2017

Volume 6

THIS MONTH

In this issue, Mr. Ganesh Sankaran, Executive Director of Federal Bank, has presented his thoughts

on the role of relationship in the banking sector. We thank Mr. Sankaran for his contribution to the

APAS Monthly publication.

This month, the APAS column presents its views on disruptions in financial services.

The economic indicators showed mixed performance. Manufacturing PMI fell from 52.5 in April

to 51.6 in May. The growth of core sectors slowed to 3.6% in May. India's Index of Industrial

Production (IIP) slipped to 3.1% in April from 2.7% in March. PMI services and composite PMI

expanded from 50.2 and 51.3 in April to 52.2 and 52.5 in May, respectively. Inflation slipped to

2.18% in May from 2.99% April. Wholesale price inflation eased to 2.17 in May from 3.85% in

April. However, all these numbers must be seen in light of the changed base year.

This newsletter also covers 21st issue of Micrometer. Cabinet approved recommendations of the

7th CPC on allowances and the proposal to introduce the Financial Resolution and Deposit

Insurance Bill 2017.

The Reserve Bank of India (RBI) issued master directions on the information technology

framework for the NBFC Sector. Also, RBI released the Financial Stability Report for June 2017.

The Insurance Regulatory and Development Authority of India (IRDAI) deferred the date for the

implementation of Ind AS in the insurance sector.

Cabinet gave ‘in principle’ approval for disinvestment of Air India and five of its subsidiaries.

APAS

MONTHLY

The Securities and Exchange Board of India’s (SEBI) board meeting took place on 21st June, 2017

and decisions with regards to restructuring in stressed assets, resolutions under Insolvency and

Bankruptcy Code, 2016, extension of lock-in-relaxation to Alternative Investment Funds, easing

of access norms for investment by FPIs, offshore derivative instruments were taken.

We hope that this APAS Monthly is insightful. We welcome your inputs and thoughts, and

encourage you to share them with us.

Ashvin parekh

On the cover

GUEST COLUMN

Mr. Ganesh Sankaran

Executive Director, Federal Bank

Role of Relationship in Growth Oriented Transformative Banking

APAS COLUMN

Disruptions in Financial services

ECONOMY

➢ Index of Industrial Production – April

➢ Inflation update – May

➢ PMI update – May

➢ Core Sector update – May

➢ Micrometer – 21st Issue

➢ Cabinet approved recommendations of 7th CPC on allowances

➢ Cabinet approved the proposal to introduce the Financial

Resolution and Deposit Insurance Bill 2017

BANKING

➢ Master directions on Information Technology framework for

NBFC sector

➢ Financial Stability Report – June 2017

INSURANCE

➢ Deferment of the date for the implementation of Ind AS in

insurance sector by Insurance Regulatory and Development

Authority of India (IRDAI)

INFRASTRUCTURE

➢ Cabinet gave ‘in principle’ approval for disinvestment of Air

India and five of its subsidiaries

CAPITAL MARKETS

➢ SEBI Board Meeting

CAPITAL MARKET SNAPSHOT

ECONOMIC DATA SNAPSHOT

“The future is the shape of things to come….”

- H. G. Wells

A brief history of the times

And how the future has set in! The first part of the 20th century was the era of “Producer economy” where

economic efforts were employed in systemising production, organising people and capital in the most

efficient way possible to overcome scarcity. World War II ushered in the era of “Consumer economy”

where scarcity moved from production to desire and where it was necessary to foster the latter through

advertising and readily available credit. Today it is the era of “Creator economy” where according to the

visionary forecaster Paul Saffo, the scarcity is in customer engagement. Banking has evolved

concomitantly along with these epochs. Especially in the “Consumer economy” it played a pivotal role in

underpinning growth by assuring an abundance of affordable credit to the producer class and to the

consumer class. In fact fostering of and providing for credit to the producer class became the primary

tenet of the corporate banking organisations of that era. The institution of “Relationship manager” was

established for servicing this rapidly institutionalising producer class. The relationship philosophy was

pivoted on 3 basic canons:

• Assessing the corporate’s needs

• Front ending the entire gamut of the banking organisation

• Providing for financing products & services

Relationship 1.0: Human@Fore, Lending@Core

The “Consumer economy” witnessed a wide proliferation of an array of financial products for the

corporates. Lending assumed the primacy amongst the competing banking products and services the

relationship manager has to offer his corporate customers. Relationship management in those simpler

times was de facto about people management- i.e. knowing the customer well at a personal level.

Corporates were searching for the most economic financing option and the relationship manager was

content to act as the purveyor of credit. Business banking/ SME segments were yet to glean the

importance of the present days and to the most part were out of scope of the relationship pool. The

individual customer experience relationship in the form of neighbourhood branches catering to his

Role of Relationship in

Growth Oriented

Transformative Banking

Mr. Ganesh Sankaran, Executive Director, Federal Bank

universal banking needs. Analytics were at best a heuristic paradigm given the modest nature of

technology involved in banking of that era.

