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We have aimed to provide our members consulting projects and challenges that will equip them to tackle future assignments confidently and competitively. We also aim for facilitating in growth of collective knowledge of the entire student community interested in the Consulting and Strategy domain. This magazine says it all. In this issue of Strategist we have emphasized on BFSI sector, which is undergoing major changes and is one of the important sector to prop up our nation’s economy in coming years. We hope you enjoy this issue of Strategist as much as we enjoy creating it. -Team ConQuest
C O N T E N TS MAGAZINE
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ARTIFICIAL INTELLIGENCE IN FINANCIAL SERVICES -
2.
DEMONETIZATION OF INDIAN CURRENCY -
3.
16
PAYMENT BANKS: IN INDIAN BANKING -
6.
12
SBI MERGER – A BEHEMOTH IN BANKING -
5.
9
FINANCIAL IMPLICATIONS OF BLOCKCHAINS
4.
5
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THE IMPACT OF BANKRUPTCY CODE -
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A rt i f i c i a l I n t e l l i g e n c e i n F i n a n c i a l S e rv i c e s Mahakpreet Bhatia, IIM Shillong Reasoning, knowledge, planning, learning, language processing and perception – All of these are traits which are generally associated with a human mind. But, when a machine is successfully able to exhibit all these humanly traits, then we term such a machine as an artificially intelligent machine. Artificial Intelligence in the simplest of the terms may be defined as the development of algorithms or computer systems which are able to perform tasks which would normally require human intelligence. Now, the main question that arises is that if humans can successfully exhibit all the previously mentioned traits, then why do we even need a machine at all to do the same for us? The primary reason being the hu-
man desire of a world where machines and devices would be able to communicate with each other to get things done, leaving us free to relax and enjoy life. With the advent of technology, the world started to move towards automation of things. Since the development of ENIAC, the world’s first electronic general purpose computer in 1946, the human race have taken giant steps towards the development of systems to perform day-to-day activities and in the recent years have even started to add the component of artificial intelligence upon it. Apple’s intelligent personal assistant “Siri” and Microsoft’s “Cortana” are some of the prime examples of artificial intelligence out there. Artificial Intelligence has started to impact every sin-
gle industry out there and how the industry works. The finance sector has been no different as well. The finance industry involves a lot of number crunching and deals with huge chunks of data on a daily basis. The dynamics of the industry is such that it favours the environment required for the development and usage of intelligent systems. The finance industry had their first interaction with artificial intelligence in late 90’s when they used it to au-
tomate their operations. Lately, this technology is being used for spending pattern prediction of various prospective clients. This information is ultimately used by the banking institutions for extension of credit card services and other offers associated with digital wallets and other premium services. Many of us would have received calls from one or the other bank stating that we have been chosen as a lucky customer for their gold or
Journey from ENIAC to CORTANA
platinum credit card services. Do you really think it is a lucky draw or a mere coincidence? The banks actually have intelligent algorithms which run through your debit card transactions and determine whether you are suitable enough for them to extend their premium services or not. On similar lines, AI is also used by financial institutions for minimising the loan associated risks by identifying potential risk defaulters. Multiple lines of codes with the added human intelligence screen various clients of the bank and comes out with a risk of potential risk defaulters and enable the institutions to minimize their risks.
Another financial ground where artificial intelligence is being widely used is stock trading. More and more trading firms are turning to machines to do the job which humans have done for decades. Services such as “Intelligent Portfolios� have been designed where lines of
Intelligent Portfolios managing your trading decisions codes are determining where to invest the money instead of humans making such important decisions. The way they tend to function is that they first determine an individual’s risk appetite and investment goals and then create and manage customized portfolios suited to the individual’s profile. The trading time which earlier used to be equal to the blink of an eye has come down to few nanoseconds. Instead of simply crunching and computations, the machines are now making the decisions.
The way these intelligent portfolios determine the profit making stocks is that the algorithm runs through various financial statements, news reports, and regulatory filings and looks for clues and pattern in the report to determine the profitability of a stock. But, all that glitters is not gold. Replacing humans with machines have had some ugly incidents as well. One such event was the loss of over 400 million U.S Dollars in just a span of half hour by US market maker company Knight Capital in 2012.
