Dun&Bradstreet_Indias_Leading_BFSI_Companies_2019

India’s Leading BFSI Companies 2019

India’s Leading BFSI Companies 2019

India’s Leading BFSI Companies 2019 Published in India by Dun & Bradstreet Information Services India Pvt Ltd.

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Editor

Nayna Banerjee Naina Acharya

Sub-Editor

Editorial Team Christopher D’Souza, Mihir Shah, Yogesh Jambhale, Omesh Kandalkar, Rohit Pawar, Nishikant Sharma, Swati Rajgarhia Suhail Aboli, Jaison Swamidas, Rajesh Kandari, Amit Rathi, Prasad Kachraj, Sukhvinder Singh, Romita Dey Talukdar, Monark Munshi, Subhonita Gargari, Dharmesh Kapoor, Dhrumil Shah, Apoorwa Tyagi, Sohail Chawla, Amit Kumar, Sonal Singh Rana, Siddarth Ravindran, Mithilesh Patodia, Miloni Shah, Apeksha Mutreja, Manjula Dinakaran, Pranava Rao, Taran Chawla, Pooja Arora, Nalini Kukreti, Rashi Sharan, Vaibhav Kapur, Sagar Kamath Mangesh Shinde, Sumit Sakhrani, Ankur Singh, Rajesh Gupta, Smruti Gandhi, Tia Roy, Nikita Sachdev, Rehan Shah, Ankita Satam, Shanice Pereira, Rithesh Poojary, Nadeem Ansari, Sanket Shinde Mohan Chilvery, Tushar Awate, Shilpa Chandolikar, Sunil Burli, Ganesh Singh, Samata Gaikwad All rights reserved Except for any fair dealing for the purpose of private study, research, criticism or review as permitted under the Copyright Act, no part or portion of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher. DISCLAIMER This publication is circulated by Dun & Bradstreet to the select recipients and at Dun & Bradstreet’s sole discretion. The publication shall neither be reproduced, republished, publicly circulated, disclosed nor shall be copied, modified, redistributed, or otherwise made available to any person or entity, in any form whatsoever including by way of caching, framing or similar means, whether in part or whole, without the prior written consent of authorized representatives of Dun & Bradstreet. This publication is meant for the fair and internal use of the recipients. Dun & Bradstreet provides no advice or endorsement of any kind through this publication. This publication does not constitute any recommendation by Dun & Bradstreet to enter into any transaction or follow any course of action. All decisions taken by the recipients shall be based solely on the recipient’s evaluation of circumstances and objectives. Dun & Bradstreet recommends that the recipient independently verify the accuracy of the contents of the publication, upon which it intends to rely. This publication contains information compiled from various sources over which Dun & Bradstreet may not have control and / or which may not have been verified by Dun & Bradstreet, unless otherwise expressly indicated in the publication. Dun & Bradstreet, therefore, shall not be responsible for any accuracy, completeness or timeliness of the information or analysis in this publication. Dun & Bradstreet thus, expressly disclaims any and all responsibilities and liabilities arising out of the publication or its use by the recipient or any person or entity. Sales Team Operations Team Design Team

India’s Leading BFSI Companies 2019 11 th Edition ISBN 978-93-86214-30-0

Contents

Preface.................................................................................................................. I

Foreword............................................................................................................. III

Executive Summary..............................................................................................V

Methodology. ....................................................................................................VII

Definitions & Calculations................................................................................... IX

Industry Overview Banks.........................................................................................................XIII NBFCs. .....................................................................................................XXIII Securities Market. ...................................................................................XXXI Mutual Funds. .......................................................................................XXXIX Insurance ............................................................................................... XLVII Fintech & Beyond . ..................................................................................... LV

Experts’ View. ............................................................................................ I-1 - I-5

Listing ..................................................................................................... L-1 - L-13

Profiles..........................................................................................................1-145

Index. ............................................................................................................... 146

Preface

In the Indian context, the Banking, Financial services and Insurance (“BFSI”) sector holds centre-stage with its ability to connect a wide section of society with the productive sectors of the economy. In recognition of the important role played by the sector, Dun & Bradstreet India is pleased to present the 11th edition of one of our premier publication, ‘ India’s Leading BFSI Companies ’. In addition, this year we have chosen to use the theme of Fintech as an area of specific emphasis. The 2019 edition of the ‘ India’s Leading BFSI Companies ’ publication profiles the leading companies from the Indian BFSI sector and captures the pulse of the sector through detailed analysis and perspectives of industry experts.

Today, Fintech is impacting each and every segment of the BFSI sector, and changing the way financial services are being delivered. The cost incurred and time spent on acquiring