Relationship Model for Transformative Banking

Relationship 2.0: Human@Fore, Digital@Core

The digital chaos unleashed by the “Creator economy” has shattered these traditional paradigms of

banking and the relationship archetypes. Today, the corporate are asking for a high-tech, high-touch,

nimble and proactive banking partner. The role of the relationship manager thus accordingly merits a

commensurate metamorphosis from that of a purveyor of credit to a strategic growth partner. But if a

bank has to earn the right of becoming a strategic partner of its customer, it has to stop

compartmentalising its relationship with the corporate based on the bank’s organisational operating

model. Bank has to consciously take coherent steps to effectively establish, publish and maximise the

lifetime value the customer. And for this purpose the relationship manager has to take a “360 degree

cohesive view” of his corporate customer and its downstream and upstream supply chains ecosystems

that can provide customer insight. Advancements in data science and AI have made this a feasible

happenstance.

CUSTOMER

RM@Fore, Branch@Core

Human@Fore, Digital@Core

360 Degree Customer View

Dig

ital

isat

ion

Neighbourhood Banking

Dyn

amic Se

gme

ntatio

n

Technology has provided an unexpected bulwark to the relationship paradigm. Mobile has dramatically

grown internet usage while simultaneously increasing the amount of time customers spend online,

making this the pre-eminent channel for customer engagement. This has helped banks to broad base the

traditional scope of the relationship pool to also embrace hitherto neglected sectors of business banking/

SME and individual customers.

In the corporate segment, API has assumed the role of being the most able and trustworthy delivery

mechanism for banks that holds the promise to reduce cost, complexity and lead time, allowing for faster,

cheaper and better innovation on a larger scale. API also allows a bank to distribute its products and

services through a potentially unlimited number of authorised third parties, alongside its own delivery

channels.

Relationship 2.5: Relationship Manager@Fore, Branch@Core

The saturation facing banks in tier 1/ 2 geographies and traditional corporate segments have rendered

new vistas for the business banking/ SME organisations and the individual class. These aspirational

customers hitherto being denied the benefit of the bank’s relationship pool have been subjected to a

vigorous engagement by banks riding on the mobile revolution. But India exists simultaneously across

multifarious timelines and thus the importance of a personal touch still assumes a place of primacy for

the non gen-Y customers. Thus traditional neighbourhood branch banking made agile by digital

technology necessarily warrants a key place in defining the relationship paradigm of the “Creator

economy” era. Person-to-person relationship dynamics tempered by omni-channel service delivery is a

potent tool of growth oriented transformative banking in this segment.

Dynamic segmentation

As such a contemporary relationship manager needs to structure his value proposition for a customer

commensurate with the nature of the customer’s organisation and its scale of operations. e.g. For a

business banking/ SME scale, the relationship manager can formulate a generic commercial proposition

that strives at its core to bring the customer in vogue with the latest banking practices (specifically in the

areas of cash conversion, remittances and financial supply chain). For a commercial business/ emerging

local corporate scale the relationship manager has to concoct an aspirational banking proposition that

while being aligned to the banking practices peculiar to the line of business of the customer are specific

to the customer’s unique needs on corporate connectivity and real time liquidity management. For a large

scale organisation the relationship manager needs to completely abandon his atavistic outlook and

engage in financial value creation.

So in conclusion

If adhered to effectively a bank can evolve its relationship model into one that enables the bank to both

capture a wider network of customers and capitalize on its existing competitive advantages such as trust,

base specific offerings, robust data, and strong execution capabilities across the value chain and access to

cheap deposit funding. The transformative bank would then be vertically integrated to take advantage of

its execution capabilities and by extension its ability to offer superior levels of customer fulfilment. The

relationship paradigm has changed forever and only the true believers in that can weather the travails of

transformation. This is how the future has been set up and the shape of things to come haven been

formed.

The financial services industry is one of the most fast paced industries and technology is not new to this

sector. However, today, a new set of technology trends is disrupting this sector and creating a huge

opportunity for fin-tech startups. These disruptions are bound to create some impact on the entire BFSI

sector, be it banking, insurance, non-banking finance companies (NBFCs), payments or asset management

companies. Let us examine the impact in each of these areas.

Payments

India is on a journey to become a digital superpower and the government is focused on the vision of Digital

India, with its various initiatives including demonetization, incentivizing digital payments, and ban on cash

transactions above a certain limit.

A number of payments innovations have emerged in the past few years, leveraging mobile and

connectivity to make payments simpler and add value. Innovations are making payments more cashless

and invisible. New consumer functionalities are being built on existing payment systems and are resulting

in meaningful changes in customer behavior.

The recently introduced payments methods such as Unified Payments Interface (UPI), BHIM, Aadhaar

Enabled Payment System (AEPS), etc. are some examples of such innovations. Out of the in-principle

holders of payments bank licenses, three have already started operations, with some others to follow suit

soon. The proposed creation of a Payments Regulatory Board (PRB) within RBI is a great start as it will

allow for more representation from payments industry experts in policymaking for digital payments while

driving a level-playing field for players across the sector.

Digitisation of payments presents a large opportunity in the Indian context. It is estimated that the total

payments conducted via digital payment instruments will be in the range of USD 500 billion by 2020, which

is approximately 10 times the current levels.

Technology trends in the form of smartphone penetration, ubiquitous connectivity, biometrics,

tokenization, cloud computing and the Internet of Things (IoT) will shape the way consumers transact in

the future.

Disruptions in

Financial Services

All these will have some implications on the payments sector.

Payments will provide access to customer transaction data, which will enable payment service providers

(PSPs) to offer relevant deals, offers and coupons to consumers and influence their consumption

decisions.

