Fintellect 2022 Annual Magazine, Capital

Foreword

India @ 100 is an exciting theme to discuss today, when India @ 75 has become the world's fifth largest economy by nominal GDP and the third largest by purchasing power parity (PPP) Of this, almost 70% of the GDP is driven by domestic consumer spending. India has also emerged as the third largest startup ecosystem in the world, with 107 unicorns as of September 2022. Now, with the world’s second largest population, and with 12 million people ready to join the labour force each year, what will the Indian economy in 2047 be like?

This will depend on whether the economy can attain growth through investment as well as consumption, which in turn will depend on the creation of good employment opportunities with reasonable wages. For now, optimism about the growth of the economy is muted as India, and all economies for that matter, deal with the challenges of supply chain disruptions, surging commodity prices, and inflation The impact of inflation for India gets magnified due to a weakening rupee, which is well past the 81 to the U.S. dollar level. The current account deficit at a decade high of around 2.8% of GDP adds to the pressure on the currency.

In the short term, as domestic inflation rules above the acceptable levels, the tightening of monetary policy by the Reserve Bank of India will impact economic activity. The duration and intensity of the Russia Ukraine conflict will remain an important issue for the global economic ecosystem and a challenge for the Indian economy. Even as several major economies prepare for a recession, or at least a slowdown, the expected fall in commodity prices will help India cut its import bills and strengthen its current and fiscal finances. This may be a temporary positive for India.

In the long term, as India @ 100 unfolds, some strong positive indicators are India’s growing financial inclusion and internet penetration 78% of Indian population above 15 years of age holds a bank account, and online transactions are on the rise The strong start up ecosystem on the rise in the country will contribute significantly to job creation and economic growth. Indeed, for India, the coming decade will set the tone for its economic growth story. This will depend on how well India is able to capitalize on its demographics, how seamlessly the agricultural sector and the rural economy are mainstreamed, and how the evidently growing climatic disorders are managed

There are several outlooks and opinions on where the Indian economy is headed from here, and the Financial Symposium of Trade Winds 2022 is an attempt to provide a platform for a hearty discussion on India @ 100.

Dr Niti Nandini Chatnani Professor (Finance) IIFT, New Delhi

Macroeconomic

January: The global economy enters 2022 amidst a new Covid variant, Omicron, rising cases and lockdowns, increasing inflation and a worsening supply chain Global growth expected in 2022 is 4.4% as compared to 5.9% in 2021

March: Evergrande delays its results for FY’21 citing auditing issues. Approximate $2billion worth of their assets are seized by banks while Sunac, China’s 3rd biggest property developer, has its liquidity position revised to ‘weak’ by rating agencies The exposure of Western Markets to Evergrande is significant through ownership of corporate bonds

May: The newly appointed PM Ranil Wickremesinghe says that Sri Lanka has run out of dollar reserves and even finding a million dollars will be difficult.

The economic crisis worsened with power cuts up to 14 hours a day and severe medicine shortage

July: Best month for Cryptocurrency as Bitcoin rose 25 percent and Ethereum rose close to 55 percent This coincides with a less investigation from the Fed and interestingly, Tesla announcing that they will slash their Bitcoin holding by 75%.

September: The Federal Reserve raises the Federal Funds Rate by 75 basis points to range from 3 3.25% to control inflation. This has happened for the third consecutive time in 2022 and the Fed’s monetary tightening stance is expected to continue into 2023.

February: War increases uncertainty as the Russian occupation of Ukrainian cities causes a rise in food and fuel prices. Global wheat prices soar as exports from Russia and Ukraine, two of the world’s largest suppliers, are halted owing to the war

April: Randstad, a global employment service provider, says the Great Resignation is likely to persist as fewer people in the job market give people more options and the chance to go where their needs are met. This is in direct response to economies making work from home more normal than ever.

The economic cri

June: Russia defaults on its foreign currency sovereign debt for the first time in a century, owing to tough Western sanctions that shut down payment routes to overseas creditors. They were unable to pay about

$100 million of interest payments despite a month long grace period.

August: Recession fears in Europe worsen with Germany, France, Italy and Spain having their growth forecasts downgraded by IMF Inflation above 10% in the UK only adds to these fears as energy crisis due to Russia Ukraine war has drastic effects.

Macroeconomic News Roundup: India

January: RBI releases framework for offline digital payments This framework is aimed at pushing digital transactions in rural and semi urban areas It will allow offline payments of up to Rs 200 per transaction, subject to the total limit of Rs 2,000

March: Government extends emergency credit line guarantee scheme (ECLGS) till March 31, 2023. Under ECLGS 3.0, business enterprises in hospitality, travel and tourism, leisure, and sporting sectors would be able to avail credit under ECGLS

May: The US becomes India’s top trading partner

As per the latest data from the Ministry of Commerce, the US was India’s top trading partner in 2021 22, surpassing China. Bilateral trade between US and India stood at $119.42 billion as

against $80.51 billion in 2020 21.

July: India received the highest ever annual FDI inflows of almost $85 billion in FY 21 22.

According to data by the Ministry of Commerce, India received annual FDI inflows of USD 84 835 billion in FY 21 22 overtaking last year’s FDI by USD 2.87 billion.

September: India became the world’s 5th largest economy by overtaking the United Kingdom. Moving past one of the biggest economies in the world, especially one that ruled over the Indian sub-continent for two centuries, is a major milestone.

February: Economic survey emphasizes a green financing framework Green finance is the usage of financial instruments like green bonds that are specific to the use of projects which are environmentally sustainable or projects that adopt the aspects of climate change

April: Centre bans PSEs from buying other govt owned firms. The objective of this move is to minimize the presence of the government in PSEs across the sectors and to make available newer investment opportunities for the private sector

June: Securities and Exchange Board of India (SEBI) has set up a 20member committee under K V Kamath on Hybrid Securities. The primary purpose of this initiative is to boost the growth of hybrid securities, ease of issuance, and attract domestic and

global capital.

August: SEBI proposes blue bonds for sustainable financing activities. A blue bond is a new form of debt instrument that is issued to support investments in healthy oceans and blue economies which refers to the sustainable use of ocean resources for economic growth.

Industry Updates

January: Telecos were given the option to convert Adjusted Gross Revenue (AGR) dues into equity This was done seeing the mounting AGR dues, and the cash strapped conditions of the companies This is largely due to the falling Average Revenue Per User (ARPU) per GB of data falling from Rs 268 to Rs 9 8 in June 2021

March: Lithium has been a mineral of discussion due to its significance in the EV industry. Traces of lithium were found in Karnataka’s Mandya District. The government has announced an 18,100 crore PLI scheme to

make lithium ion cells

It signed an MoU with Bolivia to explore and extract lithium and exploration in 7 states.

May: ONGC becomes the first Exploration and Production company in India to trade domestic gas on Indian Gas Exchange (IGX).

IGX allows buyers and sellers to trade both in the spot and forward markets for imported natural gas. This can facilitate better price discovery in the Oil and Gas industry, once more companies start trading on the platform.

July: The government announced Draft Coffee (Promotion and Development) Bill, 2022 to replace the Coffee Act, 1942. The law shifts the Coffee Boards from the Ministry of Commerce to the Ministry of Agriculture, which ensures that all the benefits under various agricultural schemes are extended to coffee growers.

September: The government spoke about the National Logistics Policy (NLP) which is potentially a big reform in the logistics industry, by reducing truck turnaround times, and increase their average ton/km A hub and spoke model will be used to ensure multimodal connectivity to ensure fast transport

February: The Finance Minister announced taxation on profits from Virtual Digital Assets (VDA) at 30% The provision also states that the losses cannot be set off, essentially making it equivalent to betting and gambling This move looks forward to discouraging the Crypto Industry, a sphere that the government wasn’t very happy about due to the associated risks.

April: Open Network for Digital Commerce (ONDC) was the buzzword recently. It is potentially a revolution in the e commerce industry as it looks forward to bringing together all the buyers and sellers in the e commerce

ecosystem on one single platform It aims to weaken the monopoly of big players like Amazon and Flipkart and promote small players.

