fin esse may july 2010

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Fin-esseFinancial Services newsletter

Foreword

In this issue

Dear readers,We are pleased to present the May July 2010 edition ofFin-esse , which marks the second anniversary of ournewsletter on the financial services industry. This quarterwitnessed a landmark development, which has thepotential to affect the way some of the major financialservices companies operate in the US. The Dodd-FrankWall Street Reform and Consumer Protection Act waspassed by the US Congress. It is expected to bringsignificant changes to the operations and cost structureof most of the financial services companies operating inthe US.To maintain financial stability, the UK Government iscontemplating forming a subsidiary of Bank of England,which would take over the bank-regulating duties that arecurrently vested with the Financial Services Authority(FSA). Meanwhile, several European economies continuedto fight their debt problems and concerns over creditworthiness to keep their economies afloat.The quarter was marked by regulators activism in India.Key developments in the quarter include the proposal ofthe Finance Ministry to setup the Financial StabilityDevelopment Council (FSDC), evoking sharp reactionsfrom the Reserve Bank of India (RBI) and SecuritiesExchange Board of India (SEBI) and steps taken by SEBI

Foreword 1Industry review 2In focus

Impact of Dodd- Frank Act 4

Base rate regime: ushering in a new era 8

IRDA's new norm on agentcommission: impact analysis 12

Business Correspondents: Facilitatorsfor financial inclusion 14

Scouting for products to enhance banking treasuryincome: is bullion the answer? 19

News section: May July 2010 21

Global economy 21

Global corporate news 22

Banking and capital markets: India 24Insurance: India 29

Asset management: India 32

Deal monitor 34Market monitor 35Ernst & Youngs initiatives 36

May-July 2010 edition

and Insurance Regulatory Development Authority toimpose further control on market intermediaries topromote investor interest.Read more about these in the Industry Reviewsection.We have also tried to present insightful analysis onsome of the topics of current interest in the financialservices sector globally and in India in the In focussection. The section contains articles on the Dodd-Frank impact, base rate regime, new norms oninsurance agents commissions, role of businesscorrespondents and the significance of the goldbusiness for banks in India.The News section summarizes some of the keydevelopments that have happened in the global andthe Indian economy and the financial services sector.Further, our Deal monitor section presents some ofthe deals confirmed during the May - July 2010period in the Indian financial services sector. Lastly,the Market monitor concludes the newsletter bylooking at the performance of some of the majorfinancial services companies.We hope that you have enjoyed the newsletter in thelast two years and will appreciate any feedback orsuggestions to improve it further.

Happy reading!Hiresh Wadhwani and Viren H. Mehta


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GlobalThe quarter ended May - July 2010 witnessed alandmark development, which had been on the cardsever since the financial crisis erupted on the globallandscape. On 21 July, the US Pres ident BarackObama signed the Dodd-Frank Wall Street Reform andConsumer Protection Act, putting into effect alegislation that will reshape the way in which banksthat operate in the US are regulated. The legislation,also known as the Dodd-Frank Act, has two main goalsfirst to reduce the amount of risk inherent in the

financial services industry and second to increaseconsumer protection. This reform centered aroundcapital, legal entity structures, operations and ITinfrastructures, governance, risk and regulatorycompliance, to pose numerous challenges to bankingcompanies. The legislation is likely to lead to thecreation of a council of regulators to monitoreconomic risks and the establishment of a new agencyto oversee consumer financial products.

One of the most debated provisions is the Volckerrule, which addresses how banks invest their ownfunds. The provision will impose a cap of 3% on thebanks' capital that can be invested in risky hedgefunds, private equity and real-estate funds. Thetemporary increases in deposit insurance coverage,which were put in place during the financial crisis, willnow become permanent. Therefore, as much asUS$250,000 in qualified deposits will be insured.

Industry review

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Besides, the regulators aim to create a system so thatlarge, complex and failing financial companies can bebroken up and liquidated without disrupting markets.

While the US firms are still in the process of gaugingthe impact of the Dodd-Frank Act on their businesses,the UK government is also planning to overhaul thecountrys banking regulations. Under the proposedchanges, the Financial Services Authority (FSA) will beeliminated and a newly formed Bank of Englandsubsidiary is likely to take over the bank-regulatingduties that are currently vested with the FSA. Therationale of the proposed change is to providesufficient authority to the Bank of England to respondswiftly to any development, which has the potential toendanger the financial stability of the overall economy.

Meanwhile, in the aftermath of the Greek sovereigndebt crisis and other visible soft spots in Europe andthe US, there is renewed uncertainty about thesustainability of the economic recovery. Amidmounting doubts over Spains credit worthiness, thecountrys central bank decided to take over savingsbank CajaSur, controlled by the Roman CatholicChurch, the second Spanish bank to fail since theoutbreak of the financial crisis. Earlier, the 110billion rescue package, put together by theInternational Monetary Fund (IMF) and the Euro-zonegovernments, failed to allay investor concerns overGreeces ability to honor its debt obligations.

The sovereign debt crisis has impacted otherEuropean countries as well. This led the EuropeanUnion to set up a 500 billion financial backstop forthe affected countries. In addition, the EuropeanCentral Bank said that it is likely to start buyingEuropean government debt. In contrast emergingmarket economies are witnessing strong growth,driven by rising domestic demand.

IndiaRegulatory actionsCloser home, the actions of the Indian regulators inthe past quarter clearly demonstrated their resolve totake effective steps with regard to investorprotection. Capital market regulator Securities andExchange Board of India (SEBI) and insuranceregulator Insurance Regulatory and DevelopmentAuthority (IRDA) have enforced amendments toensure that investor interests are better served.

Press reports suggest that SEBI plans to make ittougher for non-finance corporate firms to entermutual funds business. As per press reports, nobusiness house with less than five years of experiencein financial services will be allowed to own a stake inan asset management company; besides, the sponsorwill be subjected to tough screening before allottingthem a licence. The idea is to ensure that only seriousplayers enter this business and handle common mansmoney.

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SEBI has mandated mutual funds to levy uniform exitloads for investments through the lumpsum route andsystematic investment plans (SIPs). This has beendone to ensure that small investors are not at adisadvantage vis--vis big ticket investors in the samefund.

In the insurance segment, IRDA introduced significantchanges to the regulations governing unit-linkedinsurance plans, surrender charges and distributionchannels. The regulator has capped the chargesduring the policy term as well as the commission paid

to referrals. Starting 1 September 2010, thecommissions, which were as high as 40% in the firstpolicy year, are to be spread evenly over the first fiveyears. The invested amount will be locked in dur ingthis time period.

Although investor friendly, the new norms areexpected to cause a dent in the profitability of theinsurance firms and the distributors. The resultantimpact on valuations may further delay the insurers plans of initial public offerings. Clearly, the firms willneed to adapt their operating models to survive andthrive under changed circumstances.

The Finance Ministry released a discussion paper inend-May to all regulators on the proposed FinancialStability Development Council (FSDC), to addressamong other things, inter-regulatory co-ordinationissues. The discussion paper has evoked sharpreactions from the RBI and the SEBI, who believe thatthe paper has gone beyond its brief and is too criticalof the existing regulatory regime.

In another significant development, the Reserve Bankof India (RBI), in its draft guidelines on compensationof chief executive officers/whole time directorsreleased on 1 July 2010, has proposed a cap onannual salary increments of CEOs and whole-timedirectors of private banks and asked them to submittheir compensation structure for 2011 12 to RBI by31 December. It has also proposed to link salaries tothe risk and responsibility of the officials.

First IDR gets listedAfter a long wait, Indian markets witnessed their firstever issue of the Indian depository receipts (IDRs).IDRs of Standard Chartered listed on the NationalStock Exchange with modest gains of 1.9%. The firmraised INR24.9 billion through an issue of 240 millionIDRs at INR104 each in accordance with SEBIregulations under the 100% book building route.

Status quo in quarterly credit policy reviewThe RBI kept the key benchmark rates unchanged inits latest credit policy review announced on 27 July2010. The biggest challenge before the central bank,which is expected to govern future policy direction,pertains to maintaining a balance between short-termcompulsions of providing adequate liquidity and thepotential build-up of inflationary pressure. Pursuingthese two contradictory objectives is likely to keep themarkets guessing about the RBIs moves in the comingpolicy reviews.

Way forwardLike in the West, the Indian financial services sectorfound itself in the thick of regulatory changes in thelast few months. While the regulators in the US andthe UK have been pre-occupied with preventing asecond coming of the global financial crisis, investorinterests have taken precedence in India.

In the coming months, firms operating in the financialservices sector are likely to spend considerable part oftheir time analyzing and adapting their businesses tothe changed regulatory environment. Clearly, the onesthat manage to do a good job of it will t ake the lead.


