About Prathima Rajan

Thailand’s Growing Insurance Market

Thailand’s Insurance market is small but one of the fastest growing in the Asia Pacific region next only to China & India. The country is relatively underdeveloped both in terms of insurance penetration and insurance density as compared to some of the developing countries with in APAC region. Both insurance density (Thailand USD 199, world average USD 267 in 2010) and insurance penetration (Thailand 4.3 percent, world average is 11 percent) is considerably low. Life insurance premium constitutes about 2.6 percent of GDP and non-life insurance premium about 1.7 percent of GDP. In Asia, Taiwan’s insurance market’s contribution is the highest accounting for about 18 percent of GDP, followed by Hong Kong, Korea and Japan contributing 12 percent, 11 percent and 10 percent respectively in 2010. Growing number of young population, new pension policy and inadequate health insurance are some of the growth drives in Thailand’s insurance landscape. Life and non-life insurance in Thailand are mainly sourced by insurance agents. However, other channels, such as bancassurance, are quickly catching up. The number of insurance players in Thailand doubled from 12 in 1995 to 24 in 2009. As the insurance market is introduced to new players in terms of foreign ownership, capital requirements, and solvency ratios, it is likely to see mergers and acquisitions in the years to come. Thailand’s life insurance market is highly concentrated, with the top five life insurance players holding nearly 70 percent of market share, and the remaining 19 players fighting for the remaining 30 percent. Thailand’s property/casualty insurance business (US$2.8 billion) is nearly 4 times smaller than the life business ($9.5 billion), which experienced negative growth in 2009 due to the financial crisis. Property/ casualty insurance in Thailand is highly fragmented, with 71 non-life insurance players operating in the space. The top five players held nearly 40 percent market share, with over 40 additional players possessing less than 1 percent market share. IT investment by Thai insurance companies in 2009 was estimated to be US$413 million. Due to the impact of the financial crisis, IT spending in 2010 was limited to maintenance of existing systems. Celent expects IT investment in the market to reach US$1.5 billion by the end of 2013.

Supply Chain Finance Gaining Traction in APAC Region

Small and Medium Enterprises (SMEs) play a major role in economic development. In developing economies, they account for 49 percent of formal manufacturing employment and contribute nearly 29 percent to GDP. In Asia Pacific region several countries including India is a home for millions of SMEs. The fundamental transformation in the last decade and the latest financial crisis has seen two major trends.
  • Emergence of thousands of importers and exporters (SMEs) from the private sector adding impetus to the existing trade.
  • Limited availability of funds associated with high costs has badly affected the enterprises, especially SMEs.
These two developments have some intertwined opportunities for trade finance banks. A trade pattern and lack of access to finance could be areas for banks both regionally and globally to tap. The supply chain finance concept has gained a lot of momentum and popularity in the past two to three years as banks have identified that this could be a good method to monetize open account transactions and increase customer services. Celent defines supply chain finance as “a combination of trade finance provided by a financial institution, a third party vendor, or a corporation itself. A technology platform unites both the trading parties and financial institution which provide financing electronically to ensure efficient use of capital across the value chain.” Supply Chain Finance can take three forms to offer financing. Several reasons like faster growth of GDP in developing Asia, increasing FDI especially in Asia & Latin America and dynamic South to South trade are some of the reasons that SCF gaining traction in developing economies more so in the South. This evolving trade pattern has put forth strong growth opportunities for Trade Finance banks. It is crucial for banks to develop right kind of SCF programs to extend their coverage to key trade hubs, especially since SMEs in the region have clear financing constraints. It is also of utmost importance to address specific industries which have clear financial bottlenecks across the supply chain. One of the key elements that will accelerate the growth of SCF programs is the limited financing capabilities available to Asian SMEs. We estimates that SCF programs in Asia will see an 18% increase in the coming three years (see Figure 1 on Page 4). Numerous SMEs in the region are part of the assembling/manufacturing value chain and hence could be integrated into buyer-centric SCF programs in other industries, the supplier SCF program would be more appropriate. Hence we think that Asia will be the center of intense competition between global and regional/local players. Asia will drive Growth of SCF Programs

