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Distribution of financial products in India
I. Introduction
Financial products act as an investment avenue and provide the required
financial security to the
investors based on the risk-return profile of the financial products. In the
past, traditional financial
products were offered in India through government initiatives by Public
Sector Banks (PSBs) (deposit
account, credit account), Life Insurance Corporation (LIC), and postal
department (recurring deposit,
National Saving Certificate, Kisan Vikas Patra). However, in recent years
with the advent of liberalization
of financial services industry, diverse financial products have been
introduced through participation of
private and foreign entities in addition to the public sector enterprises. These
include products such as
debit and credit cards by banks, open-end and closed-end mutual fund
schemes (Exchange Traded
Funds (ETFs), Index Funds, Systematic Investment Plans (SIP), sector
funds, etc.), life and non-life
insurance schemes (Unit Linked Investment Plans (ULIPs), pension plans,
children education plans, etc.).
It further includes shares and debt securities offered by various entities,
investments in which are mainly
facilitated by the brokerage houses. This has led to rising competition
through introduction of innovative
and attractive products, regulatory initiatives and growth in the investor base
along with increased
marketing activities in the financial sector. The increased activities in the
financial sector could be
reflected in the growth in the aggregate deposits with banks, which has
increased from 16% in FY03 to
24% in FY07. The capital markets are also on the growth trajectory where
volumes and market
capitalization, both have registered growth. The market capitalization1 to
GDP ratio has increased from
22% in FY 03 to 82% in FY07 and the turnover (NSE) has registered a
CAGR of 26% from FY03 to FY

The number of new mutual fund schemes introduced has risen from 41 in FY01 to a staggering 414 in FY072. activities in the mutual funds have also reflected growth with the Assets Under Management (AUM) increasing at a CAGR of 33% during the same time period. post office savings and LIC policies that involve fewer risks as compared to the relatively risky investments such as mutual funds and bonds as shown in Exhibit 1. This is mainly due to the concentrated distribution activities by some players in the urban markets. The factors responsible for limited distribution networks of other investment products could include lack of willingness from the service providers as well as lack of awareness of the rural households. 1 National Stock Exchange (NSE) 2 Association of Mutual Funds in India (AMFI) 3 Insurance Regulatory and Development Authority (IRDA) 2 Exhibit 1: DISTRIBUTION OF HOUSEHOLDS BY TYPE OF INVESTMENTS4 Source: SEBI. handbook of statistics. Similarly. Even though these products have been targeted towards urban markets as well as rural markets in India. which is further explained in the note. Rural households mainly invest in products such as bank deposits.07. Further. in the insurance sector. the number of new life insurance policies introduced in FY07 stood at 208 as compared to merely 20 in FY013. The introduction of varied products has increased the scope of the financial sector to a very large extent. the investments in these products have been propelled by higher penetration of these products in rural areas that has been facilitated by growing network of the banks. total life insurance premium collected by all the life insurance companies has grown at CAGR of 23% from FY03 to FY07. Further. post offices and LIC branches mostly driven by regulatory policies. . the rural markets have remained largely untapped (See Exhibit 1). 2006. Also.

The regulators (RBI. 2006. A significant presence of financial products offered by banks and insurance companies has been largely observed in urban and rural markets in India.28% in 1998-99 to 4. June 2000. According to this survey5. June 2000. 3 explored in section II of this note. with the rising income levels of the semi-urban and rural population in India and the rapid semi-urbanization observed in rural areas. Such issues are further 4 Data sourced from SEBI-NCAER Survey of Indian Investors. the players will have to tackle obstacles for enhancing their penetration levels in the rural market. 5 Data sourced from SEBI-NCAER Survey of Indian Investors. This presence is mostly driven by certain marketing strategies adopted by these entities which are explained in section III. Section V reflects innovative marketing strategies that could be adopted by the financial service providers and regulators to reach out to the rural markets and section VI concludes with the implications of the study.The concerted efforts of the market players to tap the urban market could have led to saturation of the urban markets. Thus. the proportion of rural investor households has increased from 3.2% in the same time period. there exists a strong business case for many financial product vendors to focus on these markets for expanding their market share and customer base. SEBI) also play an important role in directing the distribution process of financial products. Moreover. whereas the proportion of urban investor households has relatively decreased from 18. This could be supported by the survey of Indian investors published in the Securities Exchange Board of India (SEBI)’s Handbook of Statistics. However. IRDA.34% to 15. Issues and concerns with distribution in the rural market .22% in 2000-01. there could be a requirement to look at the rural markets by the financial service providers in order to maintain the growth in their revenues and increase their market share. II. Section IV reflects such policy initiatives undertaken by these regulators.

