Finly MARCH 2016 by FINLY

March 2016

ISSUE NO. 51

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Demographic ProďŹ le of India

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EDITOR’S NOTE We notice that the months of speculation, debates and frenzy spanning across the news channels to corporate boardrooms has come to an end when Arun Jailtey presented the Annual Budget of 2016-17 on 29th February, 2016. The budget just like any other political document has brought the political, social and economic pundits back into the blame game arena where everyone is measuring what and how much they have got in their bucket. In this edition which happens to be the last edition of this season, we present to you the detailed understanding of the budget through our faculty section. From our Cover story we bring you the glimpse of the finance world across the globe in this financial year, where we tried to focus on the issues that affected the economies to what extent. Next in line is our Bubble Trouble series where we have the US Housing bubble, which will give you the idea of how it rattled the US economy and significantly affected others. This being the last edition of this season, we have compiled the events of Finstreet throughout the year. I would like to appreciate each and every member of our team who have had put great deal of effort throughout the year to make this committee reach this level of perfection. I would like to acknowledge all our readers, faculty members and seniors for their tremendous support. Lastly, the Winner for the Call for Article is Vaibhav Yadav from IIM Indore PGP, Congratulations and All the Best.

Abhimanyu Singh Chauhan

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CONTENTS

02 04 09 EDITOR’S NOTE

COVER STORY

GLIMPSE OF FINSTREET 2015-16

12 16 21

ARTICLE OF THE MONTH

ECO SECTION

FACULTY SECTION

23 25 27 ALUMNI SECTION

NEWS BUZZ

TRIVIA

FACULTY INCHARGE : Prof. (Dr.) Pankaj Trivedi EDITOR IN CHIEF : Abhimanyu Singh Chauhan EDITING TEAM : Shreya Gupta, Tamoghna Das, Partha Banerjee, Preyas Jain, Prateek Singh, Abhijit Khadilkar, Rishi Tekchandani, Gunjan Pathak DESIGN : Geetanjali, Prateek Singh, Rohit Prabhakar, Jay Khuthia

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COVER STORY FINANCIAL YEAR ROUND UP 2015-16 force investors to shift money The financial year 2015-16 saw sHREya guPTa out of bank assets into highsluggish growth of the world gEETaNjaLI RaI yielding assets. After 11 days economy with Japan spiraling PRaTEEK sINgH i n t o d e fl a t i o n , t h e y u a n PgdM fs (201517) of BOJ'S announcement the benchmark Nikkei has fell devaluation devastating the Chinese economy and the U.S stock market 8.5% and Japanese bank shares slumped by 30% plummeting by more than 1,000 points fueled since they are unlikely to pass on negative rates to by worries about Chinese economy and the savers who get almost negligible interest on prospect of Federal Reserve interest-rate hikes. deposits and would not pay to save. Amongst these worries one of the positive RBI ROLLS OUT STRICT NORMS FOR points is that India is set to overtake China to NPA become the world's fastest growing major economy. India's GDP has grown at an annual rate of 7.4% putting it ahead of China whose growth has slown down to 6.9%. The main reasons for the GDP growth in India are fallen oil prices and other commodity prices that have improved government tax collections and lowered the subsidy bill. Here are some highlights and lowlights of the The problem of NPA is growing since 2013 and financial year 2015-16 leaving us with hope and public and private sector banks have been concern for what's to come in 2016: showing an increasing trend of stressed assets. Overall stress in the banking sector which is BANK OF JAPAN ADOPTS NEGATIVE gross NPAs and restructured advances, has INTEREST RATE POLICY increased from 9.2 per cent in March 2013 to 11.1 per cent of the total by 2015 according to RBI d a t a . E ff e c t i v e f r o m A p r i l 1 , 2 0 1 5 a l l restructured loans (loan for which borrower has renegotiated terms of repayment) will be classified as NPA's with provisioning of 15% of outstanding compared to earlier requirement of 5% of the restructured loans. The proposed Bank of Japan (BOJ) adopts negative interest Bankruptcy Law by the Bankruptcy Law rate policy for the first time in history in an effort Reform Committee (BLRC) issues a strict to push back inflation to 2%. BOJ has timeline of 180 days for insolvency resolution announced that it would charge a negative and will greatly help in solving the problem of 0.1 percent to excess reserves that the NPA. Currently RBI has been working with the financial institutions would place at the bank. government and banks to make sure that the Basically, the move is aimed to increase lending stressed assets are recognized on a pro-actively of loans by banks to individuals and and that bank balance sheets are adequately businessmen to boost the economy. It may also provisioned and they reflect a true picture of the

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COVER STORY bank's assets. Recently, RBI has introduced the 5:25 scheme and the strategic debt restructuring. This scheme will allow banks to extend long-term loans that are given to long-gestation projects over a period of maximum 25 years, and allow them to refinance them every five years. Under the SDR mechanism, banks can take over defaulting companies by exchanging debt for equity and for 18 months, the account will not be classified as NPAs. GREECE CRISIS

restrictions on Greek banks and citizens to be removed. ZIMBABWE ADOPTED YUAN AS ITS NEW CURRENCY In December Zimbabwe announced that it will make the Chinese Yuan legal tender after China agreed to cancel the $40 Million of debt of the Zimbabwe. Zimbabwe had abandoned its Zimbabwean dollar in 2009 after hyperinﬂation, which had peaked at around 500bn%, rendered it unusable. It then started using a slew of foreign currencies, including the US dollar and the South African rand. This event was a signiﬁcant step towards the “Look East policy”. This has marked a new beginning of the new alliances with the Asian countries. The west had isolated the country over the Harare's human rights concerns. China took the advantage of the situation and became the largest trading partner of Zimbabwe. CHINESE STOCK MARKET

