Niveshak Jan17

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume X ISSUE I January 2017 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Jaiswal Aditya Kumar Jain Akshay Kaushal Anand Mittal Anisha Khurana Ankit Singhal Ankur Kumar Anoop Prakash Arjun Bhargava Devansh Sheth Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Shreyans Jain Vinay Gundecha All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong

We hope that the first month of the year brought with it the spirit of starting afresh and realizing your dreams for you. This month saw Donald Trump officially coming to power as the 45th President of the United States, an event that could drastically change the way economies across the world operate with each other. The Economic Survey 2017 presented by the Finance Minister of India, Mr. Arun Jaitley, observed that the Indian Economy is still growing strong with relatively low inflation, fiscal discipline and a stable rupee-dollar exchange rate. With more currency notes being pumped in and withdrawal limits being gradually relaxed, this month also brought some relief for the cash-starved common people. On the global front, Japan threatened to take India to the WTO, alleging that India’s restrictions over steel imports have halved Japan’s exports to our country – a step that could trigger more trade spats in the future which seems already vulnerable with high global tensions over steel and other commodities. The newly elected US President Donald Trump’s bold moves over US Visa and immigration rules also brought some turmoil for the US companies. Our cover story for the month brings a comprehensive and exhaustive review of the Budget 2017 which was presented on February 1, throwing light on the possible implications it might have for the different sectors of our economy, while also identifying the areas that were overlooked in the budget. The Article of the Month on the Venezuelan Economic Crisis, which happens to be one of the most profound economic crises in recent history, tries to look into what led to this drastic change in fortunes for one of the star performers in Latin America. Under FinGyaan, “The Trident to Slay the NPAs” elucidates one of the most critical problems that the Indian Banking Sector is struggling with, explaining the 3 R method – Recognize, Reserve & Resolve - a modern approach adopted by the banks to deal with the problem. Under the FinSight column, the author writes about the deregulation of Savings Bank Interest Rate – identifying is as a Slow Poison in Indian Banking sector. The FinaFame section highlights the immense contributions brought to the field of global finance by Jim O’Neill – the ex-chairman of Goldman Sachs Asset Management (GSAM). The article under FinView offers detailed insights into shares with differential voting rights, and evaluates whether or not are they a good investment opportunity; whereas Classroom for the month would educate the readers about Beta – one of the most commonly thrown terms in the field of Finance. To end this brief note, we would like to thank our readers for their immense support and encouragement. You remain our prime motivation factor that keeps our spirits high and give us the vigor and vitality to keep working hard. Thank you. Stay Invested! Team Niveshak

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

Niveshak Times

04 The Month That Was

CONTENTS

Cover Story

Equity Research

10 Larsen & Toubro Ltd.

Article of the month

12 Venezuelen Economic Crisis

FinGyaan 18 The Trident to Slay the NPAs

FinaFame

21 Dr. Jim Oâ&#x20AC;&#x2122;Neill

FinSight

24 Deregulation of Savings Interest Rate - Slow Poison in Indian Banking Sector

Budget 2016-17 Decoded!

27 Dr. P. Saravanan 28 Beta - Risk Factor

FinView Classroom

The Month That Was

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The Niveshak Times Team NIVESHAK

IIM Shillong Financial Stability and Development Council finds India in a better position in a fragile World Economy The FSDC Council, at its 16th meeting, reviewed the major issues and challenges facing the economy. According to the finance minister “World economy is quite fragile, yet India is much better placed today due to improvement in its macro-economic fundamentals,” Financial Stability and Development Council (FSDC) also reviewed the present status of NPAs in banks and noted that “India appears to be much better placed today on back of improvement in its macro-economic fundamentals.” Also, the regulators offered their suggestions/ proposal for the upcoming Budget for 2017-18, which were deliberated upon by the Council. FSDC discussed about the various initiatives taken by the government and regulators for promoting financial inclusion/ financial literacy efforts and discussed further measures for promoting the same,” the statement said. A brief report on the activities undertaken by the FSDC sub-committee, chaired by RBI Governor Urjit Patel, was placed before the FSDC. The Council also undertook a comprehensive review of the action taken by members on the decisions taken in earlier meetings of the Council. “The Council also discussed issues pertaining to Fintech, digital innovations and cyber security. The Council took note of the initiatives taken in this regard by the government and the regulators and discussed on further steps to be taken,” it added. Modi Abe Bhai Bhai? Japan threatens India with WTO on steel as Trump era heralds rising trade tensions Japan, the world’s second-biggest steel producer is threatening to take India to the WTO over restrictions that nearly halved its steel exports to the South Asian nation over the past year, a step that could trigger more trade spats as global tensions over steel and other commodities run high. Besides concern over India’s protection of its domestic steel industry, Japan is also worried about the rougher and tumble climate for global trade being engendered by incoming US President Donald Trump, and feels it must make a strong

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stand for open and fair international markets. India imposed duties of up to 20 percent on some hot-rolled flat steel products in September 2015, and set a floor price in February 2016 for steel product imports to deter countries such as China, Japan and South Korea from undercutting local mills. “If consultations fail to resolve the dispute, we may ask adjudication by a WTO panel,” the industry ministry official said. Tokyo says India’s actions are inconsistent with WTO rules and contributed to the plunge in its steel exports to India, which dropped to 10th-largest on Japan buyer lists in 2016 through November, down from sixth-largest in 2015. There has been a series of trade disputes over the past few years amid massive exports of cheap steel products from China, the world’s top producer, with Vietnam, Malaysia and South Africa taking or planning measures to block incoming shipments. China’s steel exports dropped by 3.5 percent in 2016 to 108 million tonnes, still about as much as Japan produces in a year. Japan is also monitoring its small volume of imports for signs of dumping, fearing that steel products with nowhere to turn because of import restrictions may head to it own market. But in an environment where a new U.S. president is threatening to tear up trade treaties and impose import duties in the world’s biggest economy, Tokyo may be at risk of helping to set off a trade war it is trying to avoid. Aadhaar mandatory for MGNREGS work from April Beginning April 1, people living in rural areas need to have Aadhaar under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) that mandates 100 days work for a household annually. People registered under the scheme will be required to give proof of possession of Aadhaar or undergo the enrolment process till March 31, 2017. Those who have applied for Aadhaar can show their enrolment slip or copy of application made to the authorities concerned for getting the 12-digit unique identification number which acts as a proof of identity and address anywhere in the country.

