Agile Financial Times August 2009 Edition

8/14/2019 Agile Financial Times August 2009 Edition

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PERSPECT IV E

ART ICLE

Treasury Management

Development of

Term MIBOR

How Green is my Technology?

AgileFINANCIAL TIMES

August2009

SOLUTION SPOTLIGHT AGILIS Core Insurance

Preparing for a New Global Environment





This month, we have gone green, literally. The

issue is a potpourri of seasonal produce - the

Germination of the New World Order, the

Fruition of our Agilis Insurance solution at

Insurance PHB, the Ripening of the MIBOR,

the Regrowth of Treasury after its Autumnal Fall

and of course what started it all - the Green

Technology Revolution! Revolution indeed as

the new cycle goes from Cradle to Cradle (as

against Cradle to Grave).

Continuing with our motto of preservation and growth of capital, we

present comprehensive coverage on treasury and insurance in this

issue. Added to that, are some pure, organic views from the cultivators

of our economy - the bankers and the insurers. Our customer, Anselem

Igbo, Managing Director of the prestigious Insurance PHB and our

reader, Mohan Shenoi, Treasurer, Kotak Mahindra Bank share their

views from technology to economics.

Interesting to note how the monsoon affects the economics of a nation,

how the farm yields have a direct impact on our money market yields

and how the right pollination of risk management and liquidity seeds

sustainable balance sheets.

From Green Treasures in the garden to the Green Treasuries in the

vault, from cradle to cradle, it rocks on.

Be Agile!

Shefali Khera

Chief Marketing Officer

Write to us at [email protected]

CONTENTS

Editor’s Note

PERSPECTIVE

Development of TermMIBOR 4

COVER STORY

Treasury Management 7

ARTICLE

How Green is myTechnology? 10

NEWS

Global Update 13

ARTICLE

The New World Order 15

SOLUTION SPOTLIGHT

AGILIS Core Insurance 17

August 2009



Development of Term MIBOR - A Need of the Hour

Mohan Shenoi Treasurer, Kotak Mahindra Bank

4

Three issues have dominated thediscourse in Indian financial

markets, particularly in thebanking arena for some timenow - repo and reverse repo

rates, prime lending rates andcorporate bond markets.

First, why do monetary policy-induced changes in the twoprincipal channels of monetary transmission, viz. money supply and the repo / reverse repo rates take an unusually long time to have an impact on the bank deposit and lending rates? Second, is the prime lending rate (PLR) announced by

banks divorced from current market reality? Third, how canthe corporate bond market be activated? On the face of it,these three issues may appear independent of each other.But a deeper reflection shows that they are indeedinterconnected and perhaps have a common solution.

Theoretically, a monetary transmission mechanism isexpected to be a three-stage process. In the first, stagepolicy-induced changes in money supply and repo / reverserepo rates are expected to nudge banks and other financial intermediaries to change their short term deposit and loanrates (medium and long term interest rates respond more tochanges in fiscal policy). In the second stage, changes inthese rates are expected to impact spending and saving patterns of consumers and firms. In the third stage, a changein aggregate demand is expected to impact inflation.

The general refrain is that short term deposit and lending rates of banks in India do not respond to monetary policy changes fast enough thereby impeding the transmissionprocess. Bankers have traditionally argued that higheradministered interest rates on small savings schemes of Government of India compete with bank deposits andeffectively put a floor below which their deposit rates cannot fall. While there is substance in this argument it is also true

that Indian banks and financial intermediaries do not respond quickly to changes in indirect instruments of monetary policy like repo / reverse repo rates. In the past,during the rising interest rate scenario, it has been observed

PERSPECTIVE



5

PERSPECTIVE

that only when the Reserve Bank of India (RBI) initiatedsledge hammer measures (like widening the repo / reverserepo corridor and forcing the market to operate at the upperend of the interest rate corridor through rapid increases inCRR) that the banks responded to monetary policy measures.

A way out of this conundrum is to develop a purely inter-bank market benchmark rate which responds instantly tomonetary policy changes and to which bulk of the bank deposit and lending rates are linked.

The Benchmark Prime Lending Rate (BPLR) of banks is arate administratively decided by the Asset-Liability Committee (ALCO) of each bank, taking into account theaverage cost of funds, cost of operations, appropriateprovisioning, capital charge and a profit margin. BPLR is

intended to be a reference rate around which most bank lending would take place. Banks use the BPLR primarily forre-pricing floating or variable or adjustable rate loans(floating rate term loans, overdrafts, cash credits etc.).However, the extant RBI guidelines requires banks to useonly external or market based Rupee benchmark interest rates for pricing floating rate products.

The liability side of most Indian banks consists of fixed rateterm deposits while the asset side has predominantly floating rate loans, cash credits and overdrafts. This meansin a falling interest rate environment the asset side of banks

gets re-priced instantly, while the liability side gets re-pricedonly over a period of time. This inevitably narrows thespreads that banks enjoy between their assets and liabilities.This fact does influence the ALCO of banks when they periodically review their BPLR.

So for banks to be more responsive to monetary policy

measures while fixing their BPLR there is a need fordevelopment of an inter-bank market benchmark linked to

which banks can raise floating rate term deposits. A floating rate term deposit will help banks minimise the interest ratemismatches between their asset and liabilities side. Whensuch a benchmark emerges there will be no need for aBPLR. Banks can link their floating rate assets as well to thisbenchmark.

