Asset Liability Management in Idbi Bank

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					World Bank Finance Forum
- Washington
Nachiket Mor – Executive Director, ICICI Bank
Email: nachiket.mor@icicibank.com

September 22, 2004
    Agenda

    Why focus on infrastructure finance

    Lessons from the past

    Way forward

    Case for Infrastructure Fund

    Conclusion


2
    The Need to focus on infrastructure
    finance
    Infrastructure is the backbone of any
    economy
    Projected need for finance in the sector is
    large

    Specialised nature of infrastructure finance




3
       Capital needs for infrastructure
       financing
                                        • In the form of equity capital
                                          or subordinated debt
                     Explicit Capital   • Provided by Promoters and
                                          other stake holders



    Infrastructure
    finance


                                        • Risk Capital provided by
                                          lenders
                     Implicit Capital   • Upside limited to interest
                                        • Leverage to Equity holders




4
    Agenda

    Why focus on infrastructure finance

    Lessons from the past

    Way forward

    Infrastructure Fund

    Conclusion


5
    Evolution of DFIs - International
    Scenario
     Oldest Institution – Society Generale pour
     favoriser I’Indurtrie established in France in
     1822
     Formed to promote strategic industrial sectors
     and social and economic development
     Channel for government support to the priority
     sector
     Historically DFI’s played a key role in rapid
     industrial development of Europe and Japan




6
    International experience of DFIs
       Government has been provider of risk capital and
        debt funds within integrated development banks
          China, South Korea and Japan have been willing to
           let DFIs build large NPAs
          Chinese banks allowed to write-off bad loans by
           actively capitalising banks
                USD 32 billion and USD 45 billion capital infused in
                 1998 and 2003
       With financial sector reforms, DFIs have
        diversified into related activities (Korea, Brazil), or
        converted into universal banks (Singapore)

    Learning from Indian experience……………


7
    Evolution of DFI’s in India
            Pre DFI Era            Private sector shied from
                                   making large investments in
    What was the need for DFI’s?   the infrastructure sector

             Features              Government forced to take
                                   up the responsibility
            Advantages

         How credit growth
           happened?
           Constraints

       Recent developments




8
    Evolution of DFI’s in India
            Pre DFI Era            Government funding not an
                                   effective route
    What was the need for DFI’s?
                                   Banks were reluctant to
             Features              lend large amounts for long
                                   tenor
                                   Capital markets were
            Advantages             underdeveloped

         How credit growth
           happened?
           Constraints

       Recent developments




9
     Evolution of DFI’s in India
             Pre DFI Era            Directed Lending

     What was the need for DFI’s?   Largely owned by the
                                    government
              Features              Access to longer tenor
                                    funds
             Advantages             Technical expertise in
                                    respective areas
          How credit growth
            happened?                IDBI
            Constraints              ICICI
                                     IFCI
        Recent developments
                                     IDFC
                                     UIDF




10
     Evolution of DFI’s in India
             Pre DFI Era            One stop shop for finance
                                    in respective areas
     What was the need for DFI’s?
                                    Subsidised funds (grants,
                                    tax breaks)
              Features
                                    Limited regulatory
             Advantages             restrictions
                                    Ability to commit long tenor
          How credit growth
                                    funds
            happened?
            Constraints             Provide technical support
                                    wherever required
        Recent developments




11
     Evolution of DFI’s in India
             Pre DFI Era            Cumulative disbursements by All
                                    India Financial Institutions for
     What was the need for DFI’s?   infrastructure sector till March
                                    2003
              Features              Sector                                  Amount
                                                                          (USD billion)
             Advantages             Power                                        10.92
                                    Telecommunication                             2.86
          How credit growth         Roads/Ports/                                  1.54
            happened?               Bridges/ Railways
            Constraints
                                    Others                                        0.70

        Recent developments         Total                                        16.01
                                        Source :IDBI report on Development banking in India




12
     Evolution of DFI’s in India
             Pre DFI Era            Closed economy
                                    Concentration of risk in
     What was the need for DFI’s?
                                    bulky assets
              Features              Underdeveloped capital
                                    markets
             Advantages
                                    Limited exit opportunities
          How credit growth
            happened?
            Constraints

        Recent developments




13
     Evolution of DFI’s in India
             Pre DFI Era            Trends in financing by
                                    Financial Institutions
     What was the need for DFI’s?
                                    Withdrawal of concessional
                                    sources of finance for DFI’s
              Features
                                    Excess liquidity forces
             Advantages             banks to venture into new
                                    areas
          How credit growth         Blue chip companies are
            happened?               able to raise cheap funds
            Constraints             directly from the market
                                    and hence shrinkage of
        Recent developments         margins




14
     DFI’s in India were not able to maintain their
     viability in the long run.




     Though there is abundant liquidity in the
     system, there is shortage of risk capital