new customers and servicing existing customers makes it unprofitable for traditional financial institutions to cater to low ticket size customers. This gap is gradually being plugged by Fintech. With the ability to innovate and provide customised financial products, Fintech is rapidly changing the core financial services areas. It has reduced the cost and time for providing financial services manifold and made it possible to reach out to individuals and firms that otherwise did not enjoy access to credit or financial services. This has raised many opportunities. These trends apply across all markets, including India. However, in addition to all these trends for India, Aadhaar can provide an enabling platform for Fintech to deliver these opportunities. Since it has created a digital identity for more than 95% of India’s population, it can be leveraged by Fintech to facilitate further financial depth and access. However, regulatory issues surrounding Aadhaar need to be resolved. Over the years, many initiatives have been taken to develop India’s financial markets and institutions. When compared to many of its peer group countries, India lags behind in terms of financial depth and access. Although the reasons are many, the prominent ones are regulatory barriers, lack of technology-readiness, constraints to efficient delivery and lack of access to financial products. Observing the journey of financial development of other countries, we have found that over the past 30 years, Brazil, China and South Africa progressed to become economies with high financial depth and high financial access while India has lagged behind. India now has no choice but to adopt Fintech to leapfrog to the matured stage of financial development with high financial depth and access. This will strengthen India’s growth opportunities. Fintech has the potential to accelerate growth through new market opportunities, transforming businesses, productivity gains, providing access to financial products for all, broadening participation of different sections of the society, creating a shared economy and higher multiplier effect on jobs. We have studied the GDP elasticity with respect to Fintech development and found an important conclusion. If India successfully adopts Fintech, we will be able to create GDP over the next 20 years equivalent to the amount we have generated since independence.

I hope you will enjoy reading this publication, and look forward to receiving your valuable feedback and suggestions.

Manish Sinha Managing Director – India Dun & Bradstreet

I

Foreword

Dun & Bradstreet India takes pleasure in announcing the launch of the 11th edition of its premier publication ‘ India’s Leading BFSI Companies ’. Through this publication, Dun & Bradstreet seeks to provide useful and comprehensive information about the leading companies from the Indian BFSI sector. Additionally, it also highlights key trends, recent developments and the financial performance of the sector during FY18. India’s Leading BFSI Companies 2019 features 336 leading companies in the BFSI sector across various segments, namely banking, insurance, NBFCs, broking houses and mutual funds. In recent times, the Indian banking sector has been grappling with NPAs and the revelation of frauds. Despite robust growth, there has been a deterioration in the asset quality of NBFCs as well, with their gross non-performing assets (GNPAs) doubling from less than three per cent in FY15 to nearly six per cent by FY18. Amidst this backdrop, the emergence of the NBFC liquidity crisis has led to concerns about the financial sector as a whole.

At a time when regulators are already being cautious about the banking sector, the issues in the NBFC sector have come to the fore at an opportune moment. Closer scrutiny of the NBFC sector could eventually lead to the development of a macro-prudential framework for NBFCs, and that could help safeguard investors’ money and enhance trust in the sector. Likewise, there is need for reforms and frameworks to help prevent fraud and mis-selling of financial products. FinTech is already disrupting the financial sector by providing solutions to enhance the customer experience and quicker and cheaper modes of financial transactions. The emergence of FinTech solutions for compliance-related and supervisory functions of regulators (RegTech and SupTech) could improve adherence to regulations by not just detecting, but possibly predicting and preventing violations as well. This holds great promise for the financial sector, and calls for higher and more purpose-driven engagement between service providers, FinTechs and regulators. We are sure that this publication would help gain a deeper understanding about the Indian BFSI sector and its leading companies. We hope you will enjoy reading the publication, ‘India’s Leading BFSI Companies 2019’ and look forward to receiving your valuable feedback and suggestions.

Nayna Banerjee Leader - Learning & Economic Insights Group Dun & Bradstreet India

III

Executive Summary

For more than a decade, Dun & Bradstreet has been closely following the progress of the Indian BFSI sector. This year, we are pleased to present the publication titled ‘ India’s Leading BFSI companies 2019 ’. The publication, now in its 11th edition, highlights the contribution of key stakeholders of the BFSI sector across India and the growth of the sector. The publication profiles the leading players of the BFSI sector, with an annual total income of ` 250 mn and above in FY18. Accordingly, this edition of the publication profiles 336 companies, comprising 81 banks, 154 NBFCs and financial services, 52 insurance companies, 29 asset management companies and 20 broking houses.

Some of the key highlights in this publication: • The credit growth of all scheduled commercial banks (SCBs) accelerated to 10% in FY18 from 8.2% in FY17; this growth was largely driven by private sector banks • However, SCBs witnessed the slowest growth in aggregate deposits in 55 years in FY18; The growth in deposits slowed down to 6.2% in FY18 from as high as 15.3% in FY17 • The asset quality of banks deteriorated in FY18. The gross nonperforming advances (GNPA) of SCBs worsened to 11.2% in March 2018 from 9.3% in March 2017 • The total number of NBFCs registered with the RBI declined to 11,402 as of March 2018 from 11,522 as of March 2017 and further to 10,190 by September 2018; this was due to cancellation of registrations with the RBI owing to stringent norms pertaining to net-owned fund (NOF) • In FY18, the total premium income of the Indian life insurance industry stood at ` 4,588.1 bn, about 9.6% higher than a year ago • In FY18, the total direct premium underwritten by the Indian non-life insurers grew by 17.6% to ` 1,506.6 bn • The aggregate AUM of the Indian mutual fund industry increased to ` 21.4 tn as on March 31, 2018 from ` 17.5 tn a year ago, reflecting a 22.3% growth; this was spurred by a strong 35.1% growth in the AUM of growth/equity oriented schemes.

‘ India’s Leading BFSI Companies 2019 ’ is an endeavour to capture the pulse of India’s financial sector. Dun & Bradstreet will continue to track of the developments in this sector for posterity through the future issues of this publication series.

