Teams will study the existing Financial Sector Regulations of various Regulators in India i.e SEBI, RBI, IRDA, PFRDA, FMC etc, (all or any of them) as well as compare them with regulations by global regulators viz SEC, Regulatory Authorities in UK, Singapore etc.

1. 18 January, 2014
Financial Sector Reforms – The
Road Ahead
BFSI & CM Study Group : Think Tank Competition

2. Dynamos Team - Financial Sector Reforms




CA Kinner Mehta – Group Leader (Debt & Capital Markets)
CA Resham Wadhwa - Participant (Banking Sector)
CA Laxmikant Gupta - Participant (Alternative Assets)
CA Rachana Kothari Doshi - Participant (Cash and Currency)

3. Banking Sector acts as a funnel for financial sector
 Banks act as custodians of Money
 Banks are important part of systemic structure of economy of the country
 Banks leads to supply of money by multiplier effect
 Failure in the banking system especially asset liability management could
lead to large scale implications impacting financial system, Hence, our
first focus area is banking

4. Critical areas for Reforms - Regulations
 This is on fact that while other businesses operate with their own funds,
banks are highly leveraged institutions that operate with public money
and hence, require to be closely regulated and supervised.
 Banking operations cannot be carried out without a license. This restricts
the free play of competitive forces and hence, makes it all the more
imperative to have a sound regulatory framework, particularly for
protection of customers.
 The primary justification for financial regulation by authorities is to
prevent systemic risk, avoid financial crises & protect depositors’ interest
(learnings from international scams)

5. Banking Sector Reforms – What Next?
 The objective of the reforms is to improve the banking sector’s ability to
absorb shocks arising from financial and economic stress, whatever the source,
thus reducing the risk of spillover from the financial sector to the real economy
1. Bringing down the cost of banking services
(Reducing NPA), strengthening the credit delivery mechanism, (banking
correspondent, new licenses, priority sector) and enhancing the financial
outreach to hitherto critical areas of economy (infrastructure and real estate )
Agriculture ( 9.3% )
Agriculture ( 11.8% )
Industry ( 28.3%)
Industry ( 43.4%)
Private Banks
Transport Operators
(4.6%)
Personal Loans &
Professional Services (
19.8% )
Trade ( 10.3% )
Transport Operators
(2.3%)
Nationalised
Banks
Personal Loans &
Professional Services
( 11.5% )
Trade ( 5.20% )
Others ( 20.9%)
Others ( 27.6%)

6. JOURNEY OF NPAs OF PUBLIC SECTOR BANKS - 2004 TO 2013
YEAR
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
( figures are in billion )
PRIORITY SECTOR
TOTAL NPA OF
Nationalised Banks
SBI Group
PRIORITY
AMOUNT % of Share AMOUNT % of Share
SECTOR
167.05
48%
71.36
47%
238.41
163.81
51%
70.17
47%
233.98
151.24
54%
72.5
55%
223.74
157.79
61%
71.75
57%
229.54
163.85
67%
89.02
58%
252.87
157.21
60%
84.47
47%
241.68
199.06
56%
109.4
50%
308.46
257.21
60%
155.67
55%
412.88
322.9
48%
239.11
52%
562.01
404.86
42%
264.42
44%
669.28
NON - PRIORITY SECTOR
YEAR
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nationalised Banks
AMOUNT % of Share
178.95
51%
153.46
48%
122.53
43%
96.68
38%
77.93
32%
101.4
39%
152.77
43%
169.47
39%
343.13
51%
553.59
58%
TOTAL NPA OF
SBI Group
NON PRIORITY
AMOUNT % of Share
SECTOR
78.03
51%
256.98
76.24
51%
229.7
58.19
44%
180.72
51.93
41%
148.61
62.22
41%
140.15
92.5
52%
193.9
106.46
49%
259.23
125.67
45%
295.14
217.59
48%
560.72
334.94
56%
888.53

7. Banking Sector Reforms – What Next?
2. Addressing the need to reach unbanked and underbanking areas through
Financial Inclusion (FI) ; it is believed that about 40% Indians still lack
access to even the simplest kind of formal financial services
 Financial Inclusion can be attained through product innovation, use of technology
for lowering cost of transaction and expanding coverage through banking
correspondents
 Mobile banking, effective leverage of Information and Communications
Technology (ICT) solutions and use of smart cards, biometric handheld devices,
mobile, ATMs, etc. can aid cost reduction.
3. Meeting the challenges in fixing the fault lines in the system,
 Consolidation
 Reducing government influence in operations