And, all this loss happened because of just a minor computer glitch. What this incident taught the world was that the world still needs a human checkpoint, no matter how much breathtaking progressions we have made in the field of Artificial Intelligence. Another associated risk with the us a g e of thes e “Intelligent Portfolios” and “Robo-Advisors” is that they have made the market much more volatile. The traditional way of trading involved regulators in spotting the dis-
crepancies in the trade, find the rationale behind the discrepancy and then modify or adopt the trading rules. But, this lightning speed of decision making adopted by the artificially intelligent systems has taken this component completely out of the picture. Artificial Intelligence has definitely made some great in-roads to the traditional ways of working and are definitely going to play a game changing role in the financial world. But to make it irreplaceable and errorfree, there are still areas where the manufacturers and developers of such systems need to ponder upon. One major area of concern would be the security and privacy concerns associated with such systems. When the AI
system at a trading firm is attacked or tampered with, then the consequences could be devastating and might lead to major crashes in the Wall Street. A compromised system would lead to poor or false advice and the users of the system would end up acting on such malicious advice. In such cases, who would be held accountable for the crash: the developer who coded the system or the trading firm who adopted the system or is it going to be the various users who knowingly chose to trust the advice of a machine and put all their money on a particular stock? As of now, the pros of using an artificial system in financial services seems too high for it to be ignored. However, the usage of such
applications have some inherent risks associated with them such as business, security and privacy issues which need to be addressed for such systems to become an integral part of the financial world. In addition to developing artificial intelligent systems, there need to be checkpoints and trust checks during the usage of such systems. For now we can use humans as checkpoints to perform regular checks for detection and removal of malicious programs. Effective government policies and laws for governing the development and usage of such systems would go a long way in successful adoption of such systems. For now, artificial intelligent systems have started to replace humans at least in the financial world, but only time is going to tell how successful artificial intelligence has been in replacing its developer human intelligence. So, either start developing one such system or sit back and see the rise of “Artificially Intelligent Systems.�
D e m o n e t i z at i o n o f I n d i a n C u r r e n c y Mohit Awasthi, DoMS, IIT Roorkee Introduction
When it Started
With the speech by PM Narendra Modi on 8th November 2016 announcing demonetization of Indian currency notes of ₹500 and ₹1000 by the RBI. According to annual report of the RBI for the year 2015-2016 indicated that the notes to these denominations accounts for more than 85 percent of the currency of all bank notes in circulation. Which roughly accounts for about 12 percent of the GDP. This is not the first time such a step is taken by the RBI. In the year 2014, RBI had demonetized all banknotes printed prior to 2005. In 1946 notes of ₹1000 and ₹10000 were discontinued and were reintroduced in 1956 with an additional note of ₹5000. These three denominations were again demonetised in 1978.
This is evidently a planned step that was taken by the government. It is clearly evident from opening of bank accounts on mega scale (for financial inclusion),linking the account with Aadhar and further, to bring everyone into the tax net, information regarding bank accounts, passport and Aadhar card was also included into the Income tax return. The income tax declaration scheme which ended on 30th September 2016 provided a vent for honest defaulters and left no room for the real defaulters. The announcement was made at around 8 pm when all the banks were closed, markets were shutting down which in turn stole sleep of those who house black money.
Implications of Demonetization
The hard earned cash that is stashed with people will definitely find its way to banks and this will increase the volume of bank deposits. This increased flow of cash would help banks to lend more as their cash reserve ratio will become healthy. This step would slash the interest rates which in turn would push the economic growth, the increased money supply in the hands of the general public will upset the apple cart of demand-supply and may cause inflation in the long run, i.e. more supply of money in the market in comparison to the supply of goods and services. Those who have large sums of money by illegal means would be surely hesitant to
The Banking Sector
declare it in banks and this unaccounted money may cause an artificial scarcity in the market, increasing the value of money. As a result, deflation of economy may take place as goods and services would be in plenty but not the money. It is expected that the prices of gold may see the real dip and real estate sector would be worst hit by the move. But as we speak of the positives, there is also a need to account for the inconvenience to the common, honest-earning low income sectors. Some short term adverse effects on daily wage labourers, roadside vendors, and small farmers as they aren’t aware of the digital transactions. We can’t go cashless as Sweden did as we don’t have
such a tech savvy population. This blow will bring in greater awareness about digital transactions, debit and credit cards, net banking and cashless wallets which would in turn bring in greater transparency, accountability and maximum tax collection. There is a parallel economy that thrives on black money, rusting the growth of economy, fuelling inflation and depriving government of its legitimate revenues. It has been divulged that Pakistan has been formally printing large demonization currency note to near perfection. The revenue earned gives the requisite wind to the sails of terrorism emanating from Pakistan.
