Basics of BFSI

Introduction
Sub Topics to be covered
 Financial Markets
 Role of Intermediaries in BFSI sector
 History, growth, current position and

challenges for Banking, Financial services and

insurance sectors
Financial system
Markets

Services Institutions

Regulators Instruments
Financial Markets
 A financial system is the set of global, regional, or
firm-specific institutions and practices used to
facilitate the exchange of funds.
 Financial markets refer to a centre that provides
the facilities of sale or purchase of financial claims
and services.
 Individuals, financial institutions ,corporations and
government trade in this market either directly or
indirectly through brokers and dealers.
 Activities in financial markets lead to direct effects
on behaviour of individual, business and
consumers
Components of Financial markets

Financial market
Financial market

Level of
Nature of
Nature Maturity Period organisation
securities

Primary Money Market Organised

Unorganised
Secondary
Capital Market
Key Financial Markets
 Money market (where short term interest
rates are determined)
 Capital Markets ( major effect on people’s

and firm’s decisions)

 Foreign exchange market ( changes in the

foreign exchange rates affect economic

activity)
 Derivatives Market (used for hedging and

speculation objective cannot be ruled out)

Financial Markets in India
 Organised & unorganised
 Low per capita leading to inadequate

participation
 Regulatory bodies like RBI,SEBI,IRDAI,MOF
 Paucity of financial instruments
 Issues of corporate governance and scams
Money Markets
 Key transmitter of monetary policy rates for short term
 Based on supply and demand for money for short term
 Products are highly liquid and large value deals occur
 High liquidity and less tenure (lower than 1 year) of the
products
 Usually over the counter deals or previously negotiated
deals are made
 Participants are Banks, Financial Institutions ,Primary
dealers(PDs)
 Unstructured, Informal as well as Formal Market
 High safety and low returns
 Enables financing and investing for short term
Money Market instruments
Products dealt in are:
Overnight:
 Call money, Triparty Repo, Market Repo, Repo in corporate

Bond
Term Segment:
 Notice Money(till 14 days),Term Money, Triparty Repo,

Market Repo, Repo in corporate Bond, Treasury Bills,

Commercial paper, Certificate of deposit, Money Market
Mutual Funds, Commercial Bills

https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?
Id=10
https://www.moneycontrol.com/news/business/markets/expl
ained-what-is-repo-and-tri-party-repo-3859991.html
https://www.financialexpress.com/policy/economy-commerci
al-paper-rates-may-affect-growth-india-inc-3006548/
Capital Markets

 Long tenure assets with higher risk involved

 Enables capital formation & economic

development
 Can be categorised into stock Markets and

Bond Markets OR primary market and

secondary market
Capital Markets
 Products are Equities, Mutual Funds, ETFs,
Securities borrowing and lending schemes,
Debts-corporate debts and securitised assets
 In bond market, long term trading of

government securities, Bonds issued by PSU

Undertakings/Corporates/Banks like floating
rate bonds, zero coupon Bonds, corporate
debentures, state government loans,
securitised assets of banks, FIs , corporates
and others
Foreign Exchange Markets
 Largest Financial market with players all over
the world
 Global network working 24 hours a day
 Facilitates determination of foreign exchange

rates between currency pairs

 Participants include Banks, forex dealers,

Central bankers, hedge funds, investors

Derivatives Market
 Derivatives are financial securities and are
financial contracts that obtain value from
something else, known as underlying
securities. Underlying securities may be
stocks, currency, commodities or bonds, etc.
 Formal derivative trading started in year 2001

after electronic trading mechanisms were

introduced in India
 Examples: Forwards, Futures, Options, Swaps

 https://rmoneyindia.com/research-blog-trad
ers/indian-derivatives-market-investing/
Types of Finance
 Direct Finance: Savers invest their funds
directly without any intervention of the
financial intermediary For example: issue of
equity shares and /or corporate bonds by
companies to public
 Indirect Finance: Involves role of financial

intermediaries to facilitate movement of

funds from surplus units to deficit units For
eg: Banks, Mutual Funds etc
Financial Institutions
Non
Intermediary Others
Intermediary

