Finly september 2016 by FINLY

FINLY| September 2016 | Finstreet | SIMSR

From the Editor’s Desk

SIMSR Dear Readers, This month we witnessed the Reserve Bank of India making variety of changes aimed at widening and deeping the corporate bond market like staggered reduction of bank's loan exposure, increased participation of overseas investors and making top rated bonds eligible for borrowing. Also, the Unified Payments Interface (UPI) interface will be going live with 21 banks in the first phase which include ICICI Bank, Axis Bank, Union Bank of India and few others and is all set to become a game changer in the ecommerce sector. In this edition, Our Cover Story on The Fintech Boom presents the future of banking and finance. Here the writers have focused on how the financial technology will help in financial innovation and help the startups to grow into billion dollar enterprises. Next in line is our economics section which covers the impact of negative interest rates in the economy and describes the reasons why some countries opt for it. Faculty section brings forth the five investments which would offer high returns with high risk and would help the fresh business graduates to make a proper decision while investing. In the section “Sector Analysis” the writers have covered the sector which is performing well in the stock exchanges of India by giving a thorough analysis of market capitalization and financial ratios of the stocks. 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 Udhbhav Bhaniramka from NMIMS, Mumbai as the winner and Dipti Agarwal from IIM Indore Mumbai Campus as the runner up. Congratulations and wish you all the best !! -Shreya Gupta PGDM-FS 2015-17 KJ SIMSR

Team FINLY

FINLY| September 2016 | Finstreet | SIMSR

Table of Contents

SIMSR

Cover Story

Introduction With the advent of innovation and technology, a new line of business that uses software to provide financial services has struck the world; widely known as FinTech or Financial Technology. With the launch of our Prime Minister, Mr.Narendra Modi's Digital India Campaign, the landscape of digital India is changing faster than ever.Huge improvisations are being made which will allow financial access to many, most of which is made in the fintech sector. Currently the value of transactions through the Indian fintech sector is estimated to be approximately $33 billion in 2016 and is expected to reach $73 billion by 2020. The growing collaboration between the financial world and technology has triggered the interests of budding entrepreneurs to come up with some â&#x20AC;&#x153;out-of â&#x20AC;&#x201C;the-boxâ&#x20AC;? ideas and solutions. Financial Technology or Fintech is a technology-based business that

competes against, warrant and/or collaborate with various financial institutions using software. A number of start-up firms have engaged in this sort of external collaborations with financial and non-financial banking institutions, research organizations, universities, consultants, government bodies and associations. This specialised network forms a highly cohesive ecosystem with expertise, experience, technical knowledge and facilities of all entities together. The success of any fintech firm is mainly attributed to this internal ecosystem. An accomplished fintech ecosystem is where all the market participants connect, collaborate, engage, dispense and share ideas across communities and networks, as well as i d e n t i f y, c o n v e r t a n d r e a l i z e opportunities into business. In the current era of technological advancement driving financial services, no market participant can afford to operate in silos.

FINLY| September 2016 | Finstreet | SIMSR

Cover Story

SIMSR Fintech in India: A new Techno realm India is rapidly transitioning into a dynamic ecosystem offering the startups to grow potentially into billion dollar enterprises. There is a prominent buzz around, right from tapping new financial markets to exploring foreign based markets and growing of fintech start-ups in India.With the surge of ecommerce and smartphone penetration in India, the traditional cash driven economy of India is shifting from its usual course and is starting to respond to fintech opportunities.

Earlier this year, the National Association of Software and Services Companies (NASSCOM) reported that around 400 fintech firms are operating in India, augmented in large parts by foreign investments in fintech-focused start-up accelerators and incubators. NASSCOM anticipates that India's fintech software market alone could touch USD 2.4 billion by 2020, doubling from the current market size of USD 1.2 billion. Bengaluru, popularly known as the start-up capital of India is also w it n es s in g a la rge n u m b er o f opportunities for fintech enthusiasts. It is ranked 15th among the world's major start-up cities. Strong, inexpensive and easily available talent pool has also contributed to the India's fintech sector

growth wave. The services of fintech have reinvented the way in which businesses and customers carry out their routine transactions. The increasing adoption of these trends is positioning India as an attractive market worldwide.

Services provided under Fintech: The major services offered by way of financial technology under fintech sector shows a new disruption in the field of banking and finance which is clear from the wide-ranging impact this industry is going through. Key offerings on digital platforms include: Âˇ Peer-to-Peer (P2P) Services: In simple terms, this service reduces the great deal of time and energy involved in filling out a plethora of forms in the process of getting a loan from the bank. Instead, what happens is that a person can very comfortably fill in certain required information through the online portal and the loan is approved within hours. This fast growing sector of online market place brings the borrowers directly in contact with the lenders; hence known as peer-to-peer or P2P lending, marketplace lending, social lending or crowd funding. This methods provide faster and easy sources of capital to start businesses Examples are Lendbox, Faircent, i2iFunding, Shiksha Financial, GyanDhan, and MarketFinance.

Cover Story

FINLY| September 2016 | Finstreet | SIMSR

· Payment Service: Companies have transformed their payment methods and gateways and transitioned from the traditional merchant accounts to accepting payments via web gateways or by mobile devices. A huge amount of fraud have been reduced as transfers are made directly to the bank account which is linked to the payee. Examples are Mobikwik, Paytm, and Oxigen Wallet. ·Remittance Services: The gaps in the c u r r e n t o v e rs e a s r e m i t t a n c e transactions are unmanageable and clumsy. The same has been targeted by several new fintech companies registered both in India and abroad with an aim to disrupt the current monopoly of firms held by Moneygram and Western Union and improve the overall efficiency and reduce lead time .Examples are Instarem, FX, and Remitly. ŸPe r s o n a l F i n a n c e o r Re t a i l

secure; these platforms are gaining popularity to combat the same. Their services are mainly targeted for the early business operation cycle. Examples include Wishberry, Start51, etc ŸCryptocurrency: India is a major cash

driven economy whereby still the majority of transactions are done with liquid cash. Usage of digital currency such as “bitcoin” has not seen much t r a c t i o n i n c o n t r a st to m a j o r international markets. However Ÿfew fintech start-ups in India are

dealing in bitcoin exchanges like Unocoin, Zebpay and Coinsecure. ŸMiscellaneous Other Software

Services: Increasing efficiency being the motto for any technology company, it aims to achieve the same by offering a range of cloud computing and technology solutions. Services ranging from online accounting software to creating specialized digital portals have helped connect buyers and sellers from niche markets across various industries.

