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Financial Services in India

India’s financial services industry has been rapidly growing, thanks to the demand for customized financial solutions and higher disposable incomes. The sector is multifaceted and includes several subsegments ranging from commercial and regional rural banks to mutual funds, pension funds, and wealth managers. These services cater to diverse clientele, from individuals and private businesses to public organizations. India has a strong presence of professional financial advisors, with a wide variety of offerings ranging from due diligence to risk consulting. Additionally, insurance and stock market solutions are popular, along with managing and investing in various financial instruments such as commodities, real estate, debt, equity, and mutual funds. This blog post will delve into the various financial services offerings available in India and how the industry is expanding rapidly.

1. Overview of Financial Services in India

India’s financial service sector is undergoing rapid expansion, driven by rising incomes and government reforms. The industry has become a major contributor to India’s market capitalization, with a share of 24% in FY21, up from just 6% in FY01. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds, and other smaller financial entities. While the banking sector dominates, the sector is diverse, and the government has been taking measures to liberalize and regulate the industry to enhance its performance, partnering with the private sector as well. The financial advisory services offered across accounting, consulting, investment, and legal spheres have helped individuals and businesses navigate the financial world. Wealth management services, including mutual funds, have seen strong growth, reflecting a rise in high net worth individuals’ participation. Insurance solutions are available across general and life categories, safeguarding individuals and organizations against unforeseen circumstances and accidents. The stock market provides solutions across various equity-linked products. The debt and bonds segment offers fixed repayments and interest payouts. Tax and auditing services span individual and business domains. Overall, India’s financial service sector spans various domains and caters to diverse customer segments, underlining its vibrant and rapidly expanding nature. [1][2]

2. Banking and Loan Products

India’s banking sector is a key component of the country’s financial services industry. It comprises several public and private sector banks, foreign banks, regional rural banks, and urban/rural cooperative banks. The Reserve Bank of India (RBI) regulates this sector and monitors its liquidity, capitalization, and financial health. Banking services in India are provided to a diverse client base, including individuals, private businesses, and public organizations.

Individual banking services include checking accounts, savings accounts, and debit/credit cards. Business banking services encompass merchant services, checking accounts, and savings accounts for businesses, as well as treasury services. Loans are also a significant product of the sector and may include business loans, personal loans, home loans, automobile loans, and working-capital loans.

Apart from these services, Indian banks also provide short-term and long-term credit facilities to the agricultural sector, MSMEs, and other priority sectors. According to Invest India Blog, “Priority sectors, as defined by the RBI, include agriculture and related activities, micro, small, and medium enterprises (MSMEs), export credit, education loans, housing loans, social infrastructure, and renewable energy.” The government also launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) – a financial inclusion scheme – to ensure a universal access to banking facilities.

“India’s banking and financial sector is poised for robust growth with the government’s continuous efforts to boost the economy,” says SBI Chairman Dinesh Kumar Khara. “With rising disposable incomes and growing customer awareness, the demand for banking and loan products is expected to witness a steady increase.” 

3. Professional Advisory Services

One the key aspects of India’s comprehensive financial services industry is the presence of professional advisory service providers. These firms offer a wide range of services to individuals and businesses. Services offered in this segment include due diligence, M&A advisory, valuation, real-estate consulting, risk consulting, and taxation consulting. India has a range of providers offering these services, from individual domestic consultants to large multi-national organizations.

Professional advisory services are important for businesses of all sizes, as they can help to ensure that a company is making informed decisions. As one report notes, “advisory services have become an integral part of business planning as top management require expert guidance in dealing with complex business issues”.

The importance of advisory services is evident in the growth of the industry. As per estimates, the financial advisory segment in India is expected to grow at a CAGR of 15.5% during 2021-2026, owing to an increase in the number of high net worth individuals and growing demand for customized financial solutions.

A quote from a leading advisory firm in India highlights the value of these services: “Our expertise lies in understanding and working with clients to provide tailored solutions for their businesses and help them navigate through challenges and opportunities. We leverage our deep sectoral knowledge, global insights, and local expertise to create innovative solutions that deliver results for clients.”

Overall, professional advisory services provide individuals and businesses with the expertise and support they need to make informed decisions and build successful financial strategies. 

4. Wealth Management and Mutual Funds

We management and mutual funds are two financial services that have been growing in popularity in India. Wealth management involves managing clients’ assets and investments to achieve their financial goals, primarily focusing on high net worth individuals and families. On the other hand, mutual funds are professionally managed investment schemes that pool investors’ money to buy securities such as stocks, bonds and other assets. Let’s take a closer look at these services and the opportunities they offer.

According to Invest India Blog, the mutual fund industry in India has witnessed double-digit growth in assets under management over the last five years, owing to its popularity as a low-risk wealth multiplier. FundsIndia, India’s #1 online investment platform for mutual funds, SIP stocks, and more, offers a range of top-rated funds and SIP investment advice from a team of award-winning experts. Their innovative strategies like Power SIP and FI Stable Growth 25 are aimed at generating higher returns for investors.