Using Aadhaar for online authentication and confirmation of KYC data will boost growth of digital payment

systems.

The big push for digital payments in India will come from merchant payments. The ability of financial

institutions and PSPs to partner with merchants will become a critical component of strategies to drive

merchant-specific usage, enable merchant-issued credits, or become a preferred card on merchant

platforms. Margins on the current payment and settlement transactions will need to be restructured as

competitive pressure grows from alternative methods. As more efficient alternative payment methods

are adopted, the role of traditional intermediaries as trusted parties may diminish.

Due to the tight economic model of payments businesses and the preference of customers to use fewer

solutions, PSPs will need to extensively partner to lower customer acquisition costs, offer a broad

spectrum of solutions and get access to a large distribution network.

Financial institutions may face a new set of risks, such as reputation, security, and regulatory issues as

they adopt new payment channels.

Banking and NBFC

Alternative lending platforms are creating competitive pressures on the banking and NBFC industries to

become more transparent and customer friendly. P2P lending is one such business model that has

gathered momentum globally and is taking shape in India. The RBI has finalized norms for peer to peer

lending platforms and is expected to release final guidelines in July. This will have some implications on

the banking and NBFC industries.

As savers leverage alternative lending platforms as short and medium-term investment vehicles, erosion

may occur among traditional deposits and investment products, such as money market funds offered by

traditional institutions, leading to some balance sheet shrinkage. Customers’ savings and credit portfolios

could become distributed over a large number of alternative platforms with varying reporting standards,

making it difficult for financial institutions to measure each customer’s creditworthiness on a consistent

basis. This intensified competition may narrow spread between deposits and loans, decreasing financial

institutions’ profitability. Financial products and services may increasingly be offered on a stand-alone

basis, limiting incumbent institutions’ ability to cross-subsidise.

Financial institutions will have to work with non-traditional players to create new distribution channels,

provide competitive product offerings and enable non-traditional services.

With access to more diverse funding options, new companies will be able to grow at a quicker pace and

the average time between funding stages will be shortened.

Insurance

Financial disruptions have percolated through the insurance sector as well. These disruptions have

impacted almost all the segments of the insurance business, although at varying levelsOpening up and

growth of the insurance sector led insurance firms to innovate by either emulating their international

strategies for growth in the Indian markets or introducing innovations as per Indian markets. The focus

lies on how the current set of innovations has impacted the sector and what lies ahead for it.

The disruptions can be broadly categorized to have occurred in two different forms: The current insurance

players innovating their processes and evolution of parallel support organizations that are either

disruptive or supportive in nature for the current players, across different components of the insurance

value-chain; Manufacturing, distribution, underwriting, claims management and risk management and

capital and investment management.

Additionally, several technology-based start-ups such as online web-aggregators have the potential to

disrupt the distribution chain to an extent of separating insurers from customer ownership. Also,

evolution of insurable entities such as self-driving vehicles could set tough challenges for companies to

price their products.

As a better ecosystem for the insurance sector evolves, companies shall have to remain focused and invest

in their core-competencies to maintain a competitive stance. The success of the ecosystem shall also

depend on the evolution and adaptability of both customers and regulators.

Asset-management companies

Asset-management, in India, by far, remains a conservative sector. The growth in Indian economy, has

fueled surplus income and hence, domestic household savings. The gradual shift of the customer segment

from xennials to millennials, has increased the demand for greater agility in investment returns and

shifted the focus from fixed-income products and thereby, increased the demand for wealth managers.

The sector continues to encounter disruptions on customer-servicing, product innovations and risk

management on the operational front. Automated wealth management services may pose as a potential

competition for the traditional wealth management services. This may commoditize the wealth

management practice and reduce the value delivered by the traditional wealth managers, thereby

creating disruptions for efficient pricing of services. Increase in investor education and awareness about

investments has further created a healthy competition for the wealth managers in India.

With the growth in outsourcing of key capabilities, technology and processes, larger financial institutions

may be expected to lose the negotiation power and may become excessively dependent on third party

services.

The key implications could then be, a creation of a wealth management services market without any entry-

barriers due to more automation and less personalization of services that used to distinguish the players

earlier. This would in turn, reduce the burden on the regulator, as the regulatory models may be expected

to shift from interpretation-based approach to more measurable black-and-white approach, reducing the

room for interpretation of regulations.

As we understand, the discussed innovations are creating and expected to create several disruptions in

the financial sector. What needs to be gauged, is the impact of these disruptions, along with their

longevity. The way forward for financial institutions lies in assessing and harnessing their key strengths,

and collaboration and co-existence while being adaptable.

-APAS

IIP (Index of Industrial Production) – April

Industrial production growth slipped to 3.1% in April due to poor show by manufacturing, mining and power

sectors coupled with lower offtake of capital goods and consumer durables.

The factory output measured in terms of the index of industrial production (IIP) had expanded by 6.5% in

April last year, the data released by the Central Statistics Office (CSO) showed.

The CSO also revised upwards the IIP growth figure for March to 3.75% from provisional estimate of 2.7%

released last month. According to the CSO data, manufacturing sector, which constitutes 77.63% of the

index, grew at 2.6% in April compared to 5.5% in same month last year. Similarly, mining sector output grew

at 4.2% in the month under review compared to 6.7 year ago. Power generation rose by 5.4% in April, down

from 14.4% expansion in April last year.

