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Editorial

Wishing all our readers a very happy new year, 2016!

In this edition we have Mr. A.P.Hota - CEO, National Payments Corporation of India,

presenting his views on the changing landscape of financial inclusion and payments.

We thank Mr. Hota for his contribution to the newsletter.

For this month, APAS column discusses the social banking and financial inclusion from

a global and Indian perspective. APAS is proud to be associated with social banking and

inclusion in multiple ways. As a part of our contribution, we are the knowledge partners

of the upcoming ASSOCHAM Social Banking Excellence Awards wherein the banks are

recognized and rewarded for their performance in social banking.

The economic indicators showed mixed performance. Manufacturing PMI decreased

to 50.30 in November from 50.70 in October. India's core sector contracted 1.3% in

November. IIP rose from 3.6% in September to 9.8% in October. PMI services and

composite PMI were respectively at 50.1% and 50.2% from 53.2% and 52.6% in the

previous month. Inflation rose to 5.4% in November from 5% in October, primarily

driven by food inflation. Deflationary trend eased in November with WPI inflation

moving up to (-) 1.99% from (-) 3.81% in October. The Gross Domestic Product (GDP)

in India expanded 7.4% in the second quarter for the current financial year slowing

from a 7.1% in the previous quarter.

The Reserve Bank of India has released the statutory report on Trend and Progress of

Banking in India 2014-15 and also the twelfth issue of the Financial Stability Report.

The report of the committee on medium-term path on financial inclusion headed by

Mr. Deepak Mohanty was also released.

The Final guidelines on computing interest rates on advances based on the marginal

cost of funds have been released.

This newsletter covers the 14th issue of MFIN Micrometer. It provides an overview of

the Indian microfinance industry, as on 30th June, 2015.

IRDAI has extended deadline until 31st March 2016 for micro-insurance products.

Rail ministry issued a concept note on the regulator determining the tariff, setting

efficiency and performance standards.

In the capital markets, we have the guidelines released by RBI introducing cross

currency futures and exchange traded cross currency option contracts.

We hope that this newsletter is insightful and we welcome your inputs and thoughts

and encourage you to share them with us.

Ashvin Parekh

Table of Contents

Guest Column

Mr A.P.Hota – MD & CEO – NPCI

Changing landscape of Financial

inclusion and payments

APAS Team

Social Banking – A global and

Indian perspective

Economy

IIP update – October

Inflation update - November

PMI update – November

Core Sector update – November

GDP – Q2 - 2015-16

Banking Sector

Financial Stability Report –

December 2015 and Report on

trend and progress of banking in

India 2014-15

Financial Inclusion

recommendations by Mr.

Mohanty Committee

Marginal Cost of Funds

Methodology for Interest Rate on

Advances

Microfinance

Micrometer – Issue 14

Insurance

IRDAI extends deadline for micro

insurance products

Infrastructure

Rail ministry issues a concept

note on proposed regulator

Capital Markets

Cross Currency Futures and

Exchange Traded Cross Currency

Options Contracts

Capital Market Snapshot

Economic Data Snapshot

Ashvin Parekh – Managing Partner, APAS

Financial Inclusion had been a key policy agenda for

financial management in the country during 2015.

The Prime Minister Jan Dhan Yojana (PMJDY) scheme

launched in August 2014 was carried forward during

the year to achieve the ambitious goal of covering all

households in rural and urban areas (245 Million) to

have a bank account.

In the process, nearly 200 Million bank accounts were

opened under PMJDY, as Basic Saving Bank Deposit

Account (BSBDA) taking the total number of bank

accounts in the system to One Billion. The next logical

step is to make these accounts active and provide full

range of banking and financial services including

credit. Transformation of this Financial Inclusion

landscape was aptly facilitated by Jan Dhan (Direct

benefit transfer), Aadhaar based payments and

Mobile – referred to as JAM Trinity. Aadhaar was

leveraged for bank account opening and also for

Direct Benefit Transfer.

Mobile based financial services with USSD technology

under Product Nomenclature - *99# also facilitated

the JAM Trinity.

National Payments Corporation of India (NPCI) played

a key role in JAM Trinity while digitizing Payments

landscape in the country.

The Government of India decided that every BSBDA

opened under PMJDY, the RuPay card would be issued

supporting digital interface between the customer

and the bank right from the beginning. Of the 200

Million accounts opened under PMJDY, RuPay cards

have been issued to all eligible account holders

numbering about 170 Million – many of them with the

profile of biometric authentication.

While it is a fact that 32% of these 200 Million

accounts are still inactive, it is only a matter of time

that these customers would also enter the

mainstream, as soon the bank accounts get funded

either through DBT or through their income

generation. These PMJDY account holders have also

brought bank deposits to the tune of Rs. 30,000 Crore.

The Government has now decided to route benefit

transfers to all key welfare schemes by way of direct

credit to bank accounts. Once MNREGA, Kerosene

subsidy, Old-age Pension and also Fertilizer subsidy

Mr. A P Hota, Managing Director & CEO - National Payments Corporation of India

gets channelized through bank accounts, a change of

massive proportion is expected. By the Government’s

own admission, leakages to the extent of Rs. 12,000

Crore could be blocked by routing the LPG subsidy

through bank accounts. Similar benefits to the

economy is expected once the identified schemes also

adopt the cash transfer system. NPCI manages the

Payments Bridge for these benefit transfer (Aadhaar

Payment Bridge System) and there has been a surge

in the volume of transactions during the year.