There is a huge stress on banking sector. The step seems to soak out liquidity from households and fuel the parched banks with liquidity. The reason could be that the international credit rating agency “Fitch Ratings” would downgrade India if it doesn’t confirm to Basel III norms. The Public sector banks have been seriously facing challenges from a long time as they suffer from poor capital buffers, thin capital ratios and quite weak prospects to raise capital through market channels. The rupee is continually falling rapidly against the dollar. This indeed hurts the sentiments of exporters as the profits they earn would be less. The stress from increased capital requirement as per Basel III norms further pressurizes the banking system. Objectives One of the objectives is to remove black money from the system. It is a known
fact that black money flourishes within the Indian economy but it needs to be understood that only a meagre percentage stands in the form of cash. In fact a huge sum is safely parked in tax heavens like Mauritius and Singapore. The balance is in form of gold and Benami properties. The government has recently allowed conversion of ₹7000 Crore from bad debts to NPA. Similarly, the bad debts acquired by absconders like Vijay Maliya are a distant dream to recover. The second objective is to tackle the menace of counterfeit currency notes but if we go by data only a miniscule amount is actually in circulation and what is the guarantee that the new currency can’t be copied. The third objective is to reduce corruption. And like every other transaction, there are
two sides to this too: demand and supply. Instead of attacking the supply side of corruption, the government has targeted the demand side. One of the biggest reasons for corruption in this country is illicit funding of political parties by those holding humongous businesses. This money is tax exempted and this pressurizes the executive to turn corrupt. With the launching of ₹2000, it has become easier for black money holders to turn their black money in to white with the help of CAs, bank managers, jewellers. Another important reason was to stop terror funding. It is an inevitable fact that terrorists don’t deal in cash, all their funding is through electronic means. The terror organizations adopt a different route by the means of fake companies set up offshore. Unless we develop a system to monitor electronic banking and tacking black money stashed in tax havens, we would not be able to stop the terror outfits.
Conclusion The demonetization of ₹500 and ₹1000 is a laudable and bold step by the government which could have been better executed. The planning was good but execution of this exercise seems to be seriously flawed. The worst hit by the move are those who don’t have access to internet or those who don’t know about cashless transactions. Exodus of daily wage labourers is another problem cropping up for small businesses. The step may be a bolt from the blue for those having black money in the form of cash but those with legitimate money are also suffering. This step will have some short and medium term effects to supplement economic growth. I hope that this cumbersome exercise gets over soon and life returns to normal for the general public.
Financial implications of Blockchains V Prathyusha, Madhuri Mehta , IPE Blockchain “A shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. This way, Bitcoin wallets can calculate their spendable balance, and new transactions can be verified to be spending Bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.” - Bitcoin.org Public Blockchain A public blockchain is a platform where anyone on the platform would be able to read or write to the platform, provided they are able to show proof of work for the same. There has been a lot of activity in this space as the number of potential users that any technology in this space could generate is
high. Also, a public blockchain is considered to be a fully decentralized blockchain.
to build proprietary systems and reduce the costs while at the same time, increase their efficiency.
Private Blockchain
Blockchains in Banking sector
A private blockchain, on the other hand, allows only the owner to have the rights on any changes that have to be done. This could be seen as a similar version to the existing infrastr ucture wherein the owner (a centralized authority) would have the power to change the rules, revert transactions, etc. based on the need. This could be a concept with huge interest from FIs and large companies. It could find use cases
• Data stored on blockchain acts as a single version of truth for all parties involved, reducing the risk of fraud.
• Significant security enhancement in areas such as payments and credit card fraud through a decentralized public transaction record that stores details of every transaction and undergoes continuous verification by miners. • Risk reduction through data integrity ensured by chronological storing of data enforced with cryptography. This, in turn, reduces the compliance burden and cuts regulatory costs in areas such as know your customer (KYC) initiatives.
