A study on bancassurance final year proj


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A study on bancassurance final year proj

  1. 1. INTRODUCTION INTRODUCTION The business of banking around the globe is changing due tointegration of global financial markets, development of newtechnologies, universalization of banking operations anddiversification in non-banking activities. Due to all these movements,the boundaries that have kept various financial services separate fromeach other have vanished. The coming together of different financialservices has provided synergies in operations and development of newconcepts. One of these is bancassurance. Bancassurance simply means selling of insurance products bybanks. In this arrangement, insurance companies and banks undergo atie-up, thereby allowing banks to sell the insurance products to itscustomers. This is a system in which a bank has a corporate agencywith one insurance company to sell its products. By selling insurancepolicies bank earns a revenue stream apart from interest. It is called asfee-based income. This income is purely risk free for the bank sincethe bank simply plays the role of an intermediary for sourcingbusiness to the insurance company. It has its genesis decades ago in France, where this channeltoday is the predominant source of insurance business. It has grown atdifferent places and taken shapes and forms in different countriesdepending upon demography, economic and legislative prescription in 1
  2. 2. INTRODUCTIONthat country. In some countries, bancassurance is still largelyprohibited, but it was recently legalized in countries such as theUnited States, when the Glass-Steagall Act was repealed after thepassage of the Gramm-Leach-Bliley Act.Bancassurance is a new buzzword. It originated in India in the year2000. Following the recommendations of First NarasimhamCommittee, the contemporary financial landscape has been reshaped.Thus, present-day banks have become far more diversified than everbefore. Therefore, their entering into insurance business is only anatural corollary and is fully justified too as ‘insurance’ is anotherfinancial product required by the bank customers. From the view point of insurance industry also the importance ofbancassurance was felt necessary. With the increased pressures incombating competition, companies are forced to come up withinnovative techniques to market their products and services. At thisjuncture, banking sector with its far and wide reach, was thought of asa potential distribution channel, useful for the insurance companies.That’s where the bancassurance came into existence. Thus,bancassurance is poised to become a key determinator / differentiatingfactor in the Insurance industry as well. Given India’s size as a continent it has, however, a very lowinsurance penetration and low insurance density. The penetration levelof life insurance in the Indian market is abysmally low at 2.3% ofGDP with only 8% of the total population currently insured. As 2
  3. 3. INTRODUCTIONopposed to this, India has a well-entrenched wide branch network ofbanking system, which only few countries in the world could matchwith. It is predicted by experts also that in future 90% of share ofpremium will come from Bancassurance business only. And almosthalf of the population likely to be in the wage earner bracket by 2010that there is every reason to be optimistic that bancassurance in Indiawill play a long inning. Currently there are more and more exchange of wedding ringsbetween banks and Insurance Company for better business prospect infuture. With the enoromous benefits for banks like increase inrevenue, return on asset, customer retention, better reputation etc., thebancassurance is going to be a big revolution in the banking industry.It is against this backdrop an attempt is made to analyse the financialperformance of the HDFC bank in bancassurance so far and to findout the areas where they can make use of and still need to focus inorder to make HDFC bank to play a vital role in the bancassuranceindustry. 3
  4. 4. INTRODUCTION 1.1 MEANING, DEFINITION AND CONCEPTMEANING: Bancassurance is a combination of two words ‘Banc’ and‘assurance’ signifying that both banking and insurance products andservice are provided by one common corporate entity or by bankingcompany with collaboration with any particular Insurance company.In concrete terms bancassurance, which is also known as Allfinanz -describes a package of financial services that can fulfill both bankingand insurance needs at the same time. It is the provision of insurance (assurance) products by abank. The usage of the word picked up as banks and insurancecompanies merged and banks sought to provide insurance, especiallyin markets that have been liberalized recently. In its simplest form,Bancassurance is the distribution of insurance products through theBank’s distribution network.. It is a phenomenon wherein insuranceproducts are offered through the distribution channels of the bankingservices along with a complete range of banking and investmentproducts and services. Bancassurance tries to exploit synergiesbetween both the insurance companies and banks. 4
  5. 5. INTRODUCTIONDEFINITION: The term first appeared in France in 1980, to define the saleof insurance products through banks’distribution channels (SCOR2003). The Life Insurance Marketing and Research Association’s(LIMRA’s) insurance dictionary defines bancassurance as “theprovision of Life insurance services by banks and buildingsocieties”. Alan Leach, in his book, “European Bancassurance –Problems and prospects for 2000”, describes bancassurance as“the involvement of banks, savings banks and building societies in themanufacturing, marketing or distribution of insurance products”. According to IRDA, ‘bancassurance’ refers to banks acting ascorporate agents for insurers to distribute insurance products.”Literature on bancassurance does not differentiate if thebancassurance refers to selling of life insurance products or non-lifeinsurance products.Accordingly, ‘bancassurance’ is defined to meanbanks dealing in insurance products of both life and non-life type inany forms.But in this research the focus is entirely concentratedtowards life insurance. It is also important to clarify that the termbancassurance does not just refer specifically to distribution alone.Other features, such as legal, fiscal, cultural and/or behaviouralaspects also form an integral part of the concept of bancassurance(SCOR 2003). 5
  6. 6. INTRODUCTION There are many definitions of bancassurance and, in essence itdoes depend upon the model used, and the stage of development.However, the definition of a fully developed model that is mostcommonly used is: “Manufacturing and distributing cost effectivelybanking and insurance products to a common customer base”.CONCEPT: This concept gained importance in the growing global insuranceindustry and its search for new channels of distribution.However, theevolution of bancassurance as a concept and its practicalimplementation in various parts of the world, have thrown up anumber of opportunities and challenges. Bancassurance is a relatively new concept in the globalstage.unlike banks and insurerswhich have been around in one form orthe another for centuries,bancassurance has only been around for afew decades. The concept of bancassurance was emerged in thewestern world when banks began to get involved in marketing ofinsurance business. From a purely historical perspective, many regardBarclay’s Life, set up in 1965 in the UK as an insurance subsidiary ofthe eponymous bank, as the pioneer of bancassurance. But the termbancassurance came into existence in France after 1980 to define thesale of insurance through an intermediary bank. 6
  7. 7. INTRODUCTION It has reared its head in France in the late 1970’s,motivated byamong other things changing customer needs due to an inadequatepension scheme that existed at that time. As the governments can nolonger maintain the funding that people have begun to take a moreactive role in their future entitlements by looking at alternatives topensions. Bancassurance provides not only provides an alternative topensions but also caters to the current taste of customers, which is nolonger satisfied by the traditional products offered by the insurers. Asbancassurance allowed the banks to move away from incomegenerated by the interest spreads it is viewed as a solution to alleviatethe problem of poor consumer savings, squeezed margins. Thuslackluster pension schemes, poor consumer savings, squeezedmargins, the need for one stop shop delivery for all financial servicesamong the consumers, increasing importance of strategic alliance hasall led to the growth of bancassurance in Europe. With the success ofbancassurance model in Europe, the bancassurance, which was only aEuropean phenomenon, is becoming popular in other continents also Bancassurance seems to have made the greatest impact inFrance. Almost 100% of the banks in France are selling insuranceproducts. It is claimed that the 55% to 60% of the life insurancebusiness in France had come through banks. In Portugal and Spain itwas over 70%. In U.K it is about 30%. In Argentina, Brazil, Chile,Colombia and Mexico also the bancassurance is becoming popular.Hardly 20 % of the United states banks are selling insurance productsas only recently the Glass steagell act was repealed which hasprohibited the banks from entering into the financial services. In Asia: 7
  8. 8. INTRODUCTIONSingapore, Taiwan and Hong Kong have surged ahead inBancassurance then that with India and China taking tentative stepforward towards it. In Middle East, only Saudi Arabia has made somefeeble attempts that even failed to really take off or make any changein the system.RELEVANCE OF BANCASSURANCE IN THE INDIANFINANCIAL SECTORi)) Integration of the financial service industry in terms of banking,securities business and insurance is a growing worldwidephenomenon. The Universal Banking concept is evolving on theselines in India.ii) Banks are the key pillars of India’s financial system. Public haveimmense faith in banks.iii) Share of bank deposits in the total financial assets of householdshas been steadily rising.iv) Indian Banks have immense reach to households. Total of 65700branches of commercial banks, each branch serving an average of15,000 people.v) Banks enjoy considerable goodwill and access in the ruralregions.There are 32600 branches in rural India (about 50% of total),and 14400 semi-urban branches, where insurance growth has beenmost buoyant.196 exclusive Regional Rural Banks in deep hinterland. 8
