Usha Pravin Gandhi College Of Management BANKS VS. INSURANCE COMPANIES…WHICH HAS A BETTER BRAND NAME?

BANKING & INSURANCE

MITALEE NEGANDHI- 73

PRIYANKA RAJA- 85

BHARGAVI RAO- 86

KANISHI SHAH - 97

RAJVI SHAH- 103

VIGNESH SHETTY- 108

Banks VS Insurance Cos.

INTRODUCTION:

BANKS-

A Bank can be described as a Corporate Entity created under the companies act 1956 and registered with RBI under The Banking Regulations Act of 1949. This registration gives the entity the right to use the term ‘BANK” in the name and to accept deposits and give loans on interest against all categories of assets. In simple words -A bank is a financial institution where you can deposit your money. Banks provide a system for easily transferring money from one person or business to another. Using banks and the many services they offer saves us an incredible amount of time, and ensures that our funds "pass hands" in a legal and structured manner.

INSURANCE:-

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a large, possibly devastating loss. The insured receives a contract called the insurance policy which details the conditions and circumstances under which the insured will be compensated.

Evolution Of Insurance Industries:

It is believed that the first insurance policy was issued in England in 1583. The 1st insuarance company in India was set up in 1818 in CALCATTA, It was known the ‘Oriental life Insuarance Company. Later, in 1823, the Bombay Life Insurance Company was set up, this was followed by Madras Equitable Life insurance Society in 1829. All the above life insurance companies were set up by Europeans. they were set up to provide financial help to the widows of Europeans. These companies provided services to Europeans and charged extra premium on Indian lives. The first Indian company insuring Indian lives at standard rates was Bombay Mutual Life Insurance Company.

1818 - Oriental Life Insurance Company – 1st Insurance Company.1870 - Bombay Mutual Life Assurance Society – 1st Life Insurance Company.

1912 - The Indian Life Assurance Companies Act enacted the 1st Law to Regulate the Life Insurance Business.

1928 - The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life & non-life insurance businesses.

1938: Earlier legislation consolidated & amended the Insurance Act with the objective of protecting the interests of the insuring public.

1956: 245 Indian & foreign insurers & provident societies are taken over by the central government & nationalized.

LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

The first General Insurance Company established in the year 1850 in Calcutta by the British.

History of banking

The first banks were probably the religious temples of the ancient world, and were probably established in the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests/monks to merchants.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806. This was one of the three presidency banks, the other two being

the Bank of Bombay and theBank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Nationalisation :

The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

Nationalised Banks

Allahabad Bank State Bank of India

Bank of India

Dena Bank

Indian Bank

Punjab National Bank

Reserve Bank of India

SBI & associates

State Bank of India State Bank of Bikaner and Jaipur

State Bank of Indore

State Bank of Travancore

State Bank of Patiala

State Bank of Hyderabad

State Bank of Mysore

Private Banks

Axis Bank HDFC Bank

ICICI Bank

ING Vysya Bank

Karnataka Bank

Kotak Mahindra Bank

BANKING INDUSTRY IN INDIA

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country.

Current Scenario

The industry is currently in a transition phase. On the one hand, the Public Sector Banks, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks

are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

One of the means of private sector banks to compete with PBS is through Mergers and Acquisitions. Over the last two years, the industry has witnessed several such instances. For instance, HDFC Bank’s merger with Times Bank, ICICI Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madura. The UTI bank- Global Trust Bank merger however opened a Pandora’s box and brought about the realization that all was not well in the functioning of many of the private sector banks.

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.

INSURANCE INDUSTRY IN INDIA

13 Private players in the market today:

6 Bank owned insurers- HDFC Standard Life, ICICI Prudential, ING Vysya, Metlife, OM Kotak, SBI Life

7 Independent Insurers- Bajaj Allianz , Birla Sun Life, Aviva, Max New York Life, Tata AIG, Reliance Life and Sahara Life

LIC – The state Insurer is the dominant player with over 70% of the market share

Total Life Market Size at Rs. 250 billion (USD 5.5. Bn)

Banks

1.Benefits to Indian Economy

Credit creation:

Banks provide credit for the economy. Credit is available for individual entrpreneurs, industry, agriculture, trade etc.Banks also provide loans to individuals as consumer credit, mortgage loan.Insurance also provides credit but to a very limited extent mostly by way of long-term infrastructure funding.Banks are thus the financial lifeline for a country's economy and its people.

In Their quest of rapid economic development, it is essential for the developing countries have found it essential to divert resources to areas that are considered most productive in some social sense.

