Setting up of IDB(Industrial Development Bank)

SUBMITTED TO: PROF. V.K. DUTTA

Aakash Sharma(231002)Abhijeet Aggrawal(231005)Ayush Jasoria(231037)Hitesh Bajaj(231065)Jayant Adlakha(231070)

ContentsShould we open a bank?........................................................................................................................4

Challenges in opening a bank................................................................................................................4

Guidelines for Licensing of New Banks in the Private Sector.................................................................5

Eligible promoter...........................................................................................................................5

“Fit and proper” criteria................................................................................................................6

Corporate structure of the NOFHC................................................................................................6

Minimum equity capital.................................................................................................................6

Foreign shareholding.....................................................................................................................7

Corporate governance of the NOFHC............................................................................................7

Exposure norms of the NOFHC......................................................................................................7

Rural bank branches and priority sector lending...........................................................................7

Bank Name............................................................................................................................................8

Promoters..............................................................................................................................................8

Key people.........................................................................................................................................8

Board of Directors.................................................................................................................................8

Business Plan.........................................................................................................................................9

Purpose of plan.....................................................................................................................................9

Operations.........................................................................................................................................9

Retail Banking................................................................................................................................9

Corporate Banking.........................................................................................................................9

IT in Banking....................................................................................................................................10

Bank Structure.....................................................................................................................................11

Committees.........................................................................................................................................11

CSR Committee................................................................................................................................11

Audit Committee.............................................................................................................................11

Stakeholder’s Committee................................................................................................................12

Customer Service.............................................................................................................................12

Treasury and Finance Committee....................................................................................................12

Number of branches............................................................................................................................12

Marketing strategy..............................................................................................................................13

Financial Projections –.........................................................................................................................14

Balance Sheet......................................................................................................................................15

2

Profit And Loss A/c..............................................................................................................................16

Schedules –..........................................................................................................................................17

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Should we open a bank?Although more new banks will help in increasing competition, increasing competition and will help in promoting financial inclusion but more than new bank we should first allow non-banking finance corporations and microfinance institutions into banking. Also competition within the banking sector comes with mixed benefits, if at all. Competition squeezes margins and forces banks to seek and accept excessive risk to generate returns for shareholders and compensation for executives.

Most of the bank assets are bottled up in cash reserve ratio, statutory liquidity ratio and priority sector lending obligations, leaving small part of the bank assets to generate acceptable returns for shareholders. This will give unnecessary pressure on bank.

Also even if we say that we need more and more branches that can reach rural areas, this can be avoided with electronic banking and anywhere banking, a multiplicity of branches is no longer an imperative.

The present effort to issue new bank licenses seems to be an attempt to create a one-size-fits-all situation but we need all kinds of banks. We need big banks with reach and stability (we already have those with the SBI, HDFC Bank, etc), we need small banks that raise deposits locally and lend in the same catchment area (we have local area banks, but they have made little progress), we need narrow banks (which only take deposits, but do not lend), we need banks that (maybe) only lend (to the poor and raise that money from the big banks in chunks), we need banks that are very lean but use technology to service customers without either raising deposits or giving out loans (the so-called white-label ATMs are banks too), and we also need non-bank finance companies that exist for specialized purposes (gold loans, housing loans, etc). Therefore The RBI needs to encourage a diversity of financial institutions and not be suspicious of anything that does not resemble a bank. It needs a mindset change.

Challenges in opening a bank Regulatory requirements

New banks will have to meet CRR (cash reserve ratio) and SLR (service level requirements) mandates from day one.

Financial inclusion and priority sector lending

RBI’s two primary objectives in issuing new licenses could prove costly and difficult for most applicants. Taking banking services to unbanked areas and lending to priority sectors could significantly pressure banks’ balance sheets.

Capital investment

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Following issuance of licenses, the new banks will need to set up an operational branch within 18 months. This will require investments in land, premises, IT and other infrastructure; recruitment and training of personnel; and advertising and publicity

Human resources

The new banks will need staff that is trained for work in a banking set-up. Apart from technical skills, staff will need to be proficient in “soft skills” as well, since banking today is also about relationship management.

