23 Mar 2015 01 May 2017
The first bank in india ,was established in 1786.from 1786 till now ,the journey of Indian banking system can be segregated into three distint phases .
The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country
1949 : Enactment of Banking Regulation Act
1955 : Nationalisation of State Bank of India.
1959 : Nationalisation of SBI subsidiaries.
1961 : Insurance cover extended to deposits
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee corPoration
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with deposits over 200
banking or other means
performance bonds, securities underwriting commitments and other forms of off- balance sheet exposures
In 1991, the RBI had proposed to from the committee chaired by M. Narasimham, former RBI Governor in order to review the Financial System viz. aspects relating to the Structure, Organisations and Functioning of the financial system. TheNarasimham Committee report, submitted to the finance minister, ManmohanSingh, on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms..The main recommendations of the Committee were.
Technology environment plays a very important role in bank's internal control.The latest developments in technology like computer and telecommunication have promoted the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed â€˜anytime, anywhere banking' facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interest directly to our account avoiding the delay or chance of loosing the post. Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers adopt customer-based approach instead of product-based approach.
Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. In India, banking has existed in one form or the other from time to time. The present era in banking may be taken to have commenced with establishment of bank of Bengal in 1809 under the government charter and with government participation in share capital. Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others followed Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget
savings are encouraged, then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector,
therefore,booming the economy If the FDI limits are relaxed, then more FDI are brought in India through banking channels.
Government and RBI policies affect the banking sector. Sometimes looking into the political advantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmer's votes. By doing so the profits of the bank get affected. Various banks in the cooperative sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks.
Before nationalization of the banks, their control was in the hands of the private parties and only big business houses and the effluent sections of the society were getting benefits of banking in India. In 1969 government nationalized 14 banks. To adopt the social development in the banking sector it was necessary for speedy economic progress, consistent with social justice, in democratic political system, which is free from domination of law, and in which opportunities are open to all. Accordingly, keeping in mind both the national and social objectives,bankers were given direction to help economically weaker section of the society and also provide need-based finance to all the sectors of the economy with flexible and liberal attitude. Now the banks provide various types of loans to farmers, working women, professionals, and traders.They also provide education loan to the students and housing loans, consumer loans, etc.Banks having big clients or big companies have to provide services like personalized banking to their clients because these customers do not believe in running about and waiting in queues for getting their work done. The bankers also have to provide these customers with special provisions and at times with benefits like food and parties. But the banks do not mind incurring these costs because of the kind of business these clients bring for the bank. Banks have changed the culture of human life in India and have made life much easier for the people.
A financial system, which is inherently strong, functionally diverse and displays efficiency and flexibility, is critical to our national objectives of creating a market-driven,productive and competitive economy. The financial system in India includes of financial institutions, financial markets, financial instruments and services. The Indian financial system is characterised by its two major segments - an organised sector and a traditional sector that is also known as informal credit market. Financial intermediation in the organised sector is conducted by a large number of financial institutions which are business organisations providing financial services to the community. Financial institutions whose activities may be either specialised or may overlap are further classified as banking and non-banking entities. The Reserve Bank of India (RBI) as the main regulator of credit is the apex institution in the financial system. Other important financial institutions are the commercial banks (in the public and private sector), cooperative banks, regional rural banks and development banks. Non-bank financial institutions include finance and leasing companies and other institutions like LIC, GIC, UTI, Mutual funds, Provident Funds, Post Office Banks etc.
