ARBITRAGE NOV 2018
VOL. 2 ISSUE 12
ARTICLE OF THE MONTH:
IL&FS CRISIS Impact on the Indian Economy
FINANCE AND INVESTMENT CLUB
Editor's Note We are pleased to publish the twenty-second 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 – "IL&FS crisis- Impact on the Indian Economy”, the author Ms. Tripti Lal from Shri Ram College of Commerce (SRCC) has tried to throw a light on the crisis's innate details and the consequent impact on the Indian economy. We hope for the continuous support of our authors and readers to make this magazine a success. -Finance and Investment Club, IIM Rohtak Parag Nawani Siddhesh S Salkar Vineeth Harikumar Naveen Kumar Sankalp Jain Pavankumar S Bibekjyoti Roy Nandi Aditi Patil
Index S.No.
Article
Pg. No.
1
Impact of the IL&FS crisis on the Indian economy
1
2
FINTECH in India: Empowering the nation's future
3
3
Crude oil prices
6
4
Is there a rise in demand for protectionism?
8
5
BASEL v/s Indian banks: Tiff or Truce?
10
6
From nothing comes the system?
12
7
Chinese economic slowdown: Reality
15
8
The business of gaming
17
9
Options have a future
19
10
RBI's capital framework and stand-off with centre
21
11
Do you have what it takes for credit analysis?
23
12
2018 in rear mirror: The stealthy and accelerated rise of Fintechs in India's credit system
25
IMPACT OF THE IL&FS CRISIS ON THE INDIAN ECONOMY Tripti Lal SRCC
ARTICLE OF THE MONTH
BACKGROUND The recent string of payment defaults by Infrastructure Leasing and Financial Services (IL&FS) has taken the entire financial sector by storm. Since September, when IL&FS failed to repay Rs 1000 crore loan from Small Industries Development Bank of India ( SIDBI), almost Rs 100 billion worth wealth got eroded from the market. It is being termed as the ‘India's Lehman Brother' crisis as IL&FS was one of the “too big to fail” organizations. Until early August, it had an AAA rating from credit rating agencies as it undertook major government infrastructure plans but now ICRA has reduced its rating to junk status as it is reeling under a Rs 90,000 crore debt with even its subsidiaries filing for resolution at National Company Law Tribunal ( NCLT). IMPACT ON FINANCIAL MARKET • NBFC MARKET In the past five years, the NBFC market has been booming and not only the number of NBFCs grew but it had also captured higher market share. Currently, 11,400 NBFCs are operating with a combined balancesheet of Rs 2.21 lakh crore. The stock market responded optimistically during 2013-14 by significantly increasing the valuations of these NBFSCs. The credit growth widened between the NBFCs and traditional bank as the latter was struggling with poor profitability and mounting NPAs. The CAGR of NBFC credit for the same period was astounding 17.3% while for banks it was only 10.4%.
But now the NBFCs are facing the heat as the repayment defaults of IL&FS have surfaced leading to a sharp decline in its business and profitability. Not just that, most of the NBFCs would have to sell assets
to make payments for the borrowings through the debt market. Also, licenses for 1500 NBFCs have been canceled by RBI due to the inadequate capital of the NBFCs as these were less stringently regulated as compared to banks. Moreover, mutual funds have also become wary of investing in NBFCs and pumping more money to these organizations. Mutual funds and investors are now not willing to venture in these troubled waters especially of housing NBFCs that have been devalued by the market immensely.
As it can be seen from the above graph, almost 45% of NBFCs' funds came from mutual funds. This depicts a high reliance of NBFCs on Mutual funds for its capital. But the tide now seems more favorable to traditional banking instruments. The non-food credit growth has been immense for banks as corporates are also moving back to banks rather than bond markets due to falling in risk appetite of corporates post this crisis. As the interest rates in bond markets are increasing to due to higher risk exposure, the bank loans are becoming cheaper. While an AA-rated borrower can raise funds from the bond market at 9.5-10% now, up from 8.5% a year ago, for a bank loan the fixed charge would be 8.5%. • SHARE MARKET The ripple effects of default string of IL&FS were
1
the markets. While RBI did one round of Open Market Operations in September to infuse liquidity, there was an overwhelming purchase of foreign exchange and other securities that had offset the RBI’s purchase of government bonds from banks. This liquidity deficit is hurting NBFCs as most of their funds are blocked in G-secs and other projects. The IL&FS crisis has badly hurt the NBFC valuations too. Moreover, banks and mutual funds have become wary of lending to them. felt even in share markets. Benchmark indices closed deep in the red last week. Sensex went down by 3.28% and Nifty by 3.32%. The share market devalued the IL&FS stocks steeply. As a resolution process, the Uday Kotak- led committee has recommended the sale of IL&FS subsidiaries at the current market valuations which is now stands at almost half of the valuation. While in 2015 the shares of IL&FS were pegged at Rs 750/piece, the valuation today has declined to Rs 350 a piece. Also, this valuation is as per SBI, which is a major stakeholder at 6.42% of IL&FS. But the markets didn’t value the shares even at Rs350 a piece and the demandsupply forces made the price hover at 150 a piece. This a 93.33% decline in the valuation since 2015. LIC, the largest shareholder of IL&FS is also expected to sell shares at this price only. Not only had this, but the shares of DHFL also hit a rock bottom when DSP mutual fund had sold the DHFL CPs at a steep discount rate leading to falling in DHFL valuations by 60%. While DSP cleared the air that it was restructuring its portfolio and not selling DHFL CPs due to fears of payment defaults, the markets by then had already devalued the shares of most NBFCs and housing finance companies. Bajaj Holdings & Investment Ltd., Religare Enterprises Ltd, Mahindra & Mahindra Financial Services Ltd., and Edelweiss Financial Services Ltd. slumped more than 7 percent in Mumbai and it is expected that it might slump further. • LIQUIDITY CRUNCH The Indian economy is facing a liquidity crunch with a net deficit of 734 billion dollars. The yields on government bonds are rising and thus the cost of borrowing in bond markets is rising which has sent the NBFCs into a frenzy. Not only this, most of the Commercial papers and debentures of NBFCs are due for redemption in December 2018-January 2019which is adding to fears due to less liquidity in
CONCLUSION The IL&FS crisis has made the situation worse for the NBFCs as they are currently facing liquidity crunch. Also, mutual funds are most likely to pull-out leaving lower profitability and market valuations. Moreover, the shadow banking sector, which was less stringently regulated until now, would be under RBI’s constant scanner. Small NBFCs have already been shut down. The market is yet to be stabilised and only with proper resolution of IL&FS fiasco, the NBFC sector would be able to stand on its feet again.
2
FINTECH IN INDIA: EMPOWERING THE NATION'S FUTURE Kritin Kapoor Joydeep Chatterjee IIFT Kolkata
Pasha, 34 years old, has been selling bananas on
In India, fintech is growing rapidly and is spread
depot in Hyderabad but is suddenly the talk of the
revenue and business expansion stages. In the ever
his pushcart for 18 years at the Dilsukhnagar bus
town in and around the fruit market. The reason?
He has started accepting payments through Paytm even if you buy a dozen bananas from him! A look at his Paytm transactions reveal he has made
transactions of as low as INR 2 into his account. Shortly after demonetization heavily affected
businesses of small vendors across India, a heavy shift from cash transactions to digital wallets was observed. With cashless transactions rising to
more than 20 times pre-November 2016 figures, the fintech revolution in India is touching more lives each passing day.
Fintech, common on the lips of millennials and Gen-X today, is a broad term used to describe
companies that apply cloud technology, open source software and other tools to improve
banking and investing processes. Every decade contributes significantly to the development.
