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Presentation at ISB Hyderabad Presentation at ISB Hyderabad
OVERALL BANKING SECTOR ROADMAP AND SOLUTION FOR PUBLIC SECTOR BANKS HAS TO KEEP IN MIND TWIN OBJECTIVES
Supporting GDP growth
Social/ macro-economic objectives
• GDP projected to grow at 8-9% going
• Financial inclusion • Agri- lending
• Infrastructure spending to be more than
USD 600 bn in the next 5 years
• Government sponsored schemes • Currency market support • Stock market support
• 500 mn new people added to middle class
• Rural and semiurban per capital
consumption to reach current urban levels by 2017
• Government debt
• Public sector banks today
• Indian economy and imperatives for banking
• Reforms needed
CREATION OF NATIONAL BANKING INSTITUTIONS HAS SERVED THE ECONOMY WELL BETWEEN 1980 AND 2000
Objective of Nationalization Inspired by a larger social purpose and to subserve national priorities and objectives such as • Rapid growth in agriculture, small industries and exports • Raising employment levels • Encouragement of new entrepreneurs, and • Development of backward areas
Sectoral deployment of non food bank credit (Rs. billions) CAGR 3,751
Number of branches
16.0% Others Wholesale trade Industry 19.6% 11.5% 3.6% 65,412 59,752 5,595 8,042 32,419 4,014 5,178 8,122
15,105 11,324 8,219 10,052 14,407
15.5% Metro 17.7% 16.2% 14.9% Urban Semi-Urban Rural
22 1,007 19 165 55 13 383 83 191 155 26 83 165 28
346 528 444
Other priority SSI Agriculture
1980 Export Credit 17.2
"Average GDP growth at 5.6% in the same period" Source: RBI, IBA
“Nationalized banks have played a key role in helping the UPA government achieve nine per cent growth in the last fiscal" – Finance Minister P Chidambaram, Oct 9, 2007 3
2 3.9 7.1 19.8 Private banks 20.4 26.0 5.2 P/B 1.8 4.4 21.7 Source: Annual reports.VALUATIONS OF PSU BANKS ARE LOW DESPITE HIGHER PROFITABILITY Bank profitability in India FY 2008 ROE 16.7 17.1 11.9 1.0 PSU banks Bank valuation in India Mar 31 2008 P/E 11.1 3.1 1.7 Private banks 17.6 29.6 1.8 PSU banks 19.4 21.6 16. Prowess 4 .8 7.5 1.
8% for foreign banks 2. Slower growth – CAGR in balance sheet for private banks over 2003-07 is 35%.6 lakhs vs Rs 7. Losing share in fee based wholesale and retail banking products – ECM. Lower productivity – Profit per branch for PSUs is only Rs 0. Institutional equities. compared to 1. Different customer profile – Foreign and private banks share of younger customers is over 60% PSU banks have only 32% customers under the age of 40. Lower asset quality – Gross NPA levels of PSU banks at 2.9% for new private banks and 1. M&A.7%. Private sector banks also have a much higher share of the more profitable mass affluent segment 5. Profit per employee is also much lower at Rs 2.sell of investment products. and insurance 5 . more than double that of PSU banks at 16% 3. transaction banking and cross.5 crores compared to Rs 2.SEVERAL FACTORS ARE RESPONSIBLE FOR LOWER VALUATIONS OF PUBLIC SECTOR BANKS 1.5 crores for private banks.6 lakhs for the private sector 4.
penetration of phone banking and internet banking is lower than competition 6 .PUBLIC SECTOR BANKS HAVE NOT EVOLVED ON SEVERAL DIMENSIONS OF THE BUSINESS MODEL IN RETAIL Key dimensions of business model Superior customer service Proactive sales Public sector banks ILLUSTRATIVE • Customer service levels and TATs below market practices • Focused on catching customers as they walk into the branch • A few public sector banks (e. but their numbers are lower than competition • In-branch sales engine is not effective World class operations • Distributed/decentralised configuration resulting in a varied performance – branches doing most of the operations New access options • Limited/low level usage of entire range of channel options • While ATM usage has increased in the recent past. Bank of Baroda.g. SBI) have recently started proactive sales..