June: The NonPerforming Assets or NPAs of Scheduled Commercial Banks

(SCBs) reduced to a 6 year low of 1 7% NPAs are stressed assets of banks, which are the loans on which the borrower has defaulted and starts to turn into a liability for a bank. This shows positive signs for the Indian Banking Industry and acts as a testimonial to the working of banking reforms

August: The government was pushing for a common charger for all mobile phones, which will be the Type C connector. This move will be a breather for the consumers as they won’t have to purchase different chargers for different devices. However, this will hurt the revenues of companies like Apple, who sell different chargers for their phones

India Inc. Updates

January: Investment firm Blackstone India consolidates assets worth $900 million. It has consolidated its 16 logistics and warehousing assets across India, having an enterprise value of USD 900 million, under Horizon Industrial Parks and has a robust track record of building high quality logistics real estate platforms around the world

March: Ed tech firm Byju’s has raised $800 million in the latest funding round, with founder and Chief Executive Officer contributing half of it. Sumeru Ventures, Vitruvian Partners and BlackRock also participated in this round, taking the company’s valuation to about $22 billion from $18 billion earlier.

May: Maruti Suzuki India said its new manufacturing facility in Haryana, the company's third in the state, would reach peak production capacity of 10 lakh units per

annum in the next eight years entailing a total investment of Rs 18,000 crore

July: India’s cement industry will add 80 100 million tonnes (mt) of capacity by 2024-25 (FY25), driven by increased spending on housing and infrastructure,. UltraTech will add around 22.6 mt capacity by FY25., following the $10 5 billion acquisition of ACC and Ambuja Cements from Holcim AG with 70 mtpa of installed capacity in the country

September: In a major move to consolidate its metals and mining businesses and simplify the holding structure, the Tata Steel board has approved the merger of six subsidiaries and an associate company into the steel major The decision involves listed entities Tata Steel Long Products, The Tinplate Company of India, Tata Metaliks, and TRF.

February: Ola Electric has committed total investments of Rs 3,500 crore in five years, much higher than the minimum investment required for such firms (Rs 2,000 crore) under the production linked incentive (PLI) scheme for the automobile industry It is one of six non automotive investors that made the cut for the scheme

April: Debt ridden Future Enterprise Ltd has defaulted on the payment of interest of Rs 1.22 crore due on non convertible debentures This is the second default by the Kishore Biyani led Future group FEL has defaulted on several payments in the last two months. The latest default is on the interest of securities issued for

a sum of Rs 25 crore

June: Online beauty retailer purplle.com became a unicorn after raising $33 million in a funding round led by South Korean investor Paramark Ventures The fresh round of investment was at a

valuation of $1.1 billion, making Purplle the second Indian start up to join the unicorn club after edtech firm PhysicsWalla. The latest round took the total funding for Purplle to over $215 million.

August: Equipment manufacturers are scaling up their local operations with the upcoming roll out of commercial 5G services, Bharti Airtel announced that it would deploy 5G services from August after announcing network agreements with Ericsson, Nokia, and Samsung. While Airtel had partnered with Ericsson and Nokia for its 4G equipment, the tie up with Samsung is its first

Market Updates

January: Adani Wilmar launches its Initial Public Offering on January 27, 2022, for initial share sale of one of the fastest growing packaged food companies in India The company raised Rs 3,600 crore through fresh issues of shares with a price band of around Rs 218 230 per share. Currently, the shares are trading at thrice the listing price.

March: Months after announcing that it would buy Future Group’s retail, wholesale and logistics business for Rs 24,713 crore, Mukesh Ambani’s Reliance Industries backs out of the deal.

Reliance says the deal cannot be executed after the secured creditors of Future Group’s flagship firm Future Retail, which operates Big Bazaar and Easyday stores, voted against it.

May: Mindtree and L&T Infotech, two software firms owned by Larsen & Toubro, announce a merger to create an efficient and scaled up IT services provider in a $3.3 billion all stock deal. The name of the combined entity will be “LTIMindtree” and comes as software companies see surging demand from businesses embracing digitization post COVID 19

July: This month is the best for stock markets as Nifty jumps 8.6% with Bajaj Finserv, Bajaj Finance, Tata Steel, Asian Paints and Hindalco as the top gainers in the market. This is owed in part to resurging FII flows

September: Local bond markets think Indian bonds will be included in a global bond index very soon i.e. the JP Morgan Global Bonds Index Emerging Markets. This opens the gates for a considerable amount of foreign inflows.

February: The LIC IPO, opens on 4th May,2022 to raise an amount of Rs 21,000 crore by selling around 22 crore shares with the price band set at Rs 902 949 per share. They are the biggest insurance company in India and the 5th largest insurer in the world. They own 4% of all stocks listed on the Indian stock market and hold more government bonds than the RBI.

April: The mega merger of HDFC Limited, the country’s largest housing finance company, with HDFC Bank, the country’s largest private sector bank by balance sheet size, has been approved by the Competition Commission of India (CCI)

Post the completion of, HDFC Bank will be 100 percent owned by public shareholders & existing shareholders of HDFC will own 41 per cent of the bank.

June: The Adani Group has partnered

with energy major TotalEnergies of France to jointly create the world’s largest green hydrogen ecosystem. TotalEnergies will acquire 25% stake in Adani New Industries Ltd (ANIL) from Adani Enterprises Ltd (AEL). ANIL plans to invest over $50 billion over the next 10 years in green hydrogen and associated ecosystem.

August: Adani Group launches an ambush takeover of NDTV by taking control of an entity that had extended loans to the media house through another holding company. The acquiring entity also announced an open offer for a further 26 per cent, which it was obliged to do according to Securities and Exchange Board of India (SEBI) rules.

Major Macroeconomic Indicators

of Industrial Production

)

indicator that measures the short

a

changes in the volume of production of a basket of industrial products. The base year chosen is 2011-12. The index assigns different weights to 6 different categories for calculation. We can see that IIP peaked on March 22, which indicates healthy production in that month IIP resembles the growth of an economy through the producer’s side

Indian Rupee value against the US Dollar

The rupee continued to depreciate against the dollar throughout the year with it touching the highest on September 26 (1 USD = 81.563 INR) and the lowest on April 5 (1 USD = 75.449 INR). The reasons for depreciating INR were majorly FIIs exiting Indian markets and rise in crude oil prices. Since India imports a considerable amount of crude oil, it has had to shell out more dollars The forecast for INR remains volatile owing to doubtful global economic environment

Purchasing Managers' Index (PMI)

Exchange Rate (INR / USD)

The Unemployment Rate

The unemployment rate in India majorly fluctuated between 6% 8% throughout the past twelve months Considering state level, the highest unemployment rate is in Haryana (37 3%) and the lowest in Chhattisgarh (0.4%).

Purchasing Managers’ Index is an index of the prevailing direction of economic trends in the manufacturing and service sectors, based on a monthly survey of supply chain managers across 19 industries. A PMI above 50 shows growth whereas that below 50 shows contraction India’s PMI has consistently been above 50 despite a volatile global environment This is owed to the growth in manufacturing and India’s growing economic status

Unemployment Rate (%)

Major

GPD growth rate has slowed in recent years, in part due to skyrocketing inflation and the unemployment rate remaining high The pandemic also exacerbated the situation leading to a negative GDP growth rate in April 2020. In the past year, the economy has revived and there are major tailwinds leading the way with positive and stable prospects visible in the long run.

Indicators

Inflation (as indicated by CPI)

continued to be a major concern of the RBI and peaked at 7.8% during April. The reduction was a result of contractionary Monetary Policy measures while the high rate was owing to high inflation throughout the globe as a result of the Russia Ukraine War and remnants of the pandemic.

GDP Growth Rate (%)

India’s Forex Reserves came down by close to $70 billion in the first 8 months of 2022 due to RBI's interventional bank action to protect the rupee. The rupee recently fell to an all time low of ₹81 50 per dollar, and while the Reserve Bank of India and economists aren't raising the alarm just yet, investors are closely monitoring the situation given the likelihood of a widening current account deficit

Major Interest Rates

How to keep the small investor in India hooked to a market with terrible mood swings

The demographics of the Indian stock markets have witnessed a stark change since the onset of COVID. The Indian investors have always been wary of the equity markets They have preferred more traditional investments like bank deposits, gold and real estate. Not even schemes designed to channel retail savings into equity markets have had any impact on their hesitancy about this class of investments

However, with the pandemic forcing millions to be homebound, India, like many other countries, has seen the reluctant retail investors checking out equity investing trading boom has been fueled by pandemic driven. The relentless stock market rally since March 2020 has drawn in more investors.

And technology, including the rise of cheap trading apps and social media YouTube influencers, Twitter, and Telegram stock tipping chat groups has attracted hordes of day traders into discount brokers such as Zerodha Broking. But unlike during previous retail investing booms, many of the new entrants live outside of

Mumbai and New Delhi, the biggest cities. More than half of Angel Broking’s new customers in the quarter that ended in December were from smaller cities and towns, the firm says.