15
     Lessons from the past (Indian Experience)

                        Risk shared among larger
     Diversification    number of investors

       Market           Provide exit opportunities to
     Development        investors

        Capital         Thinly capitalised entities not
      Requirement       viable in long run

      Regulatory        Act as deterrents to
      constraints       investment




16
     Agenda

     Why focus on infrastructure finance

     Lessons from the past

     Way forward

     Case for Infrastructure Fund

     Conclusion


17
     Government’s role as facilitator
                       Government to provide risk
      Risk capital     capital, whereas market can
       provider        provide funding -First Loss
                       Default Guarantee (FLDG)


      Create few        Risk may be managed on
      very large         own balance sheets
       entities         Diversification benefit


                        Policy  initiatives to
      Regulatory         facilitate funds flow
       changes          Market Development




18
     Facilitating the flow of funds
                  Enhancing the role of Banks
       Banks
                     Commercial banks are best placed
                      to play the role of intermediaries
      Insurance
      Companies      Benefit of diversification of asset
                      base
       Pension       Large number of smaller banks can
        funds         invest thereby diversifying the risks
                     Appropriate regulatory incentives
        Retail        required
      Investors   Constraints
                     No single bank can commit large
                      amounts required for infrastructure
                      finance



19
     Facilitating the flow of funds
                  Long term investors
       Banks
                     Insurance companies are natural
     Insurance        investors in infrastructure sector
                      on account of long term liabilities
     Companies
                     Diversified liability base
       Pension    Constraints
        funds        Exit Opportunities
                     Regulatory restrictions
        Retail
      Investors




20
     Facilitating the flow of funds
                  Long term investors
       Banks
                     Debatable whether they should
                      invest in high risk infrastructure
      Insurance
                      lending
      Companies
                     Liability diversification benefit
      Pension     Constraints
       funds         Regulatory constraints
                     Require Risk free investment
        Retail        opportunities
      Investors




21
     Facilitating the flow of funds
                  Highest savings among household
       Banks
                     Willingness to save in long term
                      assets
      Insurance
      Companies         Deep discount bonds of long
                         maturity
       Pension          Post-office savings and pension
        funds            funds
                  Constraint
        Retail       Holds risk-free investments instead
      Investors       of risky ones even at negative real
                      returns




22
     Government’s role should be restricted to
     encourage the flow of funds to finance the
     large needs of infrastructure finance




23
     Agenda

     Why focus on infrastructure finance

     Lessons from the past

     Way forward

     Case for Infrastructure Fund

     Conclusion


24
     Infrastructure fund

                          Banks




                       Infrastructur     Retail
           Insurance                   Investors
           Companies         e
                          Fund


                          Pension
                           Funds




25
     Infrastructure fund
      Consolidate project management skills in a
      single vehicle : Investors not equipped

      Since asset diversification difficult due to
      nature of assets, liability diversification is key
      Enhance returns by investing in “equity” and
      “debt” in a balanced manner

      Exit opportunities available by transfer of
      “Units” – Units can be listed on any exchange




26
     Way Forward – Infrastructure fund
      Upfront financial commitment to provide
      appetite to bid for large projects

      Minimal regulatory cost/restrictions

      Investors in the fund can capture upsides in
      any sector/ instrument




27
     International Scenario - Funds
                           •European infra fund
        Geography
                           •Africa infra fund
        based funds
                           •India infra fund


      Sector specific      •Energy
          funds            •Airports
                           •Ports


                           •Debt
        Instrument
                           •Equity
      based schemes
                           •Sub-bonds / Mez


28
     India Infrastructure Fund LLC (IIF)


     Sponsor      AMP Capital Parrtners, Australia
     Launched     November 1999
     Size         USD 100 million
     Term         10 year closed ended fund
     Objectives   Infra projects in India
     Focus        Telecom, Oil & Gas, Transportation
     Current      Bharti Televentures
     Investment   Indraprastha Gas
     Portfolio    Gujarat Pipavav Port
                  Tata Tele (Mah)




29
     Macquarie European Infrastructure
     Fund (MEIF)

     Sponsor          Macquarie Infra Group, Australia
     Launched         April 2004
     Term             10 year closed ended fund
     Size             $ A670 million
     Target segment   Pension funds
     Objectives       Essential service projects with
                      predictable cashflows in OECD
                      countries
     Current          South East Water plc
     Investment       Arlanda Express rail link
     Portfolio


30
     Africa Infrastructure Fund


     Sponsor      IFC, AIG, African Devt Bank
     Launched     Mar 2004
     Size         USD 500 million
     Term         10 year closed ended fund
     AMC          Emerging Markets Parnership (a
                  Washington bassed AMC)
     Objectives   Infra projects in Africa




