FINANCIAL REFORMS
Financial Sector Reforms Suggestions by
CA. Nitin Gandhi
CA. Namrata Shah
CA. Vikas Kabra
BFSICM Study G...
Financial Sectors & Capital Markets

Credit Market

Banks
De – regulation
Balance Sheet Quality
BASEL III
New Bank Policy
...
Structure of Credit Market

Jan 18, 2014

Team Platinum (Nitin Gandhi and team)

3
Concentration of Domestically-Controlled
Bank Assets and Share of Private Banks

Source: Secretariat calculations, Reserve...
Share of Private Banks in Total Bank Assets

Source: Mihaljek (2010), except for Vietnam which is taken from International...
Balance sheet quality:
Gross & Net non-performing loans

Source: International Monetary Fund (2010b) and Reserve Bank (201...
Bank Credit to the Private Sector
Per cent of GDP (in 2008 for comparator countries)

Source: World Bank Financial Structu...
Financial Sectors & Capital Markets

Credit Market

Banks
De – regulation
Balance Sheet Quality
BASEL III
New Bank Policy
...
Branches and ATM - Banks
No. of Bank ATM
Banks

Till 2000

2010

2013

Public Banks

-

40,680

89,088

Private Bank

-

1...
Banks – Deposit, Advances & NPA
Rs. In Billion
Particulars

1990

2000

2010

2013

1. Total Deposits – All
Banks

993

8,...
Reason and Suggestions
Reasons for higher NPA
• Huge capital expenditure and stretched working capital cycle
• Production ...
Capital Adequacy Ratio
BASEL – I (Tier I and
Tier II Capital)

2000

2010

2013

Public Sector Banks

10.85

12.11

11.22
...
Reasons and Suggestions
Reasons for Capital Infusion in Public Sector Banks
• Increasing NPAs impacting internal accruals....
Gross Domestic Saving in India and
International comparison
Country

1990

2000

2010

India

22.74%

23.20%

33.70%

US

...
Reason and Suggestions
Reasons - WHY Gross Domestic Saving is higher in India ??
• Inflation is high so relatively higher ...
Microfinance – Business in India
Rs. in Crores
2000

2010

2013

Portfolio O/s

71

18,344

21,245

Total Clients

0.52

3...
Financial Sectors & Capital Markets

Credit Market

Banks
De – regulation
Balance Sheet Quality
BASEL III
New Bank Policy
...
Securities Issued
Amount Raised through equity issue and debt issue in Rs. Crores
90,000

1,800

80,000

1,600

50,000

U
...
Largest Stock Markets by Domestic
Market Capitalization (in $ billion)
1999
• NYSE Euronext US

2009

2013

• NYSE Euronex...
Securities held by Depositories
Particular

2001 -02
Quantity
Demat Value
(Units in Crores)
(Rs. Crores)

2011-12
Quantity...
Suggestions
• Compulsory Demat for Bonds issue
• Algorithm
– Minimum Quota size for algorithm trading (either based on num...
Mutual Funds
Particular
Scheme
Equity
Debt
Hybrid
ETF & FoF
Total Units

Mar 2003
Units (nos)
167
180
35
0
382

AUM (Rs. C...
Mutual Funds
Net Asset under Mutual Fund
(in $ Billion)

2002

2012

US

6,390

13,045

Australia

356

1,667

China

N.A....
Insurance
Particular

2001 -02

2011-12

Life

12

24

Non - Life

13

25

Life

50,094

287,072

Non – Life

12,385

54,5...
Insurance Penetration
Particular

2001

2011

US Penetration (%)

8.97

8.10

South Africa Penetration (%)

17.97

12.90

...
Insurance - Suggestion
• All policy be categorized and coded under 3 to 5 groups
• FDI In Insurance
– Norms for utilizatio...
Bond