These issues are examined below: 1. rural households could avoid huge investments in risky financial products for longer time period since rural consumption of goods and services are subjected to income irregularities (See “5. According to a survey conducted by NCAER and MAX New York Life in 2005. Scale of investment: The funds available for investments among rural households are observed to be lower than the urban household due to lower incomes. 2. These providers are under continuous pressure to maintain growth in their top lines as well as bottom lines. This has led these companies to concentrate more on the urban areas than the semi-urban and rural areas since semi-urban/rural areas would require either setting up new branches resulting in high capital outlay or setting advanced technologies for providing non-branching facilities as well as providing educational facilities to the rural population. Further. The providers would have to incur huge costs on setting the required infrastructure (branches and non- branches) for providing . 3. the average income levels of urban households in India are 85% higher than that of the rural household. Competition: The competition among various financial product players is getting fierce over the years through the influx of new financial service providers/vendors in the industry. Irregularity in payments” in the current section). Customers scattered over wide areas: The investors in the rural areas are scattered over a wide geographic area thus creating accessibility problems for the financial service providers/vendors.There are several issues and concerns related to distributing financial products in rural areas due to which financial service providers have been hesitant towards providing financial services.

Promotion of financial products thus becomes difficult as the sales and marketing personnel are required to understand the local customs.financial products among large number of dispersed rural households. Operational challenges: Companies may face operational challenges such as obtaining relevant documents for verification. Financial service providers/vendors aim at targeting distribution of financial products in rural markets despite several concerns/issues summarized earlier. Some of the most commonly required documents include a PAN card. the rural investors may not prefer traveling long distances to avail the financial services due to lack of accessibility. A majority of rural households are involved in agricultural activities who occasionally fail to make such regular investments since their incomes are largely dependent on vagaries of monsoon. which are further explored in the note. awareness. 5. telecommunications and Internet networks. willingness. etc. Rural infrastructure: Many villages in India lack infrastructural facilities like roads. etc. Irregularity in payments: Most financial products require regular investments at defined time intervals by the investors. culture and language. electricity. Cultural diversity: Financial service providers find it difficult to penetrate into the rural areas due to the cultural diversity observed in India. For example. an insurance policy holder has to make a regular premium payment to the insurance company in order to keep the policy active. 6. The providers thus need to identify specific . 4 4. (SEBI) 7. birth certificate. ration card. This creates operational hurdles for players to enter into these markets further discouraging the rural households to reap the benefits provided by the players. Also.

These strategies are discussed in the following section. The distribution channels used by such banks include bank branches. The activities in a Business Correspondent model include all those of the BF model and further include disbursing small value credit. phone banking. selling banking products and financial services to rural households. etc. Banks The marketing and distribution strategies of banks are different in urban and rural areas due to diverse demographic and socio-economic nature of these markets. Under the BF model. Private sector banks are also penetrating into the rural areas by using the non-branch delivery systems like the Business Facilitator (BF) model or Business Correspondent (BC) model proposed by RBI in 2006 (See Exhibit 2). The distribution networks developed by public banks in urban as well as rural areas are a result of policy measures due to which the number of public sector bank branches is higher as compared to private or foreign banks. Various marketing strategies adopted by the major financial service providers like banks and insurance companies are discussed below. better infrastructure. post offices for banking services such as creating awareness and educating on the financial products. Private banks are mostly concentrated in urban areas due to higher income.strategies to promote and distribute financial products to the semi-urban and rural households. Marketing approach adopted by major financial service providers/intermediaries Marketing strategies play a very important role in determining the growth of the financial services industry. etc. Intermediaries under these . call centres. collecting and processing information of borrowers. direct selling agents. 1. banks utilize the network of intermediaries such as the NGOs. etc. higher investor base and concentration of 5 commercial activities in the urban areas of the country. internet banking. III. ATMs.

