the financial march 2013
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THE FINANCIAL
Cover Story
Banking Amendment Bill
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Senior Team
Komal Poddar
Achal Mittal
Dear Readers,
There is always light at the end of the tunnel and when we talk about the light of
knowledge or enlightenment per se, even ‗the west‘ looks up to ‗the east‘. No
matter how tall the western financial institutions (FIs) stood, their foundation was
always prone to damage. The domino effect that took place in the global economy
amidst the recession of 2008 and Euro crisis made sure that few players who were
‗too big to fail or fall‘ also collapsed. But, in the East, particularly India, things
were well grounded, thanks to conservative yet slowly progressive central bank
policies. The cover story of our magazine talks about such a case in point, ―The
Banking Amendment Bill‖ which looks like a new life in the dark age of global
gloom.
‗The Financial‘ on a similar note is happy to be continuously enlightened by the
hundreds of ignited minds across the Indian B-schools. It has received an over-
whelming response this time. We are happy to bring to you, with this issue, a
magazine with several new sections that will grow into a repository of original
content and opinion from the Finance Cell at NMIMS.
In this issue, we have delved into the viewpoints on ‗The Banking Amendment
Bill‘. The perspectives put forward by the budding managers from across the B-
schools are sure to give a new dimension and importance to this issue. We have
also tried to enlighten the readers about how social media can have an impact on
the future and many other novel thoughts and ideas.
The process of evolution of ‗The Financial‘ will see a deliberate attempt from Fi-
nomenon, to involve the readers as much as possible. The aim this time is not to
have an article end with its last word in the magazine but to take it beyond
through comments and discussions. Feel free to contact the writers of each article
and discuss their views or to even dispute them! As always, I hope you enjoy this
issue! Let us know how you feel about the content. Criticisms, suggestions, re-
quests, and jokes, they are all more than welcome.
We thank one and all for their valuable contributions to this magazine and hope
you enjoy the articles. ‗The Financial‘ is an interactive magazine and, beyond just
a magazine, a two-way interactive channel. As we exchange ideas, we will evolve
and grow to greater heights.
So until we meet again next time and while you wait to see what is in store for the
next issue, take care and enjoy reading!
Komal Poddar
FROM THE EDITOR’S DESK The Financial
March 2013
Finomenon
NMIMS Mumbai
All design and artwork are
copyright works of Finomenon
NMIMS Mumbai
Creative, Design & Content
Prakash Nishtala
Srijan Srivastava
Akshay Goyal
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Cover Story: Banking Amendment Bill:Cover Story: Banking Amendment Bill:Cover Story: Banking Amendment Bill: A new life in the dark ageA new life in the dark ageA new life in the dark age
1
Is silver a better investment than gold?Is silver a better investment than gold?Is silver a better investment than gold? 3
Aadhar and Financial InclusionAadhar and Financial InclusionAadhar and Financial Inclusion 6
Expert Speak: Indian Banking Industry: What Lies Expert Speak: Indian Banking Industry: What Lies Expert Speak: Indian Banking Industry: What Lies Ahead?Ahead?Ahead?
9
New Licenses in BankingNew Licenses in BankingNew Licenses in Banking––– A leap of faith towards A leap of faith towards A leap of faith towards 11
Financial Inclusion: Rural India’s Path to SuccessFinancial Inclusion: Rural India’s Path to SuccessFinancial Inclusion: Rural India’s Path to Success 14
FinKnowledge: Making of Indian Union budgetFinKnowledge: Making of Indian Union budgetFinKnowledge: Making of Indian Union budget 17
Is New Banking Licenses by RBI a good idea?Is New Banking Licenses by RBI a good idea?Is New Banking Licenses by RBI a good idea? 20
IFRS: A Global Language for Business Affairs IFRS: A Global Language for Business Affairs IFRS: A Global Language for Business Affairs 23
FinFun: The Month in Images and WordsFinFun: The Month in Images and WordsFinFun: The Month in Images and Words 26
New Licenses in Banking Sector: An urgent neces-New Licenses in Banking Sector: An urgent neces-New Licenses in Banking Sector: An urgent neces-sity for financial inclusionsity for financial inclusionsity for financial inclusion
28
Corporate Debt Restructuring: Boon Acidified to Corporate Debt Restructuring: Boon Acidified to Corporate Debt Restructuring: Boon Acidified to BaneBaneBane 30
We Care We Care We Care –––2013:2013:2013: A civic engagement internship projectA civic engagement internship projectA civic engagement internship project
34
Banking and Social MediaBanking and Social MediaBanking and Social Media 35
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Akshay Goyal is a 1st
year MBA student at
NMIMS. He has an
e n g i n e e r i n g
background and
loves to write and
sketch in his free
time.
Email ID:
akshaygoyalonline@
gmail.com
BY AKSHAY GOYAL, NMIMS MUMBAI
Indian Banking Sector has been
flourishing post independence of
India. A numerous changes in the
regulations and functioning of the
banks have been brought over the
years in order to adapt to the
changing needs of the growing In-
dian Economy. Still the sector is
plagued with its own set of prob-
lems. The Banking Laws Amend-
ment Bill 2011 which was passed
by both the Houses of the Parlia-
ment during its Winter Session of
the year 2012 seek to address these
problems. The amendments were
made in the Banking Regulation
Act, 1949 and the Banking Compa-
nies (Acquisition and Transfer of
Undertakings) Act, 1970/1980.
The major areas where the Bill fo-
cuses on are:
RBI Gets More Powers
The amendment has accorded far
reaching powers to the regulator.
The Banker‘s Bank (RBI) now has
the power to supersede the boards
of banks. The RBI can now over-
take the entire board which is a ma-
jor change when compared to the
past. Earlier, the RBI had power to
remove only a director or officers
of Banking Company and not the
entire board.
Now the RBI also has the power to
inspect the books of accounts of
associates including the holding
company, joint venture, subsidiary
company, an enterprise that con-
trols the composition of the board
of directors or other bodies govern-
ing the banking company and enti-
ties that would be benefitted from
the banking company.
There has been a considerable in-
crease in terms of monetary penal-
ties that RBI can impose on banks
for violation of RBI rules and di-
rectives.
A stricter approach has been
adopted because the issue of new
banking licenses necessitates the
need of greater regulatory control.
Raise in the Voting Rights Banks
The Bill has raised the voting rights
of the shareholders from 1% to
10% for public sector bankers and
from 10% to 26% for private
banks. The bill has also increased
the authorized capital of the banks
from Rs 1500 crore to Rs 3000
crore. All this has paved way for
investors to invest more in both
public sector and private sector
banks. At the same time it has in-
creased the say of promoters who
now will have greater influence on
the decision of the management.
This may be harmful in certain
situations where the promoters only
seek the welfare of the banking
company and may forget about the
economic welfare of the country.
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This is where stricter regulatory norms will come to
force.
Issue of Bonus Shares
The Bill provides provisions for public sector banks
to issue rights shares and bonus shares. They can
even split the shares into lower denomination which
facilitates the trading of their shares. This is good
news for public sector banks and their shareholders
as till now only private sector banks have been giv-
ing away free shares to their shareholders as bonus
shares. Public sector banks, in spite of holding huge
reserves, could not issue bonus shares so far because
the enactments through which they were national-
ized provided no provisions to issue bonus shares.
State Bank of India (SBI), which is the biggest bank
in the country, has the largest free reserves which are
nearly 125 times its paid up capital. The free re-
serves of SBI is Rs.83,280 crore against its paid up
capital of Rs.671 crore. If SBI issues bonus shares,
the stock market will be bullish, which has till now
given a low valuation for all public sector banks as
the public sector banks have been unfriendly to the
investors till now? Now the bill has cleared the way
for them to issue bonus shares, the government
should promote banks with substantial reserves to
issue bonus shares. The government will also be
benefited immensely from such a move as it has a
majority holding in all the public sector banks. It
will also help banks to raise fresh capital easily from
the market and will therefore help them in meeting
their capital adequacy requirements prescribed under
Basel III norms.
Foreign Banks
Earlier the foreign banks had to pay 20-30% tax as
capital gains and stamp duty when they transferred
their branches to a new legal entity.
But the Bill allows foreign banks to transfer share-
holding to a holding company or to convert their In-
dian operations into a wholly owned subsidiaries
without the need to pay the stamp duty. This move
will be helpful for the foreign banks who are seeking
a larger role have a freedom to expand their
branches and operations.
Conclusion
The Finance Minister of India Mr. P Chidambaram
said, ―We need 2-3 world-sized banks. China has
three among the world's top 20. We have none. We
need more banks". He was quoting the need of a
growing economy like India. India is seen as the
next superpower along with China. But for that, we
need a sound and robust finance sector that can pro-
vide a conducive environment for growth.
The Banking Laws Amendment Bill 2011 is seen as
a major step in that direction. It paves the way for
banks to grow into large organizations and increase
capitalization. The major impact that the Bill has
been successful in bringing is in terms of the power
granted to RBI. By giving RBI the power to super-
sede the boards of banks and inspect the books of all
the related entities, it has cleared the way for RBI to
issue new licenses. Till now RBI has been apprehen-
sive in issuance of new licenses fearing a misuse of
it by the new banks.
We will now see more banks competing in the bank-
ing space. This will bring new financial products and
advanced technology. All this will lead to a healthy
competition. Retail customer will benefit to a great
extent because of the deeper penetration of banking
services. They will have a variety of options both for
deposit and credit products. Financial Inclusion,
which has been the focus area of the RBI as well as
the government, is certainly going to gather pace
with new entrants in the banking space.
Overall the Bill provides a strong platform using
which the Indian Banking Sector can reach new
heights and compete with the big names at the global
level. It provides an enabling environment for the
banking sector to grow and also the Indian Economy
to flourish.
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BY RADHIKA BHATTER & L R KRISHNAN, MDI GURGAON
If all that glitters is not gold, it
might well be Silver. While
Gold has dominated the metal mar-
ket in terms of demand, supplies
and returns for many years, it
seems it is high time one starts
looking for an alternative invest-
ment. Gold, for ages, has been an
investment to hedge against eco-
nomic, political, or currency crisis.
One is astonished to hear and see
the fabulous returns that gold
promises its investors, but one
should also know that for many
years, Silver has outperformed gold
in terms of returns and volatility.
Investments in precious metals like
gold, silver, platinum, palladium
etc are made in one of two ways-
either people buy such metals
physically and store them or they
buy them as stock, the value of
which changes in tandem with that
of the precious metal. There are
also several advantages of invest-
ing in precious metals. Firstly, be-
ing a physical commodity, the in-
vestor actually owns a piece of the
precious metal rather than a share
or stock which is just a sheet of pa-
per. Secondly, there is always scar-
city of precious metals in the world
which increases their value.
Thirdly, over the years, it has been
observed that the movement of
prices of precious metals is the op-
posite of the movement of the
economy. It has been seen that a
large increase in gold prices came
at a time of great economic un-
certainty.
The various instruments used as
investment vehicles for precious
metals include - bullion bars which
can be exchanged over the counter
at major banks, coins and rounds,
exchange traded products, certifi-
cates of ownership, accounts where
the metal can be held as currency,
derivatives, mining companies.