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Necessary orders to make enrolment of Aadhaar mandatory for states like Jammu and Kashmir and few others are being issued by the Centre in this regard. Section 7 mandates that where government provides subsidy, benefit or service from Consolidated Fund of India (CFI), an individual can be asked to undergo authentication, or furnish proof of possession of Aadhaar number Rs 38,500 crore have been allocated for MGNREGS in the current fiscal by the Centre, an increase of over Rs 3,800 crore outlays made for the rural job scheme during 2015-16. The move to make Aadhaar mandatory for MGNREGS work will help in checking leakages of government subsidies and to ensure that the beneficiaries get their due. The DBT programme, a major reform initiative to check leakages of welfare funds, was launched on January 1, 2013 with regard to 24 selected schemes of eight ministries. Through DBT all cash benefits are transferred directly to the beneficiary’s bank account. The Centre has asked all its departments and state governments to widen the scope of DBT scheme to include all monetary and in kind transfers to beneficiaries. EPFO also is following the same path. BSE enters market with a blockbuster show This month Asia’s oldest stock exchange BSE came out with an initial public offer aiming to raise up to Rs. 1243 crore by issuing approximately 1.08 crore shares which had a price band of Rs. 805806 per share. The IPO first by any domestic stock exchange in India was oversubscribed nearly 12 times as it received bids for approximately 12.80 crore as against the issue size of 1.08 crore. BSE shares listed at Rs 1089 with a premium of 35% over issue price. BSE is the world’s largest stock exchange by number of listed companies. It is India’s largest and the world’s 10th largest exchange by market capitalisation.

Benami Act put in force; I-T issues notices attaching 42 assets worth crores In a move to further strangle the black money holders post the demonetisation move, the Income Tax department has issued 87 notices and attached bank deposits worth crores in 42 cases across the country under the newly enforced Benami Transactions Act which attracts a heavy penalty up to 25% of the fair value of the property and a rigorous jail term of a maximum 7 years. The Benami Property Transactions Act, 1988 is applicable on both movable and immovable property, and has been enforced with effect from November 1, 2016. Following the demonetisation move last year, the government had carried out public advertisements and had warned people against depositing their unaccounted old currency in someone else’s bank account saying such an act would attract criminal charges. The department, which is the nodal authority responsible for the new Act is being fairly active in enforcing it and is supposedly in the process of issuing fresh such summons. The demonetisation move had helped the department in identifying suspect bank accounts where huge sums of cash were deposited following the same. Undisclosed income of over Rs.5, 343 crores has so far been detected and new notes worth around Rs. 114 crores have been seized which were allegedly procured illegally.

BSE shares are listed on National stock exchange as SEBI rules does not allow listing of own share any stock exchange. Last month, BSE counterpart NSE too filed draft documents with regulator for an estimated RS. 10000 crore IPO.

The Month That Was

The Niveshak Times

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28000

1,500

BSE

DII

FII 1,000

27000

500

26500

26000

-500

25500

-1,000

BSE

27500

FII, DII Net turnover (in Rs. Crores)

Market CoverSnapshot Story

Market Snapshot

1/31/2017

1/30/2017

1/27/2017

1/25/2017

1/24/2017

1/23/2017

1/20/2017

1/19/2017

1/17/2017

1/16/2017

1/13/2017

1/12/2017

1/11/2017

1/10/2017

1/9/2017

1/6/2017

1/5/2017

1/4/2017

1/3/2017

1/2/2017

Source: www.bseindia.com www.nseindia.com

MARKET CAP (IN RS. CR) BSE Mkt. Cap

1,06,23,347 Source: www.bseindia.com

CURRENCY RATES 67.81 72.55 59.77 84.81 47.89

INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR / 1 SGD

3.50%

INR/1 USD

Euro/1 USD

3.00% 2.50% 2.00%

GBP/1 USD

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.65% 6.50% - 7.10%

RESERVE RATIOS CRR SLR

4.00% 20.50%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.75% 6.25% 5.75%

1.50% 1.00% 0.50%

Source: www.bseindia.com

0.00% -0.50% -1.00%

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Date as on January 30th

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BSE Index % change Open Close Sensex -0.76% 27868 27656 AUTO -0.82% 21989 21809 BANKEX 2.51% 22308 22867 Capital Goods 1.84% 14786 15058 Consumer Durables 0.38% 12650 12698 FMCG 1.91% 8601 8765 Healthcare -0.83% 9542 9462 IT -0.83% 9542 9462 METAL 2.03% 11701 11939 OIL&GAS 0.85% 12920 13030 POWER 0.20% 2168 2173 REALTY 3.76% 1384 1436 TECK -0.53% 5319 5291 Smallcap 1.55% 12952 13153 MIDCAP 1.53% 12888 13085 PSU 1.41% 8371 8489

% Change TECK, -0.53% Smallcap, 1.55% REALTY, 3.76% PSU, 1.41%

IT, -0.83% Healthcare, -0.83%

POWER, 0.20% OIL&GAS, 0.85% MIDCAP, 1.53% METAL, 2.03%

Consumer Durables, 0.38%

FMCG, 1.91% Capital Goods, 1.84% BANKEX, 2.51%

AUTO, -0.82% Sensex, -0.76%

Â© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Market CoverSnapshot Story

Market Snapshot

Equity CoverResearch Story

NIVESHAK

JANUARY 2017

Equity Research report: Larson & Toubro Ltd.