IT infrastructure

Applicants that are given licenses will need to considerably enhance their IT infrastructure. Tasks like core banking implementation and multi-channel banking are likely to pose major challenges for a new bank.

Regulatory reporting and compliance automation

The regulatory reporting environment for a bank is very different than that of other financial entities.

A highly competitive marketplace

Even though new banks are expected to tap unbanked areas, this may not happen immediately

Customer loyalty

Not all customers are dissatisfied with their existing banks, and not all dissatisfied customers are likely to switch banks.

Multi-channel banking

In the initial stages, new banks may not have a strong branch network or a presence in all geographical locations. To compensate for this, banks would need to offer access to banking services through multiple channels, such as online banking, phone banking and mobile banking.

Guidelines for Licensing of New Banks in the Private Sector

Eligible promoterEligibility criteria

NBFCs and entities in the public and private sectors are eligible to set up a bank through an NOFHC.

Analysis

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The earlier restriction on large industrial houses has been removed. The financial resources and management expertise that such applicants bring has been recognised. This is relevant in light of the failure of banks promoted by individuals and banking professionals

“Fit and proper” criteriaEligibility criteria

Applicants should have sound credentials and a 10-year track record of running their business successfully.

Analysis

RBI has given due importance to the credentials and integrity of applicants. The 10-year track record criteria should ensure that only those applicants with a sound business model and those that have demonstrated the ability to run a successful business are given entry into this sector. This too seems to be largely driven by the experience from licenses given earlier, as well as by recent media reports on some banks flouting AML guidelines.

Corporate structure of the NOFHCEligibility criteria

The NOFHC should be wholly owned by applicants

Analysis

As a holding company, the NOFHC will hold the bank and any other financial service entities of the bank, e.g., it will be the holding company for activities conducted through a subsidiary/JV – such as insurance, broking and also the holding company – and for activities conducetd internally or through subsidiaries/JV such as credit cards. The objective of the holding company is to separate the regulated financial service entities of the promoter groups from its other activities. Through such an arrangement, the RBI would be able to regulate the financial service activities of the holding company on a consolidated basis. The NOFHC is to be registered as an NBFC with the RBI.

Minimum equity capitalEligibility criteria

INR 500 crores to be put up by applicants. Bank to list itself within three years from start of operations.

Analysis

The minimum capital to be brought in by promoters was capped at Rs 500 crores, considering the capital outlay that would be required for setting up a new banking business. It has been raised from Rs 200 crores from the earlier cycle, taking into consideration the changed economic conditions. Additional capital may be approved if the promoters’ business plans make a compelling case.

Foreign shareholdingEligibility criteria

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Not to exceed 49% for the first five years.

Analysis

The current FDI policy notwithstanding, non-resident shareholding is to be kept under 49% for the first five years from the date of issuance of the license. This guideline seeks to ensure that the new bank does not become a takeover target in the initial years of its existence – a period when financials may not be very strong and valuations are likely to be cheap. This guideline may also ensure that the new bank remains classified as an “Indian” bank and is regulated accordingly.

Corporate governance of the NOFHCEligibility criteria

At least 50% of directors should be independent directors.

Analysis

Independent directors bring with them objectivity, and are generally not susceptible to internal pressures. They also bring a different perspective to any issue, compared to the bank’s own directors. They are in a better position to protect shareholders’ interests and also ensure that the entity is being run effectively and ethically. The RBI has mandated that independent directors should have experience/knowledge of one or more of the following subject areas: accounting, finance, banking, insurance, law, MSME, agriculture and rural economy, for example.

Exposure norms of the NOFHCEligibility criteria

NOFHC and the bank will have no exposure to the promoter group. The bank cannot invest in capital instruments of financial entities held by the NOFHC.

Analysis

This should ensure that the promoter group’s banking business functions separately, and is regulated apart from its other businesses.

Rural bank branches and priority sector lendingEligibility criteria

Bank to open at least 25% of its branches in unbanked rural centers, and also comply with PSL targets and sub-targets

Analysis

This will ensure that the new banks get serious about the RBI’s agenda of financial inclusion and rural banking. Unlike earlier, when the mandate was to open branches in rural and semi-urban areas, this time around the focus is on rural banking.