Naina R Acharya Leader Learning & Economic Insights Group Dun & Bradstreet India

V

Methodology

For the purpose of the publication, ‘ India’s Leading BFSI Companies 2019 ’, the BFSI sector has been divided into the following key segments – banking i.e. scheduled commercial banks (SCBs) based on the RBI enumeration of SCBs as on Mar 2018; companies providing financial services falling under NIC Codes 64, 65 & 66; asset management companies as registered with Association of Mutual Funds in India (AMFI); and insurance companies that are registered with Insurance Regulatory and Development Authority of India (IRDAI), in accordance with the Insurance Act, 1938. Adequate measures are undertaken, such as an advertisement in the ‘All India’ edition of a prominent business daily, to ensure that the publication covers leading companies from the BFSI sector from across the country. In addition, emails and social networking were also used for reaching out to Dun & Bradstreet India’s in-house database and companies registered with the respective regulatory bodies and industry associations. Basic Eligibility Criteria As a basic selection criterion, companies with a standalone total income of ` 250 mn and above in FY18 have been featured in this publication. For companies where the published financial statement is for a period other than 12 months, the financials have been annualized for the sole purpose of shortlisting and profiling. We have also considered additional exclusion criteria of the corporate governance record and NBFCs whose certificate of registration was cancelled by RBI (as on 27 Dec 2018) to arrive at the final list of ‘ India’s Leading BFSI Companies 2019 ’. Source of Information - In general, all information used in the publication is from publically available sources. Financials and other details of the companies have been sourced from annual reports or financial statements or various publications provided by regulatory authorities (IRDA, RBI, SEBI, AMFI and Government of India websites). Audited financial statements considered were for the period July 31, 2017 and June 30, 2018 have been used as the source of information for this publication. In case of certain subsidiaries, financials have been procured from annual reports of their respective parent companies. To ensure that all the information contained in this publication is verified and authenticated, companies that have not responded with financials statements, and/or their information is not available in public domain at the time of compiling this publication are excluded. The various financial computations are based on Dun & Bradstreet’s methodology and have been explicitly explained in the ‘Definitions and Calculations’ section. A standardized format has been used for reporting the information about the companies. The editorial team would appreciate if readers would keep Dun & Bradstreet India regularly updated regarding any changes in their companies, as and when it occurs. Each company featured in the publication has been allotted a unique identification number (D-UN-S® - Data Universal Numbering System). This will help readers locate and obtain full-fledged informative reports on these companies from the Dun & Bradstreet India database. The editorial team is confident that ‘ India’s Leading BFSI Companies 2019 ’ will serve as a useful reference tool for information on the Indian BFSI sector. We would be pleased to receive your invaluable feedback and suggestions, which we can incorporate in the next edition.

VII

VIII

Definitions & Calculations

Sr No Particulars

Formulae

1 Total Income for Insurance companies

Premiums earned - net (policy holder’s account) + Income from Investments (policy holder’s account) + other income (policy holder’s account) + income from investments (shareholders account) + other income and miscellaneous receipts (shareholders account)

2 Total Income for Banks

Total Income as per RBI

3 Total Income for other companies

Total Income as per Annual Report

4 Net Profit/loss for Banks

Net Profit/loss as per RBI

5 Net Profit/loss for other companies

Profit After Tax as per Annual Report

6 Net Premium Earned, AUM and Solvency Ratio of Insurance companies

as per the data from ARs/Financial Statements/ Public Disclosures, FY18 Annual Report of Insurance Regulatory and Development Authority (IRDA) Bills purchased & discounted (Short term) + Cash credits, overdrafts & loans (Short term) + Term loans Demand Deposits + Savings Bank Deposit + Term Deposits

