global-meltdown-and-retail-banking-in-india

“A WORKSHOP ONPERSPECTIVES OF ECONOMIC MELTDOWN:

CRISES & CHALLENGES”AT THE FIN-FEST 2009

OF MANIPAL INSTITUTE OF MANAGEMENT ON 4TH SEPT, 2009

“GLOBAL MELTDOWN AND ITS IMPACT ON RETAIL BANKING IN INDIA” -BY PROF. CHOWDARI PRASAD, PROFESSOR, TAPMI, MANIPAL

The US Financial Crises in a Century1) PANIC OF 1907 –BANKERS’ PANIC2) Wall Street Crash 1929-The Great Crash3) Depression in 1930-The Great Depression4) 1973 Oil Crisis5) Savings and Loan Companies Crisis in late 1980s6) Long Term Capital Bailout7) DOT COM BUBBLE in 20018) California Electricity Crisis9) Credit Crisis – Sub-prime Mortgage Crisis 2008

MIM FinFest 2009 2Global Meltdown n Retail Banking

Depression in 1930The Great Depression

• The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries.

• It was the largest and most important economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can fall.

• The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday


4

Timeline of key events over the period7th Sep2008

Two US mortgage finance agencies (Fannie Mae and Freddie Mac) are taken into conservatorship.

18th Sep2008

UK Bank HBOS announces its merger with rival Lloyds TSB; Central bank measures address the squeeze in US Dollar funding with $160 billion in new or Expanded swap lines;

The UK authorities prohibit short selling of financial shares.

29th Sep2008

UK mortgage lender Bradford & Bingley is nationalised banking and insurance company Fortis receives a $16 (€11.2) billion capital injection; German commercial property lender Hypo Real Estate secures a Government-facilitated credit line.

30th Sep2008

Financial group Dexia receives a $9 (€6.4) billion capital injection; the Irish government announces a guarantee safeguarding all deposits, Covered bonds and senior and subordinated debt of six Irish banks; Other governments follow up with similar initiatives or expand existing guarantee schemes over the following weeks.

MIM FinFest 2009 Global Meltdown n Retail Banking

5

3rd Oct2008

The US Congress approves the revised TARP Plan.

8th Oct2008

Major Central Banks undertake a coordinated round of policy rate cuts; including capital injections for UK-incorporated banks and guarantees for new short-to medium-term senior unsecured bank debt.The UK authorities announce a comprehensive support package,

13th Oct 2008

Major Central Banks jointly announce measures to improve liquidity in short-term US dollar fund markets, Supported by uncapped US dollar swap lines between the Federal Reserve and the other central banks; Euro area governments pledge system-wide bank recapitalizations and guarantees for new bank debt.

14th Oct2008

The US government announces that up to $250bn of previously approved TARP funds are to be used to recapitalize banks, 9 large US banks agree to public recapitalization.


6

Reasons behind the Global Financial crisis:How did this crisis start?

1. Banks lending enormous housing loans to borrowers with inadequate security and poor credit history.

– These banks repackaged the housing loans as tradable sanction and sold them to investment banks such as Merrill Lynch (1914), Bear Sterns (1923) and Morgan Stanley (1935) and AIG

2. When housing loan went bust, the property market collapsed – adding to the losses of these investment banks

3. Credit markets have suffered

4. Exotic financial investments like Credit Default Swaps (CDS) also have contributed for the crisis.

5. The spill over efforts had been felt by a number of financial institutions, stock markets melt down and investors started suffering.


7

The rise and fall of investment Banks

• Lehman Brothers (1850) • Goldman Sachs (1869)

– Merrill Lynch (1914) – Bear Sterns (1923) and – Morgan Stanley (1935) – AIG All of them became the victims of the current financial turmoil in

the US and have changed their identity during the last six months.

• Bear Sterns and Merrill Lynch were taken over by commercial banks.

• Lehman was wound up and the other two have now become commercial banks.

• I-BANK MODEL: The great stock market crash of 1929 in the US brought about drastic changes in the financial sector.

• The Glass Steagall Act, 1933 which separated commercial banking from I-banking.


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• Till late 1990s banks were prohibited from engaging in share- broking or investing in shares.

• This gave a fillip to I-banks to fill in the void and expand their activities. In fact, Morgan Stanley was started after this Act.

• The Act was repealed by Gramm-Leach Billey Act of 1999 in the US and now commercial banks there can be universal, viz, can engage in investment banking also.

• These funds in turn provided by commercial banks, mutual funds and even members of public.

