ARBITRAGE MAGAZINE - NOVEMBER 2017 ISSUE-FINANCE AND INVESTMENT CLUB |FIC PUBLISHING| IIM ROHTAK

NOVEMBER 2017

VOL-I ISSUE NO.9

ARBITRAGE FINANCE AND INVESTMENT CLUB INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Article of the Month

THE ECONOMICS OF NET NEUTRALITY

Win Rs.200/IMAGE: PIXABAY All Rights Reserved

i

Editor’s Note FINANCE AND INVESTMENT CLUB IIM ROHTAK

TEAM MEMBERS 1. ANUPREET CHOUDHARY 2. BHASKAR PODDAR 3. HEMANT JAIN 4. KEYUR BUDDHDEV 5. MAYANK JAIN 6. RUSHI VYAS 7. SHARIKH KADER 8. TANMAY MONDAL

Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

© ALL RIGHTS RESERVED FI CLUB IIM ROHTAK

We are pleased to publish the tenth issue of ‘Arbitrage’ – Finance and Investment Club’s monthly magazine.

Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics.

Our goal is to ensure that we provide significant value to the readers through informative articles and articles on current affairs. We would like to thank all the authors for contributing their articles for Arbitrage.

In the Article of the Month – ‘The Economics of Net Neutrality’, the author Ayush Chaudhuri from IIM Shillong, has done a good analysis on the importance of net neutrality.

We hope for the continuous support of our authors and readers to make this magazine a success.

-Finance and Investment Club, IIM Rohtak

ii

CONTENTS 1. The Economics of Net Neutrality

01

2. Are Indian Banks ready for BASEL-III?

03

3. Future phase of Retail banking industry in India

08

4. Abenomics & Japan’s Shrinking Workforce

13

5. The startup valuation bubble – Bursting out or Fizzling out?

20

6. The Rise of Alternative Finance – A Financial revolution ahead?

26

7. Impact of Recapitalisation on Indian economy

31

8. Emerging Peer-to-Peer Lending in India

34

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Answer these questions based on the articles in this magazine and stand a chance to win cash prize worth Rs. 200 and E-Certificate.

Please e-mail the answers to fi@iimrohtak.ac.in

1. RBI being more conservative while implementing Basel III norms, what is the ‘Total Tier I capital’ percentage it has set for Indian Banks?

2. Which accounting standard is to be implemented in the Indian banking sector from April 1, 2018?

3. Uber was valued at $59 Billion which is believed to be overinflated. What is the estimated actual worth of Uber?

4. Since its inception, in which year did Indian startups received maximum investment?

5. What was the name of the service offering to implement Net Neutrality in India?

6. What is the macroeconomic analogue of consumer surplus for a product in microeconomic terms?

7. By the end of 2016, what was the estimated worth of loans disbursed by P2P lending platforms on the online marketplace?

8. What is the expected growth rate of the P2P market during 2016-2024?

9. What was the debt-to-GDP ratio of Japan in the year 2016?

10. Abenomics succeeded in achieving its various macroeconomic goals. What crucial aspect did it fail to meet?

1

The Economics of Net Neutrality ARTICLE OF THE MONTH

Ayush Chaudhuri IIM Shillong, 2017-19 Over the past few years Net Neutrality has been one of the most hotly debated policy questions globally. In November 2017, this battle cry was once again raised in the USA as the Federal Communications Commission (The regulatory body for the internet in the USA) set in motion a plan to repeal the strong Net Neutrality provisions put in place by the Obama administration in 2015. In India, the question of Net Neutrality is not a new one, in February 2015, Mark Zuckerberg had offered FreeBasics (Earlier internet.org) a service which provided certain websites for free, without any data charges. While the proposal was ultimately rejected, with the increasing use of data, the issue of Net Neutrality will arise once again. To understand the effects that these rules, or the lack thereof, will have on the communications industry and how people use the Internet, we must examine the economics of Net Neutrality.

The essential question surrounding the regulation of the internet in the USA, lies in answering whether ISPs (Internet Service Providers) should be classified as essential utilities, or as pipes through which the bits and bytes of the internet flow or be allowed to discriminate among the content and the data which comprises the internet. Net Neutrality rules prohibit ISPs from stopping or slowing down the delivery of websites and prevent

companies from charging customer extra fees for services such as high-quality streaming.

To examine the effect of Net Neutrality rules on the economy we will look at the effect that these rules have on the total welfare. Total welfare, also known as total surplus or Marshallian Welfare (After Alfred Marshall) is a measure of the total monetary gain available to consumers because the price of a product is less than the highest price that consumers are willing to pay. It is the macroeconomic analogue of consumer surplus for a product in microeconomic terms. The key questions that we examine are: 1. How do regulations affecting fast lanes and other enhanced features to content providers affect the total welfare of the economy?

