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March 2010 Listing of Advisory Firms … Page 54 Private Equity Pulse on Financial Services Private Equity Pulse on Financial Services

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Page 1: Financial services sector

Marc

h 2

010

Listing of Advisory Firms … Page 54

Private Equity PulseonFinancial Services

Private Equity PulseonFinancial Services

Page 2: Financial services sector

Executive Summary 3

PE and M&A in Financial Services 6

What PE/VC investors think 10

Entrepreneurs' Perspective 13

Fund Manager Interview - Dhiraj Poddar, Standard Chartered Private Equity

15

PE in Financial Services - By Sanjay Doshi, KPMG India Private Limited

18

Evolution of Financial Inclusion - By Siddharth Shah & Chittaranjan Datar Nishith Desai Associates

26

Microfinance - Path to Selfsufficiency - By Sasha Mirchandani, Prashant Choksey, Anil Joshi Mumbai Angels Venture Mentors

31

Regulatory Framework for Microfinance in India - By Shivi Agarwal, Dhir & Dhir Associates

43

Payment Business in India - By Manek Fitter, Ernst & Young India

49

Listing of Advisors with special focus on Financial Services 54

38Tapping the Bottom of the Pyramid with Microfinance - By Samir Bali, Ernst & Young India

Page 3: Financial services sector

Executive SummaryExecutive SummaryIn June 2009, when the world had not yet emerged out of the global liquidity

crisis, the CEO of an Indian investment bank gave an interview to a

business newspaper that was titled “The next decade will be a golden age

for the financial sector”. He predicted that Financial Services in India will

witness growth and penetration similar to that of telecom services over the

last decade. Betting on this rosy growth outlook, his firm - that is currently

focused on institutional business - is expanding aggressively into asset

management and retail broking. Echoing this sentiment, the founder of a

leading microfinance firm wrote in an article, "With the exception of the

mobile telecom, perhaps no other sector has grown as fast and as big in

terms of customer base as the microfinance sector in India in the past two

decades. Today, the MF sector lends Rs 1,000 crore (11 digits) every

month!"

It is no wonder that the BFSI (Banking, Financial Services and Insurance) is

among the top industries when it comes to attracting Private Equity

investments. And PE investments in Microfinance continued to grow rapidly

right through 2008 and 2009 even as investments in other sectors

witnessed a steep decline.

In his interview for this report, Dhiraj Poddar of Standard Chartered Private

Equity points out how the Financial Services sector is an attractive point of

entry for investors to gain exposure to the domestic consumer and

infrastructure sectors. Apart from sectors within BFSI, providers of

technology and analytics services to this industry present another attractive

investment opportunity, he adds. Poddar says PE investors would also look

forward to investing in the capital intensive and long gestation business of

Life Insurance.

In his article on PE in Financial Services, Sanjay Doshi of KPMG points out

that opportunities abound for Private Equity in virtually every facet of the

Financial Services industry considering the expected growth of the Indian

economy combined with rising income levels, focus on infrastructure

spending, emphasis on financial inclusion, emergence of wealth managers

and expected growth of the insurance industry. Among the hurdles facing

PE investors, he includes regulatory restrictions on investment limits in

banking and insurance sectors and uncertainty in valuations of insurance

companies.

Siddharth Shah of legal advisory firm Nishith Desai Associates traces the

evolution of financial inclusion in India. Highlighting how from the time of the

Sahukars and Shroffs (money lenders) in pre-colonial India to the advent of

institutionalized banking, the banking sector in the country has witnessed

3

Page 4: Financial services sector

sweeping changes. The nationalization of banks in 1969 led to the

expansion of branch network increasing lending to agriculture and small

business and pulling in millions of people into the formal financial system.

Highlighting how the new delivery channel of Micro Finance Institutions is

enabling efficient delivery of credit to the neediest sections of society, he

indicates that The Micro Financial Sector (Development and Regulation)

Bill 2007, when cleared by Parliament, will provide the required regulatory

framework for this sector.

Highlighting the potential of Microfinance to alleviate poverty by providing

access to productive assets and financial resources, Anil Joshi, Prashant C

and Sasha Mirchandhani of angel investor group Mumbai Angels indicate

how MFIs would need US$3-5 billion over the next 4-5 years. The hunger for

capital among MFIs stems mainly from the need to meet mandatory Capital

Adequacy Requirements specified by RBI and to invest in branch network,

human capital and technology. From an investor’s perspective, the sector’s

rapid growth, high returns and relative immunity to global developments,

are strong attractions.

In his article, Samir Bali of Ernst & Young points out how the rapid growth of

microfinance has been aided by partnerships with PE firms and banks. The

revision of mobile phone banking guidelines (to enable low value

transactions), the Unique Identification Number (UIN) programme and the

establishment of a ‘Credit Information Bureau’ to encourage safe lending

practices, will provide the framework to boost further growth. He, however,

cautions that as the Indian MFIs develop a pan Indian network and increase

in size, the lack of common standards for technology, product design, the

gaps in legal and regulatory framework and the ability to tackle multiple

borrowings will pose challenges. Bali predicts that the sector will witness

consolidation over the next few years as some of the better capitalized firms

(including PE-backed ones), embark on acquisitions for expanding their

reach and size.

Indicating how a fact-finding study by the RBI observed that some of the

microfinance institutions (MFIs) appeared to be competing to reach out to

the same set of poor, resulting in multiple lending, Shivi Agarwal of legal

advisory firm Dhir & Dhir highlights the need for a general regulatory

environment for the microfinance sector that can provide oversight,

independent of the organizational form of the MFIs. The article provides an

update on the status of the Micro Financial Sector (Regulation and

Development) Bill, 2007 (which had lapsed) and on the steps towards self

regulation within the sector.

4

Page 5: Financial services sector

While writing on the payment business, Manek Fitter of Ernst and Young

highlights the factors which will throw up huge opportunities for PE in this

capital intensive and technology driven sector. The growing acceptance of

electronic payment systems from the presently low penetration levels, a

supportive regulatory stance, initiatives like the formation of the National

Payments Corporation of India (NPCI) and the issuance of UIN, coupled

with the rapid growth of telecom infrastructure and the existence of evolved

and proven payment systems, will help this sector achieve healthy and

sustainable long-term growth in India.

5

Page 6: Financial services sector

PE Investments in BFSI - By Year

Amount (US$ M) No. of Deals3500

3000

2500

2000

1500

1000

500

0

US

$ M

illio

ns

2004 2005 2006 2007 2008 2009

70

0

60

50

40

30

20

10

Private Equity and M&A in Financial ServicesPrivate Equity and M&A in Financial Services

MicrofinanceNBFCBrokingBankingFinancial TechInvestment BankingStock ExchangeMutual FundHousing FinanceAsset ReconstructionOthers

* Jan ‘04 - Dec ‘09

7%

18%

14%

14%

1%4%

13%

3%

13%

2% 11%

23%

20%

11%8%

6%5%

5%

2%3%3%

14%

MicrofinanceNBFCBrokingBankingFinancial TechInvestment BankingStock ExchangeMutual FundHousing FinanceAsset ReconstructionOthers

* Jan ‘04 - Dec ‘09

Source: Venture Intelligence PE Deal Database

6

PE Investments in BFSI - By Sector Value*

PE Investments in BFSI - By Sector Volume*

Page 7: Financial services sector

PE Investments in MicroFinanceAmount (US$ M) No. of Deals

140

160

180

200

120

100

80

60

40

20

0

US

$ M

illio

ns

2004 2005 2006 2007 2008 2009

14

16

18

0

12

10

8

6

4

2

PE Investments in NBFCsAmount (US$ M) No. of Deals

350

400

300

250

200

150

100

50

0

US

$ M

illio

ns

2004 2005 2006 2007 2008 2009

0

12

10

8

6

4

2

PE Investments in BrokingAmount (US$ M) No. of Deals

700

600

500

400

300

200

100

0

US

$ M

illio

ns

2004 2005 2006 2007 2008 2009

0

12

10

8

6

4

2

14

PE Investments in BankingAmount (US$ M) No. of Deals

600

500

400

300

200

100

0

US

$ M

illio

ns

2004 2005 2006 2007 2008 2009

0

6

5

4

3

2

1

8

7

Top PE Investments in BFSI*

Company Business Description Amount

(US$M)

HDFC Housing Finance 660 Carlyle Jul-07

National

Stock Exchange Stock Exchange 375 General Atlantic,

SAIF, Goldman Sachs Jan-07

Sharekhan Broking 200 Citi Jan-07

Indiabulls

Financial Services NBFC (Consumer Finance) 143 Farallon Capital Jun-06

India Infoline Broking 141 Orient Global Dec-07

Investor(s) Date

Source: Venture Intelligence PE Deal Database * Jan 2004 to Dec 2009 – by Investment Size

7

Page 8: Financial services sector

NBFC

Broking

Banking

Financial Tech

Investment Banking

Asset Management

Housing Finance

Others

26%18%

16%

15% 11%6%

5%

3%

By Sector - Volume

45

40

35

30

25

20

15

10

5

0

2004 2005 2006 2007 2008 2009

5

16

3032

41

25

M&A in BFSI - By Year

Source: Venture Intelligence M&A Deal Database

8

M&A in BFSIM&A in BFSI

Page 9: Financial services sector

OutboundDomesticInbound

M&A in BFSI - Deal Type*

* Jan ‘04 - Dec ‘09 By Volume

15%

62%

23%

Source: Venture Intelligence M&A Deal Database

Source: Venture Intelligence M&A Deal Database

* Jan 2004 to Dec 2009 – by Investment Size

Top M&A Deals in BFSI*

Target Co. Acquirer Sector Amount Stake Date(US$M) (%)

Centurion Bank of HDFC Bank Banking 2400 Feb-’08Punjab

DSP Merill Lynch Merill Lynch Investment 500 50 Dec-’05Banking

JM Financial Morgan Stanley Financial 445 49 Feb-’07Services

IL&FS Investsmart HSBC Financial 261 73 May-’08Services

GE Transportation Shriram Transport NBFC 252 100 Dec-’09Financial Services Finance (Transport(Truck Finance Finance)Portfolio)

9

Page 10: Financial services sector

Here are the key highlights of a poll conducted among Private Equity & Venture Capital firms for

this report. Fund managers from about 50 firms participated in the poll.

