Indian_Financial_System

A REPORT ON Financial services for Submitted to INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM) CHAROTAR UNIVERSITY OF SCIENCE AND TECHNOLOGY (CHARUSAT) CHANGA Prepared by Sandip Kanani ID No.: 10MBA036 M.B.A. Third Year Under the Guidance of Prof. Gaurang Badheka Assistant Professor INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM) CHAROTAR UNIVERSITY OF SCIENCE AND TECHNOLOGY (CHARUSAT) AT. & PO. CHANGA – 388 421 TA: PETLAD DIST. ANAND, GUJARAT Introduction The financial services sector in India has witnessed a fundamental transformation since the country was liberalized. India, in the last few years, has emerged as the one of the most rapidly growing economies across the globe. The financial services market is growing rapidly, and there is significant potential for further growth. The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market. Financial services such as financial planning, management consultancy, audit services, financial assistance and help to stock markets in India. Financial services also provides information related to companies in India providing financial and accounting services, book keeping services, tax services and insurance services. The major services are as following: * Government Banks * Other Banking Services * Private Banks * Insurance * Investment Services * Mutual Funds * Stock Exchange * Venture capital Financial Sector Reforms Financial sector reforms are at the centre stage of the economic liberalization that was initiated in India in mid 1991. This is partly because the economic reform process itself took place amidst two serious crises involving the financial sector: * The balance of payments crisis that threatened the international credibility of the country and pushed it to the brink of default; and * The grave threat of insolvency confronting the banking system which had for years concealed its problems with the help of defective accounting policies. Moreover, many of the deeper rooted problems of the Indian economy in the early nineties were also strongly related to the financial sector: * The problem of financial repression in the sense of McKinnon-Shaw (McKinnon, 1973; Shaw, 1973) induced by administered interest rates pegged at unrealistically low levels; * Large scale pre-emption of resources from the banking system by the government to finance its fiscal deficit; * Excessive structural and micro regulation that inhibited financial innovation and increased transaction costs; * Relatively inadequate level of prudential regulation in the financial sector; * Poorly developed debt and money markets; and * Outdated (often primitive) technological and institutional structures that made the capital markets and the rest of the financial system highly inefficient. Over the last six years, much has been achieved in addressing many of these problems, but a lot remains to be done. The following sections review the progress of financial sectors in some key areas. If we take into consideration the case of Western Cape to explore the scope of financial services industry it is observed that there are many parameters, which influence the financial services industry. Economic activity During the period 1995 to 2003, the financial services industry contributed 12.3% towards the gross domestic product. Employment opportunities Studies reveal that during the same period as many as 65,000 people were engaged in financial services industry. Sectoral employment grew by 1.1% every year. It was also observed that since growth in the rate of employment has been comparatively slower as compared to "output growth", there has been an increase in labor productivity simultaneously with capital intensity. 1) Banking Services Meaning of the terms Bank and BankingBank is an institution which deals in money and credit. It accepts deposits from the public and grants loans and advances to those who are in need of funds for various purposes. Banking is an activity which involves acceptance of deposits for the purpose of lending or investing. In addition to accepting deposits and lending funds, banking also involves providing various other services along with its main banking activity. These are mainly agency services, but include several general services as well.A banker is one who undertakes banking activities, accepting deposits and lending money for different purposes. The Banking Regulation Act, 1949 defines banking as an activity of accepting funds from the public for the purpose of lending or investment.The essential features of banking activities are as follows:-i) accepting deposits from public;ii) lending or investment of such deposits;iii) incidental to the activities of accepting deposits for lending or investing, banks undertake activities like — * Promoting and mobilizing savings of the public; * Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility, and transfer of funds from one place to another; * Providing agency services to customers, such as collection of bills, payment of insurance premium, purchase and sale of securities, etc., and other general services, such as issue of travellers’ cheques, credit cards, locker facility, etc; Reserve Bank of India (Central Bank)In every country, the bank which is entrusted with the responsibility of guiding and regulating the banking system is known as the Central Bank. In India the central banking authority is the Reserve Bank of India. The Reserve Bank does not deal directly with the members of public. It acts as bankers’ bank maintaining deposit accounts of all other banks