Module 1: Banking :- Overview of the BFSI domain in India - Role &

importance of banks in an economy

MODULE I
BANKING

Banking, Financial Services and Insurance (BFSI)

Banking, Financial Services and Insurance (BFSI) is set to grow exponentially in

India due to the rising per capita income, introduction of new products, innovation
in technology, expanding distribution, networking and increasing customer
awareness of financial products. BFSI Industry has seen bold reforms in the last 15
years and will continue to be a top priority focus industry for India’s economic
development based on inclusive growth.

The Banking, Financial services, and Insurance (BFSI) sector is an industry term
used to define companies that provide a range of such financial products/services.
Those companies who provide product mix of financial products or services are
termed as Banking, Financial services and Insurance (BFSI).Their services include
core banking, retail, private, corporate, investment, credit /debit cards and also
stock-broking, payment gateways, mutual funds, insurance covers etc. 

Banking, financial services and insurance (BFSI) is an industry term for

companies that provide a range of such financial products or services. This
includes universal banks that provide a range of financial services or companies
that operate in one or more of these financial sectors. BFSI comprises commercial
banks, insurance companies, non-banking financial companies, cooperatives,
pensions funds, mutual funds and other smaller financial entities.
The Banking part of BFSI may include core banking, retail, private, corporate,
investment and cards. Financial services may include stock-broking, payment
gateways, mutual funds. Insurance covers both life insurance and general
insurance.
Its potential for growth is especially stronger in developing nation like India, as it
is one of the fastest growing economies in the world. Core banking, retail, private,
corporate, investment, etc are various kinds of banking services available under
this space.

Indian economy's growth

According to a report by National Skill Development Corporation (NSDC) for

banking, financial services and insurance industry, India is one of the few countries
in recent times to have a backing of strong productivity gains and progressive
integration into the global economy.
It also plays a substantial role in promoting the long term growth
of the Indian economy, led by the major segments of this industry, viz. banking,
insurance and mutual funds. Moreover, the report also stated that the banking and
insurance sector contributes more than 6 per cent towards India's GDP during the
year ended 2008.
BFSI sector in India is valued at Rs. 81 trillion and is likely to become fifth largest
in the world by year 2020 and third largest by year 2025
 
However BFSI sector is facing challenges also. One of the most challenges is of
demand and supply and services are not reaching to the certain fraction of the
population which is rural and doesn’t have access to banking thus hindering the
growth of BFSI sector. 
 
Report from NABARD says that out of 46 million farmer households only 28 %
are getting loans for farming sector and rest are not getting access even and this
poor population is dependent on traditional barrowings from bhomidars and
unorganized sector which exploits them at their maximum. 
 
Being an important sector that can further accelerate the growth of the country, the
manpower requirement in the BFSI industry has risen to fuel that progress, with
over 8.4 million individuals projected to be employed in the next couple of years.
The NSDC also reported that the projected human resource requirement between
2008 and 2022 is estimated to reach over 4.2 million.
RBI has taken many steps to rectify and restore reach in unbanked areas. This
sector is maneuvering it’s strategy and is trying to reach masses with the help of
technology so that consumer are benefited. Usage of mobile banking is seen as
transparency and faster delivery to consumers. 

 
Recent Banking Laws amendment bill which was passed in parliament is likely to
change the overall BFSI sector and since RBI is issuing new license to newcomers
in banking, more banks will be opening shortly and hopefully each bank will open
5000 vacancies.
 
Report from Dun and Bradstreet ( D & B ) says that Indian economy is likely to get
a steady growth trajectory with reforms coming in future and with the likelihood of
government changing, new face of finance minister will have to perform. 
 
With the help of investor awareness environment and strict regulations and plenty
of positive measures, unlimited opportunities will come on way to BFSI sector and
now with just providing a vanilla banking services the entire BFSI sector will
transform to ‘anytime anywhere banking’.

Opportunities and Challenges:

 BFSI industry is set to grow significantly in the coming years due to India’s
economic expansion and growing awareness among the population of these
financial products / services
 New and wider products will provide immense opportunities to develop
niche areas
 The industry has adopted IT as an integral part of business strategy, where
RSM is well positioned to provide various services on such IT platforms
 High supervision by regulators will require constant vigilance and need to
adopt measures to mitigate risks based on various control measures
including ‘Risk Based Audits’ (RBA) as provided by:
o The Reserve Bank of India in its RBA guidelines to banks
o The Insurance Regulatory authority of India (IRDA) to the insurance
industry
o Securities Exchange Board of India (SEBI) for the mutual fund
industry
BFSI is an acronym for Banking, Financial Services and Insurance and popular as
an industry term for companies that provide a range of such products/services and
is commonly used by IT/ITES/BPO companies and technical/professional services
firms that manage data processing, application testing and software development
activities in this domain.  Banking may include core banking, retail, private,
corporate, investment, cards and the like. Financial Services may include stock-
broking, payment gateways, mutual funds etc. Insurance covers both life and non-
life.

Technology is allowing the BFSI industry to reach out to new markets and offer
novel products and services through efficient delivery channels. On the other hand,
data security and availability of information updates is critical to the banking and
insurance business, mandating high network uptime, rapid fault detection and
quick problem resolution. The banking and financial industry is also challenged by
the large number of existing legacy systems in its infrastructure. The vertical thus
 has a unique set of requirements and challenges and this section discusses them in
detail.

