Editorial - Ashvin Parekh Advisory Services November - 2015.pdf¢  Editorial...

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Transcript of Editorial - Ashvin Parekh Advisory Services November - 2015.pdf¢  Editorial...

  • http://www.ap-as.com/

  • Editorial

    Season’s greetings,

    In this edition we have Mr. Ananthakrishna – Non Executive Chairman of Karnataka

    Bank, discussing landscape of banking in the next 2-3 years with respect to ownership,

    structure and business model especially the mid-sized banks. He believes that times

    ahead are interesting with technology replacing conventional methods of banking. We

    thank Mr. Ananthakrishna for his contribution to the newsletter.

    For this month, APAS column discusses the drivers for consolidation, to suggest a

    strong case for consolidation, the required preparation and various aspects which are

    key ingredients for consolidation. Inefficiency in the system and over dependence on

    banking are important drivers to consolidation.

    The economic indicators showed mixed performance. The manufacturing PMI fell from

    51.2% in September to 50.7% in October. Growth in core sectors remain unchanged.

    India's Index of Industrial Production (IIP) growth moderated to 3.6% in September

    2015 as compared with the revised growth of 6.3% in August 2015. PMI services and

    composite PMI were respectively at 53.2% and 52.6% both rising from 51.3% and 51.5%

    in the previous month. Inflation rose from 4.4% in September to 5% in October.

    WPI inflation stood at -3.81% for the month of October, 2015 as compared to -4.54%

    for the previous month.

    RBI announced fifth Bi-monthly Monetary Policy Statement, 2015-16 keeping the rates

    unchanged. RBI also announced the revised ECB Framework as a means to attract flow

    of funds from abroad.

    IRDA has released draft reinsurance regulations enabling Llyod’s UK to set up a branch

    in India. Accordingly, Lloyds India would be subject to the same regulations as

    applicable to Indian insurer and reinsurer. Draft amendment to the final regulations

    issued for setting up of foreign reinsurance branches in India (other than Lloyd’s India)

    is released.

    On the infrastructure front we have, the news on report submitted by the Kelkar panel,

    which was appointed by the government. The Kelkar committee was mainly set up to

    look into the issues confronting the PPP sector.

    We hope that this newsletter is insightful and we welcome your inputs and thoughts

    and encourage you to share them with us.

    Ashvin Parekh

    Table of Contents

    Guest Column

    Mr. Ananthakrishna – Non-Executive

    Chairman of Karnataka Bank Ltd.

    APAS Team

     Indian banking : Let’s prepare for

    consolidation

    Economy

     IIP update – September

     Inflation update - October

     PMI update – October

     Core Sector update – October

    Banking Sector

     Fifth Bi-monthly Monetary Policy

    Statement, 2015-16

     The revised ECB framework

     Cybercrime Survey – KPMG Report

    ,2015

    Insurance

     Insurance Regulatory and

    Development Authority of India

    (Lloyd’s India) Regulations, 2015

     Draft amendment to the final

    regulations issued for setting up of

    foreign reinsurance branches in

    India (other than Lloyd’s India)

    Infrastructure

     Government appointed Kelkar

    panel to review PPP framework,

    submits report to FM Arun Jaitley

    Capital Market Snapshot

    Economic Data Snapshot

    Draft regulations for Foreign Re-Insurers

    Ashvin Parekh – Managing Partner, APAS

  • Indian Banks did well to survive the global crisis with

    minimum shocks and continued to grow post 2008

    until the cyclical downturn hit them in 2011. From

    then on, banks have been rediscovering themselves

    and trying to create a niche in an otherwise crowded

    domain.

    In this context an attempt has been made to give you

    a flavour of what banking would be in the next 2-3

    years with particular reference to mid-sized Bank and

    the changes that will come about in the ownership,

    structure and business models of banks, mainly driven

    by an overwhelming technological advancement that

    is seen around us.

