History of the Indian Mutual Fund Industry
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases:-
First Phase - 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase - 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase - since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning u under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The graph indicates the growth of assets over the years.
INSURANCE
Today concept of Banc assurance is getting very common, selling Insurance of another company to the Bank customers. Let's see the Banc assurance in detail.
What is Banc assurance?
Banc assurance is the distribution of insurance products through the bank's distribution channel. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put it simply, Banc assurance, tries to exploit synergies between both the insurance companies and banks. Banc assurance if taken in right spirit and implemented properly can be win-win situation for the all the participants' viz., banks, insurers and the customers.
Banc assurance in India
Banc assurance in India is a very new concept, but is fast gaining ground. In India, the banking and insurance sectors are regulated by two different entities (banking by RBI and insurance by IRDA) and banc assurance being the combinations of two sectors comes under the purview of both the regulators. Each of the regulators has given out detailed guidelines for banks getting into insurance sector. Highlights of the guidelines are reproduced below:
RBI guideline for banks entering into insurance sector provides three options for banks. They are:
Joint ventures will be allowed for financially strong banks wishing to undertake insurance business with risk participation;
For banks which are not eligible for this joint-venture option, an investment option of up to 10% of the net worth of the bank or Rs.50 crores, whichever is lower, is available;
Finally, any commercial bank will be allowed to undertake insurance business as agent of insurance companies. This will be on a fee basis with no-risk participation.
The Insurance Regulatory and Development Authority (IRDA) guidelines for the banc assurance are:
Each bank that sells insurance must have a chief insurance executive to handle all the insurance activities.
All the people involved in selling should under-go mandatory training at an institute accredited by IRDA and pass the examination conducted by the authority.
Commercial banks, including cooperative banks and regional rural banks, may become corporate agents for one insurance company.
Banks cannot become insurance brokers.
With huge untapped market, insurance sector is likely to witness a lot of activity - be it product innovation or distribution channel mix. Banc assurance, the emerging distribution channel for the insurers, will have a large impact on Indian financial services industry. Traditional methods of distributing financial services would be challenged and innovative, customized products would emerge. Banks will bring in customer database.
Finally Success of the banc assurance would mostly depend on how well insurers and banks understand each other's businesses and seize the opportunities presented.
Third Party Products
Banks are increasingly venturing into new areas and offering a wider bouquet of products and services to satisfy the diverse needs of their customers such as:
Demat account
Lockers
Cash management
Insurance product
Mutual fund product
Taxes Considerations for Bank
Deposit customers are the best source of cross-selling opportunity
Reduce reliance on interest spreads as the major source of income
Leverage extensive customer base
One stop shop for all Financial Services
Reduce risk based capital required for the same level of revenue
Provide integrated financial services tailored to the life cycle of customers
Increasing Merchant banking & Investment Banking business
On behalf of the bank and its clients, the primary function of the bank is buying and selling products. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.
Increasing Demand for derivatives & other risk management products
The increasingly dynamic business scenario and financial sophistication also increase the need for customized exotic financial products. The complex nature of risks faced by the companies is passed onto the banks. Innovative financial tools and advanced risk management methods are required by the banks to capitalize on this business opportunity
Increasing other service charges
Increasing other service charges can prove be an additional revenue generator for the banks. Banks must try & utilize this opportunity. These services could include Duplicate copy of bank statement Charges on Cheque bounce Account maintenance charges Issue of Duplicate deposit receipt Servicing of Dormant Accounts Closure of Accounts before a specified period Wire transfer, TT, Mail Transfer etc.
Market Scenario for Trade Services Banks
International trade grew by 6.5% during 2007. The corresponding growth for world GDP and World production (aggregation of the world's output in the agricultural, mining and manufacturing sector) is 3.3% and 2.6%.This trend is not new. For several years now, the Growth of world trade has outpaced the growth of world production. This reflects the nature Of many goods and services that are transhipped for value addition in several countries before they reach the ultimate consumer. In turn, this raises the need for supporting commercial services.
