Infineeti - 2017 New Year Edition by InFINeeti- The Business & Finance Magazine of IIFT

InFINeeti New Year Edition

February 2017

FROM THE EDITOR’S DESK

Photo Caption

Dear Readers, Greetings from Team InFINeeti! This edition of InFINeeti is coming out at a time when we are facing Black Swan events, not only in India but around the world. The major ones that we saw recently are Donald Trump’s election as the President of USA, the high-denomination note ban in India and the Brexit vote which caused concern in markets around the world. For this edition of the magazine, we received a flood of informative and in-depth articles from the best BSchools in India. The edition includes important contemporary and forward looking topics such as the prospect of cashless ecosystems, the up and coming field of RegTech, the NPA disease that is ailing the Indian banking sector. Microfinance is also an important idea that is growing rapidly in India out of the government’s push for universal financial inclusion. India’s bond market is in a very nascent stage. For the country to become an attractive investment destination, it needs to have a well developed bond market which can be leveraged by businesses for capital requirements as is done in most of the developed markets around the world. Also, the experiment of introducing nearly zero interest rates in Japan and European economies is an interesting one as there is no precedent for it. It is to be seen how this plays out and if it will be able to pull Japan out of the prolonged slump that has pushed the economy into deflation. This edition will reach you at a time when the economy is not in a very good shape. The editorial team hopes that there will be a surprising turnaround in the world economy and the next edition will be full of articles celebrating the same. Happy Reading!

InFINeeti New Year Edition

February 2017

CONTENTS

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February 2017

From the Centre Headâ&#x20AC;&#x2122;s Desk

Welcome to this New Year Edition of InFINeeti!

Prof. K. Rangarajan is an Accredited Management Teacher (AMT conferred by AIMA) and is a member of several professional bodies including AIMM (Australia). He is also amongst the Board Of Directors of The State Trading Corporation of India Limited (STC).

His expertise includes Business Strategy and Strategic Planning.

The fiscal regime is undergoing changes not only in India but around the Globe. The challenges are very many. The echoes of liberalization are toning down towards protectionism. The developed and developing economies are singing different tunes. The banking system has started facing new challenges posed by digitization, transparency and NPAs. The GST is awaiting entry in a big way. All quarters of the society are building scenarios of what they presume. Interest rates as a tool to bring-in growth stability is becoming more unviable due to the fragile economic environment. In the melee are caught both big and small firms alike. In this issue we are bringing in all these interesting aspects to enrich you with thoughts on the current fiscal regime. Enjoy reading!

Dr. K Rangarajan Head - Kolkata Campus, Head - Centre for MSME Studies

InFINeeti New Year Edition

Adios to the outgoing team

Farewells are difficult and this one is especially so. Team InFINeeti bids adieu to the outgoing senior editor team comprising of Mr. Pratik Dokania, Mr.Nitin Agarwal, Ms. Rashi Bablani and Mr. Vibhav Agarwal. Thank you for mentoring us and for all the valuable insights that you all shared with us. We wish you all a wonderful career and a happy life ahead...

February 2017

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February 2017 1

Has Abenomics failed Japan? By Srujana Sunkara Indian Institute of Management - Lucknow

Abenomics combines fiscal expansion, monetary easing, and structural reform

The rise of Abenomics dates back to the post-war period, when Japan witnessed a strong economic growth of an average of 10% between 1955-1970. By the end of 1980, a massive property and stock market bubble was fuelled due to abnormalities in the economic growth of Japan. The banks in the Japan started lending more with a disregard to the quality of the borrower. This inflated the property and stock market bubble. With an intention to keep the inflation and speculation in check, the Bank of Japan raised the lending rates to the banks. This led to the bursting of bubble and led to a stagnant growth in the Japan’s economy. The effect of which is felt from 1991-2000, which is called “Ushinawareta Jūnen” or The Lost Decade. The effects of the Lost Decade were felt on the next decade too and the modest growth that Japan gained in this period was offset by the earthquake and tsunami of 2011. Japan, the world’s third biggest economy, currently faces three major problems – Weak growth, poor monetary situation and employment related issues. 

Weak Economic Growth : I n the last tw o decades, Japan had a near zero growth rate, stagnated consumer spending, huge government debt



Monetary Situation : P rolonged deflation and a strong currency which affected the exports

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February 2017



Employment : Aging and declining population, Shortage of labour in particular areas

When Japan was reeling under such circumstances, Shinzo Abe, of the centre right Liberal Democratic Party, made policies for the revival of the Japanese economy as his agenda for the political campaign. He was elected the Prime Minister and his economic policies popularly came to be known as “Abenomics”. The core of Abenomics lies on three main strands. 

Monetary Policy: As per Abenomics, the traditional monetary policy failed to achieve the intended inflation target rate of Japan in-spite of the already low interest rates. So, in an unconventional way, like the quantitative easing policy for instance, was implemented to fight deflation and improve lending in the economy. The main motive behind these monetary policies is to break the cycle of deflation which is leading to further deflation as result of expectations of lower prices in the future. Another aspect of it is to weaken the value of yen, thereby making Japanese products more competitive in the foreign markets, which will in turn improve the exports.



Fiscal Policy: Soon after taking charge in the office, a fiscal stimulus of 10 trillion yen was announced. This stimulus was expected to boost the Japanese economy by 2%. The arenas that this package aimed to improve are 

Welfare - The aging population needs were kept in mind and hence there was a focus on welfare activities



Servicing the Debt - The government understands that it cannot spend money continuously and should look at alternate sources of income and hence raised the income tax

Japan’s working-age population (ages 15 to 64) is expected to plummet to 55.2 million in 2050 from 81.2 million in 2010

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



The BOJ increased purchases for bonds due in five-to-10 years to 450 billion yen ($4 billion), from the 410 billion yen planned, it said.

Infrastructure - In order to improve the GDP, the government planned to spend on building infrastructure and encourage small businesses

Structural Reforms: The structural were aimed to have a long term impact.

reforms



In order to tackle the problem of aging population, the government aimed to increase the number of women in the work force.



For an inclusive environment to foreigners, fast track processing for residence for foreigners, G30 program, scholarships to Japanese students to encourage them to study abroad



Tourism – With a focus to improve tourism, visa restrictions were lowered and duty- free shopping was introduced

Having understood what Abenomics is, brings us to the real question: How successful was Abenomics? Scorecard of Abenomics: 

Economic Development: I n spite of the monetary and fiscal policy taking off well initially, no sustainable changes have been observed after two years of implementation of Abenomics. Soon after the monetary policy was announced, consumption improved, share prices increased, yen was devaluated, public investments and GDP improved. But once the consumption tax rate was increased, Japan found itself to be in temporary recession as there was a stagnation in the economy



Deflation: During the period of monetary expansion, the inflation rate has moved to a positive figure of 2.1% in 2014. But, soon due to decreasing prices of oil and other economic factors, the inflation

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February 2017

rate fell again and the current inflation rate is 0.1% 

Labour Market: Unemployment rate fell to 3.0% by June,2016, but, there has been a change in the hiring patterns by the organizations. There has been a rise in the irregular employment, which in turn led to decrease in productivity, wages and skill development of the labour



Budget Deficit: Due to increased consumption tax rate, tax revenues have decreased which lead to an increasing budget deficit



Foreign Trade: I n 2014, J apan’s trade deficit was at $108 billion, while it reached to $4.56 billion surplus in 2016. The reasons behind this improvement are, shutting down of the nuclear power plant after the Fukushima disaster led to fossil fuels being imported, export articles facing unexpected problems and devaluation of yen leading to increased exports but a substantial offset by increased imports



Structural Reforms: I n spite of a series of structural reforms implemented by the Abe government, not spectacular changes were observed that spurred the economic growth of Japan. The initiatives taken so far include, creation of larger and profitable agricultural lands through liberalization of land acquisition, expansion of schooling programs, establishment of economic zones, promotion of foreign investments and exports, introduction of individual saving bank accounts for pension insurance

While it is too early to declare the success or failure of Abenomics, inflation rate of Japan has not seen much improvement even after three years of Abenomics. In spite of the decreasing value of yen,

In 2016, BOJ become top owner of 55 firms in the Nikkei 225 after it heavily bought stocks to prop up the markets

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February 2017 5

exports have not raised considerably. The credibility of Abenomics has been decreasing rapidly and is expected to have a shelf life of two more years. The reasons behind these are: ď&#x201A;ˇ

Japan in 2015 stood as the fourth-largest economy in the world after first-place China

Limiting value of Abenomics: Out of the three arrows of Abenomics, only monetary easing has been successful and yen value depreciated to a 40-year low. However, the cost of the monetary policy has been rising which increases the risk of economic shocks. The fiscal stimulus arrow, was effective initially, but, with an increase in the taxes, it was withdrawn. The structural reforms arrow, though had seen improvements, cannot be used to quantify the long term impact on the economy. Most of the

improvements do not have a long term consequence. ď&#x201A;ˇ

Expectations versus Reality: Abenomics w as expected to spur consumption, investments, exports, inflation. But, even after three years of Abenomics, the results were rather dismal. Consumption though increased initially, with an increase in the consumption tax rate, it decreased again. Investments are increasing, but the magnitude is low and exports were not as expected. Inflation though improved drastically initially, came back to the original state.

It is difficult to forecast how Abenomics will perform beyond 2017. With the scheduled rise in the sales tax, economy and inflation will cool down further. At that point of time, it will be clear to decide whether or not

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February 2017

CASHLESS The Future of Money By Archana Tammali & Arindam Malakar

IIM Kozhikode Over the decades, transactions have evolved from mere exchange oriented barter system to ones involving fiat currencies. With the rapidly changing technological scenario, cashless economy is the new kid in the block now, which is here to stay for long. Every nation is trying to catch up with it and India too has not left any stones unturned in this process.

At this juncture an analysis to weigh up the pros and cons to determine the infrastructure requirements is highly warranted for. ‘Cashless Economy’- Stakeholders’ Derivative 1. Unlocking hidden costs The popular myths concerning cash transactions is that it comes without any hidden charges. However to burst this bubble of myth, there have been different types of costs while accessing and handling of cash which have been identified. To sum it up they are as follows: 

Transaction fees



Transit expenses



Opportunity cost of idle cash



Risks involved in handling of cash



Queue – Opportunity cost

A cashless society is a society where currency notes or cash money are not used in monetary transactions

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Since cash is the primary mode of transactions in money laundering and terrorism financing, a cashless society would discourage such laundering and terrorism

Every household pays differently to access cash, this disparity arises due to differences in income, employment and demographics. For example, Delhiites spend 6 Million hours and â&#x201A;š 91 Million to obtain cash. Hyderabad on the other hand spends 1.7 Million hours and â&#x201A;š 32 Million, corresponding to fees and transport costs twice as high as Delhi on a per capita basis.

