FINLY July 2016 by FINLY

JULY 2016

ISSUE No. 52

FINly B R E X I T IAN D N I N I NPAS G SECTOR BANKIN

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REXIT: GOOD OR BAD FOR INDIA WEALTH MANAGEMEN T: ICICI SECURITIES

SIMSR

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

From the Editor’s Desk

SIMSR Dear Readers, The last month witnessed two surprise moves which sent ripples across the financial sector. Firstly, the Governor of the Reserve Bank of India Raghuram Rajan announced that he would not con nue to head the RBI and secondly, when the UK voted for Britain to leave the European Union. Britain's decision to vote for Brexit is punishing the pound, hi ng equi es and sending investors into US government bonds and gold. In this edi on, Our Cover Story on Brexit covers the impact of Britain leaving the European Union on the Indian and the world economy. Here the writers have focused on short term and long term implica ons post Brexit and how it would affect the currency market and banking sector. Next in line is our economics sec on which covers Rexit: Raghuram Rajan's sudden exit from the RBI that has put the na onal media and poli cal circles in a zzy and emphasizes how it would affect India in the long run. Our Faculty sec on brings forth the problem of NPA'S in the banking sector, it's impact on the Indian economy and how the government is trying to curb the problem. Lastly, I would like to express my deepest gra tude to our Faculty in Charge Prof. (Dr.) Pankaj Trivedi for always guiding and mentoring the FINLY team. I would like to thank our sponsors Finacue Research and Educa on for their tremendous support. Also, I would like to acknowledge all our readers, faculty members, Finstreet team members, our sponsors and seniors for their encouragement and con nued support. This me we witnessed an overwhelming response for our “Ar cle of the Month” Sec on and it was really tough to decide the best two entries for our magazine. It gives me immense pleasure to announce Sai Siddhartha from FMS as the winner and Pallav Kumar from KJ SIMSR as the runner up. Congratula ons and wish you all the best !! -Shreya Gupta PGDM-FS 2015-17 KJ SIMSR

Team Finly

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Prof. (Dr.) Pankaj Trivedi Faculty Incharge

Shreya Gupta Editor-in-Chief

Team

Geetanjali Rai

Pranav Turakhia

Abhijit Khadilkar

Sania Motwani

Prateek Singh

Gunjan Pathak

Preyas Jain

Harshita Rishi Teckchandani Agarwal

Pratik Tirodkar

Jay Khuthia

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Contents

SIMSR

From the Editorâ&#x20AC;&#x2122;s Desk pg.

pg.

Team Finly Cover Story Article of the Month - Winner Article of the Month - Runner Up Eco Section Faculty Section Alumni Section Article by Finacue News Buzz FIN Tweets Trivia

Cover Story

- Geetanjali Rai - Abhijit Khadilkar PGDM FS (2015-17) KJ SIMSR

Introduc on Bri sh exit is abbreviated as “Brexit”, which refers to the June 23, 2016 referendum by Bri sh voters to exit the European Union. Before understanding Brexit, we will understand the context which led to the forma on of European Union. During the Second World War, countries were destroyed by extreme forms of na onalism. Peace through economic integra on between the countries was of utmost importance and that is how EU was established in 1991. The EU did away lot of problems like tariﬀ, du es, immigra on charges and made the movements of goods and people across the EU members much easier. Currently, there are 28 countries which form the European Union and 19 countries which use Euro as their currency. (i.e. monetary union). UK has its own currency (pound) as it is not a part of the monetary union. An In–Out referendum - a vote in which everyone of vo ng age can take part was held on 23rd June, to decide

whether the UK should leave or remain in the European Union. And the ci zens of the United Kingdom of Great Britain voted 52:48 to leave the European Union. This was a surprise as it was not an expected outcome. Experts and opinion polls had predicted that Britain would vote to stay in the EU.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Cover Story

SIMSR David Cameron and Brexit: Few years a er winning 2010 UK elec ons, Cameron started facing a tough me as his austerity policies held back Britain's recovery, leading to a slowdown in economy. Further, ongoing Euro crisis, EU immigra on fueled and gave birth to an -EU and an -immigrant UK Independent Party (UKIP). In short, things were moving in a direc on that threatened to swallow Cameron's poli cal career. That made Cameron fall into an appeasement trap. So, in Jan 2013, Cameron formally co m m i e d to h o l d i n g a B rex i t referendum. And rest is the history. The 'Leave' campaign won. Cameron's a empt and gamble to strengthen his own party and poli cal career have resulted into a historical disaster. He did fight hard against Brexit, but he was the reason why it happened in the first place. How does the future hold post Brexit? Even if the Brexit results are in, it does not mean Britain has actually le EU. It means that the referendum sets into mo on a two-year period for the nego a ons during which EU and Bri sh Government are supposed to unwind the exis ng fiscal es and lay out a new framework. In order to withdraw from EU, Britain needs to invoke Ar cle 50 which triggers nego a ons with other 27 EU countries on topics like whether it will remain European Single market and whether it will con nue to accept unrestricted immigra on. So there are a few possible scenarios going forward:

1) Clean Break: In this scenario, UK just leaves the EU without nego a ng any other alterna ves. This could prove out to be nega ve to many businesses but will be a win for the Leave supporters. 2) "EEA + deal": In this scenario, the UK nego ates a deal with the EU, which would allow it to remain in the EEA but would exempt it from other EU rules — most notably, free migra on rules (EEA: European Economic Area). However, this scenario will trigger chain reac on and Greece, France or Netherlands will take it as a sign that they could get a similar deal. 3) Annual Vote: In this case, the referendum results will simply be taken back and Bri sh leaders will refuse to ever submit Ar cle 50 no ﬁca on. This would prevent all the disastrous consequences of Brexit. However, in this scenario, leave supporters would feel betrayed and this might sound undemocra c. Every op on available, for the Bri sh leaders is capable of crea ng poli cal and economic crisis. So, at this point of me, there is no clarity over how Brexit would unfold down the road. Theresa May, country's new prime minister, will have a tough tenure as she has taken over at the me of intense crisis. Brexit – Implica ons (Short Term/ Temporary) 1) The ﬁrst direct impact will be, Britain saving on EU membership fee. Currently Britain pays £8.5bn as the membership fee. Going forward, it will be substan ally lower, and might lead to addi onal collec on of du es.

