Niveshak Feb18

Featuring articles on Bitcoin, corproate defaults and Digital Lending

Citius, Altius, Fortius

Dear Niveshaks,

The past month had been a critical one for the entire financial world. The budget at the beginning of the month, sounded the poll bugle, as against expectations of a reformist budget.

Later in the month the banking industry was struck by a storm of loan & embezzlement frauds.

The economy was back on the growth trajectory

registering a 7.2% GDP growth, with the revised growth expectations of 7.6%.

The cover story brings to you a concise version of how crony capitalism has been a thorn in the flesh of public sector banks. On one end the MSME sector, touted to be the engine of growth, is under financed & on the other end PSB’s are

accumulating bad loans.

The AOM explains the use of digital AI based technologies to solve the problem. An AI based platform can leverage the idea of Threshold Amount based on the applicants financial statements & ear-mark the amount he/she can be loaned based on his repayment capabilities.

The cover story digs

deep into the PNB scenario. There are obvious questions on the auditing standards followed in the banking industry.The political mud-slinging has begun, the institutions are at loggerheads in fixing the responsibility for the scam, amidst all this chaos Mr. Modi is enjoying in his New York mansion(though bereft of his Indian assets) & the depositors are skeptical about the safety of their hard earned money.

In the FinGyan segment we have a critical analysis of readiness of Bitcoin as a global currency. The price volatility and absence of any backing make us question its credibility..

The GraFin segment is a special addition to this month’s budget issue. The segment creatively summarizes the 2018-19 financial budget & the impact it will have on our lives.

Given, the big ticket promises made by the FM, it will be interesting to see how the FM fulfills the promises all the while maintaining fiscal discipline.

The classroom explains the mechanics of the Letter of Credit & stresses on the caution banks need to exercise while issuing it. Finally, in the sixth edition of Juxtapose we break the myth of the belief that farm sector is a major contributing to bad loans. By pitting the financial distress in the farm sector against the financial indiscipline in corporate India, we derive that agrarian economy is much more disciplined than the sophisticated India Inc. Hope you have as much fun in reading the magazine as we had in making it!

Stay Invested, Team Niveshask

THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta

All images, design and artwork are copyright of IIM Shillong Finance Club

Š

Finance Club Indian Institute of Management Shillong Disclaimer: The views presented are the opinion/ work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

Contents NIVESHAK: FEBRUARY 2018

6

8

The Month That Was

Niveshak Investment Fund

14

18

Cover Story: PNB Scam

20

FinGyaan: Bitcoin as currency

Article of Digital Lending - The Future of MSME in India

Anniversary Issue: HDFC Equity Rearch

23

10

Juxtapose: Farmers vs Corporates NPA

19

GraFin: Union Budget 2018

24

Clasroom: Letter of Credit

THE MONTH THAT WAS

THE MONTH THAT WAS

Jaitley presents the annual budget; has election written all over it Finance Minister Arun Jaitley has presented the last full budget of the Modi government with the upcoming elections in mind. The key areas of focus this year are employment, health and agriculture. The budget has all the right ingredients to win the rural hinterlands ahead of the Lok Sabha elections to be held early next year. Some of the reforms announced to provide impetus to the rural economy include setting the Minimum Support Price (MSP) at least 50% above the cost of production. FM has also announced plans to have a Universal Health Scheme on the lines of very popular Obamacare.

On the corporate front, the major highlights include reduction of corporate tax rate to 25% for companies having turnover up to Rs 250 crores. Other major announcements include re-introduction of Long-Term Capital Gains (LTCG) tax on dividends received above a certain threshold at a modest 10%. In view of the increased spending the government aims to incur, the fiscal deficit targets for the year 2018 and 2019 have been revised upwards to 3.5% and 3.3% respectively. The Fiscal Deficit has already breached 113% of full year’s target in April-January time frame.

RBI keeps rates unchanged; changes stance from neutral to accommodative Monetary Policy Committee (MPC) in its meeting held in February, kept policy rates unchanged. The repo and reverse repo remain the same at 6% and 5.75% respectively. The

6 NIVESHAK | FEB 2018

committee has also indicated a change in stance from neutral to accommodative. The committee has flagged off various risks in the medium term like inflation due to uptick in crude prices and effect of the implementation of the seventh pay commission, slippage in fiscal deficit targets and volatility in global markets.

