Indian business environment ch 3

INDIAN BUSINESS INDIAN BUSINESS ENVIRONMENTENVIRONMENT

UNIT IIIUNIT IIIPankaj KumarPankaj Kumar

RBSRBS

Trend Of Indian Banking SectorTrend Of Indian Banking Sector

Based on the recommendations of Based on the recommendations of the Narasimham Committee (II) on the Narasimham Committee (II) on banking sector reforms, the Reserve banking sector reforms, the Reserve Bank announced a number of Bank announced a number of decisions as part of its Mid-term decisions as part of its Mid-term Review of the monetary and credit Review of the monetary and credit policy released on October 30,1998.policy released on October 30,1998.


Pension fund industry in India grew Pension fund industry in India grew at a CAGR of 122.44% from 1999-00 at a CAGR of 122.44% from 1999-00 to 2006-07.to 2006-07.

Rural and semi-urban India is Rural and semi-urban India is expected to account for 58.33% of expected to account for 58.33% of the insurance sector by 2010.the insurance sector by 2010.


In terms of ownership, debit cards are In terms of ownership, debit cards are more in number than credit cards but more in number than credit cards but in terms of transactions, credit cards in terms of transactions, credit cards are used more than debit cards.are used more than debit cards.

The ATM outlets in India increased at The ATM outlets in India increased at a a CAGRCAGR of 28.09% from March 2006 to of 28.09% from March 2006 to March 2007.March 2007.

Compound Annual Growth Rate (CAGR)


Rural and semi-urban centers Rural and semi-urban centers account for 66% of total bank account for 66% of total bank branches.branches.

Indian Mutual Fund industry Indian Mutual Fund industry witnessed a growth of 49.88% from witnessed a growth of 49.88% from May 2006 to May 2007, and higher May 2006 to May 2007, and higher growth is recorded in closed ended growth is recorded in closed ended schemes at 215.61%.schemes at 215.61%.


Increasing number of millionaires in Increasing number of millionaires in India is increasing the scope of India is increasing the scope of Wealth Management Services.Wealth Management Services.

Bankable households in India are Bankable households in India are anticipated to grow at a CAGR of anticipated to grow at a CAGR of 28.10% during 2007-2011.28.10% during 2007-2011.

Investment by banking sector in Investment by banking sector in Information Technology is expected Information Technology is expected to increase at 18% in 2007 from last to increase at 18% in 2007 from last year.year.

IDBIIDBI

IFCIIFCI

IFCIIFCI GENESIS OF IFCIGENESIS OF IFCI At the time of independence in 1947, At the time of independence in 1947,

India’s capital market was relatively India’s capital market was relatively under-developed. Although there was under-developed. Although there was significant demand for new capital, significant demand for new capital, there was a dearth of providers. there was a dearth of providers. Merchant bankers and underwriting Merchant bankers and underwriting firms were almost non-existent. And firms were almost non-existent. And commercial banks were not equipped commercial banks were not equipped to provide long-term industrial to provide long-term industrial finance in any significant mannerfinance in any significant manner

IFCIIFCI

It is against this backdrop that the It is against this backdrop that the government established The government established The Industrial Finance Corporation of Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the India (IFCI) on July 1, 1948, as the first Development Financial first Development Financial Institution in the country to cater to Institution in the country to cater to the long-term finance needs of the the long-term finance needs of the industrial sector. industrial sector.

IFCIIFCI The early 1990s when it was recognized The early 1990s when it was recognized

that there was need for greater flexibility to that there was need for greater flexibility to respond to the changing financial system.respond to the changing financial system.

It was also felt that IFCI should directly It was also felt that IFCI should directly

access the capital markets for its funds access the capital markets for its funds needs. needs.

It is with this objective that the constitution It is with this objective that the constitution of IFCI was changed in 1993 from a of IFCI was changed in 1993 from a statutory corporation to a company under statutory corporation to a company under the Indian Companies Act, 1956. the Indian Companies Act, 1956.

IFCIIFCI

IFCI remained solely responsible for IFCI remained solely responsible for implementation of the government’s implementation of the government’s industrial policy initiatives. industrial policy initiatives.

Its contribution to the modernization Its contribution to the modernization of Indian industry, export promotion, of Indian industry, export promotion, import substitution, entrepreneurship import substitution, entrepreneurship development, pollution control, development, pollution control, energy conservation and generation energy conservation and generation of both direct and indirect of both direct and indirect employment is noteworthy. employment is noteworthy.

