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  • 7/24/2019 Fin-Q-NITIE 2016

    1/ StreetAtNITIE



    India: A Cashless Economy

    Dragon enters SDR MarketNPA in Banking Sector


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    IN-FIN-NITIE Vol 8 Issue 1 IN-FIN-NITIE Vol 8 Issue 1

    IIQF is the pioneer o high-end finance education in India. It is an education initiative o top industry practitionerswho have pioneered the most sophisticated financial technologies in India like Portolio Risk Management Models and

    Systems and Algorithmic rading Systems using High Perormance Parallel Computing.

    A mere 25% o graduates that India produces every year is actually employable. Even though India is poisedto become the third largest economy in the world by 2050, out o all the graduates that pass out in an aca-

    demic year, only 25% are suitable or getting inducted into the industry.

    Jeffrey Fuller, Principal Advisor o Human Capital.

    Tere exists a huge gap between the skills that are required by the industry and what the Indian academicsystem produces. Te objective o IIQF is to i mpart training to students in those skill-sets that are in demandin the industry and make them industry ready, or as we call them Te Street-Ready.

    Certificate Program inFinancial Modelling in Excel

    A course geared towards teaching the practical skillsrequired or making a career in Investment Banking,Equity Research, M&A Specialist, Company Valuations,etc. Tis is a program where practicing Investment Bank-ers and reasury Proessionals teach the latest techniquesand modeling skills that are used in the industry. Tisis a hands-on course, with extensive use o computersand spreadsheets, the training will be imparted throughinteractive sessions with extensive use o real world Excelmodels.

    Leaning Outcome:Create MS Excel based financial models.Use the advanced tools o Excel.Record and use Excel Macros or implementing advancedunctionalities in Excel.Carry out financial analysis, orecasting, etc.Valuation o companyBond ValuationValuation o Mergers and Acquisitions

    Course Prerequisites:Basic knowledge o MS ExcelGood knowledge in Finance

    Certificate Program inAdvanced Financial Modelling in Excel and VBA

    Lot o financial proessionals who do all kinds o financialmodelling eel handicapped to quite a large extent in imple-menting certain models that requires them to do consider-able amount o programming in VBA. Merely knowing howto record or even write some odd macros in VBA is not oany help to them. Tey cant do many things as they dontknow VBA programming. Tere is no specialized course inI domain that teaches VBA Programming or Finance, acourse that teaches VBA programming with exclusive ocuson Financial Applications.

    Tis is why we have designed this course tailor-made orimparting these skills. Tis course consists o two modules1) VBA Programming or Finance and 2) Derivatives Valua-tion and Risk Analytics. Te Derivatives Valuation and RiskAnalytics module covers Monte Carlo Simulation, Value-at-Risk and Derivative Valuations o different asset classesusing the cutting edge models being used in the industry.Tis program gives a huge opportunity to participants evencoming rom non-mathematical background a chance toenter into the field o quantitative finance.

    Course Prerequisites:Knowledge o MS ExcelKnowledge o Derivative Instruments

    For more inormation log on to: w or email to: [email protected] Person: Nitish Mukherjee (+91-9769860151/ +91-22-28797660)


    Pro. Ms. Karuna JainDirector, NIIE


    Pro. (Dr.) M Venkateswarlu

    Editorial Board

    Ankur GuptaJitendra Agarwal

    Raj ShahShashank Kale

    Sundeep ariyal

    Design eam

    Anish KumarSiddhartha Paul


    Heartiest congratulations to all o you. With the release o yetanother edition o the magazine, we are getting bigger and b etter andit gives me immense pleasure and satisaction to be the convenor oStreet. In-FIN-NIIE has given me the opportunity to work withthe students and advance orth with the common goal o learningand practising finance.As always, In-FIN-NIIE brings you something new this timearound too. Afer a series o issues with identified theme and articles

    related to that theme, the current issue just gave the students to writeabout finance. Temes and matching articles aside, this issue has aplethora o written words by students about whatever caught theireye in the field o finance.I applaud the effort o Street or their unstinting efforts. I hope theystrive to take the magazine to greater heights, and also hope that issue

    will entertain you and keep you engaged about the recent happeningis the world o finance. We look orward or your comments andwish to bring out more interesting issues in the uture.

    Dr. M Venkateswarlu

    Senior Proessor o FinanceNIIE


    Te oil industry, with its history o booms and busts, is in its deepestdownturn since the 1990s. Encompassing the magnitude and the horizono its effects, this edition brings to you an exclusive article highlightingthe causes and the impacts o the slump in oil prices. Complementingthe analysis o Yuan devaluation presented in the earlier edition o IN-FIN-NIIE is a look into the possible effects o the entry o the Chinesecurrency into the SDR basket.

    As the air surrounding the speculation o Fed rate hike cleared, globaleconomies looked inwards or ripples it could cause. An abridged analysiso its impact on major economies has been presented in this edition. With

    the reverberation o GS in elongated session o Parliament sometimeseulogising and sometimes putting it under the shadow o clouds, Is theGS Bill Panacea or Indian Economy is an attempt to untangle thecomplexities o the bill or the readers.

    With the coming o digital India, this edition makes a case or a cashlesseconomy. Also, in our quest to bring to our readers a varied content, welook into the issue o NPAs and the benefits that the banks can reap throughthe use o analytics.

    We were inundated with some brilliant articles that really made us toilhard to find the best. We extend our sincere gratitude to all the authorswho burned the midnights oil to write such wonderul articles. In ourendeavour towards continuous improvement we invite eedback andcriticism at [email protected]

    Want to become an Investment Bankeror a Financial Research Analyst

    Stop dreamingAdd the skill sets required to become one

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    Since 1990s there have been periods o booms andbursts in oil industry and has impacted the worldeconomically and politically. Te declining oil priceduring 1985-1986 is considered to have contribut-ed to the all o the Soviet Union. Te oil importingcountries like Japan, China or India would benefitbut the oil producing countries would lose. It mayenhance consumer oriented stocks but may hurt oil

    based stocks. Tere may bea GDP increase between0.5% to 1.0% or India andChina but decline o great-er than 3.5% or Saudi Ara-bia and Iran. Consistentdrop in oil price will resultchanges in global econ-omy. But now with theadded scenario o shale oilsupply and the largest im-porter o oil -USA cease tobe so anymore, the largestconsumer, China in slow-down period, Iran, one o

    the top oil producer that was out o market due to theembargo is all set to become active exporter again,the global economy will bump to spring out somenew mode o economic vibration.

    Te three key variables o oil is1) Production2) Consumption3) Price per barrel

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    Decreasing Crude Oil Prices and its Impact on Global Economy 1

    Leveraging Analytics or achieving Banking without a Bank 6

    Is the GS Bill Panacea or Indian Economy 10

    Street Wall- Masala Bonds 12

    Fed Rate Hike: Impact 14

    India: A Cashless Economy 17

    Dragon Enters the SDR Market 22

    Deconstructing Indian Bankings Achilles Heel- Te Curse o Deault 26

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    From the figure, we can decipher the causes o chang-es in oil prices due to various events especially duringwars, crisis, global financial collapses the oil priceshave increased. So, during these times the supplybecomes low which in turn raises the prices o thebarrels.

    Impact on oil consumers world wide

    More than 200,000 oil workers have lost their jobs andmanuacturing o drilling and production has allensharply. Decline in oil prices has definitely benefittedconsumers but not to that extent as experts expect-ed. Te extent o retail prices varies rom countries tocountries and rom regions to regions o the world.For instance in many countries retail prices are fixed,thereby prices remain constant though world prices

    change. Tere appear two cases or consumers:a) I consumer thinks it is temporary then spendingpattern o consumers remains more or less the same.b) I consumer thinks it is permanent then spendingon other things becomes high or pay down the debts.