Fig 1 Cost of Cash and Foregone Tax Revenues as % of GDP

2. Bidding adieu to the shadow economy Shadow economy refers to the phenomenon of encouraging activities that are hidden from the purview of accounts and go unreported to avoid official scrutiny. This has horrendous consequences including a reduced tax base, lower quantity and quality of public goods, distortions in market competition and the list goes on. This disrupts the macro environment and translates to lower economic growth, affecting the citizens in terms of high prices, low demand etc. India ranks in the top 5 when it comes to the size of shadow economy. Cash based transactions are a major source for this proliferation, giving individuals the opportunity to not report transactions.

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February 2017

number as shown in the above figure. By introducing and advocating cashless transactions, hidden costs and thereby the adverse effects of shadow economy can be eliminated to a great extent. 3. Winning it for the central bank The average life of a currency note in India is less than one year due to high cash based transactions and the heavy circulation. The printing of currency over the years has also been increasing steadily as shown in the figure below:

Fig 2 Currency Growth over the Past Decade

RBI spent a whopping â&#x201A;š 11,000 crores in printing currency notes for the fiscal year 2013-14 which amounts to 0.9% of the currency in circulation for that year. This cost involves only printing costs and does not include costs of distribution which are massive in itself. By advocating cashless transactions these costs can be regulated and moreover be translated into investing into technology promoting a cashless economy, or otherwise in creating a corpus for incentivising digital payments thereby encouraging the cashless economy idea. The Bigger Picture: Macro-Economic Benefits ď&#x201A;¨

Increase in consumption

Cashless transactions provide the consumers with secure and convenient access to funds, it reduces handling costs for the merchants and assures the payments received from the customers. Governments

In Belgium, France, and Canada over 90% of consumer payments are made via cashless modes

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February 2017 9

stand to gain additional tax revenue by curbing the flow of money into unreported transactions of the shadow economy. These activities reduce the friction in the economy and increase the demand and consumption of the customers benefitting the macro economy on the whole.

The ratio of cash to gross domestic product is one of the highest in the world— 12.42% in 2014, compared with 9.47% in China or 4% in Brazil.



Keynesian Multiplier Effect

Owing to its nature, cash gets stuck up with people which is not circulated for example in cases like unused foreign currency with tourists. Cashless transactions act as a medium to alleviate this friction and increase the circulation. With the increase in demand & consumption and subsequent increase in the circulation the velocity of money increases manifold. The Keynesian multiplier comes into effect and the GDP of the country grows as a result of this domino effect as captured in the figure above. According to Moody’s report, the increase in card usage for transactions has infused $296 Billion in real (U.S.) dollars to the GDP of the seventy countries that were in study between the period of 2011 to 2015.This is equivalent of creating 2.6 Million jobs on average per year over this five year period which amounts to an unprecedented 13 Million jobs in total. Increased card translated into an increase of consumption by 0.2% in emerging markets economies, while an increase of 0.14% was recorded in the developed countries between the 2011 and 2015 period. The corresponding figures for GDP growth are 0.11% and 0.08% for emerging economies and developed countries respectively. These figures press the case for cashless economy as it reinvigorates the economy. Are we ready for Cashless Economy?

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February 2017

Having stressed on the advantages of the cashless economy we stand at crossroads to analyse the situation as to whether we are really ready to move on from the decades old fiat currency situation to one which requires a lot of acclimatisation for the masses. The pressing issue facing us is the countryâ&#x20AC;&#x2122;s readiness in terms of financial inclusion, financial literacy of citizens, technology, infrastructure and the draconian regulatory environment. The good news however, is that the Government and the Central Bank are taking this seriously. The RBI and Finance Ministry together have devised various measures that boost the cashless economy by introducing electronic payments services such as NEFT, RTGS and IMPS through debit and credit cards. PMJDY, payments banks and small finance banks have been the combined efforts to infuse life to cashless transactions in the country. However, the growth of cashless transactions and the level of cash-to-GDP ratio have not been a testimony to the impact of the above mentioned services and programmes, and a lot remains to be done for now.

Fig 3 Consumer Payments by Category: No. of Transactions 2011-16; Cash to GDP Ratio of countries

1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided

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Financial Inclusion & Literacy: A ccording to the RBIâ&#x20AC;&#x2122;s financial inclusion report of 2015, more than 50% of Indian adults held bank accounts compared to the 70% in the other BRIC nations. The customer bank account dormancy rate stands very high at a 28%. Lack of financial literacy such as information about operational procedures, product features and opening of duplicate accounts is attributed to be one of the main reasons for high dormancy rate and not a lot has changed over the years. This grey area has to be sorted out at the earliest to achieve the dream of having a cashless economy.

India has 1.02 billion mobile subscriptions,

but only 15 per cent have broadband internet

Infrastructure: The high costs of acquiring and maintaining acceptance infrastructure, last mile connectivity, lack of implementing digital payments in remote areas sum up the poor existence of proper infrastructure in the country. The low transaction volumes and ticket sizes at smaller merchants, particularly in Tier 2 and Tier 3 cities make it unfeasible for the banks to expand their foothold in the markets outside Tier 1 cities. The technology can be the saviour in this case, with more digitalization concepts such as ebranches can be the new ingredient in cooking up a tasty recipe of cashless economy. Regulatory Environment: RBI has taken steps to cap the MDR (Merchant Discount Rate) at lower rates on debit card transactions so that the interchange fees decreases, thereby relaxing the burden on the customers. It was envisaged that this cap would increase the acceptance infrastructure and grow debit card transactions and usage exponentially. However, this has not been the case, as the Reserve Bank of India (RBI) has discovered. The strict regulatory environment in India does not encourage easy mobile payments hindering the measures to create a cashless economy. India, being one of the fastest emerging economies in the world lies way behind a country like Kenya in terms of mobile payments (70% - 80% of GDP). Owing to these multiple reasons, the road to create a cashless economy seems to be bumpy. However, the dream of achieving it is not far-fetched. India can adopt the following plans and approaches to realise its dream.

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February 2017



Fiscal Incentives: The government can provide tax incentives to customers & SME’s and also waive off the import duties on POS terminals to encourage the digital payments. It could also incentivise SME’s by providing rebates on payments made through BBPS (Bharat Bill Payment System) to suppliers, employees and other stakeholders.



Leveraging Telecom Operators: Telecom operators enjoy the access to the most remotest of areas in the country, this advantage of their network can be used to reach out to the rural parts of the nation which are otherwise infeasible to operate for a bank. The licenses given by RBI to the telecom operators to open payments banks is a step towards this direction and indicates the willingness of the central bank to realize the concept of cashless economy. In addition to this, an agile and extensive offerings with the help of telecom operators coupled with awareness and willingness from consumers will go a long way in achieving the feat of making the economy cashless.

India has just

856 PoS machines per million citizens

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CROSSWORD

A person who owes money to another.

..... investment gives the holder a right to receive a share of the profits.

Of, or related to, public money.

Add, subtract, multiply , ..... .

10. A continuing rise in prices.

ACROSS

15. The price paid for something. 17. You can rent or ..... a car. 18. To give out, or provide officially, eg to ..... shares. 19. Not known. 20. People can invest money in unit ..... . 21. ..... are all the things with monetary value owned by a person or company.

DOWN

To ..... is to postpone.

The lowest part, or foundation.

Tax ..... is a tax-free amount.

..... is a colloquial word meaning an English pound.

..... is the rate of income received by an investor from a security.

People can put their money ..... property, equity or securities.

11. You can practise your English by having an English ..... . 12. If someone is left money by a relative who has died, he has ..... the money. 13. What kind of bank ..... have you got? 14. People who have paid too much tax, usually get ..... . 16. General tendencies or directions.

* The solution is provided in one of the upcoming pages

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February 2017

NPA Curse of the Indian banking sector By Anson Antony and Arjun S IIFT Introduction Non-Performing Assets(NPA) are the assets of the bank (loans given out by the bank) that have ceased to be a source of regular income. According to guidelines set by the RBI, NPA is a loan for which interest payment or instalment of principal remains overdue for more than 90 days. Banks must also classify assets in accordance to guidelines set by RBI as: Standard Assets: Assets which service their interest and principal instalments in time although they may default on payments occasionally up to a period of not more than 90 days. Unlike Standard Assets other classifications of assets are NPAs: Sub-Standard Assets: Sub Standard Assets are those assets that have remained NPA for a period of 90 days to 12 months. Doubtful Assets: Assets which remain Sub-Standard Asset for a period of 12 months are termed as Doubtful Assets. Loss Assets: Loans for which realizable value is very low that their continuance as bankable Assets is not warranted.

â&#x20AC;&#x153;Non-Performing Assets(NPA) are the assets of the bank (loans given out by the bank)

that have ceased to be a source of regular incomeâ&#x20AC;&#x153;

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Indian Scenario

As a result of RBI’s diktat, aggregate NPAs at Indian banking system jumped from 5.1% in Sep 2015 to 8.6 % (Rs.6.5 Trillion) in June 2016.

On Dec 2015, RBI issued guidelines for the banks to change their NPA identification process. Former RBI chief Raghuram Rajan stressed upon the importance of cleaner balance sheets to future loan growth for the banks and insisted that a “deep surgery” is a must for the clean-up that would require an “anaesthetic” in the form of recognising NPAs on their books. As a result of RBI’s diktat, aggregate NPAs at Indian banking system jumped from 5.1% in Sep 2015 to 8.6 % (Rs.6.5 Trillion) in June 2016. State Owned Banks

Private Banks

Q2F Y17

Q1F Y17

Q2F Y16

Q2FY1 7

Q1FY1 7

Q2FY1 6

Gross NPA

599,0 15

571,4 44

303,6 78

69,809

56,868

33,796

Provisions

33,06 2

35,55 3

22,20 1

12,830

6,798

3,217

Net Interest Income

48,20 2

47,15 0

49,58 6

26,287

25,425

22,475

Net Profit

2,425

1,215

6,943

10,478

10,291

10,371

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Indian Banksâ&#x20AC;&#x2122; tryst with bad loans did not happen overnight as Indian lenders, especially the state-run banks, engaged themselves in a volume game and ballooned their balance sheets to appease their promoter (the Government). This has been the case post- bank nationalisation as governments exploited the banking systems for populist measures. The responsibility of the bad loan crisis does not rest with the government alone but also with the banks. 64% of the respondents(bankers) said in a survey conducted by Audit and Consultancy firm EY that lack of due diligence by the banks while giving out loans was the main reason for the stressed assets. Surprisingly before sub-prime mortgage crisis, list of banks with highest NPAs was highly dominated by private lenders with ICICI bank topping the list. It was followed by small and medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas Bank, Kotak Mahindra and IndusInd Bank.