Investment Services: Customized financial informations and services such as how to save, manage money and investment options based on a person's individual needs are largely being offered through fintech companies. Examples are FundsIndia.com, S c r i p b ox , Po l i c y B a za a r, a n d BankBazaar.

Examples include AirtimeUp which is an online app providing village retailers with the ability to perform mobole topups, FTcash that enables SMEs to offer payments and promotions to customers through a mobile based platform. Some other examples include StoreKey and HummingBill for bill payments, etc.

ŸEquity Funding Services: The funding

ŸScope and Growth Prospects in India:

of a project can be done through crowdfunding platforms enabling firms to raise money from a large number of people. Since access to venture capital is very difficult to

The Fintech service industry is still in the process of redefining the way companies and customers could deal and perform transactions on a daily basis. The global investment trends

FINLY| September 2016 | Finstreet | SIMSR

FINLY| August 2016 | Finstreet | SIMSR

Cover Story

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showcase an increase - tripling to US$ 12.2 billion in 2014 from US$ 4.05 billion in 2013, and reaching US$ 19.1 billion in 2015. In India, the scale has been much smaller but at similar growth rates â&#x20AC;&#x201C; investment in India's fintech industry grew 282 percent between 2013 and 2014, and reached US$ 450 million in 2015. There is a huge untapped market for financial technology start-ups in India. Still 40% of the population are currently not connected to banks and 87% of payments are made in cash. Mobile usage is expected to surge to 64% in 2018 from the current 53% and with internet penetration steadily climbing the ladder; the potential of the fintech market in India cannot be overstated.

By estimates, 90% of small businesses are still not connected to banking and formal financial facilities which lead to gaps in the offering of services. Ingenious Potential in Traditional Banking and Finance Sector: The innovative and dynamic use of technology in the banking system like machine learning algorithms, usage of alternative data points like call records, shopping history, payments history and media footprints will increase efficiency to provide greater access to credit by fintech firms. The turnaround time for sanctioning and disbursal of loans by fintech firms is much faster despite several commercial banks like HDFC, ICICI and AXIS already digitizing and speeding up their processes.

Cover Story

FINLY| September 2016 | Finstreet | SIMSR

Major Fintech Start-ups of India: Paytm: Launched in 2010 as an addition to the industry of Fintech in India, Paytm is now one of the largest ecommerce website headquartered in Noida. Paytm started by offering mobile recharge and utility bill payments, and today, it offers a full marketplace to consumers on its mobile apps. The venture is owned, handled and operated by One97 Communication Ltd. along with investors such as Ant Financials (Alipay), Alibaba Group, SAIF Partners, Sapphire Venture, among others. The company has more than 100 million wallet users and the number of transactions carried out by them is over 75 million per month. Paytm has 80,000 merchants on its platform which is expected to increase to about 100,000 by the year-end after it allows zero-commission listings. In a recent news dated 31st August'2016, Paytm announced that it will receive an undisclosed amount in the form of investment from Mountain Capital, one of the Taiwan-based MediaTek's investment fund. The amount is approximated to be around $60million or about Rs400 crores.

Paytm, founded in 2010 by Vijay Shekhar Sharma, has raised more than $728 million till date. Alibaba group is the biggest stakeholder in the parent company One97 Communications with a stake of 40%. The company has also attracted a round from Indian Industrialist, Ratan Tata. The company is still in talks to raise $300 - $350 million or about Rs2,000 crores as it gears up to launch the payments bank as a major boost to its ecommerce business. This fund raising will value the company at $5billion according to reports. This will be a major jump in company valuation from $2.3 billion in just about 18 months. It is reported that after the launch of Payments bank the company might split into two separate groups â&#x20AC;&#x201C; Paytm Ecommerce Ser vices and Paytm Payments Bank. This is an apparent move so that Paytm's marketplace could be merged with Alibaba's when it forays into the Indian market. With Snapdeal-owned FreeCharge, claiming to have closed a million daily transactions in February this year, the competition has obviously intensified in the fintech space.

FINLY| September 2016 | Finstreet | SIMSR

Cover Story

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According to a study conducted by Nielsen in April this year, FreeCharge's market share has reached 30% from a mere 17% since last October. The same study reported Paytm to have a market share of 40%, an increase from 35% since last October. With this infused capital at this crucial juncture, Paytm has taken the game a notch higher in the fintech segment of India. Policybazar.com: Another market that grabbed the attention of technology was the Insurance sector. Majority of the population had no idea about the various insurance plans out there in the market and which one fits their budget and lifestyle. India's insurance industry was estimated at Rs 268,000 Crore in 2010 ($60 billion), and estimated to double by 2015. Life insurance is the dominating category, followed by motor and health insurance. This led to the birth of policybazar.com, an insurance policy aggregator which analyses the various insurance products available in the market for the consumers. Policybazaar.com helps Indian citizens to find cheap insurance and loans across the country by comparing the features of different insurance policies. The website searches the products which are affordable and bring more cover, security, and ease. Policybazaar covers travel insurance, loans, life insurance, health insurance, and automobile insurance. The website gets little basic information from customers and within few seconds, the compatible financial products with their reviews to the readers. The website works on an easy insurance comparison process. One has