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Equity CoverResearch Story

Â© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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Article of the Month Cover Story

Gone with the Oil- Venezuelan Economic Crisis AbhishekAgarwal IIM Shillong A political ban on high valued currency notes, long lines in front of ATMs, rising food prices, scarcity of basic commodities. No, I’m not speaking of India. But a country about 15000 kms away from the Indian coastline in the northern tip of Latin America. The country is the Bolivarian Republic of Venezuela. A country with the largest proven oil reserves in the world and still facing one of the most profound economic crises in recent history. What led to this drastic change in fortunes for one of the star performers in Latin America, long seen as a formidable market for international players. Is the reason as simple as the fall in oil prices or is the problem more deep rooted and fundamental? What kept the political leaders from identifying the red signals and what learnings does this have for the rest of the world economy and specifically for a country like India.

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What implications might its collapse have on the world economy? All of these are question that we try to answer in the subsequent paragraphs as we delve deeper into a web of political conspiracies, economic missteps and flawed policies that brought Venezuela to where it is today. Venezuela is no stranger to economic crisis’ having braved the brunt of multiple crises in the recent past from the oil price collapse in the early 1980’s to the banking crisis in 1994. However, each time, neoliberal policies and a rebound in oil prices helped the country come out of each crisis and endured steady growth. With revenue from petroleum products forming nearly 50% of the country’s GDP and roughly 95% of its exports, Venezuela has been over-reliant on oil prices to fund its growth and keep the government machinery running. This

NIVESHAK tions like Pepsico and Nestle and closing down its borders with neighbouring countries in a

the local population to create a largely socialist economy using populist approaches and large scale appropriation of private property. The nationalist administration of Hugo Chavez which assumed power in 1999 made another historic policy decision in the form of adherence to OPEC production quotas, reversing the nation’s traditional pro-US oil policy. This put the two countries at loggerheads, only to worsen under the present government of Hugo’s successor, Nicolas Maduro. Maduro continued most of the economic policies of Hugo Chavez but he did not enjoy the same level of political support as Chavez, choosing to blame the United States for most of Venezuela’s problems, expropriating lands of major US corpora-

face of a demonetisation drive. All these policies led to an economy that is highly fragile and on the brink of collapse, so much so that Economist called it the “world’s worst managed economy” in 2014. An in the two years since that things have only gone downhill with the country facing hyperinflation, only the seventh ever in Latin America, and credit agencies downgrading it to “junk territory” or below investment grade with negative outlook going forward. One of the biggest casualties of Venezuela’s economic crisis has been its official currency Bolivar Ferte. Excessive money supply by the Maduro government into the economy led to a drastic fall in

Article of the Month Cover Story

revenue has been utilised to hugely subsidise common goods and petroleum products for

Article of the Month Cover Story

NIVESHAK the value of the bolivar. Such is the condition in Venezuela today that people have to resort to weighing bills instead of counting them even for common household purchases. One of the most widely discusses themes amidst the fall of the Venezuelan Economy has been the failure of socialist forms of governance in running a stable economy. While a wide array of populist measures ranging from subsidised food products and free healthcare seemed feasible in

a oil fuelled growing economy, long term stability of such a system is put into question. At the same time, state control of private enterprises and discouragement of foreign capital greatly constricts a stateâ&#x20AC;&#x2122;s ability to effectively tackle both external and internal disturbances as has happened in the case of Venezuela. Venezuela currently has $17 billion in debt obligations due over the next year and a half with just $10 billion in foreign reserves remaining. This has already forced Venezuela to sell of much of its substantial gold reserves to avoid defaulting on its payments. Also state control of the exchange rate of the currency with its four official exchange rates has created a parallel black market for the trading of Venezuelan currency, making it nearly impossible to procure much needed foreign capital. So the question remains, how does Venezuela

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get out of this economic spiral? One of the primary measures that it needs to take is combining different exchange rates in order to curb the parallel foreign exchange market and ease the exchange of foreign capital. The next step is to undertake a massive restructuring of its debt in order to reduce its obligations while slowly allowing private enterprise to be set up and do business without the fear of the government. This will allow the country to reduce its overde-

pendence on oil and mend ties with the United States and other western countries. For developing countries like India, Venezuela present the perfect case of an economy with all things that could go wrong going wrong. It highlights the need for an open economy that is conducive for investments and has certainty in terms of policy. It also draws attention to the need to cut down on populist measures and subsidies and working towards employment generation and growth. Perhaps the most important lesson for India and the world is the necessity to design more stable and accountable political institutions that de centralises power and empowers strata of society.

