Indian Financial System

Indias GDP
India GDP for 2012-13 is estimated at Rs.94,61,979 crore.

The per capita income at current prices during 2012-13 is estimated to be Rs. 68,747.
Three major contributors are Agriculture, Manufacturing & Services. Services sector is about 60% of GDP. Manufacturing & other tangible sectors such as mining & quarrying & construction etc. is about 25% of GDP. Agriculture sector is about 14-15% of GDP.

Indian Financial System

Classification of Banks
Central Bank- Reserve Bank of India (RBI)
To Control other Banks & Economy

Commercial Banks (CB)

To accept Deposit & Lend to Individual & Corporate Clients e.g. ICICI Bank, Bank of Baroda

Industrial & Development Banks

Similar to CBs except major focus is on Industrial Development

Co-operative Banks

Similar to CBs except they have to abide by different laws & they are generally smaller in operation & size. e.g. Sarswat Bank Similar to CBs only difference big nation of origin. e.g. Citi Bank

International Banks

Merchant Banks e.g. Goldman Sachs, Morgan Stanley

Central Bank- Reserve Bank of India (RBI)

Reserve Bank of India (RBI)

Bankers bank or the Central bank of India.

It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.
RBI preliminary responsibility is to control the Inflation in the at the same time stimulate Growth in the economy and provide Stability. RBI does it through various Policy Rates and Reserve ratios.

The current Governor of RBI is Duvvuri Subbarao

Policy Rates
Policy RatesBank Rate : 8.25%

Rate of interest which RBI charges on the loans and advances to a commercial bank.

Repo Rate

: 7.25%

Rate at which the RBI lends money to commercial banks. Bank Rate Vs Repo Rate Bank Rate is not against Government Securities as a collateral whereas in case of Repo Government Securities are kept as a collateral hence the higher rate. Reverse Repo Rate : 6.25%

Rate at which the RBI borrows money from commercial banks.

Reserve Ratios
Cash Reserve Ratio (CRR) : 4% Per cent of their deposits which all types of banks hold with RBI in the form of cash. Currently RBI does not pay any interest on CRR deposit to banks. CRR CRR Liquidity or Money flow in the system Liquidity or Money flow in the system

Statutory Liquidity Ratio (SLR) : 23% The ratio which every bank has to maintain its Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities such as government securities.

Banks generally earn some interest on SLR holdings. (Near about 8% as on Jun13)

Banking Operation in India

Objective of Banks

Loan should be given to productive sectors/individuals. Lending should be done at a reasonable interest rates.
To provide security & value added services to the customers. To Facilitate the growth of Individuals, Industry & the economy at large. To facilitate activities such as agriculture, education, low cost housing through priority sector lending.

Bank Deposits
1) Demand Deposits

These are deposits which the customer can get back on demand or which are placed for very short time periods.
Two Major types of Demand Deposits Saving Account Deposit Rate of Interest (i.e. cost of funds to bank is 4% +) Current Account Deposit Rate of Interest (i.e. cost of funds to bank is 0%)

CASA (Current Account + Saving Account)

Low Cost Deposits for banks (i.e. Least cost of funds) Return earned by a depositor is lower. If current inflation is close to 7% then depositor gets negative returns from CASA.

Bank Deposits
Term Deposits These are deposits that are maintained for a fixed term. The time period can be anything from 7 days to 10 years. Benefit of term deposits is that the interest rate would be higher. Weakness is that if the investor needs the money earlier, he bears a penalty. He will earn 1% less than what the deposit would otherwise have earned.

Bank Credit

For Individuals Credit Card Personal Loan Vehicle Finance Home Finance

Bank Credit

For Business Cash Credit ( Working Capital) Term Loan / Project Finance Bank Overdraft (Amount more than what is lying in current account)

Lending Rates
Base Rate:

A base rate is the minimum rate of interest that a bank is allowed to charge from its customers.
Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than the base rate to any of its customers.

Lending Rate : A lending rate is the rate at which banks lend to their customers. The actual lending rates charged to borrowers would be the base rate plus borrowerspecific charges, which include product-specific operating costs, credit risk premium and tenor premium. So, it differs across various segments

Latest base Rates for various banks

Banks Latest base rates 10.00% 10.00% 10.00% 10.00% 10.65% 10.75% 10.75% 10.75%

(as on April11,2012)

SBI
HDFC Bank Axis Bank ICICI Bank UBI PNB Bank of India Central Bank of India

Dena Bank
Canara Bank

10.70%
10.75%

Net Interest Income / Net Interest Margin

Net Interest Income : Net interest income (NII) is the difference between revenues generated by interest-bearing assets and the cost of servicing (interest-burdened) liabilities NII = (interest payments on assets) (interest payments on liabilities)

Net Interest Margin : Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets It is similar to the gross margin of non-financial companies.

Non-Performing Assets (NPAs)

Non Performing Assets (NPA)

NPAs occur when the borrower is unable or unwilling to pay .

Expected payment from borrower consist of both interest & principle repayment.
Such debt should not be shown as regular debt . So RBI has laid down strict guidelines for definition and classification of NPAs.