RBI has also updated its inflation target to 5.15.6% for this fiscal, mainly on account rise in price of global commodities and crude coupled with the announcement of increasing the MSP in the current budget. The targeted inflation (CPI) remains same at 4% with a deviation of + - 2%. The minutes of minutes hint towards a potential rate hike in case the inflation is not in line with the target as set by the committee.

The committee is in particular vary of rising food inflation, which rose for sixth consecutive month despite deflating pulse prices.

Punjab National Bank unearths $1.8 trillion fraud; privatisation calls regain momentum PNB has admitted to a $1.8 trillion bank loan fraud involving several of its staff in the Mumbai branch. The fraud involving India’s celebrity jeweller has brought to light the sad state of affairs at India’s top PSU banks. The scam has highlighted the need for privatisation and stricter compliance of norms at such banks. The fraud unfolded as PNB discovered some its staff issued forged bank guarantees which in turn was used to secure loans and advances from other lenders including top banks and NBFCs. The bank issued as much as 151 Letter of Understandings in the year 2017 itself. The antiquated software used at PNB and other banks didn’t help the cause as PNB had no clue about the mammoth debt that was mounting on its head. It was only after water went above the head that the fraud was discovered. Ideally, on the due date PNB should have remitted the money to the overseas bank and recovered the amount from Nirav Modi, but in this case the credit was rolled over indefinitely. The fraud came as a big blow for the banking sector which is already struggling under the ever-growing NPA problem. Shares of PNB fell 10.4% in subsequent trading sessions.

THE MONTH THAT WAS

India now “World’s fastest growing economy”; GDP growth beats estimates, grows by 7.2% in Q3FY18 In a huge respite for the Modi government which is facing widespread criticism from all sections of the economy for slowdown in growth, the Q3FY18 numbers as released by the Central Statistical Office (CSO) beat analyst estimates by a good margin. GDP grew by 7.2% in this period as compared to 6.8% in the corresponding period last year.

The growth was fuelled by manufacturing and services sectors in particular. Manufacturing GVA grew by 8.1% as compared to 6.9% last year. January core sector output grew by 6.7% as compared to 4.2% in the same period last year. The impressive results also helped us reclaim the tag of “World’s fastest growing major economy”, which more than anything else should be the current government in the upcoming elections. The better than expected numbers should provide a booster shot to the economy which is bound to go general elections early next year. The only area of trouble remains the fiscal deficit targets.

Fiscal spending in January-April period stood at 113% of full year’s target, casting serious doubts over government’s ability to stick to target fiscal deficit in FY18.

Aircel files for bankruptcy; first casualty in the stressed telecom industry Aircel, today filed bankruptcy in the NCLT, after it failed to renegotiate terms of credit with creditors and lenders. The reasons given for the same are its inability to pay off the mammoth debt of 15,500 crores and intense competition in the telecom industry. The decision came after Malaysia based Maxim Telecom decided to not infuse any more funds into the sinking company. The development also hints at increased consolidation in the telecom industry whose revenues are already on a downward trajectory after the entry of Reliance Jio in September 2016.

The company has already gone through a failed attempt of merging itself with Reliance

THE MONTH THAT WAS Communications in the year 2017. Tower company GTL infrastructure has already shut almost one third of company’s towers over nonclearance of dues. To minimize inconvenience to existing subscribers, TRAI has ordered the company to generate Unique Porting Codes in order to help consumers migrate to other telecom operators.

Under fire for high profile defaults, cabinet clears “The Fugitive Economic Offenders Bill” Constantly facing opposition from all sections of the society for its inability to control high profile defaulters, Modi cabinet has cleared the much needed The Fugitive Economic Offenders Bill.

The bill aims to stop the likes of Nirav Modi from leaving the country in order to avoid prosecution under the law. The bill will cover only the offences which are more than Rs 100 crores in value. The value will allow government to take possession of property of such defaulters to recover dues.

