team titan financial reforms
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Group Research Study on
Financial Sector Reforms the way forward…
Team - Titans: CA. Abhishek Mistry CA. Gagan Choudhary CA. Gagan Kothari CA. Rima Shah
Reforms Mantra: Inclusion Growth Stability
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Topic: Regulatory Architecture Capital & Bond Markets by CA Abhishek Mistry
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Financial Regulators
An Overview
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Regulatory Architecture – India
No Central Authority
Ministry of Finance
Ministry of Consumer
Affairs
Ministry of Labour
Ministry of Company
Affairs
SEBI (Capital Markets)
IRDA (Life & General
Insurance)
PFRDA (Pension Fund)
RBI (Banks & NBFCs)
Commercial Banks
Co-Op Banks NABARD SIDBI National
Housing Bank
Ministry of Small Scale
Ministry of Urban Poverty
EPFO (Provident
Fund)
Deposit Taking
Activities
High Level Coordination
Committee on Financial Market
Registrar of Co-op Societies
FMC (Commodity
Markets)
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Regulatory Architecture – United States
Financial Stability Oversight Council
Federal Reserve
Office of Comptroller of
Currency
National Credit Union
Administration
Federal Deposit Insurance
Corporation
Securities and Exchange
Commission
Commodity Futures Trading Commission
Federal Housing Finance Agency
Bureau of Consumer
Financial Protection
Building & Friendly Societies
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Regulatory Architecture – Canada
Ministry of Finance
(Shared system of Financial Regulation and Supervision)
Department of Finance
Bank of Canada
Office of the Superintendant of
Financial Institutions
Canada Deposit Insurance Corporation
Financial Consumer Agency of Canada
Canadian Securities Regulatory System
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Regulatory Architecture – Japan
Financial Services Agency
(Planning, Policy-Making & Supervision of Financial System)
Banking
Insurance Business
Securities & Exchange Surveillance
Securities Business
Certified Public Accountants &
Auditing
Administrative Law
Financial Investigation
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Regulatory Architecture – United Kingdom
Financial Regulations
Prudential Regulation Authority
(Regulation & Supervision)
Banking
Building Societies
Credit Unions
Investment Firms
Insurance
Financial Conduct Authority
(Consumer Protection)
Financial Intermediaries
Money Laundering
Mortgage Market
Financial Investigations &
Enforcement
Promote Competition
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Regulatory Architecture – Australia
Financial Regulations
Prudential Regulation Authority
(Licensing & Regulation)
Banking
Deposit-Taking Institutions
Insurance
Friendly Societies
Superannuation
Securities & Investments Commission
(Consumer Protection & Supervision)
Financial Markets
Financial Intermediaries
Consumer Credit
Protecting Investors
Insolvency Laws
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Regulatory Architecture – Summary
Principles for setting-up Dynamic Architecture:
• Financial Sector should be guided by three mantras: Inclusion, Growth and
Stability.
• We cannot be risk-averse. Too much risk-aversion on part of regulators can
impede growth and development.
• There is no perfect regulatory architecture to suit every economic cycles. It
has to be constantly molded with changing times.
• Complexities of the financial products should be properly understood. If
these products penetrate in the system without proper knowledge, it may
create dangers to systemic stability.
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Financial Reforms from
Capital & Bond Market perspective
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Reforms – Capital & Bond Markets
Customers’ Perspective
• There is a need to adopt Customer-Centric Approach as done in UK and
Australia. Right product should reach to right customer.
• As financial products are more complex for layman to understand fully, more
responsibility should be cast on Intermediaries.
• There is a need to inculcate habit of Financial Planning with customers with
proper risk profiling.
• People should be encouraged to invest in equity market through Mutual
Fund route especially novice investors.
• Training Session should be undertaken by SEBI regularly in semi-urban
and rural areas where there is lack of knowledge.
