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Presentation at ISB HyderabadPresentation at ISB Hyderabad

Competitiveness of the IndianBanking Sector- Public Sector

Banks

Competitiveness of the IndianBanking Sector- Public Sector

Banks

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1

OVERALL BANKING SECTOR ROADMAP AND SOLUTION FOR PUBLICSECTOR BANKS HAS TO KEEP IN MIND TWIN OBJECTIVES

Supporting GDP growth

GDP projected to grow at 8-9% goingforward

Infrastructure spending to be more thanUSD 600 bn in the next 5 years

500 mn new people added to middle classhouseholds

Rural and semiurban per capital

consumption to reach current urban levelsby 2017

Social/ macro-economic objectives

Financial inclusion

Agri- lending

Government sponsored schemes

Currency market support

Stock market support

Government debt

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2

CONTENTS

Public sector banks today

Indian economy and imperatives for banking

Reforms needed

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3Source: RBI, IBA

CREATION OF NATIONAL BANKING INSTITUTIONS HAS SERVED THEECONOMY WELL BETWEEN 1980 AND 2000

15,105

34,791 32,7348,122

11,324 14,407

8,042 10,0525,595

8,219

5,1784,014

32,419

1980

59,752

1990

65,412

2000

Metro

Urban

Semi-Urban

Rural

3.6%

Inspired by a larger social purpose and to subserve national priorities and objectives such as

Rapid growth in agriculture, small industries and exports Raising employment levels Encouragement of new entrepreneurs, and

Development of backward areas

Objective of Nationalization

528

346

1,473

792

4442683

13 38319

22

8328

191

1980

165 55

155165

1,007

1990

168 Wholesale trade

Industry

Other priority

Others

SSI

Agriculture

2000

3,751

Number of branches

Nationalized banks have played a key role in helping theUPA government achieve nine per cent growth in the lastfiscal"

Finance Minister P Chidambaram, Oct 9, 2007

Sectoral deployment of non food bank credit (Rs. billions)

Export Credit

"Average GDP growth at5.6% in the same period"

19.6%

11.5%

15.5%

17.7%

16.2%

14.9%

16.0%

16 82 391 17.2

CAGR

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4

VALUATIONS OF PSU BANKS ARE LOW DESPITE HIGHERPROFITABILITY

Source: Annual reports, Prowess

Bank profitability in India Bank valuation in India

P/E P/BMar 31 2008

ROEFY 2008

PSUb

anks

Private

ban

ks

16.8

19.1

19.6

16.0

21.8

11.7

17.7

17.4

PSUb

anks

Private

ban

ks

11.0

5.9

7.8

7.2

20.6

29.4

26.4

21.9

1.6

1.1

1.5

1.1

1.8

4.1

3.2

3.7

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5

1. Lower asset quality Gross NPA levels of PSU banks at 2.7%, compared to 1.9%for new private banks and 1.8% for foreign banks

2. Slower growth CAGR in balance sheet for private banks over 2003-07 is 35%,more than double that of PSU banks at 16%

3. Lower productivity Profit per branch for PSUs is only Rs 0.5 crores compared toRs 2.5 crores for private banks. Profit per employee is also much lower at Rs 2.6

lakhs vs Rs 7.6 lakhs for the private sector

4. Different customer profile Foreign and private banks share of younger customersis over 60% PSU banks have only 32% customers under the age of 40. Private sector

banks also have a much higher share of the more profitable mass affluent segment

5. Losing share in fee based wholesale and retail banking products ECM, M&A,Institutional equities, transaction banking and cross- sell of investment products, andinsurance

SEVERAL FACTORS ARE RESPONSIBLE FOR LOWER VALUATIONSOF PUBLIC SECTOR BANKS

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6

PUBLIC SECTOR BANKS HAVE NOT EVOLVED ON SEVERALDIMENSIONS OF THE BUSINESS MODEL IN RETAIL

ILLUSTRATIVE

New accessoptions

Limited/low level usage of entire range of channel options

While ATM usage has increased in the recent past, penetrationof phone banking and internet banking is lower than competition

World classoperations

Distributed/decentralised configuration resulting in a variedperformance branches doing most of the operations