• However, Federal Reserve Bank in the US had no control over the I-banks.


MIM FinFest 2009 Global Meltdown n Retail Banking 9

Global Meltdown n Retail Banking 11 MIM FinFest 2009

Five Year Plans in India

• I Plan (1951 - 1956)• II Plan (1956 - 1961)• III Plan (1961 – 1966)• Plan Holiday 1966-69• IV Plan (1969 – 1974)• V Plan (1974 – 1979)• Break 1979 - 1980

• VI Plan (1980 – 1985)• VII Plan (1985 – 1990)• Break 1990 - 1992• VIII Plan (1992 – 1997)• IX Plan (1997 – 2002)• X Plan (2002 – 2007)• XI Plan (2007-2012)

India : 1947-69Planned Development

Planned National Development includes Bombay Plan, etc.Import Substitution Industrialisation (ISI) + Agrarian Transition

Egalitarian agrarian reforms = Higher productivity, surpluses, market

Planned industrial development = Large Public sector + diversified industrial structure + self-reliance

Quasi Marxist strategy undermined by agrarian powerCrisis of planning in Late 1960s = Green Revolution


Global Meltdown n Retail Banking 13 MIM FinFest 2009

Growth of GDP and major Sectors (% per year)

India : 1969-84Under-cover Liberalization

Prima facie increase in statism: nationalization of Banks, industrial control increased, anti-smuggling, FERA, MRTP, etc.

Underlying trend point elsewhere: labour repressionGreen and White Revolutions,State intervention pro-capitalist by default

Inflation + middle-class political unrest + emergency + 1977 Janata Government

Self-constraining inequitous growth process set pattern


India : 1984-92Domestic Liberalization

From late 1970s onwards hesitant but then accelerating decontrol: various reports (Desai, 1969, Jha, 1981) critical of state intervention

1984 Rajiv Gandhi’s domestic liberalization with limited international opening

Accompanied by usual rhetoric about free market and export-led growth; though exports remain stagnant

Growth rate picks up circa 1980 not after 1991Consumer durables-led boom (mainly vehicles)Energy/import intensity real cause of Balance of

Payments crisis


India : 1991-01Global Opening?

Structural Adjustment (but like 1981 IMF loan, paid back early)Privatization of parts of very large public sectorGrowth and industrial growth accelerateExport led-rhetoric, exports rise only in traditional categories: Textiles,

Gems and Jewellery, Leather, etc.Balance of Payments gap closed by remittancesImport penetration increasesMainly driven by pent-up demand for goods with high import contentNarrow domestic market easily saturated: industrial recession by 2001.Capital Controls remain:

RBI’s conservatism prevails over Ministry of Finance enthusiasm India escapes 1998 Asian meltdown Continuing caution about portfolio investments and reserve accumulation


2002-07Credit Fuelled Industrial Boom

Govt capacity for stimulus lower ; Fuelled by easy consumption creditIncrease in retail bankingInflow of foreign loans + portfolio inv. + foreign financial institutionsSeemingly lifts historically heavy Foreign Exchange constraintIndia’s reserves in August 2008 $310 bn, third in worldBut accompanied by trade deficit (unlike China and Japan)But Trade Deficit > software + remittances current account deficitCovered only by capital movementsM&As abroad rise, investment income rising but also outflowsDeficit on business servicesBut India begins exporting higher value added products: Chemicals,

engineering goods and pharma.Growth concentrated in some sectorsSlowdown evident since 2006


2008: Financial Crisis Transmission Mechanisms

Portfolio Investments and Withdrawals by IFIsFall in SensexDepreciation of rupee

Exposure of Indian banks to toxic assets: RBI estimate 450m (90m public + 360 pvt) + depositors and investors in foreign banks operating in India (recently

increased operations)Exposure of non-bank FIs and corporates to domestic stock and currency

markets. Expected to be large, RBI permits banks to provide loans to mutual funds

against Certificates of Deposit (CDs) or buy-back their own CDs before maturity

Cut-backs on credit to individuals by banks. Marked deterioration in growth of all consumer loans. Given reliance of growth on this sort of credit, impact on growth could be high.


Sensex: Halved by Crisis


Rupee Value

1/12/200850.1


SLOW DOWN OR BREAK DOWN?

Indian history is witnessing steep downslide in all segments of the economy. The vast investment in basic, core sector, infrastructure, housing sector in early 21st century gave momentum to the Indian economy. 8.5% growth since 2003. The jubilant Economy suddenly seems to have burst.