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A regulatory framework for OTC derivativestransactions.OTC derivatives, along withdealers and other significant participants,are subject to regulatory oversight, includingrequirements to clear certain standardizedcontracts through central counterparties,capital, margin, reporting and record keeping,with standards to be developed by the relevantbanking regulators along with the SEC and theCFTC. Oversight of derivatives activities will beshared by the CFTC and SEC. Implementingregulations will be promulgated to define whichinstitutions are covered, as well as oversight andreporting requirements.Certain derivatives activities, including equityderivatives, are required to be pushed outof insured banks into non-bank affiliates.

A registration mandate for advisors to largerhedge funds and private equity funds.Most advisors to hedge funds and private equityfunds with more than$100 million in assets undermanagement will be required to register with theSEC and be subject to SEC regulatory oversight(venture capital funds will be exempt, with adefinition of such funds to be provided by the SECwithin a year of enactment). However, advisorswith less than $150 million in assets undermanagement in the US whose only clients areprivate funds will remain exempt from registration,subject to record-keeping and reporting

granted the authority to impose newfiduciary standards.

A resolution framework for systemicallysignificant firms and the development ofliving wills.To address too big to fail and other concerns, anorderly resolution authority is established underwhich the Secretary of the Treasury may appointthe Federal Deposit Insurance Corporation (FDIC)as receiver for a systemically important non-bankfirm that has failed or is in danger of failing. Largebanking organizations and non-bank financial firms are required to prepareresolution plans (so- called living wills)describing how they would wind down theiroperations in an orderly manner if they wereto face severe financial distress or failure.

Additional assessments for systemicallysignificant firms.FDIC deposit insurance assessment is raised fordepository institutions with assets greater than$10 billion. Additional assessments may beimposed on larger firms to help fund the FSOC andadditional supervisory responsibilities of the

Federal Reserve, as well as to potentially coverresolution costs for failed institutions.

Reforms to compensation practices.Compensation practices are also addressedthrough a range of measures requiring expandeddisclosure, increased corporate governance


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requirements to be established by the SEC.Organizations that are required to register will needto establish a formal compliance policy and aframework that encompasses (1) the treatment ofconflicts, (2) the hiring of a chief compliance officer,and (3) testing, reporting and inspections by theSEC. Advisors to smaller funds may also be subjectto record-keeping and reporting requirements.

Additional disclosures and skin in the game forsecuritization.Securitization markets and activities are subject toincreased regulation, including greater disclosures.

Issuers and originators/sellers of assets to asecuritization will be required to retain a minimumof 5% of the underlying credit risk.

A new consumer protection regulatoryframework. A Bureau of Consumer FinancialProtection (BCFP) is established as anindependent agency within the FederalReserve with broad rule-making, examination andenforcement authority over savings,credit and deposit products and the firms thatprovide them.

Enhanced investor protection measures.Investor protection is enhanced throughadditional rule-making and enforcementpowers for the SEC, and the SEC is requiredto conduct a study evaluating the standardsof care applicable to brokers, dealers andinvestment advisors. The SEC is also


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oversight, say -on-pay shareholder votes andextended proxy rights. Further regulatory guidancewill follow with respect to incentive-basedcompensation schemes, as the Dodd-Frank Actmandates regulation of compensation at financialinstitutions to prohibit arrangements thatencourage excessive risk taking.

Bank regulatory consolidation.The Office of Thrift Supervision is abolished and itsfunctions are allocated among the Federal Reserve(e.g., holding companies), the Office of theComptroller of the Currency (OCC) (e.g., federalsavings banks) and the FDIC (e.g., state savingsbanks).

Changes to the regulation of the insuranceindustry. While the law retains the primacyof state regulation of insurance and does notintroduce any fundamental reform of insuranceregulation, the Federal Insurance Office isestablished within the Department of the Treasuryas a coordinating and advisory authority. Aninsurance industry expert will serve on the FSOC,and insurance firms may face enhanced supervisionas systemically significant institutions or, forthose insurance companies that are savingsand loan holding companies, be subject to anew supervisory regime.

Astronger SEC. Three provisions are expected tostrengthen the SECs regulatory role. First, theSECs budget will be doubled over the next fiveyears. In addition, the SEC will be able to tap a new

$100 million SEC reserve fund to supplement itsbudget and facilitate long-range planning andcommitments. This fund will be replenished in $50million annual increments out of SEC fee income.Second, the SEC will be able to use its existingauthority to recruit certain professionals withspecialized knowledge of financial and capital marketformation or regulation, financial market structures orsurveillance, or information technology. This isintended to assist the SECs ongoing efforts to buildgreater securities industry experience. Last, enhancedwhistleblower protection rewards individuals whoprovide the SEC with original information that leads to

successful enforcement cases between 10% and 30%of any settlement in excess of $1 million.

Get In gear

A proactive approach can be taken by allocatingsufficient resources to evaluate the challengesaheadThe full impact of these reforms will occur over anextended period, with considerable post-enactmentrule making necessary by all the agencies to clarify thepractical impact of many of the statutory provisionsand otherwise implement the new regime.Further, the law requires numerous studies tobe conducted, generally over the next year or two,which could lead to refinements ormore substantial changes to the frameworkover time.


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Notwithstanding the remaining uncertainties,regulators are already pursuing many aspects of thereform agenda under their existing authorities.Moreover, many firms are evaluating the competitive,operational, tax and other business impl ications ofthe reform agenda and are preparing their strategiesto approach the wide-ranging requirements in the lawsoon.

Initiatives to comply with regulatory demandsare already taxing firms resources, andthese demands will grow considerably asthe new landscape takes shape. Many firmshave already mobilized program resourcesto assess the impact of the reforms on theirbusinesses and operations and to identifyopportunities to leverage existing initiativesand recent enhancements.

Mapping a plan for the road ahead

Evaluating the impact on financial institutions:The magnitude of the impact will vary across industrysectors, depending on the specific areas of focuswithin the Dodd-Frank Act and the current-statepoint of departure of each institution.


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The adjoining table highlights the potentialconsequences of the Dodd-Frank Act on the mainindustry sectors. The effects of many reforms will bemost acutely felt by the large, systemically significantNBFCs not previously subject to conglomerateprudential supervision. For BHCs and banks, existingsupervisory expectations are raised even higher, withthe largest BHCs subject to the most intensiveprudential supervision and activity restrictions.

The restrictions imposed by the Volcker Rule willrequire some banks to consider longer-term options

for conforming to proscribed proprietary trading orinvestments in private funds. At the same time ,private funds will have to contend with the impact oflosing this significant investor population and therequirements of registration. More broadly, changes incapital, liquidity and legal entity structures acrossfirms will have wide-reaching impacts on funding, withresultant tax and accounting consequences.

Data quantity , IT and reporting impacts will be felt bymost sectors , as will the reach of the OTC derivativesregulation and reforms to consumer and investorprotection measures.

Above all, the impact of these activity restrictions andfunding costs on profitability and growth may causefirms to re-evaluate their strategic plans.

Conclusion

It is clear that the Dodd- Frank Act will have far- reaching impacts throughout the financial servicesindustry that will require a dynamic approach to navigating both the uncertainties and opportunities ahead.

Contributed by Ernst & Young LLP


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Lack of transparency: Banks have been chargedwith being arbitrary in resetting lending rates usinginternally developed, non-transparent benchmarksfor pricing floating rate products. Further, amandatory clause on conditional resetting ofinterest rates in loan covenants made the terms ofcontracts non-transparent for borrowers.

Downward stickiness of BPLRs: While banks havebeen quick to pass on the impact of increased ratesto customers, they have been reluctant to pass onthe entire benefit of declining policy rates. Further,

the benefit of low interest rates was passed on toonly new customers, leaving out a major chunk ofexisting customers. This not only raised an issue ofinequity among customers but also resulted in thepoor transmission of monetary policy actions. Oneof the major reasons for downward stickiness wasthe large share of deposits that banks garnered athigh rates in the past. In addition, other factorssuch as the administered interest rate structure onsmall savings and concessional lending rates linkedto BPLRs for some sectors resulted in thedownward stickiness in the BPLRs of banks.

Cross-subsidization in lending: Generally, loans toindividual borrowers were previously (other thanthe housing loans) in the high interest range (14%and above) compared with the majority ofadvances to agriculture and industry at less than14%.

The RBI has mandated all banks in the country totransition to the base rate system with effect from1 July 2010. This move appears to be a step in theright direction to reform the interest rate system inthe Indian banking sector, and perhaps the single-most important reform after the deregulation ofinterest rates in the early 1990s. The base ratesystem has replaced the erstwhile benchmark primelending rate (BPLR) system that was in existence since2003. Both systems are expected to continuetogether for some more time before the BPLR system

is entirely phased out.This move has led to a steep reduction in interestrates from the previous range of 11% 16% (under theBPLR regime) to 6.75% 8.75% (under the base rateregime). While foreign lender Deutsche Bank set thelowest base rate in the industry at 6.75%, privatesector lender Karnataka Bank announced its base rateat 8.75%, the highest among all banks.

