Finly july 2017 by FINLY

From the Editor’s Desk

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Dear Readers, We hope all of you are doing well in your respective institutes and putting in your best efforts in preparations for the upcoming placement season. To help you in your journey ahead we bring to you another edition of your beloved magazine, Finly. In this month's edition our cover story provides you with an in-depth analysis of the Blockchain technology, where the writers have explored the topic in detail to bring you every possible aspect of this revolutionary technology. The Eco section gives an insight about the farm loan waivers and the economics & politics behind the same. The Sector Analysis explores the opportunities that the logistics sector provides because of the various fundamental reasons. For this edition, we have added a new section “Internship Diaries” where senior students have shared their experiences regarding summer Internship to help the first year students who are new to the B-School environment and are still wondering what lies ahead of them. I am thankful to Prof. (Dr.) Pankaj Trivedi & the entire finance department of KJ Somaiya Institute of Management Studies and Research for providing the much needed support to the finly team every time. I extend my heartiest thanks to Finacue Research & Education for collaborating with finly for another season; your support encourages us to strive harder to improve the quality of our magazine. I would like to acknowledge the entire finly team and our readers for the constant love and support. It gives me immense pleasure to announce Miss. Astha Srivastava from NMIMS, Bangalore as the winner and Mr. Rakesh kumar Danthoj FMS, Delhi as the runner up for the finly Call for Article competition. We wish great luck to both of you for all your future endeavours. -Madhur Saxena Editor-in-Chief, Finly PGDM 2016-18 KJ SIMSR

Team FINLY

FINLY| July 2017 | Finstreet | SIMSR

Table of Contents

FINLY| July 2017 | Finstreet | SIMSR

Cover Story

Introduction If you are asked about the currency which is worth more than Gold, with no time lag you will immediately prompt that it is Bitcoin. For last 4 out of 5 years, bitcoin has been named the top performing currency. Bitcoin is that value of money which we pay cryptically in exchange for goods and services rendered to us, the way we pay via paper money, debit/credit cards, ebanking or through payment banks. This cryptocurrency might replace paper money and cards in the future. The technology behind it is Blockchain. Any currency is a token of trust between the transacting parties and Blockchain is focusing the integrity part of the transactions between these parties. Blockchain is a distributed ledger which stores data in a structured manner shared amongst computers all around the world. Identical copies of this ledger

are shared across these computers. It allows transparent transaction between two or more parties without the involvement of an intermediary. The Blockchain ledger records every sequence of transactions involved between the transacting parties. It can be a 100 steps transaction in a supply chain or an online payment of booking a movie ticket. These transactions are securely stored in the form of blocks and each block is linked to its previous and next blocks respectively. Each block has an address of the previous block thus creating a whole network of blocks. The data which is already entered in a block can never be erased or edited in the future. It prevents a lot of transaction cost and time. Interbank transactions take a few working days to get settled but with the advent of Blockchain, these transactions can be settled in a few minutes.

Cover Story

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No single person or authority owns the system. However, a Blockchain ledger can be held publicly as well as privately. In the case of public ledgers, anyone can send messages through the network and validate the transactions whereas in the case of private ledgers only a handful of people are allowed to use the system and the data is validated by select few authorized people or the administrator. Since the system is entirely decentralized, the possibility of hacking the system is reduced significantly. Blockchain manages and verifies online data which can help us track millions of devices on the internet of things. It helps to create better value for the customers. Let's take a look at how Blockchain came into light. An anonymous researcher with an alias name Satoshi Nakamoto published a white paper in October 2008 (after the financial crisis the trust among the financial institutions was broken in the minds of the public) named “Bitcoin: A Peer-to-Peer Electronic Cash System” and gave this world the concept of Bitcoin and hence its underlying technology “Blockchain”. How it works? Blockchain works on the concept of Public Key Cryptography which uses 2 keys (1 public and 1 private) which make the transactions difficult to be altered or cracked. The public key is used by the sender to encrypt the message and the private key is used by the recipient to decrypt the message making the transaction highly secured in the

transit. Each transaction is entered into a block which is validated by miners who competes to validate it by solving complex mathematical puzzles on high computing machines and in return the miners are awarded in the form of Bitcoins. The validated blocks are then added to an already existing chain of blocks which contains the address of the previously linked block in the form of hash, the original transaction metadata, time stamp and the cryptographic information needed to ensure the integrity of the transaction. Blockchain is not just confined to its status of being Bitcoin Wallet, it has the potential to transform the business operations of almost every industry. As of now the industries which have a st ro n g s co p e o f i m p l e m e nt i n g Blockchain technology are Banking and Finance wherein no more 3rd party validation will be needed; Entertainment & Media where Intellectual Property Rights, original art work would be secured; Manufacturing industry where automatic monitoring of prices and delivery time would be made possible; Healthcare industry where Electronic Health records would be aligned to the office of National Coordinator for Health Information Technology (ONC) and Personalized Medicine Initiative (PMI). Barclays along with Start-up company Wave executed first global Blockchain transaction while ICICI became the first company to do it in India.