8. DEPOSITS & CREDITS OF BANKS FOR LAST TWO YEARS
(figures in Billion )
Deposits
Advances
45000
40000
40000
35000
35000
30000
30000
25000
25000
Year 2012
20000
Year 2012
20000
Year 2013
Year 2013
15000
15000
10000
10000
5000
5000
0
Rural
0
Rural
semi
urban
metro
semi
urban
metro

9. Recommendations
We recommend stringent framework of rules and procedures for
regulating banking sector
Strengthening the
following areas:
regulatory
and
supervisory
framework
(i) Capital requirements through BASEL Framework
(ii) Liquidity Management
(iii) Structural Changes like setting up Financial Holding Companies
(iv) Revamping Financial Legislation
in

10. CHALLENGES – The Road Ahead
Revamping financial legislation
 Currently in the financial sector, we have about 60 Acts and multiple rules
and regulations. The incremental changes made to these Acts over a
period have made the laws ambiguous and complex. Government has
taken an initiative by setting up Reforms Commission which seeks to
rewrite and streamline the financial sector laws, rules and regulations to
bring them in harmony with India’s fast growing financial sector.

11. Debt Markets – Need for Development
Challenges in meeting the specific needs of the economy – Infrastructure
Financing
 Banks, traditionally, have been the major source of infrastructure
financing and their exposure to infrastructure is already high at 17 per
cent. Infrastructure projects involving long term funding plans have,
however, severe implications for the asset liability management at banks
 The targeted annual spend on infrastructure during 2007-12 is about
USD 500 bn which is doubled in the next five year plan (USD 1 trillion
during 2013-18). Shortfall in infrastructure financing, would cost nearly
4% of GDP every year !!

12. Reform in Debt Markets
 Well developed corporate bond market can help protect domestic
banking system
markets in Asia)
(Experiences of Asian Crises and Development of bond
 Wide developed debt capital raising mechanism can create alternative
pools for resource funding and reduce the pressure on government
deficits (municipal bonds and state government bodies through structured
pool mechanism to support urban infrastructure projects)
 Financial stability can be attained by developing market infrastructure to
promote healthy financial system (eg pension funds and insurance
companies to invest in market oriented debt securities across investment
grade)
 Promote well developed financial system so that investors have wider
choice and scope for better returns with risk management strategies
(Credit Default Swaps, Interest Rate Futures, Structured Pools etc)

13. Recommendations
 Provide tax breaks for investing in debt instruments like corporate bonds
and infrastructure bonds at two stages – at the time of investment and at
the stage of returns (concessional regime)
 Develop infrastructure by electronic trading system and robust market
making system to enhance liquidity in the markets
 Increase depth of markets by allowing Market Makers (Primary Dealers) in
debt market access to cheaper funding from Banks at repo rates or money
market benchmark rates
 Adequate capitalization of Debenture Trustees and additional powers to
protect debenture holders interest
 Remove tax anomalies for Pass Through Certificates
 Allow development of derivatives trading in debt market for FIIs by
simplifying rules and making enabling provisions
 Widen penetration by holding investor camps and education awareness
through a rigourous online and off line media campaign funded through
investor education fund managed by SEBI and Company Law Board

14. Reforms in Capital Market Segment - Addressing the Aam Aadmi
 Empowering investors through research – undertaken by CA professionals
 Proper utilization of Investor Protection Fund as follows:
 SEBI : BFSICM Group organize effective training programs across the
country
 Exchanges : Online Training Programs with voice over in local
languages
 Mutual Funds : Booklets and investor awareness programs

15. Other Financial Services Segment : Reforms
 Venture Funds:
 Disclosure Norms :
 Fund Launches : AUM, Corpus, Competition etc
 Performance : IRR, NAV etc : (Investor based or security based ?)
 Chinese Wall for secondary market operations
 Tax Pass Through Status for AIF registered
 Tax arbitrage goes in favour of MF
 Investment Advisors Regulation should exempt Co-Investor
arrangement
 Stock Exchange and Commodity Exchanges:
 Factors including “x” factor must work in selecting promoters :
Fit & Proper Criteria