A lot has been written about development of the corporatebond market in India. Permitting repo in corporate bonds

was thought to be one of the measures that will activate thismarket. However, no development on the regulatory front has been seen so far in this regard. Higher participation by financial institutional investors (FII) in the corporate bondmarket was also considered another way to revive themarket. Though limits for FII participation in the corporatebond market have been raised to US$ 15 billion actual investments by FIIs has been far below the approved limit.

One of the reasons why the corporate bond market has not grown is because issuers in India can only issue fixed ratebonds/debentures. Ideally, in a falling interest rateenvironment, the issuer would like to issue a floating ratebond while the investor would like to subscribe to a fixedrate bond and vice versa in a rising interest rate scenario. Toissue floating rate bond/debentures there is a need fordevelopment of a market benchmark rate linked to whichthe floating rate notes (FRN) could be issued. Coupled withthis, if a fixed-to-floating swap market is developed linked tothe same benchmark, both issuers’ and investors’ interest can be protected in different interest rate scenarios.

It can be noticed from the above that ultimately all the threeissues are interconnected and the solution for them iscommon, i.e. development of a market benchmark which is

credible, acceptable to the market players and whichresponds instantly to monetary policy changes.

Currently, overnight MIBOR is accepted by the market as a

A way out of this conundrum isto develop a purely inter-bank market benchmark rate which

responds instantly to monetary policy changes and to whichbulk of the bank deposit andlending rates are linked.



6

PERSPECTIVE

Mohan Shenoi is Treasurer and Member of theSenior Management team at Kotak Mahindra

Bank. Mohan heads integrated treasury(including forex, fixed income, money markets,

derivatives and bullion), primary dealership,debt capital markets and the balance sheet

management unit at Kotak Mahindra Bank. Heis also a Director at Kotak Mahindra Prime Ltd.

Shenoi started his banking career atCorporation Bank in 1978. He was responsiblefor shifting the Corporation Bank Treasury from

Mangalore, H.O. to Mumbai in 1990.Corporation Bank Treasury thereafter became

one of the well-known Bank Treasuries. He joined ICICI Bank in 1994 - the 5th employeeto join ICICI Bank and member of the originalteam which set up the Bank. He moved from

Treasury to Planning in ICICI Bank in 1996,and was head of Retail in 2000-01. Shenoi is a

Bachelor in Business Management (BBM),Certificated Associate of Indian Institute of

Bankers (CAIIB) and holds a Post GraduateDiploma in Bank Management (PGDBM).

credible benchmark. The underlying volumes in thisbenchmark are decent. Its acceptability amongst market participants is also reflected by the fact that an actively traded swap called Overnight Index Swap (OIS) hasdeveloped linked to this benchmark. However, thebenchmark represents overnight call money rates. Hence it is not suitable for pricing floating rate loans or deposits oreven as a link rate for monetary policy transmission.

Most US Dollar-denominated issuances in the international markets are linked to 3 and 6 month LIBOR. This issupplemented by US Dollar interest rate swap market wherethe floating leg is linked to 6 month LIBOR. In a similarfashion, there is a need to develop 3 and 6 month MIBOR in Indian markets. While these benchmarks are regularly

polled and published, they lack acceptance in the market fortwo reasons.

First, the market believes that for a benchmark to get acceptability there has to be large trading in thosebenchmarks in the underlying market. This, in my view, is amistaken belief. As per the ECB (2007) Euromoney Market Survey, in recent years (2000-2007), about 70% of thetransactions were overnight while maturities of one monthor less amounted to about 95%. Notwithstanding this, 6-month LIBOR is widely accepted as a benchmark globally.If this is so, then why should markets in India wait forelusive turnover in 3 and 6 month MIBOR for it to beaccepted as a credible benchmark?

Secondly, the polling and publishing mechanism of termMIBOR needs significant changes for it to generateconfidence in the market participants. LIBOR fixing processfollowed by the British Banks’ Association (BBA) has beentime tested and has worked even during difficult times whenthere was a total dislocation of credit markets. The IndianBank’s Association (IBA) can adopt a similar process forMIBOR fixing to generate widespread acceptance of thebenchmark in the market place.

Development of term MIBOR thus can solve three issues at one go, i.e. assisting the monetary transmission process,helping banks to manage their interest rate mismatches andin developing the corporate bond market.

Why should markets in India wait for elusive turnover in 3and 6 month MIBOR for it

to be accepted as a crediblebenchmark?



7

While the efficacy of the new measures will be proven over time, for the timebeing it has been pretty much up to the respective governments to haul theirbanks out of trenches that they dug for themselves.

Capitalism has made it imperative for banks to be profit centres and they compete in a financial market fraught with risk. The extent to which banking regulations can be manipulated was evident with the scenario that unfolded in2008 and was definitely a case of inadequate governance. None of this happenedovernight and was the result of a cascading effect of a systemic disregard of basic risk appetite fundamentals.

Unaware and under-prepared

Many claims and counter claims later, the Royal Bank of Scotland (RBS)eventually used tax payers’ money to pull itself back from the brink of disaster.Sir Fred Goodwin unceremoniously fell from the pedestal of being the one of the best in business and after leading RBS to among the top 10 largest banks inthe world. As we try and piece together facts, it emerges that there was gross

negligence on the part of the treasury and top management coupled with a seriesof decisions that blatantly ignored basic risk management mandates. RBS didreceive warnings about the global economic condition, the extent and impact of

which was never analysed. The risk calibration system was ineffective because it

Treasury

Management

The Basel Committee onBanking Supervision recently

released enhancements as partof its efforts to strengthen theregulatory capital framework.

