RBI, Securitisation and Micro-finance – at loggerheads?

Learning lessons from the far reaching consequences of securitisation of sub-prime debt in the US, the Reserve Bank of India has come out with a bunch of regulations, which clearly indicate that ‘caution’ will be the way forward in future. RBI’s June 2010 guidelines for NBFCs stipulate a Minimum Holding Period (MHP) of 9 months before the loans can be sold off for loans maturing within 24 months and an MHP of 12 months for loans maturing after 24 months. In addition, the NBFC must retain a minimum of 5% (for loans maturing within 24 months) or 10% (for loans maturing within 24 months) of the book value of loans being securitised – and in the equity tranche in case there are tranches. In issuing these regulations, the RBI has addressed the most common criticism of the sub-prime crisis – that NBFCs did not perform due diligence, since they were going to sell off the loans anyway. The minimum holding period and minimum retention requirements have ensured that the NBFCs are a significant stakeholder in the loans they are securitising. Also the RBI has implicitly acknowledged the failure or inability of credit rating agencies to properly rate such instruments. Any rating done after 9 or 12 months is likely to be more accurate than a rating done immediately after disbursement of the loans. The reaction to these guidelines has been muted considering the events of the last 2 years. However, the microfinance sector has seen red in these new guidelines. Since the last few years, securitisation was becoming a preferred method of fundraising by micro-finance institutions. However these new guidelines are likely to act as a deterrent to the growth of securitisation in the micro-finance sector as most micro-finance institutions are registered as NBFCs. Micro-finance loans are of short duration and often get prepaid with 9 – 10 months. The borrower typically pays off the remaining tail and gets a new loan. Hence, the guidelines with a holding period of 9 months largely hamper the securitisation route for MFIs. Micro-finance is growing rapidly in India on the back of good returns but concerns have been raised at the fast pace and whether due diligence is being maintained – similar to the situation of fast paced growth of high return sub-prime lending in the US. Also, micro-finance still being a relatively new phenomenon with not enough historical data, ratings provided by agencies are likely to be less accurate. In such a situation, RBI’s cautious approach to securitisation is the right step forward even if it means a slight slow-down in the rapid pace of growth of micro-finance.

Distribution Trends in the Asian Insurance Market

Asian insurance companies are moving away from a sales model that is built around agents towards developing a diverse model that encompasses various channels such as agents, banks, direct sales and financial advisers. Insurance agents from insurance companies still form the major sales channel for life insurance in many Asian countries and regions. But their market share has been gradually declining as banks are gaining more market share and catching up on them. Although the level of development of bancassurance varies with different countries and regions in Asia, insurance sales through the banking network is becoming a common trend. In some markets, the premium income for new life insurance businesses generated via banks has exceeded that of the traditional insurance model of selling via individual agents. In Celent report “Distribution Trends in the Asian Insurance Market” (Chinese version, English version coming soon), we analyzed various reasons for the rapid development of bancassurance, including:
  • In Asia, bank revenue is mainly derived from interest income, and to raise profits, a huge sum of fee-based income has to be generated. Banks are very keen on selling insurance products because the processing fees can help generate income.
  • Customers are more comfortable signing a contract with a bank than with an insurance agent because banks have a better reputation.
  • Insurance companies are able to generate more premium income and expand their market share by selling their insurance products through banks. Moreover, the commission and management costs are lower than selling via individual agents.
However, the products sold by the banks are mostly single premium investment-linked insurance products, and the bank processing fees are high. As such, this channel does not, in reality, contribute in a significant way to the profits of insurance companies, nor does it bring about sustainable premium income for the insurers. In some countries, local regulatory authorities have requested a structural adjustment of bancassurance in the hope that the banks would increase sales of traditional insurance products and policies with annual premiums. The percentage for bank processing fees has also been regulated. Besides the general trends, the report also discussed distribution channels in mainland China, Hong Kong, Taiwan, Singapore, Malaysia, Japan, South Korea, and India markets. Presently, technological solutions that are able to support multi-channel distribution models are fast gaining the attention of an increasing number of insurance companies.