    Due to all in prices, real wages become stagnant, thisin turn results all in the cost o living is important orgiving Western consumers more income to spend. Aall in oil prices is like a ree tax-cut. Te all in oilprices could lead to higher spending on other goodsand services and add to real GDP.

    Impact on Macroeconomic entities

    Macro economic impact o alling oil pricesa) Lower inflationb) Higher output

    GDP effects

    As the all in oil prices due to an increased supplyo oil, it is assumed to have positive effects on globaleconomy .However, the effects will vary greatly romcountry to country, depending on net importers ornet exporters o oil. In oil-importing countries, theeffect o alling oil prices on GDP growth is over-whelmingly positive. Households scope or con-sumption increases and companies production andtransportation costs decrease, which leads to higherprofits, investments and new recruitments like in In-dia, Indonesia and China have more energy intensive

    economies than developed economies and thereoregrow greater benefits rom lower oil prices. In con-trast, among the net exporters such as Saudi Arabia,Russia and Iraq, GDP growth is dampening as exportrevenues are alling. Te tendency among certainoil-producing countries to compensate or the de-creased prices by producing and exporting more soas not to lose too much export revenue has probablycontributed towards urther price decreases in recentmonths. Countries exporting oil are generally moredependent on the price o oil than countries import-ing oil.

    Lower oil prices help to reduce the cost o living.Oil related transport costs will directly all, leading

    to lower cost o living and a lower inflation rate. Bigenergy companies will be orced to cut down theircapital spending and reduce exploration budgets.Profit margins will be squeezed. Lower oil prices willdrive down production. Te small and medium sizedcompanies will ace a great risk because o lower oilprices.

    Effects on inflation

    Lower oil prices lead to lower global inflation. Inthe assessment o the World Bank (2015), global in-flation would all by 0.40.9 percentage points over2015 as a result o aall in oil prices o30 per cent. Howev-

    er, the effects varyrom country tocountry dependingon actors such asthe weight oil prod-ucts have in the CPIbasket, the effectso the oil price onwages and otherprices, exchangerate developments,how much reedomo action monetarypolicy has and thestructure o oil-re-

    lated taxes and subsidies. Te all in the price o oil willhave a greater direct effect on inflation in countries inwhich oil-related products orm a large part o theCPI basket. Te size o the indirect effects, which isto say how much other prices and wages are affectedby a all in the price o oil, also varies rom country tocountry. Te level o oil-related taxes also affects howgreat the impact will be on consumer prices. Fallingoil prices give some relie to consumers with high-

    er discretionary income, but given deflationand low consumer confidence, they are un-likely to spend it but preer to save. Falling oilprices rather than helping increase spendingis pushing down the headline inflation rateand making actual deflation a real possibility.

    Impact on Indian economy

    India to sustain a growth rate o 8-10% hasto work on measures to eradicate poverty,meet its developmental goals and meet itsenergy needs in the orm o renewable andsustainable orm at competitive prices. Indiais heavily dependent on coal to meet its halo its energy requirements. Te other hal isdominated by oil and gas. Oil meets 24% oIndias commercial energy requirements .India is the ourth largest oil consumer aferUS, China and Japan. Indias reserves and oilproduction has little significance over theyears. So, it largely depends on imported

    crude oil to meet its energy requirements. 70% o In-dias crude oil is imported rom Middle East mainlyrom Saudi Arabia and Iran.

    AD-AS Model o Falling Oil Prices As a Positive Supply Shock: LowerPrices, Higher Output

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    When prices were increasinga) Te price increase was passed on to consumerb) Rationalizing taxes and other levies on petroleumproducts.c) Making the National oil companies bear the bur-den.

    High domestic demand or petroleum products pro-jected high investments into refining sector. India has18 refineries and the government o India has madea lot o efforts to place India amongst net petroleumproduct exporter countries.

    Impact on US Economy

    Te orecasted impact on GDP due to lower oil pricesis accounted or 0.2-0.4 percentage point. Tis sectorhas added 5000 jobs in the past 5 years. So, it willhave minimal impact o job cuts over the economy inthe broader sense. Lower oil prices benefits major oil

    consumers like Goodyear, UPS, American Airlines,General Motors and Carnival. Te Fed may keep in-terest rates lower and thereby keeping a check in in-flation. But Lower oil prices will also negatively affectthe profitability o US energy companies such as Exx-on, Chevron etc. It has been this growth in US energyproduction, where gas and oil is extracted rom shaleusing hydraulic racturing.

    Shale has essentially severed the linkage betweengeopolitical turmoil in the Middle East, and oil priceand equities.


    Russia is one o the worlds largest oil producers. Rus-sia loses about $2bn in revenues or every dollar allin the oil price, and the World Bank has warned thatRussias economy would shrink by at least 0.7% in2015 i oil prices do not recover.

    Despite this, Russia has confirmed it will not cut pro-duction to shore up oil prices.

    Te Russians need oil prices to be above US $105 abarrel to balance Russias budget; market conditionsin which the prices all below this will either causethe Russian government to run deficits or orce it tocut down on its other development programs.


    Tough in the short term the impact on Irans econ-omy will be cushioned by the governments use o aund to counter lower oil prices, in the long run it isestimated that Iran needs oil prices to be above US$130 to balance its budget. Te nuclear deal with Iranwill be positive or Irans economy, but it would alsosignal that Irans oil would be added to the presentsupply o oil on the market, which may put urtherdownward pressure on oil prices.


    Tough China is going to become largest importero oil still the benefits o alling prices are not as ex-pected due to government raising taxes on oil prod-

    ucts. Lower growth prospects and a slowdown in realestate and increased household savings is a mattero concern. One o the reasons or lower oil prices isthe lower demand rom China Te alling oil pricemay help stimulate growth in China especially in theindustrial investment field it may translate into hugeoreign exchange savings or China will bring downbusiness expenditures or downstream industries, lo-gistic companies and airline industries, agriculturalproducts .Tis will in turn benefit the consumer sec-tors as lower inflation raises consumption throughhigher disposable i ncomes.


    Te German economy depends largely on manuac-turing. So, decrease in oil prices is a crucial determi-nant or its economy. It will accelerate car purchasesworldwide. A higher oil price avours uel-efficientcars and German car industry is at the oreront oinnovation. But in long run vehicles will be uelledby cheap solar or wind energy thus eliminating thechanges in oil price.


    Te Saudi economy is dependent on oil revenues al-most 90% o it. Te all in prices will result in a highergovernment deficit and lower government spending.It will have significant impact on job creation withinthe country. But even afer the drastic all in oil pric-es, the Saudis havent cut their oil production in orderto push oil prices upward. Te reasons or not doingso are claimed to be entirely political in nature, as thelower prices are likely to hurt shale oil production inthe US, which would be a long term positive or theSaudis. Prices o OPECs benchmark crude oil haveallen about 50% since the organization declined tocut production at a 2014 meeting in Vienna.

    Te war in Syria and Iraq has also seen Isis capturingoil wells. Tey are making about $3m a day throughblack market sales and undercutting market pricesby selling at a significant discount around $30-60 a


    Other economic impacts o lower oil prices

    1) Reduced profitability or alternative energy sourc-es.2) Delay in investment into alternative greenerorms o energy, such as electric cars.3) Decline in car use leading to decrease in trafficcongestion and environmental costs o petrol use.

    Although lower oil prices are always welcomed byconsumers, the global impact o the all in oil pric-es is much more difficult to interpret, since manycountries depend on oil as a major revenue sourceand lower prices hurt their economy. Lower oil pric-es could also signiy a weak global economy, whichcould more than outweigh the benefits o lower oilprices.

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    LEVERAGING ANALYICS FOR ACHIEVING BANKING WIHOU A BANK -Richa Agarwal and Dheeraj Lamkhade, Welingkar Institute o Management

    he banking industry is going through major dis-ruptions with several new players entering the mar-ket and seizing significant market share across thebanking value chain.