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Cover Story

Budget 2016-17 – Decoded! Akshay Kaushal &

rAgarwal IIM Shillong

monetization, twin-balance sheet and fiscal policy in detail. And the third part concentrates on medium This year saw fascinating developments term issues such as states, cities on one end and Big across the globe. Be it Brexit and political battles in Data on the other end. the advanced economies or major policy changes like demonetization and GST in India, both corporations, One of the major drawbacks that the survey observed as well as individuals, have been impacted signifi- w.r.t. India was that its Credit Rating by S&P was still cantly in a relatively short period of time. In the wake struggling to manage its position of BBB- whereas in of such circumstances, the economic survey had to the same time interval China managed to upgrade do a herculean task of summarising each and every itself from A+ to AA-. Thus, China’s credit to GDP rafacet of these short-term developments in order to tio escalated to 205% from 142% between 2009-15 whereas India still lags behind with only approx. 77% justify a billion expectations or so. credit to GDP ratio. Interestingly, the economic survey was divided into three parts viz. The Perspective, The Persistent and The survey also observed that there is a huge poThe Proximate along with one attractive section tential in India when it comes to collecting the namely ‘Eight Interesting Facts about India.’ The first property tax as compared to the rest of the world. part gives a broad overview of the economy with a Cities like Jaipur and Bengaluru collect only 20% short-term outlook. The second part talks about de- and 5% of their potential property tax respective

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Cover Story

ly. Hence, this could be one area from where the government can generate a big chunk of its tax revenue. Apart from that, the survey deems GST to be a good move expecting the formation of a common Indian market, boosting the economic growth with improved tax compliance, etc. Also, it acknowledges the short-term effects of demonetization but proposes follow up actions such as fast, demand-driven remonetisation, bringing real estate and land into the GST, etc. in order to put the nation in the same economic growth trend that it enjoyed in the recent years or so.

On similar lines, the government has tried to make this budget simple but comprehensive in nature so as to accommodate as much expectations as possible. Announcing a no big-bang plan, focusing on the infrastructure, and trying to keep the fiscal deficit under control, Finance Minister, Mr. Arun Jaitely has tried to reaffirm the government’s commitment to accelerate growth. Given the upcoming election in three states, the government could have well announced some populist measures. However, it presented the budget as an economic document and not as a political trump card. Apart from the economic facts and the announced plans, the budget was unique in its own way. This was the first budget which also included the Railway Budget and was presented in the first week of February instead of the last week. Further, this budget has done away with the Plan and Non-Plan Expenditure categories.

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For FY18, the government has revised the fiscal deficit upward to 3.2% of GDP from 3% announced in the last budget. It has postponed the target of achieving 3% fiscal deficit twice in the last four years. But given the fact the country had around 5% of fiscal deficit in past few years, the revised figure is also within the limits.To make the country more investor-friendly and to bring in more foreign capital, the FIPB (Foreign Investment Promotion Board) would be done away with.One of the reliving proposals for tax payers has been the reduction of the period for gaining the capital tax benefit to 2 years from 3 years, if capital asset is land or building. One of the boldest measure in budget 2017 is to clean up the yet untouched spectre of political funding in India widely recognised as one of the core sources of black money. The government is also planning to introduce changes in laws that would allow it to confiscate the assets of wilful defaulters. Restricting cash transaction limit to Rs.3 lakh and reduction in the limit of cash expenditure under section 40A (iii) to Rs.10000 are major steps towards promoting a cashless economy. On the taxation front, reduction in the tax burden from 30% to 25% for SME’s with turnover up to Rs.50 crore is expected to boost tax compliance while the reduction in personal IT below 5 lakhs will drive consumption and also enlarge the tax net of the government. To recoup the lost revenue, it has pro-

NIVESHAK abled payment mechanism, relaxation in norms for tax benefits to start-ups, special schemes for employment creation in the textile sector and setting up of a system to measure the annual learning outcomes in schools. Also, proposal for online education portal- “Swayam”, which offers virtual education for 350 online courses will Provides more This was the first time when the Union Budget and thrust to the government’s Digital India movement. the Railway Budget was presented together. Indian Railways has always been the ploy of the government of the day to use it for vote-bank politics. But The merger of the railway budget with the genthanks to this budget, no big announcements have eral budget failed to show any added advantages, been made. The attempt has been to complete the with the railway budget ending up being sub-par. uncompleted project and to make railways self- Another front where the budget failed was the meagre allocation of 10,000 crores towards bank sustainable. recapitalization in the face of mounting NPAs and The total capital for the Railway Budget has been approaching deadline for implementation of Basel pegged at INR 1.37 lakh crore. Of this, INR 55,000 III norms. The budget lacks a clear roadmap of crecrore (around 40%) would come from government ation of jobs, the failure of which might lead to sources and the rest would be generated by the demographic dividend turning into a demographic railways from its own sources. To mop-up funds nightmare. There was only a passing reference to for this important lifeline of the country, shares of the GST which shows that the nitty-gritties are yet IRCTC and IRFC would be listed on the various stock to be worked out. Although, the rising oil prices, exchanges. Also, the move to remove the service the 7th Pay Commission and the reduction in the charge for booking tickets through IRCTC portal is income tax rates would put further pressure on the a welcoming step. Moreover, the government has government for meeting its target of achieving a said that the railway tariff would be fixed based fiscal deficit of 3.2% of the GDP. on the cost, competition and social obligation. This would provide the much-needed relief to the railways to revise its tariff rates in the time of high Demonetisation, being one of the most hotly confuel prices. tested topics prior to the budget saw considerable stimulus in the budget. The revision of withdrawal limits from ATMs, introduction of BHIM app and Agriculture continues to form the important part Aadhar pay along with the cut in direct tax rates of our economic pillar. A dedicated focus to im- are measures likely to offer some relief to the cash prove the productivity of the labour is much need- starved economy. It will potentially boost demand ed for this sector. The government has allocated in the economy. These steps along with the ina record sum of INR 1.87 lakh crore for the agri- crease in public spending will ensure that the efculture and the allied sectors. It has also fixed fects of De-monetisation will not spill over to the the rural credit target at the record level of INR 10 next financial year. lakh crore. This shows the focus of the government toward the sector. Some of the other initiatives in this area have been setting up dedicated All in all, the budget saw many appreciations as well as criticism. But most of the experts are quite micro irrigation fund, extending the tenure of the positive as far as near term outlook is concerned. loans under Credit Linked Subsidy Scheme of Prad- Although, how well the government will be able to han Mantri Awas Yojana from 15 to 20 years and implement the planning is yet to be seen. allocating INR 48,000 crore for MGNREGA. Some of the other noticeable measures are the introduction of a merchant-version of Aadhar en© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Cover Story

posed to levy addition surcharge of 10% on persons having annual income above 50 lakh to 1 crore. However, the reduction falls short of its purpose and the increased surcharge falls short of the expected losses.