Interestingly, foreign banks, which had one of thehighest BPLR among banks in India, feature amongbanks with base rates lower than those of their peersin the private and public sectors. One of the reasonsfor this could be to cater to big corporate entities(especially for short-term lending) and maintain theirmarket share by offering them lower rates. 1

Base rate regime: ushering in a new era

Drawbacks of the BPLR regimeThe Indian banking sector followed the administeredinterest rate regime until the late 1980s, whereinnumerous rate prescriptions existed for differentactivities. With the onset of reforms in the economyand the banking sector in 1990s, the interest ratestructure was gradually rationalized. The processculminated in almost the complete deregulation oflending rates for credit limits in excess of INR200,000in October 1994. The prime lending rate (PLR) systemwas also introduced in 1994 to ensure competitiveloan pricing. Subsequently, in 2003, the BPLR systemwas introduced to serve as a benchmark rate forbanks pricing of loan products to reflect actual costs.

However, in the past seven years, the BPLR systemhas proved to be inadequate in its original intent ofenhancing transparency in lending rates. It has tendedto be out of sync with market conditions and inresponding to changes in monetary policy. Followingare some of the main drawbacks in the system:

High proportion of sub-BPLR lending: Intensifyingcompetition has forced banks to increase sub-BPLRlending, sometimes defying all sense of business,

to various categories of borrowers, such ascorporate entities and the housing and retailsectors. In fact, the share of sub-BPLR lending(excluding export credit and small loans) forscheduled commercial banks (SCBs) increasedfrom 28% in March 2002 to 77% in September2008 before declining to 67% in March 2009.


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Although differential pricing for different borrowers,based on risk-reward perceptions, is justified to someextent, such sub-BPLR lending on a large scale hascreated a perception that retail and small borrowersare cross-subsidizing large borrowers.

These drawbacks have forced the regulator tointroduce the base rate system, which is moretransparent and fair. The base rate represents theminimum rate that a bank charges to account for thecost of funds and an expected profit margin. Banks canadd a borrower-specific charge to the base ratedepending on the borrowers risk profile and

relationship with the bank. Only a few categories ofloans farm loans, loans to banks own employees,loans against deposits and export credit areexempted from the base rate system. 2 Banks will haveto document the detailed formula for the calculation ofthe base rate and follow it consistently after the initialsix-month transition period of implementation, whichends in December 2010. The formula will need to bedisclosed to the RBI and will be open to scrutiny. TheCentral Bank has allowed banks to change thebenchmark and methodology any time during theinitial six-month period.

Formula to calculate the base rateThe RBI has suggested a comprehensive formula tocalculate the base rate. The formula represents thebase rate as the outcome of four variables:

Base rate = a + b + c + da = Cost of deposits/fundsb = Negative carry on cash reserve ratio (CRR) andstatutory reserve ratio (SLR)c = Unallocatable overhead costd = Average return on net worth

The calculation for base rate accounts for a banksmajor cost heads apart from the profit margin thebank expects to earn. The negative carry on CRR andSLR balances is due to the fact that while the returnon CRR balances is nil, the return on SLR balances islower than the cost of deposits. Unallocatable

overhead cost include aggregate employeecompensation pertaining to administrative functions incorporate office, directors and auditors fees, legaland rental expenses, depreciation, cost of printing andstationery, expenses incurred on communication andadvertising, IT spending and costs incurred towardsdeposit insurance.

Implications of the base rate regimeThe base rate system is expected to usher in a new erain the lending practices in India. It would havesignificant implications for various markets andparticipants in the financial services sector in India.

The following sections delve upon these implications.Banking system

The banking system is expected to become moretransparent with the base rate system. The


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system is likely to introduce a greater degree oftransparency around lending rates, therebyresulting in improved customer confidence in thesystem. 3

More transparency will enable customers to selecttheir mortgage banks based on theircompetitiveness rather than an arbitrary andopaque BPLR system. This, in turn, could help bringmore customers to banks as compared to housingfinance companies (HFCs), which is still not coveredby the base rate system. Further, the system isexpected to increase volumes in loan business to

the residential category. It is also likely to eliminatethe practice of banks offering teaser rates, which, inturn, could prove risky for the system in the longrun. 4

Corporate debt markets

As most banks have set their base rate at 7% ormore, top-rated corporate entities will no longer beable to maneuver banks to obtain short-term loansat less than 7%. It is anticipated that this willcompel such companies to raise funds by issuingbonds in the corporate debt market. Companies areexpected to raise a significant amount of fundsthrough commercial paper (CP) and non-convertibledebenture (NCD) instruments. Further, theRegulator has allowed banks to invest in below-one-year NCDs with effect from 2 August 2010, which isexpected to further fuel the growth of the


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short-term debt market. According to industrysources, the growth of the market for short -termdebt instruments, including CP and NCD, isexpected to increase from 20% 25% to 40% withina year. 5,6

BorrowersThe effective functioning of the base rate regime islikely to significantly change both retail and corporatelending in India. Any change in the effective interestrate for a customer will depend on the "average" costof funds rather than the "marginal" cost of funds. Any

increase or decrease in the marginal cost of funds,which impacts the overall cost of funds, willimmediately be passed on to both exis ting and newcustomers.

Retail borrowers

Since current home loan rates are at the 8% 9%mark, which is close to banks announced baserates, the immediate impact for new loans isnegligible. However, it is recommended that homemortgage borrowers on a floating rate systemmove to the base rate system, away from theBPLR, on their current outstanding obligations,especially if the loan is relatively new. However,such a switch may come at a charge, despite theRBI's recommendation to waive this cost.

Corporate borrowers

According to market sources, the banking systemcurrently meets 80% 90% of the working capitalneeds of corporate entities. With the introductionof the base rate system, the cost of short-termfunds from banks for such entities is expected toincrease. Consequently, many of these entities(especially those with better ratings) are expectedto explore short-term debt options in corporatedebt markets. Mutual funds and insurancecompanies are the primary buyers of short-term

corporate debt outside the banking system. Oncethese buyers know that the bargaining power ofissuing corporate entities with banks is reducedbecause of the base rate system, they may startpushing for higher yields. Further, these buyerscould also enter bilateral transactions with suchentities, with the latter never coming to the marketwith their issue. 7

Small and medium enterprises (SMEs) are expectedto benefit from the base rate regime, especiallyafter the system stabilizes in the next 6 to 12months. While the risk profile of SMEs is likely to

continue influencing lending rates, rates areexpected to decline substantially from theprevailing range of 12% 13%. This is primarily dueto the end of cross-subsidization of lower lendingrates to big corporate entities at the expense ofhigher rates to SMEs. 8


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Regulator

In the past, regulators were not always able to getbanks to change rates in line with the levelsindicated through their monetary policy changes.Under the base rate system, there will be a floorrate in place below which banks cannot lend to anycustomer. A competitive environment and theliberty that banks will have to revise their baserates on a quarterly basis or less are expected toensure a more efficient transmission of monetaryaction, thus making the regulators job of managing

credit flow and inflation easier. It will p rompt banksto increase the base rate in an increasing interestrate scenario to protect margins. At the same time,banks will have to pass on the benefit of decreasinginterest rates to keep their institutional customers,who are likely to borrow at base rates. 9,10

Banks

Banks with a high base rate could risk losing the billdiscounting business to those with a relatively lowbase rate. Interest rates tend to be low for billsdiscounted against letters of credit, since banks aresure about the end use of the credit and of it beingbacked by a guarantee. Public sector banks, mostof which have announced higher base rates thanthose of their peers in the private and foreignsector, could lose out on this business. 11


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Rating agencies

In the base rate regime, companies with largerequirements for short-term funds are expected toincreasingly look to corporate debt markets ratherthan borrowing from banks. As a credit ratingagency in India needs to rate all instruments, thisindicates a significant business opportunity forcredit rating agencies operating in India, includingCredit Rating Information Services of India Ltd.(CRISIL), Credit Analysis & Research Ltd. (CARE),Fitch Ratings, The International Credit Rating

Agency (ICRA) and Brickwork.12

IssuesAlthough the base rate regime is a step in the rightdirection, it can be further fine-tuned to make it morecomprehensive and effective. Following are some ofthe aspects that may need more attention:

The regulator may need to look into the issue ofrestructured loans under the base rate regime.Although the system has allowed banks to charge alow rate for restructured loans in extreme cases, itis possible only if banks have agreed to arecompense clause for these restructuredaccounts. Such a clause indicates that a companywill have to start repaying the bank, the interest

income which the bank lost (due to a previouslylower interest rate) during that period. Banks havetheir reservations around the certainty with whichthis amount can be calculated. 13

As Housing Finance Companies (HFCs) competeclosely with banks in the residential housemortgage loan market, the National Housing Bank(NHB), the regulator for HFCs, could also introducea similar system for HFCs. Reportedly, the NHB isworking on a system with a similar and moretransparent regime for the pricing of housing loans

for HFCs. However, this system is not expected to

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. come into effect until March 2011. 14 Similarly, thescheme may be extended to non banking financecompanies (NBFCs), which also compete in thisspace. 15

Although there have been talks of a sunset clauseto put an end to the BPLR regime, the regulatorneeds to provide clear guidance on how long theexisting BPLR system is expected to last and how itplans to phase the regime out. 16

Conclusion

Although the real and broader impact of the base rate regime could only be visible after 6 12months of its implementation, the regime has already helped reduce the benchmark lending ratesfrom around 11% 12% to 7% 8% transparently, which is commendable. Enhanced transparency isalso expected to result in better governance among banks. Better governed banks, in turn, willcontribute to more stability in the banking system. 17 The regime could change the dynamics of thelending system, with wider implications for the financial services sector. Withthe expectation of hardening interest rates in the next 12 months, the system

will be truly tested to its core.

