Banking, Financial services and Insurance (BFSI) is an industry term for companies that provide

a range of such financial products/services such as universal banks. BFSI usually comprises
commercial banks, insurance companies, non-banking financial companies, cooperatives, pensions
funds, mutual funds and other smaller financial entities.
Banking may include core banking, retail, private, corporate, investment, cards and the like.
Financial Services may include stock-broking, payment gateways, mutual funds etc. Insurance
covers both life(Living) and non-life(Non Living).
This term is commonly used by information technology (IT)/Information technology enabled services
(ITES)/business process outsourcing (BPO) companies and technical/professional services firms
that manage data processing, application testing and software development activities in this domain.
The global BFSI Industry faced serious turmoils during the early 21st century, when a series of crisis
like 'Subprime mortgage crisis' in US, and the Great Recessionworldwide, that began in Q3-2008
and ended in Q1-2009, gave a huge setback, resulting into negative growth. But reports says that
the industry is now coming back on track, and is gaining pace on a path of recovery.
Key Challenges in BFSI
Banks: (Source)

Increasing the penetration of banking in rural area.

Tackling demand supply mismatch.

Credit disbursement to the priority sector.

Maintaining asset quality.

Improving risk management mechanism.

Technology adoption.

Insurance: (Source)

Need for Accuracy in Pricing of Risks.

Rural Market still under penetrated.

Pension Market remains untapped.

Mutual Funds: (Source)

Low level of Customer Awareness.

Inadequate reach of funds / distributors to retail investors.

Limited innovation in product offering.

Multiple Regulatory Frameworks.

Banks
Over the past decade the banking industry has witnessed many positive developments. The banking
industry in India compares quite well with many of its international counterparts on metrics such as growth,
NPAs, ROA, etc. Although the Indian banking industry has witnessed significant growth in last few years,
comparatively lower levels of financial inclusion remains a concern. A large proportion of the population is
still financially excluded, with the number of bank branches per one lakh (hundred thousand) adults being
low (by global standards) at 9.4 branches. Further, the progress made during past decade is limited to a
small part of the industry. While the onus for tackling the emerging challenges lie mainly with bank
managements, a facilitating policy and regulatory framework will be critical for the further development of
the banking industry. The following are some of the challenges faced by the Indian banking sector.
Increase penetration of banking in India- tackle demand supply mismatch
Primarily supply side constraints are responsible for the high levels of financial exclusion in the country, as
they have a causal effect in keeping demand low from certain factions of the population. The demand
supply mismatch, which is reflected in measures of financial exclusion, shows the limitations on the banks
ability to supply products and services.
A large proportion of the population in India, largely concentrated in rural areas is believed to be financially
excluded from formalized credit markets (implies having access to bank credit) and payments systems
(implies not having access to bank accounts). Inaccessible institutional credit drives these people to use the
services of unorganized credit markets which charge interest at rates in the range of 35-60%. According to
the Report of the Committee on Financial Inclusion (NABARD, 2008) and NSSO, 45.9 million farmer
households in India do not have access to credit, even from noninstitutional sources. Only 27% of farmer
households have loans from institutionalized sources, two-thirds of which also borrow from the unorganized
sector. Among the urban poor class, financial exclusion level is not determined with certainty, since this
population group is highly migratory. But, clearly, north eastern, eastern and central regions suffer more
from financial exclusion than other regions of the country.
Many initiatives are being taken by the RBI and other banks in the country, notably public sector banks, to
increase supply of financial services to the unbanked areas. Introduction of no frills account (2005) and
utilizing services of NGOs and other civil organizations for providing financial services (2006) are some

steps in that direction. The ability of banks to supply products and services is clearly reflected in the
population being served by them per branch, or their physical presence geographically.

Foreign banks committed to making a play in India will need to adopt alternative approaches to win the
race for the customer and build a value-creating customer franchise in advance of regulations potentially
opening up post 2009. At the same time, they should stay in the game for potential acquisition
opportunities as and when they appear in the near term. Maintaining a fundamentally long-term valuecreation mindset will be their greatest challenge.
Credit disbursement to the priority sector:
One of the major challenges faced by the banking system in India is to provide timely and cost effective
credit to the priority sectors especially the agriculture and Small scale industries, which are critical in
generating employment and support the growth momentum of the economy. After witnessing robust
growth between FY05-FY07, the growth in agriculture credit witnessed some moderation in FY08. Thus
banks are required to ensure availability of credit to the agriculture sector, which forms the backbone of the
Indian economy. With significant slowdown in economic activity and exports during the latter part of FY09,
the credit growth to the micro and small experienced some moderation. While it is important for the banks
to maintain the asset quality, they also need to direct the credit flow towards small and medium enterprises
which play a critical role in Indias economic development.
Maintain asset quality:
The secured advances made by banks have shown a mild decline in FY09. The unsecured advances of
banks particularly of credit card receivables have increased substantially. In FY09, the quality of assets of
banks has come under scrutiny, as the rising interest rates started putting pressure on the repayment by
borrowers in the H1 FY09. While the interest rates began to soften in the latter part of the fiscal, the risk of
default persisted mainly due to slowdown in economic activity. Thus a major challenge in the current
economic scenario for the Indian banks is to maintain the gains made with respect to asset quality over the
past few years.
In such situations, unsecured advances possess greater risk to business. The sensitive sector advances is
an important indicator towards the quality of assets held by banks. Though this does not in itself indicate a
high risk, the higher exposure signals a greater need for monitoring by the banks as the susceptibility
increases. This is of even greater importance in the current scenario when capital markets and real estate
are extremely risky sectors. The exposures of SCBs to sensitive sectors have increased inexplicably from

