InFINeeti Vivaan Edition 2018 by InFINeeti- The Business & Finance Magazine of IIFT

INFINEETI

F r o m t h e E d i t o r â&#x20AC;&#x2122;s d e s k

Welcome aboard reader! We wish to take a second to say hello and welcome you to our community of Finance and Business savvy readers. The advent of big data has set the financial sector on a confrontational path. This rapid rise of Fintech and the integration of technology with banking industry has resulted in plethora of innovative solutions. Banks have started to compete beyond financial services as they are facing intense competition from non-financial institutions providing fintech solutions like payment services.

At this transformational time we are happy to present this edition of InFINeeti which touches upon many topics which have become issues of late from the rise of Analytics based lending to Short Selling of stocks and bitcoins. The acquisition of Flipkart by Walmart has been analyzed and whether Indian startup scenario has finally moved into a different space. But we also touch on the problems facing traditional financing especially in the rural sector space.

HAPPY READING!

INFINEETI

FORE WORD

Dear Readers, Greetings from InfiNeeti….. I am happy to present before you the new edition of InfiNeeti launched along with our Vivaan 4.0. This edition is placed before you at crucial juncture where technology is dominating finance – bitcoins rolling, big data looking at financial analytics – and the banking sector witnessing crisis at the top!!!!!

Dr. K Rangarajan Center head IIFT Kolkata

Inspite of such Fintech Transformation, the season for M&As have again started showing up. It is not only in India about Walmart and Flipkart but also outside India by DRL in Netherlands, M&M in Europe. M&A may be for the biggies, what is happening to our Angels and Start-ups? Is it time to evaluate the start-up landscape? Let’s also look at our Bread-feeding sector – Agriculture. Beyond water, is the fund flowing into our agriculture sector to meet the wage and technology requirements?

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.

Sorry, I am raising more questions…. Never mind. This InfiNeeti edition in your hands is trying to analyse some of these questions and provide interesting insights…… Enjoy Reading……

INFINEETI

upasana@iift.edu

CONTENTS

(PHOTO)

5 (PHOTO)

Is the fastest major economy.... fast enough?

Analytics based lending:The future of SME lending

Sailing through a short squeeze

Is the Flip-mart deal a foretoken for budding Indian startup?

What is agricultural Indiaâ&#x20AC;&#x2122;s subprime story?

Regulatory Sandbox: Opening the Pandoraâ&#x20AC;&#x2122;s box of fortunes

Fintech in India: An insight

How Technology can boost your business

Financial markets in an era of IOT, blockchain and AI

Can Fintech capture the Gini?

Book Review

Oil prices running wild?

Deglobalisation

Short selling and Bitcoin market

Digital lending - The future of MSME in India

InFINeeti Magazine Indian Institute of Foreign Trade

INFINEETI

Did You Know? Vivaan’18 IIFT’s Business Summit had more than 3 lakhs in cash awards?! Next time don’t miss out, nor let your juniors do!! INFINEETI

The Team

Shubham Srivastava Editor-in-Chief Interned @ Sanofi Genzyme

Siddharth Gupta Senior Editor Interned @ GEP

Abhinav Pant Junior Editor Worked @ Deloitte and L&T

W Vikas Rao Senior Editor Interned @ ABFRL

Sidhartha Rana Senior Editor Interned @ Synergy Consulting

Shikha Jha Junior Editor Worked @ Evalueserve

Vinit Vikash Junior Editor Worked @ MCOM

INFINEETI

IN THE LIVES

InFINeeti and its Team

THANKING THE

GEN LEADERS

FA N O F M U S I C : G U I TA R , P I ANO, CLASSIC FUSION AND M E TA L . A D U L AT E S A R R A H MAN AND JOHN PETRUCCI. MSDIAN AND ELON M U S K FA N AT I C

BATCH

2017-19

A SPORTS E N T H U S I A S T, LIKES TO READ A N D T R AV E L. DROP IN ANYTIME, AND YOU CAN GE T A LOT O F ‘ G YA A N ’ O N ECONOMICS. B A S E G U I TA R I S T, T R AV E L L E R

DRUMMER, S TA N D - U P C O M E D I A N

HOBBIES READING NON FICTION | D R AW I N G 2D SKETCHES | COOKING CONT I N E N TA L D I S H ES

DANCER AND CYCLIST

B O O K W O R M : FA N TA S Y, F I C T I O N , P H I L O S O P H Y, EVERYTHING

INFINEETI

ECONOMICS

IS THE FASTEST MAJOR ECONOMY....FAST ENOUGH ?

T Saransh Yadav IIFT

he Indian economy has evolved from a largely agricultural & trading society during the Indus Valley civilization to a mix of manufacturing & services. It has also witnessed times of being the world leader, along with Ming China, in manufacturing by generating one-fourth of the industrial output during the Mughal era to contributing just 2% to the world’s manufacturing output under the British rule. The economic drain theory supports the fact that the British East India company imposed high taxes on the weaker Indian economy and depleted food & money stocks which led to famine in 1770s. The British also left us with another economic strain of partition. This refugee settlement led to division of India into complementary economic zones. As a result of which India inherited some economic problems at the time of independence after missing the early train of industrialization. The repercussions proved to be catastrophic as growth in India remained at around 3.5% from 1950s to 1980s, whereas, South Korea grew by 10% and Taiwan at 12% during the same period. Indian growth has grabbed some pace after economic liberalization in 1991.

ecently, the World Bank has put India ahead of France in terms of GDP being just $25 billion short of the United Kingdom. As China’s economic growth has slowed down, people are looking for the next big driver of growth and India seems to fit the bill. Under the Narendra Modi regime, India continues to be the beacon of growth in the South Asian region. This is the main reason that many multi-national companies are excited about India, dreaming of selling fast food, smartphones and fast fashion to a rapidly growing middle class. And companies like Walmart are paying top dollar for business deals in India.

INFINEETI

hile most of the Asian nations are ageing, India has a median age of only 27.3 years, compared to China’s 37.6 years & Japan’s 47.1 years. India is on a track to reap its handsome demographic dividend. The “Make in India” campaign is eventually proving its firepower as India has attracted record foreign direct investments. The World Bank has given its nod to Prime minister’s efforts and his strong reform agenda to improve India’s business environment, improving India’s rank in its ease of doing business from 130 to 100. According to the IMF economic outlook, India is expected to grow at 7.4% in 2018-19. Our country has also done exceptionally well in gaining political freedom. The maturity that our democracy has achieved can be beheld in people who have confidently chosen to vote out the governments who lost touch with the people’s needs & desires during the last 5 years. This is a big achievement in itself for a democracy as huge as India.

ndia has ascended in the list of world economies. But what does this mean for Indians looking from within? Not much, if one juxtaposes the per capita statistics graphs of India and other top economies of the world. The ground realities can only be discovered if we link the size of an economy with its geography, population and workforce. And purchasing power parity is an appropriate metric to look at in India’s scenario. According to the World Bank figures, India has an estimated per capita income at purchasing power parity of $7060 while France has $43,720, around six times more than that of India. And India stands 6th in terms of GDP but is at the 123rd position in terms of per capita income at PPP while France smiles at the 25th spot. Thus, we would find an average Indian far poorer than an average Frenchman if we use per capita yardsticks for

measurement. India has a population of approximately 134 million as compared to 67 million French people. One could cite India’s large population as a major reason for its lower per capita figures if China hasn’t had 2.5 times per capita income than that of India (whereas, Chinese’s per capita income was almost comparable to that of Indians in 1960).

he spurt in Indian economy was mainly driven by consumer & government spending after a slow down blame due to demonetisation & chaotic implementation of the GST. India’s GDP has doubled in the last decade & is expected to power ahead as an important economic engine in Asia. But it will take at least a decade for India to reach the level of prosperity enjoyed by the Chinese although growth in China has slowed down.

he not-so-satisfactory employment scenario in the country substantiates the importance of per capita figures at PPP of the nation. India has about a million population entering the labour force every month, we need significantly more growth to get them good jobs as it’s a big number that has to be absorbed. Recently, 90,000 railway jobs found applicants more than the number of people residing in Australia. Decent stable & salaried jobs for most of the employable youth is still a major challenge for the economy. Almost 80% of Indians depend on the informal sector to make their living. Agriculture contribution has sunk from 50% at the time of independence to just 15% at present but still employs majority of the Indian population. India anticipated a manufacturing revolution in 2014 but still the service sector is carrying a huge share of India’s GDP on its back. ithin our country, domestic investment has fallen as businesses have been hesitant to invest. The Goods & Services tax is also baffling some businesses for taxing some products. India’s exports have dropped despite incentivising the exporters further in mid-term review of India’s foreign trade policy 2015-20. On observing the rising oil prices trend and India being the 3rd largest oil consumer after United States & China, Moody’s & Goldman Sachs have cut their growth projections for India. Oil prices were very low in 2014 at around $40 per barrel. Then, the government was easily able to impose taxes on diesel and petrol with minimal rise in inflation.

he demographics of the two nations are almost comparable but the GDP stands at 1/5th of that of China. India should be able to generate at least 50% of the Chinese GDP in the next 4-5 years to make the macroeconomic figures start translating into common man’s livings & his per capita. We are amongst the most unequal countries in the world and are still way under our true potential. We are the world’s fastest major economy at the moment but our country needs some structural changes to boost the growth path especially in the current scenario where protectionism & trade war is escalating as unlike United States which is an isolated economy, we are more export-oriented and international trade dependent. espite its challenges, India continues to grow quickly. Our current growth reflects the hard work of the government & its people, but we need to repeat this continuously for at least next 20 years to give every Indian a decent livelihood. Our outperformance is spotlighted because the world’s growth is weak, but our growth is under sufficient to satiate hunger of every Indian. Most of the major statistics have shown India as the fastest growing economy in the world.

nd now, the government has become strongly dependent on these taxes which made up 17% of India’s total revenue last year. Unfortunately, the Indian rupee has been the worst performing currency in Asia this year & is expected to weaken further. India is under double hammer attack of a weakening currency and rising oil prices.

On observing the rising oil prices trend and India being the 3rd largest oil consumer after United States & China, Moody’s & Goldman Sachs have cut their growth projections for India. INFINEETI

F E AT U R E D

Analytics Based Lending: The future of SME Lending MSME

O T

A C

ME’s (Small and Medium Enterprises) are the building blocks of a country’s economy, often contributing one third of its GDP and half of the employment. In India, almost 40%, of its GDP is contributed by SME’s. The latest 2017-18 annual report released by Government of India’s Ministry of MSME, estimates the number of these enterprises to be around 63.4 million. The total employment figure generated is estimated to be around 111 million, so the numbers are very significant. In spite of the huge significance of the SME sector in the Indian context, SME’s are facing several key challenges that are hindering its growth. One of the most significant being the inability to raise funds from banks and governments especially for high risk projects. Most of the credit is being extended to larger businesses while the SME sector remains neglected. ut of the total outstanding credit of Rs 26,041 billion as in November 2017, 82.6% of the amount was lent to large enterprises while the MSME segment got only 17.4% of the total credit extended. There is a large unmet credit demand in the MSME segment, which was estimated to be about Rs 25 trillion in FY2017. he huge disparity between the amounts can be attributed to the tedious credit assessment process followed by the banks before extending credit. Traditional banks are increasingly wary of their business loans turning into an NPA, thereby every loan approval

process goes through an elaborate set of SME sector. P2P lending employs newer checks and balances. methods to establish the loan repaying capability of the borrowers which has gone mall business owners grapple down well with smaller businesses. with their inability to convince a bank that they are financially oreover, digital P2P lenresponsible because of the abding platforms obviate sence of reliable credit history, the need of involving fidetailed financial statemennancial intermediaries ts and financial projections. Moreover, like banks and therefobanks often ask the SME borrowers to prore save a lot of time and duce additional information about their ensure reduced complicated paperwork. businesses before extending loans. Small Several fin-tech loan aggregators have businesses don’t have the necessary whe- emerged over the past few years, from the rewithal to provide analysis additional to core lending platforms like Indifi, KredX what is sufficient for them to run their bu- and Biz2Credit. Inspite of the huge potensiness successfully. One more complaint tial these ventures show, instead of going the businesses have been making is about gung ho, a bit of caution needs to be exervery high time it takes for a lender to pro- cised as: cess a loan application and disburse funds – the time-to-money.

lternative lenders like NBFC’s, fin-tech companies and 1. ost of these fin-tech companies have P2P lenders have acted as just initiated their operations and an efficient enabler for the have not passed through the entire credit unbanked and the underlife cycle, therefore their credit models -banked. Quick in identifying are not time tested the gap in the credit supply in the Indian financial system, there has been a considerable increase in such platforms over 2. ost of these firms operate in a starthe years.

onsequently, the non-banks’ share in the MSME credit pie is expected to expand to 22-23 % by March 2022 compared to 16% in March 2017. This drastic expected increase by a whopping 6 % in the loans extended by alternative lending platforms to the MSME’s has started to play an important role in fulfilling the credit requirements of the

Kashyap Dhar IIFT

INFINEETI

t-up like environment and, consequently have prominent venture capitalists, private equity firms or angel investors backing them. So, most of these firms are weighed upon by the expectations of providing quick returns which forces these firms to take short term measures instead of long term measures.

