Foreword It gives me immense pleasure to know that the students of the Finance and Economics Club of IIM Amritsar are coming up with their second edition of the newsletter pertaining to the nontrivial issues of finance and economics. What gives me even more pleasure is the fact that I have been bestowed upon with the opportunity to write a foreword for this wonderful newsletter. We are really excited to know that the newsletter is attracting entries from the leading B-Schools in India. Moreover, it is coming at a very crucial time for the fact that current financial and economic conditions are highly dynamic. For instance, the sentiments towards global economy are as positive as at any time since 2011. As per the latest global survey conducted by McKinsey, the economic optimism has reached a six-year high at the country level. Many believe that world economic conditions are right on the track of improvement, especially for the emerging nations. This particular issue of the newsletter contains important discussions on various financial topics such as banking frauds, algorithmic trading, financial inclusion, introduction to stock markets, to mention a few. Every management student is associated with these pertinent issues in one way or the other. It would be needless to say that the shelf life of contextual knowledge is increasingly short; as a result, the need of extensive and persistent research to classrooms is dominating the traditional ways of instruction where “the sage on the stage� is no longer relevant. Therefore, management education extracts its basic meaning from learning from doing and not limited to only classroom exposure. IIM Amritsar is experimenting with new approaches and believes that students are an untapped resource who can benefit the society and businesses at large through their problem solving talents. Therefore, I appreciate the efforts of our students; especially those from the Finance and Economics Club (FEC) to undertake such an initiative to address the financial and economic problems of the society and wish them good luck for their future endeavours.
Dr. Satish Kumar Assistant Professor of Finance and Chairperson Research and Library Committee Indian Institute of Management Amritsar.
Contents
Design, Editing, & Publishing Team FEC Coordinators
Sitakanta Panda
How skilling can offset the automation threat
Samiksha Jain
Fintech: The Next Digital Frontier
APOORV TIWARI PGP03
Vivek Singla
Tech startup ecosystem in India
Ananthu R
VAIBHAV KATHURIA PGP03
Financial Inclusion: Still a hurdle for India?
Ramanathan RM
Buying a car? Read this ARVIND KUMAR PGP03
Sengodan M & Navin Chandran
The curious case of banking frauds
Shailesh Mishra
Philips Curve: one side of the story
Prasoon Mallik
Algorithmic Trading
Arshis S Balsara
Cuffing the Invisible hand
SHAILESH MISHRA PGP03
How skilling can offset the automation threat AI, robotics and Big Data are the facets of the digital revolution in which automation is the central theme. There are many aspects to the phenomenon, which most people perceive as a problem. When seen as a problem, there are many aspects to it too. For instance, on social media platforms like Twitter, “bots” are used to inflate the numbers of followers of celebrities or politicians, and also for trolling. Automation and digital revolution has led to anxiety for its disruptive possibilities, including on the future human labour. Automation in manufacturing and services sectors in G20 (and other developed) countries has increased a lot, as self-optimising, self-correcting machines are substituting human labour. These machines with fed-in algorithms are doing the work that comprises not just repetitive tasks but also cognitive tasks involving subtle and non-routine judgement. Carl Frey and Michael Osborne in a famous 2017 study “The future of employment: How susceptible are jobs to computerisation?” classify 702 occupations on their susceptibility to automation. They conclude that over the next two decades 47% of the US workers are at risk of automation. According to World Bank estimates stated in the 2016 World Development Report, 57% of jobs in OECD countries could be automated over the next two decades. The composition of the employment structure is changing and the share of labour in overall income is declining in the developed world. Yiqun Gloria Chen in a 2016 study found that employment and income shares of routineintensive occupations have declined significantly relative to non-routine occupations. Wage and income inequalities are widening as the gap between the returns to labour and returns to capital is rising.
On the other hand, benefits of automation are appealing to producers—greater penetration of robots has reduced production costs and, consequently, wages and employment decline because of displacement effects (displacing workers from tasks) and a spurt in the productivity effect (as other industries and/or tasks increase their demand for labour). In their 2017 study “Robots and jobs: Evidence from US labor markets”, Daron Acemoglu and Pascual Restrepo find that introduction of one more robot per 1,000 workers reduces employment-to-population ratio by 0.18 to 0.34 percentage points and wages by 0.25-0.5%. Digital revolution has created completely new jobs and industries (web designer, software developer, data security expert), though these demand high-skilled labour. Societies that are able to offset the negative effects of increasing automation and digital technologies that replace humans would stand to gain the most in terms of sustainable economic progress. Aggregate societal welfare would increase upon rapid tech advances that effectively substitute cheap and abundant capital for previously expensive and wilful labour. But economists like David Autor opine that eking out a living for those who own labour but do not own capital would be more difficult. Thus, the distributional effects of increasing automation are worrisome. A few salient narratives characterise how global labour markets are responding to the current technological change. First, according to a 2010 study by Autor, in an ongoing phenomenon called ‘job polarisation’, the highest and lowest ends of the skills spectrum have seen the most robust employment growth and two distinct sets of workforce have emerged—one with high-skilled, high-wage jobs, and the other with low-skilled, low-wage jobs. The jobs that need middle-level skills, in contrast, contain highest concentration of routine tasks and are relatively easy to automate and run the risk of disappearance. Second, tech progress has enabled machines to do manual tasks that are more complex and non-routine—self-driving cars could possibly replace jobs in the trucking and logistics industry and Big Data and machine learning algorithms have the potential of replacing service occupations like administrative and clerical office staff. Two competing effects of such tech progress are at work: technology replaces human labour requiring workers to reallocate their labour elsewhere, and it increases demand for other goods and services as new digital economy jobs and industries