report on pwc

7/29/2019 Report on pwc

1/18

A STUDY ON

INDIAN FINANCIAL INDUSTRY

AND

PRICE WATER HOUSE COOPERS, INDIA

BY

VISHESH MEHTA

13BSPHH010772

ADARSH REDDY

13BSPHH010299

PANKIT KEDIA

13BSPHH011071

VARUN BANGA

13BSPHH010746

SHIKHAR KUMAR

13BSPHH010602


2/18

A REPORT ON

THE INDIAN FINANCIAL INDUSTRY

SUBMITTED BY: VISHESH MEHTA SUBMITTED TO: PROF

CHETHANAKRISHNA

ADARSH REDDY

PANKIT KEDIA

VARUN BANGA

SHIKHAR KUMAR

ORGANIZATION: PRICE WATER HOUSE COOPERS, INDIA

A report submitted in partial fulfillment of

THE MBA PROGRAM

(Class of 2015)


3/18

Table of Contents

Sr. no. Particulars Page

no.

Authorization

Acknowledgement

Executive summary

Objective of the study


4/18

AUTHORISATION

We hereby declare that the project workentitled THEINDIAN FINANCIAL

SYSTEM is an original piece of work Carried out by us at Price water cooler llc,

Hyderabad, under the guidance of our Project Manager Mr. Rajesh kukunoor, Public

Relation Manager at PWC.

The abstract or any form of report has not been published earlier and it presents the original

work done by us during the Summer Internship Program under MBA Program of IBS

HYDERABAD from 11th

March 2014 to 24th

May 2014.

Submitted by: Vishesh Mehta

Adarsh Reddy

Pankit Kedia

Varun Banga

Shikhar kumar


5/18

ACKNOWLEDGEMENTS

It is our proud privilege to release the feelings of my gratitude to several persons who

helped us directly or indirectly to perform this project work.

We express our heart full indebtedness and owe a deep sense of gratitude to our teacher

and our Faculty guide Mrs. Chethanakrishna and our Company guide Mr. Rakesh

kukunoor for their sincere guidance and inspiration in completing this project.

We are extremely thankful to Prof Kavita wadhwa, IBS Hyderabad for her coordination,cooperation and kind guidance, which helped us a lot in the completion of the project in a

systematic manner.

We also thank our family and all our friends who have more or less contributed to

the preparation of this project report. We will be always indebted to them. The study has

indeed helped us to explore more knowledgeable avenues related to our topic and we are

sure it will help us in our future.

Submitted by: Vishesh Mehta

Adarsh Reddy

Pankit Kedia

Varun Banga

Shikhar kumar


6/18

EXECUTIVE SUMMARY

The summer training of a management student plays an important role to develop him into a well groomed

professional. It gives theoretical concepts a practical shape in the field of applications.

The entire project is about the major functions of the Indian Financial system.

A thriving and vibrant banking system requires a well developed financial structure

with multiple intermediaries operating in markets with different risk profiles. There

will a segregation of financial intermediation among banks, resulting in competitive

efficiency, depth and resilience to the financial system.

Other types of financial intermediaries will complement banks and act as counter-

parties, in syndications and co-financing strategies, as also in the sharing of risk.

Markets will acquire greater depth and liquidity, especially in the money and debt

segments. Rigidities in the market microstructure will be removed so that prices offinancial instruments will respond flexibly to different phases of the business cycle.

Thespectrumoffinancialinstitutionswillbringaboutfinancialdeepeningandbroad based intermediation, encouraging financial saving in the community.

While the direction in which reforms will be carried forward is reasonably clear, the

pace of reforms will be uncertain. This stems from the need to balance the many

diverse opinions on the role of Government in development and the role of publicpolicy.