Cover Story

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Cover Story

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Current Scenario: We can briefly summarize “The Blockchain” working lucidly through the following diagram:

Recently Bitcoin created a lot of buzz when its market cap reached an all-time high of approximately $48billion and price $2900 in June 2017.Its main rival Ethereum's market cap was roughly $36 billion at the same time, with a price per token of $390. Everyone was willing to invest in digital currencies of the 21st century. But on 14th July, 2017 when Ethereum's price dipped to ~$204 which is more than 50% lower than its highest price of $390 and when Bitcoin also dipped from a high of $3000 to $1990 everyone got a glimpse of the volatile nature of these next generation currencies. Lack of Regulation is the biggest risk to this upcoming sector and yet no government regulatory body of any nation seems to be interested in regulating the same. Securities and Exchange Commission which has been

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known for its innovative regulatory ideas should take a driver's seat to regulate the crypto-currency market. If kept unchecked, there are several other potential threats involved in crypto-currency such as: ŸTerrorism Funding ŸData Insecurity ŸDark web ŸMoney laundering and tax evasion Ethereum is the biggest competitor of Bitcoin so far. It may have already o v e r t a ke n B i t c o i n . B i t c o i n : a Motherboard report suggests that Ethereum has "almost five times as many nodes in its network as Bitcoin, meaning more people are using their computers to support it".

Cover Story

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Many analysts have predicted, "The Flippening"- a term coined for the time when Ethereum will overtake the Bitcoin in term of market capitalization. Bitcoin has been in dominance since a long time but it also has its own drawbacks. Bitcoin has significant scaling problems which can dismantle the whole crypto-currency system. Ethereum being the recently developed does not have those disadvantages.

the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.” Many start-ups which are raising money using ICOs can easily escape the regulatory requirements. Hence tracing the sources of funding becomes almost impossible; absence of any regulator makes it riskier.

Comparison of Bitcoin with Ethereum by Market capitalization:

Even though Blockchain has few risks, it can still be used as a technology in a lot of other areas which can be a very big

“Ethereum co-founder says crypto coin market is a time-bomb”

market for many technological companies.

Many companies are launching ICO (Initial Coin Offerings):- A means of c ro w d f u n d i n g fo r B l o c kc h a i n technology companies.

Future Scenario and roadmap:

“People say ICOs are great for ethereum because, look at the price, but it's a ticking time-bomb,” Charles Hoskinson, who helped develop ethereum, said in an interview. “There's an over-tokenization of things as companies are issuing tokens when

The future scenario for the Blockchain is relentless in terms of disruption it can cause over all the sectors. It can range from changing the way financial transactions are settled to booking of a movie ticket. The major basis for this is going to be “Smart contracts” which are nothing but a set of instructions which would be executed based on the conditions which are satisfied.

Cover Story

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Ethereum is based on this Smart contract and hence the rise of the currency vis a vis bitcoin. Shared database is used for this which is running Blockchain protocol, the smart contracts auto-execute, and all parties validate the outcome instantaneously and without need for a third-party intermediary. For this article, we would be concentrating on the roadmap which Blockchain can take for the banking and finance sector.

ŸCentralized KYC: Decentralized KYC

which is based on Permissioned Blockchain protocol can be used for instant validation and verification for customer data. This in turn can help to reduce the costs, increase efficiency and surveillance along with audit trails. ŸCross border payments: The current

issues with cross border payments are as follows: Ÿ Speed: Current international transactions take anywhere between 3 to 5 business days to complete. ŸCost: Fees for cross-border payments where volumes are high usually average 2% to 3%, but can exceed 10% where payment volumes and values are low. This is a significant cost which is related to transaction.

ŸOpacity: Currently, it is difficult for the

senders and receivers to track their funds while they are in transit, creating uncertainty about both the delivery time and payment amount. With the help of Blockchain all the above pain points can be eliminated. Blockchain allows for real time settlement which reduces liquidity and operational costs for the parties involved.

Immutability of the Blockchain allows for secure and transparent processing of transactions. Also, smart contracts allow elimination of operational errors (which helps in eliminating reconciliation of accounts). Since, Blockchain allows direct interaction between sender and receiver banks, it enables low value transactions to be feasible. ŸSyndication of loans/products:

Underwriting activities can be automated with the help of blockchain. This can help in reducing manual reviews, data re-entry and systems reconciliation. Also, distributed ledger will eliminate the need, and cost, for each market participant to maintain its own separate lending system.

Cover Story

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By use of such a system the current time for approval of syndicate loans from an average of 20 days can be reduced to within a few days. ŸCapital Markets: Blockchain would

help in reducing the settlement time in capital markets in following ways: ŸPre-trade: It can provide transparency and verification of holdings in real time. Also, KYC can be verified easily with blockchain. ŸTrade: Blockchain can provide secure, real time transaction matching and immediate irrevocable settlement. Also, automatic reporting and more transparent supervision would be possible for market authorities as all the transactions are traceable. This would result in higher Anti-money laundering (AML) standards. ŸPost- trade: In case of blockchain no central clearing houses would be required for real time cash transactions. Faster novation and efficient post trade processing can be carried out with the help of smart contracts.

ŸCustody and Security servicing: The

primary issuance can be directly carried out onto a blockchain. Also, fund subscriptions and redemptions can be a u to m at i ca l l y p ro c e s s e d o n a blockchain. With the help of above use cases capital market is expected to become more efficient and transparent. ŸTrade finance: Blockchain can be used

in case of Letter of Credits (LCs) creation and settlement process where real time settlement can be carried out with the help of smart contracts. This can result in huge cost and time savings for the parties involved. Implications for market structure: With such huge fundamental changes which are expected to occur in the future, let us take a look at the implications it would have on the market participants.