are created. The extent to which tech will substitute or complement human labour depends on the tasks automation will take over and whether it can perform them with a comparable level of skill. Studies show that sufficiently complex tasks require advanced skills that current automation technologies cannot perform. As increased digitalisation coincides with changes in the work environment and tasks expected to be carried out by workers, certain skills will be obsolete and new skills will find demand. The magnitude will vary by occupations and sectors. In some sectors, new skill-sets will supplement and not supplant existing skill-sets—many future jobs will be defined by workers’ ability to analyse and work with data, and make data-based decisions. With future prevalence of automation and AI, a number of tasks involving technical skills like troubleshooting machine problems and resource management skills would be eliminated over time. But the demand for essentially human jobs (such as technicians with skills for repairing and maintenance) will increase. Studies indicate that different countries will experience the labour market impact of automation differently. Developed countries use more technology at work and are experiencing faster changes in skill requirements, so their labour markets could witness larger disruptions in the near future. Out there, a smaller share of the workforce is employed in routine occupations susceptible to automation, but higher wages for human labour make automation a rational option. Developing and low-income countries have a large number of workers in routine occupations. As these economies adopt automation faster, their labour markets will be substantially affected, albeit with a time lag. But labour
markets in less developed countries suffer from huge skill deficit and this will exacerbate the problem of labourcapital and labour-machine conflicts. To address labour market challenges, economists have mooted solutions such as skilling and training, taxation policies, social safety nets. Promoting faster skill development of the workforce is a policy priority since the higher the skill level of a job, the less likely it is for a machine to replace a human. Matthias Oschinski and Rosalie Wyonch in a 2017 study find that occupations high in abstract, complex decision-making skills with a strong focus on creativity and ideas, critical thinking and interpersonal social skills are at low risk of being automated. Jobs that involve human interaction, heuristics of communication, persuasion and negotiation (like management, business and finance), along with jobs that require coming up with novel ideas and creativity (like those in the arts, media, engineering and science), are relatively safer jobs. As India has abundant labour segregated in the informal sector that thrive on low-skill, low-wage jobs and occupations and a paucity of skilled labour, adoption of automation in the near future is expected to be sluggish despite huge presence of ICT-enabled industries and services in some pockets. The 2017 World Robotics Report states that India purchased 2,627 industrial robots in 2016 (comprising just 0.89% of global shipment). But the looming prospect of rising automation in manufacturing and services sectors offers a big opportunity for India, especially for skilling workforce. If skilling is scaled up, we would be able to adapt to the change. (This article has originally been published in The Financial Express on July 12, 2018)
Sitakanta Panda Assistant Professor at IIM Amritsar (Economics Area)
Stocks 101 Advaith Suresh
Vellore Institute of Technology Notable entry
Two friends Ram and Yusuf were sharing a cigarette , Ram was bragging on how his uncle made some 40K over night by putting money into stock , Yusuf was staring blank into the abyss . Well that just happened to Yusuf because he just like countless of us young blooded youths of India do not really understand what Stock is . To put it into simple phrase , Stock gives you an outright-part ownership of the company ,that’s it , it represents ownership , cool right ?, well forget about all those heavy jargons and words that the so called books gave out and continue reading . Once you buy a stock you technically become a shareholder .Now stock market functions just like other market , but in virtual space . Now these virtual space are called BSE/NSE . To deal in stock you need to have three major components ,a) A saving a/c ,b) A demat a/c and C) A Trading a/c . Each a/c has different function , through savings you basically exchange the cash to the seller of a stock , in return the stock gets transferred to your Demat a/c ,where it gets stored .And you do all this transaction through the 3rd a/c called trading a/c .Well refraining myself into dwelling too deep into the subject ,I will try to glide you through the surface . As repeatedly told by our learned elders ‘it’s gambling’ its actually contrary to it .Gambling is when you do not know the foreseen outcome , but you might ask me then what about stock ,even there we do not know , that’s right even in stock market we do not know the outcome but here we can narrow down our scope by filtering out the obvious risks . If there is a scope of making intelligent decisions by a way of reducing the risk , it might not be called as gambling . Here again forget about the famous scene from the English movie Rain Man , not every one of us is Kim Peek or Rain Man . Well one famous quote is always linked to stock , “that Rome wasn’t build over night” which simply means you need to be patient , really patient ,really really patient . Famous ‘Stockies’ usually say buy a stock ,and forget about it, its that simple . Well the most difficult part of stock market is how one can narrow down the risk factors. To do this concentrate your entire knowledge into ratios . Ratios are your golden ticket to success . The ‘stockies’ often will tell you to go by ‘Value Investing’ .So this concept was proposed by one of the most prolific gurus of stock ‘Ben Graham’ , the rules of this game are simple , a) Buy stocks with a lower than average p/e ratio ,b) Buy stocks which offer high dividend ,and c) buy those stock with lower than average p/b ratio . Some of the great tactics which could be employed while investing is that, always watch for market crash ,as this is essentially marks the time of Diwali or the Big Billion Day , look market crash as an opportunity to accumulate stocks at a discount , the second way is to create a basket of SIP’s ,various analysis shows that you can earn twice as much through SIP’s rather than timing the market . The third and foremost important rule is always anticipate losses . But keep in mind that -you cannot become rich overnight , to do this you either have to be extremely lucky in lottery (which of course is banned in India ,except for few states) or you should have enough guts to break bad . The only way according to ‘stockie’ Vijay Kedia is to not be greedy and not indulge into trading (because of its success rate) . The bottom line is - anything and everything will go wrong . So enjoy stock-ing .