Apart from Aadhaar based payments, NPCI has also

launched the USSD based mobile payment service

which would facilitate self-service access to bank

accounts even with ordinary feature phones. The

volume has not taken up in a big way so far, however,

when TRAI brings down the service charges to about

50 Paise per transaction and mandates on the Telcos

to further simplify the session management in USSD

channel, the usage will go up. NPCI has also created

the platform for interoperability of Micro ATMs

available with Business Correspondents of banks. This

has helped customers in remote areas, away from

brick-n-mortar bank branches to avail of the service at

nearby outlets of the Business Correspondents using

RuPay card for deposits, withdrawals and

remittances. The benefit transfers made by the

Government are also withdrawn by the customers

using Aadhaar biometric authentication on the Micro

ATMs. A new payment system called ‘Adjara Enabled

Payment System (AEPS)’ has been built for the

purpose.

Further, convergence of various aspects of Universal

Financial Inclusion like opening of bank accounts,

access to Digital money, availing of overdraft-micro

credit, insurance and pension was also ensured. E.g.

every active PMJDY account holder is entitled for

availing Over Draft limit up to Rs. 5000/-. RuPay card

activation ensuring insurance coverage of the card

holder as well. Another NPCI payment initiative in the

financial inclusion landscape is the RuPay branded

MUDRA Card, which have been opted to be issued to

all MUDRA loan beneficiaries, a disbursement of

working capital in electronic form. Banks are be

issuing MUDRA cards for the working capital loan

amount disbursed. Borrowers are getting benefited in

the form of interest rate applicability only for the

amount used from the loan amount sanctioned.

Thus, Financial Inclusion initiatives in the recent years

have enabled through digital payments initiative of

NPCI in several ways. The focus in 2016 will be on

Mobile Payments to simplify the operation further.

Social banking, though an integral part of Indian

banking system since its establishment, has gained

awareness with the significant steps and programs

initiated by the Indian government and RBI. Key

measures such as Aadhar card, unique identification

mechanism, Pradhan Mantri Jan Dhan Yojana and

various associated schemes, are helping social

banking in India scale new heights.

From a global perspective of emerging market

countries, where financial inclusion is essential to

economic development, there has been a significant

development in the recent years. It is reported that

over 700 million adults worldwide, became account

holders between the years 2011 and 2014. The

account ownership worldwide has increased to 62%

in 2014, up from 51% three years ago. Countries

including Indonesia, Bangladesh, Vietnam, Malaysia

and Russia among the emerging markets have made

strong progress in areas such as access to ATM’s, bank

branches, retail points of sale and the use of debit and

credit cards.

New technologies and innovations are simplifying the

barriers to financial inclusion for banks. Especially,

mobile banking or branchless banking have helped in

areas, where progress has been curtailed by lack of

necessary infrastructure and transportation. Yet,

according to World Banks’s Global Findex database

nearly 2.5 billion or 46% of the adults are currently

“unbanked” in developing countries in South Asia,

Africa and Mena region. Barriers such as restrictive

regulation; government failures and lack of suitable

products still need to be addressed. The progress

made by these regions are commendable, yet serious

efforts are the need of the hour to bridge the gap.

Expanding access to financial services to those on the

margins is often advocated as a priority for the

developing world, but financial inclusion isn’t just a

developing-world issue. In developed countries like

US, 7.7% of households not having a bank account

may look harmless. But, when these numbers are

broken down by population segments, the real

challenge shows up. Approximately, 20% of black

households and 18% of Hispanic households are

unbanked. Financial exclusion imposes significant

costs on these households, including high fees and

interest paid to alternative providers. Since the

financial crisis, there has been a hit on households in

the developed countries, pushing them into poverty.

This has brought lot efforts on social banking and

finance in these regions.

In India, since independence, social banking has

evolved through various stages and has seen many

versions. Social banking in India, said to have

originated from nationalization of banks, when 14

commercial banks were nationalized on 19th July

1969. Their main objective being allocation of funds

to the deprived, eliminating monopoly of private

business houses and corporate families on banks,

extending banking across the country and reducing

regional imbalances.

Second significant landmark in social banking was

branch multiplication in the license raj. To obtain a

license to open a branch in banked area, a commercial

banks had to open 4 branches in unbanked regions.

This 1:4 license rule, ushered tremendous increase in

branches of banks. The number of branches increased

to nearly about 60,000 and banking locations

increased from 5,000 to 25,000.

Thirdly, commercial banks were asked to divert 40%

of their advances towards priority sector. Priority

sector lending included short, medium and long term

credit to agriculture, small scale industries, tiny units,

artisans, village and cottage industry, retail trade,

small road and water transport operator, professional

and self-employed persons and loan for education

etc.

Different specialized banks like National Bank for

Rural Development and Regional Rural Banks were

established to serve the Indian Population living in

rural areas. Initiatives like Lead Bank Scheme, Service

Area Approach and Self Help Groups – Bank Linkage

Programs also helped in the cause.

Many committees have been formed in the past to

work on financial inclusion. Recent recommendations

of Nachiket Mor committee have opened up the idea

of licensing new type of banks. Licensing of Small

Finance Banks and Payments Banks by RBI is a big step

towards greater financial inclusion. The recent

committee report by Deepak Mohanty on Medium-

term path on financial inclusion talks about five year

measurable action plan for financial inclusion. Cross-

country experiences of financial inclusion to identify

key learnings, particularly in the area of technology-

based delivery models have been studied.

While India is learning and progressing actively with

its financial inclusion agenda, we expect many more

positive reforms in the coming years to build a nation

with last mile financial inclusion and service.