What PE / VC Investors ThinkWhat PE / VC Investors Think

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

Micro

finan

ce

Infra

stru

ctur

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ance

Service

Pro

vide

rs to

FIs

Banking

Stock

Exc

hang

es

Insu

ranc

e Distri

butio

n

Broking

Mor

tgag

e / H

ousing

Finan

ce

Com

mer

cial F

inan

ce

Asset

Rec

onstru

ction

Perso

nal F

inan

ce S

ervice

s

Inve

stm

ent B

anking

Con

sum

er F

inan

ce

Mut

ual F

und

10

Page 11: Financial services sector

Investors chose Microfinance, Infrastructure Finance, service providers to

financial services firms (like back-offices to mutual funds, etc.), Banks,

Stock Exchanges and Insurance Distribution companies as among their

favourite sectors within the industry.

100

80

60

40

20

0

-20

-40

-60 Mic

rofin

an

ce

Infr

ast

ruct

ure

Fin

an

ce

Se

rvic

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rovi

de

rs to

FIs

Ba

nki

ng

Sto

ck E

xch

an

ge

s

Insu

ran

ce D

istr

ibu

tion

Bro

kin

g

Mo

rtg

ag

e / H

ou

sin

g F

ina

nce

Co

mm

erc

ial F

ina

nce

Ass

et R

eco

nst

ruct

ion

Pe

rso

na

l Fin

an

ce S

erv

ice

s

Inve

stm

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t B

an

kin

g

Co

nsu

me

r F

ina

nce

Mu

tua

l Fu

nd

% Voting Less than % Voting 5 or More

How Investors Rate Each Sector

No25%

Yes75%

Is Microfinance getting overhypedto bubble-like proportions?

Interestingly, even though Microfinance tops the

chart in terms of attractiveness (thanks to the large

market and supply-demand gap), investors are

simultaneously also concerned on too much money

chasing companies in this sector. Borrowers using

loans from one microfinance company to repay

loans from another are also a concern.

Investors also seem to be moving away from

viewing investments in broking firms as a way of

tapping into the much talked about under-

penetration of equity ownership among the Indian

middle-class. The undifferentiated nature of their

offerings, volatility in the earnings (which is linked

strongly to stock marketed movements) and rise in

retail investments via mutual funds and insurance

companies are among the dampeners for

investments in stock broking firms.

Yes40%

No60%

Will you invest in

Stock Broking firms

to ride the

“rising equity penetration" theme?

11

Page 12: Financial services sector

Despite the regulatory bottlenecks, most investors

surveyed feel the appetite of MNC banks to acquire

fast-growing Indian banks has not dimmed. "PE

investments in this sector have been limited not

because of lack faith in the theme. Restrictive

covenants on voting rights and related matters,

coupled with concerted activism by select

shareholder groups in various private sector banks,

have been the dampener," said one of the investors

surveyed.

Yes48%

No52%

Have the new SEBI rules

regarding distribution commissions

made AMCs less attractive?

PE investors surveyed cited regulatory restrictions as the most important

challenge in making investments in the Financial Services sector. Some

investors are also concerned about the government's keenness to tilt the

playing field in favour of Public Sector financial institutions. Apart from

ensuring the integrity of the promoter/team handling large capital, other key

issues investors face in this sector include the relative paucity of risk

assessment services; market uncertainty and intense competition.

The survey takers were split almost equally when it

came to the impact of the new SEBI rules banning

front loading of distributor commission onto mutual

fund investors.

Is the "banking sector

consolidation / acquisitions

by foreign banks" theme still valid?

No40%

Yes60%

12

Page 13: Financial services sector

VENTURE INTELLIGENCE: Why did your company choose to

go in for Private Equity financing? GAJENDRA NAGPAL: In 2007, we were a relatively new company

and not many people knew us at that time. Also, there was no track

record of the company and it was difficult to put across people’s

profile to the masses in case we decided to go in for an IPO. Hence,

the option of coming out with an IPO was ruled out. Also, the process

would have taken a long time. In comparison, PE financing is a quick

and effective way of raising financing for growth. We decided to go in

for PE financing in Nov 2007 and by March 2008, we had already

raised the money. VI: What do you think are the main value-additions brought in

by your PE investors apart from the capital? GN: The PE investors have brought a lot of experience to the table and have

helped us in the growing up process. They have helped us to get in to the

culture of maintaining a strong MIS and fiscal discipline. Although being a

private company, we behave very much like a public company in terms of

maintaining accountability and functioning of our board. VI: The recent poll we conducted among PE investors indicates that

investments into stock broking firms are no longer very attractive.

What according to you are the key differentiators/aspects that can

make brokerage firms more attractive to investors? GN: Broking is still attractive to the PE investors. Although equity broking is

coming under pressure due to decreasing brokerages, currency and

commodity broking is still an attractive option. Wealth Management is

another attractive option. We have already diversified ourselves in the

wealth management business in a big way. In future, many brokerages

would move from pure execution to a mix of execution and advisory. We

have been targeting affluent wealth segment which is set to grow rapidly in

the coming years. Also, as some of our clients in this segment grow to Ultra

High Net Individuals, we could service the HNI and Ultra HNI segments of

clients, which are typically targeted by large banks. We are also in to other

financial products like Insurance distribution/property broking etc. and their

contribution is significant to the overall top line of the company.

Entrepreneurs’ PerspectiveEntrepreneurs’ Perspective

Gajendra Nagpal, Unicon Financial

Interview with Gajendra Nagpal, Founder & CEO, Unicon Financial

13

Page 14: Financial services sector

VENTURE INTELLIGENCE: Why did your company choose to

go in for Private Equity financing? P.N.VASUDEVAN: This being a company in the financial services

sector, there are regulatory norms related to capital adequacy.

Hence capital is a constant requirement to support growth and being

an unlisted company, we tend to go for private equity to support our

equity requirements VI: What do you think are the main value-additions brought in

by your PE investors apart from the capital? PNV: Typically they bring in networks and contacts. Even one good

reference or connection could lead to a significant benefit to the

company VI: The recent poll we conducted among PE investors indicates that

some investors fear that the microfinance space is being over-hyped

and that there is danger of rise in defaults. One of the specific

concerns for example is that multiple firms are lending to the same

individuals which can lead to rising defaults as well as a fall in

margins. What is your opinion on this?

PNV: This year, around 30 leading NBFC-MFIs that account for around 85%

of the Indian market have come together to form Alpha Micro Finance

Consultants with a view to make available credit bureau services to MFIs in

the country.

Through this exercise, MFIs will be able to identify each of their members

individually with their unique ID. This ID will empower MFIs to be completely

certain of any borrower’s prior exposure to other MFIs.

P.N.Vasudevan, Equitas Microfinance

Interview with P.N.Vasudevan, Managing Director, Equitas Microfinance

Entrepreneurs’ PerspectiveEntrepreneurs’ Perspective

14

Page 15: Financial services sector

Dhiraj PoddarStandard Chartered Private Equity

Venture Intelligence recently spoke to Dhiraj Poddar of Standard

Chartered Private Equity (SCPE) on his firm’s outlook on the BFSI

industry. SCPE’s existing investments in BFSI include M&M

Financial and Federal Bank.

What is your firm’s overall view of the

investment opportunities in the Indian Financial Services

space?

We think that Financial Services is an attractive way

to gain exposure to the domestic Consumer and Infrastructure sectors in

India. Asset backed lending, be it vehicle financing, mortgage financing,

lending for infrastructure projects or SME financing are high growth areas.

We look for differentiated business models with relatively higher barriers to

entry run by conservative, yet ambitious teams. We also think Insurance

and Asset Management are attractive segments.

What is your outlook for the Microfinance sector in 2010? Will the

much anticipated SKS IPO catalyze more investments into MFIs? Will

the regulatory uncertainties in the segment act as impediments to

investments in this sector?

A successful IPO by SKS should act as a catalyst for more listings by

micro-finance companies that may have reached optimal size and scale.

The microfinance companies, given their fast pace of growth, would remain

capital hungry. Their listing will help to broaden the investor base that can be

tapped, in addition to PE (as source of funds.)

The sector, along with opportunities, does have its challenges, and

regulatory issues are one of them. I think companies with strong systems,

high quality management teams and discipline can make the difference in

overcoming some of the issues.

Venture Intelligence:

Dhiraj Poddar:

VI:

DP:

Fund Manager InterviewFund Manager Interview

15

Page 16: Financial services sector

VI:

DP:

VI:

DP:

VI:

DP:

Tell us about your investment in M&M Financial Services (Mahindra

Finance) and your expectations from this investment?

Mahindra Finance is focussed on rural and semi urban markets, which

are under-banked and currently serviced by either money lenders or some

public sector banks. The company is mainly into vehicle financing – Utility

Vehicles (UVs), cars and tractors. It is also building its mortgage finance and

insurance distribution businesses.

Mahindra Finance gives us an exposure to the fast growing rural markets,

which are increasingly emerging as big consumers for the auto industry.

The company enjoys high entry barriers, given the difficulties of access and

service of a pan India consumer base...not unlike the Microfinance Industry.

This ensures good growth opportunities and healthy profit margins for the

company. One of the key differences compared to Microfinance is the

nature of lending – it is secure as it is backed by an asset. Further, UVs and

tractors are assets to earn livelihood in many cases, which improve the

nature of security.

We are also very excited about Mahindra Finance’s foray into mortgage

lending, where again the company will be addressing a highly under-

penetrated market.

What do you think are the key issues facing PE investors in

Financial Services?

One of the challenges for PE investors is that most sizable financial

services companies have the ability to access public markets with ease.

This takes away the need for PE capital. Also, most PE investors in India do

not have specialised operating knowledge in the sector, which limits the

extent of value addition.

