ARBITRAGE MAGAZINE - OCTOBER 2017 ISSUE-FINANCE AND INVESTMENT CLUB | PUBLISHING| IIM ROHTAK by Finance and Investment Club, IIM Rohtak

OCTOBER 2017

VOL-I ISSUE NO.8

ARBITRAGE FINANCE AND INVESTMENT CLUB INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Telecom Interconnection Usage Charges: Disruptors get the Carrot and Incumbents the Stick Non-Performing Assets: A Road Block to Indian Banking Industry Growth

Editor’s Note FINANCE AND INVESTMENT CLUB IIM ROHTAK

TEAM MEMBERS 1. ANUPREET CHOUDHARY 2. BHASKAR PODDAR 3. HEMANT JAIN 4. KEYUR BUDDHDEV 5. MAYANK JAIN 6. RUSHI VYAS 7. SHARIKH KADER 8. TANMAY MONDAL

Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

We are pleased to publish the eighth 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 – ‘Telecom Interconnection Usage Charges: Disruptors get the Carrot and Incumbents the Stick’, the author Shreyans Jain from IIM Lucknow, has done a good analysis Telecomm industry. We hope for the continuous support of our authors and readers to make this magazine a success. -Finance and Investment Club, IIM Rohtak

CONTENTS 1. Telecom Interconnection Usage Charges: Disruptors get the Carrot and Incumbents the Stick

2. BLUNDER OF MISSING THE BUS: India boycotting China’s BRI

3. Future of sell-side research in a post MiFID II world

4. China Going Cashless

5. Trader – A winner in the market or a victim of the market

6. How banks are supporting MSME supply chain financing

7. Non-Performing Assets: A Road Block to Indian Banking Industry Growth

8. Emergence of FinTech in India

9. Taxing agricultural income

iii

Answer these questions based on the articles in this magazine and stand a chance to win cash prize worth Rs. 200 and E-Certificate. Please e-mail the answers to fi@iimrohtak.ac.in

1. What is the average amount of cash carried by women for daily usage in China? 2. Which third party payment app has the highest share in mobile payment market and how much? 3. In India, which bank has the largest share in loan defaulters and what is the value of the share? 4. It has been 90days and I have not repaid my loan instalment. Is it a loss asset for the bank? 5. In which year the slash in mobile termination rates maximum in India? 6. What disruptive strategy did Jio use to bring voice services cost down? 7. What is the estimated loss to the global investment banks due to alteration in MiFID II regulations? 8. As per MiFID definition, which type of products will be available for investors without suitability checks? 9. How supply chain financing creates a win-win situation for all parties involved? 10. Which particular industry will be the driver of growth for Fintech in India? 11. Which all missile and aircrafts deals have been too costly for India, and why? 12. Based on the arguments in article, how would you react to a sudden negative news regarding a company that you had invested in, why? 13. As per the article what is the major reason for continuing the exemption of agricultural income from income tax?

Telecom Interconnection Usage Charges: Disruptors get the Carrot and Incumbents the Stick ARTICLE OF THE MONTH

Shreyans Jain IIM Lucknow, 2016-18 Introduction Interconnection forms the bedrock of any telecommunication regime and may be defined as the technical and commercial arrangement that governs connection of equipment, networks and services among various service providers to enable seamless subscribersâ&#x20AC;&#x2122; access to services across different networks. The growth and innovation in telecommunication markets largely depends on the underlying interconnection arrangements that incentivises development of robust telecom networks. On the contrary, an arbitrary interconnection arrangement fragments the market into discrete islands leading to inefficient utilisation of network capacities and leakage of revenues through several arbitrage avenues. Interconnection Usage Charges (IUC) are wholesale charges payable by a Telecom Service Provider (TSP) to another TSP, for terminating or transiting/carrying a call from its network to the network of the receiving TSP1. The IUC comprises the termination charges, origination charges and carriage/transit charges. Termination Charges are the charges payable by the originating TSP, whose subscriber initiates the call, to the terminating TSP, in whose network the call terminates. The destination network may be mobile, Mobile Termination Charges (MTC) or fixed line, Fixed Termination Charges (FTC). International Termination Charges are the charges payable by an International Long Distance Operator (ILDO), which is carrying calls from outside the country, to the access provider in the country in whose network the call terminates. Origination Charges are the residual tariffs collected from the consumer and retained by the call-originating service provider after paying the carriage and termination charges. Carriage Charges are charged by a National Long Distance Operator (NLDO) to carry calls from one service area to another. If an intermediate network is involved in transmitting the call, the associated charges are called Transit Charges.

All you wanted to know about Interconnection Usage Charges, The Hindu Business Line, dated August 28, 2017 (http://www.thehindubusinessline.com/opinion/columns/slate/what-is-interconnection-usagecharge/article9833749.ece)

On September 19, 2017, the Telecom Regulatory Authority of India (TRAI) slashed the IUC by 57% from 14 paise to 6 paise and further recommended this to be reduced to zero by the year 2020 2. Exhibit 1 depicts a comparison of IUC in India with those in the United Kingdom over the last 15 years. At present, India follows the Calling-Party-Network-Pays (CPNP) regime3 for retail charging of telecommunication networks. Exhibit 1: Comparison of IUC in India and UK4

Calculation of IUC The choice of economic model is of great significance in the regulatory process to arrive at the precise IUC. Among cost-based models, recently, there has been a rising tendency among regulators to shy away from Fully Allocated Cost (FAC) model towards Long Run Incremental Cost (LRIC) methodology and variants such as LRIC Plus and Pure LRIC5. This article analyses the approach followed by TRAI to arrive at the reduced IUC and identify if the regulator has been fair in its calculations.

The Telecommunication Interconnection Usage Charges (Thirteenth Amendment) Regulations, 2017, TRAI notification dated Sept. 19, 2017 3 The Telecommunication Interconnection Usage Charges (IUC) Regulation, 2003, TRAI notification dated January 24, 2003 4 The Financial Express dated Sept. 27, 2017 and Sept. 26, 2017 5 Telecom IUC charges has drained industry lifeblood; why telcos should have been forced to come up with a rate, The Financial Express dated September 27, 2017, (http://www.financialexpress.com/opinion/telecom-iuc-charges-hasdrained-industry-lifeblood-why-telcos-should-have-been-forced-to-come-up-with-a-rate/872171/)

The regulator has deployed the pure long-run incremental cost method (p-LRIC), known for catalysing competitive efficiencies, for the calculation of mobile termination charges. In the p-LRIC method, the network demand for an equivalent TSP is identified and an efficient network is dimensioned to meet this demand. Termination cost as per Pure LRIC = (Avoidable cost if wholesale termination service is not provided) divided by (No. of total offnet incoming minutes) = (Total annualized cost for providing entire range of services minus Total annualized cost for providing entire range of service excluding wholesale termination minutes) divided by (No. of total off-net incoming minutes) The following steps are followed in the calculation of termination charges: a) Data collection from the operators b) Determination of demand to be catered by the equivalent operator in terms of coverage and busy hour traffic c) Dimensioning of the radio access network and core network d) Determination of unit costs (capital costs & operating costs) of the elements of the network e) Determination of the cost of network - (a) for providing full range of services; and (b) for providing full range of services excluding wholesale termination service separately f) Determination of mobile termination cost The summary of calculations is attached at Appendix I. Issues for Consideration The major premise in the regulator’s reasoning is that the deployment of IP-based technologies reduces the cost of delivering voice services to almost zero6. Therefore, lower costs for consumers would be an obvious outcome of reduced IUC and eventually by 2020 zero IUC will drive technology upgradation by service providers. What it essentially does not recognise is the potential avenue for revenue this distortion can create for service providers with IP-based networks. Reliance Jio Infocomm Ltd.7, for instance, allegedly disguises its voice and data tariffs by offering bundled plans. By any yardstick, it is difficult to conclude that it has brought down the cost of voice services by migrating to ‘voice free; pay only for data’ unlike the conventional ‘data free; pay only for voice’ plans. Lower revenues for TSPs as a consequence of lower IUC can actually result in higher costs for the subscribers of networks that run on legacy technologies. The brokerage assessment of the impact of lower IUCs on incumbent players is attached at Appendix II. Secondly, the very conclusion that incoming calls from other TSPs result in an incremental cost of only 5.6% even though they account for over 31 per cent of total traffic, sounds unconvincing. The total annual cost calculated for a representative TSP with 17% market share is far less than industry 6