  9. 9. INTRODUCTIONvi) Banks have enormous retail customer base.Share of ‘individuals’as a category in bank accounts is steadily increasing.Rural and semiurban bank accounts constitiute close to 60% in terms of number ofaccounts,indicating the number of potential lives that could becovered by insurance with the upfront involvement of banks.vii) Banks world over have realized that offering value-added servicessuch as insurance, helps to meet client expectations. Competition inthe Personal Financial Services area is getting `hot’ in India thatBanks can retain customer loyalty by offering them a vastly expandedand more sophisticated range of products. Insurance distribution canalso help the bank to increase the fee-based earnings to a largeextent.viii) Fee-based selling helps to enhance the levels of staff productivityin banks.This is vitally important to bring higher motivation levels in banks inIndia.ix) Banks can put their energies into the small-commission customers’that insurance agents would tend to avoid. Banks’ entry in distributioncan help to enlarge the insurance customer base rapidly. This helps topopularize insurance as an important financial protection product.x) Bancassurance helps to lower the distribution costs of insurers.Acquisition cost of insurance customer through bank is low. Sellinginsurance to existing mass market banking customers is far lessexpensive than selling to a group of unknown customers. Experience 9
  10. 10. INTRODUCTIONin Europe has shown that bancassurance firms have a lower expenseratio. This benefit could go to the insured public by way of lowerpremiums.xi) Banks have an important role to play in the pension sector whenderegulated.Low cost of collecting pension contributions is the keyelement in the success of developing the pension sector. Moneytransfer costs in Indian banking is low by internationalstandards.Portability of pension accounts is a vital requirement whichbanks can fulfill, in a credible framework.REASONS FOR BANKS TO ENTER INTO BANCASSURANCE The main reasons why banks have decided to enter the insurance industry area are the following:  Intense competition between banks, against a background of shrinking interest margins, has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products. New products could substantially enhance the profitability andincrease productivity.  Financial benefits to a bank performance can flow in a number of ways, as briefly outlined below: - Increased income generated, in the form of commissions and/or profits from the business (depending upon the relationship) 10
  11. 11. INTRODUCTION - Reduction of the effect of the bank fixed costs, as they are now also spread over the life insurance relationship. - Opportunity to increase the productivity of staff, as they now have the chance to offer a wider range of services to clients  Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts.This shift in investment preferences has led to a reduction in the share of personal savings held as deposits, traditionally the core element of profitability for a bank which manages clients money. Banks have sought to offset some of the losses by entering life insurance business.Life insurance is also frequently supported by favourable tax treatment to encourage private provision for protection or retirement planning. This preferential treatment makes insurance products more attractive to customers and banks see an opportunity for profitable sales of such products.  Analysis of available information on the customer financial and social situation can be of great help in discovering customer needs and promoting or 11
  12. 12. INTRODUCTION manufacturing new products or services.Banks believe that the quality of their client information gives them an advantage in distributing products profitably, compared with other distributors (e.g. insurance companies).  The realization that joint bank and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products.  Banks are experiencing the increased mobility of their customers, who to a great extent tend to have accounts with more than one bank. Therefore there is a strong need for customer loyalty to an organization to be enhanced.  Client relationship management has become a key strategy. To build and maintain client relationships,banks and insurers are forming partnerships to provide their clients with a wide range of bank and insurance products from one source.  It is believed that as the number of products that a customer purchases from an organization increases the chance of losing that specific customer to a competitor decreases. 12
  13. 13. INTRODUCTIONWHY IS BANCASSURANCE MORE SUITED TO LIFEINSURANCE PRODUCTS? Traditionally, much fewer non-life insurance products aredistributed through bancassurance than life insurance products. Thereare several reasons for this:✔ The main reason may be the complementary nature of lifeinsurance and banking products: bank employees are already familiarwith financial products and quickly adapt to selling insurance-basedsavings or pension products;✔ On the other hand, the non-life market requires specialmanagement and selling skills, which are not necessarily prevalent inbancassurance. In addition, such competencies require significantinvestment in training and motivation, and therefore additional costs;✔ Life insurance products are generally long-term products, whichrequire customers to have complete confidence in the institution thatinvests their money. And we now know that, in many countries, bankshave a better image and are more trusted than insurance companies;✔ Bank advisers can use their knowledge of their customers’ financesto target their advice towards specific needs. This is a majoradvantage in life insurance and less important in personal injuryinsurance;✔ Some professionals also refer to the claims management aspect ofpersonal injury insurance, which could have a negative impact on 13
  14. 14. INTRODUCTIONbrand image. This would seem to explain why for a long timebancassurance operators hesitated to offer these types of product.ADVANTAGES OF BANCASSURANCE: Everybody is a winner in bancassurance. For banks it mainlyacts as a means of product diversification and additional fee income;for insurance company it acts as a tool for increasing their marketpenetration and premium turnover and for customer it acts as abonanza in terms of reduced price, high quality products and deliveryto doorsteps. Hence it is a win-win solution for everyone whoinvolved.To the bankers:  In a situation of constant asset base the bank can increases Return on Assets (ROA)by increasing their income, by selling insurance products through their own channel. It can cover operating expenses and make operating expenses profitable by leveraging their distribution and processing capabilities  Can leverage on face-to-face contacts and awareness about the financial conditions of customers to sell insurance products. 14
  15. 15. INTRODUCTION  By acting as a one stop shop for all financial services, they can improve overall customer satisfaction resulting in higher customer retention levels  Banks enjoy significant brand awareness within their geographical region providing for a lower per lead cost when advertising through print, radio and television. The advantage of a bank over traditional distributors is the lower cost per sales lead made possible by their sizeable loyal customer base.  Can establish sales oriented culture among the employeesTo the customers:  Comprehensive financial advisory services under one roof. i.e., insurance services along with other financial services such as banking, mutual funds, personal loans etc.  Enhanced convenience on the part of the insured  Easy access for claims, as banks is a regular go.  Innovative and better product ranges 15
  16. 16. INTRODUCTIONTo the insurers:  Insurers can exploit the banks wide network of branches for distribution of products. The penetration of banks branches into the rural areas can be utilized to sell products in those areas.  Customer database like customers financial standing, spending habits, investment and purchase capability can be used to customize products and sell accordingly.  Since banks have already established relationship with customers, conversion ratio of leads to sales is likely to be high. Further service aspect can also be tackled easily.Factors that appear to be critical for the success of bancassuranceare  Strategies consistent with the banks vision, knowledge of target customers needs, defined sales process for introducing insurance services, simple yet complete product offerings, strong service delivery mechanism, quality administration, synchronized planning across all business lines and subsidiaries, complete integration of insurance with other bank products and services  Another point is the handling of customers. With customer awareness levels increasing, they are demanding greater convenience in financial services. 16
  17. 17. INTRODUCTION  The emergence of remote distribution channels, such as PC- banking and Internet-banking, would hamper the distribution of insurance products through banks.  The emergence of newer distribution channels seeking a market share in the network.Bancassurance training for bank employees:The bank employees will need to be trained in the following aspects of theinsurance business:  Features of the insurance products sold  How to identify and approach a potential customer  Basic insurance needs  Handling basic objections  Other distribution channels and products  Expected roles  Procedures  Remuneration and incentive schemes  Cultures  Customer serviceContinuous training and supervision: Apart from initial training, there should be further training tosupport the development of the agent or employee. Some ways in which this canbe done are:  Agency meetings  Bank branch meetings  Area banking meetings  In-house magazine  Training circulars  Area sales seminars  Company library 17