- APAS

IIP (Index of Industrial Production) – October

Industrial production in India rose 9.8 percent year-

on-year in October of 2015, the fastest pace since

October of 2010 when it went up 10 percent,

bouncing back from the four-month low it touched in

September (i.e) 3.6 percent.

Mining improved over the three per cent rise in the

previous month to 4.7 per cent growth in October.

Manufacturing, which constitutes three-fourths of

the IIP, grew 10.6 per cent in October, up from 2.6 per

cent in September. The growth was the highest since

June 2011.

Electricity generation also kept pace at nine per cent

growth in October, albeit lower than its 11 per cent

rise in September.

Consumer durables were up by 42.2 per cent in

October, against 8.4 per cent in September, due to the

festivities. Consumer non-durables recorded a growth

of 4.7 per cent, against a contraction of 3.5 per cent.

As a result, consumer goods production rose 18.4 per

cent, against 1.2 per cent in September. Capital

goods grew 16.1 per cent, against 10.3 per cent,

indicating rising investments may fuel the IIP in the

coming months.

Expansion in basic goods was static as these grew 4.2

per cent against 4.1 per cent. However, intermediate

goods grew 6.7 per cent against 4.2 per cent.

Some of the important items showing high positive

growth during the current month over the same

month in previous year include Gems and Jewellery,

Sugar Machinery, Telephone Instruments including

Mobile Phone and Accessories, Ethylene, PVC Pipes

and Tubes, Antibiotics & its Preparations, Steel

Structures, Colour TV Sets, Cable, Rubber Insulated,

Aluminium wires & extrusions, Scooter and Mopeds

and Passenger Cars.

Some of the other important items showing high

negative growth are: Polythene Bags including HDPE

& LDPE Bags, Ship Building & Repairs., Grinding

Wheels, Instant Food Mixes (Ready to eat), Furnace

Oil and Aviation Turbine Fuel.

3.8 4.2

6.4

3.6

9.8

Jun-15 Jul-15 Aug-15 Sep-15 Oct-15

IIP (%YoY)

This data, if viewed over a longer period from year

2014 -15, 1st quarter till date it would suggest the

following

3.83

1.13

0.43

3.233.53

4.73

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16

IIP

%

Quarter

IIP Trend

For this period therefore an evaluation of

sectors which would have contributed to the

volatility suggest that mining activity recovered

during 2014-15 from a three-year slump,

buoyed by a sharp increase in the production of

coal. Weakness in consumer spending, sluggish

investment activity and poor external demand

operated as drags on manufacturing activity

during 2014-15.

During April- June 2015, however, the growth in

IIP decelerated mainly on account of a sluggish

performance in capital goods, electricity and

food products.

IIP has experienced a downfall from 3.83% to

0.43% in Q1 to Q3 (14-15) respectively. Further

IIP rose to the level of 4.73% in 2015-16.

Consumer Price Index - November

Consumer inflation rose to a 14-month high in

November. Retail inflation, as measured by the

consumer price index, rose to 5.41 percent in

November, higher than 5 percent in the previous

month.

The rise came on the back of increasing food prices,

especially of pulses, up 46.1 percent year-over-year

for November.

Consumer food price inflation rose 6.07 percent for

November, compared with a 5.25 percent rise in

October. Among the sub-groups, the prices of pulses

rose 38.47 percent for rural areas and nearly 61

percent for urban areas, year-over-year, in

November.

Vegetables and cereals and products rose 4 and 1.7

percent respectively.

The combined group of food and beverages rose 6.08

percent. Fuel and lighting, showed an increase of 5.28

percent. Miscellaneous items— household goods and

services, health, transport and communication rose

3.78 percent over a year.

This data, if viewed over a longer period from year

2014 -15, 1st quarter till date it would suggest the

following

0

2

4

6

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

CPI (%, YoY)

For this period therefore an evaluation of sectors which

would have contributed to the volatility suggest that CPI

moderated significantly since the second quarter of 2014-

15. It declined to an all-time low of 5% in Q3 of 2014-15

after having remained stubbornly sticky at around 9-10%

for the last two years.

During the third quarter of 2014-15, the CPI food inflation

declined considerably due to seasonal softening of food

and vegetable prices after the late arrival of monsoon

exerted some pressure on vegetable prices during June-

August, 2014. CPI inflation in the fuel and light group

registered a consistent decline during 2014-15, touching

3.4% in the third quarter following the sharp decline in

International Crude Oil prices.

Food inflation is one of the major drivers for high CPI

numbers.

Second factor that mainly increasing the cost of

production of farm articles is uncontrolled rural wages.

CPI inflation in the fuel and light group registered a

consistent decline during 2014-15, touching 3.4% in the

third quarter following the sharp decline in International

Crude Oil prices.

8.117.38

4.97 5.22 5.09

3.95

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16

CP

I %

Quarter

CPI Trend

WPI (Wholesale Price Index) – November

Deflationary trend eased in November with WPI

inflation moving up to (-)1.99 per cent as food articles,

led by pulses and onion, turned costlier.

This is the 13th month in a row when the wholesale

inflation remained in the negative territory. It has

been in the negative zone since November last year.

It was (-)3.81 per cent in October.

Food inflation shot up to 5.20 per cent in November,

as against 2.44 per cent in October. Inflation in pulses

and onion stood at 58.17 per cent and 52.69 per cent,

respectively.

The rate of price rise in case of vegetables was 14.08

per cent during November. Index of primary articles

rose by 1.6%. The rate of price rise in potato was (-

)53.72 per cent, while in egg, meat and fish it was

(-)2.24 per cent.

