Financial Management of Banks, NBFCs and

Insurance Companies in India

Academic Year 2010-11

Trimester V
Lecture 1

1
 Lecture I Part I
Books/Other material for
study/reference

2
 Books
• Management of Banking and Financial Services,
Pearson Education-2nd Edition 2010
Authors: Padmalatha Suresh & Justin Paul
• Management of Banking, Cengage Learning-6th
Edition 2006, Indian Reprint 2009
Authors: S Scott MacDonald & Timothy W Koch
• Risk Management & Insurance, Tata McGraw-Hill
2004 Edition, 9th Reprint 2010
Authors: Scott E Harrington & Gregory R Niehaus
3
 Other Important Material
Available on respective Websites
• RBI Report on Trend and Progress of Banking
in India for the Year ended 30th June 2009
dated 22nd October 2009
• IRDA’s Annual Report for 2008-09 dated 1st
December 2009
• Latest Annual Reports of major Banks, NBFCs
and Insurance Companies
• Coverage in newspapers and magazines
relating to current issues facing the industry
4
Lecture I Part II
Some observations on the Indian
Banking Industry

5
 Banking Industry in India: 1999-2009
• During the last decade,
 The number of banks has declined from 297 in 2000 to 171 in 2008,
mainly due to closure/merger of weak rural banks
 Number of branches rose from 65,412 in 2000 to 76,050 in 2008.
However, the break up shows greater focus of the banks in this regard on
metro and urban areas, as under:
 Rural branches went down from 32,734 to 31,076
 Urban branches went up from 10,052 to 14,392
 Metro branches went up from 8,219 to 12,908
 All Banks’ aggregated Loan book rose from Rs 4 trillion to Rs 29.41
trillion in 2009, with percentage of bank loans to GDP, going up from
19% to around 52% as of now, and the credit deposit ratio going up from
53.3% in 2000 to 70.34% as of now

6
 Major Banks in India: Performance during 1999-2009
• Among the private sector banks, assets of Axis Bank grew from Rs 66.69 billion
to Rs 1.48 trillion, HDFC Bank from Rs 116.56 billion to Rs 1.83 trillion & ICICI
Bank from Rs 120.73 billion to Rs 3.8 trillion. During the decade their net
annual profits went up respectively from Rs 51 crore to Rs 1,815 crore, from Rs
120 crore to Rs 2,215 crore, and from Rs 105 crore to Rs 3,758 crore
• During the decade, the assets of SBI, PNB and BOB went up respectively from
Rs 2.61 trillion to Rs 9.65 trillion, from Rs 0.54 trillion to Rs 2.74 trillion, and
from Rs 0.58 trillion to Rs 2.27 trillion. Their profits went up respectively from
Rs 2,056 crore to Rs 9,121 crore, from Rs 408 crore to Rs 3,091 crore, and from
Rs 503 crore to Rs 2,227 crore
• The reduction in NPAs by the public sector banks has been truly remarkable. In
2000, 4 of them had double digit net NPAs which are now down to less than
1% in case of Indian Bank, Allahabad Bank and SBB&J, with Dena Bank also at
just 1.09%
• The relative movements in case of NPAs of new generation private sector
banks are not comparable, since having come up in the mid 90s, they were not
carrying any baggage
• A few of the private sector banks either died or were merged during the past
decade. Global Trust Bank was merged with Oriental Bank of Commerce;
Centurion Bank first took over Bank of Punjab and then merged with HDFC
Bank. The story goes on
7
CURRENT ISSUES AND FUTURE
CHALLENGES IN INDIA

