Finly January 2019 by FINLY

FINLY| January 2019 | Finstreet | SIMSR

From the Editor’s Desk

Dear Readers, We at Finstreet are proud to unveil the January New Year edition of our monthly magazine FINLY for the academic year 2018-19. Our Cover Story helps us understand what has transpired when India's statistical office shifted to a new GDP series, with the base year of 2011-12 and the authors inspect does it really reflect the true growth of GDP over the past few years. Next in line, is the Eco Section, which explains in detail about the profit-sharing arrangement between the RBI and the government and is the capital really enough? In the Sector Analysis, the authors inspect the Health Care sector, with an in-depth analysis of the latest disruptions in the industry, along with covering the leading industry players. This month's Fintech Funda covers the emerging trends in Digital Lending and how it may impact the future of traditional lending methods. We are fortunate to have Mr. Kiran Ramakrishna, the outgoing student of PGDM-Finance to pen down his experiences during MBA, in the Alumni Section. Mr. Siddharth Manral, current student of PGDM Finance and Vice President – SIMSR Sports Committee, has penned the experiences of his summer internship at Artha Ventures India, which I am sure will definitely be useful for juniors for getting a feel of the type of companies that come to campus and the stay of their internship at any company in the future. In the end, we have introduced a new section called “Know Your Finance”, which contains information, breaking down some useful concepts in Finance, which would help any aspiring finance student to take baby steps in building the concepts as well as confidence in the subject. I am thankful to Prof. (Dr.) Pankaj Trivedi (Course Coordinator, PGDM Core, and Faculty Coordinator, Finstreet) for providing the essential mentoring, support and backing to the Finly team. I would also like to thank our New Sponsors, White Knight Ventures, for an enriching collaboration. We hope to continue the partnership for a very long time. We have received an overwhelming response for this month's call for article competition, with some high-quality content from some of the best management colleges of the country and I thank each and every participant for their sincere efforts and participation. This month's winner's and runner-up articles are a recommended read. I thank all our readers and faculty members for their constant love and support. Your reviews and feedback are much appreciated. Team FINLY has always been a strong set of focused individuals who put in a lot of efforts and dedication to stitch together this magazine and I can't thank them enough for their constant support and initiative. HAPPY READING!!! R Prasanth, PGDM-FINANCE, 2017-2019,

Isha Koolwal

Yash Manghnani

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

Cover Story

Article of the Month-Winner Article of the Month-Runner Up

Eco Section

Fintech Funda Alumni Section Sector Analysis Internship Diaries

Know your ď&#x20AC; nance Corporate Panel Discussion Investrix- As it happened

THE NEW GDP SERIES: A TRAVESTY OF STATISTICS Pinal Shah, MMS, 2018-2020 Shubham Goyal, MMS, 2018-2020 Yash Manghnani, PGDM FS, 2018-2020

Cover Story

BRIEF ABOUT GDP Gross Domestic Product is one of the primary indicators used to measure the health of a country's economy. It is the final value of all goods and services produced within the geographic boundaries of a country during a specific period of time. Measuring GDP can be a complicated process and it is generally calculated either by adding up what everyone earned in a year (Income approach) or by adding up what everyone spent (Expenditure approach) and total output produced by the producers (Production method). In India, the Central Statistics Office (CSO) is responsible for gathering and maintaining a statistical record at the macroeconomic level. Coming under the Ministry of Statistics and Program Implementation, it coordinates with states and various central government a ge n c i e s to co l l e c t d ata a n d i s

responsible for calculating the nation's GDP and other statistics. The GDP in India is broadly calculated using the Expenditure approach or at Factor cost, which is an economic activity b a s e d m e a s u re m e nt . A s p e r t h i s approach, the data on net change in the value of each sector for a specific period is collected. GDP numbers for the current quarter or year are generally expressed in comparison to the previous quarter or year. Nominal GDP is calculated using the current market price, whereas Real GDP is calculated at the prices which are prevalent at some point in time in the past, known as base year price or reference price. Hence the Real GDP reflects the economic worth of the country after adjustments for inflation or deflation and nominal value includes inflation. Since both values

Cover Story

FINLY| January 2019 | Finstreet | SIMSR

differ, GDP deflator is used to measure the difference and is calculated as (Nominal GDP/Real GDP)*100. Each value has its own benefit. However, the confusion still exists between the two, as to which one better indicates the country's economic progress.

GVA by mining, manufacturing, and construction grew at a slower pace in the second quarter as compared to the previous quarter. Household spending slowed down from 8.6 percent to 7 percent and it accounted for 54.5 percent of the GDP.

Q2 FINANCIAL RESULTS

On the other hand, government spending, gross fixed capital formation, exports, and imports rose faster as compared to that in the previous quarter. A slowdown was observed in the financial, real estate and professional services (6.3 percent compared to 6.5 percent); manufacturing (7.4 percent compared to 13.5 percent in the previous period); agriculture, forestry and fishing (3.8 percent compared to 5.3 percent); construction (7.8 percent compared to 8.7 percent); and mining (2.4 percent compared to 0.1 percent). On the contrary, there was significant growth of trade, hotel, transport, communication, and broadcast based services (6.8 percent compared to 6.7 percent); and public administration and defense (10.9 percent compared to 9.9 percent). Figure 2 shows the GVA values of 3 sectors over 2 years.

India's GDP growth rate saw almost a four year high of 8.2 percent in the first quarter of 2018 but the second quarter witnessed a slow growth in the economy at 7.1 percent (RBI expected it to be 7.4 percent) and the Gross Value Added (GVA) - which is GDP excluding taxes, slumped down to 6.9 percent. (Figure 1 shows the GDP growth and GVA from Q1 2016-17 to Q2 2018-19). The RBI had expected a growth rate of 7.4 percent in Q2 and a rate of 7.1 percent and 6.9 percent for the subsequent quarters.

THE DECLINE - WHERE AND WHY? Q2 witnessed the lowest growth rate due to a slowdown in consumer spending amid high oil prices and a weaker rupee. Almost all major sectors underwent a moderation in growth. GVA by agriculture slipped to 3.8 percent in Q2 from 5.3 percent in Q1.

CHANGE IN THE BASE YEAR - HOW AND WHY? B a s e y e a r s ke e p c h a n g i n g , o n c e

Cover Story

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statisticians think that it has become obsolete. To understand this, let us suppose that India's GDP is ₹100 and the base year is 2004. Now, in 2015, many sectors such as manufacturing, IT, ecommerce, telecommunication, and others contribute to our economy, which was not present in 2004. Thus, India might not be showing correct GDP figures, since the majority of sectors driving economic activity are not represented in ₹100. So, the government decided to change the base year. Normally any of the years can be considered as the base year but it is important to look at some important factors here: 1. The Base year shouldn't have a lot of business activity going on. The year in which markets are not stabilized is not considered an option for the base year 2. It is important to consider the inflation rate of a particular year while deciding the base year 3. The year in which no particular natural calamity, famines or droughts had occurred is considered OLD SERIES VS NEW SERIES – SOME KEY STATISTICS Following are some key data: ● Average economic growth between 2006-07 and 2011-12 fell from 8 percent under the old series to 6.7 percent under the new series ● Average economic growth between 2012-13 and 2017-18 stands at 6.9 percent under the new series

the new series, the growth rate for that year was revised lower to 8.5 percent Central Statistics Office has brought about many changes in the new GDP series. The base year has been changed from 2004-05 to 2011-12 in the year 2015, which is one of the major change. Also, the use of MCA (Ministry Of Corporate Affairs) database has been made instead of an annual survey of industries and RBI survey. MCA provides a much more comprehensive outlook of the corporate sector. Also, in the manufacturing sector, an enterprise approach is used instead of the establishment approach, which means if any enterprise is operating multi-plants, then the aggregate report needs to be submitted instead of a plantwise report. The new series resulted in a decrease in the growth of the tertiary sector as many i m p ro ve m e nt s we re m a d e i n i t s calculation. For instance, in the t e l e c o m m u n i c a t i o n s e c t o r, t h e estimation is done by taking minute u s age in stead o f th e n u mb er o f subscribers and in the new series, sectorspecific price indices are used instead of aggregate indices to deflate the data. The Central Bank (RBI) is no more considered as the market entity and therefore their data is dogged off from GDP calculations. The new series and calculation methodology account for a far greater representation of the Indian economy and it is globally more comparable.

● In 2010-11, GDP growth stood at 10.26 percent under the old series while under

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FINLY| August 2016 | Finstreet | SI

Cover Story

GDP GROWTH - OLD VS NEW SERIES The old series had the base year of 200405 while the new series has a base of 2011-12 and the following chart shows the comparison between the GDP growth between the two:Source:Bloomberg

INVESTMENT GROWTH V/S GDP GROWTH

Source:Bloomberg

The question, whether the new series is in sync with other economic factors like tax collection growth, investment trends etc. are questions to be pondered about and is answered below: BANK CREDIT V/S GDP GROWTH The growth in bank credit is often linked with faster growth in GDP, but this has not been the case with older series. Between 2006 and 2012, average growth in bank credit stood at 20.3 percent while between 2012 and 2018, average growth fell to 12.3 percent. Yet, the GDP growth in the 2006 to 2012 period was slower than in the period between 2012 and 2018. Soumyakanti Ghosh, the chief economist at State Bank of India, suggests that maybe the link between the bank credit and GDP has weakened over the years as banks have started lending companies through other sources like commercial paper and bonds.

