BFSI Industry Dismantled – 10X10Y

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Back in the day, the Financial industry was simply classified into Banking and Non-Banking. However, with the exponential growth of the industry over the last decade, every sub-industry has made a name for itself. Thus, a more structured name propped up, called the BFSI Industry. BFSI stands for Banking, Financial Services and Insurance which gives us a complete gist of the industry. However, there’s a lot more depth into what seems to be a simple classification. I’ve tried to bring the complete picture to you thenceforth, 

The B in BFSI – Banking Industry

The banking industry is the backbone of India’s financial services industry.  Taking a bird’s eye view, the Banking Industry can be simply classified into Private Sector Banks and Public Sector Banks. Public sector banks are those where majority of the stake in the bank is held by government. Whereas in a private sector bank, majority is held by shareholders of the private bank. SBI is a public bank and HDFC Bank is a private bank.

A different and a more exhaustive approach to classify the Banking Industry would be as follows:

The Banking Industry can be classified as following:

  •  Commercial Banks – Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business model is designed to make profit. Their primary function is to accept deposits and grant loans to the general public, corporate and government. Commercial banks can be divided into-
  • Public Sector Banks – These are the nationalised banks and account for more than 75 per cent of the total banking business in the country. They are SBI, Bank of Baroda, etc.
  • Private Sector Banks – These include banks in which major stake or equity is held by private shareholders. The banks include HDFC Bank, ICICI, Kotak Bank, etc.
  • Foreign Banks – A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity. These kinds of banks are HSBC, Citibank, etc.
  • These are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises. They usually operate at regional levels in different states of India and may have branches in selected urban areas as well.
  •  Small Finance Banks – This is a niche banking segment in the country and is aimed to provide financial inclusion to sections of the society that are not served by other banks. The main customers of small finance banks include micro industries, small and marginal farmers, unorganized sector entities and small business units. A few SFBs in India are Au Small Finance Bank, Ujjivan Small Finance Bank, etc. 
  •  Payments Banks – This is a relatively new model of bank in the Indian Banking industry. It was conceptualised by the RBI and is allowed to accept a restricted deposit. The amount is currently limited to Rs. 1 Lakh per customer. Few of the payments bank in India are Paytm Payments Bank, Airtel Payments Bank, Jio Payments Bank, India Post Payments Bank, etc.
  •  Co-operative Banks – Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee. These work on no-profit no-loss basis and mainly serve entrepreneurs, small businesses, industries and self-employment in urban areas. In rural areas, they mainly finance agriculture-based activities like farming, livestock and hatcheries. They can be classified into :

(a) Urban Co-operative Banks – They refer to the primary cooperative banks located in urban and semi-urban areas.

(b) State Cooperative Banks – They are a federation of the central cooperative bank which acts as custodian of the cooperative banking structure in the State.

The I in BFSI – Insurance Industry

The other primary part of the BFSI segment is the Insurance Sector.  The insurance sector with a market size of close to $280 Billion, is widely known for its Life Insurance. In today’s age of consumerism, insurance requirements have expanded to keep pace with the increasing risks. Gone are the days when life insurances ruled the roost; today we have a wide assortment of risk coverage commencing from health insurance to travel insurance to theft insurance to even a wedding insurance. General insurance companies have willingly catered to these increasing demands and have offered a plethora of insurance covers that almost cover anything under the sun. General Insurance is also known as Non-Life Insurance in India. 

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Life Insurance – The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of the sudden or unfortunate demise of the policy holder. The top 4 Life Insurance companies in India with the highest Claims Settlement Ratio are mentioned above in the chart.

General Insurance – Any insurance other than ‘Life Insurance’ falls under the classification of General Insurance.

