Finly March 2018 by FINLY

FINLY| MARCH 2018 | Finstreet | SIMSR

From the Editor’s Desk

Dear Readers,

Team Finly is back with our last edition for this academic year. We hope Finly helped you in enhancing your knowledge last year. We promise to continuously strive to bring the best content regarding the latest happenings of the world for our readers next year as well. This issue also covers the prominent issues like PNB fraud in various sections. Also, we have tried to analyse the Modi Government's performance of last four years as the discussion regarding 2019 Grand Elections has started. Also, especially for this edition we are writing a special section “Finstreet 360” where the Convenors of Finstreet, the finance committee of KJ SIMSR share the contribution made by the committee to help students in learning finance. Since this is the end of the academic year edition. I would like to acknowledge each and every person who contributed towards making Finly a success. I would like to thank Dr. Pankaj Trivedi for his unwavering support to the Finstreet Team in all our endeavours. I would also like to thank entire department of finance for their timely support. I extend our gratitude to the Finly sponsors Finacue Research & Education for constantly motivating our team. Last but not the least, I would like to acknowledge the contribution by each member of team Finly for making this magazine a success. I would like to declare Komal Bhoria from IIT B, SJMSOM as the winner and Prasanth Kumar Yede from IIM Udaipur as the runner up for this month's call for article competition. Congratulations and we wish you all the very best for all your future endeavours. Madhur Saxena Editor-in-Chief PGDM KJ SIMSR

Team FINLY

FINLY| MARCH 2018 | Finstreet | SIMSR

Table of Contents

Cover Story

4 Years of Modinomics

Madhur Saxena (PGDM 2016-2018) Vipul Varkar (PGDM 2016-2018) Abhinav Kulkarni (PGDM 2016-2018)

Modi government undertook the power in the backdrop of falling GDP growth rate, rising fiscal deficit, corruption scandals and the huge promises made during the election campaign regarding job creation, inflation control etc. Hence, it was a challenging situation for the government to work upon. After looking at the 4 years of Modi government, the record on economic front can be said to satisfactory. The government tried to bring in reforms keeping formalization and digitization of the economy at the core of its policy making. Below is the analysis of some of the initiatives undertaken by the Modi government on economic front: G S T: - O n e n a t i o n , o n e t a x After numerous rounds of discussions, much discussed Good and Services Tax i.e. GST was finally introduced on 1st July 2017. Introduction of GST is a

landmark step towards transforming India's 29 states in to a single marketplace with uniform tax rate. Under GST regime, goods and services are being taxed at one of five rates: zero, 5 per cent, 12 per cent, 18 per cent or 28 per cent. Within one year, tax rate for some products have been revised. Recently, the GST Council slashed tax rates for a range of items, including daily consumption items and tweaked tax filing rules to make it more convenient for the businesses, especially for SMEs. GST seems to be settling down looking at the tax collection trends. Small businesses had to face a lot of difficulty complying with the guidelines of new tax system. This was reflected through fall in tax revenue collection of government. Tax revenue collection declined from Rs. 94063 Cr in July 2017 to Rs. 83364 Cr. in November 2017. However, tax collection has shown upward trend and showed a rise to Rs. 86703 Cr in December 2017.

Cover Story

Also, many sectors in economy experienced a temporary disruption. Under current GST regime, about 80 items are excluded from the purview of GST considering their contribution in the revenue of states. The list of excluded items include alcohol, petroleum products etc. The central government thinks to bring these products under the purview of GST in the long run. It would be important as it leads to uneven prices due to state taxes and illegal trafficking. However, it will be challenging for the center to find out a way for compensating the revenue loss for the respective states and convince them over the same. Meanwhile, the world has seen introduction of GST as a positive step. Moody's, a US-based credit rating agency upgraded India's rating almost after 13 years from Baa3 to Baa2 with â&#x20AC;&#x153;stableâ&#x20AC;? outlook, sighting the drive towards reforms. Also, as exuded by Prime Minister Modi, India's

ranking in the ease-of-doing-business being published by the World Bank is expected to improve further next year as the impact of the GST is considered. Fiscal Deficit: Government was hugely benefited by falling crude oil prices and fall in gold imports on fiscal front. India is a net importer of crude oil as it imports almost 72% of its crude oil requirement. Falling crude oil prices benefited mainly in 3 forms i.e. decrease in expenditure towards purchase of crude oil, reduction in subsidies provided towards petrol and diesel and increase in the tax collection as excise duties could be hiked. In addition to that, falling crude oil prices also helped in bringing the inflation down as most of the industries in India are closely linked with fuel prices. Fiscal position of India is directly linked with the crude oil prices. Graph shows

Cover Story

that declining crude oil prices since 2014 has helped India to improve fiscal deficit as it has reduced from 4.93% of GDP in FY2012-13 to 3.52% in FY201617. A study done by Sajjid Chinoy, Chief Economist at JP Morgan India shows that the declining prices benefited government to the extent of 0.9% of the GDP in terms of lower expenditure on subsidy and higher collection through taxes, thereby boosting the public investments in sector. The windfall was beneficial for firms and households as well.However, a sharp reversal in crude oil prices can roll back these falling fiscal deficit and may stall economic recovery. Oil prices have touched a two-year high of USD 63 per barrel this January and may touch USD 70 per barrel mark in short term. A study by Nomura Capital shows that every $10 increase in crude oil prices worsens current account deficit by approx. 40 basis points. Government seems to have considered this factor during annual budget. Considering the need to maintain the revenue collection at par, not much of tax concessions were offered to the middle class. It will be challenging for the government to maintain fiscal balance considering this change in the scenario. Formalization of economy: Formalization of economy was one of the important agenda set by Modi government. The government undertook several policy initiatives such as Jan Dhan Yojana, GST, Payment banks, currency swap etc. as well as shock treatment in form of demonetization. While success of demonetization is debatable, other

initiatives have served in financial inclusion and spreading awareness about mainstream banking processes. Even though government's intent is clear and justified, formalization of economy is much more challenging and will require sustained efforts. A huge labor force operates in informal job market. Informal job market has various sectors linked to each other. Due to interlinked nature, i m p rove m e nt o n o n e f ro nt w i l l necessitate working on another. Policy makers will have to ensure that formalization of sectors doesn't impact job market significantly. Also, state government will have a bigger role to play while pushing for land and labor reforms. The government needs to push these reforms with having a consensus with state government and other parties, to avoid any potential failure as Land Acquisition Ordinance faced. Bank recapitalization: The Asset Quality Review (AQR) program undertaken by Mr. Raghuram Rajan revealed the severity of NPA issue being faced by Public Sector Banks. Even on today's date, it is estimated that public sector banks are together carrying over Rs. 9 lac Cr of NPAs on their balance sheets. In the last 3 years, the government has already pumped in Rs. 51,000 crore capital address this issue. In addition to that, center announced a massive bank recapitalization program in December 2017, which includes infusion of a whooping Rs 2.11 lac Cr. capital in public sector banks within next 2 years. The capital will be raised through recapitalization bonds, budgetary support and equity dilution. While Ministry of Finance has urged public sector banks for

Cover Story

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performance improvement, it will be important to see how this infused capital is mobilized. Public sector banks will need to take special efforts to retain the trust of investors on the wake of recently revealed PNB Scam. Recapitalization is set to give some relief to public sector banks and increase competitiveness in banking sector. However, government needs to ensure that banks with dedicated efforts for reduction in NPAs should be rewarded w h i l e a l l o cat i n g ca p i ta l . A l s o, consolidation program in the publicsector banks can be seen fastened in future, to reduce number of public sector banks to 10-15. Consolidation will help in formation of banks with competitive market cap and efficient utilization of assets. Focus on Agriculture: Prime Minister Mr. Narendra Modi called for doubling the income of farmers by 2022, shifting from historical focus on increasing the production. The government also seemed to have targeted this sector, especially after alarming results of Gujarat Assembly elections. One of the significant progress on this front can be seen in form of the launch of PMFBM (Prime Minister Fasal Beema Yojana). This scheme has shown good results in initial period and helping in bring more and more farming area under insurance. It stands out distinct from previous crop insurance schemes with minimal settlement period for claims. In addition to that, use of technology for agriculture has been promoted by government by introducing web portals and mobile