The month of July 2015 witnessed Greece defaulting on sovereign debt which later received credit of 7.16 billion euros through European Financial Stabilization Mechanism (EFSM) in order to remain financially strong. In August, 2015 IMF Declared Greece to be no longer in default on it's loans after it remitted about 2 billion euros to make up for missed debt payments. Athens had also initiated repayment of overdue loans to European Central Bank ( ECB ) along with payment of 500 million-euro loans to it's own central bank. Greece also owed 3.5 billion euros to the ECB and national central banks in the euro area for government bonds that had matured. The ability of Greece to meet these debt repayments over the long-term remains uncertain even after receiving a third bailout in July. The IMF has noted that Greece's ability to repay its debt would happen if it achieves difficult budget surpluses and economic growth. However, the agreement between Greece and European creditors means that at least in the short-term Greek default is unlikely. The deal will provide some stability to the Greek financial sector and will allow for

The Chinese stock market started booming at the latter half of 2014, this was happening at the time when the Chinese economy was slowing down. Normally when the market is bullish the stock prices go up and vice versa in the case otherwise. So there was a real mystery since Chinese economy after almost decades of strong growth was on the downslide. It showed the slowest growth rate since 2009, it grew at a 7% y-o-y in its quarter I of 2014. The stock market grew by almost 150% during the year. It created almost $6.5 trillion in value.

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COVER STORY But by the beginning of 2015 these skyrocketing stock prices were taking a free fall. The Two main Chinese stocks Shanghai Composite Index and Shenzhen Composite Index fell sharply post hitting the peak on June 12. Both the indexes lost 32% and 40% of their values respectively since then, less than a month. It is one of the biggest stock market bubbles and this crash is expected to be bigger in value in Greece crisis. Since the Chinese Economy represents a greater share in the global economy than that of the Greek Economy. The main reasons for the lot of Chinese people had started investing in stocks with borrowed money. Many of these investors were inexperienced with little or no knowledge of the stocks. These investors were investing huge amounts of money into stock through back door methods, particularly margin lending. China had also relaxed its norms over the last half a decade over margin lending which further accelerated the no of stocks and the value of the stocks fell. This reduction in value further worsened the situation.

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Rajan had said that much depends on the monsoon, which could play a spoilsport. Finance Minister Arun Jaitley had been targeting for a rate cut as the economy was targeted to grow at the 8-8.5% for the current ﬁnancial year ending March 2016. The GDP while slowed to 7 per cent in the second quarter (June quarter) as compared st to the 7.5 per cent in the in the 1 quarter (March quarter). US Federal Reserve kept the interest rates unchanged.

OIL PRICE CRISIS 2015

RBI RATE CUT THE REPO RATE

The RBI cut the repo rate to lowest in the 4 years it cut the repo rate by 50 bps. Repo rate was brought down from 7.25% to 6.75% and the reverse repo is 5.75%. The reasons for the RBI's decision were as below:  Retail inflation had dropped significantly low to 3.66% in August. Plummeting global oil prices analysts say, restrained the inflation. RBI Governor Raghuram

The Current oil price shock in 2015 is the fall in the price of the Brent Crude (It is a major trading classiﬁcation of light crude oil which serves as the major benchmark price of the purchases of oil worldwide). During the period, 2010-2014 the prices of the oil have been fairly stable, averaging more than $100 per barrel. In the January 2015 however the price of the Brent Crude oil dipped to below $50 per barrel. There were various reasons for it. Some of the key reasons were opening up of Libyan port which had been closed due to the unrest this increased the supply so the price fall to extent became inevitable. Then followed the Shale revolution resulted in the fastest growth in the oil production in the history the oil production which was 5 million bpd in 2008 increased to 8.5 million bpd so this further put a downward pressure on the prices. Further the OPEC countries also didn't cut their production which otherwise would have provided some cushion to the falling oil prices.

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COVER STORY This had a multilayered impact on the economic situations of the countries. The oil exporting countries besides the OPEC Russia, Venezuela have faced severe ﬁscal crises. For the OPEC countries their growth forecast has been cut down signiﬁcantly by the IMF for the 2016.

population got into debt expecting the value of their “investments” to grow but now inﬂation is rising quickly and with it, the payments on their inﬂation-adjusted mortgages. Overly leveraged home builders are sitting on unsustainable amounts of unsold real estate inventory.

BRAZIL CRISIS

STARTUP INDIA, STAND UP INDIA A positive and vibrant message was sent to the masses that starting up your own business is not as cumbersome as it used to be. If we weave a thread and connect it to the present day where Prime Minister Narendra Modi has announced “Start-up India, Stand up India” campaign in his Independence Day address in August 2015 we see the basking of a new era which promotes selfemployment.

The onset of Brazil's current crisis was started back in 2003, when then president-elect Lula took the office. President Lula adopted the policies, known as the “tripod of stability”, that were centered on balanced budgets, free-floating currency exchange rates, and an independent central bank. Government banks (BNDES, Caixa and Banco do Brasil) were ordered to give out low-interest loans to pretty much anyone, but especially to people with good government connections. The government also injected large amounts of public money into the real estate market. The government implemented a policy in which any worker with a formal job would receive a government backed loan of at least 100 thousand Reais (about US$30K at the time). As a result, overnight 100 thousand Reais became the floor price of any home, in any condition, anywhere in Brazil. As massive amounts of government credit flooded the real estate market, huge construction boom started. This artificial real estate boom gave Brazilian families a false sense of economic prosperity, as the value of their homes tripled or quadrupled in just a few years. As a consequence, many of them went into deep consumer debt, trusting on the high value of their homes as backing. Predictably, the government created real estate bubble has burst. A large chunk of the

The government has ﬁnally started deploying funds from the Self-Employment and Talent Utilisation (SETU) scheme and the Atal Innovation Mission (AIM) scheme which were announced in the Union Budget for 2015-16, to promote start-ups and scientiﬁc research, after over ten months of spadework. The AIM stresses on inviting aspiring entrepreneurs to solve India's contemporary socio-economic problems through 'grand challenges' that offer substantial awards for incubating and scaling up winning ideas. The SETU scheme's resources is devoted to strengthen incubators and setting up 'tinkering labs' where ideas can be formed into prototypes before they are ready for funding. To make the support

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COVER STORY mechanism for budding entrepreneurs more robust, half of the funds under SETU would be kept aside for strengthening existing incubators in the country that are backed by different departments. From providing setting up a corpus ďŹ ns to enable the new ďŹ rm start business with ease to tax exemption, Prime Minister Narendra Modi had unveiled an array of incentives while kick-starting his visionary project: Start-Up India. This campaign focuses on restricting the role of States in the policy domain and to get rid of "license raj" and hindrances such as, in land permissions, foreign investment proposal, environmental clearances, etc.