further. As the local population has trust in these intermediaries it is possible to cross-sell various products. credit counseling centres for educating the semi-urban and rural population with respect to minimizing yield risk and price risk in agriculture. The usage of such non branching delivery channels has been very less.000 Rural Career Agents in LIC. This. As on March 31. farmers clubs. in lifeinsurance companies. knowledge centres. real-estate companies. It also benefits the customer through fair prices for the products. as the personal interaction is necessary for persuading the customer. distribution is mainly through agents. However.models have knowledge about the local population and provide feedback about the requirements of the local population (See Exhibit 2). Banks have also initiated “credit plus” services such as setting up of rural training centres for small enterprises. However. Insurance The insurance sector can be classified into life insurance companies and non-life insurance companies. banks also use simple-to-use cash dispensing and collecting machines similar to ATMs which have operating instructions in vernacular languages too. leads to lower lending rates and lower credit risk. agreements with the corporates. In addition to the branch and non-branch delivery systems adopted respectively by public and private sector banks. banks. direct sales force. the insurance sector remains highly untapped in the . However. reduces customer acquisition costs. there is further scope for private banks to adopt such non branching delivery models. Cross-selling helps in customer retention.Banks 2. with rising incomes in the semi urban and rural areas. easier processing and customized products. there are approximately 20. insurance agents. etc. 6 Exhibit 2: Distribution channels . Non-life insurance companies utilize distribution channels such as direct mail. 2006.000 Urban Career Agents and 47.

Nevertheless. Many insurance companies are selling group term insurance policy to the members of the SHG who have collectively taken credit from the MFI. to market and distribute its insurance products to the rural households. For example. The large rural customer base and wide branch network of these banks offer an effective distribution channel to the insurance companies. ICICI has entered into an agreement with e-choupals. MFIs lend to Self Help Groups (SHGs) in the rural areas. which have a well set-up distribution network. The SHGs willingly buy such insurance policies because it acts as cost effective collateral for them to avail credit from the MFIs or other financial institutions. the web based marketing platform of ITC. 5. thereby promoting bancassurance6. 7 2. etc. over 82% of the rural households in India had no insurance cover. Micro Finance Institutions (MFIs) are an important distribution channel for many insurance companies. regulators also have an important role in promoting .rural market. 3. The private players are also tying up with public sector banks. A few insurance companies have also tied up with consumer goods companies like HLL. Most of the life insurance companies are selling group insurance schemes to meet their social sector obligations and cover maximum lives under the social sector. Some of the initiatives taken by the insurance companies are as below: 1. Along with the major financial services providers. co- operative bank and the Regional Rural Banks (RRBs) to penetrate into the rural market. most of the players have realized the potential of the rural market and have taken proactive initiatives to tap the market. 4. According to the World Bank-NCAER Rural Finance Access Survey 2003. Insurance companies are offering small premium term insurance products to the rural sector to increase sale of insurance policies in rural areas. ITC.