  18. 18. INTRODUCTION  Video tapes  Certified courses  Lectures  Training material bookletsRemuneration of bank employees: Any commission payable by the insurance company is, as a principle, tobe credited to the bank profit center for the bancassurance operation. The bankmanagement sets the commission level for each manager and employee engagedin the bancassurance operation.  Selling in the bank branches (by employees or by financial advisers): For simple packaged products: employees could be rewarded with gifts and/or salary increments based on their selling performance in promoting both banking and insurance products. Such performance could be quantified via the use of a points system where by the various products are allocated as a number of points.  Warm leads: In return for providing warm leads, the bank will get a share, say 50%, of the normal first year commissions. A basis is needed for allocating this amount between branch staff (whoprovide the warm leads) and the bank owners. A possible basis would be:25% 25% 50%.The structure shown above generates benefits as follows:  Financial rewards for employees who generate warm leads  Financial rewards for managers and other staff of the bank branch who have supported bank activities while the assurance business was being generated. 18
  19. 19. INTRODUCTION Group awards or bonuses are more desirable when the contribution ofthe individual employee is either difficult to distinguish or depends on groupcooperation. 1.2 A) NEED FOR THE STUDY Today’s banking business is not the one we have seen in the past. It hasbecome much more diversified. With the shift in the customer preferences fromdeposits to investments, intense competition etc., the banks saw their profitmargin declining. Thus it has become imperative for the banks to retain thecustomer by providing more value added services under one roof as well as tofind alternative ways to generate more income. As bancassurance provides thebest possible solution to all these, most of the banks nowadays have started sellinginsurance products to its customers. HDFC bank is also having a tie up with itssubsidiary company HDFC Standard Life Insurance for selling Life insuranceproducts to its retail customers. Hence there is a need for the study to knowwhether HDFC bank has been benefited out of bancassurance by way of financialanalysis and to suggest the areas where they can make use of and converge theattention of the bank if any, is required. 19
  20. 20. INTRODUCTION 20
  21. 21. INTRODUCTION 1.2 B) STATEMENT OF THE PROBLEM To understand the financial impact of bancassurance in HDFC bankand to suggest the ways and means to improve the existing performance by wayof collecting responses from the customers. 21
  22. 22. INTRODUCTION 1.2 C) BENEFITS TO THE ORGANIZATION • Through the study the bank can know its financial performance in bancassurance and whether it is contributing to the overall progress of the bank or not. • The study would enable HDFC bank to know the general opinion of customers about insurance and bancassurance so as to know whether any awareness need to be created about the same. • The study would enable HDFC bank to know how far their initiatives in promoting HDFC standard life Insurance products have reached its customers. • It would also enable the bank to know whether they have established a strong relationship with the customers, as it is important for bancassurance. • It would also enable the bank to know the number of persons who are planning to take a life insurance policy in their near future so that it can take the advantage of the same. • The bank can also know the willingness of the customers in accepting HDFC bank as their distribution channel in case of obtaining HDFC standard Life Insurance policy in future. • Finally, it provides the opportunity for the bank to know the areas where they need to give much emphasis and uplift themselves in order to occupy a key role in the area of bancassurance. 22
  23. 23. INTRODUCTION 1.2 D) SCOPE OF THE STUDY The study focuses on the financial performance of HDFC bank in bancassurance and its contribution to the overall progress of the bank with respect to life insurance alone. The study analyses the awareness of the customer and the viewpoints of the customer about insurance as well as bancassurance. The study also measures the initiatives taken by HDFC bank in endorsing HDFC Standard Life insurance products. The study also throws light on the relationship building by HDFC bank with its customers, as it is the deciding factor for considering the bank as a one- stop shop for all their financial solutions. It also indicates the persons who are willing to take life insurance policy in the immediate future and the reasons for taking the same. It also pinpoints the willingness of the customer in accepting HDFC Bank, as their distribution channel, in case of their choice is HDFC standard Life Insurance for obtaining a policy 23
  24. 24. INTRODUCTION 1.3 OBJECTIVES OF THE STUDYPrimary objective: It is to make an analysis on the financial performance ofHDFC bank in bancassurance with specific reference to life insurance and tosuggest the ways and means to improve the existing performance by way ofcollecting responses from the customers.Secondary Objectives: .  To analyze the financial performance of HDFC bank in bancassurance and its contribution to the overall progress of the bank using ratio analysis.  To analyze the initiatives taken by the HDFC bank in endorsing the HDFC Standard Life Insurance products.  To assess the relationship building factors of HDFC bank, which is significant for bancassurance.  To know the customer preferences in selecting HDFC bank as a distribution channel in case of their willingness to obtain HDFC Standard Life Insurance policy in future. 24
  25. 25. INTRODUCTION 1 .4 LIMITATIONS OF THE STUDY  Time has played a biggest constraint that the research could not be carried out comprehensively as the duration of the study was only 4 months.  As the research contains the Secondary data for making a financial analysis the accuracy and reliability of the analysis depends on reliability of figures derived from financial statements.  The sample size for collecting the primary data was meager as it includes only 100 respondents, hence the conclusion would not be a universal one.  Personal biases and prejudices of the customers may also affect the study. Inspite of the limitations, the study was effective in analyzing theperformance of HDFC bank in bancassurance with specific reference to lifeinsurance. 25
  26. 26. INTRODUCTION 1.5 A) INDUSTRY PROFILE Banks are among the main participants of the financial system in India.Banks in India can be categorized into non-scheduled banks and scheduledbanks. Scheduled banks constitute of commercial banks and co-operative banks.In terms of ownership, commercial banks can be further grouped into nationalizedbanks, the State Bank of India and its group banks, regional rural banks andprivate sector banks (the old/ new domestic and foreign). During the first phase of financial reforms, there was a nationalization of14 major banks in 1969. This crucial step led to a shift from Class banking toMass banking. Since then the growth of the banking industry in India has beena continuous process. It has become an important tool to facilitate thedevelopment of the Indian economy. During the second phase of reforms, in the early 1990s, the thenNarasimha Rao government embarked on a policy of liberalisation and gavelicences to a small number of private banks, which came to be known as NewGeneration tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up), HDFCBank andICICI Bank. This move, along with the rapid growth in the economy ofIndia, kickstarted the banking sector in India, which has seen rapid growth withstrong contribution from private banks and foreign banks. Currently, India has 88 scheduled commercial banks (SCBs) - 28 publicsector banks (that is with the Government of India holding a stake), 29 privatebanks (these do not have government stake; they may be publicly listed andtraded on stock exchanges) and 31 foreign banks. They have a combined networkof over 53,000 branches and 17,000 ATMs. According to a report by ICRALimited, a rating agency, the public sector banks hold over 75 percent of total 26
  27. 27. INTRODUCTIONassets of the banking industry, with the private and foreign banks holding 18.2%and 6.5% respectively. There are 70324 bank offices in India and each bankoffice serves around 16000 people. It’s a huge banking infrastructure andamong best banking network in world.Current scenario: As far as the present scenario is concerned the banking industry is in atransition phase. The Public Sector Banks, which are the mainstay of the IndianBanking system account, are unfortunately burdened with excessive NonPerforming assets massive manpower and lack of modern technology. while onthe other hand the private sector banks are consolidating themselves throughmergers and acquisitions. On the other hand the Private Sector Banks in India are witnessingimmense progress They have pioneered Internet banking, mobile banking, phonebanking, ATMs. etc., They are forging ahead and rewriting the traditional bankingbusiness model by way of their sheer innovation and service. The banks today are more market driven and market responsive. Thetop concern in the mind of every banks CEO is increasing or at leastmaintaining the market share in every line of business against the backdrop ofheightened competition. With the entry of new players and multiple channels,customers have become more discerning and less "loyal" to banks. This makesit imperative that banks provide best possible products and services to ensurecustomer satisfaction. To address the challenge of retention of customers, therehave been active efforts in the banking circles to switch over to customer-centric business model. The success of such a model depends upon the approachadopted by banks with respect to customer data management and customerrelationship management. 27