Lecture I
Part III

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 Banking Industry in India – the road ahead
M & As
• With mergers and amalgamations we might see emergence of
3/4 banks, which are half or one third the size of SBI, depending
on the initiatives of the government. The issue however
continues to be politically sensitive
• FINANCIAL INCLUSION CHALLENGE
• Only 40% of the Indian population has bank accounts, 13%
debit cards and 2% credit cards. Spread of banking at a faster
pace in the rural areas, through branches, banking
correspondents and mobile telephony, at a fast pace is likely.
RBI has directed banks to come up with specific plans for
covering rural India
• Banks are being compelled to reach out to rural India, but they
are increasingly appreciating the business opportunity in
financial inclusion, as urban consumers suffer from loan fatigue
and corporations find other ways of raising money 9
 NEW CHALLENGES
• The global financial crisis of 2007 has thrown up new
challenges for the financial system
• The key contributory factors for the crisis were:
– Lower interest rates inducing higher risk taking, and leading
to an asset price bubble
– Changing structure of the financial sector and rapid pace of
innovation over the last two decades, and the failure of risk
management to match up to the new demands
– Failure to adequately regulate highly leveraged financial
institutions
• The very foundation that a sound financial system
requires – TRUST, crumbled. Consequently, Banks that
had liquidity hoarded it, and the banks who did not
have it, faced doomsday
10
 FINANCIAL REGULATION
• There are two vital objectives of financial
regulation
– Mitigation of systemic risk
– Consumer protection
• Financial regulation typically uses tools such as
– Prudential regulation
– Specialized tools such as deposit insurance
– Regulation of payment and settlement systems
– Regulation of business entities

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FINANCIAL STABILITY – THE OVERARCHING AGENDA OF
FINANCIAL REGULATION FOR THE FUTURE

• Financial stability has to be an explicit

objective of regulation
• International co-operation key to resolving
systemic crises in the new world
• India’s financial sector reasonably insulated
from crisis of 2007
• ‘Financial stability’ has now been made
explicit objective of RBI monetary policy

12
 The New Focus on Financial
Stability across the World
• For a fairly long time the main focus of the
regulators used to be on Inflation and Growth
• One major outcome of the G 20 deliberations
post the crisis is the establishment of a new
‘Financial Stability Board’ that includes all
large countries of the world, to be operated by
the IMF, with a strengthened mandate

13
 Financial Stability and Development Council
Differing views of RBI & MOF
• The Reserve Bank of India had shown a red flag to the finance ministry on
the proposed Financial Stability and Development Council.
• In a letter written to the ministry in July 2010, the central bank had said
that the proposed FSDC should not try to be a super regulator but rather
confine itself to financial literacy and inclusion.
• The latest letter was in response to a discussion paper from the finance
ministry on FSDC. In this, RBI has also made a case for being designated
the 'systemic regulator', a role it says that it has already been performing.
• RBI feels that the responsibility for financial stability and macro-
prudential regulation of the financial sector should 'vest explicitly' with
RBI.
• The bank has cited four international practices -- the US Federal Reserve,
Bank of England, European Central Bank and Bank of France -- who have
the final say in their country/region over issues concerning financial
stability.

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Challenges before regulators in the world
– How do we define ‘financial stability’?
– Who takes the responsibility of ensuring financial
stability?
– Where does ‘risk management’ amount to
‘conservativeness’?
– What are the reforms required to create an efficient
and effective regulatory architecture to ensure
financial stability?
– How do we resolve the constant tension between
fiscal and monetary policies? Think about the need
to keep rates low because of large government
borrowing programmes. 15
COMMERCIAL BANKING SYSTEM IN
INDIA - AS OF 2009
• Public sector banks [27]
• Private sector banks [22]
• Foreign banks [32]
• Regional rural banks [84]
[Figures in brackets show number of
institutions]