Fintech: the next digital frontier Written BySamiksha Jain IMI Delhi Winning Entry
“FinTech is changing the finance sector just like the Internet changed the written press and the music industries. In what is a stagnant sector monopolized by banks, finance is ripe for innovation and FinTech is unquestionably the catalyst needed for change.� - Philippe Gelis.
Over the past decade, the term FinTech has evolved from just being a buzzword among digital-savvy people to an organized sector signalized by hyper-growth. This new avatar of digital technology is completely revolutionizing the way business has been done. In the race for becoming the next superpower, India has been proactive in redefining the way ahead – particularly in the financial services sector. Its discussion in union budget symbolizes its importance. Initially, innovations in the FinTech space have been held back by regulatory uncertainties and a conservative approach on the part of the government on such matters. Financial institutions also showed a slow approach towards adapting themselves according to the new changes. However, over the past few years, we have seen a paradigm shift in these perspectives. Now FinTech is seen as a tool to bring more transparency and efficiency in the system. Today, India is listed as a nation with highest expected ROI of 29% on FinTechs. One of the most well performing areas of FinTech industry is digital payment. In 2017, the value of total transactions was around $43,831mn. WhatsApp, the most widely used messaging app, has recently started a Unified Payments Interface (UPI). With a base of 20 crore customers, it is expected to drive large base on peer-to-peer and merchant payments. Other major players are also gearing up. Google has already launched its payments app Google Tez, while Samsung has launched Samsung Pay and Amazon has introduced Amazon Pay. Apple, too, is looking to introduce Apple Pay in the country in the near future. Jio also entered the league by launching Jio money. Alibaba also announced to invest over half a billion dollars in Paytm. Other homegrown digital payment firms are PhonePe, MobiKwik, and FreeCharge. Technology is changing every aspect of the financial industry, and lending is no exception. While lending used to be the exclusive notion of banks and various credit unions, numerous FinTech companies are now extending loans to consumers and small business owners, changing the face of lending. Companies such as LendingClub and Prosper have adopted a strategy where people can earn interest by lending their money and they take a small fee as a brokerage for providing a platform to them. Instead of application, borrowers get a loan by presenting compelling stories, depicting why they need a loan. Companies like SoFi and Earnest entered the market with services like student loan financing, personal loans, and mortgages. The main advantage of securing loans from these FinTech companies is that they offer faster application, approval, and funding. Funds can be granted even in less than 24 hours. This efficiency is giving tough competition to the traditional players. FinTech companies offer personal financial services such as assisting consumers in filing taxes, wealth management, insurance etc. Apps like Cleartax and Moneyview are few examples of it. The major part of this is insurance sector. It is growing more conservatively as we compare it to other digital services. But by providing insurers with improvement in sales, reduced cost, better risk management, and efficiencies, the scope for growth is quite positive. Online insurance platform like Policybazaar is growing at a tremendous rate and has risen $70M as funding. This segment includes risk management models, regulatory compliance and other software solutions for banks and other financial institutes. This segment forms the base of solutions that can be offered by financial technology. Almost 74 companies are working in this area. Backed by technologies like artificial intelligence and machine learning, technology has completely changed the customer experience. Services now are more customized and efficient. In past years, we can see an adoption of these technologies like bot enabled conversational banking services, automation of underwriting using microeconomic indicators and device fingerprinting.
Indian Fintech Landscape As the government is heading towards financial inclusion, digitalization and technology up-gradation has led to the introduction of various new policies which provides a strong support to the FinTech sector in India. Initiatives such as Jan Dhan Yojana, Aadhaar and the emergence of UPI provide a foundation for FinTech companies to reach a large segment of the customers and to cater to their needs. In 2016, technology sector saw a decrease in funding due to increased global uncertainty. The USA and Europe saw a negative trend in FinTech funding. On the other hand, investments related to financial technology in Asian region increased by around 12.5%, mainly focusing on India and China. According to a report by Google and Boston Consulting Group, the digital payments in India will reach level of $500 billion by 2020. There are various factors which are accelerating the growth of FinTech in India. These include inefficiencies in the country’s present banking system, a large segment of the unbanked population, increase in accessibility towards internet and increase in awareness among people. FinTech can reshape the financial landscape in India in three ways- by providing better quality in reduced cost, by developing unique and innovative models of assessing risks and by creating a more diverse financial landscape. The FinTech sector found special mention in the 2017 annual budget speech, depicting that government is expected to roll out new regulations in the near future. Despite of such a huge potential in digital technology, there are certain challenges faced by the FinTech industries in India. First, India has predominantly been cash-based economy. Almost 80% transactions in India are still been done by cash. Despite of events like demonetization, use of cashless ways are still being unable to penetrate in maximum areas. Second, there is a large segment of people who are still unable to access internet. Majority of them are the unbanked segment which can be seen as a potential customer base for FinTech companies. Providing them with the internet is a problem. Third is the lack of infrastructure in India. Proper infrastructure is not available in India, especially in rural sector, where more than half of the country’s population lives. And last, lack of a regulatory framework. The FinTech sector is still regulated by banking regulations. Although RBI has allowed payment banks in the recent past, a lot of restrictions still remain in the path of FinTech players. RBI and SEBI should form separate guidelines for FinTech sector. Despite a few concerns about regulatory clarity and reduced deal values in last year, both nationally and globally, the scope for FinTech in India remains very encouraging. Regulatory support, financial inclusion and the digitalization of services in the industry, with technologies like artificial intelligence and machine learning are likely to boost investment in the area going forward and it has a potential to completely change the future of finance in India.
