Unnati Sector Presentation
Banking, Financial Services and Insurance
SSA: Saurav Sing
JSAs: Darshan Gand
Adit Agraw
What is Banking? Balance Sheet
Intermediation
Sources of
Funds
Application of
Funds
Loans &
Advances
Deposits
Borrowin
gs
BAN
K
Share
Capital
Fixed
Assets
Securitie
s & Cash
Banking is about intermediating to earn a spread between interest received & paid
Banking is all majorly about the amount of loans a bank can give out and hence maximize profits
Thus the profits flow from the size of the loans given
This is why unlike any other industry where size of the market may be defined by total
revenues or units
, in Banking it is defined by the BALANCE SHEET SIZE
History of Banking
1991:
Liberalizat
ion, with a
small
number of
private
banks
given
licenses
like UTI
(Axis),
ICICI &
2013-14
HDFC
2003--04:
Yes Bank &
Kotak
Mahindra
were given
licenses
1980:
2nd wave of
nationalizati
1969:
on as 6
1st wave of
more banks
nationalization were
as 14 Indian
1949-55:
nationalized
banks
were
RBI was
centralized nationalized
(85% of total
and the
Bank Deposits)
Banking
RBI likely to issue new Banking
Pre
Regulation Act
licenses
Independenc 1949 was
Raghuram Rajan supporting the view
e:
passed
of issuing new Banking licenses soon
BoI, BoB,
Imperial Bank
PNB, CBI,
of India was
Indian Bank
nationalized
established
and renamed
STRUCTURE & OVERVIEW
Structure of Banking in India
Central Bank: RBI
Public Sector
Banks
Nationalized
Banks
SBI & Associates
Commercial Bank
Co-Operative
Banks
Regional Rural
Banks
Private Sector
Banks
Domestic Banks
Development
Banks
Foreign Banks
NBFC
Asset Finance
Companies
Loan Companies
Old Private
Sector Banks
Investment
Companies
New Private
Sector Banks
Infrastructure
companies
Systematically
important core
investment
company
Some Examples
SBI &
Associat
es
Other
Nationali
zed
Banks
Old
Private
Banks
New
Private
Banks
Private
Foreign
Banks
RRBs
State
Bank of
India
Allahaba
d Bank
Catholic
Syrian
Bank
Axis
Bank
Barclays
North
Malabar
Gramin
Bank
State
Bank of
Bikaner
& Jaipur
Bank of
Baroda
Dhanlax
mi bank
HDFC
Bank
Citibank
Uttar
Bihar
Kshetriy
a
Gramin
Bank
State
Bank of
Hyderab
ad
Bank of
India
ING
Vysya
Bank
ICICI
Bank
Credit
Suisse
Gurgaon
Gramin
Bank
State
Bank of
Mysore
Central
Bank of
India
Karnatak
a Bank
IndusInd
Bank
Deutsch
e Bank
State
Bank of
Corporati
on Bank
Federal
Bank
Kotak
Mahindr
HSBC
CoOperativ
e Banks
Developme
nt Banks
Sarasw
at CoOperati
ve
Bank
IDBI
EXIM
IFCI
Overview of Commercial Banks
Share of
credit
Share of
deposit
31st Dec.
2012
Rs in Crores
Total Deposits
64,66,317
Total Credit
50,24,884
Major Segments
Wholesale/
Corporate
Auto Loans
Credit Cards
Home Loans
Retail Banking
Segme
nts
Equity & Bond Trading
Foreign Currency Trading
Derivative Contracts Trading
Others
Brokerage Income
Any other non-defined
revenue
Treasury
Working Capital Loans
Structured Finance
Loan Syndication
Foreign Currency Debt
RBI POLICY & OTHER KEY REGULATIONS
RBI Monetary Policy
Process by which the RBI controls the supply of money in the country
Announced four times a year (and four mid-quarter reviews)
Three factors on which Monetary policy is based
Money supply
Interest Rates
Inflation
Also, RBI announces norms for banking and financial sector and the institutions
governed by it
Monetary Policy Tools-Rates
Repo Rate The rate at which RBI lends money to commercial
banks when they have shortage of funds. This lending is for short
term
Current Repo Rate : 7.25%
RBI Policy
Rates
Reverse Repo Rate Rate at which banks park their short term
excess liquidity with the RBI.