TALENT. OWNERSHIP ARE BIGGEST ISSUES FOR PSU BANKS Talent Operational • Unable to attract entry level talent – Rigid recruitment policies – Slower growth to middle and senior management path – Lower compensation/no ESOPs – Poor performance culture – Perceived lack of operating freedom • Fear of accountability – Accountability to government restricts decision making • CVC guidelines adherence issues • CAG Audit • Procurement process L1/L2 • Union issues – Transfers/Reassignments – Disciplining – Inability to mete out significant consequence management systems Ownership • Government ownership floor at 51% restricts ability to raise capital • More than fair share in – Priority sector – Minority lending – Bankers to government – Financial inclusion/rural 7 . OPERATIONAL CONTROL.
WHILE ON AN AGGREGATE. Axis 8 . PERFORMANCE DIFFERENCE BETWEEN PSUs AND PRIVATE SECTOR IS SIGNIFICANT… FY 2002 Profit per branch (Rs crore) PSU Bank average* FY 2008 0. PNB.28 Private Bank average** 0. HDFC.24 1.10 Private Bank average** 5.49 2002 Profit per employee (Rs lakh) PSU Bank average* 2007 1.20 4.34 * Average of SBI.20 6. Canara Source: Annual reports ** ICICI.84 2.
3 3. HDFC. THE GAP IS NOT THAT STARK IN METRO AND URBAN (1/4) Operating profit per branch.1 * ICICI. Rs. Axis Source: Annual reports 9 .…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI. crore Private sector SBI overall SBI.7 5. 2008.metro and urban SBI-rural 0.2 1.
Rs.9 9. HDFC.0 13. Axis Source: Annual reports 10 . 2008.metro and urban SBI-rural 1. lakh Private sector SBI overall SBI.9 * ICICI.…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI.0 15. THE GAP IS NOT THAT STARK IN METRO AND URBAN (2/4) Operating profit per employee.
94 402. THE GAP IS NOT THAT STARK IN METRO AND URBAN (3/4) FY 2008 Deposits per branch (Rs crore) SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average* 99. HDFC.44 157.97 Deposits per employee (Rs lakh) SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average* FY 2008 435.…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI.69 22. Axis Source: Annual reports 11 .63 * ICICI.89 217.
THE GAP IS NOT THAT STARK IN METRO AND URBAN (4/4) FY 2008 Advances per branch (Rs crore) SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average* 85.92 Advances per employee (Rs lakh) SBI metro-urban avg (~3200 branches in ~500 cities) SBI rural avg (~6900 branches) Private Bank average* FY 2008 373.44 13.…A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI.67 348. Axis Source: Annual reports 12 .14 136.56 127.99 * ICICI. HDFC.
CONTENTS • Public sector banks today • Indian economy and imperatives for banking • Reforms needed 13 .
112 2007** 1. Real GDP growth* US$ billion 7.9% over 2003 .2007 773 709 5.3% 9. . Team Analysis 14 .4% 60 118 279 1950 Population (Million)** 365 1970 548 1990 850 2000 1. Economic Survey of India.016 2006 1.169 * Base year = 2002 ** 2007 figures are forecasts sourced from WMM Source: Global Insight.2% 464 4.0% Average growth rate of 8. .INDIA’S GDP HAS RISEN STEADILY SINCE THE 1950’S.4% 3.
A GROWING WORKING AGE POPULATION WILL PROPEL GROWTH TILL 2035 LATER THAN CHINA Working age population (age 15-60) Per cent of total population 72% 70% 68% 66% India Brazil 64% 62% 60% 58% 2000 China Russia G6 2005 2010 2015 2020 2025 2030 2035 2040 15 Source: Global Insight. Team Analysis .
2000 Compound annual growth rates 1985-2005 2005-2025 500 Actual Forecast Urban 400 5.6% Rural 100 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: McKinsey Global Institute 16 .8% 3.HOUSEHOLD INCOMES WILL ACCELERATE ACROSS INDIA Average household disposable income Thousand.8% All India 300 200 4.6% 5. Indian rupees.3% 3.6% 2.