A press statement issued bythe stated that the program

aims to introduce newstandards to promote the build-up of capital buffers that can be

drawn down in periods ofstress, strengthen the quality of

bank capital and introduce aleverage-ratio as a backstop to

Basel II.

Preparing for a New Global Environment



was restricted to correctly identifying the risks, but nevertook the all important step to precisely quantify the risk. Therisk-reward ratio was unnaturally high during the boom, andthe the warning bell that the balance sheet was skewed wasnot loud enough to make an impact. The envelope wasfurther pushed with the acquisition of ABN Amro, theexposure to the sub-prime crisis, and RBS finally gave in toa triple assault of liquidity, credit and counter-party risk.

Credit risk management forms a big part of managing risks within a bank which manifests when a borrower fails torepay as per commitments. This needs constant monitoring of the profile of borrowers, estimate extent of credit losses,and a constant review of the control mechanism. Since thecredit repayment behaviour reveals itself over a period of time, it is important for top management to recognise thesigns well in advance to halt the credit doles and therefore

the cascading effect of non-repayment.

The unrealistic financial boom and security was partly created by banks, when lending took to proportions never

witnessed before. The aggressive credit expansion, increasein asset prices and little or no savings in the westerncountries spiralled into big trouble for banks. Offeringsacross various asset classes with little experience, highassociated risks and aiming at profits did not work well.

One-up on situation

The risks of lending were evident as early as in 2006, when

the rate of non-payment of mortgage loans started toincrease. Some banks such as HSBC took corrective actionon time, and lived to tell the tale. Most of the banks that survived the crisis were conservative in approach and mostly

on top of their risk management criteria. Spotting a risk hasto be followed up with an appropriate action. It is very apparent that banks that survived did not do so by chance,but because they had strict measures in place. While not all risk models can be completely reliable in terms of extent of damage, they do indicate a strong possibility of trouble.

Fang Fang, JP Morgan’s China Managing Director and Chief Executive Officer, recently said that the company was ableto tide over the crisis successfully on account of its strict internal control and risk management mechanism.

According to him, the company managed to avoid the sub-prime mortgage crisis as they identified the related risks andmoved away from complex structured financial productsright at the start of the US housing market bubble burst. Asa matter of policy, the company set aside additional capital earned during the boom to tide over losses in bad years. The

company also maintained a healthy capital adequacy ratiothrough out, which has paid off in turbulent times, as clientsand investors have expressed more confidence by moving toit.

Treasuries: Balancing the Act to Even Out

Bank treasuries are in a position where they have access toinformation on both liabilities and assets of a company.Traditionally treasuries have focused on liabilities, but considering the way that markets function has changed,treasuries are now paying more attention to the asset side as

well.Banks are very susceptible to credit risk, as the chances of losing capital in credit business are very high. Constant reviewing of exposure limits is essential to make sure that caps are commensurate to handle the changing economicscenario. Adherence to internal controls at all times will ensure that trading balances risks and rewards withinreasonable limits of size and position.

Facing market risks arising out of liquidity, interest rate,exchange rate and equity price changes essentially requiresthe treasury department to stay close to rule books when it comes to trading in various securities, bonds, and otherinstruments. Maintaining a close watch on liquidity of thebank ensures that funds are available when needed to tideover negative cash flows, changing performance of assets,and be able to cash in on opportunities when they arise.

While there is no clear winner among the risk management models that emerged during the crisis, it essentially has to bea mix of various factors.

Greg Fischer, assistance Treasurer, Janus Capital Group,says, “The primary objective for a treasurer is to protect thecompany’s money. Therefore, preservation of principal is

paramount. The next objective is typically liquidity as fundsfor operations can be needed any time. Finally, maximising yield within the prior two objectives should be a goal. Therise in volatility requires that investments be monitored

8

COVER STORY

Capitalism has made it imperative for banks to be profit

centres and they compete in afinancial market fraught with

risk. The extent to whichbanking regulations can bemanipulated was evident withthe scenario that unfolded in

2008 and was definitely a case of inadequate governance.





One of the many institutions that has taken over theresponsibility of educating people includes the UnitedNations Environment Program (UNEP), with focus on

increasing involvement at all levels - governments, scientists,corporates and the society at large. The pertinent environmental issues include global warming, wastegeneration management, carbon emission reduction andrenewable energy resources. Some statistics from 2009UNEP Year Book will put in perspective the appaling situation that we are in currently:

A one-metre rise in sea levels world-wide is enough todisplace around 100 million people in Asia, mostly Bangladesh, eastern China and Vietnam; 14 million inEurope and 8 million each in Africa and South America.In the next century, the estimated rise in sea level rangesfrom 0.8 metres to 2 metres from Greenland iceoutflows alone.2008 had the second smallest area of Arctic sea-icefollowing the summer thaw since satellite monitoring began in 1979.Studies in 2008 indicate oceans are now soaking 10million tons less C02.Over two billion tons of waste is being generated every year globally; by 2030, China and India are estimated tocontribute about 500 million and 250 million tons of solid waste every year respectively.

It is no surprise therefore, that conversations about environmental sustainability have started to move from theUnited Nations and Green Peace offices into corporateboard rooms.

How Greenis my

Technology?‘Green is in’ but just a cursory stock check is enough to reveal the anomaly.

A recent internet search on ‘environmentalconcern’ gave 169,000,000 results, while

‘green initiatives’ gave 12,000,000. While ontheir own the numbers may not mean much,they do indicate the black hole that humanity

has created for itself with persistent disregardtowards the planet’s vulnerable environment.