“The adoption of internet and online access is going deeper into the country,” says Peeyush Mittal, a co-manager of the Matthews India Fund in San Francisco “What we hear from companies in the brokerage space is tier 2 and tier 3 city investors are more long term in their view of the market. Whenever the markets are down, they tend to put in more money compared to people in the biggest cities.”

The number of demat accounts in India have crossed the 10 crore mark for the first time.

Following the trend of increasing Demat accounts, Dr. Niti Nandini Chatnani, professor in the department of finance at IIFT Delhi and a contributor for The Economic Times, lends us her insight on how recent small investors can be retained for a long time.

The transformation of the Indian stock markets post liberalization has been an interesting one, with its fair share of setbacks and scams. But the indefatigable spirit of businesses and investors has seen the Sensex go from 1,000 levels to 60,000 over the last three decades

This time period also witnessed the introduction of the NIFTY index in 1996, and its rise to prominence as India’s most popular financial product, and the world’s most actively traded contract.

The Indian stock markets have fashioned abundant stories of wealth creation that attract investors, and yet there are enough stories of wealth destruction that call for caution. SEBI, as the regulator, has successfully promoted market activity, while continually upgrading and reinforcing its market monitoring and regulatory apparatus, bringing in transparency and reducing market manipulation and fraud

The regulator has relentlessly worked to increase retail investor participation, both to offer them new options to deploy their savings, and also to mobilize small investor capital for investment

In countries such as the US, where the equity culture is well developed and where retail investor participation in the stock markets is high, the major challenge faced by the regulator is the rather uninformed and irrational behavior of these investors. India, however, has not seen the same kind of retail investor involvement.

To bring in retail investors into the stock markets, and to guide them to safer equity investments, the Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the budget of 2012 13.

The RGESS aimed to improve the depth of the domestic stock markets by widening the retail investor base, leading to financial stability and financial inclusion

Designed as a tax saving scheme for the first time retail investors with annual income below Rs 12 lakhs per year, this scheme combined the twin objectives of encouraging individual investors to step into equity investing, while protecting their investments by restricting them to stable large cap stocks and funds only, and with investment lock ins

The scheme distinguished itself from the Equity Linked Savings Scheme (ELSS) as in addition to indirect investments through Mutual Funds, it also provided for direct investment through equities

However, this scheme did not gain much traction with the targeted group of investors, with only about 20,000 demat accounts set up till 2017, and low levels of investment made through them. This ultimately led to the scheme being discontinued after April 2018 To be fair to RGESS, it was a good scheme launched at a bad time The years immediately following the financial crisis of 2008 were not good for investors

The NIFTY went down by 6.5% between January 2008 and July 2013, and a sense of gloom prevailed over the performance of the stock market The eligibility constraints and investment checks built into the scheme further limited investor interest

The performance of the stock markets after the sharp fall in April 2020 has been a different story altogether, and the sharp surge in the stock prices thereafter has left investors who were not participating in these markets till now to feel the loss of a great wealth creation opportunity. As a result, 15 million new demat accounts were added in FY 2020 21, and 30 million in FY 2021 22. More than 15 million new demat accounts were added in the first half of 2022 The presence of discount online brokers has also encouraged this surge in demat accounts

But many of the first time retail investors, who were encouraged by the exceptional returns from the markets post April 2020, are now facing market volatility, and losses in their equity investments and IPO allotments. This is hurting the investor sentiment. Markets will, nevertheless, not change their nature to accommodate new retail investors.

This is a good time to bring an Equity Saving Scheme (ESS) for first time equity investors. Most suggestions to boost retail investor have revolved around removal of the Securities Transaction Tax (STT), which, with increasing numbers of investors and trade volumes in the market, generates huge revenues for the government.

An ESS will focus on tax breaks only to first time equity investors, thereby not cutting into the revenues earned through STT.

At a time when retail investors are showing inclination to start direct equity investing, encouraging them to set up trading accounts, and handholding them through the first few years of their entry into the stock markets will be very helpful in building their confidence and creating a stable population of retail investors

An ESS is necessary today to give a shielded entry to new equity investors into the stock markets, while also giving them some timebound tax benefits for carving out their savings for equity investing.

Indian stock markets need strong retail participation to mitigate the risk of foreign fund outflows

The enthusiasm for opening demat accounts is evident, with their number crossing the 100 million mark in the end ofAugust 2022

It is now important to also induct these retail investors into the stock markets and ensure that their involvement is not stifled due to the volatile market conditions. An ESS at this time will keep the retail investor participation going and will also guide these novice investors from making the wrong investment moves at the start of their equity experience.

Dr. Niti Nandini Chatnani

The Economic Times September 17, 2022

Hawkish Federal Reserve rate hikes: Ramifications on Emerging Economies

"When the U.S. sneezes, the world, including emerging markets and developing countries, catches a cold " When the financial crisis of 2008 hit the world, no market was spared. As the herd behaviour of panic and dread took over, the emerging economic powers crashed in sync with the developed ones

In 2022, the world appears to be experiencing déjà vu. The Federal Reserve's aggressive endeavour to control inflation in the United States by hiking benchmark interest rates might have long term negative consequences for developing economies worldwide. The Federal Reserve, led by Jerome Powell, delivered its most aggressive tightening interest rate regime to date, providing a brutal reality check to economists The estimates are hawkish, intending to raise interest rates until the funds level reaches a terminal rate of 4 6% in 2023, implying a steep quarter point increase next year with little possibility of a drop Increasing federal funds rates to a range of 3% 3.25% in an effort to combat inflation, which has reached levels not witnessed since the early 1980s, was followed by a third subsequent 0 75 percentage point increase. History counsels extreme caution and fear as a trip down memory lane to the post World War I years and the orchestrated efforts of the Federal Bank to hike interest rates, which though pushing the economy to reverse recession in the major industrialized countries, let the non industrialized ones drown in several years of curtailed growth, has left them in a trance today Another example is developing countries defaulting on debts in the early 1980s as a result of aggressive interest rate hikes to combat inflation. Coming to the present, no one can deny that the developing world is already in a precarious state.

The pandemic and its aftermath, Russia's atrocious invasion of Ukraine, deep debt distress, and other macroeconomic weaknesses have already caused significant economic disruption

In such a situation, the thought of the Federal Reserve entering a full fledged inflation fighting mode has undoubtedly left many apprehensive about the probable consequences of its actions on growing powers, all thanks to history. Rising interest rates can expose developing countries to vulnerabilities such as increased debt burdens, capital outflows, currency devaluation, and tightening financial conditions (the fundamental cause of a financial crisis) According to the IMF's April 2022 report, the prospect of almost 60% of lowincome developing nations having deep debt or being at risk of experiencing the same is considerable. Indeed, the report specifically noted that such a rapid rise in interest rates in wealthy countries could be the backdrop for diminishing external financial conditions in emerging economies. High interest rates in the United States can lead to higher rates abroad Technically quoting another fact at the end of the day, the working class has to suffer the wrath of such aggressive interest rate hikes, since the same rates mirror the rates imposed by banks on debt instruments, particularly home equity loans and expensive auto financing Second, the substantial withdrawal from risky assets following a rate hike in the United States often makes emerging economies unappealing, as foreign investors are compelled to pump liquidity out of them The dollar index causes fear, resulting in "strong buying as a powerful hedge" against interest rate hikes and the inflation cycle. Furthermore, an increase in U.S. interest rates raises the relative returns on dollar assets, strengthening the U.S. currency.

With the dollar strengthening, emerging economies are more likely to face significant outflows of foreign capital. Furthermore, the persistent depreciation of currencies follows the two decadelong strengthening of the U.S. dollar index in the hope that demand for safe haven currencies such as the dollar would increase.

This diminishes purchasing power and complicates servicing debt denominated in foreign currencies (the U S Dollar) Diversion of essential resources to 3 make debt payments rather than investing in healthcare and community needs should, at the very least, raise the alarm to cancel debt, as such soaring interest rates would push developing countries over the edge to make debt payments in the shortest possible time due to future price increases.

