THE FINANCIAL

Cover Story

Banking Amendment Bill

Senior Team

Komal Poddar

Achal Mittal

Dear Readers,

There is always light at the end of the tunnel and when we talk about the light of

knowledge or enlightenment per se, even ‗the west‘ looks up to ‗the east‘. No

matter how tall the western financial institutions (FIs) stood, their foundation was

always prone to damage. The domino effect that took place in the global economy

amidst the recession of 2008 and Euro crisis made sure that few players who were

‗too big to fail or fall‘ also collapsed. But, in the East, particularly India, things

were well grounded, thanks to conservative yet slowly progressive central bank

policies. The cover story of our magazine talks about such a case in point, ―The

Banking Amendment Bill‖ which looks like a new life in the dark age of global

gloom.

‗The Financial‘ on a similar note is happy to be continuously enlightened by the

hundreds of ignited minds across the Indian B-schools. It has received an over-

whelming response this time. We are happy to bring to you, with this issue, a

magazine with several new sections that will grow into a repository of original

content and opinion from the Finance Cell at NMIMS.

In this issue, we have delved into the viewpoints on ‗The Banking Amendment

Bill‘. The perspectives put forward by the budding managers from across the B-

schools are sure to give a new dimension and importance to this issue. We have

also tried to enlighten the readers about how social media can have an impact on

the future and many other novel thoughts and ideas.

The process of evolution of ‗The Financial‘ will see a deliberate attempt from Fi-

nomenon, to involve the readers as much as possible. The aim this time is not to

have an article end with its last word in the magazine but to take it beyond

through comments and discussions. Feel free to contact the writers of each article

and discuss their views or to even dispute them! As always, I hope you enjoy this

issue! Let us know how you feel about the content. Criticisms, suggestions, re-

quests, and jokes, they are all more than welcome.

We thank one and all for their valuable contributions to this magazine and hope

you enjoy the articles. ‗The Financial‘ is an interactive magazine and, beyond just

a magazine, a two-way interactive channel. As we exchange ideas, we will evolve

and grow to greater heights.

So until we meet again next time and while you wait to see what is in store for the

next issue, take care and enjoy reading!

Komal Poddar

FROM THE EDITOR’S DESK The Financial

March 2013

Finomenon

NMIMS Mumbai

All design and artwork are

copyright works of Finomenon

NMIMS Mumbai

Creative, Design & Content

Prakash Nishtala

Srijan Srivastava

Akshay Goyal

Cover Story: Banking Amendment Bill:Cover Story: Banking Amendment Bill:Cover Story: Banking Amendment Bill: A new life in the dark ageA new life in the dark ageA new life in the dark age

1

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Aadhar and Financial InclusionAadhar and Financial InclusionAadhar and Financial Inclusion 6

Expert Speak: Indian Banking Industry: What Lies Expert Speak: Indian Banking Industry: What Lies Expert Speak: Indian Banking Industry: What Lies Ahead?Ahead?Ahead?

9

New Licenses in BankingNew Licenses in BankingNew Licenses in Banking––– A leap of faith towards A leap of faith towards A leap of faith towards 11

Financial Inclusion: Rural India’s Path to SuccessFinancial Inclusion: Rural India’s Path to SuccessFinancial Inclusion: Rural India’s Path to Success 14

FinKnowledge: Making of Indian Union budgetFinKnowledge: Making of Indian Union budgetFinKnowledge: Making of Indian Union budget 17

Is New Banking Licenses by RBI a good idea?Is New Banking Licenses by RBI a good idea?Is New Banking Licenses by RBI a good idea? 20

IFRS: A Global Language for Business Affairs IFRS: A Global Language for Business Affairs IFRS: A Global Language for Business Affairs 23

FinFun: The Month in Images and WordsFinFun: The Month in Images and WordsFinFun: The Month in Images and Words 26

New Licenses in Banking Sector: An urgent neces-New Licenses in Banking Sector: An urgent neces-New Licenses in Banking Sector: An urgent neces-sity for financial inclusionsity for financial inclusionsity for financial inclusion

28

Corporate Debt Restructuring: Boon Acidified to Corporate Debt Restructuring: Boon Acidified to Corporate Debt Restructuring: Boon Acidified to BaneBaneBane 30

We Care We Care We Care –––2013:2013:2013: A civic engagement internship projectA civic engagement internship projectA civic engagement internship project

34

Banking and Social MediaBanking and Social MediaBanking and Social Media 35

Akshay Goyal is a 1st

year MBA student at

NMIMS. He has an

e n g i n e e r i n g

background and

loves to write and

sketch in his free

time.

Email ID:

akshaygoyalonline@

gmail.com

BY AKSHAY GOYAL, NMIMS MUMBAI

Indian Banking Sector has been

flourishing post independence of

India. A numerous changes in the

regulations and functioning of the

banks have been brought over the

years in order to adapt to the

changing needs of the growing In-

dian Economy. Still the sector is

plagued with its own set of prob-

lems. The Banking Laws Amend-

ment Bill 2011 which was passed

by both the Houses of the Parlia-

ment during its Winter Session of

the year 2012 seek to address these

problems. The amendments were

made in the Banking Regulation

Act, 1949 and the Banking Compa-

nies (Acquisition and Transfer of

Undertakings) Act, 1970/1980.

The major areas where the Bill fo-

cuses on are:

RBI Gets More Powers

The amendment has accorded far

reaching powers to the regulator.

The Banker‘s Bank (RBI) now has

the power to supersede the boards

of banks. The RBI can now over-

take the entire board which is a ma-

jor change when compared to the

past. Earlier, the RBI had power to

remove only a director or officers

of Banking Company and not the

entire board.

Now the RBI also has the power to

inspect the books of accounts of

associates including the holding

company, joint venture, subsidiary

company, an enterprise that con-

trols the composition of the board

of directors or other bodies govern-

ing the banking company and enti-

ties that would be benefitted from

the banking company.

There has been a considerable in-

crease in terms of monetary penal-

ties that RBI can impose on banks

for violation of RBI rules and di-

rectives.

A stricter approach has been

adopted because the issue of new

banking licenses necessitates the

need of greater regulatory control.

Raise in the Voting Rights Banks

The Bill has raised the voting rights

of the shareholders from 1% to

10% for public sector bankers and

from 10% to 26% for private

banks. The bill has also increased

the authorized capital of the banks

from Rs 1500 crore to Rs 3000

crore. All this has paved way for

investors to invest more in both

public sector and private sector

banks. At the same time it has in-

creased the say of promoters who

now will have greater influence on

the decision of the management.

This may be harmful in certain

situations where the promoters only

seek the welfare of the banking

company and may forget about the

economic welfare of the country.

1

This is where stricter regulatory norms will come to

force.

Issue of Bonus Shares

The Bill provides provisions for public sector banks

to issue rights shares and bonus shares. They can

even split the shares into lower denomination which

facilitates the trading of their shares. This is good

news for public sector banks and their shareholders

as till now only private sector banks have been giv-

ing away free shares to their shareholders as bonus

shares. Public sector banks, in spite of holding huge

reserves, could not issue bonus shares so far because

the enactments through which they were national-

ized provided no provisions to issue bonus shares.

State Bank of India (SBI), which is the biggest bank

in the country, has the largest free reserves which are

nearly 125 times its paid up capital. The free re-

serves of SBI is Rs.83,280 crore against its paid up

capital of Rs.671 crore. If SBI issues bonus shares,

the stock market will be bullish, which has till now

given a low valuation for all public sector banks as

the public sector banks have been unfriendly to the

investors till now? Now the bill has cleared the way

for them to issue bonus shares, the government

should promote banks with substantial reserves to

issue bonus shares. The government will also be

benefited immensely from such a move as it has a

majority holding in all the public sector banks. It

will also help banks to raise fresh capital easily from

the market and will therefore help them in meeting

their capital adequacy requirements prescribed under

Basel III norms.

Foreign Banks

Earlier the foreign banks had to pay 20-30% tax as

capital gains and stamp duty when they transferred

their branches to a new legal entity.

But the Bill allows foreign banks to transfer share-

holding to a holding company or to convert their In-

dian operations into a wholly owned subsidiaries

without the need to pay the stamp duty. This move

will be helpful for the foreign banks who are seeking

a larger role have a freedom to expand their

branches and operations.

Conclusion

The Finance Minister of India Mr. P Chidambaram

said, ―We need 2-3 world-sized banks. China has

three among the world's top 20. We have none. We

need more banks". He was quoting the need of a

growing economy like India. India is seen as the

next superpower along with China. But for that, we

need a sound and robust finance sector that can pro-

vide a conducive environment for growth.

The Banking Laws Amendment Bill 2011 is seen as

a major step in that direction. It paves the way for

banks to grow into large organizations and increase

capitalization. The major impact that the Bill has

been successful in bringing is in terms of the power

granted to RBI. By giving RBI the power to super-

sede the boards of banks and inspect the books of all

the related entities, it has cleared the way for RBI to

issue new licenses. Till now RBI has been apprehen-

sive in issuance of new licenses fearing a misuse of

it by the new banks.

We will now see more banks competing in the bank-

ing space. This will bring new financial products and

advanced technology. All this will lead to a healthy

competition. Retail customer will benefit to a great

extent because of the deeper penetration of banking

services. They will have a variety of options both for

deposit and credit products. Financial Inclusion,

which has been the focus area of the RBI as well as

the government, is certainly going to gather pace

with new entrants in the banking space.

Overall the Bill provides a strong platform using

which the Indian Banking Sector can reach new

heights and compete with the big names at the global

level. It provides an enabling environment for the

banking sector to grow and also the Indian Economy

to flourish.

2

BY RADHIKA BHATTER & L R KRISHNAN, MDI GURGAON

If all that glitters is not gold, it

might well be Silver. While

Gold has dominated the metal mar-

ket in terms of demand, supplies

and returns for many years, it

seems it is high time one starts

looking for an alternative invest-

ment. Gold, for ages, has been an

investment to hedge against eco-

nomic, political, or currency crisis.

One is astonished to hear and see

the fabulous returns that gold

promises its investors, but one

should also know that for many

years, Silver has outperformed gold

in terms of returns and volatility.

Investments in precious metals like

gold, silver, platinum, palladium

etc are made in one of two ways-

either people buy such metals

physically and store them or they

buy them as stock, the value of

which changes in tandem with that

of the precious metal. There are

also several advantages of invest-

ing in precious metals. Firstly, be-

ing a physical commodity, the in-

vestor actually owns a piece of the

precious metal rather than a share

or stock which is just a sheet of pa-

per. Secondly, there is always scar-

city of precious metals in the world

which increases their value.

Thirdly, over the years, it has been

observed that the movement of

prices of precious metals is the op-

posite of the movement of the

economy. It has been seen that a

large increase in gold prices came

at a time of great economic un-

certainty.

The various instruments used as

investment vehicles for precious

metals include - bullion bars which

can be exchanged over the counter

at major banks, coins and rounds,

exchange traded products, certifi-

cates of ownership, accounts where

the metal can be held as currency,

derivatives, mining companies.

