single bank branch. This skewed distribution and under-banking exacerbates the problem of
credit availability and financial inclusion in the country.!"!
The Reserve Bank of India regulation to issue new bank licences addresses this problem of
service penetration with preferences to Non-Banking Financial Corporations (NBFC). The
major regulatory directives imposed by RBI can be classified as serving three different
purposes of imposing safety, enhancing financial inclusion and offering sufficient support
services. RBI insists a sound track record in an organization applying for bank licence with
no involvement in past activities related to speculation. Further the organization cannot
establish any other financial entity in the next three years after obtaining the licence and the
banking operation should be conducted using a wholly owned subsidiary independent of
other financial services offered."!
In order to achieve inclusion, RBI mandates opening of 25% of the applicant's branches in
rural regions and sets targets and sub targets for priority sector lending. The bank applicants
are also mandated to employ a rural customer grievance cell which is likely to increase the
costs of operation, In order to operate effectively with above mentioned constraints the
financial institutions might have to improve their risk management capabilities by employing
better analytics and optimize distribution costs with effective use of technology and careful
outsourcing policies,
Financial inclusion presents only one portion of the challenge. The other challenge stems
from the fact that people who are aware and included in the services are conservative and
prefer to save rather than invest. The ratio of savings to GDP has constantly been on the rise
post liberalization and was around 34% during the year 2012 (Figure-3). In the absence of
individual social security, the savings are seen as a safety net by majority of individuals
resulting in a misperception of other financial investment instruments being too risky. This
suggests a possible need for financial planning advisors who could help both corporate and
individual investors with objective evaluation of investment choices
India Gross savings (As % of GOP)
FIGURE-3: INDIA’S GROSS SAVINGS AS A PERCENTAGE OF GDP"!
It is in this context of economic conditions the values of parent company are analyzed and
each of the financial divisions of ABFSG are evaluated,
ADITYA BIRLA FINANCIAL SERVICES GROUP | 72.0 INDUSTRY & DIVISION OVERVIEW
2.1 LIFE INSURANCE
Prior to 1999, LIC was the only major player in life insurance segment primarily dealt with
traditional life insurance. The sector was liberalized in 1999, and consequently, many private
players entered the Indian market and the premium collection grew 8 times over 2001-10
period at CAGR of 31%, and is currently at $ 59.9 billion out of the present total insurance
market premium of $ 72 Billion, This period was followed by 2 years of sluggish growth at a
low CAGR of 2%,
One of the reasons for this is the slow GDP growth of the Indian economy which came down
from an average of 8.7 % (2003-07) to 6.7% (200813). India’s financial savings as a
percentage of household savings also fell from 52% in 2008 to 36% in 2012 thereby
establishing @ positive correlation between percentage of household savings, insurance
CAGR and India’s GDP growth.
Another reason for the insurance sector losing its earlier sheen can be the Insurance
Regulatory and Development Authority (IRDA’s) new policies
July’10 which resulted in industry wide lowering of commission structures. The new policy
resulted in reduction of per capita premium underwriting (density) for the first time since
2000. The penetration rates also decreased because the total life insurance premiums
collected declined by 1.6% in 2011-12. This decrease was partly a result of change in the
insurance product portfolio from Unit-Linked Insurance Plans (ULIPs) to traditional (non
unit linked) plans. This change took place because of 2 reasons:
that were introduced in
1. Capping of first year commission on ULIPs which affected the interme
2. Poor equity market performance- The equity component of ULIPs had a 6 year
CAGR of 6.7% (SENSEX) when compared to a CAGR of 19.5% & 8.3% for gold
and fixed deposits respectively which led the end customer to prefer a combination of
risk cover and fixed income investments.
Also, other similar insurance plans like Highest Daily NAV and Term Assurance Plans (Pure
Risk Plans) are available in the market.
2.1. BIRLA SUN LIFE INSURANCE (BSL1),
BSL is the flagship company of ABFSG with a Top Line share of 87% in 2012 and captured
2.05% of the $60 billion life insurance premium market by 2012. The growth of BSLI was
fuelled by a paradigm shift in its policies and the HR revamp, which resulted in lower
‘operating costs and turnaround time.!"
(KPI for employees and outsourcing HR for entire group to achieve economies of scale.
These resulted in lower operating expenses to total premium ratios and healthier persistency
rates, helping BSLI when the new IRDA policy was implemente
Changes include standardized performance metric
BSLI increased its total life insurance premium rapidly in the early years, expanding S times
between 2007 and 2012 to over 650 branches." But it couldn’t keep pace with insuran
companies backed by banks that had a wide captive distribution network of over 1000
6
branches. The individual agents accounted for more than 60% of new business premiums,
8 | ADITYA BIRLA FINANCIAL SERVICES GROUP