Cover Story

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

1) The markets faced a knee-jerk reac on: Whenever there is a major shock like Brexit, it is followed by the immediate risk aversion. And we no ced similar bloodbath in almost all the global markets, US treasuries, Currencies and in the selloff of emerging market assets. However, this was over-reac on and most of the markets have recovered since then. 2) The surprise outcome of the Brexit has indicated that overall poli cal will is deteriora ng. Going forward we might witness tremendous amount of vola lity as more countries and na onalist par es will force referendums advoca ng exits. Brexit – Implica ons (Long Term/ Permanent) Bri sh economy post Brexit: Britain's imports are more than its exports. With a big economy and low resources, it is largely dependent on rest of the Europe, China and India for its imports. Un l Brexit, Britain was able to access markets as it was a free trade area. But now, post Brexit, Britain will have to explore markets of developing countries for its trade. Bri sh economy is facing severe disrup on and uncertainty in which FDI in UK has slowed down. That is causing the value of pound to fall and which in turn will likely prompt a recession. E s p ec ia lly, t h e d ec is io n o f t h e referendum has far reaching and damaging consequences on London's financial sector. London has one of the world's largest financial sector. It is home to over 250

foreign banks, It also accounts for 10% of the na on's GDP and it is the largest exporter of wholesale ﬁnancial services in the world. London was European Headquarter for many large European mul na onal companies as it has large English speaking popula on and compara vely lower taxes (By the European Standards). So un l Brexit, London was a rac ve base of opera ons as EU's single market allowed MNCs to do businesses throughout the con nent from anywhere. All the major economic power houses around the world view London as a conduit between Asia, America and Europe. Post Brexit scenario will force these MNCs to shi their headquarters somewhere else crea ng a nega ve impact on employment and overall economy of the Britain. Around 2.2 million EU ci zens who work in Britain will have to leave. Such an exodus would only exasperate the skills and would lead to labor shortage that Britain already faces. Impact on banking sector: Banks across the globe have been ba ered by the Brexit. Shares of all the global banks tumbled between 7 to 20 percent on the day UK voted to quit the EU. Though other parts of the market have since recovered, non-UK banks have failed to recover their losses.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Cover Story

SIMSR The implica ons are listed below: · Overseas banks used to have a base in London. Now they are facing uncertainty over whether they will need to get new EU banking licenses. The confusion creates new expenses fo r c o n n g e n c y p l a n n i n g a n d , poten ally, for reloca on. If post Brexit UK fails to nego ate with EU, then European banking will likely migrate to Frankfurt or Amsterdam. · Many banks have faced inventory losses. (When assets held by the banks fall in value) · Investment banks are already facing drop in trading revenues due to inac vity because of vola lity and overall uncertainty. · A long awaited interest rate hike by either Fed or ECB has been delayed further in the a ermath of the Brexit vote. When interest rates are lower, banks make less money as the gap between what they pay and what they charge narrows. · The drama c fall in sterling means overseas banks will get less benefit for any profits that they do earn in UK. · A loss of European banks could prove out to be beneficial for American banks. The biggest US banks will have an epic market share opportunity versus weaker European banks. · Macro implica ons of the Brexit vote could be two-fold: Lower loan growth as the economy slows and higher loan losses. Impact on Currency Market: The Brexit vote sent ripples across the Currency markets. The investors in the

currency markets have been experiencing a bumpy ride. Currency is the most aﬀected segment and pound has been the focus point since Brexit. It has slumped to a 31-year low against dollar and is expected to fall further. 1) USD Vs GBP

USD Vs JPY

However, one of the biggest exporters, Japan is seeing a major rise as a result of unwinding of the carry trade and more people returning to Yen. It breached 100 against USD. Impact of Brexit on Indian Economy: Brexit has led to global ﬁnancial market vola lity. Markets across the world tanked. India couldn't remain immune to this. Sensex tumbled in the short-run by 1,090.89 points and the NSE Ni y fell below the 8,000-mark in early trade as investors indulged in all-round selling, tracking meltdown in global equi es. However, value-buying in key bluechips,

Cover Story

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

helped Sensex recover and close the session 604.51 points or 2.24 per cent down at 26,397.71. This was the index's weakest closing since February 11. Indian companies will have to rework their business strategies following the UK's decision to leave the European Union. Specula ons suggest that it will not have a great impact on them in the long term me frame. European markets are one of the key drivers for Indian companies, specifically IT companies, inves ng in the UK. Indian companies would now be thinking to re-engineer their European strategy of doing businesses. For India, UK is considered to be a gateway into the European market. This can be a ributed to the historic and cultural es with UK. Indian companies deliberately set up their factories in UK to access the European free market system for selling their products. India is the second biggest source of FDI for UK. A er the Brexit, it will not be as a rac ve a des na on for Indian FDI as before. Thus, UK might try extra hard to a ract Indian companies to invest in UK by providing other financial incen ves in terms of tax breaks, lesser regula on etc. One of the main concerns in leaving the EU w a s t h e c o m p l e x b u r e a u c ra c regulatory structure of EU that made it difficult for other countries like India to trade with EU. Now Indian companies could expect a deregulated and freer market in UK. India will now have to enter into new

es with other countries within EU post UK's exit from EU. This would be a benefit for India in the long run. India is trying to enter into trade nego a ons with Netherlands, France, Germany, and others, albeit in a small way planning way ahead of Brexit. Presently, India's top FDI des na on is Netherlands. With UK dri ing apart from the EU, it will be in a great need of finding new trading partners and new sources of capital and labour. There have already been many specula ons sugges ng that the UK might look towards the Commonwealth to forge new alliances. UK would s ll need a steady inflow of talented labour, and India fits the bill perfectly due to its English-speaking popula on. UK would be able to accommodate migra on from other countries as the migra on from mainland Europe would be drying up, which will suit India's interests. Brexit is advantageous for Indian students who wish to study in UK as it is considered to be one of the most preferred des na ons for Indians who want to pursue higher studies from abroad. Bri sh universi es were earlier forced to offer subsidized rates for ci zens of the UK and EU. With Brexit, however, the universi es would no longer be compelled to provide scholarships to EU ci zens, which will free up funds for students from other countries like India.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Cover Story

