200th edition

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Special Thanks to Ishan Gupta and Anupama Kumarswami (IBS Hyd Alumni and Members of IBS Times) For Contributing to the 200th Edition of IBS Times

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Debt-Laden World The whole world and not just India is debt laden, whether it’s the governments, corporates, farmers or households.

Credit growth plunged to a six-­decade low of 5.08% in 2016-­17. In the last one month, it’s the loans and the non-­ performing loans that grabbed all the headlines in the financial world. Whether the farm loans should be waived or not, has been and still is, the bone of contention between the Centre and the States. We cover in out cover story “Wave the Farm Loans Goodbye”. We cover how RBI and the government has been tougher with both the banks and how the introduction of new ordinance in banking will affect the banking industry.

Internationally, a lot has happened, Chinas’ rating was lowered from A1 to Aa3, we cover it in our article “The Dragon Downgraded”. The Fed expectedly continued to be hawkish and increased the interest rates again.

Meanwhile, we saw confusion regarding IT layoffs, we cover it in our article “IT layoff fear, True to what extent?”.

Team F inStreet

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COVER STORY - WAIVE THE FARM LOANS GOODBYE

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THE DRAGON DOWNGRADED

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INCOME OR INCOME TAX FOR FARMERS?

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SCRATCHING BLACK FOR WHITE

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REVISED TAX TREATY WITH SINGAPORE AND MOURITIUS TAXES EFFECT

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RBI WILL NOT TOLERATE

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FEDERAL RESERVE INTEREST RATE

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THE BANKING REGULATION - ORDINANCE 2017

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KING OF GOOD TIMES

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EMERGING ARCHITECTURE REFORM : SMALL FINANCE BANKS IN INDIA

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IT LAYOFF FEAR – TRUE TO WHAT EXTENT?

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WHATEVER YOU DO CHINA !

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MARKET WATCH - GLOBAL ACHE DIN?

WAIVE THE FARM LOANS GOODBYE - ANUPAMA KUMARSWAMI “It's wrong to rob banks, yeah, but is it right for banks to loan people money, knowing full well they can't pay it back?” ~ Jeff Bridges Well, when the famous actor-­director Jeff Bridges quoted his opinion on the loan waivers, he had no idea about what was on the agenda of the Telengana State Government and the Uttar Pradesh Chief Minister Yogi Adityanath with his party, the BJP. While the CM Yogi Adityanath had announced a waiver of Rs.36, 359 crore farm loan, much before that the Telengana State government had issued the orders for the waiver of Rs.17000 crores farm loans and become the first region in the country to execute such a scheme. The Madras High Court has also ordered the Tamil Nadu government to issue waiver. Maharashtra government is also feeling the pressure of providing such a relief scheme. Now, the Punjab government is already working on a farm loan waiver. All of this at the cost of long-­ term impact on the farmers and the banking sector.

What is a Farm Loan Waiver?

A farm loan consists of investment option loans for buying farm tools and equipment

as well as crop loans. When the harvest is good, both the farmer and the bankers are profited. As and when a natural calamity of even a poor monsoon forays, the farmers become unable to pay back the loans. When such situations occur, the Centre or the State decides to propose a relief by reducing or completely cutting off the farm loans. Thus, the Centre or the State repays the banks by taking up the liability of the farmers in need. The decision of a Loan Waiver is generally undertaken very judiciously. In 2008, similar waiver was taken for investment and crop loans for marginal and small farmers and 25% reduction was provided to other farmers.

Why does it matter?

Agriculture is the backbone of the Indian economy. We all have overlooked the gore realities behind such a statement.

Agriculture sector in our country has been facing huge amount of issues like reducing amount of underground water levels, low quality of soil, high input costs and very low output and productivity. To 6

make the ends meet, the farmers are often forced to borrow loans and other non-­banking options to maintain the expenses. With the depleting weather conditions, the farmers find themselves in indebtedness. This is the main reason behind the huge amount of farmer suicides in our country. The waiver provided by the Centre or the State brings a breath of relief for the farmers during the hard times.

Everything that affects the producers of our food also affects us in the end. While the loan waivers are a temporary solution, it is important that the government comes up with a sustainable way of reducing the costs and inefficiencies and thus by increasing the income and production. As tax payers, we are the people who are affected by the loan waiver schemes. The loan waiver costs are paid off from the Tax revenue collected by the government.

Above this, such schemes are maliciously presented by the politicians to win votes.

Even as an investor in the bank stocks, the waivers are presented as the non-­ performing assets in the books of accounts, which directly affects the investor’s money.

What are the implications of Loan Waiver schemes?

The short term benefits of Farm Loan Waivers weren’t quite received well and a caution against the morality of the benefiters was given by the RBI Governor Urijit Patel. He had mentioned “Waivers undermine an honest credit culture. It leads to crowding-­out of private borrowers as high government borrowing tends to impose an increasing cost of borrowing

for others. I think we need to create a consensus such that loan waiver promises, otherwise sub-­sovereign fiscal challenges in this context could eventually affect national balance sheet.”

Implications on the credit market: The loan waiver schemes are an unfavorable step towards the development of the credits markets of the country. When there are high levels of indebtedness, the debtor usually forces himself to repay the debt as soon as possible. In such a situation, with a loan waiver scheme and the reduction of the debt induces the finest efforts by the debtor to pay back the loan amount. But with the availability of frequent loan waiver policies, there are alterations in the pattern of loan repayment expectations and also a change in the future credit contract’s enforcement. Loan waiver policies mislead a household’s incentive framework and keep them away from the productive investments and result in wilful defaults. Thus, these defaults affect the whole credit system in the country.

Implications on the farmers: The loan waiver scheme announced by the UP government would be affecting the State’s Gross State Domestic Product to lessen by 2.6%. This is a big effect for a temporary stance. The history shows a different picture too. These policies haven’t helped the farmers as expected.

These schemes provide relief for one season and then again the farmer has to find new ways to manage the expenses.

Indian Statistical Institute conducted study on the viability of loan waiver schemes in 2013 and concluded that Loan Waiver Scheme wasn’t a permanent solution for 7

the Indian Agricultural scenario. The Central government had announced Rs.60, 000 crore as waivers. It affected the honest farmers who were repaying the loan to default and avail the waiver.

Not only that, there has been no evidence of better investment, productive consumption and positive outcome of labour market in the places where such relief schemes were introduced.

Implications on the banking system: Farm loans waiver schemes consist of huge amount of writing off of the loans.

The scheme which was implemented in 2008 had a huge impact on the banks.

The waiver resulted in threefold increase of non-­performing assets in the books of the commercial banks. Same effects are also expected out of the recent loan waiver schemes introduced. Stating the damages that can be easily foreseen, Arundhati Bhattacharya, Chairperson of State Bank of India mentioned in an interview last month that the farm loan waivers will lead to credit indiscipline.

Movement of a privilege motion was undertaken against the SBI chairperson for such a statement at the Maharashtra assembly.

the consequences can’t be ignored. If the schemes are designed well, then it could enhance the financial security of the house-­holds, improve their investments and consumption and boost the utilization of the loan and mend the repayment patterns. While implementing the waiver schemes, formulation of eligibility criteria should be conducted on the basis of the policy benefiter’s historical loan consumption, repayment and investments. The scheme developer should also explore an alternative like a provision of agricultural insurance.

Alternatives that help the households to invest more and the ones which increase the long term productivity should be developed. To make this a Win-­Win situation, not just the government but also policy makers contribute towards exploring new solutions.

Is it then a Win-­Lose situation?

Every scheme and policy implemented in a developing country like ours are ought to face certain amount of criticism. In a dynamic market like ours, wherein no one could predict how any small decision could affect anyone or anything, everything should be scrutinised. The Farm Loan Waiver Scheme is a wave of fresh air for more than 2.10 crore poor farmers in the state of Uttar Pradesh but 8

THE DRAGON DOWNGRADED - ISHAN GUPTA The dragon was given it first blow by Moody’s rating agency after 28 years.

Moody’s cuts its rating to A1 from Aa3.

