Category: Banking & Finance

We are fairly satisfied with the performance. The January numbers have come out. We have grown faster than the private sector. We grew by 24 per cent while the private sector grew by seven per cent. On a year-to-date basis, we have grown faster than the private sector. We have had a 250 basis points expansion in market share. Our balanced product and distribution mix has helped us. Also, product innovation is important. Term products continue to do well.

For new business premium, this year is likely to be close to zero, given that we are at negative four per cent in the private sector space. The next year should be decent with growth between 12 per cent to 15 per cent for the life insurance industry. Some of it will be the base effect. But if we are talking of a fairly good rebound in GDP growth, then there will be growth in savings, and we will channelise some of it in the life insurance sector.

We have typically not focussed on high ticket ULIPs of over ₹2.5 lakh and, in fact, we haven’t focussed on ULIP at all. We usually pitch some other policy but worst-case scenario will be about three per cent on our topline, but it will be zero impact on our bottomline. Balance product mix is handy for any kind of changes like this.

They can buy non-par savings, which is an attractive product. They can also buy participating savings, where they can get their money back immediately. If a customer is in their 50s, it will be very good to buy a deferred annuity in 10 years when you retired. Below ₹2.5 lakh is tax-free. Alternatively, a customer can plan it in a manner and spread it across your family.

As a listed company, eventually it is possible that more and more of foreign investment will come in. We still have a headroom today, we are not even close to 49 per cent. Gradually, over a period of time for HDFC Life and if and when our promoters decide to pare down their stake, it gives more optionality for foreign investors to come in.

We are working strategies that are impacting all our key stakeholders, including employees. For employees, we see a shift in how we attract and retain employees. For customers, we are migrating to various facilities. We have introduced a video-based tool for seamless customer servicing; they can directly connect with our executives without having to walk in to a branch. We have a Whatsapp bot to answer simple questions. People are using that quite a bit. We also have digital on-boarding of agents. We are licensing, on-boarding and training them through digital, and we are giving them tools for end-to-end pitch. Our traditional bancassurance channels such as HDFC Bank, Bandhan Bank, RBL Bank are all moving digital, and the entire process of on-boarding a customer is digital.

The Reserve Bank of India (RBI) has set up an eight-member expert committee to examine the issues and to provide a road map for strengthening the urban co-operative banking (UCB) sector, including suggesting effective measures for faster rehabilitation/ resolution of these banks and assess potential for consolidation in the sector.

The committee, headed by NS Vishwanathan, former Deputy Governor, RBI, will leverage on the recent amendments to the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) to review the current regulatory/supervisory approach and recommend suitable measures/changes to strengthen the sector.

The committee will take stock of the regulatory measures taken by the central bank and other authorities in respect of UCBs. It will assess the impact of these measures over last five years to identify key constraints and enablers, if any, in fulfilment of their socio-economic objective.

The panel will consider the need for differential regulations and examine prospects to allow more leeway in permissible activities for UCBs with a view to enhance their resilience.

Vision document

It will draw up a vision document for a vibrant and resilient urban co-operative banking sector having regards to the Principles of Cooperation as well as depositors’ interest and systemic issues.

The committee will submit its report within three months from the date of its first meeting.

Besides Vishwanathan, the other members of the committee are: Harsh Kumar Bhanwala, former Chairman, NABARD; Mukund M Chitale, Chartered Accountant; NC Muniyappa and RN Joshi (both retired IAS officers); MS Sriram, Professor, IIM Bangalore; Jyotindra M Mehta, President, NAFCUB; and Neeraj Nigam, Chief General Manager-in-Charge, Department of Regulation, RBI.

The amendments to the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) have brought near parity in regulatory and supervisory powers between UCBs and commercial banks in respect of regulatory powers, including those related to governance, audit and resolution.

Two public sector banks (PSBs) in India’s financial services sector firmament may come a full circle if the government makes good on the Budget announcement of privatising them.

Why full circle? Because prior to their nationalisation, which happened in two phases – in 1969 (14 banks) and 1980 (6 banks) – all PSBs were private sector banks.

Since the Budget announcement on February 1, various viewpoints have emerged as to which two PSBs could be picked up for privatisation.

Some experts say the six PSBs that were left out of last year’s mega-consolidation exercise could be on the government’s radar for privatisation. Others opine it could be two of the five large PSBs into which eight mid-sized PSBs merged in the last two years.