• Consumer Redressal Forum should be pro-active on specific cases like
mis-selling of financial products, etc
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Reforms – Capital & Bond Markets
Regulators’ Perspective
• Regulators should revise upwards its Capital Adequacy Norms for
intermediaries.
• Exchanges should provide for Settlement Guarantee Fund on the basis of
turnover on its platform.
• Although RBI exercises lot of regulatory powers, yet there is a need for
Independent Regulator in bond market like SEBI and IRDA.
• Bond market awareness and participants needs to be increased. Presently,
it is dominated by PSU Banks and trading is mostly in G-Secs.
• There should be uniform stamp duty across all states and no TDS on
interest. Tax deduction u/s 80CCF should be extended.
• Make unified regulator so that movement of funds by investors across asset
class is easier.
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Reforms – Capital & Bond Markets
Issuers’ Perspective
• A platform should be set for international listing in India.
• IPO process should be fastened. Presently, it takes around 4 to 6 months.
• Allow Pension, Provident Fund Trusts and Insurance to invest in Corporate
Bonds without limits.
• Retrospective amendments of laws should be avoided.
• Committee to be formed on ‘Why MNCs in India prefer delisting?’
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Topic: Banking Insurance by CA Gagan Choudhary
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Financial Reforms from
Banking perspective
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Narasimham Committee (1998) - Recommendations
• Autonomy for the public sector bank
• Reform in the role of RBI: segregation of the roles of RBI as a regulator of
banks and owner of bank
• Stronger banking system: Merger of larger Indian bank but its still pending
• Non-performing assets: Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 got implemented
• Capital adequacy and tightening of provisioning norms: The committee
targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002
• Entry of foreign banks: Increase the capital limit for foreign banks
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Nachiket Mor Committee (2013) - Vision
• Universal Electronic Bank Account (UEBA)
• Ubiquitous access to payment services and deposit products at reasonable
charges
• Sufficient access to affordable formal credit
• Universal access to a range of deposit and investment products at
reasonable charges
• Universal access to a range of insurance and risk management products
at reasonable charges
• Right to Suitability
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Issues faced by Banking Sector
• Increase penetration of banking in India- tackle demand supply mismatch
• Credit disbursement to the priority sector
• Maintain asset quality
• Improve risk management mechanism
• Technology adoption
• Are Indian Banks Prepared for Basel III
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Challenges for Banking Sector
• Indian banks would require additional capital of Rs 5 trillion to meet Basel-
III norms by March 31, 2018
• Half the population does not have access to banking services
• Allotment of new Banking Licenses
• Growth is still a concern for the banking sector on account of a sustained
slowdown in the economy as well as reduced demand for credit on account of
the current high interest rate environment
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Major Banking Reforms – in Pipeline
• Creating a global bank
• Licenses for specific banking tasks
• Easy access and smaller banks
In March 2013, the Financial Sector Legislative Reforms Commission
headed by former justice B. N. Srikrishna suggested:-
• SEBI and IRDA should be merged into a unified financial agency
• Role of RBI should be restricted to regulating banks and managing monetary
policy.
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Funding Options for Startups in India
• Bank doesn’t fund Startups since they don’t have track record and
collaterals to offer
• Angel Investors and VCs only fund about 2% of total starts ups looking for
funds on selective basis
• Scenario is different in US where they have passed
JOBS Act (Jumpstart Our Business Startups Act), through which funding
through internet is possible, it is called Crowd Funding.
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Reforms Suggested
• Public sector banks need urgent and bold reforms:-
Consolidation of PSB
Government should reduce ownership in PSB
Governance: Professional CEO and Board
• Banking License should be given to Indian Postal department immediately
they have almost 155,000 branches with almost 90% in rural areas.
• In India also we should have something like JOBS Act (Jumpstart Our
Business Startups Act) that will allow small businesses and startups to raise
funds through internet.
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Financial Reforms from
Insurance perspective
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Overview of Insurance Sector
• Among top insurance markets:
India ranked 10th among 156 countries in the life insurance business,
with a share of 2.3 per cent during FY12.