Payment Services are provided when a bank executes a payment on behalf of its client to the Seller's bank, to pay the seller for the goods received or to be received. Banks provide pre-shipment and post-shipment finances to help produce goods and to sell or buy the produced goods.
The market was now, for reasons mentioned above, looking for opportunities to offshore their Processing and lower their cost base. After migrating a large percentage (around 60%) of the Bank's business offshore, ABN AMRO was in a position to create white-labelled capabilities on the technology side and offer offshore back office capabilities to other banks who did not either have scale or had a strategic objective to offshore.
To enable clients of ABN AMRO's trade services outsourcing business to choose their most efficient portfolio, ABN AMRO broke the trade services process into sub-components to be able to customize the needs of a bank and their immediate and long term goals. Based on this approach, the outsourcing bank could choose the components and the degree of outsourcing that they were comfortable with.
The results presented today represent an excellent operating and financial performance. These results are based on a strong production performance across the breadth of banking industry, outstanding cost control in the face of significant cost pressures and additional volumes from newly commissioned growth projects. Our Underlying EBIT of US$9.6 billion is an increase of 5.4 per cent over last half-year. Underlying EBIT margin was 44.4 per cent. Earnings per share, excluding exceptional items, were up 2.8 per cent at 106.8 US cents reflecting the benefit of the share buy-back program. This result has been achieved in an environment in which input prices have increased significantly and currencies have appreciated strongly. The reduction in Underlying EBIT, as a result of the weaker US dollar, was US$506 million more than the corresponding period.
In pursuit of our strategy, we continue to focus on the fundamental drivers of value creation for shareholders: by operating large, long-life, low cost expandable assets while taking a disciplined and value-focused approach to pursuing additional organic and non-organic growth options.
We achieved record or equal record production for seven major commodities and significantly increased production across a further six commodities. Production records were achieved by 12 assets in six of our Customer Sector Groups. This performance reinforces our track record of consistent growth on the back of predictable project delivery coming from a deep inventory of projects that will continue to underpin our growth plans. This increased production from high returning assets has allowed us to capture the benefits of strong first half conditions in key commodity markets.
In the modern world of today of Banking Industry progressive players are relentlessly focusing on prospect conversion. They seek to achieve competitive differentiation through service excellence and innovation. The goal is to delight customers, proactively address their needs and deepen relationships. In a world where product differentiation alone is no longer adequate to entice customers, the challenge to sell is significant for banks.
Finacle finanz tools enable easy-to-understand rendering of complex concepts, by presenting interactive and exciting overall product pictures to the customer, without compromising on the details. This allows the customer to simulate various scenarios and understand products in detail, before making informed choices.
Credit Cards
Finacle finanz tools help banking customers understand various offerings in the credit card space and choose the ones best aligned to their needs. These tools help in planning credit card repayments, analyzing impact of transferring balance from other credit cards and studying implications of changing credit cards. Increasingly customers are seeking to understand the long term advantages of credit card products. Finacle finanz tools are an invaluable resource for the bank's sales force to convincingly illustrate the benefits of the bank's credit card offerings.
Axis Bank has announced its unaudited results for the first quarter of FY 2008-09, following the approval of its Board of Directors at a meeting held in Mumbai on 14th July 2008. The Net Profit of the Bank for the first quarter was Rs. 330.14 crores, a growth of 88.67% over the Net Profit of Rs. 174.98 crores during the first quarter of the previous year. The Net Profit was recorded after making a provision of Rs.225.20 crores on the depreciation of the Bank's investment portfolio, on account of weakening financial markets. The Bank has ended the first quarter of the current financial year with Net NPAs at 0.47% of Net Customer Assets and with a capital adequacy ratio of 13.25%. The quarterly EPS (diluted) at Rs. 9.03 was 51% higher than the EPS of Rs. 6.00 in the first quarter of the previous year.
