Banking & Finance in India Bill Susinski, Head of International Business, HSBC India
Agenda Banking & Finance in India Banking Sector & Regulatory Issues for MNCs Payment Landscape Foreign Exchange & Hedging Market Financing Options
Banking Sector & Regulatory Issues for MNCs 3
Banking Overview Reserve Bank of India Scheduled Banks (232) Commercial Banks (167) Co-operatives Foreign Banks (40) Public Sector Banks (27) Pvt Sector Banks (30) Regional Rural Banks (196) SBI & Associates (8) Other Nationalised Banks (19) Source: Wikipedia
Indian banks as change agents Indian banking differs from banking elsewhere in the world as 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) Regulatory filings required for capital injections and loans from parent. Lending Onshore Foreign currency borrowings only allowed for trade (pre/ post shipments) Offshore External Commercial Borrowings (foreign currency term loans) 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
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. - 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. - 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.
Count (Million) USD Billion 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 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 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 daily volume of ~USD 50 Mio and 6-7 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
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.
Key Regulations FX Options Proof of underlying exposure in terms of specific or past performance is required similar to FX forwards Corporates are prohibited from selling a naked option (i.e. selling an option without buying another) Only vanilla options are permitted in both FCYINR and Cross Currencies, i.e. exotic options such as barriers and digitals are not allowed While cost reduction structures (option combinations involving selling at least one option) are allowed, the following conditions apply: - Company should be above a specific size (Min Net worth USD20m under specific underlying and USD40m under past performance) - The company must adopt AS 30/32 accounting policy and have a risk management policy which allows cost reduction structures - The set of underlying exposure allowed is restricted to Trade and ECB exposure.
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 16
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
Thank You 19
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