Finly November 2016 by FINLY

From the Editor’s Desk

FINLY| November 2016 | Finstreet | SIMSR

Dear Readers, This month we witnessed the demonetization drive by Prime Minister Narendra Modi to curb black money by banning Rs. 500 and 1000 notes. In this single move, the Government has attempted to tackle all the three issues affecting the economy i.e. a parallel economy, counterfeit currency in circulation and terror financing. Also, Donald Trump has stunned the entire world with a crushing victory in the US Presidential election. The political expectations raised by Trump's election is huge and there is substantial pressure on him to deliver meaningful change in the future for the global economy. In this edition, Our Cover Story on Basel Accords : A future to a resilient banking system presents the basel norms, challenges in implementing FRTB and it's impact on Indian Banks. Next in line is our economics section which covers Prime Minister's bold move related to demonetization and it's impact on the Indian economy. The writers have focused on the impact on various sectors and the stock market. In the section “Sector Analysis” the writers have analysed the increase in market capital of individual sectors and the reason for the better performance of the sector that generated best returns in the last one month. The faculty section discusses about demonetization and how it would impact the people. The alumni section focuses on the experience at L & T financial services and how SIMSR helped our alumnus to hone his skills and bag this coveted job. Lastly, I would like to express my deepest gratitude to our Faculty in Charge Prof. (Dr.) Pankaj Trivedi for always guiding and mentoring the FINLY team. I would like to thank our sponsors Finacue Research and Education for their tremendous support. Also, I would like to acknowledge all our readers, faculty members, finstreet team members, our sponsors and seniors for their encouragement and continued support. It gives me immense pleasure to announce Rishabh Gupta & Shreyas Kulkarni from KJ SIMSR, Mumbai as the winners and Isha Varma from TAPMI as the runner up. Congratulations and wish you all the best !!

-Shreya Gupta PGDM-FS 2015-17 KJ SIMSR

Team FINLY

FINLY| November 2016 | Finstreet | SIMSR

Table of Contents

FINLY| November 2016 | Finstreet | SIMSR

Cover Story

The 2008 financial crisis –A tsunami which shocked the whole world and left behind the great depression. One of the interesting comments on the Lehman brothers after the 2008 financial crisis was “Whatever was on the left-hand side (liabilities) was not right and whatever was on the right-hand side (assets) was not left”.Few questions that may come to our minds when we think of this crisis are: Were there any regulations already present to prevent this crisis? YES, there were regulations namely BASEL accords. The answer leads to the next question,“Why couldn't BASEL accords prevent this crisis?” To find that answer we have to dig a bit deeper into BASEL accords. Basel Accords or Basel Norms of Banking which are set by the Basel committee, are recommendations for banking laws and regulations. These norms were articulated to create a more resilient and stable banking

system in the world which is competent enough to withstand financial crisis. What is BASEL committee? BASEL committee on banking supervision was established in 1975 by central bank governors of the group ten countries. It was formed to improve banking supervision and risk regulation. The committee frames guidelines and standards in many areas such as capital adequacy, risk regulation etc. which are known as BASEL accords. Till now they have come up with four accords namely BASEL I, II, III and FRTB which we will look into as we move further. It is not a classical multilateral organization as it does not have any founding treaty. Hence, BASEL committee cannot enforce these regulations. National regulators of respective countries have to put in force these guidelines. Before starting a discussion on BASEL accords we would like to discuss a few commonly used terminologies namely:

Cover Story

FINLY| November 2016 | Finstreet | SIMSR

Tier-I Capital: Tier 1 capital consists of Shareholder's equity and retained earnings which again are a part of Core capital. It measures a bank's financial health. For example, bank ABC has $600,000 in equity and retained earnings and has $10 million in risk-weighted assets. Its tier 1 capital ratio is 6% ($600000/$10 million), which meets the minimum Basel III requirement of 3%. Tier-II Capital: Tier 2 capital is any bank's supplementary capital. It includes the increased value of an asset after it is revalued, money which is lost and which cannot be calculated, undisclosed reserves and hybrid instruments (debts and equity). It is not as reliable as Tier 1. For example, a bank has tier 2 capital of $100,000 and risk-weighted assets of $10 million. Therefore, the tier 2 capital ratio is 1% ($100000/$10 million). Thus, the total capital ratio is 7% (6%+1%). Under Basel III, the bank would not meet the minimum total capital ratio of 8%. Counter Cyclical Buffer: This is a way to prevent banks from the potential losses that might be caused due to cyclical systemic risks increasing in the economy. Under this, banks add additional capital when the credit is shooting up so that the buffer can be reduced when the economic cycle turns. The money that the bank buffered during the growth phase of the financial cycle can be used in the phase of stress thus helping the bank to cover its losses.

Banking Book: A company's register that shows withdrawals and deposits made by the company. This register can be crosschecked with the bank statement. Trading Book: A company's register that shows the stock market shares sold and purchased by the company. Systemically Important Banks: These are the banks which if went insolvent could trigger a financial crisis in the economy. They are considered as â&#x20AC;&#x153;Too big to failâ&#x20AC;?. To name a few, we have Barclays, HSBC, Llyod, J P Morgan Chase amongst others. Under the BASEL scheme, a bank's capital comprises Tier 1 and Tier 2 capital. Sum total of these two capitals helps determine a bank's capital. BASEL-I The Basel committee came out with the first set of guidelines in 1988 called as BASEL-I. The BASEL I took into account the credit risk. As per these guidelines: 1) Banks which operate internationally should maintain a capital ratio of 8% based on the risk-weighted assets 2) Bank assets can be classified into five risk categories such as 0%, 10%, 20%, 50%, and 100% where 0% shows no risk debtors such as government bonds etc. and 100% shows very high risk debtor such as unsecured loans etc. It can be summarised as given in the table below:

Cover Story

FINLY| November 2016 | Finstreet | SIMSR

ŸThe credit risk: -The risk of losses that

result from credit defaults.

