Indian Financial System and Services

By Dr. Sudeshna Dutta

 Why IFSS?

 The concepts are useful to one and all

 We have heard about the concepts but donot know much
about them and their uses.
 No MBA is complete without knowing these concepts. That is
why it is core subject
 Financial Services which deals with these concepts offer a lot
of job opportunities to MBAs (all streams).

by Dr. Sudeshna Dutta, BIITM

 Financial System
 An institutional framework existing in a country to
enable financial transactions
 Three main parts
 Financial assets (loans, deposits, bonds, equities, etc.)
 Financial institutions (banks, mutual funds, insurance
companies, etc.)
 Financial markets (money market, capital market, forex market,
etc.)
 Regulation is another aspect of the financial system
(RBI, SEBI, IRDA, FMC)

by Dr. Sudeshna Dutta, BIITM

 Financial system
 Transfer savings from ‘savers’ in the economy to ‘borrowers’
in the economy ‘efficiently’.
 Savers----!!!
 Borrowers----!!!

 ‘Efficient transfer and allocation’ is the key word.

by Dr. Sudeshna Dutta, BIITM

 How is economy benefited
from this transfer ?
 People who save are frequently not the same people who have profitable
investment opportunities available to them, the entrepreneurs

 Suppose A has Rs, 50,000 as excess savings this year, but no borrowing
or lending is possible so this 50,000 does not earn any further income for
A.

 B has a small business scheme needing an investment of Rs.50,000( say

an up gradation of his grocery shop) which will fetch him additional
10,000 Rs per year, but he has no money to start the business.

 If A can lend his money to B and charge an interest rate of 10% per year,
he gets 5000 extra and B gets 10,000 – 5000 (interest) = 5000 extra
income, so both of them are better off.

by Dr. Sudeshna Dutta, BIITM

 Direct Financing /
RISK & Disintermediation Process
RETURN Funds
Funds 1.
MARKETs
Money
Market
Capital SEEKERs/
SAVERs/ Market BORROWERS
LENDERS 2.Facilitators Households
Households Regulato Corporate/firms
Corporate/firms rs Government Non-
Government Non- INTERMEDIARI Residents
Residents ES BANKs
NBFCs
Insurance
Companies
Indirect Financing
RISK &
/Intermediation
by Dr. Sudeshna Dutta, BIITM
RETURN
 Fund transfer from savers to borrowers ---Direct and
indirect route
 Direct Finance Route :
 borrowers borrow funds directly from the lenders in the financial
markets, by selling them securities ( also called financial instruments).
These are assets who issues them and liabilities to those who
sell( issue) them.
 The indirect Route :
 This involves a financial intermediary between lender- savers and
borrower –spender and helps transfer funds from one to the other.
 The intermediary borrows funds from the savers and then using this
fund makes loans to the borrower spenders.

by Dr. Sudeshna Dutta, BIITM

 Transfer of funds through
Intermediary..
 Example :
 A bank might acquire funds by issuing a liability in the
form of savings deposits( an asset for the public).

 It might then use the funds to acquire an asset by making a

loan to reliance Industries by buying a bond issued by RIL
in the financial markets.

 Results in transfer of funds from the public( lender –

savers) to RIL( borrower spender) with the help of a
financial intermediary.
 Process called financial intermediation

by Dr. Sudeshna Dutta, BIITM

 Financial Intermediation.. Global picture
 Financial intermediaries are a much more important source of financing
for corporations than securities markets are

 This is true for most countries globally.. US, Great Britain, Japan, Italy,
Germany, France etc. ( true even for US which has the most developed
financial markets in the world).

 Germany and Japan have made least use of Financial markets in that the
financing from financial intermediaries have been ten times greater than
for securities markets.

 In India ….also historically financial intermediaries have played a more

important role than the financial markets .

by Dr. Sudeshna Dutta, BIITM

 WHAT ARE THE FUNCTIONS OF
FINANCIAL SYSTEM
 Payment System- A payment system to enable exchange of goods and
services for money. The banking system makes possible all sort of
payment for various transactions. Cheque, Draft, ATM withdrawals,
RTGS and NIFT etc. are part of such payment system.
 Pooling of Funds: Pool the large chunk of small savings into a big pool
of finance and use it for large lending. Banks and other FIs do this
activity
 Price information for decentralized decision making : The FS , facilitates
through various publications dissemination of price related data of
financial products among buyers and sellers and help in decentralized
decision making.
 Transfer of resources: From surplus sector to deficit sectors and help
capital formation.