Direct
Banking
Investments

Support to FI

Non Banking
consultancy
like insurance
Financial Intermediaries-Role
 Mobilise savings
 Capital formation
 Optimal utilisation of resources-Economic

progress
 Liquidity
 Advisory
 Risk reduction
Types of Financial services
 Fund based financial services
◦ Provide finance
◦ Reduce risk
◦ Examples: Lease financing, Factoring , Hire purchase, venture
capital, House financing, discounting
◦ Entities: Insurance companies, Banks, Housing finance
institutions
 Fee based financial services
◦ Specialised services
◦ Professional fees charged to clients
◦ Examples: Portfolio consultancy, Merchant banking, Capital
restructuring
◦ Entities: Investment bankers, Portfolio consultants, Issue
managers
Four key sectors in BFSI

 Insurance
 Mutual Funds
 NBFCs
 Banks
Insurance
What is Insurance?
 Purpose: pooling of risks
sharing of losses
transferring risk

 Basic Principle: insurable interest, indemnity,

subrogation, contribution, disclosure, utmost
faith, relevance of proximate cause
 Two main streams: Life & Non-Life/General
Key facts
 The first quarter of FY24 saw nonlife players' premium income
increase by 17.9% year-over-year to Rs. 64,262.8 crore (US$ 7.72
billion) due to strong demand for health and motor policies.
 The government’s flagship initiative for crop insurance, Pradhan Mantri
Fasal Bima Yojana (PMFBY), has led to significant growth in the
premium income for crop insurance
 As per the Insurance Regulatory and Development Authority of
India (IRDAI), India will be the sixth-largest insurance market
within a decade, leapfrogging Germany, Canada, Italy and South
Korea.
 India allowed private companies in insurance sector in 2000, setting a
limit on FDI to 26%, which was increased to 49% in 2014 and further
increased to 74% in the Union Budget (Feb 2021).
 The market share of private sector companies in the non-life
insurance market rose from 15% in 2004 to 62% in FY23.
 Private insurers like HDFC, ICICI and SBI have been some tough
competitors for providing life as well as non-life products to the
insurance sector in India.
Life Insurance trends
 The life insurance industry is expected to
increase at a CAGR of 5.3% between 2019
and 2023. India’s insurance penetration was
pegged at 4.2% in FY21, with life insurance
penetration at 3.2% and non-life insurance
penetration at 1.0%. In terms of insurance
density, India’s overall density stood at US$
78 in FY21.
Non life insurance trends
 India is the 4th largest general insurance market in Asia and
the 14th largest globally.
 In FY23, non-life insurers (comprising general insurers,
standalone health insurers and specialized insurers) recorded
a 16.4% growth in gross direct premiums. In India, gross
premiums written off by non-life insurers reached US$ 31
billion in FY23 and US$ 10.95 billion in first quarter of FY24*,
from US$ 28.14 billion in FY22, driven by strong growth from
general insurance companies.
 Going forward, general insurance companies will be key
beneficiaries of the opening-up of economies, especially with
improved trade activity increasing demand for motor and
health insurance. Strong growth in the automotive industry
over the next decade is expected to boost the motor
insurance market
Videos for Insurance updates
 https://youtu.be/8OZngCJQ-GA?si=ZCH6rFU
DnT67v6JD

 https://youtu.be/1SV8h9n2pLY?si=FLBTgEfg
owCgS29g
Number of Insurers in India
Life Insurers General
• 24 Players • 34 Players
• Largest :LIC • 25 general
• 7 standalone
health
• 2 specialized
insurers
Types of Life Insurance Products
 Term Insurance
 Endowment Policy
 Whole Life Insurance
 Children's Policies
 Annuity Plans
 Many others
Insurance penetration and density in
India

IBEF August 2023

Growing share of private players in insurance
Source: IBEF August 2023
Health, Motor & crop insurance set
to grow

IBEF August 2023

Promising future lies ahead
 The government has approved 100% FDI for insurance
intermediaries and increased FDI limit in the insurance
sector to 74% from 49% under the Union Budget 2021-
22.
 The relaxation of foreign investment rules has received
a positive response from the insurance sector, with
many companies announcing plans to increase their
stakes in joint ventures with Indian companies.
 Over the coming quarters, there could be a series of
joint venture deals between global insurance giants and
local players.
 Increasing investments including FDI in Insure-tech,
Robust demand ,Policy support, Attractive opportunities
Insurance market – attractive?

