TABLE OF CONTENTS

1. Banking Sector 3 – 13

1.1 Introduction to Banks….…………………………………………... 3

1.2 History of Banking in India……....………………………………... 3
1.3 Types of Banks…………...………………………………………... 4
1.4 SWOT Analysis……………………………………………………. 5
1.5 NPA and Asset Quality Review……………………………....…… 6
1.6 Digital Payments………………………………………………….. 8
1.7 Current Scenario………………………………………………....... 9

2. Financial Services Sector 14 – 24

2.1 Introduction to Financial Services….……………………………... 14

2.2 Types of Financial Services………………………………………... 14
2.3 Growth Drivers…………………………………………………….. 16
2.4 SWOT Analysis……………………………………………………. 16
2.5 Capital Markets ……………………………………………....…… 17
2.6 Non-Banking Financial Intermediaries (NBFIs)………………….. 21
2.7 NBFC Crisis…………………………………………………...…... 22
2.8 Current Scenario………………………………………………...… 24

3. Insurance Sector 25 – 30

3.1 History of Insurance in India....…………………………………….. 25 26

3.2 Types of Insurance…………………….…………………………… 25

3.3 Growth Drivers………..…………………………………………… 27
3.4 SWOT Analysis………………………..........................................… 28
.

3.5 Budget Allocation………………………………………………….. 28

3.6 Current Scenario…………………………………………………… 29

4. Impact of COVID-19 31 - 32

4.1 Overview of the Impact.....……………………….…….................. 31

4.2 Recovery Measures.……………….……………………………….. 31
4.3 Road Ahead…………………………………………….................... 32
 1 BANKING SECTOR

1.1 Introduction to Banks

A bank is an institution that performs the role of financial intermediation by accepting deposits of
money from the public and lending them to borrowers.

There are 3 types of intermediations:

Credit intermediation: Facilitating transfer of money from lenders to borrowers.

Maturity intermediation: Changing the maturity period of deposits accepted and loans granted.
Liquidity intermediation: Changing the liquidity of assets and liabilities.

Functions of banks can be classified into primary functions and secondary functions.

Primary functions

• Accepting deposits: Banks accept different types of deposits such as Saving Deposits, Fixed
Deposits, Current Deposits and Recurring Deposits.
• Granting loans: The deposits accepted from the public are utilised by banks to give loans to
businesses and individuals. Banks charge a higher rate of interest on loans than the rate which they
pay on deposits. This difference between lending interest rate and interest rate generates profit for
the banks.

Secondary functions
• Agency functions: Banks are the agents for their customers, so they perform various agency
functions such as transfer of funds, periodic collections, periodic payments, collection of cheques
and portfolio management.
• Utility functions: Issuing letters of credit, underwriting of shares and debentures etc.

1.2 History of Banking in India

The History of Banking in India dates back before India got independence in 1947. The banking sector
development can be divided into three phases:

Phase 1 (Pre-independence period from 1770 to 1947): The first bank of India was the Bank of
Hindustan, established in 1770 and located in Calcutta, the then capital of India. Following the path of
Bank of Hindustan, various other banks were established in India such as The General Bank of India,
Oudh Commercial Bank, Bank of Bengal, Bank of Bombay, Bank of Madras, Allahabad Bank, Punjab
National Bank, Bank of India, Central Bank of India, Canara Bank and Bank of Baroda.

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is
currently the largest Public sector Bank.

3
Three of these banks - Bank of Bengal, Bank of Bombay and Bank of Madras – were established by
the East India Company and were called Presidential Banks. In 1921, they were merged into one single
bank, which was called the Imperial Bank of India. The Reserve Bank of India (RBI) was established
in 1935 to regulate the issue of bank notes, maintain reserves to secure monetary stability and operate
the credit and currency system of the country to its advantage.

Phase 2 (Post-independence period from 1947 to 1991): At the time of independence, all the major
banks of India were led privately which was a cause of concern as the people belonging to rural areas
were still dependent on money lenders for financial assistance. With an aim to solve this problem, the
government decided to nationalise these banks. The RBI was nationalised in 1949. Following this was
the formation of the State Bank of India in 1955. In 1969, 14 banks were nationalised under the
Banking Regulation Act, 1949. Another 6 banks were nationalised in 1980, taking the number to 20
banks. In 1975, Regional Rural Banks were established to develop rural areas and to provide all the
necessary banking information and facilities to the rural population. Due to nationalisation, there was
an increase in funds and improvement in the economic condition of the country. Rural and agricultural
sectors experienced a boost and many employment opportunities opened up for people.

Phase 3 (Liberalisation period from 1991 till date): 1991 saw a remarkable change in the Indian
economy. The finance ministry led by then finance minister Manmohan Singh introduced liberalisation
reforms that did away with the License Raj, reduced tariffs and interest rates, and ended many public
monopolies, allowing automatic approval of foreign direct investment in many sectors. This move
marked the entry of private players in the banking sector. The RBI provided banking licenses to private
entities such as ICICI, HDFC, Axis Bank, IndusInd Bank and DCB. This move, along with rapid
growth in the economy, revitalised the banking sector in India, which saw rapid growth with strong
contribution from all the three sectors of banks - government, private and foreign banks.

1.3 Types of Banks

• Central Bank: RBI is the central bank of our country. It was established on 1st April 1935 and
holds the apex position in the banking structure. RBI performs various developmental and
promotional functions. It is also known as the banker’s bank as it provides assistance to the other
banks of the country and manages the financial system of the country. They have the authority to
formulate and implement monetary and credit policies. It is owned by the government of a country
and has the monopoly power of issuing notes.

• Commercial Bank: It is an institution that accepts deposits, makes business loans and offers
related services to various businesses like accepting deposits and lending loans and advances to
general customers and business men. These institutions run to make profit. They cater to the
financial requirements of industries and various sectors like agriculture, rural development, etc

During the pre-independence period, over 600 banks had been registered in India.

4
It is a profit making institution owned by the government or private or both. The commercial banks can
be further divided into three categories:
1. Public Sector Banks (PSB): A bank where the majority stakes are owned by the Government or
the central bank of the country.
2. Private Sector Banks: A bank where the majority stakes are owned by a private organization or
an individual or a group of people.
3. Foreign Banks: The banks with their headquarters in foreign countries and branches in our
country, fall under this type of bank.