Indian Banks Migrating From Self-Service Model to Outsource Model in ATM Space

There was a time when banks wanted to have control of all the activities, especially those that involved the new technology; right from identification, deployment, installation, ownership and management. As time passed by, banks realized that all this took a significant bandwidth in order to have a dedicated team that did not justify the productivity and costs so involved. During this time, Reserve Bank of India allowed banks to partner with third party vendors to outsource certain technology completely even without prior approval from the central bank. Banks in India are increasingly migrating from self-service model to outsource model to achieve cost savings, increase the convenience for customers thereby banks can focus on core banking business. From banks perspective, there is better efficiency in ATMs if outsourced to third parties. Apart from this, it also helps to standardize the systems and process across locations. Another benefit of such model for banks is that the service charges incurred from such outsourcing can go under operational expenses in banks books as opposed to the assets in self – service model. ATMs in India are now in outsourcing phase, where banks are thinking on outsourcing ATM related deployment and maintenance to third party vendors. Banks like HDFC bank, ICICI bank and AXIS bank have already outsourced their ATM management and maintenance to third party vendors. And several others want to try out in bits and pieces before outsourcing the entire process. At present, 20,000 ATMs in the country are maintained by third party vendors like AGS Transact Technologies, Financial Software & Systems, Tata Communications, Euronet, Fidelity National Information Services, Prizm Payments and First Data. Apart from this there are also ATM equipment manufacturers like NCR, Diebold and Wincor Nixdorf who also cater to end-to-end solution needs in the ATM space.

Islamic Finance Could Not Avoid Crisis For Long

The last few years, Islamic banking and financial services evidenced rapid growth across the globe. Middle East and South East Asian countries pioneered Islamic finance. Though estimates vary, there is little dispute that annual global growth is consistently in the double digits and has surpassed conventional banking growth in a few regions. The Islamic banking assets are currently close to USD 1 trillion. Islamic banking got greater attention when conventional banks in western countries collapsed resulting in the subsequent global financial crisis and economic recession. This is when Islamic banking and finance was recognized as an alternative model. While interest income is considered the main source of income in conventional banking, the same interest or Riba is not acceptable in Islamic banking. This played the key role in financial crisis as Islamic banks were shielded from conducting interest bearing activities as per Shariah principles. Islamic financial institutions were also restricted from investing in interest bearing bonds and securities. When Islamic banks were feeling delighted about the practice, the crisis in the Middle East shook their confidence living certain questions unanswered. The global financial crisis finally stuck the Arab Gulf end of 2009, after it managed to avoid this for more than a year. Dubai stunned financial markets when it said it might need to freeze debt payments by its largest conglomerate Dubai World and two of its flagship real estate firms-Nakheel World and Limitless World-for a standstill on debt worth 59 billion dollars. The two subsidiaries are run according to Islamic law through the issuance of billions of dollars worth of sukuk. This led to a wave of aftershocks that struck the global financial markets that were in the process of recovering from the effects of the global financial crisis. While countries like Singapore and Malaysia are unaffected by the crisis neighbouring countries like Saudi Following are some of the latest developments in the Islamic finance Space: a) As investors flee debt in Dubai, neighboring Bahrain, Qatar and Saudi Arabia are likely to pick up much of its Islamic banking business as the financial hub is expected to bounce back eventually. Since emirate is positioned well and act a financial hub between Asia and Europe. Much of the talent and money flow was directed to neighbouring countries post crisis. b) Singapore and Malaysia are relatively unaffected by the Dubai Crisis and have evidenced more investments as adverse effect of crisis. c) Malaysia, for example, has the world’s largest Islamic bond market and is known for more business-friendly interpretations of what is allowed under sharia law than many Gulf countries, this has opened doors for far greater range of financial products. d) The recent Dubai Crisis has prompted several countries in the region to re-look at the regulatory aspects and are re-working on the operational and structural frame of Islamic banking in the country. e) Pakistan, Bangladesh & Indonesia are a good potential for growth for Islamic banking. In all three countries, majority of population being Muslims makes it all the more attractive for Islamic banking. While all these countries are still in the growth stage, various foreign banks operating with in these countries are also targeting at offering Islamic banking either as a window or as a subsidiary. f) India recently got a green signal from the Reserve Bank of India for Islamic banking in the country. This new development was most awaited and is expected to see some exciting progress in the days to come. g) Technology like in any other service offerings is playing a key role in Islamic banking or finance. While some banks are opting for dual offering (Islamic and Conventional banking offering) technology vendors are struggling to accommodate various forms of Shariah-approved financing. Challenges like quicker implementation, support back office functions with straight-through processing capabilities; web-based interface still exists. h) Many countries across the region are promoting Islamic banking under three broad categories
  • Allow foreign banks/ private banks to open new full fledged Islamic banks.
  • Allow the conventional banks to set up Islamic banking subsidiaries
  • Allow the existing conventional banks to open Stand-alone Islamic banking
Point of Concern a) While need for uniform Shariah regulation with and across the region is a must, the definitation of each Islamic products will avoid dilution of such product offerings. b) Islamic banks will have to appraise credit risk and indeed need to be more cautious about their credit exposure. c) The increasing competition among incumbent and new players presents challenges not only in terms of fighting for market share but also in creating innovative products. d) Dearth for scholars is no more a concern, but dearth for experienced scholars is still worry.