to fill the necessary details about his or her requirement to get the compatible list of companies to select from. The website doesn't charge any money from its customers and comparison is provided free. Yas h is h D ah iya, started Policybazaar.com with Avaneesh Nirjar and Alok Bansalâ&#x20AC;&#x201D;all first generation entrepreneursâ&#x20AC;&#x201D; in 2008,to make insurance purchase easy in the country. The main cause of setting up the i n s u ra n c e p o r ta l wa s t h e l o w penetration of insurance, which in turn threw up notable opportunities. Insurance penetration rate in India was around 4.1 percent in 2011. ETechAces, owning Policybazaar, got an investment of INR 20 crore in 2008 from Info Edge (India) Limited, owners of Naukri.com. In 2011, the company received another round of funding from Info Edge and Intel Capital, the capital arm of chipmaker Intel. Intel invested INR 30 crore and Info Edge, INR 10 crore. The firm secured another funding of INR 27.50 crore from investors led by Inventus Capital Partners. Existing investors Info Edge and Intel Capital also participated. The company used most of the funds for brand consolidation, platform augmentation and customer services. The traffic to the site progressed steadily and according to Alexa the site attracted more than 23,000 hits in the last week of July 2013. With about 5 million registered users, Policybazaar.com currently has a headcount of 400 employees spread across offices in Gurgaon, Delhi, and Mumbai.

Cover Story

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Revenue generation strategy Any person looking at the industry would have liked to just go and start selling insurances online straight away. But, it not only involved getting licenses from the regulator, but also required the industry to move to the postmodern era, without going through the intermediate steps. Selling insurances online in 2007 could have meant a sales cost of Rs 50,000 per policy (Rs 100 per lead and a 0.2% conversion to customer). And at margins of 20% on a motor insurance policy worth Rs 10,000, that would have led to the company folding up soon.

This allowed Policybazaar to move to the next level, wherein they started taking ownership of the sales process to the legally permissible extent, through their call centers. This has meant better conversion rates, as the agents are welltrained to assist/persuade the customer to complete a sale. Even the call center, which is a costlier channel than a pureplay online sale is expected to give way to pure-play online sales engine. This careful migration of the business model, within short spans of time, has allowed Policybazaar to build scale without breaking the bank.

I n s t e a d o f t a k i n g t h a t ro u t e , Policybazaar consciously started as a lead generation engine, which sold leads to the partner principals. Though the margins in a lead sales business are low, that gave them the breathing space to build traffic without losing money in the process. And once the traffic started building up, the free traffic (organic) increased, and the cost of leads started going down.

It has also become the runaway leader in the third party online insurance sales space. Policybazaar sold around Rs 50 Crore ($11 million) worth of insurance in 2010 and is looking to double that in 2011. Unlike the loans segment, Policybazaar has been moving fulfillment online at a rapid pace, with around 20% of its sales currently happening completely online. With over 55% of its visitors coming

FINLY| September 2016 | Finstreet | SIMSR

Cover Story

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through organic means, Policybazaar is developing an early edge in the online insurance segment. Policybazaar, continues to strive hard to be ahead of the market, even though it remains far ahead of its competition already.

Challenges and Opportunities for Fintech Expansion: Although Fintech companies have streamlined and simplified processes to a great extent, still they have a long way to go before the conservative Indian customers instill confidence in their s e r v i c e s . Tra d i t i o n a l f i n a n c i a l institutions and processes still have an established infrastructure and legacy that cannot be easily replaced. Figuring out how to market to their needs and influence the financial behaviour of the consumer are some of the biggest challenges. The disruptive nature of this sector has forced the traditional banking and financial institutions to invest in modernization of their firms and upgrading their technology. On top of it, by investing in digital products and solutions they can leverage their well

established and strong customer base. This will greatly help in cost reduction and boost the growing banking population. Banks like HDFC and AXIS have launched mobile phone applications allowing customers to transact online with minimum effort. Federal Bank in partnership with Startup Village is investing in the development of innovative digital banking products. Barclays, has decided to setup up their fifth fintech nnovation centre in India. Goldman Sachs Principal Strategic Investments Group (GSPSI) is looking to invest in Bengaluru's fintech startup scene. FinTech has several new players across developed and growth markets which are growing at a rapid pace. Driven with innovation and cutting edge technology these fintech firms are driving the sector. Although FinTech's is expected to have a powerful impact, several factors need to be taken into account, on multiple levels. Factors include limited protection of retail investors, the potential of funding the unworthy borrowers and also systemic risk arising due to partly unregulated and opaque sector. The potential of FinTech for businesses and thus for the economy as a whole seems to be massive. Opportunities exist for national governments, development finance institutions, entrepreneurs and investors to support and, at the same time, benefit from this trend. While the pace of change is still unclear, the potential magnitude of FinTech's growth possibility is hard to deny. The current momentum is expected to keep up and grow stronger.

Article of the Month - Winner

Introduction The talk of the town at the start of 2016 had been the nose diving crude oil and other commodity prices in the global markets. The news of Iran passing the nuclear hurdle and returning to international oil markets as the world lifted economic sanctions on the C e nt ra l A s i a n state h a d b e e n s u r p r i s i n g l y fo r m a ny. A l m o st immediately, the Iranian president vowed to add 50,000 barrels of crude a day as the nation tried to rebuild its oil supply infrastructure. Speculation led to the prices of Brent crude hovering at a 12-year lowof $28 per gallon because of a supply glut. To deteriorate the effect, world-wide demand for oil relaxed with the insipid economic growth in China, South America and Europe impacting it.When oil prices started to fall down a year ago, most firms thought that the drop would be insignificant and short-term.Instead, the price of crude has plunged by 72%

from its 2014 peak and looks very likely to say low for a longer duration. Multiple reasons have contributed to this unforeseen state of affairs in the international commodity markets. One of the reasons is the discovery and surging increase in shale gas production in the US, Canada and Russia (the non OPEC market). Using horizontal drilling and hydraulic fracturing (fracking), drillers pumped out millions of barrels of shale oil. US shale gas production grew by 75% in a few years. More n o t a b l y, i n N o v e m b e r 2 0 1 4 , OPECvetoedagainst cutting down production of oil as they try to gain market share at any costs. This decision was mainly led by Saudi Arabia, whose cost of extracting oil is much lower than US shale oil. This was a landmark decision by the cartel to ramp up production and pull down prices in order steal the march on higher cost producers, i.e., the non OPEC nations.