 Growing middle class

 Young insurable population
 Growing awareness of the need for

insurance
 Retirement planning a big opportunity
 Growth in premia expected at 12-15%

over next 3-5 years

New initiatives for Insurance
 https://www.ibef.org/industry/insurance-sector-indi
a/infographic

 Bima Vahak:Bima Vahaks (women centric)have to be deployed

in each gram panchayat before December 31, 2024, says the
insurance regulator

 Bima Vistaar :The first of its kind all-in-one affordable

insurance product, Bima Vistaar — offering life, health and
property cover — is likely to be rolled out soon. January 2024

 Bima Sugam :simplifying buying insurance on a

single platform: June 2024
 Recent Trends
 New distribution channels – bancassurance,
online distribution have increased reach and
reduced costs
 Growing Market share of Private players
 Differentiated Banks – non-exclusive tie-ups

for distribution
 Launch of apps
 Traditional products are being customised to

meet specific needs: Micro Insurance

Growth drivers and Opportunities
 New distribution channels
 B30 cities and other non-metros are a large

potential market
 Growth in Financial industry
 Innovation and efficiency
 Increasing competition
 Foreign players bringing expertise and capital
 IPOs
 Use of Technology for customization and

distribution
Mutual Funds
What are Mutual Funds?
 Mutual fund is a mechanism for pooling the
resources by issuing units to the investors and
investing funds in securities in accordance
with objectives as disclosed in offer document.
 Investments in securities are spread across a

wide cross-section of industries and sectors and

thus the risk is reduced.
 Regulated by SEBI
Key features and significance
 Provides expert advice for management of
financial assets
 Risk diversification
 Economies of scale
 Transparency and accountability led by
regulatory oversight
 Flexibility based on investor preference and risk
appetite

 https://www.youtube.com/watch?
v=annVByCpYCw
Types of Mutual Funds -1
Investment
Maturity
objective

Open ended Growth/Equity

Close ended Income/Debt

Balanced/Hybrid

Tax saving

Capital
protection
Types of Mutual Funds -2
Specialized Others

Sector Gilt

Exchange
Index traded
funds

Fund of Load or No
funds Load fund

Real Estate
Funds
Increase in MF AUM

Source: IBEF August 2023

Largest stock exchange operators worldwide as of December 2023, by market
capitalization of listed companies (in trillion U.S.$)

Market cap in trillion U.S. dollars

0 5 10 15 20 25 30

NYSE, United States 25.56

NASDAQ, United States 23.41

Euronext, Europe 6.89

Shanghai Stock Exchange, China 6.52

Japan Exchange Group 6.15

National Stock Exchange of India 4.34

Shenzhen Stock Exchange, China 4.29

Hong Kong Exchanges 3.97

LSE Group, UK 3.42

TMX Group, Canada 3.09

Saudi Stock Exchange (Tadawul) 3.02

Nasdaq Nordic and Baltics 2.12

Deutsche Boerse AG 2.07

SIX Swiss Exchange 2.04

Korea Exchange 1.97

Key facts & Growth drivers Mutual
Funds.
 As of July 2023, AUM managed by the mutual funds industry
stood at US$ 556.81 billion (Rs. 46.38 Trillion) which is
around a two-fold increase in the span of five years.
 The MF Industry’s AUM has grown from US$ 259.6 billion (Rs.
21.36 trillion) as on March 31, 2013 to US$ 482.40 billion (Rs.
39.42 trillion) as on March 31, 2023.
 Indian equity markets performing well along with fastest
growing GDP
 Large number of company listings and IPOs
 Increasing number of UHNWI and HNWIs in India (Ultra High
network Individuals)
 People shifting from physical asset classes to Financial asset
class
 In 2021, India’s gross savings almost 30% of its GDP
Source: IBEF August 2023
Investors in Mutual funds