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apps to assist farmers w.r.t. weather and farming activities. However, picture is not good in all areas. Government was not able to find solution over MSP (Minimum Support Price) issue related to various crops. Provision of MSP equivalent to 1.5 times of production cost had to be proposed in Budget 2018. Also, promises of farm loan waiver scheme made during electoral campaigns are turning averse to the financial situation of states and center. Such politically motivated steps should be avoided as they couldn't turn to be concrete solution anytime. Defence policies: The direction of the defence policies was shaped during the swearing in ceremony in 2014 when all the South Asian Association for Regional Cooperation (SAARC) leaders were invited. The heads of states i.e the Presidents or Prime Ministers of Afghanistan, Bangladesh, Bhutan, Maldives, Mauritius, Nepal, Pakistan and Sri Lanka were present during the swearing-in ceremony. This signalled to the world that India under the current government was open and ready to engage with the neighbouring countries in terms of both economic and defence cooperation. It also signalled to arch rival Pakistan that the current government is open for dialogues provided conducive environment is created for the same, it helped in pressing the reset button for the relationship between two countries. Also, keeping personal vendetta aside Prime Minister Narendra Modi travelled to USA where deeper defense and strategic cooperation was established with USA. The results can be seen in terms of USA supporting India's

Cover Story

entry into closed group elite groups like the Wassenaar Arrangement, The Australia Group and Missile Technology Control Regime(MTCR). In case of Nuclear Suppliers Group(NSG) the entry was blocked by China. We have also seen some bold moves from the current regime in terms of responses towards cross border infiltration by Pakistan, the coveted surgical strikes carried out by the Indian army in PoK and the befitting reply given by the Indian army to Naga Insurgents inside the Myanmar border. The defense strategy of the current government can be broadly classified into two main components, first attempting to make India's defense sector more competent, agile, and competitive by streamlining the procurement process, cutting red tape and, secondly, encouraging greater involvement by India's private sector in an arena long dominated by stateowned enterprises.In terms of procurement of defense items we have seen the government move from an impasse times during the UPA regime due to opaque procurement policies towards a more transparent policies for procurement. Also, the current push towards “Make in India” for defense purpose is a policy in the right direction as majority of the critical defense equipments are imported by the country which can act as a major weakness during crisis times. Also, opening up of defense sector to private players with policy of “Strategic partnership” with foreign vendors is a step in the right direction for development of capabilities in the private sector space. The government also increased the FDI limit in the

defense sector from 26% to 49% under automatic route and 100% under government approval route where access to modern technology is provided. In terms of spending annual Defence Budget of the country is yet to see a visible hike, India's defence budget for 2017-18 was Rs 2.74 lakh crore which is 1.63% of country's GDP compared to China's military spending for 2017 is pegged at $152 billion, which is close to around 3% of its GDP and three times higher than that of India's defence budget. Also, added to it in terms of capex the allocation is very less as salaries and pension is a huge obligation in terms of expenses. So there is a huge gap in terms of allocation of capital for defense purposes especially during current time where China is trying to increase its influence in the Indian region with its One-Belt-One-Road and China Pakistan Economic Corridor (CPEC) which needs to be rectified so as to create a capable defense force for the nation. In terms of defense policies the current government has taken up systematic changes in terms of procurement policies and development of capabilities for defense equipments, but to counter the dual China-Pakistan threat there needs to be more allocation of capital to the sector for modernization purposes. Social Aspects: BJP governments are popularly called Saffron governments. There has to be some reason for this. Ideologically the Bhartiya Janta Party believes in Hindu supremacy and thus there are always concerns related to polarisation and marginalisation of minorities. So, let us try to analyse the changes that Modi Government brought in during the last

four years in terms of social context. Triple Talaq It's an open secret that Muslims are not a traditional vote bank for BJP and developments on sensitive issues like Triple Talaq further aggravates the debate on religion & interests of minorities. Despite the possible political backlashes, the Modi government went ahead in case of “Muslim women Protection of Rights on Marriage”. This was seen as a sign of strong government and consolidated the faith in the government among Hindu hardliners at the same time disturbing people at the other end of the religious spectrum. The social cost & benefits of this move are yet to be seen but through this move, the government looked committed in terms of implementing the agenda of its ideological parent organisation RSS. Aadhar Modi government is strongly backing Aadhar and thus it is ultimately trying to bring a structural change in the way state and citizen interact, which is highly important in a country like India. Linking Pan Card, bank accounts and mobile phones to Aadhar gives government a clear method of transferring subsidies etc. to the beneficiaries' account directly and avoid leakages. This will be a very crucial instrument of social reform as India moves closer to a system of state sponsored social security through Ayushman Bharat- National Health Protection Mission. Reforms & rural India Modi government has been very dynamic as far as economic reforms are

considered but GST, demonetisation left a scar on the rural & semi urban economy which affected results in Gujrat Assembly elections and as result of which government came out with a populist budget and tried to woo rural voters. Still, the divide between India & Bharat is quite apparent under Modi Raj. The rural India seems to be lagging and feeling left out, thus the government has set out ambitious goals for farm economy in the recent budget. Caste BJP has been traditionally a party of upper caste hindus but in the recent years, the party along with its ideological parent organisation working under the umbrella of RSS realised that they need to break the barriers of caste for the sake of social & economic upliftment of Hindus and also consolidate the party's already polarised Hindu vote base. Thus, government has embraced the iconic figures of dalits and has been kind in offering the highest designations like President based on caste in an attempt to woo certain sections of society. So, in a way this is really ironic that the government that came promising a new developed India indulged itself in Caste based politics heavily. Foreign Policy: Foreign policy has been one of the areas where the government looked confident and focused. Modi government made several new friends, some even at the cost of “All-Weather” Friends like Russia. Modi Era saw India-USA moving ahead from special partners to strategic partners as far as defense is considered, though with Donald Trump coming in as

FINLY| October 2017 2018 Finstreet Finstreet||| SIMSR SIMSR FINLY|JANUARY MARCH 2018 |||Finstreet SIMSR

the 45th president of U.S.A. the economic partnership became a matter of concern but as far as defense is considered, Uncle Sam expects India to play an active role in Indian Ocean and the partnership seems intact. Closeness to U.S.A has come at the cost of Russia earlier considered as India's All Weather Friend trying to balance itself and maintaining equally good relations with both India & Pakistan for business interests. Though Modi Government lost on Russia front, it has been exceptionally good as far as China is considered. The Doklam standoff gave a clear indication of a strong government unbudging from its stand. Though the escalated tensions made the markets jittery, it sent a strong message to China and the rest of the world, that Diplomacy is the only way to resolve the territorial disputes between Indian and China. Let's come to the second most discussed neighbour of India; Pakistan. Modi government had had a roller coaster ride dealing with Pakistan, ultimately coming to a situation of standstill where solution to the kashmir issue is very difficult to find. Still, the government should be appreciated in taking a tough stand against Pakistan in front of international community at crucial situations for example.Financial Action Taken Force's grey listing of pakistan. Other than this, PM Modi made 35 visits to 6 continents till date visiting 53 countries which reflects in India's improved relations with Gulf, Japan and South Korea. Thus, Overall it can be seen that Modi government had tried to forge economically advantageous relations with major powers of the world but at the same time keeping India's Interest at the forefront, for example the latest

treatment given to Canadian Prime Minister Justin Trudeau where the ministers of high rank deliberately avoided to meet him because of certain sections of his government supporting the idea of â&#x20AC;&#x153;Khalistanâ&#x20AC;? which is against the sovereignty of India. So, Will the Modi Government return to Power??? Modi Government's returning to power is crucial for the economic reforms it initiated during this tenure. A weak Indian National Congress and no clear third option at the national level augurs well for the ruling Bhartiya Janta Party and Indian markets. However the poor performance in the current elections in Gujarat assembly and U.P. by polls is a matter of concern for the government. A modi wave that swept the Loksabha elections of 2014 may not be visible in 2019 but however it can be expected that people appreciate the strong decisions made by the Modi Government in order to ensure development and protect the rights of Sovereign India. What ultimately happens will be an interesting story to follow.

