Institute of Management, Nirma University

Integrated BBA-MBA (2022-27)

Semester - III
Indian Economy Individual Assignment

Submitted To
Prof. Kalkikumar Soni

(28/10/2023)

Submitted By

Sec Roll No Name

B 227248 Omm Poddar
The Indian Financial Service Sector

An Overview and Outlook

The financial services sector in India comprises various segments such as banking, insurance,
capital markets, mutual funds, pension funds, and non-banking financial companies (NBFCs).
The sector plays a vital role in the economic development of the country by providing financial
intermediation, mobilizing savings, allocating resources, and facilitating transactions.
According to the Ministry of Finance, the sector contributed 6.6% to India’s gross value added
(GVA) in 2019-201. The sector also employed about 4.5 million people in 2018-192.

The financial services sector in India has witnessed significant growth and transformation in
the past few decades, driven by various factors such as liberalization, globalization,
digitization, innovation, and regulation. The sector has expanded its reach and penetration
across the country, especially in rural and semi-urban areas, through various initiatives such as
Pradhan Mantri Jan Dhan Yojana (PMJDY), Aadhaar, India Stack, Unified Payments Interface
(UPI), and Bharat Bill Payment System (BBPS). The sector has also embraced new
technologies and business models such as FinTech, block chain, artificial intelligence, robo-
advisory, and peer-to-peer lending. The sector has also faced some challenges and risks such
as asset quality deterioration, cyber security threats, data privacy issues, and regulatory
uncertainty.

The financial services sector in India has a significant impact on the Indian economy in terms
of GDP growth, employment generation, financial inclusion, poverty reduction, and social
welfare. Some of the key contributions of the sector are:

 GDP growth: The financial services sector is a key driver of economic growth by
providing credit and liquidity to various sectors of the economy. According to a study
by NITI Aayog, a 1% increase in credit to GDP ratio leads to a 0.11% increase in GDP
growth rate3. The sector also contributes to the development of capital markets and
infrastructure financing.
 Employment generation: The financial services sector is a major source of employment
creation both directly and indirectly. According to a report by KPMG and FICCI, the
sector has the potential to create 1.6 million direct jobs and 4.8 million indirect jobs by
20224. The sector also enables skill development and entrepreneurship through various
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 schemes such as Pradhan Mantri Mudra Yojana (PMMY), Stand-Up India, and Startup
India.
 Financial inclusion: The financial services sector is instrumental in promoting financial
inclusion by providing access to formal financial services to the unbanked and
underbanked population. According to the World Bank’s Global Findex Database
20175, India has made significant progress in financial inclusion by reducing the
percentage of adults without an account from 47% in 2014 to 19% in 2017. The sector
also supports social security schemes such as Pradhan Mantri Jeevan Jyoti Bima Yojana
(PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), and Atal Pension
Yojana (APY).
 Poverty reduction: The financial services sector plays a crucial role in reducing poverty
by enhancing income opportunities, consumption smoothing, risk mitigation, and asset
accumulation for the poor. According to a study by RBI6, access to formal finance
reduces poverty by 5.5 percentage points on average. The sector also facilitates
financial literacy and awareness among the low-income groups.
 Social welfare: The financial services sector contributes to social welfare by supporting
various initiatives such as education loans, health insurance, microfinance, corporate
social responsibility (CSR), and environmental sustainability. The sector also fosters
innovation and inclusion by leveraging digital platforms and FinTech solutions.

The government of India has taken several policy initiatives to support the growth and
development of the financial services sector in India. Some of the recent policy initiatives are:

 National Strategy for Financial Inclusion (NSFI) 2019-24: This is a comprehensive

strategy document that outlines the vision, objectives, targets, and action plans for
achieving universal access to formal financial services in India7. The strategy focuses
on six pillars: universal access to financial services; providing basic bouquet of
financial services; access to livelihood and skill development; financial literacy and
education; customer protection and grievance redressal; and effective coordination.
 Atmanirbhar Bharat Package: This is a stimulus package announced by the government
of India in response to the COVID-19 pandemic that aims to make India self-reliant
and resilient8. The package includes various measures for supporting the financial
services sector such as liquidity infusion for NBFCs, partial credit guarantee scheme
for NBFCs, moratorium on loan repayments, interest subvention for MSMEs,

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 emergency credit line guarantee scheme for MSMEs, special liquidity scheme for
mutual funds, and recapitalization of public sector banks.
 FinTech Vision 2025: This is a vision document that outlines the roadmap for
developing India as a global FinTech hub by 20259. The vision focuses on five pillars:
FinTech ecosystem development; FinTech regulation and supervision; FinTech
innovation and capabilities; FinTech market development; and FinTech international
cooperation.
 Regulatory Sandbox: This is a framework that allows FinTech entities to test their
innovative products and services in a controlled environment under the guidance and
supervision of the regulators10. The framework aims to foster innovation, inclusion,
efficiency, and customer protection in the financial services sector. The RBI, SEBI,
IRDAI, and PFRDA have launched their respective regulatory sandbox frameworks for
FinTech entities.