SIMSR Impact of Brexit on speciﬁc Indian companies: D u e to fa l l i n t h e p o u n d rate , companies which have income from UK and Europe have been badly hit, at least for shorter term. Company

Impact of Brexit Has turnover more than GBP 2

Tata Steel

billion from UK Steel Plants. Has 12 production plants spread across UK.

Tata Motors

Jaguar and land Rover are UK

(Jaguar & Land based and are UK’s largest Rover) Motherson Sumi

Kitex Garments

Tata Consultancy Services

automotive manufacturers Have major Automotive Clients in Europe and derives more than half of its income from Europe. Kitex Garments client Mothercare derives 20% of revenue from UK For FY16, its Europe operation grew by 12.9% and UK by 8.23%. Europe and UK together are major contributors to its revenue. Caters European automotive

Bharat Forge

clients, Has 3 plants in Germany and 1 in UK Has Banking and Financial Clients

Tech Mahindra from UK, and acquired UK based firm Fintech Has been rated by Grant Bharat Airtel

Thornton as fastest growing

Why is Brexit terrifying apart from economics: Global economy has been moving in the direc on of greater openness for quite some me. However, the surprise outcome of the Brexit has changed these basic thumb rules. Un l Brexit, global super na onal ins tu ons like EU were standing strong on two pillars of migra on and a shared set of ins tu ons. These were the things that integrated Europe into EU economy and helped it prosper. But now that op mism is threatened. Brexit is the biggest blow to the liberal sy s t e m l l d a t e . A n d t h e m o s t frightening thing is that the Brexit might just prove out to be the beginning. An immigrant populists are surging in all the European countries. The propor on of low income, low educated voters in these countries is also signiﬁcant who don't see beneﬁts of global order. This could trigger a vicious cycle. Poorer and angrier people will beget xenophobia and interna onal tensions which would end up in higher uncertainty and making everything worse.

Indian company in UK Marksans

UK and Europe market account

Pharma

for 60% of their revenue.

Emcure Pharma

Has acquired UK based Tillomed Laboratories and still expanding

Apart from the above listed companies, Indian Pharma is aﬀected since it has got more exposure towards Europe.

Conclusion: It would be in best of Europe's interests to develop strong trade and strategic es with India. Brexit would surely play a major role in accelera ng this process. Thus, the net eﬀect can turn out to be posi ve for India although UK stands to suﬀer from leaving the European Union in terms of reduced trade and a sustained drop in its GDP.

State Bank of India Merger with Associate Banks

Article of the Month - Winner

Sai Siddharth FMS-Delhi MBA-FT (2015-17)

SBI merger: Background The Union Cabinet gave a goahead to the merger of State Bank of India with its five associate lenders in a move to consolidate the banking sector. SBI has five associate banks - State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Pa ala, State Bank of Mysore and State Bank of Hyderabad. Of all the associate banks, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed. Drivers for the merger is that India's largest lender would reap benefits of scale and a larger balance sheet and more effec ve u liza on of the resources.

Management's view "The group will get the benefit of e ffi c i e n c i e s t o b e c re a t e d f ro m ra onalisa on of branches, common treasury pooling and proper deployment of a large skilled resource base," the SBI chief said. A significant aspect of employee ra onalisa on will be aligning the pay structures. The reason behind the move is that ra onaliza on of costs would lead to efficient profit realiza on of the associate banks. We will analyse the effect of the merger on various key performance indicators to gauge the short term and long term effect of the merger.

Opera onal Expenses The employees of the associate banks are also likely to expect salary on par with SBI's employees, which would mean an increase in SBI's per employee cost.

Source: Investor/Analyst presenta on

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Article of the Month

SIMSR In addi on to this, the produc vity of associate banks are lower than that of SBI. Per branch Net Interest Income, Other Income and Advances are lesser for SBI associates as compared to SBI. The lower eﬃciency can be a ributed to the inferior technology in the associate banks. This means SBI's eﬃciency is expected to dip in the short to medium term before stabilizing and reaching older levels a er inves ng in technology. Both employee expenses and capital expenditure are expected to increase, resul ng in increased opera onal expenses in the short run which can be expected to stabilize in the medium to long term.

Source: Investor/Analyst presenta on

Capital Requirement The merger will not only mean that available capital will decrease but also capital requirements will increase. RBI has classiﬁed SBI as an SIB requiring 60bps higher Tier 1 capital than other banks under Basel - III. If the subsidiaries were to merge, then capital requirements for the associate banks would increase by 60bps. The Tier 1 ra o of the combined en ty would be lower than SBI. The capital requirements for all the en es would increase by 60bps and hence could poten ally push SBI to go for a capital raise as its Tier 1 would only be slightly higher than the required Tier 1 of 8.9%. Asset Quality On an asset quality basis, only State Bank of Pa ala and State Bank of Mysore have worse Gross & Net NPLs. This means the overall Gross NPL and Net NPL won't be aﬀected by the merger as the increase in NPAs owing to SBP and SBM will be countered by the other associates with lower GNPA and NPA than SBI. As we can observe in the below image, the Net NPA and coverage ra os are expected to marginally improve post the merger.

