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Editorial

Season’s Greetings!

In this edition we have Mr. Ritesh Kumar – MD & CEO, HDFC Ergo, articulating his

thoughts on General Insurance industry and its increasing penetration. We thank Mr.

Kumar for his contribution to the newsletter.

For this month, APAS column cover various facets of differentiated banking in India and

globally.

The economic indicators showed signs of mixed performance. Manufacturing PMI fell

from 52.4 in March to 50.5 in April. India’s core sector accelerated to 17-month high at

8.5% in April. The growth in Index of Industrial Production (IIP) for the month of March

decreased to 0.1% versus 2% in February 2016. PMI services and composite PMI were

at 53.7 and 52.8 in April, from 54.3 each in March. Inflation rose to 5.39% in April from

4.83 % (final) in March. WPI moved upwards to 0.34% in April after remaining in a

negative zone for a long time. It was (-) 0.85% in March 2016.

The Reserve Bank of India issued draft guidelines on relaxation of banking license

requirements (draft guidelines for ‘on tap’ licensing of universal banks in the private

sector). It also issued a consultation paper on peer to peer lending which talks about

P2P lending globally and in India. Cabinet approved MoU between RBI and Central Bank

of UAE. RBI tightened Rules for Large Corporate Borrowers. Lok Sabha gave its approval

on the new bankruptcy law, “Insolvency and Bankruptcy code, 2015”. RBI tweaked

shareholding norms for private sector banks. RBI released its Second Bi-monthly

Monetary Policy Statement, 2016-17 keeping the rates unchanged.

IRDAI released comprehensive guidelines on corporate governance for insurers in

India. Also the authority has proposed to issue the following amendment to IRDAI

(Registration of Indian Insurance Companies) (Eighth Amendment) Regulations, 2016.

Government of India cleared railway projects worth Rs. 10,736 crore to improve

infrastructure. Also, India and Iran signed Chabahar port deal on 23rd May, 2016.

SEBI (Securities and Exchange Board of India) tightened registration norms for offshore

derivative instruments.

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

encourage you to share them with us.

Ashvin Parekh

Table of Contents

Guest Column

Mr. Ritesh Kumar – MD and CEO – HDFC Ergo

APAS Team

Differentiated Banking

Economy

IIP update – March

Inflation update – April

PMI update – April

Core Sector update – April

Banking Sector

Draft guidelines for ‘on tap’ licensing of Universal Banks in the private sector

Peer to peer lending

MoU between RBI and Central Bank of UAE

Tightening of rules for large corporate borrowers

Insolvency and Bankruptcy code, 2015

Shareholding norms for private sector banks

Second Bi-monthly Monetary Policy Statement, 2016-17

Insurance

Corporate governance for insurers in India

Amendments to IRDAI (Registration of Indian Insurance Companies) (Eighth Amendment) Regulations, 2016.

Infrastructure

Clearance of railway projects

Signing of Chabahar port

National Capital Goods Policy

Announcement of new smart cities

Capital Markets

Tightening of registration norms for offshore derivative instruments

Capital Market Snapshot

Economic Data Snapshot

Ashvin Parekh – Managing Partner, APAS

The general insurance industry has been in a state of

evolution ever since the industry opened up in 2001.

Though it has grown almost 10 times over the last 15

years, the general insurance penetration in the

country continues to be abysmally low at about 0.8%

of GDP. The rural penetration is even lower and

stands at below 0.2%. As the Regulator’s gives effect

to changes necessitated by the Insurance

Amendment Bill, there is increased effort on their part

to improve insurance penetration in India. It is equally

important to be mindful of these measures in the

context of the developments that are taking place in

the larger ecosystem and the evolving consumer

behavior.

Distribution trends

When we look at some of the regulatory interventions

in the recent past, it is apparent that a strong

framework is being created for insurance distribution

to reach out to a larger customer base. These include,

allowing Banks to sell insurance products for multiple

insurers, a new category of intermediaries called

Insurance Marketing Firms who can sell for two

insurers each; point of sale persons (PoSP) and

insurance distribution through CSCs. With the

framework in place, coming years will see multiple

channels reaching out to everyone who is insurable.

Last few years has also seen a huge push from the

Government to increase insurance penetration in the

country. Rashtriya Swasthya Bima Yojna, a program to

provide medical insurance to the weaker sections of

the society has been there for a while. We are

completing the first anniversary of the Pradhan

Mantri Suraksha Bima Yojna, a program to ensure

personal accident policies for all. A comprehensive

crop insurance program in the form of Pradhan

Mantri Fasal Bima Yojna has been launched earlier

this year with a view to increase crop insurance

penetration from presently 22% to 50% over the next

2 years.

Mr. Ritesh Kumar, Managing Director & CEO – HDFC Ergo

The regulatory and Government’s initiatives will

effectively take insurance to the remotest corners of

the country bringing all sections of the society within

the insurance net. Insurance inclusion is as important

as financial inclusion.

Evolved Customer making informed decisions

Today's customer is smart and would like to have and

analyze all possible information before making a

purchase decision. The technology today enables him

to do so. Today business models empower the

customer to have all required information before

making a purchase, platform are built for the

customers to be able to not just compare products

and prices but also be able to design the products and

price combination that matches their requirements.

The web aggregator model is one such example. With

so many companies and brokers competing for the

business, the customer is really spoilt for choice.

Product reforms with focus on value driven

insurance solutions

The insurers on their part are becoming more and

more customer focused. In the past, insurance was

just a risk transfer mechanism, but today it's so much

more. Services like cashless claims payment to

hospitals and garages have become essential part of

the product offering which means service network

management has become one of the core functions

for an insurance company. In the past most of the

claims were serviced on reimbursement basis. Today,

roadside assistance, ambulance services etc. are all

standard expectation and thus necessary part of the

product offering.

After de-tariffing, there has been a spate of new

product features in the market. The simplest of

products such as motor and health today are not

standard anymore. For example in motor, zero

depreciation has become the most popular cover with

host of add ons. In health segment, as compared to

the standard “mediclaim”, today we have hospital

cash, critical illness, top up etc. as standard product

supplements.

