Agile Financial Times August 2009 Edition

Agile

FINANCIAL TIMES

Treasury Management Preparing for a New Global Environment

PERSPECTIVE

Development of Term MIBOR ARTICLE

How Green is my Technology? SOLUTION SPOTLIGHT

AGILIS Core Insurance

August 2009

August 2009

Editor’s Note This month, we have gone green, literally. The issue is a potpourri of seasonal produce - the

CONTENTS

Germination of the New World Order, the Fruition of our Agilis Insurance solution at Insurance PHB, the Ripening of the MIBOR,

PERSPECTIVE

the Regrowth of Treasury after its Autumnal Fall

Development of Term MIBOR

and of course what started it all - the Green

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Technology Revolution! Revolution indeed as the new cycle goes from Cradle to Cradle (as

COVER STORY

against Cradle to Grave).

Treasury Management

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.

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ARTICLE

How Green is my Technology?

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NEWS

Global Update

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

ARTICLE

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

The New World Order

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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]

SOLUTION SPOTLIGHT

AGILIS Core Insurance 17

PERSPECTIVE

Development of Term MIBOR - A Need of the Hour Mohan Shenoi Treasurer, Kotak Mahindra Bank

Three issues have dominated the discourse in Indian financial markets, particularly in the banking arena for some time now - repo and reverse repo rates, prime lending rates and corporate bond markets.

First, why do monetary policy-induced changes in the two principal 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 can the 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 indeed interconnected and perhaps have a common solution. Theoretically, a monetary transmission mechanism is expected to be a three-stage process. In the first, stage policy-induced changes in money supply and repo / reverse repo rates are expected to nudge banks and other financial intermediaries to change their short term deposit and loan rates (medium and long term interest rates respond more to changes in fiscal policy). In the second stage, changes in these rates are expected to impact spending and saving patterns of consumers and firms. In the third stage, a change in 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 transmission process. Bankers have traditionally argued that higher administered interest rates on small savings schemes of Government of India compete with bank deposits and effectively 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

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that only when the Reserve Bank of India (RBI) initiated sledge hammer measures (like widening the repo / reverse repo corridor and forcing the market to operate at the upper end of the interest rate corridor through rapid increases in CRR) that the banks responded to monetary policy measures. A way out of this conundrum is to develop a purely interbank market benchmark rate which responds instantly to monetary policy changes and to which bulk of the bank deposit and lending rates are linked. The Benchmark Prime Lending Rate (BPLR) of banks is a rate administratively decided by the Asset-Liability Committee (ALCO) of each bank, taking into account the average cost of funds, cost of operations, appropriate provisioning, 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 for re-pricing floating or variable or adjustable rate loans (floating rate term loans, overdrafts, cash credits etc.). However, the extant RBI guidelines requires banks to use only external or market based Rupee benchmark interest rates for pricing floating rate products. The liability side of most Indian banks consists of fixed rate term deposits while the asset side has predominantly floating rate loans, cash credits and overdrafts. This means in a falling interest rate environment the asset side of banks gets re-priced instantly, while the liability side gets re-priced only over a period of time. This inevitably narrows the spreads 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 for development 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 rate mismatches between their asset and liabilities side. When such a benchmark emerges there will be no need for a BPLR. Banks can link their floating rate assets as well to this benchmark.

A way out of this conundrum is to develop a purely inter-bank market benchmark rate which responds instantly to monetary policy changes and to which bulk of the bank deposit and lending rates are linked. A lot has been written about development of the corporate bond market in India. Permitting repo in corporate bonds was thought to be one of the measures that will activate this market. 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 bond market was also considered another way to revive the market. Though limits for FII participation in the corporate bond 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 rate bonds/debentures. Ideally, in a falling interest rate environment, the issuer would like to issue a floating rate bond while the investor would like to subscribe to a fixed rate bond and vice versa in a rising interest rate scenario. To issue floating rate bond/debentures there is a need for development of a market benchmark rate linked to which the floating rate notes (FRN) could be issued. Coupled with this, if a fixed-to-floating swap market is developed linked to the 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 three issues are interconnected and the solution for them is common, i.e. development of a market benchmark which is credible, acceptable to the market players and which responds instantly to monetary policy changes. Currently, overnight MIBOR is accepted by the market as a

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PERSPECTIVE

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

Why should markets in India wait for elusive turnover in 3 and 6 month MIBOR for it to be accepted as a credible benchmark?