Gold has certain features which are

unbeatable in an investor‘s per-

spective. In India, Gold is some-

thing which every family buys be-

cause of the attraction for this

metal. On any special occasion/

festival, gold is the common man‘s

choice. While not more than 40%

of the middle class is capable of

affording the currently priced gold,

it is hard to believe that the demand

for the yellow metal has been rising

for a decade now. The gold market

is also subject to speculations just

like any other market. The history

of gold, the role of gold reserves of

country, gold's low correlation with

other commodities, and its pricing

in relation to currencies even dur-

ing the 2008 global financial crisis,

suggest that gold is more like

a currency than a commodity.

On the other hand, silver has

emerged as the so-called ―poor

man‘s gold‖ and brings with it

some properties that gold possesses

3

Radhika Bhatter is

currently a student at MDI Gurgaon pursuing

Post graduate

programme in

Management (2012-14

batch). She completed

her BSc (Hons) Economics from St.

Xavier’s College

(Autonomous), Kolkata

in 2011.

E-mail:

pg12radhika_b@mandevi

L R Krishnan is

currently a student at

MDI Gurgaon pursuing

Post graduate

programme in

Management (2012-14

batch). He has done MSc (Hons) in

Mathematics from BITS,

Pilani. He has 8 months of work experience in

the IT industry.

E-mail:

pg12lr_krishnan@mande

vian.com

it is precious, malleable, lustrous, resilient and

rare. While silver‘s existence in the market de-

pends on the same factors as gold, one has to un-

derstand a few dif-

ferences between

trading of gold and

silver in the market

– Firstly, silver

market is only a

fraction of the size

of gold market

(Demand for silver

= $31 billion vs De-

mand for gold =

$222 billion as per

2011). Secondly,

silver is driven more by industrial demand (10%

in case of gold vs 46% in case of silver). Thirdly,

silver prices are highly volatile making it a high

risk, high return commodity.

The third reason, although,

can be derived directly from

the first two, it severely im-

pacts the sentiments of an

investor. As silver, the com-

modities‘ impact is short-

lived because of perception

of investors about gold com-

pared to silver.

Price of gold and silver are sub-

ject to certain factors – demand

and supply, practical significance

of the metal and substitute to

currency. The price of any material is determined by

the movements in its supply and demand. For in-

stance, the reserves of gold have increased 700%

from 1 billion ounces in 1950 to 7 billion ounces in

2010. On the other hand, silver reserves showed an

opposite trend as they fell 95% from 10 billion

ounces in 1950 to 500 million ounces in 2010. The

reason for this is that gold is generally stored in the

form of bars or jewellery which is recycled and

hardly ever lost in the process. However, silver has

several applications in industry where it is used in

the form of thin parts which get lost and therefore,

can never be reused.

The practical use of gold

and silver differ signifi-

cantly. On the one hand,

gold is traditionally seen

as a preferred metal for

jewellery which does not

have much utility apart

from a few places. Con-

versely, silver has more

industrial usage than any

other precious metal. A

report by Hinde Capital

states, ―It‟s the best con-

ductor of both heat and electricity, the most reflec-

tive, and second-most ductile and malleable element,

after gold. The white metal is also being put to sev-

eral new uses like-water purification,

air-handling systems and a natural

biocide.‖ This extensive use increases

the demand for silver substantially.

From the above two factors determin-

ing price of gold vs silver, it is evident

that the demand for gold arises out of

purely sentimental reasons while the

growth in demand for silver is created

by strong fundamentals. Thus, we can

conclude that while the ever increas-

ing demand for gold might remain

buoyant, the demand for the white

metal will see a phenomenal spurt with increasing

applications and no foreseeable substitute in sight.

Precious metals have a unique property of acting as

a substitute to currency as they can be held as physi-

cal assets in the most tangible form. Particularly, in

times of uncertainty and economic crisis it is seen as

the safest investment to make.

While gold as an investment has leveraged its posi-

tives for many years, lately it has succumbed to cer-

tain challenges, both intrinsic to the metal as well as

external, from the market. Firstly, it is the purity of

4

gold that is questioned before investing. The gold

market has various grades of purity and associates

different prices to each kind. If one is not cautious,

one ends up paying more than it is worth. Secondly,

it faces the threat of authenticity of dealers who deal

in gold buying and selling. Random selection of gold

dealers might lead you to one of the biggest mistakes

of your life. While these two challenges are specific

to gold, a major challenge posed by the market to an

investor is to time the investment appropriately.

While gold prices are constantly increasing and mar-

ket sentiments changing almost every day, one

should time his investment in such a way that one

invests in gold to leverage a major hike.

Recently, in the fourth quarter of 2012, gold prices

declined in major curren-

cies – Dollar, Euro, Chi-

nese Yuan and Rupee.

Across all currencies,

gold fell by 6.2% in that

quarter. Volatility of gold

and transactions have

touched their decade‘s

low in the last quarter.

According to World Gold

Council, market players

have been active under

selling pressure during

this period. About the

effect of a loose mone-

tary policy, WGC said

―The combined efforts of

the Fed, European Central Bank (ECB) and Bank of

Japan (BOJ) to underwrite markets with promises of

unlimited monetary support served to quell nervous-

ness, as did the results of the US elections‖. The re-

cent observation in the equity market is that inves-

tors are pouring money into risky assets, which is

seen as a disadvantage for gold. A report by WGC

states that general risk aversion is not necessarily

characterised by prudent risk managing tactics. It

also foresees an opportunity for gold to play a larger

role of being a valued commodity in this period of

reduced exposure.

If an investor looks for an alternative investment to

gold, he would be glad to notice the 300% returns

that silver has produced in a span of 3 years (2008-

11) – a fact that has gone almost unnoticed. The fact

that investor‘s focus has not completely shifted from

gold severely impacts silver‘s price volatility. Add-

ing fuel to the debate is the consistent double-digit

returns given by silver in 7 out of the last 10 years.

A rough calculation shows that if one had invested

in silver in 2005, he would have got a 500% return

on his investment today.

In the US, Silver has acted as a perfect hedge to the

falling currency, showing a -0.79 correlation (over a

period of 10 years from 2003-13) to US dollar. Al-

though silver‘s prices have shown high levels of

volatility, it has fared well in comparison to the gen-

eral market volatility. It has

shown a 0.1 magnitude corre-

lation to the general volatility

index while S&P 500 has

shown a negative correlation

of -0.49 with respect to the

same index. Currently, the

price of silver is determined

majorly by industrial demand,

where it is almost irreplace-

able.

As an investor if one looks for

a sustainable investment port-

folio, one would realize the

importance of hedging risk

against equity instruments by investing in metals

like gold and silver. Studying the phenomenon

deeper, one would realize that the growth opportu-

nity and market size that silver can capture is huge

compared to gold. Agreeing to what Warren Buffett

had to say about gold, it has already run its course

while a similar course is just beginning for silver.

Therefore, a reasonable investor would choose to go

with the one with strong fundamentals rather than

being driven by sentiments.

5

Nitin Singh, first year

student of MBA Finance at

Symbiosis Institute of

Management Studies,

Pune. Had work

experience of two years

in Java at Tata

Consultancy Services,

New Delhi. Done

graduation, BE in

Electronics &

Telecommunication from

Army Institute of

Technology, Pune.

Email id-

nitin.singh2014@sims.edu

BY NITIN SINGH, SIBM PUNE

The much sought after and of

course coveted goal of financial

inclusion is the silver bullet for

lurking sustainable growth. Yawn-

ing divide between rural and urban

is spooking our growth. Disparity

of financial and even basic banking

services is a major stumbling block

in the path of nation‘s prosperity.

With the rapid advancement of ur-

banization making inroads into the

rural hinterlands, it is imperative

that people inhabited there need

greater access to banking facilities.

With the 72% population nesting in

rural India, ignorance or turning a

deaf ear would be fatal for econ-

omy as well. Penetration of urbani-

zation is quite evident and growth

in urbanization in this fiscal year

was pegged at a whopping 32%.

Commiserate to that, financial in-

clusion has become a major pana-

cea for economy. As 60% of our

GDP contribution is from rural and

s m a l l

t o w n s .

But stark

reality is

that only

47% of

our popu-

lation is

s t i l l

banked!!

A l a s ,

looking at the gloomy and poor

global economic scenario, it is in-

dispensable that we must spur our

internal market. If we can recuper-

ate our botched domestic mar-

ket, there would be an in-

creased demand and supply. It will

give boost to market sentiments

and investments too.

Amalgamation of Aadhar and Fi-

nancial Inclusion

Aadhar is touted to be an elixir for

Direct Cash Transfer Scheme. With

burgeoning fiscal deficit, it was

inevitable to rein in mounting sub-

sidies. Subsidies in cooking fuel,

fertiliser, food etc, given to BPL

families is the major reason for

skewed fiscal deficit. Vicariously,

Aadhar was chosen to accomplish

the task cut out. Definitely, Aadhar

has its pros that will cut down on

middlemen, leakages and evasion

of subsidies.

According to Aadhar project, eligi-

ble people must have bank ac-

counts. Cash in place of subsidies

would be transferred directly to

their respective accounts. But here

comes a grave idiosyncrasy. Pau-

city of banking facilities becomes

the moot point. Now to tide over

this intricate issue, people must

have bank accounts with them.

Though, it is a daunting task for

government to facilitate banking

facilities in each and every nook

and cranny of vast nation. But due

to the exigency associated with it

and it is the only option available

6

with government to exercise. Therefore, Aadhar and

financial inclusion must be on the same page to

stave off bungled economy.

There are some systemic flaws

which dither integration of Aad-

har and financial inclusion.

However, government has tried

to roll out Aadhar project in a

phased manner. But at the speed

with which project is carried out

is not adequate. Issues in bio-

metric identification and data-

bases are also impeding speed

of project. Lack of skilled la-

bour is another issue.

However, it will smooth process of documentation

in account opening. Banks can verify Aadhar cards

for identification purpose. That means, Aadhar will

buttress financial inclusion in this way also.

But the issue of paramount importance is of cost in-

curred to government on

this project. Executing such

a humongous project cov-

ering mammoth population

is challenging. It is evident

that expenditure involved

in it is astronomical. Apart

from that the project needs

a good amount of time too.

Due to dearth of skilled

labour which can work in

remote areas, drift is ob-

served in project.

Financial Inclusion – A buzzword

In every national daily, it is seen that financial inclu-

sion is making to the headlines. Gradually, financial

inclusion is gaining traction. In various quarters of

media, this has become buzz now. Many multina-

tional organizations and banks are conducting vari-

ous multifaceted programmes and drive to rev up

inclusion.

RBI has taken some measures to promote financial

inclusion. But as inclusion

does not come into the core

business of banks, they are

turning Nelson‘s eye to it.

Taking all these intricacies

into consideration, it is os-

tensible that inclusion is a

Herculean task for govern-

ment.

But as around every bevy

of dark clouds there is a

silver lining. Hence finan-

cial inclusion can see the light of the day if consoli-

dated and integrated efforts are poured in. Recent

upturn in banking licences can alleviate the situa-

tion. So far efforts taken by RBI have come a crop-

per. With uptick in more banks operating in our na-

tion, there would be more penetration of banking

access to people yet re-

mained oblivious. Thus,

there is a golden opportu-

nity for RBI to introduce

more effective and benefi-

cial requisites mandated to

banks for licences.