Tech Start-up Ecosystem in India
Vivek Singla PGP03054 IIM Amritsar
A summary of NASSCOM’s Indian Start-up Ecosystem Report,2017 The Indian Start-up Ecosystem Report has been co-developed by NASSCOM and ZINNOV Management Consulting after a comprehensive three-month study of the Digital Start-up Landscape in India. The report showcases the Analysis done on various aspects of the Start-ups in India like the evolution of the ecosystem, its growth drivers, aesthetics of the start-up, demographics, the role played by Investors, incubators/ accelerators, and the government. The focus of this article is to summarize the key findings of the report to help us have an understanding of the Ecosystem as Entrepreneurship is a key domain in the journey of a B-school student. What is a Start-Up? A company incorporated by an Indian resident in last five years, headquartered in India (or outside with product development centre largely in India), backed by an IP technology product or technology platform (E-commerce and aggregators also considered). The Overall Picture 2017 has witnessed a growth of 7% YoY in the Total tech start-ups in India with Start-ups now shifting their focus to quality rather than quantity as the number of new start-up additions in 2017 has decreased by 29% to 1000. Growth in B2B Segment The industry witnessed growth of start-ups in B2B segment with the share of such start-ups in newly incorporated start-ups being 47%, which is higher than the B2B share in overall start-up base. The mortality rate of start-ups in B2B segment has also decreased from 36% in 2016 to 30% in 2017, showing further promise in this segment of the startups. Enterprise product emerges as the top vertical for B2B start-ups (100% share), followed by fin-tech (49% share). Funding Landscape Funding per Start-up has increased 7% YoY despite funding value and number of deals dropping in 2017. Comparing the funding scenario across various stages in the life of a start-up, there has been a massive decrease in the funding of seed-stage start-ups (-53%), followed by a decrease in funding of the start-ups in expansion stage (-38%). Early stage start-ups saw the maximum increase in funding (83%) at $307 million. This shows that cautious investors are shifting money from Seed stage start-ups to Early and Growth stage start-ups. Some of the major deals includes $250 Mn funding of Oyo, $80 Mn to Swiggy, $70 Mn to BlackBuck, $21 Mn to UrbanClap and Medwell Ventures. 220+ Foreign investors accounted for a total funding of $1.2 Billion. Majority of the funds came from US (46%), followed by Japan (31%), and other economies such as Singapore, Europe and China.
Vertical Analysis of Funding
% Increase/Decrease in Number of Start-Ups 40.00%
31.00%
28.00%
30.00% 20.00%
13.00%
10.00% 0.00% -10.00%
Aggregators/ Fin-Tech Vertical Ecommerce Vertical
Enterprise Vertical Health-Tech Vertical Food-Tech Vertical -13.00%
-20.00% -30.00%
-33.00%
-40.00% % Increase/Decrease in Number of Start-Ups
% Increase/ Decrease in Value of Funding 160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% -60.00%
135.00%
129.00%
45.00% 22.00%
Aggregators/ Fin-Tech Vertical Ecommerce Vertical
Enterprise Vertical Health-Tech Vertical Food-Tech Vertical -40.00%
% Increase Decrease in Value of Funding
The above graph shows the increase/ decrease in the five verticals of the Tech Start-ups in India, namely: Aggregators/ Ecommerce Vertical: Includes start-ups such as Oyo, Swiggy, UrbanClaps, MagicPin, PaisaWapas, etc. Fin-Tech Vertical: It includes MoneyTap, AYE, Coverfox, airpay, Capital Float, etc. Enterprise Product Vertical: It includes Flutura, Belong.co, Now Floats, Pipe Candy, Clodura, etc. Health-Tech Vertical: Startups such as PharmEasy, Myra, Grow Fit, Sig Tuple, Fitnapp, etc. Food-Tech Vertical: Swiggy, Licious, Hola Chef, Eazydiner, etc.
Mergers and Acquisitions Total number of M&A deals grew by 25% from 40 in 2016 to 50 in 2017. Following is the distribution of the share in M&A deals by value.
% Share in M&A (By Acquirer Category)
14.00% 16.00% 10.00% 60.00%
Indian Corporates
Indian Unicorns
Indian Start-Ups
Global Corporates
Some of the major deals by acquirer category were: In Indian Corporates, Axis Bank acquired FreeCharge, an online payment platform for Rs.385 Crore. Kalyan Jewellers acquired Candere, a jewellery ecommerce company for Rs.35-40 Crores. In Indian Unicorns, Paytm acquired Insider.in, an online ticketing and events platform for more than Rs.35 Crore. Quicker acquired Zimmber, hyper local home services start-up for $10 million. In Indian Start-Ups, Little, a deal discovery start-up acquired Stylofie, a beauty and wellness start-up in a mixed cash & equity deal. MyDidi, domestic help provider acquired home services start-up TimeMyTask in an all-equity deal. In Global Corporates, Google acquired Halli Labs (within 4 months of inception) for an undisclosed amount. News Corp, diversified media and information services acquired analytics start-up GyanMatrix. The start-up ecosystem as described by the above statistics looks promising and attractive to draw funding from all over the world. Indian Start-ups in their quest to grow and accomplish have proved their mettle to the world in such turbulent times with the fear of Trade War and Financial crisis looming over. Despite such global cues, due to mushrooming of start-ups in almost every vertical of the industry, the Indian growth story is set to remain on its track, making India a desired place to invest money.
Financial Inclusion, still a hurdle for India? Written By-
When there are some efforts and lesser results, it calls for an introspection. This is the
Ananthu R
simple reason why we should look in to the matter of lesser proportionate results or improvement in financial inclusion of India despite of the colossal efforts.
