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Wednesday, October 12, 2016


The latest RBI initiative under the new Governor, Mr. Urjit Patel of cutting the Repo Rate by 25 basis points might have pleased both the hawks as well as the doves of monetary policy. However, other leading metrics of growth like the IIP, credit growth to industry etc. have reported declines showing that this may turn out to be a dud cut after all.

The policy makers are perhaps hoping to bank on the boost in private consumption from festivals to drive domestic economic growth. The close to normal monsoon and the disbursement of pay commission bounty together are expected to boost urban spending. Yes, there are positive signs of revival in consumption demand as shown by the rise in the automobile sales in September of 20% - the highest in the past four and half years.  Airlines have reported a robust 23% growth in passenger traffic between April and August this year which works out to a 20% growth over the previous year. Pizza Hut and KFC have reported a robust same store-sales growth in September quarter after 11 straight quarters of decline.

This urban boost will put pressure in prices of most commodities except food perhaps - the latter would benefit from a good harvest. However, the overall private investment has remained muted due to excess capacity and high leverage across firms, according to a CRISIL report.

Disturbingly, the industrial production (IIP) has declined 0.3% year - on - year between April and August 2016 caused by a decline in manufacturing and weak growth in mining. Manufacturing output has fallen 0.3% in August over a decline of 3.4% in July 2016. The mining output is down 5.6% against growth of 0.9% in July. Electricity generation is up by 0.1 % against growth of 1.6 % in July. Cumulatively (April-August) IIP has declined 0.3% this year as against 4.1% increase in the corresponding period of the previous year. Adding to these woes is the abysmal performance of the bank credit growth to industry which has fallen to less than zero (-0.2) as against the January 2016 figure of +5.6%.

Economists say that this contraction reflects high unutilized capacities in industrial units and significant investments not taking place in industry. In such as scenario, a cut in interest rate can hardly give an impetus to fresh investments.

Therefore, the rate cut of 25 basis points obviously is not likely to trigger an investment cycle. It might possibly just send a signal for consumption boost, which ultimately might even generate its own inflationary pressure. In this context, the new Governor’s subtle shift of the goal post in inflation fighting - from targeting 4% CPI inflation to 4 - 6% CPI inflation band is troublesome. It might appease certain business groups without doing any good in terms of boosting industrial production.
In the end, what purpose has this rate cut achieved?


Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

Tuesday, October 4, 2016


Mr. Urjit Patel, Governor of RBI on October 5, 2016, has announced a repo rate cut of 25 basis points – a six year low of 6.25 % from 6.5% with immediate effect (October 5, 2015).

Banks are expected to pass on the benefit of the rate cut to customers. Markets cheered the move, with Sensex rising 91 points and Nifty closing above 8, 750. A positive beginning for the new RBI Governor in kickstarting the so called marketing sentiments.

The assumption seems to be that the inflationary pressures would trim down over time. There may be calls for further cuts in the next round. However, such an easing needs to be balanced with the need to preserve positive real rates of savings to reverse the decline in it. IMF says that India’s gross savings rate has fallen to 31% of GDP, from 37% eight years ago. This is in contrast to China’s saving rate of 49-50%.

The moot point is whether the slowdown in India’s saving rate is influenced by cyclical factors or structural issues. In the rest of Asia, even when the savings rate have been falling, the per capita income has been going up, while India’s per capita GDP is amongst the lowest in the region and is stagnating.

Structural Factors, especially demographics, are in our favour. India’s dependency ratio is moving south, while that of Japan and China are rising. The working age group population (15-64 years) constitute nearly 2/3rds of our overall population.

Therefore, even as structurally the factors are favourable, the savings rate has hit a plateau due to cyclical factors.

The private sector, (households and corporate) is the main driver of total savings, while the public sector is a laggard. Within the private sector, households are the main source of savings which have been pulling down the rate of late.

From a high 70% or years earlier, households, now contribute to only 60% of overall savings. The reason may be low incomes plus long period of high inflation alarmingly forcing them to set aside more of their income for consumption and less for savings. Household savings now constitute only less than a quarter of the family disposal income – down 5%.

Two thirds of household savings comprise of fiscal assets to ward of inflation.
The latest monetary policy, unless it kicks off an investment boom, will not be of much help in increasing the savings rate. In short, in spite of the hype in rate reduction, savings are likely to be in the doldrums for quite some time to come.

Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

Tuesday, July 12, 2016

Common Service Centre (CSC)- A hope for increasing rural insurance penetration

Rural Insurance Scenario:-
In spite of good industrial and urban developments in last few decades majority of the Indian population continue to reside in rural belt. Although the agriculture & allied industries in country has not been doing well but because of the overall growth of the economy , the living condition and the aspirations of the people in rural belt have gone up. Rural market has become a hot spot for many industries particularly that of  FMCG with its growing consumption pattern. However the story is not same for insurance industry. The rural India has got a huge market potential  for agriculture , cattle and other lines of insurance business but the insurance companies have so far failed in harnessing the full potential. As per a rough estimate almost more 80% of agriculture, 90% of cattle , more than 50% of vehicles do not carry insurance coverage. The real reason for it  is the  cost of distribution & servicing which is much higher in rural areas because of geographical spread and thin population density. 