The core businesses of the Bank have grown strongly in Q1, leading to an Operating Profit of Rs.802.32 crores, a growth of 118% over the Operating Profit of Rs. 367.94 crores in the first quarter of the financial year 2007-08. The Net Interest Income (NII) for Q1 was Rs. 810.46 crores, a growth of 93% yoy over the NII of Rs. 420.91 crores during Q1 of the preceding year. Similarly, Fee Income during Q1 was Rs. 483.54 crores, a growth of 80% over the Fee Income of Rs. 268.97 crores during Q1 of the preceding year. This growth in earnings has been possible because of the rapid expansion in Advances. Net Advances have grown by 48% yoy. Further, the Bank's balance sheet size has grown by 44% yoy to Rs. 1, 13,660.04 crores as at end June'08 from Rs. 79,109.04 crores as at end June'07.
Retail Banking
Growing Retail Business - The Bank's retail business continued to show strong growth. The number of Savings Bank accounts grew from 50.49 lakhs as at end June'07 to 65.23 lakhs as at end June'08, a growth of 29% yoy, thereby creating buoyancy in Savings Bank deposit balances.
Wealth Advisory Services and Third Party Products:. The Bank offers Wealth Advisory Services and Mohur - Gold Coins and bars - through its select branches, and Personal Investment Products including Mutual Funds, Life Insurance products in association with MetLife India, General Insurance products in association with Bajaj Allianz Insurance, and Online trading accounts in association with Geojit Securities. Financial Advisory Services Fees earned grew 108%yoy to Rs. 45.44 crores in Q1.
Capital & Net Worth:
The Net Worth of the Bank stood at Rs. 8,742 crores as at end June'08 as compared to Rs. 3,406 crores a year earlier, a growth of 157% yoy. The Capital Adequacy Ratio for the Bank was at 13.25% as at end June'08, as compared to 11.50% as at end June'07. The Tier - I capital amounted to 9.93%.
REVENUES GENERATED FROM THIRD PARTY PRODUCTS
Commission earned on selling other companies' products (or third-party distribution business) is emerging as a new revenue source for many banks. The commission or fee is earned mainly through selling insurance products (both life and general) and mutual funds.
HDFC Bank, for instance, earned about Rs 200 crores through sale of insurance products and mutual funds. Of course, it helped that the bank's parent, HDFC, had started ventures in these fields. Public sector banks too have entered into a number of tie-ups with other insurance companies and mutual funds and are mopping up funds for them.
Although the fee amounts are still small, they are a valuable contribution to diversifying revenue streams, increasing the mix of non-interest income and also improve profits.
Syndicate Bank, for instance, earned a commission of Rs 12 crores in 2006. Similarly, Andhra Bank earned Rs 24 crores through such sales while Allahabad Bank earned Rs 18 crores in 2005-06.
As more community banks look, to securities brokerage as a way to meet their customer's financial needs and provide fee income to smooth process of lending, they naturally are concerned about competing with the large brokerage houses and large banks that dominate this business.
INVEST Community Bank Brokerage Study examines how community banks can be successful in this highly competitive business, and provides benchmarks for banks to assess their performance.
For this study, 26 banks and credit unions with retail deposits of less than $2 billion completed a detailed questionnaire about their brokerage operations. Consequently the study encompasses 635 community-based institutions. We compared the brokerage performance of these banks with 57 larger banks that are fairly evenly divided among super-community banks with retail deposits of $2-7 billion, regional banks with retail deposits of $7-12 billion, super-regional banks of $12-30 billion, and megabanks with retail deposits greater than $30 billion.
Productivity good, profits lag
Average annual broker productivity--the gross sales revenue produced per financial consultant--is the traditional yardstick of performance in the brokerage industry. By this measure, community bank brokerages compare favourably with larger institutions. The average productivity of financial consultants in community banks was $257,323 last year, 4% higher than the average broker productivity in all banks, regardless of size.