by Dr. Sudeshna Dutta, BIITM

 WHAT ARE THE FUNCTIONS OF
FINANCIAL SYSTEM
 Liquidity: The FS provides markets through which one can sell his
financial products and get cash in return. Thus an early exit process is
allowed by the system.
 Price Discovery Process: A platform to negotiate price is given to
buyers and sellers. For example in dealing with shares one can give
different price orders and see if there is any takers
 Risk Management: The FS helps in managing risk of investing (parting
with one’s funds).There are intermediaries who take over risk of
depositors and assume them themselves.There are also market regulators
who help maintain fairness , transparancy and obligations.
(i) Counter-party risk:.
(ii) Credit risk:
(iii) Documentation risk

by Dr. Sudeshna Dutta, BIITM

 INDIAN FINANCIAL SYSTEM

Organised Unorganised
(Formal) (informal)
Financial Financial System
System or or Sector
Sector

by Dr. Sudeshna Dutta, BIITM

Components/ Constituents of Indian Financial
system:

by Dr. Sudeshna Dutta, BIITM

 Components Indian Financial System

Regulatory Authorities
The main component of any financial system is the regulatory system it has. In any
economy, the financial system is regulated by the central banking authority of that
country. In India, the central bank is named as the Reserve Bank of India

There are other regulatory authorities operating in India like

Securities and Exchange Board of India

Insurance Regulatory and Development Authority

by Dr. Sudeshna Dutta, BIITM

 Components Indian Financial System

 Financial Institutions
The financial system consists of many financial institutions. While most of them are
regulated by the Reserve Bank, there are some which it manages just indirectly
Institutions Regulated by the Reserve Bank of India
The institutions regulated by the RBI are:
1. Nationalised Bank
2. Specialised Bank
3. Micro Finance Institution
Certain financial institutions are not regulated by the Reserve Bank of India. These
include securities firms, investment banks and mutual funds which come under the
purview of the SEBI,
Insurance Companies and Insurance Brokers which are regulated by the IRDA, etc.

by Dr. Sudeshna Dutta, BIITM

 Components Indian Financial System

The Financial Market,

The Financial market is the market for credit and capital, can be divided into the
Money
There are two type : Market and the Capital Market.
Money Market: it is for short term interest bearing securities
The Capital Market is the market for trading in medium – long term assets.
The main purpose of the Capital Market is to facilitate the raising of long-term funds
The Forex Market: The foreign exchange market is a global decentralized or over-the-
counter market for the trading of currencies. This market determines foreign exchange
rates for every currency. It includes all aspects of buying, selling and exchanging
currencies at current or determined prices.

by Dr. Sudeshna Dutta, BIITM

 Components Indian Financial System

 The Financial Market,

 The Financial Market can be also be classified according to instruments,
such as the debt market and the equity market. The debt market is also
known as the Fixed Income Securities Market and its segments are the
Government Securities Market (Treasury bills and bonds) and the Private
Debt Securities Market (commercial paper, private bonds and debentures).
Another distinction can also be drawn between primary and secondary
markets.

by Dr. Sudeshna Dutta, BIITM

 Components Indian Financial System
Financial Instruments
The main financial instruments can be categorized as under:
Deposits: Deposits are sums of money placed with a financial institution, for credit to a customer's
account.
There are three types of deposits - demand deposits, savings deposits and fixed or time deposits

Loans:A loan is a specified sum of money provided by a lender, usually a financial institution, to a
borrower on condition that it is repaid, either in instalments or all at once, on agreed dates and at an agreed
rate of interest. In most cases, financial institutions require some form of security for loans.
Treasury Bills and Bonds: Treasury bills are government securities that have a maturity period of up to one
year. Treasury bills are issued by the central monetary authority (the RBI), on behalf of the Government of
India. Treasury bills are issued in maturities of 91 days, 182 days and 364 days

by Dr. Sudeshna Dutta, BIITM

by Dr. Sudeshna Dutta, BIITM
 REFORMS IN
INDIAN FINANCIAL SYSTEM

by Dr. Sudeshna Dutta, BIITM

 BACKGROUND
⚫ Financial Crisis in 1991.
⚫ The Country overhauled the financial system and introduced
major changes encompassing liberalization ,privatization and
globalizations of all segments of the financial system.
⚫ Some of the major reforms in each segment is discussed as
under

by Dr. Sudeshna Dutta, BIITM

 BANKING SECTOR REFORMS
1. Reduction in SLR and CRR limits.The statutory liquidity ratio (SLR)
which was as high as 39 per cent of deposits with the banks has been
reduced in a phased manner to 25 per cent.
2. Income recognition and asset classification norms introduced.
Provisioning and Capital adequacy standards specified. Indian Banks
required to fulfill these norms by 1994 and 1996.
3. Guidelines for the establishment of private sector banks issued.This
heralds a new policy approach aimed at fostering greater competition.
4. Nationalised Banks allowed to tap the capital market to strengthen their
capital base.