There could also be another dimension – the government may choose a combination of the aforementioned two possibilities.

Though Debashish Panda, Secretary, Department of Financial Services, has said that all PSBs are eligible for privatisation, in all likelihood, State Bank of India (SBI) will be kept out of this exercise as it the only government-owned bank that is classified as a domestic systemically important bank (D-SIB). The other two D-SIBs – ICICI Bank and HDFC Bank – are private sector banks.

The bid to privatise PSBs stems from the fact that the government is having to keep pumping in money year after year to help them meet regulatory capital as well as growth capital despite stretched finances.

So, the government’s move to have a bare minimum presence of public sector enterprises (PSEs) in strategic sectors, including “banking, insurance and financial services”, comes in the aforementioned backdrop.

The remaining Central PSEs in the strategic sector will be privatised or merged or subsidiarised with other CPSEs or closed, per the Budget.

Since 2017-18 and till date, the government has infused capital aggregating ₹2,56,943 crore. Of the recapitalisation provision of ₹20,000 crore for FY21, ₹5,500 crore has been provided to Punjab & Sind Bank. The balance ₹14,500 crore has not yet been allocated.

Suppressed market valuation

Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA, said the current suppressed market valuation (of PSBs) makes it tricky as to how much the government will be able to raise from disinvestment.

And given the very low market capitalisation of many PSBs, unless the government dilutes a significantly large stake, the effective money it can raise is not going to be meaningful.

Srinivasan observed that if the government has to sell a significant stake in PSBs, it will also need to have the Reserve Bank of India (RBI) on board because of the regulations relating to (cap on) single party shareholding in banks.

Not selling family silver

In her address at a conclave in Mumbai February 7, Union Finance Minister Nirmala Sitharaman rebutted Opposition charge that disinvestment/ privatisation of public sector enterprises (PSEs) is akin to selling family silver.

“This (disinvestment/ privatisation) needs to be seen in the correct perspective. It is not, as the Opposition says, a case of selling family silver. Not at all. Family silver should be strengthened. It should be your taakat (strength). “To prime the PSEs is the only aim of our policy. You need them, you need them to scale up, you need them to be in maximum potential so that they meet the aspirations of growing India,” said Sitharaman.

She emphasised that the logic of bare minimum presence in the strategic sectors is that the government enterprise should operate on a large scale so that India gets a strategic advantage.

Sitharaman observed: “For India’s aspirations and developmental requirements, we may possibly need 20 banks of the size of State Bank of India (SBI).

“For that, we need to create more and more strength for the existing public sector undertakings, scale them up and make sure that they professionally run themselves.”

Which PSBs could be privatised?

This is a million-dollar question and there is no clear-cut answer. However, analysts have tried to wrap their head around this question and find answers, as is their wont.

Some analysts posit that the government may leave out the five large PSBs – Bank of Baroda (BoB), Punjab National Bank (PNB), Canara Bank, Union Bank of India (UBI) and Indian Bank – from the privatisation exercise as, post-consolidation, they are currently in the midst of stabilising their operations and have just started to reap the benefit of cost-savings.

Moreover, going by the FM’s statement that India may need 20 banks of the size of SBI, the aforementioned banks are likely to remain in the public sector. Maybe, a 5-10 per cent disinvestment of government stake could happen in these PSBs a year or two down the line.

Hence, the attention turns to the six PSBs – Bank of India (BoI), Bank of Maharashtra (BoM), Central Bank of India (CBoI), Indian Overseas Bank (IOB), Punjab & Sind Bank, and UCO Bank – which were not part of the mega-consolidation exercise that happened last year. Since BoI is a fairly large PSB with an international presence (global business mix of ₹10,26,866 crore as of December-end 2020), the government may not be keen on privatising it.

UCO Bank, too, is unlikely to be privatised as two Kolkata-headquartered PSBs have already been amalgamated (United Bank of India with PNB and Allahabad Bank with Indian Bank). So, the Centre may want to retain at least one PSB with its headquarters in East.

Since the government infused ₹5,500 crore in Punjab & Sind Bank only two months back, it may hold back on its privatisation for a year or two. So, the shortlist of PSBs that could be eligible for privatisation gets whittled down to three – BoM, CBoI and IOB. CBoI and IOB are still under the RBI’s prompt corrective action (PCA).

