Our Team 39

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 walletbased (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 ecommerce because it is more convenient than visiting physical stores. BNPL is quickly becoming the preferred method of payment in ecommerce 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

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 digitalbank 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 – 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 deeper into this.

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 AIanalytics 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 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.

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 neobanks 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. 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 neobanks 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 Neobanks would catalyse the path of progress to be witnessed by India @ 100!

Nihar Dighe IIFT Delhi

Global Minimum Taxes: A boon 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.

10.00%

8.00%

6.00%

4.00%

2.00% 1.20% 9.40%

6.10%

0.00%

-2.00% 2018 2019 2020 2021

-1.20%

Effective Tax Rate

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. 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.

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 USbased 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 IIFT Delhi Special Mention Fintellect – Article Writing Competition

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 “NEOBANKS”. 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

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 byproduct 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 • 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.

Global Digital Bank (VC funding)

53 52 55 64 63

Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20

Funding (in US$ m) No. of deals

70 60 50 40 30 20 10 0

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. 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

• 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

These features will enable them gain prominence in the greater financial services ecosystem and further improve their legal, regulatory and customer acceptability.

Tanika Yetre IIFT Delhi Special Mention Fintellect-Article Writing Competition

Banking 2030: Indian NBFCs as the Driving Force for PostCOVID Financial Adaptation 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, nonbanking 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.

Rounds

400

300

200

100

0

Figure 1: Fintech funding in India Source: BLinC Insights

2016 2017 2018 2019 2020 2021

Fundings Rounds 6

4

2

0

Fundings billions of Dollars

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.

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 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.

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 nonavailability of valid documents and legitimate collaterals from the MSMEs and are faced with the challenges of improving distribution and penetration.

Figure 2: Value of credit deployed by Non-Banking Financial Companies Source: Statista

13.2 14.8 19.6 22.8 24.6 26.98

2016 2017 2018 2019 2020 2021

Trillions of Indian Rupees

Figure 3: Credit Supply, Demand and Gap in the MSME Sector Source: Empower IAS

25.8

8.8

10.9 10.9

1.5 0.61

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 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.

Figure 4: Market Size of Different NBFCs Source: 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. 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 NBFCMicrofinance Institutions sector. It has preceded even those acquired by banks. Secondly, NBFCMicrofinance 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 5: Active Loans Source: Business Standard 2019

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

USD 3.5 Billion

LTI Mindtree

LTI + Mindtree

USD 40 Billion

HDFC Bank HDFC Ltd.

USD 1.6 Billion

PVR Inox Ltd

PVR + Inox Ltd.

USD 10.5 Billion

Adani Ltd.

Holcim

At a Glance –Adani’s acquisition of Holcim

Potential Synergies

The businesses of Adani Enterprise includes developing many infrastructural projects, of which cement forms a major part Backward Integration will reduce input costs for Infrastructure Companies, making them operationally efficient and

Potential Barriers

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

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

Potential Consolidation among ACC and Ambuja will bring operational efficiencies in terms of better bargaining power, capacity expansion and distribution The cement companies will benefit with the greater volumes of Adani companies. Access to ports and logistics channel will help with distribution

Deal Size: $10.5 Billion

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

63.11% Stake of Holcim through Ambuja

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

4.48% Direct stake in ACC

₹1400 crores

₹3600 crores ₹4300

Issue Price₹278 to ₹292 Listing Price₹360 LTP- ₹ 577.50

Issue Price₹901 to ₹949 Listing Price₹872 LTP- ₹ 621.65

₹ 20,557 crores

Issue Price₹218 to ₹230 Listing Price₹227 LTP- ₹ 755

crores

Issue Price₹615 to ₹650 Listing Price₹855 LTP- ₹ 1,375.95

Issue Price₹2080 to ₹2150 Listing Price₹1955 LTP- ₹ 637.95

₹18,300 crores

Issue Price₹870 to ₹900 Listing Price₹845 LTP- ₹ 711.20

Listing Loss

₹7,249 crores

Listing Gains

₹5,351 crores

Issue Price₹1085 to ₹1125 Listing Price₹2018 LTP- ₹ 1,272.10

Issue Price₹65 to ₹68 Listing Price₹48 LTP- ₹ 47.60

₹60 crores

Across

2.Compares the return on investment with its risk

3.Right issued by the company to buy equity at a certain price before expiry 6.Company with the highest IPO price in the whole world

7.Defense tactic to prevent activist investors from staging a takeover 8.Rapid escalation in market value followed by sudden fall

Down

1.Analysis to help you determine what is driving a Company's RoE

2.Contract to exchange liabilities or cash flows

4.Slow growth and high prices

5.A new company is created by distributing the shares of the parent company to existing shareholders

7.Stocks of small publicly traded companies that trade at very low prices (usually below INR 10)

Vivaad – a panel discussion on the topics "Are we heading towards a global recession?” and “Are stock markets and startups heading towards a bubble?”

Social Media Initiatives

Detailed posts on social media that offer simplified explanations to complex financial terminologies and phrases such as Capital Asset Pricing Model (CAPM) and Black Swan Event.

Capital, the Finance and Investment Club of IIFT, Delhi acts as a bridge between the Finance industry and the students of IIFT and enables constant improvement in the learning of students.

Senior Club Coordinators

Aadarsh Basotia

Vighnesh Hari Prasanna Pande

Yash Jha

Harsh Agarwal

Junior Club Coordinators

Mahak Jain Medha Sinha

Indian Institute of Foreign Trade, Qutub Institutional Area, Delhi-110016