and advances money to banks whenever needed. It regulates the volume of currency and credit, and has powers of control and supervision over all banking institutions.The Reserve Bank also acts as goverment banker and maintains the record of goverment receipts, payments and borrowings under various heads. It advises the government on monetary and credit policy, besides deciding on the rate of interest on bank deposits and bank loans. It is the custodian of currency reserves consisting of foreign exchange, gold and other securities. Another important function of the Reserve Bank is the issue of currency notes and regulation of the money supply.Commercial banksCommercial banks are banking institutions which accept deposits from the public and grant short-term loans and advances to their customers. In India, there are nationalised (public sector) commercial banks as well as private sector banks which are corporate organisations. The largest commercial bank is the State Bank of India which was established in 1955 under a special Act. The main source of income of commercial banks is the difference between the interest they charge on loans and the interest they allow on deposits. Commercial banks generally grant short-term loans repayable within one year. But they also meet the medium-term and long-term requirements of business enterprises. Besides accepting deposits and lending money, commercial banks provide other services such as issue of bank drafts, traveller’s cheques and letters of credit, collection of bills, dividends and interest safe keeping of valuables, transfer of money from one place to another, payment of insurance premium etc. All these functions are discussed in the next lesson under the head “Functions of Banks”.Industrial BanksIndustrial Banks are corporate organisations which specialise in providing industrial capital by subscribing to the share and debenture issues of public companies. Industrial banks normally meet the long term requirements of funds for purchase of land, plant and machinery, and financing of expansion and diversification activities of industrial companies. These banks generally secure representation on the board of directors, and provide technical guidance in the management of industrial companies.Foreign Exchange BanksBusiness firms engaged in foreign trade receive and make payment through foreign currency. In order to facilitate such transactions and also help exporters and importers, there are banking institutions which primarily engage in transactions involving foreign exchange. These are known as Foreign Exchange Banks. In India, Export and Import Bank of India (EXIM Bank) has been set up by the Government to help export and import trade and other related activities. Such activities are also undertaken by the foreign exchange division of commercial banks. Exchange banks which are foreign in origin have their head offices located outside India. Besides financing foreign trade, the exchange banks also render services incidental to their main function, such as acting as referees, collecting and supplying information about the foreign customers, providing remittance facilities. They engage in other kinds of banking business as well, like acceptance of deposits, grant of loans and advances, etc. However, financing foreign trade remains their field of specialisation. Licensing of these banks is required under the Banking Regulation Act 1949. Their operations are subject to general control of the Reserve Bank of India. Regarding their foreign exchange transactions, these banks are governed by the Exchange Control Regulations.Development BanksDevelopment banks are special financial institutions which provide longterm capital to industry. Rapid development of industries in India after independence requiring huge financial investment and promotional efforts led to the establishment of these instutions. Development banks assist the promotion, expansion and modernisation of industries, Besides providing long-term finance, these banks also subscribe to the capital issues of industrial undertakings, if the public subscription falls short of the total issue. Thus they act as underwriters as well. Moreover, these banks provide technical advice and assitance, if needed. Development banks which have been established and functioning in India are: * Industrial Finance Corporation of India (I.F.C.I) * State Finance Corporation (S.F.Cs.) * Industrial Credit and Investment Corporation of India (ICICI) * Industrial Development Bank of India (I.D.B.I.) * Industrial Reconstruction Bank of India (I.R.B.I.)Industrial Development Bank of India acts as an apex oganisation to co-ordinate and assist in long term industrial finance by other institutions.Regional Rural BanksCommercial and industrial banks cater to the financial needs of trade and industry. In rural areas, there are small farmers, farm labourers, artisans and small entrepreneurs, who need financial assistance. To meet their financial needs, a separate category of banks known as Regional Rural Banks have been set up in India. These banks are financed by nationalised banks. The central goverment specifies the local limits within which regional rural banks shall operate. The banks are allowed to establish their own branches or agencies within the specified area. They grant loans at lower rates of interest than the rates charged by other banks. These banks are rural based, rural oriented and organized like commercial banks. The purpose of these banks is to finance agricultural operations and provide employment to rural