Proactivesales

Focused on catching customers as they walk into the branch

A few public sector banks (e.g., Bank of Baroda, SBI) haverecently started proactive sales, but their numbers are lower

than competition In-branch sales engine is not effective

Key dimensions of

business model

Superiorcustomerservice

Customer service levels and TATs below market practicesPublic sector banks

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TALENT, OPERATIONAL CONTROL, OWNERSHIP ARE BIGGESTISSUES FOR PSU BANKS

Unable to attract entry level talent Rigid recruitment policies Slower growth to middle and senior

management path

Lower compensation/no ESOPs Poor performance culture Perceived lack of operating freedom

Union issues Transfers/Reassignments

Disciplining Inability to mete out significant

consequence managementsystems

Fear of accountability Accountability to government

restricts decision making CVC guidelines adherence

issues CAG Audit Procurement process L1/L2

Talent Operational

Ownership

Government ownership floor at 51% restricts ability to raise capital More than fair share in Priority sector

Minority lending Bankers to government Financial inclusion/rural

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WHILE ON AN AGGREGATE, PERFORMANCE DIFFERENCE BETWEENPSUs AND PRIVATE SECTOR IS SIGNIFICANT

FY 2008

Profit perbranch(Rs crore)

2007

Profit peremployee

(Rs lakh)

FY 2002

0.24

0.84

2002

1.28

2.49

1.20

5.20

4.10

6.34

Private Bankaverage**

PSU Bankaverage*

Private Bankaverage**

PSU Bank

average*

* Average of SBI, PNB, Canara ** ICICI, HDFC, Axis

Source: Annual reports

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A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOTTHAT STARK IN METRO AND URBAN (2/4)

* ICICI, HDFC, Axis


15,9

9,0

13,0

SBI- metro and urban

SBI-rural

SBI overall

1,9

Private sector

Operating profit per employee, 2008, Rs. lakh

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A CLOSER LOOK SHOWS THAT AT LEAST FOR SBI, THE GAP IS NOTTHAT STARK IN METRO AND URBAN (4/4)

FY 2008

Advances perbranch(Rs crore)

FY 2008

Advances peremployee

(Rs lakh)

136.92

13.14

85.44

348.99

127.67

373.56

Private Bankaverage*

Private Bankaverage*

SBI metro-urbanavg (~3200branches in ~500cities)

SBI rural avg(~6900 branches)

SBI metro-urbanavg (~3200branches in ~500cities)

SBI rural avg(~6900 branches)

* ICICI, HDFC, Axis


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CONTENTS



Reforms needed

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* Base year = 2002

** 2007 figures are forecasts sourced from WMM

Source: Global Insight; Economic Survey of India; Team Analysis

Real GDP growth*

US$ billion

60118

279

464

709

773

1950 1970 1990 2000 2006

Population(Million)**

365 548 850 1,016 1,112

INDIAS GDP HAS RISEN STEADILY SINCE THE 1950S. . .

3.4%4.4%

5.2%

7.3%

2007**

1,169

9.0%

Average growth

rate of 8.9% over2003 - 2007

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58%

60%

62%

64%

66%

68%

70%

72%

2000 2005 2010 2015 2020 2025 2030 2035 2040

Brazil

Per cent of total population

China

Russia

G6

India

A GROWING WORKING AGE POPULATION WILL PROPEL GROWTH TILL2035 LATER THAN CHINA

Working age population (age 15-60)

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HOUSEHOLD INCOMES WILL ACCELERATE ACROSS INDIA

0

100

200

300

400

500

1985 1990 1995 2000 2005 2010 2015 2020 2025

Rural

Urban

5.8%

3.6%

All India

5.3%

4.6%

2.8%

3.6%

Actual Forecast

1985-2005

2005-2025

Compound annualgrowth rates

Average household disposable incomeThousand; Indian rupees; 2000

Source: McKinsey Global Institute

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Strivers (5001,000)

Seekers (200500)

Aspirers (90200)

Deprived (1,000) 1.2

10.9

91.3

101.1

2.4

Number of

householdsMillion

Household income

bracketsThousand, Indianrupees, 2000

Aggregate

consumptionTrillion, Indian rupees,2000

1.2

2.1

8.5

4.1

1.0

Strivers (5001,000)

Seekers (200500)

Aspirers (90200)


55.1

106.0

74.1

5.54.1

11.8

12.2

3.3

2.7

Strivers (5001,000)

Seekers (200500)

Aspirers (90200)