Common Service Centre :-

The CSC(Common Service Centre) is a strategic cornerstone of the National e-Governance Plan (NeGP), approved by the Government of India in May 2006, as part of its commitment in the National Common Minimum Programme to introduce e-governance on a massive scale. It is being implemented by the  Department of Electronics and Information Technology (DeITY), Government of India on a Public-Private-Partnership (PPP) model.  CSCs are  the front-end delivery points for government, private and social sector services to citizens of India. The CSCs  are to offer  web-enabled e-governance/private companies services in rural areas, including application forms, certificates, and utility payments such as electricity, telephone and water bills, rural & micro banking and insurance etc.  The Scheme creates a conducive environment for the private sector to play an active role in implementation of the CSC Scheme, thereby becoming a partner of the government in development of rural India. The PPP model of the CSC scheme envisages a 3-tier structure consisting of the CSC operator (called Village Level Entrepreneur or VLE); the Service Centre Agency (SCA), that will be responsible for a division of 500-1000 CSCs; and a State Designated Agency (SDA) identified by the State Government responsible for managing the implementation in the entire State.
To make the scheme financial viable sale of insurance and other financial line products were made part of the bouquet to enhance the fee based income of the operator i.e. Village Level  Entrepreneur (VLE). By the end of 2014-15 there were  approximately 125000 VLEs across the country.

Sale of Insurance through CSC :-

As per the original scheme and model CSCs were established by various Service Centre Agencies (SCAs) in different states. Hence, for distribution of insurance through VLEs the insurance companies were required to enroll these state level SCAs as a Corporate Agent. These SCAs were not much aware about insurance services and therefore not much inclined for adding this service in bouquet of services being provided through them. Other limitation was that of them being corporate agent and restricted to the sale of the products of only one insurance company each from life and general domain which was not that great from their income point of view because customer were having preference for certain well known brands. The VLEs were spread in a large geographical locations & it was difficult to identify those  who were interested to sell insurance. Providing training to the selected VLEs on insurance Product and process was a big challenge. Even supplying product collaterals for marketing purposes was a challenge because of the distances in rural areas.

In September, 2013, Insurance Regulatory & Development Authority ( IRDA)  came out with a separate guideline for the sale of insurance policies through CSCs and brought in place a broker model as they were open to all insurance companies and could offer a choice to the customers.

For this particular purpose M/s CSC e-Governance Services India Limited, a Special Purpose Vehicle (SPV) was  formed to work as an  insurance broking company having on its roll all those VLEs through their respective state level institution (SDAs ) who were interested in selling insurance policies. The guidelines so issued permitted  both Life and Non Life Insurers in India to market certain categories of pre-underwritten and simple retail insurance policies and services through M/s CSC e-Governance Services India Limited (CSC-SPV) and its Common Service Centers Network. The prime objective of these Guidelines was  to facilitate the Insurers in India to reach out to the rural India utilizing the network of CSC-SPV.

CSC-SPV now  as an insurance intermediary & have entered in to agreements with Insurance companies for sales / servicing of the rural clients. They assist the  VLEs now named as RAPs(Rural Authorized Person) to undergo the prescribed training and certification as per regulatory requirements. On successful completion of training and passing the prescribed examination and based on the certificate issued by examining institute, CSC-SPV enters into an agreement with the RAP authorizing him to solicit the approved insurance products. The entire system is web based and all the RAPs are to register themselves on to get access of the services provided by CSC SPV. The remuneration so mutually agreed and approved by IRDAI is shared by RAPs (80%), SDA/SCA (12%)  and CSC SPV (8%). All the Insurers are to integrate their IT system to the CSC SPV portal for easy access and technology enabled services by RAPs. Initially the   regulator  allowed only Motor-TP product but subsequently in  October,2014 they extended the product range to include  Personal Accident ,  Farmer’s Package, Agricultural Pump set, Livestock and Fire & Burglary for dwellings and Life Insurance.

Progress so far :-

Like any other initiative, CSC-SPV model had a slow start but it is picking up well now. Against the collection of mere Rs 33.77 crores in year 2013, the figure stood at Rs 128.69 in calendar year 2015. In the first five months of calendar year 2016 – the figure has crossed 110 Cr and future looks very bright. HDFC Ergo, Future Generali, Iffco Tokio and Reliance General have taken initial lead and they are doing very well. Motor third party product continues to be the most sought after product contributing almost 92% of premium followed by Life insurance which shares 6%. But in life insurance most of the premium collected is of renewal less of new business. The number of RAPs has crossed 10k mark and the progress is very good on this count. The launch of Pradhan Mantri Fasal Bima yojana and its possible sale through CSC-SPV would add more value to this channel.

The scheme is operative in almost all major states and so far more than 25 companies have join it. The big daddy LIC so far has restricted this channel only for renewal collection. Sale of LIC’s new business would be a booster , if it happens for all because of its brand and ease of sale.

