The focus of the 'Open House with Dr Chakrabarty' organised by Moneylife Foundation was on all aspects of banking services, especially on mis-selling of third party products, grievance redress system and technology glitches in banks
At a Moneylife Foundation programme today attended by a packed audience in Mumbai, the deputy governor of Reserve Bank of India (RBI) Dr KC Chakrabarty said that, "Customer service in banking is not negotiable, but customers must be aware about their rights. If customers depend on regulator for simple things like reading forms in details before signing blankly, then the banking system will not function". He was speaking at an Open House in Mumbai organised by Moneylife Foundation.
"Customer is the most important part of a banking system and it is necessary that the bankers do not ‘squeeze’ customers. However, after saying this, we must understand that banking is not just a service but it is also a business and banks need to levy charges on services in order to survive", Dr Chakrabarty said.
While accepting that mis-selling should not happen in banks, the RBI deputy governor said, “Mis-selling is same across banks and brokers and we need to decide to first identify what is mis-selling. For example, insurance penetration in our country is just 5-6%. However, even the highly educated people fall for ‘higher returns’, rather than the insurance and sign papers blankly”.
Earlier, while welcoming the guests, Debashis Basu, Founder Trustee of Moneylife Foundation and Editor & Publisher of Moneylife, said, “Ideally, banks should stop selling third Party Products: They often do not know what they are selling and do not care what happens to customers who buy them. There is no formal process of learning about a product, or about ethical selling. And they are never accountable for the outcome.” Moneylife Foundation has been arguing that while bankers are supposed to stand for trust; they hold a lot of money on behalf of customers. “Yet, today, bankers are often being referred to as banksters for mis-selling third-party products or for rampant mismanagement of money under the garb of wealth management services. Insurance products, gold at higher than market prices with no buyback, and the worst of all, Wealth Management Products including unregulated products like Art Funds are all sold by banks by exploiting the depositors' trust. Unfortunately, this often inflicts large losses on the hapless bank depositor,” pointed out Mr Basu. Moneylife has narrated several such cases. “As a consumer organisation, all we want is something simple and logical: we want bankers to be made responsible for what they sell,” appealed Mr Basu to the Deputy Governor.
Monelife Foundation placed before the Deputy Governor, a few submissions regarding third party products.
Selling process: If they continue to sell these products, a specific sign off by the customer on all clauses denoting risk factors and disclosure is a must. The BCSBI along with consumer bodies can be asked to work on these in a time bound manner but not more than three months.
Onus on banks: The onus of selling products appropriate to customers must be on the banks. Otherwise, they will keep selling a five-year locked in mutual fund to a 79-year old man. Or sell ULIP to a 60+ retiree, which requires hefty premium payments to be made for a five years before it starts making any returns at all.
Paper trail: Banks must be made responsible to create proof and trail mail/hard copy when relationship managers/tellers accost customers at home or at the banks. A clear email spelling out specific terms and pros and cons must be sent to the consumer.
Compensation: RBI must codify compensation to victims of mis-selling. Since the onus of proving appropriateness of products must be on the bankers, there must be detailed specified penalties when mis-selling is established.
Sale of gold: Indians love to buy gold and trust their bank. This can be a dangerous combination. On every auspicious occasion, such Akshaya Tritiya banks heavily advertise the sale of gold coins. Banks charge a huge premium over the spot price and also different banks charge different prices. Having sold, banks cannot buy back the gold they sell. It is only fair that if banks are allowed to continue sell gold, all these major drawbacks of buying gold from banks must be prominently displayed at the bank, the websites and the ads.
Mr Basu also pointed out that “the RBI has set up an elaborate system of customer services committees. A committee of the board, a standing committee, a branch level committee etc. We would be happy if there was an audit of whether these committees are actually formed, are they meeting, are customers encouraged to share their grievances and so on. If there is a yearly report of the functioning of these committees in the public domain with independent benchmarking, that would actually make the idea useful for customers.”