94.9

93.1

49.9

33.1

14.1

24.6

11.9

2.4

16.5

2005

2015

2025

THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGEDRAMATICALLY AS INCOMES GROW

Source: MGI India Consumer Demand Model, v1.0

Middle class toswell from justunder 50 million

today to about583 million by2025

By 2025, India will

produce 2 millionglobals annually

Share of incomesof the middle

class and globalswill rise from lessthan 30% today tomore than 80% by2025

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CURRENT PLANS REVEAL ASPIRATIONS TO SPEND OVER ~US$600BILLION ON INFRASTRUCTURE DURING 200712

Dedicated Freight Corridorsbetween Mumbai-Delhi andLudhiana-Kolkatta, ~10,300kms of new railway lines;modernisation of 21 railwaystations

73Railways

Additional generationcapacity of ~70,000 MW(includes rural areas)

177Power(generation,transmission,anddistribution)

Capacity addition of 485million MT in major Ports;345 million MT in minorPorts

21Ports

Source: Planning commission

Area

Expected

spend

US$ billion

Key projects

Six-laning of 6,500 kms andfour-laning ~18,000 kms ofcorridors and highways

96Roads

Modernisation andredevelopment of 4 metroand 35 non-metro airports

Construction of 7 green-fieldairports in North East

10Airports

Area

Expected

spend

US$ billion

Key projects

Growing subscriber base to600 million, including 200million rural telephoneconnections

Providing broadband accessto 20 million and 40 millioninternet connections

77Communi-cation

Water supply and sanitationprojects

57Water

Developing 16 millionhectares through major,medium and minor irrigationworks

62Irrigation

Gas distributioninfrastructure LNG terminals, gas

transmission lines, citygas distribution

6Gas

Storage to supportagricultural development

6Storage

585Total

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* Number of deals for calendar year 2000, and till May 08

** Average deal size (in US $ mn) is based on deals for which the values has been disclosed

Source: Dealogic; Team Analysis

INDIAN COMPANIES ARE AGGRESSIVELY ESTABLISHING GLOBALFOOTPRINT

AverageDeal Size**

Number ofDeals*

The recent spurt inoutward FDI is causedby:

Regulatory changes:Indian companies can nowmake overseasinvestments equal to 300%of their net worth on anautomatic approval basis

Easy access to capital

Decline in interest ratescoupled with liberallending policies adoptedby banks

Active participation by PE

firms Nearly 20% of thedeals were backed byprivate funds in 2006

Cross-border M&A by Indian companies

50

470

1086

0

200

400

600

800

1000

1200

1400

2000 2007 2008

0

50

100

150

200

250

300

350

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^ 2008: As on May 2008

* Includes all completed deals even where deal value is not available** Includes Finance, Insurance, Leisure & Recreation, Professional Services, Healthcare, Transportation and Publishing,Dining & Lodging & Retail

*** Includes Chemicals, Machinery, Auto / Truck, Consumer Products, Textile and Food & Beverage Manufacturing

Source: Dealogic; Press articles; Company website; Team Analysis

No. ofDeals*

Acquisitions of Indian companies by MNCs

325416 557 832339 1226

SIMILARLY, MNCs ARE ACTIVELY SEEKING THE INDIAOPPORTUNITY . . .

9.109

2002

4.545

2003

6.053

2004

20.163

2005

30.243

2006

58.447

2007

11.282

2008^

ValueUS$ billion

Per cent of Total Deal Value, 2007

Break-up by sector495

19

24

3 9

10

35Services

Manufacturing

ConstructionHigh Tech

Others

Telecom

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* Major world economies considered are the BRIC and G6 countries

Source: Goldman Sachs BRIC report 2003

2.1

5.0

20.1

2000 2020 2050

Per cent

Real GDP growth (Per cent)

India

ChinaBrazil

Russia

India will contributea giant share of theincremental GDP growthof major world economies*

IN SUMMARY, INDIA IS ON COURSE TO BE AN ECONOMIC SUPERPOWER OF THE 21ST CENTURY

Fastest growing global

economy by 2012

India most rapid growth potential of the BRICs

0

1

23

4

5

6

7

8

9

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

11th largest economy today (GDP US$560 billion)

4th

largest by 2025 (GDP US$3,200 billion, six-fold increase)

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* Base year: 2002

Source: Global Insight; Team Analysis

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1980 1985 1990 1995 2000 2005 2010