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February 2017 17

Over the course of UPA II regime, the NPA landscape started changing with more public players coming into the picture. By March 2014, months before BJPâ&#x20AC;&#x2122;s ascension to power, the list was dominated by Public Sector Banks.

Credit Suisse recently highlighted that demonetisation of currency notes is likely to cause a further deterioration in asset quality particularly for lenders exposed to real estate and SME segments.

More than 2 years into the Narendra Modi government, it wouldnâ&#x20AC;&#x2122;t be an exaggeration to claim that 90 % of the total NPAs in the industry belong to the state run banks. Many of them have reported losses due to huge NPAs reported last quarter. Credit Suisse recently highlighted that demonetisation of currency notes is likely to cause a further deterioration in asset quality particularly for lenders exposed to real estate and SME segments. With March 2017 deadline set by RBI for lenders to clean up their balance sheet fast approaching, all eyes are on the banking sector and their approach towards resolving this crisis. Comparison between Private and Public Sector The July September quarter results showed a huge demarcation between private and state owned banks. The net profits of most of the private banks rose in September 2016 quarter while most of the state owned banks demanded more provisioning for bad loans which resulted in lower profits.

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February 2017

Among private banks, YES bank, Kotak Mahindra Bank, IndusInd Bank and HDFC Bank reported a growth of 20-31% in profits as compared to the September 2015 period. However most of the state owned banks have declared a dip in profits for the same period. Central Bank of India and Bank of Maharashtra reported net losses for September 2016 quarter, whereas Syndicate Bank and Union Bank profits fell by more than 70% each. Axis Bank (Private Bank) which posted an 83% decline in profits and Vijaya Bank (Public Bank) which witnessed a 34% rise in profits are however exceptions. In terms of asset quality, the difference between state owned banks and private sector banks is much more contrasting. The weighted average of NPA ratio (NPA as a % of total loans and advances) is somewhere near 11% for public sector banks as compared to a meagre 3.2% for six large private sector banks.

The huge repository of bad debts has also affected public sector banksâ&#x20AC;&#x2122; ability to lend more. This stress in public sector banking has led to an overall slowdown in credit growth since the public sector banks account for two-third of the overall credit disbursed by scheduled commercial banks.

In terms of asset quality, the difference between state owned banks and private sector banks is much more contrasting

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February 2017 19

One of the first measures taken by RBI to tackle the situation of

bad loans in Indian banking sector is the strategic debt restructuring

(SDR) scheme.

Government Measures With poor credit growth playing spoilsport to Indiaâ&#x20AC;&#x2122;s growth story, Narendra Modi government acted swiftly by passing laws to fight bad debt in our country. Some of the laws enacted by Narendra Modi government are: Strategic debt restructuring (SDR): One of the first measures taken by RBI to tackle the situation of bad loans in Indian banking sector is the strategic debt restructuring (SDR) scheme. It allows banks to convert the debt into equity based on a predetermined formula thereby taking control of the company for inducting a new management to turn it around. Action has been initiated in several cases under this scheme but no successful takeover has been completed thus far. One reason is that banks typically convert only enough debt into equity to gain control but are unwilling to accept haircuts on the remaining debt, which may be too large for the project to be attractive to a new investor. Scheme for Sustainable Structuring of Stressed Assets(S4A): I n J une 2016, RBI came up w ith a scheme to bolster the ability of the lenders to deal with the NPAs. Under this scheme, debtor is provided with more flexibility to service the debt by identifying the sustainable component of debt (Portion of the debt which can be serviced by the current cash flow of the company, representing not less than 50% of the current funded liabilities) and the unsustainable component can be restructured into equity or redeemable preference shares.

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February 2017

Bankruptcy code: Bankruptcy code is another significant reforms by the Narendra Modi government to resolve the insolvency problem and improve the debt recovery rate in India. At present, it takes an average of 4.3 years to resolve an insolvency case in India which is one of the reasons why India is ranked 136th in the World Bankâ&#x20AC;&#x2122;s insolvency resolving ranking. According to the new bankruptcy code, in case of a default, the resolution has to be completed in 180 days which in some cases can be extended by another 90 days by the adjudicator. The code at the same time will come as a relief to workers and employees of the defaulting company as it gives first priority to payment of their wages for up to 24 months in case of insolvency. The new law will give birth to a new class of insolvency professionals to manage the liquidation process. The bill also proposes to set up a new entity called the Insolvency and Bankruptcy Board of India to regulate the insolvency professionals and information companies which maintains the credit information of the corporates. The Bankruptcy Code authorises two bodies to deal with insolvency. One being the National Company Law Tribunal which will adjudicate cases for companies and limited liability partnerships, while the other being the Debt Recovery Tribunal for individuals and partnership firms.

According to the new bankruptcy code, in case of a default, the resolution has to be completed in 180 days which in some cases can be extended by another 90 days

by the adjudicator

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Bad Banks: The government has been mulling over the idea of bad banks for cleansing the balance sheets of the public sector banks. This entity will buy bad assets from the banks at a lower value which will reside in the books of the bad bank until they are disposed off or the company is revived with sufficient cash flow to service the debt.

Recapitalisation of Banks: Government has committed Rs. 70,000 Cr. to invest in state run banks to improve the current lending capabilities of the

PSBs

The idea of bad banks was vehemently opposed by, the then RBI chief Raghuram Rajan on the grounds that much of the assets backing the banksâ&#x20AC;&#x2122; loans are viable or can be made viable and selling these assets to the Bad Bank will impede the capital infusion into these projects. But the current RBI chief Urjit Patelâ&#x20AC;&#x2122;s soft stance towards this idea might pave way for the establishment of Bad banks. Recapitalisation of Banks: Government has committed Rs. 70,000 Cr. to invest in state run banks to improve the current lending capabilities of the PSBs. According to the plan, the government will allocate Rs.25000 Cr each for the FY15-16 as well as FY16-17 and the remaining Rs. 10,000 Cr each for FY17-18 and FY18-19. Conclusion The NPA crisis that is grappling the Indian banking system especially the state run banks has been long time coming. Lack of due diligence by the public sector banks while issuing credit, coupled with outdated laws for tackling NPAs has resulted in a vast deterioration in the quality of the assets in the balance sheet of the banks. However, efforts of private sector banks to keep NPA at bay have paid dividends as they are outpacing the public sector banks in credit growth.

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February 2017

Due to high inflow of deposits into the banking

system, there would be surplus funds that can be It is too early to start talking about the effect of demonetisation on Indian banking sector. Due to high inflow of deposits into the banking system, there would be surplus funds that can be extended as credit by the public sector banks. However, in the short term cash crunch might lead to accumulation of more bad debts to the already existing NPAs as Real estate and Steel sectors have started to feel the brunt of demonetisation. The recent measures by the RBI and Indian Government would provide banks with tools to combat the future NPA scenarios. The proper implementation of these measures along with persistent efforts of RBI and the government will help secure the Indian Banking System.

extended as credit by the public sector banks

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February 2017 23

RegTech The next big thing By Viraj Raisurana XIMB Introduction

The Securities and Futures Commission, the financial regulatory body of Hong Kong, imposed a fine of HK$4 million on a forex broker firm called FXCM Asia Limited for breaches in the way it executed forex orders

Recently, a â&#x201A;Ź3.3 million fine was levied on Ulster Bank, one of the four major banks in Ireland, by the Central Bank of Ireland on grounds of breaches of anti -money-laundering (AML) and terrorist-financing regulations. M&S Bank of the UK, a subsidiary of the HSBC group, paid hundreds of pounds to some customers after the bank realized its mistake of not reminding its customers of their right to make early repayment of their loans. The Securities and Futures Commission, the financial regulatory body of Hong Kong, imposed a fine of HK$4 million on a forex broker firm called FXCM Asia Limited for breaches in the way it executed forex orders. And the list goes on! The common factor, clearly, amongst the aforementioned pieces of news is regulatory breach. Banking and financial institutions across unanimously believe that compliance with regulatory requirements is a major issue for them. To put things into perspective, fines levied on investment banks have eroded the equivalent of a whopping 14 percent of their equity capital. Also, failures in client reporting have cost the investment banks the most at $43 billion between 2009 and 2015. The research, conducted by an Irish RegTech startup Corlytics, covered top investment banks namely Barclays, Bank of America, Citigroup ,

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Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS.

The problem is exacerbated due to the ever changing regulations as a result of the dynamics of the global economic and political environment. The Greek economic crisis, Brexit, the election of Republican candidate Donald Trump as the next president of the USA and, of course, the demonetization of Rs 500 and Rs 1000 currency notes are examples of drivers of the change of the complex global economy. Considering the complexity of problem described above, firms, especially financial institutions, have started adopting what is known as RegTech. RegTech is the use of technology to ease the implementation of and compliance with regulatory norms. It, therefore, enables firms to gain competitive advantage as a result of increased levels of compliance, reduced operational costs and risks, and increased customer insights.

RegTech is the use of technology to ease the implementation of and compliance with regulatory norms; it, therefore, enables firms to gain competitive advantage as a result of increased levels of compliance, reduced operational costs and risks, and increased customer insights.

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While RegTech can broadly be classified as a part of FinTech as risk management, regulatory and governance software, a predicted market size of USD 118.7 billion by 2020 qualifies it to be a separate term

The Financial Conduct Authority (FCA), the financial regulatory body of the UK, was the first to formally define RegTech as “a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” While RegTech can broadly be classified as a part of FinTech as risk management, regulatory and governance software, a predicted market size of USD 118.7 billion by 2020 qualifies it to be a separate term. Investments in RegTech software can lead to a return on investment of 600% with a payback period of less than three years. Yet, most financial services firms have not adopted RegTech yet which implies that investment in RegTech is a huge opportunity in front of us. While technology has been used to implement regulatory requirements for quite some time, certain features are salient to RegTech software. 

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Flexibility – The solutions are scalable and flexible making the implementation of the continually changing regulatory requirements much easier than in traditional enterprise risk management software. Scalability – RegTech solutions are mostly cloud based solutions which enables them to be scalable as per the requirements. Agility – RegTech uses ETL (Extract, Transfer Load) technologies are used to de-couple and organize cluttered and intertwined data sets. Speed – Since the data is organized, the execution time of jobs decreases and leads to faster processing. Consequently, the configuration and generation of reports becomes quicker. Integration – The reports are collated in short timeframes to enable the solution to be available for use quickly. Analytics – RegTech software integrates with itself analytic tools which help use the huge

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amounts of data available in an efficient manner and derive multiple insights from the same data. The RegTech Ecosystem RegTech and its implementation involves the complex interactions of four major stakeholders i.e. regulatory bodies, RegTech firms, consulting/advisory firms and financial institutions. All of these for stakeholders must work in co-ordination so as to ensure that each of the stakeholders gain value from the RegTech ecosystem.