1. Life insurance policies and Insurance Regulatory and Development Authority (IRDA) The IRDA initiated reforms in the insurance sector in 2000-01 that included allowing private and foreign insurance companies to participate in the urban and rural areas along with the public sector institutions. This regulation has thus facilitated access to financial products in rural areas. These regulators have initiated certain policy and regulations to facilitate smooth distribution of financial products and services through financial service providers/ vendors (public. Initiatives taken by the regulators Indian financial sector is mainly regulated by three regulators – the Reserve Bank of India (RBI). private and foreign companies) in rural areas. These regulations aim at creating awareness of specific financial products in rural areas as well as the overall development of the financial services industry. 8 Table 1: Obligation of life insurers to social and rural sector Year of operation Social sector (Number of lives covered) Minimum business requirement for life insurance companies (% of total number of policies) 1 5000 7 2 7000 9 3 10000 12 4 15000 14 .financial products in rural areas. IV. Further. it was made mandatory for new players to maintain a minimum proportion of life insurance policies sold in the rural areas thereby necessitating setting up of distribution networks in the rural areas (See Table 1). Securities and Exchange Board of India (SEBI) and the Insurance Regulatory & Development Authority (IRDA). 6 Insurance products offered through banks.

RBI approved setting new branches condition to 50% of such branches being opened in unbanked areas. However. According to a study provided to the World Bank and OECD. Building bank networks in rural areas RBI has undertaken several initiatives to increase bank networks in rural areas which are summarized below: 1. income levels and financial assets held among urban and rural households. artisans and physically challenged self-employed individuals.000. 2005). 3. 2. In India. such as agricultural labourers. which are inconsistent especially across rural households. Minimal Credit/Deposit Facilities through financial inclusion in rural areas Financial inclusion is a process of providing basic banking services at an affordable cost to the vast sections of deprived and low income groups. access to financial services can lead to favorable economic growth (Claessens. with a population density of less than 400 per square kilometer.5 20000 16 6+ 25000 18 Source: IRDA Note: As per the census definition. road construction workers. can enter into distribution agreements with private or foreign mutual fund houses for marketing their schemes based on the terms and conditions specified by the RBI. with approximately less than half of the population (48%) having access to financial 9 . Rural Regional Banks (RRBs) were allowed to market mutual fund units based on the approval from their Board of Directors. access to these services is subjected to factors such as financial literacy. fishermen. and where more than 25 per cent of the male working population is engaged in agricultural pursuits. Social sector includes economically vulnerable sections of the population. From 2006 onwards. In 2006. 2. These RRBs. a rural area is one with a total population of less than 5.

In India. RBI promoted financial inclusion through the introduction of Kisan Credit Cards (KCCs) provided by the PSBs. However. Under the Union Budget for 2007-08. promotional and technology interventions. According to Census 2001. in recent years. RBI made it mandatory to open at least half of new branches in unbanked areas. Korea – 63%) it becomes necessary to prioritize financial inclusion to promote economic growth. Simplified general purpose credit card with a revolving credit limit of Rs. Regulators thus play an important role to create awareness among investors through financial literacy. Malaysia – 60%. In 2006. financial literacy gains even more importance as the literacy rate in the country is low and a large section of population is out of reach of formal financial set-up. The demand for financial products mainly depends upon the investor awareness which further depends upon the literacy levels of the rural investors. Some of the initiatives undertaken by RBI for promoting financial inclusion include: 1. Financial literacy enables investors to make an informed investment decision. 4.services (Sri Lanka – 59%. This also includes providing awareness among the investors about the financial products. 4.8% of which the literacy rate among urban population is 79. the finance minister has also announced creation of Financial Inclusion Fund and Financial Inclusion Technology Development Fund for managing the costs of development.7%. Regulators’ initiatives include the following: . all India literacy rate is 64. the process of financial inclusion has been gradually extended by RBI wherein all banks are advised to align their policies and strategies accordingly.9% whereas for the rural population it is 58.25000 for rural households 3. Introduction of a No Frills Basic Bank Account 2. In 1998. Promoting financial literacy in rural areas Literacy rates in rural areas are comparatively lower than urban areas.

