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Group Research Study on

Financial Sector Reforms the way forward…

Team - Titans: CA. Abhishek Mistry CA. Gagan Choudhary CA. Gagan Kothari CA. Rima Shah

Reforms Mantra: Inclusion Growth Stability

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Topic: Regulatory Architecture Capital & Bond Markets by CA Abhishek Mistry

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Financial Regulators

An Overview

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Regulatory Architecture – India

No Central Authority

Ministry of Finance

Ministry of Consumer

Affairs

Ministry of Labour

Ministry of Company

Affairs

SEBI (Capital Markets)

IRDA (Life & General

Insurance)

PFRDA (Pension Fund)

RBI (Banks & NBFCs)

Commercial Banks

Co-Op Banks NABARD SIDBI National

Housing Bank

Ministry of Small Scale

Ministry of Urban Poverty

EPFO (Provident

Fund)

Deposit Taking

Activities

High Level Coordination

Committee on Financial Market

Registrar of Co-op Societies

FMC (Commodity

Markets)

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Regulatory Architecture – United States

Financial Stability Oversight Council

Federal Reserve

Office of Comptroller of

Currency

National Credit Union

Administration

Federal Deposit Insurance

Corporation

Securities and Exchange

Commission

Commodity Futures Trading Commission

Federal Housing Finance Agency

Bureau of Consumer

Financial Protection

Building & Friendly Societies

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Regulatory Architecture – Canada

Ministry of Finance

(Shared system of Financial Regulation and Supervision)

Department of Finance

Bank of Canada

Office of the Superintendant of

Financial Institutions

Canada Deposit Insurance Corporation

Financial Consumer Agency of Canada

Canadian Securities Regulatory System

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Regulatory Architecture – Japan

Financial Services Agency

(Planning, Policy-Making & Supervision of Financial System)

Banking

Insurance Business

Securities & Exchange Surveillance

Securities Business

Certified Public Accountants &

Auditing

Administrative Law

Financial Investigation

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Regulatory Architecture – United Kingdom

Financial Regulations

Prudential Regulation Authority

(Regulation & Supervision)

Banking

Building Societies

Credit Unions

Investment Firms

Insurance

Financial Conduct Authority

(Consumer Protection)

Financial Intermediaries

Money Laundering

Mortgage Market

Financial Investigations &

Enforcement

Promote Competition

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Regulatory Architecture – Australia

Financial Regulations

Prudential Regulation Authority

(Licensing & Regulation)

Banking

Deposit-Taking Institutions

Insurance

Friendly Societies

Superannuation

Securities & Investments Commission

(Consumer Protection & Supervision)

Financial Markets

Financial Intermediaries

Consumer Credit

Protecting Investors

Insolvency Laws

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Regulatory Architecture – Summary

Principles for setting-up Dynamic Architecture:

• Financial Sector should be guided by three mantras: Inclusion, Growth and

Stability.

• We cannot be risk-averse. Too much risk-aversion on part of regulators can

impede growth and development.

• There is no perfect regulatory architecture to suit every economic cycles. It

has to be constantly molded with changing times.

• Complexities of the financial products should be properly understood. If

these products penetrate in the system without proper knowledge, it may

create dangers to systemic stability.

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Financial Reforms from

Capital & Bond Market perspective

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Reforms – Capital & Bond Markets

Customers’ Perspective

• There is a need to adopt Customer-Centric Approach as done in UK and

Australia. Right product should reach to right customer.

• As financial products are more complex for layman to understand fully, more

responsibility should be cast on Intermediaries.

• There is a need to inculcate habit of Financial Planning with customers with

proper risk profiling.

• People should be encouraged to invest in equity market through Mutual

Fund route especially novice investors.

• Training Session should be undertaken by SEBI regularly in semi-urban

and rural areas where there is lack of knowledge.