Current Reverse Repo Rate : 6.25%
Marginal Standing Facility Rate The rate of interest which
RBI charges on the money lent to commercial banks in addition
to funds available under Repo Rate facility
MSF Rate : 10.25% (Repo Rate + 300 bps)
Monetary Policy Tools-Ratios
Cash Reserve Ratio Refers to the liquid cash that banks
have to maintain with RBI as a certain percentage of their net
demand and time liabilities (NDTL)
NDTL: DTL minus deposits with other banks
RBI
Reserve
Ratios
Current Cash Reserve Ratio : 4%
Statutory Liquidity Ratio The amount of liquid assets, such
as cash, gold or other approved securities, that a financial
institution must maintain as reserves
Current Statutory Liquidity Ratio :
23%
BASEL Norms
Issued by the Basel Committee on Banking Supervision which is a committee formed
towards strengthening international financial stability.
Though Basel norms prescribe many norms for banks the most important norm and one
that has been made compulsory by RBI is Capital Adequacy Ratio (CAR), which takes into
account the risk element in various types of funded balance sheet items as well a nonfunded off-balance sheet exposures.
Basel I:
1988
Basel II:
2004
Indian Banks at present are complying with
BASEL II norms
Basel
III:
2010
Basel Norms: Capital Adequacy Ratio
Funded Risk Assets
Tier 1 Capital: - Tier I capital is equal to sum of
equity capital and disclosed reserves.
Tier 2 Capital: - Tier 2 capital is secondary bank
capital that includes items such as preferred stock,
undisclosed reserves, loss reserves, term debts etc.
Significance of Tier 1 and Tier 2 Capital:Tier 1 capital absorbs losses without a bank being
required to cease trading and tier two capital absorbs
losses if the bank winds-up its business.
i.e., Capital adequacy ratio acts as a cushion in the
event of loss, defaults and protects the depositors.
Finally the ratio is calculated as =
(Tier I capital + Tier II capital) / RWA
Percentage
weights
1. Cash, balances with RBI, balances
with other banks, money at call and
short notice and investments in
Govt. and other trustees securities
2. Claims on commercial banks such
as certificates of deposits etc.
20
3. Other Investments
100
4. Loans and advances including bills
purchased and discounted and other
credit facilities
A. Loans guaranteed by GOI
B. Loans guaranteed by State Govt.
5. Premises, furniture & fixtures
6.Other Assets
2.5
2.5
100
100
Basel II vs Basel III
Basel II
Requirements
Basel III*
8%
Minimum Ratio of Total Capital to Risk Weighted Assets
2%
Minimum Ratio of Common Equity to Risk Weighted
Assets
11.5%
7%
(4.5% +
2.5%)
6%
None
Tier 1 Capital to Risk Weighted Assets
Capital Conservation Buffer Capital to Risk Weighted
Assets
None
Leverage Ratio (Tier 1 Capital / Capital lent)
None
Countercyclical Buffer
3%
0% to
2.5%
None
Minimum Liquidity Coverage Ratio
100%
None
Minimum Net Stable Funding Ratio
100%
4%
2.5%
* Basel III requirements will be phased-in progressively till 2018
Priority Sector Lending
Priority Sector Lending:
Public banks, private sector banks and foreign banks with more than 20 branches
have to lend 40 % of their bank credit to the priority sector
For Foreign Banks with less than 20 branches the lending requirement is 32 % - to
be increased to 40% wef August, 2018
Some examples of priority sector lending are Agriculture, Small Scale Industries,
Education
Industry Trends
Rise in Non Performing Assets
The NPA ratio (the ratio of loans accounts which have defaulted on interest or principle beyond
90 days to the total bank loans) of Indian banks, as of March 2013, was at 3.23% (as against 2.94
% - March12). After provisioning for some of these bad loans, the net NPA ratio works out to
1.56% (as against 1.24 % - March12) of the total loans.