Mohan Shenoi is Treasurer and Member of the Senior 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. He is also a Director at Kotak Mahindra Prime Ltd. Shenoi started his banking career at Corporation Bank in 1978. He was responsible for 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 employee to join ICICI Bank and member of the original team 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 Graduate Diploma in Bank Management (PGDBM).

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Most US Dollar-denominated issuances in the international markets are linked to 3 and 6 month LIBOR. This is supplemented by US Dollar interest rate swap market where the floating leg is linked to 6 month LIBOR. In a similar fashion, 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 for two reasons. First, the market believes that for a benchmark to get acceptability there has to be large trading in those benchmarks in the underlying market. This, in my view, is a mistaken belief. As per the ECB (2007) Euromoney Market Survey, in recent years (2000-2007), about 70% of the transactions were overnight while maturities of one month or less amounted to about 95%. Notwithstanding this, 6month LIBOR is widely accepted as a benchmark globally. If this is so, then why should markets in India wait for elusive turnover in 3 and 6 month MIBOR for it to be accepted as a credible benchmark? Secondly, the polling and publishing mechanism of term MIBOR needs significant changes for it to generate confidence in the market participants. LIBOR fixing process followed by the British Banks’ Association (BBA) has been time tested and has worked even during difficult times when there was a total dislocation of credit markets. The Indian Bank’s Association (IBA) can adopt a similar process for MIBOR fixing to generate widespread acceptance of the benchmark 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 and in developing the corporate bond market.

The Basel Committee on Banking Supervision recently released enhancements as part of its efforts to strengthen the regulatory capital framework. A press statement issued by the stated that the program aims to introduce new standards to promote the buildup of capital buffers that can be drawn down in periods of stress, strengthen the quality of bank capital and introduce a leverage-ratio as a backstop to Basel II.

Treasury Management Preparing for a New Global Environment While the efficacy of the new measures will be proven over time, for the time being it has been pretty much up to the respective governments to haul their banks 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 in 2008 and was definitely a case of inadequate governance. None of this happened overnight 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 in the 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 series of decisions that blatantly ignored basic risk management mandates. RBS did receive warnings about the global economic condition, the extent and impact of which was never analysed. The risk calibration system was ineffective because it

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COVER STORY

was restricted to correctly identifying the risks, but never took the all important step to precisely quantify the risk. The risk-reward ratio was unnaturally high during the boom, and the the warning bell that the balance sheet was skewed was not loud enough to make an impact. The envelope was further pushed with the acquisition of ABN Amro, the exposure to the sub-prime crisis, and RBS finally gave in to a 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 to repay 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 the credit repayment behaviour reveals itself over a period of time, it is important for top management to recognise the signs well in advance to halt the credit doles and therefore the cascading effect of non-repayment.

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 in 2008 and was definitely a case of inadequate governance. The unrealistic financial boom and security was partly created by banks, when lending took to proportions never witnessed before. The aggressive credit expansion, increase in asset prices and little or no savings in the western countries spiralled into big trouble for banks. Offerings across various asset classes with little experience, high associated 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 to increase. Some banks such as HSBC took corrective action on time, and lived to tell the tale. Most of the banks that survived the crisis were conservative in approach and mostly

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on top of their risk management criteria. Spotting a risk has to 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 able to 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 subprime mortgage crisis as they identified the related risks and moved away from complex structured financial products right at the start of the US housing market bubble burst. As a 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 ratio through out, which has paid off in turbulent times, as clients and investors have expressed more confidence by moving to it. Treasuries: Balancing the Act to Even Out

Bank treasuries are in a position where they have access to information 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 economic scenario. Adherence to internal controls at all times will ensure that trading balances risks and rewards within reasonable limits of size and position. Facing market risks arising out of liquidity, interest rate, exchange rate and equity price changes essentially requires the treasury department to stay close to rule books when it comes to trading in various securities, bonds, and other instruments. Maintaining a close watch on liquidity of the bank ensures that funds are available when needed to tide over 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 be a mix of various factors. Greg Fischer, assistance Treasurer, Janus Capital Group, says, “The primary objective for a treasurer is to protect the company’s money. Therefore, preservation of principal is paramount. The next objective is typically liquidity as funds for operations can be needed any time. Finally, maximising yield within the prior two objectives should be a goal. The rise in volatility requires that investments be monitored