Notwithstanding the growing significance of alternative lending platforms, banks still remain the cheapest and the most accessible source of credit for MSME’s in India. Hence their significance in meeting the credit requirements can’t be overstated. However, considering the deficiencies in the credit risk assessment process followed by banks, the process needs an overhaul. This calls for improvement in the whole of the credit life cycle by:

Although some banks have started to take steps in the right direction, it’s the need of the hour for the other banks to also incorporate the above-mentioned initiatives to reach up to the standards of service the SME customers have started to expect. SME clients have started to favour alternative lending platforms and to buck this trend banks need to replace their orthodox ways of providing banking services with a banking approach that is more digital and data intensive.

• Better data utilisation: Hitherto, the traditional sources of data like financial statements, income projections of a business entity have been used by banks to estimate the viability of the borrower. Newer sources of information such as bank transactions, POS (Point of Sales) data, bureau performance, transactions available on accounting/CRM system, transactions with suppliers and e-commerce platforms are available which should also be utilised to create a more intensive credit risk model. These data sources are a better indication of the health of the business of the SME’s rather than financial accounting statements that can be easily manipulated. • Technology Improvements: Increased computing power, advancements in data analytics and machine learning algorithms hold a lot of promise for improving the credit risk assessment process. Banks also need to discover new tools and sources that facilitate non-traditional data gathering. Newer technologies along with unorthodox data hold great potential to come up with a richer credit risk model. Enhanced early warning, portfolio monitoring systems can ensure that loans don’t turn into NPA’s. • Process Improvements: Automating manual processes and implementing a rule based decisioning system reduces human intervention in the credit underwriting process, hence expediting in principle approval of simpler and lower exposure loans. Higher exposure loans require much more due diligence and therefore demand much more focus of precious banking resources. • Infrastructure upgradation: The upgradation of technology infrastruture should focus on removing redundant tasks (e.g., multiple instances of keying in the same data) via integration and implementation of solutions with a lower overall cost of ownership. Banks, possess legacy IT systems, therefore require infrastructure upgradation, through outsourcing or cloud applications, for the implementation of algorithms for advanced credit risk models.

INFINEETI

TRADE

Sailing Through a Short Squeeze

“They have about three weeks before their short position explodes”

he tweet from Elon Musk on June 18th, 2018 taunting and warning the short sellers for betting against Tesla which came after he bought $10 Million worth of Tesla shares and predicted a short squeeze. His prediction came true with Tesla stock rising rapidly and short sellers losing reportedly billions of dollars later in June. But there wasn’t enough information to confirm a Short Squeeze. While one could argue it’s not a squeeze owing to lack of substantial information, it’s also hard to ignore this important surge in price on a heavily shorted stock. It’s very imperative to define a short squeeze here.

What is a Short Squeeze?

Short squeeze is a risk associated with short selling that involves selling a borrowed security with the intention of buying it back at a cheaper price in the future. Unlike long trade, where losses are limited to the extent of total investment, short sells have the potential for unlimited losses as the price can continue rising indefinitely. A short squeeze occurs on a heavily shorted commodity or stock when its price moves sharply higher forcing short sellers to close their position by buying the stock usually at a loss. This further adds upward pressure on the stock by increasing the demand for the stock and decreasing the supply and ultimately short sellers tend to close their position even if it involves substantial loss to the investment. Thus, the short sellers are squeezed out of their short position.

re price surged 174% when more than 40% of the supermarket chain’s outstanding shares were shorted.

n October 28th, 2008, Volkswagen briefly became the world’s biggest company in terms of market value when it’s share price soared to 945 Euros up by 82 percent after a surprise announcement by Porsche, revealing it had effectively gained control of close to 75 percent of Volkswagen’s shares. Porsche held 42.6% of Volkswagen’s voting shares and 31.6% in cash-settled stock option. In addition to this, the Lower State of Saxony in Germany had another 20% of Volkswagen’s shares. This meant that less than 6% of Volkswagen’s voting stock were floating in the market. With such a tiny free float in the market, short sellers panicked and paid as much as 1000 Euros a share to close their positions. The traders who had sold borrowed Volkswagen’s shares in the hope of buying them back at lower prices witnessed an unprecedented and the worst case of short squeeze.

he most recent example of a short squeeze before Tesla is Straight Path Communications Inc. The stock had been the target of several short sellers with nearly half of the company’s total stock shorted. The price skyrocketed more than 150% after AT&T announced $1.6 Billion buyout of the communications company. Supervalu Inc, listed in S&P 1500, has a similar story. The shaINFINEETI

Sidhratha Rana IIFT

“Buy when the cannons are firing, and sell when the trumpets are blowing”

How to Spot a potential Short Squeeze?

mited with investment risk only limited to the price paid for buying stocks. This investment profile is significantly opposite to one achieved he risk of short squeeze associa- by short sellers. ted with a stock can be identified he second approach is to idenby measuring the total number tify the stock and wait until the of shares that the investors have price surges aggressively to consold short but are yet to close pofirm a short squeeze. As soon as sitions. This is defined as short the buying pressure on the stock interest. As a percentage, short interest is the ceases, enter into a short position number of shorted shares divided by total that is, sell the borrowed security. It is impornumbers of shares outstanding. This can provide insights into the overall market sentiment. tant to execute a buy-stop order to keep the For instance a rise in short interest to 20% mi- risk involved with short sell under check. Thus ght be a warning signal of a growing negative short squeezes can be rewarding and terrifying sentiment and a 20% increase in the number at the same time. Buying stock during a short of investors who expect the stock price to go squeeze is hard to time as the trend may not south. Therefore, stocks with higher Short In- last long with the initial strong price movement terest ( More than 40% ) are more likely to have happening quickly. And when it ends, the pria short squeeze. ‘Days to cover’ is another ratio ce could go in reverse direction. Furthermore, that traders usually pick to spot potential short taking advantage of a short squeeze can still be squeeze and it is derived by dividing total short dangerous for multiple reasons. The number position by daily average volume. Thus, the of short shares is not the only criteria affecting longer the days to cover, the bigger the danger a stock but there are multiple factors affecting its price. The legendary banker, Nathan Mayer for the shorts. Rothschild’s war quote seems very reasonable How to profit from a Short advice to conclude this article: “Buy when the cannons are firing, and sell when the trumpets Squeeze? are blowing” here are generally two ways to make the profit from a short squeeze after finding the potential stock. The sole reason behind the short sell strategy of investors is that the trend is often down and they expect it to go lower. Make short term long trade. In simple words, buy securities that are heavily shorted to take advantage of the potential surge in price. Although these spikes are short lived but the profit potential is unli-

INFINEETI

E-COMMERCE

Is the Flip-Mart Deal a Positive Foretoken for Budding Indian Start-ups? “The season has come, but the rain hasn’t.”

Keya Mehta IIFT

was in attendance at a recently held town hall of one of the largest e-commerce companies in India. The company is in dire need of either funding or operating profit. The very first question addressed in the town hall was in reference to the Walmart’s purchase of Flipkart and the chances of receiving funding for the company after the multi-billion dollar deal. The only sentence the CEO said was, “The season has come, but the rain hasn’t.” I could sense the uncertainty behind the diplomacy. The undertone wasn’t positive.

almart aiming at close to 18% of the world’s population bought 77% stake in the country’s largest online marketplace, Flipkart, for $16 billion, in what is known to be the world’s largest e-commerce deal. Kishor Biyani, the largest retailer of India controlling about one-third of India’s organized retail, referring to the deal said that it is a new dawn of retail, but chances are none that it would affect India’s strong brick and mortar retail. As in 2018, only 4.4% of India’s retail across all categories is done online.

ost of the top investors in Flipkart were not from India. It was funded by the US technology company Microsoft, Chinese investment holding company Tencent, Japanese conglomerate Softbank, South African entertainment and internet company Naspers to name a few. It is these foreign investors that helped the Indian start-up grow to the largest e-commerce company from just a book selling website. And it is still a foreign company that would help it become even bigger and stronger to fight against the recently declared world’s richest person.

ow if you think that the whooping $16 billion is coming to India then scratch your heads again! Most of it is going to America, China, Japan and South Africa. Investors belonging to

Rajat Rokade IIFT these countries & many other small investors only be hoped that these incentives are deepeholding more than 70% of Flipkart’s share are ned and bettered for the Indian start-ups. exiting from the company partially or completely. These are the players gaining the most out he expected increase in positivity of this deal. No doubt Flipkart would benefit towards better funding is true for from the practices and retail knowledge base start-ups operating in almost all of Walmart, but monetary benefits to the comdomains. However, E-commerce pany are miniscule. start-ups(especially marketplaces) would go for a lull as the top adly, before 2010, Indian busines- two players (Amazon and Flipkart) go on becosmen looked at technology star- ming stronger than ever, with a huge product t-ups with scepticism and that is portfolio, an ever-growing number of sellers, what took the foreign companies and more than 87% of Indian e-tail market to come, invest, earn, and exit. share. It would be difficult for other companies With this deal, the Indian com- to survive and play the discount game against panies and big investors would have a positi- these giants, especially when investors would ve outlook towards the start-ups and make it be more conservative in giving funds to e-comeasier for them to get funding. The Flip-Mart merce start-ups. Those operating in niche segdeal is referred to as the largest foreign direct ments like Nykaa are growing strong. Nykaa is investment in India. Technically speaking, it is expected to become profitable in the next year foreign investment going to a foreign company. with a stable funding at hand. This is also beIn October 2011, Flipkart flipped shareholding cause the two big players are concentrating on into a new Singapore company called Flipkart fashion, lifestyle, and consumer electronics, Pvt. Ltd. This was done as it was difficult to deal but not beauty. Swiggy - the fastest start-up to with Indian bureaucrats when the initial rou- enter the unicorn club, Big Basket – an online nds of funding happened. Apart from the short grocery provider, and PayTm – an entire digital sightedness of Indian investors, it being a Sin- ecosystem, are the other players who are doing gapore company it was difficult for interested very well in the online segment but different Indian investors to invest there as it would not verticals. Today most of the start-ups in fintebe seen in a positive light by the Indian govern- ch, healthcare, education, fashion, AI & ML ment. So, here was a company that runs on the are in technology space. But the increase in huge potential of India’s buying capacity, but the number of these start-ups has decreased, Indian capital could no longer be invested in it. despite many of them doing very well. This has hampered the funding scenario as well. lipkart is not the only company to move its base to Singapore. According to the Singapore Economic Development Board, the number of companies doing so increased to 4000 in 2012 from 1100 in 2000. These include start-ups like Grofers, Capillary Technologies, Mobikon, InMobi, and Tonbo Imaging. The reasons for this include zero corruption in Singapore, easier tax regime, better ease of doing business, easier reach to the entire South East Asian region, and more credibility. With Start-up India, the Indian government is trying to give more incentives for Indian start-ups to stay in India. With this deal, it can