ChinaCAGR = 10.1%(1990-2005)

India1990-2005

CAGR = 5.98%

Lead indicators

of inflectionvisible in India

Lead indicators

of inflectionvisible in India

1978: Chinaliberalizes

1992: Indialiberalizes

Inflection inChina GDP

Taxes: Laws simplifiedresulting in bettercompliance and ease of

tax payment

Infrastructure: Increasedinvestment ininfrastructure e.g., Ultra

Mega Power Projects Liberalisation: FDI in key

sectors like airports,NBFCs, Insurance,electrical equipments,

telecommunications,construction etc allowed

US$ billion

Triggers behind growth

inflection in IndiaReal GDP growth PPP adjusted*

AND GROWTH IN INDIA IS AT AN INFLECTION POINT, SIMILARTO CHINA 15 YEARS AGO

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Key growth drivers Overall banking sector core revenue pools

US$ billion** CAGR

Per cent

* Includes revenue pools of NBFCs, HFCs in retail, and DFIs in corporate

** Using 2006 average exchange rate

Retail Robust growth in middle-

class asset ownership, e.g.,houses, cars

Increased acceptance ofconsumer credit

Investment products toincrease in demand

Wholesale Shift from plain vanilla

lending to more complex fee-based products and service

Emergence of investmentbanking

Need to fund large scaleinfrastructure

New business models evolvingin SME

Financial inclusion andprofitable business model forrural

23

17

23

15

17

WHILE BANKING REVENUE POOLS ARE EXPECTED TO GROW AT ARAPID CLIP, COMPLEXITY WILL INCREASE

Margincompression

7.9

16.7

24.8

11.4

16.7

6.2

13.6

Rural

WB

32.5

71.8

Retail

SME

FY 12FY 07

6.9

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IMPERATIVES FOR BANKING SECTOR

Retail Provide the new productsdemanded

Create infrastructure for newchannel access

Provide financial advice Build stronger relationships

Leverage new technologies forcustomer value management

Capture fully the bankingpotential in the mass affluentand upwards Serve across product

categories Raise standards to match

urban customers Create a new model to reachthe unbanked Savings as much as lending New technology which does

not need physical presence Partnerships a must New methods of managing

channels

Rural

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IMPERATIVES FOR BANKING SECTOR

Fund infrastructure growth peggedat excess of US$600 billion in the

next 5 years through variety ofinstruments

Provide cost efficient credit andservices to the large and midcorporate sector Credit at the right time in the right

quantum Trade intermediation services

(factoring, forfaiting, structuredfinance)

Hedging services (interest rates,

fx, commodities) Investment/ Surplus management

products (structured products) Transaction intermediation

services (local and global) Provide capital raising and advisory

services Equity raising DCM as a viable substitute to

credit M&A/ PE advisory to large and

mid corporate (help Indiancorporates in their quest to goglobal)

Wholesale

Go beyond credit Transaction services

PE advisory Corporate structuring Relationship management

Creation of a model whichcombines institutional skills andlocal touchpoints is critical

Shift mindset from treating SME aspriority sector to being business

SME

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CONTENTS



Reforms needed

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27

TRANSFORMATION OF THE INDIAN BANKING SECTOR HAS SEVENKEY ELEMENTS

A: Industry structure

B: Social development

C: Unified regulator

D: Corporate governance

E: Supporting infrastructure

F: Labor reforms

G: Real sector reforms

A INDIAN BANKS MINISCULE ON THE GLOBAL PAGE

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A. INDIAN BANKS MINISCULE ON THE GLOBAL PAGEMegabanks will be even larger . . .

* Based on historical growth rates; Global Insight estimates; MGI estimates

** As of 11 June, 08

Source: Bloomberg, Datastream; McKinsey

2.5

0.1

1990 2005

8.5

2020 withmarketgrowthonly*

15.5

2020 withexpectedconsolida-tion*

Shareof globalassetsPer cent

8 30 30 45

. . . increasing the already great gap among the topbanks

US$ billions**

Market capitalisation of top-30 banks

US$ trillions

The 2 largest Indian banks (SBI and ICICI) havemarket capitalisation of about ~US$ 20-25 bn