7 Total Advances

8 Total Deposits

9 Total Business

Total Deposits + Total Advances

10 Net Profit Margin (NPM) %

Net Profit/Total Income*100

11 Net Interest Margin (NIM) (%)

Net Interest Margin as per RBI

12 Net NPA Ratio (%)

Net NPA Ratio as per RBI

13 Asset Under Management (AUM) for Insurance Companies

Asset Under Management as per IRDA Annual Report

14 AAUM(Quarter Ended) of assetmanagement companies As per Association of Mutual Funds in India (AMFI)

IX

Banking Overview

The global banking industry witnessed favorable conditions in 2018 as the world economy gained traction during the year. The credit situation remained largely supportive for banks, with subdued inflation rates despite a decline in unemployment levels. On the flipside, the escalating US-China trade spat, ongoing political uncertainty in the Euro zone, and prospects of monetary-policy normalization are likely to erode investor confidence, weighing down on the overall growth momentum. In Europe, economic growth slipped a notch since the start of 2018, with Britain’s imminent departure from the European Union adding to uncertainty. In Japan, as well as in the Euro Zone, central banks continued with large-scale asset purchases and negative interest rate policies. Emerging markets, although buoyed by global economic growth, moved in tandemwith the US Dollar. Until the initial months of 2018, financial conditions remained significantly eased on account of a weaker Dollar. However, as the Dollar gained ground post Q1-2018, exerting pressure on some emergingmarket currencies, financial conditions began to squeeze. Besides, banks in emerging markets continue to be marred by governance and transparency issues even as efforts are underway to bring banking regulations on par with international standards. Post-crisis reforms augur well for the sector The year 2018 marked the 10th anniversary of the global economic crisis. The collapse of US investment bank Lehman Brothers and France’s BNP Paribas sent ripples across the world, brought the global financial system to a standstill. A spate of reforms followed in the aftermath, to resuscitate banking regulatory systems around the world. A decade later, with new standards and stringent protocols in place, the global banking industry looks much more resilient and on firm footing. Some of the reforms that have been successfully implemented include Basel III capital and liquidity norms and stress tests for banks in addition to macro-prudential policy frameworks for systemic oversight. As a result, banks now have substantially higher capital levels and holdings of liquid assets. These measures have improved bank resilience to shocks and reduced counterparty risks. On the downside, however, operating costs have increased on account of new reporting requirements and increased compliance costs. Besides, there are certain other issues that warrant action, namely complete implementation of the leverage ratio and the building of necessary frameworks for cross-border resolution of banks and insurer insolvency. Moreover, with the emergence of new threats to the financial system, regulators also need to remain vigilant and take appropriate measures for areas such as FinTech and cyber-security. Low interest regime continues to hurt profitability Since the financial crisis of 2008, interest rates have remained persistently low in major economies like the US, Japan, Euro Zone and the UK. This prolonged low-interest rate regime in advanced economies has been a major drag on bank profitability on account of diminishing net interest margins, which in turn erodes the returns on assets (ROA). In the emerging markets, overall profitability and net interest margins have been comparatively better. However, high levels of non-performing loans have been hurting profitability in some emerging economies. In 2018, most economies continued with accommodative monetary policies to spur economic growth. However, as the recovery picked up pace, there were hints of a possible shift towards monetary policy normalization. But that remained limited to a few major economies like the US, where the Federal Reserve continued with its very gradual tightening policies. The European Central Bank scaled down its monthly net asset purchases while extending the time-frame of its asset purchase program, but remained committed to keeping interest rates at prevailing levels. In most other advanced economies, policy rates remained unchanged at existing levels. The Bank of Japan also continued with its easy monetary policy. In the emerging markets, China and India continued to adopt a neutral policy stance.

Returns on Assets (%)

2008

2012

2013

2014

2015

2016

2017

Advanced Economies Australia

1.3 0.5 0.1

1.2 1.1 0.3 0.5

1.4 1.1 0.5 0.4 1.4 0.4 0.4 0.2 0.4 1.4 1.3 0.7 1.9 1.4 -0.8

1.2 1.1 0.2 0.4

1.4 1.0 0.4 0.4 0.3 0.4 0.5 0.3 0.4 1.5 1.1 0.4 0.2 1.5 -2.5

0.8 1.0 0.3

1.2 1.1 0.4 0.4

Canada France

Germany

-0.1

Greece

0.9 0.3

-1.8 -0.1

-1.0 -0.2

0.1

-0.2

Italy

-0.5

0.6

Japan Spain

0.3

0.4 0.4 0.3 0.3 1.3 1.2 0.7 0.9 1.4

0.3 0.4 0.3 0.4 1.1 0.6 0.4 1.2 1.7

0.8

-1.4

0.5 0.5 0.3 1.5 0.9 0.3 1.0 1.7

UK US

-0.1

0.2 0.3

Emerging & Developing Economies Brazil 2.1

1.4 1.3 0.9 2.4 1.5

China India Russia

0.9 2.1 1.6

South Africa

Source: Financial Soundness Indicators, IMF

Return on Equity %

2008

2012

2013

2014

2015

2016

2017

Advanced Economies Australia

22.4 15.0

23.0 22.7

27.0 22.3

22.9 22.5

23.8 20.7

12.0 19.9

16.7 21.4

Canada France

3.6

6.0

8.4 7.5

4.4 7.2

6.8 7.5

5.5

6.4 6.3

Germany

-2.5 12.4

10.8

Greece

-10.4

-29.3

0.8

-1.3

Italy

4.9

-0.9

-11.5

-2.8

3.4 8.9 7.1 4.4 3.0

-7.7

7.5

Japan Spain

6.0

8.9 5.4 3.8 3.3

9.4 5.7 5.6 2.8

8.3 5.5 3.8 3.2

12.6 -2.5

-21.0

6.7 7.6 2.9

UK US

3.2 2.7

Emerging & Developing Economies Brazil 19.2

13.1 19.8 13.8 17.9 20.5

13.2 17.6

13.2 17.6

15.4 15.0

11.3

13.9 12.6

China India Russia

7.6 5.1 9.8

14.6 13.7 28.0

9.6 7.5

9.6 7.5

6.3 2.0

4.5 7.9

South Africa

18.8

18.8

20.6

22.2

20.0

Source: Financial Soundness Indicators, IMF

Extended periods of low interest rates have serious implications for banks – not only do they hurt profitability and bank resilience, but they also curtail the bank’s ability to replenish capital in the event of unexpected losses. Low interest rates also encourage banks to move towards riskier avenues to recover profitability, for instance risky lending practices, and/or increase in maturity mismatches between loans and funding, thereby exacerbating financial vulnerabilities. Other ways to boost revenue would be through operational improvements like reduction in branches or employees, and mergers.