Cover Story

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ŸClients: The clients would be

benefited the most from the reduction in cost of capital markets dealing in securities and servicing. ŸDealers: The role of the dealers will

change from just providing market access to advising on transactions, execution management, providing liquidity for assets or taking principal risks where liquidity is thin. ŸCCPs: Central counter party clearing

house would have lesser role in real time cash transaction settlements as both parties have pre-trade transparency that the counter party would be able to meet the terms of the transactions and settlements happens almost instantly. However, transactions with a longer life cycle (such as derivatives) still need the advantage CCP to reduce future counter party credit risk. ŸCSDs: Central security depository role

would be required for coordinated oversight and orderly functioning of the markets Challenges: The challenges involved for blockchain technology are varied and some of the major challenges are listed below:

ŸRegulatory: Disrupters in other

industries (such as Airbnb and Uber) have adopted an 'act first, seek forgiveness later' approach to regulation. Innovations in financial markets, however, require the explicit

blessing of regulators well ahead of time. New regulatory principles may be needed where blockchain technologies become an integral part of the market infrastructure, and where consensus protocols are run through an international network of nodes. ŸS e c u r i t y : A l t h o u g h u n l i ke l y,

distributed ledgers and blockchains are subject to reorganization should a participant or group of participants choose to overpower the network by overpowering the nodes. ŸScalability: Scalability will be affected

by the architecture and configuration of the blockchain platform due to variable requirements for processing power, network bandwidth and data storage. Bandwidth and storage may be of particular concern in a blockchain type network because of the replication and distribution of data between all participants, rather than just the C o u nte r - p a r t i e s i nvo l ve d i n a transaction ŸPrivacy vs traceability: Finding a way

to meet the regulatory and auditing reporting needs while maintaining confidentiality of data will be critical. Undeniably Blockchain is a disruptive innovation which has the potential to change the way current market forces are organized and can reduce the gap between the transacting parties. So, due to this the current intermediaries may have to scout for new business model or lag.

Article of the Month - Winner

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The financial crisis that erupted in Asia beginning in mid-1997 swept like a b r u s h f i re t h ro u g h t h e “ t i ge r economies” of SE Asian. The crisis is now behind us and the economies are recovering strongly but his rebound did not happen spontaneously. It came about as a result of steadfast policy implementation by the affected countries and large-scale financial support from the international community, especially the IMF. Sustaining the recovery and making long-term progress depend critically on the continued maintenance of macroeconomic stability and firm implementation of key structural reforms. The roots of the Asian crisis extended from the fundamental change in the economics of the region, the transition of many Asian nations from being net exporters to net importers. The most visible roots of the crisis were in the

excesses of capital inflows into Thailand in 1996 and early 1997. With rapid economic growth and rising profits forming the backdrop. Thai firms, banks, and finance companies had ready access to capital on the international markets, finding U.S. dollar debt cheap offshore. Thai banks continued to raise capital internationally, extending credit to a variety of domestic investments and enterprises beyond what the Thai economy could support. As capital flows into the market hit record rates, financial flows poured investments of all kinds, including manufacturing, real estate, and even equity market marginlending. As the investment “bubble” expanded, some participants raised questions about the economy's ability to repay the rising debt. The baht came under attack. Within days, in Asia's own version of what is called the “tequila effect”, a number of neighboring Asian nations, came under speculative attack.

Article of the Month - Winner

The International Monetary Fund, Asian Development Bank, World Bank and the region's governments all came to the rescue in the form of monetary support and liquidity in the foreign exchange market. The IMF insisted on a combination of tight macro-economic policies, including cuts in public spending and higher interest rates, the deregulation of sectors formally protected from domestic and foreign competition, and better financial reporting from the banking sector. Although politicians in each country initially resisted these conditions, they ultimately accepted them and so far at least, seem to be pursuing them. The Federal Reserve played an active role in informing and supporting the US and global policy responses. The Asian financial crisis highlighted the risks associated with doing business in developing countries into sharp focus. The Asian crisis undoubtedly had some painful effects on companies with major activities and investments in the region's troubled economies. To make matters worse, many Asian companies looking to export their way out of recessionary conditions in their home markets led to a flood of low priced exports from troubled Asia economies to other countries. United States and European steel companies, for example, were bracing themselves to deal with the adverse impact on demand and prices in their home market of an increased in the supply of low cost steel from South Korea. On the other hand, firms that sourced components from Asia saw a steep drop

in the price of those inputs, which has a beneficial impact on profit margins. Furthermore, several firms were reportedly taking advantage of the changing circumstances in Asia to increase their rate of investment in the region. Plunging stock markets across the region left many Asian companies trading at prices that are less than their break-up value. As a result of these factors, it was reasonable to expect firms from outside of these countries to start buying the assets of troubled companies while they can be purchased for cents on the dollar. Indeed, there were signs that that was starting to happen by early 1998. Crises are inevitable. But vulnerability to crises can be limited. Analysis of implications that rose due to the crisis provides us with important insights into what went wrong and how economies around the world could learn from it. First, it is essential that appropriate supervisory and prudential procedures be in place and that banks be in a position to assess risk. Second, one very important lesson that has emerged from this crisis is that the economy needs to have a healthy banking system and a strong reserve position that can withstand a defensive rise in interest rates to fend off speculators. Third, capital market liberalization must be undertaken with care. The decision of liberalizing short-term capital inflows prior to foreign direct investment clearly backfired during crises. Furthermore, although capital inflows

Article of the Month - Winner

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were liberalized, the financial system remained closed to outside competition. The combination of partial liberalization and structural rigidities meant that capital was invested without due regard to risk.

the experience not weaker, but stronger institutions and a greater ability to attain sustainable economic growth.