Inflation
RBI through the monetary policy tries to moderate/expand the economy by raising or lowering
these tools.
By raising the policy rate, the cost of funds for the banks increases which leads to higher
deposit rates and vice-a-versa
Inflation has a profound effect on the sentiments and savings-investment pattern of households
of the country, a higher inflation leaves less with people to save or invest.
With high inflation people demand more of their investments and savings pushing the cost of
deposit in the upward direction.
WPI: Aug13 6.10% and July13 5.79%
CPI: Aug13 9.52% and July13 9.64%
Fiscal Deficit
Fiscal deficit is the difference between the receipts and payments (Revenue & Capital) for
the Government for a year.
Fiscal deficits in India can only be financed through market borrowings i.e. the Government
securities which are placed by RBI.
As the Government borrows from these market it raises the overall rates in the economy as
it has to offer a higher rate to place more funds and also since it leaves less money to be
invested as majority of the savings would have been taken by the Government. This is called a
liquidity crunch. Therefore the cost of funds for a bank increases as it has to pay higher rates
to get more funds.
Fiscal deficit also harms the industrial activity in the country as it leaves less money for
corporate borrowing
India also faces the risk of a downgrade due to high fiscal deficit, which would push up the
cost of external borrowing for the Indian Banks and corporates
FY13: 4.89%
Global Interest Rates Scenario
Interest rates in developed markets have always been lower than developing markets. However,
a good spread between these rates is needed for capital flow between countries.
Due to announcement of Bond Tapering by US Fed, bond yields and money market rates
throughout the world has shown increase because of decreased money supply in future. US 10
year bond yield have risen from 1.88% to 2.88% since mid May.
Interest Rates
10.00%
9.00%
8.00%
6.00%
6.00%
5.00%
4.00%
2.00%
0.00%
0.10%
0.25%
0.50%
0.50%
4.50%
6.50%
7.25%
RATIOS & PERFORMANCE INDICATIORS
NIM (Net Interest Margin)
NIM (%)
NIM = Interest Income Interest Expense
Average Interest bearing assets
5.00%
4.18%
4.00%
Difference between theinterest income
3.00%
generated by banks or other financial
2.00%
institutions and the amount of interest paid
1.00%
out to their lenders
0.00%
2.36%
2.76%
3.16%
2.97%
One of the Most important profitability ratios
for a bank
Signifies what is the net margin on these
assets
Yield=
Difference between NIM and Net
Interest Spread
Interest Income
Average Interest Bearing Assets
Cost of Funds=
Interest Expense
Average Interest Bearing
Liabilities
Interest Spread = Yield Cost
of Funds
3.96%
Types Of Accounts
Term deposits are more expensive source
CASA- Source of cheap funds for a bank
of funds
Interest on Saving account = 4% Interest on FD/RD= 8% - 9% depending
Interest on Current account = 0% on term maturity
CASA Ratio
Represents the percentage of current account and savings
account deposits to a banks total deposits
Cheap source of funds for banks as the interest paid on
these deposits is very low as compared to other deposits
and liabilities
A higher CASA ratio generally leads to higher margins for a
bank
This may also allow banks to give loans at cheaper rates as
compared to competitors and hence higher growth
CASA Ratio
(Current A/C & Saving A/C)
50.00%
40.00%
47.43%
7.20%
6.80%
6.77%
29.24%
30.00%
20.00%
41.89%
6.91%
44.28%
6.40%
18.95%
5.98%
6.00%
5.91%
5.85%
10.00%
5.60%
0.00%
5.20%
Yes Bank
Kotak Mahindra
ICICI Bank
CASA Ratio
Axis Bank
HDFC Bank
Cost of funds
Note:
Interest Paid by bank on
Savings Account ~ 4%
Current Account ~ 0%
FD/RD ~7.75% - 9% depending on the maturity of term deposit
Other Important Ratios
Performance Indicators
Name
Formula
Significance
Slippage Ratio
Additions in Gross NPA/
Avg. Advances
Shows the % of accounts which have turned bad
during the year
Provision
coverage ratio
Closing Provision
balance/Closing Gross
NPAs
Shows the % of bad debts which have been
covered
Credit Deposit
Ratio
Total Loans & Advances
(Credit)/Total Deposits
Amount of funds which can be further lent out
without a need to raise capital
Return on Assets
Net Income/ Avg. Total
Assets
Helps to compare profitability of banks of different
size
Cost to Income
Ratio
Total Cost/ Total Income
Measures efficiency of operations i.e. the lower the
ratio, more efficient the bank
Unlike other ratios which focus on Interest
Expense, Takes into account total cost hence
measures efficiency
Valuation Ratios
Price/Book Value
Price Per Share/
Book Value Per
Share
For an industry driven by the size of balance
sheet, this ratio truly captures the valuation
premiums/discounts
Also as the book values reflect the market
Non Banking Financial
Institutions
What is NBFC?