Some Segments of BFSI Industry:

 Cards
 Banking Technology
 Depository/Registry
 Custody
 Reconciliations
 Retail Banking
 Investment Banking
 Risk and Compliance
 Surveillance
 Corporate Banking
 Wealth Management
 Exchanges/Trading/Broker-Dealer
 Clearing/CCP
 Life Insurance
 General Insurance
 Reinsurance

Overview of Banking Industry

A bank is a financial institution that provides banking and other financial services

to their customers. Banks are a subset of the financial services industry and play an
important role in the global economies. They are a key player in stimulating
economic growth. Banking is an important undertaking. The movement of capital
handled by banks allows economies to grow and prosper. Businesses and
governments need money to operate, and banks act as intermediaries between the
suppliers of funds and users of funds.
Banking Basics: The Law of Banking

Banking law is based on a contractual agreement between the bank and customer.
The customer is any entity for which the bank agrees to conduct an account or
business. Given below are the generally accepted rights and obligations:

• The bank account balance is the financial position between the bank and the
customer: when the account is in credit, the bank owes the balance to the customer;
when the account is overdrawn, the customer owes the balance to the bank.
• The bank agrees to pay the customer's cheques up to the amount standing to the
credit of the customer's account, plus any agreed overdraft limit.
• The bank may not pay from the customer's account without a mandate from the
customer, example cheques drawn by the customer.
• The bank agrees to promptly collect the cheques deposited to the customer's
account as the customer's agent, and to credit the proceeds to the customer's
account.
• The bank has a right to combine the customer's accounts, since each account is
just an aspect of the same credit relationship.
• The bank has a lien on cheques deposited to the customer's account, to the extent
that the customer is indebted to the bank.
• The bank must not disclose details of transactions through the customer's account
—unless the customer consents, there is a public duty to disclose, the bank's
interests require it, or the law demands it.
 • The bank must not close a customer's account without reasonable notice, since
cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between

the customer and the bank. The statutes and regulations in force within a particular
jurisdiction may also modify the above terms and/or create new rights, obligations
or limitations relevant to the bank-customer relationship.

Types of Banks: Commercial & Investment Banking

The banking industry can be divided into two categories ‘commercial-banking’ and
‘investment-banking’. Commercial banks play a key role in the entire financial
system by mobilizing deposits from households spread across the nation and
making these funds available for investment, either by lending or buying securities.
Investment Banks on the other hand, raise capital (cash/money) for companies,
which companies need in order to grow and expand their businesses. Investment
banks sell securities to public investors in the form of stocks or bonds.

Distinctive types of banks are evolving to cater to the various business demands,

social needs and global complexities. These different banking institutions conduct
their operations in a different manner. However, on the basis of their functions,
clientele served and products or services offered, we can classify banks as follows:

1. Central Banks
2. Commercial Banks
3. Co-Operative Banks
4. Local Area Banks (LAB)
5. Specialized Banks
6. Small Finance Banks
7. Payment Banks

1. Central Bank: RBI is the central bank in India that governs and regulates the
other banks working throughout the country. Central Bank guides the other
banks, issue currency, implement the monetary policies and supervise the
financial system. It is also called the banker’s bank.

2. Commercial Bank

Commercial banks were regulated under the Banking Regulation Act,1949 to

operate on a commercial basis and earn a profit. These banks have a unified
structure and can be run by any government or private entity and tend to all sectors
whether rural or urban.

Types of Commercial Bank

 Public Sector Banks

 Private Sector Banks
 Foreign Banks
 Regional Rural Banks (RRB)

Public Sector Banks

In public sector banks, Government or the RBI are the major stake owners. These
banks are nationalized and a large part of the Indian banking system revolved
around this sector. These nationalized banks cover about 75 percent of the total
banking business in India. Indian government holds the majority of its stakes in
these banks. The largest bank in the public sector is SBI (State Bank of India).
India has now 12 nationalized banks.

Private Sector Bank

In these banks, private organization or the group of people owns the stakes. These
banks also have to follow the rules and regulations set by RBI.

Foreign Sector Banks

Some of the foreign banks have branches In India and headquarters abroad. These
types of banks are included in this sector. These banks follow the rules and
regulations of their country’s central bank as well as RBI. The number of foreign
banks in India is more than 40.

Regional Rural Banks (RRB)

These banks work for the agriculture and rural sectors. These Banks were
established in 1975 and registered under Regional Rural Bank Act, 1976. The
stakes of these banks are owned by the Central bank (50%), State Government
(15%), and Commercial Bank (35%).

3. Co-operative Banks

All those banks which run by an elected managing committee working on no-gain
no-loss and are registered under the Co-operative Societies Act 1912, are known as
Co-operative banks.

These banks finance agricultural activities like farming, hatcheries, etc. in rural
areas and small businesses, self-employment, and industries in non-rural areas.

These banks are divided into three types. Those are:

A. Urban Co-operative Banks

The banks located in semi-urban and urban, which finance small businesses.

B. State Co-operative Banks

The bank is an association of central co-operative bank and acts as a protector of

the collaborative banking system in the state. Its funds are gained from the
overdrafts, social capital, loans, etc.
 C. Primary Agricultural Credit Society (PACS)

A Primary Agricultural Credit Society (PACS) is a basic unit and smallest co-
operative credit institutions, which works on the grassroots level (gram panchayat
and village level).

4. Local Area Banks (LAB)

These banks were introduced in India in 1996 and registered under the Companies
Act 1956. These are organized by the private sector and there are only 4 local area
banks in India (South India).