The output of capital goods, which are the barometer of investment in the country, contracted by 1.3% in

April compared to growth of 8.1% a year ago. Similarly, consumer durables or white goods production

declined by 6% in April against 13.8% growth a year ago.

As per use-based classification, the growth rates in April 2017 over April 2016 are 3.4% in primary goods,

4.6% in intermediate goods and 5.8% in infrastructure/ construction goods.

The consumer non-durables have recorded a growth rate of 8.3%. Consumer goods overall grew at 5.8%.

In terms of industries, 14 out of 23 industry groups in the manufacturing sector have shown growth in April

2017 compared to the corresponding month of the previous year.

The industry group ‘manufacture of pharmaceuticals, medicinal chemical and botanical products’ has shown

the highest growth of 29.1% followed by 17.9% in ‘manufacture of tobacco products’ and 9.5% in

‘manufacture of machinery and equipment’.

ECONOMY

On the other hand, the industry group ‘manufacture of beverages’ has shown the highest decline of (-)

19.2% followed by (-) 15.6% in ‘manufacture of motor vehicles, trailers and semi-trailers’ and (-) 14.4% in

‘manufacture of electrical equipment’.

Source: APAS BRT, www.eaindustry.nic.in

1.9

2.7

3.1

Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

IIP (% YoY)

Base rate 2004-05 Base rate 2011-12

CPI (Consumer Price Index) – May

India's retail inflation, or consumer price index (CPI) reached new lows in the month of May 2017 to stand

at 2.18% as against 5.76% in May of 2016. The CPI rate for the month of April stood at 2.99%.

Food and beverages, which account for 45.86% in the CPI index, have been at the centre of this decline. The

food-and-beverages inflation has witnessed a sharp decline over the last one year. From around 9% in May

2014, it came down to 7.2% in May 2016. Over the last one year, it fell sharply and in April 2017 was 1.29%

before hitting a low of -0.22 in May 2017. The decline has also been propelled by a high base effect.

Within the basket of food and beverages, the sharp fall in inflation was led by a deflation in the prices for

pulses and vegetables. While pulses (-19.45%) and vegetables (-13.44%) led the fall, low inflation on other

items such as eggs (0.72%), fruits (1.4%) and spices (0.52%) too contributed to bringing CPI inflation down

to 2.18%. Vegetable prices have been in the negative territory for the ninth straight month and pulse prices

for the sixth straight month.

Core inflation (CPI excluding food, fuel and light, petrol and diesel), however, saw only moderate easing to

4.1%, compared with 4.2% in April, as inflation stayed stubbornly high in housing (4.8%) and education

(4.9%).

Rural and Urban inflation for the month was 3.02% and 3.03% respectively.

Source: APAS BRT, www.mospi.gov.in

3.17

3.653.81 3.89

2.99

2.18

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Jan-17 Feb-17 Mar-17 Apr-17 May-17

CPI

Base rate 2004-05 Base rate 2011-12

WPI (Wholesale Price Index) – May

With food items such as vegetables becoming cheaper, wholesale price index (WPI) based inflation eased

to a five-month low of 2.17% in May. It was much higher at 3.85% in April and had contracted by 0.9% in

May last year.

Food prices displayed a broad downtrend at the wholesale level in May 2017. Food inflation contracted

2.27% after accelerating 1.16% in the previous month with prices of all food items declining. A massive

decline in the vegetable prices was noticed. Inflation in vegetables contracted 18.15% in May compared

with a 7.79% contraction in the previous month.

Inflation in minerals also contracted 3.17% in May from 8.09% increase in the preceding month. Fuel and

power inflation contracted 11.69% in May after expanding 19% in the previous month.

The considerable easing in crude oil prices in the first fortnight of May 2017 contributed to a decline in the

prices of diesel and petrol in the subsequent fortnight, which led to dampening of the headline inflation to

some extent.

Core WPI inflation, which excludes food and fuel items, eased to 2.06% in May 2017.

Manufactured products also continued to witness weaker inflation at 2.55% in May as against 2.66% in April.

Source: APAS BRT, www.mospi.gov.in

5.25

6.55

5.7

4.26

5.51 5.29

3.85

2.17

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Jan-17 Feb-17 Mar-17 Apr-17 May-17

WPI

Base rate 2004-05 Base rate 2011-12

Manufacturing PMI – May

Manufacturing sector in India expanded for the fifth consecutive month. The Nikkei India Manufacturing

Purchasing Managers' Index, or PMI, an indicator of manufacturing activity stood at 51.6 in May 2017

but down from 52.5 in April 2017.

This was supported by upturn in new business, however, incoming new work rose at the weakest pace

since February, with slowdowns evident in the consumer and intermediate goods categories. Output grew

solidly, though growth across the manufacturing sector was at a three-month low. Manufacturing jobs

decreased in May after expanding for last two consecutive months.

Decrease in new export orders led to decline in international demand for Indian-manufactured goods in

May. The contraction was only slight, but ended a three-month sequence of growth. Holdings of finished

goods decreased in May as companies sought to fulfil orders from stocks. The rate of depletion was sharp,

and the most pronounced since August 2015. Outstanding business volumes rose again, marking a one-year

sequence of accumulation. Despite accelerating since April, the pace of expansion in backlogs was modest.