Financial institutions that provide banking services without meeting the legal
definition of a bank.
Provides services such as loans and credit facilities , private education, funding
retirement planning, trading in Money Markets, etc
Registered with RBI or other regulatory bodies
Classification of NBFCs
NBFC Guidelines
An NBFC must be registered with RBI and has to get authorization to
accept deposits from public
NBFCs can not accept deposit for a period of less than 12 months and
more than 60 months
RBI does not guarantee the repayment of deposits accepted by NBFCs
Deposits with NBFC are not insured
The maximum interest an NBFC can offer is 12.5 % per annum. This
percentage is regulated by the RBI
Deposit taking NBFCs have a minimum liquid asset requirement of 15%
of outstanding public deposits. Out of this 15%, minimum 10% must be
invested in government approved securities while the remaining may
be invested in term deposits in any scheduled commercial banks.
INSURANCE
Brief Overview of Insurance
Insurance may be described as a social device to reduce or eliminate risk of
loss to life and property
Types of Insurance
Life Insurance - Protect individuals against the risk of life
General Insurance - It protects the property and casualty by covering losses from
disasters and accidents thereby protecting from property damage and liability
Re Insurance- It is purchased by insurance companies to mitigate risks
associated with insurance business
IRDA was formed by an act of the Indian Parliament (known as the IRDA Act, 1999)
as the regulatory body to govern the Indian insurance sector.
No Re insurance company allowed in private sector
Capital requirement :
Paid up equity share capital of Rs.100 Crores for life or non-life insurance
business
Paid up equity share capital of Rs.200 Crores for reinsurance business
Insurance Companies
Company
Indian Promoter
Foreign Partner(s)
LIC
Government of India
None
ICICI Prudential
ICICI Bank Ltd
Prudential, UK
SBI Life
Bajaj Allianz
SBI
HDFC
BNP Paribas, France
Allianz, Germany
HDFC Standard
Life
Bajaj Auto
Standard Life, UK
Company
Indian Promoter
Foreign Partner(s)
New India
Insurance
United India
Insurance
Oriental
Insurance
Government of India
None
Government of India
None
Government of India
None
National
Insurance
ICICI Lombard
Government of India
None
ICICI Bank
Lombard, Canada
Key developments in Insurance Industry
Under Insurance Act, FDI of up to 26 per cent is permitted in the
insurance sector
FDI norms - The Insurance Laws (Amendment) Bill, 2008, proposes to
provide for the increase in share holdings by a foreign company from the
current limit of 26 per cent to 49 per cent.
Insurance companies can now invest upto 12% -15% (depending on the
size of the controlled funds) up from 10 %. LIC can invest upto 15%.
Proposal to increase it to 30% as LIC has exhausted its limit in most of the
blue chip stocks
Government spending on health sector during the 12th five year plan is
expected to be around 2% of the GDP from the current 1%. This would
increase the total expenditure on health to 4% of GDP.
