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INDIA’S FINANCIAL SECTOR REFORMS 2010-2016: OUTCOMES AND ISSUES

RakeshMohanNonResidentSeniorResearchFellow

StanfordCentreforInterna8onalDevelopment,StanfordUniversityand

Dis8nguishedFellowBrookingsIndia

And

ParthaRayProfessor

IndianIns8tuteofManagementCalcuEa

1

Presenta+onattheSCIDIndiaConference2016Stanford

June2,2016

Scheme of Presentation

2

I.   MacroFinancialCondi8ons

II.   CentralBankGovernanceandMonetaryPolicy

III.   DevelopmentsintheBankingSector

IV.  Forma8onofNPAsintheBankingSector

V.   FinancialInclusionVI.   LookingAhead

Macro Financial Conditions (1) Growth and Inflation Outcomes

Period (Averages) GDP Growth (%) WPI Inflation (%) 1951-60 3.6 1.2 1960-70 4.0 6.4 1970-80 2.9 9.0 1981-91 5.6 8.2 1991-92 (Crisis Year) 1.4 13.7 1992-2000 6.3 7.2 1998-2008 7.1 5.0 2003-08 8.7 5.5

2008-10 (NAFC) 7.0 5.6 2010-12 7.8 9.3 2013-16* 6.5* 3.2 (7.4)

3

*GrowthfiguresrelatetoGVAatbasicpricewith2011-12baseyear.Figuresinbracketsareinfla+onareonthebasisofcombinedCPISources:EconomicSurvey,GovernmentofIndia,2015-16;RBIBulle+n,

Macro Financial Conditions (2) Inflation in India

4

Year AllCommodi8es

PrimaryAr8cles

Fuel&Power

ManufacturedProducts

CombinedCPI

Infla8on 2000-01 7.2 2.8 28.5 3.3 2001-02 3.6 3.6 8.9 1.8 2002-03 3.4 3.3 5.5 2.6 2003-04 5.5 4.3 6.4 5.7 2004-05 6.5 3.6 10.1 6.3 2005-06 4.4 4.3 13.5 2.4 2006-07 6.6 9.6 6.5 5.7 2007-08 4.7 8.3 0.0 4.8 2008-09 8.1 11.0 11.6 6.2 2009-10 3.8 12.7 -2.1 2.2 2010-11 9.6 17.7 12.3 5.7 2011-12 8.9 9.8 14.0 7.3 5.8 2012-13 7.4 9.8 10.3 5.4 10.1 2013-14 6.0 9.8 10.2 3.0 6.7 2014-15 2.0 3.0 -1.0 2.4 5.8 2015-16 -0.9 2.1 -8.3 -0.1 5.5

Macro Financial Conditions (3) Inflation in India: Different Rates

5

-5.0

0.0

5.0

10.0

15.0

20.0

Apr-05

Sep-05

Feb-06

Jul-0

6

Dec-06

May-07

Oct-07

Mar-08

Aug-08

Jan-09

Jun-09

Nov-09

Apr-10

Sep-10

Feb-11

Jul-1

1

Dec-11

May-12

Oct-12

Mar-13

Aug-13

Jan-14

Jun-14

Nov-14

Apr-15

Sep-15

Feb-16

WPI CPI-IW CPIAll-India

Macro Financial Conditions (4) Bank Credit & Investments: Growth Rates (%)

6

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

InvestmentinG-Sec BankCredit

Source:HandbookontheIndianEconomy,RBI.Note:Figuresrefertoinvestmentandcreditofallcommercialandco-opera+vebanks

Macro Financial Conditions (5) Credit, Investments, and Deposits of

Commercial Banks (% of GDP)

7

Macro Financial Conditions (6) Payment System Indicators

8

Type Volume(Million) Value(RupeesBillion)

2016 2010 2005 2016 2010 2005

1RTGS 9.97 4.8 0.1 1,22,784 1,08,658 5,825 2CCILOperatedSystems 0.3 0.1 0.1 75,012 34,827 7,290 3PaperClearing 98.1 13.18 – 7,717 102 – 4RetailElectronicClearing 328.3 37.1 4.8 11,136 1,657 80 5Cards 917.4 44.8 15.5 2,573 103 29 o/wCreditCards 72.8 23.4 11.8 230 70 24 o/wDebitCards 844.6 21.4 3.6 2,342.82 33.57 4.67 6PrepaidPaymentInstruments 72.0 – – 59.72 – – 7MobileBanking 48.4 – – 625.01 – – 8NumberofATMs(inactuals) 199,100 – – – – –

DatapertaintoMarchofthegivenyears.Source:DatabaseonIndianEconomy,RBI

Macro Financial Conditions (7) What did the IMF FSAP report (2013) say?