Source: IBEF August 2023

Opportunities and Challenges –
Mutual Funds
 The number of Ultra High Net Worth Individuals (UHNWI) is estimated
to increase from 12,069 in 2022 to 19,119 in 2027. India’s UHNWIs
are likely to expand by 58.4% in the next five years.
 In 2021, India’s gross savings was at 29.3% of GDP amounting to
US$ 930.56 billion. In 2022, India’s gross savings stood at 29.84%
of GDP.
 India is expected to be the fourth largest private wealth market
globally by 2028.
 Low penetration
 Rising middle class incomes
 Reduction in interest rates may induce investors to invest in Mutual
funds rather than in Fixed deposits
 Trend is clearly seen in people investing in financial assets rather
than physical assets
 Millennials and Retirees : two ends of the spectrum – needing
customized solutions
 Leverage technology & greater dependence on financial advisors
Articles/Videos for Mutual fund
industry
 https://www.statista.com/statistics/204095/
distribution-of-ultra-high-net-worth-individ
uals-for-selected-countries/

 https://www.youtube.com/watch?v=annVByC
pYCw

 https://www.youtube.com/watch?v=XltjQD40
iS4&t=251s
NBFCs
What is a NBFC?
 a company registered under the Companies Act,
1956
 engaged in the business of loans and advances,
acquisition of shares/ stocks/ bonds/ debentures/
securities issued by Government or local authority
 or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit
business
 financial assets constitute more than 50 per cent of
the total assets & income from financial assets
constitute more than 50 per cent of the gross
income
Difference between bank and NBFC

 NBFC cannot accept demand deposits

 NBFC not part of payment and settlement

system
 Cannot issue cheques drawn on self
 Depositors not covered by DICGC insurance
Importance of NBFCs
 Credit intermediation;
 niche financing;
 alternative to banking credit, last mile

servicing

 Can be classified into:

 A)asset liability structures
 B) systemic importance
 C) activities undertaken
Types of NBFCs
Asset Liability structure Non Deposit taking-size Kind of activities

• Deposit taking • Systemically imp • Asset Finance

• Non Deposit • Other • Investment Company
• Loan company
taking • Infrastructure Finance
• NBFC-MI
• Infrastructure Debt
Fund-NBFC
• NBFC –Factors
• Mortgage Guarantee
Companies
• NBFC-Non operative
Financial Holding Co
Challenges -NBFCs
 High dependence on banks for finance
 Withdrawal of investments by Mutual funds due
to confidence issue post IL&FS causing Liquidity
issues
 Rating downgrades post IL & FS crisis
 High proportion of low rated or unrated advances
 Low demand due to pandemic
 Recent developments to reduce the regulatory
arbitrage between Banks and NBFCs by RBI
 Tough competition by Fintechs

 https://economictimes.indiatimes.com/industry/banking/
finance/rbi-comes-out-with-pca-framework-for-nbfcs/ar
ticleshow/88277487.cms
Banks
What is a Bank?
 A bank is a financial intermediary that
receives deposits from the general public
(including demand deposits ) and lends it
 Forms part of payment and settlement system
 Deposit insurance facility available to

depositors upto Rs 5 lakhs per depositor

 Other functions
Types of Banks

Public Sector (12) Private Sector (21) Foreign (45)

