Arbitrage Magazine - March 2018 by Finance and Investment Club, IIM Rohtak

FINANCE AND INVESTMENT CLUB

Article of the Month

Fintech Revolution

MARCH 2018

VOL-2 ISSUE NO. 3

Editor’s Note We are pleased to publish the fourteenth issue of ‘Arbitrage’ – Finance and Investment Club’s monthly magazine. Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics. Our goal is to ensure that we provide significant value to the readers through informative articles and articles on current affairs. We would like to thank all the authors for contributing their articles for Arbitrage. In the Article of the Month – ‘FinTech Revolution’, the author Mr. Pramod Gupta from SCHMRD, has done a good analysis on the evolution of Fintech industry over the years. We hope for the continuous support of our authors and readers to make this magazine a success. -Finance and Investment Club, IIM Rohtak

FINANCE AND INVESTMENT CLUB IIM Rohtak 2018-19 Parag Nawani

Siddhesh S Salkar

Vineeth Harikumar

Sankalp Jain

Pavankumar S

Bibekjyoti Roy Nandi

Naveen Kumar Aditi Patil

CONTENTS

1. Fintech Revolution

2. Disrupt and Rise: Technology redefining finance

3. Ways to tackle NPA problem in India

4. Behavioral Finance

5. Is Indian Stock Market heading towards a crash?

6. FinTech growth in India

7. Financial Resolution and Deposit Insurance (FRDI) Bill 2017

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Fintech Revolution ARTICLE OF THE MONTH

Pramod Gupta SCHMRD (2017-19) Prologue: Although the traces of FinTech evolution belong to 90s when Citigroup took an initiative in the domain of financial developments using technology and thereafter FinTech has seen spectrum of versions and developments but the story of the deep footprints of FinTech dates back to 2008. It was the Global Financial Crises (GFC) of 2008 which was the quantum leap in the evolution of FinTech into a new revolution.

provide seamless, speedy, reliable and secure services to the customers. Started with the usage of computer technology in the back-end, the FinTech is now a wide spectrum of innovations. It has expanded its horizons to Insurance services, Payments and monetary transactions, Data security, Digital cash so on and so forth by the means of IoT, Blockchain, AI, Cloud, Digital banking and the like. “FinTech: It’s money on a click.”

The post-crises decisions played a key role in the advancement of FinTech. The enactment of Jump Start Our Business Startups (JOBS) Act created the path for the FinTech startups to evolve and thrive. The Act purveyed the alternatives to the credit demand of public for their businesses. The JOBS Act eased the process of raising funds and capital for the businesses through P2P platforms. The capability to cater with alternative funding sources at time when banks were confined to lending and innovate led the emergence of FinTech and related startups. Introduction: Financial Technology or “FinTech” refers to the use of technology to deliver financial services. It is often contemplated as the wedding of financial services with the technology. FinTech incorporates the technological innovations into the financial space to

Fig. FinTech affairs

2|Page Global FinTech Landscape: According to the latest statistics obtained from statista.com, the worldwide transaction value in FinTech market amounts to USD 4256.8 billion, which is expected to grow at the CAGR of 17% between the year 2018-2022 taking the number to USD 7973.8 billion. This clearly shows the growth as well as the strength this sector holds. This

In terms of headcount, the potential users in the FinTech market are expected to be 3.5 billion which is almost half of the total population of the world. This clearly implies the acceptance of FinTech worldwide. And in order to serve this ‘FinTech’ customers, financial institutions are partnering and integrating with the FinTechs. Cases in point: 1.

HSBC:

• HSBC has tied knot with Silicon Valley based AI startup ‘Ayasdi’ to automate its business process, and boost and streamline the compliance and regulatory affairs. • In another ‘game-changing’ event, it has also partnered with ‘Tradeshift’ – a supply chain

exponential growth comes amidst the partnerships between traditional banks and fintech companies mostly startups. The incumbents (88% worldwide) believe that their businesses are at risk due to the swift emergence of this fintech disruptors and so in order to retain their businesses, the financial institutions are embracing the advanced and innovative ways brought in by the latter.

invoicing startup to increase the working capital by offering trade finance. 2.

JP Morgan Chase & Co.:

• In order to provide seamless service in terms of payments and fraud detection, the company has acquired Silicon Valley-based fintech ‘WePay’. • It has also acquired payments technology firm MCX to strengthen its mobile and digital wallet for Chase customers. To cut a long story short, leading-edge FinTech companies and financial innovation are changing the competitive landscape, and are redrawing the lines of the Financial Services industry with financial institutions hand in hand.

3|Page Indian FinTech Sketch:

percentages at the sides of the graph indicates the change from 2016 to 2017.

The early signs of FinTech were observed in mid2000s when FinoPay Tech and Eko India brought and implemented Banking Correspondent(BC) model with a pint of basic technology in Indian Financial Services sector. But the major disruption was prompted by the Oxigen-PayTM-MobikWikFreeCharge quartet between 2005-2010. Thenceforth, many players have burgeoned in this landscape. As of now, there are 600+ FinTech startups in India, enhancing the financial services by the means of technological innovations. As reported by a KPMG-NASSCOM report, the Indian FinTech realm is estimated to reach USD 2.4 billion by the year 2020. In terms of potential users of FinTech, the size is reckoned to amount to 662 million, nearly half the total population of country. This upsurge in the FinTech adoption by Indians has been triggered by e-commerce, mobile wallets and smartphone penetration. The transaction value, as of 2018, is USD 52 billion which is expected to grow by a CAGR of 22% amounting to USD 73 billion by 2020. The major activities moving under the fintech umbrella are Payments, Fund transfer and financial inclusion. P2P lending, Insurance, Wealth Management and the like are striding fast towards the fintech realm. Of all this, the â&#x20AC;&#x2DC;Paymentsâ&#x20AC;&#x2122; sector is the fastest growing due to the large-scale adoption of mobile payments. The mobile payments industry is growing at a CAGR of 68% and it is poised to cross USD 185 million by 2020. Roadblocks: The fintech industry hands-down is on the highgrowth track but still there are a few challenges within this space that need to be addressed in the first scene: As reported by the PwC, the FinTechs and the traditional financial institutions are facing several challenges as put up in the infographic. The