Gold has certain features which are
unbeatable in an investor‘s per-
spective. In India, Gold is some-
thing which every family buys be-
cause of the attraction for this
metal. On any special occasion/
festival, gold is the common man‘s
choice. While not more than 40%
of the middle class is capable of
affording the currently priced gold,
it is hard to believe that the demand
for the yellow metal has been rising
for a decade now. The gold market
is also subject to speculations just
like any other market. The history
of gold, the role of gold reserves of
country, gold's low correlation with
other commodities, and its pricing
in relation to currencies even dur-
ing the 2008 global financial crisis,
suggest that gold is more like
a currency than a commodity.
On the other hand, silver has
emerged as the so-called ―poor
man‘s gold‖ and brings with it
some properties that gold possesses
3
Radhika Bhatter is
currently a student at MDI Gurgaon pursuing
Post graduate
programme in
Management (2012-14
batch). She completed
her BSc (Hons) Economics from St.
Xavier’s College
(Autonomous), Kolkata
in 2011.
E-mail:
pg12radhika_b@mandevi
L R Krishnan is
currently a student at
MDI Gurgaon pursuing
Post graduate
programme in
Management (2012-14
batch). He has done MSc (Hons) in
Mathematics from BITS,
Pilani. He has 8 months of work experience in
the IT industry.
E-mail:
pg12lr_krishnan@mande
vian.com
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it is precious, malleable, lustrous, resilient and
rare. While silver‘s existence in the market de-
pends on the same factors as gold, one has to un-
derstand a few dif-
ferences between
trading of gold and
silver in the market
– Firstly, silver
market is only a
fraction of the size
of gold market
(Demand for silver
= $31 billion vs De-
mand for gold =
$222 billion as per
2011). Secondly,
silver is driven more by industrial demand (10%
in case of gold vs 46% in case of silver). Thirdly,
silver prices are highly volatile making it a high
risk, high return commodity.
The third reason, although,
can be derived directly from
the first two, it severely im-
pacts the sentiments of an
investor. As silver, the com-
modities‘ impact is short-
lived because of perception
of investors about gold com-
pared to silver.
Price of gold and silver are sub-
ject to certain factors – demand
and supply, practical significance
of the metal and substitute to
currency. The price of any material is determined by
the movements in its supply and demand. For in-
stance, the reserves of gold have increased 700%
from 1 billion ounces in 1950 to 7 billion ounces in
2010. On the other hand, silver reserves showed an
opposite trend as they fell 95% from 10 billion
ounces in 1950 to 500 million ounces in 2010. The
reason for this is that gold is generally stored in the
form of bars or jewellery which is recycled and
hardly ever lost in the process. However, silver has
several applications in industry where it is used in
the form of thin parts which get lost and therefore,
can never be reused.
The practical use of gold
and silver differ signifi-
cantly. On the one hand,
gold is traditionally seen
as a preferred metal for
jewellery which does not
have much utility apart
from a few places. Con-
versely, silver has more
industrial usage than any
other precious metal. A
report by Hinde Capital
states, ―It‟s the best con-
ductor of both heat and electricity, the most reflec-
tive, and second-most ductile and malleable element,
after gold. The white metal is also being put to sev-
eral new uses like-water purification,
air-handling systems and a natural
biocide.‖ This extensive use increases
the demand for silver substantially.
From the above two factors determin-
ing price of gold vs silver, it is evident
that the demand for gold arises out of
purely sentimental reasons while the
growth in demand for silver is created
by strong fundamentals. Thus, we can
conclude that while the ever increas-
ing demand for gold might remain
buoyant, the demand for the white
metal will see a phenomenal spurt with increasing
applications and no foreseeable substitute in sight.
Precious metals have a unique property of acting as
a substitute to currency as they can be held as physi-
cal assets in the most tangible form. Particularly, in
times of uncertainty and economic crisis it is seen as
the safest investment to make.
While gold as an investment has leveraged its posi-
tives for many years, lately it has succumbed to cer-
tain challenges, both intrinsic to the metal as well as
external, from the market. Firstly, it is the purity of
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gold that is questioned before investing. The gold
market has various grades of purity and associates
different prices to each kind. If one is not cautious,
one ends up paying more than it is worth. Secondly,
it faces the threat of authenticity of dealers who deal
in gold buying and selling. Random selection of gold
dealers might lead you to one of the biggest mistakes
of your life. While these two challenges are specific
to gold, a major challenge posed by the market to an
investor is to time the investment appropriately.
While gold prices are constantly increasing and mar-
ket sentiments changing almost every day, one
should time his investment in such a way that one
invests in gold to leverage a major hike.
Recently, in the fourth quarter of 2012, gold prices
declined in major curren-
cies – Dollar, Euro, Chi-
nese Yuan and Rupee.
Across all currencies,
gold fell by 6.2% in that
quarter. Volatility of gold
and transactions have
touched their decade‘s
low in the last quarter.
According to World Gold
Council, market players
have been active under
selling pressure during
this period. About the
effect of a loose mone-
tary policy, WGC said
―The combined efforts of
the Fed, European Central Bank (ECB) and Bank of
Japan (BOJ) to underwrite markets with promises of
unlimited monetary support served to quell nervous-
ness, as did the results of the US elections‖. The re-
cent observation in the equity market is that inves-
tors are pouring money into risky assets, which is
seen as a disadvantage for gold. A report by WGC
states that general risk aversion is not necessarily
characterised by prudent risk managing tactics. It
also foresees an opportunity for gold to play a larger
role of being a valued commodity in this period of
reduced exposure.
If an investor looks for an alternative investment to
gold, he would be glad to notice the 300% returns
that silver has produced in a span of 3 years (2008-
11) – a fact that has gone almost unnoticed. The fact
that investor‘s focus has not completely shifted from
gold severely impacts silver‘s price volatility. Add-
ing fuel to the debate is the consistent double-digit
returns given by silver in 7 out of the last 10 years.
A rough calculation shows that if one had invested
in silver in 2005, he would have got a 500% return
on his investment today.
In the US, Silver has acted as a perfect hedge to the
falling currency, showing a -0.79 correlation (over a
period of 10 years from 2003-13) to US dollar. Al-
though silver‘s prices have shown high levels of
volatility, it has fared well in comparison to the gen-
eral market volatility. It has
shown a 0.1 magnitude corre-
lation to the general volatility
index while S&P 500 has
shown a negative correlation
of -0.49 with respect to the
same index. Currently, the
price of silver is determined
majorly by industrial demand,
where it is almost irreplace-
able.
As an investor if one looks for
a sustainable investment port-
folio, one would realize the
importance of hedging risk
against equity instruments by investing in metals
like gold and silver. Studying the phenomenon
deeper, one would realize that the growth opportu-
nity and market size that silver can capture is huge
compared to gold. Agreeing to what Warren Buffett
had to say about gold, it has already run its course
while a similar course is just beginning for silver.
Therefore, a reasonable investor would choose to go
with the one with strong fundamentals rather than
being driven by sentiments.
5
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Nitin Singh, first year
student of MBA Finance at
Symbiosis Institute of
Management Studies,
Pune. Had work
experience of two years
in Java at Tata
Consultancy Services,
New Delhi. Done
graduation, BE in
Electronics &
Telecommunication from
Army Institute of
Technology, Pune.
Email id-
BY NITIN SINGH, SIBM PUNE
The much sought after and of
course coveted goal of financial
inclusion is the silver bullet for
lurking sustainable growth. Yawn-
ing divide between rural and urban
is spooking our growth. Disparity
of financial and even basic banking
services is a major stumbling block
in the path of nation‘s prosperity.
With the rapid advancement of ur-
banization making inroads into the
rural hinterlands, it is imperative
that people inhabited there need
greater access to banking facilities.
With the 72% population nesting in
rural India, ignorance or turning a
deaf ear would be fatal for econ-
omy as well. Penetration of urbani-
zation is quite evident and growth
in urbanization in this fiscal year
was pegged at a whopping 32%.
Commiserate to that, financial in-
clusion has become a major pana-
cea for economy. As 60% of our
GDP contribution is from rural and
s m a l l
t o w n s .
But stark
reality is
that only
47% of
our popu-
lation is
s t i l l
banked!!
A l a s ,
looking at the gloomy and poor
global economic scenario, it is in-
dispensable that we must spur our
internal market. If we can recuper-
ate our botched domestic mar-
ket, there would be an in-
creased demand and supply. It will
give boost to market sentiments
and investments too.
Amalgamation of Aadhar and Fi-
nancial Inclusion
Aadhar is touted to be an elixir for
Direct Cash Transfer Scheme. With
burgeoning fiscal deficit, it was
inevitable to rein in mounting sub-
sidies. Subsidies in cooking fuel,
fertiliser, food etc, given to BPL
families is the major reason for
skewed fiscal deficit. Vicariously,
Aadhar was chosen to accomplish
the task cut out. Definitely, Aadhar
has its pros that will cut down on
middlemen, leakages and evasion
of subsidies.
According to Aadhar project, eligi-
ble people must have bank ac-
counts. Cash in place of subsidies
would be transferred directly to
their respective accounts. But here
comes a grave idiosyncrasy. Pau-
city of banking facilities becomes
the moot point. Now to tide over
this intricate issue, people must
have bank accounts with them.
Though, it is a daunting task for
government to facilitate banking
facilities in each and every nook
and cranny of vast nation. But due
to the exigency associated with it
and it is the only option available
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with government to exercise. Therefore, Aadhar and
financial inclusion must be on the same page to
stave off bungled economy.
There are some systemic flaws
which dither integration of Aad-
har and financial inclusion.
However, government has tried
to roll out Aadhar project in a
phased manner. But at the speed
with which project is carried out
is not adequate. Issues in bio-
metric identification and data-
bases are also impeding speed
of project. Lack of skilled la-
bour is another issue.
However, it will smooth process of documentation
in account opening. Banks can verify Aadhar cards
for identification purpose. That means, Aadhar will
buttress financial inclusion in this way also.
But the issue of paramount importance is of cost in-
curred to government on
this project. Executing such
a humongous project cov-
ering mammoth population
is challenging. It is evident
that expenditure involved
in it is astronomical. Apart
from that the project needs
a good amount of time too.
Due to dearth of skilled
labour which can work in
remote areas, drift is ob-
served in project.
Financial Inclusion – A buzzword
In every national daily, it is seen that financial inclu-
sion is making to the headlines. Gradually, financial
inclusion is gaining traction. In various quarters of
media, this has become buzz now. Many multina-
tional organizations and banks are conducting vari-
ous multifaceted programmes and drive to rev up
inclusion.
RBI has taken some measures to promote financial
inclusion. But as inclusion
does not come into the core
business of banks, they are
turning Nelson‘s eye to it.
Taking all these intricacies
into consideration, it is os-
tensible that inclusion is a
Herculean task for govern-
ment.
But as around every bevy
of dark clouds there is a
silver lining. Hence finan-
cial inclusion can see the light of the day if consoli-
dated and integrated efforts are poured in. Recent
upturn in banking licences can alleviate the situa-
tion. So far efforts taken by RBI have come a crop-
per. With uptick in more banks operating in our na-
tion, there would be more penetration of banking
access to people yet re-
mained oblivious. Thus,
there is a golden opportu-
nity for RBI to introduce
more effective and benefi-
cial requisites mandated to
banks for licences.