With the implementation of “Use & File” regime the

market will witness major change in the product

landscape in insurance. While the speed to market

will significantly improve, even the product contours

will undergo a major shift especially on the corporate

side. The provision to launch ‘Pilot Products” is likely

to encourage companies to test and market new

products with increasing frequency. Multi-year

products and premium collection in installments

would gain acceptance.

IT and social media

Information technology and social media are playing

a significant role in shaping customer choice and

product & service delivery. Through the internet, the

entire ecosystem is getting connected which has

infinite possibilities. Online purchase of policies and

claims payments are passé, the future lies in the

connected world. Connected information backed with

strong analytics and service networks will define the

new paradigm of insurance in the brave new world.

Today online purchase of insurance products has

become a standard practice. Through enabled

platform, the customer can design the product per his

needs and the transaction can be closed on the net.

Today in case of a claim, loss prevention sensor driven

devices can be activated to control the damage and

message is flashed to the service network to provide

on the spot assistance, survey, repair and payment of

loss. In such a scenario, one can imagine that

information, analytics, strong and connected network

of service providers will play a key role.

With economy showing signs of recovery and backed

by the above initiatives and developments,, the

industry growth rate this year is expected to be around

25% as compared to 13.8% for FY16 – this would make

FY17 potentially as the year with the highest ever

growth rate for the general insurance industry. This

trend of increasing penetration is going to be a very

strong theme for quite some time.

Financial sector reforms in 1991 rejuvenated Indian

economy and contributed greatly to the progress that

India has achieved today. Much later in 2014, a set of

recommendations which aimed at financial inclusion

were set forth by RBI-constituted Nachiket Mor

committee. The committee recommended

establishing differentiated banks meant for providing

banking access to the poor and the unbanked. Hence,

the foundation stones for differentiated banking were

laid.

Similar trends in the banking industry have been

observed around the globe. USA, Australia, Singapore,

Hong Kong, London and Indonesia, practice

differentiated Bank licensing model. In these

economies, the purposes of issuing differentiated

banking licenses are anchored either to capital

conditions or to the activity being financed.

Differentiated banking has existed in India in past, in

the form of regional rural banks and local area banks.

However, they were not very successful owing to

various reasons. The purview of regulations

applicable to all these entities have been different.

NBFCs, regional rural banks and local area banks have

traditionally been under the scope of RBI and Banking

regulations act, 1949, while, co-operative banks are

disciplined by state co-operative society act.

RBI has been encouraging various financial entities to

convert into differentiated banks, thereby increasing

financial inclusion and bringing them under the

expanse of RBI.

Every entity being established under the

differentiated banking umbrella, follow regulations

set by RBI. RBI has to adopt a sophisticated approach

in drafting regulations. These regulations will have to

differentially use the main tools of micro-prudential

regulation – capital adequacy and reserve

requirements, regulatory audits, reporting and

compliance – so as to achieve the desired results,

while recognizing differences in business models. RBI

will also have to ensure that there is no regulatory

arbitrage that is created across different types of

banks.

Some leeway in terms of capital required and other

regulatory capital is allowed and the rationale behind

providing leeway to these banks can be attributed to

the fact that these banks are meant for servicing loans

of lower ticket sizes and also operate in small

geographic areas.

Differentiated banks are signs of government and

RBI’s efforts towards financial inclusion of masses. In

order to induce habit of saving and switching to

formal sources of credit among the unbanked

population, many of the recently introduced benefit

transfer schemes like direct benefit transfer scheme,

etc. require mandatory ownership of bank accounts

to receive the benefits. Close proximity of

differentiated banks like small finance banks,

especially in rural areas, would ease the process of

transmission of benefits to the unprivileged. Better

asset-liability management and stronger regulatory

structure under RBI would help differentiated banks

fundamentally achieve more success than earlier

versions of differentiated banks like co-operative

banks.

Differentiated banking licenses have caught the

attention of foreign banks as well. Foreign banks have

been engaged in specialized banking business, despite

having been allotted a universal banking license, due

to restrictions in guidelines on sub standardization.

Hence, they may decide to opt for a differentiated

banking license and maintain focus on their core

activity.

Creation of small finance and payment banks is likely

to promote better utilization of financial resources,

bring depth to core activities, and allow institutions to

focus on specific needs and customer segments.

Announcing that RBI shall soon provide universal bank

licenses on tap is a step furthering the financial

inclusion.

The launch of differentiated banking models are part

of a revolution in the Indian economy and certainly

seems to be a good idea. However, the question that

- will India remain receptive and positive to the

change, still prevails. The success of the differentiated

bank idea will herald a major change in the banking

arena.

-APAS

IIP (Index of Industrial Production) – March

The growth in industrial output, measured by index of

industrial production (IIP) for March, decreased

sharply to 0.1% versus 2% in February 2016 as

manufacturing growth contracted by 1.2% as against

0.7% in February.

In March, the IIP was boosted solely by electricity

generation, which rose by 11% from the 9.6% rise seen

in the previous month. Annual growth in electricity

generation however moderated to 5.6% from the 8.4%

growth seen in the previous year.

On the other hand, mining output contracted by 0.1%

in March, a sharp fall considering the 5% witnessed in

February. Mining growth increased by 2.2% in the last

financial year as compared to a 1.4% rise in 2014-15.

Among product categories, radio, TV and

communication equipment registered the highest

growth at 36.5%, followed by Tobacco products at

19.8%. Electrical machinery & apparatus on the other

hand, continued to fall by the largest margin at 36.2%.

Cable, Rubber Insulated, continued its long streak in

contributing the most to the contraction in the index.

Also commercial vehicles and telephone instruments

were the positive contributors to growth. On the use

based classification, capital goods, considered a proxy

of investment demand, continued to contract sharply,

going down by 15.4% after a 9.8% slide in the

preceding month. Annually, it went down by 2.9% after

a 6.3% rise in the previous financial year. This

contraction has consistently acted as the big drag on

the performance of the IIP Index.

On the demand side, decline in consumer non-

durables accelerated to 4.4% from the 4.2% fall in the

previous month. Growth in consumer durables

however increased by 8.7% after growing by 9.7% in

February. In March, 13 out of the top 25 products

within manufacturing showed growth, down from 19

last month.

