Banking & Finance in India

Banking & Finance in India Sandeep Uppal, Managing Director & Head of Commercial Banking, HSBC India

Agenda Banking & Finance in India Banking Sector & Regulatory Issues for MNCs Payment Landscape Foreign Exchange & Hedging Market Financing Options HSBC in India

Banking Sector & Regulatory Issues for MNCs 3

Banking Overview Reserve Bank of India Scheduled Banks (232) Commercial Banks (163) Co operatives (69) Foreign Banks (34) Public Sector Banks (26) Pvt Sector Banks (21) Regional Rural Banks (82) Top 5 Banks as per Advances: Top 5 Banks as per Advances: Top 5 Banks as per Advances: 1. Stan Chart 2. Citibank 3. HSBC 4. Deutsche 5. RBS 1.State Bank of India 2. PNB 3. Canara Bank 4. IDBI Bank 5. Bank of Baroda 1. ICICI Bank 2. HDFC Bank 3. Axis Bank 4. Yes Bank 5. Federal Bank Source: RBI

Indian banks as change agents Indian banks are seen as being more than just financial intermediaries Agents of Social Change. Increasing financial inclusion by serving all sections of the population. Safe repositories of public deposits, suppliers of credit to support enterprise and fuel economic development in the micro, small and medium enterprises Supporting agriculture sector through financing Providing jobs and funding infrastructure development

Regulatory Issues for Multinationals Accounts Branch/ Liaison Offices require prior RBI approval typically 8-10 weeks if all documentation correct. Minimum criteria must be met (e.g. parent must be in existence for 5 years). Non-Resident Account is allowed subject to specific conditions and Regulatory approval (if required) Currency is Regulated for Capital Account Transactions Capital Infustion (FDI) is generally freely permitted Mandatory filings within timelines Parental Loans (In FCY termed ECBs) are Permitted subject to specified tenors, end uses and values with an interest rate caps. Lending Onshore Foreign currency borrowings only allowed for trade transactions (pre/ post shipments). Offshore External Commercial Borrowings (foreign currency term loans - ECBs) only allowed for certain purposes (e.g. expansion, new capex). Financial due diligence and justification for use of facility required Erosion of capital by a certain amount requires reporting to the BIFR Board

Payment Landscape in India 7

The Evolving Banking Landscape in India RBI Initiatives The Financial Settlement Infrastructure of India is undergoing a rapid change Exponential growth in volumes of RTGS/NEFT settlements Electronic transactions now represent 90% of payments by value Source: RBI Monthly Bulletin May 2012 Primarily Paper-based Clearing Cheques / Drafts Upto 1994 Introduction of Electronic Clearing in India Electronic Clearing Service (ECS) Electronic Fund Transfer (EFT) Real-time Settlement for HV Transfers Real Time Gross Settlement (RTGS) * Batch Settlement for Low Value High Volume Transfers National Electronic Fund Transfer (NEFT) 1995 2004 2005 2007 2008 2009-12 Year of Introduction Increased Efficiency in Outstation Clearing Cheque Truncation Service (CTS) Centralised Bulk Electronic Clearing, further efficiency in o/s clearing National Electronic Clearing Service (NECS) Speed Clearing (SCS) Mandatory E-payment of Govt dues / taxes Disincentivise Paper Clearing High-value cheque clearing Phased out Fee Standardisation for electronic transactions National Financial Switch connecting all ATM s in India - free usage across banks HSBC is one of the founding board members of NPCI (National Payments Corp of India)

New Frontiers Emerging Banking Channels Mobile Banking Transactions - Rapid expansion in the use of mobile phones as a mode of communication has created new opportunities for banks to use this channel for banking transactions. Active mobile connection base is 683 Million as at Mar 12 (source: TRAI & MediaNama) - Guidelines allow mobile banking transactions both for e-commerce and money transfer Purposes, subject to limits prescribed by each bank. Pre-paid Payment Instruments - Pre-paid payment instruments facilitate purchase of goods and services against the value stored on such instruments via smart cards, magnetic strip cards, internet accounts, internet wallets, mobile accounts, etc - To bring in transparency and facilitate orderly growth of this payment product, RBI issued guidelines in 2009 on issuance and operations of pre-paid payment instruments. Point of Sale (PoS) terminals - The number of Point of Sale (PoS) terminals in India is now more than eight times the number of ATMs, offering added convenience to customers and merchants. Over 99,000 ATMs are deployed in India as of Jun 12 (Source: RBI) - The Bank has permitted small value cash withdrawals at PoS terminals. Electronic/online mode of payments - Intermediaries like aggregators and payment gateway service providers handle customer funds. - Guidelines were issued in 2009, which prohibit the use of such funds by these intermediaries to ensure the safety of the funds. - Banks holding these balances are to ensure timely onward settlement of funds to public utility companies/ merchants.