• Regional Rural Bank (RRB): These banks provide credit to the weaker sections of the rural areas,
particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs. RRBs
are joint ventures between the Central government (50%), State government (15%), and a
Commercial Bank (35%). The National Bank for Agriculture and Rural Development (NABARD)
holds the apex position in agricultural and rural development.

• Co-operative Bank: They are organised and managed on the principle of cooperation and mutual
help. The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans. They give short term loans to the agriculture sector and other allied activities.

• Small Finance Bank: As the name suggests, this type of bank looks after the micro industries,
small farmers, and the unorganized sector of the society by providing them loans and financial
assistance. These banks are governed by the RBI.

• Payments Bank: A newly introduced form of banking, the payments bank was conceptualized by
the RBI in 2015. People with an account in the payments bank can deposit an amount of only up to
INR 1,00,000 and cannot apply for loans or credit cards under this account. Options for online
banking, mobile banking, the issue of ATM, and debit cards can be done through payments banks.
Examples include Airtel Payments Bank, Jio Payments Bank and Paytm Payments Bank.

• Local Area Bank (LAB): These banks were introduced in India in 1996. They are organised by the
private sector and their main objective is to earn profit. They enable mobilization of rural savings
by local institutions and make them available for investments in the local areas.

1.4 SWOT Analysis

Strengths

• India’s banking sector is sufficiently capitalised and credit, market and liquidity risk studies suggest
that Indian banks are generally resilient and have withstood the global downturn well.

Industrial Finance Corporation of India (IFCI) was the first Development Finance Institution set up in 1948.

5
• The advancement in technology which has brought mobile and internet banking services is laying a
great emphasis on providing optimum customer service.
• The Indian banking industry has witnessed the roll out of innovative banking models like payments
and small finance banks, hence helping the resurrection of the domestic banking model.
• The digital payments system in India has evolved the most among 25 countries with India’s IMPS
being the only system at level five in the Faster Payments Innovation Index.

Weaknesses

• Less reach to under-penetrated market in spite of Pradhan Mantri Jan Dhan Yojana.
• State-owned banks account for 70% of assets in the nation’s banking sector, thus making it difficult
for India to address financing gaps in key areas of development such as infrastructure, small and
medium-sized businesses and housing.
• In the post-Covid world, banks are facing fresh onslaught of Non-Performing Assets in unsecured
loans, MSMEs and services sector.

Opportunities

• Rising income is expected to enhance the need for banking services in rural areas, and therefore,
drive the growth of the sector.
• The government's move to privatise two state-owned lenders provides a good opportunity for both
investors and the banks in a bad financial state to recover.
• Significant growth possible in private sector lending as credit disbursal by private sector banks is
expected to increase.

Threats

• Failure of a few banks compromises the stability of the entire sector.

• High inflation and interest rates can cause decline in corporate borrowing and repayments.
• Increased competition among banks can lead to bankruptcy of a few foreign banks.
• The small and local banks face difficulty in bearing the impact of the global economy, and hence
look for mergers.

1.5 NPA and Asset Quality Review

Non Performing Asset (NPA)

An NPA is a loan or advance for which the principal or interest payment remained overdue for a
period of 90 days. NPAs are classified into 3 types:

As per Union Budget 2021-22, the government will disinvest IDBI Bank and privatise two public sector banks.

6
• Substandard Assets: Assets which have remained NPA for a period less than or equal to 12 months.
• Doubtful Assets: Assets which have remained in the substandard category for a period of 12
months.
• Loss Assets: Assets which are uncollectible and of such little value that their continuance as a
bankable asset is not warranted, although there may be some salvage or recovery value.

Asset Quality Review (AQR)

One of the main financial sector problems is the rising NPAs with the banking system. To address this
issue, RBI came out in April, 2015 with additional inspections on the ​balance sheets of the banks to
check the genuine nature of assets. The report from such inspections is termed as Asset Quality
Review (AQR).

With the asset classification in March 2021, a clearer picture of the quality of banks’ balance sheets
has emerged. Scheduled Commercial Banks’ (SCB) gross Non-Performing Assets (GNPA) and net
NPA (NNPA) as ratios of gross advances settled at 7.5% and 2.4% respectively at the end of March
2021.

Furthermore, banks’ resort to restructuring under the COVID-19 resolution framework was not
significant and write-offs as a percentage of GNPA at the beginning of the year, fell sharply as
compared to 2019-20. Overall, GNPAs declined by 5.9%, mainly due to a fall of 8.4% in bad loans of
PSBs.

Growth in SCBs’ GNPAs (YoY) SCBs’ NNPA Ratio

Source: Statista Source: Statista

Sectoral Asset Quality

SCBs’ GNPA ratios for two major sectors, viz., agriculture and industry declined during 2020-21, but
rose for the personal loan sector. Within the industrial sector too, the ratio reduced for all the sub-
sectors in March 2021 relative to a year ago.

The Finance Ministry announced to infuse INR 14,500 crore in banks that are under the RBI's prompt
corrective action framework.

7
 Sector-wise GNP Ratio

Source: Statista

1.6 Digital Payments

With rapid advancement of technology and advent of new developments and innovations in the
payments ecosystem, the Reserve Bank enhanced its focus on safety and security of payment systems.
In addition, the Reserve Bank continued its efforts to nurture efficiency, innovation, competition,
customer protection and financial inclusion.

Increase in Tele-density over the years

Source: Statista

• The payment systems recorded a robust growth of 26.2% in terms of volume during 2020-21 on top
of the expansion of 44.2% in the previous year.
• The nationwide lockdown due to COVID-19 pandemic resulted in decline in payments during its
initial phase. However, the value and volume of payments subsequently picked up with the gradual
relaxations in lockdown.
• Amongst the electronic modes of payments, the number of transactions undertaken using RTGS
increased by 5.7% during the year, with value amounting to ₹1,056 lakh crore.

PhonePe leads In UPI transactions with 47% market share in April 2021.