One of the many issues that Moneylife has taken up with the Reserve Bank of India (RBI) is the need for a technology audit of banks and the systems and processes that they adopt. Over the years, individual banks have often configured systems in a manner that hurt depositors' interest. And, since technology changes are complex and outsourced, the process of incorporating even small, but necessary changes is both cumbersome and expensive.
Recently Moneylife wrote how SBI deducted 40% as TDS (System glitch deducts 40% amount as TDS from SBI depositors’ account! ). What is the reporting and monitoring system for this? HDFC bank was found regularly deducting TDS from the principal (Now, even your fixed deposit principal may be at risk ). Surely, bankers are expected to know that tax is on income and can never be deducted from principal under any circumstances? It is even a violation of the RBI master circular. But the bank kept justifying it to customers with the argument that their systems are geared that way. Who will audit and fix these? Is there an annual audit on the robustness and correctness of bank IT systems?
This is certainly the thought process in the developed countries. From Australia to the US, many countries are now creating a separate agency, whose job will only be to regulate and supervise financial conduct and consumer protection across all financial products. India has started considering this too. Financial Sector Legislative Reforms Commission has suggested creating a consumer protection agency. Meanwhile, by June-end, we are supposed to get a new set of rules from the RBI, on wealth management and sale of third party products.
Applicants have to submit their applications by 1st July for evaluation to get a new bank licence, the RBI said, even as it extended the validity of in-principle licence nod from 12 months to 18 months
Making it tougher for aspirants, the Reserve Bank of India (RBI) today said it will look for very high quality applications to issue new bank permits and may not be possible to issue licences to all eligible applicants.
“There is no predetermined number. RBI will be very selective while considering the applications for new bank licences. It will look for very high quality applications,” the apex bank said in a notification elaborating its response to the queries raised by various stake holders.
“It may, therefore, be not possible to issue licence to all the applicants meeting the eligibility criteria,” it said.
On the timeline for granting in-principle approval for bank licence, RBI said: “It will not be possible to indicate the timeline for grant of in-principle approvals at this stage.”
The RBI, which had on 22nd February issued final guidelines for issuing new banking licences, today came up with clarifications to various queries, as many as 443 from 39 entities, raised by prospective licence seekers.
Applicants have to submit their applications by 1st July for evaluation to get a new bank licence, it said, even as it extended the validity of in-principle licence nod from 12 months to 18 months.
The regulator also said after getting in-principle approval, the licencee has to open the branches within 18 months from the date of in-principle approval.
“After the in-principle approval is accorded by RBI for setting up a bank, the promoters/promoter group have to set up the NOFHC and the bank within 18 months from the date of in-principle approval and the bank has to commence banking business within this period after obtaining the banking licence from RBI...” the notification said.
Cadila Healthcare’s 4Q was ahead of estimates by 10% at the operating level, driven by higher royalty income in the quarter. Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins
CDH’s (Cadila Healthcare) 4Q was ahead of Nomura’s estimates by 10% at the operating level, driven largely by higher royalty income in the quarter. Gross margins remain under pressure due to a price drop in the US market and higher contribution from Authorised generic sales, said Nomura Equity Research in its Quick Note on the company’s fourth quarter performance.
EBITDA margin at 18.6% in FY13 dropped 301 bps (basis points) y-o-y and is the lowest in many years. US approvals remain the most important factor driving margins. There is limited visibility on interesting US launches in FY14. Therefore, most of the margin expansion is expected in FY15 when most of the interesting approvals are expected to contribute.
The management’s guidance of a 15% effective tax rate (versus 25%-30% earlier) to an extent negates the risk of slippage in the US, said Nomura. “We are currently reviewing our earnings estimates. On our current estimates, the stock is trading at 18.6x FY14F and 16x FY15F EPS, a 0-25% discount to other generic companies, which we believe is justified given near-term earnings risk. We remain Neutral,” the brokerage added.