IFCIIFCI

Some sectors that have directly benefited Some sectors that have directly benefited from IFCI’s disbursals include: from IFCI’s disbursals include:

Consumer goods industry (textiles, paper, Consumer goods industry (textiles, paper, sugar); sugar);

Service industries (hotels, hospitals); Service industries (hotels, hospitals); Basic industries (iron & steel, fertilizers, basic Basic industries (iron & steel, fertilizers, basic

chemicals, cement); chemicals, cement); Capital & intermediate goods industries Capital & intermediate goods industries

(electronics, synthetic fibers, synthetic (electronics, synthetic fibers, synthetic plastics, miscellaneous chemicals); and plastics, miscellaneous chemicals); and

Infrastructure (power generation, telecom Infrastructure (power generation, telecom services). services).

BSEBSE

Bombay Stock Exchange Limited is the Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was heritage. Popularly known as "BSE", it was established as "The Native Share & Stock established as "The Native Share & Stock Brokers Association" in 1875. Brokers Association" in 1875.

It is the first stock exchange in the country It is the first stock exchange in the country to obtain permanent recognition in 1956 to obtain permanent recognition in 1956 from the Government of India under the from the Government of India under the Securities Contracts (Regulation) Act, 1956 Securities Contracts (Regulation) Act, 1956

NSENSE

The National Stock Exchange (NSE), located The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It was in Bombay, is India's first debt market. It was set up in 1993 to encourage stock exchange set up in 1993 to encourage stock exchange reform through system modernization and reform through system modernization and competition.competition.

SEBI - IntroductionSEBI - Introduction

In 1988 the Securities and Exchange In 1988 the Securities and Exchange Board of India (SEBI) was established Board of India (SEBI) was established by the Government of India through an by the Government of India through an executive resolution, and was executive resolution, and was subsequently upgraded as a fully subsequently upgraded as a fully autonomous body (a statutory Board) autonomous body (a statutory Board) in the year 1992 with the passing of the in the year 1992 with the passing of the Securities and Exchange Board of India Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. Act (SEBI Act) on 30th January 1992.

SEBISEBI

The basic objectives of the Board The basic objectives of the Board were identified as:were identified as:

1.1. To protect the interests of investors To protect the interests of investors in securities; in securities;

2.2. To promote the development of To promote the development of Securities Market; Securities Market;

3.3. To regulate the securities market and To regulate the securities market and 4.4. For matters connected therewith or For matters connected therewith or

incidental theretoincidental thereto

Role of SEBIRole of SEBI

SEBI appointed the SEBI appointed the L. C. Gupta CommitteeL. C. Gupta Committee in 1998 to in 1998 to recommend the regulatory framework for derivatives recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Control of Trading and Settlement of Derivatives Contracts. Contracts.

Role of SEBIRole of SEBI Role of SEBIRole of SEBI1.1. Cash and Futures Market RelationshipCash and Futures Market Relationship

The Committee felt that the operations of the cash market, on which the The Committee felt that the operations of the cash market, on which the derivatives market will be based, needed improvement in many respects. derivatives market will be based, needed improvement in many respects. It therefore suggested improvements to the Cash Market.It therefore suggested improvements to the Cash Market.

2.2. Regulatory frameworkRegulatory frameworkRegulatory control should envisage modern systems for fool-proof and Regulatory control should envisage modern systems for fool-proof and fail-proof regulation. Regulatory framework for derivatives trading fail-proof regulation. Regulatory framework for derivatives trading envisaged two-level regulation i.e. exchange-level and SEBI-level, with envisaged two-level regulation i.e. exchange-level and SEBI-level, with considerable emphasis on self-regulatory competence of derivative considerable emphasis on self-regulatory competence of derivative exchanges under the overall supervision and guidance of SEBI. exchanges under the overall supervision and guidance of SEBI.


3.3. Regulatory Role of SEBIRegulatory Role of SEBISEBI will approve rules, bye-laws and regulations. New SEBI will approve rules, bye-laws and regulations. New derivative contracts to be approved by SEBI. Derivative derivative contracts to be approved by SEBI. Derivative exchanges to provide full details of proposed contract, like - exchanges to provide full details of proposed contract, like - economic purposes of the contract;likely contribution to the economic purposes of the contract;likely contribution to the market's development; safeguards incorporated for investor market's development; safeguards incorporated for investor protection and fair trading.protection and fair trading.

4. Specifications Regarding Trading4. Specifications Regarding TradingStock Exchanges to stipulate in advance trading days and Stock Exchanges to stipulate in advance trading days and hours. Each contract to have pre-determined expiration date hours. Each contract to have pre-determined expiration date

and time.and time.