INFINEETI

s it can be seen, the funding deals are decreasing since 2016 due to the decreased confidence of investors in Indian start-ups. As can be seen the deals in 2018 are also bleak but the figures after the Flipkart Walmart deal are yet to be seen. The one thing that this deal taught to the young start-ups while looking for investors is to prefer strategic investments over financial investments.

mazon was interested in acquiring Flipkart. Apart from the Competition Commission of India’s good decision to not allow that to avoid monopoly in the Indian e-commerce, Flipkart itself was not willing to be acquired by Amazon. The elimination of competition would have led to a reduced bargaining power of both customers and the sellers. Flipkart chose Walmart instead as it would get a better strategic advantage over the former one as it would be benefitted by the world-class proven offline processes of the re-

he deal is a meeting point for Flipkart’s consumer durables, fashion, mobile phones & electronics, and Walmart’s global sourcing, food & grocery, unified commerce and private label. This acquisition is capable of a lot of functions within itself with operations across so many categories. It would further grow to sustain itself with little or no help from other companies that offer supporting infrastructure like payment gateways. It would be an ecosystem of online and offline retail. Amazon is also an ecosystem in itself with operations in e-commerce, cloud services, entertainment services, payment wallets, and still expanding to untapped fields. Google also has created an ecosystem with products ranging from search engine, to maps, to cloud storage, to marketing, to home improvement, to education and so much more. Facebook also acquired its competitions Instagram and WhatsApp to become a social almart is already sourcing media and digital marketing ecosystem. As goods worth a few billion dollars from Indian suppliers in the categories of generic medicines, handicrafts, and apparel for its stores in the UK, Canada, US, and South America. With this deal, it would further intensify its procurement practices in India which would benefit the small businesses and ‘Make in India’ initiative through positive cascading impact. Also, there are a lot of start-ups in India like OfBusiness and Adurcup that are tech start-ups but dealing with sourcing and procurement. Start-ups in this space can learn, benefit, and get business by Walmart’s India operations. tailer. It would also get to take operational and learning advantage by the global value chain that Walmart is a part of. Start-ups that sought funding should look at it through this angle as well. Going for strategic funding would help them grow faster as mentorship would be an added benefit along with monetary benefits. One problem that Indian start-ups face is the lack of multiple exit options. Exiting with an IPO is difficult as there are a lot of norms and bureaucracy in India that forces the start-ups to take the headache of going to a foreign country and get listed. In April 2015, Snapdeal acquired Freecharge, a mobile payments start-up for $400 million. Later in July 2017, Axis bank bought out Freecharge for only $60 million . This devaluation of Freecharge and multiple acquisitions put other technology start-ups in a worry. With the Flip-Mart deal, the start-ups would have a positive outlook towards exiting through acquisition.

INFINEETI

ECONOMY

What Is Agricultural Credit Indiaâ&#x20AC;&#x2122;s Subprime Story?

INFINEETI

f one has to pick an Indian equivalent of USA’s 2007-08 national banking emergency ‘subprime mortgage crisis’ it would definitely be the biggest component of targeted or priority sector lending programme: Agricultural Credit. Although the share of agriculture in Gross Bank Credit(GBC) in India at present is not as high as the share of credit backed by Mortgage Backed Securities and Collateralized Debt Obligations in USA in 2007. As per the RBI’s latest Gross Credit Deployment Report(May 2018) agriculture and allied activities accounts for only 13.5 percent of GBC. But the quality of assets and underlying economic philosophy tell a story similar to American Housing Bubble in early and mid-2000s.

Asset Quality Paradox

hen in January this year RBI Governor Urjit Patel cautioned against farm loan waiver schemes by state governments as it creates pressure on finances of both government and lenders; a former PSB CEO questioned his wisdom by saying, “corporates defaulted on repayments, destroyed credit discipline and culture. Why should farmers be blamed?” Upto an extent this is true. As of 2017 Industry and Infrastructure sectors constituted for 76.7 percent of total NPAs and defaulted 20.8 percent credit whereas farmers defaulted only 6 percent of credit supplied to them. But rising demands for farm loan waivers by farmer pressure groups across the states and ever rising number of farmer suicides contradict fidelity of this number. There may be several reasons for lower recognition of agriculture NPAs. Most of farm loans are sanctioned at branch office level so in case of a possible default they are easily ‘restructured’ again and again. My experience as a rural banker suggest that it is a widely prevalent practice across the banks to keep NPA levels under check. Second, penal cost of default for farmers is much higher than industry as they would immediately lose interest subvention benefit and whatever insurance cover they have. So even in situations of stress they tend to borrow from relatives, moneylenders or most probably from commission agents at exorbitant interest rates of 24, 36 percent or more to service interest of debt. So a Non Performing Asset now becomes a Debt Trapped Asset.

gible to draw the whole cash credit limit on the same day. Usually farmers repay only accrued interest and two credit and debit transactions of equal amount would do the work. So debt load of the farmers remain constant over the years and they keep on paying interest for years. In theory KCC is a production limit, that is credit provided for working capital requirement in course of production of crops. So the farmers should be able to repay that amount after harvest, which they are not able to. Why they are unable to repay is something we are going to discuss in ensuing paragraphs. So stable asset quality in agricultural credit is a myth.

Underlying Economic Philosophy of Agricultural Credit in India

nion budget 2018-19 announced raising institutional credit for agriculture to 11 lakh crores from 10 lakh crores in 2017-18. Increasing institutional credit every year or alternate year by 10 percent has been the practice for at least last two decades. So why does government want to supply more debt to an already debt-ridden sector? I find two reasons behind this irony. First is the simplistic reason that additional 10 percent credit can easily cover the interest part(which is more or less of similar magnitude) and banks can easily ‘restructure’ or ‘rollover’ the KCCs without expecting farmers to repay at least interest part. Philosophy part is in the second reason. During my close interaction with unsecured and secured farm and non-farm borrowers one issue that came to forefront was that a significant portion of this credit expansion went to consumption purposes instead of productive activities. So upto a good extent this confirms the fears of ‘Consumption Smoothing’ raised against Gramin Bank in Bangladesh founded by Muhammad Yunus. As Raghuram G. Rajan(2010) has rightly concluded that in the absence of easy solution to reduce income inequality there was a political focus on reducing consumption

he most important aspect in this game is practice of ‘rollover’. A Kisan Credit Card(KCC- the scheme under which most of the agricultural credit is disbursed) as a cash credit limit is different from a commercial cash credit/overdraft limit in the respect that in case of later a borrower just has to pay interest and charges on monthly basis and account remains standard. But in case of KCC the farmer has to repay the whole interest plus principle amount after each harvest(generally six months), then only accounts remain standard and farmer is eligible for interest subvention. They are eliINFINEETI

inequality which included boosting access to credit. Interestingly this is true for both developed economies(subprime crisis in USA) and developing economies(agricultural credit expansion in India). Whether this was a deliberate policy or unintended fallout of a well-meaning policy; remains to be investigated enough.

ircumstantial evidences suggest that it has been a deliberate policy both in developed and developing economies. Political fallout of inequality can be dangerous in a democratic polity. So establishments in countries like USA and India try to raise consumption by poorer sections by providing easy credit. That is why even if farmers with decent landholdings do not have income comparable to urban-middle class they continue to enjoy similar living standards. They own cars and kothis and spend generously on marriages only because of easy access to credit. This serves the purpose of them not realising income inequality.

What is exactly wrong with India’s agricultural credit policy?

o discussion about agricultural credit is complete without discussing the flagship KCC scheme. Launched in 1998, KCC scheme increased farmers’ access to institutional credit drastically. As we have discussed it is a cash credit limit(CCL) with certain variations. Another important aspect is that all working capital cash credit limits are backed by stock as primary security which in case of KCC is crops. But while a non-farm sector CCL need not to be backed by collateral or secondary security upto Rs ten lakhs, a KCC even of Rs one lakh has to be secured by land as collateral. In fact value of land is used to decide size of KCC and not the value of stock(Crops) as in commercial CCLs. So practically a KCC can be repaid only by selling land and not crops. As farmers need money for consumption and banks want to expand

their portfolio they inflate production cost so that a higher CCL can be sanctioned. I don’t but will effectively cure agrarian crisis without know people up in hierarchy agree with this any major hiccups. policy or banks(or RBI) simply adopted this practice of mortgaging land from their predee can’t dispute Schumpecessors: the moneylenders. ter’s conjecture(quoted in Gol’s Economic Survey ow because loan is backed by 2011-12) that Financial Dereal estate banks really don’t velopment(of which credit care about protecting the stois most important compock(crop). They simply debit the nent) facilitates real economic growth. Joseph crop insurance amount from A Schumpeter wrote in the Theory of Econoborrower and remit the amount mic Development(1911) that Financial Interto Insurance Companies. This aggravates the mediaries play a pivotal role in economic desituation as Interest coverage of most farm uni- velopment because they chose which firms get ts is already very weak, in case of a crop failure to use society’s savings. But I tried to relate gap it deteriorates further and debt accumulation between desired outcomes and these realities begins. of Indian agriculture by analysing different levels of social, economic and financial develohis situation is dangerous in two pment in various economies, close interaction ways. First it weakens private among which creates an illusion of universaliproperty rights in land, which ty of applicable principles. Raghuram G Rajan farmers of this country takes vary and Luigi Zingales (1998) stress that industries seriously as a matter of honour. that depend more on external financing grows Second if there is sudden focus of faster in countries with higher level of finanbanks on cash recovery then price of land may cial development. In economies with lower fall sharply and this holds potential of threate- level of social and financial development indining stability of whole financial system. This is cators expanded credit may mainly go to conwhere it becomes subprime like situation. sumption. Social development, financial literacy and discipline have a definite relationship What can be done? with rational behaviour of actors, which should not be ignored by policymakers in their push oan waivers are totally ineffec- towards financial expansion. tive in such a situation because farmers tend to borrow the same amount again. To right size the inflated ‘production limits’ a portion has to be repaid by famers in one go which they can’t. So as an alternate that portion can be converted into a term loan to be repaid over a period of time like 5 to 7 years. A similar condition was announced by RBI recently for MSME cash overdrafts. This may drain liquidity from rural areas in short run

N T

INFINEETI

PradeepPradeep Pradeep Pradeep IIFT K IIFT

POLICY

Regulatory Sandbox: Opening the Pandora’s Box of Fortunes

L R

et’s start with a simple story: Mr X, has come up with an idea for a mobile based insurance product for the fishermen from his place. His target is an underserved section and his product will help in achieving inclusion. But now comes the twist in the tale. Mr X quits after working for the idea for over 2 years. The reason he gives: “The never-ending regulatory proceedings for RBI, PFRDA, TRAI, etc.” egulatory sandbox is an ecosystem created by the regulator(s) for enabling limited roll-out of products by firms to customers to check the feasibility and the risks associated with the product. The product if found feasible and risk free after the limited roll-out is further examined on a case-by-case basis and granted license. This system also helps the regulators to know what all regulations should be introduced in the market after the testing.

