Issues and Prospects of Emerging Financial Services in India
The bank of the future has to be essentially a marketing organisation that also sells banking products. New distribution channels are being used; more & more banks are outsourcing services like disbursement and servicing of consumer loans, Credit card business. Direct Selling Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the application form filled in properly and also take your passport-sized photo. Home banking has already become common, where you can order a draft or cash over phone/internet and have it delivered home. ICICI bank was the first among the new private banks to launch its net banking service, called Infinity. It allows the user to access account information over a secure line, request cheque books and stop payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering net banking to its Suvidha program to customers.
Products like debit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks.
Corporates are also deriving benefit from the increased variety of products and competition among the banks. Certificates of deposit, Commercial papers, Nonconvertible Debentures (NCDs) that can be traded in the secondary market are gaining popularity. Recently, market has also seen major developments in treasury advisory services. With the introduction of Rupee floating rates for deposits as well as advances, products like interest rate swaps and forward rate agreements for foreign exchange, risk management products like forward contract, option contract, currency swap are offered by almost every authorised dealer bank in the market. The list is growing.
Public Sector Banks like SBI have also started focusing on this area. SBI plans to open 100 new branches called Personal Banking Branches (PBB) this year. The PBBs will also market SBI's entire spectrum of loan products: housing loans, car loans, personal loans, consumer durable loans, education loans, loans against share, financing against gold.
LATEST FINANCIAL SERVICES BY BANKS
* Bill Payment
* Ticket Booking
* Prepaid Mobile Recharge
* Card-2-Card FT
* Share Trading
CHANGING PARADIGMS OF THE FINANCIAL SERVICES
Today, financial markets are turbulent, globally. Traditional business models, when businesses were clearly differentiated (Banks conducted banking, insurance companies offered risk covers and securities companies offered investment opportunities), have become the footnotes of the finance literature.
Today, insurance companies are exploring values in the banking and investment products and vice versa . It is no more a bank competing with another bank and insurance company competing with another insurance company, but an insurance company competing with banks and what not. Hence, the most precious word today is the "convergence" of the opportunity zones in financial markets from concept to culmination.
It may be observed that the competitive dynamics of market has changed phenomenally. Today, players in the market compete in one segment and cooperate in other segment. Strategic alliances of the competing banks on the ATM infrastructure is a live example of this. Today, Mutual Funds compete with the Banks on deposits, as they too provide the cheque facility with certain limitations. Revolutionary waves have gone to the extent of providing the ATM facility to the Mutual Funds investors. It is very interesting to observe the competition mounting across the opportunity zones because that encourages people to improve and deliver better values to the market leading to growth of overall productivity of the nation.
Another example here is that of the insurance products. You would observe that the buyer of the insurance products also looks at them as the investment products. This is an issue of conditioning over the period of time and therefore, the customers of the insurance products are both the customers of the risk protection and the investment products. That leads to the insurance sector competing with the other avenues of the investment including banks, financial institutions and investment companies.
Enterprises in the finance are talking about one stop shop offering all the products ranging from commodities to securities to currencies under one roof. Globally, availability of all sorts of financial products (both money market and capital market) on the exchanges is driven by the benefits like transparency, better price discovery, wider dissemination of information and large investing community. Simplification of the customers' life is being priced by the market. Virgin Bank provides all the services to its customers including checking account to savings account to housing loan to car loan to credit card etc…with a single bank account.
THE ROLE OF TECHNOLOGY
Technology is also helping market players redefine the way they have been operating in the market. See, today, banks are taking ATM machines to the customers, Availability of the concepts like phone banking, anytime banking etc. has become possible because of the technological developments only.
Strategic alliances between the market participants across the segments is quite apparent in the market. You may see a real estate products provider having alliance with both banks for the financing and insurance companies for the risk management products, for his customers. The goods dealers are providing both the finances and insurance to their customers.
The case in example is airline's tickets having insurance embedded in it. Latest and very interesting phenomenon is that Holiday Inn is building a hotel in Texas, wherein entry to the room will be through the credit card. absolutely hassle free check in and check out.
TECHNOLOGY IS REVAMPING INDUSTRIAL STRUCTURE FOR FINANCIAL SERVICES
* Entry of new specialized financial service providers --from direct product providers to so called aggregators
* Entry of non-bank entities (telecoms/utilities)
* Consolidation around recognized brand names
* Emergence of mixed financial and non financial conglomerates
* Globalization of markets and trading systems
TECHNOLOGY: CHANGING FINANCIAL SERVICE PROVISION
Massive cost reductions in technology and communications cost
– In particular, the internet :
* reduces processing and labor costs
* allows for new distribution channel
* allows for better and more cost effective
customer stratification and personalized pricing
* permits unbundling of financial products and commoditization
* lowers barriers to entry
TECHNOLOGY IS CHANGING THE COMPETITIVE LANDSCAPE
The clear trend is movement towards virtual transactions rather than physical. The Internet has impacted the financial services industry in a major way. Today many new players — traditionally in non-finance — are getting into the field and leveraging the World Wide Web. Further, delivery channels of financial services have proliferated and this has resulted in increased customer expectations.