For example. The objective of the scheme is to provide free financial literacy and credit counseling in rural and urban areas. crop insurance. RBI proposed a scheme for Financial Literacy and Counseling Centres (FLCC). Financial education for the rural investors should focus on their financial needs and the products catering to such needs. the players and the regulators. This is due to the major differences in perception of financial products of the rural population. For example. Way forward In order to tap the rural and the semi-urban markets for distributing financial products certain steps have to be taken by both. Customize/repackage the financial products The marketing/promotion approach to be taken for rural population should be different as compared to their urban counterparts. 10 V.1) In the Mid-tem review of the Annual Policy for the year 2007-08. central banking and finance. This would not only increase the depth of the market for the financial products but also facilitate the financial inclusion in India. rural households prefer saving-oriented life insurance policies which could fulfill their long term goals like the costs of a daughter’s marriage as opposed to their urban counterparts . 2) RBI has also launched a financial information web-site in Hindi. 3) Public sector banks could act as an important channel through which financial literacy could be generated in rural areas as they possess network and reach in the areas. etc. 2. the population involved in agricultural activities should be educated about insurance of agricultural implements. Creating awareness about different financial products Regulators like RBI and IRDA have taken steps to promote financial literacy but further efforts are required from both the regulators and players in the financial industry to increase awareness among the rural investors. English and 12 regional languages that aims at teaching basics of banking. 1.

4.for whom tax consideration is a major influential factor for purchasing a life insurance policy. 6. For example. Leveraging on technology A well developed technological system in financial services companies could reduce cost of transactions . etc. Credit bureaus or credit information companies could be instrumental in filling this information gap and would help small investors to access various financial products at fair prices. staff expenses. Credit bureaus Risk assessment of the households in the semi-urban and rural areas is one of the major hurdles for companies offering financial products in the rural areas. Explore new distribution channels Financial service providers should explore new distribution channels or tie up with intermediaries like the MFIs or other social groups. Obligatory targets Regulators in the financial market can impose targets on players in the industry to achieve certain level of penetration in the rural areas. The development of the MFI model in India would be critical for the distribution of financial products. Thus there is need to understand the perception of the rural households and design innovative products to cater to their needs. 3. 11 5. a mutual fund should be required to spend certain amount of its profits on generating financial literacy or investor education campaigns. This step would also boost the confidence of the players who are looking at the semi-urban and rural households as their potential customers. This would boost the efforts on the part of the financial players to initiate financial education campaigns and develop or design products for the rural households. They can bank on the network and established operations of these institutions as against opening up of new branches that involve higher infrastructure costs.

com/default. Securities Exchange Board of India. India Stats (2008). debentures. However. The thrust lies mainly on the distribution of financial products to deepen the market for such products and improvements in the product design itself. etc are available in India.asp on April 15. “Handbook of Statistics on the Indian Securities Market 2006”. Further development and innovation in these products would be faster if they are accessed by all classes of investors in urban as well as rural areas. Through the use of technology.censusindia. insurance.gov. accessed at http://www. enhancement in productivity levels of the employees. which can help adding products in the same database and promoting distribution of all financial products under one roof. derivative instruments.in/Index. one-time development of a database of customers can be facilitated.indiastat. Financial inclusion in India would lead to enormous volumes and enhanced customer base which requires a robust technology. shares. Census (2001). 12 REFERENCES SEBI (2006).jsp? contentDisp=Section&sec_id=3 on April 15. accessed at http://www. Accessed at http://www.and processing of applications. Conclusion Variety of financial products like mutual funds. Other benefits of technology include growth and sustenance of customers.in/Census_Data_2001/India_at_glance/rural. 2008. the reach of these products is very limited and the features of many of these products are very basic in nature.asp x on April 15.gov. The responsibility of ensuring these improvements vests with all the stakeholders in the financial services industry. 2008. 2008. .sebi. The companies distributing financial products by using MFI network in rural areas can control their own operations by leveraging on advanced technological devices like the smart card readers. VI.