To increase the contribution of the financial services sector in the Indian economy, the
following suggestions and future actions are proposed:

 Strengthen the physical and digital infrastructure for financial service delivery,
especially in rural and remote areas, by investing in roads, railways, power supply,
telecommunication networks, internet connectivity, cybersecurity, and interoperability.
 Enhance the digital literacy and awareness among the masses, especially the
marginalized and vulnerable groups, by providing education, training, and awareness
campaigns on various aspects of financial services such as products, features, benefits,
risks, rights, and responsibilities.
 Streamline and harmonize the regulatory and legal framework for financial services in
India, in consultation with all the stakeholders, to provide clarity, consistency, and
certainty to the sector. The framework should also ensure effective implementation and
enforcement of the existing and proposed laws and policies related to financial services.
 Promote innovation and inclusion in financial services by encouraging research and
development, fostering collaboration and partnerships among various stakeholders such
as government, regulators, industry, academia, civil society, and international
organizations, and creating an enabling environment for FinTech startups and
entrepreneurs.

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  Adopt and adhere to ethical and social norms and values in financial service activities
such as respecting data privacy, protecting consumer rights, ensuring fair trade
practices, adopting environmental sustainability practices, and supporting social
welfare initiatives.

In conclusion, the financial services sector in India is a dynamic and diverse sector that has a
significant impact on the economic growth and social development of the country. The sector
has shown remarkable resilience and adaptability in the face of various challenges and
opportunities. The sector has immense potential for further growth and expansion in the future.
However, it also requires concerted efforts from all the stakeholders to address the existing
gaps and issues and leverage the emerging trends and technologies. By doing so, the financial
services sector in India can achieve its full potential and contribute significantly to the Indian
economy in the future.

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References

1: Ministry of Finance. (2020). Economic Survey 2019-20.

2:KPMG & FICCI. (2018). Indian Financial Services Sector: Gearing up for the next phase of
growth.
3: NITI Aayog. (2018). Strategy for New India @ 75.
4:KPMG & FICCI. (2018). Indian Financial Services Sector: Gearing up for the next phase of
growth.
5: World Bank. (2018). Global Findex Database 2017.
6: RBI. (2017). Report of the Household Finance Committee.
7: RBI. (2020). National Strategy for Financial Inclusion (NSFI): 2019-2024.
8: Ministry of Finance. (2020). Atmanirbhar Bharat Package.

9:Ministry of Electronics & Information Technology. (2020). FinTech Vision 2025: A

Roadmap for Developing India as a Global FinTech Hub by 2025.
10: RBI. (2019). Enabling Framework for Regulatory Sandbox.

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The Banking Sector in India
An Overview and Outlook
The Indian banking industry is a vital component of the country’s financial system, providing
a range of services such as deposit-taking, lending, payment and settlement, and financial
intermediation. The industry consists of various types of banks, such as public sector banks,
private sector banks, foreign banks, regional rural banks, cooperative banks, small finance
banks, and payments banks. According to the Reserve Bank of India (RBI), the total assets of
the banking industry were Rs. 201.9 lakh crore (US$ 2.7 trillion) as of March 20211. The
industry has witnessed a steady growth in deposits and advances over the years, driven by the
expansion of banking infrastructure, the adoption of digital technologies, and the
implementation of various government schemes.

The banking industry plays a crucial role in the Indian economy, contributing to its growth,
development, and stability. Some of the key contributions of the industry are:

 GDP growth: The banking industry facilitates the mobilization and allocation of
financial resources for productive activities, thereby supporting economic growth.
According to a study by RBI2, a one percentage point increase in bank credit to GDP
ratio leads to an increase in GDP growth rate by 0.11 percentage points in India.
 Employment generation: The banking industry is a major employer in India, providing
direct and indirect employment opportunities to millions of people. According to RBI3,
the banking industry employed 13.5 lakh people as of March 2020. Moreover, the
industry also supports employment generation in other sectors by providing credit and
financial services to various segments of the economy.
 Financial inclusion: The banking industry has been instrumental in promoting financial
inclusion in India, which refers to the access and use of formal financial services by all
sections of society. The Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in 2014,
is a flagship scheme that aims to provide universal access to banking facilities, such as
savings accounts, debit cards, overdraft facilities, and insurance cover. As of February
2021, more than 41 crore accounts have been opened under PMJDY with a total balance
of Rs. 1.4 lakh crore4.
 Poverty reduction: The banking industry also contributes to poverty reduction in India
by providing credit and financial services to the poor and marginalized sections of

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 society, such as farmers, small entrepreneurs, women, and self-help groups. The
Pradhan Mantri Mudra Yojana (PMMY), launched in 2015, is a scheme that provides
loans up to Rs. 10 lakh to non-corporate and non-farm small and micro enterprises. As
of February 2021, more than 29 crore loans have been sanctioned under PMMY with a
total amount of Rs. 15.3 lakh crore5.

