FICCI Lending to Service Sector Critical Issues Strategies

8/11/2019 FICCI Lending to Service Sector Critical Issues Strategies

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September 15, 2004 1

Chairman & Managing Director

Indian Bank

Welcome to the

Presentationby

M B N Rao


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Strategy for Financing Service Sector

Critical Issues

September 15, 2004


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Service Sector - an Overview

Service Sector plays a very vital role in developed

countries

Due to the IT potential of India, Service Sector in India

has been growing faster

Its contribution towards GDP is very significant

The share of Service Sector in GDP is 56.2 %

Service Sector can generate higher income with lesser

capital

During the last ten years, Service Sector has grownahead of GDP


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Service Sector - Share in GDP and Growth Rate

Share Percentage in GDP

1994 2004 Agri 31.0 22.1

Industry 21.1 21.7

Service 48.0 56.2

Cumulative Average Growth Rate (10 Years)

Overall GDP 6.21%

Agri 2.70%

Industry 6.53% Service 7.90%


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Components of Service Sector

Share % in GrowthGDP (02-03) during 2002-03

Construction 5.3 7.3Trade 14.0 4.5

Hotels & Restaurants 1.1 4.0

Railway 1.1 5.7

Other Transport 4.3 6.0Storage 0.1 -7.8

Communications 3.5 22.0

Banking & Insurance 6.9 11.6

Real Estate, Business / Legal Services 6.1 5.9

Defence 5.9 5.3

Other Community & social Services 7.8 6.2

Total Service Sector 56.1 7.2


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Classification of Service Sector

Lenders Perspective

Based on Nature of Operations, Investment,

Term Loan and Working Capital Requirements


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1.Financial Services depending on Public Deposit,premium - not mainly depending on institutional

borrowing

Banks

Financial Institutions Non-Banking Financial Companies

Life Insurance Companies

Non Life Insurance companies


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2.Services requiring huge investments

RequiringProject Finance, higher TL and Working Capital

Landline Telephone

Cellular phones, Pager services

Telegraph, Telex service Providers Lease line provider

Broadcasting /Telecasting Services

IT Companies

BPO companies

Real Estate Agents


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3. Services requiring Some initial Investment, TermLoan and Working Capital

Trade

Whole Sale

Retail Trade


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4. Service requiring higher investment in Building andequipment requiring Term Loan and some working

capital

Sound recording studio

Video Processing Studios

Video production agencies


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4. Services requiring Investment in Land and Building

and / or Moveable assets but very less or no workingcapital requirement

Educational Institutions, Warehouses, Godowns

Marriage and Conference Halls, super Markets, Malls

Hotels, Cinema theatres, Hospitals Bus Operators Tour operators with own vehicles

Airways, Ship and Truck Operators

Courier Agency with own Vehicles

Agriculture related works Tractor / Power Tillerservices for ploughing

Road laying machines, Construction related machinerycement mixer


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5.Services with Small one time investment for purchasing

equipment without working capital requirements Automobile Service Stations

Beauty parlour & Barber Shops

Cable TV operators

Commissioning and installation services

Health club and fitness Centre

Fast Food Centres, Small Hotels

Commercial concerns providing online information and

data base access and / or retrieval services Dry Cleaner, Franchise services, Internet Caf

Maintenance and repair services and

Photo Studio.


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6. Very low Fixed and Working Capital Expenses

Operating with Small Office Major expenses - Salary to Staff.

Other expenses - Phone Bill, Personal Computers,stationery and travelling expenses

Insurance & NSC Agents, Travel Agents

Advertising agency, Architects

Consultants, Event Managers

Training Class Conductors, Recruitment agencies

Interior designers, Chartered accountants

Security agencies, Courier Service Packing and Transporting companies without their own

vehicles


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Financing Opportunities


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Financing Opportunities to Service Sector

IT Companies and BPO Companies

Our Country - leading Service provider in the world

Vast Potential & High Growth

Thrust for agricultural Lending

Financing Traders of Tractors, Power Tillers, Fertilisers

can do well Financing individuals to purchase tractors / Power tillers

who can provide ploughing services on rental basis

Financing Setting up of Godowns / warehouses

Securitisation act makes Mortgage security morereliable and preferable

Financing Marriage Halls, Mini conference Halls, Hotelsand Hospitals


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Communication Services

Fastest Growing Service industry Many types phone services throng the market

Land Line, WLL, Cellular

International Players

Opportunity for traders to sell instruments and sim cards Banks can finance Service providers as well as traders

Entertainment services

Cable Channels are very popular

Producers and advertisement agencies boom


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Trade Finance

Conventional Trade - Wholesale / Retail Trade

Super Markets

All under One Roof

Grocery, Vegetables, Eatables, Household articles,White Goods, Dress Materials etc.