by Dr. Sudeshna Dutta, BIITM

 continued

5. End of Administered Interest Rate Regime: Lending

rates of commercial banks deregulated. Banks required to
declare their Prime Lending Rates (PLR). Banks are
allowed to fix their own interest rates on domestic term
deposits with maturity of two years.
6. Computerisation of banking operations and
Introduction of ATMs.
7. The Office of the Banking Ombudsman established for
expeditious & inexpensive resolution. of customer
complaints related to Banking services.
8. Digitalization of Banking Operations and phone banking.

by Dr. Sudeshna Dutta, BIITM

 CAPITAL MARKET
⚫ Abolition of Comptroller of Capital Issues(CCI)
⚫ Easing the norms for public issue of shares by
companies
⚫ Establishment of SEBI- The Securities and
Exchange Board of India was established on April
12, 1992
⚫ SEBI introduced regulations of Stock
Exchanges ,Initial Public Offerings, Insider
trading ,Mutual Funds etc in order to protect
investors interest.
⚫ National Stock Exchange commenced operations.
For the first time online trading
by Dr. Sudeshna Dutta,was
BIITM made possible.
 Continued…
⚫ Derivative trading, primarily the exchange traded
variety was started in India in June 2000 with
introduction of index futures trading on NSE of
India.This followed in July 2001 by introduction of
index option, option on individual securities, and
futures on individual securities ( single stock futures).
⚫ BSE also introduces online trading.

by Dr. Sudeshna Dutta, BIITM

 Insurance Sector
⚫'Committee on Reform of the Insurance Sector',
RN Malhotra.
⚫Insurance Regulatory and Development
Authority (IRDA) was incorporated in 1999
with an objective to promote competition in
insurance sector.
⚫License to Private Sector for opening insurance
companies.
⚫FDI in insurance sector was introduced.
by Dr. Sudeshna Dutta, BIITM
 Foreign Exchange Market
⚫ Unified Exchange rate.
⚫ Rupee made convertible on the Current
Account.

by Dr. Sudeshna Dutta, BIITM

 Indian Banking Systems

Definition of Banking :
Section 5 (1) (b) of the Banking Regulation Act 1949 defines
banking as “the accepting ,for the purpose of lending or
investment of deposits of money from the public ,repayable on
demand or otherwise and withdrawable by cheque ,draft ,order or
otherwise”
Section 5 (1) (c) defines a banking company as “any company
which transacts the business of banking in India.”

by Dr. Sudeshna Dutta, BIITM

by Dr. Sudeshna Dutta, BIITM
 Fun Quiz
1.What is the Largest Bank of World?
2. What is the Largest Bank of India
3. What is the Largest Pvt Bank of India?
4. Fastest Growing Bank in India?
5. Oldest bank of India?

by Dr. Sudeshna Dutta, BIITM

 Reserve Bank of India

Scheduled Banks Non-Scheduled Banks

Commercial Banks Co-operative Bank

Urban Co-Operative Banks

Public Sector Banks

Private Sector Banks State Co-Operative Banks

 
Foreign Banks

Regional Rural Banks

by Dr. Sudeshna Dutta, BIITM

by Dr. Sudeshna Dutta, BIITM
 FUNCTIONS OF COMMERCIAL BANKS ( Also covers
BANK PRODUCTS /SERVICES)

The Functions of a Commercial Banks can be categorized as under

1.Primary Function
They mobilize savings in the form of deposits and channelize the funds to its
most productive use by lending and investments., there by boosting economic
development of the country.
So accepting deposits and lending is the primary function of a commercial
bank. They carter to all sectors including households, corporate, agriculture
business, government sectors etc.
They intermediate between surplus money-holders and money-seekers. In
the process they act on their own account and assume risk

by Dr. Sudeshna Dutta, BIITM

 FUNCTIONS OF COMMERCIAL BANKS ( Also covers
BANK PRODUCTS /SERVICES)

Primary Function includes :

(i) Accepting Deposits:
They accept deposits for different maturities and also lend for different maturities.
Deposits are basically of two types
I. Savings Bank Account /Current Account Deposits: These are demand deposits.
II. Term Deposits : These deposits are for fixed term and normally withdrawn after
maturity
(ii)Lending and Deployment of Funds : The funds collected through deposits are
deployed profitably by lending or investments.
(i) Granting Loans and Advances

by Dr. Sudeshna Dutta, BIITM

 FUNCTIONS OF COMMERCIAL BANKS ( Also covers
BANK PRODUCTS /SERVICES)

Loans and Advances :