The quantum of resources required to be mobilised, as the economy grows in complexity and generates new demands, places the financial sector in a vital position for promoting efficiency and momentum. It intermediates in the flow of funds from those who want to save a part of their income to those who want to invest in productive assets. The efficiency of intermediation depends on the width, depth and diversity of the financial system. Till about two decades ago, a large part of household savings was either invested directly in physical assets or put in bank deposits and small savings schemes of the Government. Since the late eighties however, equity markets started playing an important role. Other markets such as the medium to long-term debt market and short term money market remained relatively segmented and underdeveloped. In The past decades, the Government and its subsidiary institutions and agencies had an overwhelming and all encompassing role with extensive system of controls, rules, regulations and procedures, which directly or indirectly affected the development of these markets. The financial system comprising of a network of institutions, instruments and markets suffered from lack of flexibility in intermediary behavior and segmentation of various markets and sets of financial intermediaries. Well developed markets should be inter-connected to facilitate the demandsupply imbalances in one market overflowing into related markets thereby dampening shocks and disturbances. The inter connection also ensures that interest rates and returns in any market reflect the broad demand supply conditions in the overall market of savings. But such adjustment of interest rates is delayed when the intermediaries lack flexibility. On account of the historical role of the Government in controlling and directing a large part of the financial activity, such adjustments were slow and the problem needed to be addressed urgently if the financial sector had to keep pace with the reforms in the real sector. World wide experience confirms that the countries with well-developed and market-oriented financial systems have grown faster and more steadily than those with weaker and closely regulated systems. The financial sector in general and banking system in particular in many of the developing countries have been plagued by various systemic problems which necessitated drastic structural changes as also a reorientation of approach in order to develop a more efficient and well functioning financial system. The Indian financial system has been no exception in this respect and the problems encountered in the way of efficient functioning necessitated the financial sector reforms.Recognising the critical nature of the financial sector prompted the Government to set up two Committees on the Financial System (Narasimham Committees) in 1991 and 1998 to examine all aspects relating to the structure, organisation, functions and procedures of the financial system. The deliberations of the Committees were guided by the demands that would be placed on the financial system by the economic reforms talking place in the real sectors of the economy and by the need to introduce greater competition through autonomy and private sector participation in the financial sector. Despite the fact that the bulk of the banks were and are likely to remain in the public sector, and therefore with virtually zero risk of failure, the health and financial credibility of the banking sector was an issue of paramount importance to the Committees. The Committees proposed reforms in the financial sector to bring about operational flexibility and functional autonomy, for overall efficiency, productivity and profitability. In the banking sector, in particular, the measures have been taken aimed at restoring viability of the banking system, bringing about an internationally accepted level of accounting and disclosure standards and introducing capital adequacy norms in a phased manner. Most of the measures suggested by the Committees have been accepted by the Government. Interest rates have been deregulated over a period of time, branch-licensing procedures have been liberalised and Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) have been reduced. The entry barriers for foreign banks and new private sector banks have been lowered as part of the medium term strategy to improve the financial and operational health of the banking system by introducing an element of competition into it. A Board for Financial Supervision has been set up within the Reserve Bank of India and it has introduced a new system of offsite surveillance even while revamping the system of on-site surveillance. The financial sector reforms have been pursued vigorously and the results of the first set of reforms have brought about improved efficiency and transparency in the financial sector. It is well recognized that reforms in the financial sector are an ongoing process to meet the challenges thrown up on account of the integration of financial markets, both within the country and worldwide.
If the financial sector reforms are viewed in a broad perspective, it would be evident that the first phase of reforms focussed on modification of the policy framework, improvement in financial health of the entities and creation of a competitive environment. The second phase of reforms target the three interrelated issues viz.
Credit Rating Information Service of India Limited(CRISIL)
Investment Information and Credit Rating Agency of India (ICRA India)
Insurance Regulatory and Development(IRDA)
Board for Industrial and Financial Reonstruction(BIFR)
Export Import Bank of India
National Bank for Agricultural and Rural Development(NABARD)
Small Industries DevelopmentBank of India(SIDBI)
National Housing Bank(NHB)
Insurance is basically risk management device. The losses to assets resulting Form natural calamities like fire, flood, earthquake, accident etc. are met out of the common pool contributed by large number of persons who are exposed to Similar risks. This contribution of many is used to pay the losses suffered by unfortunate few. However the basic principle is that losses should occur as a result of natural calamities or unexpected events which are beyond the human control. Secondly insured person should not make any gains out of insurance. Insurance in India can be traced back to the Vedas.
For instance, yogakshema,the name of Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by the Aryans. Burial societies of the kind found in ancient Rome were formed in the Buddhist period to help families build houses, protect widows and children. Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in 1870. Other companies like Oriental, Bharat and Empire of India were also set up in the 1870-90s. It was during the swadeshi movement in the early 20th century that insurance witnessed a big boom in India with several more companies being set up. As these companies grew, the government began to exercise control on them.
