The Financial Sector

1
The Financial Sector Liberalisation The
Indian Experience
2
Economic backdrop
Demographic forces
GDP growth of about 8
Resurgent industrial sector
Continued expansion of services sector
Untapped rural potential
growing international linkages giving impetus to
all sectors of the economy
3
Indian economy till the 1980s...
Extensive state control of economic activity
Dominance of public sector Less focus on
viability
License regime
Limited competition Inefficient operations
Inward looking development strategy
Import substitution Import restrictions
Heavy regulation of products and players
Regulated interest rates Regulated capital markets
Minimal use of technology
Largely generic products to customers
Delivery using brick mortar infrastructure
Limited scope for innovation
4
1991 Economic reforms

• Dismantling of licensing and easing of
  production, pricing and distribution controls
• Greater thrust on private (domestic as well as
  foreign) investment in infrastructure (power,
  telecom, roads and ports)
• Import liberalisation removal of import
  licensing, reduction of customs duties
• Liberalisation and rationalisation of exchange
  controls, current account convertibility

5
Banking sector reforms

• Deregulation of interest rates and reduction in
  statutory liquidity reserve requirements
• Licensing of new private banks in 1994
• Foreign banks permitted to set up 100
  subsidiaries and foreign ownership ceiling in
  private sector banks raised from 49 to 74
• Increased autonomy accompanied by more stringent
  prudential norms for asset classification, income
  recognition provisioning
• Capital adequacy norms aligned with international
  standards
• Manpower rationalization for cost efficiencies

6
Impact of the reforms
Sectoral share of GDP()
Sector
Growth 2005 ()
57.6
Services
8.6
21.9
Industry
8.3
20.5
Agriculture
1.1
GDP
6.9
One of the fastest growing economies in the world
Source RBI,CSO
7
Comparison with China
Sectoral composition of GDP
Indias services-led model is similar to western
economies
Services
Industry
Agriculture
vis-à-vis Chinas traditional, capital
intensive model
8
resulting in greater efficiency
bank loans to GDP at about 30 in India compared
to about 130 in China
Source EY Report
9
Balanced growth phase
()
India is in a phase of high growth low
inflation
Source CEIC, ICICI Bank Research
10
Stable exchange rate
India remains the least volatile of all Asian
currencies
11
Services as the key growth driver

• Accounts for over 57 of GDP
• Leveraging rich pool of human capital
• Quality educational institutions
• Large English speaking population
• Globally-positioned software IT services sector
• 34 increase in exports from US 12.8 bn in
  FY2004 to US 17.2 bn in FY2005
• International services hub
• Commenced with IT-enabled services voice data
  
• Expanded to all knowledge sectors
  pharmaceuticals, biotechnology, engineering
  design
• Growth in financial services, travel hospitality

12
Consumer revolution

• Changing demographic profile
• Upper income segment CAGR of 40 in major cities
• 69 of population under 35 years
• Low penetration of finance
• Retail credit at about 10-11 of GDP
• Easier availability and improved affordability of
  credit
• Entry of banks increased competition and
  coverage
• Increasing use of technology
• Decline in interest rates by half

13
Renewed industrial growth

• Prolonged period of restructuring and
  repositioning
• Early 1990s capitalising on domestic demand
• Mid- to late 1990s restructuring to achieve
  world-class efficiency
• 2000 Articulation of international
  competitiveness
• Key transformational trends
• Increasing deployment of technology
• Deleveraging and organic capital generation
• Constantly improving quality standards
• Internationally competitive across several
  sectors
• Emergence of Indian multinationals

investment plans of over US 50 bn
14
with growing efficiency in operations
15
and improvement in capital structures
16
Progress in infrastructure development

• Construction of Golden Quadrilateral and
  North-South, East-West corridors
• 13,000 km long - worlds largest single highway
  project
• Boosting demand for steel, cement, commercial
  vehicles

Roads

• Cellular subscriber base of about 54 million
  CAGR of 87 over last five years
• Improving telecom infrastructure has had a
  positive impact on efficiency of firms services
  exports