Inflation for September has been revised to (-) 4.59

per cent, from the provisional estimate of (-)4.54 per

cent.

Inflation in fuel and power segment was (-)11.09 per

cent, while for manufactured products it was (-)1.42

per cent in November.

This data, if viewed over a longer period from year

2014 -15, 1st quarter till date it would suggest the

following

-6

-5

-4

-3

-2

-1

0

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

WPI (%YOY)

5.62

3.77

0.53

-1.59 -2.47

-4.51

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16

WP

I %

Quarter

WPI Trend

For this period therefore an evaluation of sectors

which would have contributed to the volatility

suggest that WPI has started showing a declining

trend during the year 2014-15 (April-December).

During the first quarter of 2014-15, WPI inflation

stood at 5.8% as mainly food and fuel prices were

high. In the second and third quarters of 2014-

15, WPI inflation declined to 3.9% and 0.5%

respectively. WPI food inflation which remained

high at 9.4% during 2013-14 moderated to 4.8%

during April-December, 2014 following a sharp

correction in vegetable prices and moderation in

prices of cereals and eggs, meat and fish.

Average WPI inflation declined to 3.4% in 2014-

15. The WPI inflation even breached the

psychological level of 0% in November, 2014 and

January, 2015. The decline was majorly caused by

lower food and fuel prices.

PMI update

Service PMI – November

Posting a five-month low of 50.2 in November

(October: 52.6), the seasonally adjusted Nikkei India

Composite PMI Output Index was indicative of little-

change in the level of private sector activity in India.

Growth of manufacturing production softened to the

slowest in the current 25-month sequence of

expansion, while services activity broadly stagnated.

Down from October’s eight-month high of 53.2 to

50.1 in November, the seasonally adjusted Nikkei

Services Business Activity Index pointed to broadly

unchanged levels of services activity across the

country. Sub-sector data indicated that output

growth in the Financial Intermediation, Post &

Telecommunication, Renting & Business Activities

and ‘Other Services’ categories was offset by declines

at Transport & Storage and Hotels & Restaurants

firms. In fact, the latter recorded a sharper rate of

reduction.

Indian services companies saw demand growth lose

strength during November, leading to the slowest rise

in incoming new work since July.

Amid evidence of outstanding payments from clients,

unfinished business in India’s private sector rose

during November. The rate of backlog accumulation

was only modest. Work-in hand increased at both

manufacturers and service providers. Meanwhile,

growth of service sector employment was only slight

and below the ten-year survey average, while goods

producers reported broadly unchanged staffing

levels.

This data, if viewed over a longer period from the year

2012 till date it would suggest the following

For this period therefore an evaluation of sectors

which would have contributed to the volatility

suggest that a stronger rise in new business and

an improvement in year-ahead expectations at

service providers are positive developments, but

the overall health of the economy remains fragile

amid a weak manufacturing sector.

Services PMI in India averaged 51.44 Index Points

from 2012 until 2015, reaching an all-time high of

57.50 Index Points in January of 2013 and a

record low of 44.60 Index Points in September of

2013.

Source: www.tradingeconomics.com

Manufacturing PMI - November

Manufacturing PMI in India decreased to 50.30 in

November from 50.70 in October of 2015. Subsector

data highlighted consumer goods as the best

performing category, while operating conditions at

intermediate goods companies deteriorated for the

first time since December 2013.

Indian manufacturers indicated that new business

inflows rose in November, marking a 25-month

sequence of expansion. That said, the rate of growth

was the weakest over this period.

There were reports that growth of new work was

hampered by subdued domestic demand and

competitive pressures. Mirroring the trend for new

orders production increased at the softest pace in the

current 25-month sequence of expansion.

New business from abroad increased further in

November. Although only slight, the rate of growth

was the strongest in three months. New export orders

rose at consumer and intermediate goods firms, while

a contraction was seen in the capital goods category.

This data, if viewed over a longer period from the year

2012 till date it would suggest the following

For this period therefore an evaluation of

sectors which would have contributed to the

volatility suggest that the manufacturing PMI

contracted for the first time since October

2013, as incessant rainfall in Chennai

impacted heavily on the sector.

Meanwhile, falling new work prompted

companies to scale back output at the

sharpest pace since February 2009. On the

price front, inflation rates of both input costs

and output charges were at seven month

highs.

Manufacturing PMI in India averaged 51.96

from 2012 until 2015, reaching an all-time

high of 55 in June of 2012 and a record low of

48.50 in August of 2013.

Source: www.tradingeconomics.com

Core Sector Growth – November

India's core sector contracted 1.3% in November after

expanding for six consecutive months, dragged down

by a sharp decline in steel production due to weak

demand and imports. The Index of Eight Core

Industries had increased 3.2% in October.

The fall in core sector output may curb industrial

growth, which reached a five-year high of 9.8% in

October.

The eight infrastructure sectors that make up the core

sector index - coal, crude oil, natural gas, refinery

products, fertilizers, steel, cement and electricity -

together have a 38% weightage in the Index of

Industrial Production (IIP).

Steel production declined 8.4% in November,

dropping for the fifth consecutive month. Other

sectors with lower output were cement (-1.8%), crude

oil (-3.3%) and natural gas (-3.9%).

The fertilizers sector was the clear outlier with growth

of 13.5% last month, while coal output rose

3.5%. Petroleum Refinery production increased by 2.5

% in November, 2015.

Electricity generation recorded no change in

November, 2015 over November, 2014.

