Indian Banking at Inflection – Topical Themes Credit Suisse Asian Investment Conference March 19, 2018
Presentation Path 1. Finally, a Viable NPA Resolution Platform 2. Formalization of Economy 3. Financialization of Savings 4. Serving the Underserved – the Rural Frontier 5. Operational Risk Management 2
Reforms Set to Expand the Banking Opportunity Serving the Rural Banking Frontier • Underserved Financialization Demonetization & Change in Status Quo for • of Savings Investments in Physical Assets Formalization of Economy Goods & Service Tax • Current Banking • Bankruptcy Code – a Viable NPA Resolution Market – Platform Dealing with NPAs 3 Note: Bubbles not to scale
Reforms Set to Expand the Banking Opportunity Serving the Underserved 1. Legislation well drafted and thought through Financialization of Savings 2. Time lines being adhered 3. Haircuts?? Formalization of Economy Current • Bankruptcy Code – a Viable Banking Market - NPA Resolution Platform Dealing with NPAs 4 Note: Bubbles not to scale
Serving the • Rural Banking Underserved Financialization Demonetization & Change in Status Quo for • of Savings Investments in Physical Assets Formalization of Economy • Goods & Service Tax: Benefits far outweigh initial hiccups Current • Bankruptcy Code Banking Market 5
GST in New Zealand – A Case in Point Pre-GST New Zealand (NZ) exhibited macro characteristics similar to India on inflation, fiscal deficit and rates NZ economy has improved consistently post implementation of GST in 1986. NZ today is one of the highest tax productive nations (GST Revenue / GDP Ratio) among OECD nations (1) and has a Fiscal Surplus! Evidence from other countries indicate one-off effects dissipated after one to two years of implementation Consumer Price Index Govt. 10 Year Bond Yield Fiscal Surplus / Deficit (% of GDP) (2) 20% 20% 5% 15% 15% 0% 10% 10% 5% -5% 5% 0% GFC GST GST 0% -10% -5% Mar-85 Apr-89 May-93 Jun-97 Jul-01 Aug-05 Sep-09 Oct-13 Nov-17 Mar-72 Jun-75 Sep-78 Dec-81 Mar-85 Jun-88 Sep-91 Dec-94 Mar-98 Jun-01 Sep-04 Dec-07 Mar-11 Jun-14 Sep-17 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 (1) Source : IMF 2015 (2) Source: NZ Treasury; Adjusted Financial Balance till 1993; Operating Balance Before Gains and Losses Post 1993 6
GST To Benefit Growth & Profitability of Banks Informal Economy – Demonetization addressed the stock while GST addresses the flow. Demonetization & GST driving Direct Tax triangulation; Direct tax collections for Apr17-Feb18 up 19.5% GST to boost economic growth by additional 0.5% to 1% with a stable and transparent tax system Formalization of cash economy with improved quality of information enhancing bankable wallet Lower government borrowings means lower SLR & CRR freeing capital to fund the economy (more benefit to banks with higher difference between investment and loan yields) SME, MSME invoice / bill discounting to get a fillip with GSTN bills being offered / financed on TReDS* * Trade Receivables e-Discounting System 7
Serving the • Rural Banking Underserved Financialization Demonetization & Change in Status • of Savings Quo for Investments in Physical Assets Formalization of • Goods & Service Tax: Benefits far outweigh initial Economy hiccups Current • Bankruptcy Code Banking Market 8
Financialization is Now a Virtuous Cycle Lower Inflation Lower Lower Govt Rates Borrowing Lower Need for Funding Inflation Economy Hedging Assets Banking & Para Banking Assets 9
Banks Are Natural Homes for Para-Banking Products Private Life Insurers - New Business Premiums by Channel General Insurance – IBL A Large Distributor Brokers, Corporate Individual 3% Agent (Non agents Bancassurance Banks), 3% 2% 24% Direct Direct and Majority Business Others, IBL 35% 10% Banks, 54% Corporate Agents - Non- Agents, Banks Brokers 30% 28% 11% AMC AUMs by Parent Entity Top 5 Retail Brokers are Linked to Banks Global AMC & ICICI Securities Others, 11% 10% HDFC Securities 7% NBFC/Financi al Institution, Sharekhan Ltd 13% 6% Banks, 49% Axis Securities 5% Others Conglomerates, 67% 27% Kotak Securities 5% 10 Source: IRDA, AMFI, NSE, Management Estimates
What is Attracting IndusInd Management Attention ? Para Banking – From Large Distributor to Manufacturing Profit Pools Preferred Approach High Low Capital Consumption Inorganic / JV Organic Gestation Period Inorganic / JV Organic Investment Size Issuance of Shares Cash Specialist Skills Inorganic / JV Organic / Bolt-on IBL Franchise Valuation for Franchise 11