Fourth, exchange rate policy of a country should be aligned with its authorities preparedness to do what it takes. Since the collapse of the Bretton Woods' fixed exchange rate system in 1973, the world has functioned with a floating exchange rate system. However, there are variations to this theme. Most Asian countries tried to peg the value of their currency against the US dollar, intervening selectively in the foreign exchange markets to support the value of their currency. This practice, know as a managed float, is an attempt to achieve some of the benefits associated with a fixed exchange rate regime in a world of that lacks such a regime. Critics argue that such a policy is vulnerable to speculative pressure. Today, Asia's growth relies much more on domestic demand hence, now the region has a stronger economic outlook. The question that remains is would it be appropriate to impose capital controls to avoid future crises? It would be more effective to deal with the underlying problems in the financial and corporate sectors and to create such an environment that when capital inflows resume they can be used productively. To the extent that the crisis gives Asian countries an incentive to reform their economic systems, and to initiate some much need restructuring, they may emerge from

Article of the Month - Runner Up 15

Paris climate agreement, is an agreement within united nations framework convention on climate change(UNFCC) whose major run is to limit the greenhouse gas emission to control the global warming, aiming to hold the temperature raise at 2 degrees Celsius which is now projected at 3.6 degree Celsius by the end of 2100. The agreement is signed by 195 members of the UNFCC and the targets for CO2 emissions cut down were taken by the respective countries voluntarily. United States is one of the key player, which not only pledged to cut down 26%-28% from 2005 levels by 2015 but also to help the under poor nations financially to invest in the renewable energy, so that they can also be contributing to the Agreement. With the Republicans coming into the power, president Donald Trump has decided to revoke from the Paris Agreement.

Impact: T h e U. S w i t h d rawa l f ro m t h e agreement doesn't necessarily kill it, but it will leave significant impact on the other nations which have committed to the agreement, it may weaken their commitment towards the deal and their efforts and expenses to achieve them and this could trigger ripple effect. The void the U.S will leave is huge, it in terms of leadership and in terms of the foot bill, which is hard for the successor to fill in. According to Sydney university environment politics professor David Schlosberg, with the US withdrawal, India and china could likely pick up slack, leaving US politically isolated. China is growing with high pace, catching up the world first economy faster than anticipated. U.S is in 2nd position after china in the emissions and it has already taken 12% cut in their

Article of the Month - Runner Up

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greenhouse gas emissions from 19902015 and, with U.S pledging the Paris agreement for the large cut of the emissions, it is likely to affect the industrial sector and cascade the effect to employment sector. Since the inception Trumps regime is probusiness and with U.S withdrawal from Paris agreement, investors who were encouraged to put in their money in to boost the renewable energy sources are now with the major player exit it will get attracted towards the nonrenewable energy sources, and this may discourage the investors of the renewable energy source which could result in increase in global temperature. Although the countries are not obliged to cut their emissions, with US exiting there is a chance that it could scale up the industrial sector which may increase the greenhouse emission and pollution.

This will weaken US ability to shape international actions going forward, including actions on other issues. And other nations, such as China, the EU, etc. may seek policies that punish the US for stepping back from climate

action, which include the imposition of border adjustment tariffs on US exports and other policies that could harm the U.S. economy, such as freezing US firms out of contracts to supply renewable energy to other nations. Withdrawal cedes leadership in the emerging renewable energy industry to China and others. Fight of other countries in Paris agreement China, the major greenhouse emitter, is continuing to carry out innovation in field of renewable energy source and investing more in renewable energy than any other nation, pledging a further $360 billion by 2020. Although the aim of achieving the global temperature increase from projected 3.6 degrees to 2 degrees

Celsius, with US participation in the Agreement, the projected increase will come down to 3.3 degree Celsius. With US exit from the Agreement, to fight the emissions, signatory nations may redouble their efforts.

ECO Section

Fortunes of Indian economy are closely tied with the South-west monsoons as it is the major source of water for drinking, industrial and irrigation purposes. Even today, agriculture sector which contributes to almost 18% of the Indian economy, solely depends upon monsoons. Over the years, distribution of monsoons across different states in India has become more unequal and uncertain, leading to draught and flood situations. The uncertainty of monsoons, along with i n e f f i c i e n t m a r ke t m e c h a n i c s associated with grains has deteriorated economic condition of farmers. A huge section of farmers is unable to repay their loans and is trapped into the indebtedness cycle, as a solution to this problem, loan waiver schemes are being demanded in various states. So far, demands for farm loan waivers were put forward through protest marches. However, year 2017 saw such

demand taking form of strikes. As promised during UP election campaign, Narendra Modi government offered loan waiver to farmers of UP. Following that, cultivators in various parts of the country demanded a similar dole. Farmers in Maharashtra decided to observe strike since 1st June, demanding complete waiver. Rajasthan farmers read out a list of 13 demands and announced large gatherings for protests from 15th June; while Haryana farmers blocked state highways for three hours on 16th June. Similar demands have been put forward in Tamil Nadu and Madhya Pradesh. Below table shows total amount of waiver being demanded and no. of potential beneficiaries.