Article of the Month - Winner

SIMSR The cost of extraction for OPEC members is roughly less than $20 per barrel whereas US shale gas costs around $40-60 per barrel (each oil field has a different breakeven level). If prices remain below $30 per barrel for a sustained period of time then there will be enormous pressure on shale oil production which will lead to removal of excess supply, thus in turn raising the prices. Before having a macro view of the world, let's first look at the effect such a change has on India. The sinking energy prices will have a major impact on India's BOP and its overall economic machinery. India ranks 4th in the intake of crude oiland is almost 80% import dependent to meet its oil requirements and had spent $113 billion in fiscal year 2015 on 189 million tonnes of Brent crude. Because of a drop in the price of crude, the bearing on current account deficit is massive. The net import bill balloonsby â&#x201A;š 7,096 crore if crude prices increases by $ 1 per barrel. For the onlookers, what matters is the corporate earnings of listed corporations like BPCL, HPCL and IOC who have greatly profited from the fall in price as their under recoveries from selling fuel below operating cost has considerably diminished. Stocks of all the three above mentioned companies have unswervingly outperformed the BSE Sensex since the start of last year. Companies involved in the aviation and lubricant manufacturing sectors have also benefitted greatly. Airlines in India have been using the opportunity provided by low Aviation Turbine Fuel prices to pass on discounts to the customer. Castrol India Ltd. has been

recording exceptional quarterly results as compared to FY 2013, when oil prices were at its peak. Fuel & Power represents a weightage of 14.9 % on the Wholesale Price Index in India, which is quite noteworthy. A change in fuel prices will impact the inflation rates of the country according to which the Reserve Bank of India sets its monetary policy to ease or contract money supply in the economy. But there is a flip side to this as well; when Brent crude is hovering well under $50 there is an effect on oil exploration and production activities. As a result, many projects face viability issues. Hedge funds who have gone long on crude have been obstructed by the fall as well. Refining margins for concerns like Cairn India have thinned (due to inventory losses) and thus have reported steep revenue falls for the first quarter. Companies involved in the business of crude oil derivatives like polymer and synthetic yarn are trapped with high-cost inventories, purchased when crude prices were sky high. Products made from such derivatives fetch only throwaway prices at current market rates. Now let us have a global outlook about the impact of a $30 per barrel listing. As the fall in oil prices since 2014 is reckoned to be mainly due to the supply side, it is expected it will have positive effects on the advance of the global economy as a whole. Historic parallels show that the fall in oil prices would escalate the global level of GDP by nearly 1 per cent in a few years' time, assuming that the commodity prices remainroughly around today's level.

Article of the Month - Winner

FINLY| September 2016 | Finstreet | SIMSR

A majority of countries of the world are net importers of crude. In oil-importing countries, the effect of tumbling oil prices on GDP growth is overpoweringly progressive. The consumption capacity of households' increases and firms' production and transportation costs fall due to low energy prices, which generally leads to higher profits, increased retained earnings, subsequent investments and more job creation. The magnitude of these factors usually depend on how energyintensive the said economy is Some governments, like India and China, have already taken advantage of the lower oil prices to reduce their domestic subsidies and increase excise to improve their balance sheets. In contrast, net exporters such as Saudi Arabia, Venezuela and Russia bear the brunt of slow GDP growth as EXIM revenues fall. They have been forced to adopt strict austerity measures and focus on other cash cows like tourism, etc.

Article of the Month - Runner Up 15

With large fiscal deficit, there is not much left for the government to do and hence all the heavy lifting is to be done by the central bank through monetary policy instead of fiscal policy. The Central bank keeps a check on inflation by adjusting the overnight rate, the rate at which the large banks borrow and lend from one another in the overnight market. And this is what it was doing before the financial crisis of 200809.The Central bank reduces this rate if the companies cut back on their spending owing to speculation for unstable future, thereby reducing the funding costs for the banks and enabling them lend loans at low price. This prevents the economy from falling into recession. On the other hand, if the inflation is rising, the central bank would increase this rate, thereby preventing the banks from extending loans. Now, what happened during the global financial crisis was even after reducing the rates to zero, it failed to r e c o v e r g r o w t h i n e c o n o m y.

Consequently, a new tool of pumping money into the economy was adopted, and this is called as Quantitative Easing. It was first adopted by Bank of Japan (BOJ) in 2000s to fight deflation. Subsequently, during the global financial crisis of 2008, the same was used by US Federal Reserve. How it works? QE is a policy through which the Central bank buys the financial assets (primarily government bonds) from the commercial banks and other financial institutions through open market operations. This lowers the long term interest rates and helps combat the recession. This is often the last resort used as it brings short term benefits in exchange for long term effects. However, this is possible only for countries in which the Central bank controls the currency used. For example- for the countries part of European Union, the Central Bank cannot unilaterally implement the quantitative easing.

Article of the Month - Runner Up

Finly | July 2016 | Finstreet | SIMSR

They rely on European Central Bank for a common policy implementation. Though it was first used by Japan in 2001, it was not until 2008 that the world's largest Central banks have used it. The below figure describes the 3 stages of QE by US Fed.

Positive Impacts: · Lowers the interest rates: Since the Central bank buys the financial assets primarily the government bonds from the other financial institutions, there is a surge in the prices of these assets leading to a decrease in the interest rates. · More Lending/Borrowing: The buying of government securities by Central banks helps the commercial banks create money ex nihilo. Henceforth, they can use these reserves to either lend more or buy back more bonds from the bank. Or we can say that it encourages the businesses to raise capital. In either way, it will stimulate the economic growth due to increase in money supply. · Confidence Building: If the Central Bank is serious about fighting deflation and high unemployment, it sends a positive signal to the market. This increases the investor's confidence and can lead to fast recovery.

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Another positive impact is the investor's attention towards other investments options like stock market, the demand for which will increase the prices of these shares and create more money.