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IDB(Industrial development Bank )

Promoters

Muthoot finance- It is known as the largest gold financing company in the world. In addition to financing gold transactions, the company offers foreign exchange services, money transfers, wealth management services, travel and tourism services, and sells gold coins at Muthoot Finance Branches. It operates over 4,400 branches throughout the country.The company has been licensed by Reserve Bank of India under Section 45 I(a) of the RBI Act, 1934 to function as a Non-banking financial company(NBFC) without accepting public deposits.

Key peopleM G George Muthoot (Chairman) is an Indian entrepreneur and Businessman with more than 55 years of industry experience. He is also a member of the National Executive Committee of the Federation of Indian Chambers of Commerce & Industry and the Chairman of the FICCI Kerala State CouncilGeorge Alexander Muthoot (MD) was appointed as the Managing Director of the Muthoot Group in February 1993George Jacob Muthoot Joint Managing DirectorGeorge Thomas Muthoot Joint Managing Director

Apart from the Muthoot group, GIC Singapore's sovereign wealth fund , International Finance Corporation (IFC) will be the bank’s major shareholders.

Board of Directors1. Mr. N.S. Kannan (MD and CEO)- His responsibilities includes Finance, Treasury,

Commercial Banking, Corporate Legal, Risk Management, Secretarial, Corporate Communications, Corporate Branding and Strategic Solutions Group. He also has the responsibility for day to day administration of the Compliance and Internal Audit functions. Mr. Kannan was Executive Director & CFO of ICICI Bank from May 1, 2009 to October 25, 2013.

2. Mr. Rajiv Sabharwal - He has over 22 years of experience in the Banking/Financial Services industry. He will be responsible for Retail Banking, Business Banking, and Rural Banking & Financial Inclusion Business.

3. Mr. Dileep Choksi - is a qualified chartered accountant and has over 35 years of professional experience. In addition to tax and commercial law, his areas of practice have included the audit & assurance functions. In the field of banking, he has held the positions of director and member of advisory boards.

4. Mr. Homi R. Khusrokhan- He has over 40 years experience in the corporate sector. He has earlier been the Managing Director of Tata Tea Limited and Glaxo India Limited.

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5. Dr. Tushaar Shah-He is an economist and public policy specialist and was formerly the Director of the Institute of Rural Management at Anand in India. He has over 30 years of experience and has done extensive research in water institutions and policies.

6. Mr. V. K. Sharma- is the Managing Director of LIC effective November 1, 2013 prior to which he was the Managing Director & CEO of LIC Housing Finance Limited (LIC HFL). He has been associated with LIC since 1981.

7. Dr. Sanjiv Misra- was a member of the Indian Administrative Service for over 35 years during which period he held a wide range of key positions in the Federal and state governments, He was a Secretary in the Ministry of Finance till his superannuation in 2008. Subsequently, he served as a Member of the 13th Finance Commission, a constitutional position with the rank of a Minister of State.

The promoters of the Muthoot finance and Board of directors has vast industry knowledge with the knowledge of diverse field; experience of atleast 30 years.All the key position holders has a clean track record and have successfully held important designations in their prior stint.The current business model of promoter’s group i.e gold financing is different from the proposed bank business model; mainly related to Deposit, Loans and Investment. Hence both the business model won’t interfere with each other and hence the risk is avoided.

Business PlanBusiness plan will describe the purpose and operations of the bank.

Purpose of planThe main purpose is to get the approval for opening a new bank.

OperationsMajor operations of the bank will be in retail and corporate banking

Retail BankingBank will open various branches for retail branches in urban, semi-urban and rural areas. Urban branches will constitute 75% of branches.