Short Term Benefits The implementation of RegTech has numerous advantages. The advantages in the short run are: ď&#x201A;ˇ

Reduced cost of compliance â&#x20AC;&#x201C; RegTech solution are flexible and can automate the implementation of regulatory requirements by mapping them to key business processes thus reducing operation costs due to the avoidance of manual intervention.

RegTech and its implementation involves the complex interactions of four major stakeholders i.e. regulatory bodies, RegTech firms, consulting/ advisory firms and financial institutions..

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While the use of RegTech in the financial services industry makes a lot of sense and is a hot topic of discussion, RegTech can be of use in other industries as well.

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Sustainable and scalable solutions – The RegTech space however poised to grow is current in its nascent stages. Once the ecosystem is built, institutions can move away from traditional enterprise risk management solutions to cloud based, flexible RegTech solutions. Advanced data analytics – RegTech solutions come with powerful data analytics capabilities. These algorithms analyze available data in various ways including but not limited to What-If analysis and scenario analysis which help firms to anticipate issues and plan their mitigation, thereby enabling them to stay ahead of the curve. Risk and control convergence – RegTech solutions bring along with them enterprise-wide governance, risk and control platforms which allow control and risk frameworks to be linked seamlessly.

Long Term Benefits The long term benefits of adopting RegTech are as follows: 

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Enhanced customer experience – RegTech will help to enhance customer experiences by improved transaction times and automation to take care of regulatory compliance. Increased market stability – RegTech solutions will provide firms which use it a competitive advantage over others. The advanced analytic capabilities will provide firms insights about the industry they operate in and enable them to stay relevant in changing times. Improved governance – RegTech can provide improved reporting of risks and compliance a firm needs to look out for and thus aid in overall governance of the firm.

Why RegTech is here to Stay? As we move towards a world where the use of the

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cloud and mobile devices is perverse across industries, we must think of the complexities it will bring along. According to a survey by Cloud Industry Forum (CIF), 78% of the firms who took part in the survey reported having a presence on the cloud. The trend of adoption of cloud services has only been upward over the years. With the huge amount of data

that is available (and that will be generated), it is imperative to have agile services which can ensure that compliance to regulatory requirements is adhered to. Moreover, to gain a competitive edge, firms should be able to foresee problems which will require the use of powerful data analytics tools. RegTech totally fits the bill. While the use of RegTech in the financial services industry makes a lot of sense and is a hot topic of discussion, RegTech can be of use in other industries as well. According to CSC, 80% of healthcare data will pass through the cloud by 2020. The healthcare industry also has regulatory requirements to be met and thus, RegTech can be of great use. Consider a case where medical drugs are to be bought. How is it ensured that the drug being bought is genuine and not spurious?

The healthcare industry also has regulatory requirements to be met and thus, RegTech can be of great use.

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The spurious drug market in India is huge as India, unlike North America, Europe and even Pakistan, does not have a proper mechanism to verify the authenticity of the drugs sold.

The growth of RegTech over the last few years has been phenomenal and new firms are mushrooming each year with new capabilities

A viable and effective solution could be to have unique codes (alphanumeric or graphical) on the medicine and use a scanner to have the code verified by a centralized database over the internet in real time. Moreover, to verify whether the sale of a drug of a particular composition is legal, this service can very quickly get the latest norms and regulations for the particular composition and determine whether or not the composition of the drug being sold meets the latest regulations. RegTech solutions, being cloud based and secure, will be the best choice to ensure the drug is authentic and meets the regulatory requirements.

The growth of RegTech over the last few years has been phenomenal and new firms are mushrooming each year with new capabilities. Here are a few players in the RegTech space and a little about what they do. From the aforementioned scenarios, we see that RegTech is a technology that has multiple uses across industries. With the rapid growth of data and introduction of complex and changeable regulations, RegTech, by 2020, might become a basic requirement for firms to survive in their respective industries. RegTech is the next big thing!

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The spurious drug market in India is huge as India, unlike North America, Europe and even Pakistan, does not have a proper mechanism to verify the authenticity of the drugs sold.

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Rupee Depreciation Current Scenarios, Causes & The Journey Ahead By Pavan Agrawal & Manan Shah NMIMS Rupee Depreciation- Current Scenario, Causes & The Journey Ahead

The rupee has fallen 3.55% against the dollar so far this year and touched its all -time low of 68.86 on Thursday, 24 November, its lowest level since August 2013, before closing at 68.57.

The rupee has fallen 3.55% against the dollar so far this year and touched its all-time low of 68.86 on Thursday, 24 November, its lowest level since August 2013, before closing at 68.57. With a plethora of global events unfolding recently, the rupee-dollar exchange rate has gone for a toss. Before we do the thorough analysis of the event letâ&#x20AC;&#x2122;s first go to the basics and understand the process of how the exchange rates are decided between two currencies and various factors that affect the movement of the same. Later weâ&#x20AC;&#x2122;ll first take a look at the reasons due to which our home currency is taking such a severe hit. Finally, after studying the factors that are causing INR to depreciate as compared to USD we will be giving our opinion on what can we expect in future when it comes to USD vs INR. Determination of Currency Exchange Rates: Currency exchange rates across the globe show how much 1 unit of a currency can be exchanged for another currency. Exchange rates can be fixed or floating. Floating currency exchange rates change continually based on numerous factors, while fixed

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exchange rates are pegged to another currency and move in tandem with the currency to which they are pegged. Currency exchange rates help an array of people like investors, multi-national corporations, the Government, importers-exporters and even the common man. There are some important factors which affect these rates and thus need to be considered whilst dealing with them. Factors affecting Currency Exchange Rates: Just like any other goods or commodities, exchange rates are dependent on the market forces of demand and supply. Appreciation or depreciation in a currency’s value depends upon how much demand is there for that particular currency as against its supply in the market. However, the demand and supply is affected by a multitude of geopolitical and economic factors. Some of the important ones are Interest rate Inflation Current account deficit Terms of trade Public debt GDP growth Political and economic stability of a country Reasons behind the falling rupee

The basic concept of demand and supply that we discussed earlier is applicable here. Also, factors like political events (Trump being elected as president) have had an impact on the exchange rate. The reasons behind this are threefold: Strengthening of Dollar The main reason for the rupee's fall is the dollar's strength. Donald Trump’s victory had expected to send the dollar into a downward spiral because of his protectionist approach towards the economy but what

Factors affecting currency exchange rates:Interest rate Inflation Current account deficit Terms of trade Public debt GDP growth Political and economic stability of a country

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Fed Chair Janet Yellen signalled that a rate hike was on the cards. The dollar surged to its highest level in 13 years on Thursday on account of robust US data.

ensued was completely the opposite. It has soared against most currencies, including the rupee, on the expectation that his economic policies will spur growth and inflation in the worldâ&#x20AC;&#x2122;s largest economy. The dollar index, which measures the greenback against its major peers, rose 0.1 percent to 101.77, its highest in nearly 13 years. Despite the intervention from RBI on Thursday and twice before that, the rupee continued to fall which signals that the central bank will need to constantly intervene to stop it from breaching the 70 mark. Fed rate hike In congressional testimony, last week, Fed Chair Janet Yellen signalled that a rate hike was on the cards. The dollar surged to its highest level in 13 years on Thursday on account of robust US data. US durable goods orders rose 4.8 per cent in October, beating expectations for a 1.5 per cent increase. Along with this, data for US GDP numbers and unemployment rate is yet to be released in the upcoming week which is expected to strengthen a chance for rate hike by the Fed. Considering all these factors investors are now pricing in a 100% probability of rate hike which might be followed by more hikes in the next year if the new administration delivers on some of its promises, including tax cuts, deregulation and infrastructure spending and the economy continues to show the signs of improvement. Because of the potential US rate hike, the emerging market basket is not preferred by foreign investors and money may flow back into US government bonds. Below graph shows the past trend of Federal Fund Rates compared to % change in GDP and S&P Index movements. The Economic activity is expected to pick up as the economy shows the signs of recovery and so are the rates expected to head towards North.

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Why FIIs are withdrawing the money from equity and debt markets? This is because a weak currency of the country in which the investor is invested in shrinks the value of a foreign investorâ&#x20AC;&#x2122;s portfolio. That is because he will now get fewer dollars when he wants to take his money back home because of the fall in the local currencyâ&#x20AC;&#x2122;s value. So, when the rupee weakens, FIIs start pulling out money from equities as a cautious move, fearing that the value of their portfolio will reduce further.

The dollar index, which measures the greenback against its major peers, rose 0.1 percent to 101.77, its highest in nearly 13 years Hence, these rate hike expectations are prompting foreign investors to pull out of the emerging market currencies. We have seen the foreign institutional investors (FIIs) selling a combined $3.94 billion worth of assets in equity and debt, which is the steepest selling witnessed in over three years. Also, bond yields in India are trading at their lowest levels since April 2009 at 6.15%.

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Demonetisation

The Finance Ministry had revealed that GDP growth might slow down to 5.5% in Q3 of FY17 as consumption and broader economic activity will take a severe hit due to the currency crunch.

In a surprise move, on 8th November, our Prime Minister Narendra Modi announced demonetisation of Rs.500 and Rs.1000 notes. There are concerns that the demonetisation and the cash crunch will result in an economic slowdown in the near-term, which also is affecting the rupee's strength. The withdrawal of capital from emerging market assets has built significant pressure on the rupee which has been augmented by the Centreâ&#x20AC;&#x2122;s decision to demonetise higher denomination currencies. With the demonetisation move infusing a surge of liquidity into the banking system, domestic interest rates are expected to decline, making the rupee less attractive to investors. The Finance Ministry had revealed that GDP growth might slow down to 5.5% in Q3 of FY17 as consumption and broader economic activity will take a severe hit due to the currency crunch. That in turn could make the rupee assets unattractive for foreign investors. Road ahead In 2013, one of the first things that the new RBI Governor, Raghuram Rajan, announced was that the central bank would offer a special concessional window for FCNR-B deposits to stabilise the tumbling rupee back then which had reached its lowest levels of 68.68 in August. Foreign currency non-resident deposits, usually abbreviated as FCNR-B, are term deposits that non-resident Indians (NRIs) can open with banks in India. These deposits are denominated in foreign currencies permitted by the Reserve Bank of India. To bolster the rupee in 2013, the RBI offered to swap these funds for a minimum of three years at a fixed rate of 3.5%, leading to inflows of $ 34 billion, and helped stabilise the currency. Now these deposits are up for redemption in December and it is expected that it will build more pressure on the rupee. Though the RBI has announced that it has sufficient reserves to take care of redemptions, investors and

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analysts are wary of how the rupee will perform bearing in mind the several changes that are taking place. The central bank may have to continue intervening to contain the volatility of the currency. The task before policymakers, and the monetary policy committee which is set to meet on December 7, a week before the Federal Open Market Committeeâ&#x20AC;&#x2122;s rate decision, will be to reassure markets and investors that Indiaâ&#x20AC;&#x2122;s economy remains robust.