FinGyaan

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The Trident to Slay the NPAs Rushi Vyas “When you’re in a pit, the first thing to do is to stop digging.” - James Ellman, Seacliffe Capital “When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” – Chuck Prince, Citigroup All of us who even remotely follow the events in the financial sector know about the three alphabets which threaten the financial stability of our country – NPAs. History has been witness to severe instability in financial systems of various countries after a period of poor lending. Credit is good for an economy as long as it promotes investment without default risk. However too liberal lending policies lead to higher default risk probability which is detrimental to the economy. The 3 R method

JANUARY 2017

IIM Rohtak

is the modern approach adopted by the banks to deal with the rising Non-Performing Assets (NPAs) problem. The 3 Rs stand for Recognise, Reserve and Resolve. also open accounts in payment banks.The upper hand of payment banks over regular banks is that such banks don’t charge very high fees also avoid stringent KYC (Know Your Customer) norms which complicate the transactions for the customers. Payment banks are more technologically intensive and as a result their costs and hence fees are lower. Also, payment banks can provide last-mile connectivity unlike regular banks as they are heavily technologically driven. Initially there were 41 applicants for getting licenses for payment banks, but on 19th August 2015, RBI gave “in-principle” (valid for 18 months within which the entities cannot engage in banking activities) licenses to the following

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UBanks should recognise NPAs at the earliest. A problem can be solved only if it is identified. Hence instead of pretending that everything is fine, the banks should start recognising NPAs at the earliest. According to RBI guidelines, NonPerforming Asset is any loan/advance for which: *Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, - The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC), - The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, - The instalment of principal or interest there on remains overdue for two crop seasons for

NPAs of Top 5 Indian Banks short duration crops, - The instalment of principal or interest there on remains overdue for one crop season for long duration crops. (Source: rbi.gov.in) The Indian banks were forced to recognise this problem under ex-RBI Governor Dr. Raghuram Rajan when the central banker initiated an Asset Quality Review in FY 2015-16. Under AQR the banks were required to classify all their assets as per the RBI guidelines. The

result was a large increase in the reported Non-Performing Assets especially in the Public Sector Banks. The AQR should have been a wake-up call to the banks as far as recognition of stressed assets is concerned. The steep rise in NPAs of top 5 Indian banks is clearly visible in graph shown above after the Asset Quality Review was introduced. Reserve is the provisioning for bad loans carried out by the banks. Banks should be good at estimating the expected defaults on the loans they have given. This measure helps the bank to have enough liquidity (cash on hand) to bear losses in case of such defaults. Provisioning Coverage Ratio (PCR) PCR is the ratio of the total provisions for bad loans to the total non-performing assets. A

higher PCR is ideal because it indicates that higher amount of losses due to NPAs have been covered by the loan loss reserves. In 2010 RBI issued guidelines stating that the banks should have a PCR of 70% or higher. The banks were in denial arguing that the write-offs were low and hence there was no such need of a high PCR and consequently the guidelines were taken back. However today the situation is different due to increase in the write-offs. The banks are reporting losses

FinGyaan Cover Story

11 entities;

FinGyaan

NIVESHAK on account of increasing PCR and they still need government to infuse capital to bear the losses. The circumstances demand for higher provisions for stressed assets and the banks should respond accordingly. As evident from the graph, the top 5 Indian

may fail to revive the stressed assets thereby incurring losses themselves. Transfer to ARCs (Asset Reconstruction Companies): ARCs take the stressed assets out of the financial system altogether. ARCs are approved by the RBI and regulated as an NBFC.

Loan Loss Reserves of Top 5 Indian Banks banks increased the loan loss reserves substantially last year after they recognised a high amount of NPAs in Asset Quality Review. The third and final R of stressed asset management is Resolution. Once the NPAs have been recognised and part of them are covered by the loan loss reserves, the remaining need to be treated in order to avoid losses. Various methods which are followed to resolve the bad loans are explained below. Sale of Assets: One way of dealing with the NPAs is to offer them on sale to other banks and NBFCs (Non-Banking Finance Companies). These NPAs are sold to the banks and NBFCs at a high discount thereby at least recovering part of the losses incurred due to the defaults. The banks and NBFCs then try and revive the stressed assets and sell them later at a higher price. In this manner both the seller and the buyer have benefits. However it is not as simple as it looks because the buyers of the NPAs

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The concept was given in The Narasimhan Committee Report as a consequence of which ARCIL (Asset Reconstruction Company India Ltd.) was established as the first ARC of India. ARCs are beneficial because they allow the financial institutions to concentrate on their core business rather than worry about bad debts. Moreover ARCs have toughness to recover the bad loans which PSBs cannot muster. ARCs work like mutual funds. They pool the various NPAs into different trusts from which they need to recover value till maturity which is usually 5 or 8 years. The ARC needs to have at least 5% investment in the trust. Any loss at maturity is borne by the trust holders proportionately. This approach has its own drawbacks. First, the seller of the NPAs needs to provide an annual management fee to the ARCs which is typically 1.5-2% of the acquisition value of assets. ARCs only need to hold the stressed asset