•Bubble created in the Economy during 2007 & 2008

•Bubble has burst

•Industry facing turmoil

•Sensex disaster

•Prices of 17 essential commodities doubled in 4 years

•Closures, slow down in industries

•Chaos in job market

resulting in

LOSS OF ONE CRORE JOBS & SUFFERING OF COMMON MAN

DISASTER SYMPTOMS

• Financial services segment witnessed steep downfall

• Real estate – lost estate

• Large retailers/malls closing down speedily

• Half of small scale industries of industrial townships facing closure

• Several Large Industries have declared Closure /Partial

Closure e.g.:

• Tata Motors • Thyseeankurup Industries

• Ford Motors • Tata Yazaki

• Kirloskar Brothers • Bosch

• Bharat Forge • Bajaj Auto

DOWN…INCOME TAX COLLECTIONS

• Direct Tax receipt down by 13.4% in Dec 2008.

• Direct Tax collection down to Rs.52,749 Cr in Dec 2008 against Rs.60,976 Cr of

December 2007

• Central Board of Direct Taxes Chairman stated “Direct Tax collection shall be short by Rs

1 Lac Crores in 2008/09

• The tax collection will be less than Rs.3 lac crore against the target of Rs.3 lac 95

thousand crores

SLOWDOWN BLUES: TAXES COLLECTION DOWN

BE FY 08Actuals till Dec.

% of Actualsto BE FY 09


Excise duty 10671 9017 75485 77108 -15.5

Customs duty 8175 7399 74455 82741 -9.5

Service tax 4414 4254 31420 39416 -3.6

Total 23260 20670 181360 199265 -11.1

Tax Times

FISCAL DEFICIT UP

BE FY 08Actuals till Dec.



Total receipts 6,17,597 3,78,954 61.40 74.90

Fiscal Deficit 1,33,287 2,18,262 163.80 51.40

Revenue deficit 55,184 1,73,830 315.50 54.90

• Revenue deficit was estimated at Rs.55,184 crores in the Budget of • 28.2.08. This has gone up by Rs.1,73,830 crores as on 31.12.08

FOREX RESERVE DIPS

• Forex reserve down by $4.5 billion to $247.6 billion

• Forex reserve had gone up to $315 billion

• The reserve was increasing since the year 2000

• Forex reserve is coming down consistently for more than 3 months

GOVT. EXPECTS JAN. EXPORTS TO FALL 22%

• December figures showed exports declining by 1.1% to $12.69 billion against 21%

growth in December 2007. Exports had shrunk 12.1% in October 2008 and 10% in

November 2008

• Exports have dipped for the first time in 7 years

• Trends of overseas shipments taking a plunge in January due to slump in demand

for Indian goods in the global market

• India may achieve $170 billion exports in the current fiscal against the target of

$200 billion

% growth in December 2007 ($) % growth in December 2008 ($)

Exports 20.85 - 1.1

Imports 24.26 8.8

FUNDS FLOW TO INDIA SHRINKS Rs.94,000 CRORE

2007-08 ($bn) 2008-09 ($bn)

Credit by commercial banks (A) 50 63.7

Flow from other major sources (B) 68.4 41.6

Public issues by non-financial entities 8.6 2.9

Gross private placements by non-finance entities 8.6 2.9

ECB 15.7 12.6

Short-term credit from abroad 10.4 8.3

FDI 4.8 3.8

Total (A+B) 124.5 105.2• External commercial borrowing (ECB) and short-term credit from abroad

contributed 8.2% in 2008-09 of the financing against 20% in 2007-08• While credit to the agriculture & service sectors have remained largely unchanged,

personal loans have declined due to falling housing loans

SUBHIKSHA – LARGE RETAILER CLOSING DOWN PART OPERATION

• Subhiksha has chain of 1600 stores

• Turnover in 2008 – Rs.2305 crores

• Total staff employed – 15,000

• 6500 stores closed down

• Due to lack of funds, may closed down half of its chain of stores

• Unable to pay rental and salaries of employees

CAPITAL MARKET

• 25% Stocks / Shares on NSE & BSE found illquid in Dec. 2008

• 9th January BSE Sensex touched 21000. Finance Minister immediately came on TV &

stated “Its my economic policies. India will not look back. We are now in double digit

Growth”.

• Bull run in an Open Economy - Capital Market may be accepted but conversion of it

into Bubble is dangerous. Bubble is to Burst, we are observing the same now. 2009

could be the worst year India has seen in decades.