The Telecommunication Interconnection Usage Charges (Thirteenth Amendment) Regulations, 2017, TRAI Explanatory Memorandum dated September 19, 2017 7 Reliance Jio tariff plans can be accessed at https://www.jio.com/en-in/4g-plans

standards8. In addition, the cost structure does not take into account the spectrum acquisition costs which forms a considerable part of a TSP’s expenditure. On the contrary, TRAI’s argument underlying the change in IUC regime was that “when a service provider establishes a network, it is not only for sending but also for receiving calls. The operator, therefore, does not do anything special or extra to provide for receiving another service provider’s calls. Thus, additionality of costs for receiving calls, in the strictest sense, is close to zero.” Given the precarious financial health of the over leveraged telecom sector in India, it seems highly unlikely that lower IUC will encourage competition. High roll-out expenses and thin margins leave TSPs with scarce resources for the huge investments required for upgrading networks. Thus, the decision seems to be heavily skewed, not one that balances competing interests9. As can be observed from Exhibit 2(a), shares of major telecom companies were under pressure on September 20, 2017, a say after TRAI lowered IUC. The share prices of Bharti Airtel Ltd., Idea Cellular Ltd., and Reliance Communications Ltd. slumped during the day, while those of Reliance Industries Ltd., which owns Jio, closed up 0.85 per cent at Rs. 847.10 after hitting an intra-day high of Rs. 872.10. Airtel’s shares recovered later in the day to end up marginally while those of Idea and RCom closed down 3.43 per cent and 1.74 per cent respectively. Exhibit 2(b) shows the impact of lower IUC on the profitability of incumbent TSPs. Exhibit 2(a): Intraday Movement in Share Prices of Incumbent TSPs

Exhibit 2(b): Impact of Lower IUC on Incumbent TSPs’ Profitability10

Why TRAI’s IUC arguments are struggling to hold water by Mobil Philipose, Live Mint dated Sept. 28, 2017, (http://www.livemint.com/Opinion/8vZAE6qiGzMG5KIuIEbpON/Why-Trais-IUC-arguments-are- struggling-to-holdwater.html) 9 TRAI’s Order on Interconnection Charges is Full of Holes by Rahul Khullar, The Wire dated Sept. 24, 2017 (https://thewire.in/180905/trais-order-interconnection-charges-full-holes/) 10 TRAI Lowers IUC, Reliance Jio Prevails Over Airtel, Idea, Live Mint dated Sept. 20, 2017 (http://www.livemint.com/Industry/hVC1wiXiOvvNchHh5Jt7hI/Reliance-Jio-prevails-over-Airtel-as-Trai-cuts-IUCto-6-pais.html) 8

The Way Forward It is imperative for the regulator to resolve the current impasse and strike a balance between service providers and subscribers. At this juncture, given their high leverage, intense competition, stretched balance sheets and impending spectrum auctions, incumbent TSPs can ill form a regulatory risk of this magnitude. However, now that the regulator has indicated its intention to switch to the Bill and Keep (BAK) regime11 by the year 2020, it is time the telcos re-calibrated their finances to migrate to superior network technologies in the near future.

Under Bill and Keep (BAK) method, each TSP bills its own subscribers for outgoing traffic that it sends to other interconnecting TSPs and keeps all the revenue received from its subscribers. It is not required to pay any interconnection charge.

Appendix I Calculation of Mobile Termination Charges

*Assumptions: a) The dimensioning of network is done for an equivalent TSP i.e. a TSP who has a fair share in the relevant market. b) This TSP incurs costs that would occur in a competitive market. Thus the method uses present costs i.e. forward looking costs. c) The method of costing is long-run costing i.e. the size of the network deployed is reasonably matched to the level of network demand. d) The method allocates the costs to wholesale services i.e. off-net incoming calls.

Appendix II Brokerage Assessment of the Impact of Lower IUCs on Incumbent TSPs12

TRAIâ&#x20AC;&#x2122;s IUC Cut: What Brokerages are Saying About Telecom Stocks, The Economic Times dated Sept. 21, 2017 (http://economictimes.indiatimes.com/markets/stocks/news/trais-iuc-cut-what-brokerages-are-saying-about-telecomstocks/articleshow/60773923.cms) 12

BLUNDER OF MISSING THE BUS (on India boycotting China’s BRI) Prabal Pratap Singh Chauhan & Rajat Jain IIM Ahmedabad, 2016-18 Touted by Chinese President Xi Jinping as “project of the century”, the Belt and Road Initiative (BRI), launched in 2013 aims to improve connectivity and cooperation between Eurasian countries. The project is poised to have five land and one sea corridor connecting China to various parts of Europe and Asia along with developing ports in Africa. An estimated investment of over $ 900 billion over the next decade in roads, railways, pipelines, ports, power plants will make it the largest such infrastructure building initiative by a single country post US’s Marshall Plan, which gave $190 billion (in 2016 $ value) to rebuild Europe post WW2. Financially, $3 Trillion of foreign reserves and Renminbi’s inclusion in IMF’s Special Drawing Rights (SDR) basket have given China enough muscle to deliver on the project commitments. More than 60 countries including close Indian allies Nepal, Bangladesh and Sri Lanka have come on board the BRI.

The deadlock for India is the China-Pakistan Economic Corridor (CPEC), to be built with an investment of $62 billion connecting China to the Pakistani port of Gwadar and passing through POK, allegedly infringing on Indian sovereignty. Also, media rhetoric around China “owning” strategic Pakistani assets in the garb of CPEC further fuels the Indian jingoism taking the matter further away from a rational unbiased analysis. In our piece, we objectively assess how cheap credit has been instrumental to India’s infrastructure growth, and how the fears of Chinese “ownership” are unfounded and baseless. Moreover, we will argue that India would have done good keeping its strategic and economic interests separate, the way it has done with other countries and highlight how Marshall Plan has played a key role in Western European economic development without compromising on sovereignty, a similar role BRI is poised to play.

Fig 1: BRI – proposed routes. (Source: McKinsey&Company)

Scanty Indian Infrastructure and current investment scenario Arun Jaitley admitted to India requiring at least $1.5 Trillion of investment in infrastructure over the next decade. Logistics cost for India is as high as $7/km vs $2.5/km for China and $3/km for Sri Lanka. Various research puts the long-term infrastructure economic multiplier to 2.5 – 3.8 (i.e. for every $1 spent on infrastructure GDP increases by at least $2.5). The outlay for infrastructure was projected to be ₹ 56 lakh crore during 12th five year plan (2012-17) but was revised downwards to mere ₹ 38 lakh crore (~70%) due to paucity of funds. Furthermore, of the actual investment made,