A greener lifestyle that will counter or evenslow down the rate of damage is eons away

10

ARTICLE



Green Governments: A Global Tangle

After a number of multi-level conferences, government representatives from across the globe have found it virtually impossible to decide unilaterally on hard hitting measures,instead revelling in blame games, passing the buck, andprocrastination. There is an unresolved conflict of who isresponsible for the current environment pathos andtherefore who should bear the maximum responsibility of cleaning it up.

The importance of engaging in constant efforts to reducecarbon emission is not lost, and some of the targetsestablished over the last one year broadly include thefollowing:

By 2020, the European Union (EU) plans to cut overall

greenhouse gas emissions by 20% over 1990 levels; aimsto use renewable sources such as wind, waves and plant

waste to generate 20% of overall EU energy requirement; and to make efficiency savings of 20% overforecast consumption.The United States, Canada, Japan and Russia assented toa G8 declaration to endorse the position on climatealready taken by the EU. According to this, global temperatures, which increased by 0.7ºC in the 20thcentury, should not be allowed to rise by more than 2ºCas compared to the pre-industrial levels.Eight other countries, broadly representing the

developing world at the G-8 conference, signed up to thetarget.

As usual, experts are skeptical about claims and promises.This is obvious from the recent G8 meeting in Italy wherethe aim was specified, but an implementation road map onhow to achieve this goal was conspicuous by its absence.

Green Corporates: A Global Exigency

In an era of rapid industrialisation, fast growth andautomation that spanned decades, few spared thoughts,efforts or investments towards making any of this growthenvironment-friendly. However, as the atmosphere went through changes, translating into hardships visible ineveryday life, corporates and governments alike woke up tothe reality and responsibility. In the last 5-7 years, almost all large corporations are holding themselves more accountable.UN officials in a General Assembly meeting said they firmly believed that renewable and clean energy would help combat climate change and reverse the global economic crisis, thusindicating the inevitability that corporates need to addressthis issue urgently. Increasingly, almost all government economic stimuli programs have a green component embedded into them indicating the seriousness.

Balancing ROI

While it is obvious that companies will monitor return on

investment (ROI), and most decisions will be driven by profitability, investments in greener technologies haveproven to be profitable in the long run. For instance,General Electric (GE) began its campaign to go green withan initiative called Ecomagination. Since 2005, the company has been trying to effectively utilise technology andindustrial capabilities to reduce environmental impact whilealso reducing costs by over US$100 million. Such results will ensure complete acceptance of strategy that weaves inenvironment sustainability across the organisation. GEmanaged to reduce greenhouse gas emissions intensity on arevenue basis by 30% by 2008. There was a 33% increase inofferings portfolio with ecomagination revenues registering an increase of 21%. The company remains committed to itsrevenue target of US$25 billion and an increase in R&D in2010 in spite of the tough economic environment.

Companies cannot afford to go green as a by-product of their efforts to control costs. The need of the hour hasmoved way beyond this and requires urgent action. Resultsare bound to be different when environment is a priority andan inherent part of business strategy. All industries havecontributed immensely to carbon emissions and efforts haveto be made across each to arrest the impact. Data centres of IT companies generate huge amounts of heat which iscurrently wasted, but has been recycled by some companies

to heat buildings. Even supermarkets are looking to sourcelocally to reduce their produce ‘food miles’. The maximumimpact towards a greener existence would arguably be inpower and water conservation.

Large corporates are also investing in companies doing research on environment-friendly technologies. For instance,Intel announced an investment of US$10 million in fivecompanies developing technology to promote cleanerenvironment. Nokia works with five pillars of Greeninitiative identified as Evolve, Recycle, Energize, Create and

Support. Following a life-cycle-based thought process and with an aim to focus on all facets of operations, devices andservices, Nokia is looking to reduce its overall adverseimpact on the environment. The approach analyses the

11

ARTICLE

There is an unresolved conflict of who is responsible for thecurrent environment pathos andtherefore who should bear themaximum responsibility of cleaning it up.



12

ARTICLE

product through the entire chain of operations, starting with extraction of raw materials and ending with recycling, treatment of waste, and recovery of usedmaterials. The bigger changes that have made the initiative achieve success arebetter product design, control on production processes, and increased material reuse and recycling.

Beyond CSR: Onus on CIOs

When green initiatives are proactively driven from the top management level,they form an important part of the strategy as it affects the way the customers,clients, suppliers and government perceive the company.

According to research estimates, environmental concerns will be one of the topfive priorities for Chief Information Officers (CIO) for the next 5 years in 50%of large organisations. CIOs select and implement information technology inorganisations to enable and support the business plan. Going forward,operational efficiency needs to be targeted in tandem with environmental

efficiency more as a rule than an exception. Involving other top management executives will be important in implementing a mix of the easier and obviousenergy efficient options along with the more strategic investment in processesand information technology.

Starting with short term changes and goals, it is imperative that these thenfurther evolve into schemes that are specifically aimed at increasing awarenessabout their carbon footprint. Measures on a larger scale would entail using renewable sources of energy, water harvesting and usage, alter powerconsumption patterns, using environment friendly methods of heating andcooling, and infrastructure changes which have to gradually be incorporatedinto long-term plans and visions, spreading the message within the company

and industry.In this scenario, some initiatives that CIOs are already addressing include:

Altering and optimizing business processes.Reducing the size of offices so that more people can work out of smallerspaces.Initiating use of technology to allow remote working, connectivity,communication and co-ordination.Cutting the use of paper through online processes.Monitoring and reducing power consumption.Optimizing the use of servers and computers.Initiating virtualization; reduction in travel has been found to be the most effective and easy measure.