The 1950s saw the emergence of credit cards to ease the burden of carrying cash. The 1960s brought about ATMs to replace tellers and
branches. In the 1970s, electronic stock trading
began on exchange trading floors. The 1980s saw the rise of bank mainframe computers and
complex data recording systems. In the 1990s, the
internet and e-commerce business models started mushrooming and ever since the leading edge of
technology in fintech has been changing every few
evenly (21%-27%) across ideation, prototype, early
flourishing field of startups in India, 7% of all fintech startups have already turned profitable indicating
the huge growth in technology and investment we have seen in the country over the past years.
PayTM could well serve as a leading example of the fintech revolution in India to describe the
exponential growth this sector has seen so rapidly.
PayTM began as a prepaid mobile recharge website in 2010, when the market was in the introductory
stage. Without any significant incumbents present, PayTM began to leverage publicity campaigns
based on their cashback & discount policies. PayTM also kept an eye out for services like DTH recharges and electricity bill payments which it eventually integrated into its mobile app that started as a "recharge only" venture.
PayTM entered the growth phase buoyed by its
launch of the PayTM Wallet, an online digital wallet that allowed users to store and pay for online and
later on offline services. This was at the same time
the digital transactions had hit 9 billion in numbers
and â‚š 1,329 trillion in value. Further, PayTM pushed for product differentiation by foraying into other uses of mobile wallets like utility payments &
movies. They were aided by the growth in the
shipment of smartphones from 8 million in 2010 to 102 million by 2015.
years.
In the early part of the 21st century, retail financial services are being further digitized via mobile
wallets, payment apps, robo-advisors for wealth and retirement planning, equity crowdfunding platforms for access to private and alternative investment opportunities and online lending
platforms. Â These fintech services are not simple
enhancements to banking services, but complete replacements for banking services instead.
3
More recently, PayTM got the license from RBI to
& RTGS and the mobile wallets, who have a limit of ₹
management products that helped push their
capture a considerable market share, with over 246
offer payments bank services, along with wealth
cumulative app downloads to over 100 million by the end of 2017. At the same time, PayTM has been
successful towards cashing in, on the growth of
10,000 pre KYC. The UPI service has been able to
million transactions amounting to ₹ 40,834 crores as at June 2018.
smartphones sales in India which is set to grow from 200 million in 2015 to 340 million by the end of 2018.
The government and other regulatory bodies are the major market makers for the fintech industry.
Coming just out of the nascent stage of growth,
fintech has remained largely lesser regulated than most other industries. Post demonetization, a
renewed push for regulation and regularization of the fintech sector was taken, with emphasis on converting India to a cashless economy.
Some of the major initiatives along these lines are: The Start-Up India initiative has allocated funds
worth $1.5B for funding start-ups. Such ventures have historically been the ones to create major
innovations like mobile wallets, KYC compliances in the BFSI sector like in the case of Primechain Technologies.
One of largest pushes for financial inclusion was in the case of the Pradhan Mantri Jan Dhan Yojna (or
While the apex regulator, the Reserve Bank of India (or RBI), has banned the use and linking of bitcoin and related cryptocurrencies, it seems to be
favouring the Blockchain technology as a process
enabler. The Institute for Development & Research in Banking Technology, which was established by the
RBI, published a white paper that suggested banks to set up private Blockchain networks for internal uses. Also, a consortium of banks led by SBI, who have formed the BankChain Alliance, have helped to
PMJDY) which achieved a total deposit target of over address several issues and aided in recording of ₹ 80,000 crores in over 31.45 crore accounts. India’s liens, mortgages, etc on a central blockchain ledger. rating on the Crisil Inclusix Index also rose from 56 in 2016 to 58 in 2018. Aadhar based biometric security
has been pushed by the RBI, with a view to improve
security as the nation shifts to cashless transactions. Under this system, an Aadhaar number in entered
into the system, which links to the Aadhaar database and pulls information for matching the biometrics of the user. As an additional layer, an OTP is also
entered by the user to complete the authentication
process. This system can be used for authenticating
As India whips through this era of revolution in the fintech landscape that bridges the gaps and brings together technological advancements, unified
payment platforms and changing mind-sets of citizens of India, we are all stakeholders of this change in the Indian economy. According to a YourStory Research study, in 2016, the Indian
FinTech start-up ecosystem witnessed more than
$687 million being poured into the space across 88
transactions and opening new accounts under the E- deals that indicates the sheer potential in a KYC system. developing country like ours. Today, any citizen with The government backed organization, National
Payments Corporation of India (or the NPCI), has led the push into the small payments segment, with the Unified Payments Interface (or UPI). With a
transaction limit of ₹ 1 lakh, the UPI service is
positioned between full-fledged transfers like NEFT
a smartphone can lend, borrow or invest money,
make payments, seek financial advice and manage portfolios at the swipe of a screen. More power to consumers brings more power to corporations leading this change.
4
It is 22:00 and Pasha is back to his house after a
wallet transactions is helping it grow. His mobile
weather doesn’t help him relax and the worry of his
which says - “Your SBI account has been credited
gruelling day of selling bananas at the bus depot. The son’s school admission is constantly on his mind.
Lying down, he thinks about his business and how
phone cries loudly, it is a message from his bank
with… Payment ref: PAYTMXXX….”. Pasha sighs and calls it a day with a smile on his lips.
5
CRUDE OIL PRICES Aditya Patil Akshay Nipane SIMSREE Formed from ancient plants and animals; under
supplies to ExxonMobil, low production from Iraq
high temperature, extreme pressure and lack of
who still wasn’t recovered from wartime damage,
has made economies, shaped political boundaries,
day, 1.36 million barrels per day of Nigerian
This primary fuel source, like any other commodity,
oil facilities and many more such events
behave differently over different time-horizons, if
it went as low as 17.27.
be said with fair certainty that one cycle takes about
decade, it comes out to be 73.12. So while we are
Month Price( in $)
are getting it at nearly same average price!
September 98 24.90
Rising crude oil price is a double edged sword for
September 00 44.81
commodity under concern is linked to dollar($)
oxygen over hundreds of thousands of years, oil is a saboteurs blowing up the two main oil export pipelines thereby cutting about 300,000 barrels per lifeline of any economy. This commodity by itself created wars & abused civil rights.
production shutting off due to militant attacks on
follows cyclic behaviour of commodity. Though it is contributed to this upheavel. On the other hand, the burst in price occurred in November 1998 when difficult to find cycle period of oil as oil prices we take a look at oil prices over last 20 years, it can
If we take a 10 year average of crude oil for last
12-14 years.
getting frenzied about the rising crude oil price, we
September 97 33.17 September 99 36.86
India as quantum of imports are humongous &
September 01 33.18
price.
September 03 39.80
The rising oil prices have become an albatross
September 05 84.12
products, India has mainly two problems. For
September 07 98.89
adequate export of refined petroleum products
September 09 82.54
for domestic consumption. But for the crisis arising
September 11 88.15
as demand is inelastic.
September 13 110.31
Sanctions on the Iran are posing serious problems
September 15 47.84
is tailor made for the Indian refineries as most of the
Last peak in price occurred in June 2008 when price
Iranian crude oil. In simple terms, the refineries give
(Though it dropped to $33.87 five months later).