1/3rd came from the private sector and India was more than welcoming the private funds. Not just private equity, India has been welcoming of capital as debt from governments and multi-lateral institutions to meet its dire need of funds. For instance, Japan’s international lending arm Japan International Cooperation Agency (JICA) has pumped in over ₹ 2 lakh crore as loans across 60 projects in key strategic sectors: transport (55%), water (16%) and energy (13%), making India its largest debtor. The much hyped Ahmedabad – Mumbai bullet train project will be funded by Japan through a soft loan of ₹ 80,000 crore (over 80% of project cost), with additional conditions on part of capital expenditure being to Japanese

firms only. Also, the Delhi Metro Rail Project is funded with over 50% of capital coming from Japan as loan, despite its financial non-viability (only ₹ 3,000 crore paid back of the total outstanding of ₹ 23,600 crore by March 2016). At multi-lateral institutional level, India has borrowed heavily for investment. India received the largest assistance till date among World Bank member countries, amounting to over $ 100 billion in last 70 years. To put that in perspective, second largest borrower is Brazil has borrowed only $58.8 billion. The line of credit from World Bank’s International Development Agency (IDA) is officially poised to stop in 2017 as India’s rising prosperity makes it ineligible as per GNI per capita (upper cap of GNI $1,215 for FY16).i Foreign assistance has been instrumental in the development of infrastructure in India and successive governments have done well to shed the Nehruvian view of “state ownership of assets” to successfully leverage the capital and carry out key infrastructure projects in the country, maintaining source of capital being of secondary importance to the terms of actual deal. As WB’s line dries up and the need for funding remains as high as ever, it would have been in national interest to bring China to negotiation table to reach an amicable solution and develop projects beneficial to both the emerging economies of Asia. Separate Strategic and Economic Interests Another question of relevance here is: whether Chinese favoured India on international stage before India denied being a part of BRI? We can safely conclude that far from the truth. China is vehemently opposing India’s candidature for permanent membership in UNSC. Further, China didn’t allow India to join NSG saying Pakistan

equally deserves to join and further adding complications that a non-signatory of NPT will not be eligible for NSG membership. Moreover, China has repeated foiled India’s attempts to declare Masood Azhar (Chief, Jaish-e-Mohammad) as a UN – branded terrorist, despite his involvement in several terrorist attacks on India. Indian collaboration with China on strategic issues can be safely assumed to be non-existent and has remained like this for decades. Also, one more intriguing question that needs to be addressed is how India’s “strategic partners” has done a mere lip-service to Indian interests while serving their own interests in a manner that has actually been detrimental to India. For instance, India has inked a deal with France to purchase 36 Rafales for ₹ 63,000 crores, paying ₹ 1,750 crores per aircraft – a sum that could develop three Tejas or fetch two Sukhoi-30 MKIs, the best combat aircraft in the world. As far as the, competitive edge of Tejas is concerned, Mr Manohar Parrikar has accepted that Tejas is as capable as any other aircraft in the world, just that it is a Light Combat Aircraft”. This is not even the tip of the iceberg. India’s purchase of QRSAM & SRSAM missiles from Israel has proved to be too costly as DRDO successfully test-fired indigenous QRSAMs this month and Aakash (indigenous SRSAMs) are already operational with IAF. With both France and Israel, India has excellent economic ties and bilateral agreements to further deepen the prospects of FDI to India and increasing trade cooperation. Chinese presence in Indian Economy China has committed an FDI of $20 billion in India and has pumped over $900 million since 2014. It is among top 10 sources of FDI for the period 2014-17. Moreover, India had

a deficit of $46 billion against the trade of $70 billion in 2016. Even anecdotal evidence like Chinese mobile phone makers gaining over 50% of India’s smartphone market and Chinese e-commerce giant Alibaba owning close to 40% stake in India’s largest appbased payment interface Paytm also points to the growing presence of the Chinese in the Indian market already. Hence, fears of Chinese ownership and compromise of sovereignty are ill-founded and not based on sound economic logic. Marshall Plan’s impact on Europe The US government invested $190 billion to rebuild Western Europe and modernize industry, albeit with an ulterior motive to prevent the spread of communism. Nevertheless, the plan had played a “decisive contribution to the renewal of transport system, raising of productivity, and facilitating of intra-European trade”, as Belgian economic historian Herman Van der Wee puts it. The economy of all countries had surpassed their pre-war levels by at least 35%.

Road Ahead India is already investing in building infrastructure in its neighbourhood and in poor African countries. For instance, India granted a combined aid of ₹ 3,000 crore in 2015-16 to Nepal, Bhutan, Sri Lanka, Bangladesh, Afghanistan and Myanmar. Early this month, India approved ₹ 1,600 crore road project connecting Myanmar and Manipur. Clearly, the role China is taking at international level, has been and is continued to be played by India as well, albeit at a smaller scale, and the aid receiving countries have not faced any loss of sovereignty. As evident from the aforementioned arguments, BRI is nothing but old wine in a new bottle. Rather than cribbing about Chinese dominance, India will do well to let bygones be bygones and heed the Kissinger’s advice “There are no permanent friends or enemies in foreign policy, only permanent interests.” And join the wagon of economic prosperity by still getting on board the BRI.

Future of sell-side research in a post MiFID II world Parag Nawani IIM Rohtak, 2017-19 Introduction

Background

Then European Commissioner for Internal Market and Services, Michel Barnier said: "Financial markets are there to function for the real economy â&#x20AC;&#x201C; not the other way around. Markets have been altered over the years and our legislation needs to keep pace. The crisis serves as a grim reminder of how complex some financial activities and products have become. This has to change. The proposals will help lead to better and more open financial markets."

In force since November 2007, the Markets in Financial Instruments Directive (MiFID) administers the provision of investment services in financial instruments (such as brokerage, dealing, portfolio management, underwriting, etc.) by banks and investment firms and the operation of traditional stock exchanges and other trading venues (socalled multilateral trading facilities). Although MiFID spurred competition between the services and reduce prices for investors, shortcomings were exposed in the wake of the financial crisis.

In recent years, financial markets have changed greatly. New trading products have come onto the scene and technological developments have altered the landscape. Taking lessons from the 2008 financial crisis, the G20 agreed at the 2009 Pittsburgh summit on the necessity to improve the transparency of less regulated markets â&#x20AC;&#x201C; including derivatives markets; and to address the matter of unwarranted price volatility in commodity derivatives markets. In response to this, the European Commission has shelved proposals to revise the Markets in Financial Instruments Directive (MiFID). These proposals consist of a Directive and a Regulation to make financial markets more efficient and transparent, and to strengthen the protection of investors. The new framework will also enhance the supervisory powers of regulators and provide fine operating rules for all trading processes.

Key elements of the proposal: The important points pertaining to MiFID are shown in Figure 1. Some of the points are explained in brief below: Robust and effective market structures: MiFID already contained Multilateral Trading Facilities and regulated markets, but the revision will bring a new kind of trading venue into its regulatory structure: the Organised Trading Facility (OTF). These are systematic platforms which are presently not regulated, but play an important role. For example, regular derivatives contracts are increasingly traded on these platforms. In order to facilitate better access to capital markets for small- and medium-sized enterprises (SMEs), the proposals will introduce the creation of a specific label for

SME markets. This will provide a quality label for platforms that target to meet SMEs' needs. Increased transparency: By introducing the OTF category, the proposals will mend the transparency of trading activities in equity markets, including "dark pools" (trading

volumes or liquidity) that are not accessible on public platforms. Exemptions would only be acceptable under approved conditions. It will also introduce a new trade transparency decree for non-equities markets (i.e. bonds, structured finance products and derivatives).

Figure 1: MiFID objectives and core measures source: EY report

Reinforced supervisory powers and a firmer framework for derivatives markets: The proposals will reinforce the powers of regulators. In coordination with the European Securities and Markets Authority (ESMA), supervisors will be able to ban specific products or practices in case of threats to investor protection or the orderly functioning of markets. The proposals also foresee tougher vigilance of commodity derivatives markets.

Stronger investor protection: Building on a broad set of guidelines already present, the revised MiFID sets stricter requirements for portfolio management and the offer of complex financial products such as structured products. In order to avoid possible conflict of interest, independent advisors and portfolio managers would be barred from making/receiving third-party payments or additional monetary advances. Lastly, rules on corporate governance and managers' responsibility would be presented for all investment firms.