In this era of cut throat

competition, every finan-

cial institution or bank vie

for marginal market shares

as these tad shares can

prove to be cliff-hangers. To extract every possible

profit out of populace, organizations cannot afford to

expend their resources on noncore businesses, where

probability of being a leader in the pack is diminu-

tive. So, drawing their attention to inclusion is an

arduous task. What our government can leverage is

that it must incentivize the inclusion process in a

7

manner so that people and bank involved are benefit-

ted. Banking Correspondents involved are reluctant

to work into rural areas.

Aadhar can go haywire

Infrastructure needed to accomplish Aadhar project

is gargantuan. Especially in remote rural areas set-

ting up workshops for Aadhar is laborious and costly

too. Duplication of data stored in National popula-

tion register is another stubborn issue. Technology

related issues can emerge anytime like integration of

banking details and biometric data. If tardy progress

of Aadhar project is not monitored continuously then

it can gather dust by being just a run of the mill pro-

ject by government. GOI must demarcate a dedi-

cated ministry to keep a tab on Aadhar project. GOI

can incentivize people who come for Aadhar regis-

tration. That will refurbish mental predilection of

people too.

In a nutshell

Firstly, financial inclusion and Aadhar project must

be integrated swiftly to plug any possible loopholes.

In a nutshell, I can say that looking at current pros-

pects if intricacies are not weeded out from system

in time then situation can worsen.

The mission would be completed only if imperfec-

tions are regularly revamped in time. For this to hap-

pen, coordinated efforts of both GOI and RBI are

most important. Though, financial inclusion is a gi-

gantic and Herculean task. GOI and RBI have their

task cut out. And these two must dispense their duty

in letter and spirit to alleviate widening poverty.

Financial Inclusion‘s elusive and laborious goal is

hard to achieve but integrated efforts can make us

succeed.

Any policy paralysis would aggravate the blight.

Unrelenting fiscal deficit is the major cause for bleak

economy. And in order to stem the nip in bud itself

it is vital for us to arrest it. Now panacea for that to

happen is financial inclusion. Inclusion is possible

only with the on-board coordination with Aadhar

project. If we wish to see India transforming into

proverbial Golden Sparrow of yore then inclusion is

the light of the day for us.

8

Mr. Agarwal is a

seasoned banker with

more than 14 years of

experience in banking

sector. He has

received several

accolades for his

contribution in the

field of knowledge

management,

customer relationship

management etc.

Being an avid writer,

he willingly

contributes analytical

articles on Indian

Banking Industry.

BY ISHWAR CHANDRA AGARWAL, MANAGER, UNION BANK OF INDIA

A discussion on the global econ-

omy would always be incomplete

without bringing in ―The Banks‖. I

would rather say that Banks are the

―engine‖ of the global economy. In

the last decade, India has emerged

as the economic power house. 2008

was the year that registered itself as

‗The Great Recession‘, witnessed

obituaries of several global banks

& financial institutions being writ-

ten down. Thus, cemented its posi-

tion just a notch below from The

Great Depression of 1929 in the list

of worst ever global economic cri-

ses. Like other economies, India‘s

economy has been banking on

Banking sector, however, it was at

an arm‘s length from the turmoil

that engulfed US‘ & European Na-

tions‘ financial system. Our Central

Bank‘s & government‘s too conser-

vative policies were proved judi-

cious when India was completely

unaffected by the ‗engine missing‘

problem! For instance, when the

major economies considered norms

of Basel-II to maintain a Capital

Adequacy Ratio (CAR) of 8% as a

bulwark that would be good

enough to keep away all Financial

Hazards, at that time Reserve Bank

of India that is indeed very

―reserve‖ asked Indian banks to

have a CAR of at least 9%. Thus,

rightfully by many of its ―reserved‖

policies it did not only reserve the

Indian economy to slip into the

quagmire of bail-outs rather growth

trend in India was reversed vis-à-

vis the other major economies fal-

ling graph of GDP growth.

In the last decade, our banking sys-

tem has been through a sea change.

The emergence of this century wel-

comed two few new Indian banks.

With humble beginnings, these

banks have created a special place

for themselves in the sector. Re-

maining abreast with other sectors

this sector also has also held the

hands with Information Technol-

ogy & led to the gestation of what

we called Core Banking Solution

or CBS. As per RBI guidelines,

now almost all public & private

banks have CBS and CBS in co-

operative banks is a part of the un-

dergoing next stage. In last few

years, a couple of major changes

have taken place when talking

about interest paid by banks on

savings account. First change is the

deregulation of interest to be paid

to depositors on savings account

with bank. Another major change is

the interest rate calculation method.

Earlier, the interest was used to be

calculated on the minimum amount

in an account between 10th & the

last date of the month, however

now it‘s on daily basis. Banking

Amendment Bill that was in lurch

since so long has finally got the

approval from the parliament. This

may entail greater powers in the

hands of the central bank. RBI has

now a greater power wherein they

can call for information and returns

from banking companies and even

9

inspect them. Earlier RBI could remove only a direc-

tor now it can supersede the whole board, the public

sector banks can also issue bonus shares, rights issue

or preference shares. The private shareholders of

public sector will have 10% voting rights while in

private sector banks it 26% voting rights are pro-

posed. This bill also paved the way for issuing new

banking licenses. Hence, in the following years more

players would be in the market leading to high com-

petitive practices to capture more market share & in

the whole act consumers would be benefitted the

most.

As cited above the whole sector seems to be robust

however things are not very hunky-dory. After put-

ting in efforts for so many years still around 33% of

the population has bank account and a larger chunk

of rural population has been mired in local pawnbro-

kers when it comes to loans & mortgages. To follow

the Basel-III norms the sector needs at least Rs.

90,000 crores in the next 5 years, what makes the

matter worse is that in recent budget only Rs. 14,000

crores were allotted contrary to the expectations of

Rs. 18,000 crores. India banks are also nowhere in

the periphery of the top-10 banks of the world.

While the public sector banks can boast their high

levels of Non-Performing Assets (NPA), the top pri-

vate banks have been plagued down by the allega-

tions made by ‗Cobrapost‘ through its sting nation-

wide operations. These have been mocking various

―Know Your Customer‖ (KYC) & ―Anti-Money

Laundering‖ (AML) policies and only time will tell

whether the ―Cobra‖ has indeed stung or not.

Seeing the story so far, this sector asks for ‗cautious

optimism‘. We can hope that new banks would em-

bark the new horizons for the sector. The lender of

the last resort, together with the government makes

sure that Financial Inclusion no more remains a buzz

-word. These major stakeholders must identify all

the needs and act as necessity is the mother of ac-

tion.

Disclaimer: The views and opinions expressed in

this article are those of the author and do not neces-

sarily reflect the views of the organization he is

working for.

10

BANKING AMENDMENT BILL: AN INFOGRAPHIC

REPRESENTATION

Souvik has graduated

in civil engineering

from Jadavpur

University, Kolkata.

Post that, he has

worked briefly in a

firm associated with

power sector

consulting. Now, he is

a student of IIM

Lucknow, batch of

2012-14. Souvik wants

to build a career in

banking industry.

Email Id-

pgp28170@iiml.ac.in

BY SOUVIK DE, IIM LUCKNOW

In a popular commercial advertise-

ment by one of India‘s leading pri-

vate banking giant captures the rip-

ple effect of an economic activity

on the economy as a whole. It

struck a chord with the audience as

highlights how everyone achieve

his or her personal aspirations be-

cause of vast banking network.

However, it took one vital assump-

tion as granted- the ubiquitous

presence of banks in India. How-

ever, in reality, according to the

recent RBI data, only 59 percent of

adult population in India have bank

accounts- in other words, 41 % of

the population is unbanked. The

situation is worse in rural India

where banking coverage is 39% as

opposed to 60% in urban areas. So,

one conclusion can safely be drawn

from these statistics that India

banking sector is under-branched

and underserviced.

Existence of an efficient banking

system promotes economic growth

as they allocate savings to those

investments yields higher returns.

Banks encourage economic pru-

dence and savings in common

mass. Banks have the potential to

collect small savings from nook

and corners of the country and then

mobilize this savings toward capi-

tal formation for mega-

infrastructural projects which has

been a bottleneck for India‘s eco-

nomic growth. So, banking plays a

pivotal role in monetizing Indian

economy.

Banking promotes entrepreneurship

and plays a crucial role in acceler-

ating the pace of economic devel-

opment. Banks increase the partici-

pation of private sector in eco-

nomic development by making

available the loans easily on rea-

sonable rate of interest. In rural In-

dia, micro-finance firms (MFI) has

propelled a wide gamut of entre-

preneurial activity by giving loans

to the Self-help groups (SHG). But,

recently some of MFI have been

shut down, over questionable prac-

tices and high costs, leaving the

poor villagers back in the clutches

of the moneylenders who are even

more predatory.

On the flip side, after the economic

collapse of 2008, the world has

witnessed how reckless banking of

few Wall Street Giants has made

the world‘s economic system tee-

tering on the precipice of collapse.

India has, to some extent, decoup-

led itself from this disaster because

of the tight banking regime advo-

cated by the Central bank of our

country - Reserve Bank of India

(RBI). Now, RBI has faced a di-

lemma whether to trade this robust

system for fulfilling the dream of

financial inclusion. Luckily, RBI

has found a way out. The process

started a long back. In 2010, the

11

Government of India has taken a decision to issue

new banking licences in wake of global economic

pundits censuring Indian Govt. for not doing the

adequate to bring the country out of economic

slump. However, cautious RBI managed to put a

hold onto the suggestion as it felt the requirement of

strengthening the current banking system in order to

avert any future economic backlash.

Let‘s us check the current banking landscape of In-

dia. Current Indian Banking landscape is constructed

by public banks, private banks and foreign banks.

India has 96 scheduled commercial banks (SCBs)—

27 public sector banks 31 private banks and 38 for-

eign banks—having a combined network of over

53,000 branches. In percentage terms, the division is

PSU banks (74%), private banks (20%) and foreign

banks (6%), according to Crisil Research. Banks are

further divided according to their working mecha-

nism into commercial and co-operative banks. So,

Indian Banking Industry has service products which

cater to citizens from every stratum of society. How-

ever, the banking coverage is at abysmal low in

some part of the country. Rural only constitute only

30 % of the commercial bank branches where 70%

of our population

live.

Following the news

of issuing new license

many corporate

houses in India, such

as, TATA, Reliance,

L&T and Aditya

Birla Group have

evinced interest to set up banks or turn their existing

Non-banking Financial Company (NBFC) into a

bank. However, RBI declined to grant them new

banking license until Banking Regulations Act is

passed by Parliament. Ultimately, in the winter ses-

sion of Lok Sabha of the previous year on 20th De-

cember, the Banking Amendment Bill has passed by

the LokSabha and is expected to be passed by Rajya

Sabha as the Main Opposition Party has been a pro-

ponent of the bill. This bill gives RBI the power to

supersede the whole board, should the situation

come. So, it is expected that under RBI regulation

these banks will behave properly and help us

achieve the goals for which they are established.