-3.2

-1.2-1.5

2.0

0.1

Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

IIP (%YoY)

Quarterly evaluation of IIP

3.83

1.13

0.43

3.233.53

4.73

1.80

0.20

Q1 14-15Q2 14-15Q3 14-15Q4 14-15Q1 15-16Q2 15-16Q3 15-16Q4 15-16

IIP

%

Quarter

IIP Trend Mining activity recovered during 2014-15 from a

three-year slump, buoyed by a sharp increase in

the production of coal. Weakness in consumer

spending, sluggish investment activity and poor

external demand operated as drags on

manufacturing activity during 2014-15.

During April - June 2015, however, the growth in

IIP decelerated mainly on account of a sluggish

performance in capital goods, electricity and

food products.

IIP has experienced a downfall from 3.83% in Q1

to 0.43% in Q3 (14-15) respectively. Further IIP

rose to the level of 4.73% in 2015-16. Following

which it fell to the extent of 0.20% in Q4 of 2015-

16. Manufacturing sector has recorded a

marginal growth in the Q4 as compared to

mining and electricity sectors which grew slightly

better.

Consumer Price Index - April

Retail inflation, as measured by the consumer price

index (CPI) for April accelerated to 5.39% (Provisional)

as compared to 4.83% in March (Final).

Food inflation picked up to 6.32% in April from 5.21%

in the previous month. This was the first pickup in

retail inflation since January 2016. The pace of price

gains in April was driven mainly by higher food costs.

An early summer heat wave led to an increase of 3.8%

in month-on-month prices for staple vegetables. Price

of pulses surged 34.1% in April, while sugar and

confectionary rose 11.2% year-on-year during the

month.

Rural and Urban inflation rose to 6.09% and 4.68% in

April (Provisional) from 5.7% and 3.95% in March

(Final) respectively.

Quarterly evaluation of CPI

4.4

4.6

4.8

5

5.2

5.4

5.6

5.8

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16

CPI

The inflation rate eased for the second straight

month, reaching the lowest figure since

September 2015 and compared to market

expectations of 5% as food prices rose at a slower

pace. Inflation Rate in India averaged 7.79% from

2012 until 2016, reaching an all-time high of

11.16% in November of 2013 and a record low of

3.69% in July of 2015.

CPI rose in December 2015, reaching the highest

since September 2014, in line with market

expectations.

For Q1 of 2015-16, CPI inflation remained at

5.09%. Thereafter falling to 3.95% for Q2.

Post that CPI inflation rose back to 5.34% in Q3. It

continues to be relatively high and “sticky”,

despite the sharp fall in commodity prices

globally, especially crude oil.

Even after a sharp rise in food inflation, CPI has

fallen from 5.34% in the Q3 of 2015-16 to 5.26%

in Q4 of 2015-16 due to ease in rural and urban

inflation respectively.

8.117.38

4.97 5.22 5.09

3.95

5.34 5.26

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16

CP

I %

Quarter

CPI Trend

WPI (Wholesale Price Index) – April

India's annual wholesale price index (WPI)

accelerated into the positive terrain after staying in

negative zone for 17 straight months. The

annual WPI moved up to 0.34% for April, from (-)

0.85% in March and (-) 2.43% during the

corresponding month of the previous year. The

upward movement in WPI mainly occurred on the

back of a rise in the prices of pulses, potatoes, sugar,

edible oils, egg, meat, fish and milk.

On a year-on-year basis, the April data disclosed that

prices of primary articles rose 2.34%, whereas the

manufactured product edged up by 0.71%. Food

articles inflation jumped to 4.23% due to higher prices

of tea, pulses, poultry and fruits and vegetables.

Other food items such as wheat and vegetables

recorded modest price increases. Wheat was dearer

by 2.22%, and vegetables by 2.21%. Even under the

manufactured products category, prices of

commodities pertaining to processed food rose –

especially sugar that was higher by 16.07%, followed

by food products which were up by 8.01%. The edible

oil prices increased by 5.61%.

Notwithstanding the upward price trend, fuels prices

fell. The fuel and power index was down 4.83% --

petrol was cheaper by 4.18% and diesel by 3.94%.

Cost of cooking gas fell by 18.4%.

Quarterly evaluation of WPI

Wholesale prices in India averaged 7.36%

from 1969 until 2016, reaching an all-time

high of 34.68% in September of 1974 and a

record low of -11.31% in May of 1976.

During the Q1 of 2014-15, WPI inflation stood

at 5.8% as mainly food and fuel prices were

high. In the second and third quarters of

2014-15, WPI inflation declined to 3.8% and

0.5% respectively. The WPI inflation even

breached the psychological level of 0% in

November, 2014 and January, 2015. The

decline was majorly caused by lower food and

fuel prices.

However in 2015-16, WPI has been in

negative zone for all the four quarters.

5.62

3.77

0.53-1.59 -2.47

-4.51

-2.18-0.88

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16 Q4 15-16

WP

I %

Quarter

WPI Trend

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16

WPI

PMI update

Service PMI – April

The seasonally adjusted Nikkei India Composite PMI

Output Index dropped from 54.3 in March (37- month

high) to 52.8 in April. It pointed a softer expansion in

private sector activity across the country. Slower

increases were seen at both goods producers and

service providers.

Down from 54.3 in March to 53.7 in April, the

seasonally adjusted Nikkei Services Business Activity

Index pointed a solid, although softer, expansion in

activity. The latest increase in output was supported

by growth in the Financial Intermediation, Post &

Telecommunication and Transport & Storage sub-

sectors.

New business at services firms rose for the tenth

straight month in April. Despite easing since March,

the rate of expansion was solid overall. Although the

demand improved, there were mentions of

competitive pressures. Incoming new work in the

private sector as a whole increased at a moderate and

weaker rate, weighed on by stagnant order books

among manufacturers. April data highlighted a lack of

pressure on the capacity of Indian service providers,

as unfinished business declined. The latest fall was the

third in as many months, but the weakest in this

sequence and fractional overall. In contrast to this,

manufacturers accumulated backlogs.