To bolster the rupee in 2013, the RBI offered to swap these funds for a minimum of three years at a fixed rate of 3.5%, leading to inflows of $ 34 billion

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Microfinance In India Impact of demonetization and future pathway By Gandhali Inamdar TAPMI

“I did something that challenged the banking world. I looked towards the poor.” -Muhammad Yunus

With Private sector Kotak Mahindra Bank acquiring BSS Microfinance at Rs.139 Crore to reach a wider customer base for a 99.49%, IDFC Bank acquiring Grama Vidiyal Microfinance Ltd, a Tamil Nadu based Microfinance Institute (MFI) for a 100% stake in the latter,around 6 IPOs of various NBFC-MFIs oversubscribed, 8 MFIs granted bank licences and a projected growth of 200-300% by the year 2020; 2016 has been a very successful year for Indian Microfinance Industry so far. Muhammad Yunus, founder of Grameen Bank reflects on Microfinancing as, “I did something that challenged the banking world. I looked towards the poor.” Microfinance in India Founded on the philosophy of co-operation and its central values of equality, equity and self-help, Microfinance is “An economic development approach that involves providing financial services through institutions to low income clients. .”Over time, it has come to include a broader range of services (credit, savings, insurance and others) as it has been realised that the poor, who lack access to traditional formal financial institutions,need a variety of financial products. The various MFIs coming together have also constituted a self-regulatory organization called MFIN

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(Microfinance Institutions Network) to address grievances of microfinance clients and ensure that MFIs stick to their code of conduct. Microcredit (small loans) is the most common product offering. In India, most microfinance loans have amounts not exceeding Rs.1,00,000 in aggregate

from two MFIs at most ,depending on the crop patterns for rural household whose annual aggregate income does not exceed Rs.1,00,000 with a facility of daily loan repayment most of which is cash-rich. Growth in MFI sector A CRISIL Report on May 18, 2016 states that MFIs are projected to grow at 125%. This growth is largely attributed to1. Securitization of microfinance loan receivables via issuance of Pass-Through Certificates(PTCs).PTCs are the debt instruments issued by a trustee company in the securitisation structure thereby enabling investors

"Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge. And while the lack of financial services is a sign of poverty, today it is also understood as an untapped opportunity to create markets, bring people in from the margins and give them the tools with which to help themselves."

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" The notion that we can serve the poorest of the poor [using microfinance] without reliance on subsidy is farfetched at this point. We will need to make changes not only to the model but to the delivery mechanism. "

to draw interests from the securitised assets. MFI partners such as mainstream commercial banks â&#x20AC;&#x201C; private banks (ICICI etc.), PSBs as well as many NBFCs such as MUDRA Bank issue PTCs for MFIs. Around 26% of Asset Classes for PTC Securitization transactions were for Microfinance sector according to CRISIL Ratings. 2. Relaxation in borrowing norms for MFIs with respect to increasing the cap on both lending amount from Rs.50000 to Rs.100000 and maximum aggregate annual income of microfinance clients from Rs.60000 to Rs.100000 for rural customers. The success and outreach of MFIs, especially the large ones both in credit and financial penetration has

Robert Cull also enabled them to obtain approval to operate as mainstream banks/ Small Finance banks facilitating lowering of funding cost and passing on the benefit to their clients. The Indian microfinance industry saw a 52%CAGR in assets managed between FYs 2012-13 and 2014-15, Religare Capital Markets said in a report published last year. In FY 2015-16 alone, the sector saw a growth of 60%, according to a September report by

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Sa-Dhan, a self-regulatory body for the microfinance sector. Religare Capital Markets said in a report published last year. In FY 2015-16 alone, the sector saw a growth of 60%, according to a September report by Sa-Dhan, a self-regulatory body for the

microfinance sector. Impact of Currency Ban The currency shock is hitting the cash-driven sector at a time of high growth. The demonetisation of highvalue currency notes has descended down as a double whammy for MFIs, which have temporarily stopped providing credit to their customers at the same time taking a major hit on loan repayments, industry sources said.

Largest Microfinance Institute-turned-bank Bandhan Bank declared that it has temporarily stopped its micro-credit disbursement after the government demonetized Rs 500 and Rs 1,000 notes on November 8. "We have stopped micro-credit lending since the first day of currency ban came into effect and it will remain closed till Saturday (November 19). The company requires Rs 130 crore to disburse as loans every day but limited cash availability means this disbursal is not possible", Bandhan Bank CEO & MD Chandrashekhar Ghosh told BloombergQuint.

Microfinance stands as one of the most promising and cost effective tools in the fight against global poverty Jonathan Morduch

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Many MFIs have deferred the repayment schedule of their borrowers for the next few days. In the earlier four-five days post currency ban announcement, repayment collections of about Rs.500 crore to Rs.600 crore ($74-89 million) has been deferred. "A lot of microfinance institutions put disbursement on hold because we need some clarity and it is currently quite ambiguous. We need clarity whether the institutions can collect Rs.500 or Rs.1000 notes from their borrowers as repayments of loans or not. We are not sure about it," Gurugram-based MFIN CEO Ratna Viswanathan told IANS over a phone call. This is because majority of the microfinance industry is cash-intensive.

Usually, MFIs record a repayment rate of 99%, but it has taken a blow after demonetisation.

Usually, MFIs record a repayment rate of 99%, but it has taken a blow after demonetisation. The sector is worried about taking the business forward in view of the increasing risk of loan defaults as the repayment rate has dropped to approximately 70% around November 10th following the announcement. The resultant liquidity crunch is likely to hurt repayment capacity of borrowers and lead to shortterm delinquencies in loan accounts, India Ratings & Research said with a possible catalysis effect because of demonetisation hurting SMEs. In particular, a section of borrowers associated with the construction sector and unorganized sector self-employed individuals could be negatively impacted. Issues faced by MFI sector "The notification regarding the demonetisation of high currency notes primarily talked about retail customers and there is no clarity about institutional customers. We want to know whether it is applicable to institutional customers. As far as repayment is concerned, we want a clear idea on how we can deal with it because the institutions are also in the loan repayment business. Institutions share each and every client's data with

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the credit bureau," Viswanathan pointed out. The answer to above ambiguity came in the form of a press release on 21st November by RBI giving borrowers of loans upto Rs.1 Crore, an additional 60day â&#x20AC;&#x2DC;forbearanceâ&#x20AC;&#x2122; window to make loan repayments, extending the cut-off norm for NPA recognition to 150 days for loan payments due between 1st November and 31st December intended to offer respite to MFIs on loan provisioning grounds. The short term deferment of NPA recognition norm will not only prevent a spike in bad and/or restructured loans due to temporary delays in collection of dues but also assist in setting up back the repayment collections for NBFCs and MFIs. Short term Trouble 1. Lack of sufficient liquid cash in hand for loan disbursements and fall in collections. 2. Non-payment of loans within stipulated time leading to loan defaults possibly leading to their classification as NPAs. Long term Issues 1. Rural Economy which is majorly cash based is hit adversely as higher denomination notes are not very practical to use even if available. 2. Fight for maintaining market share under present crisis may cause weakening of credit appraisal standards by MFIs. 3. Increasing focus of Government towards Digital payments and Direct-To-Account (DTA) payments could demand a change in the collections mechanism. 4. Even if all MFIs are allowed to function as a business correspondent for banks allowing them to accept old currency notes, it would mean additional paperwork since collecting agents need to maintain a detailed database of old notes including the names, addresses and the number of old notes provided by a

The short term deferment of NPA recognition norm will not only prevent a spike in bad and/or restructured loans due to temporary delays in collection of dues but also assist in setting upback the repayment collections for NBFCs and MFIs.

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borrower thereby adding to labour and time costs. 5. The additional 60-day forbearance window provided for deferring NPA recognition could be exploited by end consumers for intentionally deferring payments adding to the cash woes for MFIs.

The microfinance industry is paying for its own relaxed attitude towards re-routing loan disbursements and repayments through bank accounts

Contradictory Opinion A section of the industry has a contradicting opinion about the victim status of Microfinance industry. It opines that to certain extent, the microfinance industry is paying for its own relaxed attitude towards re-routing loan disbursements and repayments through bank accounts and assisting the formal banking system in connecting their clients to the formal banking system- especially to the Jan-Dhan accounts. Conclusion Born out of the need of providing financial services through institutions to low income clients, Microfinance industry has surely blossomed through years with its exceptionally high audience coverage, repayment rate among other achievements. Demonetization has certainly hit the cash-driven sector inversely affecting both its disbursements and loan repayments. As cash liquidity will increase in days ahead, short term cash troubles would get resolved. Banking licences to large MFIs can aid financial inclusion drive. Also, taking cues from changing trends and many government initiatives towards financial inclusion, “less-cash” & “cash-less” future and digital payments, MFIs should on updating and upgrading their business model, including multi-modal business through banks, smartphone payments, e-wallets among many others by undertaking end-user financial education initiatives so as to ensure sustainable growth in future.

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CROSSWORD - SOLUTION

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Indian Bond Markets Scope and Challenges By Himanshu Lunia & Shikhar Kholi IIM Lucknow

Why Indian Bond Market is important for financial growth of the country

Once a India is one of the fastest growing large economies and has very ambitious plans for future to continue this growth rate and assert its dominance over the world. It has already replaced Britain in term of size of GDP and is now the 6th largest economy in the world. To remain on track of reforms and development, a huge amount of funding is required by government and also by corporates to invest, when the time is right. To obtain such huge funding the credit system of the country should be strong, to support the needs of government and private companies. Here comes the bond market of a country, in the picture. Robust, vibrant and deep bond market is also essential for the financial stability of the country, mitigate risks of bad debt on banks and support the funding requirements. Bond markets can be further classified into the public bond market and corporate bond market. India has traditionally been dominated by equity markets or banks for the funding requirements. Though India started quite early for securitization as compared to other Asian economies, according to Wells and SchouZibell (2008), the market has not experienced the level of growth, it should ideally have. Public Bond Market The public bond market essentially entails the sale and

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purchase of government securities. The prospects for the Indian bond market improved considerably with the economic liberalization brought in by the reforms enforces in 1991. However, it still remains somewhat illiquid, with less than 20% of the outstanding securities being traded in a day, even considering the more liquid sectors of the bonds market. Most bonds are rarely traded till their maturity dates. The Government of India issues Treasury Bills (or Tbills in common parlance), which are short-term debt instruments of 91, 182 or 364 day maturity periods. They are issued at a discount and redeemed at face value at maturity. The Government of India also issues Cash Management Bills, which are used to meet temporary shortfalls or surpluses in cash flow of the Government’s coffers. They are usually issued for periods of less than 91 days.