This brings it to the same level as Fitch and a level lower than what has been kept by S&P. It highlights the dangers of one off the most levered economies in the world. But if history serves, a rating downgrade at the sovereign level may not have that intended effect (In the case of US and Japan). The Chinese authorities have attacked Moody’s (As expected), toing the state line of a vibrant and growing economy. It will not have a major impact on China as most of its debt is domestic but it will have a trickledown effect on neighbors.

surely support that fact

As per Bloomberg data in 2015 the debt to GDP ratio was 247%. Breaking debt into 4 levels we find that bank debt is around 19%. Corporate debt is a massive 165% of the GDP. This is the most worrying figure for investors. Companies are way over their limits to borrow debt.

China has tried measure such as debt-­ equity swap, but has remained largely unsuccessful. Government debt stands around 22% of the GDP and lastly the household debt accounts for 40%. As some say China has been keeping its economy on steroids and the debt levels

The markets shrugged off the news. The Shanghai Index went up 0.1%, after slumping as much as 1.3% to approach the key 3,000 level. The Yuan was stable against the dollar, while the return on the 10-­year government bond stayed at 3.67%. So as of now the markets have completely ignored the news. This can be for two reasons. First, the markets have already priced in the riskiness of government debt. Second, since 88% of the debt is domestic it is manageable and not that dangerous.

Impact on China Currently, the debt to GDP ratio for China is around 260%in 2016 up from 160% back in 2008. The Chinese economy has been heavily dependent on debt to meet its growth target and keep its economic engine running. However, it has reached its peak and has become unsustainable.

The government realized it and the top Chinese leaders have decided that structural reforms and financial stability are priorities. But just like any major economic reform it will be painful and messy.

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Overall, other than being breaking news, the rate cut did not have a major impact.

The political class is aware of the problems and is taking steps. Moody’s themselves in a statement has said that although the situation has deteriorated, it not a cause of panic.

Impact on neighbors Although the effect has been miniscule on the People’s Republic of China, the tremors have been felt in Hong Kong.

Because of the integrated nature of the two economies, hours after China was downgraded Moody’s also cut their rating for Hong Kong. Moody’s cut their rating from Aa1 to Aa2 and changed the outlook from stable to negative. Over the years, the economy of the small nation has become increasingly integrated with the world’s second largest economy both financially and politically.

Similar to China, the impact on the market was minimal.

Following China’s statement, Hong Kong rejected the downgrade accusing the rating agency of ignoring the financial strength and stability of the region.

Some analysts were gung ho about Moody’s rate cut, as a positive signal for India. They believed that this improves India’s competitiveness relative to that of China. What they forget is that China is still higher rated than India and Moody is the only agency which has downgraded the country’s credibility. Further, India still has a lot of its own debt problems to solve.

The Rating Mess Moody’s is the only rating agency that has stuck its neck out by downgrading China.

The other two bigwigs, S&P and Fitch, have kept their ratings unchanged.

Over the years, the three have started to diverge a lot from one another and the mess of 2008 has dented their credibility.

However, they still remain a force in the largest asset class in the world and their opinion matter in a large number of cases. A large number of analysts believe that a massive bank bailout might be needed as bad loans mount.

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China has been fueling its economic growth through unsustainable credit and a lot of asset managers do not rely on the country’s official numbers.

Moody’s may be right in downgrading them now but there will be no justification if the three rating agencies are not coherent or if there is some problem clearly visible on the ground. Their stand needs to be vindicated by either another rating agency or fundamental news.

At most, the downgrade is only symbolic in nature, highlighting the myriad of problems facing the world’s second largest economy.

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INCOME OR INCOME TAX FOR FARMERS? - SRUJANA NAIK India, the country of a mixed economy has taken a center stage on the subject of farm taxation. Since decades, the agricultural income derived in India by taxpayers is completely free from income tax u/s 2(1A) of IT Act, 1961.

This will make sure that the tax does not come in the way of farmer’s income. And this would be an indirect tax on commodities which will get included under GST. The farmer’s income will still be outside the extent of income tax.

India being a land of farmers, it has been noticed that rich farmers taking benefit of not having to pay taxes, to such an extent that they go out of their way to show their illegally earned money as agricultural in order to avoid paying taxes. This is one of the areas where money is channeled to avoid paying taxes. So, this is an unusual situation where a considerable amount of money can be channeled here to escape tax by diverting funds to agriculture on documents and using it for their lavish living. This is what needs to be removed.

The government should work on removing such leakages. This is similar to the money drawn out by the value chain when it comes to food subsidy where ration shopkeepers sell food grains in the open market and make illegal entries for this in their books. A solution to this could be to tax the product which is currently done in some of the states through a mandi tax. This tax will then have to be passed on to the customer who will have to pay the higher price for the product.

In short, the largest segment of the economy should not be dismissed out of tax. The exemption of farm taxes will encourage non-­agricultural entities to avoid taxes by declaring agriculture as their source of income. This erodes any attempt to control the circulation of black money in the economy. According to the recent reports it was seen that post-­ demonetisation, there was an increase in the number of cases having farm income more than Rs 1crore. But the Modi government’s fight to curb black money wouldn’t be fruitful if agricultural sector is not brought within its scope.

According to the survey, it was seen that companies Monsanto and Kaveri Seeds claimed exemption of Rs 94 crore and 186 crores as agricultural income in the year 2014-­2015. So, there is no point in keeping big farmers and agricultural companies out of the scope of the tax department. They should definitely be brought under the tax net.

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Niti Aayog member Bibek Debroy said that two-­thirds of India’s 225 million households are in rural India and are effectively not taxed. Also, India has 110-­ 120 million cultivators and a tax payers base of 64.4 million. So, it is not fair to impose the burden of taxation on such a small proportion of the country’s population. There is a loss in tax revenue because agriculture acts as a tranquillizer on the tax to GDP ratio of any country and especially for a country like India where agriculture still comprises about 18 percent of the GDP, it’s a major concern.

Introducing a uniformity in the taxation of agricultural income will help to eliminate the different taxes imposed by their state governments. Like plantations in Kerala are taxed at 50 percent whereas in Tamil Nadu it is free. So, this discrimination leaves little scope for agricultural growth and it shall only end if the taxes are imposed.

One of the major problems that may occur after moving towards agriculture taxation is the implementation process.

An agricultural income tax above a certain limit based on self-­declaration of income

will be tough to verify due to the commonness of cash transactions and absence of any standard book-­keeping.

This has been witnessed in some states which tried taxing agricultural income in the past and it was evident that there was a natural evolution of taxation towards plantation crops. The main reason for this is plantation agricultural activity that has large scale operations, formal records of accounts and connection to the banking systems.

The other concern for the government is to decide what should be taxed. The value of output or the net income earned by farmers? While the value of output sold can be assessed and tracked to the extent that it enters the market, this is not net income as there are expenses incurred in growing crops which includes seeds, water, fertilizers etc. And for the ones who own the equipment, a depreciation value has to be assigned.

This means farmers have to be treated at par with companies and not just income tax assesses. And it’s complicated to draw up such a profit loss account.

Also, there is a lot of produce that does not enter the market and the marketable surplus can range from anywhere between 65 to 100 percent depending on whether it is a food crop or a commercial product such as cotton and jute. Hence, a large part of the value will be hard to comprehend on this score. Also, there is a lot of under-­reporting given the state of logistics in the country.

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An effective mechanism of taxing agricultural income would be delegating taxation powers to local levels. First, local governments will have a greater sense of the ground reality of agricultural practices.

It will be tough to hide farm earnings from a local tax authority than when the state government is in charge of tax collection.

Second, when the taxpayers have the assurance that their money will be used in the local development or reinvested in improving the local agriculture sector, they will be more co-­operative. If the expenses on inputs are deducted from income and depreciation subject to rebates it will help to ensure higher consent. This will also incentivize farmers to invest in inputs, thus increasing agricultural productivity.