To whom does MiFID II apply? MiFID II applies to MiFID firms, i.e. those Financial Services businesses undertaking MiFID Business anywhere in the European Economic Area (EEA). It will affect all participants in the EU's financial markets, whether they are based in the EU or elsewhere, including providers of asset management and supervisory services. MiFID II also relates to European suppliers of MiFID services in the European Economic Area (EEA), such as investment managers of pension funds and credit institutions. It has some use for UCITS (Undertakings for Collective Investment in Transferable Securities) management companies and AIFMs (Alternative Investment Fund Managers) where they offer definite investment services. Moreover, European providers of MiFID services which have branches outside the EEA may be impacted by MiFID as, even if not situated in the EEA, their interactions with EEA firms may mean that they are indirectly influenced by MiFID II. Taken with other new regulations, the impact of MiFID II will be profound, thinks Rebecca Healey of TABB Group. She says, “When you attempt this level of change, it is like using a sledgehammer; the risk is that the chips will fly off in all directions, and not always the one where you intended.” According to a new study published by Hong Kong based consultancy, Quinlan & Associates, the global investment banking community could bear losses of as much as $240 mn in their research divisions as the EU’s MiFID II regulation alters how investment research is bought and paid for. Quinlan estimates that large global investment banks spend between $600 mn to $800 mn per year on research, whereas tier 2 banks spend $300 to $450 mn. Given these

firms’ cost to income ratios of 90%, a forecasted drop in research revenue of 40% due to MiFID II would lead to a loss of $240 mn in a post-MiFID II world grounded on investment banks’ existing cost structure. While European regulators don’t have direct impact on firms domiciled outside of the EU, the new guidelines will put indirect force on these domiciled firms. European firms may, in order to be MiFID II-compliant, request additional disclosures from their non-EU equivalents. If we take the example of the U.S., asset managers usually either invest money from, or with, an EU-based asset manager or direct orders to an EU broker. Conversely, U.S. brokers complete trades on behalf of EU asset managers. Realizing the perspectives of their EU counterparts will be crucial for U.S. firms to make sure they can meet the requirements of their clients and carry on to do business with them, when MiFID II comes into power. Here are some of the key areas, adviser firms need to be aware of: Defining independence: For the first time, MiFID II will present a European-wide standard for independent advice, needing firms that call themselves independent to assess a range of financial instruments, not limited to entities to which the firm is connected. Any UK independent adviser, that’s already amenable with RDR (Retail Distibution Review), should notice little difference, other than from an augmented scope of investments. However, there are two advances worth noting. First, a firm will be able to offer both non-independent and independent advice, provided there is a clear separation between the two (for example, the same adviser cannot offer both independent and non-independent advice on MiFID products). Secondly, the FCA (Financial Conduct Authority) has indicated that a firm

will be able to call itself independent, if it only offers advice on a certain area of the market. Implication: It could make it more attractive for independent firms to specialise in a particular area of the market. Firms may want to reorganise into dual independent and nonindependent operations for different areas of financial planning. Complex products: Investment products would be defined as complex or noncomplex, with only the latter available to private investors without any suitability checks. The MiFID II definition of complex products covers non-UCITS retail schemes (NURS) and structured UCITS funds that embed a derivative. However interpretation of the rules is eventually left to each national regulator and the FCA has preferred not to categorise either NURS nor investment trusts, automatically, as complex products. Instead, the FCA says the complex designation should be made case-by-case. Implication: It could create a bigger opportunity for firms to counsel on more complex products. Or it could encourage

product providers to reduce the complexity of products they offer. Suitability: Before recommending a product or a transaction (including selling as well as buying instruments), a firm must make suitability trials to ascertain a clientâ&#x20AC;&#x2122;s relevant knowledge, their objectives and ability to bear losses. Implication: Both European and UK regulators are intent on making suitability requirements as tight as possible. Any firm that has not got a clear procedure in place for assessing, recording and periodically updating client suitability needs to revisit their processes and systems urgently before January. MiFID would prove to be a milestone in strengthening the trading market. There would be far-reaching effects on the various stakeholders. Organizations would need a strategy that spreads across individual regulations. Managing them individually will incur considerable costs and will stretch even large organizations beyond their capabilities.

China Going Cashless Nimish Joshi IIM Rohtak, 2017-19 A cashless economy is seen as the future and

cashless payments are being widely accepted.

China, a developing nation and the 2nd largest

Big giants like McDonald’s also prefer

economy in the world is in the race to be

cashless payments, especially during the night

cashless soon. China was the first country to

after cash counters are closed. It won't be a

introduce paper currency in its economy and

hyperbole if one says that China is living the

analysing the current trend it seems that it

future.

would be the first one to discard it too in the near future. China is a leading example of a cashless population

Asian of

country.

With

819,767,019,

China

total has

developed a reliable infrastructure to create and sustain its cashless revolution. In the metros especially, ‘empty pocket’ is the new trend as people prefer to go out without cash. From a street pedlar to a premium mall,

Analysing the cashless revolution, third-party mobile payments apps have set the real stage. Though there has been a continuous increase in usage of credit and debit cards, and banking mobile payment apps, transactions through third-party mobile payment apps witnessed a jump of over 100 times since the year 2013.

In 2016, according to iResearch, China’s

China’s population relies on mobile payments

mobile payments volume hit $5.5 trillion

and carry no cash at all to go around.

which is approximately 50 times the size of

Millennials, especially, are the face of China’s

$112 billion market of America. Mobile

Cashless revolution as they prefer to carry less

payments witnessed an increase of more than

than one-third of the money carried by the

200% over the year 2015. Adam Minter, a

older generation. Also, women tend to carry

Bloomberg View columnist, called that year

lesser cash than men, making them early

as “China’s Cashless Revolution.” Today,

adopters of the cashless lifestyle.

according to a survey by iResearch, 14% of

This tremendous growth of mobile payments

payments segment. The omnipresence of

in China is a result of the strong base of

WeChat app (over 889 million users) gives it

smartphone users, high mobile internet,

an added advantage to have a rapid growth

under-developed traditional financial market

after being developed in the year 2013.

and deep e-commerce penetration. The rest is contributed by various third-party mobile payment apps. Alipay and WeChat are the most widely used third-party apps for mobile payments in China. Alipay, owned by Alibaba affiliate Ant Financial Services, has a share of 54.1% and Tenpay (encompassing QQ Wallet and We chat) has 37.02% share in mobile

QR codes should also be given their due credit for boosting mobile payments. A QR code is a 2-dimensional barcode with a random tiny black squared pattern with a white background and is capable of storing 300 times more data than a traditional one-dimensional code. They can be designated as the building blocks of the

cashless economy of China. Unlike credit

etc. Due to the inclination of people towards

cards, QR based payment systems don’t

mobile payments for personal use, third-party

require POS terminals such as card reader or

apps ensured that people get the convenience

credit card machine. In this way, sellers don’t

to pay at every nook or corner whenever

need to invest for cashless adoption which

needed. The impact can be imagined by the

would have been passed to customers. Even

fact that customers are asked “Will you pay by

platforms like Apple Pay relying on near-field

Alipay or WeChat?” rather than asking them

communication (wirelessly sensing when a

for bank cards for making payments. In retail,

payment console is nearby) lags behind QR

mobile payments have the highest acceptance

code based platforms, as cell phone capable of

frequency in convenience stores (68%),

QR codes are ubiquitous. It explains why

followed by supermarkets and malls with

Apple Pay, which is very popular in the USA,

acceptance frequency of 63% and 62%

doesn’t qualify for even top-10 third-party

respectively. In the entertainment sector,

mobile payment apps in China.

mobile payments are most popular in

The increase in mobile payments in China is a consequence of a change in services for which the consumers used mobile payments. Mobile payments were majorly used for mobile finance in the year 2015, but by the year 2017, it was modified to be mostly used for personal usage like movies, travel, convenience stores,

purchasing movie tickets (70%) with karaoke bars at 2nd place (60%) and beauty salons at 3rd (52%). Regarding travel too, mobile payments are routine as they pay 62% of taxi rides, 57% of hotel expenses and 56% of tourist places. Thus, for any service, mobile payments come to the rescue in China.