In this era of cut throat
competition, every finan-
cial institution or bank vie
for marginal market shares
as these tad shares can
prove to be cliff-hangers. To extract every possible
profit out of populace, organizations cannot afford to
expend their resources on noncore businesses, where
probability of being a leader in the pack is diminu-
tive. So, drawing their attention to inclusion is an
arduous task. What our government can leverage is
that it must incentivize the inclusion process in a
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manner so that people and bank involved are benefit-
ted. Banking Correspondents involved are reluctant
to work into rural areas.
Aadhar can go haywire
Infrastructure needed to accomplish Aadhar project
is gargantuan. Especially in remote rural areas set-
ting up workshops for Aadhar is laborious and costly
too. Duplication of data stored in National popula-
tion register is another stubborn issue. Technology
related issues can emerge anytime like integration of
banking details and biometric data. If tardy progress
of Aadhar project is not monitored continuously then
it can gather dust by being just a run of the mill pro-
ject by government. GOI must demarcate a dedi-
cated ministry to keep a tab on Aadhar project. GOI
can incentivize people who come for Aadhar regis-
tration. That will refurbish mental predilection of
people too.
In a nutshell
Firstly, financial inclusion and Aadhar project must
be integrated swiftly to plug any possible loopholes.
In a nutshell, I can say that looking at current pros-
pects if intricacies are not weeded out from system
in time then situation can worsen.
The mission would be completed only if imperfec-
tions are regularly revamped in time. For this to hap-
pen, coordinated efforts of both GOI and RBI are
most important. Though, financial inclusion is a gi-
gantic and Herculean task. GOI and RBI have their
task cut out. And these two must dispense their duty
in letter and spirit to alleviate widening poverty.
Financial Inclusion‘s elusive and laborious goal is
hard to achieve but integrated efforts can make us
succeed.
Any policy paralysis would aggravate the blight.
Unrelenting fiscal deficit is the major cause for bleak
economy. And in order to stem the nip in bud itself
it is vital for us to arrest it. Now panacea for that to
happen is financial inclusion. Inclusion is possible
only with the on-board coordination with Aadhar
project. If we wish to see India transforming into
proverbial Golden Sparrow of yore then inclusion is
the light of the day for us.
8
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Mr. Agarwal is a
seasoned banker with
more than 14 years of
experience in banking
sector. He has
received several
accolades for his
contribution in the
field of knowledge
management,
customer relationship
management etc.
Being an avid writer,
he willingly
contributes analytical
articles on Indian
Banking Industry.
BY ISHWAR CHANDRA AGARWAL, MANAGER, UNION BANK OF INDIA
A discussion on the global econ-
omy would always be incomplete
without bringing in ―The Banks‖. I
would rather say that Banks are the
―engine‖ of the global economy. In
the last decade, India has emerged
as the economic power house. 2008
was the year that registered itself as
‗The Great Recession‘, witnessed
obituaries of several global banks
& financial institutions being writ-
ten down. Thus, cemented its posi-
tion just a notch below from The
Great Depression of 1929 in the list
of worst ever global economic cri-
ses. Like other economies, India‘s
economy has been banking on
Banking sector, however, it was at
an arm‘s length from the turmoil
that engulfed US‘ & European Na-
tions‘ financial system. Our Central
Bank‘s & government‘s too conser-
vative policies were proved judi-
cious when India was completely
unaffected by the ‗engine missing‘
problem! For instance, when the
major economies considered norms
of Basel-II to maintain a Capital
Adequacy Ratio (CAR) of 8% as a
bulwark that would be good
enough to keep away all Financial
Hazards, at that time Reserve Bank
of India that is indeed very
―reserve‖ asked Indian banks to
have a CAR of at least 9%. Thus,
rightfully by many of its ―reserved‖
policies it did not only reserve the
Indian economy to slip into the
quagmire of bail-outs rather growth
trend in India was reversed vis-à-
vis the other major economies fal-
ling graph of GDP growth.
In the last decade, our banking sys-
tem has been through a sea change.
The emergence of this century wel-
comed two few new Indian banks.
With humble beginnings, these
banks have created a special place
for themselves in the sector. Re-
maining abreast with other sectors
this sector also has also held the
hands with Information Technol-
ogy & led to the gestation of what
we called Core Banking Solution
or CBS. As per RBI guidelines,
now almost all public & private
banks have CBS and CBS in co-
operative banks is a part of the un-
dergoing next stage. In last few
years, a couple of major changes
have taken place when talking
about interest paid by banks on
savings account. First change is the
deregulation of interest to be paid
to depositors on savings account
with bank. Another major change is
the interest rate calculation method.
Earlier, the interest was used to be
calculated on the minimum amount
in an account between 10th & the
last date of the month, however
now it‘s on daily basis. Banking
Amendment Bill that was in lurch
since so long has finally got the
approval from the parliament. This
may entail greater powers in the
hands of the central bank. RBI has
now a greater power wherein they
can call for information and returns
from banking companies and even
9
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inspect them. Earlier RBI could remove only a direc-
tor now it can supersede the whole board, the public
sector banks can also issue bonus shares, rights issue
or preference shares. The private shareholders of
public sector will have 10% voting rights while in
private sector banks it 26% voting rights are pro-
posed. This bill also paved the way for issuing new
banking licenses. Hence, in the following years more
players would be in the market leading to high com-
petitive practices to capture more market share & in
the whole act consumers would be benefitted the
most.
As cited above the whole sector seems to be robust
however things are not very hunky-dory. After put-
ting in efforts for so many years still around 33% of
the population has bank account and a larger chunk
of rural population has been mired in local pawnbro-
kers when it comes to loans & mortgages. To follow
the Basel-III norms the sector needs at least Rs.
90,000 crores in the next 5 years, what makes the
matter worse is that in recent budget only Rs. 14,000
crores were allotted contrary to the expectations of
Rs. 18,000 crores. India banks are also nowhere in
the periphery of the top-10 banks of the world.
While the public sector banks can boast their high
levels of Non-Performing Assets (NPA), the top pri-
vate banks have been plagued down by the allega-
tions made by ‗Cobrapost‘ through its sting nation-
wide operations. These have been mocking various
―Know Your Customer‖ (KYC) & ―Anti-Money
Laundering‖ (AML) policies and only time will tell
whether the ―Cobra‖ has indeed stung or not.
Seeing the story so far, this sector asks for ‗cautious
optimism‘. We can hope that new banks would em-
bark the new horizons for the sector. The lender of
the last resort, together with the government makes
sure that Financial Inclusion no more remains a buzz
-word. These major stakeholders must identify all
the needs and act as necessity is the mother of ac-
tion.
Disclaimer: The views and opinions expressed in
this article are those of the author and do not neces-
sarily reflect the views of the organization he is
working for.
10
BANKING AMENDMENT BILL: AN INFOGRAPHIC
REPRESENTATION
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Souvik has graduated
in civil engineering
from Jadavpur
University, Kolkata.
Post that, he has
worked briefly in a
firm associated with
power sector
consulting. Now, he is
a student of IIM
Lucknow, batch of
2012-14. Souvik wants
to build a career in
banking industry.
Email Id-
BY SOUVIK DE, IIM LUCKNOW
In a popular commercial advertise-
ment by one of India‘s leading pri-
vate banking giant captures the rip-
ple effect of an economic activity
on the economy as a whole. It
struck a chord with the audience as
highlights how everyone achieve
his or her personal aspirations be-
cause of vast banking network.
However, it took one vital assump-
tion as granted- the ubiquitous
presence of banks in India. How-
ever, in reality, according to the
recent RBI data, only 59 percent of
adult population in India have bank
accounts- in other words, 41 % of
the population is unbanked. The
situation is worse in rural India
where banking coverage is 39% as
opposed to 60% in urban areas. So,
one conclusion can safely be drawn
from these statistics that India
banking sector is under-branched
and underserviced.
Existence of an efficient banking
system promotes economic growth
as they allocate savings to those
investments yields higher returns.
Banks encourage economic pru-
dence and savings in common
mass. Banks have the potential to
collect small savings from nook
and corners of the country and then
mobilize this savings toward capi-
tal formation for mega-
infrastructural projects which has
been a bottleneck for India‘s eco-
nomic growth. So, banking plays a
pivotal role in monetizing Indian
economy.
Banking promotes entrepreneurship
and plays a crucial role in acceler-
ating the pace of economic devel-
opment. Banks increase the partici-
pation of private sector in eco-
nomic development by making
available the loans easily on rea-
sonable rate of interest. In rural In-
dia, micro-finance firms (MFI) has
propelled a wide gamut of entre-
preneurial activity by giving loans
to the Self-help groups (SHG). But,
recently some of MFI have been
shut down, over questionable prac-
tices and high costs, leaving the
poor villagers back in the clutches
of the moneylenders who are even
more predatory.
On the flip side, after the economic
collapse of 2008, the world has
witnessed how reckless banking of
few Wall Street Giants has made
the world‘s economic system tee-
tering on the precipice of collapse.
India has, to some extent, decoup-
led itself from this disaster because
of the tight banking regime advo-
cated by the Central bank of our
country - Reserve Bank of India
(RBI). Now, RBI has faced a di-
lemma whether to trade this robust
system for fulfilling the dream of
financial inclusion. Luckily, RBI
has found a way out. The process
started a long back. In 2010, the
11
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Government of India has taken a decision to issue
new banking licences in wake of global economic
pundits censuring Indian Govt. for not doing the
adequate to bring the country out of economic
slump. However, cautious RBI managed to put a
hold onto the suggestion as it felt the requirement of
strengthening the current banking system in order to
avert any future economic backlash.
Let‘s us check the current banking landscape of In-
dia. Current Indian Banking landscape is constructed
by public banks, private banks and foreign banks.
India has 96 scheduled commercial banks (SCBs)—
27 public sector banks 31 private banks and 38 for-
eign banks—having a combined network of over
53,000 branches. In percentage terms, the division is
PSU banks (74%), private banks (20%) and foreign
banks (6%), according to Crisil Research. Banks are
further divided according to their working mecha-
nism into commercial and co-operative banks. So,
Indian Banking Industry has service products which
cater to citizens from every stratum of society. How-
ever, the banking coverage is at abysmal low in
some part of the country. Rural only constitute only
30 % of the commercial bank branches where 70%
of our population
live.
Following the news
of issuing new license
many corporate
houses in India, such
as, TATA, Reliance,
L&T and Aditya
Birla Group have
evinced interest to set up banks or turn their existing
Non-banking Financial Company (NBFC) into a
bank. However, RBI declined to grant them new
banking license until Banking Regulations Act is
passed by Parliament. Ultimately, in the winter ses-
sion of Lok Sabha of the previous year on 20th De-
cember, the Banking Amendment Bill has passed by
the LokSabha and is expected to be passed by Rajya
Sabha as the Main Opposition Party has been a pro-
ponent of the bill. This bill gives RBI the power to
supersede the whole board, should the situation
come. So, it is expected that under RBI regulation
these banks will behave properly and help us
achieve the goals for which they are established.