Ashvin ParekhPartner and National Leader,

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deliver the business. With customer proposition in theproducts becoming richer, ULIPs are bound to becomesuperior products from a holistic perspective.Companies are likely to continue selling ULIPs, as thisis one of those products that indirectly help the ruraland the urban population to access capital marke ts.The only change that companies are expected to haveto bring about would be around the method of sellingthese products. Insurance companies will have toinvest on training agents in selling long-term products.

The biggest gainers from this change will be

customers, as products will now be more tr ansparentand customer-friendly and aimed at protecting thelong-term interests of customers.

The IRDAs disclosure norms pertaining to agentcommission earned through the sale of ULIPs is a stepin the right direction. However, these disclosurenorms are only applicable to ULIPs and not totraditional products. Addressing one facet of theinsurance product space and leaving the other open islikely to create an imbalance in future, with companiesand agents becoming inclined toward sellingtraditional products. Hence, the implementation of

this new norm will definitely boost the sale oftraditional products vis--vis ULIPs.

In future, the concept of independent financialadvisors may gain prominence in India. People will beable to take rational decisions with the help of theiragents to decide which product is most suitable for

Agents are the main driving force behind the outreachof insurance policies to rural areas and several urbanareas. In FY 10, around three million agentscontributed to 80% of the industrys sales and werepaid a commission of around 8% 10% of the totalpremiums.

Recently, the IRDA issued a notification for agents todisclose to the customer, the commission they earn onthe sale of unit-linked insurance products (ULIPs),effective 1 September 2010.

With this development, it is expected that weightedcommission rates across industry participants willdecline to around 8% 12% per year. The majority ofcompanies operating in the industry, barring a fewplayers such as ICICI Prudential and LIC, who arealready operating at this level, are likely to feel theshort-term impact of this proposed change.

This move by the IRDA reflects its efforts to ensuretransparency and implement more stringent disclosurenorms to avoid mis-selling. This is like ly to allowinsurers to recover their cost in a more t ransparentand informed way, thereby reducing unfairpractices and the information gap in the domesticinsurance industry to enhance market discipline.

Although the IRDAs stance is in favor of bringingtransparency in agents commission structure, thisnorm could impact agents negatively, at least in theshort run. To address the impact of reducedcommission, insurance companies may resort to

IRDA's new norm on agent commission: impact analysis

innovative ways of compensating their top-performingagents. Non-commission based remuneration mayincrease. Companies may expand their differentreward and recognition programs to make the sale ofULIPs attractive for agents in light of these recentchanges.

In the long run, the role of agents is expected toevolve with this policy change. In future, increasedtransparency is likely to make agents moreaccountable not only in selling the right product, butalso in providing better customer service. This is also

likely to ensure that agents justify the commissionsthey earn. From being mere agents, they will beexpected to serve as financial planners selling abouquet of financial products.

With the implementation of the IRDAs new norm,insurance companies may initially face a setback inpolicy sale numbers and total premiums. In FY10,Reliance Life is expecting the contribution of ULIPs inits total product portfolio to decline from 90% to 60%.Similarly, Bajaj Alliance is expecting a decline from80% to 70%. Insurance companies will have to exercisea disciplined approach in running their operations to

reduce expenses and cut costs to meet recurring costand distribution charges. After the initial one or twoyears, the industry can expect to record a healthygrowth of around 15% per year. It is anticipated thatnon-bank-promoted insurance companies will face amore formidable challenge, because such companiessignificantly depend upon the agency channel to


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them based on returns, age, the amount ofinvestment, risk appetite and other factors. Unlikecompany-specific agents, these advisors will have theflexibility to offer different types of investmentproducts and not restrict themselves to products ofonly one company.

In future, a new model of differential pricing offered byvarious channels of distribution can be expected toemerge in India. To illustrate, as in foreign market s,the online purchase of insurance may be a lessexpensive mode than an agent model. Currently,insurance products are priced at the same level,

whether bought through an agent or online or througha bank.


Back

Conclusion

Insurance as an industry is maturing, and this is expected to further help establish insuranceproducts as a viable long-term investment option. Insurers will have to proactively adaptthemselves to the regulatory changes that the IRDA introduces and implements to ensurehealthy industry growth.

Samir BaliPartner

Business Advisory Services,

Financial Services


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to banks and operating common service centers(CSCs) can act as business correspondents.

In engaging these intermediaries as businesscorrespondents, banks need to ensure that they arewell established, enjoy good reputation and have theconfidence of the local people. Banks should widelypublicize its business correspondent in the locality andtake measures to avoid being misrepresented.

In addition to activities listed under the businessfacilitator model, the scope of activities to beundertaken by the business correspondents willinclude (i) disbursal of small value credit, (ii) recoveryof principal/collection of interest (iii) collection ofsmall value deposits (iv) sale of microinsurance/mutual fund products/pensionproducts/other third party products and (v) receiptand delivery of small value remittances/otherpayment instruments.

The BF/BC model is one good example of how aninnovative model emerges based on market needs toserve the bottom of the pyramid. Since the tr aditionalbrick and mortar branches can only penetrateremote areas of our vast country to a limited extent,this model presents banks with a workable/pragmaticoption to provide banking services to the inaccessibleareas in a cost-effective manner.

2. Use of branch-less banking technologyTechnology has played an important role in bridging

1. BackgroundAt least 41% 1 of Indians, predominantly the rural poor,urban poor and rural middle class, do not have accessto banking services. Recently, financial inclusion hasbeen a point of focus of the RBI and the government.It is expected that the availability of reliable andaffordable banking services to the poor will positivelyimpact their income generation.

Currently, the access to the formal financial sector isvery limited due to the following reasons:

The physical distance from the financial institution

Lack of education and knowledge on availability ofservices

Complexity of the paper work and the transactionprocess

The business correspondent/business facilitator modelhas been allowed by the RBI in 2006 to serve this needof branchless banking through intermediaries.

Business Facilitator (BF) model: eligibleentities and scope of activitiesIn the business facilitator model, banks can useintermediaries, such as, non-governmentorganizations (NGOs)/farmers' clubs, cooperatives,community-based organizations, IT-enabled ruraloutlets of corporate entities, post offices, insuranceagents, well-functioning panchayats, village knowledge

Business Correspondents: Facilitators for financial inclusion

centers, agri clinics/agri-business centers, Krishi VigyanKendras and KVIC/ KVIB units, depending on thecomfort level of the bank for providing facilitationservices. Such services can include (i) identification ofborrowers and fitment of activities; (ii) collection andpreliminary processing of loan applications includingverification of primary information/data; (iii) creatingawareness about savings and other products, advice onmanaging money and debt counselling; (iv) processingand submission of applications to banks; (v) promotionand nurturing self-help groups/joint liability groups; (vi)post-sanction monitoring; (vii) monitoring andhandholding of self-help groups/joint liabilitygroups/credit groups/others; and (viii) follow-up forrecovery.

Business correspondent (BC) model: eligibleentities and scope of activitiesIn the BC model, NGOs/ microfinance institutions (MFIs)set up under Societies/Trust Acts, Societies registeredunder Mutually Aided Cooperative Societies Acts or theCooperative Societies Acts of states, section 25companies, registered NBFCs not accepting publicdeposits and post offices, individual kirana/medical/fairprice shop owners, individual public call office (PCO)operators, agents of small savings schemes of theGovernment of India/insurance companies, individualswho own petrol pumps, retired teachers, authorizedfunctionaries of well-run self help groups (SHGs) linked


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1 RBI Report of the Working Group to review the BusinessCorrespondent Model, August 2009 RBI website, www.rbi.org.in,accessed August 2010


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the gap and reaching out to under privilegedcustomers. One of the approaches banks have adoptedis a Biometric smart card a branch-less bankingtechnology. It is an end to-end outsourced modelusing the services of BCs and technology serviceproviders. The bank opens a no frill Savings Bankaccount using simplified KYC Account opening form.The technology service provider, using enrollmentstations comprising a laptop, web camera and fingerprint grabbing machine, enrolls the customer byrecording the relevant data (such as name, address,fathers/husbands name, occupation, annual income,category etc). Thereafter, impressions of all the tenfingers are captured and stored. The data thuscaptured is stored in the chip embedded in the bio-metric card and handed over to the account holder.