NIVESHAK fair value i.e. the market price in case of public companies. Both India and China have taken up the SDR method to deal with bad loans. World’s oldest bank – Monte dei Paschi, recently planned a debt to equity swap in hope of reviving its bad loans. S4A (Scheme for Sustainable Structuring of Stressed Assets): The S4A scheme launched by RBI is similar to the SDR scheme. Under S4A the banks/lenders have to separate the total debt into 2 categories: Unsustainable Loans and Sustainable Loans. Sustainable loans are those part of the debt which can be recovered through existing cash flows. Unsustainable loan is converted into equity or related instruments thereby reducing debt burden of the borrower as well as equity stake of the promoters. According to RBI, the sustainable loan should be at least 50% of the unsustainable loan. In a period where the Non-Performing Assets are on the rise and threaten the stability of lenders, the 3 R approach can be an effective measure to put a check on these stressed assets. RBI has aggressively implemented these schemes to deal with the rising NPAs problem. Only

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till maturity during which they continue to receive the management fees. Thus they have less incentive to revive the stressed asset since they’re already earning the management fees. Second, in many cases since the ARC is entitled to only 5% investment, the trust is subscribed by the original NPA seller too. In such cases the NPA risk is still with the seller but is merely classified as an investment in the trust. SDRs (Strategic Debt Restructuring): In June 2015 RBI introduced the scheme of Strategic Debt Restructuring in light of the increasing NPA problems. Under this scheme, the lenders will agree with borrowers on converting the entire loan or part of it into equity (shares in the company). This step effectively transfers the management of the company as well as the risks and losses bore into the hands of the lenders. Managementandoperationalinefficiencieslead to financial stress in companies. Through SDR scheme the management can be changed and efficiencies can be increased to rejuvenate the financial health of the company. The valuation of the debt to equity conversion is done at the

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Dr. Jim O’Neill Dhruvika Chawalla IIM Shillong Introduction Jim O’Neill was the chairman of Goldman Sachs Asset Management (GSAM). As a chairman, he was involved in helping guide all aspects of GSAM’s business around the world. Prior to assuming this role in September 2010, Jim was head of Global Economics, Commodities and Strategy Research. He serves on the European Management Committee and the Senior Diversity Council. Jim joined Goldman Sachs in 1995 as a partner, co-head of Global Economics Research and chief currency economist. Prior to joining the firm, Jim was head of research, globally, for Swiss Bank Corporation (SBC) from 1991 to 1995. He joined SBC in 1988. Prior to that, he was with Bank of America and International Treasury Management, a division of Marine Midland Bank. He is the creator of the acronym BRIC. Together with his colleagues, he has published much research about BRIC, which has become synonymous with the

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emergence of Brazil, Russia, India and China as the growth opportunities of the future. He is a member of the board of the Itinera Institute and has been on the board of Bruegel since its creation. He is a member of the UK-India Round Table and the UKIBC. He is chairman and one of the founding trustees of the London-based charity SHINE. He is also chairman of the Greater Manchester Local Enterprise Partnership Advisory Board. Jim serves on the board of Teach for All and a number of other charities specializing in education. He previously served as a non-executive director of Manchester United before it returned to private ownership in 2005.He earned a degree in economics from Sheffield University in 1978 and a PhD from the University of Surrey in 1982. He received an honorary doctorate from the Institute of Education, University of London, in 2009 for his educational philanthropy.

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BRIC “I got 2 out of 4 countries right”, says Mr BRIC, Jim O’Neill, in an interview. In 2001, when he coined the term ‘BRIC’, he forecasted China’s economy to grow by 7 percent on average per year until 2011. Despite the slowdown and the

stock market rout, China’s growth trumped this every year until 2015. Last year the economy grew by 6.9 percent with claims that the GDP numbers are inflated. India’s GDP has overtaken China, with its economy expanding by 7.3% in both 2014 and 2015. According to him, “Russia and Brazil are showing classic signs of the commodity curse and they have to get through it.” Both these countries are mired in recession with both the economies contracting by more than 3 percent and Brazil’s economy grappling with severe political unrest. However, he then corrects himself saying that both these countries have considerable problems that has disappointed them for years. On being asked about his opinion about India, he says that it is a really important time for India and that the whole BRICS concept was based on demographics and productivity. The demographics of India gets better in the next 15 to 20 years whereas China has started to deteriorate making it easy for India to grow at a bigger rate. He is also very optimistic about the Modi administration and admits that India, however, requires a boost in its productivity and growth rate. He even suggested the inclusion of BRICs to G7replacing it with G9-in order to allow more effective global policymaking. Anti-microbial Resistance About 5,00,000 people are suffering from multi-drug resistant tuberculosis (MDR-TB). MDR-TB is what happens when drugs lose potency against new stains of previously treatable infections. TB is now the world’s deadliest infectious disease, killing well over one million people every year, and MDR-TB continues to spread in low and middle income countries as health care providers struggle to combat it. At the G20 summit in China this year, he raised the issue of anti-microbial resistance signaling that the international community recognized it as a threat to global economic development and prosperity. The G20 also made the largest effort to replenish stalled pharmaceuticaldevelopment pipelines for new antibiotics and roll out diagnostic tests enabling clinicians to use the drugs they have more effectively. He lays out a strategy on how the UN must proceed to stymie AMR which is as followsFirst, the UN member states should begin to integrate their responses to AMR across all regulatory bodies and relevant sectors, it

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Economic Views Jim O’Neill claims not to commit to a specific financial ideology and is known for his ‘pragmatic, long term’ vision of currency markets. He improves upon traditional methods of data analysis by incorporating elements that ultimately make them more accurate. He has been called a ‘currency guru’ and has been hailed as ‘the top foreign-exchange economist anywhere in the world in the past decade’. For example, in 2004 he accurately predicted that the Euro would rise from $1.25 to $1.30 a year later; he was also right about the yen’s rise in the mid-1990s. He has been the head of global economics research and commodities and strategy research at Goldman Sachs. Along with BRIC, he even coined the terms MIKT for the countries of Mexico, Indonesia, South Korea and Turkey and MINT for Mexico, Indonesia, Nigeria and Turkey to differentiate between the variety of emerging economies calling them the next ‘economic giants’.