9

• Remarkable progress toward developing a stable financial system. • The prominent role of the state in the financial sector contributes to a

build-up of fiscal conPngent liabiliPes and creates a risk of capital misallocaPon that may constrain economic growth(?)

• Despite risks related to worsening bank asset quality and renewed pressures on systemic liquidity, financial system vulnerabiliPes appear manageable.

• Sharp credit expansion with recent economic slowdown puWng pressure on banks’ asset quality, especially for infrastructure and priority sector (?).

• Group concentraPons have reached troubling levels at some banks. • Risk of reversal of capital flows and a repeat of liquidity pressures like

2008. • Stress tests :banks’ substanPal buffers of high quality assets (cash and

SLR Gsecs) enable them to deal with such pressures.


10






Central Bank Governance and Monetary Policy (1) RBI Committees (1)

11

Board for Financial Supervision (BFS)

ü ConsPtuted in 1994 as a commi_ee of the Central Board

ü ObjecPve: Undertake consolidated supervision of the financial sector

comprising commercial banks, financial insPtuPons and non-banking finance companies.

ü Members: 4 Independent Directors from the Central Board; All Deputy Governors

ü Meets monthly

Ø Can become formally responsible for Financial Stability and Macro prudenPal RegulaPon

Central Bank Governance and Monetary Policy (2) RBI Internal Committees (2)

12

Board for RegulaPon and Supervision of Payment and Se_lement

Systems (BPSS)

ü Payment and Se_lement Systems Act, 2007 ü Sub-commi_ee of the Central Board of the Reserve Bank of India ü Highest policy making body on payment systems in the country. ü Empowered for authorizing, prescribing policies and seWng standards for

regulaPng and supervising all the payment and se_lement systems in the country

ü Assumes increased importance with spread of fintech

Central Bank Governance and Monetary Policy (3) Financial Stability and Development Council

(FSDC) (1)

13

• FSDC set up by Government December 2010. • ObjecPves

ü strengthening and insPtuPonalizing the mechanism for maintaining financial stability

•  Macro prudenPal supervision of the economy, including funcPoning of large financial conglomerates

ü enhancing inter-regulatory coordinaPon and ü promoPng financial sector development

•  financial literacy and financial inclusion

• ComposiPon ü Chairman: Finance Minister ü Vice Chairman : Governor RBI ü Members

•  Heads RBI, SEBI, PFRDA, IRDA •  Finance Secretary and/or Secretary, Department of Economic Affairs, •  Secretary, Department of Financial Services, and Chief Economic Adviser.

•  AddiPonal Secretary, DEA is the Secretary to FSDC

• Financial Data Management Centre to be set up under FSDC ü integrated data aggregaPon for analysis in the financial sector.


(FSDC) (2)

14

• The FSDC Sub-commi_ee : Chair Governor, RBI ü Meets more ohen than the full Council. ü Members: § All the members of the FSDC § All Deputy Governors of the RBI and AddiPonal

Secretary, DEA, in charge of FSDC § ExecuPve Director, RBI (in charge of financial Stability)

is the Member Secretary §  Financial Stability Unit (FSU) of RBI is the Secretariat

for the Sub-commi_ee.