educated youth who possess the requisite orientations.The Regional Rural Banks have been included in the second schedule of the Reserve Bank of India Act and, therefore, they enjoy the same privileges and facilities as the scheduled banks, including access to the Reserve Bank for financial accommodation.Nature and Scope of Banking ActivitiesBanking activities are considered to be the life blood of the national economy. Without banking services, trading and business activities cannot be carried on smoothly. Banks are the distributors and protectors of liquid capital which is of vital significance to a developing country. Efficient administration of the banking system helps in the economic growth of the nation. Banking is useful to trade and commerce. Banking activities are useful to trade and industry in the following ways.a) Money deposited in a bank remains safe. Precious articles too can be kept in the safe custody of banks in lockers.b) Banks provide credit facilities to their customers. Customers with bank accounts also enjoy better credit in the business world.c) Banks encourage the habit of saving and thrift among people. They mobilise savings and invest them in productive activities. Thus, they help in increasing the rate of savings and investment in the country.d) Banks provide a convenient and safe means of transferring money from one place to another and facilitate business dealings/ transactions.e) Banks collect and realise bills, cheques, interest and dividend warrants etc. on behalf of their customers.f) Foreign trade is facilitated considerably with the help of banks which receive and make payments, provide credit and deal in foreign exchange. They protect importers from the risk of loss on account of exchange rate fluctuations. They issue letter of credit and provide information on the credit worthiness of importers. They also act as referees of their customers.g) Banks meet the financial needs of small-scale business units which are located in economically backward areas.Service activities of banksService activities of banks may be categorized as follows: * Agency services * General services * Agency servicesBanks undertake/various agency services for their customers. These are outlined below.a) Collection of cheques, drafts, and bills of exchange on behalf of customers.b) Collection of dividend and interest warrants of customers.c) Collection of pension of government employees.d) Purchase and sale of securities on the instructions of customers.e) Executing standing orders for payment of rent, electricity bill, insurance premium etc.f) Acting as correspondent or representative of customers in dealing with other banks.g) Acting as trustee or executor when so nominated. * General ServicesA commercial bank also performs the following services of general utility to the public:a) Issue of letters of credit, traveler’s cheques and circular notes.b) Safe custody of valuables like gold, jewellery and important documents in safe deposit vaults (lockers) available on hire.c) Supply of trade information.d) Acting as a referee as regards financial status of customers.e) Acceptance of bills of exchange on behalf of customers.f) Underwriting loans floated by government and public bodies. 2) Mutual Funds ServiceThe Indian mutual fund industry has witnessed significant growth in the last few years. Besides the demographic factors, growth has been driven by the increasing reach of Asset Management Companies (AMCs) and distributors. Further, relatively low penetration levels coupled with rapid growth in the assets under management (AUM) in recent years signifies a high growth potential of the Indian mutual fund industry. India's mutual fund industry's average AUM increased by 6 per cent to Rs 7.43 trillion (US$ 167.57 billion) in the first quarter (April-June) of the current financial year (2011-12), from Rs 7 trillion (US$ 157.87 billion) in the fourth quarter (January-March) of the last financial year (2010-11), according to the data released by industry body Association of Mutual Fund Industry (AMFI). The mutual fund industry, which comprises 43 fund houses, witnessed an increase of 6.07 per cent to Rs 425.46 billion (US$ 9.6 billion) on average AUM. The Indian mutual fund industry is expected to register robust growth, given the growing aspirations of retail customers. KPMG in India is of the view that the industry AUM is likely to continue to grow in the range of 15 to 25 per cent from the period 2010 to 2015 based on the pace of economic growth. The assets under management for the mutual fund industry have crossed Rs. 3.5 trillion. And yet many say we are just getting started. It is this panache which is driving more and more global fund houses towards destination India. Experts argue that till the overall size of the market does not increase, with more and more fund houses biting into the same pie of urban investors and asking for an increased share of the same wallet, the entire mutual fund business in India may turn into a red ocean of bloody competition. Fund houses too are beginning to realise this and are re-writing the ground rules to ensure that overall market size increases. A classic example is the introduction of Systematic Investment Plans with investments as low as Rs. 50 or Rs. 100 a month.The current macro-economic environment, despite concerns around rising inflation and expected slow down in the economic growth rate, presents a unique set of opportunities for fuelling the growth of the mutual fund industry.High cost of business in Tier I citiesThe high cost of doing