But they could be brought out of PCA as there are visible signs of improvement in some of the key parameters such as profitability and asset quality (in net NPA terms as they have stepped up provisioning) in the last 3-4 quarters.

BoM stands out as it has posted net profit for eight quarters on the trot after the massive quarterly loss of ₹4,856 crore in December 2018. The Pune-headquartered PSB’s asset quality has shown marked improvement and it has a good RAM (retail, agriculture, MSME) to corporate loan mix of 61: 39.

In 2018, Uday Kotak, Executive Vice-Chairman and MD, Kotak Mahindra Bank, observed that private banks’ market share will go up significantly and be on a par with that of PSBs in the next five years. The top banker’s comment came in the backdrop of PSBs then reeling under bad loans and provisioning constraining their ability to lend.

So, will Kotak’s market share prediction come true? Only time will tell whether the government has taken the right decision.

The various measures introduced by the Government of India and RBI last year have helped limit the adverse impact of the Covid-19 pandemic on the economy.

Measures such as the sharp cuts in policy rates, the transmission of the same to lending rates by virtue of maintaining abundant liquidity conditions, targeted operations to meet the funding requirements of NBFCs, and facilitating a large sovereign borrowing programme at competitive rates were some of the major initiatives undertaken by the Monetary Policy Committee (MPC) and the central bank.

While the industry and markets have become far more optimistic after the announcement of a growth-oriented Budget by the Finance Minister, continuing regulatory support to make economic growth more durable, while not compromising on the financial sector stability, is certainly the need of the hour.

The RBI remains cognizant of the surplus systemic liquidity and, expectedly, resumed normal liquidity operations from January 2021 to absorb a part of the excess liquidity, which has led to a rise of around 30 bps in the short-term rates and contributed to flattening of the yield curve.

Subsequently, with the announcements of increase in the GoI’s dated market borrowings as a consequence of slippage in fiscal deficit relative to the earlier targets surfaced, the long-term yields recorded a sharp rise. The effects spilled over on the corporate bond markets as well, with the yields on the 3-year and 5-year AAA corporate bond yields rising by 37 and 30 bps, respectively, in the days immediately after the announcement of the Budget FY22.

Bond markets

However, in its review on February 6, the MPC allayed the market concerns by continuing the assurance of maintaining the accommodative stance of monetary policy into the next financial year to revive the growth on a durable basis. This was supplemented by the RBI with policy measures such as extension of enhanced levels of held-to-maturity levels of bond portfolio of banks by one-year and phased hike of cash reserve ratio.

Additionally, the RBI Governor’s statements of ensuring the orderly completion of sovereign borrowing for FY22, assurance that the stance of liquidity remains accommodative in consonance with that of monetary policy, and reiteration that the yield curve is a public good, were intended to reassure the bond market.

The subsequent announcement of open market operations to purchase government securities of ₹20,000 crore helped in reversing a part of the rise in yields on benchmark government bonds. However, despite the reassurances, the devolvement of government bonds on to the primary dealers in recent auctions is likely to keep an upward pressure on government securities as markets continue to remain concerned on huge supply.

Despite recent RBI measures, the yields on corporate bonds still remain elevated compared to pre-budget levels.

Apart from the short-term measures to address the investor demand for large supply of sovereign debt, the regulatory proposal to provide direct access to retail investors could widen the investor base for government securities in the long term. If successful, this could lead to a structural change in yields on risk-free instruments, which act as pricing benchmarks for corporate bonds. Improved investor education and awareness on linkages of bond yields and price will be needed to attract retail investors, who also have access to other risk-free investment products such as Small Savings Deposit products of GoI which, though illiquid, offer higher returns.

Extension of time period

A continued assurance to markets with necessary actions to prevent a sharp rise in bond yields will be vital to maintain continued buoyancy in the Indian debt capital markets. Over the years, NBFCs have accounted for more than 50 per cent of the domestic bond issuances.

With bank exposure to NBFCs rising steadily over the last few years, better access to bond markets will be important for the latter to scale up, given the recent events that have reduced the investor appetite for NBFC papers. The announcement of funding availability under on-tap TLTROs is a welcome move; however, an extension of time-period beyond March 31, 2021, could have been considered by the RBI as the availability of adequate funding is still a challenge for the sector.