XV

To counter this, banks, especially in low-interest rate economies, have resorted to certain business adjustments like increased focus on fee-based business and trading. As a result, with banks providing more diversified portfolio of services, the share of non-interest income (fees, commissions, trading income, capital gains, etc.) in bank’s total income has increased. Banks have also raised the maturity of their assets to sustain interest margins from lending and bond investing.

Asset quality continues to be weak in emerging economies

Bank Non Performing Loans to Total Loans 2008

2012

2013

2014

2015

2016

2017

Advanced Economies Australia

1.4 0.7 2.8 2.9 4.7 6.3 2.8 1.6 3.3

1.7 0.7 4.3 0.9

1.4 0.6 4.5 2.7

1.0 0.5 4.2 2.3

0.9 0.5 4.0 2.0

1.0 0.6 3.9

0.9 0.5 3.1 1.5

Canada France

Germany

Greece

23.3 13.7

31.9 16.5

33.8 18.0

36.6 18.1

36.3 17.1

45.6 14.4

Italy

Japan Spain

2.4 7.5 3.6 3.3 3.4 1.0 3.4 6.0 4.0

2.1 9.4 3.1 2.5 2.9 1.0 4.0 6.0 3.6

1.7 8.5 1.7 1.9 2.9 1.2 4.3 6.7 3.2

1.5 6.2 1.0 1.5 3.3 1.7 5.9 8.3 3.1

1.4 5.6 0.9 1.3 3.9 1.7 9.2 9.4 2.9

4.5 0.7 1.1

UK US

Emerging & Developing Economies Brazil 3.1

3.6 1.7

China India Russia

2.4 3.8 3.9

10.0 10.0

South Africa

2.8

Source: Financial Soundness Indicators, IMF

Factors like external financing vulnerabilities, banking systemweaknesses andweak global trade amidst rising protectionism and corporate fragilities have led to the deterioration in the asset quality of banks in some emerging economies. Banks in emerging economies have witnessed a rise in non-performing loans due to economic weakness (Brazil & Russia), continued corporate leverage growth (China) and sector-specific downturns (India). Due to heavy credit losses due to non-performing and problematic loans, banks have raised provisioning levels in recent periods. However, that hasn’t kept pace with the rise in bad loan formation. In India, asset quality continues to be weak, even as the bulk of legacy problematic loans have been recognized and resolution of large non-performing loans is expected. In China, there are high risks of asset quality deteriorating amid ongoing trade tensions with the US and tighter lending conditions in the domestic market. In Russia, asset quality continues to drag even as the central bank is carrying out an extensive cleanup of the banking sector. In contrast, asset quality of banks in advanced economies like the US and UK has improved over the last few years, thanks to reforms implemented by regulatory authorities. Banks hold adequate capital levels Bank capital ratios have improved considerably on the back of stringent regulations, enhanced supervision, higher provisioning for non-performing loans and recapitalization of stressed banks. Capital and liquidity buffers have also improved for banks in some countries on account of consolidation within the banking sector. Besides, comprehensive capital analysis and stress tests are also being conducted regularly to assess the soundness of banks and to identify risks that may affect balance sheets of systemic banks.

XVI

Regulatory Capital to Risk Weighted Assets (%) 2008

2012

2013

2014

2015

2016

2017

Advanced Economies Australia

11.3 12.2 10.5 13.6 10.0 10.4 11.3 12.9 14.5

11.9 16.2 14.5 17.9 13.4 14.2 11.6 17.1 14.5 16.4 13.3 13.1 13.7 15.9 9.6

11.6 14.3 15.4 19.2 13.5 13.7 15.9 13.3 19.6 14.4 16.1 12.2 12.3 13.5 15.6

12.2 14.2 16.3 18.0 14.1 14.3 15.3 13.7 17.3 14.4 16.7 13.2 12.5 12.5 14.8

13.8 14.2 17.1 18.3 16.5 14.8 15.9 14.7 19.6 14.1 16.4 13.5 12.7 12.7 14.2

13.6 14.8 17.6 18.8 16.9 13.8 16.2 14.8 20.8 14.2 17.2 13.1 13.0 13.1 15.9

14.5 14.8 18.9 19.4 17.0 16.7 15.6 20.5 14.5 18.1 13.6 12.8 12.1 16.3

Canada France

Germany

Greece

Italy

Japan Spain

UK US

Emerging & Developing Economies Brazil 17.7

China India Russia

13.0 16.8 13.0

South Africa

Source: Financial Soundness Indicators, IMF

In Jun-2018, 35 of the largest banks in the US cleared the first stage of an annual regulatory stress test, indicating that they have enough capital buffer to withstand economic headwinds. In Europe, regulators conducted a similar test in Nov- 2018 to assess how resilient banks are to the aftershocks from Brexit and Italy’s bond slump. China’s central bank ran a similar stress test in the first half of 2018 on 20 commercial banks to gauge their stability during macro-economic shocks. In India, banks have a high proportion of un-provided non-performing assets vis-à-vis the capital levels. Banks in China and Brazil, on the other hand, have greater capital cushion as compared to the NPAs. Impact of No-Deal Brexit: • In Jan-2019, the British parliament voted to renegotiate its Brexit terms. Lawmakers also voted against leaving the EU without any withdrawal agreement. The European Council, however, rejected any such possibility, increasing the likelihood of a disorderly Brexit. • A no-deal exit would come as a severe blow to the UK economy, with uncertain economic conditions, lack of trade deals and disruption at borders. • Banks in UK are especially vulnerable given the likely slowdown in the economy, which would exert pressure on banks’ profitability and asset quality. However, UK’s major banks look well-cushioned against any such scenario. • Operational costs would increase as UK banks lose access to other EUmarkets, with duplication of some banking

activities and business structures in different locations adding up to the expenses. • Operating in different regulatory regimes would also entail higher costs for the banks.

