Vitta Artha - Volume 6

CONTENTS 1. Foreword Prof. Nagarajan Ramamoorthy (Director, IIM Amritsar)……………………………………..2 2. Cover Interview Dr. Abhishek Saurav (Economist, World Bank)…………………………………………..…3 3. Risk Management: Demystified Mr. Simran Pradhan (Risk Management, Goldman Sachs)…………………………………....8 4. Job Interview in Finance and key Takeaways from Courses Dr. Pankaj Gupta (Assistant Professor, IIM Amritsar)……………………………………....13 5. The impact of the SEBI Circular on Multi-cap Funds on the prevailing structure of investments by Mutual Funds Saurodeep Chatterjee | Jay Masalawala (MBA06, IIM Amritsar)…………………………….15

6. RBI Operation Twist Deepak Kushwaha | Kaushalender Kumar Varma (PGP05, IIM Amritsar)…………………...18 7. Stock Market soars during General Economic Distress Suranjana Banerjee (NMIMS, Mumbai)……………………………………………………21 8. Strategy for Business Survival & Resiliency Recovering from the impact of Covid-19 & Lockdowns Nishant Satyam | Vasu Golyan (IPM, IIM Indore)………………………………………….23 8. Banking and Finance for the Indian Rural Economy Need of the Hour? - Affirmative Nandini Chowdhury (K J Somaiya Institute of Management Studies)…………………………...26 9. Internship Experiences…………………………………………………………...29 10. Golden Investment Fund………………………………………………………..32 11. Club Activities……………………………………………………………………37 12. Our Recommendations………………………………………………………….40 13. Comic Corner…………………………………………………………………….43 14. Team FEC…………………………………………………………………………44 CONTENTS

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FOREWORD

PROF. NAGARAJAN RAMAMOORTHY Director, IIM Amritsar

Dear All, I am pleased to announce that FEC (Finance and Economics Club), at IIM Amritsar is back with the sixth edition of its bi-annual magazine - Vitta Artha. FEC is incessantly working to decipher the complexities of the world of finance and economics. It is the endeavour of the club to harness talent and enrich learning experiences of our student community. Vitta Artha is one such initiative of the club to better understand the dynamics of finance. Articles from prominent B-schools and the valued insights of the industry stalwarts is a way to keep the students updated and informed of the advancements and transitions in the field of finance and economics around the globe.

This edition of Vitta Artha dives deep into the repercussions of the pandemic on the financial markets and consumer sentiments with the on-going liquidity issues considering the lockdown situation across the world.

Coronavirus has mangled almost all economic planning and forecasts and the world has lost its balance, leaving every country in a state of emergency. This edition also talks about navigating through these uncertain times effectively and the crucial role of the government and banking sector in stabilising the economic situation. However in managing the immediate crisis we should not lose focus of the bigger picture. The favourable manufacturing competitiveness and demographics of India has a lot better chance of rejuvenating the momentum in the economy. The various macroeconomic parameters and their significant impact on the finances are very much highlighted for the finance enthusiasts to be cognizant of the happenings around them and take their financial decisions more appropriately.

This edition also deconstructs commonly held beliefs and challenges various views on the practice of Risk Management and how it aids the field of finance. The way the financial markets are to be approached, what are the key takeaways from a financial course and the strategy for job interviews in finance is also epitomised in the following edition. Alongside this internship experiences of various students of IIM Amritsar in the domain of finance are also articulated. I hope this issue of the magazine adds value to its readers and thus develop their interest and curiosity in the field of finance and economics.

FOREWORD

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Dr. Abhishek Saurav Economist World Bank

“HOW TO MITIGATE THE ECONOMIC EFFECTS OF THE COVID-19 PANDEMIC IN INDIA AND LEVERAGE NEW OPPORTUNITIES” HERE’S WHAT WE LEARNT FROM THIS COVER INTERVIEW Here are some of the things we learned, from his work at the World Bank and a look through his knowledge lens at the pandemic and its effect on the world, specifically in the Indian context. The interview was conducted on 30th September , 2020.

Question: With the pandemic affecting a huge way in which businesses and countries used to function, the promotion of indigenous goods by different countries, FDI’s have currently reduced significantly. What do you think, is this the era of “anti-globalization” sentiments?

There is little doubt about the COVID-19 pandemic’s acute impact on the global economy. The impact is clearly universal, with greater than 90 percent of

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world’s economies projected to experience simultaneous recessions/ contraction in output in 2020. Recent World Bank estimates suggest that global GDP will contract by more than 5 percent in 2020.

As is well known, what originated as a localized shock to Chinese production rapidly transformed into disruption of global supply chains – this was mainly because of the heavy reliance on producers in China .The effect has been quite severe on globally connected producers, such as MNCs who are lead firms in the system of globally distributed production also known as GVCs. It is evident that global businesses are experiencing significant shifts, but it is too early to conclude that this is an era of “anti-globalization”.

The current pandemic has exposed the vulnerability of global supply chains and highlights the risks of relying on the concentration of manufacturing facilities of a single or small set of countries. Realizing this vulnerability does not predict a significant shift away from global production and globalization. It is difficult to agree with predictions of extreme localization of production because the economic rationale for such change is weak.

“A more likely scenario is to see an upsurge in domestic production in some sectors, especially those related to immediate needs of food, health, and hygiene.”

And the emergence of regional supply networks to manage risk and boost visibility of supply networks.

For global producers a series of supply chain adjustments are already underway and expected to intensify over time. These include: increasing the visibility of supply chains and network of suppliers, leveraging digital technologies to manage the complexity of supply networks, closer collaboration with suppliers through support and adaptation, and diversification of suppliers (within and across economies) to lower concentrated risk.

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Question: With the changing landscape of FDI, what initiatives can the current government in India take to attract foreign investments?

The current global scenario does present opportunities for economies with manufacturing scale and production capacity such as India. Indian policymakers have a twofold opportunity: The first strategy is to undertake reforms to strengthen FDI competitiveness to attract foreign investors It begins with understanding what foreign investors want. Recent evidence from research that I authored finds that for foreign investors the most important decision factors are political stability, macroeconomic stability, and the quality of the legal and regulatory environment – all factors within the domain of governments.

To improve the regulatory environment for FDI, structural reforms are in order that require implementation with surgical precision. Based on our research, streamlining investment approvals, relax foreign investment limits, removing caps on foreign equity ownership are some of the ways to do so.

The second strategy is to closely follow shifts in global value chains towards some localization, emergence of regional supply chains, and to some extent the relocation of global producers. Sectoral dynamics matter in this regard– for example India may seek to identify comparative advantages in emergent sectors such as healthcare manufacturing, digital services, food processing, and logistics services.

“The recent economic survey calls for an extension of the make in India thrust to now include an assemble in India for the world aspiration.”

What this means is that the policy environment has to support specialization at large scale in laborintensive activities, for “network products” – defined as a type of production that occurs across Global Value Chains that are led by multi-national corpora-

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tions. This will require a laser-like focus on enabling assembling operations at mammoth scale in network products to generate significant employment opportunities for the multitudes of young Indians entering the labor market. Estimates suggest that the potential for employment generation in deploying this strategy amounts to anywhere between 40-80 million jobs in the next decade. But this potential cannot be realized by an insecure trade and investment policy architecture.

This has to go hand in hand with a suitable trade and investment policy package that allows manufacturers, both domestic and foreign, to compete in new markets and product categories and does not deter global producers from choosing to locate their affiliates in India. Also, policymakers must recognize that any protectionist barriers in trade and investment will be misguided and its economic costs will far overshadow its benefits. One such measure with promise is to liberalize the tariff regime. In the manufacturing sector this would entail lowering or eliminating tariffs in products that constitute key inputs into exportoriented value-added manufacturing in India. In the services sector, policymakers should recognize the major thrust towards digitalization and the economic potential for remote service delivery. Removing regulatory and operational barriers to remote digital service delivery across the globe from India, are also in order to realize this potential.

Question: What competitive advantages should India leverage to gain most from the current opportunity to be global lowcost manufacturing base?

The COVID-19 pandemic and an increase in the incidence of natural disasters and adverse weather events, have contributed to a major pivot in business, characterized by a shift from efficiency driven low cost production and offshoring and towards more flexible and adaptable supply chains that are more resilient to crises. Consumer preferences are also similarly shaping

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and it is only natural that producers will respond to changing nature of demand. The drivers or factors you identified as key to manufacturing competitiveness does bear out in empirical literature as well, i.e. the importance of human capital, large size of consumer markets, and supportive policy environment are important to define a locations’ investment competitiveness.

and supported by government.”

I’d identify three sources of competitive advantage that India could leverage, to gain from the current opportunity to be a global low-cost manufacturing and assembling base:

In a post covid world the competition for the marginal investment is going to be acute, and existing sources of competitive advantage may not be adequate. The winners in the near future are likely to be those economies that can create new sources of competitive advantage through eliciting investor confidence by offering predictable business operating environments and an open and transparent trade and investment policy regime.

First is deep manufacturing capacity: Despite the slowdown in manufacturing activity in pre-COVID years, India’s manufacturing capacity remains potentially a source of strength. It is clearly ahead of Asian competitors on this front. This matters quite a bit because export-oriented value-added manufacturing relies heavily on raw and intermediate inputs, and a broad diversified manufacturing base ensures that over time local linkages with domestic suppliers becomes a marked sources of cost advantage in product markets for producers.