The GoI’s proposal to have an institutional framework for the proposed body, which will act as market maker in corporate bonds in normal and stressed times, is a welcome measure. If operationalised well, it will aid in improving not only the secondary market liquidity, but also deepen the bond markets. The measure will also help improve the credit flow at competitive rates to the NBFC sector, which helps in last-mile credit delivery in India. While the RBI continues to reiterate the importance of NBFCs in the Indian financial system, the proposal to tighten the regulations for NBFCs, along with higher supervision, is a welcome move as the investor confidence levels are not uniform across issuers. In that context, the discussion paper released by the RBI does not seem onerous on the NBFCs. While the paper did not articulate on a backstop facility from the RBI as available to banks, it did not stipulate any CRR or SLR requirements as well.

The anxiety on outcomes of asset quality among lenders and investors remains high, and though the government has budgeted capital of ₹200 billion for public banks for FY22, the proposal to defer the peak regulatory capital by six months could be a confidence booster for public banks.

Given the uncertainty on asset quality and timing of capital infusion by the GoI, the proposed measure will reduce the risk aversion of lenders towards making fresh credit proposals, as their worries on capital position ease. Apart from capital, improved confidence among lenders on faster resolution of stressed assets could address the issue of low credit growth.

A focussed approach for faster resolution, which the proposed asset management company could bring in, could be a positive. Regulatory incentives, which can prompt lenders to transfer stressed asset to the proposed AMC, could aid in the consolidation of such assets for faster resolution. Going ahead, the regulator could consider providing sufficient incentives for the same. To conclude, proactive monetary policy measures will be required to sustain the recovery being witnessed in financial sector, to retain the improved confidence of lenders as well as investors.

The writer is MD and Group CEO, ICRA Limited

Max Life Insurance, a private life insurer, plans to ramp up investments on cloud and analytics as it goes about taking its digital journey to the next higher trajectory, said a top official.

As part of its aim to become a differentiated player and an innovative digital organisation over the next three years, the company will also create an omni channel-consistent experience for customers by increasing focus on digitisation, Prashant Tripathy, Managing Director & CEO, Max Life Insurance, told BusinessLine.

By an omni channel-consistent experience, Tripathy was referring to the aspect of using digitisation to give customers the same experience irrespective of the channel they choose for their product purchases. “We are reasonably digital. Now, we want to make it more sophisticated, more penetrated, and make it more robust. Cloud penetration for us must go up. The theme of digitisation and innovation is what we want to pursue rapidly,” he said.

Already, about 80 per cent of customer transactions are digital and 100 per cent of in-force policies are digital, he added.

For the just-concluded December quarter, Max Life Insurance had reported a net profit of ₹220 crore, up 43 per cent over the same quarter last fiscal. Gross written premium had recorded 19 per cent growth at ₹4,629 crore.

For the nine months ended December 31, 2020, Max Life’s margins went up to 25.9 per cent from 21 per cent in same period last year. The Value of New Business (VNB) written during the first nine months stood at ₹788 crore, reflecting a 37 per cent increase on a year-on-year basis.

“Our margins have gone up because we made smart changes in product mix. We have increased the share of protection and rebalanced the portfolio, did better underwriting. Throughout the year we maintained consistent pipeline of innovative designs which has helped. We got the tailwind of the market. Protection grew 55 per cent and online channel grew very significantly at 50 per cent. There is a tailwind towards protection that we have managed to leverage because of our strategy,” he added.

Till December-end 2020 this fiscal, Max Life reported a 11 per cent growth on individual adjusted basis. Tripathy said that January, too, was a good month for the company and expects to also ride on the base effect for March.

FDI cap increase

Asked if Max Life Insurance will see some capital structure rejig now that the government has announced a hike in FDI limit in insurance sector from 49 per cent to 74 per cent, Tripathy replied in the negative. “We don’t have any immediate plans. FDI limit increase for insurance sector creates more depth in the market. There is nothing specific on any plans we have. It’s going to be same like we are now following. At a long term basis, Max Financial and Axis Bank will be our shareholders,” he said. He also expressed confidence over getting IRDAI nod by end March for the recent Axis transaction.

ULIP taxation

Asked about the Budget announcement on Unit Linked Insurance Plan (ULIP) taxation, Tripathy said it would have negligible impact in terms of attractiveness of ULIP. “We get nearly 40 per cent of our revenues (sales) from ULIP and the rest from traditional products. The Budget proposal on ULIP taxation will at the most bring it down 2-3 per cent — nothing more than that,” he added.