1)Differentiate assets between trading book and banking book There were certain limitations of BASEL-I like: ŸCredit risk had limited differentiation ŸDefault risk was statically measured ŸTerm-structure of credit risk was not recognised ŸEffects of Portfolio diversification were not recognised ŸBalance sheets falsification was not taken care of So, there was a need to improvise on BASEL-I and to come up with newer norms. On account of same, BASEL- II was introduced. Its objective was to maintain consistent regulations, better resource allocation and superior risk evaluation. BASEL-II The Basel committee focused on a second set of guidelines for improving risk assessment in 2004 called as BASEL-II. BASEL-II had three major pillars: ŸMinimum capital ŸSupervisory review ŸMarket discipline The BASEL-II emphasised on three types of risk: ŸThe market risk: - The risk of losses that result from market fluctuations. ŸThe operational risk: -The risk of losses that result from insufficient or failed internal procedures, people & system, or external events.

As per these guidelines: ŸCapital ratio was set at 4% ŸBanks should have a process for assessing and maintaining their capital adequacy ratio ŸNo additional capital conservation buffer ŸNo counter cyclical capital buffer ·No capital for systemically important banks With growing complexity in the capital market, there was a need for more sophisticated norms which lead to the inception of BASEL-III. Following were the major concerns with BASEL-II: ŸMore emphasis was given on external rating agencies which benefited Europe from its presence much later than the US ŸImpractical value at risk models which led to underestimation of capital requirements ŸLiquidity risk was not adequately taken into account BASEL III The 2008 financial crisis also exposed various loopholes in the previous accords which lead to the evolution of BASEL-III. Basel-III is a set of reforms aimed at regulation, supervision and risk management within the banking sector. It came out in late 2009 .The guidelines focused on four vital banking parameters - capital adequacy, leverage ratio, funding and investing to have a more resilient banking system.

Cover Story

FINLY| November 2016 | Finstreet | SIMSR

Major emphasis was on capital adequacy. It was developed to address the deficiencies of the existing financial regulations worldwide, exposed by the 2008 financial crisis. As per Basel III guidelines: ŸSystemically important banks should have loss absorbing capacity beyond the preceding standards. ŸBanks should hold additional conservation buffer of 2.5% in core tier-I equity to handle any stress situation. ŸBanks whose capital fall below the buffer zone will be restricted from paying dividends. ŸIn addition to the tier 1 capital ratio and conservation buffer, banks should also hold a counter cyclical buffer of 02.5% of core tier1 capital during the period of high credit growth. This measure was taken considering the fact that most of the bank crisis occurred during high credit growth. ŸNon risk based leverage ratio (is calculated by dividing tier-I capital by the bank's average total consolidated

FINLY| August 2016 | Finstreet | SIMSR

assets) of minimum 3% was introduced. ŸTwo required liquidity ratios are : Ø Liquidity coverage ratio:-Banks should have adequate liquid assets to cover total net cash flows over 30 days Ø Net stable funding ratio:-Banks should maintain sufficient long term, stable sources of funding to cover their long term assets In a nutshell, BASEL-I helped us mitigate the capital risk which did not suffice. The system needs to deal with credit, operational & market risk. Hence, BASEL-II was brought in which helped us deal with the aforementioned crisis but it had some loopholes. In the meanwhile, the world witnessed a financial crisis in 2008 which proved to be a significant lesson for the world economy. The world took the leaning of the crisis, evolved and BASEL III norms were established so that we might not end up committing the same mistakes. Finally we can summarise BASEL-I, II and III as below:

Cover Story

FINLY| November 2016 | Finstreet | SIMSR

Fundamental review of the trading book: BASEL-III was implemented to strengthen Market Risk capital base. The FRTB is put forward to be the solution to Market Risk by addressing the persisting issues and allowing regulatory authorities to better compare institutions. People have already started calling FRTB as BASEL-IV. It is expected to be adopted by January 2019. To alert the management of risk and capital within the financial firm's trading book, it applies more regress qualification for both trading and banking books. Proposed regulations will require significant changes in order to comply. The key components in the makeup of the FRTB are: ŸDefined boundary between trading book and banking book ŸEmphasis on the standardize model approach: - It is made compulsory to use standardize method for sensitivity computation, risk aggregation in FRTB ŸMarket Liquidity risk: - Liquidity horizon is 10 days in BASEL-III for everything but in FRTB liquidity horizon varies depending on the risk factor ŸRevised internal model based approach Impact on investment banks: Investment banks have to adapt themselves in order to comply with FRTB regulations. In the following areas it would be a big challenge for the banks to implement these regulations when the world economy is going through turbulent times:

ŸMeeting the stringent capital

requirements ŸDefining the boundary between the banking book and the trading book ŸSwitching to the standardised models approach from internal model approach smoothly ŸD e v e l o p i n g t e c h n o l o g i c a l infrastructure to calculate risk capital ŸOperating banks which have global presence in multiple jurisdictions under various national regulators Challenges in implementing FRTB: There will be challenges in implementing the FRTB such as: ŸStrict capital requirements ŸThe standardised approach is not risk sensitive enough to constitute a credible alternative to the internal models introduced by the banks themselves ŸSlowdown in the world economic growth Status of Indian Banks on BASEL III: The capital requirement under BASEL-III is likely to put nearly half of Indian banks atrisk of breaching capital trigger. As per a Fitch report, out of 27 Indian banks, the capital adequacy ratio for 11 banks was lower than the minimum of 11.5% required by March-2019. India is 3rd from bottom among the major emerging market economies which is not a good position to be mentioned. State run bank are more at risk due to poor capital buffers and less chances of raising capital through the market.Out of 11,6 did not have enough capital to meet the CAR minimum of 10.25% by March 2017.