List of Local Area Banks

1. Coastal Local Area Bank Ltd.

2. Capital Local Area Bank Ltd.
3. Krishna Bhima Samruddhi Local Area Bank Ltd.
4. Subhadra Local Area Bank Ltd.

5. Specialized Banks

These banks are established for a specific purpose only. These are:

1. Small Industries Development Bank of India (SIDBI)- These banks are set
up to provide loan facilities to small-scale industries and businesses.  This bank is
also responsible for providing modern technology equipment to small-scale
industries.
2. EXIM Bank (Export And Import Bank)- EXIM bank is responsible for
providing loans or any financial assistance with the export or import of the goods. 
3. National Bank of Agricultural and Rural Development (NABARD) – This
bank is responsible for providing financial assistance to the rural, Handicraft,
village, and Agricultural development.
 6. Small Finance Banks

These banks provide loans and financial support to the small farmers, Micro
industries, and other unorganized sectors of society. RBI Governs these Banks
also.

1. Examples: AU Small Finance Bank

2. Capital Small Finance Bank
3. Esaf Small Finance Bank
4. Equitas Small Finance Bank

Payments Banks

The payment banks are conceptualized by the RBI but customers of these banks

cannot issue loans or credit cards and the deposit limit is Rs.2 lacs only. Customers
can get the facilities like online banking, ATMs, Debit cards, etc.

List of Payment Banks

1. Airtel Payments Bank 

2. India Post Payments Bank
3. Jio Payments Banks
4. Paytm Payments Bank
5. NSDL Payments Bank

Customer Profiles
Banks are large and complex organizations. Their clients range from individuals
and institutions, all the way up to the governments and central banks of entire
countries. This industry builds and maintains financial relationships with variety of
customers ranging from individuals to governments to supply financial products
and services. Given below are major classification of banking customers:

• Individual Consumers
• Small Businesses & Traders
• Farmers & Rural Consumers
• Corporates and Corporations
• Banks – Domestic & International
• Governments
• Institutional Investors
• Non-Profit Organizations
• International Clients

Banking Products & Services

The Banking sector offers several facilities to their customers including

safeguarding their money and valuables and providing them with numerous types
of credit loans to meet their many needs like home loans, consumer loans, personal
loans etc. Bank Products means any facilities or services related to cash
 management, including treasury, depository, overdraft, credit or debit card,
purchase card, electronic funds transfer and other cash management arrangements.
Banking services are Any activities involved in accepting and safeguarding money
owned by other individuals and entities, and then lending out this money in order
to earn a profit. Banks also provide additional services like credit, and payment
services, such as checking accounts, money orders, and cashier's cheques.

Difference between banking products and services?

Banking services use banking products and/or products and services of

otherbanks. Banking Product would be a tangible or an intangible in nature Eg:
In Banking, A loan would be a product. In Banking Service: It is part of
a product, (may be sold for some consideration or may not) that is Intangible.

The different products in a bank can be broadly classified into:

 Retail Banking.
 Trade Finance.
 Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level
while the wholesale banking operations, which cover treasury operations, are at the
head office or a designated branch.

Retail Banking:

 Deposits
 Loans, Cash Credit and Overdraft
 Negotiating for Loans and advances
 Remittances
 Book-Keeping (maintaining all accounting records)
 Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

 Issuing and confirming of letter of credit.

 Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and other securities.
 Treasury Operations:

 Buying and selling of bullion, Foreign exchange.

 Acquiring, holding, underwriting and dealing in shares, debentures, etc.
 Purchasing and selling of bonds and securities on behalf of constituents.

The banks can also act as an agent of the Government or local authority. They
insure, guarantee, underwrite, participate in managing and carrying out issue of
shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole
lot of other services like investment counseling for individuals, short-term funds
management and portfolio management for individuals and companies. It
undertakes the inward and outward remittances with reference to foreign exchange
and collection of varied types for the Government.

The banks also offer investment and insurance products. The key operational
activities are listed below:

1. Acceptance of Deposits
2. Lending of Funds
3. Clearing of Cheques
4. Remittance of Funds
5. Lockers & Safe Deposits
6. Bill Payment Services
7. Online Banking
8. Credit & Debit Cards
9. Overseas Banking Services
10. Wealth Management
11. Investment Banking
12. Social Objectives
Functions of Banking Industry

The banking industry is growing rapidly.. Bank provides various services and offer
many products. The following discussion explains key functions of the bank:

Provide security to the savings of customers by safeguarding it

Offering interest on the deposits kept with it
Control the supply of money and credit
Arrange funds to the parties who need them by borrowing from parties who have
surplus
Encourage public confidence in the working of the financial system
Increase savings speedily and efficiently
Avoid focus of financial powers in the hands of a few individuals and
institutions
Set equal norms and conditions to all types of customers

Dynamic Regulatory Environment

Banks operating in most of the countries are exposed to various stringent
regulations. Most governments enforce rules and procedures to govern their
operations and service offerings, and the manner in which they grow and expand
their facilities to better serve the public. A banker works within the financial
system to provide loans, accept deposits, and provide other services to their
customers. They must do so within a climate of extensive regulation, designed
primarily to protect the public interests. The main reasons why the banks are
heavily regulated are as follows:

• To protect the safety of the public's savings.

• To control the supply of money and credit in order to achieve a nation's broad
economic goal.
• To ensure equal opportunity and fairness in the public's access to credit and other
vital financial services.
• To promote public confidence in the financial system, so that savings are made
speedily and efficiently.
• To avoid concentrations of financial power in the hands of a few individuals and
institutions.
• Provide the Government with credit, tax revenues and other services.
• To help sectors of the economy that they have special credit needs for example
Housing, small business and agricultural loans etc.