The Global Story So Far

Pratheep M IIFT

he Sandbox mentioned above is a simplistic one and modified versions of it are being used in many countries now for achieving various goals. Based on the level of the development of Financial Services Industry in the country, the objective varies from fostering Innovation to increasing Financial Inclusion in that country: for UK and Netherlands it is fostering innovation whereas for Malaysia and Bahrain it is achieving inclusion. Let’s see some examples.

B Govind M Nair IIFT

ank Negara Malaysia’s Sandbox: Started in October 2016, this sandbox “seeks to provide a regulatory environment that is conducive for the deployment of fintech.” The main objective of this sandbox is to increase access to Financial Services through FinTech enterprises. In 2017, 7 firms got the approval to test their products for 12 months.

entral Bank of Bahrain’s Regulatory Sandbox: Launched in June 2017, this was the first one to allow players to test the Islamic Banking Products. The test period was defined to be 9 months with the possibility of extending it to 12 months. Currently, 2 products are being tested here.

onetary Authority of Singapore’s Sandbox: First started in June 2016, it received more than 30 applications in that year itself and out of that one graduated and became a product in the market. The idea behind the establishment of this sandbox was to make Singapore a hub for FinTech start-ups by promoting innovation. INFINEETI

inancial Conduct Authority’s Sandbox in the United Kingdom: The first cohort was rolled out in June 2016 and 18 firms were allowed to test their products. Currently, the firms in the 4th Cohort are testing their products. Most of the tested products were launched in the market and this model is now being studied by almost all the Central Banks.

hough the above cases are clear examples of Regulatory Sandboxes, there are other approaches which resemble it in many ways and have been tried in many countries. One such approach was followed by the Central Bank of Kenya (CBK) in 2007. Before Safaricom launched M-Pesa in the market, it approached CBK to do a test run and CBK agreed to that by making some amends to its constitution. CBK laid only basic conditions for Safaricom to adhere to and after the test period, the product was launched. The product became an instant success and is considered to be the forerunner of all the affordable Financial Products. Why is it needed in India?

hough all the advantages of regulatory sandboxes like Reducing Time to Access, Minimizing Costs, Increased access to Finance, Push for more Innovation, Regulatory Relief and Limited Failure Consequences (Deloitte, 2017) are well relevant to India, there are two unique reasons that makes this framework an imperative for India. Financial Inclusion in India:

bserve the charts below (Source: Financial Inclusion Insights Survey) It’s clear that usage of formal financial products in India is low. This has continued even after a mission drive by the government to financially include people through various schemes which resulted in opening of 32.17 crore bank accounts. This means that there is a huge section of the society that is still not using the formal financial services despite having access to it. The reason could be that the current product offerings are not satisfying the demands of the financially excluded population. Also, in a country like India, the demand patterns will hugely differ across regions. To fulfil that demand, there is a need for a mechanism to test different products to see what works and what doesn’t, and a Regulatory Sandbox helps in that direction. This is obvious from the increased usage of Mobile banking in Kenya after introduction of M-Pesa through a regulatory sandbox like structure.

Improving the Innovation Ecosystem for FinTechs in India:

he PwC-Start-up bootcamp report puts the number of fintech start-ups in India at around 1,500. Also, according to information and analysis firm Venture Intelligence, in 2016 and 2017 there were around 103 private equity/venture capital investments in the fintech sector in India amounting to $2.39 billion. Most of these Fintech firms are either operating in the payment space or acting as intermediary between the consumer and the Formal Financial Institutions. They can’t move up the value chain because of the regulatory costs and laws associated with it. To make India a thriving hotbed for fintechs, Regulatory Sandbox is needed as it will considerably reduce the regulatory hurdles and the risks associated with it.

approaches, safeguards and regulations to be followed within the sandbox, which is difficult and can lead to conflicts among the parties involved. Quantitative conclusions about the different risks involved with the different services in the sandbox and finalising of customised regulations to be followed, after the graduation is also difficult to define. An approach which can be followed in India for setting up of Regulatory Sandboxes is to have a structure similar to that of National Payments Corporation of India, where in all stakeholders had a say and helped in taking decisions without much conflicts. In the case of Regulatory Sandboxes, such an umbrella organisation can be set up with all regulators as stakeholders. The Government should also take cues from countries

The Story So Far in India

ince the Nationalisation of banks in 1969 to schemes like Jan Dhan Yojana in the current day, the Government has always strived to achieve complete financial inclusion, but the results so far have not been encouraging. Recently RBI introduced a rule which effectively banned usage of Cryptocurrencies in the country. This shows the regulator’s and Government’s apprehensions towards the new technologies. The processes which RBI followed to give license to P2P services was also a cause of concern: giving notification to stakeholders through their website and finally giving the services NBFC status with a lot of restrictions. The regulator’s decision to stop the various payment banks from adding new customers was also frowned upon. The upcoming Data Localisation Laws will make it tougher for the start-ups and other innovative financial services to thrive in the country which is in need of these technologies.

he only major study conducted by RBI towards Regulatory Sandboxes was by an inter-regulatory working group on Fin-Tech and Digital Banking. The report which this committee submitted in February 2018 identified the need for and recommends setting up of Regulatory Sandboxes or Innovation Hubs which is to be done with the help of Institute for Development and Research in Banking Technology (IDRBT). Another relevant development is the setting up of a panel by the Ministry of Finance in March 2018. The panel is expected to give recommendations on using Fintech to enhance financial inclusion of MSMEs and develop regulatory interventions like regulatory sandbox model. Issues Involved and the Way Forward

hough regulatory sandboxes globally have achieved great results, there haven’t been any proper studies and thus no concrete evidence to prove the effectiveness of this system. The setting up of the sandbox involves defining the testing INFINEETI

such as Singapore, Bahrain, Malaysia and Kenya to set up the system in India. The system complements with various schemes like Digital India and Start up India. Finally let’s hope the system which when introduced will help innovative people like Mr X to come up with various new initiatives to help the common man.

inancial Technology aka Fintech refers to the deployment of new technology and innovation to enhance the delivery of financial services. In comparison to the state-of-the-art technology at play in sectors like manufacturing, IT services etc, it is clear that Financial services is clearly lagging behind in the efficient use of technology to make lives better. While customer expectations have gone through the roof, there is a clear gap in this particular industry between what customers have come to expect and what the institutions have been able to deliver. This gap is often attributed to the Financial Crisis of 2008, which led to a call for the prioritization of stability over innovation. Thus around the turn of the decade, we could book a flight from the comforts of home, but had to carry lots of documents physically to the bank to open a bank account.

FinTech in India : an insight

he landscape is changing, however. A decade having passed since the last major global financial crisis, the world economy is rapidly growing. Investors have renewed confidence. With the seemingly limitless amount of customer data available, analyzing credit worthiness has never been easier. Penetration of smartphones and internet have led to a significant jump in financial inclusion. A key aspect to note about the new entrants is that they have skipped a phase in the transition. Thus, instead of progressing from money in almirahs to banks to digital services, there are people who have never even had a bank account. India has very high potential for Fintech expansion. Some of the factors that make fintech a highly promising industry in India are : Unrivalled youth demographic which is rapidly growing

ore than 65% of India’s 1.3 billion population is below the age of 35. Having been used to the ease of technology at their fingertips, most of them are loath to brick-and-mortar banking. Smartphone penetration

uoyed by cheaper smartphones, faster connectivity, and affordable services, the number of mobile internet users in India is estimated to touch 490.9 million by 2018. Untapped market

ccording to an April 2018 World Bank report, India has 19 crore adults without a bank account. What’s more, almost half of account owners had an account that remained inactive in the past year. With the Indian economy getting formalized on account of Demonetisation and GST, there’s likely to a surge in demand for savings and investment instruments. Aadhaar – will minimize the effort for KYC

YC is one of the significant challenges faced by Fintech companies around the world. With the introduction of Aadhaar, the customer onboarding process has become significantly smoother, saving companies significant time and hassle. Lending is a massive opportunity, especially for MSMEs

ack of collateral, missing credit history, lack of documentation and no bank account are some of the major challenges faced by MSMEs in raising credit from the formal banking sector. There exists a huge credit deficit of about USD 2 trillion for the MSMEs. There is a huge opportunity for fintech firms to step in and bridge this gap. Acknowledging the MSME credit gap in his 2018 Budget address, Finance minister Arun Jaitley assured that his ministry was looking into devising the policy and institutional development measures needed for creating the right environment for fintech companies to grow in India. With more customer data available than ever before, companies are able to evaluate loan applications digitally based on financial performance, business performance, social profile, and statutory compliance.

INFINEETI

Digital insurance and savings

he one-size-fits-all approach in traditional Insurance has been obsolete for quite some time. With personalized targeting made possible by analytics, customers will have to realize that they need to pay an extra premium for risky behavior such as poor health and bad driving habits. Conversely, prudent customers can expect to pay less. Going digital also reduces operational costs and the cost advantage can be transferred to the customers. Digital payment and digital credit lending have taken enormous leaps in India, but the insurance sector is yet to follow suit. However, there are challenges to be overcome before Fintech can achieve full scale maturity. Privacy issue – Regulation concerns

Manukrishnan S R IIFT

he Justice Srikrishna committee submitted the long awaited data protection bill to the IT ministry for review on 27 July. We can only speculate what the final form of the law would look like – but its clear data privacy regulations are at an inflection point in India. For years, there were no regulations in place, and companies used this to their advantage with customer profiling. The onset of new regulations in this industry is set to pose a new challenge. Threat of China

he influx of Chinese multinationals in the Indian fintech space has caused the government to sit up and take notice. Current FDI regulations allow 100 percent foreign investment in NBFCs, which has spurred fear of predatory pricing and capital dumping by Chinese companies. Private and financial data of millions of individuals and corporates are also at risk. For instance, Alibaba has applied for NBFC license in India through Paytm where it has a majority stake. Despite these challenges, it is clear that Fintech in India is still in its infancy and has great potential for growth. As we conclude, here are some of the recent interesting news segments which may herald the future of Fintech in India: Peer to peer lending platforms

eer to peer lending is a method of financing that helps individuals borrow and lend money without the use of an official financial institution as an intermediary. P2P is one of the promising avenues of Fintech in India. In April 2016, there were 30 peer to peer lending startups in the country. Since October 2017, rules stipulate that peer-to-peer lenders register with the RBI. Nine months since, only 5 of these lenders are registered. But RBI regulations have reposed trust in the P2P lending system. Registered Fintech firms are attracting thousands of new lenders each month, and the number of borrowers approaching these companies have also seen a substantial increase. A recent article in the economic times explored the trend among millennials to reach out to fintech startups to finance vacations and getaways. Bankers recent article in economic times talked about how senior bankers are leaving lucrative positions in major banks to start their own ventures. These experienced professionals may set the tone for next generation banking – they have seen the system for years, and know what needs to be fixed and what doesn’t.

(PHOTO)

DBS – Expansion through Fintech

BS is converting itself into a banking subsidiary in India. The advantages are clear – removal of restrictions in business expansion in India including the one that pertains to opening of branches, permission to acquire private lenders, permission to open more branches etc. This potentially represents the way forward for traditional banks. Opening and maintaining physical branches takes a drain on the institution’s resources. INFINEETI

20 18

TECHNOLOGY

How technology can boost your business!

