Reforms Mantra: Inclusion Growth Stability Financial Sector Reforms the way forward Team A: CA. Abhishek Mistry CA. Gagan Choudhary CA. Gagan Kothari CA. Rima Shah
Topic: Regulatory Architecture Capital & Bond Markets by CA Abhishek Mistry
Financial Regulators An Overview BFSICM Study Group of WIRC
Regulatory Architecture India Ministry of Finance Commercial Banks SEBI (Capital Markets) IRDA (Life & General Insurance) PFRDA (Pension Fund) RBI (Banks & NBFCs) Ministry of Consumer Affairs No Central Authority FMC (Commodity Markets) Ministry of Labour Co-Op Banks NABARD SIDBI Registrar of Coop Societies High Level Coordination Committee on Financial Market Ministry of Small Scale EPFO (Provident Fund) National Housing Bank Ministry of Company Affairs Ministry of Urban Poverty Deposit Taking Activities
Regulatory Architecture United States Financial Stability Oversight Council Federal Reserve Office of Comptroller of Currency Federal Deposit Insurance Corporation National Credit Union Administration Building & Friendly Societies Securities and Exchange Commission Commodity Futures Trading Commission Federal Housing Finance Agency Bureau of Consumer Financial Protection
Regulatory Architecture Canada Ministry of Finance (Shared system of Financial Regulation and Supervision) Department of Finance Bank of Canada Office of the Superintendant of Financial Institutions Canada Deposit Insurance Corporation Financial Consumer Agency of Canada Canadian Securities Regulatory System
Regulatory Architecture Japan Financial Services Agency (Planning, Policy-Making & Supervision of Financial System) Banking Insurance Business Securities Business Securities & Exchange Surveillance Certified Public Accountants & Auditing Administrative Law Financial Investigation
Regulatory Architecture United Kingdom Prudential Regulation Authority (Regulation & Supervision) Banking Building Societies Credit Unions Insurance Investment Firms Financial Regulations Financial Conduct Authority (Consumer Protection) Financial Intermediaries Money Laundering Mortgage Market Financial Investigations & Enforcement Promote Competition
Regulatory Architecture Australia Prudential Regulation Authority (Licensing & Regulation) Banking Deposit-Taking Institutions Insurance Superannuation Friendly Societies Financial Regulations Securities & Investments Commission (Consumer Protection & Supervision) Financial Markets Financial Intermediaries Consumer Credit Protecting Investors Insolvency Laws
Regulatory Architecture Summary Principles for setting-up Dynamic Architecture: Financial Sector should be guided by three mantras: Inclusion, Growth and Stability. We cannot be risk-averse. Too much risk-aversion on part of regulators can impede growth and development. There is no perfect regulatory architecture to suit every economic cycles. It has to be constantly molded with changing times. Complexities of the financial products should be properly understood. If these products penetrate in the system without proper knowledge, it may create dangers to systemic stability.
Financial Reforms from Capital & Bond Market perspective
Reforms Capital & Bond Markets Customers Perspective There is a need to adopt Customer-Centric Approach as done in UK and Australia. Right product should reach to right customer. As financial products are more complex for layman to understand fully, more responsibility should be cast on Intermediaries. There is a need to inculcate habit of Financial Planning with customers with proper risk profiling. People should be encouraged to invest in equity market through Mutual Fund route especially novice investors. Training Session should be undertaken by SEBI regularly in semi-urban and rural areas where there is lack of knowledge. Consumer Redressal Forum should be pro-active on specific cases like mis-selling of financial products, etc
Reforms Capital & Bond Markets Regulators Perspective Regulators should revise upwards its Capital Adequacy Norms for intermediaries. Exchanges should provide for Settlement Guarantee Fund on the basis of turnover on its platform. Although RBI exercises lot of regulatory powers, yet there is a need for Independent Regulator in bond market like SEBI and IRDA. Bond market awareness and participants needs to be increased. Presently, it is dominated by PSU Banks and trading is mostly in G-Secs. There should be uniform stamp duty across all states and no TDS on interest. Tax deduction u/s 80CCF should be extended. Make unified regulator so that movement of funds by investors across asset class is easier.
Reforms Capital & Bond Markets Issuers Perspective A platform should be set for international listing in India. IPO process should be fastened. Presently, it takes around 4 to 6 months. Allow Pension, Provident Fund Trusts and Insurance to invest in Corporate Bonds without limits. Retrospective amendments of laws should be avoided. Committee to be formed on Why MNCs in India prefer delisting?
Topic: Banking Insurance by CA Gagan Choudhary BFSICM Study Group of WIRC
Financial Reforms from Banking perspective
Narasimham Committee (1998) - Recommendations Autonomy for the public sector bank Reform in the role of RBI: segregation of the roles of RBI as a regulator of banks and owner of bank Stronger banking system: Merger of larger Indian bank but its still pending Non-performing assets: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 got implemented Capital adequacy and tightening of provisioning norms: The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002 Entry of foreign banks: Increase the capital limit for foreign banks
Nachiket Mor Committee (2013) - Vision Universal Electronic Bank Account (UEBA) Ubiquitous access to payment services and deposit products at reasonable charges Sufficient access to affordable formal credit Universal access to a range of deposit and investment products at reasonable charges Universal access to a range of insurance and risk management products at reasonable charges Right to Suitability
Issues faced by Banking Sector Increase penetration of banking in India- tackle demand supply mismatch Credit disbursement to the priority sector Maintain asset quality Improve risk management mechanism Technology adoption Are Indian Banks Prepared for Basel III
Challenges for Banking Sector Indian banks would require additional capital of Rs 5 trillion to meet Basel- III norms by March 31, 2018 Half the population does not have access to banking services Allotment of new Banking Licenses Growth is still a concern for the banking sector on account of a sustained slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment
Major Banking Reforms in Pipeline Creating a global bank Licenses for specific banking tasks Easy access and smaller banks In March 2013, the Financial Sector Legislative Reforms Commission headed by former justice B. N. Srikrishna suggested:- SEBI and IRDA should be merged into a unified financial agency Role of RBI should be restricted to regulating banks and managing monetary policy.