Construction Output in India averaged 5.08 Percent

from 2005 until 2015, reaching an all-time high of

11.66 Percent in January of 2010 and a record low of

-0.42 Percent in April of 2015.

This data, if viewed over a longer period for the entire

year 2015, it would suggest the following

1.831.45

-0.09-0.42

4.4

3

1.1

2.63.2 3.2

-1.3

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15Co

re s

ect

or

dat

a %

Month

Core sector Trend - Monthwise The growth rate of the core sector for 2014-

15 was a mere 3.5%, even lower than the

4.2% growth notched up in the previous

year.

There has been a continuous slide in core

sector growth from 6.7% in November 2014

to 2.4% in December, 1.8% in January, 1.4%

in February and to a negative 0.1% in

March. It continued to remain in a negative

zone in April.

However, it continued to expand for six

months, before it contracted in Nov 2015 to

a negative 1.3% mainly driven by a decline

in steel production.

GDP Q2 - 2015-16

The Indian economy expanded 7.4 percent year-on-

year in the three months to September of 2015,

following an upwardly revised 7.1 percent expansion

in the previous quarter.

GDP at constant (2011-12) prices in Q2 of 2015-16 is

estimated at 27.57 lakh crore, as against 25.66 lakh

crore in Q2 of 2014-15, showing a growth rate of 7.4

percent.

Industry analysis

Agriculture, forestry and fishing sector grew by 2.2

percent as compared to growth of 2.1 percent in Q2

2014-15. Mining and quarrying sector grew by 3.2

percent as compared to growth of 1.4 percent.

Manufacturing sector grew by 9.3 percent as

compared to growth of 7.9 percent in Q2 2014-15

whereas Electricity, Gas, water supply and other

utility services sector grew by 6.7 percent as

compared to growth of 8.7 percent.

Construction’ sector grew by 2.6 percent as compared

to growth of 8.7 percent in Q2 2014-15.

Trade, hotels and Transport & communication and

services related to broadcasting grew by 10.6 percent

as compared to growth of 8.9 percent in Q2 2014-15.

Financial, insurance, real estate and professional

services grew by 9.7 percent as compared to growth

of 13.5 percent.

Public administration and defence sector grew by 4.7

percent as compared to growth of 7.1 percent in Q2

2014-15.

This data, if viewed over a longer period from year

2014 -15, 1st quarter till date it would suggest the

following

For this period therefore an evaluation of

sectors which would have contributed to the

volatility suggest that there has been a surprise

increase of GDP to 8.4% in July-Sept 2014 from

6.7% in Q1 14-15.

GDP rose 7.5% in January-March 2015

compared with 6.6% in the October quarter,

showing a slight pickup.

It grew by 7.4% year on year in the second

quarter of fiscal year 2015/16 (April-March),

up from 7.1% in the previous quarter.

The economic expansion is driven by

consumption and government spending on

infrastructure. Foreign direct investment is

also rising, although concentrated into a few

states.

The improvement in India’s economic

fundamentals has accelerated in the year 2015

with the combined impact of strong

government reforms, RBI's inflation focus

supported by benign global commodity prices.

6.7

8.4

6.67.5 7.1 7.4

Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16

GD

P %

Quarter

GDP Trend

Financial Stability Report and Report on Trend and Progress of Banking in India 2014-15

The Reserve Bank of India released the

statutory Report on Trend and Progress of Banking in

India 2014-15 (RTP) as also the twelfth issue of

the Financial Stability Report (FSR) – Dec 2015. The

RTP presents the performance and salient policy

measures relating to the banking sector including

that of the co-operative banks and non-banking

financial institutions during 2014-15. The FSR gives an

assessment of risks to financial stability as also the

resilience of the financial system.

The RTP examined the following subjects in detail -

Perspective and Policy Environment

Operations and Performance of Scheduled

Commercial Banks

Developments in Co-operative Banking

Non-Banking Financial Institutions

The highlights of the Financial Stability Report,

December 2015 are -

Macro-Financial Risks - While the first Fed

rate hike since 2006 appeared to have been

factored in by the markets, the pace of

further increase may have a significant

bearing on market behaviour. This along with

the developments in China and sluggish

global trade growth would define the global

economy going forward. While India’s

macro-economic fundamentals are relatively

stronger, domestic demand and private

investment are still not picking up. This calls

for the need to step up public

investments. Exports have been affected.

The ratio of short term external debt to forex

reserves has been moderating.

Financial Institutions: Soundness and

Resilience

Scheduled Commercial Banks – Performance

and Risks - The business of scheduled

commercial banks (SCBs) slowed as reflected

in further decline in both deposit and credit

growth. Between March and September

2015, the gross non-performing advances

ratio increased, whereas restructured

standard advances ratio declined. Sectoral

data as of June 2015 indicates that ‘industry’

continued to record the highest stressed

advances ratio of about 20 percent, followed

by ‘services’ at 7 percent. The capital to risk-

weighted asset ratio (CRAR) of SCBs

registered some deterioration during the

first-half of 2015-16.

Financial Sector Regulation

Banking sector - Steps taken for developing

corporate debt markets in India are showing

some results and hence the dependence on

bank finance continues even as the banks,

especially the PSBs face challenges on asset

quality, profitability and capital. In addition

to the focus on governance processes

through initiatives like ‘Indradhanush’, the

PSBs may need to review their business

models, and examine strategic decisions like

capital planning and dividend policy.

Securities market - Indian capital markets

regulation has kept pace with the

requirements of changing business

environment by, among other things,

creating special platform for enabling the

start-up companies to access the capital

markets.