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FINSTREET 2015-16 GLIMPSE OF FINSTREET EVENTS 2015-16 With the last issue of Finly 2015-16 we would like to remember the events we have organized throughout the year. We hope everyone had as much fun as we had in organizing these events….

Event 3: The ultimate finance quiz competition 'FINZOMANIA' for finance aficionados. th Online Round: 14 August, 2015 Final round: 17th August, 2015

Let's take a look at the wonderful events we had : EVENT 1: Guest Lecture by Mr.Vivekanand Subbaraman, Research Analyst, HDFC Securities Date: August 3, 2015 Topic: Equity Research Fundamentals

Event 4: FINSTRUCT- Corporate Restructuring case study competition. This was an inter college event where all the teams were given a case study of a Distressed company, and they were supposed to make corporate restructuring to make the Company proﬁtable again. The top 5 Teams with best solution were called on campus to present their solution and Judges chose the best 2 teams. Date: 9th October, 2015 Event 2: Guest Lecture by Mr Peeyush Chitlangia, MBA in Finance from IIM CALCUTTA and CFA level 3 certiﬁed. Date: August 14, 2015 Topic: Introduction to Financial Services Industry and Opportunities

Event 5: Finstreet Fiesta: Finance festival of Finstreet These competitions were held during the ﬁesta week:

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FINSTREET 2015-16 Day 1: 4th January, 2016 UNDERGRADUATE FINANCE QUIZ This was a National level undergraduate Finance quiz, where 167 teams from all over the country participated to show their ﬁnancial expertise. th

Day 2: 5 January, 2016 I N V E S T R I X - C O R P O R AT E PA N E L DISCUSSION The topic for discussion was “Prospects and challenges for investments in Indian capital markets under present global environment”. Experts from industry discussed about the topic and provided different views and perspectives regarding the same.

Day 3: 6th January, 2016 LOCK, STOCK and TRADE The ﬁnal round of LST was an open outcry trading competition, where top 8 teams from KJ SIMSR selected through online trading round competed to maximize their portfoilio value.

Day 4: 7th January, 2016 EQUITY RESEARCH COMPETITION The 8 teams that made their way to the ﬁnal round, through an overwhelming 270+ teams that marked round 1, presented their Financial models and valuations to an esteemed panel of Judges.

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FINSTREET 2015-16 E v e n t 6 : S I M S R I N T E R N AT I O N A L FINANCE CONFERENCE (SIFICO) Theme: Trends in Financial Markets and Services It covered various areas from valuations, stock market performance , agricultural credit, transfer pricing, self-help groups to sustainable growth in India. The best papers were awarded to Dr. Thomas B. Berger from Germany and Prof. P.S. Raghukumari and all the participants were awarded with a participation certiďŹ cate.

Event 8: PRAVARTANA- Structured Financial Product Designing Competition th Date: 12 February, 2016 As an integral part of Melange, Finstreet conducted Inter college Structured Financial Product Designing Competition, Pravartana. The teams were asked to develop a structured product which is pre-packaged investment strategy based on derivatives, indices, commodities, debt issuance, foreign currencies and swaps with a primary feature that they offer protection of principal if held till maturity. Mr. Jayan Velayudhan and Mr. Saurabh Jain judged this event for us.

Event 7: KNOWLDEGE SHARING SESSION Topic: Mutual Funds Presenter: Pranav Turakhia, Sania Motwani, Harshita Agarwal The idea was to present the crowd with a broad idea of the concept of Mutual Funds and the response received was extremely positive. 3 of the team members started the discussion by making a presentation which included many examples and practical real time demonstrations.

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ARTICLE OF THE MONTH DEMOGRAPHIC PROFILE OF INDIA – OPPORTUNITY OR THREAT change in some time. While the India is a country bustling with vaIbHav yadav ratio for India is expected to population with more humans IIM INdORE decrease, the ratio of other PgP MuMbaI per square feet than anywhere 20152017 countries is expected to rise else on this planet. These further. Around 64% of India's teeming millions require Food, Healthcare, Sanitation, Infrastructure and other population would be under 35 years of age by the basic civic amenities. If provided with the right year 2022. Thus, India would have a huge pool of skill set and the jobs to go with them along with human resources which can kick-start its journey these basic amenities, then this burgeoning to becoming a superpower. However in order to reap the demographic dividend, India would population would be a force to reckon with. But, what exactly is the demographic proﬁle of need to create both job opportunities and the requisite skills along with Education and India? India is following the demographic transition Healthcare facilities. pattern of all developing countries from initial levels of high birth rate-high death rate to the THE JOB AT HAND- CREATING JOBS current intermediate transition stage of high By 2022, around 100 million jobs need to be birth rate-low death rate which leads to high created. These jobs need to be focused mainly on rates of population growth, before graduating to the manufacturing sector as the elasticity of employment in the manufacturing industry is levels of low birth rate-low death rate. It is all set to become one of the world's youngest more than that in the services industry. By country by 2020 with an average age of 29 years, focusing on manufacturing, India can emerge as while the other parts of the world would be a global manufacturing giant owing to its policy reeling under the pressures of an aging of 'Act East' and 'Link West'. population with the average age of China, USA The level of skilled population in India is only around 2%. Hence India should focus on and Japan being 37, 45 and 47.5. industries such as hospitality and tourism industry which require lesser skills. Moreover POPULATION DEMOGRAPHICS Demographic dividend refers to a period – India should shift its focus from capital intensive usually 20 to 30 years – when fertility rates industries (such as gems and jewels industry and fall due to signiﬁcant reductions in child and engineering goods) to labor intensive industries such as leather, textiles and energy and infant mortality rates. The dependency ratio of India is around 0.53 as infrastructure because these industries can easily against .63for countries like Japan . That means absorb the excess labor force. in India for every 10 working adults, there are The growth in young population is mainly likely 5.3 people who need to be supported, be it to come from the poorest states of India. Hence through social security or childcare. Having a the demographic dividend can be fully reaped lower dependency ratio puts India in an only if India is able to create job opportunities for advantageous position and translates into more the population in these areas. Hence India should growth and less mouths to feed. Even though the invest in areas such as water harvesting and dependency ratio of countries like US is lesser irrigation, large scale regeneration of arable land, than India right now, the picture is all set to strong logistics and cold chain infrastructure and