In the draft guidelines issued in August 2011, the
RBI had prohibited companies with significant inter-
est in the real estate and brokerage industries from
applying for new bank licenses. When few years
back the world‘s economic system was brought to
the brink of oblivion by reckless banks through trad-
ing mortgage-backed securities, RBI‘s apprehension
cannot be discounted. However, later on, the clause
has been relaxed and any private or public sector
entity is allowed to apply for the license before 1st
July, 2013. A committee by RBI will check each one
of the applications and licenses will be given seeing
the objective and past track record of the bank. So, a
huge power is given to Reserve Bank on this matter.
The way reserve bank handled India‘s economic sys-
tem, there should be little doubts about RBI‘s intent
and capability.
Promoter or promoter groups will be permitted to
apply for a new bank only through a wholly-owned
non-operative financial holding company (NOFHC),
which will hold a stake in the bank as well as all the
other financial ser-
vices companies
regulated by the
RBI or other finan-
cial sector regula-
tors. The objective
is that the holding
company should in-
sulate the the new
banking activity from the other commercial activi-
ties of the group that are not regulated by any finan-
cial sector regulators and additionally, the bank
should also be insulated from other regulated finan-
cial activities of the group. This step will help a
great deal to decouple banking from other upheavals
in global financial sectors.
Sufficient regulatory measures have been taken by
RBI in regard to setting up new banks. Minimum
capital requirement of the new banks has been
marked at Rs 5 billion which is higher than the capi-
12
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Tal requirements set during the earlier rounds of
bank licensing in 1993 and 2001. This clause will
encourage only serious player to enter the sector.
Also, he bank shall be required to maintain a mini-
mum capital adequacy ratio of 13 per cent of risk
weighted assets (RWA) for a minimum period of 3
years after the commencement of its operations. This
clause will keep the systemic risk of the industry in
check that will enhance with new players entering.
To keep the domestic banking sector insulated from
global economic upheavals RBI has set a limit of 49
percent foreign shareholding for the first 5 years and
post that the existing rule of 74% foreign sharehold-
ing limit for private players will be applicable.
Now, let‘s analyse how these new licensee will help
India grow economically with financial inclusion.
Unlike banks other financial institution like NBFC
can‘t take demand deposit, such as Current Account
and Saving Account. Sometimes, few NBFCs might
have license to take time deposit such as Fixed Ac-
count. How-
ever, they
can‘t take
CASA funds
(Current Ac-
count and
Saving Ac-
count) - the
most inex-
pensive
funds amongst all. This cheap fund has the potential
to reignite sluggish Indian economy. Product like
convertible saving account by which customer can
transfer money to fixed account from saving account
would be beneficial for both the parties. However,
regulations must be there to check on this innova-
tion.
For achieving inclusive growth India needs to har-
ness the potential of its rural segment. Some Non-
banking Financial Company (NBFC) and Microfi-
nance Institutes (MFI) are making efforts in this di-
rection. NBFCs are giving tractors on lease to poor
farmers who increase productivity through this. Self-
help groups are provided with seed capital by MFIs
to make them self-reliant and enhance their family‘s
income. Now, this so far financially excluded seg-
ment of the society should be brought under organ-
ized banking coverage, so that inclusive growth can
be attained. Reserve Bank has focused on financial
inclusion for the new entrants. Guidelines say a new
licensee should open at least 25 per cent of its
branches in unbanked rural centres (population up to
9,999 as per the latest census). In addition, it would
also be required to meet priority sector lending tar-
gets and sub-targets as applicable to existing banks.
And also, from the competition theory, it‘s expected
the new banks will try to innovate new products for
currently unbanked market rather than fighting in
highly competitive market space.
The first flush of allowing private players to set up
banks in the liberalization era has been quite suc-
cessful. We have the success story of Axis Bank and
HDFC bank to support our claim. However, in this
context, we must mention old private sector banks
have not pursued national-level branch expansion
which could have enabled them to provide banking
services to a wider population base. So, RBI and
government should ensure that so far untapped
population base is brought under banking coverage.
The apex bank can take some unconventional and
innovative measure like issuing license for entity to
take over moribund regional rural bank and restruc-
ture them into a profitable organization. This mecha-
nism while containing the systemic risk, would be
able to achieve financial inclusion. Simultaneously,
stand-alone MFI and NBFCs can be allotted new
banking license whose balance sheet don‘t have
risky assets and which have good presence in the
geographic reach that has remain unbanked so far.
There is always a trade-off. New banks along with
suitable regulations and supervisions by the apex
bank can alter the Indian banking space and give the
much-needed impetus to Indian economy. Focus
should be always to increase competition and help
India achieve financial inclusion. A concerted effort
of private sector, RBI and Government of India has
become need of the hour to push this reform for a
better future India. I hope Indian Elephant start
dancing again!
13
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Parth completed his
B.E. in Electronics and
Tele-Communications
from VESIT, Mumbai in
the year 2012.
He is currently
pursuing his M.M.S.
from Sydenham
Institute of
Management Studies,
Research &
Entrepreneurship
Education, Mumbai.
Email Id:
parth.pandya@simsre
e.net
BY PARTH P. PANDYA, SIMSREE MUMBAI
Financial Inclusion is ―the process
of ensuring access to appropriate
financial products and services
needed by vulnerable groups such
as weaker sections and low-income
groups at an affordable cost in a
fair and transparent manner by
mainstream institutional players.‖
-Mr. K.C. Chakrabarty, Deputy
Governor, RBI
1. Introduction
India has seen consistent growth
during the last few years. However,
this growth has been superficial
and not to the core of India. The
growth has not been witnessed by
the rural population. According to
the 2011 census about 83 crore
people in India live in villages.
This 83 crore people have not yet
tasted the flavour of India‘s eco-
nomic development. This is evident
from the fact that, around 37% peo-
ple in India still live below poverty
line. Financial Inclusion is contem-
plated in a number of ways. For
instance the Finance Ministry con-
siders that financial inclusion ends
by ensuring that everyone has a
bank account. For the RBI it is en-
suring that the money does not leak
in the process of transfers. Hence it
becomes necessary to understand
the actual need of financial inclu-
sion.
2. Need for Financial Inclusion
The government has declared a
number of schemes and passed a
number of bills in the parliament
like the Mahatma Gandhi National
Rural Employment Guarantee Act
(MGNREGA), Food Subsidy bill
etc. in order to make the lives of
the poor better and easier. The gov-
ernment declares huge subsidies for
these people. However the benefits
of these subsidies hardly reach the
poor. Hence the government has
voiced a new method called the
Electronic Benefit Transfer (EBT).
This is a way in which the benefits
or the amount is directly trans-
ferred to those who deserve it into
their bank account. Hence it be-
comes necessary that each and
every person has a bank account.
This will reduce the leakages in the
system and reduce the corruption to
a great level. This shows the need
of providing banking and financial
services to every person in the
country.
According to Census 2011 only
58.7 percent households in the
country avail banking services.
This suggests that more that ap-
proximately half the nation does
not get an access to banking ser-
vices. Hence financial inclusion is
something that is stressed upon by
the government. Some of the figur-
14
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es shown in the table suggest that there is a dire need
for improving the banking services in rural India.
3. Challenges against Financial Inclusion
The Reserve Bank of India and the Government of
India are constantly striving to make this dream of
financial inclusion come true. However there are
certain challenges faced in the area of providing fi-
nancial services from both the demand and supply
side. Some of the challenges are listed below.
3.1 Demand side challenges
Low literacy rate: Low literacy rate is the major
concern as far as the demand side is con-
cerned. People do not even have the basic
knowledge about the financial products
&services available in the country.
Low income: Lower income level is another
problem with rural India. There is a huge gap
between the per capita income in the rural
and urban parts of the country. Considering
2004-05 as the base year the per capita in-
come in the rural areas is around Rs.16400
and in the urban areas is Rs.44170 approxi-
mately.
Lack of assets: Absence of assets that can be
used as collateral is also an issue that is a
major concern of the banks. In case of a de-
fault the banks are unable to get back the
principal amount by selling the assets as the
asset quality becomes a problem.
Social exclusion can also be a possible reason.
3.2 Supply side challenges
Cost: Banks and NBFCs are the vital touch
points as far as providing basic financial ser-
vices to the rural areas are concerned. How-
ever, usually banks are reluctant and cautious
to open branches in such areas. The reason is
that opening branches requires a lot of capital
expenditure like acquiring land, construction,
and office staff, providing communication
and internet services and others. In the rural
areas the transactions are negligible and of
very small amounts. Hence the transaction
costs itself sometimes exceed the transaction
amount.
Distance: Moreover such areas are remote and
highly inaccessible and hence it becomes dif-
ficult for the banking operations. Addition-
ally there is operational risk involved in
physical movement of cash and other impor-
tant documents. This also increases the time
taken to complete every transaction where
the physical movement of documents is re-
quired.
KYC: For rural citizens the KYC (Know Your
Customer) norms are very difficult to satisfy
as they do not have enough documents re-
quired to be submitted while opening an ac-
count. Thus it becomes difficult for the banks
to maintain the database of such customers.
4. Ways and means to achieve Financial Inclusion
Lack of access to banking services drives the people
to approach informal financial services like money
lenders, unregistered financial companies etc. This
leads to several imperfections and unethical prac-
tices like expensive credit and exploitative condi-
tions. The precious savings of the rural population is
lost and they become indebted to the money lenders.
15
Type of
the bank
Total no.
of
Branches
Rural
Branches
Rural
branches
as a per-
centage
of total
SBI and its
Associates
18685 6419 34.35%
National-
ised Banks
48284 15435 31.97%
Foreign
Banks
306 7 2.29%
Regional
Rural
Banks
16170 12084 74.73%
Private
Sector
Banks
12614 1419 11.25%
Total 96059 35364 36.81%
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This further creates a rift between the rich and the
poor. To tackle this, we considered these options:-
4.1 Mobile ATMs
Since opening physical branches and multi-
functional ATMs is costly and unnecessary for the
banks, banks can therefore use small mobile ATMs
with basic functionality like cash withdrawal, bal-
ance enquiry etc. These ATMs can move from a
place to the other depending on the time of the day
E.g., they can be near market place in the evening or
petrol pumps in the morning. This will cost the bank
lesser and provide banking facilities at the door step.
4.2 Business Correspondents
Banks might grant permission to some correspon-
dents for providing certain basic banking facilities
like withdrawal, deposits, cheque books etc. The
correspondents can be any trusted person or institu-
tion abiding by the rules and regulations. They can
be the local grocery stores or certain institutions
working for the welfare of the people in rural areas.
This carries with it the risk of exploitation and mis-
guidance. However, a strict check on their working
can prevent any kind of misguidance by them.
4.3 Mobile Banking
According to TRAI there are approximately 90 crore
mobile connections in India. So the reach of mobile
phones is deep into India and hence it can be used as
an instrument for providing financial service on the
mobile. Certain services like transfer of money from
one account to the other, payments of bills, balance
enquiry and other such facilities can be easily pro-
vided using mobile as a platform. There is another
method in which this model can be used. The retail
shops for the mobile recharge are spread across most
of the parts in the country including the remote ar-
eas. The retailer will have an account with a bank
and the customers can deposit and withdraw money
from him in a way similar to mobile recharge. The
transactions can take place via SMS which can then
be considered as a proof of the transaction. The fol-
lowing table shows the cost per transaction incurred
because of different delivery channels.