Cover Story

FINLY| November 2016 | Finstreet | SIMSR

Tier 1 capital ratio for Indian banks is 10.08% currently (As per IMF latest global financial stability report).In order to increase this ratio, large state owned lenders like SBI, IDBI and Union Bank of India have recently announced additional tier-I fund raising worth Rs.2100cr, Rs.1500cr and Rs.1000cr respectively. SBI is also planning to hit the market to raise ~$1billion in at least two tranches. Indian banks will need $90 billion in new capital by 2019 to meet BASEL-III norms, with the state banks accounting for nearly 80% of the total. The government is infusing $10.4 billion capital into the state banks through fiscal 2019.This will not be sufficient as banks have large pile of non-performing assets in its balance sheets. Banks have to go a long way to meet these capital requirements. As per RBI projections, the gross nonperforming assets of banking sectormay touch 8.5% by March 2017.It will further demonise the problem.It would be a difficult task for Indian banks to implement BASEL III specially for PSU banks which are in great distress due to rising NPA and low credit growth. In turn, it may also act as a hindrance to growth for a capital starved country like India. As per a recent report,

As private investment is not picking up, government has to boost the public

investment through PSU banks to achieve its aspiration of double digit GDP growth rate. If BASEL III is enforced then it would further deteriorate PSU banks' health. Banks have to walk on the tight rope to achieve both the targets. We learn from mistakes; fair enough; but fair only if we are committed towards not repeating the same in the future. Earnings from the 2008 financial crisis lead to the evolution of BASEL-III accords which should drive us towards a resilient banking system. But, the current scenario of the German Multinational Bank, Deutsche indicates something else. The Bank has $1.8 trillion valued assets with shareholder equity of just $66.5 billion. The span of this bank is almost 3 times to that of the Lehman Brothers. If the bank goes insolvent, the impact on the world economy will be humungous. Inspite of having such effective norms in the form of BASEL accords, why are we at the verge of repeating the dark history? This raises a question whether we learned anything from the 2008 financial crisis. We t h i n k e i t h e r w e fa i l e d i n implementing BASEL regulations effectively OR we became so obsessed with the economic growth that we have ignored financial stability.I will leave this decision to our readers.

Article of the Month - Winner

Introduction India's financial services sector is one of the biggest in the world. Earlier Banks were solely responsible for managing and securing the wealth of the common man. The banking industry whether public banks or private banks, was the most trusted business entity where people used to deposit their money for safety. However in today's world there is another institution which has gradually made its presence felt in this field - Non Banking Financial Company (NBFC). An NBFC offers a wide array of financial services and focus on businesses related to loans and advances,

acquisition of shares, stock, bonds, debentures, leasing, hire-purchase, insurance businesses, and chit businesses. NBFCs are often small players that largely go unnoticed. However, they are still important to the economy, especially in a developing a country like India where 70% of the population lives in rural areas. NBFCs role and how are they different from banks: NBFCs play an important role in promoting inclusive growth in the country by catering to the diverse financial needs of the bank excluded customers.

Article of the Month - Winner

They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector by delivering credit as well as providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs). NBFCs have a striking similarity with the banks in terms of the services offered. However, there is a major difference between the roles, responsibilities and functions between banks and NBFCs. Some of the differences can be pointed out as below: ŸAn NBFC cannot accept demand

deposits. For example, if we deposit Rs.5000 today in an NBFC and tomorrow we need the money back, the NBFC can refuse to give, since the money deposited has to be kept for a certain period of time i.e. minimum 12 months. Also it cannot issue cheques to its customers. ŸDeposit insurance facilities are also not

available for NBFC depositors unlike in case of banks. For example - The money deposited in NBFCs is not insured. If NBFCs go void, whatever money is deposited cannot be claimed. Now the question is “why do we deposit?” The prime reason is they give us higher rate of interest than the banks (10-11%).

Size and Growth of NBFCs The NBFC sector has grown considerably in the last few years despite the slowdown in the economy. As of March 2013, it accounted for 12.5% of the country's Gross Domestic Product (GDP). This is up from 8.4% in March 2006. However, this counts only NBFCs with assets more than Rs 100 crores. The Figure.1 data clearly shows the sector had grown at a considerable pace from 2006 to 2013.Even at the time of recession this sector grew. So thinking optimistically NBFCs will grow further in the coming future. Reasons favouring NBFCs Growth NBFCs have been changing the scenario of sectors such as micro financing, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance. Financial inclusion by NBFCs in these sectors has been quite successful and has resulted in substantial increase in the size of the industry. NBFCs are increasingly filling the gaps left by banks in rural/semirural markets and also in some urban centres and they have also created a major impact in developing small and micro businesses through their local presence and strong customer relationships.

FINLY| November 2016 | Finstreet | SIMSR

Article of the Month - Winner

타By financing infrastructure projects,

NBFCs broaden capital formation of the country and thereby contribute to the o v e ra l l e c o n o m i c g ro w t h a n d development of the country.

monetised gold stocks. Over the years 2009-2013 gold loan NBFCs have increased from Rs.39 billion to Rs.475 billion with a CAGR of 86.7%

타The quantum of infrastructure finance

provided by the NBFC sector witnessed a CAGR of 26.2 per cent from Rs. 2228 billion to Rs. 4479 billion during the period between March 31, 2010 and March 31, 2013 as per figure 2. NBFCs finance to infrastructure accounted for 35.8% of their assets in March 2013. The above figures 1,2 and 3 clearly depicts that in growing country like India, there are multiple factors which have triggered growth in the NBFC space.

타NBFCs are also into affordable housing

wherein they lend Rs.2-6 lakhs to borrowers with monthly income of Rs 6000-12000. Despite being smaller than Private or Public sector Banks (PSBs) their quantum of money in this sector is equivalent to the PSBs. This shows that NBFCs have completely penetrated into the market which has resulted in substantial growth. 타Gold loan NBFCs like Muthoot finance

provide loans against security of gold jewellery. Although banks are involved in gold loan business, NBFCs' gold loans witnessed phenomenal growth due to their customer friendly approaches like simplified sanction procedures, quick loan disbursement etc. Gold loan NBFCs are one of the key resources of

Analysing the rise in Stock prices and profits of NBFCs over the past few months: Shares of non-banking financial companies have been on a joyride even though the bad-loan or the non performing assets problem has dragged banking stocks down. There was a time when stocks of private banks were favourites of investors but now NBFC stocks have even surpassed stocks of private banks, changing the mind-set of the investors. Figure 4 shows - Some NBFC shares have surged 60-80% in the current rally, with investors buying decisions based on their higher growth numbers and superior asset quality reported by them.