5.5. Membership Eligibility CriteriaMembership Eligibility CriteriaThe trading and clearing member will have stringent The trading and clearing member will have stringent eligibility conditions. The Committee recommended eligibility conditions. The Committee recommended for separate clearing and non-clearing members. for separate clearing and non-clearing members.

6. Mark to Market and Settlement6. Mark to Market and SettlementThere should the system of daily settlement of futures There should the system of daily settlement of futures contracts. Similarly the closing price of futures to be contracts. Similarly the closing price of futures to be settled on daily basis. The final settlement price to be settled on daily basis. The final settlement price to be as per the closing price of underlying security.as per the closing price of underlying security.


7. Risk disclosure document with each client 7. Risk disclosure document with each client mandatorymandatory

8. Sales personnel to pass certification exam 8. Sales personnel to pass certification exam

9. Specific authorization from client's board of 9. Specific authorization from client's board of directors/trustees directors/trustees


10. Prices on the system shall be exclusive of 10. Prices on the system shall be exclusive of brokerage brokerage

11. Maximum brokerage rates shall be 11. Maximum brokerage rates shall be prescribed by the exchange prescribed by the exchange

12. Brokerage to be separately indicated in the 12. Brokerage to be separately indicated in the contract notecontract note

Banking Sector Reforms In IndiaBanking Sector Reforms In India

The last decade witnessed the The last decade witnessed the maturity of India's financial markets. maturity of India's financial markets. Since 1991, every governments of Since 1991, every governments of India took major steps in reforming India took major steps in reforming the financial sector of the country. the financial sector of the country.


The important achievements in the following fields is discussed under The important achievements in the following fields is discussed under separate heads: separate heads:

1.1. Financial markets Financial markets 2.2. Regulators Regulators 3.3. The banking system The banking system 4.4. Non-banking finance companies Non-banking finance companies 5.5. The capital market The capital market 6.6. Mutual funds Mutual funds 7.7. Overall approach to reforms Overall approach to reforms 8.8. Deregulation of banking system Deregulation of banking system 9.9. Capital market developments Capital market developments 10.10. Consolidation imperative Consolidation imperative


1.1. Financial MarketsFinancial Markets

In the last decade, Private Sector Institutions played an In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and important role. They grew rapidly in commercial banking and asset management business. asset management business.

2. Regulators2. Regulators

The Finance Ministry continuously formulated major policies The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independant. Securities and of India (RBI) has become more independant. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important and Development Authority (IRDA) became important institutionsinstitutions


3. The banking system3. The banking system

Almost 80% of the business are still controlled by Public Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges.already listed on the stock exchanges.

4. The capital market 4. The capital market

The number of shareholders in India is estimated at 25 million. The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last country's stock market trading infrastructure during the last few years few years


5.5. Mutual funds Mutual funds

The mutual funds industry is now regulated under the SEBI (Mutual The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. many more players, both Indian and foreign players.

6.6. Overall approach to reformsOverall approach to reforms

The last ten years have seen major improvements in the working of The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international entry of foreign players has assisted in the introduction of international practices and systems.practices and systems.


7. Capital market developments7. Capital market developments

The Capital Issues (Control) Act, 1947, The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital repealed, office of the Controller of Capital Issues were abolished and the initial share Issues were abolished and the initial share pricing were decontrolled. SEBI, the capital pricing were decontrolled. SEBI, the capital market regulator was established in 1992. market regulator was established in 1992.

Foreign institutional investors (FIIs) were Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets allowed to invest in Indian capital markets after registration with the SEBI. Indian after registration with the SEBI. Indian companies were permitted to access companies were permitted to access international capital markets through euro international capital markets through euro issues. issues.


8. 8. Buy back of shares allowedBuy back of shares allowedThe SEBI started insisting on greater corporate disclosures. Steps were taken to The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee. improve corporate governance based on the report of a committee.

SEBI issued detailed employee stock option scheme and employee stock purchase SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies. scheme for listed companies.

Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialised shares in any denomination. Companies given the freedom to issue dematerialised shares in any denomination.

Derivatives trading starts with index options and futures. A system of rolling Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital settlements introduced. SEBI empowered to register and regulate venture capital funds. funds.

The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. agencies operating in India.

Challenges in Banking IndustryChallenges in Banking Industry

Financial System is the most important Financial System is the most important institutional and functional vehicle for institutional and functional vehicle for economic transformation of any country. economic transformation of any country. Banking sector is reckoned as a hub and Banking sector is reckoned as a hub and barometer of the financial system. As a pillar barometer of the financial system. As a pillar of the economy, this sector plays a of the economy, this sector plays a predominant role in the economic predominant role in the economic development of the country.development of the country.