Iranian crude oil. It is extremely difficult for the
changes in market fundamentals—surging demand
in a short span of time. The much talked about Iran-
contributed to this upheaval. Venezuela cutting
revived to help India meet its increasing gas
September 02 42.48 September 04 65.97
around India’s neck. In respect to petroleum
September 06 78.26
scenario where there is rise in demand, India has
September 08 116.14
(around $24.1 billion in 2017) which can be diverted
September 10 92.45
from supply side constraint, India has no solution
September 12 100.58 September 14 96.72
for India. The oil produced from the Iranian oil fields
September 16 50.46
Indian refineries are configured to process the
touched 161.56$. This was highest ever in history!
their maximum efficiency when they are refining
Although this atypical rise was consistent with
refineries to switch from one crude to other crude
and falling supply; many seemingly small shocks
Pakistan-India (IPI) pipeline dream needs to be
6
requirement.
on daily basis but the rise is done in unison manner.
There were a few moments which India could have
while 3-4 companies of India are acting together to
taken advantage of but could not. For example, in
2015, when the oil prices were lower and the assets
were available at attractive cost abroad, the surplus with ONGC could have been used to garner the assets abroad. Instead, India went with assets acquiring at domestic front.
Various industry forums & trade associations like FICCI, ASSOCHAM are demanding reduction in
excise duty. This may seem as an easy option, but
reducing excise duty will have a serious effect on the
Competition commission is keeping its eyes shut
regulate the price. In such scenario, the imports are progressively rising, but the exports of the refined
products are stagnant. Due to the high retail selling
price in domestic markets, the private players do not find any need to sell their products in the
international market. There has been huge rise in the number of retail outlets of these private refineries
because they realize the pricing mechanism that has been created on the improper principles is bonanza for them.
budget deficit. Post-2014, we saw major
We need genuine reforms in the prices of domestic
attributed to falling oil prices & progressive
play where refineries are competing against each
improvement in the fiscal health of India which was imposition of excise duty. Managing the rising CAD is a challenging task in ever increasing USD rates.
There might be drawbacks of not cutting the taxes on
petrol and diesel. Let the true efficiency come into
other to improve their efficiencies so that the refining cost comes down.
petroleum products, but cutting the taxes may add
While these remedies seem too ideal to be
All in all, cutting excise duty is not going to solve the
live in the reality. We have to accept the fact that we
fuel to already increasing Balance of payment crisis. problem. This issue needs much more fundamental change.
One of the fundamental changes could be reviewing
the Trade Parity Price (TPP). The crude consumption pattern is 80% import-20% export to determine the dealer level prices. This 80-20 bifurcation was the outcome of controlled petroleum prices. Our
venerability for the oil will always be there as long as
we have 80% import dependence on crude oil. Petrol and diesel were deregulated a few years ago, but the deregulation that India is following is pseudo-
deregulation. At present, OMCs revise the price
implemented, they are need of the hour. We have to are subjected to a commodity that is highly
influenced by the geopolitical events. Let us also remember the fact that America and Western
countries now do not rely on the Middle East for their oil needs. We are the ones who are completely
dependent on the Middle Eastern oil. We are going to bear the brunt if any mishaps happen in Middle
East. Frankly speaking, we have limited number of options available at the disposal to influence the policies of the oil producing countries.
We can only try to mitigate the effects it causes on our economy.
7
IS THERE A RISE IN DEMAND FOR PROTECTIONISM? Niranjan Reddy P National Institute of Agricultural Extension Management (MANAGE) As this year marks the decennial of the collapse of
Goods” twice in a month. First on 19 items that
economic crisis in the modern day world, and from
was followed by another round of increase in
Lehman Brothers, which leads to a greatest
that lessons are learnt to prepare for next one. But
the vital question is “What probably will trigger the
includes Diamonds, Footwear, and Grey goods. It import duties on products that mainly from
telecom industry, and this list is growing day by
next global recession and crisis?” The answer might day. All these are symptoms of rise in demand for
be the “Mr. Trump, a bull in the World trade, and his protectionism in the world and leads to breakdown policies which provoking the protectionism in the
of global integration.
The Liberalization, Privatization, and Globalization
The Economic negatives associated with the
standards of people worldwide. The integration of
Distortion in movement of capital, Inefficiency in
globe”.
was the major contributors to escalate the living
many developing economies into a one place for trade, and amicable policies for trade between
nations, thrust the national incomes for higher
levels and elevate millions above the poverty line. The Economic Crisis before a decade, brought
down that growth to a minimal level; however,
recently the world trade has been turning into the upward path with a slight increase in the normal
growth in the average growth of world GDP that is
protectionism in the world is very well known to all. the full employment in resources, Increases in the prices of consumables, Unemployment etc. all
these leads to decline in the global growth, IMF
reviewed its global growth forecast from 3.9 to 3.7 for a year 2018-19, citing the reasons of Trade
tensions and protectionism. Along with these
protectionism poses one more threat: Increase in Inflation.
around 5 percent. Yet this inchoative growth is at
Cost-Push inflation is the worst kind of inflation,
obstacles for global economic integration.
caused by protectionism. To elaborate this,
risk due to the anti-globalization sentiment and
United States Administration has embarked on an aggressive trade war with countries like China,
which is America’s one of the major supplier of low cost inputs and consumer goods. US imposed a
25% tariffs on steel imports and 10% on aluminum
from European Union, for that Europe retaliate with
tariffs on about 2.8 billion euros worth US products. And it withdrew from Trans-Pacific Partnership
(TPP) and started renegotiating the North American Free Trade Agreement (NAFTA). Brixit movement happening in the European continent. The above scenarios are issues of developed nations And
Populist nations argue that protectionism will give
protection for domestic producers, and some other adopts to reduce the current account deficit. For example, India responds for widening Current
account deficit and falling Indian rupee against a
dollar, by hiking custom duties on “Non-essential
because it is structural in nature, which is mainly Protectionism turns global markets into a local one. The inflationary impulse is partly due to tariffs and due to trade barriers, which prevent the local
markets from benefitting from access to cheaper
inputs and labor. Which in turn increases the cost of production leads to spike up the final goods prices. To illustrate this, US steel prices has been
increased than China and Europe, after US imposes tariff, Every industry which uses steel – i.e. every manufacturing, industrial and construction
industries pays a premium price for steel, which
goose the output prices, marks the inflation rise.
Protectionism forces the machine shops and labour intensives works to offer a higher wages to lure the skilled workers, although the productivity won’t
increase. Other workers too demands hike in the
wages. Individual may get rise in pay, but in holistic society will suffer with inflation.
8
The protectionism breed to inflation, which can
The group of world’s 20 largest economies met
which has inflation in a upward trend, and seen
where they stressed on the importance of World
observed in countries like US, Mexico, and Argentina nearly one percent rise in each between Q1 2018 to Q2 2018.
According to Competitiveness Research Network, the firms that exports have a greater productivity, and pays higher wages. But barriers in trade will
undermine this competitive advantage for exporting firms and brings down economy as a whole.
An economic shutdown between the world’s
economies doesn’t yield fruit for any country,
Industry, Sector. As Henry George summarized
“Protectionism is what we do to ourselves in times of peace, what enemies seek to do us in war times”,
Protectionism is a costly phenomenon – at least for small open economies, even for those who used it temporarily, even used when economies struck in liquidity trap and regardless of the flexibility of exchange-rates.
on a G20 summit in the early week of October, Trade Organization as a forum to resolve the
Protectionism issue by accepting the draft of the reform proposal called “Strengthening and
Modernizing the WTO” prepared by Canadian Government. The12th Asian-Europe Meeting
held in Brussles, brought 30 European leaders with their counterparts from Asian nations,
Together the group accounts for two-third of the world’s economic output and contributes 55 percent of world trade are pledged to have a “Rules – based global trade and pledged to Multilateralism”. This kind of treaties are
bringing little hopes among the economists and people, about restoring of globalization and
liberalization of trade between the countries and establishment of Global Economic Integration among all nations, which makes globe as a “Single Market” again.
