Finly December 2016 by FINLY

From the Editor’s Desk

FINLY| December 2016 | Finstreet | SIMSR

Dear Readers, This month we witnessed that the Federal Reserve has raised short-term interest rates for the second time since the 2008 financial crisis. This move reflects the Fed's growing confidence that the economy is on a sustainable growth footing and that inflation is becoming a bigger danger to the US economy than sluggish growth or another recession. The Chief Economic Advisor of India, Mr. Arvind Subramanian has emphasized that the Indian economy is very well cushioned to absorb the impact and that India will be less affected than other countries. In this edition, Our Cover Story on Trump's Economic Policy : Hit or Miss presents the analysis of economic policies adopted by Trump which can impact the development of the United States of America and the global economy. Next in line is our economics section which covers the Italian referendum and it's financial implications. In the section “Sector Analysis” the authors present the detailed analysis of NBFC sector, government regulations and future ahead for these financial institutions in India. The faculty section discusses about black money laundering and how it would affect the Indian economy. Finally, the alumni section elaborates upon the experience of working as a Product Portfolio Manager for the Netbanking Team at HDFC Bank. I would like to express my deepest gratitude to our Faculty in Charge Prof. (Dr.) Pankaj Trivedi for always guiding and mentoring the FINLY team.I would like to thank our sponsors Finacue Research and Education for their tremendous support. Also, I would like to acknowledge all our readers, faculty members, finstreet team members, our sponsors and seniors for their encouragement and continued support. It gives me immense pleasure to announce Harshita Gupta from SIBM, Bangalore as the winner. Congratulations and wish you all the best !!

-Shreya Gupta PGDM-FS 2015-17 KJ SIMSR

Team FINLY

FINLY| December 2016 | Finstreet | SIMSR

Table of Contents

FINLY| December 2016 | Finstreet | SIMSR

Cover Story

Introduction On November 8 2016, a shock was delivered to the world when the U.S elections results were declared and the Republican Nominee, Donald Trump was declared as 45th president elect of the United States.â&#x20AC;&#x153;Make America Great Again!â&#x20AC;? was used as the campaign slogan by Trump and almost all his campaigns were large crowds and often, public controversy. The campaign which was run by Trump and his team was seen as a radical one and often challenged the way political campaigns were held normally. It was often reported that his campaign promoted racism and sexism, a charge which was repeatedly denied by the team. But, as the voting results came by, these campaigns, which, in the beginning looked as a perfect example of how not to run a presidential campaign, proved everyone wrong and Trump emerged as the clear winner. Trump's policy was majorly focused on the illegal immigration, securities bringing the

business back to United States. Not only Donald Trump, but other world leaders of various countries like China, Turkey, and Russia seem to be against the very notion of globalization and want the resources to be consumed and benefits reaped for their home nation only and seem to be have least interest in the globalization phenomena. Incidentally, Trump's campaign slogan coincided with Ronald Reagan's campaign slogan of 1980. While many critics believe that Reagan's economic policies were mostly failures, some say he reinstated the 'American faith'. But while Reagan was more inclined to make America an important factor for the world's safety, Trump wants everything, that the world has taken from America in the name of globalization, back. While Reagan's policies seemed to be more optimistic, Trump's policies and his campaign looks threatening.

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

Withdrawal from TPP: What is TPP?

The Trans-Pacific partnership(TPP) was an agreement, which was aimed to extend the restricted intellectual rules all over the globe. This agreement covered 40% of the world's economy. This agreement aimed to boost free trade between different countries by cutting down the tariffs. These countries included US, Japan, Malaysia, New Zealand, Australia, Peru, Vietnam, Canada, Mexico, Brunei, Chile and Singapore. One of the reasons of signing this agreement was that Beijing was being the trading center of the world, due to the exponential growth of China in trade volume and value. Trump and TPP: Almost all kinds of goods and tariffs were included in this agreement. The agreement also said to work on wider problems like employment issues across the nations and also the transference of intellectual properties. There were already threats for the TPP as there were lot of oppositions already.

One of the first decisions taken by Trump was that he would no longer participate in TPP, an agreement which was his predecessor Obama's central and foreign trading policy. Trump saw this deal as a disaster and a 'job-sucker' for the Americans. Instead, what he wanted was a negotiated trading agreement which would help in bringing the jobs back to the Americans. Hit or Miss: This agreement was aimed for intercountry trading and a step forward to a global world. America, pulling out of the agreement could mean a fatal disaster for the agreement. Japan's prime minister had said that TPP without America's participation would be meaningless. If we look at the size of the world that would have been affected due to TPP, this agreement was one of the most ambitious project. With this agreement excluding China, America had the chance of showcasing that it can be an important Asian exporter. This will affect the developed and rich countries also, as they reduce their import duties so that global consumers get cheap products. Future trade deals' state will also now be hanging because of this step and this can be considered one of the biggest global economic loss. The other 11 countries will try to persist without America, but truth be told, it would be very had as U.S was one of the major economy whose help will be needed if these agreement wants to see success. Also, now China has an opportunity to take the loss as a strong and stable economy.

