Banking Financial Services and Insurance (BFSI): An Overview
Banking Financial Services and Insurance or BFSI is a term that is used by industry experts for common understanding. It denotes the companies that provide various financial products and/or services. BFSI comprises of insurance companies, commercial banks, non-banking financial companies, cooperatives, mutual funds among others. BFSI’s banking part includes core banking, private, retail and investment whereas financial services includes stock broking, payment gateways, mutual funds etc. The BFSI industry is growing at a rapid pace in India. This is due to compact regulation, acceptance, and development of technology in the country. Fin-tech companies have evolved their products and services to cover BFSI products. BFSI Industry has witnessed eye-catching reforms in the last 20 years and will remain a top priority based industry for India’s economic development based on inclusive growth.
Growth of Banking Financial Services and Insurance Sector
Ever since globalization and opening of markets in the 1990s, this sector has shown signs of progression. According to research, this sector represents a multibillion-dollar industry and is continuously growing. In 2010, the tech boom added new players in the BFSI sector. These players include fin-tech companies, data analytics companies, and AI companies.
Collaboration is the main factor for the growth of this sector. Fin-tech companies collaborate with finance companies such as NBFC (Non-Banking Financial Companies). Due to collaboration, fintech companies and NBFCs benefit from economies of scale and economies of scope. Both fin-tech companies, as well as NBFCs, enjoy the benefits of collaboration.
Some significant factors that led to this sector's development are adaptability, progress, digitization, and collaboration. As per reports, this sector will continue to proliferate in the next ten years. Financial institutions and banks will adapt more and bring in technology for their products.
Banking and Financial Services Insurance Sector- Market Size
According to a report, the Indian banking ecosystem comprises of 12 public sector banks, 22 private sector banks, 46 foreign banks, 1485 urban cooperative banks and 96000 rural cooperative banks apart from cooperative credit institutions. The total number of ATMs in India reached 213,145 in 2021. Further during FY-18 to FY21, bank assets across sectors increased and the total assets in the banking sector soared to US$ 2.48 trillion in FY21.
In FY 2021 the total assets in the public as well as private banking sectors were US$ 1,602.65 billion and US$ 878.56 billion, respectively. Between FY16-21, bank credit increased at a CAGR of 0.2%. By 2021, the total credit provided increased to US$ 1,487.60 billion. During FY16-21, deposits increased at CAGR of 12.3% and amounted to US$ 2.06 trillion by FY21. As per RBI, as of 2021, the bank credit reached Rs. 110.46 trillion and credit to non-food industries stood at Rs. 109.82 trillion.
As far as the financial services sector is concerned, it comprises of capital markets, insurance sector and NBFCs each of these have registered significant growth in the last few years. Various steps have been taken to reform the financial services sector and especially capital market. The complex IPO process has been simplified which has allowed qualified foreign investors to access Indian bond market. Investment in Indian equities by foreign portfolio investors touched 5 year high of Rs. 101,122 crore (US$ 14.47 billion). The investment by FPIs in Indian capital market stood at Rs. 12.52 lakh crore (US$ 177.73 billion) between FY02-21 (till August 10, 2020).
Main Regulatory Body for BFSI
There are different regulatory bodies for BFSI. Some of the main regulatory bodies for BFSI sectors are as follows:
- Banking Sector/ Payments/ Digital Payments- Reserve Bank of India.
- Foreign Exchange Management- Reserve Bank of India.
- NBFC sector- Reserve Bank of India, Registrar of Companies, and Ministry of Corporate Affairs.
- Insurance Sector- Insurance Regulatory and Development Authority of India (IRDAI).
Key statutes and Regulations applicable to Banking Financial Services and Insurance Sector
The regulations governing the banking and financial services industry includes the following:
- RBI Act 1934;
- Banking Regulation Act 1949;
- Foreign Exchange Management Act 1999.
- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- Payment and Settlement Systems Act, 2007;
- The Insolvency and Bankruptcy Code, 2016.
There are various regulations governing the Insurance Sector but some of the prominent ones includes the following:
- IRDA 1999;
- Insurance Act, 1938;
- Life Insurance Corporation Act, 1956;
- General Insurance Business (Nationalisation) Act, 1982;
- Insurance Regulatory and Development Authority of India (Insurance Web Aggregators) Regulations;
- Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations;
- IRDAI (Re-Insurance) Regulations.
Different Institutions under Banking Financial Services and Insurance
The BFSI sector comprises of the following institutions:
The banking structure of India comprises of the Central Bank, and under them, there are private and public sector banks. The Reserve Bank of India (RBI) is the central monetary authority for banking business in the country. This central bank is considered as a guardian of the banking system of the country. The RBI regulates all banking products. They regulate fin-tech products, microfinance products, and products which use financial software. They also regulate foreign exchange management in India. To secure a license to open a bank in India, approval from RBI is required. The minimum amount of capital required to start a bank is Rs. 300 crore. Banks are further divided into private sector banks and public sector banks.
- Public Sector Banks (PSB)
Public sector banks are those banks wherein the government owns the majority stake i.e. greater than 50% and whose shares are listed on public exchanges. The number of active public sector banks has been reduced from earlier as few PSBs have merged under a single pre-existing bank.
- Private Sector Banks
Those banks whose majority stake/equity is controlled by private shareholders are termed as private sector banks. The Indian economy houses numerous Private Sector Banks such as HDFC Bank, ICICI Bank, Axis Bank, etc.
Financial Institutions can be classified into microfinance companies and companies that provide loans and accept deposits from customers. Financial institutions would also require prior approval from the RBI to operate in the country. Microfinance institutions offer short term finance to the public. Some financial institutions require approval from nodal institutions such as the Securities and Exchange Board of India (SEBI).