(i)Cash Credit or Overdraft and Discounting of trade bills – Short term loans:
Sometimes, the bank provides overdraft facilities to its customers through which they
are allowed to withdraw more than their deposits.
Interest is charged from the customers on the overdrawn amount.
(ii) Term Loans – Long term loans
(b) Loans to Agriculture: Kissan Credit Card and other agriculture loans
(c) Loans to Individuals – Consumer Credit , Vehicle loan ,Education loans
and Credit Card etc.
(ii) Investment in Securities:
(a) Investment of Corporate Securities.
(b) Dealing in Foreign Exchange

by Dr. Sudeshna Dutta, BIITM

 FUNCTIONS OF COMMERCIAL BANKS ( Also covers
BANK PRODUCTS /SERVICES)

(2) SECONDARY FUNCTIONS: This includes Agency Functions where the

banks renders some functions as an agent of its customers. The Banks also
renders certain utility functions to its customers.

(a) Agency Functions: As per the instruction of the customers or on his behalf
a Bank provides following Agency functions:
I. Funds transfer facility at the instruction of the customer.
II. Collection of Cheques on behalf of customers
III. Periodic payments or Collections
IV. Managing Investment Portfolio of Customers

by Dr. Sudeshna Dutta, BIITM

 FUNCTIONS OF COMMERCIAL BANKS ( Also covers
BANK PRODUCTS /SERVICES)

(2) SECONDARY FUNCTIONS

(b) Utility Functions: For the benefits of its customers a bank also provides
following utilities
Issue Drafts ,Issue of Bank Guarantee, Issue of Letter of Credit ,Locker
Facility , Currency Exchange ,Letter of Reference ,Issuing Travelers
Cheque ,Electronic Fund
Transfer (EFT) ,Automated Teller Machines ,Issuing Debit Card or Credit
Card, Internet payment facility , Phone pay facility etc.

by Dr. Sudeshna Dutta, BIITM

 BANKING PRODUCTS AND SERVICES

Banking Products include

(1) Deposit Products – for mobilization of funds
(2) Loan Products – for deployment of funds
Deposits of banks can be of:
1.Saving banks deposits:- This deposit is intended primarily for small scale savers. The
primary objective of this account is to develop the habits of savings among the small
scale investors or individuals.
2.Current a/c deposits:- A Current a/c is a account which is generally open by business
people for their benefits & convenience. Money can be deposited & withdraw anytime
3.Term Deposits: In this type of deposit the funds is kept for a fixed term and the
depositor is not allowed to withdraw before maturity except on apecial cases. Banks
pays higher rate of interest on such term deposits.

by Dr. Sudeshna Dutta, BIITM

 BANKING PRODUCTS AND SERVICES
DIFFERENT TYPES OF DEPOSITS:-
1.LOAN:
(A) SHORT TERM OR DEMAND LOAN: Demand loan is payable at demand at it is for a short
period of time. For 1 yr and usually granted to meet the working capital requirement & need of
borrower.
(i). CASH CREDIT:
A cash credit is an arrangement by which the customer is allowed to borrow up to a certain limit.
This is a permanent arrangement & the customer need not draw the sanctioned amount at once but
draw the amount as and when required
(ii)OVERDRAFT:
Overdraft is an arrangement between a banker & his customer which the later is allowed to withdraw
over & above his credit balance in the current account up to an agreed limit. It is an temporary
arrangement granted against some security
(iii)BILL DISCOUNTED & PURCHASED:
Bank grant advances to their customers by discounting bills of exchange. The amount after deducting
the interest from the amount of the instrument is credited in the accounts of a customer. In this form
of lending the interest is received in advance by the banker

by Dr. Sudeshna Dutta, BIITM

 Recent Trends of Banking system in India

 Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since March 2004, is a
system through which electronics instructions can be given by banks to
transfer funds from their account to the account of another bank. The
RTGS system is maintained and operated by the RBI and provides a means
of efficient and faster funds transfer among banks facilitating their
financial operations. As the name suggests, funds transfer between banks
takes place on a ‘Real Time' basis.
 Electronic Funds Transfer (EFT)
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to
make payment to another person/company etc. can approach his bank
and make cash payment or give instructions/authorization to transfer
funds directly from his own account to the bank account of the
receiver/beneficiary
by Dr. Sudeshna Dutta, BIITM
Indian Insurance System

by Dr. Sudeshna Dutta, BIITM

 Definition
• There can be two definitions of
insurance
– (i) Functional Definition
– (ii) Contractual Definition

by Dr. Sudeshna Dutta, BIITM

 Functional Definition
• “Insurance is defined as a co-operative
device to spread the loss caused by a
particular risk over a number of persons
who are exposed to it and who agree
to ensure themselves against that risk.
Risk is uncertainty of a financial loss.”