9
BASEL V/S INDIAN BANKS: TIFF OR TRUCE? Madhulika Jadhav NIBM, Pune “A bank is a place where they lend you an umbrella
and Pillar III (market disclosures). Basel III was
begins to rain.” This famous quote by Robert Frost
not supersede either Basel I or II, but focuses on
in fair weather and ask for it back again when it
sketches beautifully the good and dark side of the banks. In earlier times banking came into picture
because people needed to double their money and that to safely. Banks in the historic times had a
simple lending and borrowing function. But now it
has completely transformed into a complex system which renders services like lending, investment,
trading, hedging and many more. The mechanism is so complex that sometimes it could lead to a heavy jolt into the system. Similar debacle occurred
developed in response to the financial crisis; it does different issues primarily related to the risk of a bank run. Minimum tier 1 capital – the key
constituent of the banks’ funds a significant part of which should be in the form of shares – should
amount to 7% of the lenders' risk weighted assets and the total capital at 9%. In addition, a 2.5%
Capital Conservation buffer is to be maintained, taking the requirement to 11.5% of the risk weighted assets.
during 2008 in America when the whole financial
The RBI initiated reforming Indian banking Sector
“systemically important” corporations. These series
commercial Banks in 1992. Earlier the CRAR level
system froze because of collapse of major
of crises was due to mortgage lending to “subprime customers” who ended up by defaulting on these loans.
To overcome from this catastrophe and to prevent it from happening in future, representatives from
the central bank and regulatory authorities came up with a set of recommendations for regulations in
banking industry the “Basel Accords”. These rules acted as a prototype that how should a bank
manage its liquidity issues and the amount of
capital reserves to be held to absorb the losses so
that it won’t hit the depositor’s money. Basel I and
Basel II were developed to ensure minimum capital requirements for the banks. Basel I included rules for credit risk and market risk. The Basel II
superseded the Basel I and was intended to amend international banking standards that controlled
how much capital banks were required to hold to guard against the financial and operational risks
banks face. These regulations aimed to ensure that the more significant the risk a bank is exposed to,
the greater the amount of capital the bank needs to hold to safeguard its solvency and overall
economic stability. It had three pillars Pillar I
(regulatory capital), Pillar II (supervisory review)
through adopting Basel I norms for Scheduled
was 8% norm by 1996, but in RBI monetary policy
review the norms were raised to 9% of CRAR level. Studies found that Indian banks have successfully adopted Basel I and II norms. The Basel III norms came with the aftermath of financial shocks and needed to apply for stringent capital adequacy norms in order to absorb jerks coming from
liquidity problems and to avoid bank run. The
Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to get all commercial
banks BASEL III-compliant by March 2019. So far,
India’s banks are compliant with the capital needs. On average, India’s banks have around 8% capital adequacy. This is lower than the capital needs of
10.5% (after taking into account the additional 2.5% buffer). In fact, the BASEL committee credited the RBI for its efforts. These norms were tougher for Indian banks as they already had to keep CRR
(capital reserve ratio) and SLR (statutory liquidity ratio) as mandated by the RBI. This means more
money has to be kept aside further stressing the
balance sheet. According to the Basel Committee
on Banking Supervision (BCBS) report, core capital requirement for banks as prescribed by the RBI is 1 per cent higher than what Basel III norms
recommend. Indian banks as per RBI direction are
10
required to maintain 5.5 per cent Common Equity
Central government to loosen up the capital held
the Basel III framework.
RBI was in a view that the capital can be utilized in
Tier 1 (CET 1) as against 4.5 per cent required under
Maintaining such huge amount of capital buffer was very difficult for Indian banks as more capital was being tied up in creating buffers and there were
fewer amounts to lend. This led to shrink in the profit
margins of the banks and halt their growths. With the
by the RBI and transfer it to the government. The stressed situations. More recently the RBI has
eased the capital adequacy requirements according to the Basel-III; Banks will have to meet the capital conservation buffer norms under Basel III by 31 March 2020.
rising NPA’s in the balance sheet of commercial
In order to fully imbibe the Basel III into the banks
Moreover about 11 banks are under the PCA (Prompt
requirements as many developed do not have these
banks these stricter regimes are difficult to follow.
Corrective Action) framework by the RBI which more or less stops the banks from lending, increasing deposits etc.
A few months ago there was a spat between RBI andÂ
the RBI should give up on the CRR and SLR
mandates. The norms are creating an additional
buffer which is stopping the banks from growing. The RBI should also ease the norms for banks
under the prompt corrective action. Moreover
stringent rules should be there to control the flow of credit.
11
FROM NOTHING COMES THE SYSTEM Ankit Barnwal SRCC (GBO) The A, B, C’s
slicing on the cake. The system of credit rating
sounds so authentic that one can’t help to simply
otherwise (and still not become wiser!).
Credit Rating Agencies(CRA’s)-The term itself
question the ratings assigned by these agencies.
seems iron clad on paper but lately we have seen
And why shall the matter be any different when all the credible CRA’s are licensed by SEBI – the
watchdog of securities market. But the time has
shown that even the God is not perfect and so how can be the mighty representative of our securities market!
It only makes sense to lend money to trusted
groups/projects. But the entire pastime of CRA’s is based upon the trustfulness of a potential project. This trustfulness, when measured, evolves into
credit ratings screaming the credit worthiness of a particular debt instrument. Thus this seemingly
obvious choice of forwarding one’s hard earned
money only to trusted debt instruments is not so obvious after all. An entire mechanism of fully
functioning sleuth of Credit rating agencies are responsible for it, at least supposedly! The System
Credit rating doesn’t have a much distant past in
India, coming into existence in the second half of 1980’s. Currently SEBI permits only six CRAs to function in India which are
1. Credit Rating Information Services of India Limited (CRISIL)
2. Investment Information and Credit Rating Agency of India Limited(ICRA)
3. Credit Analysis and Research limited (CARE) 4. Brickwork Ratings (BWR)
5. India Rating and Research Pvt. Ltd.
6. Small and Medium Enterprises Rating Agency of India (SMERA)
These CRAs operate under regulations of SEBI and rates various debt instruments and debt issuing
organizations based upon which investors proceed their money. Creditors trust these ratings simply because of the fact that one can’t analyze the
creditworthiness of each institution on their own. Further these CRAs being SEBI backed serve a
(various credit ratings and their significance) The Sins of my past
Heading straight back to the Achilles heel, the 2008 sub-prime crisis in the US, which shadowed the entire financial world was courtesy of modestly
high credit ratings to low quality mortgage backed securities by America’s CRA S&P, Moody’s and a
few others. Moody’s raked up fines of $864 million for its role in 2008 crisis, while incorrect rating
practices has led to fines of €1.2mm in Europe.
Standard & Poor’s (S&P) paid $1.4bn for rubber stamping dicey mortgage bonds.
Going desi(indigenous), one can hardly forget the
mixed records of CRA’s in our nation. While cases such as Amtek Auto and Ricoh Indian led tighter disclosure norms by SEBI. Such meagre inapt
slandering has its frit ripened- the devastating
problem of rising NPAs in Indian banking system.
NPAs are essentially bad loans, the loans which are unlikely to be recovered! Indian banks’ bad loans
stand at a humongous absurd Rs 10.25 lakh crores
as on 31st march 2018(according to RBI data). That
constitutes around 22% of our Rs 44.34 lakh crores annual GDP which is more than enough to raise
brows of an economist let alone a “rating” agency. The CRA’s seem like innocuous bystanders
12
amongst this crisis, only that they are actually not. Let’s look at how data never lies!
the companies had already began defaulting.
10% of corporate groups account for nearly 20% of all distressed loans (House of Debt). Over the last
year, there have been a barrage of opinion articles by various experts across all mainstream newspapers most of which conspicuously missing the
inadvertent role of these innocent bystanders.