Source: Business standard report

Loan book size Based on the latest available informa on, if the deal were to be completed, SBI total assets and advances will increase by 27% and 28% respec vely. Also, SBIs deposit base will increase by 30%. However, this will mean a reduc on in the CASA ra o of the bank on an overall basis and this could be one of the areas of synergy if SBI is able to improve its subsidiaries' CASA deposits.

Article of the Month

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Cost of fund The cost of raising fund for SBI is lower as compared to the associates which means the associates will gain out of the merger as they will be able to raise funds at a rela vely cheaper rate. The challenge for SBI would be to increase the CASA ra o of the merged en ty to the levels of SBI thereby leveraging the lower cost of fund. Post-merger, the CASA ra o of the merged en ty will be lower than SBI. As we can observe in the table below, the CASA for all the associate banks is lower than that of SBI substan a ng the higher cost of fund for the associate bank. The merger would bring down the CASA of SBI marginally resul ng in a slight increase in cost of fund of the merged en ty as compared to SBI prior to the merger.

Source: Investor/Analyst presenta on

Cost to Income The consolidated bank is expected to manage costs be er. The cost-to-income ra o could reduce by as much as 100 basis points (bps) owing to ra onaliza on of branches and employees resul ng in be er u liza on of resources. The expected beneﬁt in cost to income ra o is owing to ra onaliza on of the workforce and branches as the cost associated with recruitment is expected to come down. The capital expenditure in the near term is also expected to come down owing to a reduced need to open new branches.

Source: Investor/Analyst presenta on

Conclusion As we can note from the findings, the reason for the merger is clear. To ra onalize the large branch network and employees and improve their efficiency. It is a welcome change for the associates as they are set to gain from the merger. But it is not going be a th smooth ride as the employees of the associate banks have called for a strike on July 12 th - 13 since they an cipate the merger to hit the business and customers. Assuming the merger takes place, the earlier the merger is completed the be er it is for the stake holders. Though the merger is a welcome move by most, there are some short term concerns like manpower integra on, technology, higher capital requirement etc. But it is also fair to say the above-men oned shortcomings are expected to be short lived and the move is expected to yield benefits in the medium to long run.

Approval and Impact of

7th Pay Commission

Article of the Month - Runner Up

Pallav Kumar MMS (2015-17) KJ SIMSR The union cabinet led by Mr. Narendra Modi had accepted the recommenda on of 7th pay commission on pay and pension benefits to the central government employees. It has come into effect on 1st January 2016. This will give benefit to more than 1 crore employees which includes over 47 lakhs central government employees and 53 lakhs pensioners. Some highlights of the CPC are as following: · The pay band and grade pay system has been replaced by a new pay matrix which is determined by the status of the employee and minimum pay has increased from Rs7000 to Rs18000 per month and maximum salary has been fixed to Rs2.25 lakh per month. · A er applying fitment factor of 2.57 on all pay matrix and DA prevailing rate, the salary and pension of employees and pensioners will be raised by at least 14.29 percent. · There will be a 3 percent annual

increment to employees and 24 percent hike to pensioners. · The gratuity has been increased to 20 lakhs from 10 lakhs and house building advance has increased from 7.5 lakhs to 25 lakhs. · The addi onal liabili es to the government by implemen ng this 7th pay commission in the year 2016-17 will be Rs1,02,100 crores. · The Cabinet has decided to cons tute two separate Commi ee. First is to suggest measures for streamlining of Na onal Pension System (NPS) implementa on and second is to look into anomalies that is likely to arise out of implementa on of the Commission's report. Implicit assump ons on GDP The total monetary fund of 1.02 lakh crore has been bifurcated into: · Union budget (Rs73,650 crores) · Railway budget (Rs28,450 crores) Following is the GDP impact due to 7th pay commission and its projec on for the FY17

Article of the Month

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

This increase in pay will increase the expenditure by 0.67 percent of GDP in FY 17 and the government is expec ng 11.3 percent of GDP growth. If we assume that infla on will be 7.5-8.0 %, then the GDP deflator will be 3.3-3.8%. Impact on Fiscal deficit: -

*assumming the ﬁscal deﬁcit number is frozen at Fy16 level and Pay commission burden added.

The above fiscal deposit figure shows Rs6,29,299 crore which is 4% of the GDP and is due to the increase in pay structure. The government has a target fiscal deficit of 3.5% for the FY17. So addi onal 80,000 crore revenue is needed to cover off excess 0.05% of fiscal deposits. Alterna vely, the government has to cut its expenditure to compensate for expenditure due to increment of salaries and pensions. Infla on Impact Since salaries rises by 23%, it will generate more demand and hence will increase money supply in the economy and thus impact infla on. However the demand drivers and good monsoon predic on will drive the growth. It is es mated that Indian economy will boost by Rs45,100 crores which is

about 0.3% of total GDP and savings will increase by Rs30,170 crores which is 0.20 percent of GDP. Though consumer price index is showing 19 month high of 5.76% in June, Impact of wholesale price index is likely index is likely to be muted due to the counter balance provided by defla on of the prices of commodity and excess capacity available in the manufacturing sectors. So as a whole, Infla on will get a marginal push in Indian economy. Macroeconomic Impact The increase in salaries and pension will increase purchasing power in the Indian economy. According to FY14, it says that Indian saving rate is 30% of the total income. Since government has pumped 1.02 lakh crore into the Indian economy, the break up will be 39,000 crore in salar y 29,300 crore in allowance and 33,000 crores in pensions. So we can say that 70% of 68,400 crore would be spend by salaried households. As most of the pensions are saved we assume only 20% of pensions are spent. So increase in total amount of money in the Indian economy will be around 54,620 crore. Increase in household expenditure will benefits sectors like electronic goods, housing and real estate, consumer durables, automobiles, steel industries etc. Banks would also gain its business in the form of high home loans. Secondary Government Impact Following the 7th pay commission, the state government will also give same amount of hike and will experience the increased liabili es. So finances of the state government will also be impacted.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Article of the Month