Dated government securities are issued by the Government for a long time period (even up to 30 years). They carry a fixed interest rate, payable on the face value of the bond, and the interest is usually paid half yearly. These bonds are of various types : 

Fixed rate bonds – The interest for this bond is fixed till its expiry date

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Floating rate bonds – The interest rate (or the coupon rate) is fixed at set intervals (say every six months).

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Zero coupon bonds- They yield no interest, instead, they are issued at a discount. They are no longer issued by the Government.

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Capital Indexed Bonds – The principal amount of these bonds in linked to an inflation index, so that the purchaser (or the holder) in protected from inflation.

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Bonds with call/put options – These bonds give the purchaser to the right to sell or purchase the

State governments also raise loans from the market (SDLs – State Development Loans). In most respects, they are similar to the debt instruments issued by the Central Government.

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bonds at a pre-determined rate. ď&#x201A;ˇ

Collectively, the government issued

bonds are also called G-secs (government securities).

Special securities â&#x20AC;&#x201C; These are issued from time to time by the government under the market borrowing program. These are provided to entities like the Food Corporation of India in lieu of cash subsidies. These bonds can then be traded in the secondary market.

The prices of the government bonds were not market driven prior to 1993. The government fixed yields in the primary market, containing the cost of borrowing it incurred. Banks, therefore, purchased fewer bonds, and the statutory liquidity ratio steadily increased. Since banks purchased government securities largely to meet their SLR requirements, transactions in the secondary market were few. The secondary market essentially was an over-the-counter (OTC) market with scheduled commercial banks as the main participants. There were barriers to dissemination of information about prices and yields in the secondary market, and it was marked by the absence of market makers. These factors did not make the secondary market attractive to most buyers.

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The price of a Government security keeps changing in the secondary market. The price is determined by demand and supply of the securities. The prices of Government securities are influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as expected rate of inflation, liquidity in the market, etc. Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the Government securities. Developments in international bond markets, such as the US Treasury T-Bills, affect prices of Government securities in India. Monetary policy measures undertaken by the RBI can also impact the prices of the G-secs in secondary markets. By far, bond markets are one of the largest security markets in the world. Investors purchase bonds for different reasons â&#x20AC;&#x201C; capital preservation, as an additional source of income, diversification and as a hedge against economic security. In the past, governments have sold bonds even to finance war efforts. Understanding bond markets is one of the keys to understanding how the average investor can protect and grow the average investment portfolio. Though the market for government bonds is susceptible to political and economic uncertainties, it is still considered to be the keystone to hedging a diversified portfolio. Bonds historically have performed well when equity markets are underperforming, and pick for the investor interested in parking funds in fixed income instruments.

Corporate Bond Market Corporates require funds to expand their operations and they acquire required funding in 2 ways, either through debt or through equity. Debt can be further classified into a loan from banks or borrowings from the public by issuing bonds. In India, the corporate

Investors purchase bonds for different reasons â&#x20AC;&#x201C; capital preservation, as an additional source of income, diversification and as a hedge against economic security.

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In India, the corporate bond market is estimated to be around $287 billion which is about 14% of GDP.

bond market is estimated to be around $287 billion which is about 14% of GDP. Though it may seem to be a huge market but when compared to bank assets which are 89% of GDP and Equity markets which is 80% of GDP the first glance makes us believe that the corporate bond market is underdeveloped in India. Moreover, as stated earlier major source of funding to corporates is from equity or bank loans. Owing to the present situation of bad debt of banks, the credit system of banks has taken a hit and thus it becomes much more essential to develop the corporate bond market. As compared to other Asian economies also, the Indian corporate bond lags far behind which is evident from the chart below.

Fig 2. Size and composition of LCY bond market

The under development of corporate bond market can be traced to the problems associated with 3 pillars of the bond marketregulators and institutions, market participants and instruments offered. In India, there is multiple regulatory authority for different institutions which participate and constitute the bond mar-

InFINeeti New Year Edition

February 2017

ket. Corporates bonds and its participants like brokers and mutual funds are regulated by SEBI, banks are under regulation of RBI, Insurance companies and pension funds which are huge investors in the bond market are regulated by IRDA and Pension Fund Regulatory and Development Authority respectively. Due to multiple institutions regulating different fragments of the complete bond market, there is a chaos and often the policies of some regulatory bodies are at cross purposes.

Fig 3. Micro Structure of Corporate Debt market in India

Next two pillars which determine the growth of corporate bond market i.e. market participation and instruments offered as more or less interconnected. Taking a look at the instruments offered in September 2016, provides us the insights that about 72% of total out-

The under development of corporate bond market can be traced to the problems associated with 3 pillars of the bond marketregulators and institutions, market participants and instruments offered

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February 2017 51

standing instruments are of fixed type, thus not indicating variety in the instruments offered by corporates.

Type of Instruments

Opening No. of Instruments outstanding

Fixed Rate

Which means the majority of bonds gets bought by large institutions and public have very little participation

Opening Outstanding Amount (in Rs. crores)

16691

1867954

Floating Rate

2131

73171.67

Structured Notes

1324

27184.94

Others

2965

95003.88

23111

2063314

Total

Table 1. Types of Instruments issued outstanding on September 2016

Type Corporates

Amt Raised from primary mkt 4424

Turnover in secondary mkt 2877

Private placement of Corp. debt 4041

Table 2. Private placement of corporate debt 2014-15 (All figures in Rs. Billion)

From above two tables, it is clear that the securities offered does not have variety and also a large part of debt is placed through private placement and not through public, which means the majority of bonds gets bought by large institutions and public have very little participation. This further leads to the vicious cycle of Nelsonâ&#x20AC;&#x2122;s Low-Level Equilibrium.

Since only a few types of securities are being offered, it does not satisfy varied requirements of different investors and thus has a limited investor base which further makes it not viable to issue to public and thus has the majority of the issue through a private placement. Due to all these reasons mentioned, Indian corporate debt market has not been developed and requires urgent attention so that credit is available at cheap costs and stress from the banking sector is reduced. Moreover, the government has been financing its deficit from public borrowings,

InFINeeti New Year Edition

February 2017

which further leads to crowding out and thus increasing the cost of funds high for corporates which further hamper the development of the corporate bond market. The government has taken few steps to boost debt market in the previous budget but more such actions need to be taken and that too continuously. There is a need to bring reforms to encourage more participation to boost the demand as well as the supply side of the market. Thus concluding, the bond market in India, considering the size of its economy and its growth rate, is not developed to that extent. The public bond market is comparatively better placed but the corporate bond market needs to be given impetus to encourage companies to invest, which would eventually be beneficial in the growth process and also bringing a financial stability to the credit system.

Indian corporate debt market has not been developed and requires urgent attention so that credit is available at cheap costs and stress from the banking sector is reduced

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February 2017 53

Lowering of Interest rates Mechanism and implications of zero and negative interest rates

By -Amit Kumar Shaw IIFT-Kolkata Economic Policy for a country can be divided broadly into two –

Fiscal Policy determines the income and expenditure of the government , whereas Monetary Policy determines the money supply in the economy



Fiscal Policy



Monetary Policy

Fiscal Policy determines the income and expenditure of the government , whereas Monetary Policy determines the money supply in the economy. Fiscal Policy is determined by the government using annual budget as a tool among many others, Monetary Policy is determined by the Central bank. The main objective of fiscal policy is to increase the income of micro elements of a country and in turn total economy. The objective of monetary policy is twofold – to generate employment and to control inflation. The most important tool to control the money supply is the interest rate. Increasing the interest rate will decrease the money supply in the economy which will bring the inflation down (inflation is nothing but a simple rise in price of goods), and vice versa .The concept of Zero interest rate has been devised way back by the likes of Keyenes and economists like John Hicks and Paul Krugman have worked in it, It was in 2008 after the economic crisis that serious thought was given to it. Since many blamed that a reluctance in decreasing interest rate by the central bank was the main reason behind the great depression of 1930s, when the

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February 2017

economy hit a slowdown in 2008 the central banks across the developed world started reducing the interest rates, since the interest rate in these countries were already low the rates became nearly zero. The basic principle behind this was simple – reduce interest rate to increase money supply in the economy to in turn increase the expenditure and thus roll back the economy. But the big question here arises what after zero? Technically the interest can’t be reduced beyond zero because that would mean penalizing someone for keeping money in the bank. Few European economies although reduced the interest rate to make it negative. But there is a danger in doing so – The Liquidity trap. What is a Liquidity trap ? A liquidity trap is a situation described first by John Maynard Keynes in which further infusion of money by the central bank fails to reduce the interest rate making the monetary policy useless. This happens because at an already low interest rate when further infusion of money takes place the consumer feels safe to keep money in the form of savings (bank accounts, cash etc), and they do not expend the money often spurred by the fear of negative economic event in the near horizon. John Hick’s analysis of John Maynard Keynes work in 1937 first set out the concept of liquidity trap. Paul Krugman updated that framework in the analysis of Japanese economy in1998. In This story a really nasty economic shock knocks an economy into a bad equilibrium; rates fall to zero, after which the Monetary Policy becomes ineffective. Real rates can't go low enough to stimulate the economy, which remains stuck with a shortfall in demand. To get out, the government either needs to borrow heavily and spend to boost demand, or the central bank needs to promise to tolerate high inflation once, at some point in the distant future, the economy returns to health: to "credibly promise to be irresponsible", in Mr Krugman's phrase. Higher exected inflation reduces the real interest rate in the

Liquidity trap

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February 2017 55

present, providing the needed stimulative jolt. In his paper, Mr Krugman mused that a target of 4% inflation for fifteen years might be the sort of thing needed to get Japan out of its trap—assuming Japanese households would find such a target credible. How low could the interest rate go?

Future promise of higher inflation rate to make the real interest rate negative

Not long ago it was thought that interest rates can go to the lowest of 0. But that notion has been broken by the ECB (European Central Bank). Recently the ECB and many other European banks are charging negative interest rate to the commercial banks. Technically speaking, R = N – I, Where R = Real interest rate

N = Nominal interest rate I = Inflation rate So if inflation rate is say 3%,and nominal interest rate is 2%, that makes real interest rate –ve 1%. This is what the central banks across these economies are retorting to. Future promise of higher inflation rate to make the real interest rate –ve. But when there is already stagnant demand it becomes very difficult to maintain a high inflation rate.

European Central Bank decides monetary policy for the Euro Zone which comprises of 19 of the 28 European Union countries (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Lu xembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain). But these countries are free to decide on their fiscal policy and may have different inflation rate e.g Germany – 1.70, Italy 0.50, France – 0.60 and henceforth.

