FINANCE LEAGUE IIM Indore

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

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RBI Requirements
Requirement
Promoter Shareholding not below 40% for 1st 5 years

Justification
Promoters retain significant interest during crucial start-up period Ensures diversification of shareholding, Bank not influenced by single entity

Compulsory reduction in promoter shareholding in long term Separate unleveraged non-operating holding company (NOHC) CAR of 12% for 1st 3 years

Effective control and Monitor by RBI Prevent Double leveraging Provides cushion to deposit holders during start up phase Stability to proposed banks. Simpler & Effective Supervision

Promoter: Diversified ownership, sound credentials & integrity NOHC: At least 50% of directors independent of Promoters

Stronger corporate governance

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RBI Requirements
C H A L L E N G E S R E C O M M E N D A T I O N

Ownership and Listing Conditions

Listing the Bank within next two years Bring 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 Plans
5% for non-resident and 10% for resident 25% branches in rural areas within 5 years Lead to Higher NPAs and Transaction Costs

Apply for Permission to Set Up a Private Bank

Convert 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 areas Business correspondents Mobile ATMs/Branches Innovative products in rural areas Seed financing Bank financed commodities forward contracts Working Capital for small to medium Enterprises

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Opportunities and Roadblocks

Opportunities
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

Roadblocks
Statutory Compliances CRR, SLR etc. 40% Lending in Priority Sector Strict Reporting Requirements Rural Expansion Requirements 25% Higher Transaction Costs High NPAs Lower Profitability

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L&T Finance s Competitive Adv.

RBI Requirement
 25% rural branches  Decreased Non-Performing Assets 

Competitive Advantage
Meet with the L&T Financial Holding s objective of focus on Rural and Infrastructure products Strong Presence in Rural Areas Strong credit risk department and evaluation framework in place Portable Knowledge Base Management with Proven Track Record

Organizational Expansion

    

Reaching Unbanked Areas

Established Collection System Strong Brand Equity Diverse Customer Base

People s trust and IPO within 2 years

CAR requirements

Already as NBFC, equity much higher than required

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Business Strategy
Strategy
Innovative Models in Rural Areas

Justification
High credit and NPA risk in rural areas call for Prudent Lending & Credit assessment Easy deeper reach through already established MFIs Leverage the established trust Alliances with dealers (vehicle), Agricultural retail network Minimize the Initial Capital expenditure

L&T Advantage
 Established Credit Evaluation Frameworks

L&TFH MFIs as Banking Correspondents Alliances with Retail Networks Tie-up with other Banks for ATM networks Start with branches in geographies where higher Brand Equity Focus on Online & Mobile Banking in urban Areas

 Cross Selling through the L&TFH s MFIs

 Existing relationships

Attract more & easy deposits

 High Brand Value

Lower the operating Costs Increase Efficiencies

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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

PEST
Economic
Greater share of the market will be serviced by MFIs and NBFCs Source of Funds: Collaborative alliances with international banks

Technological
Mobile Phones; Source of primary delivery mechanism in rural areas owing to their high penetration & low costs

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Design and Regulations

Increased Regulations by RBI
Statutory Ratios CRR: 6%, SLR: 24% Less Deposits available for lending Dig in Net Interest Income

Reporting Compliances

Fortnight Reporting Auditing Expenses Higher Transaction Costs Higher NPAs Agriculture, Education etc. Optimize movement line of user within Bank space Enhanced Sign System: Convey Information in most effective manner

40% Priority Sector Lending

Design Issues

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Organizational Architecture
Trained Personnel Improved Technology Employee Option Stock Scheme Strategic Relationships with Eminent Companies

NonCompliance to RBI: Penalties, Loss of Market Esteem

Mobile & Internet based services

Retain Employees

Core Banking Solutions

Employees: Familiar with IFRS Guidelines

Collaboration with top IT companies to provide Technology

Enable them to participate in Bank s future growth & Financial Success Hire Best talent for senior management & Key positions

Debit and Credit Cards

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

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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

Business Models
Limited Transactions in rural areas Full fledged Bank not a viable option Huge operational cost Alternative: Business Correspondent Outsource selected Banking Services
Point of regulation, Core Banking System Balance Sheet

Industry Examples
Bank
Product

HDBC
Loans through SHG Bank Linkage 203 13

SBI

ICICI

No Frill Loan saving Saving RD, FS Account 33 Pan India 48 13

Bank

BCs enrolled Operational states

Business Correspondent

Operation, Coordination Training

Clients reached

650,000

2,700,000

500,000

Technology Vendor

Transaction Security, Processing Authentication, Data Storage Account opening (KYC), Sales & Marketing, Customer care Liquidity, Referral

BC Company
Eko Aspire Foundation FinTech Foundation Zero Mass

Technology Vendor
Eko Financial Services FINO A little World

Customer Service Point

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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&T s Credit Plan

Credit for agricultural purposes & short term credit for personal Use Wider reach & financial inclusion Cheaper & faster transactions Data Mining for future recommendations

Financial Projections - Bank

Balance Sheet (in Rs. Crores)
FY 2013 Assets Advances Investments Other Assets Total Assets Liabilities Shareholder's Funds Deposits Borrowings Other Liabilities Total Liabilities 2020.2 1010.1 336.7 3367.0 500.0 553.0 2102.5 211.5 3367.0 9333.1 4666.5 1555.5 15555.2 2309.9 1935.5 11055.9 253.8 15555.2 9553.3 4776.6 1592.2 15922.1 2364.4 5806.5 7446.6 304.6 15922.1 10271.8 5135.9 1712.0 17119.7 2542.3 6393.0 7818.9 365.5 17119.7 11144.5 5572.3 1857.4 18574.2 2758.3 7167.5 8209.9 438.6 18574.2 FY 2014 FY 2015 FY 2016 FY 2017

Total Liabilities
20000.0 15000.0 10000.0 5000.0 0.0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 20000.0 10000.0

Borrowings/Deposits
Borrowings 0.0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Deposits

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Financial Projections - Bank

P&L (in Rs. Crores)
Interest Income from Advances Interest Income from Investments Non-Interest Income Total Income Interest Expense for Deposits Interest Expense for Borrowings Non-Interest Expense Total Expense PBT Tax PAT FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 99.0 556.3 925.4 971.4 1049.4 37.9 212.9 354.1 371.7 401.6 16.4 92.3 153.5 161.2 174.1 153.3 861.5 1433.1 1504.3 1625.1 16.6 74.7 232.3 366.0 406.8 86.7 542.8 763.2 629.7 661.2 34.7 160.2 164.0 176.3 191.3 138.0 777.7 1159.5 1172.0 1259.3 15.3 83.8 273.6 332.3 365.8 5.4 29.3 95.8 116.3 128.0 9.9 54.5 177.8 216.0 237.7

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