Article of the Month - Winner

JEWELLERY SECTOR: RIPPLES FELT POST THE PNB SCAM

Komal Bhoria Shailesh J. Mehta School of Management, IIT Bombay

Whenever any scam gets exposed in the country, clear evidence of information asymmetry between both the ends involved depicts the shortcomings of our markets and institutions. Talking about the latest such scam which absorbed much of the limelight and made investors and their agents to think about the consequences for the same around the happenings of the event. After series of defaulters exposed in the recent times, PNB fraud made the riskaverse investors to give a serious second thought for country's most reputed banks and their compliances for issuing loans of huge amounts. Diamantaire Nirav Modi, one of the youngest person to be on Forbes' richest list for Indians in alliance with top bank officials managed to breach the internal messaging system for lenders to approve loans as

well as succeeded in issuing multiple fraudulent letters of understanding without any collateral. One of the industries that was majorly hit post the fraud turned out to be jewelry sector that included psychological as well as financial concerns. This fraud turns out to be even bigger than the Jatin Mehta's Winsome Diamond scam where the default amounted to be around Rs. 7,000 Crore where PNB's exposure turned out to be the highest valued at Rs. 1,800 Crore. The man at the center of the scam, Nirav Modi defaulted more than $1.77 billion as per the complaint filed by Punjab national bank to the enforcement agencies. Another man involved in the case is Nirav Modi's Uncle Mehul Choksi, Head of Gitanjali Group who also colluded with the officials by issuing unauthorized loans

Article of the Month - Winner

from the bank. Modi's company Firestar Diamond has recently filed for bankruptcy in a New York court creating unrest among other banks who were involved in providing credits to other similar Diamond companies. Such incidences lead to sudden strict compliances towards the industry due to series of wave undermining the credibility of such businesses and their management. Consequences have already been felt by the small and medium scale jewelers where they are denied INR 10 Crore of loans even after shelving out more than 100 to 125% of collaterals despite considerable creditworthiness hitherto. India's largest lender State bank of India showed the figure that is being exposed to gems and jewelry sector amounting to less than 1% of its domestic loan equivalent to 13,000 crore, also they are planning to ask the borrowers in the jewelry sector to back the current lending through greater amount of collaterals (earlier 10-15% to at least 40-50% currently) or to reduce the amount within a time-bound period. Such immediate decision was taken by the management to mitigate the risk of the market and shield itself by preventing any backdrop from the situation post the scam. Such decisions will influence other lenders as well leading to significant dry up in the credit flow to the jewelers both in the organized and unorganized sector. As per latest statistics, gems and jewelry sector contribute to 6-7% of country's GDP as well employing more than 25 Lakh, also contributing to significant dollar inflows in the country. One of the major reasons that more than 90% of diamond in terms

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of volume is received in India for the purpose of cutting and polishing, turns out to be lower labor costs as compared to the west. As per domestic ratings firm CARE, Firestar Diamond and Gitanjali Gems contribute to 16% of total revenue generated by gems and jewels market in the country's organized sector. Shutdown of these two major giants will lead in 5% to 6% of decrease in the diamond and jewels foreign trade over the next year 2018-19. Also, both the companies have clearly informed their employees about the current situation and their inability to provide them salaries after the seizing of stocks and bank accounts by the income tax department, It has also created jeopardy among 11,000 regular employees of the reputed firm. Apart from such resistances internally, there is a recorded decrease in the demand for diamonds in the last two months (FebMar) as per the survey by Industry lobby Assocham. Among the unorganized sector particularly, people are finding it hard to sustain the faith on purity and worthiness of their jewelers as well as postponing their purchases for the timebeing. Another interesting insight from the survey reveals that 65% of the jewelers in the unorganized sector are shifting from diamond to traditional gold and silver ornaments as their buyers are asking for purity concerns post the scam. Since lenders are susceptible to securities presented as assets in form of gems and diamonds, the expertise is missing in differentiating between the natural and artificial ones, therefore to get hold of the situation and to bring back the trust of the lenders, online diamond trading

Article of the Month - Winner

platform such as Indian commodity Exchange (ICEX) should come up with even smaller sized diamond certification (currently one to 0.5 carat size) to foster participation from other small and medium sized firms and issuing certification by globally recognized agencies such as Gemological Institute of America and International Gemological Institute. After the scam volumes on the platform has significantly increased though not in terms of value, from 83,249 lots worth INR 323 Million (In Feb) to 113,372 worth INR 225 Million (In March). Even while handling such assets, there exists a high chance of fraudulent occurring inside the premises after the loans have been issued against the securities, careful monitoring of such assets is the need of the hour by concerned authorities.

HOW TO TACKLE THE

Article of the Month - Runner Up

PROBLEM IN INDIA

Prashant Kumar Yede IIM Udaipur

What is NPA - Non Performing assets? NPA is defined as the classification of loans in the books of financial institutions that have defaulted or the scheduled payments for the interest or principal are in arrears. Generally debts are classified as NPAs, if the scheduled payment is not made for 90 days or more, but this period may vary depending upon the terms and conditions of the contract. The bad effects of NPA The NPAs affect lenders in three ways, first the non-payment of interest and principal reduces cash inflow for the banks which affects the earnings and disrupts budgets. Second increasing bad loan provisions (funds set aside) for the default loans, reduces capital available for giving further loans, which slows down the credit flow to the industry. Third default loans are written

off against the earnings once the actual losses are determined. This is the very reason behind the famous twin balance sheet problem (TBS) of India. This will hamper the growth prospects of Indian economy. Recently some famous cases of loan defaults (Kingfisher Airlines, PNB fraud) have spiraled into the public domain, drawing much needed attention of the Government and regulatory bodies on the critical issue. This has highlighted an underlying problem mushrooming in the Indian banking industry. In the aftermath of PNB fraud fallout, banks especially public sector banks, which account for more than 70 percent of banking in India have turned very cautious in disbursing loans to corporates,. However lending to reputed and established firms is business as usual, those with high leverage are facing the heat. Banks are also hesitant to issue trade credit guarantee and letter of

Article of the Month - Runner Up

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credit, which is adversely impacting foreign trade. Credit growth in India which was on the recovery path has again started slumping. NPAs in India The bad loans or NPAs for public sector banks reached Rs.7.34 lakh crore by the end of second quarter this fiscal. This figure was comparatively low for private sector banks at Rs.1.03 lakh crore as per RBI reports. The major contributors to NPAs are corporate defaulters accounting for approximately 77 percent of the total gross NPAs. In last 23 years NPAs have increased at an alarming rate. The NPAs in India have more than doubled since the year 2015. In the year 2015 gross NPAs stood at around Rs. 3.4 lakh, which now stand at around Rs. 8.4 lakh crore. The nonperforming assets-NPAs are 9 percent of the total assets of Indian banking system. This is as high as 12 percent for the public sector banks (PSBs).

Among the banks in India State Bank of India (SBI) has NPAs worth Rs.1.86 lakh crore, highest amongst all, followed by Punjab National Bank at Rs. 57,630 crore, Bank of Baroda at Rs.46.307 crore, Bank of India Rs. 49,3017 crore, Canara Bank at Rs.39,164 crore. Among the private sector banks ICICI Bank has highest NPAs worth Rs.44, 237 crore, followed by Axis Bank at Rs.22, 136 crore and HDFC Bank at Rs.7, 644 crore. NPA ratio in India is 9.1 percent, which is closely behind Russia at 9.2 percent. Other countries like Brazil, China and South Africa have NPA ratio of 3.8%, 1.7% and 3.2%. Figure 2 â&#x20AC;&#x201C; Comparison of NPAs as a percentage of total assets in different countries

