CASE STUDY 1

The fortunes of non-banking finance companies (NBFCs) appear better now than in the last three-four years. The industry shake-out, the stringent regulatory framework and the tough market conditions have ensured that only the strong companies survive. Even a year ago, the future seemed bleak. NBFCs not only had to bear the brunt of the economic slowdown, they were put under the spotlight by the Reserve Bank of India, which was determined to clean up things through drastic measures. The regulatory pressure was applied in the backdrop of a few well-publicized cases of companies (CRB Capital and Prudential Capital, among others) failing to honor their obligations, which undermined the confidence of public deposit holders. But all that is now history. Today, the top-rung NBFCs stand well-placed to avail themselves of the opportunities thrown up by a reviving economy. The signals of resurgence also come in the backdrop of an improvement in the regulatory climate for NBFCs, especially those which are in the fund-based business. It is perhaps this factor that drove up the valuation of some NBFC stocks in recent times. The best news in a long time for NBFCs is that industrial growth is picking up. For finance companies in the fund-based business, the implications are positive, not just for prospective business, but for past disbursement too. In addition to opening up new opportunities, industry sources say there has been a positive impact on over dues. With the improved flow of orders, clients on the default list have begun to pay up once again. The commercial vehicle segment the best bedrock of industrial growth in a country where 60 percent of all goods is moved by road has shown definite signs of revival. Not only have the sales of all types of commercial vehicles risen in the first quarter of this year over the corresponding previous period, the production figures have also shown an uptrend. In addition to commercial vehicles, the data for other sectors are also encouraging. The Index of Industrial Production (IIP) grew 5.6 percent in the first quarter of this year over the corresponding previous period. The portents are promising for finance companies that have shown a marked shift towards financing industrial assets over the last couple of years.

According to industry sources, the environment is marked by stability now after a few regulatory shocks in the last couple of years. January 1998 saw a crackdown on NBFCs by the RBI o the heels of defaults and credit rating downgrades. While the RBIs intent was universally hailed, the measures appeared draconian and threw the industry into turmoil. In particular, the measures to curb the NBFCs access to public deposits and the stiff deadlines for repayment of excess deposits had an across-the-board impact. Since then, the situation has changed significantly. For one, the RBI has amended its initial regulations to bring them in line with the ground reality. There has been a clear demarcation between the companies carrying on fund-based activities and other. The access to public deposits has been linked to capital adequacy rather than credit rating. Another aspect to the changed regulatory environment is that the RBI consciously encouraged banks to augment funding to finance companies. Any boost in wholesale is likely to impart more stability to the liabilities side of a finance companys balance sheet. The noteworthy factor among the recent developments in the financial sector is the increasing thrust of all the players in the retail segment. The presence of banks, foreign finance entities and financial institutions in the retail market is growing. In the last couple of years, banks have made their presence felt in the car finance area. Banks begin business in this market with a big advantage the ability to access funds at a much lower cost. This is sharpened by the widespread network with most banks. But, NBFCs are not really disturbed by the increased competition from banks and financial institutions for they have their own strengths.

Question for Discussion

1. It is a historical fact that unless there is stringent regulation on the amount of deposits collected by NBFCs, it will not be long before they create scams. The RBI has, therefore, issued stringent regulations in 1998 on deposit collection by NBFCs, through they were relaxed later. What are the current guidelines regarding eligibility of NBFCs for raising deposits? Briefly explain them.

2. According to the case study NBFCs are not really disturbed by the increased competition from banks and financial institutions. Do you agree that the existence of NBFCs is not under threat from banks and financial institutions? Justify. 3. According to the case study, Any boost in wholesale funding is likely to impart more stability to the liabilities side of a finance companys balance sheet. What does the statement mean? Elaborate. Also explain the importance of such stability. CASE STUDY 2 With the liberalization of the banking sector in India, many banks are in the constant look-out for new opportunities. One of the areas where different banks are vying with each other to gain a strong position is in the Wealth Management Services market, according to a recent study by IBM, called Indian Wealth Management & Private Banking Survey 2003-04, the population of individuals of high net worth (HNI) has been growing at a rate of 40% per annum. Merrill Lynch and Cap Geminis (E&Y) World Wealth Report 2003 predicts that by the end of 2003, Indian will have 61,000 HNIs. A similar study made by NCAER estimates that population with an annual household income above 10 lakhs will touch the figure of 700,000, and the population with income above Rs 50 lakh will touch the figure of 51,000 by the end of 2006. The enlargement of these sections of the population had encouraged banks to make serious efforts to capture these individuals as their clients. According to IBMs study, the wealth management services market is growing at a rapid pace with an average growth rate of 40%. The wealth management market can be divided into four key segments: retail segment consisting of customers willing to invest up to Rs 1 lakh, semi-affluent segment consisting of customers willing to invest between Rs 1 lakh to Rs 25 lakhs, affluent segment consists of consumers willing to invest between Rs 25 lakhs to Rs 2 crores, and HNIs who are willing to invest Rs 2 crores and above. Wealth management services seem attractive to customers because of various changes in the environment. With the boom in the economy, the income levels of customers are increasing at a significant rate, resulting in high disposable incomes. The fall of interest has made the traditional financial instruments like bank deposits and small saving instruments less attractive as an investment option for customers. Volatility in the financial markets and growth in new financial