India Is In Accelerating Phase of Financial Inclusion

Inadequacies in rural access to formal finance and the seemingly extortion terms of informal finance for the poor provide a strong need and ample space for innovative approaches to serve the financial needs of India’s rural poor. The past decade has witnessed the emergence of several new channels to reach the last mile. However the impact of commercial banks on financial inclusion has been lesser than that of co-operative banks, regional rural banks and especially microfinance institutions (MFIs) operating with in the country. Technology for financial inclusion is accelerating world-wide and regulations are playing extremely significant role in shaping the future growth. India is at a very important juncture of financial inclusion as a huge number of regulatory and technological changes are on its way. India has bank driven inclusion model with business correspondent (BC) / agent banking model slowly catching up. The market is shaping up towards a more collaborative model as several other players join the race. In terms of the strategic aspects, RBI has asked banks to come up with a board approved Financial Inclusion Plan ( FIP ) for the next 3 years with enough flexibility in choosing the business model. This is stressed upon by allowing banks to develop a profitable business model for financial inclusion by providing basic bouquet of services with full geographic coverage in mind. Following are the accelerating factors that will further the growth of inclusion. Evolution of the agent model regulations: The recent amendment to BC regulation passed by Reserve bank of India (RBI) in 2006 has encouraged banks and other third parties to come up with profitable business model to facilitate financial access to the untapped. The new amendment allowed a range of service providers to act as BCs and permit banks to charge fees to customers for using BCs. This has motivated several players in the financial inclusion supply chain to offer better products and services, and is expected to do so in the days to come. The Unique Identification (UID) project: 2011 Union Budget has emphasized on issuing Unique Identification numbers with a view to improve service delivery, accountability and transparency in governance of various schemes. So far 200 thousand cards have been given and from 1st October 2011, one million cards will be generated per day. This will play a vital role in government initiated payment schemes and other financial inclusion programmes. Stringent MFI regulations: The recent Andra Pradesh Crisis has resulted in the central bank coming up with regulatory policy for reining in the negative implications of unrestrained microfinance growth, mainly by the formation of non-banking financial companies (NBFC-MFI) and thereby regulating this segment. Growth of G2P payments through direct cash transfer program: Indian government has decided to shit to direct cash transfer program instead of subsidy. A number of schemes like Public Distribution Schemes (PDS) that provides grains, food items, cooking fuel and fertilizers meant for poor families operated inefficiently. In order to overcome these inefficiencies and provide more structural distribution, government has now decided to transfer cash; this will certainly involve banks and business correspondents to reach the rural poor and therefore said to impact the financial inclusion in India. Issuance of new banking licenses: The set of new bank licenses that RBI is planning to issue will see more NBFCs in the Indian banking market. This move is expected to see stiffer competition in the market as well as more banks serving rural areas which is mandatory in Indian banking system. Postal Banking: As part of financial Inclusion, State Bank of India and the country’s postal department are gearing up to offer banking services to rural India. Currently India Post has the largest postal network in the world with 155,000 post offices, of which (89%) 139,000 are in rural areas. The post can thus work with the largest public or the largest private sector banks for distributing banking services to bridge the gap between banks and financially excluded.