62

66

67

69

69

72

75

76

8384

84

Unicredit SPA

Bank Of China Ltd

China Construction Bank

Banco Santander Sa

Wells Fargo & Co

Citigroup Inc

Mitsubishi UFJ Financial Group

Ind & Comm Bk Of China

JP Morgan Chase & Co

BNP Paribas

Bank Of America

104

107

118

128

129

144

Royal Bank Of Canada

Sumitomo Mitsui Financial Group

Royal Bank Of Scotland Group

Banco Itau Holding

244

Sberbank

192

Intesa Sanpaolo

Goldman Sachs

194

HSBC Holdings Plc

Banco Bilbao Vizcaya Argenta

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29

Develop mechanisms for identifying anchor banks- strong andsolvent institutions

Layout out blue-print for the sector

Encourage market driven consolidation

Create 4-5 global sized institutions, 6-8 national champions

Reduce government participation in the sector; create holdingcompany; introduce concept of golden shares

Give public sector banks more operational freedom and accessto talent

Increase level of foreign participation to ~20% of banking assets

A. CHANGES NEEDED IN THE INDUSTRY STRUCTURE

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30

GOVERNMENT SHOULD ALLOW IMMEDIATE OPERATIONALCONTROL TO PSUs

All of these can beachieved easily ifgovernmentholding decreases

below 51%

Government canstill be singlelargest shareholder

Through direct

holdings/holding company

Through otherPublic sectorholding such as

LIC, GIC etc. This will allow PSU

banks to raisecapital as well

Ability to attract talent at entry and senior levels throughappropriate compensation

Ability to consequence manage non-performance

Ability to reward and accelerate track of high performers

Ability to affect personnel related changes withoutinterference from unions

Peoplemanagement

Ability to appoint partners without getting constraint byCVC guidelines

Freedom from CAG Audit Ability to reconstitute boards

Governance

Allow consolidation of PSU with PSU and private banks.This will also be accompanied by ability to leveragesynergies through

Reduction in staff

Elimination of overlapping branches

Synergies captured through structural changes inorganisation

Consolidation

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31

Impact of Privatization

Extensive organizational restructure Division of Retail Banking into three units, Personal

Banking, Business Banking and Banking Operations(initiated April/May 1993)

Enhanced Customer Service Program (including a newcustomer service computer system) and removal of the

majority of processing functions from branches so staff canfocus on customer service and sales.

Internet site launched on September 1995. Launched CommSec - a low cost telephone based share

trading service for the 'Do it Yourself' investor, developingthe business to become Australia's leading broker.

Merged with Colonial Limited in 2000 - created a strong,dynamic and globally relevant financial services group

Awarded Bank of the Decade in November 1999 and namedBest Bank at the Australian Banking and Finance Awards forthe years 1996, 2000 & 2002.

Leader in many areas # 1 in total deposits (29% market share) # 1 in mortgage (23% market share) # 2 in credit card (22% market share)

8th largest bank in Asia Pacific in terms of market cap (US$67 billion) with profit of US$ 3 billion in 2006

Market cap 12% higher than 2nd largest National AustraliaBank

CASE EXAMPLE OF A SUCCESSFUL TRANSITION TO PRIVATESECTOR BANK: CBA (COMMON WEALTH BANK OF AUSTRALIA)

Source: Press search; Corporate website

Governments Role

Established in 1911, first bank to conduct bothsavings & general (trading) bank business, with thesecurity of a Federal Government guarantee.

Corporatisation in 1950s - dual function of both acommercial and central bank were divided

As a result of banking industry deregulation and foreignbank entry in the mid 1980s, the bank underwent internalreorganization, develop new products, and massive

computerization.

To increase its presence and scale, CBA acquired NewZealand based ASB Bank Ltd in 1989, and State Bank ofVictoria in 1990. The latter created Australia's largestdomestic bank and further strengthening its leadership inretail branch banking.

Privatized to ensure competitive neutrality is restored 30% sale in 1991, further 20% sale in 1993 andremaining sold in 1996.