Current Industry Trends

As a variety of models for cooperation and integration among finance industries

have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms are fast diminishing. In spite of all these
developments, banks continue to maintain and perform their primary role—
accepting deposits and lending funds from these deposits. During the recent times,
technological advances has enabled banks to extend their reach globally, and there
is no longer a need for customers to visit bank’s branches for every transaction, as
most of the transactions can happen online.

The growth in cross-border activities has also increased the demand for banks that
can provide various services across borders to different nationalities. Despite these
advances in cross-border activities, the banking industry is nowhere near as
globalized as some other industries. There is no doubt that “Technology” is going
to be catalyst in that growth, creating huge opportunities for professionals with
good understanding of banking industry domain.

Overview of Insurance Sector

Insurance is the equitable transfer of the risk of a loss, from one entity to another in
exchange for payment (known as insurance premium). It is a form of risk
management primarily used to hedge against the risk of a contingent, uncertain
loss. Insurance Industry manages the risk to people and businesses from the
dangers of their current circumstances.

Insurance is a contract between two parties, the insurer or the insurance company
and the insured or the person seeking insurance, whereby the insurer agrees to
hedge the risk of the insured against some specified future events or losses, in
return for a regular payment from the insured as premium. Insurance policy helps
in not only mitigating risks but also provides a financial cushion against adverse
financial burdens suffered. Insurance policies are a safeguard against the
uncertainties of life.

An insurer, or insurance carrier, is a company selling the insurance; the insured, or

policyholder, is the person or entity buying the insurance policy. The amount to be
charged for a certain amount of insurance coverage is called the premium. The
insurance company has to deal with the “Risk Management”, the practice of
appraising and controlling risk.
The transaction involves the insured assuming a guaranteed and known relatively
small loss in the form of payment to the insurer in exchange for the insurer's
promise to compensate (indemnify) the insured in the case of a financial (personal)
loss. The insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be financially
compensated.

How Insurance Works:

An insurer, or insurance carrier, is a company selling the insurance; the insured, or

policyholder, is the person or entity buying the insurance policy. The amount to be
charged for a certain amount of insurance coverage is called the premium. The
insurance company has to deal with the “Risk Management”, the practice of
appraising and controlling risk.

The transaction involves the insured assuming a guaranteed and known relatively
small loss in the form of payment to the insurer in exchange for the insurer's
promise to compensate (indemnify) the insured in the case of a financial (personal)
loss. The insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be financially
compensated.

Types of Insurance

Any risk that can be identified and quantified can potentially be insured. Specific
kinds of risk that may give rise to claims are known as perils. An insurance policy
will set out in detail which perils are covered by the policy and which is excluded.
Given below is a non-exhaustive list of the many different types of insurance that
exists in today’s world.

Auto Insurance/ Vehicle Insurance:

Auto insurance protects the policyholder against financial loss in the event of an
incident involving a vehicle they own, such as in a traffic collision. Any financial
loss arising due to accident of the vehicle owned by the policyholder is covered
under Vehicle Insurance policy. In some comprehensive policies the expenses on
medicines for treating injuries and any other medical expenses are also covered.
Coverage typically includes the damage to or theft of the car and legal
responsibility to others for bodily injury or property damage. Some policies may
cover the cost of treating injuries, rehabilitation and sometimes lost wages and
funeral expenses.

Gap Insurance:

Gap insurance covers the excess amount on your auto loan in an instance where
your insurance company does not cover the entire loan. Gap insurance is typically
offered by your finance company when you first purchase your vehicle.

Health insurance and Dental Insurance:

Health insurance covers various types of insurance related to health. Health

insurance is insurance against loss by illness or bodily injury. It provides coverage
for medicine, visits to the doctor or emergency room, hospital stays and other
medical expenses. Dental insurance, like medical insurance protects policyholders
for dental costs. In the US and Canada, dental insurance is often part of an
employer's benefits package, along with health insurance.

Accident, Sickness and Unemployment Insurance:

Workers' compensation, or employers' liability insurance, is compulsory in some

countries. Disability insurance policies provide financial support in the event of the
policyholder becoming unable to work because of disabling illness or injury. It
provides monthly support to help pay such obligations as mortgage loans and
credit cards. Short-term and long-term disability policies are available to
individuals, but considering the expense, long-term policies are generally obtained
only by those with at least six-figure incomes, such as doctors, lawyers, etc.

Casualty Insurance:

Casualty insurance insures against accidents, not necessarily tied to any specific
property. It is a broad spectrum of insurance that a number of other types of
insurance could be classified, such as auto, workers compensation, and some
liability insurances. Crime insurance is a form of casualty insurance that covers the
policyholder against losses arising from the criminal acts of third parties. Political
risk insurance is a form of casualty insurance that can be taken out by businesses
with operations in countries in which there is a risk that revolution or other
political conditions could result in a loss.

Life Insurance:

Life insurance is an agreement between insurer and policyholder that guarantees

payment of a stated amount of money and benefit either at the end of the policy or
at the death of the policyholder. Human life is subject to risks of death and
disability due to natural and accidental causes. When human life is lost or a person
is disabled permanently or temporarily, there is a loss of income to the household.
Life insurance provides a definite amount of money to the dependents of the
insured in case the insured dies during his active income earning period or
becomes disabled on account of an accident causing loss in his income earnings.
Life insurance provides a monetary benefit to a decedent's family or other
designated beneficiary, and may specifically provide for income to an insured
person's family, burial, funeral and other final expenses. Life insurance policies
often allow the option of having the proceeds paid to the beneficiary either in a
lump sum cash payment or an annuity.