instruments has made investing a complex proposition for customers. Moreover, the time constraints they face make it difficult for customers to allot enough time and effort to the management of their investment portfolio. Customers are therefore turning to professionals to manage their investments rather than managing them on their own. Speaking on this issue, HDFC Bank country head, equity and private banking group, Abhay AIma says, Essentially private banking is for people who do not have the time to study the various investment instruments or have access to information from Reuters, Bloomsberg, CNBC, CNN, Crisil or his own research database to take an informed decision. Another societal change that is aiding the growth of wealth management services is the growth of nuclear families. A smaller family structure is prompting individuals to invest at an early stage in life, so that they can lead their post-retirement life comfortably. Jitendra Panda, vice-president (retail), Motilal Oswal Securities, says, The recent trend is towards nuclear families and there is an increased cautiousness towards securing ones post-retirement days; hence the emphasis on wealth creation during the productive years. The financial institutions that offer wealth management services can be categorized into two groups corporate banks and capital market players. Major players in the banking sector are Citibank, HSBC, HDFC, ICICI, ABN-Amro and Standard Charted. Some of the prominent capital market players who provide wealth management services are UTI, Ask Raymond, DSP Merill Lynch, and Enam Securities. The customer service level of wealth management services depends on the funds the client puts in. Clients investing smaller amounts are offered standardized services, and a single relationship manger handles a large number of such customers. On the other hand, for customers whose investment is large, service providers will offer personalized service customized to the needs of each customer. A relationship manager handles between 30 and 40 such customer accounts. There are three types of fee structures that financial institutions follow for their wealth management services. According to one model, the charge is fixed as a percentage of the total investment amount of the customers. Another model charges the customers on a per transaction basis. Some service providers do not charge the customers, but instead charge the mutual funds and insurance companies whose products they sell.

Though the wealth management services market in India is growing, the competition is heating up with the entry of foreign players and independent wealth management consultancies. Another challenge the financial institutions are facing is the shortage of competent and experienced professionals. As the wealth management services market is still a new area, there are not enough professionals with the requisite skills and experience in the market. Due to cut-throat competition among the players, the attrition rate is also high.

Questions for Discussion:

1. What factors are responsible for the increased prominence of wealth management services in India? 2. Financial institutions have divided wealth management services market into four segments based on income levels. Do you think that such segmentation helps in understanding the customer need and targeting the right segment? If not, on what other basis can the market be segmented?

CASE STUDY 3 Kotak Securities Ltd., (KSL), the stock broking arm of the Kotak Group, was set up in 1994 with minority participation from Goldman Sachs (Mauritius) L.L.C. (25%) and Pannier Trading Company (75%). Kotak Securities was a corporate member of both the Bombay Stock Exchange and the National Stock Exchange of India Limited. Its operations included stock broking and distribution of various financial products including private and secondary placement of debt and equity, mutual funds, and fixed deposits. In 2001, Kotak Mahindra Financial Limited (KMFL) bought a 75% stake in the company, thereby making Kotak Securities as a subsidiary company. Subsequent to obtaining a bank license in 2003, all KMFL subsidiaries de facto became subsidiaries of Kotak Mahindra Bank (KMB). In 2004, KSLs operations spanned a range of five businesses Institutional Business, Private Client Services, Client Money Management, Retail Distribution of financial Services, and Depository Services. Kotak Securities was one of the largest broking house in India with a wide geographical reach that spanned eleven Indian cities as well as offices in the US, the UK, and the Middle East through its affiliates.

