Platinum Financial Sector Reform

FINANCIAL REFORMS

Financial Sector Reforms Suggestions by

CA. Nitin Gandhi

CA. Namrata Shah

CA. Vikas Kabra

BFSICM Study Group

Jan 18, 2014

De – regulation

Balance Sheet Quality

BASEL III

New Bank Policy

Micro Finance

Rural Banking

Deposit Taking

Entities

Equity

Bonds / Debenture

AMC

Regulator

IRDA

Listing

Jan 18, 2014 2 Team Platinum (Nitin Gandhi and team)

Financial Sectors & Capital Markets

Credit Market

Banks Securities &

DP MF &

Insurance

Structure of Credit Market


Concentration of Domestically-Controlled Bank Assets and Share of Private Banks


Source: Secretariat calculations, Reserve Bank of India, CEIC

Share of Private Banks in Total Bank Assets


Source: Mihaljek (2010), except for Vietnam which is taken from International Monetary Fund (2010a).

Balance sheet quality: Gross & Net non-performing loans

Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 6

Source: International Monetary Fund (2010b) and Reserve Bank (2010b).


Bank Credit to the Private Sector

Source: World Bank Financial Structure Database, 2010 version

Per cent of GDP (in 2008 for comparator countries)

De – regulation


BASEL III

New Bank Policy

Micro Finance

Rural Banking

Deposit Taking

Entities

Equity

Bonds / Debenture

AMC

Regulator

IRDA

Listing



Credit Market

Banks Securities &

DP MF &

Insurance

Branches and ATM - Banks

Banks 1990 2000 2010 2013

Public Banks 41,790 46,082 55,438 70,421

Private Bank 4,695 5175 8,877 14,584

Foreign Bank - 194 293 331

RRB’s 13,277 14,447 15,127 17,007

Total 59,762 65,898 79,735 102,343

Banks Till 2000 2010 2013

Public Banks - 40,680 89,088

Private Bank - 18,447 46,762

Foreign Bank - 1,026 1,230

No. of Bank ATM

No. of Banks Branches


Banks – Deposit, Advances & NPA

Particulars 1990 2000 2010 2013

1. Total Deposits – All Banks

993

8,516 45,880 70,549

a. Deposit - Public Banks - 6,469 34,248 52,470

b. Deposit - Private Banks

- 961 8,068 13,178

2. Total Advances – All Banks

671 4,541 32,650 53,711

3. GNPA (in Amount) – All Banks

- 640 818 1,839

4. GNPA – Public Sector - 533 573 1556

5. Priority Sector NPA - 237 309 669

6. % of GNPA in Priority Sector

- 44.50% 53.84% 42.93%

Rs. In Billion


Reason and Suggestions Reasons for higher NPA

• Huge capital expenditure and stretched working capital cycle

• Production fall by 56%

• Higher authorities and political pressure for sanction and disbursement of loan

• Less focus of banks on priority sector or SME lending.

Suggestions

• Tackle problems of unemployment, poverty and food security through advance to agricultural and small sector

• Branch positioning and Lending focus with incentives to banks

• Align WC Loan to product operating cycle and quantum

• Independence for disbursement in true sense required.

• ATM penetration till 2020 and ATM Positioning policy


Capital Adequacy Ratio BASEL – I (Tier I and

Tier II Capital) 2000 2010 2013

Public Sector Banks 10.85 12.11 11.22

Private Sector Bank 12.60 15.38 13.39

BASEL – II BASEL – I (Tier I and Tier II Capital)

2000 2010 2013

Public Sector Banks - 13.27 12.15

Private Sector Bank - 15.95 14.72

Rs. in Crores 2013-15 2012-13

2011-12

2010-11

Capital Infusion by Govt. of India

22,000 12,517 12,000 20,117


Reasons and Suggestions

Reasons for Capital Infusion in Public Sector Banks

• Increasing NPAs impacting internal accruals.

• High Operational costs

Suggestions

• Consolidation of Banks based on geography, book-size, management experience and focus perspectives.

• Professional management like private banks


Gross Domestic Saving in India and International comparison Country 1990 2000 2010

India 22.74% 23.20% 33.70%

US 16.30% 16.72% 11.62%

Japan 34.08% 26.55% 20.97%

China 39.63% 37.53% 52.65%

India 1990 2000 2010

Household 17.34% 20.40 % 23.50%

Private Corporate 3.50% 3.70 % 8.10%

PSU 1.90% (0.90) % 2.10%

Total 22.74% 23.20 % 33.70%


Reason and Suggestions

Reasons - WHY Gross Domestic Saving is higher in India ??

• Inflation is high so relatively higher deposit interest rates

• High blockage of funds in non-productive assets like real estate and gold

• Absence of social security system (E.g. - Canada)

Suggestions –

• Introduction of Social security plans - Invite FDI in security and growth oriented plans

• Reinvestment plan and restrictive profit policy for FDI.


Microfinance – Business in India

2000 2010 2013

Portfolio O/s 71 18,344 21,245

Total Clients 0.52 3.11 3.17

• Effective tool for Poor people access to credit and insurance.