2. How does charging content providers for terminating traffic affect the total welfare?

3. Should ISPs be classified as utilities under existing economic principles?

Effect of Fast Lanes and Enhanced Services Fast lanes and enhanced services are propositions offered by ISPs mainly to content providers for enhanced customer experiences for their products. These services can be considered as variations in the product lines

1

offered by the companies. Restricting fast lanes and enhanced services offered by ISPs in effect lead to a single product offering which no choices for the consumers of the service, whether it be the home/business users of the internet or the content providers. Having these services lead to multiple levels of service and choice offered to the consumers. The effect of restricting these services are manifold.

Because of single product restrictions, those who would have purchased low-quality connections are unable to enter the market, those willing to pay at rates in the middle of the spectrum are forced to purchase costlier connections and those at the top of the market must be content with connections of lower and less efficient qualities. The aggregate effect of this is the exclusion of those unable to pay the standard rate and no scope of improvement for those who are able and willing to pay above the fixed rates. The net effect is a reduction in total surplus enjoyed by the consumer. We can also see that the content providers at the bottom of the market, those that net neutrality regulations are meant to benefit, are those that are harmed the most by them, as the fixed rate product offerings become an entry barrier for

these players. This is in contrast to a varied product line offering by ISPs, which will enable them to service both the top and bottom of the market efficiently.

Traffic Termination Charges and their effects Under the current model followed by ISPs across the globe, an ISP does not charge content providers who are not directly attached to their services for delivering content to the end users. ISPs only charge the end users and content providers who are their direct customers (i.e. have a physical connection to their network) for the data they consume. Termination charges are those which the ISP can levy on all content providers that deliver content to its end users, irrespective of whether the content providers are on its network or that of another ISP. This is one of the scenarios likely to happen with the removal of Net Neutrality restrictions.

To understand how these charges can affect the total welfare of the economics we consider the end user, ISPs and content providers as a

2

two-sided market. The ISP becomes a platform provider, or intermediary between the end user and content provider, with a separate market on each side of the internet pipeline. The content providers in this scenario must pay multiple ISPs for delivery of their content to the end user, as opposed to the single market model where they only pay their own ISP. A two-sided pricing model provides ISPs with a source of secondary revenue and help improve the efficiency of their investments. However, this same model leads to a reduction in total welfare as the burden on the content providers is substantially increased. This model also affects the innovation in the content provider space and raises the barrier of entry for new players.

Are ISPs Utilities?

In the USA, utilities are regulated under Title II of the Communications Act. Title II is the lynchpin on which the Net Neutrality regulations hinge. Without broadband providers being classified as utilities under Title II, the FCC would lack the legal authority to enforce net neutrality rules against block, throttling, and paid prioritization.

Economists in the 1900s identified the economic principles behind Title II restrictions. These regulations designed for public utilities are meant for firms which have a significant impact on public social welfare, especially in cases where undue discrimination can be unduly damaging.

Economists on the whole, with little disagreement, are concurrent about the economic importance of internet services to public welfare. In 2016, the United Nations declared access to the internet as a

fundamental human right. What is unclear, however, is how regulations affect the service providers who have the potential to exploit or extort the consumers, arising from the natural monopolies that these services generally become.

Conclusion In conclusion, the economic impacts of the Net Neutrality regulations are not as cut and dry as they initially appear. What can be definitively said is that like in many other industries, the absence of regulations leads to a free market equilibrium under ideal conditions and result in an increase in the total welfare available to consumers in the economy. However, the anti-consumer practices that arise from the lack of regulation have the potential to reduce the total welfare and adversely affect the content providers and end users.

References [1] Hermalin, Benjamin E. and Katz, Michael L., The Economics of Product-Line Restrictions with an Application to the Network Neutrality Debate (February 2007).

AEI-Brookings Joint Center Working Paper No. 07-02.

Available at SSRN: https://ssrn.com/abstract=1003391 or http://dx.doi.org/10.2139/ssrn.1003391 [2] Musacchio, J., Schwartz, G. & Walrand, J. (2009). A Two-Sided Market Analysis of Provider Investment Incentives with an Application to the Net-Neutrality Issue.

Review of Network Economics, 8(1), pp. -.

Retrieved 25 Nov. 2017, from doi:10.2202/1446-9022.1168

3

ARE INDIAN BANKS BASEL-III READY? Gandhali Inamdar T A Pai Management Institute, Manipal. 2016-18

Introduction The deadline is approaching and the vigilance is increasing. Private Placement and Corporate Bonds seem to be the flavour of the season for raising equity capital. On 31st October 2017, state-owned Oriental Bank of Commerce issued a statement that the bank plans to raise up to Rs1000 crore by issuing Basel III-compliant bonds on a private placement basis. Across the town, Axis Bank is in talks with Bain Capital to raise around $6500 Crore in what is poised as the largest private equity placement of the year. Another public sector bank, the Andhra Bank also issued similar bonds for raising capital through private equity earlier this month. Basel III seems to be the buzzword in the banking domain.