KSLs client money management division provided professional portfolio management services to high net-worth individuals (HNIs) and corporates. It was backed by in-house expertise in research and stock broking, which helped it to have the right perspective in providing quality investment advisory services. KSL spotted an opportunity for business in the changing attitude of customers from being savers to investors. It therefore focused on this segment comprising high-income group persons. It strategically positioned itself through KMB as a wealth manager and financial advisor across the nation. Initially, (in 1999) it targeted film stars as potential customer for its Private Clients Group, which was developed to managing funds for HNIs. According to S. A. Narayan (Narayan), Executive Director, KSL, managing the portfolio of film stars would form an integral part of its private client servicing (PCS) module where investors, with more than Rs 25 lakh to invest, handed over their funds to KSL, which in turn, invested it in different kinds of securities. KSL offered customized products to its clients for portfolio management services, namely Sigma Equity (65 per cent large-capital) stocks, 35 per cent mid-capital stock), Smart Investor (emerging businesses) and Opportunities, a thematic portfolio depending on investment options in the year of availing of the scheme. The customer had the choice of both fixed and performance-linked fee options. Through these services, the customers got a double benefit tailor-made products and periodic information. To maintain the interest of these customers, KSL came up with unique value proposition. For example, they got their top clients to interact with Roopa Purushotaman, a Goldman Sachs economist, who authored a report that said India could be the worlds third-largest economy by 2050. Such moves were more effective than handing over movie tickets and other coupons, which did not interest a high net-worth client. KSL launched Kotak Infinity as a distinct discretionary Portfolio Management Service that looked at the middle end of the market in 2004. This enabled customers with a minimum of Rs. 10 lakh to avail of these services. By November 2004, KSL managed Rs. 1,200 crore under its Portfolio Management Services across 150 cities with 60 branches across the nation. In 2005, the company was expected to start investment advice o arts a new field. The future strategies of KSL can be summed up by one comment by its vice-president and head of portfolio management, Shashank Khade, For us, it is

widening the product basket and catering to the growing need of the financial investor. Leveraging on the existing infrastructure makes good business sense for everybody.

Questions for discussion:

1. What do you understand by portfolio management services, also briefly summarize the case? 2. In providing portfolio management services, what were the advantages that Kotak

Securities Ltd (KSL) had to serve its customers better? Also discuss its products with reference to customer needs. 3. Building a base of Rs. 1200 core I portfolio management services (PMS) requires a wellplanned strategy. Discuss KSLs approach to these services. CASE STUDY 4 With the Indian Government initiating the liberalization and deregulation process in the late nineties, the Indian Banking Industry changed completely. Liberalization and deregulation saw the entry of private sector banks into India. These banks used state-of-the-art technology, had lean organizational structures, focused on specific customer segments, and set high standards of operations and customer service. They also adopted global practices, and developed core competencies in the form of proprietary technologies and processes and brand building to differentiate them. In the face of such competition, public sector banks had to soon follow suit, and they increased the range of products offered, computerized most of their operations, and improved customer service. To stay ahead of the competition, service provided have to constantly try and improve and innovated their services. This was even more so in the case of banking, with private banks, foreign banks, and public sector banks each trying to grab a larger share in the market. The banking industry consisted of 289 scheduled commercial banks (March 31, 2003). The cluttered, competitive environment has made it a Herculean task for banks to differentiate themselves. The result was that most of the banks adopted similar strategies to differentiate themselves. These include investing in securities of blue-chip companies, entering into the retail

banking sector, increasing the customer and deposit base through value-assed services like ATMs and online banking. All these strategies were based on technology. The emphasis o technology was especially formidable in the private banking sector. Most of these banks took the help of proprietary processes and technology to launch innovative products to woo customers and differentiate themselves from the competition. Kotak Mahindra Bank, for example, offered a unique Sweep-in account wherein any amount in excess of Rs 1.5 lakh was invested in Kotaks liquid mutual funds that earned an average return higher than the saving account interest. ABN Amro offered home loans at 6.5% interest rate (the lowest in the country) for the first two years, after which the consumer paid the market-determined rate. ICICI Bank offered loans to customers against their cars, provided these were less than five years old. The private banks also launched technology-based customer services to increase their customer base and stave off competition. HDFC Bank offered a unique online card called NetSafe that minimized the risk arising out online frauds. Netsafe, a single usage online card, contained a specified amount debited from the credit or debit card of the consumer. This card was valid for the day on which it was issued. Any unspent amount was transferred back to the customers account. HDFC Bank also offered OneView service. This service enabled customers to access account related information, including their accounts in other banks like ICICI Bank, Citibank, HSBC, and Standard Charted Bank, on the Net. Apart from all this, private sector banks also offered various services aimed at enhancing banking convenience to their consumers. For instance, sensing an opportunity to differentiate itself through the convenience factor, ABN Amro offered consumers who withdrew cash between Rs 5,000 and 2 lakh, free secure and timely delivery at their doorstep. HDFC Bank, in association with Travelex India, Provided home delivery of foreign exchange, including cash and travelers checks. ICICI Bank increased banking hours from 8 A.M to 8 P.M for customer convenience. Select branches also remained open throughout the year. Banks also started using their ATMs as a means of differentiating their services, making them more accessible and attractive to consumers. Added bill payment and credit card payment option at the ATMs. Many banks including SBI, ICICI Bank, and Bank of India operated mobile ATMs that traveled along select busy routes and stay put at important junction. This made it convenient for customers like office-goers and businessmen traveling on these routes, as they were able to