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• At the end of March 2021, the NEFT facility was available through 1,75,283 branches of 225
banks.
• The Reserve Bank in its Statement on Developmental and Regulatory Policies of February 6, 2020
announced that the Reserve Bank would construct and periodically publish a composite Digital
Payments Index (DPI).
• The Reserve Bank mandated that existing proprietary QR codes shall migrate to interoperable QR
codes by March 31, 2022.
• In May 2021, Unified Payments Interface (UPI) recorded 2.54 billion transactions worth INR 4.91
lakh crore (USD 67.32 billion).

The Reserve Bank’s primary focus was to:

• Facilitate digital penetration.

• Introduce innovative payment options.
• Ensure smooth operations notwithstanding the disruptions caused by the COVID-19 pandemic.
• Organise consumer awareness campaigns on digital payments, which are the building blocks to
achieve the objective of a “less-cash” society.

1.7 Current Scenario

Current Banking Structure

Banking Industry in India functions under the umbrella of Reserve Bank of India - the regulatory,
central bank. Banking Industry mainly consists of: Commercial Banks and Co-operative Banks.

The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled
Bank. Scheduled commercial Banks constitute those banks which have been included in the Second
Schedule of Reserve Bank of India (RBI) Act, 1934.

RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide
section 42 (60) of the Act. Some co-operative banks are scheduled commercial banks although
not all co-operative banks are. Being a part of the second schedule confers some benefits to the
bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the
same time, however, this status also subjects the bank certain conditions and obligation towards
the reserve regulations of RBI.

For the purpose of assessment of performance of banks, the Reserve Bank of India categorises them as
public sector banks, old private sector banks, new private sector banks and foreign banks.

India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate (CAGR) of 150% to
reach USD 4.4 billion by 2022.

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 Classification of Banking Sector

Source: IBEF

Growth in Indian Banking Sector

• Credit off-take has been surging ahead over the past decade, aided by strong economic growth,
rising disposable incomes, increasing consumerism and easier access to credit.
• Demand has grown for both corporate and retail loans. Services, real estate, consumer durables and
agriculture allied sectors have led the growth in credit.
• According to the RBI, credit stood at INR 108.34 trillion (USD 1.48 trillion), as of June 04, 2021.
• Access to the banking system has also improved over the years due to persistent effort from the
Government to promote banking technology and promote expansion in unbanked and non-
metropolitan regions.

Key Trends

Source: IBEF

In August 2020, the Chinese Central Bank People’s Bank of China acquired a 0.0065% stake in ICICI Bank for
INR 15,000 crore (USD 2,127.9 million).

10
At the same time, India’s banking sector has remained stable despite global upheavals, thereby
retaining public confidence over the years.
According to the RBI, the performance of the Indian banking sector improved in FY20, as lenders
reported a profit on an aggregate basis after two years of losses.

Recent Trends

• Indian banks are increasingly focussed on adopting integrated approach to risk management.
• Most of the banks have put in place the framework for asset-liability match and credit and
derivatives risk management.
• By 2022, digital assistants, social media and third-party channels are projected to act as primary
channels for banking.
• The Ministry of Finance, Government of India, launched the Financial Inclusion Index.
• The Government of India made the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme an open-
ended scheme and also added more Incentives.
• On February 9, 2021, under open market operations (OMO), Reserve Bank of India (RBI)
announced to buy government securities worth INR 20,000 crore (USD 2.75 billions).

Central Bank Digital Currency (CBDC) and E-RUPI

CBDC and its need in India

A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency
and is exchangeable one-to-one with the fiat currency. CBDC is a digital or virtual currency and it is
sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a
central bank’s balance sheet. CBDCs should be exchangeable at par with cash.

• CBDCs, depending on the extent of its use, can cause a reduction in the transaction demand for
bank deposits.
• Since transactions in CBDCs reduce settlement risk as well, they reduce the liquidity needs for
settlement of transactions.
• Potential costs of disintermediation mean it is important to design and implement CBDC in a way
that makes the demand for CBDC, vis-à-vis bank deposits, manageable.
• CBDCs are issued largely through the banking system, as is likely, more liquidity may need to be
injected to offset the currency leakage from the banking system.
• Payment of negative interest rate on CBDC is an unconventional monetary policy tool used to boost
spending.

In August 2019, the Government announced major mergers of public sector banks. United Bank of India and
Oriental Bank of Commerce merged with Punjab National Bank; Allahabad Bank merged with Indian Bank;
and Andhra Bank and Corporation Bank merged with Union Bank of India.

11
RBI is currently working towards a phased implementation strategy and examining use cases which
could be implemented with little or no disruption. Some key issues under examination are –

• The scope of CBDCs.

• The underlying technology.
• The validation mechanism.
• Distribution architecture.
• Degree of anonymity etc.

E-Rupi and its need in India

E-RUPI is an e-voucher, which will be delivered to beneficiaries in the form of a QR code and SMS-
string-based voucher through which funds will be directly transferred to their bank account.

• Any government agency and corporation can generate E-RUPI vouchers via their partner banks. A
beneficiary will be required to show the QR code or the SMS message to the merchant, who will
scan the same and a verification code will be sent to the beneficiary’s phone number. The latter will
have to share the code with the merchant and the payment will be successful.
• Aimed at bridging the digital gap among the unbanked population, the beneficiaries or users of this
payment mechanism will not require a card, digital payments app, or internet banking access to
redeem the voucher.
• E-RUPI transaction process is said to be secure and will be keeping the details of the beneficiaries
completely confidential, maintaining their privacy.
• The introduction of Covid vaccination voucher is also aimed at ramping India’s vaccination drive as
E-RUPI allows beneficiaries to easily book appointments for the shots.

However, E-RUPI is not CBDC, both are completely different concepts. E-RUPI is the first step
towards having a digital currency in India, it in itself is not a digital currency but rather a social service
voucher system. Here money is not being created, money is already available with the benefit provider
which it wants to transfer to the platform for the beneficiary. The key difference is here there is no
money created, whereas in CBDC there will be money creation.

Loan Moratorium for Relief

A moratorium period is a period during a loan term when the borrower is not obligated to make a
payment. It is a waiting period before the borrower starts making fixed monthly payments.
While the moratorium announced in the first wave in 2020 pertains to a blanket deferment of
payments, new measures in the second wave in 2020 pertain to the restructuring of loan terms to

India is expected to be the fourth largest private wealth market globally by 2028.