Friday, May 13, 2016

Pradhan Mantri Fasal Bima Yojana – Opportunities & Challenges


Agriculture and allied sector continues to be the backbone of our economy as more than 65% of  the population is dependent on it directly or indirectly. This  sector has been in trouble for last few years because of the  severe financial hardship well reflected by a never ending trail of farmers suicides. The changing climatic conditions and the uncertainty attached with the monsoon has been the real cause of this hardship. With the purpose of mitigating the losses arising out of the crop  related uncertainties and  helping the farmer community , the Govt. of India has launched a very ambitious crop insurance scheme named as “Pradhan Mantri Fasal Bima Yojana (PMFBY) ” staring with the “ Kharif” season this year.

The use of “Insurance” as a risk mitigating tool in agriculture is not new. It started in early 20th century in  Europe. In  India , the background can be traced back to 1915 in Mysore State where Shri J.S. Chakravarthi  did some pioneer work. But on big scale the concept got  introduced in year 1985 by crop Insurance division of General Insurance Corporation of India. The scheme got upgraded as National Agriculture Insurance Scheme (NAIS) and Modified National Agriculture Insurance Scheme (MNAIS) subsequently . Even a specialized insurance company named Agriculture Insurance Company (AIC) was established in 2002 to carry out these  schemes with the help of state governments and the designated banks.   However  the  schemes failed to deliver the expected results. Some of the reasons  which can be attributed to its failure could be linked to the fact that  these schemes were restricted only to the loanee farmers, the premium rates were higher , the cover granted was inadequate  and most important claim settlement experience was very poor. The farmer centric approach was completely missing and it remained a scheme to help the banks recover their outstanding loans partially. As per the latest data available for year 2014 , out of the gross cropped area of 195.26 million hectares only 42.82 million hectares or 22% was covered under crop insurance.

The new scheme is prepared on the five basic premises i.e.  coverage to all , enhanced  coverage in terms of sum insured & perils, high subsidization , use of latest technology and participation of more insurance companies. The important features of the scheme are as follows:
  1.        The scheme is open to all the farmers across the country . it is no more restricted only to those who take agriculture related loans from banks. it provides a wide scope of  business to the insurance companies to motivate them to venture in to crop insurance. In fact it is first “ One nation – one policy” kind of initiation.
    2.       There is no capping of the maximum sum insured. A farmer is free to take higher coverage for his crop within the scope of principle of indemnity depending up on his premium paying capacity. The scope of the cover has also been enhanced by adding all possible perils such as prevented sowing , loss to standing / harvested crop and localized calamity such as hailstorm, landslide and inundation during the crop cycle.
    3.       The premium to the farmer community is low and there is a heavy subsidy by Govt in it.  It is kept @2% for kharif and 1.5% for the rabi crop. For the commercial & horticulture crop it is capped @ 5%. The difference between the actual premium quoted by insurance companies and these fixed rates for farmer , is to be born by Central & State Govt on 50:50 basis. There is no upper cap proposed as far as the subsidy element is concerned.
    4.       The heavy emphasis is given on use of technology such as remote sensing ,drone and mobile technology to assess the damage for smooth and speedy claim settlement. The geographical limit for loss assessment has also been brought down to village level which used to be a block / tehsil earlier – there by making more realistic claim assessment. The entire insurance process right from joining of the farmers to disbursement of claim is to be made electronically to make it a fraud free and effective scheme.
    5.       For the wide coverage , the Govt has empanelled eleven insurance companies one PSU and ten private insurance companies to participate in the scheme. It is for the first time that a much wider participation from the private sector companies is seen. 

    Like its all other schemes , the Govt of India has fixed a ambitious target of getting 50% of the farmers under the PMFBY ambit and has set aside a budget of Rs 8,800 Cr as its share of premium for the next three years. 

    However like in the  past,  the path is not going to be easy even for this new scheme. Few expected challenges  are as follows :

    1.       The scheme has a high level of in built subsidy to be born by Central & State Govt. It requires a full participation and commitment from the State Govt. too. It is very unlikely that all states would support it because of political & financial reasons. It is rumored that some of the debt burdened states have expressed their unwillingness to be part of this grand scheme.
    2.       The success of the scheme is heavily based on its acceptance by the non-loanee farmers. In a country where people are averse of taking even mandatory motor third party insurance more so in rural belt , promoting voluntary crop insurance would not be an easy task.
    3.       The distribution set-up of the insurance companies empanelled for the scheme are not up to the desired level and it require huge effort in infrastructure building. At the time when insurance companies are struggling with their cost structure such investment is doubtful. One surprise element is non-inclusion of the four PSU general insurance co which have the huge network.  
    4.       The proposed claim settlement process of the loss assessment by Govt. agencies could also lead to the dispute. There is a possibility of such agencies assessing claim looking at the political benefit rather than on the sound technical footing. The proposed use of technology has not been used in past and relaying solely on it can give trouble.
    5.       There has been no solution to the  very genuine issue of the relationship between land owner & the cultivator i.e. cultivator incurring loss and the land owner getting compensation ( officially) in this scheme too. All hope is on the proposed legislation which is under consideration to take care of it.  

    Irrespective of the challenges mentioned above , no one can dispute this fact that the scheme is really good and has the potential of changing the fate of agriculture sector if implemented with true spirit.