Property Insurance:

Any financial loss to the property due to fire, theft, burglary or due to any other
natural calamity like flood, earthquake etc. are covered under Property Insurance
policy. This may include specialized forms of insurance such as fire insurance,
flood insurance, earthquake insurance, home insurance, inland marine insurance or
boiler insurance. The term property insurance may, like casualty insurance, be used
as a broad category of various subtypes of insurance. Home insurance, also
commonly called hazard insurance or homeowners insurance (often abbreviated in
the real estate industry as HOI), provides coverage for damage or destruction of the
policyholder's home.

Liability Insurance:
Liability insurance is a very broad superset that covers legal claims against the
insured. Many types of insurance include an aspect of liability coverage. The
protection offered by a liability insurance policy is twofold: a legal defense in the
event of a lawsuit commenced against the policyholder and indemnification
(payment on behalf of the insured) with respect to a settlement or court verdict.
Directors and officers liability insurance (D&O) protects an organization (usually a
corporation) from costs associated with litigation resulting from errors made by
directors and officers for which they are liable. Professional liability insurance,
also called professional indemnity insurance (PI), protects insured professionals
such as architectural corporations and medical practitioners against potential
negligence claims made by their patients/clients. Professional liability insurance
may take on different names depending on the profession. For example,
professional liability insurance in reference to the medical profession may be
called medical malpractice insurance.

Credit Insurance:

Credit insurance repays some or all of a loan when certain circumstances arise to
the borrower such as unemployment, disability, or death. Mortgage insurance
insures the lender against default by the borrower. Mortgage insurance is a form of
credit insurance, although the name "credit insurance" more often is used to refer
to policies that cover other kinds of debt. Credit insurance provides a business with
protection against the failure of a customer to pay their trade credit debts. This can
arise as a result of a customer becoming insolvent or because your customer fails
to pay within the agreed credit period. Credit insurance can reduce the unnecessary
cost of bad debt and protect the hard-earned success.

Travel Insurance:

Travel insurance is an insurance cover taken by those who travel abroad, which
covers certain losses such as medical expenses, loss of personal belongings, travel
delay, and personal liabilities. Travel insurance is the cover against risks during
domestic or international travel. A standard travel policy covers death, personal
accident, medical expenses, repatriation, loss or delay of checked baggage,
passport loss and third party liability.
Reinsurance:

Reinsurance is a type of insurance purchased by insurance companies or self-

insured employers to protect against unexpected losses. Financial reinsurance is a
form of reinsurance that is primarily used for capital management rather than to
transfer insurance risks

How money is made in Insurance Business:

The major income sources for Insurance Company are Earned Premium and
Investment Income. The expenses are Incurred Loss/Claims and Underwriting and
Other Expenses.

 Earned premium, a source of income, is the total of all the premium payments
received by an insurer for the current coverage period. Premiums are not
considered "earned" until the policy period they cover is over. Investment income
is the residual income generated as a result of investing premiums in the capital
markets. Investment income also includes annuity considerations and asset
earnings.

Incurred loss is the sum of all claims paid, adjusted by the change in claims reserve
and related claim expenses for the same accounting period. Underwriting expenses
include all the costs associated with a policy, including commissions and the
portion of administrative, general, and other expenses attributable to underwriting.
Clubbed with other expenses the profit for the Insurance company is calculated by
subtracting from the total revenue.

Financial Institutions

What is a financial Institution? 

A financial institution is an institution that provides financial services for its clients
or members. Probably the most important financial service provided by financial
institutions is acting as financial intermediaries. A bank is a financial intermediary
for the safeguarding, transferring, exchanging, or lending of money. The
government to safeguard depositor’s money generally heavily regulates most
financial institutions. 

What are Financial Intermediaries? 

Funds flow from lenders to borrowers indirectly through financial intermediaries,

such as banks, or directly through financial markets, such as the New York Stock
Exchange. If you get a loan from a bank the flow of funds to you as a loan is
known as indirect finance. The flow is indirect because the funds that the bank
lends you came from people who have put money in checking or savings deposits
in the bank. Hence, the bank is not lending its own funds directly to you. On the
other hand, if you buy stock that a firm has just issued, the flow of funds is direct
finance because the funds are flowing directly from you to the firm. 

Types of Financial Institutions: 

There are two primary types of financial institutions. 

Depository Intermediaries are those that get funds from the public and use them
to finance their business. These are deposit-taking institutions that accept and
manage deposits and make loans, including banks. Depository intermediaries
receive deposits from customers and use the money to run their businesses. These
institutions may have other sources of income, but the bread and butter of their
business is handling deposits, paying interest on them, and lending money based
on those deposits. 

Non-depository Intermediaries are those that do not take or hold deposits. They

earn their money selling specific services or policies. Examples are building
societies, credit unions, trust companies, mortgage loan companies and other
contractual institutions like insurance companies, pension funds, investment
institutes, investment banks, underwriters and brokerage firms. As the name
suggests, non-depository intermediaries do not take deposits. Instead, they perform
other financial services and collect fees for them as their primary means of
business. In many cases, these institutions are private companies. Although the
government may regulate them, they are usually not backed or protected by the
government. 
Distinction between Depository and Non-Depository: 

A wide range of financial services is available from both depository and non-
depository intermediaries. Most of the non-depository institutions are private
companies earning money by performing specific services. You do not make
deposits, earn interest, or have checking or savings accounts with them. Non-
depository institutions are a part of the financial world and help move money
through the economy. However, they are not part of the banking system and may
not really be considered to be in the business of banking. 

