Savings play a pivotal role in the capital formation of any country. The gross domestic savings (GDS) of a country mainly account from household, private and public sectors. In India, household savings, composed of financial and physical occupy a major chunk in the GDS.
The objective of the paper is to signify the bank’s role in promoting insurance business – termed as bancassurance, in the light of understanding the trend of gross financial assets of households in India. This is so because bank deposits constitute dominant share of the financial savings of households. Besides, insurance plays a very vital role to cover the risk of loss under uncertainty and contributes a lot to the general economic growth of the society.
Hence, bancassurance would help the banks not only augment their income but would also allow more capital formation for the development of the country. Keeping in view, both the potential of insurance industry and strong banking system, the study highlights the significance of bank deposits as an important component of household savings since 1990s and the importance of bancassurance channel.
III. Trends in Gross Financial Savings of Households in India
The gross domestic savings rates of India, China and Singapore continue to show an upward trend, even as those of many other emerging and advanced countries have either stabilised at much lower levels or are on a declining trend. India’s savings performance has been quite impressive in a cross-country context. (RBI Report of the Working Group on Savings during the Twelfth Five-Year Plan).
During the period 1990-2000, Indian households preferred to invest in financial assets whereas during 2000-07, more savings were found in physical assets. Again, in 2007-08, more investments were made in financial assets. However, the investment in financial savings declined in 2008-09 due to financial crisis. Thus, from 2008 onwards, physical savings are preferred to financial savings.
According to the RBI, as a percentage of the gross domestic product (GDP) at current market prices, gross financial savings of households have fallen from 15.8% in 2006-07 to 15.2% in 2007-08 and to 14% in 2008-09. This is due to decrease in household investments in shares and debentures, which accounted for 2.6% of in 2008-09 (12.4% in 2007-08). It is evident that investors are risk-averse and they invested more in debentures rather than shares.
However, while bank deposits, in 2008-09 accounted for 54.9% of total household financial saving (50.4% in 2007-08), life insurance funds rose to 19.5% of financial savings correspondingly (17.4% in the previous year). The deposits with non-banking companies also increased because of their higher interest rates. One of the reasons for decline in the share of their financial savings is due to high inflation since 2009.
According to the annual Macroeconomic and Monetary Developments report, while household savings declined from 25.2 per cent in 2009-10, to 23.5 per cent in 2010-11 and further reduced to 22.3 per cent in 2011-12. The financial savings was 12% in 2009-10, declined to 10.4 per cent in 2010-11 and to 8 per cent in 2011-12. The physical savings for the corresponding years are 13.2 per cent, 13.1 per cent and 14.3 per cent.
According to the Economic Outlook, gross financial savings (measured as increase in gross financial assets), which was at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to 13.6 per cent in 2010-11. Further, the gross domestic saving rate as per central statistics office’s (CSO’s) estimates declined to 30.1 per cent in 2012-13 from 31.3 per cent in 2011-12, mainly on account of a decline in the rate of household physical savings. This eventually led to low capital formation.
During 2013-14, household financial savings rate increased only marginally to 7.2 per cent of gross domestic product (GDP) in 2013-14 from 7.1 per cent in 2012-13. In 2013-14, the total currency (in cash) held by the households was at Rs 1,018 billion (Rs.1116 in the previous year). The total investments made in bank deposits were Rs 6,722 billion (Rs.5750 in the previous year).
The total non-banking deposits made in 2012-13 and 2013-14 were Rs.157 and Rs 185 billion respectively. The investments in Life insurance funds also increased from Rs 1,803 billion to Rs 1,996 billion.
The investments in Provident and Pension funds were being around Rs 1,020 billion in 2013-14 (Rs.960 million in 2012-13) and that of shares and debentures showing a decrease from Rs. 438 million to Rs.274 in the previous year.
On the whole, total financial assets increased in 2013-14 by 12.5% from last year i.e., from Rs.10436 billion to Rs 11,740 billion. Hence, it is very clear that the majority of household savings are routed to bank deposits.