• Material cost reduction through the elimination of expensive proprietary infrastructure. • By storing data in blocks and using a tamper-proof hash format, banks can improve the security of the stored identity, improve portability of data and reduce the time taken for KYC efforts. • It helps in cost reduction and prevent it from the threat of hacking. Blockchain distributed ledger is an in-erasable record of bitcoin transactions reduces the risk of the bankers. Blockchain in capital market The blockchain concept, most known for being the technology underpinning Bitcoin, has generated a huge amount of interest within capital markets.
In the last 20 years, we’ve witnessed significant technological advancements in capital markets, much of it concentrated in front-office functions. Investment in blockchain technology increased from $30 million in 2014 to $75 million in 2015, and is expected to grow in 2016 and beyond. Linux Foundation are bringing together technology and capital markets firms to establish standards for blockchain technology in capital markets. There’s no doubt about it: Change is afoot. The likely outcome is that blockchain technology will primarily work within the existing infrastructure or ecosystem to help to restructure and simplify many existing processes and strip out significant inefficiencies associated with reconciliation. Blockchain solutions will not replace the current capital markets ecosystem. Instead, we believe this technology will offer the opportunity to fundamentally re-
architect processes–driving blockchain from experimentation to mainstream adoption across multiple business applications. Blockchain in treasury and financial system
Blockchain has the potential to transform banking (even more so) into an 'eat or be eaten' market, as startups and smaller players hold significant power to come up with innovative uses for blockchain that could sideline some of the traditional roles of banks. Financial institutions are naturally keen to the be the first to develop the financial products and systems of the future. “The blockchain is ultimately disruptive to the financial system because it removes the need for trusted third parties to guarantee a transaction. By combining distributed architecture with powerful encryption, the block chain itself coordinates agreements among all the parties in a transaction — and does so in a way that’s
change. • Leverage smart contracts for trade finance to support workflows like Data LC and Bank Payment Obligations. • Attributes of blockchain allow banks to explore incremental new working capital solutions to optimise health of clients’ supply chains. highly resistant to interference.” Transaction banks rely on “the need for trusted third parties to guarantee a transaction” and they are happy to meet that demand. If blockchain sidelines that demand, we could see a very big hole in the banking business model and a power shift in the corporate-bank relationship. Blockchain can be used in trading of bonds and stocks and in verifying the authenticity of documents. Other uses could be the verifying of intellectual property and the sharing of large amounts of data. Potential Opportunities in trade to leverage Blockchain
• Incremental changes are driving new trade finance process models.
Challenges of Blockchain
• Trade documents creation and usage within physical and financial supply chain continue to present challenges for the Trade industry as a whole.
Resolving challenges such as transaction speed, the verification process, and data limits will be crucial in making blockchain widely applicable.
• Participants of trade ecosystem have strong interconnections and implications of each of them presenting challenges across end to end physical and financial supply chain linkages. • Banks can leverage Blockchain as the enabler to transform its traditional Doc Prep Services into a trusted private E-Doc Ex-
1. Nascent technology
2. Uncertain regulatory status Because modern currencies have always been created and regulated by national governments, blockchain and Bitcoin face a hurdle in widespread adoption by preexisting financialinstitutions if its government regulation status remains unsettled. 3. Large energy consumption The Bitcoin blockchain net-
work’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power. 4. Control, security, and privacy While solutions exist, including private or permissioned blockchains and strong encryption, there are still cyber security concerns that need to be addressed before the general public will entrust their personal data to a blockchain solution. 5. Integration concerns Blockchain applications offer solutions that require significant changes to, or complete replacement of, existing systems. In order to make the switch, companies must strategize the transition. 6. Cultural adoption Blockchain represents a complete shift to a decentralized network which requires the buy-in of its users and operators.
7. Cost Blockchain offers tremendous savings in transaction costs and time but the high initial capital costs could be a deterrent. Conclusion Blockchain, mostly known as the backbone technology behind Bitcoin, is one of the hottest and most intriguing technologies currently in the market. Since 2013 Google searches for “blockchain� have risen 1900%. Similar to the rising of the internet, blockchain has the potential to truly disrupt multiple industries and make processes more democratic, secure, transparent, and efficient. Entrepreneurs, startup compa-
nies, investors, global organizations and governments have all identified blockchain as a revolutionary technology. It's clear that the race is on among banks, stock exchanges, governments and all sorts of businesses to harness the latest technologies. The rush to innovate uses for blockchain among global banks is a case in point. Bank of America Merrill Lynch is one of the latest global banks to announce it is starting a blockchain-based pilot for trade finance transactions, while a consortium of 40 banks led by the startup R3 has trialled five difference blockchain products.