  28. 28. INTRODUCTION There has been an increase in the bank focus on retail segment with theeconomic slow down. Retail banking has become the new mantra for bankingindustry. Banks are now realizing that one of their best assets for buildingprofitable customer relationships especially in a developing country like India isthe branch. Branches are in fact a key channel for customer retention and profitgrowth in rural and semi-urban set up.. Branches could also be used to inform andeducate customers about other, more efficient channels, to advise on and sell newfinancial instruments like consumer loans, insurance products, mutual fundproducts, etc. Thus, all the above led to the practice of bancassurance. The ReserveBank of India being the regulatory authority of the banking system, with thereorganization of the need for banks to diversify their activities at the right time,permitted them to enter into insurance sector as well. It has issued a set ofdetailed guidelines setting out various ways for a bank in India to enter intoinsurance sector. IRDA has also felt the necessity of introducing an additional channel ofdistribution, which is the Bancassurance to reach out more people. It startedpicking up after Insurance Regulatory and Development Authority (IRDA) passeda notification in October 2002 on Corporate Agency regulations.Legal Requirements: In India, the banking and insurance sectors are regulatedby two different entities (banking by RBI and insurance by IRDA) andbancassurance being the combinations of two sectors comes under the purview ofboth the regulators. Each of the regulators has given out detailed guidelines forbanks getting into insurance sector. Highlights of the guidelines are reproducedbelow:RBI guideline for banks entering into insurance sector provides three options forbanks. They are: 28
  29. 29. INTRODUCTION  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 thebancassurance 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.Currently there has been an increase in the number of tie-ups with banks andinsurance companies. Some of the models practiced by the banks in India are I)Referral model ii) Corporate agency model iii) Insurance as a fully integratedmodel etc.,Some of the Bancassurance tie-ups in India are as follows: 29
  30. 30. INTRODUCTION TABLE 1.1: SOME OF THE BANCASSURANCE TIE-UPS IN INDIA Insurance Company Bank Bank of Rajasthan, Andhra Bank, Bank of Muscat,Birla Sun Life Insurance Co. Ltd. Development Credit Bank, Deutsche Bank and Catholic Syrian BankDabur CGU Life Insurance Canara Bank, Lakshmi Vilas Bank, American ExpressCompany Pvt. Ltd Bank and ABN AMRO BankHDFC Standard Life Insurance Co. HDFC bank, Union Bank of India, Indian bank, saraswatLtd. bank. Lord Krishna Bank, ICICI Bank, Bank of India,ICICI Prudential Life Insurance Co Citibank, Allahabad Bank, Federal Bank, South IndianLtd. Bank, and Punjab and Maharashtra Co-operative Bank. Corporation Bank, Indian Overseas Bank, Centurion Bank, Satara District Central Co-operative Bank, JanataLife Insurance Corporation of India Urban Co-operative Bank, Yeotmal Mahila Sahkari Bank, Vijaya Bank, Oriental Bank of commerce.Met Life India Insurance Co. Ltd. Karnataka Bank, Dhanalakshmi Bank and J&K BankSBI Life Insurance Company Ltd. State Bank of IndiaBajaj Allianz General Insurance Co. Karur Vysya Bank and Lord Krishna BankLtd.Royal Sundaram General Insurance Standard Chartered Bank, ABN AMRO Bank, Citibank,Company Amex and Repco Bank.United India Insurance Co. Ltd. South Indian Bank Thus, the present day banks are more diversified than ever before. They cannot restrict themselves to traditional banking. As bancassurance prospects in India are brighter that banks in India can make use of the situation to gain profitable business venture. 1.5 (B) COMPANY PROFILE About HDFC BANK: 30
  31. 31. INTRODUCTION HDFC bank was incorporated in August 1994 in the name of HDFCBank Limited, with its registered office in Mumbai, India. The HousingDevelopment Finance Corporation Limited (HDFC) was amongst the first toreceive an in principle approval from the Reserve Bank of India (RBI) to set up abank in the private sector, as part of the RBIs liberalization of the Indian BankingIndustry in 1994.It commenced operations as a Scheduled Commercial Bank on16th January 1995. The bank has grown consistently and is now amongst theleading players in the industry. In a milestone transaction in the Indian banking industry, TimesBank Limited (another new private sector bank promoted by Bennett, Coleman &Co./Times Group) was merged with HDFC Bank Ltd., effective February 26,2000. The acquisition added significant value to HDFC Bank in terms ofincreased branch network, expanded geographic reach, enhanced customer base,skilled manpower and the opportunity to cross-sell and leverage alternativedelivery channels. The Bank at present has an enviable network of over 746branches spread over 329 cities across India. All branches are linked on an onlinereal-time basis. Customers in over 120 locations are also serviced throughTelephone Banking. The Banks expansion plans take into account the need tohave a presence in all major industrial and commercial centers where its corporatecustomers are located as well as the need to build a strong retail customer base forboth deposits and loan products. The Bank also has a network of about over1647-networked ATMs across these cities. Moreover, all domestic and internationalVisa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American ExpressCredit/Charge cardholders can access HDFC Bank’s ATM network.Vision: To build a World-Class Indian Bank.Mission: 31
  32. 32. INTRODUCTION Use Enabling Technology to provide value added products andservices to customers. The objective is to build sound customer franchises acrossdistinct businesses so as to be the preferred provider of banking services for targetretail and wholesale customer segments, and to achieve healthy growth inprofitability, consistent with the bank’s risk appetite. The bank is committed tomaintain the highest level of ethical standards, professional integrity, corporategovernance and regulatory compliance.Values: HDFC Bank’s business philosophy is based on four core values –  Operational Excellence  Customer Focus  Product Leadership  PeopleCapital: The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is Rs.311.9 crore (Rs.3.1 billion). The HDFC Group holds 22.1% of the banks equity and about 19.4% of the equity is held by the ADS Depository (in respect of the banks American Depository Shares (ADS) Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors (FIIs) and the bank has about 190,000 shareholders. The shares are listed on the Stock Exchange, Mumbai and the National Stock Exchange. The banks American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol "HDB". Management: 32
  33. 33. INTRODUCTION Mr. Jadish Capoor took over as the banks Chairman in July 2001. Prior to this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and before joining HDFC Bank in 1994 was heading Citibanks operations in Malaysia The Banks Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing HDFC are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength. Awards received: The bank has received many awards to its credit, Best Local Bank in India - 2003 by Finance Asia, Best Domestic Bank in India Region in The Asset Triple A Country Awards 2003. Apart from this, the bank has rated Best Bank in India in 2003 by Business Today, Best Bank in the Private Sector for the year 2003 in the Outlook Express Awards, Best New Private Sector Bank 2003 by the Financial Express in the FE-Ernst & Young Best Banks survey 2003. It was also figured in the Best Under a Billion, 200 Best Small Companies for 2003 by Forbes Global. For use of information technology the bank was awarded with Best IT user in Banking at the IT User Awards 2003 conferred by Economictimes.com &Nasscom. The bank has also been poured by several awards during the FY 2005-06, which includes one received from ‘Business Today’, which rated the bank as ‘Best Bank in India’. Asia money awards selected the Bank as Best Domestic Commercial Bank, Best Domestic Provider for Local Currency Products and Best Cash Management Bank-India. Hong Kong-based Finance Asia Magazine selected the Bank as Best Bank in India. The Asset Magazine 33
  34. 34. INTRODUCTION named the Bank Best Cash Management Bank and Best Trade Finance Bank in India, in 2006. The Economic Times - Avaya Global Connect Customer Responsiveness Awards 2005 named the Bank Most Customer Responsive Company - Banking and Financial Services. The Bank has also been named Best Domestic Bank in India in The Asset Triple A Country Awards 2005. During 2006-07, the Bank was selected as the Best Bank in India by the Business Today Magazine for the Fourth consecutive year. Forbes magazine named the Bank as One of Asia Pacifics Best 50 companies. The Bank was named as the Best Listed Bank of India by the Business world magazine. The Bank was named as the Best Listed Bank of India by the Businessworld magazine. The Bank was selected as the Best Domestic Bank at The Asset Magazines Triple A Country Awards.Business Areas:The bank has three key business areas:1. Wholesale Banking Services: Here, the bank’s target market is primarilylarge, blue chip companies and to a lesser extent, emerging mid-sized corporate.For these corporates, HDFC bank provide a wide range of services, includingworking capital finance, trade services, transactional services, cashmanagement, etc. They are a leading provider of structured solutions, whichcombine cash management services with vendor and distributor finance, forfacilitating superior supply chain management for our corporate customers. Theyare also recognized as a leading provider of cash management andtransactional banking solutions to mutual funds, stock exchange members andbanks.2. Retail Banking Services: The objective of the Retail Bank is to provide thetarget market customers a full range of financial products and bankingservices, giving the customer a one-stop window for all his/her bankingrequirements. The products are backed by world-class service and delivered to 34