business in Tier I metro cities, primarily due to high cost of real estate have forced corporate houses, especially multi nationals who have off shored their back office operations to India, to look at the economically more viable Tier II cities. This would eventually result in the creation of the income effect in these cities and towns. Higher income generally results in higher saving potential and these savings could then be channelised to mutual funds.Interest rate scenario in IndiaTraditionally, mutual funds were looked upon by retail investors primarily as an option to direct equity investing. However, in the wake of a correction in equity markets and the north bound movement in interest rates, fixed maturity plans offered by mutual funds, which are akin to fixed deposits have caught fancy with the retail investors.OpportunitiesThe assets under management for the mutual fund industry have crossed Rs. 3.5 trillion. And yet many say we are just getting started. It is this panache which is driving more and more global fund houses towards destination India. Experts argue that till the overall size of the market does not increase, with more and more fund houses biting into the same pie of urban investors and asking for an increased share of the same wallet, the entire mutual fund business in India may turn into a red ocean of bloody competition. Fund houses too are beginning to realise this and are re-writing the ground rules to ensure that overall market size increases. A classic example is the introduction of Systematic Investment Plans with investments as low as Rs. 50 or Rs. 100 a month.The current macro-economic environment, despite concerns around rising inflation and expected slowdown in the economic growth rate, presents a unique set of opportunities for fuelling the growth of the mutual fund industry. * High cost of business in Tier I citiesThe high cost of doing business in Tier I metro cities, primarily due to high cost of real estate have forced corporate houses, especially multi nationals who have off shored their back office operations to India, to look at the economically more viable Tier II cities. This would eventually result in the creation of the income effect in these cities and towns. Higher income generally results in higher saving potential and these savings could then be channelised to mutual funds. * Interest rate scenario in IndiaTraditionally, mutual funds were looked upon by retail investors primarily as an option to direct equity investing. However, in the wake of a correction in equity markets and the north bound movement in interest rates, fixed maturity plans offered by mutual funds, which are akin to fixed deposits have caught fancy with the retail investors. * Development of commodity exchangesThe relatively quick development of two commodity exchanges in India, the Multi Commodity Exchange of India Limited and the National Commodity and Derivatives Exchange Limited, may prove to be a blessing for the mutual fund industry. The two exchanges are clocking record turnovers in commodities like gold and silver and provide an advanced commodity trading platform for institutions and investors. A vigilant regulator in the form of the Forward Markets Commission keeps a very close watch on the commodity market thereby building investor confidence.Commodity funds which are quite popular in the mature markets may just be able to make a debut in India. The Summit takes a look at the state of preparedness of the industry and the regulator to introduce commodity funds in India. * The Real Estate boomWith the liberalisation of Foreign Direct Investment rules in real estate by the Reserve Bank of India, the sector has seen an influx of foreign funds which has lifted the real estate prices to dizzying heights. The traditionally closed construction sector is now in the public eye and this will lead to a more transparent real estate market.Real estate has always been one of the preferred investment avenues for the Indian investor. And what better way for the smaller investors to participate in this boom than to have a real estate mutual fund. However, a real estate mutual fund would come with its own set of challenges. SEBI on its part would be keen to ensure that all relevant regulations are in place before real estate mutual funds kick-off as this being a sensitive area any negative event could have a severe impact on investor confidence. The Summit would provide an insight on key areas such as valuation, declaration of net asset value and accounting, on which discussions have been initiated by the working committee on real estate mutual funds. * The opportunity to Go GlobalIt’s been a good year for India. Indians have made headlines globally from making big ticket international acquisitions to earning global awards for the most consistent fund performances. The India growth story was known to all; but now its time to make way for the global Indian. The Reserve Bank of India has also added the right ingredients to further spice it up for the mutual fund industry. Indian investors are now allowed to invest upto USD 100,000 abroad. Its time to go global! But opportunities always come with challenges. The steps have been initiated but there’s a long way to go. Fund managers having proven their mettle locally would be ready to take on further challenges. But the risks are manifold. The retail investor ultimately has to be convinced about the opportunities available in the more mature global markets and the time’s just right to make a beginning. With a strong regulatory