The Indian Economy and The Financial Sector Opportunity

The Indian Economy and The Financial Sector Opportunity July 12, 2005

Agenda Current Scenario Drivers of Growth Challenges Summary

India : Overview Country Country Population 1,055m GDP (03-04) $ 579 Bn 3 year CAGR of GDP 6.5% Inflation 5% Savings rate (03-04) 25% Insurance penetration* 2.3% MF Penetration 0.5% Life insurance market Characteristics * Insurance Premiums as % of GDP ** April 2003 – March 2004

Size and Distribution of Savings Share of Financial Savings HH Savings (Rs Mn) Gross Physical Savings 5 Year 20.2% Financial Savings 5 Year 11.6% Mutual Fund Life Insurance Government Small Savings PF & Govt Pension Currency & Deposit Sources: RBI

Opportunities in life insurance

Opportunities in non-life insurance

Retail credit opportunity… Net retail NPA levels are low at about 1.6% for the Indian banking sector as a whole and even lower for many of the leading players

Opportunities in asset management

Opportunities in Credit Card

Twin Growth Drivers • Demographic Transition • Economic Surge

Lowering Dependency Ratio …

…leading to growth in Household Financial Savings Reducing dependency could trigger a self-reinforcing savings growth dynamic in the next decade • Expected demographic trends suggest, in light of experience elsewhere, in the next decade India’s national savings could rise to 30% or more • Bulk of the savings contributed by Households • Decline in share of financial savings a negative – however expected to increase with development of financial system and higher awareness

Rising Income levels Increases Target Market CAGR (%) Income 10.1% >140k 70k-140k 7.06% No. of HH (M) -2.31% <70k Income range based on 1998-1999 prices Source:Based on NCAER & Govt Of India estimates

... Insurance Is Poised For Growth Insurance premium as % GDP INDIA 100 1,000 10,000 100,000 GDP per capita in USD (log scale) • PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shown Source: Swiss Re; NCAER

Twin Growth Drivers Demographic Transition Economic Surge

Drivers of resurgence… • Services sector driving momentum • Established leadership in information technology • Successful forays across knowledge-based sectors • Renewed industrial growth • Operational efficiency and quality focus • Supported by financial restructuring • Progress in infrastructure development • Significant achievements in telecom and roads • Focus on power sector and urban rejuvenation

Services sector driving momentum • Leveraging rich pool of human capital • Quality educational institutions • Large English speaking population • Globally-positioned IT sector • Software exports of US$ 12.2 bn in FY2004 and US$ 7.1 bn in H1-2005 • International services hub • Commenced with IT-enabled services : voice & data • Expanded to all knowledge sectors: pharmaceuticals, biotechnology, engineering design • Growth in financial services, travel & hospitality

Impact of the resurgence Sector Sectoral share of GDP(%) Growth FY2004(%) Services 56.2 9.1 Industry 21.7 6.6 Agriculture 22.1 9.6 GDP 8.5 One of the fastest growing economies in the world with 7.0% growth rate in H1-2005 Source: NAS

Renewed industrial growth • After a prolonged period of restructuring and repositioning growing competitiveness • Increasing deployment of technology • Deleveraging and organic capital generation • Constantly improving quality standards • Emergence of Indian multinationals • Setting up production capacities overseas • Setting up international distribution • Consolidating supply chain • India’s emergence as a global manufacturing hub • Second-most favoured destination for FDI in manufacturing

Progress in infrastructure development • Construction of Golden Quadrilateral and North-South, East-West corridors • 13,000 km long - world’s largest single highway project • Boosting demand for steel, cement, commercial vehicles Roads • Cellular subscriber base of 49 million, growing at over 150% • Positive impact on efficiency of firms & services exports Telecom …missteps in power and urban infrastructure being addressed

India has just started on the journey

Challenges of Intermediation in India • Size of the country and dispersed affluent population • Lack of Data – specially the area of Health • Attracting the Talent Pool • Evolving Regulatory Environment

Size & Dispersion of Population • Area : 2973190 sq. Kms. • More than 70% of population in rural areas • More than a third of Mass affluent & rich households in rural areas • 5161 towns & cities comprise urban India

Challenges from lack of Data • No single customer identification number like social security number • Single Mortality table used • No cuts available by geography or customer segment • Very scarce data for annuitants • Health records not available • Health incidence data or morbidity tables not developed • No consolidated medical individual history available • No standard definition of conditions & surgeries

Attracting the Talent Pool • Increasing attrition levels • Poaching within & across industries • Attrition at frontline sales level around 20% • Payhikes • Salary increases grossly out pace inflation • Projected increases to continue at a minimum 10-12% • Premium for “critical skills” with a sudden advent of new industries e.g. Insurance & ITES

Evolving Regulatory Environment • Multiple Regulators • Boundaries in RFS becoming fuzzier • Pension reforms on the anvil • Tax rules in flux • Creates distortions in incentives to invest in various financial instruments • Regulations still evolving as regulators gain maturity

Summary • Strong growth prospects for the Indian Economy • Demographic transition should lead to a positive savings growth spiral – fuelling growth of financial savings • Changing structure of savings could lead to increase in allocation to Insurance & Pensions • Need to manage unique intermediation challenges of operating in India

Thank you

The Indian Economy and The Financial Sector Opportunity