The morning thinker: Why do fools around me INVEST?

It was a Wednesday morning. I was commuting to work; it was a normal day with an anomalous business paper in my hands. The dark news of crumbling of the biggies of US financial jungle was out in Black & White. Dailies were filled with analysis, scrutiny, sarcasm and depressive words. It felt like there was no tomorrow. I have not yet invested a single buck in the stocks, yet I was feeling the pinch. Why?

Well the answer lies in the fact that all Indian ministers and chieftains of Indian banking behemoths were lying when they say that India is protected from the current financial turmoil. I don’t believe a word they say. This morning I was pondering sitting in a BEST bus (Mumbai’s public transport). I was pondering why the hell do these guys invest in stocks? What are their incentives and motivations? And why do they have such long faces every time the markets crash?

To find the answers I imagined a scenario. Analyst in me was put to work…

Let’s assume I am a guy who just got a job in a BPO. 10 months later I have a good corpus from my savings as I have very less expenses, say Rs.1, 00,000. I want to marry after 4 months and want to take housing loan, to buy a flat in Mumbai! To get superlative returns I invest in stocks. Which stocks do I buy? A friend told to buy some banking stocks. I thought he is right after all banks are doing great. My broker told me investments would appreciate by 20%. I was very happy. I had looked out for my flat as well. I had talked to the estate agent and inquire about the papers I would require to apply for a housing loan. Two months later my stocks crash.

I ask, why did I loose? Why the hell did I loose my hard earned money? All those night shifts, pacifying those angry American customers, why me? For the fist time in my life I buy an ET and read that some sub prime lending lead to the fall. After 4 week of reading the business dailies I understand that because some lazy American bum didn’t pay his mortgage, I lost my housing loan! I say this is unfair. On my last holiday in Goa, I saw how these American bankesr work one year and holiday for another. Our driver told us that these Americans work for a year and put all their money in FDs and come here and holiday! Just because his currency is worth 40 times mine I loose my dream home! I feel like going back to Goa and kicking that white man and screaming in his ear drums, “ run home you fools and pay your motgage!! You will loose your home and I will lose mine!”

What a beautiful story I thought! But I wish it was perfect. I had a gut feel that something was wrong. The systems thinker in me told that this ought to be a balanced loop not a negative reinforcing loop.

How come everybody is loosing, somebody must have gained. There must be some positive forces in this loop. Why was everybody happy earlier? What happened before this? Two things happened.

I the Indian got the job. The American went on a holiday. Na….
The American went on a holiday… Job got outsourced… Indian got the Job.

Now the cycle is complete.

So the loss is on both sides,

Short term:
American lost his job, Indian lost his house.

Long term:
American looses his house, Indian looses his job.

Vola !

BANCASSURANCE IN INDIA

After First Narasimham Committee report, Indian banking system gone through huge reforms like merchant banking, lease and term finance, capital market / equity market related activities, hire purchase, real estate finance and so on. Few years back banks of India entered into another financial instrument that’s Insurance.

Let’s have a quick look on Indian insurance market as at end-March 2006, among the life insurers, there were 15 companies in private sector and Life Insurance Corporation of India (LIC) was the solitary public sector company. Among non-life insurers, 9 companies were in private sector and 4 companies were in public sector as regarding the present size of the insurance market in India, it is stated that India accounts not even 1% of the global insurance market. According to various studies, in India LIC done exceptionally very good job but its able to insured 25-26% of insurable population.

Thus in a country with more than 1.2 billion population, the penetration ratio was 4.8% by end of march-2006 which was far less than world’s penetration ratio (7.5%). It also indicates that a vast majority of population remain outside the reach of the insurance, especially in rural and semi-urban areas, in the context of the absence of social security schemes.

In year 2004, due to these vulnerable statistics, IRDA introduced an additional channel of distribution in way long traditional distribution model of Insurance industry called Bancassurance.

The prospects of bancassurance in India is really bright because of following reasons:

• Indian economy is growing with 9% of growth rate.
• Increasing PPP (purchasing power parity).
• Huge inflow of FDI.
• Expansion of middle income class Indians.
• Huge banking infrastructure across urban, semi urban & rural India.
• BASEL NORM-II (2009)

Another reasons are:

In 2007, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. Altogether they (banks) have a combined network of over 53,000 branches and reach in urban, semi urban & rural areas of nation. There are 70324 bank offices are there in India and around 16000 people are served by each bank office. It’s a huge banking infrastructure and among best banking network in world.

Why banks are very much interested in bancassurance?

Related Posts:

Bancassurance: An Overview