What is Attracting IndusInd Management Attention ? Search for New Domains – Wealth Management Ultra HNW Search on for Wealth Management – One More Domain Affluent New Domain Home Markets Mass Affluent ~ 6mn Customers Vehicle Finance Mass ~3 mn Customers Microfinance Bottom of Pyramid (IBL + BFIL* ~8 mn Customers ) 12 * Merger under approval process
• Rural Banking: Serving the Next Growth Frontier Underserved Financialization Demonetization & Change in Status Quo for • of Savings Investments in Physical Assets Formalization of • Goods & Service Tax: Benefits far outweigh initial Economy hiccups Current • Bankruptcy Code Banking Market 13
Government Schemes Bridging the Urban / Rural Divide Household Details (2011 Census) Rural Urban 93% 81% 65% 64% 55% 52% 40% 31% 18% 11% House with Concrete House with Brick Walls Electricity Sanitation facility Cooking Gas Connection Roof within the premises Pradhan Mantri Awas Saubhagya Swachh Bharat Ujjwala Yojana Yojana (Gramin) Yojana Yojana 14
… And Are Well Executed … And Well Supported Average Daily Rural Roads Constructed (km) 156 2.4x 130 100 100 Building Blocks of “Rural Stack” 69 66 • Credit Bureau Coverage Mobile Penetration • FY13 FY14 FY15 FY16 FY17 FY18 Jan Dhan Accounts • (Target) Expenditure on Rural Development Schemes (Rs cr) GST to formalize MSME • Govt + Private Customer Service Centre Infrastructure • 1,05,448 2.1x 95,099 77,321 67,263 58,630 50,162 Cost of Delivery Falling Rapidly ! FY13 FY14 FY15 FY16 FY17 FY18 (E) 15 Source: Ministry of Rural Development
Union Budget 2018-19 Promises More Increasing Farm Income – Minimum Support Price for major crops at 1.5x the cost of production National Health Protection scheme – Health insurance for 100 mn rural households; Pilot of Rs 20 bn to be ramped up in subsequent years. Swachh Bharat Mission – targets additional ~19 mn individual household sanitation facilities Ujjwala (LPG connections to BPL households) – increased target from 50 mn to 80 mn households Saubhagaya (Electricity connection to households) – targets additional 17.5 mn households with electric point in every house. 16
Rural India Under-served for both Assets & Liabilities Deposits by Population Category Credit by Population Category Rural, 10% Rural, 7% Semi-Urban, 11% Semi-Urban, 16% Metropolitan, 52% Urban, 15% Metropolitan, 67% Urban, 21% 17 Source: RBI, Data as of March 2017
Rural Opportunity >3x the Current Market Rural India HouseHolds: 168 mn Less: Accessibility: 20%; Credit Rejection: 20% Balance HouseHolds: 100mn Average HouseHold Borrowing: Rs 1,50,000 Average Outstanding Credit Per Account (Rs mn) Rural Credit Market (Rs. Trillion) 15.0 1.07 0.47 5.3 0.21 0.15 Rural Semi-urban Urban Metro Current Potential Source: Census 2011, RBI Population Group-wise Outstanding Credit Of Scheduled Commercial Banks – March 2017 18
IndusInd Being Positioned to Harness the Opportunity Over 1,700 IBL + BFIL Rural Branches Assets: Microfinance, Home Improvement, • • 2-Wheeler, Consumer Durable Finance Access to 1,00,000+ Villages • • Liabilities: Saving A/C, Recurring Deposits Network Products • Doorstep Delivery Services: DBT, Remittances • Rural India Technology CSR Part of local ecosystem with Health, • • Cashless Collections & Disbursals Education & Water Initiatives • Online Credit Underwriting • Financial & Legal Literacy Programs • Facilitate e-commerce 19
Pilots Validating Retail Distribution Service Point Model (RDSP) 20
Operational Risk Management 21
Sources & Mitigants of Operational Risks Segregation of Business, Risk and Ops Credit Risk Well Discussed & Understood People Multiple Lines of Defense Key Risks in Market Risk Banking Self Assessment and Process Training Operational Risk Requires More Attention / Is Less Understood Systems External 22
Sources & Mitigants of Operational Risks Segregation of Business, Risk and Ops Credit Risk People Multiple Lines of Defense Key Risks in Market Risk Banking Self Assessment and Processes Training Operational Risk Systems External Factors 23
Sources & Mitigants of Operational Risks Segregation of Business, Risk and Ops Credit Risk Multiple Lines of Defense People (Unit level, Concurrent, Internal Audit) Key Risks in Market Risk Banking Processes Self Assessment and Training Operational Risk Systems External Factors 24
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