Case Study- Challenges and Perspectives of Indian Financial Service Industry

The financial services sector in India, which accounts for 6 percent of the nation’s GDP, is
growing rapidly. Although the sector consists of commercial banks, development finance
institutions, nonbanking financial companies, insurance companies, cooperatives, mutual
funds, and the new “payment banks,” it is dominated by banks, which holds over 60 percent
share.

The Reserve Bank of India (RBI) is the apex bank of the country, controlling all activities in
the financial sector. Commercial banks include public sector and private sector banks and are
under the regulatory supervision of the RBI. Development finance institutions include
industrial and agriculture banks.

The country’s financial services sector consists of the capital markets, insurance sector and
non-banking financial companies (NBFCs). India’s gross national savings (GDS) as a
percentage of Gross Domestic Product (GDP) stood at 30.50 per cent in 2019. The total
amount of Initial Public Offerings increased to Rs 84,357 crore (US$ 13,089 million) by the
end of FY18. In financial year 2019, total funds raised stood at Rs 19,900 crore (US$ 2.85
billion). Ultra-High Net Worth Individual (UHNWI) increased to 2,697 in 2018 and the
population of UHNWI has grew by 118 per cent from 2013 to 2018. The number of HNWIs
in India reached 256,000 by the end of 2018.

India has scored a perfect 10 in protecting shareholders' rights on the back of reforms
implemented by Securities and Exchange Board of India (SEBI) in World Bank's Ease of
Doing Business 2020 report.

The assets of the mutual fund industry are worth $190 billion. The pension corpus fund is
projected to record $1 trillion by 2025. Reforms to put the financial services industry and the
economy on the fast track include measures to make finance available to medium, small, and
micro industries.

In November 2018, Bombay Stock Exchange (BSE) has enabled offering live status of
applications filed by listed companies on its online portal and introduced weekly futures and
options contracts on Sensex 50 index from October 26, 2018. The Government of India is
planning to launch a global exchange traded fund (ETF) in FY20 to raise long term
investments from overseas pension funds.

The Government of India has taken various steps to deepen the reforms in the capital
markets, including simplification of the Initial Public Offer (IPO) process which allows
qualified foreign investors (QFIs) to access the Indian bond markets. In 2018, Rs 30,959
crore (US$ 4.43 billion) were raised from initial public offerings (IPOs) whereas Rs 10,300
crore (US$ 1.47 billion) have been raised in H1 2019.

As per Union Budget 2019-20, 100 per cent foreign direct investment (FDI) will be permitted
for insurance intermediaries. The insurance sector could be opened to 74 per cent FDI from
49 per cent.

Government has approved 100 per cent FDI for insurance intermediaries.
Non-banking finance companies (NBFC) provide loans, purchase stocks and debentures, and
offer leasing, hire purchase, and insurance services.

Insurance companies function in both public and private sectors and are controlled by the
Insurance Regulatory and Development Authority (IRDA).

India also has a vibrant capital market with stocks exchanges controlled by the Securities and
Exchange Board of India (SEBI).

According to a report by KPMG-CII, India’s banking sector is on the way to becoming the
fifth largest in the world by 2020. The country’s life insurance sector is the biggest in the
world, and the market size is expected to touch about $400 billion by 2020. India once had a
heavily government-dominated financial services industry, and most services were provided
by nationalised banks. Financial sector reforms were initiated in 1991 with the aim of
accelerating economic growth. In the following years, industry and service sectors were
opened up for foreign direct investment. The reforms ended the dominance of the public
sector and reduced direct government control on industrial investments.

Financial sector reforms in India have improved resource mobilisations and allocation. The
liberalisation of interest rates and the easing of cash reserve norms have helped make funds
available to various sectors.

However, prudential norms have been tightened and transparency and regulation increased to
avoid a systemic collapse that other countries have suffered.

Question 1: Comment on the current status of Indian Financial service industry

Question 2: Discuss different steps taken by government to strengthen the financial service
sector recently.