‘Financing this decade for growth and sustainability’

India has ushered into this new decade with 17.5% of the human race and with newly acquired hope and expectations from world community to serve as the global growth engine for the decade as traditional growth engines in west slow down.

But this is only brighter side of the story. India has also entered this decade with one of the largest populations of below poverty line people with absolutely no access to health, educational or financial facilities. Our illiterate population is comparable to the entire population of many continents and major chunk of our workforce is grappling with disguised unemployment all of which raise questions on the sustainability of India’s growth story.

Both these facts put together simply means that India can’t afford to slow down its pace for many decades to come and that too with much more inclusion than we have seen in past two decades. Good news is that ‘Growth’ and ‘sustainability’ happens to be complementary ideas and not contradictory as some perceive it.

For achieving this target of growth and sustainability, financial sector needs to innovate so that it can extend credit to fragmented agricultural sector without burdening the industrial or personal consumers to compensate the NPAs and high cost of reaching out. We need to provide bank accounts to bottom of the pyramid; safe modes of investment in capital markets to middle class; developed debt and derivatives market to industries and HNIs and much more.

What else could be better discussion in the first year of the new decade than the financial innovations for growth with sustainability?

Indicated below are the suggestive and non-restrictive subthemes for the seminar.

• Financial regulatory reforms- a need or an overreaction?

The near-collapse of the world financial system in the fall of 2008 and the global credit crisis that followed has led world financial system regulators to come together to work towards ‘new global financial system’ by implementing tougher regulations, greater oversight and additional safeguards against any crisis situation. The Dodd-Frank Act, Volcker Rule, Basel III norms, greater reporting requirements on private funds, and restrictions on the use of Derivatives are some of such regulatory changes. India too is strengthening its regulatory framework by constituting bodies like Financial Stability and Development Council (FSDC) and Financial Sector Legislative Reforms Commission (FSLRC), implementation of IFRS and greater reporting requirements by SEBI and RBI.

With whole lot of such regulatory changes sweeping the financial sector across the world, it is worthwhile to think if these changes are actually a need or just an overreaction and how can financial institutions adapt to the new regulatory framework?

• Financing of MSMES- the road ahead

Micro, small and medium-sized enterprises (MSMEs) are the backbone of all economies and a key source of economic growth, dynamism and flexibility. In India too, MSMEs constitute the dominant form of business organisation, accounting for over 8 % of India’s GDP and 45% of India’s total industrial employment.

Despite of MSME being such an important sector, there is a huge gap in meeting its financing needs. Lack of basic information, incomplete range of financial products, regulatory rigidities coupled with volatile pattern of growth and lower survival rate are some of the factors that undermine the initiatives taken by government like provision of micro-credit and micro-finance by SIDBI, better risk management and technological upgradation of the Banks.

What could be the new innovative ways to bridge the gap between the requirements and availability of funds to MSME sector?

• Infrastructure sector financing- Is the dream run over?

The infrastructure investment is a key factor to attain 9% and double digit economic growth. However, there is a big gap in infrastructure targets and achievements with progress slow in several sectors like roads and Transmission and Distribution. Three key reasons for this are shortfalls in awarding projects, time and cost overruns in construction phase and potential funding shortfalls. The need for funds is enormous with the requirement pecked at ` 12.7 lakh crore in FY11 and FY12. Prevailing high interest rates and high input costs (like crude, steel, cement etc) in current scenario is hurting infrastructure sector.

But these concerns are addressed to some extent by our Finance Minister in the Union Budget by providing various instruments such as Increase in FII limit in Corporate Infrastructure bonds to USD 25 billion, allocating ` 2.14 Lakh crore to the sector, extending the tax sops in infrastructure investment bonds etc.

High interest costs, poor order inflows, slow execution and policy delays have taken the wind out of India’s infrastructure sector. Touted as the next sunrise sector after IT and telecom, infrastructure has taken a severe beating over the last few quarters as profitability and growth is adversely impacted by macro headwinds and policy paralysis. While order flow has dropped on one hand, capital costs have dramatically increased for the sector. This puts pressure on the profitability of the sector.

Given the sops to the sector in the Union Budget, How can the sector come out of the woods and can the sector see its dream run as it did in 2006?

• Private equity- Emerging source of finance for Indian businesses

India has come a long way from a time where there were only a few nationalized entities having a private equity arm to a position where the number of private equity firms in the country has reached more than a few hundreds. Indian firms which are looking to finance their businesses for either expansion or takeovers are increasingly considering private equity as one of the sources of financing. Private equity investors have benefited firms, particularly entrepreneurs by providing not only capital but also expertise in terms of management and execution. In return, the investors too have reaped high returns.