• MFI recovery – 30 days + 0.27% delinquencies as on March 2013

• Expected Annualized growth by 2020 to 35%-40%

Suggestions

• Allocate more funds to microfinance business

• Improve policy and good governance of MFI

• Generation of employment through MFI

Rs. in Crores


De – regulation


BASEL III

New Bank Policy

Micro Finance

Rural Banking

Deposit Taking

Entities

Equity

Bonds / Debenture

AMC

Regulator

IRDA

Listing



Credit Market

Banks Securities &

DP MF &

Insurance

Securities Issued

*Upto Dec 31, 2013

Equity Issue includes funds raised through IPO, FPO,OFS and Right Issue

Debt Issue includes funds raised through public debt

Source: Primedatabase

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1989-90 1994-95 1999-00 2004-05 2009-10 2013-14*

U

n

i

t

s

I

s

s

u

e

d

Rs.

In C

rore

s

YEAR

Equity Funds raised Debt Funds raised Equity Issues Debt Issues

Amount Raised through equity issue and debt issue in Rs. Crores


Largest Stock Markets by Domestic Market Capitalization (in $ billion)

1999 2009 2013

• NYSE Euronext US (11,438) • NYSE Euronext US (11,838) •NYSE Euronext US (17,950)

• Nasdaq OMX (5,205) • Tokyo SE (3.306) • Nasdaq OMX (6,085)

• Tokyo SE (4,463) • Nasdaq OMX (3,239) • Tokyo SE (4,543)

• London SE (2,855) • NYSE Euronext (Europe) (2,869) •London SE (4,429)

• NYSE Euronext (Europe) (2,444) • London SE (2,796) •NYSE Euronext (Europe) (3,584)

• BSE (N.A.) • BSE (1,306) • BSE (1,139)

• NSE (N.A.) • NSE (1,224) • NSE (1,113)

Suggestion: • Reduce Time lag from filling of prospectus to listing date

• Make pricing efficient – put onus on Merchant Banker, Underwriter

• Disclosure – Loss of market cap to total issues managed (Merchant Banker wise)

– Funds collected in loss making IPO / funds collected in profit making IPO


Securities held by Depositories

Source: Handbook on Indian Securities Market 2012

Particular Mar 2007 Mar 2012

Corporate Bond No. of trades Traded Value (Rs. in Crores)

No. of trades Traded Value (Rs. in Crores)

BSE 1,234 4,234 465 3,239

NSE 123 1,486 2,178 24,207

FIMMDA - - 2,594 24,787


Particular 2001 -02 2011-12

Quantity (Units in Crores)

Demat Value (Rs. Crores)

Quantity (Units in Crores)

Demat Value (Rs. Crores)

NSDL 5,167 615,001 57,980 7,132,300

CDSL 482 24,337 13,357 1,020,569

Corporate Bonds Issued

Source: Handbook on Indian Securities Market 2012

Suggestions

• Compulsory Demat for Bonds issue

• Algorithm – Minimum Quota size for algorithm trading (either based on number

of share or price ceiling)

• Regulation related to use of social media to disclose financial by business house, Investment advisor firms and Stock brokers


Mutual Funds

Particular Mar 2003 Mar 2013

Scheme Units (nos) AUM (Rs. Crores) Units (nos) AUM (Rs. Crores)

Equity 167 11,115 347 172,508

Debt 180 65,208 857 497,451

Hybrid 35 3,141 32 16,307

ETF & FoF 0 58 15,177

Total Units 382 79,464 1,294 701,443

Suggestion:

• To start mutual fund for top 3 most traded commodity on commodity exchange


Source: AMFI

Mutual Funds Net Asset under Mutual Fund (in $ Billion)

2002 2012

US 6,390 13,045

Australia 356 1,667

China N.A. 437

Japan 303 738

India 20 114 Source: 2013 Investment Company Factbook

Suggestion:

• Introduce product that provide return at least equivalent to G-Sec


Insurance

Particular 2001 -02 2011-12

No. of Companies

Life 12 24

Non - Life 13 25

Total Premium (Rs. Crores)

Life 50,094 287,072

Non – Life 12,385 54,578

Market Share of LIC (based on Total Premium) 99.46% 70.68%

AUM (Rs. Crores)

Life* 230,369 1,581,259

Non – Life (26,646) (881,684)

*Includes Life fund, Pension & General Authority Annuity & Group Fund, Unit ULIP fund

Source: Handbook on Indian Insurance Statistics 2011 -12


Particular 2001 2011

US Penetration (%) 8.97 8.10

South Africa Penetration (%) 17.97 12.90

PR China Penetration (%) 2.20 3.00

Japan Penetration (%) 11.07 11.00

India Penetration* (%) 2.71 4.10

Insurance Penetration

*data related to financial year 2001 -02 and 2011-12

Source: Handbook on Indian Insurance Statistics 2011 -12


Insurance - Suggestion

• All policy be categorized and coded under 3 to 5 groups

• FDI In Insurance – Norms for utilization of FDI funds towards improvement of Service