Article of the Month - Winner

FINLY| November 2016 | Finstreet | SIMSR

Profit after tax for private sector banks increased by 23% while that for NBFCs rose by 32% for March 2016. The primary reason for low profits of PSBs was-Public sector banks are suffering huge losses due to stricter nonperforming asset (NPAs) provisioning while NBFCs have a healthy asset quality in their loan book so they suffered minimal losses due to NPAs. â&#x20AC;&#x153;All these factors are converging to a point that the best from NBFCs is yet to come.â&#x20AC;?

NBFCs are already game changers, as can be seen from the analysis above. This sector has continuously played a critical role in encouraging growth of the Indian economy. Thinking of the future after the Campaigns like Make in India, Startup India and relaxation of government policies to encourage MSMEs, NBFCs have a huge potential to capture the market and grow further.

Article of the Month - Runner Up

The financial relations between the two most populous and fastest emerging economies in the world, People's Republic of China and India, will be world's most crucial bilateral relations in the coming years. With both the countries growing at around the same average of 7%, there has been a stiff combination between the two countries for the past few years. There has also been a debate on whether India will be able to surpass China in future. And this debate is often dominated by the discussion of financial ties between the two nations. Trade relations between China and India date back to 1950's. However, there was a brief disruption in trade and investments due to some cross-border wars. But the economic ties resumed a few years after that. The past decade has seen a transformation of these economic relations. Indian Prime Minister, Atal Bihari Vajpayee's

2003 China visit was a successful endeavor to establish agreements with China, including the Sikkim border trade agreement. The two nations are m e m b e rs o f t h e Wo r l d Tra d e Organization. The trade barriers have been eased and economic cooperation has been increasing since then. More recently, Chinese Prime Minister Xi Jinping met Indian PM Narendra Modi during the BRICS Summit 2016 in Goa. There were discussions about building sound ties by suppressing terrorism and cross-border friction. The financial representatives of the two nations, Arun Jaitley (India) and Lou Jiwei (China) headed the eighth round of India-China Financial Dialogue in August 2016 in Beijing. There have been seven such India-China Financial Dialogues each year since 2006, except in the year 2012.

Article of the Month - Runner Up

FINLY| November 2016 | Finstreet | SIMSR

During these summits, the two representatives of the countries comprehensively discussed the macroeconomic situations, economic and financial policies, and the new challenges facing the economies. Also, the Finance ministers meet investors, bankers and wealth and fund managers during such visits. The ninth financial dialogue is scheduled to be held in India in 2017.

other, the cumulative bilateral FDI is less than $500 million. Some very popular Indian organizations like Mahindra and Mahindra (M&M) and Tata Consultancy Services Ltd (TCS) have their joint ventures in China and Chinese Huawei Technologies Co Ltd has its single largest market outside China in India. As more such companies expand, investment linkages between India and China will deepen.

Unlike the trade relations, the IndoChina investments have been low. One of the reasons could be the growing nature of organizations in these nations. The companies are still learning as to how to operate in the other country. Also, FDI requires much more commitment, involvement,and knowledge about the other country. In spite of an estimated 100 companies from each country having offices in the

The Industrial and Commercial bank of China (ICBC), one of the world's biggest banks, obtained the license to start banking operations in India and inaugurated its first branch in Mumbai in 2011. On the other hand, Indian banks like State bank of India, ICICI Bank, Bank of Baroda have their branches in China. The State bank of India holds an authorization to conduct

Article of the Month - Runner Up

Finly | July 2016 | Finstreet | SIMSR

FINLY| November 2016 | Finstreet | SIMSR

local currency business at its Shanghai branch. Many more government institutions and banks of the two countries are working on expansion and cooperation from the other country, on matters related to taxing, auditing, employment and tourism. India has imposed some anti-dumping measures against Chinese products to protect the domestic manufacturing industry. But both the governments are keen to resolve any unresolved trade issues mutually rather than taking them to WTO. The exchange rate for converting Indian Rupee to Chinese Yuan is 1 INR to 0.101 CNY. Any devaluation of the currency of one country also impacts the value of the other currency. India and China are similar in many ways. Both are large economies with large populations, low per capita incomes and sizeable rural sectors. The similarities increase the opportunities that lie ahead for the two economies. Indian finance minister, Arun Jaitley has said that economic relationship between India and China is significantly improving almost by the day.And amidst all the border disputes between the two Asian giants, the national leaders Xi Jinping and Narendra Modi have maintained a stand of growth and harmony. This clearly indicates the depth of efforts to improve Indo-China ties and the potential of India-China financial relationships.

ECO Section

Standing in long queue to withdraw money at the ATM or to deposit the old currency notes at the banks? Finding it difficult to get change for your new 2,000 rupee currency note? These scenes must be familiar to each of us after the recent move by the Narendra Modi government to demonetize the 500 and 1,000 rupee notes. A lot of us m u st b e f i n d i n g i t ex t re m e l y bothersome to deal with the changes in dealing with our cash, but demonetization in itself has certain objectives. Let us understand what exactly demonetization is and why is it done? Demonetization is the act of stripping a currency unit of its status as legal tender. It is done whenever there is a change in the national currency. However, as in the recent case it may be done to keep a check on the black money in the economy. The other objectives associated with it are to

eliminate fake currency notes and the funding of the terror activities by the terror groups in India. It also decreases cash circulation in the economy thus directly affecting the corruption levels and cash hoarding, in turn leading to collapse of the parallel black economy. This is not the first time for the Indian economy that such a change has been implemented. In January 1946 , Rs 1,000 and Rs 10,000 notes were d e m o n e t i ze d t o s u p p r e s s t h e unaccounted money. Rs 1,000 , 5,000 and 10,000 were reintroduced in the year 1954 and the same were demonetized in January 1978. This was done on the recommendation of the Wanchoo committee, which was a direct tax enquiry committee set up by the government. However, owing to the public nature of this recommendation the money hoarders could quickly get rid of the higher denomination currency. The look of the note of 10000 is shown below.