India Transaction Landscape Paper to Electronic Transaction Volume Distribution Transaction Value Distribution 100% 100% 80% 80% 60% 40% Paper Electronic 60% 40% Paper Electronic 20% 20% 0% 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 0% 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Year Year Transaction Volume Transaction Value Count (Million) 2000 1500 1000 500 0 2003-04 2004-05 2005-06 2006-07 2007-08 Year 2008-09 2009-10 2010-11 2011-12 Electronic Paper USD Billion 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00-2003- 04 2004-05 2005-06 2006-07 2007-08 Year 2008-09 2009-10 2010-11 2011-12 Electronic Paper Source: RBI Monthly Bulletin May 2012 Growth in transactions primarily electronic Efficiency and faster turnaround time introduced in paper settlements through introduction of Cheque Truncation Service and Speed Clearing

Foreign Exchange & Hedging Market in India 11

FX Market Characteristics Spot & Forwards Very liquid spot market estimated daily volume of USD 4 billion Over 15 active interbank counterparties Very liquid forwards market up to 5 Years Typical Interbank Lot Size is USD 1-3 Mio Interbank Spreads for a lot size of USD 1 Mio is INR 0.0100 to 0.0200 Options An active Options market with 6-7 main Interbank counterparties Market is liquid up to 5 Years but quotes up to 7 Years Market Characteristics Market Timing from 9:00 AM to 4:30 PM IST Active involvement of the Central Bank (Reserve Bank of India) Reserve Bank prohibits any international speculative access to the Rupee RBI declares a daily USD/INR RBIB benchmark spot rate which is polled from randomly chosen banks in a random 5 minute period between 11.45 AM to 12.15 PM

Market Participants Interbank Corporates Central Bank Corporates Interbank FX Market Rates Market Retail Institutional FII Institutional FII

Offshore Participants FX As an Investor: Permissible Trades: Products: Regulations: 1. Capital infusion 2. Hedging of Dividends 3. Hedging of translation risk from investment in India 1. Spot 2. Forwards - Fixed date or Settlement anytime during a window period 3. Plain Vanilla FCY Put(Call) INR Call(Put) Options (*HSBC India is also positioned to arrange for Escrow services on your capital inflows and outflows) 1. For equity inflow: 1. Firm underlying and any necessary approvals a must 2. Equity Inflow hedge can be executed for a tenor of upto six months 3. If cancelled, hedge cant be rebooked for same underlying and exchange gains if any will have to be foregone 2. Dividends can be hedged once declared 3. For translation risk hedging: a. Market value of investment can be hedged b. If cancelled, hedge cannot be rebooked for the same underlying

Onshore Participants FX As an Operating Company: Permissible Trades: 1. To hedge FX risk against transaction Specific Documentation: a. To hedge FX risk on account of current account exposures b. To hedge foreign currency interest/principal repayments c. To hedge translation risk from investments made overseas 2. To hedge FX risk against Past Performance for trade in goods and services Products: 1. Spot 2. Forwards - Fixed date or Settlement anytime during a window period 3. Plain Vanilla Options 4. Cost reduction structures viz. Collars, Call/Put Spreads etc. (Additional eligibility criteria) Regulations: 1. Tenor and Amount of hedge should not exceed the valid underlying and quarterly statutory auditor certificates on the same 2. Signed hard copy of specific underlying to be submitted to the bank within 15 calendar days of executing the Fx trade 3. Contracts can be rolled over, but not cancelled and rebooked 4. Corporates are prohibited from selling naked options

Key Regulations FX Forwards RBI regulations require proof of underlying currency risk in order to book a forward contract. This can be in the form of a specific underlying or past performance Specific Underlying Currency Risk - The underlying documents need to be submitted with the bank within 15 days. The documents need to equal or exceed the forward booked in the amount and tenor of the hedge. - Contracts once cancelled cannot be rebooked under the same underlying document except under certain specified conditions stipulated by RBI. - In case of failure to comply, penalties include : i) cancellation of contract with the loss passed on to the client but not the gain if any, or ii) requirement of production of underlying documents prior to dealing in future Past Performance - Past Performance route allows booking of forwards based on exports/imports by the company in previous years. - The past performance limit for exporters is defined by the average of the previous three financial years actual export turnover or the previous year s actual export turnover, whichever is higher. For imports, the limit is 25% of this number - Contracts booked under PP must be delivered and cannot be cancelled - There is no restriction on the tenor of the hedge under the past performance route. - Quarterly statutory auditor certificates stating that the contracts outstanding at any point in time with all banks during the quarter did not exceed the value of the underlying exposures/past performance limit are required to be submitted.