SMALL INVESTORS RUBBED

• Bubble was created in Capital Market in 2007-08

• Sensex was manipulated upto 21000 from 15000

• Promoters (bogus intention) sold their stakes at higher

rates

• Promoters pledged their stakes at higher value with

banks and financial institutions and borrowed heavily

• Satyam Promoters’ stake has come down to 4% as on

7.1.2009

3 CRORE SMALL INVESTORS LOOTED

• Congress Govt. – Mr. Chidambaram pushed creation of Bubble in Share Bazar –

Capital Market

• Sensex was 21,000 – Jan 2008

• Sensex now 9,000 – Jan 2009

• Small Investors of Share Bazar, Mutual Fund, ULIP lost their savings

• 1 Crore Small Investor-Demat Accounts holders & 2 Crores Small Investors of

Mutual Funds, Unit Link Insurance Policy lost heavily.

• Rs.10,000 Invested in year 2007 has become Rs.4,900 now

DIWALI OR DIWALA

• Since Diwali (Muhurt) 2002 Sensex gone up till Diwali of 2007. At the end of Samvat

year on Diwali 2008 Sensex lost 55%, loss of Rs.35,94,012 Crore of Market Capital

Diwali Day Sensex close % change BSE mkt cap (Rs. Cr) Change

Oct 28,2008 8,510 -55 2,651,933 -3,594,012

Nov. 9, 2007 19,059 50 6,245,945 2,984,939

Oct. 21, 2006 12,709 61 3,261,006 1,208,448

Nov. 1, 2005 7,892 33 2,052,561 899,642

Nov. 12, 2004 5,954 25 1,452,919 501,102

Oct. 28, 2003 4,757 61 951,817 412,557

SMALL INVESTOR – MUTUAL FUND DISASTER

Largest Mutual Fund Companies Loss in 2008

• Franklin Templeton Mutual Fund - - 37.85%

• ICICI Prudential Mutual Fund - - 26.13%

• UTI Mutual Fund - - 19.30%

• Baroda Pioneer Mutual Fund - - 63.51%

• Sahara Mutual Fund - - 28.07%

• Taurus Mutual Fund - - 47.21%

TOP 10 PERFORMANCE

SCHEME RETURNS*(IN%)

UTI MNC -32.34

Birla Sun Life Asset Allocation -32.51

Birla Sun Life Dividend Yield -33.27

UTIDivident Yield -34.08

IDFC Imperial Equity -35.21

FT India Life State FoF -36.77

UTI Contra -37.11

DSPBR Top 100 Equity Inst. -37.21

Sahara Growth -37.48

DSPBR Top 100 Equity Reg -37.67

Source : Value research;*1 year

MUTUAL FUNDS GET POORER BY RS. 1,50,000 CRORE

• In 2008 Mutual funds became poorer by about Rs 1,50,000 crore, or about one-third

of their total size.

• The mutual fund industry in India, with nearly 36 members, was regarded as a safe

avenue of mutual gains for investors till 2007 — when their total wealth grew by more

than Rs 2,30,000 crore to Rs 5,50,000 crore.

• However, in 2008, lost Rs 1,50,000 crore, bringing its asset size to nearly Rs 4,00,000

crore.

90% IPOS TRADE BELOW ISSUE PRICE

• 38 of 42 initial public offers (IPOs) that were listed since January 2008 trading below

their issue price.

• Mumbai-based engineering and construction company Niraj Cement Structural's is the

worst performer. The stock at Rs 17.80 on the BSE, down 90.6 per cent from the issue

price of Rs 190.

• For the remaining 37 firms, 2008 has been no different. Stock of companies —

Chemcal Biotech, First Winner Industries, Tulsi Extrusions, — are down over 80 per

cent from their issue prices.

ULIP (LIC) – VALUE DEPRECIATED TO 50% IN ONE YEAR

Plan Premium

Investment

1 year ago

(in Rs.)

Value on

26.10.2008

(in Rs.)