Insurance sector - The insurance business

model encompassing both insurers and

reinsurers has specific features that

differentiate it from the banking system and

make it a source of stability in the financial

system.

Pension sector - The national pension system

(NPS) is showing steady growth, and the Atal

Pension Yojana (APY) aims to mitigate

challenges faced by people in the

unorganised sector.

Systemic Risk Assessment - the ‘global risks’

continued to be perceived as major ‘high’ risk

factor facing the Indian financial system,

while domestic macroeconomic risks moved

down to ‘medium’ risk category.

Financial Inclusion

The Reserve Bank of India released, the Report of

the Committee on Medium-term Path on Financial

Inclusion.

The committee chaired by Mr.Deepak Mohanty was

set up with a primary objective of working out a

medium term (five year) measurable action plan for

financial inclusion.

The major recommendations were on the subjects

including –

Greater reliance on mobile technology for

‘last mile’ service delivery and how to

address infrastructure issues

Special efforts for financial inclusion of

women

Unique biometric identifier such as Aadhaar

should be linked to each individual credit

account and the information shared with

credit information companies for mitigating

the overall indebtedness of individuals

Translate financial access into enhanced

convenience and usage, there is a need for

better utilisation of the mobile banking

facility and the maximum possible G2P

payments

The Committee recommends that in order to

increase formal credit supply to all agrarian

segments, the digitisation of land records

should be taken up by the states on a priority

basis

Introduction of Aadhaar-linked mechanism

for Credit Eligibility Certificates and

regulatory guidelines to banks to directly

lend to tenants / lessees against such credit

eligibility certificates

Phasing out the interest subvention scheme

and ploughing the subsidy amount into a

universal crop insurance scheme for small

and marginal farmers

Kisan Credit Card can be explored which can

provide a benefits tracking mechanism

Capacity building of JLG members should be

made essential and ways should be devised

for market linkage of the produce/products

A universal crop insurance scheme covering

all crops should be introduced. Restructure

the Agriculture Insurance Company (AIC) to

take up the role of a dedicated ‘Crop

Insurance Corporation’.

In order to deepen the credit guarantee

market, the role of counter guarantee and re-

insurance companies should be explored

MSEs that can provide collateral should not

be put under the guarantee scheme. In the

case of registered MSMEs, it will be useful to

collect and link the Aadhaar identification of

directors so as to check possible fraudulent

operation by the same set of persons

Exploring a system of professional credit

intermediaries/ advisors for MSMEs, the

credit intermediaries/ advisors could

function in a transparent manner for a fee

and be regulated by the Reserve Bank. A

framework for movable collateral registry for

MSEs

Commercial banks in India may be enabled to

open specialized interest-free windows with

simple products

BCs to be established at fixed location,

monitoring of BCs should be allotted to

designated link branches in the area. A

graded system of certification of BCs, a

Registry of BC Agents wherein BCs to track

the movement of BCs and supervise their

operations, training BCs and sensitization

towards SHGs

Creation of Geographical Information System

(GIS) and harmonized database of financial

inclusion footprints, in terms of outlets,

service points, devices and agent networks,

may be put in place using a GIS platform

Role of Credit Information Committees (CICs)

Tax-exempt status for securitization vehicles

needs to be restored

Removal of restriction requiring that the all-

inclusive interest charged to the ultimate

borrower by the originating entity must not

exceed the base rate of the purchasing bank

plus 8 per cent per annum

The Financial Inclusion Fund (FIF) may be

utilised to encourage rural ATM penetration

Connectivity of micro ATMs to the National

Financial Switch should be enabled

Aadhaar and e-KYC should be the uniform

KYC accepted by all regulators including TRAI

pre-paid payment instrument (PPI)

interoperability may be allowed for non-

banks to facilitate ease of access to

customers and promote wider spread of PPIs

across the country.

Bridging the gap between product availability

and awareness

Deposit accounts of beneficiaries of

government social payments, preferably all

deposits accounts across banks, including the

‘in-principle’ licensed payments banks and

small finance banks, be seeded with Aadhaar

in a time-bound manner so as to create the

necessary eco-system for cash transfer.

The FLC network needs to be strengthened to

deliver basic financial literacy

RSEITIs to be used for financial education of

MSMEs

Customer complaints related infrastructure

and incentivizing banks for faster customer

redressal

Information monitoring systems

RBI announced Marginal Cost of Funds Methodology for Interest Rate on Advances

The Reserve Bank of India released the Final

guidelines on computing interest rates on advances

based on the marginal cost of funds. The guidelines

will come into effect from April 1, 2016. Apart from

helping improve the transmission of policy rates into

the lending rates of banks, these measures are

expected to improve transparency in the

methodology followed by banks for determining

interest rates on advances. The guidelines are also

expected to ensure availability of bank credit at

interest rates which are fair to the borrowers as well

as the banks.

Further, marginal cost pricing of loans will help the

banks become more competitive and enhance their

long run value and contribution to economic growth.

The highlights of the guidelines are as under:

All rupee loans sanctioned and credit limits

renewed w.e.f. April 1, 2016 will be priced

with reference to the Marginal Cost of Funds

based Lending Rate (MCLR) which will be the

internal benchmark for such purposes.

The MCLR will be a tenor linked internal

benchmark.

Actual lending rates will be determined by

adding the components of spread to the

MCLR.

Banks will review and publish their MCLR of

different maturities every month on a pre-

announced date.

Banks may specify interest reset dates on

their floating rate loans. They will have the

option to offer loans with reset dates linked

either to the date of sanction of the

loan/credit limits or to the date of review of

MCLR.