I think PE investors will either need to specialise over time or take earlier

stage bets. Valuations are another issue – especially in certain sub-

segments. Brokerages were trading at steep valuations earlier and now

(valuations of) microfinance companies look rich.

How attractive are stock exchanges & commodity exchanges in

terms of PE investments?

There is a strong investment thesis clearly reflected in the amount of PE

capital the segment has attracted. It revolves around the low level of

penetration of savings products and equities, as well as growing risk

management needs of companies. Again, there are some regulatory

challenges (especially in the commodity side).

16

Page 17: Financial services sector

Exchanges enjoy very high entry barriers and in some sense, the winner

takes it all. So, it is important in our view to pick the right platform as well.

Your outlook on the Investment Banking sector?

It is a people business with relatively low predictability on revenues…I

don’t see much of a play there for PE unless the Investment Banking

platform is bundled with other revenue streams like broking or distribution

services.

Are you excited by ancillary services to BFSI (for example Back-

office to funds, technology providers etc.)

Absolutely! We as a fund invested in I-flex in 2003, a technology

provider to the BFSI space, which did well for us. As companies in the BFSI

sector grow, especially in a vast market like India, the role of outsourcing

companies is likely to change from being a cost reduction option to

becoming business enablers. I would expect some of the BPO companies,

which are already big in the BFSI segment and are presently servicing the

west, to begin focussing on domestic markets. I think Analytics in Financial

Services is also just starting out – the need to cross-sell and mine existing

data for risk management should drive the business for high quality analytic

services.

Any other segments within the sector which excite you?

Insurance – especially Life Insurance is exciting. There are high entry

barriers – in the form of distribution reach, branding, service quality etc. The

value increases over time as the pool of underwritten business grows so

long as the risk management is sound, which is great from the perspective

of a long term investor. In India, most life insurance businesses are capital

hungry and will take time to accrue value – which PE investors would be

better positioned to understand and appreciate.

VI:

DP:

VI:

DP:

VI:

DP:

17

Page 18: Financial services sector

By Sanjay DoshiDirector, Corporate Finance, KPMG India Private Limited

1&2 Venture Intelligence

YEARS GONE BY

The Indian financial services sector has attracted private equity capital in 1excess of USD 4 billion during the last 3 years . A significant share of this pie

was absorbed by brokerage houses, microfinance companies, stock and

commodity exchanges, and mortgage and consumer financing institutions.

However, in comparison to 2007, when the sector attracted private equity

capital in excess of USD 3 billion; 2009 was one of the most challenging

years the sector has seen, with private equity inflow significantly reducing to 2

the tune of USD 300 million .

Private Equity (PE)in Financial ServicesPrivate Equity (PE)in Financial Services

18

Page 19: Financial services sector

While this sector was severely affected with reduced inflow from private

equity post the global financial crisis, as well as the liquidation of global

financial organisations like Lehman Bros; it demonstrated remarkable

resilience due to a combination of factors such as systematic stability,

conservative credit policies and robust regulatory monitoring.

The sector has kept pace with the growing needs of corporates and other

borrowers. Banks, capital market participants and insurers have developed

a wide range of products and services to suit varied customer requirements.

Moreover, the Reserve Bank of India (RBI) has successfully introduced a

regime whereby the interest rates are largely determined by the market.

TRANSFORMATIONAL CHANGES

The Indian financial services industry is on the verge of a major growth

phase. India’s GDP is expected to grow in excess of 8 percent over the next 3

few years , and financial services sector is likely to have a significant role to

play in achieving this growth. With recent and expected regulatory

changes, the dynamics of the business is likely to change significantly. It

may not only bring in a fresh set of challenges for various players across the

financial services spectrum but may also present a set of opportunities to

fringe players by offering them a level playing field (for e.g. removal of the

entry load on many mutual fund mobilisations provides opportunity to newer

entrants in the distribution play). This is also an interesting time for private

equity players as it provides them with an opportunity to participate in this

play by investing in companies that are well placed to face the challenges.

It is imperative to understand the key influencers, regulatory or market-

oriented, which are likely to have an impact on the sector in the next few

years.

Deferral of opening up of banking sector

In view of the current global financial market turmoil, the RBI has decided to

continue with the current policy and procedures governing the presence of

foreign banks in India, thereby indicating a deferral of the opening up of the

banking sector for foreign players. Given the current regulations on the

restrictions of voting rights and equity stake in banks, banks in need of

capital are likely to continue to face the challenge with limited avenues to

access capital funds.

Removal of entry load on Mutual fund mobilisations

Though the regulation has been perceived as customer friendly, it has

affected many distributors.

3 Eleventh five year plan

19

Page 20: Financial services sector

This change has consequently forced the distributors to focus more on

distribution of insurance products (which provides high commission on the

first year premium) as compared to the mutual fund products.

With customers averse to paying advisory fees to distributors, mutual funds

and distributors are likely to rethink their distribution strategy, which may

lead to a paradigm shift in the business model.

Recommendations made by Swarup Committee (on Investor

Awareness and Protection)

Swarup Committee has recommended the removal of upfront commissions

paid to insurance agents. Although this is likely to bring parity between

distribution of various financial products (for e.g. mutual fund products and

unit linked insurance products, etc.), it has been vehemently opposed by

insurance companies and agents. If implemented, this could significantly

change the distribution landscape.

Infrastructure spending

Indian Infrastructure opportunity has been valued at approximately USD

500 billion during the 11th plan period (FY2008-12) and approximately USD 4

950 billion during the 12th plan period (to attain a GDP growth of 9 percent) .

This spells significant opportunities for road developers, power equipment

suppliers and construction companies. This expected growth in

infrastructure spending is likely to result in a significant demand for

construction equipments and hence may provide a huge boost to

construction equipment financing, project financing, etc. Improvement in

road infrastructure is likely to boost the road transportation thereby

increasing the demand for commercial vehicle financing business.

5Introduction of Infrastructure Finance Companies

In view of the critical role played by Non-banking Finance Companies

(NBFCs) in providing credit to the infrastructure sector, RBI has recently

introduced a fourth category of NBFCs as “Infrastructure Finance

Companies” (IFCs). IFCs have the benefit of higher credit concentration

limits as compared to other NBFCs. Further, RBI has also increased the

exposure limits for banks lending to IFCs. This will provide more head room

to NBFCs and thereby increasing their participation in infrastructure growth.

Thrust on Financial inclusion

Financial inclusion is one of the key priorities of the government and is expected to be a significant driver of growth.

4 Eleventh five year plan5 RBI Notification dated February 12, 2010

20

Page 21: Financial services sector

The key success of financial inclusion relies on ensuring access to various financial products and services to the low income groups at a reasonable cost. Considering that rural retail markets are expected to reach USD 58

6billion by 2015 , and financial products have yet to reach this section of the society, there is a tremendous opportunity for various players to penetrate in the sector.

Consumer spending

Rising household income levels, an ever increasing middle-class

population and a favourable demographic age group profile towards young

and middle age generation is likely to increase the per capita spending of

Indian consumer significantly, thereby resulting in higher demand for retail

financing.

Consolidation

The various sub-sectors within the financial services are likely to go through

a consolidation phase given the number of players operating in the sector

and also the current market dynamics. Some of the key drivers of

consolidation include:

POTENTIAL OPPORTUNITIES FOR PE PLAYERS

Integrated play in broking, wealth management, distribution,

investment banking

Several brokerage firms capitalised on the buoyancy in the Indian capital

market to transform themselves from a traditional broking outfits into

providers of various services required by retail customers and thereby

starting a new chapter in the broking industry. With support of private equity

capital, large and mid-sized brokerage houses diversified into margin

financing, investment and merchant banking, distribution and wealth

management businesses. However, a drastic fall in the capital market had

a negative impact on the broking and margin financing business. Further,

the removal of the entry load has significantly impacted the distribution

revenue of these players.

4Restrictions on access to funds may drive weaker banks to merge with

stronger banks

4Fragmented broking industry is likely to undergo a consolidation phase

with large players providing a wide spectrum of financial services and

mid-sized players having a niche carved out for themselves

4Asset Management companies on account of overcrowding of space

and the recent change in regulation

6 CII-Yes Bank Study

21

Page 22: Financial services sector

7 Celenet8 Intellcap

With the impending implementation of the Swarup committee report, the

brokerage and distribution companies are ideally placed to transform

themselves from a mere distributor into wealth managers providing advise

that is primarily driven by customer needs than the commission structure of

the financial product. With the expected size of USD 1 trillion of wealth 7management industry , early movers stand to gain a higher share of the

highly promising wealth management market.

Further, with volumes on equity markets expected to rise due to growth in

economy and increased retail participation over the next few years, many

large brokerage houses may require capital for their growth through organic

as well as inorganic route.

Microfinance

Microfinance companies have been able to service the unserved population

through leverage from commercial banks who are unable to extend their

reach to this segment directly. Thus, they have been facilitators of the

objective of ‘financial inclusion.’ This sector has been quite successful in

attracting private equity capital even during the lean period following

financial markets turmoil. The key factors attracting private equity players 8are expected growth rate of around 40 percent for the next 5 years, growth

opportunities in under penetrated geographies like Maharashtra, West

Bengal, Gujarat, etc., lower delinquencies, attractive spreads and hence

attractive return on equity. However, the sector also faces challenges which

are very unique to this business, and need to be assessed.

Insurance

Insurance companies are in need of capital to maintain the solvency

requirements and for funding their expansion plans. Opportunities in this

space are broadly divided into three segments:

Given the long break-even period, the opportunity

arises with established players who have been in this business for more

than 8 years and would be nearing break-even. The key value drivers are

expected growth due to the under penetrated semi-urban and rural market,

potential in improvement of profitability on account of improving persistency

ratios and productivity enhancement, unlocking of the embedded value of

in-force business.

4Life Insurance:

22

Page 23: Financial services sector

4Non-life insurance:

4Health insurance companies:

Many of the private sector insurance

companies who have entered the market pre-2001 have achieved break-

even. However, given the potential available for lowering the combined

ratio (i.e. loss plus operating expenses), decline in commissions, and

expected improvement in underwriting and operation efficiency, these

companies are expected to improve their future profitability.