In the draft guidelines issued in August 2011, the

RBI had prohibited companies with significant inter-

est in the real estate and brokerage industries from

applying for new bank licenses. When few years

back the world‘s economic system was brought to

the brink of oblivion by reckless banks through trad-

ing mortgage-backed securities, RBI‘s apprehension

cannot be discounted. However, later on, the clause

has been relaxed and any private or public sector

entity is allowed to apply for the license before 1st

July, 2013. A committee by RBI will check each one

of the applications and licenses will be given seeing

the objective and past track record of the bank. So, a

huge power is given to Reserve Bank on this matter.

The way reserve bank handled India‘s economic sys-

tem, there should be little doubts about RBI‘s intent

and capability.

Promoter or promoter groups will be permitted to

apply for a new bank only through a wholly-owned

non-operative financial holding company (NOFHC),

which will hold a stake in the bank as well as all the

other financial ser-

vices companies

regulated by the

RBI or other finan-

cial sector regula-

tors. The objective

is that the holding

company should in-

sulate the the new

banking activity from the other commercial activi-

ties of the group that are not regulated by any finan-

cial sector regulators and additionally, the bank

should also be insulated from other regulated finan-

cial activities of the group. This step will help a

great deal to decouple banking from other upheavals

in global financial sectors.

Sufficient regulatory measures have been taken by

RBI in regard to setting up new banks. Minimum

capital requirement of the new banks has been

marked at Rs 5 billion which is higher than the capi-

12

Tal requirements set during the earlier rounds of

bank licensing in 1993 and 2001. This clause will

encourage only serious player to enter the sector.

Also, he bank shall be required to maintain a mini-

mum capital adequacy ratio of 13 per cent of risk

weighted assets (RWA) for a minimum period of 3

years after the commencement of its operations. This

clause will keep the systemic risk of the industry in

check that will enhance with new players entering.

To keep the domestic banking sector insulated from

global economic upheavals RBI has set a limit of 49

percent foreign shareholding for the first 5 years and

post that the existing rule of 74% foreign sharehold-

ing limit for private players will be applicable.

Now, let‘s analyse how these new licensee will help

India grow economically with financial inclusion.

Unlike banks other financial institution like NBFC

can‘t take demand deposit, such as Current Account

and Saving Account. Sometimes, few NBFCs might

have license to take time deposit such as Fixed Ac-

count. How-

ever, they

can‘t take

CASA funds

(Current Ac-

count and

Saving Ac-

count) - the

most inex-

pensive

funds amongst all. This cheap fund has the potential

to reignite sluggish Indian economy. Product like

convertible saving account by which customer can

transfer money to fixed account from saving account

would be beneficial for both the parties. However,

regulations must be there to check on this innova-

tion.

For achieving inclusive growth India needs to har-

ness the potential of its rural segment. Some Non-

banking Financial Company (NBFC) and Microfi-

nance Institutes (MFI) are making efforts in this di-

rection. NBFCs are giving tractors on lease to poor

farmers who increase productivity through this. Self-

help groups are provided with seed capital by MFIs

to make them self-reliant and enhance their family‘s

income. Now, this so far financially excluded seg-

ment of the society should be brought under organ-

ized banking coverage, so that inclusive growth can

be attained. Reserve Bank has focused on financial

inclusion for the new entrants. Guidelines say a new

licensee should open at least 25 per cent of its

branches in unbanked rural centres (population up to

9,999 as per the latest census). In addition, it would

also be required to meet priority sector lending tar-

gets and sub-targets as applicable to existing banks.

And also, from the competition theory, it‘s expected

the new banks will try to innovate new products for

currently unbanked market rather than fighting in

highly competitive market space.

The first flush of allowing private players to set up

banks in the liberalization era has been quite suc-

cessful. We have the success story of Axis Bank and

HDFC bank to support our claim. However, in this

context, we must mention old private sector banks

have not pursued national-level branch expansion

which could have enabled them to provide banking

services to a wider population base. So, RBI and

government should ensure that so far untapped

population base is brought under banking coverage.

The apex bank can take some unconventional and

innovative measure like issuing license for entity to

take over moribund regional rural bank and restruc-

ture them into a profitable organization. This mecha-

nism while containing the systemic risk, would be

able to achieve financial inclusion. Simultaneously,

stand-alone MFI and NBFCs can be allotted new

banking license whose balance sheet don‘t have

risky assets and which have good presence in the

geographic reach that has remain unbanked so far.

There is always a trade-off. New banks along with

suitable regulations and supervisions by the apex

bank can alter the Indian banking space and give the

much-needed impetus to Indian economy. Focus

should be always to increase competition and help

India achieve financial inclusion. A concerted effort

of private sector, RBI and Government of India has

become need of the hour to push this reform for a

better future India. I hope Indian Elephant start

dancing again!

13

Parth completed his

B.E. in Electronics and

Tele-Communications

from VESIT, Mumbai in

the year 2012.

He is currently

pursuing his M.M.S.

from Sydenham

Institute of

Management Studies,

Research &

Entrepreneurship

Education, Mumbai.

Email Id:

parth.pandya@simsre

e.net

BY PARTH P. PANDYA, SIMSREE MUMBAI

Financial Inclusion is ―the process

of ensuring access to appropriate

financial products and services

needed by vulnerable groups such

as weaker sections and low-income

groups at an affordable cost in a

fair and transparent manner by

mainstream institutional players.‖

-Mr. K.C. Chakrabarty, Deputy

Governor, RBI

1. Introduction

India has seen consistent growth

during the last few years. However,

this growth has been superficial

and not to the core of India. The

growth has not been witnessed by

the rural population. According to

the 2011 census about 83 crore

people in India live in villages.

This 83 crore people have not yet

tasted the flavour of India‘s eco-

nomic development. This is evident

from the fact that, around 37% peo-

ple in India still live below poverty

line. Financial Inclusion is contem-

plated in a number of ways. For

instance the Finance Ministry con-

siders that financial inclusion ends

by ensuring that everyone has a

bank account. For the RBI it is en-

suring that the money does not leak

in the process of transfers. Hence it

becomes necessary to understand

the actual need of financial inclu-

sion.

2. Need for Financial Inclusion

The government has declared a

number of schemes and passed a

number of bills in the parliament

like the Mahatma Gandhi National

Rural Employment Guarantee Act

(MGNREGA), Food Subsidy bill

etc. in order to make the lives of

the poor better and easier. The gov-

ernment declares huge subsidies for

these people. However the benefits

of these subsidies hardly reach the

poor. Hence the government has

voiced a new method called the

Electronic Benefit Transfer (EBT).

This is a way in which the benefits

or the amount is directly trans-

ferred to those who deserve it into

their bank account. Hence it be-

comes necessary that each and

every person has a bank account.

This will reduce the leakages in the

system and reduce the corruption to

a great level. This shows the need

of providing banking and financial

services to every person in the

country.

According to Census 2011 only

58.7 percent households in the

country avail banking services.

This suggests that more that ap-

proximately half the nation does

not get an access to banking ser-

vices. Hence financial inclusion is

something that is stressed upon by

the government. Some of the figur-

14

es shown in the table suggest that there is a dire need

for improving the banking services in rural India.

3. Challenges against Financial Inclusion

The Reserve Bank of India and the Government of

India are constantly striving to make this dream of

financial inclusion come true. However there are

certain challenges faced in the area of providing fi-

nancial services from both the demand and supply

side. Some of the challenges are listed below.

3.1 Demand side challenges

Low literacy rate: Low literacy rate is the major

concern as far as the demand side is con-

cerned. People do not even have the basic

knowledge about the financial products

&services available in the country.

Low income: Lower income level is another

problem with rural India. There is a huge gap

between the per capita income in the rural

and urban parts of the country. Considering

2004-05 as the base year the per capita in-

come in the rural areas is around Rs.16400

and in the urban areas is Rs.44170 approxi-

mately.

Lack of assets: Absence of assets that can be

used as collateral is also an issue that is a

major concern of the banks. In case of a de-

fault the banks are unable to get back the

principal amount by selling the assets as the

asset quality becomes a problem.

Social exclusion can also be a possible reason.

3.2 Supply side challenges

Cost: Banks and NBFCs are the vital touch

points as far as providing basic financial ser-

vices to the rural areas are concerned. How-

ever, usually banks are reluctant and cautious

to open branches in such areas. The reason is

that opening branches requires a lot of capital

expenditure like acquiring land, construction,

and office staff, providing communication

and internet services and others. In the rural

areas the transactions are negligible and of

very small amounts. Hence the transaction

costs itself sometimes exceed the transaction

amount.

Distance: Moreover such areas are remote and

highly inaccessible and hence it becomes dif-

ficult for the banking operations. Addition-

ally there is operational risk involved in

physical movement of cash and other impor-

tant documents. This also increases the time

taken to complete every transaction where

the physical movement of documents is re-

quired.

KYC: For rural citizens the KYC (Know Your

Customer) norms are very difficult to satisfy

as they do not have enough documents re-

quired to be submitted while opening an ac-

count. Thus it becomes difficult for the banks

to maintain the database of such customers.

4. Ways and means to achieve Financial Inclusion

Lack of access to banking services drives the people

to approach informal financial services like money

lenders, unregistered financial companies etc. This

leads to several imperfections and unethical prac-

tices like expensive credit and exploitative condi-

tions. The precious savings of the rural population is

lost and they become indebted to the money lenders.

15

Type of

the bank

Total no.

of

Branches

Rural

Branches

Rural

branches

as a per-

centage

of total

SBI and its

Associates

18685 6419 34.35%

National-

ised Banks

48284 15435 31.97%

Foreign

Banks

306 7 2.29%

Regional

Rural

Banks

16170 12084 74.73%

Private

Sector

Banks

12614 1419 11.25%

Total 96059 35364 36.81%

This further creates a rift between the rich and the

poor. To tackle this, we considered these options:-

4.1 Mobile ATMs

Since opening physical branches and multi-

functional ATMs is costly and unnecessary for the

banks, banks can therefore use small mobile ATMs

with basic functionality like cash withdrawal, bal-

ance enquiry etc. These ATMs can move from a

place to the other depending on the time of the day

E.g., they can be near market place in the evening or

petrol pumps in the morning. This will cost the bank

lesser and provide banking facilities at the door step.

4.2 Business Correspondents

Banks might grant permission to some correspon-

dents for providing certain basic banking facilities

like withdrawal, deposits, cheque books etc. The

correspondents can be any trusted person or institu-

tion abiding by the rules and regulations. They can

be the local grocery stores or certain institutions

working for the welfare of the people in rural areas.

This carries with it the risk of exploitation and mis-

guidance. However, a strict check on their working

can prevent any kind of misguidance by them.

4.3 Mobile Banking

According to TRAI there are approximately 90 crore

mobile connections in India. So the reach of mobile

phones is deep into India and hence it can be used as

an instrument for providing financial service on the

mobile. Certain services like transfer of money from

one account to the other, payments of bills, balance

enquiry and other such facilities can be easily pro-

vided using mobile as a platform. There is another

method in which this model can be used. The retail

shops for the mobile recharge are spread across most

of the parts in the country including the remote ar-

eas. The retailer will have an account with a bank

and the customers can deposit and withdraw money

from him in a way similar to mobile recharge. The

transactions can take place via SMS which can then

be considered as a proof of the transaction. The fol-

lowing table shows the cost per transaction incurred

because of different delivery channels.