Wealth management is also a rapidly growing sector that offers customized solutions to clients as per their financial goals, risk appetite, and time horizon. Concerning the importance of wealth management, Tanuj Shori, CEO of Square Yards, states, “The goal for any individual, family or group is to achieve financial freedom, and wealth management is nothing but the roadmap to achieve that freedom.” Square Yards is a leading wealth management platform for NRIs.

Whether it’s investing in mutual funds or availing of wealth management services, both these services offer excellent opportunities to grow your money and achieve financial freedom.

5. Insurance Solutions Available

In India, insurance solutions are considered an essential financial service to safeguard against unforeseen circumstances and accidents. There are two main categories: General Insurance and Life Insurance. General Insurance covers products such as automotive, home, medical, fire, and travel insurance. On the other hand, Life Insurance includes term-life, money-back, unit-linked, and pension plans.

“Insurance solutions enable individuals and organizations to safeguard against unforeseen circumstances and accidents. Payouts for these products vary across the nature of the product, time horizons, customer risk assessment, premiums, and several other key qualitative and quantitative aspects,” as mentioned in Invest India Blog.

To provide these services, there are 24 life insurance and 39 general insurance providers present in the Indian market. The market is regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

Despite the importance of insurance solutions, insurers have been slow to innovate in their industry. “Insurance is not typically considered a bastion of innovation despite a long track record of creating new and exciting markets around emerging risks and consumer demands,” as stated by McKinsey. However, insurers are recognizing the power of innovation to accelerate the pace of company change.

Innovation is crucial for insurers as they seek to meet new customer expectations and confront new sources of competition from insurtechs, leading tech companies, and third-party capital. Adopting breakthrough initiatives is a significant step for established insurers in the industry. By reallocating resources from core business tasks to potentially disruptive initiatives, insurers can rebalance their product portfolios toward potential breakthroughs or new business models—forms of innovation that often hold the key to sustainable growth.

In conclusion, insurance solutions are vital financial services in India, and insurers should embrace a culture of innovation to remain competitive in the global market. 

6. Stock Market Offerings

The stock market has been an attractive avenue for investing, offering a wide range of equity-linked products to customers. According to Invest India Blog, “the stock market segment includes solutions for customers in Indian stock markets (National Stock Exchange and Bombay Stock Exchange) across various equity-linked products.” The returns for customers are based on capital appreciation and dividends paid by the companies to its investors.

India benefits from a large cross-utilization of channels to expand the reach of financial services, and the stock market is an integral part of this expansion. As per IBEF, the financial services industry in India is growing rapidly, and its share in India’s market capitalization has increased to 24% in FY21 from ~6% in FY01. The net inflow of equity mutual funds stood at Rs. 22.16 trillion (US$ 294.15 billion) by the end of December 2021 and registered a net inflow of Rs. 1.5 lakh crore (US$ 18.09 billion) by inflow in India’s mutual fund schemes via systematic investment plan (SIP).

Moreover, the derivatives trade association, the National Stock Exchange of India, emerged as the world’s largest derivatives exchange in 2020. The stock market offerings in India have been diversified, offering various investment instruments to investors. The issuer of the bonds (borrower) offers fixed payments (interest) and principal repayment to the investor at the end of the investment period. In addition, equity-linked assets are gaining traction among individuals, businesses, and public organizations due to their potential for higher returns.

The Indian stock market has been expanding and diversifying, and the government has been introducing reforms to enhance this industry. The infusion of foreign direct investment has created an opportunity for emerging markets, providing an impetus to the growth of the financial services industry. With its huge potential and promising growth prospects, the Indian stock market is poised to become one of the largest stock markets in the world. 

7. Debt and Bonds

De and bonds are an integral part of India’s financial services industry, offering customers access to a range of financial instruments. Indian stock markets provide customers with investment options in various equity-linked products. In this segment, the returns for investors are based on capital appreciation and/or dividends made by companies to their investors. Besides, the debt and bond segment includes a variety of instruments such as listed bonds, non-convertible debentures, and capital-gain bonds, among others. These instruments offer fixed payments in terms of interest and principal repayment to investors at the end of the investment period. Bond investments are a popular choice amongst Indian citizens as they offer higher returns than traditional savings accounts and are considered less volatile than the stock market.

“State-owned insurance companies are getting a pass from regulators to raise subordinated debt as the government prepares to enlist them to extend health coverage to half a billion poor people,” reports Reuters. These relaxations are not generally given to private sector companies. The relaxed rules have benefited companies such as United India Insurance (UIIC) and National Insurance, which have raised Rs. 9 bn and Rs. 8.95 bn in capital, respectively. The move is expected to help the government finance a sharp rise in spending on rural areas and healthcare. State-owned insurance companies are expected to find subordinated bonds an efficient avenue to shore up their solvency ratios at a relatively cheaper cost compared to raising equity capital. Analysts suggest that such cross-holdings of subordinated debt among insurance companies do not increase systemic risk as the investment in such securities is relatively small in proportion to their overall investment portfolio.