16. Way Forward : New Initiatives
 Monsoon Derivatives : Useful for Agricultural Societies, Manufacturing
sector dependent upon agri raw material
 Sentiment Index Derivatives :
 Event Trigger based rather than Direction based
 Superior to buying Out Of Money Call / Put
 Corporate Reforms :
 Independent Directors : Adequate Coverages

17. World over – what gets deposited in Banks?
- Cash
- Cheques
In India –

first currency notes introduced include Bank of Hindostan (1770–1832),
the General Bank of Bengal and Bihar (1773–75, established by Warren Hastings),
and the Bengal Bank (1784–91); mass production started from mid 1940s..

Fully printed Cheques were introduced in early 1700s, 1st personalised cheques
find mention in 1881 – Negotiable Instruments Act.
 From Bearer cheques to Endorsable cheques, we have come a long way to move to
MICR system of clearing and latest being CTS system ; However we lack serious
reforms in our Cash currency – we are currently using Mahatma Gandhi series
(replaced Ashoka Pillar Capital series) of Bank Notes which has replaced all other
series – was introduced way back in 1996 with the embedded security features
carried on from 1996..

18. Counterfeit Currency circulation statistics for some prominent economies...
* The US $ chart represents Value in Mn and not number of notes in Mn.

19.  These
figures suggest a significant
amount of resources spent by every
country to control counterfeit currencies
 However, a few countries have been able
to control it and some have failed…
To put these numbers in perspective for India –
Particulars (in Rs Crs. For FY 2013)
GDP @ current prices
Value of counterfeits (including RBI and other
seizures)
Impact on GDP
101,700
2,600
2.6%
PROBLEMS CURRENTLY FACED BY INDIA :
 Compressing GDP…
 High inflation trajectory
 High rate of interest and Depreciating currency
 Reducing value of INR…
 All of these can be addressed at one go – to some extent by addressing the issue of
fake currencies..

20. Recommendations:
 Polymer Resin currency notes to replace Current Paper currency
 these notes to contain Censor chips weaved in each currency note – chip to contain
data of Mint at which it was produced, printed and originated
 Each Mint should have different marker to identify and differentiate the currency
notes – to make it extremely difficult to fake
currently 4 mints for coins – Mumbai( ), Calcutta ( ), Hyderabad(*) , Noida( .)}
{currently 4 mints for notes - Currency Note Press in Nashik, Bank Note Press in Dewas, Bharatiya Note Mudra
Nigam (P) presses at Salboni and Mysore, Watermark Paper Manufacturing Mill in Hoshangabad
{currently different identification marks on each note - 20: vertical rectangle, 50: square, 100: triangle, 500: circle,
1,000: diamond)
 Reduce the faking as it will be extremely difficult to make exact replica of data
contained on chip due to different denominations and different permutation and
combination of date of production, place of origination etc
 Censor chip will enable trail of the currencies – at least should be introduced in higher
denomination notes to trace the faking to its source..
CHALLENGES IN IMPLEMENTING THESE REFORMS:
 Political will to enable reforms – RBI should prevail over the Ministries as
currently it is taking care of the currency printing Mints as well..
 Cost of production will be high – with technological advancements, cost of
production can be brought down significantly just like it has happened with RFID
and Bar codes technology..

21. Questions

22. Annexure : Data Slides and
Back up Slides

23. Reform -History
• Financial sector reforms were initiated in 1991-1992. The Narasimham
Committee Report (1991) recommended several reform measures such as
1. reduction of reserve requirements
2. de-regulation of interest rates
3. introduction of prudential norms
Second Narasimham Committee Report (1998 ) Which was focused on the :• strengthening of the banking system
• upgrading of technology
• human resource development