(FSDC) (3)

15

• Working Groups/Technical Groups under FSDC Sub-Commi_ee

ü Inter Regulatory Technical Group: headed by ED in charge of Financial Stability, RBI

ü Technical Group on Financial Inclusion and Financial Literacy: Chaired by DG, RBI RepresentaPves from all regulators, DEA and DFS

ü Inter Regulatory Forum for monitoring Financial Conglomerates: Headed by DG RepresentaPves of all the sectoral regulators

ü Early Warning Group: chaired by DG, RBI in-charge of Financial Markets ü Macro Financial and Monitoring Group: chaired by the Chief Economic

Adviser ü Working Group on resoluPon regime for financial insPtuPons

16

Central Bank Governance and Monetary Policy (6) Changes in Operating Procedure: 2011

•  OperaPng target of monetary policy: Weighted average overnight call money rate •  Repo rate : Main policy rate •  New Marginal Standing Facility (MSF) Banks: 100 basis points above the repo rate

ü Banks can borrow up to 1 %of their respecPve NDTL; now 2 %

•  The Bank Rate aligned to the MSF rate. •  The revised corridor was defined with a fixed width of 200 basis points. •  The repo rate was placed in the middle of the corridor •  Reverse repo rate 100 basis points below repo rate •  Morerecently,onApril52016withaviewto“ensuringfineralignmentoftheweightedaveragecallrate(WACR)withthereporate”,theRBInarrowedthepolicyratecorridorfrom+/-100basispoints(bps)to+/-50bpsbyreducingtheMSFrateby75basispointsandincreasingthereversereporateby25basispoints

•  Currently,PolicyReporate=6.5%,ReverseRepoRate=6%,&MSFRate=7%

Ø Liquidity always expected to be in shortage

Central Bank Governance and Monetary Policy( 7) Daily Net Injection (+)/Absorption (-) of

Liquidity by the RBI (Rs. Billion)

17

-1,500.00

-1,000.00

-500.00

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

NetInjec+on(+)/Absorp+on(-)=Repo+TermRepo+MSF+SLF+Openmarketpurchase–Reverserepo–Termreverserepo–OpenMarketSaleSource:DatabaseonIndianEconomy

Central Bank Governance and Monetary Policy (8) Liquidity Adjustment Facility (LAF)

Corridor and Call Rate

18

0

2

4

6

8

10

12

14

16

18

20

Percen

t

CallRate ReverseRepoRate RepoRateNote:Callratestouched52-54percentonoccasionsduringtheperiodMarch21-31,2007.

Central Bank Governance and Monetary Policy (9) New Monetary Policy Framework (1)

19

Flexible InflaPon TargePng Ø CPI 4 % +/-2 %

Monetary Policy Commi_ee • Governor • Deputy Governor i/c of Monetary Policy • RBI Official nominated by RBI •  3 “Nominees of Central Government”

ü 4 Year non renewable term

• Government can submit wri_en views • Governor has casPng vote in case of Pe

Central Bank Governance and Monetary Policy (10) New Monetary Policy Framework (2)

MPC: Other Key Jurisdictions

20

• US Federal Reserve ü Chairman, All other 6 Governors, NY Fed President,4 District Fed Presidents

•  ECB ü President, All other 5 ExecuPve Board Members, 19 European Central Bank

Governors

• Bank of England ü Governor, 3 of 4 Deputy Governors, Chief Economist, 4 External(Full Time)

Members, Treasury non voPng Observer

• Bank of Canada ü Governor, 5 Deputy Governors (no outsiders)

• Reserve Bank of Australia ü RBA Board, Governor, Deputy Governor, Secretary Treasury, 6 External (part Pme)

Members

Central Bank Governance and Monetary Policy(11) New Monetary Policy Framework (3)

Issues Arising (1)

21

• Most Major Central Bank MPCs do not have part Pme outside voPng members Ø Will External Members be full Pme or part Pme? Ø Conflicts of interest as external voPng members? Ø How much informaPon can be shared with the members

• Most have all Deputy Governors as Members Ø Synergy from other DGs with knowledge of bank regulaPon, supervision, financial

markets, external markets Ø Indian MPC has lost this synergy with their exclusion

• Government Wri_en Submission Ø How will this be treated?

Central Bank Governance and Monetary Policy(12) New Monetary Policy Framework (4)

Issues Arising (2)

22

Flexible InflaPon TargePng has been adopted • ConsideraPon of other objecPves?