Figure 1 â&#x20AC;&#x201C; Growth of NPAs in India over the years

Article of the Month - Runner Up

Ways to tackle NPAs problem in India Steps taken by the Government To tackle NPAs problem in India a combination of preventive and curative measures is required. The Indian Government has rolled out slew of measures to clear the menace of NPAs in the country. Some of the measures are as follows. New Insolvency and Bankruptcy code 2016 India ranks very poorly when it comes to resolving insolvencies. As per a 2017 World Bank report it takes around 4.3 years to complete insolvency proceedings against a company after it declares bankruptcy. In comparison it takes only around 1 year in countries like US, UK and Germany. The recovery rates are also very poor in India, for every 100 cents loaned to the companies banks are able to recover only around 26 cents as compared to around 80 to 90 cents in countries like US, UK and Germany. The new Insolvency and Bankruptcy code is aimed at expediting insolvency proceedings against willful defaulters and bankrupt companies. Earlier the onus to start debt restructuring process lied with debtors but now it lies with creditors. Creditors will give moratorium period of 180 days during which a professional from lenders side will form a committee to decide whether to go for liquidation or revival. In case of liquidation lenders will have more say in what has to be done with the money recovered. Increasing the network of Debt recovery tribunals The Government of India has expanded

the network of debt recovery tribunals (DRTs) within the country. There are now 39 debt recovery tribunals as compared to 33 in FY 2016-17. This is aimed towards expediting the process of debt recovery. Recapitalization of banks Last year in one of the public gatherings RBI Governor Urjit Patel called for recapitalization of banks to improve the NPA situation of Indian banks, as taking large haircuts is not an option for many of the banks given their unhealthy balance sheets. Government in January this year announced recapitalization of public sector banks with Rs. 2.11 lakh crore over the next four years. The government will raise money for recapitalization via three routes, issue of recapitalization bonds, divestment of public entities and rest via fiscal provisions. This will ensure that public sector banks remain in good health and have enough funds to fuel credit growth in the country. Suggested structural reforms to tackle NPAs in India Ĺ¸Amendment in banking laws to give RBI more power There is a need to amend the banking regulation act to give RBI more powers so that it can monitor the accounts of big loan defaulters. The present law allows the government to direct RBI to conduct inspection of defaulters but does not allow to setup a committee. RBI demands stricter rules for joint lending forums (JLF) and oversight committee. Also there should be laws to prevent a bank from extending loans to a company which has failed to repay other banks.

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Article of the Month - Runner Up

HOW DO THEY MAKE MONEY? PA R A – P u b l i c s e c t o r a s s e t way would be to first recapitalize then Ÿ

rehabilitation agency PARA or public sector asset rehabilitation agency will be an independent entity which will identify the biggest NPAs of the bank and buy and manage them. It can solve NPA problem in two ways. First as it will buy and consolidate loans from different banks it will lead to faster settlements rather than banks dealing with defaulter individually. Second it can better negotiate and strictly enforce recovery from defaulters.

reform governance structure and then privatize. ŸUse of Technology

Use of technologies such as artificial intelligence for financial services might improve risk management of financial institutions. Technology can help in two ways, first at engagement stage to analyze the risk profile of prospective clients in deciding whether to give loan or not, then at post disbursement stage for early detection of probable loan default.

ŸRecapitalize, Reform and Privatize

NPAs of public sector banks are very high as compared to private sector banks; Figure 3 – Years to resolve insolvency and hence privatization appears to be a recovery rate for different countries possible solution the problem. But PSBs public sector banks in their current state will find it difficult to get any takers. And repeated recapitalization of PSBs also creates moral issues as tax payers money is used to write-off bad loans. So the right

ECO Section

Ankit Chhatwani( PGDM-FS 2017-2019) Shreya Maheshwari (PGDM 2017-2019) Priyansha Aggarwal (PGDM 2017-2019)

The past year has been a litmus test for the Central Bank of the country. Its resolve to restructure and evolve the Indian Economy has been facing headwinds. It has been trying to push for ease of access and transparency on various fronts. One of the bitter pills it gave to the banking system on February 7, 2018 was to 'harmonize' the bank rate with the Marginal Cost of Lending Rate (MCLR). This has been receiving rebuke from the Banks on its policy decision. The revival of credit growth has generated optimism in the financial markets. So, a discussion on the changes made in loan pricing carries a core importance in this regard. With this article we will try to examine the stance and the need to take this stance taken up by Reserve Bank of India. Understanding the Loan Pricing Regimes: A trip down the RBI Lane

The Story begins, in 1994, when the lending rates were deregulated with banks under only regulatory requirement to disclose Prime Lending Rates (PLR) i.e. interest a bank earns from most creditworthy borrower. Alike all 'free regimes' that exist in India, this system came under scanner for opacity in setting lending rates. The Reserve Bank evolved this system into Benchmark Prime Lending rates (BPLR) requiring the Board governing each bank to give a consent on the lending rate of loans over 2 lakh. But again, this regulatory check came under the scanner when it found in September 2008 (Curious Dateâ&#x20AC;Ś Isn't it?) that sub-BPLR lending was upwards of 75%, that too in form of long term loans. This was considered a 'major distortion' and a new regime of Bank Rate was introduced in July 2010

ECO Section

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Before we delve into complexity to pricing of loans lets go through some concepts in Corporate Finance: 1.Cost of Funds: The average cost of Banks Sources of Funds. It is important as Bank has to make sure it doesn't lose on a loan it has made to a borrower. 2.Marginal Cost of Funds: Simply it is interest payable on a new loan. Technically, it is sum of marginal cost of borrowings and deposits (a) (other than equity) and a return on net worth (b). a.Marginal Cost of borrowing: It's the product of rates offered on different types of loans and balance outstanding in deposit. It carries a weight of 92% as per BASEL III Accords. b.Return on Net worth: Cost of equity which carries a weightage of 8% as per BASEL III Accords. 3.Spread: The Profitability component decided by the board of each bank keeping in mind the business strategy and credit risk premium a bank want to charge to the borrower. 4.Negative Carry on CRR: Loss made on regulatory requirements of Cash Reserve Ratio (CRR) by the Central banks of the country. This provision on the logic of returns that loss must take in on the account of possible investment of CRR money. 5.Tenor Premium: The cost arising from loan commitments of longer tenure. Banks need to publish MCLR as a statutory norm as per overnight, onemonth, three-month, six month and one-year duration.

The Base Rate System of pricing the loans: Under this system a bank needed to announce a base rate, taking into account various components as prescribed by RBI guidelines on Interest rate on Advances which includes following components: a. Cost of deposit/funds b.Negative Carry on CRR/SLR c. Unallocated Overhead Costs d. Average Return on Net Worth So, Base Rate = a + b+ c + d The 'Refined' MCLR system of Pricing of Loans: April 1, 2016 saw a change again (which will be discussed later), introduction of MCLR system of Pricing wherein it has four components: e. Marginal Costs of Funds f. Tenor Premium g. Operating Costs h. Spread MCLR rate = e+ b+ f+ g +h The need of 'Refinement' of the Base Rate System and case for MCLR: RBI in its Study on the performance of different pricing methodologies has described various tactics used by four big banks (obviously without naming them) to inflate the base rates: 1. Cost of Funds was calculated by one public sector bank as the average rate over credit card deposits to inflate the cost of funds neglecting the average cost on CASA. 2. Another Public-Sector bank, despite the decline in its cost of funds by 40 basis points, decided to manipulate the return

ECO Section

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on net assets to 45 basis points to keep the base rate unchanged. 3. A private sector bank tweaked the formula of Base rate calculation to inflate the rates and trying to reach close to the suggested formula by adding new components to the formula.

RBI argued that such instances has made it difficult to transmit monetary policies which it has been trying to push to control inflation. Profitability and liquidity are two primary purposes of the bank, in this case the former was shadowing the latter. This brings in the case for a system like MCLR to be brought in for the effective policy transmission using home and auto loans as a vehicle to transmit

policy rates. To understand this better let's take an example that Repo has fell by 75 basis points since April 2016, SBI's Base rate has been down only by 65 basis points but SBI's MCLR is down by over 125 basis points. The reset clause, of one year, helps to pass on the changes in monetary policy. The borrower under base rate was given options by bank to move to MCLR rate by payment of Migration fees. Some banks have waived off this fee based on

ECO Section

borrower profile and repayment history. The figure above shows the changes in Weighted Average Lending Rates by Scheduled Commercial Banks after the implementation of MCLR rates. The trend seems declining especially in fresh loans governed by MCLR. Base rate linked loans have seem to have sluggish transfer of repo rate cuts. Therefore, a case of harmonising Base Rate with MCLR is justified looking at the above trend. This seems to present a rosy picture and give us the confidence that RBI has been phenomenal like always! But the Central Bank is again facing new challenges. MCLR System: A Panacea or a riddle just getting more confusing? In an easy monetary policy climate, like we experience now, the average cost of deposit is lower than the marginal cost, banks attract customers at lower interest rates as per MCLR and the existing customers are encouraged to stay on base rate regime or they are charged migration fee which erodes the time value of money, bringing them par to original rates. This has been the primary reason for sluggish transfer of monetary policy through MCLR regime. Till October 2017, only 40% of Corporate Portfolios and about 25% of retail portfolios have been migrated to MCLR regime .