InFINeeti New Year Edition

February 2017

Country

Interest Rate

Inflation Rate

United States

0.75

1.70

European Central Bank*

0.0

1.10

China

4.35

2.10

Japan

-0.10

0.50

India

6.25

3.41

Brazil

13.00

6.29

Russia

10.00

5.40

Canada

0.50

1.20

Indonesia

4.75

3.02

Australia

1.50

1.30

United Kingdom

0.25

1.20

Now let us think logically, why would someone lend their money to the bank if they are charged negative interest (they have to pay to keep their money in the bank), and if people do not deposit their money in the bank how would the bank lend back? Well there is a solution. Reduce the return to holding money below zero. Imagine that the central bank were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. That move would free the central bank to cut interest rates below zero. People would be delighted to lend money at negative 2 percent. Losing 2 percent is better than losing 10. Of course, some people might

European Central Bank decides monetary policy for the Euro Zone which comprises of 19 of the 28 European Union countries

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February 2017 57

decide that at those rates, they would rather spend the money by, for example, buying new car. But since expanding aggregate demand is precisely the goal of the interest rate cut, that incentive is not a bug but a feature! That may not seem practical and that’s the reason it has not been implemented by any central bank as of now.

Commit to higher inflation so as to reduce the real interest rate. ( Stated by Paul Krugman in his paper)

Krugman further says that the important thing about this solution is that we can just expect it – the central bank only has control over the expected inflation to the extent that it can convince the stakeholders that it will deliver the promised inflation rate once the liquidity trap is over. 

.Convince

way

Current policy makers that it is the right



Make that argument persuasive enough that it will guide the actions of future policymakers



Convince investors, firms and consumers that you have in fact achieved the first two. According to Krugman unfortunately we haven’t even gotten anywhere near. The conventional theory in policymaker’s mind still says that any rise in expected inflation rate above 2% is bad, when it is actually good.

Real Interest rates across few economies in the past two decades

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February 2017

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Equity Research Report

Jet Airways By Nilesh Daklia IIFT Kolkata

Founded â&#x20AC;&#x201C; April 1, 1992 Commenced Operations- 5 May, 1993 HeadquartersMumbai

Operating BasesBangalore, Chennai, Delhi, Kolkata, Pune

Jet Airways is an Indian airline based in Mumbai. As of February 2016, it is the second largest airline in India after IndiGo with a 21.2% passenger market share. It operates over 300 flights daily to 68 destinations worldwide from its main hub at Chhatrapati Shivaji International Airport and secondary hubs at Amsterdam Airport Schiphol, Chennai International Airport, Indira Gandhi International Airport, Kempegowda International Airport and Netaji Subhas Chandra Bose International Airport. Incorporated in April 1992 as a limited liability company, the airline began operations as an air taxi operator in 1993. It began full-fledged operations in 1995 with international flights added in 2004. The airline went public in 2005 and in 2007, it acquired Air Sahara. It became the largest carrier in the country by 2010 before being eclipsed by IndiGo in 2012.

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February 2017

Indian Aviation Industry â&#x20AC;&#x201C; Overview Indiaâ&#x20AC;&#x2122;s civil aviation industry is on a high-growth trajectory. India aims to become the third-largest aviation market by 2020 and the largest by 2030. The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as low-cost carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic airlines, advanced information technology (IT) interventions and growing emphasis on regional connectivity. India is the ninth-largest civil aviation market in the world, with a market size of around US$ 16 billion. India is expected to become the third largest aviation market by 2020 Market Potential During January-August 2016, domestic air passenger traffic rose 23.14 per cent to 64.47 million from 52.36 million during the same period in 2015. Passenger traffic during FY 2015-16 increased at a rate of 21.3 per cent to 85.57 million from 70.54 million in the FY 2014-15. In July 2016, total aircraft movements at all Indian airports stood at 168,400, which was 14.3 per cent higher than July 2015. International aircraft movements increased by 8.2 per cent to 32,830 in July 2016 from 30,330 in July 2015. Domestic aircraft movements increased by 15.8 per cent to 135,570 in July 2016 from 117,050 in July 2015.Indian domestic air traffic is expected to cross 100 million passengers by FY2017, compared to 81 million passengers in 2015, as per Centre for Asia Pacific Aviation (CAPA). India is among the five fastest-growing aviation markets globally with 275 million new passengers.

Fleet Size- 114 Destinations- 68 Company SloganThe Joy of

Flying

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February 2017 61

SWOT Analysis of Jet Airways Strength:   

 

Has created a good image among the Indian fliers and trusted Airline by the Corporates One of the biggest Indian airline companies with over 13,000 employees Operations in over 75 Indian cities and over 400 daily flights Top of the mind brand due to excellent operations and marketing It also has international destinations in nearly 20 countries

Weakness: 

Key PeopleNaresh Goyal (Founder & Chairman )



Competition from the LCCs and other competitors means market share growth is tough Presence of other airlines on international routes making it difficult to have significant market share

Opportunity:  

Strongly positioned in the International routes and has presence in every segment Increasing number of people opting to travel by airlines

Threats: 

LCCs eating up the market share Rising Fuel Costs and Labor Costs



Why prefer Jet Airways?



Lower fuel keeps margin upbeat



More focused on international compared to domestic segment



Margins to remain healthy followed by benign ATF prices



InFINeeti New Year Edition

February 2017

In order to give the recommendation of buying or selling the stock, we have performed a discounted cash flow analysis on this stock to find its intrinsic value. Terminal Values 

Total revenue from operations: INR 35,150.15 crore



Total value: INR 1,02,800.46crore



PV factor: 0.54



Present value: INR 55512.25 crore

Our findings generated the following result: 

Intrinsic value per share: INR 682.41



Market value per share: INR 419.50



Our recommendation: BUY

Other Information In Financial Year 2014, the Company sold a 24 % minority stake to Abu Dhabi’s Etihad Airways for US$379 million. A further investment of US$ 150 million is planned which will take Etihad Airways’ stake up to 50.1%. This alliance will bring significant guest benefits with expanded code sharing and by creating a combined network of 140 destinations. Ownership Pattern In its latest stock exchange filing dated 31 March 2016, Jet Airways reported a promoter holding of 51.00 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors. At the same time, institutional holding in the Company stood at 14.09 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors.

Our Recommendation

BUY

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February 2017 63

DCF Calculation of Jet Airways in Rs. Lakhs Gross revenue (A) growth (in %) Net Revenue from operations (A )

FY14A

FY15A

FY16A

FY17E

FY18E

FY19E

FY20E

1771047

2028073

2191096

2438152.79

2713066

2989702.45

3316052.50

14.51%

8.04%

11.3%

10.2%

10.9%

2028073

2191096

2438152.79

2713066

2989702.45

3316052.50

14.51%

8.04%

11.3%

10.2%

10.9%

717542 40.5%

668626 33%

501573 22.9%

783257 32.1%

795637.05 29.3&

840552.64 28.1%

990043.78 29.9%

1260826

1480542

1388718

1320868

1537540

1736286.67

1867183.05

1771047

growth (in %) Cost of goods sold % of sales Other Operating Expenses % of sales EBITDA

71.2%

73%

63.4%

54.2%

56.7%

58.1%

56.3%

(207323)

(121035)

300805

334026.33

379829.30

412863.13

458825.67

margin (in %)

-11.7%

-6%

13.7%

14%

13.8%

D&A

87575

76250

99509

109716.88

122087.99

122862

127220.87

EBIT

(294898)

(197345)

201296

224310.06

257741.31

290001.14

331605.25

margin (in %) Capex

-16.7%

-9.7%

9.2%

9.5%

9.7%

10%

(113365)

(39102)

(44284)

(84117.43)

(66914.83)

(79102.82)

(94643.24)

% of sales

-6.4%

-1.3%

-2%

-3.5%

-2.5%

-2.6%

-2.9%

D&A

87575

76250

39509

103716

122087.99

122862

127220.42

(200940)

(115352)

(143793)

(193834)

(189002)

(201364.82)

(221863.66)

15.70

14.6

15.15

14.97

15.09

137448

162546

166911

179041

197297

221493

120922

137448

123185

148048

163544

180421.44

16526

25100

37726

30993

33752

41072

1.3

0.89

1.1

1.098

1.09

542782

580367

876955.75

724854

765716

908297.05

Opening Payable

484046

542782

580367

561574

570970

566272

Change in Payable

58736

37585

298588

163280

194745

342024

(42210)

(12485)

(258862)

(132285)

(160332)

300952.32)

30.0%

396694.2

719430.36

623795.28

688819.97

882160.07

1 0.86

2 0.75

3 0.68

4 0.61

5 0.54

341157

539573.22

424180.79

420160.18

476366.44

Net Capex Receivable Turnover Ratio Closing Receivable

120922

Opening Receivable Change in Receivable Payable Turnover Ratio Closing Payable

484046

Change in WC Tax rate

30.0%

FCFF TV Year PV Factor Present Value Firm Value Cash and cash equivalents

Enterprise Value

7752682.64 420.43

7752262

InFINeeti New Year Edition

February 2017

Calculations Tax rate

30.00%

Post Tax Cost of Debt

5.35

Beta

1.9

10 Years Treasury Bond Yield (Rf)

8.00%

Cost of Equity

15.54

Debt/Capital (Wd)

3.68%

Equity/Capital

96.32%

WACC

15.16%

Debt (In INR Lakhs)

434.38

Equity (In INR Lakhs)

11360

Market return (Rm calculation)

BSE SENSEX Financial Year

Open

2011

17,055.04

19,463.11

14.12%

2012

19,063.11

17,429.96

-8.57%

2013

17,029.96

18,890.81

10.93%

2014

18,890.81

22,455.23

18.87%

2015

22,455.23

27,954.86

24.49%

Average Return: 11.97% *Source www.bseindia.com

Annual Return

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February 2017 65

Technological Metamorphosis of Indian Banking Sector By Rahine Bose & Amit Giri ISB Hyderabad The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks

Flashback – 20th June, Year 2006– Thousands line up near the Gram Panchayat of Gosaba Village, Sundarbans at around 12 Noon. Well it’s the day for them to get their share of NREGA scheme funds. Sonai Gayen, shouts out from the long queue “Pradhan Saheb… ar koto shomoe..at this old age I can’t bear the brunt” – she can’t go through the wait under the scorching sun and yells out her distress , counting the people in front of her and awaiting her turn to receive the cash. Today in 2016 her daughter Shyamali, gets an SMS alert notifying credit of the NREGA scheme and AILA disaster management funds into her SBI account. Fast ! Safe ! Secure ! Hassle free!! She doesn’t need travel anywhere. Power of electronic settlement. The story is same for millions across the country riding on a digitally revolutionized Indian Banking sector. Let’s zoom in on Mr. Banerjee, an

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February 2017

octogenarian, living in a plush residency in Ballygunge area in Kolkata. He doesn’t visit his ICICI Bank branch any more, and rather has the bank come over to his living room. Now don’t get shocked , his son , who lives out of the Silicon Valley has set up the Video Banking application for him which he uses at his ease to converse with his Relationship Manager and get all his queries solved without him having to physically visit the branch . The delta shift brought about in the Indian Banking through technology is a compelling story so much so that today if we see a segment like Mobile Banking, India shines amongst the top 5 in the world with 37% usage ahead of countries like US , France , UK and some of the other biggies.