Quarterly evaluation of Service PMI

Services PMI in India averaged 51.56 Index

Points from 2012 until 2016, reaching an all-

time high of 57.50 Index Points in January of

2013 and a record low of 44.60 Index Points in

September of 2013. The rate of backlog

depletion was sharp and the most

pronounced for the fourth quarter ended

March 2016, since March 2009.

The trend in employment showed little-

change through much of 2015-16. Except for

last July where hiring among service providers

was mild, a broadly stagnant labour market

was seen for the past two years. Input costs

across the private sector meanwhile rose at

the quickest rate in three months and inflation

likewise accelerated.

The average of Service PMI was seen rising

from Q3 ended December 2015 to Q4 ended

March 2016 (52.13 to 53.33). The main reason

being sharper increase in new business

spurring activity growth in service sectors.

Having accelerated to the fastest in over three

years during March, activity growth across

India’s private sector took a step back in April.

Source: www.tradingeconomics.com

Manufacturing PMI - April

The seasonally adjusted Nikkei India Manufacturing

Purchasing Managers Index fell from 52.4 in March to

50.5 in April. This meant weakest improvement in

business conditions in the current four-month

sequence. Indian manufacturers saw incoming new

orders broadly stagnate in April, following three

consecutive months of growth.

New work from abroad continued to increase.

Nonetheless, new export orders expanded at the

slowest pace since last October. In spite of the

stagnation in new work, goods production increased

in April. The rate of expansion was only slight and

softened since March, however. Meanwhile, buying

levels rose for the fourth successive month, which in

turn resulted in a further accumulation in stocks of

raw materials and semi-finished products. April saw

manufacturing employment in India remain broadly

unchanged, a trend that has been evident for almost

two years.

Quarterly evaluation of Manufacturing PMI

Manufacturing PMI in India averaged 51.93

from 2012 until 2016, reaching an all-time

high of 55 in June of 2012 and a record low

of 48.50 in August of 2013. As a consequence

of rising purchasing activity, preproduction

inventories expanded. A softer overall

increase in output prices meanwhile suggests

a strongly competitive environment, as cost

inflation in fact accelerated to the fastest

since May 2015.

The rate of accumulation was slight overall

and in line with those seen throughout the

current four-month sequence of growth.

Manufacturing PMI kept fluctuating for the

first two quarters of 2015-16. Further it

slowed down in the Q3 ended December

2015. The average being 50.03 for that

quarter. However, the average for the Q4

ended March 2016 rose to 51.53. The reason

for this rise was expansion of output at an

accelerated rate. New orders were also

welcomed. There was an improved demand

from both domestic and external clients.

Source: www.tradingeconomics.com

Core Sector Growth – April

Core sector production continued on its positive

trajectory for the fifth straight month, with April

growth accelerating the fastest in 17 months at 8.5%.

This was due to a low base and better performance by

petroleum refinery, fertilizer, steel, cement and

electricity sectors. This is the highest since the 8.54%

growth recorded in November 2014.

Petroleum refinery production rose 17.9% in April

2016 (as against -2.9% in April 2015) while fertilizer

output increased by 7.8% (-0.04% in April 2015) and

steel production jumped 6.1% (0.01% in April 2015).

Cement output went up by 4.4% (-1.4% in April 2015)

while electricity generation increased by 14.7% (-0.5%

in April 2015).

The areas of concern included coal production that

shrank 0.9% (8.1% in April 2015) and crude oil

production that contracted by 2.3% ( -2.5% in April

2015). Natural gas production also decreased by 6.8%

(-3.6% in April 2015). The core sector output had

slipped into the negative territory in November 2015

when it shrunk by 1.3%.

Monthly evaluation of Core Sector

Core Sector continued to expand for six months,

before it contracted in Nov 2015 to a negative 1.3%

mainly driven by a decline in steel production.

During April-December 2015 period this fiscal, the

output of these eight sectors slowed to a 1.9%

growth from 5.7% growth in the same period last

fiscal.

From December 2015 onwards, core sector output

has grown from 0.9% to 6.4% in March 2016. This

growth was due to increase in output of electricity,

cement, fertilizers and refinery products. Also coal

output was seen to increase in December 2015 and

January 2016 which led to an overall growth.

Thereafter, it showed highest growth in April 2016

(8.5%).

Petroleum refinery products and cement have

shown excellent growth (in April) due to extremely

low base. Growth in electricity output remains the

bright spot. Even growth in cement output is

encouraging and appears to be benefiting from the

revival of road sector.

-0.42

4.4

3

1.1

2.63.2 3.2

-1.3

0.9

2.9

5.76.4

8.5

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Relaxation of Banking License requirements

The Reserve Bank of India (RBI) issued proposals for

the relaxation of requirements for banking licenses.

This was done as an effort to boost a sector struggling

with $100 billion of stressed debt that is choking the

financial system and hitting economic growth. These

are called Draft guidelines for ‘on tap’ licensing of

Universal Banks in the Private sector.

Only about half of India's population is having access

to financial services, particularly in rural areas.

Hence, RBI has been keen to extend the sector's

reach.

The draft guidelines include a move to allow large

industrial companies to buy up to 10% stakes in new

lenders. Resident individuals and professionals

having 10 years of experience in banking and finance

will be eligible to promote universal banks. Non-

Operative Financial Holding Company (NOFHC) has

now been made non-mandatory in case of promoters

being individuals or standalone

promoting/converting entities who/which do not

have other group entities.

The central bank proposed a lowering of the

minimum ownership level for companies or people

setting up lenders under a financial holding structure

to 51% from 100%. Existing specialized activities have

been permitted to be continued from a separate

entity proposed to be held under the NOFHC subject

to prior approval from the Reserve Bank and subject

to it being ensured that similar activities are not

conducted through the bank as well.

Key features of the guidelines have been stated.

These include eligibility of the promoters, ‘Fit and

Proper criteria’, corporate structure, minimum

capital requirement, foreign shareholding in the

bank, corporate governance prudential and exposure

norms, business plan for the bank, other conditions

and the procedure to be followed by the banks for

application.