COVER STORY

much more closely than in the past and that complete reliance on a broker or on the rating agencies is not the approach taken.” While lean and simple banks would be easier to maintain and regulate nothing can really predict that they will not suffer in crisis. Bear Stearns was a small entity and yet it needed government bailout. Distributing risk with larger firms seems plausible but they will have inherent issues of monitoring and can be very expensive to rescue. What is essential is keeping the size of the risk small and this has to be initiated by banks themselves - ensuring that no risk is big enough to ruin them. Credit Suisse has put in place a capital-allocation risk management committee which aims at maintaining a balance between the business opportunity and the downside risk. Although it has a business strategy similar to that of UBS, its wealth-management division is still attracting investors. Another example is HSBC, which was able to blunt the impact of its performance in the US with its sizable presence in emerging markets. To treat each risk separately and then try to figure out its impact may not be the best way of ascertaining if the business will still continue to thrive. Banks have dedicated teams to tackle different risks that work in isolation. To understand the bigger picture and move ahead in a volatile market, it is imperative that banks have platforms where information can be shared. For instance, Credit Suisse has a group that looks at market risk and credit risk together. It is also no secret that banks are increasingly using technology to provide them with analytics to potentially spot any further adverse blips on the radar. Using processes to advantage

Going forward, banks will have to follow many regulations and be more compliant than ever before. Product innovations will be scrutinised and weighed, before implementation is allowed. Banks themselves may have to redefine stress tests, and bank treasuries need to ascertain a workable mix of asset classes under various circumstances, and consider the ramifications of depending on too many exotic instruments or very simplistic offers. While most large banks have risk management processes in place, the need really is greater discipline. Following a well thought-out approach to managing funds and capital, with basic rules in place and an insistence from the topmanagement on adherence will be the key to the effective role of treasury. Treasuries also need to strictly follow international best practices of three layers within the treasury department, where the front office is responsible for deals, the mid-office for compliance to tolerance limits and the back office for settlement. Greater involvement in the business plan is also likely to result in better control on liquidity and funding, which can be very important in times of crisis.

Fang Fang, JP Morgan’s China Managing Director and Chief Executive Officer, said that the company was able to tide over the crisis successfully on account of its strict internal control and risk management mechanism. 9

ARTICLE

How Green is my Technology? ‘Green is in’ but just a cursory stock check is enough to reveal the anomaly. A recent internet search on ‘environmental concern’ gave 169,000,000 results, while ‘green initiatives’ gave 12,000,000. While on their own the numbers may not mean much, they do indicate the black hole that humanity has created for itself with persistent disregard towards the planet’s vulnerable environment. A greener lifestyle that will counter or even slow down the rate of damage is eons away

One of the many institutions that has taken over the responsibility of educating people includes the United Nations 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, waste generation management, carbon emission reduction and renewable energy resources. Some statistics from 2009 UNEP 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 to displace around 100 million people in Asia, mostly Bangladesh, eastern China and Vietnam; 14 million in Europe and 8 million each in Africa and South America. In the next century, the estimated rise in sea level ranges from 0.8 metres to 2 metres from Greenland ice outflows alone. 2008 had the second smallest area of Arctic sea-ice following the summer thaw since satellite monitoring began in 1979. Studies in 2008 indicate oceans are now soaking 10 million tons less C02. Over two billion tons of waste is being generated every year globally; by 2030, China and India are estimated to contribute 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 the United Nations and Green Peace offices into corporate board rooms.

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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, and procrastination. There is an unresolved conflict of who is responsible for the current environment pathos and therefore who should bear the maximum responsibility of cleaning it up. The importance of engaging in constant efforts to reduce carbon emission is not lost, and some of the targets established over the last one year broadly include the following:








By 2020, the European Union (EU) plans to cut overall greenhouse gas emissions by 20% over 1990 levels; aims to 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% over forecast consumption. The United States, Canada, Japan and Russia assented to a G8 declaration to endorse the position on climate already taken by the EU. According to this, global temperatures, which increased by 0.7ºC in the 20th century, should not be allowed to rise by more than 2ºC as compared to the pre-industrial levels. Eight other countries, broadly representing the developing world at the G-8 conference, signed up to the target.