4.4 Financial Literacy

Though the literacy rate of rural India is improving,

the number of people having basic financial knowl-

edge is minimal. Thus it becomes necessary to im-

part appropriate knowledge with regards to the fi-

nancial products and services. Also the products de-

signed for such rural population must be very easy to

understand. Most of the times, people do not become

a part of the system because of the complexity of the

system products and procedures. The knowledge

must be imparted in their native language which

would make it easier for them to understand.

4.5 Using UID number

The unique identification number scheme that has

been started by GOI is considered as an important

step when it comes to microfinance and financial

inclusion. The number will be acting as an identity

proof for those who do not have any documents for

this purpose. Hence opening accounts in the bank

will be much easier. Also this cards can be used for

the disbursal of social benefits like scholarships,

pensions NREGA wages etc. This card can also be

linked with the micro ATMs and bank accounts of

the number bearers. A no frills account can be

opened along with a regular account. No frills ac-

count is a low balance maintenance account along

with lighter KYC norms. Thus the UID number can

be a facilitator for the purpose of microfinance and

financial support to the financially excluded section.

5. Conclusion

It is simple to know that in spite of the continual

economic development of India the dream of becom-

ing an economic power cannot be achieved until and

unless each and every Indian tastes the flavour of

this progress. For this it will be necessary to bring

everyone under the ambit of banking and financial

services industry. Hence it is high time that the GOI

put some concentrated efforts in this direction.

16

Delivery Channel Cost per transac-

tions (Rs.)

Physical Branch 40

ATMs 0 to 20

Mobile Banking 9

Internet Banking 6

Prakash Nishtala is

a first year

student of MBA at

SBM, NMIMS,

Mumbai. He holds a

B.Tech degree and

has 2 years of

work experience in

IT and Stock

Exchange (F & O

Segment)

Email ID :

prnishtala@gmail.c

om

BY PRAKASH NISHTALA, NMIMS MUMBAI

Budget has always been a cynosure

of all the people of the country.

Preparing the annual Union Budget

is a laborious and lengthy exercise

that takes over five months, and is

accompanied, in the final stages, by

an obsessive emphasis on secrecy.

The budget preparations has two

important facets: Content side and

Logistics Side

Content Side:

The budget content-wise has two

major parts:

Revenues

Expenditures

Department of Revenue assesses

the revenue collection from various

central taxes while the Department

of Expenditure estimates the ex-

penditure needs for the next finan-

cial year which also includes as-

sessment of resources of the public

sector undertakings (PSUs).

The Budget division is a part of the

Department of Economic Affairs.

The Finance Secretary coordinates

the overall Budget-making process.

All of them keep the finance minis-

ter informed and seek directions

from time to time. The Chief Eco-

nomic Advisor assists the con-

cerned departmental officer in this

process.

1) Resources (Revenues) side

Apart from the tax receipts, the

other sources of the revenue which

go into the Budget are the divi-

dends paid by the PSUs on the gov-

ernment shareholdings which in-

clude the interim dividends and the

capital receipts on account of the

divestment of the government enti-

ties.

Also, external receipts on account

borrowing from international agen-

cies like World Bank, ADB, etc,

are included in the estimation.

PSUs are generally funded through

their own resources except in some

strategic and economically vital

areas where the budgetary support

is provided based on the recom-

mendations of the Planning Com-

mission.

This assessment of the Internal and

External Budgetary Resources

(IEBR) conducted by the Depart-

ment of Expenditure forms part of

the total plan resources and is also

reflected in the budget documents.

Estimation of the earnings of the

PSUs is done by inviting the

CMDs or the finance directors of

the PSUs to the North Block. A

one-on-one meeting is conducted

by a joint secretary level officer of

the ministry of finance to estimate

the revenues.

This information is then passed on

17

to Expenditure Secretary, who in turn, passes on the

information to Finance Secretary. This revenue

forms a part of plan expenditure.

Now, the role of different ministries comes into the

picture. The financial advisor from each ministry is

called by the ministry of finance and asked about the

expenditure of the amount allocated to his ministry.

Based on the inputs of different ministries Revised

Estimate (RE) is prepared. Revised Estimate means

as to how much is actually required by the ministry.

The government has issued instructions to various

ministries to adhere to the quarterly expenditure

schedule and to avoid bunching of the expenditure in

the last quarter. Additional funds are also provided

in the RE stage. Important is the estimates of the non

-plan requirement for the next year.

Plan allocations are to be provided by the Planning

Commission later based on the total gross budgetary

support (GBS) indicated by the ministry of finance.

This exercise starts in the month of October-

December. As is known, the Department of Reve-

nue, the ministry of finance has two boards, Central

Board of Direct Taxes (CBDT) and Central Board of

Excise and Customs (CBEC). By mid-January, these

boards give the figure of tax collection up to Decem-

ber 31. For remaining three months, tax collection is

assumed on the basis of previous trends.

The boards also estimate the tax revenue expected in

next financial year. The integrity of the budget mak-

ing depends on the realistic nature of these estimates

particularly in the face of the fiscal discipline im-

posed by the FRBM Act.

2) Expenditure side

While the ministry is busy estimating the revenue

receipts, the Planning Commission, simultaneously,

goes into stock-taking mode. It starts meeting with

individual ministries in the month of September-

October and reviews ongoing schemes of the minis-

tries, considers allocation for them, etc. It may de-

cide to stop some ongoing scheme or merge two

similar schemes.

Thus, an estimate of Plan Budget is prepared. The

Planning Commission conveys to the ministry of

finance that it requires so and so amount to run

planned schemes for next financial year. The finance

minister and the Deputy Chairman of Planning Com-

mission discuss the demand in detail. This way Plan

Expenditure is ready. Different ministries are also

asked to tell about their fund requirement, which

forms a part of budget estimate.

Side by side, Department of Economic Affairs meets

representatives of trade unions, industry chambers,

economists and other groups. In the Budget-making

exercise, suggestions of different stakeholders are

kept in mind.

FM‟s decision with his team

By this time, the finance minister is in a position to

estimate as to how much it will get through taxes

and how much it has to spend in coming financial

year. The finance minister has other constraints also.

He has to abide by FRBM Act and cut fiscal deficit.

Keeping in mind all these, the finance minister --

with his team -- decides whether some new taxes

should be levied to collect more tax, how to widen

tax net in order to earn more revenue. While doing

so the suggestions from various interest groups are

duly taken into account.

GDP assessment

The Department of Expenditure and the Department

of Economic Affairs sit to decide GDP assessment

for next year. Generally, a nominal growth in GDP

is projected. Actual growth in GDP is nominal

growth of GDP reduced by inflation figure.

The Budget Speech of the FM

The finance minister delivers the Budget Speech in

Parliament. Normally, on February 28, the finance

minister delivers the Budget Speech in Lok Sabha.

After which Budget documents are made available.

18

Logistics Side:

The following pictorial representation shows the various levels of logistical support activities that

goes behind the making of the budget.

19

The above picture is taken from Hindustan Times, February 23, 2013.

Vidhi Jain is currently

in second year of her

PGDM from T A Pai

Management Institute,

Manipal

BY VIDHI JAIN, TAPMI MANIPAL

Indian economy is one of the fast-

est growing among emerging

economies. The strong policy

measures by government have

helped India recover quickly from

the crisis. Counted as an attractive

destination for investment, there is

robust demand for banking services

in India. India has huge and un-

tapped potential for banks fueled

by growing demand for affordable

and high return savings products.

Other avenues which demonstrate

huge possibility for growth of

banks are rising affluence in coun-

try, liberal investment regimes with

options in diverse sectors as tour-

ism, infrastructure etc and increas-

ing middle class segment. The key

objective of broadening and deep-

ening reach of banking services in

India has prompted RBI to consider

giving fresh banking licenses after

10 years.

Following is the insight into those

license norms by RBI which merit

consideration:

20

Norms Description Remarks

Minimum Capital Re-

quirements

The minimum paid up

capital requirement

for applicant is Rs.

500crore.

This amount is neither

too less(<=300 crore)

nor too high (1000

crore). Thus will hin-

der non-serious play-

ers from applying.

Ownership Pattern

At the start of banking

operation promoter

should bring in mini-

mum 40% capital

with 5 year lock-in,

which has to be

brought down to 15%

within 12 years.

This clause will en-

sure promoters inter-

est in making banks

business model a suc-

cess due to high

stakes, The dilution of

stake at later stage

will ensure diversifi-

cation and no entity

will have significant

control as the bank

grows.

The new banking licenses are undoubtedly likely to

encounter challenges of geographical coverage, in-

sufficient infrastructure and inadequate technology.

However certain regulations have gathered op-

ponents more than proponents.

On the contrary

The opponents of reform allowing industrial houses

to enter banking space have argued of conflict of

interest between corporate interest and banking in-

terest. It has been observed that regulators in other

countries also do not allow corporate to set up banks

and if they do there are restrictions on ownership

and voting rights. The flaw in the reform is possibil-

ity of increase in risky loans from lending to related

firms. If the loans backfire it could trigger a huge

crisis. But on the flip side India can leverage upon

deep pockets of corporate and bring new technolo-

gies to extend financial inclusion to underserved

markets.

Rural branch coverage compulsion can be a bottle

neck as it is difficult to service those in remote areas

and also be profitable. Achieving priority sector

lending target of 40% also seems unrealistic consid-

ering existing banks failure to meet the target. But

constraints give way to innovations. FMCG compa-

nies have long back understood the dynamics of the

rural segment and have been making maximum

money from bottom of the pyramid. But careful

thought and strategy will enable banks to seek

niches in this segment of population and make a dif-

ference.

Likely new entrants - NBFCs, Realtors, Brokers?

The criterion for new bank applicants is sound finan-

cial track record for past 10 years. This has been a

setback for realtors as last few years have been chal-

lenging for real estate sector with high debt ratios

and low market valuation. Brokerage sectors may

stand a slightly better chance than Realtors but fi-

nancial ratios may or may not be optimum consider-

ing dip in equity trading due to 2008 financial crisis.

Most of the pure-play NBFCs are best placed to

meet RBI‘s criteria and have much better financial

ratios. NBFCs stand a good chance of foraying in

21

Eligible Promoters

Anyone can apply for license be

it public entity, private entity or

financial institution.

This gives fair chance to every-

body and allows broader set of

entities in banking.

Unbanked rural area coverage

At least 25% of new banks‘

branches must be in rural centers

with no banking facility.

This move will benefit popula-

tion excluded from banking ser-

vices earlier. With new banks

coming into the system the pene-

tration will improve. It would

also lead to more people coming

into the system.

Foreign shareholding

FDI is capped at 49% for first

five years after which it can be

extended.

This restricts foreign investors

willing to invest more capital in

India. However increase in vot-

ing right will help in attracting

foreign investors as they will

have more say in banks.

High Asset Price Volatility

Clause

The business model of promoter

group should not indulge in ac-

tivities which are speculative or

subject to high price volatility.