Shopping Malls and Multiplexes Collective Community activities

Emerging Trends

Sales, Services, Entertainment, Indoor games,.Restaurants, Community Hall all in a multiplex

Banks can finance

Construction of multiplexes , Super Markets, Godowns

Trade Finance for the Shops in the complex


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Loans to professionals

Doctors - Private Clinics Advocates, Chartered Accountants, Interior Designers etc.

-To set up their office

Loans to Educational institutions

For new building, lab equipment, furniture

Conversion of thatched roof into permanent structure

PURA- Provision of Urban amenities in Rural Areas

Services available in Urban area can be extended to RuralAreas also with the help of Self Help Groups

Setting up of Internet Kiosks to get eGovernance and otherinformation services

Courier agency

Marketing Agencies


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Financing Construction Activities

Tax benefits for interest on Housing Loans and highrisk / low returns on other investment avenues offervery good potential for construction activities in a bigway

IT industry is booming - Scope for huge employmentopportunities with very high salary - IT employeesinvest in flats in a big way

NRIs also invest in Flats and Buildings

Banks flooded with liquidity find Home Loans to be

safe. More Home loans at cheaper rate results inbooming of construction industry


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Critical Issues


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Critical issues

Banks are willing to finance Reputed / Rated companies

They raise on their own resources. Less reputed /unrated companies require institutional finance. FIsperceive higher Risk

In a number of Service Sector Activities, tangible assetsnot created but they require Working Capital Finance

Banks have Security concern

BPO Companies- Good Potential

Electronic Assets -Fast obsolescence - High depreciation

Should not depend on a single company from abroad

Soundness of the outsourcing company also matters

Political Risk - Possible ban on outsource by otherCountry


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Critical issues

Finance for construction activities

Real Estate and Construction activities associated witheach other

As per RBI guidelines Banks should have prudential policyto Real Estate exposure

During late 90s in Japan and few European countries some

Banks failed due to sudden slump in Real Estate Market

In India, there is a steady increase in Land value

Frauds / Forgeries in Land Records pose problems. Thereare difficulties in verification of the genuineness of the title.

Power of Attorney issues also to be carefully verified


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Critical issues

Finance against Buildings

Financing Multiplexes, Super Markets, Hotels, CinemaTheatres

The location is very vital

Due to shift in developmental activities, some

prominent locations may lose importance and newbusiness centres may emerge within the same city ortown

Then business activities in the existing place mayslowly wean out

Financing Marriage Halls, Hospital Buildings Income generation capacity depends on maintenance and

other services extended


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Critical issues

Finance against Buildings

SARFAESI Act comes to the rescue of Bankers

Still Problems prevail

Delay in acquisition

Borrowers obtain Stay Orders

Non availability of prospective purchasers

Very low Distress Sale Value

Deterioration due to non maintenance for a long time incase of long drawn legal disputes


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Critical issues

Highly sensitive Projects - High Investment - High Risk

Financing Communication Industry

The following may lead to extinction of few players

Presence of International Players & very high competition

Price War

Changing technology

Regulatory issues

Financing TV Media, production and Channel Services

Number of Channels on the increase

Heavy competition

Payment Channel issues

Lack of Advertisement support may impact theincome

No guaranteed airing / return for the serials


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Critical issues

Financing Share Brokers / others with shares as security

At various period, many Banks have incurred huge losswhile financing against shares

RBI has imposed many restrictions and prescribed highermargin (to the extent of 40 %) for lending against shares

With a lot of market discipline imposed by SEBI, theimprovement in trading system and higher margin,lending against shares may not be not so risky

Banks could avert any major loss, by continuous marketwatch and prompt action


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Critical issues

Truck Financing

Good potential Higher depreciation

Distress Sale value Low

Banks prescribe higher margin

Restricted finance by Banks for second hand vehicles NBFCs and Private Financiers lend more to this sector

They have close monitoring and cease the vehicles in caseof default


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Critical issues

Loans to Small Proprietary concerns / Self Employed

Persons / Small Business / Retail Trade Activity Selection is very important

Obsolete activities not fetching adequate income

Saturation - Supply exceeding Demand - Less Business

Change in Technology


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Critical issues

Loans to Professionals

Abundant Educational opportunities have produced a lotof Professionals such as Doctors, Lawyers, CharteredAccountants, Architect, Journalists etc.