4.4 Financial Literacy
Though the literacy rate of rural India is improving,
the number of people having basic financial knowl-
edge is minimal. Thus it becomes necessary to im-
part appropriate knowledge with regards to the fi-
nancial products and services. Also the products de-
signed for such rural population must be very easy to
understand. Most of the times, people do not become
a part of the system because of the complexity of the
system products and procedures. The knowledge
must be imparted in their native language which
would make it easier for them to understand.
4.5 Using UID number
The unique identification number scheme that has
been started by GOI is considered as an important
step when it comes to microfinance and financial
inclusion. The number will be acting as an identity
proof for those who do not have any documents for
this purpose. Hence opening accounts in the bank
will be much easier. Also this cards can be used for
the disbursal of social benefits like scholarships,
pensions NREGA wages etc. This card can also be
linked with the micro ATMs and bank accounts of
the number bearers. A no frills account can be
opened along with a regular account. No frills ac-
count is a low balance maintenance account along
with lighter KYC norms. Thus the UID number can
be a facilitator for the purpose of microfinance and
financial support to the financially excluded section.
5. Conclusion
It is simple to know that in spite of the continual
economic development of India the dream of becom-
ing an economic power cannot be achieved until and
unless each and every Indian tastes the flavour of
this progress. For this it will be necessary to bring
everyone under the ambit of banking and financial
services industry. Hence it is high time that the GOI
put some concentrated efforts in this direction.
16
Delivery Channel Cost per transac-
tions (Rs.)
Physical Branch 40
ATMs 0 to 20
Mobile Banking 9
Internet Banking 6
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Prakash Nishtala is
a first year
student of MBA at
SBM, NMIMS,
Mumbai. He holds a
B.Tech degree and
has 2 years of
work experience in
IT and Stock
Exchange (F & O
Segment)
Email ID :
om
BY PRAKASH NISHTALA, NMIMS MUMBAI
Budget has always been a cynosure
of all the people of the country.
Preparing the annual Union Budget
is a laborious and lengthy exercise
that takes over five months, and is
accompanied, in the final stages, by
an obsessive emphasis on secrecy.
The budget preparations has two
important facets: Content side and
Logistics Side
Content Side:
The budget content-wise has two
major parts:
Revenues
Expenditures
Department of Revenue assesses
the revenue collection from various
central taxes while the Department
of Expenditure estimates the ex-
penditure needs for the next finan-
cial year which also includes as-
sessment of resources of the public
sector undertakings (PSUs).
The Budget division is a part of the
Department of Economic Affairs.
The Finance Secretary coordinates
the overall Budget-making process.
All of them keep the finance minis-
ter informed and seek directions
from time to time. The Chief Eco-
nomic Advisor assists the con-
cerned departmental officer in this
process.
1) Resources (Revenues) side
Apart from the tax receipts, the
other sources of the revenue which
go into the Budget are the divi-
dends paid by the PSUs on the gov-
ernment shareholdings which in-
clude the interim dividends and the
capital receipts on account of the
divestment of the government enti-
ties.
Also, external receipts on account
borrowing from international agen-
cies like World Bank, ADB, etc,
are included in the estimation.
PSUs are generally funded through
their own resources except in some
strategic and economically vital
areas where the budgetary support
is provided based on the recom-
mendations of the Planning Com-
mission.
This assessment of the Internal and
External Budgetary Resources
(IEBR) conducted by the Depart-
ment of Expenditure forms part of
the total plan resources and is also
reflected in the budget documents.
Estimation of the earnings of the
PSUs is done by inviting the
CMDs or the finance directors of
the PSUs to the North Block. A
one-on-one meeting is conducted
by a joint secretary level officer of
the ministry of finance to estimate
the revenues.
This information is then passed on
17
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to Expenditure Secretary, who in turn, passes on the
information to Finance Secretary. This revenue
forms a part of plan expenditure.
Now, the role of different ministries comes into the
picture. The financial advisor from each ministry is
called by the ministry of finance and asked about the
expenditure of the amount allocated to his ministry.
Based on the inputs of different ministries Revised
Estimate (RE) is prepared. Revised Estimate means
as to how much is actually required by the ministry.
The government has issued instructions to various
ministries to adhere to the quarterly expenditure
schedule and to avoid bunching of the expenditure in
the last quarter. Additional funds are also provided
in the RE stage. Important is the estimates of the non
-plan requirement for the next year.
Plan allocations are to be provided by the Planning
Commission later based on the total gross budgetary
support (GBS) indicated by the ministry of finance.
This exercise starts in the month of October-
December. As is known, the Department of Reve-
nue, the ministry of finance has two boards, Central
Board of Direct Taxes (CBDT) and Central Board of
Excise and Customs (CBEC). By mid-January, these
boards give the figure of tax collection up to Decem-
ber 31. For remaining three months, tax collection is
assumed on the basis of previous trends.
The boards also estimate the tax revenue expected in
next financial year. The integrity of the budget mak-
ing depends on the realistic nature of these estimates
particularly in the face of the fiscal discipline im-
posed by the FRBM Act.
2) Expenditure side
While the ministry is busy estimating the revenue
receipts, the Planning Commission, simultaneously,
goes into stock-taking mode. It starts meeting with
individual ministries in the month of September-
October and reviews ongoing schemes of the minis-
tries, considers allocation for them, etc. It may de-
cide to stop some ongoing scheme or merge two
similar schemes.
Thus, an estimate of Plan Budget is prepared. The
Planning Commission conveys to the ministry of
finance that it requires so and so amount to run
planned schemes for next financial year. The finance
minister and the Deputy Chairman of Planning Com-
mission discuss the demand in detail. This way Plan
Expenditure is ready. Different ministries are also
asked to tell about their fund requirement, which
forms a part of budget estimate.
Side by side, Department of Economic Affairs meets
representatives of trade unions, industry chambers,
economists and other groups. In the Budget-making
exercise, suggestions of different stakeholders are
kept in mind.
FM‟s decision with his team
By this time, the finance minister is in a position to
estimate as to how much it will get through taxes
and how much it has to spend in coming financial
year. The finance minister has other constraints also.
He has to abide by FRBM Act and cut fiscal deficit.
Keeping in mind all these, the finance minister --
with his team -- decides whether some new taxes
should be levied to collect more tax, how to widen
tax net in order to earn more revenue. While doing
so the suggestions from various interest groups are
duly taken into account.
GDP assessment
The Department of Expenditure and the Department
of Economic Affairs sit to decide GDP assessment
for next year. Generally, a nominal growth in GDP
is projected. Actual growth in GDP is nominal
growth of GDP reduced by inflation figure.
The Budget Speech of the FM
The finance minister delivers the Budget Speech in
Parliament. Normally, on February 28, the finance
minister delivers the Budget Speech in Lok Sabha.
After which Budget documents are made available.
18
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Logistics Side:
The following pictorial representation shows the various levels of logistical support activities that
goes behind the making of the budget.
19
The above picture is taken from Hindustan Times, February 23, 2013.
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Vidhi Jain is currently
in second year of her
PGDM from T A Pai
Management Institute,
Manipal
BY VIDHI JAIN, TAPMI MANIPAL
Indian economy is one of the fast-
est growing among emerging
economies. The strong policy
measures by government have
helped India recover quickly from
the crisis. Counted as an attractive
destination for investment, there is
robust demand for banking services
in India. India has huge and un-
tapped potential for banks fueled
by growing demand for affordable
and high return savings products.
Other avenues which demonstrate
huge possibility for growth of
banks are rising affluence in coun-
try, liberal investment regimes with
options in diverse sectors as tour-
ism, infrastructure etc and increas-
ing middle class segment. The key
objective of broadening and deep-
ening reach of banking services in
India has prompted RBI to consider
giving fresh banking licenses after
10 years.
Following is the insight into those
license norms by RBI which merit
consideration:
20
Norms Description Remarks
Minimum Capital Re-
quirements
The minimum paid up
capital requirement
for applicant is Rs.
500crore.
This amount is neither
too less(<=300 crore)
nor too high (1000
crore). Thus will hin-
der non-serious play-
ers from applying.
Ownership Pattern
At the start of banking
operation promoter
should bring in mini-
mum 40% capital
with 5 year lock-in,
which has to be
brought down to 15%
within 12 years.
This clause will en-
sure promoters inter-
est in making banks
business model a suc-
cess due to high
stakes, The dilution of
stake at later stage
will ensure diversifi-
cation and no entity
will have significant
control as the bank
grows.
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The new banking licenses are undoubtedly likely to
encounter challenges of geographical coverage, in-
sufficient infrastructure and inadequate technology.
However certain regulations have gathered op-
ponents more than proponents.
On the contrary
The opponents of reform allowing industrial houses
to enter banking space have argued of conflict of
interest between corporate interest and banking in-
terest. It has been observed that regulators in other
countries also do not allow corporate to set up banks
and if they do there are restrictions on ownership
and voting rights. The flaw in the reform is possibil-
ity of increase in risky loans from lending to related
firms. If the loans backfire it could trigger a huge
crisis. But on the flip side India can leverage upon
deep pockets of corporate and bring new technolo-
gies to extend financial inclusion to underserved
markets.
Rural branch coverage compulsion can be a bottle
neck as it is difficult to service those in remote areas
and also be profitable. Achieving priority sector
lending target of 40% also seems unrealistic consid-
ering existing banks failure to meet the target. But
constraints give way to innovations. FMCG compa-
nies have long back understood the dynamics of the
rural segment and have been making maximum
money from bottom of the pyramid. But careful
thought and strategy will enable banks to seek
niches in this segment of population and make a dif-
ference.
Likely new entrants - NBFCs, Realtors, Brokers?
The criterion for new bank applicants is sound finan-
cial track record for past 10 years. This has been a
setback for realtors as last few years have been chal-
lenging for real estate sector with high debt ratios
and low market valuation. Brokerage sectors may
stand a slightly better chance than Realtors but fi-
nancial ratios may or may not be optimum consider-
ing dip in equity trading due to 2008 financial crisis.
Most of the pure-play NBFCs are best placed to
meet RBI‘s criteria and have much better financial
ratios. NBFCs stand a good chance of foraying in
21
Eligible Promoters
Anyone can apply for license be
it public entity, private entity or
financial institution.
This gives fair chance to every-
body and allows broader set of
entities in banking.
Unbanked rural area coverage
At least 25% of new banks‘
branches must be in rural centers
with no banking facility.
This move will benefit popula-
tion excluded from banking ser-
vices earlier. With new banks
coming into the system the pene-
tration will improve. It would
also lead to more people coming
into the system.
Foreign shareholding
FDI is capped at 49% for first
five years after which it can be
extended.
This restricts foreign investors
willing to invest more capital in
India. However increase in vot-
ing right will help in attracting
foreign investors as they will
have more say in banks.