The best part is that even after having such rapid growth and large consumer base, these third-party mobile payment giants are still pushing hard to gain a broader consumer base. This year Alipay held a promotional event called “Cashless City” during the first week of August, which was followed by “Cashless Day” event by WeChat running for the rest of the month. During these periods, various incentives like rewards, digital money, gifts, etc. were given to their users to encourage them to use their apps for payments and add new users. When we talk about cashless China, one obvious comparison with India, another large developing country, comes to our mind. The

Indian government also tried to implement a top-down cashless initiative, but due to various reasons like lack of infrastructure, education and awareness, the project achieved limited gains. Even the urban mass was unable to go entirely cashless due to unfamiliarity with the technology and its advantages. The implementation relied only on the ‘need to adopt cashless methods’ due to demonetization rather than the ‘convenience’ for the users. China, on the other hand, implemented its cashless initiative by making cashless payments more convenient than by paying cash. Presence of suitable platforms and identification of the untapped potential in the cashless market by various companies gave rise to China’s Cashless Revolution. It won't be a wonder if cash becomes a relic of past in China for its upcoming generations.

TRADER – A WINNER IN THE MARKET OR A VICTIM OF THE MARKET Ajay Norman V Great Lakes Institute of Management, Chennai

“Anybody can make money, just enter the market”,

friend

quoted.

That

word

‘anybody’ dragged me into the market and pulled me down in the market almost all the time. Where is the gaffe? Is it with me believing someone’s words or the way in which I trade? Finding out where you went

Trading:

wrong in trading was a daily activity for me in those days. Because the other daily activity was losing money all the time. Am I threatening you? For those who think ‘No’, “Welcome to the world of losses”. For those who think ‘Yes’, “Sit where you are and start losing opportunities”. So what should you do now? It’s up to you to change the above quoted phrase from ‘losses’ to ‘wins’ and it will take time. This article gives you an overview of trading, types of trading markets, mind-set for trading, and my personal experiences as a beginner in trading.

What is trading? No general definition. Personally, it means how you play with money. I used to play offensively and aggressively. When I try to hit the ball to six, I got caught. When I play defensively, runs are in peanuts. So what do I want? Do I want more runs on the scoreboard and get out soon (or) waste the balls and score one or two runs? A successful trader is similar to a player who scores one or two runs but at a faster pace. Meaning?? Don’t be a trader who wins one big trade and loses 10 trades. Be a trader who wins

6 or more small trades and loses 4 or less small

trading. I have won most of the trades with this

trades.

mentality. But how much patience is

Types of trading markets:

essential? “Too much of patience is good for losers”. A successful trader knows the level of

Equity market: Where the stocks of individual

patience he should have to cut down

company are being traded. Ex: NSE lists

humongous losses. One cannot find out such

stocks like Reliance Industries, ITC etc.

level unless they enter the market.

Commodity market: Where commodities like

Tolerance. What should you tolerate? Is it the

Gold, Crude oil, Aluminium and many are

loss? No! It’s the effect of the loss which is

being traded. Eg: MCX lists gold, crude oil in

nothing but Pain. “Endure the Pain now, you

lot sizes where each lot has certain number of

will reap the gain later”. It doesn’t mean you

contracts.

can endure the loss if you think the market will

Futures and Options market: Called F&O

move against you. A trader cannot win all the

market, it has all the future contracts and

trades all the time but can lose all the trades

options of individual stocks and indices where

most of the times. Can you bear the pain or

one can gain or lose in big numbers. One of

will you suffer the beating on and on? It

the riskiest markets.

depends on your mentality.

Forex market: Where all the other currencies

Ability to cope up with failures and learn

are being traded. Eg: CDS lists Dollars to INR

from mistakes. An effective trader is not the

and many more.

one who sits and feels after each loss but sits and analyses the reason for the loss. At the end

Cryptocurrency market: The hot market in the recent days. Where digital currencies like Bitcoin, Ethereum, Litecoin and many more are being traded.

of every day, market will teach you a lesson and you need to work on it on that day itself. This is the mentality which can replace the rotten fruits with the fresh ones. Meaning? A

Mind-set, Skills and Efforts needed for

rupee loss can be turned into 2 rupees gain the

trading:

next day, if home work is done.

There is a saying in English “Everything

Analytical mind-set. A quote from my

comes to you in the right moment. Be patient”.

professor, “A non-finance guy (with no basic

Patience is the keystone for your success in

finance knowledge) can enter the market and

donate his/her own money to the market”. Can

impoverish your account balance if you trade

anybody enter the market and buy a stock if it

too much. So what is the home work in

shows an uptrend? Yes, you can but if you are

trading? A good approach would be reading

a money donor. A guy with no proper

dailies and writing down the stocks on radar

knowledge

macroeconomic

for tomorrow, analysing the chart today,

environment, no proper understanding of the

predicting how the stock will perform

importance of technical indicators may win

tomorrow, and when to enter & exit the

first few trades or so. But a deep dig is waiting

market. The above are few key traits that a

for him/her. A guy with such knowledge and

successful trader should have.

about

the

ability to predict the market may lose some

Fear Vs Greed:

trades, but will get green light in most of the Which is indispensable? “Mitigate fear,

trades. Story Building. “US bombed North Korea” headlined

Times

(assumption).

common man feels for North Korea and decries US. What does a trader do? He is inclined to think, “If US bombs North Korea, and it means a war. If it is a war, you need tanks, bombing equipment etc. If you need tanks and fighter jets, you need oil to run them. Yes!!! Its money time. There is going to be huge demand for oil. So let’s long on (buy) oil.” A trader must be a good story builder and not just a passive reader.

Eradicate greed” is my slogan every day when I enter the market. When you are afraid to take a position and not enter the market, how would you feel if the market moved as per your expectation? Keeping this in mind, you enter the market next time wanting not to lose opportunity. Yes!!You entered and you are making money and there is green light in your dashboard. When you see greenlight in your dashboard the one thing which occupies your mind is “Greed” and it will make your dashboard red. Similarly, when you see redlight in your dashboard the one thing which

Home work. “You work hard, you win most

occupies your mind is “Fear” but in this case

of the trades. You sit idle, you lose all the

it will make your dashboard green after you

trades”. The habit of writing down what you

exit the position. So why am I saying this?

will trade tomorrow is really mandatory for a

What is the mantra to outplay all these for a

beginner. For instance, if I did not build a story

beginner? It is nothing but “Experience”. So

and read the charts yesterday, I would not

beginners, let’s begin with a positive note

enter the market this morning. You will

“Welcome to the world of making and losing

money, but ensure your wins outweigh your losses with your preparationâ&#x20AC;?.

HOW BANKS ARE SUPPORTING MSME SUPPLY CHAIN FINANCING AKASH GAHLOT NMIMS, Mumbai 2016-18 Intorduction Supply chain refers to the movement of goods, information and money as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. A robust supply chain is the backbone of every business. Traditionally the procurement side of supply chain environment had 2 components i.e. the manufacturer and its supplier of raw materials and components. In India many of these suppliers are actually MSME’s which usually crop around the facility of manufacturer. Take the example of Gurgaon and Chennai which today are not only home to major automotive manufacturers like Maruti Suzuki and Hyundai but also to scores of dedicated suppliers for these giants. Competition today has forced manufacturers to looking at suppliers not in a transactional sense but rather strategically. Demand fluctuations, a persistent pressure to reduce lead times and to have continuous flow of components and raw materials from their key supplier’s, manufacturers have to ensure that they invest into suppliers and pay them on

time. Failure of even one critical supplier can dampen a buyer’s production momentum and its shipment of goods to distributors. However, in this eco system exists an inherent conflict as the SME’s want to convert their inventory into cash as soon as possible whereas the buyers want to stretch the payment terms in order to improve its cash conversion cycle. Every manufacturer wants to lengthen its day’s payable and the suppliers want to shorten their accounts receivables. This tussle among the two leads to increased risk as well as distrust among supply-buyer. It is to solve this paradox that banks come in, by providing what is known as Supply chain financing or reverse factoring which comprises of a scheme that permits businesses to prolong their payment terms to their suppliers while providing them the incentive to get paid early. The solution is simple as the banks agree to pay up the suppliers at a predetermined rate and the buyers settle the payment with the bank on a later date.

