FROM EDITOR’S DESK Dear Niveshaks,
Niveshak Volume X ISSUE VII JULY 2017 Faculty Chairman
Prof. P. Saravanan
THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha
All images, design and artwork are copyright of IIM Shillong Finance Club Finance Club Indian Institute of Management Shillong
A lot has been happening around the World and in India as well. The Doklam standoff keeps everyone on their heels with India maintaining its calm and diplomacy. From the financial world, the SBI brought about a 50 basis point cut to its deposit rates which would hamper the amount of savings of the retail customers of the bank. The SEBI may ease the dispute settlement norms as requested by legal advisors and other stakeholders. The fiscal deficit soared to 81% of FY18 target in April-June owing to an increase in the food, fertilizer, and fuel subsidy. As per the Moodys poll, India to grow at a modest 6.5-7.5% over 1218 months before it reaches to the 8% GDP growth rate again. Infosys, TCS, Tech Mahindra see a shrink in the workforce for the first time, and the Snapdeal, Flipkart and Ola founders look at clawing back the lost ground from the investors. The Cover Story for the month of July discusses the ‘Insolvency and Bankruptcy Code’ enacted by the Government in 2016. In the words of Arundhati Bhattacharya, Chairman, State Bank of India, “Going to the Insolvency and the bankruptcy Code would be the new normal.” This code was brought in existence to come up with a better solution to the prevalent NPA issue of the banks, safeguard their interests and the welfare of other creditors and various stakeholders. The Bankruptcy Code shall supersede all the other existing laws with regards to the issue of insolvency in the country. Keeping in mind the focus of the present Government at the ‘ease of doing business,’ this Code shall improve the ranking of India at the global level by reducing the time to sort the Insolvency issues in the country which accounts for a staggering 4.3 years to resolve presently. The Article of the Month, ‘Universal Basic Income,’ talks about a problem quite germane to India and globally too. The idea of UBI (Universal Basic Income) stresses upon the importance of achieving social cooperation and justice as well as a robust financial system by reducing income disparities. The article further compares the UBI with the other prevalent top six welfare schemes of India, critically going through its advantages and limitations when pitted against them. It poses apposite questions of whether such schemes be implemented in India and is a fine read to the reading masses. The FinSight and FinGyaan sections discuss of the ‘State of Economies of the World’ and ‘Tail Risk in Sub-prime Crisis’ respectively. FinGyaan deals with the problem of carrying a tail risk being acute especially in the modern financial system. It mentions of the sub-prime crises as a typical story of classic informational and distorted conflicting incentive problem among the stakeholders of the security market and underpricing of the tail risk leading to a financial disaster. The FinSight mentions of the macroeconomic scenario of the world, discussing of the slump in Oil prices, the present situation in the three major countries of South East Asia, China, India and Japan and their impact on the world economy. In the FinaFame section, one gets to know more about Mohammad Yunus - The Man who was the visionary and developer of the one of a kind micro-credit idea, the Grameen Bank. Awardee of the Nobel Prize, the article takes the reader through the personalities life history and his achievements. The Classroom section of the July issue briefs the reader about the ‘Arbitrage Pricing Theory’ and how it helps in predicting an assets’ return using various risks attached to it. Thank you. Stay Invested!
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 Times
04 The Month That Was
Cover Story
Article of the month
10 Universal Basic Income: An Idea Whose Time Has Come?
13 The Insolvency and Bankruptcy Code 2016
FinGyaan
FinView
FinFame
Classroom
27 Malcolm Athaide, Senior 17 Tail Risk in Sub Prime Crisis President and Chief Risk Officer, Yes Bank
20 Muhammad Yunus
FinSight
24 State of the economies in the world (India, China and Japan
28 Arbitrage Pricing Theory
The Month That Was
4
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The Niveshak Times SEBI may ease dispute settlement norms Under consent mechanism norms, someone who anticipates penal actions by SEBI can settle the matter in question by offering SEBI a fee. If this committee agrees with the decision of the internal committee, the file is sent for final approval to a whole-time member of SEBI. In 2016, SEBI had said that only those infractions that have market-wide impact and where the losses to investors are significant can’t be settled under the mechanism, in order to bring down pending cases. “Every case should be allowed to be settled through consent mechanism,” said Sandeep Parekh, founder of Mumbai-based law firm Finsec Law Advisors and a former SEBI official. For these reasons, the 2016 amendment didn’t help in solving the huge pendency of cases at Sebi and the case backlog kept rising.
is owned by T Rowe Price. However, an exception was made after the US-64 debacle and when SBI, PNB, BoB and LIC were asked to buy into UTI, they were given a one-time waiver even though they run mutual funds of their own. Reliance Nippon Life AMC, Birla Sun Life AMC and SBI MF are currently ahead of UTI AMC on the basis of their AUM as in the April-June quarter. T Rowe Price, however, has communicated that it is willing to dilute to below 26% if there is a broader listing, the mutual fund will be board-managed and it does not want any veto power. As per UTI’s shareholder agreement, shareholders have the right to direct the firm to appoint a banker to establish the feasibility of listing — ICICI Securities was appointed for this after BoB, PNB and US firm T Rowe Price invoked this clause.
India raises concerns around Chinese firm Shanghai Fosun Pharmaceutical Groups takeover of Indian drugmaker Gland Pharma: Source India’s concerns over the Gland-Fosun deal are not, however, a result of the border tensions, the source said. India has privately raised objections to Chinese firm Shanghai Fosun Pharmaceutical Group’s proposed $1.3 billion takeover of Indian drugma ker Gland Pharma, a source familiar with the matter said on Monday. Chinese authorities have approved the takeover of the injectable drugmaker, but it is awaiting a nod from the Cabinet Committee on Economic Affairs of India, Shanghai Fosun said in a statement to Reuters. Shanghai Fosun Chairman Chen Qiyu said in a filing to the Hong Kong bourse on Tuesday that India had not informed Gland Pharma of the result of its review of the acquisition. Malik told Reuters that report was “totally speculative” and that the matter had not yet come before the committee.
SBI cuts deposit rates by 50 bps; know what it means for you As per RBI guidelines, banks must offer the same interest rate on savings accounts where the balance is up to Rs 1 lakh. For balances more than Rs 1 lakh, banks are permitted to offer differentiated rates. The RBI had in October 2011 deregulated the interest rate on savings banks deposits. The bank’s domestic advances grew 7.9% in 2016-17 to Rs 13.4 lakh crore. As such, the lender will now save approximately Rs 4,230 crore in interest payments annually.