In conclusion, the debt and bond segment offers customers a variety of investment options; however, government support remains crucial for state-owned companies to make use of this avenue for capital raising. 

8. Tax and Auditing Services

One the key subsegments of the financial services industry in India is the tax and auditing services domain. This segment offers a wide range of financial services to both individuals and businesses. It can be segmented based on individual and business clients.

For individuals, tax services include determining tax liability, filing tax returns, and providing tax-saving advice. On the other hand, tax services for businesses include determining tax liability, filing tax returns, providing tax-saving advice, and preparing tax reports.

Auditing services are also an important aspect of this domain. These services are provided to both individuals and businesses and help ensure compliance with various laws and regulations. Auditing is critical in detecting financial irregularities, fraud, and discrepancies.

India has a strong presence of professional tax and auditing service providers, ranging from small domestic consultants to large multinational organizations. These providers offer a wide range of services, including due diligence, M&A advisory, valuation, real estate consulting, risk consulting, and taxation consulting.

According to a report by Invest India Blog, “India’s financial services industry is growing rapidly owing to demand drivers and supply drivers.” The demand for these services is increasing due to higher disposable incomes and a need for customized financial solutions. The supply of financial services is also increasing with new service providers and new financial products.

In conclusion, the tax and auditing services domain is a crucial sub-segment of the financial services industry in India. The presence of numerous professional service providers in this segment further highlights its importance in ensuring financial compliance and stability in the Indian economy. 

9. FDI and Emerging Markets

India has been actively courting foreign investment, especially in the wake of COVID-19 pandemic. The country has enacted ambitious structural economic reforms to attract private and foreign direct investment (FDI), with plans to raise $2.4 billion through an ambitious privatization program. Parliament further liberalized the insurance sector in March 2021, increasing FDI limits to 74% and repealing a law adopted by the previous Congress-led government in 2012 that taxed companies retroactively.

However, India’s progress in attracting FDI has been mixed. While the government under Prime Minister Modi has tried to create more favorable conditions for foreign investment, there are still challenges for investors. India’s infrastructure gaps are blamed for higher operational costs that hinder investment. Additionally, new protectionist measures have increased tariffs, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards.

Despite these challenges, the potential in India’s emerging markets is significant. The long-term nature of FDI has a more stable influence on the economy compared to portfolio investment. Economists suggest it is critical for the country to boost FDI, particularly because of its weak economic growth, record high current account deficit, and other external pressures. As Rajeev Malik, a senior economist at brokerage CLSA notes, “It should not have raised hopes if it was not totally sure and, most importantly, it should not have started talking if it could not deliver because now is the time to actually deliver, not just talk.”

India is taking steps to ease restrictions on FDI, with the hope of attracting foreign companies to invest in broad swathes of industries. However, approvals from multiple ministry bodies are required, which sometimes leads to pushback and disagreements. But experts suggest that it is important for the government to follow through on its plans to boost FDI, lest the fickle flows of portfolio investment continue to destabilize the economy. 

10. Rapid Expansion and Government Reforms

India’s financial system has rapidly expanded over the years, led by the government’s reforms to keep up with the country’s fast-paced growth. The financial sector plays a crucial role in channelling domestic savings and foreign capital into productive investments, promoting economic and social stability. According to a report by the IMF, India’s financial system, which comprises banks, equity and bond markets, and other financial institutions, needs to undergo deeper reforms.

The report recommends that India should unleash its financial sector from government strictures to generate millions of jobs and achieve a high growth rate. The financial system will need to provide adequate services to the large population, including retail customers, SMEs, and large corporations. The report emphasizes that the financial sector’s deep linkages with other reforms, including broader monetary and fiscal policies, are essential to achieve real progress.

India’s financial system has made significant strides, with the stock market capitalization rising significantly and a vibrant private banking system coexisting with public sector banks. However, despite India’s favourable demographics and resources, the country needs to create significant population-wide savings and invest them efficiently to deliver returns and sustain growth.

The Modi-led government and the Reserve Bank of India have made strides in rapidly expanding financial inclusion and reducing transaction costs. However, India still faces challenges in creating an effective financial system, and it will require political capital to overcome these challenges. As India stands as a stable and growing zone amidst global political risks and turbulence, the country’s domestic financial savings will be essential to driving its growth.

Quote: “India has grown by leaps and bounds in recent years and is emerging as a major world economic power. The challenge now is to maintain this growth momentum and provide benefits as well as economic opportunities to a broad swath of the population.” – Eswar S. Prasad and Raghuram G. Rajan, IMF.