As usual, experts are skeptical about claims and promises. This is obvious from the recent G8 meeting in Italy where the aim was specified, but an implementation road map on how to achieve this goal was conspicuous by its absence. Green Corporates: A Global Exigency

In an era of rapid industrialisation, fast growth and automation that spanned decades, few spared thoughts, efforts or investments towards making any of this growth environment-friendly. However, as the atmosphere went through changes, translating into hardships visible in everyday life, corporates and governments alike woke up to the 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, thus indicating the inevitability that corporates need to address this 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 have proven to be profitable in the long run. For instance, General Electric (GE) began its campaign to go green with an initiative called Ecomagination. Since 2005, the company has been trying to effectively utilise technology and industrial capabilities to reduce environmental impact while also reducing costs by over US$100 million. Such results will ensure complete acceptance of strategy that weaves in environment sustainability across the organisation. GE managed to reduce greenhouse gas emissions intensity on a revenue basis by 30% by 2008. There was a 33% increase in offerings portfolio with ecomagination revenues registering an increase of 21%. The company remains committed to its revenue target of US$25 billion and an increase in R&D in 2010 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 has moved way beyond this and requires urgent action. Results are bound to be different when environment is a priority and an inherent part of business strategy. All industries have contributed immensely to carbon emissions and efforts have to be made across each to arrest the impact. Data centres of IT companies generate huge amounts of heat which is currently wasted, but has been recycled by some companies

There is an unresolved conflict of who is responsible for the current environment pathos and therefore who should bear the maximum responsibility of cleaning it up. to heat buildings. Even supermarkets are looking to source locally to reduce their produce ‘food miles’. The maximum impact towards a greener existence would arguably be in power 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 five companies developing technology to promote cleaner environment. Nokia works with five pillars of Green initiative 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 and services, Nokia is looking to reduce its overall adverse impact on the environment. The approach analyses the

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product through the entire chain of operations, starting with extraction of raw materials and ending with recycling, treatment of waste, and recovery of used materials. The bigger changes that have made the initiative achieve success are better 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 top five priorities for Chief Information Officers (CIO) for the next 5 years in 50% of large organisations. CIOs select and implement information technology in organisations 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 obvious energy efficient options along with the more strategic investment in processes and information technology.

According to research estimates, environmental concerns will be one of the top five priorities for Chief Information Officers (CIO) for the next 5 years in 50% of large organisations. CIOs select and implement information technology in organisations to enable and support the business plan. 12

Starting with short term changes and goals, it is imperative that these then further evolve into schemes that are specifically aimed at increasing awareness about their carbon footprint. Measures on a larger scale would entail using renewable sources of energy, water harvesting and usage, alter power consumption patterns, using environment friendly methods of heating and cooling, and infrastructure changes which have to gradually be incorporated into 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 smaller spaces. 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 implementation and adherence to procedures is regulated and monitored. With smaller, definite and 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 and backward, needs to be insisted upon. Encouraging employees to be sensitive to the environment, albeit at a smaller scale, would still have a cascading effect. CIOs of leading companies in all industry segments need to propagate and practice green best practices, and provide an example to the rest of the industry. With many industry leaders having already taken green initiatives, and established profitable practices, it is only a matter of acknowledging the importance of each little contribution before the environment finds itself embedded in all business plans and strategies. The results would be for all to see as they are tangible, measurable and adaptable.

NEWS

Global Update A quick review of industry news from around the world. Abax Global Capital to Start Private Equity Fund in China

Hong Kong based will soon start a private equity fund in China to invest in companies making environmentallyfriendly products like clean energy. Abax, which is promoted by Morgan Stanley, plans to raise US$73 million from Chinese investors in the first round. Abax came into existence in 2007, and initially focused on investing in companies that managed transactions like mergers and acquisitions, 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 do is to build a platform with multiple strategies." Earlier this year, Abax raised US$50 million from a small group of high net worth individuals in China for funds that focus on publicly issued, frequently traded high-yield and convertible bonds. Risk of Double-Dip Recession?

Nouriel Roubini, the New York University professor who predicted the financial crisis, has said in the press that the chance of a double-dip recession is increasing due to risks related 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 in nations such as China, France, Germany, Australia and Japan. Governments around the world have pumped in US$ 2 trillion to revive their economies. Government and

bankers may undermine the recovery and put their economies 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 Ushaped recovery, where growth will be "anemic and belowtrend for at least two years." Challenger Financial Services to Increase Funds Under Management

James Packer-backed Austria-based Challenger Financial Services Group has announced that may increase its funds under 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 Australia Bank 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 to government 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 in the previous three months, according to a government statement. Very recently, the cabinet approved a revised 1.06 trillion- baht, three-year investment program to help lift the

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

believed to have expanded 0.9 percent last quarter, as compared to a low of 0.4 percent in the previous three months.