Market Plus Annual 10,000 5818

Money Plus Annual 10,000 4743

Profit Plus Annual 10,000 4920

Defaults threaten fixed maturity plansJoydeep Ghosh & Sidhartha K / Mumbai October 8, 2008, 0:22 IST – BUSINESS STANDARD

A senior executive in the industry claimed that around 10 to 15 per cent money of the total AAUM has been invested in real estate and NBFC papers. Over the last two years, the real estate sector was offering 1-2 per cent higher yield than the market, luring many fund managers to invest almost 60 to 70 per cent of their corpus in them.In fact, for the past eight to ten months, most fund managers have stayed away from these papers. Some like UTI Mutual Fund stopped investing in them since December 2007 and Kotak Mutual Fund even declared in the offer documents of some of their FMPs that they would not have any exposure to real estate and NBFCs.Another important development in the recent months has been that all fund houses have started declaring their FMP portfolios to investors. Earlier, only a few leading funds would do so.The threat of exit of large investors accentuates the problem for FMPs as there will be pressure or withdrawal. Also, little money will trickle in from fresh investors to counter the outflows

The mutual fund industry is under pressure and not just from falling markets. Fixed maturity plans (FMPs), which have garnered Rs 102,133 crore of average assets under management (AAUM), are facing the prospect of rising defaults on their investments in real estate and non-banking financial companies (NBFCs). This implies that if there are redemption pressures from their corporate and retail clients, these FMPs would have to raise cash from other resources to meet the demand.FMPs contribute almost 19 per cent to the Rs 5.29 lakh crore average assets of the industry. Though mutual funds have turned cautious about investing in these sectors since early 2008, the fear is that the money that has already been invested could be in for some trouble in terms of payment delays.Sources said some of the leading real estate companies have defaulted on their repayments and are seeking rollovers. And though there hasn’t been any huge redemption pressure, mutual funds are gearing up for it, especially from companies that have invested in the FMPs.

According to senior banking sources, a large fund recently had to borrow on the call money market at over 20 per cent to meet redemption pressures. Last month, a medium-sized fund faced redemption pressure on its FMP from high net worth individuals, when it was declared that the company was being taken over.“When investors are willing to even shell out 2 per cent as exit load to redeem, it becomes very difficult for us,” said a fund manager. Many others have resorted to rolling over schemes to avoid paying their clients.Mutual funds, on their part, said investor wealth is not at risk at the moment.

WHAT ARE FMPs?FMPs are funds in which investors park their funds for one to six months, sometimes for more than a year. These plans invest in corporate bonds, bank deposits and commercial papers. The longer tenure is offered to take advantage of double indexation benefits.This implies that if someone invests in an FMP for 13 months, say, between March 2008 and April 2009, his capital gains will get indexation benefit for 2007-2008 and 2009-2010. So his tax liability would go down substantially. That is why retail investors prefer to invest in the longer- term FMPs. The shorter-term ones cater to the needs of corporate clients. Market experts say retail investors contribute 20 to 30 per cent of the AAUM.

“There may be isolated instances but the overall system is sound,” said the head of a fund house.Though the industry has not seen any pressure from corporate clients as of now, the head of a financial conglomerate said there have been some withdrawals by companies in the last few weeks to meet their immediate liquidity needs. Over the last fortnight, the liquidity in the market has been tight as companies had to pay advance tax and there were large borrowings by cash-strapped oil and fertiliser companies. As a result, banks borrowed heavily from RBI and call rates touched 17 per cent.

TATA STEEL – STEEP DOWN

Quarter ending Total Revenue

(Rs.Cr.)

Profit

(Rs.Cr.)

30.6.08 6,177 1,488

30.9.08 7,089 1,787

31.12.08 4,735 466

• Revenue & profit of Tata Steel goes up and up till Diwali of 2008

• Steep down slide since Diwali 2008 may be observed

• Turnover and profit of Tata Steel for the Quarter ended 30th June 2008 was Rs.6,177 crores

and Rs.1,488 crores respectively.

• The same went up by 75% for the Quarter ended 30th Sept. 2008

• Steep downfall observed in 3 months ended 31st Dec. 2008. Profit down by 80%, turnover

down by 40%

TATA MOTORS DOWN DOWN

Quarter ending Total Revenue

(Rs.Cr.)

Profit

(Rs.Cr.)

30.12.07 7,251.8 499.0

30.6.08 6,928.4 326.1

30.9.08 7,078.8 346.9

31.12.08 4,758.6 - 263.2 (loss)

• Revenue of Tata Motors has come down to Rs.4758 crores in the Quarter ended

31.12.08 from the previous Quarter of Rs.7078 crores

• In just 3 months, the Profit of Rs.346 crores has turned into loss of Rs.263 crores

QUARTERLY RESULTS

Dec ’07 Mar ’08 Jun ’08 Sep ’08 Dec ’08

Sales Turnover

7,251.83 8,749.52 6,928.44 7,078.85 4,758.62

Other Income

91.81 234.34 315.61 429.28 99.51

Gross Profit 924.38 890.16 838.14 994.18 -49.08

Profit Before Tax

665.10 698.05 345.09 358.01 -419.15

Net Profit 499.05 536.27 326.11 346.99 -263.26

QUARTERLY RESULT OF 31.12.2008DOWN! DOWN! DOWN!