India continues to outpace most of the world markets in terms of economic indicators. Indian companies also need enough capital to pour in to enable them to scale up their operations and compete at the world level. The banking system, equity markets and bond markets are not able to fully cater to the needs of the growing businesses. Hence Private Equity can play a crucial role in fulfilling those gaps and create strong businesses in this decade.

How should businesses utilize private equity as a source of financing?

• Role of international financing in growth of India

India is emerging as one of the top destinations for foreign investments for the past few years. After the process of liberalization began in 1991, we have witnessed unprecedented inflows of foreign funds to our country. Foreign Institutional Investors have made beeline for India. The foreign inflows to the country were $22 billion in 2010. The number of FIIs has also shown a healthy growth trend. Yet, some sectors are totally untouched and many partially covered by foreign investments due to regulations. This has also meant that our business firms are not only able to reach out to the world but also can now serve a huge base of the young population whose disposable income is seeing a continuous upward trend.

In 2010, India began implementing a consolidated FDI policy wherein foreign companies can invest funds in Indian companies without needing any prior permission from the Indian government. This can create conducive environment for India to attract foreign investors. However, for Indian companies the challenge remains to get the requisite permissions from the authorities and for the regulators to chart out the sectors of investment clearly.

Also, as the focus of the world shifts from west to Asia post the financial crisis, it becomes important for Indian companies and government to develop systems and practices to leverage on opportunities provided by international finance for long-term growth of the economy. How can companies benefit out of the FDI policy and role of international financing in the years to come?

• Emerging trends in capital markets

The Indian capital market is more than a century old. Its history goes back to 1875, when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the Indian securities market has evolved continuously to become one of the most dynamic, modern, and efficient securities markets in Asia. Today, Indian market confirms to best international practices and standards both in terms of structure and in terms of operating efficiency.

Indian financial market is also witnessing significant changes for some time. In recent past, it has experienced paradigm shift in terms of global M&A activity, big ticket IPOs, renewed interest of FIIs, private equity deals, hedge funds, international listing of Indian securities & the effect of global recession & recovery. Indian financial market is no more immune to global events and getting increasingly integrated with global market.

But with all these, volatility in Indian stock market has also become the hallmark of the day. With multiple TV channels airing expert comments on buy and sell recommendations, equity pricing projections, and effect of events happening all over the world; equity valuation has taken different meaning now. Sometimes, the bond or debt market start looking much more lucrative as an investment option with rising yields.

Question: What are the emerging trends in the Indian capital market in this decade & how to act accordingly?

• Financial inclusion- To bank the unbanked

Financial inclusion is defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. Financial inclusion has become the buzzword today. We regularly hear about the steps government is taking & planning to take for ensuring financial exclusion. The savings rate in India is healthy but large part of these savings is in low yielding assets like bank deposits and traditional insurance, there is the need for the efficient conversion of this saving into investment.

There is a need to facilitate coordinated efforts, across sectors and across regions; providing people access to a wide range of usable financial services and products; incentivizing the people for holding a bank account & investing in various other investment products; supporting innovative products, services and business partnerships; encouraging the diversity of sound financial services providers; developing enabling and proportionate regulatory and supervisory frameworks conducive to financial inclusion; defining supportive frameworks to encourage the opportunities that technology solutions bring to expand access to finance; supporting the financial literacy efforts & ensuring an appropriate level of consumer protection.

Question: What steps the government should take to increase financial inclusion & diverting the savings to healthy investments?

• Future of exotic financial products post financial crisis

The global financial crisis has significantly affected the financial landscape in terms of the nature of financial products which will be traded in the market in the future. Innovative products such as CDOs that achieved volumes of multi-trillion dollars prior to the crisis have lost significant sheen after the Lehman Debacle and the financial world has became averse to the exotic products and has went back to the fundamental trades and plain-vanilla products as risk aversion gripped the markets.

Is it the end of the road for exotic products?

• Need for a strong corporate Bond Market in India

Development of corporate bond markets is a key part of any country’s capital market development. While the rest of India’s capital markets have surged ahead and now offer a world class market, its corporate debt market has not flourished. Conventionally, corporate sector in India rely heavily on banks for debt finance. But rapid growth in both corporate and consumer credit demand in foreseeable future is expected to put enormous pressure on bank balance sheets. A fully developed corporate bond market would provide an additional source of finance to the Indian firms. In addition to that, a successful primary and secondary bond market can potentially become an alternative less risky avenue for institutional investors such as pension funds and life insurance companies.

Question: How should the corporate bond market be strengthened in India?