12
accommodate flexible repayment terms. This may include rescheduling of payments, conversion of
any interest accrued or to be accrued into another credit facility, revisions in working capital sanctions,
granting of moratorium based on an assessment of income streams.

Schemes by Government

• Pradhan Mantri Suraksha Bima Yojana: This scheme is mainly for accidental death insurance
cover for up to INR 2 lakh.
• Pradhan Mantri Jeevan Jyoti Bima Yojana: This scheme aims to provide life insurance cover.
• Atal Pension Yojana - Under the scheme, subscribers would receive a fixed pension up to INR
5,000 at the age of 60 years (depending on their contributions).
• Pradhan Mantri Jan Dhan Yojana: Under the scheme, each & every citizen will be enrolled in a
bank for opening a Zero balance account.
• Capital Infusion Scheme: The Finance Ministry announced its plan to infuse INR 14,500 crore as
capital infusion in public sector banks in the fourth quarter of FY21.

Insurance industry has been expanding at a fast pace. The total first year premium of life insurance companies
reached INR 2.59 lakh crore (USD 36.73 billion) in FY20.

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 2 FINANCIAL SERVICES SECTOR

2.1 Introduction to Financial Services

The financial services sector provides financial services to people and corporations. This segment of
the economy is made up of a variety of financial firms including investment houses, lenders, finance
companies and real estate brokers. According to the International Monetary Fund (IMF), financial
services are the processes by which consumers or businesses acquire financial goods. The financial
services sector is the primary driver of a nation's economy. A strong financial services sector can lead
to economic growth while a failing system can drag down a nation's economy. India’s financial
services sector consists of capital markets, insurance and Non Banking Financial Companies (NBFCs).

Classification of Financial Services

Source: Statista

2.2 Types of Financial Services

• Professional Advisory
India has a strong presence of professional financial advisory service providers, which offer
individuals and businesses a wide portfolio of services, including investment due diligence, M&A

Financial Services provide the free flow of capital and liquidity in the marketplace.

14
advisory, valuation, real-estate consulting, risk consulting and taxation consulting.

• Wealth Management
Financial services offered within this segment include managing and investing customers’ wealth
across various financial instruments including debt, equity, mutual funds, insurance products,
derivatives, structured products, commodities and real estate, based on the clients’ financial goals, risk
profile and time horizons.

• Mutual Funds
Mutual fund service providers offer professional investment services across funds that are composed of
different asset classes, primarily debt and equity-linked assets. These products are very popular in
India as they generally have lower risks, tax benefits, stable returns and properties of diversification.
The mutual funds segment has witnessed double-digit growth in assets under management over the
past few years, owing to its popularity as a low-risk wealth multiplier.

• Stock Market
The stock market segment includes investment solutions for customers in Indian stock markets (NSE
and BSE) across various equity-linked products. The returns for customers are based on capital
appreciation – growth in the value of the equity solution and/or dividends – and pay-outs made by
companies to their investors.

• Treasury/Debt Instruments
Services offered in this segment include investments into government and private organization bonds
(debt). The issuer of the bonds (borrower) offers fixed payments (interest) and principal repayment to
the investor at the end of the investment period. The types of instruments include listed bonds, non-
convertible debentures, capital-gain bonds, GoI savings bonds, tax-free bonds, etc.

• Tax/Audit Consulting
Tax consulting services to individuals include determining tax liability, filing tax returns and tax
savings advisory. Tax consulting services to businesses include determining tax liability, transfer
pricing analysis and structuring, GST registrations and tax compliance advisory. In the auditing
segment, service providers offer solutions including statutory audits, internal audits, service tax audits,
tax audits, process/transaction audits, risk audits, stock audits, etc. These services are essential to
ensure the smooth operation of business entities from a qualitative and quantitative perspective, as well
as to mitigate risk.

• Capital Restructuring
These services are offered primarily to organizations and involve the restructuring of capital structure
(debt and equity) to bolster profitability or respond to crises such as bankruptcy, volatile markets,

Financial sector in India is predominantly a banking sector with commercial banks accounting for more than
64% of the total assets held by the financial system.

15
liquidity crunch or hostile takeovers. The types of financial solutions in this segment typically include
structured transactions, lender negotiations, accelerated M&A and capital raising.

• Portfolio Management
This segment includes a highly specialized and customized range of solutions that enables clients to
reach their financial goals through portfolio managers who analyse and optimize investments for
clients across a wide range of assets (debt, equity, insurance, real estate, etc.).

2.3 Growth Drivers

• Innovation: Emerging digital gold investment options.

• Policy Support: The government has approved 100% FDI for insurance intermediaries and
increased the FDI limit in the insurance sector to 74% from 49% under the Union Budget 2021-22.
• Growing Penetration: Credit, Insurance and Investment penetration is rising in rural areas.

Financial Services Sector in India

Source: IBEF

2.4 SWOT Analysis

Strengths

• Rising income is driving the demand for financial services across income brackets.
• India benefits from a large cross-utilisation of channels to expand reach of financial services.
• The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy
access to finance for Micro, Small and Medium Enterprises (MSMEs).

Weaknesses
• A large number of financial institutions are owned by the government and due to the multiplicity of

Insurance industry has been expanding at a fast pace. The total first year premium of life insurance companies
reached INR 2.59 lakh crore (USD 36.73 billion) in FY20.

16
 institutions, there is a lack of coordination among these institutions.
• Corporate customers do not prefer raising finance through the capital market due to its erratic
nature.
• Government is burdened with high levels of domestic debt.

Opportunities

• High Net Worth Individuals (HNWI) participation is growing in the wealth management segment.
• Lower mutual fund penetration of 5-6% reflects untapped growth opportunities.
• The regulatory environment for fiduciary duties in wealth management is evolving, which would
greatly benefit investors through quick adoption of new investor protection measures.

Threats

• Failure of any large finance company can hurt credit availability and adversely affect economic
growth.
• Due to the current Work From Home scenario, a large number of employees with remote login
facilities may make it easier for cybercriminals who infiltrate networks and access sensitive data.
• Finance is a constantly changing industry so, for organizations to be successful and to survive
longer, such changes must either be anticipated or be adapted.