Banking is a highly leveraged business. Hence,

licenses shall be issued on a very selective basis to

those who conform to the above requirements, who

have an impeccable track record and who are likely

to conform to the best international and domestic

standards of customer service and efficacy.

Peer to peer lending

Peer to Peer lending is a form of crowd-funding which

can be defined as the use of an online platform that

matches lenders with borrowers in order to provide

unsecured loans. The borrower can either be an

individual or a business requiring a loan. The lender

can also be a natural or a legal person. Fee is paid to

the platform by both the lender as well as the

borrower. At present, there is no clear regulatory

framework in India governing the functioning of the

Peer to Peer lending platforms. There are many

variants of Peer to Peer lending platforms. Nature

and extent of services provided by them and global

regulatory practices also vary.

The Reserve Bank of India released the Consultation

Paper on Peer to Peer Lending. It talks about P2P

lending globally and India, arguments for and against

regulating this sector and the way forward.

RBI said it would be “prudent” to regulate the

business because of “the impact it can have on

traditional banking channels” and NBFCs and its

“potential to disrupt the financial sector and throw

up surprises”.

As per the media reports, in 2015, around 20 new

online P2P lending companies were launched in India.

At present, there are around 30 start-ups in the P2P

lending business in India.

However, the contours of regulating Peer to Peer

Lending will be decided in consultation with the

Securities and Exchange Board of India (SEBI).

Cabinet approved MoU between RBI and Central Bank of UAE

The Union Cabinet approved the memorandum of understanding (MoU) between the Reserve Bank and the Central Bank of United Arab Emirates (UAE) on co-operation on currency swap agreement. As per the MoU signed in February, RBI and the Central Bank of UAE will consider signing a bilateral Currency Swap Agreement on mutually agreed terms

and conditions after undertaking technical deliberations, subject to concurrence of respective governments.

This will further strengthen the economic relations

between India and UAE.

RBI tightened Rules for Large Corporate Borrowers

The Reserve Bank of India today placed on its website

the Discussion Paper (DP) on Framework for

enhancing Credit Supply for Large Borrowers through

Market Mechanism.

This aimed at mitigating the risk posed to the banking

system on account of large aggregate lending to a

single corporate. Absence of an overarching ceiling

on total bank borrowing by a corporate entity from

the banking system has resulted in banks collectively

having very high exposures to some of the large

corporates. The proposed Framework will come into

effect from the financial year 2017-18 and will be

applicable to all banks in India as well as branches of

Indian banks abroad.

Insolvency and Bankruptcy code, 2015

India has moved a step closer to adopting a new

bankruptcy law after the Lok Sabha passed the

legislation. After the approval in Rajya Sabha, the law

will ensure time-bound settlement of insolvency. This

will enable faster turnaround of businesses and

create a data base of serial defaulters. This is critical

in resolving India’s bad debt problem which has

crippled bank lending.

The lower house passed The Insolvency and

Bankruptcy Code, 2016, with all the amendments

proposed by the joint parliamentary committee

being accepted by the government. Bankruptcy

applications will now have to be filed within three

months rather than the earlier six months.

The new code will replace the existing bankruptcy

laws and cover individuals, companies, limited

liability partnerships and partnership firms. It will

amend laws, including The Companies Act, to

become the overarching legislation to deal with

corporate insolvency. And, it will also help creditors

recover debt faster. Enactment of this legislation

before 31st May this year will help India improve its

position in the World Bank’s ease of doing business

ranking, where it is currently ranked 130.

According to the World Bank, at present it takes more

than four years to resolve bankruptcy in India.

However, this code seeks to reduce the time frame to

less than a year. The law restores the balance of

power between promoters and creditors.

The Panel had submitted a number of changes like

provisions to address cross-border insolvency

through bilateral agreements with other countries

and shorter time frames for every step in the

insolvency process—right from filing a bankruptcy

application to the time available for filing claims and

appeals in the debt recovery tribunals (DRTs),

National Company Law Tribunals (NCLTs) and courts.

To protect workers’ interests, the committee

proposed that the money due to workers and

employees from the provident fund, the pension

fund and gratuity fund shouldn’t be included in the

estate of the bankrupt company or individual.

Further, workers’ salaries for up to 24 months will get

first priority in case of liquidation of assets of a

company, ahead of secured creditors.

There are also provisions that disqualify anyone 

declared bankrupt from holding public office, thereby

ensuring that politicians and government officials

cannot hold any public office if declared bankrupt.

The bill proposed the creation of a new class of

insolvency professionals that will specialize in helping

sick companies.

It also provides for creation of information utilities

that will collate all information about debtors to

prevent serial defaulters from misusing the system.

The information utilities will be regulated by the

bankruptcy board which will have eminent people.

The bill proposed to set up the Insolvency and

Bankruptcy Board of India, to act as a regulator for

these utilities and professionals.

RBI tweaked shareholding norms for private sector banks

The Reserve Bank of India has issued new guidelines

on ownership in private sector banks by bundling

shareholding patterns into two broad categories of

individuals (natural persons) and legal

entities/institutions. However, it retained the cap on

foreign ownership at 74%. The new norms, which

envisage diversified shareholding in private sector

banks by a single entity/corporate entity/group of

related entities, are aimed at helping them meet the

additional capital under the Basel-III regulations.

RBI has stipulated separate limits for non-financial

and financial institutions. For all existing banks, the

permitted promoter/promoter group shareholding

will be in line with what has been permitted in the

February 22, 2013 guidelines on licensing of universal

banks at 15%.

In case any promoter/promoter group is eligible for

higher shareholding as per the licensing guidelines,

the same will apply. The limits prescribed for all

shareholders in the long run will not apply.

In case of financial institutions that are owned to the

extent of 50% or more or controlled by individuals,

the shareholding would be deemed to be by a natural

person and the shareholding will be capped at 10%.

Under the new norms, RBI has retained the provision

of seeking its prior mandate if someone wants to

increase shareholding/voting rights to 5% or more.

The 'fit and proper' criterion for acquisition of

shareholding in a private bank beyond 5% will

continue to apply.