Corporates are likely to be more successful in their efforts if implementationand adherence to procedures is regulated and monitored. With smaller, definiteand achievable targets, progress is achievable and measurable. CIOs of global companies can spread the message faster and ensure compliance across all branches. Similarly compliance across supply chains, both forward andbackward, needs to be insisted upon. Encouraging employees to be sensitive tothe environment, albeit at a smaller scale, would still have a cascading effect.CIOs of leading companies in all industry segments need to propagate andpractice green best practices, and provide an example to the rest of theindustry. With many industry leaders having already taken green initiatives, and

established profitable practices, it is only a matter of acknowledging theimportance of each little contribution before the environment finds itself embedded in all business plans and strategies. The results would be for all tosee as they are tangible, measurable and adaptable.

According to research

estimates,environmental concerns will be one

of the top fivepriorities for Chief

Information Officers(CIO) for the next 5

years in 50% of largeorganisations. CIOs

select and implement information

technology inorganisations to

enable and support the business plan.



13

Global

Update A quick review of industry news fromaround the world.

bankers may undermine the recovery and put theireconomies back into "stagdeflation" if they raise taxes, cut spending and mop up excess liquidity in their systems to

reduce fiscal deficits, said Roubini. He currently expects a U-shaped recovery, where growth will be "anemic and below-trend for at least two years."

Challenger Financial Services to IncreaseFunds Under Management

James Packer-backed Austria-based Challenger Financial Services Group has announced that may increase its fundsunder management as much as 50 percent to A$30 billion by buying domestic or overseas rivals. Challenger also recently agreed to sell its mortgage business to National AustraliaBank and is now focusing on life insurance and managing savings. With a spare capital of A$880 million, the company is looking at expanding the annuities unit. Four years ago,Challenger bought HSBC Holding’s Australian asset management unit, and according to a statement by its CEO,is looking for more such transactions.

Thailand Easing out of Recession

The central bank in Thailand has not reduced the interest rates, with signs of the recession easing last quarter due togovernment spending and improvement in export orders.The gross domestic product fell 4.9 percent in the second

quarter from a year earlier, after contracting 7.1 percent inthe previous three months, according to a government statement. Very recently, the cabinet approved a revised 1.06trillion- baht, three-year investment program to help lift the

Abax Global Capital to Start Private EquityFund in China

Hong Kong based will soon start a private equity fund inChina to invest in companies making environmentally-friendly products like clean energy. Abax, which is promotedby Morgan Stanley, plans to raise US$73 million fromChinese investors in the first round. Abax came intoexistence in 2007, and initially focused on investing incompanies that managed transactions like mergers andacquisitions, asset sales and large share buybacks. According to Donald Yang, president, Abax, "From a business point of

view, having a single strategy is risky. What we’re trying to dois to build a platform with multiple strategies." Earlier thisyear, Abax raised US$50 million from a small group of highnet worth individuals in China for funds that focus onpublicly issued, frequently traded high-yield and convertiblebonds.

Risk of Double-Dip Recession?

Nouriel Roubini, the New York University professor whopredicted the financial crisis, has said in the press that thechance of a double-dip recession is increasing due to risksrelated to ending global monetary and fiscal stimulus.

According to Roubini, the global economy will bottom out in the second half of 2009 and the recession in the US, UK,and some European countries will not be "formally over"

before the end of the year, while the recovery has started innations such as China, France, Germany, Australia and

Japan. Governments around the world have pumped in US$2 trillion to revive their economies. Government and

NEWS



economy out of its recession. This is in addition to a 116.7billion- baht stimulus package implemented in the first half of 2009.

Banco do Brasil to Increase Lending

The largest lender in Latin America - Banco do Brasil, isplanning to double credit to individuals over the next few years as a drop in interest rates have increased demand forcar and home loans. Personal loans may contribute to 50percent of the bank’s total credit portfolio, up from 27percent in the second quarter. The bank’s net interest marginincreased to 7.3 percent in the second quarter from 7.1percent a year earlier. The bank has regained its position asLatin America’s largest bank in the second quarter from SaoPaulo-based Itau Unibanco. Banco do Brasil is also awaiting US regulatory approval to start a retail business in the US

this year to serve the population of Brazilians living there.The bank also has plans to expand in Africa and Asia, withmore than 10% of earnings in future targeted frominternational markets.

Nigeria Fires Five Bank Chiefs

Nigeria’s central bank Governor Lamido Sanusi recently fired the CEOs of five banks due to a debt crisis in theindustry, and has announced that the central bank wouldinject around US$2.7 billion into the banks. Nigeria’s anti-graft agency is seeking the former CEOs of two of the five

banks that received cash injections from the central bank.Cecilia Ibru of Oceanic Bank and Erastus Akingbola of Intercontinental Bank are wanted in connection withfraudulent abuse of credit process, insider trading, capital market manipulation and money laundering, according tothe Economic and Financial Crimes Commission. Both Ibruand Akingbola have moved the Nigerian court and arechallenging their dismissals.

Standard Chartered to Sell Insurance in Africa

Standard Chartered has entered into a six-year agreement with Sanlam Ltd to sell its life insurance products in five African countries. The agreement includes StandardChartered’s units in Botswana, Tanzania, Ghana, Zambiaand Kenya. In addition, Standard Chartered is also planning to expand its bancassurance business in the region toprovide cover for illness, funeral expenses, savings andeducation.

