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Team Ashes - Ahvan
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FINANCE LEAGUE
IIM Indore
Team AshesIIM Lucknow
Team Ashes, IIM Lucknow
Gaurav Bhuwania Nikhil Loyal Rishabh Maheshwari
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Agenda
RBI requirements
Recommendations
Strategic Implications
Bank: A different ball game
Strategic Fit
Design and regulation implications
Changes: Organizational Structure
B-Plan
Financial Projections
Team AshesIIM Lucknow
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RBI Requirements
Team AshesIIM Lucknow
Requirement Justification
Promoter Shareholding not below 40%
for 1st 5 yearsPromoters retain significant interest
during crucial start-up period
NOHC: At least 50% of directors
independent of PromotersStronger corporate governance
Promoter: Diversified ownership,
sound credentials & integrity
Stability to proposed banks.
Simpler & Effective Supervision
CAR of 12% for 1st 3 years Provides cushion to deposit holders
during start up phase
Separate unleveraged non-operating
holding company (NOHC)Effective control and Monitor by RBI
Prevent Double leveraging
Compulsory reduction in promoter
shareholding in long term
Ensures diversification of shareholding,
Bank not influenced by single entity
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RBI Requirements
Team AshesIIM Lucknow
Ownership and Listing Conditions
Listing the Bank within next two yearsBring down the promoter shareholding to 40% within two years
Restriction on non-promoter shareholding
5% for non-resident and 10% for resident
Restriction on establishing any financial services for the first three years
Expansion Plans5% for non-resident and 10% for resident
25% branches in rural areas within 5 yearsLead to Higher NPAs and Transaction Costs
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Apply for Permission to Set Up a Private BankConvert to a full fledged bank
Initial focus on areas where present market share of L&T finance is high
Can attract higher deposits
Innovative business models in rural areasBusiness correspondents
Mobile ATMs/Branches
Innovative products in rural areas
Seed financing
Bank financed commodities forward contracts
Working Capital for small to medium Enterprises
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Opportunities and Roadblocks
Team AshesIIM Lucknow
Opportunities Roadblocks
Access to CASA accounts
Cost of funds down to 6-7%
Current Account: 0%
Savings Account: 4%
One Stop for all Banking Services
Greater Visibility
Cross-sell other financial & advisory
products
Sticky Customer Relationships
Deposits guaranteed by RBI
Secured deposits
Statutory Compliances CRR, SLR etc.
40% Lending in Priority Sector
Strict Reporting Requirements
Rural Expansion Requirements 25%
Higher Transaction Costs
High NPAs
Lower Profitability
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L&T Finances Competitive Adv.
Team AshesIIM Lucknow
RBIR
equirement Competitive Advantage
25% rural branches
Meet with the L&T Financial Holdings
objective of focus on Rural and
Infrastructure products
Strong Presence in Rural Areas
CAR requirements Already as NBFC, equity much higher
than required
Peoples trust and IPO within 2 years Strong Brand Equity
Diverse Customer Base
Reaching Unbanked Areas Established Collection System
Organizational Expansion Portable Knowledge Base
Management with Proven Track Record
Decreased Non-Performing Assets Strong credit risk department and
evaluation framework in place
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Business Strategy
Team AshesIIM Lucknow
Strategy Justification L&T Advantage
Innovative Models in
Rural Areas
High credit and NPA risk in
rural areas call for Prudent
Lending & Credit assessment
Established Credit Evaluation
Frameworks
L&TFH MFIs as
Banking
Correspondents
Easy deeper reach through
already established MFIs
Leverage the established trust
Cross Selling through the
L&TFHs MFIs
Alliances with Retail
Networks
Alliances with dealers
(vehicle), Agricultural retail
network
Existing relationships
Tie-up with other
Banks for ATM
networks
Minimize the Initial Capital
expenditure
Start with branches ingeographies where
higher Brand Equity
Attract more & easy deposits High Brand Value
Focus on Online &
Mobile Banking in
urban Areas
Lower the operating Costs
Increase Efficiencies
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Strategic Assessment
Team AshesIIM Lucknow
Political
Strict Regulatory Regimes
Changes in norms & frameworks
Social Scenario
Consumers: More awareness about
financial services & products
One stop solution from the FIs
EconomicGreater share of the market will beserviced by MFIs and NBFCs
Source of Funds: Collaborativealliances with international banks
Technological
Mobile Phones; Source of primarydelivery mechanism in rural areasowing to their high penetration & lowcosts
PEST
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Design and Regulations
Team AshesIIM Lucknow
IncreasedR
egulations byRB
I
Statutory Ratios
CRR: 6%, SLR: 24%
Less Deposits available for lending
Dig in Net Interest Income
Design Issues
Optimize movement line of user within Bank
space
Enhanced Sign System: Convey Information
in most effective manner
40% Priority Sector Lending Higher Transaction Costs
Higher NPAs
Agriculture, Education etc.