The major segments covered under General Insurance Policy India are:

  •  Property Insurance – Insurance of property against fire, theft, burglary, terrorism, natural disasters etc. Property Insurance can be further classified into specialized forms as follows: 
  •      Fire insurance.
  • Home insurance.
  •      Earthquake insurance.
  • Flood insurance.
  •      Boiler insurance
  •  Motor Insurance – Insurance of motor vehicles against damages or accidents and theft.
  •  Travel Insurance – Travel insurance is an insurance product for covering unforeseen losses incurred while travelling, either internationally or domestically.
  •  Health Insurance – Personal insurance such as Accident Policy, Health Insurance and liability insurance which covers legal liabilities
  •  Marine Insurance – Policies that provide marine insurance covering goods in transit by sea, air, railways, waterways and road and cover the hull of ships.
  •  Machinery Insurance – Policy covers such as coverage of machinery against breakdown or loss or damage during the transit
  •  Others – There are now endless types of General Insurance. Some of the other types of General Insurance not classified above are – Cab Travel insurance, Mobile Insurance, Online Fraud Insurance, Inventory insurance, etc.

The insurance industry of India has 57 insurance companies registered by the Insurance Regulatory and Development Authority of India (IRDAI) – 24 are in the life insurance business, while 33 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.

The F in BFSI – Financial Services Industry

Financial Services is the third component of the BFSI Industry. It’s one of the biggest services industries in the country and a major contributor to the growth of the Indian Economy. Due to the varied nature of the industry, it can be widely classified into numerous segments such the following:

  1.  Asset Management – Asset Management Company collects investments from different investors, makes a pool of funds collects and invest in a diversified portfolio across Equity, Debt and Risk-Free Instruments. Few AMC companies in India are HDFC AMC, UTI AMC. 
  2.  Cards & Payment Solutions – SBI Cards is the second largest Cards and Payment solutions provider in India. Payment Gateways such as Razorpay, CCAvenue, PayU too are considered part of this segment. 
  3.  Depository & RTAs – A depository is an entity which helps an investor to buy or sell securities such as stocks and bonds in a paper-less manner. Securities in depository accounts are similar to funds in bank accounts. The two depositories in India, namely National Securities Depository Limited (NSDL) which is promoted by the National Stock Exchange. The other depository is the Central Depository Services Limited (CDSL) which is promoted by the Bombay Stock Exchange Bombay Stock Exchange.

    RTAs stand for Registrar & Transfer Agents. The two leading Registrar and Transfer Agent companies in India are Computer Age Management Services (CAMS) and Karvy. Both these companies are instrumental in the smooth functioning of the mutual fund companies of India. They take care of almost 80% funds of mutual funds in India.

  4.  Investment Banking & Stock Broking – Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them. There are a host of Indian and foreign investment banks in india. The top Indian ones being Axis Capital, Avendus Capital, IDBI Capital, etc. and the top foreign ones being Bank of America, Barclays Capital, JP Morgan, etc.

    Stock Broking – Stockbroking is the function of buying and selling Financial Securities such as Stocks and BONDS through the Stock Market by a dealer (stockbroker) who acts as an agent on behalf of clients wishing to buy or sell securities. Few of the top stocking broking companies in India in terms of active clients are Zerodha, ICICI Direct, Upstox, etc. ICICI Direct is a retail trading and investment service from ICICI Securities, the second largest broking company in India. ICICI Securities is also into Investment Banking.

  5.  Credit Rating Agencies – A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to pay back their interests and loan amount on time and the probability of them defaulting. As of now, there are six credit rating agencies registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Ratings provided by these agencies determine the nature and integrals of the loan. Higher the credit rating, lower is the rate of interest offered to the organisation.
  6.  Diversified Finance – These are financial services companies providing a wide array of services which keeps them from being classified in one particular segment discussed above. Few of these services include Investment Banking, Equity, Debt and Commodity Sales and Trading, Wealth Management, Portfolio Management Services, Asset Management, Alternative Asset Management, Financing and Lending, Distressed Asset Management, etc. Few such diversified finance companies are Edelweiss, JM Financial, etc. 
  7.  NBFCs – This one segment of the Financial Services industry is so far-flung that it requires a separate classification of its own. The NBFC categorization is done under two boards, that are defined on:

    (A) The basis of deposits
    – NBFC can also be broadly classified based on liability/deposits such as the following:
    (i) (NBFC-D)-Deposit-taking Non-Banking Financial Company
    (ii) (NBFC-ND)-Non-Deposit taking Non-Banking Financial Company.