Banco do Brasil to Increase Lending

Bank of China to Increase Real Estate Lending in the UK

The largest lender in Latin America - Banco do Brasil, is planning to double credit to individuals over the next few years as a drop in interest rates have increased demand for car and home loans. Personal loans may contribute to 50 percent of the bank’s total credit portfolio, up from 27 percent in the second quarter. The bank’s net interest margin increased to 7.3 percent in the second quarter from 7.1 percent a year earlier. The bank has regained its position as Latin America’s largest bank in the second quarter from Sao Paulo-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, with more than 10% of earnings in future targeted from international markets.

Bank of China, which is expanding into the real estate lending business in the UK, is looking at cherry-picking prime borrowers from British lenders. The Chinese bank is looking at attracting customers with good credit histories who are struggling to get new mortgages or restructure their debts from traditional real estate lenders in the UK. While Bank of China was earlier focused on lending to the ethic Chinese community in the UK, it is now expanding its horizons, 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 the UK, 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

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 the industry, and has announced that the central bank would inject around US$2.7 billion into the banks. Nigeria’s antigraft 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 with fraudulent abuse of credit process, insider trading, capital market manipulation and money laundering, according to the Economic and Financial Crimes Commission. Both Ibru and Akingbola have moved the Nigerian court and are challenging 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 Standard Chartered’s units in Botswana, Tanzania, Ghana, Zambia and Kenya. In addition, Standard Chartered is also planning to expand its bancassurance business in the region to provide cover for illness, funeral expenses, savings and education.

The Australian government will bestow new powers on the country’s corporate regulator to supervise real-time trading on all domestic licensed markets. The Australian Securities and Investments Commission (ASIC) will be responsible for supervision as well as enforcement of the laws against misconduct on Australia’s financial markets, said treasurer Wayne Swan recently. In the existing scenario, the responsibility for day-to-day supervision of trading, investigations into possible breaches, and providing referrals to ASIC rests with ASX Ltd. According to Anshuman Jaswal, an analyst with Celent, "The reduction of regulatory powers of ASX was necessary in encouraging competition in the Australian equity markets and the possibility of entry into the Australian market from end-2010 onwards is an exciting opportunity for the exchanges in Asia. Leading exchanges such as those in Tokyo, Shanghai, Singapore and Hong Kong, and also NSE and MCX (operated by Financial Technologies) in India, should see this as an opportunity to expand their global footprint and establish themselves in an economy which has weathered the recent economic crisis relatively well." The implementation is expected to take effect by the third quarter of 2010, and will announce a transition plan after the legislative framework has been set up. Ahli United to Increase Stake in Egypt and Iraq

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 a recession 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 prospects are much stronger and policy makers will keep rates steady for as long as necessary. The Philippines economy is

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Bahrain-based Ahli United Bank has announced that it plans to increase its stake in lenders in Iraq and Egypt. The bank, which is the largest commercial lender in Bahrain, has received approval from the Egyptian central bank to raise its stake in Ahli United Bank Egypt to 90 percent, up from 35.3 percent. Ahli United has also received an approval from the Iraqi central bank to increase its stake in Commercial Bank of Iraq to 75 percent, up from 49 percent.

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The New World Order Life After the Recession

All through the second half of last year, the financial sector went through some of the most defining events of the recessionary period. Analysts speculated on likely financial players that would crumble under pressure and then laid threadbare the causes and effects. Banks are perceived as the rock-solid institutions with expertise and control on all matters related to money, not just their own but also the investors. 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 the face of the industry and economies across continents.

together to evolve into a pattern, governments rushed in to save 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, efforts moved onto measures to make the financial sector more resilient. Evaluation of policies and regulations of countries that emerged with banks intact from this crisis revealed that stricter controls and guidelines to regulate the industry was the key. This is no doubt an oversimplification of prevailing conditions and their ramification, but this is where all the immediate changes are bound to happen. Preparing for Take-off: Altering the Basics

