Banking & Finance in India Bill Susinski, Head of International Business, HSBC

India

Agenda – Banking & Finance in India

Banking Sector & Regulatory Issues for MNCs

Payment Landscape

Foreign Exchange & Hedging Market

Financing Options

3

Banking Sector & Regulatory Issues for MNCs

Banking Overview

Reserve Bank of India

Scheduled Banks (232)

Commercial Banks (167) Co-operatives

Foreign Banks (40)

Public Sector Banks (27)

Pvt Sector Banks (30)

Regional Rural Banks (196)

SBI & Associates (8)

Other Nationalised

Banks (19)

Source: Wikipedia

Indian banks as change agents

Indian banking differs from banking elsewhere in the world as banks are seen as being

more than just financial intermediaries

Providing jobs and funding infrastructure development

Agents of Social Change. Increasing financial inclusion by serving all sections of the

population.

Safe repositories of public deposits, suppliers of credit to support enterprise and fuel economic

development in the micro, small and medium enterprises

Supporting agriculture sector through financing

Accounts

• Branch/ Liaison Offices require prior RBI approval – typically 8-10 weeks if all documentation correct.

Minimum criteria must be met (e.g. parent must be in existence for 5 years).

• Non-Resident Account is allowed – subject to specific conditions and Regulatory approval (if required)

• Regulatory filings required for capital injections and loans from parent.

Lending

• Onshore Foreign currency borrowings only allowed for trade (pre/ post shipments)

• Offshore External Commercial Borrowings (foreign currency term loans) only allowed for certain purposes

(e.g. expansion, new capex).

• Financial due diligence and justification for use of facility required

• Erosion of capital by a certain amount requires reporting to the BIFR Board

Regulatory Issues for Multinationals

7

Payment Landscape in India

The Evolving Banking Landscape in India – RBI Initiatives

Year of Introduction

1995 2004 2005 2008 2007 2009 - 12

Electronic

Clearing Service

(ECS)

Electronic

Fund Transfer

(EFT)

Real Time

Gross Settlement

(RTGS)

National

Electronic

Fund Transfer

(NEFT)

Cheque

Truncation

Service

(CTS)

National

Electronic

Clearing

Service

(NECS)

Speed Clearing

(SCS)

Mandatory

E-payment of

Govt dues / taxes

High-value

cheque clearing

Phased out

Fee

Standardisation

for electronic

transactions

National

Financial

Switch

connecting all

ATM’s in India

- free usage

across banks

Introduction of

Electronic

Clearing

in India

Real-time

Settlement for

HV Transfers

Batch Settlement

for Low Value

High Volume

Transfers

Increased

Efficiency in

Outstation

Clearing

Centralised Bulk

Electronic

Clearing,

further efficiency

in o/s clearing

Disincentivise

Paper Clearing

Cheques /

Drafts

Primarily

Paper-based

Clearing

Upto 1994

*

The Financial Settlement Infrastructure of India is undergoing a rapid change

Exponential growth in volumes of RTGS/NEFT settlements

Electronic transactions now represent 90% of payments by value Source: RBI Monthly Bulletin May 2012

New Frontiers - Emerging Banking Channels

Mobile Banking Transactions

- Rapid expansion in the use of mobile phones as a mode of communication has created new opportunities for banks to use this channel for banking transactions.

- Guidelines allow mobile banking transactions both for e-commerce and money transfer Purposes, subject to limits prescribed by each bank.

Pre-paid Payment Instruments

- Pre-paid payment instruments facilitate purchase of goods and services against the value stored on such instruments via smart cards, magnetic strip cards, internet accounts, internet wallets, mobile accounts, etc

- To bring in transparency and facilitate orderly growth of this payment product, RBI issued guidelines in 2009 on issuance and operations of pre-paid payment instruments.

Point of Sale (PoS) terminals

- The number of Point of Sale (PoS) terminals in India is now more than eight times the number of ATMs, offering added convenience to customers and merchants.

- The Bank has permitted small value cash withdrawals at PoS terminals.

Electronic/online mode of payments

- Intermediaries like aggregators and payment gateway service providers handle customer funds.

- Guidelines were issued in 2009, which prohibit the use of such funds by these intermediaries to ensure the safety of the funds.

- Banks holding these balances are to ensure timely onward settlement of funds to public utility companies/ merchants.

India Transaction Landscape – Paper to Electronic

Source: RBI Monthly Bulletin May 2012

•Growth in transactions primarily electronic

• Efficiency and faster turnaround time introduced in paper settlements through introduction of Cheque Truncation Service

and Speed Clearing

Transaction Volume

0

500

1000

1500

2000

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

Year

Co

un

t (M

illio

n)

Electronic

Paper

Transaction Value

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

Year

US

D B

illio

n

Electronic

Paper

Transaction Volume Distribution

0%

20%

40%

60%

80%

100%

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

Year

Paper

Electronic

Transaction Value Distribution

0%

20%

40%

60%

80%

100%

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

Year

Paper

Electronic

11

Foreign Exchange & Hedging Market in India

FX Market - Characteristics

Spot & Forwards

Very liquid spot market – estimated daily volume of USD 4 billion

Over 15 active interbank counterparties

Very liquid forwards market up to 5 Years

Typical Interbank Lot Size is USD 1-3 Mio

Interbank Spreads for a lot size of USD 1 Mio is INR 0.0100 to 0.0200

Options

An active Options market with daily volume of ~USD 50 Mio and 6-7 Interbank counterparties

Market is liquid up to 5 Years but quotes up to 7 Years

Market Characteristics

Market Timing from 9:00 AM to 4:30 PM IST

Active involvement of the Central Bank (Reserve Bank of India)

Reserve Bank prohibits any international speculative access to the Rupee

RBI declares a daily USD/INR RBIB benchmark spot rate which is polled from randomly chosen banks in a

random 5 minute period between 11.45 AM to 12.15 PM

Key Regulations – FX Forwards

RBI regulations require proof of underlying currency risk in order to book a forward contract. This can be in the form of a specific underlying or past performance

Specific Underlying Currency Risk

- The underlying documents need to be submitted with the bank within 15 days. The documents need to equal or exceed

the forward booked in the amount and tenor of the hedge.