The advantage of the card is that instead of pinnumber it recognizes and authenticates transactionson the basis of fingerprints of the account holdereliminating all probabilities of impersonation andembezzlement. It is safe, as it allows only the accountholder on matching his fingerprints to carry out anytransaction. The biometric card has multiple slots,thereby allowing the bank to offer different financial

products to the cardholder such as savings, termdeposit, recurring deposit, loan product, insurance etc.

Once the card is issued to the customer, it is ready foroperations. The BC will move to the customer with the


Back

hand held device called Point of sale machine (POS),which also works as a storage device. The POS getsactivated only after the BC identifies himself with the

intermediary card provided to him. Once the POSmachine gets activated, the account holder can starttransacting after completing his identification processinserting his card, matching the fingerprints etc. Oncompletion of each transaction, the POS generates a

Process of performing transactions through the Biometric smart card

2 RBI Circular (DBOD.No.BL.BC. 58/22.01.001/2005-2006),Financial Inclusion by Extension of Banking Services - Use ofBusiness Facilitators dated 25 January 2006

receipt in duplicate, of which one copy is given to theaccount holder. As per the regulatory 2 requirement,the transactions need to be accounted for and

reflected in the bank's.

Identification process beforeundertaking transaction-Inserting smart card and

matching the fingerprints.

Enroll the Customer Finger print capture and smartcard issuance

On completion of eachtransaction, the POS generatesa receipt in duplicate and onecopy is given to the account

holder.

After settlement of all activePOS machines, the technologyservice provider can identify

the transactions carried out onPOS machines. This helps intracking the POS not settled.

At the end of the day the datais uploaded in the bank serverthrough a telephone landline

point.


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books by the end of day or next working day. So at theend of the day, the intermediary goes to a nearesttelephone landline point and uploads the data to thebank server. Once all the active POS machines aresettled, the technology service provider will come toknow about all the transactions carried out on POS


Back

Source: RBI Report of the Working Group to review the Business Correspondent Model dated August 2009c

3. Fees for BF/BCFor this channel to become financially viable,regulations require that all revenues from the servicesare collected by the bank. The BF/BCs are notpermitted to charge fees to clients for the services.The banks revenue may come from the extension ofservices such as accounts, savings, credit andpayments. The bank under contractual relationshipsthen makes payment of service charges to the BCsand technology vendors. The agreement with theBF/BC is required to specifically prohibit them fromcharging any fee to the customers directly forservices rendered by them on behalf of the bank.

4. Advantages of using BF/BCsAdvantages in using BCs are as follows:

Reaching the un-banked and under-bankedareas: The BC model enables banks to extendfinancial services to the clients beyond theirbranch network as beneficiaries of the BCs aremostly located at un-banked and under-bankedareas.

A better alternative than bank branches:Normally a rural bank branch can serve 3,000 to4,000 families in 12 to 15 villages. Further,obtaining permission to open a branch is a longprocess. The BC option potentially enables banksto reach out much faster and at a much lower cost.

Doorstep banking: It leads to disbursement andloan recovery at the doorsteps of the beneficiary.

S. no. Nameof bank

Region Business correspondent/technology provider

Achievements of the project

1 State Bank of

India

Mizoram (Aizwal),

(Medak) andUttaranchal(Pithoragarh)

Zero Mass

Foundation

The project started on a modest scale

with the opening of 5,000 accountsthrough use of smart card technology.

2 ICICI Bank Delhi Financial InformationNetwork & Operations,Ltd. (FINO)

As on 31 March 2009, the BC hadacquired a customer base of 2,350.

3 OrientalBankof Commerce

Punjab FINI FinotechFoundation

In the blocks of Majitha and Anjala13,600 accounts were opened, while1,500 beneficiaries were enrolled inblocks of Verka and Jandiala.

4 Punjab

National Bank

Himachal Pradesh FINO Fintech

Foundation

30,000 smart cards were issued in the

district and deposit of Rs 21 lakh wasmobilized.

machines. This process helps in tracking the POS notsettled carried out on POS machines. This processhelps in tracking the POS not settled.

Example of field level experiences during theimplementation of branch-less banking technology:


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5. Challenges to the BC ModelCash handling: Allowing BCs to handle cash is thebiggest challenge. Besides the logistics of handlinglarge volumes of cash, it leads to increased costs andadded operational risks. Moreover, clients tend toperceive that the BCs are the owners of thetransactions and not facilitating them on the banksbehalf.

Irregular accounting: There can be irregularities inaccounting of clients withdrawals and deposits byBCs, which results in delays in accounting the banking

transactions with the bank by the BC.Misguidance, fraud and misappropriation:Customers, who use BC services are mostly illiterateand unfamiliar with technology rendering themsusceptible to being misguided by the BCs. Since theBCs staff operates individually without any linesupervision, the risk of fraud and misappropriation ishigher.

Inactive No Frills Accounts: Initially, opening ofthe accounts to provide deposit services andsubsequently widening the coverage of activities witha view to making these accounts profitable have notmade desired progress. Retaining customers after theinitial transactions proves to be a big challenge. Themajority of No Frill Accounts opened by BCs are notoperational. The average balances in savings accountshave been very low at unviable levels for banks.

Costs for BC operations: The BCs incur costs towardstaff salaries, training, which the currentcompensation structure does not cover. Where theBCs have to cover large distances, the transport costoften becomes prohibitive. Further, where powersupply is a problem, the BCs have to move withgenerator kits/batteries, which add to the cost. Thecommission paid by banks to the BCs is not consideredadequate for a viable business model. A majority ofBCs have reported losses and some of them have evensuspended their operations.

6. The way forwardThe BC banking channel is still not financially viableand both the industry and regulators need to considerways in which the channel can improve its serviceofferings and financial performance. Hence thefollowing may be considered for implementation infuture:

Building industry-level data: Informationregarding BCs engaged by banks is not available inthe public domain. Information on business viabilityof BCs could be beneficial for the stakeholders tobetter analyze the model. The industry may lead aneffort to share information and generate industry-wide data. Industry data-tracking could includeaccount usage, coverage/outreach, costs ofdelivery and revenue generation. The annualreports of banks generally do not include theprogress with respect to extending bankingservices through the BC model


Back

Better quality of assets: Target clients are wellknown to local NGOs, post offices and similar localsocial bodies and thus loan facilitation by theNGOs/BCs (who are the promoter/builder of thegroups) enhances quality of assets.

Table: Details regarding number of BCs appointedand accounts opened by banksPublic Sector banks

Source: RBI Report of the Working Group to review the BusinessCorrespondent Model dated August 2009

Banks No. of BCsappointed

No. of accountsopened

Punjab National Bank 14 2,704,345

State Bank Of India 24 2,574,139

Union Bank 3 1,654,464

Corporation Bank 3 456,655

Andhra Bank 3 405,000

Total 47 7,794,603

Banks No. of BCsappointed

No. of accountsopened

The Federal Bank Ltd. 2 68

ICICI Bank Ltd. 38 136,659Nainital Bank Ltd. 1 532

Axis Bank Ltd. 3 676,000

Total 44 813,259

Private Sector banks


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and the initiatives taken by banks in this regard.This information could be included in the annualreport and publicized.

Develop banking knowledge of BCs: The BCs andtheir staff may be encouraged to gain minimumbanking knowledge and skills. Common programsmay be instituted by the regulator/banks orsupport may be provided though government-sponsored social programs. Banks may alsodevelop suitable training modules in the locallanguage/s, in order to provide proper attitudinalorientation and skills to the BCs.

Educate customers: The banks may educate theircustomers through various means print,electronic etc., the role of the BC and their ownobligations toward the customers in the vernacularlanguages. The banks may make available in theirwebsites, the details of the BCs they haveemployed for public information.

Services through BC: At present, the BC model islargely perceived as a channel for undertaking onlythe liability side business (deposits). For a BC tobecome viable, the range of services to be

delivered through the BC should be ramped up toinclude suitable small savings, micro credit, microinsurance, small value remittances etc.


Back

Conclusion

The focus of the model has to shift significantly to ensure that it is aligned to the businessstrategies of the banks and not merely found in the footnotes of their annual reports. Since the BCmodel is in its initial stages, the focus seems to be on financial inclusion. The experiments are nottreating the BC model as a commercial prospect and seek to contain costs of investments, whichare critical from a long-term point of view. Thus the key to success of BCs lies in banks makingclient acquisition and business expansion a business proposition and not treating it as a financialinclusion activity.