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ARTICLE OF THE MONTH land and crop productivity. Investing in these industries will help find jobs for youth in the rural areas and also help India to become a strong global player in the field of agriculture. The government has initiated significant reforms in the field of creating job opportunities for the youth. 'Make in India' and 'Start up India' are some of the examples of such initiatives. Both have provided wings to entrepreneurship opportunities in India. However, there are some apprehensions regarding such initiatives. For instance, in the case of Startup India, the inter-ministerial board will decide which startup is to be chosen for the envisioned benefits .There is a school of thought that believes that this will lead to a regression to the era of “License Raj”. To remove such apprehensions, the criteria to choose a startup should be clearly stated and empirically demonstrable. The Government alone cannot cater to all job needs. The private players also need to contribute towards the same. This is where India Inc. needs to reinforce the government's agenda, which it has begun by acting as Training partners for NSDC and spurring investments. Continuation of such efforts with more intensity will ensure that every willing person gets a job commensurate to her/his skills in the not so distant future. SKILLING THE POPULACE Apart from job creation, another aspect that needs to be looked at is the skill level of the population. Currently only around 2% of India's working population is skilled compared to around 60-70% of the population in developed countries and around 90% in countries such as Japan. Skill development is an important foundation stone to bridge the gap between divisions such as rural/urban, traditional/temporary workforce etc. It will also help ensure a better life for around 90% of our population which is employed in the unorganized sector. On the global front, India can help fill the gap in skills expected to increase further by 2022. Many initiatives are being taken by the

Government in this regard. 'The National policy on Skill Development and Entrepreneurship 2015' which has been formed is a point in picture. As part of the policy, people will get degrees and diplomas for the skills that they possess. The skills gathered by them will also be bankable. The target of the policy is to make 500 million people skilled by the end of 2022. Also, the possibility of skill development training for students after school hours would be explored. Since the skills required keep changing in the job market the courses designed would be short, relevant and open to feedback. However, merely launching schemes is not enough, the key lies in the effectiveness and quality of their implementation. According to the Macquarie report, only 7% of India's population has had vocational education. Government has taken several initiatives to increase this number. For instance the number of private ITIs (Industrial Training Institutes) has been increased from 2,000 in 2003 to about 10,000 in 2013. However, concerns are being raised about the quality of the trainers in ITIs. In order to be truly effective, the training needs to be at par with the global standards. In order to recognize the skill levels, India can also introduce star ratings among skilled personnel. A higher star rating would mean possession of a higher level of skill set. The star ratings could also be revised once every five to ten years. This will help the people to work harder towards gathering skills. Mere skill generation however is not sufficient, they must also be employable. Despite having the world's second largest workforce, only 50% of India's graduates are employable. Also, only around 20% of the 11 million students graduating each year get jobs relevant to their skill set. In order to make the marriage of skilled employees and corporations successful, the quality of skill generation needs to be looked at carefully. The situation of in-firm training in India is also not very flattering. Only 16 per cent of the Indian firms carry out any in-firm training themselves, as

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ARTICLE OF THE MONTH against 80 per cent of Chinese firms. Also most of the micro, small and medium sized firms provide little/no training to their employees. In the young India of 2022, the level of training would have to be increased in order to truly harness the advantage of its youth. One step in this direction could be the collaboration of industry with colleges. The skills required by some of the major recruiters could be understood and incorporated in the college curriculum. EDUCATING THE MASSES According to 2011 Census, India's literacy rate is around 74% which is well below the world average literacy rate of 84%. Moreover there is a huge gender disparity in the literacy rate: effective literacy rates (age 7 and above) in 2011 were 82.14% for men and around 65.46% for women. Apart from the literacy levels, the quality of education in India is also a major concern. According to ASER 2014, in Std. III, only 25% children could read a Std. II text fluently and only 25.3% of Std. III children were able to perform a two digit subtraction correctly. Moreover, the dropout rates in India are alarmingly high. According to official surveys, around 52.28% boys and 53.45% girls drop out of school between class I-VIII. The condition of education at the higher education level is also not very promising. Their gross enrolments rate is below 20%, the overall quality of higher education systems is well below global standards and the graduates are usually not employable. One of the steps that can be taken to improve the education system is making the curriculum more dynamic. Also, people need to be given the option of doing multiple courses in the first year so that they can choose what to do in the second year. Moreover curriculum should be projects driven and not exams driven. TOWARDS A HEALTHY INDIA One more prerequisite for India to harness its

demographic dividend is a healthy population. According to the World Health Organization estimates, India is one of the highest ranked countries in terms of malnutrition. In terms of Human development Index too, India ranks an abysmal 135 out of 187 countries. Moreover, the state of health services in India is inadequate to meet the needs of the growing population .For instance, we have only around 0.7 surgeons per 1000 citizens for India, while this number is around 2.5 for most of the developed nations. Some steps that can be implemented by Government of India are buying drugs in bulk which will lower their cost. Moreover medical equipment ﬁrms can join hands with the government to provide IT-enabled point-of-care data management systems for immunization tracking and better disease prevention. Similar steps need to be followed to ensure a healthy India. D E M O G R A P H I C DIVIDEND/DEMOGRAPHIC CATASTROPHE The famed demographic dividend of India can also turn to be a demographic catastrophe if not handled properly. The dearth of jobs and the alarming inequality may tempt the disenchanted youth to resort to crime. This can be addressed by introducing the practice of Community Policing to make the common citizens the guardians of law. Another problem which can turn the youth bulge into youth bomb is terrorism. They may resort to joining both external and internal extremist organizations. Naxalism which is already giving the government sleepless nights might turn out to be an even bigger problem as most of the working population would be added in the rural areas. According to Macquarie's report most of the increase in income between 2015 and 2025 will belong to India's upper middle class and rich households. Hence with time the rich poor divide is only set to rise. This will increase the dissatisfaction levels in the society.