It is all a game of numbers. In terms of raw figures, quarterly forecasts for rates and economic statistics revealed that unemployment rates are predicted to surge to 4 4% from the present 3.7%. Another source of concern is the GDP's intentional slowing to 0 2%, with a long term rate of 1.8%. In fact, Powell himself calls for a possible recession in the near future as a result of the Fed's rapid rate tightening. However, these increases are unmistakably linked to the objective and goal of lowering headline inflation, which is expected to decline to 5 4% this year from 6 3% last year, and finally to 2% in 2025. Another surprising figure is that of gold Irrespective of the bullion being considered one of the strongest' hedgers' against inflation, the hawkish interest rates' powers have disfigured the metal's might, pushing it down by 0 3% and giving a higher push to the dollar. Our country is a beautiful example of the

contemporary The recent narrowing of the interest rate differential between India and the United States is a classic example of how emerging economies have grown less appealing for currency trade Despite the RBI's intervention, the rupee exceeded 81.50, indicating India's sensitivity to U.S. interest rates and opening the door to further devaluation. The risk of large capital outflows, currency depreciation, and extended imported inflation has reached its apex. The increase in lending rates by banks and the rising tendency of FIIs to "outflow" causes foreign exchange reserves to dwindle below their current levels, resulting in rupee depreciation. The consequences are multifaceted since businesses involved in cross border activity have to suffer increased import costs and riskier geopolitical uncertainties, directly impairing the country's current account deficit. In such a case, the RBI has decided to raise interest rates by 50 basis points to keep the economy from collapsing. Given the global policy environment shift, would not rising central banks in a comparable circumstance be driven to do the same? Though Powell's remarks about the Federal Reserve's job to ensure that higher inflation is not incorporated into future economic decision making hopes that the future has no other issues to deal with other than high inflation can only be prayed for

Kanniguli Saumya Suresh

IIM Ranchi

1st Position

Fintellect Article Writing Competition

Buy Now, Pay Later: Flourish with Gen Z demand or fade under RBI Scrutiny

Introduction

Credit is an important element in trade and commerce. Over the years, credit has taken different forms like loans, debentures, bonds, credit cards etc. Buy Now Pay Later (BNPL) scheme is one form of credit which can be traced back to 19th century, where consumers purchased expensive goods and paid it in instalments at a later point in time. With the advent of technology, BNPL itself became a new business model, where lot of fintech companies integrated the system with e commerce where the customer is able to access instant credit at the point of sale It is a kind of short term financing that bridges the gap between the income of the customer and their needs, and it is mostly provided on an interest free basis. The major players in the Indian BNPL market include LazyPay, Zest Money, Amazon Pay Later, Flexmoney, Simpl etc. This system has revolutionized the retail segment by inducing customers to buy more and often beyond their limits When the top line of firms increase due to BNPL schemes, we should not close our eyes to the moral hazard it can create It should be noted that availability of easy credit and buy now pay later schemes was one of the reasons for the Great Depression in 1929.

How Companies Use BNPL as a Strategy

BNPLis a financing option for point-of-sale that has gained popularity recently, especially with younger demographics. This can be proved by prospect theory.

1.Off card financing solutions

2 Virtual rent to own models

3.Card linked installment offerings

4 Vertical focused larger ticket plays

5.Integrated shopping apps

How the front runners approach their Go to Market strategy?

Klarna To reach potential BNPL clients, Klarna acquired the British price comparison website Price runner The likelihood that you are interested in BNPL is higher if you give price a lot of thought Additionally, when you intend to make a buy, you're more inclined to compare pricing, a wonderful match

Affirm has made early investments in solid alliances and enables the Shopify Shop Pay and Amazon BNPL services.

Afterpay Block purchased Afterpay in January 2022, and it now benefits from its mature ecosystem. Block is the owner of the music streaming service Tidal, Cash App, a supplier of mobile payments. This offers a solid foundation for connecting to the consumer and merchant networks using a single BNPL solution.

BNPLTarget Customers?

Millennials and Generation Z have historically been the younger groups that BNPL has targeted as customers.

Gen Z

Generation Z (aka Gen Z, iGen, or centennials), refers to the generation that was born between 1997 2012, following millennials The implications of growing up in a super active technological environment shifts youth behaviors, attitudes, and Lifestyles.

What is the source of all this money?

They produce $229 billion in annual salaries alone from full time employment With the help of side jobs, this group generates roughly $40 billion annually

Gen Z Has $360 Billion to Spend, Catch Is Getting Them to Buy Report shows instead of spending they’re saving and investing (Bloomberg)

Why Genz and BNPL go hand in hand?

Convenience BNPL payments are processed quickly. The trip (faster checkouts) is just as significant as the ultimate purchase (faster delivery)

Lack of Alternative Credit: Since many Gen Z are first time borrowers, banks will not issue them a credit card without a guarantee. First time borrowers have access to credit thanks to BNPL products, which use alternative data and artificial intelligence to analyse a user's profile and extend credit appropriately.

Easy Refunds: If a customer later decides they want to cancel the order, the e commerce company will issue a refund; however, it will take time once the money reaches the customer's bank account But in BNPL programme, the refund is processed right away.

User habits

Demands Sustainable Shopping

The mobile first, digitally native generation

Gen Z characteristics

Young people nowadays are statistically considerably less likely than their counterparts a decade ago to pursue the humanities and much more likely to study STEM (Science, Tech, Engineering, or Math) disciplines

Easy EMIs: A lot of Gen Z and millennial customers utilise BNPL for minor purchases, which enables them to divide the cost into manageable EMIs that may be paid over three or more months of an interest-free period. People are now able to purchase products that were previously beyond their price range.

Existing Integration: A QR code payment system has been implemented in many offline establishments, including Kirana retailers. Because of financial apps like MobiKwik, Paytm, PayU, consumers who make offline purchases can also take advantage of BNPL It is integrated with the purchaser's e wallet, like, Paytm

RBI Regulations on BNPL Schemes

The BNPL industry in India showed a massive growth of 569% and 637% in 2020 and 2021 respectively Moreover, the thin line between credit cards and BNPL schemes was reducing. In India, only banks are allowed to issue credit cards; even an NBFC is not allowed to issue credit cards. This required BNPL companies to shift their business model and shift to Prepaid Payment Instruments. The prepaid cards issued were topped up by a credit line or loan from an NBFC. The cards were issued from a bank, but the credit line was evolving from NBFC arm of the BNPL companies. For example, Slice came up with its prepaid cards, which was issued by State Bank of Mauritius and credit line coming from Quadrillion Finance, which is the NBFC arm of Slice. This was clearly a case of bypassing the formal banking system. Moreover, the number of cards issued by the fintech firms was around 2 million as compared to 1.5 million credit cards issued by banks. Due to these circumventions, RBI banned PPIs with credit lines

RBI Governor Shaktikanta Das had told that BNPL also comes under lending activity. So it implies that the fintech firms offering these services will be under the supervision of RBI in the future

Earlier the KYC process was diluted by the fintech firms and easy credit was provided even to customers whose creditworthiness is doubtful. Several complaints were registered related to loan disbursement without consent, KYC discrepancies etc It was also revealed that there were 1100 unauthorized digital loan providers in India The proliferation of BNPL schemes will create a situation of overleverage in the market and this can lead to another financial crisis, if not appropriately managed.

Conclusion

Even though BNPL schemes have been showing robust growth in recent years, especially among the Gen Z population of India, their legal validity was always in question. The moves made by these companies to circumvent the regulations have been put on a hard stop by the RBI These regulations have halted the business model of these firms. The moral hazards or BNPL schemes will be unknown to the users The audience these firms are targeting is mostly the young population who will be finding more utility in instant gratification rather than finding value in delayed consumption This euphoria in consumption can create a lot of chaos in the market. One of the causes of the Great Depression of 1929 was the idea of buy now pay later which was adopted as the motto of the majority of the population at that time. The regulations imposed by the RBI will be helpful to both society and the fintech companies to reinvent their business models. Unsupervised lending will only lead to larger problems, and this has been evident from history. So it is advisable for the BNPL schemes to reinvent their business models, leading to responsible lending

Jerry George & Saumyata Arora

Tiruchirappalli

Buy Now Pay Later: Flourish with GenZ demand or fade under RBI scrutiny?

Buy Now and Pay When?