Besides this, there are few more challenges that hampers the growth of FinTechs such as: 1. Low awareness

financial

literacy

and

customer

2. Absence of financial transaction infrastructure and telecommunications 3.

Security and privacy challenges

4. Data infringement malware contamination

Cross-platform

5. Lack of collaboration between financial institutions and FinTechs 6. Regulatory barriers such as KYC, digital identity authentication etc. Future Roadmap: The future of FinTech will be, for the most part, driven by Artificial Intelligence, Blockchain, Analytics and most importantly, Mobile. Thus far, there has been a little talk on AI and Blockchain but no late than five years, these will be the key drivers of financial services. Startups in collaboration with

4|Page tech giants are investing heavily in Blockchain and the like. • Alphabet, the parent company of Google, has pumped USD 1.2 billion in blockchain startups hitherto and is leading the cohort of blockchain investors. • The second place in the cohort is retained by Goldman Sachs followed by JP Morgan Chase, SBI Holdings and Citi.

•

Digitization of Retail banking

•

Wealth Management

•

Payments

•

Alternate lending

•

Insurance Tech

•

Fund transfers

Fig. Fintech activities on focus (Percentage indicates the priority of the activity)

Fig. Technological areas of interests

Closing note: The seed sown almost ten years ago has now turned into a sampling but there’s a long time due for it to become a tall tree. The financial services industry will be no more the same. The disruptors of today will transform the face of financial services sector tomorrow. The speed with which investments are getting pumped in the FinTech startups, it won’t be wrong to propound that banks will become a history in the next five years.

Fig. Emerging technologies

The segments that are going to be in the spotlight of fintech revolution in near future will be:

5|Page

Disrupt and Rise: Technology redefining Financial Markets Pritam Bannerjee, IIT Kharagpur Imagine the scene of stock exchange robbery in “The Dark Knight Rises” – hundreds held hostage and billions of dollars robbed in broad daylight. This plot epitomises the impact of a weak link in the chain of financial services and underscores the need for a secure and robust system for obscuring the possibility of financial debacles. FinTech, the technology that is disrupting the status quo, is driving efficiency and enabling innovation in the financial markets. This enabler is built around the primary themes of convergence of other industries into financial services, and a transformative journey which involves leveraging of disruptive ideas like the Internet of Things (IoT) and blockchain technology.

AR / VR

Digital Security journey in the extended ecosystem Advanced Analytics – Customer insights to the next level

Intelligent Automatio n – new co-worker for digital age

IoT – Door to the customer’s value chain

Componen ts of FinTech [1]

Banking APIs – Time to market, Partner Integration

Platforms – New ways of growing business

Blockchain – Impacting centralized business models Cloud – Agility, cost, security, compliance

IoT in financial markets In this context, technology-driven by sensors and web, collectively termed as the IoT, has been the front-runner in changing the landscape by disrupting the very way of conducting business,

6|Page

accounting for nearly 28.5% revenue growth. With IoT expected to enable nearly $11 trillion economic growth, its applicability in the financial market is no longer a sci-fi abstract.

IOT REVENUE OPPORTUNITY [2]

Manufacturing Other 44%

Banking

Manufacturing 23% Banking 4% Retail 8% Healthcare 8%

Utilities 5%

Retail Healthcare Transportation Utilities Other

Transportation 8%

With the early signs already there with IoT in banking, the key interest lies in how the banks leverage the availability of the huge volume of physical and observational data to create opportunities in better understanding the creditworthiness of customers. The ability to continuously monitor asset conditions with the help of sensor nodes mounted on physical items will allow banks to project timely lending services. With Barclays opting for smart piggy bank services, it is evident that IoT enabled services will be used by the leading banks to attract the young audience by making them understand the value of money in a cashless society. The launch of pay bands in the form of smart wearables further underlines the growing impact of IoT as an alternative option to facilitate contactless payment systems.

IoT also promises to change the way how the insurance sector functions, by enabling continuous engagement and positive relationship between the policyholders and the insurance company. With the use of IoT, the focus is shifting from a restitution-based insurance policy to a preventative one, by using real-time data to mitigate risks. The availability of granular data will lead to the unbundling of insurance offerings to focus more on need-based insurance at a reduced premium. Beyond personal insurance coverage, the commercial insurance sector also stands to gain from IoT implementation, permitting the providers to gauge uncertainties in real-time.

7|Page

Data – Information led real-time decision making

Inclusion – solutions for all with lower entry barriers

Acquire – Simplified KYC for mass adoption

IoT enabled bank operating model [3]

Cost Cutting – Marginal cost of transaction reduced to almost 0

Ease of access for everyone Interoperability across all systems participating in a transaction

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Implications of IoT for Insurance Industry [4] The use case of IoT implementation in the asset and wealth management industry, as well as capital market, is showing a strong positive trend, with clients demanding enhanced digital experience in terms of transparency and access, beyond the simple features, functions and tools. Analysis of investment patterns based on data encompassing oneâ&#x20AC;&#x2122;s action and inclination collected through the IoT network is a primary example of how portfolio managers can leverage the power of digitalization to offer customised experience around data. Keeping up with the trend of mobility â&#x20AC;&#x201C; the modern mantra in wealth management to develop new channels for enhanced customer relationship, retention and potential profitability â&#x20AC;&#x201C; firms are making use of the live data flow to automate fund allocation based on risk resilient models. Machine learning algorithm running on real-time data collected over the sensor nodes is also promising to open up new avenues in the capital markets, with better prediction of the dynamic market behaviour, thereby enabling the formulation of comprehensive trading strategy devoid of human intervention.

Internet of Assets: Improvement in Asset Management by % with IoT [5] 55% 28%

35%

27%

38%

35%

34%

25% 12%

The real estate sector also stands to benefit from the IoT implementation, as it enables factual and transparent property valuation and easier transaction proceedings. Furthermore, it is the internal risk management within the financial institutes which can be better handled using IoT solutions, allowing to continuously monitor the vulnerable operational issues that can eventually lead to fraudulent activities or lacklustre performance from employees.

