the Talent Pool

Evolving Regulatory Environment

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 Size & Dispersion of Population
Area : 2973190 sq. Kms.

More than 70% of population in rural areas

• More than a third of Mass affluent & rich households in
rural areas

5161 towns & cities comprise urban India

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 Challenges from lack of Data
No single customer identification number like social
security number

Single Mortality table used

• No cuts available by geography or customer segment
• Very scarce data for annuitants

Health records not available

• Health incidence data or morbidity tables not
developed
• No consolidated medical individual history available
• No standard definition of conditions & surgeries

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 Attracting the Talent Pool

Increasing attrition levels

• Poaching within & across industries
• Attrition at frontline sales level around 20%

Payhikes
• Salary increases grossly out pace inflation
• Projected increases to continue at a minimum 10-12%
• Premium for “critical skills” with a sudden advent of
new industries e.g. Insurance & ITES

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 Evolving Regulatory Environment

Multiple Regulators

• Boundaries in RFS becoming fuzzier

Pension reforms on the anvil

Tax rules in flux

• Creates distortions in incentives to invest in various
financial instruments

Regulations still evolving as regulators gain maturity

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 Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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 Summary
Strong growth prospects for the Indian Economy

Demographic transition should lead to a positive

savings growth spiral – fuelling growth of financial
savings

Changing structure of savings could lead to increase in

allocation to Insurance & Pensions

Need to manage unique intermediation challenges of

operating in India

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 Thank you

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