FINLY| August 2016 | Finstreet | SIMSR

FINLY| November 2016 | Finstreet | SIMSR

ECO Section

segment could face less heat. Luxury vehicles will see a drop in sales. As for tractors, close to 65% of the purchases are financed, therefore the impact of cash squeeze could be minimal. Real Estate Real estate is expected to be worst hit by demonetization. This particular sector involves high degree of cash transactions. Be it affordable housing or luxury housing. Resale of property will see a dip as well. Real estate sector is known to be less transparent hence the cleanup drive will take place on a huge scale. Impact of Demonetization on economy: Indian economy comprises of various sectors. The well being of all individual sectors ensure the good health of economy. Let's understand the impact of demonetization on different sectors. Impact on Sectors: Automobile This sector has variety of products like two wheelers, passenger vehicles and tractors. Demand is likely to dip for few months for two-wheelers, but passenger vehicles and tractors will be less impacted. In the two-wheeler industry, maximum purchases are made by cash. Around 35-45% purchases are made via financing, while the rest are via cash.But in the passenger vehicles segment, close to 75%-80% of sales are either through financing, or even down payments are made mostly by cheques, so this

Cement Companies and dealers are indicating that volumes may get impacted in the near-term as real estate demand (which is 55-60% of overall demand), especially in tier 2 and 3 cities, may get affected in the interim. Demand in tier1 cities has been weak for the past 2-3 years. But infrastructure demand, backed by government spending which has been driving growth, is unlikely to be impacted. Building material Building material stocks would come under pressure due to a sudden slowdown. Renovation of building and houses would also get impacted as most of the demand is serviced through cash. Dealer sales in certain projects too would take a hit. Banks The move towards a cashless economy will boost savings in financial assets.

FINLY| November 2016 | Finstreet | SIMSR

ECO Section

With any sharp infusion of deposits and relatively limited avenues to lend, the credit deposit ratio for banks would become unfavorable, and thus impact margins. In case of a spike in capital adequacy, it would be positive for margins. While in the event of a higher rise in deposits, the immediate avenue to deploy would be G-Sec bonds, and this could create a temporary downward blip in bond yields. We may see rate cut by RBI to mitigate the effect of disinflation caused by demonetization. This may give rise to demand for Perpetual bonds as well. Thus some of banks could see windfall gains on treasury.

FINLY| September 2016 | Finstreet | SIMSR

in cash. Trade channels may take a few weeks to recover as their transactions will be of higher value. If their purchases decline, that will affect sales growth reported by companies. At consumer level the move will cause a liquidity crunch. Consumer will become choosy while purchasing which will adversely affect the sales of products. A poor quarterly report from FMCG giants could be expected this quarter. Telecom There's no material impact as average transaction size is very small. However, slowdown in smart phone sales could potentially slower adoption of mobile broadband subscriber penetration.

Jewellery Gold demand rose when the demonetization news came out. Several households, who were stuck with old currency notes, converted them into gold. Move is good for the organized industry. But in the short term, purchase of gold will be reduced owing to lack of liquid cash. About 7075 per cent of jewellers in the country are unorganized. But 25 per cent of the organized jewellers are contributing more than 80 per cent business. There will be a shift from unorganized to organized sector in the jewellery industry.

Pharmaceuticals Impact of demonetization will be least on Pharma sector and demand is not expected to get affected in a big way. However, luxury hospitals may see some impact due to spending cuts.

FMCG The impact of the government's move of demonetization on FMCG companies can be seen in two parts. One is on the distribution channel and second is at consumer level. Small retailersâ&#x20AC;&#x201D;who make up the bulk of salesâ&#x20AC;&#x201D;mostly deal

Impact on Stock Market Since demonetization has happened the stock market has seen large swings. The Sensex is made up of very large companies which may not be impacted as much by the demonetization process. BSE's mid-cap and small-cap

Paints Paint companies which are into big project sales, deal in cash component worth 30-40% of sales, while for shops which have higher retail sales, cash component could be 70-80%.Therefore, paint companies could face fall in sales in the short term.

FINLY| November 2016 | Finstreet | SIMSR

ECO Section

FINLY| September 2016 | Finstreet | SIMSR

comprises of companies which gets more affected by liquidity crunch hence the indices have fallen by over 6% each at the time of writing. The largest impact of the government's move will be in the unorganized sector, which isn't represented in the markets. The real effect is seen in sectoral indices such as the BSE Realty index, which was down as much as 15% at the time. Stock like DLF Ltd was down nearly 20%. This shows the investors anticipation of poor performance in real estate. Similarly, stocks of jewelers companies such as Titan Industries Ltd have fallen by around 11% as well, perhaps because a lot of gold purchases are through cash. Besides, stocks of mid- and small-sized finance companies which collect payments in cash have fallen by 8-10%. Conclusion: Demonetization has currently slowed

down the economy since buyers are not having enough cash and this may reduce the demand for goods. Owing to this the quarter results of companies may see a dip in sales and profit figures. In short term it may hurt the economy but in the long run it will certainly benefit India. The FII's sentiment will be positive because of the filtering out of black money. Government is expected to have huge amount of capital collected as tax from black money depositors. We may get to see healthy capital expenditure by government for stabilizing infrastructure and banking sectors. Once all the new notes come into circulation it will be business as usual and all sectors will come back to the growth trajectory. Rate cut by RBI is very much on the card to improve the disinflationary condition caused by demonetization. Demonetization is a bitter dose for long term benefit. The country has to endure temporary pain for long term gain