Government still enforces ban of mergers among thetop 4 banks

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CASE EXAMPLE OF A SUCCESSFUL MAJORITY OWNED GOVERNMENTBANK: DBS (DEVELOPMENT BANK OF SINGAPORE)

ource: Press search Cor orate website

Success

The largest bank in South East Asia in terms of assets,US$129 billion in 2006, 22% larger than 2nd largest UOB inSingapore. Also a leading bank in Hong Kong

21st largest bank in Asia Pacific by market cap (US$ 23,140million)

Net profit of US$ 1,153 million in 2006

Largest network of branches in Singapore, plus branches inHong Kong, Indonesia, China, India, Japan, Korea, Malaysia,Myanmar, the Philippines, Taiwan, Thailand, U.K, the U.S. andthe Middle East

Market leader in many areas Leader in IPOs and regional equity transactions in the

Singapore capital market. Top-rated custodian for institutional investors Key player in the Singapore money market Leader in domestic treasury services

Leader in corporate lending

The Bank's "AA-" credit rating is among the highest in the Asia-Pacific region.

Innovative - many firsts - from introducing Saturday afternoonbanking to playing a significant role in the interbank market, after

interest rates were freed in mid-1975

Governments Role

Established in 1968 as a DFI

Received seed capital from several established banks

in Singapore and diversified into commercial banking1 year later

Its pioneer move to pay interest on current account wasprotested strongly by other banks, but to no avail - 5 of 7local banks petitioned the Finance Ministry, Associationof Banks and Monetary Authority of Singapore

Merged with POSBank, another state bank, in 1998 inline with government aim to create global/regionalplayer. Annual cost saving from the acquisitionestimated atS$30 million per year.

A boost to retail banking, freeing DBS banking officialsto service their clients overseas, including the biggerSingapore companies with regional operations.

Current government holding of 27.7%

DBS operates like a private sector bank in terms of

talent and procedures

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PUBLIC SECTOR BANKS WILL NEED TO PULL FIVE LEVERS TOCOMPETE IN THE EMERGING BANKING LANDSCAPE

Close the technology gap with the private sector banks

Restructure operating platforms by centralizing and outsourcing operations Redesign processes to match competition on TATs, productivity, error

rates and cost of operations

Rapidly implementIT and operationsinitiatives

1

Re-focus the efforts of core strengths branch network and staff on sales Convert to a sales and marketing led organization Proactively target emerging mass affluent and affluent segments

Build sales andmarketingcapabilities

2

Strengthen risk management skills to enable Basel II compliance Risk modeling Review and collections

IT support

Strengthen riskmanagement

3

Focus on reskilling employees to shift attention to sales and marketing,and infusing specialist skills through external recruiting (e.g., in treasury,cash management)

Comprehensive change in mindsets and behavior

Build human capital4

Pro-actively build skills in acquisition and post-merger management toenable effective play in the process of local consolidation

Prepare for localconsolidation

5

Providing operational freedom in solving thetalent issue across levels and wrt performance

management will help significantly across all levers

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34

THANK YOU

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35Source: McKinsey analysis

OTHER CHANGES NEEDED (1/2)

C. Unifiedregulator

D. Corporategovernance

B. Socialdevelopment

Offer market based incentives for under-penetrated segments e.g., subsidyauctions, creation of credit guarantee corporation

Remove rural branch restrictions Remove directed lending Ensure insurance provisioning on loans to urban and rural poor Reimburse banks the admin cost for rural banking to allow lower interest rates

charged to customers

Improve regulations for STCBs, RRBs, MFIs, NBFCs and remove regulatoryarbitrage

Move to a coordinated regulator model

Separate central bank and regulator roles New unified Financial Services Modernization Act to bring together, under a singleumbrella, all aspects of financial services on the lines of legislations in US and UK

RBI to guide Indian banks towards adopting international standards in corporate

governance Improve corporate governance primarily by increasing board independence and

accountability

Enhance corporate governance norms, Institute penalty for weak corporate

governance Ensure independence by appointing directors appointed on the recommendationof a nomination committee based on clearly defined and transparent criteria.