Standalone health insurers are

well poised to grow, given the under penetrated health insurance market in

India. However, investment horizon could be longer, given the strained

profitability due to stiff competition from multi-line non-life insurers. New

business models such as managed healthcare are likely to emerge with

health care providers turning to health insurance.

Although, there are significant opportunities for private equity players in the

insurance domain, some of the key challenges include: 4Uncertainty in valuations of the Indian insurance companies due to

lack of valuation benchmarks coupled with a relatively nascent

Indian insurance market as compared to the matured western

markets

4Regulatory restrictions on the foreign direct investment limits

(currently being 26 percent) thereby restricting direct private equity

infusion (as most of the insurance companies have a foreign JV

partner holding 26 percent stake)

Infrastructure Financing, Asset based financing and retail financing

NBFCs have served as an important medium for access to credit for

customers who do not have access to banking credit. NBFCs have created

a niche for themselves in the areas of SME financing, construction

equipment financing, infrastructure financing, commercial vehicle financing

and retail loans. There have been hugely successful business models,

wherein NBFCs due to its distribution reach, strong collection infrastructure

and customer relationships have generated higher returns driven by low

cost of operations, lower delinquencies and attractive spreads.

With the introduction of IFCs, large NBFCs and Corporates may look

forward to create IFCs with aim to achieving higher growth trajectory

thereby requiring capital infusion on regular basis. Further, the expected

growth in retail and asset based financing (at an estimated CAGR of 20 9percent over next 5 years) , NBFCs is likely to need an infusion of capital to

meet its financing requirements and also to maintain capital adequacy.

9 SSKI, Cris Infac, KPMG analysis

23

Page 24: Financial services sector

Private equity infusion has been a favoured route by many players in the

sector and the trend is expected to continue in future.

The housing finance market, which faced a slowdown during the recent

downturn, is also expected to pick-up. However, with increasing

competition in the housing finance market, there is likely to be an increased

focus on the Loan against Property (LAP) business. A high risk and higher

return product, LAP provides an opportunity to mortgage financiers to attain

a higher growth rate and earn higher returns.

Ancillary sectors

The advent of technology has revolutionalised consumer banking. The

increase in the usage of ATMs, credit cards, internet banking options,

mobile banking has opened up various opportunities for players in sectors

ancillary to financial services. Given the nascent stage of this business and

with high growth potential, the players are likely to be in need of capital to

fund their expansion plans. However, lower profitability margins in this

business results in the return on capital primarily dependent on and driven

by higher volumes, thereby reducing the attractiveness of this business.

Banks

Growing financing requirement driven by infrastructure spending,

impending consolidation in the banking sector and expected progressive

reforms would be the key drivers for private equity investments in banks.

However, the restriction on voting rights and limits on shareholding is likely

to limit private equity players to acquire only up to 5 percent stake in a Bank.

CONCLUSION

Indian financial services sector is at an inflexion point given the expected

changes in regulations and market landscape. The anticipated economic

growth and the importance of a healthy and well regulated financial services

market are likely to be key growth drivers for the various sub-segments

within this sector. However, keeping in mind the limitations on account of

structural and regulatory matters, private equity players should seek to

adopt focused strategies in order to identify opportunities, which meet their

investment objectives.

The views and opinions expressed herein are those of the author and do not

necessarily represent the views and opinions of KPMG in India. The

information contained is of a general nature and is not intended to address

the circumstances of any particular individual or entity.

24

Page 25: Financial services sector

Sanjay Doshi brings with him over 12 years

of experience with more than 9 years in

transaction services. He has advised on

more than 40 private equity deals across

various sectors. Sanjay has significant

experience in the financial services sector

having worked on more than 30 transactions

in the financial services space in the last 5

years with KPMG.

Sanjay Doshi

Director,

Corporate Finance,

KPMG India Private Limited

Mobile: +91 98202 98832

Email:: [email protected]

25

Page 26: Financial services sector

By Siddharth Shah, Principal & Chittaranjan Datar, Associate,

Nishith Desai Associates

The committee on Financial Inclusion headed by former Governor of the

Reserve Bank of India (“RBI”) describes it as “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 1

cost in a fair and transparent manner by mainstream Institutional players.”

In layman terms it means making finance and related services available

within the reach of the common man.

Evolution ofFinancial InclusionEvolution ofFinancial Inclusion

1 (www.rbi.org.in)

26

Page 27: Financial services sector

Early credit delivery in India:

Credit delivery in India right till its colonization by Britain was mainly through

indigenous money-lenders and country bankers, who still hold sway in the

villages and towns. Institutional banking was brought to India by the British

with the setting up of banks in presidency towns.

Banks in pre-independence and newly-independent India were privately

owned. There were entry barriers for customers based on the social,

economic and political status. Such banks catered to only a select few and

most rural Indians had to rely on the expensive and oft unfair loan terms of

indigenous bankers (shroffs, sahukars etc.) Also, loan recovery was brutal,

often lending to pathos like seen in the famous cinematic work “Do bigha 2zameen”. A law to contain this phenomenon has been passed and it

continues to regulate such moneylenders activities.

3Banks continued to be privately owned till their nationalization in 1969.

Post-Nationalization there was an expansion of branch network to

unbanked areas, leading to increased lending to agriculture & small

business and pulling in of millions into the formal financial system. Slowly

but surely the banking and financial services industry grew and expanded.

Further steps included the setting up of Regional Rural Banks (“RRBs”) and

Urban Co-operative Banks (“UCBs”). All the above institutions were

prescribed lending norms meant to include small and medium enterprises

(“SMEs”) and the agricultural sector, as “priority sectors”. Besides the

banks credit societies lent their bit to grassroots credit delivery. The industry

added another channel, the Non Banking Finance Companies (“NBFCs”) to

augment credit delivery.

2 Money lenders acts passed by various states seek to cap rates of interest and deny certain modes of recovery to

unregistered lenders.

3 14 banks were nationalized in 1969 & a further 8 in 1980 under the Banking Companies (Acquisition and Transfer

of Undertakings) Act, 1970 & The Banking Companies (Acquisition, etc.) Act 1880 respectively. Nationalization

was guided by Article 39 of the Constitution which puts the onus on the State to direct its policy towards securing

(b) that the ownership and control of the material resources of the community are so disturbed as best to sub serve the

common good; and

(c) that the operation of the economic system does not result in the concentration of wealth and means of production

to the common detriment. Statistics seem to suggest these objectives were achieved by the nationalization.

27

Page 28: Financial services sector

However the need of the hour in 21st century Indian economy is to ensure

the delivery of banking and financial services at an affordable cost to the

vast sections of unbanked, disadvantaged and low income groups. That

said, a recent survey by the RBI found that between 1995 and 2006, the

number of registered traditional moneylenders increased 56% to 19,627

from 12,601. Though much harder to quantify, unlicensed lenders are

believed to have made similar gains, the survey says.

So what lies ahead and how does Financial Inclusion happen?

4Agencies like NABARD set up with the avowed aim of ensuring Financial

Inclusion are operationalised in the Indian economy. The turn of the century

saw the advent of a new delivery channel viz Micro Finance Institutions

(“MFIs”). Operating mainly as Self Help Groups (SHGs), through their

linkages with banks, they seek to ensure efficient delivery of credit to the

neediest sections of the economy like village workers, artisans, craftsmen,

herdsmen, women’s groups and the like. As on March 31, 2009 61 lakh

savings linked and more than 42 lakh credit-linked SHGs cover about 8.6

crore poor households. The inclusion of lending to such MFIs by banks as

part of their priority sector lending targets is another welcome step towards

achieving financial inclusion.

5For the marginal farmer the Kisan Credit Cards provide for revolving cash

credit facilities with unlimited withdrawal and payments to meet production

credit needs, cultivation and contingency needs.

With the RBI playing facilitator more endeavors like the Banking

Correspondent and Business Facilitator models seek to take credit closer to

the needy through “branchless banking”. The Mahatma Gandhi National

Rural Employment Guarantee Act, 2005 envisages payments through “no-6

frills” bank accounts for work done by participants. They will also be eligible

for bank credit through such accounts. The Government in an initiative

aimed at regulating micro-finance activities with a view to ensuring smooth

passage of credit to the underprivileged and unbanked sections of society

has drafted the Micro Financial Sector (Development and Regulation) Bill

2007. The bill is under consideration of the Parliament and once passed

would lent itself to regulating the channelization of requisite funds to the

micro-finance sector.

4 NABARD : National Bank for Agriculture and Rural Development, incorporated in 1981 under the NABARD Act

5 Introduced by NABARD and RBI in 1998-99 for small and marginal farmers

6 Bank accounts opened with no balance requirements with basic banking services including credit.

28

Page 29: Financial services sector

The MF industry, which is at the forefront of facilitating financial inclusion, is

seeing consolidation. Also funding from the traditional sources like banks is

being augmented by a keen interest from Private Equity funds and Venture

Capitalists. Some shining examples are Sandstone and Sequoia’s

investment in SKS Microfinance and Sequoia’s investment in Equitas. More

abounds on the horizon. The recent Union Budget promises to see the roll

out of more bank-channeled funding for poor and marginalized persons. All

such well meaning measures implemented well, efficiently and effectively

will certainly lead to greater financial inclusion.

To quote the American realist and literary critic William Dean Howells, “An

acre of performance is worth a whole world of promise.”

The authors Siddharth Shah, Principal - Corporate & Securities Practice,

and Chittaranjan Datar, Associate, member of Banking & Financial Services

Industry Team and Microfinance Team, work for Nishith Desai Associates,

Mumbai. The views expressed here are personal. The authors wish to thank

Ms Radhika Mathur, Intern for her inputs.

29

Page 30: Financial services sector

Mr. Siddharth Shah is a Principal at Nishith

Desai Associates (www.nishithdesai.com).

As head of the Corporate and Securities

practice group, he has led several of the

capital market transactions involving

domestic and overseas offerings. He heads

the firm’s Funds Practice Group and is a

member of the firm's M&A and Banking and

Structured Finance groups. With over 13

years of professional experience, he brings a wealth of knowledge and

understanding of the capital markets.