1.1. The changing paradigm of Banking The changing paradigm of Banking 2.2. Financial intermediation Financial intermediation Till recently the role of banks in the economy was Till recently the role of banks in the economy was

perceived to be 'catalysts' of mobilizing resource perceived to be 'catalysts' of mobilizing resource requirement for growth. This view has undergone a requirement for growth. This view has undergone a change and banks are no longer viewed as passive change and banks are no longer viewed as passive mobilizer of funds, Efficiency in the financial mobilizer of funds, Efficiency in the financial intermediation is the ability of the financial intermediation is the ability of the financial institution to intermediate between savers and institution to intermediate between savers and investorsinvestors


3.3. Market discipline Market discipline Transparency and disclosure norms are assuming Transparency and disclosure norms are assuming greater importance in the emerging environment. greater importance in the emerging environment. Banks are now required to be more responsive and Banks are now required to be more responsive and accountable to the investors. accountable to the investors.

4.4. Adopting International Standards Adopting International Standards

The fallout of Asian crisis and the impetus given to The fallout of Asian crisis and the impetus given to the strengthening of domestic financial systems has the strengthening of domestic financial systems has resulted in a more by the regulators to set up resulted in a more by the regulators to set up universally acceptable standards and codes for universally acceptable standards and codes for benchmarking financial systemsbenchmarking financial systems


5. Technology Banking 5. Technology Banking

Innovation in technology and world-wide revolution Innovation in technology and world-wide revolution in information and communication technology are in information and communication technology are perceived to be the catalyst of productivity growth. perceived to be the catalyst of productivity growth.

6. Rural banking 6. Rural banking

Having committed 75% of their branches network to Having committed 75% of their branches network to serving rural and semi-urban population, public serving rural and semi-urban population, public sector banks have to adopt a financial emerging sector banks have to adopt a financial emerging approach to rural bankingapproach to rural banking


Human resource development in banks Human resource development in banks

The core function of HRD in the banking industry is The core function of HRD in the banking industry is to facilitate performance improvement, measured not to facilitate performance improvement, measured not only in terms of certain financial indicators of only in terms of certain financial indicators of operational efficiency but also in terms of quality of operational efficiency but also in terms of quality of financial services provided. The skill level, attitude financial services provided. The skill level, attitude and knowledge of the personnel play an important and knowledge of the personnel play an important role in determining the competitiveness of a bank. role in determining the competitiveness of a bank.

Non-Performing Assets in Indian Non-Performing Assets in Indian BanksBanks

In liberalizing economy banking and financial In liberalizing economy banking and financial sector get high priority. Indian banking sector sector get high priority. Indian banking sector of having a serious problem due non of having a serious problem due non performing. The financial reforms have helped performing. The financial reforms have helped largely to clean NPA was around Rs. 52,000 largely to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity crores in the year 2004. The earning capacity and profitability of the bank are highly and profitability of the bank are highly affected due to this affected due to this

Non-Performing Assets in Indian Non-Performing Assets in Indian BanksBanks

Reasons: Reasons: Various studies have been conducted to analysis the reasons for Various studies have been conducted to analysis the reasons for

NPA. What ever may be complete elimination of NPA is NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two:impossible. The reasons may be widely classified in two:

(1) Over hang component (1) Over hang component (2) Incremental component(2) Incremental component

Over hang component is due to the environment reasons, Over hang component is due to the environment reasons, business cycle etc.business cycle etc.

Incremental component may be due to internal bank Incremental component may be due to internal bank management, credit policy, terms of credit etc.management, credit policy, terms of credit etc.

Asset Classification :Asset Classification : The RBI has issued guidelines to banks for classification of The RBI has issued guidelines to banks for classification of

assets into four categories.assets into four categories.

11. Standard assets:. Standard assets:These are loans which do not have any problem are less risk.These are loans which do not have any problem are less risk.

2. Substandard assets:2. Substandard assets:These are assets which come under the category of NPA for a period of These are assets which come under the category of NPA for a period of less then 12 months.less then 12 months.

3. Doubtful assets:3. Doubtful assets:These are NPA exceeding 12 monthsThese are NPA exceeding 12 months

4. Loss assets4. Loss assets::These NPA which are identified as unreliable by internal inspector of bank These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.or auditors or by RBI.

Indian business environment ch 3

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