The Union budget 2014-15 supported both investment and savings such as measures to increase in the personal income tax exemption limit so as to increase disposable income, increase in investment limit under section 80C of the Income-Tax Act as well as the annual ceiling limit in the public provident fund (PPF) that will encourage savings and improve financing of investment. Besides, the RBI complemented these measures by providing incentives for encouraging the flow of bank credit to infrastructure and affordable housing.
Taking into account, the demand for gold in India, the budget 2015 proposed gold bond and deposit schemes. It is estimated that Indian households hold about 25,000 tonnes of gold. The approximate value of gold privately held in India is about Rs 50 lakh crore i.e., 35% of country’s GDP and 60% of its bank deposits.
For generating more capital, the government has to tap this source through integration of the physical market for gold with the financial market. Although gold loans and ETFs are in practice by the NBFCs, the banks too must take part in offering gold-backed deposit schemes keeping in view the price risk and the fungible nature of gold.
According to the NCAER (National Council for Applied Economic Research) survey, bank deposits are the most preferred avenue of savings in both rural and urban areas. While rural households prefer insurance, urban households prefer provident funds to invest their savings. The share of bank deposits has always occupied a lion’s share of household savings.
This is because the banks enjoyed the patronage of people because of various services offered by the banks, thereafter mobilize deposits, increased net work of branches and bringing about various reforms from time to time such as financial inclusion to tap unbanked population. As regards the share of Life Insurance Funds, the policy changes brought in the ULIP and withdrawal of tax incentives made it less attractive. But, with the increasing insurance density, favourable demographics and government initiatives such as insurance inclusion, insurance industry in India would be a lucrative one.
Provident and Pension Funds, non-banking deposits, claims on Government and currency have showed a declining trend over the years. The fluctuation in the deposit of shares and debentures is due to volatility in stock markets and downturn in industrial activity. The share of Units of UTI, Mutual Funds, etc has always been small relatively and has even turned negative during 2000s. Trade debt (net) has been negligible.
In sum, bank deposits continue to account for the predominant share of gross financial savings of the households from 1970s. The Twelfth Five Year Plan period projected that the average household savings which is at 23.2% of GDP in 2011-12 would become 24.4% by 2016-17. Further, it is estimated that the bank deposits would increase from 8.6 to 9.1 for the corresponding period.
Hence, the banks can take advantage of its trusted customers by diverting their household savings towards purchase of insurance products and services. This can be done by making them aware of having an insurance policy and its benefits and thereafter providing tailor-made insurance products and services to its clientele.
In the process, the banks can also increase its fee-based income. The process by which banks sell insurance products to its own customers is called bancassurance. Bancassurance concept originated in Europe but came into India since 2000.
According to Twelfth Five Year Plan period projections, India, with its growing young population, insurance penetration is expected to continue to rise, with the insurance premium increasing from 4.1 per cent of GDP in 2010-11 to 6.4 per cent of GDP by the end of 2017. This shows the potential of Indian insurance industry.
IV. Importance of Bancassurance
The role and importance of insurance need not be overemphasized. It benefits individuals, business as well as the society. It provides safety and security, generates financial resources, encourages savings, spreads the risk besides being a tax saving tool.
Due to the changes brought in by the liberalization and globalization, on the recommendations of Malhotra Committee banks were also allowed to participate in the insurance business.
Bancassurance channel has obvious benefits of extending the customer database through banks distribution net work and gives the advantage of cost savings to the insurers. According to the IRDA (Insurance Regulatory Development Authority), under channel-wise individual and group new business performance, in terms of percentage of premium, bancassurance channel alone contributed to 5.57% and 2.33% respectively in 2006-07 and showing an corresponding increase of 15.62% and 6.35% in 2013-14.
The share of corporate agents (including banks) by gross direct premium income in non-life increased from 9.1% in 2012-13 to 10% in 2013-14. In this regard, both the banks and insurance companies have to take a strategic approach and work together to reap the benefits of this channel.
Thus, increasing household savings, low insurance density and penetration, huge branch network, government initiatives of financial inclusion and reforms in the FDI are some of the factors for encouraging the growth of bancassurance in India.
Hence, in this context, it is worthwhile to note that both the banks and insurers can successfully tap the uninsured population through the bancassurance channel.