Pratik Shah,Associate Director,

Advisory Services

Ensuring viability of BC model: It is apparent thatthe BC model can be successful only if sufficientbusiness is generated, the commission earned bythe BC is commensurate and banks own up the BCsas their agents. Therefore, banks may need to havea relook at the compensation structure for BCs.The BC model provides an opportunity to banks tosave on costs, which they would have incurred incase they had gone in for the brick and mortarbranch model. Some of these cost savings by

adopting the BC model could be passed on to theBCs by banks, to a certain extent, to make themodel viable. Banks may consider providinghandholding support to the BCs, at least during theinitial stages. In order to improve the viability ofthe BC model, banks may consider providingreasonable temporary overdrafts to the BCs atminimal interest charges.


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Scouting for products to enhance banking treasury income: is bullion the answer?

When something is too good to be true it generally isnot. The fallout from complex derivatives has thrownthe spanner in the money spinning machine of banksand has ended the dream run of the lucrativederivatives business. Back to hard work in the treasurybusiness, banks are scouting for relatively risk-freebusiness opportunities to reinvigorate their treasuryincome without investing more risk capital. The largelyoverlooked bullion business may prove to be just theanswer. Traditionally, bullion business has beendominated by a handful of banks and designatedimporters. Net imports of gold rose to 188 tonnes

during the first quarter of 2010. However, theparticipation of banks in this relatively risk-freebusiness has been largely skewed. Out of the 23nominated banks authorized to undertake import ofgold, most of the bullion business has beenconcentrated with five banks.

Gold business is transacted by banks in India primarilythrough three product offerings such as consignmentbusiness, gold-on-loan scheme and gold coin business.The contribution of gold consignment business hassteadily reduced over the years given the flexibilityoffered by the gold-on-loan scheme and reluctance of

jewelers to assume gold price risk. Through most of2009, the gold coin business has been largely ignoredon the back of increasing gold prices that have

prompted negative net retail investment demandduring the first quarter of 2009. Historical datasuggests an inverse correlation between gold pricesand demand for imported gold as domesticallyrecycled gold supply compensates for reducedimports. During the first quarter of 2009, the supplyof domestically recycled gold increased to 54 tonnesfrom 20 tonnes during the previous quarter. Thisnumber has consistently fallen through 2009 as goldprices have remained stable.

Apart from the product offerings in the physical gold

business, banks are permitted by the RBI to offerbullion forward to enable customers to hedge theirgold price risk. The increasing popularity of the gold-on-loan scheme has diminished the utility of bullionforwards as a hedging tool.

With increasing volatility in gold prices and variabledemand patterns for imported gold, banks withrelatively low penetration in the bullion business havean opportunity to leverage their extensive branchnetworks to capitalize on retail demand from the goldcoin business. Re-alignment of demand patterns andthe reluctance of jewelers to hold large amounts ofpriced gold inventory also provide banks with anopportunity to provide integrated gold price riskmanagement offerings to clients. While the volume of

gold business transacted by banks is expected tocontinue its variable trend in line with volatile goldprices, opportunities exist for new entrants andmarginal players to cement their position byleveraging their customer relationships.

During the first quarter of 2010, consumption of goldin India was worth US$6.9 bill ion, and maintained itsposition as the largest consumer of gold globally.Jewellery demand continued to be strong at nearlyUS$5.2 billion. During the same period, imports heldsteady at 188 tonnes from 204 tonnes in the previous

quarter. During this period, the market sharecontinued to be largely polarized due to inability ofnew entrants and marginal players to scale up theirbullion desks to meet customer requirements both interms of product offerings and volumes.

The role of banks in the bullion wholesale business islargely limited to allowing jewelers and other end-users to utilize their import licenses. In return, theyearn a clean spread that may be attributed to barriersof entry into the gold import business. The ability ofbanks to leverage their branch network to reach outto smaller jewelers, retailers and other fragmenteddemand sources will determine the sustainability ofthe bullion operations. With the advent of organizedretail in the gold business, the need to scale up bulliondesk capabilities to meet demand and servicerequirements to capture market share is critical.


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.

Fin-esse Financial Services newsletter 20

Back

Hemal H. Shah,Partner,

Advisory Services

Muzammil PatelManager,

Advisory Services

Conclusion

Dependence on interest income as the key contributor to tr easury profit creates uncertainty andinvolves risk capital. Reluctance to enhance proprietary trading activities means that banks willinvariably be forced to explore newer avenues to bring about stability in the treasury business.The bullion business provides one such relatively stable source of treasury income with littleinvolvement of risk capital. The opportunity and timing to enhance this aspect of the treasuryproduct portfolio is likely to betoo compelling to pass on.

With the rebound in net retail investment demand,retailing of gold coins provide banks with anotheropportunity to enhance treasury income. Highermargins in gold coin business and the need for anestablished branch network provide marginal playerswith a sustainable treasury business opportunity.

Sources: Quarterly reports, World Gold Council and GFMS website,www.gold.org, accessed 20 August 2010.


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Date News

31 JulyUS regulators closed five more banks in the four states of Georgia, Florida, Washington and Oregon. With these closures, the total number of failed banks in 2010stands at 108. According to the Federal Deposit Insurance Corp., the five latest failures are likely to cost its insurance fund nearly US$335 million. 18

6 July Defensive investment strategies adopted by hedge fund managers helped the US$1.8 trillion US hedge fund industry avoid a big loss in the first half of 2010. Thisloss was avoided amid global concerns of sovereign debt problem and the double-dip recess ion. 19

8 May German financial services companies have contributed 8.1 billion in financing to assist Greece bailout. These companies have a total 43.4 billion invested inGreece . 20

News section: May July 2010

Global economy


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Entity Date News

American International

Group Inc. (AIG)15 July Chairman of AIG, Harvey Golub, resigned after his standoff with the Robert Benmosche. According to company sources, another

board member Robert S. Steve Miller is likely to replace him. 21

Banco de Espaa 24 MaySpain's central bank has taken over CajaSur, the Roman Catholic Church-controlled savings bank. CajaSur's is the second failure inSpain since the global financial crisis due to which the Spanish banks have faced difficulties in gett ing funds from the internationalmarkets. 22

Bank of America 18 JuneBank of America Merrill Lynch started its online brokerage business. The main objective of this initiative is to defend clients' assetsrather than expanding them. Merrill Edge will have half-a-million existing clients belonging to BoA's existing online brokeragebusiness. These clients will be transferred to Merrill Edge in July and August. 23

Barclays Capital 29 May Barclays Capital has appointed the former Canadian Finance Minister and Ambassador Michael Wilson as Chairman of its operatio ns inCanada. Previously, he worked with RBC Capital Markets as Deputy Chairman. 24

Citigroup Inc 15 June Citibank has sold its MasterCard portfolio worth near ly C$2 billion to the Canadian Imperial Bank of Commerce. This move is i n line

with Citibank's continued effort to divest its noncore assets.25

Citigroup Inc 5 May Citigroup has plans to launch a US$200 million fund for small-business lending in low- and moderate-income communities. Theseloans will be in the range of US$14,000 to US$500,000. 26


Global corporate news

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Entity Date News

Credit Suisse Group 25 June Credit Suisse has appointed Eric Varvel as CEO of its investment bank, while the current Head of Investment Banking, Paul Calello will

serve as the Chairman of the Securitie s unit. 27

Landesbanks 24 July The eight German state-sector regional banks, known as Landesbanks, have passed the stress tests. However, there are still somedoubts over their poor risk management, which calls for an urgent reform of the Landesbank sector. 28

Prudential PLC 28 May Prudential PLC is in talks to cut the price of its US$35.5 billion acquisition of AIG's Asian life insurance unit. The talks are focused onfinding a price that will be acceptable both to Prudential PLC and AIG. 29

Royal Bank of ScotlandGroup PLC (RBoS) 11 May

RBoS has plans to cut 2,600 jobs in its insurance and retail-banking divisions. The company will lay off around 2,000 people in itsinsurance unit and 600 in the back offices of its retail network. 30

RBoS 31 JulyRBoS is expected to announce the sale of its two assets valued at up to a total of 4.3 billion (US$6.71 billion) in its efforts to shrinkits balance sheet. According to market sources, RBS is selling 318 branches in the UK to Spain's Banco Santander SA for about 1.8billion and its Global Merchants Services division for between 2 billion and 2.5 billion. 31


Global corporate news

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Banking and capital markets: IndiaRegulatory actions