BFSI consulting services also include the Insurance Sector. Insurance companies in India are regulated by the Insurance Regulatory and Development Authority of India (IRDAI). This authority regulates insurance products, insurance companies, and the policies offered by them. There are different forms of insurance companies in India which are classified into the following:
- Insurance Company; and
- Reinsurance Company.
Insurance companies are further divided into categories such as:
- Commercial Insurance Companies
This will include business insurance, property insurance, cyber insurance, and other insurance providers.
- Non-Commercial Insurance Companies
This will include life insurance, general insurance, and health insurance.
Products offered by insurance companies have to be according to the standards prescribed by the IRDAI. This would include abiding by the norms of minimum capital requirements and other factors.
Fin-tech is a term which is a combination of two words 'Finance' and 'Technology.' Technology has disrupted how individuals and businesses operate. Fin-tech can be in any form. It can be a software application on the smartphone, allowing users to provide information and conduct transactions through these devices. Events leading to disruption of fin-tech has taken considerable time. However, fin-tech companies and payment companies are regulated by the RBI. Apart from this, other nodal agencies also authorize fin-tech companies.
Non-Banking Financial Companies
Non-Banking Financial Companies, are also known as NBFCs. NBFCs provide different forms of financial services; however, they do not have a banking license issued by the RBI. NBFCs are also regulated by the RBI. NBFCs are permitted to carry out some of the activities. Specific activities are not allowed to be carried out by an NBFC, which includes acceptance of deposits or savings bank funds from the public.
Typically the services which can be offered by an NBFC are the following:
- Underwriting Services;
- General Finance Consultation Services;
- Loan Services; and
- Consultation services related to a particular transaction.
NBFCs in India have evolved due to increased collaboration with fintech companies in India. Through collaboration, NBFCs are allowed to offer their products to individual and institutional customers. In BFSI consulting services, starting an NBFC requires specific capital requirements. Apart from this, the company has to be registered with the Registrar of Companies as a public limited company. An NBFC cannot operate without complying with the above requirements
These banks provide facilities such as issuing loans and cards to customers. The services offered by payments bank is primarily related to mobile applications and mobile-based wallet systems. An individual can make a payment through payments banks. The individual has to provide independent credentials for the payments bank to operate. A typical example of a payments bank is PayTM, and Amazon Pay.
Licenses applicable under Banking Financial Services and Insurance sector
Different types of licenses are applicable to different institutions in India. The type of license/registration depends on the type of activity performed by such entity.
Types of Licenses under Banking and Financial Sector
Banking license- A banking license is required to run a bank in India. The Reserve Bank of India authorises banks to function in the country.
NBFC Registration- In order to provide the services of an NBFC, an entity needs to secure NBFC Registration. This is also granted by the RBI.
Account Aggregator License- This is mandatory for an entity to act as a consent broker which will help financial data sharing among different financial institutions in the financial sector.
P2P License- Peer to Peer or P2P lending is a form of lending under which individuals can lend money or borrow money. In order to carry out P2P lending business, one needs to obtain license from the RBI.
Payment Aggregator License- A payment gateway refers to a software service which allows e-commerce businesses to process transactions on their website/application.
Payments Bank License- Any entity which desires to function as payments bank in the country should mandatorily obtain a payment bank license. The Reserve Bank of India issues this license as per Section 22 of the Banking Regulation Act 1949.
Small Finance Bank License- Small finance banks are set up to support the under-privileged section of the country, which often fails to avail the benefit of major banks. Small finance banks are licensed under Section 22 of the Banking Regulation Act, 1949.
Credit rating agency registration- Credit Rating agency is a body corporate, involved in the business of rating of securities offered by way of a public issue or right issue. It is necessary for an entity to get itself registered under SEBI before commencing the credit rating activity.
Types of Licenses and Registrations under Insurance sector
Insurance Company License- In order to start an insurance company in India one must mandatorily obtain insurance company license from the Insurance Regulatory and Development Authority.
Insurance Broker License- Insurance brokers represents customers while ensuring that they secure the best insurance policy as per their needs. Insurance Broker License is necessary for an individual/company that desires to act as an intermediary between insurance companies and the prospective clients.
Insurance Web Aggregator License- Insurance Web Aggregators compile information on different policies offered by different insurance entities. Insurance Web Aggregator License is a must for business entities who intends to maintain a website that provides information on insurance policies.
Insurance Marketing Firm License- These firms sell insurance products on behalf of insurance companies. An entity to operate as an insurance marketing firm should get an insurance marketing firm licence mandatorily.
Insurance Surveyors and Loss Assessors Licence- Insurance Surveyors and Loss Assessors Licence must be obtained by individuals or a company desirous of practising as an Insurance Surveyor and Loss Assessor. Surveyors and loss Assessors are appointed by the insurance companies who assist in determining the amount of actual loss in events beyond the parties' control.
Compliances under Banking Financial Services and Insurance Sector
Banking financial services sector and insurance sector involves some complex compliances requirements that must be met by an entity. Failure to adhere to the compliance requirements as prescribed by the regulatory authority can lead to adverse consequences like cancellation of registration/license. This compliance requirement may vary from one entity to the other with respect to minimum capital requirements, drafting of policies and Loan documents, Statutory Return filing, disclosure requirements etc. as the case may be. Hence an entity’s smooth functioning depends on its adherence to compliance requirements as set forth from time to time by the regulatory authority.
Banks and other financial institutions are required to comply with the guidelines specified by the RBI whereas entities providing insurance services should ensure reporting of compliance to the IRDAI.
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