UTI to take one more shot at listing, LIC remains on the fence SBI, BoB and PNB hold stakes of 18.5% each in in UTI AMC, while remaining 26%
July 2017
Fiscal deficit soars to 81% of FY18 target in April-June The PD surged to Rs 3.08 lakh crore or 1,314% of the 2017-18 target compared to 527% a year ago. The food subsidy spend in the first three months were 64% of the allocation of Rs 1.45 lakh crore for 2017-18. While Rs 1.37 lakh crore was released as food, fertilizer and fuel subsidies in the first three months of this year, only `93,500 crore had been spent on this front a year ago. In AprilJune this year, the Centre released a food subsidy of about Rs 92,900 crore, which was
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three months of this year, only `93,500 crore had been spent on this front a year ago. In April-June this year, the Centre released a food subsidy of about Rs 92,900 crore, which was 54% higher than Rs 60,200 crore incurred a year ago. The Centre’s net tax revenue, after transfer of states’ share, was Rs 1.77 lakh crore, or 14.5% of the 2017-18 target; a year ago, it stood at 14.9% of the full-year target. Moodys poll: India to grow 6.5-7.5% over 12-18 months However, it will take 3-4 years for India to return to the 8% growth trajectory, the poll said. While most respondents viewed that the GST will support faster growth in the next 12-18 months, they were divided on the precise estimate of a growth boost due to the indirect tax reform. The Indian economy will likely grow in the range of 6.5-7.5% over the next 12-18 months and the growth momentum will get support from the goods and services tax (GST) regime, according to the views held by a majority of respondents in a poll by Moody’s. However, over 200 market participants, polled by Moody’s and its affiliate ICRA, were confident of India’s stable economic growth prospects. The poll found that asset quality risks linger for banks and credit growth will remain subdued.
and SoftBank, which have together invested more than $5.5 billion in Indian internet companies. At two of India’s iconic Internet startups, Flipkart and Snapdeal, the founders are fighting hard to keep control of their companies or striving to come back in more prominent roles after a period in which two powerful investors, Tiger Global Management LLC. Infosys, TCS, Tech Mahindra see workforce shrink for the first time The five firms, which together employed 984,913 people at the end of the June quarter, saw their workforce shrink by 1,821 people. Tata Consultancy Services Ltd, the country’s largest software services firm, saw its workforce decline by 1,414 people to 385,809 employees at the end of June quarter, as against 387,223 at the end of the previous quarter. Infosys Ltd saw a net decline of 1,811 people while Tech Mahindra Ltd, the fifth largest company, saw its workforce shrink by 1,713 people. For the first time, three of the five largest IT companies saw their workforce shrink in the quarter ended 30 June. This means that India’s 10 largest IT firms added 205 employees in April-June period to take their total workforce to over 1 million employees at the end of June 2017.
Snapdeal, Flipkart, Ola founders look to claw back lost ground from investors Yet, Flipkart, Snapdeal and even Ola have failed to live up to investor expectations to varying degrees. The decision to end talks with Flipkart marked a win for the Snapdeal founders, both of whom were against the sale to their arch-rival from the start. Indeed, the Flipkart-Snapdeal merger and an accompanying SoftBank investment deal with Flipkart were being pushed by these two investors primarily for their own benefit. The two investors hit hardest by the struggles of these start-ups are Tiger Global and SoftBank, which have together invested more than $5.5 billion in Indian internet compa© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
The Month That Was
The Niveshak Times
5
6
NIVESHAK
33000.00
2,500
BSE
DII
FII 2,000
32500.00
1,500 1,000
BSE
32000.00
500 31500.00
0 -500
31000.00
FII, DII Net turnover (in Rs. Crores)
Market Snapshot
Market Snapshot
-1,000
31/07/2017
28/07/2017
27/07/2017
26/07/2017
25/07/2017
24/07/2017
21/07/2017
20/07/2017
19/07/2017
18/07/2017
17/07/2017
14/07/2017
13/07/2017
12/07/2017
11/07/2017
10/07/2017
07/07/2017
06/07/2017
05/07/2017
04/07/2017
03/07/2017
30500.00
-1,500
Source: www.bseindia.com www.nseindia.com
MARKET CAP (IN RS. CR) BSE Mkt. Cap
1,25,96,812 Source: www.bseindia.com
CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ SGD 4.00% 3.50% 3.00%
INR/1 USD
Euro/1 USD
GBP/1 USD
64.20 75.82 58.14 84.66
LENDING / DEPOSIT RATES Base rate Deposit rate
9.10% - 9.60% 6.25% - 6.90%
RESERVE RATIOS CRR SLR
4.00% 20.00%
47.33 JPY/1 USD
SGD/1 USD
POLICY RATES Bank Rate Repo rate Reverse Repo rate
6.50% 6.25% 6.00%
2.50% 2.00% 1.50% 1.00% 0.50% 0.00%
Source: www.bseindia.com Date as on July 31st
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BSE Index
Open
Close
% change
Sensex MIDCAP Smallcap AUTO BANKEX CD CG
30922 14644 15411 23408 26278 16013 17076
32515 15390 16094 24463 28387 16467 17973
5.15% 5.09% 4.43% 4.51% 8.02% 2.84% 5.25%
FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK
10428 14190 9834 11374 13203 2226 8113 2043 5524
10094 14195 10438 12426 14190 2324 8687 2186 5897
-3.21% 0.03% 6.15% 9.25% 7.48% 4.4% 7.08% 7.00% 6.76%
% CHANGE
% Change TECK, 6.76% Smallcap, 4.43% REALTY, 7.00% PSU, 7.08% POWER, 4.41% OIL&GAS, 7.48% MIDCAP, 5.09% METAL, 9.25% IT, 6.15%
1 Healthcare, 0.03% FMCG, -3.21%
Consumer Durables, 2.84%Capital Goods, 5.25% AUTO, 4.51% Sensex, 5.15%
BANKEX, 8.02%
Market CoverSnapshot Story
Market Snapshot
7
NIF PERFORMACE EVALUATION JulyJuly 31, 2017 2017 AsAs onon 31th
July Month's Performance of NIF 205
106
195
105
185
104
175
103
165
102
155
101
145 135
100
125
99
115
98 97 03-Jul-17
Performance of Niveshak Investment Fund since Inception
105 95 10-Jul-17 Scaled Sensex
17-Jul-17
24-Jul-17
31-Jul-17
Scaled NIF
Total Investment Value : 10,00,000 Current Portfolio Value : 19,23,383 Change in Portfolio Value : 92.33% Change in Sensex : 51.94%
Sensex Scaled values
Portfolio Scaled Values Value Scaled to 100
Risk Measures: Standard Deviation NIF: 21.23 Standard Deviation Sensex: 11.21 Sharpe Ratio : 4.16 (Sensex : 4.87) Cash Remaining: 141,150
Comments on NIF’s Performance & Way Ahead: The S&P BSE benchmark index gained 5.44% in July to start the third quarter on the positive note where as NIF also got momentum of above 4%. India’s large-cap equity benchmark index recorded 17 new all-time highs during July, setting platform for the month to close at a record level of 32,515. Unlike June’s results, this month large-cap index outperformed mid-cap segment, which in turn outperformed smallcap segment. This Month NIF was revised from top to bottom considering flat performance of Large caps from past a few months. Considering negative outlook for IT industry due to US Policies, NIF team reduced exposure in IT sector to zero where as exposure in Pharma sector was significantly reduced. Driven by the “Housing for all” scheme of NDA government and other positive policy frameworks, NIF team expects a big boost in building and construction sector in the near future. Hence, associated sectors such as adhesives, tiles & marble and Housing Finance sectors are likely to be benefitted from the same. For NIF, due to increased cess on cigarettes under GST, share price of ITC witnessed biggest one day fall for the year, which in turn significantly affected the performance of NIF in this month. Also, Pharma sector continues to feel the pressure due to FDA restrictions in the US market, which again had an adverse impact on the performance of NIF this month.