FIG 1: STEPS INVOLVED IN SUPPLY CHAIN FINANCE 1

MSME /SUPPLIER

MANUFACTUR ER /BUYER

BANK 5

1. 2. 3. 4. 5.

Supplier delivers goods to the buyer and generates invoice Buyer confirms the delivery and submits the invoice to banks Banks and supplier decide the lending terms If supplier agrees then banks pay the amount discounted by interest rate to the suppliers Buyer do the full settlement at a later date

This results in win-win situation for both the buyer and supplier through goal alignment. The buyer optimizes working capital, the supplier generates additional operating cash flow and the banks earn interest. The manufacturer or buyer does not have to take loan, he gets discount from the vendor for paying early. The banks on the other hand get to lend to “transactions” which makes are a safer deal given recent NPA’s which have been plaguing the Indian banking sector.

TABLE 1: ADVANTAGES OF SUPPLY CHAIN FINANCING ECOSYSTEM BUYERS

SUPPLIERS

BANKS

Lower Borrowing Costs

Quick Repayment for supplier

Contribution to Priority Sector Lending

Agility in their supplying ability

Safer bet to lend to “transactions”

Balance Sheet unaffected More working capital available Improved Supplier Relationship Supplier Risk reduced Reduced CCC

Another interesting take on why would banks would like to be on board in this scheme is that RBI has mandated that Banks both domestic and foreign have to lend a certain percentage of total lending to certain priority sectors. As per the latest guidelines this percentage is 40% of total ANBC or Adjusted Net Bank Credit. The list of these priority sectors includes MSME which makes supply chain finance useful for banks. TABLE 2: RBI NORMS FOR PRIORITY SECTOR LENDING CATEGORIES

DOMESTIC SCHEDULED FOREIGN BANKS WITH COMMERCIAL BANKS AND LESS THAN 20 BRANCHES FOREIGN BANKS WITH 20 BRANCHES AND ABOVE Priority 40 percent of ANBC 40 percent of ANBC

Total Sector Agriculture MSME

8 percent of ANBC. 7.5 percent of ANBC

NA NA

Advances to 10 percent of ANBC. Weaker Sections

NA *Source:RBI Website

The Indian banking is still seeing the dawn of supply chain financing, however as we proceed banks will see a greater role in ensuring that India moves towards a manufacturing oriented economy which is the need of today by providing a well-oiled supply chain machinery.

Non-Performing Assets: A Road Block to Indian Banking Industry Growth Arnab Kar, IIM Rohtak, 2017-19 Non-Performing Assets, NPAs’ are those assets which have ceased to generate or bring in income for the owner or the lender. A NonPerforming Asset is a liability to whosoever is owning the asset and a credit facility for the lender which is not anymore considered to generate returns. For a long time NPAs have been hindering the growth, as banks provide loans and a certain amount is changed upon the principal amount, which the borrower has to repay over a stipulated interval of time. The record shows that NPA has been rising for a long time and the number of defaulters on loans has been increasing. An asset or credit facility is termed as NonPerforming Asset when the asset fails to generate income or repay its instalments for a continuous period of 90 days or more. From 31st March 2004, which is also the year ending as per Indian financial calendar, the norms for Non-performing assets has been changed, and the present timeline for an asset to be termed

as a Non-performing asset is 90 days. A loan or an advance is recognized as a Nonperforming asset where:   

 



If instalments or interests are not paid on the principal for a period of 91 days. The account stays out of service or is not used for a period of 90 days. For a period of 90 days, if bills are not paid against anything purchased or discounted. Stagnant account without any transactions for a period of 91 days. In case of agriculture, the period for interests or instalments payment is two harvest seasons. In case of cash credit facility, if submissions are not made for 3 continuous quarters.

NPAs occur because of failure to meet the financial obligations which in turn result into “Bad Loans”.

Assets

NonPerforming Assets

Sub-standard Asset

Doubtful Asset

Perforing Assets

Loss Asset

Standard Asset

Fig.- Flow chart of Classification of Assets



Sub-standard Asset- An asset which has a period of 12 months to pay the instalments or interests on the principal. In this type of NPA, the bank has to maintain a 15% of its reserve. Doubtful Asset- An asset which continues to be an NPA for a period of more than 12 months. Loss Asset- It is an asset which has been tagged as an NPA by either the bank, auditors or bank inspectors. These are also called as irrecoverable assets.

The Non-performing assets bring along a lot of losses to the economy. The average of Nonperforming assets of the world for the year 2015 was 6.99% with Cyprus leading the list with 47.75% and Macao standing at the bottom with 0.12%. The likes of India, USA, UK varies between 1% to 10% which needs to be further cut down to as low as possible.

Fig.- Non-performing assets as percent of all bank assets. (Source http://www.theglobaleconomy.com/rankings/Nonperfo rming_loans)

The chart shows that the most stable countries in terms of NPA are at the bottom part of the list and are mostly the lenders but the defaulters like Cyprus, San Marino, Greece, etc. are on bad debt and have a huge amount to repay to the lenders with an interest which now has been termed as a Non-performing asset.

Fig.- Percentage of NPAs considering gross NPAs. (Sourcehttps://data.worldbank.org/indicator/FB.AST.NPER.Z S?end=2016&start=1997&view=chart)

In USA, the Federal Bank has witnessed a year on year growth of 17.03% in the SME Advances segment, but the Gross NPA and Net NPA stood at 3,15% and 1.66% respectively at the end of Q3 (Third Quarter).

In Cyprus the situation has improved from 2013-14 but the picture still is gloomy. Cyprus still has 80% bad loans which are in other words NPAs. Though the trend is positive and the predictions show a bright picture ahead with speedy recovery at the rate of 3% growth in the next year, Cyprus is heading towards the right path.

Fig.- NPA growth of USA

In the global context India fares averagely with NPA of 7.21% when considered with Gross NPA(GNPA), as stated by CARE Ratings. India being one of the developing nation has one of the fastest growing economies in the world which is catering to the need of higher employment, agricultural output, hygiene and sanitation, education and other issues. To support such a large infrastructure and accommodate everything for the most populated country in the world, it is a difficult job and hence the number of associated loans have increased with time out of which now some has turned into bad loans making the count stand at 7.21% of GNPA. India has one of the vast banking networks, consisting of 38 banks. Out of the 38 Indian banks, 18 Public Sector Banks have been bearing the heat to have generated the most number of loan defaulters. The 18 Public Sector Banks consists of State Bank of India(SBI), IDBI Bank, Indian Overseas Bank, UCO Bank, etc. and among the 38 banks, SBI accounted for the largest share of 22.2% summing up to a total of ₹ 1,88,068 crores out of the compiled 38 banks defaulting sum of ₹ 8,29,338 crores. The numbers have increased drastically from the last quarter, the first quarter of Financial Year 2018(FY 18) experienced an increase of 34.2% on year on year basis when compared to first quarter of FY 17. These indication sounds alarming to the banking sector as NPAs has been a roadblock to growth for the banking system in India. The loans or advances provided becomes NPAs due to the following reasons:  

Bad lending practices by banks Crisis in the financial institutions like banks, NBFCs (Non-banking financial corporations) which crumples the economy of the country

 

Occurrence of externalities like harvest failure, floods, etc. Occurrence of internal issues like policy change, reforms, etc.

