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In the second of a five-part series, looking at the impact the opening up of crucial sectors has had on public sector entities, we turn the spotlight on the changes banking & insurance saw after the introduction of private banks
The entry of private players in banking and insurance hasn’t curbed the influence of state-run entities, which continue to dominate in terms of market share. While government-owned banks now command more than 70 per cent of the loan and deposit market, India’s only state-run life insurer, Life Insurance Corporation of India (LIC), collects about 72 per cent of the life insurance premium in the country.
However, that is only a part of the story. Private banks have been more profitable and better managed than their state-run peers. For instance, the return on assets of new private banks was at 1.74 per cent, while the return on equity was 16.51 per cent at the end of FY13. In comparison, the return on assets of public sector banks was 0.78 per cent and the return on equity was 13.24 per cent.
New private banks also scored over state-owned lenders with better asset quality (net bad loan ratio of 0.52 per cent versus 2.02 per cent) and stronger capital base (capital adequacy ratio of 16.84 per cent versus 12.38 per cent).
Experts say one of the major reasons for the continued dominance of public sector banks in market share is that even after the opening up, the sector remained tightly regulated with high entry barriers. Most of the 10 new players allowed following the 1993 guidelines either got merged or failed to make any difference. Two bank licences were granted following the 2001 guidelines and the two awarded recently come after a gap of about 10 years.
The banking regulator, however, has reservations about such performance comparisons. “Given the size and variety of public sector banks, it is possible to find banks that could equal the good private sector banks as well as the not- so-good ones. In addition, public sector banks had to reckon with legacy problems, such as many of the non-performing assets that they have been saddled with,” the regulator said in its discussion paper on banking structure in India, released in August, 2013.
Also, many studies in the Indian context have not found any significant difference between the performance indicators of state-run and private banks in the post-reform period. According to data from the Reserve Bank of India (RBI), the share of public sector banks in the overall profits of the banking sector increased from 39 per cent to 61 per cent between 1995-96 and 2011-12.
Beyond the comparisons, most analysts feel the overall productivity of the banking sector has improved following the re-introduction of private banks, because increased competition forced the state-run lenders to manage cost efficiently, explore new business opportunities and improve service standards.
The increased competition has led to expansion of the market and significant improvement in customer service, say experts. “The re-introduction of private investment in banking has strengthened the system in terms of width and depth. Customers have benefited by way of more products, better pricing and good quality of service. In insurance, the entry of private players has improved the penetration and the size of the market has grown substantially,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services and senior expert advisor on global financial services at EY (formerly Ernst & Young).
At the time of India’s independence in 1947, banks were owned privately and there was
How LIC bounced back
The experience has been mixed in the insurance sector, where entry restrictions for private players were lifted in 2000-01. Foreign investment has been allowed with a 26 per cent cap and there is a proposal to increase the upper limit to 49 per cent.
While the introduction of new players in life insurance initially threatened LIC’s control over the market, the post-2008 crisis period saw the insurer making the most of the slowdown. LIC saw a sudden jump in its market share, which crossed 65 per cent. Around the same time, private insurers which had gone heavy on unit linked insurance plans, or Ulips, saw a shift in customer buying behaviour to traditional products. LIC was able to tap this customer base, thereby increasing its market share.
According to LIC officials, from a time when the insurer’s market share fell to 60 per cent when new private insurers entered the market, LIC came back aggressively and its market share has now crossed 80 per cent.
On the basis of total premium income, LIC’s market share increased to 72.7 per cent in 2012-13 from 70.7 per cent a year earlier. In 2012-13, LIC paid Rs 1,436 crore as dividend to the government. In comparison, only five of the 23 private life insurers announced dividend aggregating Rs 1,156 crore.
In the non-life segment, private players appear to have outperformed their state-run rivals, especially in motor insurance. Aggressive marketing strategy, better policy servicing and claim management, and quick turnaround time have aided private players in increasing their market share in motor insurance. However, in health, corporate and fire insurance segments, public sector insurers continue to remain dominant players.
State-run general insurers had a 55.6-per cent share in the overall non-life insurance market at the end of 2012-13. While the public sector general insurers together reported a net profit of Rs 2,603 crore, private players’ aggregate profit was Rs 679 crore during this period.
“In life insurance, LIC continues to be the market leader. While private players have introduced innovative products, the market for such products is still relatively small and they have limited appeal. Public sector insurers lost nearly 50 per cent of market share to private players in motor insurance. But the public sector firms are still dominant in other non-life insurance segments such as group health. The entry of private players has ensured that customers now have a far greater choice of products,” said Shashwat Sharma, partner at KPMG in India.