ü Economic Growth ü Employment ü Financial Stability

• US, ECB, UK, Australia, Canada, have some of these objecPves ü InflaPon target is primary objecPve ü Growth, Employment, financial stability as secondary objecPves


23






Developments in the Banking Sector (1) Key Features of Trends 2010-2016

24

•  Slowdown in credit growth

•  Increase in share of corporate lending by public sector banks • Reversal of convergence in performance of public and private sector

banks

•  Increasing NPAs in public sector banks •  Increasing share of foreign holdings in private sector banks

Developments in the Banking Sector (2) Productivity and Efficiency Indicators (%)

25

Indicator Year PSBs NewPrivateBanks

ForeignBanks AllCommercial

Banks

Intermedia+oncost@

1998-99 2.7 1.7 3.4 2.7

2008-09 1.5 2.2 2.8 1.7

2014-15 1.6 2.2* 2.3 1.8

Netinterestmargin 1998-99 2.8 2.0 3.5 2.8

2008-09 2.1 2.8 3.9 2.4

2014-15 2.3 3.4* 3.5 2.6

Returnonassets 1998-99 0.4 1.1 1.0 0.5

2008-09 0.9 1.1 1.7 1.0

2014-15 0.5 1.7* 1.9 0.8&:Ra+oofopera+ngexpensestototalincomelessinterestexpenses.@:Ra+oofopera+ngexpensestototalassets.*:Forallprivatesectorbanks(New&old).Source:Mohan(2010)&Sta+s+calTablesrela+ngtoBanksinIndia,RBI,2014-15.

Developments in the Banking Sector (3) Bank Group-wise Shares (%)

26

1995-96 2000-01 2008-09 2014-15*

PublicSector

Bank

s

Income 82.5 78.4 68.0 70.1Expenditure 84.2 78.9 68.4 72.6TotalAssets 84.4 79.5 71.9 72.1NetProfit -39.1 67.4 65.2 42.1GrossProfit 74.3 69.9 60.1 59.2

New

Priv

ateSector

Bank

s

Income 1.5 5.7 17.6 23.8Expenditure 1.3 5.5 17.8 22.1TotalAssets 1.5 6.1 15.2 21.6NetProfit 17.8 10.0 16.0 43.5GrossProfit 2.5 6.9 17.5 29.9

ForeignBa

nks

Income 9.4 9.1 9.7 6.1Expenditure 8.3 8.8 9.2 5.3TotalAssets 7.9 7.9 8.5 6.3NetProfit 79.8 14.8 14.2 14.4GrossProfit 15.6 15.7 18.0 10.9

*Figuresfor2014-15pertaintoallprivatesectorbanks(asagainstonlynewprivatesectorbanksforotheryears).

Developments in the Banking Sector(4) Financial Performance of Commercial Banks

27

Source:FinancialStabilityReport,RBI,December2015.

Developments in the Banking Sector (5) Shareholding Pattern of Select Private Sector

Banks & SBI

28

Name of the Bank Size (Total Assets, in Rs. Billion)

Share of Residents (%)

Share of Non Residents (%)

ICICI Bank 6,461 29.6 70.4

HDFC Bank 5,905 26.6 73.4

Axis Bank 4,619 49.4 50.6

Yes Bank 1,361 54.4 45.6

IndusInd Bank 1,091 28.4 71.6

Kotak Mahindra Bank 1,060 55.8 44.2 State Bank of India 20,481 85.8

(58.6) 14.2

Note: Figures in bracket is the share of Government &RBI in SBI Source: Statistical Tables relating to Banks in India, RBI, 2014-15

Developments in the Banking Sector (6) Capital to Risk-weighted Assets Ratio (CRAR)

29

•  CRARhasimprovedgreatlyfrom8.7%in1995-96to13.6%in2009-10.•  CRARdeclinedto12.7percentfrom13.0percentbetweenMarchandSeptember2015,•  Tier-Ileveragera+oincreasedto6.5percentfrom6.4percentduringthesameperiodSource:FinancialStabilityReport,December2015,RBI

Developments in the Banking Sector(7) Key Policy Developments

30

• Governance of Public Sector Banks ü PJ Nayak Report on Public Sector Bank Reform

Ø Indradhanush

• Changes in Bank Licensing Policy

• Financial Inclusion

• Strengthening of Credit Culture ü Bankruptcy Code ü Strengthening of Asset ReconstrucPon Companies

Developments in the Banking Sector (8) Public Sector Banks: Nayak Committee Report (2014)

31

• The Government has two opPons: ü PrivaPze these banks ü Design a radically new governance structure for PSBs.