Reporting CompliancesFortnight Reporting
Auditing Expenses
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Organizational Architecture
Team AshesIIM Lucknow
Trained
Personnel
Non-Compliance toRBI: Penalties,Loss of Market
Esteem
Employees:Familiar with
IFRS Guidelines
Improved
Technology
Mobile &Internet based
services
Collaborationwith top ITcompanies to
provideTechnology
Employee Option
Stock Scheme
RetainEmployees
Enable them toparticipate inBanks future
growth &FinancialSuccess
Hire Best talentfor senior
management &
Key positions
StrategicRelationships
with EminentCompanies
Core BankingSolutions
Debit and CreditCards
RBI Compliance Guideline
Moving certain lines of existing businesses to bank
Retail and Corporate loans & advances
Shifted from existing business to Bank in a phased manner
Leverage the lower cost of funds
Remove the possibility of arbitrage
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Successful Business Model Successful Financial Inclusion in Rural areas: Emphasis on-
Availability
Affordability
Accessibility
Awareness
Acceptability
Existing Business Model through Business Correspondents
Innovative Products in rural areas
Innovative Business Model
Mobile ATM/Branch: Villagers informed in a priori location &
timing of mobile ATM van. Advantages: Less Man working hours
One van can cover a cluster of villages
Deposits per mobile Branch increases, hence lower
transaction costs
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Point of regulation, CoreBanking System
Balance SheetBank
Operation, Coordination
TrainingBusinessCorrespondent
Transaction Security,Processing
Authentication, DataStorage
Technology
Vendor
Account opening (KYC),Sales & Marketing,Customer care
Liquidity, Referral
CustomerService Point
Bank HDBC SBI ICICI
Product
Loans
through
SHG Bank
Linkage
No Frill
Saving
Account
Loan saving
RD, FS
BCs
enrolled203 33 48
Operationalstates
13 Pan India 13
Clients
reached650,000 2,700,000 500,000
BC Company Technology Vendor
Eko Aspire
Foundation
Eko Financial Services
FinTech
Foundation
FINO
Zero Mass A little World
Limited Transactions in rural areas
Full fledged Bank not a viable option Huge operational cost
Alternative: Business Correspondent
Outsource selected Banking Services
Business Models
Industry Examples
Team AshesIIM Lucknow
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Financial Projections - Bank
Team AshesIIM Lucknow
Assumptions Balance Sheet
Starting with Minimum Capital as per RBI Guidelines
Considering already existing wide reach in 23 states, 0.01% of deposits can be attracted
IPO in 2014 as per RBI guidelines
Advances:Investments:Other Assets = 6:3:1
Deposit Growth rate over 5 years CAGR = 131%
Capital Adequacy Ratio has to be maintained above 12% and on an average 16.5%
IPO will be priced at Rs. 70
20% growth in Other Liabilities
Assumptions P&L
Interest Income from advances at 10% of average of year balance
NPAs assumed at 2% of advances
Interest Income from investments at 7.5% of average of year balance
Non-interest Income assumed to be 12% of interest inc (Industry average around 12-14%)
Interest Expense in case of deposits at 6% of average of year balance
Interest Expense in case of borrowings at 8.5% of average of year balance
Non-Interest Expense assumed to be 1.03% of Total Assets
Tax rate 30%
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Innovative Products:
Status Quo: Kisan Credit
Card
Credit only for agricultural processes
Inconvenience in reaching out to branch
for every transaction
Limitation of cash delivery points
Only 10.09cr Kisan credit card holders
but more than 25 cr mobile owners in
rural India
Limited Credit line of 3 years at 7% p.a
L&Ts Credit Plan
Credit for agricultural purposes
& short term credit for personal
Use
Wider reach & financial inclusion
Cheaper & faster transactions
Data Mining for future
recommendations
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Financial Projections - Bank
Team AshesIIM Lucknow
Balance Sheet (in Rs. Crores)
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017Assets
Advances 2020.2 9333.1 9553.3 10271.8 11144.5
Investments 1010.1 4666.5 4776.6 5135.9 5572.3
Other Assets 336.7 1555.5 1592.2 1712.0 1857.4
Total Assets 3367.0 15555.2 15922.1 17119.7 18574.2
Liabilities
Shareholder's Funds 500.0 2309.9 2364.4 2542.3 2758.3
Deposits 553.0 1935.5 5806.5 6393.0 7167.5Borrowings 2102.5 11055.9 7446.6 7818.9 8209.9
Other Liabilities 211.5 253.8 304.6 365.5 438.6
Total Liabilities 3367.0 15555.2 15922.1 17119.7 18574.2
0.0
5000.0
10000.0
15000.0
20000.0
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Liabilities
0.0
10000.0
20000.0
FY
2013
FY
2014
FY
2015
FY
2016
FY
2017
Borrowings/Deposits
Borrowings
Deposits
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Financial Projections - Bank
Team AshesIIM Lucknow
P&L (in Rs. Crores)
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Interest Income from Advances 99.0 556.3 925.4 971.4 1049.4
Interest Income from Investments 37.9 212.9 354.1 371.7 401.6
Non-Interest Income 16.4 92.3 153.5 161.2 174.1
Total Income 153.3 861.5 1433.1 1504.3 1625.1
Interest Expense for Deposits 16.6 74.7 232.3 366.0 406.8
Interest Expense for Borrowings 86.7 542.8 763.2 629.7 661.2Non-Interest Expense 34.7 160.2 164.0 176.3 191.3
Total Expense 138.0 777.7 1159.5 1172.0 1259.3
PBT 15.3 83.8 273.6 332.3 365.8
Tax 5.4 29.3 95.8 116.3 128.0
PAT 9.9 54.5 177.8 216.0 237.7