Company Down by

Videocon Industries 76%

M&M 93%

DLF 67%

Parsvnath 95%

Unitech 74%

• Experts feel these results also do not reflect the correct status of the company

• Window dressing is adopted to show less loss/downfall

• Sales to subsidiaries form bigger part of the above

NOIDA

• Automobile, BPO, Automobile ancillaries worst affected

• Large companies production down by 25% to 60%

• 40% of Small Scale units affected

• 1 lac casual contract, construction workers affected

• BPO sector facing

• Noida & Gurgaon heavily affected

• Construction work is at halt since Feb. 2008

HYDERABAD

• IT, KPO, BPO, Automobile, construction industry worst affected

• The above industries growing upward continuously since the year 2000/01

• 1 lac labour affected

• Large industries, particularly Automobile functioning at 50% level

• Small scale units production down by 40 to 50%

• Default started in loans repayment

STORIES OF SOME OF THOSE AFFECTED BY THE RECESSION IN THE JOB MARKET

• ASHOK JAISWAL, 30 Company: GlobalLogic Position: Software engineer Salary: Rs 18

lakh p.a. The week couldn’t have started on a worse note for Ashok Jaiswal, an

employee of the Noida-based Itcompany who was summoned by his employer only to

be told that he was among the 17 employees who were being “laid off”.

• AYUSH JAIN, 30 Company: Kotak Mahindra Position: Trainee (wealth management)

Salary: Rs 15,000 and above Family: Seven members. This business administration

graduate from University of Indiana, US, thought he was one of the luckiest guys to

have returned to India and clinched an offer from a leading bank. Not any longer. He

was told resign on October 31, with three others.“It was a rude shattering of a dream,”

says Ayush. “Buoyed by the increasing presence of high networth individuals in India,I

was looking forward to a career in this lucrative line. ”Within 3 month of working,the

ominous signs made their telltale presence felt.

Courtesy: India Today

STORIES OF SOME OF THOSE AFFECTED BY THE RECESSION IN THE JOB MARKET.

• Sunil Jain, Proprietor/Exporter IC Textiles- 1100 workers sacked

• It was a 100 per cent export oriented unit with a turnover of Rs 120 crore. Last

November unit shut down. 1100 workers retrenched.

• Ashok Leyland has decided to moderate the production plan for the next two months.

Ashok Leyland's manufacturing plants, worked 3 days a week, till December 08.

• S.P. Oswal, chairman, Vardhman Group, Ludhiana-based Rs 3000-crore textile giant

says ‘ The textile industry is definitely hit by detrimental effect of slowdown. More so,

because exports form 40 per cent of India's 55 billion dollar textile industry.

• Never before in my 42 years in textile industry did I ever have to shut down our

capacity because of a lack of orders.

Courtesy: India Today

Some top Indian information technology (IT) firms such as Tata Consultancy Services (TCS), Satyam Computer and Polaris could feel the heat if Citigroup decides to sell part of its business or look for partners to tide over its losses. Analysts feel TCS’ revenue might have an impact as Citi has signed an assured revenue agreement of $2.5 billion (Rs 12,500 crore) for a period of over nine years. This was the part of the $505 million acquisition of Citigroup Global Services (CGSL) — the business process outsourcing (BPO) arm of Citigroup — by TCS a few months back. When contacted, a TCS spokesperson said, “TCS announced its intention to acquire Citigroup Global Services in October and the transaction is proceeding as per the terms of the agreement in a planned manner.

Our agreement with Citigroup adequately addresses our interests in case of a sale or merger of the bank.” However, analysts are not convinced. Citi is a $300 million account for TCS. With the acquisition of CGSL, Citi not only catapults itself as the largest client for the IT giant but also means an account size of half abillion. Experts point out that Citi would easily account for around 5-6 per cent of the IT giant’s revenue. “Whenever the ownership of a company changes, all the contracts and deals come under the review of the new owner. So,

in case Citi has a change of owners, we assume even the $2.5 billion contract will also come under review. It’s too early to predict anything. But there are chances of price negotiations,” said another deal tracker. Analysts said they are hoping that TCS has made no upfront payment. “However, we think TCS would have structured the deal accordingly and would have built such a scenario into the contract,” they said. TCS is not the only IT firm. Satyam, India’s fourth largest IT firm might also be impacted as Citi is part of its top 10 clients.