A comparison between the investment growth and GDP also shows an inconsistency. Gross fixed capital formation grew by an average of 10.7 percent from 2006 to 2012. It grew at 5.3 percent from 2012 to 2018. But once again, GDP growth was higher in the latter period. This might be because of the rising economic efficiency which has led to a lower Incremental Capital Output Ratio (ICOR). The ICOR assesses the marginal amount of investment capital necessary for an entity to generate the next unit of p ro d u c t i o n . A l s o, t h e g ro w t h i n investment and output is not always uniform in a business cycle, wherein, the first half of cycle is the consumptionbased while the latter is driven on excessive investment.

Source:Bloomberg

Cover Story

IMSR

FINLY| January 2019 | Finstreet | SIMSR

GROWTH IN TAX COLLECTIONS VS GDP GROWTH

IS IT AN ARTIFICIALLY BOOSTED GROWTH?

Tax collections grew at 16.5 percent from 2006 and averaged at 13.8 percent for the same duration after 2012. Any changes in tax rates would have a bearing on the growth in tax collections over and above the GDP growth.

The new series which comes before the general elections has become a hot topic for discussion between the statisticians and economists. Many questions have arisen as to whether there is a political motive behind the move. Why NITI Aayog released the GDP data instead of CSO? How did numbers increase in spite of decreasing credit growth and decreasing net exports growth? Does the series also lower the growth of the National Democratic Alliance (NDA) years between 1998 and 2004?

Source:Bloomberg

GDP GROWTH V/S INFLATION Higher economic growth rates tend to drive up inflation. Between 2006 and 2012, average retail inflation was at 9.6 percent, shows data collated by SBI Economic Research. Inflation averaged 6.4 percent, despite higher growth for the next six years. The maximum growth rate the economy achieved since 2004-05 now stands at 8.5 percent for 2010-11, lower than the 10.3 percent figure estimated earlier. This suggests that the long-term potential growth rate for India might be lower than what was perceived earlier.

Basically, what is important for every country is to make efforts to improve their database, which India did by bringing a lot of upgradations in the collection of data for GDP calculation. Changing a base year is the need of a dynamic environment. The thing which matters the most is that any government should not politicize the issue by going a decade back when the industries like digital, IT, AI were not much developed. Such independent organizations like CSO, RBI, and CBI should not work under the umbrella of politicians. It is very important for any country to get the mirror image of their growth rate in order to take precautionary steps while making new policies.

Source:Bloomberg

Article of the Month - Winner

CONSEQUENCES OF AN INVERTED YIELD CURVE

Tripti Lal Global Business Operations, Shri Ram College of Commerce

CONCEPT OF INVERTED YIELD CURVE: The yield curve, which maps the combinations of the term to maturity and the yield, is generally upward sloping for a well-functioning market. But yield curve can also be downward sloping, which means that the treasury bills/ bonds of longer maturity will provide lower interest rates than the ones having shorter maturity. This phenomenon can be theoretically explained using the preferred habitat hypothesis, which combines features of both expectations and segmented-markets hypothesis. The preferred habitat hypothesis gives a rationale for the downward sloping yield curve. Let us suppose an investor prefers a one-year T- bill as against a two-year Tbill, then only one thing can induce the

investor to shift his preference from the former to the later and that is the term premium. While the term premium makes up for any fall in short-term interest rates but if the short-term interest rates are expected to fall drastically, even term premium cannot compensate for the fall and thus the long-term rates are expected to be less than the short-term rates, making the yield curve downward sloping.

This equation explains that for any bond of maturity 'n' period how the rates of subsequent long-term maturities can be calculated using term premium, Îą.

Article of the Month - Winner

FINLY| January 2019 | Finstreet | SIMSR

interests, the movement in short-term rates trace out the long-term rates, which is also evident in the preferred habitat hypothesis. TALKING ABOUT TRENDS- RELATION BETWEEN RECESSION IN US AND INVERTED YIELD CURVE

Source: Investopedia, 2018

This curve is obtained when subsequent interest rates (preferably one year) E1i, E2i and so on keep falling drastically for a fixed term premium, Îą

The inverted yield curve has more or less predicted recessions in the US economy if we consider the data from the last 40 years. Although inverted yield curves are not the sole reason for a recession, they sometimes can be a sufficient condition to predict future recessions. While the Fed has the power to control short-term interest rates, which it might increase to curb inflation and overheating of the economy, higher short-term rates may spill into lower demand for long-term credit and higher savings which might pull down the long-term interest rates.

The downward sloping yield curve depicts that the long-term securities would become expensive, as yield and prices of securities (bonds) have inverse relation. This means that long-term investments might take a backseat signalling an impending recession. Also, when the economy moves towards a situation of depression, investors try to lock in the current higher yields, thereby increasing the demand of the securities in the present, and consequently pushing up the prices and further lowering the yields.

From the below diagram, we can see that the equilibrium moves from Point A to Point B due to reduced demand for longterm credit as short-term interests rates have increased and the consumer is induced to save more, leading to a high supply of loanable funds.

Thus, the downward yield curve is both a reason and a consequence of a slowing economy. The short-term interest rates are generally determined and affected by business capital spending, household credit, and consumer durable credit; while long-term interest rates are usually determined by the demand for credit in the global economy and the supply of savings of the population. While Central banks generally control short-term

Also, after analysing data for the past 40 years' treasury yield spread and particularly the difference in yields

Article of the Month - Winner

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between 10-year and 2-year bonds, we notice that whenever the spread has been low or negative, the US economy has faced recessions.

Source: Forbes, 2018

The blue vertical thick columns show that whenever this difference became negative, that is when long-term interest rates were lower than short-term interest rates, recessions have occurred in the US economy. The inverted yield curve has shown that the investor's trust in the near-term economy has reduced and would like to go in for long-term bonds. They reduce demand for short-term bonds and consider them to be riskier. It is so because they believe that the money obtained from short-term bonds would then have to be reinvested at lower rates and hence they reduce the demand for short-term bonds. Also, apprehensions about the performance of other financial assets like stocks and equities also make investors more inclined towards longterm government bonds. These twin factors induce the Fed to raise short-

FINLY| August 2016 | Finstreet | SI

term rates to attract more investors, which further widens the gap between the long-term and short-term rates. This is exactly what happened before the 2007 financial crisis. The artificially suppressed interest rates fuelled housing credit, instilling inflation fears. The Fed increased the short-term rates, and investors were worried about the bursting of the housing bubble and moved to long-term bonds, which further pushed down the long-term yields. The first inversion happened in December 2005, when the Fed feared building up of a housing bubble. That pushed the yield on the two-year Treasury bill to 4.41 percent. But the yield on the 10-year Treasury note didn't rise as fast, hitting only 4.39 percent. That meant investors were willing to accept a lower return for lending their money for 10 years than for two years. The Treasury yield spread was -0.02 points. That was the first inversion. Unfortunately, the Fed ignored the warning. It thought that as long as longterm yields were low, they would provide enough liquidity in the economy to prevent a recession. The Fed was wrong. The yield curve stayed inverted until June 2 0 0 7 a n d t h e f i n a n c i a l co l l a p s e happened. CURRENT SCENARIO AND THE WAY FORWARD On December 3rd, 2018, the Treasury yield curve inverted for the first time since the recession. While the yield on the five-year note was 2.83 percent, on the three-year note it was 2.84 percent.

Article of the Month - Winner

IMSR

FINLY| January 2019 | Finstreet | SIMSR

On December 4th, the inversion worsened. The yield on the five-year note was 2.79 percent, while the yield on the three-year note was 2.81 percent. It is also expected that the Fed would be raising interest rates despite the slowing down of the economy and the current inflation levels well within range. This has spiked fears among the investors that the economy is heading towards another great recession. It's better if the Fed takes into cognizance of these signs and learns from the demons of the past experiences.

Article of the Month - Runner Up

CRYPTO-CURRENCY MARKET HITTING NEW LOWS

Vishal Jain, KJ SIMSR, 2018-20

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” - Satoshi Nakamoto With this aim, cryptocurrency was introduced into the market. Behind it was a strong blockchain technology, whose potential was actually realized over a period of time. Many companies started releasing their cryptocurrencies and implementing it in their business. As news started rolling out, “cryptocurrency” became the new buzzword which led to an exponential growth in market capitalization and the prices of various cryptocurrencies skyrocketed in 2017, with Bitcoin touching $19,783 at the year-end. After an amazing 2017, we are now witnessing the after-effects of an unprecedented rise in prices of Bitcoin

and its other allies - 2018 is just the retracement of that. Not only cryptomarket but also broader markets seem to be bearing the brunt, where tech stocks, for example, are following a similar pattern. As with all markets, if the prices reach a level which is higher than what can be justified, they will need to pull back. The market has been ruthless in case of cryptocurrencies. REASONS FOR THIS BEARISH MARKET First reason is related to the Internet Google and Facebook banned the advertising of cryptocurrencies. It means you shall no longer see ads for crypto, ICOs, or Bitcoin in your search results. Secondly, the way China handled cryptocurrencies when their prices skyrocketed in 2017. China banned all websites that offered cryptocurrency trading services in the country at the start of 2018. Even the search engines were