NIVESHAK INVESTMENT FUND SECTORAL WEIGHTS
INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE Monthly Performance
21%
-40% -20% 0% 20% 40% 60% 80%
15% 4%
Thirumalai Chem Asian Granito Maruti Suzuki
9%
8%
Speciality Rest Westlife Dev
9%
6%
Avenue Supermar Manappuram Fin PVR
14%
Paramount Comm ADF Foods
Auto
NELCO Blue Dart Indiabulls Hsg PPAP Automotive NOCIL Guj Flourochem Titan Company
14%
Building and Construction
Chemical Financial Services
Entertainment
Pharma
Telecom
FMCG
Misc.
Lupin ITC
TOP GAINERS FOR THE MONTH • Paramount Communication (+56%) • Thirumalai Chemicals (+48%) • NOCIL (+27%)
HDFCBank GodrejConsumer Dr Reddy's COLPAL Britannia
TOP LOSERS FOR THE MONTH
BharatForg 0%
2%
4%
6%
8%
10%
Individual Weights
• ITC (-17%) • Blue Dart (-11%) • Dr. Reddy’s Laboratories (-11%)
10
Article of the Month Cover Story
NIVESHAK
Universal Basic Income: An Idea Whose Time Has Come? SaswatSatpathy XIMB Introduction The idea of a Universal Basic Income (UBI) is nothing new and has been around for a few centuries now. First proposed by EnglishAmerican political activist Thomas Paine in his seminal works, Rights of Man and Agrarian Justice, he laid the ground work for this idea by stressing upon the importance of achieving social cooperation and justice as well as a robust financial system by reducing income disparities. The UBI, as understood today, should have three basic and distinguishing characteristics: First, It
JULY 2017
should be truly “universal� and not targeted, simply because of the fact that people fall in and out of poverty and it becomes a challenge to identify the rightful recipients of subsidies. Second, it should be carried out through cash transfer instead of in-kind transfer (food stamps or grains provided through PDS). Third, the scheme should be unconditional in nature i.e. it should not be tied to exhibiting certain behaviour. In India, UBI became a hot topic of discussion when the Economic Survey of 2016-17 hinted
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The current state of the welfare schemes The government of India currently runs 950 central sector and centrally sponsored sub schemes in India accounting for about five percent of the GDP by budget allocation. If you add to this the number of schemes that are run by the states, the total amount of money spent on welfare schemes would increase drastically. If we consider the top six welfare schemes in the country- Pradhan Mantri Awas Yojna (PMAY), Sarva Shiksha Abhiyan (SSA), Mid Day Meal (MDM), Pradhan Mantri Gram Sadak Yojna (PMGSY), Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and Swachh Bharat Mission (SBM) and map the districts where there have been shortage of funds for these schemes, a case of acute misallocation would emerge wherein the poorest districts from the states of UP, Bihar, Chhattisgarh, parts of Jharkhand, eastern Maharashtra and Karnataka, among others, account for a large
share of the poor and receive less-than-equal share of the resources. There have been severe repercussions due to misallocation of resources, the most severe and debilitating one being referred to as the “exclusion error”, a situation where the genuine poor find themselves completely cut off from the welfare schemes of the government. The states of Odisha, Rajasthan, U.P, M.P and Bihar, which account for about half of the poor in the country, are recipient of just 1/3rd of the resources from MGNREGS. Similarly, an estimate from 2011-12 showed that 40 percent of the bottom 40 percent are excluded from the PDS. Though there has been a 20 percent drop in the exclusion error of the PDS since then, a large part of the population that deserves to come under the safety net of these schemes remain unprotected. How can a UBI help? The problem of misallocation would effectively cease to exist as a UBI completely bypasses the need to segregate the poor from the non poor, which is one of the key shortcomings of the current system and a burden for the administration. The simplicity of the process, where the beneficiaries can withdraw money from their accounts as and when they please without having to jump through various bureaucratic hoops, cannot be overstated. This also implies that the success of the scheme is far less dependent on local bureaucrats as opposed to other schemes. A UBI can even act as a basic form of insurance.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Article of the Month Cover Story
that such a scheme was being conceptualised by the government. The Economic Survey called it “a radical and compelling” paradigm shift in thinking about both social justice and a productive economy. Though the UBI,as put forth by the Chief Economic Advisor Arvind Subramanian, is premised on the idea of social justice, administrative efficiency, poverty reduction and employment, several challenges remain unattended which include the problem of universality, curtailing the fiscal costs and difficulty to exit from existing welfare programmes to name a few.
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of such individuals being able to get help from the authorities. A UBI can unlock the access to formal credit for farmers by removing credit constraints in the form of higher income. From the graph shown below (Source: Debt and Investment Survey 2013), it is evident that as one moves along the consumption spectrum, the proportion of farmers taking informal loans falls and formal loans take over. The inference that can be drawn from the sharp discontinuity at the 78th percentile is that if consumption level of farmers could be increased to this level, there might be a significant jump in the access to formal credit. Arguments against UBI As a cash transfer programme, some experts argue that a UBI will lead to increased spending on social evils such as tobacco, alcohol, etc. If UBI is expected to replace other in-kind programs, then this is a crucial point which the government needs to address. While some researchers have found that spending on “temptation goods� forms a small portion of the overall budget as overall consumption increases and hence it would be a fallacy to suggest that a UBI will lead to increase in temptation goods consumption, it is still too early to come to a conclusion. Another argument against UBI is the threat of people dropping out of the labour market. As cash transfers increase the income of households for each unit of labour it already supplies, the households can afford to reduce labour without affecting the aggregate
JULY 2017
A controlled trial of the UBI was conducted in a few villages of Madhya Pradesh where results proved that there was no impact on the supply of labour. Although these results look promising, they do little to remove any apprehensions on the overall labour supply once the UBI is launched all over the country. But the biggest hurdle, as some economists have pointed out, is the cost to the exchequer once a UBI is doled out. If a monthly sum of Rs.1090 is given to every individual, which is the income equivalent of the poverty line (the Tendulkar committee poverty line) in 201516 prices, then the total amount would be equivalent to 12.5 percent of the GDP, which is equal to the size of the Union Government’s budget. However, it may not be a necessary condition for the UBI to match the poverty line as studies conducted by the United Nations have shown that a lower level of income transfer can significantly improve the lives of the poor. Conclusion There are many who regard UBI as the answer to poverty eradication and a means to bring down the complex and inefficient welfare schemes that have long been mired by bureaucratic and administrative inadequacy. But at the end of the day, the government must take a call whether such a large scale change and shift from the status quo is worth the cost because in life, there are no free lunches.