org. RBI (2007). RBI (2006).in/rdocs/notification/PDFs/70491. 2008.sadhan.pdf on April 15. 2008.aspx?Id=2718 on April 15. 2008.ncaer.Where Do we go from Here?” Accessed at http://www. “Asia-Pacific Insurance Review”.com/p/articles/mi_qa4012/is_200107/ai_n8957497/print on April 15. . Accessed at http://findarticles. “Financial Sector Policies for growth and employment” Accessed at http://rbidocs.in/scripts/NotificationUser.asp?ArticleID=16410 on April 15. net/Adls/Microfinance/AR/Annual_Report_Final_2004-2005. accessed at http://www.watsonwyatt.Use of Business Facilitators and Correspondents”. “Emergence of Flexible Distribution Channels for Financial Products: Electronic Banking as Competitive Strategy for Banks in India”. RBI (2007).aspx?Id=3908&Mode=0 on April 15.jsp# on April 15. Accessed at http://www. EPW (2005). 2008. “Mid .epw.pdf on April 15. 2008.in/Census_Data_2001/India_at_glance/literates 1.pdf on April 15. “Study of Services to Depositors and Small Borrowers in Rural and Semi-Urban Areas- Volume-I”.org. RBI Notification (2006).in/epw/user/userindex. Accessed at http://rbidocs.rbi.org/downloads/Reports/Services- to-Depositors_RBI-Vol_I. 2008. 2008. FindArticles (2001). 2008. Accessed at http://www.censusindia.pdf on April 15. Sa-Dhan (2005).in/rdocs/Speeches/PDFs/81252.gov. Census (2001).org. “Annual Report 2004-05”.rbi. NCAER (2008).rbi. “Marketing of Mutual Fund Units – RRBs”.org. 2008.com/asia- pacific/pubs/apinsurance/showarticle.org. “Financial Inclusion by Extension of Banking Services . 2008. “Expanding Access to Financial Services.in/Scripts/BS_CircularIndexDisplay.Watson Wyatt Worldwide (2008). Accessed at http://www.aspx on April 15. Accessed at http://www.Term Review of the Annual Policy 2007-08”. Accessed at http://rbi.

NSC etc.org. 2008. Investments Tax Savings PPF offering highest safety. Accessed at http://rbidocs.88.attractive returns & tax benefits. “Financial Inclusion for Sustainable Development: Role of IT and Intermediaries”. Insurance We market various insurance products for safe & secured future.We also recommend selective investment to our clients & sub- broker.. Postal Saving We market variety of small saving schemes like. monthly income scheme. KVP.ssrn. Debt A broad spectrum of fixed income debt instrument is Instruments marketed to suit every class of investors. Accessed at http://papers.Bonds floated by ICICI.also for capital gain investment products like NHAI. Distribution of Financial Products IPO ENAM is credited to be associated with IPO of almost all the companies approaching the capital market. True & transparent advise is available to investors to narrow down his options Fixed Deposits We market fixed deposits of various reputed companies offering a vide array of maturity space.com/sol3/Delivery. 2008 RBI (2006).Certain debt mutual funds qualifying for charitable Fund Trust Investment are readily available. .pdf on April 15.SSRN (2005). Saving Schemes a/c.in/rdocs/Speeches/PDFs/73715. Mutual Funds The need of the hour is to protect your capital & invest wisely.based on your ability to absorb risks associated with the vagaries of the capital market.rbi. “Access to Financial Services: A Review of the Issues and Public Policy Objectives”. recurring deposit a/c.RBI / SBI relief bonds.cfm/SSRN_ID744644_code427206. Mutual funds offering various schemes suitable to every class of investor are made available.NABARD are made available. Charitable Reputed companies deposits eligible for charitable Trust Trusts Investment & also for PF/Gratuity are available on &PF/Gratutity demand.IDBI for sec.pdf ?abstractid=744644&mirid=1 on April 15. Companies with excellent track records are highlighted.