SIMSR The state will have to generate addi onal revenues or will have to cut down their expenditure to maintain its financial deficits. Also the salaries of Public Sector Units (PSUs), Public Sector Banks (PSB), teachers are linked with this pay structure and will have impact of higher expenditure on salary account. Challenges for the Central Government The government will need to increase its revenue to pay the salary and pension expenses. Since government has reduced corporate tax from 30% to 25%, the pressure is shi ed to service tax. The government may further increase service tax rate to meet the deficit. The disinvestment level must be maintained by the government In order to reduce the impact of fiscal deficit. It would be a challenge for the government to raise around 70000 crore for this year, however this raising of capital will be a good news for stock markets. Also the government must

work on maintaining the balance of its fiscal and monetary policy without compromising on the capital expenditure. The chance of providing further subsidies to Indian ci zens may not be available unless there is a further ra onaliza on of the expenses. However a ques on arises that whether this expenses due to pay commission will impact on capital expenditure of government which was budgeted for Rs1.3 lakh crores for the Fy16. Concluding remarks The pay commission recommenda on has given poten al to increase the purchasing power of Indian house hold. It will increase the demand in the economy and further increase the liquidity in the market. This along with the capital expenditure program developed by the government will help India in accelera ng the growth. However the government must closely look at the fiscal figures while making fiscal provisions and fiscal consolida ons.

REXIT: Good or Bad for India?

ECO Section

Preyas Jain MMS (2015-17) KJ SIMSR

All too o en, the stewards of India's economy have been short of credibility. Promises of economic reform are rarely fulﬁlled and bureaucrats' assurances are widely disbelieved. To add to that, even India's growth numbers have come under the scanner. The Reserve Bank of India and its governor, Raghuram Rajan has however proved an excep on to this rule That's why the government's decision to oust Rajan cons tutes self-harm of monumental propor ons. With much else during his tenure, Raghuram Rajan recently broke the news of his departure, unconven onally, in a le er to the central bank's employees well in advance of the government's announcement of any decision. With the Government not conﬁrming him, he had li le reason to hang about wai ng for the inevitable. In his le er, he subtly and gracefully made clear

that he was willing to serve an extended term, but following “consulta ons with the government,” had decided to leave. With this, Raghuram Rajan became the first RBI governor since India's economic liberaliza on not to serve an extended, five-year term. The decision to grant an addi onal two years to a governor serving a three-year term had become a norm. However, the Modi government chose to break this nascent (and healthy) tradi on for the poorest of reasons: its unease with Raghuram Rajan's independence. He had discomforted the government on several occasions -- most notably, in his address wherein he merely restated basic liberal principles and linked na onal progress to an open and diverse marketplace of ideas. But many in the ruling party took it as a direct affront. That Raghuram Rajan had served as a

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

ECO Section

SIMSR as a top economic advisor in the previous administra on, run by the nominally liberal Congress party, didn't help. Whatever their personal beliefs, Modi and his more urbane ministers, such as Finance Minister Arun Jaitley, have signally failed to prevent the more ra d i ca l m e m b e rs o f t h e r u l i n g Bhara ya Janata Party and Raghuram Rajan o en became the target of noisy condemna ons issued by powerful BJP leaders even as a rela vely mild statement tempering jubila on over India's economic numbers was harshly cri cized by a ra of senior ministers, including Jaitley. Consequently, Rajan was forced to apologize. The best-case scenario is worrying enough: that Modi and Jaitley were u ps et a b o u t R a g h u ra m R a j a n ' s hawkishness on interest rates and allowed him to be a acked, knowing they could then replace him with someone more malleable. If so, the RBI's hard-won independence on monetary policy -- preserved and strengthened by successive governors scuffling with profligate poli cians in New Delhi -- has been undermined, perhaps fatally. That the best-case scenario is so dire tells you exactly how big a disaster Raghuram Rajan's forced exit is. There are more worrying possibili es. Raghuram Rajan, as an economics professor, studied and wrote against crony capitalism. As RBI governor, he's been working diligently to clean up the balance sheets of Indian banks stressed by bad lending to poli cally i n fl u e n a l t y c o o n s . T h e e ffo r t provoked some resistance, with the

government warning that banks -- 70 percent of which are state-owned -were reluctant to bring bad loans into the open for fear that the original lending might invite criminal prosecu on. While Raghuram Rajan did cau on against a "witch-hunt" targe ng bankers who had done nothing wrong, this might have been viewed by the government as not enough of a compromise on his part. If so, India's vital ba le against cronyism and bad lending risks being watered down or abandoned, with dangerous consequences for the en re financial sector. Consequences of Rexit Star ng with Brexit, it is a major interna onal issue both in poli cal and financial terms for the global economy. The verdict of Britain to exit from the European Union (EU) will indisputably have an impact on the interna onal currencies including that of India. At a me when the markets are patchy, vola lity rules the roost, and infla on is seen raising its head Raghuram Rajan's abrupt departure can cause further disquietude. However, it will be wrong to say that markets just hinge on 'personali es'; though it's no secret that the Indian bourses aren't totally about fundamentals as well. Foreign fund managers conven onally say that about 5-10 percent of the rupee is Raghuram Rajan. So it's apparent that rupee will be under pressure for some me. But, for how long, is s ll to be seen. Coming to the second and the most important factor, currently, the redemp on of the Foreign Currency Non-Residen al (FCNR) bonds issued