IMI Delhi Winning Entry
Since independence India is pushing itself towards financial inclusion in rural areas as the soul of India lies in rural India. There are several initiatives which includes priority sector lending, followed by, co-operative lending, lead bank scheme, service area approach, microfinance, kisan credit cards, business correspondence. Creation of National Bank for Agriculture and Rural development, introduction of regional rural banks/ local area banks and Pradhan Mantri Jan-Dhan Yojana forms some notable and extensive initiatives. Financial inclusion is our nation’s priory. It is no longer an option, but a compulsion. The state of India today, where about three-fourths of the total population is surviving with under Rs 120 a day. It is probably a reflection of our collective mistake of believing all the pushing efforts would include every Indian under financial services or inclusion. If we closely observe, all these initiatives are supply driven. That is supplying of financial services to the door step of people. Finance availability is not an end to itself, but a means to an end. Our ultimate aim is to get a way for constant source of income for poor, so that there will be demand for financial services. If banks do not take initiatives to penetrate into the rural market, there will be other players who are willing to, provided there is a demand for it. Here, supply driver financial inclusion doesn’t work.
The results of most of the earlier initiatives were on the lower side. Based on NSSO reports, the share of institutional credit to farmers declined from a peak of 69.4 per cent in 1991 to 56 per cent in 2012. That is farmers dependence on noninstitutional loans has gone from 30% to 44%. The availability of finance is needed, but not sufficient enough for the reduction of poverty. High cost financial inclusions have rarely enthused rural households. According to Kamaljit Rastogi (Head of products, FINO, a key service provider in micro-banking industry), opening a bank account itself is huge challenge. It has taken around four to five years to make a noticeable impact on this respect. The biggest problem lies in sustainability of these accounts. According to available data, nearly 70% of such accounts are inoperative after opening. Banks should not just stop at opening an account for the rural people. Banks should understand their needs, create awareness among them and help in their economic upliftment. How do they recover the costs? They need to offer multiple products like savings, remittances, insurance, and loans over this channel to make sufficient money to make the whole network sustainable. In India the literacy rate is almost 73% only. If we take the states such as Bihar, Rajasthan, Utter Pradesh, Madhya Pradesh and Jharkhand, where the majority of financial inclusion has to be done, literacy rate is around 60% only. Even though institutions are trying to give all the information through mobile messages, illiterate people need the help of other to get the meaning of it. This puts them into a threat of insecurity. This will in turn keep illiterate away from financial inclusion. Here the privacy of poor people is breached. Sometimes BC are giving same PINs for all the customers to make his/her job easy. It is very important to note that not only big corporates are concerned about data breaches, even these people are concerned in their own way even though we estimate the cost of data loss is almost zero. Despite persistent efforts by institutions to implement financial inclusion, moneylenders are flourishing in the same sector. In India 30% of total banking business is accounted by moneylenders. This leads to a question, does interest rate really matter in this segment? These questions leads to need of grass root level research. That is if interest rates matters then why people are not shifting to banking rather than seeking from moneylenders. Not only banks there is a well structures financial network of cooperatives, MFIs, self-help groups. Is it only due to ease of doing business or some other factors influence the same?
BC model was introduced in 2006. The aim was to provide banking services to poor at very reasonable cost. MC model played a very critical role in fetching large number of Jan-Dhan accounts. But BC model was unable to provide various basic banking services for rural poor. Reserve Bank has asked banks to open at least one branch in every village with a population of 2000 or more. But according to 2011 census, almost 96% of villages have pollution less than 1000. The compensation given for BC agents in the form of commission is very less compared to that of insurance and mutual fund agents. Lending activities of Banks through BCs are very less. The main activity of BC model is opening new accounts, but after a while this opportunity is getting exhausted (particularly after implementation of Jan-Dhan scheme) Banks have been partnered with agents in creating BC networks to offer services such as remittance. Customers recognise the agent through the signage and remit money by paying legitimate fees and taxes. After each such transactions, the remitter will receive a mobile friendly receipt as a proof. PPIs can offer services such as mobile top-ups, railway ticket bookings, utility bill payments, etc. Now, apart from these PPIs can also provide domestic money transfer services. But now some PPIs have started poaching banks’ BC agents. Because of this, banks’ efforts in building wide BC network go waste. Physical branches, a solution? If we take the case of a village having a population of around 1000, if we can implement Jan-Dhan based account opening for all, there will be around 1000 accounts. Any number of accounts more than 500 cannot be served properly by BC model, instead, there is a need for Brick and mortar branch. If our system is able to open these branches in the villages, we might be able to tackle the situation. Again the difficulty is how to ensure 1000 accounts under one branch where there are various financial players with many more savings, deposits, loan instruments. There comes the need of the day, financial integration among the services and
different players. Under close examination, even more than one branch of different banks or financial institutions can spoil the functioning of both of them. This type of an integration should be taken under state-level Bankers Committee. The sustainability of the services can be ensured only through the demand-driven economy. So, the government should pool all the rural development programmes to an integrated scheme which can ensure a permanent source of income for poor, through the employment of the rural people. Even though variations will be there, this can ensure a demand-driven financial inclusion, which is the current need for developing India. Need for single authority Presently, there are a number of regulatory authorities which take the responsibility of financial inclusion. RBI, NABARD National Bank for Agriculture and Rural Development, SEBI - Securities and Exchange Board of India, MUDRA bank are some of them. All are thinking that these many number of authorities can ensure financial inclusion of India. But the truth is that there is no fixed responsibility on a single institution or the responsibilities are not divided properly. If we take the present conditions, NABARD has a widespread presence across the country. It can be the most suitable single authority to take this responsibility. But NABARD is not well equipped to head this mammoth task. Still they can give a try through phased manner, which gives further hope to Indian financial inclusion.