Return on Net Worth calculation is facing inflation due to arbitrariness in Capital Asset Pricing Model Mutual Funds and ULIPS (Unit linked Insurance Plans) have also turned up the ante by offering a high return on savings, diverting the primary source of funds of the banks towards these instruments. Absence of any external market/ method benchmark has led to variance in tenor premium. Conclusion: A new stride with an External Benchmark Rate The Indian debt market is facing a great dilemma, internal benchmarks have been rigid and clearly shows the effect of balance sheet of the bank. One way forward is introducing External Interbank Offer Rate like LIBOR associated to even home and auto loans. Ex ternal Benchmarks have occupied a central anchor in modern financial systems. In Wheatley Review of LIBOR after The LIBOR Scam of 2012, it was found that there was no decline in use of LIBOR as a benchmark rate even after the news of scam broke in the markets. This brings us to the development of a benchmark that must be robust, reliable and must have a term structure to cater to various maturity of loans. RBI has various options as T bills, Certificate Deposit Rates and Policy rates. We hope that RBI works in its way forward in creating a healthy debt market for a country with an economy growing at a 7.5 % rate.

The reset clause has been sluggish again to transmit the monetary policy. There has been a recommendation to review the MCLR rate on quarterly basis.

FINLY| August 2016 | Finstreet | SIMSR

FINLY| August 2017 | Finstreet | SIMSR

Fintech Section

SWIFT PNB SCAM

Introduction: The bail-out announced by the government in the form of recapitalization with 2.11 lakh cr, came as a huge relief for the PSBs, which were hurt by a string of NPAs. The stock markets welcomed this move and bank stocks surged up to 32%. The government since then has been trying to create a comprehensive framework by discussing various alternatives for bail – outs i.e. FRDI bill (bail – in provision) and IBC (Insolvency & Bankruptcy Code) for faster and stricter resolution. With such reforms in talks, the market was optimistic on the bank sector, until the Nirav Modi & Mehul Choksi scam hit Punjab National Bank (The second largest PSB) of Rs 11,400 crores. The PNB stock took a huge toll by this.

Amey Patale (PGDM 2017-2019) Aarzoo Doshi (PGDM 2017-2019) Deepanshi Agrawal (PGDM 2017-2019) PNB Scam: To understand how the scam happened, let's take an example of two friends, one of whom is a banker with access to SWIFT and another one being a jeweler. The jeweler needs cheap loans, the banker offers them at let's say 10%. The jeweler feels the rate is too high and thinks of going for a foreign currency loan with much less interest rates LIBOR + 2%. The foreign bank wouldn't lend the jeweler as it did not know him. So now the jeweler approaches his friend the banker and seeks a guarantee for his loan from the foreign bank in the form of a “Letter of understanding” (LOU). The banker sends a message on SWIFT – the banking message service – that the Bank guarantees the loan amount for the jeweler at an interest rate of LIBOR + 2%. The Bank is this example is PNB and the

Fintech Section

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jeweler is Nirav Modi. PNB's nostro account gets the money. PNB then gives Nirav Modi the money from the Nostro account, usually paid off to whoever Nirav Modi is buying his diamonds from. During payoff, new LOUs where being issued to repay the existing loans. Thus, it was bit like a Ponzi scheme. Banks provide LOU facility as it is a way of earning for them. PNB gave a guarantee without collateral because of business relationships, again a normal practice. These guarantees were then sent via Swift messages to overseas branches of Indian lenders including State Bank of India, Axis Bank, Allahabad Bank and Canara Bank which then made local currency payments to designated bank accounts in Antwerp, Frankfurt, Hong Kong, Mauritius and Bahrain. PNB uses Finacle, developed by IT giant Infosys for its operations since 2001. But PNB's outdated version of the software was not integrated with Swift, the international financial messaging

FINLY| September 2016 | Finstreet | SIMSR

system. That meant Swift transactions had to be logged separately into PNB's core banking system. Infosys' 2008 version of Finacle integrated the two systems. However, PNB did not upgrade to the new software that allowed members of Brady House branch staff to continue sending Swift requests without detection. Had the SWIFT been integrated with Core Banking system, such transactions could have been easily detected. What is SWIFT and how it works? The Society for Worldwide Interbank Financial Telecommunication (SWIFT) lends its name to an electronic messaging network, which is used globally by over 11,000 banking and securities organizations. It allows easy money transfer from one institution to other. The SWIFT network handles a massive volume of messages â&#x20AC;&#x201C; over 450 million financial messages transmitted and received. Customers using the SWIFT network can

Fintech Section

FINLY| September 2016 | Finstreet | SIMSR

connect to it in a variety of ways: directly through permanently leased lines, through the Internet, or through SWIFT's own cloud service. Most financial institutions broker/dealers, commercial banks, custodian banks, transfer agents and foreign exchange brokers all utilize the SWIFT messaging network. SWIFT messages are used for various types of wire transfers of information: buying and selling of securities, corporate actions notifications and instructions, foreign exchange and international currency transfers, and more For example, if the ABC Company from the United States would like to make a payment of US$100,000 to their

supplier, XYZ Company in Australia, they would contact their local bank office, in United States. ABC Company would instruct its bank to send a payment and would provide the name and account of the beneficiary (the person or business they are transferring currency to, in this case, XYZ Company), the amount to be transferred, and the receiving bank's SWIFT Code. Once ABC Company's bank receives the instruction (and confirms that it is legitimate), the bank then debits ABC's account of the US $100,000. It sends a SWIFT message to XYZ Company's bank in Australia, with the instruction to credit XYZ's account with US $100,000. XYZ Company can choose to have that US$100,000 exchanged, as a foreign currency exchange, into Australian Dollars, or keep it as U.S. Dollars to then be used to make payments to their own

Fintech Section

suppliers who prefer payment in U.S. Dollars What is LoU? LoU is an abbreviation of bank guarantee known as a letter of undertaking, under which a bank A allows its customer to raise money from another Indian bank B's foreign branch in the form of a short-term credit. It serves the purpose of a bank guarantee for a bank A's customer for making payment to its offshore suppliers in the foreign currency. These natures of the transactions are not retail and are mostly used by businesses for import of goods. Who gets LoU? The borrower uses his/her existing credit relationship with a bank in India or any country to avail the required credit outside the country (foreign country). An authorized dealer may give a guarantee in the form of letter of undertaking or letter of comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy. How does LoU works? For example, you are a customer of an Indian bank A and you require a shortterm credit in a foreign country to import something. You can approach the foreign exchange department of your bank A and ask for a LoU. In return, the bank A would ask you for a collateral

or a guarantee, which could be in the form of fixed deposits or other assets. The credit percent depends on your relationship with the bank. If bank A is convinced, it will issue a LoU, which when given to an overseas branch of another Indian bank B would result in release of the amount in foreign currency. This amount goes to a specific bank account of your banker back home and does not come in to your account directly. It is called Nostro account. You can then decide in whose favour the payment needs to be done. What went wrong in PNB case in regards of LoU? ÂˇFor raising the LOU, the customer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But as reported by Reuters in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money. What is CBS? CBS is short form used for Core Banking System where all branches are interconnected to ensure that all the bank customers - regardless of their home branch - are able to operate their account and transact in any of the member branch located anywhere in the world. After this process, a customer is no more customer of a branch, but she/he becomes customer of bank. The primary objective of CBS is to centralize details of financial transactions and maintain a universal database of the credit-history of customers of all the individual branches. All the transactions are updated real-time. What went wrong in PNB case in regards

Fintech Section

of SWIFT and CBS? The CBS system of bank was not linked with SWIFT, the SWIFT activity had to be done manually as they were using an older version of Finacle, so this activity did not appear on log of audit reports of CBS system in PNB, how vulnerable system, process and security are when not integrated is best quoted here. This lead to the wiles of rogue employees who choose not to log transaction and fudge the records. As per CBI report 150 fraud LoUs were issued in 7 years period Future Ahead: The third-party intervention to make payment led to PNB scam. If there is a process where there is no third party dependency and transaction occurs between the two parties with records available to a decentralized system where records cant be reverted nor manipulated, This all points to the use of Distributed Ledger Technology (DLT) of Block chain .The Distributed Ledger Technology can be the future and SWIFT in also in Test phase of SWIFT gpi, where they are testing that whether the expected liquidity can be maintained and cost of transaction can be bought down using the DLT mechanism. But the recent scam demands focus on the validation of the transfers made. The transaction being recorded on distributed ledger can be approved and reviewed by multiple authorities, thus there by reducing the vulnerability of the scams by corrupt employees and manipulative customers of bank.