6 11.2 1.000) 2015 Seekers (200–500) Aspirers (90–200) Deprived (<90) Globals (>1.9 91.1 16.1 3. v1.1 4.9 93.1 9.7 11.000) Strivers (500–1. Indian rupees.5 33.1 49. Indian rupees.1 8. India will produce 2 million globals annually • Share of incomes of the middle class and globals will rise from less than 30% today to more than 80% by 2025 17 .3 14.5 24.9 Aggregate consumption Trillion.0 2.4 10.0 74.000) 2025 Strivers (500–1.1 2.5 4.1 106.5 55.THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGE DRAMATICALLY AS INCOMES GROW Household income brackets Thousand. 2000 1.3 101.9 2.000) Seekers (200–500) Aspirers (90–200) Deprived (<90) Source: MGI India Consumer Demand Model.4 • Middle class to swell from just under 50 million today to about 583 million by 2025 • By 2025.000) 2005 Seekers (200–500) Aspirers (90–200) Deprived (<90) Globals (>1.000) Strivers (500–1.2 2.1 94. 2000 Globals (>1.2 3.3 5.8 12.0 Number of households Million 1.
medium and minor irrigation works 21 • Capacity addition of 485 million MT in major Ports.CURRENT PLANS REVEAL ASPIRATIONS TO SPEND OVER ~US$600 BILLION ON INFRASTRUCTURE DURING 2007–12 Area Expected spend US$ billion Roads 96 Key projects Area Expected spend US$ billion Key projects • Six-laning of 6.000 MW (includes rural areas) Irrigation 62 • Developing 16 million hectares through major. including 200 million rural telephone connections • Providing broadband access to 20 million and 40 million internet connections Railways 73 • Dedicated Freight Corridors between Mumbai-Delhi and Ludhiana-Kolkatta.500 kms and four-laning ~18. modernisation of 21 railway stations Water 57 • Water supply and sanitation projects Power (generation. 345 million MT in minor Ports Gas 6 • Gas distribution infrastructure – LNG terminals. ~10. transmission.000 kms of corridors and highways Communication 77 • Growing subscriber base to 600 million. gas transmission lines. and distribution) Ports 177 • Additional generation capacity of ~70. city gas distribution Airports 10 • Modernisation and redevelopment of 4 metro and 35 non-metro airports • Construction of 7 green-field airports in North East Storage 6 • Storage to support agricultural development Total 585 Source: Planning commission 18 .300 kms of new railway lines.
and till May’ 08 ** Average deal size (in US $ mn) is based on deals for which the values has been disclosed Source: Dealogic.INDIAN COMPANIES ARE AGGRESSIVELY ESTABLISHING GLOBAL FOOTPRINT Cross-border M&A by Indian companies The recent spurt in outward FDI is caused by: • Regulatory changes: Indian companies can now make overseas investments equal to 300% of their net worth on an automatic approval basis Number of Deals* Average Deal Size** 350 1400 1200 1000 800 600 400 200 0 2000 2007 2008 50 470 100 50 0 1086 300 250 200 150 • Easy access to capital – Decline in interest rates coupled with liberal lending policies adopted by banks – Active participation by PE firms – Nearly 20% of the deals were backed by private funds in 2006 * Number of deals for calendar year 2000. Team Analysis 19 .
545 6.282 4. Leisure & Recreation. Press articles. of Deals* 416 339 325 557 832 1226 58.109 Value US$ billion 11. 2007 Others 19 35 Services 30. .447 495 Break-up by sector Per cent of Total Deal Value.053 Telecom 24 10 Manufacturing 9 High Tech Construction 3 2002 2003 2004 2005 2006 2007 2008^ ^ 2008: As on May 2008 * Includes all completed deals even where deal value is not available ** Includes Finance. Textile and Food & Beverage Manufacturing Source: Dealogic. Consumer Products. Transportation and Publishing. Company website.243 20.163 9. MNCs ARE ACTIVELY SEEKING THE INDIA OPPORTUNITY . Acquisitions of Indian companies by MNCs No. Auto / Truck. Machinery. Dining & Lodging & Retail *** Includes Chemicals. Team Analysis 20 . Healthcare. . Insurance. Professional Services.SIMILARLY.