According to Credit Suisse estimates, this house of
debt group had a total debt of nearly Rs 3 lakh crore
as of FY 2010.By FY 2014, their debt ballooned to Rs 7 lakh crore including 20 individual companies that
belong to these 10 corporate groups. In the 3 years
from FY11 to FY 13, every single one of these House
of Debt companies were deemed to be in the low risk or no risk category by all the credit rating agencies.
The recent IL&FS case is most interesting, at least for someone rare not affected by the financial NBFC
sector hit. The rating agencies simply reaffirmed the
AAA- rating of IL&FS debt instrument even when the
dues were delayed since months. That was only until the black swan event occurred this august when
IL&FS itself confirmed the inability to meet its dues. The CRA’s, again as with NPAs in 2014, abruptly slashed the rating from AAA- straight to a D (imminent default).
Source: Credit Suisse
Armed with these strong credit ratings, these
corporate groups went on a massive borrowing
spree and as a result an astonishing one-third of all corporate bank loans went to these corporate
groups. Now 7 of these 10 groups had dangerously high level of debt starting FY12 indicating stressed balance sheets, which was more than enough to
FRUIT OF THE POISONOUS TREE
never downgraded. Cut to early FY13, many of these
SEBI authorized private CRAs comes from nothing-
enough to meet their interest liabilities, yet the
these credit ratings nor from the stock markets
downgrade their credit ratings, only that they were
This supposedly efficient system of credit ratings by
CRA’s “golden goose” were not even earning
no remittances from either the investors who use
strong credit ratings continued.
which expect a fair rating of different companies
It was only in late 2014 that the credit ratings of many
soul, the bread and butter, from the companies it has
grade to default imminent status, only after few of
CRAs obtain their revenue from the companies being
of these groups were abruptly slashed from high
listed on it. On the contrary this system acquires its
a responsibility to rate, the ‘issuer pays’ model. The
13
rated which has proven a toxic pollutant for the
compelling paradigm shift unlike GST making this
2008, RBI constituted an advisory committee on
appears to remain. So going by the sad state of
whole financial ecosystem. Post the financial crisis of gauging the exposure of Indian credit rating system to such systemic failures. This committee though recommended no urgent need of tightening
regulations but silently advocated towards doing
away from this Issuer pay model. A better alternative could be the ‘subscription model’ where rather than charging the companies being rated, the investors
are charged a fixed amount for access to the ratings done by the CRA’s. This will not only eliminate the
dependency of the assessors(CRAs)on the assesses
still just a matter of debate and the status quo
affairs of misinformed debates sticking the entire
blame of NPAs and IL&FS crisis only upon the mere existence of the public sector banks. Most certainly the banks won’t have loaned such huge credit to these failed units if the CRA’s hadn’t bestowed
exceptional credit ratings upon these units. This
being a clear mystery needs no Sherlock to solve, just an upheaval of the present credit rating system!
(companies being rated) but will also fix a
(The author, Ankit Barnwal, possesses wide array
monetarily. Unfortunately, there appears no
research and is currently pursuing PGD-GBO
responsibility of the former towards the investors political gain sating our political class from such
of industrial work experience in operations
(Global Business Operations) at Shri Ram College of Commerce, Delhi University, INDIA).
14
CHINESE ECONOMIC SLOWDOWN: REALITY Akash Bhatia IIT Kharagpur The slowdown in the Chinese economy is not a
improvement in the education of the workforce and
transition, the outcome of which will determine the
most trained and mobile workforce will continue to
cyclical crisis. It is part of a deep and complicated future of China and, with it, the rest of the world. The reality of the economic slowdown in China,
the level of skills have also slowed down. While the
contribute to productivity growth, it is impossible to keep up with the past.
stripped of the essential, has to do with the
A second important contribution to productivity
factors for productivity growth that has driven the
allocation system to a price-driven market
diminution of the effectiveness of several key
country's spectacular economic expansion over the past three decades. These include the increase in
the quality and quantity of the workforce, the more efficient allocation of resources and investment
capital, the rapid updating of technology and the sustained high growth of exports.
When economic reform began in the late 1970s, the vast majority of the Chinese labor force worked in agriculture, using tools and methods not unlike
was the transition from a top-down resource
economy. This was crucial to allow the emergence and expansion of a private sector, which could be driven by changing price signals in the search for new investments and market opportunities. In
recent years, private sector investments have grown to represent two-thirds of the total. The gains in the
efficiency of the allocation were absolutely massive,
as described by Nicholas R. Lardy in the Market Over Mao: The Rise of Private Business in China.
However, the transition to market prices generally
centuries ago. Although literacy and basic education occurs (notable exceptions are the banking and oil have been strongly promoted under socialism, only 2% of young adults have had any kind of post-
secondary education. Over the next three decades,
sectors) and their contribution to higher
productivity increases will inevitably be lower.
hundreds of millions of agricultural workers moved
These two contributors to productivity growth have
sites, trained in the use of modern equipment and
rapidly update its technology. Foreign direct
from villages to factories and urban construction machinery. By 2016, around two thirds of the
population is urban and over 30% of young adults
have university education. According to data from
been largely complemented by China's ability to
investment (FDI) has played an important role in this regard. IED flows tend to arrive with more advanced technologies, as well as technical and managerial
the National Bureau of Statistics of China, during the knowledge. Foreign multinationals have been a same period, the Un Niño policy also produced a
massive demographic dividend with an increasing
critical channel in technology transfer (voluntarily
or not, depending on the case). However, as China's
percentage of working age and total population. The technological capabilities are close to that of net effect was a growing and increasingly
advanced economies, the recovery is becoming
But the demographic dividend ended in 2012, when
Finally, the Chinese economy has benefited greatly
population peaked, ironically caused by the same
have grown on average by 17% per year for three
productive workforce.
the relationship between working age and total Un Niño policy that produced the
demographic dividend, amplified by the growing longevity of the population. The pace of
much more difficult.
from its exports of extraordinary success, which
decades, according to the International Monetary Fund, a surprising record. This has pushed China
15
from a small player to become the biggest exporter in the world today. However, as the world's largest
exporter, Chinese exports can not grow much faster than the world economy. To try to do so, China will
have to continually remove market shares from other
exporters, which will be economically demanding and politically disastrous. In the next decade and beyond, China will have to deal with the low growth rates to a figure of exports.
The economic slowdown in China is, therefore,
natural and desirable. It is natural because most of the cheap fruit has already been harvested, such as price
liberalization and the export of labor with little added value. And it is desirable because the slowdown requires a transition to higher value-added
production, increasing wages, consumption. China is not there yet. To successfully complete the
transition, China must abandon some old habits and risk taking new initiatives. While the rapid urbanization of China has created a fertile
environment for private entrepreneurs, especially in the service sector; must be supported by better
access to more investment capital. The practice of the banking and financial sector will have to change.Â
While China is poised to create mega metropolitan regions with over one hundred million inhabitants each, the way the 250 million migrants without residence permits will be absorbed and
significantly integrated into Chinese urban society will influence the outcome. Social policies on
residence control, access to public services and
provision of social assistance will have to change. There are many challenges to be faced.
For now, however, it is a mistake to look at China's GDP growth rates, which is to lose the overall
image altogether. In 2010, 10% growth in real GDP added $ 606 billion to the economy. However, in
2017, 6% growth added $ 1,202 billion, double the 10% growth in 2010. Although India's real GDP growth rates have exceeded those of China in
recent years, the every two year period from 2010
what China has added to its GDP is bigger than all of the Indian GDP. As a result, the gap between
Chinese and Indian economies is widening, not
diminishing. Despite the economic slowdown in China, the scale and influence of the global
Chinese economy will expand, and this is the broader picture we need to look at.