Buy Now Pay Later (or BNPL) is based on a very simple concept It is a type of short term financing that facilitates customers to buy products at present and pay for them at a later date, often interest free. Consumers make a down payment at the time of purchase and pay off the remaining amounts generally in Equated Monthly Instalments

ATale as Old as the Industrial Revolution

BNPL is no brand new concept. Our story begins in the 1600s when instalment paying has first been mentioned. However, the mechanization and production of consumer durables in the 19th century made this concept available to the common people as well Between 1840 and 1890, four products furniture, pianos, farm equipment, and sewing machine were the torchbearers of credit financing throughout the world Singer's Sewing Machine, an American manufacturer, then became very famous in the 1860s for their credit plan "A dollar down, a dollar a week" to sell more products. But how do modern BNPL companies earn? Two methods: merchants and customers. They charge merchants 2% 8% of the purchasing amount as service fees. If the customers default on their instalment, they are charged an interest anywhere between 10% 30% which forms another source of income for the companies

BNPL and India's Burgeoning Consumer Sector

BNPL as a financing concept has found great love in India during the pandemic It also has the greatest presence in the e-commerce segment and the growth trend follows the trend of an increase in cashless payments. The major BNPL players in India are app based (ZestMoney, Lazypay), e commerce (Amazon Pay Later, Flipkart Pay Later),

card based (Slice, Postpe), or mobile wallet based (Paytm post paid, Mobikwik). Lazypay has witnessed 400% growth in the last two years

Paytm Post Paid now has a user base of over 5 3 million customers and is accepted by 11 million online and offline merchants This growth is reflected by a 486% Y o Y volume increase as of June 2022 These are just a few numbers from a business that is growing at a tremendous pace and forecasts show that life is only about to get better for them.

Young India Wants to Buy Now and Pay Later

Nowhere has BNPL found to support more than the young population of our country. Its prime segment consists of the 26 35 age group of the newly employed and the 18 25 age group actively using e commerce. A report by ZestMoney says that BNPL use by GenZ went up 232% in 2021. This is an amalgamation of multiple trends, but it can be boiled down to one word: convenience. GenZ is adept at using e commerce because it is more convenient than visiting physical stores. BNPL is quickly becoming the preferred method of payment in e commerce sites because it takes a few seconds, and the consumer can conveniently pay the actual amount later in instalments. Another layer of convenience here is that GenZ otherwise does not have easy access to credit from traditional banks and therefore prefers BNPL.

Combine this with a growing middle class, growing e commerce penetration, and growing comfort with online payments and we have ourselves an explanation for why Mobikwik has seen an 840% increase in BNPL GMV in one year from 2020 to 2021.

RBI (allegedly) Wants You to Buy Now and Pay Now

RBI, in its Payments Vision 2025, has said that it is exploring guidelines on payments involving BNPL services. "This novel method shall be examined, and issuance of appropriate guidelines on payments involving BNPL shall be explored" was the statement made by them. In June of 2022, RBI disallowed non bank prepaid payment instruments to load credit lines. This regulation by RBI puts the business model of several companies such as Lazypay, Slice, and Uni in jeopardy.

A prepaid payment instrument (PPI) is an instrument that stores a certain value against which goods and services can be purchased. Examples would include smart cards, internet wallets, mobile wallets, and so on

But BNPL is growing so beautifully, why regulate it? Before we hastily conclude that RBI is passing regulations just for the sake of hindering BNPL's growth, we must critically examine the whole situation Here is where we combine the risk-taking behaviour of FinTechs and something called First Loan Default Guarantee

What is First Loan Default Guarantee? FLDG is a lending model between digital lending FinTechs and the banks and NBFCs they partner with. The FinTech originates a loan and promises to compensate their partner up to a pre decided percentage of the loan value if the customer fails to repay the loan. The banks/NBFCs lend to the customers from their books. The main reason for RBI's regulation is to stop the rampant spread of FLDG agreements

that are taking place to facilitate BNPL And why is RBI wary of FLDGs? Because this introduces credit risk into the balance sheet of digital intermediaries These FinTech companies are not required to maintain any regulatory capital. If several loans went unpaid, the companies would have to compensate a significant amount to their partner which would then lead to permanent structural harm. India's FinTech space has billions of dollars of venture capital money invested, and a structural weakness will have a domino effect leading to bankruptcies and mounting NPAs

So, since RBI cannot regulate every single FLDG agreement, it decided to stop non bank companies from extending any credit line via PPIs. But this should not be interpreted as a move to stop the growth of BNPL as a medium.

Flourish or Fade?

RBI guidelines may have thrown a short roadblock in the path to progress, but the demand for BNPL services doesn't look to be slowing down anytime soon. This is mostly because BNPL is directly linked to e commerce penetration and the growth of online payment culture, both of which are megatrends expected to rise significantly The idea of BNPL fading also seems unrealistic unless the RBI launches some drastic measure to suppress its functioning And given how important this medium has become amongst those without a credit card, a discouraging move by the RBI is unlikely as it will negatively affect demand Moreover, the regulatory authorities aren't hoping that BNPL fades away. Their goal is to introduce security and stability into the system. So, will BNPL flourish with GenZ demand or fade under RBI scrutiny? I think it will flourish with GenZ demand and do so securely due to RBI scrutiny

Medha Sinha IIFT Delhi

AI-led Neo-banking in India: An Epoch in Indian Growth Story

Indian banking is at an Epoch it is transitioning from a traditional set up, to a new, digital phase: one with innovative approaches and disruptive in roads. At a macro level, India is expected to grow at 7.3% with respect to its GDP, and it is expected to grow even more rapidly at the onset of total recovery from COVID 19. It is home to some of the top tech firms, has an average internet penetration of about 43%, has a reviving banking set up But, a big “but” in this story is an overall low banking penetration of nearly 50% in the

country. According to a NABARD survey, 52% of respondents preferred to keep their savings at home. Poor implementation of policies such as PMJDY has created mistrust among beneficiaries, which has resulted in larger number of inoperative accounts. A rather new entrant in this epoch is “Neo Bank”, a digital bank with zero branches of its own. Having a technologically sound ecosystem and a positive macro outlook, let us see how Neo banks could boost Indian growth and make it a financial power by its 100th year of Independence

In my opinion, Neo banking could be an answer to the plight of under banking present in the country We can encompass larger masses, especially the digitally-accustomed generation, to imbibe banking/financial services into their lives. An increased number of internet users as well as availability of cheaper smartphones makes this even more plausible. Still in its nascent stage, the Indian neo banking market is expected to reach USD 11 65 Bn by FY2025, with a CAGR of 50.5%. While India’s growth story counts heavily on a young population with almost 50% below the age of 28, which is also a digitally accustomed, an onset of neo banks could emerge as the future of Indian banking

story We already have 12 neo banks in the country such as RazorPayX, Jupiter, Kotak811, Niyo to name a few Neo banks could create a strong banking set-up, which would eventually help aggregate resources at a micro level helping small-scale businesses to grow through multitude of easy financing options. Developed nations like USA have already adopted digital banking (60% of population as of 2020 used digital banking), whereas India still has to make inroads in developing a robust ecosystem for the same A step in this direction could also create better opportunities as an easy financing route could mean a better ease of doing business in our country.

What if?

What if we have a way to accelerate the pace of Indian progress in digital banking through neobanks? One such way could be use of Artificial Intelligence (AI) to give personalized banking solutions through the usage of AI led data analytics tools According to a McKinsey forecast, AI has the potential to create USD 1Tn additional value for banks globally each year. This value generated through both advanced and traditional AI tools could contribute up to 15% of bank revenues. From strictly a neo bank perspective, let us dive

based on their AI-search tool it could include the savings made in a month to the total amount spent on shopping sites like Amazon!

Super-App

One for All! According to an EY survey, out of all customers engaged with neo banks as their primary financial relationship, 37% are aged between 18 to 34 and prefer a super app ecosystem. A super app would combine integration and customer centricity to provide a personal financial operating system. For starters, neo banks can emerge as aggregators, help customers connect with other financial apps and seamlessly integrate them into their own app as a single banking solution. One such example is UK based Revolut, which increased its revenues by 57% and acquired 4 5Mn more customers in 2020 by positioning itself as “the first truly global financial super app”, thereby creating a platform to access almost every financial service through a single account which could be accessed from anywhere across the globe.

Predict to Personalize

According to a Zinnov report, the total spend on data and analytics across all sectors would amount to a global figure of USD 333Bn by 2024, in which AI led analytics would account to almost USD 160Bn. Using advanced AI analytics tools to predict the customer behaviour in the future, based on a detailed understanding of the past context, would help to personalize the content available on the neo bank app. A hyper personalized app with sticky features, such as quick insights in the form of personalized dashboards, bucketing of regular expenses, salary based accounts and investment options such as mutual funds, is a commonality in the neo-banking market. One such example is Jupiter in India Apart from targeting segments which have been under-banked with features such as zero balance savings account and commission free mutual funds at finger tips, retail neo banks like EpiFi also provide insights

Empower a Niche, Expand into the Nation

India is a land of growing start-ups, giving birth to almost 75,000 of them by its 75th year of Independence. Moreover, it is also a land of booming SMEs which account for almost 45% of total industrial production. A recent MSME census report (2015 16) indicated that there India has 63 9Mn unincorporated MSMEs, creating 110Mn jobs and contributing to 30% of GDP as of 2019 20 A huge challenge for both SMEs and small scale start ups is availability of easy financing options and through neo banks, we can solve this issue, boosting the ease of doing business in the country Many neo banks like Zikzuk, Nupay, RazorpayX, Khatabook, OkCredit and Open are engaged in dealing with niche markets like the one of catering to SMEs in India.