·Increased Spending: As said before, there will be an increase in money supply, it will result to an increase in consumer spending as well. Hence, more profits for the company leading to more job opportunities by enabling the companies to hire more. As much as there are positive impacts of this policy, there are downside risks associated with it. This is why I said it provides short term benefits but at the expense of long term effects. Negative Impacts · No lending, only hoarding: This entire policy is based on the rationale that more cash with the commercial banks will result in more loans extended to the businesses resulting in recovery but what if the banks instead of lending to the businesses hoard cash and hence, no demand is created for loans. · Selling back securities: When the Central bank sells those accumulated assets back to the market, it will lead to increase in interest rates and repress recovery.

· Boosting other investment options:

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Article of the Month - Runner Up

SIMSR · Probability of Hyperinflation: If the money circulation in the economy increases to more than the desired amount, it can lead to hyperinflation. Due to increased money supply, the purchasing power of the consumers increases, and it leads to an increased demand. But as the supply of the goods remains same, the price of goods has to go up leading to inflation. · Depreciated exchange rate: QE also leads to depreciation of the country's exchange rates. Due to reduced interest rates, there are more imports from other countries. This leads to an increased capital outflow, hence less demand for country's currency resulting in its devaluation. · Encourages excessive debt: It is true that the reduced interest rate will enable the companies to borrow more and invest more, it can also result in excessive borrowing other than what is required. More the debt raised, more the chances of an even more weakened economy. Other than all the impacts mentioned above, one of the major snag is that it leads to increase in the wealth of the rich while there is no impact on poor's wealth. In 2012, a Bank of England report showed that its quantitative easing policies has benefitted mainly the wealthy and 40% of those gains went to the richest 5% of the British households. Hence, it further exacerbates the income inequality. To conclude, I would say that QE creates new money ostensibly to ensure that bank lending will support the economy.

But it actually does not work. It drives down the interest rates but because of the side effects, it weakens the growth in other areas. So, you land with one foot on acceleration while the other is on the brakes.

ECO Section

FINLY| August 2016 | Finstreet | SIMSR

Negative interest rates are the interest rates where the lender pays the borrower for the privilege of lending. This existence of such an environment implies that the various central banks and other commercial lending banks and financial institutions have slashed their interest rates lower than zero per cent. Currently the central bank of a country pays the commercial banks some interest for the funds parked with them . However, the negative interest scenario would mean that banks and other financial institutions would have to pay to keep their excess reserves stored at the central bank rather than receive positive interest income. During negative interest rate regime, it is more expensive for banks to hoard cash which in turn encourages them to circulate money in terms of extending long term loans and therefore these deposit costs are supposed to encourage the banks to lend or invest.

Some examples are central bank policies in the Eurozone, in Denmark, Sweden, Switzerland and Japan, central banks have decided to have a negative rate on commercial banks' excess funds held as deposits at the central bank. It's an extreme execution of monetary policy, which includes changing interest rates, much like when central banks decrease the rates to stimulate economic activity. The aim in the Eurozone is to stimulate economic growth and to raise inflation, which is also below zero and achieve the European Central Bank's target of below but close to 2%. In Sweden too, it is about raising inflation. In Denmark and Switzerland the immediate objective has been to prevent the currency rising too much. The idea of lower and negative interest rates is to discourage investors from buying the local currency, which tends to pushes its value up.

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SIMSR boosting inflation as imports become more expensive. Policy makers are also trying to prevent a slide into deflation, or a spiral of falling prices that could disrupt the recovery. By weakening their currency, they hope to import inflation by making goods coming into the country more expensive, raising domestic prices.

In some instances, central banks opt for negative rates to lower their exchange rates and make their exports more competitive, another way to stimulate growth. For example: Lower rates on a country's bonds mean less demand. The less demand for a country's bonds, the less demand for its currency and, thus, a decline in its price, the exchange rate. That, in turn, makes a country's exports more attractive to foreign investors. If more and more central banks use negative rates as a stimulus tool, the policy might ultimately lead to a currency war of competitive devaluations.

Another problem that persists is that the old people in the economy who depend on interest income, get hurt further and cut their consumption more deeply than those who benefit â&#x20AC;&#x201C; rich owners of equity â&#x20AC;&#x201C; increase theirs, undermining aggregate demand today.

ECO Section

So when does an economy go for negative interest rates? When the economy is weak and needs a boost, a stimulus is provided in terms of negative interest rates and to push up the inflation rate, if the inflation rate is below target. Negative interest rate complement other measures like quantitative easing, and signals central bank's resolve to tackle persistent below-target inflation.

Sub-zero rates strongly have the potential to weaken a nation's currency, making exports more competitive and

Conclusion But, as the World Bank has pointed out, negative rates can have undesirable effects. They can eat into bank's profitability by narrowing interest-rate margins. They can also encourage banks to take excessive risks, leading to asset bubbles. These lower interest rates on deposits may cause large sections of the economy to become cash-based, while pension and insurance companies may struggle to meet long-term liabilities at a fixed nominal rate.

ECO Section

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What central banks should be doing is focusing on the flow of credit, which means restoring and maintaining local banks' ability and willingness to lend to SMEs. Instead, throughout the world, central banks have focused on the systemically significant banks, the financial institutions whose excessive risk taking and abusive practices caused the 2008 crisis. But a large number of small banks in the aggregate are systemically significant â&#x20AC;&#x201C; especially if one is concerned about restoring investment, employment, and growth. Perhaps irrational search for yield implies that many investors will shift their portfolios toward riskier assets, exposing the economy to greater financial instability.