• Govt to transfer its stake in PSU banks to a holding company (BIC) ü Appoint professional management for BIC ü Reduce Govt stake in BIC to under 50 percent ü Ownership funcPons to be transferred by BIC to the bank boards.

Appointments of directors, CEO to be the responsibility of bank boards

ü BIC to be assured of autonomy

Ø Thus distance between government and public sector banks

.

Developments in the Banking Sector(9) Indradhanush Framework for Transforming PSU Banks(1)

32

•  Banks Board Bureau ü Independent Chairman, 3 Experts, 3 Ex Officio

o Secretary Financial Services, DG RBI, Secretary Dept of Public Enterprises

ü Recommend SelecPon of Chairmen and Managing Directors

of PSU Banks and Financial InsPtuPons ü Separate posts of Chairman and Managing Director ü Help Banks in developing strategies and capital raising plans.

.

Developments in the Banking Sector(10) Indradhanush Framework for Transforming PSU Banks(2)

33

•  Capitalise Banks ü Rs 1800 billion 2015-19 ü Rs 700 billion from budget ü Rs 110 billion from market ü CapitalisaPon to be made dependent on performance

• No Interference from Government

• Plan to “DeStress” PSU Banks ü Facilitate project implementaPon ü AcPve Clearances to infrastructure and large projects ü CreaPon of a Central Repository of InformaPon on Large Credits (CRILC)

by RBI ü Strengthen and acPvate ARCs ü Set up 6 new debt recovery tribunals

Developments in the Banking Sector (11) New Bank Licensing Policy

34

•  Licence to two new banks aher nearly 10 years •  IDFC Ltd •  Bandhan Financial Services

•  DifferenPated Banks to be permi_ed ü  Payments banks (11) ü  Small finance banks (10) ü  Niche licenses for banks with more narrowly defined

businesses •  Now commercial banking licenses to be on tap

Developments in the Banking Sector (12) New Bank Licensing Policy

Payments Banks

35

• Payments banks ü EssenPally narrow banks (i.e., without any lending acPvity) ü Can raise deposits of up to Rs. 100,000 ü Interest can be paid as in savings bank accounts ü Expected to uPlize newer mobile technology and payment

gateways ü Transfers and remi_ances to enabled through mobile phones ü Can issue debit cards and ATM cards

• 11 Payments Banks licenses issued ü 3 withdrawn ü  10 microfinance enPPes and one non-bank financial company

ü Includes some non finance business groups

Developments in the Banking Sector (13) Small Finance Banks:

36

• RBI received 72 applicaPons ü 11 insPtuPons given in-principle licenses September 2015. ü Valid for 18 months to enable the applicants to achieve

compliance • Expected to further financial inclusion primarily through

ü Mobilizing savings ü Supply of credit to small business units, small and marginal farmers,

micro and small industries and other unorganised sector enPPes ü Use of high technology-low cost operaPons.

• Small finance banks similar to regular commercial banks but ü scale of services to be much smaller ü 50% of their loans to be of Pcket sizes under Rs 2.5 million


37






Formation of NPAs in the Banking Sector(1) Non-Performing Loans (NPL)

38

GrossNPA NetNPAAs%ofGrossAdvances As%ofTotalAssets As%ofNetAdvances As%ofTotalAssets

2002-03 8.8 4.1 4.0 1.82003-04 7.2 3.3 2.8 1.22004-05 5.2 2.5 2.0 0.92005-06 3.3 1.8 1.2 0.72006-07 2.5 1.5 1.0 0.62007-08 2.3 1.3 1.0 0.62008-09 2.3 1.3 1.1 0.62009-10 2.4 1.4 1.1 0.62010-11 2.5 1.4 1.1 0.62011-12 3.1 1.7 1.3 0.82012-13 3.2 2.0 1.7 1.02013-14 3.8 2.4 2.1 1.32014-15 4.6 2.5Sept2015 5.1 2.8Source:Sta+s+calTablesrela+ngtoBanksofIndia,RBI,variousIssues,andFinancialStabilityReport,RBI,December2015.