9|Page

BFSI: % of IoT Spending by Core IoT Business Area [6] 32%

30% 22% 16%

Product Monitoring

Customer Monitoring

Premises Monitoring Supply Chain Monitoring

CAGR (2013-20) of IoT sensor deployment by financial categories [7] 98% 71% 34%

Banking

21%

23%

Capital Markets

Investment Management

Insurance

Commercial Real Estate

Blockchain in financial markets According to PwC Global FinTech Survey 2016, 56% managers have already identified the relevance of blockchain technology in the financial spectrum. The blockchain in simple terms is a ledger that is distributed on several nodes. The system has no central authority, instead, it is a shared record of transactions distributed over a vast network of users. This distributed ledger has brought about a fundamental evolution in trust management among interacting parties, ranging from clearing houses to trading houses, settlement centres to the rovision of tax receipts made through government.

10 | P a g e Creation of Electronic Message i.e. transaction details Network replicates record of verified transactions

Sent to distributed nodes with unique crypto signature

How Blockchain works? Block added to all distributed ledger copies

Economic race to be first to validate transaction

Confirmation broadcast to rest of network

The biggest gain in terms of financial uses of blockchain that has kept the large banks excited is maintaining track of trades, in bonds or stocks, and making sure that payments are made properly â&#x20AC;&#x201C; eventually leading to the abolishment of the current complex process involving banks, traders, exchangers and clearing houses and making sure that blockchain is used to log ownership data to get the work done in minutes. This use case is expected to save banks $20bn. per year, as it promises to free up huge fund currently tied up waiting for trades to be processed, and even streamline cross-border remittance by 2-3%.

Bank spending on blockchain (USD Mn.) [9] 400 310 205 80

2015

120

2016

2017

2018

2019

Blockchain technology will also lead to reduced risk in this sector, ensuring easy traceability of transactions, which in turn enhances real-time accolade and reward management for banking and

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insurance industry through a 24*7 feedback mechanism. The system of distributed ledger also promises to significantly reduce online fraudulent activities which cripple 45% of financial agents yearly. The blockchain architecture consisting of series of data blocks, each recording a batch of transaction, electronically chained together through advanced cryptography, makes it particularly robust against hacking attempts. This disruptive technology is also capable of cutting down on compliance cost, as it eases up the online identification process, allowing the re-iterative use of verified data.

Value ($Bn.) generated by blockchain in financial use cases [8] Identity Fraud

KYC / AML management

OTC Derivatives

Repurchase agreement transactions (repos)

Cross-Border P2P Payment

Cross-Border B2B Payment Trade Finance

60 17

The insurance sector will also be positively impacted by the blockchain technology, through a shift towards digital contracts running on the de-centralised ledger network. These smart records are capable of automatically bargaining and implementing statutory specifications, and thereby speed up the claim settlement process between the involved parties without mediator intervention. With NASDAQ venturing into this disruptive technology, it is clear that blockchain will redefine trading experience and the capital markets. Riding on the success of enhanced trade efficiency, the cryptocurrencies powered by blockchain technology is turning out to be an exclusive crowdfunding instrument. Moreover, the capabilities ranging from a decentralised stock exchange to the eradication of brokerage service, increased scalability to an augmented performance by tackling redundancy is greatly propelling share dealings.

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Traditional Model

Blockchain Model

Trade Finance on Blockchain [10] Another promising use case of blockchain technology is the advent of cryptocurrencies. The bitcoin blockchain, operated by bitcoin miners who organise and secure a tiny fraction of bitcoin transactions into the blockchain, is leading a currency revolution across the globe. With countries like Canada set to try out digital currency, blockchain technology showcases a wide prospect in transforming the financial business models.

Existence in absence of trust Remote independent writers

Distributed ledger

Causing disintermediation

5 key criteria for blockchain [8]

Economic benefit for participants

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AI in financial markets Robotic Process Automation will reduce the manual paperwork catapulting customer delight through a faster turnaround of financial services. This will also change the pattern of employment in the industry as tedious clerical work would lose human dependency. Not only will ML impact the simpler jobs in the financial sector, it obtains the capacity to replace partially, if not totally, the advisory roles of financial consultants. Robo-advisor uses ML algorithms for portfolio management tailored to clientâ&#x20AC;&#x2122;s needs. HDFC Bank uses its chat-bot, Eva, not only to make life easier for its employees, but also for providing seamless service to all its customers enhancing loyalty and advocacy. The launch of â&#x20AC;&#x153;Thought Factoryâ&#x20AC;? by Axis Bank which is aimed to innovate AI solutions for banking operations underscores the degree of influence of technology in this industry.

Focus on Emerging Technologies in Financial Sector [11] 19%

Blockchain

50%

20%

Biometrics & Identity Management

43% 30%

Artificial Intelligence 0%

10%

20%

30%

46% 40%

50%

60%

% of large companies that identified these emerging technologies as the most relevant to invest in within next year Financial Institutions

FinTech

The magic of AI is also being utilized for performing sentiment analysis using the social media outlet to enable the financial services including high-frequency trading and hedge funds. A further proliferation of this asset will be the algorithms developed in devising trading signals for making investment decisions. Although a double-edged sword at times, this technology can only improve for the betterment in the future. The usage of AI for credit risk analysis and customer churning forecast have released newer avenues of operation in the financial arena.

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Technology •Improvements in computing power, data availability, algorithms, costs etc.

Financial sector factors •Availability of infrastructure and data to apply new techniques

Profitability

Competition

Regulation

•Potential for cost reduction, revenue gains, improved risk management

•Race with other financial institutions and firms

•Prudential regulations, data reporting, best execution etc.

Supply Factors

Demand Factors

Financial adoption of AI and machine learning [12] A further modification of the tools may lead to bots as relationship managers and advisors on matters related to taxation and retirement. It has also been claimed that bots, trained in market pattern study, may contribute to about 80% of the daily stock trading amount by buying and selling stocks in nanoseconds.

Financial scopes where AI & Machine Learning can be introduced in the next 3 years [13] 49%

45% 37%

Risk Assessment

Financial Analysis

Portfolio Management

33%

Trading

29%

Credit Approval Process

29%

26%

19%

KYC and Anti- Regulation Administration Money and Laundering Compliance

Industry 4.0 is here, and the greatest leap in advancement will be in the field of FinTech. Yes, money still cannot be planted in fields, but certainly, money can be motioned through sound investment for improved velocity and accelerated growth. The progress of the financial sector is indispensable for overall economic growth. Considering the path of progress chartered on the wheels of technology, we can certainly be hopeful for a fruitful ride.