The government has taken several policy initiatives in recent years to strengthen and reform
the banking industry in India. Some of the major initiatives are:

 Recapitalization and consolidation: The government has infused capital into public
sector banks to improve their capital adequacy ratio and enable them to lend more.
Between 2015-16 and 2020-21, the government has infused Rs. 3.5 lakh crore into
public sector banks6. The government has also merged several public sector banks to
create fewer but stronger entities with enhanced scale and efficiency. In April 2020, 10
public sector banks were amalgamated into four anchor banks7.
 Privatization and liberalization: The government has announced its intention to
privatize two public sector banks as part of its disinvestment plan for 2021-228. The
government has also invited applications for new banking licenses from private players,
including non-banking financial companies (NBFCs), corporate houses, and fintech
firms9. The RBI has also issued guidelines for on-tap licensing of small finance banks
and universal banks10.
 Digital transformation: The government has launched various initiatives to promote
digital payments and transactions in the banking industry, such as Unified Payments
Interface (UPI), Bharat Interface for Money (BHIM), Aadhaar Enabled Payment
System (AEPS), National Electronic Toll Collection (NETC), etc. The RBI has also set
up a regulatory sandbox for testing innovative products and services in the fintech
space11. Moreover, the RBI is exploring the feasibility of issuing a central bank digital
currency (CBDC) in India12.

The banking industry in India has immense potential to increase its contribution to the Indian
economy in the future. Some of the suggestions and actions that can help achieve this are:

 Enhancing governance and accountability: The banking industry needs to improve its
governance standards and accountability mechanisms to ensure transparency,
efficiency, and integrity in its operations. The RBI should ensure effective supervision

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 and regulation of all types of banks and enforce prudential norms and guidelines
strictly. The government should also ensure operational autonomy and professional
management of public sector banks and reduce its interference and influence in their
functioning.
 Improving asset quality and resolution: The banking industry needs to address the issue
of non-performing assets (NPAs) and stressed assets, which hamper its profitability and
credit growth. The RBI should expedite the implementation of the Insolvency and
Bankruptcy Code (IBC) and the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act for speedy resolution of bad
loans. The government should also set up a bad bank or an asset reconstruction
company to take over the stressed assets of banks and facilitate their recovery or sale.
 Leveraging technology and innovation: The banking industry needs to leverage
technology and innovation to enhance its customer service, product offerings,
operational efficiency, and risk management. The industry should adopt new
technologies such as artificial intelligence, blockchain, cloud computing, big data
analytics, etc. to improve its processes and systems. The industry should also foster a
culture of innovation and collaboration with fintech firms, startups, and other
stakeholders to create new solutions and business models for the evolving needs of
customers.

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References

1: RBI (2021). Statistical Tables Relating to Banks in India 2019-20.

2: RBI (2018). Report on Trend and Progress of Banking in India 2017-18.

3: RBI (2020). Basic Statistical Returns of Scheduled Commercial Banks in India - March 2020.

4: PMJDY (2021). Pradhan Mantri Jan Dhan Yojana - Progress Report.

5: PMMY (2021). Pradhan Mantri Mudra Yojana - Achievements.

6: PIB (2021). Capital Infusion in Public Sector Banks.

7: PIB (2020). Amalgamation of Public Sector Banks.

8: PIB (2021). Budget Speech 2021-22.

9: RBI (2020). Guidelines for ‘on tap’ licensing of Universal Banks in the Private Sector.

10: RBI (2019). Guidelines for ‘on tap’ licensing of Small Finance Banks in the Private Sector.

11: RBI (2019). Enabling Framework for Regulatory Sandbox.

12: RBI (2021). Reserve Bank Innovation Hub Announces the First Cohort under its Regulatory
Sandbox.

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The Indian Insurance Industry

An Overview and Outlook

The insurance industry in India is one of the key sectors of the economy that provides financial
protection and risk management services to individuals, businesses, and society. The industry
consists of life insurance, non-life insurance, and reinsurance segments, with various types of
products and services offered by public and private players. According to the Insurance
Regulatory and Development Authority of India (IRDAI), the total premium income of the
insurance industry in India was Rs. 7.31 lakh crore (US$ 98.9 billion) in 2020-21, registering
a growth of 1.4% over the previous year 1. The insurance penetration, which is the ratio of
premium to GDP, was 4.2% in 2020-21, while the insurance density, which is the ratio of
premium per capita, was US$ 78 2.