Second is industrial and logistics infrastructure: An area where competitive advantage can be rather quickly upscaled is in the area of industrial and logistics infrastructure. This includes the system of economic zones, industrial parks, and industrial estates that span the length and breadth of the country. This infrastructure has attracted voluminous public investments over the years and created industrial infrastructure that is purpose built for support to manufacturing units. However, its performance has been underwhelming due to institutional and governance arrangements. Some more recent ones that have been developed under a PPP framework have performed markedly better.

“In this case I think the private sector has an opportunity to take lead in investments facilitated

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Third is human capital: A key competitive advantage for India is going to be the size of its workforce and relatively low wages. It is evidently clear that this is going to be an important source of competitive advantage for skill-intensive service sectors (especially digital services) and also for low-cost production and assembling manufacturing.

Question: Will the conventional monetary and fiscal policy prove effective to offset the fall in consumption, since the shock is both on the demand and supply side?

I think much has been said about the role of monetary and fiscal policy response on the ability to mitigate the adverse effects of the pandemic on the economy. What should be taken into account is that advanced economies and developing economies have varying ability to respond through traditional measures such as - lowering interest rates, stimulating financial markets, affecting bank lending, supporting failing businesses, or providing business liquidity. Developing countries are faced with multiple constraints, which limit their policy choices. For instance, the taxbase is smaller with implications for government expenditure, some are already leveraged in debt markets with implications for future borrowing to address the health crisis and the economic fallout. From the course of the pandemic in developing countries, such as India, it is evident that the decline in consumption of non-essential goods and services is likely to last

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until when the pandemic is under control. Clearly, there are limits to conventional policy measures.

Some of the needs could be met through borrowing from multilateral organizations, to attend to the priorities of the much-needed public health and economic stimulus responses. Another avenue is to monetize the fiscal deficit by increasing the supply of money. It has risks, but the government should exercise high caution and not shy away from it, if it helps in attending to its responsibilities towards the vulnerable.

Since we know that individuals from economically lagging regions and poor households have a higher likelihood of undertaking migration, both within and across borders, their risk of income loss directly aggravates the pre-existing economic vulnerability of their families and kin. In the case of India, where during early stages of the pandemic migrant workers undertook arduous and risky journeys back to their hometowns, the effects are already evident. One of the effects has been a decline in human capital investments due to the risk of dropping out of schools.

“The economic contraction and its implications for welfare are significant. The policy response, including stimulus measures, ought to be stronger for more effective mitigation.”

Question: In your opinion what are the long-term problems that are yet to arise as a result of COVID? Is there any way that we can brace ourselves for?

Question: With migrants being affected the most due to the current pandemic, remittances are going to slip down ,representing a loss of a crucial financing lifeline for many vulnerable households. How is this going to affect the inequality gap around the world?

This is a significant risk for developing countries, which often rely on remittances as a significant and stable source of external capital for households and businesses. I recall research I conducted as part of my doctoral dissertation, that showed that households that received remittances had a higher likelihood of engaging in entrepreneurship, as compared to households without remittance receipts. Recent estimates suggest that remittances are projected to decline sharply in 2020. Surely, this affects recipient households’ budgets and the ability to finance investments into health and education, in addition to the direct effect on sustenance. The equality concern arises from the greater risk of migrant workers, often less educated and commanding lower wage jobs in destination economies, to lose employment or experience a decline in working hours, wages, or both.

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Slow economic growth: Slow growth, globally and in India. This year growth has significantly slowed as compared to 6 percent in FY19 and 8.3 percent in FY17. Future estimates of contraction are more severe. The effect on the services sector has been disproportionate (from 7 percent to lower than 2 percent). Growth was already slowing before the pandemic, and a return to pre-pandemic growth rates may not be automatic or immediate.

Magnified vulnerabilities for the poor: “Poor are more vulnerable to contracting the virus - closed quarters and the inability to afford not going to work and the awkward choice of earning a livelihood or saving yourself from the pandemic.” They also have lower access to healthcare.

Second, another vulnerable group comprises domestic migrant workers, who account mainly for surplus agricultural labor from the rural countryside and undertake risky migration to urban centers in search of jobs and livelihoods.. Recent research suggests that districts with higher rates of outmigration also report higher number of cases of COVID-19, likely driven by the return of migrants. Some big questions

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emerge, vis-a-vis the livelihood prospects of return migrants, the role of safety nets, and the resumption of businesses in urban areas with the missing market for low-cost labor.

Human capital implications: Schools and universities have been closed, partially operating, or operating with alternative arrangements across the world as part of the policy response to slow the spread of COVID-19. The associated learning disruptions, although partially compensated by home schooling and remote teaching, are likely to have the most adverse effects for disadvantaged students, including on health and safety. The limits on collective workplaces can further deprive individuals of opportunities to improve skills and productivity through apprenticeships.

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Mr. Simran Pradhan Risk Management Goldman Sachs

Risk Management: Demystified

pitch to lionize the practice nor is it a critique to puncture holes in it. Any shortcomings in views are purely mine, so I would request you to please bear with me.

Before, I dive into unraveling some of the myths around risk management let me expound for a bit on what is risk management.

Risk management is the process of identifying a risk, measuring and analyzing it and making decisions that contain or limit the impact of the risks in an adverse scenario.

For instance, you are invested in a single equity stock in your portfolio. The stock is subject to fluctuations in its price which will impact its value in your portfolio. The price fluctuation can be caused by several factors ranging from news around the company or its industry, the prevailing macro-economic scenario, a regulatory action, acts of god like natural calamities and the like. The set of activities that involve mapping of these risks and taking action to contain or mitigate them is what constitutes risk management.

Illustration 1 I recently had the privilege of addressing a curious and well-informed batch of students at the Indian Institute of Management, Amritsar on the subject of Risk Management and Resilience in the current macroeconomic context.

The prospect of facing 200 + B-school students on Zoom was both exciting and challenging. My main objective lay in sharing a broad perspective which would be jargon light, yet would help the students connect the dots to the big picture. And as I started to prepare for the talk, it began my exploration of deconstructing commonly held beliefs and challenging my own views on the practice of Risk Management.

This piece is a humble attempt to share some of my key learnings about the profession and the role it plays in the world of finance. It’s also neither a sales

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Now, I will try to address some of the common notions that we (including myself for a long time) hold around risk management.

Myth 1: Risk Management originated post the 2008 Global Financial Crisis

Illustration 2

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Contrary to popular belief, the origins of risk management may actually date back many years to ancient civilizations when the simplest of games were played with dice. Per a blog by Angus Rhodes at Ventiv Technology (a risk, insurance and claims software solution provider) that I used to research for this topic, evidence shows that gaming actually gave rise to probability. This can be found from the writings of notable mathematicians like Pascal and Fermat dating back to the 1600s. The field of Insurance too holds its genesis in the ancient practice of mutual aid and burial societies. Thus, the sophisticated metrics and fast calculation models that we see today are actually a refinement of the idea of risk that germinated many centuries ago.

the 2008 financial crisis, for the risk managers it was their finest hour to show their chops. When I first landed on the risk job, my boss told me- “A calm day in the markets is no kick for a risk manager but a volatile day is what you really wait for”.

I would add to it and say, that a risk manager treats the calmer days as no less vital for he/she knows that when the storm hits, it’s their preparedness that will count. And on that note, I’ll make a segue into the next myth that I want to bust.

Myth 2: Risk Management is about predicting the next crisis

So, what changed? How did evolution happen and how did we get to where we are today?

My sense is, that as commerce grew so did banking.

And as banking advanced, so did the opportunities and challenges in making money. As products evolved from cookie cutter investments, there came the realization of the need to understand the interrelatedness of different “actors” and “factors” in the market. By actors, I refer to various intermediaries beyond the good old bank that are involved in any financial transaction. From simple 2-way exchanges, we have grown to have complex structures that could easily compare with the web of one’s social network.

And thus, the challenge to estimate what is the exposure in the portfolio and the consequent potential risk started to grow. In terms of factors, we have evolved from a space where the instrument traded was treated as the risk in itself to looking at a combination of micro and macro factors and some as far reaching as geopolitical, climate and now even a Pandemic! And as the complexities started to rise, so did the investment in trying to keep a grip on what could go wrong and more importantly what to do when something went wrong.

While much is often said about the role of bankers in

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Illustration 3 Well, we have always been fascinated with the “Crystal Ball”. We have toyed with this idea in movies and real life in equal measure. From Star Wars to serials on mythology to predicting who will win the soccer world cup, we have not hesitated to use different props as a metaphor for the crystal ball. The octopus Paul at the soccer world cup was my personal favorite.

Risk managers are no magicians. Their skill lies in the detailed rigor of the analysis they put together. Their effectiveness is in their ability to influence the risk

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taker (trader/ investor, etc.) to make a tempered choice that balances the risks and rewards. Their triumph is evidenced when they go against the tide and enforce a business decision that turns out to be providential for the firm, its clients and shareholders.

Myth 3: Where can I see the impact of Risk Management: The topline or the bottom line?

Advanced Models, attractive dashboards, faster calculation engines and the powers of data mining to conjure new metrics are merely but tools at the disposal of risk managers. Their mastery of these tools and the insights from the results that these tools generate is what keeps the role relevant.