Acquisition of shareholding in a private sector bank

by foreign entities will continue to be subject to the

extant FDI policy, and the aggregate foreign

ownership through FDI, FII/NRIs cannot exceed 74%

of paid-up capital. At all times, at least 26% of the

paid-up share capital of the private sector banks will

have to be held by resident Indians.

Banks, including foreign ones having branch presence

here, can continue to acquire stake in a bank's equity

shares up to 10% of the investee bank's equity

capital. But in case of exceptional circumstances,

such as restructuring of problem/weak banks or in

the interest of consolidation in the banking sector,

RBI may permit them a higher level of shareholding.

In those banks where there are no major regulatory/

supervisory concerns, a person may be permitted to

acquire higher shareholding, if the same is supported

by the board. In such banks, hostile takeover will not

be allowed. Whereas, in banks where there are

regulatory/supervisory concerns and, if RBI feels that

there is a need for a change in the

ownership/management of the bank in the interests

of the depositors of the bank, RBI may permit a

person to acquire higher shareholding, even if the

existing board does not support the same. Such a

person may or may not be an existing shareholder.

In case of an existing private sector banks, where

specific orders have been passed by RBI relating to

dilution of shareholding by persons/entities/groups,

those orders will continue to apply for such

shareholding. Where specific approvals have been

granted by RBI for promoters/entities/groups to have

shareholding in excess of 10%, they could continue to

hold such shareholding in the banks up to the

specified period. Where any promoter/promoter

group has shareholding in excess of 15% and

timelines have already been stipulated by RBI for

bringing it down to 10%, such timelines shall continue

to apply for bringing the shareholding down to 15%.

Second Bi-monthly Monetary Policy Statement, 2016-17

In its Second Bi-monthly Monetary Policy Statement,

2016-17, RBI kept key policy rates unchanged,

expressing concerns over rising inflation. The repo

and reverse repo rate remained at 6.5% and 6%

respectively. Also, CRR remained unchanged at 4%.

The marginal standing facility (MSF) rate and the

Bank Rate was retained at 7.0%. It has also been

decided to provide liquidity as required but

progressively lower the average ex ante liquidity

deficit in the system from one per cent of NDTL to a

position closer to neutrality.

The bi-monthly monetary policy has been assessed considering the following factors -

World trade softened in an environment of weak demand. In the United States, growth was slow once again in Q1. This was due to contraction in industrial activity and exports.

In the Euro area, by contrast, Q1 GDP rose strongly on the back of robust consumer spending. In Japan, growth surprised on the upside in Q1, with the economy escaping a technical recession. But the industrial activity remained weak. GDP growth slowed sequentially in China in Q1 along with which retail sales, industrial production and fixed investment showed signs of weakness in recent months.

Global financial markets have recorded gains

throughout the Q2 of 2016. The crude prices

that set in around mid-March has been

supported in subsequent weeks by some

temporary reductions in global supply. Gold

prices remain elevated on safe haven

demand.

The policy maintained gross value added

(GVA) growth projection for 2016-17 at 7.6%

with risks evenly balanced.

Domestic conditions for growth are

improving gradually, mainly driven by

consumption demand, which is expected to

strengthen with a normal monsoon and the

implementation of the Seventh Pay

Commission award.

The introduction of the electronic national

agriculture market (e-NAM) trading portal,

should moderate unanticipated flares of food

inflation.

Exports declined for the seventeenth

consecutive month in April in US dollar terms

in spite of a modest increase in volume. The

fall in crude oil prices led to lower export

realizations from petroleum products (POL),

although the volume of shipments of

petroleum products is estimated to have

picked up modestly.

RBI pushed for more monetary transmission

from banks to support the revival of growth.

Timely capital infusions into constrained

public sector banks will also aid credit

flow. The Reserve Bank injected liquidity

through purchases under open market

operations (OMOs) of ₹ 700 billion during

April-May.

The Reserve Bank will monitor macroeconomic and

financial developments for any further scope for

policy action.

Corporate Governance for insurers in India

Insurance Regulatory and Development Authority of

India (IRDAI) has released comprehensive Corporate

governance guidelines including a cap on salary of

CEOs and policy on whistle blowers.

It aims to strengthen the boards of insurance

companies. The Board will look at a broad range of

areas such as overall direction of business of the

insurance company, including policies, strategies and

risk management across all functions. It would also

look into projections of capital requirements,

revenue streams, expenses and profitability. All

compliance to the Insurance Act would rest with the

Board. The Board is also required to set up

committees like audit committee, risk management

committee, policyholder protection committee,

investment committee, nomination and

remuneration committee and CSR committee.

The revised guidelines laid down the corporate

governance norms for appointments of managing

director/CEO/whole-time director and also some

other key positions. It is also applied to appointments

of statutory auditors of insurers. The rules laid down

in the guidelines will be applicable from 2016-17.

Insurers will have to set up a ‘whistle blower’ policy,

where-by there existed mechanisms for employees

to raise concerns internally about possible

irregularities, governance weaknesses, financial

reporting issues or other such matters. IRDAI’s

responsibility is to protect the interests of

policyholder’s demands.

These guidelines shall be applicable to all insurers

granted registration by the Authority except that:

Reinsurance companies may not be required

to have the Policyholders’ Protection

Committee; and

Branches of foreign reinsurers in India may

not be required to constitute the Board and

its mandatory committees as indicated

herein.

This sound corporate governance in the insurance

sector will prevent and ensure financial stability.

Insurance Regulatory and Development Authority of India (Registration of Indian Insurance Companies)

(Eighth Amendment) Regulations, 2016

The Authority has notified the IRDAI (Registration of

Indian Insurance Companies) (Seventh Amendment)

Regulations, 2016.

The manner of computation of equity capital which is

held by the foreign investors is provided under

Regulation 11 of the said Regulations. These

regulations cover both direct and indirect holding in

the Indian promoter and Indian investor. The Indian

promoter / Indian investor is not a bank or public

financial institution.

It has been indicated by the insurers, that it would be

difficult to monitor the indirect holding, more so as

companies are intending to go public.

The Authority has examined the representations and

it is proposed to issue the following amendment to

IRDAI (Registration of Indian Insurance Companies)

(Eighth Amendment) Regulations, 2016.