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

The Chinese are trying to have a new deal in place called FTAPP (Free trade Area of the Asia-Pacific). But this agreement will be hard to be successful as other countries are already averse of the Chinese. However, this step might prove successful for the developing Asian countries. Due to the failure of TPP, the developed countries on RCEP (Regional Comprehensive Economic Partnership), a free trade agreement between the ASEAN countries. The other developed countries can try and showcase that the global trade can also go through without the presence of America and this will a deadly blow to America's image. Trumponomics: Renegotiating with NAFTA to get a better deal for the US workers What is NAFTA? NAFTA stands for North American F r e e Tra d e A g r e e m e n t . T h i s agreement was signed by president Bill Clinton, in December'93. By the virtue of this agreement, all tariffs were eliminated to promote the flow of goods and trade across borders and thus, increase trade. Currently, it is estimated that the approximate value of the U.S-Mexico trade is about $1.4 billion per day. Why is Trump behind NAFTA? According to Trump, many Americans have lost their jobs in lieu of the trade opening and import-export. Because

of this agreement, Mexico's economy went into modernization and now Mexico's economy is largely dependent on the import-export. And because of the cheap manufacturing in Mexico, the imports were cheaper as compared to the manufacturing in America. Hence, the blue-collar workers in America were losing jobs over these from the last few years. One of the main reasons of the victory of Trump was the persuasion of blue collar workers and wining their trust. Hence, he promised to renegotiate with terms of NAFTA and if not satisfied, might as well remove the whole agreement as well. Hit or Miss: The major aim of doing away with the NAFTA agreement is to bring back the jobs to America. But, this won't be the entirely true and neither this would be entirely beneficial for them. It is true that some blue-collar jobs are lost because of the agreement, but the Major Car companies like Ford and General Motors, which have their base in Mexico, hire a large proportion of their work force from U.S itself. Apart from this, as the manufacturing in Mexico is cheaper, U.S citizens had to pay less for the goods and the economy of U.S was also benefitted from the trades. Moreover, doing away with NAFTA would rather cut more U.S jobs, if the ties with Mexico is cut, the big companies will start searching for cheap bases and chances are they settle down in a more distant land, which will affect the U.S employment adversely.

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

Trump's China Policies: Much before the results were declared and Trump was chosen as the president, he was clearly against the excess Chinese trading and had announced that he would be increasing the import tariff to an exorbitant 45%. The businessman's policy was antiglobalization and particularly against the Chinese. Trump wants to bring the manufacturing job back to U.S. He has repeatedly backed up the increment of American Export volume and has also promised a tax structure which will be complimenting the export increment. The Chinese - U.S relation has also undergone changes over the last few years. The main intention of U.S of opening up the trading barrier was that ultimately china will also open up their market for the U.S investment. But, this has failed to happen. As a matter of fact, the Chinese Leader Xi Jinping had rolled back a lot of policies which his predecessor had started for letting china become a better trade country. Now, Trump has clearly showcased that after years of sustaining with such policies, he is not ready to deal with such country as he thinks that because of these policies, the economy of U.S is getting killed. Also, Trump did away with the climate pact which was made by the previous president Obama with Xi Jinping China: A currency manipulator Trump has always said that China has been a currency manipulator and his first 100 days' plan include legally l a b e l i n g C h i n a a s a c u r re n c y manipulator. According to him, The

FINLY| August 2016 | Finstreet | SIMSR

Chinese keep on devaluating the Yuan to get more trade done with other countries, including U.S. As a matter of fact, Yuan is down to 12% of its peak value of 2004, an eight-year low. This leads to costlier American export while the import from China becomes cheap, which leads to more consumption of Chinese goods and hence, lose of manufacturing jobs in U.S. Hit or Miss: Hiking the import duties doesn't seem to be a viable option as a rise in tariff will result into more cost of goods, but won't affect the job scenario and neither will it create more jobs. Trump's accusation of Chinese being currency manipulator seems to be hollow as recently China had spent down a large portion of its foreign reserve. This was done to keep the value of RMB intact, rather than having it lowered down. Moreover, all the allegations regarding the Chinese-U.S. trade have been settled in the WTO by their dispute settling mechanism. The fact is that the currency manipulation did happen, but that was the thing of past and is not happening now and these kinds of allegations will only make inter country trading difficult and hence goods will become costlier for the citizens. Tax cuts: One of the policies of Trump has been the much talked about, reducing individual tax rates, more so for the high-income group. The proposed tax plan is as follows:

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

Hit or Miss: The above-mentioned reforms will have benefits in the short term, but the country may lose significant revenue for the long term, as per experts. Lowering the taxes will cause increase in government borrowings, which will in turn increase the debt. Also, with less trade and less capital flows, this debt could cause a blow to the economy in the long term. Another important aspect to be considered would be which section would these tax cuts actually benefit. According to Research by the US Tax Policy Center, the top earners of US (that is top 0.1%) would benefit by getting a tax cut of about $1.1m. On the other hand, the poorest fifth of the population, would get a tax cut of just about $110 a year. However, Trump believes that tax cuts will lead to faster economic growth. He believes that if he looks after the economy, debt and deficit will look after themselves. Higher interests: Interest rates are going to move higher, which would cause faster growth and faster inflation. It means a stronger currency, but at the same time a larger trade deficit.