Commercial banks can influence pace and pattern of development by the efficiency with which they mobilize and allocate savings and by the direction of their allocation of these savings.

2. Interdependence

Interdependence of banks and insurance companies:

Like other organizations, insurance companies also need banks; for example

1. for collecting premium from their customers2. For settling insurance claims through cheques drawn on their accounts with banks.3. For transferring funds to and from their branch offices.

Banks as the major lenders to businesses require the property/assets of the financed by them insured for loss due to burglary, theft, fire, etc. Banks are thus dependent on insurance companies for this purpose.

Many of the products of insurance companies are sold to customers by bank employees under the bancassurance channel. Insurance companies and banks together give loans to infrastructure projects etc. They thus depend on each other for sharing the securities available, sharing information on the borrowing firms etc.

Insurance companies use bank branches for remitting commission and incentives to their agents deployed at different locations for selling their insurance policies. Banks use insurance products such as travel insurance, mediclaim insurance etc for insuring their employees.

Even insurance co's need banking services; insurance premia are also paid by customers through bank accounts and premia are also collected and deposited in banks.

All the banks are insured upto the extent of Rs.1 lac with DIGCC. Banks insure their assets with the insurance companies.

3.Services and products:

i) Primary functions: The primary functions of a commercial bank include:

a) Accepting Deposits; and

b) Granting Loans and Advances;

a) Accepting depositsThe most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public

are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.

i) Current DepositAlso called ‘demand deposit’, current deposit can be withdrawn by the depositor at any time by cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction.

The Reserve bank of India prohibits payment of interest on current accounts or on deposits upto 14 Days or less except where prior sanction has been obtained. Banks usually charge a small amount known as incidental charges on current deposit accounts depending on the number

of transaction.

Fixed depositThe term ‘Fixed deposit’ means deposit repayable after the expiry of a specified period. Since it is repayable only after a fixed period of time, which is to be determined at the time of opening of the account, it is also known as time deposit. Fixed deposits are most useful for a commercial bank. Since they are repayable only after a fixed period, the bank may invest these funds more profitably by lending at higher rates of interest and for relatively longer periods. The rate of interest on fixed deposits depends upon the period of deposits. The longer the period, the higher is the rate of interest offered. The rate of interest to be allowed on fixed deposits is governed by rules laid down by the Reserve Bank of India

Recurring DepositsRecurring Deposits are gaining wide popularity these days. Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specific period of time. Each instalment may vary from Rs.5/- to Rs.500/- or more per month and the period of

account may vary from 12 months to 10 years. After the completion of the specified period, the customer gets back all his deposits alongwith the cumulative interest accrued on the deposits.

Miscellaneous DepositsBanks have introduced several deposit schemes to attract deposits from different types of people, like Home Construction deposit scheme, Sickness Benefit deposit scheme, Children Gift plan, Old age pension scheme, Mini deposit scheme, etc.

Savings deposit/Savings Bank AccountsSavings deposit account is meant for individuals who wish to deposit small amounts out of their current income. It helps in safe guarding their future and also earning interest on the savings. A saving account can be opened with or without cheque book facility. There are restrictions on the withdrawls from this account. Savings account holders are also allowed to deposit cheques, drafts, dividend warrants, etc. drawn in their favour for collection by the bank. To open a savings

account, it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank.

b) Grant of loans and advancesThe second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment.

The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.

i) LoansA loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lumpsum or in instalments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lumpsum or in installments.

ii) AdvancesAn advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans maybe granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements

of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

Modes of short-term financial assistanceBanks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.

a) Cash CreditCash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers.

b) OverdraftOverdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both.

c) Discounting of BillsBanks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

ii) Secondary functions:Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows -

a) Issuing letters of credit, travellers cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers;

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to another branch of the bank.

e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc.

f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.

Insurance

LIFE INSURANCE

Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. As with most insurance policies, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon the lives of the people named in the policy.

NON LIFE INSURANCE

General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance.

PROPERTY INSURANCE

Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main ways - open perils and named perils. Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion and theft.

MARINE INSURANCE

Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination.

Cargo insurance is a sub-branch of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.

MISCELLANEOUS INSURANCE

Miscellaneous Insurance exists to help people gain a good understanding of the various kinds of insurance coverage's that are available to people today. Insurance has become a very important part of many people's lives as they realize the need to provide protection for different areas of their everyday life. There is a wide variety of types of insurance coverage available today.

Bancassurance

Bancassurance is the selling of insurance and banking products through the same channel, most commonly through bank branches selling insurance. The sales synergies available have been sufficient to be used to justify mergers and acquisitions.