INDIA IS ON COURSE TO BE AN ECONOMIC SUPER POWER OF THE 21ST CENTURY India – most rapid growth potential of the BRICs Real GDP growth (Per cent) 9 Fastest growing global 8 economy by 2012 7 India 6 5 China Brazil 4 3 2 Russia 1 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 India – will contribute a giant share of the incremental GDP growth of major world economies* Per cent 20.0 2.200 billion.1 2000 2020 2050 • 11th largest economy today (GDP US$560 billion) • 4th largest by 2025 (GDP US$3. six-fold increase) * Major world economies considered are the BRIC and G6 countries Source: Goldman Sachs BRIC report 2003 21 .IN SUMMARY.1 5.
electrical equipments. SIMILAR TO CHINA 15 YEARS AGO Real GDP growth PPP adjusted* US$ billion 8.000 4. NBFCs.000 3.1% (1990-2005) Inflection in China GDP India 1990-2005 CAGR = 5.g.000 7.000 0 Triggers behind growth inflection in India • Taxes: Laws simplified resulting in better compliance and ease of tax payment China CAGR = 10..000 2. Team Analysis “Lead indicators” of inflection visible in India 22 .000 5.AND GROWTH IN INDIA IS AT AN INFLECTION POINT. construction etc allowed 1980 1985 1990 1995 2000 2005 2010 * Base year: 2002 Source: Global Insight.98% 1978: China liberalizes 1992: India liberalizes • Infrastructure: Increased investment in infrastructure e.000 1. Ultra Mega Power Projects • Liberalisation: FDI in key sectors like airports. Insurance. telecommunications.000 6.
WHILE BANKING REVENUE POOLS ARE EXPECTED TO GROW AT A RAPID CLIP. HFCs in retail. houses. e.6 • Retail – Robust growth in middleclass asset ownership..8 15 6.9 11.9 17 FY 07 FY 12 * Includes revenue pools of NBFCs.2 24.8 Margin compression 13. and DFIs in corporate ** Using 2006 average exchange rate 23 .4 16.7 7.7 23 32. COMPLEXITY WILL INCREASE Key growth drivers Overall banking sector core revenue pools US$ billion** CAGR Per cent 23 71.g. cars – Increased acceptance of consumer credit – Investment products to increase in demand • Wholesale – Shift from plain vanilla lending to more complex feebased products and service – Emergence of investment banking – Need to fund large scale infrastructure • New business models evolving in SME • Financial inclusion and profitable business model for rural 17 16.5 SME Rural WB Retail 6.
IMPERATIVES FOR BANKING SECTOR Retail • Provide the new products demanded • Create infrastructure for new channel access • Provide financial advice • Build stronger relationships • Leverage new technologies for customer value management Rural • Capture fully the banking potential in the mass affluent and upwards – Serve across product categories – Raise standards to match urban customers • Create a new model to reach the unbanked – Savings as much as lending – New technology which does not need physical presence – Partnerships a must – New methods of managing channels 24 .
commodities) – Investment/ Surplus management products (structured products) – Transaction intermediation services (local and global) Provide capital raising and advisory services – Equity raising – DCM as a viable substitute to credit – M&A/ PE advisory to large and mid corporate (help Indian corporates in their quest to go global) SME • Go beyond credit – Transaction services – PE advisory – Corporate structuring – Relationship management Creation of a model which combines institutional skills and local touchpoints is critical Shift mindset from treating SME as priority sector to being ‘business’ • • • • 25 .IMPERATIVES FOR BANKING SECTOR Wholesal e • Fund infrastructure growth pegged at excess of US$600 billion in the next 5 years through variety of instruments Provide cost efficient credit and services to the large and mid corporate sector – Credit at the right time in the right quantum – Trade intermediation services (factoring. forfaiting. structured finance) – Hedging services (interest rates. fx.
CONTENTS • Public sector banks today • Indian economy and imperatives for banking • Reforms needed 26 .
TRANSFORMATION OF THE INDIAN BANKING SECTOR HAS SEVEN KEY ELEMENTS • A: Industry structure • B: Social development • C: Unified regulator • D: Corporate governance • E: Supporting infrastructure • F: Labor reforms • G: Real sector reforms 27 .