Businesses increased their purchasing activity during May. Subsequently, stocks of purchases rose, with the

pace of accumulation the quickest in the past three-month sequence of growth. Input costs rose at the

slowest rate since September, but charge inflation accelerated. The rate of inflation softened to the slowest

in eight months, however, it was below the long-run series’ average.

Business confidence improved in May, with firms expecting new product launches, machinery acquisitions

and marketing campaigns to support output growth in the year ahead. Moreover, the degree of optimism

climbed to a six-month high.

Source: www.tradingeconomics.com

Service PMI – May

Indian service sector activity continued to expand during May, supported by quicker growth of new work,

and companies hired additional staff over the month to cope with greater overloads. The seasonally

adjusted Nikkei Services PMI Business Activity Index was up from 50.2 in April to 52.2 in May. Expansion in

month of May was more than in current four months sequence of expansion.

Input costs facing service providers continued to rise during May, which analysts associated with higher

prices paid for fuel, freight and food. The rate of jobs growth accelerated to the fastest in almost four

years. Companies linked the upturn in activity to rise in new business inflows. The stronger upturn in

services new work counterbalanced the slowdown in growth of manufacturing orders and new work across

the private sector economy expanded at a faster pace than in April. The seasonally adjusted Nikkei India

Composite PMI Output Index reached seven-month high of 52.5 in May up from 51.3 in April.

Job creation at services firms also mirrored expectations of output growth, with various factors like new

offerings, business expansion plans, more marketing and favourable government policies supporting

positive sentiment regarding the 12-month outlook. Purchasing price inflation at manufacturers eased to

an eight-month low, but output prices were raised at a faster pace than in April.

Outstanding business volumes at service providers rose further in May, taking the current sequence of

continuous accumulation to one year. Despite being more pronounced than in April, the pace of increase

in backlogs was moderate. Despite being more pronounced than in April, the pace of increase in backlogs

was moderate. Once again, the rise in outstanding business was linked to pending client payments. The

level of unfinished work held by manufacturing firms also expanded at a modest pace.

Source: www.tradingeconomics.com

Core Sector Data – May

The growth of eight core sectors slowed to 3.6% in May due to fall in output of coal, fertilizer and steel.

The growth rate of eight infrastructure sectors—coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity—was 5.2% in May last year.

Coal and fertilizer productions recorded negative growth of 3.3% and 6.5%, respectively, as per the government data released for the month of May, 2017.

Steel output dipped to 3.7% last month as against 13.4% in May 2016. Slow growth in key sectors would

also have implications on the Index of Industrial Production (IIP) number as these segments account for

about 41% to the total factory output. Crude oil output rose a meagre 0.7%, compared with a 0.6% decline

in the previous month. Cement output gained 1.8% compared with a 2.4% decline in April. It could be a

signal of a turnaround in construction activity, driven by a pickup in the housing and infrastructure

segments, particularly, road and irrigation.

However, growth in refinery products and electricity output grew by 5.4% and 6.4% in May as against 3.3%

and 6.2%, respectively in the same period last year. Natural gas production too grew by 4.5% in May as

against a negative growth rate of 6.5% a year earlier. In April, these eight sectors had recorded a growth

rate of 2.8%.

Source: APAS BRT, www.eaindustry.nic.in

2.8

5.2

3.0 3.2

5.0

6.6

4.95.6

3.4

1.0

5.0

2.5

3.6

Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise

Micrometer issue 21 – FY 2016-17

This is the 21st issue of the Micrometer published by Microfinance Institutions Network (MFIN) and it

provides an overview of the Microfinance Industry as of 31st Mar 2017.

Some key highlights of this quarter are as under:

• As of 31st Mar 2017, NBFC-MFIs provided microcredit t around 2.75 Cr clients*, an increase of

30% over Q4 FY 15-16.

• The aggregate gross loan portfolio (glp) of MFIs stood at Rs 46,847 Cr (excluding non-

performing portfolio i.e. PAR > 180 days in Andhra Pradesh and Telangana). This represents a

yoy growth of 25% over FY 15-16 and 5% over the last quarter.

• Loan amount disbursed in FY 16-17 increased by 13% compared to FY 15-16 reaching to Rs

50,266 Cr.

• Total number of loans disbursed by NBFC-MFIs increased by 13% in FY 16-17 compared with

FY 15-16 reaching to 2.83 Cr.

• Portfolio at Risk (PAR) 30 has increased considerably from 0.4% in FY 15-16 to 14.1% in FY 16-

17. This is directly attributed to the impact of demonetization.

• Average loan amount disbursed per account is reduced to Rs 17,779 in FY 16-17 from Rs 17,812

in FY 15-16.

• MFIs now cover 32 states/union territories.

• In terms of regional distribution of portfolio (GLP), south accounts for 31% of the total industry

portfolio, north for 27%, west for 24%, and east for 18%. Top five top states, viz. Karnataka,

Tamil Nadu, Uttar Pradesh, Maharashtra and Madhya Pradesh account for 56% of glp.

Cabinet approved recommendations of the 7th CPC on allowances

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi approved the recommendations of

the 7th CPC on allowances with some modifications. The revised rates of the allowances shall come into

effect from 1st July 2017 and shall affect more than 48 lakh central government employees.

While approving the recommendations of the 7th CPC on 29th June 2016, the Cabinet had decided to set

up the Committee on Allowances (CoA) in view of substantial changes in the existing provisions. The

modifications are based on suggestions made by the CoA in its Report submitted to Finance Minister on

27th April, 2017 and the Empowered Committee of Secretaries set up to screen the recommendations of

7th CPC.