XVII

Digitization and Banking With the advent of artificial intelligence and machine learning, the global banking industry has been swept over by a new wave of digital transformation. Financial Technology or ‘FinTech’ is bringing about rapid changes in the industry, opening up avenues for innovative business models, products, processes and applications. • FinTechs are not only transforming but also challenging business models of traditional banks. On the other side, banks are also gearing up, setting up their own fintech units within the organization or joining hands with external service providers through collaborations, investments or acquisitions to keep pace with the fast-evolving landscape. • In 2018, policymakers worldwide took proactive steps towards building regulatory checks to counter the challenges of digitization. In October 2018, the IMF and World Bank released guidelines aimed at helping authorities devise appropriatemeasures to safeguard the financial system from inherent risks. InMarch 2018, the European Commission and the European Banking Authority published a Fintech Roadmap, setting out priorities and action plan for 2018-19. In the US, the Treasury Dept. released an extensive report on regulation of nonbanks, including FinTech firms and data aggregators. Mexico passed a law to regulate FinTech institutions. Indian Banking Industry: Overview The Indian banking industry has been grappling with various issues over the past few years, most importantly persistent deterioration in asset quality and the emergence of multiple scams and frauds. In FY18, the banking sector witnessed a high number of frauds (number of cases on frauds reported by banks generally hovered at around 4,500 in the last 10 years before their increase to 5,835 in FY18), with 80% of these being large-value scams involving ` 500 mn and above. For the first time since 1994, the banking industry, as a whole, registered losses, largely reported by public sector banks. The overhang of stress was a major drag for the banking sector in FY18, necessitating sharp hikes in provisions. Despite this, credit growth recovered during the year and banks witnessed improved capital levels, while asset quality improved marginally. Given the problems plaguing the industry, the RBI in recent years has undertaken several proactive measures to revive the sector, including: – 1) Recognition of non-performing assets, which is nearing completion, 2) Implementation of a new framework for resolution of stressed assets under the bankruptcy law, the Insolvency and Bankruptcy Code (IBC). 3) Recapitalization of public sector banks SCBs witness slowest growth in deposits in 55 years in FY18 In FY18, scheduled commercial banks (SCBs) witnessed the slowest growth in deposits since 1962-63. The growth in deposits slowed down to 6.2% in FY18 from as high as 15.3% in FY17. This was largely attributed to the combination of three factors – the phasing-out of restrictions on cash withdrawals and the gradual pick-up in currency demand following the demonetization in FY17, the easing of interest rates on deposits, and a shift in investor from term deposits to equity markets during the year. Private banks drive 10% credit growth in FY18 Driven largely by private sector banks, credit growth returned to double-digit growth in FY18. It revived from a low of 8.2% in FY17 to 10% in FY18. Credit to industry picked up, and personal loans and credit to services surged above the overall growth of bank credit. In contrast, the credit from public sector banks were subdued, largely due to the capital-related constraints, impaired assets and higher provisioning. Among sectors, credit to the industry returned to growth in FY18; although it was tepid. It grew by 0.7% in FY18, as against a decline of 1.9% in FY17. Personal loans grew by a faster 17.8% in FY18, over a 16.4% in FY17. Agricultural loans, however, grew by a much slower 3.8% as against a 12.4% growth in FY17. Loans to the services sector also slipped, down to 13.8% in FY17 from 17% in the previous fiscal.

XVIII

Trends in Credit and Deposit Growth (y-o-y)

Sectoral Deployment of Gross Bank Credit (% y-o-y growth)

10 12 14 16 18

20.0

15.0

10.0

0 2 4 6 8

5.0

-

Agriculture

Industry

Services

Personal Loans

(5.0)

FY13

FY14

FY15

FY16

FY17

FY18

FY17 FY18

Deposit

Credit

Source: RBI

Source: RBI

Dismal Financial Performance in FY18 The financial performance of banks in FY18 was lackluster, largely due to deteriorating asset quality and treasury losses, which eroded non-interest income. Banks reported sharply higher loan-loss provisioning during FY18 on account of elevated levels of gross non-performing assets and large delinquent accounts being referred to the National Law Tribunal under the new bankruptcy law. Higher provisioning proved to be a major drag on the profitability of public-sector banks; they reported net losses to the tune of ` 854 bn in FY18. Return ratios erode in FY18 In FY18, both return ratios came in lower for SCBs, owing to losses. The collective losses of public sector banks weighed down heavily on overall returns. Accordingly, SCBs reported losses on assets in FY18 to the tune of 0.2%, as against a return ratio of 0.4% in FY17. Likewise, SCBs reported losses on equity of 2.8% in FY18, as against a return of 4.2% in the previous fiscal.