Among these the vital player which causes NPA is bad lending practices by the banks. What banks do to lend money is that they generally carry out a general and almost ineffective check of the property of the borrower and accordingly create the portfolio against which the loan is to be provided. But here banks become a bit lenient and allow a margin which provides more sum to be roped in by the borrower from the banks and this mostly causes the borrower to suffer from large repayment dues. When the borrower doesn’t pay for more than 91 days, the advances are then termed as NPA. The level of NPA indicates the credibility and efficiency of the banks and banker’s credit risk management for allocation of resources. The rising NPAs is now considered as a curse for the Indian economy as the present data shows that the bad loans in India has soared to more than ₹ 7.75 lakh crores for FY17-18. Such

huge NPAs in the banking industry cripples the growth and causes the following:  

 

Affects the bank shareholders Failure to allocate funds to good projects due to no repayments from the bad ones Liquidity concern due to lack of repayment from bad loans Uninsured accounts might face the heat of the NPAs

A simple solution to the above stated problem is few amendments in the Acts that

ensure prevention of bad credits, by including stringent rules of loan repayment and before that strong credit risk assessment of the borrowers by the bank without bypassing any requirements mentioned in the laws and policies. If these two are ensured, Indian banks will be able to recover more than 50% of the bad loans that they circulate. Reforms and strict implementation of policies by the banks is the need of the hour to save the Indian economy from any turmoil like that of 1991. The sooner we act, the better the changes of growth, the better the possibilities of sustainability.

Emergence of FinTech in India Bibekjyoti Roy Nandi, Kumar Bardhan IIM Rohtak, 2017-19 According to the Global FinTech Report 2017 by PWC, the expected annual ROI on FinTech related projects is stated to be 20%. Financial institutions are embracing the disruptive and continuous innovation and are integrating and partnering with the innovators to stay ahead of the curve. The report stated that 30% of large financial institutions are investing in Artificial Intelligence and 77% are expected to adopt blockchain by 2020. This shows the rapid pace of transformation that the financial sector is undergoing. In 2016 alone, FinTech companies globally raised a total of ~$36 billion in funding across over 1500 funding deals from over 1700 unique investors (data accumulated by the Financial Technology Partners). The figures clearly depict a paradigm shift that is happening across borders and the need for the financial sector to adopt and adapt to the disruptions.

FinTech Scenario in India: As per NASSCOM, by2020, the Indian FinTech software market is forecasted to reach USD 2.4 billion. According to Statista, the transaction value for India Fintech sector is forecasted to touch approximately USD 92 billion by 2021, from USD 44 billion in 2017 growing at an annual growth rate (CAGR 2017-2021) of 20.2 %. "Digital Payments" is the market's largest segment with a total transaction value of approximately USD 43.8 billion in 2017. What are the factors that are and will be propelling the growth of FinTech in India? A look at the below points would reveal certain insights: ď&#x201A;ˇ

According to the World Bank projections, the average annual addition of population in India is projected to reach 19.3 million by 2021.



and 490.423 million by 2031 opening up a huge scope of growth for the FinTech sector.

World Bank projects the youth population (age 15 to 34) to reach approximately 479.40 million by 2021

NASSCOM in its report projects the Internet user in India to reach 730 million by 2020, with 75% of the new Internet user growth coming from rural areas. The report also forecasted that 70% of the e-commerce transactions to take place via mobile

phones and 50% of travel transactions to be done online. 

According to a Nasscom report, some of the primary factors driving the corporates to deploy FinTech solutions are streamlining operations, driving sales and revenues, cost reduction, increasing reach and, managing risk and compliance costs.



Support by major IT players is also providing an impetus to the growth. IBM has announced the adoption of Ethereum for its IoT projects and collaborated with London Stock Exchange, Cisco and Intel to launch an open source blockchain initiative. EdgeVerve has launched Blockchain framework for financial services. Microsoft Ventures through their ScaleUP and HiPO programs facilitates rapid scaling up of many early stage fintech start-ups. Collaboration with incumbents is also a contributing factor towards the growth. SBI has teamed up with Ezetap to launch 'Chota ATM' and provide mobile POS devices across India. Bank of India offers a Paynimo wallet which is powered by TechProcess. Initiatives by the Government of India launching India Stack, Start-Up India, Jan Dhan Yojana, Aadhaar Adoption, UPI and BHIM app are adding to the momentum.



Government is also aiding growth by providing tax and surcharge reliefs like providing tax rebates for merchants accepting more than 50% of their transactions digitally.



The growth has also been driven by the need of the Small and Medium Enterprises which has witnessed lack of credit support by the incumbents. According to Confederation of Indian Industry (CII), MSMEs contribute

about 8% of GDP, 45% of the total manufacturing output and 40% of the exports from the nation. Thus, there's a huge potential for development of the nation by providing FinTech solutions to this industry. Emerging FinTech segments: The Indian FinTech landscape has witnessed a growing ecosystem with ~200 start-ups with ~60% of them focussed on payment processing. Some of the emerging FinTech segments in India are: 

Payments: Undoubtedly the fastest growing FinTech segment in India, the digital payments space is projected to grow to USD 500 billion by 2020 representing about 15% of GDP in 2020. With 80% of economic transactions in India still happening through cash, there is a significant growth potential facilitated by strong user adoption of mobile payment and P2P transfer solutions. With emergence of new technologies like contactless payment and cloud-based PoS, the payments segment is undergoing transformation like never before.

catering to it in 2016. Tracxn India FinTech Landscape reported a funding of USD 199 million across 33 deals as of October 2016, in this segment. P2P lending is focused broadly on micro finance, consumer loans, and commercial loans and offers stable rates irrespective of prevailing market conditions. Faircent, for example, consistently provides returns at more than 18% per annum. Some of the leading P2P lenders in India are i2ifunding, i-Lend, Faircent, Milaap, and Loanmeet. This segment is to be regulated by the RBI wherein all P2P lending platforms will be treated as NBFCs.

The above two charts clearly depict the factors enhancing digital payments and the declining trend of paper-based clearing systems respectively. ď&#x201A;ˇ

Alternative Lending: According to PWC's FinTech India 2017 report, Alternative lending is the second most funded segment after payments. Driven mostly by MSMEs' demand for sufficient credit supply lines, this segment witnessed 158 startups

ď&#x201A;ˇ

Wealth Management: The Wealth Management and Advisory segment

is still in early stages of adoption in India. Earlier this year, SEBI allowed investment in mutual funds via digital wallets. The population of India lacks participation in the stock and bond markes presenting a significant scope in this segment for new entrants providing streamlined products and services. To make quality financial advice affordable, robo-advisory is picking up the pace. However, globally there is a shift from solely robo-advisory to a hybrid humanassisted robo-advisory. Customer perception of robo-advisory lacking personal touch, lack of financial literacy are some of the challenges this segment is facing in India. Yet, it is expected to gain momentum in the coming years. ď&#x201A;ˇ

InsureTech: According to National Health Profile 2015, published by Central Bureau of Health, more than 80% of Indian population is not covered even under the most basic health insurance. This provides a significant room for growth to emerging players in this segment who can leverage technologies and innovative business models such as P2P insurance, micro-insurance, and on-demand insurance. IoT and analytics will be the hot technologies in the insurance industry. Focus will also be on improving customer experience via virtual assistant and prescriptive analytics. Wearables can

provide large amount of data to the insurance companies helping in pricing, risk assessment and providing tailored insurance service. According to a report, 75% of the non-life insurance is expected to come from online channels by 2020. Thus, disruptors can collaborate with the incumbents to provide customercentric services. ď&#x201A;ˇ

RegTech: With an increasing number of fintech startups and innovative business models, there is an inherent need for compliance and regulation. To avoid compliance related fines, there is a need for the implementation of regulation technology or RegTech. RegTech can also hasten the process of documentation and form filling via automation, thus reducing costs and improving operational efficiency. Providing data-based insight, it will facilitate informed risk choices. Although this segment is not a familiar concept in India, the evolution of fintech sector will drive the need for RegTech

Conclusion: According to PWC's FinTech India 2017 report, the expected RoI on FinTech projects on India is 29% versus the global average of 20% clearly depicting the huge potential of FinTech in Indian markets. It should, however, be kept in mind that the traditional players have a significant advantage of being trusted by the customers. The strengths of the

incumbents in the financial sector are existing loyal customer base, broad product set, low cost of capital, regulatory compliance and etc. The FinTech industry has new ideas, cutting edge analytics and their implementation is agile. Both the parties can complement each other, and a mutually beneficial relationship

can be established to solve issues and achieve user satisfaction. Thus, a collaborative, rather than competitive approach between new entrants and the established banks and financial institutions is needed to create a winwin situation for companies and customers both.