framework, clear guidelines and the talent to back it up, the Indian mutual fund industry is in a position to cater to the new breed of investors who are keen to diversify their risks.Challenges * Growth versus Governance- A right mixThe Indian Mutual Fund industry has held its ground in the midst of adversities in the capital markets thanks to the strong regulatory framework in place. An increasing responsibility is being placed on the Trustees to ensure that the operations of the funds are managed to the full benefit of the unit holders. As the number of players in the market increases, competition may force fund houses to comply not only with the laid down regulations and concentrate more on growth but endeavor in creating excellence in governance as well. In this challenging environment, the debate of growth versus governance is surely set to assume greater significance. * Regulations- What more is needed'As the industry moves on from its nascency to adolescence, it is joint responsibility of the industry players, the regulators and also the investors to ensure that it further transits to maturity as smoothly as possible. A strong regulatory platform is a key challenge in any business environment, more so in the Indian context at this point on the growth curve of the industry. While we do have a strong regulatory platform in place, more can be done based on the experience of mature markets like the US and UK, where investor protection has assumed top priority. The industry is well governed with a spate of reactive regulations and its now time to introduce more proactive, growth enhancing regulations. * Administration and DistributionNo discussion on mutual funds can be complete without touching upon the aspect of distribution. A lot has been spoken about the need to increase penetration of mutual funds in Tier II and Tier III cities. Rural participation in mutual funds continues to be poor. Such poor penetration has much to do with lack of investor awareness, inefficiencies in fund transfer mechanisms, presence of safer substitutes and cost of establishing presence in smaller areas. Fund houses cannot fight this battle single handedly. They need adequate support in terms of banking infra structure, distribution services and technological solutions to ensure a sustainable cost-benefit model of growth. Even in terms of the transfer agency function, the choice of players was very limited which too sometimes places a constraint in terms of ensuring administered growth. However, with more players entering the business, watch out this space for more action. * Investor Education- A thrust on financial planningThe efforts taken by the industry and AMFI towards investor education are definitely showing results. The media is also making a fair share of its contribution. Today, we have news channels, running dedicated shows for mutual funds, wherein fundamentals of investing in mutual funds are explained and queries of investors are answered by experts. However, the fact remains that in our country mutual funds are sold rather than bought. And this trend has been observed uniformly across all classes of investors and for all kinds of products. This is where professional help is required. The economic boom in our country has led to the emergence of a very strong Small and Medium Enterprise (SME) sector. Banks and financial institutions are also vying for a stake in wooing this niche business segment. However, the focus of SMEs has primarily been in the manufacturing sector. The services sector could also be accredited with this status. This would help professionalise financial planning in our country as is the trend in mature markets like the USA. The Certified Financial Planner accreditation can now be acquired in India. With the right kind of assistance from the banking sector, we could have an army of entrepreneurs willing to take up financial planning as a very profitable business option and this could go a long way not only in ensuring professional education and guidance to the investors but also in improving the long term financial health of investors. * The technological backboneFund houses have introduced interesting technological innovations such as transacting through the internet, net asset value updates on mobile phones, unit balance alerts via SMS messages, transacting through ATM cards etc. However, these innovations currently cater to the already pampered urban class of investors. The internet revolution in our country is yet to penetrate to the grass root levels. The per capita usage of internet in our country is still very low compared not only to the developed countries but also as compared to our developing peers. Mobile telephony comparatively has grown exponentially. Herein lies another important challenge for the industry. It is very important to strike the right balance while choosing to invest in technological advancements. As mentioned earlier, the industry is now at a stage where to progress to the next level of growth, it needs more support from other sectors in the economy. A few fund houses with deep pockets may be able to make necessary investments in the required technology. But for the long term benefit of all the players in the industry, it is indeed necessary to join hands with other sectors of the economy such as banking and telecommunications. * Diminishing talent poolPrint media these days has dedicated space to capture resource movements between companies, especially in the financial services sector. The acute shortage of talented resources is slowly but surely showing