Polaris is another firm that may be in a spot if Citi sells some of its business units. “Citi does source some work to Polaris as well. But the biggest impact would be if Citi sells its stake in Polaris, which is over 40 per cent,” said an analyst. Citigroup holds 22.88 per cent in Chennai-based Polaris and an additional 20.45 per cent through its wholly-owned subsidiary, Orbitech. The rumours on Citigroup led to changes in share prices of the Indian IT companies in different ways. While the TCS stock price went up by 7.8 per cent to close at Rs 506 on Friday, Satyam was up 3.08 per cent. However, Polaris was down by 0.52 per cent on buzz that Citi might sell its stake in the company. TCS, Satyam and Polaris are likely to be impacted by the change of fortunes of Citigroup

“1 CRORE JOB LOSS IN 2009”

• Horrible downslide in Textile Jwellery exports

• Industries Association & Govt. Official wories 1 Cr Job loss

• Exports orders dying up

• Exporter says no order beyond January 2009

• Labur intensive industry affected

• Export down by 54% in Oct – Dec 2008

ECONOMIC CRISIS – AFFECTED FROM BIG TO SMALL MAN

Chaos started from the Capital Market, then Real Estate, Automobile, luxury segments, has gone up to the Smallest person. More than 1 crore lost jobs.

Industry Job loss (in lacs)

Construction workers 10

Small scale industries/workshops 25

Labour-oriented export 25

Service sector, financial services, large retailers, hospitality, tourism, transport

20

Contract/casual workers of big industries 10

Job loss/partial loss/income loss to tempo, autoriskshaw, tea vendors, hamals, etc.

25

Total job loss/income loss in all 1.15 crore


Reasons for growth ofRetail Banking in India

1. Introduction of Technology2. Increased competition among Banks3. Opening of New Gen’ of Private Banks4. Inviting of more Foreign Banks after WTO5. Focus on Productivity and Profitability6. Deregulation of Interest Rates7. Absence of Directed Lending


Reasons for Retail Banking … 8.Drive to bring down Non Performing Assets 9.Tilt towards consumer and life style spending10.Innovation of new products and services11.Implementation of Pru-Norms, ALM, RM12.Closure / Re-locating of Loss-making brs13.VRS of surplus staff – and Sales orientation 14.Corporates sourcing funds from non-Banking


Reasons for Retail Banking … 15. Revival of Mutual Fund Market16. Revitalising of Stock Market17. Increase in Life Expectancy - health care18. Increasing contribution to GDP from Services

Sector19. Change in Govt policy of FDI in Banking20. Thrust on Infrastructure Dev’ment by GOI21. Opening up of Insurance Sector


Personal Loans : Growth in 5 years (A/cs in

Mns and Amt is Rs ‘000s Crs : CMIE Data)

Details

A/cs Mar 1997

Amt o/s Mar 1997

A/cs

Mar 2002

Amt o/s Mar 2002

Total Loans

55.6 284.4 56.4 656.0

P Ls 11.4 28.0 17.6 82.5

Cons Ln 0.8 0.9 1.2 3.2

Hsg Lns 1.0 7.9 1.8 32.8

Others 9.6 19.2 14.6 46.5


Retail Portfolio Status as on 31st March 2004 (RBI Data)

S

No

Retail Loan Particulars

Amt o/s in Rs Crs

% Gross NPAs

% Net NPAs

1 Housing Loans 89,449 1.9 1.4

2 Consumer Loans 6,256 6.6 4.0

3 Credit Card dues 6,167 6.3 2.4

4 Other Per Loans 87,170 2.6 1.6

5 Total Retail Loans 1,89,041 2.5 1.6

6 Total Loans 8,59,092 7.4 2.8


Retail lending takes the lead !(Ref: IIBF News dt Nov 30, 2004)