Paras Goel IIFT

I A

n this era of technological boom, all of us have heard about virtual reality, augmented reality, artificial intelligence and even more. These technologies are not only restricted to movies like â&#x20AC;&#x2DC;The Matrixâ&#x20AC;&#x2122; but have also achieved an eminent role in the real world in the last couple of years. While virtual reality can be described as an experience that critically places the user in an imaginary world or dimension, augmented reality places the content into the real world, with the help of a mobile device. Samsung Gear VR or Sony Playstation VR are the examples of virtual reality, while the game- Pokemon Go, which was released in mid-2016, can be one of the best examples of augmented reality. ccording to The Hindu, the Indian market for Augmented Reality and Virtual Reality is expected to grow at a compound annual growth rate of 76% over the next 5 years. The demand is mostly from business and consumer sectors. The past couple of years have seen the emergence of more than 150 start-ups using these advanced technologies in the country. Some of these start-ups are so promising that even the big venture capitalists and investors are approaching these founders themselves for funding the businesses. Even the existing companies have now started taking it seriously. Let us look at some examples of both: the new start-ups as well as the old brands which are putting real money in the virtual reality segment, to make their businesses profitable.

INFINEETI

Near Me – Axis Banks

hat do you do when you go to a new city where you don’t know about the outlets and you are feeling hungry? You will most likely take out your phone and log in to a food listing application to see which restaurant can be visited for a good deal. Now, you will not be needing that. The mobile banking application of Axis Bank is a better option for both the location and the discount. On August 24th 2016, Axis bank rolled out an Augmented Reality feature, ‘Near Me’ in its mobile application. The feature lists all the places for dining, shopping centers, property listings, banks, ATMs and many more. The feature not only provides the location of these centers, but also displays the real-life images of the same along with the direction and distance. The customer only has to open up the application named ‘Axis Mobile’ and click on the Near Me feature. It itself switches on the GPS and the Camera of the smartphone. The customer just has to scan the area around him and the application will display all the possible details about the places where the user can get some attractive deals.

AEC Solutions - SmartVizX

martVizX is one of the highest funded startups in India, in the category of advanced technology( Virtual Reality to be specific). The company offers a wide variety of VR solutions on smartphones, desktop and other mobile devices. The working of SmartVizX is based on virtual reality solutions rather than the traditional decision-making processes for MSME. They cater to almost all type of industries whether it be Engineering, construction or architecture. Currently, the startup offers only 7 products: ArchViz, ArchVizM, 360-VIZ, ViViz, ViVizM, ViVizVR, and Trezi. It also offers a couple of services other than these. The features of products offered by the company include walkthrough of an entire project, a 24-hour simulation of sunlight at any corner of the room, a ‘balcony view’ from any point of the room and many more. The users find this experience mesmerizing and connect it with virtual gaming.

Virtual Reality Test Drive - Volvo

base. The purpose of this camera is simple- in businesses, it can be used by the hotel booking applications and websites, travel portals and real estate organizations, to map any room completely. The other uses for architectures can be to create housing plans and floor. Plans using this smart gadget. Big companies like MakeMyTrip, Housing.com, NestAway and commonfloor. com have already started using this next generation, image capturing device.

No clicks, No claps –Fluid AI

very MBA aspirant of India wants to get into a top 10 B-School. But what if you are already there and you leave the college to open a start-up? That is exactly what the owners and founders of the tech startup Fluid AI did. This is a Mumbai based startup founded by 2 brothers-Raghav and Abhinav, who are drop outs of IIM A and ISB Hyderabad, respectively. Both the brothers are ‘coders’, but they call themselves ‘disruptors’. They believe that one successful use of Artificial Intelligence is across industries and businesses. They have created smart, gesture-controlled touchless experiences and interactive screens for customers. The use of the same is in gaming, exploration of products and services, shopping, banking and several other tasks controlled only through gestures. The recent advances in Artificial Intelligence, Augmented Reality and Virtual Reality in several sectors such as speech and image recognition, banking, shopping for products and services, virtual gaming and more, and the availability of virtually unlimited amount of computing power has started a new era in which machines can complement most of the human work.

he above examples show that businesses using advanced technology and providing High-Tech solutions are increasing rapidly. Use of technology by organizations, like in the above case, increases the customer footfall at their doorsteps and helps in creating a long-term loyalty towards the companies. That’s the reason why nowadays, several businesses are focusing on the latest technological trends and several ‘niche’ start-ups are incorporating their use in the products they offer.

hen someone thinks of virtual reality, possibly the first thing which comes to their mind is: a test drive. Moreover, when you don’t have a car dealer nearby, the use of VR for the test drive is the best possible application of it. A couple of years ago, Volvo became the first company to achieve this feat. They didn’t stop here and continued to come up with the updates of this application. The application is easily downloadable on a smartphone. This initiative again forced the public to talk about Volvo which gave the company a huge amount of business. Volvo partnered with a digital agency R/GA and the Framestore VFX-studio and started a video campaign for its SUV XC90, several months before its launch in the market. The ad campaign incorporates a combination of CGI and a 360o VR high-definition video. The video campaign generated close to 50,000 application downloads and the first edition of the SUV sold out within 2 days only.Near Me – Axis Banks

Methane 360o VR Camera - Tesseract Inc.

o you remember the famous video of Mark Zuckerberg using a 360o camera which got viral on the social media? The Indian startup Tesseract has invented India’s 360o VR camera, Methane. The camera can map and shoot videos for any corner of a room around it, in 3D. The camera with a 360o revolving head is mounted on the top of a cylindrical

INFINEETI

TECHNOLOGY

Financial markets in an era of IOT, blockchain and AI Pritam Banerjee IIT KGP

magine the scene of stock exchange robbery in “The Dark Knight Rises” – hundreds held hostage and billions of dollars robbed in broad daylight. This plot epitomises the impact of a weak link in the chain of financial services and underscores the need for a secure and robust system for obscuring the possibility of financial debacles. FinTech, the technology that is disrupting the status quo, is driving efficiency and enabling innovation in the financial markets. This enabler is built around the primary themes of convergence of other industries into financial services, and a transformative journey which involves leveraging of disruptive ideas like the Internet of Things (IoT) and blockchain technology.

IoT in financial markets

I W

n this context, technology-driven by sensors and web, collectively termed as the IoT, has been the front-runner in changing the landscape by disrupting the very way of conducting business, accounting for nearly 28.5% revenue growth. With IoT expected to enable nearly $11 trillion economic growth, its applicability in the financial market is no longer a sci-fi abstract. ith the early signs already there with IoT in banking, the key interest lies in how the banks leverage the availability of the huge volume of physical and observational data to create opportunities in better understanding the creditworthiness of customers. The ability to continuously monitor asset conditions with the help of sensor nodes mounted on physical items will allow banks to project timely lending services. With Barclays opting for smart piggy bank services, it is evident that IoT enabled services will be used by the leading banks to attract the young audience by making them understand the value of money in a cashless society. The launch of pay bands in the form of smart wearables further underlines the growing impact of IoT as an alternative option to facilitate contactless payment systems.

oT also promises to change the way how the insurance sector functions, by enabling continuous engagement and positive relationship between the policyholders and the insurance company. With the use of IoT, the focus is shifting from a restitution-based insurance policy to a preventative one, by using real-time data to mitigate risks. The availability of granular data will lead to the unbundling of insurance offerings to focus more on need-based insurance at a reduced premium. Beyond personal insurance coverage, the commercial insurance sector also stands to gain from IoT implementation, permitting the providers to gauge uncertainties in real-time. The use case of IoT implementation in the asset and wealth management industry, as well as capital market, is showing a strong positive trend, with clients demanding enhanced digital experience in INFINEETI

terms of transparency and access, beyond the simple features, functions and tools. Analysis of investment patterns based on data encompassing one’s action and inclination collected through the IoT network is a primary example of how portfolio managers can leverage the power of digitalization to offer customised experience around data. Keeping up with the trend of mobility – the modern mantra in wealth management to develop new channels for enhanced customer relationship, retention and potential profitability – firms are making use of the live data flow to automate fund allocation based on risk resilient models. Machine learning algorithm running on real-time data collected over the sensor nodes is also promising to open up new avenues in the capital markets, with better prediction of the dynamic market behaviour, thereby enabling the formulation of comprehensive trading strategy devoid of human intervention. The real estate sector also stands to benefit from the IoT implementation, as it enables factual and transparent property valuation and easier transaction proceedings. Furthermore, it is the internal risk management within the financial institutes which can be better handled using IoT solutions, allowing to continuously monitor the vulnerable operational issues that can eventually lead to fraudulent activities or lacklustre performance from employees.

Blockchain in Financial Markets

ccording to PwC Global FinTech Survey 2016, 56% managers have already identified the relevance of blockchain technology in the financial spectrum. The blockchain in simple terms is a ledger that is distributed on several nodes. The system has no central authority, instead, it is a shared record of transactions distributed over a vast network of users. This distributed ledger has brought about a fundamental evolution in trust management among interacting parties, ranging from clearing houses to trading houses, settlement centres to the provision of tax receipts made through government.

he biggest gain in terms of financial uses of blockchain that has kept the large banks excited is maintaining track of trades, in bonds or stocks, and making sure that payments are made properly – eventually leading to the abolishment of the current complex process involving banks, traders, exchangers and clearing houses and making sure that blockchain is used to log ownership data to get the work done in minutes. This use case is expected to save banks $20bn. per year, as it promises to free up huge fund currently tied up waiting for trades to be processed, and even streamline cross-border remittance by 2-3%.

lockchain technology will also lead to reduced risk in this sector, ensuring easy traceability of transactions, which in turn enhances real-time accolade and reward management for

banking and insurance industry through a 24*7 feedback mechanism.

he system of distributed ledger also promises to significantly reduce online fraudulent activities which cripple 45% of financial agents yearly. The blockchain architecture consisting of series of data blocks, each recording a batch of transaction, electronically chained together through advanced cryptography, makes it particularly robust against hacking attempts. This disruptive technology is also capable of cutting down on compliance cost, as it eases up the online identification process, allowing the re-iterative use of verified data. The insurance sector will also be positively impacted by the blockchain technology, through a shift towards digital contracts running on the de-centralised ledger network. These smart records are capable of automatically bargaining and implementing statutory specifications, and thereby speed up the claim settlement process between the involved parties without mediator intervention. With NASDAQ venturing into this disruptive technology, it is clear that blockchain will redefine trading experience and the capital markets. Riding on the success of enhanced trade efficiency, the cryptocurrencies powered by blockchain technology is turning out to be an exclusive crowdfunding instrument. Moreover, the capabilities ranging from a decentralised stock exchange to the eradication of brokerage service, increased scalability to an augmented performance by tackling redundancy is greatly propelling share dealings.

to make life easier for its employees, but also for providing seamless service to all its customers enhancing loyalty and advocacy. The launch of â&#x20AC;&#x153;Thought Factoryâ&#x20AC;? by Axis Bank which is aimed to innovate AI solutions for banking operations underscores the degree of influence of technology in this industry.

he magic of AI is also being utilized for performing sentiment analysis using the social media outlet to enable the financial services including high-frequency trading and hedge funds. A further proliferation of this asset will be the algorithms developed in devising trading signals for making investment decisions. Although a double-edged sword at times, this technology can only improve for the betterment in the future. The usage of AI for credit risk analysis and customer churning forecast have released newer avenues of operation in the financial arena.