Formation of NPAs in the Banking Sector(2) Cross-Country Comparison of NPA to Total Loans(%)

39

Source:RajivKumar,Gee+maDasKrishna,andSakshiBhardwaj(2016):“Indradhanush-BankingSectorReforms”,CPRWorkingPaper(basedonWorldBankData)

Formation of NPAs in the Banking Sector(3) Asset Quality of Commercial Banks

40Source:FinancialStabilityReport,December2015,RBI

Formation of NPAs in the Banking Sector(4) Sectoral Composition of NPL of Nationalized Banks

41

Priority Sector (% of total)

Non-Priority Sector (% of total)

Public Sector (% of total)

TOTAL (Rs. Billion)

2015 34.6 65.3 0.1 2049.59

2014 36.5 63.5 0.1 1474.48

2013 40.2 58.9 0.9 1016.83

2012 47.0 51.5 1.5 690.48

2011 55.6 43.8 0.5 442.72

2010 53.8 45.4 0.8 363.95

2009 59.4 40.2 0.5 265.43

2008 64.0 34.3 1.8 249.74

2007 58.6 39.5 1.9 261.72

2006 51.8 45.9 2.3 288.17

2005 46.8 52.0 1.2 328.04

Formation of NPAs in the Banking Sector(5) Four Key Reasons

42

1.  Regulatory Forbearance in the ahermath of the North AtlanPc Financial Crisis Ø We behaved as if we had similar crisis

2.  Sharp fall in commodity prices leading to sharp declines in profitability of sectors such as steel

3.  Aggressive Government promoPon of public-private-partnership (PPP) for infrastructure Ø  EnthusiasPc Response from private sector Ø  Entry of heavily leveraged companies Ø  Problems in implementaPon of projects Ø  Economic Slowdown

4.  Governance issues with the management of select public sector banks Ø  Government behest? Ø  Inadequate due diligence Ø  CorrupPon?

Formation of NPAs in the Banking Sector(6)

RBI was a Pioneer in Initiating Macro Prudential Policy Counter-cyclical Prudential Policies / Dynamic provisioning (1)

43

• IMF - “India is a pioneer in the use of macro prudenPal policy and has made conPnued efforts to strengthen systemic oversight. RBI has long-standing experience in the use of macro prudenPal instruments to counter credit cycles” – IMF FSAP Update (Jan 2013)

• Macro prudenPal policies 2005-08 ü Capital risk weights were raised between 2005 and 2008 to

counter rapid credit growth in five sectors v  capital markets, v housing, v retail, v commercial real estate, and v  non-deposit taking NBFCs

Formation of NPAs in the Banking Sector(7) RBI was a Pioneer in Initiating Macro Prudential Policy

Counter-cyclical Prudential Policies / Dynamic provisioning (2)

44

• Macro prudenPal policies 2008-10

ü Some risk weights lowered at onset of financial crisis to miPgate downturn,

ü Sectoral provisioning requirements also adjusted during same period in conjuncPon with changes in capital risk weights,

ü A loan to value (LTV) cap introduced in November 2010 to counter growth in housing loans and house price inflaPon.

Formation of NPAs in the Banking Sector(8) RBI was a Pioneer in Initiating Macro Prudential Policy

Counter-cyclical Prudential Policies / Dynamic provisioning (3)

45

•  Regulatory Forbearance 2008-10 ü  Provisioning requirements for most standard assets reduced

to a uniform level of 0.40 per cent; ü  Risk weights on banks’ exposures to certain sectors revised

downward ü  One-Pme measures

Ø  PrudenPal regulaPons for restricted accounts modified as temporary measure for applicaPons received up to March 31, 2009

Ø  Restructured accounts to be treated as standard assets, if standard before the crisis (September 1, 2008), even if non-performing at the Pme of restructuring.

•  Did we overdo the counter-cyclical policies?

46

Formation of NPAs in the Banking Sector(9) Stagnation in Select Industries

•  Fivesub-sectorsviz.mining,iron&steel,tex+les,infrastructureandavia+on,whichtogethercons+tuted24.2percentofthetotaladvancesofSCBsJune2015,contributedto53percentofthetotalstressedadvances.