Adv’s (Rs Cr) Variation 2003-04 Variation ‘02-03

Retail Loans 41,811 26,188 of which Housing 15,394 12,308

Cons Durables 1,055 -111

NBFCs 2,675 4,399

Shares, Bonds.. 19 242

Real Estate .. -317 502

Other Personal 7,260 2,687

Against FDs 3,638 1,458

Tourism 841 266


Retail Portfolio of Banks(Amt in Rs Crs) – T&P OF BKG IN INDIA 2005

S No

Item March 2004

March 2005

%Vari-

ation

01 Housing Loans 89,449 1,34,653 50.5

02 Consumer Loans 6,256 3,810 -39.1

03 Credit Card Dues 6,167 8,405 36.3

04 Other Per. Loans 87,170 1,20,120 37.8

05 Total Retail Lns 1,89,041 2,66,988 41.2

06 Total Loans 8,64,271 11,05,725 27.9

07 % of (5) out of (6) 21.9 24.1


Personal Loans : Rs in Crs

Particulars Oct 2006 Dec 2006 May 2007

Retail Loans

3,98,055 4,27,909 4,55,439

Housing 2,09,468 2,17,829 2,30,751

Agst FDs 33,744 35,764 39,092

Cr Cards 11,870 11,913 14,221

Education 12,692 13,399 15,438

Con Dur’ble 9,291 8,558 8,831

Others 1,20,990 1,40446 1,47,106


Share of Select Instruments in Financial Savings (Source: RBI)

Instruments 2005-06 2006-07

Currency 8.7 8.6

Bank Deposits 46.2 55.7

Equities / Debentures 1.3 1.4

Mutual Funds 3.6 4.8

Small Savings 12.2 4.9

Life Insurance 13.4 14.6

PF & Pension Funds 10.5 9.2


And now,

• Credit Cards• Mutual Funds• Sale of Gold• Home Equity Loans• Reverse Mortgage Loans• Insurance Products• Micro Finance• Finance to SMEs

• Payment of Utility Bills• Auto-Sweep• Rail Ticket Reservations• ECS, EFT, ATMs• Core Banking Facility• Demat Accounts• Internet Banking• Mobile/SMS Banking• Wealth Management


Retail Portfolio of Banks(Amt in Rs Crs) – T&P OF BKG IN INDIA 2008

S No

Item March 2007 March 2008 %Var’n

01 Housing Loans 2,24,481 2,52,932 12.7

02 Consumer Loans 7,296 4,802 -34.2

03 Credit Card Dues 18,317 27,437 49.8

04

05

Auto Loans

Other Per. Loans

82,562

1,55,204

87,998

1,97,879

6.6

27.5

06 Total Retail Loans 4,87,860 5,71,048 17.1

07 Total Loans 18,93,775 23,32,490 23.2

08 % of (6) out of (7) 25.8 24.5

No revival in Credit demand (BS 8/8/2009)

Bank credit grew at unprecedented rates during the 5 years upto 2008

So also India’s GDPOverall credit grew at 27 per cent

Retail advances grew at 32 per centCredit growth declines in 2009 : 18%Expected to grow at 12-14% in 2010

(CRISIL)


Retail Business Downtrend in Q1 of 2009 : BL dt August 09, 2009 (Rs Cr)Some Public Sector Banks Profit from

Retail : 1,039Total Profits :

Rs. 10,5401. State Bank of India - 1,034 4,116

2. Punjab National Bank 701 1,740

3. Bank of Baroda 198 1,520

4. Canara Bank 372 1,001

5. Bank of India 215 870

6. Union Bank7. IDBI Bank

27042

597196

8. Corporation Bank 275 500MIM FinFest 2009 86Global Meltdown n Retail Banking

Some Private Sector Banks

Private Sector Banks Retail Profit / Loss- Rs in Crores

Total Profit / Loss- Rs in Crores

ICICI BANK -437 1,205

HDFC BANK 144 860

AXIS BANK -49 861

KOTAK BANK -19 127

TOTAL -361 3,053


Retail Segment share in profits slips to 10% for top 8 Banks

• SBI, the leader posted highest – loss in Retail• Profits from retail down from 69% last year• Profits recorded from treasury and corporate• Both SBI and ICICI recorded losses in retail• Retail depositors paid high interest rates• Defaults in retail portfolio loans increasing• Lending avenues in corporate & retail slipping• Substantial drop in fee income in distributionMIM FinFest 2009 Global Meltdown n Retail Banking 88

BS 8/8/2009 contd………CRISIL

• Sharp decline expected in retail advances• Growth in retail credit slowed sharply to

around 4 per cent in 2008-09 from a peak of 42 per cent in 2004-05

• Expected to revive, marginally, to 8 per cent in 2009-10 and to 13 per cent in 2010-11

• Housing Loans, Auto Loans – weak demand• Sharp raise in delinquencies and recovery…


Thanks for your attention

Questions Please?

Prof Chowdari PrasadTAPMI, Manipal

Off: 0820-2701045Mobile: 09242124642

Email: [email protected] FinFest 2009 Global Meltdown n Retail Banking 90

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