by Dr. Sudeshna Dutta, BIITM

 According to Functional Definition
Insurance is a
 A co-operative device to spread risk
 The system to spread the risk over a number
of persons who are insured against the risk,
 The principle to share the loss of each
member of the society on the basis of
probability of loss to their risk.
 The method to provide security against
losses to the insured

by Dr.
Sudeshna
 Contractual Definition
• “ Insurance has been defined to be a contract
under which a sum of money as a premium is
paid in consideration of the insurer’s
incurring the risk of paying a large sum upon
a given contingency.”

by Dr.
Sudeshna
As per this contractual definition the insurance is
a contract wherein
 Certain sum called premium is charged in consideration by
the insurer.
 Against the said consideration a large sum is guaranteed to
be paid by the insurer
 The payment will be made in a certain definite sum i.e. the
loss amount or the sum assured which ever may be and
 The payment is made only upon a contingency

by Dr. Sudeshna Dutta, BIITM

 Nature (Feature) of Insurance:
1. Co-operative Device – It is the result of co-operation of a
large number of persons.
2. Sharing of Risk:- Insurance is an device to share the
financial losses which might befall on an individual or his
family on the happening of a specified event.
3. Value of Risk – The value of risk is calculated at the
beginning (based on probability)and is shared and paid
as premium.
4. Payment at contingency – Except for life insurance
payment is made only when the contingency occurs. In life
insurance payment is made if the contingency (death)
occurs or on expiry of the term.

by Dr. Sudeshna Dutta, BIITM

5. Amount of Payment: In non-life insurance payment is
made on the basis actual loss .But in life insurance the
insurer promises to pay a fixed sum.
6. Large number of insured persons - Normally large number
of persons are insured against the same risk.
7. Insurance is not a gambling- In gambling by bidding the
person exposes himself to risk of losing. However insurance
is just opposite. By insuring one protect himself against
loss.
8. Insurance is not charity-Charity is given without
consideration but insurance is not possible without
premium.

by Dr. Sudeshna Dutta, BIITM

 Functions of Insurance :-
• (i) Primary Functions:
– Insurance provides certainty- In a uncertain
situation of loss due to a risk insurance provides a
certainty that loss would be made good.
– Insurance provides protection against financial
loss .
– Risk-sharing- The risk is shared among large
number of people.

by Dr. Sudeshna Dutta, BIITM

(ii) Secondary Functions:
– Prevention of Loss -Insurer also work with authorities and
institutions to minimize loss.
– Supplies Capital- The huge amount of premium
collected is invested in business in the form of capital and
help in industrialisation.
– It improves efficiency.- When a person or firm is
insured against financial loss it can work more efficiently.
– It helps in Economic Progress-The insurance by
protecting the society from huge losses of damage
,destruction and death encourages it to work hard for economic
progress.

by Dr. Sudeshna Dutta, BIITM

 PRINCIPLES OF INSURANCE
• Insurance as a contract – Insurance may be defined as a
contract between two parties whereby one party called
insurer undertakes , in exchange for a fixed sum called
premium ,to pay the other party called insured , a fixed
amount of money on the happening of a certain event.
• Insurance as a contract involves
– (i) the elements of general contract and

-(ii) the elements of special contract relating to insurance

by Dr. Sudeshna Dutta, BIITM

 Elements of a General
Contract
1. Agreement (Valid Offer and Acceptance) – The proposal to enter the
insurance contract is the offer and if the insurer allows the policy it is
the acceptance.
2. Legal Consideration - Payment of premium is the valuable
consideration for the insurer to give the promise to compensate of
pay fixed on the event of happening of the contingent event..
3. Competent to make contract- Normally insurer accept proposal of
competent persons only.
4. Free Consent -There is free consent when the assured sign the policy
document and pays premium.
5. Legal Objects- The object of insurance is always legal and lawful

by Dr. Sudeshna Dutta, BIITM

Elements of “The special contract of insurance”