•  Avia+onsectorstressedadvancesincreasedto61%June2015;58.9percentinMarch2014•  Infrastructuresectorstressedadvancesincreasedto24%from22.9%duringthesameperiodFinancialStabilityReport,RBI,December2015

Formation of NPAs in the Banking Sector(10) Debt Levels of Indian Corporates

47

Source:CreditSuisse–HouseofDebtReport,October2015

Formation of NPAs in the Banking Sector(11) Increase in Share of Debt for Corporates with an

interest coverage ratio (ICR) < 1

48

•  Stresstestsofcorporatebalancesheetsconfirmthatexposuretopoten+alshocksishigh.Corporates’debtrepaymentcapacity,aperimprovingin2013/14,showedsignsofmarginaldeteriora+onin2014/15.

•  Corporatedebt-at-risk—theshareofdebtowedbyfirmswithaninterestcoveragera+o(ICR)belowone-edgedupto10.8percent,followinganimprovementto10.2percentinFY2013/14.

•  Anupwardshipindomes+cinterestratescon+nuestobeakeyriskforIndiancorporates,withtheshareofdebt-at-riskes+matedtoincreaseto17percentincaseofa250basispointriseindomes+crates.

Source:India:StaffReportforthe2016Ar8cleIVConsulta8on,IMF,January2016.


49






Financial Inclusion(1) Some Key Features

50

• MulP pronged approach towards financial inclusion via mulPple channels ü postalsavingsbank1880sü ruralandurbanco-opera+vebanks1900sü Na+onaliza+onofbanks1969/1980ü regionalruralbanks(RRBs)1975ü MFIs&SHGs1990s/2000s

•  SPll (From NSS 2003) ü 51%offarmerhouseholdsfinanciallyexcludedfrombothformal/informalsources

ü Only27%oftotalfarmerhouseholdshaveaccesstoformalsourcesofcredit

•  There are several diverse dimensions of financial inclusion such as, income,

region / province, caste, gender, economic size of the firm / household, and type of economic acPvity.

Financial Inclusion(2) Some Key Measures 1990s-2000s

51

• Kisan Credit Card allows farmers to have cash credit faciliPes without going through Pme-consuming bank credit screening processes repeatedly, 1998

• No-Frills accounts in commercial banks Introduced in 2005; Now

replaced by “Basic Accounts” • Business Correspondents (BC) introduced in 2006 third-party,

non-bank agents to extend their services right to people’s doorsteps.

Financial Inclusion(3) Recent Activist Stance

52

• Pradhan Mantri Jan-Dhan Yojana (Prime Minister's People Money Scheme) PMJDY August 2014 ü This scheme envisages universal access to banking faciliPes with at

least one basic banking account for every household, ü Apart from accessing basic banking services like credit, insurance and

pension facility, the beneficiaries get a Debit card having inbuilt accident insurance cover of Rs. 100 thousand.

ü By February 2016, over 200 million bank accounts were opened and over Rs 300 billion was deposited under the scheme.

• Payment Banks and Small Finance Banks 2015 •  JAM: Jan Dhan/Aaadhar/Mobile

ü ConnecPng bank accounts with mobile phones through Unique IdenPficaPon

ü Enabling Direct Benefit Transfer

Financial Inclusion(4) Outstanding Debt of Rural Household:

Institutional versus Non-Institutional Sources

53

SourcesofCredit 1951 1961 1971 1981 1991 2002 2012*

Non-ins8tu8onal 92.8 85.2 70.8 38.7 36.0 42.9 40.2

ofwhich:

(i) Landlords 3.5 0.9 8.6 4.0 4.0 1.0

( i i ) A g r i c u l t u r a lmoneylenders

25.2 45.9 23.1 8.6 7.1 10.0

( i i i ) P r o f e s s i o n a lmoneylenders

46.4 14.9 13.8 8.3 10.5 19.6

Ins8tu8onal 7.2 14.8 29.2 61.3 64.0 57.1 59.8

ofwhich:

(i) Government 3.7 5.3 6.7 4.0 6.1 2.3

(ii)Co-opera+vesocie+es 3.5 9.1 20.1 28.6 21.6 27.3

(iii)Commercialbanks 0.4 2.2 28.0 33.7 24.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Thereareissuesrela+ngtocomparabilityofthecons+tuentgroupsoddatacollectedunder59throundofNSS(for2002)and70throundofNSS(2012)

Financial Inclusion(5) AIDIS Survey – 2012 (NSS 70th Round)

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•  non-ins+tu+onalsources

con+nuedtoplayamajorroleinprovidingcredittotheruralhouseholds

•  About19%ofallruralhouseholdshaveacquiredcreditfromnon-ins+tu+onalsources

•  10%urbanhouseholdshaveacquiredcreditfromnon-ins+tu+onalagencies.