  35. 35. INTRODUCTIONthe customers through the growing branch network, as well as throughalternative delivery channels like ATMs, Phone Banking, Net Banking andMobile Banking. The HDFC Bank Preferred program for high net worthindividuals, the HDFC Bank Plus and the Investment Advisory Services programshave been designed keeping in mind needs of customers who seek distinctfinancial solutions, information and advice on various investment avenues. Theyhave a wide array of retail loan products including Auto Loans, Loans AgainstSecurities, Personal Loans and Loans for Two-wheelers. HDFC bank are also aleading provider of Depository Services to retail customers. Further HDFCbank are one of the leading players in the “merchant acquiring” business with alarge number of Point-of-sale (POS) terminals for debit / credit cards acceptanceat merchant establishments.3.Treasury Operations: Within this business, the bank has three main productareas viz., Foreign Exchange and Derivatives, Local Currency Money Market& Debt Securities and Equities. With the liberalization of the financial marketsin India, corporates need more sophisticated risk management information,advice and product structures. These are provided through the banksTreasury team. The Treasury business is responsible for managing the returnsand market risk on the banks investment portfolio.The above business groups are supported by the following groups:  Audit & Compliance  Credit & Market Risk  Finance, Administration & Legal  Human Resources  Information Technology  Operations 35
  36. 36. 2.0 REVIEW OF LITERATURE2.1 Bancassurance - A Global Breakdown: It is important to outline the impact that bancassurance has had ondiffering regions around the world, as well as looking at the major regulations thatimpact the further growth of bancassurance. Below, is provided with a briefsynopsis of bancassurance markets in certain key areas.EUROPE: Bancassurance is a construct of Europe (France in particular) and thisperhaps helps explain why it is such a phenomenal success within certainEuropean markets. Largely the 1989 Second Banking Coordination Directivemotivated the large influx of banks into insurance within Europe in recent years.Currently, the penetration levels are fairly stable in Europe, since bancassurancein the majority of Western European countries (France, Netherlands, Portugal andSpain) has reached what studies such as Swiss Re. (2002) argue to be maturity.These penetration levels will only pick up once bancassurance manages to fullyinfiltrate Central and Eastern European countries such as Hungary and Poland,and the Baltic nations. Currently, the final major hurdle for bancassurance inWestern Europe seems to lie in the U.K. where a predominantly strong insuranceboard still attempts to resist the bancassurance trend even in the face ofwidespread deregulations.FRANCE: In France, the success of bancassurance is mitigated by a favorable taxtreatment on life insurance products, lack of competition within the insuranceindustry, and an inadequate pension scheme (Bonnet and Arnal (2000). Thepioneer of bancassurance in France is argued to be Credit Mutual, which createdits own life and non-life subsidiaries in the early 1970’s (Sakr (2001)). 36
  37. 37. REVIEW OF LITERATUREBancassurance has seen the most success in the life insurance market, somethingthat is true for every nation, increasing from 52% in 1995 to account for 69% oflife insurance business n 2000 (Durand (2003), and Turner (1998)). However, asof late, the banking networks market share of the life insurance market hasremained fairly stagnant, actually dropping over the years to 66% market share in2001 and 61% in 2003 (Falautona and Marsiglia (2003), Datamonitor (2003)).This resulted from a combination of falling stock market prices and the bankingnetwork bearing the brunt of lower transfer prices according to Benoist (2002). This means that banking and insurance companies are overseen separatelywithin the country. For a conglomerate, the regulator will depend on who is theparent of the two. for example, if the bank is dominant, then it is the job of thebanking regulator to oversee the company. There are no separates regulators forfinancial conglomerates, merely a strong cooperation between differentregulators.UNITED KINGDOM: Bancassurers have faced a tougher time in trying to penetrate the U.K.market, thanks in large to a combination of restrictive regulations and a powerfulinsurance governing body. The first move for bancassurers came in 1985 whenStandard Life purchased a stake in the Bank of Scotland. Changes in legislationsoon followed in 1986 and 1988, which made it legal for banks to marketinsurance products and set up their own insurance subsidiaries (Sakr (2001)).Even then, the main type of union between the two was a joint venture, since thebanks placed an emphasis on maintaining the knowledge of the insurer. Twentyyears later, researchers argue that bancassurance is still in its infancy within theU.K., currently accounting for 15% of new insurance premiums issued (Benoist(2002), It is argued that restrictive regulations were detrimental to the growth ofbancassurance within the country and that due to the lack of experience the 37
  38. 38. REVIEW OF LITERATUREcorrect model for the U.K. is still to be found (Hubbard (spring 2001)). Twobenefits of the regulatory system in the U.K. are firstly, that it is based on onealmighty regulator that overseas the different factors of the financial servicesindustry (the financial Services Authority). This leads to more streamlinedregulations than in other countries that employ functional form regulatorysystems.SPAIN: Spain has one of the most developed markets in bancassurance(Datamonitor (2003)). Current penetration of bancassurers is over 75% of lifeinsurance business and an ever-increasing proportion of the non-life business. InSpain, the evolution of the bancassurance market is fostered by the phenomenalgrowth within the insurance services industry (life insurance alone has seen 30%growth per annum over the past 15 years (Durand (2003)). The development ofbancassurance in the Spanish market was facilitated by the well-establishednetwork of regional building societies, and also the cultural mentality that it iscorrect to take on risks (Goddard (1999)).BRAZIL: In Brazil the laws are in the bancassurers favor, and the banks within thecountry control more than 65% of the insurance market (Nigh and Saunders(2003)), a size that rivals the leading bancassurers in Europe. Furthermore, inBrazil, bancassurers are assisted by regulations that ban the development of agentnetworks (Benoist (2002)).NORTH AMERICA: The North American financial services market is the largest in the worldand bancassurance has developed in a differing manner in this region dependingon the country in question. In Canada, there has been consolidated regulation formore than 15 years and banks are legally allowed to own insurance companies,but limitations are placed on the products that can be provided (Dorval (2002)). 38
  39. 39. REVIEW OF LITERATUREWhile in Mexico, bancassurance has been a flourishing industry due largely to therole played by banks in the creation of pension funds since the 1997 pensionreforms. Bancassurance in the U.S. has, in contrast, faced a very tight regulatoryand legislative environment for many decades. The formation of financialconglomerates was greatly hindered by the Banking Act of 1933 (Glass-StegallAct) and the Bank Holding Company Act of 1956. Only in 1999 did laws becomemore favorable to banks offering insurance products, with the passing of theGramm-Leach Bliely Act. However, due to the divergence between the state andfederal laws regarding banks offering insurance products, bancassurers still face ahard time ahead in relation to regulations and attempting to overcome powerfullobbies that aim to maintain existing hierarchies (Boot (2003)). Currently, onlyaround 7% of Americans purchase their insurance products through bankbranches (Thomson (summer 2002b)). However, with the ever-continuingregulatory changes such as the demutualization of insurance companies coupledwith an ageing population, it is widely believed that there will be strong growthpotentials for bancassurers in a mature market such as the U.S.ASIA AND THE PACIFIC: Bancassurance in the Asian region has been relatively slow to take off,with the exception of countries such as Australia, Hong Kong and Singaporewhere regulations have been considerable lenient (Swiss Re. (2002)). The trend inthe majority of mainland Asian countries has been for a bank to form ties with aforeign insurer in order to begin bancassurance operations with around 80% ofthese being life insurers, and the financial structure of the operation tends to be inthe form of a distributional agreement. Since bancassurance is still in its infancyin most Asian countries, it is very susceptible to global changes. The Swiss Re.(2001) study argues that one of the major threats to the growth of bancassurancein the region is a U.S. or EURO economic slowdown. 39
  40. 40. REVIEW OF LITERATURE Most countries within Asia have only recently begun allowing theformation of bancassurance operations with the main players listed below. Certaincountries within the region are still holding out against the onslaught of thebancassurance trend. Vietnam still restricts banks from offering life insuranceproducts, while South Korea has made certain rules that make it difficult to begina bancassurance operation within the country. Nevertheless, bancassurers havemade considerable advancements within the Asian region, having a positiveoutlook for future growth. The Swiss Re. (2002) study believes that in few yearsfrom now bancassurers could account for 13% of total premiums collected inAsia’s life insurance sector. 40
