Business Standard

MUMBAI, T H U R S D AY 24 NOVEMBER 2011

S T AY U P D A T E D T H R O U G H T H E D AY, V I S I T W W W. B U S I N E S S - S TA N D A R D . C O M

FINANCE 7

[IN BRIEF]
RBI TO REDUCE VALIDITY OF CHEQUES: FINMIN
The Union government has said the Reserve Bank of India (RBI) would reduce the validity of cheques and bank drafts from the present six months to three months beginning next financial year. RBI has advised that with effect from April 1, 2012, banks should not make payments against cheques, drafts, pay orders or bankers cheques if these are presented after the period of three months from date of issue, Minister of State for Finance Namo Narain Meena said on Tuesday. PTI

BANKS CAN PARTNER INSURANCE Stress seen in small COS, SELL MULTIPLE PRODUCTS loans, advances
BS REPORTER Mumbai, 23 November

ING Vysya Bank signs MoU

ING Vysya Bank has signed a memorandum of understanding with stateowned Oriental Insurance Corporation for offering epayment services through its branches across the country. Oriental selected ING Vysya Banks state-ofthe-art payment platform, ING P@y, after the general insurer initiated e-payments as a mode of payment to its customers, ING said in a statement. PTI

n a radical move, the Insurance Regulatory and Development Authority (Irda) proposed to open up a bancassurance distribution channel, where banks would be allowed to tie-up with one set of insurance companies (life, non-life and standalone health insurance company), in one state. This indicates, in a particular state, a bank would be allowed to sell insurance products of only one life insurance company, one general insurance company and one standalone health insurance company. However, in another state, the same bank can sell the product of any other life, non-life and standalone helath insurance company. In the draft guidelines, to provide a level playing field for all insurance companies, Irda has divided all states and Union territories into three zones (A, B and C), based on the insurance penetration. Zone A consists of 13 states and Union territories, and an insurance company cannot have a tie-up

WITH MULTIPLE TIE-UPS,

banks would be able to offer optimum products to their customers

with a particular bank in more than nine states in the zone. Similarly, in Zone B, an insurer is restricted to tie-up with one particular bank in six states. This means, for instance,

a life insurance company like SBI Life, whose bancassurance partner is State Bank of India (SBI), can have bancassurance tie-up with SBI Life in nine states of Zone A but would have to opt for different partners for the remaining four states in the zone. However, an insurance company could have a same bancassurance partner for

all the states under Zone C. We welcome the draft guidelines on Open Architecture and support this move. Allowing such a structure for distribution of insurance products through banks under a corporate agency would help customers and the insurance industry as a whole. With multiple tieups, banks would be able to offer optimum products to its customers. For example a bank can offer the best term product offered by one life insurer and the best pension product or child product offered by another life insurer, said T R Ramachandran, CEO & MD, Aviva India. The draft recommended that any upfront payments or equity discount offered by insurers to banks should be treated as advanced commission and be amortised within three years of the deal. The discount is defined as the difference between the market consistent embedded value and purchase value of the equity of the insurer. Besides, Irda has capped the commissions to banks at 85 per cent of the commissions received by the individual agents.

to small businesses
United Bank of India is facing the twin challenge of slow credit growth and the deteriorating quality of assets. In an interview with T E Narasimhan and Somasroy Chakraborty, the Kolkata-based bank's chairman and managing director, BHASKAR SEN, says the lender has pared its credit growth target and stepped up efforts to improve loan recoveries. Edited excerpts:
sectors in which delinquency rates are high? The deterioration in asset quality is seen across the sector. The stress is mostly seen in low-ticket advances, particularly among micro, small and medium enterprises. We are seeing that the cash flows of many of these companies are not able to match the interest outgo. Some of these companies are not able to manage their receivables and handle their inventories properly. Their marketing teams are not strong. Also, their interest payments are increasing, because of the successive rate hikes. As a result, slippages are taking place. We are keeping a close watch on the situation. We have identified stressed assets and strengthened our recovery teams. Going forward, I'm not unduly concerned about our asset quality. What is your outlook on the net interest margin? We have been able to improve our margin, despite the increase in deposit rates. We ended the July-September quarter with a net interest margin of 3.16 per cent. We expect it to remain at around three per cent in the current
financial year. We have reduced our dependence on high-cost bulk deposits and are focusing on mobilisation of current account and savings account deposits. Do you plan to raise capital in the near term? We are comfortable with our capital adequacy ratio, which is currently 12.95 per cent, without taking into account the profits in first two quarters. Government holding in the bank is over 85 per cent. So, we don't expect fresh fund infusion from the government in the near future. We are focusing on improving our internal accruals. Internally, we are also deliberating on the scope for a follow-on public offer. We have not decided on the size of the issue. We would probably tap the market by the end of the next financial year.