Though the issue of farm income taxation is politically sensitive, it could be implemented and will be successful if designed in a proper and scientific manner. So, it’s time that government starts some reforms in the direction of farm taxes so as to bring accountability in the system while plugging the tax loophole

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SCRATCHING BLACK FOR WHITE - GAGAN KAPOOR Under Operation Clean Money (OCM) initiated by Income Tax Department, more than 60,000 individuals, including 1,300 high risk, have been recognized for scrutiny concerning cases of intemperate money deals amid the demonetization time frame.

According to documents, more than 6,000 exchanges of high valued property purchases and 6,600 instances of outward settlements will be subjected to exhaustive enquiries. Every one of the situations where no reaction is gotten might likewise be subjected to point by point enquiries.

It said that broad requirement move has been made by the administration including pursuit and seizure and reviews to a great extent in light of the data gotten amid the demonetisation time frame.

More than 2,362 pursuit, seizure and study activities have been directed by the Income Tax Department amid November 9, 2016 to February 28, 2017, prompting seizure of assets worth more than Rs. 818 crore, which incorporates money of Rs 622 crore, and discovery of un-­ uncovered wage of more than Rs 9,334 crore.

More than 2,362 pursuit, seizure and study activities have been directed by the Income Tax Department amid November 9, 2016 to February 28, 2017, prompting seizure of assets worth more than Rs. 818 crore, which incorporates money of Rs 622 crore, and discovery of un-­ uncovered wage of more than Rs 9,334 crore.

More than 400 cases have been alluded by the duty division to the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI). Studies have been led in more than 3,400 cases by Assessment Units.

"The effect of government activity is now noticeable in the expansion of 21.7% in the profits of pay gotten in FY 2016-­17, 16% development in gross gathering (the most noteworthy over the most recent five years), 14% development in net accumulation (the most astounding in most recent three years) or more 18%, 25% and 22% development in individual Income Tax, customary evaluation expense and self-­appraisal charge separately," the announcement included.

The Central Board of Direct Taxes (CBDT) is building up a devoted entryway 15

for the examination of those recognized to have made stores or huge buys not in accordance with pronounced pay as a follow-­up to Operation Clean Money.

event that tax avoidance surpasses Rs25 lakh, the discipline is between six months and seven years of thorough detainment and fine.

The Income Tax Department propelled Operation Clean Money (OCM) on January 31, 2017 to use innovation for e-­ check of money stores made amid the demonetization time frame.

The operation being directed by the assessment division utilizing propelled information examination and making least burden the citizens.

The entrance will encourage correspondence amongst people and expense experts by method for the changeless record number (PAN). The division is hoping to keep the procedure as non-­meddling as conceivable with an accentuation on e-­appraisal to keep human collaboration to the base.

The test denote the second phase of the crackdown on dark cash taking after information catch and examination. The following stage will edge of charges in situations where the division is not happy with the clarifications given. Situations where the assesses question the division's finding of tax avoidance will wind up in courts, beginning with the salary charge tribunal.

The salary impose law recommends between three months and two years of thorough detainment and a fine for demonstrated instances of 'wilful endeavor' to sidestep assesses not exactly or equivalent to Rs25 lakh. In the

The principal period of Operation Clean Money included e-­check of trade stores made out the banks. The whole stage was led on the web, and 17.92 lakh individuals, who gone into money exchanges that did not seem, by all accounts, to be in accordance with their expense profile, were recognized and asked for online reactions on such exchanges.

Out of this, 9.46 lakh individuals reacted on predefined parameters of wellsprings of the money stores. Online questions were brought up in 35,000 cases and online confirmation was finished in more than 7,800 cases.

The announcement said that it has been chosen to close the confirmation in situations where clarification of wellspring of money was observed to be defended. In situations where the money store has been pronounced under Pradhan Mantri Garib Kalyan Yojna (PMGKY), the confirmations would likewise be shut.

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The operation has now moved into the second stage with recognizable proof of high hazard people for definite examinations by the duty experts.

one year however with the assistance of innovation and nonstop authorization activity all the obligated records will be conveyed to expense," it included.

The recognizable proof has been done through utilization of cutting edge information examination, including coordination of information sources, relationship bunching and support following. The high hazard classes recognized incorporate organizations guaranteeing money deals as the wellspring of money stores which is observed to be over the top contrasted with their past profile or industry standards;; substantial money stores made by government or Public Sector Undertaking (PSU) representatives;; people who have embraced high esteem buys;; people who have utilized shell elements for layering of assets, and where no reactions were gotten.

“No science is immune to the infection of politics and the corruption of power -­ Jacob Bronowski”

"One of the expressed targets of demonetisation was 'end of dark cash that throws a long shadow of parallel economy on our genuine economy'. The OCM and the ensuing requirement activities being embraced by the ITD should keep on achieving the objective set out by the administration," the announcement said.

"The open doors made by demonetization is being utilized by the wage assess division for augmenting and developing of the duty base and make prevention, not seen some time recently, and to control era of dark cash in the Indian economy The entire exercise of analyzing all the dubious and non-­charge consistent records may take over.

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REVISED TAX TREATY WITH SINGAPORE & MOURITIUS TAXES EFFECT - DEBANJAN PAUL Mauritius and Singapore are two of the top sources of Foreign Direct Investment into India. They are also accountable for a big chunk of total inflows into the country’s capital market.

Mauritius and Singapore has accounted for 17 Billion USD of the total FDI inflows of 29.4 Billion USD in April-­December 2015-­16.

While Mauritius was the single biggest source of FDI into India in 2014-­15, accounting for about 24% of 24.7 billion USD FDI, Singapore accounted for 21%.

The taxation agreements with both these nations is said to have been misused by many Indian and multinational companies to avoid paying tax or to route illegitimate funds.

Hence, the revised tax treaty is aimed at checking round tripping of funds. Most of the clauses of the amended treaty was signed on December 30, which took effect from February 27. However, the principal clause allowing levy of capital gain taxes on investment routed through Singapore and Mauritius has come into force from April 1.

Why has amended?

the

treaty

been

The policy of this government is to curb out any black money from the system in the form of money laundering and tax avoidance. A statement from the Finance Ministry came out that this change would tackle the issues related to treaty abuse and round tripping of funds. It would prevent double taxation and abuse and round 18

tripping of funds. It would prevent double taxation and reorganize the flow of investment and also stimulate the flow of exchange of information between India, Mauritius and Singapore.

Most importantly it would discourage any speculators and non-­serious investors, which will reduce the volatility in the market.

How will it impact P-­notes?

With the new tax treaty coming in, inflows through P-­notes would see a sharp drop.

According to SEBI, 90% of P-­notes investment are routed through Singapore and Mauritius. The new treaty says that capital gain which is arised through shared purchase April 1 by foreign investors based in these two countries can be taxed in India. Besides the higher tax outgo, issuers of P-­Notes are also worried about operational difficulties.

Also, Sebi, in a letter to finance ministry, has raised concerns over foreign portfolio investors (FPIs) reducing exposure in P-­ notes. For P-­Note investors, the cost will increase in investment on Indian shares.

As a result, this might lead to lower returns to investors and the change would make foreign investors re-­evaluate the cost of compliance before taking this route.

the transition period from 1st April 2017 to 31st March 2019.

The investors who invested in listed securities and remain invested for more than 12 months will not have a tax burden in India. This is because long-­term capital gains tax is zero per cent in these cases.

It has been predicted by some experts that some investors who are bullish on India may advance their plans and invest before April 1, 2017 in order to save tax, many others will raise their due diligence procedure on investments, factoring in the tax cost in the returns they generate.

Is any country likely to benefit as a result of the amendment?

There are claims that Netherlands may emerge as an attractive destination for FPIs following the changes to the treaty.

The India-­Netherlands treaty is a smart treaty, and it can emerge as a preferred alternative for FIIs especially those in Europe.

Will it impact all investors coming in from the Mauritius and Singapore route?

The full impact of the changes in the protocol will fall on investments beginning from April 1, 2019. The tax rate will be limited to 50% of the domestic tax rate of India when such capital gains arise during 19

Conclusion: This is certainly a decisive move by the Government of India which puts at rest more than a decade long controversy around the Mauritius treaty. This also falls in line with the government’s agenda of tax rationalisation and simplification of tax rates.