– Innovation in distribution channel to ensure rural reach

– Use of technology to educate prospective insuree

• Third Party rating of Insurance companies

• Transparent and Standardizing of Terms & Conditions – Average premium per policy issued be in range of +/- 20% of national

average

– Uniform commission across different product category

• Compulsory Segmentation with respect to issue of policy

• Securitization of insurance products to facilitate additional capital to Insurance companies

• Promote more companies to act as re-insurance company


Bond

Suggestion:

• Inflation adjusted bonds (CPI / WPI + benchmark return)

• Insurance based on bond maturity value

• Bonds that provide return equivalent to real rate of return

• Facilitate listing of municipal bonds


Source: Asian Bonds Online


BROKERS • Allocate div for even inactive /closed client

o Transfer to IPF if credit remain unpaid >180 days/ 3 yr

• Client FO Margin –Treat like pledge - shares in client a/c

o Specific lien not general hypothecation.

• 50% - IPF must be used for benefits of losses of < 1 lac

clients - No Education seminars

BANKS • Set of standard for servicing - levying charges - bounce sms

intimation MUST

• Penalty for non-performance (EOD non credit)


DP • Broker Pool AMC linked to volume & Min charge

Rs. 2500 p.m. be cancelled

• Transfer to Unpaid client a/c - free or half cost –

broker must compulsory hold separate A/c

• Non pan a/c holder – upload on site – let claimant

come forward

Credit card • Heavy penalty for double collection

Eg: Agency relationship

Disclosure – SEBI and Exchanges

• Migrate IPO Process- like OFS - let broker take risk of pay-in

• Strict vigilance of “Concentrated Applications”

• MB performance index( Loss of Mkt cap) for launching IPO –

MUST disclose

• Tighten insider trading norms – UPSI

• FO obligation upload of all MB+, BRLM+, in Settlement

Prohibition Period

• Vigilance of > 5% position holder/Top 25 broker position (F+O)

• Launch of IRF – Int rate future- Qualitative


Banks • Introduce Banking Transaction Tax

• Migrate from Corporate Agent to Insurance Broker

• Remove 25% ceiling from promoter group biz

• Incentive for technology tie up for multiproduct branches

• Mor committee report CFS4SBLIH

o Far reaching over path breaking ambition

o Do away int subvention and debt waiver - Stop evergreening

o Interoperability of last mile- 15 min by walk – BC, PI

o Externalise cost of delivery – client protection – Mobile wallet

o Weighted Priority sector lending – Incentivise for difficult lending

o Universal Electronic bank a/c by 2016 for access credits

o Payment bank (Nw 50 cr) - Priority sector wholesale


•

New Bank Entry Policy

• In mid of 1990 ,10 banks opened and only 4 survived

• Allow only Focus Small Bank that can convert MFI into bank to focus on Agri and small Business


Custodian-FPI

• P-note holder can register directly- $1000 fees- save 2-2.5% transaction cost

• Decide responsibility for TDS- custodian/ QDI/ QFI

• YU- E –BAO-– Chinese bank savings int. 0.35% MMF yields -6% -17 times


•

International Reforms China


760 IPO Queue… 2010 347 raised $ 82 bn…..

• Substitution approval - based system with a Registration - based Mechanism

• Steps for strengthening investor confidence

• Buyback for misleading disclosures detected - extended lockup period

• If 50% drop in business profits in year 1

- temporarily stop applications from underwriter

• Sponsor-Issuer Collusion, inflated IPO Valuations, Over – intervention on pricing, slap –on- wrist penalties for misleading financial reporting

• Compulsory market oriented delisting program

International Reforms Japan


• FIEL Fin. Instruments and Exch. Law

• Short Selling Reform –

• Prohibition to participate in IPO to settle short positions-

• Settlement Prohibition- Illegal Act

• As an Investment Technique- permitted -More flexibility in the short selling price - Uptick Rule

• Permanent ban on naked selling,- Secure borrowing of shares

• Revamped system of reporting/ publication of short positions

• Two –Tier system

• Short selling balance ratio of 0.2 % report .50% publicize by exch

• Expansion of the scope of the regulations to PTS

International Reforms USA : Dodd- Frank Wall Street Reforms & Consumer Protection Act


• Accelerated rule making Release for Leverage, Derivatives, REITS, mortgage pools

• Incentive Based Compensation for legal Advisers

• Monthly reporting –FORM SLT

• Client can ask for contact of Enforcement Investigators and copies of deficiency Letters

• Whistleblower Program- Revitalize bounty program who tips insider trading

• Wiretaps

• Pay to play rule –Permits Advisers to compensate regulated persons

• SRO to enhance oversights of registered entity

• Clg. House major Swap Participant

• Fiduciary Standards for broker Dealers

Mobile Banking

Banks 1lac branhces+ BC+ Grameen - 57 banks with 17000 branches still

• 40% still have no access to financial services

• Use of Mobile Wallets – Financial transaction without presence of bank

• Additive Model

• Transformational Mode – E.g. Kenya


Economy & Finance

Platinum Financial Sector Reform