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Cover Story
The Insolvency and Bankruptcy Code 2016 FinanceClub IIM Shillong ”Going to the Insolvency and Bankcruptcy Code (IBC) would be the new normal”
- Arundhati Bhattacharya, Chairman, State Bank of India
Introduction: The Insolvency and Bankruptcy code, 2016 (IBC) legislated by Narendra Modi led NDA government consolidates the existing framework for insolvency and bankruptcy in a single law. Earlier, there were various overlapping laws which had adjudication over financial failures in India which made it very difficult to initiate recovery proceedings against defaulters. Also, willful defaulters were using a net of
the erstwhile legislative framework as an instrument to delay or escape the recovery and liquidation proceedings. Hence, there was an impeccable need for a single sound legislature which could expedite the recovery and safeguard the interest of banks, creditors, and various stake holders. Provisions of IBC 2016 override or supersede other existing laws on the matters related to bankruptcy and insolvency.
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Cover Story
The Objective section of IBC 2016 “An act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.” Why do we need a strong IBC 2016? In the World Bank ‘Ease of Doing’ business index, resolving insolvency is one of the main parameters among others. As per the World Bank report, insolvency resolutions in India takes 4.3 years on an average to liquidate a company which is the longest time compared to other countries. The time to resolve insolvency i.e. the time from the filing for insolvency suit until the resolution is just six months in the case of Japan, eight months in Singapore, one year in the United Kingdom, and 1.5 years in the United States. Let’s look at India’s standing in World Bank insolvency parameters: IBC 2016 seeks to resolve insolvency and bankruptcy issues in a time bound manner.
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However, in spite of the various efforts, IBC code has been ranked at 136th position in the year 2017, a rank down from its position in the year 2016. Further, a stable and sound banking system is a prerequisite for the healthy growth of an economy. In recent years, Indian banking system has been plagued with the problem of NPA’s. NPA’s have significantly impacted the balance sheet of leading banks in the country, and willful defaulters have added to the woes of the banks. A look at the statistical figures from the RBI and Indian Express which cogently explains the gravity of the situation; even though the corporate advances have seen a decrease from March 2016 to September 2016, the gross NPA’s have risen continuously. Hence, IBC had become the need of the hour to save Indian banking system primarily from defaulted repayments of the large corporate borrowers accounting for lakhs of crores of rupees. Backed by the regulators, banks are now pursuing dissolution of these willful defaulters at the earliest, a directive that is likely to save the bleeding balance sheets of banks. How will IBC 2016 help? One of the essential features of the IBC 2016 is that it allows loan providers and creditors to assess the financial viability
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Cover Story
of a debtor as a corporate decision, and decide upon a concrete plan for either its revival or a speedy liquidation. The Code also creates a new institutional legislative framework consisting of a regulatory body (Insolvency and Bankruptcy board) which includes insolvency professionals, information utilities as depository or record of the financial information and sound adjudicatory mechanisms, that will facilitate a smooth, organized and time bound insolvency proceedings and liquidation. IBC 2016 coherently outlines the corporate liquidation process as follows:
of the board of directors shall vest with insolvency professional. • Adjudication authority will order moratorium period which shall be observed as clam period i.e. during the moratorium period no judicial proceedings can be taken against the company or its assets. The focus during moratorium period is on running the Company on going concern basis as per the resolution plan prepared and approved by the Committee of creditors
• Any financial creditor or operational creditor(s) can initiate insolvency resolution proceedings (IRP) on default of interest payment or debt at the National Company Law Tribunal (NCLT). The defaulting corporate, suo motu, its employees or shareholders, may also initiate IRP.
• The creditor’s committee contemplates various proposals for the revival of the company and must decide under stipulated time of 180 days (subject to a one-time extension by 90 days) whether to proceed with a revival plan or liquidate the company. Committee of creditors shall decide as per their voting share. If 75% of the creditors approve any resolution, it shall be implemented.
• On receipt of the application, regulatory body shall appoint an insolvency professional (IP) who shall take over the management of the company. All powers
• Failure to approve revival plan shall result in the liquidation of the company. Insolvency professional shall act as a liquidator and form an estate of the assets
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and shall determine the value of creditors’ for public comment on the code which shall claim. be open until 31st December. Modifications All the proceedings from liquidation shall based on the recommendation to the regulations would be made by 31st March be distributed in the following order: 1. IRP costs (Fees of insolvency professional) and should be effective from 1st April 2018. If the bylaws of code are implemented in 2. Secured creditors and dues up to 24 letter and spirit, it is bound to bring about a months of the workforce significant impact on the Indian economy. 3. Other employee’s salaries/dues up to 12 months 4. Financial debts including unsecured creditors 5. Government dues up to 2 years 6. Any remaining debts and dues 7. Equity Will IBC 2016 succeed in its objective? According to a report, successful implementation of IBC 2016 has potential to release about 25000 crores of rupees in next five years. Backed by the regulatory empowerment of IBC 2016, RBI recently directed the various banks to initiate IRP against 12 debt ridden corporate defaulters which include the likes of Bhushan Steel, Bhushan Power & Steel, Essar Steel, Monnet Ispat & Energy, ABG Shipyard and Lanco Infratech. RBI directives were challenged by Essar steel in the Gujrat high court on the ground of “arbitrary distinction” which was later turned down by the court. Though the law has paved the way for banks and creditors to initiate time bound recovery, however, implementation challenges can still be observed. IBC 2016 face various challenges such as adoption of IBC 2016 in ecosystem, addition work burden on Debt Recovery Tribunals and NCLT, conflicts among the committee of creditors and limited market or liquidity for secondary industrial assets. To resolve all the implementation issues, the Insolvency and Bankruptcy Board of India (IBBI) has called
JULY 2017
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FinGyaan Cover Story
Tail Risk In Sub-Prime Crisis! AnilShankar T A PAI MANAGEMENT INSTITUTE The roots of the latest depression the world faced, the sub-prime crisis is all, but too familiar. This also was a typical story of classic informational and distorted conflicting incentive problem among the stakeholders of the security market. All of it combined created a market which under-priced the tail risk, which resulted into a credit boom. Of the important considerable aspects only the names have changed to sub-prime crisis and CDOs from LDC and south sea companies. The roots of the crisis was the transfer of risk of default on mortgaged backed securities (housing market) from mortgage lenders to global financial market which included major banks, insurance companies, hedge funds etc.