  41. 41. REVIEW OF LITERATURE 2.2 Quantitative works of major Researchers related to bancassurance Compared to the vast amount of descriptive work that has been publishedin the field of bancassurance, there is only a limited amount of empiricalstudies conducted on the effects that bancassurance actually has on thecompany once implemented. This was largely due to the lack of information thatresulted from poor company disclosure statements and inadequate collections ofnational statistics. As these problems are being rectified, researchers into thebancassurance practice are making more and more empirical research;nevertheless, it is still in its early stages. The following aims at highlighting themajor quantitative findings of certain researchers that have performedresearch into the union of banks and insurers. The majority of past studies have focused mainly on the risk andprofitability effects resulting from the union of a banking and non-bankingfirm. One of the earliest studies in this area was performed by Boyd and Graham(1986). They conducted a risk-of-failure analysis and looked at two periodsaround a new Federal Reserve policy (1974s go-slow policy). they found thatbank holding companies (BHCs) involvement in non-banking activities issignificantly positively correlated with the risk of failure over the period1971-1977, while the period 1978-1983 showed no significance, thus indicatingthat the new policy had a considerable impact on bank holding company(BHC) expansion into non-banking activities. Boyd and Graham (1988)followed their 1986 study with a paper that used a simulation approach, wherebythey simulated possible mergers between banking and non-banking companieswhich were then compared to existing BHCs in order to determine whether therisk of bankruptcy will increase of decrease should expansion be allowed in to thenon-banking industry, and also to determine the concurrent effect on companyprofitability. Their main finding was that the risk of bankruptcy only declinedshould the BHC expand into the life insurance practice. Brewers (1989) study 41
  42. 42. REVIEW OF LITERATUREfinds similar risk reduction benefits existing however cannot specify whetherthey originate as a result of diversification, regulation or efficiency gains. Boyd,Graham and Hewitt (1993) build on Boyd et al. (1988) by conducting asimulation study. They once again conclude that mergers of BHCs withinsurance companies may reduce risk, whereas those with securities or real-estate firms will not. Saunders and Walter (1994) and Lown, Osler, Strahanand Sufi (2000) use a similar method to Boyd and Graham (1988) and obtainsimilar results with more current data. Estrella (2001) examines diversificationbenefits for banks by using proforma mergers. In contrast to previous studiesthat incorporate accounting data, Estrella uses market data and a measure of thelikelihood of failure that is derived through the application of option pricingtheory to the valuation of the firm. the findings indicate that banking andinsurance companies are likely to experience gains on both sides in themajority of the cases. The other major series of studies on banks expansion into non-bankingactivities focus on the wealth effects of such a move. Cybo-Ottone and Murgia(2000) analyzed the stock market valuations of mergers and acquisitions in theEuropean banking industry over the period 1988-1997, and found the existenceof significant positive abnormal returns associated with the announcement ofproduct diversification of banks into insurance. Furthermore, they found thatcountry effects do not significantly affect their overall results, suggesting ahomogeneous stock market valuation and institutional framework across Europe.Carow (2001) looked at the abnormal returns of bank and insurance companiesfollowing the changing legislation brought about as a result of the Citicorp-Travelers Group merger, and discovered that investors expect large banks andinsurance companies to gain significantly from the legislation removingbarriers to bancassurance. In an event study released later in the same year,Carow (Mar 2001) found in support the contestable market theory that insurancecompanies became worse off and banks had no long-term gains followinglegislations further supporting bancassurance within the U.S.Cowan, Howell and 42
  43. 43. REVIEW OF LITERATUREPower (2002) conducted a similar event study surrounding four separate courtrulings and discovered that on average only larger, riskier BHCs with fee-basedincome gain the most, while smaller, riskier insurers sustain the highest wealthlosses. Fields, Fraser and Kolari (2005) find that bancassurance mergers arepositive wealth creating events by examining abnormal return data. Theyfurther deduced that scale and scope economies were a contributing factor inthese results. As always, the opponents are there. Amel, Barnes, Panetta and Salleo(2004) and Strioh (2004) found that consolidation in the financial sector isbeneficial up to a relatively small size in order to reap economies of sale, and thatthere is no clear evidence supporting cost reductions stemming fromimprovements in managerial efficiencies. Strioh (2004) finds non-banking incomevolatile and that there is little evidence of diversification benefits existing. But,the majority of the past studies have found risk reduction and wealth creatingbenefits associated with the expansion of banks into the insurance industry. 43
  44. 44. REVIEW OF LITERATUREArticle 2.3Title: INSURERS UPBEAT ON BANCASSURANCE CHANNEL Bancassurance is likely to generate approximately 35% of privateinsurers’ premium income by 2008, according to an analysis of India’sbancassurance sector by Watson Wyatt Worldwide, a leading globalinsurance consulting firm. ‘India Bancassurance Benchmarking Study- 2006/7’ is the first of its kindsurvey in the Indian market, and part of an Asia-wide analysis focused onbancassurance distribution. It sets out to define bancassurance performancestandards and benchmarks against a cross section of industry practices, processesand productivity indicators. Watson Wyatt has analyzed the bancassurancechannel from the perspective of banks, life insurers and non-life insurersseparately in the report. Mr. Graham Morris, Director, Watson Wyatt Worldwide said: “the purposeof the survey was to focus and understand how banks and insurers developstrategies for selling life and non-life insurance products through the vastnetwork of bank branches in India and the practical issues they face inimplementing the sales process”. Watson Wyatt had chosen India as the firstcountry in Asia to do the Benchmarking Survey considering the vibrant growthof this alternative channel in the country compared to the other Asian markets. A total of 25 banks covering PSU, Private, and Foreign banks hadparticipated in the Survey, along with almost all private life and general insurerslicensed in the country. Nearly 90% of interviewed life insurers are expecting an increase of over75% in new business premium income for the current financial year from the 40
  45. 45. REVIEW OF LITERATUREbancassurance channel, despite the fact that they consider lack of sales culture onthe part of bank’s branch staff as a key issue in the success of bancassurance.The lack of a clear bancassurance vision on the part of the bank partner is themost visible reason for the slow progress in cross selling of insurance, despite thebank partners having impressive branch networks or large customer bases. The quality of bank customer data is frequently poor and the absence ofsimple CRM tools in most banks makes it difficult to launch specific initiativesto cross sell insurance products. Public sector banks in the country, which controlmore than 90% of the total customers, are seem to be inefficient in recordingbasic data about customers and managing available information. “Growth in bancassurance in India will fall short of its potential unless theperceived lack of sales culture and vision begin to get addressed by the banks.An understanding of theses differences will facilitate the mutual goal ofincreasing bancassurance as the leading channel in insurance distribution inIndia,” said Mr. R.Krishnamurthy, Managing Director, Distribution Practice,Watson Wyatt Insurance Consulting of the India office. Banks’ have overwhelmingly expressed a leaning towards insurers withbancassurance expertise and showing evidence of their commitment. On productdesign and development, they seem to demand more attention from insurers toinvolve the bank management team. The brand image of the bank partner, its willingness to bring about a culturalchange and involving the entire branch network are the vital factors that lifeinsurers consider when entering into a bancassurance tie-up. While developingtheir bancassurance strategy, general insurers consider increasing new businessand tapping new markets as the key factors. 100% of respondents ranked gainingsupport and commitment from the bank’s management as the critical factor inbuilding successful bancassurance operations. 41
  46. 46. REVIEW OF LITERATURE Both bankers and insurers are bullish about the future outlook ofbancassurance with nearly a quarter of respondents predicting that the overallshare of bancassurance would be about 50% or more in the life segment in theyear 2010. About 30% of the life insurers have indicated that by the year 2010, ruralinsurance business would constitute between 16-20% of their total bancassurancenew business premium. Life insurers have also expressed overwhelming support to innovativechanges in the bancassurance channel, such as banks having multiple insurerrelationships, exclusive bancassurance products for deepening insurancepenetration and simpler training requirements for the bank staff to qualify asinsurance salespersons. There is no doubt that bancassurance in India will play a major role as theinsurance sector develops. India has the unique experience of drawing strongregulatory support for this channel. Coupled with the growing awareness ofbanks to leverage on their branch network and customer strengths, the insuranceselling opportunities would get widely tapped at bank branches in the yearsahead.Source: “Business line” dated Wednesday, 19 December 2007, 42