Recent Developments in the Australian Capital Markets

Capital markets worldwide have undergone radical transformation over the last decade with heightened competition among the stock exchanges. This has mostly been a US-Europe phenomenon with the Asian exchanges landscape being dominated by national exchanges. However, the situation is slowly changing. Recently Australia undertook initiatives towards making its securities market more competitive by breaking the monopoly enjoyed by the Australian Securities Exchange (ASX). Till now the ASX was responsible for surveillance of trading activity in Australia; but according to a new legislation, the Australian Securities and Investments Commission (ASIC) will now take over the supervisor role from ASX. This decision, which took over two years’ assessment and deliberation, was necessary to allow new competitors of ASX to enter and access the securities market. As a result, Chi-X Australia has already received an approval from the government and will possibly be the first player to enter into this evolving market. A US institutional broker Liquidnet and a New Zealand Stock Exchange backed platform are also seeking licenses to operate in the Australian market. Amidst this evolution, ASX has taken a number of initiatives to meet the new challenges of a competitive environment and maintain its stronghold in the market. Recently it consulted with a broad range of market participants, end-users, vendors as well as regulators to improve its service offerings. Besides deciding to slash its main trading fees the ASX is planning to launch three new trading platforms by 2011, each targeted at different customer segment. VolumeMatch, a block matching facility that allows matching of orders anonymously, is targeted towards sell side players. TradeMatch, an ultra-low latency, high capacity, trading platform that will provide a full functionality trade execution for all ASX-quoted securities, is scheduled to be launched in November, 2010. Third is PureMatch, an adjacent ultra-low latency execution facility for the top 200 ASX listed securities. It is targeted at high frequency traders and scheduled for release in early 2011. These developments can be potential game changers in the Australian context. They can also bring major changes in other Asian countries as regulators in the region will be keeping a close eye on Australia.

Technology Investment Trends for Asia insurers

At the first half of 2010, Celent interviewed selected Asian CIOs. The interviews covered business and IT priorities for 2010, as well as details around changes to budgets, spending priorities, and attitudes towards outsourcing and new technologies. Asia is a diverse market. Some trends in one market may not apply to another market. However, there are a number of common trends in technology investment: —Increase investment in process automation to improve operational efficiency; Many Asia insurers employ a large team of back office staff because these Asia insurers at present have a low automation level, they still use quite a lot manual method when process business. CIOs understand that they must gradually automate many process, to achieve operational efficiency, as well as reduce cost. The IT initiatives we see in Asia insurers’ projects plan that supporting automation are further investment in enterprise technologies such as BPM (Business Process Management), BRM (Business Rules Management), and document management. —Centralize IT operation; Over 85% of the Asia CIO survey participants said they have their IT operation centralized, for global players, some are centralized in whole Asia with minimal on-country IT, some are centralized at country level. —IT outsourcing is increasing in general. Over 45% of the Asia CIO survey participants said that they will keep their IT outsourcing in 2010 as the same of 2009, around 40% of insurers will increase their outsourcing. —Asian insurers are technology aware; In regard to IT architecture strategy, insurers plan to develop a SOA enterprise wide or De-couple front and back office with a middleware layer, very few will maintain existing architecture; Asian insurers are not yet actively using emerging technologies but are in consideration for using selected emerging technologies in non-critical business. Celent’s new report “Asia Insurance—the year ahead: The CIO Perspective” will be published soon, and will discuss on business themes such as growing the business, cost reduction, ease of doing business, meeting regulation requirements, time to market, and their related IT initiatives in detail; will discuss IT budget, areas of increased investment, IT initiatives arround Underwriting /Policy Admin, distribution and claims; In regard to Enterprise IT strategy, the report discussed IT structure, Architecture Strategy, IT Outsourcing, and Emerging Technology such as AJAX, social networking, cloud computing, SaaS.

Celent Asia Model Insurer Nomination Opening Day!

Celent’s Model Insurer awards have become a standard for recognizing excellence in technology best practice at insurers globally. Insurance in Asia faces its own set of business challenges and insurance technology has evolved along a distinctive–and sometimes more advanced–path. For these reasons, Celent is conducting an Asia specific program to identify the potentially unique “model insurer” components that have recently been deployed in the Asia-Pacific region: Celent Model Insurer Asia. Celent is seeking outstanding Asian implementations of software and process in areas such as agency portals, document management, claims, billing, distribution management, sourcing and policy administration. If you know of an insurance company in Asia who exhibits best practices in the use of technology, please click on the link and complete the nomination form http://www.celent.com/2889.htm Submissions are being accepted until August 31, 2010. Celent Asia Model Insurer winners will be profiled in a Celent report, and awards presented at a formal awards ceremony later in the year. We look forward to seeing you and your nominees there!

Welcome to Celent’s Asia Blog

Celent is continually looking for ways to better connect and interact with the financial and technology communities. Continuing in the tradition of Celent’s industry-specific banking and insurance blogs, we are now launching a blog focused on issues in business and technology strategy in the Asian financial services. Welcome to Celent’s new Asia blog. From the beginning, a differentiator at Celent has been our coverage of financial and technology issues from a global perspective. As part of this commitment, over the past few years, we have been ramping up our research on Asia and India. We have now built up quite a substantial library of research on these regions, which we think is pretty unique. Building on this, we have recently also launched two new research services, one focused on India, the other focused on the rest of Asia. These services essentially bundle reports from our banking, securities & investments, and insurance services into regionally-focused services aimed at firms seeking cross-vertical competitive information on Asia and India specifically. And now the Asia blog. We have a baker’s dozen of analysts ready to lob commentary on what we see developing in the region, as well as on Celent’s activities. We think you will find our essays informative and stimulating. And we encourage you our readers to participate in the feedback loop by sending us your comments and questions. The goal is to create an active dialogue on the evolving financial services and technology markets in India and Asia.