Return on Assets (%)

Return on Equity (%)

1.2

10 12 14 16

1

0.8

0.6

0 2 4 6 8

0.4

0.2

0

FY13

FY14

FY15

FY16

FY17

FY18

FY13

FY14

FY15

FY16

FY17

FY18

-0.2

-4 -2

-0.4

Source: RBI

Source: RBI

Capital Adequacy The capital to risk-weighted asset ratio (CRAR) of all SCBs showed slight improvement in FY18with the phased implementation of Basel III norms. All banks, including public sector banks, stood well capitalized and above the regulatory requirement of 10.875% for March 2018. However, the CRARs of public-sector banks declined as compared to private sector and foreign banks, due to persistent deterioration in asset quality, and losses.

XIX

Capital to Risk Weighted Assets Ratio (CRAR)

16

14

12

10

8

6

4

2

0

FY13

FY14

FY15

FY16

FY17

FY18

Source: RBI

Non-Performing Assets Worsening asset quality, especially in public sector banks, continues to be a major cause of concern. In FY18, the gross non-performing assets (GNPA) worsened to 14.6% from 11.7% in FY17. The net non-performing advances ratio of SCBs stood at 6.0% as of March 2018. Private sector banks fared better when it came to GNPA ratios, owing to their efforts to have cleaner balance sheets through higher write-offs and better recoveries.

Gross NPAs as percentage of Gross Advances

12

10

8

6

4

2

0

FY13

FY14

FY15

FY16

FY17

FY18

Source: RBI

Amongst sectors, industries contributed to around 75% of NPAs, with asset quality in the sector deteriorating further during FY18. The gems & jewellery sector reported a sharp hike in GNPAs during FY18, as new frauds came to light during the year. Other industries with high stressed advances ratio included metals & metal products, engineering, vehicles, construction and textiles. Resolution Process Banks have so far been using various channels like Lok Adalats, Debt Recovery Tribunals and invocation of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interests (SARFAESI) Act, 2002 to reduce their non- performing assets. The IBC 2016 and recent amendment to the SARFAESI Act (providing for imprisonment of borrower for failing to provide asset details, and for providing possession of mortgaged property to the lender within 30 days) have helped improve recovery of stressed assets since FY18. Besides, banks also undertake sale of doubtful/loss assets to asset reconstruction companies (ARCs) and other banks or NBFCs or financial institutions.

XX

Key Developments in Indian Banking Industry The Reserve Bank of India (RBI) has adopted a proactive approach for resolution of stressed assets and to manage liquidity and risks in the market. Some of the important measures undertaken by the RBI during FY18 include – 1) The RBI revised the Prompt Corrective Action (PCA) framework effective 1 April 2017, under which the central bank monitors key performance indicators of banks as an early warning exercise and initiates corrective action in case thresholds related to capital, asset quality and profitability are breached. Up to September 2018, 11 public sector banks have been placed under the PCA. 2) In Feb-2018, the central bank issued a revised framework for resolution of stressed assets. It also directed lenders to refer an account with more than ` 20 bn loans for resolution under the IBC, if it is in default and has not been resolved within 180 days. 3) In Feb-2018, the RBI withdrew various loan restructuring schemes in practice by banks to restructure defaulted loans. These included the Corporate Debt Restructuring, Sustainable Structuring of Stressed Assets or S4A, Strategic Debt Restructuring, and Flexible Structuring of Existing Long Term Project Loans stand abolished. The Joint Lenders Forum, which was set up to resolve potential bad debts, has also been disbanded. 4) Effective Oct-2018, the RBI introduced changes to the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) with a view to boost liquidity in the system. 5) In September 2018, RBI issued guidelines on co-origination of loans for priority sector lending, allowing banks and NBFCs to contribute credit jointly, to boost funding to priority sectors. 6) The RBI also liberalized norms of External Commercial Borrowings (ECBs) for companies in the manufacturing sector and allowed banks to market rupee-denominated or Masala bonds overseas. 7) In view of the spike in government yields and the consequent provisioning for mark-to-market (MTM) losses by banks on investments held in Available for Sale (AFS) and Held for Trading (HFT) portfolios, the RBI allowed banks to spread the MTM losses on their investment portfolio for the quarters ended Dec-2017, Mar-2018 and Jun-2018, equally over a period of four quarters commencing from the quarter in which the loss was incurred. The central bank also directed banks to build an Investment Fluctuation Reserve (IFR) to safeguard against future market risks. Financial Inclusion The Government of India and the RBI have been making concerted efforts to promote financial inclusion. Through the PradhanMantri Jan Dhan Yojana (PMJDY), the number of persons joining the formal financial systemby opening an account at a financial institution has crossed 80% of the Indian population. The current status of the program is as under: - 1. Towards the goal of financial inclusion, all SCBs are required to adopt a structured and planned approach with board- approved Financial Inclusion Plans (FIPs). The third phase of the FIPs is being implemented during the period 2016-19, and banks are directed to submit data on the progress on various parameters under the FIPs. 2. The PMJDY, which was launched in two phases upto August 2018, was extended beyond this period with new features namely, opening account for every adult (from every household earlier); overdraft limit raised to ` 10,000 from ` 5,000; overdraft facility up to ` 2000 without any condition; accidental cover raised for new RuPay cardholders, for PMJDY accounts opened after August 28, 2018. 3. Total number of accounts opened under the scheme increased to 328 mn since its launch in 2014 with ` 851 bn deposits as of Sep-2018. 4. Opening of new bank branches reduced by more than 25% during FY18, on account of branch rationalization by banks to reduce operating costs. 5. The number of ATMs in rural and semi-urban areas increased modestly during FY18, but declined in the urban and metropolitan areas. At the end of March 2018, there were 206,871 ATMs of SCBs at various centres.