ECO Section

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History: How many times farm loans were waived in India? It all started when recently the Chief Minister of Uttar Pradesh, Yogi Adityanath, in line with his election manifesto, announced waiver on farm loans to varying extends. Similar actions were taken by the state government of Maharashtra followed by agitations and protests by the farmers from Tamil Nadu in Delhi for the same. But this is not the first time that the government has announced such a scheme. There have been a lot of instances in the past where such measures were adopted. Listing some of those are: 1990: The first ever farm waiver was announced nation-wide and the cost borne by the state was Rs10,000Cr. As per a working paper by Indian Council for Research on International Economic Relations (ICRIER), this scheme of former Prime Minister, V.P.Singh, proved to be a very costly affair for the banks and the economy. Thereafter,

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there was a decline in recovery by the financial institutions as farmers who could afford to pay would also not pay these institutions in expectation of a waiver. The credit discipline was shaking and it took banks several years to recover from the impact. 2008: Prior to the general elections of 2009 and to address the indebtedness of the farmers, the Indian government released approximately Rs52,000Cr in its waiver plan. However, later an audit conducted by CAG revealed several lapses and errors leading to inaccuracy of claims and inclusion of ineligible beneficiaries under the waiver scheme. 2017: Uttar Pradesh government has now announced a waiver of Rs. 36,000 Cr and Maharashtra followed suit by announcing the loan waiver corpus of Rs. 35,000 Cr. Causes of failure of waiver schemes: Agricultural loans given out to farmers are insured by the Agricultural Insurance Company of India (AIC), whose liabilities are backed by the

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ECO Section

Centre through budgetary support. Essentially, this means that the Centre will have to pay the banks for any losses that might occur due to the poor monsoon, natural calamity or acute farmer distress causing a transfer of funds from taxpayers to borrowers thus causing an increase in overall government borrowing.

Farmers today are moving away from the traditional method of subsistence agriculture to a more commercial framework of agriculture. This has caused them to take greater risks by taking huge loans for investment in latest machines and technology. Poor monsoon and uncertain climatic conditions creates havoc of food inflation and render the farmers in huge debts with very grim options left. Indebtedness is a key reason for many farmer suicides in the country.

Loan waivers in such cases does provide some sort of relief to the farmers but this is majorly for a temporary period. Long term effectiveness of such schemes is still under doubt as it skews the credit discipline and banks become wary of lending to the farmers in future. Government finances also take a hit as borrowing increases and they bear the entire write-off waiver amount on behalf of the farmers by paying the banks. Farmers are important for the political parties and hence politicians are wary of themand make efforts to gain their support by such schemes. How effective was the 2008 farm loan waiver? In 2008, the UPA Government at the

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center and various state governments combinedly waived Rs. 88000 Cr in loans to 4.8 Cr farmers. The analysis has shown that farm-loan waivers such as 2008 are band-aids of uncertain efficacy and fail to address the root cause of malaise gripping India's agrarian economy. The main objective of the waiver scheme was to discourage suicides by farmers by reducing the widespread indebtedness. However, it could be observed that loan waiver had little or no impact on suicide rates. The reason associated with this could be the reliance of small and marginal farmers o n i nfo r m a l s o u rc e o f c re d i t . Approximately 30% of the small and marginal farmers rely on informal source for credit. Hence, loan waiver has no benefit for them. In addition to that, it was further revealed that loopholes in the execution of waiver process were exploited by no. of rich farmers to divert the flow of money towards them. Hence, the target group received no benefits. Loan waiver schemes have always resulted in a rise in the NPAs of banks, particularly public-sector banks. They also had a significant impact on the State and National fiscal deficits. 2008 Loan waiver scheme was not an exception and it is reflected by agricultural NPAs accounting for 41% of 'priority sector'in 2013. Since 2008 farm loan waiver, agricultural NPAs rose by almost 300%, from Rs. 7,149 Cr in 2009 to Rs. 30,200 Cr in 2015. As a result, banking sector became hesitant towards agricultural credit.

ECO Section

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Possible impacts of proposed loanwaiver: Uttar Pradesh, Maharashtra, Punjab and Karnataka have announced farm loan waivers on more than Rs. 75000 Cr (combined amount) in agricultural loans since April. These moves have significant political motives attached to it. However, it remains important to analyze possible impacts of farm loan waive in economic and social context. RBI Governor Mr. Urjit Patel cautioned in April 2017 that loan-waivers provide only temporary relief and they place a significant burden on public finance and economy. Terming the waivers â&#x20AC;&#x153;a moral hazardâ&#x20AC;?, he further explained that such a waiver undermines an honest credit culture and produce challenges for national balance sheet as well. His statement truly reflects opinions of most of the experts in this field. Farm loan waiver may have adverse impact on credit policy of banks. Even after declaration of highest ever farm loan waivers so far in the country, banks have not received any guarantee

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for debts. On the other hand, state governments are directing banks to issue fresh credits when they are short of capital. This may prompt banks to tighten their norms in terms of incremental credit to the agrarian economy, a move that could further slowdown the loan growth in rural areas. Farm loan waiver will put a significant burden on respective states. Center has already backed out from the provisions and has addressed states to arrange the funds at their own. This will probably raise state fiscal deficit. Also, to raise funds, states will have to issue bonds or sell some of the assets. As states are already carrying a heavy debt burden, additional debt financing looks difficult. Also, altering indirect taxes would also be difficult as recently introduced GST is yet to settle. Consider example of Maharashtra state. Maharashtra's Rs. 30,000 Cr farm-loan waiver is likely to raise the state's fiscal deficit to 2.71%which is much higher than the budgeted deficit of 1.53%. In case of Uttar Pradesh, fiscal deficit is

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ECO Section

likely to rise to 2.6% as compared to budgeted deficit of 1.53%. As per the guidelines issued by the 14th Finance Commission, fiscal deficits shouldn't exceed 3% of state budgets.

Remedies: The magic wand of a waiver can offer temporary relief, but long-term solutions are required to solve farmer woes. The constitutional provisions are such that the health of the banks is the concern of the Central Government while that of the farmers is the concern of the State Government. This division of responsibility is asymmetric and does not align the interests of both farmers and the banks. The need of the hour is to formulate a farm loan model together by both Centre and the State government without bringing politics into it to create a real sense of â&#x20AC;&#x153;cooperative federalismâ&#x20AC;?.