The crises of the past have led to strengthening of the risk management rigor by way of more regulatory focus and swifter and more decisive management action. Each crisis has helped to plug the gaps in risk taking and amplify the voice of the risk managers in the industry. Even when we are in the thralls of a hard to predict/model risk such as the Pandemic, it has been the hard lessons learned in the past around managing liquidity, focus on quality of credit, stronger capital planning (i.e. your buffer reserves that may often come at the cost of a business opportunity) that have defined the resilience of in the financial services industry. Even in the non-financial world, I think the example of Wimbledon is a standout- the organizers took a $2mn Pandemic insurance for the last 17yrs and cashed in almost $141mn when the pandemic hit. I’d surely like to meet the risk managers behind the organizers of Wimbledon!

I will summarize the risk manager’s credo by borrowing a military phrase that my father often mentions to me“The harder you sweat in peacetime, the lesser you bleed in war”

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Illustration 4 As a young professional in any domain, we are always curious to ascertain where our works adds value. If you are in sales or in financial trading, you’d probably say the top line in the balance sheet of the company.

If you are an auditor or in accounting, you might be helping save costs and therefore sit in the bottom line.

As a risk manager, I have often asked myself this question- where does my work impact?

For the longest time, I have held the common view that risk management influences the bottom line. After all, we come up with cool strategies to mitigate/ hedge risks to limit losses and costs of doing business.

But I am inspired to borrow from Jeremy Irons (CEO of the firm) in the movie Margin Call. He is addressing a crisis meeting in a room full of business and risk side professionals past midnight, and asks Kevin Spacey (the head of Sales) what he thought of the idea to sell out of the problem portfolio in a fire sale? And Kevin says-“if you do this you will kill the market and you will lose your clients forever!” If only caution

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was heeded in time, the company would have made a better choice about the way it leveraged itself – a lot of money can be made the right way too. And ironically, the head of risk management was let go under staffing cuts the very same morning!

Sustaining the topline is no mean task and if you look around you will find that banks are ever more cautious about the investment choices they make. ESG and green finance are not mere CSR initiatives. It’s financial institutions committing to a philosophy of how they aim to conduct their business. And who do you see playing a vital role in helping make these choices in the background? It’s the risk manager.

Myth 4: Artificial Intelligence is the New Risk Manager

FinTech is the new buzzword and technological acumen is the new beeline in terms of the skills to desire.

I spend a significant time of my learning hour in the day reading about tools and systems to make my work more impactful. Data Science has given us the power to search vast swathes of data and fetch the information we need. Document Intelligence tools devour large pdfs with enormous ease and can arrange data in any format that we desire. Machine learning tools have helped tackle repeatable and high-volume calculations leaving us risk managers with more time to think what next. Sure, cost and value efficiencies have been large but you shouldn’t feel threatened that the bot you’ve just created will actually replace you in the job.

And here is why I say so.

Any artificial intelligence combines learning and problem solving. The learning comes from rules and calculations come from the formula that has been set in its brain center. It is objective and will almost always deliver a result. But of what good is a result that doesn’t speak to me? I see a risk number on my computer screen- but who determines whether it is material and worth actioning. Or who determines what set of inputs, assumptions and logic is required to be configured in the tool that gives me the risk number in the first place?

The key is to understand, that automation is helping free up our plate so we can think and innovate with better ideas. Any risk manager worth his salt will sayhis number 1 priority is to make sense of the numbers, stitch to gather a narrative that makes sense and drive action that creates value.

Illustration 5 Technology is an inseparable part of our lives. That it is an enabler is an understatement. I often find asking myself rhetorically- do I own the technology I use or does the technology I use own me?

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Moore’s Law and risk management in my opinion have strong parallels. As machine sizes shrunk and compute power grew, the risk managers’ ability to affect business outcomes has grown exponentially.

My advice to you would be – Master the machine and make it work for you and not the other way around!

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To summarize, I feel that TCS’s erstwhile tagline, “Look beyond the obvious!” typifies what a risk manager should be like. I spend my day analyzing the risk numbers I see on my screen. I am always thinking of how I can derive insights and get a decision maker to listen/action on my viewpoint. And as I was preparing for the talk, I realized that we are risk managing in every sphere. Be it for personal choices like one’s own investment portfolio to common day purchasing decisions to making a choice of how you would handle your studies in a B-school in a crunched time frame. We are always wearing the risk manager’s hat. It is as much intuition driven as its analysis based. It is as much about being the voice of reason and sometimes dissent as it is about ideating on how to get more returns.

I hope I was able to communicate the simplicity of what lies at the heart of risk management. Financial concepts can and will be learnt and mastered, but a feel for risk has to be cultivated. Whatever choices you make, you will find an embedded risk-reward relationship. Some choices you’ll make consciously and others unconsciously. But hey! even a decision that results in a sunk cost is full of learnings that you can take away. And well, risk truly is about learning and striving to not repeat the same mistake.

Note :- All images are sourced from the internet. They have been used for illustrative purposes only.

Disclaimer :- This article is an extension of an address delivered by the author as a guest speaker at IIM Amritsar. All thoughts and views expressed in the article are personal.

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Dr. Pankaj Gupta Assistant Professor IIM Amritsar

JOB INTERVIEW IN FINANCE AND KEY TAKEAWAYS FROM COURSES So, what it takes to prove your mettle and get yourself accepted by an interviewer as a finance wizard? Is it a list of popular courses and good grades in your CV which impress the interviewer? Or is it the list of various projects you worked on previously? Or the certifications in the finance area like CFA and FRM that give you an edge over others. The answer is mixed, but above all, an interviewer expects candidates to have a basic understanding of related aspects of financial markets. Based on my experience both in industry and academia, I wish to share a few points that students need to remember when they go for job interviews in financial markets.

Courses : Draw an Integrated Framework When you start preparing for an interview, you should always remember to look at the finance courses in an integrated framework. Suppose you think that Cost and Management Accounting, which you study in term II is entirely separable from strategy and cost management and has no role in business strategy. In that case, I think you misunderstood these courses. Similarly, companies' corporate governance and hedging program can be interlinked and

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need to look from that perspective. You need to develop the connection and understand the link. The Hedging and risk management program needs board oversight. Board usually links the compensation structure of the CEO with her risk-taking/ management abilities and ensures that the CEO avoids incurring losses through poor management skills. The risk management program of a company involving the board's decisions sometimes raises critical ethical issues in few circumstances, which I believe the interviewee should be capable of discussing.

In this way, while preparing for a job interview, you should look at ethics, corporate governance issues, and risk management in an integrated framework. I suggest students draw an integrated framework of courses on a writing board and learn to link various courses (core and electives) in one framework..

Importance of Views and Perspectives I always emphasize on views and perspective when looking at a financial decision and making a choice.

What fits from one perspective is not acceptable when you look at the same phenomenon from a different perspective. Few conflicts of interest situations like in between fund suppliers, owner-manager, or controlling shareholders-public shareholders develop your ability to think from different perspectives and help decide when you are in those roles. Developing critical thinking from those perspectives broadens your horizon of understanding.

Models are not Foolproof You study lots and lots of models and quantitative stuff during various electives and courses. On the one hand, we should appreciate the beauty of methods and models. On the other hand, we must remember that a model is a depiction of reality, and inferences based on data might not be the whole truth! It would be best if you also appreciated this because it is not in any model's capacity to include everything,

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especially qualitative factors/aspects. So, you should critically evaluate a model and talk about what a model does not have. For example, – The environment, social, and governance features of a company are ignored by typical valuation models, but these factors matter from a valuation point of view! Please keep checking the recent research updates on most founding models and methods taught by faculty in various courses.

Theorists vs. Empiricists View What we teach you are theory and theoretical models, what you like is empirical methods and analysis (my understanding). An ideal trade-off is to be able to analyze both critically. Theory broadens your knowledge of issues. Empirical methods and approaches help you to operationalize numbers, visualize data, and thus helps in deciding. I suggest a judicious mix of both is essential. I also recommend reading recent noble laureates work in economics and financial markets. I like Bengt Holmstrom and Oliver Hart’s work in contract theory. Jean Tirole’s work in Regulated Industry and Corporate Finance helped me understand the investment banking and corporate restructuring area. What do you like? Ask yourself and develop the connection between their work and your learning from finance & economics courses.

Is it Science or Art? Finance and application of methods is both science and art. Estimating ratios are right but taking actions and building strategies to improve the future needs lot of understanding, decision-making ability, and problem-solving approach. So, it is both Science as well as Art. You learn a few things from experience and exposure.

Above all its Behaviour?

havior might deviate from the assumption of rationality! The theories and models, including agents' behavior, are based on the premise of rational behavior.

But this is not always true!! If you understand this departure from theory, you can better explain the phenomenon. For example - We trust that marketbased ratios are more objective and can be proper measures, but, from the past, we learn that the market also failed in interpreting information by companies like Lehman Brothers and ILFS.

Give Different Perspective than in Newspaper?

What comes to your mind when you read a piece of news given in the newspaper? Can you read between the lines? Had you developed the ability to provide opinion differently than news correspondent or analyst comments mentioned therein? Can you give a view from different standpoints and perspectives?

Can you include what you learn from the points mentioned above? The day you develop this, I believe you can defend your case in an interview very well. This comes through exposure and experience that we wish to bring through a simulated learning environment like case-based discussions and projects.

It’s just the Beginning, not the End! It is just the beginning of your career and exposure to the financial markets. You have many things to learn and enrich yourself. Therefore, keep improving yourself and update the skill sets as required by the industry. Above all, it’s all about how well you convince, persuade, and intelligently represent yourself. My best wishes to all of you for a healthy, safe, and, an enriching learning experience at IIM Amritsar.

Best wishes for the placements.