Philippines Stocks Hit Seven Month High

The Philippines benchmark stock index rose to its highest point in seven months on expectations that it has avoided arecession in the second quarter and is poised for an

economic recovery later this year. Diwa Guinigundo, deputy governor of the central banks, said that economic prospectsare much stronger and policy makers will keep rates steady for as long as necessary. The Philippines economy is

believed to have expanded 0.9 percent last quarter, ascompared to a low of 0.4 percent in the previous threemonths.

Bank of China to Increase Real Estate Lendingin the UK

Bank of China, which is expanding into the real estatelending business in the UK, is looking at cherry-picking prime borrowers from British lenders. The Chinese bank islooking at attracting customers with good credit histories

who are struggling to get new mortgages or restructure theirdebts from traditional real estate lenders in the UK. WhileBank of China was earlier focused on lending to the ethicChinese community in the UK, it is now expanding itshorizons, and is signing up mortgage distributors consisting of around 15,000 brokers to sell the bank’s home loan

product. Bank of China currently employs 250 people in theUK, and aims to raise its loan-to-deposit ratio in the UK from the existing 30 per cent to around 70 percent.

ASIC to Gain New Powers to Supervise Markets

The Australian government will bestow new powers on thecountry’s corporate regulator to supervise real-time trading on all domestic licensed markets. The Australian Securitiesand Investments Commission (ASIC) will be responsible forsupervision as well as enforcement of the laws against misconduct on Australia’s financial markets, said treasurer

Wayne Swan recently. In the existing scenario, theresponsibility for day-to-day supervision of trading,investigations into possible breaches, and providing referralsto ASIC rests with ASX Ltd. According to Anshuman

Jaswal, an analyst with Celent, "The reduction of regulatory powers of ASX was necessary in encouraging competitionin the Australian equity markets and the possibility of entry into the Australian market from end-2010 onwards is anexciting opportunity for the exchanges in Asia. Leading exchanges such as those in Tokyo, Shanghai, Singapore andHong Kong, and also NSE and MCX (operated by Financial Technologies) in India, should see this as an opportunity toexpand their global footprint and establish themselves in aneconomy which has weathered the recent economic crisisrelatively well." The implementation is expected to takeeffect by the third quarter of 2010, and will announce atransition plan after the legislative framework has been set up.

Ahli United to Increase Stake in Egypt and Iraq

Bahrain-based Ahli United Bank has announced that it plansto increase its stake in lenders in Iraq and Egypt. The bank,

which is the largest commercial lender in Bahrain, hasreceived approval from the Egyptian central bank to raise its

stake in Ahli United Bank Egypt to 90 percent, up from 35.3percent. Ahli United has also received an approval from theIraqi central bank to increase its stake in Commercial Bank of Iraq to 75 percent, up from 49 percent.

14

NEWS



15

ARTICLE

The New

World Order Life After the Recession

together to evolve into a pattern, governments rushed in tosave these banks, announcing measures and bail-outs. There

was debate and opposition, but eventually, billions of dollars

were pumped in. With this life-support in place, effortsmoved onto measures to make the financial sector moreresilient. Evaluation of policies and regulations of countriesthat emerged with banks intact from this crisis revealed that stricter controls and guidelines to regulate the industry wasthe key. This is no doubt an oversimplification of prevailing conditions and their ramification, but this is where all theimmediate changes are bound to happen.

Preparing for Take-off: Altering the Basics

The financial sector overhaul is inevitable. The USgovernment has been very open in its criticism of the way companies conduct business. There is however more to it than just competition and risk appetite. Evidently theregulatory system was ineffective, inward looking and couldnot keep up with the changing demand and supply pattern inmarket. The last couple of months have indicated the courseof the industry going forward - the direct fall out of thiscrisis include increase in government role, decline inconsumer spending and basic policy and procedural changes in banks. The impact of the recession, correctivemeasures and their repercussions will initiate not only functional metamorphosis in banks, but will alter consumerhabits and national economies.

Bail-out: Governments to Control Strings

The one common line of thought that has emerged as the

All through the second half of last year, the financial sector went through some of the most defining events of therecessionary period. Analysts speculated on likely financial

players that would crumble under pressure and then laidthreadbare the causes and effects. Banks are perceived as therock-solid institutions with expertise and control on all matters related to money, not just their own but also theinvestors. The recent collapse, against popular perceptions,left no doubt about their vulnerability. Together, they left investors and eventually governments alike with gaping holes in their pockets. Take-overs and bail outs changed theface of the industry and economies across continents.

Build-up to the Alarming Scenario

The looming recession was evident as early as 2007. Therisks associated with sub-prime mortgage played out at its

worse. Oppressive competition in housing-loan segment andprofitability driving all decisions, risks were ignored.Housing sector went under, leading to the crippling mortgage market collapse. The number of defaulters caught banks and other financial institutions on the wrong foot. Asthe financial sector crumbled, wealth and savingsdisappeared. In the ensuing crunch, companies acrossindustries were left with no recourse and job cuts became

very much a part of corporate life. As per US Department of Labour, the number of people who have lost jobs sincethe star of recession was pegged at 6.5 million at the end of

June 2009, and the unemployment rate is at 9.5%. Europe isnot far behind with an unemployment rate of 9.2%.

Even as the erroneous judgments were being strung



world economy struggles and looks ahead to post recessiondays - regulations are mandatory and here to stay. Bail out packages removed all possibility of resistance to regulatory initiatives and bodies going forward. Issues in formoderation are interest rates, possible areas of business,business models, requisite minimum capital, risk management, borrower profiles etc.