At the end of Regulation 11 (1), a proviso is proposed

to be inserted;

Provided further that the clause (ii) shall not be

applicable to any Indian promoter or Indian investor

of a listed Indian insurance company where such

Indian promoter and /or Indian investor are

regulated by Reserve Bank of India, Security

Exchange Board of India and /or National Housing

Bank.

.

Government cleared Railway Projects worth Rs. 10,736 Crore to improve infrastructure

The Union cabinet chaired by Prime Minister

Narendra Modi approved an investment of Rs. 10,736

crore in five railway projects involving decongestion

of the existing network, through doubling and tripling

of existing lines.

The doubling and tripling projects would benefit

multiple states including Gujarat, Maharashtra, Uttar

Pradesh, Odisha and Andhra Pradesh. The funds for

implementing the projects would be sourced through

a combination of Gross Budgetary Support (GBS)

from the finance ministry and Extra Budgetary

Resources (EBR).

The projects included doubling of the 467-kilometer

Pune-Miraj-Londa line in Maharashtra at a cost of Rs.

3,627 crore; doubling of 116-Km Surendranagar-

Rajkot project in Gujarat at a cost of Rs. 1,002 crore

and doubling of 180-Km Roza-Sitapur-Burhwal broad

gauge single line in Uttar Pradesh at an estimated

cost of Rs. 1,295 crore.

The cabinet also approved laying 264-Km

Vizianagaram and Titlagarh third line project at a cost

of Rs. 2,335 crore. This link opens an alternative route

to oversaturated Kharagpur - Jharsuguda section

Howrah-Mumbai Grand Trunk Route and Howrah-

Chennai section main line. Districts in Odisha and

Andhra Pradesh would be benefitted through this

project.

The Cabinet Committee on Economic Affairs (CCEA)

also gave its approval for taking up Bina-Katni third

line project involving an investment of Rs.2,478

crore. The 278-km long railway line is likely to ease

passenger flow and freight traffic in Sagar, Damoh

and Katni districts in Madhya Pradesh.

.

India and Iran sign 'historic' Chabahar port deal

India signed a historic deal to develop the strategic

port of Chabahar in Iran and agreed on a three-nation

pact to build a transport-and-trade corridor through

Afghanistan that could help halve the time and cost

of doing business with Central Asia and Europe. This

major effort would boost economic growth in the

region.

India would invest $500m (£344m) to develop the

port. From Chabahar port, the existing Iranian road

network can link up to Zaranj in Afghanistan. This

road can then connect to the 218-km Zaranj-Delaram

road -- constructed by India in 2009 at a cost of Rs 680

crore – and finally to Afghanistan’s Garland highway.

This will give India road access to four major cities;

Afghanistan-Herat, Kandahar, Kabul and Mazar-e-

Sharif but Kabul has already warned New Delhi to be

ready for possible attacks by Pakistan-backed

elements to delay the project. Future plan include an

International North-South Transport Corridor

through Iran to Russia and Europe.

India and Iran share centuries-old cultural and

linguistic ties, but their relations have suffered

several setbacks in recent years. Iran was unhappy

when India supported an International Atomic Energy

Agency resolution condemning Tehran's nuclear

programme in 2009. India also reduced its oil imports

from Iran in the following years.

Indian companies now see the country as a great

investment destination after international sanctions

were lifted against Iran last year.

National Capital Goods Policy

The Cabinet approved National Capital Goods Policy,

which aimed at increasing production to Rs. 7.5 lakh

crore by 2025. Apart from tripling the sector's

production from Rs. 2.3 lakh crore now, the policy

aims to increase direct and

indirect employment from 8.4 million to at least 30

million by 2025.

The Department of Heavy Industry had earlier stated

that capital goods production could boost the

domestic economy. Capital goods act as inputs for

the manufacture of other goods. Likewise, capital

goods production, which forms 8.8% of the Index of

Industrial Production, is considered a proxy for

industrial and investment demand. It contracted for

the fifth straight month till March, this year.

The government also aims to increase the share of

domestic production in India's capital goods demand

to 80% by 2025. Currently, at 60%, the large scale

influx of low-duty goods from foreign shores has

been blamed. The erstwhile Planning

Commission had targeted a growth rate of 16.8% per

annum for the sector during the XII five-year Plan

period.

The aim of the policy is to create game changing

strategies for the capital goods sector. Some of the

key issues addressed include availability of finance,

raw material, innovation and technology,

productivity, quality and environment friendly

manufacturing practices, promoting exports and

creating domestic demand.

.

Announcement of new Smart cities

Urban Development Minister Venkaiah Naidu

announced the list of 13 more cities selected in the

second batch to be developed as "smart

cities". Lucknow topped the list of winners of the Fast

Track competition conducted for 23 cities from as

many states and union territories. Lucknow that

missed the list of first 20 smart cities improved the

quality of its smart city plan by 19% to make it to the

select list.

Besides Lucknow, Warangal (Telangana),

Dharamshala (Himachal Pradesh), Chandigarh,

Raipur (Chhatisgarh), New Town Kolkata (West

Bengal), Bhagalpur (Bihar), Panaji (Goa), Port Blair

(Andaman and Nicobar Islands), Imphal (Manipur),

Ranchi (Jharkhand), Agartala (Tripura) and Faridabad

(Harayana) make it to the list of cities that will be

developed as smart cities.

With the selection of these 13 cities, 25 states and

union territories now covered under the Smart City

Mission. This 13 smart cities those are selected and

the 20 cities announced earlier will involve an

investment of Rs 80,789 crore. These 13 cities were

selected based on the marks scored by them in the

Fast Track competition and the bench marks set by

the top performers in the first round of Smart City

Challenge competition in which the first 20 cities

were selected from among 98 mission cities. To

resolve the election deadlock, government will allow

Jammu and Kashmir’s Jammu and Srinagar cities

along with and UP’s Raebareli and Meerut to

compete for Smart Cities.