Hit or Miss: A strong impact could be on consumer spending, as with increased interests the costs of houses, cars, other luxury items would go up. Secondly, it would hurt the business investments. These two factors contribute majorly to the growth of the nation. Infrastructure improvement: Trump plans to spend about $1 trillion to improve the US infrastructure. A study found that this huge investment in the public domain would create 19,795 jobs. Hit or Miss: The scope for improvement is the repair of bridges, freeways, tunnels, improve school infrastructure, improve the air network traffic and strengthen the digital infrastructure. Time will tell where the humongous amount proposed would be spent. Get back US companies: Another step towards job creation is to get back the 34 per cent jobs that US lost during the period of 1998 to 2010, to Japan, Mexico and China. US has a high taxation system, encouraging companies to hold their investments abroad. Trump proposes to cut down

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

the corporation tax form 35 per cent to 15 per cent. Another step in this direction is to introduce a destinationbased tax system and ending the tax deferral on the $5 trillion in corporate cash which is held abroad. A one time repatriation would be allowed which would be taxed 10 per cent. Hit or Miss: These steps would dissuade US companies from doing international tax planning and subsequent profit shifting and income shifting. It would help to get back an estimated $2.4 trillion which are held offshore to avoid the high tax rates in the US. Also, it would help to get back jobs and increase investments in the US.

US manufacturers. However, the flip side to it looks to be more prominent as increased tariffs would mean increased costs to the consumer. It would also affect the supply chain and global logistics systems. In the world of globalization, this step may not be so beneficial to the economy. For example, if we take the example of Walmart, it imports $50 billion worth goods form China every year. Increase in the tariffs, would increase the cost of the products, for which finally the consumer would have to pay. Another example would be the imports f ro m M ex i co w h i c h co n st i t u te manufactured products, vegetables, coffee, cotton, fruits and these account for about $294.7 billion. Subsequently, other countries may retaliate and reduce American exports. This would severely hinder the international trade.

Import tariffs: Tariffs basically mean a tax on imports, which would make these more expensive in comparison to the homemade goods. Trump proposes a 35 per cent tariff on goods imported from Mexico, one of the major countries US imports from.

Grow economy by 6 per cent annually: The proposed figure of 6 per cent annual growth is considered as too fast a growth for an economy by some

Hit or Miss: Principal impact desired is to encourage

experts. Such a growth is not possible over a long term as it is pinned down by the rate of technological change, that

Cover Story

FINLY| December 2016 | Finstreet | SIMSR

being closer to 1 per cent to 1.5 per cent annually after inflation. Hit or Miss: It may cause inflation, slowing growth of the economy resulting in the boombust cycle and finally contraction and crash of the economy. Illegal migrants: Trump has proposed to deport the 2-3 million illegal immigrants and to ensure that jobs are opened to American workers first. Also, to tackle with the illegal immigration he has proposed the erection of a 1,000-mile wall on the Mexican border and forcing Mexico to pay somewhere about $5 billion to $10 billion for it. If it refused, he would threaten to change a rule under the USA Patriot Act antiterrorism law which would confiscate Western Union money transfers sent to Mexico from illegal immigrants.

Protectionism- Gain now, Pain later? Trump's policies could very well lead to increased jobs, higher profits, investments for the next few years. But a very highly protectionist approach towards development can lead to severe long term effects, which may cause the economy to contract in the future, according to some experts. The policies need to be evaluated for the long-term risks associated with them, and not just the immediate benefits and opportunities provided. They may just as well back fire considering the possible impacts that have been discussed above. Protectionism may look good at the outset for the economy, but considering the highlyglobalized environment and the VUCA world that we live in, it may not be the best way to fulfil Trump's dream of â&#x20AC;&#x153;making America great againâ&#x20AC;?.

There is a popular sentiment that Trump's protectionist policies may also restrict the H-1B visas which allows about 315,000 foreign workers to fill many of the US jobs. Hit or Miss: Restricting H-1B visas could lead to many companies losing market share, profits and not getting the suitable talent for the jobs. Also, America's illegal immigrants constitute about 5% of the labor force, which means this policy could lead to a drop in the labor and productivity.

Article of the Month - Winner

â&#x20AC;&#x153;Whenever the Federal Reserve sneezes, the emerging markets catch a coldâ&#x20AC;? The Oil Prices dropped, the two-year Treasury Yields soared to their highest level, the Bloomberg commodity index fell and the Dollar jumped 1.2 percent, reaching its strongest level since January 2003, all this happened as The Federal Open Market Committee (FOMC) raised the short-term interest rates to 0.50-0.75 bp on December 14, 2016, the second time after 2008 crisis. The last time when it happened, in December 2015, the Emerging Markets were wobbling, as they are more vulnerable as compared to the developed markets. Companies relying on dollars had to refrain themselves as hike increased the lending rates. And here it comes again, all set to give market jitters. In the recent history, the Fed funds rate usually hovered around between 2-5%.