Whenever you are in a dilemma about a particular situation or suspect how the company will decide, you should remember that sometimes its human be-

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Saurodeep Chatterjee MBA06 IIM Amritsar

Jay Masalawala MBA06 IIM Amritsar

THE IMPACT OF THE SEBI CIRCULAR ON MULTI-CAP FUNDS ON THE PREVAILING STRUCTURE OF INVESTMENTS BY MUTUAL FUNDS On September 11, 2020, SEBI issued a circular mandating multi-cap funds to allocate 25 % of the total funds into each of the categories of Small caps, mid-cap, large-cap within one month from the date of publishing the next list of stocks by AMFI. The majority of the MF had allocated their funds primarily in large caps, low in mid-caps, and almost negligible in small caps, before this development. This was done

by MF to reduce its risk level and generate maximum returns. As 50% of the fund allocation now would be

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in the small and mid-cap segment which is considered a higher risk segment than large-cap by MFs, so they are reluctant to do so. There is a lot of ambiguity as to how MFs should proceed.

The circular was launched to take care of the market regulator’s perceived problem of mislabelling of certain mutual funds. SEBI’s concern was that many of the funds in the multi-cap category were practically large-cap funds, so were not ‘true to label’. So the solution was to mandate a minimum 50% investment in mid-cap and small-cap stocks for all the multi-cap funds. Moreover, the regulator has been iterating that when they said that multi-cap should have some portion in the small-cap and mid-cap, they are not forcing anyone to invest in those caps, they just want that the investments should be done keep in mind the best interest of the investors. But the funds are putting forth arguments that Smallcaps will not be able to mitigate large funds, due to their shallow liquidity. The impact costs when buying or selling small-cap stocks can be as high as 1520 percent, especially if large positions are to be moved. Mutual funds have come up with a lot of data to show that there is no way multi-cap funds with high AUM could be expected to park half of their investments in mid-sized and small-sized firms.

Also, SEBI wants the new norms to be implemented

by February 28, 2021. The mutual fund industry is very likely to want SEBI to consider extending this deadline to at least one year.

Some financial pundits have welcomed this initiative while others have been sceptical about the benefits of the same. “The revised asset allocation for MultiCap Funds as per SEBI’s latest guideline would drastically change the risk of the funds. However, those invested in Multi-Cap Funds should avoid a kneejerk reaction to the revised norms by exiting those funds immediately. Multi-Cap Fund investors should wait for more clarity from their fund houses regarding how they would position their existing Multi-Cap Funds to comply with revised norms,” said Sahil

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Arora, Director, Paisabazaar.com. “This circular has as big an impact as the introduction of LTCG,” said Purvesh Shelatkar, head of institutional broking at Monarch Networth Stockbroking Ltd, referring to the tax on long-term capital gains. “The SEBI circular will ensure funds are no more required to buy expensive stocks at expensive valuations compulsorily but can diversify into quality small and midcaps.’’

Currently, the top 5 multi-cap mutual funds of India

by Assets Under Management, have allocated almost 73 % of their funds in large caps, 22% in mid-caps, and 5% in small caps. So the total AUMof these top 5 MFs is146529 cr. According to the current circular, these MFs would have to reallocate their funds, of which 23% (33702 crore) will flow out from the large caps due to excess, 3% (4396 cr) will inflow into the mid-caps due to shortfall and 23% (29306 crore) will inflow into the small caps due to shortfall. This amount seems to be larger but they are not as the to-

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tal AUM of all the MF is about Rs. 27,49,000 crores and this Rs. 33,702 crore is 1.22% of it. So, on the equity markets, it is less likely to have long term effects while short term effects are expected.

If MFs refuse to go by SEBI’s guidelines then MFs can combine their funds into already existing funds.

MFs will likely merge their funds into large-cap funds as they have allocated almost the required amount of their funds into a large-cap and the amount required to fulfill the criteria of large-cap funds is less and will be easy to cover. Under the existing framework, a large-cap fund is required to invest a minimum of 80 percent of assets in largecap stocks. The remaining 20 percent is flexible and it is at the discretion of the fund managers as to how they want to allocate it. Some of the fund houses, which are large-sized multi-cap funds, also see the creation of a new Flexi-cap category of funds as a possible solution. Such a categorization

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would allow funds to have allocation according to their choices in all the caps without any limits. Another option could be to convert the multi-cap funds into a thematic fund like ESG funds but this would not be available to all due to government, social, and environmental score constraints.

The idea behind the step might have a noble one by SEBI but will it achieve the desired outcome, only time will tell. But from where we are now Funds have already started looking into ways, they can bypass this circular and they might just get away with it. Many experts are of the opinion that this might destabilize the market by forcing MFs to invest in especially small-cap, where though a large number of good opportunities exist, then so do the bad apples. Circulars have long been used by regulators to achieve these types of objectives but the question of their effectiveness remains open to debate.

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Deepak Kushwaha PGP05 IIM Amritsar

Kaushalender Kumar Varma PGP05 IIM Amritsar

RBI OPERATION TWIST Open Market Operations (OMO) is an activity undertaken by the central bank of a country (The Reserve Bank of India, in our country’s case) to manipulate the amount of liquidity in the market, and also the existing interest rates. This is done by either buying or selling government securities (G-Secs) in the open market.

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There is a distinctive relationship between the supply of money in the economy and the short term interest rates. When there is an increased demand for money, the RBI goes to the open market to buy a financial asset, like G-Secs. To purchase them, the bank has to print more money, which in turn increases the amount of currency in circulation. However, when the bank sells these securities, the liquidity in the market is reduced. When both buying and selling is done simultaneously, these unconventional measures are termed, “Operation Twist”, and they were undertaken for the first time by the US Federal Reserve in 2011, to recover from the Global Financial Crisis of 2008.

RBI too decided that to increase long term investment in the country, it needs to simultaneously sell short term securities and buy long term securities through the open market operations. It was done keeping in mind that investors seemed reluctant to invest in the Indian economy over long periods, and it was clear that the RBI needed to step in and lower the interest rates for long term investing. This, in turn, would have ensured that people could avail long term loans at lower rates.

It would prove to be an excellent stimulus for spending, as the expected returns from long term

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savings will reduce, private sector borrowing will increase and a catalyst for growth will be provided. RBI has also been doing these operations to recalibrate the sovereign yield curve, especially to ensure lower yields at the shorter end of the curve.

Why “Twist”, and its significance during the Pandemic Since March of this year, the RBI has conducted many simultaneous sales and purchases of short term and long term securities, respectively. This has been done keeping in mind the uncertainty induced by the Covid-19 pandemic all over the world, and the immediate liquidity crunch imposed by it on the Indian economy. The idea behind “Twist” is that bond prices and yields move inversely, therefore purchasing of long term securities drives their prices up and yields down, and at the same time selling of short term bonds causes their prices to fall and yields to increase.

When considered in their entirety, these two actions twist the shape of the yield curve.

The times are tough, and unprecedented. RBI was looking for some unconventional open market operations to stimulate investment and economic growth, as it was fast becoming apparent that repo rate operations are not having the desired results. Public lenders were showing conservatism and rigidity in interest rate benefit transmission, and that was hampering the government’s objective of bringing down long term loan interest rates.

Since February 2020, RBI has given 135 basis point worth of breathing space to banks, however the banks have not passed it on fully, opting instead to bolster their weak financials. Twist is one of the new options at the disposal of RBI, and its effect has started showing on market sentiment as well as on yields of 1 year treasury bills, which have increased significantly, and also on the 10 year G-Sec yields, which have moderated slightly.

Impact on Government borrowing STUDENT ARTICLE

The government is facing a massive resource crunch. Tax collections have stagnated due to the crushing impact of the lockdown on businesses.

Consequently, borrowing needs to be increased to support expenditures. Here, the significance of Twist becomes clear. Since it helped the RBI in reducing the long term yields, it directly helped the government raise capital at a lower expense and ensured that its repayment will not be as difficult as it would have been at the previous levels of long term bond yield.

Let us consider a simple example – Let the price of a 10 year G-Sec be Rs 2000, with an interest rate of 10% (Rs. 200).

The RBI steps in with huge purchase of long term bonds. This increases the price of the bond in the secondary market, to say, Rs 2100, because of high demand.

Now, whenever an individual will buy the bond at Rs 2100, he will receive the interest amount of Rs 200 only, which is the same amount which is being received by an individual who brought the bond for Rs 2000. Hence, the yield has fallen from 10% to 9.52%, i.e. price increased, yield decreased. This rate will be used as a benchmark by other financial institutes’ to price their long term lending.

Impact of external benchmarks on rate transmission and administered interest rates In 2019, the RBI had asked all banks to move all floating rate business loans to an external benchmark to hasten rate transmission, which hitherto had been facing multiple roadblocks. Since the Monetary Policy Committee report of October 2019, RBI has observed that lending interest rates have improved, with drops of 6 to 73 bps being reported, ranging from Vehicle to MSME loans.

One of the major factors which provides stability to

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the interest rate structure in India is the “Administered interest rates� on small savings instruments. The interest rates on these instruments is benchmarked to the secondary market yields of various G-Sec’s of comparable maturities. Due to Twist, these yields have increased considerably, and as a result the interest rates on small savings instruments have appreciated, which more than compensate for the illiquid nature of these financial instruments.

This has come in particularly handy for the common man, as the government has recently had to cut the interest rates on all small savings instruments sharply, ranging from 70 to 140 bps, except the savings account.

Future applications of the Operation Twist by the RBI The latest Twist is scheduled for the 1st of October.