2.5 Capital Markets

Capital market refers to the market for funds with maturity of 1 year and above. In this market, capital
funds comprising both equity and debt are issued and traded. Financial instruments issued in the capital
market are equity shares, preference shares, bonds, debentures etc. Capital market can be divided into
primary market and secondary market.

Primary market

• Initial Public Offering (IPO): Companies can raise equity capital with the help of an IPO by
issuing new shares to the public. Book building process is used in IPO for efficient price discovery.
While the IPO is open, bids are collected from investors at various prices and the offer price is
determined after the bid closing date.
• Follow-on Public Offer (FPO): It is also called secondary offering. It is the issuance of additional
shares to investors by a public company that has gone through the IPO process.
• Rights Issue: Under this, the company gives its existing shareholders the right to subscribe to
newly issued shares in proportion to their existing holdings. The new shares are offered at a
discount.

India has scored a perfect 10 in protecting shareholders' rights on the back of reforms implemented by
Securities and Exchange Board of India (SEBI) in the World Bank's Ease of Doing Business 2020 report.

17
• Bonus Issue: Bonus shares are additional shares given to the current shareholders based on the
number of shares they own, without any additional payment. Companies issue bonus shares to
encourage retail participation and increase their equity base.

Financial Markets

Source: Wall Street

Secondary market

Stock exchange: Once new securities have been sold in the primary market, they are traded in the
secondary market through stock exchanges. India’s premier stock exchanges are Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE).
BSE is the first stock exchange in Asia and SENSEX is its equity index. NSE started operations in
1994 and NIFTY 50 is its index.

Terms associated with secondary market

Bull: Bull is an optimistic person who purchases shares in bulk and expects the share prices to go up.
Bullish is a situation where there is more buying in the market and the stock market has an upward
trend.

In FY21, the number of listed companies on the NSE and BSE were 1920 and 5542 respectively.

18
Bear: Bear is a pessimistic person who sells shares in bulk and expects the share prices to go down.
Bearish is a situation where there is more selling in the market and the stock market has a downward
trend.
Stag: Stag is an investor or speculator who subscribes to a new issue, expecting the price of the stock
to rise immediately at the start of trading. The sole aim of a stag is to sell the shares soon after
allotment to realise a quick profit.
Insider Trading: It is the buying or selling of a security by someone who has access to non-public
information about the security. The existence of information asymmetry makes it possible for certain
participants to take unfair advantage, necessitating regulatory control.

Derivatives

A derivative is an instrument whose value is derived from the value of one or more underlying assets
which can be commodities, precious metals, currency, bonds, stocks etc. Four common derivative
instruments are Forwards, Futures, Options and Swaps.

Classification of Derivatives

Source: IBEF

Alternate Investment Funds (AIFs)

AIFs refer to any privately pooled investment fund in the form of a trust or company or Limited
Liability Partnership (LLP) that is incorporated in India. Below are the types of AIFs:

• Venture Capitalist: It is a financing that investors provide to growing or established companies

and small businesses that are believed to have long-term growth potential. These investments are
risky but can give impressive returns. Venture capitalists have the power to influence major
decisions of the companies they are investing in.
• Angel Investors: It refers to a money pool created by high net worth individuals or companies for
investing in business start-ups.

In FY21, USD 4.25 billion was raised across 55 initial public offerings (IPOs).

19
 Investment Funds

Source: Finception

• Private Equity: It consists of investment in equity securities that are not listed or traded publicly on
a stock exchange.
• Hedge Funds: It is a pool of money that strives to hedge risks to investors’ money against market
ups and downs by employing complex strategies, to generate high returns at reduced risk.

Asset Management Company (AMC)

AMC is a firm that invests funds pooled from different investors in securities, with the objective of
optimal return in exchange for a fee. AMC maintains the diversity of its portfolio by investing in both
high-risk and low-risk securities. Factors such as industry risk, market risk, return risk, political risk
are considered before selecting any security to meet the return on investment targets. Following are the
tasks performed by an AMC:

• Market Research and Analysis: To build a portfolio for an investor the asset manager needs to do
a lot of research on the market trends, on the basis of which the appropriate securities are selected
which will outperform the return expectations of the investors.
• Asset Allocation: On the basis of market research and investor’s financial objectives, the asset
manager allocates the funds to different assets.

India is about the only country where the cash credit system of lending is popular. All over the world the
businesses take loans that are renegotiated on sure dates.

20
• Creating a Portfolio: After research and analysis by analysts and decision of asset allocation are
done, the asset manager on the basis of market findings creates a portfolio. Here the asset manager
will take decisions like which security to sell, buy or hold for a period.
• Performance Review: Since the fund of an investor is at stake, the performance measurement of
the portfolio becomes very important. At every point, the asset manager has to justify a buy, sell or
hold securities to investors. Every asset manager generally provides regular updates to investors
regarding factors which might affect their portfolio.

Investment Banking

Investment banking is a special segment of banking operation that helps individuals or organisations
raise capital and provides financial consultancy services to them. They act as intermediaries between
security issuers and investors and help new firms to go public. They either buy all the available shares
at a price estimated by their experts and resell them to the public or sell shares on behalf of the issuer
and take commission on each share. They provide various types of financial services such as
proprietary trading, mergers and acquisitions advisory, leveraged finance that involves lending money
to firms to purchase assets and settle acquisitions, restructuring and new issues or IPOs. Bank of
America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan are some of
the largest investment banks in India.

2.6 Non-Banking Financial Intermediaries (NBFIs)

NBFIs are a heterogeneous group of financial institutions other than commercial and cooperative
banks. They include a variety of financial institutions which raise funds from the public either directly
or indirectly. There are two types of NBFIs:

Development Banks
• They are specialised financial institutions promoted by the government which provide long-term
finance to sub-sectors of the economy and perform various promotional roles conducive to
economic development.
• They are the financial ‘gap fillers’, providing crucial finance where the risks may be higher than
what the ordinary financial system is willing to bear.
• They do not seek or accept deposits from the public and specialize in providing medium and long-
term finance, unlike commercial banks which provide short-term finance.
• They have development as their primary motive rather than pure commercial profit.
• Examples of development bank – Small Industries Development Bank of India (SIDBI) and
National Bank for Agriculture and Rural Development (NABARD).