The government also deserves an applause for giving sufficient notice period before the change takes effect as well as providing protection to existing investment.

Significantly, this change also blunts the impact of the much condemned GAAR, which would have conflicted with the capital gains exemptions under the Mauritius and Singapore treaties.

The amendments made to this tax treaty was quite necessary to curb the menace of black money but how will foreign investors react to this is something only time will tell.

For the near future, one will need to be cautious of the impact of this development on foreign flows.

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RBI WILL NOT TOLERATE - SHILPAM DUBEY

(EDITOR IN CHIEF) On March 23th, we saw a sudden but not unfamiliar side, of RBI, it went ahead with putting IDBI Bank, UCO Bank and Indian Overseas Bank under special watch. The reason was, not so unbelievable, excessive rise of bad loans in these banks. This was just the beginning of a much stricter steps taken later. There has been a series of steps then, including the introduction of a new banking ordinance and amendment in the RBI Act. NPA problem of public sector banks in India is busting, and there is every reason why Government and RBI would be serious about it. Indian banks accumulated pile of more than Rs 7 trillion of toxic assets which makes up 9 % of all bank credit When the banking sector goes wrong, it takes a toll on the entire economy.

What RBI has done Well RBI and government has two options to deal with the problem of bad loans, one to be tough with the banks and two, to be tough with the defaulters. They are doing both, clearly indicating that is not going to tolerate any more. But, let’s consider both cases separately.

When RBI is tougher with the banks, there can be multiple goals that RBI is

trying to achieve. One of them is to make the recovery as soon as possible. To put the banks under pressure, so that they pass that pressure on to the defaulters and get the loans recovered. After RBI conducted its routine Asset Quality Review (AQR) in March and realising that the banks, especially the public sector banks are in huge bad loans mess, it decided to establish a separate committee for the recovery of bad loans.

It put four banks including putting IDBI Bank, UCO Bank and Indian Overseas Bank under special watch. After this step was taken, bad assets of these lenders jumped over Rs 1 lakh Crore. RBI advised these banks to look for option of capital infusion, to try keep away from risky assets and improve their financial health.

Being Tough with Defaulters While being tougher with the defaulters, government has revealed the names of top 12 loan defaulters which comprise of 25% of total bad loans and is heading forward with the bankruptcy procedures of these companies. RBI advised the banks to set aside higher provisions for even the good loans of some stressed sectors.

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Exposure to sectors like telecom, steel and infrastructure has posed huge risks to the balance sheets of banks.

Reducing exposure, or limiting the exposure to these sectors will help cleaning up the balance sheet in future.

Also, after the Asset Quality Review which ended in March, RBI had revised the PCA (Prompt Corrective Action) framework. The PCA framework is a set of parameters which is structured to examine the financial state of the banks.

The parameters include-­ Capital to risk weighted assets ratio (CRAR), Net NPA and Return on Assets (RoA). In the new revised framework, Net NPA levels for including a bank under PCA framework has been reduced to 6% from 10%. That means more banks would come under PCA framework if they don’t reduce their NPAs or don’t increase the provision coverage on NPAs. Infact, after the revised framework, 16 public sector banks and 2 private sector banks will be under PCA framework and will require to corrective actions of dividend payments, branch expansions, infusing capital etc.

Bad Loan Problem will not resolve soon Even the new banking ordinance doesn’t necessarily promise to address the root cause of bad loans, it will simply increase the RBI’s interference in the bank’s business and this starts another debate-­ Is this interference healthy for a democracy? Is it a right step in a world where the involvement of government and their bodies in the businesses is considered regressive?

While structural reforms in public sector banks is one option, according to some economists, the notion of the public-­ sector banks itself needs to be re addressed. Sure, India has been proud of the stability of its banking system, especially because of the fact that if emerged out of the 2008-­09 Global Financial Crisis unfazed, because of which India was one of the few economies which wasn’t devastated after the crisis. President Pranab Mukherjee, in a speech in 2009 said that dominance of government ownership in the financial system is the reason why India could stand stable amidst the turbulence around.

The fact that public sector banks continue to show their increasing inefficiency makes us re-­think the idea of a government-­owned bank. Today, it’s the piled-­up stress arising out of that inefficiency that pose a huge big risk to the economy. Reducing the government ownership in the public sector banks has been stressed lately by RBI deputy governor in a speech, where he boldly put forward in his speech how privatisation of public sector banks can help solve the bad loan mess. Infact, it is not a new idea, even the Atal Bihari Vajpayee government proposed to bring down the government holding in the PSBs to as low as 33%.

Both government and RBI are on their toes to resolve the bad loans issue. They even went to the extent of shuffling of some Bank chiefs, like Sunil Mehta, previously, executive director at Corporation Bank has been appointed as

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chief executive officer of Punjab National Bank (PNB), while Usha Ananthasubramanian of PNB has been moved to Allahabad Bank. Their seriousness regarding the issue is so appreciated that, investors are seeking huge interests in the banking stocks.

Bank Nifty has continued to surge in the last 6 months since the government has started taking strict reforms.

Though government and RBI’s take on bad loan mess should be appreciated but they can again pile up in future, if the systematic loopholes are not addressed.

It’s important to debate about this, whether its privatization or consolidation of banks.

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FEDERAL RESERVE INTEREST RATE - RADHIKA GUPTA First the question arises what is federal interest rare? Federal interest rate is the interest rate in United States at which banks lend reserves to other depository institutions overnight with no collateral security. Balances for the reserves are held at Federal Reserve to maintain depository institutions reserve requirements. Then the institutions with the surplus balances in their accounts lend the money to other institutions that are in need of money. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

Suppose if a particular depository institution issues a loan, then this reduces the money with that bank. This drops the ratio below the legally required minimum.

For filling this gap bank can borrow requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

As of April 2017 the target range for the Federal Funds Rate is 0.75-­1.00%.This represents the third increase in the target rate since tightening began in December 2015.

The target rate is determined by the members of Federal Open Market Committee which occurs eight times a year. To make federal funds effective rate follow the federal funds target rate, the Federal Reserve uses open market operations to influence the supply of money in the US economy. Every financial institution is required to maintain some amount of reserve with them s that they can meet the demands.

The last full cycle of rate increases occurred between June 2004 and June 2006 as rates steadily rose from 1.00% to 5.25%. The target rate remained at 5.25% for over a year, until the Federal Reserve began lowering rates in September 2007.

The last cycle of easing monetary policy through the rate was conducted from September 2007 to December 2008 as the target rate fell from 5.25% to a range of 0.00-­0.25%. Between December 2008 and December 2015 the target rate remained at 0.00-­0.25%, the lowest rate 24

in the Federal Reserve's history, as a reaction to the financial crisis of 2007– 2008.

When the Federal interest rate has to be reduced at that time Federal Open market Committee reduces the interest rates, the money supply in the economy is increased by buying the government securities. When the money supply increases the price falls. The price refers to the cost of money which means the federal interest rate decreases. In the same way when the committee wishes to increase the interest rate, they sell the government securities which reduce the money supply as they take back money from the market by selling securities;; this increases the interest rate keeping everything else constant.

A low federal funds rate makes investments in developing countries such as China or Mexico more attractive. A high federal funds rate makes investments in other countries less attractive. The long period of a very low federal funds rate from 2009 forward resulted in an increase in investment in developing countries. As the United States began to return to a higher rate in 2013 investments in the United States became more attractive and the rate of investment in developing countries began

to fall. The rate also affects the value of currency, a higher rate increasing the value of the U.S. dollar and decreasing the value of currencies such as the Mexican peso.

Impact of Federal Interest Rate The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following: Credit Card Rates Rates will be affected for credit cards and other loans as both require extensive risk-­ profiling of consumers seeking credit to make purchases. Short-­term borrowing will have higher rates than those considered long-­term.

Savings Money market and credit-­deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.

U.S. National Debt A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt

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Auto Loan Rates Auto companies have benefited immensely from the Fed’s zero-­interest-­ rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve's announcement because they are long-­term loans.