The percentage of credit originating on the Net is increasing. Today a borrower has the power to choose his lender sitting in his premises unlike earlier days when he had to approach a bank manager in person.
The emerging trend is electronic bill presentment payment (EBPP) whereby the bank or financial services provider captures various bills — utilities, insurance etc — online and waits for online authorisation from the accountholder to pay the same. Here the consumer does not get a physical bill as it is happening now. Everything is in electronic format.
Apart from the comforts offered to the consumer, EBPP results in huge cost savings for the service providers and some utilities in the US actually offer an incentive for switching over to the electronic mode of bill payment.
Account aggregation is yet another new trend that is becoming popular among foreign banks. Under this, a bank customer can transact or visit his favourite sites by just logging on to his bank's portal.
Internet Banking is the most convenient channel to manage and pay your bills anytime. For example, ICICI Bank has tied up with more than 60 organizations across the country to facilitate payment of bills for Utility Companies (Electricity and Telephone) Bills, ICICI Bank credit card, Mobile Phone and Insurance Premium bills.
Banks have tied up with various organizations to facilitate online shopping for all its Internet Banking Customers.
Banks provide facility of online railway/air ticket booking, mobile phone recharging, etc.
CARD TO CARD FUNDS TRANSFER
Card to Card Funds Transfer allows to transfer money from your Bank account to any other Visa Debit or Credit Card, anytime, anywhere in India.
COMMUNITY BANKING SERVICES
To Donate, Volunteer, Shop for crafts produced by rural artisans. For instance ICICI has tie-ups with charity organizations like The Cause, GiveIndia, I Volunteer, Infochange.
Banking products now allow investment in Shares, Mutual funds, Derivatives (Futures and Options) and other financial products via cash trading, margin trading, spot trading.
FINANCIAL SERVICES BY BANKS IN RURAL SECTOR
In a phase in the international development endeavour in which ideology is out of fashion, the search is on for practical, workable solutions to the deep-seated challenges of poverty. Micro-credit seems to provide just such a solution.
By delivering financial services at a scale, and by mechanisms, appropriate to poor people, micro-credit can reach them. By providing poor people with credit for microenterprise it can help them work their own way out of poverty. And by providing loans rather than grants the micro-credit provider can become sustainable by recycling resources over and over again. In other words microcredit appears to deliver the 'holy trinity' of outreach, impact and sustainability.
The micro-credit industry has sought to resolve the tensions between a focus on poverty and a commitment to sustainability by integrating them within a matrix defined by two axes, of outreach (or access) and financial sustainability.
The formal financial sector may achieve financial sustainability, but has little outreach to poor clients (quadrant 2). Traditional efforts by non-governmental organizations (NGOs) may reach poor clients, but are often unsustainable (quadrant 4). Good micro-finance practice, on the other hand, combines both outreach and sustainability in the virtuous quadrant 1. Such practice is perhaps most clearly embodied in the micro-finance bank, which marries the best of the formal financial sector in terms of sustainability with the outreach to poor clients of the development NGO.
MICRO FINANCIAL SERVICES INCLUDE FOUR CLASSES OF SERVICES:
1. BASIC BANKING SERVICES:
Basic banking services that include savings and withdrawal facilities meet the demand for liquidity whether it be for enterprise purposes or for emergencies. The availability of savings products,the design of which takes into account the cash flows of the poor, would be very crucial to the effective mobilisation of savings. There is also a need to innovate for micro-investment products that enable the poor to maximise returns on their surplus.
2. INSURANCE INCLUDING LIFE, DISABILITY, HEALTH AND ASSETS:
The vulnerability of the poor points to insurance being a crucial product. Existing ways of informal insurance among the poor are: drawing down on savings, reciprocal need-based gift exchange, selling physical assets and diversifying income sources. However, there is only a limited role that these informal mechanisms can play. There is a need for a mechanism to pool, price and trade the risks of the poor and the means to do this would be an insurance product that is able to bring under its fold the poor with varying risk profiles.
