Basics_of_BFSI_Session_1.pptx for mba students

Basics of Banking

1. Basics of BFSI Introduction

2. Financial Markets Role of Intermediaries in BFSI sector History, growth, current position and challenges for Banking, Financial services and insurance sectors Sub Topics to be covered

3. Financial system

4. 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 Financial Markets

5. Components of Financial markets Money Market Capital Market Money Market Organised Unorganised

6. 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) Key Financial Markets

7. Organised & unorganised Low per capita leading to inadequate participation Regulatory bodies like RBI,SEBI,IRDA,MOF,NCLT Paucity of financial instruments Issues of corporate governance and scams Financial Markets in India

8. 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 Markets

9. 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 papers, Certificate of deposits, Money Market Mutual Funds, Commercial Bills, https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=10 https://www.moneycontrol.com/news/business/markets/explained-what-is-repo-and-tri-party-repo-3859991.html https://www.financialexpress.com/policy/economy-commercial-paper-rates-may-affect-growth-india-inc-3006548/ Money Market instruments

10. 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

11. 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 Capital Markets

12. 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 Foreign Exchange Markets

13. 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-traders/indian-derivatives-market-investing/ Derivatives Market

14. 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 Types of Finance

15. Financial Institutions

16. Mobilise savings Capital formation Optimal utilisation of resources-Economic progress Liquidity Advisory Risk reduction Financial Intermediaries-Role

17. 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: Merchant bankers, Portfolio consultants, Issue managers Types of Financial services

18. India’s GDP 3550 Billion $ in 2023 (World Bank ) India’s bank credit in July 2024, 2020 Billion US $ (RBI speech) India’s population: 143 crores in 2023 (Statista, 2024) No of mobile phone users in India: 105.5 crores in 2024 (Statista, 2024) No of Aadhar card holders in India: 139 crores in 2024 (Forbes, 2024), 130 crores in 2023 (GOI, Loksabha discussion, 2023) Data points for India

19. No of Jan dhan Yojanaa accounts 53 crores in 2024 ; of which 35 crores is from non urban locations (Economic Times, August 28, 2024) This is in Guiness Bok of world records- most bank accounts (1.8 crore) opened in 1 week (August 23 to 29, 2014) UPI – 16.6 billion transactions in one month (86% instant reversals of incorrect transactions); 46% of global real time financial transactions is UPI (RBI governor speech, Nov 2024) Innovations - Account Aggregators, OCEN, and financial services on ONDC Trade Receivables Discounting System ( TReDS )- MSME funding at reduced costs (RBI governor speech, Nov 2024)- ₹52.2 trillion As of October 2024, around 5,000 active FinTechs (RBI governor speech, Nov 2024) Internet Penetration in India – 40% of rural households and 78% of people in the age group 20-230 use internet in India. 1/3 rd Households - online purchases of consumables and services ¼ th of households – online buying of consumer durables 1/10 th of households – online food purchases   Results…

20. 75% of Indian Banks offer online account opening , digital KYC and digitally enabled doorstep banking 60% of Indian Banks offer digital lending 50% of Indian Banks offer payment aggregator services 41% of Indian Banks use chatbots 24% of Indian banks use Open banking 10% of Indian banks have integrated Internet of things Results…

21.   Digitalisation gains for Indian banks: monthly savings of 14,500 person-days 25-30 per cent decline in customer acquisition costs reduction of the use of 84 tons of paper saving of four lakh litres of fuel in commutes to banks by customers 40 per cent reduction in customer wait times at branches 50 per cent reduction in the compliance monitoring time and shortening account opening time to less than a day Aadhaar – India’s unique identification number – has halved the cost of conducting the Know Your Customer process Digitisation benefits for banks

22. Insurance Mutual Funds NBFCs Banks Four key sectors in BFSI

23. Insurance

24. 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 What is Insurance?

