Banks need long term resources for expansion like setting up new branches, developing new products, and modernization. They rely on both deposit and non-deposit sources. Deposits have been the mainstay but faces challenges like availability of other investment options. Physical savings need to be converted to financial savings. Banks need to explore new sources and retain customers. Having a strong capital base is important for banks to survive difficult times.

1. NEED FOR LONG TERM
RESOURCES FOR BANK
BY CHAMPION GROUP:-
PRIYAMVADA
AJAY KUMAR
STANISLAUS I AGERA
RANJIT KUMAR SINHA
HITESH R THANTHARATE
ATUL KUMAR SRIVASTAVA

2.  Long Term Sources are those that are needed over a longer period
of time - generally over a year
 The reasons for needing long term resources are generally
different to those relating to short term resources.
 long term resources may be needed to fund expansion
programme of bank
 It may be required for setting up new branches, subsidiaries etc.
 It may be required for developing and launching new products
 It is very important to note that in most cases Bank will not use
just one source but a number of long term sources.

3.  Long Term Sources are used for
modernisation, expansion, diversification.
 It is required to cater Asset Liability
mismatch, Interest Rate Risk, liquidity risk

4. Authorised, Issued, Subscribed and Paid up
capital Par/face value, Issue Price, Book value and
Market Value
 Rights of equity shareholders
-Right to Income :PAT less preferred
dividends
-Right to Control: voting rights
-Pre-emptive Right: for additional issues,
rights issue in the same
proportion
 -Right in liquidation: residual claim over

5. Advantages
• No fixed maturity, no obligation to
redeem
• No compulsion to pay dividends
Provides leverage capacity
• Dividends tax exempt for investors
Disadvantages
Dilution of control of existing
owners
High Cost: rate of return
expected by equity holders
higher than debtholders
Dividends are not tax
deductible: hence cost is higher
Issue costs higher:
underwriting, brokerage, other
issue expenses
Higher servicing costs: hold
AGMs, post annual reports etc.

6. Pros
Readily available, no talking
to outsiders
Effectively additional equity
capital, however no issue
costs of loss due to
underpricing
No dilution of control
No expansion in equity base,
hence no dilution of EPS, BV
per share etc.
Cons
Quantum very
limited
High Opportunity
costs: dividends
forgone by equity
holders
Requires careful
attention to NPV of
projects

7. Is a hybrid form of financing, payment after debt but before
equity
Equity features:
-out of distributable profits
-not an obligatory payment
-dividends not tax deductible
Debt features:
-dividend rate is fixed
-capital is redeemable
-normally no right to vote
Can have other features like cumulative, convertible,
participating…..

8. Pros
No obligation to pay dividend,
no bankruptcy or legal action
for non payment
Financial distress of redemption
obligation not very high
Part of net worth, hence
increases its creditworthiness/
leverage capacity
No dilution of control
No pledging of assets required
Cons
Expensive source since
dividends not tax
deductible
Though no legal
consequences, liability
to pay dividends
stands, can spoil
company’s image
Can acquire voting
rights in some cases
Have claim prior to
equity holders

9. Like promissory notes, are instruments for raising LT debt
More flexible compared to term loans as they offer variety of choices as
regards maturity, interest rate, security, repayment and other special
features
Interest rate can be fixed/floating/deep discount
Convertibility : Can be FCDs, NCDs, PCDs
Warrants : Can have warrants attached, detachable or non detachable,
detachable traded separately
Option : Can be with call or put option
Redemption: Bullet payment or redeemed in instalments
Security: Secured or unsecured
Credit rating: Need to have a credit rating by a credit rating agency
Trustee: Need to appoint a trustee to ensure fulfilment of contractual
obligations by company
DRR: Company needs to create a DRR if maturity more than 18 months

10.  Initial Public Offer (IPO)
 Secondary Public offer
 Rights Issue
 Bought out deals
 Euro Issues
 Private Placement
 Preferential allotment
 Venture Capital/ Private Equity transactions

11. Pros
 Access to larger amount of
funds
 Further growth limited
companies not using this route
Listing: provides exit route to
promoters; ensures
marketability of existing shares
 Encash on value created in the firm
 Recognition in market
Stock prices provide useful
indicators to management
 Sometimes stipulated by private
investors in the company
Cons
Pricing may have to be
attractive to lure
investors
Loss of flexibility
Higher accountability
More disclosure
requirements to be
met
Visibility in market
Cost of making a
public issue quite high

12. Eligibility criteria defined: net worth, track record of
profitability, issue in same year; secondary issues have no
such restrictions
Book Building process: process of tendering quantities
at prices within a band
Issue expenses: underwriting, brokerage commissions,
fees to managers to the issue, registrars, printers,
advertisers, listing fees, stamp duty
Issue pricing: free pricing, disclose basis for issue price
Public issue of debt: appointment of debenture trustee,
creation of DRR, credit rating reqd., security to be created

13. • Issue of capital to existing shareholders
• Offer made on a pro rata basis
• Offer document called Letter of Offer
• Option given to apply for additional shares
• Rights renunciation: are tradeable, may be sold off in
the market
• Comparison with Public issue: with familiar
investors, hence likely to be more successful; less
floatation costs since no underwriting; but lower
pricing to benefit shareholders

14. Sale of securities directly to wholesale investors like FIs, banks, MFs,
FIIs,PE funds etc.
Called private placement in equity/equity related instruments, in
unlisted companies and in all cases of debt
Called preferential allotment in case of unlisted companies for
equity/equity related instruments
Different from reservations made for such QIBs out of a public issue
Subject to SEBI regulations on pricing, lock in period, open offer to be
made to public
QIB placement guidelines recently issued by SEBI for compliance and
disclosures