The bank has decided to buy securities maturing between 2025 and 2029. This was decided immediately after the RBI did not go ahead with its plan of purchasing Rs 10,000 Cr worth of bonds from the market, indicating the fact that perhaps the bank was not ready to offer as much high yields as the bidders expected.

In the post-Covid era where the nations will be tremendously leveraged and central banks will be short of monetary tools, Operation Twist can be the go-to strategy for cooling down long-term yields and boosting short term liquidity.

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SURANJANA BANERJEE NMIMS, MUMBAI

STOCK MARKET SOARS DURING GENERAL ECONOMIC DISTRESS As the number of coronavirus cases in India were exponentially increasing, a lockdown was imposed by the government which froze all transport services, factories and induced limited mobilization.

Around 40 million jobs, mostly in the informal sector, including medium enterprises, small businesses etc. were lost due to such lockdown. Such medium and small enterprises are the maximum in states like Uttar Pradesh, Bihar, Madhya Pradesh etc. according to The Economic Times. Further, most of the informal sector under the MGNREGA, 2005, which belonged to daily wage earners and migrant labourers in construction companies felt the pinch of such job loss as they were not compensated with jobs during lockdown.

Apart from this, job loss induced by travel restrictions also left Indian manufacturing units short of labour which disrupted supply chain and logistics across automotive, pharmaceutical, consumers good among other industries. Apart from this, agriculture, which could have been done in open, also suffered due to trade and travel restrictions percolating down to the local “mandis”. This fall of unorganised sector is expected to continue further as job cuts are rapidly increasing combined with multiple lockdowns and weak GDP. Amidst this scenario, while the Indian GDP slipped by 23.9% in Q1’20 the stock market is currently soaring 8% high.

Concerning the stock market on 24 Sep’20, the Sensex ended 1,115 points lower at 36,553 while the Nifty fell 326 points to settle at 10,805. While Nifty

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was at 10,302 as on June 30, 2020, the top 15 stocks were trading at a level of 13,890, and the bottom 35 were trading at a level of 7,498. Thus there was a sharp distinction between the “safety net” of top 15 companies and the rest. On January 17, 2020, when the Nifty was at 12,000, the market cap to GDP ratio was about 78%, slightly above the historical average.

On March 23, 2020, when the Nifty was at 7,600, the market cap to GDP ratio was about 51%, quiet below the historical average. However, currently, a market cap to GDP ratio is about 72% which matches the historical average figure for buying stocks. Further, Price-to-earnings (P/E) ratios of 85 percent of Nifty stocks and 75 percent of Nifty 500 stocks were trading below their long-term averages, thus attracting value buying opportunities. The financial market also witnessed increase in depositories for share purchases from 40.8 million in March to 43.2 million in June, according to the Securities and Exchange Board of India.

Such an attractive stock market has multiple reasons to offer. Firstly, most investors are looking at the future value of companies. Hence, rather than valuing it based on current earnings investors are considering FY22 earnings. To provide stimulus to this, the Reserve Bank of India cut the repo rate by 115 basis points over the last three months of COVID 19 along with injecting liquidity of Rs. 8 lakh crore in the financial markets since March 27, 2020. Also, the Reserve Bank and the government together boosted fiscal (government consumption, lowering taxes, etc.) and monetary stimulus which might slip India's FY21 GDP growth to a negative figure, but will provide an immense boost for a strong rebound in FY22 GDP growth. Also, during May and June, India witnessed a high foreign investment of Rs. 36,400 crore into the Indian equities due to an increase in MSCI and FTSE Index in India. Moreover, in FY2021 India is forecasted to be a surplus due to lower oil imports, lower gold imports, and reduction in imports from China. If this becomes true, then the market will see a Vshaped recovery. Thus, investors are optimistic about

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the financial market.

Secondly, institutional investors are looking for longterm investments in stocks with high profitability index even during the ongoing pandemic. The Fang Stocks-Facebook, Amazon, Netflix, and Google, which often include Microsoft and Apple, too have provided a significant boost to attract the institutional investors. While attractive offerings by Microsoft included facilitating millions of "work-from-home" professionals through its cloud computing service Azure, Amazon offered an online delivery service that witnessed high demand among customers. Facebook's video calling and messaging facilities were widely used whereas YouTube (owned by Google) was the most frequently streamed app. Further, Netflix witnessed 60% surge in subscriptions during lockdown, according to Financial Express. Hence as digital media consumption has increased significantly due to the pandemic, this trend could lead to a permanent shift in consumer behaviour. Such a trend is acting as a confidence booster for institutional investors to invest and increase delivery percentage in the stock market.

Apart from this, as these tech-giants have better financial capabilities and global foot print where COVID was managed better than India, also boosted confidence in institutional investors to invest in such companies.

ly. Hence, the retail investment in Q1'20 has increased overall turnover by 78% to reach to Rs.33,731 crore in cash segment, according to Motilal.

Hence, while the stock market plummeted due to the attractive opportunities to make money, the GDP showed a negative growth even without considering the unorganised sector which has experienced the hardest hit due to the pandemic. Agriculture is the only category in the unorganised business, which is considered for GDP but it would have risen only a little due to operational inefficiencies imposed by repeated lockdown. This unorganised sector contributes 94% of the total workforce and 45% of the country’s economic output but is not considered for GDP calculation. So, if this unorganised sector would have been taken into account, GDP would have suffered further dip. This means the calculated -23% growth is essentially the decline of the organised sector. However, the stock market is not in tandem with the economic scenario as it does not consider unorganised sector or small businesses as stocks. It is only an economic indicator which reflects strength and size of corporate profits and “expectations� of the investors.

Thus, the financial market is not a true representation of the overall economic status of a country.

Moreover, retail investors wanted to take advantage of the low interest rate and melting market condition since March to make quick money from the stock market while sitting at home. Working from home has given investors enough time to explore the stock market and technology driven online KYC norms eased the process further. To facilitate investment in stock market, many retail investors aimed for lowerpriced shares in the Z group shares and the mid-cap and small-cap segments. This investment has pushed prices higher, providing them with instant gains. This instant success motivated them to invest more money in the market, and also refer to such money-making opportunities in the market to their friends and fami-

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NISHANT SATYAM IPM, IIM INDORE

VASU GOLYAN IPM, IIM INDORE

STRATEGY FOR BUSINESS SURVIVAL & RESILIENCY RECOVERING FROM THE IMPACT OF COVID-19 & LOCKDOWNS “This is not a one-time thing; this is our entire future.�

- Greta Thunberg

highly contagious virus. Challenges, abound especially for Indian businesses. Supply-chain disruptions, suspension of economic activity, mass-migration of seasonal labour, availability of essential goods/services, contact-tracing and testing in a highly populated country spread across vast demographics, all the while ensuring the norms of social distancing and limited public health resources, are perhaps any government's worst nightmare.

However, what could be even worse, as numerous experts around the world have repeatedly stated, is not knowing when and how all this will be over?

What innovations can help businesses survive? When will it be safe to move out of our houses? How will economic activity restart amidst a shortage of labour and norms of social-distancing? Can we minimize the impact that this pandemic will have on our businesses?

As WHO has repeatedly stated, the coronavirus is here to stay. Until a cure or a potential vaccine is developed, it will continue to have an impact on how we function as a society, or how business is conducted in such time of uncertainty. The pandemic is thus, not just a one-time thing, but it is our entire future, and all that we could do currently, is to prevent its spread and deploy strategies across sectors, which minimizes the impact of this deadly virus.

Countering the Economic Impact Introduction The impact of the COVID-19 pandemic presents the most significant challenge businesses face, postWorld War II. Across countries, disruptions have become the norm, rather than an exception, in all aspects of life. It is estimated that over 2.6 billion people (nearly a third of the global population) across 100 countries have been facing government-enforced lockdowns, implemented to arrest the spread of the

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Perhaps after the healthcare sector, industries are the ones most affected. National/Local lockdowns have suspended nearly all economic activity. Be it heavy industries such as iron and steel, automobiles, cement, telecommunications, or the services sector, from ITES to the tourism industry, all of which form a significant proportion of India's economy, have been negatively affected by the lockdown. Apart from the evident pains faced by big corporate houses, the Micro, Small and Medium Enterprises (MSMEs) are the most affected. They do not possess pockets deep

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enough to see through such long-periods of low-tozero business. They are unable to pay their staff, or sell their existing inventory. MSMEs employ nearly 40% of India's workforce and contribute 29% to the country's GDP. Supply chain disruptions, absence of labour (who have migrated) and zero-demand of their products, has primarily pushed such industries to the brink of bankruptcy.

Ensure financial security for MSMEs The Indian government needs to ensure the survival of these industries, not just because of their significant contribution to the economy, but also because of the massive number of people they employ. During such unprecedented times, the government cannot afford to have the problem of unemployment as well on its hands. Strategies in the form of tax reliefs, liquidity injections, an extension of moratorium on loans, working capital loans at cheap interest rates, local sourcing of labour etc. can go a long way in ensuring that this crucial sector survives the impact of the pandemic.

Start-ups and MSMEs A golden opportunity would be for the start-ups in the country to team-up with the MSMEs and use their expertise and innovation in services and ITES, to augment the productivity of the MSMEs manufacturing capabilities. This mutual collaboration can open up enormous opportunities for both the stakeholders, at the same time ensuring the survival as well valueaddition for both during tough times. Onboarding the agriculture sector as well, along with technology, manufacturing and the vast supply-capacity of the rural farmlands, can fast-track India to growth, in the postCOVID-19 world. It will also augment the struggling incomes of the farmers, as well as allows MSMEs and start-ups to expand into a significant market-base.