Taxing agricultural income Siddhesh Suhas Salkar IIM Rohtak, 2017-19 In the colonial era the Crown collected the levies

Introduction

on agrarian produce and hence when the income In recent times key decisions like GST, demonetization, etc. have been taken by the government to increase the tax revenue. One of the ways to increase tax revenue is to impose taxes on agricultural income. In 1925, the Indian Taxation Enquiry noted that there is no theoretical

justification

continue

tax

exemption for agricultural income, but there are political

objections

for removal

of this

exemption. Almost a century later we feel that this situation has remained the same.

tax was introduced by British in 1886, they did not

include

agricultural

income.

The

Government of India act was passed in 1935 which transferred the power to tax agricultural income to provinces. When India attained independence in 1947, these powers were transferred to states. As we adopted the new constitution, the states have the rights to tax agricultural income. Currently, there are a few states like Odisha, Assam, Kerala, Tamil Nadu, etc. which tax agricultural income in some or the other way. However, there is no consistency in the tax laws across states. Yoginder K. Alaghâ&#x20AC;&#x2122;s 1961 analysis of agricultural tax yields, Case For An Agricultural Income Tax, in The Economic

Weekly,

indicate

substantial

increase in revenue collection if agricultural income is taxed and this is very vital for a growing nation like India. Some attempts were made in the past to bring reforms in the policies related to taxation of agricultural income which

History

dates as early as 1947. The Expert committee report on the financial provision to constituent

assembly suggested to bring about changes in

economy has to be maintained at the current

policies so that agricultural income can be taxed.

growth rate.

Also in 1972, Raj committee provided a comprehensive report on this topic and proposed changes in the taxation policies. In 2002, The Vijay Kelkar committee also recommended that states should be persuaded to pass a resolution to authorize the central government to tax agricultural income.

There also another argument in favor of taxing agricultural income. Just like any other economic activity, agrarian activities provide income to the farmers. How is it reasonable that an entity is treated differently based on the business it is involved in? In places like Punjab, it is prevalent to see large farm owners driving

Why should Agricultural income be

luxury cars and owning luxury homes, whereas,

taxed?

businessmen in cities who pay taxes find it difficult to afford such luxuries. In such

Last year, only 39 million people paid taxes in

scenarios income tax laws seem to be biased

India. That is just about 6% of the total

towards wealthy farmers.

population of India. More than 4 lakhs taxpayers claimed for exemption by agricultural income. The income tax laws allow the exemption to corporates to claim exemption on the income earned on agricultural land, and hence we see agro-companies claiming for colossal tax exemptions. If agricultural income is taxed, then revenue

from

taxes

would

increase

Some people consider this as an emotional issue and argue that farmers provide food to us which is the basic need for human beings and hence should not be taxed. However, income from fishing activities is taxed under Indian tax laws. How can this be justified? Fishing also provides food to us and hence should not be taxed.

substantially. For a country like India where

There have been many instances where

agrarian production contributes about 17% to

individuals as well corporation use agricultural

the GDP, exclusion of agricultural income from

income as a way to evade taxes. These have

tax creates a massive shortfall in the revenue.

been dealt in detail in the next section.

The revenue collected from agricultural income can

used

provide

infrastructural

development. There is a need to improve infrastructure in India if the growth of our

The major reason for continuing the exemption of agricultural income from income tax is the vested interests of politicians. The first five decades saw political leadership by land-owning classes. It is apparent that they would not go against their interests. Those who do not belong to land-owning classes have large farm owners

How have income tax laws been misused?

as their vote banks. These politicians want to keep farmers happy by continuing the same laws which

have

been

governing

since

pre-

In the last fiscal year, 307 individuals reported

independence era.

income of more than 1 crore. Nine out of the top

In pre-independence era, there have been

10 claimants of tax exemptions were corporate

popular unrests due to agricultural taxes which

companies. Corporate seed company Kaveri

fueled independence movement of 1947 in a

seeds reported a profit of Rs. 215 crores and

significant way. This has resulted in antipathy

claimed

towards farm taxes, and prosperous farmers

exemption

for

Rs.

186

crores.

Monsanto India claimed an exemption for Rs. 95

crores.

Tax

Administration

have carried forward this antipathy even after

Reform

independence to pressurize the government to

Commission report released in 2014 stated that

exempt agricultural income from taxes. The rise

agricultural income had been increasingly used

in farmer suicides has garnered sympathy

as a way to avoid taxes by individuals as well

towards farmers which has also strengthened

corporates.

these rich farmerâ&#x20AC;&#x2122;s arguments to exempt their

Post-demonetization, the parliamentary panel

taxes.

has also raised concerns about the increase in the

Another

number of entities having agricultural income

implementation of the tax on agricultural

more than Rs. 1 crore. This suggests that tax

income is the informality that exists in this

laws on agricultural income have been used as a

sector. In 2004 World bank paper, Prof. Indira

way to evade taxes by many people.

Rajaraman

Challenges involved in reforming tax

developing countries to show how lack of

laws

accounting standards and payments in cash or kind

problem

have

has

associated

analyzed

created

with

data

barriers

from

the

reducing

informality in the agrarian sector. In 1948, Uttar

It should also be noted that if income tax is

Pradesh government introduced agricultural

applied to agricultural income as per current

income tax but repealed it in 1957. Similar flip-

income tax slabs for other economic activities,

flops were done by five other states partially

95% of the farmers would not be under the slab

because

administer

with zero tax. This is also corroborated by

agricultural income tax. It is possible to track the

reports of the Vijay Kelkar committee in 2002.

output sold in the market. However, this is not

In this way, rich farmers will be taxed, and the

the net income of the farmers as there are

rest will be exempted from taxes just like before.

expenses

So if only 6% of the farmers are taxed, then our

was

involved

difficult

growing

crops.

Calculating the profit and loss of this account will be a very tedious task.

tax base would be doubled. In some of the developed nations, the agrarian produce is taxed given the organized nature of

How can this problem be solved?

this sector in these countries. Our government needs to take steps so that agricultural sector in

One of the suggestions provided by Prof. Indira

India becomes organized. National Agricultural

Rajaraman is to give crop specific levy on land

Market is a good initiative by the government in

rather than self-declared output. This should be

this direction. Biometric systems should be used

assessed and implemented at Panchayat level for

to track sales transactions that take place at the

flexibility and accuracy. Some incentive can

mandi. There should be mandatory registration

also be provided if the income is utilized back to

of farmers in the mandi. Once National

agrarian activities.

Agricultural Market attains maturity, then

Section 10 (1) of the Income Tax Act of India contains exemption clause which does not

tracking people with large transactions would become relatively easy.

authorize the central government to impose a tax

Now the government needs to take well-planned

on agricultural income. The state governments

steps so that reforms are smoothly implemented

must pass a resolution under article 252 of the

in phases.

constitution to authorize the central government to tax agricultural income. There is a need for the state as well as the central government to take such bold decisions.

References http://www.newindianexpress.com/natio n/2017/may/06/should-agricultural-income-

be-taxed-all-you-need-to-know-1601774-1.html

http://www.esiweb.org/pdf/bridges/koso vo/4/14.pdf

http://www.thehindubusinessline.com/op inion/india-should-taxagriculture/article9677312.ece

http://www.thehindu.com/news/national/ fincome-tax-departments-revealsagriculture-sectorfigures/article8371424.ece

http://www.livemint.com/Opinion/IjHS4 ld7qFwApFx5NzVpXO/Why-India-shouldtax-agricultural-income.html https://ageconsearch.umn.edu/bitstream/ 176666/2/agec2000-2001v024i003a007.pdf

https://timesofindia.indiatimes.com/busi ness/india-business/As-crorepati-farmersmushroom-tax-officials-go-digging-forevasion/articleshow/51377186.cms

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