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ARTICLE OF THE MONTH The increase in working population will also put lot of pressure on the existing exhaustible resources by increasing the consumption of fossil fuels, degrading the already poor air quality and putting a pressure on India's water resources. In a nutshell India stands at a juncture where it can either turn its demographic proďŹ le into a dividend or a catastrophe. India with the power of its three Ds - democracy, demand and demographic dividend, and due to the aging population elsewhere in the world, can easily become the global manpower supplier and global consumer. India also has the potential to become the next global manufacturing hub. The ball is in India's court. Now all it needs to do is play it wisely.

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ECO SECTION BUBBLE TROUBLE: THE US HOUSING BUBBLE

Let us start by deﬁning by what actually a Housing PRaTIK bubble is? PgdM fs Well, a housing bubble is very much like any other bubble wherein the house prices begin to rise due to an increase in demand and limited supply. This further attracts the speculators resulting in heavy buying and selling to make quick proﬁts. After a point of time the demand decreases and this causes a sharp decline in housing prices resulting in the bubble burst.

Now where have we seen such a bubble burst? Yes, the US Sub-prime crisis which shook the world economy to its roots and people has still not fully recovered from it.

didn't have a developed TIROdKaR financial structure then. Thus (201517) these foreign savings started finding their way into the US market. The share of foreign savings to GDP in the US rose from 1.5% in 1995 to around 6% in 2006. These developing countries were looking for good returns with less risk hence; they started investing in the US government securities. In order to funnel these savings into the mortgage market new financial products were developed. SECURITISATION: MBS What is a MBS? Mortgage back security (MBS) is an outcome of Securitization. Securitization is the process through which an issuer creates a financial instrument by combining other financial assets and then markets the repackaged instruments to willing investors. To illustrate how a MBS works: -

What is a sub-prime lending? Basically Sub-prime loans means loans given to people with not so great credit score. They are turned away by the traditional lenders hence they are charged a higher interest rate as the risk of lending is greater as well. How did it really happen? Inﬂux of savings from developing economies In wake of the dot com bubble burst in the early 2K, the savings rate was kept low by the FED to boost the economy. But at the same time there was a glut of savings getting accumulated in the developing economies like China, Brazil and the oil producing countries and these countries

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ECO SECTION Freddie Mac and Fannie Mae were government backed firms which first started issuing Mortgage back securities on a large scale. Now these foreign investors didn't mind in investing in such MBS products because the understanding was that even in case of a meltdown the government would always bail out these 2 firms. After getting favourable returns from the government backed MBS the investors ventured into buying these securities issued by the Wall Street firms. The risk factor was still pretty much in control as these securities had received favourable ratings from very creditable rating agencies like Moody's and S & P . Something that backfired and snowballed into a huge factor post the sub-prime crisis and is a considered a very pivotal reason resulting in the crisis. These credit rating agencies post the crisis suffered from a total lack of confidence from the investors and public alike. All this aided in keeping the mortgage rates low and very affordable.

As you can see from the above graph the mortgage rates dipped to an all-time low during the period from 2003-2006. The low mortgage interest rates contributed in the housing bubble by keeping the monthly mortgage payments affordable to the buyer even as house prices rose. Credit Default Swaps (CDS) A credit default swap (CDS) is a ﬁnancial swap agreement that the seller of the CDS will compensate the buyer (usually the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event. It is a derivative instrument. The economic function of derivative

securities is to transfer risk from those who do not want to bear it to those who are willing to bear it for a fee. This was the main reason why the market for CDS grew astronomically during the years from 2004-2007 to around $50 Trillion. The buyers bought the CDS not to insure their assets, but to speculate on whether the buyer will default. If the borrower defaulted the buyer of the CDS would profit. There was a lack of transparency in the CDS transactions as most were done OTC. There was no regulatory authority devised to look at CDS. Thus when the default of mortgages started to increase the CDS started to trigger. Banks like Lehmann, AIG were caught in a soup as they were the major issuers of CDS worth hundreds of billions of dollars and had they had bet wrong. So they were liable to honour their CDS agreement. This was one of the major reason for the fall of Lehman Brothers, AIG(were bailed out). Adjusted Rate Mortgages As mentioned earlier the FED had cut the interest rates to 1.75 % to provide an economic boost. This also meant that loans were available at a very less interest rate. As a result, because of the affordability of the monthly payments people started buying houses which were actually out of their financial scope. They were playing a game of high leverage. In order to have a further share of the pie financial instruments like Adjustable rate mortgages (ARM) were developed. ARM basically meant that the buyer had an option to pay a lesser interest initially and then increase the interest rate gradually typically after 2 years. Other options provided were they could only pay the principal amount initially without touching the accumulating interest or vice versa. All these gave further rise to house prices and it was gross failure on the part of the authorities who couldn't regulate such financial products. Thus the price of the houses was increasing faster than the income of the household. Once the FED started increasing the rates again it all started falling apart. The people could no longer afford to pay their monthly

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ECO SECTION payments and started defaulting. As a result of this and lack of demand for new homes the housing prices started to decline sharply. The price of the properties foreclosed by banks fell below the initial price for which the mortgage was issued. Thus came the process of due diligence while giving loans under the spotlight.

Failure of Due diligence There was no doubt that the standards for giving mortgages were relaxed over a period of time. Previously the banks demanded at least 20% of the mortgage amount as down payment or at least mortgage insurance. Also a thorough check on if the income of the applicant was substantial enough to pay the mortgage was done. But the government introduced a policy which made it mandatory for banks to give a percentage of their mortgage loans to lower income groups. Thus the standard of due diligence made before granting a loan dropped as they had to meet the number speciﬁed by the government. As discussed earlier securitisation of mortgages in the form of MBS were a major source of funding for the mortgage market. What Freddie mac and Fannie may use to do is purchase the mortgages from the banks in bulk convert them into tranches and then sell it to the willing investors. The investor use to receive the interest and principal payments directly from the person paying the mortgage. Freddie Mac and Fannie May had certain standards when buying loans and only bought them if they met their standards. But it was made compulsory for them to have mortgages to low income group as a part

of their portfolio. These mortgages never met the standard prescribed. Then came the internet and inﬂux of mortgage givers at favourable interest rates which meant more competition and further lax of requirements for issuing a loan. Also the CRA gave “AAA” ratings to the tranches as a whole so if the tranche contained couple of subprime loans they got covered because such previous tranches were highly rated. Thus it came to be known as subprime crisis because subprime loans are those which are given to people with greater credit risk and this basically brought about the housing crisis.