This is because the Federal Reserve had found that a healthy economy functions best with an inflation target of 2%. However, there had been times in history where the Fed funds rate was well above that, to curb the inflation. Other times, it was below to stimulate the economic growth. Fed Rates: A Brief History: The following Graph shows the Fed Rate over a period of time. The rate was as high as 20% in 1981 as the American economy tipped into recession in 1980, the primary cause of which was the disinflationary monetary policy adopted by the Federal Reserve, at which point the central bank took its foot off the brakes. The all-time low was 0%. The Fed lowered it to this level on December 17, 2008, when the world was struggling with a recession.

Article of the Month - Winner

FINLY| December 2016 | Finstreet | SIMSR

Why should Indian Markets care? India is not immune to the Fed rate hike as foreign investors opt for the safer US bonds, triggering market volatility. This is why there is market volatility on just a signal from the Federal Reserve. Also, the rupee could come under pressure leading to a spiralling impact on the import bill. Not only that, India imports 80% of its oil needs, so the inflation could shoot up as well if our import bill goes higher. On Dec 16, 2015, The US Federal Reserve raised the range of its benchmark interest rate by 25bp to between 0.25 and 0.50% which was earlier maintained as 0-0.25%. But India, Asia's third largest economy was and is better placed than most of its rivals and could actually see a gain in the bonds and rupee markets. First, its external balances have significantly improved since mid-2013, with foreign exchange reserves rising and the current account deficit narrowing.

Second, India is less dependent on commodity exports when compared to its peers, and has thus not been negatively affected by the global rout in commodity prices. Third, only a small portion of India's sovereign debt is held by foreigners or is denominated in foreign currency. Fourth, India's favourable economic growth outlook makes India relatively attractive for foreign investors. It was expected that the Fed would increase the rate in July 2016 but the rate remain unchanged due to uncertainty after the UK voted to leave EU. It kept the rates unchanged in September 2016 and November 2016 as well. This move could be because of the election uncertainty, as it was suspected a trump victory could trigger financial market volatility. It was expected that there will be a hike in December 2016 as the trump victory continues to shake global financial markets and the Fed stood up to the expectations.

Article of the Month - Winner

FINLY| December 2016 | Finstreet | SIMSR

Quo Vadis, India? The rupee is on a resilient note. Since Donald Trump's surprise the Indian currency has fallen 1.36 percent against the dollar, making it the seventh best performing emerging market currency. The Reserve Bank of India's also kept the rates unchanged, that could revive overseas demand for rupee debt, as its yield advantage over Treasuries improves. The Indian currency is forecast to deliver a total return of 5.7 percent by the end of 2017, the highest in Asia, according to estimates compiled by Bloomberg. So as the Fed gets set to hike rates for the second time in a decade, past trends will clash with changing dynamics for the Indian rupee. But India is prepared for any such situation. The Reserve Bank of India (RBI) would come to the rescue, to stem extreme volatility on D-street. Currently, the RBI is sitting on

comfortable forex reserves and can stabilise the Indian currency. It can also keep the door open to ease the home rates as well. A good monsoon this year combined with the upcoming Seventh Pay Commission bonanza is expected spur consumer spending and help boost the domestic industry.

ECO Section

Introduction: After Donald trump's surprise election the whole world's attention turned toward another global event that could have serious implications. The Italian Prime Minister Matteo Renzi proposed some drastic changes in the country's constitution to make its legislature more efficient. The changes were radical in nature and sparked a fierce debate within Italy and across the world. So, let us have a look at what were the changes proposed, the arguments in favour and against of the c h a n g e s , t h e re s u l t s a n d t h e implications for the world especially EU. What is happening? Italian Parliament is bicameral which comprise of House of Chambers and Senate. Members of the Chamber (lower chamber)are selected via a proportionate electoral system while the members of senate (upper

chamber) are both elected as well as nominated by the president. The nominated members serve the term for life time. Both senators and deputies (members of House of Chambers) are elected for five years and their tenure can only be extended in case of war. The two houses have equal power right now, which lead to delaying in law making and implementing them. Matteo Renzi proposed that the should country move from a perfect bicameral system to a new system in which the senate would have less power. Also the government proposes to redefine the p o we rs o f l o c a l a n d re g i o n a l institutions. This clearly meant that the central government will have more control over regional governments and the Senate having lesser say in law making. It was also proposed to reduce the number of Senators from 315 to 100 and rather than being elected, they would be picked by the government from regional councils.

ECO Section

FINLY| August 2016 | Finstreet | SIMSR

The Fiscal perspective: The government of Italy has been running into deficits from more than a decade (see graph below). The fiscal deficit of the country in recent years is consistently high. The reason for this is not that the government is spending more than it earns but because of the fact that the government had to pay a large amount as interest for the loan taken previously. But since the last few years it has been unable to payback its debt as well (Graph 2).

FINLY| December 2016 | Finstreet | SIMSR

This gave rise to the grave situation where government would require raising money for an economy suffering from a deep recession and the reforms required to make the budget balanced are unable to be pushed because of political situation. How much EU is going to support Italy in this situation? Will EU ask for more austerity measures? And how will the current government which already seeks more flexibility in austerity measures will react to it? These are some of the grave concerns related to Italian economy currently.