The country ranked 19th among 156 countries in the non-life premium
income, with a share of 0.62 per cent in FY12.
• Rapidly growing insurance segments:
The life insurance premium market expanded at a CAGR of 20.1 per
cent, from USD11.5 billion in FY03 to USD59.9 billion in FY12.
The non-life insurance premium market rose at a CAGR of 18.0 per
cent, from USD3.4 billion in FY04 to USD12.7 billion in FY13.
• Increasing private sector contribution:
The share of private sector in the life insurance premiums increased
from 2 per cent in FY03 to 29.3 per cent in FY12.
The market share of private sector companies in the non-life insurance
premium market rose from 14.5 per cent in FY04 to 42.9 per cent in FY13.
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Challenges for Insurance Sector
• FDI in insurance sector to increase from 26% to 49%
• Public issue by Insurance Companies
• Effective Distribution Channel
• Focus on overall Financial inclusion
• Understanding consumer needs and preferences
• Reach out to rural areas and show them the benefit of insurance
• Increase the penetration of insurance services in India
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Reforms Suggested
• FDI should be immediately increased from 26% to 49%.
• Insurance product should be standard across all Insurance companies, so
customer is well informed before selecting the insurance product and
Insurance companies.
• Insurance companies should be allowed to raise money from public like
any other company.
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Topic: Provident and Pension Fund by CA Rima Shah
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Indian Pension System – Current Scenario
National Pension Scheme
• Managed by PFRDA
• Move from Defined Benefit (Civil Pension Services) to Defined Contribution
Scheme
• Government Employees:
Compulsory
10% Contribution each
• All Citizens:
Option to Decide the Investment Proportion in Debt-Equity
Tier I & II: Minimum Rs.6,000/Rs.2,000 per year
Employees Provident Fund & Pension Scheme
• Establishments having 20 or more Employees
• Employer-Employee – 12% Contribution each
Other Pension Schemes
• LIC Annuity Scheme
• Retirement Benefit Schemes provided by Various Banks and NBFCs
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FDI in Pension
06/09/2013: Parliament passed the Pension Bill:
• Allowing FDI in Pension Sector
• It pegs FDI in pension sector at 26%
• More Funds in Indian Market
• Will attract New Schemes in Market
• Increase the Competition
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Why Pension Reforms ?
• India is emerging as most populous country – 1,210 Million in 2011.
• Elderly population comprises 8.6% of total population (1.2% increase from
2001)
• Elderly population is expected to be 10.7% of total population by 2021.
• By 2050, 200 million will be above 65 years of age.
• Pension liability was about of 2.6% of GDP in 2012-13.
• Increase in cost of private health care facilities.
• Inadequate public health care facilities.
• Declining work participation among elderly.
• Break-down of joint family system.
Age group 1991 2001 2011
0-4 12.2 10.7 9.3
5-9 13.3 12.5 10.5
10-14 11.8 12.1 11.0
15-59 55.4 56.9 60.3
60+ 6.8 7.4 8.6
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Global Scenario
Melbourne Mercer Global Pension Index – 5th Report – October 13
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Reforms Suggested
• NPS / EPFO should be mandated for all establishments on the basis of its
Revenue and not on the basis of number of employees:
The Use of PRAN will help in case of Employee Turnover.
More Coverage of Employees.
• FDI Schemes should be managed and controlled:
Properly managed to sustain until the life of the person.
Provide adequate returns on the Investment.
Effectively controlled to win public confidence.
• Agricultural economy – more farmers:
Special schemes for farmers based on size of land owned & its yield.
Initially, to encourage, only DC by Govt.:
Combination of DB (Govt. High)+ DC Scheme
• Tax benefits should be raised:
Currently, NPS Contribution (Employee) is in Rs1 lac limit u/s 80CCD (In
line with PPF – hence, PPF has gained more Importance)
Additional deduction over Rs 1 lac should be provided.
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Q&A Session
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Thank You
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