15. Pros
Less expensive mode
Lesser SEBI and other
regulations
Easier to market the issue to a
few investors
Entry of wholesale financially
sophisticated investors in
company’s profile
May use this route until IPO
decision taken
Less administrative
maintenance
Cons
Does not qualify for
listing in an unlisted
company
Restrictive covenants
may be imposed by the
investors
May call for
management
participation
Issue pricing more
tight

16. Equity finance to potentially high growth companies
Reasonably long to medium term commitment
Hands on management approach, active participation in
management
Considered value add investor
VC: primarily high risk high return investment esp. in technology
oriented/ knowledge intensive businesses with long development
cycles, greenfield ventures
Can be in unlisted or listed (PIPES) Companies
Exit route to be defined at the time of investment
Restrictive clauses on promoters’ holding sell off and other
financial/operational issues
Detailed memorandum/business plan on company, its financials to
be prepared
Shareholders agreement to be signed by both parties
Valuation of Company key issue
Leads to dilution of control by existing promoters

17. The Indian economy has witnessed robust growth performance in recent
years and banks have played a major role in providing the required amount
of resources. In order to sustain the growth process, banks would have to
continue to provide funding on a large scale. In India, there exists an
enormous potential of savings in rural and semi-urban areas. Also, quite a
large part of domestic savings is locked up in unproductive physical assets.
The mobilisation of savings from hitherto untapped areas and conversion
of physical savings into financial savings would necessitate introduction of
appropriate products to suit the demand of savers. Banks are indeed in an
ideal position to do so because of certain inherent characteristics of
deposits such as safety and liquidity.
 Apart from mobilisation of deposits, banks, for meeting their resource
needs, also depend on non-deposit resources both at home and abroad. A
part of non-deposit resources comes from borrowings, which help augment
the funding needs of the banks instantly. However, they also pose a
challenge in terms of their availability and management of borrowing
costs, amidst potential interest rate and exchange rate risks.

18. Bank deposits have all along been the mainstay of the savings process
in the Indian economy. Although banks have played an increasingly
important role in stepping up the financial savings rate, physical savings,
nevertheless, have tended to grow in tandem with the financial savings.
A major challenge, thus, is to convert unproductive physical savings into
financial savings. This is also necessary for banks as they face several
challenges in realising the full potential of deposit mobilisation in a
growing economy. Bank deposits have become relatively less attractive
to the households in view of the availability of a wide menu of alternative
saving instruments offering scope of higher returns to savers.
Furthermore, savers have also become more informed in managing risks
of their portfolios through the use of specialised services offered by other
financial intermediaries. This behaviour is expected to accentuate in
future. In view of the shrinking share of the household sector deposits in
total deposits, banks need to explore ways of broadening the depositor
base as also provide improved services for retaining their clientele. It is,
therefore, necessary for banks to seek for new sources/alternate
resources.

19.  Since bank nationalisation, banking in India has become increasingly
politicised. Non-performing assets have become worse since recent past.
There is already an expectation of yet another write-off of loans by a
government desperate to improve its image after being riddled with scams
and scandals.
 It is important to have strong capital base for a bank to survive in times
of distress. If there is a run on a bank, only strong capital base of a bank can
bail it out of difficulties. This is because, while deposits are repayable
immediately, assets take time to be materialised and collected. The history
of financial crises, including the one of 2007-09, is littered with cases where
many banks having low capital base, faced insolvency or financial
difficulties serious enough to warrant state support.
 At the time of distress only strong bank having large capital base can
sustain.
 Bank also require long term resources to fulfill the gap caused by Asset
Liability mismatch.

20.  As BASEL III regulation progressively kick in, the amount of capital
needed to keep the banking system running is multiplied.
It has increased pressure for infusion of fresh capital, one of major long
term resources.
 As the BASEL III guidelines are progressing, almost all the systems capital
requirement for BASEL III transition will be due in coming years (2016-18)
and additional buffers for Capital Conservation and for India`s yet to be
identified “systematically important banks” will also kick in.
 Today`s banking is Capital intensive. For every Rupees that is lent out by
a Bank it has to set aside 23 paise in low interest earning Government
Securities. Another 3 paise is to be set aside to meet Regulatory Cash
Reserve Ratio requirements.
 Within the balance amount, Banks must also meet Priority Sector
guidelines that is upto 40% of credit.

21.  With the balance amount free for Lending to Indian Companies and
Individuals at market determined rates.
 The real problem arises when loans begin to turn sour. It must be
provided for bank non performing loans as they age over time and fully
provided for once they turn from sub - standard to loss over a period of two
years.
 Capital Adequacy Ratio of Indian Public Sector Banks have been
severally hit due to falling profitability and rising NPAs.
 Most of the public sector banks are at the bottom of pile when it comes
to meeting RBI`s Capital Adequacy requirements.
 India Ratings have estimated that Capital requirements in 2014-15 for
Indian Banks will be modest but demand for Tier I Capital will accelerate
sharply from 2016.

22.  Total Capital requirements for BASEL III transition will be around Rs.
520000 Crore for the entire sector.
 Of this Common Equity is expected to constitute Rs.230000 crores, Tier I
Hybrid Bonds Rs.170000 crores and Tier II Subordinate Debts Rs.120000
Crores.
 Out of above govt banks will require 80% of the amount.
 India Ratings projections assume additional buffers above minimum
requirements of 1.5% for the five largest bank and a buffer of 0.5% for all
other banks.
 For the above requirements Banks shall have to regularly tap the Equity
Market as well as Overseas for long term resources in the form of fresh
capital.
 One of the other options to bring resources is by way of selling shares to
LIC.

23.  One of the other sources is by way of placing BASEL III Hybrid Bonds.
Any Questions ?

24. THANK YOUTHANK YOU