This is a best prospect industry sector for this country. Includes a market overview and trade data.
Last Published: 8/1/2017

Overview

India has a diversified financial sector, which is undergoing rapid expansion. The sector has witnessed disruptive changes recently with “Demonetization” that was announced in November 2016, and introduction of digital technologies such as wallets, Unified Payment Interface (UPI), analytics and payment banks.

In 2016, Reserve Bank of India (RBI) allowed 100 % foreign investment through automatic route to the regulated financial services companies other than banks and insurance companies.
Financial sector covers banking, pension, insurance, capital markets, investment management, real estate investments and
foreign exchange services.


According to a   joint report by KPMG and Confederation of Indian Industry (CII) India is projected to become the fifth largest banking sector in the world by 2020. Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 11-13% in FY17.

Financial inclusion at the bottom of the social pyramid is among the topmost priorities of the Government of India (GOI). In 2014 Prime Minister Narendra Modi announced the Jan Dhan Yojana, an initiative to ensure access to financial services, including banking, savings and deposit accounts, remittance, credit, insurance, and pensions in an affordable manner. As of March 2017, there were 280 million Jan Dhan Yojana bank accounts with deposits of approximately $9.8 billion. 18 million operational accounts have deposits of more than $76 (Rs. 5000). The plan is to channel all Government benefits (from Center / State / Local governments) to new beneficiaries’ accounts and providing RuPay (local credit and debit) cards. While a downside to the initiative is that 24% of these accounts are currently dormant with a zero balance, 218 million RuPay debit cards have been issued as of March 2017. Post-demonetization, 23 million new Jan Dhan Yojana accounts were opened, the bulk of which (80%) were with public sector banks.  Increased access to mobile technology throughout the country is leading to ever increasing access to financial services of all kinds.

Leading Sub-Sectors

Banks
The banking sector in India has seen a number of changes recently with introduction of Payment banks, Small finance banks; Introduction of Unified payment Interface (UPI), Bharat Interface for Money (BHIM) and Aadhar enabled Payment System (AEPS). Banks dominate the financial sector in India with 21 public sector banks, 26 private sector banks, 43 foreign banks and a large network of regional rural banks and co-operative banks.

GOI has introduced reforms to liberalize, regulate and enhance this industry. The advent of technology has also aided the growth of the industry.

A per latest Reserve Bank of India (RBI) guidelines, foreign banks can only enter India via their wholly-owned subsidiaries; however, foreign banks present in India before 2010 can operate in India through a branch model as well as a subsidiary model.

Foreign direct investment (FDI) in an Indian bank is allowed up to 49% under the automatic route; FDI between 49 and 74 % is allowed with GOI approval. The limit of 74% is inclusive of any investment under the portfolio investment scheme (PIS) by foreign institutional investors (FIIs) and non-resident Indians (NRIs).

Besides setting up a wholly owned subsidiary, other regulatory hurdles when entering the Indian market include priority sector lending norms and a lack of niche banking licensing.

Despite stringent regulations and restrictions by the RBI, India will continue to attract foreign banks looking to set up branches or representative offices to facilitate trade and commerce with their home markets. Foreign banks in India are free to undertake any banking activity (e.g., wholesale, retail, investment banking, foreign exchange, etc.) that are allowed to domestic banks.

Four American banks – American Express, Citibank NA, Bank of America and JP Morgan Chase – have branches in India. Bank of New York Mellon and Wells Fargo have representative offices in India.

Insurance
India’s life insurance sector is the largest in the world with about 360 million policies. That number is expected to increase at a CAGR of 12 to 15% over the next five years. The insurance industry is planning to increase penetration levels to five percent by 2020 and could reach the $1 trillion mark in the next few years. Insurance penetration is defined as the ratio of premia underwritten in a given year to gross domestic product (GDP). The insurance market size of $ 79.14 billion is expected to increase to $280 billion by 2020. The crop insurance market in India is the largest in the world and strong growth in automotive industry over the next decade can be a key driver of motor insurance.

The insurance industry in India can broadly be divided into life insurance and general insurance categories. There are 54 companies including 24 in life insurance, 29 in non-life insurance and one in re-insurance business. The Life Insurance Corporation of India (LIC) is the only public sector company in life-insurance category and there are six public sector players in the non-life category.