Trade Finance on Blockchain

nother promising use case of blockchain technology is the advent of cryptocurrencies. The bitcoin blockchain, operated by bitcoin miners who organise and secure a tiny fraction of bitcoin transactions into the blockchain, is leading a currency revolution across the globe. With countries like Canada set to try out digital currency, blockchain technology showcases a wide prospect in transforming the financial business models.

obotic Process Automation will reduce the manual paperwork catapulting customer delight through a faster turnaround of financial services. This will also change the pattern of employment in the industry as tedious clerical work would lose human dependency. Not only will ML impact the simpler jobs in the financial sector, it obtains the capacity to replace partially, if not totally, the advisory roles of financial consultants. Robo-advisor uses ML algorithms for portfolio management tailored to clientâ&#x20AC;&#x2122;s needs. HDFC Bank uses its chat-bot, Eva, not only INFINEETI

Financial adoption of AI and machine learning

further modification of the tools may lead to bots as relationship managers and advisors on matters related to taxation and retirement. It has also been claimed that bots, trained in market pattern study, may contribute to about 80% of the daily stock trading amount by buying and selling stocks in nanoseconds. Industry 4.0 is here, and the greatest leap in advancement will be in the field of FinTech. Yes, money still cannot be planted in fields, but certainly, money can be motioned through sound investment for improved velocity and accelerated growth. The progress of the financial sector is indispensable for overall economic growth. Considering the path of progress chartered on the wheels of technology, we can certainly be hopeful for a fruitful ride.

tion of Digital Evolution Index 2017, Harvard Business Review (HBR) determined that India has the greatest market potential in the entire world when it comes to Fintech. (Source : DEI,2017) For an instance, the online payments sector in India with players like Amazon, Google, Uber and Paypal coming in, has become a $500bn giant. Funding has been exceptional for the past 2-3 years and it is acting as a catalyst for the growth. In Q1 of FY’17, fintech startups in India received almost $300mn in funding. Late into the year, Paytm shocked the entire industry by raising a staggering $1.4bn which was shortly followed by PhonePe, receiving $500mn from its parent company, Flipkart.

TECHNOLOGY

Can Fintech Capture The Gini ?

“

Two heads are better than one”, goes a famous English proverb. For the modern world to be a better place, two heads have come together in the recent times - Finance and Technology or the fusion as it’s called, FINTECH. This fusion has expanded rapidly throughout the globe and is really the NEXT BIG THING! Paytm Payments Bank, Itz Cash, MobiKwik, CCavenue etc. are some of the most encountered names over the internet. And yes, they do solve a purpose.

ight from Mobile recharge to Bank Accounts Transfer, all of them have now become a ‘Sweat-Free’ process. Banks in India are all set to cut cost by shutting their branches and adopting Fintech as their operations warrior. The extent of enthusiasm in the Indian Fintech Space is so much that we surpass the World average by 9%. According to a PwC research, India’s ROI on Fintech investment stands at 29% while the world is at 20%. In short, the market is attractive and the Game is on. However, enthusiasm like this always comes with a flip-side just like the .com crash or the 2008 Financial Crisis. But here, we can lose something more than just money, and we can hurt more than just markets. Although financial inclusion has been the buzzword as the fintech era sets in, the question is whether Fintech would be able to counter the ever increasing Gini index in India or it would exacerbate the menace like never before? Let’s delve deeper into the Fintech regime and go beyond just the ‘Finance and Technology’ aspect of it.

ost demonetization, Fintech landscape in India has changed significantly with players engaging in segments such as Payments, Alternative lending, Wealth management, Microfinance, InsurTech etc. To any financial institution in India, technology has been the catalyst for growth in its business propositions for a considerable amount of time. Technology indeed has the capability to alter, enhance and disrupt the theme of Financial services. The Transaction Value (TAV) of Indian Fintech stood at $33bn in 2016 and is forecasted to reach $73bn in 2020 with a CAGR of 22%. Similarly, TAV for UPI transactions has grown form $0.1mn in Oct’16 to $79mn in Oct’17. (Source : investingindia.gov.in) Fintech is also helping the govt. to progress on its e-governance path by reducing $3bn in leakages. ( Source : Yes Bank Fintech Report) Govt. is also looking forward to expand its lending prowess to MSEs via this channel since the formal mediums have been unable to cater MSEs demands of over Rs 26.5 trillion debt. Lending via Fintech will surely boost credit expansion in the sector.

intech has opened the doors of opportunities for startups. Even the big shots of the financial sector acknowledge the potential disruption that can be realized by small but focused enterprises. The acquisition of FreeCharge by Axis Bank is a prime example. This was a Rs 385crore all-cash deal. The environment for startups in the segment surely seems to be phenomenal, barring some stringent regulations. Indian startups have posted a Year-on-Year growth of 31% reaching 360 entities. In the latest edi-

INFINEETI

verall, the market and market prospects for Fintech looks very promising in India. The govt. is pushing many structural reforms in the sector and is also reaping the benefits of its action in form of better e-governance, e-tendering, e-procurement etc. As the fintech industry grows, we can expect a huge upsurge in lending and financial management services apart from online payments and Microfinance.

s per the founder of the Rich Dad company, Robert Kiyosaki, and I quote, “Financial Freedom is a Mental, Emotional and Educational process.” After the introduction of Income tax in India in the year 1922, this process got lost somewhere in the oblivion. By this, I don’t mean that regulations before 1922 were spot on. But post 1922, the focus on the Gini index became void. It is evident from the fact that majority of people who talk about GDP do not have any idea about Gini coefficient. Gini coefficient/index is the most commonly used measure for Income inequality. Leaving the statistical part of the Gini aside, I would put Gini as a way to depict what percentage of population is holding how much national wealth with it. As a thumb rule, when Gini index goes up, Income inequality goes up as well. Zero Gini Index, therefore, implies perfect equality. As of November 2016, India stands as the 2nd rank holder when countries are arranged in descending order of inequality. The reason why I mentioned the year 1922 is that up till 1922, British records monitored the wealth of top 1% income bracket people and after that, income tax regime was introduced. In 1939, this 1% bracket was is possession of 20.7% of country’s wealth. The figure, as of now, stands at around 58.4%

he question that now arises is whether the financial inclusion of Fintech era would facilitate inclusion vertically or horizontally? Whether Fintech would facilitate financial consolidation for those who are already in the financial umbrella or it would increase its gambit? If this doesn’t go the latter way, Gini index would go out of control. By financial inclusion, I don’t refer to a person’s registration on a Financial Service platform. Financial inclusion is more about assuring prosperity share to everyone from the economic well being of a country. The problem with rapid increase in Fintech is that the areas that are currently lacking Infra for the same are going to be left out for a longer amount of time. In September 2015, the

wireless tele-density in rural India was 48% while in September 2016 it increased to 50%. During the same time interval, urban density increased from 148% in September 2015 to 151% in September 2016. (Source : ZeeBiz)

entioning literacy, more than one-quarter of the population is illiterate, let alone financial literacy. Nearly 76% of Indians do not understand even the basic finance concepts. (Source: IIFL) This is exactly where online frauds come into picture. According to Experian’s Digital Consumer Insights Report 2018, 1 out of 4 customers in India is a victim of online fraud (Source : ET) Consumer Protection Framework is still very weak in India and therefore, BoP customers are highly vulnerable.

ooking it from the gender equality perspective, it took India almost 60 years to streamline women into the formal banking sector. According to a Findex 2017 estimate, 77% of Indian women now own a Bank account as against 26% in 2011. The gender gap in account ownership came down to 6.4% in 2017 from 19.8% in 2014. (Source : FE) The problem with Fintech is that in the rural context, the owners of smartphones are predominantly male. Even if Fintech ignores the infrastructural barriers that telecom have not yet been able to address, the growth in Fintech would undo the inclusion of women into the formal sector. This would affect the Gini index even further. The reason why I am pointing out these factors regarding Fintech is that if you take examples of Amazon, Google, Flipkart etc., they have primarily targeted affluent and middle class society of the country and this has been the pretext of many ‘physical’ financial services going off the sight. Another issue is that the customers in such markets value physical evidences more than any other market. The value of personal relationships in those markets is really significant and these people are slow when it comes to trusting technology for their hard earned money. Just imagine the level of hassle of an illiterate person if a branch near him/her shuts down. SBI is planning to cut down costs via this approach. Therefore, serious considerations have to be taken for these 300mn odd people.

lthough there is no doubt regarding the consolidation power that Fintech can bring to the market, concerns primarily hover because of the ultrasonic expansion due to which areas with poor infra lag way behind. India has seen rapid financial inclusion as far as bank accounts are concerned, but we should also remember that this inclusion was made possible only when thousands of bank officials worked in order to provide physical access to the banks. Fintech policy therefore, should ensure that exclusion of those sections doesn’t happens at any cost.

INFINEETI

Vinit Vikash IIFT 27

IN THE READS

BOOK REVIEW

odern economy has faced many crises and every other time, it engulfed more and more countries that appeared just helpless in front of them. Raghuram G. Rajan, arguably the most popular Central Bank Chief of India, put forward an intriguing aspect of globalisation and financial risk in his book, ‘Fault Lines : How Hidden Fractures Still Threaten The World Economy’. The whole idea of analysing financial crises individually gets challenged throughout the book which puts forth the idea of inherent systemic fault lines in the financial system. The book begins by revisiting the 2008 financial crisis. Rajan recalls one of the most frequent questions asked during that time, “Didn’t you see it coming?”. He answers this question in affirmative as many bankers and economists did so. But the bigger question stands still – “Why did that happen and what were the underlying factors that led to such a widespread financial pandemic?”. He emphasises on various factors such as credit expansion and export-led growth to provide a convincing argument for the premise. Further, he points towards govts. throughout the globe that allow some financial institutions to become systematically too important to fail and it becomes their obligation to bail-out these banks during the period of crisis just to ensure that the crisis doesn’t become even more contagious. One of the fascinating belief that the book challenges is the notion of linking capital abundance to growth. There is obviously a palpable difference between any rich country and a poor country in terms of capital, both in visible and subtle form. He argues that the expected growth figures projected using simple calculations proved fatal to many of the investment projects, which ultimately acted as conducting wires for any financial crisis. This is quite noticeable in the African context. However, as he moves forward with the book, he defends Central banks as it is evidently much easier to point out the mistakes made by the Central banks in hindsight. Financial markets are the brain of the modern economy. But we need to consider that these markets are still in an evolving state and therefore, making accurate predictions and hypotheses is still a daunting task. Rajan then takes on the issue of disproportionate rewards for top level managers for taking exorbitant level of risks. He terms Credit Default Swaps as ‘toxic’ for the economy and rightly so. The amount of speculation and gambling in the financial system has certainly taken a toll when it comes to fundamentals of economy. The whole idea of providing crazy incentives for such speculations is also one of the major factors intensifying the fault lines. He then talks about Human capital and ways to improve on that front by providing extensive credit access into sectors such as education and healthcare. Further, he focuses on measures that could effectively manage global economic governance and provides insights on other financial steps such as limiting incentives for speculation, hedging against risks in case of export-driven growth, making it easier to resolve financial institutions etc. Towards the end, the former RBI governor directs the way forward for India as a fast-growing economy and the challenges ahead. He argues that reforms in India, however, are more inclusive and therefore, impact prospects with general consensus as well. InFINeeti thinks that there are many things to learn from this book about systemic macroeconomic risks and its impact global economy as well as a corporation’s health. The book deals in each of the aspects in great detail.