High Asset Price Volatility
Clause
The business model of promoter
group should not indulge in ac-
tivities which are speculative or
subject to high price volatility.
This will ensure only companies
with market exposure to less
volatile prices will pass through.
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the banking space also due to their prior presence in
financial sector. Currently higher rates of borrowing
and lending by NBFCs impede growth of borrowers.
Conversion to banks will give NBFCs access to low-
cost CASA (current account, savings account) funds
which will in turn reduce lending rate to borrowers
in urban and semi-urban areas. The regular NBFC
clients like Infrastructure, farming companies will
receive equipment financing at low cost making
them competitive. Also capitalized banks is what
India needs and some leading NBFCs are well-
capitalized than existing banks.
RBI‟s Objective
RBI along government have taken major steps of
nationalization of banks, priority sector lending
norm, emphasis on mobile banking in the past to
bring un-banked population under the umbrella of
banking services. Being bank of banks RBI has re-
sponsibility of safeguarding the public interest. It
has come up with tight guidelines to ensure only re-
sponsible people enter the banking space.
The new entity is required to set up a wholly-owned
Non-Operative Financial Holding Company
(NOFHC). This will protect banking operation from
other businesses of group. The high quality regula-
tion can ensure liquidity and profitability of banks.
Kotak Mahindra bank is the best example for the
same.
Road Ahead
Overall guidelines by RBI seem to be a welcome
development, paving way for more capital and more
players in the sector. For the industry dominated by
state lenders new banking license move is intended
to increase competition and efficiency in the sector.
Although challenges of risk management, rising
NPAs, capital adequacy ratio compliance and other
stringent norms remain, the strong performance of
banking sector over past few years showcases vast
opportunities.
22
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BY APRA CHORDIA & STAR JAIN, IMI DELHI
Introduction
Since the advent of internet, the
world has shrunk, distances have
lost their importance and informa-
tion has no more remained a differ-
entiating factor in this global arena.
―Globalization‖-the BUZZWORD
has swept nations within its leap
and business at this hour, across the
international boundaries has be-
come as easy as it was in the do-
mestic setup. Unfettered, unbridled,
the corporate world is expanding
and spreading its reach beyond na-
tions conquering them at the rate of
knots and boundaries have lost
their relevance without a doubt.
At this point, it is the need of the
hour to have globally set standards
in all domains to avoid discrepan-
cies and conflicts across boundaries
and have a well defined, structured
policy framework throughout. In
this regard, a need for an interna-
tionally accepted accounting stan-
dard becomes all the more un-
avoidable so as to ensure greater
accountability and homogeneity in
the financial sector and bridge the
lacuna that exists in the accounting
standards. So, the transition from
GAAP i.e. Generally Accepted Ac-
counting Principles to IFRS- Inter-
national Financial Reporting stan-
dards becomes indispensable.
What is IFRS?
International Financial Reporting
Standards (IFRS) are designed as a
common global language for busi-
ness affairs so that company ac-
counts are understandable and
comparable across international
boundaries.
These are standards for report-
ing financial statements appli-
cable to all the companies un-
der its ambit.
IFRSs are developed and ap-
proved by IASB (International
Accounting Standard Board)
One of the basic features of
IFRS is that it is the principle
based standard rather than rule
based
Need of IFRS in India
With the transition of a large num-
ber of countries towards acceptance
of IFRS as their financial reporting
standard, it has become the need of
the hour for India to quickly adopt
the IFRS standards so as to stay
competitive and investor friendly.
Also to ensure greater flexibility,
ease and friendly environment for
the growth of our companies we
need a globally accepted reporting
framework so as to ensure greater
credibility of the Indian companies
on the global podium.
Global Scenario
All EU listed companies were re-
23
Apra is currently
pursuing her PGDM (1st
year) at IMI, New Delhi.
After completing her
engineering in
Computer Science, she
was associated with
TCS for 2 years. She is
a member of Finance
Committee at IMI.
E-mail Id:
Star is currently
pursuing PGDM I yr at
IMI, New Delhi. He
graduated as a
Computer Science
Engineer and then
worked with Infosys for
21 months. He has a
strong inclination
towards finance and he
loves to reads and
writes articles.
Email Id:
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quired to prepare their financial statements follow-
ing IFRS from 2005 as a result of a regulation
passed in 2002.
The Securities and Exchange Commission (SEC), in
2007, also announced that it would allow foreign
companies to have access to US Capital Markets
while reporting under IFRS, which in turn affected
around 1100 U.S. companies with US listings, along
with any companies planning U.S. IPO‘s. A road-
map for mandatory adoption of IFRS, in US, by
2016 has also been proposed by the SEC.
Following EU and America, China has taken the
path of IFRS adoption but in its new domestic ver-
sion called the Accounting Standards for Business
practices, which was issued by its Ministry of Fi-
nance in Feb, 2006.
India
Starting 1st April, 2011, The Ministry of Corporate
affairs (MCA), a part of Government of India, laid
out a roadmap for transition to IFRS Converged In-
dian Accounting Standards (IAS) in January 2010 in
three different phases for companies.
Roadmap for Companies for the transition towards
IFRS
For companies who do not fall in the above catego-
ries, if voluntarily wants then they can disclose their
financial statements under IFRS.
Benefits:
Effective Comparison of performance with other
business
With the acceptance of IFRS by all the na-
tions, the burden on the multinationals in re-
porting their accounts and profitability will
be much less and their accounts will be more
comprehensible.
Increased transparency
There will be greater transparency for the
companies in comparing the performance of
the company outside its country. It will also
help the companies in judiciously evaluating
the companies in foreign lands and taking the
decision about their prospective alliances or
partners in different countries.
Universality
Adoption of a universal reporting standard
will help the users in easily understanding
the financial statements and hence make the
business decisions.
Ease of application
It will be easy and simple for the internat
ional bodies to make the changes and enforce
them globally as much subsequent changes
will be needed.
Flexibility and Reusability
A huge amount of rework is avoided as
changes done by the companies need to be
24
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done again and again if all the countries in
which the company is listed, originally be-
long to or operates in all adopts the IFRS,
hence ensuring greater flexibility.
Increase the credibility of Indian companies
globally
Ease in partnering with global partners
Drawbacks of non adoptability of IFRS:
The increased burden on foreign investors who have
their financial statements reported under IFRS to
convert it to GAAP in order to list themselves on
Indian stock exchanges. This extra cost will mitigate
the investment sentiments and will in turn reduce the
foreign capital inflow to India. The non-adoptability
of IFRS has attracted a very poor rating in terms of
ease of doing business in India.
Challenges
Inadequate trained people on IFRS
A large pool of people trained on IFRS will be re-
quired which is a big challenge for India.
Complex Transition
Transition from GAAP to IFRS is complex as it not
only requires changes in the accounting procedures
but also in our IT systems.
IFRS requires assets to be reported as per the market
value instead of historic value as required under
GAAP. This may adversely impact the financial
statements of a huge number of firms initially and is
attracting resistance from a large number of corpo-
rate houses. Unlike other countries, the accounting
framework in India is subject to a wide number of
laws and regulations. With the complete adoption of
IFRS, changes need to be incorporated in various
regulatory requirements under The Companies Act
1956, Income Tax Act 1961, SEBI, RBI etc.
Along with the people preparing the financial state-
ments; stakeholders, regulators, auditors, employees,
tax authorities, management and people in other de-
cision making bodies need to be trained.
Indian Efforts towards Adoption of IFRS
Realizing the utter need of IFRS, The MCA finally
took a step forward and announced a three phase
roadmap for the companies specifying the date for
them for reporting their financial statements in ac-
cordance with the IFRS. In order to ensure the
smooth attainment and helping companies in the
transition process, government of India has taken the
following steps:
A high level task force was set up in India to expe-
dite the convergence process. Extensive Research
and surveys were carried out to understand the state
of readiness of the companies on adoption of IFRS
and it was concluded that a large number of them
had successfully attained the pilot phase. Small and
Medium Enterprises (SMEs) were exempted in
adopting the IFRS in the roadmap proposed as the
whole transition is very cost intensive and will pose
great burden on SMEs. Also ICAI has suggested that
for SMEs, a separate standard may be formulated
based on the IFRS issued by the IASB after modifi-
cations, if necessary. As per a senior official of
ICAI, they are planning to upgrade the CA curricu-
lum with the adoption of IFRS in India by including
some of the certification courses , conducting pro-
grams and also training people on this.
Conclusion
Since the inception of the idea of a universal finan-
cial reporting standard, more than 100 countries
have already adopted it to enjoy the long term bene-
fits derived due to its homogeneity and standardiza-
tion. Seeing and analyzing the benefits of IFRS, it
becomes all the more pertinent for a country like In-
dia to adopt it as soon as possible so as to maintain
investors‘ positive sentiments and also strengthen
their faith and credibility in the Indian Market. The
adoption might lead to short term investments and
initial challenges but the long term benefits are
strong enough to justify the initial hassles of imple-
mentation and adoptability.
A holistic roadmap, with the support of the govern-
ment, must be chalked out to train all the people
from the top management to all the stakeholders in-
volved so as to gain maximum benefits from IFRS.
25
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26
THE MONTH in images and words
In times like these when the global and domestic scenarios do not give us
much to cheer about we could use some comic relief. This section cap-
tures some of the main events of the past three months in cartoons, cou-
pled with some of the insightful and sometimes humorous quotes.
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27
Compiled by: Anirudh Kowtha, MBA I Year, NMIMS, Mumbai
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Soumya is currently
pursuing MBA from
IIM Kozhikode as part
of 2012-14 batch and
is an elected member
of MEDIA CELL. He is
also a member of the
“Economics, Politics &
Society” Interest
Group at IIM K. Author
is a 2009 batch pass
out, ECE engineer with
31 months of work
experience in
ERICSSON.
Email Id:
BY SOUMYA CHATTOPADHYAY, IIM KOZHIKODE
The government decision of allow-
ing new banks to come up was
much awaited and RBI has finally
come up with guidelines for finan-
cial institutes to be eligible for set-
ting up new banks. The new bank
licences are expected to start a new
era in Indian banking by inducing
fresh blood in the markets. India‘s
banking sector progression story is
one of a careful progression in the
global financial arena that is heav-
ily dominated by the likes of US
and European entities. However,
the crying need for increasing the
number of banks does not derive
solely from a competitive point of
view. There are other reasons sub-
stantial enough to suggest that we
need more banking entities. If the
question is about India‘s need for
more banking, the answer is a firm
yes. India‘s GDP growth has been
mostly sustained by its huge do-
mestic savings. At one hand we
have a huge population that needs a
safe place to deposit their savings
and on the other, we have Industry
in the need of financing to operate
and grow. If we consider the low
per capita income of our country,
the aggregate savings by the house-
holds is significantly high. Banks
have played the crucial role of in-
termediaries, channelling funds
from one end to the other. It is very
important to note that Indian econ-
omy is having a financing model
which is predominantly bank-
oriented, which is crippled by the
absence of debt market and as a
result, we have over reliance on the
banking system as the source for
funds for both short and long term
growth.
