The Indian Economy and The Financial Sector Opportunity

July 12, 2005

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Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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India : Overview

Country

Population1,055m

GDP (03-04) $ 579 BnLife insurance market

* Insurance Premiums as % of GDP** April 2003 – March 2004

Country

3 year CAGR of GDP 6.5%

Inflation 5%

Savings rate (03-04) 25%

Insurance penetration* 2.3%

MF Penetration 0.5%

Characteristics

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Size and Distribution of Savings

Sources: RBI

Share of Financial Savings

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

93

-94

19

95

-96

19

97

-98

19

99

-00

20

01

-02

Mutual Fund Life Insurance Government Small Savings

Currency & Deposit PF & Govt Pension

0

100,000

200,000

300,000

400,000

500,000

600,000

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

5 Year 11.6%

HH Savings (Rs Mn)

Financial Savings

Gross Physical Savings5 Year 20.2%

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Opportunities in life insurance

Life insurance premium as % of GDP

10.7%

8.9% 8.7%

5.7%

4.4%3.4%

2.3% 2.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

UK J apan Korea Austrlia US Malaysia India China

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Opportunities in non-life insurance

Non-life insurance premium as % of GDP

4.6%

3.5% 3.4% 3.4%

2.2%1.8%

0.9%0.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

US UK Australia Korea J apan Malaysia China India

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Retail credit opportunity…Consumer loans / GDP (%)

18

33

52

8

55

0

10

20

30

40

50

60

Korea Taiwan Malaysia Thailand India

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

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Opportunities in asset management

AUM as % of GDP

87%

72%

30%23% 21%

6%

0%

20%

40%

60%

80%

100%

Australia US Brazil UK Korea India

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Opportunities in Credit Card

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Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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Twin Growth Drivers

Demographic Transition

Economic Surge

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Lowering Dependency Ratio …

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…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

SG-2005-0042 14Source:Based on NCAER & Govt Of India estimates

CAGR (%)

141123

4872

15.727.8

0

30

60

90

120

150

180

210

'03-'04 '09-'10(E)

No. of HH (M)

<70k

70k-140k

>140k

-2.31%

10.1%

Income

Rising Income levels Increases Target Market

7.06%

Income range based on 1998-1999 prices

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0

2

4

6

8

10

12

0 1 2 31,000 10,000 100,000100

(1) PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shownSource: Swiss Re; NCAER

Insurance premium as % GDP

GDP per capita in USD (log scale)

INDIA

... Insurance Is Poised For Growth

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Twin Growth Drivers

Demographic Transition

Economic Surge

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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

Drivers of resurgence…

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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

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Impact of the resurgence

Sectoral share of GDP(%)

Sector

22.1Agriculture

21.7Industry

56.2Services

Growth FY2004(%)

9.6

6.6

9.1

GDP 8.5

Source: NAS

One of the fastest growing economies in the world with 7.0% growth rate in H1-2005

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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

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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

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

Cellular subscriber base of 49 million, growing at over 150%

Positive impact on efficiency of firms & services exports

Cellular subscriber base of 49 million, growing at over 150%

Positive impact on efficiency of firms & services exports

Roads

Telecom

…missteps in power and urban infrastructure being addressed

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India has just started on the journey

S-curve for income growth in Asia

0

5,000

10,000

15,000

20,000

25,000

0 10 20 30 40 50 60

Years from start of reforms

GD

P p

er

cap

ita i

n 2

003 (

US

$)

Source: Morgan Stanley

India

Philippines

China

Thailand

Malaysia

KoreaTaiwan

Singapor

Hong Kong

J apan

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Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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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

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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

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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

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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

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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

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Agenda

Current Scenario

Drivers of Growth

Challenges

Summary

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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

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Thank you