Definition of NPA
An NPA is a loan or advance where: Term Loan interest and / or installment of principal remains overdue for more than 90 days. Overdraft / Cash credit - account is out of order i.e. Outstanding balance remains continuously in excess of the sanctioned limit / drawing power; Outstanding balance is within the sanctioned limit / drawing power, but there are no credits continuously for 90 days as on the date of balance sheet, or the credits are not enough to cover the interest debited during the same period. Bills purchased and discounted bill remains overdue for more than 90 days. Short duration crops (crop season is up to a year) installment of principal or the interest thereon remains overdue for two crop seasons. Long duration crops - installment of principal or the interest thereon remains overdue for one crop season.

Classification of NPAs
NPA Categories
Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets.

Sub-Standard Assets: An asset that has remained NPA for up to 12 months.

Doubtful Assets: An asset that has remained sub-standard for up to 12 months. Loss Assets: An asset that the bank or its auditors or the RBI has identified as a loss, but the amount has not been written off entirely.

Provision for NPAs

Gross NPA vs. Net NPA

Gross NPA is a advance which is considered irrecoverable, for. bank has made provisions, and which is still held in banks' books of account. Net NPA = Gross NPA - (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account +Total provisions held)

Basel II & Basel III norms

Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision (BCBR), to strengthen the regulation, supervision and risk management of the banking sector. Basel III is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. Objective of Basel III norms is to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency.

3 Pillars of Basel II & Basel III norms

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas. Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face. Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks

Risk Weighted Assets for the bank

RBI assigns risk weights to various assets that bank have depending upon their probability of default. e.g. Cash, balances with RBI has 0% risk weight whereas NPA Investment purchased from other banks has 100% risk weight.

In India banks are expected to maintain a CAR of 9% and capital conservation buffer of 2.5% of risk weighted Assets.
So effective CAR for Indian Banks is 11.5%. Moreover RBI has said the common equity in tier-I capital must be 5.5 per cent of risk weighted assets and the minimum tier-I CAR must be seven per cent.

Tier 1 & Tier 2 Capital

CAR is the ratio of Banks Tier 1 plus tier 2 Capital to the total risk weighted Assets of the bank.

Tier 1 or Core Capital for the Bank

Equity Capital Disclosed Reserves (or Retained Earnings) Non-redeemable Non-cumulative preferred stock

Tier 2 Capital for the Bank

Undisclosed Reserves General Loss Reserves Subordinated term debt, and more.

Financial Services offered by Investment Banks

Full Fledged Investment Banks

Investment Banking Services

Corporate Finance
Mergers & Acquisition (Cross Border, Domestic & Distressed Assets)

Capital Markets
Capital Raising (IPO, FCCB, Rights Issue , ADR/GDR, QIP) FCCB/Debt Restructuring Debt Syndication (ECB/Rupee Loan / Promoter Financing

Sales & Trading

Equity Research Trading & Brokerage for Indian / Foreign funds (Proprietary, Institutional, Stocks, F&O) Debt Market Trading

Asset Management
Wealth Management for HNI Managed Funds ((including arbitrage) Debt Market Trading

Private Equity Syndication

What is a Mutual Fund?

Professionally Managed entity

Collective Pool of Money

Money from many investors

Invested into

Managed by a Fund Manager

A. Stocks B. Bonds C. Money Market D. Gold

Manufacturing in India

Importance of Manufacturing Sector to Indian Economy

Potential to provide employment to millions of Indians

Agriculture provides employment to 60% Indians but contributes only 15% GDP.
There is large mismatch of wealth between Indians. Manufacturing can be the solution as it does value added work. It can increase the income levels of relatively uneducated population. For overall GDP growth manufacturing growth is a essential.

Advantages
Low Cost Labor

Skilled Labor
Hugh Untapped Market of Consumers

Importance given by various central & state governments

Creates employment for a uneducated workforce

Disadvantages
Poor Infrastructure

Low Productivity
Regulated Approach

Often delays lead to cost overrun

Labor Unions

Direct & Indirect Taxes

Current Status in the economy

The IIP growth has slipped to 2 per cent in April on account of dismal performance by manufacturing, mining and power sectors coupled with lower output of capital goods. Overall GDP growth rate is at a decade low of 5% Many infra projects stuck due to inter-ministerial clearances India Inc has been demanding a rate cut to promote growth. Reserve Bank on June 17,2013 kept the key interest rates unchanged citing elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows. The repo rate at which the RBI lends to the system has been retained at 7.25 per cent, while the cash reserve ratio will continue to be 4 per cent.

Current Status in the economy

Rs 150,000 crore worth of government infrastructure projects are held up for want of various clearances. As per the latest employment data, employers have created hardly any new jobs in the last seven years, so increasingly workers are pushed into self-employment. The annual Doing Business report of the IFC/World Bank shows that India ranks only 132nd out of 185 countries in ease of doing business, and has not improved its ranking for years. Indias ranking is particularly bad in relation to ease of starting a business (173rd), getting a construction permit (182nd), paying taxes (152nd), trading across borders (127th) and enforcing contracts (184th).

Thank You