Faculty Section 21

Demonetize, a word having combined origins of French and Latin, has caused a lot of socioeconomic as well as political storm in India off late. Lot of discussions in print and social media, on both public and private forums alike have sent people, irrespective of their economic status into a financial turmoil, at least on the personal front. Needless to say, the obvious happenings around of long queues at banks, ATMs and any other available source to exchange and or invest currency, people have been jolted out of their slumber, especially those who had cash in their holdings and find it devalued overnight. Across reports and daily news that keep the common man occupied and engaged to the news portal like never before, beaming information of every day changes being made by the government t o m a ke b o t h l e g i t i m a t e a n d unaccounted money holders alike, voluntary or otherwise, exchange, deposit or declare at least the currency

part of their holdings, one thing is for sure, and that is, it has once again brought people to think alike on what is good for the nation and what is not. People who never thought through earlier as to where they were investing, consciously or otherwise, have now to think twice as to what they are doing or will do with their wealth in future. With this move, it has sent across a message to people: enough of this menace of repatriation or advantages to ideas and elements that tend to be antinational.Think India first. Without bordering on the political aspects, as they seem to never cease in any nation, the current demonetization drive sometimes even leans towards an extreme approach for achieving its objective of rendering unaccounted money useless, at least on the currency front with 500 and 1,000 rupee denominations that have approx. 8085% impact value of all cash circulation

Faculty Section

in the Indian economy. Chinese media, for example are seeing this move as a very bold gamble setting a precedent on its impact on corruption irrespective of its success or failure. While this aggression has forced experts and analysts to come up with some statistics and statements such as write off of the GDP to the extent of 2 â&#x20AC;&#x201C; 2.5%, a possible reduction in economic growth due to cash shrinkage with immediate impact on sectors such as FMCG, a move without consensus which lacks proper planning and execution, etc, the immediate impact can be seen on decline in terrorist funding and activities, reduction in fake currency circulation, increased digital transactions, an increased sense of responsibility towards one's own wealth, etc. People who have used etransactions and cards will surely agree regarding its ease and comfort however, the risk of personal data being compromised coupled with fast paced changes and complexities in the digital hardware domain that puts off a lot of people, especially senior citizens, from trying this portal. The case being compromise of debit cards in the recent past of some banks. Also, care must be taken to ensure that the digital transaction wave, once accepted fully, does not make citizens swipe for anything carelessly, or otherwise we might just find ourselves slowly turning in to another consumer driven economy, rather than savings driven which predominantly has been our strength. Ask the US citizens. Inspite of social security in place, the hardships they had to face in case of an economic

downturn and the level of debt in the credit card driven system. Talking about e-transactions, analysts hint at a possible dawn of new digital transaction era, however with a few riders that point towards financial inclusion. While financial inclusion tries to reach the last mile inclusion for carrying out savings or making the poorest of poor participate in to some sort of transactions, the move needs to be backed by a majority literate population which is fully aware and in the know-how of digital and mobile technology. Thus, to make the scheme a success, largely with the co-operation of the common householder, for any government, the root cause is it to eradicate illiteracy first and bridge the knowledge and awareness gap existing amongst all strata of society as transactions; cash in particular, do not see the hands of the holder. Fathom this: home makers, the true perceived domestic finance ministry in every household, are already talking of paying domestic services such as house maids in cheques or through e-wallets but what about the literacy, awareness and more importantly, readiness to participate? While one can argue that Jan-Dhan accounts were already in place, unless acted upon, it is becoming a case of an opportunity lost to actually achieve financial inclusion, with the purest of intentions. As reports surface that lot of unaccounted money is stashed by misuse of such accounts, it makes one actually wonder: Will we never see a clean society? For how long will governments keep talking about it,

Faculty Section

FINLY| November 2016 | Finstreet | SIMSR

some of the leaders even risking their political careers to back such hard measures while the defaulters and culprits run around searching for investments and measures that include even illegal commission based rental account options to safeguard their unaccounted money? While it is next to impossible to imagine a near cash free transaction based economy, at least as of now, the authorities must ensure that problems such as currency duplication, tax evasion and avoidance, as well as illegal activities are brought to a halt, to say the least, as no nation can afford such hard measures repeatedly. However, the buck does not stop there. Citizens are equally responsible. After all, there is progress and prosperity in a peaceful environment and not otherwise. One of the hallmarks of a good developed nation is that its people (irrespective of intellectual or socioeconomic standing) listen to their elected leaders, understand their intentions and then go all out to support them once convinced, even at the cost of slight inconvenience (certainly not included in the list is medical emergencies, weddings, funerals, child births, and the likes). The government reciprocates by bringing in an ever improved people oriented mechanisms, devoid of corruption at any level. Hence, time and again, the same lessons keep coming up in front of society at large, you obey what is expected of you and expect the same from your government. As the proverb

in Sanskrit goes, Yatha Raja, Tatha Praja.

Alumni Section

Finly | July 2016 | Finstreet | SIMSR

Before stepping into the portals of SIMSR, I have always been hearing from people that life is truly rigorous in a BSchool and that your two years of MBA are some of the most hectic and grilling years. Well, today I completely disapprove of this notion. I would say that these two years at SIMSR are truly one's “golden days”, whose fond memories are only to be cherished the rest of his/her life. Yes, I miss my SIMSR days very much from the bottom of my heart. Before discussing further, I would like to show my gratitude to this institute for being my stepping stone to success and for opening the doors into the corporate world. Secondly, I would like to convey my regards to my professors at SIMSR, to whom I owe whatever I have achieved and continuously achieving. And last but not the least, I am extremely grateful to Finstreet for giving me the opportunity to pen my

thoughts in the esteemed panels of Finly. I am presently employed in L&T Financial Services as a Manager in the Treasury Department and am posted in their headquarters in Mumbai. L&T Financial Services is a leading NBFC in India having its branches all over India. The treasury of any organisation can be termed as the “heart” of the company. Ours is no exception. Being an NBFC, the primary function of our treasury is to control and manage the NBFC's money in terms of capital and liquidity. Like any other NBFC, retail and wholesale lending are the core businesses of L&T Financial Services. Hence the primary re s p o n s i b i l i t y o f t h e t re a s u r y department is to efficiently carry out the borrowing functions or in other words, to borrow at optimal costs without compromising on asset liability management.