less than 3.5% to over 20% within a span of two years. New private sector banks have the highest
exposure to sensitive sectors, largely due to the exposure in real estate.
Improve risk management mechanism:
Strategies to combat the problem of high risk perception must be taken up by banks on priority basis.
Increased usage of rating services must be employed to reduce risk. Besides, SME specific risk
management procedures must be setup to make the business more viable, as the risk perception
associated with lending to small enterprises is generally very high. Further, the banks would also be
required to acquire skill for managing emerging risks resulting from innovations in financial products as well
as technological advancements.
The availability and ease access to reliable data/information to both banks and regulators/supervisors of
the banking system is a key for prudent risk management. Hence, strengthen the existing system would be
another challenge for the banking industry. More over the recent global financial market turmoil has
accentuated the need for further improvement in the transparency and disclosure standards.
Technology adoption:
The problem of resistance from workforce has largely been neutralized over the years, but the primary
issue involved with the adoption and rapid integration of technological processes within banks still related
to human resources- the availability of technically skilled resources is scarce. Technology is not among the
core competencies of financial institutions, which necessitates outsourcing. Banks in India are different
from banks in many other countries, in ways that they have a very large branch network and varied needs
specific to regions and customers. Most off the shelf solutions are not exactly in conformity to the needs of
the banks, which makes room for large customizations.
Besides, a serious concern in implementing complex technologies is protection against frauds and hackings.
Security concern slows down technology adoption significantly for the banking industry. A fast pace of
development of security systems is imperative to the adoption of large scale innovations in the industry.
Another issue is that of business process reengineering, which is required after computerization. Failure to
successfully carry out BPR neutralizes the benefits that an institution wishes to accomplish via adoption of a
technological process.

Insurance
Need for Accuracy in Pricing of Risks

The continual entry of new private players coupled with the intense competition owing to the detariffication of the general insurance sector has also resulted in strengthening the bargaining power of the
customers and development of customer centric insurance products. While the customer has benefited on
account of the detariffing, the impact on the insurers has been less promising so far on account of the price
wars and the resultant underwriting losses. Thus, it is apparent that without an accompanying development
of systems to ensure accurate pricing of risks, the profitability and the solvency levels of the general
insurance players would increasingly come under pressure. Insurers will have to improve and consolidate
their processes for data mining and MIS for undertaking informed underwriting risks. Adequate training of
underwriters and the sales staff for equipping them with the ability to respond to these new changes in the
market would also have to be initiated by the insurance companies.
Challenges to Face in the Future
The current free pricing regime has set the backdrop for risk-based pricing over the longer term. Gradually,
the industry players are expected to focus on franchise building (via improved client servicing), cost
competitiveness and product differentiation, which in turn is likely to help them to face increased
competition if and when the industry is opened up further to foreign direct investment. Most private players
in the domestic general insurance business would require capital infusion for future growth. With most of
the private entities being joint ventures, balancing the shareholding and business objectives of the partners
while infusing capital to sustain growth is a challenge. This is further compounded by the weak
underwriting environment at present. Despite these challenges, the long term outlook for the domestic
general insurance industry remains positive because the current low levels of insurance penetration and the
countrys long term economic growth potential.
Outlook Remains Positive
The general insurance industry has witnessed radical changes since the opening of the market to private
players in the year FY00. The entry of private players invigorated the insurance industry, resulting in strong
premium growth; improved marketing focus along with product innovations. The general insurance industry
has been growing at a little over 16% CAGR over the past three years. In a growing economy, low
insurance penetration in terms of premium percentage to GDP, as well as increasing affordability on
account of higher disposable incomes and savings, increasing urbanisation and increasing awareness, are
some of the factors that would continue to fuel growth of the general insurance sector in India.

Mutual Funds
While the Indian Mutual fund industry has come a long way since its inception, there are certain areas of
concerns which need to be addressed in order to grow at the rapid pace. The factors that could turn out to
be the major impediment going forward are: low levels of customer awareness, unwillingness to undertake
even minimal risk, inadequate reach of funds/ distributors to retail investors, limited innovation in product
offerings, limited focus of the public sector network on distribution of mutual funds, multiple regulatory
frameworks, and competition from assured return products like Government of India bonds, post office
monthly income schemes, senior citizen savings schemes, national saving certificates, etc.
Low level of Customer Awareness
As noted earlier, low levels of customer awareness is the biggest challenge in channelizing households
savings into mutual funds. A majority of investors in Tier 2 cities as well as metros lack understanding of
mutual fund products and can draw little distinction in their approach to investing in mutual funds and
direct stock market investments. As a result, they are generally unwilling to undertake even minimal risk.