Abundant availability provides more opportunity forlending -

At the same time it results in higher risk for the bankIt is true that in any profession, a minor section ofpeople have a major share of business & income and themajor section of the people have a minor share only

Assessment of actual Income is difficult - Dependence onthe declaration of the professional

Inadequate income generation may leads to default inBanks Loans


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Strategies for Financing Service Sector

Categrisation of Service Sector to be done based on theirSize and nature of Credit requirement similar to that of

Industry (Large Scale / Medium Scale / Small Scale /Village and Cottage Industries)

Credit Needs analysed and Financing patterns arrived foreach category

Security and Margin issues of financial Sector is differentfrom that of Manufacturing Industries. Suitable strategyto be evolved

Financing based on Rating of the company - More Ratingagencies with more Rating coverage required

Benchmarking for each Service should be done forperformance and profitability based on the operations ofthe best performing companies in the respective service

Suitable Risk rating models to be evolved


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Strategies for financing Service Sector

Financing IT companies and others with intangible

security Rating of the Company

Reputation of the promoters and past track record

Firm contract order and Higher margin

Sale proceeds to be directly received by the Bank byway of Bill etc.

Variable Credit Limit based on projection of cash flow


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Financing Communication and Media Services

Highly Sensitive - Banks should have necessary riskManagement

Exposure should be minimum and selective

Financial soundness and good track record of thepromoter is vital

Banks may Finance retail operations such as sale ofphone instruments, Sim cards, other electroniccomponents etc.


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Truck Financing

Banks can tie up with NBFCs Identification of borrowers, recovery and other

formalities - NBFCs

Back to back running account loan by Banks to

NBFCs Portfolio Securitisation

Lending to NBFCs / Micro Credit Institutions

for onward lendingto priority sector treated as priority

sector lending by Banks Identification of borrowers, account maintenance and

recovery by NBFC / MCI


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Potentials of Tourism Industry

Tourism Industry is the most potential but less tappedindustry

With rich heritage, we can attract foreign travellers andearn foreign Exchange

Many other services can benefit from Tourism

Airways

Railways

Tourist Bus / Taxi Operators

Hotels

Restaurants Travel agencies / Tour organisers,

Guides

Tourism can generate a lot of employment opportunities


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Lending to public to develop Tourism Industry

Banks offer loan to customers to meet foreign tourexpenses

Similar loans to meet the expenses for tours within thecountry will promote tourism

Banks can have tie up with Hotels and Tourist operators

and announce structured product loans to tourists

Support Required Private Sector

Government / Public Sector Employees have LTC facility

They make actual journey for getting reimbursement

Many Private Sector Companies pay cash on the basis ofdeclaration (even without performing journey )

Private Sector should also insist on actual journey forLTC reimbursement which will promote tourism


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Financing Small Proprietary concerns / Self Employed

persons / Small Business / Retail Trade Borrower Selection criteria

Activity should have demand

Less number of Players

Multiple related activities by the same borrower Good customer service

Technology implications

Sustainability of the activity

Integrity of the borrower


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Financing Service Activities in Rural Area

Hitherto Service activities are less in Rural area Micro Financing to Self Help Groups are fast catching up

NGOs and Voluntary Organisations educate SHGs toinvolve in more service oriented activities

SHG members are being trained in various activities andmarketing

Marketing and other Tie up arrangements with UrbanService providers will help spreading Service activities inRural Areas

Since the repayment rate is very high in the case of SHGs,banks are ready to finance in a big way


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Financing Service Activities in Rural Area through SHGs

Watershed Development

Drinking Water supply and Sanitation services

Non conventional Energy (such as gobar gas, windmill)services

C


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Conclusion

The problems in Service Sector are relatively lowercompared to Agriculture and Manufacturing Sectors

With the proposed opening up of Service Sector,Competition will be stiffer

Global players will enter with advanced technology andvery good marketing skills

Service Sector has higher Employment Generation

Potential

C l i


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Conclusion

New avenues and expansion opportunities requiring

higher Bank Finance will arise

Banks should prepare themselves to expand their Creditportfolio in Service Sector

Banks should device suitable strategies for lending toService Sector

Due to its IT potentials, Indian Service sector will achievea new dimension in the near future


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S b 15 2004 41

Thank You

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FICCI Lending to Service Sector Critical Issues Strategies