Such persons will have a six weeks window in which they will have to present themselves at a specified place at a specified time, failure to do so will in confiscation of their properties. The law also prevents other stakeholders such as managers and shareholders to make civil claims over such disputed assets.

The cabinet has cleared setting up of National Financial Reporting Authority (NAFRA) to oversee functioning of regulators and large listed companies in order to strengthen the regulatory framework. The current regulator ICAI will continue to maintain its purview over smaller and unlisted firms. The same will be made applicable through due amendments in Companies Act 2013.

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NIF PERFORMACE EVALUATION th, 2018 As onAs February on 31th28 July 2017

February Month's Performance of NIF

Scaled Sensex

27-Feb-18

25-Feb-18

23-Feb-18

21-Feb-18

19-Feb-18

17-Feb-18

15-Feb-18

13-Feb-18

11-Feb-18

09-Feb-18

07-Feb-18

05-Feb-18

03-Feb-18

01-Feb-18

101 100 99 98 97 96 95 94 93 92 91 90

Scaled Portfolio

265 255 245 235 225 215 205 195 185 175 165 155 145 135 125 115 105 95

Performance of Niveshak Investment Fund since Inception

Sensex Scaled values

Portfolio Scaled Values Value Scaled to 100

Total Investment Value : 10,00,000 Current Portfolio Value : 23,13,851 Change in Portfolio Value : 131.38% Change in Sensex : 66.77%

Risk Measures: Standard Deviation NIF: 30.73 Standard Deviation Sensex: 15.03 Sharpe Ratio : 4.15 (Sensex : 4.18) Cash Remaining: 96,190

Comments on Equity market and NIF’s Performance: The month of February started with the all important and much hyped Budget 2018.

But it failed to impress the Investors and with the introduction of LTCG, market fell by more than 5% in the month of February. Weak global cues also played role in the fall of market. In this month of uncertainty too, Niveshak fund was able to outperform the market. The maximum rise was seen by NELCO which rose close to 48% in February.

Strong results in Q3 have taken this stock to near 10 year high.

The month also witnessed biggest banking fraud in Indian history. With amount close to 13,000 crore involved in fraud, PNB stock took a nosedive and fell more than 40%, in the same month. Due to this the PSU banking sector has also taken a huge blow.

Going ahead, Niveshak team sees outperformance of Large cap stocks in near future but in long term Small cap and Mid cap fund may outperform the market. Good buying opportunities may be seen in the Banking sector, which has been going through correction after the fraud was reported. Global markets will also play huge role in deciding the market direction in near future.

NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE

NIF Sectoral Weights

Monthly Performance Portfolio Weight

6.44%

10.35%

15.96%

11.50%

3.33% 8.31%

11.69%

4.42%

26.53%

1.49%

Auto

Infrastructure

Chemical

Media

Financial Services

FMCG

Pharma

Telecommunication

Misc

Services

TOP GAINERS FOR THE MONTH • NELCO (+47.99%) • Avenue Supermart (+14.74%) • Bharat Forge(+9.12%) TOP LOSERS FOR THE MONTH • Asian Granito(-11.87%) • ADF Foods (-9.75%) • Indiabulls Housing(-8.93%)

ARTICLE OF THE MONTH

DIGITAL LENDINGTHE FUTURE OF MSME IN INDIA -Rajit Das, IIM Rohtak

Historically

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 only contributes roughly about 8% in 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?

Hence 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 same.

By 2020, GOI targets to achieve 15% contribution in GDP and 50 % contribution in creation of employment from the MSME sector.

10 NIVESHAK | FEB 2018

ARTICLE OF THE MONTH

But why the traditional banks are failing?

What are the problems when it comes to funding MSMEs:

Why is digital lending different?

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ARTICLE OF THE MONTH

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

• 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 12 NIVESHAK | FEB 2018

assessment can be done online”.

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

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

ARTICLE OF THE MONTH

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.

But what if the financial statements are not available?

The model stated above is perfect for the new generation startups. But what is the solution for around 50% of the MSME’s which have minimal financial information available to them?

