Overview on the Banking, Financial Services and Insurance (BFSI) Sector

Financial Institutions
The Financial Institutions mainly comprises of the Central Banks, Financial Regulatory Authorities, Commercial Banks, Insurance Companies, Mutual Funds, Credit Rating Agencies, and the Specialized Financial Institutions. Broadly they can be categorized as under:

Financial Institutions
Regulatory Agencies Non-Intermediaries Intermediaries

Banks

Non Banks

Regulatory Agencies
They are Government or Statutory bodies and ensure discipline in all financial transactions. Every country have formulated their own financial regulations and have established entities to supervise their implementation and adherence. Financial institutions in most countries operate in a heavily regulated environment as they are critical parts of countries' economies. Regulation structures differ in each country, but typically involve prudential regulation as well as consumer protection and market stability. Some countries have one consolidated agency that regulates all financial institutions while others have separate agencies for different types of institutions such as banks, insurance companies and brokers. India USA

Securities and Exchange Board of India (SEBI) National Stock Exchange (NSE) Bombay Stock Exchange (BSE) Reserve Bank of India Foreign Investment Promotion Board

The Federal Reserve System, Central bank of the US, also known as `the Fed' U.S. Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB)

United Kingdom - Financial Services Authority

Non-Intermediaries
Financial Non-Intermediaries are typically lending and advisory / consulting institutions. They do not accept deposits from the public, rather they are usually funded by the government or other financial institutions. Their objective stays focused on developing selected areas in trade and commerce. Following are some examples in India: African Development Bank Asian Development Bank European Bank for Reconstruction and Development Inter-American Development Bank International Fund for Agricultural Development At the international level, World Bank, International Monetary Fund (IMF), Asian Development Bank etc also falls under this category.

Intermediaries
Financial intermediation consists of channeling funds between surplus and deficit agents.

The movement of capital from surplus units through financial institutions to deficit units seeking bank credit is an indirect form of financing known as intermediation. The Depositors are net suppliers of funds, whereas business and government are net borrowers. Some examples of Financial Intermediaries are: Banks Credit Unions Specialized Financial Institutions Investment Companies Insurance Companies Mutual Funds Self Help Groups

Banks
Banking is defined as accepting deposits from the public with an intention to lend. The spread between the interest they pay to the depositors and the interest they collect from the borrower becomes their profit. Apart from this, they also undertake several ancillary activities such as: Remittances and Collection of Funds Cash Management Services Issuance of Guarantees Offering Safe Deposit Vaults Safe Custody of Documents Payment of Pensions Issuance of Credit Cards Sale of Insurance and Mutual Funds Products Payment of Utility Bills Offering Demat Services Each of these services is either fee based or commission based. The earnings are categorized as Non Interest Income (NII). A substantial portion of the banks revenue is derived from these sources.

Bank Categories
Depending upon the functionalities, banks are classified into various categories. Below is an indicative list. In subsequent screens, we shall discuss their activities in more details.
Central Banks Commercial Banks Merchant Banks Investment Banks Universal Banks Development Banks Export Import Banks Islamic Banks

Central Banks
Central Bank of each country is the apex financial institution and performs the duties of Advisory as well as Regulatory functions. They are responsible for the following broad functions:

Supervision of the banking system

Advising the government on monetary policy Issue of banknotes and Controlling the Currency Reserves Acting as banker to other banks Acting as banker to government Raising money for the government Liaising with international financial bodies and Regulators The Reserve Bank of India, The US Federal Reserve, The Bank of England, The Bank of Mexico, The Bank of Japan, The Bank of Canada, The Reserve Bank of Australia are few examples of Central Banks.

Commercial Banks
Commercial Banks are financial intermediaries whose prime function is to accept deposits from the public and provide short term loans to individuals and business. Consequently, the customer base of Commercial Banks is very large compared to other categories of the banks. For accepting deposits, they device a number of deposit schemes (products) such as Checking (Current), Savings Bank, Fixed Deposit and Certificate of Deposits Accounts. Similarly, for lending, banks devise products in the forms of Business Loans, Industry Loans, Housing Loans, Conveyance Loans etc. Their banking activities are channelized through 2 broad streams: 1. Retail Banking caters to the needs of individuals and small business 2. Wholesale (Corporate) Banking targets large Corporations and Companies. At times they service other retail banks also. However, the underlying principles of business is same for both the types.

Negotiable Instruments
Apart from Cash, the commercial banks deals with a special type of Financial Instrument known as Negotiable Instruments. A negotiable instrument is an unconditioned writing that promises or orders the payment of a fixed amount of money. The governing laws for these instruments are similar across the globe. The unique feature of these instruments is the Negotiability, i.e., they can be legally transferred for value and as such, can be used in lieu of cash. There are 4 types of negotiable instruments: 1. Promissory Note A promise by one party to pay money to another party or to bearer 2. Bill of Exchange An unconditional order by the maker directing payment to certain person to the holder of the instrument. 3. Cheques A draft drawn on a bank and payable on demand to bearer 4. Drafts An order by one person to another person or to bearer

Banking Channels Branch Banking Online (Internet) Banking / PC Banking Mobile Banking Telephone Banking TV Banking Automated Teller Machines (ATM) Cash Dispensing Machines (CDM)

Point of Sale (PoS) Terminals

Branchless Banking Financial Inclusion

Investment and Merchant Banks

Investors

Investments

Business

Consultancies Investment Bank

Depositors

Deposits

Bank

Deposits

Business

Capital Markets
CAPITAL MARKET

PRIMARY MARKET

SECONDARY MARKET

PUBLIC ISSUE

RIGHT ISSUE

BONUS ISSUE

STOCK MARKET

Capital Market Instruments

The playing ground for the Investment and Merchant bankers are the Capital Markets where they help raise Capital for intending enterprises.

