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Growth of Financial Services Sector
By:
Srivastava Saurabh
Mukherjee Ashim
Abstract: Services
are
economic activities- intangible such as banking, tourism,
insurance and accounting, in contrast to tangible goods.
The Indian Services sector is the most significant sector of
the Indian economy contributing nearly 55 per cent of the
GDP in 2006-07. The sector has come to play an increasingly
dominant role in the economy accounting for 68.6 per cent of
the overall average growth in GDP in the last five years
between 2002-03 and 2006-07.
Importance of the service industry has increased
dramatically over the last decade both at national levels as
well as global. De-regulation of services, growing
competition, increased demand and application of new
technology has posed a serious challenge to the service
providers. The importance of services as a source of
competitive advantage in manufacturing has increased greatly
in the last five years.
The most
happening field of financial service is banking where
the banks, private or public, are investing heavily to set
up infrastructure to incorporate Information Technology at
every single office process. Carrying bundles of notes for
shopping, standing in long queues for paying utility bills,
bringing home loads of groceries may soon turn history.
With the advent of Internet and Credit Cards, the above are
close to reality. Value based financial services have
become a new economic imperative. Banking system has
undergone tremendous transformation. From local to
regional; national to global, banking has seen it all.
Introduction
Industry
and services are two major pillars of Indian economy.
Together, they have fueled the economic growth in India.
Service industry in India comprising of - Information
Technology (IT), tourism, financial services, education,
media, health etc. has shown an impressive growth. The
Indian Services sector is one of the most significant
sectors of the Indian economy contributing nearly 55 per
cent of the GDP in 2006-07. The sector has come to play an
increasingly dominant role in the economy accounting for
68.6 per cent of the overall average growth in GDP in the
last five years between 2002-03 and 2006-07.
That means that service sector has overtaken the growth rate
of agriculture and manufacturing sector.
Zeithaml and Bitner say that Services are deed
process and performances. Gronroos in 1979
has attempted following definition of services: “service is
an activity or a series of activity of more or less
intangible nature that normally but not necessarily take
place in interaction between the customer and service
employees and or physical resources or goals and or systems
of the service provider which are provided as solutions to
the customer problems:” From the definition we can confer
that services involves activities arising out of interaction
between customer and the service provider. Services
includes all economic activities whose output is not a
physical product or construction.
Importance of the service sector has increased dramatically
over the last decade nationally as well as globally. The
de-regulation of services, growing competition, fluctuation
in demand and application of new technology has presented a
considerable challenge to the service companies.
Development of Service Industry
World
War II marked a milestone in the explosive rise of the
service industry. At the end of the war major social and
economic changes transformed western economies. The
restructuring of the shattered European economy brought
massive new investment projects, which placed new demands on
the financial service sector. Specialization in all areas of
production meant that business became more reliant upon
contracted services.
The
increased rate of spending upon personal consumption
services has also been impressive rising from approximately
30% to over 50% in the last 30 years.
Individuals are spending great proportion of their income on
travel, restaurant and leisure services to improve the
quality of their lives; on telephone postal and
communication services reflecting a more dynamic and fast
moving environment and on purchasing better quality health
and educational services. The growing complexity of
banking, insurance, investment, accountancy and legal
services has led to greater demands for financial and
professional services in each of these areas.
Over the
past few decades service sector has come to dominate our
economy. The trend has been so strong that it has been
described as second industrial revolution.
This sequence of events indicates the transformation of
services as a full-fledged industry as an aftermath of World
War II. The importance of services as a source of
competitive advantage in manufacturing has increased greatly
in the last five years. This is reflected in the 68.6
percent of overall average growth in gross domestic product
(GDP) between the years 2002 – 03 and 2006 – 07.
The
year 2004 marked a turning point in the history of global
trade in services, with growing acceptance of IT based
global delivery model. With ever increasing availability of
international bandwidth and powerful workflow management
software, it is now possible to disaggregate any business
process, execute the sub-processes in multiple centers
around the world, and reassemble it, in near-real time, at
another location. This is driving fundamental changes in the
global IT services landscape, vendors and customers are
redefining the levels of value creation in the industry. In
the wake of changing global service landscape, Indian
Information Technology (IT) and IT enabled services (ITeS-BPO)
continue to chart remarkable growth.
This growth has encouraged FDI into services sector. The
chart below shows that service sector is the second most
preferred sector for FDI, topping telecommunications and
transportations.
Financial sector
Indian
economy grew at the rate of 9.4 per cent in 2006-07 which
was 9 per cent in 2005-06. Of this, services grew at an
impressive rate of 11 per cent in 2006-07 against 9.8 per
cent in 2005-06.
That means services sector continued to record double-digit
growth in the current fiscal with a growth rate of 10.6 per
cent during the first quarter of the current fiscal year.
The major growth has been witnessed in the following areas:
·
Trade, hotels, transport and communication grew by a robust
growth rate of 12 per cent.
