BEAT THE STREET

Road Map for NBFC to Banking

A Finance Case Study

Contents Introduction .................................................................................................................................................. 3

Business Segments ........................................................................................................................................ 4

Consumer Finance .................................................................................................................................... 4

Corporate Finance ..................................................................................................................................... 5

Others ....................................................................................................................................................... 6

Banking Sector Overview`6

Key Statistics ............................................................................................................................................. 7

Government Initiatives ............................................................................................................................. 8

Key Deliverables ............................................................................................................................................ 9

Financial Summary of ABC Bank ................................................................................................................. 10

Annexure A .................................................................................................................................................. 12

Format & Other details ............................................................................................................................... 12

Key Guidelines……………………………………………………………………………………………………………………………………….12

Introduction

Date: September 30, 2011

Venue: Corporate Office, ABC Finance Limited.

The Union Finance Minister, in his budget speech for the year 2010-11 had announced that ‘The

Indian banking system has emerged unscathed from the crisis. We need to ensure that the

banking system grows in size and sophistication to meet the needs of a modern economy.

Besides, there is a need to extend the geographic coverage of banks and improve access to

banking services. In this context, I am happy to inform the Honorable Members that the RBI is

considering giving some additional banking licenses to private sector players. Non Banking

Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.’

Ever since this announcement by Finance Minister Mr. Sarabhai, Chairman of ABC Finance

Limited is excited about the new licenses. He is sure that ABC Finance Limited will meet the

criteria to get banking license.

Mr. Sarabhai calls for a meeting of the top management and discusses the plan of action for his

firm in terms of expansion and growth. He has a vision to grow the business of ABC Finance

Limited once they get the banking license.

Suppose you are the head strategist at ABC Finance Limited, and RBI has given a banking

license to ABC Finance Limited. Mr. Sarabhai, Chairman of ABC Finance Limited has asked you

to draft a strategy for growth and expansion in the next 5 years.

About ABC Finance Limited

The Company has created unique, common sales and service structure which dovetails all

consumer finance & advisory products and services into a common branch network. This

translates into a ‘one stop shop’ for the customer servicing his entire financial requirements

through a ‘single window’.

Business Segments

Consumer Finance

It offers a wide range of products which include home loans, loans against property, SME loans,

commercial vehicle loans, auto loans, loans for construction equipment, and loans against

securitiesand infrastructure loans

Two-wheeler financing

Riding on the back of a robust two-wheeler sales growth, loan deployment in this segment grew

by 37% YOY. ABCFL’s two wheeler financing is available across 151 dealership locations and 870

sub-dealers across the country. The company acquired more than 112,000 customers in the

year, representing a 28% growth over the previous year.

Consumer durables financing

This business is present in 69 cities of India. Consumer durable financing deployment grew by

68% to Rs. 492 cr. in FY2011, versus an estimated industry growth of 31%. The company

acquired over 56,000 new customers, and is currently present in over 1,200 points of sale

across the country. ABCFL’s strategy of focusing on relatively affluent customers and major

dealerships has yielded benefits through lower operating costs and improved risk performance.

Personal loan cross-sell

This business is present in 68 cities of India. It targets customers with good repayment history

of their two-wheeler and/or consumer durables loans to cross-sell a personal loan. ABCFL grew

this business in a cautious manner in FY2011. During the year, deployment under this category

grew by 46% to Rs.820 cr. ABCFL financed 140,500 new customers in FY2011.

Vendor financing

ABCFL started to grow this new line of business in the current year. It focuses on short and

medium term lending needs of vendors of large auto manufacturers.

Mortgage business

Present in 23 cities of India, the business targets affluent and high net worth small business

customers, and offers loans against the mortgage of retail, residential and commercial

premises.

Corporate Finance

Infrastructure Finance Business

The company has started its foray in infrastructure finance and sanctioned loans worth Rs. 2050

cr.The Company also launched its construction equipment finance business during FY2012. It

focuses on financing small, mid and large strategic contractors for their construction equipment

financing needs. This is asset-backed financing collateralized by the construction equipment

assets. During the first year of operation, the company deployed Rs.1694 cr. and added some

42,900 customers.

SME loans

This is present in 23 cities across India. Small business loan deployments grew by 51% to Rs. 870

cr. in FY2011. The Company’s strategy of focusing on affluent SME and its cautious approach

has helped it to steadily grow this business without unwarranted risks.

Others

Securities Business

Under this vertical the company provides Equity Research, Advisory and Broking for both

institutional and retail customers. It also provides Wealth Management services to clients.

Investment Banking

This includes M&A Advisory, Debt and Equity Capital Market services for institutional and

corporate enterprises.

Private Equity

This includes Private equity investments in India and overseas. ABCFL continues to evaluate

investment opportunities in the promising and fast growing sectors viz., consumer durables,

auto components, power equipment manufacturer, print & media and fashion & designer

apparel.

Banking Sector Overview

The banking sector in India is expected to have another good year during 2011, with growth

being propelled by factors such as good economic growth, favorable demographics and low

penetration, according to a report titled ‘Indian banks are likely to ride an economic growth

wave’, by research firm Standard & Poor’s.

The country’s economy grew by 8.5 per cent in the last fiscal and the government expects

the growth impetus to continue this year as well

More than 50 per cent of India’s population is under the age of 30 years, which is a major

target group for banks

Penetration of banking services in the country remains low. The government has set targets

to provide banking facilities to all areas with a population of over 2,000 by March, 2012.