Inadequate reach of funds / distributors to retail investors

The mutual funds in India have historically raised funds by targeting the institutional investors segment
that accounts for 63% share in AUM as at March 2008. This can primarily be attributed to the tax arbitrage
available to corporates on investing in money market mutual funds and easy access to institutional
customers concentrated in Tier 1 cities. Besides, raising funds from retail investors require a significant
distribution capability. The Indian Mutual fund industry has limited penetration beyond the top 20 cities. In
fact, the retail investors residing in Tier 2 & 3 towns, though aware and willing, are unable to invest in
mutual funds due to limited access to suitable distribution channels and investor servicing. However, with
the deepening of the global financial crisis, many mutual funds witnessed sudden redemption pressures due
to their dependence on institutional AUM. This is expected to lead AMCs to start focusing on retail investors
segment.
Limited innovation in product offering
Though over the years, the Indian Mutual fund industry has introduced a range of products, it has limited
focus on innovation and new product development. It is still to launch green funds, socially responsible
instruments, fund of hedge funds, enhanced money market funds, renewable and energy/ climate change
funds, etc. Multi-manager funds that are among the most hybrid funds world-over have also not grown in
India due to the prevailing tax structure.
Multiple Regulatory Frameworks
Besides, multiple regulatory frameworks governing financial services sector verticals have affected the
Mutual fund industry in India. For instance, the mandatory PAN card requirement for an investment of Rs
50,000 and above in mutual funds has restricted the Mutual fund industrys ability to tap small investors.
On the other hand, Unit Linked Insurance Plans (ULIPs) which is a competing product do not have the
mandatory PAN requirement. In addition to the PAN card requirement, the customers are required to
procure KYC acknowledgement which requires submission of several documents and an extensive paperwork.
Moreover, while the payment for investment into mutual fund is required to be made only through banking
facility, no such requirement exists for ULIP. These complicated regulations restrict potential customers
from investing in mutual funds. Further, this calls for an urgent need for government to harmonise policies
and processes across different verticals in the financial services sector.
Future Outlook
The low penetration level of domestic AMCs as well as limited share of mutual funds in the household
financial savings point towards the future potential of the Mutual fund industry in India. Further, given the
rise in income levels and household financial savings, an increasing number of households are expected to
invest in mutual fund products that yield higher returns with reasonable risk. The continuous process of

urbanisation, enhanced financial literacy and a huge young population with an increased risk appetite are
also likely to be instrumental in the long term growth of the retail segment of the Mutual fund industry.
Further, the public sector network of nationalised banks and post offices are likely to increase their focus on
the distribution of mutual funds in Tier 2 and Tier 3 towns. This will enhance the reach of mutual funds to
the rural population.
In case of institutional segment of mutual fund, rising corporate earnings, maturing capital markets and
increased demand for sophisticated treasury management products are expected to play a key role in
accelerating the growth of the Indian Mutual fund industry. Profitability of the Mutual fund industry in India
is expected to witness a gradual decline as AMCs focus on low margin products to attract risk-averse
investors will affect revenue generation. At the same time, AMCs focus on increasing their penetration in
rural population beyond Tier 2 cities will lead to increase in operating costs.
Furthermore, with the entry of global players, competition for the domestic mutual funds is expected to
increase. In view of the intense competition and shrinking margins, the industry is likely to witness some
consolidation as AMCs will review business strategy and explore exit/mergers in case of no significant
competitive advantage.

Sl.No Name of shareholder Shares held %

1 Narayana Murthy 2,379,672 0.41
2 Sudha N Murty 7,314,660 1.27
3 Akshata Murty 8,106,412 1.41
4 Rohan Murty 7,949,782 1.38
5 Nandan M Nilekani 8,345,870 1.45
6 Rohini Nilekani 7,501,174 1.31
7 Jahnavi Nilekani 1,665,791 0.29
8 Nihar Nilekani 1,665,810 0.29
9 S Gopalakrishnan 6,656,726 1.16
10 Sudha Gopalakrishnan 12,294,625 2.14
11 Meghana Gopalakrishnan 604,366 0.11
12 K Dinesh 4,596,537 0.80
13 Asha Dinesh 7,047,482 1.23
14 Divya Dinesh 1,375,130 0.24
15 Deeksha Dinesh 1,375,130 0.24
16 S D Shibulal 2,469,711 0.43
17 Kumari Shibulal 2,811,044 0.49

18 Shruti Shibulal 3,671,924 0.64

19 Shreyas Shibulal 3,676,232 0.64
91,508,078 15.94