The role of NBFIs is generally to allocate surplus resources to individuals and companies with financial
deficits, allowing them to supplement banks.

21
Non Banking Financial Companies (NBFCs)

• Also known as shadow banks, NBFCs are regulated by RBI and sector specific regulators.
• They cannot accept ‘demand deposits’. Deposit taking NBFCs are allowed to accept only ‘time
deposits’.
• NBFCs do not form a part of the payment and settlement system and cannot issue cheques drawn
on itself.
• NBFCs specialize in particular fields. For example, Manappuram Finance specializes in gold loans
and Bajaj Finance in automobile loans.

2.7 NBFC Crisis

Reason for the crisis

NBFCs typically borrow money from banks or sell commercial papers to mutual funds to raise money.
They lend this money to small and medium enterprises, retail customers and so on. When NBFCs
don’t have money to lend, that reduces the credit flow to the economy, hits economic growth and
causes many borrowers to default on loans. NBFCs raise short-term funds and lend them out as long-
term loans. This leads to an asset-liability mismatch. The NBFC has to keep renewing the debt in the
short-term or raise fresh loans to repay the debt. This cycle can be broken during tough situations and
this is what happened when some firms of the IL&FS (one of the prominent companies in the NBFC
sector) group defaulted on loans. Banks, mutual funds and their investors were afraid that more such
entities would default and many institutions refused to give money to NBFCs.

NBFC Loans and Advances

Source: Finception

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum
period of 60 months. They cannot accept deposits repayable on demand.

22
Impact of the crisis

NBFCs were lending in sectors where banks refused to go or did not want to go. Their liquidity crunch
choked the flow of credit to the economy and hit the MSME sector which was already suffering from
the twin blows of demonetisation and GST. Most of the financing for automobile consumption was
done by NBFCs, so sales of automobiles were affected. The real estate companies also were getting
money largely from the NBFCs because they were not getting any lending from the banks. The NBFCs
were giving these companies funds to start new projects, construction and financing etc. The real estate
companies got stuck because the projects did not go ahead and subsequently shut down due to the
NBFC crisis.

NBFC Stocks Post IL&FS Fallout

Source: Finception

Measures to recover from the crisis

• RBI, to solve this issue of the NBFC crisis, first, pooled large funds in the NBFC, as well as the
banking sector, to minimize the impact through OMO (Open Market Operations).
• Together with monitoring the top major NBFCs based on business volume, size, etc., closely. A
committee was formed for reviewing the framework of liquidity management.

Asset Liability Mismatch (ALM) is the situation that occurs when a financial institution borrows short-term
funds and provides long-term loans.

23
• RBI bought government debt paper worth INR 3 lakh crore from the market. This way the money
was provided to the banking system to on-lend.
• RBI canceled the NBFC License of several companies that were found to be disregarding the
regulations.

2.8 Current Scenario

Growth of AUM

In May 2021, the mutual fund industry’s Assets Under Management (AUM) amounted to INR
3,305,660 crore (USD 454.12 billion). In May 2021, the mutual fund industry crossed over 10 crore
folios. Inflows in India's mutual fund schemes via systematic investment plan (SIP) were INR 96,080
crore (USD 13.12 billion) in FY21. The Association of Mutual Funds in India (AMFI) is targeting
nearly five-fold growth in AUM to USD 1.47 trillion by 2025.

Recent Trends

• In January 2021, the National Stock Exchange (NSE) launched derivatives on the Nifty Financial
Service Index. This service index is likely to provide institutions and retail investors more flexibility
to manage their finances.
• In November 2020, Paytm reported 2x growth in digital gold transactions in the last six months.
New customers have increased 50% since the beginning of this financial year and the average order
value has increased by 60%.
• In November 2020, the Reserve Bank of India (RBI) announced the establishment of its Innovation
Hub. In order to encourage access to financial services and goods and foster financial inclusion, this
initiative would create an ecosystem. The Innovation Hub of the Reserve Bank (RBIH) is intended
to promote innovation across the financial sector by leveraging technology and creating a conducive
environment for innovation.
• India’s leading bourse, Bombay Stock Exchange (BSE), will set up a joint venture with Ebix Inc to
build a robust insurance distribution network in the country through a new distribution exchange
platform.

Finance Minister Nirmala Sitharaman on Monday said the government will infuse INR 20,000 crore into public
sector banks (PSBs) in 2021-22 to meet the regulatory norms.

24
 3 INSURANCE SECTOR

3.1 History of Insurance in India

1818 saw the advent of life insurance business in India with the establishment of the Oriental Life
Insurance Company in Calcutta. In the last three decades of the nineteenth century, three insurance
businesses were started in Bombay. This era, however, was dominated by foreign insurance offices.
Due to allegations of unfair trade practices in the mid nineteenth century, the Government of India
decided to nationalize insurance business. An ordinance was issued in January, 1956 nationalising the
Life Insurance sector, and Life Insurance Corporation (LIC) came into existence in the same year. The
LIC absorbed 154 Indian, 16 non-Indian insurers and also 75 provident societies. The LIC had
monopoly till the late 90s when the Insurance sector was reopened to the private sector. In 1999, the
Insurance Regulatory and Development Authority of India (IRDAI) was constituted as an autonomous
body to regulate and develop the insurance industry. The key objectives of the IRDA include
promotion of competition so as to enhance customer satisfaction through increased consumer choice
and lower premiums, while ensuring the financial security of the insurance market.

3.2 Types of Insurance

Life Insurance

A Life Insurance policy is a contract-drawn arrangement between the insurer and a beneficiary. The
insurer promises to pay the beneficiary a specified sum of money factoring in the date of
maturity/completion of the policy, any other pre-determined date at periodic intervals, untimely death
of the beneficiary, in which case the payment is made towards the nominees of the policyholder by the
insurer. Policyholders make payments towards the insurer periodically, which are called premiums.
This could either be monthly, yearly, or a lump sum/one-time payment. Given the uncertainty of life,
life insurance is looked upon as a safe bet for two unavoidable stages. The first involves retiring with
ample savings at hand to provide for oneself in the absence of a regular income. The other is the
untimely demise of the beneficiary which often leaves a vacuum of finances for the dependent kin of
the family. In this second case, life insurance emerges as a way to ensure financial support in desperate
times.

