The services sector has been a great stimulus to the Indian economy accounting for 65 per cent of the gross domestic product (GDP), wherein the financial services segment has been a major contributor. The growth of the financial sector in India at present is nearly 8.5 per cent per year.
Dominated by commercial banks which have over 60 per cent share of the total assets.
Through the Financial Inclusion Plan (FY 10–13), banking connectivity in the country has increased more than three-fold to 211,234 villages in 2013 from 67,694 at the beginning of the plan. India’s banking sector has the potential to become the fifth largest banking sector globally by 2020 and the third largest by 2025.
The cap on foreign direct investment (FDI) also looks likely to be increased from 26 per cent to 49 per cent. The Insurance Bill which has been approved by the Government of India and will in all possibility be cleared by the Parliament is expected to increase FDI inflows to US$ 10 million in the short term.
The regulatory agency which oversees the functioning of stock markets is the Securities and Exchange Board of India (SEBI), which is located in Bombay.
The Reserve Bank of India (RBI) has bought a net of $5.8 billion US dollars from the market in April, taking total net purchases to more than $25 billion in September 2013. The central bank is buying US dollar aggressively to serve twin purposes: to prevent an appreciation of the rupee, and to build foreign exchange reserves which contracted last year amid rating downgrade fears that triggered panic selling by overseas investors.
India’s foreign exchange reserves rose $203 million in the week to June 6 as Reserve Bank of India purchased dollars from the foreign exchange market to prevent volatility in exchange rate amid strong dollar inflows. The reserves rose to $312.586 billion, breaking a two week’s consecutive fall.
It is expected to become the fifth largest banking sector in the world by 2020 and the third largest by 2025, according to a joint report by KPMG–CII.
Bank credit is expected to grow at a compound annual growth rate (CAGR) of 17 per cent in the medium term leading to better credit penetration.
The insurance sector also has bright times ahead. Life Insurance Council, the industry body of life insurers in India, has estimated a CAGR of 12–15 per cent over the next few years for the segment, with the country’s insurable population projected to touch 750 million by FY 2020.
Financial service institutions in India are struggling to retain their competitiveness and to align their business models to the rapidly changing circumstances. Forward-looking organisations are seeing the shake-up as a once in a generation opportunity to redefine their strategies and business models, when the competitive structure of their industries are relatively open to change.
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