25. 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. Key facts

26. 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. Life Insurance trends

27. 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 Non life insurance trends

28. https://youtu.be/8OZngCJQ-GA?si=ZCH6rFUDnT67v6JD https://youtu.be/1SV8h9n2pLY?si=FLBTgEfgowCgS29g Videos for Insurance updates

29. Number of Insurers in India

30. Term Insurance Endowment Policy Whole Life Insurance Children's Policies Annuity Plans Many others Types of Life Insurance Products

31. Life Insurance business datapoints IBEF August 2024

32. Non Life Insurance pemiums IBEF August 2024

33. Insurance penetration and density in India IBEF August 2024

34. Growing share of private players in insurance IBEF August 2024

35. Health, Motor & crop insurance set to grow IBEF August 2023

36. 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 Promising future lies ahead

37. 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

38. Bhima Vahak : Bima Vahaks (women centric)have to be deployed in each gram panchayat Bhima 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.  Bhima Sugam :simplifying buying insurance on a single platform New initiatives for Insurance: Insurance trinity set to have soft launch soon- IRDAI Chairman https://www.newindianexpress.com/business/2024/Oct/22/first-phase-of-bima-insurance-trinity-will-be-ready-for-soft-launch-soon-irdai-chief

39. 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: HDFC ERGO General Insurance, Policybazaar's PBPartners , Canara HSBC Life Insurance App Traditional products are being customised to meet specific needs: Micro Insurance

40. 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

41. Mutual Funds

42. 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 What are Mutual Funds?

43. 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 Key features and significance

44. Types of Mutual Funds -1

45. Types of Mutual Funds -2

46. Increase in MF AUM Source: IBEF August 2024

47. Key facts & Growth drivers Mutual Funds. As of 31 st October 2024, AUM managed by the mutual funds industry stood at Rs. 67.26 Trillion, which is around a two-fold increase in the span of five years. The MF Industry’s AUM has grown from Rs. 26.33 trillion as on October 31, 2024 to Rs. 67.26 trillion as on October 31, 2024 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) UHNWI expected to go from 12,069 in 2022 to 19,119 in 2027(58% growth) People shifting from phys ical asset classes to Financial asset class In 2023, India’s gross savings was 30% of its GDP Note : HNWI: Investible assets more than Rs 5 crores VHNWI: Investible assets between Rs 5 crores and Rs 25 crores UHNWI: Investible assets more than Rs 25 crores Source: AMFI accessed on 18 th Nov, 2024 & IBEF August 2024

48. Increase in HNWI Source: IBEF August 2024

49. Investors in Mutual funds Source: IBEF August 2024

50. 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 Opportunities and Challenges –Mutual Funds

51. Growing confidence in Indian equity markets Source: IBEF August 2024

52. https://www.statista.com/statistics/204095/distribution-of-ultra-high-net-worth-individuals-for-selected-countries/ https://www.youtube.com/watch?v=annVByCpYCw https://www.youtube.com/watch?v=XltjQD40iS4&t=251s Articles/Videos for Mutual fund industry

53. NBFCs

54. 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 What is a NBFC?

55. 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 Difference between bank and NBFC

56. 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 Importance of NBFCs

57. NBFC Market capitalisation Source: IBEF August 2024

58. Types of NBFCs

59. 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 issue 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/articleshow/88277487.cms Challenges -NBFCs

60. Banks

61. 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 What is a Bank?

62. Types of Banks

63. 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 Banking Sector

64. 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

65. 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 17-18. Increasing Co-lending arrangements Issuance of green bonds & Foreign currency bonds by Banks Key trends

66. 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

67. 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 Key trends

68. 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 Banks and fintechs

69. Increase in digital payments Source: IBEF August 2023

70. 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. Some new terms related to Banking

71. https://economictimes.indiatimes.com/definition/payments-banks https://www.youtube.com/watch?v=-G3kQloMVKQ Articles/Videos on payment bank business models

72. Limit for Payment bank increased to Rs 2 Lacs per account

73. Latest trends in scheduled commercial banks Stiff competition from Fintech 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

74. 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 Banking sector – latest trends

75. Growing GDP and population Increased digitalization and UPI Policy support: Jan dhan Innovations: CBDC, ONDC … Open Banking FDI Inflow Growth drivers for Banks

76. 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 Challenges ahead

77. THANK YOU