S B I M e r g e r – A B e h e m o t h I n Ba n k i n g V Prathyusha, Madhuri Mehta , IPE A merger is a deal to unite two existing companies into one new company. Most mergers unite two existing companies into one newly named company. Merger is a technique of business growth. Merger is done on a permanent basis. It is done between two companies. However, it can also be done among more than two companies. Smaller banks merge with larger bank and it is part of consolidation process duly
approved by RBI. This will help the small banks as their capital base is widened and it will be able to compete better on the strength of parent bank. Earlier SB of Indore and SB of Saurashtra merged with SBI. As they belong to same group, no difficulty is faced by the merged banks with the parent Bank. Introduction to the Merger The merger of SBI with the associate banks is determined plan of the government in order to reduce the NPAs and to increase the financial condition of the banks. On June 15th 2016 the cabinet approved SBI to merge with 5 Associate banks which brings the major consolidation in Banking Sector. The main idea of the merger is to make banks stronger & to increase the net score of the banks. This will help the
small banks to increase their capital base and will be able to compete with other banks. In 1921Imperial bank was formed with the merge of 3 Indian banks i.e. Bank of Calcutta, Bank of Madras, Bank of Bombay which upon independence became State Bank of India. Now SBI set to merge with 5 associate banks- State Bank of Hyderabad (SBH), State Bank of Bikaner and Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). Prior to this, in 2010 the largest deal was State bank of Indore’s 470 branches merge with SBI. This merger will involve the services of 70,000 people and about 7000 branches. The government has a stake of 61.32% in these banks.
Reasons for merger Here are major reasons for SBI merger. • To be among top 50 banks of the world: As of now, no Indian has been ranked in top 50 banks of the world. The merger of 5 SBI Associates and BMB with SBI will create a banking powerhouse and also place SBI in the list of top 50 banks of the world. SBI alone has approximately 16,500 branches, including 198 foreign offices spread across 36 countries in the world. • Widespread network of SBI: The Chairperson of SBI Arundhati Bhattacharya believes that the merger of SBI and its associate banks is a win-win situation. The network and reach of SBI will increase by leaps and bounds. With this merger, the global economy is also likely to improve. Benefits of merger The SBI merger will not only be beneficial to the employees of SBI & its Associ-
ates but will strengthen the economy and share market. Merits of the SBI merger. • Creation of banking behemoth: As per the Forbes report, the SBI merger will
create a unified body with aggregate deposits of over Rs. 21 lakh crore, net profit of Rs. 11,589 crore and advances of Rs. 18 lakh crore. • Among top 50 global banks: After the merger, the
ther, she added that repetitive cost will also come down. Challenges post merger To conclude, let’s glance through a few challenges that SBI is likely to face after the merger. • Manpower integration: Integrating 70,000+ employees of the 5 SBI Associates will be a tricky issue for the State Bank of India. State Bank of India will be ranked among top 50 global banks. SBI is likely to be placed on the 45th • Drop in the cost-toincome ratio: The cost-toincome ratio is the company’s costs with respect to its income. As per a report from SBI, the cost-toincome ratio will drop by 100 basis points a year. • Combined treasury: A combined treasury/treasury pooling will result in lower cost sa ving and streamlining the audit process.
• Rationalization: Branch ra-
tionalization is likely to be one of the significant results of SBI merger. Post merger, efficient banking system will smoothen the banking system.
• Restructuring job profiles: Amalgamating SBI employees and the employees of SBI Associates will be a monumental task for the SBI.
• Economic boost: The merger of SBI Associates & BMB with the State Bank of India will strengthen the Indian economy and banking system across the country.
• Remuneration to staff: SBI employees are entitled to pension, provident fund and gratuity, however, the employees of SBI Associate banks do not receive contributory provident fund.