Mr. Chittaranjan Datar is a member of the

Microfinance and Banking and Financial

Services Industry teams at Nishith Desai

Associates. With considerable work-

experience and industry knowledge of

mortgage financing, having spent 13 years

plus with a leading mortgage lender in India,

he combines a unique flavour of law and

industry experience and contacts. His past

assignments included work areas relating

to mortgage loans, developer finance, loan recovery and security

enforcement. He was also a member of a task-force engaged in rolling

out rural finance projects in his previous employment. Socially too he

is focused on “financial inclusion” and empowerment having held the

post of District Director – Microfinance Projects for Rotary

International’s District 3030 in the year 2008-09.

30

Page 31: Financial services sector

By Sasha Mirchandani

Prashant Choksey

Anil JoshiMumbai Angels

A layman understanding about microfinance is not more than a provision of

small loans to the poor. However, there is something more to it. “Reaching

those excluded from formal financial services”. On the face, both of them

appear similar; however, their distinction makes the latter more relevant.

The first definition talks about providing loans only to poor, while the later

definition does not discriminate on economical / social basis. It attempts to

cover all those who are, hitherto, unreachable. So, this definition focuses

more on geographical exclusion than social exclusion. A definition by

Journal of Microfinance states that “Microfinance is arguably the most

innovative strategy to address the problems of global poverty.”

Microfinance - Path to SelfsufficiencyMicrofinance - Path to Selfsufficiency

31

Page 32: Financial services sector

Albeit the Indian economy is booming and showing robust path ahead, but it

also the house to one of the largest poor in the world. In order to achieve

long and sustainable growth it is very important for a nation to take its entire

populace together. The Government nationalized banks to ensure that the

banks reach the masses. However, even till today a significant portion of the

population is still not associated with any formal financial institution mainly

due to strict banking norms and collateral based finance. This gap created a

need for different financing model especially catering to the needs of the

poor who could not offer collateral. A few years back, the success of

Grameen Bank (GB) of Bangladesh grabbed the attention of many people

around the world. The GB model has shown the way to reach up to the

maximum number of people without even accumulating NPAs. In fact, their

loan recovery rate was astonishingly high at around 98%. This model also

brought a lot of social changes into the society.

Microfinance refers to loans, savings, insurance, transfer services and

other financial products targeted at low-income clients. Microfinance

institutions (MFIs) are using various Credit Lending Models throughout the

world. Some of the models are listed below.

This is where the target community forms an 'association' through which

various microfinance (and other) activities are initiated. Such activities may

include savings. Associations or groups can be composed of youth, or

women; they can form around political/religious/cultural issues; can create

support structures for micro enterprises and other work-based issues. In

some countries, an 'association' can be a legal body that has certain

advantages such as collection of fees, insurance, tax breaks and other

protective measures.

As the name suggests, a bank guarantee is used to obtain a loan from a

commercial bank. This guarantee may be arranged externally (through a

donor/donation, government agency etc.) or internally (using member

savings). Loans obtained may be given directly to an individual, or to a self-

formed group.

Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds

may be used for various purposes, including loan recovery and insurance

claims. Several international and UN organizations have been creating

international guarantee funds that banks and NGOs can subscribe to, to

lend or start micro credit programmes.

Associations:

Bank Guarantees:

32

Page 33: Financial services sector

Community Banking:

Cooperatives:

Credit Unions:

Grameen Bank Model:

The Community Banking model essentially treats the whole community as

one unit, and establishes semi-formal or formal institutions through which

microfinance is dispensed. Such institutions are usually formed with

extensive help from NGOs and other organizations, who also train the

community members in various financial activities of the community bank.

These institutions may have savings components and other income-

generating projects included in their structure. In many cases, community

banks are also part of larger community development programmes which

use finance as an inducement for action.

A co-operative is an autonomous association of persons united voluntarily

to meet their common economic, social, and cultural needs and aspirations

through a jointly-owned and democratically-controlled enterprise. Some

cooperatives include member-financing and savings activities in their

mandate.

A credit union is a unique member-driven, self-help financial iinstitution. It is

organized by and comprised of members of a particular group or

organization, who agree to save their money together and to make loans to

each other at reasonable rates of interest.

The members are people of some common bond: working for the same

employer; belonging to the same church, labor union, social fraternity, etc.;

or living/working in the same community. A credit union's membership is

open to all who belong to the group, regardless of race, religion, color or

creed.

A credit union is a democratic, not-for-profit financial cooperative. Each is

owned and governed by its members, with members having a vote in the

election of directors and committee representatives.

The Grameen model emerged from the poor-focused grassroots institution,

Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It

essentially adopts the following methodology:

A bank unit is set up with a Field Manager and a number of bank workers,

covering an area of about 15 to 22 villages. The manager and workers start

by visiting villages to familiarize themselves with the local milieu in which

they will be operating and identify prospective clientele, as well as explain

33

Page 34: Financial services sector

the purpose, functions, and mode of operation of the bank to the local

population. Groups of five prospective borrowers are formed; in the first

stage, only two of them are eligible for, and receive, a loan. The group is

observed for a month to see if the members are conforming to rules of the

bank. Only if the first two borrowers repay the principal plus interest over a

period of fifty weeks do other members of the group become eligible

themselves for a loan. Because of these restrictions, there is substantial

group pressure to keep individual records clear. In this sense, collective

responsibility of the group serves as collateral on the loan.

The Group Model's basic philosophy lies in the fact that shortcomings and

weaknesses at the individual level are overcome by the collective

responsibility and security afforded by the formation of a group of such

individuals.

The collective coming together of individual members is used for a number

of purposes: educating and awareness building, collective bargaining

power, peer pressure etc.

This is a straight forward credit lending model where micro loans are given

directly to the borrower. It does not include the formation of groups, or

generating peer pressures to ensure repayment. The individual model is, in

many cases, a part of a larger 'credit plus' programme, where other socio-

economic services such as skill development, education, and other

outreach services are provided.

Intermediary model of credit lending position is a 'go-between' organization

between the lenders and borrowers. The intermediary plays the critical role

of generating credit awareness and education among the borrowers

(including, in some cases, starting savings programmes. These activities

are geared towards raising the 'credit worthiness' of the borrowers to a level

sufficient enough to make them attractive to the lenders.

The links developed by the intermediaries could cover funding, programme

links, training and education, and research. Such activities can take place at

various levels from international and national to regional, local and

individual levels.

Intermediaries could be individual lenders, NGOs, micro enterprise /

microcredit programmes, and commercial banks (for government financed

Group:

Individual:

Intermediaries:

34

Page 35: Financial services sector

programmes). Lenders could be government agencies, commercial banks,

international donors, etc.

NGOs have emerged as a key player in the field of micro credit. They have

played the role of intermediary in various dimensions. NGOs have been

active in starting and participating in micro credit programmes. This

includes creating awareness of the importance of micro credit within the

community, as well as various national and international donor agencies.

They have developed resources and tools for communities and micro credit

organizations to monitor progress and identify good practices. They have

also created opportunities to learn about the principles and practice of micro

credit. This includes publications, workshops and seminars, and training

programs.

Rotating Savings and Credit Associations (ROSCAs) are essentially a

group of individuals who come together and make regular cyclical

contributions to a common fund, which is then given as a lump sum to one

member in each cycle. For example, a group of 12 persons may contribute

Rs. 100 per month for 12 months. The Rs. 1,200 collected each month is

given to one member. Thus, a member will 'lend' money to other members

through his regular monthly contributions. After having received the lump

sum amount when it is his turn (i.e. 'borrow' from the group), he then pays

back the amount in regular/further monthly contributions. Deciding who

receives the lump sum is done by consensus, by lottery, by bidding or other

agreed methods.

Village banks are community-based credit and savings associations. They

typically consist of 25 to 50 low-income individuals who are seeking to

improve their lives through self-employment activities. Initial loan capital for

the village bank may come from an external source, but the members

themselves run the bank: they choose their members, elect their own

officers, establish their own by-laws, distribute loans to individuals and

collect payments and savings. Their loans are backed, not by goods or

property, but by moral collateral: the promise that the group stands behind

each individual loan. While India is one of the fastest growing economies in

the world, poverty runs deep throughout country. About two thirds of India’s

more than 1 billion people live in rural areas, and almost 170 million of them

are poor.

Non-Governmental Organizations:

Rotating Savings and Credit Associations:

Village Banking:

35

Page 36: Financial services sector

Although urban migration continues, three out of four of India’s poor live in

rural areas of the country where poverty is a chronic condition especially

among the scheduled castes and tribe communities.

One major cause of poverty in India is lack of access to productive assets

and financial resources. Women are generally the most disadvantaged

people in Indian society, though their status varies significantly according to

their social and ethnic backgrounds.

It’s been seen that the economical development of the country depends

upon the way people live and spend. So from the last five years it’s been

seen that Microfinance companies in India did a good job and are keeping

the same. In fact some of the MFIs made it to the Forbes’ list of leading

Microfinance companies. Lured by its 100 per cent growth and the fact that it

seems immune from adverse global developments, private equity

companies and venture capitalists are upbeat on investment in MFIs.

“Many professionals have identified the MFI business as good potential

towards entrepreneurship. They also need capital on a continuous basis, as

micro finance is a capital-intense business, since as business keep growing

one needs capital to maintain CAR, Capital infusion also becomes essential

since MFIs are at a growth stage,”

It is estimated that MFIs would need over USD 3 to USD 5 billion over the

next 4 to 5 years. MFIs mainly need money to meet mandatory CAR

specified by RBI and to invest in branch network, human capital and

technology. Experts say the sector is immune to developments in the global

economy, with 25 per cent returns over a three to five-year period. Also, the

sector is growing at 100 per cent yearly. Experts say there are very few

opportunities at this growth pace, with such low delinquency on loans.

There is a rush to fund this segment, as there is a good amount of money to

be made,”

Note: This article has been prepared after taking inputs from various books and articles. The purpose is to share basics on the industry and not to infringe anybody's rights.