But the most significant reason that
many tend to overlook is the abys-
mally low financial inclusion in our
country and the urgent need to in-
clude more and more people under
the coverage of institutionalized
finance. Banking system in our
country had an audacious target of
covering close to 55.8 million ex-
cluded households and all villages
with greater than 2,000 populations
by 2012. It is already 2013 and we
have missed the target by miles.
More appalling is the fact that there
was a tacit acceptance among the
authorities well before the deadline
about the infeasibility of the target.
It is high time Government takes a
hard look at its own financial inclu-
sion initiatives. With the change in
PDS system and direct cash trans-
fer proposition, it is high time we
approach financial inclusion with
adequate urgency. It is a necessity
rather than being a choice for us.
Over the decades since the initial
phase of bank nationalization in
1969, the regulations have de-
manded the financial institutions to
have a wider reach into the rural,
semi-urban and other financially
excluded areas. It is no wonder that
only significant locations of the
28
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rural areas of major states came under adequate
banking services coverage as it was only about
meeting regulatory guidelines. However, huge part
of population living in interior villages is excluded
and accumulative figure of exclusion is shocking.
Quoting NSSO data, 45.9 million farmer households
(51.4%), out of a total of 89.3 million households
have no access to credit, neither institutional nor non
institutional sources. Moreover, despite the continu-
ously improving network of nationalised banks‘ ru-
ral branches, not even one third of total farm house-
holds are indebted to formal sources .Farm house-
holds lacking access to credit from formal sources as
a proportion to total farm households is shockingly
high at 95.91%, 81.26% and 77.59% in the North
Eastern, Eastern and Central Regions respectively.
Thus apart from financial exclusion being large,
there is noteworthy variation across regions, groups
and communities. The poorer the group, the greater
is the exclusion. It is true everywhere irrespective or
region, religion, ethnicity or any other identity. As-
set holding or lack of it is primary key to under-
standing financial exclusion pattern.
However, there is strong counter view as well. It
champions the cause of having few, stronger bank-
ing entities by consolidation in the sector rather than
creating new banks which would mean more number
of banks that are comparatively small. Creation of
more banks will increase the competition and cus-
tomers are supposed to benefit from that. But it is
not that easy to say if competition within the bank-
ing sector comes with significant benefits, if at all.
Competition squeezes margins and forces banks to
take increased risk to ensure returns for shareholders
and compensation for executives. What happened in
2008 in global finance meltdown can largely be con-
tributed to such a scenario. The advocates for larger
banks instead of more banks also argue that in a
country with rather shallow financial markets domi-
nated by short term speculative players, where
nearly 70% of bank assets are bottled up in cash re-
serve ratio, statutory liquidity ratio and priority sec-
tor lending obligations, leaving only 30% of the kitty
to generate returns for shareholders, the environment
is ripe for excessive risk-taking if competition in-
creases further in the banking sector.
It is important to understand that what we need is
variation in banking sector. We need new entities
that would not be just a replica of already existing
private banks because in that case granting new li-
censes will simply increase competition in the case.
It is not desirable keeping in mind the consumer‘s
side is sufficiently protected by ever vigilant RBI.
Any further competition in the banking sector will
cause much more harm than benefits to the custom-
ers, if any. The purpose of creating more banks must
be expanding the reach of institutionalised finance.
The utility of having new banks has to be measured
by how much financial inclusion can be achieved
through them rather than their ability to cater to the
needs of industry or upper middle class and rich sec-
tion of the population. With total bank lending less
than even half the size of the GDP, Indian banking
system is stunted, something which is a boon to un-
authorised local money lenders, who occupy the
space vacated by the banks. There should be no
doubt that we need more banks but new licensing
regulations and eventual market player selection
must ensure that the very purpose of this expansion
activity is not defeated by creating replicas of exist-
ing urbanised private banks.
29
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BY DADICH BHATT & VAISHNAVI SHAH, SCHOOL OF PETROLEUM
MANAGEMENT, GANDHINAGAR
―The best of intentions get defeated
when a system is not used judi-
ciously.‖ -K.C.Chakrabarty
What is Corporate Debt Restruc-
turing?
Corporate Debt Restructuring is a
mechanism by which a company
attempts to reorganize its out-
standing obligations. This can be
done in any of the following ways:
Increasing the tenure of the
loan
Reducing the rate of interest
One time settlement
Conversion of debt into equity
Converting un-serviced portion
of interest into term loan
There are occasions when corpo-
rates find themselves in financial
hitches due to factors beyond their
control and also sometimes due to
internal glitches. For the resur-
gence of corporates and for the
security of the money lent by the
banks and financial institutions,
timely support through restructur-
ing of genuine cases is called for.
Why do corporates go for CDR and
also what interests does it serve of
lenders?
Borrower‟s perspective:
When a company is having out-
standing debts which cannot be ser-
viced under its existing operations,
it can either go towards not so sus-
tainable path of enhancing its quan-
tum of debt with an expectation to
increase its profitability and repay
its original debt which comes with
its own risks or cease the opera-
tions of the company leading to its
natural death. A more viable alter-
native which is formulated by gov-
ernments of many countries is to
consider a structured plan to rene-
gotiate the current debt with its ex-
isting lenders itself.
This is where restructuring gains
prominence.
Lender‟s perspective:
The primary interest of lenders lies
in recovering the principal amount
lent to corporates along with re-
turns on that investments and not in
liquidation of assets. Apart from
this liquidation, proceedings are
notorious for yielding low returns
for creditors. CDR gives lenders a
unique opportunity to avoid being
encumbered with NPAs.
Hence, CDR becomes an instru-
ment for lenders, i.e. banks to aid
the transformation of otherwise
NPAs into productive assets.
30
Dadich is a Electrical
engineer having a work
experience of 35
months in petroleum
industry. He is currently
studying at School of
Petroleum Management,
Gandhinagar.
Email Id:
m
Vaishnavi is an IT
engineer from
University of Ballarat,
Australia with a work
experience of 10 months
in IT industry.
She is currently
studying at School of
Petroleum Management,
Gandhinagar.
Email Id:
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How does CDR work?
The Corporate Debt Restructuring (CDR) Mecha-
nism is a voluntary non-statutory system based on
Debtor-Creditor Agreement (DCA) and Inter-
Creditor Agreement (ICA) and the principle of ap-
provals by super-majority of 75% creditors (by
value) which makes it binding on the remaining 25%
to fall in line with the majority decision. The CDR
cell negotiates the exits of companies whose loans
are being restructured if they fulfill conditions as
follows:
Have been in the CDR mechanism for at least 5
years
Reported a 25% growth in earning before inter-
est, tax, depreciation and amortisation
(EBITDA) for the last 2 years
Declared more than a 10% dividend
Undertaken major capex expansion
How has the CDR cell helped the Indian companies?
As per the latest data available with CDR cell, a total
of 466 cases, involving total debt of Rs 2.46 lakh
crore, have been referred to it since its inception. Of
this, 101 cases involving about Rs 64,000 crore have
been referred in 2012 itself.
Of the total 466 cases referred to CDR cell so far, 75
cases involving Rs 27,400 crore have been rejected
by the bankers, while 64 cases (totalling over Rs
31,000) crore are under finalisation of restructuring
packages. A total of 327 cases have been approved
since the start of CDR mechanism as on September
30, 2012 for a total amount of Rs 1.88 lakh crore.
Between its inception in 2001 and March 2013, the
corporate debt restructuring (CDR) cell will have
successfully negotiated the exits of over 80 cases
worth over R60,000 crore.
Major companies benefitted from CDR so far were
Subhiksha Retail, Vishal Retail, Kingfisher Airlines,
Wockhardt, Hindustan Construction Company,
Suzlon, Essar Oil, Essar Steel, Jindal Steel to name a
few.
Also, due to the non-availability of coal and indige-
nous natural gas power plants are lying idle and due
to the price increase in coal input cost of distribu-
tions companies and power producers become very
high which they cannot transmit over the consumers
because of government regulations hence their bal-
ance sheet have seen red color often. According to
the power ministry, the Cabinet took up a proposal
to recast about Rs 2 lakh crore debt of the power dis-
tribution companies to provide financial support for
the sustainability of those companies however CDR
cell approved only 3869 crores which also helped
power and distribution companies to survive. So
during economic downturn CDR provides fresh
blood to the companies which are striving for cash
flows.
What‟s in for banks?
The banking system has also improved the quality of
its assets over the years - the industry has reduced
the outstanding gross NPAs from 11.4% in FY01 to
2.3% in FY11.Further, the overall net profit of
the banking industry in FY01(before CDR was im-
plemented) was merely 10% of the outstanding
gross NPA. This has become 75% in FY11.
An attractive mechanism, isn‘t it?The most vital sta-
tistics often hide more than they reveal.
Why did so many Indian companies opt for CDR?
Many companies started raising money through
FCCB (Foreign Currency Convertible Bonds) for
their expansion plans and to cater to their capital
needs. However, the actual cash flow generated from
the growth plan didn‘t meet the expected level of
return, thereby leaving them with insufficient
amount to pay debts. Also, during recession, as the
stock market crashed, the shares of most of the com-
panies plummeted meaning conversion unviable for
bondholders. This was further catalyzed by the de-
preciation of rupee. Hence, most of the companies
were finding it unviable to continue their operations.
Adding to the prevailing difficult scenario was rise
in interest costs, which led the companies to default
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on their financial obligations, resulting in sharp in-
crease in CDR cases.
The story of how companies get themselves into
debt distress has many strands. Consider Iron and
Steel Industry which is a cyclical business. During
boom times, they go ballistic on expansion. Capacity
addition leapfrogs suddenly, which means they take
a lot of debt. When the economy slows, raw material
and inventory move slowly, and revenues do not go
fast enough to recover the debt. Consider retail
firms. ―Vishal‖ and ―Subhiksha‖ based on consump-
tion forecasts, expanded rapidly. Soon, they found
themselves buried under a mountain of debt. Due to
high real estate costs, excessive inventory and fal-
ling revenues, their balance sheets were awash in
red, taking them down the road to a painful CDR.
So, what went
wrong?
What happens
when foreign
holders and
bondholders ,
and domestic
banks don‘t do
a deal?
This is evident
f r o m KS L
case. KSL and
Industries, a textile company which is a part of the
Tayal group wanted to restructure its 700 crore loans
to state owned banks. It had also raised 500 crloan
by the way of foreign currency convertible bonds.
Bank of Mellon New york, trustee of bondholders,
filed a petition in the Bombay HC said that they
would lose out from the restructuring if they were
not part of it.
KSL‘s Response: It bought back the FCCB from the
foreign banks by raising loans through the Indian
Banks, thereby leaving the Indian banks holding the
bag.
If the reason for the current increase in restructured
accounts is the downturn in economy, it should have
been echoed equally across public as well as private
and foreign banks. This reflects arguable mirrors
that public sector has not been as judicious in the use
of restructuring as a credit management tool as the
private sector and foreign banks.
Lopsided burden sharing:
It has been discovered that the public sector banks
share a disproportionate burden of such accounts.
Chennai's Indian Overseas Bank has the highest per-
centage of restructured assets, 9.7 per cent, followed
by Mumbai-
based Central
Bank of In-
dia, 8.39 per
cent. In com-
parison, the
restructured
assets of
ICICI Bank,
HDFC Bank
and Axis
Bank, are all
below two
per cent.