A. 08 Source: Bloomberg. . increasing the already great gap among the top banks US$ billions** 8. McKinsey 28 . INDIAN BANKS MINISCULE ON THE GLOBAL PAGE Megabanks will be even larger . Market capitalisation of top-30 banks US$ trillions 15. MGI estimates ** As of 11 June.5 2. Global Insight estimates. Datastream.5 0. .5 Ind & Comm Bk Of China China Construction Bank HSBC Holdings Plc Bank Of China Ltd JP Morgan Chase & Co Bank Of America Banco Santander Sa Mitsubishi UFJ Financial Group Citigroup Inc Wells Fargo & Co BNP Paribas Unicredit SPA Banco Bilbao Vizcaya Argenta Intesa Sanpaolo Sberbank Goldman Sachs Banco Itau Holding Royal Bank Of Scotland Group Sumitomo Mitsui Financial Group Royal Bank Of Canada 244 194 192 144 129 128 118 107 104 84 84 83 76 75 72 69 69 67 66 62 . . .1 1990 2005 2020 with market growth only* 2020 with expected consolidation* Share of global assets Per cent 8 30 30 45 The 2 largest Indian banks (SBI and ICICI) have market capitalisation of about ~US$ 20-25 bn * Based on historical growth rates.
CHANGES NEEDED IN THE INDUSTRY STRUCTURE • Develop mechanisms for identifying anchor banks.A. introduce concept of golden shares • Give public sector banks more operational freedom and access to talent • Increase level of foreign participation to ~20% of banking assets 29 . create holding company. 6-8 national champions • Reduce government participation in the sector.strong and solvent institutions • Layout out blue-print for the sector • Encourage market driven consolidation • Create 4-5 global sized institutions.
GOVERNMENT SHOULD ALLOW IMMEDIATE OPERATIONAL CONTROL TO PSUs People management • Ability to attract talent at entry and senior levels through appropriate compensation • All of these can be achieved easily if government holding decreases below 51% • Ability to consequence manage non-performance • Ability to reward and accelerate track of high performers • Ability to affect personnel related changes without interference from unions Governance • Government can still be single largest shareholder – Through direct holdings/ holding company – Through other Public sector holding such as LIC. This will allow PSU banks to raise capital as well • Ability to appoint partners without getting constraint by CVC guidelines • Freedom from CAG Audit • Ability to reconstitute boards Consolidation • Allow consolidation of PSU with PSU and private banks. This will also be accompanied by ability to leverage synergies through – Reduction in staff – Elimination of overlapping branches – Synergies captured through structural changes in organisation • 30 . GIC etc.
Corporate website 31 . developing the business to become Australia's leading broker. CBA acquired New Zealand based ASB Bank Ltd in 1989. further 20% sale in 1993 and remaining sold in 1996. • Corporatisation in 1950s . • Awarded Bank of the Decade in November 1999 and named Best Bank at the Australian Banking and Finance Awards for the years 1996. with the security of a Federal Government guarantee. • Merged with Colonial Limited in 2000 . – Internet site launched on September 1995. the bank underwent internal reorganization. first bank to conduct both savings & general (trading) bank business. dynamic and globally relevant financial services group • To increase its presence and scale.a low cost telephone based share trading service for the 'Do it Yourself' investor. – Division of Retail Banking into three units. 2000 & 2002. • Leader in many areas • Privatized to ensure competitive neutrality is restored – 30% sale in 1991. – # 1 in total deposits (29% market share) – # 1 in mortgage (23% market share) – # 2 in credit card (22% market share) • Government still enforces ban of mergers among the top 4 banks • 8th largest bank in Asia Pacific in terms of market cap (US$ 67 billion) with profit of US$ 3 billion in 2006 • Market cap 12% higher than 2nd largest National Australia Bank Source: Press search. The latter created Australia's largest domestic bank and further strengthening its leadership in retail branch banking. and massive computerization.dual function of both a commercial and central bank were divided • As a result of banking industry deregulation and foreign bank entry in the mid 1980s. Personal Banking. Business Banking and Banking Operations (initiated April/May 1993) – Enhanced Customer Service Program (including a new customer service computer system) and removal of the majority of processing functions from branches so staff can focus on customer service and sales.CASE EXAMPLE OF A SUCCESSFUL TRANSITION TO PRIVATE SECTOR BANK: CBA (COMMON WEALTH BANK OF AUSTRALIA) Impact of Privatization • Extensive organizational restructure Government’s Role • Established in 1911.created a strong. develop new products. – Launched CommSec . and State Bank of Victoria in 1990.