Corporate BankingBank will provide loans to various companies and industries operating in different sector

Revenue Interest from Loans like Home loans, Education loans, Auto loans, Personal loans,

and MSME. Fee/commission for various services like drafts, internet banking, derivatives and

transaction

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Income on investments Interest on balances with RBI and other bank

Investments in banking Government securities Debentures and bonds Instruments like CD/CP, mutual fund

Expenses Interest on deposits

o Saving deposito Term deposito Current deposito RBI/inter-bank borrowings

Operating expenseso Provisions to employeeso Rent, taxes and lightingo Printing and stationaryo Advertisemento Repairs and maintenance

Channel expenseso Branches costo Setting up ATMso Internet banking set-upo Mobile banking set-upo Call centre expenses

IT in BankingIT operations in bank has been outsourced to third part for maintenance

For centralized database Call centre/ customers helpdesk(CRM) Operational excellence Online banking Business Intelligence

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Bank Structure

Committees

CSR Committee To allocate the budget for CSR activities Identify the major CSR activities Comply with the government rules and regulations

Audit Committee Responsible for monitoring the accounting practices in the bank

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Board of directors

CEO

Chief data officer

Technical support Group

CFOChief

commercial officer

Marketing Department

Chief Risk officer

Human Resouce head

HR department

COO

Rural operations

Branch officer

Customer Service

Urban branches

Branch officer

CSR committee

Customer Service

Audit Committee

Treasury and Finance

Committee

Stakeholder Committee

Keep a check that all the standards and rules are followed To review the financial reports of the company and look for discrepancies if any To keep a check on Fraud

Stakeholder’s Committee To look into redressal of shareholders To look into the grievances of shareholders on various issue

Customer Service To look into the grievances of customers on various issue To identify the solutions for customers going out of business

Treasury and Finance Committee Asset-liability management Investment portfolio management Comply with Liquidity requirements

Number of branches We are planning to open 20 branches on day1 .There will be around 15 branches in

tier1 and 5 branches in tier 2 cities, the reason being is that we are targeting industrial hubs which are mostly present in tier 1 and tier 2 cities.

Branches on DAY1

CITY CLASSIFICATION

CITY BRANCHES-2016

TIER1 DELHI 2TIER1 MUMBAI 2TIER1 KOLKATA 2TIER1 CHENNAI 2TIER1 BANGLORE 2TIER1 HYDERABAD 2TIER1 AHMEDABAD 2TIER1 PUNE 1TIER2 CHANDIGARH 1TIER2 JAIPUR 1TIER2 THIRUVANANTHPURAM 1TIER2 KOCHI 1TIER2 WARANGAL 1

In a year(2016) we are planning to open around 100 branches with 25 percent in rural areas as per RBI guidelines.

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In the next year (2017) we will introduce around 25 new branches ,these will be introduced in tier2 and tier3 cities along with 6 new rural branches.

Considering the projected growth rate we will grow by 35% so we around 43 new branches to be included in the year 2018.

Number of employees

There will be around 15 employees per branch .Considering that we are opening around 100 branches so there comes out to be 1,500 employees in a year.Apart from this there are 7 board of directors.

Marketing strategyThe two main pillars of our marketing strategy are Market penetration and Product development.

Will upgrade our branches and the employees with the latest technology and enter into the untapped markets with wider product portfolio. Expansion in more cities with more number of branches and ATM services will take place in few years once the bank came into functioning. New technology will help in improving the customer experience related to the services like Internet banking and Mobile banking. Our brand is a popular name in the market and known to the customers so this factor of brand image will also help us to expand and in increasing our reach.

We will use both, above the line and below the line techniques for the promotion

The above the line promotion includes the advertisement in popular TV channels, News channels, Financial news papers and Magazines.

Below the line promotion will include the events that will be organized in different company offices for the awareness of our banks, distribution of brochures there and lead generation. Sales team will interact with prospects directly to convert them into customers.

Focus on customer relationship will help in the improvement of customer satisfaction and ultimately to a large customer base of the company.