Things That Decrease When Federal Increases Interest Rates

the

savings account that currently pays out a few bucks a year will become more generous.

The Dollar Strengthens The value of the dollar strengthens as the interest rate increases.

Many more things get impacted by the change in Federal Interest rate. These were some of them which affect the most.

Business Profits When interest rates rises, the cost of capital required expanding goes higher, this carves into profitability. This basically increases the profitability of the banking sector.

Home Sales Higher interest rates and higher inflation typically cool demand in the housing sector. ​Consumer Spending Higher interest rate reduces the consumer spending as now they have to pay more interest so they tend to spend less.

The 4 Most Important Effects of Rising Interest Rates Borrowing Becomes More Expensive The borrowing of money from bank becomes expensive because the interest rate increases. More interest has to be paid to get the same amount of money.

Deposits Yield More Higher borrowing costs also apply to banks, which take loans from savers in the forms of deposits. In other words, the 26

THE BANKING REGULATION - ORDINANCE 2017 - ANTRA BHARATI The amendments to the Banking Regulation Act 1949, introduced through the Ordinance, and the notification issued thereafter by the Central Government empower RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).

This will involve amending Section 35 of the Banking Regulation Act, which currently deals with powers of inspection for RBI. The cabinet has approved an amendment and sent an ordinance to President for his approval.

The Insolvency and Bankruptcy Code, 2016 has been enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders.

The SARFAESI and Debt Recovery Acts have been amended to facilitate recoveries. A comprehensive approach is

being adopted for effective implementation of various schemes for timely resolution of stressed assets.

The non performing assets in the banking system have reached unacceptably high levels and it calls for urgent measures for the resolution, by empowering the banking regulator to issue directions in specific cases. Also the banks and investors perceive an implicit guarantee on the part of the government and think it will bear the cost of defaults and losses.

This scheme will try to correct that perception It is aimed at accelerating a resolution of the Rs 9.64 trillion in bad loans choking the banking system. The NPA problem is, to a large extent, confined to 50 large loan defaulters.

Immediately upon the promulgation of the Ordinance, the Reserve Bank issued a directive bringing the following changes to the existing regulations on dealing with stressed assets. • It was clarified that a corrective action plan could include flexible restructuring, SDR and S4A. • With a view to facilitating decision making in the JLF, consent required for 27

approval of a proposal was changed to 60 percent by value instead of 75 percent earlier, while keeping that by number at 50 percent.

• Banks who were in the minority on the proposal approved by the JLF are required to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF • Participating banks have been mandated to implement the decision of JLF without any additional conditionality.

• The Boards of banks were advised to empower their executives to implement JLF decisions without further reference to them.

Two new sections have been introduced i.e. 35AA and 35AB 35AA. Power of Central Government to authorize Reserve Bank for issuing directions to banking companies to initiate insolvency resolution process – The Central Government can authorize the Reserve Bank to issue directions to any banking companies to adhere to the provisions of the Insolvency and Bankruptcy Code, 2016, in order to deal with any default.

35AB. Power of Reserve Bank to issue directions in respect of stressed assets.– • Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets.

• The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for

appointment to advise banking companies on resolution of stressed assets.

Currently, under the so-­called Scheme for Sustainable Structuring of Stressed Assets (S4A), there is a provision for an oversight committee consisting of “eminent persons” recommended by the Indian Banks’ Association in consultation with RBI. One of the functions of the panel under the new framework will be to ensure that the so-­called joint lenders’ forums are more comfortable with taking decisions and speeding them up.

The Oversight Committee (OC) comprises of two Members. It has been constituted by the IBA in consultation with RBI. It has been decided to reconstitute the OC under the aegis of the Reserve Bank and also enlarge it to include more Members so that the OC can constitute requisite benches to deal with the volume of cases referred to it.

While the current Members will continue in the reconstituted OC, names of a few more will be announced soon. The Reserve Bank is planning to expand the scope of cases to be referred to the OC beyond those under S4A as required currently.

Protection of commercial decisions from vigilance inquiries has been a key demand from bankers, especially after the Central Bureau of Investigation arrested former officials of IDBI Bank Ltd, including a former chairman, for sanctioning loans worth Rs 950 crore to Kingfisher Airlines Ltd.

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This fear has prevented lenders from sacrificing a part of the amount due to them and push through sales of stressed assets to turnaround specialists and private equity firms.

RBI said accounts with outstanding amounts of more than Rs5,000 crore, of which at least 60% was classified as non-­ performing by banks as of 31 March 2016, can be referred for bankruptcy.

Under the IBC (Insolvency & Bankruptcy Code), once a case is admitted by the NCLT (National Company Law Tribunal), a resolution plan must be in place within 180 days of admission. This is extendable by up to 90 days. In case there is no plan or the committee does not agree on one, the company will go into liquidation.

Bankers have also asked for other measures which will give them more comfort, such as allowing amortization of loan losses and structuring repayments over a longer time period.

It was made clear to the banks that non-­ adherence would invite enforcement actions.

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KING OF GOOD TIMES

- UTSAV CHANGOIWALA Time is one thing that never remains constant for anyone, Be it the King or a roadside beggar & it has the power reverse their fortunes also. It was rightly said by somebody that Good times flies away faster than Bad times. This is the case with the great absconder of our time, Mr. Vijay Vittal Mallya who was once to be known as 'King Of Good Times' has been having a bad times since 2010. He was once known for his flamboyant lifestyle, which everybody would just wish for but now he is been known as 'chor', who all the institutions wishes to get hold off. Recently when he was seen in public, he was greeted with the word ' Chor' (meaning robber in Hindi). He has confined himself to his UK property.He has got property worth thousands of crores all over the world. It is these properties that the 17 banks are eyeing on in order to recover its loans. His story of absconding has inspired many others to be a wilful defaulter and when banks go out to recover money from them , they just got one thing to say first collect your money from Vijay Mallya and then come to us. The banks have from then been under quite some pressure from its regulators, its borrowers, infact all stakeholders. Now people just got say this about Kingfisher ,'It never had a good

business model, "models".’

it

only

had

good

Kingfisher had commenced its operations in 2005 and it saw its success very soon by around 2007 when people had started to flock into their aircrafts seeing the quality of their operations at very economical rates. They were doing well at that time and were considered to be at second position with consideration to the passengers flying with them and Air Deccan was at the first. It was then that Kingfisher got very ambitious and went ahead to buy Air Deccan. Some consider this was their biggest mistake and one of the main reasons for company to accumulate losses over the years as the issue they faced was the supply was more than the demand and considering that they were economical airline and keeping the rates economical was not being fruitful for the company when crude oil prices were at their highs. Aviation industry is where oil prices plays an important role as that is their main operating expense. On top of that the company had bought new aircrafts and airbuses on loan. Kingfisher had taken several loans from different banks. In order to fill the excess supply the management of the airline had come up 30

with another totally unviable idea of selling air tickets at base prices of One Rupee, Four Hundred Rupees etc. Soon around 2010 they reached in a situation where in neither were they able to repay the banks, nor were they able to pay their employees. They had also not paid the service tax due on them and the Tax Deducted on Source on the employee's salary. They had also not deposited money with bank against their employees provident fund.

In 2008, Kingfisher debt amounted to INR 938 Crores which by next year had rocketed to INR 5,665 Crores. Similarly their losses which was INR 188 Crores in the financial year 2007-­2008 had grown exponentially to INR 1,608 Crores in the following year. The year financial 2008-­ 2009 was as such not favourable for the aviation industry as the crude oil prices were soaring at USD 140 per barrel which is currently at around USD 45 per barrel.

To add cherry to the cake for the aviation industry the financial crisis had also hit then. Then other airlines were also not performing and were in losses but Kingfisher along with growing losses were covered with ever increasing debt.

By 2010, Kingfisher's debt had also sky rocketed to more than INR7000 Crores.

They had piled up losses from previous years and this was the year when they were turned into a non-­performing asset or a bad loan. Mr. Vijay Mallya had not lost hopes in its business, he still believed that his airlines would fly back to the top and in order to accomplish that he had proposed for debt restructuring. The debt restructuring happened on November 2010, the consortium of lenders was led

by SBI, where it was decide that debt of INR 1,355 Crores was converted to equity at a premium of 61.6% to the market price.