Build-up to the Alarming Scenario

The looming recession was evident as early as 2007. The risks associated with sub-prime mortgage played out at its worse. Oppressive competition in housing-loan segment and profitability 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. As the financial sector crumbled, wealth and savings disappeared. In the ensuing crunch, companies across industries 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 since the star of recession was pegged at 6.5 million at the end of June 2009, and the unemployment rate is at 9.5%. Europe is not far behind with an unemployment rate of 9.2%. Even as the erroneous judgments were being strung

The financial sector overhaul is inevitable. The US government 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 the regulatory system was ineffective, inward looking and could not keep up with the changing demand and supply pattern in market. The last couple of months have indicated the course of the industry going forward - the direct fall out of this crisis include increase in government role, decline in consumer spending and basic policy and procedural changes in banks. The impact of the recession, corrective measures and their repercussions will initiate not only functional metamorphosis in banks, but will alter consumer habits and national economies. Bail-out: Governments to Control Strings

The one common line of thought that has emerged as the

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world economy struggles and looks ahead to post recession days - regulations are mandatory and here to stay. Bail out packages removed all possibility of resistance to regulatory initiatives and bodies going forward. Issues in for moderation 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 instance Obama’s Financial reform plan has increased the scope of responsibilities of Federal Reserve with different mandates for large and mid-sized firms. A new bank agency, the National Bank Supervisor was established to monitor national 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 the global market, one was how the erstwhile frowned upon regulated financial sector in some nations, withstood the test. Canada and Australia are free economies yet certain mandates helped banks and economies tide over the crisis, without external aid. While there seem to no immediate measures to nationalise banks that have under-performed, policy interventions are imminent. Holding on: Consumer Spending Declines

Apart from these long-term measures, change in consumer spending 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’ luxurious items. A chunk of bank earnings are from ‘interchange’ charges levied on retailers and roll-over charges paid by card holders. 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 for banks further. Loan facilities is another form of revenue stream for banks, and one that is depleting fast. Job cuts and devalued investments have hit the consumers hard. Chances are that they would not want to increase their liabilities. Considering interest rates will be high with added emphasis on borrower profiles, chances are that loan seekers will defer decisions. Secure Landing: Accruals and Rebuilding

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

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between. Colossal gains, consistently over a long period are needed 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 the structure. These institutions under the circumstances, where government involvement has gone up, and consumers are cautious, will have to revamp their product portfolio. The portfolio will have to optimise returns, minimise risk and discourage malpractices. Risk aversion: With almost all banks and companies reevaluating their exposure to risks, viability and strength of financial relationships are under scrutiny. Investments and lending deals are under the scanner. Interbank exchanges are cautious, reflected in increased LIBOR. Individual investors are opting for safer investment options, even if that means lower returns. Slower growth: Credit availability has squeezed, and interest rates are up. Liquidity issues are cropping up, and funds 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 in coming 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 their over dependence on USD. They have used alternate currencies to invest, to conduct business, and plan to continue diversification for further transactions. Leaner finds favour: While job cuts were painful, they did help cut the flab. Job cuts were most rampant in the US, and experts opine that the lean economy may find it easier than others to be back on track. While the governments issue blanket decisions on the financial 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 and continue with those without getting pressurised by competitors, and other new businesses. Forays into new lines of businesses have to be backed by reason, and be subjected to pre-requisites. Interest rates are determined on risk factors associated with borrowers, which ideally then should not spiral out of control, as borrower profiles are scrutinised and risk is capped. With margins under pressure now, this is more critical than ever. Self regulation and self discipline by the industry will encourage its otherwise slow return to normal.

SOLUTION SPOTLIGHT

AGILIS Core Insurance A solution for insurance companies from Agile FT

As insurance companies, both conventional and Islamic (Takaful), strive to create innovative business models, reduce costs and increase market share, the limitations of their current processes, software and infrastructure are major impediments in achieving these business objectives. In addition, insurers have to deal with the nuances of soliciting and servicing customers both directly, and through intermediaries. Most insurers frame strategies that attempt to differentiate their products and target market segments to win customer sets from competitors. This drives a need for more product sophistication and quality market data, sometimes across geographic boundaries. Emerging markets represent a significant business opportunity for insurers, but the rules and requirements to do business in such markets are very different. In their quest for meeting changing customer demands, increased regulation, and creating innovative business models, insurance companies need a technology platform that can truly support their changing needs without affecting their capital allocation and operating expenses to a large extent.

the point of getting a proposal for new policy up to the issuance of the policy (or any other disposal of the proposal). The proposal goes through a number of checks, validations and decision points before the insurance company issues or rejects the proposal. The system handles proposal 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 process and improved turn-around-time leading to higher levels of customer service. Workflow The solution can be configured to a specific workflow to reflect the desired business process. While the solution comes 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 transaction through its life cycle in the system, coupled by the scanned images of the associated documents. An automated workflow ensures that the policy document travels through a defined business process, which eliminates delays in processing that may otherwise take place.