Product Adaptation The MSME sector, as well as the established MNCs, must adapt their products to suit the demand of the

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current times, i.e. to essential goods or services or start producing medical equipment or active pharmaceutical ingredients (APIs) etc. It can serve the dual problem of utilizing the idle manufacturing capacity and supplying items which are in short supply globally. Of course, such shifts in product-offerings must adhere to the highest quality standards, and government agencies across the country will need to authenticate and approve these new products on a fasttracked priority basis. Even for the MSMEs, it makes sense to be agile in an uncertain environment and quickly adapt to changing consumer preferences.

Manufacturing Expansion Amidst the economic gloom, this pandemic also presents a great opportunity for India Inc., be it MNCs or even the MSMEs. Since China enforced restrictions on economic activities, manufacturers and countries across the world realized that they couldn't be too reliant on a single supply-node. Additionally, the dubious ways in which the Communist Party of China has handled the pandemic as well as threats of retaliatory measures from countries such as the USA, Australia create a sense of business uncertainty. Another trade-war like situation cannot be ruled out. The continuing stand-offs on the LAC against China is only going to add to the domestic resentment against it. Capital flight from China, in a post-pandemic world, is an eventual reality. And countries like India, which have low-labour costs, and a developing manufacturing base, can take advantage of this capital flight, and become the next global manufacturing hub. Policies which attract companies looking to shift production out of China (such as Japan's $2.2 billion to incentivize firms moving production out of China), ease restrictions on land-availability and raw material, taxsops etc. can significantly accelerate the post-COVID -19 economic recovery in India. Make-in-India, tradesubstitution and complementing the strong servicesector in India, are great opportunities which the country can exploit, to accelerate the recovery of the industrial sector, in the post-COVID-19 phase. The

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idea of “Buy Indian” must be capitalized upon, by both the MSMEs and the big corporate houses.

Concluding Comments The ongoing pandemic has presented humanity with challenges it seldom encountered before. Even though similar highly contagious diseases have spread previously in human history, the relative isolation of countries and the absence of globalization ensured that country-specific outbreaks were quickly contained. However, the extent of internationalintegration and globalization has spread the virus across 212 countries, disrupting life as we know it.

Especially in a densely populated developing country like India, the challenges are multi-fold.

Innovative strategies which leverage technology, deploy international relations, promote innovation and adaptation, turn challenges into opportunities and fast -track relief measures are the need of the hour. The Indian government, as the custodian of the future of more than a billion people, faces the tricky task of reviving a shut economy, while controlling the pandemic, and simultaneously ensuring minimumacceptable welfare of the people. And businesses have a key role to perform in this resurrection. In today’s world, despite what geography might say, no country is an island. The flows of capital, labour, technology and science all bind us together. International cooperation, strategic decision-making and innovation only, can get the world out of this sticky situation.

Till then, adapting from Sir Winston Churchill’s speech, “we shall fight in the hospitals, we shall fight in the containment zones, we shall fight with advancing technology and medical research, we shall fight with all countries as one, and we shall defend humanity. We shall fight with all our resources, and we shall never surrender.”; the world will, through innovative strategies, tame the COVID-19 pandemic because, in the end, life always finds a way.

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NANDINI CHOWDHURY K J SOMAIYA INSTITUTE OF MANAGEMENT STUDIES

BANKING AND FINANCE FOR THE INDIAN RURAL ECONOMY NEED OF THE HOUR? -AFFIRMATIVE

life’s savings of Rs 2 lakh. Such scams are prevalent which not only leaves the underprivileged out of life’s savings but also leaves them high and dry with damaged trust in the Financial Institutions. Inquisitive about the Scheme?

The Saradha chit fund scam, one of the financial frauds that surfaced in 2013, alluring lakhs of investors to deposit money in its schemes with an assurance of abnormally high returns which eventually got lost in the deep web of scams.

The Unmet Economical Need The Global Findex Report by the World Bank puts India as the country with the second-highest unbanked population in the world, after China. Even if a job was attainted, not having a bank account deprived one, access to financial services, and made the individual completely dependent on cash.

As per findings by researchers, there is a high likelihood of an unbanked population being on the edge of poverty, exclusion, and vulnerability.

The Chit Fund Debacle “Investigation into the multi-crore Ponzi scheme has been on since then. Two crores, largely poor and lower-middle-class people duped of Rs 2 lakh crore, and six years later, all that has been returned is around Rs 140 crore” Chronicle of one among the many Investors in the Scheme illustrates the aggrieved Basumati Patra whose son had to drop out of school while her daughter had to leave her graduation course mid-way.

Why? Thanks to the Scam where she invested her

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Against the backdrop of the Chit Fund scam, one of the reasons that came to light for so many people to remain to be unbanked was the lack of trust in institutions. A study presented that almost 30% of unbanked adults report lack of trust in Financial Institutes, as a barrier to opening an account, which is reflected in the low level of formal savings in the Rural Sectors. Less than 25% of people in developing countries borrow from formal sources.

Financial Illiteracy & Financial Exclusion in rural areas are the dual reason, due to which the free markets are failing lakhs of individuals of their basic need of access to financial services.

Changing Times One of the gross misconceptions by economists have had is that the Urban Economy was the engine of the country. The rural economy was considered as the supplier of labour and agricultural inputs. With chang-

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ing times rural areas are endowed with substantial basic infrastructure as the urban centers. There is no reason to keep the rural economy as an appendix to the urban economy. The rural economy is being built as a parallel economy, an independent economy to open up opportunities for its own human and resources.

The Emerging Robin Hood Economy In 1984, John Hatch noticed that lack of capital was keeping Bolivian farmers poor. Without collateral, they couldn’t borrow as well as loans were too expensive, Thus, he designed a structure where the farmers would form groups to share a loan and guarantee repayment, and also, access the funds they needed to invest in their farming operations. It was the dawn of what we know today as Microfinance.

A case in point is Bandhan Bank which was founded in 2001 with inclusive banking at its core, has been assiduously working towards the upliftment of the vulnerable sections of society. Not only has the Bank provided access to timely credit, but it has also fostered a culture of savings through deposits, which has led to financial independence for many low-income households. The bank has over one crore microborrowers and not only has this improved their livelihood but also created jobs for others.

The Global Fintech Summit 2020, witnessed WhatsApp India’s proposal in this parallel Universe.

“It confirmed pilot projects to be embarked to enable a scale-up in the rural digital ecosystem. The idea behind it is of digitization of the MSME economy with more working capital in the hands of these organizations,” Providing access to financial services such as insurance, micro-credit, pension and lower-income segments in rural India is WhatsApp’s next big bet on the payments front. The collective aim in the coming years is to enable low-wage earners and the unorganized sector access to- insurance, micro-credit, and pension. The company Officials also suggested that

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“the accelerated lending could cover 67 percent of the government’s GDP targets for 2025.”

COVID crisis woes The coronavirus crisis revealed massively how vulnerable the Indian economy is. The helplessness of the people in the so-called ‘informal sector’ constitutes the majority of the workforce of India. The pandemic caused the income of the daily income earners to vanish, moreover leaving millions of migrant workers with no options but to walk back home, hundreds of kilometres away.

Akin to a coin, the coronavirus pandemic brought a pool of opportunities as well, to build a new economy and a new society and introducing new ideas and concepts.

The Way Forward Financial inclusion has always been a critical goal of the Government of India’s economic policies. It can pave the way for India’s unbanked and underbanked population into the mainstream economic system, giving them equal access to financial services at an affordable cost, thereby reducing income inequality across the society.

An essential criterion for financial inclusion is easy to access to adequate credit for micro-borrowers through digital lending. It can help provide easy access to affordable credit to a large segment of the population.

Technology as a Solution (TAAS) According to People Research on India's Consumer Economy, a non-profit group, although 88 percent of Indian households own a mobile phone, India lags behind countries like Kenya, where 73 percent of the population use mobile payment services, compared with just two percent in India.

India now has some of the cheapest data plans globally, creating a potential for digital financial services to expand, especially to rural areas that are poorly served

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by bricks-and-mortar bank branches.

Digitization of loan application processes can help borrowers apply for loans remotely – a very important requirement in a post-pandemic world.

Micro-Entrepreneur Bank as a Solution (MEBAAS) The micro-entrepreneur sector as a whole deserves a new class of dedicated financial institution — a social business Micro Entrepreneur Bank (MEB). The goal of MEBs would be to free all micro-entrepreneurs from loan sharks — formal and informal.

Regulatory Authority as a Solution (RAAS) To make rural economies independent, another important aspect would be to create a dedicated regulatory authority for rural areas with the RBI governor as the chair. An example from one of our neighbour would be the Microcredit Regulatory Authority created in Bangladesh in 2006.

Improved Financial Services as a Solution (iFSAAS) By introducing non-traditional sources of credit to a credit-starved population and small businesses, fintech lenders can help people get easy access to capital.

Financial Literacy as a Solution (FLAAS) To responsibly use the Financial services, Institutions and the Central Authority should ensure greater financial literacy among citizens and provide consumer protection safeguards.

By building appropriate financial systems for rural areas, we can ignite growth at the grass-root level. Rural households need access to financial institutions built exclusively for them, eliminating traditional money-lenders, thereby avoiding debt-traps that are common in rural India.