• Consumer Redressal Forum should be pro-active on specific cases like

mis-selling of financial products, etc

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Reforms – Capital & Bond Markets

Regulators’ Perspective

• Regulators should revise upwards its Capital Adequacy Norms for

intermediaries.

• Exchanges should provide for Settlement Guarantee Fund on the basis of

turnover on its platform.

• Although RBI exercises lot of regulatory powers, yet there is a need for

Independent Regulator in bond market like SEBI and IRDA.

• Bond market awareness and participants needs to be increased. Presently,

it is dominated by PSU Banks and trading is mostly in G-Secs.

• There should be uniform stamp duty across all states and no TDS on

interest. Tax deduction u/s 80CCF should be extended.

• Make unified regulator so that movement of funds by investors across asset

class is easier.

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Reforms – Capital & Bond Markets

Issuers’ Perspective

• A platform should be set for international listing in India.

• IPO process should be fastened. Presently, it takes around 4 to 6 months.

• Allow Pension, Provident Fund Trusts and Insurance to invest in Corporate

Bonds without limits.

• Retrospective amendments of laws should be avoided.

• Committee to be formed on ‘Why MNCs in India prefer delisting?’

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Topic: Banking Insurance by CA Gagan Choudhary

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Financial Reforms from

Banking perspective

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Narasimham Committee (1998) - Recommendations

• Autonomy for the public sector bank

• Reform in the role of RBI: segregation of the roles of RBI as a regulator of

banks and owner of bank

• Stronger banking system: Merger of larger Indian bank but its still pending

• Non-performing assets: Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 got implemented

• Capital adequacy and tightening of provisioning norms: The committee

targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002

• Entry of foreign banks: Increase the capital limit for foreign banks

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Nachiket Mor Committee (2013) - Vision

• Universal Electronic Bank Account (UEBA)

• Ubiquitous access to payment services and deposit products at reasonable

charges

• Sufficient access to affordable formal credit

• Universal access to a range of deposit and investment products at

reasonable charges

• Universal access to a range of insurance and risk management products

at reasonable charges

• Right to Suitability

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Issues faced by Banking Sector

• Increase penetration of banking in India- tackle demand supply mismatch

• Credit disbursement to the priority sector

• Maintain asset quality

• Improve risk management mechanism

• Technology adoption

• Are Indian Banks Prepared for Basel III

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Challenges for Banking Sector

• Indian banks would require additional capital of Rs 5 trillion to meet Basel-

III norms by March 31, 2018

• Half the population does not have access to banking services

• Allotment of new Banking Licenses

• Growth is still a concern for the banking sector on account of a sustained

slowdown in the economy as well as reduced demand for credit on account of

the current high interest rate environment

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Major Banking Reforms – in Pipeline

• Creating a global bank

• Licenses for specific banking tasks

• Easy access and smaller banks

In March 2013, the Financial Sector Legislative Reforms Commission

headed by former justice B. N. Srikrishna suggested:-

• SEBI and IRDA should be merged into a unified financial agency

• Role of RBI should be restricted to regulating banks and managing monetary

policy.

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Funding Options for Startups in India

• Bank doesn’t fund Startups since they don’t have track record and

collaterals to offer

• Angel Investors and VCs only fund about 2% of total starts ups looking for

funds on selective basis

• Scenario is different in US where they have passed

JOBS Act (Jumpstart Our Business Startups Act), through which funding

through internet is possible, it is called Crowd Funding.

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Reforms Suggested

• Public sector banks need urgent and bold reforms:-

Consolidation of PSB

Government should reduce ownership in PSB

Governance: Professional CEO and Board

• Banking License should be given to Indian Postal department immediately

they have almost 155,000 branches with almost 90% in rural areas.

• In India also we should have something like JOBS Act (Jumpstart Our

Business Startups Act) that will allow small businesses and startups to raise

funds through internet.

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Financial Reforms from

Insurance perspective

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Overview of Insurance Sector

• Among top insurance markets:

India ranked 10th among 156 countries in the life insurance business,

with a share of 2.3 per cent during FY12.