For a bank, a better measure of brokerage performance than broker productivity is how well the bank penetrates its opportunity, i.e. capturing the retail investment business of its own customers. One such measure is the contribution to the bank's pre-tax profit that the brokerage business produces per million of retail deposits. This measure enables comparison of banks of, different sizes on a pound-for-pound basis. A super-regional bank should easily be able to produce more profit dollars from its brokerage business than a community bank can, but the community bank could do a better job of penetrating its customer opportunity.
But by this measure, community bank brokerages lag behind their larger competitors. The average community bank brokerage earned $482 in pre-tax profit contribution per million of retail deposits last year, 12% less than the average for all banks, and less than the average for any of the larger bank size categories.
What is the source of this shortfall?
Profit penetration is essentially the product of revenue penetration--how much revenue the bank's brokerage produces relative to its opportunity--and the profit margin it makes on that revenue. Community banks tend to underperform larger banks on both revenue penetration and profitability of their brokerage businesses.
The average community bank produced $1,644 in brokerage revenue per million dollars in bank retail deposits last year, 12% less than the average for all banks, and 43% less than the average for super-regional banks. The brokerage business in community banks generated an average contribution to pre-tax profit of the banking enterprise of 26% of brokerage revenue. The profit margin of the typical bank brokerage, regardless of size, was 28%.
Take a look at 3rd party credit card processing companies if you want the least expensive and easiest way to start selling your products or services on the Web. They are companies that accept credit card orders on your behalf without requiring you to have your own merchant account.
The imminent cap on Unit-linked insurance plan charges and the recently instituted ban on entry load fees levied by mutual funds is likely to adversely impact fee-based income of banks. Income from distribution of third-party products such as insurance policies and mutual fund schemes is already under pressure because of the unfavourable economic climate. The Insurance Regulatory and Development Authority said in a July 22 circular that for policies with tenure of 10 years or less, the difference between gross and net yields should not exceed 300 basis points within which fund management charges were capped at 1.5 per cent.
Income from distribution of third-party products is already under strain with new business premia for the insurance industry falling 6 per cent on a year-on-year basis in 2008-09. In addition, from August 1, 2009, mutual funds have been barred from charging entry load fees of about 2.5 per cent to customers, a bulk of which was used to pay distributor commissions.
Retail banking revenues, which reached $9.2 billion in the Gulf Cooperation Council bloc, can be increased by at least 15 percent on an annual basis by enhancing the level of customer service at the banks.
Bank of India has planned to make its foray into the mutual fund business later this year. Once its mutual fund business takes off, it will have to stop selling the mutual fund products of five companies, including UTI MF, Kotak Mahindra, Franklin Templeton, and HDFC as per the norms.
Besides, the bank is also likely to venture into the life insurance business in a joint venture with Daiichi (26%) of Japan and Union Bank of India (23%) later this year. Once it happens, the bank will stop selling products of ICICI Prudential as third party distributor.
SOME OTHER THIRD PARTY PRODUCTS
Click Bank
Click Bank accepts customers who offer digital products and services that are delivered entirely over the Internet itself (via Web pages, files, or email). Your products are promoted through their network of over 100,000 online affiliates. You select an affiliate commission percentage in advance.
REVIEW OF LITERATURE
Mr S. Krishnamurthy, Banc assurance drives growth for SBI Life.
The company, which derives about 67 per cent of its business from banc assurance, plans to diversify and have a more balanced portfolio of products. SBI Life will offer a creditor protection cover for SBI's India Millenium Deposits. The company will also launch a Unit linked Insurance Plan (ULIP), a single premium product, a savings product as well as pension products. SBI Life reported a new business premium of Rs 482 crore in 2004-05. The premium from banc assurance, which grew three times compared to the previous year, was the major driver of growth.
Manoj Kumar, From the banks' point of view, opportunities and possibilities to earn fee income via Banc assurance route are endless. Different insurance products can be tailored and targeted to specific segments based on the knowledge about customer's spending patterns. All that is needed is to offer them a product which is tailored to fit their requirements and provides better value for the money.
