Team Ashes - Ahvan

8/3/2019 Team Ashes - Ahvan

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FINANCE LEAGUE

IIM Indore

Team AshesIIM Lucknow

Team Ashes, IIM Lucknow

Gaurav Bhuwania Nikhil Loyal Rishabh Maheshwari


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Agenda

RBI requirements

Recommendations

Strategic Implications

Bank: A different ball game

Strategic Fit

Design and regulation implications

Changes: Organizational Structure

B-Plan

Financial Projections



3/16

RBI Requirements


Requirement Justification

Promoter Shareholding not below 40%

for 1st 5 yearsPromoters retain significant interest

during crucial start-up period

NOHC: At least 50% of directors

independent of PromotersStronger corporate governance

Promoter: Diversified ownership,

sound credentials & integrity

Stability to proposed banks.

Simpler & Effective Supervision

CAR of 12% for 1st 3 years Provides cushion to deposit holders

during start up phase

Separate unleveraged non-operating

holding company (NOHC)Effective control and Monitor by RBI

Prevent Double leveraging

Compulsory reduction in promoter

shareholding in long term

Ensures diversification of shareholding,

Bank not influenced by single entity


4/16

RBI Requirements


Ownership and Listing Conditions

Listing the Bank within next two yearsBring down the promoter shareholding to 40% within two years

Restriction on non-promoter shareholding

5% for non-resident and 10% for resident

Restriction on establishing any financial services for the first three years

Expansion Plans5% for non-resident and 10% for resident

25% branches in rural areas within 5 yearsLead to Higher NPAs and Transaction Costs

C

H

A

L

L

E

N

G

E

S

R

E

C

O

M

M

E

N

D

A

T

I

O

N

Apply for Permission to Set Up a Private BankConvert to a full fledged bank

Initial focus on areas where present market share of L&T finance is high

Can attract higher deposits

Innovative business models in rural areasBusiness correspondents

Mobile ATMs/Branches

Innovative products in rural areas

Seed financing

Bank financed commodities forward contracts

Working Capital for small to medium Enterprises


5/16

Opportunities and Roadblocks


Opportunities Roadblocks

Access to CASA accounts

Cost of funds down to 6-7%

Current Account: 0%

Savings Account: 4%

One Stop for all Banking Services

Greater Visibility

Cross-sell other financial & advisory

products

Sticky Customer Relationships

Deposits guaranteed by RBI

Secured deposits

Statutory Compliances CRR, SLR etc.

40% Lending in Priority Sector

Strict Reporting Requirements

Rural Expansion Requirements 25%

Higher Transaction Costs

High NPAs

Lower Profitability


6/16

L&T Finances Competitive Adv.


RBIR

equirement Competitive Advantage

25% rural branches

Meet with the L&T Financial Holdings

objective of focus on Rural and

Infrastructure products

Strong Presence in Rural Areas

CAR requirements Already as NBFC, equity much higher

than required

Peoples trust and IPO within 2 years Strong Brand Equity

Diverse Customer Base

Reaching Unbanked Areas Established Collection System

Organizational Expansion Portable Knowledge Base

Management with Proven Track Record

Decreased Non-Performing Assets Strong credit risk department and

evaluation framework in place


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Business Strategy


Strategy Justification L&T Advantage

Innovative Models in

Rural Areas

High credit and NPA risk in

rural areas call for Prudent

Lending & Credit assessment

Established Credit Evaluation

Frameworks

L&TFH MFIs as

Banking

Correspondents

Easy deeper reach through

already established MFIs

Leverage the established trust

Cross Selling through the

L&TFHs MFIs

Alliances with Retail

Networks

Alliances with dealers

(vehicle), Agricultural retail

network

Existing relationships

Tie-up with other

Banks for ATM

networks

Minimize the Initial Capital

expenditure

Start with branches ingeographies where

higher Brand Equity

Attract more & easy deposits High Brand Value

Focus on Online &

Mobile Banking in

urban Areas

Lower the operating Costs

Increase Efficiencies


8/16

Strategic Assessment


Political

Strict Regulatory Regimes

Changes in norms & frameworks

Social Scenario

Consumers: More awareness about

financial services & products

One stop solution from the FIs

EconomicGreater share of the market will beserviced by MFIs and NBFCs

Source of Funds: Collaborativealliances with international banks

Technological

Mobile Phones; Source of primarydelivery mechanism in rural areasowing to their high penetration & lowcosts

PEST


9/16

Design and Regulations


IncreasedR

egulations byRB

I

Statutory Ratios

CRR: 6%, SLR: 24%

Less Deposits available for lending

Dig in Net Interest Income

Design Issues

Optimize movement line of user within Bank

space

Enhanced Sign System: Convey Information

in most effective manner

40% Priority Sector Lending Higher Transaction Costs

Higher NPAs

Agriculture, Education etc.