36

Anil JoshiSasha Mirchandani Prashant Choksey

Page 37: Financial services sector

37

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Postal Address of Headquarters :

111, Industrial Area, Cine Max Lane, Sion (East),

Mumbai - 400 022, India

Tel :9323810171 Fax: 022-24072949

Contact Person & Email:

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Cell: 9323810171

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IT products and services, Business Process Outsourcing /

Knowledge Process Outsourcing, Retail, Biotechnology

and Pharmaceutical, Internet, Media and Entertainment,

Telecommunication, Consumer

Mumbai Angels Venture Mentors

Page 38: Financial services sector

Tapping theBottom of the Pyramid with Microfinance

Tapping theBottom of the Pyramid with Microfinance

The microfinance sector in India witnessed consistent growth even through

the economic upheaval. The government has harnessed the potential of

this sector to consolidate its priorities and advance its agenda of poverty

alleviation and financial inclusion. Financial inclusion of the underprivileged

is ongoing as microfinance institutions (MFIs) tap the bottom of the pyramid

and self-help groups (SHGs) evolve in remote parts of India. Moreover, the

profitability of MFIs has been facilitative in the increased acceptance of this

business model.

By Samir BaliPartner - Business Advisory Services & National Leader, Insurance Sector Ernst and Young India

38

Page 39: Financial services sector

The potential of microfinance sector can be gauged by the substantial

estimated demand of INR1.2 trillion of microcredit from 120 million

households. Currently, the Indian microfinance sector has provided about

INR160 billion worth of loans as of March 2009, out of which MFIs account

for INR114 billion, which has increased by 90% over 2008. In total, this

sector consists of over 3,000 MFIs and NGOs, with the leading 10 MFIs

accounting for 74% of outstanding loans.

The progressive growth witnessed in the sector has been supported by two

underlying factors. First is the expanding reach of MFIs and the

establishment of their pan-India presence. Second is the increased

participation of private equity funds and banks. As these entities are

bringing in more funds, the sector is getting further integrated with the

capital markets. Approximately 11 private equity deals, amounting to

USD143 million, were finalized between January 2009 and October 2009 as

compared with eight deals worth USD61 million during the same period last

year. The massive growth of the sector has been supported by some key

initiatives undertaken by MFIs:

Forging partnerships: MFIs are partnering with local vendors to

strengthen and expand their outreach in a profitable way. These local

partners include players in the organized (postal department) or

unorganized sector (local shops).

Establishment of a credit information bureau: The launch of two

new credit information bureaus- High Mark in Dec 2009 and CIBIL

and MFIN in March 2010 fills a much needed gap in the market. These

services will aid MFIs to avoid exposure to multiple borrowers and

expand in a controlled manner, leading to greater financial inclusion.

M-banking: Reserve Bank of India’s (RBI) revision of mobile phone-

based banking guidelines has created a framework to enable low

value transaction amounts. The ability to transfer funds via s u c h

an easy method is also likely to accelerate the flow of funds to the

remote sections of India.

120

100

80

60

40

20

0

20

15

10

5

0

INR

Bill

ion

Mill

ion

3

5

9

16

114

3260

16

Customers

Mar-06 Mar-07 Mar-08 Mar-09

Loan Outstanding

Lending Growth of MFIs Trends in disbursement (MFIs)

350

0

300

250

200

150

100

50

INR

Billio

n

1530

45

72

4527

110

6644

183

95

88

287

185

102

FY05 FY06 FY07 FY08 FY09

SHG-bank linkage MFIs Total

39

Page 40: Financial services sector

Furthermore, reforms undertaken by the government are also significantly

aiding the sector’s growth. The ‘unique identification program’ is a step in

the right direction as it will meet the objective of reducing customer

acquisition costs. Moreover, the RBI is also encouraging banks to increase

lending to the weaker sections of society. Organisations like the Rashtriya

Mahila Kosh have played a significant role in wholesaling, advocacy, and

market development. These initiatives are helping the sector to expand in

an orderly fashion, but MFIs still face fundamental issues that need to be

addressed:

Overall, the Indian microfinance sector is witnessing substantial growth and

is also overcoming challenges. Compared with microfinance models in

other parts of the world, the Indian microfinance model of MFI and SHG is

growing rapidly.

Various microfinance models working effectively in different countries

include Grameen Bank in Bangladesh, Bank Rayat in Indonesia and

BancoSol in Bolivia. Grameen Bank, one of the largest MFIs in Bangladesh,

has been extremely successful in pushing the agenda of financial inclusion,

as it has disbursed USD8.7 billion worth of micro-credit since its inception.

The Grameen Bank network has 2,319 branches spanning 74,462 villages.

Multiple borrowings: MFIs’ customers engage in multiple borrowings in

order to refinance existing loans or to invest. This can result in substantial

non-performing assets as multiple borrowing is most certain to weigh

heavily on the customer’s repayment capacity.

Legal and regulatory framework: As MFIs increasingly become

mainstream organizations, the legal and regulatory framework becomes

ever more important. Regulations, whether they are from external

regulators or form within the industry, are not only required for orderly

growth, but shall also help MFIs expand their service offerings such as

accepting deposits.

Lack of common standards: As the sector focuses on financial

inclusion and expands its reach, the lack of common standards for

technology, e.g., smart cards, pose a hindrance. This translates into lack

of information about customers, thus pushing the customer acquisition

costs and making due diligence ever more difficult.

Product design: A challenge for MFIs is the assumption that pure debt is

expected to improve the standard of living for people. There is a need for

a mechanism for monitoring of the end-use of the finance.

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While the Indian microfinance sector does have significant similarities with

the structure of the microfinance industry in other parts of the world, it is

expected that one of the key impacts to the future direction of the sector can

come from the evolving regulatory environment and the opportunity to the

microfinance institutions to change the nature of the entity that they operate

through. There is a need for interventions at a systemic level as well from

within the industry in the form of creation of self regulatory bodies. There is

also likely to be an increased pressure on the MFIs to effect changes in their

processes to achieve significant cost savings and enhanced technology

usage; those that are not able to adapt will become targets for the other

more successful institutions.

The sector is likely to witness some consolidation as a key trend over the

next few years. As large MFIs have proliferated even the remote parts of

India, they have created their own niches, in terms of geography or sector.

As these entities grow further, with the help of capital from promoters, PE

funds, or through the IPO route, they will embark on an acquisition led

growth strategy to expand their reach and size. As the industry evolves,

there will be an opportunity for the leaders to establish the norms that will

become the industry standards and benchmarks for the others.

41

Sources:u“Microfinance lenders to stop multiple loans,” Mint, 17 December 2009, via Dow Jones Factiva,

© HT Media Limitedu“An Overview Of Microfinance Industry,” Cygnus, September 2008u“Equity Investment in Indian Microfinance: A guide for practitioners,” Institute for Financial Management and

Research and National Bank for Agriculture and Rural Development, May 2009u“Microfinance: Treading a Fine Line Between Financial and Social Objectives,” The Wall Street Journal,

16 December 2009, via Dow Jones Factiva, © 2009 Dow Jones & Company, Inc.u“Microfinance lenders to stop multiple loans,” Mint, 17 December 2009, via Dow Jones Factiva,

© HT Media Limitedu“Microfinance: Treading a Fine Line Between Financial and Social Objectives,” The Wall Street Journal,

16 December 2009, via Dow Jones Factiva, © 2009 Dow Jones & Company, Inc.u“Microfinance finds favour with private equity players,” The Press Trust of India Limited, 16 April 2009, via Dow

Jones Factiva, © 2009 Asia Pulse Pty Limitedu“Uganda looks to Bangladesh's BRAC to ease poverty,” Reuters News, 13 May 2009, via Dow Jones Factiva,

© 2009 Reuters Limitedu“Russian govt to set up fund for lending to small businesses,” Prime-TASS News (Russia), 9 February 2009,

© 2009 PRIME-TASS News Agencyu“UIN to expedite fin inclusion,” The Times of India, 5 December 2009, via Dow Jones Factiva, © 2009 The Times of

India Groupu“Does m-banking offer us financial inclusion?,” Financial Express (India), 15 January 2010, via Dow Jones

Factiva, © YYY Indian Express Pty. Ltd.u“An Invisible Revolution in Rural India,” The Wall Street Journal (Online and Print), 4 January 2010, via Dow Jones

Factiva, © 2010 Dow Jones & Company, Incu“India Top 50 Microfinance Institutions,” Crisil rating, October 2009u“News,” The African Microfinance Network Website, http://www.afminetwork.org/news.html,

accessed 20 January 2010uBRAC 2008 Annual Reportu“Data & Reports,” Grameen Bank website,

http://www.grameen-info.org/index.php?option=com_content&task=view&id=346&Itemid=416, accessed 20 January 2010

u“Microfinance India – State of the Sector Report 2008,” SAGE Publications.

Page 42: Financial services sector

Samir Bali is a Partner with the Business

Advisory Services practice at Ernst &

Young and the National Leader for the

firm’s insurance industry vertical and

brings with him over 20 years of

experience of in the area of financial

services. Samir has worked on several

strategy and restructuring initiatives for

financial institutions and banks in India,

USA, Europe and Sri Lanka. He has also

worked with international and domestic

companies on their diversification and

entry strategies for insurance, credit

cards and other FS businesses. He has

also led engagements on process

improvement and technology for clients

in the financial services arena.

Samir Bali

Partner - Business Advisory Services &

National Leader, Insurance Sector

Ernst and Young India

Office Phone: 022 - 66286440

Email : [email protected]

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Page 43: Financial services sector

Regulatory Frameworkfor Microfinance in IndiaRegulatory Frameworkfor Microfinance in India

The microfinance sector has witnessed near vertical growth during the

recent years. The “State of Sector Report-Microfinance, N. Srinivasan”

points out that during the year 2008-09 there was a 60% increase over 2008

in the clients being serviced by mFIs and a 30% growth in the total

outstanding microfinance loans during the same period. On the other hand

the sector received phenomenal access to funds in 2009 by way of private

equity, fund raising on debt markets and securitisation of loan portfolios.