16
THE BUSINESS OF GAMING Yash Agarwal FORE School of Management However, what is really remarkable is the growth of ‘Battle Royale’ games. Battle Royale genre, which
involves gamers fighting in a shrinking playground
to be the last player standing, has seen tremendous success and estimated to generate $12.6 billion in
revenue this year, up from just about $1.7 billion in 2017.
Fortnite, PUBG, Ring of Elysium are some of the games spearheading Battle Royale genre rise to Ever seen a group of people busy concentrating on
huge popularity. In addition, with more and more
plugged in. Chances are they are busy playing the
gaming trend, Battle Royale revenue is expected to
their cell phones, sitting silently with earphones
game studios trying to capitalize on the biggest
super hit game PlayerUnknown’s Battlegrounds
ascend to $20 billion next year.
(PUBG). A few years ago, college fads revolved
around clothes and music. Now they are equally or more likely to involve video games. What is even
crazier is the fact that competitive video gaming can soon be the newest Olympic sport.
The gaming industry is booming, along with the
expanding demographics of gamers. With more
people playing games and creating demand for more immersive entertainment (Video games are also
cheaper to consume than cable television or going to the movies), the future of the video game industry looks bright.
According to Newzoo (a market research firm that
The gaming industry could not have taken off
without widespread use of mobiles. Mobile gaming has played a big role in the rise of the gaming
tracks usage and trends of video games, mobile and industry and will continue to do so; it has shown 10 e-sports), gamers will spend roughly $138 billion years of double-digit growth since 2007 (launch of around the world this year. This sum represents a
iPhone) and is expected to grow 25.5% year on year
13.3% increase year on year, i.e. an extra $16.2 billion. to reach $70.3 billion.
Different games are using a diverse variety of
innovative revenue models: Games that involved a single transaction of buying have decreased in popularity. Some games are free and are
completely driven by advertisement revenue. The most popular model is the freemium model,
wherein, the games are free or inexpensive to download but users can spend more to buy
additional items to enhance their gameplay.
Another area, which has seen huge growth, is eSports or competitive gaming.
17
According to a report from Newzoo, revenues from
eSports are expected to cross $900 million in 2018, a major jump from $655 million in 2017. The revenue
from eSports consists of advertising, sponsorships, media rights and game publisher fees. In addition,
developers receive fees when tournaments include games developed by them. A big opportunity
Games can also create a positive externality; they are a great way to develop Artificial Intelligence.
This is due to several reasons; AI can use games as training grounds for the real world. In addition,
different games require diverse cognitive skills, and games can enable them to break the problem of
intelligence into smaller, more sensible chunks. Another recent addition to this industry is the
blockchain based gaming. Developers can employ the decentralized characteristics of the blockchain framework to cut the middleman and go
to customers directly. In addition, games can
accept payments in cryptocurrencies rather than traditional payment methods. Blockchain
applications can have massive potential that needs to be exploited further.
Gaming presents a huge opportunity for a country like India. The Indian gaming market is currently pegged around $890 million and is expected to
continue its golden run. The booming opportunity in digital gaming has prompted investors and
companies like Alibaba backed-Paytm, Tencent,
Youzu and Nazara to keep a keen eye on India and be a part of the next big game that is about to sweep the market.
As we know, the Indian market has greatly
benefitted from growing smartphone penetration
and availability of 4G speeds. However, this is only the first step. A lot more needs to be done. An increased focus on the local development of
games, a large volume of users and the rising
potential of monetization is needed at the earliest. Another area can be promoting eSports and the ability for players to bet on the games they play (income from wagering should be duly taxed).
Artificial Intelligence & blockchain applications
should be developed further. Moreover, special policies need to be implemented that can make gaming a significant sector creating jobs for
thousands of millennials who can join the creative workplace.
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OPTIONS HAVE A FUTURE Akash Agarwal Neha Deshmukh N.L. Dalmia Institute of Management Studies and Research In order to build wealth, we need to invest. The
that is , cover the down side of the market and at the
which have fixed but low returns, and as it is truly
rides over the market.
avenues for investment are Fixed income securities same time make profit out of it even when bear said by Robert Arnott that ‘In investing, what is
comfortable is rarely profitable’ ,So people invest in Investing in derivatives have a lot of benefits. The stock market which is riskier than fixed income securities but provide higher returns and the
ability to leverage by investing a small amount to gain exposure to a much larger investment is the
products can vary from investing in cash markets to key benefit of derivatives. Futures and Options are future derivatives. But with such a high volatility witnessed in stock market these days, panic has
used to manage the portfolio risks. Futures
Contracts, standalone, are like raging bulls. But the
gripped the investors and has put them in a situation combination of futures and options provide an where they are in a dilemma about when and where excellent investing strategy. to invest. For example, on September 21, 2018, the
BSE benchmark SENSEX swung ,1500 points before For a limited risk and maximum profits can be settling the day and this happened with NIFTY too.
achieved in derivatives by combining the bull and
The question here arises that Markets have always
future contract of say security X with a required
the bear spreads. The strategy involves buying a
behaved irrationally, so how does one strategize his number of lots and then buying the same number investments to make profits out it, without burning
of lots in the put contract at the strike price
where even a small bad news leads to high
Now the security X can be an Index, a script or any
his fingers even in such a highly volatile market, fluctuations?
Investing in derivatives can be one of the solutions. Derivatives is a widely misunderstood term. This word often conjures up visions of speculative
dealings, a big boom and a big crash. Also the most prevailing misconception is that derivatives should be used only to Hedge your positions when the
equivalent to the future contract price.
commodity. Let’s take an example of NIFTY futures and option as trading in nifty provides
diversification, requires fewer margins, are highly liquid contracts and can be used to hedge against the stock portfolio as Nifty being a benchmark index of NSE, so most of the stocks reflect the trend.
price curves tends to have negative slope and thus
freeze your position at the hedged price and wait for another cycle to achieve the same level of prices which may even take long time and may put the investor in doubt about his forecasts and may compel him to square of his positions.
But these notions are not true. So the question that arises here is that can there be a derivative strategy that can help cover risks which would arise on the
trading of securities on which the derivative is based
19
Description:
Case 1: Buy Nifty Futures say for an example @ 10,000 for one month and roll over the position
every month till the term of the investment. Also buy a Put option contract of Nifty @10,000 strike price of equal lots as that of Future contract and
considering the premium value for the put option contract to be Rs 200.
Suppose, the value of Nifty falls to 9500.There will be a Rs500 loss in futures and a Rs500 gain in put option of which we need to pay Rs200 as premium so net profit in put will be Rs 300. The overall loss in the
transaction will be -500 + 300 = -200. So a Rs 200 loss in the overall transaction.
Case 2: Roll over the previous position by buying
Nifty Futures @ 9500 and a Put Option contract of Nifty @ 9500 strike price with say Rs 200
premium. Now, if the Nifty recovers back to its
previous value of 10,000 then it will be a profit of Rs 500 in futures and a loss of Rs 500 in the
put option. The put option will not be exercised and hence we will have to pay only the
premium value. So the net profit will be 500(futures) - 200(put) = Rs 300.