Financial Markets

A financial market is a market in which people and entities can trade financial
securities, commodities, and other financial assets at prices that reflect supply and
demand. Financial markets are places or channels for buying and selling stocks,
bonds, and other securities.

Securities include stocks and bonds, and commodities include precious metals or
agricultural goods. Markets work by placing many interested buyers and sellers,
including households, firms, and government agencies, in one "place", thus making
it easier for them to find each other. Traditionally dealers who would meet face-to-
face in the physical markets traded stocks and bonds. Today, most securities
trading takes place electronically between dealers linked by computers and is
referred to as “over-the-counter” trading. 

Financial markets, from the name itself, are a type of marketplace that provides an
avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange,
and derivatives. Often, they are called by different names, including “Wall Street”
and “capital market,” but all of them still mean one and the same thing. Simply
put, businesses and investors can go to financial markets to raise money to grow
their business and to make more money, respectively.

Types of Financial Markets

There are so many financial markets, and every country is home to at least one,
although they vary in size. Some are small while some others are internationally
known, such as the New York Stock Exchange (NYSE)  that trades trillions of
dollars on a daily basis. Here are some types of financial markets.

1. Stock market

The stock market trades shares of ownership of public companies. Each share
comes with a price, and investors make money with the stocks when they perform
well in the market. It is easy to buy stocks. The real challenge is in choosing the
right stocks that will earn money for the investor.

2. Bond market

The bond market offers opportunities for companies and the government to secure
money to finance a project or investment. In a bond market, investors buy bonds
from a company, and the company returns the amount of the bonds within an
agreed period, plus interest.

3. Commodities market

The commodities market is where traders and investors buy and sell natural
resources or commodities such as corn, oil, meat, and gold. A specific market is
created for such resources because their price is unpredictable. There is
a commodities futures market wherein the price of items that are to be delivered at
a given future time is already identified and sealed today.

4. Derivatives market

Such a market involves derivatives or contracts whose value is based on the market
value of the asset being traded. The futures mentioned above in the commodities
market is an example of a derivative.

 
Functions of the Markets

The role of financial markets in the success and strength of an economy cannot be
underestimated. Here are four important functions of financial markets:

1. Puts savings into more productive use

As mentioned in the example above, a savings account that has money in it should
not just let that money sit in the vault. Thus, financial markets like banks open it up
to individuals and companies that need a home loan, student loan, or business loan.

2. Determines the price of securities

Investors aim to make profits from their securities. However, unlike goods and
services whose price is determined by the law of supply and demand, prices of
securities are determined by financial markets.

3. Makes financial assets liquid

Buyers and sellers can decide to trade their securities anytime. They can use
financial markets to sell their securities or make investments as they desire.

4. Lowers the cost of transactions

In financial markets, various types of information regarding securities can be

acquired without the need to spend.

Importance of Financial Markets

There are many things that financial markets make possible, including the
following:
  Financial markets provide a place where participants like investors and
debtors, regardless of their size, will receive fair and proper treatment.
 They provide individuals, companies, and government organizations with
access to capital.
 Financial markets help lower the unemployment rate because of the many
job opportunities it offers

Financial markets facilitate: 

 The raising of capital (in the capital markets)

 The transfer of risk (in the derivatives markets)
 Price discovery
 Global transactions with integration of financial markets
 The transfer of liquidity (in the money markets)
 International trade (in the currency markets) 

How the Financial System Works? 

The financial system matches depositors and borrowers broadly by using two
channels; first being the banks & other financial intermediaries and the second
being the financial markets. These two channels are different because of the way
the funds flow from depositors, or lenders, to borrowers and by the financial
institutions involved. 

Both Savers (Depositors) and borrowers can be households, firms, or governments,

both domestic and foreign. Savers receive their returns in various forms, including
dividend payments on stock, coupon payments on bonds, and interest payments on
loans. Financial markets facilitate the buying and selling of financial assets and
maintain liquidity in the market when depositors or savers want to have their
money back.

Key Services of the Financial System

Effective Payment System: 

One of the biggest services provided by financial system is the effective payment
system. Financial systems make is possible in any economy the usage and
availability of money for its various purposes. The efficiency of any financial
system is the ability of its institutions (banks, trust companies, credit unions, and
so on) helping billions of exchanges to happen amongst millions of people
participating in the financial system. The financial system helps the process of
exchange by making it easier to exchange goods and services by enabling
consumers to purchase goods and services using money that the system helps to
provide and circulate. 

Secondly effective payment system enables the usage of negotiable instruments

like cheques or promissory notes. In an economy with only cash, all transactions
have to be made in cash, which is not only burdensome but also risky. Financial
institutions and a financial system overcome the problems and risks of dealing in
cash. Cheques can be used to make many transactions, particularly larger ones,
easier and safer. 

Intermediary to Investors and Borrowers: 

In addition to providing an effective payments system, the financial system acts as

an intermediary, linking savers and borrowers and enabling purchasing power to be
transferred from one group to another. Financial intermediaries facilitate this
process by raising funds from depositors and lending the same funds to borrowers.
Commercial banks play a key role in the financial system by taking in deposits
from households and firms and investing most of those deposits, either by making
loans to households and firms or by buying securities, such as government bonds
or securitized loans. 