Article of the Month - Runner Up

FINLY| January 2019 | Finstreet | SIMSR

cleaned of any mention of cryptocurrencies. Being one of the biggest markets for cryptocurrency in the world, this was one major setback. The third reason can be the negativity that existed in the environment after statements such as, “cryptocurrency is a pure gamble and will only destroy wealth”, were given by very prominent investors. This played into the minds of retail investors and they also started taking out their money from the market which led to the crash. As per the recent market trends, the first ten cryptocurrencies are turning red, such as Bitcoin, Ethereum, and all other major cryptocurrencies are suffering. Most of them are trading at 90%+ low from their maximum rates. IS THIS THE BEGINNING OF THE END FOR CRYPTOCURRENCY? Bitcoin and other cryptocurrency prices in 2019 have been marked by volatility, which has made price prediction in short-term a bit of a challenge, even for an experienced analyst. The only way crypto-market is going to regain its composure is when institutional investors enter the market. This will create a continuous cash flow as well as give retail investors some assurance of the market. The faith of retail investors is very i m p o r ta nt fo r c r y p to c u r re n c y ' s comeback. The high volatility in today's market is because of the fact that cryptocurrency is still at its initial level. This brings us to the second point that

states why cryptocurrency will bounce back. CRYPTOCURRENCY CAN STILL BOUNCE BACK Cryptocurrency is built on a solid and innovative idea which is “blockchain technology”, the implementations of which are yet to be explored. The principles behind blockchain have already been used in the manufacturing and financial industry. So, once applied to other systems like real estate, supply chain management or anything that requires a unique identifier, a high amount of security and protection for both the user and the vendor, the market for cryptocurrency will become more prominent, which will attract more investors. If cryptocurrency is able to achieve the aim with which it was introduced, that is, allowing online payments to be sent directly from one party to another without going through a financial institution, it will become the mode of payment and eventually, the demand will have to increase as well. It will also decentralize the banking system along with this process, which will be a huge development in itself. This is also the reason why many governments have tried to ban it as it will undermine the power of the Fiat currency - US dollar, Indian rupee and the like. BITCOIN BANS AND WHAT LIES FOR IT IN THE FUTURE As early as 2013, Bitcoin was "banned" by the Thailand government. In 2017, it

Article of the Month - Runner Up

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came as big news when China banned Bitcoin and the latest news carried a ban by the RBI (Reserve Bank of India). The problem is that this news is not appropriate because it is simply not possible to declare Bitcoin or any cryptocurrency as illegal completely for that matter. Cryptocurrencies just do not fit into traditional regulatory or banking framework. The reason is that these cryptocurrencies that run on the blockchain technology are decentralized, meaning they do not run on any server or a URL or an IP address. These virtual currencies run on multiple nodes which are spread across the globe and can be run by anyone with internet access. This is similar to a torrent for example. If I hold Bitcoin(s) in my wallet and transfer it to another wallet, the government cannot block it because the entry of the transfer is recorded in a distributed ledger. But statements like these have actually led to a deteriorating image of cryptocurrencies which have led to a loss of trust of retail investors. For a fact, countries like Venezuela have started to come up with official, statesanctioned cryptocurrencies, such as Venezuela's â&#x20AC;&#x153;Petroâ&#x20AC;?. If not now then surely in some coming years people will realize the underlying idea of cryptocurrency and the positives it can bring for the advancement in technology. Many governments have tried and failed and in 2018, it is accepted that there will be regulations rather than bans.

FINLY| August 2016 | Finstreet | SI

Another major element which is not getting highlighted as of now is the fixed supply of 21 million BTCs which will play a major role in price determination in the future. As economies of scarcity will come into the picture and somewhere down the line demand for Bitcoin will increase, the limited supply will play its hand and the rate will automatically go up. Experts would prefer to make predictions over a longer period of time. While the current reality of cryptocurrency may s u g ge st s o m e g l o o m s , i t ' s wo r t h remembering that the heights achieved last year came amidst similar conditions along the way. Also at this stage, Bitcoin and other cryptocurrencies prices will be greatly affected by speculations. Even small statements by governments or any organization will affect the prices, but the factors stated above will be the key in determining the future of cryptocurrencies.

IMSR

THE CAPITAL IS NOT ENOUGH: PROFIT SHARING BETWEEN THE RBI AND THE GOVERNMENT

ECO Section

Ankit Chhatwani, PGDM FS, 2017-19 Pratik Sharma, MMS, 2018-2020 Mohak Shah, MMS, 2018-2020

The Reserve Bank of India's policy actions must be credible, with complete autonomy and effectiveness. Being a co u nte r p a r t y i n m a ny f i n a n c i a l transactions, the RBI is expected to deliver on its obligations, no matter what the market condition is. This means that the RBI needs a very strong balance sheet with adequate reserves and buffers which can be used during adverse times to stabilize the economy. But how much capital should the RBI hold? This question has no clear answer and different central banks use different methods. At one end, the view is that the central bank's capital holdings do not matter because they can always issue liabilities and moreover, central banks' stream of profits will eventually make up for their shortfall because of their unique seigniorage. On the other

hand, shortage of capital can lead to biases in their monetary policy and lead to a condition of higher inflation. This can be seen from the capital position of different central banks as shown in Figure 1. The capital as a percentage of assets varies from 40% in the case of Norway to a case of negative capital for countries such as Chile, Israel, and Thailand. The global median is at 8.4% while the RBI's requirement is at 27.7%. RBI is clearly an outlier among major central banks and it is also the fifth largest amongst all major central banks. Also, the RBI's core capital (confined to accumulated profits and losses, excluding valuation gains/losses) stands at 8.2% while the global median is at 2%. Taking the framework used by other major central banks and applying it to the Indian

ECO Section

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Source: Annual reports of different central banks

context and RBI's balance sheet, it can be seen that RBI holds 11-13% points more than what it actually requires. Thus, it would take extreme cases which are not used by other countries to justify the current level of capital of RBI. BACKGROUND

Source:RBI

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Any central bank's balance sheet consists of a large bulk of assets that accrue interests but many of its liabilities are interest-free. This gives RBI the required “Seigniorage” because of which it generates large net interest income. Most of this income is transferred to the government but a considerable portion is retained by the RBI under the Section 47 of the RBI Act (“Allocation of surplus profits: After making provision for bad and doubtful debts, depreciation in

ECO Section

IMSR

FINLY| January 2019 | Finstreet | SIMSR

assets, contributions to staff and superannuation funds and for all other matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the Central Government.â&#x20AC;?)

government over a period of 3 years.

As the main assets of RBI are subject to market risk, it needs to make provisions for its assets. To safeguard against any such risk, the RBI maintains internal reserves. In addition to the equity and retained earnings, there are some buffers which supplement the capital reserves. These include: a)CGRA: The currency and Gold Revaluation Account b) IRA: Investment Revaluation Account c) CF: Contingency Account d) ADF: Asset Development Fund The CGRA and IRA are used to protect against adverse movement in the exchange rate and volatility in gold prices, and both domestic and foreign securities. The CF is used to meet unexpected contingencies. The ADF is used to meet internal capital expenditure in case of subsidiaries and other associated institutions. Over the last 20 years, RBI has never made a realized loss in any year. Moreover, there has not been any year when core capital has declined and total capital has also been rising almost consistently. Also, the Malegam committee (2013) observed that the total capital required by the RBI to cover the various risk it faces is in excess of what is required. It recommended the entire surplus to be transferred to the

Source: EPW

THE RBI'S CURRENT ECONOMIC CAPITAL FRAMEWORK The Economic Capital Framework is a f ra m e wo r k w h i c h u s e s d i ffe re nt scenarios to arrive at the potential risks for the RBI's balance sheet. The ECF was designed after holding consultations with other central banks and also the Bank for International Settlements (BIS). ECF considers the following risks: a) Market Risk b)Credit risk due to default by counterparties c) Operational risk d) Contingency risk e) Emergency Liquidity Assistance (ELA) f) Inflation management operations g) Currency stabilization operations In computing the market risk, the RBI uses Value-at-Risk framework (VaR). The

ECO Section

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VAR is used to estimate the expected loss in a given portfolio for a given confidence level and time period. A VaR framework uses the determination of the returns and their risk levels and the determination of the risk tolerance. Using this, we can estimate the risk buffer needed in the case of the central banks, equity and other different forms of capital.

context, the number comes out to be 14% for optimal capital adequacy.

When deploying a VaR framework, four key choices are to be determined: a) The time period considered (daily, weekly, fortnightly, semi-annually, or annually) b) Historical sample (VaR vs s-VaR) c) Risk tolerance (protection against some percentage of adverse outcome: 5%, 3%, 1%, and 0.1%) d)Expected Shortfall Model (Conditional Value at Risk - CVaR) â&#x20AC;&#x201C; Instead of calculating risk at a particular confidence level, this model calculates the risk at every possible outcome to the left of the outcome at that particular confidence level. This considers the extreme losses that are present in the tail of the distribution. Thus, CVaR is a better measure of risk as it helps in portfolio optimization. Nearly all the major central banks work with a 10-day time period, VaR sample, and a 99% or 95% confidence level. To what extent these choices matter to attain capital adequacy is the question that needs to be addressed. On application of VaR analysis used by all other central banks to the RBI's balance sheet and also considering the Indian

FINLY| August 2016 | Finstreet | SI

Source:EPW

Only if we take extreme conditions which are not employed elsewhere (99.99% Confidence Interval), the number comes out to be 27% which is close to RBI's current capital holdings. The excess 13% points account for Rs. 4.5 Lakh Crore at the end of March 2018.