• Increase in market share: The Chairperson of SBI Arundhati Bhattacharya expects that the proposed merger will raise our market share exponentially. Fur-
Current status of merger
SBI
The SBI merger is likely to be completed by the end of the current financial year. SBI chairperson Arundhati
Bhattacharya looks forward to a combined balance sheet for the financial year 201617. Highlights of the Deal: • The latest merge of SBI with its associate banks will bring their assets to $550 billion. Through this merger SBI will become a global sized bank & India’s largest bank with around 22,500 branches & 58,000 ATMs. It will place SBI in the world’s top 50 banks.
• It will increase the reach and network of SBI and would help to innovate new technology and methods to provide flexibility to the customers. • It is Win-Win situation for the SBI and its associates which was said by Arundhati
Bhattacharya. • Though SBI would have benefits of a large scale but larger balance sheet, merge of NPAs, maintenance of staff & nationalization of banks will be a key challenge. • It has a balance sheet of 28 lakh crore which is expected to grow to 37 lakh crore after the merger. • The aggregate of deposits would be around 21 lakh crore, advances of 18 lakh crore and net profit will be 11,590 crores. • The NPA situation is almost same for all the banks i.e. “State Bank's gross NPA is about 6.5 per cent. State Bank of Travancore is about 4.8 per cent, State Bank of Mysore is about
6.6 per cent, State Bank of Bikaner and Jaipur is at 4.8 per cent, State Bank of Patiala is at 7.9 per cent, and State Bank of Hyderabad is at 5.8 per cent. So the only exception is State Bank of Patiala, whose gross NPA ratio is slightly higher than SBI. Conclusion It is a Win-Win situation for SBI & its associates. The major challenge is integration of human resources because the employees have a lot of apprehension and trepidation. Consolidation must be done in the correct way to avoid future discrepancies and the NPAs must be recovered in a welldefined manner. The banks will encounter the challenge of restoring the confidence of their customers in services post the merger
Payment Banks: Revolutionizing the Indian Banking Industry Shubham Chhabra, IIM Indore (Mumbai Campus) Payments banks in India are primarily formed for the purpose of financial inclusion of under-banked and unbanked rural areas, migrant labourers and poor households. Initially, 40 applicants applied for payments banks license but RBI granted the license to 11 applicants out of which 3 have already opted out of the process. They were given a gestation period of 18 months after which RBI will review whether they have
completed the formalities or not. Licenses for payments banks have been given to already established telcos because they have penetrated into those areas where Traditional Banks cannot even think of. Mobile phones have reached to around 1 billion people, but banks have not reached even 60% of the Indian population. Moreover, payments banks have shaped
the way how cashless transactions are effected in many developing countries. Most of the banks are going online and targeting the youth because in India average age of the persons is around 30 years. So it has a lot of scope. Furthermore to add m-wallets like PayTm has increased manifolds since they have initiated the operations and is penetrating into the market exponentially. One enormous advantage for payments banks is that they already have the setup and audience know about Vodafone, Idea, Airtel etc. and they enjoy loyalty among the local merchants. Till now the m-wallets are only strategizing about the mobile recharges and other bills, but with upcoming of the payments banks, they would also focus on diverse areas like Kirana stores, paan shops etc. However, 70 per cent
of transactions in India are performed still through cash. This is quite ironical and raises questions on the efficacy of our banking system and also their capacity to cater to those who still remain excluded. In Kenya, Vodafone m-pesa has been very successful and is able to financially include 70% of its population even though they do not have proper infrastructure to support traditional brick and mortar banks and 68% population do not have a bank account. Once customers have an M-PESA account, they can use their phones to transfer funds to both MPESA users and non-users, pay bills, etc. The affordability of the service has been key in opening the door to formal financial services for Kenya’s poor. So the key take away from the success of m-pesa in Kenya which Nachiket Mor committee has taken into account areLeveraging of mobile technology to extend financial services to large segments of
unbanked poor people, Designing usage-based rather than float-based revenue models for reaching poor customers with financial services and the need for a low-cost transactional platform that enables lowincome customers to meet a range of payment needs. In India, Nachiket Mor committee is trying to replicate the success of m-pesa by introducing payment banks. Adding to the benefits above, it will also help to curb the flow of Black Money as most of the transactions will happen online and they will be recorded thus no transaction will go off-record. That will help to achieve yet another one of the prominent mission of Modi Government. If the Modi Government is able to channelize this properly, then that will be a success for the country and will change the dimensions of the banking sector. For migrant labourers whose houses are located in remote areas and they even