Cabinet approved the proposal to introduce the Financial Resolution and Deposit Insurance Bill

2017

The Union cabinet has approved a proposal to introduce a bill to deal with bankruptcy of banks, insurers

and other financial services firms, seeking to shield the financial system from systemic crises and protect

consumers.

The move has been in line with an announcement in finance minister Arun Jaitley’s 2016-17 budget speech

that the government intends to put in place a comprehensive resolution framework to tackle any potential

crises in financial companies.

When enacted, the Financial Resolution and Deposit Insurance Bill, 2017, might lead to the setting up of a

Resolution Corporation that will protect the stability and resilience of the financial system; provide deposit

insurance to consumers of some categories of financial services up to a reasonable limit; monitor

systemically important financial institutions (SIFI); and protect public funds to the extent possible. It would

also result in the repealing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, to transfer

the deposit insurance powers and responsibilities to the Resolution Corporation.

The corporation would cover up to Rs.1 lakh worth of deposits by individuals in Indian banks. The proposed

Resolution Corporation would help households deal with potential crises at other financial services

providers like insurance firms and asset management companies as well. Insurance firms in India have been

highly capitalized and unlikely to face bankruptcy, but the new body may need to monitor banks and other

financial institutions on a regular basis.

Experts said the ministry of finance had borrowed the concept of Resolution Corporation from the Financial

Sector Legislative Reform Commission (FSLRC).FSLRC designed a single consistent framework for the full

financial system. One component in this was the Resolution Corporation, which deals with the failure of

most financial firms.

In May 2016, Parliament enacted the Insolvency and Bankruptcy Code, 2016 for non-financial entities. The

proposed Bill complements the Code by providing a resolution framework for the financial sector.

The bill would provide comfort to consumers of financial service providers in financial distress and would

also inculcate discipline among financial service providers in the event of financial crises by limiting the use

of public money to bail out distressed entities.

Information Technology Framework for the NBFC Sector

The Reserve Bank of India Act, 1934 (Act 2 of 1934), in order to regulate the credit system of the country,

issued Master Directions - Information Technology Framework for the NBFC Sector, 2017.

These provided directions on IT frameworks for the NBFC sector. These frameworks would enhance

safety, security and efficiency. The focus of the proposed IT framework is on IT Governance, IT Policy,

Information & Cyber Security, IT Operations, IS Audit, Business Continuity Planning and IT Services

Outsourcing.

NBFCs may place these directions before their Board, together with a gap-analysis vis-a-vis the Master

Direction and the proposed action by September 30, 2017.

NBFCs- Systemically Important shall comply with the Master Directions by June 30, 2018 and other NBFCs

(asset size below ₹ 500 crore) shall comply by September 30, 2018.

While implementing IT Governance, clearly-defined roles would enable effective project control. The basic

principles of value delivery, IT Risk Management, IT resource management and performance management

must form the basis of governance framework.

NBFCs are required to form an IT Strategy Committee. Roles and Responsibilities of IT Strategy Committee

have been specified.

NBFCs may formulate a Board approved IT policy, in line with the objectives of their organization.

Information is an asset to all NBFCs and Information Security (IS) refers to the protection of these assets

to achieve organizational goals. The purpose of IS is to control access to sensitive information, ensuring

use only by legitimate users so that data cannot be read or compromised without proper authorization.

NBFCs must have a board approved IS Policy.

BANKING

NBFCs should put in place a cyber-security policy elucidating the strategy containing an appropriate

approach to combat cyber threats given the level of complexity of business and acceptable levels of risk,

duly approved by their Board. NBFCs should review the organizational arrangements so that the security

concerns are appreciated, receive adequate attention and get escalated to appropriate levels in the

hierarchy to enable quick action.IT Operations should support processing and storage of information, such

that the required information is available in a timely, reliable, secure and resilient manner.

The objective of the IS Audit is to provide an insight on the effectiveness of controls that are in place to

ensure confidentiality, integrity and availability of the organization’s IT infrastructure. IS Audit shall

identify risks and methods to mitigate risk arising out of IT infrastructure such as server architecture, local

and wide area networks, physical and information security, telecommunications etc.

BCP forms a significant part of an organization’s overall Business Continuity Management plan, which

includes policies, standards and procedures to ensure continuity, resumption and recovery of critical

business processes. Outsourcing of IT related business process can provide an NBFC the opportunity to

realize valuable strategic and economic benefits.

It has been recommended that smaller NBFCs may start with developing basic IT systems mainly for

maintaining the database. NBFCs having asset size below ₹ 500 crore shall have a Board approved

Information Technology policy/Information system policy. This policy may be designed considering the

undermentioned basic standards and the same shall be put in place by September 30, 2018. IT Systems

should be progressively scaled up as the size and complexity of NBFC’s operations increases.

Financial Stability Report

The June month ended with improved market sentiments and political stability on the domestic front,

said the Reserve Bank of India (RBI) in the Financial Stability Report (FSR) for June 2017.

RBI expects accelerated reforms, overall positive business sentiment and macroeconomic stability in

the second half of FY2017. India’s financial system remains stable, even though the banking sector

continues to face significant challenges. The gross non-performing advances (GNPAs) of the banking

sector have shot up, but the stressed advances ratio declined between September 2016 and March

2017 due to fall in restructured standard advances. RBI’s bi-annual publication, Financial Stability

Report reflects the overall assessment on the stability of India’s financial system and its resilience to

risks emanating from global and domestic factors.