Source: EPW

DETERMINANTS OF QUANTUM OF RESERVES The determinants of the quantum of capital/reserves that should be held by a central bank are: a) The share of net foreign assets in the overall portfolio of the central bank, wherein due to the extra riskiness of such assets, it would affect the capital

ECO Section

IMSR

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requirements of the central bank b) Capital account openness in which we study the volatility of flows to determine additional reserve requirements to be maintained c) The fiscal position of the government where greater capital holdings by the central bank would be warranted by a less robust fiscal position d) The health of the banking system, wherein a higher share of non-performing assets in total loans would warrant higher reserves with the central bank so as to provide liquidity or support to the stressed commercial banks ANALYSIS OF RESERVES With respect to the focus on the overall level of reserves, an important point to be noted is that about 3/4th of RBI reserves are in the form of valuation gains. Here a question arises that whether such valuation reserve is real or is it 'funny money'. In the case of commercial banks, such gains are recognized as the mark to market gains and are recognized as profit in the P&L statement, which can then be either distributed as dividends or form part of the reserves.

valuation losses from the foreign exchange reserves b) Rise in domestic interest rates, leading to losses on the g-sec holdings Though prudence is necessary, excessive caution is not. At present, the valuation buffer reserves with the RBI are so huge that it can withstand rupee appreciation to the extent of â&#x201A;š50 to a dollar. Rupee at present being at the level of around 70, an appreciation of 30% seems exceedingly unlikely. This indicates excessive caution being exercised by the RBI and there is a scope for it to transfer part of the valuation reserves without endangering its own financial stability. TRANSFER OF VALUATION RESERVES According to critics opposing such t ra n sfe r, t h e re a re t wo p ra c t i ca l difficulties which would have to be overcome to transfer the valuation reserves:

a) Since it is a non-cash unrealized reserve, the underlying assets i.e. the foreign exchange reserves or the g-secs would have to be sold to realize the gains b) Such sale would lead to Rupee However, the Central banks follow a appreciation, thereby causing the interest conservative convention wherein even rates to soar and reducing the liquidity in though they recognize the mark to market the market gains on their securities and foreign exchange holdings, such gains do not form A solution to this is that the RBI can a part of the P&L, and are directly added directly transfer the assets to the government rather than realizing them to the Reserves of the central bank. and transferring cash. The conservatism arises primarily on account of fear of a reversal of the gains due to:

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Using such transactions, there is a reduction in RBI's reserves and g-sec holdings and a corresponding increase in PSU bank's capital and g-sec holdings.

THE OPPORTUNITY COST FOR THE SOCIETY Maintenance of excess capital in the central bank creates an opportunity cost for the society. It is measured as a difference between the Return on Assets (ROA) of the central bank versus the social returns from deploying the capital elsewhere. An example of the same is the average debt servicing cost of the Government. Rates on government bonds have been consistently higher than the RBI's ROA, by a wide margin. It is estimated that using the excess capital of about â&#x201A;š5 lakh crore of the RBI, the government could save â&#x201A;š33000-45000 crore of interest outflow per year by way of retiring its debt. CONCLUSION If the excess capital is used for financial budgetary spending, it would lead to the injection of cash in the economy and thereby inflating the money supply leading to inflationary pressure. Such transfers should be used specifically for Recapitalisation of PSU banks or to ret i re t h e ex i st i n g d e b t o f t h e government. Moreover, such transfers should be

m a d e o n l y a f t e r c o o p e ra t i v e l y discussing with the RBI so as to avoid any sense of government raiding the RBI and also ensuring that it does not create any risk on the RBI's balance sheet.

Fintech Funda

INTRODUCTION Before we get into the introduction of Digital Lending, let us just take some time to understand what is lending and how does it work presently in the traditional format. Lending is simply the process of giving money on credit to an individual or a business called the borrower, who will repay the money to the lender with the interest over a defined period of time. The lending process involves a number of steps starting with bringing a borrower on-board through various sales channels. The next step is Know Your Customer or KYC which deals with the collection of information about the

borrower such as his/her identity, financial history, income, along with the document proofs. Once the lender has acquired all required information, the lender has to make a decision if he would like to give a loan to the customer and decide the amount of the loan, interest rate and time period to repay - this process is called underwriting. After the loan is disbursed, the borrower is expected to make periodic and timely repayments to complete the loan. Digital lending attempts to perform each step of this process through paperless or electronic means saving ample amount of time and resources. Many banks have started paperless processing of loans by accepting scans of documents and the customer no longer needs to visit the

Fintech Funda

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branch for paperwork. But the most important step in the digital lending l a n d s ca p e h a s b e e n t h e u s e o f algorithms and machine learning to fully automate the lending process and let the machine decide whether to approve a loan or not with the use of real-time data. Presently, in the traditional method of lending, the average “time to decision” for small businesses and corporate lending is between three and five weeks whereas the average “time to cash” is nearly three months. Now, leading banks have embraced the digitallending revolution, bringing “time to decision” down to five minutes, and time to cash to less than 24 hours. DIFFERENT TYPES OF MODELS Tech Giants like Amazon and WeChat are continuously evolving in the digital lending ecosystem. Amazon in 2017 gave over 1 billion dollars in loans to small merchants and used its huge database to quickly evaluate customers. Amazon has real-time data on sellers and also, the customer reviews on the merchants help them to decide on the credentials of the merchants they are giving the loans to. These companies are again able to process loans faster because of their ecosystem. It takes them less than a second to approve a loan as everything is automated and is done without any human intervention. Digital lending is helping lenders to overcome geographical barriers, reduce costs and increase transparency. There are various forms of digital lending that have risen due to different regulatory environments, market structures and

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different needs of the customer. The different types of models that can be seen in the market are:Online Lenders- They offer fully digital end-to-end lending experience via mobile applications or via their website. There is no need for face to face interaction with the customers. They are very prominent in African countries like Nigeria and Kenya where fintech companies like Lidya, Branch, and Tala help entrepreneurs getting funds for their businesses. P2P platforms- These platforms bring the customer and the lender together and facilitate the transaction. They also design the product and offer recollection facilities as well. CreditEase, KwikCash, and LoanFrame are some examples in India. E-Commerce and Social Media PlatformsAs discussed before, companies like Amazon and WeChat are not lending companies primarily, but they leverage their digital ecosystem and customer data to offer credit to merchants. Supply Chain Lenders- Firms like Tienda Pago and M-Kopa Solar provide shortterm working capital loans to borrowers. The loans can be used to purchase i nve nto r y o r to m e e t s h o r t- te r m obligations and working capital requirements. It is not necessary that a company has to follow only one model, rather it can redevelop and refine their models according to customer requirements. Creditas, a digital lender in Brazil began as a marketplace platform but moved to credit scoring and financing solutions for its

Fintech Funda

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Source: www.consultancy.in

customers to become an online lender. Similarly, Jumo in Kenya which started as an online lender has also become a marketplace platform now. DIGITAL LENDING IN INDIA Digital lending is also becoming hugely popular in India with lots of youngsters who are in urgent need of funds and want faster and paperless approval of loans. Today various marketplaces like Paisbazaar.com offer a very good customer experience through easy access to various products and services. Innovations like Aadhaar have set the perfect evaluation criteria for lenders. Pan card and Aadhaar can be verified online and lots of data can be gathered from the source itself and thus, there is very less chance of forgery or fraud. Talking about the size of digital lending in India, of the 15 lakhs applications for personal loans received, 15-20 percent are received online, which was zero almost 4 years ago. Players like

Paisabazaar, MoneyTap, and LoanTap are increasing their market share and have shown immense growth over the past few years. The faster processing time is what engages customers and the millennials today are high on fintech. DIGITAL LENDING IN MSME SECTOR For the MSME sector, digital lending will grow manifold and is expected to increase to 10 or 15 times by 2023. The annual disbursements from digital lending to MSME Sector are expected to reach â&#x201A;š6 lakh - 7 lakh crore ($80 billion-$100 billion) by that time. All this will definitely help to grow the MSME sector and has the potential to disrupt the traditional financial services industry. MSME sector contributes significantly to the GDP of the country but is still far less than what is the case in the US and in China, lagging 10 percentage points from the US and 23 percentage points from China in terms of contribution to the GDP.

Fintech Funda

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Source: www.consultancy.in

The main problem for the MSME sector in India is that they often have to obtain credit from informal sources and pay high rates of interest (around 2.5 times more than the formal sector). Almost 60 percent of the MSME sector borrows from the informal sector today. This scenario is expected to completely change in the future through digital lending, with more than 85 percent of the sector expected to borrow through the formal sector. Digital lending also has its cons though. They offer a smaller amount of loan as compared to traditional lending models today and also the rate of interest is a bit on the higher side. So digital lending is not suited for every kind of financing and is not the best solution for every need. FUTURE OUTLOOK The digital lending space will be a potent force in the future. The lenders will have to refine and re-develop their models according to changing customer needs. But the similarities of today, where

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everything is done digitally right from acquiring customer data, evaluating them, offering rocket fast approval and d i s b u rs e m e n t a n d e n ga g i n g t h e customer without actually meeting them, are here to stay for a very long time. Traditional banks have to quickly adapt to these models if they want to survive because digital lending is the future and customers will demand speed, transparency, and efficiency, which is being provided by digital lenders. In the coming days, we can further see a line of new credit scoring algorithms, leveraging vast pools of data with cutting-edge technology, Machine Learning, Artificial Intelligence & predictive models to expose a large customer pool to credit underwriting. A new wave of lending is on the rise and it is going to wash away the existing limitations which have kept the Indian masses underserved for decades.