now have to travel miles to avail the services of the banks will enjoy the money in their hands by 2-3 clicks. In African countries, much development has been done in this regard, and people are purchasing petty things in remote areas by transferring the money by messages That will be a breakthrough, and because in this era Post Offices are getting redundant, India Post Payments banks will provide the muchneeded revival to the sinking ship. The Indian Post office having more than 150,000 branches across the length and breadth of India will provide an enormous advantage and trust earned by several years of service will
boost the process of banking to all the unbanked individuals. Considering the growth of the m-wallets in the past 3 to 4 years, payments banks have tremendous potential. In addition to this, payment banks will provide interest on deposits, so it will encourage the youth to have the money in their mobile and travel cashless without worrying about carrying many Cards, especially Debit. It will provide massive comfort as all you need to have is a Mobile phone. Moreover, looking at the profile of corporates which have got licenses in the first round, the acceptance of this sort of money will be immense. So whether you want to purchase Versace or want to enjoy a cup of tea at the top of Himalayas, all you need to have is charged mobile. However, there are several challenges for payment banks. One of the biggest challenges for Payments Banks is of security as the
latest news regarding data theft of debit/credit cards has shaken the whole ecosystem. Secondly, since the payment banks can not extend credit, so they have to play by volume. Also, according to the study of Institute for Financial Management and Research, 274 domestic migrants and their families found that the average cost to make a domestic remittance (including both direct and indirect fees) across all channels was only 3.5%, with India Post costing 6%, informal hawala channels 4.6%, and banks 3.0%. To encourage digital account adoption, Payments Banks will need to price their domestic transfer services competitively. The payment banks require substantial upfront investment, and if all goes well, it will take 3 to 5 years before the business shows positive cash flows. Also, cash addiction in Indian society is immense. The 2014 Intermedia Financial Inclusion Insights (FII) survey of 45,000 Indian adults found
that 82% of adults consider cash to be the “best tool� for small- to medium- transactions and over 80% of respondents in both urban and rural areas receive remittances in cash and in person. One option for migrating cash-based customers to digital accounts is to charge rock bottom digital transaction fees f or ba s ic P2P. Telesom Somaliland, for example, sought to migrate cash-based customers into digital channels by offering digital payment transactions for free which led to rapid uptake and usage, with the average Telesom customer conducting 40 digital transactions per month. So no matters there are challenges but opportunities are also immense, and payment banks have to carve a way out in order to establish their supremacy.
T h e I m pa c t o f B a n k ru p t c y C o d e Sumeet Kumar Jangir, IIM Udaipur The Parliament of India passed the most awaited ‘The Insolvency and Bankruptcy Code, 2015’ (Code) on May 11, 2016, to lower the NPAs and faster winding -ups of insolvent companies, in line with the economic reforms in the country. Why Bankruptcy Code? The prelim to the code reads as, “An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected
therewith or incidental thereto.” (Ministry of Law and Justice, n.d.) The growth of a country is decided by the law and order system in the country. A country like India which is in developing stage felt the need of law to deal with the increasing involvement of money defaults and NPAs. Then the recent cases like Mr. Vijay Malya which allegedly involves a loan default of Rs. 6,027 crores, triggered the government to come up with a dedicated law to deal with such cases. Increasing NPAs are a major setback for the both public and private sector banks. NPAs creates unpro-
ductive money supply in the market which is a deterrent to the economic growth. NPAs in the country has grown at a faster pace during last two years. Here is the snapshot of NPAs standing in the country from the year 2013 to 2016. The code will keep track the potential financial defaults and help the lenders to deal with them on time. What is Bankruptcy Code? The bankruptcy code includes the provisions related to the bankruptcy in 255 sections divided into five parts to deal with the different matters followed by the schedules containing amend-
ment in other existing laws in the country. The first part includes two stage process to resolve matters relating to the initiation of insolvency process of corporate debtors. In this part, the first stage is insolvency resolution process where financial creditors assess the viability of the debtor. In the second stage, there is a process related to wind down the business of the debtor and distribution of the assets if the financial creditor decides to do so. Another part of the Act contains provisions relating to other defaulters, provisions related to the composi-
tion of institutional infrastructures like the formation of The Insolvency regulator, professionals, and adjudicatory authorities.