Faculty Section

When Shreya was picked up by the highest campus recruiter she was on cloud9. She frantically called her parents and informed them about this good news, her parents' heart swelled with pride and tears tricked down. Her family had many dreams for her and seeing them come true so soon was an overwhelming moment for the family. Her father was a retired Government officer and mother was a homemaker living in Nagpur. Although her family had been saving their income but most of the savings and investments were in bank deposits and the family's surplus gap was reducing over the years as they had not planned for their long term needs. Pondering over her families' financial position and the burden of fulfilling so many responsibilities with decreasing surplus got her thinking. A decade back, bank interest rates on fixed deposits were attractive enough to save in a bank, since the inflation rates were low. Today, India is one of the

fastest growing economies in the world with falling interest rates and much higher inflation, the real rate of return is negative. To beat this scenario, equity is the obvious answer but it requires a lot of research and experience because higher returns come with higher risk. Mutual funds are a better alternative for new investors who have limited financial knowledge since they provide good returns with specialists managing the money. Firstly, the large cap mutual funds; these funds are invested in some of best companies with good potential for returns. Long Term returns on a 3 to 5 year horizon has been 12 -15%. Be cautious not to invest in a below par fund and equally important not to get put off when the markets are not doing well and wait for the business cycle to pick up before redemption. Secondly, the Index funds, although they are called high risk investments, invest in the index companies which are

Faculty Section

the best of Indian companies and growing. These funds are as strong as the Indian economy which is poised to become a super power. Some of the top performers in the category with a long track record is a fund to invest for high returns.

which will give you the long term gain because the money is carefully invested by the fund manager in companies which have the potential to become a large cap stock in future. Although the risk is very high, the fund manager by active fund management and by

Source: Valueresearch Thirdly, Income Funds a class of debt mutual funds can deliver superior returns compared to bank deposits. They seek to generate returns both in declining and rising interest rate scenarios by managing their portfolio actively. They either generate interest income by holding the instruments till maturity or manage gains by selling them in the debt market if the price of the instrument rallies well. That means that these instruments will not guarantee you fixed returns like deposits but if you are investing for not less than two years, then income funds are tax efficient as well as fetch better returns and liquidity is high. The average returns are pretty decent in the range of 9-11%. The portfolios of some best funds are in Government securities and well rated bonds and therefore the risk practically is low. Midcap funds are a must in the portfolio but limit it to 5%.These are the funds

diversification can return an average of 15% plus. If you get lucky, during a bull run the units can be redeemed with high profits. Finally, selected bluechip stocks are also a must in any of your portfolio because you can book your own profits in a bull run. Timing is everything while investing in these stocks. Buy low and sell high should be your mantra. You should track a couple of sectors and a few companies. If you can follow the business of the company closely it can give true insights ahead of the markets and you can profit from the same. Managing Risk You should first construct an asset allocation plan for various stages of your life to be in control of your finances. With age on your side, the allocation should be more on the risky assets like stocks and mutual funds. More importantly youngsters must invest in the above category of investments and

FINLY| September 2016 | Finstreet | SIMSR

Faculty Section

SIMSR it is a necessity for long term planning; but manage risk by choosing the top few funds worth the effort. To mitigate risk one should follow the right asset allocation and diversify the investments. Asset Allocation. Invest in various asset classes in your portfolio (for example stocks, bonds, real estate and cash), and increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Diversification. Within the asset class the investment should be made in various categories of the same asset class like buying stocks of different companies and in different sectors or fixed income investments of different kinds. When you diversify, if the prospects of one asset is under stress, the other asset could be moving up thus giving the portfolio a cushion. In short, you don't put all your investment eggs in one basket. Choosing a variety of investment options is always a good investment principle. Successful investors often have a mix of aggressive and conservative assets in their portfolios. For achieving long term goals for the well-heeled, investing in risky assets is a basic need. The challenge is how to play it as safe as possible. One can start with a small SIP and keep track of the performance to test the waters. Buy direct plans to optimize expense of the fund. Mutual funds are tax efficient products with good returns but care

should be taken to select some of the top performers, not essentially the best.

Alumni Section

Finly | July 2016 | Finstreet | SIMSR

It gives me immense pleasure to share my experience with the Finly readers. It also gives me an opportunity to connect back to the committee of which I was a part for 2 years. I have recently joined Deutsche bank at Mumbai. I am part of the team that performs independent price verification for money markets, commodities and FX. This role acts as a second line of defence in the valuation control process of the bank with front office and group audit being the first and third line of defence respectively. The team does independent control and validation of the prices and the market input parameters. The trading positions are valued based upon appropriate bid or offer levels or mid market levels less specific fair value adjustment. The IPV (Independent Price Verification) data for testing is sourced from consensus sources like the Bloomberg, Reuters or other market data sources.

In risk based testing, the product of the risk sensitivity factor and the difference between the desk and IPV marks gives the variance. For risk based testing of the products like Repos and IR Swaps, the product of the interest rate risk sensitivity factor (Rho) for various tenors and the difference between the desk and IPV rates gives the variance. In the event of the variance exceeding the tolerance, appropriate discussion and escalation procedures are followed. Price based testing is carried out for products like treasury bonds, IR futures, Bond futures and options. In price based testing, the difference in the desk and IPV prices is multiplied by the notional to arrive at the variance. In case of illiquid products for which good quality consensus data is not available or for which the bank can influence the price by virtue of its huge position relative to the total amount issued, we carry out proxy testing. For e.g. in proxy testing of a bond, another

FINLY| September 2016 | Finstreet | SIMSR

Alumni Section

SIMSR bond with almost similar characteristics and good liquidity is used as a reference. The Z spread (for fixed rate bond) or the discount margin (for floating rate bond) of the reference bond is used in conjunction with additional spread to bridge the gap between the bond characteristics to arrive at the IPV price of the bond to be proxy tested. For the testing to be performed on month-end dates, there are additional checks and reconciliations as the month end results and adjustments are posted into the ledger and considered for PnL. For e.g. we calculate the Bid-Offer reserve for month-end dates because the IPV testing is performed at Mid prices and trader uses Bid or Ask prices to exit the positions depending on whether the positions are long or short. The analysis of the testing is reported to the traders and the Fds. I hope my experience helps the Finance enthusiasts to get a taste of the role of independent price verification. It is always a pleasure to contribute to Finly and connect back to Finstreet. I wish all the very best to the senior batch for their placements and a warm welcome to the juniors for their journey with SIMSR.