Entity Date News

Ministry of Finance(MoF) 28 July

The Government of India introduced a Bill in the Parliament on 28 July to replace the contentious Securities and Insurance Laws(Amendment and Validation) Ordinance, 2010, thereby seeking to formally give the jurisdiction powers to IRDA to regulate ULIPS. Furtherthe Bill also proposes a joint mechanism headed by the finance minister to resolve regulatory disputes and elevate the central bankgovernor to the level of Vice Chairperson of the joint mechanism. 32

RBI 3 July RBI has proposed a cap on annual salary increments of CEOs and whole -time directors of banks, which are not state -run. The regulator hasalso proposed to link salaries to the risk and responsibility of the officials. 33

RBI 25 JuneRBI has come up with new guidelines on pricing of shares of unlis ted companies where shares of unlisted companies can be transfer red ata price not less than the fair value , which is to be determined by a SEBI-registered merchant banker or chartered accountant as per thediscounted free cash flow method. 34

SEBI 31 July SEBI has approved the launch of exchange-traded currency options on the rupee -dollar spot rate. It is expected to boost the turnover ofthe exchange-traded currency derivatives segment, where currently, only futures trading are available. 35

SEBI 8 July SEBI has relaxed the exposure margin requirement for stock derivatives effective from 15 July. According to new norms, the exposuremargin is expected to be higher of 5% or 1.5 times the standard deviation of the notional value of the gross open position in single stockfutures and gross short open position in stock options in a particular underlying. 36

SEBI 25 May SEBI has strengthened regulations related to voting rights of holders of depository receipts (DR). The regulator is not comfortable in caseswhere the voting rights rest with the board of directors and not DR holders. 37

SEBI 5 May SEBI has allowed exchanges to offer option contracts based on Sensex and Nifty with tenure of up to five years. This leverage will widenthe scope of index-based options. 38

SEBI 4 MaySEBI has asked the credit rating agencies to disclose compensation from issuers and the methodology and procedures related to bothsolicited and unsolicited credit ratings. It has also stated that credit rating agencies must also maintain a summary of discussions with theissuer, its management, auditors and bankers , which have a bearing on the credit rating. 39

SEBI 4 May

SEBI has strengthened its guidelines for credit r ating agencies by standardizing the definition of defaults and the formula f or computing

default rates. This will help the investors to evaluate the performance of the rating agency and understand the historical pe rformance ofeach category. 40

Forward MarketsCommission (FMC) 30 July

FMC has directed commodity exchanges to disallow sub- brokers and allow them to appoint authorized persons, either an individua l or anentity, to deal with clients on members behalf. 41

FMC 1 JulyFMC has issued strict norms for the members of commodity exchanges to have a minimum net worth of INR50 million for the prece dingthree consecutive financial years to enable it to invest abroad for trading in overseas commodity exchanges and undertake relatedactivities. 42


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Other important news

Entity Date News

Axis Bank 9 July Axis Bank is exploring options to monetize its network of 4,200 ATMs. The options include selling the entire network to third -partyservice providers for an upfront payment and pay them on a per-transaction basis. 43

Bombay StockExchange (BSE) 22 June

The BSE has formed Indian Clearing Corporation to consolidate its clearing and settlement business. The new company has a str ucturesimilar to the National Stock Exchange and is likely to be headed by an ex-government official. 44

Canara Bank 13 JulyCanara Bank has sought approval of its shareholders to raise up to INR25.9 billion through a variety of instruments, including equityand preference shares. The government's current holding is pegged at 73.17%, allowing the bank enough room to raise additional Tier-I capital. 45

Central Bank of India(CBI) 16 July

CBI is looking to expand overseas and plans to seek licences to open offices in Hong Kong, Bahrain and a few African countries. Thebank wants to establish its presence in geographies, such as Africa, South and South East Asia, where there are not too many Indianbanks at present. 46

Central DepositoryServices (India) Ltd.(CDSL)

23 July BSE has proposed top-level management changes at CDSL, after the former acquired a controlling stake of 54.2% in the latter. Thesechanges were discussed at its board meeting held on 16 July and the final decision is expected soon. 47

Dhanlaxmi Bank 21 July HSBC and JPMorgan have acquired a 3% stake each in the Kerala-based Dhanlaxmi Bank by subscribing to its sale of shares to qualifiedinstitutional buyers (QIBs). The bank raised INR3.81 billion from the QIB issue. 48

ICICI Bank 20 May Bank of Rajasthan has decided to merge with ICICI Bank. This is the third acquisition by ICICI Bank in the last 10 years. 49

IDBI Bank 23 JulyThe board of the IDBI Bank has provided its in -principle approval to merge the wholly owned housing finance subsidiary of the bankwith itself. According to Executive Director of the bank, RK Bansal, it made better sense as the company had outstanding loans ofINR30 billion only as compared to INR160 billion of IDBI Bank. 50

IFCI Ltd. 14 JulyIFCI is likely to come up with a bond offering for retail investors in the third quarter (October-December) of this fiscal year. This followsthe Central Governments recent move to allow IFCI, among other companies, to issue infrastructure bonds, which provide retai linvestors a window to get additional tax deduction of INR20,000. 51

ING Bank 25 June ING has sold its entire stake of over 3% in Kotak Mahindra Bank in a bulk deal on the National Stock Exchange for INR8.01 billion 52.


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Entity Date News

Karnataka Bank 22 May A consortium of the US-based asset management company Wellington Management, Bajaj Allianz Life Insurance, Axis Bank and FamHealth Care Pvt. Ltd. together had picked up close to a 6% stake in the Karnataka Bank. 53

Lakshmi Vilas Bank (LVB) 24 JulyLVB is reportedly in talks with the Citigroup to acquire its non-banking finance company CitiFinancial Consumer Finance India. LVBhas hired investment bank JM Financial to carry out due diligence of CitiFinancial, which has a INR90 billion balance sheet , 116branches and close to 1,600 employees. 54

LVB 5 July LVB plans to form a separate subsidiary for its housing finance business. The move focuses to improve the banks profitability asgenerally, housing finance companies operate on a higher return on assets ratio than banks. 55

LIC Housing Finance(LICHF) 2 June

LICHF is planning to start a venture capital fund, which is expected to raise its first funds of around INR5 billion from Sep tember2010. Arun Goel has been appointed as the CEO to start off this venture. 56

Muthoot Finance 30 JulyKerala-based non-banking finance company Muthoot Finance has raised INR1.57 billion by selling nearly a 4% stake to two privateequity firms Baring Private Equity Partners India and Matrix Partners India. The funds will be utilized to shore up the company'scapital adequacy and expand its business. 57

National Bank forAgriculture and RuralDevelopment (NABARD)

14 June NABARD is planning to set up rural credit bureaus on the line of the Credit Information Bureau (India) Ltd. to help the flow of creditto the rural sector. 58

National Stock Exchange(NSE) 8 June

NSE plans to form alliances with regional stock exchanges Jaipur Stock Exchange, Madhya Pradesh Stock Exchange and VadodaraStock Exchange. This step has been taken to increase its geographic footprint and prevent rising competit ion. 59

Punjab National Bank(PNB) 25 June

PNB is in the process of restructuring its subsidiaries after rationalizing costs in the past three years and bringing the cost-to-income ratio down to 42% in FY10 from 50% in FY08. 60

Rabobank 23 JuneRabobank has sold its 11% stake in Yes Bank leaving it with a total shareholding of only 4.9%. The shares were sold in a series ofbulk deals at an average pr ice of INR263 per share. The buyers included Life Insurance Corporation of India, SBI Life, Templetonand French fund Carmignac. 61

Standard Chartered Bank 19 May Standard Chartered has increased its stake in Standard Chartered-STCI Capital Markets Ltd. from 75% to 100%. 62

State Bank of India (SBI) 24 July SBI has raised US$1 billion (approx. INR47 billion) through a five-year senior unsecured bond issue at a fixed coupon rate of 4.5%.The bonds, issued through its London branch to investors on 27 July, will be listed on the Singapore Stock Exchange. 63



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Entity Date News

SBI 16 JulyThe Cabinet approved the acquisition of State Bank of Indore by SBI by according its in -principle approval to introduce a Bill in theParliament for making consequential amendments in the SBI (Subsidiary Banks) Act, 1959, to remove references to State Bank ofIndore. The acquisition will allow economies of scale in terms of footprint, manpower and other resources. 64

SBI 15 July SBI and State General Reserve Fund (SGRF) of Oman signed a joint venture agreement on 14 July to form a Joint Investment Fund . Thefund, which will invest in India to start with, will begin with a corpus of US$100 million to be contributed equally by SGRF and SBI. 65

SBI/ ICICI Bank 12 July SBI and ICICI Bank have got an extension up to September 2011 and March 2011, respectively to increase their provisioning coverageratio (PCR) to 70% of its non-performing assets. SBI and ICICI have a PCR ratio of 60% and 59.5%, respectively, as of March 2010. 66