The research methodology was conclusive, tentative and descriptive in nature. Both the secondary and the

primary data collection methods were taken into consideration and the conclusions of the report were

derived fundamentally on the basis of the primary data collected and thus analyzed accordingly


7/18

OBJECTIVE OF STUDY

Objective of studying financial system:

1 IntroductionIndias Financial Sector Reforms can be characterised as slow, careful steps and

avoidance ofshocktherapy. The reforms have focussed on five areas key to the

financial sector:

1)Money, capital and debt markets2)Financial Intermediaries (banks, NBFCs, DFIs, Insurance etc)3)Supervisory, regulatory systems for reducing systemic risk4)Decouplingthemonetaryfromfiscalpolicybyderegulatinginterestrates,scalingdownofinterestratesubsidies,SLR,CRRandmandatorycreditallocation5)External sector reformsTheperformanceofthefinancialsectorandthehealthoftheeconomyareintertwinedandthisistobetakenintoaccountwhiletheoutlookforfinancialsector is investigated. For instance, care is to be taken that as the financial sector

movesforward,creditcreationslowdowndoesnotoccurbecauseofsupplyproblems or due to rationing of credit.

Ilookatthefinancialintermediaries(primarilybanks),markets,regulatory&supervisoryframework,infrastructureandtheevolvingroleofRBItopainta

picture of what the Indian financial sector might look like.

2BankingSector:TheFutureLandscapeTheeconomicdifferencesbetweentheparticipantsofbankingsector(SCBs,UCBs,RRBs,PCARDBS,StARDBSetc)werenotaccentuated.Thiswas

becauseofexternalinflexibilities(publicsectornature,administeredinterestrates,pre-emptionofbank resources,lessdeveloped markets,social

responsibility) and internal inflexibilities (inefficient operations, incentive problems,

govt.nominatedmanagement,hiring&firingrestrictions).TheDFIswereadifferent segment altogether.


8/18

In a practical world while intermediaries will always have overlaps, theoretically in

asimplescenariotheyshouldcompeteindifferentmarketsegments,targetingdifferent depositors and investors, and have different risk profiles. I define such a

scenario as multi-tiered.

Forwantofabetterword,IcharacterisethecurrentBankingsystemaspseudomulti-tiered and expect it to become multi-tiered in the true sense of the word.

2.1FirstTier:SCBsandDFIs-EmergenceofBundlingofServicesThemostfundamentalissueisthequestionofthebalancebetweengovernmentand free markets. It is necessary to tackle the following poser by Governor Jalan:

ThecrucialissuethatthecountryhastodebateiswhetherCorporateGovernanceiscompatiblewithpublicownership?Couldwehavepublicownership without Government or political control or do we need to change

to a corporate structure?

BanksinIndiaoperatewithsocial/developmentalobjectivesandformthebackboneofrural/agriculturecredit.TheGovernmentwillpreservethepublicnatureofbanks.Largescaleprivatisationintheshort-mediumtermwillnottake

place. When equity offerings happen, they will be widely diffused.

The factors in the development of this tier are:

1.Need for capital and emergence of shareholders2.Operational challenges and right pricing of credit3.Role of banks in priority sector lending, and4.Consolidation in the industry.2.1.1NeedforCapitalandEmergenceofShareholdersIftheriskweightedassetsofsomestrongbanksgrowinlinewiththeeconomy,additionalcapitaltotheextentofRs.10,000croreswillbeneeded.Currentlyminimumgovernmentshareholdinglegislation(RBIincaseofSBI)givesthemaheadroomofRs.1000crores1.Governmenthasdrawnupthenecessary


9/18

legislationforloweringtheminimumshareholdingrequirementtousemarketaccess.

Withregardtoweakerbanks,developingcountriesexperienceshowsthatthegovernmentcleansupthebalancesheetsofbanksbeforeofferingtheirequity.Depressed market conditions and lack of enthusiasm for weak bank stocks would

impedeinapproachingthemarket.Thegovtwillinfusecapitalneededduetostricter provisioning and higher CAR norms. Eventually these weak banks will also tap the market.

Banks will become answerable to shareholders. Shareholder pressure will require

morefreedomforbankstooperatewithinawellregulatedframeworkandanincentive structure that goes with a private enterprise.

2.1.2OperationalChallengesandemergenceofRightPricingofCreditByJanuary2007theBaselCommitteeintendstoreplacethecurrentCapitalAccord with a New Framework, built on a three-pillar approach - minimum capital

requirement, supervisory review and market. Though non G10 countries have the

freedomtocustomiseit,Indiawillimplementit,atleastforthetopbankswithcomplexoperationsandhavingamarketsharegreaterthan1%orwithsubstantial foreign operations.