Healthy growth in the Indian financial system is expected in second half of 2017 on the back of reforms

in foreign direct investment, the rollout of GST and revival in external demand. Under asset quality

pressures, credit intermediation by banks has retrenched and that by NBFCs and mutual funds has

increased significantly.

Concerns arising from frauds and cyber-attacks remain elevated with the recent global ransomware

attacks. Various responses by the regulators in this regard include setting up of an Inter-Disciplinary

Standing Committee on Cyber Security by the RBI.

Implementation of Ind AS in Insurance Sector

Insurance Regulatory and Development Authority of India (IRDA) deferred the effective date for

implementation of Ind-AS accounting model in the insurance sector to April 2020 from April 2018.

The authority has approved the regulatory override whereby the implementation of Ind-AS in the

insurance sector has been deferred by two years to Fiscal 2020-21, an IRDA circular dated 28th June said.

An IRDA board meeting on 31st May noted peculiarities of the domestic insurance sector, specifically the

fact that the country does not have a standard equivalent to international accounting standards (IAS) 39.

The IRDA concluded that implementation of Ind AS in the present form is expected to lead to a position

where assets would be valued on fair value/market value basis and liabilities would continue to be valued

as per the existing formula based approach. This might even lead to mismatch in the asset and liability

valuation and would also cause volatility in the financial statements of the insurance companies.

Additionally, IRDA has observed that the compliance costs will have to be incurred twice-once

immediately on implementation of Ind-AS and second when IFRS 17 would be implemented in the

country. After considering the given facts, IRDA through its 28 June circular has deferred the

implementation of Ind-AS to April 2020.

However, insurers would still be required to submit the proforma Ind AS financial statements to IRDA on

a quarterly basis, which was started from December 2016. The IRDA has, with the deferment of Ind AS

road map, paid heed to the requests of a number of insurance companies and tried to avoid two major

changes in accounting framework for the insurance sector, it added.

The regulator had on 17th November, 2015 stated that the insurers would converge with IFRS after the

issuance of the revised standard on insurance contracts by the International Accounting Standards Board.

INSURANCE

Subsequently, corporate affairs ministry had on 30 March 2016 notified the road map for implementation

of Ind AS for banks, insurers and NBFCs from April 2018.

IRDA also constituted an implementation group on 17 November 2015 to facilitate Ind-AS convergence

for insurers.

On 18th May 2017, the IASB issued the comprehensive international standard on insurance or IFRS 17,

insurance contracts. IFRS 17 replaces IFRS 4, insurance contracts 1 which was an interim standard pending

the completion of project on insurance contracts by IASB.

The release of IFRS 17 standard led IRDA to review its position in the matter of implementation of Ind-AS

in the insurance sector.

Cabinet gave ‘in principle’ approval for disinvestment of Air India and five of its subsidiaries

The Union Cabinet has given in-principle approval to the Civil Aviation Ministry’s proposal to divest a stake in Air India, said Finance Minister Arun Jaitley, adding that a Group of Ministers will now look into the quantum, mechanism, debt and other issues of disinvestment.

The Cabinet nod is based on the Niti Aayog recommendations on disinvestment of Air India and five of its subsidiaries. The think tank has suggested constitution of an Air India-specific Alternative Mechanism headed by the Finance Minister, and including the Civil Aviation and other ministers.

The committee will look at issues such as treatment of Air India’s unsustainable debt, hiving off certain assets to a shell company, de-merger and strategic disinvestment of three profit-making subsidiaries, the quantum of divestment and the universe of bidders.

The ministerial group would be set up. The recommendations of the group will have to be approved by the Cabinet.

INFRASTRUCTURE

SEBI Board Meeting

The SEBI Board meeting took place on 21st June 2017 in Mumbai. The board took some of the following

decisions, enumerated below -

▪ Restructuring in stressed companies

With a view to facilitate turnaround of listed companies in distress which will benefit their shareholders

and lenders, the Board has approved the following proposals:

Presently, relaxations from preferential issue requirements under SEBI (Issue of Capital and Disclosure

Requirements) Regulations, 2009 and from open offer obligations under SEBI (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011 are available for lenders undertaking restructuring of listed

companies in distress through Strategic Debt Restructuring (SDR) scheme in terms of the guidelines of RBI.

It has been represented to SEBI that where the lenders have acquired shares and propose to divest the

same to a new investor, they are facing difficulties as the new investor would need to make a mandatory

open offer which would reduce the funds available for investment in the company. Hence, they have

requested for exemptions to these investors. Accordingly, it has been decided to extend the aforesaid

relaxations to the new investors acquiring shares in distressed companies pursuant to such restructuring

schemes. However, such relaxations shall be subject to certain conditions and schemes undertaken in

accordance with guidelines of RBI.

• Resolution plans approved under the Insolvency and Bankruptcy Code, 2016

The Board has also approved the proposal to provide exemption from open offer obligations, under the

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for acquisitions pursuant to

resolution plans approved by NCLT under the Insolvency and Bankruptcy Code, 2016.