Above are some of the graphs showing the sharp decline in the housing prices once the housing bubble burst and the share of subprime mortgages as % of total mortgage market which grew very rapidly from 2003-2006.

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ECO SECTION How did they all tumble?

backﬁred as they reported a loss in the quarter ending June 2008. The sheer volume of Mortgage securities in their portfolio made them ever so vulnerable post the takeover of Bear Stearns. The period from July to September went in discussions about take overs and bail outs but nothing materialised. They ﬁled for Bankruptcy th on 15 September 2008 leading to a 92% fall in its stock. WHAT DID WE LEARN FROM THE HOUSING CRISIS?

Most of the big banks in America took a tumble during the crisis. There was helter skelter bail out packages being drawn to keep the banking and finance institutions afloat. Bear Sterns, one of the biggest underwriters for mortgage securities was bailed out by JP Morgan when they were given $27 Million loan by the government. Fannie May and Freddie Mac were given a cash credit of $100 Million each to keep them afloat. Biggest of all was the American Insurance Group (AIG) one of the biggest insurance companies in the world was given a loan of $85 billion by the Federal government. The government took a 79.99% stake in the company and it was the 1st time that the government had taken control of a private firm. But nothing quite surpasses the humungous fall of the Lehmann Brothers, the one that got away. The 4th largest bank as per market cap with 25000 th employees worldwide filed for bankruptcy on 15 September 2008. They went with the market flow and bought 4 mortgage lenders which specialized in Alt-A loans. Meaning loans without full paperwork. Initially as the realty market rose the profits and the share price of Lehmann rose as well at a record rate. But they made the mistake of dipping their fingers too deep into the mud. As st during the 1 quarter of 2007 the realty rates started to crumble so did the stock price of Lehmann brothers. They shut down some of their mortgage lending units to cut losses. But Lehmann brothers still underwrote more mortgage back securities in 2007 cumulating to $85 billion off their portfolio. This move

Speculation, no thanks!! : - Well, the one major learning from the housing crisis is to not just believe or buy into the speculation of market without reasoning. Before the crash of the realty sector housing prices had never gone down. It was presumed that investing in the realty market would certainly give returns. This proved to be a big factor in the building up of the Housing bubble as the properties became grossly overvalued and insisted of actually ﬁnding out the rationale behind it most investors just went with the ﬂow and the eventually the bubble popped!! They aren't smarter than you : - One thing that the Subprime crisis proved is that the people in charge are not that much smarter than you. Post the crisis the onus, criticism and pressure on the Investment bankers of the Wall Street was huge as they were being equally held responsible for their part in the crisis. No one had actually predicted or warned about the possibility of the recession. On the contrary Wall Street till 2005 was bullish on the housing stocks. It is better not to be over reliant on analysts and imperative to do your own very research about any investment. Because the Bankers live in a herd and as they saying goes on Wall Street “it is better on Wall Street to fail conventionally than to be right unconventionally.” Due diligence : - Pre 2006 period the banks were trigger happy when it came to giving mortgages. Because of the MBS instrument they could get those loans of their balance sheets. People who

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ECO SECTION couldn't afford to pay the monthly instalments were also given mortgages. This was a major failure on the part of the due diligence of the banks. The crisis could have been averted by simply following the regulated standards and checks while giving mortgages. Thus post the 2006 period there was a lot of stress given to the KYC. Strict procedures were to be followed while giving loans. Keep it simple: - Many a times knowledge makes us overlook the most obvious of approaches just because it may seem simple and not ﬁt in our complex calculations. The people who invested in the simple stocks like MacDonald's, Coke, Johnsons and Johnsons made a fortune even during the crisis. And the king of simple investments invariably was Warren Buffet who enhanced his reputation on the Wall Street by coming out a winner. Also one important lesson learnt was the need to diversify. As they say “Never put all your eggs in one basket”.

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FACULTY SECTION STEWARDSHIP OF FM: BUDGET 2016-17

Increased allocations to With many of expectations from infrastructure and rural, along all stakeholders some of which PROf. (dR.) sNv with pay commission award is are contradicting others and in sIva KuMaR expected to lift rural demand the backdrop of challenging and act as a catalyst to slowing contemporary global economic economic growth. Creation of and political environment, the Central depository for Government of India tried its certificates /documents, Jan best to perform a balancing act Dhan, DBT, social security via between industry and insurance and pension plans agricultural sectors reforms. It are all designed to improve tried to shift focus to internal services sector growth and needs of rural economy and digital India campaign to long-pending infrastructural unfold and tKe India into the reforms to boost internal next level. demand and address problem of creating skilled jobs to youth who voted in favour of the NDA government SECTORAL IMPACTS: Agriculture: irrigation allocation tripled, with an overwhelming majority. common e-market to over 585 APMC across Despite the global geopolitical risks and India, and farm income expected to increase due financial market turbulences impacting Indian to introduction of various schemes. corporate and public sector players, government through this budget reflected its sincere efforts Auto Sector: pro rural measures will have to boost growth and keep inflation on desired positive impact on farm incomes. Capex allocations will create additional rural jobs. trajectory. Deduction of R&D expenditure reduced Key expectations from this budget are five-fold affecting auto makers Tata Motors and Mahindra -Fiscal stance, revenue mobilization, revival of negatively. growth, expenditure and carrying forward the reforms. These have been proposed to be BFSI: recapitalization and proposed PSU banks addressed with increased capital spending on consolidation and privatization, tax exemptions roads, railways and mass housing, flagship for affordable housing,49 percent FDI in schemes were allocated with resources, and insurance and pension sector via automatic and some key bills introduction to address banking divestment and listing of general insurance . NPA problems, GST and improve ease of doing business by simplifying processes and a big Cement: boost in demand from infra allocations. Passing of the Real Estate push to Make in India concept. (Regulation and Development) Bill by Rajya The key to success in achieving the goals Sabha and the Lok Sabha in the same order in depend on successful implementation of March 2016, merely within weeks after the schemes to have real impact on beneficiaries. Finance Bill was introduced by the FM is