Following are the salient features of the code• Time-bound insolvency resolution processes of 180 days. If cannot be resolved, the assets of the debtor may be sold to repay. • Licensed insolvency professionals (IPs) will resolve the matters. • IPs will be the members of insolvency professional agencies (IPAs). • To facilitate insolvency resolution, Information utilities (IUs) will be set up
to collate, collect, & disseminate financial information. • The adjudicating authority for insolvency resolution for companies will be the National Company Law Tribunal (NCLT). The Debt Recovery Tribunal (DRT) will be the adjudicating authority for insolvency resolution for individuals. • The Insolvency and Bankruptcy Board of India will be set up to regulate the functioning of IPs, IPAs, and IUs. (Ministry of Law and Justice, n.d.) How will it impact on the functioning of the system? • Curbing the NPAs: Performance of the bankers of a country are the growth indi-
cators of any country. At the same time increasing NPAs push back the growth of the bankers. The code will ensure that the timely review and resolution of bad loans of the system which will result in lowering the NPAs of the bankers as well as other creditors. The code gives power to the creditors to call for a recovery in case of non -performance of the debtors. This power will result in more recovery actions from the creditor's side hence will result in lowering the bad loans. At the same time, these provisions will demotivate the defaulter from doing defaults. • Productive utilization of the money: Lower bad loans and lower default money will ensure circulation of the money in productive ways. Reduction of NPAs will lead to a reduction in the writeoff of bad loans. That will increase the money supply in the market through more credit creation. • More smooth functioning of financial transactions:
The code will come up with more smooth and transparent system of credit creation and financing. Since the code includes clear cut steps relating to the recovery of the loans which indeed a big step to enhance more accountability and redressal of financial defaults. If more transparent credit systems are there in a country, it will increase capital flow in the country and more funds will be available. That will lead to the sustainable growth of the economy. • Protection to workers: The new code has given priority to the dues of workers in case of recovery before secured creditors which is a welcome move regarding protection to the rights of the workers. If the assets of the debtors remain shorter than the dues, then the workers will be the payee in the first place. • Covers cross-border insolvency matters: The code has introduced cross-border insolvency resolution mech-
anism which is a great move keeping in mind the increasing globalization and expanding business networks. Ao, this code will provide remedies for the crossborder issues also. • Effective administration: The code prescribed a prefixed administration to resolve the matters relating to bankruptcy and insolvency, this will lead to less ambiguity in the administration of the matter. The code has authorized NCLT and DRT as adjudicating authority for the matters related to this law; this will ensure effective and efficient execution of the matters relating to the Act. Along with adjudicating authority, the Act has mentioned the formation of licensed insolvency professionals (IPs) and the insolvency professional agencies
(IPAs) which is in line with the more effective administration. What are the challenges in accomplishing its goals? • Only creditors are decision makers: The code have given decision-making powers to the creditors only to decide on the matters relating to the insolvency resolution procedure and recovery of the debts by declaring bankruptcy of the debtors. It may lead to dysfunctional to the smooth process of loan creation and repayment, and personal biases may affect the decision-making process. • The government, the last one to get: The unsecured creditors and wages have been given place before the government dues at the time of recovery of the debts. First preference to unsecured creditors before the government dues will lead to more revenue losses to the government. • Equal voting rights to the unsecured creditors: As per the code, while deciding on
any matter relating to the recovery and declaring insolvency, the unsecured creditors will have equal rights as are with secured creditors. These rights will lead to more complications in reaching a consensus. • Operational Challenges: The code required more infrastructure, professionals, and qualified system to implement the smooth functioning of the activities under the Act. These requirements have left a new challenge before the administration in term of building the effective network of people and infrastructure. • Complications due to the interplay of existing laws: This code has amended 11 statues and replicated two statues. The increased inter-
ventions among the statutes will lead to more dysfunctionality in the execution of the matters where another statute also applicable. Conclusion Finally, in the end, note, we can say that this code will bring up with more transparency and smoothness in the functioning of the existing system but at the time there going to be challenges also in front. The code is yet to implement in the country, so we must welcome the act irrespective of stated challenges attached to it.
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