The Indian Economy and The Financial Sector Opportunity

1
The Indian Economy and The Financial Sector
Opportunity

• July 12, 2005

2
Agenda

• Current Scenario
• Drivers of Growth
• Challenges
• Summary

3
India Overview
Country
Country
Population 1,055m GDP (03-04) 579 Bn
3 year CAGR of GDP 6.5 Inflation 5 Savings
rate (03-04) 25 Insurance penetration 2.3 MF
Penetration 0.5
Life insurance market
Characteristics
Insurance Premiums as of GDP April 2003
March 2004
4
Size and Distribution of Savings
Share of Financial Savings
HH Savings
(Rs Mn)
Gross Physical Savings
5 Year 20.2
Financial Savings
5 Year 11.6
Mutual Fund
Life Insurance
Government Small Savings
PF Govt Pension
Currency Deposit
Sources RBI

5
Opportunities in life insurance
6
Opportunities in non-life insurance
7
Retail credit opportunity
Net retail NPA levels are low at about 1.6 for
the Indian banking sector as a whole and even
lower for many of the leading players
8
Opportunities in asset management
9
Opportunities in Credit Card
10
Agenda

• Current Scenario
• Drivers of Growth
• Challenges
• Summary

11
Twin Growth Drivers

• Demographic Transition
• Economic Surge

12
Lowering Dependency Ratio
13
leading to growth in Household Financial Savings
Reducing dependency could trigger a
self-reinforcing savings growth dynamic in the
next decade

• Expected demographic trends suggest, in light of
  experience elsewhere, in the next decade Indias
  national savings could rise to 30 or more
• Bulk of the savings contributed by Households
• Decline in share of financial savings a negative
  however expected to increase with development
  of financial system and higher awareness

14
Rising Income levels Increases Target Market
CAGR ()
Income
10.1
gt140k
70k-140k
7.06
No. of HH (M)
lt70k
-2.31
Income range based on 1998-1999 prices
SourceBased on NCAER Govt Of India estimates
15
... Insurance Is Poised For Growth
Insurance premium as GDP
INDIA
1,000
10,000
100
100,000
GDP per capita in USD (log scale)

• PPP adjusted GDP per capita higher by a factor of
  5-6 lower income categories not shown
• Source Swiss Re NCAER

16
Twin Growth Drivers

• Demographic Transition
• Economic Surge

17
Drivers of resurgence

• Services sector driving momentum
• Established leadership in information technology
• Successful forays across knowledge-based sectors
• Renewed industrial growth
• Operational efficiency and quality focus
• Supported by financial restructuring
• Progress in infrastructure development
• Significant achievements in telecom and roads
• Focus on power sector and urban rejuvenation

18
Services sector driving momentum

• Leveraging rich pool of human capital
• Quality educational institutions
• Large English speaking population
• Globally-positioned IT sector
• Software exports of US 12.2 bn in FY2004 and US
  7.1 bn in H1-2005
• International services hub
• Commenced with IT-enabled services voice data
  
• Expanded to all knowledge sectors
  pharmaceuticals, biotechnology, engineering
  design
• Growth in financial services, travel hospitality

19
Impact of the resurgence
Sectoral share of GDP()
Sector
Growth FY2004()
56.2
Services
9.1
21.7
Industry
6.6
22.1
Agriculture
9.6
GDP
8.5
One of the fastest growing economies in the world
with 7.0 growth rate in H1-2005
Source NAS
20
Renewed industrial growth

• After a prolonged period of restructuring and
  repositioning growing competitiveness
• Increasing deployment of technology
• Deleveraging and organic capital generation
• Constantly improving quality standards
• Emergence of Indian multinationals
• Setting up production capacities overseas
• Setting up international distribution
• Consolidating supply chain
• Indias emergence as a global manufacturing hub
• Second-most favoured destination for FDI in
  manufacturing

21
Progress in infrastructure development

• Construction of Golden Quadrilateral and
  North-South, East-West corridors
• 13,000 km long - worlds largest single highway
  project
• Boosting demand for steel, cement, commercial
  vehicles

Roads

• Cellular subscriber base of 49 million, growing
  at over 150
• Positive impact on efficiency of firms services
  exports

Telecom
missteps in power and urban infrastructure being
addressed
22
India has just started on the journey
23
Agenda

• Current Scenario
• Drivers of Growth
• Challenges
• Summary

24
Challenges of Intermediation in India

• Size of the country and dispersed affluent
  population
• Lack of Data specially the area of Health
• Attracting the Talent Pool
• Evolving Regulatory Environment

25
Size Dispersion of Population

• Area 2973190 sq. Kms.
• More than 70 of population in rural areas
• More than a third of Mass affluent rich
  households in rural areas
• 5161 towns cities comprise urban India

26
Challenges from lack of Data

• No single customer identification number like
  social security number
• Single Mortality table used
• No cuts available by geography or customer
  segment
• Very scarce data for annuitants
• Health records not available
• Health incidence data or morbidity tables not
  developed
• No consolidated medical individual history
  available
• No standard definition of conditions surgeries

27
Attracting the Talent Pool

• Increasing attrition levels
• Poaching within across industries
• Attrition at frontline sales level around 20
• Payhikes
• Salary increases grossly out pace inflation
• Projected increases to continue at a minimum
  10-12
• Premium for critical skills with a sudden
  advent of new industries e.g. Insurance ITES

28
Evolving Regulatory Environment

• Multiple Regulators
• Boundaries in RFS becoming fuzzier
• Pension reforms on the anvil
• Tax rules in flux
• Creates distortions in incentives to invest in
  various financial instruments
• Regulations still evolving as regulators gain
  maturity

29
Agenda

• Current Scenario
• Drivers of Growth
• Challenges
• Summary

30
Summary

• Strong growth prospects for the Indian Economy
• Demographic transition should lead to a positive
  savings growth spiral fuelling growth of
  financial savings
• Changing structure of savings could lead to
  increase in allocation to Insurance Pensions
• Need to manage unique intermediation challenges
  of operating in India

31
Thank you