    Weaker customer experience levels have opened thedoors or many non-bank competitors. echnology

    companies (like PayUMoney, m-rupee), retail firms(like Paytm) and social/crowd source und aggrega-tors (like KickStarter, GoFundMe) are ew such en-tities which have gained significant customers in ashort period o time.

    Let us first understand the main types o b ank and itscore unctions:Commercial Bank: It is also known as business bank-ing, which deals with corporates customers.

    Investment Bank:It is that division o bank, which isused to assist the ways to create capital to individuals,corporates and the government.

    Retail Bank: It is a visible ace o the bank to the pub-lic, which deals which with the retail customers di-rectly.

    Retail banking is not a new phenomenon in India.It has become synonymous with mainstream bank-ing or many banks in last ew years. It is typicallymass market banking where individual customers

    use local branches o larger commercial banks. Ser-vices offered include savings and checking accounts,mortgages, personal loans, debit cards, credit cardsand so.

    Te retail loans constitute less than seven per cent oGDP in India Vis-- Vis about 35 per cent or otherAsian economies: South Korea (55 per cent), aiwan(52 per cent), Malaysia (33 per cent) and Tailand(18 per cent). (Source: International Journal o Re-cent Scientific Research)

    Industry Challenges

    In retail banking industry the customer relationship

    is core o the business. Due to Hyper-competition inthe market the industry is acing challenges to main-tain this relationship.

    Lost personal touchFor Banks, growing cost advantage made the serviceindustry move rom a physical model to a digital one.As per BCG analysis an average bank transaction

    through a branch costs 40-50 INR where as a mobiletransaction costs 0.20 INR.

    For customers, advancements in technology andmultichannel service availability, has resulted in cus-tomers using PCs and smartphones or interactingwith banks. Tis resulted in reduced stickiness andlower switching costs, which in turn affected thebanks profitability.

    A recent report shows a relative study o customervisits to bank with respect to new value added ser-vices offered, considering ICICI and PNB data.



    Decreasein no. ovisits

    % Change % Change

    No De-crease

    22% 26% 24%


    54% 52% 53%


    12% 18% 15%

    No Resp. 12% 4% 8%

    able 1: A comparative study o VAS and customerretention by aculty o MDU, Rohtak

    Tere has been a significant increase in takers or val-ue added services like AM banking, internet bank-ing, tele-banking. Post availability o VAS, we cansee that customers have decreased their bank visitsconsiderably but still they preer visiting the physicalbranch when it comes to decisions regarding invest-ments, processing o loans.

    Tus a Digital model (Physical + Digital) can givebanks a small but significant window to build rela-tionship with the customer.

    Customer Churn AnalysisWhen a customer leaves a bank, not only the u-ture lie time value o the customer is lost but alsothe total marketing spend in acquiring the customeris accounted. With lucrative products in the marketand lower switching cost or customer, there is a bigchallenge or banks to retain the customers. Smallchanges in customer churn can easily bankrupt thebusiness or can turn a slow moving business into apower house.

    For Example: Past data showed, a customer is morelikely to buy a home loan afer 3-4 years o regularincome. He/ She goes around searching or lowestrates and offers associated with his employer andthe builders. I this customer switches to a new bankthere is a high possibility that he/she will move theirsalary account too. So, banks need to provide rightinormation at right time or making the cross-sellhappen.

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    Risk AssessmentTe total credit off-take has seen the growth sidedue to the positive economic conditions. Risk basedunding still continuous to be a major considerationactor or decision making.

    It is believed that with years o data in the pocket,we can start developing BI models which can act as asupporting agent or risk assessment.

    Figure 1: Reserve bank o India, echSci research

    Analytics the way orward

    With growing competition it is imperative or banksto offer an interactive and consistent online bankingexperience coupled with high-quality branch bank-ing service. In order to achieve aster time to market,banks need to anticipate the customer needs well inadvance. Analytics thus play an important role in de-veloping a base or uture banking products.

    Over the period banks have implemented variousreporting and descriptive analytic systems like theCRM, accounting systems, data mining systemswhich have resulted into multiple disparate systems.But now the need o the hour is to integrate data romall these systems or providing predictive and pre-scriptive analytics onto a single dashboard.

    Below are ew o the banking segments with signifi-cant use o analytics:

    1. Customer behavior and mar-keting:

    Banks are already analyzing yourspending patterns. One o my recentinteraction with a telebanking ex-

    ecutive revealed that they are track-ing my requent flying patterns andhave suggested credit card insurancein case the card is lost in-travel. Teconcept is backed with a great cre-ative idea o providing travel ticketand hotel booking assistance in caseo credit card thef at nominal premi-um o 1000 INR per year. But there isan issue with the data science behind

    selecting a customer like me who is a student withoutany regular income, who always pre-books a ticketand havent booked a hotel yet.

    So it is i mportant to have a balance between creativ-ity and discipline, between art and s cience.

    Some o the predictive and prescriptive analyticstechniques or significantly improving the marketingoutcomes without proportionately increasing mar-keting budget are:

    Social media listening and measurement o cus-tomer sentiments Customer segmentation Identiying profitablecustomers, profitable cross and up selling products,possible avenues or migrating customers rom lessprofitable relationships to more profitable ones. Omni Channel Engagement and Campaign man-agement rigger based cross selling Customers are irritat-ed with the telebanking calls or old vanilla productslike credit card, insurance. Identiying the triggers inthe customer behavior and then selling the productwill give higher probabilities o a sell.

    Some examples or impact analysis are:Figure 2: Key ocus areas or Analytics

    ime-to-market reduced by 25% Operating cost or a new product reduced by 15% Conversation rate in trigger based selling was 45%higher than usual. arget customer campaigns helped in increasingthe assets by 15% over normal YoY growth

    2. Risk, raud and KYC:

    Recently I had attended this Analytics roundtableconerence held at Welingkar Institute o Manage-ment, Mumbai. Te key speaker or the event wasrom SaaS global who talked about how SaaS helpedthe Income ax department in order to detect below2 types o risks:

    Know Unknown ax evasion happens and itis one o the know issues or the I office, SaaS helped

    them identiy the unknown side Te evaders. Unknown Unknown Te same team wasable to discover another VA reund scam which wastotally unknown to the I department.

    Reducing NPAs has been one o the top challengesor most o the banks. Post 2008 crisis there has beenlot o compliance requirements in the banking in-dustry. Te introduction o Basil III norms and newregulations in the industry (like credit card account-ability, responsibility and disclosure act), has signifi-cantly increased the operating cost due to additionalactivities like record keeping, auditing, portolio risk


    Business Analytics can thus help in creating refinedcustomer risk profiles or a better understanding oassets.

    3. Product and portolio optimization:

    Multiple product lines spread across the globe, it isvery important or the company to find out the keyperormance indicators to determine the asset poolquality. Tis can also help in analyzing the effect opre-payments on the cash-flows and effects o pay-ment deaults.

    I the mortgage portolio is used or trading/invest-ing, analytics can be used to calculate risk o theseportolios.Even though the data is important, the right data isessential. Te clear business goals gives the under-standing o whats important to the business andhelps analyst to find what data counts or should becounted.

    Banking without a bank is the newtrend.

    It will be interesting to watch how the veterans inbanking industry will compete with this new trend.

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    In India, currently we have a number o indirecttaxes including excise duty, countervailing duty andservice tax levied by central government and valueadded tax, octroi tax, entry tax and luxury tax by thestate government. All o these add a lot o complexityin the whole taxation system. Te panacea i s nothingbut Goods and services tax (GS). It has been pro-posed that GS would be implemented rom April 1,2016 by the Government o India.

    Goods and Services ax would work as a compre-hensive tax on manuacture, sale and consumption o

    goods and services except petroleum products, alco-hol or human consumption and tobacco throughoutIndia replacing taxes levied by the Central and Stategovernments.