General Insurance

It offers many variants safeguarding against wide-ranging issues. It can be used to ensure the property
against natural disasters such as floods, storms, earthquakes, landslides, etc. Additionally, it also covers
man-made disasters like riots, burglary, terrorism, etc. and extends the same towards personal
insurance that, in turn, covers health, travel and accidents, and liability insurance.

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

25
Some examples of General Insurances in India are:

• Health insurance: Health insurance plans allow the policyholder to be treated for ailments without
paying any cash. Customers could opt for individual health insurance plans, family health insurance
plans, critical illness insurance, and so on. The insurer could cover such charges as hospitalization,
operational supplies, etc. Beneficiaries could also avail reimbursements for such expenses through
the policy after making the payment from their side first. Such insurance is referred to as a
Mediclaim.

• Motor insurance: Motor Insurance is designed to cover on-road and off-road damages to a vehicle.
A user-centric motor insurance policy often includes damages incurred from both natural and man-
made disasters. The Indian law mandates every vehicle owner to insure their vehicle.

• Travel insurance: A travel insurance cover is targeted towards travellers who would like to secure
their belongings against unexpected losses whether traveling internationally or domestically. While
cheaper policies include only the incurred medical expenses, detailed policies offer additives such
as trip cancellation, lost luggage and liability insurance.

• Home insurance: A home insurance policy generally covers private property. It covers damages to
property, appliances, furniture or any other contents stored at home due to man-made or natural
disasters.

• Re-insurance: Re-Insurance is a general practice followed by institutional insurers to protect the

business against unexpected volume of claims. The insurer purchases insurance from a second
insurance company, to safeguard its finances if too many policyholders apply for claims at the same
time. When one insurer purchases such a scheme, they pass on the responsibility of settling a claim
to their insurer. Financial entities opting for reinsurance are referred to as ceding companies and the
insurer offering the same is called the reinsurer.

Share of Public and Private Sectors in

Non-Life Insurance, FY20

Source: IBEF

In March 2021, health insurance companies in the non-life insurance sector increased by 41%, driven by rising
demand for health insurance products amid COVID-19 surge.

26
 Key players in Indian Insurance

Life insurance:

• Life Insurance Corporation of India (only public sector insurance company in India)
• Aditya Birla Sun Life Insurance Company
• ICICI Prudential Life Insurance
• Bajaj Allianz Life Insurance Company
• PNB Metlife India Insurance
• Aviva Life Insurance Company

Non-life insurance:

• SBI General Insurance Company Limited

• ICICI Lombard General Insurance Company
• Max Bupa Health Insurance Company
• The Oriental Insurance Company

Key Players in Insurance Sector

Source: Business Standard

3.3 Growth Drivers

• Robust Demand: Growing interest in insurance among people, innovative products and
distribution channels are aiding growth.
• Policy Support: Union Budget 2021 increased Foreign Direct Investment (FDI) limit in
insurance from 49% to 74%. India’s IRDAI has announced the issuance, through Digilocker, of
digital insurance policies by insurance firms.

Life insurance industry in the country is expected to increase by 14-15% annually for the next three to five
years.

27
 • Increasing Investment: In February 2021, the Finance Ministry announced to infuse INR
3,000 crore (USD 413.13 million) into state-owned general insurance companies to improve
the overall financial health of companies.

3.4 SWOT analysis

Strengths

• Growing interest in insurance among people, innovative products and distribution channels are
aiding growth.
• Growing use of the internet has pushed the demand.
• IRDAI is given full flexibility to frame regulations for the sector.
• New and wide range of products introduced.

Weaknesses

• India is among the lowest-spending nations in Asia in purchasing insurance.

• Insurance penetration in India is 3.7% of GDP as against the world’s average which is 6.31%.
• Insurance companies are often slow to respond to changing needs.
• Increased incidence of frauds.

Opportunities

• Strong growth potential for micro insurance, especially from rural areas.
• Life insurance industry in the country is expected to grow 12-15% annually over the next three
to five years.
• Many existing private players are tying up with banks to expand their distribution network.

Threats

• Governance and regulatory issues.

• Heightened customer expectations.
• Dominance of entrenched players stagnates the industry.
• Increased price and value transparency.

3.5 Budget Allocation

Fund of INR 16,000 crore (USD 2.20 billion) has been allocated for crop insurance schemes for
the

In June 2021, the government extended a INR 50 lakh (USD 66.85 thousand) insurance coverage scheme for
healthcare workers across India until the next one year.

28
Fiscal Year 2021-22. The Finance Ministry announced to infuse INR 3,000 crore (USD 413.13
million) into state-owned general insurance companies to improve the overall financial health of
companies. Union Budget 2021 increased FDI limit in insurance from 49% to 74%. In June 2021, the
government extended a INR 50 lakh (USD 66.85 thousand) insurance coverage scheme for healthcare
workers across India until the next one year.

3.6 Current Scenario

The insurance industry of India has 57 insurance companies - 24 are in the life insurance business,
while 33 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole
public sector company. There are six public sector insurers in the non-life insurance segment.

Share of Public and Private Sectors in Life Insurance, FY20

Source: IBEF

India’s insurance penetration was pegged at 3.76% in FY20, with life insurance penetration at 2.82%
and non-life insurance penetration at 0.94%.

Recent Developments

• India’s insurance penetration was pegged at 3.76% in FY20, with life insurance penetration at
2.82% and non-life insurance penetration at 0.94%.
• In FY21, LIC achieved a record first-year premium income of INR 56,406 crore (USD 7.75 billion)
under individual assurance business with a 10.11% growth over last year.
• In June 2021, Aditya Birla Sun Life Insurance announced the launch of a new Vision Life Income
Plus Plan that will provide guaranteed regular income plus flexible bonus payouts to policyholders.
• In March 2021, health insurance companies in the non-life insurance sector increased by 41%,
driven by rising demand for health insurance products amid COVID-19 surge.

India is the second largest Insurtech market in Asia-Pacific, according to S&P Global Market Intelligence
data.