The periodicity of reset shall be one year or

lower.

The MCLR prevailing on the day the loan is

sanctioned will be applicable till the next

reset date, irrespective of the changes in the

benchmark during the interim period.

Existing loans and credit limits linked to the

Base Rate may continue till repayment or

renewal, as the case may be. Existing

borrowers will also have the option to move

to the Marginal Cost of Funds based Lending

Rate (MCLR) linked loan at mutually

acceptable terms.

Banks will continue to review and publish

Base Rate as hitherto.

The Reserve Bank of India had stated in its First Bi-

monthly Monetary Policy Statement 2015-16

announced on April 7, 2015 that ‘For monetary

transmission to occur, lending rates have to be

sensitive to the policy rate. With the introduction

of the base rate on July 1, 2010 banks could set

their actual lending rates on loans and advances

with reference to the base rate. At present, banks

are following different methodologies in

computing their Base rate – on the basis of

average cost of funds, marginal cost of funds or

blended cost of funds (liabilities). Base rates based

on marginal cost of funds should be more sensitive

to changes in the policy rates. In order to improve

the efficiency of monetary policy transmission, the

reserve bank will encourage banks to move in a

time-bound manner to marginal-cost-of-funds-

based determination of their base rate’.

Accordingly, the Reserve Bank of India had brought

out the draft guidelines on banks adopting marginal

cost of funds methodology for calculating Base Rates

on September 1, 2015. Based on the feedback

received from all stakeholders, as well as extensive

discussions held with banks, the final guidelines have

been released.

This is the fourteenth issue of the Micrometer. It

provides an overview of the Indian Microfinance

Industry, as of 30th June, 2015 and a comparative

analysis with the corresponding quarter of previous

fiscal year (Q1 FY 14-15) and previous quarter (Q4 FY

14-15).

Key highlights include:

As of 30th June 2015, MFIs provided

microcredit to over 3.11 Cr clients, an

increase of 24% over Q1 FY 14-15

The aggregate gross loan portfolio (GLP) of

MFIs stood at Rs. 42,106 Cr (excluding non-

performing portfolio i.e. PAR > 180 days in

Andhra Pradesh which is close to Rs. 3,000

Cr). This represents a y-o-y growth of 69%

over Q1 FY 14-15 and an increase of 10% over

the last quarter

Disbursements (loan amount) in Q1 FY 15-16

increased by 71% compared to Q1 FY 14-15

Total number of loans disbursed by MFIs

grew by 42% in Q1 FY 15-16 compared with

Q1 FY 14-15

Funding to MFIs (in Q1 FY 15-16) grew by 40%

compared with Q1 FY 14-15

Portfolio at Risk (PAR) figures remained

under 1% for Q1 FY 15-16 90% of total

microfinance industry business (NBFC-MFIs)

Average loan amount disbursed per account

is now Rs. 17,848. For Q1 FY 14-15 it was Rs.

14,847.

MFIs now cover 32 states/union territories

MFIs’ coverage is now geographically well

dispersed with GLP in south at 28%, east at

29%, north at 22% and west at 21%

Productivity ratios for MFIs continued to

move upwards. GLP per branch is now at Rs.

4.17 crore, up by 58% over Q1 FY 14-15 and

avg. GLP per loan officer is now Rs. 81 lakh,

41% more from the last year i.e. Q1 FY 14-15

Insurance (credit life) to over 3.78 crore

clients with sum insured of Rs. 75,764 crore

was extended through MFI network

Pension accounts were extended to over 17

lakh clients through MFI network.

IRDAI extends deadline for micro insurance products till Mar31

The Insurance Regulatory and Development

Authority of India (IRDAI) issued a circular on 29th

December, 2015, which said that the existing micro

insurance products will continue to be on offer till

March 31, 2016.

As per Insurance Regulatory and Development

Authority of India (Micro Insurance) Regulations,

2015, it was mandated that all existing micro

insurance products that are not in compliance to

these regulations shall be withdrawn with effect from

January 1, 2016.

It was observed that since the date of notification,

only a few products have been filed by the insurance

companies till date. Hence to ensure availability of

the micro insurance products adequately in the

interest of the segment of low income group, the

Authority extends the date for continuance of

existing MI (micro insurance) products till March 31,

2016.

As per these (2015) regulations, there is a provision

for flexible premium payout option and non-selling of

MI products under unit linked platform among

others.

Rail ministry issues a concept note on proposed regulator

The rail ministry on 4th Jan, 2015 floated a Concept

note on the proposed regulator for the railway

sector. Among the Rail Development Authority's key

roles are determining tariff, setting efficiency and

performance standards and ensuring a level playing

field to attract private investment.

The concept note specifically stated that the

regulator would not be involved in policymaking and

financial expenditure management.

Streamlining the tariff determination mechanism and

fixing tariffs rationally, based both on the cost

recovery principle and what the traffic can bear, is an

absolute necessity for the railways. This will mainly

help reduce cross-subsidy and can improve the

market share in freight.

It added that the authority would recommend

passenger and freight tariffs considering the cost

structure, including all direct and indirect costs such

as pension liabilities, debt servicing, replacements

and renewals, productivity parameters, market-

driven demand and supply forces and future

investments.

Key takeaways from the Concept paper on rail

development authority of India –

The Rail Development Authority will set

efficiency and performance standards, and

ensure compliance of these

Regulator will not be involved in policymaking

Regulator to determine tariff keeping in mind

sustainability of railways

In case of violations, it will suggest action, impose

penalties

For those cases where the government does not

accept the suggested tariffs, Indian Railways would

be compensated appropriately, perhaps through

increased allocations in the Gross Budgetary

Support or through a suitable mechanism.