    Over 130 countries have already implemented GSsystem to ensure an efficient and transparent taxationsystem. In the proposed GS system, the customerswill have the burden o only the GS charged at thelast stage afer getting benefits o tax charged in ear-lier stages. According to the recommendations, theCentre will collect tax on inter-state business activ-ities. Te tax amount would be distributed betweenthe Centre and the states according to the set provi-sions. Te council or GS consists o Union financeminister, union minister o state o finance and the fi-nance ministers o all the states. o mitigate the loss-es o the state governments due to incoming o GS,the Centre is planning to levy an additional tax notexceeding one percent on inter-state trade in goods

    and services. Te power to make rules related to in-ter-state business transaction will be available to theCentre while the state would have the power relatedto intra-state business activities.

    GS will help in elimination o multiplicity o taxes.Tis system would rationalize the overall tax struc-ture and simpliy the compliance procedures. Terewould be less errors and duplication would be mit-igated. A major distinguishing eature is o the pro-posed GS is the destination principle. Under thisprinciple, exports would be zero-rated while the tax-es would be imposed on imports. Similarly, the tax-es would apply in the destination state instead o thepoint o origin. GS would change the ways how

    the companies operate their businesses. For ex-

    ample, currently supply chains have been decided insuch a manner so as to minimize the Central Salesax.

    GS would bring down the inventory costs. Tepeople at each stage o value addition would get taxcredit on the inputs used by them. GS would resultin repricing o the products afer variations in themargins over the cost. Also the timing o payment otax will also get changed which will orce the man-

    uacturers to plan their cash flows accordingly. Tesofware which is currently in use or recording the

    transactions will also become redundant and willneed to be replaced. Te employees would have to beeducated to ensure smooth implementation o GSsystem.Let us understand with an example how the GS re-gime works. Assume there is a sugar manuacturerthat purchases raw materials at 1000 lakhs per batch.Te manuacturer obtains an operating profit o 300lakhs and incurs a processing cost o 100 lakhs. Tetotal tax amount to be paid by the manuacturer tothe government would be 250 lakhs. It includes 100lakhs on procurement and 150 lakhs on the sales. Buti we have GS in place, the total tax required to bepaid is just 150 lakhs instead o 250 lakhs. When the

    manuacturer sells the output at 1500 lakhs, he hasalready paid a tax o 100 lakhs on the inputs usedor production. Now he would pay only 50 lakhs ad-ditionally because he would get a tax benefit o 100lakhs while calculating tax o 150 lakhs on sales. TusGS decreases the burden on the manuacturers.Tis is true with the people at a ll stages o value addi-tion. Te outcome is the reduction in the overall taxwhich would reduce the cost o the production andthus boost the output in the long run.

    GS would reduce the overall tax burden o the con-sumers which is currently around 25%-30%. GSbrings a pool o benefits or all. It is a very transpar-ent tax system and would simpliy the t ax complianc-

    es. Customers would come to know the exact amount

    o tax paid by them on the items o purchases. Tetax burden would be distributed equally betweenthe manuacturing activities and services. Afer theincoming o GS, there would be no hidden taxand thus doing business would become easier. GSwould prove beneficial or the country as a whole. Itwould promote exports and provide more employ-ment which would boost the economy.

    Currently there are separate taxes or goods andservices which have created a lot o conusion. It re-quires division o the transaction values separatelybetween goods and services or taxation purposeswhich makes the whole process very complicated.Tis problem would not exist in GS system. Tere

    would be no economic distortion as GS would belevied only at the final stage and not at various points.GS would make the tax administration corruptionree.

    But there is a lot o opposition against GS in the up-per house o parliament where the bill could not bepassed. GS excludes petroleum and alcohol prod-ucts. Introduction o GS would bring heavy lossto the exchequer. Te proposed GS rate o 16% ishigher compared to current 12.5 % VA. Introduc-tion o GS would create huge revenue losses orsome states. So they are reluctant to support GS.Tere is some disagreement between states and theCentre regarding tax sharing provisions. Some o thecritics say that the real estate industry would heav-ily suffer because o GS. It is estimated that GSwould increase the cost o new houses by about eight

    percent and thus the demand will decrease by abouttwelve percent. Some o the economists are o theview that GS is nothing but the old wine in the newbottle. Tey dont find GS to be very different romthe present indirect taxes. GS is projected as a sin-gle taxation system but actually it is dual in naturewhere both Centre and the state play important roles.Currently some categories o persons and goods areexempted rom central excise which is not availablein the proposed GS system. So, it would affect theirbusinesses negatively. Some people think that mac-roeconomic actors like production, exports, gov-ernment support etc. are the actors which promotegrowth. A country has never revolutionized becauseo the taxation system in that country.

    Tere is a lot o support or GS rom the corporates.But the implementation o GS is not an easy task.GS can not be launched in India effectively with-out adequate I inrastructure. GS requires proper

    I inrastructure not just at administration level butalso at the tax payer level. A lot o changes are neededin the present I inrastructure to enable GS imple-mentation. But this task is very challenging and cost-ly or I department. Bringing substantial changes insuch a short span o time adds to the problem. As onow, the GS bill has been passed by the lower housebut yet to be tabled and passed in the upper houseo the Parliament. Te opposition parties would notlet the bill pass easily. So it is very much necessaryto convince those parties. For successul implemen-tation o GS bill, the state governments should alsoto be taken into confidence. Te government shouldadopt a flexible stance and appreciate the suggestionsto make it happen.

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    FED RAE HIKE: IMPAC-Shivangi Sharma, Institute or Financial Management and Research

    On December 16, 2015, Fed Open Market Com-mittee (FOMC) declared an increase in the Fed undrate by 25 basis points. Tis was the most long await-ed decision and many countries were eying towardsthis hike. Tis rise in rates came afer 7 years. So let usfirst start with what this Fed hike is all about.

    Fed Hike: All you need to know

    Just like any other countrys CentralBank, Te USAs central bank (FederalReserve) announced a hike in its interestrates by 25 basis point. Tis announce-ment comes afer almost a decade- romzero rate o interest to 0.25%. Tis hikeends the ultra-loose monetary policywhich was initiated to fight 2008 finan-cial crises. ypically, in any economy, theinterest rates are increased to fight offinflation. During inflation, the moneyflow is in abundance and is also cheap.

    So in order to control this flow, the central bank in-creases interest rate (i.e., cost o borrowing moneybecomes expensive). So what could be the possiblereasons or this hike?As per Federal Reserve, Job Growth is the main rea-son or such increase. Unemployment is alling inUSA since the recession, which is a good sign. So a

    rise in interest rate will curb inflation thereby helpingto boost employment.

    Federal Reserve; Bureau o Economic Analysis; Bureau o Labor Statistics

    Also, savers will also see higher rates which meansthat different saving vehicles will start offering higherreturns on sae investments. More returns will bringin more investments.

    Government borrowing cost as well as mortgagerates will increase.

    All this and much more is there or USA with thishike. But this hike brings about both, good as well asbad effects.

    Tis hike will have a crippling effect on global mar-kets as it ripples through commodity prices, andweakens currencies in comparison to US Dollar dueto significant capital outflows. Even or the U.S econ-omy, the exports will become less competitive in theglobal market and inflation will be reduced (as we allknow a little inflation is good or the market).

    As ar as benefits are considered, For savers, low interest rates have brought about thefinancial equivalent o a long drought.

    A positive inflation scenario afer a rate hike mightinclude lower prices o imported consumer goods,due to a likely higher exchange value o the dollar ithe domestic rate increases are not matched by policytightening in other major economies. Afer the crisis, lending came to a halt. Now lend-ing has resumed but credit remains tight in some sec-tors. When interest rates rise, financial institutions,including banks, may part with their money morereely. As a rate hike brings better returns to savings vehi-cles, the nations senior citizens should enjoy betterpaydays. Stock prices may start to make more sense.