The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into investments, expenditure and management of these companies' funds. By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. However, in the absence of regulatory systems, scams and irregularities were almost a way of life at most of these companies. As a result, the government decided nationalizes the life assurance business in India. The Life Insurance Corporation of India was set up in 1956 to take over around 250 life companies. For years thereafter, insurance remained a monopoly of the public sector.
opening up of the insurance sector to private players -- that the sector was finally opened up to private players in 2001. The Insurance Regulatory & Development Authority, an autonomous insurance regulator set up in 2000, has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.
The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are:
Provide Protection- The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.
Collective bearing of risk- Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.
Assessment of risk- Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
Provide Certainty- Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.
The secondary functions of insurance include the following:
Prevention of Losses- Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured.
Small capital to cover larger risks - Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.
Contributes towards the development of larger industries- Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
Means of savings and investment- Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance.
Source of earning foreign exchange- Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways.
Risk Free trade- Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.
The Union Govt. of India decided to open the insurance sector to make it more dynamic and customer friendly.
The main objective for the opening up the insurance sector to the private insures as under.
To provide better coverage to the India citizens.
To augment the flow of long term financial resources to finance the growth of infrastructure.
The Insurance Regulatory and Development Authority Act was introduced to end the monopoly of State-owned companies and to invest in the Insurance.
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at â€œcreating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reformsâ€¦â€ In 1994, the committee submitted the report and some of the key recommendations included:
Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered than after remaining companies are registered. Here we have described the private life insurance companies registered in which year wise.
Within India political ambitions and rise of communalism, fissiparoustendencies are on the rise and may well continue for quite some time to time.Therefore, it expected that the insurance companies might consider offering politicalrisk coverage also. The only area where Indian insurers consider giving cover is withregard to customs duty change under certain conditions.Certain type of political risk at the international level has serious implicationsfor exporters. The term â€˜political risk' has a wider connotation than commonlyunderstood or assumed. It covers events arising not just from politics, but risks in thecourse of international transactions. In this connection, it may be noted that exportcredit insurance has evolved out of uncertainties relating to international trade,particularly due to problems arising out of foreign legal jurisdiction, political changesand currency exchange difficulties faced by many developing countries.
All insurers are required to undertake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies to persons residing in the rural sector, workers in the unorganized sector or to economically vulnerable classes of society and other categories of persons as specified by the IRDA.
The paid up equity of an insurance company applying for registration to carry on life insurance business should be Rs 100 Crores.
An insurer, who has been granted a certificate of registration, should have the registration renewed annually with each year ending on March 31 after the commencement of the IRDA Act. The application for renewal should be accompanied by a fee as determined by IRDA regulations, not exceeding one forth of one percent of the total gross premium income in India in the preceding year or Rs 5 Crores or whichever is less, but not less than Rs 50000 for each class of business as per Section 3A.
The minimum paid up equity capital, excluding required deposits with the RBI and any preliminary expenses in the formation of the country, requirement of an insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to
exclusively do reinsurance business as per Section
Insurers outside India as per Section 27-C cannot invest the funds of policyholders.
After the commencement of the IRDA Act, 1999, every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specified by the IRDA in this behalf. It is mandatory for the new companies to meet the obligations relating to the rural and unorganized sector as per section 32B.
Since 1956 insurance sector was highly regulated by government of India. On March 16, 1999, the Indian cabinet approved on Insurance Regulatory Authority Bills that was designed to liberalize the insurance sector.
For better regulation purpose of the insurance sector the government has established following bodies;
Another factor, which affects the insurance sector, is the tax policy. The tax reforms in India are such that it encourages the citizens to invest in the india.The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of saving. Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save.
Interest rate at bank and interest rate of P.F variation very much affect to insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance industry, becausethe unemployment people will not have earning, so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake, Monsoon, and Natural calamity. Because of these events turns into lots of death, so the life insurance companies have to pay claim against policy. Infant mortality rate and maternity mortality rate are also affecting to life insurance. Typical Indian want luxurious product against low income, so that they prefer installment or annuity (EMI), so that they may not have extra saving to invest in life insurance.
Although economic activity has slowed down since 1996, sooner or later there will Be an upswing. The increase in the growth rate in various sectors accompanied by The growth in trade in the context of fulfilling of commitments to the WTO will signal a growth in the demand for insurance covers of new types.
During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase.