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 Alternative Organisations for
Financial Conglomerates
• Universal Bank Model – All financial operations are
conducted within a single corporate entity
• Operating Subsidiary Model – Operations are
conducted as subsidiaries of a financial institution
• Holding Company Model – Financial operations are
carried out by distinct entities such as banks,
mutual funds, insurance companies, NBFC, HFC, etc.
(Current model used in India is the ‘Operating
Subsidiary Model)
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 CO-OPERATIVE CREDIT INSTITUTIONS
• URBAN CO-OPERATIVE BANKS [1721]
– Scheduled UCB [53]
– Non scheduled UCB [1668]
• RURAL CO-OPERATIVE CREDIT INSTITUTIONS [96061]
– Short term [95344]
• State co-operative banks
• District central co-operative banks
• Primary agriculture credit societies
– Long term [717]
• SCARDB – State Co-op and Rural Development Bank
• PCARDB – Primary Co-op and Agriculure Rural
Development Bank
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 Committee on Financial Sector
Assessment (CFSA)
• According to CFSA, dual regulatory control of RBI and
NABARD, is the single most important regulatory and
supervisory weakness in the co-operative banking
sector
• Further, directors are appointed on political affiliation
• CFSA’s report points out that the sector is plagued by:
1. Low resource base
2. Inadequate business diversification and recoveries
3. High level of accumulated losses
4. Weak MIS and poor controls
19
 EVOLUTION OF INDIAN BANKING
The period can be divided in 4 phases, as under:
– Pre 1947: no entry norms, several banks failed as they were
either too small to stand global pressures or mismanaged
– 1947-1967: Banking Companies Act (now called Banking
Regulation Act) enacted, SBI expanded in rural areas, nexus
between big industrial houses and banks resulted in no credit
being extended to agricultural or SSI sectors
– 1967-1991-92: tightening of social controls, directed lending
introduced, asset quality suffered, banks low on profitability
– 1991-92: financial sector reforms, prudential norms in
accordance with international best practices, improved
profitability, greater risk aversion also leading to low credit,
particularly to agricultural sector
20
 NON BANKING FINANCE COMPANIES: 2009
• Deposit taking – NBFC-D [336]
• Non deposit taking – NBFC- ND [12402] - There are a few
very important companies classified in this category under
the sub-category, NBFC-ND-SI, which are systemically
important, have asset size of over Rs 100 crores and are
the fastest growing category in the NBFCs space
• Residuary NBFC – RNBFC [2]

Total – (12740)

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 Some other Classifications: Finance Companies
• There are 43 Housing finance companies.
These are regulated by NHB
• NBFCs are also classified on the basis of “Asset
Type” as ‘Asset Finance Companies’, ‘Loan
Companies’ and ‘Investment Companies’
• Mortgage Guarantee Company (Reserve Bank)
Guidelines, 2008' notified on 15th February
2008 now allows mortgage guarantee
company to commence the business of
providing mortgage guarantee in India
22
 Lecture I
Part IV
Group Presentations
Guidelines to follow
AND
List of Topics for Group
projects/presentations
23
Topics: Indian Banks, NBFCs and Insurance Companies
• You will cover all the entities in the group i.e. each bank,
finance company, and insurance company, separately as well
as present the group position on a consolidated basis
• ICICI Bank
• Housing Development Finance Corporation Limited
• Life Insurance Corporation of India
• Bajaj Finserv Limited
• SBI
• Punjab National Bank
• Reliance Capital Limited
• Bank of India
• Kotak Mahindra Bank

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 What aspects will you focus on?
• Look at the position/developments over a period of 10 years, at
least 5 years
• Cover the following aspects, at the minimum (think about what
you learnt in the first year in the course “Financial Analysis”)
1. Strategy
2. Performance
3. Financial Strength – Capital Adequacy
4. Diversifications
5. M & As
6. NPAs
7. Technological Upgradation
8. Corporate Communication
9. Customer Service
10.Market Position 25
 Guidelines for presentations
• Make a oral 5 minutes presentation (1 person only from each
group) in the next class on Monday, the 27th of September, 2010 to
talk about what exactly you will cover in your group presentations
later. This will be like presenting your project synopsis
• As regards the final group presentations, one group will present in
each session. This will be an exhaustive presentation
• The final examination may include questions from the better
presentations
• Class participation marks will be given on the basis of contribution
made by the remaining students in regard discussions on the
company being discussed
• Presentation time of each group will be 45 minutes, including Q&A
time
• All group members to present some slides
• Commencement of presentations on 11th October 2010
• All PPTs to reach me in advance, by 5.30 pm on 8th October 2010
• Delay will attract a penalty
 An important point
• As the companies/banks in the list should be
among the recruiters later during the
academic year, every one in the group should
actively participate in the group-work and do a
first rate job. Free-riders beware!
• For the same reason, be very attentive in the
classes, particularly during the presentations,
and make these as meaningful as possible.
Add value for the whole class by your
interventions; you need to go beyond asking
questions 27