1. Insurable Interest.
2. Utmost Good Faith
3. Indemnity
4. Subrogation
5. Warranties
6. Proximate Cause
7. Mitigation

by Dr. Sudeshna Dutta, BIITM

 1. Insurable Interest
• This means that the insurer must have some pecuniary( financial) interest
in the subject matter of the insurance.
• This means that the insurer need not necessarily be the owner of the
insured property but he must have some vested interest in it. If the
property is damaged the insurer must suffer from some financial losses.
• His interest in the property must be lawful
Example –
• An owner of an asset normally has insurable interest.
• Even a banker which has financed an asset has an insurable interest in
that asset.
• A person has insurable right on the life of his own family members but
not that of neighbors

by Dr. Sudeshna Dutta, BIITM

 2. Utmost Good Faith
• The principle of disclosing all material facts with utmost good faith is the
essence of a valid insurance contract.
• Both the parties of the insurance contract must be of the same mind ( ad
idem) at the time of contract.
• There should not be any misrepresentation , non- disclosure or fraud
concerning the material facts.
• Unlike any normal business contract an insurance contract is a contract
of “uberrimae fidei” i.e. of absolute good faith , where both parties of
the contract must disclose all material facts truly and fully .
• What is material Fact ? A material fact is one which affects the judgment
or decision of both parties in entering into contract. For example in case
of life insurance material facts include, age, residence, occupation
health, income etc.
by Dr. Sudeshna Dutta, BIITM
 Facts need not be disclosed by
insured
1. Facts which tend to lessen the risk
2. Facts of Public knowledge
3. Facts which could inferred from information disclosed.
4. Facts waived by the insurer.
5. Facts governed by the conditions of the policy.

by Dr. Sudeshna Dutta, BIITM

 3.Principle of Indemnity:
• Indemnity means security, protection and compensation given against
damage, loss or injury.
• According to the principle of indemnity, an insurance contract is signed
only for getting protection against unpredicted financial losses arising due
to future uncertainties .
• This principles ensures that the policy holder is not entitled to make profit
of his loss.
• However, in case of life insurance, the principle of indemnity does not
apply because the value of human life cannot be measured in terms of
money
• For example in case theft of a three year old bike insurance company will
make payment after taking into account the depreciation of the bike. It
will not pay the purchase cost or sum assured.

by Dr. Sudeshna Dutta, BIITM

 4.Doctrine of Subrogation:
• Subrogation means substituting one creditor for another.
• Principle of Subrogation is an extension and another corollary of the principle of
indemnity. It also applies to all contracts of indemnity
• The doctrine of subrogation refers to the right of the insurer to stand in the
place of the insured after settlement of a claim in so far as the insured’s right of
recovery from an alter native source.
• For example after settling claim a for a damaged vehicle the insurance company
hold rights to the damaged parts.

by Dr. Sudeshna Dutta, BIITM

 5.Warranties :
• There are certain conditions and promises in the insurance
contract which are called warranties which are to be full filed
by the insured ( policyholder).
• These warranties may be expressed ( mentioned in the policy
) or implied. On breach of warranties the insurer becomes
free from his liability.
• For example if one has insured his cloth shop against fire, he
is allowed to cook inside using gas stove or cause fire
himself intentionally.

by Dr. Sudeshna Dutta, BIITM

 6.Proximate Cause:
• The rule is that immediate and not the remote cause is to be regarded.
• The real cause must be seen while payment of loss .If the real cause of loss is
insured the insurer is liable to compensate the loss ,otherwise the insurer may not
be responsible for the loss
• Cause, means when a loss is caused by more than one causes, the proximate or the
nearest or the closest cause should be taken into consideration to decide the
liability of the insurer.
• However, in case of life insurance, the principle of Causa Proxima does not apply.
• For example :- A cargo ship's base was punctured due to rats and so sea water
entered and cargo was damaged. Here there are two causes for the damage of the
cargo ship - (i) The cargo ship getting punctured because of rats, and (ii) The sea
water entering ship through puncture. The risk of sea water is insured but the first
cause is not. The nearest cause of damage is sea water which is insured and
therefore the insurer must pay the compensation

by Dr. Sudeshna Dutta, BIITM

by Dr. Sudeshna Dutta, BIITM
 7.Mitigation
• In case of any loss or casualty, the asset
owner must attempt to keep loss to a
minimum, as if the asset was not insured.

by Dr. Sudeshna Dutta, BIITM

TYPE OF INSURANCE

by Dr. Sudeshna Dutta, BIITM

 TYPE OF INSURANCE

LIFE NON-LIFE MICRO-

INSURANCE INSURANCE INSURANCE

RE- INSURANCE

by Dr. Sudeshna Dutta, BIITM

 KINDS OF INSURANCE FROM RISK POINT OF VIEW

Personal Insurance Property Insurance Liability Insurance

Life Personal Health

Insurance Accident Insurance
Insurance

Auto-
Marine Fire Machinery
mobile

Cattle Crop Theft

Third Party Employees Re-insurance

by Dr. Sudeshna Dutta, BIITM
 Personal
Insurance
• The personal insurance inscludes insurance of human life
which may suffer loss due to death
, accident and desease.Therefore the personal insurance is
further sub-divided into life insurance , personal accident
insurance and health insurance