3. FINANCE INCLUDING CREDIT, EQUITY AND LEASING:
This class of products has great relevance to the promotion of micro-enterprises. Even when these services do not benefit the poorest of the poor directly, they may provide benefits to them through the promotion of economic activity and employment. Equity is an important means of sharing the risk of enterprising poor to engage in ventures with the possibility of high returns.
Derivatives are instruments the value of which is derived from the value of an underlying asset. Derivatives enable a buyer and a seller to enter into a contract in the present period to buy/sell at a future date at a pre-determined rate. The principles of a derivative contract appear to have relevance in the context of commodity markets and indices based on weather and other variables that have a bearing on the livelihoods of the poor.
CASE STUDY :
ICICI Bank- Microfinance Model
UBIQUITY AND LOW COST OUTREACH
1. Shared Services Point of Transaction at the village level
a. Combining financial and non-financial services
b. Local partner is either an entrepreneur or an agricultural input service provider
2. Driving down costs of intermediation
a. Low-cost ATM, use of cards to replace cash
3. The kiosk pilot
a. Through rural internet kiosks in S. India
b. Offer internet banking, investment, remittances, sale of gold coins and insurance products.
EXPANDING THE RANGE OF FINANCIAL SERVICES
1. Aim to provide "complete" market.
2. Weather Insurance a. Launched India's first index based rainfall insurance product which compensates the farmer for loss in yield due to deficient rainfall.
3. Health Insurance.
a. Domestic fund transfer facility between urban centers and villages especially to cater to the migrant population.
5. Commodity Derivatives
a. Enable price discovery and hedging against price risks by small farmers through participation in commodity exchanges with NGO/MFIs serving as aggregators.
New Products for MFIs and NGOs
1. PARTNERSHIP MODEL
a. Partner (NGO/MFI) engages in promotional role while ICICI Bank meets the financial needs of the borrowers.
b. Partner shares the credit risk and is incentivised for good performance of the clients.
MFI assigns existing micro-finance receivables to ICICI.
MFI provides a credit enhancement to ICICI.
MFI continues to service the portfolio and thus maintain relationships with the clients.
3. ON-TAP SECURITISATION
ICICI provides advance purchase consideration to
MFI for building portfolio
MFI assigns receivables to ICICI.
MFI provides a credit enhancement to ICICI and collects receivables.
MFI continues to build further portfolio and assign to ICICI.
REGULATION OF FINANCIAL SERVICES
On regulators side, deeper co-ordination has become a respectable word. Creation of the Financial
Services Authority by merger of all the regulators in the economy in U.K. has set a precedent in itself. Now, a number of countries, across the globe, are thinking on these lines. Recently, Germany has joined the U.K. through creation of the Financial Services Supervisor, a combined regulatory authority for the banking, securities and insurance. Logic is simple – integration of the opportunities zone demands a flexible, efficient and effective supervisory regime. This can be accomplished either through the effective coordination among the regulators or the creation of single regulatory body. Some economies are choosing the first and some second. Further, financial innovation is becoming ubiquitous. Availability of the financial products, linked to the temperature, earthquake, snow fall, rain fall, hailstorm and what not communicates that there is a huge room for creativity in this area. Today, anything and everything is being traded in the market.
LATEST NEW PRODUCTS BY BANKS NETSAFE FROM HDFC BANK
NetSafe eliminates the need for disclosing the card number while making credit /debit card payments for online shopping and virtually eliminates the risk of cyber fraud. It also saves cardholders from exposing their credit limits or account balances to potential cyber criminals lurking in the anonymity of the web.
To shop online, existing HDFC Bank cardholders can create a virtual card on their existing debit or credit card with a pre-defined limit, valid only for a short time or a single transaction after which the card ceases to exist. For example, if a customer wishes to buy something from a particular site worth Rs 500, she can create her own NetSafe card where she is allotted a single use card number with a limit of just Rs 500 which is debited to her credit or debit card.
In the event that the customer fails to use NetSafe within 24 hours of creating the card, the card simply disappears and the credit limit or amount in account is reverted back to the customer's credit / debit card.
HOW TO REGISTER FOR NETSAFE
* The customer clicks on Register for NetSafe on the home page.
* After agreeing to the terms and conditions, the user is prompted to enter the Debit or Credit Card Number, ATM PIN, and expiry date to identify him.
* Once the customer identity is verified, the customer is directed to the NetSafe enrollment screen to input a few details for enrollment.
* A confirmatory email is sent automatically to the email address given by the customer. The mail content will include the login ID given by the customer.
Even among the young working class the are averse to use credit cards and do feel restricted in using their debt card for transactions over the internet. This gap could be exploited by making a product available like NetSafe.
