platinum financial sector reform
DESCRIPTION
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.TRANSCRIPT
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
Jan 18, 2014 3 Team Platinum (Nitin Gandhi and team)
Concentration of Domestically-Controlled Bank Assets and Share of Private Banks
Jan 18, 2014 4 Team Platinum (Nitin Gandhi and team)
Source: Secretariat calculations, Reserve Bank of India, CEIC
Share of Private Banks in Total Bank Assets
Jan 18, 2014 5 Team Platinum (Nitin Gandhi and team)
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).
Jan 18, 2014 7 Team Platinum (Nitin Gandhi and team)
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
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 8 Team Platinum (Nitin Gandhi and team)
Financial Sectors & Capital Markets
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
Jan 18, 2014 9 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 10 Team Platinum (Nitin Gandhi and team)
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 11 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 12 Team Platinum (Nitin Gandhi and team)
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 13 Team Platinum (Nitin Gandhi and team)
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 14 Team Platinum (Nitin Gandhi and team)
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 15 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 16 Team Platinum (Nitin Gandhi and team)
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 17 Team Platinum (Nitin Gandhi and team)
Financial Sectors & Capital Markets
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
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i
t
s
I
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s
u
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d
Rs.
In C
rore
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YEAR
Equity Funds raised Debt Funds raised Equity Issues Debt Issues
Amount Raised through equity issue and debt issue in Rs. Crores
Jan 18, 2014 18 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 19 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 20 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 21 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 22 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 23 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 24 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 25 Team Platinum (Nitin Gandhi and team)
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 26 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 27 Team Platinum (Nitin Gandhi and team)
Source: Asian Bonds Online
Jan 18, 2014 28 Team Platinum (Nitin Gandhi and team)
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 29 Team Platinum (Nitin Gandhi and team)
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
Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 30
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
•
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 32 Team Platinum (Nitin Gandhi and team)
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
•
International Reforms China
Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 34
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
Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 35
• 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
Jan 18, 2014 Team Platinum (Nitin Gandhi and team) 36
• 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
Jan 18, 2014 37 Team Platinum (Nitin Gandhi and team)