Article by FInacue

Now we can all do “Data-giri”, which is an opportunity for every Indian to do unlimited good things, with unlimited data – Mr. Mukesh Ambani in Reliance Industries' 39th AGM (1st Sep 2016) Reliance Jio (RJio) took the world by storm by finally announcing its big bang launch of full service telecom operations (it had acquired spectrum six years back!!!). Needless to say, even after being on trial for over six months, RJio's official announcement rocked customers, investors and other participants in the telecom and media ecosystem. Once again, the Indian telecom industry is at crossroads with RJio threatening to disrupt the hegemony of incumbent telcos. However, this time it isn't just about telecom; media and financial services firms will also need to brace themselves as data networks act as carriers for a whole host of services. In this article we examine the implications of the big bang launch.

Investors scurry as RJio changes the game with free voice and gargantuan capacity RJio's offerings are centered around the following pillars: (1) An all-IP network with humongous capacity (estimated at 3-6x that of incumbent telcos) – allowing the company to offer much more data, which is bundled in regular usage as well as wi-fi. RJio announced that it plans to setup ~1mn wi-fi hot spots by mid-2017. Also, the company is gearing up to scale up its existing network capacity of ~52crore GB/month to ~250crore GB/month as it wants to achieve a scale of 100mn users on launch. Mr. Ambani assumes that an average RJio user will hog 25GB of data/month. (2) Affordable devices – LYF's (Reliance Jio's handset brand) entry smart phone is priced at Rs2,999/-. The company also has an offering for users who don't wish

FINLY| September 2016 | Finstreet | SIMSR

Article by Finacue

SIMSR The entry offering of Rs149/- yields ARPU net of service tax of Rs136/mo and is comparable to ARPU of the telecom industry. However, with the target market for RJio being 4G-LTE handset users, it is likely that users will opt for a plan with reasonable data usage bundled in the same, viz. the Rs299/- plan. This plan translates to monthly spends of Rs449/-; users get unlimited voice and 3GB of data (and additional 6GB on wifi). Clearly, RJio is gunning for premium subscribers. Don't let the long queues of customers fool you… the common folk who braved

long queues just to get a feel of RJio's. 'Datagiri,' may very well stop using the service or share it among their families as they're charged Rs449/monthly. Service quality, the key differentiator With gargantuan network capacity, which even puts incumbents to shame, RJio certainly has the network capacity to battle it out with incumbents. However, RJio does have ecosystem constraints including: (1) Low proportion of existing telecom subscribers having 4G-LTE handsets (as of 30th June 2016, 8% of Idea's user base had 4G handsets). A subset of these devices has VoLTE capability, severely restricting RJio's catchment market (atleast for now). (2) No fallback – incumbents have legacy 2G and 3G networks, which will allow for connectivity even if there's no

4G access. That's not the case with RJio, which only has a 4G-LTE network. Nonetheless, RJio's strategy of targeting premium customers and creating a niche for itself (student-only offers) is a bold move. Service quality will be the key differentiator. premium customers will certainly rely on word of mouth feedback before they try and buy this. RJio isn't aiming to be the customer's second SIM – it wants to replace incumbent SIMs of premium customers. Irrespective of the winner; the customer wins With RJio's aggressive pricing and

offerings encompassing unbridled entertainment access, the customer is likely to be spoilt for choice. Incumbents are likely to match RJio's offering by providing a lot more for the current tariffs…viz. reduce rates for voice and data services, and also bundle entertainment content. Whether RJio is able to wean away high value customers from incumbents or not, one thing is very clear…the customer remains king and will surely be pampered in the days to come!!! Finacue offers multiple related projects in the area of telecom equity research – such as 'the Data Opportunity in India.' Team Finacue - Finacue offers rolespecific industry projects in Finance, allowing B-school students to hone their skills in the subject of their choice.

Article by FInacue

FINLY| September 2016 | Finstreet | SIMSR

S o u rc e : I d e a C e l l u l a r i nve sto r presentation change phones to switch to RJio – a personal 4G-LTE wifi router, Jio-Fi, priced at Rs1,999/-. (3) Applications and content – the company has created a suite of content offerings ranging from live TV to ondemand content (movies, music). It is offering these services free for customers till 31st Dec 2017.

The company pegs the value of such services at Rs15,000/per annum. (4) Service quality – whilst this remains untested, the company emphasized on quick on-boarding of new customers through eKYC and its self-care platform. (5) Simplified tariff – the company has announced ten tariffs for prepaid and postpaid users.

FINLY| September 2016 | Finstreet | SIMSR

It has done away with charges for voice usage, blackout days and voice roaming. Investors of Bharti Airtel and Idea Cellular – listed incumbent telcos were in for a rude shock as RJio openly challenged their cash cow, voice services, by offering the same for free. Further, seeing RJio's chutzpah in offering humungous data limits, investors were also spooked with the massive capacity upgrades needed to

Source: Yahoo Finance; note: IDEA.NS = Idea Cellular; BHARTI.NS = Bharti Airtel

match RJio's capacity and product offerings Unlike other new entrants, RJio is chasing premium customers . RJio's tariff plans start at Rs149/- for 28 days, implying a monthly bill of Rs160/for unlimited voice usage and 0.3GB of data usage.

Sector Analysis 29

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 their advance to decline ratio to analyse the performance of each sector and will try t o f i n d o u t w h i c h sector/segment/company is favourable for an investor to invest in. Following NSE data of the last 30 day period of 12 August 2016 to 12 September 2016, which shows us how the stocks of various sectors are performing? As observed from the chart below, the automotive sector was the biggest winner of the month which showed a positive change of 5.39% in the market cap, followed by banking and financial services (4.47%) and oil and gas (4.33%). The sectors that reported a negative change were telecommunication (-11.04%),

IT (-6.38%) and services (-5.84%). Also, the automotive sector showed a relatively high Advance/Decline ratio of 1.86. A/D ratio is the ratio of the number of advancing shares to the number of declining shares. A/D ratio tells us whether the stocks in a market are overbought or oversold and whether the market momentum will sustain or change. A higher A/D ratio means that the stocks are overbought while a lower A/D ratio means that the stocks are oversold. Reasons for the growth of the sector: A growth is seen in almost all the verticals in the automotive sector for the month. Main reasons for this could be above normal rainfall received during the monsoon season, resulting in increased agricultural activities and farm production, boosting the rural spending. Also, a series of new, attractive and affordable models have been introduced in the market in the