Existing loans were further stretched to another nine years with 2 year moratorium, Interest rates were cut and also a fresh loan was sanctioned. All this was done on the following collateral provided by the company: • Personal Guarantee of Mr. Vijay Vittal Mallya worth INR 248.97 Crores • United Breweries had provided a corporate guarantee of INR1,601.43 Crores • All movable assets of Kingfisher Airlines which was worth INR 5,238.59 Crores • Mr. Vijay Mallya's personal assets were also pledged.

However , the loan repayment was not enough for the revival of the company , it continued to bleed with every passing year.

But this stop Mr. Vijay Mallya from withdrawing heavy amount of INR 33.46 Crores as salary in the years 2011 & 2012.

Finally by 2012 , the company's operations had come to a halt and by February 2013 the company's flying licence also expired.

By then the service tax department and other government departments had already started to chase the company for defaulting its payments. Mumbai International Airport Private Limited sold off Vijay Mallya personal aircraft for INR 22 Lakhs to clear off his airport dues.

In May 2014, United Bank Of India was the first lender to announce Mr. Vijay Mallya as a 'wilful defaulter' followed by SBI and later one by one other banks also followed the same.

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Once the pressure of this was mounting on other companies that Vijay Mallya was a part of , He was asked to step down from the post of chairman of United Spirits Limited ( a company that his father had set up & which was very dear to him) with a lump sum of INR 515 Crores, with which he has absconded the country.

These cases might bring Vijay Mallya back but recovery of the amount he owes is highly doubtful. Kingfisher is an example of complete failure of the system which created the complete mess in banking industry. With complete faith in the judiciary that one day the guilty will be punished and the money will be brought back in the market.

Vijay Mallya is currently is fighting 27 cases in various courts, mostly for loan defaulting and various other for money laundering and many other financial crimes. He was recently caught by the Scotland Yard Police in London and is currently out on bail. A Joint team of CBI and Enforcement Directorate has been working to prove Vijay Mallya's case at the Webminsters Magistrates Court to extradite him from UK and bring him back to India for his punishment of a financial crime worth INR 9000 Crores. Currently the case put forward by the team to the court is regarding money laundering of INR 900 Crores from IDBI Bank by Vijay Mallya and few officials of the bank.

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EMERGING ARCHITECTURE REFORM: SMALL FINANCE BANKS IN INDIA - SHREYA RANI Almost 35% of the adult population in India has an account with a formal financial institution. This means, around 500 million people do not have access to even a basic bank account, let alone the variety of financial products and services they need. The ambitious Pradhan Mantri Jan Dhan Yojana (PMJDY), with its mission to provide at least one bank account for every household in India, seems set to change the financial inclusion landscape considerably. In the last decade and more, microfinance institutions (MFIs) in India have played an important role in enhancing the reach of financial services to include low income rural communities.

However, MFIs (including NBFC-­MFIs) as a part of rapid outreach and horizontal expansion, MFIs have largely followed a monoproduct, group-­based lending approach that makes a limited contribution to the financial inclusion agenda. A paradigm change was introduced Realizing that financial inclusion urgency, the Reserve Bank of India, on 27th November 2014, and released guidelines for a new class of banking entity called “Small Finance Banks” (SFBs). Small Finance Banks by definition caters to the diverse needs for

financial services income people

amongst the

low-­

Sustainability of financial institutions like small finance, payments and universal banks including MFIs/NBFCs rests to a large extent on the ability to offer a full range of financial products. The risks presented by credit only institutions dealing with low income clients were brought to the lights during the so-­called ‘Andhra crisis’. Institutional formats which enable a full package of products and services to low-­income group as well as for the long term sustainability of the institutions themselves. To this level the move towards SFBs will add benefits to NBFCs/MFIs. In addition to this transformation to SFB will allow the MFIs/NBFCs to work without constraining factors of the margin cap and qualifying asset criteria. An added rationale for MFIs/NBFCs to transform into an SFB is that the rural markets in which they primarily operate are unconstrained and present an upcoming business opportunity as long as client centric products can be loaded onto low cost delivery platforms.

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RBI guidelines highlighted that preference will be accorded to institutions that focus on the following aspects: • Banking penetration and Geography Low Income States (LIS) comprising Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Orissa, Uttar Pradesh ,Rajasthan, , and North East States (NES) comprising Arunachal Pradesh, Meghalaya, Nagaland, Assam, Mizoram, Tripura, Manipur present opportunity for expansion on account of poor banking penetration. : 25 per cent of branches must be in unbanked villages with population less than 9,999. The Underserved regions of north east, east and central regions of India.

• Segments and Products: Target segments of small businesses, unorganized sector, low income households and farmers. Market Potential, micro and small enterprises as well as low-­income households (comprising agriculture-­dependent households, small and marginal farmers, and agricultural laborers) face severe challenges in terms of access to finance. These two main segments present notable demand for credit and savings. LIS and NES are not considered potential markets by banks because of which banks invest less in infrastructure and have lower penetration. However altogether, LIS and NES have a total of 85.7 million low-­income households’ people. These households have the potential to save INR21.4 trillion (US$345 billion) and an unfulfilled credit demand of INR18.3

trillion (US$295 billion) and adding to it there is about 11.8 million small and micro enterprises in LIS and NES that have a total debt demand for assets financing and working capital of around INR 21.8 trillion (US$351 billion) and savings potential of INR5.9 trillion (US$95 billion). All together these two segments present considerable upcoming opportunities for formal financial institutions to click on.

Benefits from Transformation: The benefits for MFIs/NBFCs to transform to SFB include: • Diversification: Diversification of the range of products to create a holistic product suite comprising primarily savings and credit, as well as distribution of insurance, pension, mutual funds, payment/remittance facilities and access to ATMs. • Leverage on Low Cost structure: MFIs/NBFCs to rapidly achieve profitability can use their low cost structures. MFIs have remarkably lower operational expenses than that of banks because they have low cost infrastructure and high productivity/ low salary structure of their employees.

• Branding: Microfinance one of a booming industry with a huge number of financial service providers in this overcrowded markets.

Individual microfinance institutions struggle to gain the desired mind space in terms of real loyalty from customers. An SFB license allows MFIs to create differentiated brand name and leverage it to create long-­term client relationships.

• Diversified Funding Base: As of now MFIs are totally reliable on debt and equity sources. While initially mobilizing 34

savings wasn’t that cost effective in the long run and with customer-­centric offerings now the SFB may mobilize savings at costs lower than debt in particular if they address the unmet demand for programmed/recurring savings deposits and illiquid.

• Political Risk Management: A holistic product offering and a banking framework reduces the possibility of political interference, a risk experienced by MFIs. • Deepening Rather Than Widening: SFBs will have an opportunity for vertical penetration with an expanded range of products, unlike the MFIs/NBFCs that expand horizontally with limited number of products. This will also allow SFBs to create an intelligent mix of high and low value customers there by strengthening the business pillar.

• Impact on Customers Financial Well-­Being: A range of products gives poor people the tools they need to manage the fluctuations in their income and expenses better, protect themselves against risk and to seize opportunities as they arise. This is not only important from a development perspective, but also from a business perspective in that customers with growing wealth are, of course, more valuable to (and profitable for) the financial institution.

repayment or collection of loans have traditionally been in cash. To flourish and survive the MFIs will construct alliances with different kinds of bank as such small finance, payments and universal banks and also digital wallet service providers to disburse and collect money via the banking channel. This new framework will make loans a bit expensive for the MFI borrowers as the money won’t be disbursed at their doorsteps anymore, for that they will have to travel to the nearest bank branch or the business correspondent and in this process of disbursement, they will have to lose half-­a-­day’s wage or incur costs in travelling to that place.

On the other side, the operational cost for the MFIs will be toned down as they will not need huge employee base for the disbursements of loans and collection of repayments. Hence, this will help them cut down the price of loans and compensate for the additional cost incurred by the borrowers.