Basel III Accord One of the key shortcomings of the first two Basel Accords was that they approached the solvency problem of each institution independently. The bankruptcy of Lehman Brothers & the financial crisis of the year 2007-08, highlighted the presence of an additional system-wide risk and indicated the need for more efficient regulation of banking industry. To reinforce the stability of the financial system, policy-makers and the Basel committee introduced the Basel III Accord in 2010.

Basel III is tasked with many objectives, majorly related to improving of shock absorbing capacity of individual banks as the first level of defence In case, one or a more banks do fail, Basel III norms must ensure that the banking system does not crumble and its domino effect on the whole

4

economy is minimized. Therefore, Basel III norms have both micro-prudential measures to mitigate risk contained in each individual institution; and macroprudential measures to take care of issues relating to the systemic risk Basel III focus  Improving the quality, and transparency of the core capital base through stricter conditions on eligibility of instruments to be included  Enhanced risk coverage by strengthening counterparty-credit risk capital requirements coming from OTC* derivative markets, NPAs menace and security financing  Reduce pro-cyclical and promote counter-cyclical lending tendencies and demands capital buffers through a combination of forward-looking provisions

*Abbreviations can be found at the end of article Basel III Norms for India Among the world’s fastest-growing economies, India is primarily a bankingfinanced economy, unlike many developed countries. Coupled with various initiatives like Make in India and Digital India; the banking industry needs be made resilient enough to provide a firm and durable foundation for economic growth. Also, compliance with the global standard regulations will only help the Indian banks wrt accessibility and cost of capital.

As with Basel II, RBI has been more conservative in specifying the norms for Basel III as compared to the norms suggested by the BCBS for ensuring a sustainable balance between growth and safety approach to banking in India.

Source: https://rbidocs.rbi.org.in/rdocs/content/pdfs/FBSEIII020512_I.pdf

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Timeline Basel III Implementation in India; Source: Based on BCBS documents

Effects of Basel III  The increase in Tier-I equity capital requirement is likely to increase the WACC. Banks are likely pass on the increase cost of capital to the borrowers in the form of higher loan rates.  The increase in capital requirements will have a negative effect on RoE, adversely affecting bank shareholders. However, a decrease in RoE due to increase in capital does not lead to reduction in valuation as the shareholders expect lower return by way of improved downside protection.  Introduction of Leverage Ratio (3% as the ratio of Tier-1 Capital to total risk exposure) would possibly lead to decrease in profitability of the bank as it can do less profitable





lending. However, it would result in increased financial stability.

Increase in the strictness of interbank liability limits is expected to reduce interdependence of banks and hence possibly avoid a domino effect in times of crises.

Basel III asks for improved risk management systems in banks.

Until recently, most of the Indian Banks used a standardized approach to calculation of RWAs. While a few large banks did use the IRB method, it did not feature in many aspects of operational and market risks. In process of complying with the Basel III guidelines, banks will be encouraged to take more calculated and strategic approach towards business decision making, asset choices and growth strategy

6



while allocating capital towards opportunities that suit the bank’s actual risk-return profile, leading to better asset quality.

Increased supervisory vigilance and capital requirement would possibly lead smaller banks to crowd out or take a toll on their profits. This could lead to new business models being developed in addition to banks looking to reorganize their legal identity by resorting to M&As, disposal of portfolios, entities etc.

Short-term Challenges India has witnessed many important structural reforms in past couple of yearsNPAs, Demonetisation, GST, RERA Actall impacting Indian economy and the banking sector. The adaption of IFRS accounting standards is another large international mandate that is knocking at India’s doors. The banking sector is needs time to completely assimilate the impact of all these reforms before embracing another one.

There are four important issues that need to be dealt within a few coming months First, the recapitalisation is required for the past static stock of toxic assets that now prevalent in the balance sheets of most banks rather than the actual flow of cash. The challenge here will be to ensure that the lending spree to influential institutions or individuals does not continue unchecked. The reforms in the Indian banking sector— especially in policy and divestment from PSBs—could be the next







steps.

Decreasing ownership concentration would then possibly reduce risk-taking decisions of various banks.

Second, every bank recapitalisation of this sort naturally sends out signs of moral hazard. The government should be objective when allocating additional capital on offer. A statement by the RBI Governor Mr. Urjit Patel suggests that the banks which have worked harder to deal with their problem loans will most likely get priority capital. A market discipline needs to be established.

The weaker banks should be given capital only to maintain their current operations, while the large borrowers who have defaulted on loans should face the heat of the new Bankruptcy Act. Third, the Government needs to decide proportion of the fresh capital injected for writing off existing bad loans and for issuing new loans.