Shri Venkaiah Naidu informed that the new urban

sector initiatives of PMAY (Urban), Atal Mission for

Rejuvenation and Urban Transformation (AMRUT),

Start City Mission, Swachh Bharat Mission and

Heritage Development and Augmentation Yojana

(HRIDAY) have a total investment potential of Rs. 18

lakh crore. Of this, an investment of Rs.1,48,093 crore

has already been approved. This include; Affordable

housing - Rs.43,922 crore, Atal Mission - Rs.20,882

crore, Smart City Mission - Rs.80,789 crore, Swachh

Bharat Mission - Rs.2,000 crore and HRIDAY - Rs.500

crore.

.

SEBI tightened registration norms for offshore derivative instruments

SEBI vide circular dated January 17, 2011 introduced

comprehensive reporting framework for Offshore

Derivative Instruments (ODI) issuers, whereby ODI

issuers are required to provide reports on monthly

basis in a prescribed format containing detailed

information pertaining to their ODI activities such as

name and jurisdiction of the end beneficial owner,

details of underlying trade in the Indian market, etc.

On 19th May, 2016, after the conclusion of its

quarterly board meeting held at Mumbai, the

regulator announced that issuers

of offshore derivative instruments, would need to

register their investors under the current know-your-

customer process in a bid to prevent suspected illegal

funds from flowing into the country.

The Securities and Exchange Board of India (SEBI)

also tightened rules for transferring ownership of

these offshore instruments to other investors while

mandating that issuers must report suspicious

transactions with regulators. Earlier ODI subscribers

were not required to take prior permission of the ODI

Issuer for transfer of ODIs to another investor

offshore. In order to tighten the ODI regime and have

more control over issuance and transfer of ODIs, it

has been decided that the ODI subscribers will have

to seek prior permission of the original ODI issuer for

further/onward issuance/transfer of ODIs. It was also

decided to capture the details of all the transfers of

the ODIs. The Board decided that in the monthly

reports on ODIs all the intermediate transfers during

the month would also be required to be reported.

ODI Issuers shall be required to put in place necessary

systems and carry out a periodical review and

evaluation of its controls, systems and procedures

with respect to the ODIs.

Sources: National Stock Exchange

Sources: Bombay Stock Exchange

Sensex reported 1,000 points rise on penultimate working

day of May on account of global cues and over 1,000

companies posting their March-quarter earnings.

Smaller double-digit growth for companies which have

reported their earnings till now was also a reason for the

huge rise in Sensex and was seen as an encouraging and

healthy sign.

The rupee broke its 3-day rising trend and retreated from

its one-week high to close at 67.16. Renewed strength in

dollar which climbed to a two-month high against other

major currencies predominantly pressurized the local

unit. However, expectations of strong capital inflows amid

surging local equities helped the domestic currency in

recouping some losses.

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Sources: APAS Business Research Team

66.56 66.6066.76

67.4467.63 67.14

67.21

65.50

66.00

66.50

67.00

67.50

68.00

1-M

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6

3-M

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6

5-M

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6

7-M

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6

9-M

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11

-May

-16

13

-May

-16

15

-May

-16

17

-May

-16

19

-May

-16

21

-May

-16

23

-May

-16

25

-May

-16

27

-May

-16

29

-May

-16

31

-May

-16

$/₹ (May-2016)

7.44

7.44

7.427.43

7.42

7.467.46

7.477.47

7.47

7.46

7.47

7.38

7.40

7.42

7.44

7.46

7.48

7.50

2-M

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6

4-M

ay-1

6

6-M

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6

8-M

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6

10

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12

-May

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14

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16

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18

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20

-May

-16

22

-May

-16

24

-May

-16

26

-May

-16

28

-May

-16

30

-May

-16

GIND10Y (May-2016)

7747

7736

7888 7861

7731

8070 81798160

2-M

ay-1

6

4-M

ay-1

6

6-M

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6

8-M

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10

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12

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14

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16

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18

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20

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-16

22

-May

-16

24

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26

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-16

28

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30

-May

-16

CNX Nifty (May-2016)

25230

25229

2559725774

25400 25305

26654 2672626668

2-M

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6

4-M

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6

6-M

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16

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18

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20

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22

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24

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26

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28

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30

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BSE Sensex (May-2016)

17.46

16.95 1716.1615.33

15.9816.05

0.00

5.00

10.00

15.00

20.00

25.00

Indian VIX (May-2016)

* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5 year yield

Quarter represents a three month period of a financial year

Countries GDP CPI Current Account

Balance Budget Balance

Interest Rates

Latest 2016* 2017* Latest 2016* % of GDP, 2016* % of GDP,

2016* (10YGov), Latest

Brazil -5.9Q4 -3.7 0.6 9.3 April 8.3 -1.6 -5.4 12.9

Russia -1.2 Q1 -1.3 1.2 7.2 April 8.2 3.7 -2.2 8.97

India 7.3 Q4 7.5 7.1 5.4 April 5.2 -1.0 -3.7 7.46

China 6.7 Q1 6.5 5.9 2.3 April 1.8 2.8 -3.0 2.76^

S Africa 0.5 Q4 0.8 1.4 6.2 April 6.4 -4.1 -3.3 9.43

USA 2.0 Q1 1.8 2.1 1.1 April 1.2 -2.7 -2.5 1.88

Canada 0.5 Q4 1.6 2.0 1.7 April 1.5 -2.8 -1.4 1.39

Mexico 2.6 Q1 2.4 2.7 2.5 April 3.1 -2.8 -3.0 6.17

Euro Area 1.5 Q1 1.5 1.6 -0.2 April 0.2 2.8 -1.9 0.16

Germany 1.6 Q1 1.5 1.6 -0.1 April 0.3 7.6 0.4 0.16

Britain 2.1 Q1 1.9 2.1 0.3 April 0.6 -4.7 -3.6 1.57

Australia 3.0 Q4 2.5 2.8 1.3 Q1 1.7 -4.1 -2.0 2.31

Indonesia 4.9 Q1 5.1 5.3 3.6 April 4.3 -2.4 -1.9 7.58

Malaysia 4.2 Q1 5.5 5.4 2.1 April 2.9 2.7 -3.7 3.86

Singapore 1.8 Q1 2.8 3.4 -0.5 April 1.3 20.4 0.9 2.17

S Korea 2.7 Q1 2.5 2.5 1.0 April 1.3 7.3 0.5 1.78

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