ECO Section

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

by Raghuram Rajan way back in October 2013 to protect the rupee from its worst crisis in decades is causing major ji ers to the currency market. The currency market is due to face an ou low of $20 billion in the coming three months. This will put substan al pressure on the rupee – much more than what it's facing at present. It will take immense work to keep the currency markets vola lityfree especially in September-October when the redemp on of FCNR bonds is due. Raghuram Rajan was assuredly a credible force, and rupee's stability derived a lot of conﬁdence from him. Injec ng liquidity into distressed public banks, implemen ng a goods-andservice (GST) tax and land acquisi on s ll are some of the biggest issues that remain unresolved. With Raghuram Rajan calling the day, uncertainty is bound to further increase in the markets. And how rupee and markets will shape out for India in days ahead is

not easy to predict since more than fundamentals, many known unknowns drive the sen ments. Brexit, US Fed and Donald Trump are deﬁnitely some of them. Conclusion: E i t h e r w a y, t h e a p p a r e n t a n d unfortunate message is that within India's government, commitment and loyalty is prized over competence. This is dangerous indeed. In an increasingly uncertain world, it's crucial for e m e r g i n g m a r ke t s t o m a i n t a i n credibility. Those that appear to value transparent and skilled economic leadership are the ones that will survive coming storms. The circumstances of Raghuram Rajan's departure have seriously devalued India's credibility. “Rexit,” as wags in Mumbai have called it, could prove as damaging in its own way to India as Brexit would be to Britain.

NPAs in

Indian Banking Sector;

large borrowers, larger problem

Faculty Section

Dr. Pankaj Trivedi Professor and Area chairperson; Department of Finance KJ SIMSR

The recent Financial Stability Report (FSR) published by Reserve Bank of India clearly indicates that Indian banking sector is passing from a very delicate situa on. The rising Non Performing Assets in the Indian banks is a ma er of serious concern for the banks as well as the regulator. It is not only aﬀec ng the banks alone but also has serious impact on macro-economic factors like growth as well as ra ng of the country at global level. Time and again Reserve Bank of India has raised warning against rising NPAs and urging banks to take measures to control NPAs, but poor balance sheet of the corporate sector made the banks to suﬀer this problem. RBI has reviewed the assets quality of the banks and found that the gross NPAs of the banks which was 5.10 % of the total advances in September 2015, has increased to 7.60 % of the total advances in March 2016. Such a jump in just two quarters

is a ma er of concern for banking sector as well as ﬁnancial markets as a whole. In the total of the loans given by banks, the share of stressed assets is 11.50 %. Due to rising NPAs and therefore, increasing provisions for NPAs 12 public sector listed banks have reported losses as on 31st March 2016 and there is big fall in the proﬁtability of other banks. The banking stability indicators are showing that the banking risk has increased within the period of the last FSR and current FSR. Special feature of the current problem According to FSR, the important aspect to be noted in this problem is that, of the total NPAs nearly 20 % is by 100 top borrowers. The FSR also shows that of the total bad loans, share of top 100 borrowers is as high as 19.30 % which was 2.90 % at the end of September 2015. Due to such a jump in NPAs by top

Faculty Section

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

borrowers nearly 37 % of the capital of re I ci es' banking system is eroded. This is a very serious ma er having adverse impact on the en re banking system. The current NPA problem is quite different from that of the same prevailing in 70s and 80s. The alarming feature of current problem is NPAs by large borrowers. It raises several ques ons. Usually top borrowers have large capacity to borrow and service the borrowings. Is that it is myth? Is it a wilful default? Is that the business condi ons in the country are poor and therefore, NPAs is rising? Is that banks are not alert enough right from the ini al signals of probable NPA account? All these ques ons have affirma ve answers but the most important reasons are a tude of the borrowers. Once this tendency will spread, it is going to be all the more difficult for banks to recover s cky advances. It will discourage the banks to take risk in lending and the flow of credit, which is cri cal for growth, would be affected. Banks would follow narrow banking prac ces rather than taking risk of lending. These implica ons are not good for the health of the economy. Rising NPAs by large borrowers also gives wrong signal to small borrowers with respect to default in repayment of loans. It is collec ve responsibility of all stake holders to control this problem. The major responsibility is, of course, that of banks. Banks need to develop some mechanism which gives them early signals of the probable NPAs. Timely ac on would help the banks to prevent the problem. Efficient recovery mechanism is yet another step which

could control this problem. Rising pending cases with Debt Recovery Tribunals is known to everyone. Delay in legal course of ac on against the defaulter is common. We need to improve upon these ma ers. Simply leaving this problem to regulator to tackle, has limited success. Impact on the banks The impact of such rising NPAs will naturally be on the profitability, efficiency and risk in the banks. The Banking Stability Indicator like assets quality, profitability, liquidity and efficiency are con nuously falling. Following table clearly shows the impact on the profitability. Return on Assets (ROA) and Return on Equity (ROE) of scheduled commercial banks declined. Sharp increase in provisions and write offs have adversely affected the balance sheets of the banks and deteriorated Banking Stability Indicators.

Source: RBI FSR 2016

Solu on; will it be eﬀec ve? Recently we heard that Government is thinking to merge few public sector banks and to make six to seven large banks. This is not a new idea. We are hearing about it since long from few ﬁnancial sector experts also. Of course,

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Faculty Section

SIMSR now as well as before, banking sector is not accep ng this step as a solu on to the problems of banks. The arguments from those who are in favour of such merger are that it will help the banks to reduce credit cost and will make the administra on and regula on easy and effec ve. It is true that on these two front, perhaps merger will help the banks but to make the balance sheet of the banks free from NPAs merger is not the effec ve solu on. It is because, in our banking sector it is hard to find two banks with large difference in their NPAs to total advances and at the same me having large capital base to sustain the NPAs of the bank which is merged. In other words, none of the public sector bank is financially strong enough which can play the role of consolidator without pu ng at risk its own credit level. Interna onal ra ng

agency like Moody's have also shown apprehension for solu on to this problem by merger. According to Moody's in the present economic environment proposal to strengthen the banks by merger will lead to such risk which will offset long term possible benefits from merger. Conclusion The problem is not new to us but it is serious and need to be controlled right away. Indian has seen the problem e a r l i e r a s we l l d u r i n g 9 0 s . T h e Narsimham commi ee had recommended some measures to improve on this front and strengthen the banking sector. Now the problem is ge ng new dimensions. It demands thinking and research to come out with effec ve solu ons.