Government involvement that started with bail outs will continue with insistence on compliance. For instanceObama’s Financial reform plan has increased the scope of responsibilities of Federal Reserve with different mandatesfor large and mid-sized firms. A new bank agency, theNational Bank Supervisor was established to monitornational banks, including federal branches and agencies of foreign banks. Requisite capital requirements and credit exposure are under scrutiny.

Among the various lessons that this slowdown taught theglobal market, one was how the erstwhile frowned uponregulated financial sector in some nations, withstood thetest. Canada and Australia are free economies yet certainmandates helped banks and economies tide over the crisis,

without external aid. While there seem to no immediatemeasures to nationalise banks that have under-performed,policy interventions are imminent.

Holding on: Consumer Spending Declines

Apart from these long-term measures, change in consumerspending pattern will have immediate effect on the banks.The effect will be manifold, as it will directly impact earnings, business opportunities and growth strategies of the banks. Expenditures will decline across both classes of customers - individual and corporate.

The ripple effect has been reduction in credit card usage by retails customers especially on the ‘nice to have’ luxuriousitems. A chunk of bank earnings are from ‘interchange’charges levied on retailers and roll-over charges paid by cardholders. While realisation of earlier defaults is an issue,further decrease will force banks to change their schemes.Customers prefer to hold on to their cash, and are placing them in safe accounts. This reduces the opportunities forbanks further. Loan facilities is another form of revenuestream for banks, and one that is depleting fast. Job cuts anddevalued investments have hit the consumers hard. Chancesare that they would not want to increase their liabilities.Considering interest rates will be high with added emphasison borrower profiles, chances are that loan seekers will deferdecisions.

Secure Landing: Accruals and Rebuilding

There is complete consensus that the road back is unwieldy and long. Though there are some reports of positive growthfrom some countries, banks having repaid some part of financial help, markets creeping up, etc, these are few and far

between. Colossal gains, consistently over a long period areneeded to offset the recent overt losses - no doubt underlining the ultimate catchphrase - easier said than done.

Product portfolio: Going back to the root, the financial sector, where most of these aforementioned arguments will create an impact - will witness drastic remodeling in thestructure. These institutions under the circumstances, wheregovernment involvement has gone up, and consumers arecautious, will have to revamp their product portfolio. Theportfolio will have to optimise returns, minimise risk anddiscourage malpractices.

Risk aversion: With almost all banks and companies re-evaluating their exposure to risks, viability and strength of financial relationships are under scrutiny. Investments andlending deals are under the scanner. Interbank exchanges are

cautious, reflected in increased LIBOR. Individual investorsare opting for safer investment options, even if that meanslower returns.

Slower growth: Credit availability has squeezed, andinterest rates are up. Liquidity issues are cropping up, andfunds to tide over these challenges are hard to come by.Companies are postponing their expansion plans, their

working capital requirements are pending, jobs are being cut,and almost all industries predict much slower growth rates incoming quarters. Margins will be affected as almost all sectors are battling for survival.

Likely weakening of USD: The US was one of the worst affected countries, and the volatility had an adverse impact on the strength of USD. Even during the crisis, a number of companies and countries started on attempts to reduce theirover dependence on USD. They have used alternatecurrencies to invest, to conduct business, and plan tocontinue diversification for further transactions.

Leaner finds favour: While job cuts were painful, they didhelp cut the flab. Job cuts were most rampant in the US, andexperts opine that the lean economy may find it easier thanothers to be back on track.

While the governments issue blanket decisions on thefinancial sector, self discipline by banks and financial institutions will definitely be more effective. Risk management is crucial for survival. These institutions must determine what businesses they would like to engage in andcontinue with those without getting pressurised by competitors, and other new businesses. Forays into new linesof businesses have to be backed by reason, and be subjectedto pre-requisites. Interest rates are determined on risk factors associated with borrowers, which ideally then shouldnot spiral out of control, as borrower profiles are scrutinised

and risk is capped. With margins under pressure now, this ismore critical than ever. Self regulation and self discipline by the industry will encourage its otherwise slow return tonormal.

16

ARTICLE



17

SOLUTION SPOTLIGHT

AGILIS Core

Insurance A solution for insurance companies

from Agile FT

the point of getting a proposal for new policy up to theissuance of the policy (or any other disposal of theproposal). The proposal goes through a number of checks,

validations and decision points before the insurancecompany issues or rejects the proposal. The system handlesproposal entry (including scanning of documents), tracking,

verification, scrutiny, automatic and manual underwriting,collection of first premium, and issue of policy document.The new business feature enables consistency of processand improved turn-around-time leading to higher levels of customer service.

Workflow

The solution can be configured to a specific workflow toreflect the desired business process. While the solutioncomes pre-configured with a proposed business workflow,there are provisions in the system to change this workflow.This enables the automation of movement of a transactionthrough its life cycle in the system, coupled by the scannedimages of the associated documents.

An automated workflow ensures that the policy document travels through a defined business process, which eliminatesdelays in processing that may otherwise take place.

Policy Management

This module enables capture of transactions pertaining topolicy after its issue, such as receipt of renewal premium /recurring premium, alteration of fixed information of thepolicy, policy lapse, reinstatement or surrender.

As insurance companies, both conventional and Islamic(Takaful), strive to create innovative business models, reducecosts and increase market share, the limitations of their

current processes, software and infrastructure are majorimpediments in achieving these business objectives.

In addition, insurers have to deal with the nuances of soliciting and servicing customers both directly, and throughintermediaries.