Case 3: Buy the Nifty Futures Contract @ 10,000. Buy Put Option of Nifty @ 9500 strike price, the
lowest value of Nifty in our investment cycle so that
we can prevent any losses to our investment value. As we are buying the Put option out of the money hence the value of the premium will be very low say Rs 20. Now suppose the Nifty value goes to
11000. As, Nifty has gone to 11000, there will be a
profit of Rs 1000 in futures and a loss of Rs 1000 in put option. We will not exercise the put option thus minimizing our loss only to the premium
value. The total net profit will be = 1000-20 = Rs 980. Thus as the value of Nifty will go on increasing, the investment will make profit in futures and the loss
will be restricted to the premium value. Also, as the value of Nifty goes on increasing the we will buy
the Put option with the lowest value of Nifty in our investment cycle and hence the value of premium required to be paid will be very low. Thus this
investment approach provides for an unlimited
profit for a limited loss of the premium amount. Derivatives are highly risky investments, but if you adopt safeguards, they can be rewarding as well. **Disclaimer: All the information and views
present in the article are hypothetical and are for
the information purpose only and in any form does not gives any recommendation or advisory.
Investors are advised to make their own sound discretion and judgement before investing.
20
RBI'S CAPITAL FRAMEWORK & STAND-OFF WITH CENTRE Tanmay Hazari FORE School of Management There has been a long standoff between RBI and the
government. The surplus after allocation is
With elections overhead, the government is trying
budget session. A settlement is reached every year
current government over RBI's Capital framework.
hard to fulfil its promise of increasing rural incomes, improve unemployment condition and address the
transferred to the government every year before the by showing flexibilities from both sides.
ongoing liquidity issue in the current market.
But with elections overhead and over a dozen PSUs
The Government wants to reset the existing capital
means they can't lend money to industry and thus
framework of RBI by recoursing a section 7 never
used in 83 years of history of RBI to free a cash worth
bank under Prompt corrective action (PCA), which the MSME lending have gone down.
of 3.6 lakh crores from RBI's cash surplus which is
The government wants the surplus cash from the
transferred to the government.
MSME and Shadow lending to boost the economy.
approximately 2.1 % of last year's GDP to be
The framework governs the risks of RBI for
absorbing the losses in currency value and forex market operations. The timing of government
RBI to push liquidity in the market and increase
The government will also be trying to increase the
rural income by providing the promised minimum support prices for crops to the farmers.
mounting pressure on RBI's War chest is though
NBFCs sector had a tremendous growth in previous
independence of the Central bank who were praised
major lenders are facing redemption pressure and
questionable that it is trying to curb the
for their policies during the 2008 economic crisis. A lot of global banks went out of business but RBI
managed the liquidity crisis and maintained smooth operations for Indian banks. Though RBI's current capital structure of capital adequacy is a little
stringent as compared to BASEL - III norms and that can be relaxed if the government insists.
4-5 years, but with the IL&FS debacle, most of the
lack of cash for further lending.Huge cash outflow from the primary market and Mutual funds are adding more to the liquidity crisis. The RBI's
contingency funds have been reduced from 12% to 6% over a span of 10 years and it is working on a
system that will systematically access the risk-buffer requirement of the funds required.
So, what is RBI's WAR CHEST?
Under the tenure of Ex-RBI governor Mr Raghuram
of the government securities holding, overnight
buffer limit, it was transferred to the government in
The income that the RBI incurred from the interest lending to commercial banks and returns from
foreign currency assets and the main expenditure is
the cost of printing currency, agency commission to commercial banks & salaries to 17000+ employees.
The estimated level of funds RBI holds right now is 9 lakh crores as surplus, but these funds are allocated by RBI as various statutory funds and meeting
specific provisions such as depreciation in gold,
securities and investments. The tussle is on how much amount RBI should set aside as statutory
funds and how much should it hand over to the
Rajan, the accumulated reserves exceeded the
totality without keeping any surplus. But post-
demonetisation the cost of printing new currency
notes and disposal of collected old currency erodes
the excess surplus that RBI accumulates and now to meet the government's fiscal expectation there is a tussle with the RBI's Capital framework to reduces
the contingency fund allocation of RBI and transfer of the excess funds to the centre. The government
will try to mount pressure to RBI to loosen up on the stringent capital framework policy and ease of lending of banks to MSMEs and shadowÂ
21
lenders to bring back liquidity in the market in RBI's board meet.
RBI's Board Meet Outcome -
Both the centre and the RBI has reached to resolve
the conflict by forming a committee for restructuring the existing Capital Framework and the main issue raised was the liquidity crunch and stringent rules imposed on banks to issue loans to MSMEs and Other shadow lenders. RBI had agreed to take
corrective measures under the PCA framework and
relax some of the norms that will allow the banks to lend money to the MSMEs sector and address the liquidity crunch. What will happen to the 3.6 Lakh
crores of surplus money of RBI is still not certain and will be decided after the committee make any
recommendations. This is the first time that RBI was in direct conflict with the centre that stretched too long that there were discussions of centre using section 7 to vote on a matter going against
the decision of the RBI. But with current monetary
policy and concerns of growing NPAs of banks, the government should not interfere in the works of
the central bank to clean the books of debt-ridden banks. This extra surplus that the RBI holds as
contingency funds can be used in the time of crisis to kick-start the economy or give a rate cut at a later stage to control growing inflation. The
committee that will be formed to look into the
existing capital framework needs to analyse that what per cent of funds that RBI needs as its statutory funds and what amount is to be
transferred to the government. If there is any
change in the structure and government get access to extra funds will help not only the existing
government to complete the pending projects and reach the estimated projections, but it will also
help the next government to be elected in 2019 to
employ these extra funds in Nation's development.
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DO YOU HAVE WHAT IT TAKES FOR CREDIT ANALYSIS? Parag Nawani IIM Rohtak Quantitative analysis
It includes cash flow analysis, trend analysis, and financial projections. It also entails analysis of
various ratios like interest coverage ratio, debt service coverage ratio, current ratio, etc. and calculation of working capital cycle. “Credit rating agencies downgraded credit ratings of IL&FS from AAA to D.”- These kind of updates were
running on TVs recently. What do AAA and D mean? What is a credit rating? A debt investor must be knowing the importance of these terms and downgrade, but for a novice, it might be an unknown thing.
We all listen about the equity market, its volatility and the great returns that the investors get by
investing in various stocks. However, much more
important than the equity market is the debt market, which is bigger than the equity market.
Companies/sovereigns and various other parties
issue short/long-term bonds to raise money from the market to invest in specific projects. Investors
subscribe to these bonds and provide their money to the issuer and in return, receive interest
payments and principal payments. Credit market
plays a critical role in the development of a nation,
since many projects are financed through debt, and many companies expand into new markets using
these bonds. In this article, I have tried to provide
some insights into a proper credit analysis, which is gaining momentum nowadays.
Credit analysis is that analysis which an investor
performs on companies to measure their ability to meet their debt obligations. The credit analysis
pursues to identify the suitable level of default risk associated with investing in that particular entity. I have divided it into Quantitative and Qualitative analysis, the brief of which is explained in the following paragraphs.
Financial projections
Analysts have to perform financial projections for companies taking long-term debt, taking into
account the industry outlook and the company’s future planning. Monte Carlo simulation is one effective method to perform this. Cash flow analysis
“Cash to a company is like water to a fish. Remember without it, the fish dies.” It is critical to understand
the cash flow of a company. The company might be
showing profits on its statements, but is deprived of real cash generation. That means it won’t be able to pay its obligation. Financial ratios
The financial statements of a company tell about the financial health of a company. They need to be
properly analyzed for sound credit analysis- the
ratios like interest coverage ratio, and debt service
coverage ratio help in determining the debt-paying capacity of the company. Other measures like working capital cycle tell about the cash
management strategy about the company. These
ratios are to be compared with the industry average to get a better idea of the company performance. These are some of the important quantitative
parameters to analyze a company from a credit point of view. Other such parameters can be used for a deeper understanding of the company. Qualitative analysis
Qualitative analysis includes analysis of 5 Cs of
credit. This is the most important framework to analyze the company’s credit position.