This will ensure only companies

with market exposure to less

volatile prices will pass through.

the banking space also due to their prior presence in

financial sector. Currently higher rates of borrowing

and lending by NBFCs impede growth of borrowers.

Conversion to banks will give NBFCs access to low-

cost CASA (current account, savings account) funds

which will in turn reduce lending rate to borrowers

in urban and semi-urban areas. The regular NBFC

clients like Infrastructure, farming companies will

receive equipment financing at low cost making

them competitive. Also capitalized banks is what

India needs and some leading NBFCs are well-

capitalized than existing banks.

RBI‟s Objective

RBI along government have taken major steps of

nationalization of banks, priority sector lending

norm, emphasis on mobile banking in the past to

bring un-banked population under the umbrella of

banking services. Being bank of banks RBI has re-

sponsibility of safeguarding the public interest. It

has come up with tight guidelines to ensure only re-

sponsible people enter the banking space.

The new entity is required to set up a wholly-owned

Non-Operative Financial Holding Company

(NOFHC). This will protect banking operation from

other businesses of group. The high quality regula-

tion can ensure liquidity and profitability of banks.

Kotak Mahindra bank is the best example for the

same.

Road Ahead

Overall guidelines by RBI seem to be a welcome

development, paving way for more capital and more

players in the sector. For the industry dominated by

state lenders new banking license move is intended

to increase competition and efficiency in the sector.

Although challenges of risk management, rising

NPAs, capital adequacy ratio compliance and other

stringent norms remain, the strong performance of

banking sector over past few years showcases vast

opportunities.

22

BY APRA CHORDIA & STAR JAIN, IMI DELHI

Introduction

Since the advent of internet, the

world has shrunk, distances have

lost their importance and informa-

tion has no more remained a differ-

entiating factor in this global arena.

―Globalization‖-the BUZZWORD

has swept nations within its leap

and business at this hour, across the

international boundaries has be-

come as easy as it was in the do-

mestic setup. Unfettered, unbridled,

the corporate world is expanding

and spreading its reach beyond na-

tions conquering them at the rate of

knots and boundaries have lost

their relevance without a doubt.

At this point, it is the need of the

hour to have globally set standards

in all domains to avoid discrepan-

cies and conflicts across boundaries

and have a well defined, structured

policy framework throughout. In

this regard, a need for an interna-

tionally accepted accounting stan-

dard becomes all the more un-

avoidable so as to ensure greater

accountability and homogeneity in

the financial sector and bridge the

lacuna that exists in the accounting

standards. So, the transition from

GAAP i.e. Generally Accepted Ac-

counting Principles to IFRS- Inter-

national Financial Reporting stan-

dards becomes indispensable.

What is IFRS?

International Financial Reporting

Standards (IFRS) are designed as a

common global language for busi-

ness affairs so that company ac-

counts are understandable and

comparable across international

boundaries.

These are standards for report-

ing financial statements appli-

cable to all the companies un-

der its ambit.

IFRSs are developed and ap-

proved by IASB (International

Accounting Standard Board)

One of the basic features of

IFRS is that it is the principle

based standard rather than rule

based

Need of IFRS in India

With the transition of a large num-

ber of countries towards acceptance

of IFRS as their financial reporting

standard, it has become the need of

the hour for India to quickly adopt

the IFRS standards so as to stay

competitive and investor friendly.

Also to ensure greater flexibility,

ease and friendly environment for

the growth of our companies we

need a globally accepted reporting

framework so as to ensure greater

credibility of the Indian companies

on the global podium.

Global Scenario

All EU listed companies were re-

23

Apra is currently

pursuing her PGDM (1st

year) at IMI, New Delhi.

After completing her

engineering in

Computer Science, she

was associated with

TCS for 2 years. She is

a member of Finance

Committee at IMI.

E-mail Id:

apra.p12@imi.edu

Star is currently

pursuing PGDM I yr at

IMI, New Delhi. He

graduated as a

Computer Science

Engineer and then

worked with Infosys for

21 months. He has a

strong inclination

towards finance and he

loves to reads and

writes articles.

Email Id:

star.p12@imi.edu

quired to prepare their financial statements follow-

ing IFRS from 2005 as a result of a regulation

passed in 2002.

The Securities and Exchange Commission (SEC), in

2007, also announced that it would allow foreign

companies to have access to US Capital Markets

while reporting under IFRS, which in turn affected

around 1100 U.S. companies with US listings, along

with any companies planning U.S. IPO‘s. A road-

map for mandatory adoption of IFRS, in US, by

2016 has also been proposed by the SEC.

Following EU and America, China has taken the

path of IFRS adoption but in its new domestic ver-

sion called the Accounting Standards for Business

practices, which was issued by its Ministry of Fi-

nance in Feb, 2006.

India

Starting 1st April, 2011, The Ministry of Corporate

affairs (MCA), a part of Government of India, laid

out a roadmap for transition to IFRS Converged In-

dian Accounting Standards (IAS) in January 2010 in

three different phases for companies.

Roadmap for Companies for the transition towards

IFRS

For companies who do not fall in the above catego-

ries, if voluntarily wants then they can disclose their

financial statements under IFRS.

Benefits:

Effective Comparison of performance with other

business

With the acceptance of IFRS by all the na-

tions, the burden on the multinationals in re-

porting their accounts and profitability will

be much less and their accounts will be more

comprehensible.

Increased transparency

There will be greater transparency for the

companies in comparing the performance of

the company outside its country. It will also

help the companies in judiciously evaluating

the companies in foreign lands and taking the

decision about their prospective alliances or

partners in different countries.

Universality

Adoption of a universal reporting standard

will help the users in easily understanding

the financial statements and hence make the

business decisions.

Ease of application

It will be easy and simple for the internat

ional bodies to make the changes and enforce

them globally as much subsequent changes

will be needed.

Flexibility and Reusability

A huge amount of rework is avoided as

changes done by the companies need to be

24

done again and again if all the countries in

which the company is listed, originally be-

long to or operates in all adopts the IFRS,

hence ensuring greater flexibility.

Increase the credibility of Indian companies

globally

Ease in partnering with global partners

Drawbacks of non adoptability of IFRS:

The increased burden on foreign investors who have

their financial statements reported under IFRS to

convert it to GAAP in order to list themselves on

Indian stock exchanges. This extra cost will mitigate

the investment sentiments and will in turn reduce the

foreign capital inflow to India. The non-adoptability

of IFRS has attracted a very poor rating in terms of

ease of doing business in India.

Challenges

Inadequate trained people on IFRS

A large pool of people trained on IFRS will be re-

quired which is a big challenge for India.

Complex Transition

Transition from GAAP to IFRS is complex as it not

only requires changes in the accounting procedures

but also in our IT systems.

IFRS requires assets to be reported as per the market

value instead of historic value as required under

GAAP. This may adversely impact the financial

statements of a huge number of firms initially and is

attracting resistance from a large number of corpo-

rate houses. Unlike other countries, the accounting

framework in India is subject to a wide number of

laws and regulations. With the complete adoption of

IFRS, changes need to be incorporated in various

regulatory requirements under The Companies Act

1956, Income Tax Act 1961, SEBI, RBI etc.

Along with the people preparing the financial state-

ments; stakeholders, regulators, auditors, employees,

tax authorities, management and people in other de-

cision making bodies need to be trained.

Indian Efforts towards Adoption of IFRS

Realizing the utter need of IFRS, The MCA finally

took a step forward and announced a three phase

roadmap for the companies specifying the date for

them for reporting their financial statements in ac-

cordance with the IFRS. In order to ensure the

smooth attainment and helping companies in the

transition process, government of India has taken the

following steps:

A high level task force was set up in India to expe-

dite the convergence process. Extensive Research

and surveys were carried out to understand the state

of readiness of the companies on adoption of IFRS

and it was concluded that a large number of them

had successfully attained the pilot phase. Small and

Medium Enterprises (SMEs) were exempted in

adopting the IFRS in the roadmap proposed as the

whole transition is very cost intensive and will pose

great burden on SMEs. Also ICAI has suggested that

for SMEs, a separate standard may be formulated

based on the IFRS issued by the IASB after modifi-

cations, if necessary. As per a senior official of

ICAI, they are planning to upgrade the CA curricu-

lum with the adoption of IFRS in India by including

some of the certification courses , conducting pro-

grams and also training people on this.

Conclusion

Since the inception of the idea of a universal finan-

cial reporting standard, more than 100 countries

have already adopted it to enjoy the long term bene-

fits derived due to its homogeneity and standardiza-

tion. Seeing and analyzing the benefits of IFRS, it

becomes all the more pertinent for a country like In-

dia to adopt it as soon as possible so as to maintain

investors‘ positive sentiments and also strengthen

their faith and credibility in the Indian Market. The

adoption might lead to short term investments and

initial challenges but the long term benefits are

strong enough to justify the initial hassles of imple-

mentation and adoptability.

A holistic roadmap, with the support of the govern-

ment, must be chalked out to train all the people

from the top management to all the stakeholders in-

volved so as to gain maximum benefits from IFRS.

25

26

THE MONTH in images and words

In times like these when the global and domestic scenarios do not give us

much to cheer about we could use some comic relief. This section cap-

tures some of the main events of the past three months in cartoons, cou-

pled with some of the insightful and sometimes humorous quotes.

27

Compiled by: Anirudh Kowtha, MBA I Year, NMIMS, Mumbai

Soumya is currently

pursuing MBA from

IIM Kozhikode as part

of 2012-14 batch and

is an elected member

of MEDIA CELL. He is

also a member of the

“Economics, Politics &

Society” Interest

Group at IIM K. Author

is a 2009 batch pass

out, ECE engineer with

31 months of work

experience in

ERICSSON.

Email Id:

soumyac16@iimk.ac.in

BY SOUMYA CHATTOPADHYAY, IIM KOZHIKODE

The government decision of allow-

ing new banks to come up was

much awaited and RBI has finally

come up with guidelines for finan-

cial institutes to be eligible for set-

ting up new banks. The new bank

licences are expected to start a new

era in Indian banking by inducing

fresh blood in the markets. India‘s

banking sector progression story is

one of a careful progression in the

global financial arena that is heav-

ily dominated by the likes of US

and European entities. However,

the crying need for increasing the

number of banks does not derive

solely from a competitive point of

view. There are other reasons sub-

stantial enough to suggest that we

need more banking entities. If the

question is about India‘s need for

more banking, the answer is a firm

yes. India‘s GDP growth has been

mostly sustained by its huge do-

mestic savings. At one hand we

have a huge population that needs a

safe place to deposit their savings

and on the other, we have Industry

in the need of financing to operate

and grow. If we consider the low

per capita income of our country,

the aggregate savings by the house-

holds is significantly high. Banks

have played the crucial role of in-

termediaries, channelling funds

from one end to the other. It is very

important to note that Indian econ-

omy is having a financing model

which is predominantly bank-

oriented, which is crippled by the

absence of debt market and as a

result, we have over reliance on the

banking system as the source for

funds for both short and long term

growth.