Alumni Section

IMSR

Kiran Ramakrishna PGDM â&#x20AC;&#x201C; Finance | 2016-2018 It all started with the sight of me standing in front of my Father on my nervous toes, asking to help me with funding for MBA. Unknowingly, he prepared me for the interview process as the first question shot up "why MBA?" I answered in whatever way possible, throwing simple jargons like

career growth, business knowledge, CEO, etc. Though he was partly convinced, he gave a nod and said "this is the first time you've taken ownership of your life. Now make sure you carve it smoothly. Coming to my story, I started off as an electrical e n g i n e e r. T h e c i r c u i t s a n d t h e semiconductors that were drawn during my electrical engineering never taught me a lesson or two on how the company that manufactures the same does its business. As any other routine engineer's story, IT was the place which offered me comfort. Technical coding was entirely a novice concept considering my academic background, but that's how it went. Eventually, the comfort turned out to be my couch zone where I could seldom picture my destination. I was at the c ro s s ro a d s o f n o t b e i n g a b l e to completely devote myself to coding, nor could I ask for a vertical change, since getting that was not so easy from the organization's perspective and practices. To put it in a euphemistic way, coding never interested me. There is no worst feeling than being at a place where you don't belong at all. Coming from a techy

Alumni Section

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world, a thorough grasp on business was always missing on my resume. As I stepped into my first lecture of management, I realized that there were far more peers who had been through the same shores as mine. Not only from my academic background but other varied streams of study. The concoction of diverse thought processes, different opinions and the flexibility to understand the best among them is what makes management a tad unique from other courses. THE RIGHT MISTAKE A famous scene from the movie 'First Man', which is based on the life of Neil Armstrong, flashes my memories. After one of the thrust systems for the propulsion of rocket for the Apollo mission fails and blasts off, the protagonist Ryan Gosling (who plays Neil in the movie) says â&#x20AC;&#x153;We should fail here so that we do not screw up in the spaceâ&#x20AC;?. These lines are the perfect representation of how to perceive the management course. Yes, you heard it right. Management is all about making mistakes and learning from them so that you don't repeat the same as you elevate up the ladder of the hierarchy at your workplace. These two years set the right tone for your career goals. You have a rightful license to resurrect your grey areas and set them in accord with your financial objectives. It is about the preparation and foresight of how you are going to improvise on every aspect of your personality, be it your communication skills, academic knowledge, networking and diversity in

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experiences. Consequently, visualize yourself as a complete package before the corporate world grabs you with open hands. OUTSIDE THE WHITE PAGES If you think that the subjects in your academic curriculum will make you a better management professional, then you may be taking only a pie of your education. There should be a mature change in your thought process as you go and sit at office desks. Your peers and bosses at the workplace will consider you worthwhile not for learning the process of the organization or just slogging out day and night for projects. It is all about the value you add to the organization and the strategic fit in the profile offered. The company would also be free to put you in different verticals depending on your performance and availability at that point in time. To achieve this checklist, the focus should be on experiential learning in these two years. As you start learning outside the syllabus, there will be an entirely new dimension which will be thought-provoking and eyeopening. The business conferences, guest lectures, case study competitions and seminars outside college horizon are what completes one as a management professional. As you step out of the cocoon, you start gathering different perspectives to the same scenario. The more viewpoints you gather, the more open-mindedness you congregate. What makes a management course different from other courses is the advantage of stitching their skills themselves using electives, and can then implement those

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Alumni Section

on placements at a relevant company. THE COCOON OF SPECIALIZATION: On the flip side, I would also like to stress upon the specialization conundrum. Since a big crop of engineers end up pursuing MBA , one is bound to experience jitters when he/she views the balance sheet or income statement of a company for the first time. I have seen people opt for marketing just because they wanted to dodge the perceived complications involved in finance. Also, those who undermine the STPs and 7 C's take up other specializations. All I want to convey here is that management is an equivocal amalgamation of all the four major specializations. An ideal CEO would recognize all features of Marketing , Finance, Operations, and HR on an identical level. Once you step into the industry, no employer of yours would be interested in asking if you can do credit analysis or comprehend the business model. It's a dynamic world and the expectation out of you would also be of that level. In that scenario, you cannot escape the realities of the kind of expectations set from you by giving excuses as imbecilic as “these weren't the concepts that featured in my subjects/electives”. Only a non-aspiring middle manager would say that.

School, which is one of the world's finest place to pursue an MBA. She was resolute and determined to get there and rightfully got so. As her 2nd trimester started, her faculties lashed out at her for bringing poor grades in the 1st trimester (i.e. grades just enough to pass). Then she questioned herself “Was my dream to just get into Wharton or complete graduate at Wharton with good grades?” If you are chasing your MBA dream just for the placement and a lucrative package, you may end up living only half your dream. This is something which should be deeply introspected. After conscientiously putting in tons of hard work in cracking those tough quant questions and crawling my way through the group discussions and personal interviews, I took a bold call on career advancement, having an iota of an idea about what summary these two years would speak of myself. I guess many like me ended up doing the same. All the very best!

CONCLUSION - WHAT'S YOUR GOAL I have a short story to sum it up. One of my closest friends ended up at her dream college, Wharton Business

HEALTHCARE SECTOR

Sector Analysis

HEALTHCARE

INTRODUCTION The healthcare sector is one of the most vital sectors for any nation. Being one of the fastest growing industries, it is also a major contributor of GDP in most of the developed as well as developing economies. The broad segments of healthcare in India:

The hospital industry makes 80% of the total healthcare market in India. It is estimated to reach $ 132 bn by 2023 from $ 61.8 bn in 2017; growing at a CAGR of 1617%. The share of the organized sector is almost 25% in this segment (15% in labs and 10% in radiology). The primary care industry is presently valued at $ 13 bn. The industry is growing at an incredible pace owing to its increasing coverage, services and greater than ever expenditure by the public as well private players. Despite being in its budding stages, the growth trajectory of the home healthcare sector in India has been very strong. Affordability, awareness about diseases, increase in income and consciousness about health are the primary reasons for this upward trend. Also, on the supply

Sector Analysis

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side, government initiatives are a major reason for the growth of the healthcare sector in India which is expected to reach $372 billion by 2022. TRENDS IN THE GROWTH OF THE SECTOR MARKET SIZE

The expenditure on healthcare in India is q u i te l o w a s c o m p a re d to o t h e r developed and developing economies. India's spending on the healthcare sector has grown from 1.2 percent of the GDP in 2013-14 to 1.4 percent in 2017-18. It is expected to grow with the Ayushman Bharat scheme providing financial banking to a population of 50 crore for secondary and tertiary hospitalization. The National Health Policy, 2017 plans to raise government health spending to 2.5 percent of the GDP by 2025. It also predicts an increase in the state sector health spending to more than 8 percent of their budget by 2020. TRENDS IN CENTRE-STATE SHARE (%) IN PUBLIC EXPENDITURE

Source: IBEF

There has been a steady rise in the market size of the healthcare industry in India, owing to an increase in the per capita income, awareness among citizens and medical tourism. The government has also taken several initiatives through the introduction of schemes over the period of time steadily increasing the public expenditure in the healthcare sector. HEALTHCARE EXPENDITURE AS A % OF GDP: INDIA VS OTHER NATIONS

The public health expenditure in India is financed by both the central and the state government. From the above chart, it can be seen that the share of the center towards health expenditure has remained in the range of 29%-37% during 2013-18, while most of the contribution has come from the state governments. According to the April 2017 official press release, of the total â&#x201A;š1,80,656.8 crore budget estimated for the financial year 2016-17 on the healthcare sector, â&#x201A;š 1,30,782.4 crore was funded by the state governments and union territories, while the government

Sector Analysis

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of India funded â&#x201A;š49,874.3 crore towards the healthcare sector. In the Union Budget 2018-19, the central government announced two major initiatives under the Ayushman Bharat programme which was the Health and Wellness Centre and the National Health Protection Scheme (NHPM). A budget of â&#x201A;š 1200 crore has been made available for 1.5 lakhs wellness centres, whereas, under NHPM more than 10 crore families will be provided 5 lakh per family annual for secondary and tertiary hospitalization. GROWTH DRIVERS

services. Also, the increasing income from this age group will serve as a major source of demand for these facilities. India's life expectancy is 69.09 years in 2018 against 61.61 years in 2000 which can be majorly attributed to the efforts made to tackle communicable diseases. As a result, there is a rise in the elderly population in India. This will have numerous implications as the elderly population would need greater healthcare facilities, which would, in turn, require higher healthcare expenditures than other population groups. G R O W I N G H E A LT H I N S U R A N C E PENETRATION

RISING PER CAPITA INCOME With the growing middle-income class, there is a significant rise in the per capita income which also paves way for more demand for healthcare services. The Yo-Y growth in the per capita income is in the range of 5-7%. However, this growth doesn't guarantee a rise in the spending of the economically weaker sections as people in India are at different strata of the income distribution. However, there is an immense opportunity for players targeting the middle-class segment. D E M O G R A P H I C S I T U AT I O N & INCREASING LIFE EXPECTANCY The portion of India's working age group is more than half of the total population. The dynamic demographic group would want to make use of modern and effective healthcare services for treatments instead of relying on underequipped facilities which, in turn, would augment the need for healthcare

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Health insurance boosts the demand for healthcare services as the insured pays a p re m i u m fo r t h e p o l i c y w h i c h i s reimbursed by the insurer in case he/she has to undergo treatment on account of illnesses, sickness or diseases. This insurance up to certain extent covers the health expenses of an individual which eventually reduces his/her burden of healthcare costs. Therefore, a likely increase in the health insurance market will drive the demand for healthcare services. Also, the role of government in providing insurance to the below poverty line segment through various schemes has given rise to the growth in the health insurance market.