B CREDIT GUARANTEE SCHEMES CAN PROMOTE SOCIAL OBJECTIVES

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36

B. CREDIT GUARANTEE SCHEMES CAN PROMOTE SOCIAL OBJECTIVESWHILE MINIMISING DISTORTIONS TO THE FINANCIAL SYSTEM

Features

Potential credit guarantee structure

Commercialbanks

Government

Executive management

Independent board

Credit guarantee

corporation

Collateral-short butviable, creditworthySME

Guarantee to coverpart of the risk Competitionbetween banksto disburse theloan

Korea Credit Guarantee Fund

Extends guarantees for loans to promisingenterprises that lack tangible collateral

Risks of default shared with credit institutions Flexible guarantee fee ranging from 0.5% to 2%

depending on creditworthiness, guarantee periodand guarantee amount

Joint funding by government and commercial banks

Taiwan small and medium business guarantee fund

Extends credit guarantees to small and mediumenterprises short of required collateral

Only those Contracted Financial Institutions (CFIs)signing an Entrustment Contract (and makingdonations) are eligible to provide guarantee service

Annual guarantee fee of 0.75% Paid up capital contributed by central and local

government and CFIs

Pricing of loans based on best practice creditprocesses and credit guarantees provided

Customers served by institutions with requiredskills and infrastructure to serve low income

segment

B A MARKET BASED SUBSIDY PROGRAM WOULD PROMOTE BANK

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B. A MARKET-BASED SUBSIDY PROGRAM WOULD PROMOTE BANKINTEREST IN LOW INCOME SEGMENTS

Ownership: Chilean Socialinvestment fund (FOSIS), Ministry ofPlanning and Cooperation

(MIDEPLAN)

Chile government program

Concept: Banks given a fixedamount of money for each loangranted to micro entrepreneur

Process: Subsidy budget granted through abi-annual auction

Commercial banks invited to bid on aper loan subsidy needed

Bidding banks propose subsidy detailson loans

Winning banks are those offering tomake the largest number of microloans for the smallest subsidy

Four large commercial bankshave entered micro-finance andmake loans to about 100,000customers

On an average one third of microenterprises in Chile are

customers of these four banks By 2000, value of subsidy for an

average loan amount of US$1,200 had fallen to US$ 80 fromUS$ 240 in 1993

Chilean banking regulator needsto spend very little timesupervising this micro loanportfolio

Achievements

RBI couldconsider a similarmarket-basedbidding system to

encourage makesure commercialbanks to enter thelow-incomesegment

C AS AN INTERMEDIATE STEP INDIA COULD HAVE RBI AS THE C0

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C. AS AN INTERMEDIATE STEP, INDIA COULD HAVE RBI AS THE C0-ORDINATING REGULATOR

Now: Multiple regulatory agencies Intermediate: Coordinating body

Commercialbanks andFIs

Cooperativebanks

Regionalrural banks

Capital

markets

Insurancecompanies

Housingfinancingcompanies

RBI

IRDA

Reg.of

coop.SEBI

NHB

RBI

Regulating authority

RBI

RBIState Registrarof CooperativeSocieties

RBI NABARD

SEBI

IRDA

NHB

+

+

RBI takes overthe activities ofdifferentregulatory

agencies Internal

separation ofregulatory andcentral bankfunction

C ULTIMATELY REGULATION SHOULD BE SEPARATED FROM THE

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C. ULTIMATELY, REGULATION SHOULD BE SEPARATED FROM THECENTRAL BANK

Intermediate: Coordinating bodyFinal: Unified regulator separate fromCentral Bank

RBI

IRDA

Reg.of

coop.SEBI

NHB

RBI

RBI Internalregulationfunction of RBIhanded over toa separateregulator withlegislative

sanction Unified body

regulatescommercialbanks,cooperative

banks, capitalmarkets,insurance,securities,mutual fundsand micro-financeinstitutions

FSA

BankingInsurance

Securities

OTHER CHANGE NEEDED (2/2)

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OTHER CHANGE NEEDED (2/2)

F. Labor

reforms

G. Real sector

reforms

E. Supportinginfrastructure

Accelerate credit bureau and payment infrastructure

Support creation of industry utilities for processing e.g., Symcor in Canada

Amend banking regulations to enable formation of holding company to owngovernments shareholding in PSBs and their other financial service

Address loopholes in SARFAESI to ensure banks get a fair hearing

Implement recommendations of Patel Committee for development of primaryand secondary debt market

Push labor reforms, support re-skilling of employees

Greater flexibility in surplus labour and freedom to link compensation withperformance

Real economy reforms required to complement financial system reformsProduct market reforms: Elimination of reservation of products for SSI,

removal of licensing requirements, reduced duties and unrestricted FDI

Land market reforms: Fast-track courts to settle land market disputes,computerize land records and cut stamp duties

State ownership: Transfer management of productive/commercial assets tothe private sector; contract out the construction and management of new

infrastructure.

OPBhatt

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