Another niche market is targeting the younger masses, wherein companies like Liv Bank of UAE (through Liv Young feature) or Yodaa in India have integrated financial services such as bill split, savings account, financial education, investing, etc to capture the youth Many neo banks can start with making in roads through such niche markets via services like payments and then expand those to many other sticky features, eventually creating a complete banking ecosystem for their customers.

The RoadAhead

Some key challenges, as per a Partner at Financial Services Consulting, Grant Thornton Bharat, are unclear regulations, security issues, fierce competition from fintech and big tech firms. Banking in India has traditionally involved human interactions, thus, a shift to a digital bank could take time building trust among people On a brighter side, a strong focus on younger generation in the country and usage of Indian talent in the field of AI and analytics, could help us integrate AI based features in neo banks smoothly and profitably It could help increase banking penetration even in rural India, create better financing options for businesses in nascent growth stage and make Indian youth financially more responsible. Lastly, with the right regulatory support, neo banks in India can create not only a digital but also a financial epoch, a turning point in the glorious growth story. Thus, we can surely say that AI led Neo banks would catalyse the path of progress to be witnessed by India @ 100!

Nihar Dighe IIFT Delhi

Global Minimum Taxes: Aboon or bane for countries and world trade?

What is the Corporate Tax rate in countries across the world? Most companies pay an effective rate of 18 25% as corporate taxes in India 21% is the corporate tax rate for the USA However, what was the effective tax rate of Amazon for 2021? You will be surprised to know that the figure was a meagre 6.1% for 2021. Similar is the case for various Multinational Corporations like Microsoft, Google, Apple, Nike etc. who pay minimal taxes, which allows them to earn higher profits

However, ABC wants to avoid these taxes. Now, it will set up wholly owned subsidiaries in each country that it operates. Now, this is the subsidiary that is selling goods and services in a specific country and earning profits.

However, ABC Inc. headquartered in the Cayman Islands will charge each of the subsidiaries in different countries, which will reduce the profits of each of the subsidiaries to a great extent, virtually enabling the company to pay minimal, or even zero taxes. Even though this is an oversimplified example, this is the way corporations avoid paying billions of dollars in taxes They open the headquarters in Tax Havens like Cayman Islands, Monza, Bermuda, British Virgin Islands etc

Amazon’s effective Tax Rate

How do corporations escape by paying such less taxes?

Let us understand how companies avoid paying taxes despite earning billions of dollars in revenues.

Let us take for example a company named ABC Inc The company is earning $10 billion from Europe, the UK and the Middle East. Let us say that the company is headquartered in the Cayman Islands, where the average corporate tax rate is 0%. As per tax rules, a company pays taxes as per the tax treaties that the home country has signed with other countries where the company operates Let us say that a company needs to pay taxes in the country where it derives its income For example, if ABC is earning $100 million in profits from the UK, it needs to pay taxes on these profits in the UK itself.

Lower taxes in countries help attract investments by these huge MNCs as they can save immense amounts of taxes. As a result, developed countries with higher corporate taxes like the USA, UK etc. were losing out billions of dollars in Tax Revenue, which was intensified during the pandemic

Hence, the G7 countries proposed the concept of a Global Minimum Tax (GMT) Rate This was then taken up by the Organization of Economic Corporation and Development (OECD) This proposal was accepted by 136 countries. As per the proposal, a company will have to pay a minimum tax of 15% irrespective of wherever it operates

The GMT proposal is based on 2 pillars. The first pillar aims to reallocate taxes to countries from where a company generates revenues In today’s digitized world, companies are increasingly exhibiting a “digital only” presence This is helping them avoid domestic taxes which demand a physical presence in the country GMT is looking forward to solving this problem by forcing companies to pay a certain amount of taxes in the country where they are operating, whether physically or digitally.

However, for this to happen, countries will need to remove any additional levies that they might apply to companies with a digital presence for example, Equalization Levy in India.

The second pillar essentially looks forward to discouraging countries to keep taxes lower than the GMT rates. As per this pillar, if a company is paying taxes lower than the GMT rate, it needs to pay the difference in tax amount in the home country For example, if Israel keeps a tax rate of 10% to encourage investments, a US based company will have to pay the balance of 5% in taxes in the USA, effectively taking away the investment incentive of investing in Israel. Hence, it will be pointless for Israel to keep taxes at 10% since it will be losing out on revenue Therefore, countries will keep their minimum taxes at the rate of GMT which is 15%

Whether GMT is a boon or a bane for economies?

In my opinion, there is no correct answer to this question For the developed countries with high corporate tax rates, this initiative is definitely a positive signal as it will enable them to earn the much-needed tax revenues, which large corporations were effectively avoiding for several years.

On the flip side, developing countries used to deliberately keep their tax rates low in order to attract investment in their countries, which will eventually help them create employment, infrastructure and demand in the economy

However, GMT will strip countries of that option and will make it difficult for them to attract investments.

What does it mean for World Trade?

World Trade is a function of the demand of the people residing in various countries. Demand is in turn a function of the prices of goods and services. It is unlikely that companies will increase their prices due to the higher taxes they will need to pay, as higher prices may lower demand, further impacting a company’s bottom line. If anything, companies will try to boost their revenues and profits, so that they can earn a higher PAT and keep their shareholders happy. For that to happen, companies will need to improve their revenues more aggressively

With that, governments earning higher revenues will spend more on Capital Expenditure and improve their infrastructure This will help companies to operate their businesses more efficiently, which will further help them participate in World Trade.

All in all, the implementation of a Global Minimum Tax rate will help governments earn more, helping them spend more, which will in turn help the citizens of various countries to live a better life. However, a lot is dependent on the implementation of the whole scheme and whether various countries will be accepting of the whole scheme of things. There is also no stopping the sharp minds in the industry to find another loophole and come out with new ways of fooling the tax authorities and keeping their profits with themselves. Hence, we will have to see how everything plays out!

Harsh Agarwal

Delhi

Mention

Article Writing Competition

Neo-banking: The latest in a long line of fintech revolutions

All of us in some point in our life have been through this stage knocking the doors with aspirations for livelihood, but turning back exhausted with a grim of hope. Yes, I am talking about our experience on going to a bank be it for opening a savings account, proposal for a housing/ business loan, even a trivial thing like Senior citizens going for their passbook entry to validate their pension balance with mental accounts in their heads. The very nature of archaic systems in place leaves one who enters brimming with energy turn into a despaired individual, costing him his crucial asset “TIME”. I am a conflicted writer here, as a son of a Public Sector Bank employee Few years back having had tea-conversations with my father on this topic, I questioned him “Appa, with the growth of technology at this rapid pace and the dynamic nature of customer preferences, do you think one fine day brick and mortar banks will disappear from the face of earth and all of this will happen online?” He smeared and shrugged me off, cancelling my viewpoint as a wannabe tech savvy millennial who is isolated in his gated community of India far away from the realities of Bharat But, looking at the present landscape, I feel Charles Darwin and his theory of evolution have been much kinder to me.