FINLY| September 2016 | Finstreet | SIMSR

Sector Analysis

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

Source: www.moneycontrol.com passenger vehicle segment. The market leader in this segment, Maruti Suzuki, reported sales of 119,931 units, showing a 12% YoY growth in despatches. The product wise split shows that the new product launches are clearly the winners for the company. With the seventh pay commission implementation and the progress on the GST front, the future of the automotive industry looks promising, which may provide great returns to the investors. Apart from the promising future prospects, the hot money flowing across the world and the improved market sentiment have added to the increasing momentum of the Automotive Industry's stocks. With the advent of the festive season in the coming months, this segment will be what an investor could look forward to. Now let us take a look at the various segments within the Automotive Industry and try to analyse which segment is doing better. The growth of the segments within the automotive industry is shown below: So, clearly 'Tyres' is the winner with an increase in market capitalisation by 19.93%. Second best performing segment being 'Tractors' with an increase in market capital of 9.19%, followed by '2 & 3 wheelers' segment which grew by 9.51%.

FINLY| September 2016 | Finstreet | SIMSR

Finly | July 2016 | Finstreet | SIMSR

Sector Analysis

SIMSR Apart from the factors adding to the growth of the automotive industry the rally in the stocks of the tyre companies has been mainly because of the falling rubber prices. Rubber prices fell to Rs. 130 per Kg down 9.8% since august 1, 2016. These are the lowest prices since June 2016 as per the Rubber Board of India.

But it should not be assumed that the wonderful performance by this segment will continue as the market may be heading towards correction and the segment is highly overbought with an A/D ratio of 7 which is very high. Considering various aspects of the performance of tyre manufacturing companies like EPS, P/E, Sales and net profits we suggest that the investors can invest in companies of this segment which have decent sales growth, good net profits, higher brand value and low P/E ratio in order to avoid investing in overly brought companies to get good

Sector Analysis

companies to get good returns. We also suggest that investors should choose carefully the stocks within this segment which may give them the best returns. Our recommendations are Apollo tyres and MRF ltd. For your convenience, we have listed down the major manufacturers of Tyres below with their key ratios for a better understanding of the performance of the companies within the tyres segment which can help you pick the right stock.

FINLY| September 2016 | Finstreet | SIMSR

News Buzz

SIMSR Real time money transfer using Unified Payments Interface becomes a reality The national payments corporation of India (NPCI), the umbrella body of all payments within the country received clearance from the RBI and allowed banks UPI applications to go live on the Google Play Store. The interface initially has 21 banks which include ICICI Bank, Axis Bank, Union Bank of India among many other banks. NPCI still uses the IMPS route for the movement of money between customers and banks. The technology is used for peer-to-peer payments and does away with the traditional approach of having to use the account number and IFSC code of the beneficiary.

Finance Ministry revises criteria for recapitalisation of PSU banks. Finance Minister ArunJaintley in his Budget Speech for 2016-17 had proposed to allocate Rs.25,000 crore towards recapitalisation of PSU banks. The government in July had announced the first round of capital infusion of 75% of the amount i.e. Rs.22915 crore for 13 banks. The second round of capital infusion for the current fiscal would be based on operations as well as recovery and quality of credit on the basis of risk weighted assets. Only those banks who fulfil the criteria post third quarter(October-December) will be eligible for the second round of funding. BSE files IPO draft papers with SEBI,aims to raise Rs.1200-1300 crore. BSE has filed for its initial public offering (IPO) that will see it list on larger rival NSE of the National Stock Exchange of India Ltd. Individual shareholders, mainly brokers and trading members, hold 56.83% in BSE. The rest is held by institutional holders such as LIC, SBI and Bajaj Holdings, besides the foreign bourses. Once BSE gets listed, its indices and products will get more visibility from market participants across the globe which is a huge positive for the stock market.

FINLY| September 2016 | Finstreet | SIMSR

FIN Tweets

FINLY| September 2016 | Finstreet | SIMSR

Trivia

SIMSR Helicopter money-a phrase coined by economist Milton Friedman refers to an unconventional monetary policy tool that means printing large sums of money and distributing it to the public to jumpstart the economy during deflationary periods. Developed markets of Japan and Europe are resorting to this concept to boost demand and inflation. Deflation damages an economy as when prices fall, consumers spend less and businesses will have to cut prices in order to find buyers.

ICICI Bank says automation will handle 20% of the total nondigital transactions by March end.This will save nearly 60% in response time for customers using the mechanical interventions and will also be saving on costs through better utilization of human resources. At present, the solutions have been introduced in processes in the retail banking, agro business, trade and forex, treasury and HR functions. The solutions are being used for repetitive, high volume and time consuming tasks like filing of TDS under the 15G/15H process or wrongful debit at ATM without the cash being dispensed.

Trivia

FINLY| September 2016 | Finstreet | SIMSR

The Taula de la Ciutat opened in Barcelona in 1401 to act as a treasury resource for the Catalonian government. The bank is on record as the first official bank in the world, although the practice of banking has been traced back for several centuries. The oldest continually operating bank in the world is Banca Monte deiPaschi di Siena, which has been operating as a bank in Italy since 1472. It was originally named The Monte di Pieta. The original goal of the bank was to offer charitable loans to the poor. The bank continues to operate today and has branches throughout Italy.

Venezuela has a current inflation rate of 57.30%. The country has been suffering from inflation for many years (see chart below). During the period from 1973 to 2014, it's been as high as 115.18% and as low as 3.22%. The annual rate has exceeded 100% during two episodes. The first occurred in June 1989 when it hit 103.29%. The second time, inflation remained above 100% for seven months from July 1996 (108.13%) to January 1997 (103.24%). Currently, it's on the rise again and many economists believe it could breech the century mark once again and hyperinflation will ensue. What's particularly disturbing for the citizens of Venezuela is that, after the mid-1980s, the annual inflation rate has been above 20% more often than not (see red dotted line in the graph).

Finly | September 2016 | Finstreet | SIMSR

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

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