The Indian insurance industry has several strengths and opportunities that make it a potential
growth driver for the economy. Some of these are:

 A large and young population with increasing awareness and demand for insurance
products, especially in health, motor, and term life segments.
 A low penetration and density rate compared to global and emerging market averages,
indicating a huge untapped market potential.
 A supportive regulatory environment that allows foreign direct investment (FDI) up to
74% in the insurance sector, encourages innovation and digitalization, and promotes
financial inclusion and social security schemes.
 A diversified and competitive landscape with 69 insurers operating in the market,
including 24 life insurers, 34 non-life insurers, 5 standalone health insurers, and 6 re-
insurers 3.
 A robust distribution network that includes agents, brokers, banc assurance, web
aggregators, corporate agents, and direct channels.

However, the Indian insurance industry also faces some challenges and threats that may hamper
its growth prospects. Some of these are:

 A low level of customer trust and satisfaction due to mis-selling, frauds, delays, and
disputes in claim settlement processes.

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  A high cost of acquisition and servicing due to inefficiencies, intermediaries, and
commissions.
 A lack of product innovation and differentiation that caters to the diverse and evolving
needs and preferences of customers.
 A volatile and uncertain economic environment that affects the profitability and
solvency of insurers.
 A rising competition from new entrants, fintech players, and alternative risk transfer
mechanisms.

The Indian insurance industry plays a vital role in contributing to the economic development
and social welfare of the country. Some of the benefits of the industry are:

 It mobilizes long-term savings and invests them in productive sectors such as

infrastructure, housing, agriculture, etc., thereby enhancing capital formation and
economic growth.
 It provides risk coverage and financial security to individuals, businesses, and society
against various contingencies such as death, illness, accidents, natural disasters, etc.,
thereby reducing their vulnerability and enhancing their resilience.
 It generates employment opportunities for millions of people directly or indirectly
involved in the industry as agents, distributors, service providers, etc., thereby
improving their income and living standards.
 It supports the government’s initiatives for financial inclusion and social security by
offering affordable and accessible insurance products to the under-served segments
such as rural areas, women, senior citizens, etc., thereby improving their financial
literacy and well-being.

The government has taken several policy initiatives in recent years to boost the growth and
development of the insurance industry in India. Some of these are:

 The increase in the FDI limit in the insurance sector from 49% to 74% in 2021 4, which
is expected to attract more foreign capital, technology, expertise, and innovation in the
industry.
 The launch of various social security schemes such as Pradhan Mantri Jeevan Jyoti
Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY),

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 Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY), etc., which
provide low-cost life and health insurance coverage to millions of people 5.
 The introduction of regulatory sandbox framework by IRDAI in 2019 6, which allows
insurers to test new products, services, business models, distribution channels, etc., in
a controlled environment with relaxed norms for a limited period of time.
 The implementation of risk-based capital (RBC) regime by IRDAI from 2022 7, which
will align the capital requirements of insurers with their risk profiles, thereby enhancing
their solvency and stability.

To further increase its contribution to the Indian economy, the insurance industry needs to take
some future actions and suggestions. Some of these are:

 To leverage digital technologies such as artificial intelligence, machine learning,

blockchain, internet of things, etc., to improve customer experience, operational
efficiency, product innovation, and fraud detection.
 To focus on customer-centricity and personalization by offering customized and
flexible products and services that suit the needs and preferences of different segments
and niches of customers.
 To expand the reach and penetration of insurance products and services to the untapped
and under-served markets, especially in rural areas, by using innovative and cost-
effective distribution channels such as mobile, online, e-commerce, etc.
 To enhance the awareness and education of customers about the benefits and features
of insurance products and services, by using effective communication and marketing
strategies such as social media, influencers, testimonials, etc.
 To collaborate and partner with other stakeholders such as government, regulators,
industry associations, fintech players, etc., to create a conducive and supportive
ecosystem for the growth and development of the insurance industry.

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References

1: IRDAI. (2021). Annual report 2020-21.

2: Swiss Re Institute. (2021). World insurance sigma report 2021.

3: IRDAI. (n.d.). List of insurers.

4: The Economic Times. (2021). FDI limit in insurance sector increased to 74% from 49%.

5: Invest India. (n.d.). Insurance industry in India.

6: IRDAI. (2019). Guidelines on regulatory sandbox.

7: The Hindu Business Line. (2021). IRDAI to implement risk-based capital regime for insurers
from April 2022.

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