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INTERNSHIP EXPERIENCES Aditya Arora

Nihal Kharkate

PGP05 IIM Amritsar

PGP05 IIM Amritsar



Equity Research Intern, Ventura Securities





Investment Banking Business Solutions

My role as an equity research intern was to prepare a financial model for the listed companies with in-depth quantitative, qualitative research and a research report to support recommendations of BUY/SELL, this role helped to learn the true dynamics of the real world, identify forward-looking indicators, develop macro capabilities & combine with a contrarian philosophy to forecast economic cycles and spot market trends well ahead of the curve.

While preparing for the interview I concentrated on the basics of financial subjects, reading business and financial articles is the key to making yourself aware of the current and future trends, I would advise my fellow juniors while learning financial subjects try to understand what is the purpose of studying the concepts and try to apply those concepts in real life, pick randomly one company from the listed space, analyze a company from the financial perspective historically then read what management says about the demand/ supply in the future, try to understand why/where the company is making the capital allocation, attend earnings calls if possible because this is where you will understand the business, Industry, true intent, and strategies implemented by the management to fight uncertainty, lastly make good use of free research reports available over the internet.

Intern,

Opulence

My internship at Ventura Securities was an enriching experience. I had the opportunity to interact with industry stalwarts like Mr. Nilesh Shah and got to understand their mantra of investing. I worked in the Speciality chemical space and came up with industry reports, valuation models for companies. The internship helped me build a perspective on how to go about analysing the securities: what are the growth drivers. What is the competitive positioning of the company? Met a lot of people and made new friends and mentors for life.

Where my stint at Ventura Securities was a learning one, my internship as an IB intern was a roller coaster ride. I worked in the Mergers and Acquisition department and worked in the FMCG and Online Media Space. Contrary to my expectation, IB is way more than being just proficient at Finance acumen. It is more about building relationships and networking and knowing the right people. The most important learning from this internship was that you have to be very patient and have a genuine interest in building relations. And long hours at IB is true!!

INTERNSHIP EXPERIENCES

Equity Research Intern, Oldpine Advisors

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

Rishabh Jain

Pranal Sontakke

PGP05 IIM Amritsar

PGP05 IIM Amritsar

Equity Research Intern, Oldpine Advisors

My Internship was in an Equity Research firm where I learned in-depth about the financial markets, its nuances, trends, and the opportunities it offers. My role was to prepare financial models and research reports of various companies by performing an in-depth analysis of the company along with the industry it is associated with. The internship taught me that a company's share price not only depends on usual factors such as its profitability, market share, growth prospectus but also on its goodwill and the market sentiments about the company.

While preparing for the interview the three important things which I focussed on were, my expertise, what line of business was the company in, and what position did they want me to fill as an intern. I would advise everyone to focus on the same. Also, before filling up the form, read about the company and the Job profile it is offering and modify your resume so that it resonates with what the company is looking for. This will help you get an edge during Resume Shortlisting.

Post that, try to revise and refresh those subjects and skills which you think the company would be interested in. Finally, during the Interview be honest and confident while answering questions even if you don't know. Always remember, apart from Knowledge, the main aim of any interview is to check how much you are aligned with the values of the company and how well would you be able to adjust to their working environment

INTERNSHIP EXPERIENCES

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Research Intern, Crisil

For interview preparation, I reached out to my seniors who have already interned in the firm. After understanding what the company is looking for in their interns, I started revising those concepts. Also, I made sure to read about the company and the areas in which its business revolves. Practiced the HR questions diligently and made them as original as possible so that it doesn't sound scripted. Understand what the company is looking for in their interns. Reach out to your seniors who have interned before in a particular company and learn about the internship experience of students from different institutes on platforms like InsideIIM. Research about the industry in which the company functions and two more industries which are in the highlights. In interviews, it becomes important to showcase apart from technical skills what soft skills you bring to the table. Make sure in your conversation you highlight that you are easy to work in a team and have an ever-learning attitude. The Internship project was about doing industry analysis of the Indian Poultry and the Seafood (Shrimp) Industry and after analysing the two, made a forecast on the future demands and growth of the two industries in India. The project requirement was also to study the impact of coronavirus on the industry. It was followed by a systematic approach of analysis where we started with an overview of the industry and how its value chain operates, followed by the current demand & supply scenario of the industry and the trends in the raw materials concerning the industry. We had to forecast the future of the industry for the next 2-3 FY based on the market demand, growth, and scope of the industry. Various factors such as the government norms and policies related to tariffs and subsidies, global scenario, etc. were taken into consideration while framing the future opinions.

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vice to people looking for an internship in the finance domain would be -

Rishabh Parakh PGP05 IIM Amritsar

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Credit Rating Intern, Crisil

My Interview Experience - Over 8 weeks starting from April 20th, I had the privilege of working as a Credit Rating Intern at Crisil. I can reflect upon many new learnings in my tenure there. I was very excited to start my journey at Crisil as this was going to be my first corporate experience. However, with the outbreak of the coronavirus pandemic and the announcement of lockdown, I started feeling anxious and worried about missing out on a great experience. However, the HR team of Crisil was up for the task and virtually on-boarded 60 odd interns in different business units seamlessly.

1. Revisit concepts thought in FSA (especially ratios). Interviewer will most likely not ask you direct theoretical questions, instead question would be like - Is negative WC a bad thing.

2. Be very thorough with every small detail mentioned in your resume. (I was cross-questioned on a research project which I did three years back)

We kick-started with an immensely insightful induction program for the interns, introducing us to various departments and their heads. Coming to my project, I worked in 3 different industries- wind power, education, and palm oil. I understood the functioning of these industries, did an industry analysis on the same and summarized the credit rating criteria of the education and wind power industry. I also forecasted the impact of coronavirus on the consumption of edible oil and its substitutes in India. This work gave me an insight into what’s goes behind rating a company. I was blessed to have a wonderful mentor who guided and supported me continuously during my internship.

I strongly feel that the pedagogy at IIM Amritsar, coupled with peer discussions helped me immensely as I was juggling with multiple projects and trying to bring in my insights.

Advice to Upcoming Batch - The summer placement season is about to start. My interview preparation ad-

INTERNSHIP EXPERIENCES

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GOLDEN INVESTMENT FUND The Finance and Economics Club, IIM Amritsar announced the launch of Golden Investment Fund (GIF), the student-run investment fund of IIM Amritsar, in February 2019. It was started with the aim to give hands-on experience to the students about investing and applying their research into the equity markets. Team GIF aims to create a culture of research, analysis, and investment among the members of FEC and Finance Enthusiasts of IIM Amritsar. The equity fund intends to achieve better risk-adjusted returns than its benchmark index through investment in large-cap, mid-cap, and small-cap stocks.

GIF team releases weekly company reports and monthly fact sheets of its portfolio under management. The monthly report provides an outlook of the current market scenario as well as the companies in the portfolio of the fund. GIF team analyses the company’s fundamental and competitive.

GIF ANALYSTS

HARSHIT GARG

URVESH PATEL

AMAN

GOLDEN INVESTMENT FUND

GURNEET KAUR

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GOLDEN INVESTMENT FUND

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GOLDEN INVESTMENT FUND

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GOLDEN INVESTMENT FUND

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GOLDEN INVESTMENT FUND

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CLUB ACTIVITIES Since its inception in 2017, FEC has been one of the most important student interest groups of IIM Amritsar. To provide students, an enriching learning experience in the world of Finance, the club organizes numerous interactive events throughout the year. It supports students in their journey at IIM Amritsar, helping them harness their potential and enthusiasm and guiding them at every turn. From providing advice about additional certifications and online courses, like Bloomberg Market Certification, to helping them with subject choices and interview experiences, FEC facilitates outside-classroom training to upskill them leading to brighter career opportunities.

sheets of its portfolio under management. Along with an overhaul of their reports GIF team also contributes to the IIM Amritsar’s culture by conducting knowledge sessions and investment lectures to engage peers and motivate students to invest in stock markets.

Even this year, with sessions going online for an entire term, the impact of Covid were not high enough to mar the spirit of the club that conducted the following events:

Pariprekshya: From 2017, FEC, in collaboration with the Industry Interaction Cell, has been successfully organizing IIM Amritsar's maiden Finance and Marketing Conclave where eminent industry experts share their view and experience on the big stage in front of IIM Amritsar faculty & students.

Finclusion: FEC welcomed MBA06 with its Finclusion induction event. In this, the students of MBA06 were officially welcomed by the club and were apprised about the workings of the club. The event also consisted of a series of quizzes on the topics of Finance and Economics which were played in teams to enhance group dynamics and familiarize the batch with their fellow students. The winners were awarded certificates.

Guest Talks: FEC organized a guest lecture on the topic “Risk and Resilience in the current macro environment” delivered by Mr. Simran Pradhan from Goldman Sachs to give the students more practical exposure to risk management. The students got to know invaluable industry insights and trends which helps the students keep up to date with the current situations prevailing in the industry.

Golden Investment Fund (GIF) is a studentmanaged investment fund comprising of experts in the field of F&O and intraday trading. GIF team releases weekly company reports and monthly fact

CLUB ACTIVITIES

Bridge the Gap is a newly launched interactive discussion series. It aims to connect students with our alumni and other industry stalwarts through sessions and discussions on various relevant financial topics. To bridge the gap between academia and the industry, FEC successfully conducted two sessions with our esteemed alumni who guided the students on certifications like CFA and FRM.