ECO Section

FINLY| December 2016 | Finstreet | SIMSR

The referendum: On December 4 2016, Italy voted in favour or against the government. If there was a majority of “YES” the referendum may pass paving a way for changes in the constitution and if there was a majority of “NO” the referendum would berejected and the status quo would be maintained. The Prime Minister Matteo Renzi saw the changes as the “most revolutionary reforms since WW 2”. He believed the changes will lead to streamlining of decision making and fasten the slow moving bureaucracy of the country. But a majority of players in the political spectrum of the country were opposed to any such changes; The five star movement an anti-establishment populist party led the NO campaign joined by Far-right party Northern league and the far left parties. The opponents believed and propagated that the changes will remove the necessary checks and balances in the system and make the central government toopowerful. Mr. Renzi overestimated the support for him and the constitutional changes and made the referendum personal declaring that he will resign if the YES campaign is defeated. So, on 4th December when Italy went for the referendum more than 60% of total voters said No to changes. This was huge a setback for the incumbent government. Youth of the country which was expected to vote in favour also voted NO. Not only, the status quo will be maintained but the referendum has given rise to a problematic situation where the current Prime

Minister has resigned and appointed his ally Paolo Gentiloni as the next prime minister of the country who is yet to prove majority of his government of Democratic Party in senate as on 13 December 2016. However the new PM has assured that his government will mostly continue the previous government's policies. Implications: The political chaos created and the uncertainty has led to slowdown in the economic activity. Italy is poised to go for elections in which the populist five star movement is said to have an advantage. Italy governed by five star movement is likely to give tough times to European Union because of its populist stance. EU has imposed tough austerity measures on Italy. The GDP growth rateof Italy is expected to be 1% for next year, the country is already facing high unemployment and the debt to GDP ratio is 133% which is very high and requires fiscal discipline which is difficult under governments of populist parties. It is also feared that the change i n g o v e r n m e n t m ay t r i g g e r a referendum for Italy's exit from EU; however these fears seem to be too farfetched. It is also a possibility that the current Democratic parties government continue to govern the country. So, how this referendum will affect Italy's future political events and its relations with EU only time will tell. For now, the status quo has been maintained and the fiscal condition of the Italian economy is likely to remain as troubled as it is now.

Faculty Section

Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner. The other terms used for black money are 'unaccounted income', 'black income', 'black economy', 'parallel economy', 'shadow economy' etc. A white paper on black money in India by the Government of India suggests black money arising from illegal activities such as racketeering, trafficking in counterfeit, smuggling, narcotics trade, forgery, illegal mining, human trafficking, and financial fraud, However significant amount of black money is generated through legally permissible economic activities, which are not accounted for and disclosed or reported to the public authorities as per the law or regulations. The 'corruption' is bribery and theft by those holding public office. The fight against generation and accumulation of black money is far

more complex. There are no adequate estimates regarding the magnitude of black money generated in the country and the unaccounted wealth stashed aboard. A lot of variation in the calculation of black money can be seen in different reports..The range is from 25% of the GDP to even 50 % of GDP. A reliable estimate by the National Institute of Public Finance and Policy (NIPFP) pegs this figure at 40% of India's GDP in 201011. And yearly estimate of black money in India during 1975-1983 was between 15 to 21 percent of GDP. The World Bank report of July 2010 estimated 'Shadow Economies' of 162 countries from 1999 to 2007. It reported that the weighted average size of the shadow economy (as a percentage of 'official' GDP) of India was 23.2 per cent in 2007. According to another World Bank data ,20 per cent of India's GDP is unreported, and in the black economy.

Faculty Section

In the past ten years, from 2006 to 2015, India's accumulated GDP was $20,134 billion."That means at 20 per cent of illegal money, $4,027 billion have been created as black money in India in past ten years, In case of black money outside India, a report from Global Financial Integrity (Nov. 2010 ) estimates that over a 60-year period, India lost US$213 billion in illicit financial flows beginning in 1948; adjusted for inflation, this is estimated to be $462 billion in 2010, or about $8 billion per year. And $332 billion was illicitly moved out of India's borders between 2010 and 2013 through trade mis-invoicing. 'About Rs 45 lakh cr of black money stashed abroad' Ficci. Certain sectors of the economy or activities are more vulnerable to source of generation of black money. These include real estate (accounts for over 40% of the total domestic unaccounted income), the bullion and jewellery market, financial markets, public procurement, non-profit organizations, external trade, international transactions involving tax havens, and the informal service sector It is possible that the illicit money transferred outside India may might actually come back to India through various methods such as hawala, mis-pricing, foreign direct investment (FDI) through beneficial tax jurisdictions, raising of capital by Indian companies through global depository receipts (GDRs), and investment in Indian stock markets through participatory notes. As per one estimate, in 2010, $6 billion worth of foreign exchange transactions was done

through the hawala market. The education sector in India through donations, high capitation fees etc. generates around Rs.48,400 crores of unaccounted income each year for the past several years. Agricultural income as its exempted from taxation, give open invitation for tax evasion and money laundering. The generation of unaccounted income through corruption takes place within the government through government schemes, defense procurement, irrigation projects, road construction, public works, national highways and other infrastructure projects. The same applies to government auctions of natural resources such as mining rights and spectrum sale.