  47. 47. 3.0 RESEARCH METHODOLOGYINTRODUCTION: Research is an academic activity and as such the term should be usedin technical sense. According to Clifford Woody research comprises defining andredefining problems, formulating hypothesis or suggested solutions, collecting,organizing and evaluating data; making deduction and reaching conclusion; and atlast care fully testing the conclusions to determine whether they fit theformulating hypothesis. The main aim of the research is to find out the truth which is hiddenand which has not been discovered as yet.OBJECTIVES OF RESEARCH: 1. To gain familiarity with a phenomenon or to achieve new insights into it. 2. To portray accurately the characteristics of a particular individual, situation or group 3. To determine the frequency with which something occurs or with which it is associated with something else 4. To test a hypothesis of a casual relationship between variablesRESEARCH DESIGN: Research design is the arrangement of conditions for collection andanalysis of data in manner that aims to combine relevance to the research purposewith economy in procedure of data. It is a blue print specifying every stage ofaction in the course of research. The research design adopted in this study for secondary data, isexploratory and analytical in nature. Exploratory research aims to gain familiarityand new insights into any phenomenon while analytical research aims atanalyzing the current scenario and thereby using that to project the future 43
  48. 48. RESEARCH METHODLOGYperformance. This research aims at studying the historical performance of thecompany in bancassurance and it also evaluates the future prospects of thecompany Descriptive research design is used for collecting primary data.It is concerned with the research studies with a focus on the portrayal of thecharacteristics of a group or individual or a situation. The main objective of suchstudies is to acquire knowledge. The major purpose of Descriptive research isdescription of the state of affairs, as it exists at present.SAMPLING: Sampling may be defined as a selection of some part of an aggregateor totality on the basis of which a judgment or inference about the aggregate ortotality is made.SAMPLING DESIGN: A sampling design is a definite plan for obtaining a sample givenpopulation. There are different methods of sampling. Here Conveniencesampling technique has been used.CONVENIENCE SAMPLING: This method of sampling involves selecting the sample elements usingsome convenient method without going through the rigor of sampling method.The researcher may make use of any convenient base to select the requirednumber of samples.Accordingly, the area selected for the study was kilpauk,chennai. 44
  49. 49. RESEARCH METHODLOGYSAMPLE SIZE: Sample size refers to the number of items to be selected for the universeto constitute a sample. The total sample size was taken to be 100.METHODS OF DATA COLLECTION:NATURE OF DATA: There are two types of data namely primary and secondarydata.PRIMARY DATA: Primary data is the data collected for the first time throughfield survey. This has been used to collect the data for the purpose of this study.METHOD OF PRIMARY DATA COLLECTION The method followed in obtaining the primary data was through thestructured questionnaire. The researcher had used a Questionnaire for obtaining the primarydata for analysis. A questionnaire is a form prepared and distributed to secureresponses to certain questions. Here a well-structured questionnaire has beenprepared with all the important details regarding bancassurance. It has both openended and close-ended questions.PILOT STUDY: Before a questionnaire is finalized it should be field-tested. As such, pilotstudy has been done. That is after the questionnaire was drafted, to decidewhether it is comprehensive or not, it is used with a few (10) respondents Theirresponses are studied and it has been helpful in changing the questionnaire likegiving more instructions to the respondents for filling up, re-sequencing thequestions, addition and deletion of questions etc., 45
  50. 50. RESEARCH METHODLOGYSECONDARY DATA: It refers to the information or facts already collected.Such data are collected with the objective of understanding the past status of anyvariable. Here, secondary data has been used for making a financial analysis.METHOD OF SECONDARY DATA COLLECTION:  Annual reports  Journals and Magazines  Internet Annual reports of HDFC bank have been used for making an analysison the financial performance of HDFC bank in bancassurance. And the datapertinent to bancassurance like articles, previous researches, etc., has beencollected from journals & magazines as well as Internet.RATING SCALES:Summated rating scale: In this method, the attitude of people is classified intospecific points with approximately equal attitude value. The respondents toquestions indicate the degree of agreement or disagreement through theirresponse. Based on the response of all the questions, the attitude of therespondents is determined. This scale has been used for the following question no:10,15,17,18,21.TOOLS USED: As the research contains both primary and secondary data itincludes both financial statement analysis and statistical analysis. 1. FINANCIAL STATEMENT ANALYSIS: Financial statements refer to the formal and original statements prepared by a business concern to disclose its financial information. They are useful only when they are analyzed and interpreted. The basis for financial planning, analysis and 46
  51. 51. RESEARCH METHODLOGY decision-making is the financial information. Financial information is needed to predict, compare and evaluate the firm’s earnings ability. In this research, financial statements like annual reports of HDFC bank from the year 2003-2006 has been used for making an analysis on the financial performance of HDFC bank in bancassurance and its contribution to the overall progress of the bank. Ratio analysis, one of the most important techniques of financialstatement analysis has been used in this research.  RATIO ANALYSIS: An analysis of financial statements based on ratios is known as ratio analysis. Ratio analysis is the process of computing, determining and presenting the relationship of items. Some of the ratios used in this research are:Business ratios: They are used for comparing changes in the business fromperiod to period. With the help of this, one can pinpoint improvements inperformance or developing business areas. Some of the ratios used in this studyare:  Non-interest income as a percentage of total revenue: Non interest income is the revenue earned by the bank apart from the interest income. Hence, calculation of this ratio would reveal the contribution of non-interest income to the total revenue of the bank. It can be find out by using the formula: Non-interest income Total revenue  Non-interest income as a percentage of operating profit: This would reveal the percentage of non-interest income contribution to the operating profit.It can be find out by using the formula: Non-interest income Operating profit 47
  52. 52. RESEARCH METHODLOGY  Non-interest income as a percentage of working funds: This would indicate the percentage of non-interest income contribution to the working funds. It can be calculated by using the formula: Non-interest income Working funds  Return On Assets (Average): This ratio is calculated to measure the productivity of assets. A comparison of net income and average total assets, the ROA ratio reveals how much income management has been able to squeeze from each rupee’s worth of a companys assets Return On Assets (Average) = Net Income Average total assets  Business per employee: This is used to find out the productivity of the employees. This is calculated based on the average employee numbers. And business is the total of net advances and deposits. (Net of inter bank deposits) Business per employee = Total of net advances and deposits Average employee numbers  Profit per employee: This is also used to find out the productivity of the employees in terms of profit. This is also calculated based on the average employee numbers.  Percentage of net non-performing assets to customer assets: This is used to find out the percentage of net non-performing assets to customer assets. This can be obtained by using the formula: Net Non Performing Assets Customer Assets 48
  53. 53. RESEARCH METHODLOGY  Percentage of net non-performing assets to gross advances: This is used to find out the percentage of net NPA’s to gross advances. This can be obtained by using the formula: Net Non Performing Assets Gross advancesCapital Adequacy Ratio: Capital adequacy ratios are a measure of the amount ofa banks capital expressed as a percentage of its risk weighted credit exposures. Itis also called as Capital to Risk Weighted Assets Ratio (CRAR) .It determines thecapacity of the bank in terms of meeting the time liabilities and other risk such ascredit risk, operational risk, etc. In the most simple formulation, a banks capital isthe "cushion" for potential losses, which protect the banks depositors or otherlenders.. Capital Adequacy Ratio = Total capital funds Risk weighted assets and contingentsSTATISTICAL TOOLS USED: This constitutes an integral part of research analysis. Hence any analysis ofdata compiled should be subjected to relevant analysis so that meaningfulconclusions could be arrived at. The statistical tools applied in this research are:  Correlation co-efficient  Chi-square test  Percentage analysis.CORRELATION COEFFICIENT In a bivariate study distribution we may beinterested to find out if there is any correlation or co-variance between the twovariables under study. If the change in one variable affects a change in the othervariable, the variables are said to be correlated. If the two variables deviate in thesame direction i.e. if the increase (or decrease) in one results in a correspondingincrease (or decrease) in the other, correlation is said to be direct or positive. But 49