Today paperless transactions including the likes of card based, electronic & internet banking transactions have surpassed the traditional transaction instruments like cheques and the figures are startling. Paper-based transactions (April 2014 – March 2015) garnered INR 85 lakh crore whereas cashless transactions through credit card, debit card, NEFT, and online wallets comprised of INR 92 lakh crore2 . Adding to this interesting build up is the plan of Mr. Modi to implement the National Optical Fibre Network (NOFN)3 across 2.5 lakh villages in India which is going to further boost internet penetration and in turn propel the technology revolution in the way India

In July 2016, the government allocated Rs 22,915 crore (US$ 3.41 billion) as capital infusion in 13 public sector banks, which is expected to improve their liquidity and lending operations

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The Indian economy is on the brink of a major transformation, with several policy initiatives set to be implemented shortly

currently banks . If we need to highlight some of the core areas of advancement then we cannot miss the following - a) Electronic Funds Transfer b) Electronic Clearing System c) Tele-banking d) Automated Teller Machines e) Shared Payment Network System f) Credit Cards/Debit Cards g) Corporate Banking Terminals h) Point of Sale Terminal. i) Electronic Data Interchange. Now lets us look at some of the latest technology based initiatives that have eased banking operations and augmented its client base:24x7 Electronic Branch: 24x7 electronic branches have become the one-stop shops for all banking transactions wherein customers can transact on their own at a time of their convenience. The offerings are aplenty: cheque deposit machine, an interactive kiosk, and a cash deposit machine with instant credit facility. In September 2016, around 1.08 million transactions were carried out at ICICI Bankâ&#x20AC;&#x2122;s electronic branches.

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February 2017

Tab Banking: Tab Banking provides the customers the luxury of opening his bank account at his or her home or office. This has also eased out the operational process at the Bank’s end as accounts can be opened at lightning pace. Bank-on-the-Move: This is a new kid on the block which is basically a POS terminal with an in-built GPRS and Wi-Fi connectivity to carry out various banking transactions in remote locations where fullfledged bank branches are not feasible. E-Locker: E-Locker is a virtual online locker, which is available on the bank’s internet banking platform which can be used to safely store electronically scanned copies of important documents like legal agreements, policy documents, degree certificates etc. 24 Hour Bank Locker – Today we see banks like ICICI, come up with 24 hours robotic lockers where

customers can walk in at their own sweet time, no matter even if it is at 2 am and access their lockers which are manned by robots. Robotic Banking- ICICI Bank became the first bank in India to deploy ‘software robots that emulate human action and reduce the response time to customers by up to 60 per cent. The robots process over 10 lakh transactions daily, bringing in operational efficiency, accuracy and a sizeable reduction in processing time for customer services.

Many banks, including HDFC, ICICI and AXIS are launching contact-less credit and debit cards, which use near field communication (NFC) mechanism; this will allow customers to transact without having to insert or swipe the card

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Payment Banks â&#x20AC;&#x201C; The next round of revolution will hover around this. Payments banks cover services like ATM cards, debit cards online banking and mobile banking and will give the impetus to the goal of financial inclusion with its reach across millions from the unbanked zones. Paytm , India Post and the likes are going big on this.

Indiaâ&#x20AC;&#x2122;s Rs 65,000 crore microfinance industry is set to change its ways of working in 2017, in the aftermath of the ban on highvalue notes

Mobile Banking: Even Graham Bell w ould not have forecasted the way the world has evolved on

telephony and today boasts of this amazing mobile connectivity. India is not far behind, and has welcomed the technology with open hands. Today it stands tall amongst the top 10 nations on mobile penetration wherein millions are connected. Banks have seized this opportunity quite brilliantly and today Mobile Banking is a major driving force for them. Look at Axis Bank stacking up more than six million mobile banking transactions worth Rs 6,268 crore in December 2015. The transactions have leapfrogged almost 400% in 2016 fiscal and are on a rise.

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February 2017

Internet Banking: Banking sector has w itnessed a surge in its internet banking subscribers. Although it needs to traverse thousand more miles still the achievement is quite commendable. Statistical evidence shows that the banks have benefitted in terms of rise in their asset base. The average asset base of internet banking enabled banks have a mean base of around of INR 50,000 crores which is 400% of the non â&#x20AC;&#x201C; internet savvy banks.

Core Banking Solution (CBS): W hether you are in the distant Andamans or near home, when you find your bank branch , just walk in and avail all the banking services no matter even if itâ&#x20AC;&#x2122;s not your base branch . Thatâ&#x20AC;&#x2122;s the power of Core Banking revolution which is at the heart of the banking technology revolution which has reduced the issue of geographical distances.

Not only the MFIs all non-banking financial companies (NBFCs) will have to change their business model following the clampdown on cash

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Indiaâ&#x20AC;&#x2122;s banking industry is on the cusp of a major transformation, with new banking licenses expected to bring in more players in an already competitive environment

ATM Revolution: N eed to transfer Funds , order a cheque book , check balance , withdraw , deposit cheques , pay your bills . Go to the one stop shop, ATM , a revolutionary gift given to the consumers of the financial world . Available 24*7*365, ATMs are your best buddies waiting to serve you.

CTS revolution - Another innovative fund clearing mechanism is the grid based Cheque Truncation Project (CTS). Cheque Truncation is a process of stopping the physical movement of cheques and is based on image clearing technology. This has reduced the logistic costs for the banks including the cores of money spent on courier services

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February 2017

Online Loan Processing: Need a loan.. You are just a click away, as you can go to the bank’s website and order your requirement. Provided all KYC and CIBIL checks are proper your loan can be through and the TAT can be as fast as 5 hours. Card less Cash withdrawal – Stuck somewhere with no ATM card. You can ask your friend to send you the codes on your mobile number and use this to withdraw from ATM. New age banking. Technological advancements have not only benefited the marquee banks but it has propelled the Cooperative Banks both the Urban and DCCBs to march along sharing the technological know how’s of the leading banks. For example through the National Financial Switch and through the implementation of RuPay AADHAAR MicroATM & ATM cards bolstered by the technology brought in by NPCI, the co-operative bank customers can enjoy all the modern banking facilities. In this model the major banks like ICICI, HDFC act as the sponsor banks which reduce the capital expenditure on the part of the cooperative banks . Also the Cooperative Banks which are yet to get CBS enabled, can give RTGS/NEFT/IMPS facilities to its customers by using the E-platform of the leading scheduled commercial banks. The facility is called E-Collections and is done through Virtual coding of accounts. This has helped these banks to retain its customers in a big way. We can see that in the current environment RTGS/NEFT transactions have leapfrogged by over 600% and 90% respectively. IMPS (Immediate Payment Service) with its 24*7 fund settlement option launched by NPCI are also catching up. Transactions between April and August grew by 126% year-onyear to Rs 1.28 lakh crore.

PMJDY, India's national mission for financial inclusion to ensure access to financial services; by 1 February 2017, over 270 million bank accounts were opened and US$10 billion were deposited under the scheme

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The RBI has given in-principle approval to 11 applicants to establish payment banks. These banks can accept deposits and remittances, but are not allowed to extend any loans

Rupay Cardsâ&#x20AC;&#x201C; We have heard about the Masters and Visa cards , but today with the launch of Ru pay cards ,which is the domestic alternative a lot of money that used to move out of the country due to fee payments to these international service providers is now getting retained back within the country . Banks are benefitting from this in a big way as the merchant client base is increasing due to lower transaction charges. Typically the charges are around 90 paise per transaction which is less than the Masters/Visa charges which range between 1%-2% of transaction amount. Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 250 million accounts were opened and 192.2 million RuPay debit cards were issued which in turn mustered deposits worth almost Rs 44,480 crore (US$ 6.67 billion) for the banks. Banking Contributes about 7% to Indian GDP and with the impetus on technology it will further boost up this contribution. Technology is thus helping in bringing unaccounted cash flows into the organized system and in term augmenting the interest income.

InFINeeti New Year Edition

February 2017

The Reserve Bank of India (RBI) released the Vision 2018 document, aimed at encouraging greater use of electronic payments by all sections of society by bringing down paper-based transactions There is a clear direct relationship between the technological advancement in banking and GDP and we can also see that Interest Income is rising with unaccounted cash going down.

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The Positive Impacts in a diagrammatically shown below –

nutshell

No boon comes without its share of bane. Technology revolution has also had some issues which have been mammoth. These basically relate to the online security breaches and cyber fraud. Recently 3.2 million debit cards have faced security

Till the first week of December 2017, the credit growth of the Indian banking sector has been a meagre 5.8%, year on year

breaches and major banks have taken the hit. Also, there are times of internet downtimes, branch network connectivity downtimes where millions of transactions get held up leading to revenue losses and consumer inconveniences. But, yes, necessary processes, which are dynamic in nature, are getting set up by the banks to plug in these issues which can crop up. Indian banking sector has been continuously metamorphosing since the year 1770 when the Bank of Hindustan was established in Calcutta and today it features amongst top 14 in Global Banking rankings due to the cumulative impact of advancements in technology. Just before we end don’t forget to catch up on India Posts whirlwind journey as the largest Payment Bank to be operational in the world and with the recent push by Modi on demonetization, it’s time to get Digitally Smart. Woooooha!! We can proudly say “Jai Hind” and embark on the next phase of this exhilarating journey..

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February 2017

MEET THE TEAM - SENIOR EDITORS

Nilesh Daklia 

IT Engineer from Nirma University

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Intends to specialize in Finance

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Loves to play cricket and follows Warren Buffet religiously

Sarthak Khanna 

Electronics and Communication Engineer

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Intends to specialize in Finance

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Loves to play Table Tennis and spend time on novels

Shashank Sharma 

Electronics Engineer from Panjab University, Chandigarh

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Former Systems Engineer, Infosys

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Intends to specialize in Marketing and Finance

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Pink Floyd fanatic, loves photography and reading non-fiction

Devottam Bhattacharya 

Engineer from VIT University

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Intends to specialize in Finance

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Football fan, loves reading

Hope You Enjoyed Reading !!! For feedback, please contact Team InFINeeti at :

infineeti@iift.edu

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