Traditional Financial Institutions are already facing the heat of online Transactions replacing cash. This trend has already accelerated in countries like India, with the advent of UPI in 2016 which recently clocked 6 billion transactions in a month. The magnitude of scale is unprecedented like never before Wait, how all of this happened overnight? The seeds were sown with the penetration of mobile data down to the level of Tier II and Tier III towns. With service providers rationalising their tariff structure for 4G services, more and more people started adopting the Internet as a part and parcel of their day-to-day routine. With thrust from the government, this eventually earned a moniker in the headlines “Digital India”. As we know any breakthrough is never static, it keeps

leapfrogging ahead, the latest entrant to join this Fin Tech bandwagon have been “NEO BANKS”. Well, all fin geeks in B Schools eyeing for coveted finance shortlists would have already been familiar with this term by now For finance agnostic laymen, in simple terms, a NEO Bank is a DIGITAL bank without any branches. Sounds like a Steven Spielberg Sci Fi movie, right? Believe it or not, this is happening real time and is expected to rattle the status quo in a few years to come Now having had a look at the basic premise, let’s delve deeper into it’s functioning They are basically Fin Tech firms which have a single umbrella canvas of bundled financial apps that provide digital and mobile services for payments, money-transfers, money lending and other miscellaneous XYZ financial services. They act as challengers to the existing banking players competing on low operational cost structure, cutting down on physical rental space. Neobanks can thus pass these advantages on to their clients through low or no fees and large interest rates on deposits. They have also streamlined and optimised the process of credit lending, with little/no paper work and instant processing

All of this raises a pertinent query “Why these fancy institutions should exist in first place?” The answer is democratising personalised and hassle-free Customer Experience. It’s a common sight to see in present banks where high turnover Current Account Holders getting their working capital loans approved swiftly, with step motherly treatment from the Branch Manager, whereas it is a struggle for a MSME to get his files moving Neo banks resolve this by disposing off the bureaucracy, quick onboarding and bringing everyone on a unified technological platform, going further ahead with offerings like payment gateway, an invoicing software for the MSE. Looking at another example, suppose I am a debit card holder of a particular bank on an international vacation, I can’t use it in it’s present state, I have to request for a new card/upgrade, but my neo bank account would allow me to transact at current

exchange rates. Further, Middle-class customers unlike HNI’S do not have a full time accessible relationship manager for accessing the financial products, but these digital banks will help them unlock this potential by offering curated solutions. All of these gaps in customer experience are bridged through the intervention of technology by Neo banks. Having sophisticated databases and Infrastructure systems, high compute power, non glitchy user interfaces provide the foundation for collecting 360 degree comprehensive information about the customers, creating cohorts and deliver tailor made flexible data oriented unique customer experiences

Shifting the lens to India, the neo banking market was valued at $3.42 billion as of FY22 and is expected to grow at a three year Compound Annual Growth Rate (CAGR) of 50.5 per cent to reach $11.65 billion by FY25. These astronomical projections substantiate and herald neo banks as the future of banking. India has seen the emergence of players like 811 by Kotak Mahindra Bank, Digibank by DBS, Niyo, Fi Money, Jupiter and existing payment services companies like Razorpay, Paytm. Competitive advantage in this fin tech space is offering unique value propositions for the customers, so every neo bank is trying outdo the other by

focusing on it’s product development and tech stack. Advances in the buzzwords of the town “Artificial Intelligence”, “Analytics”, “Machine Learning”,” Blockchain” is further going to propel the market forward. With growth comes it’s own set of challenges which largely revolve around security and regulatory compliance Cybersecurity is still a concern despite features like biometric verification, 2 factor authorisation, and encryption, and needs more strengthening and investment to build trust with the customers. Also, as of now, Neobanks do not have a license of their own but can count on their partner banks for one. Though recently, there have been concerted efforts by policy makers across the globe in creating robust regulatory frameworks for legal licenses to protect the interest of the stakeholders, but as far as India is concerned the RBI is still sceptical about the risks of having a separate digital entity. In the long run as financial infrastructure matures and Neobanks prove themselves better than the current BFSI organisations, we can be assured that the central bank too will let go of it’s shyness to issue licenses and come out of it’s cocoon just like my Appa The future has arrived with Neobanks and amidst the chaos, Technology and human beings will coexist in a mutually beneficial ecosystem.

Aravintha Kannan T IIM Calcutta

2nd Position

Fintellect Article Writing Competition

Neo-banking: The latest in a long line of fintech revolutions

To bank or to neo bank is the dilemma of the contemporary millennial bread earner. Providing a good client experience is the main goal of banking. The latest revolutions in banking are neither novel nor specific to the neobank category The FinTech sector, as a whole, has always emphasized digital technologies and customer satisfaction as its two main pillars. Neobanking is the latest upgrade.

Digitalisation of the entire banking and transaction process, as well as updating outdated systems and serving customers, who facilitate the large scale embedded finance ecosystem is the face of neo banking. Modern banking is rapidly changing. Integrated finance will become key to satisfying customers Neobanks are thriving because they meet these essential requirements of customers.

Originally, a neobank was characterised as a financial institution that operated entirely online and dealt with customers directly Neobank, instead strives to be a bank that offers a superior online banking experience rather than just another bank.

Banking services provided by established players have transitioned away from being exclusively digital. NeoBanks cater to a variety of customers through their unique business offerings.

1) Retail Customers

Neobanks serving the retail market are concentrated on providing basic banking at reasonable and competitive pricing They provide the following benefits to their end

consumers:

• Access

Neobanks have discovered untapped prospects across a variety of consumer demographics, including digital millennials and tier 2 and tier 3 rural locations There is little focus on millennials, who make up a sizable portion of the unbanked/underbanked population. Since they are technologically competent and have recently shown interest in accessing financial products, neobanks are crucial in meeting their needs.

The rigidities and inefficiencies of traditional bank distribution mechanisms, coupled with higher acquisition costs, render some customer segments unviable for traditional banks, contribute to the overreliance on informal lending sources

NeoBanks

Retail customers

Access Personalisation Convenience Synergies

Business customers SaaS

Traditional Banks BaaS

Customers increasingly want solutions that can be tailored to meet their more specialised needs in terms of quantity/ticket size, duration, and price. Due to their rigid cost structures, traditional banking institutions are typically unable to offer such flexible financial products

• Convenience

Since customers may now enjoy on the click of a button services across a variety of service sectors, including logistics, travel, and commerce thanks to Zomato, Uber, Amazon, they have similar expectations for the convenience of financial services as well

Instant access to information, simpler data and r equest gathering, and customised points of servi ce delivery are now considered core service prin ciples and anticipated of financial services deliv ery channels as well.

• Synergies with non financial services

The integration of financial services solutions into a larger customer experience flow is a by product of seamless customer service. Many non financial services like as e commerce, individual tax and personal finance management, digital commerce platforms, GST filing include components of financial services. Neobanks have been able to seize this market gap, generate value and capture revenue streams.

2) Business Customers

In addition to servicing business accounts, lending, and cross-border payments services, some neobanks also provide offerings for financial services embedded within their larger company framework. They do so by offering value added services like open APIs and seamless connection with business apps (accounting and business communication apps) Neobanks may provide website development possibilities, invoicing, AR tracking, and online

bookkeeping services to the company’s clients

• Software as a service (SaaS)

They also help marketplaces, BigTech, software corporation and logistics companies offer embedded financial software as a service (SaaS) to support small businesses and consumers in the retail sector

3) Traditional Banks

Several major players in the world are making their skills available as services for other banks to use. This approach is especially in the context of the Indian ecosystem, where neobanks are currently required to collaborate with traditional banks and create products that banks that they partner with may profit.

• Banking as a service (BaaS)

The incumbent banks have been recognising their shortcomings of their current operating procedures and accept the advantages of collaboration They need an efficient and affordable banking service distribution model as well as create an offering that delights the customer.

Neobanks come to the rescue as supporting forces and help make Banking as a service (BaaS) a success. By assisting FinTechs in connecting with banks through application programming interfaces (APIs), BaaS enables them to construct their financial services on top of the regulated infrastructure. Neobanks offer customer initiated onboarding, account funding, and other banking services using the BaaS APIs.

Evolution of the Neobanking landscape

Neobanking has had a rapid expansion throughout North and South America, the United Kingdom, Europe, and the Asia Pacific (APAC) area.

Neobanks initially started to appear in Europe. Due to the early adoption of similar banking regulations for the entire European Union, the UK got a head start in neobanking (EU)

FinTechs exploited APIs to create open banking systems that are specifically designed to collaborate with banks to serve specialised consumer segments This fuelled the expansion of neobanks in the UK.

Following suit, the US, Canada, and a number of EU nations led to the development of neobanking players, some of whom had operations in numerous countries

The funding that neobanks have received and the volume of deals that have been completed in this market segment show the growing interest in this industry. Neobanks experienced constant deal activity throughout 2020, sometimes even encouraged by the pandemic

The expansion of India's neobanking industry is also being aided by factors like incumbent banks trying to form strategic alliances with neobanks and interest from private equity players

Specific licences or regulatory authorization have not yet been granted to Indian neobanks. Therefore, unlike in several other countries, digital banks or challenger banks are not present in the nation The basis of Indian neobanks is banking partnerships, which is a significant distinction between the global and Indian neobanking models.

The future growth story

Neobanks are gaining ground and have a big chance to upend the banking and financial services industry, but their operational model hasn't demonstrated continuous profitability yet. However, they offer the potential for tremendous value addition and growth because oftheir technological expertise and creative business concepts.