Interest Rate Products A person resident in India who has borrowed foreign exchange may enter into the following for hedging / transforming their loan exposure : An Interest Rate Swap or A Currency Swap or A Coupon Swap or An Interest Rate Cap or Collar (purchases) or A Forward Rate Agreement (FRA) contract Regulations: Booking and Cancellation: Contract does not involve the Rupee Freely cancelled and rebooked Contract involves Rupee If cancelled once shall not be rebooked Final approval has been accorded or loan identification/registration number issued by the RBI for borrowing in foreign currency Notional principal amount of the hedge does not exceed the outstanding amount of the foreign currency loan Maturity of the hedge does not exceed the unexpired maturity of the underlying loan

Relevant Master Circulars for Regulations Master Circular on Risk Management and Interbank Dealings Master Circular on External Commercial Borrowings and Trade Credit Master Circular on Foreign Investments into India Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad All available on the RBI website under Notifications Section

Financing Options in India 19

Short Term Financing Options Tenor Pricing Security Documentation Working Capital Demand Loan As per trade cycle assessment Floating rate linked to base rate of the bank. Charge on current assets including stock and book debts Loan Agreement and Demand Promissory Note Receivables Factoring As per trade cycle assessment Floating rate linked to base rate of the bank. Charge on current assets including stock and book debts Factoring Agreement, Demand Promissory Note and Notice of Assignment Vendor Finance As per trade cycle assessment Floating rate linked to base rate of the bank. Charge on current assets including stock and book debts Demand Promissory Note Buyer's Credit (availed outside India) Max tenor - 360 days from shipment Pricing is linked to 3/6 months LIBOR. Pricing restricted to max of L+200bps for import of raw materials Charge on current assets including stock and book debts TFGA, Demand Promissory Note and Counter Indemnity Pre/Post Shipment Credit Pre-shipment Max tenor 180 days. Can be rolled over for further 180days with prior approval from RBI. Pricing is linked to 3/6 months LIBOR. Pricing restricted to max of L+210bps Charge on current assets including stock and book debts Demand Promissory Note

Long Term Financing Options Amount Tenor Pricing Security Documentation INR Term Loan No restriction Bullet repayment at the end of [ ] years. Amortizing structure is also possible Floating rate linked to base rate of the bank. Charge on fixed assets of the company with cover of 1.25x Loan Agreement and Demand Promissory Note FCY Loan No restriction, subject to availability of FCY funds Bullet repayment. Amortizing structure is also possible subject to availability of FCY funds for the said tenor Pricing is linked to 3/6 months LIBOR. The borrower has full flexibility to hedge the currency and/or interest rate risk Charge on fixed assets of the company with cover of 1.25x Loan Agreement and Demand Promissory Note Capex Buyer's Credit (availed outside India) No restriction Max tenor of 3 years from date of shipment Pricing is linked to 3/6 months LIBOR. The borrower has full flexibility to hedge Charge on fixed assets of the company with cover of 1.25x TFGA, Demand Promissory Note and Counter Indemnity ECB (availed outside India) Maximum of USD 20M for an avg maturity of 3 years. Average maturity in excess of 5 years if the amount is more than USD 20 M For average maturity period of 3 to 5 yrs: Max 300 bps over 6 months LIBOR For average maturity period more than 5 years : Max 500 bps over 6 months LIBOR Charge on fixed assets of the company with cover of 1.25x ECB Agreement

HSBC in India 22

HSBC in India Over 150 years of presence in India A network of 50 branches across 29 commercial cities A full service bank offering term and working capital finance, trade, cash management, treasury services, investment banking, asset management, insurance, private banking and personal banking Total Assets of USD 20 Bn in India which includes USD 6 Bn of Advances (source: RBI FY 2011) Total Deposits of USD 12 Bn in India (source: RBI FY 2011) Ahmedabad Vadodara Mumbai Chandigarh Ludhiana Jaipur Surat Pune Noida New Delhi Gurgaon Indore Nashik Nagpur Bangalore Mysore Hyderabad Patna Chennai Raipur Guwahati Visakhapatnam Kolkata Trivandrum Kochi Coimbatore

Thank You 24

Disclaimer This document is prepared, issued and presented by The Hongkong and Shanghai Banking Corporation Limited ("HSBC") based on information obtained from sources it believes to be reliable but which it has not independently verified. Whilst care has been taken in preparing such information, HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The presentation is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Except as specifically indicated, the expressions of opinion are those of HSBC only and are subject to change without notice. The information is provided for general information purposes of its customers only and is neither intended to provide professional advice nor as an offer or solicitation and should not be relied upon in that regard. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. Appropriate professional advice should be sought where necessary before taking any action based on the information. Information in this document is confidential. Distribution of this document or information in this document (whether by reproduction, storage in a retrieval system, or transmission, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of HSBC, to any person other than an original recipient (or to such recipient s advisors) is prohibited. This document remains the property of HSBC and on request this document, and all other materials provided by HSBC relating to proposals contained herein, must be returned and any copies destroyed. The issue and presentation of this document shall not be regarded as creating any form of contractual relationship between HSBC and the recipient(s). Neither HSBC nor any of its directors, officers or employees make any representation or warranty expressed or implied as to the reliability, accuracy or completeness of any of the information contained herein. While this presentation has been prepared in good faith neither HSBC nor any of its directors, officers or employees shall have any responsibility or liability whatsoever in respect of any statements or omissions here from. Any liability is accordingly expressly disclaimed by HSBC, its directors, officers and employees. Copyright The Hongkong and Shanghai Banking Corporation Limited 2012. ALL RIGHTS RESERVED No part of this presentation may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, without the prior written permission of HSBC.