    (B) The basis of their activity – Based on the activity the NBFCs performed, they were categorized as follows:
    (i) Investment Activities
    (ii) Lending or similar activities
    (iii) Other activities

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However, Reserve Bank of India (RBI) released a notification on February 22, 2019 to consolidate the multiple categories. The new notification now classified NBFC into the following three categories:

  1. NBFC-ICC – RBI said that “Investment and Credit Company – (NBFC-ICC)” means any company which is a financial institution carrying on as its principal business- asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by the Bank in any of its Master Directions.

  2. Mutual Benefit Financial Company (MBFC) – The MBFCs also called as “Nidhis”, are the non-banking finance companies that enable its members to pool their money with a predetermined investment objective.

  3. NBFC-Factor – NBFC Factor means a non-banking financial company fulfilling the Principal business criteria i.e. whose financial assets in the factoring business constitute at least 75 percent of its total assets.

The top 5 NBFCs, Based on Net Profit and Annual Turnover are:

  • Bajaj Finance Limited
  • Shriram Transport Finance Company Limited
  • Muthoot Finance Limited
  • M&M Financial Limited
  • Sundaram Finance Limited

Due to the innovative offerings by the NBFCs, the industry has seen multiple companies develop their own niche. This niche in which they specialize in, has also resulted in a big competitive advantage over the banks. These niches have also become their identity, so an ideal method of classification could also be to classify them based on their niche. This could be the following classification based on their niche:

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  • Consumer Finance – These companies primarily provide consumer loans which are availed to finance the purchase of consumer durables such as electronic gadgets and household appliances
  • Housing Finance – These companies primarily provide home loans which provides you with the finance required to purchase or construct your home.
  • Infrastructure Finance – These companies primarily provide financing to infrastructure projects.
  • Vehicle finance – These companies primarily provide finance to purchase vehicles such car, two-wheelers, tractors, trucks, etc. 
  • Micro Finance – These companies primarily provide finance to the low-income individuals in rural and semi-urban areas.
  • Gold Finance – These companies primarily provide Gold Loans (also called loan against gold) which is a secured loan taken by the borrower from a lender by pledging their gold holdings as collateral. As we shall be extensively researching into the gold finance industry, it makes sense to further understand the Gold Finance bifurcation. The bifurcation looks something like this:

Unorganised Sector

The fact that 65% of the Gold Loan industry is controlled by the Unorganised Sector makes it a good point to start the bifurcation. For centuries, gold loans have been provided to literally anyone willing to pledge gold, by money lenders and pawn brokers. The origins of the informal lending can be traced to the traditional moneylenders such as the Chettiars of Tamil Nadu, Kabuliwalas of West Bengal and landowners from across

the country who have lent to villagers against the physical gold held by them. A massive 65% of the Gold Loan Market is controlled by such informal lending, who charge borrowers exorbitant interest rates anywhere between 26% and 50%

Organised Sector

The rest of the 35% Gold Loan Market is held by the Organised players. Organized Industry is where companies are registered by the government and have to follow rules and regulations. There are two regulatory bodies in the Gold Loan space, RBI and MCA. Nidhi Companies are regulated by the MCA, and the other players by RBI :

  •  Banks – Gold loans provided by them have the lowest interest rates but Gold Loans are the primary focus of disbursement for them. Banks mostly see Gold Loans as a method to fulfil their Priority Sector Lending (PSL) quota. SBI and Canara Bank provided the lowest interest rates at 7.5% and 7.65% respectively. Small Finance Banks have also aggressively expanding their operation in this space. SFBs are the most eligible threats to NBDCs. Public banks at 44% and Private Banks at 13% together hold 57% of the Gold Loan space.
  •  NBFCs – Players like Manappuram Finance and Muthoot Finance have a specialisation in this space having operated for decades now. They charge anywhere between 12%-22% interest rates but have a solid hold in the market. NBFCs hold more than 37% share of the entire organized gold loan space.
  •  Co-operative banks in their own capacity also provide Gold Loans. About 6% of the Gold Loan Market is held by them.

I hope these sincere efforts of mine facilitated you in getting a complete understanding of the how the BFSI Industry is structured. You can expect me to do a deep dive into the Gold Finance Industry in the articles thenceforth. 

Thank You. 

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Moulik Jain
Moulik is 24, an Entrepreneur, and a successful Angel Investor at Beardo (exited). He is currently one of India's youngest Angel Investors.
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