23
5 Cs Character (Management quality)
This is an important measure of proper credit analysis. The intent and competency of the
management team of the company determine, to a large extent, the future financial condition of the
company. The debt history of the company and its plans can be analyzed for this parameter. Capacity
This can be measured by the quantitative analysis of the company, using the financial statement analysis and the financial projections of the company. The trend and cash flow analysis also provides an
insightful idea about the financial capacity of the company. Capital
This refers to the company’s resources used for the
project. This gives an idea about the serious intent of the company towards the project. Conditions/Covenants
This refers to the debt covenants mentioned in the bond. The covenants are meant to protect the
investors’ interests. A proper analysis of covenants
provides an idea of the future risk of investing in the bond.
Collateral
It is an asset used as a back-up, that, in the case of a
default, can be used for repayment. Collateral with a
good market value works towards the interests of the investors and can act as a last resort in the case of a
Credit rating
Credit rating agencies assign credit ratings to bonds of various companies, which tell the
investors whether those bonds are investment grade or not. In India, the major credit rating
agencies are CARE, CRISIL, ICRA and India Ratings. These companies perform a proper credit analysis
of corporate bonds and weigh their performance as per their standards. Conclusion
The debt market is a critical factor in the growth of nations. The corporates finance many of their
projects using the debt raised from the market.
They expand into new markets using the raised capital. Investors should perform proper due
diligence before investing in these bonds. The
qualitative and quantitative methods presented in the article will help those take more informed
decisions regarding their debt investments. Credit ratings will also help them take their decisions. I hope this article might bring some use to you.
default.
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2018 IN REAR MIRROR: THE STEALTHY AND ACCELERATED RISE OF FINTECHS IN INDIA'S CREDIT SYSTEM Naveen Kumar IIM Rohtak
2018 has seen a lots of changes in the decade with
JAM trinity and a couple of Huge NPA’s in the
Government led stimulus for economic growth to
crunch in the economy and Voila! You have setup
the US Fed system’s policy of rollback of
the fall of Bitcoin, but in India, one of the unseen or the slow rise was the accelerated spread of Indian
Fintechs through our credit system. In this article, we foray into these pervasive Fintechs which are
making slow inroads into our digital economy and
implementing the “Real Trickle Down” Economics as we know it. Over 10,000 Startups are playing in this sector and becoming an effective catalyst in bringing about some tangible changes and
changing the Indian digital finance ecosystem as we know it. But the main sectors can be grouped into 3 fields namely:
1) Artificial Intelligence 2) Open Banking
3) Blockchain (There is so much to it than the
balance sheets of banks which brings the liquidity the perfect ecosystem for the rise of Fintech. So, now let’s move on to some valuation on these Fintech by using the traditional data.
Valuation – HDFC bank still continues to trade at a crazy 5x the Book value and the same is the case
with other irrational valuations like Kotak, Indusland & Bandhan Banks. But moving on, we see the same wave present in NBFC’s like Bajaj Finserv (6x Book
Value) and others such as Edelweiss, Indiabulls etc. So with a safe estimate we can say Fintechs also
would be valued at such a crazy valuation. Now, a good question, might be why are we looking at
valuation of Fintechs before understanding what
those Fintechs are? Well it all will come together in the end, so just wait on a little longer.
inefficient Bitcoin...�)
Coming back to Open Banking, we have the entire
Through this article and my primary research, I try
about below for your reference.
to categorize the 3 fields and their pervasive impact
architecture courtesy of KPMG report on what it is all
in Indian Credit sector to understand on how we can equip ourselves better with these to grow and
manage ourselves professionally in these changing landscapes.
Reason for the rise – Now we all heard countless
times about the rise of the Fintechs like Paytm. It is
basically due to a mix of Demonetization, add in the
So what is basically Open Banking in a crux is that
Banks got tired of maintaining the auxiliary services like customer verification, Spend analyzer and loan eligibility. Hence, it started building APIs so that
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Fintechs would take care of this services while it can
version of the payment interface soon which would
products which Fintechs leverage, the APIs offer the
players like PayTM and Google Tez.
focus on the core banking job. Hence, these APIs are Fintechs a super exclusive peek into the customer
change the face of digital payment prominent
banking & transaction data. That is how they are able
Creation of next-gen AI Model in Indian Financial
customers.
With open banking, we saw new revenue streams
to come up with innovative services to the
This arena is still in the nascent stage with relatively amateurish applications like verification, instant
credit score predictor and spend analyzer, but with the coming years, is going to transform into the crucial and impressive segments in the years to come.
Sector
being unlocked with the API’s. But what do the
Fintechs do with the data. Well here comes AI into the picture. AI has been the buzzword whenever
someone mentions what needs to be done to make ourselves prepared to the future. It is a word which is thrown around so frequently that it has lost its essence in the general frame of things. But
Fintechs are utilizing it left and right across Front,
Mid and Back-office operations with a wide variety
of use cases. Some of them are customer services, targeted sales, marketing, smart automation, till compliance and risk management. So all those who are in the business doing compliance for
global banks – well your jobs are at stake. Better
learn coding – this is now a key requirement of JP Morgan Chase analyst which is to Code!
Fintechs would take care of this services while it can focus on the core banking job. Hence, these APIs are products which Fintechs leverage, the APIs offer the Fintechs a super exclusive peek into the customer
banking & transaction data. That is how they are able to come up with innovative services to the customers.
This arena is still in the nascent stage with relatively amateurish applications like verification, instant
credit score predictor and spend analyzer, but with the coming years, is going to transform into the
These are some of the use cases which has been
come.
not a bad thing after all, as it frees us from the
The phenomenal rise of the digital wallets and
things which actually adds customer value to the job
crucial and impressive segments in the years to
summed up where AI is going to strike next. Well it’s mundane things and helps us, focus on complex
numerous apps which you have installed in the
nature.
bonus they provide is due to the rise of UPI.
BLOCKCHAIN, BLOCKCHAIN, BLOCKCHAIN!!!
phones due to the insane offers and the referral WhatsApp has sought the RBI nod to launch its own
Finally, we come to the finance buzzword of the year
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which has been the craze with the ICO’s, countless
is here to stay. One of the more exciting feat is that
are being perpetrated. But in its essence, Blockchain
our fiat currency to leverage blockchain’s
crazy cryptocurrency and innumerable frauds which is an innovative concept which can actually make
financial markets more efficient if utilized properly, and that is what the Fintechs are exactly trying to achieve.
In India, Blockchain technology has permeated quite a bit into our system. Below are listed of some of the use cases.
our central bank is working on a draft to digitize underlying benefits.
Bringing it all together
Now we bring to the end on why it mattered to the valuation. Well these Fintechs are currently are in the business model of burning huge loads of
investors cash to increase market share, increase scalability and then realize profits. Well the
investors who are offering the cash to be burnt are just willing to let go of because of those crazy valuations and that is why it was necessary to
understand where those crazy valuations were arising from.
We have seen the many facets of Fintech. People But the future is very ripe for the taking. From
International funds transfer, trade financing to
reinventing the Capital markets, Blockchain offers untold possibilities for the Indian Financial
Landscape. There is good improvements being
made on the regulatory front to allow these techs to grow.
Crypto currency are not seeing any signs of
backing down in spite of the heavy crackdown by
the government regulators and hence, Blockchain
still confuse digitization with Fintechs but the latter clearly is the future and with reactionary view
associated with the field. For the Fintechs sector, there is going to be a lot of data analysis, data
processing, AI and ML and many more. These
various facets would combine together to form the Digital Economy of India which is already
undergoing significant changes and spreading amongst the credit sector.
Fintechs are clearly the future people. Place your bets!
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