Due to relaxation in investment norms in equity and Alternate Investment
Funds (AIFs) by IRDA, the insurance companies will get more leeway to
generate better returns on their investments
Banks can now sell insurance policies of multiple insurers. This will
increase penetration of along with the competition among insurers
Mutual Funds
A mutual fund takes in money from a large number of
investors and invest them in financial instruments
generating returns for the investors
Types of Mutual Funds
Open ended funds allow investors to invest and withdraw any time from
the fund
Close ended funds have limitations as to the investment and withdrawal
Microfinance
Microfinanceis usually understood to entail the provision offinancial
servicesto micro-entrepreneurs and small businesses, which lack access
tobankingand related services due to the high transaction costs associated
with serving these client categories.
The two main mechanisms for the delivery of financial services to such
clients are(1)relationship-based banking for individual entrepreneurs and small
businesses
(2)group-based models, where several entrepreneurs come together to apply
for loans and other services as a group.
AP (Andhra Pradesh) act on Microfinance Institutions
AP (Andhra Pradesh) act & its implication on Microfinance Institutions
The passage of this act dealt a major blow to the entire microfinance industry
across India since Andhra Pradesh, which is widely regarded as the birthplace
of private sector microfinance in India, accounted for 30% of all loans by MFIs
across India according to some estimates.
Other Financial Services
Intermediation or Advisory Services
These services involve stock brokers (private client services) and discount
brokers. Stock brokers assist investors in buying or selling shares.
Primarily internet-based companies are often referred to as discount
brokerages, although many now have branch offices to assist clients.
Private Equity
Private equity funds are typically closed-end funds, which usually take
controlling equity stakes in businesses that are either private, or taken
private once acquired. Private equity funds often use leveraged buyouts
(LBOs) to acquire the firms in which they invest.
Conglomerates
A financial services conglomerate is a financial services firm that is active
in more than one sector of the financial services market e.g. life insurance,
general insurance, health insurance, asset management, retail banking,
wholesale banking
Credit Ratings
A Quantitative measure of Credit worthiness of a borrower.
Generally divided into two categories viz, Investment Grade and
Junk Grade
Risk that an
issuer
is
exposed to is a
combination of
the industry risk
in
its
major
product
segments and
its competitive
position within
the industry
This relates to
the
attractiveness
of the industry
of the industry
in which the
issuer operates.
Aspects
examined
include
expected
Some of the
parameters to
do
this
are
operating profit,
leverage, debt
service
coverage ratios,
working capital
analysis,
cash
flow
analysis,
accounting
CURRENT SCENARIO
Macro Economic Numbers
FY13 CAD / GDP
GDP
Growth
Q1
3.90%
5.50%
Q2
5.40%
5.30%
Q3
6.70%
4.50%
Q4
201213
Q1
FY14
3.60%
4.80%
4.80%
E
5.00%
4.40%
April'
13
May'1
3
June'
13
July'1
3
Aug1
3
CPI
WPI
IIP
10.24%
4.77%
2.00%
10.68%
4.58%
-1.60%
9.87%
4.86%
-2.20%
9.64%
5.79%
2.60%
9.52%
6.10%
Gsec (SLR) Portfolio taking a hit
Liquidity Hit
RBI Measures to address QE withdrawal fears
and USDINR volatility
Individual bank borrowing limits at Repo
Rate restricted at 0.5% of deposits
Mandatory for banks to maintain 99%
of the CRR requirement on daily basis
with RBI against the earlier 70%
MSF rate Repo Rate + 300 bps
Government action: 10% Import duty
on Gold
80:20 rule
Raghuram Rajan and new policy
initiatives
New Banking Licenses likely to be announced
around January 2014
Foreign Currency Non Resident (Banks) deposits
at 3.5% (Indian Banks) for over 3-year deposits current US$15.1bn - inflow of US$10bn expected
Stressed the need to reduce the pre-emption of
deposits via the SLR
Recognizing the need to address the NPA
situation, a committee will be formed to suggest
a comprehensive reform of financial inclusion
targets for banks (currently 40%)
Future Outlook
Uncertainty prevails as FOMC decides
today on the amount of Bond
repurchase program tapering
New RBI Governor, new measures
Domestic and international macroeconomic environment of great
significance
Syria
others
QUESTIONS