its impact. The pool of talented people is diminishing and staff costs are soaring. The key challenge is to find a permanent solution to tide over this acute shortage. One possible solution could be for the industry through AMFI to tie up with universities and colleges to offer programmes dedicated to the financial services industry in general and the mutual fund industry in particular, which would cover various critical aspects of the financial services industry ranging from fund management, research, analysis, treasury, operations and accounting. Aspirants acquiring accreditation in these courses could then be directly channelised into the various subsets of the financial services industry. This could ensure a continuous steady supply of talented resources to the industry.What would these challenges lead to…' * Pressures on MarginsTo effectively tide over the challenges, fund houses will have to expand their cost budgets which may put pressure on margins in the short run. Reduced margins may have the effect of funds houses flexing their muscles to garner a higher market share of assets under management to enjoy the benefits of economies of scale. This will surely benefit the investors in the long run as they would be able to enjoy better service standards and more product differentiation. Increasing regulations may also bring about an increase in the cost of compliance. * Consolidation in the IndustryIncreasing challenges and growing competition may make it difficult for the smaller players to survive. With more and more new players keen on entering the market, a new wave of consolidation may spark of by way of mergers and acquisitions in the industry. * Innovation and product differentiation Global fund houses are set to make their presence felt in India in a big way. Some of these fund houses are known globally for their specialisation in structured products and offering an array of different choices to the investors. With competition hotting up in India and most fund houses offering the same bouquet of products to the investors, product differentiation could take centre stage going forward. Innovative distribution models and service standards would also be a key distinguishing factor amongst players. * Increasing trend on outsourcingWith the industry facing a shortage of talented resources, there is an increasing trend amongst players to outsource the non-core functions and utilise the limited available resources only for core functions to be performed in house. This is a norm in mature markets for global fund houses which may set a similar trend in our industry as well. Sensing this, more players have entered the fund accounting service provider market in the last one year. Having crossed the Rubicon and introducing the next generation products to the investors, funds house have to now roll up their sleeves and get back to the drawing board to find effective solutions to newly emerging challenges. These are interesting times for the industry. It is rightly said that Change is the only constant. The sea of changes in the financial and economic scenario in our country has brought with it a fresh wave of opportunities. These opportunities and challenges can only lead to the betterment of the investment community at large. The message to the investors is Happy Investing!! 3) Indian Insurance Sector The insurance industry in India has a big opportunity for national as well as foreign investors. As Indians are getting richer, the desire to save for retirement is growing. India ranks at number 11, in terms of ranking by premium volume in 2010, according to Swiss Re’s sigma study , “World insurance in 2010”. India has surpassed Spain to become the 11th largest insurance market in the world, according to the study. In the life insurance business itself, India has surpassed ten major markets in the last ten years. The total gross premium of 23 players in the non-life insurance market increased by 27 per cent in May 2011, from Rs 3,151.41 crore (US$ 710.73 million) in May 2010, according to the Insurance Regulatory and Development Authority (IRDA). The four Public Sector Units (PSUs), which account for about 59 per cent of the total general insurance industry, had their gross premium collections rise by 23 per cent to Rs 2,358.60 crore (US$ 531.9 million) in the same period. Fundamental functions of insurances and their implications for the economy.According to these findings some useful determinants were found, which are candidates for incorporation into our endogenous production function. * Premiums Premium income of insurance companies directly depicts the interest of the economy in insurance coverage, may be a fairly accurate measure for the payouts to clients and can roughly represent influx of capital into the insurers assets. Although in some cases insurance coverage is not voluntary (e.g. automobile insurance) and policy pricing may be subject to restrictions (e.g. Japan), most premiums are determined by actuarial theory, the companies pricing policy and supply and demand. * Insurance indemnificationThe amount of indemnification paid is a direct measure of the additional income of the policyholder and may reflect the volume of precautionary savings the customer dared to free in exchange for the insurance coverage. Or, to put it the other way, at the time of payment the indemnification represents the value of compulsory depreciation and an indicator for future investments to replace the lost value. Due to the ambiguity of this indicator in terms of what value it does represent, at