Starry Nights: FEC is known for its trademark "Starry Nights" sessions where members share their knowledge and experience in an informal setting. In Starry Nights an informal discussion takes place on particular topics in which every attending student can participate in the discussion sharing their point of view, hence contributing to a healthy discussion on important issues. 2 Starry Nights sessions have been conducted since July 2020 on topics like venture capital and the journey of Coca-Cola in India.

Fin-League: FEC’s weekly Fin-League quizzes also puts students’ business acumen to the test and helps keep their minds sharp and ready while fostering a competitive environment. Winners of Fin-League quizzes are awarded prizes and certificates. It is a series of quizzes with each quiz focusing on a particular field of finance and economics and it involves learning in a fun way about the concepts relating to the field.

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AArunya 4.0: FEC organizes two events as a part of AArunya, the annual college fest. Insight Out, a valuation competition, and Pit Trading, a casebased trading competition.

Budget ki Baat: Students of IIM Amritsar came together to discuss the Union Budget revealed on 2nd Feb 2020. Different students came prepared with different sectors and shared what they had analyzed from the budget.

Activities on Social Media: FEC members release a small post every week to keep students up-to-date with recent news in the financial world. It includes crucial events like budget, company mergers, bankruptcies, famous economics concepts, success stories of companies, and many more. A new series of posters under the name of “Fin-Bytes� has also been started by FEC to apprise the students of financial terms like ratio analysis, hedge funds, and many more. . .

CLUB ACTIVITIES

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PARIPREKSHYA ‘20

AARUNYA 4.0 GUEST LECTURES

FINLEAGUE & FINBYTES

CLUB ACTIVITIES

STARRY NIGHTS

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MOVIE RECOMMENDATION Part-I: How We Got There The first part of the documentary talks about how this Financial Crisis took place. The main cause of this Financial Crisis was deregulation in the 1980s, of the Financial Institutions which included Banks, Insurance Companies, Credit Rating Agencies, etc.

This documentary also explained that the deregulation created a bubble in the economy that burst at the end of 2008. After 2001, the financial institutions had also created the Securitization Food Chain, which is as follows:

Narrated by: Matt Damon

The lenders started to make a mortgage loan to home buyers and then sold off those mortgage loans to investment banks and then the investment banks made a new product called CDO (Collateralized Debt Obligation), these CDOs received AAA ratings, the highest possible rating and the investors invested huge funds in these CDOs because of their high ratings.

Distributed by: Sony Pictures Classics

Part-II: The Bubble (2001-2007)

Release date(s): May 16, 2010 (Cannes); October 8, 2010 (United States)

The second part focuses on the financial bubble that was created from 2001 when everyone could get a house mortgage loan, even if they could not possibly pay it back, as a result of this the house prices skyrocketed. Another culprit was the Credit Default Swap, these were derivatives issued by insurance companies to the investors who purchased the CDOs, in other words, the insured CDOs, due to this the investors felt more secure. However, the insurers also issued these derivatives to those who did not own any CDOs, thus creating a way to bet against the housing market.

Directed by: Charles Ferguson

Running time: 108 minutes Country: United States

Language: English

SUMMARY The Financial crisis of 2008 hit all the economies around the world. The documentary 'Inside Job' is a detailed analysis of that crisis which cost over $20 trillion to the taxpayers. The Financial crisis in 2008 was the second-largest financial crisis after the Great Depression. Through exploratory research and interviews of journalists, politicians, academics, and financial insiders, the film tries to look into the root causes and the effects of this financial crisis.

The financial institutions which were selling CDOs were also betting against them because they knew that it might get difficult to pay CDOs back. The CDOs were shown to the real investors as safe investments, whereas in actual, they were quite risky.

This documentary has been divided into five parts:

OUR RECOMMENDATIONS

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Part-III: The Crisis The third part covers the various warnings raised by economists and journalists through their articles and reports during the bubble period. In 2008, a large number of mortgage loan holders failed to pay back their loans, as a result, the Securitization Food Chain started crumbling. This created a cascading effect.

From the mid of 2008, major Financial institutions started to collapse and filed for bankruptcy. One of the major bankruptcies was that of Lehman Brothers in September 2008 which caused disruptions in the global financial markets. On September 17, 2008, AIG was also taken over and bailed out by the Government. Finally, on October 14, 2008, President Bush signed a $1400 billion bailout package, but the market continued to fall. This crisis not only hit the US but it also hit the major economies of the world.

Part-IV: Accountability This part looks into how many CEOs and major decision-makers who were responsible for this crisis just walked away. Many Economists, Academics, and Professors who were in favor of deregulation were appointed advisors in the economic affairs of the country and many were also elected as directors of major financial institutions, rather than being held accountable for the financial crisis.

Part-V: Where Are We Now The final part reviews the condition of the American economy after the crisis, which was now weak as compared to what it was before the financial crisis.

Competitors like China were flourishing, unemployment and inflation had increased in the US. The construction industry was falling, however, I.T industry in the US was still the strongest worldwide; but getting a job in the IT industry required high-level qualifications, and getting good qualifications had become very expensive in the US. The difference between rich and poor was now higher in the United States than in any other country.

OUR RECOMMENDATIONS

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BOOK RECOMMENDATION finance. The ability to fund a war through a market for Government debt gave rise to war bonds. Though many nations favored war bonds, the irresistible temptation to depend on them led economies such as Italy and France into financial ruin. He then delves into the story of Rothschild, who sold bonds in different countries and stockpiled gold for the British army that ultimately resulted in Napoleon’s final defeat at Waterloo.

He illustrates the dangers of the stock market by exemplifying John Law, the creator of the first-ever market bubble. Filled with such historical facts, ‘The Ascent of Money’ transits from one topic into the next with neatness, engulfing the reader in anticipation of seemingly uncovered historical facts.

Author(s): Niall Ferguson Publisher: Penguin Books Pages: 448 SUMMARY The ‘Ascent of Money’ is an enchanting journey tracing the evolution of money from the erstwhile Ancient Mesopotamian Economic System to the complex financial instruments of the modern-day. A tale of human proclivities that have often proved pivotal to the rise and the decline of money over the ages, ‘The Ascent of Money’ is the incredible story of the journey of finance.

The author offers crisp explanations of key financial concepts such as Cash Reserves, Money Supply, Credit Creation, Fractional Reserve Banking, Gold Standard, etc. Ferguson explores the beginnings of the banking and credit system, taking the reader through the evolution of the system. He talks about the power of Italian banks (Banco dei Medici) of the medieval periods. Ferguson also promulgates the evolution of the bond market as a radical move in the evolution of

OUR RECOMMENDATIONS

Ferguson also does an incredible job of explaining the connections between the Great Depression and the 2008 financial crisis. The author also questions the role of credit-rating agencies which were the instigators of the 2008 crisis. Ferguson very rightly remarks on the long-existing paradox of capitalism in the US, “The world’s most successful capitalist econ-

omy seems to be built upon foundations of easy economic failure.” Each US citizen has an inalienable right to declare themselves bankrupt and seek legal recourse to reorganization/liquidation of the debt.

The author also captures the shift that was taking place from the US as the central hub of Finance to the joint China-America entity often called Chimerica.

The Ascent of Money is a fascinating book by a noted historian, who has the gift of writing in an easy to follow, engrossing, and illuminating style. Reading about the history of finance teaches us valuable lessons and shows us that the business models have been in existence in various forms for many years. This is the time to learn about “the ascent of money.” Individuals who read this book will be reassured that Money, Financing, And Capital Markets are here to stay, over time the structures will change, but money’s role will remain the same.

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COMIC CORNER

Cookie jar accounting: An accounting practice in which a company stores up funds during good times to dip into during bad times. Because it effectively misleads investors — making them think goals are being met even when the company is losing footing.

Sandwich generation: It sounds like a fun term, but the sandwich generation actually refers to the age group sandwiched between their aging parents and young kids. These adults are typically tasked with financially supporting both their older and younger dependents while trying to save for their own retirements.

COMIC CORNER

Dead cat bounce: A small recovery after a sharp decline in price of a stock in the stock market. It is based on the old investment saying goes: "Even a dead cat will bounce if it is dropped from high enough."

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SENIOR COORDINATORS

SAMBHAV JAIN

ADITYA ARORA

RISHABH JAIN

KUSHAGRA KUKREJA

JUNIOR COORDINATORS

SAURODEEP CHATTERJEE

AMAN MUNDHRA

FINANCE AND ECONOMICS CLUB

HARSHEEN KAUR

ISHIKA AGARWAL

VAIBHAV KAPOOR

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CROSSWORD

Across 3. Curve named after an economist who proposed that there was a trade-off between inflation and unemployment 7. Fraudulent investing scam promising high rates of return with little risk to investors 8. Profits earned by the government due to the difference between the value of currency and the cost of producing it.

9. Government, in which the politicians and bureaucrats in charge use the powers of the state to feather their own nests 10. Derivatives that give the right, but not the obligation, to buy or sell a security at a certain price before the expiration 12. Responsiveness of one variable to changes in another 13. The institution undertakes the risk associated with a venture 15. Unemployment caused by people simply changing jobs

Down 1. An ancient system of moving money based on trust 2. Selling something for less than the cost of producing it 4. The index that shows the sum of a country’s inflation and unemployment rates 5. Interest that is not paid but must be accounted for on a tax basis 6. Policies to pump up demand and thus boost the level of economic activity 11. Equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players 14. Coefficient measures the inequality of income distribution within a country 16. A measurement of a portfolio's risk-adjusted return

CROSSWORD

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