    So afer understanding what rate hike is and how itllimpact USA, let us now shif our ocus to India.

    Any change that takes place ar awayrom our country, definitely have an

    impact on our economy. Te econo-mists always wait or such instanceswhere even a small change in someother economy, can bring about ameager effect on ours. Be it 2008 Fi-nancial crisis in USA or Chinas stepto devalue its currency, all such hap-penings may have an impact on oureconomy.

    So looking at this rate hike, howcould this possibly affect India?

    Looking at the past trends, we cantake lessons rom how markets behaved when similar

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    - Akshay Ratan and Aishwary Kumar Gupta,XLRI

    In the words o amous French poet, Victor Hugo,no one can stop an idea whose time has come, andwith FY2016 Budget and recent push o envisioninga Digital India by PM Narendra Modi, the idea o In-dia as a cashless society has become o paramountimportance. Te annual report o the RBI or 2013-14 estimates the cash currency in circulation to bearound Rs. 12.83 trillion with a CAGR o 10% overthe past two years. Te banks only have a nominal 5%o the amount with them, ultimately costing us about0.25% o our GDP in maintaining and managing thecash-based economy o India which has become oneo most cash-intensive economies in the world hav-ing a Cash-to-GDP ratio o 12%.

    Cashless economy is defined as a scenario o an econ-

    omy in which all monetary transactions have to be viaelectronics channels such as debit and credit cards,electronic clearing payment systems such as IMPS,NEF, and RGS in India. Te journey o the nationrom a cash-based to a less-cash and eventually a cash-less economy might be a long one, but it will have adeep impact by providing with a methodological andtransparent structure to improve the delivery o ser-vices or the citizens. ransparency and accountabili-ty under a cashless system is very well recognized bythe society. Apart rom the act that cherishing or asharp economic growth o India is not possible withsuch over-dependence on cash in circulation, but alsoanalyzing the value-chain o social developmentalprojects, the government has realized the presence o

    hikes have taken place. Since 1983, the Fed has raisedrates six times, the last one being in 2004. For Indi-an markets, however, the last three in 1994, 1999and 2004 are more relevant since oreign moneydata has been maintained by SEBI only rom 1993onwards.

    Te immediate impact o the hike on India seems tohave been pretty mellow owing to the markets seem-ing to have effectively priced in the move.

    Indian Currency and Inflation: Because o anincrease in interest rates, there is a high chance thatrupee will depreciate. Tis will make India morecompetitive in exports, but because o slowdown, In-dia has not been able to take advantage o the situa-tion. Being an importer o crude oil a depreciating

    rupee will add pressure on inflation.

    I Fed will increase its interest rate then a strongmessage will go around the world that the economiccondition o the USA is improving. Due to this inves-tor rom around the world will pull out their moneyrom other countries whose economic policies arenot so good like India. Investors pull out their mon-ey rom Indian market that will put upward pressureon rupee and rupee will become cheap compared todollar (or e.g. $1= Rs 68). And when this will hap-pen, import will become more costly and export willdecrease, hurting CAD and eventually BOP crisis.

    Stock markets:Tis rate hike has been widely an-ticipated. Te FIIs have already been pulling money(around $2.5 billion) rom equity market. Hence, thecorrection in the market started long beore becauseo the speculation. Tis was one o the prevailing rea-sons or the continuous all o stock markets.

    Downward trend in Indian Equities

    A series o hikes in interest rates in the US over aperiod o time will raise the borrowing cost or car-ry trade (borrow rom US and invest in India), andthereby reduce their risk-adjusted return in India.

    On the other hand, the Reserve Bank o India hasembarked on cutting interest rates, and has cut reporates twice by 25 bps each. A cut in India and a hikein US urther reduces their risk-adjusted return. Ex-perts also say that this may make US bonds more at-tractive. Te US is in any case considered a sae ha-ven, and investors looking or stable returns will bemore attracted towards US bonds.

    Investments: A rate hike will increase the strengtho the US Dollar and make it more difficult or Indi-an investors to invest in American equity. A normalmiddle class Indian citizen, will not eel much o animpact. It will most likely make American manuac-tured exports more expensive. Tis means that theprices o imported diamonds, aircraf and electricmachinery, and medical instruments could rise be-cause they are Indias largest imports rom the Unit-ed States. But again, as a normal middle class Indian,this wont affect you much.

    So, overall, India is better placed than most o itspeers. Its external balances have improved signifi-cantly (about $65bn to $353bn as o November 2015).Plus, only a small part o Indias sovereign debt is heldby oreigners or is denominated in oreign currency.All this can have a positive impact on our countryseconomy despite the rate hike. Also, institutions suchas RBI are established to protect our economy romany sort o externalities.


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    substantial cash leakage resulting in tax evasions andblack money. Cashless transactions would by andlarge ensure that these loopholes in public systemsare plugged and benefits are delivered to the intendedbeneficiaries. As a nation, the reorms such as JAMtrinity (Jan Dhan Yojna, Aadhar, & Mobile Banking)to implement direct transer o benefits to the citizen,is a big step in reducing the allacies o cash trans-actions and thus ueling the economy to success. AMoodys recent research concluded thatthe impact oelectronic transactions to 0.8% increase in GDP oremerging economies and 0.3% increase in developedones. Te benefits o a cashless society is not limitedto effective government administration but more toindividuals. Cashless transactions with secure digi-tal system ( implementing biometrics) addresses theinconvenience o long queues outside AMs, bear-ing transaction costs o using AMs o other banks,

    risk o carrying currency in wallets and even makesit easier to loan or borrow money. Tere would bea considerable reduction in volumes o cheque anddemand drafs with very ew people actually carryingcash with them. From the business perspective, theresult o this digital wave will help the E-Commercesector grow more rapidly, and will lead to reducedlogistic costs and increased security with a drop in at-tempts to steal cash. Further, improvement in creditaccess would eventually contribute in the growth oSmall and Medium Enterprises in the long run. Spe-cialized payment entities such as Giro,aggregatingthe billers and uniying the ramework o paymentsinduced by payer to payee, intends to bring a moreeffective and efficient system o payer-induced pay-ments throughout the payment lie cycle. AdvancedNordic economies (such as Denmark, Norway &Sweden), or instance, have ensured the successulcashless transactions o smallest o services, and ithas consistently proved it to be a cheaper, hassle-ree,

    and secured mechanism.

    Historian Ramachandra Guhawhile commenting onthe diverse nature o our nation wrote in his book,India afer Gandhi,how it is so difficult to even en-compass the nation like India in our minds. Te pathto a cashless economy has to be much strategized butnot beore identiying the potential roadblocks andstakeholders to the issues which plague this vision.Te stakeholders discussed here are crucial in un-derstanding the strategy to be proposed to envisionan India with an entirely cashless economy. One othe primary stakeholder is the inormal, unorganizedbusiness sector comprising o retailers, suppliers andservice providers. Te lack o access and adoption to

    digital technology, this unorganized sector neitherhas the inrastructure to offer services or cashlesstransactions, nor any inclination to incentivize theircustomers. Further, cash-based transactions leave aroom o opportunity to avoid payment o taxes, andthus there lies a negative connotation or governmentto encourage them to shif their transaction prac-tice. Some o the incentives which the governmentcan strategize is to set up revenue models or acil-itating payments towards Government run utilitypayments, simpliying the approval process & givingincome tax rebatesor those retailers who are report-ing more than 50% o their customer-transactionsthrough electronic means. For instance, a percentagereduction in the VAcould be considered on all cardtransactions made by merchants.Tis in turn would ensure than the retailers wouldadvertise their business accordingly resulting in pro-