The capital is raised mainly through the following 3 instruments: 1. Equity Shares: Popularly known as Shares, it is an form of fractional ownership in which a shareholder, as a fractional owner, undertakes the entrepreneurial risk associated with the business venture and shares the profit as well as loss. Shares take various forms and the holders are members of the company, some with voting rights.
1. Debentures: Debentures, representing long term loans, are bonds issued by a company bearing a fixed rate of interest, usually payable half-yearly, on specific dates and the principal amount repayable on a particular date on redemption of the debentures. They are normally secured against the asset of the company in favour of the holder. 1. Bonds: A bond, like Debenture, is a negotiable certificate evidencing indebtedness. But it is normally unsecured. When these instruments are issued by the enterprise itself, the market is known as Primary Market. But when they are traded in Stock Exchanges and other markets, the market is known as Secondary Market

Development Banks
These institutions are normally government sponsored and target very large developmental activities and remain focused on a particular geography or a sector. Since their ultimate aim is overall development of that geography or sector, they provide technical consultancies apart from finances.

These banks operates broadly at 3 levels, International, Regional and National.

Classic example of a Development Bank at international level is the World Bank Group (IBRD, IDA, IFC, MIGA, ICSID). At Regional Level, there are Asia Development Bank, African Development Bank etc. At the National Level, India has NABARD, IDBI etc.

Islamic Banks
These banks undertake all the activities of commercial banking. Islamic Banking must operate within the framework of the religion, based on Qura'n and Sunnah. Hence only Halal activities are allowed. Scholars trained in Islamic law (Islamic Jurisprudence) screen the suitability of investments on an ongoing basis and provide guidance on products to the Bank's management. Interest, known as Reba, is forbidden. Hence, all banking activities must avoid interest. Instead of interest, the Bank takes a predetermined share from the profit. They also charge fees on financing facilities they extends to customers.

The depositors earn a share of the Bank's profit as opposed to interest. Returns are variable and not guaranteed as they are linked to the banks performance.
The Dubai Islamic Bank has the distinction of being the world's first fullfledged Islamic bank, formed in 1975.

Specialized Financial Institutions

As the name specifies, these institutions are created with focused objective on a limited number of activities. Specialized Financial Institutions are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. However, their operations are still regulated by Banking Regulations of respective countries.

They are typically not allowed to take deposits from the general public and have to find other means of funding for their operations such as issuing debt instruments.
India is an exception. Reserve Bank of India has allowed some of them, categorized as Non Banking Financial Institutions (NBFCs) to accept deposits from the public with certain limitations. 1. 2. They can not accept demand deposits (Current / Savings) and consequently, can not issue cheques. The deposits with NBFCs, unlike those with commercial banks, are not insured by the government.

Specialized Financial Institutions

Most of their activities resemble to those of commercial banks, but they do not take up all the activities.

Depending upon the focus on specific segment, a SFI may be categorized as any of the following:
Consumer Finance Company Housing Finance Company Equipment Leasing Company Hire Purchase Finance Company Venture Capital Company Custodian Banks Chit Fund Company

Very often these companies finance people who do not qualify for bank credits. To countermand the risk, the rate of interests are normally high compared to prevailing market rated.

Mutual Funds
Mutual Fund is an investment company that pools money from shareholders and invests in a variety of securities, both in primary and secondary market. When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. The shareholders are issued with units the face values of which keeps on changing with the performance of the investments. The market value of the units is know as Net Asset Value (NAV). Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. State Bank of India Mutual Fund, Prudential ICICI Mutual Fund, Birla Sun Life Mutual Fund, ABN AMRO Mutual Fund are some of the Mutual Funds companies in India.

Mutual Funds Working

1
Mutual Fund Companies with different products

3 Mutual Fund Companies with different products

Millions of small investors

Types of Mutual Funds

Mutual Funds

Structure
Open Ended Closed Ended Interval

Objectives
Growth Income

Balanced
Money Market Load

No-Load

Insurance Companies
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.
The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'. The amount of the premium is determined by the operation of the law of averages as calculated by actuaries. By investing premium payments in a wide range of revenue-producing projects, insurance companies have become major suppliers of capital, and they rank among the nation's largest institutional investors.

How Insurance Works

Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.

Investments

Returns

Policy Holders

Insurance Company

Actuary Data

Types of Insurance Life Insurance

Term Insurance Policy Whole Life Policy Endowment Policy Money Back Policy Annuities and Pensions It has remained a constant endeavor for the insurers to add various features to basic insurance policies in order to address specific needs of a cross section of people.

Non-Life Insurance
Fire Insurance Marine Insurance Miscellaneous

These features are known as riders and attract additional premium.