•  Twowaysofinterpre+ngsuchtrendsandoneisopenunabletodecidewhethertheglassishalfemptyorthreequarterfull

Financial Inclusion(6) JAM Trinity—Jan Dhan, Aadhaar, Mobile (1)

Coverage over time

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Source:EconomicSurvey,2015-16,GovernmentofIndia


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Aadhaarcoverageacrossstates BasicSavingAccountcoverageacrossstates

Source:EconomicSurvey,2015-16,GovernmentofIndia


One of the missing pieces of JAM – a thriving BC industry

57

Financial Inclusion(9) Issues with PMJDY

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Financial Inclusion(10) Issues Arising

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• How should financial Inclusion be measured? ü Access or actual

• How much is real deposit coverage? ü Bank Accounts ü Post Office savings accounts ü Urban and Rural CooperaPve Banks ü Primary Agriculture CooperaPve SociePes

• Howmuchiscreditcoverage? • What is adequate financial inclusion?

ü InternaPonal comparisons • How much debt should poor have ? • Financial inclusion as subsPtute for public services?


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Looking Ahead(1) Key Financing Needs

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1.  Reviving of Overall Credit Growth 2.  Infrastructure Financing

•  Sources of Equity Funds •  Sources of Long Term Debt Funds

3.  PrivaPsaPon/Divestment Programmes •  Need for Equity Fund Sources that are not concentrated •  Need to avoid Russian type result of crony capitalism

4.  Bank Ownership Reform •  Dependent on widely held equity sources to avoid ownership

concentraPon

5.  Development of Liquid Debt Market •  Dependent of presence of insPtuPonal investors

Looking Ahead(2) Deepening the Indian Financial Sector

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• Bank dominated system ü Will remain so for quite some Pme ü Have to ensure equitable access ü Lot being done: perhaps excessive a_enPon

• Need greater a_enPon to development of insPtuPonal investors • Mutual funds:

ü why are they not growing faster with deeper footprint among retail investors

•  Insurance Funds ü Great need for life, health, property insurance, etc ü Financial stability for families

• Pension Funds: Great PotenPal ü Higher longevity, urbanizaPon, breakdown of joint families

Looking Ahead(3) Banking Reform(1)

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• Current Strategy ü Greater compePPon through greater entry ü DiversificaPon of banking system ü Be_er governance of public sector banks

• New banks take a decade to provide real compePPon to established incumbents ü Except through use of legacy free new technology ü Greater innovaPon and new products

• No privaPsaPon of public sector banks ü A_empt at be_er governance through Bank Board Bureau ü ExisPng constraints remain

Ø CAG, CVC, CBI, CIC,ACC

Looking Ahead(4) Banking Reform(2)

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Time for Bold New Strategy •  Phased programme for acPve disinvestment towards privaPsaPon

ü 18 public sector banks excluding SBI and subsidiaries ü All have wide countrywide spread with some regional concentraPon ü All have significant proporPon of widely held privately owned shares

•  Some best exisPng private banks had government parentage ü ICICI, Axis Bank, IDFC Bank ü So newly privaPsed banks can follow suit: will provide new compePPon

quickly • Need to deal with unions: opportune Pme

ü Current age structure is highly skewed to 50 + ü ExisPng employees can be grandfathered

• M and As aher privaPsaPon will result in organic market based consolidaPon

•  PrivaPsed banks will be widely held

Looking Ahead(5) Tackling NPAs

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• AcPve ConsideraPon from both MoF and RBI •  Transparent programme for capitalisaPon : Is it enough? • Bankruptcy law enacted

ü Need to move fast to implement it • Need to clean PSB balance sheets

ü Bank managements could be apprehensive re: valuaPons etc ü Fear of CAG/CVC/CBI/CIC

Ø Establish Bad Bank with public sector ownership ü Special governance proviisions ü Board populated with ciPzens above suspicion

§ As in rescue of Satyam • AcPvate and strengthen ARCs to take over NPAs in market based mechanism

• Carefully re-examine PPPs : where are they appropriate?

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