Some of the sales synergies come through the extensive customer base that banks have. Some come from opportunities to sell insurance together with some banking products. For example, banks generally insist on life insurance for mortgage borrowers. Although borrowers are not

obliged to buy insurance from the lender, many do (despite it often being very over-priced) as it is an easy option.

Credit cards and personal loans create opportunities for banks to sell protection insurance (another high margin business) and the knowledge a bank has of its customers' finances creates opportunities to sell other products.

Bancassurance has become significant. Banks are now a major distribution channel for insurers, and insurance sales a significant source of profits for banks. The latter partly being because banks can often sell insurance at better prices (i.e., higher premiums) than many other channels, and they have low costs as they use the infrastructure (branches and systems) that they use for banking.

4. Benefits to organizations

Benefits of banks to organizations:

Organizations or businesses require funds for their operations and banks lend to such businesses whether it an industry, trade or a business. Organizations or businesses can keep their surplus funds in banks and earn interests; such deposits in banks are relatively risk-free. Banks with their branch network and electronic fund transfer are an important vehicle for various businesses or organizations to collect and transfer money, make payments to various parties etc. Documents covering purchase and sale of goods domestically as well as internationally are routed through banks against payment. Banks facilitate trade transactions.

Benefits of insurance companies to organizations:

Every organization or business has valuable assets which need to be protected from risk of theft, burglary, fire, damage due to natural calamities. Insurance companies provide protection against such risks by way of insurance policies. Life Insurance companies provide organizations and businesses the facility of managing their employee’s superannuation funds. Thus insurance companies help to provide their employees with retirement benefit. Non life insurance companies provide health care facilities like mediclaim for the benefit of the employees of the organization. Insurance companies also provide funding support to businesses especially those with long gestation periods such as infrastructure development projects.

5. Additional services provided

banks also provide various other services such as investment banking, assisstance in mergers and acquisitions, raising money from piblic through ipo's.

MERCHANT BANKING

In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking.[1] The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services, including in relation to mergers and acquisitions.

FUNCTIONS OF MERCHANT BANKS:

portfolio management

leasing

loan syndication

project finance

issue management

INVESTMENT BANKS

An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions, derivatives, etc. Further it provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities.

Unlike commercial banks and retail banks, investment banks do not take deposits.

FUNCTIONS OF INVESTMENT BANKS:

Investment banks have multilateral functions to perform. Some of the most important functions of investment banking can be jot down as follows: Investment banking help public and private corporations in issuing securities in the primary market, guarantee by standby underwriting or best efforts selling and foreign exchange management . Other services include acting as intermediaries in trading for clients. Investment banking provides financial advice to investors and serves them by assisting in purchasing securities, managing financial assets and trading securities. Investment banking differ from commercial banking in the sense that they don't accept deposits and grant retail loans. However the dividing line between the two fraternal twins have become flimsy with loans and securities becoming almost substitutable ways of raising funds.

Small firms providing services of investment banking are called boutiques. These mainly specialize in bond trading, advising for mergers and acquisitions, providing technical analysis or program trading.

6.Safety

Banks are a vehicle for people's savings and they offer safety and reasonably good interst on the savings deposited with them, on the other hand insurance companies essentially offer protection against life and assets.

7.Benefits to Family

Banks are used extensively by people to transfer funds to their business assosciates, relatives and children for payment of fees etc. Banks are alomst 100% trade transaction whether domestic or international export-import are channelised through banks. Without banks therefore it would be virtually impossible to conduct trade and other services.Insurance companies have a far limited role- they only sell their own insurance products.

CONCLUSION

Banks have a better brand name because:

Banks offer safety and reasonably good interest on the savings 

Banks provide credit for the economy.

Even insurance co's need banking services;

Banks also sell insurance products.

Banks also provide various other services such as investment banking, raising money from public through IPO's.

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/History_of_banking

http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2

http://en.wikipedia.org/wiki/Investment_banking

http://en.wikipedia.org/wiki/Savings_bank

http://en.wikipedia.org/wiki/Merchant_banking.

http://www.financialcrisis2009.org/forum/Insurance/How-does-insurance-affect-our-economy-235984.htm

http://www.jstor.org/pss/1991084

http://moneyterms.co.uk/bancassurance/

http://en.wikipedia.org/wiki/Bancassurance

http://www.financialcrisis2009.org/forum/Insurance/How-does-insurance-affect-our-economy-235984.htm

http://en.wikipedia.org/wiki/Insurance#