Funding Options for Startups in India Bank doesn t fund Startups since they don t have track record and collaterals to offer Angel Investors and VCs only fund about 2% of total starts ups looking for funds on selective basis Scenario is different in US where they have passed JOBS Act (Jumpstart Our Business Startups Act), through which funding through internet is possible, it is called Crowd Funding.
Reforms Suggested Public sector banks need urgent and bold reforms:- Consolidation of PSB Government should reduce ownership in PSB Governance: Professional CEO and Board Banking License should be given to Indian Postal department immediately they have almost 155,000 branches with almost 90% in rural areas. In India also we should have something like JOBS Act (Jumpstart Our Business Startups Act) that will allow small businesses and startups to raise funds through internet.
Financial Reforms from Insurance perspective
Overview of Insurance Sector Among top insurance markets: India ranked 10th among 156 countries in the life insurance business, with a share of 2.3 per cent during FY12. The country ranked 19th among 156 countries in the non-life premium income, with a share of 0.62 per cent in FY12. Rapidly growing insurance segments: The life insurance premium market expanded at a CAGR of 20.1 per cent, from USD11.5 billion in FY03 to USD59.9 billion in FY12. The non-life insurance premium market rose at a CAGR of 18.0 per cent, from USD3.4 billion in FY04 to USD12.7 billion in FY13. Increasing private sector contribution: The share of private sector in the life insurance premiums increased from 2 per cent in FY03 to 29.3 per cent in FY12. The market share of private sector companies in the non-life insurance premium market rose from 14.5 per cent in FY04 to 42.9 per cent in FY13.
Challenges for Insurance Sector FDI in insurance sector to increase from 26% to 49% Public issue by Insurance Companies Effective Distribution Channel Focus on overall Financial inclusion Understanding consumer needs and preferences Reach out to rural areas and show them the benefit of insurance Increase the penetration of insurance services in India
Reforms Suggested FDI should be immediately increased from 26% to 49%. Insurance product should be standard across all Insurance companies, so customer is well informed before selecting the insurance product and Insurance companies. Insurance companies should be allowed to raise money from public like any other company.
Topic: Provident and Pension Fund by CA RimaShah BFSICM Study Group of WIRC
Indian Pension System Current Scenario National Pension Scheme Managed by PFRDA Move from Defined Benefit (Civil Pension Services) to Defined Contribution Scheme Government Employees: Compulsory 10% Contribution each All Citizens: Option to Decide the Investment Proportion in Debt-Equity Tier I & II: Minimum Rs.6,000/Rs.2,000 per year Employees Provident Fund & Pension Scheme Establishments having 20 or more Employees Employer-Employee 12% Contribution each Other Pension Schemes LIC Annuity Scheme Retirement Benefit Schemes provided by Various Banks and NBFCs
FDI in Pension 06/09/2013: Parliament passed the Pension Bill: Allowing FDI in Pension Sector It pegs FDI in pension sector at 26% More Funds in Indian Market Will attract New Schemes in Market Increase the Competition
Why Pension Reforms? India is emerging as most populous country 1,210 Million in 2011. Elderly population comprises 8.6% of total population (1.2% increase from 2001) Elderly population is expected to be 10.7% of total population by 2021. By 2050, 200 million will be above 65 years of age. Age group 1991 2001 2011 0-4 12.2 10.7 9.3 5-9 13.3 12.5 10.5 10-14 11.8 12.1 11.0 15-59 55.4 56.9 60.3 60+ 6.8 7.4 8.6 Pension liability was about of 2.6% of GDP in 2012-13. Increase in cost of private health care facilities. Inadequate public health care facilities. Declining work participation among elderly. Break-down of joint family system.
Global Scenario Melbourne Mercer Global Pension Index 5 th Report October 13
Reforms Suggested NPS / EPFO should be mandated for all establishments on the basis of its Revenue and not on the basis of number of employees: The Use of PRAN will help in case of Employee Turnover. More Coverage of Employees. FDI Schemes should be managed and controlled: Properly managed to sustain until the life of the person. Provide adequate returns on the Investment. Effectively controlled to win public confidence. Agricultural economy more farmers: Special schemes for farmers based on size of land owned & its yield. Initially, to encourage, only DC by Govt.: Combination of DB (Govt. High)+ DC Scheme Tax benefits should be raised: Currently, NPS Contribution (Employee) is in Rs1 lac limit u/s 80CCD (In line with PPF hence, PPF has gained more Importance) Additional deduction over Rs 1 lac should be provided.
Q&A Session BFSICM Study Group of WIRC
Thank You BFSICM Study Group of WIRC