Source: Asian Bonds Online

Suggestion:
• Inflation adjusted bonds (CPI / WPI + benchmark return)
• Insurance based ...
BROKERS
• Allocate div for even inactive /closed client
o Transfer to IPF if credit remain unpaid >180 days/ 3 yr
• Client...
DP
• Broker Pool AMC linked to volume & Min charge
Rs. 2500 p.m. be cancelled
• Transfer to Unpaid client a/c - free or ha...
Disclosure – SEBI and Exchanges
• Migrate IPO Process- like OFS - let broker take risk of pay-in
• Strict vigilance of “Co...
Banks
•
•
•
•
•

Introduce Banking Transaction Tax
Migrate from Corporate Agent to Insurance Broker
Remove 25% ceiling fro...
New Bank Entry Policy
• In mid of 1990 ,10 banks opened and only 4 survived
• Allow only Focus Small Bank that can convert...
Custodian-FPI
• P-note holder can register directly- $1000 fees- save 2-2.5%
transaction cost
•
• Decide responsibility fo...
International Reforms China
760 IPO Queue… 2010 347 raised $ 82 bn…..
• Substitution approval - based system with a Regist...
International Reforms Japan
•
•
•
•
•
•
•
•
•
•

FIEL Fin. Instruments and Exch. Law
Short Selling Reform –
Prohibition to...
International Reforms USA : Dodd- Frank Wall
Street Reforms & Consumer Protection Act
• Accelerated rule making Release fo...
Mobile Banking
Banks 1lac branhces+ BC+ Grameen - 57 banks with 17000
branches still
• 40% still have no access to financi...
Platinum Financial Sector Reform
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Platinum Financial Sector Reform

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Teams will study the existing Financial Sector Regulations of various Regulators in India i.e SEBI, RBI, IRDA, PFRDA, FMC etc, (all or any of them) as well as compare them with regulations by global regulators viz SEC, Regulatory Authorities in UK, Singapore etc.

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Platinum Financial Sector Reform