India. but to no avail . • The Bank's "AA-" credit rating is among the highest in the AsiaPacific region. Myanmar. Korea. Indonesia.CASE EXAMPLE OF A SUCCESSFUL MAJORITY OWNED GOVERNMENT BANK: DBS (DEVELOPMENT BANK OF SINGAPORE) Success Government’s Role • The largest bank in South East Asia in terms of assets. Annual cost saving from the acquisition estimated at S$30 million per year. and the Middle East • Its pioneer move to pay interest on current account was protested strongly by other banks. Thailand.153 million in 2006 • Largest network of branches in Singapore.140 million) • Net profit of US$ 1. • Market leader in many areas – Leader in IPOs and regional equity transactions in the Singapore capital market.many firsts . after interest rates were freed in mid-1975 Source: Press search. Association of Banks and Monetary Authority of Singapore • Merged with POSBank. Also a leading bank in Hong Kong • Established in 1968 as a DFI • Received seed capital from several established banks in Singapore and diversified into commercial banking 1 year later • 21st largest bank in Asia Pacific by market cap (US$ 23.7% • DBS operates like a private sector bank in terms of talent and procedures • Innovative . Corporate website 32 . another state bank.from introducing Saturday afternoon banking to playing a significant role in the interbank market. U. Malaysia. in 1998 in line with government aim to create global/regional player.5 of 7 local banks petitioned the Finance Ministry. – Top-rated custodian for institutional investors – Key player in the Singapore money market – Leader in domestic treasury services – Leader in corporate lending • A boost to retail banking. freeing DBS banking officials to service their clients overseas.S. 22% larger than 2nd largest UOB in Singapore. plus branches in Hong Kong. the Philippines.K. China. Japan. including the bigger Singapore companies with regional operations. • Current government holding of 27. the U. Taiwan. US$129 billion in 2006.
cash management) Comprehensive change in mindsets and behavior enable effective play in the process of local consolidation Providing operational freedom in solving the talent issue across levels and wrt performance management will help significantly across all levers 33 • Pro-actively build skills in acquisition and post-merger management to .PUBLIC SECTOR BANKS WILL NEED TO PULL FIVE LEVERS TO COMPETE IN THE EMERGING BANKING LANDSCAPE 1 Rapidly implement IT and operations initiatives Build sales and marketing capabilities Strengthen risk management • Close the technology gap with the private sector banks • Restructure operating platforms by centralizing and outsourcing operations • Redesign processes to match competition on TATs. productivity.g. in treasury. error rates and cost of operations 2 • Re-focus the efforts of core strengths – branch network and staff – on sales • Convert to a sales and marketing led organization • Proactively target emerging mass affluent and affluent segments • Strengthen risk management skills to enable Basel II compliance – Risk modeling – Review and collections – IT support 3 • Focus on reskilling employees to shift attention to sales and marketing.. 4 Build human capital • 5 Prepare for local consolidation and infusing specialist skills through external recruiting (e.
THANK YOU 34 .
subsidy B. under a single umbrella. Unified regulator • Improve regulations for STCBs. 35 Source: McKinsey analysis .. creation of credit guarantee corporation Remove rural branch restrictions Remove directed lending Ensure insurance provisioning on loans to urban and rural poor Reimburse banks the admin cost for rural banking to allow lower interest rates charged to customers • • • • C. Corporate governance • RBI to guide Indian banks towards adopting international standards in corporate • governance • Improve corporate governance primarily by increasing board independence and • • accountability Enhance corporate governance norms.OTHER CHANGES NEEDED (1/2) • Offer market based incentives for under-penetrated segments e. MFIs. RRBs. Social development auctions. Institute penalty for weak corporate governance Ensure independence by appointing directors appointed on the recommendation of a nomination committee based on clearly defined and transparent criteria.g. NBFCs and remove regulatory • • • arbitrage Move to a coordinated regulator model Separate central bank and regulator roles New unified Financial Services Modernization Act to bring together. all aspects of financial services on the lines of legislations in US and UK D.