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FACULTY SECTION expected to bring a greater boost to urban housing by protecting the buyer with timely delivery of the flats by the builders. While criticism has already started from select builders and developers across prominent cities of India that there is over dose of regulation and little on development role, it is too premature to draw any inferences before the President of India gives his nod and it the provisions of the Act get notified. Capital: capex increased allocations to roads and railways by almost 25%, metro rail projects, accelerated depreciation for wind projects. LT, ABB, Siemens and some EPC companies stand to benefit.

prudence so far, and not adopting the populism. One may safely state that the ﬁscal and ﬁnancial discipline consistent with the IMF views are adhered to by the Government of India with an expenditure in nominal terms of close to Rs. 20 lakh crores (Rs 19,78,060 crore), which works out to be over 11.28% higher than the preceding year's expenditure (BE) of Rs. 17,77,477 crore. (Author wishes to acknowledge the valuable inputs from Prof. Dr. Asha Prasuna, disclaimer applies).

FMCG: excise duty negative impact on ITC while increased rural schemes allocation to push up rural demand. Infrastructure: measures to revitalize PPP and increased funds and affordable housing smart cities expect to revive infra sector growth. Besides the expectations from and likely impact of the Budget on select sectors as mentioned above, one interesting fact is the that all deficit parameters have shown remarkable improvement between 2014-15 (actual) and 2015-16 (RE) and further for 2016-17 (BE). As per the International Monetary Fund (IMF), budget planning and preparation are (or should be) at the heart of good public expenditure management. To be fully effective, public expenditure management systems require four forms of fiscal and financial discipline: 1. control of aggregate expenditure to ensure affordability; that is, consistency with the macroeconomic constraints; 2. effective means for achieving a resource allocation that reflects expenditure policy priorities; 3. efficient delivery of public services (productive efficiency); and 4. minimization of the financial costs of budgetary management (i.e., efficient budget execution and cash and debt management practices). (Source: IMF: Guidelines for Public Expenditure Management (Section 3)) To sum up, the recently formed government has been following the right fiscal principles and

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ALUMNI SECTION MARKET RISK: MY EXPERIENCE AT FIS – SUNGARD APT risk models are built Hola SIMSRites..! Hope you all are doing well. First of all, abHIjIT dEsHPaNdE based on the insights of arbitrage pricing theory. We, in heartiest Congratulations to PgdM – fINaNcE APT, are well versed with Finly for such a great initiative (201315) statistical risk model building and thanks to my alumni friends MaRKET RIsK process and based on cONsuLTaNT, for sharing their wonderful corporate experiences. It suNgaRd fINaNcIaL financially engineered data, sysTEMs generate the risk profile of the certainly helps everyone keep multi-asset class portfolios the track of industry dynamics (across the major asset classes and next generation corporate of vanilla and derivatives leaders to decide the instruments). The job profile appropriate career route. revolves around the three Through this article, I am going pillars of Risk Management to share my views and viz. Risk Measurement, Risk experience in the field of Market Attribution and Scenario Risk Management. I am currently working as Market Risk Analysis. Consultant with SunGard Financial Systems Risk Measurement: Based on the risk models (recently acquired by Fidelity National developed, understand the methodology used in the calculations of risk analytics like volatility, Information Services) in Asset Management division. SunGard is the world's leading VaR, tracking error, TaR and many more. software solution provider in Financial Services Understand the simulation technique like Monte Carlo which is used by almost every client in the industry. In here, I am a part of Client Services t e a m f o r A P T ( A d v a n c e d P o r t f o l i o finance industry. Explain these methodologies, Technologies) product family (Advanced their significance, tools to derive those to the Portfolio Technologies was an independent clients for their portfolios. This pillar needs one London based entity, founded in 1985, acquired to be well equipped with the core of risk by SunGard in 2008). APT solutions provide measurement (and valuation) theory. integrated risk management and timely risk Risk Attribution: It deals with the aspect – reporting for the businesses to take necessary “from where the risk of the client's portfolio is stance. The team focuses on providing world arising from”. It needs one to identify the risk class consulting services to financial giant like exposure and systematic drifts in the client's Institutional Investors – Asset Management portfolios; spot the diversification and hedging firms, Investments Banks, Hedge Funds etc. in opportunities. One should be well-versed with Market Risk domain. Needless to say, Market risk attribution techniques in APT (based on the risk arises from fluctuations in various macro- assets classes involved in the portfolio), economic factors like world equities, fixed understand the Mathematics and operations income instruments, their indexes, oil and other involved in deriving the risk exposure from APT commodities etc. which causes the clients' tools. Also, conduct the risk budgeting exercise (investor) portfolio value to fluctuate as they and consult on the same to the client. have exposures in these factors.

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ALUMNI SECTION Scenario Analysis: It deals with analyzing the impact of stressed scenarios (like 1997 Asian Crisis, 2008 Mortgage Crisis, 2012 Sovereign Debt Crisis etc.) on the client's portfolio. It gives an idea to the client on the line of – if the similar event occurs again, how it will impact their portfolios in terms of value and fluctuation levels. One need to also assist the clients to develop userdefine scenario and apply the shock levels to the factors. Apart from these, a decisive service is provided – Portfolio Optimization. It deals with gathering the requirements from the client and based on those, optimize the portfolio risk–return trade-off by efficiently allocation the fund among chosen assets. This needs one to have a deeper understanding of linear and quadratic problem solving techniques (you all must have come across this in Data Modeling while dealing with simple excel Solver add-in) and heuristics. I hope this would have at least provided you the ABC of the highly complex (and rapidly growing too) market risk management industry. By this time, I assume most of you certainly have cracked the job interviews and have bagged handsome opportunities. So I need not bore you with a piece of advice in this area. However there are quite a few things I realized later after I started to dig further down into the nitty-gritty. So I don't want you all to replicate the same mistakes. It has been observed that almost 80% of the batch is of engineers and among those almost 80% had prior IT background. In fact MBA is one of the escape routes for them to get rid of that IT job. You gotta take it with a pinch of salt..! Current job market scenario needs you to have a prior technology exposure in any of the programming languages / tools. Someone with in-depth techno-functional knowledge is very difficult to get from the job pool available. Engineers having prior knowledge do not want to touch it as that was one of the reasons for getting admitted in to MBA program while others with non-engineering background think that it's not their cup of tea so prefer to stay away. Big reason to worry..! You should be proficient in