Here lenders can assess more by the Industry on which the firm is operating, at which geographical location and the amount of

Capital invested by the Owner of the firm himself.

Lending to a supplier of a big firm can be a safe bet under these scenarios. Also, rather than lending money directly to the firm, paying to the supplier of raw material or equipment of the firm, to have direct control on the usage of Fund can be an alternative.

Also, it is not necessary to approach the same bank or financial institution for all the cases. Given that the risk involved in different businesses are different, for a higher risk investment, a digital lending platform can approach a High Net-worth Individual (HNI). Whereas for a lower risk investment, an established financial channel might be a better option.

The whole plot seems like a game of Mario where the Government (Mario) eyed to kill the monster (Black money) but aimed to save the princess (Banking sector). We all concentrated on the eyes of the state IIM Shillong | 13

COVER STORY

PNB SCAM: WAS IT INEVITABLE? When Punjab National bank announced on 14th of February that it had been defrauded to the tune of 114 billion rupees, it set off a mad scramble to lay off accountability and deny responsibility. The amount under default has since another 13 billion in what is increasingly looking to hit the financial position of the bank hard. The most striking aspect of the situation is the crude and simple way in which the entire episode was let to happen and is only matched by the equally astonishing way in which the entire event came to 14 NIVESHAK | FEB 2018

COVER STORY

COVER STORY

light. While the specifics of the case are widely known at this point, we start off by providing a brief rundown of the facts as we know to date.

branch realised something was amiss when representatives of Mr. Modi came to the bank and demanded the continuation of these fraudulent practices. Indications are, Mr Modi knew that his gig was up as far back The Saga of Stupidity as November when this incident happened and has neatly planned his escape. If reports The country’s second largest public- are to be believed, Mr. Modi is currently in sector bank was defrauded of about the United states, which refuses to confirm Rupees 130 Billion over the past few or deny his presence in the country. years. At the crux of the fraud is Letter of Undertakings(LoUs) raised at the The Money Trail PNB Brady House branch by Nirav Modi and his family. These LoUs are usually The fist LoU was issued somewhere in 2011 raised by the importer and issued by the for about 800 crores. That this loan went bank for a specified amount on reception unpaid does not seem to have raised any of a guarantee of equivalent monetary red flags in the system and the operation value. These LoUs can then be sold, was carried out numerous times with other usually at a discount, to foreign banks by banks in about 17 countries including the exporter who receives these LoUs in Belgium, Hong Kong, the US, the UK, Dubai, exchange for goods. The foreign bank, Singapore among others. The root of the now in possession, of the LoU can now problem here seems to be that the bank’s get its due from the issuing bank. This, 2002 version of Finacle was not integrated in essence, facilitates the transaction with the Core Banking System and SWIFT which would otherwise take longer to fully. How such a gross oversight could process by traditional methods. occur beggars belief and is a scathing In this case, the deputy branch indictment of the banks current management manager, Gokulnath Shetty, and and its competence. Moreover, the SWIFT his subordinate, are alleged to have transactions were to be monitored manually provided unapproved, “fraudulently by a manager every day, a protocol that was issued” bank guarantees, i.e. LoUs flouted and could have saved the bank form to Mr Modi’s firms. Subsequently, Mr its current predicament.

Choksi’s Gitanjali Gems, one of India’s When the news broke, there was an attempt largest jewellery retailers, was added to by the bank deflect blame to the other the FIR filed by the bank as co-accused. parties who honoured PNB’s LoUs. A PNB The fraudulent LoUs were issued and official said that other banks did not do their transferred directly through SWIFT, the due diligence. “There is a dispute. Banks interbank transfer system, under PNB are making claims and want PNB to pay up. name, without reflecting it in the banks Yes we admit, our processes didn’t work ledger. Thus the banks liabilities were as they were supposed to. But processes rising without the knowledge of the bank have failed at other banks also. The banks itself. did not do the due diligence and see the The fraud came to light when the purpose for which these loans were used usual conspirators fled the country, by the borrower,” said an official at PNB, and new employees who joined the who did not wish to be identified. “We have IIM Shillong | 15

COVER STORY

said that we will meet our bona fide commitments. But we need to be sure that there was no flouting of rules at the other banks. The Reserve Bank of India and the government will have to step in and tell us how the matter has to be settled among the banks. There has to be some kind of arbitration,” the official added. However quickly it became clear that it was unlikely to work with PNB conceding that it would accept what it was liable for “under the law of the land”.