  1. 1. FINANCIAL REFORMS Financial Sector Reforms Suggestions by CA. Nitin Gandhi CA. Namrata Shah CA. Vikas Kabra BFSICM Study Group Jan 18, 2014
  2. 2. Financial Sectors & Capital Markets Credit Market Banks De – regulation Balance Sheet Quality BASEL III New Bank Policy Micro Finance Rural Banking Jan 18, 2014 Securities & DP Equity Bonds / Debenture AMC Regulator Team Platinum (Nitin Gandhi and team) Deposit Taking Entities MF & Insurance IRDA Listing 2
  3. 3. Structure of Credit Market Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 3
  4. 4. Concentration of Domestically-Controlled Bank Assets and Share of Private Banks Source: Secretariat calculations, Reserve Bank of India, CEIC Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 4
  5. 5. Share of Private Banks in Total Bank Assets Source: Mihaljek (2010), except for Vietnam which is taken from International Monetary Fund (2010a). Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 5
  6. 6. Balance sheet quality: Gross & Net non-performing loans Source: International Monetary Fund (2010b) and Reserve Bank (2010b). Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 6
  7. 7. Bank Credit to the Private Sector Per cent of GDP (in 2008 for comparator countries) Source: World Bank Financial Structure Database, 2010 version Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 7
  8. 8. Financial Sectors & Capital Markets Credit Market Banks De – regulation Balance Sheet Quality BASEL III New Bank Policy Micro Finance Rural Banking Jan 18, 2014 Securities & DP Equity Bonds / Debenture AMC Regulator Team Platinum (Nitin Gandhi and team) Deposit Taking Entities MF & Insurance IRDA Listing 8
  9. 9. Branches and ATM - Banks No. of Bank ATM 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 Banks Branches 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 RRB’s 13,277 14,447 15,127 17,007 Total 59,762 65,898 79,735 102,343 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 331 9
  10. 10. Banks – Deposit, Advances & NPA Rs. In Billion Particulars 1990 2000 2010 2013 1. Total Deposits – All Banks 993 8,516 45,880 70,549 - 6,469 34,248 52,470 - 961 8,068 13,178 671 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% a. Deposit - Public Banks b. Deposit - Private Banks 2. Total Advances – All Banks Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 10
  11. 11. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 11
  12. 12. 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 Capital Infusion by Govt. of India 22,000 12,517 Jan 18, 2014 2011-12 12,000 Team Platinum (Nitin Gandhi and team) 2010-11 20,117 12
  13. 13. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 13
  14. 14. 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% Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 14
  15. 15. 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. Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 15
  16. 16. Microfinance – Business in India Rs. in Crores 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 16
  17. 17. Financial Sectors & Capital Markets Credit Market Banks De – regulation Balance Sheet Quality BASEL III New Bank Policy Micro Finance Rural Banking Jan 18, 2014 Securities & DP Equity Bonds / Debenture AMC Regulator Team Platinum (Nitin Gandhi and team) Deposit Taking Entities MF & Insurance IRDA Listing 17
  18. 18. Securities Issued Amount Raised through equity issue and debt issue in Rs. Crores 90,000 1,800 80,000 1,600 50,000 U n 1,400 i 1,200 t s 1,000 40,000 800 30,000 600 20,000 400 10,000 200 Rs. In Crores 70,000 60,000 0 1989-90 1994-95 1999-00 2004-05 2009-10 0 2013-14* I s s u e d YEAR Equity Funds raised Debt Funds raised Equity Issues Debt Issues *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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 18
  19. 19. Largest Stock Markets by Domestic Market Capitalization (in $ billion) 1999 • NYSE Euronext US 2009 2013 • NYSE Euronext US (11,838) •NYSE • 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 • NYSE Euronext (Europe) (2,444) • London SE (2,796) •NYSE • BSE (N.A.) • BSE (1,306) • BSE (1,139) • NSE (N.A.) • NSE (1,224) • NSE (1,113) (11,438) Euronext US (17,950) SE (4,429) Euronext (Europe) (3,584) 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 19
  20. 20. Securities held by Depositories Particular 2001 -02 Quantity Demat Value (Units in Crores) (Rs. Crores) 2011-12 Quantity Demat Value (Units in Crores) (Rs. Crores) NSDL 5,167 615,001 57,980 7,132,300 CDSL 482 24,337 13,357 1,020,569 Source: Handbook on Indian Securities Market 2012 Corporate Bonds Issued Particular Mar 2007 Corporate Bond No. of trades Mar 2012 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 - - 2,594 24,787 FIMMDA Source: Handbook on Indian Securities Market 2012 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 20
  21. 21. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 21
  22. 22. Mutual Funds Particular Scheme Equity Debt Hybrid ETF & FoF Total Units Mar 2003 Units (nos) 167 180 35 0 382 AUM (Rs. Crores) 11,115 65,208 3,141 79,464 Mar 2013 Units (nos) 347 857 32 58 1,294 AUM (Rs. Crores) 172,508 497,451 16,307 15,177 701,443 Source: AMFI Suggestion: • To start mutual fund for top 3 most traded commodity on commodity exchange Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 22
  23. 23. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 23
  24. 24. Insurance Particular 2001 -02 2011-12 Life 12 24 Non - Life 13 25 Life 50,094 287,072 Non – Life 12,385 54,578 99.46% 70.68% Life* 230,369 1,581,259 Non – Life (26,646) (881,684) No. of Companies Total Premium (Rs. Crores) Market Share of LIC (based on Total Premium) AUM (Rs. Crores) *Includes Life fund, Pension & General Authority Annuity & Group Fund, Unit ULIP fund Source: Handbook on Indian Insurance Statistics 2011 -12 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 24
  25. 25. Insurance Penetration 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 *data related to financial year 2001 -02 and 2011-12 Source: Handbook on Indian Insurance Statistics 2011 -12 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 25
  26. 26. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 26
  27. 27. Bond Source: Asian Bonds Online 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 27
  28. 28. 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) Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 28
  29. 29. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 29
  30. 30. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 30
  31. 31. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 31
  32. 32. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 32
  33. 33. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 33
  34. 34. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 34
  35. 35. International Reforms Japan • • • • • • • • • • FIEL Fin. Instruments and Exch. Law Short Selling Reform – Prohibition to participate in IPO to settle short positionsSettlement 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 35
  36. 36. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 36
  37. 37. 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 Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 37
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