31
     Macquarie Power Income Fund

     Sponsor      Macquarie Bank
     Launched     April 2004
     Term         Open ended scheme
     Objectives   Investment in power utilities in US
                  and Canada
     Size         Can $ 212 million
     Listing      Toronto Stock Exchange
     Current      156 MW plant, Ontario
     Investment
     Portfolio
     Risk profile Low risk – utilities in commercial
                  operation


32
     Agenda

     Why focus on infrastructure finance

     Lessons from the past

     Way forward

     Case for Infrastructure Fund

     Conclusion


33
     Conclusion
     Government to play an active role as a
     facilitator
     DFI’s in India are not viable in their present
     form
     Need for a layer of credit enhancement to
     channelise the surplus liquidity
     Market development is a key to widen the
     investor base
     Infrastructure fund : Possible bridge between
     needs of borrowers and lenders/investors




34
     Thank you




35
          Infrastructure sector - opportunities
          Sector growth rates (%)
40%                                    37%
                                                 Road      and  Telecom
32%                                               sectors are expected to
24%
                           17%                    continue to grow at a
16%

8%        6%
                   9%                             fast pace
0%                                               Recent           reform
         Power    Port     Roads      Telecom
                                                  initiatives in sectors
                                                  such as power are
       Projected Investments upto FY 08
                                                  expected to unleash
  Sector                           USD (Bn)       the inherent growth
  Pow er                                12.36
                                                  potential
  Telecom                                6.76
  Roads                                  2.18
  Ports                                  0.94
  Others                                 0.37
  Total                                 22.61



  36
      Large                   Higher
     Amounts                   Risk

                   Key
                 Features
                              Low but
       Long
                            Positive Real
      Maturity
                              Returns




37
     Drawbacks of Government finance
      Fiscal Prudence
      Allocation efficiency
      Pay for use concept v/s taxing the entire country
      Private projects are cheaper and give better
       quality of service




38
     Trends in financial assistance by
     DFI’s
                                                 Trends in financial assistance by DFIs

                30.00

                25.00

                20.00
     USD (bn)




                15.00

                10.00

                 5.00

                 0.00
                        1995-96




                                              1996-97




                                                                1997-98




                                                                           1998-99




                                                                                            1999-00




                                                                                                         2000-01




                                                                                                                              2001-02




                                                                                                                                             2002-03
                                                                                     Year


                                  Sanctions             Disbursem ents     Sanctions (excluding ICICI)             Disbursem ents (Excluding ICICI)




                                                                          Source : RBI – Trends and progress in banking




39
     Surplus Bank Liquidity
                                                   Surplus Bank Liquidity

                 48.00
                 46.00
                 44.00
     (USd (Bn)




                 42.00
                 40.00
                 38.00
                 36.00
                 34.00




                                                                                  Oct-03
                         Apr-03




                                                                                                    Dec-03




                                                                                                                      Feb-04


                                                                                                                               Mar-04
                                     May-03




                                                       Jul-03




                                                                         Sep-03




                                                                                                             Jan-04
                                                                Aug-03




                                                                                           Nov-03
                                              Jun-03




                                  Surplus funds (Surplus of net demand and time liabilities and excess of
                                  statutory pre-emptions and credit offtake




                                                                                   Source : RBI




40
     Fund raising by corporates
                             Public Issues                                                   Private Placement

                1.40                                                          10.0
                                                                               9.0
                1.20
                                                                               8.0
                1.00                                                           7.0




                                                                   USD (Bn)
                                                                               6.0
     USD (Bn)




                0.80                                                           5.0
                                                                               4.0
                0.60
                                                                               3.0
                0.40                                                           2.0
                                                                               1.0
                0.20                                                           -
                                                                                     1997-   1998-   1999-   2000-   2001-   2002-   2003-   2002-
                 -                                                                    98      99      00      01      02      03      04      03
                       1997- 1998- 1999- 2000- 2001- 2002- 2003-                                                                     (Apr-   (Apr-
                        98    99    00    01    02    03    04                                                                       Dec)    Dec)

                              Public Issues (Private sector)                                   Private placement (Private sector)
                              Public Issue (Public sector)                                     Private placement (Public sector)



                                                                                             Source :RBI
                                                                                             Includes equity and debt issuance




41
     Sector wise saving rates
               Sector wise saving rates




                                      Source : RBI




42
     Regulatory changes
        Policy changes to facilitate flow of funds
           Regulatory incentives like tax breaks, exemptions
            etc
           Reduce controllable uncertainties
        Market Development
           Adopt the Re-insurance market model for transfer
            of risk between financial intermediaries
           Permit entry of non-traditional investors such as
            insurance companies, retail investors, provident
            funds etc.
           Securitization
                 Large loan to be broken into smaller loans and sold
                  to market participants


43

				
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