    motion o cashless transactions. On the similar lines,rural economy is also not a walkover while strategiz-ing or a cashless economy. India accounts or almost21% o the worlds unbanked population, and thus en-visioning an India with digital financial services firstrequires enabling our masses with linked bankingacilities. TroughDirect Benefit ranser Scheme &Pradhanmantri Jan Dhan Yojna, the government hasmanaged to make huge improvements in financialinclusion and financial awareness. Te latter schemelaunched in 2014 has already acilitated the openingo more than 180 million bank accounts. Tis leads toanalyzing the second stakeholder - Consumers. Teperception o the ease o transaction through cash,the habit o having a bargaining power and perceivedno-advantage rom the use o cards and electronictransers remains as an important hurdle in the task.India has always been an economy which ocuses onsavings. Te financial discipline that a middle-classamily man in India has grown up in, the branding o

    the credit cards and online b anking which talks moreo an affluent liestyle and impulse buying rather thanenlisting the utilitarian financial aspects o cards hasdone little to entice them or using credit cards. Un-less these challenges o helping the consumers shiftheir habitual transaction patterns, the idea o a cash-less society will elude us. Te most important thingto be done here is to largely incentivize the electronicpayments.Card users should be granted discounts,banks should promote cards and e-transers by re-moving the transaction charges and confidence mustbe given to the consumers that cashless system isan end to end ramework. For this, the governmentneeds to create a solid ecosystem to create a valuechain right rom manuacturers to distributors to

    make the services to the end user ully compatibleand as extensive as possible. Removing additionaltransaction costs such as Merchant Fee, convenienceee, interoperability o wallets, tax incentives, and de-livery o a secure system along with constant inter-ventions to make the consumer aware are some o thekey steps which can be taken to ensure that the con-sumers eel comortable in making this tectonic shif.

    Smartphones could be a big game changer in helpingthe society to seamlessly transition itsel to a cash-less mode. With gradually every Indian householdpossessing a smartphone, branchless banking in re-mote rural areas can be enabled, thus making thesmartphones a Point-o-Sale (POS) credit card ter-minal. According to a data analytics report, in justthree years the number o transactions using mobilebanking has increased 4 times to 95 million while the

    amount transacted has increased three times to 60billion Rupees. Te new paradigm shif o a cashlessera would come rom this smartphone wave increas-ingly penetrating the inaccessible areas o the coun-try. Te telecom industry has to spearhead this digi-tal change and lead India or a transormation.

    Te status quo is that we have a mix o cash and cash-less transactions taking place, and many policies bythe Government and the Reserve Bank o India arepushing towards a less-cash economy by giving vari-ous kind o incentives to the stakeholders discussed.With a cashless society, the nation can aspire to putits economy on a ast track, with improved credit ac-cess, financial inclusion, reduced tax avoidance andmore importantly lean balancing the cash circula-

    tion in the economy. Te perspective to see the entiresituation need not be to oppose the use o cash, butto gradually assist the use o cash, and ultimately tosubstitute the use o cash. Cashless transactions canthus become a reality to be successully implementedin India.


    Anand R. (2015, June 15). Ready or a cashless economy?Live Mint. Retrieved rom FE Bureau (2015, June 18). ax sops, other incentives pro-posed to boo st e-transactions. Te Financial Express. Re-trieved rom Zandi, M., Singh, V., & Irving, J. (2010). Te impact o elec-tronic payments on economic growth. ECONOMIC ANALY-SIS.

    RBI Notifications (2014, November, 28). Implementation oBharat Bill Payment System (BPPS) Guidelines Andersen, . M., Holmstrm, B., Honkapohja, S., Korkman,S., son, S. H., & Vartiainen, J. (2007). Te Nordic Model. Em-bracing globalization and sharing risks. ELA B. Harrison V, (2015, June 2). Tis could be the first country togo cashless. CNNMoney. Retrieved rom Chaia, A., Dalal, A., Goland, ., Gonzalez, M. J., Morduch, J.,& Schiff, R. (20 13). 2 Hal the World Is Unbanked. Banking theworld: empirical oundations o financial inclusion, 19. FE Bureau, (2015, June 27). Data Drive: Less currency ora cashless economy. Te Financial Express. Retrieved rom Petrone N, (2015, October 20). Why and How should wemove towards a #Cashless Society? New initiatives aoot inIreland and India. Lets alk Payments (LP). Retrieved rom

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    DRAGON ENERS HE SDR MARKE -Milan Modi and Preyas Jain, SIMSR


    Statutory Drawing Rights is a kind o reserve o or-eign exchange assets comprising o leading curren-cies globally and ormed by the International Mone-tary Fund in 1969.



    Beore 1969, all the trade internationally took placein US Dollars. So i Brazil wanted to import Ford carrom USA, the latter would accept the payment onlyin dollars. In order to settle accounts, the world usedUS dollars and Gold. Te countries could use goldholdings and commonly accepted currencies to buytheir local currencies abroad in order to maintaintheir exchange rates. But the world trade increasedat a rapid speed and thus the supply o gold and thedollar was insufficient in the new developments ofinancial markets. In order to address the issue, IMFcreated an asset that could be exchanged or reelyusable currencies - Special Drawing Rights (SDR).

    SDR consists o 4 major currencies o the world - US

    dollar, Euro, British Pound and Yen (Japan)and is also known as a basket o national currencies.Afer a period o 5years, the composition o this bas-ket o currencies is reviewed and the weightage ocurrencies may be altered. Tis adjustment o weightsis done by taking into account the contribution byits member counter to world trade and national or-eign exchange reserves. As o Sept 2015, SDRs worth$204.1 billion had been created and allocated tomembers o IMF.

    During the Global Financial Crisiso 2008-09, theSDR allocations totaling 182.6 billion played an im-portant role in providing liquidity to the global eco-nomic system and augmenting member countriesofficial reserves amid economic turmoil.

    Te below was the percentage share o our nationalcurrencies in the SDR as on 2011 to 2015. Te imagealso shows the new share by with Chinese Yuan eat-ing up a small share o the pie.

    Te Entry o the Dragon

    IMF decided to include Yuan into its SDR basket as a5th currency, along with the British Pound, the Euro,US Dollar and the Japanese Yen with effect rom 1stOctober 2016.

    Central banks across the world use their reserves ooreign currencies to buy their own currency or payinternational debts. Now the inclusion o the yuanwould mean these banks who tend to hold theiroreign exchange reserves in either dollars or euroscould have an option. For many emerging economieso the world, trade linkages with this Asian giant arealready strong and now their reserves could reflectthis understanding.

    What does the move by IMF suggests?

    Tis addition o Yuans in the basket indicates thatthe IMF believes about the global standing o the





    Current SDR Basket

    US Dollar


    British Pound

    Japanese Yen






    SDR Basket by October 2016

    US Dollar


    British Pound

    Japanese Yen

    Chinese Yuan

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    Chinese currency, similar in strength to other ourcurrencies currently in the basket. Te decision to include the yuan is landmark mile-stone in the assimilation o the Chinese economyinto the international financial system. Although China is marred by other problems, thisassimilation shows the progress that the Chinese au-thorities have made in the recent past in reormingChinas economic and monetary systems.

    How will this recognition affect the yuan?

    In the short run:Te Chinese economy was growing strong or thepast ten years. However in it the growth numbersstarted ailing since 2014. Te country also devalued

    its currency to increase its exports in the world. Inorder to have a firm hold in the global trade o cur-rencies, China was pursuing since many years to en-ter this basket. As this integration is sustained andurther deepened, it will bring about a strong inter-national financial system, which shall help in achiev-ing a stable Chinese economy. Tis in turn will keepthe world economy also stable as ar as impacts roma manuacturing giant like China is concerned.

    Te currency should be reely usable this is oneo the pre-requisites or a currency to be includedin SDR basket. Te Peoples Bank o China (PBoC)has also clarified that it would allow the currency tobe increasingly determined by market orces. In thenear uture, this may lead to more volatility.