INFINEETI

ECONOMICS

OIL PRICES RUNNING WILD ?!? M Kanagarjun IIM I

rude oil prices are expected to rise over $80/barrel this summer according to Goldman Sachs, aided by OPEC-led supply cuts and strong demand from the US and non-OECD nations such as India. Additionally, on-going tensions in the middle-East and US re-imposing sanctions on Iran are expected to drive oil prices during the year. However, crude oil prices are not expected to sustain at the current levels, over the longer term. While the OPEC nations, along with Russia, have been talking about entering into a long-term pact to support oil prices, the existing production cuts are not expected to continue beyond 2018 for, Saudi would be flush with funds post Aramco’s IPO(in the first quarter of 2019) and Russia’s fear of increased shale competition. Geopolitical tensions (which lead to disagreements among the member nations) and planned expansions in output where investments have already been made will discourage members from staying in the pact. Additionally, rising prices will bring more shale production and make other offshore projects feasible, thus negating the impacts of such cuts.

he fast ramp-up in US shale production since the incorporation of the OPEC cuts is expected to contribute to the problem of excess supply in the oil markets and is expected to average ~ 10.7-10.8 million barrels per day by the end of 2018. The increase in shale production is expected to be a serious threat to OPEC’s strategy of simply extending oil production cuts and is likely to coax them to reverse their cuts once they perceive a serious threat from shale capturing their market.

rude oil demand growth in developed countries, for the most part, is on the slide as alternative fuels and environmental concerns take precedence. In France, Japan, Germany and the UK, crude oil demand growth is expected to remain flat for the long term,

a net deficit in the market. ith OECD crude inventories trending below their five-year seasonal norms, OPEC is considering new approaches in its management of the market. Among those gaining most traction is an approach that would see producers attempt to manage prices at a ‘sustainable investment level’. That is, at a level where investment in the sector is sufowever, increased protectio- ficient to meet - but not substantially exceeds nism could derail global trade expected future demand, which would make and negatively impact econo- investment a more explicit target than has mic growth and will weigh on been seen previously. physical demand for oil, with rguably the most significant the shipping, road and air freiobstacle is identifying in what ght sectors being important pillars of global price range the sustainable indemand. Moreover, slowing reform momenvestment level lies. This requires tum in a number of emerging markets could assumptions as to both the voludiscourage inflows and reduce demand growme of resources that need to be th, posing downside pressure on crude and developed and the cost of their development. fuel prices. Even assuming a fixed volume of supply, there ccording to the IMF, the world remain large question marks around the level economy is expected to grow at of capital needed to develop it. In practice, the 3.9%, as against a 3.7% growth sustainable investment level will be a moving observed in 2017, with growth target dragged along by a host of other variaparticularly driven by the recent bles, including (but not limited to), services tax policy changes in the US. The cost inflation, trends in productivity and effistrong on-going global growth will bode well ciency, the volume and make-up of the resourfor oil demand growth in the upcoming year. ces under development and the way in which However, rising oil prices, changing patterns those resources are developed and produced. of oil use in China, switch to natural gas by As a result, the sustainable price level will also several OECD and non-OECD countries is ex- be a moving target. Investment decisions tend pected to restrict demand growth. Despite US- to lag prices and are influenced by a number of -China trade tensions, the economic outlook is factors, many unrelated to the price itself. In broadly positive, but a number of headwinds addition, long project lead times mean it takes are emerging, not least a stronger dollar, rising several years before supply hits the market and inflationary pressures and tightening liquidity the balance between supply and demand can across many of the developing economies. This be felt. could harm demand from the industrial sector hese issues add to more perennial also, further pressing on global growth. challenges for the group. Maintaining cohesion can be a strugower oil prices over the past three gle, as interests within the group years led to a tapering of the global diverge. Even when the group acts upstream projects pipeline. A detogether, the lion’s share of global cline in final investment decisions, combined with persistent decline production lies outside their control and they rates on existing production asse- hold little sway over demand. In addition, the ts, will slow total supply growth and maintain oil price is not solely driven by supply and de-

primarily due to subdued economic recovery, improvement in vehicle fuel efficiency and in part, to increasing penetration of electric vehicles (flat demand growth in Japan also due to ageing population); the transportation sector accounts for about 60% of the EU’s crude oil requirement. Also, Brexit is expected to create more uncertainty across Europe as economic growth could be dented, thus affecting oil demand in EU.

INFINEETI

mand and an increasing share of the market’s participants do not trade based on the fundamentals. As such, even if a sustainable price level could be identified, it would arguably be beyond OPEC’s capabilities to manage prices within the appropriate channel.

bring back shale production, thus negating the impact of such cuts. As a result, production from OPEC members is expected to increase in the long term. Growth from unconventional sources is also expected to be strong, with US adding ~2.8-3 mbpd alone. Additionally, some incremental output is expected from Canada, verall then, a policy targeted Brazil, and Russia adding about 0.7-0.8 mbpd towards the sustainable invest- of output together resulting in an overall proment level will struggle in its duction rise by ~6.1-6.3 mbpd between 2016 implementation. A closer focus and 2021. on investment levels could help dampen some of the extremes ajority of the incremental in price cyclicality that sector has struggled demand (~6mbpd according with previously In the absence of a substantial to EIA & IEA estimates) is uptick in investment in the near term, or sigexpected to come from nonnificant increase in shale production to cover -OECD nations like India the additional demand, there is a risk of susand China. Additionally, hitained spike in prices by 2020’s. While this wou- gher estimated economic growth in the US could improve the revenues of OPEC producers in pled with some European countries could conthe medium term, it could inflict significant tribute to some amount increase in demand. damage over a longer-term horizon, accelera- However, the rise in demand is still expected ting trends towards demand destruction and to be slower as compared to the growth seen in displacement. last 5 years (~7mbpd) as rising fuel efficiencies, slowdown in Chinese demand, coupled with igher oil prices and the outlook increasing penetration of electric vehicles will for sustained strength in the impact growth. As a result, long term oil prices crude price have reignited risks are expected to remain subdued, ranging beof oil demand destruction, as tween $55-65 per barrel. consumers are hit with higher prices. It is expected that fuel subsidy reforms in a range of emerging markets will exacerbate the effects of demand destruction from higher prices, as consumers are exposed to fluctuations in the oil price for the first time and may temper the expected global oil demand growth outlook. More broadly, oil demand faces structural decline as the global energy mix continues to decarbonise. This is being led by developed markets and China, but will gain increasing traction in EMs more broadly. For the near-term, energy efficiency gains will be the main means of demand destruction. Displacement to alternative fuels – such as electricity, hydrogen or natural gas – will also factor, but a significant dent on growth will be slower to accrue.

H T

his time round, and in this particular price cycle, a key unknown affecting demand elasticity is the potential effect of widespread subsidy reform in emerging markets, which has exposed consumers within these markets to price pressures for the first time. In previous cycles, emerging market consumption has remained mostly unaffected by higher oil prices. Healthy economic growth, increasing vehicle ownership and rising household incomes have driven up demand. But similarly, and equally importantly, has been the widespread use of fuel subsidies, which has masked consumers in these markets from potentially painful price movements.

rude oil prices are expected to remain subdued in the long term to 2021. OPEC is expected to add ~2.4-2.6 mbpd of output between 2016-2021, with most of it coming from Libya, Nigeria, Iran, and Iraq. Output cuts may not continue for long beyond 2018, as any increase in price will INFINEETI

Increased protectionism could derail global trade and negatively impact economic growth and will weigh on physical demand for oil, with the shipping, road and air freight sectors being important pillars of global demand

ECONOMICS

Is the world leading towards De-Globalization?Are we moving out from the idea of achieving a free trade world?Is this trade war going to be the biggest trade war, ever?

Grisha Dhingra

Nikhil Puri SRCC

SRCC

The year 2018 will not just be remembered for the denuclearization deal between North Korea and The USA,or for the progress of Brexit but this year would definitely be remembered for the start of something unpleasant,“Global Trade-War”. When the name itself contains the word ‘war’,the impact is less likely to be positive.It can be estimated from a report of BloombergEconomics which says that a full-blown trade war could cost the global economy $470 billion & could shrink the global economy by 0.5% by 2020 than it would have been without any tariffs. So from bird’s eye view,any trade war is not going to be favorable for the global economy. But if we all know that free trade is the best trade practice, what stops the leading economies to follow it in the real scenario?

INFINEETI

efore we analyze the current situation, let us discuss about one of the drivers of the trade war, Import-tariffs.According to Investopedia,‘Tariffs are used to restrict imports by increasing the price of goods and services purchased from overseas and making them less attractive to local consumers.’Theoretically, the tariffs benefit the government of the country imposing it as it leads to increased revenues for the government.Also,by this,the government can help domestic players to compete and sustain.Tariffs could also be a measure to protect a country against unsuitable trade practices followed by its trade partner.So,tariffs can be seen as a tool for protection and development of the economy but in the practical interconnected world it isn’t as simple as it seems.

The beginning

arlier this year, the US, world’s largest economy by nominal GDP,under the presidency of Donald Trump revised its trade policies by imposing safeguard tariffs on solar panels and washing machines from China. It was followed by Import tariffs on steel and aluminium majorly imported from China and EU exempting its NAFTA partners-Canada and Mexico with few others. Donald Trump has been clear on his policy of ‘America-First’ which he had announced while contesting US presidency elections in 2016 and imposing tariffs on steel and other imports have been justified by him as a step to revive its own domestic industries and creating more employment opportunities for Americans. Another reason under his justification umbrella is to improve US trade deficit, which increased to 2.9% of GDP in 2017,up from 2.7% in 2016 and Trump clearly doesn’t like it,especially with some of the large economies like China,which can be a threat considering the pace China is growing at.

long with the growing deficit,another major concern for US is the declining workforce over time(in-pic) and he considers the move as a step forward for making it better. In one of his recent statements,Trump cleared his intention about EU by saying that ‘EU was possibly just as bad as China,just smaller’. Not just China and EU,America’s trade policies is likely going to affect its trade relations with India, South Korea,EU and other nations.This clearly indicates how strict Trump has become in his protectionist policies and it’s not against any one country but against all those who might become a hindrance in his policy implementation, and this may arise the possibility of ‘America Alone’ rather than his agenda of ‘America First’

Reaction to the action

s every action has an equal and opposite reaction,the steps taken by the US government has given rise to retaliatory actions by other countries.US announcement of tariffs on $200bn worth of goods imported from china, sprung up the news that over 128 product(including products, wine& pork) imports from US were being targeted by China as a retaliatory measure.Since then,China has not left a chance to retaliate whenever US announces a list of fresh tariffs. Even the European Union slapped tariffs on almost $3.2bn worth of US imports including whiskey,tobacco & even Harley Davidson!!,just to give a strong message to the US.The list of countries retaliating to US import tariffs just goes on and on including its NAFTA partners strongly opposing Trump’s protectionism policy. When every country starts trying to protect its own interests, the whole economy cannot grow altogether because trade,at its very first place,is there to benefit the end Consumers by providing them with cheaper,better & extensive range of products thereby increasing standards of living and boosting the world GDP growth.

INFINEETI

Is the US ‘winning’?

onald trump tweeted which said,“Trade wars are good, and easy to win”. However,the question is if US is actually getting what it intends and is really on the winning side, if there is any.As compared to the China’s import of US products(nearly about $130 billion),USA’s imports of china products is approximately 4 times larger($505 billion).This number game might support the strong stance of US in the war but US will still have consequences to worry about. American farmers can be affected the most because retaliatory actions from other countries will be mostly on the farm and dairy products.Besides the farm belt, other sectors are also likely to get affected because of the adverse impact on the exports after the retaliatory tariffs.This has lead the businesses in US to move out of the country and produce in those where they cannot export their products without facing high tariffs and this move does not align with the employment generation motive of Trump. Not only this, but the US consumers have to face high cost of goods and may be lesser variety if import tariffs are applied.