- Contracts once cancelled cannot be rebooked under the same underlying document except under certain specified

conditions stipulated by RBI.

- In case of failure to comply, penalties include : i) cancellation of contract with the loss passed on to the client but not the

gain if any, or ii) requirement of production of underlying documents prior to dealing in future

Past Performance

- Past Performance route allows booking of forwards based on exports/imports by the company in previous years.

- The past performance limit for exporters is defined by the average of the previous three financial years actual export

turnover or the previous year’s actual export turnover, whichever is higher. For imports, the limit is 25% of this number

- Contracts booked under PP must be delivered and cannot be cancelled

- There is no restriction on the tenor of the hedge under the past performance route.

- Quarterly statutory auditor certificates stating that the contracts outstanding at any point in time with all banks during the

quarter did not exceed the value of the underlying exposures/past performance limit are required to be submitted.

Key Regulations – FX Options

Proof of underlying exposure in terms of specific or past performance is required similar to FX forwards

Corporates are prohibited from selling a naked option (i.e. selling an option without buying another)

Only vanilla options are permitted in both FCYINR and Cross Currencies, i.e. exotic options such as barriers and digitals

are not allowed

While cost reduction structures (option combinations involving selling at least one option) are allowed, the following

conditions apply:

- Company should be above a specific size (Min Net worth USD20m under specific underlying and USD40m under past

performance)

- The company must adopt AS 30/32 accounting policy and have a risk management policy which allows cost reduction

structures

- The set of underlying exposure allowed is restricted to Trade and ECB exposure.

Relevant Master Circulars for Regulations

Master Circular on Risk Management and Interbank Dealings

Master Circular on External Commercial Borrowings and Trade Credit

Master Circular on Foreign Investments into India

Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly

Owned Subsidiary (WOS) Abroad

All available on the RBI website under Notifications Section

16

Financing Options in India

Short Term Financing Options

Tenor Pricing Security Documentation

Working Capital

Demand Loan

As per trade cycle

assessment

Floating rate linked to

base rate of the bank.

Charge on current

assets including stock

and book debts

Loan Agreement and

Demand Promissory

Note

Receivables

Factoring

As per trade cycle

assessment

Floating rate linked to

base rate of the bank.

Charge on current

assets including stock

and book debts

Factoring Agreement,

Demand Promissory

Note and Notice of

Assignment

Vendor Finance As per trade cycle

assessment

Floating rate linked to

base rate of the bank.

Charge on current

assets including stock

and book debts

Demand Promissory

Note

Buyer's Credit

(availed outside

India)

Max tenor - 360 days

from shipment

Pricing is linked to 3/6

months LIBOR. Pricing

restricted to max of

L+200bps for import of

raw materials

Charge on current

assets including stock

and book debts

TFGA, Demand

Promissory Note and

Counter Indemnity

Pre/Post

Shipment Credit

Pre-shipment – Max

tenor 180 days. Can be

rolled over for further

180days with prior

approval from RBI.

Pricing is linked to 3/6

months LIBOR. Pricing

restricted to max of

L+210bps

Charge on current

assets including stock

and book debts

Demand Promissory

Note

Long Term Financing Options

Amount Tenor Pricing Security Documentation

INR Term

Loan

No restriction Bullet repayment at

the end of [ ] years.

Amortizing structure

is also possible

Floating rate linked to

base rate of the bank.

Charge on fixed

assets of the

company with

cover of 1.25x

Loan Agreement

and Demand

Promissory Note

FCY Loan No restriction,

subject to

availability of

FCY funds

Bullet repayment.

Amortizing structure

is also possible –

subject to availability

of FCY funds for the

said tenor

Pricing is linked to 3/6

months LIBOR. The

borrower has full

flexibility to hedge the

currency and/or

interest rate risk

Charge on fixed

assets of the

company with

cover of 1.25x

Loan Agreement

and Demand

Promissory Note

Capex Buyer's

Credit (availed

outside India)

No restriction

Max tenor of 3 years

from date of

shipment

Pricing is linked to 3/6

months LIBOR. The

borrower has full

flexibility to hedge

Charge on fixed

assets of the

company with

cover of 1.25x

TFGA, Demand

Promissory Note

and Counter

Indemnity

ECB (availed

outside India)

Maximum of

USD 20M for

an avg

maturity of 3

years.

Average maturity in

excess of 5 years if

the amount is more

than USD 20 M

For average maturity

period of 3 to 5 yrs:

Max 300 bps over 6

months LIBOR

For average maturity

period more than 5

years : Max 500 bps

over 6 months LIBOR

Charge on fixed

assets of the

company with

cover of 1.25x

ECB Agreement

19

Thank You

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