Conclusion: Considering all above aspects, it can be concluded that farm loan waivers are like emergency response by the States to the issues in agrarian economy. They do not address issues in the long term and sometimes, this treatment creates additional problems. There is a need of focusing on providing more incentives to farmers (higher MSP and market availability) and innovation in farming techniques. This will not only address the issues of indebtedness and farmer suicides, but will also lead us towards Prime Minister Mr. Narendra Modi's dream i.e. doubling the income of farmers by 2022.

Internship Diaries

Vipul Varkar PGDM 2016-18 Company - Amazon Department – CS-Operations Role – Operations Intern What did you actually do? The role was of process improvement for various departments. I had to identify use cases for complex processes which are currently being carried out and then based on findings which are supported by data had to propose improvements. A typical day involves interacting with various stakeholders which can be different teams, with data analysts to identify and mine relevant data, present findings to Operations manager, discuss the feasibility of the identified solutions with the help of US based teams and handling team members and monitor their performance.

Key skills required - Excellent communication skills, Self-driven, Team player, Excellent Analytical skills E x p o s u re / E x p e r i e n c e ga i n e d Interaction with senior management, Peer learning from fellow interns, Operation knowledge of Amazon, Key Process insights, Networking opportunities with top management of Amazon. Work culture - Open culture, Great Teams, Good Management Kriti Srivastava PGDM IB (2016-18) Organisation – Reserve Bank of India Department – Department of Currency Management Role – Strategic Analysis of International Cash Distribution Models and propose a cost optimised model for India

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Internship Diaries

What did you actually do? The job was basically to understand the current cash distribution model followed by RBI in India and propose a cost optimized model with increased scope of private entities from the Cash Logistics Association of India. It required a detailed study of Indian Cash Management System, analysis of the balance sheet of the Issue Departments of RBI, models adopted internationally by different countries and understanding of the Cash Logistics or Cash-in-Transit Industry as a whole. The project was more in the research domain and required usage of strategic management tools for industry analysis. Key skills required â&#x20AC;&#x201C; Analytical Skills, Basic grasp of banking industry and functions of Reserve Bank, Communication skills, team player and presentation skills. Exposure/Experience gained - Direct reporting to the General Manger of the department. Interaction and exposure with top policy makers at India's Central Bank, gained insights about the slow but increasing growth of the cash logistics industry. Developed understanding about Indian currency management and balance sheet of RBI Wo r k c u l t u r e - O p e n & f r e e environment, supportive colleagues, Great Work life balance, extensive training and skill development

Yash Parikh PGDM 2016-18 Company - HSBC Department - Commercial Banking Team Role - Business Development in IT, Textiles and Plastics What did you actually do? The role was business development which means to aid the Business Banking Team in furthering their business. A t y p i c a l d ay w o u l d sta r t b y approaching CEO, CFO, MD, Director of a SME Company (Turnover 10 crores to 350 crores) and setting up a meeting for HSBC to explain their proposition. Accompany a senior relationship manager, AVP, VP for the meeting and try to understand the requirements of the business in order to make a proposal which adds value to the prospects business. Key skills required - Communication skills, team player, Basic grasp of banking and financial products, presentation skills. E x p o s u r e / E x p e r i e n c e ga i n e d Interaction with Top management and Promoters, developed understanding of corporate banking, industry insights of IT, Textiles and Plastics, Networking opportunities with top management of HSBC, First hand industry experience. Wo r k c u l t u r e - O p e n & f r e e environment, supportive colleagues, Great Work life balance, extensive training and skill development

Internship Diaries

Pranav Parikh MMS 2016-18 Company – Arcesium India Department – Liquidity and Collateral Management Role – Treasury Intern What did you actually do? The role basically revolved around understanding the interest rates charged on various agreements undertaken by the client Hedge funds and also automate various interest computation processes to analyse daily data efficiently. The job was to understand every financial product; the client hedge funds invested in and calculate the interest charged on the agreements as each agreement in a hedge fund consists of a high amount of leverage. A typical day would start by checking the trades carried out by the front desk on the previous day, in markets all over the globe and identify any Push-Pull collateral calls for any of the trades. The identified calls would then be analysed by the treasury team and checked for proper calculation of the interest amounts. Any mismatch between the internal and broker numbers would then be communicated to the brokerage firms and rectified or reconciled depending upon the solution obtained.

Basic understanding of Fixed Income s e c u r i t i e s a n d B o n d m a r ke t s , Presentation skills E x p o s u r e / E x p e r i e n c e ga i n e d Interaction with top management, Peer learning from fellow intern, knowledge gained due to the excellent buddy program, understood the working of hedge funds, Key Process insights, networking opportunities with top management of Arcesium and D E Shaw group. Work culture – Flat hierarchy , Great Teams, Good Management, Open & free environment, Great Work life balance , Extreme emphasis on innovation and technology, Excellent Pay structure and employee engagement

Key skills required - Excellent communication skills, Self-driven, Team player, Excellent Analytical skills, Advanced understanding of complex financial products and OTC agreements,

Article by FInacue 25

Difference between NEFT and RTGS With the technological progress, digital money transfer system is acquiring popularity due to its speed, simplicity, safety, and convenience. Funds can be transferred electronically from one bank/account/place/branch to another through this system. Moreover, the system enables instant account update and provides quick information about the foreign exchange rates. In India, NEFT and RTGS are the two electronic

media which involves fund transfer. While the former is used to handle smaller size transaction, the latter gives effect to big ticket transactions. The diagram below shows the chart of the Indian payment system, where two systems are mostly applicable, the retail system and large value system. Retail systems refer to NEFT and large value systems refer to RTGS.