    In a nutshell, it will be an exciting period, where

    conventional methods of banking will be replaced by

    technology.

    Ownership:

    Today the government holds stakes ranging from 56

    per cent to 84 per cent in 24 state run banks that

    account for 70 per cent of the total outstanding loans.

    A new school of thought is emerging on reducing the

    Government ownership in these banks.

    In line with the recommendations of Dr. P J Nayak

    Committee that the Center should distance itself from

    the governance of bank, the government has recently

    announced the setting up of a 'Bank Board Bureau'

    that will give way to a holding company to which the

    Center will transfer its ownership of all these Banks.

    This is expected to make raising of funds by the Banks

    from the market easier and simultaneously trim the

    Government stake in PSBs.

    Banks will be needing more capital in the coming

    years to meet Basel III requirements and will now

    have to woo the investors on their own strengths.

    They will have to undertake capital conservation by

    re-balancing their asset portfolios to check growth in

    risky assets and align their growth numbers with their

    capacity to attract capital. We may see Balance Sheets

    being trimmed in the case of not so efficient banks.

    Mr. Ananthakrishna – Non-Executive Chairman of Karnataka Bank Ltd.

  • New Entrants:

    We are today debating on the complexity of financial

    systems. The universal banking model is getting

    replaced by leaner models. New players like payment

    banks and small finance banks have been licensed to

    commence business. The 'bottom of the pyramid' has

    lots of opportunities. The national strategy of

    financial inclusion (PMJDY) implemented by the GOI

    in coordination with banks followed by the social

    security measures have helped opening around 170

    million accounts. But with many of these accounts

    presently having zero balance, there will be an

    opportunity to convert such accounts into active ones

    and bring them into the mainstream in terms of

    usage. There are lots of opportunities here with

    enough space to grow for the existing as well as new

    players. Banks will be queuing up for strategic

    alliances with these new entrants for both sourcing

    and dispensing of funds.

    Asset quality & recovery:

    Performance statistics of banks for FY16 continues to

    highlight the fact that there is a continued

    deterioration in asset quality. Even though the

    exposure of midsized banks to highly leveraged and

    stressed corporates is capped (prudently) a rippling

    effect on the smaller companies will slow down their

    growth prospects and can impact the portfolio of the

    midsized banks as well. A delinquent portfolio

    requires higher capital and the midsized banks may

    have to introduce a higher level of sophistication into

    their credit appraisal, monitoring and recovery

    systems with the sole aim of keeping the defaults at

    bay, even as the Indian economy prepares to take off

    in the next couple of quarters.

    Liquidity constraints:

    Along with the existing preempting ratios namely CRR

    & SLR, two more ratios, the LCR and the NSFR will

    promote short term resilience to potential liquidity

    disruptions, ensuring that banks have sufficient HQLA

    to survive a stress scenario lasting for 30 days.

    Consequently, banks will have lesser lendable funds

    and the impact on NIM is worth debating. Around 30

    per cent of the NDTL in banks will yield a lower NIM

    (may even turn negative) putting pressure on the

    lending strategies. There are limited options of

    HQLAs' as well.

    Technology as an enabler:

    Technology will continue to be a game changer. After

    ATM, internet banking and mobile banking,

    technology is evolving. 'Disruptive innovations' is the

    latest buzzword. FinTech industry is growing offering

    solutions in payment processing, mobile payments,

    remittances, data analytics automation of process

    etc. Paytm, Bill desk, Fino Pay Tech, Bank Bazar,

    Lending Kart, M-swipe etc have emerged and as their

    number grows, they will challenge the ancient

    business models of banking. At this point of time,

    studies show that the adoption curve for digital

    banking is trailing the curve of on-line shopping. It will

    be interesting to watch the face of banking as these

    curves meet.

    The demography of India is unique. With more than

    65 per cent of the population below the age of 35

    years, it is expected that by 2020, the average age of

    an Indian will be only 29. Further, complexity is lent

    by a great variation that occurs across this population

    on