The global financial market accepted it willingly because it underestimated the associated tail risk. Mathematically, tail refers to the extreme end portions of the distribution curves. In a bell curve, the returns with highest probability are bulged at the centre and the lower probability returns are at the ends of the distribution curve. Therefore tail risk is a risk of lower probability. The financial bodies investing in these mortgage backed securities placed their bet against a tail risk of default. The probability of default is very low here for two reasons; the securitization of theses mortgaged backed securities was done through tranches and only a nationwide distress would trigger such a default. In a normal conditions the correlation between
Š FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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two different mortgaged defaults is very low but the economic stress increased this correlation drastically, which triggered the collapse. Another attribute of the tail risk and the most important one for this case is it is very costly when it’s realized, so no matter how feeble their probability is, they can’t be ignored. These mortgaged backed securities masked their risk with surprisingly high ratings. Now, why were the sub-prime loans so highly rated? This was basically done by tranches which pooled a loans with different default risks. Tranches also ensures that highly rated creditor is paid the principle and the returns before the low rated creditor. Thus making it seemingly less risky but the underlying risk still being the same. Almost 60% of these mortgaged backed securities were AAA rated, while generally 1% of corporate bonds were AAA rated. These Highly rated tranches of mortgage backed securities seemed more attractive to investors since it provided higher
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attractive to investors since it provided higher returns than other investment instruments with such ratings. But neither the rating agencies nor the investors could anticipate the level of correlation between defaults of tranches. Next is the incentives for financial managers to bet on such risky instruments. It is the responsibility of financial economist to come up with careful econometric models which gives an appropriate or market driven returns for a certain level of risk. And the financial managers are expected to outperform this bench mark more often than not. The investors also rewarded the financial manager whose returns beat the appropriate benchmark. This excess return over the benchmark is known as alpha in the financial jargon. Many a times, when financing is in plenty, it creates an immense level of competition between these managers, and thus pushing the fund managers to take inexorable risk in the search of alpha. As a tail risk is realized rarely,
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is realized rarely, the possibility of it being hidden is very high. Therefore many of the managers didn’t realize that they were taking tail risk. What is particularly malign about tail risk is, when taken in high doses, it generate incentives to take more of it, resulting to an irrational frenzy. What was incredible about this crisis was that global players of financial market including those who originated these investment instruments, held on to a significant portion of it. Any firm which has originated and held a particular type of asset, is unsurprisingly reluctant to put an end to the boom the asset has ridden. In the financial firms, the role of risk managers was subdued. Risk takers were rewarded and risk aversion was considered conservative. The role of risk manager is to adjust every firm’s return down for the risk it takes. In most of the excessively aggressive firms which were in turmoil after crisis hit, risk management was used mainly for regulatory compliance rather than as a management control. The risk management designations were also paid significantly less than other operating designations. This ensured that risk manager as a profile attracted less talented individuals. The pattern of risk taking in these aggressive banks paid off for a short term. The management of these firms failed to realize that these small successes were mostly based on luck and how they collectively were working to create the platform of their own demolition. It is hard to believe that the debt holders didn’t realize the risk especially after equity options signalled trouble. But the exposure of the risk was so penetrated into the market that the debt-
believed that government would intervene. This was backed by two reasons. Firstly unsecured bond holders didn’t worry because of direct government intervention in housing and credit market. Secondly the firms involved were too systematic and the government couldn’t let them fail. The government provided impetus to the housing sector, expecting to boost consumption, without analysing the consequences. It introduced tax measures to encourage home ownership. The government has done more than simply support the mortgage market. It shifted the risk to the tax payers that should have been borne by the private investors. The problem of carrying a tail risk is acute especially in modern financial system where fund managers are pushed to produce risk-adjusted returns. But still the tail risk is dangerous for two reasons. They are hard to recognize even for those who are taking them. And once enough of tail risk is taken it becomes impossible for government to intervene and mitigate the fallout. It is the combination of high incentives for extraordinary performance that are innate in the modern financial system and the reluctance of an elegant government to let a slump in the financial sector drag down ordinary citizens the prospective for pursuing tail risk and periodic, costly meltdown.
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Muhammad Yunus RAMAN MALIK
IIM Shillong Muhammad Yunus, the visionary and developer of the one of a kind microcredit idea, was born at a dark town in Chittagong in June 28, 1940.He was the 3rd amongst the 14 children of Sufia Khatun and Mohammed Dula Miah, a jewellery merchant. The Grameen Bank, which Muhammad Yunus established and shares the Nobel Peace Prize 2006 with, now has 2,211 branches covering 70,370 towns and 6.5 million individuals. Representation with Grameen Bank Grameen Bank (GB) has move out of conventional banking by expelling the requirement for collateral and created a
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accountability, mutual trust, and creativity. GB gives credit to the poorest of the poor in Bangladesh, with no security. At GB, credit is a financially savvy weapon to battle poverty and it serves as a catalyst in the overall improvement of financial states of the poor who have been kept outside the banking circle on the ground that they are poor and thus not bankable. Professor Muhammad Yunus, the developer of “Grameen Bank” and its Managing Director, reasoned that if monetary assets can be made accessible to the needy individuals on terms and conditions that are suitable and sensible, “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”
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Grameen Bank’s impact on its poor and formerly poor borrowers has been reported in numerous studies by organizations like World Bank, the International Food Research Policy Institute (IFPRI) and the Bangladesh Institute of Development Studies (BIDS). Grameen Bank and Muhammad Yunus Yunus initially included himself in battling poverty amid the 1974 starvation in Bangladesh. Yunus found that little monetary help could have a huge effect
Bangladesh. Yunus found that little monetary help could have a huge effect to a poor individual’s ability to survive. The first credit he gave was of $27 from his own pocket. He lent this money to 42 female basket weavers in the town of Jobra, close to Chittagong University. He found that they could repay the sum rapidly by selling their products in the market. Before this, they used to take credits from village loan-sharks with higher interest rates. In few cases, the loan costs remained at an amazing 10 percent a week. However, banks were not interested in giving minor credits to the deprived as they considered them to be awful borrowers and it will increase their NPA. In 1976, Yunus propelled the exercises of Grameen Bank and began offering credits to poor Bangladeshis without taking into consideration the instruction of banks and the government. He carried on giving out micro-loans and in 1983, he formally shaped the Grameen Bank, which means village bank, on the principles of trust and solidarity. The Grameen Bank’s technique for giving out advances is currently utilized as a part of projects in 58 nations, including the likes of US, Canada, France, the Netherlands and
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With more than eight million clients, Grameen has in reality prospered. The bank has loaned $10.3 billion since it started operations in 1976 and has a credit recuperation rate of around 97%. It has multiplied the quantity of its workplaces in the course of recent years to more than 2,900 and representatives to somewhere in the range of 23,000, including more than 13,000 credit officers, almost all ladies. The average credit per borrower is $123, with the cost per borrower throughout the years drifting amongst $8 and $13 every year. As of 2009, Grameen had $1.5 billion of advantages and a return on equity of 5.64%.