The General Insurance Corporation of India (GIC) is the sole national re-insurer. However, in 2017, the opening of wholly owned branch offices by foreign reinsurance companies will change the landscape of re-insurance market.
With the relaxation of the foreign investment limit from 26% to 49% in 2015, several companies announced plans to increase their stakes in joint ventures with Indian companies. For example, PNB MetLife India Insurance Company Limited (PNB MetLife) is the result of a joint venture between MetLife International Holdings Inc. and Punjab National Bank Limited. However, challenges remain for foreign insurance companies as the ownership and control of an Indian insurance company must remain in the hands of resident Indians at all times.

Government of India has taken many positive steps for the growth of insurance sector in India. The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue redesigned initial public offering (IPO) guidelines for insurance companies in India.

Demographic factors such as growing middle class, young insurable population and growing need for protection and retirement planning will support growth of Indian life insurance.

Pension Funds
Pension fund investments in India are expected to exceed $1 trillion by 2025 following the passage of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013.

The extra tax benefit and the option to select between Employers Provident Fund (EPF) and National pension Scheme (NPS) are expected to attract more business for the pension players.

Recently RBI has allowed foreign investments up to 49% in the sector without any government approval subject to registration and compliance with PFRDA act.

The entry of foreign pension funds will facilitate the government’s efforts to ensure a rapid increase in pension coverage of the private sector workforce in India. There will be more than 300 million people over the age of 60 by 2050, compared with nearly 100 million people in that age group in India at present according to the Credit Rating Information Services of India Limited’s (CRISIL) study report. The current scenario in India is marked by insufficient pension coverage, with only 8% of the population covered.

Non- Banking Financial Companies (NBFCs)
NBFCs are a diverse mix of financial institutions that mainly receive deposits, provide financing and leasing, invest in securities, chit funds,  and lease purchases.

NBFCs can broadly be categorized as deposit taking (NBFC-D) or non-deposit taking (NBFC-ND). 100% FDI under the automatic route was allowed in 18 NBFC activities until August 2016, when the Government of India amended regulations to increase this list to activities provided that are regulated by one of the financial sector regulators. Foreign investment in NBFCs not regulated by any financial sector regulator (“Unregulated NBFCs”) will require prior government approval.
Previous minimum capitalization norms as mandated under the FDI policy have also been eliminated, as most financial regulators already have fixed minimum capitalization norms.

Within this space some segments have emerged stronger than others. Mortgages, microfinance and unsecured loans appear to be driving growth.

Asset Management Companies (AMC) / Mutual Funds
Mutual funds in India are set up as trusts with sponsors, trustees, asset management companies (AMC) and custodians. Each trust is established by a sponsor. The trustees of the mutual fund hold its property for the benefit of the unitholders. An AMC, approved by Securities and Exchange Board of India (SEBI), manages these funds by making investments in various types of securities. Governance is an important consideration for AMCs and all mutual funds must register with SEBI before launching an individual fund offering. SEBI imposes strict regulations governing trustees and AMC boards.
The asset base of the mutual fund industry is expected to grow and exceed $325 billion by 2018 with investor base of more than 100 million accounts.

Franklin Templeton, Goldman Sachs, Prudential Financial (operating as DHFL Pramerica Asset Managers Private Limited) and JP Morgan are some of the U.S. mutual fund companies present in India.

Foreign Exchange- Remittances
The Foreign Exchange Management Act, 1999 (FEMA) regulates the foreign exchange market in India.

Besides, authorized dealers and brokers, authorized moneychangers, travel agents, certain hotels and government owned shops are provided with limited rights to accept the foreign currency. India has topped the list as global remittances with receipt of $62.7 billion in 2016 as per World Bank report.

Besides traditional banking channels, companies like Western Union, MoneyGram, TransFast   and others are operating in the segment. As sending and receiving money internationally through traditional banking channel is expensive and time consuming, many technology companies are making an attempt to reduce the turnaround time and cost by using technology.
Payment Banks and Small Finance Banks

Payment banks increase financial inclusion by providing small savings accounts, payments and remittance services to migrant labor, low income households, small businesses and other unorganized sector entities by enabling high volume and low value transactions in deposits as well as payment/remittance services in a secured technology-driven environment.
People can open current and saving accounts with payment banks up to a maximum balance of $1538 (100,000 rupees). These banks can issue ATM and debit cards, but cannot issue credit cards or loans
.