SBI CARD IN MARCH 2005, LAUNCHED A CREDIT CARD, SBI SOCIAL CARD, THE FIRST AFFINITY CARD in the country to feature four non-governmental organizations (NGOs).
The social card allows the cardholder to donate to the NGOs every time they use it. The card will earn the customers double reward points. While one half will go to the NGOs. SBI Card will donate 20 per cent of the annual fees or renewal fees to the NGOs. Moreover, customers also have the option to issue standing instructions for a fixed amount to be donated to any of the NGOs.
The non-governmental organisations that have the tie-up with SBI Card are Cancer Patients Aid Association, National Association for the Blind, SOS Children's Villages of India and World Wildlife Fund, India.
NATIONAL SECURITIES DEPOSITORY LTD (NSDL) AND IDBI BANK HAVE LAUNCHED COUNTRY'S FIRST ONLINE DIRECT TAX PAYMENT FACILITY. This facility will enable individuals as well as corporate tax payers, to make payments for income tax, corporation tax, gift tax, tax deducted at source (TDS) etc over internet. The details entered by the assessee would be validated by NSDL and control would be passed to IDBI bank through a secure payment gateway. The bank will debit the customer account after authentication and completes the payment of tax to the government as an agency bank for which it will be paid a service charge.
IDBI bank also plans to migrate this facility to other channels like mobile phones and ATMs. State Bank of India (SBI), Corporation Bank, Punjab National Bank and Bank of India are expected to soon roll out online direct tax payment facility.
FINANCIAL SERVICES IN RURAL AREAS
1. Kiosk operators to Collect cash from villager and pay
2. Online, the Govt. payments, Telephone bills.
3. Kiosk operator to be an agent for agri-crop loans, Rural Insurance, Health and Crop .
4. Rural low cost ATMs at kiosks Works along with the PC already existing with breakthrough pricing envisaged of $ 1000
OUTSOURCING OF FINANCIAL SERVICES
Financial firms have entered into outsourcing arrangements for many years, albeit not to the extent seen in the recent past. For example, in the securities industry, since the 1970s, firms have outsourced quasi-clerical activity, such as the printing and storage of records. This was undertaken because of the comparative cost savings. As technology has evolved, outsourcing of information services has become more common. In the 1980s and 1990s, such deals tended to be large scale and often involved the outsourcing of whole IT divisions primarily based on cost and the importance of remaining up to date with rapidly evolving technology.
GLOBALIZATION OF THE FINANCIAL SERVICES INDUSTRY
* Globalization and technology are fundamentally changing the financial services industry worldwide
* Competition has accelerated and is fierce for "best credits"/corporates in most countries
* New competitors have entered the market
* Margins and fees are narrowing significantly
* Development of securities markets is disintermediating banks
BROAD RANGE OF FINANCIAL SERVICES OFFERED
With time we have seen the changing face of Indian banking which has increased the range of services offered by banks in areas of :
* Mutual Funds
* Debit / Credit Cards
* Retail Loans
* Venture Capital Finance
* Infrastructure Finance
* Financing Export Services
* Financing Social Projects
* Export Credit and Guarantee Services
* IT Enabled Financial Services
* Outsourcing of Financial Services
RETAIL FINANCE SERVICES- MARKET SIZE
Low relative penetration
This implies a strong market opportunity in India.
THE PROBLEM OF LIMITED ACCESS TO FINANCIAL SERVICES AND STABLE INCOMES IN RURAL INDIA
For the rural poor in India, formal financial services would enable them to maximize returns on their surplus, smooth their consumption, and reduce their vulnerability to risk. However, their financial service needs—which include consumption credit and cash savings are seldom met due to systemic problems in the financial sector and monsoon risk.
Indian banks seek to expand their crop lending to non-irrigated areas but are constrained by monsoon risk. One way to blend index insurance and rural finance is to integrate weather index insurance into loans taken by the farmers.
The objective of the pilot scheme proposed by the World Bank and its partners is to insure farmers against drought risk and allow for continued borrowing and savings throughout drought years. The savings portion of the scheme enables farmers to build collateral, which improves their access to credit and lower interest rates. Eventually the scheme seeks to improve the farmers' creditworthiness to a level where creditors would provide access to consumer credit. The incremental transaction costs are minimized by using smart cards and by packaging the crop loans and risk management with agricultural extension services and crop marketing. The weather index insurance is not a self-standing insurance product, but it is embedded in the loan agreement and then combined with a (forced) savings account.