by Dr. Sudeshna Dutta, BIITM

 Life
Insurance
• Life Insurance is a different for of insurance than others. , in
the sense that the subject matter is life of human being.
• It is a contract of certainity where the insurer will pay a fixed
amount of insurance at the time of death or at the expiry of
certain period.
• This insurance is not only a protection but is a sort of
investment.
• The amount of premium is higher than that of non- life
insurance

by Dr. Sudeshna Dutta, BIITM

 Property
Insurance
• The property of an individual and of the
society is insured against the loss of the fire
and marine perils, against thefts, accidents.
Crop insurance covers reduction in
production

by Dr. Sudeshna Dutta, BIITM

 Liability Insurance
• The liability insurance covers the risks of third
party due to accident and others , compensation
payable to employees for any accident during work
and reinsurances.

by Dr. Sudeshna Dutta, BIITM

 Microinsuranc
e
• Microinsurance is the protection of low- income
people (those living on between approximately $1
and $4 per day( below $4)) against specific perils
in exchange for regular premium payment
proportionate to the likelihood and cost of the
risks involved.

by Dr. Sudeshna Dutta, BIITM

 Reinsuranc
e
• Reinsurance is the transfer of insurance business from one insurer
to another. Reinsurance is insurance of insurance companies.
• In other words, it protects insurance companies from financial
ruin, thereby protecting the companies' customers from
uncovered losses.
• The insurer transferring the business is the called “ principal”and
the office to which the business is transferred is called “ reinsurer”
• The principal must disclose all material facts to the reinsurer.
• Reinsurance is also a contract of indemnity. At the time of loss the
reinsurer indemnifies the loss up to the amount of reinsurance.
• The reinsurance amount is obtained by deducting retention
amount from the original policy amount

by Dr. Sudeshna Dutta, BIITM

 Continued
•
…
The IRDA micro-insurance Regulations, 2005 defines micro insurance as
a general or life insurance policy with a sum assured of Rs 50,000 or less.
In other words, micro- insurance aims to provide financial protection to
low-income families, particularly those with approximate income of less
than Rs. 250 per day.
• A micro-insurance policy is:A general or life insurance policy with a sum
assured of Rs 50,000 or less

by Dr. Sudeshna Dutta, BIITM

Different insurance product and their
applicability

by Dr. Sudeshna Dutta, BIITM

 Endowment Plans
• An endowment policy is a life insurance contract designed to pay a lump
sum after a specific term (on its 'maturity') or on death. Typical maturities
are ten, fifteen or twenty years up to a certain age limit. Some policies also
pay out in the case of critical illness.
• Traditional with profits endowments: There is an amount guaranteed to be
paid out called the sum assured and this can be increased on the basis of
investment performance through the addition of periodic (for example
annual) bonuses. Regular bonuses (sometimes referred to as reversionary
bonuses) are guaranteed at maturity and a further non- guarantee bonus
may be paid at the end known as a terminal bonus

by Dr. Sudeshna Dutta, BIITM

 ULIPs
• A Unit-Linked Insurance Plan is essentially a combination of insurance
and an investment vehicle. A portion of the premium paid by the
policyholder is utilized to provide insurance coverage to the policyholder
and the remaining portion is invested in equity and debt instruments.
The aggregate premiums collected by the insurance company providing
such plans is pooled and invested in varying proportions of debt and
equity securities in a similar manner
to mutual funds.
Each policyholder has the option to select a personalized investment mix
based on his/her investment needs and risk appetite. Like mutual funds,
each policyholder's Unit-Linked Insurance Plan holds a certain number of
fund units, each of which has a net asset value (NAV) that is declared on
a daily basis. The NAV is the value upon which net rates of return on
ULIPs are determined. The NAV varies from one ULIP to another based
on market conditions and fund performance.
by Dr. Sudeshna Dutta, BIITM
 Banc assurance
• “The selling of life assurance and other insurance products and services
by banking institutions.”
• Bancassurance is an arrangement between a bank and an insurance
company allowing the insurance company to sell its products to the
bank's client base.
• This partnership arrangement can be profitable for both companies.
Banks earn additional revenue by selling insurance products, and
insurance companies expand their customer bases without increasing
their sales force or paying agent and broker commissions.

by Dr. Sudeshna Dutta, BIITM

 Money- back
Policy
• A money back plan is a type of life insurance plan that allows the
policyholder to receive payouts at regular intervals during the policy
term as part of the survival benefit.
• In a money back plan, the insured person gets a percentage of sum
assured at regular intervals, instead of getting the lump sum amount at
the end of the term. It is an endowment plan with the benefit of
liquidity.