The thumb rule for the bank should be to cross-sell at least one insurance product to each of their customer base since every existing relationship is a potential source of additional income in terms of Banc assurance sales. It is much easier for the banks to sell insurance products, mainly asset and wealth management products, as they have complete knowledge about the financial status of the customers through their spending and saving patterns. In terms of efforts too, it is easier for the bank to approach and convince a customer to buy a particular insurance product since he trusts the banks more than his insurance company. The method of approaching the customer and the sales practice shall however depend upon the business model adopted by the bank and may vary substantially from one place to another.
Marcello Bofondi and Francesca Lott (2006) study the Innovation in the Retail Banking Industry: The Diffusion of Credit Scoring they study technology diffusion in the retail banking industry. Our contribution to the empirical literature is twofold: Firstly, we explore technology diffusion in the financial sector, whose relevance has often been neglected; secondly we focus on credit scoring adoption, a relevant process innovation still under-explored. Estimating a set of duration models, we analyze the patterns of diffusion of this technology among Italian banks. We find that credit scoring is firstly introduced by large banks with broad branch networks, which can fully exploit scale economies. We present robust evidence that banks with large market shares operating in more concentrated markets are early adopters, providing a direct support of the Schumpeterian hypothesis that market power enhances innovation.
Mr Anil Khandelwal, "Anybody who sells insurance and mutual funds needs customers and a platform. I have both. Anybody who has customers can get into the financial services sector today - even someone who has a petrol pump. We make ideal partners for mutual funds and insurance companies. Most importantly, our surplus workforce can be utilised for this." He added that with implementation of full computerisation and networking of most branches (core banking solutions), banks have redeployed a part of their workforce to other areas.
Mr Ananthakrishna, "We sell life insurance for MetLife, general insurance for Bajaj Allianz, besides mutual fund and remittance products such as Western Union's services. At the time of the introduction of core banking solutions, we saw that fee-based income on demand drafts, money transfers and collection of bills and cheques fell. We wanted to supplement these with some other income. You'll find that the fee-based income during the last three years has been more or less static. Now we will look at a growth of 10-12 per cent in fee income every year. We are getting about Rs 10 crores through sale of insurance products and about Rs 1 crore through Western Union. Our aim is to earn Rs 15 crores through these third party products this year."
Nagya.S (2006) study on innovations in the banking Industry in India. The banking sector in India saw great emphasis being placed on technology and innovation. Banks began to use technology to provide better quality of services at greater speed. Internet banking and mobile banking made it convenient for customers to do their banking from geographically diverse places. Banks also sharpened their focus on rural markets and introduced a variety of services geared to the special needs of their rural customers. Banking activities also transcended their traditional scope and new concepts like personal banking, retailing and banc assurance were introduced.
RESEARCH METHODOLOGY
DATA COLLECTION METHOD
Primary Data:
The primary data are which are collected afresh and for the first time, and thus happen to be original in character.
Secondary sources:
The Secondary data are those which have already been collected and through processed the statically process.
LIMITATIONS OF THE STUDY
Limitation of the study is that all the research is depending on the secondary source of data which make the study limited.
Study faces the problem of time constraint that there is less time to achieve the appropriate research on the third party products revenue generation.
FINDINGS
ATMs have emerged as an alternative banking channels which facilitate low-cost transactions vis-à-vis traditional branches / method of lending.
Credit cards have also played an important role in promoting third party products of bank. The use of credit cards has been growing significantly over the last few years.
This study show that with the introducing of new baking products consumer have various choices.
This study shows that through selling of third party products in the bank, the bank will generate more revenues from selling.
Third party products are becoming popular among the consumer.
CONCLUSION
Third party products is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years.
Third party products as a whole are facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business.
There is a need for constant innovation in Third party products sector. While Third party products offer phenomenal opportunities for growth, the challenges are equally discouraging.