How does China, being an export led country, gets affected through this trade war?

rom China’s perspective, China has no option but to retaliate whenever US imposes fresh tariffs on Chinese goods in the same intensity if possible because the matter doesn’t seem to stop by ignorance and is surely going to impact Chinese economy. But, since the amount of goods China imports from USA (worth $180$200 billion) is much lesser than what China exports to US every year, it will have to come with some creative ways to Trump’s measures. For instance, China could also limit visits to the United States by Chinese tourists, which according to a business state media is worth $115 billion, or shed some of its U.S. Treasury holdings. What’s good for China is the value added in its exports, to the U.S. in particular, is less than 3 percent of its economy. As China has not got much in the bag as its imports from USA are limited and it can only threaten US upto a point, this is why it has to look for other non-tariff measures to react. US is trying to hit the right spot by targeting essential goods such as furniture, electronics, machinery, textiles and fibers which will put immense pressure on China’s trade surplus with the US. Major part of the export industry of China will be threatened by tariffs because it is the primary source of hard currency and place substantial strain on the capital-control system. That, in turn, will jeopardize China’s dreams of signature international investment and potentially destabilize its finances as it becomes harder to balance capital flows.

How India can make a deal out of it?

T H

he supposed beginning of trade war through tariffs imposition on steel and tax by US has an effect on India but a significant fact to be considered is that India’s Steel exports to US is about 1% of its annual production capacity and this number does not seem to create much stress for India. Direct tariff effects are not the one India should be concerned of but yes, second order effects are something to be prepared for.The trade war could affect global prices for some commodities and if one of them is oil, India can be in a problem then as it spends a lot in importing it. owever for now, with much focus of US reducing its trade deficit with China and EU, India can make a way out and in turn can create opportunities for it to progress. India can try to substitute Chinese exports to US in which it already has an expertise such as textile, garment, gems etc. If India can make itself capable of producing the export demand of US, it can cover up its trade deficit and hence does not have to heavily depend on foreign investments for balancing its BOP, which is likely to get affected when this tariff war possibly impacts the capital flow. 32

Whatâ&#x20AC;&#x2122;s the future of world economy,if this persists?

hile different countries would be affected in different ways, it is quite evident that the Global Economy will ultimately have to pay the price of the ongoing Tit-for-Tat Tariff war. Since manufacturing of many products is dependent on the Global Supply Chain which involves various countries at different stages; this could have a rippling effect over short, medium and long terms. It has been estimated by Bloomberg Economics that if the current scenario prevails, the global trade could go down by 3.7 percent, thereby reducing the overall productivity and the sustainable growth rate.

Would there be any winner in this WorldTrade War? Or would any country wave the white flag and put a halt to this before itâ&#x20AC;&#x2122;s too late?

INFINEETI

BITCOIN

IS SHORT SELLING GOOD FOR

“No price is too low for a bear or too high for a bull” –Unknown

BITCOIN MARKET VOLATILITY?

arkets are the biggest victims of the self-fulfilling prophesies in the integrated world that we are living in now where informational constraints are almost negligible. When the shares of a company are listed and traded publically, theory says that the share prices will be affected by the forces of demand and supply: if there is a high demand for a particular share, its share price would be pushed upwards whereas, increased supply would lead to a decline on share price. However, markets are largely governed by expectations, which may or may not be rational. Traders involved in short-selling play on these impulses of the population. These investors sell shares that are not owned by them at the time of sale in the expectation that an induced sale of shares in the market will lead to a fall in price of that particular share, an implication of the excess supply of shares in the market. The seller can gain from buying back the share at a lower price, in future. In Figure 1, as the short-seller sells shares in large quantities in the market, a situation of excess supply is created and due to the availability of these additional shares in the market the price of share falls from P1 to P2. At this point (E’), the short-seller again comes in and buys shares at a reduced price P2, pocketing the profits generated per share (P1-P2). As short-selling often exacerbates market volatility, in times of crisis, policy makers have often imposed bans on short selling. INFINEETI

FIGURE 1

GRAPH 1

Go Short or go Home

he most prominent case in point is the Financial Crisis of 2008. The collapse of Lehman Brothers and Northern Rock triggered a ban on short-selling as short sellers were accused of causing sharp decline in stock prices and benefitting from the resulting collapse of several major financial institutions. Here, the motivation for imposition of such bans is clear however, the outcome of achieving the goal is ambiguous. In a bear market, short selling may lead to price volatility and manipulative trade strategies with a fall in confidence in commercial institutions. However, the proponents of short selling argue that it induces liquidity in the market. Short sellers are better informed about the market conditions. Short selling bans can be seen as efficiency-reducing measures as such bans discourage the process of price discovery and it is often the case that short selling eradicates overvalued equity from the market. The prospect that asset/equity price increases can be reversed in future by short-selling will keep the valuations in check from blowing up to unmanageable proportions.

All Hail the New Entrant

he rise of cryptocurrency has baffled established economists and generated sharp in the market. bitcoin, the most prominent cryptocurrency, saw speculation drive up its prices. On December 17, 2017, bitcoin traded at its highest level in the history (intraday: 1 BTC=$19694.68). However these prices were a result of rampant speculation and market frenzy. But by February 2018, the prices had slumped to sub $7000 level. What was the reason behind this abrupt decline?

Bitcoin: The party goes berserk and big shorts decide to c(r)ash in

n December 11, 2017, Chicago Board of Exchange launched the world’s first bitcoin futures contract. This meant that for the first time, short selling was possible. Chicago Merchants Exchange followed suit. Within a week of its launch, the volume of futures being traded surpassed 1000 contracts/day (Refer Graph 1) At the same time, between December 11, 2017 and February 1, 2018, the value of bitcoin plunged to 50% and the market cap plunged to $10,000. This led to a torrential outpour of criticism, with bitcoin being labelled as “fraud” by J.P. Morgan Chase & Co. Chairman and CEO Jamie Dimon, and “evil” by noted economist Paul Krugman. Although no assumptions can be made over the nature of the futures, we would assume that a majority of them bet on the price going down, as can be seen from a continuous fall in Graph. This would be in line with the historic trend of prices after December 17, 2017.

The Big Q: Are shorts the culprits?

he transactional value of bitcoin is different from its cumulative value. The transactional value is directly correlated to the acceptability of bitcoin in the marketplace. The speculative value is derived from the event of people buying bitcoins and hoping the price would increase. Before December 2017, no instrument existed which could be used to bet on the decline of bitcoin, and the price surged based on one sided speculation. With the advent of short selling, many in the bitcoin community and in the governments around the world have depicted it as the root cause of decline. There is a strong argument that short selling did cause the decline in price.

The world view: Woe unto shorts INFINEETI

espite the criticism of bitcoin’s volatile nature and an apparent burst in bubble, the developed economies remained genially positive towards bitcoin. However, emerging economies who are traditionally conservative and hawkish in nature, such as India, were not pleased with the volatility of bitcoin. More importantly, they were also not pleased by their lack of ability to monitor and control new financial instruments. Traditionally, governments and government institutions have had distinct control over the currency as well as the markets of the country. They can ban certain financial instruments, such as naked short selling, and regulate others. However, the decentralized structure of bitcoin puts governments in a bind. Since it is not under the control of any country, there cannot be a control mechanism. Let us assume the case of two countries; A, which discourages short selling, and B, which encourages it. Hypothetically, if country A discourages short selling, it can traditionally regulate this financial instrument and its effects on the market. From the country A’s perspective, it can “protect” its investors from the “effect” of this instrument. Unfortunately for country A, in case of bitcoin this control mechanism fails miserably. Any effect of short selling of bitcoins in country B would be realized on the price of bitcoin and on investments by individuals of country A.

Counter View: Praise be upon Shorts

owever, short selling also achieved something that bitcoin desperately needed to gain: traction as “world’s currency”. It reduced the speculative value. Although this has hurt those who bought into the bubble, it has also reduced volatility in the market (Refer Graph 2)

GRAPH 2

However, short selling also achieved something that bitcoin desperately needed to gain: traction as “world’s currency”. It reduced the speculative value.

As can be seen from Graph 2, the daily historical volatility of bitcoin over a 30-day period saw wild fluctuations in 2017 and breached 8% level during the intense speculation and rise of bitcoin. Periods of high volatility continued with the entrants of future contracts. However, the recent trend, from May 2018 to July 2018 saw reduced D-HV volatility. The reduced volatility augers well for the future of bitcoin as it will help bitcoin gain acceptance as a medium of transaction. Low volatility in bitcoin should ideally lead to an increased acceptance of bitcoins by individual vendors as well as financial institutions for transactional purposes.

currencies that unifies markets and enables seamless transactions, most of its value today is derived via speculations by investors belonging to the category with high disposable incomes. But if the case of bitcoin is to be furthered and transactional demand for bitcoin is to be increased, the price of bitcoin needs to be stabilized where various financial institutions can step in to distribute the risks associated with the volatility in the price of bitcoin. Traditionally, the volatility was reduced using government regulations and policies. However, a counterview has emerged which states that the lack of regulation actually stabilizes bitcoin as bitcoins can be isolated from the impact of fluctuations in the political systems across countries. Therefore, short-selling may further reduce volatility which would help the case of bitcoin gaining acceptance in markets as a medium The governments cannot control the re- of exchange. With a downturn in US and lated impact of financial instruments in case China pushing for a ‘global currency’ in the of bitcoins. Although bitcoin’s original aim market, bitcoin can seize this opportunity was, and is, to emerge as one of the leading and emerge as a ‘currency without borders’.

Closing remarks

Surya Bhatia

Shikha Jha IIFT

IIFT

INFINEETI

ECONOMICS

Digital Lending- The future of MSME in India

istorically it’s proven that the MSME sector has been pivotal to the success of any developed country, be it in terms of GDP contribution or be it in terms of employment generation. Presently, India in-spite of being one of the largest growing Economy lags far behind when it comes to the MSME sector. In India, this sector contributes roughly about 8% only to the GDP as compared to more than 30% for most of the developed nations. On the employment front, the sector only contributes around 21% as compared to more than 50% for almost all the developed countries. So, to sustain the GDP growth rate of 8% and above, what the Government of India wishes to achieve?

H same.

ence, in order to achieve that, GOI has launched a number of schemes to boost MSMEs but still there has been a huge gap between the demand for Debt and the actual supply for the

otal Debt Demand to meet need for MSMEs is Rs. 33 Trillion out of which Rs. 26.5 Trillion of MSME Debt Demand unmet by formal Financial Channels. Besides this to according to PWC, 84% of the formal financial channels are embracing disruption and close 64% are into financial distress which means they are not in a position to sanction loan to the MSMEs.

But why the traditional banks are failing? RAJIT DAS IIM Rohtak

• • • •

Percentage of GDP

Inherent Bias towards giving loan to MSMEs Limited product innovation and customization which is essential for heterogeneous segment Extremely slow processing Using Vanilla Risk assesment which uses rigid credit and collateral parameters to assess risk

How Digital Lending Operates? From a customer perspective, he/she only has to follow 2 steps, online application and documents upload. From Document verification to Risk assessment everything will be done by the AI-based system itself. Now comes the next question, “How Risk assessment can be

done online?”

Percentage of Employment

INFINEETI

What are the problems when it comes to funding MSMEs

Why is digital lending different?

Besides these, four important parameters are considered in generating a score for the company. • Capacity: Whether a company’s current or future income will be adequate to cover debt obligations that the company is seeking to incur • Collateral: It can be in the form of business inventory, accounts receivable, equipment, property or any other tangible asset. The chances of loan approval become more positive when more than one form of collateral supports the loan application. • Capital: The owner having a significant investment in the business increases the chances of approving a loan • Financial Ratios: Ratios like Debt to equity, liquidity ratio, Leverage ratio gives a fair idea about the company’s financial health. These four aspects are considered with appropriate weightages along with sector they are operating in and Return / Risk factor to generate a final score for the applicant which is then compared with a threshold value to approve the loan.In case the threshold value is less, as compared to the amount applied for, the applicant is eligible for a loan of the Threshold Amount.

INFINEETI