RBI has since directed PNB to pay up the entire amount. Allahabad bank appears to be exposed the most to these loans with an exposure of over 40 billion.

These banks have been instructed by RBI to make provisions for these loans till the time PNB is able to come up with the money, which will have to bear the loss.

Contingent and guaranteed liabilities of Indian Banks. Source: RBI PNB is trying to maintain a brave face through the entire episode with the bank claiming to have enough resources to meet its liabilities. No doubt some of it will come from the 54 billion of capital infusion that the bank is set to get from the government for its pre-existing NPAs. The bank financial situation seems suspect at best with there being a scare that it may have a liquidity crunch and may not be able to repay its CASA depositors. However, these fears seem to be misplaced given the bank has substantial liquid assets at least for the time being.

Who watches the watchers?

The entire issue could also have been prevented had there been strong

Contingent and guaranteed liabilities of Indian Banks. Source: RBI 16 NIVESHAK | FEB 2018

COVER STORY

auditing standards in place. The sum involved are too large to be hidden for too long if the auditors were looking closely and had there been stronger and more advanced auditing standards in place. The notion that these activities ore difficult to be caught has been debunked by reputable sources. In the normal course of business, a bank and its branches are subject to internal audit, concurrent audit and statutory audit, apart from the regular inspection by the RBI, all of which are the bank has supposedly come through unscathed.

How auditing which involves reconciling two accounts could fail to flag this is difficult to believe. Even in terms of LoUs, the size of the ones in question is too big to have passed for so long without having raised an eyebrow.

Who ends up with what An analysis of the companies owned by Mr. Modi and Mr. Choksi show that the companies that they own do not have either the assets or cashflows to pay

COVER STORY

back what is due. The most notable of Mr. Modi’s companies, Firestar Diamonds filed for bankruptcy this week unable to meet its expenses and obligations. The enforcement department has attached about Rs.55 billion of assets including jewellery, precious and semiprecious stones real estate and vehicles and other property. Now that Mr. Modi is in the United States of which he is a citizen of, through his marriage, means there is little chance of his extradition or him being bought to justice.

In yet another shockingly blatant case of gross mismanagement, lenderpolitician nexus, and crony capitalism, the taxpayers of the nation will once again be forced to infuse further capital into what is increasingly evident to be a poorly managed bank. There were calls for the government to privatise all state owned banks except one, presumably SBI, which this column agrees with.

While that will not prevent further frauds or rich businessmen getting away with breaking the law, at least the taxpayer is not directly on the hook.

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Anniversary Issue

- Harsh Agarwal and Arunabha Banerjee, NMIMS Mumbai The following Equity Research Report was adjudged as the winner of the Anniversary Issue competition conducted by Niveshak.

To read the complete report, please visit our website at: https://niveshak.wixsite.com/home

18 NIVESHAK | FEB 2018

NIVESHAK | FEB 2018 | 18

The following infographic was adjudged as the winner of the GraFin competition conducted by COVER STORY COVER STORY Niveshak during the FinWeekend.

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FinGyaan

BITCOIN AS CURRENCY --VENKAT SAMALA, ONKAR HABBU IIM BANGALORE

Anatomy of a Currency: Throughout the history, any form of currency which has been accepted universally broadly performs three major functions: 1.

Serves as a medium of exchange: As a medium of exchange, money should be able to make payments for goods and services in the country. So, as a means of facilitating transactions, the unit of currency should possess the quality of general acceptability amongst the masses.

2.

Unit of value: It must form a common denomination across the landscape of economy to compare all goods and services available.

With recognition as fiat currency, it should hold an intrinsic value which could be guaranteed by the Central bank.

3.