FINLY| July 2017 | Finstreet | SIMSR

Article by Finacue

A snapshot of monthly volumes for the year 2015-16 :

In the above table the total numbers of transactions and total amount of funds transferred in all months of 2015 through the RTGS and NEFT system have been indicated. It can be inferred that in March 2015, there had been an increase in the volume and amount of NEFT fund transfers (106 million and Rs.7173.09 respectively). There was also an increase in volume and amounts of RTGS funds transfers (9672.739

million and Rs.87421.48 bn respectively in 2015 and in 2016 there has been 9864.091 million and Rs.100045.36) in the same month and this has been the highest transaction done. The reason being that March is the end of the financial year hence huge volume of financial transaction happens through the online funds transfer system.

Article by FInacue

FINLY| July 2017 | Finstreet | SIMSR

It is observed that he RTGS transfer is done in large volume of amount within as well as outside the nation without netting and works in real time basis hence takes lesser time to transfer the funds. Hence number of transactions and funds amount using RTGS are higher than the NEFT system's volume and amount. National Electronic Funds Transfer (NEFT) NEFT also called as National Electronic Funds Transfer, established in 2005, is a nation-wide payment system facilitating one to one funds transfer. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT. This means that transactions are settled in batches under net. Every bank should be a participant in the NEFT system and a login ID is given to access it. Through login ID the banks deposit the amount to NEFT account with detailed information about the account holders or beneficiary so that NEFT system transfers the fund to concern bank in their customer account. This syste m i s e s p e c i a l l y u s e d fo r transferring small amount. The important thing is to locate the beneficiary account to enable transfer, for which an IFSC (Indian financial accounts code) is required. As per RBI guidelines settlement of funds occurs in batches.

How does NEFT work while online transaction is done? I. The payer provides details of the intended receiver to the bank. This is done by "Adding the Payee" in online banking link. ii. The payer initiates the funds transfer either online or by filling in the form available at the bank branch. iii. The bank creates information and conveys it to its pooling centre where the main bank is. iv. Pooling centre transmits it to NEFT clearing centre that is operated by RBI, and it gets processed in next batch. v. NEFT clearing centre classifies the request destination bank wise and organizes to receive funds from originating bank and sends them to destination bank. vi. Messages are forwarded to destination banks through their pooling centre. vii. Destination banks processes the messages and credits the receiver accounts. Real Time Gross Settlement System (RTGS) The Real Time Gross Settlements system is also an online funds transfer system by which funds are transferred from one bank to another bank in continuous real time ('push 'transfer) and gross basis.

Article by Finacue

FINLY| July 2017 | Finstreet | SIMSR

Real time means the beneficiary receives the instructions for fund transfer immediately and there is no lag time between the instruction and execution. Gross indicates that settlement of fund transfers takes place individually on an order by order basis, without netting within or from outside the nation. Netting is termed as merging the value of two or more transactions in order to create the single value. It is one of the fastest interbank money transfer facility available through banking channels in India. The beneficiary bank has to credit the recipient's account within 30 minutes of receiving the funds transfer message. Since the settlements of the funds takes place in the books of RBI, the payments are final and irrevocable. RTGS allows transfer of funds above Rs.2 lakh. Once the transaction is completed it treated as the final and irrevocable. How does RTGS work while online transaction is done? I. Most bank provide RTGS facility with the net banking option, hence online option can be availed.

v. After money is being sent to receiving bank, RBI intimates the user's banker that the fund transfer requested under RTGS has been sent. vi. The banker intimates the user after getting a message from RBI. These steps takes place in real time and the process gets over within few minutes. Incase the money does not reach the receiver then the receiver bank pays the money back to the banker and in turn the banker pays it to the user. Electronic Fund transfer (EFT) service is one of the easiest methods of carrying out financial transactions in the country though there are certain disadvantages attached to it. EFT will enable the use of plastic money and digital money to a great extent, thus bringing transparency in bank accounts. Subsequently, the use of paper currency will reduce. The bank should offer an utmost security for customers' financial transaction ensuring zero error, to increase the usage of EFT. Awareness on usage of NEFT/RTGS is to be created to increase the volume of EFT and to attract more customers.

ii. The user requests the banker for an RTGS. iii. The banker processes RTGS request to the bank to which the user wants money to be transferred. iv. Money is then routed from the user's bank account through RBI.

Article by FInacue

FINLY| July 2017 | Finstreet | SIMSR

The difference between RTGS and NEFT:

Sector Analysis

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

Logistics is considered as the backbone of the economy, enabling efficient and cost effective flow of goods on which commercial sectors rely. It is the interplay of infrastructure, technology and new types of service providers with an ultimate aim of reduced cost and efficient service delivery. The Indian logistics industry was valued at an estimated US$ 130 billion in 201213. It has grown at aCAGR of over 16 per cent over the last five years. The GST regime is having a significant bearing on the way transportation and storage of goods happens across the country. As of now, logistics players in India have been maintaining multiple warehouses across states to avoid CST levy and state entry taxes. Most of these warehouses operate below their capacity and thus adding to their operational inefficiencies. However, post GST India will become one single market wherein goods can move freely

inter-state without any levy therefore resulting in consolidation of wa re h o u s i n g n e t w o r k . A s t h e additional 2 per cent CST levied on inter-state sale of goods cease to exist warehouse location would no longer be based on tax considerations and instead would be based on demand considerations â&#x20AC;&#x201C; this would also result in consolidation of warehouses. The GST would have three major implications for the logistics sector â&#x20AC;&#x201C;-a shift towards a 'hub and spoke' model, higher degree of tax compliance and creation of level playing field between express and traditional transport services.The flow of goods is expected to i m p rove w i t h re d u c t i o n i n turnaround time as VAT related check posts will be removed which may lead to 15-20 per cent reduction in the truck stoppage time. This will further bring warehouse consolidation across the country and we can witness mega logistic hubs and