Sector Analysis

IMSR

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TRENDS IN NUMBER OF PERSONS COVERED UNDER HEALTH INSURANCE

Source: IRDAI MEDICAL TOURISM Medical tourism is booming in India. In October 2015, India's medical tourism sector was estimated to be worth US$3 billion. According to the Confederation of Indian Industries (CII), the main reason that attracts medical value travel to India is cost-effectiveness and treatment from accredited facilities at par with developed countries at much lower cost. The Medical Tourism Market Report: 2015 found that India was "one of the lowest cost and highest quality of all medical tourism destinations, it offers a wide variety of procedures at about one-tenth the cost of similar procedures in the United States.â&#x20AC;? TRANSITION IN DISEASE PROFILE Over the years, there has been a substantial change in the disease profile of Indians. As the share of communicable, maternal, neonatal, and nutritional diseases for death

decreased to 27.5% in 2016 from 53.6% in 1990 and that of non-communicable diseases increased to 61.8% in 2016 from 37.9% in 1990. This represents the transition or shift in the disease profile of the population in India which provides an ample scope of opportunity for healthcare services in the country as the non-communicable diseases tend to be of a long duration which, in turn, increases the need for healthcare services with respect to noncommunicable diseases. Malaria, cholera, dengue etc. are referred to as communicable diseases and diseases like cancer, diabetes, cardiovascular diseases and stroke etc. are referred to as non-communicable diseases. INVESTMENTS Hospitals and diagnostic centres attracted $ 5.25 billion in foreign direct investment (FDI), between 2000 and 2018, according to the Department of Industrial Policy and Promotion (DIPP). Some of the recent investments in the Indian health sector are: India and Cuba have signed a Memorandum of Understanding to strengthen cooperation in the areas of health and medicine Fortis Healthcare approved the split of its hospital business with Manipal Hospital Enterprises. TPG and Dr. Ranjan Pal invested â&#x201A;š3,900 crore ($ 602.41 million) in Manipal Hospital The healthcare has access to a pool of investors with lower cost budgets and

Sector Analysis

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better credit ratings, both of which provide a lower capital cost. IHH Healthcare, the largest Asian hospital operator, has acquired a chain of 30 hospitals of 6,500 beds from Fortis Healthcare, currently the second largest hospital chain in India. While public health spending has stagnated over the years, the private health sector has exploded. CHALLENGES Infrastructure: Existing healthcare infrastructure in India are not sufficient to meet the needs of the growing population. There is a lack of funds and staff in public health facilities Low public expenditure: Public health expenditure accounts for only 1.2% of total health expenditure. This is extremely low compared to the WHO recommendation of 5% The disparity between rural and urban areas: The gap between supply and demand in rural areas is enormous, resulting in the largest proportion of the population and a lower percentage of healthcare services in rural areas. Primary health centres (PHCs) have more than 3,000 physicians, as most healthcare providers are located in urban areas Insurance: The government's contribution to insurance is very low and most Indians do not prefer to have a health insurance Double burden of disease: In addition

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to maternal and child mortality, communicable diseases, lifestylerelated diseases, such as diabetes and hypertension, are on the rise in India HEALTHCARE STARTUPS IN INDIA Start-ups should innovate by renewing the sector by combining technologies such as artificial intelligence (AI) and machine learning with traditional practices in the healthcare sector. With the advent of the (medical) Internet of Things (IoMT), mobile and portable devices can be used to identify risk factors and provide preventive treatment to patients. It can be used to predict trends and issues related to healthcare. Visualizing a clear and concise clinical action that adds value to the patient, the physician, and the healthcare system will become an effective solution. Patients can also share their experience of hospital care and procedures during treatment, staff and hospital operations. PRACTO - BUILD A UNIQUE HEALTH PLATFORM What began in 2007 as a SaaS platform for physicians has become in the last 10 ye a rs a u n i q u e d e st i n at i o n fo r appointments, consultations, medical records, insurance, and online drug orders. With a team of more than 1,500 people, Practo, the Bengaluru-based healthcare company is now present in 38 cities in India, Singapore, Indonesia, Philippines, and Brazil. With more than 1,000,000 doctors supporting this scale,

Sector Analysis

IMSR

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Practo currently treats 25 million patients every year. AMAZON COMPREHEND MEDICAL Amazon has announced a new service called Amazon Comprehend Medical, which aims to help hospitals, insurers, and pharmaceutical companies analyse their health data. This decision pushed A m a zo n i n t o t h e $ 3 0 0 b i l l i o n healthcare digitization market, in the face of fierce competition in healthcare from IT giants such as Optum, Epic, and Cerner.

PERFORMANCE OF MAJOR STOCKS IN THE INDUSTRY

consolidated sales of ₹1139.90 Crore, up 9.39 % Q-o-Q and down -4.78 % Y-oY. The company has reported a net profit after tax of ₹-147.07 Crore in the latest quarter 2.THYROCARE Ÿ It is the world's largest diagnostic

centre and pathology lab in India with a focus on providing quality preventive healthcare services at affordable costs. It is a mid-cap company (having a m a r ket ca p o f ₹ 2 9 5 5 . 0 6 C ro re ) operating in the Pharmaceuticals and Healthcare sector Ÿ Thyrocare Technologies Ltd.'s key

hospitals, headquartered in India. It is a mid-cap company having a market cap of Rs 10173.51 Crore operating in the Pharmaceuticals and Healthcare sector

Revenue Segments include Diagnostics, which contributed ₹313.03 Crore to Sales Value; Sale of services, which contributed ₹10.45 Crore to Sales Value; Other Operating Revenue, which contributed ₹ 5.48 Crore to Sales Value; and Glucose Strips/Glucometer, which contributed ₹2.84 Crore to Sales Value for the year ending 31st March 2018

Ÿ Fortis Healthcare Ltd.'s key Revenue

Ÿ For the quarter ended on November

Segments include Healthcare Services, which contributed ₹648.28 Crore to Sales Value (98.30 % of Total Sales); Lease Rentals, which contributed ₹6.64 Crore to Sales Value; Other Operating Revenue, which contributed ₹4.36 Crore to Sales Value; Scrap, which contributed ₹14 Crore to Sales Value and Export Incentives, which contributed ₹0.05 Crore to Sales Value for the year ending 31st March 2018

2018, the company has reported a consolidated sales of ₹103.88 Crore, up 6.93 % Q-o-Q and up 18.00 % Y-o-Y. The Company has reported a net profit after tax of ₹24.81 Crore in the latest quarter

1.FORTIS Ÿ Fortis Healthcare Limited is a chain of

Ÿ For the quarter ended on November

2018, the company has reported a

3.APOLLO HOSPITALS Ÿ Apollo Hospitals introduced its digital

platform, Ask Apollo in the year 2015. T h e p l a t fo r m p r o v i d e s r e m o t e healthcare services. The platform connects patients with doctors remotely and provides services like a

Sector Analysis

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consultation with the doctors via video, voice calls, and email. It is a large-cap company (having a market cap of ₹ 1 7 3 9 6 . 2 1 C ro r e ) o p e ra t i n g i n Pharmaceuticals and Healthcare sector Ÿ Apollo Hospitals Enterprise Ltd. key

Revenue Segments include HealthCare Services, which contributed ₹3890.31 Crore to Sales Value; Pharmaceuticals, which contributed ₹3268.88 Crore to Sales Value and Other Operating Revenue, which contributed ₹23.82 Crore to Sales Value for the year ending 31st March 2018 Ÿ For the quarter ended on November

2018, the company has reported a Standalone sales of ₹2090.12 Crore, up 9.41 % Q-o-Q and up 12.88 % Y-o-Y. The company has reported a net profit after tax of ₹78.98 Crore in the latest quarter

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to 31st March 2020 4)In April 2018, the Indian government approved the signing of the Memorandum of Understanding with the BRICS Medical Agencies for cooperation in the field of medical products WAY FORWARD Healthcare in India today points towards taking preventive measures, increasing awareness about diseases and their treatment but has little importance of wellness. 1) Technology: It is playing a significant role in making healthcare accessible a n d a f fo r d a b l e . W i t h a r t i f i c i a l intelligence, internet of things, data analytics, remote monitoring of patients, India can be optimistic about improving India's healthcare.

GOVERNMENT INITIATIVES 1)The Indian government has launched the Indradhanush mission to improve immunization coverage in the country. The goal is to achieve 90% immunization coverage by December 2018, which will cover unvaccinated and partially vaccinated children in rural and urban areas of India 2)In April 2018, the Indian Government approved the signing of the Memorandum of Understanding between India and the World Health Organization to facilitate the improvement of public health in India 3)In March 2018, the Cabinet of the Indian Union approved the continuation of the National Health Mission with a budget of ₹ 85,217 Crore (13.16 billion USD) from 1st April 2017

2) Medical tourism: India has been visited by over 3.5 lakh people from different countries every year. Given this scenario, India is set to become a medical tourism hub in the near future. 3) Ayushman Bharat: The scheme has been implemented so far in 33 States and Union territories except for Delhi, Odisha, and Telangana. More than a Lakh people has benefited from this regime as of October 2018. Over 825,000 e-cards have been generated and many private hospitals have started to participate in this project.The time is not far when people realise that even an ounce of prevention is worth a pound of cure.