Islamic Bank in India to get Green Signal

The Kerala high court recently dismissed a petition objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with Shariah rules. The move could pave the way for introduction of Islamic finance products by existing lenders and also reduce regulatory objections for an Islamic Bank. The conventional Indian banks have welcomed Islamic banking and finance take roots in India with the second largest Muslim population in the world (over 150 million). This has certain set of apprehensions about whether Islamic finance has any future in this country with an avowedly secular constitution. While regulators make way for Islamic banks in India the big question is about the responsibilities associated with it for the advocacy groups to move ahead and lay a solid foundation for introduction of Islamic finance in India keeping in line with Shariah principles. The dearth for Islamic scholars should not put the task of Islamic banking into wrong hands repeating in the blunders committed elsewhere of bringing in the “corrupt and spurious” products and models of some so-called Islamic banks. It is also of at most important to focus on organic growth with out being over ambitious, resulting in dilution of Shariah laws. The point of concern is the awareness of the concept of Islamic banking even with in Muslims with in the country is very low which will result in delayed acceptance and this is where educating the customers comes into picture.

Are we witnessing times of diluted Micro-finance objectives?

Microfinance, synonymously cited for growth in emerging markets has been witnessing its share of negative publicity of late. The spotlight is currently on how the sector is rapidly becoming an area of exploitation for individual benefit. The recent crisis in Andhra Pradesh (India) has drawn the attention of microfinance practitioners worldwide towards regulations & compliance within the MF operation space. India’s sporadically growing unregulated MFIS have created havoc and have resulted in suicide of many borrowers for over –indebtedness, specifically in the state of Andhra Pradesh. The alarming debt to equity ratio, which is high in India as compared to other similar economies, finally resulted in the regulators intervention. The drilled down motive behind investors funding MFIs was more for an individual profit than that of social objective. This translated into high pressure on the MFIs for repayments. The Reserve Bank of India set up Y H Malegam committee to probe into MFI issues to bar MFIs from stock markets and private equity (PE) saying that such moves are profit-driven, thus defeating the very purpose of financial inclusion. Apart from the clear need for a separate regulator for MFIs, there are several points of concerns at the individual MFI level like lack of transparency, conflicts of interests in ownership, accounting standards, lack of clearly defined roles etc. To conclude, micro-finance, which started as an informal lending sector at local levels has now transformed into a full fledged industry with significant capital market participation and global integration. This is also accompanied with some of the pain points discussed earlier; therefore any further development in this space will clearly call for fair rules and regulations together with compliance and supervision on the part of various stakeholders.

Bancassurance, Next Only to Agent Distribution Channel in Asian Insurance Market

While my earlier article discussed in general on how Bancassurance channel is shaping up in various regions in Asia Pacific. This write-up sheds some light in terms of market share and growth of Bancassurance in various regions in A Pac. It is evident that this channel is picking up in most of Asia Pacific region. However the channel is still next only to the dominent Agent channel. In Mainland China, Bancassurance accounted for 27 percent market share of total insurance sales, agent channel dominated the market (37 percent market share) in 2009. Insurance market in China is undergoing structural changes with in the market and this is expected to boost the premium income of insurers via banking channel. In Hong Kong, Banks have become an important distribution channel for life, health and mandatory provident funds, supplying up to 40 percent of the market’s new business. HSBC and Hang Seng Bank together held 40 percent of the Mandatory Provident Fund (MPF) market. In Taiwan, the concept of “One Stop Shop” has become a common philosophy for banks. Premium income for individual life insurance new business from bancassurance accounted for 68 percent in 2009. Banks contributed 88 percent to new individual annuities, 66 percent to new investment-linked businesses, and 51 percent to new life insurance businesses. While P&C market is dominated by agents and brokers (67 percent of the market share). Personal accident/ health Insurance is mostly under taken by Insurance companies themselves, thus accounting for 91 percent of this line of business. In Singapore, insurance agents make up the main sales channel for life insurance. The market share however has declined from 66 percent from 2004 to 61 percent in 2009. Bancassurance accounted for 22 percent of the total weighted new business premium income Bancassurance market share in Malaysia has grown from 45 percent in 2005 to 51 percent in 2008. The agency network had traditionally been the main distribution method but has gradually lost some ground to bancassurance. Agency network accounted for 47 percent market share in 2004 which has come down to 44 percent in 2008. Domestic insurers account for over 80 percent of Bancassurance market. In South Korea, solicitors and internal employees make up the main sales channel for the life insurance industry. In 2008, the bank channel grew to 37 percent next only to solicitors and internal employees of the insurance companies with 54 percent. Indian life insurance market is dominated by tied agents, more so with the state owned Life Insurance Corporation of India (LIC). Over 75 percent of new business premium is generated by individual agents. However, individual agents in private companies account for less than 50 percent of total sales, while more than 40 percent is attributed to the bank and direct selling channel. Banks and brokerage firms have 30 percent and 20 percent respectively of the P&C insurance market. Markets such as Thailand, Malaysia and China have better acceptance of bancassurance channel as opposed to India and Singapore as brokers and agents are still major insurance carriers in these region. It is also noteworthy that all developing and accelerating markets are evidencing high potential for growth in Bancassurance.