Most insurers frame strategies that attempt to differentiatetheir products and target market segments to win customersets from competitors. This drives a need for more product sophistication and quality market data, sometimes acrossgeographic boundaries.

Emerging markets represent a significant businessopportunity for insurers, but the rules and requirements todo business in such markets are very different. In their quest for meeting changing customer demands, increasedregulation, and creating innovative business models,insurance companies need a technology platform that cantruly support their changing needs without affecting theircapital allocation and operating expenses to a large extent.

AGILIS Core

The features of AGILIS Core include:

New Business

The new business feature handles the business process from



18

SOLUTION SPOTLIGHT

Underwriting

The underwriting module supports both automatic andmanual processes, with complete flexibility to theinsurer while defining the rules. It has the ability toanalyse the current data about the proposer, combine it

with past experience data about the proposer and thetotal risk cover in force, and then approve the case withappropriate cover and premium. The system supportsmanual intervention as per the defined workflow.

Channel Management

This module keeps track of the distribution channel through which a proposal was received, policy issued,and commissions processed. The software maintainsidentity of the distribution channels, their members,

and the relationships between the members, including hierarchical relationships.

It is capable of dealing with multiple channels such asemployees, agents, brokers and bancassurance partners.In addition to tracking training, computation of productivity, contests and rewards, it also handlespayment processing to channels in an automatedmanner.

Security

The solution provides security at the data, usage androle levels, enabling the organisation to enable specificusers to handle specific functions only. All authorisedusers of the solution are protected by their uniqueidentifiers and passwords, and are governed by thepermissions given by the system administrator. Theapplication maintains an audit trail of all activitiestaking place in the system. This enables completetracking of all actions matched with the identity of theuser who carried out the action.

Claims Management

The benefits management function services the claimsmade by the beneficiary and provides simplifieddocument handling, with all documents pertaining to aclaim scanned and integrated into the defined workflow,including steps like receipt of first intimation of loss,receipt and verification of claim documents, payment decision and settlement.

Management Reports

The system allows for generation of management reports related to operational control as well as service

levels pertaining to all processing. Reconciliation andexception reports are also available in the system, as arereports on business performance, trends and regulatory compliance.

Insurance PHB Accelerates Pace with AGILIS

Nigeria-based Insurance PHB has signed an agreement withAgile FT to implement AGILIS Core Insurance.

The implementation will be overseen by FASYL, Agile FT’spartner in Nigeria. The selection of the core applicationsoftware from Agile FT was made after an extensiveevaluation process that included detailed workshops and sitevisits to existing clients of the software. Insurance PHB'sintention is to create a strong technology backbone that wouldbecome a foundation for its growth strategy. When fullyimplemented, the software will improve turnaround time ofoperations in the company.

As an integrated comprehensive solution for insurance

companies, applying powerful tools that cover the entirebusiness cycle from underwriting and claim management toreinsurance and accounting, AGILIS Core Insurance willenhance Insurance PHB's business processes. Employing amodular and parametric approach to management of theinsurance business and deploying its enterprise wide, web-based technologies, AGILIS will ensure quick, accurate andeasy access to information. The online portals are expectedto greatly enhance interaction between Insurance PHB'sclients, sales force and agents, as well as provide acompetitive edge in expanding its distribution network.

Speaking at the signing ceremony, Anselem Igbo, ManagingDirector, Insurance PHB, said the partnership between thetwo companies is a mutually beneficial arrangement, whichgives Insurance PHB the opportunity of offering seamlessservices to its clients. By deploying state of the art technologyoffered by Agile FT, this project will set an industry benchmarkon the timely and effective use of technology within Nigeria,especially as web services and AGILIS’ robust technologyframework will result in creating new possibilities in clientservicing in Insurance PHB.

Kalpesh Desai, CEO, Agile FT, pledged the readiness of hisorganization to demonstrate new possibilities for InsurancePHB and was confident that Agile FT's systems andprocesses will be the foundation and enabler of InsurancePHB's vision of growth and expansion of its market share.

Bade Aluko, CEO, Finance Application Systems Limited(FASYL), said that with its wealth of experience of Nigeria'sfinancial industry, their alliance with Agile FT promises to offercustomers in Nigeria access to best-of-breed solutions,backed by strong service, and will support organizations toachieve mutual long-term success. He expressed confidenceon AGILIS as a solution that is proven, scalable and reliablewhose tools are very well integrated. Aluko said organizations

can take advantage of FASYL'S presence in Nigeria and theirunderstanding of the business requirements to partner withthem on similar projects.



www.agile-ft.com

Views expressed in this publication do not necessarily represent the views of Agile FT and the information contained herein is only a brief synopsis of the issues discussed herein. Agile FT makes no representation as regards the accuracy and completeness of the information contained herein and the same should not be construed as legal, business or technology advice. Agile FT, the authors and

publishers, shall not be responsible for any loss or damage caused to any person on account of errors or omissions.

Agile Financial Technologies808-A, Business Central Towers

TECOM, Dubai Internet CityP.O. Box 503007

DubaiUnited Arab EmiratesTel: +971-4-4331825

Fax: +971-4-435-5709

Agile Financial Technologies Pvt Ltd701-A, Prism Towers

Mindspace, Malad (West)Mumbai 400064

IndiaTel : +91-22-42501200Fax: +91-22-42501234

Agile Financial Technologies Pte Ltd20 Cecil Street, #14-01

Equity PlazaSingapore 049705Tel: +65-64388887Fax: +65-64382436



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Agile Financial Times August 2009 Edition

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