Wealth Management

at ICICI Securities

Alumni Section

Abhimanyu Singh Chauhan PGDM Core 2014-16

Wandering back to the lanes where you have spent the most memorable me of your life is not always nostalgic, it some mes forces you to introspect about how be er have you become and how far have you come. While wri ng for FINLY again this me as an alumnus I don't know how and what to measure right now as it's being just 2 months in the corporate world (ICICI Securi es) for me. What I have realized is I am just a ny stone in this world of huge and unwavering rocks. But what is more important is to realize how strong that ny stone should be, to survive the worst of the mes, because in the ﬁnancial world, the worth of the asset ca n o n l y b e j u d ge d d u r i n g t h e challenging and changing mes. In my s nt of 2 months what I have learnt is, though it is important for us to have a sound knowledge base but more important is networking, as this will give you business in tough mes. Yes “business” this is what ma ers,

because if your knowledge can't give business to the firm, you are worthless. So objec ve of your learning should be such that you can add value to your firm. For instance, if you are good with accoun ng then you should able to understand the annual report of the company, iden fy the loopholes and try to come up with the issues which the company is facing just by looking at the numbers. If you are good with macro and micro, then you should be able to figure out the business cycles and hence iden fy whether the business is sustainable or not. So just understanding the concepts alone doesn't work, you need to connect things into a chain and try to figure out the rela onship between the variables and then iden fy the missing links. So ICICI Securi es came to our campus in 1st week of January with 2 profiles – one was in products and the other was investment and advisory. I was chosen for Products, so let me give you a brief

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Alumni Section

SIMSR idea about the profiles. In products we deal with different asset classes like Direct Equity, Bonds, Mutual Funds, Structure products and Private Equity. We deal with different AMCs on these asset classes and design different products for our HNI and UHNI clients who have a net worth above 100 Crs. So, we are the clients for AMCs and our clients are RM and Sales team of I-sec, to whom we propose our products. We deal with AMCs on Pricing, Designing, l o t s i ze ( m i n i m u m i nv e s t m e n t amount), opera onal issues and their ra ngs. Our objec ve is to get best business for I-sec keeping in mind the requirement in the market. ICICI security is among the top three distributors in the private banking division in the country and the largest in terms of standalone Asset under

m a n a g e m e n t . I t i s fa i r l y a ﬂ a t organiza on, where you get opportuni es to switch within the departments. Being in the corporate oﬃce, we get the opportunity to get in touch with the senior management, which helps you a lot in understanding the industry as a whole. Lastly I would like to thank Finstreet, Finly team and Shreya for giving me this opportunity to get in touch with you all. All I want to say is, enjoy what you are doing at SIMSR and remember you don't need to prove anything to anyone, but to yourself . I am trying it so should you. If you want to get in touch with for me anything, I will be there @7506564584(whatsapp),7506396981 & abhimanyuschauhan06@gmail.com

Will

Digital Advertising

get disrupted by incumbents?

Article by Finacue

-Team Finacue

Digital adver sing is the fastest growing adver sing stream accoun ng for 1013% of India's adver sing spends ($1bn of the $8bn adver sing industry in 2015); accruing primarily to Google and Facebook (80% goes to these two digital giants). India's online content distribu on space is witnessing hypercompe on, with broadcasters, independent content producers, telcos, content aggregators and distribu on pla orms launching their own over the top (OTT) applica ons. These apps compete with Google and Facebook for user a en on with content being the centerpiece of the oďŹ&#x20AC;ering. User engagement is the sustainable compe ve advantage of a pla orm, allowing for mone za on either through adver sing, subscrip on or on a per transac on basis. Indian content owners (broadcasters) seem to have learnt lessons from the US where independent content aggregators (Ne lix) and digital giants (Google and

Facebook) stole a march over them to push them to irrelevance in internet adver sing. We believe that interes ng days are ahead of us, with consumers ge ng a plethora of content choices and hyper compe on ensuring that pricing will be palatable. India's internet consump on is rising thanks to increased smartphone penetra on The mobile device is the key avenue of internet access by Indian consumers (~95% of users). Whilst India's internet user base now stands at ~277mn, 40% of them would be consuming broadband (3G/4G). This is underpinned by smartphone penetra on increasing to ~30-35%.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Article by FInacue

SIMSR Broadband consump on key to mobile video Increased broadband demand allows users to consume video content on mobiles. This is evidenced by the ag gressive launch campaign of Reliance Jio, which is oﬀering 4G data o n i t s LY F b r a n d e d h a n d s e t . Interes ngly, LYF's ads focus on consump on of entertainment on mobile handsets rather than sale of data at low prices.

mobile pla orm along with television subscrip on. 3) Independent content owners: this includes recently funded TVF Play (a Tiger Global investee company), Eros Now, ALT Balaji (soon to launch) etc. 4) C o n te n t a g g re ga t o rs : t h i s includes global giants like recently launched Ne lix, soon to launch Amazon Prime and other such as Hungama Digital, HooQ etc. Telcos: Bhar Airtel and Vodafone have launched video malls, which aggregate content/redirect users to other pla orms.

Source: Reliance Jio Aggression in the OTT space… Considering the above…viz. improving bandwidth availability, greater consumer pull, the online content streaming space is seeing intense ac on. Various industry par cipants are joining the bandwagon oﬀering consumers sweet deals: 1) Broadcasters: These are large content owners looking to setup their own content distribu on avenues. Star has aggressively marketed Hotstar by oﬀering live streaming of cricket on its app. 2) Distribu on pla orms: These include DTH operators, which already provide several on-demand video consump on op ons to consumers on set top boxes. Of the DTH operators, Tata Sky is bundling subscrip on to its

…reflected in the plethora of content choices and business models on offer With mul ple pla orms now in the fray, several business models are being experimented with, including a d ver s in g s u p p o rted vid eo o n demand, subscrip on supported video on demand and transac on supported video on demand. There is also differen a on in content choices provided by various pla orms.