Telecom
missteps in power and urban infrastructure being
addressed
17
The internationalisation of India

• International orientation of Indian businesses
• Growth in foreign trade
• 26 growth in exports in current year
• Internationally competitive across several
  sectors
• Emergence of Indian multinationals
• Setting up production capacities overseas
• Setting up international distribution
• Consolidating supply chain
• Indias emergence as a global manufacturing hub
• Second-most favoured destination for FDI in
  manufacturing
• Vast Indian diaspora about 20 million
• Inward remittances US 20 bn per year

18
Opportunities in insurance and asset management

• Wider range of products, adoption of technology
  and growth in premiums
• Significant under-penetration of insurable
  population and low average sum assured
• Insurance premium/GDP about 3.2(1)

Insurance

• Private sector entry in the 1990s
• Significant presence of leading international
  players
• Robust growth potential AUM of about Rs. 2.1
  trillion, only about 10.5 of bank deposits(2)

Asset management

• Source Swiss Re, Economic Research Consulting
  (2005)
• Source Association of Mutual Funds of India and
  Reserve Bank of India

19
Tapping rural Indias potential

• Growing policy focus on sustainable development
  of the rural economy
• Large credit needs
• Micro-finance
• Investment in agriculture/ food supply chain
  modernization and productivity improvement
• Enhancing access to financial services
• Scaling up availability of finance
• Funding through micro-finance institutions
• Securitisation of micro-finance portfolios
• Using technology
• Electronic farmer loan cards, internet kiosks and
  low-cost rural ATM

20
Rural banking The new growth horizon

• Though agriculture constitutes only 20 of
  Indias GDP, rural economy (agri non-agri)
  constitutes about 50 of GDP1
• Rural population of about 780 million2 with
  limited access to financial services

Opportunities

• Nature of demand
• Doorstep banking
• Flexibility in timings
• Low value and high volume of transactions
• Require simple processes with minimum
  documentation
• High costs of delivery through conventional
  channels

Challenges

• Source CERG (Consumer Economic Research Group)
• Source Tata Statistical Outline

21
Improving corporate governance

• Securities and Exchange Board of India has issued
  corporate governance guidelines under the Clause
  49 of the Listing Agreement
• At least 50 of the board of directors to be
  comprised of non-executive directors
• A qualified and independent audit committee to be
  set up consisting of at least three non-executive
  directors
• Additional disclosures about related party
  transactions and contingent liabilities to be
  made
• Large companies already comply with these
  guidelines and all companies are required to
  comply by January 2006.

22
Internationally benchmarked regulatory setup

• Reserve Bank of India - Central banking and
  monetary authority in India
• Alignment with global developments in banking
  supervision is a focus area for regulators and
  banks
• Manages money supply and foreign exchange
• Bank regulation entails
• Issuing guidelines on exposure standards
• Income recognition
• Asset classification
• Provisioning for NPAs
• Investment valuation
• Outlining and monitoring capital adequacy norms

23
Result - A stronger banking sector

• Low systemic risk
• At 4, Indias outstanding NPAs as a of GDP is
  one of the lowest in its peer group (compared to
  45 for China, 40 for Malaysia and 25 for South
  Korea)
• Few weak banks
• Growing focus on risk management and capital
• Systemic move towards alignment with
  international practices
• Understanding risk-based capital allocation
• Focus on market risk

24
We have made significant progress

• Liberalisation has created a diversified, robust
  and resilient economy
• Significant growth from private entrepreneurship
  in a liberal environment without government
  restrictions e.g. the information technology
  sector
• Radical improvement in communications
  infrastructure with cellular subscriber growing
  at a CAGR of 87 in last five years success of
  government policy and private enterprise
• Public sector enterprises are also listed and
  focused on market demands and value creation

25
A Summary
Balanced growth based on industry and services
Inflation under control
Interest rates hinge on inflationary expectations
High exports growth, capital account in surplus
Stable exchange rate
26
Thank you