29
Government Schemes

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): PMJJBY is a yearly renewable term
insurance policy launched by the central government of India. The scheme was launched with an
objective to encourage insurance protection of poor and low-income sections of the society. The
Pradhan Mantri Jeevan Jyoti Bima Yojana offers an annual life coverage of INR 2 lakh in case of the
demise of the policyholder during the policy term.

Differentiation

Companies are trying to differentiate themselves by providing a wide range of products with unique
features. For example: New India Assurance launched Farmers’ Package Insurance to cover farmer’s
house, assets, cattle etc. United India launched Workmen Medicare Policy to cover hospitalisation
expenses arising out of accidents during and in the course of employment.

On January 13, 2021, Crop Insurance Scheme, the Pradhan Mantri Fasal Bima Yajana (PMFBY), completed
five years of operations towards strengthening risk coverage of crops for farmers of India.

30
 4 IMPACT OF COVID-19

4.1 Overview of the Impact

The Indian economy wasn’t in great shape even before the COVID-19 outbreak, which has only made
matters worse. 19 sectors, which were not under stress before the pandemic but have been hit now,
account for INR 15.5 lakh crore of debt. Retail and wholesale trade are the worst affected with
outstanding debt of INR 5.4 lakh crore. The pandemic has also affected 11 sectors which were already
under stress. Agriculture and allied products make up the biggest silver lining in India’s debt
landscape. This sector has debt of INR 9.8 lakh crore. It was stress-free before the pandemic and
continues to be so.

Debt of Various Sectors

Source: RBI

4.2 Recovery Measures

• Credit Related Measures: With the objective of alleviating the potential stress to individual
borrowers and small businesses due to the COVID-19 pandemic, a limited window was opened by
the Reserve Bank permitting lending institutions to implement resolution plans in respect of their
exposures to individuals, MSMEs and other small businesses with aggregate exposure upto ₹50
crore, while classifying the same as standard. Moreover, priority sector classification was extended
to fresh credit advanced by Small Finance Banks to specified categories of NBFC-MFIs and other
MFIs for the purpose of on-lending to individuals in order to address the emergent liquidity stress
faced by smaller MFIs.

• Bad Bank: In the Union Budget for 2021-22, the Government announced a proposal for setting up
the National Asset Reconstruction Company Limited (NARCL), popularly termed as a “bad bank”,
to consolidate and take over stressed debt from banks. The aggregation of assets is expected to
assist in turning around the assets and eventually offloading them to AIFs and other potential
investors for further value unlocking.

As of June 2, 2021, the number of bank accounts opened under the government’s flagship financial inclusion
drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’ reached 42.44 crore.

31
• Innovation through Regulatory Sandbox: The Reserve Bank has adopted a thematic approach to
its regulatory sandbox (RS) in the fintech sector, which allows it to pursue specific sector-wise
objectives and visualize risks at sub-levels. After the first cohort was launched in November 2019
with “Retail Payments” as its theme, the second cohort was launched in December 2020 with the
theme “Cross Border Payments”. The Reserve Bank also selected “MSME lending” as the theme
for the third cohort.

• Amalgamation of Urban Co-operative Banks (UCBs): The Reserve Bank issued comprehensive
directions to facilitate amalgamation of weaker UCBs with stronger entities. These include
incentives for an amalgamating UCB, such as relaxed conditions for closure/merger of branches as
well as minimum entry point capital if the entity becomes a multi-state UCB on account of the
amalgamation.

• Development of the Credit Risk Market: In order to facilitate diversification of credit risk
originating in the banking sector and to ensure market-based credit products for diversified set of
investors having commensurate capacity and risk appetite, the Reserve Bank has been working on a
comprehensive framework for transfer of loan exposures and on institutionalizing a secondary
market for corporate loans. As part of the latter, it has facilitated the establishment of a self-
regulatory body viz., Secondary Loan Market Association (SLMA), comprising of market
participants.

4.3 Road Ahead

The challenges unleashed by the COVID-19 crisis on the global social and business fabric are perhaps
the most serious in a century. The COVID-19 impact on banking and insurance is being felt across
segments and sub-segments. With the current pandemic, the health of this sector will depend on the
quick recovery of India’s economy. To steer the country through these unprecedented times, the RBI
and the Indian government must continue implementing fiscal measures that provide relief to financial
institutions.

Digital lending to micro, small and medium enterprises (MSMEs) in India is expected to reach USD 100 billion
by 2023.

32
 REFERENCES

• www.ibef.org

• www.investindia.gov.in

• www.kpmg.com

• www.pwc.com

• www.rbi.org.in

• www.economictimes.com

• www.timesofindia.com

• www.businessstandard.com

• www.investopedia.com

• www.visionias.com

• www.drishtiias.com

Lorem Ipsum, "Lorem ipsum dolor sit amet..", comes from a line in section 1.10.32.
Malorum" (The Extremes of Good and Evil) by Cicero, written in 45 BC. This book is a

33
Research and Scholastic Development Team (R.S.D.T.)

S - Team
Aishwarya Dhamangaonkar (Operations)
Akansh Arora (Finance)
G.S.V. Ramana (Finance)
Samiksha Gamare (Marketing)
Sunaina B N (HR)
Tushar Upadhyay (Marketing)
Vamshi Krishna Salem (Marketing)
Yamini Mathur (Operations)

I - Team
Bhavini Priyamvada (Marketing)
Keerthi Krishna A. S. (Operations)
Komal Agrawal (Marketing)
Kshitiz Jaiswal (Marketing)
Phanindra Sai Siddamsetty (HR)
Sheetal Sable (Operations)
Shubhada Vyawhare (Marketing)
Vallabh Agarwal (Operations)
Yash Vardhan Chaudhary (Marketing)

34
 SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT
Constituent of Symbiosis International University
Accredited by NAAC by ‘A’Grade

Gram: Lavale, Tal: Mulshi, Dist: Pune – 412115

Email: rsdt@sibmpune.edu.in, Tel: 020 39116068
Website: www.sibm.edu
Source: smallcase.com

editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover
many web sites still in their infancy. Various versions have evolved over the years, sometimes by
accident, sometimes on purpose (injected humour and the like).