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Financial Projections – Deposits Break-up

Particulars 2016 2017 2018Demand Deposits Number of Current Accounts 500 550 600 Number of Other Savings A/c 1700 1870 2,040 Savings Bank deposits 180 198 216 Term Deposits Number of Bank's Term Deposit 280 308 336 Number of Other's Term deposit 900 990 1,080

Break-up Advances( Product wise) (In Thousands)Date/Product 2016 2017 2018 Demand Deposits Number of Current Accounts 868,480.81 1,041,818.82 1,383,462.08 Number of Other Savings A/c 312,653.09 375,054.78 498,046.35 Savings Bank deposits 2,952,834.74 3,542,183.99 4,703,771.07 Term Deposits Number of Bank's Term Deposit 1,563,265.45 1,875,273.88 2,490,231.74 Number of Other's Term deposit 486,349.25 583,418.54 774,738.76 Average Deposits 6183583.333 7,417,750.00 9,850,250.00

Schedule :AdvancesParticulars 2016 2017 2018

Home loans 1,200,000.00 1,800,000.00 3,200,000.00 Education loans 300,000.00 450,000.00 800,000.00 Auto loans 600,000.00 900,000.00 1,600,000.00 Personal loans 150,000.00 225,000.00 400,000.00 MSME,Others 750,000.00 1,125,000.00 2,000,000.00 Total 3,000,000.00 4,500,000.00 8,000,000.00

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Balance SheetBalance Sheet as on 31st March 9 ( In Thousands)

ParticularsSchedule No. 2016 2017 2018

Capital and Liabilities

Capital 5,000,000.00

5,000,000.00

5,000,000.00

Reserves & Surplus -

-

-

Deposits 6,000,000.00

7,500,000.00

10,000,000.00

Borrowings -

-

-

Other Liabilities and Provisions 741,659.83

884,083.33

996,958.66

Total

11,741,659.83

13,384,083.33

15,996,958.66

Assets

Cash in Hand & Balances with R.B.I. 270,000.00

375,000.00

550,000.00

Balances with Banks and Money at call and short Notice

289,000.00

404,790.52

189,818.99

Investments 2,700,000.00

3,000,000.00

2,500,000.00

Advances 3,000,000.00

4,500,000.00

8,000,000.00

Fixed Assets 4,032,659.82

4,234,292.81

4,235,139.67

Other Assets 1,450,000.00

870,000.00

522,000.00

Total

11,741,659.83

13,384,083.33

15,996,958.66

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Profit And Loss A/cIncome Statement for the year ended 31st march ( In Thousands)

ParticularsSchedule 2016 2017 2018

Income

Interest Earned 541,016.47

638,618.92

855,968.31

Fee income and other income 90,000.00

135,000.00

360,000.00

Commission, Exchange, Brokerage

178,900.00

200,368.00

224,412.16

Profit/Loss on derivative transactions

89,000.00

106,800.00

128,160.00

Dividend Income 7,850.00

10,205.00

13,266.50

Total

1,195,116.97

1,405,905.62

1,813,077.57

Expenditure

Interest Expended 401,932.92

445,065.00

615,640.63

Operations Expenses 120,000.00

131,250.00

150,000.00

Provisions & contingencies 741,659.83

884,083.33

996,958.66

Total

1,263,592.74

1,460,398.33

1,762,599.29

Net Profit (68,475.77)

(54,492.71)

50,478.29

Add: Balance brought Forward 0

-68475.7746

6

-54492.7140

8Transfer to - Statutory reserve 0 0 0

Balance Carried forward (68,475.77)

(54,492.71)

50,478.29

Earnings per Equity Share 0 0 0.01%

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Schedules – Schedule 1: Capital

Total Paidup capital 5,000,000,000.00

Face value of each Share 10

Total Number outstanding shares 500,000,000.00

Schedule 3: DepositsParticulars 2016 2017 2018A. Demand Deposits

From Banks 300,000.00

375,000.00

500,000.00

From others 600,000.00

750,000.00

1,000,000.00

B. Savings Bank deposits 1,800,000.00

2,250,000.00

3,000,000.00

C. Term Deposits

From Banks 900,000.00

1,125,000.00

1,500,000.00

From others 2,400,000.00

3,000,000.00

4,000,000.00

Total 6,000,000.00

7,500,000.00

10,000,000.00

Schedule : Interest EarnedParticulars 2016 2017 2018Interest on Advances 299516 377577 638677Income on Investments 241500 261042 217292 Total 541016 638619 855968