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The origin of Grameen Bank can be followed back to 1976 when Professor Muhammad Yunus was the in charge of the Rural Economics Program at the University of Chittagong, propelled an action research project to look at the likelihood of outlining a credit delivery framework to provide banking facilities to the rural poor of the country. The Grameen Bank Project (Grameen signifies “village” in Bangla) came into operation with the accompanying goals: -extend banking facilities to poor men and women; -eliminate the exploitation of the poor by money lenders; -create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh; -bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and -reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income” The action project showed its power in Jobra and some of the neighbouring villages amid 19761979. With the sponsorship of the central bank of Bangladesh and backing of the nationalized commercial banks, the venture was reached out
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to Tangail (an district north of Dhaka, capital of Bangladesh) in 1979. With the accomplishment in Tangail, the venture was reached out to several other states in the nation. In October 1983, the Grameen Bank Project was changed into an independent bank by the government of Bangladesh on his conviction that credit is a fundamental human right. Today, Grameen Bank is owned by the poor of the country whom it serves. Borrowers of the Bank have 90% of its shares, while the remaining 10% is possessed by the government. In the late 1980s, Grameen began to enhance by going to underutilized fishing ponds and irrigation pumps like profound tube wells. In 1989, these differentiated interests began developing into partitioned associations. The fisheries got to be Grameen Motsho (“Grameen Fisheries Foundation”) and the water system one became Grameen Krishi (“Grameen Agriculture Foundation”). In time, the Grameen activity developed into a multi-faceted gathering of gainful and non-benefit projects, including ventures like Grameen Trust and Grameen Fund, which runs Grameen CyberNet Limited, Grameen Software Limited, Grameen Knitwear Limited as well as Grameen Telecom, which has a stake in the greatest telephone organization in Bangladesh, Grameenphone. The achievement of the Grameen microfinance demonstrate motivated similar endeavours in around 100 developing countries and even in developed nations including the United States.
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Recognition He is one of just seven people to have won the Nobel Peace Prize, Presidential Medal of Freedom, and the Congressional Gold Medal. Other outstanding honours incorporate the
Ramon Magsaysay Award in 1984, the World Food Prize, the International Simon Bolivar Prize in 1996, the Prince of Asturias Award for Concord and the Sydney Peace Prize in 1998, and the Seoul Peace Prize in 2006. Furthermore, Yunus has been granted 50 honorary doctorate degrees from universities of over 20 countries, and 113 international awards from 26 unique nations including state honours from 10 countries. Bangladesh government drew out a commemorative stamp to respect his Nobel Award.
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Many microcredit ventures hold Grameen’s emphasis of lending to ladies. More than 94% of Grameen credit have gone to ladies, who experience the ill effects of destitution and who are more probable than men to dedicate their income to their families.
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State Of Economies Of The World (India, China and Japan) Pankaj Soni
SYSITS The era of globalization has brought a state where one country’s downfall could cause adverse impact on the global economy. An economic downturn of a country could affect many countries directly or indirectly. Let us turn the pages of history where in 2008, US crisis dumped the global economy and had adverse effect on many countries. This type of crisis brings global cues which make investors and producers reluctant to invest somewhere, thus the economy is affected. We saw a global cues during 2012 Eurozone Crisis, where 5 European nations- Greece, Portugal, Ireland, Spain and Cyprus were unable to repay or refinance their government debt. It affected global economy as
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omy as a whole. Since Europe is importer of many goods from different countries like India, China US, Gulf nations, everyone was impacted by its downfall. In this article, we will discuss about declining crude oil prices and the current state of 3 giant Asian economies. Decreasing Oil Prices Resulting In Global Cues: The world has witnessed a drastic fall in crude oil prices, from $108 to $47 per Barrel, a change of almost 56% in last two years. The prices even fall to $33 per barrel in February 2016. The impact of this to the major economies is not disastrous yet, but is alarming. The increased supplies from OPEC countries and US Shale as well as low
but is alarming. The increased supplies from OPEC countries and US Shale as well as low demand from major importers have been the reason for declining prices. The oil exporting nations are now holding their production and cutting supplies. A reason for declining demand of crude oil is due to insipid growth of China and European countries coupled with an appreciation of Dollar. Does this impact the economies? Are we heading to another global recession? Let us see the state of few economies of the world. Current Scenarios Of 3 Asian Economies: INDIA: India imports oil of about 2/3rd of its requirement, constitutes around 30% of total imports. A fall in price of crude oil could result in both win and lose situation for India. The import of oil at the prevailing prices could help India improve balance of payment subsequently improving Current Account Deficit. The excess Current Account Deficit was one of the major concerns during the UPA government rule in 2012, which was again somehow because of the global recession at that moment. The things are changed now, the Modi led government should be happy to see the improving fiscal deficit due to reduction in oil prices. But is there only a positive impact? There would negative impact too. With such global cues many countries such as Russia, OPEC countries, US and other oil exporting nations may face
a downturn in their economy. Since India is heavily dependent on FDI and FIIs, these countries might pull up their investments, which will pinch the Indian markets. It is likely to be a correction in most of stocks in coming future because right now with positive sentiments after Demonetization & GST coming in action, Sensex & Nifty have touched record highs. The downturn in the share market will surely not be sudden, because the impact of oil prices will hit the countries in long run and not the short run. But as of now, till what extent markets are going to fall is a big question for investors! CHINA: China’s oil consumption increased by 43% in 2014, making it the world’s 2nd largest importer of oil after United States. But since mid of 2015, it has been facing a downturn. After the 2008 US crisis, China invested in domestic environment and showed sign of growth through investment in Infrastructure sector. The infrastructure projects led to increase in GDP on papers but on the back of it, these projects were completed with heavy debts from banks. According to the new reports, it seems that more than 25% of the infrastructure particularly real estate is vacant, due to which the prices have come down drastically. This scenario is somewhat similar to the housing bubble in US. Now since prices have come down,
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it would directly impact banking sector and slowly all other sectors. This chaos in the economy is already reflected in Shanghai Stock market. The bubble of economic growth through infrastructure created by China is now on the verge of bursting. Thus, it’s an alarming situation for other countries because a downturn in China’s economy could affect 50 countries with whom China trades. JAPAN: Japan is the third largest consumer of oil after US and China, so the impact of oil prices would be there for Japan as well. This decline would benefit government to improve the fiscal deficit and balance of payment. Japan is already facing fiscal deficit issue since 2008. After the US crisis in 2008, Japan’s fiscal deficit has been in range of 7.7% - 8.9% of GDP. What could be the reason behind such high fiscal deficit? The few top automobile companies like Hyundai, Honda, Yamaha are the ones contributing a lot to their production sector. But this is just one side of a coin. There is a social problem in Japan which has resulted in economic problem for them. The social problem is the negligence of women to have kids, which has resulted into decline of Birth rate from 2 per women to 1.2 children per women. Due to this the population growth rate is declining, and people from age group of 20-60 are not growing. The nation schools and amusement parks in many places have been shut down due to less children entertaining those. The government
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of Japan has two major expenditure-firstly, the payouts to the local government and secondly, transfers to elder citizens through Social Security and Health care. The Social Security of elder people is more painful and difficult to control due to the rising population of elder citizens. As of now, Japan has more than 50,000 people with age more than 100 years. The life expectancy of women is Japan is 88 years. The government has to incur huge expense for the social security of people above 60 years of age. And since the population is declining, the tax revenues are not going high. The birth rate has gone down to 1.2, which means there are less number of young people to pay tax in favor to welfare of elder people. Hence, a social problem has pushed Japan into a deficit trap. Conclusion: So with this discussion, I would like to conclude with a note that decreasing oil prices will impact positively and somewhat negatively to these economies. But Japan and China are already facing the deficit problem and is likely to face a downturn in their economy due to their internal problems. And with some global cues as well it seems that good days are not likely ahead for these two countries. The effects of downturn in these two economies could affect many more nations in the world. So it’s an alarming situation for rest of the world towards global recession.