This scheme can significantly increase access to crop loans and savings mechanisms in rural areas, particularly in rainfed areas.3 Farmers relying on rainfed agriculture in particular do not have access to formal crop finance, because banks perceive the risks as too high for the type of (capped and regulated) interest rate they can charge. Weather risk and moral hazard can tend to be higher for the rainfed farmer.
In the case of monsoon-related crop failure, a culture of low payment morale sets in as the crop failure and resulting default on debts are seen as force majeure. In addition, political pressures for debt forgiveness tend to rise in drought years. This proposed scheme seeks to transfer systemic risk out of the farmer-bank relationship into insurance markets. It can lower the moral hazard problem by removing any excuse for non-repayment in case of monsoon-related crop failure.
The design has four components:
1. monsoon index insurance;
2. a risk management account;
3. weather risk reinsurance; and
4. a smart card
Monsoon index insurance
The essential principle of monsoon index insurance is that contracts are written against specific rainfall outcomes (e.g. drought or flood) recorded at a local weather station.
Risk management account
The purpose of this component is income stabilization, it is the risk management part based on farmer's individual decisions. The farmer pays half of the overall insurance premium into a risk management account, effectively serving as selfinsurance.
Weather risk reinsurance
The monsoon index insurance provider reinsures most of the risk in national and international weather risk markets through traditional excess of loss or quota share treaties. This allows for the global pooling of risk and thereby more competitive "portfolio-adjusted" pricing for the insurer and ultimately for the farmer.
The farmer can access his risk management account through a Smart Card. Initially the card serves as a debit card in agricultural service center hubs, certain points of sale, and at ATMs. Eventually it can be upgraded to a credit card.
Miscellaneous Rural Banking Services
Monsoon derivatives can be a market instrument that can enable them to hedge against an "excess" of rainfall or a "dearth" of the amount of rainfall received in a region over a fixed period of time. The derivative will derive value as a multiple in rupees of the difference in the level of rainfall that fell over a period of time.
Since these contracts can be traded and settled on a national exchange, farmers can hedge their earnings against a "good" or a "bad" monsoon. Different climatic regions of the country can have different rainfall indexes. This can permit farmers in regions which had good rainfall to compensate farmers that received bad rainfall. This can be a market instrument for insuring against the monsoon risk!
ICICI Bank is working in conjunction with ICICI Lombard, the ICICI Group's insurance company, to propose a few pilot cases of indexing interest payments to rainfall measures. (figure 2) The borrower pays a higher interest rate in normal years that comprises the weather index insurance premium, but in case of a severe rainfall deficit and in one case excessive rainfall in critical periods the borrower pays little or no interest on the loan.
M&M ShubhLabh – an example
A ShubhLabh office starts by "identifying" a set of farmers with good credit history. The farmers sign on for their services for a "consulting" fee: this covers consulting on farming practices, crop advice, sourcing of inputs, pickup of produce, delivery to the final buyer. The ShubhLabh interfaces with ICICIBank for the financing wrt the fertiliser and seeds firm, as well as for the delivery of produce to the end buyer and payment to the farmer. Offices submit a database of the farmers and their performance on delivery of the produce which is maintained as a database at ShubhLabh.
In the ICICI Bank Farmer Service Center operating model with Mahindra Shubhlabh, (figure 4) ICICI identified an integrated agricultural services provider (IASP) that has a good relationship with the farmer and provides genuine and timely information through extension services. ICICI enters into a tripartite agreement with the IASP and the output buyer. ICICI provides credit to the farmers on the recommendation of the IASP, the farmer pledges its produce to the output buyer, and the IASP provides inputs to the farmer. Loan processing, disbursement and collection are effectively done by the IASP, while the credit decision remains nominally with ICICI Bank. At the end of the season, the farmers supply the crop to the output buyer and the output buyer deducts the loan amount from the sale proceeds and remits the loan to ICICI Bank in full settlement of the loan amount. The IASP receives a service fee for the loan processing and supervision services (1.5 percent on recovered loans). Currently 45 Shubhlabh offices operate on a franchise basis, financing around 4,000 farmers.
Opportunities Insurance Sector.
………resulting in grow th of 25-30% with significant increase in average premiums and sum insured
Emergence of the areas like credit derivatives, real options, securitizations is paving an entirely fresh set of opportunities for the market. There is a huge room for the structured and synthetic products in the Indian market. The market is in for an exciting phase in terms of the financial innovations. Today, investors are perceived as not just as the investors but buyers of the financial solutions. Therefore, the philosophy of customer being king is driving the financial markets as well. Accordingly, it is no more customers chasing the products; it is the appropriateness of options chasing the customers . Today, financial institutions are co-designing the products/services with their customers and striving to provide them with global solutions.
Source : E-mail September 27, 2005
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