Buying a car? Read this. In the financial year 2016-17, 31 lakh cars were purchased by taking a loan. Is taking loan to own a car is beneficial? If not, is there any other ways to fund a car purchase? For illustration, say, I want to buy a car which costs me 10 lakhs now. Assuming I have 2 lakhs to pay 20% of cost as down payment. Scenario 1: I opt for Loan to fund the remaining 8 lakhs. Car loans are available at many ranges. Let us assume that I got the loan at 9%, hoping that I will get the best interest rate possible and the tenure is 3 years. For the calculation purpose excluding the processing fees and anything that is levied for the loan. On using the EMI calculator, we can see that for 8 lakhs loans at 9% interest rate for 3 years, the EMI will be Rs. 25,440/- per month. The total amount paid back will be Rs. 9, 15,832/-. The total outflow for purchasing the car is down payment (2 lakhs) plus the total amount paid back in three years (9, 15,832) which is equal to 11, 15,832. Scenario 2: Assuming, that I am indifferent to purchase the same car now or after three years. Instead of taking a loan, I can invest in a mutual fund with an excepted return of 12% per year. For the illustration purpose let us take that inflation for these three years to be 13% (i.e.) the price of the car would increase to Rs. 1,130,000. However, in this case, I can invest the 2 lakhs which I kept for down payment and since I don’t have to pay EMI of Rs. 25,440/- per month which I can start SIP in a mutual fund. Assuming, the rate of return to be 12% per annum. The total expected amount after three years from the mutual fund will be Rs. 13, 87,821. Clearly, this is Rs. 2, 57,821 greater than the price of the car. When we compare the above two scenarios, we can say that one can save Rs. 2,57,821 by not taking loan. So, purely from the financial point of view, it would definitely be beneficial not to take loan while buying a car. Ramanathan RM PGP03 IIM Amritsar
C O N C L A V E
In picture (L to R) – Mr. Pankaj Arjunwadkar (Delloitte), Prof. Vipul Mathur (Economics, IIMC), Mr. AP Singh (Ex CEO – IPPB), Mr. Sanjay Sharda (Indusind Bank), Mr. Prashant Singh (UIDAI)
N O V 17
A discussion on Financial Inclusion in India
E V E N T S 2
INQUEST – NATIONAL LEVEL EQUITY RESEARCH COMPETITION MDI GURGAON WERE THE CAMPUS WINNERS
0 1 8
DAYS ON DALAL STREET– NATIONAL LEVEL EQUITY RESEARCH COMPETITION MDI GURGAON WERE THE CAMPUS WINNERS
F E C A C H I E V E R S
The curious case of banking frauds Written BySengodan M Navin Chandran Indian Institute of Management Lucknow Winning Entry
A
ccording to a report, India has lost more than 61,000 crores in 8670 fraud cases
between 2012 and 2017. And, the name of Nirav Modi in the long list of SK Jain, Vijay Mallya, Bipin Vohra, etc., is a no shocker. Some of these frauds could have been stopped if data transparency and proper regulatory frameworks were in place. The major impact of willful defaults will be the stern actions that can be expected from banks and also the drop in ease of doing business factor, which in a larger picture, and will affect India’s growth. The most worrisome situation is scam has more effect in India than Non-performing assets. The frauds that are happening are either internal or external frauds. The frauds started from accounting fraud, continued with internet frauds like identity fraud, phishing, skimming, card fraud, etc. Solutions for thwarting fraud must be differentiated too! If the banks are really curious and serious enough to thwarting fraud or keeping it away from spreading, then the regulations must be reviewed and updated periodically. The solutions must try to prevent further frauds rather than to lament the willful defaults that have a detrimental effect on the economy.
The primary responsibility lies with individual banks, however, the central bank (RBI) has a major role to play in curbing the frauds. Not all the banking frauds are quick enough like digital or card frauds, which practically is difficult to control, some frauds which happened like in PNB, are like inflation affecting banks slowly. This cannot be stopped unless there are proper systems in place. There are two things, one at the customer level and another at the central level, which Reserve Bank of India needs to implement uniformly across all the financial institutions. Firstly, the data sharing between departments, banks, and the central bank is one of the cures for these type of problems that is persistent for a long time. The data sharing will help in developing a fraud preventing mechanism. If data is not shared and not utilized wisely, banks lose the sight and can’t see a clear picture. By not working closely, not only the bank loses opportunity but also the entire banking system loses its sight of fraudsters. Secondly, the technology comes into play where safety is assured. The best way is, to begin with, the implementation of multi-factor authentication structure among all the financial institutions which is not in place. But the problem with multifactor authentication is that it consumes the user time in the world where people want everything in seconds. The blockchain is the solution for both these problems where data transferred will be stored in a decentralized register and also it is safe and secure. Also, this technology can help banks by providing transparency and avoiding simple human malfeasance. Blockchain varies from the traditional banking system in a lot of ways. It is a decentralized system where the encrypted transactions are shared by multiple parties. It provides further scope to leverage technologies like machine learning and Artificial intelligence where fraudulent patterns are picked at a very early stage. These technologies coupled with the blockchain repository will avoid future frauds through a systemic verification and monitoring process. Tracking patterns and preventing them will help our country avoid yet another wilful default. Several banks have already started this as the way forward and early adoption will save Indian banks from scams and increase the transparency in the system. The frauds even happen during the lending itself. Though the data is available in CIBIL, it is prone to human errors. Blockchain has the decentralized registry with transaction linked as a chain which cannot be tampered without affecting the entire ecosystem. Such technology, provides traceability and human errors can be avoided by applying an initial screening. The world ruled by big data and blockchain is going to be the game changer. It is high time to change from traditional system to modern system, which is safe and secure than never before. What we need is an improved banking system which facilitates ease of doing business while implementing sufficient safety norms to detect and prevent frauds.