The government is pushing for cashless economy as cash has always been a facilitator of black money since transactions made in cash do not leave any audit trail. In India 97% of all transactions by volume are done in cash. .PM Modi's move on November 8 to withdraw 500- and 1,000-rupee notes (which account for 86% of currency in circulation) is one step to curb on black money. The major idea behind the move seems to be to

Faculty Section

FINLY| December 2016 | Finstreet | SIMSR

to incapacitate those who are holding a lot of black money in the form of cash. This currency reform is an attempt at a one-time reduction in the stock of unaccounted wealth, but will have just a loss of a fraction of unaccounted wealth, on the generation and flow of unaccounted income, because most unaccounted money would have converted it into other assets such as real estate, gold, luxury cars, etc. A comprehensive mix of well-defined strategies are required to curb, control, and finally prevent the generation of black money in future as well as repatriation of black money. To achieve this steps are required such as rationalization of tax rates, reducing transaction costs of compliance and administration, economic liberalization, reforms in sectors vulnerable to generation of black money.

Alumni Section

Finly | July 2016 | Finstreet | SIMSR

I would like to congratulate the Team FINLY and extend my warm greetings; it gives me immense pleasure to write for FINLY. FINLY has always been close to my heart, I used to head the designing team and with every release there was an inherent sense of pride. The purpose of writing this article is to give my fellow readers a perspective about my corporate journey and few insights on Digital banking at HDFC Bank.

HDFC Bank is India's largest digital and second largest private bank in terms of asset. In terms of Market Capitalization also it is India's largest bank. I am part of the strong and robust NetBanking team. On our platform millions of customers do billions of worth of transactions every month. HDFC Bank NetBanking platform provides more than 200 transactions and truly is “Bank aapki muthi mein”

I am currently working as Product Portfolio Manager for NetBanking team at HDFC Bank. The company visited the campus during this month last year and recruited students for Mumbai headquarter. Two profiles were offered Relationship Manager and Product Manager. The interview mostly revolved around HDFC Bank's digital products and future of digital banking. They judged/selected us on the basis of quality of knowledge and vision.

I guess enough of the gyaan about bank. Now, let me tell you guys about my role in detail. In nutshell, my role is to manage the entire portfolio of the Bank, promotion of NetBanking usage and migration of customers to digital platform along with migration of transaction from offline to online. • We do Campaign Management; strategies and execute campaigns end to end along with in depth customer segmentation and detailed post campaign analysis.

Alumni Section

FINLY| December 2016 | Finstreet | SIMSR

• Liaise with merchants and aggregators to bring exclusive offers for NetBanking users. • Do in depth Portfolio Analysis to p rov i d e st rate g i c i n s i g ht s a n d actionable to the Branches and Product teams for driving NetBanking usage and Financial usage. • Engage with Product team to take new initiatives to ensure further traction on NetBanking and • Design contest for the various channels of the Bank to drive NetBanking usage. Banking's linear trajectory was disrupted by our beloved Prime Minister, who overnight changed the way of banking by dropping the demonetization bomb. Huge uproar and ruckus was created as 500 and 1000 denomination notes which contributed to almost 85% of our paper economy suddenly became mere pieces of paper. Contrary to popular opinion, even we as bankers were shell shocked. Despite being flag bearers of banking industry, we also didn't know about the brewing of such decision. Whether the decision is right or wrong, it should be left open for debate. But one thing which directly impacted my life was the rise of Digital baby. All our digital products in one shot got directly marketed. There was huge spike both in terms of quantity (Logins) and quality (Transactions). Teams which were struggling to meet the targets suddenly were flooded with orders and clients. Hopefully “Pyaare Deshwaasi” will understand the benefits of Digital

Banking and as projected by 2030 India will become the largest digitally penetrated economy. Now time for little placement season “Gyaan”. I would urge everyone to give their best shot for all the companies on campus and explore all the opportunities available. Flexibility is of utmost importance, you may not get all that you want; try to look at the bigger picture. It is mere a beginning so stay excited about the journey. Stay motivated and enjoy each moment. I would like to end on the note “Long way to go before I sleep, long way to go before I sleep”. I convey my best wishes to all my fellow SIMSRites for the road ahead. Do cherish your time at SIMSR and enrich yourselves with all the sweet memories and experiences. I would once again like to thank the Team FINLY and FINTSTREET for this opportunity and wish them greater success on the road ahead. I would like to extend my appreciation committee in charge Dr Pankaj Trivedi and all the Faculty members for the guidance and support provided at SIMSR. Also if anyone is up for a healthy digital discussion do contact me at rohitprabhakar1902@gmail.com

Sector Analysis

Introduction: Non-Banking Finance companies (NBFC) are financial institutions that provide services, similar to banks, but they do not hold the banking license. They broadly carry out lending and investment activities. They cannot accept deposits repayable on demand, however some authorized NBFCs can accept fixed term deposits (These

deposits cannot be withdrawn whenever the depositor wants). Also, NBFC are not part of payment and settlement systems, which implies that they cannot issue cheques drawn on itself. Since they do not hold the banking license they are also not part of the Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation.