by Dr. Sudeshna Dutta, BIITM

 Pension Plans
• Pension plans or retirement
plans are insurance + investment plans that help an individual
create a corpus for their own future, over a period of time
(policy term). On maturity (retirement), a third of the
accumulated corpus can be withdrawn as a lump sum and
the rest in parts in the form of a pension.

by Dr. Sudeshna Dutta, BIITM

 Insurance Regulatory and Development Authority of
India (IRDAI)
 The IRDAI is an independent and autonomous statutory
body. The IRDAI was constituted under the Insurance
Regulatory and Development Authority Act which was
passed in 1999. The main function of the IRDAI is to
regulate the insurance industry of the country
 For many years the insurance sector of India was protected.
The IRDA Act of 1999 allowed the entry of private
companies in the insurance sector. It also allowed for 26%
investment by foreign companies. Since 2014 the FDI limit
has been increased to 49% and further opened up the
insurance sector

by Dr. Sudeshna Dutta, BIITM

• So the Insurance Regulatory and Development
Authority of India has a role to protect the
policyholders from any form of discriminatory
practices. They regulate all the insurance
companies. All companies have to approach
the IRDAI for registration certificates. And
they are responsible for the renewal,
modification or cancellation of these
certificates.
by Dr. Sudeshna Dutta, BIITM
 POWERS OF
IRDAI
• All insurance companies have to register with IRDA compulsorily.
• Companies can undertake only insurance business.
• The capital structure of the companies will be determined by IRDA.
• Companies have to deposit with RBI the amount stipulated by IRDA.
• Accounts and balance sheets of companies have to be submitted to
IRDA.
• Investment of assets will be prescribed by IRDA in the form of approved
securities.
• The nature of general insurance business will be prescribed by IRDA

by Dr. Sudeshna Dutta, BIITM

 COMPOSITION OF
IRDAI
• One chairperson and not more than 9 members of whom
not more than 5 would be full time members and they are
appointed by the government. Those who have experience
in life and general insurance, actuarial service, finance,
economics etc., are appointed.

by Dr.
Sudeshna
 FUNCTIONS OF IRDA
1. Issuing certificate of registration.
2. protecting the interest of policy holders.
3. issuing license to agents.
4. Specifying code of conduct for surveyors and loss assessors.

5. Promoting efficiency in the insurance business.

6. Undertaking inspection, conducting enquiries etc., on insurance
companies.
7. Control and regulations of rates, terms and conditions by
insurance company to policy holders.
8. Adjudication of disputes between insurance company and others
in the insurance business.
9. Fixing the percentage of insurance business to rural and social
sectors by Dr. Sudeshna Dutta, BIITM
Indian Insurance Industry

by Dr. Sudeshna Dutta, BIITM

 Life
Insurance
• There are 23 private sector players and 1 public sector player
(LIC of India).

• The government raised FDI in insurance under the automatic

route to 49% from 26% in 2015.

by Dr. Sudeshna Dutta, BIITM

 Some Important private sector
players
• HDFC Standard Life Insurance Company Ltd.
• ICICI Prudential Life Insurance Company Ltd.
• Aditya Birla Sunlife Insurance Company Ltd.
• Aegon Life Insurance Company Ltd.
• Aviva Life Insurance Company India Ltd.
• Bajaj Allianz Life Insurance Company Ltd.
• Reliance Nippon Life Insurance Company Ltd.
• SBI Life Insurance Company Ltd.
• TATA AIA Life Insurance Company Ltd.

by Dr. Sudeshna Dutta, BIITM

 Non-Life Insurance -
Private
• Bajaj Allianz General Insurance Company Ltd.
• Bharti AXA General Insurance Company Ltd.
• Cholamandalam MS General Insurance Company Ltd.
• ICICI Lombard General Insurance Company Ltd.
• IFFCO Tokio General Insurance Company Ltd.
• Kotak Mahindra General Insurance Company Ltd.
• HDFC ERGO General Insurance Company Ltd.
• SBI General Insurance Company Ltd.
• Shriram General Insurance Company Ltd.
• TATA AIG General Insurance Company Ltd.

by Dr. Sudeshna Dutta, BIITM

 Non-Life Insurance –Public
Sector
1. National Insurance Company Ltd.
2. The New India Assurance Company Ltd.
3. The Oriental Insurance Company Ltd.
4. United India Insurance Company Ltd.

by Dr. Sudeshna Dutta, BIITM

 SPECIALISED INSURERS

• Agriculture Insurance Company of India Ltd.

• Export Credit Guarantee Corporation of India Ltd.
• REINSURER:
• General Insurance Corporation of India
• ITI Reinsurance Limited

by Dr. Sudeshna Dutta, BIITM

Thank you

by Dr. Sudeshna Dutta, BIITM