Q&A
BHASKAR SEN
CMD, United Bank of India
Your credit growth has been slow compared to last year. Are you looking to revise your loan growth target for this financial year? We are seeing moderation in loan demand. Our credit growth was 26 per cent in the last financial year. But so far this year, the growth has been 17 per cent because of a number of factors like uncertain economic conditions and high interest rates. Aggressive lending in the current scenario may not be a wise decision. Initially, our target was 20 per cent growth in advances, but going by the recent trend, and taking into consideration the slowdown in demand, we now expect it to be 15-18 per cent. The bank's asset quality took a knock in the first two quarters. How do you plan to improve it? Which are the

INDIAN LIFE INSURANCE INDUSTRY

Among the least profitable across Asia

NILADRI BHATTACHARYA Mumbai, 23 November

WHERE WE STAND
GWP Estimated Share of NBAP ROR (in bn $) CAGR global GDP margins (2004-09) GWP in % growth in % in basis (2010-15) (2010-15) points Japan China Taiwan Australia India 378 114 64 33 57 -1 18 2 5 5 13-14 2.8 28.3 1.1 2.8 1.7 10.3 NA 30-60 18 20-44 10 18 25 118 5 74 166 -27

At a time when the countrys life insurance industry is facing a downturn in premium collection, it has earned itself a dubious distinction of being one of the least profitable market across Asia. According to a study by McKinsey, the returns and profit margins in India are one of the lowest in the region. The study shows, the return on reserves from the life insurance sector in the country is the lowest, at 27 basis points, whereas it is 110 basis points in China. Similarly, the profit margins or the new business adjusted profit (NBAP) margins are at 18 per cent, faring poorly with China, where the NBAP in the same period stood at 30-60 per cent. In the past decade, ending 2010-11, the total capital invested by private sector life insurers was over $7.5 billion, of which 50 per cent or close to $4 billion was invested to fund accumulated losses, which have largely been incurred to create distribution capacity, the re-

South Korea 52

GWP: Gross written premium till 2010 NBAP: New business adjusted profit ROR: Return on reserves Net profit divided by statutory reserves Source: McKinsey

port said. Therefore, it is not surprising that a few of the 22 private life insurance companies operating in India have been able to achieve their break-even targets set out in their original business plan. Till March 31, only three private life insurers have registered accounting profits for five years of their operation while a further four players have registered profits in three years of their operations. In the early years there

THE REPORT EXPECTS CURRENT SLOWDOWN

in the premium collection in the Indian life insurance industry to continue for another 12-18 months, as the insurers are looking to adapt their business model in accordance with the new regulatory changes
tended to be a land grab, and we went into second, third, fourth tier cities. Everyone was trying to build a scale. So, the new regulation was

just a pull back of that earlier land grab strategy where we did build some scale, but didnit get the value. What we are seeing in India is a natural transition, Mark Tucker, group chief executive and president, AIA, recently said during an interview with Business Standard. Accordingly, most private life insurance companies have dropped their expansion drive and and adopted various rationalisation exercises in terms of branch network, agency force and distribution network, to cut cost and preserve capital. The report expects the current slowdown in premium collection in the Indian life insurance industry to continue for another 12-18 months, as insurers are looking to adapt their business model in accordance with the regulatory changes. However, it indicated, in the medium to short-term prospects for the Indian life insurance sector remain attractive. It is estimated a growth rate of 13-14 per cent on a cumulative basis over 2010-2015, taking the total industry gross written premi-

um at $110 billion. Since the new regulatory norms were introduced in September 2010, the sector has been witnessing a drop in the premium collection. During October-September last year the first year premium collection for the industry was down by seven per cent. This slide continued in the first six months of the financial year as well, when insurers witnessed a 21.35 per cent drop in premium collection. Given the changes in the regulatory stance, McKinsey expects that the Indian life insurers will shift their focus towards desigining products providing long term savings and protection for the economy. The current low levels of protection in India indicates that the upside for growth in the industry remains significant. This will entail a significant shift in the proposition of the industry from deriving short-term investment linked products to increased focus on meeting the long term savings and protection objectives of the economy, the report said.

Fed Reserve seeks to bolster confidence in large US banks

BLOOMBERG Washington, 23 November

Co-op banking needs revamp, despite rising credit flow, says Nabard
SANJAY JOG Mumbai, 23 November