Average depositsClosing Bal. of Advances (In Thousand) 2015-16 2016-17 2017-18

15-Apr 5,340,000.00

6,340,000.00

7,340,000.00

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30-Apr 5,800,000.00

6,300,000.00

7,800,000.00

15-May 6,100,000.00

6,600,000.00

8,100,000.00

31-May 5,980,000.00

6,480,000.00

8,980,000.00

15-Jun 6,239,000.00

7,139,000.00

9,239,000.00

30-Jun 6,458,000.00

6,958,000.00

10,458,000.00

15-Jul 6,890,000.00

7,390,000.00

10,890,000.00

31-Jul 6,700,000.00

7,920,000.00

10,700,000.00

15-Aug 6,400,000.00

7,900,000.00

10,400,000.00

31-Aug 6,800,000.00

8,300,000.00

10,800,000.00

15-Sep 6,760,000.00

8,260,000.00

10,760,000.00

30-Sep 6,340,000.00

7,840,000.00

10,340,000.00

15-Oct 5,800,000.00

7,300,000.00

9,800,000.00

31-Oct 5,430,000.00

6,930,000.00

9,430,000.00

15-Nov 5,410,000.00

6,910,000.00

9,410,000.00

30-Nov 5,419,000.00

6,919,000.00

9,419,000.00

15-Dec 5,890,000.00

7,390,000.00

9,890,000.00

31-Dec 6,230,000.00

7,730,000.00

10,230,000.00

15-Jan 6,520,000.00

8,020,000.00

10,520,000.00

31-Jan 6,890,000.00

8,390,000.00

10,890,000.00

15-Feb 6,540,000.00

8,040,000.00

10,540,000.00

28-Feb 6,240,000.00

7,740,000.00

10,240,000.00

15-Mar 6,230,000.00

7,730,000.00

10,230,000.00

31-Mar 6,000,000.00

7,500,000.00

10,000,000.00

Average deposits 6,183,583.33

7,417,750.00

9,850,250.00

Weighted average cost of funds 6.50% 6% 6.25%

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Total Cost 401,932.92

445,065.00

615,640.63

Schedule : InvestmentsAs On 2016 2017 2018

30-Apr 2750000 3050000 255000031-May 2750000 3050000 255000030-Jun 2850000 3150000 265000031-Jul 2850000 3150000 2650000

31-Aug 2850000 3150000 265000030-Sep 2450000 2750000 225000031-Oct 2450000 2750000 225000030-Nov 2450000 2750000 225000031-Dec 2700000 3000000 250000031-Jan 2700000 3000000 250000028-Feb 2700000 3000000 250000031-Mar 2700000 3000000 2500000

Average Investments 2683333 2983333 2483333Average yield on investments 9% 8.75% 8.75%Total Yield 241500 261042 217292

Scehdule: Average AdvancesParticulars 2016 2017 2018

April 2,700,000.00

3,100,000.00

4,700,000.00

May 2,727,000.00

3,193,000.00

4,935,000.00

June 2,754,270.00

3,288,790.00

5,181,750.00

July 2,781,812.70

3,387,453.70

5,440,837.50

August 2,809,630.83

3,489,077.31

5,712,879.38

September 2,837,727.14

3,593,749.63

5,998,523.34

October 2,866,104.41

3,701,562.12

6,298,449.51

November 2,894,765.45

3,812,608.98

6,613,371.99

December 2,923,713.11

3,926,987.25

6,944,040.59

January 2,952,950.24

4,044,796.87

7,291,242.62

February

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2,982,479.74 4,166,140.78 7,655,804.75

March 3,000,000.00

4,500,000.00

8,000,000.00

Average Advances 2,852,537.80

3,683,680.55

6,230,991.64

Average return on loans 10.50% 10.25% 10.25%

Return 299,516.47

377,577.26

638,676.64

Fee income and other income (as percentage of year end advances)

3% 3% 4.50%

90,000.00

135,000.00

360,000.00

Provisions & ContingenciesParticulars 2016 2017 2018

Provisions For NPA's (15%) 570,507.56

663,062.50

623,099.16

Provision for Restructured assets (1%)

28,525.38

36,836.81

62,309.92

Provision for other contingencies(5%)

142,626.89

184,184.03

311,549.58

Total 741,659.83

884,083.33

996,958.66

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