FINSTREET 360

FINLY| MARCH 2018 | Finstreet | SIMSR

Yash Parikh (PGDM 2016-2018) Convenor Krishnakant Sharma (PGDM 2016-2018) Co-Convenor Pasan Choksi (MMS 2016-2018) Co-Convenor

The last year of any postgrad program holds a special place in the heart of every student and it was the same for us. As we, the 2016-18 batch progressed into their second year of MBA, we were given the opportunity to be the flag bearers of our committee, i.e. FINSTREET. Each of the senior batch had some visions and ideas for all the incorporations that could have been incorporated into the committee for the benefit of every stakeholders, seniors and juniors alike. As we reach towards the end of this final year of MBA, we, the steering committee of FINSTREET, would like to take this opportunity to go through the year that went by. Here, we would be elaborating on the plans we had for the committee and its members and how we tried to make sure that everyone

associated with FINSTREET, gains the maximum out of it. ·Our Vision – 1.To make Finstreet a knowledge enabler in the field of finance for the students of SIMSR 2.To bridge the gap between Industry and academics 3.To provide a platform for every SIMSR student to explore finance and make informed career decisions ·How did we go about for the execution of the above 3-point vision – 1 - To make Finstreet a knowledge enabler in the field of finance for the students of SIMSR. 1.Knowledge sharing sessions(KSS):

FINSTREET 360

To bridge the gap between the Industry and academics, Finstreet regularly conducted KSS where various topics were covered. A KSS is an open event, which was taken by either the seniors or juniors and where everyone could attend and interact on the topic. We started the year with Basics of Stock markets, to ensure that every student is well versed with basic terminologies. This was followed by a KSS on Derivatives, which was held on a crucial time, i.e. just before the companies which used to focus on derivatives for recruitment purposes came to campus for summers. During the whole year, there were other KSSs, like on Falling interest rates and on Mutual Funds. We ended the year with a KSS on Technical Analysis of the stock market. 2.FinReach: This was exclusive for the Finstreet members, where regular GDs on Financial topics (usually current affairs, e.g. Demonetisation & GST) were conducted and the seniors helped the juniors so that their knowledge base and their presentation skills could be improved, which would help them in their SIPs and during Final placements. 3.Finly: Finly is the monthly magazine dedicated to the world of Economics and Finance. The magazine seeks to connect the dots between the latest happenings of the world and the concepts taught in the classroom. The magazine has following sections: ŸCover Story to provide an in-depth coverage of a major event. ŸEco section to explain readers about

the practical aspects of economics. ŸSector Analysis to help readers understand the current happenings in the stock market. ŸI n t e r - C o l l e g e " C a l l f o r A r t i c l e competition" with exciting prices to encourage students to improve their writing skills. ŸFintech section to update students regarding the technological advances changing the world of finance. ŸNews Buzz & Trivia to give a quick update of important news from around the world to readers. 4 SIFICO: As a part of the Finance week at SIMSR, Finstreet assisted the Department of Finance at SIMSR in organizing the International Finance Conference SIFICO. This is a platform provided globally to researchers to present papers around the themes of finance and economics. SIFICO usually sees domestic as well as international papers. The conference is open to highly regarded academicians and students alike. It enables a two-way dialogue with topic experts. Finstreet takes great pride in hosting this event on behalf of the Department of Finance. Top 6 papers are published each year from the entries received and presented. 2.To bridge the gap between Industry and academics 1.Live Projects: Finstreet members undertook live projects with financial services companies mainly in the broking and distribution business. distinct live projects were undertaken –

FINLY|JANUARY MARCH 2018 FINLY| 2018||Finstreet Finstreet||SIMSR SIMSR

1. Equity Research 2. Mutual fund research Live projects give students opportunities to interact with industry mentors and work on topics which are relevant in some of the most coveted finance profiles.

FINSTREET 360

Students from the senior team guide and assist the junior team to understand the assigned sector, which is followed by Company valuation. The valuations were done by various methods like Discounted cash flows(DCF),etc. Here also, the juniors were guided by the seniors. Mutual Fund Research involved creating a sales pitch presentation for a particular fund. It involves studying holdings, management, risks, returns, ratios to develop a view on a particular fund. 2.Investrix: As a part of the Finance week at SIMSR, Finstreet organizes Investrix, a corporate panel discussion. Our topic for the year 2018 was – “Stock markets growing faster than the GDP”. This event is reserved for the CXOs, MDs and other top officials to participate and shed some light on industry relevant topics (Technical Analysts, fundamental analysts, venture capital investors, Quants-derivatives analyst, BSE representatives). 3.Lock Stock & Trade: An intra-college event held by Team Finstreet over two legs. The objective of the first round was to actively manage their portfolio (one portfolio per team)

during the trading window of 5 days and maximize their Net worth (Final Cash + Stock value). While the second round was all about open pit and was dependent on the news which was based on probability. The objective of the event was to make students aware and give exposure to the trading world. 3.)To provide a platform to explore finance and make informed career decisions 1.Guest Lectures: We invite industry experts to our college to share their knowledge with our students. We have had regular GLs like Careers in Finance, how to excel in summer internship, etc. 2.Finzomania: An Intra-College Finance Quiz competition, which was designed by the first years. This event tested the financial mettle of the candidates in all fields namely Banking, Accounting, Derivatives, FinTech etc through various fun filled rounds. These helped the students to have a check on their financial and general awareness questionnaire acumen. 3.Equity Research Competition: An inter college event which was conducted as part of Melange'18. The competition tests the financial acumen of teams by evaluating their valuation techniques and recommendations given for the stock by evaluating the rationale given behind for it. The participants need to take an holistic view of industry along with macro-economic conditions in the country and showcase the same in terms of growth potential the company they

FINSTREET 360

FINLY| MARCH 2018 | Finstreet | SIMSR

value has to offer. Based on the industry in which the company lies and the clarity of different methods of valuation with their application and limitation, they are expected to adopt and assign weightages to different methods while calculating the final target price and giving a buy, hold or a sell rating. The finalists have an opportunity to showcase their financial mettle with the blend of personal communication skills which are integral for a career in investment-oriented services by way of a stock pitch.

greater heights in the upcoming year. All the very best to you guys! As we said in the beginning, the last year of any postgrad program holds a special place in the heart of every student, make the most of the upcoming years, coz the memories made here will last a lifetime. Team FINSTREET (16-18 Batch) wishes all the readers best of luck for all their future endeavors!

As can be seen from the various above events which were held by the committee, our main objective was the maximum value addition to all the students. We hope all the participants of the events and the attendees of the various guest lectures and KSSs were able to get the most out of them. Lastly, but most importantly, we would like to thank the whole team of FINSTREET, without whom none of these would have been possible. The Senior team, which selflessly came forward for helping with the executions of various events and their domainexpertise, guiding each and every junior in every way possible. The Junior Team, which soon would be the senior team, deserves a very special mention. Without the Juniors, it wouldn't have been possible to accomplish what we had aspired to do for the committee.Every junior worked hard so that FINSTREET could reach much greater heights. We are sure you guys would take the committee to even

Team Finstreet 2016-2018

Krisnakant Sharma

Yash Parikh

Pasan Choksi

Madhur Saxena 31

Vipul Varkar

Team Finstreet 2016-2018

Aditya Shetty

Jagdish Bang

Neha Swaroop 32

Ronak Shah

Anindya Mitra

Abhinav Kulkarni

Team Finstreet 2016-2018

Ankita Lavande

Abhas Sharma

Nandani Chaturvedi

Swetanshu Sondagar

Pranav Parikh

Team Finstreet 2016-2018

Reemal Kumar

Prince Nagaria

Kriti Srivastava

Priyanka Beriwala

Arita Guha

HEALTHCARE INDUSTRY

Sector Analysis

Aditya Shetty(PGDM-FS 2016-18) Varun Momaya(MMS 2017-19) Jerin Shaji(PGDM 2017-19)

Health is wealth. For a country, there is nothing more valuable than good health of its citizens. A healthy workforce is thus a country's real asset. Hence, investment in healthcare becomes very important for a country. The Indian healthcare sector is poised to register a compound annual growth rate

(CAGR) of 22.9 per cent during 2015-20 to US$ 280 billion.