XXI

Non-Banking Financial Companies (NBFCs)

Overview Non-banking financial companies (NBFCs) play a crucial role in the Indian financial system by extending financial services to the unbanked section of the society and enhancing competition and diversification in the system. They complement the banking sector in terms of meeting the financial needs of the corporate sector, the unorganized sector, especially the micro, small and medium enterprises (MSMEs), as well as small retail borrowers, and in this regard, contribute significantly to nation-building and financial inclusion. With a size of around 15% of scheduled commercial banks’ (SCBs’) combined balance-sheet, NBFCs have been posting consistent growth over the past few years, providing innovative services/products including personal loans, housing loans, gold loans and insurance in addition to niche products such as microfinance, finance for physical assets, commercial vehicles, and infrastructure loans. In addition, NBFCs also provide leasing and hire-purchase services, corporate loans, investment in non-convertible debentures, IPO funding, margin funding, small ticket loans, venture capital, etc. NBFCs, however, do not provide operating account facilities like savings and current deposits, cash credits, overdrafts etc. Although both banks and NBFCs are engaged in increasingly similar business activities, especially on the assets side, NBFCs are subject to certain regulatory constraints, which restrict their business portfolio. Owing to the different regulatory and cost-incentive structures of banks and NBFCs, the RBI has imposed certain checks and balances on the latter to safeguard the interest of banks’ depositors against any possible risk arising due to the inherent differences. However, in order to provide a more level-playing field to the NBFCs, the RBI has undertaken certain policy measures in the recent past to ensure regulatory harmonization in the financial sector and to get rid of any regulatory arbitrage. While the issue of uneven regulatory coverage has been addressed to some extent by the RBI, there still remains room for further policy improvement in order to help NBFCs capitalize on their full potential and make further growth in serving the financial needs of the economy. Number of NBFCs registered with RBI continues to decline NBFCs can be classified as a) Deposit-taking NBFCs (NBFCs-D), which are authorized to accept and hold public deposits, and b) Non-Deposit taking NBFCs (NBFCs-ND), which do not accept public deposits but raise debt from banks and market. Under NBFCs-ND, those with asset size of ` 5 bn or more are classified as NBFCs-ND-SI. At the end of March 2018, there were 168 NBFCs-D and 230 NBFCs-ND-SI.

Registrations & Cancellation of CoRs of NBFCs

1000

800

600

400

200

0

FY16

FY17

FY18

FY19 (Upto Sept. 2018)

Registrations

Cancellations

Source: RBI

XXIV

The total number of NBFCs registered with RBI has been showing a downtrend in recent years. At the end of March 2018, the total number of NBFCs declined to 11,402 from 11,522 as of March 2017. The declining trend is largely due to cancellation of registrations with the RBI. The central bank mandates NBFCs to maintain a minimum net-owned fund (NOF) of ` 20 mn. Failure to comply with this criterion leads to cancellation of the certificate of registrations (CoR). This is reflective of the RBI’s proactive and vigilant approach to consolidate the NBFC sector. The number of cancellations of CoRs of NBFCs has exceeded new registrations in recent years, with 1,293 NBFC CoRs being cancelled since March 2016. By the end of September 2018, the number of NBFCs registered with the RBI declined further to 10,190.

Particulars

As of March 2016

As of March 2017

As of March 2018

As of Sept 2018

NBFCs

11,682

11,522

11,402

10,190

NBFCs-D

202

178

168

108

NBFCs -ND NBFCs-ND-SI

11,480

11,344

11,234

10,082

220

220

230

276

Source: RBI

Financial Performance of NBFCs Over the last few years, the lending portfolio of NBFCs has been growing rapidly in view of slow credit growth of SCBs, easy liquidity, better asset quality vis-à-vis banks and lending rate spread between NBFCs and banks. Bank credit growth has been adversely affected due to a number of factors, most prominently deteriorating asset quality and abnormally high NPA levels. The consequent slowdown in bank credit growth proved to be a boon for NBFCs, which filled the gap by providing an alternative source of credit, even as they weathered the transient effects of demonetization and GST. In FY18, NBFCs continued to expand their balance sheet (consolidated) driven by robust credit growth, led by retail and services sector loans, lower non-performing assets (vis-à-vis SCBs) and strong capital buffers. Net profit was up 22.9% in FY18 while return on assets was 1.7% in FY18.

NPA Ratio of NBFCs and SCBs

10

14

12

8

10

6

8

6

4

4

2

2

0

0

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

NBFCs

SCBs

Source: RBI

The aggregate balance sheet size of the NBFC sector, including government NBFCs, grew 17.2% to ` 26 trillion in September 2018 from ` 22.2 trillion in September 2017. Share capital of NBFCs increased 8.3% in FY18 while borrowings grew 19.1%. In FY18, loans and advances, which accounted for 77.5% of the total liabilities, grew by 19.2% as compared to 12.8% in the previous fiscal, while investments posted a growth of 9.1% as compared to a 18.6% growth in FY17.

XXV

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