In the last decade, the sector witnessed many positive developments, as policy makers which

comprise the Reserve Bank of India (RBI), Ministry of Finance and associated government and

financial sector regulatory entities, made several distinguished efforts to improve regulation.

Key Statistics

The banking sector in India is well capitalized, with capital ratios being above the global

average. The average tier-1 Capital Adequacy Ratio (CAR) of the Indian banking industry is

above 10 per cent compared to the Basel III norm of 8.5 per cent including the contingency

buffer.

The banking sector in India has made significant progress in the last five years – the growth is

well reflected through parameters including profitability, annual credit growth, and decline in

non-performing assets (NPAs).

During the last five years, while the annual rate of credit growth was 23 per cent, profitability

was maintained at around 15 per cent.

The total assets size of the banking industry rose by more than five times between March 2000

and March 2010 - from US$ 250 billion to more than US$ 1.3 trillion - a Compound Annual

Growth Rate (CAGR) of 18 per cent compared to the average GDP growth of 7.2 per cent during

the same period.

Efficient internal capital generation, fairly active capital markets, and strong support from the

government ensured good capitalization for most banks. The overall CAR reached 14 per cent

as on March 31, 2011. High levels of public deposits also ensured a comfortable liquidity profile.

While the Indian banking sector is characterized by the presence of a large number of players,

the top 10 banks accounted for a significant 57 per cent share of the total credit as on March

31, 2011.

With respect to gross bank credit, nationalized banks had the highest share of 51.6 per cent in

the total bank credit. They were followed by SBI and its associates at 22.7 per cent and new

private sector banks at 13.7 per cent. Foreign banks, old private sector banks and regional rural

banks had comparatively lower shares in the total bank credit at 5.1 per cent, 4.5 per cent and

2.5 per cent, respectively.

Real GDP growth for 2010-11 was estimated at 8.6 per cent. Signs of moderation, however,

emerged in the second half of the year. Particularly significant were the slowdown in capital

goods production and investment spending. Going forward, high oil and other commodity

prices and the impact of the anti-inflationary monetary stance will weigh on growth. Most

business confidence surveys conducted by various agencies show a decline in business

confidence.

Government Initiatives

The policy makers for the banking sector, which comprise the Reserve Bank of India (RBI),

Ministry of Finance and related government and financial sector regulatory entities, have made

several notable efforts to improve regulation in the sector. These changes include:

Strengthening prudential norms

Developing the payments system

Integrating regulations between commercial and co-operative banks

To support capitalization, the government has infused Rs 23,200 crore (US$ 5.2 billion) into

state-owned banks during the last three fiscals

With financial inclusion being a key program for RBI and the government, the central bank

has decided to give private banks a push to go rural. The RBI has, in its circular, said that

banks should open at least 25 per cent of the branches under the annual branch expansion

plan in un-banked rural centers

Reserve Bank of India’s (RBI) recent draft guidelines on issuing new bank licenses have

generated significant excitement among companies that have been waiting for RBI’s move on

the subject. The step will encourage competition, which will result in lower interest rates and

customized loan and deposit products for the consumer. Considering that banking penetration

of loans and deposits in India is extremely low—mortgage as a percentage of the gross domestic

product (GDP) in India was 7% compared with an average of 22.5% in other developing

countries and 80% in the US (2008 statistics)—more competition and greater financial inclusion

are worthy policy objectives to pursue while managing the inherent risk that goes with such a

change in licensing regime

The license will help ABC Bank to substantially expand its current range of services in the Indian market. ABC application for this license is part of the Bank's international strategy to expand its activities in major growth markets

With the banking license, ABC will broaden its product suite. ABC bank will be able to accept deposits and use its balance sheet to provide working capital financing to clients. The license

will also permit the Bank to deal in foreign exchange, domestic fixed income products and trade finance.

Key Deliverables

Targets for ABC Finance Limited (in terms of profit, loan book, distribution network and

others)

Financial and Marketing strategy for ABC Finance Limited for a period of 5 years.

Projected Financials for next 5 years (till March 2016)

Risks anticipated and Mitigation strategies

Financial Summary of ABC Bank

Balance Sheet for ABC CAPITAL (In Cr.):

Annexure A

Format & Other details

Submission should include a PowerPoint presentation for strategic plan (not more than

15 slides) and an Excel for financial plan.

Please submit a detailed excel for the financial plan, with a separate sheet capturing the

assumptions used in building the model. Please add 1-2 slides presenting snapshot of

the model, and capturing the key assumptions used in building the model.

Wherever data sources are referred to (industry data), clearly indicate the source of

data.

SMEs 12%

Mortgages 23%

Auto 6%

Commercial Vehicle

16%

Personal 10%

Infrastructure Finance

33%

Loan Book Composition

Rules and Regulations

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φ A team must consist of 2/3 members (bonafide Management School Students only) from the same

institute, but can be from different programs.

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φ There is no restriction on number of teams from the same institute.

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The front slide should carry

Institute Name & address

Team Name

Details of the team members (Name, Course, Email IDs, Phone nos.)

φ These details of the participants SHOULD NOT appear anywhere else in the entry submitted.

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“Beat the Street<space>College Name<space>Team Name” .

Team Name: eg: Invincible (to be decided by the team)

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participation within a day of receipt of the mail, failing which the next best team in order of ranking

of all submissions would be invited.

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φ The finalists shall be reimbursed for 2-way sleeper tickets for the shortest distance between

NITIE and their college.