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“The views expressed in this interview are personal and do not represent the views of the organization.” Q1. FinTech revolution has been the talkof-the-town for a few years now. Since you are a Fintech enthusiast yourself can you enlighten the common man with some advancements that are invisible to us and what according to you is going to be its future? I believe, financial technology startups are bringing significant disruption to the banking industry in the form of technological innovation and process automation. One of the finest example of this disruptive innovation is Blockchain. From daily transactions to trade finance to instantaneous credit facility, block chain can change the core processes of banking industry. Innovative payment technologies like Samsung pay, NFC payment, Payment through wearable devices are changing the payment industry. Social media analytics, alternative data analysis are already changing the digital marketing space and banks are now proactively analyzing customer data to reach to their customers at the right time with right product. I believe, the future banking will be based on 4 key objectives: Speed, Convenience, Efficiency, Accessibility and fintechs will help banks to achieve these objectives. Another key focus area in future banking is the use of ‘Robotic Process Automation’ and ‘Artificial Intelligence’ in banking. On AI combined with RPA process thousands of operational as well as credit decisions with amazing accuracy. Robotic teller machines are making repetitive processes much faster and accurate making smooth the customer experience. Robotic advisers are giving excellent legal advisory services that even humans can not. Big data processing platforms like Hadoop and Mapreduce are changing the data processing landscape by
Increasing usage of crypto currency is engaging the minds of stakeholders, including regulators. Q2. Effect of Automation on banking job market in India: Automation may reduce the workload from the front end where the jobs are more operation oriented, however we are not at the stage currently where automation can displace ‘knowledge oriented jobs’ like Risk Management, Client relationship Management, etc. While automation may reduce human resources required to do certain type of jobs, at the same time automation also opens up new avenues of employment in the banking industry in banks in various functions like Technology & Projects team, Information Security, Data analytics, Systems Infrastructure management, etc. Fintech will also influence job creation indirectly as various projects are developed, deployed and managed in partnership with fintech companies. Banks and other financial service providers are partnering/incubating start-ups in this space by opening their platform for co-creation of innovative and more customized solutions. In medium to long term, say 3-5 years from now, productivity will get enhanced and banks will be able to cater to more customers and process more transaction without minimal human intervention. We keep hearing examples of complete digitized branches, digital lockers, chat bots in place of tele-executive, etc. At the same time, I believe, predicting outcome of changes happening around with any degree of conviction is no less than crystal gazing – millennials as customers and bankers will decide the pace of this transition!!!
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Malcolm Athaide is senior president and chief risk officer at a top private bank - A ‘Fintech Enthusiast’ with 20 years’ risk experience in Retail Assets Banking, Business Banking and Microfinance and Small Enterprise in Risk Management, Policy, Analytics, Fraud Management and Credit Operations. He has completed his Ph.D from XLRI Jamshedpur and MMS from Sydhenam Institute of Management.