But the most significant reason that

many tend to overlook is the abys-

mally low financial inclusion in our

country and the urgent need to in-

clude more and more people under

the coverage of institutionalized

finance. Banking system in our

country had an audacious target of

covering close to 55.8 million ex-

cluded households and all villages

with greater than 2,000 populations

by 2012. It is already 2013 and we

have missed the target by miles.

More appalling is the fact that there

was a tacit acceptance among the

authorities well before the deadline

about the infeasibility of the target.

It is high time Government takes a

hard look at its own financial inclu-

sion initiatives. With the change in

PDS system and direct cash trans-

fer proposition, it is high time we

approach financial inclusion with

adequate urgency. It is a necessity

rather than being a choice for us.

Over the decades since the initial

phase of bank nationalization in

1969, the regulations have de-

manded the financial institutions to

have a wider reach into the rural,

semi-urban and other financially

excluded areas. It is no wonder that

only significant locations of the

28

rural areas of major states came under adequate

banking services coverage as it was only about

meeting regulatory guidelines. However, huge part

of population living in interior villages is excluded

and accumulative figure of exclusion is shocking.

Quoting NSSO data, 45.9 million farmer households

(51.4%), out of a total of 89.3 million households

have no access to credit, neither institutional nor non

institutional sources. Moreover, despite the continu-

ously improving network of nationalised banks‘ ru-

ral branches, not even one third of total farm house-

holds are indebted to formal sources .Farm house-

holds lacking access to credit from formal sources as

a proportion to total farm households is shockingly

high at 95.91%, 81.26% and 77.59% in the North

Eastern, Eastern and Central Regions respectively.

Thus apart from financial exclusion being large,

there is noteworthy variation across regions, groups

and communities. The poorer the group, the greater

is the exclusion. It is true everywhere irrespective or

region, religion, ethnicity or any other identity. As-

set holding or lack of it is primary key to under-

standing financial exclusion pattern.

However, there is strong counter view as well. It

champions the cause of having few, stronger bank-

ing entities by consolidation in the sector rather than

creating new banks which would mean more number

of banks that are comparatively small. Creation of

more banks will increase the competition and cus-

tomers are supposed to benefit from that. But it is

not that easy to say if competition within the bank-

ing sector comes with significant benefits, if at all.

Competition squeezes margins and forces banks to

take increased risk to ensure returns for shareholders

and compensation for executives. What happened in

2008 in global finance meltdown can largely be con-

tributed to such a scenario. The advocates for larger

banks instead of more banks also argue that in a

country with rather shallow financial markets domi-

nated by short term speculative players, where

nearly 70% of bank assets are bottled up in cash re-

serve ratio, statutory liquidity ratio and priority sec-

tor lending obligations, leaving only 30% of the kitty

to generate returns for shareholders, the environment

is ripe for excessive risk-taking if competition in-

creases further in the banking sector.

It is important to understand that what we need is

variation in banking sector. We need new entities

that would not be just a replica of already existing

private banks because in that case granting new li-

censes will simply increase competition in the case.

It is not desirable keeping in mind the consumer‘s

side is sufficiently protected by ever vigilant RBI.

Any further competition in the banking sector will

cause much more harm than benefits to the custom-

ers, if any. The purpose of creating more banks must

be expanding the reach of institutionalised finance.

The utility of having new banks has to be measured

by how much financial inclusion can be achieved

through them rather than their ability to cater to the

needs of industry or upper middle class and rich sec-

tion of the population. With total bank lending less

than even half the size of the GDP, Indian banking

system is stunted, something which is a boon to un-

authorised local money lenders, who occupy the

space vacated by the banks. There should be no

doubt that we need more banks but new licensing

regulations and eventual market player selection

must ensure that the very purpose of this expansion

activity is not defeated by creating replicas of exist-

ing urbanised private banks.

29

BY DADICH BHATT & VAISHNAVI SHAH, SCHOOL OF PETROLEUM

MANAGEMENT, GANDHINAGAR

―The best of intentions get defeated

when a system is not used judi-

ciously.‖ -K.C.Chakrabarty

What is Corporate Debt Restruc-

turing?

Corporate Debt Restructuring is a

mechanism by which a company

attempts to reorganize its out-

standing obligations. This can be

done in any of the following ways:

Increasing the tenure of the

loan

Reducing the rate of interest

One time settlement

Conversion of debt into equity

Converting un-serviced portion

of interest into term loan

There are occasions when corpo-

rates find themselves in financial

hitches due to factors beyond their

control and also sometimes due to

internal glitches. For the resur-

gence of corporates and for the

security of the money lent by the

banks and financial institutions,

timely support through restructur-

ing of genuine cases is called for.

Why do corporates go for CDR and

also what interests does it serve of

lenders?

Borrower‟s perspective:

When a company is having out-

standing debts which cannot be ser-

viced under its existing operations,

it can either go towards not so sus-

tainable path of enhancing its quan-

tum of debt with an expectation to

increase its profitability and repay

its original debt which comes with

its own risks or cease the opera-

tions of the company leading to its

natural death. A more viable alter-

native which is formulated by gov-

ernments of many countries is to

consider a structured plan to rene-

gotiate the current debt with its ex-

isting lenders itself.

This is where restructuring gains

prominence.

Lender‟s perspective:

The primary interest of lenders lies

in recovering the principal amount

lent to corporates along with re-

turns on that investments and not in

liquidation of assets. Apart from

this liquidation, proceedings are

notorious for yielding low returns

for creditors. CDR gives lenders a

unique opportunity to avoid being

encumbered with NPAs.

Hence, CDR becomes an instru-

ment for lenders, i.e. banks to aid

the transformation of otherwise

NPAs into productive assets.

30

Dadich is a Electrical

engineer having a work

experience of 35

months in petroleum

industry. He is currently

studying at School of

Petroleum Management,

Gandhinagar.

Email Id:

dadhich.bhatt@gmail.co

m

Vaishnavi is an IT

engineer from

University of Ballarat,

Australia with a work

experience of 10 months

in IT industry.

She is currently

studying at School of

Petroleum Management,

Gandhinagar.

Email Id:

vaishh1807@gmail.com

How does CDR work?

The Corporate Debt Restructuring (CDR) Mecha-

nism is a voluntary non-statutory system based on

Debtor-Creditor Agreement (DCA) and Inter-

Creditor Agreement (ICA) and the principle of ap-

provals by super-majority of 75% creditors (by

value) which makes it binding on the remaining 25%

to fall in line with the majority decision. The CDR

cell negotiates the exits of companies whose loans

are being restructured if they fulfill conditions as

follows:

Have been in the CDR mechanism for at least 5

years

Reported a 25% growth in earning before inter-

est, tax, depreciation and amortisation

(EBITDA) for the last 2 years

Declared more than a 10% dividend

Undertaken major capex expansion

How has the CDR cell helped the Indian companies?

As per the latest data available with CDR cell, a total

of 466 cases, involving total debt of Rs 2.46 lakh

crore, have been referred to it since its inception. Of

this, 101 cases involving about Rs 64,000 crore have

been referred in 2012 itself.

Of the total 466 cases referred to CDR cell so far, 75

cases involving Rs 27,400 crore have been rejected

by the bankers, while 64 cases (totalling over Rs

31,000) crore are under finalisation of restructuring

packages. A total of 327 cases have been approved

since the start of CDR mechanism as on September

30, 2012 for a total amount of Rs 1.88 lakh crore.

Between its inception in 2001 and March 2013, the

corporate debt restructuring (CDR) cell will have

successfully negotiated the exits of over 80 cases

worth over R60,000 crore.

Major companies benefitted from CDR so far were

Subhiksha Retail, Vishal Retail, Kingfisher Airlines,

Wockhardt, Hindustan Construction Company,

Suzlon, Essar Oil, Essar Steel, Jindal Steel to name a

few.

Also, due to the non-availability of coal and indige-

nous natural gas power plants are lying idle and due

to the price increase in coal input cost of distribu-

tions companies and power producers become very

high which they cannot transmit over the consumers

because of government regulations hence their bal-

ance sheet have seen red color often. According to

the power ministry, the Cabinet took up a proposal

to recast about Rs 2 lakh crore debt of the power dis-

tribution companies to provide financial support for

the sustainability of those companies however CDR

cell approved only 3869 crores which also helped

power and distribution companies to survive. So

during economic downturn CDR provides fresh

blood to the companies which are striving for cash

flows.

What‟s in for banks?

The banking system has also improved the quality of

its assets over the years - the industry has reduced

the outstanding gross NPAs from 11.4% in FY01 to

2.3% in FY11.Further, the overall net profit of

the banking industry in FY01(before CDR was im-

plemented) was merely 10% of the outstanding

gross NPA. This has become 75% in FY11.

An attractive mechanism, isn‘t it?The most vital sta-

tistics often hide more than they reveal.

Why did so many Indian companies opt for CDR?

Many companies started raising money through

FCCB (Foreign Currency Convertible Bonds) for

their expansion plans and to cater to their capital

needs. However, the actual cash flow generated from

the growth plan didn‘t meet the expected level of

return, thereby leaving them with insufficient

amount to pay debts. Also, during recession, as the

stock market crashed, the shares of most of the com-

panies plummeted meaning conversion unviable for

bondholders. This was further catalyzed by the de-

preciation of rupee. Hence, most of the companies

were finding it unviable to continue their operations.

Adding to the prevailing difficult scenario was rise

in interest costs, which led the companies to default

31

on their financial obligations, resulting in sharp in-

crease in CDR cases.

The story of how companies get themselves into

debt distress has many strands. Consider Iron and

Steel Industry which is a cyclical business. During

boom times, they go ballistic on expansion. Capacity

addition leapfrogs suddenly, which means they take

a lot of debt. When the economy slows, raw material

and inventory move slowly, and revenues do not go

fast enough to recover the debt. Consider retail

firms. ―Vishal‖ and ―Subhiksha‖ based on consump-

tion forecasts, expanded rapidly. Soon, they found

themselves buried under a mountain of debt. Due to

high real estate costs, excessive inventory and fal-

ling revenues, their balance sheets were awash in

red, taking them down the road to a painful CDR.

So, what went

wrong?

What happens

when foreign

holders and

bondholders ,

and domestic

banks don‘t do

a deal?

This is evident

f r o m KS L

case. KSL and

Industries, a textile company which is a part of the

Tayal group wanted to restructure its 700 crore loans

to state owned banks. It had also raised 500 crloan

by the way of foreign currency convertible bonds.

Bank of Mellon New york, trustee of bondholders,

filed a petition in the Bombay HC said that they

would lose out from the restructuring if they were

not part of it.

KSL‘s Response: It bought back the FCCB from the

foreign banks by raising loans through the Indian

Banks, thereby leaving the Indian banks holding the

bag.

If the reason for the current increase in restructured

accounts is the downturn in economy, it should have

been echoed equally across public as well as private

and foreign banks. This reflects arguable mirrors

that public sector has not been as judicious in the use

of restructuring as a credit management tool as the

private sector and foreign banks.

Lopsided burden sharing:

It has been discovered that the public sector banks

share a disproportionate burden of such accounts.

Chennai's Indian Overseas Bank has the highest per-

centage of restructured assets, 9.7 per cent, followed

by Mumbai-

based Central

Bank of In-

dia, 8.39 per

cent. In com-

parison, the

restructured

assets of

ICICI Bank,

HDFC Bank

and Axis

Bank, are all

below two

per cent.