what time point and when the payment takes effect and the lack of appropriate data, this indicator was skipped during the modeling considerations. * Total capital under insurance coverageThe sum of values covered by insurance is an adequate measure for the secured assets in the economy, but may not be an adequate determinant of the insurer’s beneficiary role. Differences in legal and accountancy rules, the problem of correct valuation of assets at a certain point in time and the question of accurate capital adequacy make this figure a blurry measurement of the possible influence of insurance services. Furthermore sufficient time series were not available. * Insurance assets Although facing the same problems in terms of capital adequacy like the above mentioned capital under coverage, the volume of insurance assets is an appropriate indicator for economic engagement and weight. As already utilized and shown by Catalan, Impavido and Musalem (2000), the amount of insurance assets is a valid determinant for the development of financial markets capitalization and value traded. * Bank assets/Insurance asset ratioAs an alternation of the above, the bank/insurance asset ratio, besides tracking an supposed “savings substitution”, could shed some additional light on whether bank assets or insurance assets are more valuable. But in contrast to discussions about whether banks or stock markets are better in facilitating growth37 , we argue that the differences in management performance may vary much more significantly within each sector from company to company and from each country-to-country than between the two sectors and hence no accurate prediction can be made. * Net position to GDP, Asset risk profileAs already described above, the value of both determinants for growth detection is not clear enough, due to their double-edged character. Furthermore several interlinked problems arise when adopting these to figures. Besides problems of calculating the investment risk, the measurement of risks is only meaningful when also quantifying possible earning which is not included in the net position to GDP variable. When incorporating the risk exposition into a growth model and making predictions about elasticity and significance, this would also anticipate, that a specific risk level is ideal for the economy and investments, which might be quite questionable to state. * Determinants of Legal System & RegulationDeterminants of legal origin, economic freedom and market regulation are often used when running growth regressions. As a banner-bearer we like to mention works by La Porta et al. (1996, 1997, 1999), Beck et al. (2003) and followers, who investigated various aspects of legal systems’ influence on finance and economic performance. After investigating the possible determinants of insurance engagement – for the first estimates – total premium income, and for a separated focus life and non-life premium figures will be used. As robustness indicators we will add the interest and inflation rate.Insurance and Economic GrowthProviding protection, insurers could affect economic growth through the channels of marginal productivity of capital, technological innovations and saving rate. Insurance companies indemnify the ones who suffer a loss and stabilize the financial position of individuals and firms. With possibility of transfer of different kinds of risks to insurance companies, risk adverse economic units are more induced to buy goods and services, especially those of higher values. In this way insurance sustains demand or consumption for goods and services which encourage production and employment and finally, economic growth. Firms exposed to various risks of their liability, property, illness and disability of their employees and life of key employees, have possibility of managing of those risks by transfer to insurance companies. This allows firms to concentrate their attention and resources on their core business. Therefore, they are more willing and able to take real investments that result in higher rate of economic growth. Additionally, entrepreneurs are encouraged to take not only those investments that encompassed present products and production processes, but also those that include technological innovation. Namely, being innovative presupposes the willingness to take the risk.Although insurance cannot change the risk attitude of economic units (risk aversion does not change with insurance) it plays a key role in freeing entrepreneurial spirit (CEA, 2006). Therefore, insurance helps entrepreneurs to take innovative and higher-return projects. Without mechanism for mutualisation, pooling and transferring risk which insurance companies provide, part of the economic activities would not take place and positive effects on social welfare would fail. In other words, by creating an environment of greater security, insurance fosters investment and innovation or economic growth. Insurance increases marginal productivity of capital also in a way that it makes no need for high liquid contingency funds of firms what results in more funds available for financing high-return projects. Without insurance coverage large contingency funds would be needed to protect firms against risk. It would be particularly hard for small and medium size firms whose access to financing in the case of adverse events is very limited. Increasing availability of funds could result from kind of insurance products by which insurance companies provide protection from credit risk to other financial intermediaries. In that way financial