Internship Diaries

“I would suggest students who want to become an entrepreneur or who want to make a career in the startup industry, should surely consider Artha India Ventures as a serious option to work for.” THE FIRM

SIDDHARTH MANRAL PGDM - FINANCE 2017-2019 VICE - PRESIDENT, SPORTS COMMITTEE

I completed my internship from Artha India Ventures, an early-stage investment arm of Artha Group of companies which is part of the family office of Mr. Ashok Kumar Damani and Mr. Ramesh M. Damani (both served as ex-Directors of the Bombay Stock Exchange). Artha India Venture or in short AIV was founded by Mr. Anirudh Damani, who is a stalwart in the field of early stage and seed investment in India. Currently, Mr. Anirudh Damani is handling the Artha Venture fund as a managing partner. AIV is currently headed by Ms. Apurva Damani

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Internship Diaries

as the Managing director. AIV is an early-stage sector agnostic fund that has been investing in start-ups since early 2012. Though it is sector agnostic fund, AIV has a particular inclination towards Fintech, FMCG, Technology, Energy, Consumer goods etc. AIV currently has a portfolio of 55 companies with many startup deals in the pipeline. AIV is very clear about the type of startups that they invest in. As most early startups are just ideas and people working on these ideas, revenue and profits are sometimes not the most important parameters to judge the business. AIV understand this so well and that is why they look for disruptive ideas, which have a potential to create a good market and a highly motivated and robust team, which has the passion to realize the ideas. AIV is very proud of its unique investment model. They invest in highyield renewable energy assets. The profit generated is then used to invest in the shortlisted startups. When the firm exits from the startup, they plow back the returns into the energy assets, thus making a self-sustaining cycle. THE PROCESS The process was relatively simple for AIV. It consisted of 3 written tests which included Quantitative Aptitude, General Knowledge, and basic Excel Skills. The test was used as a shortlisting mechanism for further rounds.

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Two interviews took place in the AIV office at Kala Ghoda, Mumbai. The first interview was taken by a senior associate and second was taken by Ms. Apurva Damani, Managing Director, AIV. The technical interview taken by the senior associate involved questions on the lines of how to shortlist a startup, valuation of a startup, parameters for shortlisting a startup, news related to starting up the sector in India etc. Other questions ranged from CV to personal life, aspirations, and long-term career goals. I was also asked to design a report on one of their portfolio's startup company in detail. The quality of the report was satisfactory as per their evaluation and one of the key reasons for my selection in Artha. Overall, the interview was smooth and without frills. They look for good general knowledge and aptitude towards startups. Good communication skills are a must, as there is a plethora of meetings and conference calls with prospective founders almost every other day. THE EXPERIENCE I had a wonderful 2 months at AIV. The team is small and I got to do all the work an associate can possibly do in the organization. From evaluating startups, setting up a meeting with founders, exa m i n i n g t h e b u s i n e s s i d e a s o f prospective and upcoming startups, examining legal documents, maintaining excel workbooks of startups to be reviewed, maintaining founder contact lists, preparing daily and monthly reports to taking printouts and filing Shareholders

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Internship Diaries

Agreements. T h i s t y p e o f wo r k gave m e t h e perspective of working in a small company and the amount of work that is to be handled. I learned to hustle in this internship. The most interesting part of the job was when the founders visit the office with their products and you get to examine the product first hand, before anyone else and this gives you the thrill of a lifetime. Working in a small team has its own perks. I could sit with anyone and learn about any aspect of the Startup industry including aspects such as initiation, negotiations, legal documents, meeting etc.

I want to state that I am pursuing finance in the second year as my specialization. This internship will give you more insight into the startup industry and strategic management. This internship taught me what I want to do in my professional life and how to go about with my career. I would suggest students who want to become an entrepreneur or who want to make a career in the startup industry, should surely consider Artha India Ventures as a serious option to work for. All the very best!

I was asked to generate multiple reports on startup industry trends, funding scenarios, and government policies associated with startups in India. I also worked on multiple articles to be written for various newsletters, published within the firm and outside. In my 2 month stint, I went through hundreds of startups and evaluated 35 of them closely. I also took part in the evaluation, dealing, negotiation and completion of 2 deals. MY INSIGHTS The two months that I spent at AIV were the best learning months in my entire PGDM course. I learned and kept getting b e t t e r w i t h t h e d ay o n a l m o s t ever y th in g , all over aga in - my communication skills, writing skills, excel skills and overall my critical thinking process.

Know your Finance 39

STOCK MARKET INTRODUCTION TO VALUATION Every asset has a value, we just have to come up with the right way to measure it. In this article, we will focus on the valuation of businesses. There are various methods for doing that. The two most widely used approaches are Intrinsic value & Relative value/Pricing. The intrinsic value of a firm is the present value of expected cash flows,

nothing less or nothing more. Relative value/Price of a firm is what others are willing to pay for it. There is a gap between the two - most of the times. Markets are assumed to make mistakes in valuing the companies & are assumed to correct them over time. Investors try to exploit this gap. Discounted Cash flow is the method used to come up with the Intrinsic value. As the name suggests, there are two components to it, the Discount rate & Cash flows. There are two different ways to execute this process - equity valuation & firm valuation. Equity valuation values only equity claims in the firm, whereas, firm valuation considers both equity & debt claims. Here, we will focus on equity valuation. CAPM (CAPITAL ASSET PRICING MODEL) The discount rate is a required rate of return for an investor & it should be

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consistent with the cash flows. It is difficult for an equity investor to determine the required rate of return due to the unpredictable nature of the equity. Capital asset pricing model provides a logical way to estimate the cost of equity. It has three components Risk-free rate, Equity risk premium & Beta. Cost of Equity = Risk-free rate + (Beta * Equity risk premium) Each term is explained in the sections that follow.

Thus, the currency used for valuation matters & should be the same for estimating discount rate & cash flows. Generally, a 10-year government bond rate is used as the risk-free rate. But, an important point to notice here is that not all governments bonds are completely default-free. Rating agencies like Moody's and S&P give sovereign ratings for governments of different countries, which indicate the risk associated with them. This risk is quantified in the form of a default spread which is factored in the rate of return on government bonds. The default spread is an additional margin expected by the investors to compensate for the possibility that the government may default. Hence, by subtracting this default spread from the government bond rate, we can come up with the actual risk-free rate. EQUITY RISK PREMIUM

RISK-FREE RATE It is the rate of return on a risk-free investment. A risk-free investment should have no default risk & no reinvestment risk. Default risk is the risk of default whereas re-investment risk refers to the risk that the same rate of return on a security instrument may not be available in the market when it matures. Thus, the time horizon is important while estimating the risk-free rate along with the default-free nature of the security. The risk-free rate is a combination of two components: Risk-free rate = Expected real interest rate + Expected inflation in the currency

The equity risk premium is the premium investors require over & above the riskfree rate to invest in risky assets like equity. The usual practice is to use historical equity risk premiums. In simple words, the historical risk premium is the average of equity risk premiums over several past years. But there are some issues with historical premiums. Over a small time period of say 5-10 years, they give a very high standard error while over a long period of say 75100 years they may factor in unwanted effects because market conditions are very different over such a long time.

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The better way of doing it is using implied equity risk premiums. These premiums are computed by looking at future market conditions as opposed to past. Implied equity risk premium = Equity risk premium in mature market + (Country default spread * Îť) Equity risk premium in a mature market like the US is the rate at which expected earnings of the stock market index are discounted to get the present value of the index. The default spread captures the additional risk of the country in which the company operates. Lambda (Îť) is the relative measure of volatility in the equity market as compared to volatility in a government bond. All these components put together, give us a market price for equity risk.

leverage has an amplifying effect in both good & bad times. Following are the steps to compute the beta: 1. Find the business in which the firm operates 2. Calculate the average of regression betas of publicly traded companies in the same business 3. Unlever the average beta using the average debt to equity ratio across the publicly traded firms 4. Compute a levered beta for your firm using the market debt to equity ratio of the firm Unlevered Beta = Levered Beta/ [1 + (1 - t) (Average D/E ratio across firms)] Levered Beta = Unlevered Beta * [1 + (1 t) (D/E ratio of the firm)]

BETA GENERAL AWARENESS Beta is the measure of relative risk of a stock with respect to average equity risk. We use it to avoid assigning the same risk to two different companies having a different risk profile.The usual practice is to use regression beta. But it has a high standard error & can be misleading at times. There is a better approach for doing this.