Are Islamic Banks to Enter Indian Market?

Islamic banking has become a major global industry, with growth of 10% to 15% per year over the last decade. Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is in an infancy stage in North Africa and Europe. There are about 300 Islamic banking institutions, and, as the market is growing rapidly, there is still a huge potential for entrants in Islamic banking Islamic banking is yet to make its headway into Indian market as currently only Non Banking Financial Institutions are allowed to operate under Shariah principles. Since the Shariah principles directly conflict with conventional banking principles, making it difficult for Indian banks to offer Islamic banking products. For instance Al Wadiah (for saving bank account): Section 21 of the Banking Regulation (BA) Act requires payment of interest on such deposits; thus, interest-free deposit and a simple charging of premium or Hiba is not permissible. Likewise Mudharabh (for term deposit or investment) under section 21 of the BR Act disallows such products where the bank can invest the money in equity funds (in India, equity exposure is determined by a separate set of rules), and the customer has complete freedom in the management. Reserve bank of India has formed a committee (Raghuram Rajan Committee) to look in to the matter and the Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact. India with a 15% Muslim population, the highest in a non-Islamic country and second highest in the world thus offers huge potential to exploit. The size of the market will be very large as the Indian population is over a billion thus making it about 150 million Muslim population and majority of them, in the name of religious faith, are looking for interest free banking and finance. However, realistically speaking, Indian market will have to wait for another 2 – 3 years for an Islamic bank to become operational. Apart from this awareness of Islamic banking and products, dearth for Shariah scholars, designing Shariah compliant products are still are challenge.

Is Bancassurance flavour of the Season?

Bancassurance is growing in many Asian markets buoyed by deregulation of banking sector on one hand and Insurance companies intending to optimize distribution via banks on the other hand. On the local level, bancassurance business in Asia-Pacific countries has evolved in different ways. While different geographies are targeting different customer base and products, for instance countries like Malaysia, Indonesia, Thailand where Muslim population is high and growing, insurance companies are joining hands with banks to provide a wide range of Islamic finance and takaful insurance products. And in some other emerging economies with predominant agricultural countries like India banks are joining hands with co-operative societies and Regional Rural Banks to reach out to vast untapped population. Asia Pacific region is “Agent” dominated distribution in terms of both life and non life, however Bancassurance is growing quickly. Penetration of Bancassurance ranges from <10 percent in countries like Japan and Thailand to as high as 40 – 50 percent of new business in countries like South Korea and Malaysia The existing bank branches and other infrastructures like ATM, online, telephone, and mobile modes have triggered the insurance companies to come up with various innovative models in collaboration with banks to effectively use the already existing channels. Bancassurance is one of the growing models that insurance companies are targeting to reach various customer segments. Since bank customer are co-related to savings and insurance customers are co-related to retirement, pension etc, routing insurance products via bank branches will not only build long lasting relation with customers, but also act as one stop shop for all financial needs of customers.