Phillips Curve: One side of the Story
Shailesh Mishra PGP03 IIM Amritsar
Phillips curve has been one of the most debated opuses in the economic context and has been involved in the economic policy ever since its wide acceptance among renowned economists. Developed by A.W.H. Phillips, it shows that there exists a negative relationship between inflation and the unemployment rate in any economy. Phillips studied the data of inflation and unemployment in the UK from 1861 to 1957 to come to this very interesting conclusion. The underlying logic behind the Phillips curve is that when actual output surpasses potential output, there comes an increasing upward pressure on wages in the labor market. Giving rise to the cost of production and hence the general level of prices. Phillips curve plays a very pivotal role in the monetary policy formulated by economists and central bankers of any economy. They try to maintain an optimum level between the rate of unemployment and inflation rate, that is the unemployment rate at which inflation is under control. Whenever inflation is below acceptance limit and unemployment too high central banks follow expansionary policy to bolster employment. And when there is a high growth rate in inflation they follow contractionary policy to lower the inflation. But the relationship between inflation and growth has always been controversial between structuralists and monetarists. Nobel laureate Milton Friedman lucidly explained the dubious nature of the relationship as follows “historically, all possible combinations have occurred: inflation with and without development, no inflation with and without development”. The stagflation during the 1970s is a concrete evidence that high unemployment and high inflation can co-exist. One of the studies done by Kydland and Prescott (1990) argued that it is supply shock, not demand shock that is responsible for the inverse relationship between unemployment and inflation. In the context of India, the paper “Inflation and Economic growth in India-An Empirical Analysis” examines the relationship between inflation and GDP growth in India. It has been found that there exists a long-term negative relationship between inflation rate and GDP growth rate in India. So, it is evident that there have been events that successfully embraced the Philips curve, but the other side of the picture should not be completely ignored. Every economy behaves in their own peculiar way. Wages in the labor market is determined by many factors. Given such complexity involved in the economy, policy should be derived from rational thinking and the assumptions well known.
Algorithmic Trading Prasoon Mallik PGP03 Amritsar
1 SECOND = 1000 MILLISECONDS 1 SECOND = 1000000 MICROSECONDS BLINK OF AN EYE = 300-400 MILLISECONDS
HFT HAS REDUCED ARBITRAGE OPPORTUNITIES FROM 97 MILLISECONDS IN 2005 TO 7 MILLISECONDS IN 2011.
IN HFT, EACH MILLISECOND IS WORTH $100 MILLION IN REVENUES
FIRM PROCESSES ORDER IN LESS THAN 400 MICROSECONDS (0.0004 SECONDS)
IN 1960, AN AVERAGE SHARE WOULD BE HELD FOR FOUR YEARS. IN 2000, THE HOLDING TIME FELL TO EIGHT MONTHS AND TO TWO MONTHS IN 2008. IN 2014, THE AVERAGE SHARE WAS HELD FOR 20 SECONDS
Decoding the Black Box Black Box Trading, popularly known as Algorithmic Trading (or Algo Trading, in short). A trading system based on advanced and complex mathematical models, tools and formulas; algo trading facilitates high-speed buying and selling of securities in the financial markets. As per statistics, in India, algorithm based trading accounts for one-third of the total volume on cash segment and around half of the volume in the derivatives segment. The foundation stone of this trading system is the pre-fed computer programmes which are generally based on a defined set of rules provided by the investor. An investor can define the time, price, volume etc. in the system (through a software generally provided by the broker) and it shall execute the trades automatically on the behalf of the investor. The software ensures that the transactions are accurate and fast, with a better price discovery and minimized risk, ease of use and extent of customization thus earning optimal returns for the investor.
Evolution of Algo Trading Algorithmic trading was first introduced in the financial markets during the late 1980s. But it was the early years of the 21st century that saw a boom in High-Frequency Trades (HFT). During 2001, HFT had an execution time in seconds which shrunk to milliseconds by 2010, and nanoseconds by 2012. By 2012, HFT accounted for 70 percent of US equity orders as compared to 10 percent during the early 2000s. According to NYSE, HFT volume saw a growth of 164 percent during 2005-09. In September 2012, Dataminer Inc. launched a service that turned social media streams into
IIM
actionable insights for trading which would help to report the latest business news up to 54 minutes faster than existing conventional media channels.
Does it have a potential to reshape the future of trading? Human life is now being driven by sophisticated algorithms – from the traffic signal to the social media feed. An area which was untapped until now was the securities market. Algorithm-based trading systems are now ready to write the future of financial markets, bringing greater efficiency through the algorithms. Today, algo trading has become a hot topic. It has vested more powers to the investors in this ever-evolving market by minimizing human intervention and chances of human errors. Algo trading has reshaped the rules of traditional broking and has become eye-candy of FIIs, HNIs etc. given the fact that large institutional investors deal in a heavy amount of shares, thus making the most of these algorithm-based trading. These algorithms make quick decisions, thus reaping the profitable opportunities arising in the market much before a human can get to spot them. Also, with algo trading, an investor need not keep a tab on his/her portfolio all the time. The algorithm is there to monitor it on a second-by-second basis and for making smart decisions. The future algorithms can be made so much self-learned so that they can themselves study all the historical data, analyze it, predict the future market and develop strategies accordingly. It may also tune itself to different market conditions through its self-learning aspect.