Also, the data on restructuring suggests that the re-
structuring is substantially biased towards more
privileged borrowers vis-a-vis small borrowers. This
highlights an issue if the misuse of CDR by banks as
well as corporate. It has been observed that avail-
ability of standing regulatory forbearance to CDR
mechanism has prompted banks to avoid using other
means of credit management judiciously , i.e.,
proper due-diligence before sanctioning a credit fa-
cility, regular and proper monitoring of accounts af-
ter disbursal and taking prompt corrective action on
the first signs of weakness in the accounts.
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Misuse of CDR by borrowers:
The CDR route for debt mitigation has also been
found to be unfairly exploited by Kingfisher, a pri-
vate airline, by getting a part of its massive debt to
banks converted into equity at inflated valuations.
The Way Forward:
Make it Personal:
One of the prominent recommendations by the RBI
working group was to ask promoters to provide a
―personal guarantee‖ to the loans so that they do not
see loans just as the liabilities of the corporate but
have their own skin into it. The problem faced is
some of the promoters do not agree to provide per-
sonal guarantee but the group of RBI went on rec-
ommending that the RBI should prescribe promoters
personal guarantee as a mandatory requirement for
all cases of CDR.
Develop Specified Risk Architecture:
Banks should develop specific risk architecture to
analyze the credit worthiness of borrower prior to go
with the restructuring. For example, banks need to
examine the effective levels of leveraging in the pro-
ject. Higher leveraging raises the risks of a project
especially in an uncertain environment. There have
been many instances of even the promoter‘s equity
component being financed out of debt. There have
also been instances of debt flows being structured as
equity and of the ―private‖ component of Public Pri-
vate Partnership projects being debt finance. Bor-
rowing from another bank is not equity and adds to
the burden of debt servicing. It is thus important to
ensure, at the time of restructuring that projects are
not over leveraged. It would also be important to
establish that the borrowers are sincere about the
project, in particular, that the borrowers, or at least
the senior management of the borrowing companies,
are willing to tighten their belt and share the burden
of restructuring (Dr. K. C. Chakrabarty).
Equal attention to small players:
There should be a structured mechanism for restruc-
turing of retail, SME and agricultural loans same as
for larger accounts. This structure will need to be
built in at various levels –at the state, the district, the
region and the bank level. Hence, our entire ap-
proach towards restructuring should be reoriented to
depict more compassion towards small players.
Time:
Time is very often a critical essence in the turn-
around of the companies and therefore an elongated
process of restructuring assessment could erode the
viability of the project. Hence, for restructuring
process to be successful in helping the borrower tide
over the temporary difficulties, it is vital that the as-
sessment of the proposal and its approval gets done
in a specific time period, around 90 days.
Rightly put by a veteran banker—when a small man
owes a few thousands to a bank, he is in deep trou-
ble but when a big tycoon has outstanding running
into crores with the bank, it is the bank that faces the
music!
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34
We care –2013:
a civic engagement internship
Espousing its rich tradition, School of Business Management, NMIMS successfully organ-
ized “We Care- 2013” which received a lot of praise from industry and students alike. The
aim of the programme was to socially sensitize MBA students through „We Care: Civic En-
gagement Internship Project‟. Under this project, the students worked in NGOs/social en-
terprises to gain firsthand experience in examining social issues impacting the Indian soci-
ety and exploring how social sector organizations strive to make a difference.
We Care achieved its mission by placing students across all the geographical parts of the
country. Students worked in various domains like Advocacy, Women Empowerment, Rural
Development, Disaster Management, Social Research and Micro Finance.
Team Finomenon is happy to share few of such handpicked experiences of students who
have worked for Micro Finance Institutions/NGOs.
―Our objectives mainly focused on studying the current state, financial and otherwise, of the
several tribal people who stay in Abu Road block. Keeping the time and distance constraints
in mind, a suitable sample size and a suitable methodology was chosen to undertake the
study.
The entire course of carrying out the survey for the project left us with wonderful experi-
ences. A great learning came out from the entire process, which we are sure, would not have
come to us through class room teachings. We realized how herculean is the task of organi-
zations like Jan Chetna Sansthan, which deals with people having extremely low level of
awareness. The field trips that we made for our survey helped us become more sensitive
about the pathetic situation of most basic facilities like roads and electricity. We discussed
the results in an analytic manner, mainly to cater the needs of our own academic purpose.
We have aimed that the project helps to understand, analyze and interpret the various as-
pects of the lives of the Adivasis (the local tribes) and it leads to some initiatives that will
help to enhance their livelihood.‖ - Vivek Verma, MBA Banking Management, I year,
NMIMS interned with Jan Chetna Sansthan, Abu Road
―SAATH savings and credit cooperative ltd. (SSCCL) has been supporting the urban slum
population of Ahmedabad since 2002. By encouraging saving habits amongst the people, it
has worked towards financial inclusion and betterment of living standards. In 2007, it
launched the joint liability group (JLG) model for procuring loans. This innovative model
has made it possible for groups living in the same community to procure financial aid with-
out providing any substantial security. The members of the group are only required to save a
minimal amount every month on which they also receive interest. The liability of paying
back is on the entire group and this reduces the default risk. So, SAATH has been able to
revolutionize the Micro Finance landscape through this innovation.
My experience at SAATH was very enlightening. I learnt a lot about the Micro Finance sec-
tor and the needs of the poor. I realized that they have a huge potential to better their lives if
given a chance. They are highly adept at managing their local businesses. It‘s only that they
are overlooked which prevents them from improving their lives.‖ - Pratik Bajaj, MBA, I
year, NMIMS, interned with SAATH, Ahmedabad
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Ipsita Pradhan is
currently pursuing
her management
studies from
Institute: Institute
for Financial
Management and
Research,
Chennai.
Email Id:
ipsita.pradhan@ifm
r.ac.in
BY IPSITA PRADHAN, IFMR CHENNAI
Corporate social media is not a new
concept anymore. Social media has
opened up a huge potential gate-
way for business. But opening an
account and getting likes or follow-
ers is not enough. In a research
done by Harvard Business Review
Analytics Services, there are 43%
of companies, who have entered
social media usage, but have not
made effective use of it. While
45% of the rest are still planning,
only 12 % have been able to use
the platform effectively.
Today, even if many companies
have opened social media accounts,
there have been only a few who
have been successful in taking ad-
vantage of the platform.
Few industries are as highly regu-
lated as finance. So it may seem
counter-intuitive for the industry to
call for enhanced regulation and
guidance. But presence in social
media necessitates strategic plan-
ning and strict corporate govern-
ance for banks, given the highly
sensitive nature of information han-
dled by the institution.
Social media provides a lens into
the beliefs, needs, desires and beh-
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viors of tens of millions of people across all con-
sumer segments. They are increasingly comfortable
expressing themselves more often and across a wider
variety of topics. There is no limitation of knowl-
edge imposed by a fixed number of pre-determined
survey questions. Various tools are being used for
surveys e.g. there are monitoring tools that use key
words to search relevant data. Besides collecting
data, companies are using ―shout marketing," by us-
ing social more often to promote their brand, moni-
tor trends among customers, and even research new
product ideas. Information can be provided to the
customer about policies, offers, changes etc. Cus-
tomer feedbacks can be taken about changes, offers,
interests, problems, choices, etc. It can also be used
for recruitment purposes e.g. announcing vacancy.
So first of all, the objective/objectives of using so-
cial media should be defined
Next step would be deciding the platform/platforms.
Since, choices are many, it is essential to identify on
one or two key platforms and decide on the phases
in which the engagement will take place. The choice
of platform could be made on the basis of potential
for reaching ability of the platform to required cus-
tomer segment, means of interaction provided by the
media, popularity of the media, customer expecta-
tions, security etc.
The most important stage in the process is the devel-
opment of right corporate governance. A social me-
dia account establishes an organization‘s online
identity. There are two important areas here. First,
building and maintaining the profile/profiles. The
name should be given so as to be easily recognized
and found. It is of critical importance that password
access to the account be given only to the respective
responsible personal and a set of rules written down
to guide and restrict the use. It should be clearly
mentioned in the rules and regulations, about who
can access the account and what is allowed and what
is not allowed to be done.
A separate department may be formed to manage the
account or accounts. This would require a set of
policies to determine the adequate method to do the
job. These policies have to be separately formulated,
since they would be different from the regular bank
policies. The employee engaged to the accounts
should have a clear idea about the type of content
that can be made public and should have good com-
munication skills to respond to customer enquiries,
complaints etc. The time plot for response strategy
should be formulated and conveyed. Since bank han-
dles a lot of sensitive data, it is essential to take extra
care in handling the content that is public in the ac-
count/accounts. Customers should be given advice/
instruction to avoid posting sensitive information
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The records so generates should be managed care-
fully. While they can be used for research purpose, it
is important to protect the information from unau-
thorized access. Care should be taken to follow the
policies and laws. In India, the legal implications
must be viewed in accordance with the law of land
e.g. RTI Act, IT ACT 2000 & IT Amendment Act
2008 etc. as also rules and regulations made there
under. These policies must be circulated internally to
ensure uniformity of response.
The second thing to keep in mind is that, most of the
employees have social accounts of their own. They
indirectly represent the company. Actions taken by
them, especially anything written by them about
their bank might be seen as voice of the bank itself.
A set of rules and regulations is necessary in order to
avoid possible adverse effects. For example, em-
ployees may be asked to write a disclaimer specify-
ing their own opinion and not that of bank, while
updating anything about the bank.
Before going online, a small scale pilot project
should be created and monitored. All the ideas
should be tried and reviewed. The study should be
used if possible to make further improvements in the
system, wherever required. There should be regular
inspections of social media usage. Innovative ideas
should be encouraged from time to time, in order to
improve the engagement. Every time, before a new
idea is fully introduced, small tests should be con-
ducted.
Establishing the best account, a set of rules and a
system to work on it is not enough. What most ac-
counts are lacking today is continuous usage and
responsiveness. For example, on a twitter account,
while SBI made frequent announcements of new
plans, ICICI used the platform to respond to a cus-
tomer‘s complaint, apologizing for the inconven-
ience, promising quick solution and asking for
phone number or email ID for further contact. While
SBI used the account for generating awareness,
ICICI used it not only for awareness but also to di-
rectly reach the customer. These days, many new
ideas are coming up. While HDFC had been using
the platforms for engaging visitors with interesting
facts, ICICI has been trying to incorporate online
banking in social media. The best users understand
that social media is a conversation, not a monologue.
More effective companies use social media to inter-
act with customers by creating online customer
groups and monitoring trends. Social media usage is
still relatively new and it provides a platform to ex-
periment new ideas in order to enhance performance.
In the long run, it is important to ensure that the pro-
ject is scaled and integrated with the existing admin-
istrative and communication structure. Although the
idea may seem too far-fetched or unrealistic to
many, it‘s a growing trend and its growing fast.
What is important to do, is not only to embrace the
opportunity but, to do it the right way.
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"Money was never a big motivation for me, except as a
way to keep score. The real excitement is playing the
game." - Donald Trump
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