Article by FInacue

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

Whilst online incumbents rely solely on adver sing as they don't charge users for subscrip on, evidence of growing importance of video content is seen.

become mainstream, accoun ng for 10-12% of industry adver sing. Globally, however Google + Facebook dominate internet adver sing. Anecdotal evidence suggests that such trends are visible in India too.

Source: KPCB Source: KPCB Challenging Google & Facebook's duopoly of internet adver sing Its early days for the Indian digital ecosystem, which is at a very nascent stage and digital adver sing is yet to

Will hyper-compe on in India's OTT space mean that Google + Facebook don't get to garner the Lion's share of internet market? Only me will tell!

Finacue offers mul ple related projects such as 'Digital disrup on of the distribu on landscape,' 'Mone sa on of video/audio content.' Team Finacue - Finacue offers role-specific industry projects in Finance, allowing Bschool students to hone their skills in the subject of their choice.

Finly | July June 2016 2016 || Finstreet Finstreet || SIMSR SIMSR

News Buzz

SIMSR German investor morale fell in July to the lowest level since November 2012 and much more than expected, a survey by German think tank ZEW showed on Tuesday. The Mannheim-based ZEW ins tute's latest in d icato r o f eco n o mic sen ment in Germany fell in July, to 6.8 points from 19.2 points in June. Reuters had expected the index to fall to 9.0 points. ZEW said the economic and poli cal uncertainty brought about by the U.K.'s decision last month to leave the European Union (EU) was largely responsible for the decline.

German

business condence falls to lowest level

since November 2012.

Taking his cri cs head-on, RBI Governor Raghuram Rajan has challenged them to show how inﬂa on is “very low” before accusing him of “being behind the curve” in his focus on containing price rise than on growth and debunked such cri cism as mere 'dialogues'.

Show me

how ination is low:

Raghuram Rajan

on 'dialogues' by critics

An Upgraded

3,000-Year-Old Pea Could Ease India's

Ination Problem

On a campus in southern India, Kiran Sharma and his team of biologists are perfec ng a recipe that may solve the na on's inﬂa on woes. Sharma for six years has been tes ng a new variety of pigeon pea, a 3,000-year-old indigenous crop used to make dal, a staple of the diet in India. By adding a gene to the seed's DNA, he hopes to make it pest-proof, boost output by 30 percent and help reduce dependence on imports in a country that's both the world's biggest producer and consumer of dry legumes, also known as pulses.

News Buzz

Finly | July 2016 | Finstreet | SIMSR

India's merchandise exports rose 1.27 per cent year-on-year in June to $22.57 billion, reversing a trend that started in December 2014 due to weak global demand and a fall in commodity prices, government data showed. In value terms, this was the highest since March when shipments were worth $22.7 billion, but it had in that month shrunk 5.5 per cent. The low-base eﬀect has helped this June as exports in June 2015 had shrunk 16 per cent over June 2014. In absolute terms, neither the $22.57 billion worth of exports in June 2016 nor the $22.28 billion in June 2015 was near the $26.47 billion in June 2014

Exports

return to growth after 18 months

A er stalling brieﬂy, the U.S. job-crea on engine is again revving into high gear, rejuvena ng Wall Street and sending stocks close to record highs. The U.S. economy created 287,000 new jobs in June, which was 100,000 more than economists had forecast and the best monthly gain since October 2015. And that is about as good a news headline as Wall Street could ask for a er May's gloomy jobs report (the ini al 38,000 May jobs count was revised down to a paltry 11,000 in Friday's report) and all the Brexit-related doom-and-gloom the past few weeks that put a scare into investors.

Strong jobs report helps

debunk recession fears

Less than a year a er Prime Minister Narendra Modi visited Tesla's state-ofthe-art factory in Fremont, California, his government has invited American electric carmaker to set up a manufacturing for South and South East Asia in India. Ni n Gadkari, minister of road transport and highways, who visited the company's San Francisco factory on Friday, offered land near major Indian ports to facilitate exports, an official statement said The minister offered to promote joint ventures between the global leader in electric car technology and Indian automobile companies to introduce pollu on-free road transport in India.

Modi Govt Woos Tesla

Finly | July 2016 | Finstreet | SIMSR

FIN Tweets @ BREXIT

SIMSR

Trivia

Finly | July 2016 | Finstreet | SIMSR

On January 1, 1791, the U.S. na onal debt was $75 million. As of August 28, 2011, the oﬃcial debt of the United States government was approximately $15.9 trillion. To pay this debt would require approximately $51,000 from every single person living in the United States.

The youngest of the self-made tech mavens is 25-year-old Snapchat cofounder Evan Spiegel, who ﬁrst appeared on the Billionaires List last year with a net worth of $1.5 billion. In May, Snapchat raised $538 million in funding, valuing the ephemeral messaging company at $16 billion and increasing Spiegel's net worth to $2.1 billion. Spiegel seems to be se ling into his new high proﬁle life, escor ng his model girlfriend Miranda Kerr all around town. His cofounder and Stanford friend, 27year-old Bobby Murphy is the next youngest self-made billionaire with a net worth of $1.8 billion.

Start-ups fastest to reach billion dollar valua ons.

"PayPal Maﬁa" is a term used to indicate a group of former PayPal employees and founders who have since founded and developed addi onal technology companies such as Tesla Motors, LinkedIn, Ma erport, YouTube, Yelp & Yammer. Most of the members a ended Stanford University or University of Illinois at Urbana–Champaign at some point in their studies. Three members, Peter Thiel, Elon Musk, and Reid Hoﬀman, have become billionaires.

Finly | July 2016 | Finstreet | SIMSR

We Welcome your valuable Feedback www.finstreet.weebly.com Finstreet, Finance Committee of SIMSR finstreet@somaiya.edu

SIMSR