Alumni Section

FINLY| November 2016 | Finstreet | SIMSR

The treasury of any organisation is split into the front and mid office. The front office directly deals with the debt or fixed income market, whereas the mid office performs the operational activities of the treasury. As far as my profile is concerned, I am fortunate enough to get an opportunity in the front office of our treasury. Myself being an Economics Honours graduate along with an MBA in Finance, I specifically provide inputs to formulate the borrowing strategy of the treasury. I carry out research and forecasts p r i m a r i l y t h ro u g h q u a nt i tat i ve techniques on how the key macroeconomic variables of the economy (especially interest rates) move up or down which directly affects the ever dynamic borrowing strategies of the treasury. I am presently in the seventh month of my wonderful journey with L&T Financial Services, and to be honest I am undergoing a very steep learning curve sitting amidst extremely talented and highly experienced fixed income dealers of the front office. Speaking of our selection process, the company was one of the first ones to come to our campus during our placement season and had offered us great profiles for finance. Yes, I still remember 7th October, 2015, the day I was placed in this elite organisation. To speak about the selection process, the company had come to campus only for finance specialisation. We had an aptitude test as an initial screening process. The next process was a case based group discussion, where the

shortlisted candidates were grouped into batches of eight to ten students. The candidates qualifying the group discussion round were then interviewed by a three member panel of senior personnel of the organisation. This was the final round, after which we were selected. Well, I know this time of the year is the most awaited placement season at SIMSR. I would first like to convey my heartiest congratulations to all my juniors who have already made it through. To all others, my message is to have patience. There is nothing called a “good profile” or a “bad profile”. What is important is who the “best fit” is for a particular profile. Our institute provides ample opportunities for every student. Hence just sit back and relax. Everything is going to fall into place. And finally before bidding adieu to all, myself being a Finstreet Member (201416), I would like to convey my regards to the current Finstreet team: “You people are doing really well! Please carry on the same legacy over the upcoming batches.”

Article by FInacue

When we think about very basic financial need like opening a saving account or applying for an education loans we have many banks to choose from. The key factor one would naturally consider here are the interest rates. The interest rate for a savings account is largely the same across all banks so this might make the decision easier, and you may choose the closest one in your neighborhood. For the other need since is an education loan one would be required to pay interest. Here the expected rates would range between 10 to 100 basis points between banks. So a natural conclusion is to get the loan from the same bank in the neighborhood. Now if there are five different banks offering the same rates for both your needs how can decision be m a d e ? T h i s i s w h e re p ro d u c t differentiation comes in. Over the century very basic financial products have evolved as banks began competing with each other. Competition is an

important characteristic of market growth with incremental benefits for the consumer. In retail banking product differentiation happens through following aspects: price, product features, access to services, innovative add-on offering, and branding. But over the last decade financial disasters, regulatory pressures, delinquent accounts and money laundering have put tremendous pressure on banks. This has lead to a gradual commoditization of a financial product with limited scope of innovative differentiation and rising costs.

Article by Finacue

FINLY| November 2016 | Finstreet | SIMSR

Let's assume a bank wants to differentiate through its service delivery. Then the bank will have to invest in strengthening its touch point effect iven es s wh ich b ein g t h e relationship managers and customer

traditional branch. As a result of this shift to mobile and online activity, many o t h e r co m p a n i e s a re a l l o w i n g customers to pay directly through third part companies know as Fintechs (Financial Techonology : Paytm, Paypal

interaction staff within its branches. This would mean the service delivery is a smooth and seamless experience with a wow factor for each customer. The challenge in Indian banking is that on an average a customer holds around 2 to 2.5 products with the main bank, which is well below the global average of 4 to 6 products, which is where costs optimization is unattainable. Interestingly, a research by Reichheld and Sasser in the Harvard Business Review indicates 5 per cent increase in customer retention can directly increase profitability by 35 per cent. Along with this, India is also undergoing a demographic metamorphosis. Generation X and the Millennials are aging, causing a shift in the core customer segment and how they choose to interact with their financial institutions. These customers prefer to bank online or mobile device (smart phones, tablets, etc.), instead of the

etc ). Thus considering such shifts in the sector the banks would need to ensure that service is delivered based on customer preferences and not quite on how a bank would prefer. This would mean a bank would need to have a robust digital presence with a secured transaction platform underneath. Based on a survey by Economic Times the top changes the customer wants from their banks are listed above: To stay in business and continue to have skin in the game apart from traditional banking products banks have to adopt technologies that deal with what customers desire in a cost effective way. Currently the commercial bank space can be classified with banks grouped under following categories relating advancements in differentiation.

Article by FInacue

FINLY| November 2016 | Finstreet | SIMSR

To stay in business and continue to have skin in the game apart from traditional banking products banks have to adopt technologies that deal with what customers desire in a cost effective way. Currently the commercial bank space can be classified with banks grouped under following categories relating advancements in differentiation.

Sector Analysis

In this section, we will try to provide you an analysis of which sector is doing well on the Stock Exchanges in India. We will look at the increase in market capital of individual sectors and the reason for the better performance of the sector that generated best returns in the last one month. While the Indian markets were beaten badly by the Demonetisation and Donald Trump's surprise election as U.S. president resulting in the loss of market capital in most sectors still there were a few sectors which generated good results. Following NSE data of the last 30 day period of 18 October 2016 to 18 October 2016,this shows us how the sto c ks o f va r i o u s s e c to rs a re performing: As observed from the chart below, the PSU Banks were the best performers with a return of 7.2% followed by Public sector Enterprises which gave a return of 0.58%. All other sectors gave a negative return that is the investors lost

their wealth in these sectors. Realty was hit the worst in the anticipation of reduced business activity because of demonetisation and Indian government cracking down on the black economy which forms a sizeable part of Real Estate business in India. The sector lost 20.98% of its market capital. Realty was followed by Automobiles which lost 11.48%. So it is pretty evident that PSU Banks were the winners but what made them defy the market sentiment and generate good returns? Let's take a look. Reasons for the growth of the sector: The shares of public-sector banks have emerged the major gainers from demonetisation. At a time when benchmark indices have declined about 5%, major state-owned banks' stock prices have moved up 6-22%, with SBI, the biggest lender, up by over 10% and Union Bank topping the list with over 21% returns.