CREDIT GUARANTEE SCHEMES CAN PROMOTE SOCIAL OBJECTIVES WHILE MINIMISING DISTORTIONS TO THE FINANCIAL SYSTEM Korea Credit Guarantee Fund Potential credit guarantee structure Government Commercial banks • Extends guarantees for loans to promising • • • enterprises that lack tangible collateral Risks of default shared with credit institutions Flexible guarantee fee ranging from 0.B.75% Paid up capital contributed by central and local government and CFIs Competition between banks to disburse the loan • Pricing of loans based on best practice credit • processes and credit guarantees provided Customers served by institutions with required skills and infrastructure to serve low income segment 36 .5% to 2% depending on creditworthiness. creditworthy SME Features Taiwan small and medium business guarantee fund • Extends credit guarantees to small and medium • • • enterprises short of required collateral Only those Contracted Financial Institutions (CFIs) signing an Entrustment Contract (and making donations) are eligible to provide guarantee service Annual guarantee fee of 0. guarantee period and guarantee amount Joint funding by government and commercial banks Credit guarantee corporation Independent board Executive management Guarantee to cover part of the risk Collateral-short but viable.
Ministry of Planning and Cooperation (MIDEPLAN) Concept: Banks given a fixed amount of money for each loan granted to micro entrepreneur Process: • Subsidy budget granted through a bi-annual auction Achievements • Four large commercial banks have entered micro-finance and make loans to about 100.B.200 had fallen to US$ 80 from US$ 240 in 1993 • Commercial banks invited to bid on a per loan subsidy needed • Bidding banks propose subsidy details on loans • Chilean banking regulator needs to spend very little time supervising this micro loan portfolio • Winning banks are those offering to make the largest number of micro loans for the smallest subsidy 37 . A MARKET-BASED SUBSIDY PROGRAM WOULD PROMOTE BANK INTEREST IN LOW INCOME SEGMENTS Chile government program Ownership: Chilean Social investment fund (FOSIS). value of subsidy for an average loan amount of US$ 1.000 customers RBI could consider a similar market-based bidding system to encourage make sure commercial banks to enter the low-income segment • On an average one third of micro enterprises in Chile are customers of these four banks • By 2000.
IRDA SEBI NHB 38 . INDIA COULD HAVE RBI AS THE C0ORDINATING REGULATOR Now: Multiple regulatory agencies Regulating authority Commercial banks and FIs Cooperative banks Regional rural banks Capital markets Insurance companies Housing financing companies RBI Intermediate: Coordinating body RBI + + State Registrar of Cooperative Societies NHB RBI • RBI takes over the activities of different regulatory agencies Internal separation of regulatory and central bank function RBI NABARD IRDA RBI • SEBI Reg.C. of coop. AS AN INTERMEDIATE STEP.
C. securities. of coop. ULTIMATELY. mutual funds and microfinance institutions 39 NHB RBI IRDA Banking • SEBI Reg. . capital markets. REGULATION SHOULD BE SEPARATED FROM THE CENTRAL BANK Intermediate: Coordinating body Final: Unified regulator separate from Central Bank • RBI Internal FSA RBI Insuran ce Securi ties regulation function of RBI handed over to a separate regulator with legislative sanction Unified body regulates commercial banks. insurance. cooperative banks.
contract out the construction and management of new infrastructure. Source: McKinsey analysis 40 . Labor reforms • Push labor reforms. Symcor in Canada • Amend banking regulations to enable formation of holding company to own governments shareholding in PSB’s and their other financial service • Address loopholes in SARFAESI to ensure banks get a fair hearing • Implement recommendations of Patel Committee for development of primary and secondary debt market F. removal of licensing requirements. support re-skilling of employees • Greater flexibility in surplus labour and freedom to link compensation with performance G. Real sector reforms • Real economy reforms required to complement financial system reforms – Product market reforms: Elimination of reservation of products for SSI.OTHER CHANGE NEEDED (2/2) E. reduced duties and unrestricted FDI – Land market reforms: Fast-track courts to settle land market disputes. Supporting infrastructure • Accelerate credit bureau and payment infrastructure • Support creation of industry utilities for processing e.g. computerize land records and cut stamp duties – State ownership: Transfer management of productive/commercial assets to the private sector..
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