Sharing of Economic & Financial Risk: 

We know that the value of financial assets change over period based on a number
of factors. Some factors could be interest earned or expanded, inflation, growth of
economy, price in the share market, demand and supply ratio etc. Risk is the
chance that the value of financial assets will change relative to your expectation or
your current value. The financial system makes it possible for individual depositors
and borrowers to share the risk. 
Diversification: 

Most individual investors want to have a steady return on their assets rather than
erratic swings between high and low earnings. One way to improve the chances of
a steady return is by holding a portfolio of assets. This helps in distributing the
risk. For example, during any particular period one asset or set of assets may
perform well and another not so well, and having a diversified portfolio, tend to
average out the earnings. This splitting of wealth into many assets is known as
diversification. The financial system provides risk sharing by allowing investors to
simultaneously invest in and hold many assets. 

Liquidity: 

The ability of the financial system to provide risk sharing added with the capability
to make investments repayable on demand, makes investors more willing to buy
stocks, bonds, and other financial assets. This willingness, in turn, increases the
ability of borrowers to raise funds in the financial system. This generates liquidity
on the systems. Liquidity is the ease with which an asset can be exchanged for
money. Liquid assets can be quickly and easily exchanged for money, while less
liquid or illiquid assets can be exchanged for money only after a delay or by
incurring costs. During the past two decades, the financial system has increased the
liquidity of many other assets besides stocks and bonds. The process of
securitization has made it possible to buy and sell securities based on loans. As a
result, mortgages and other loans have also become liquid assets that investors are
holding today. 

Financial Information: 

Financial system also facilitates collection and communication of information, or

facts about borrowers and expectations of returns on financial assets. Financial
intermediaries collect information on borrowers and perform their research to gain
ability to forecast likelihood of borrowers repaying the loans advanced to them.
Because these financial intermarries specializes in collecting and processing
information, the costs for information gathering are lower and available to a pool
of information users as many financial systems share the information with each
other. Further the financial markets convey information to both savers and
 borrowers by determining the prices of stocks, bonds, and other securities. The
incorporation of available information into asset prices is an important feature of
well-functioning financial markets.

The bankers can find out the ability of the business to meet its obligations, short
term and long term solvency, credit worthiness and earning capacity. Besides, the
bankers make comprehensive analysis of customers’ policies and plans. The extent
of loan can be easily fixed by the banker on analyzing the financial information

The shares and debentures of a company are traded in the stock exchanges. The
value of shares and debentures are determined on the basis of financial position
and credit worthiness of the company. The financial statements are giving correct
information to fix the price for shares and debentures.

Associated Job roles in BFSI:

 Insurance agents: Insurance agents are professionals who represent an
insurance firm and sell policies to people on its behalf. Since this is a commission-
based service, agents try to attract as many clients as possible to generate
maximum value for their respective insurance companies. They are the official
representatives of the company.
 Bank and Financial product sales executive: Bank sales consultants and
sales managers are responsible for handling and looking after the sales of all bank
products and financial services to the clients. Products include loans, credit cards,
mortgage, etc
 Equity product sales executive: Equity sales executives and/or equity
dealers are responsible for researching latest equity trends, fund management, and
generating total returns on allotted assets
Investment representatives: Investment representatives/financial
planners/advisors are professionals who work at either banks, credit unions, or
investment firms to provide advice related to investment products and other
financial services.
 Insurance agents: Insurance agents are professionals who represent an
insurancefirm and sell policies to people on its behalf. Since this is a commission-
based service, agents try to attract as many clients as possible to generate
 maximum value for their respective insurance companies. They are the official
representatives of the company.
 Bank and Financial product sales executive: Bank sales consultants and
sales managers are responsible for handling and looking after the sales of all bank
products and financial services to the clients. Products include loans, credit cards,
mortgage, etc
 Equity product sales executive: Equity sales executives and/or equity
dealers are responsible for researching latest equity trends, fund management, and
generating total returns on allotted assets
 Investment representatives: Investment representatives/financial
planners/advisors are professionals who work at either banks, credit unions, or
investment firms to provide advice related to investment products and other
financial services. They offer representation and advice for various financial
products like - Annuities, Estate planning, Insurance, Mutual funds, Retirement
plans, Stocks, Education savings, and Trust funds
 Stockbrokers: Stockbrokers are registered specialists associated with
brokerage firms or are independent brokers who are responsible for buying and
selling stocks and other similar securities for retail as well as institutional patrons.
The job is usually carried out in exchange of a set fee or commission
Salary/Remuneration Package: Freshers in the BFSI industry can expect to get
up to Rs 10,000 to Rs 12,000 per month, while those with an experience of one
year and more can take home approximately Rs 15,000 to R 30,000. A seasoned
professional can also earn lots of incentives, like a 7-30 per cent share in sales
depending on the level of task accomplished.
Career projection: Individuals in this line of work can expect to take on advisory
roles after two to three years depending on their skills and industry knowledge.
Skills required: While each job role in this industry will require specific skills, the
most common requirements are: Proficiency in sales, stock market knowledge,
mathematical aptitude, mutual fund awareness, and knowledge about banking
operations.
Other aspects like good communication skills, confidence, and being well-groomed
can help individuals succeed, not just in the BFSI sector, but other industries as
well.
Apart from the skills mentioned, those looking for a career in the BFSI sector can
also improve their industry expertise by earning certificates, which can become an
added bonus to their budding career. Some companies organise regular training
sessions for employees to keep them abreast of latest trends in this space and
improve their efficiency.
Furthermore, earning certification from institutions like the National Institute of
Securities Markets (NISM), the Association of Mutual Funds in India (AMFI), and
Insurance Regulatory and Development Authority of India (IRDA) can help
candidates get lucrative job offers without any hassle.