Sector Analysis

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

FINLY| November 2016 | Finstreet | SIMSR

Source: www.moneycontrol.com Because of Demonetisation, people are depositing their cash in the banks, and mostly PSU Banks, these huge deposits have turned the magic wand on them. India's largest lender State Bank of India (SBI) on Friday said it had received Rs.1.27 trillion worth of cash deposits, which is humongous. PSUs which were sweltering with low deposits/funds and low capital base along with lower profitability growing NPAs and increasing cost of funds, this is surely a breather for them. These huge flows of deposits will bring down the cost of funds as now money will stay in the financial system. And resulting to which banks will have room to cut lending rates as well, as there is a huge supply of money and thus more credit generation giving banks a better profitability. SBI chairman Arundhati Bhattacharya had recently said that such deposits from smaller customers would not

move out of the system in a hurry. This surely explains our purpose as to why state banks (PSUs) are currently the favourite among investors and are keen to buy those as against Private lenders such as IndusInd Bank, Axis Bank, etc. which are down 3-10%.Eventually, this will not only help them have higher deposits but also better their CASA ratio, Cost to Income, etc. and reduced NPA ratios, which will lead to areevaluation of the PSU Banks as a whole. So, below is the comparison of PSU Banks & Private sector banks and shows how the former has out performed the markets post Demonetisation Scheme. Below is the snapshot of the NIFTY PSU BANK sector, from 18th October 2016 to 18th November 2016. Markets, including the banking sector, were just skeptical about the US elections outcome.

Sector Analysis

FINLY| November 2016 | Finstreet | SIMSR

With markets also expecting a Trump's possibility of winning PSU bank saw a flat-to-negative movement, things changed when on 7th early morning Hillary was given clean chit on her Email charges, Post the election outcome on 9th morning, just the night before Mr. Modi, had announced Demonetization

Finly | July 2016 | Finstreet | SIMSR

and with Trump's win pushing all the emerging markets (India) in gravity, it was Mr. Modi's Demonetization which gave support to the banking sector, especially PSU banks, and thus from the 9th of November we have seen upward movements in this sector which can be interpreted easily from the chart below.

Sector Analysis

So, ultimately everything is hinted at the profitability of these companies which will eventually be reflected in their valuations and thus we saw an upwards movement in stock prices. With Indian bond yields (interest rates on bonds) also edging towards 2009 lows, we can see an up-tick in the Banking sector because of an increasing demand for the loans due to lower interest rates.

News Buzz

FINLY| November 2016 | Finstreet | SIMSR

maximum deposit limit in such accounts is ₹50,000.

` GDP growth to slow down over demonetization: Goldman Sachs Global financial services major Goldman Sachs has predicted a deceleration in India's GDP growth at 6.8% this fiscal, down from 7.6% in 2015-16, due to the demagnetization of ₹500 and ₹1,000 currency notes. Goldman Sachs said, the liquidity shortage would be a significant constraint on the domestic activity following demagnetization, which will affect the GDP growth.

Airtel launches India's 1st payments bank Bharti Airtel on Wednesday launched a pilot of India's first payments bank in Rajasthan with 7.25% interest on deposits in savings accounts. Airtel subscribers' mobile number will function as a bank account number and transfer from Airtel to Airtel phone numbers will be free. Payments banks can accept deposits of up to ₹1 lakh per account, but cannot issue loans.

₹21,000 crore deposited in Jan Dhan accounts since note ban Accounts under the Pradhan Mantri Jan DhanYojana have reportedly witnessed deposits worth ₹21,000 crore since the government announced the demonetisation of ₹500 and ₹1,000 notes. The maximum amount of money is said to have come from the states of Karnataka and West Bengal. The

1% of India's richest own more than 50% of wealth The richest 1% of Indians own 58.4% of the country's wealth, making India one of the most unequal societies, according to data on global wealth from Credit Suisse. The number has steadily increased from 49% in 2014 and 53% last year. There are more than 100 billionaires in the country with MukeshAmbani being the richest.

FINLY| November 2016 | Finstreet | SIMSR

FIN Tweets

FINLY| September 2016 | Finstreet | SIMSR

Trivia

FINLY| November 2016 | Finstreet | SIMSR

ABC Agreement ABC agreement is an agreement or a contract between a brokerage firms registered on a stock or commodities exchange and employee of the firm highlighting the rights of the firm when it buys a stock or commodities exch a n ge memb ers h ip fo r t h e employee. The ABC agreement consists of three stipulations referenced in the eponymous A-B-C for the future dispositions of the seat held in the exchange by the employee. A – It allows the employee of the firm to transfer his or her ownership to another employee of the firm. B – It allows the employee of the firm to buy another membership or second seat on the trading floor for another employee of the firm while still retaining the ownership of the first seat. C – It states that the employee must transfer any gains back to the firm from the sale of the seat or must transfer the seat back to the firm for a nominal consideration should the employee die.

Abenomics A name assigned to an ambitious multiyear plan by Japan Prime Minister Shinzō Abe (2012) to get Japanese Economy back on track. It had three parts to it: Ÿ To print additional currency to the

tune of 60-70 trillion Yen to make the Japanese Exports more attractive. The surplus liquidity in the system would also generate modest inflation that would counter years of deflation. Ÿ To introduce new government

spending schemes to slowly generate demand in the Economy. Ÿ Reforms in the Japanese Government

regulations to make the industries more effective and efficient. The most important part of this part was the ability to remove inefficient workers with ease from the company. This was a tough task in earlier times. The section also aimed to improve and modernize the Agriculture, Pharmaceutical Sector. Yen has fallen by up to a whopping 50% against the dollar. The exports have started showing signs of revival. These are early signs of a possible recovery for Japan.

Finly | November 2016 | Finstreet | SIMSR

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