The country ranked 19th among 156 countries in the non-life premium

income, with a share of 0.62 per cent in FY12.

• Rapidly growing insurance segments:

The life insurance premium market expanded at a CAGR of 20.1 per

cent, from USD11.5 billion in FY03 to USD59.9 billion in FY12.

The non-life insurance premium market rose at a CAGR of 18.0 per

cent, from USD3.4 billion in FY04 to USD12.7 billion in FY13.

• Increasing private sector contribution:

The share of private sector in the life insurance premiums increased

from 2 per cent in FY03 to 29.3 per cent in FY12.

The market share of private sector companies in the non-life insurance

premium market rose from 14.5 per cent in FY04 to 42.9 per cent in FY13.

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Challenges for Insurance Sector

• FDI in insurance sector to increase from 26% to 49%

• Public issue by Insurance Companies

• Effective Distribution Channel

• Focus on overall Financial inclusion

• Understanding consumer needs and preferences

• Reach out to rural areas and show them the benefit of insurance

• Increase the penetration of insurance services in India

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Reforms Suggested

• FDI should be immediately increased from 26% to 49%.

• Insurance product should be standard across all Insurance companies, so

customer is well informed before selecting the insurance product and

Insurance companies.

• Insurance companies should be allowed to raise money from public like

any other company.

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Topic: Provident and Pension Fund by CA Rima Shah

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Indian Pension System – Current Scenario

National Pension Scheme

• Managed by PFRDA

• Move from Defined Benefit (Civil Pension Services) to Defined Contribution

Scheme

• Government Employees:

Compulsory

10% Contribution each

• All Citizens:

Option to Decide the Investment Proportion in Debt-Equity

Tier I & II: Minimum Rs.6,000/Rs.2,000 per year

Employees Provident Fund & Pension Scheme

• Establishments having 20 or more Employees

• Employer-Employee – 12% Contribution each

Other Pension Schemes

• LIC Annuity Scheme

• Retirement Benefit Schemes provided by Various Banks and NBFCs

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FDI in Pension

06/09/2013: Parliament passed the Pension Bill:

• Allowing FDI in Pension Sector

• It pegs FDI in pension sector at 26%

• More Funds in Indian Market

• Will attract New Schemes in Market

• Increase the Competition

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Why Pension Reforms ?

• India is emerging as most populous country – 1,210 Million in 2011.

• Elderly population comprises 8.6% of total population (1.2% increase from

2001)

• Elderly population is expected to be 10.7% of total population by 2021.

• By 2050, 200 million will be above 65 years of age.

• Pension liability was about of 2.6% of GDP in 2012-13.

• Increase in cost of private health care facilities.

• Inadequate public health care facilities.

• Declining work participation among elderly.

• Break-down of joint family system.

Age group 1991 2001 2011

0-4 12.2 10.7 9.3

5-9 13.3 12.5 10.5

10-14 11.8 12.1 11.0

15-59 55.4 56.9 60.3

60+ 6.8 7.4 8.6

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Global Scenario

Melbourne Mercer Global Pension Index – 5th Report – October 13

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Reforms Suggested

• NPS / EPFO should be mandated for all establishments on the basis of its

Revenue and not on the basis of number of employees:

The Use of PRAN will help in case of Employee Turnover.

More Coverage of Employees.

• FDI Schemes should be managed and controlled:

Properly managed to sustain until the life of the person.

Provide adequate returns on the Investment.

Effectively controlled to win public confidence.

• Agricultural economy – more farmers:

Special schemes for farmers based on size of land owned & its yield.

Initially, to encourage, only DC by Govt.:

Combination of DB (Govt. High)+ DC Scheme

• Tax benefits should be raised:

Currently, NPS Contribution (Employee) is in Rs1 lac limit u/s 80CCD (In

line with PPF – hence, PPF has gained more Importance)

Additional deduction over Rs 1 lac should be provided.

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Q&A Session

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Thank You