Citigroup, BofA may see cut in dividend target

BLOOMBERG New York/san Fransisco, 23 November

THE Federal Reserve sought to bolster confidence in the US banking system as concerns over the European sovereigndebt crisis roil financial markets and pose risks to the economic expansion. The Fed yesterday told the 31 largest US banks to test their loan portfolios against a deep recession to ensure they have enough capital to withstand losses. Banks with large trading operations will also test against a European market shock. The most severe scenarios outlined by the Fed include an unemployment rate of as much as 13 per cent, an eight per cent drop in gross domestic product and a 52 per cent

plunge in stocks from the third quarter of 2011 to the fourth quarter of 2012. This is a daunting test, said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the largest banks. The Feds credibility as a tough guy cant be challenged based on this. The tests, which the Fed said dont represent its outlook for the economy, aim at making banks capital adequacy more transparent by demonstrating whether they can handle a deeper downturn and financial market shock. The Fed helped clear away uncertainty surrounding banks in May 2009, when it published stress tests showing that 10 US firms need-

ed to raise a total of $75 billion, giving investors more clarity. Transparency is very important to enhancing global stability, and helps with the overall confidence of the banking system, said Sabeth Siddique, a director at Deloitte & Touche LLP. The KBW Bank Index, which includes shares of 24 companies, including Bank of America Corp and Capital One Financial Corp, is down 31 percent this year, compared with a 5.5 per cent decline for the Standard and Poors 500 Index. The Fed aims to prevent the kind of capital depletion that occurred before and during the financial crisis, when firms bought back stock and paid dividends even as their loan portfolios soured and the economy deteriorated.

THE state-run National Bank for Agriculture & Rural Development (Nabard) has sounded an alarm over the state of the cooperative banking sector largely due to lack of professionalism and non-adherence to banking norms. This is despite a rise in agricultural credit flow from these banks. Nabard fears that as many as 60 banks 56 district central cooperative banks (DCCBs) and four state cooperative banks (SCBs) may not get their licence renewed by March. Unless RBI extends the period, the deadline for some of the cooperative banks would actually end in March 2012. A Nabard official, who did not want to be identified, told Business Standard: "Out of 56 DCCBs, the biggest problem is in Uttar Pradesh, with 23 DCCBs being non-compliant with Section 11 (for maintaining minimum paid-up capital and reserves), covering eastern UP. This is where agriculture productivity needs to increase, but these are unlikely to get a licence by March 2012, resulting in half of UP not getting any agricultural credit from the cooperative sector. There are 10

`27,000 crore disbursed by them by this time last year, or 49 per cent of the target. It is `17,000 crore more. In other words, during the kharif season, the cooperatives had already used up most of the credit they were expected to disburse for the whole year, with rabi still on. As for regional rural banks, against the target of `50,500 crore, they disbursed Rs. 23,000 crore or 46 per cent, compared to 43 per cent last year. "So, in absolute terms, cooperatives and CREDIT RRBs have providFLOW UP ed a significantly In a recent presenlarge amount of tation to the finance `44,000 crore of credit. The banking minister, Nabard system as an aggretheir target of said banks had as on gate (all commerAugust 31 disbursed `69,500 crore, cial banks, cooperclose to `2 lakh crore which is 63% of atives and RRBs) out of the target of the annual target had provided cred`4.75 lakh crore set it as on August 31 to by the finance minister in the 27.2 million accounts, comyears budget speech. Com- pared to 20.9 million accounts mercial banks had disbursed (for the same period) last year. `1.24 lakh crore of their target Commercial banks did so from of `3.55 lakh crore, or 34.9 per 8.6 million accounts last year centof the target; it was 40 per to 9.3 mn. Cooperatives have cent of the target last year for done remarkably well in this the same period. While coop- field. Last year, they had fieratives had disbursed `44,000 nanced by this time 9.3 mn crore of their target of `69,500 farmers; this time they have alcrore, which is 63 per cent of ready financed 14.28 mn farmthe annual target, compared to ers, Nabard said.
DCCBs in Maharashtra, seven in MP, four in Jharkhand and a couple of SCBs also not meeting the deadline. We have to find alternatives, at least in eastern UP, immediately." Adding: Nabard is in the midst of preparing a road map to see if some of these banks can get the licence. The objective is that farmers must get agricultural credit. Nabard is exploring options, including increase in refinance and use of Rural Infrastructure Development Fund money.

COOPERATIVE BANKS HAD DISBURSED

CITIGROUP Inc and Bank of America Corp (BofA) are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve toughens capital tests for the biggest US banks. The Fed imposed a tougher capital test on the 31 largest US banks yesterday, releasing the criteria for measuring their wherewithal if the US economy sours and major trading partners default on their debt. Lenders need to prove they have the capital to withstand a severe US recession with 13 per cent unemployment and an eight per cent decline in gross domestic product before they

can increase dividends or repurchase shares. The more pessimistic scenario will damp banks ambitions to return more capital to shareholders, whose holdings have been decimated. The KBW Bank Index of 24 US lenders has plunged 31 percent this year and is down 70 percent from its all-time high in February 2007. Its going to be very difficult for any of these companies to do any major buybacks into next year, said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets Corp. in Arlington, Virginia. Bank of America and Citigroups chances of upping a dividend or buying back any stock next year are almost zilch.

Business Standard
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