Cadila Healthcare reported sales at Rs15.6 billion, a growth of 16.5% y-o-y, 1.6% ahead of Nomura’s expectation. Gross margins were the lowest in the past 28 quarters, declining 367 bps y-o-y. Gross margin was under pressure due to pricing erosion in the base US business, price erosion in Taxotere and higher contribution from authorised generics sales. However, employee cost and other expenses were lower than our estimate and as a result EBITDA margins were in line with estimates, said Nomura. Net earnings were boosted by a tax write-back.
For the quarter, EM and Europe recorded 86% and 36% growth y-o-y, respectively. The growth in Europe was driven by France and Spain. EM growth was driven by countries in Asia-Pacific and Africa, as per company. US revenues declined 1% q-o-q due to lack of any meaningful launches. For FY13, CDH launched only seven new products, including one product from Nesher. Japan revenues in rupee terms were under pressure due to yen depreciation, with sales growth at 3.7% y-o-y. India formulation growth at 14.4% was largely in line with expectations, the brokerage said.
High-value launches in the US are critical for margin expansion. However, the developments in the recent past and management commentary fail to provide clarity on such launches in the near term.
CDH has so far filed 173 ANDAs, with 97 awaiting approvals. CDH filed an impressive 33 ANDAs in FY13, which include eight injectables, two topical (the first of derma filings) and the third transdermal. The pipeline presents some interesting product opportunities, but there is limited clarity of upside being realised in FY14, believes Nomura.
CDH lost a district court case on Prevacid, which was the potential low competition opportunity near term. The hearing date for Lialda is yet to be decided. There is limited visibility on other important products such as Asacol, Toprol XL, nasal sprays and transdermals at this stage. The nasal spray facility was inspected by the USFDA last year and the transdermal facility will likely be inspected next quarter. The management suggests most of the upside will be realised at best towards the end of FY14. The company has guided for 22 approvals in FY14 (with two from Nesher) and expects moderate growth of 20% y-o-y.
Nomura expects the new price ceiling for products under NLEM (National List of Essential Medicine) to be announced soon. According to the management, the overall impact of the pricing control is estimated at 2.5% of domestic sales. The implementation could also lead to some destocking by the channel on the impacted products, thereby slowing growth in 1QFY14. New product launch momentum has been maintained, as the company launched 90 new products in India versus 92 last year. The number of first-time launches was 21 against 29 in FY12.
Brazil and Mexico have been categorised as home markets by CDH and hold long-term potential. However, the approval pace in Brazil has slowed, adversely impacting growth. The company has 100 filings in Brazil, with 18 new dossiers filed in FY13. The company has obtained three new approvals in Mexico and is planning commercial launch in 2QFY14. Overall, 20 dossiers have been filed in Mexico, of which six were filed in FY13, according to Nomura.
Consumer business recorded healthy growth of 26% y-o-y, maintaining the growth momentum of the previous quarter. The growth was driven by Sugar Free, which has now started to grow in double digits, according to the management. The company has maintained its guidance of consumer business sales reaching Rs5 billion in FY14.
JV sales at Rs1.15 billion recorded a muted 1.1% growth y-o-y. Pricing pressure in Taxotere in the Hospira JV has adversely impacted growth and more importantly margins, according to Nomura. The Hospira JV collaboration has been expanded for 12 additional products, of which site transfer has already taken place for three (two for US and one for EU). These additional products will drive volume growth, though may not add to margins, stated the brokerage. The Nycomed JV has expanded to three more APIs. Overall, the management believes that JV sales will deliver growth in FY14 on a low base.
EBITDA margin for FY13 at 18.6% (Q4 margin at 16%) was the lowest in many years, and declined 301 bps y-o-y. Nomura expects improvement in margins from here on, driven by new launches in the US, Prisim 2 initiatives to control costs and improvement in margins in countries such as France and Spain. Clearly, US approvals is the most important factor.
Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins.
The management expects an effective tax rate at 15% going forward (including MAT credit) compared to 25%-30% guidance earlier. The capex for FY15 is estimated by the company at Rs6 billion (versus Rs7 billion in FY14), and is likely to come down thereafter.