intermediaries are more willing to lend funds for financing real investments what encourage economic growth.Positive effect on economic growth through more efficient allocation of resources could be realized by relieving the burden of social welfare system. It is particularly important in the new demographic situation of prolongation of life expectancy, an increase in elderly people and a falling birth-rate while at the same time people expect to receive a high level of healthcare and pensions. It makes big pressure on social security system and could have negative effect on economic growth. But, private insurers could give their contribution in solving problem of social security system. They provide protection from the financial consequence of illness and injury, unemployment and retirement.Thus, insurance products such as life, health and payment protection insurance, can substitute for government security programs. In the process of making decision on underwriting risk insurance companies gather relevant information on risk factor and assess risk. Insurers’ risk assessment is reflected in price and policy conditions. Providing insurance to firms about which they have special knowledge insurers can signal their informed status. In this way, they offer firms an indicator of their risk level. This influences their decisions on investment projects and contributes to more efficiently allocation of their resources.The function of providing insurance coverage could affect economic growth through saving rate channel in mixed way. On the one side, insurance protection contributes to greater security what makes individuals and firms less careful. As a consequence, they could lower their precautionary savings. On the other side, by offering various life insurance products that combine risk protection and saving benefits, insurance companies encourage long-term savings. Besides providing insurance, insurance companies could affect economic growth by function of resources accumulation and their allocation with managing various financial risks. | 4) Stock Markets The Indian equity markets are among the most deep and active markets across the globe. The country's market capitalization (cap)-to-GDP ratio, an indicator of the total listed wealth of a country as a percentage of its GDP, reached a record level of 132.47 per cent in financial year 2010-11 from 23.28 per cent in 2002-03, according to a report by SMC Global Securities. The country's market capitalisation as a proportion of the world market cap was 2.8 per cent as on June 28, 2011. Stock market activity As measures of stock market activity, we use two variables: market capitalization and value traded. For both variables, we need data on domestic and international activity. While there are several sources on domestic stock market capitalization and value traded that comprise a large number of countries, there is no comprehensive database on the extent of the internationalization of stock market activities. Therefore, we need to combine a number of sources. On domestic activity, the data on market capitalization and value traded on the major stock exchanges come from the Standard & Poor’s Emerging Markets Database and Global Stock Markets Factbook and cover the period 1975-2004 for 117 countries. On international activity, we use data from Claessens, Klingebiel, and Schmukler (2006), who collect firm-level information from several sources and aggregate it to obtain country-level variables. Here, we only present a brief description of these data. In terms of trading in international markets, the data come from the Bank of New York and cover trading in ADRs for the period 1989-2000. Data from the Bank of New York, Euromoney, the London Stock Exchange (LSE), NASDAQ, and the New York Stock Exchange (NYSE) are used to identify the “international” firms in each country. International firms are those that are listed in international markets, directly or via DRs, or have raised capital in international equity markets. This classification is used to determine the market capitalization of all international firms in each country. We use six variables for our analysis, two for the development of local stock markets, two for the internationalization of stock exchange activities, and two for the relative degree of internationalization. The first two are: market capitalization over gross domestic product (GDP) and value traded domestically over GDP. The next two are: market capitalization of international firms over GDP and value traded abroad over GDP. The last two are: market capitalization of international firms over total domestic market capitalization and value traded abroad over value traded domestically. Financial Services - Road Ahead Demand for financial services in India is taking off. Noteworthy is the fact that International financial institutions are playing an increasing role in the expansion of India’s large corporations. Great opportunity lies in the SME segment, which remains largely untapped. On the retail side, India already has more middle-class people on a purchasing power parity basis than the entire population of the US, and a consumer credit market that is rising by more than 40 per cent per annum. The sector has huge growth potential, and with government considering steps to liberalize it further, the sector can be one of the most significant ones for the growth of the Indian economy. Bibliography * Financial services – M Y Khan – fourth edition – McGraw-hill companies * Indian financial system – Bharati V. Pathak – Pearson education