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WAYS TO TACKLE NPA PROBLEM IN INDIA Avik Mandal, IIM Lucknow

Introduction: A Non-performing asset(NPA) is defined as a credit facility in respect of which the borrower has failed to make interest or principal payments for 90 days. In NPA the interest and/or instalment of Bond finance principal has remained ‘past due’ for a specified period of time. It not only effects the balance sheet of the banks but also effects the economy. The following impacts are created due to high NPA:  Profit margins of the banks go down and they charge more interest rates to maintain the profit margin  As less money is available, the banking sector fails to invest in high NPV projects which impacts the GDP of a country  Due to less investment, unemployment increases.  Investors do not get desired returns To follow best practices & maintain transparency RBI has defined NPA (in March 2004) in the following ways:

In case of agricultural purpose if the loan is overdue for more than 2 harvest seasons Interest/Loan/bills overdue more than 90 days In case of cash credit if the account remains out of order for a period more than 90 days Non submission of stock statement for more than 3 quarters in case of cash credit policy

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Types of NPA: Depending upon the period of non-performance NPA can be classified into three categories:

Sub standard assests

Doubtful assests

NPA less than 12 months

NPA more than 12 months

Loss assests Loss is identified but amount has not written of fully or partially

Current situation in India: As per the data from RBI NPAs were only 3 percent of gross advances of all banks in India in 2013. But in 2017 1st quarter it has grown to 10.21 percent of gross advances with 829338 crores. For private banks NPA grew from 2 percent in 2013 to 3.5 percent in 2017. In case of nationalised banks NPA grew from 2.9 percent in 2013 to 14 percent in 2017. The NPA data of the last 2 years & the growth rate are as follows: Table 2: Growth in NPAs(q-o-q)

From the below bank wise data of NPA of June 2017 the following observations can be made:

17 | P a g e Table 3:NPA position of different Indian Banks



State Bank of India has the highest share of NPA around 22.7% during the quarter  The top 5 banksSBI,PNB,BOI,IDBI,BOB accounts a share of 47.4% of total NPA with an amount of Rs.393154 crore.  In the list of top 10NPA holders ICICI bank is the only private bank. It shows that the issue is more prevalent in nationalised banks compared to the private banks.  ICICI Bank and Axis Bank are the only private sector banks in the top 15 with a combined share of 7.9% in the total NPAs

Table 4:NPA vs Total Debt Ratio of different Indian Banks

From the NPA to total debt table it can concluded that:  The top 20 banks with highest NPA to debt ratio are public sector banks.  IDBI bank has the highest NPA to debt ratio of 24.11%

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ď&#x201A;ˇ

ICICI bank has the highest NPA to debt

ratio among private sector bank of 7.99% ď&#x201A;ˇ

YES Bank is the only bank with a ratio

of just less than 1

Reasons for the rise in NPA in recent years: In India almost 10% of the loans falls under the category of NPA. It means the 10% of the total loans taken are not repaid back. When restructured and unrecognised assets are added the total stress would be 15-20% of total loans. Not only this NPA has increased significantly in the last 5 years. This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime

crisis

2008

the

United States of America. The main reasons of this is stated below: External Factors

Internal Factors

Others

Government Policy Changes

Time & cost overrun duringPolitical pressures project implementation stage

Price volatility

Business failure

Pressures due to liberalization

Input shortage

Investment in new projects

Inability to reduce funds

Exchange rate fluctuations

Inefficiency in bank management Fund mismatching while issuing loans

Recession

Poor monitoring

credit

management

&Following government directives while issuing loans

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How to tackle NPA Problems:

Preventive actions

Curative Actions

NPA Issue solving NPA problems can be solved in mainly 2 ways: 

Preventive Actions



Curative Actions

Preventive Actions: The following preventive actions can be taken to prevent NPAs:

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Proper risk manag ement

Strengthen ing KYC

Loan restructuri ng schemes

Rotation of staff

Sector wise issue

Audit & inspection

Strengthen ing supervisor y capacity

Preventive actions

Penalise for wrongdoin g

Strict NPA rules

Restructur ing of banks

RBI more power Checking of political schemes



use of data analytics

Strengthening KYC: The objective of highly leveraged financial institutions such

of KYC guidelines in banks is to better understand

as banks to provide badly needed venture capital; it

their customers and their financial dealing. It

implies that financial systems need more than banks.

prevents the banks from being used, intentionally or They also provide greater stability to financial systems and alternative funding sources for unintentionally, by criminal elements for money laundering activities. This helps them manage their borrowers. risks prudently. 

Proper risk management &

credit management systems: Risk management implies significant limits on the ability



Loan restructuring schemes: RBI

has over the past few decades come up with a number of schemes such as corporate debt restructuring (CDR), formation of joint lenders’

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forum (JLF), strategic debt restructuring (SDR)

pointed out that the NPA problem has to be tackled

scheme and sustainable structuring of stressed assets before the time a company starts defaulting. (S4A) to check the menace of NPAs.



RBI more power: The Banking



Audit & inspection: Banks must

Regulation Act may be amended to give RBI more

conduct frequent audits & inspections of the

powers to monitor bank accounts of big defaulters.

companies to gauge the current financial condition of

The amendment in the banking law will enable

the companies.

setting up of a committee to oversee companies that have been the biggest defaulters of loans. RBI wants stricter rules for joint lenders’ forum (JLF) and oversight committee (OC) to curb NPAs. 



Sector wise issue: If we go for the

sector wise data of total debt issued and gross NPA we can see that Metal, Mining, Construction & Gems/Jewellery are the sectors in which highest

Strict NPA rules: The government investment is done & they are the highest. So, banks

has over the years enacted and tweaked stringent

must evaluate the industry properly before giving

rules to recover assets of defaulters. The

loans.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or Sarfaesi Act of 2002 was amended in 2016 as it took banks years to recover the assets. Experts have



Checking of political schemes: It

is often observed that due to some political schemes banks have to issue high value loan to the

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companies. This often creates high NPAs. So, banks Bank who was bribed by the promoters of Bhushan must evaluate these schemes properly before giving Steel was in jail for barely a few months and has not loans. 

been convicted as yet.