Conclusion: India’s Rs 65,000 crore microfinance industry will change its ways of working in 2017, in the aftermath of the ban on high-­ value notes. Around 85% of the loan disbursements by the microfinance institutions (MFIs) and close to 95% 35

IT LAYOFF FEAR – TRUE TO WHAT EXTENT? - SMRITI PATODIA The one thing that has taken a toll over the Economy and the much talked about – IT Industry. The layoffs and job cuts in the IT firms has been into controversy off lately. For India, IT outsourcing has long been its flagship Industry. A sudden layoffs and decline in the recruitment percentage by the big tech companies is what disturbing the most. Experts say that new technology, automation and undoubtedly US President Donald Trump’s clampdown on H-­1B visas is what creating an Industry wide upheaval.

The IT Industry growth rate which was in double digit has come down by 5-­6 %.

Also the squeeze in margins by the overseas clients who wants to save through automation, robotics etc has reduced the overall IT business. It is for the first time that the Indian IT industry is laying off people in managerial level. Most of the managers being let go were given generous compensation depending upon their years of service. As per the information floating, the managers/ other employees who are laid off are not updated with the latest technologies or with the market. These are basically people of about 38+ age group with high paid salaries of about 15 lakhs and above.

nterestingly, there are companies that are laying off people on one hand and hiring on the other hand. These companies are hiring people in the same age group with higher salaries, provided they are specialised in their domain and expertise in client handling. A McKinsey report has said that nearly half of the workforce in the IT services will be ‘irrelevant’ over the next 3-­4 years.

However, amidst all this fear, the IT firms have other things to say. Companies like TCS and Infosys have clarified that layoffs are done on the basis of lack of performance and not because of poor business conditions. Whereas Tech Mahindra claims that they need employees to re-­skill themselves with artificial intelligence to meet the new avenues of growth. Companies are looking for employees with different skills and that there is no such shortage of jobs globally.

Companies like Infosys, Cognizant, Wipro and Tech Mahindra have recently initiated annual performance reviews, a program that filters out the bottom or non performers.

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As per the Labour Bureau data, in the three months from October – December 2016, 1.32 lakhs new jobs were added, far more than 21000 added in the immediate previous and 77000 in the April-­ June quarter of 2016. Whereas in the previous year of 2015, no new jobs were created but there was actually a decline of 20000 jobs in the December quarter. The September quarter also saw the lowest quarter in the previous six years adding only 1.34 lakhs new jobs across the same eight sectors still being the lowest in the race. Reports also say that none of the IT majors have reported losses even when the mouth underperformance as the reason for sacking employees.

“Shouldn’t underperformance reflect in the bottomlines?”

Exploring the opportunity As the need for reskilled and upskilling employees are increasing, the Indian IT firms are gearing up to embrace the changes in technology, artificial intelligence, automation, big data and cloud to meet their clients demands. The critical crisis that the Industry is facing right now is finding the right talent to remove the undergoing technology gap.

Betting big on this opportunity, a group of new online learning start-­ups are providing digital courses to employees and corporate to help them get equipped with the modern technology and become future ready employees. These education start-­ ups provide various courses both online and offline. According to the companies, the number of employees registering for the course has increased

two fold over the last one year. Major reason for this boom is its growing need and the large scale layoffs in big IT services companies.

The growing opportunity has also excited venture capitalist to invest in this online sector. Simplilearn had raise over Rs 182 crore from Kalaari Capital meanwhile there are other start-­ups that has raised crores of Rupees tapping the opportunity of online education. Online learning is playing a key role in helping IT industry to reduce the skill gaps by helping employees assess their skills, get expert help and build the right learning path.

Silver Lining IT sector will continue to thrive but at a lower growth rate. It will be like any other Industry. In the next 4-­5 years, the growth rate will be around 5-­7 %.

Companies will grow, albeit at a slower rate. Over the past decades, IT companies have only being focusing on exports to US and Europe because of high profits. Now is the time to explore the domestic market. Thanks to the Digital India wave of Prime Minister Narendra Modi, internet is penetrating into the interior parts of India while the improves internet speed has led to fast growth of data business. Along with data, there are a lot of services that are being offered which makes Indian market ripe for growth. Most of the top companies are fully aware of this and have geared up with top notch teams to tackle the domestic market.

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WHATEVER YOU DO CHINA! - SNEHA TIBREWAL (MANAGING EDITOR) THE IMF “systematically impoverishes foreigners”, and the World Bank’s advice has “negative value to its best clients”.

These harsh words were voiced not by lefty critics of the Washington Consensus, but by two men (David Malpass and Adam Lerrick, respectively) whom Donald Trump has picked to lead his Treasury’s dealings with the rest of the world, including the international financial institutions (IFIs), such as the World Bank and IMF, and the G20 group of leading economies.

Their future boss, Steven Mnuchin, America’s treasury secretary, is not much more reassuring to the global financial establishment. At his first G20 meeting, in Baden-­Baden in Germany on March 17th-­ 18th (pictured), he vetoed a long-­standing pledge to “resist all forms of protectionism”. It had often been breached. But hypocrisy is the tribute vice pays to virtue.

To veterans of international economic affairs, this combative stance is baffling.

America’s government now seems to disdain a set of institutions it nurtured into life—institutions that are more commonly criticised for following America’s will too closely. “The United States is just handing

the leadership over to China of the multilateral system,” Jeffrey Sachs of Columbia University told Bloomberg this week.

But if there is a vacancy, is China qualified or even interested in the job? In January President Xi Jinping seemed to audition for the role in a speech praising globalisation at the World Economic Forum in Davos, Switzerland. As evidence of its capabilities, China can also point to a hefty portfolio of cheque book diplomacy. The China Development Bank, one of its policy lenders, already has a bigger book of overseas assets than the World Bank. Another institution, the Export-­Import Bank of China, is not far behind. In addition, the country’s central bank has extended currency-­swap lines to over 30 countries, including many that America’s Federal Reserve would not touch.

What about its willingness? Most of China’s economic diplomacy to date has been bilateral, allowing it to win loyalty, reward friends and secure contracts for its companies. Over 60 countries will, for example, supposedly benefit from Mr Xi’s nostalgic vision of a revived Silk Road

38

(the “Silk Road Economic Belt and 21st Century Maritime Silk Road”, mercifully shortened to “One Belt, One Road”, or OBOR).

managing the transition to a more flexible yuan and communicating its policy to the markets.

As for multilateral efforts, China’s most eye-­catching initiatives have worked around the existing system, not through it.

It set up two multilateral lenders of its own, the New Development Bank (known as the BRICS bank, based in Shanghai, with financial contributions from Brazil, Russia, India and South Africa as well as itself), and the Asian Infrastructure Investment Bank (AIIB), in Beijing, which just increased its membership to 70, including every G7 country except Japan and America.

So it might seem that China has little interest in filling any gaps America might leave in the old multilateral system. But that would ignore another, less heralded trend. Overshadowed by its bilateral boondoggles and multilateral innovations, China’s relationship with the incumbent IFIs has been warming. It has become more “compliant” with G20 commitments, according to the G20 Research Group at the University of Toronto (see chart). Its currency is now more fairly valued and its current-­account surplus has narrowed, removing a bone of contention with the IMF. The IMF’s decision in 2015 to include the yuan as one of five reserve currencies in its Special Drawing Rights basket has also helped to rebut the notion that the fund is an arm of an American policy of containment. Moreover, since China’s ham-­fisted devaluation earlier that year, it has often sought the IMF’s advice on

The IMF’s decision in 2015 to include the yuan as one of five reserve currencies in its Special Drawing Rights basket has also helped to rebut the notion that the fund is an arm of an American policy of containment. Moreover, since China’s ham-­fisted devaluation earlier that year, it has often sought the IMF’s advice on managing the transition to a more flexible yuan and communicating its policy to the markets.

China is similarly happy to learn what it can from the World Bank, which has advised it on everything from managing the debt of its provinces to cleaning the air in its cities. The bank’s suggestions are not always taken. But at least China seems to value its advice non-­negatively.