Sector Analysis

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Now that we have seen what NBFC is, let's take a look at the size of the sector. In 2013, the sector accounted for 12.5% of the country's Gross Domestic Product (GDP) which is up from 8.4% in 2006 that too only considering NBFCs with assets more than Rs.100 crore. In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. Now that we have seen the size of the sector along with the historical growth trends, lets now take a look into the details of the sector. Types of NBFC: The NBFCs are classified as follows for the companies with asset size of Rs.100cr and above: Ÿ Asset Finance company(AFC): The AFC are those type whose principal business(Principal business for this purpose is defined as aggregate of f i n a n c i n g r e a l / p hy s i c a l a s s e t s supporting economic activity and income arising there from is not less than 60% of its total assets and total

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income respectively) is financing of physical assets supporting productive or economic activity. The NOF i.e. Net owned funds should be of minimum Rs.25 lakhs. In general, the AFC may be either giving loans to business for purchasing of physical assets or leasing these assets to business. It also includes hire purchase type of financing. The example for these would be Digantal Finance. ŸInvestment company (IC): The IC are

those whose primary business is purchase of sale of securities like financial instruments like stocks and bonds. A mutual fund would come under this category. The NOF should be of minimum Rs.25 lakhs. The example would be companies like Motilal Oswal, UTI mutual fund, etc. Ÿ Loan company (LC): Loan company

means an NBFC whose principal business is that of providing finance, by giving loans or advances. It does not include leasing or hire purchase. The NOF should be of minimum Rs.25 lakhs.

Sector Analysis

The example for such company would be Tata Capital Limited.

Let's now take a look at the top three companies those who are present in this sector:

Ĺ¸Infrastructure Finance Companies

(IFC): IFC are those companies who have minimum of 75 per cent of their assets be deployed in infrastructure provided it has credit rating of A or above and has a CRAR of 15% and their net owned funds should be Rs 300 crore or above.The example for this type of NBFC would be SREI Infrastructure Finance.

In the below table, we have selected top 3 companies in the NBFC sector based on market capitalization of the firms. The market capitalization of the NBFC, which was just 50 per cent of public sector banks on March 31, 2006, is now nearly twice that of the latter at the end of FY 2016. During the same period, the net profit of 33 NBFCs grew

These NBFC's can be further classified on the basis of those taking deposits and those not taking deposits based on the guidelines issued by the RBI. The capital to risk weighted assets ratio(CRAR) is 100% on all the asset classes for NBFCs so this coupled with no deposits access increases the cost of funds for NBFCs in general. The exception to this is when NBFC has access to cheap funds, e.g. LIC housing finance. In this case the NBFC's raise the funds from banks, debentures, etc. They make up for this high borrowing costs by way of ease of rules for consumers to borrow and focussed targeting on the sectors where the banks usually do not service or service sparingly.

at a compound annual growth rate of 23 per cent, according to data provided by Capitaline. In comparison, 13 private banks' net profit grew at 23.88 per cent during the ten-year period. Now, let us analyze some of the biggest firms in the sector and see their growth and investment potential. HDFC: The firm operates in the housing sector and has a market capitalization of Rs.196,219.29 Cr. The current share price of the company was Rs.1238.05 compared to Rs.600.8 five years back showing a CAGR of 15.55%. The net profit for the firm was Rs.7,093.10cr. The earnings per share for the firm was 49.37 which is an indicator of the

Sector Analysis

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company's profitability.The P/E ratio was 25.08 compared to industry P/E ratio of 25.96. The historical average P/E ratio for last 5 years is 20.3 which is lesser than the current 25.08 which shows that the investors are expecting higher earnings growth in the future compared to overall market. Bajaj Finance: The frim operates in the Leasing and hire purchase sector and has a market capitalization of Rs. 44,141.88Cr. The current share price of the company was Rs.802.55 compared to Rs.56.85 five years back showing a CAGR of 69.8%. The net profit for the firm was Rs.1,278.52cr. The earnings per share for the firm was 28.38 which is an indicator of the company's profitability. The P/E ratio was 28.38 compared to industry P/E ratio of 25.96. The historical average P/E ratio for last 5 years is 13.22 which is lesser than the current 28.38 which shows that the investors are expecting higher earnings growth in the future compared to overall market. Bajaj Finserv: The frim operates in the investment sector and has a market capitalization of Rs.42,862.14Cr. The current share price of the company was Rs.2693.50 compared to Rs.384.78 five years back showing a CAGR of 47.57%. The net profit for the firm was Rs.163.13cr. The earnings per share for the firm was 129.99 which is an indicator of the company's profitability. The P/E ratio was 20.72 compared to industry P/E ratio of 26.22. The historical average P/E ratio for last 5 years is 6.26 which is lesser than the current 20.72 which shows that the

investors are expecting higher earnings growth in the future compared to overall market. From above analysis, we can see that the expectation of the investors is high in terms of future returns from the various companies operating in different sub-sectors of NBFC. So, it is prudent to invest in the stocks of these companies.