• Extension of Lock-in-relaxation to Category II Alternative Investment Funds (AIF)

The Board also approved the proposal for extending the relaxation to Category II AIFs. This would aim to

bring uniformity, ease of doing business and expand the investor base available for capital raising.

CAPITAL MARKETS

• Consultation paper on Easing of access norms for investment by FPIs

FPI regime, which commenced from June 01, 2014, has been put in place with the objectives to rationalize

various foreign portfolio investment routes, simplify the procedures to attract more foreign funds. SEBI

proposes to carry out appropriate amendment (s) to SEBI (Foreign Portfolio Investors) Regulations, 2014

and issue necessary circular/guidelines etc. issued thereunder, to further ease the access norms for

investments by FPIs in Indian securities market.

Some of the proposed changes were as follows:

▪ Expansion of eligible jurisdictions for grant of FPI registration to category I FPIs by including

countries having diplomatic tie-ups with India.

▪ Simplification of broad based requirements.

▪ Rationalization of fit and proper criteria.

▪ Permitting FPIs operating under the Multiple Investment Managers (MIM)structure and holding

FVCI registration to appoint multiple custodians.

Accordingly, the Board considered and approved the proposal for initiation of public consultation process

before implementing the aforesaid proposed changes to SEBI (Foreign Portfolio Investors) Regulations,

2014 and necessary circular/guidelines etc. issued thereunder.

• Offshore Derivative Instruments (ODI)

The Board has decided to levy a "Regulatory Fee" of US$1000 on each ODI subscriber, to be collected and

deposited by the ODI issuing FPI of such ODI subscriber, once every three years, starting from April 1,

2017. SEBI shall amend SEBI (FPI) Regulations, 2014 to implement the decision taken by the Board.

The Board has decided to prohibit ODIs from being issued against derivatives, except on those which are

used for hedging purposes. SEBI will issue a circular in this regard.

• SEBI Annual Report 2016-17

The Board considered and approved the SEBI Annual Report 2016-17. In compliance with Section 18(2) of

SEBI Act, 1992, the same Annual Report would be submitted to the Central Government.

CAPITAL MARKETS SNAPSHOT

Source: National Stock Exchange Source: Bombay Stock Exchange

Sources: APAS Business Research Team Sources: APAS Business Research Team

Sources: APAS Business Research Team

The Indian rupee pared all the losses and closed marginally stronger against the US dollar ahead of the rollout of goods and services tax due later on 30th June 2017. So far, this year, the rupee has gained 5.1%, while foreign investors bought $8.40 billion and $14.40 billion in local equity and debt markets, respectively.

The 10-year bond yield closed at 6.511%, a level last seen on 12 June, compared to its previous close of 6.507%. Bond yields and prices move in opposite directions.

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CNX Nifty (June-2017)

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BSE Sensex (June-2017)

11.31 11.07 11.18

10.92

11.2111.99

11.3810.00

12.00

14.00

16.00

18.00

20.00

Indian VIX (June-2017)

64.42 64.43

64.435

64.245

64.465

64.495 64.475

64.66

64.62

64.00

64.10

64.20

64.30

64.40

64.50

64.60

64.70

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$/₹ (June-2017)

6.30

6.35

6.40

6.45

6.50

6.55

6.60

6.65

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GIND10Y (June-2017)

ECONOMIC DATA SNAPSHOT

* The Economist poll or Economist Intelligence Unit estimate/forecast;

^ 5-year yield

Quarter represents a three-month period of a financial year beginning 1st April

Countries GDP CPI Current Account Balance

Budget Balance

Interest Rates

Latest 2017* 2018* Latest 2017* % of GDP,

2017* % of GDP,

2017* (10YGov),

Latest

Brazil -0.4 Q4 +0.6 +2.3 3.6 May 4.1 -1.3 -7.7 10.1

Russia 0.5 Q1 1.4 1.7 4.1 May 4.2 2.8 -2.2 8.13

India 6.1 Q1 7.2 7.6 2.2 May 4.6 -1.2 -3.2 6.43

China 6.9 Q1 6.7 6.3 1.5 May 2.1 1.6 -4.0 3.5*

S Africa 1.0 Q1 1.0 1.7 5.4 May 5.7 -3.5 -3.2 8.58

USA 2.0 Q1 2.2 2.4 1.9 May 2.2 -2.6 -3.5 2.16

Canada 2.3 Q1 2.2 2.1 1.6 April 1.9 -2.8 -2.7 1.49

Mexico 2.8 Q1 1.9 2.1 6.2 May 5.5 -2.5 -2.3 6.96

Euro Area 1.9 Q1 1.8 1.6 1.4 May 1.6 3.0 -1.4 0.26

Germany 1.7 Q1 1.8 1.7 1.5 May 1.7 8.1 0.5 0.26

Britain 2.0 Q1 1.6 1.3 2.9 May 2.7 -3.4 -3.6 1.07

Australia 1.7 Q1 2.6 3.0 2.1 Q1 2.2 -1.5 -2.0 2.39

Indonesia 5.0 Q1 5.2 5.4 4.3 May 4.2 -1.7 -2.0 6.79

Malaysia 5.6 Q1 5.2 4.8 3.9 May 4.0 1.4 -3.0 3.90

Singapore 2.7 Q1 2.6 2.0 0.4 April 1.3 19.0 -1.0 1.99

S Korea 3.0 Q1 2.7 2.6 2.0 May 1.9 6.0 0.7 2.14

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