·
Financial services (comprising banking, insurance, real
estate and business services) grew by 11per cent as against
10.8 per cent.
·
Community, social and personal services grew at the rate of
7.6 per cent.
A rapid transformation
has been taking place in the financial sector. According to
Ministry Of Finance it is expected that the finance industry
in India is worth US$ 28 billion and it has grown at around
15 per cent per year.
The key to success has been adaptability to the
environment. The need and demand for financial products and
services have increased. The industry responded by being
innovative and finding lucrative segments. Banks capital
markets and insurance companies have come up with wide range
of products and services. Add to this, RBI measures to keep
the interest rates affordable.
Banking
The
Indian banking system has a large geographic and functional
coverage. Presently the total asset size of the Indian
banking sector is US$ 270 billion while the total deposits
amount to US$ 220 billion with a branch network exceeding
66,000 branches across the country. Revenues of the banking
sector have grown at 6 per cent CAGR over the past few years
to reach a size of US$ 15 billion.
Banking
has witnessed exciting growth avenues. Mr. M.V. Nair has
identified four factors
propelling the growth. They are: Globalization,
liberalization, customers and technology.
Globalization and liberalization have together opened up new
markets and segments. Indian market witnessed coming up of
foreign banks. A new marketing approach and culture has
been infused into Indian banking system. This system
focuses more upon providing lifelong better customer
satisfaction and value added services. Apart from that
organizations are moving more towards untapped potential.
So the focus has shifted from urban to rural segment. As a
result there has been an altogether very different strategic
approach for this ‘very special market’. Banking has also
been largely affected by IT. In fact, banks were wise
enough to understand the implications of IT in banking
operations. As a result, they have been early adopters of
IT and related technology. This has made it more customer
friendly. The disposal of information and services is quick
and fast.
Insurance
Insurance industry till now was a dominance of Indian
companies. With globalization and IRDAs liberal policies,
Indian market was opened up for foreign investment with the
conditions that they can enter insurance market in
collaboration with an Indian company only. As a result now
there are 15 private players in Life insurance against 1
public sector organization which is LIC. Whereas in Non Life
insurance there 6 public players against 9 private players.
Life
insurers:
The life
insurers underwrote a premium of Rs. 29664.64 crore during
the six months in the current financial year as against Rs.
11323.13 crore in the comparable period of last year
recording a growth of 161.98 per cent. Of the total premium
underwritten, LIC accounted for Rs. 23435.08 crore and the
private insurers for Rs. 6229.56 crore. The premium
underwritten by the LIC and the new insurers grew by 178.69
per cent and 113.78 per cent respectively, over the
corresponding period in the previous year.
Non life
insurers:
Non-life
insurers underwrote a premium of Rs. 12377.76 crore during
the first half of the current financial year recording a
growth of 22.81 per cent over Rs.10079.15 crore underwritten
in the same period of last year. The private sector non-life
insurers underwrote a premium Rs. 4340.57 crore as against
Rs. 2688.50 crore in the corresponding period of the
previous year, recording a growth of 61.45 per cent. Public
sector non-life insurers underwrote a premium of Rs. 8037.19
crore which was higher by 8.75 per cent (Rs. 7390.65 crore
in the first half of 2004-05).
Regulation and development of financial markets,
institutions, technology etc.
To
enhance efficiency and stability of the financial system and
thus contribute to growth and employment, RBI has taken
several steps
for widening, deepening and integrating financial
markets.
-
New processes and
institutional arrangements have been put in place in
regard to the banking sector, deposit-taking non-banking
financial companies and systemically important
non-deposit-taking non-banking financial companies.
-
These initiatives, in
particular supervisory systems, are in alignment with
the global best practices, but there are dynamic trade
offs between public ownership of financial institutions,
regulation, financial innovation, etc.
-
Several steps have
been taken to enhance use of technology and market
micro-structures in the financial sector. The financial
sector policies are continuously evolving, essentially
in a proactive manner.
-
Medium term
frameworks or vision documents have been formulated in
each of these areas since 2004 and are being implemented
through a continuous process of consultations with
market participants and industry associations.
Conclusion
Financial sector needs to be ready to take on the challenges
unleashed by various external forces such as competition
globalization , shrinking margins and internal forces
relating to human resources, needs for changes procedures
etc. Government has followed a liberal policy. Because of
these policies, our economy is said to be growing at a good
pace.
Substantial portion of
these problems can be easily addressed by technology.
Financial sector in India need to be complimented in the
inculcation of technology in large way in their day to day
operations. Credit must be given to Indian banks that have
brought on the new wave of techno banking in the country.
In a short span of less than 2 decades, customers of bank
have felt the positive impact of technological solutions
implemented by the bank.
As Shri V. Leeladhar
Deputy Governor RBI remarks – “Technology has today become
basic necessity rather than luxury in the banking sector”.
Reasons why banking sector is feeling the need of technology
are importantly:
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Lower cost of
accounting services
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Better customer
relation and
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Because they have to
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