Healthcare sector is constituted by the following sub sectors: ·Pharmaceuticals ·Infrastructure ·Diagnostics ·Medical Insurance ·Tele-medicines ·Medical equipment & supplies

1.)Pharmaceuticals India's pharmaceutical market ranks third in the world in terms of volume and 11th in terms of value. At US$ 17.4 Billion, the market in India accounted for 1.6% share of the global market in 2016. It is expected to grow at a CAGR of 10-13% to US$ 26-30

Sector Analysis

Billion by 2021. The overall penetration of modern medicines is quite low in India. The per capita spending on pharmaceuticals in India is one of the lowest among emerging markets. Compared to the emerging market average per capita spending of about US$ 117 per year, the spending in India is approximately US$ 15-25 per year. Affordability, access and awareness are the prime factors, which determine the demand for pharmaceutical products in the Indian market. Other factors like rising per capita income, improving access to healthcare facilities, and higher government spending on healthcare drive market demand. Moreover, increasing insurance penetration, more healthcare awareness and enhanced investments for treating chronic ailments serve as key growth drivers. 2.)Infrastructure The rapid forecasted growth in healthcare can be attributed to the under-penetrated Indian market which has very low health infrastructure in comparison to world median. Thus there is a tremendous growth opportunity in this sector. Owing to its competitive pricing and huge healthcare costs in developed markets, India is one of the leaders in medical tourism. India's medical tourism market is expected to more than double in size from USD 3 billion at present to around USD 8 billion by 2020. The number of foreign tourists coming to India for medical purposes rose by almost 50 per cent to 201,333 in 2016 from 134,344 in 2015. Ayurveda, yoga and wellness industry in India set it apart from other

medical tourism destinations in the world. A major portion of secondary, tertiary and quaternary healthcare institutions comes fro m th e p rivate secto r with a concentration in metros, tier II and tier I cities. The market size of private hospitals has also been on a rise from $ 22 billion in 2009 to $ 81 billion in 2015 has been growing at a pace of 29.8% CAGR. Increase in the number of hospitals in Tier-II and Tier-III cities has fuelled the growth of private sector. Government policies are also assisting in improving the sector outlook. 100% FDI in Greenfield projects and 100% FDI in brownfield projects with government regulation is improving investment environment in India . 3.)Diagnostics Diagnostics market is expected to grow at a CAGR of 20.4% to $32 billion from $5 billion in 2012. Ms Anupriya Singh Patel, Minister of State for Health, Government of India said that Indian medical technology industry would grow to US $ 14 billion by 2022 from the present level of US$ 1.4 billion riding on the back of unprecedented digital initiatives and focus on manufacturing, particularly electronics equipment. The diagnostics have been hit by the GST tax rates and various other rules and regulations. As the tax charges are geared up to a hefty number it seems that the GST has cursed in the diagnostics more than it has blessed. After 15th August, as the new stock arrived, it has lashed out the tax rates on the general public as many important heart and kidney operations are under the slab rates 12 to 28 percent GST which has increased its costing per

Sector Analysis

individual. Around 80 percent of lifesaving medicines have become expensive after the August timeline. 4.)Medical Insurance Health insurance has been the fastest growing segment of the industry, recording a CAGR of 35% in the last five years. Still, the gap between healthcare spend in India and that covered by health insurance is a mammoth US$57 billion. This gap is waiting to be addressed, with more innovative products. Penetration of health insurance of any form is in single digits vs developed economies where it hovers at 80% or more. Even those covered are under-insured in some form or the other.

FINLY| NOVEMBER 2017 | Finstreet | SIMSR

implementation of GST has also impacted the sales of medicines in the short run and this is evident from the fact of muted sales growth in the months of August-September 2017. Also issuance of an order by the government to doctors to only specify the names of generic drugs and not branded one has affected the market strategy of firms. 6.)Tele-medicines The tele-medicines vertical is on an upswing in recent times as it addresses the basic issue of providing healthcare to inaccessible rural masses at affordable rates. The government of India has also emphasized on initiatives l i ke M o t h e r & C h i l d Tra c k i n g Syste m ( M C T S ) a n d Fa c i l i tat i o n Centre(MCTFC). Also, the emergence of businesses like Practo, 1mg, etc is providing new avenues of investments.

Both the central and state governments are increasing the scope of public health cover for the poorer sections of the society. Few notable mentions are, the Rashtriya Swasthya Bima Yojna (National HealthInsurance Policy) created for people below the poverty line. Another government initiative which has brought millions under health insurance cover is the Rajiv Aarogyasri in Andhra Pradesh. With increasing demand for affordable and quality healthcare, penetration of health insurance is poised to grow exponentially in the coming years

Availability of multiple government & private hospitals, private clinics & the advent of e-clinics has created multiple options for buyers. Further, a plethora of pharma companies & strong impetus of providing low price generic drugs has created options for buyers. However proprietary drugs still do have a sizable market share.

5.)Medical equipments & Supplies The NPPA's effort to regulate the prices of drugs and medical equipments like stents, orthopedic implants has resulted in cutting down on margins of m a r k e t p l a y e r s . M o r e o v e r,

Bargaining power of buyers: medium Options for buyers in terms of generic drugs. However, some medicines do not have a generic substitute. Moreover, the buying decision in India is largely governed on the basis of preference of

Porters' Five Forces: Healthcare sector Threat of Substitutes: medium

Sector Analysis

FINLY| DECEMBER 2017 | Finstreet | SIMSR

doctors & pharmacists, though active measures have been taken in recent times to reduce this influence. Bargaining power of supplier: low The raw materials for drug production are commodities & have multiple suppliers thus giving them low power with reference to the pricing of products. Competitive rivalry: medium There is an increasing number of players in the market, however, patent protection has helped keep the pricing power in the hands of the companies. However, the national pharmaceutical pricing authority (NPPA) has further capped the prices on hospital procedures and medical devices in recent times leading to affordable pricing in the sector. Threat of new entrant: medium Stringent US FDA rules & NPPA price capping has created an entry barrier for new entrants in the pharma sector. Further domestic growth in terms of health insurance has been on a rise as the government tries to reduce 'out of pocket' expenses of people opening up a lucrative market for companies to venture into such spaces. Government policies Open defecation free drive Open air defecation and lack of proper sanitation cause serious health diseases like diarrhoea, intestinal infections, cholera, typhoid, hepatitis. Government's Swachh Bharat Abhiyan included eradicating open defecation

FINLY| MARCH 2018 | Finstreet | SIMSR

practice from India. According to the latest progress report announced by the government as on 30 Dec 2017, around 3 lakh villages have been successfully eradicated from open defecation. Total sanitation coverage in India has reached an all-time high of 75% vis-à-vis 39% in 2014. Till Dec 2017, the government has been successful in building more than 6 crore individual house hold latrines (IHHLs) in rural and urban parts of the country and has declared nine states and two Union territories free from the practice of open defecation. In the year 2017, over 1.79 crore toilets have been built in rural areas. While, in urban areas, little over 16 lakh IHHLs have been constructed in this year which is more than 8 and 10 lakh in 2015 and 2016 respectively. National Health Policy, 2017 The policy proposes to increase the public health expenditure by 2.5 percent of the GDP from the current 2 percent GDP spending on healthcare. The policy aims ·To reduce the maternal mortality rate, infant and child death rate due to many infectious diseases. ·To eliminate leprosy by 2018, kala-azar by 2017 is targeted in the policy. ·To reduce the prevalence of blindness to 0.25 per 1,000 persons by 2025. ·To reduce premature mortality from cardiovascular diseases, cancer, diabetes or chronic respiratory diseases by 25% by 2025

Sector Analysis

FINLY| MARCH 2018 | Finstreet | SIMSR

·To reduce in the current use of tobacco by 30% by 2025, safe water and sanitation for all by 2020 are targeted in this policy.