By Shivi AgarwalDhir & Dhir Associates

Dhir & Dhir Associates

43

Page 44: Financial services sector

Organizational Framework for Microfinance

Microfinance has been defined as the provision of thrift, credit and other

financial services and products of very small amount to the poor in rural,

semi-urban and urban areas for enabling them to raise their income levels

and improve their living standards.

Microfinance is available through a wide range of organizational spectrum

ranging from highly regulated banking sector, including commercial banks,

regional rural banks and cooperative banks, which are strictly monitored

and regulated by the RBI to non-governmental organizations structured as

societies, trusts and not for profit companies. The middle of this band is

inhabited by non-banking finance companies, which are regulated by the

Reserve Bank of India. The organizations other than banks providing

microfinance facilities are often referred to as microfinance institutions

(“mFI”)

The banking sector often works in collaboration with other Microfinance

participants through different models. Such linkage of mFIs with the banking

system has many advantages like high recovery performance, reduction in

the transaction costs for both banks and mFIs, reasonable margins for both

and opportunity to the banks for getting future quality clients. One of the first

initiatives in such banking- mFI linkages was the Self Help Savings and

Credit Groups (“SHG”) – bank linkage model piloted by National Bank for

Agriculture and Rural Development (“NABARD”). In view of the success

and benefits arising from such linkages, RBI on April 2, 1996 advised banks

to treat lending to SHGs and to mFIs for further lending to SHGs as part of

their regular business activity and introduced separate reporting segment

under the head of “Advance to SHG” to facilitate reporting of such lending

irrespective of the purpose for which members of SHGs were provided such

credit. RBI has thereafter, from time to time issued guidelines to facilitate

and enhance grant of micro credit by banks, including designating such

lending as a priority sector. The emphasis has been on simplicity of

procedures and documentation for enabling SHGs to access bank finance

and flexibility of products and procedure to allow customization for suiting

on local conditions, while setting out broad parameters for selection of

SHGs.

The other model that has developed is where the microfinance loans

continue on the books of the banks, but they are originated and managed by

mFIs. Such loans may originally be granted by the bank itself, or the mFI

may securitize and sell its own portfolio of microfinance assets.

However, such loans are eventually treated in the books of the banks as

direct credit exposure to the end borrowers and therefore are subject to

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higher regulatory burden, including know your customer guidelines and

regular reporting and provisioning requirements, which is not well suited to

the nature of microfinance business and clients.

However, while the banking sector continues to be a mainstream and

significant player in microfinance, the stupefying spurt in lending through

mFIs has emerged principally through non-banking finance companies,

which are able to access greater avenues for fund raising and have been the

drivers in conversion of microfinance from a philanthropic pursuit to a

business which is as much for profit as for social benefit.

NBFCs as companies under the Companies Act, 1956, are eligible to

receive foreign direct investment, which is not permitted in societies and

trusts and is highly restrictive and regulated for banks. NBFCs can be fully

foreign owned under the automatic route for foreign direct investment,

subject to minimum investment of US$ 50 Million of which US$ 7.5 Million is

to be brought in upfront and the balance over 24 months. An NBFC can be

50% foreign owned with minimum capitalization of US$ 0.5 Million. Further,

unlike in case of societies and trusts, which are not eligible for listing on

stock exchanges, NBFCs can list debt and equity securities in the same

manner as other companies, subject to the reporting and other listing

requirements. NBFCs which meet certain criteria as prescribed by RBI,

including having a minimum credit rating and net owned funds, are also

eligible to mobilize funds through public deposits (see Notification No.

DNBS. 199/CGM (PK) -2008 dated 17th June, 2008).

On the other hand from a regulatory perspective, NBFCs are subject to the

regulatory supervision of RBI. They are required to be registered with the

Reserve Bank of India and are required to maintain minimum net owned 1funds of Rs. 20 Million . Non –Banking Finance Companies are also subject

to prudential norms, including provisioning for bad and doubtful debts,

capital adequacy based on risk weight of assets, deployment of funds etc.,

which norms are different for deposit accepting and non-deposit accepting

companies. For example while a deposit accepting NBFC is required to

maintain a minimum capital ratio of at least 12% of its aggregate risk

weighted assets on balance sheet and of risk adjusted value of off-balance

sheet items, there is no capital adequacy requirement for non- deposit

taking NBFC, unless it is a systemically important NBFC.

Similarly, while non deposit accepting NBFC are only required to give a

thirty days prior public notice in case of transfer or change in management

or merger or amalgamation, deposit accepting NBFC are required to obtain

Regulatory Framework for Microfinance NBFCs

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Page 46: Financial services sector

prior approval of RBI, so as to ensure that “fit and proper” character of

management of the NBFC is maintained.

The regulatory framework governing NBFCs, while not being as stringent as

that of banks, ensures greater transparency and accounting discipline than

is available in case of trusts and societies, giving greater comfort to

investors.

While there is a general regulatory framework for NBFCs, there is need for a

general regulatory environment for microfinance sector, which can regulate

the sector and its participants independent of the organizational form of

MFIs. The need for this is highlighted by some of the observations made by

RBI in its Master Circular on Micro Credit dated 1st July, 2009. The RBI

pursuant to a fact-finding study on microfinance conducted jointly with a few

major banks observed that some of the microfinance institutions (MFIs)

financed by banks or acting as their intermediaries/partners appear to be

focussing on relatively better banked areas, including areas covered by the

SHG-Bank linkage programme.

In this regard, the Micro financial Sector (Regulation and Development) Bill,

2007 was introduced in Parliament, which has however lapsed since then.

The Ministry of Finance has now invited comments and suggestions on a

draft document on regulation and development of Microfinance Sector,

which retains the provisions of the lapsed Bill. Some of the key features of

the draft are highlighted and discussed below:

(i) Microfinance is restricted to financial assistance of upto Rs. 50,000 to a

single borrower and of up to 1,50,000/- in aggregate per individual for

housing purposes. The draft also contemplates provision of other financial

services and insurance services by for “Microfinance organizations”

(“MFO”), which will continue to be regulated by the general regulator for

such services.

(ii) Compulsory registration framework for MFO, which includes societies

and trust but does not include not for profit companies and NBFCs, thereby

leaving a large number of Microfinance participants outside its purview.

(iii) Allowing MFO to take deposits from their members, subject to such

organization having been in existence for over 3 years, having promoters’

contribution of Rs. 0.5 million and having a suitable management structure.

A more focused regulatory framework

1 While not for profit companies incorporated under Section 25 of the Companies Act are exempted from requiring registration with RBI, the inherent non-profit nature of such companies, stymies accretion of valuation and therefore, does not make this a viable option for private equity investors.

46

Page 47: Financial services sector

The limit and terms of the deposits would be determined through delegated

legislation.

(iv) Creation of a reserve fund of 15% of its profits by each MFO. It may be

pointed out that as against this, the Task Force on Supportive and

Regulatory Framework for Microfinance constituted by NABARD under

chairmanship of Mr. Y.C. Nanda had recommended reserve requirements

of 10% of savings in the form of bank deposits as at the end of the second

preceding quarter for mFIs mobilizing deposits upto Rs. 0.25 Million and of

15% for deposits mobilized above Rs. 0.25 Million. Such reserve

requirement was therefore, independent of the financial performance of the

mFIs business and provided a greater safety net for members. It had also

recommended that mFI mobilizing deposits above a particular cut off should

be registered with the RBI. The draft also does not create different

regulatory framework for deposit accepting and non-deposit accepting

MFOs. However, it is possible that this distinction may emerge in the

delegated legislation.

(v) NABARD has been vested with regulatory and monitoring powers. This

aspect of the proposed legislation has come under most criticism,

particularly on account of being anti-competition, since NABARD is an

active and significant player in Microfinance sector.

In addition to the above, significant steps have already been taken towards

self regulation within the sector, beginning with the adoption of the Voluntary

Mutual Code of Conduct formulated in 1996 under the aegis of Sa-Dhan, a

national level organization of MFI’s after the microfinance crisis in Andhra

Pradesh. Sa-Dhan is also reportedly working on a revised code to deal with

issues like high-handed recovery tactics, lending limits, overlapping of

loans, cash flow examination of borrowers and non-poaching agreement

between members, which is expected shortly. Microfinance Institution

Network, an association for NBFC-mFIs is undertaking preparation of a

similar code of conduct.

The creation of the right regulatory environment for micro finance will,

therefore, have to be based on legislative protection as well as self

regulation. On the one hand, legislative initiatives need to be refocused to

look at the sector as a whole, including the inter-linkages between providing

of credit and other financial services as a holistic model of micro finance,

with focus on providing sufficient consumer protection and security nets to

that section of society which has least ability to absorb losses. On the other

hand, it is necessary that such legislation should not stifle the ability to

innovate and adapt, which is necessary to make microfinance customized

and relevant to the diversified clientele that it should serve, leaving sufficient

room for intelligent self regulation.

47

Page 48: Financial services sector

The author, Shivi Agarwal, is a partner with

the Firm and specializes in private equity

and real estate.

Dhir & Dhir Associates is a multidisciplinary

f i rm, prov id ing lega l adv ise and

representation on various corporate and

commercial laws and transactions. Its

teams are led by six partners, who deal with

different practices of the firm, including

Civil, Commercial & Company Litigations,

Alternate Dispute Resolution, M&A, Private

Equity, Real Estate, Project Financing,

Power and Infrastructure, Insolvency and

Corporate Restructuring. The firm has

offices in Delhi and Mumbai.

Shivi Agarwal

Dhir & Dhir Associates

Advocates & Solicitors

Delhi Office: D-55,

Defence Colony,

New Delhi -110024

Ph: 91 11 4241 0000

Fax: 91 11 4241 0091

[email protected]

Dhir & Dhir Associates

48

Page 49: Financial services sector

The payment business in India is in the midst of a rapid transition, fueled by

the growing acceptance of electronic payment systems. Presently, total

payment flows into India are estimated to be close to USD9 trillion, with the

annual revenues of the payment industry hovering around USD14 billion.