Proper use of data analytics: Now



Strengthening supervisory

a day’s banks are using data analytics and predictive capacity: Banks must ensure proper supervision to data mining to evaluate the companies before giving all the officers so that there is no issue of partial loans. This is highly beneficial because by data treatment while issuing loans. analytics the bank is able to predict the future value of the firm.



Rotation of staff: Improvements to

HR practices can help mitigate egregious behaviour 

Restructuring of banks: The

like frauds. For instance, PSBs tend to man the

measures could include a combination of capital

business verticals with the brightest talent and less

raising from the market, dilution of government

competent staff in the inspection and supervision

holding, additional capital infusion by the

roles. If officers are rotated in these roles, this could

government, merger based on strategic decision and not only strengthen the supervision of banks, it sale of non-core assets. would also mean that staff on the business 

Penalise for wrongdoing:

Although vigilance mechanisms exist, lax enforcement means that wrongdoing is rarely penalized. For instance, the Chairman of Syndicate

development side have experience in supervision and inspection and will therefore self-regulate better.

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Curative Actions: The following curative actions can be taken to prevent NPAs:

Rephasement of loans

Recovery action

Debt restructuring

Curative actions

Debt recovery tribunals

Acquisition of sick units

Restructuring of banks



Re-phasement of loans: It is a

Using Lok Adalats



Encouraging acquisition of sick

practice that involves restructuring the terms of an

units by healthy units: Government and banks

existing loan in order to extend the repayment

should encourage acquisition of sick units by healthy

period. Debt rescheduling may mean a delay in the

units so that loans can be returned and NPAs can be

due date(s) of required payments or reducing

reduced.

payment amounts by extending the payment period. 

Pursuing corporate debt



Using Lok Adalats for small &

doubtful loans: Banks can go to Lok Adalats for

restructuring: Corporate debt restructuring is the small & doubtful loans. reorganization of a distressed company's outstanding obligations to restore its liquidity and keep it in business.

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

Approaching debt recovery

tribunals: Banks sometimes must approach debt recovery tribunals for loan recovery. 

Recovery action against large

NPAs: Strong rules must be there so that it is easier for the banks to get the high value loans back.

Conclusion: Looking at the giant size of the banking industry, there can be hardly any doubt that the menace of NPAs needs to be curbed. It poses a big threat to the macro-economic stability of the Indian economy. An analysis of the present situation brings us to the point that the problem is multi-faceted and has roots in economic slowdown; deteriorating business climate in India; and the operational shortcoming of the banks.The government can’t be expected to rescue the state-run banks with taxpayer’s money every time they fall into a crisis. But, the kind of attention with which this problem has been received by policymakers and bankers alike is a big ray of hope. Right steps, timely and concerted actions and a revival of the Indian economy will put a lid on NPAs. Prevention, however, has to become a priority than mere cure.

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Behavioral Finance Yash Gupta, GLA University

BEHAVIORAL Finance………! What it is? Is it the sister of behavioral economics or belongs to different family.Whenever weauscult finance….NIFTY: SENSEX: NIKKEI...Time value of money...GOLDMAN SACHS……BANK OF AMERICA:SBI……CAs ,CFO , CFA starts coming in our brain, Does the finance field restricted to principles only OR there is any space of psychology & emotions in the world of finance. Let’s commence the investigation……

“Mumbai is busy every day, so we know that everyone is rational.” In very simple words it is the Science behind irrational decision making. It amalgamates social and psychology theory with financial theory to comprehend how price surges and slashes of securities in the stock markets occur freewheeling of any corporate conduct. In 1759 Adam Smith mentioned investors make more decisions on basis of psychology rather than rational analysis. It states that homo sapiens are not mathematical equations. The field of study stands in stark antithesis to the efficient markets hypothesis. Admirable work incepted in 1979 by Daniel kahneman & Amos Tversky in this field. Conventional economics & finance says humans are rational “Wealth maximizers” and consider them a Homo Economicus but the situation is somewhat distinct in bona fide world, for instance recently how many people invested in bitcoin on the basis of rational analysis or in purchasing of land many acquired on the present trends or purchase lottery ticket in the hope of hitting big jackpot.

Start boll rolling financial theory focal point on the trade-offbetwisk risk and return. However, behavioral finance commend investors are overconfident in furtherance of to making gains and oversensitive to losses. Let’s begin the journey with the causations. Anchoringresults moot decision due to basis of illogical references. It is fairly accepted in context where people are barter with brainchild that are neoteric and modernistic.au-corant instance for this is people had invested in bitcoin in the basis of image created by few agog investors. Now story continues to Mental Accounting which concerns to the mindset of people who distribute their money into apportioned accounts based on a multiplicity of subjective gauges. The linchpin to concede for mental accounting is money is commutable regardless of its antecedents or aforethought use, all money is the same. It is the habit of human beings treat money distinctively based on its source. For instance some investors apportioned their investments betwixt a safe investment portfolio and a speculative portfolio in order to anticipate the negative return. Now let’s move the vehicle to another

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causation of this field. Which are confirmation bias and hindsight bias? It is believed that "seeing is believing”.Confirmation Bias which says it can be abstruse to rezvendous anything without having a prejudice conception. The first impression pays more focuses to information that abutment their opinions, while ignoring the rest. which not matches with our opinions Result of this causation is Franz as focal point on brass tacks and facts that supports original idea rather than argumentation points.Hindsight Bias which isAnother prevalent way of seeing bias is happen in context where a person believes (after the fact) that the onset of some older event was anticipated and completely apparent, whereas in fact, the event could not have been adumbrate.For investors in world of finance , the hindsight bias is a accumen for one of the most potentially hazardous mindsets that an investor or trader can have is overconfidence concern to investors' or traders' unfounded assumption that they having higher stock-handling aptitude. Herd behavior which is already known point. It causes due to the societal load of compliance. It make them assuetude sociable and have a primary desire to be acknowledged by group, alternatively branded as an outcast.It had diplayed in the late 20th century as venture capitalists and were agitatedly investing corpus of funds into online computer network companies, even though many of these dotcoms were not economically sound, that’s why the effectual advocate is to always do rational analysis before following any au-courant trend. Now turn your vehicle to Overconfidence causation. Confidence means sensibly trusting in one's aptitude, while overconfidence generally means an overly