The effect of demonetization is going to be negative for NBFC sector in the short run as majority of them operate in the rural economy where cash is the preferred mode of transaction. But, for the long run differentiated product offerings compared with ease of approvals is going to make this sector as a high growth potential one. Conclusion: NBFCs hold a critical position in strengthening of the structure of the Indian financial system and improving the macroeconomic condition of the c o u n t r y. E n h a n c e m e n t s a n d advancement in the regulatory frameworks from time to time has made these organizations to be more stable and focused. However, in this era of globalization and increasing competition, NBFCs need to focus and continuously improve their core competencies while improving upon the weaknesses to serve as a catalyst in the growth of the country.

News Buzz

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RBI's digital push

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accounts by paying 50 per cent of the total amount. Out of the 50% tax paid, 30 per cent will be used as tax, 10 per cent as penalty and 33 per cent of the taxed amount as GaribKalyanCess. Fed Hike

RBI lowers charges on debit card payments to promote digital transactions. The Reserve Bank of India (RBI) has capped the Merchant Discount Rates (MDR) for debit card transactions up to Rs. 1,000 at 0.25% and for transactions above Rs. 1,000 and up to Rs. 2,000 at 0.5% in order to incentivise greater adoption of digital payment methods. Moreover, RBI also has asked banks and prepaid payment instrument (PPI) issuing entities not to levy any charges for transactions uptoRs. 1000 settled using Immediate Payment Service (USSD) based *99# and Unified Payment Interface (UPI) systems. Pradhan Mantri Garib Kalyan Yojana

The Fed Wednesday raised rates for the second time in 10 years, boosting their short-term interest rate target by a quarter point to 0.50 to 0.75 percent. In forecasts released after its meeting, Fed officials also indicated that they could hike the fed funds target rate three times next year, instead of the two quarter-point increases previously forecast for next year. They also raised the forecast for future years to three hikes in both 2018 and 2019. Stocks traded sharply lower, while yields snapped higher. The 2-year Treasury yield, the most sensitive to the Fed, shot to a seven-year high of 1.27 percent. The dollar index also spiked, jumping 1.2 percent to 102.24.

The Pradhan Mantri Garib Kalyan Yojana to give another chance to tax evaders to come clean after paying 50% tax on depositing junk currencies in bank account. The scheme will allow people to deposit money in their

News Buzz

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Sheela foams stellar debut

S l e e p we l l b ra n d e d m att re s s e s constituted a share of around 20-23% of the organized Indian mattress market as of 2015-2016. In fiscal years 2014-15 and 2015-16, revenue from the sale of home comfort products aggregated to Rs916 crore and Rs1,016.4 crore, constituting 64.6% and 65.5%, respectively, of Sheela Foam's total revenue for these years. Sheela Foam has 11 manufacturing facilities in India and five in Australia. It has a nationwide network of more than 100 distributors and around 5,000 dealers. The company also exports its products to almost 25 countries. Investors showed huge confidence on the firm and its future growth.

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FIN Tweets

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Trivia

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One 97 communications, the parent company of digital payments provider Paytm is preparing to merge its wallet service with the eponymous payments bank. The Noida based company had incorporated Paytm E-Commerce Pvt Ltd and Paytm payments bank as separate entities, but the payments bank is in the process of obtaining final license from RBI and will commence operations after obtaining due approvals. This is in line with the regulatory requirements that the company has to segregate its ecommerce business from the payments business. Paytm claims over 5 million transactions on a daily basis with a peak of Rs120 crore worth of transaction in a single day.

The government wants to give people an opportunity to pay taxes with penalties and declare undisclosed income through the proposed Pradhan Mantri Garib Kalyan Yojana. PMGKY will allow people to deposit previously untaxed money by paying 50% of the total amount: 30% as tax and 10% as penalty on the undisclosed income, as well as 33% of the taxed amount as cess. If the declarant refuses the option of using the government deposit scheme, 85% of the amount will be deducted as taxes and penalties. For money that is found in raids, taxes and penalties of nearly 90% of the amount will be levied, leaving just 10% with the owner.

Trivia

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United States Federal Reserve (Fed) Chairwoman, Janet Yellen, announced a 25 basis points(bps) hike in the federal funds rate on December 16 and pledged a gradual pace of increase to more 'normal' levels. The long anticipated move comes after the Fed quietly ended its Quantitative Easing efforts in October last year. This effectively ends almost a decade worth of a steady and ultra loose monetary policy that was initiated to fight the ravages of the 2008 financial crisis. The equilibrium or neutral rate in the United States is believed to be around 3.5 to 5 percent although most recent estimates put it at a shade below the 3 percent mark. India has benefited tremendously from foreign capital attracted by the large interest rate differential between India and the US. A steady increase in rates in the US is bound to cause a flight to safety by foreign investors preferring the stable and less risky returns back home. A series of hikes will also raise the borrowing costs for carry trade and reduce the risk adjusted returns investors receive from India thus making it less attractive. This will likely be exacerbated by RBIs recent spurt of interest rate cuts which further reduces the rate differential and also weakens the rupee.

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