    In the long Long-run: Te inclusion o the yuan is likely to result in thecurrency becoming more international. Many Cen-tral banks around the world will be encouraged to

    increase their holdings o the yuan. Asian countrieslike South Korea, and Indonesia are planning to in-crease their Yuan reserves.

    Other central banks may also take steps to increasethe percentage holdings o yuan to diversiy theiroreign exchange reserves. Moreover, the portolioso international entities like the World Bank are in-ter-linked to the SDR basket.

    Te currency may appreciate in the long-term asthere may be an increased demand rom the inves-tors or the yuan.

    I the currency does appreciate, it is likely to back

    the governments determination in rebalancing theeconomy. Te Chinese governments plan to decreasethe economys reliance on exports and investmentand to increase the contribution o consumption toeconomic growth reinorces its intention.

    A stronger yuan will act as an incentive or the con-sumers to purchase oreign goods and restrict theburgeoning current account surplus o China. Overthe last ew years, China has run large surpluses thathave been blamed or causing global imbalances.

    Furthermore, with the official recognition o yuanas a global reserve currency, China may attract moreFPI inflows, especially rom sovereign wealth undsbecause o accommodative monetary policies in Eu-rope and Japan. Currency appreciation usually ol-lows higher oreign inflows.

    Te counter viewYuan making its way into the SDR basket isno big deal

    Afer a lot o equivocation the Chinese Renminbi hasat last made its way into the SDR basket. However,according to many economists the move is largelysymbolic as it isnt going to have an impact on theground reality as regards its increased circulation inthe international market is concerned. Te reasonbeing that SDR is not a floating currency and cannotbe sold and purchased in the international curren-cy markets. It is used by the Government o the IMFmembers to settle their inter se accounts throughbooks.

    Moreover, it played an insignificant role in the 2008world financial crisis with its epicenter in the USA.Tereore, Yuans elevation is, to a large extent, a non-event except that it has ueled larger expectationsas to whether this is an antecedent to the currencyeventually becoming yet another reserve currency.Whether or not, it will become another floating andreely available currency in the international marketis a big question one might ask. Tis doubt rears itshead because despite yuan being a reely usable cur-rency, is not a reely convertible currency yet.

    Impact on India

    Te move to include Yuan will indirectly benefitIndia. ill now, India had to bear the brunt o Chi-

    nas over-capacity as well as its devalued currency.Te latter will now pose a lesser threat as the abilityo China to influence its exchange rate will becomemore restricted which will consequently make its ex-ports less competitive.

    As the PBOC (Peoples Bank o China) allows mar-kets to be more open and accessible to outside inves-tors, this would give Indian investors a chance to in-vest in Chinese companies which are not listed in theHong Kong and NY stock exchanges. Good thing orIndian investors: Tis generally would include smallcap and mid cap opportunities or Indian investors.Tis is very significant as China is ast shifing roman industrial economy to retail economy, so percent-age o growth o these retail companies is supposedto be higher.

    Since China is a major trading partner or India,so the trade can now be handled in yuan rather thandollars so it makes the trading process more conve-nient.

    BRICS Bank do not have to buy and sell loans inU.S. Dollar. BRICS Bank will issue loan in Yuan. Tecountries (other than BRICS) will have to pay Yuanto BRICS Bank to buy the loan. At maturity, BRICSBank will payback in Yuan. Te value o loan willdepend on the exchange market value o Yuan. Testable Yuan will encourage investors to buy the yu-an-denominated bond.

    Like BRICS Bank, India will benefit in a similar way.We all are well aware o the act that how much RBIsmonetary policy depends on U.S. Central Banks de-cision to cut interest rate. Even stock market go highor low on hearing a rumor about U.S. interest ratehike or cut. Such high exposure to U.S. Dollar is a

    sign o concern. U.S. can use this dependence in itsavor in areas like climate change and WO negotia-tion. So, Yuans inclusion in reserve currency basketwill allow India to diversiy its portolio. Although,India will still continue to depend on Dollar, Yuanwill give India a little breathing space.

    Te bottom-line:

    Te projected higher inflows may materialize onlygradually. Global central banks need not increasetheir reserves just because the change in SDR basket.

    Moreover, Chinas A-shares are still excluded rom

    key global indices, which to some extent, stands inthe way o oreign inflows.

    Some reorms must be implemented beore Chinacan increase its ties with global markets. Along withthe PBOCs indication o gradually relinquishing itscontrol o the yuan, China should also emphasize onliberalizing its capital markets.

    Te inclusion o the yuan in the SDR will hopeullybe an incentive to policymakers to persist in its finan-cial and monetary reorms to enable the yuan to takeon a more global role and also all in line with TeIMFs expectation or the same.

    Te transparency and reliability o Chinese finan-cial data is ofen under the scanner with its notoriousshadow banking hiding a lot o bad debts.

    Te Central bank restricts the fluctuation o yuanwithin a tightly defined range which is a bad sign toany floating currency which by definition must notbe hamstrung by any restrictions.

    Due to avorable circumstances and the first mov-er advantage gained by the US Dollar in 1944, it re-mains the only true global reserve currency with USdollars sloshing around outside the US estimated tobe as much as within the US.

    A large number o Chinese capital goods manuac-turers give or arrange tied loan so that both the cur-rency and such goods are sold. However, the oil ex-porting nations are happy accepting dollar paymentsrather than in any other currency.

    Although China is the worlds largest exporter andthe largest economy afer the US, the Economist rath-

    er pertinently points out that the Yuan is not going tobecome a global reserve currency in the oreseeableuture and will inspire confidence only among thosewho have strong economic ties with China.


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    Govt seeks extra $4 billion capital boost orPSBs to beat NPA blues OI article on31.08.2015

    he headline published in the imes o India prettymuch sums up the situation in the Indian Bankingsector at the moment. Te banking sector has beengrappling with the problem o non-perorming as-setsor over hal a decade now. When borrowers arenot able to pay back the amount they borrowed rombanks and other lenders as per agreed terms they areclassified as non-perorming assets by the lender.Under ordinary circumstances when financial insti-tutions (FIs) perorm at a moderate efficiency levelthe ratio o non-perorming assets to total lending othe bank should be not more than 2%. o put things

    into perspective, the Indian financial system is cur-rently witnessing NPA levels close to 6% totaling tomore than 4,00,000 crores, with an additional 10% o

    stressed and restructured assets

    Public Sector Vs Private Sector Banks

    As you may already have anticipated, the privatesector banks have clearly outperormed their publicsector peers in this space as well, i.e. they have beenmuch more efficient and have had lower number ostressed assets thanks to better due-diligence andcredit appraisal mechanisms. Also, a very importantactor in getting things back on track or banks withNPAs is their recovery. Private Banks with their bet-ter management expertise, skill set and non-bureau-cratic behavior have managed to recover their bad

    loans at a much aster rate than public sector bankslike the State Bank.

    NPA Figure orIndian Banks

    As on March2015

    As o June2016

    Public SectorBanks

    Figures in Rs. Crores

    -State Bank &Associates

    73,508 73,557

    -Other PublicSector Banks

    269,483 285,748

    otal (PSBs) 342,991 359,305

    Private SectorBanks

    31,857 34,710

    Grand otal 374,848 394,015

    Te Regulators RoleTe Reserve Bank o India came up with the Secu-ritization and Reconstruction o Financial Assetsand Enorcement o Securities Act(SARFAESI Act)in 2002 to enable banks deal with the problem onon-perorming assets by vesting more power withthe banks on the legal ront to acilitate recovery osuch loans.