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NIVESHAK outcomes, and it should commit to putting AMR back on the General Assembly’s agenda every two years. This would create a framework for measuring global progress, while also sending a strong message that the UN is in it for a long haul, and that AMR should be a high priority for the next secretary-general. Finally, the UN should employ a Special Envoy for AMR to ensure continued progress in the coming years. The envoy would need to be defined as a high level position, authorized to work with countries and multilateral governance bodies to maintain momentum in the battle against AMR. Because of these initiatives, we can now be cautiously optimistic that AMR is getting the global attention it deserves. But this can be all too fleeting and if we fail to hold our leaders’ feet to the fire, the consequences for everyone could be deadly. Conclusion Having worked in finance for over a 30 years, he has brought in newer perspectives and changes to this world. Theresa May, British Prime Minister, suffered her first ministerial resignation this year when Jim O’Neill quit amid speculation that he was unhappy with her policies on China and other things. In his resignation, he wrote that he had joined the ministry with the intention of bringing about enhancement of his goals on antimicrobial resistance. He wanted to improve the country’s ties with that of China and India. He

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is now working on both these critical initiatives as a non-governmental person. He was assured that the ministry would work on the foundations laid by him. Jim O’Neill is a man of his words and has a strong thinking to back him. His contribution in the field of finance through the various initiatives has been immense.

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FinSight

RahineBose ISB OnOctober2011,whenRBIdecidedtoderegulate Savings Bank interest rates, it met with wide appreciation across the counters.Today standing in 2016 and when majority of the banks are facing the stress on their profitability, we need to sit and understand that whether this move has been correct. A bank majorly makes profit from the interest rate difference of lending and borrowing. The borrowing rate for a bank is the deposit rate through which it mobilizes funds to strengthen its balance sheet liability side. Unfortunately, today, faced with stress of falling NII and NIM due to NPA, banks are under pressure from the markets to hike up rates, to remain competitive. Deregulation thus seems to be a snake bite which will have its slow poisoning effect in the current scenario and can even force towards default, which is unheard of in India in recent years, and can have major financial ramifications in the overall banking industry.

I am sure RBI, doesnâ&#x20AC;&#x2122;t want a cartel to build up, where all major banks join hands and fix rates. This is inevitable. All the major banks like ICICI , SBI , HDFC , Axis , PNB are facing stress in terms of competition from mid-sized banks like Yes, Indusind, Lakshmi Vilas, RBL and the likes. When RBI wants the banks to become more profitable and to maintain a healthy Capital Adequacy Ratio, CASA needs to be the primary focus of majority of the banks. CASA is the deposit mobilization through Current Account and Savings Account and is a bread and butter business for a bank to survive. A typical savings account brings an NII of 1.8% and a Current Account pumps in around 5.5% NII. In case of Current account it is higher as bank is under no obligation to pay interest. These are typically the low cost deposit unlike the Fixed Deposit where the NII is as low as 0.50% because of the fact that there is a substantial interest payout

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which ranges between 7.5%-9.5% per annum in current market environment. Banks have always wanted to bolster their low cost deposit through enhancement of CASA and it is always desirable to have the share of the same hovering in 45%-50% range in its overall portfolio. Now, just imagine, when the banks are under pressure to increase the rates of these low cost deposit (savings account) , what is the magnitude of dent this is going to create on the overall profitability and the impact on NII and Net Interest Margin. There is a long term and short term impact of

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the deregulation .Well, one can say that bigger banks have not changed their rates and are still competitive, but for how long. Recently I can give a live example of a particular corporate which shifted its entire base of 46 crores pertaining to its CSR Trust funds (please note that large Trusts , NGO accounts , Religious bodies ,Society Act accounts , Schools , Colleges ,other such Not for profit organizations , Government Scheme Accounts are in the form of Savings Account and can have a huge impact on base of a bank if moved away, apart from small deposit individual accounts) to a new age bank like RBL which offers a rate of 7.1% . No matter what services its old relationship bank gave , it could not get the extension of the banking relationship from its board as there was a clear 3.1% margin of loss on savings bank interest rate . I only hope that the overall idea of financial inclusion and creating a healthy competition in the banking industry remains as the steady pillars on which RBI envisions the years ahead. Also , rather than benefitting clients it can also push the interest rates in the long run to settle at very low levels

NIVESHAK Some recent instances can be checked from these links wherein we see the leading banks reduce their MCLR rates big time - http://www. thehindubusinessline.com/money-and-banking/ sbi-icici-bank-corporation-bank-cut-mclr-byup-to-15-bps/article9284771.ece, http://www. bloombergquint.com/business/2016/10/31/ sbi-and-icici-banks-loans-get-cheaper. Similar reductions cannot be brought in by banks like Yes, RBL, etc which I was mentioning above and in the long term will have a bearing on their Asset Liability book which will lead to a

will ultimately impact its overall NII. The bigger banks in turn will reduce its lending rates and will attract more customer base and may also put stipulations on clients to have their transactional accounts with them if they have to avail the loans. This will have a boomerang effect on mid-sized banks as the same customers whom they attracted through higher savings bank rate would be swayed away by lower borrowing rates by large sized banks. Also the banks may thus put various slabs of interest rates favoring the clients maintaining higher balances and may drive down the overall rates to rock bottom levels. This will put a lot of financial stress on mid-sized banks in the longer run as it will be on larger banks in the short term.

mismatch. With stressed loans at a bulky USD 138 Billion in June, the negative impact of interest rate deregulation looms large3. We can safely assume that till the time India finds reliable alternatives in the form of a developed corporate bond market or other long term instruments, and till the time Banks improve their NPA books , there will be a very miniscule positive impact of deregulation of interest rates and will rather create financial stress in the industry entailing higher financial risk.