China’s relationship with these institutions is also becoming more generous. It is now the 11th-­biggest donor to the International Development Association (IDA), the arm of 39

the World Bank that helps the world’s poorest countries.

The China Development Bank has co-­financed several World Bank projects in Africa.

Last autumn, when the IMF was looking for money to help Egypt, it phoned China, which agreed to extend a currency-­swap line worth 18bn yuan ($2.6bn). The call took only five minutes and China’s generosity embarrassed the G7 into stumping up some money in addition.

China had been similarly helpful to the IMF bail-­out of Ukraine a year earlier.

The World Bank and the IMF are imperfect vehicles for China’s economic diplomacy. The bank’s capital constraints might inhibit a big expansion in its lending and China’s voting power and financial stake in the IMF will rise only if America permits. It took Congress six years to approve the last reform and it is hard to imagine the next round, due in 2019, winning much support from Mr Trump.

But by adding extra dollops of financing to favoured bank and fund programmes, China can nonetheless steer the multilateral system indirectly, by adding its weight where it sees fit.

In the long term, if China becomes the world’s leading economy, it is conceivable it will become the biggest financial contributor to the bank and the fund. At that point, according to their articles of agreement, their headquarters would have to decamp to China. All the more reason for the World Bank to help Beijing clean its air.

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MARKET WATCH GLOBAL ACHE DIN? - DIXITA REDDY Stock markets across the globe have been on the up and down swings over the past few months The Nasdaq closed above the 6,000 threshold for the first time ever. In an ebullient rally on Wall Street, the tech-­ heavy Nasdaq ended up 41.7 points at 6,025.5, having earlier hit a new lifetime high of 6,031.91 on April 25th 2017. The milestone came more than 17 years after the index touched the 5,000 mark.

Meanwhile, the Dow Jones posted triple-­ digit gains, breaching the 21,000 barrier for only the fifth trading session in its 131-­ year history before closing up 1.1pc at 20,996.1 on April 25th.Since then there have been swings over the next months.

What’s driving this rally?

Global liquidity which has been a prominent factor in pushing Indian market played a key role along with domestic liquidity to push the market into uncharted territory. There are many factors which could be driving a rally in Indian equity markets such as strong GDP growth, stable political outlook, lower inflation, expectations of a rate cut, pro-­growth reform process such as GST, NPA etc, forecast of good monsoons, and strong rupee among others.

The victory of centrist French presidential candidate Emmanuel Macron has sent positive sentiment across the euro region.

Le Pen and Macron, both outsiders, locked out France's two major parties for the first time in nearly 60 years. The French stock market soared 4 percent and the euro spiked to a five-­month high on the day of first round voting. The same holds for the regional elections victories for Angela Merkel.

Technology sector led the US market, accompanied by Trump tax talk .

The market is strong this year as the cloud [storage technology] is driving more and more of the earnings within the Nasdaq index and it’s a growth area that’s expected to continue. Technology shares recovered from a recent sell-­off.

The global rally has been largely liquidity driven which has led to a steady market performance despite the geopolitical issues and sluggish macroeconomic conditions,” Prasanth Prabhakaran, Sr. President and CEO, YES Securities (I) Ltd. MOVEMENT IN BENCHMARK STOCK INDICES ACROSS COUNTRIES: 41

End of day Commodity Futures Price Quotes for Crude Oil WTI (NYMEX)

The median value of the change in stock market indices was 14.9 percent. 5 countries witnessed changes of above 20 percent: Poland (up 30 percent), Argentina (up 29.6 percent), South Korea (up 25 percent), Turkey (up 24.2 percent) and India (up 23 percent) while 11 had changes of between 15-­20 percent. Stock indices had declined in Canada and Russia.

COMMODITY MARKET The Bloomberg Commodities index lost ground in Q1, largely due to a decline in the energy component. Brent crude fell -­ 7% as oil inventories and production in the US increased at a faster rate than expected. Natural gas was down -­14.3% and coal declined -­8.7%. The agriculture component was also weaker, largely attributable to weakness from sugar and soybeans prices. By contrast, industrial metals generated a positive return. Iron ore rallied 5.7% while copper (+5.8%) and zinc (+7.5%) also rose on higher demand from China. Precious metals finished in positive territory, with gold (+8.3%) and silver (+14.2%) both posting gains.

The global market remains awash in surplus oil, rising U.S. crude production and weak domestic gasoline demand kept pressure on prices. Natural-­gas futures, meanwhile, rallied since April to their highest finish of the month to date, with traders encouraged by a rise in weekly U.S. supplies of the fuel that came in below market expectations. July natural gas NGN17, -­0.85% rose 12.3 cents, or 4.2%, to $3.056 per million British thermal units—the highest settlement since May 31, after ending on June 14th at their lowest since mid March. U.S. government short-­term forecasts indicate warmer-­ than-­normal weather in the South and Middle Atlantic consuming markets, which are big consuming markets for natural gas, With lower oil prices and bettergrowth prospects -­ liquidity has been chasing returns,” Siddhartha Khemka, Head – Equity Research (Wealth) at Centrum Broking Limited told Moneycontrol.

Brent crude futures LCOc1 rose 0.9 percent to settle at $48.72 per barrel, while benchmark U.S. crude CLc1 gained 0.8 percent to settle at $46.46.on June 14th.

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EQUITY MARKET We may well look back at April 2017 as the turning point for European equities (Information Technology being the major contributor)in terms of their performance relative to the rest of the world.

In the equity market, big technology names like Microsoft (MSFT.O) and Alphabet (GOOGL.O) helped prop up U.S. stocks, along with materials and energy shares. Tech has led the S&P 500's 9-­percent rally this year. In a reversal of the performance patterns in the fourth quarter of 2016, small and mid-­ cap equities trailed large caps, with the Russell 2000 and Russell 2500 recording respective gains of 2.5% and 3.8% over the period. Mergers & acquisitions (M&A) were an important theme for the UK. Across the quarter, the stock market in Japan was led by cyclical sectors such as marine transportation, paper stocks and chemical companies as investors continued to discount the possibility of stronger global growth.

However, one point to remember is that liquidity conditions have been high since the times of US quantitative easing program. Since then high liquidity conditions have prevailed in the global markets leading to a run up in prices across asset classes including equities.

The global equity market is on a roll and been mainly led by emerging countries .An upswing in global growth and a lack of follow-­through on protectionist trade policy from the Trump administration supported risk appetite. Korea, Mexico, Taiwan and China all benefited from these factors and outperformed. In China, the weaker US dollar also served to

alleviate concerns over capital outflows while economic data stabilised. Indian equities rallied as GDP growth appeared to shrug off demonetisation concerns.

The ruling BJP also performed well in state elections, reflecting support for ongoing reforms. Poland was the strongest index market as positive economic data increased expectations for growth this year.

DEBT MARKET Short-­dated U.S. bond yields briefly hit multi-­week highs ahead of an anticipated interest rate increase from the Federal Reserve. Against the backdrop of strengthening growth, rising inflation and marginally more hawkish central banks, global credit, particularly high yield, outperformed government bonds. Global high yield credit outperformed government bonds by 2.4% on an absolute return of 2.8%. UK high yield proved particularly strong with a return of 3.3% and outperformance of 2.8% above government bonds. Global investment grade corporate bonds rose 1.2% outperforming government bonds by 0.7%.

Among government bonds, Europeans sovereigns came under pressure amid political concerns and markets starting to adjust to the prospect of monetary stimulus withdrawal. Spreads on French and Italian bonds over Bunds widened markedly reflecting political risk. French 10-­year yields rose from 0.67% to 0.97% and Italian 10-­year yields from 1.81% to 2.31%. Ten-­year Bund yields rose from 0.21% to 0.33%. US and UK government bonds performed better. The US 10-­year yield came in from 2.44% to 2.39% and the UK’s from 1.24% to 1.14%.

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FINANCIAL TRIVIA According to the Deutsche Bank Long-­Term Asset Return Study, the last time interest rates were near current levels, in the 1950s, T reasury bonds lost 40% of their inflation-­adjusted value over the following three decades.

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