BISproposalrequiresregulatorstoensurethatbankscapitalpositionsareconsistentwiththeiroverallriskprofilesandstrategies.Thesenewnormsmeanthatskillswillhavetobeacquiredforthedevelopment,testingandvalidationofinternal rating and credit risk models used by the banks. Practices will have to bedevelopedforgeneratingaccurateriskprofiles.SophisticatedMIStools,riskmanagementsystemsandcompetencesofriskappraisalandmanagement

personnelwill need to be developed.Accountinganddisclosurestandardswillhavetofallinlinewiththeinternational

best practices.


10/18

ApartfromaboveandtheNPAoverhang,banksareincreasinglyfacingchallengesinALMexpertise,rapidintegrationoftechnologyrequiringhugeinvestments,emergenceofabuyersmarket,increasedcompetition,rootingoutinefficienciesandhighgrowthincustomerexpectation.Properaddressingofthesechallenges,especiallyinrisk-management,willgivebankstheexpertiseto

pricecredit

optimally

inorder

tomaximise

risk

adjusted

returns.

This

will

preventlarge scale misallocation of funds.

2.1.3PrioritySector,InfrastructureAndBanksIdontvisualiseprioritysectorlendingtobedoneawaywith.Itwillbeimperativefor banks to manage credit risk in this sector. They will do so by teaming up with

NGOs,SHGsandusingmicrofinanceinnovationsandimprovingthequalityoftheir loan assets; thus improving the productivity of loans in the rural sector. If and

whensecuritisation,takeoutfinancing,sounddebtmarketsdominatedbypublicissuesareinplace,bankscouldalsoproceedwithinfrastructurefinancing,especiallyattheshorterend.Additionallybankswillstartplayingamoreactiverole in the market for term funds as they start compiling data on maturity gaps and interest rate gaps to be complied under ALM discipline. Difficulties in collection of

data from hundreds of rural and semi-urban branches will be combated on a war

footingandcomputerisationinthesebranchestofacilitatedatacompilationprogressively will occur.

2.1.4BankingSectorConsolidationThesechallengesandconcernsofshareholderswilldrivebankstowardsmarketdriven

consolidation

(in-market

mergers

and

market-extension

mergers)

toimprovetheinefficientindustrystructure,asopposedtogovernmentledconsolidation.Evidenceexiststhat,globally,consolidationoffinancialinstitutionshasbeendrivenbyshareholdervaluemaximisation(increaseinefficiencies,


11/18

revenues, market power) and massive investments in technology. This scenario is

likely to repeat in India.

ApartfromfewsporadiccasestheM&AroutehasnotyetcaughtthefancyofSCBs.ThoughtherehavebeennooverhintsfromtheRBIandgovernment,thegenerallineofthinkingisclear.WhentheRBIsaysthatitwillnotevenconsiderlicensing more than 2-3 private banks till 2004, it has in mind the potential of M&A torestructurethebankingsector.Simplyput,whentherearesomanyPSBswaiting to be taken over, why create new entities?

Thebankswillalsostartfocussingongeneratingmorefeesbasedincomeandconcentratingonretail&consumerbanking,givingaboosttomorediversifiedfinancialintermediation,whichstartedinthe80swhenbankswereallowedtoundertakeleasing,investmentbanking,mutualfunds,factoring,hire-purchaseactivitiesthroughseparatesubsidiaries.ThiswillgiverisetoFinancialConglomerisationandbundlingoffinancialservices.DFIshavealreadybeenallowedtosetupbankingsubsidiaries,entertheinsurancebusinessalongwith

banksandareallowedtoundertakeworkingcapitalfinancingandtoraiseshort-termfundswithinlimits.Throughaviabletransitionpath,theDFIswillbecomeuniversal banks.