Role of Banks in the Economic Development of a Country

The banking system plays an important role in the modern economic world. Banks
collect the savings of the individuals and lend them out to business- people and
manufacturers. Bank loans facilitate commerce.

Manufacturers borrow from banks the money needed for the purchase of raw
materials and to meet other requirements such as working capital. It is safe to keep
money in banks. Interest is also earned thereby. Thus, the desire to save is stimu-
lated and the volume of savings increases. The savings can be utilised to produce
new capital assets.

Thus, the banks play an important role in the creation of new capital (or capital
formation) in a country and thus help the growth process.

Banks arrange for the sale of shares and debentures. Thus, business houses and
manufacturers can get fixed capital with the aid of banks. There are banks known
as industrial banks, which assist the formation of new companies and new
industrial enterprises and give long-term loans to manufacturers.

The banking system can create money. When business expands, more money is
needed for exchange transactions. The legal tender money of a country cannot
usually be expanded quickly. Bank money can be increased quickly and used when
there is need of more money. In a developing economy (like that of India) banks
play an important part as supplier of money.
The banking system facilitates internal and international trade. A large part of trade
is done on credit. Banks provide references and guarantees, on behalf of their
customers, on the basis of which sellers can supply goods on credit. This is
particularly important in international trade when the parties reside in different
countries and are very often unknown to one another.

Trade is also assisted by the grant of loans by discounting bills of exchange and in
other ways. Foreign exchange transactions (the exchange of one currency for
another) are also done through banks.

Finally, banks act as advisers, counsellors and agents of business and industrial
organisations. They help the development of trade and industry.

There are special types of banks which provide facilities to different kinds of
economic activities. Now-a-days in every country there is a central bank which
controls the activities of all other banks, endeavours to keep the price level steady,
and controls the rates of foreign exchange.

Banks accept deposits and make loans and derive a profit from the difference
in the interest rates paid and charged to depositors and borrowers respectively.
The process performed by banks of taking in funds from a depositor and then
lending them out to a borrower is known as financial intermediation.

Through the process of financial intermediation, certain assets are transformed

into different assets or liabilities. As such, financial intermediaries channel
funds from people who have extra money or surplus savings (savers) to those
who do not have enough money to carry out a desired activity (borrowers).

Banking thrive on the financial intermediation abilities of financial

institutions that allow them to lend out money and receiving money on
deposit. The bank is the most important financial intermediary in the economy
as it connects surplus and deficit economic agents.

When you deposit your money in the bank, your money goes into a big pool
along with everyone else’s, and your account is credited with the amount of
your deposit. The role of the bank is to provide a safe place to keep your
money and sometimes the opportunity to earn interest on your deposits.

Services like current and savings accounts provide convenient ways for you to
pay your bills without the hustle of using cash. At the same time, when you
run short of liquidity, the bank is able to give you some advance to cover up
for your shortfall through other depositors funds.

In the absence of banks; where would you go to borrow money? What would
you do with your savings? Would you be able to borrow (save) as much as
you need, when you need it, in a form that would be convenient for you? What
risks might you face as a saver (borrower)?

Because of the power of financial intermediation of the banks, these puzzles

are resolved through the banking system hence they cease to be your problem
but the banks problem.

Banks are vital institutions in any society as they significantly contribute to

the development of an economy through facilitation of business. Banks also
facilitate the development of saving plans and are instruments of the
government’s monetary strategy among others.

Credit provision — Credit fuels economic activity by allowing businesses to

invest beyond their cash on hand, households to purchase homes without
saving the entire cost in advance, and governments to smooth out their
spending by mitigating the cyclical pattern of tax revenues and to invest in
infrastructure projects.

Liquidity provision — Businesses and households need to have protection

against unexpected needs for cash. Banks are the main direct providers of
liquidity, both through offering demand deposits that can be withdrawn any
time and by offering lines of credit. Further, banks and their affiliates are at
the core of the financial markets, offering to buy and sell securities and
related products at need, in large volumes, with relatively modest transaction
costs.

Risk management services — Banks allow businesses and households to pool

their risks from exposures to financial and commodity markets. Much of this
is provided by banks through derivatives instruments transactions. Banks also
enable individuals and businesses to take part in the global foreign exchange
and commodity markets indirectly. It would be very difficult for example for a
small company needing only a few million Japanese yen to import a vehicle
from Japan to get onto the global currency markets without the aid of a bank.

Remittance of Money — Cash can be transferred easily from one place to

another and from one country to another by the help of a bank. It has
facilitated transactions in distant places. This, in turn, has expanded the
internal and external trade and market. The men have become free of the risks
of carrying cash, gold, silver etc. The credit instruments issued by banks such
as cheque, draft, Real time gross settlement, credit cards have facilitated the
transfer of money.

Rapid Economic Development — The banks make available loans of different

periods to agriculture, industry and trade. They make direct investments in
industrial sectors. They provide industrial, agricultural and commercial
consultancy hence facilitating the process of economic development.

Promotion of Entrepreneurship — The role of private sector is crucial in

accelerating the pace of economic growth. The banks increase the
participation of the private sector in economic development by making
available the loans easily on reasonable rate of interest. The expansion of
financial sector encourages entrepreneurs to make investments by promoting
entrepreneurship

The aim of the banking system is to provide security and confidence in the
economy. If banks were allowed to go bankrupt and consumers lost savings; it
would cause widespread financial panic and many consumers would withdraw
their savings and hold as cash. If there was a withdrawal of money it would cause a
shortage of funds for lending. This is why Central banks act as lender of last resort.