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, like what has happened in countries like South Korea , Taiwan , Singapore , Malaysia , where the rates are at abysmal low in the range of 0.20 % to 0.8% p.a . Now, one can question that how come this will happen. Quite simply put, once a bank increases its low cost deposit rates, it will have spiraling effect on its lending rates / asset servicing rates .With the current MCLR (Marginal Cost of fund based lending rates) policy, such increases will impact the cost of funds and will therefore create stress on the banks and negatively affect its asset growth and Credit to Deposit Ratio which

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FinView Cover Story

Dr. P. Saravanan

Asso. Prof. of Corporate Finance and Financial Planning Indian Institute of Management, Shillong

DIFFERENTIAL Voting Rights shares, popularly known as DVRs, are like ordinary equity shares, but with different voting rights. DVRs provide the shareholders fewer voting rights than that of ordinary equity shares. They are listed and traded in in the same manner as ordinary equity shares. Is it a good idea to have DVRs in your portfolio? Let us check it out. Whats difference between ordinary shares and DVRs? DVRs are similar to ordinary shares but carry lower voting rights and higher dividend. For instance, class ‘A’ DVR shares carry one tenth of voting shares which means one voting right for every 10 DVRs held. At the same time, this type of shares get 5% more dividend than that of ordinary equity shares. Generally, companies issue DVRs to prevent dilution of voting, hostile takeover and sometimes to fund large projects. DVRs are mostly traded at a discount owing to the lower voting rights they carry. Globally, the discount rate is 10-12% but in India, they are traded at a discount of 40-50%. Ordinary shares and DVR shares tend to follow the similar pattern, of course, with a gap in price, and volumes of trade in DVRs are lower. Currently, only a handful of companies such as Tata Motors, Gujarat NRE Coke, Pantaloon Retail and Jain Irrigation have issued DVRs. What are your views on DVRs buying? There are several important factors that a retail investor needs to consider while buying DVRs. As we have discussed, DVRs mostly trade at a discount and sometimes, the gap between DVR and ordinary shares is big, providing investment opportunities. However, this gap will shrink over a period of time when everyone realises this

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as an opportunity and increase in awareness of this product and price of the DVRs will go up. DVRs are a good investment opportunity for those investors who are keen to receive higher dividends and are not interested in attending annual general meetings of the companies and take part in decision making and voting process. Similarly, as an investor if you are bullish on the company’s long term prospects, you may look at investing in its DVRs as it provides an opportunity to receive higher dividend and also take part in the company’s growth via capital appreciation. However, before investing in DVRs, you should be convinced about the company’s future prospects and its fundamentals, and most importantly, management. Otherwise, there is no merit in giving up your voting rights for a lower price and it may not yield you the desired returns.

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FinFunda of the Month

Sir, what is Beta? Why is it so important to understand Beta in terms of finance? Beta is the measure of an asset’s risk in relation to the market, or to an alternative benchmark. It is used to determine the volatility of a portfolio or an asset in relation to the overall market. It is important to understand beta as in the last few decades, the Capital Asset Pricing Model has occupied a central position in most corporate financial analysis. The model requires three inputs in order to compute expected returns, namely, the risk free market rate, the expected risk premium for the portfolio, and a beta for the asset. Sir, how do we generally calculate Beta? Beta can be calculated in many ways, because the variables for input depend on certain factors like the investment time horizon, the index used, and several other factors. Mostly, practitioners calculate Beta by regressing the returns on an asset against returns on a stock index representing the portfolio, over a reasonable period of time, with the slope of regression being the beta of the asset. Beta : Covariance (ri, rm)/Variance of Market

Beta - Risk Factor Pratibha Sapra IIM Shillong

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to the market. If a stock has the beta greater than 1, it is said to be more volatile than the market. Similarly, a beta below 1 shows the lower volatility of the stock than the market. Though these lower beta stocks are less risky, they generally provide less opportunity for a higher return. Sir, we see that there are several online services that provide Beta. Why it is still advised to use personally calculated Betas instead of provided Betas? As stated above, the calculation of Beta is subject to several factors which are specific to a certain investor, like choice of market index, choice of return interval, etc. Betas provided by online services have unknown variable inputs, which might not be adaptive to the investor’s unique portfolio. An advantage of calculated beta is that the investor can gauge the beta’s reliability by calculating the coefficient of determination (or r-squared). This is a powerful tool to determine how well the beta measures risk. This statistic ranges from zero to one. The closer the r-squared is to unity, the more reliable beta is.

Beta could also be calculated by dividing the standard deviation of security’s returns by the standard deviation of benchmark’s returns. Which is then multiplied by the correlation of the security’s and benchmark’s returns. Beta: Correlation (ra, rm)* S.D(i)/ S.D(m) How does the Beta measure a stock’s market risk? Beta is generally used as a statistical measure of systematic risk (that is, the risk inherent to the entire market), and also as a measure of performance of a stock. The market is generally described as having beta of 1. The beta for a particular stock describes how much the stock moves in relation © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate. Instructions »» Please send your articles before 20th February , 2017 to niveshak.iims@gmail. com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 800- 1000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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