  54. 54. RESEARCH METHODLOGYif they constantly deviate in opposite directions i.e., if increase (or decrease in oneresults in corresponding decrease (or increase) in the other, correlation is said tobe negative. ∑xy/n - (∑x/n) (∑y/n)Correlation coefficient = …………………………………….. √∑x²/n-(∑x/n)² √∑y²/n-(∑y/n)²CHI-SQUARE TEST:When certain observed values of a variable are to be compared with the expectedvalue the test static, Ψ² = (O - E) 2 EWhere Oi = observed frequencyEi = Expected frequencyFor more accuracy, Yates correction is used and the formula used is given below: Ψ² = (O - E) 2 EPower of association test: When the calculated value in the test is greater thanthe tabulated value, we accept the alternative hypothesis Hi. In this case, power ofassociation test is applied in order to show the strength of association, where N =sample size. Based on the power of Association Test, the value indicates the fairrelationship between the variable.PERCENTAGE ANALYSIS: These are the measures of central tendency. It isused to describe relationships. It can be used to compare the relative terms, thedistribution of 2 or more series of data, since the percentage reduces everything toa common base and thereby to allow meaningful comparison to be made.Percentage Analysis = No. Of respondents * 100 Total No. Of respondents 50
  55. 55. DATA ANALYSIS AND INTERPRETATION 4.0 DATAANALYSIS AND INTERPRETATION4.1 Secondary data analysis: Secondary data analysis, the imperative part of thisstudy has been undertaken to analyse the performance of HDFC bank inbancassurance so far and the contribution of bancassurance to the progress of thebank in the form of increase in ROA, revenue etc., using ratio analysis. SinceHDFC bank has started earning revenue for the sale of insurance policies from2004 that the analysis includes from the year 2004-2006.TABLE 4.1.1HDFC BANK’S EARNINGS FOR THE SALE OF HDFC STANDARD LIFEINSURANCE POLICIES FROM 2004-2006 Year 2004 –05 2005 -06 2006- 07 Revenue earned 16,99 lacs 88,14 lacs 112,09 lacs for the sale of insurance policiesCHART 4.1.1 Revenue earned for the sale of insurance policies 120 112.09 100 88.14 80 60 Revenue (in lacs) 40 16.99 20 0 2004-05 2005-06 2006-07INFERENCE: From the above, it can be seen that there has been an impressivegrowth in the revenue over the years for the sale of HDFC standard life insurancepolicies by HDFC bank. 51
  56. 56. DATA ANALYSIS AND INTERPRETATIONTABLE 4.1.2RETAIL SEGMENT PROFIT FROM THE YEAR 2004 TO 2006: Retailbanking segment is undertaking bancassurance. And it is the fastest growingbanking business segment. One of the reasons being the bank’s dealing with thesale of insurance policies to its retail customers. It has been mentioned even in thedirector report of HDFC bank. Thus a glimpse at its profit would be imperative. Year 2004-05 2005-06 2006-07 Profit earned by 520,64 lacs 701,67 lacs 875,71 lacs the retail segment of HDFC bankCHART 4.1.2: Profit earned by the Retail Segment 1000 875.71 800 701.67 Revenue Earned 600 520.64 (in Lacs) 400 200 0 2004-05 2005-06 2006-07INFERENCE: From the above, it can be observed that there has been aphenomenal increase in the profit of retail segment from 2004-2006, whichsymbolizes the bancassurance contribution. 52
  57. 57. DATA ANALYSIS AND INTERPRETATIONTABLE 4.1.3RETAIL SEGMENT ASSETS FROM THE YEAR 2004 TO 2006: Retailsegment asset can also be increased by way of bancassurance operation. Let us takea look at its asset position from the year 2004-05 to 2006-07. Year 2004 –05 2005 -06 2006- 07 Retail assets 24,469,93 38,571,09 50,100,34CHART 4.1.3 Growth of Retail Assets 6000000 5010034 5000000 3857109 4000000 Retail Assets Value(in 3000000 2446993 Lakhs) 2000000 1000000 0 2004-05 2005-06 2006-07INFERENCE: From the above, we can infer that there has been a phenomenalincrease in the growth of retail assets over the years that it indicates thecontribution of bancassurance to it. 53
  58. 58. DATA ANALYSIS AND INTERPRETATIONTABLE 4.1.4:OPERATING EXPENSES FROM THE YEAR 2004 TO 2006: Bancassurancewill lead to a reduction in the operating expenses of the bank as it can have theopportunity of economies of scale. Thus let us took a look at the operating expensesof HDFC bank from the year 2004-05 to 2006-07. Year 2004 –05 2005 -06 2006- 07 Operating 1,085,40 1,691,09 2,420,80 expensesCHART 4.1.4: Operating Expenses - An overview3000000 2,420,802500000 Operating2000000 1,691,09 Expenses (in1500000 Lakhs) 1,085,401000000 500000 0 2004-05 2005-06 2006-07INFERENCE: From the chart, we can observe that there has been an increase inthe operating expenses of the bank. Since, HDFC bank is only in its infant stage inbancassurance, it can perform more to reduce the same in the long run. 54
  59. 59. DATA ANALYSIS AND INTERPRETATIONTABLE 4.1.5:NON-INTEREST INCOME AS A PERCENTAGE OF TOTAL REVENUE:As bancassurance revenue leads to an increase in the non-interest income, the non-interest income as a % of total revenue from the year 2004-2006 is as follows: Year 2004-05 2005-06 2006-07 Non interest 651,34 1,123,98 1,516,23 income Total revenue 3,744,83 5,599,32 8,405,25 Ratio 17.39 20.07 18.03Chart 4.1.5: Non-interest income as a percentage of total revenue 21 20 19 Ratio 18 17 16 2004-05 2005-06 2006-07INFERENCE: From the above, it can be observed that non-interest income as a% of total revenue though increased in the year 2005,it has been decreased in theyear 2006. 55
  60. 60. DATA ANALYSIS AND INTERPRETATIONTABLE 4.1.6: NON-INTEREST INCOME AS A % OF OPERATING PROFIT: Non-interest income as a contribution to the % of operating profit from the year2004-2006 is shown as below: Year 2004-05 2005-06 2006-07 Non-interest 651,34 1,123,98 1,516,23 income Operating 1,156,02 1,733,84 2,562,86 profit Ratio 56.34% 64.82% 59.16%Chart 4.1.6: Non-interest income as a % of operating profit 66% 64% 62% 60% Ratio 58% 56% 54% 52% 2004-05 2005-06 2006-07INFERENCE: From the above, it can be observed that non-interest income as a% percentage of operating profit has been increasing from 2004 to 2005.But it hasbeen decreased in the year 2006-07.Note: Operating profit = (interest income + other income – interest expense –operating expense –amortization of premia on investments - profit/(loss) on saleof fixed assets). 56
  61. 61. DATA ANALYSIS AND INTERPRETATIONBusiness ratios (As per the director’s report of HDFC bank)TABLE 4.1.7:NON – INTEREST INCOME AS A % OF WORKING FUNDS: Non-interestincome as a % of working funds is shown as below: Year 2004-05 2005-06 2006-07Non interest income 1.44% 1.79% 1.76% as a % of working fundsChart 4.1.7: Non interest income as a % of working funds 2.00% 1.50% ` 1.00% Ratio 0.50% 0.00% 2004-05 2005-06 2006-07INFERENCE: From the chart it can be observed that non-interest income as a%percentage of working funds though increased in the year 2005,it has beendecreased in the year 2006.TABLE 4.1.8:RETURN ON ASSETS (AVERAGE): The best opportunity for the banks, whichundertakes bancassurance operation is that, it can increase its return on assets.Hence, the return on assets of the bank from 2004-2006 is as follows: 57
  62. 62. DATA ANALYSIS AND INTERPRETATION Year 2004-05 2005-06 2006-07 Return on 1.47% 1.38% 1.33% Assets (Average)Chart 4.1.8: Return on assets 1.50% 1.45% 1.40% Ratio 1.35% 1.30% 1.25% 2004-05 2005-06 2006-07INFERENCE: From the above, it can be observed that the return on assets of thebank has been decreased from the year 2004 – 2006.TABLE 4.1.9;BUSINESS PER EMPLOYEE: The business per employee from 2003-2006 is asfollows: Year 2004-05 2005-06 2006-07 Business Per 806 758 607 58
  63. 63. DATA ANALYSIS AND INTERPRETATION EmployeeChart 4.1.9: Business per Employee 900 800 700 600 500 Ratio 400 300 200 100 0 2004-05 2005-06 2006-07INFERENCE: From the above, it is clear that the business per employee of thebank over the years has been on the decreasing trend.TABLE 4.1.10PROFIT PER EMPLOYEE: Profit per employee from 2004-2006 is as follows: Year 2004-05 2005-06 2006-07 59
  64. 64. DATA ANALYSIS AND INTERPRETATIONProfit per 8.80 7.39 6.13employeeChart 4.1.10: Profit per Employee 10 8 6 Profit per 4 employee 2 0 2004-05 2005-06 2006-07INFERENCE: From the above, it can be observed that profit per employee of thebank over the years has been on the decreasing trend.RBI guidelines: As per the RBI guidelines for the banks to enter into theinsurance sector, The CRAR of the bank should not be less than 10 per cent,and the level of Non Performing Assets (NPAs) should be reasonable. Hence,analysis of such ratios is also important.Capital adequacy ratio: Capital adequacy ratio from the year 2004-2006 canbe shown as follows: (As the total capital includes tier-1 and tier-2, it can beviewed separately.)TABLE 4.1.11 Tier 1 capital: Year 2004-05 2005-06 2006-07 60
  65. 65. DATA ANALYSIS AND INTERPRETATION Tier 1 capital 3,96,216 5,149,91 6,352,71Risk weighted assets and contingents 41,27,103 60,217,62 74,081,92 Ratio 9.60% 8.55% 8.57% TABLE 4.1.12 Tier 2 capital: Year 2004-05 2005-06 2006-07 Tier 2 capital 1,054,73 1,720,71 3,339,99Risk weighted assets and contingents 41,27,103 60,217,62 74,081,92 Ratio 2.56% 2.86% 4.51%Where, Tier –1 capital includes paid up capital, statutory reserve, general reserve,balance in profit and loss account and amalgamation reserve. From this,outstanding deferred tax asset, if any, is deducted. Tier– 2 capital includes general loan loss reserves, investment fluctuationreserve and subordinated debt.TABLE 4.1.13 Total Capital: Year 2004-05 2005-06 2006-07 Total capital 5,016,89 6,870,62 9,692,70 Risk weighted assets and 41,27,103 60,217,62 74,081,92 contingents 61
  66. 66. DATA ANALYSIS AND INTERPRETATION Ratio 12.16% 11.41% 13.08%Chart 4.1.11: Capital Adequacy Ratio 13.5% 13.0% 12.5% Ratio 12.0% 11.5% 11.0% 10.5% 2004-05 2005-06 2006-07INFERENCE: From the above, it can be seen that the capital adequacy ratiothough decreased in the year 2005,it has been increased in the year 2006-07.TABLE 4.1.14:PERCENTAGE OF NET NON PERFORMING ASSETS TO CUSTOMERASSETS: The percentage of net non-performing assets to customer assets isshown as below from the year 2004-2006: Year 2004-05 2005-06 2006-07Percentage of net 0.20% 0.36% 0.38%non performing 62