In 2015, The Reserve Bank of India (RBI) gave an approval to 11 entities to launch payment banks but three had opted out citing concerns with regulatory framework. RBI also approved 10 other entities to start small finance banks.
Small finance banks can offer basic banking services, accept deposits, give loans to under-served sections of customers and distribute simple financial products like insurance, pension and mutual funds. The objective is to extend the services to unbanked population in low-income groups.

Telecom companies, retailers, mobile wallet providers, large business houses and several others are betting that India’s huge unbanked population will take to payment banks just as they took to cell phones due to the high success rate of technology led mobile banking platforms.

REITs
SEBI recently approved the formation of Real estate investment trusts (REITs) in India.
REITs are listed entities that mainly invest in income-producing real estate assets, the earnings of which are mostly distributed to their shareholders. REITs are allowed to invest in income-generating real estate properties which could be offices, residential apartments, shopping centers, hotels and warehouses.

FDI in REITs is allowed under automatic route and can invest up to 20 % in under construction properties.

Alternative Investment Funds (AIF)
Alternative Investment Fund platform are used for fund raising and are meant for startups and small medium enterprises (SMEs), which cannot raise capital through Initial Public Offerings (IPOs). Venture capital firms, high net worth individuals (HNIs) and financial corporations can use this platform to fund promising startups.

Considering that the majority of technology enabled startups are not clearly understood by traditional investors and shareholders, this alternate investment platform will act like a stock exchange for these early stage companies working on new technology and new domains.

Alternative investment funds may attract capital from foreign investors. Reserve Bank of India (RBI – India’s central bank) has also allowed these funds to invest overseas to diversify their portfolios.

AIF can be divided into 3 types:
1. Category I- venture Capital Funds
2. Category II- PE Funds
3. Category III- Hedge Funds

Wealth Management Services- Family Offices:
The concept of a family office is gaining popularity and becoming a normal business practice.

The overall growth in wealth has created a need for professional companies offering wealth management solutions for High Net worth Individuals (HNI), chartered accountants and legal experts specializing in estate and succession planning.

The trend began about 20 years ago with liberalization, but has blossomed over the last 10 years.

More and more business houses in India are opening family offices. As new millionaires emerge every year, a family office is becoming the norm rather than the exception, according to wealth management experts.
Estimates of High Net worth Individuals (HNI) in India

 

2009

2010

2011

2015

2020

Net worth of $1m - $5m

157,000

183,333

210,000

315,000

508,127

Net worth of $5m - $30m

36,000

43,000

50,000

84,000

13,280

Net worth above $30m

17,000

21,000

26,000

40,000

56,000

Total wealth holdings of millionaires ($ bn)

361.78

503.12

584.49

1,559.06

2,950.06

Total households

210,000

247,333

286,000

439,000

694,406













Source: Deloitte Center for Financial Services

GIFT City
The Gujarat International Finance Tec-City  (GIFT) is a central business district in the Indian state of Gujarat. GIFT is conceptualized as a global financial and IT services hub, a first of its kind in India.

The GIFT city aspires to cater to India’s large financial services potential by offering global firms world-class infrastructure and facilities in the areas of offshore banking, fund custody, insurance, assurance and reinsurance, corporate treasury management, securities trading and other related services.

It aims to attract the top talent in the country by providing the finest quality of life all with integrated townships, International Financial Service Center and multi-specialty special economic zone. The site is 12 kilometers (KM) from the Ahmedabad International Airport and 8 KM from Gandhinagar.

Fin-Tech            
India has gradually climbed up the fin-tech ladder. The demonetization policy announced in November 2016 has ushered in new sense of urgency in implementing innovative digital solutions for the financial system. The Government of India (GoI) along with regulators SEBI and RBI are aggressively supporting the ambition of Indian economy to become a cashless digital economy by building a strong fin-tech ecosystem.

Two broad subsectors of fin-tech firms exist:

  • Firms providing personal finance, lending, insurance, payments and wallets in B2C category and;

  • Firms that work horizontally across the sectors providing services to banks and other financial institutions (B2B) such as data analytics, artificial intelligence, robo-advisory, blockchain and security- biometrics.