SBI 2 July SBI has started a green channel counter where customers make paperless deposits, withdrawals and remittances. The bank expe ctsthat this will make things easier for senior citizens who prefer branch banking besides bringing down its carbon footprint. 67

SBI 17 June SBI plans to launch its wealth management services in a phased manner in FY11. The bank has already launched its financial pl anningand advisory services. The bank has also identified new initiatives such as setting up of private equity funds. 68

Union Bank of India 24 May Union Bank of India is planning to launch its asset management business in October. Thereafter, the bank is also getting read y to enterthe wealth management business and is looking to partner with a top foreign wealth management service provider. 69

United StockExchange (USE) 11 July

United Stock Exchanges (USE) plans to commence exchange -traded currency derivative trading in the near future is expected to fuel thecompetition in this segment. Currently, only NSE and the MCX Stock Exchange provide currency derivative trading in India. 70



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Management movement

Entity Date News

Indian Banks' Association(IBA) 9 June

OP Bhatt, Chairman of SBI, has been appointed as the Chairman of IBA. Aditya Puri, MD of HDFC Bank, MD Mallya, CMD of Bank ofBaroda and AC Mahajan, CMD of Canara Bank were also selected as Deputy Chairmen. 71

Bank of America MerrillLynch 4 May

Bank of America Merrill Lynch has appointed Asit Bhatia as the Managing Director of Corporate & Investment Banking, India. He willbe responsible for investment banking, global markets and corporate banking teams in India. Previously, he was the Head ofCorporate Coverage team at Bank of America in India. 72

CholamandalamInvestment & Financecompany (CIFCL)

29 July Vellayan Subbiah , the only son of the groups former chairman MV Subbiah, has been appointed as the MD of CIFCL, the assetfinancing arm of US$3.03 billion (INR136.17 billion) Murugappa Group. 73

Citigroup Inc 4 MayCitigroup has given Sunil Nair an additional responsibility to head its private equity business in India. Apart from this, he is also theManaging Director and Head of Citi Venture Capital International's investment activities in Central and Eastern Europe, Middle Eastand Africa. 74

IDBI Bank 9 July IDBI Bank has appointed RM Malla as its Chairman and Managing Director. Previously, he was the Chairman of Small IndustriesDevelopment Bank of India. 75

Religare Capital MarketsLtd 23 May

Religare Capital Markets has appointed Tarun Kataria as the CEO for its Indian businesses. Previously, he was Managing Director ofGlobal Banking and Markets, HSBC India. 76

Standard Chartered Bank 3 JulyV Anantharaman, has been appointed as Managing Director and Head of Corporate Finance and Advisory Business in StandardChartered Bank. Anantharaman had left Stanchart in 2006 to join Credit Suisse as its Managing Director and was pivotal in setting upits investment banking team. 77



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Insurance: India

Regulatory actions

Entity Date News

IRDA 2 July IRDA has introduced a number of changes in the insurance sector. This includes a ceiling on charges during the policy term of ULIPs, limit on thecommission paid to referrals, stringent norms on agents and introduction of a guaranteed return of 4.5% on pension products. 78

IRDA 20 JuneThe government has issued an amendment favoring IRDA over SEBI regarding ruling ULIPs. The law ministry issued an ordinance amending the RBI Act1934, Insurance Act 1938, SEBI Act 1992 and Securities Contract Regulations Act 1956, clarifying that the life insurance business will include anyULIPs or scripts or any such instruments. 79

IRDA 12 June IRDA has proposed that an insurance companys board should take decisions regarding the appointment of a corporate agent. The regulator has alsomade it mandatory for insurers to undertake physical inspection at their corporate agents' offices. 80

IRDA 5 June IRDA has proposed to incorporate a new provision for insure rs to issue key feature documents for various products to the policy holders in s implelanguage. The documents will have the same legal sanction that a comprehensive policy document would have. 81

IRDA 19 May IRDA has capped the referral fee paid to agents to regulate non-banking entities acting as referral agents in the life insurance industry. This step willalso prevent multi-level agencies from sel ling insurance products that do not follow any code of conduct. 82

IRDA 17 MayIRDA has asked non-life insurance companies to submit yearly financial condition reports from March 2010. The report should include businessprojections, analysis of business growth, adequacy of premium/capital, risk management, investment and asset liability management and current andfuture financial condition. 83

IRDA 10 May IRDA is planning to introduce an advanced integrated grievance management system for speedy and effective redressal of grievances. This will be anintegrated robust system, which can capture everything happening in insurance companies on policy-holder grievance management. 84


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Entity Date News

DLF Pramerica LifeInsurance 28 July

Real estate firm DLF is likely to bring in a strategic Indian investor in DLF Pramerica Life Insurance, its insurance joint venture withUS-based Prudential International Holdings. The Indian investor may acquire up to a 44% stake out of DLFs total stake of 74% wi thPrudential's holding remaining at 26%. 85

General InsuranceCorporation of India (GIC) 21 July

General Insurance Corporation of India (GIC) is looking to acquire a reinsurance company in Africa. The reinsurer plans to increaseits share of international business to 50% by 2012 from 44% as of March 2010. 86

Life Insurance Corporationof India (LIC) 15 June

LIC is planning to enter the reverse mortgage space. The company has had initial talks with the housing finance regulator, NationalHousing Bank (NHB), to introduce this scheme to its clients. LIC is awaiting clearances from the organization. 97

Maruti Suzuki India Ltd, 29 July Maruti Suzuki, the nation's largest passenger car maker, is exploring options to float a general insurance firm with a local partner.The move was prompted by the insurance regulator IRDAs decision to ban it from selling motor insurance to its customers. 88

Multiple entities 10 July All insurance companies providing cashless health insurance facility such as Apollo, Fortis, Ganga Ram, Max or Medicity in Delhi,have stopped direct payment of treatment charges to about 150 high -end hospitals in the Delhi region from 1 July. 89

Reliance GeneralInsurance/ RoyalSundaram Alliance

14 JulyReliance General Insurance and Royal Sundaram Alliance have submitted a proposal to IRDA to merge their businesses. If themerger goes through, it will enable the UK insurer Royal Sun Alliance to acquire a 26% stake in the second-largest private insurerand Sundaram to exit from the business. 90

Reliance Life Insurance CoLtd 12 July

Reliance Life is planning to start its IPO process within two weeks after the regulators' approval. The company is also looking out fora foreign strategic partner to offload stake of up to 26%, in which case, it is prepared to put its IPO plans on hold. 91

Star Health and AlliedInsurance Company 29 July

Two private equity funds, ICICI Ventures and Sequoia Capital, plan to pick up stake in the Chennai -based stand-alone health insurerStar Health and Allied Insurance Company. Reportedly, while ICICI Ventures has already put in INR1,000 million and will invest anadditional INR200 million, Sequoia Capital is at an advanced stage to invest INR1,300 million. 92


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Management movement

Entity Date News

Birla Sun Life Insurance 18 June Birla Sun Life has appointed as Jayant Dua its new CEO. The company has been without a head since its former CEO Vikram Mehmiquit in December 2008. 93

Kotak Life Insurance 17 July Kotak Life Insurance has appointed Mr. Pankaj Desai as MD of the company. He succeeds Mr. Gaurang Shah who has moved to theKotak Mahindra Group as the Head of its domestic and international asset management and life insurance businesses. 94


Insurance: India

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Asset management: India

Regulatory actions

Entity Date News

SEBI 13 July SEBI has directed mutual funds (MFs) to have a uniform exit load for investments through the lumpsum route as well as systematic investment plans(SIPs). 95

SEBI 18 June SEBI has given a mandate that upfront commission should be paid from the profits of fund houses and not from the expense pool. As a result, AMCshave slashed upfront margins payable to distributors for pushing their schemes to investors. 96

SEBI 12 June SEBI has proposed that persons investing in mutual funds must have their own demat accounts. The move, if implemented, is expected to give a fillipto the poor trading volumes of mutual funds on both the exchanges. 97

SEBI 31 May SEBI has proposed to put in place a system of product suitability, presenting a certain type of investor with a set of products having attributes that fittheir requirements. The measure is aimed at regulating the distributors and is expected to promote right selling and reduce misselling. 98

SEBI 14 May SEBI has asked fund houses to disclose details of investor complaints on their websites and annual reports. SEBI has classified such complaints into

three categories delay/non-payment of money, statement of accounts and service related.99


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Management movement

Entity Date News

Pension Fund RegulatoryDevelopment Authority 8 May

Yogesh Agarwal has been appointed as the Chairman of the interim PFRDA. He will be serving a five-year tenure with PFRDA.Previously, he was the Managing Director of IDBI Bank. 104

Pramerica AssetManagers Pvt. Ltd. 9 June

Pramerica Asset Managers have appointed Ravi Gopalakrishnan as Head of Equities. R

fin esse may july 2010

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