Also, the data on restructuring suggests that the re-

structuring is substantially biased towards more

privileged borrowers vis-a-vis small borrowers. This

highlights an issue if the misuse of CDR by banks as

well as corporate. It has been observed that avail-

ability of standing regulatory forbearance to CDR

mechanism has prompted banks to avoid using other

means of credit management judiciously , i.e.,

proper due-diligence before sanctioning a credit fa-

cility, regular and proper monitoring of accounts af-

ter disbursal and taking prompt corrective action on

the first signs of weakness in the accounts.

32

Misuse of CDR by borrowers:

The CDR route for debt mitigation has also been

found to be unfairly exploited by Kingfisher, a pri-

vate airline, by getting a part of its massive debt to

banks converted into equity at inflated valuations.

The Way Forward:

Make it Personal:

One of the prominent recommendations by the RBI

working group was to ask promoters to provide a

―personal guarantee‖ to the loans so that they do not

see loans just as the liabilities of the corporate but

have their own skin into it. The problem faced is

some of the promoters do not agree to provide per-

sonal guarantee but the group of RBI went on rec-

ommending that the RBI should prescribe promoters

personal guarantee as a mandatory requirement for

all cases of CDR.

Develop Specified Risk Architecture:

Banks should develop specific risk architecture to

analyze the credit worthiness of borrower prior to go

with the restructuring. For example, banks need to

examine the effective levels of leveraging in the pro-

ject. Higher leveraging raises the risks of a project

especially in an uncertain environment. There have

been many instances of even the promoter‘s equity

component being financed out of debt. There have

also been instances of debt flows being structured as

equity and of the ―private‖ component of Public Pri-

vate Partnership projects being debt finance. Bor-

rowing from another bank is not equity and adds to

the burden of debt servicing. It is thus important to

ensure, at the time of restructuring that projects are

not over leveraged. It would also be important to

establish that the borrowers are sincere about the

project, in particular, that the borrowers, or at least

the senior management of the borrowing companies,

are willing to tighten their belt and share the burden

of restructuring (Dr. K. C. Chakrabarty).

Equal attention to small players:

There should be a structured mechanism for restruc-

turing of retail, SME and agricultural loans same as

for larger accounts. This structure will need to be

built in at various levels –at the state, the district, the

region and the bank level. Hence, our entire ap-

proach towards restructuring should be reoriented to

depict more compassion towards small players.

Time:

Time is very often a critical essence in the turn-

around of the companies and therefore an elongated

process of restructuring assessment could erode the

viability of the project. Hence, for restructuring

process to be successful in helping the borrower tide

over the temporary difficulties, it is vital that the as-

sessment of the proposal and its approval gets done

in a specific time period, around 90 days.

Rightly put by a veteran banker—when a small man

owes a few thousands to a bank, he is in deep trou-

ble but when a big tycoon has outstanding running

into crores with the bank, it is the bank that faces the

music!

33

34

We care –2013:

a civic engagement internship

Espousing its rich tradition, School of Business Management, NMIMS successfully organ-

ized “We Care- 2013” which received a lot of praise from industry and students alike. The

aim of the programme was to socially sensitize MBA students through „We Care: Civic En-

gagement Internship Project‟. Under this project, the students worked in NGOs/social en-

terprises to gain firsthand experience in examining social issues impacting the Indian soci-

ety and exploring how social sector organizations strive to make a difference.

We Care achieved its mission by placing students across all the geographical parts of the

country. Students worked in various domains like Advocacy, Women Empowerment, Rural

Development, Disaster Management, Social Research and Micro Finance.

Team Finomenon is happy to share few of such handpicked experiences of students who

have worked for Micro Finance Institutions/NGOs.

―Our objectives mainly focused on studying the current state, financial and otherwise, of the

several tribal people who stay in Abu Road block. Keeping the time and distance constraints

in mind, a suitable sample size and a suitable methodology was chosen to undertake the

study.

The entire course of carrying out the survey for the project left us with wonderful experi-

ences. A great learning came out from the entire process, which we are sure, would not have

come to us through class room teachings. We realized how herculean is the task of organi-

zations like Jan Chetna Sansthan, which deals with people having extremely low level of

awareness. The field trips that we made for our survey helped us become more sensitive

about the pathetic situation of most basic facilities like roads and electricity. We discussed

the results in an analytic manner, mainly to cater the needs of our own academic purpose.

We have aimed that the project helps to understand, analyze and interpret the various as-

pects of the lives of the Adivasis (the local tribes) and it leads to some initiatives that will

help to enhance their livelihood.‖ - Vivek Verma, MBA Banking Management, I year,

NMIMS interned with Jan Chetna Sansthan, Abu Road

―SAATH savings and credit cooperative ltd. (SSCCL) has been supporting the urban slum

population of Ahmedabad since 2002. By encouraging saving habits amongst the people, it

has worked towards financial inclusion and betterment of living standards. In 2007, it

launched the joint liability group (JLG) model for procuring loans. This innovative model

has made it possible for groups living in the same community to procure financial aid with-

out providing any substantial security. The members of the group are only required to save a

minimal amount every month on which they also receive interest. The liability of paying

back is on the entire group and this reduces the default risk. So, SAATH has been able to

revolutionize the Micro Finance landscape through this innovation.

My experience at SAATH was very enlightening. I learnt a lot about the Micro Finance sec-

tor and the needs of the poor. I realized that they have a huge potential to better their lives if

given a chance. They are highly adept at managing their local businesses. It‘s only that they

are overlooked which prevents them from improving their lives.‖ - Pratik Bajaj, MBA, I

year, NMIMS, interned with SAATH, Ahmedabad

Ipsita Pradhan is

currently pursuing

her management

studies from

Institute: Institute

for Financial

Management and

Research,

Chennai.

Email Id:

ipsita.pradhan@ifm

r.ac.in

BY IPSITA PRADHAN, IFMR CHENNAI

Corporate social media is not a new

concept anymore. Social media has

opened up a huge potential gate-

way for business. But opening an

account and getting likes or follow-

ers is not enough. In a research

done by Harvard Business Review

Analytics Services, there are 43%

of companies, who have entered

social media usage, but have not

made effective use of it. While

45% of the rest are still planning,

only 12 % have been able to use

the platform effectively.

Today, even if many companies

have opened social media accounts,

there have been only a few who

have been successful in taking ad-

vantage of the platform.

Few industries are as highly regu-

lated as finance. So it may seem

counter-intuitive for the industry to

call for enhanced regulation and

guidance. But presence in social

media necessitates strategic plan-

ning and strict corporate govern-

ance for banks, given the highly

sensitive nature of information han-

dled by the institution.

Social media provides a lens into

the beliefs, needs, desires and beh-

35

viors of tens of millions of people across all con-

sumer segments. They are increasingly comfortable

expressing themselves more often and across a wider

variety of topics. There is no limitation of knowl-

edge imposed by a fixed number of pre-determined

survey questions. Various tools are being used for

surveys e.g. there are monitoring tools that use key

words to search relevant data. Besides collecting

data, companies are using ―shout marketing," by us-

ing social more often to promote their brand, moni-

tor trends among customers, and even research new

product ideas. Information can be provided to the

customer about policies, offers, changes etc. Cus-

tomer feedbacks can be taken about changes, offers,

interests, problems, choices, etc. It can also be used

for recruitment purposes e.g. announcing vacancy.

So first of all, the objective/objectives of using so-

cial media should be defined

Next step would be deciding the platform/platforms.

Since, choices are many, it is essential to identify on

one or two key platforms and decide on the phases

in which the engagement will take place. The choice

of platform could be made on the basis of potential

for reaching ability of the platform to required cus-

tomer segment, means of interaction provided by the

media, popularity of the media, customer expecta-

tions, security etc.

The most important stage in the process is the devel-

opment of right corporate governance. A social me-

dia account establishes an organization‘s online

identity. There are two important areas here. First,

building and maintaining the profile/profiles. The

name should be given so as to be easily recognized

and found. It is of critical importance that password

access to the account be given only to the respective

responsible personal and a set of rules written down

to guide and restrict the use. It should be clearly

mentioned in the rules and regulations, about who

can access the account and what is allowed and what

is not allowed to be done.

A separate department may be formed to manage the

account or accounts. This would require a set of

policies to determine the adequate method to do the

job. These policies have to be separately formulated,

since they would be different from the regular bank

policies. The employee engaged to the accounts

should have a clear idea about the type of content

that can be made public and should have good com-

munication skills to respond to customer enquiries,

complaints etc. The time plot for response strategy

should be formulated and conveyed. Since bank han-

dles a lot of sensitive data, it is essential to take extra

care in handling the content that is public in the ac-

count/accounts. Customers should be given advice/

instruction to avoid posting sensitive information

36

The records so generates should be managed care-

fully. While they can be used for research purpose, it

is important to protect the information from unau-

thorized access. Care should be taken to follow the

policies and laws. In India, the legal implications

must be viewed in accordance with the law of land

e.g. RTI Act, IT ACT 2000 & IT Amendment Act

2008 etc. as also rules and regulations made there

under. These policies must be circulated internally to

ensure uniformity of response.

The second thing to keep in mind is that, most of the

employees have social accounts of their own. They

indirectly represent the company. Actions taken by

them, especially anything written by them about

their bank might be seen as voice of the bank itself.

A set of rules and regulations is necessary in order to

avoid possible adverse effects. For example, em-

ployees may be asked to write a disclaimer specify-

ing their own opinion and not that of bank, while

updating anything about the bank.

Before going online, a small scale pilot project

should be created and monitored. All the ideas

should be tried and reviewed. The study should be

used if possible to make further improvements in the

system, wherever required. There should be regular

inspections of social media usage. Innovative ideas

should be encouraged from time to time, in order to

improve the engagement. Every time, before a new

idea is fully introduced, small tests should be con-

ducted.

Establishing the best account, a set of rules and a

system to work on it is not enough. What most ac-

counts are lacking today is continuous usage and

responsiveness. For example, on a twitter account,

while SBI made frequent announcements of new

plans, ICICI used the platform to respond to a cus-

tomer‘s complaint, apologizing for the inconven-

ience, promising quick solution and asking for

phone number or email ID for further contact. While

SBI used the account for generating awareness,

ICICI used it not only for awareness but also to di-

rectly reach the customer. These days, many new

ideas are coming up. While HDFC had been using

the platforms for engaging visitors with interesting

facts, ICICI has been trying to incorporate online

banking in social media. The best users understand

that social media is a conversation, not a monologue.

More effective companies use social media to inter-

act with customers by creating online customer

groups and monitoring trends. Social media usage is

still relatively new and it provides a platform to ex-

periment new ideas in order to enhance performance.

In the long run, it is important to ensure that the pro-

ject is scaled and integrated with the existing admin-

istrative and communication structure. Although the

idea may seem too far-fetched or unrealistic to

many, it‘s a growing trend and its growing fast.

What is important to do, is not only to embrace the

opportunity but, to do it the right way.

37

"Money was never a big motivation for me, except as a

way to keep score. The real excitement is playing the

game." - Donald Trump

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