The Indian Context Until a few years ago, algo trading was a noble concept for Indian retail investors. But as everything is gradually going digital, so did the trading. During recent past, Indian retail investors have started embracing technology in trading. The investors have now started learning the fundamentals of automated trades. Many broking firms have started offering algo trading to their clients, some with training modules and simulator access too. Going by industry estimates, retail investors are using algo trading only for two to five percent of total transactions. Though the proportion is considerably less, but it is expected that the trend would pick up soon, expectedly posting a double-digit growth in customer adoption. In May 2018, SEBI declared new customs to make algo trading easily accessible to the investors. It also proclaimed rigorous scrutinizing of these transactions, in order to ensure efficient functioning of the financial markets.
The Bottom-line Everything in the world has a downside, and so does algo trading. Given the fact that building a robust trading strategy using algorithms is a complex process in itself; it might sometime fall victim to curve fitting if the traders develop algorithms based on historical trends rather than adopting a balanced mix of history with actual fundamental strategy.
Cuffing the Invisible hand Written ByArshis S Balsara MMK College Notable Entry
It is said that in a country where everyone is a billionaire, no one is actually rich. This is because of a certain self-correcting macro-economic tool that has either been used as a scalpel to surgically improve the economic fundamentals of a country and also, much more often, been used as a weapon, far stronger than any bomb or tank, to change nations and worlds. The tool which we casually call Inflation, is a measure simple to calculate, but its consequences impossible to comprehend. One country, unfortunate enough to understand this first hand recently was once the richest country of South America, Venezuela, an economic paradox and a tragic story of how a country, sitting on the largest oil reserves of the world are facing a crisis that was caused by a sole wrong decision. Venezuela is a country of millionaires where you need to have billions for basic necessities. The inflation rate is an estimated approx. 13,800% compared to India’s rate of a mere 5%! We can feel the crunch of that 5% even though it seem nothing compare to the latter figure. Imagine only being able to buy an apple for the price you paid for apartment only a few years back.
Even though Venezuelan Bolivar has depreciated in value to such an extent that people carry out transactions by the weight of the notes rather than its fiat value, the government still feels the need to push out currency of higher denominations. The true sorrow is that all this could have been avoided if the decision makers remembered one small proverb for their trade policy- “Never put all your eggs in one basket.” The over-dependence on the export and high prices of oil and bad policy caused this issue. Faulty policy and bad decisions are too expensive, even for black gold. The history of Venezuela is Interesting. Oil in Venezuela was used a medicine by the local inhabitants. Eventually the abundance of oil got the attention of the major oil companies. This led the rapid increase in the value of the native Bolivar to the dollar. However this made the exports of other items such as agro goods much more difficult for the importing nations. So instead of giving subsidies or promoting a quality increase, the government under the Charismatic Populist Socialist leader Hugo Chavez decided to import all the goods with the revenue receipts from oil. This one move ruined the domestic production of many other sectors. When a country is so depended on one commodity whose valuation is based on bubbles, such that it needs to sell it for food and clothing, it could only spell for an economic disaster. In 1976, the nightmare of every free market thinker and laissez faire advocate became a reality when the oil sector was nationalized creating the PDVSA. After the death of the spirit of Venezuelan freedom, Hugo Chavez, his right hand man Nicolas Maduro took his shoes. Although he was personally picked by Chavez he didn’t have the Charisma nor did he was the popularity of the senior leader. He also didn’t have control over the oil prices. Due the fall in oil prices from $110 per barrel to nearly $65 in 2014 all the OPEC member nations did not honour their agreement with other OPEC nations. Now it’s not a catastrophic issue for a country that has a diversified economy, however for a country like Venezuela, the falling oil prices meant that their economy fell down by almost half its GDP. Besides that they were stuck into their oil at a price which was not sufficient enough to run their economy and trade. No exports meant no more imports, no imports led to foreign goods into the market which was Venezuela was no food, clothes, medicine or even toilet paper and other such essentials. Since the entire sector is under red tape and monopolized by the government, private individuals can’t sell or buy goods even such as medical gowns, without government approval. People have resorted into eating zoo animals and pets for food. The Socialistic philosophy of the nation even prevents them from even accepting foreign aid from other nations due to their views on Capitalism. Recently there has been a lot of criticism from almost all nations of the world alike due to rising oil prices. One must try to look at those few countries such as Venezuela whose major chunk of economic activity and to some extent happiness of their citizens depends only open this slurry of the remains of ancient fishes and marine animals stuck deep inside the ground over million years of geographical changes. The invisible hand is a concept by Adam Smith that is a representation of how human
intuition will eventually get a fair and just deal for all, rich, poor and thus make government intervention in the economy meaningless. But the economy is much more than just an international price correction, it’s an attempt to value in money all the hopes, dreams, desires, wants, fears, hope, greed and more. It`s big enough force of nature to attract government attention. Pragmatically speaking, the free hand will always be restricted to prevent catastrophic overcorrections. Economist past, present and future from Chanakya to Smith, Marx to Keynes, Friedman to Thaler have tried to understand this intricate system in which our world and maybe universe rewards people and beings to eventually make the demand and supply in perfect equilibrium. Giving everyone justice and fair compensation for work. Its upto each individual to decide what affects what, does the amount of compensation given determine the level of disequilibrium in a situation or maybe the amount of disequilibrium determines the amount of fairness in a situation.