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The risk of a company mainly depends on the kind of products or services they are offering and their financial leverage. The companies offering luxury products are more susceptible to changes in business cycles than those offering necessary products& thus have more risk associated. Also, companies with more financial leverage are riskier. The

THE RELATIONSHIP BETWEEN BOND PRICES AND INTEREST RATES

A bond is a type of loan which the investors give to the bond's issuer. The issuer of the bond promises to payback the amount borrowed (the principal) when the loan is due (maturity of the bond) and in return gives a fixed income periodically to its lenders, which is known

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as interest or coupon. A bond can be bought either through a mutual fund or directly from the issuer of the bond. Bonds when issued, carry a coupon rate which is close to the one prevailing in the market. At that prevailing rate and price, the bonds are purchased by the investors. But, bond prices decrease when the interest rate rises as the fixed interest and principal payment of the bond of the already purchased bonds become unattractive to the investors. This can be better explained by the concept of opportunity cost. The opportunity cost or simply stated the next best alternative becomes more lucrative for the investor when there is an increase in the interest rate. It is like a price war, where the price of the bond adjusts to keep the bond competitive in the market in lieu of the changes in the market rates. This can be illustrated by a simple example.

In case of a fall in the interest rate to say 6%, the bond held by the investor becomes competitive. The worth of the bond becomes more than Rs.1000. It will be priced at a premium since the interest rates are higher than the rate prevailing in the market. Many factors go into determining the attractiveness of a bond such as the length of time until the bond matures, whether or not its interest is taxable, the creditworthiness of its issuer, the likelihood that the issuer will pay off debt early, etc. But, the important point to be remembered is that change occurs in market interest rates virtually every day. The movement of bond prices and bond yields is simply a reaction to that change.

EXAMPLE PERSONAL FINANCE XYZ Ltd. offers a bond carrying a coupon of 7% and has a par value of Rs.1000. If the interest during the year goes up to 8%, the new bond issued at a face value of 1000 will give an interest of Rs.80 instead of Rs.70, given by the older bond. As a result of this, the bond issued earlier giving Rs.70 as interest loses its competitiveness. In such a situation, if the investor wants to sell the bond, he will have to reduce the bond price to an extent where it yields a return of around 8%.

INSURANCE SCHEMES, SAVINGS AND TAX BENEFITS

In India, Insurance schemes can broadly be classified into two categories

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There are several types of general and insurance policies which will be stated below GENERAL INSURANCE POLICIES Ÿ Ÿ Ÿ Ÿ

Personal Insurance Rural Insurance Industrial Insurance Commercial Insurance

Personal Insurance provides protection against unforeseen events like death or accident. Personal insurance is further broken down into:1. Medical Insurance- It is used to cover the expenses of medical treatment, including domiciliary and hospitalization charges. Some of the medical insurance providers in India are as follows:Ÿ Bajaj Allianz General Insurance Ÿ Apollo Munich Health Insurance Ÿ ICICI Lombard 2. Accidental Insurance- It is used to protect against eventualities of an accident including death. The major accidental insurance cover providers in India are as follows:Ÿ ICICI Lombard Ÿ TATA AIG Insurance Ÿ The Oriental Insurance Company 3. Property Insurance- It provides financial coverage in case of damage to property caused by natural calamities and theft. They can be further s u b d i v i d e d i nto f i re i n s u ra n c e , earthquake insurance etc. Some major

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property insurance providers in India are follows:Ÿ Standard fire and Special Perils policy of SBI General Insurance 4. Vehicle Insurance- It is used to provide cover against any damages suffered by vehicles due to accidents or any unforeseen event. Leading vehicle insurance providers in India are as follows:Ÿ Bajaj Allianz General Insurance Ÿ Royal Sundaram General Insurance Company Rural Insurance provides protection to residents of rural areas and caters to their various requirements ranging from life, health to agriculture. Major rural insurance providers in India are as follows:Ÿ TATA AIG Insurance Ÿ New India Assurance Ÿ ICICI Prudential Industrial Insurance- Used by companies to secure protection against damages caused to projects, equipment caused by fire or natural calamities. Major industrial insurance providers in India are as follows:Ÿ United India Insurance Ÿ New India Assurance Commercial Insurance- It provides security against any sort of property damage or theft. Major commercial insurance providers in India are as follows:Ÿ National Insurance Company LIFE INSURANCE POLICIES

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Term Life Insurance Endowment Plans Money Back Plans ULIPs

Term Life Insurance-It provides death cover for a specific period. If the person assured passes away during the specified period the benefit is paid to the nominee. But in case the person assured outlives the specified period, then no benefits are passed on to the nominee. The benefit is paid in lump sum after the insured has expired. Some of the major term life insurance providers in India are as follows:Ÿ Life Insurance Corporation Ÿ HDFC Life Endowment Plans- It is a combination of both insurance and saving. It provides coverage to the insured for a specific period of time. In case of expiry of the insured, the full amount is paid to the nominee. If the insured outlives the term, the full amount is paid to the insured on the maturity of the policy. Endowment policies are typically NonULIP life insurance plans. Some of the major endowment policy providers in India are as follows:Ÿ Reliance Life Insurance Ÿ HDFC Life Ÿ SBI Life Insurance Company Money Back Insurance- A percentage of the entire amount insured is paid to the insured at regular intervals in addition to the maturity amount. These periodic payments, known as survival benefit accrue and are paid over the entire tenure of the policy as long as the insured is alive. In case of death of the

insured before the expiry of the policy, the nominee is paid the maturity amount and the survival benefits cease to accrue. Some of the major money back policy providers in India are as follows:Ÿ Life Insurance Corporation Ÿ Aegon Life Insurance Company Ÿ HDFC Life ULIPs- It is a combination of insurance and investment. A part of the premium paid is used to provide coverage and a part of it is invested by the company in capital market instruments like bonds, equities etc. Some of the major ULIP policy providers in India are as follows:Ÿ Max Life Insurance Ÿ ICICI Prudential Life Insurance Ÿ Bajaj Allianz Life Insurance Whole Life Insurance-Unlike term insurance, which provides coverage for a specific period, whole life insurance covers the insured for the whole life. Some of the major whole life policy providers in India are as follows:Ÿ Bajaj Allianz Life Insurance TAX BENEFITS OF LIFE INSURANCE Tax deduction benefits can be availed under section 80C of the Income Tax Act for the premiums paid on the life insurance bought. The maximum benefit that can be availed is up to Rs. 1 lakh from the taxable income. Premium paid for health insurance is also eligible for tax benefits under section 80D.

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INVESTRIX:

ANNUAL CORPORATE PANEL DISCUSSION EVENT, 2018 – AS IT HAPPENED

Saurav Jain | PGDM | 2018-20

ABOUT THE EVENT

Investrix

Finstreet, the official finance committee of KJ SIMSR has been conducting “Investrix”, an annual finance panel discussion event organized from the past 25 years with the purpose of bringing eminent personalities from the financial sector to a common platform, where they discuss and share their ideas. The ideas shared will give impetus to budding managers to understand the finance industry and bridge the gap between theory and practice.

Investrix 2018 was conducted on the 15th of December, 2018 and the topic for the panel discussion was “Trends of Investment in Different Asset Classes”. The panel comprised of the best of the best from the industry, including the l i ke s o f M r. A n a n d S h a h ( H e a d Investments and Deputy CEO, BNP Paribas), Ms. Laxmi Iyer (CIO, Debt and Head Products, Kotak Mahindra AMC), Mr. Shobhit Agarwal (MD and CEO, Anarock Capitals) and Dr. Vikas V. Gupta

(CEO and Chief Investment Strategist, Omniscience Capital). The moderator for the event was Mr. Ajaya Sharma (Head Of research Markets- ET Now). SOME EXCERPTS FROM THE EVENT The asset classes discussed included equity, debt, real estate and commodities. On the equity side, what came out as learning is the fact that one cannot make wealth without investing in equity. Mr. Amitabh urged the audience to invest in equity as the Indian Economy has a huge potential to grow in the years to come. He also emphasized upon the fact that a missed opportunity to trade in equities can turn to be a painful one in the future. If one has to gain wealth in the equity market, it cannot be done overnight. Long-term presence and patience is the key. Speaking about the risk involved in equity, Mr. Anand said: “Investing in equity might be risky, but not investing in equity is definitely risky!” He threw light upon the importance of Macroeconomic analysis, but at the same time emphasized

Investrix

upon the crucial role which company analysis and deep analysis of the business it is involved in, plays an important role in the process of creating wealth in the equity market. Ms. Lakshmi compared equity to the famous energy drink, Red Bull and fixed income asset class to lemon juice. No matter how much Red Bull thrills, the fact is that lemon juice is a drink you can always fall back to and cannot be easily substituted. Lemon Juice saves one from dehydration; just like the fixed income asset class always saves us from the doomsday. Ms. Laxmi also talked about having the correct balance between debt and equity in the portfolio.

and scary. For us "Average Joes," the questions seemed never-ending. And it b e co m e s re a l l y i m p o r ta nt fo r u s millennials to have an extra edge by being aware and updated about the changes happening all around us from the world of finance and after an informative discussion, we all were able to take back a bucket full of knowledge.

Mr. Shobhit explained how there is a huge potential for the real estate sector to grow in the years to come. â&#x20AC;&#x153;Real estate is directly related to the political will. Unlike other investment classes, real estate is not research-based investing as there is no data available for the years before 2006-07. Investing in real estate is 80% art and 20% science.â&#x20AC;? Mr. Vikas threw light on the use of technology for the purpose of investing. He also stated that real estate investing in India is different from real estate investing abroad. While real estate investing in India is mostly residential investing, for other countries, it is commercial investing. When changes in the financial market are a constant thing, three words come to mind: overwhelming, intimidating,

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We welcome your valuable feedback Finstreet, The Finance Committee of K.J. S.I.M.S.R.

Email Us At : finstreet@somaiya.edu