2.1.5CautionBydefinition,anin-marketmergerwillnecessitateclosingofbranchesandreductionofworkforceforreductionincosts,requiringaparadigmshiftinthe

publicpolicytowardsbanks.Forinstance,publicsectorbankshavealargenumberofbranchesinbackwardareasandhenceitmaynotbefeasibleinasocio-economicsensetopermitclosureorsaleofthesebranches,wheneveramerger takes place. If 20 per cent of branches of public sector banks account for

80percentofbusinessandiftheonlyobjectiveisprofitabilityandshareholderwealth maximisation, will they close the 80 per cent.


12/18

Farreachingradicalchangesintheorganisationandmanagementofbanks(incentivesbasedflexiblewages,goodgovernance,transparency,concernforshareholders etc) will be required.

Theseadmittedlyareatallorder.Asandwhenmarketforcestakeover,theyshouldleadtotheemergenceofasociallyresponsible,efficientandaprofitable

banking industry at SCB level, which I call the first tier.

2.2SecondTierThesecondtierofbankswillcompriseoftheUCBs,StCBs,DCBs,localarea

banks with not much retail reach. They will be excluded from the purview of Basel

NewAccord.Asthesebanksgetpushedoutofthetopendofthemarketbythefirsttierbanks,theywillconcentrateonlendingtoSMEs,notveryhighratedcorporates,workingcapitallendingandtolocalcustomers.Theywillnotbe

presentsignificantlyinretailandconsumerbanking(likecreditcards).TheywillslowlyandsteadilybuildexpertiseinSME,lowratedcompanies,ruralandagricultural financing.Atsomepointintime,regulationsmightpermitthefirsttierbankstocompletetheirprioritysectorlendingthroughthesebanks.Howeverthiswilltakeplaceifand only if the second tier banks have significant number of branches in the rural

areas. Currently, the branches of deposit taking institution per capita is very low in

India and this ratio needs significant improvement.

2.3ThirdTierThis third tier will include RRBs, StARDBs and PCARDBs, rural based NGOs and

microfinanceorganisations.Thistierwillcaterexclusivelytotheruralandagriculturalsector.Thissectorwillseemanymicrofinanceinnovationstoreininthe NPA problems and to improve credit risk.


13/18

3Supervision/Regulation/GovernanceAsthebankingcrisesinmanydevelopedandemergingcountrieshavedemonstrated,afree-marketbasedbankingsystemseldomworkswithoutanefficientsupervisionandregulatoryframework.Progressivestrengthening,deepeningandrefinementoftheregulatoryandsupervisorysystemforthefinancial sector have been important elements of financial sector reforms. Further

progresswillplayacrucialroleinestablishingincentivesandtransparencyrequired for shareholder wealth maximisation and financial stability.

Financialsectorsupervisionwillbecomeincreasinglyrisk-basedandconcernedwithvalidatingsystemsratherthansettingthem.Theemphasiswillbeonevaluating the quality of risk management and the adequacy of risk containment.

Credibilityassignedbymarketstoriskdisclosureswillholdonlyiftheyarevalidated by supervisors. Supervision will be critical in the effectiveness of capital

requirements and market discipline.

Wewillseerapidstridesintheareasofconsolidatedsupervision,countryandtransfer risk monitoring, inter-agency co-operation and cross-border supervision.

4MarketDevelopment:IncreasingFinancialDisintermediationTherehavebeenimpressivedevelopmentsintherepo,call,debtandstockmarkets.Thedevelopmentofacorporatedebtmarketisimportant.Duetounderdeveloped pension arrangements a major source of potential capital market

activity is absent. The insurance sector will provide liquidity to these debt markets.

Forpricingofloanstobemarket-based,developmentofGovernmentsecuritiesmarketiscrucialsincealltheratesintherestofthemarketsarepricedoffthezero-risk yield curve.

Issueslikeandevelopmentofanauctioncalendar;lackoftradingstructuresuitablefordirectaccessbypotentialparticipants;lackofarbitragebetween


14/18

separatedwholesaleandretailgovernmentbondmarketsegmentsleadingtoreduced quality of prices in the retail market will have to be addressed.