optimistic evaluating of one's knowledge or curb over a situation which is a straight different b/w them. Overconfident investor is only a trade away from a very humbling wake-up call. “Past track record is not an gauge of future performance” How can we forgot about Availability and Overreaction bias,whenever some straits comes out about a company, everyone attempts to get out of the sinking ship as quickly as soon as possible . This causes the stocks to slashes to alarming levels. But in practical the straits may not be that bad to cause such a huge percentage slashes in prices. This works equally well for the good news too. All investors want to get in the stock based on the au-corant, neoteric and drive up the prices more than its value. This is wholly contradictory to the Efficient Market Hypothesis.Investors overreacted to the bad news and drove the stock prices down a lot. Similarly they overreacted to the good news and drove the `stock prices all the way up. Last but not the least,Prospect theory which says if a investor were given two alike alternatives, one stated in terms of attainable gains and the other in cinch losses, people would choose the first one- even when they achieve the similar financial extreme outcomes. & negative financial results have more emotional appulse than an agnate amount of gains. Let us say, the quantity of satisfaction gain from receiving $60 should be equal to a situation in which you gained $100 and then lost $40. In duo context, the final outcome is a net gain of $60.In addition to this, it also illustrates the happening of the disposition effect, which is the assuetude for investors to clasp on to going down stocks

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for too long and clinch winning stocks too soon. The probable approach would be to hold on to leading and profitable stocks conducive to additional gains and to clinch going down stocks in order to prevent amplifying bereavement.

Adam smith has very rightly said that â&#x20AC;&#x153;All money is a matter of beliefâ&#x20AC;?.

Whether it's mental accounting, irrelevant anchoring or following the herd, probabilities are possible that we all have been guilty for minimum biases and moot behavior is the result of that irrational decision. Hopefully, our future financial and economic decisions will be more analytical, realistic, fruitful and productive as well which makes a work of behavioral finance successful.

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Is Indian Stock Market heading towards a crash? Pandi Selvam A, Mahalingam K IIM Kozhikode

Intoruduction

From Crest to Trough:

The place that provides an opportunity of an

NIFTY has experienced a whooping growth

ownership of huge billion dollar firms to a

of 694.85(8.49%) points whereas SENSEX

common citizen in the country, the same

has grown by 2470.5(7.3%) in the month of

place that provides an ideal breeding ground

January whereas the same for the calendar

for future icons like Jhunjhunwala, Damani-

year 2017 recorded a rise of 2344.9 and

Stock market. As the Oracle of Omaha

7430.37[3,4].

rightly said it is a device for transferring

conducted by AAII on Jan 3 concluded that

money from the impatient to the patient. The

59.8% of polled investors were bullish about

so-called money transferring device has been

the market. This is the highest level in about

spread across the globe and has been going

7 years and significantly higher than the

through peaks and troughs since the start of

average of 38.5%. The net investment from

2018. In general, bears dominated the market

FPIâ&#x20AC;&#x2122;s in India grew tremendously to around

10 days before the announcement of Indian

Rs.2 Trillion during the calendar year 2017

Union budget during the last four years but in

Rs.-23079 trillion in the previous year [5].

contrast bulls took over the Indian stock market for almost entire pre-budget season after the economic survey and the IMF predicting India to be the fastest growing economy in the world [1,2].

Investor

Sentiment

Survey

But the revised target of fiscal deficit to 3.3%, introduction of Long Term Capital Gains Tax and the rise in US bond yield has created a negative sentiment among the FPIs. The duo of existing Security Transaction Tax (STT) and the new LTCG tax makes India as

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the highest tax imposing nation among the emerging markets in Asia

[4]

industry, aluminum had an impact as the

. Such measures

industryâ&#x20AC;&#x2122;s market capitalization fell by 6.5%

from the government will result in investors

whereas the share of major firms like JSW

shifting to other emerging markets due to

steel, SAIL, TATA steel fell in the range of

cost concerns. In addition, the US bond

10-14% at a time when the Indian stock

yields has recorded to a three year high

indices were experiencing the rock bottom

exacerbating the negative concerns about

level of the year so far[20].

Indian market among the FPIs. These events caused the SENSEX falling from 35906.66 to 33703.59 and NIFTY to drop approximately 700 points during the month of February

[1,2]

Banking Sector Weaknesses and Impact

Future

Growth

Companies:

The reduction of corporate tax in US from

In addition, weaknesses in the key structural

35% to 21% was another blow to the Indian

facet of Indian economy viz. Banking Sector

market. The measure of tax cut implies

doomed the investor expectations. The ability

higher earnings per share for the US investors

of banking sector to extend access to credit is

in their domestic market. This is expected to

vital for the expansion of economy. This is

bring down the share of FPIs, the second

substantiated by the positive co-relation

largest investment community of Indian

coefficient seen between the market indices

market. Adding to the woes, the introduction

and the bank indices in both BSE and NSE

of tariffs on metals such as iron and steel

metrics.