Others including
Regional Rural (43) ,
Small Finance (12) Payments (4)
Local Area (3) ,
Cooperative
Banking Sector
 Types of Banks : differentiated by nature of allowable
activities, level of regulation.
 21 Private sector banks,3 Local area banks,12 small
finance banks,4 payments banks, 12 Public sector banks,
4 financial institutions,43 Regional rural banks,44
Foreign banks with branches in India
 Co-operative banks : Multi state Cooperative banks under
direct control of RBI. District central co-operative banks
and state cooperative banks under dual regulators.
Primary agricultural credit society(PACS) not under RBI
purview.
 List of scheduled banks (other than co-operative)
available on https://www.rbi.org.in/scripts/banklinks.asp
Key Trends
 Public sector banks hold around 66% of the total
assets of the banking sector
 Private sector banks have better profitability than
Public sector banks
 Profitability under pressure sue to tough
competition from fintech; especially in retail
segment
 Increase in bank branches and ATMs (of private
sector banks)
 Exposure of private sector banks to sensitive
sectors like real estate is lowering but still higher
than that of public sector banks
Key trends
 During and post pandemic, deposits have grown at
a higher pace than advances(PSBs gathering more
deposits than PVBs); excessive profitability. Low
economic activity and risk aversion causing low
credit growth. This trend has now reversed.
 Lending to Retail sector increasing while that to
Industry and agriculture is showing a dip
 GNPA ratio of industries is highest with large
accounts going bad from FY 18-19.
 Increasing Co-lending arrangements
 Issuance of green bonds & foreign currency bonds
by Banks
Key trends
 IBC proceedings a dominant source of
recovery from NPAs
 Retail fraud – a concern
 Need to increase investor awareness
 Consolidation occurring in the sector in

Public sector banks as well as Private sector

banks
Key trends
 Increase in technology enabled solutions
 Customer centric approaches
 Mobile penetration with low cost internet – a

boost to use of telecom for banking services-

driving financial inclusion
 Expected increase in NPAs given the rolling

back of policy measures and the standstill in

asset classification allowed to banks
 Notable increase in digital payments like

UPI,NEFT,IMPS
Banks and fintechs
 Increasing collaboration and competition between
banks and fintechs
 Use of technology to reduce costs and provide
transparency, flexibility and last mile financial services
to hinterland driving fintechs
 Digital lending, use of blockchain, application of AI and
ML are the emerging areas of influence for fintechs
 Regulatory sandbox mechanism (recently for use of
mobile banking on feature phones ) will be a path
breaking initiative.
 Mobile banking, Mobile bill payments, Mobile
commerce: to reduce costs and increase volume
Increase in digital lending

Source: IBEF August 2023

Some new terms related to Banking
 Neo Banking: Digital Banks with no physical
presence, reducing infrastructure and
administrative costs and fostering innovation. In
India, they are not allowed to function in solo, they
rely on bank partners to provide services For eg:
Razorpay X, Jupiter, Niyo, Open. Challenges include
lack of trust, limited services, regulatory hurdles.
 Open banking: banking practice that will allow third
party financial providers access to financial data
across the banking sector by use of application
programming interfaces(APIs). Account aggregator
service allowed in India is a step in this direction.
Articles/Videos on payment bank
business models
 https://economictimes.indiatimes.com/defini
tion/payments-banks

 https://www.youtube.com/watch?v=-G3kQlo
MVKQ
Limit for Payment bank increased to Rs 2 Lacs per account
Banking sector – latest trends
 Latest trends in scheduled commercial banks
◦ Stiff competition from fintech companies
◦ Higher unsecured lending
◦ Expected to need more capital to face adversity
◦ Issuance of green bonds by AXIS bank
◦ Co-lending agreements
◦ Excessive Liquidity
 Latest trends for Small finance Banks
◦ High proportion of unsecured loans
◦ Collection efforts under stress due to COVID pandemic
◦ Lower CASA base, dependent on borrowings and refinance
◦ In need to increase Provision coverage ratios
Banking sector – latest trends
 Payment banks
◦ Many are yet to break even
◦ Lower interest rates and high initial infrastructure
costs impacting profitability
◦ Generation of capital flows an issue
 Co-operative banks
◦ Absence of secondary market for trading shares
and one person –one vote making mobilization of
share capital an issue.
◦ Loan defaults and low capital base is the problem
faced
Growth drivers for Banks
 Growing GDP and population
 Increased digitalization and UPI
 Policy support: Jan dhan
 Innovations: CBDC, ONDC …
 Open Banking
 FDI Inflow
Challenges ahead
 Stiff competition from fintech
 Greater growth of loans than deposits
 Cybersecurity risks increasing
 Higher unsecured lending post pandemic
 Higher capital requirements to meet higher

risks
 Costs of technology adoption and compliance

increasing
THANK YOU