    Along with the SARFAESI Act, other bodies andmechanisms were set up to ensure smoother reso-lution o non-perorming cases and enable b oth thelender and the borrower reach an optimal solution.Tese institutions were the Board or Industrial andFinancial Restructuring (BIFR),Debt Recovery ri-bunals (DRs) in each state, Corporate Debt Re-structuring Mechanism(CDR) and now the StrategicDebt Restructuring (SDR). However, none o thesehave really helped barring a ew cases in recovery orresolution but have only contributed to deerring theproblem by a ew years i not more.

    Along with the SARFAESI Act, in line with estab-lishments in European and South Asian economieslike Korea and Singapore the RBI started giving li-censes or setting up companies which would deal inthe secondary market or these bad loans and helpin recovery, resolution and in many cases revivingthese fledgling business by inusing resh capital intothem. Tese companies are called Asset Reconstruc-tion Companies (ARCs).

    In India, as on date there are 15 such ARCs dealingin the business o non-perorming assets. Te prima-ry business model o an ARC is to acquire bad loansrom banks at a discounted value and try to maxi-

    mize recovery to generate a return on investmentwhich is generally higher than the usual ROI b ecauseo the higher risk involved in the transaction. Onecould compare it to the business o junk bonds inmature financial markets

    Why the CDR, BIFR, and now SDR are notthe right solution.

    As exclaimed earlier, these methods have ailed mis-erable and continue to do so, heres why. Most o thesemechanisms are developed or the restructuring andresolution o big ticket transactions involving a con-sortium o lenders. More ofen than not,

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    it would take almost 20-24 months only or thelenders to reach a consensus with a restructuring orstimulus package to support the business entity andcreate a win-win situation or all parties involved.In situations where banks having to compromise ontheir recovery value, smaller banks may sometimesjeopardize the entire package by not playing ball. RBIrules mandate or at least 60% o lenders (in terms oloan exposure) and 75% o no. o lenders to agree orany proposal to get through the respective mecha-nism, i.e. CDR/BIFR or SDR.

    Increasing number o ailed cases under the Cor-porate Debt Restructuring Scheme. Here are somenumbers to validate why the CDR is not the mosteffective o tools to encourage restructuring o badloans.

    Te Reserve Bank o India on 8th June, 2015 came upwith something called the Strategic Debt Conversionoption or banks. Under SDR (Strategic Debt Re-structuring), banks could take a guarantee rom pro-moters to allow banks convert their debt into equityi promoters ail to honor the terms laid out in therestructuring proposal. Banks will then hold a min-imum o 51% in equity capital o the company andcan then sell the unit or assets; or effect a change inmanagement. Te issue with SDR is that banks haveonly 18 months post conversion o debt to equity tosell the unit.

    A recent report published by Religare InstitutionalResearch on 4th January, 2016 mentions that SDRwould only delay the problem associated with NPAs.Banks might end up financing 30-40 big ticket ac-counts under SDR, and then convert debt into equityto end up with no real buyers. Tis in effect will onlypostpone the classification as NPA. According to thereport, banks have already invoked their option oSDR in 15 companies, worth a whopping Rs 81,300crore and ound no resolution in these cases to date.

    Challenges aced by Public Sector Banks

    Having spoken about the inefficiency o Indianbanks and PSBs in particular to control and keep theamount o slippages towards stressed assets in theirbooks, there are certain issues in built in the systemwhich do not allow much room or managers at thehead office and branch level in avoiding the currentproblem.

    I you thought that corrupt practices o businesshonchos getting loans sanctioned or big proposals(in excess o 100 crores) via the finance ministry inDelhi were a thing o the past then you are sadly mis-taken. Tings like due diligence and checking or vi-ability o a project go over the window once there is acall rom the ministry babu to get a proposal sanc-tioned at any public sector bank. Te manager at thebranch, the general manager at the head office andthe directors, all are lef with no choice when such adirective arrives.

    Another plaguing issue lies in the legal system. Techallenges aced by banks to enorce their rights aslender or recovery o bad loans are as bad as thoseaced by the aam aadmi in getting his pension rom

    the government coffers. Debt recovery ribunals(DRs) are not only marred with bureaucracy butalso have inefficient management in terms o num-ber o Presiding Officers (judges in the DRs arecalled POs) available to hear the pleas o banks andnot to orget the level o corruption involved in de-laying tactics by promoters and their lawyers.

    Banks Extend




    Banks take

    haircuts and

    book losses

    Govt Infuses

    Fresh Capital

    Fresh Capital

    = Tax Payers


    Capital Boost & How the ax Payer eventu-ally suffers

    Coming to how this entire problem is directly relatedto the common man on the street who pays his taxesto the government. I you had a good look at the firstquote o the article you might have guessed it. Hereshow I have deconstructed the cycle o flow o unds.

    Capital boost is the need o the hour or most publicsector banks at the moment. Tanks to high provi-sioning or bad loans as well as Basel III norms mak-ing it mandatory or banks to have adequate level ocapital or which they would have to raise moneyrom the markets. Raising resh capital rom the mar-ket is going to be an immense challenge or bankers.

    Basel III norms are to be implemented by bankswhich would require banks to have a higher capitalbase. Te total regulatory requirement under BaselIII guidelines will be in the orm o a 2 ier struc-ture - ier I Capital (going concern capital) will man-date banks to have 5.5% o total risk-weighted assets(RWAs) in the orm o common equity, in addition tothis there will be a requirement o capital conserva-tion buffer (CCB) to the tune o 2.5% o RWAs. ierII Capital (gone concern capital) would comprise ogeneral provision and loss reserves which will be an-other 2% o RWAs.

    Tereore, we can understand the situation which ispressurizing Indian banks to maintain cleaner bookso accounts to be able to raise resh capital rom thepublic and institutional investors come 2017. A pro-posal floated by Mr. Jaitley in mid-2015 to get ap-proval or an injection o $4 Billion in the currentfiscal o which 50% was earmarked to inject liquidityinto state-run banks.

    Design or Systemic Change

    Having seen the various issues and reasons or the

    same, let us take a look at what could possibly bedone by various stakeholders to curb the issue o ex-isting NPAs and reduce urther slippages in the longterm.

    Te first step which needs to be taken is in line withmaking the Central Vigilance Commission (CVC)more proactive. Te CVC has all the tools in place topunish those who have resorted to unlawul meansto avail sanctions rom banks either by bribes or bytheir rich contacts in the ministry. Second and equal-ly important is careul due diligence. Banks do nothave the necessary wherewithal to undertake effec-tive due diligence or credit appraisal. Tree aspectsneed to be taken care o while sanctioning any limit Financial, Legal and Real Estate due diligence.

    On the resolution ront, Fast track DRscould be set-

    up or cases with outstanding debt o more than 100crores to make sure unnecessary delays are avoidedand disputes i any between the borrower and lenderare also settled at a much aster pace. As ar as ARCsare concerned, they have been accused o being over-ly conservative while bidding or acquisition o badloans. Te RBI needs to put some thought into howto bridge this gap between expectations o bank andability o ARCs to offer a decent bid such that it cre-ates a win-win situation or both institutions.

    Another proposition would be to set up a bad bank todigest all the bad loans and allow public sector banksocus more on their core competencies. An attemptlike this was made though on a very small scale bythe RBI by setting up IDBI SASF (Stressed Asset Sta-bilization Fund), however with no concrete resolu-tion strategy in place or various types o accounts ithas now become a burden more than an efficient toolto take care o the pool o stressed assets.

    Te problem o businesses not doing well due to mi-cro or macroeconomic actors will always be there.What would differentiate the scenario now rommaybe 10 years rom now in similar situations is theability o financial institutions to tap problems attheir roots and identiy early warning signs. o beable to extend credit only to the most suitable appli-cant and be patient with examining proposals. Tereis still a lot to be done in this space and finding theright synergy between borrowers, banks, and theregulator is key to address this huge issue engulfingthe banking sector at the moment.

    86 cases

    Rs. 14000 crs


    12 cases

    Rs. 4300 crs


    9 cases

    Rs. 3000 crs


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