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SENSEX vs S&P BSE SENSEX 40000 35000 30000 25000 20000 15000 10000 5000 0

SENSEX

S&P BSE BANKEX

Source: bseindia.com

NIFTY VS NIFTY BANK 30000 20000 10000 0

NIFTY

NIFTY BANK

Source: nseindia.com

The highly increasing amount of Non-

companies which in turn will decrease the

Performing Assets (NPA) of banking sector

value creating opportunities of companies.

has proved to be a barrier for the banks to lend as loans worth Rs.200000 crores is expected to head for bankruptcy court. Also, the stressed loan contribution with overdue for 61 days will spike beyond 16% of gross NPAâ&#x20AC;&#x2122;s when compared to the current state of 10.3%[22]. The inability of banks to lend will decrease

the

investment

spending

The banking sector has the capability of denting other domains of business as they play a key role in the foreign trade in a global economy. A negative mark on the credibility of these banks affects the international trade as well as loss of trust of domestic investors. For example, the fraudulent activities of public sector banks such as the fraud in Punjab National Bank with the jewelry

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businessman Nirav Modi dented the trust

mutual funds has shot up since then. The

between banks and diamond traders[14]. Even

domestic inflows to the mutual fund market

with

have hit a record high of Rs 1.6 trillion so far

Bankruptcy

for the current financial year with a monthly

Board of India, the recovery of NPAs seems

average share purchase of Rs 117 billion[8-

to be a long term goal while considering the

the smart investor, business standard,7th

magnitude and complexity of NPAs.

march 2018]. The contribution of equity

the

introducing

Government Insolvency

measures and

through New Fund Offers (NFO) from

Is the marked still overpriced?

mutual fund sector has more than doubled to

The current scenario is an overpriced market

15% when compared to a level of below 7%

and as per experts view the market can be

in the previous year[19]. This increased level

expected to undergo a correction of 5-10%

of domestic inflows will increase the tally of

[9]

retail investors and reduce the dependence on

. The SENSEX rose by 38% since the start

of 2016 while the EPS will be expected to

FPIs.

grow by 16% from FY16 to FY18. This was

expected to bring more taxpayers into the tax

evident across all markets as the MSCI world

bracket with revenue increasing to Rs.86706

index increased by 27% whereas the EPS

crores in the month of December after initial

climbed by only 10% in the span of 2 years

hiccups[16] and also the direct tax payment

from 2016 to 2017[10].

has been increasing after the waves of

short

term

orientation

the

complete story of stock market?

The implementation of GST is

demonetization. All such disruptions are a part and parcel of an economic cycle. In between 1897 and 1949 the S&P Composite

All these factors will result in a further

Index has witnessed ten complete market

downfall of market in the short term. But as

cycles comprising of the rock bottom bear-

Warren Buffet, the worldâ&#x20AC;&#x2122;s third richest man

market lows and bull-market highs. But as

and a global iconic investor rightly conveyed

Warren Buffet rightly believes the ideal focus

in his letter to his shareholders 2018, a huge

of investment should be on long term and

success as an investor will demand the power

such a dipping market opens the doors for an

to withstand the downtimes of the market.

ideal investor.

With banks lowering the interest rate of Fixed Deposits, the stock purchases towards

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The

principles

Value

investing

fluctuate over the years. The availability of

propounded by Benjamin Graham also helps

daily prices of stocks in stock market makes

in reinstating the need for long term

the investor enticed to buy/sell them. A true

orientation for an investor rather than short

investor will pay attention to day to day

term gains. Every investor who owns

prices only to the extent that fits to his book.

common stock must expect to see them

Source: https://www.bseindia.com/

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Source: CNBC century, Dow Jones Industrial Average From the graphs, it can be inferred that the Sensex from 1979 to 2018 and S&P from 1929 to 2018 has short term dips but in the long run markets will climb up. In the last

(DJIA) has gone from 68.13 in 1900 to 25,335.74 in 2018 despite of the 2 World Wars, Great Depression 1929, Sub-prime Mortgage crisis 2008. Hence businesses will do fine overtime.

“In terms of what’s going to happen to stock market prices in a day, week, month or year I have never felt that I knew it and I have never felt that was important. I will say in 10, 20 or 30 years stocks will be a lot higher than they are now.” - Warren Buffet

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FinTech growth in India Bhavya Khurana, IIM Indore (2017-19) Government and Regulators Overview

In India, since the crowning of Mr. Narendra

With the advent of liberalization in the Indian

Modi, the growth of the Fintech sector has

economy, India started moving towards

been phenomenal. With the foundations set

Fintech with the introduction of technologies

with the Unique Identification Number(UIN)

like NEFT and MICR that transformed the

based Aadhar and a vision to make India a

banking industry and factored in the growth

digital economy, the scope for growth of

of Indiaâ&#x20AC;&#x2122;s GDP. Mimicking the trends in the

Fintech has been phenomenal. In the process,

global economy, India has become a hub of

Indian currency was demonetized which

startups in the sector occupied by players like

acted as a catalyst for the move towards

Paytm, Mobikwik, Faircent etc. and trying to

digitization

broaden its scope since 2005. Since 2010,

payment banks, financial institutions and

India has started witnessing developments in

Unified

various segments apart from startups

service providers.

KPMG India has recognized 8 pillars of the

RBI has set target is for the financial

Indian

(a)

inclusion penetration to reach 90% by 2021.

Government & Regulators (b) Investors (c)

The push for financial inclusion from the

Financial Institutions (d) Universities and

Government and the Central bank helps

research institutions (e) Incubators and

FinTech lenders, as digital lending platforms

Innovation Labs (f) Tech vendors (g) Users

can target customer segments that were

(from corporates to retail customers) (h)

previously underserved.

Startups. In this article, we will examine the

An indirect push in this regard came in the

role of these important sectors in pushing the

Fiscal Budget of 2016 when Narendra Modi

growth of Fintech in India.

launched a Rs. 100 billion fund to support the

Fintech

ecosystem

namely:

and

Payments

opened

gateways

Interface(UPI)

for based

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startups and provide them with tax breaks in

holds 20% in the incubator which will invest

the first 3 year operations. The NASSCOM

in early stage start-ups.

(National

Goldman

Association

Software

and

Sachs

Principal

Strategic

Service Companies) predicted a growth rate

Investment Group that focuses on making

of 40 percent for startups in a year in 2017

long-term strategic bets on fast growing

and the same was easily achieved.

technology companies, had set its sights on

Investors

Indian Fintech startups since 2016.