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Q3. What do you think of the microfinance industry that is also leading to high number of suicides due to its higher interest rates? At the outset, I would like to disagree with this statement. And let me build my argument. Firstly, nature abhors vacuum. As is evident from statistics on financial inclusion, the results of various policy interventions over the years has has seen mixed results. The challenge at hand is humongous. Money lenders, deposit taking NBFCs, chit fund companies have attempted to address the unmet demand for financial services. However, we have recently seen media reports exposing large scale scams by some of these entities. Microfinance industry has stepped up to fill that space. From a humble beginning in late 1980s when NABARD piloted SHG Bank linkage, the industry has come a long way. The micro-finance sector, like any other has its own share of challenges, however, a combination of regulatory guidelines and steps taken by self regulatory organizations - SADHAN and MFIN have ensured that the industry stays on course for next phase of growth. The role of microfinance industry has impacted livelihoods in a positive manner and has also led to empowerment of women as most of the MFI clients are women. Government and regulators have acknowledged the contribution of MFIs in furthering the agenda of financial inclusion by awarding full banking license to Bandhan. Eight out of ten entities selected for Small Finance Bank license being NBFC MFIs is a further validation of the sectorâ&#x20AC;&#x2122;s perceived contribution of MFIs. However, can we deny the reality of vast instances of suicides across the country? Not really. And to blame it squarely on microfinance is equally wrong. Secondly, there are structural issues in rural economy. We need to acknowledge that there is stress in rural economy with more than 50% of the population still dependent on agriculture (which contributes roughly 15% of the GDP and has been consistently declining). In developed nations < 5% of population is into farming and feeds balance 95% of population. There have been little reforms on supply management, logistics and marketing of crop produce. While the input costs in agriculture have increased, net income for
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have increased, net income for farmer has not seen a commensurate increase. Lack of employment opportunities outside agriculture has resulted into undisguised unemployment on one hand and issues of migration to cities on the other hand. The migrating population is largely unskilled or semi-skilled and hence fails to find enough venues for a remunerative job/self employment. This leaves people frustrated and often has been a cause of social distress and law and order issues. Farmers face a classical paradox, wherein increased produce leads to crash in prices and reduced production in any case will lead to lower income. Distortions in price discovery coupled with lack of storage facility leads to distress sales. Can we as a country afford a situation where nearly 30% of perishables get destroyed due to lack of proper storage and transportation. To summarise, we have a long way to go in providing a social security net to the needy and to improve the socio-economic condition of a large section of society. Q4. With the UP loan waiver and implementation of GST, how have these changes made their impact on the private banking industry? Loan waiver is an emotive topic and jury is still out on the impact of the same on the lives of those whose loans are waived or for the banking industry or for the ruling political dispensation! In the medium to long term, such loan waivers and subsidies are not sustainable. However, in short term, I believe that certain sections of society may need support to sustain themselves and for larger socio-economic well being of those at the bottom of pyramid. However, there is scope for improvement in targeting of loan waiver and similar schemes. Simplification of guidelines will also lead to better execution and lesser hassles for stakeholders involved. Even from a perspective of those in favour of loan waivers, the interventions so far have been limited to crop loans from banks. It doesnâ&#x20AC;&#x2122;t cover other agricultural loans and consumption loans from banks or NBFCs or crop loans from licensed money lenders. Crop loans may only form a smaller proportion of overall debt of an individual. Also, delays in announcing and settlement of claims may
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Q5. People perceive banking sector to be an established sector with low growth opportunities. What is your view for all the MBA graduates who want to pursue their career in the banking industry? Studies have shown that banking sector growth is around 2-3 x of a country’s GDP growth and is seen as a mirror to the performance of economy. Policy measures like demonetization and GST
would eventually lead to an increased role of banking in our lives. NPA stress in banking industry has led to a cautious approach by industry. I see this as a transient cyclical phenomenon. However, banking will continue to be a pivot around which economic growth of the country will shape up. I foresee a lot of disruption taking place in this sector due to automation, digitization, analytics, robotics, artificial intelligence and machine learning. This is keeping the banking fraternity excited and every bank is in a race to create a ‘wow’ experience for the customer. As the automation and digitization increases, it will also lead to increase in the requirement of manpower in the space of information security, data privacy, compliance, etc. Hence, the traditional banker’s role is undergoing an evolution, the pace of which is only likely to get enhanced in near future. Fintech is disrupting the way all financial services, other than banking as well are distributed and consumed. Changing customer profile is driving this change and for sure there is a difference in how milllenials will want to bank as compared to their previous generation. There are fintech startups talking about bots giving personalized investment advise. Earlier e-wallets and now payment banks are leading a revolution in payments space. Crypto currencies have forced regulators to take note and take a stand on the same. This will also keep future bankers excited. Technology is helping banks and other financial service providers to expand their reach and is facilitating banks in delivering services to consumers at a much lower cost to the underserved segment of society - thus increasing the overall size of financial services market. Hence, the shape and form may change, but banking as a sector would retain its marquee space in the economy as a pivotal force – for individuals, business and government. We are in the times where forecasting that one single career option will last us for our entire career spanning 35 years may not be practical. One has to continuously upgrade to make the best of opportunities available after every 8-10 years and also be prepared for a lateral change in industry a couple of times in your career.
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debt of an individual. Also, delays in announcing and settlement of claims may lead to impact on sowing of next crop as well. Loan waivers do vitiate the credit culture in the economy as people may not pay even in future in anticipation of next loan waiver, especially if elections are around the corner. And those who have already repaid loans regularly, feel shortchanged and penalized for exhibiting a good credit discipline. While these issues are still short term and one can live with it as long as one sees that time bound efforts are being paralelly made to eventually to address the endemic structural issues, thus leading to self sustainability of farmers. Thus, in short term, loan waiver from a banking industry perspective, can have multiple impacts which may not be in the best interest of the borrowers, viz lenders becoming more cautious in lending, increase in cost of borrowing, etc Implementation of GST is supposed to lead to ease of doing business and bring down inflation in general. It is also expected to increase tax compliance rates in the country where tax to GDP ratio is abysmally low at ~ 15-16% lagging behind peers who are in mid 20s. Implementation of GST is also expected to increase exports and also lead to increase in employment. While all of these assumptions are still to be seen on ground, however, should the script play out as envisaged, this augurs well for business as well as individuals. We need to see the real impact on business, household budget and economy after the initial euphoria and teething troubles settle down. There is a high positive correlation between consumption and banking, hence, I am personally upbeat, but keeping my fingers crossed.
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CLASSROOM
Arbitrage Pricing Theory
FinFunda of the Month
Yo Mr. Fin! Could you tell me what an Arbitrage Pricing Theory (APT) is all about? I haven’t really been able to keep up with all this techy stuff. Hey Sam! Arbitrage pricing theory helps in predicting asset’s return using various risk factors. Stephan Ross created this theory to develop relationship between portfolio return and individual asset return. Both these returns are interconnected and relationship between these 2 returns can be established using a linear combination of many independent macroeconomic variables. Sweet! Maybe not the exact process, but could you elucidate the factors that are considered in APT? Arbitrage is the practice of taking positive expected return from overvalued or undervalued securities in the inefficient market without any incremental risk and zero additional investments. APT uses macroeconomic factors to calculate expected returns and risk premiums. After calculating every factor and its risk premium, APT predicts if asset is overpriced or underpriced in respect with benchmark portfolio. APT tries to establish a linear relationship between benchmark portfolio Insightful! How does APT mechanism works? In the APT setting, arbitrage comprises of exchanging two assets – with no less than one mispriced asset. The arbitrageur sells the asset which is moderately overpriced and utilizes the returns, to get one which is generally underpriced. Under the APT, an asset is mispriced if its present cost varies from the cost anticipated by the model. The asset value today should rise to the total
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Finance Club IIM Shillong
of all future cash flows marked down at the APT rate, where the normal return of the asset is a linear function of different components, and sensitivity to changes in each factor is represented by a factorparticular beta coefficient. An accurately estimated asset price here might be in reality a synthetic asset - a portfolio comprising of other effectively evaluated resources. This portfolio has a similar exposure to each of the macroeconomic factors as the mispriced asset. The arbitrageur makes the portfolio by distinguishing x effectively evaluated assets (one for every factor in addition to one) and afterward weighting the assets with the end goal that portfolio beta per factor is the same as the mispriced asset. At the point when the financial specialist is long the asset and short the portfolio (or the other way around) he has made a position which has a positive expected return (the contrast between asset return and portfolio return) and which has a net-zero exposure to any macroeconomic factor and is in this way risk free (other than for firm particular risk). Cool! That certainly helped me develop a perspective. Thanks, Mr. Fin! Cheers, Sam! Stay inquisitive, stay invested!
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