Stability in its value: Currency should have stability in two ways – Time series and cross section i.e. the value of the currency shouldn’t be too volatile and at the same time be liquid for conversion to other accepted currencies at stable rates, governed by

dynamics of demand and supply. As a store of value, it should be able to transfer purchasing power across time horizon allowing users to either defer or prepone their transactions with the help of financial institutions.

Bitcoin – in a nutshell: Now that the premise for currency is set up, let’s look at how Bitcoin positions itself in this space. Bitcoin is a form of digital currency which was developed as an open software in the year 2009 by Satoshi Nakamoto. It employs encryption and blockchain technology for peer-to-peer electronic transfer. One of the biggest advantages which work in its favour is the decentralised nature, meaning it has the same value at any point of time across the globe and there are no transfer or exchange expenses that we associate with the existing form of currency.

Bitcoin as a form of currency: Bitcoin is a sort of disruption which challenges our rudimentary understanding of currency and attempts to bring about a paradigm shift in the way the currency is perceived and forces us to think about how the currency could evolve to keep up with changes in technological domain.

Though it has been accepted as a medium of payment, such instances have been very few, meaning it still has a cover a long ground to meet general acceptance, especially given its scepticism among the masses. As far as stability goes, although it has cross-sectional stability, its fluctuation across time is huge rendering it futile as a medium of exchange.

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FinGyaan

FinGyaan

to reduction in output and trim down expenses on innovations to cut down on their losses. In a world where there have been innumerable innovations to cater to ever-growing consumer needs, such a fixed-supply monetary system is difficult to surmise and is grossly regressive in nature.

Absence of a watchdog:

Image Source : convoyinvestments.com Market forces in a bitcoin economy: As an alternative monetary system, the biggest issues with the currency would be its fixed supply and lack of any central governing authority. Taking a time horizon of at least 50-60 year, let’s look at how economy shall pan out if its accepted. Given the limited supply of the bitcoins, deflation would be a given in such a world. With the growing needs of people and advent of technology, the demand shall increase meaning the world’s output shall increase. However, money supply being constant, the finite money shall have to be spent on these goods and services.

Hence, the prices are bound to go down. If this price deflation manifests itself in the economy, there shall soon be a time when consumers shall start postponing or defer their purchases and discretionary spending in the hope of cheaper products soon.

Meanwhile, the producers will also resort 21 NIVESHAK | FEB 2018

Not only will the bitcoin render the power authority of central banker useless, it shall also make the current financial system obsolete. It would be indeed comforting to presume that bitcoin promotes free-market economy by letting market forces dynamics determine its worth.

However, by placing an upper limit on its supply, it violates this very principle. In the current system, the central banker plays the role of a guardian, who only monitors the money supply and its environment only to nudge periodically to ensure its stability.

Lack of such a regulatory framework such as central bank, will only magnify the already discussed deflation into a vicious circle which could even lead to volatility in everyday pricing of commodities.

A recipe for inequality: By adoption of such a monetary convention, the rich and middle class may postpone their purchasing decisions, thereby hoarding money with them hoping its future value will be higher than the present. It spells chaos to workers who shall be laid off by industry because lower outputs. Result – rich keep growing richer and poor shall find it hard to survive.

FinGyaan

Meanwhile, the government, in the absence of central bank, will not have access to its fiscal engineering tools to finance its social welfare schemes for these people.

Gold Vs Bitcoins: Bitcoins are often compared with Gold as both tend to have difficulty in estimating intrinsic value. Both cannot be valued based on the future cash flows. They are primarily used to store value. This comparison subtly hints at Bitcoin moving towards a trading asset than an acceptable currency. But, Gold wins hands down here as it has a very stable price history throughout the history and it was even used to back the real currency at some point of time. Bitcoin, on the other hand, fails to gain even the value storage credibility owing to its price volatility and limited supply.

Cost of mining per transaction: Bitcoins require the heavy computing infrastructure for its functioning. The underlying Blockchain requires machines with high processing power as well as the time of miners who are busy solving complex mathematical puzzles. This makes the bitcoin transactions expensive currently.

Though, it is predicted that the scale of the Bitcoin transactions in future would reduce such costs, such network effects introduce a tinge of uncertainty.