Inflation can also be one of the causes to change the scenario of the insurance sector. High inflation for instance, would tend to reduce the insurance business, particularly life, because the real value of the money paid back to the policyholder
Growth in the population is a major factor pushing up the demand. It is also going to exert a special influence on the life insurance market in other ways. Apart from exerting pressure on demand for goods and services, and through that, ill effects of uncontrolled growth of population also could spur the growth of demand.
The peculiar lifestyle of a country or an age also influences the insurance business. Change therein produces different demands for life insurance.
India is one of the developing countries: the level of education is very low here. The literacy rate is very poor. More than 50% of the population is still uneducated or more or less not educated. Thus the people are not able to understand the concept of the life insurance. Among the educated people the quality of the education is still a big question mark. Thus the awareness is not created and it has become a big challenge for the industry. Thus one of the factors, which affect the life insurance sector, is low level of education.
Another factor, which affects the life insurance sector, is the level of earning. In India the rule of 80-20 is working. The 80% of the total population is having the 20% of the wealth and the 20% of the total population is having 80% of total wealth. Thus the richer are richer and poorer are poorer. Due to this the life insurance sector is affected very much.
In view of the fact that large sections of India have inadequate life insurance cover, an important social responsibility of the government relates to spreading it far and wide. In addition, the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas through such means special schemes for the weaker sections, and by tilting of the life insurance companies' investments in favour of social developments.
Internet as an intermediary in the current Indian market customer is not aware about the intrinsic value of insurance. He thinks of insurance only in the mount of March as a tax saving measure. The security provide by an insurance cover is rarely thought about. In such a scenario Internet can be an effective medium for educating the consumers about insurance. It serves as a single window for disseminating product, process and procedural information to the consumers. Product development and target marketing through the Internet: with increase in the number of insurance companies there will be a need for market segmentation and subsequently product designed for each of them.
In such a scenario Internet can be a effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions for different types or covers can also be generated through the Internet. Retail marketing is a commonly expected concept and the providers of the retail products and service will try out for larger market and market share. There would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology.
Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. There fore the use of technology and specifically the Internet with realigned strategies would be one of the key factors to success. Constraints of locations, timing and accessibility would not be a hurdle for either customers or businesses.
The most important factor that is affecting the insurance industry is the marinating the database of the customers. The insurance industry having a huge list of the customers. In order to maintain it in manual format it is really the work of stupidity. With the change in time the computers has taken the work of this things. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. A person can switch over to the computer and get the details of the customer very easily. Thus maintaining the database has really become easy due to the development in technology.
The Internet has played a vital role in transforming the business of the 21st century. Computers are now being used extensively for creating a storing data, information with the help of complex and sophisticated technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficiency, cost reduction among several other benefits. However, with every positive change, there is an evil attached and technology is no exception.
In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings with it, an increased factor of risk involved. The risk can be of various attributes, for example, the risk of data being lost due to a virus attack, the theft of important and confidential information and so on, which ultimately results in losses for the business entity. With this change in the business process, insurers have to devise new methods for assessing, underwriting and servicing claims for the so-called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them because such risks don't have any past data, which makes it all the more difficult for actuaries. Moreover, what financial impact a particular risk can have is very difficult to be determined.
For example, if some hackers obtain credit card information of few customers, it's a loss for banks, their credibility, customers and also their brand. Will an insurance policy cover all of this is million dollar question hence; the difficulty is to design a cover first of all, which really answers the needs of customers. But even after designing and pricing such products with difficulty, the challenge to underwrite and handle claims for such policies remains existent.
Distribution channels are the most important part of the insurance industry. The scenario is continuously changing in this industry. In future the customers are expected to be more technology - oriented, better informed, more knowledgeable and more demanding. The insurers will have to offer all types of channel to customer and it is the customer who will have the right to choose the channel suiting him/ her. Dual income families with young children, singles with long working days and flexi-timers all demand high level of sophistication and ease when it comes to service.
Hence the companies have to be very careful and cautious in catering to the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication, the carriers and producers can now reach the customers in different ways as has been proved in the US market and other developed nations the web is extensively used for the access of information but when it comes to the purchase of policy, the offline mode is preferred. The private players in India seems to have identified this and have put substantial information on there websites regarding policies, quotes and contact information among other routine.
So I can conclude that political ,economical ,security and social factor are very important part of development in BFSI SECTOR.When I do pest analysis of BFSI SECTOR then see that these are directly effected the improvement .
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