save on the time and bother of going to an ATM located in select areas. Bank also provided access to ATMs of other banks free of cost. For example, ING Vysya under the orange savings account provided free access to 8000 ATMs of other banks. Similarly, relatively new entrants like Kotak Mahindra Bank offered free access to 4000 ATMs of other banks to its customers. In addition, the banks also tried to differentiate their services through their service personnel. Kotak Mahindra Bank, for instance, assigned a relationship manager for every customer to look after customer deposits, give any required advice and in addition, manage the customers investment portfolio. Similarly, ABN Amro also assigned relationship managers to manage the investment portfolios of high net-worth individuals. On the whole, innovative products and technology-based banking services gave way over the years to technology-based value-added services focused on customer convenience.

Question for Discussion:

1. With the banking industry in India already cluttered with 289 scheduled commercial banks (March 31, 2003), private sector players have resorted to proprietary processes and technology to differentiate themselves. What are the different means that banks have adopted to differentiate their services from those of competitors? 2. Banks have begun to lay emphasis on remote service encounters by encouraging customers to use ATMs and Internet banking services for their banking transactions. Briefly discuss the pros and cons associated with the usage of remote service encounters. CASE STUDY 5 The Hire Purchase & Lease Association (HPLA) has expressed the view that some of the banks were still chary of leading to NBFCs, particularly asset financing companies (AFCs), as they are still not clear about the RBI policy in this regard. Recognizing that bank finance has become an alternate source to bridge the asset-liability mismatch in NBFCs, it is being suggested that banks, now flush with funds (after further lowering of the CCR), could deploy their resources more fruitfully through NBFCs.

The Chairman of HPLA, Mr. Sanjay Chamria, told Business line here recently that PSU banks, including SBI, UCO, Punjab and Sind Bank and Oriental Bank of Commerce, have, in a recent communication responded favorably to the associations plea to augment the flow of bank credit to NBFCs, particularly the sound AFCs. Mr. Chairman said the banks have assured HPLA that the RBI directives on bank finance to the NBFC sector were being implemented and that the credit proposals of companies complying with the RBI guidelines were being dealt with on merit. While expressing concern over the perceptible slowdown in bank credit to NBFCs despite clear-cut RBI guidelines, he said until two years ago, the AFCs enjoyed the confidence of the banking sector for playing a role complementary to the banking sector; but overnight, after the CRB scam, even the sound finance companies started being treated like untouchables. The AFCs, working in tandem with the banks, had helped mobilize rural savings and extend credit to the unorganized sector, he said. Pointing out the recommendations of the Vasudev panel that RBI should consider steps to ease the flow of credit from banks to NBFCs and then prescribe the ratio between secured and unsecured deposits for NBCs, he contended that the distinction between AFCs and speculative companies such as CRB, which are primarily engaged in transactions relating to shares, debentures, real estate, etc. should be clearly understood. To boost credit exposure of AFCs in the financing of commercial vehicles, the RBI (through a circular to banks) had classified bank credit to NBFCs as priority sector advance for onward lending to small road transport operators (SRTOs). In recent times, HPLA members have received an indifferent response to their request for nee-base credit facility from banks. In addition, the apex bank has also recently permitted banks to re-discount the bills discounted by finance companies against the sale of commercial vehicles.

The RBI has also liberalized depreciation norms on commercial vehicles, enhancing the rate to 60 percent on a vehicle bought with the objective of replacing an existing vehicle, and 40 percent if bought otherwise. AFCs, according to him, have financed and created an asset base of over Rs. 50,000 crore, a substantial part of which has taken place in the under-privileged sectors of the economy, which do not have access to bank and institutions. HPLA, in a recent communication to banks, has pointed out that NBFCs, especially AFCs, have been recognized as an integral part of the financial system, and several RBI committees have lauded their role in financial intermediation, particularly I extending credit to road transport operators, small-scale businessmen and locale trade.

Question for Discussion:

1. What do you understand by NBFCs? Briefly discuss the case? 2. Are banks justified in their hesitation to lend to the NBFCs? 3. According to the case study, the increase of depreciation allowance on commercial vehicles to 60% for replacement buying and 40% for new investments will help the finance companies. Explain how.