Moreimportantly,thereisaperceptionthataslongasRBIhasleverageinadjustingquantitiestosetrates,eitherthroughchangeinnotifiedamountorbyaccepting a devolvement, a market-related rate is difficult to achieve.

Significant pricing errors exist when Government bonds are priced using the term

structurealone2.Residualmaturity,timesinceissuance,currentyieldandissuesize are security-specific attributes that account for most of pricing discrepancies.

Setting up of anindependent public debt office function will be imminent and RBIis moving towards it.

The issue of fragmentation of outstanding govt securities also exists. Since 1999,

RBIhasbeenfollowingapolicyofpassiveconsolidationofloansthroughre-issuance and re-opening of existing issues.Bondmarkets,bytheirverynature,areOTC.EvendevelopedcountrieslikeGermanyandUS,haveentirelynegotiatedmarketsandhaveminimalretailactivity.Encouragingretailparticipationwillhavetobedonebysettingupexchanges, improving post trade transparency and arbitrage.

Only the US has a well developed market for high yield corporate bonds. In India,

only AAA rated companies have been successful in tapping the bond market3. As

financialintermediarieslearntopricecreditsuitably,evenlowratedcompaniesshould be able to tap the market.

Structuredpartialcreditguaranteedeals(e.g.IFCandBallarpurIndustries)raisethe credit rating of the issuer company . Its emergence will provide a momentum

to non AAA companies to tap the bond market, thus deepening it.

5RoleofRBIandDecouplingofmonetaryandfiscalpoliciesWithsupportofgovernment,RBIiscontemplatingseparationofitsrolesofdebtmanager,supervisor/regulator,ownerandformulatorofmonetarypolicy.Itis


15/18

shiftingtowardsusingindirectsignalsformonetarypolicy,bybuildingastrongmoneymarket.MeasureslikeLAF,WMA,pureinter-bankcallmoneymarket,strong repo market all point to this. India will find that external sector linkages will

removetheabilitytopursueeconomicpoliciesthatarenotconsistentwiththoseoftheothermajoreconomies.RBIwillhavetoadoptalonger-termapproachtowardsmonetary policy. This will be achieved by a publication of a stable outline policy which will be tweaked to affect short-term circumstances.Themonetarypolicywillbeincreasinglydecoupledfromfiscalpolicy.Thiscouldgive rise to a conflict in the RBI objectives of price stability and credit availability.

6ConclusionThepolicyofadoptingfreemarketmodelsaftercustomisingthemtotheIndianconditionshaspaidrichdividendstilldate.Nowthereisanurgencytogivelegitimacytointernationalpressuresbroughtaboutbyfinancialglobalintegrationandmorelinkagestotheexternalsector.Thesheersize,structuralproblems,legacies,complexityandmulti-facetednatureofIndiamakethisurgencynecessarilymorefraughtwithuncertaintiesandpossiblymoredivisiveinternally.ThisdilemmacanbesummedupbyapoembyLadySarashina,wholivedinearly 11

thcentury Japan :

Cross it, trouble lies ahead,

Do not cross, and you are still trouble-bound

Truly a troublous place

Is the Ford of Shikasug


16/18

Rich Customer Base of PWC


17/18

The Main Competitors of Price Water Cooper House


18/18

SWOT Analysis

Strength

1. They have a large client base many of which are repeat clients.

2. Many business units apart from financial services like, Consumer

& Industrial Product Service, Private Company Service etc.

3. They have a very extensive geographical reach with presence in

150+ countries

4. They have a workforce consisting of the best talent pool

5. It is the world's largest professional services firm and one of the

largest of the "Big Four" accountancy firms

6. Has nearly 170,000 employees globally

Weakness

1. Stiff competition from other leading industry players means

restricted market share

2. Brand visibility and advertising lesser than some industry majors

Opportunity

1. They can benefit from the growing prospects in emerging

economies

2. There are many opportunities in providing compliance solutions

3. Increase in companies looking for expert business solutions

Threats

1. Recession resulting from the ongoing Euro crisis can affect the

business

2. Expansion of competitors

3. Fluctuating global economy affects operations

Competition

Competitors

1. KPMG2. Ernst & Young3. Deloitte

report on pwc

Documents