Reporting CompliancesFortnight Reporting

Auditing Expenses


10/16

Organizational Architecture


Trained

Personnel

Non-Compliance toRBI: Penalties,Loss of Market

Esteem

Employees:Familiar with

IFRS Guidelines

Improved

Technology

Mobile &Internet based

services

Collaborationwith top ITcompanies to

provideTechnology

Employee Option

Stock Scheme

RetainEmployees

Enable them toparticipate inBanks future

growth &FinancialSuccess

Hire Best talentfor senior

management &

Key positions

StrategicRelationships

with EminentCompanies

Core BankingSolutions

Debit and CreditCards

RBI Compliance Guideline

Moving certain lines of existing businesses to bank

Retail and Corporate loans & advances

Shifted from existing business to Bank in a phased manner

Leverage the lower cost of funds

Remove the possibility of arbitrage


11/16

Successful Business Model Successful Financial Inclusion in Rural areas: Emphasis on-

Availability

Affordability

Accessibility

Awareness

Acceptability

Existing Business Model through Business Correspondents

Innovative Products in rural areas

Innovative Business Model

Mobile ATM/Branch: Villagers informed in a priori location &

timing of mobile ATM van. Advantages: Less Man working hours

One van can cover a cluster of villages

Deposits per mobile Branch increases, hence lower

transaction costs


12/16

Point of regulation, CoreBanking System

Balance SheetBank

Operation, Coordination

TrainingBusinessCorrespondent

Transaction Security,Processing

Authentication, DataStorage

Technology

Vendor

Account opening (KYC),Sales & Marketing,Customer care

Liquidity, Referral

CustomerService Point

Bank HDBC SBI ICICI

Product

Loans

through

SHG Bank

Linkage

No Frill

Saving

Account

Loan saving

RD, FS

BCs

enrolled203 33 48

Operationalstates

13 Pan India 13

Clients

reached650,000 2,700,000 500,000

BC Company Technology Vendor

Eko Aspire

Foundation

Eko Financial Services

FinTech

Foundation

FINO

Zero Mass A little World

Limited Transactions in rural areas

Full fledged Bank not a viable option Huge operational cost

Alternative: Business Correspondent

Outsource selected Banking Services

Business Models

Industry Examples



13/16

Financial Projections - Bank


Assumptions Balance Sheet

Starting with Minimum Capital as per RBI Guidelines

Considering already existing wide reach in 23 states, 0.01% of deposits can be attracted

IPO in 2014 as per RBI guidelines

Advances:Investments:Other Assets = 6:3:1

Deposit Growth rate over 5 years CAGR = 131%

Capital Adequacy Ratio has to be maintained above 12% and on an average 16.5%

IPO will be priced at Rs. 70

20% growth in Other Liabilities

Assumptions P&L

Interest Income from advances at 10% of average of year balance

NPAs assumed at 2% of advances

Interest Income from investments at 7.5% of average of year balance

Non-interest Income assumed to be 12% of interest inc (Industry average around 12-14%)

Interest Expense in case of deposits at 6% of average of year balance

Interest Expense in case of borrowings at 8.5% of average of year balance

Non-Interest Expense assumed to be 1.03% of Total Assets

Tax rate 30%


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Innovative Products:

Status Quo: Kisan Credit

Card

Credit only for agricultural processes

Inconvenience in reaching out to branch

for every transaction

Limitation of cash delivery points

Only 10.09cr Kisan credit card holders

but more than 25 cr mobile owners in

rural India

Limited Credit line of 3 years at 7% p.a

L&Ts Credit Plan

Credit for agricultural purposes

& short term credit for personal

Use

Wider reach & financial inclusion

Cheaper & faster transactions

Data Mining for future

recommendations


15/16



Balance Sheet (in Rs. Crores)

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017Assets

Advances 2020.2 9333.1 9553.3 10271.8 11144.5

Investments 1010.1 4666.5 4776.6 5135.9 5572.3

Other Assets 336.7 1555.5 1592.2 1712.0 1857.4

Total Assets 3367.0 15555.2 15922.1 17119.7 18574.2

Liabilities

Shareholder's Funds 500.0 2309.9 2364.4 2542.3 2758.3

Deposits 553.0 1935.5 5806.5 6393.0 7167.5Borrowings 2102.5 11055.9 7446.6 7818.9 8209.9

Other Liabilities 211.5 253.8 304.6 365.5 438.6

Total Liabilities 3367.0 15555.2 15922.1 17119.7 18574.2

0.0

5000.0

10000.0

15000.0

20000.0

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Total Liabilities

0.0

10000.0

20000.0

FY

2013

FY

2014

FY

2015

FY

2016

FY

2017

Borrowings/Deposits

Borrowings

Deposits


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P&L (in Rs. Crores)

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Interest Income from Advances 99.0 556.3 925.4 971.4 1049.4

Interest Income from Investments 37.9 212.9 354.1 371.7 401.6

Non-Interest Income 16.4 92.3 153.5 161.2 174.1

Total Income 153.3 861.5 1433.1 1504.3 1625.1

Interest Expense for Deposits 16.6 74.7 232.3 366.0 406.8

Interest Expense for Borrowings 86.7 542.8 763.2 629.7 661.2Non-Interest Expense 34.7 160.2 164.0 176.3 191.3

Total Expense 138.0 777.7 1159.5 1172.0 1259.3

PBT 15.3 83.8 273.6 332.3 365.8

Tax 5.4 29.3 95.8 116.3 128.0

PAT 9.9 54.5 177.8 216.0 237.7

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