·Improved

quality of healthcare, more accessibility, increased reach to underprivileged ones and reduced cost of healthcare delivery are aimed to achieve under the new NHP. The policy seeks to increase the use of public health facilities by 50% from current levels by 2025. National Health Protection scheme Finance Minister Arun Jaitley on the 1st February, 2018 announced this NHPS scheme in the Budget. Under this scheme, Rs 5 lakh cover will be provided a year to 10 crore poor and vulnerable families in the country for secondary and tertiary care hospitalization. Ayushman Bharat Programme The National Health Policy, 2017 has envisioned Health and Wellness Centres as the foundation of India's health system. Under this 1.5 lakh centres will bring health care system closer to the homes of people. These centres will provide free essential drugs and diagnostic services. The Budget has allocated Rs.1200 crore for this flagship programme. Also, in order to further enhance the accessibility of quality medical education and health care, 24 new Government Medical Colleges and Hospitals will be set up, by up-grading existing district hospitals in the country. This would ensure that there is at least 1 Medical College for every 3 Parliamentary Constituencies and at least 1 Government Medical College in each

State of the country. E-hospital app Online Registration System (ORS) is an online portal where citizens having Aadhaar can enroll for appointments in hospitals across various States and Union Territories of India. Through this service ·getting an Online appointment

·lab reports ·blood availability in any government hospital has become online and easy. As on September 2016, 46 hospitals covering 478 departments provide this service. NHP Indradhanush The “NHP Indradhanush” is designed to alert parents for their children vaccine who are up to 16 years of age. The vaccine schedule is configured automatically by providing the date of birth of the child. The app takes away pressure of having to remember life critical information amidst juggling work and home for the parents. Features ·The user can add baby and corresponding details ·The user can set reminders for each baby on immunization ·The user can add new immunization in addition to the recommended ones ·The application is designed to work on Android phones for now Pradhan Mantri Surakshit Matritva Abhiyan The program aims to provide assured, comprehensive and quality antenatal care, free of cost, universally to all pregnant women on the 9th of every

Sector Analysis

FINLY| MARCH 2018 | Finstreet | SIMSR

every month. It guarantees a minimum package of antenatal care services to women in their 2nd / 3rd trimesters of pregnancy at designated government health facilities. Past Sector Trend Above graph shows the movement of S&P BSE Healthcare index in the last 2 years. It's clearly seen that the sector has not given a good return over last 2 years. The sector contains companies from pharmaceuticals and hospitals. In the last two years, pharmaceutical companies are going through a rough patch. India's major export of pharmaceuticals goods happen to the USA. Indian companies are facing issues like FDA non-approvals which is limiting the exports. Trump's policies to ease manufacturing of medicines in US and capping the price of drugs has hurt the sector. Companies that are exporting to US are facing regulatory hurdles hence the revenue is getting severely impacted. US FDA has increased approvals which bring more player in the sector and the supply side has increased. Channel consolidation has reduced the number of buyers for the company which has given more strength to the buyers and thus increased their bargaining power. Above graph shows the performance of sectors in SENSEX. Healthcare was the only sector which was a drag on the SENSEX in the year 2017. Scams in Healthcare Current regulatory and accountability mechanisms are not sufficient to ensure quality and prevent negligence. Patients'

interests are not adequately protected. A private hospital Fortis near Delhi terming the nearly Rs 16 lakh for 2 weeks of care of a child suffering from dengue. Hospitals hiked prices of diagnostic services and devices, which do not fall under the NPPA's purview. The NPPA published a report showing how some of the private hospitals buy medicines and medical devices in bulk at low cost and sell them to patients much above the maximum retail price, earning huge margins up to 1,737%. Medical tourist face another problem of paying extra commission to the translator. The commission ranges from 30%- 40% of the procedural expense. Future outlook Communicable/ non-communicable disease: The improving social status of people has led to the increase in health issues due to eating of unhealthy food. The new viruses are causing more new diseases and that bring a great opportunity for pharmacy companies to make a windfall gain by introducing vaccines for preventing diseases. Infrastructure: The present infrastructure is not enough to deal with the problems of vast population. Hence giving very good opportunity to existing private hospitals to serve the underserved market. Insurance: India has one of the lowest per capita healthcare expenditures in the world. Government contribution to insurance is very low as compared to some of the developed nations. The high

FINLY| MARCH August 2017 SIMSR 2018 | Finstreet Finstreet || SIMSR

Sector Analysis

out-of-pocket expenses in India is because of the fact that 76 percent of Indians do not have health insurance.

Rural-urban disparity: The number of the hospital facilities and medical staff in rural areas is very less compare to the population living in rural places. This gives private hospitals scope to expand to tier 2 and tier 3 cities. Thus the changing regulatory landscape has led to the erosion of margin of market players and thereby firms are looking at more sustainable market strategy. As a result, the prices of stocks are low in the medium term and they hold tremendous growth potential owing to both domestic and global indicators. Currently, stocks are trading at a low valuation and thus healthcare sector is a good sector to invest in.

News Buzz Trivia

FINLY| DECEMBER 2017 | Finstreet | SIMSR

Tata sons to sell stakes in TCS to pay debt of Tata Teleservices

Tata Sons Ltd. one of India's biggest business group which owns 73.5% stake in TCS, plans to sell 1.48% or 1.25 billion dollars of its stake in Tata Consultancy Services. The company plans to sell shares at between 2872rupees to 2925rupees a share. Citi Group Incorporation and Morgan Stanley are bankers to the sale. The proceeds from the sale will be used to pay creditors of its wireless division. Tata sons sold Tata Teleservices Ltd's mobile phone operations to Bharti Airtel Ltd. last year and pledged to pay the unit's obligation. They have mandated lenders a loan of 1.5 billion dollars for a period of six years. Tata sons plan to use this sale proceed to pay the debt of the creditors of Tata Teleservices. The company is also seeking an offshore syndicated loan to pay back the debt. SEBI to consider changes in model code of conduct of company due to information leakage on WhatsApp

In May 2015, SEBI drafted a code that includes principles a company needs to follow for preventing insider trading leakage of price sensitive information. The reason for citing this is the unpublished financial result of the companies finding their way in

FINLY| MARCH 2018 | Finstreet | SIMSR

W h a t s A p p g ro u p s . T h i s l e a ke d information has found to be the mirror of the actual results for the companies- Axis Bank Ltd, HDFC Bank Ltd, and Tata Motors Ltd and Bata India Ltd. These companies have been asked to conduct internal inquiry and strengthen their system. Other companies may be asked to conduct background checks on employees dealing with price sensitive information and create a separate and secured workspace for discussing issues that are price related. This matter is still under probe as there can be a possibility of leakage due to systematic issue and not a company specific. TRIVIA GST refund issue likely to be resolved by the E-Wallet Mechanism

In a recent interview, Minister of Commerce and Industry, Mr. Suresh Prabhu strongly vouched for the introduction of the e-wallet mechanism to be a blessing, addressing complaints filed by exporters with regard to delays in refund of taxes under the GST regime. With the help of the e-wallet mechanism, a notional credit would be transmitted to the accounts of the exporters. This would be done on the basis of their past track record, and they can conveniently use the credit provided to pay the taxes on inputs.

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As per what exporters have to say, delays in the refund of taxes significantly blocks their requirement of working capital and affects shipments. The problem of refunds has been going about for over eight months. Approximately Rs. 20,000 crore of funds is withheld on account of delays in refund of taxes under the new indirect tax regime. In contrast, the revenue department has claimed th at th ere are critical discrepancies between the forms submitted by exporters to the customs authorities and those with the GST Network. The Central Board of Excise and Customs (CBEC) has established the 'GST refund fortnight' concept commencing from 17th March, to expedite the sanctioning of remaining refunds to the exporters. The Federation of Indian Export Organizations (FIEO) mentioned that the problem of liquidity could be well tackled, with the usage of e-wallet. The mechanism can be used like a regular bank account â&#x20AC;&#x201C; funds being debited from the e-wallet when supplies relate to duty that is paid, are carried out and the amount is credited as soon as proof of exports are generated.

Finly | MARCH 2018| Finstreet | SIMSR

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