Cross Currency Futures and Exchange Traded Cross Currency Options Contracts

The Reserve Bank of India has issued Guidelines for

introduction of cross currency futures and exchange

traded cross currency option contracts in the

currency pairs of Euro (EUR)-US Dollar (USD), Pound

Sterling (GBP)-USD and USD- Japanese Yen (JPY).

Further, exchange traded option contracts in the

currency pairs of EUR-Indian Rupee (INR), GBP-INR

and JPY-INR have also been introduced in addition to

the existing USD-INR pair.

The cross currency contracts shall enable direct

hedging of exposures in foreign currencies and

facilitate execution of cross-currency strategies by

market participants.

The key features of the new contracts include

i. Market Participants, i.e., residents and foreign

portfolio investors, are allowed to take positions

in the cross currency contracts without having to

establish underlying exposure subject to the

position limits as prescribed by the exchanges.

ii. Authorized Dealer Category-I bank trading

members may undertake trading in all permitted

exchange traded currency derivatives within their

Net Open Position Limit (NOPL) subject to limits

stipulated by the exchanges (for the purpose of

risk management and preserving market integrity)

provided that any synthetic USD-INR position

created using a combination of exchange traded

FCY-INR and cross-currency contracts shall have to

be within the position limit prescribed by the

exchange for the USD-INR contract.

The related circular A.P. (DIR Series) No.35 dated

December 10, 2015 with the details of the above

announcements has been published on Reserve

Bank’s website.

The Reserve Bank had, on September 29th, 2015,

announced the introduction of cross-currency

futures and exchange traded option contracts in

the Fourth Bi-monthly Monetary Policy Statement

2015-16.

Sources: National Stock Exchange

Sources: Bombay Stock Exchange

The rupee tumbled by 4.95 percent against the dollar

during the year 2015 in view of slowing down of

foreign capital inflows. As on 31st Dec 2015, it closed

24 paise higher at 66.15 against the US dollar on

hopes of foreign capital inflows amidst recovery in

the equity market.

Global stock markets fell on 4th January 2016, as the

Chinese bourses tumbled 6.9% in their opening

session of 2016, its biggest decline on record for the

first trading day of the year, forcing exchanges to halt

trade for the first time. This so called “circuit breaker"

mechanism. The slide in Chinese stocks and the

Yuan’s accelerated depreciation drove markets

elsewhere in the region deep into the red.

Sources: APAS Business Research Team

Sources: APAS Business Research Team

Sources: APAS Business Research Team

7931

7782 7613

7701

7786

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CNX Nifty (Dec-2015)

15.49

15.8717.8

14.48 14.414.35

13.87

0.00

5.00

10.00

15.00

20.00

25.00

Indian VIX (Dec-2015)

26118

25530

252522549425519

2585026079

2596026118

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BSE Sensex (Dec-2015)

66.79 66.86 66.86

66.24

66.02

66.21

65.20

65.40

65.60

65.80

66.00

66.20

66.40

66.60

66.80

67.00

67.20

67.40

$/₹ (Dec-2015)

7.74

7.76

7.8 7.78

7.787.74 7.76

7.767.75

7.76

7.65

7.70

7.75

7.80

7.85

GIND10Y (Dec-2015)

* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5 year yield

Quarter represents a three month period of a financial year

Countries GDP CPI Current Account

Balance Budget Balance

Interest Rates

Latest 2015* 2016* Latest 2015* % of GDP, 2015* % of GDP,

2015* (10YGov), Latest

Brazil -4.5Q3 -3.1 -1.9 10.5 Nov 9.3 -3.8 -6.0 15.9

Russia -4.1 Q3 -3.8 -0.3 15.0 Nov 15.2 4.7 -2.8 9.61

India 7.4 Q3 7.3 7.6 5.4 Nov 5.1 -1.2 -3.8 7.79

China 6.9 Q3 6.9 6.4 1.5 Nov 1.5 3.1 -2.7 2.86^

S Africa 1.0 Q3 1.4 1.6 4.8 Nov 4.7 -4.3 -3.8 9.52

USA 2.2 Q3 2.4 2.5 0.5 Nov 0.2 -2.5 -2.6 2.19

Canada 1.2 Q3 1.1 1.9 1.0 Oct 1.2 -3.2 -1.8 1.49

Mexico 2.6 Q3 2.4 2.8 2.2 Nov 2.8 -2.5 -3.4 6.39

Euro Area 1.6 Q3 1.5 1.6 0.1 Nov 0.1 3.0 -2.1 0.65

Germany 1.7 Q3 1.6 1.7 0.4 Nov 0.2 7.9 0.7 0.65

Britain 2.3 Q3 2.4 2.2 0.1 Nov 0.1 -4.5 -4.4 1.89

Australia 2.5 Q3 2.3 2.6 1.5 Q3 1.6 -4.1 -2.4 2.88

Indonesia 4.7 Q3 4.7 5.0 4.9 Nov 6.3 -2.4 -2.0 8.98

Malaysia 4.7 Q3 5.4 6.1 2.5 Oct 2.5 2.5 -4.0 4.37

Singapore 1.9 Q3 2.9 3.0 -0.8 Oct 0.2 21.2 -0.7 2.57

S Korea 2.7 Q3 2.5 2.7 1.0 Nov 0.7 7.3 0.3 2.22

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