at least one of the programming languages – C, C++, Python, VB, MATLAB, R etc. This will certainly give you an edge if you want to get into the profiles like risk modeling, valuation (pricing), quant analyst (one of the hottest and not easy to get into currently). Have an in-depth knowledge of the subjects like security analysis and portfolio management, derivatives and risk management if you want to pursue career in the field of asset management. Higher secondary and (any) bachelor's degree Maths which almost everyone might have ignored, plays a crucial role in the background of this . Please do not consider your prior experience as an obstacle while deciding what you want to pursue in the future. Leverage on that instead. Last but not the least – start preparing for the certifications like CFA, FRM as early as possible. It certainly pays-off..! I am grateful to all of you – my friends, the hostel life, the classrooms for developing my brain and making me able to dive into and swim across the corporate ocean. I would like to express my gratitude for the institute for providing me wonderful two years, endless gyan and an effective launch pad for the career. Sincere thanks to Prof. C. P. Joshi Sir, Dr. Pankaj Trivedi Sir and all the faculty members (I really mean it) for their constant support, encouragement and for building in me the firm root of Knowledge. Thanks to Prof. Vineet Swaroop Sir for inculcating a bug of THINKING..! I convey by best wishes to all of you for the future endeavors. Enjoy your priceless time at SIMSR and cherish these memories. Perform well in your chosen career path and make the institute feel proud. Please do remember that it our onus to make SIMSR achieve her goal of being among the most respected B-schools across the globe. And should you want to know (absolutely) anything else please feel free to reach out to me via any medium phone (+91-8097274954), e-mail (deshpande.abhijit26@gmail.com), social networks (Facebook, LinkedIn).

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NEWS BUZZ FIIS MAKE $2.2BN NET INVESTMENT IN MARCH After pulling out funds from the Indian markets for four consecutive months, Foreign Institutional Investors (FIIs) are back with a bang. FIIs have made net investments of about Rs 14,534 crore $2.2 billion so far in March (till 22nd), data with share depository NSDL showed. They bought more shares than what they sold in value terms in all but whole trading sessions during the month. Incidentally, FIIs net sold shares to the tune of around Rs 26,538 crore ($4 billion) between November and February. Despite the strong showing in March, FIIs remain sellers on a net basis in 2016.Their net sales in the equity markets stand at Rs 2,113 crore so far in the current year.

DRAGHI EXPANDS ECB STIMULUS WITH MORE QE AND LOWER RATES Mario Draghi delivered interest-rate cuts, more bond purchases and a potential subsidy to lenders in a renewed attack against the threat of deflation, before whipsawing the euro by saying the European Central Bank is done with lowering borrowing costs for now. The 25-member Governing Council, which met in Frankfurt on March 10th reduced the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases under QE.

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NEWS BUZZ SBI RAISES RS 3,000 CRORE THROUGH PRIVATE PLACEMENT The country's largest lender, SBI, raised Rs 3,000 crore on a private placement basis. The bank issued 30,000 Basel-III compliant, tier-ll bonds in the nature of debentures in a BSE filing. The debentures have a face value of Rs 10 lakh each at par, with a 10-year tenure, bearing 8.45 per cent per annum coupon payable annually and with a call option after 5 years. The fund raised is part of SBI's Rs 12,000 crore debt capital.

DRAGHI EXPANDS ECB STIMULUS WITH MORE QE AND LOWER RATES Reserve Bank of India made life a bit easier for banks by softening rules on liquidity measurement and risk management. Now, banks do not need to consider retail deposits with maturity beyond a month for liquidity coverage ratio (LCR) calculation, giving more flexibility in their daily operations. The banking regulator has also excluded pledged deposits with over 30 days residual maturity from the calculation. In line with global standards to improve health of banks following the 2008 crisis, RBI prescribed LCR and Liquidity Risk Monitoring Tools for eliminating potential liquidity disruptions to survive acute stress scenario.

CAD SHRINKS TO 1.3% The country's current account deficit (CAD) narrowed to $7.1 billion, or 1.3 per cent of GDP, during the third quarter of 2015-16 mainly because of a lower trade deficit, the RBI said today. The RBI said the contraction in CAD was primarily on account of a lower trade deficit ($34 billion) than in the third quarter of last year ($38.6 billion) and $37.4 billion in the preceding quarter. India has benefited significantly from the lower crude oil prices. The country imports close to 80 per cent of its crude oil requirements.

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TRIVIA Zimbabwe has experienced the worst inﬂation in the world - 6.5 percent sextillion in November 2008

2008 was Berkshire's worst year in the 44 years that Buffett's been its Chairman. Net worth fell by $11.5 billion that year, a decline that reduced per-share book value by -9.6%. The only other year that saw a decline was 2001, when Berkshire's net worth fell by 6.2%.

In the ﬁnancial world, there are Zombies, also called "living dead", which are companies that continue to operate even though they are bankrupt.

"Blue Chips" is a term borrowed from poker, where the blue chips are the most valuable, and refers to the stocks of the largest, most consistently proﬁtable corporations.

The note with the highest value printed by Reserve Bank of India was the Rs.10,000 note in 1938.

Including dividends, the S&P 500 gained 135% from March 2009 through January 2013, during what people remember as the "Great Recession." It gained the exact same amount from 1996 to 2000, during what people remember as the "greatest bull market in history."

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MARCH 2016

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

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