This figure is likely to grow exponentially, given the RBI’s continued thrust

on making payment systems in the country more efficient, safe and

accessible.

Payment Businessin IndiaPayment Businessin IndiaBy Manek FitterPartner - Business Advisory - Financial Services Ernst & Young India

49

Page 50: Financial services sector

Electronic modes of payment in the retail segment are likely to gain

significant ground. At present, electronic retail payments account for 12%

(in terms of value) of total retail payments in India. In comparison, in mid-

2007, retail payments through credit and debit cards alone stood at 51% of

overall transactions in Australia, followed by 47%, 40% and 37% in Canada,

France and the US, respectively. Although modern payment systems have

taken decades to develop in advanced economies, this transformation is

likely to take place much faster in emerging markets due to the presence of

already evolved and proven payment systems. This is evident from the rate

at which electronic payment systems are replacing traditional ones in India.

Over the last five years, electronic retail payments have registered a CAGR

of 57.2% in India to cross USD109 billion (INR5 trillion) in FY09.

Opportunities galore

This migration toward electronic payment channels presents exciting

opportunities to entities associated with this business, e.g., banks, payment

gateways, telecom companies as well as equipment and software solution

providers. The following lines of business are likely to benefit substantially

from this change:

Point-of sale (POS) terminals: The value of the annual business

generated through POS terminals in India has crossed USD17 billion

(INR800 billion) and is growing at a yearly rate of over 25%. However,

there is still substantial untapped potential. This can be gauged from the

fact that there are only 450,000 POS terminals as compared to more than

150 million debit cards and 25 million credit cards in circulation in the

country. Banks are therefore increasing their focus on this segment to

close the gap. For instance, State Bank of India (SBI) plans to float a

wholly owned subsidiary for its merchant-acquiring business by setting

up and implementing 600,000 POS terminals during the first five years of

its operations. Several other banks, including the Bank of India and Union

Bank of India, have ambitious plans to put in place thousands of POS

terminals in the near future.

Online payment gateways: The convenience factor, coupled with

growing internet penetration among Indians, has given a tremendous

boost to online transactions in segments including remittance, utility

payments and e-ticketing. The need for an online payment gateway is

indispensable for an online retailer. Moreover, the revenue potential of

online payment gateways is attractive, given that the fees charged by

them can be as high as 6–7% of sales.

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Page 51: Financial services sector

Mobile payments: The growth prospects of the mobile payment

business cannot be underestimated in a telecom market that is adding

8–10 million subscribers every month and is expected to have more than

half a billion mobile users by the end of 2010. Given the way mobile

phones have penetrated the length and breadth of India, mobile

payments have the potential of becoming the biggest non-cash payment

solution in the country.

The RBI took a significant initiative last year by allowing non-banking

entities to issue mobile phone- based pre-paid instruments. Going by

global precedents, this initiative may be vital for the evolution of mobile

payments. In Europe, for example, competition between bank and non-

bank providers of payment services, including post office services, has

been a key factor for promoting the transition toward electronic modes.

From the perspective of banks, the payment business can be a source of

valuable non-interest income, particularly during times of shrinking

spreads. Several of the Indian banks have begun to realize that payments is

not just a service or a cost center, but has a definite potential to become a

profit center and contribute to the bottom-lines, thereby creating wealth for

banks, intermediaries and investors. As a result, banks are now willing to

invest in building a robust payment infrastructure. Many of them continue to

operate their payment solutions on obsolete platforms, which is an

unsustainable proposition from a long-term perspective. To realize their full

potential, they need to upgrade their technological functions, and thereby,

open business opportunities for software solution providers. In addition to

banks, virtually every mode of electronic payment requires technological

solutions and continued support functions. Therefore, growth in the

business of technology solution providers is likely to be the natural outcome

of the expansion of the payment industry as a whole.

Attractive investment proposition for PE firms

There are several reasons why the payment business is likely to attract

more and more private equity (PE) players in times to come.

Firstly, segments such as payment gateways are extremely capital-

intensive, which results in promoters having to tap external sources of

capital. There are already several venture capital (VC)-backed firms that

are focusing on India in the payment space, e.g., Paymate, JiGrahak and

Prizm Payments. In fact, companies such as mChek have already opted for

subsequent rounds of capital infusion to scale up their business.

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Page 52: Financial services sector

Secondly, with the emergence of several niche areas within the payments

business, there is room for significant deal activity as banks may seek to

enter or expand in certain niche segments while exiting the others. One

such trend could be of banks hiving off their POS operations. In the Indian

context, ICICI Bank has been the first to do this by selling its POS terminal

business to First Data Corporation (FDC) for USD80 million. Similar

initiatives by other banks will offer investment opportunities to the PE

players.

Thirdly, the industry may witness a wave of consolidation among the

intermediaries where again the PE firms will have a role to play.

Lastly and most importantly, there are concrete precedents of PE firms

making substantial gains from their investments in this space in India — the

Carlyle Group’s recent stake sale in Financial Software & Systems (FSS) is

a case in point. PE firms Jacob Ballas Capital and New Enterprise

Associates paid USD60 million for a 40% stake in FSS, 34% of which was

bought from the Carlyle Group. The latter had invested USD10 million in

FSS in 2001 and made its exit with handsome gains.

Conclusion

Growing acceptance of electronic payment systems, a supportive

regulatory stance, as well as initiatives including the formation of the

National Payments Corporation of India (NPCI) and issuance of unique

identification numbers (UIN), indicate the healthy and sustainable long-term

growth of India’s payment industry. Banks’ investments in building the

required payment infrastructure will not only pay them rich dividends over

the coming decade, but also contribute meaningfully to foster economic

growth.

With the deeper penetration of electronic payment solutions in smaller

cities, there will be abundant growth opportunities that can be availed by

banks, service providers and PE firms. From the latter’s perspective, the

initial few deals seem to be just a beginning of what indicates every

likelihood of becoming a long-term and rewarding trend.

52

Page 53: Financial services sector

Manek Fitter is a Partner with Business

Advisory team with Ernst and Young and

brings with him over 12 years of experience

of in the area of financial services. He has

led strategic direction, re-structuring,

t r a n s f o r m a t i o n a n d p e r f o r m a n c e

improvement assignments across a host of

banking, capital markets and other industry

players and to several PE firms interested in

investments in the sector. He has been

associated with the public sector banks for

various growth initiatives and MNC / private

sector players for their entry and expansion

initiatives.

Manek Fitter

Partner

Business Advisory - Financial Services

Ernst & Young India

Office Phone : 022 - 40356390

Email : [email protected]

53

Page 54: Financial services sector

Firm Name : Collins Stewart Inga Pvt. Ltd.

Website: www.csinga.com

Postal Address of Headquarters :Collins Stewart Inga Pvt Ltd A-404 Neelam Centre, Hind Cycle Road, worli, Mumbai 400 030

Tel: 91 22 2498 2919, 22 2498 2927, 22 2498 2937Fax: 91 22 2498 2956

Other Office Locations: London, Singapore, Dubai, Zurich

Contact Person & Email:S.Karthikeyan Kavita [email protected] [email protected]

About Us- An Advisory Boutique which focuses on Fund Raising, Corporate Advisory, Mergers & Acquisitions with a special focus on Mid cap segment

Sectors of Interest- Infrastructure/Real Estate, Media, Financial Services, Education & Healthcare.

Firm Name: Ernst & Young Private Limited

Website: www.ey.com

Postal Address of Headquarters : Ernst & Young1st Floor, Tower A, Building no 8, DLF Cybercity Phase 2Sector - 25, Gurgaon, Haryana, India, 122002

Tel: +91 124 457 5000 Fax: +91 124 457 5200

Other Office Locations: Ahmedabad, Bengaluru, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai, New Delhi, Pune, Secunderabad

Contact Person & Email:Hiresh WadhwaniPartner and National DirectorFinancial [email protected]

Sectors / Companies of Interest: Private Equity, Microfinance Institutions, Financial Technology Companies, Banks, Mutual Funds, Insurance Companies and other Financial Institutions

Listing of Advisory Firms with Special Focus on Financial ServicesListing of Advisory Firms with Special Focus on Financial Services

54

Page 55: Financial services sector

55

Firm Name: KPMG India Private Limited

Website: www.in.kpmg.com

Postal Address of Headquarters :Lodha Excelus1st Floor, Apollo Mills Compound, N.M.Joshi Marg, Mahalakshmi, Mumbai 400 011

Tel: 91-22-39896000Fax: 91-22-39836000

Our Corporate Finance team for Financial Services

Mr Abizer DiwanjiExecutive Director – Corporate FinanceHead – Financial [email protected]

Mr Sanjay DoshiDirector – Corporate [email protected]

KPMG’s Corporate Finance practice in India has a successful track record of providing a broad range of financial and strategic advisory services to clients across a wide array of industries. These services comprise objective advice on mergers and acquisitions, financing options and evaluating strategic alternatives.

Listing of Advisory Firms with Special Focus on Financial ServicesListing of Advisory Firms with Special Focus on Financial Services

Page 56: Financial services sector

Strategic AdvisorsUnique Approach

Bo

sto

n L

on

do

n M

um

ba

i Sa

n F

ran

sis

co

The Parthenon Group congratulates India Equity Partners (IEP) on its

investment in IL&FS Education & Technology Services (IETS). The

Parthenon Group is proud to be associated with the deal as the

commercial due diligence advisor.

The Parthenon Group has a commitment to and expertise in working with

leading private equity and venture capital firms and other investor groups.

We have a dedicated group of professionals that brings together a valuable

mix of background experience in operations, marketing, accounting, law and

strategy consulting. We advise leading firms on private equity related issues such as investment

opportunity due diligence, portfolio company performance, firm investment strategy and operating

strategy. Parthenon has conducted over 600 commercial due diligence assignments over the last 3 years

for private equity investors across the globe. For further information please contact:

Amit Garga | +91 9930127589 | [email protected]

Education & TechnologyS e r v i c e s L i mi t e d

Commercial DueDiligence

Equity Provider:India Equity Partners

January 2010

Page 57: Financial services sector

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