AGILIS Core

Policy Management The features of AGILIS Core include: New Business The new business feature handles the business process from

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

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SOLUTION SPOTLIGHT

Underwriting Insurance PHB Accelerates Pace with AGILIS Nigeria-based Insurance PHB has signed an agreement with Agile FT to implement AGILIS Core Insurance. The implementation will be overseen by FASYL, Agile FT’s partner in Nigeria. The selection of the core application software from Agile FT was made after an extensive evaluation process that included detailed workshops and site visits to existing clients of the software. Insurance PHB's intention is to create a strong technology backbone that would become a foundation for its growth strategy. When fully implemented, the software will improve turnaround time of operations in the company. As an integrated comprehensive solution for insurance companies, applying powerful tools that cover the entire business cycle from underwriting and claim management to reinsurance and accounting, AGILIS Core Insurance will enhance Insurance PHB's business processes. Employing a modular and parametric approach to management of the insurance business and deploying its enterprise wide, webbased technologies, AGILIS will ensure quick, accurate and easy access to information. The online portals are expected to greatly enhance interaction between Insurance PHB's clients, sales force and agents, as well as provide a competitive edge in expanding its distribution network.

Channel Management This module keeps track of the distribution channel through which a proposal was received, policy issued, and commissions processed. The software maintains identity of the distribution channels, their members, and the relationships between the members, including hierarchical relationships. It is capable of dealing with multiple channels such as employees, agents, brokers and bancassurance partners. In addition to tracking training, computation of productivity, contests and rewards, it also handles payment processing to channels in an automated manner. Security

Speaking at the signing ceremony, Anselem Igbo, Managing Director, Insurance PHB, said the partnership between the two companies is a mutually beneficial arrangement, which gives Insurance PHB the opportunity of offering seamless services to its clients. By deploying state of the art technology offered by Agile FT, this project will set an industry benchmark on the timely and effective use of technology within Nigeria, especially as web services and AGILIS’ robust technology framework will result in creating new possibilities in client servicing in Insurance PHB.

The solution provides security at the data, usage and role levels, enabling the organisation to enable specific users to handle specific functions only. All authorised users of the solution are protected by their unique identifiers and passwords, and are governed by the permissions given by the system administrator. The application maintains an audit trail of all activities taking place in the system. This enables complete tracking of all actions matched with the identity of the user who carried out the action.

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

Claims Management

Bade Aluko, CEO, Finance Application Systems Limited (FASYL), said that with its wealth of experience of Nigeria's financial industry, their alliance with Agile FT promises to offer customers in Nigeria access to best-of-breed solutions, backed by strong service, and will support organizations to achieve mutual long-term success. He expressed confidence on AGILIS as a solution that is proven, scalable and reliable whose tools are very well integrated. Aluko said organizations can take advantage of FASYL'S presence in Nigeria and their understanding of the business requirements to partner with them on similar projects.

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The underwriting module supports both automatic and manual processes, with complete flexibility to the insurer while defining the rules. It has the ability to analyse the current data about the proposer, combine it with past experience data about the proposer and the total risk cover in force, and then approve the case with appropriate cover and premium. The system supports manual intervention as per the defined workflow.

The benefits management function services the claims made by the beneficiary and provides simplified document handling, with all documents pertaining to a claim 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 and exception reports are also available in the system, as are reports on business performance, trends and regulatory compliance.

www.agile-ft.com

Agile Financial Technologies Pvt Ltd 701-A, Prism Towers Mindspace, Malad (West) Mumbai 400064 India Tel : +91-22-42501200 Fax: +91-22-42501234

Agile Financial Technologies 808-A, Business Central Towers TECOM, Dubai Internet City P.O. Box 503007 Dubai United Arab Emirates Tel: +971-4-4331825 Fax: +971-4-435-5709

Agile Financial Technologies Pte Ltd 20 Cecil Street, #14-01 Equity Plaza Singapore 049705 Tel: +65-64388887 Fax: +65-64382436

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.