Mobile wallets and digital payment services have dominated the fin-tech space so far. Two of the fin-tech companies namely PayTM and FINO PayTech have also received Payment Bank licenses from the Reserve Bank of India (RBI). Indian consumers and businesses are adapting to fin-tech rapidly due to smartphone penetration, Government’s emphasis on financial inclusion, a less-cash economy post demonetization and growth of e-commerce.

The launch of Unified Payment Interface (UPI), Bharat Interface for Money (BHIM) and Aadhar enabled payment System (AEPS) is expected to increase number of digital transactions exponentially.

UPI is a single window mobile payment system launched by National Payment Corporation of India (NPCI). BHIM is a digital payments solution app based on UPI from NPCI. AEPS is a new payment service offered by NPCI to banks, financial institutions using 'Aadhaar' number and online Unique Identification Authority of India (UIDAI) authentication through their respective business correspondent service centers. Aadhaar is a 12-digit unique identification number issued by the Indian government to every individual resident of India.

The current fin-tech hubs are Mumbai, the country’s financial capital; Bengaluru with a strong start-up and tech culture; and Delhi which attracted the most investment.

Size of the market:
The Indian fin-tech software market is estimated to touch $2.4 billion by 2020 from a current $1.2 billion, as per The National Association of Software and Services Companies (NASSCOM). The transaction value for the Indian fin-tech sector is expected to grow from approximately $33 billion in 2016 to $73 billion in 2020 growing at a five-year CAGR of 22%. 

Opportunities
India can skip a whole generation of financial services like bank and cards as it rethinks the payment ecosystem while moving to “less cash economy”. Due to increased broadband connectivity and smartphone user base, fin-tech can address the legacy issue of low banking penetration and dormancy in rural parts of India.

Besides, Payment and personal finance the opportunities exist in following segments:
Peer to Peer (P2P) lending: P2P lending has the potential to bring disruption in personal loan, microfinance, commercial loans and alternative lending categories. The country requires a mix of good regulatory practices to balance the growth of this model and to adopt fair practices.

Robo-Advisory: Robo advisors are the next level in the evolution of asset management and financial advice. Many new entrants and traditional broking firms have launched robo-advisory services in India such as Aditya Birla Money’s MyUniverse, BigDecision, ScripBox, Arthayantra and FundsIndia.

Blockchain: It is at a very nascent stage and is yet to mature into a mainstream application in India. This technology is receiving encouraging reviews from market players in the country across financial services, government recordkeeping and supply chain management segments. RBI has also set-up a committee to understand the possibility of using blockchain technology and to determine appropriate regulatory policies.

Data analytics: Data analytics, machine learning and artificial intelligence (AI) is used widely by financial services companies for credit scoring, customer acquisition, risk management and investment management.

Security and Bio-metrics: Banking and financial institutions are becoming more vulnerable to the security threats due to increased cyberattacks and there is a pressing need for financial institutions to adopt biometric technologies and cybersecurity solutions. Consumer acceptance of eKYC (Know Your Customer) and biometric authentication will also increase fingerprint recognition as most commonly used technology for customer interactions.

Regulations:
In the absence of nodal agency to regulate fin-tech, it falls under several regulators and governing agencies including the Reserve Bank of India (RBI); the Securities and Exchange Board of India (SEBI); the Telecom Regulatory Authority of India (TRAI) and the Insurance Regulatory and Development Authority (IRDA). The Ministry of Finance leads on the central government side.

Inclusive Cashless Payment Partnership- Catalyst:
This multi-stakeholder partnership between The U.S. Agency for International Development (USAID) and India’s Ministry of Finance is designed to scale digital payments systems in India, catalyzing an exponential increase in cashless payments in select geographic locations.

The initiative will help to catalyze the rapid adoption of digital payments in India as a step toward universal financial inclusion and to end “economic untouchability” in India.

To know more on this initiative visit the website.

Web Resources
 AMFI- Association of Mutual Funds in India
CRISIL-Credit Rating Information Services of India Limited
FEMA-Foreign Exchange Management Act
FIPB-Foreign Investment promotion Board
Foreign Exchange Dealers Association
GIC- General Insurance Corporation of India (GIC)  
General Insurance Council
IRDA- Insurance Regulatory and development Authority
PFRDA- Pension Fund Regulatory and Development Authority
SEBI- Securities and Exchange Board of India
KPMG report on Fin tech

 

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India Financial Services Trade Development and Promotion