24. Present
Major Reforms in the Banking Sector :-
•
•
•
•
•
•
•
•
•
New Services and New Products - Some of the Banks have established subsidiaries in
merchant banking, mutual funds, insurance, venture capital, etc which has led to
diversified sources of income from them.
New Generation Bank emerged : Banks such as ICICI Bank, HDFC Bank, UTI Bank have
given a big challenge to the public sector banks leading to a greater degree of
competition
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
interest rates deregulated - Banks now enjoy freedom of fixing the lower and upper
limit of interest on deposits. Interest rates on the bank loans above Rs.2 lakhs are fully
decontrolled. These measures have resulted in more freedom to commercial banks in
interest rate regime.
RBI Prudential Norms - It includes recognition of income sources. Classification of
assets, provisions for bad debts, maintaining international standards in accounting
practices, etc. It helped banks in reducing and restructuring Non-performing assets
(NPAs).
Capital to Risk Weighted Asset Ratio (CRAR) - all most all the banks in India has reached
the Capital Adequacy Ratio (CAR) above the statutory level of 9%.
Freedom :- If a bank satisfies the CAR then it gets freedom in opening new branches,
upgrading the extension counters, closing down existing branches and they get liberal
lending norms
MPBF system was removed : (Maximum Permissible Bank Finance)

25. FUTURE – The Road Ahead
•





Customer Expectations - have been growing. Clients should get services from
the banks on a 24x7 -Broadly, these expectations are swift service with
minimal response time, efficient service delivery, tailor-made and value-added
products to suit specific needs, hassle-free procedures and minimum
transaction costs, and pleasant and personalized service. Banks have to
undertake a continuous process of monitoring customers’ perceptions of
service quality, identifying the causes for service quality shortfalls and taking
appropriate remedial action to improve quality.
Other Income - The future strategies of banks should be to earn more of ‘other
income ‘and reduce dependence of interest income.
Service Sector - contributing around 50 per cent to the Gross Domestic
Product, banks should explore the possibilities to tap this sector.
Staff Productivity - There is need to downsize staff to cut high cost of staff
expenses
Marketing - In the coming years, the key word is marketing would be
innovation. It would become impossible to survive and prosper unless
organizational skills are effectively channalised towards innovating new ideas,
new products, and new strategies for winning over and retaining the customer.
NPA - The level of Non-Performing Assets (NPA ) of public sector banks
remained high;

26. Reforms in Banking and Allied Sectors
Shadow Banking System – Greater consistency in regulation
Another important regulatory challenge is ensuring “greater consistency in
regulation of similar instruments and institutions performing similar activity" to
prevent or contain regulatory arbitrage.
In the case of systemically important non-deposit taking NBFCs (NBFCs-ND-SI), a
gradually calibrated regulatory framework in the form of capital requirements,
exposure norms, liquidity management, asset liability management and reporting
requirements has been extended, which has limited the space for regulatory
arbitrage as also their capacity to leverage.
Given the increasing significance of the sector, the supervisory regime for the
systemically important NBFCs will need to be strengthened further for a more
robust assessment of the underlying risks.

27. Recommendations – Others
Liquidity Management

There are concerns over growing reliance of banks on wholesale funding/ market
borrowing to fund assets

During the crisis as the wholesale funding sources can dry up quickly. Banks,
therefore, have to factor this in their liquidity management. Besides, there is an
issue under Basel III about the extent to which SLR holdings can be taken into
consideration for the purpose of calculating the liquidity ratios

Further, the major challenge for Indian banks in implementing the liquidity
standards is to develop the capability to collect the relevant data accurately and
granularly and also to formulate and predict the liquidity stress scenarios with
reasonable accuracy and consistency.

28. SOME INTERESTING ANECDOTES FOR COUNTERFEITS :
 Faking is as old as currency itself – first of currencies faked was metal coins produced by
Roman kings in 1200s – the process was knowing as clipping where metal coins were plated
with silver and gold to make them work in place of real silver and gold coins..!!!
 The history of the rupees traces back to Ancient India in circa 6th century BC, ancient India
was one of the earliest issuers of coins in the world along with the Chinese wen and
Lydian staters.
 The word rūpiya is alleged to be derived from a Dravidian word rūpa, which means
"wrought silver, a coin of silver
 Nations have used counterfeiting as a means of warfare. The idea is to overflow the enemy's
economy with fake bank notes, so that the real value of the money plummets….!!!
 Great Britain did this during the American Revolutionary War to reduce the value of
the Continental Dollar. The counterfeiters for the British were known as "shovers,"
presumably for the ability to "shove" the fake currency into circulation
 Operation Bernhard was the codename of a secret Nazi plan devised during the 2nd World
War to destabilise the British economy by flooding the country with forged Bank of England
£5, £10, £20, and £50 notes…
 http://www.businesspundit.com/10-most-notorious-counterfeiting-operations-of-the-last100-years/