Sector Analysis

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high investments in infrastructure wherein 100% FDI (Foreign Direct Investment) has already been allowed. As an outcome of GST, warehouse operators and e-commerce players have already shown interest in setting up their warehouses at strategic locations such as Nagpur, which is the zero mile city of India and is well connected throughout. So logistics is a sector worth looking, other reasons as to why it makes sense to be in this sector is that it has a strong backup from the government side and which can be witnessed from their continuous improvement. In a recent interview with the Economic Times, road transport and shipping minister Nitin Gadkari claimed that logistics sector will be the biggest beneficiary of GST. Also on Friday, the government had approved a plan to build 34 mega multi-modal logistics parks at an investment of Rs 2 lakh crore. So now when we look at the listed stocks apart from the traditional logistics and transportation companies, we find that much of the contribution of

Finly | July 2016 | Finstreet | SIMSR

Airline revenues are from transportation and logistics. So even Airlines companies are into logistics and are also cheaply available than its listed peers.Though the GST is now rolled, we should not expect immediate price rise as the things are already discounted in its price, but definitely something to have a long-term approach. There is a market saying â&#x20AC;&#x153;Buy on rumours, sell on newsâ&#x20AC;? so the news for GST is out, market will now see how the earnings are improving in this sector, post which we can expect a re-rating. Though there is no specific sectoral index for logistics and transportation but there is a similar fund in this space. So we have compared the Nifty benchmark with the logistics fund (UTITransportation and Logistics Fund). As we can see, the fund has outperformed Nifty in the 3-year period predominantly witnessing a great demand from the E-Commerce and increasing trade and the next leg of growth would be fuelled by the GST. So a good time to keep an eye on this sector and pull your socks up to start buying this.

News Buzz

FINLY| July 2017 | Finstreet | SIMSR

Reliance AGM Highlights: The Grand Affair

1500 INR fully refundable security deposit. The phone was unveiled at the AGM and various basic features were showcased. 4.Announcement of 1:1 bonus share: A bonus share was announced for each share that was held by an investor.

The Recently concluded Reliance AGM was one grand affair. Attended by various shareholders, the AGM was also showcased live over various channels. Major announcements were expected to be made regarding Jio and other various offers that were in store. With the inaugural plans of jio coming to an end, other plans were anticipated. Various growth plans disclosure was also one of the anticipated outcomes of the event. The major highlights and take-away from the 40th AGM is given below: 1.From 10,000 to 1 Crore: Reliance's turnover has increased by 4700 times since 1977 i.e. from IPO to present. This meant that by investing a INR 10,000 in the ipo and holding it till date, would had made one a crorepati! The money would have doubled every 2.5 years. 2.Making 4G surpass 2G: Due to the continuous increment in the reliance network, soon JIO's 4G network would surpass all the 2G network present in India. Currently, Jio has the leading 4G network share, as said by TRAI 3.Making a '0 cost' Phone: An Entry level phone JIO was announced, which would effectively be free with having a

During the due course of the announcements and other underlings, shares of other telecom giants tumbled, while reliance made a gain of 3.78%. Air India Privatization- Coming a full circle:

Air India, a debt-ridden PSU has been in the news lately. A committee has been formed under Mr Jaitley, to find suitable avenues and dis-invest Air India. The debt has been mounting up and has reached a staggering 52,000 Cr INR. The Disinvestment of Air India and its 5 subsidiaries has been yet to decide up to what percentage will be the disinvestment be. To make Air India more attractive, the committee is planning to sell off the prime properties which are owned by Air India around the globe. Such debt laden PSU will be hard to sell off. The debt was increased under the UPA

News Buzz

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government, where a bailout of more than 30,000 crore was done. The TATAâ&#x20AC;&#x2122;s are said to be the prime contender for buying Air India since JRD tata had founded the same airline, names as TATA airlines, in 1932. The airlines got nationalized in 1953. Since TATA already have plans to have international flights with their Singapore airlines venture, Air India could provide them with a ready-made network. WIPRO shares buyback- A trend follower:

Wipro has announced a mega buyback offer of 11,000 cr. With this, it has joined the other IT companies which were distributed the cash surplus they had, to re-instigate and keep the equity shareholders interest. This has been done, as I.T companies have going through tough times, due to uncertain global market factor. By the buyback program, the EPS increases which makes the companies look more attractive to investors, especially when the industry is going through sluggish times.

Trivia

FINLY| July 2017 | Finstreet | SIMSR

Incognito leverage Incognito leverage means an asset or debt or financing activity not on the company's balance sheet. It is also known as off balance sheet items. The assets managed or brokered by financial institution are of client's. The bank cannot claim it as assets. Thus these become off balance sheet items.

India VIX National Stock Exchange of India Ltd. has constructed a volatility index called India VIX. India VIX indicates the investor's perception of the market's volatility in the near term. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Abandonment value Abandonment value is the equivalent cash value of a project if it is liquidated immediately after reducing all debts which need to be repaid. The abandonment value is generally a cash value, or equivalent, associated with an asset. This value is important for companies when analyzing the profitability of particular projects or assets and deciding whether they should be maintained or abandoned. Abandonment values are also an important factor in bankruptcy proceedings, where assets are typically sold at distressed or liquidation prices

Finly | July 2017 | Finstreet | SIMSR

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