Apart from the venture capitalists and private

Financial Institutions

equity houses the growth of Fintech has

In the past year, with the launch of ‘BHIM’

facilitated entry of some non-traditional

and the advent of UPI, digital payments have

players whose existence in the sector could

been fast-tracked with a Virtual Payment

not have been predicted in the past.

address and has reduced the need to

SBI Chairman Arundhati Bhattacharya has

remember complicated account numbers and

setup the ‘IT Innovation Start-up Fund’ will

IFSC codes to make the payments. In India,

consider assistance of Rs. 200 crores to any

around 29 banks have become UPI enabled

Indian-registered company operating in the

with around 19 having their own UPI based

area of banking and related technology (up to

apps to facilitate payment. Even Google India

₹3 crores per company). She believes that the

has seen UPI as a growth driver and has

new-age customer lives in the ‘GAFAA’ —

entered the market with its app called ‘Tez’.

an acronym for Google, Apple, Facebook,

Also, the market leaders including ICICI

Android and Amazon — realm, in which the

Bank, HDFC Bank & SBI have started

penetration

through

organizing start-up contests to spot the best

smartphones and Fintech is the best way to

innovators in the FinTech space and adopt

get access to these customers.

their technology.

can

increased

YES Bank has taken it up a notch by Recently, Reliance Industries has set up a

innovating into the ‘Blockchain’ technology.

technology incubator

Israel. namely

It has become the first bank in India to

Incubator,

successfully implement innovation in Supply

partnership with Israel-based start-up crowd-

Chain Finance using Blockchain and API

funding platform Our Crowd, Motorola

Banking. YES BANK collaborated with IBM

Solutions. RIL has invested $ 25 million and

to use their Hyperledger fabric and used a

Jerusalem

Innovation

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Smart Contract. The ‘YES ENGAGE’ is a

Incubators and Innovation Labs

Chatbot

employee

Many key incubation centers have come up

engagement and productivity management,

in the Fintech space backed by strong support

developed to help YES BANK sales teams

and investment from industry leaders like

plan and update visits done by them through

Microsoft,

a completely mobile tool. This transparent

Barclays etc.

sales monitoring process makes it easier for

One of the most active incubation center in

the frontline workforce to plan their day-to-

news recently is Microsoft Ventures, which is

day activities. The bank has won the

a corporate venture capital subsidiary of

‘FINNOVITI Award 2018’for the same.

Microsoft. Founded in March 2016, its

Universities and research institutions

mission is to be an active, strategic partner at

The

universities

key stages of a startup's growth. It supports

producing ‘world class entrepreneurs’ rather

not only company objectives, but customers,

than securing placements for the students has

partners and the ecosystem more broadly.

been on a rise. In the upcoming years, IIT

Tech vendors

and IIM now has a functional E-cell which

IBM has emerged as the leading technology

helps student-run and other startups to get

vendor catering to the needs of various

funding from venture capitalists. The CIIE at

clients. New initiatives in the area of

IIM Ahmedabad, SINE at IIT Bombay, IITM

(a)cognitive

Incubation Cell at IIT Madras are some of the

structured and unstructured data and turning

examples of famous incubation centers which

that into knowledge to enable acquisition and

have been able to pull in funding’s for the

retention of new customers (b) Blockchain

Small

using the Hyperledger framework and smart

Industries Development Bank of India (SIDBI)

contracts were the major themes explored for

has tied the knot with IIM Lucknow for

the growth of fintech in the future.

nurturing technologies impacting financial

This does not mean that innovation in the

inclusion with their incubation center SCI-FI.

industry is restricted to the big players like

based

trend

student

platform

of college

-run

startups.

for

and

Recently,

Also, almost all prominent B-schools and IITs hold entrepreneurship summits to pitch their ideas to the leading private equity firms in the industry.

Oracle,

PayPal,

banking-

YES

Bank,

processing

IBM. Ezetap is a mobile based payments company that has collaborated with SBI and aims to change the landscape of electronic payments in emerging markets. It has

37 | P a g e

developed a Chotu-ATM (small -ATM)

internet users which has recently crossed 480

device for small ration shops which can be

million users in December 2017.

used to make POS payments and withdraw

Startups

upto Rs. 1000 per day in cash daily.

The

Also, HDFC Bank has been collaborating

consumers and Fintech boom has acted as

with Chillr for payments, BankBazaar for

catalyst for the increase in number of startups

lending, Money View for mobile banking,

in the field. Presently, India boasts of over

Niki for chatbot on Facebook messenger and

600 start-ups in Fintech that belong to

Ultra Cash for payments using soundwave

various segments and the same is expected to

technology and utilizing this gamut of

grow with the introduction of a focused

services

accelerator program by local and state

and

being

cost-effective

flourishing

effect

the

Indian

partnerships with small vendors.

governments and banks in collaboration with

Users

the Startup India vision by the Centre.

The users of the services offered have been

Conclusion

growing at a phenomenal pace. In February

With the Indian population crossing 1.3

2017, post demonetization, the number of

billion people, not even 2% of the consumers

subscribers of Paytm crossed the 200 million

have become active users of Fintech-based

mark doubling its base in less than 2 years.

technologies. This goes to show the future

This has been supported by the growing

growth potential of Fintech in India.

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FINANCIAL RESOLUTION AND DEPOSIT INSURANCE (FRDI) BILL 2017 Arjun Sankar N, Priya K.N.L T.A.Pai Management Institute, Manipal a fresh set of concerns and anticipation

Introduction Every bill or law proposed in our country makes waves even before being passed in the two houses of the parliament. The Financial Resolution and Deposit Insurance (FRDI) Bill of 2017, is no exception. The financial

among everyone. The Bill establishes a Resolution Corporation to monitor financial firms,

anticipate

risk

failure,

take

corrective action, and resolve them in case of such failure.

sector and particularly the banking sector of

Financial institutions work closely all the

India are undergoing a phase of restructuring

over the world. Their activities have a major

under the BJP government. Various issues

impact on the countryâ&#x20AC;&#x2122;s and global economy

like the NPA and the insolvency cases have

at large. The Lehman Brothersâ&#x20AC;&#x2122; crisis in 2008

been appreciated, criticized and debated by

is a significant example of the same. After

people from all levels of the society. Amidst

the crisis, countries around the world

all these concerns, the FRDI Bill, tabled at

developed mechanisms and laws to bring

the Lok Sabha in August 2017, has given rise

about a discipline among the financial institutions. Though India has various laws and regulations for the firms, they are scattered and there is no sole law for the monitoring of all firms. Currently, different regulators such SEBI, IRDA, RBI, etc., take care of the firms under them. The FRDI bill seeks to address this issue by working with the regulators and create a Resolution

Figure 1

Corporation. The Corporation will classify the

firms

under

five