Neobanks through cooperation with the g government can play an instrumental role in financial inclusion to the underbanked population

Source: CB insights, PWC report

In India similarly, many start up neobanks have proliferated including RazorPayX, Jupiter, Freo, Niyo, EpiFi.

In the past two years, the neobanking environment in India has rapidly expanded. They offer unique product values to different target customer categories for example, Mahila Money Neobank dedicated towards female entrepreneurs from all walks of life.

India's financial services industry is developing stricter regulations, technologically advanced FinTechs, and a stronger emphasis on the demands of the client.

• Provide quick lending facilities to MSMEs and help the unorganised sector

Offer accessibility, cost effectiveness, availability of both financial and nonfinancial features on a single platform to customers

Create and deliver unique solutions targeted at particular consumer groups

enable them gain

in the greater financial services

further improve their legal, regulatory and customer acceptability.

Tanika Yetre

Delhi

Banking

Indian NBFCs as the Driving Force for PostCOVID FinancialAdaptation and Resilience

The Winds of Change

While the ostentatious mainstream zeitgeist leaves no stone unturned to portray banks as the principal players in the game of finance, NBFCs have acquired their fair share of success. In an era where the penetration by banking institutions in India continues to be low, to achieve ease of access to financial services, non banking financial companies (NBFCs) have demonstrated a remarkable track record. As a reflection of their growing assets, NBFCs have posed tough competition to the banking systems by serving as an alternative to the centralized banking industry. NBFCs are now nationally at a strategic turning point where they can serve as a tool to achieve India’s goal of financial inclusion. Since 190 million Indians are still “unbanked”, by moving the needle beyond a traditional “credit scored” consumer finance, professional NBFCs have devised custom growth strategies that mainly serve the financially excluded and unorganized sectors. This article delves into a concise and comprehensive study of how NBFCs have formulated novel strategies to navigate the frenzied financial landscape of India and have been successful in creating a more robust and resilient financial market with more potential for fruitful investments.

Adapting to Crisis by Shifting Trends

Coupled with the global trends, India’s FinTech ecosystem has witnessed colossal growth over the last few years, making it one of the world's largest and fastest growing FinTech markets. In 2020, India topped the Asia Pacific (APAC) list of countries in terms of the volume of FinTech investments. High value deals in the NBFCs amid COVID 19 led to disruptions in the

funding ecosystems

With the ubiquity of other investment options, it becomes worthy to conscientiously scrutinize the factors that led to the shift in trends. As indicated by the), there have been considerable investment chart (Figure 1) in the FinTech sector. Although it was overshadowed by the pandemic, it was soon to catch up again once the pandemic subsided. However, the missing connection between NBFCs and FinTech is yet to be analyzed qualitatively. FinTech has allowed NBFC to reinvent its business model. The NBFC sector is always at the forefront of digitalization and technological acquisition in the financial services industry. Both large and small NBFCs have achieved digitalization in credit processes, business operations, and credit cycles to develop dynamic underwriting models NBFC is agile and uses digital tools and platforms to make swift and easy deliveries. This has allowed NBFC to expand its reach and serve non bank people

NBFCs have heavily relied on tools such as eKYC, digital signatures, and Aadhaar based verification to extend their reach and serve people without bank accounts.

Furthermore, local language chatbots and voice bots, RPA, cloud computing, AI, and ML have helped their businesses to accelerate the process of connecting deeper with their customers and improving their overall customer experience. NBFC is also leveraging the proliferation of Indian smartphones and better Internet penetration by providing mobile based financial services platforms in the local language. These indigenous platforms have guaranteed secure delivery systems designed to serve the unbanked segments in different regions, thus promoting financial inclusion.

successfully implemented throughout the country. The shifting trends as discussed above serve as the evidential proof of such an endeavor Only when easy and affordable credit is available, juxtaposed with technological innovation that drives efficient deliveries, can the finance industry be equipped to navigate future adversaries and unfavorable changes in the business landscape.

The MSME sector, which accounts for 29 % of India's GDP, is made up of 63.3 million enterprises and employs approximately 110 million people in India's rural and urban areas Given its contribution to the economy, this sector is an important growth engine and is a fact recognized by the government and economic think tanks. Despite the impact of demonetization and the implementation of GST, the MSME sector was able to clock only a meager CAGR of approximately 10% over the last five years

The above chart (Figure 2) shows the yearly data on the amount of total credit deployed by the NBFCs in India The data depicts an increasing trend of credits from 13.2 trillion INR in 2016 to 26.98 trillion INR in 2021. Thus, almost doubling the amount in five years! The advent of non banking financial companies has made it hassle free for the general public to utilize credit lines. Accessibility and remote coverage make NBFC the most approachable alternative for borrowers as compared to banks Furthermore, credit from NBFC is more profitable than a bank because of its low cost. This helps to provide customers with affordable loans Banks also have tedious paperwork and strict regulations, making it easier to get a loan from NBFCs. As the need for funding grows gradually, banks alone will not be able to meet this growing demand Therefore, NBFCs will fund both the public and private sectors.

Adaptations to the crisis have always been the foundational target of an NBFC, which is been

Credit availability and affordability are one of the major constraints that plague the growth of the MSME sector Borrowing costs are high as only 16% of MSME companies have access to formal credit services. The introduction of GST was not effective in this respect as banks and financial institutions are constrained by the non availability of valid documents and legitimate collaterals from the MSMEs and are faced with the challenges of improving distribution and penetration

Credit Supply, Demand and Gap in the MSME Sector

NBFCs serve approximately 20% of the sector's lending needs and have recorded a CAGR of 30% over the last five years. Focusing specifically on the lower bounds of the spectrum, NBFC has provided credit by leveraging product customization, deeper comprehension of the microfinance market, alternative data driven underwriting models, risk-based pricing, and technological innovations Focusing on MSME, NBFC has

Figure 4: Market Size of Different NBFCs

EnterSlice Insights

Towards Development Boosting New Investments

NBFC has facilitated access to money and credit in areas where banks are less prevalent As NBFC invests the funds raised primarily in the stock market, this helps to increase the company's capital stock. Loans and credits provided to MSME through NBFCs contribute toward employment generation that further support the country's economic development. As foreign direct investments are allowed for NBFCs, it helps to attract larger investment opportunities and promote the country's forex NBFC has provided significant support for infrastructure growth, as some of the projects financed by NBFC are long term and involve more risks that exceed the appetite of most banks.

introduced its business model by geographically focusing on niche segments, products, and sectors to improve its market penetration. Their target to penetrate the non banking markets has resulted in better credit inclusions, which is a much needed result to achieve resiliency in financial markets.

A closer inspection of the above statistics (Figures 5 & 6) shows valuable insights in this regard. The number of unique customers acquired is the highest in the NBFC Microfinance Institutions sector. It has preceded even those acquired by banks Secondly, NBFC Microfinance Institutions also have the highest active loans as compared to banks and other lending bodies. This shows that NBFCs employ a significant value of total loans in the country, which functions as a source of investment to boost the economy of the country

Figure

Unique

Final Thoughts

The financial functions that NBFCs have inherited from commercial and public banks have grown over the years to pave the way for a new finance revolution By encapsulating swift services with technology, NBFCs have meticulously crafted a new future of credit finance by extending their reach to the underserved demographic of the country. The impetus stimulated by the growth of NBFCs has

served as the sole driver to bootstrap and rejuvenate the MSME sector which accounts for a significant chunk of the country’s GDP. While the revolution in Indian finances may have been the offshoot of a plethora of economic reforms, NBFCs have been the reinforcing factor to ensure its widespread implementation.

Attiso Bhowmick, University of Agricultural Sciences (UAS), Bangalore

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At a Glance

Potential Synergies

The businesses of Adani Enterprise includes developing many infrastructural projects, of which cement forms a major part

Potential Consolidation among ACC and Ambuja will bring operational efficiencies in terms of better bargaining power, capacity expansion and distribution

Adani’s acquisition of Holcim

Potential Barriers

Backward Integration will reduce input costs for Infrastructure Companies, making them operationally efficient and

The cement companies will benefit with the greater volumes of Adani companies.

Access to ports and logistics channel will help with distribution

Access to ports operated by Adani will also help to increase the prospects of exports at competitive prices

The Financials of Adani Enterprise which is highly leveraged and risky might pose a threat to the operations of the entity.

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Cement, being a highly polluting industry might face intrusion by The Pollution Control Board, which can increase the cost of production and hurt demand.

The production capacity of Ultratech, the market leader is double that of the combines entity. Expansion and market capture plans by the former might hurt the latter

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