Rumours surrounding Bitcoins: There are lot of negative rumours surrounding bitcoins regarding their use for the illegal activities like terrorism and deep dark web funding etc. Such rumours can accrue over time and it can cause the governments around the world to be cautious about Bitcoins. Many countries could even ban Bitcoins by law if they see they are losing the control over their economy. This threat will always loom over bitcoins.

Conclusion: All the above factors reflect that Bitcoins are still not ready to be globally accepted as the currency. The price volatility and absence of any backing make us question its credibility. Though bitcoins disrupted our financial doctrines with introduction of decentralisation of money market, it has a long way to go to meet the requirements of the transactional currency. What worries most of the finance professionals is that the current price rally bitcoin is enjoying. There are speculations of various unknown dark and illegal activities that are fueling this rally as there is nothing drastic that is happening in the public domain which will explain the more valuation and demand for the bitcoins.

As every tradable asset has faced in the history at some point of time, this can sure the be Bubble of Bitcoin, which appears to burst sooner than later.

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JUXTAPOSE

JUXTAPOSE:

FARMERS VS CORPORATES NPA Even though the banks have witnessed a Rs.

11,400 crore spike in bad loan of agriculture in fiscal 2017, still farmers are more disciplined borrower with their defaults only amount to 6% of their total outstanding. Farm sector bad loan constitutes 8.3% of the total banking sector NPA. Farm credit, which is a part of priority sector lending, mainly includes short-term crop loans. It has been said that a major reason for a rise in agriculture bad loan is expectation of waiver by farmers. RBI governor has cautioned time and again against increasing farm loan waiver. But if corporates defaulted on repayments, destroyed credit discipline and culture. Why should farmers be blamed?

Corporates which majorly includes industry and infrastructure, infamous because of Vijay Mallya’s and Nirav Modi’s, accounts for Rs. 558,500 crore NPA or 76.7% of the total NPA. Their default rate is also very high which is around 20.83% of the total borrowing. This is not it, as many as 265 account in State Bank of India alone has bad loans of more than Rs. 100 crore each, totalling to Rs. 77,538 crore much more than the total NPAs of farmer taken in total. Still government is willing to give Rs. 80000 crore in the form of bank recapitalization.

23 NIVESHAK | FEB 2018

CLASSROOM: Letter of Credit A Letter of Crodit (LC) is a financial instrument issued by a bank or ace financial institutions that guarantees payment. Letters of credit are also called documentary credits. Security is provided during the purchase and sale of letter of credit.

Banks will issue a letter of credit only if the customer assures them and the banks are confident that the buyer will pay. Banks usually need a pledge of securities or money as collateral for issuing a letter of credit. Banks typically collect fees for service. This fee is a percentage of the size of the letter of credit.

TYPES OF LETTERS OF CREDIT In a commercial letter of credit, the issuing bank makes the payments to the beneficiary, and this is a direct payment method. In contradiction, a standby letter of credit is where the bank pays the beneficiary only when the holder cannot pay, and they use a secondary payment technique.

In a revolving letter of credit, the buyer can make any number of draws in a definite limit during a given period. In a confirmed letter of credit apart from the issuing bank it also involves another bank guaranteeing the letter of credit. The second bank is the confirming bank, usually known as the seller’s bank. If both the holder and therefore the issuing bank defaults, the confirming bank then

ensures the payment under the letter of credit.

The issuing bank in international transactions typically requests this arrangement.

WHAT CAN GO WRONG? Letters of credit make it achievable to reduce risk at the same time continuing to do business. They’re necessary and useful tools. However, they only work after you get all of the details right. A minor mistake or delay can wipe out all of the advantages of a letter of credit.

If one relies on a letter of credit to receive payment, they need to make sure that they: • Carefully review all essentials for the letter of credit before agreeing to any deal • Understand all of the documents needed • Are actually ready to get all of the required documents for the letter of credit • Understand the deadlines related to the letter of credit, and whether or not they’re reasonable • Figure out how quickly the service providers (shippers, etc.) will provide documents to them.

• Get all the required documents to the bank on time.

• Make all the documents required by the letter of credit match the letter of credit

IIM Shillong | 24

Fin.

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