IFRS, the global accounting standard, is to be implemented in the Indian banking sector from April 1, 2018. This is projected to have a major impact on banks’ balance-sheets, especially on provisioning norms, investments, use of financial and derivative instruments, regulatory compliance, IT systems, and tax calculations.

The government should back the bank recapitalisation with reforms in the financial sector—PSBs in particular.

7

Recapitalisation bonds used for capital infusion should not become an alternative for better governance. Apart from increased capital standards, Basel III brings an additional challenge in the form of establishing a modified and robust risk identification and management culture at the enterprise level. It also requires a proactive supervisory role on the part of RBI as India’s banking regulator.

In case of Indian banks, transition to Basel III has been an evolution than a complete revolution. Complete implementation of Basel III norms will most likely take place as per schedule by March 2019, considering healthy macroeconomic factors and influx of money through increased CASA deposits, effective AML programs and GST, and will in turn bring about a major difference to the operations of the financial system. I trust that banking will be safer than before, though marginally more expensive, with widespread ramifications throughout all the sectors of the economy. I believe that the future macroeconomic benefits of the Basel III implementation for the sector and the society as a whole will outweigh the microeconomic costs for individual institutions and citizens today.

References http://www.livemint.com/Opinion/1HPa ESu6reDVRWDron7obL/Reformsneeded-to-back-bankrecapitalisation.html 2. http://www.thehindubusinessline.com/m oney-and-banking/india-may-delay1.

3.

4.

5.

6.

implementation-of-basel-iii-norms-sbireport/article9899890.ece http://www.iibf.org.in/documents/resea ch-report/Report-25.pdf https://rbidocs.rbi.org.in/rdocs/content/ pdfs/FBSEIII020512_I.pdf http://www.livemint.com/Money/ay3XU GCNUm3YNmxetYDmLL/OrientalBank-of-Commerce-to-launch-Rs1000crore-bond-issu.html https://www.wjrr.org/download_data/W JRR0401017.pdf

Annexure (Abbreviations)  OTC- Over the Counter  NPA- Non Performing Assets, i.e. assets which are not generating revenue  BCBS- Basel Committee on Banking Supervision  WACC- Weighted Average Cost of Capital  RoE- Return on Equity (Or Capital)  M&A – Mergers and Acquisitions  RERA- Real Estate Regulatory Agency  GST- Goods and Services Tax  PSBs- Public Sector Banks  AML- Anti Money Laundering  CASA- Current Account Savings Account  IFRSInternational Financial Reporting Standards  IRB- Internal Ratings Based (Approach to Risk Assessment)  RWA- Risk Weighted Assets

8

Future phase of Retail banking industry in India Rajesh Khanna & Aswin Ram IIM Rohtak, 2017-19 Introduction Indian banking system has undergone a massive transformation since the start of this millennium. The transformation process had started when private sector banks signed a transformation deal with Infosys for implementing Core Banking System (CBS) to improve their overall efficiency, which attracted people in huge numbers towards the banking system. The transformation had taken in a very short duration at minimal cost which would have been impossible anywhere around the world. After modernization, banks have started to offer a variety of products to their customers through internet and mobile applications.

Retail banking refers to the offering of financial services by a bank to retail customers instead of corporations or financial institutions. Retail banking includes a variety of financial products viz. deposit products, loan products such as Home loans, Jewel loans, Vehicle loans, residential mortgage loans, auto finance, personal loans, loans against equity shares, bill payment services, investment advisory services, insurance, credit / Debit Cards and other cards. Retail banking is characterized by large volumes of transactions, diverse portfolio, low risk and high competition to capture the market share. After modernization, banks have started to offer a variety of products to retail banking

customers through internet and mobile applications.

Initially, retail banking is thought to be less attractive than corporate banking because of low profitability and significant maintenance cost.

Thus, banks concentrated mostly on corporates rather than individuals. Nationalization of banks was introduced in 1969 to bring the banks under the government to focus on priority sectors like education, agriculture, and other low-profit high utility projects.

During the last 40 years from the nationalization of Banks, retail banking has taken a significant transformation due to financial sector reforms. The rapid advancement of technology has contributed to a substantial reduction in transactional costs, facilitated greater diversification of portfolio and improvements in credit delivery of banks. Despite this progress, banks are battling against problems like the decline in quality of loans, capital inadequacy, and increasing Nonperforming assets.

The Indian retail banking is anticipated to grow vastly because of the metamorphosing attitude of customers towards banks, low cost of borrowings and optimism regarding economic growth which in turn results in higher credit capability of middle-class people.

9

Current Scenario in retail banking Retail banking constitutes a considerable portion of the total business of a bank and offers a variety of services according to the need of the customers. Home loans represent the remarkable proportion of retail banking segment. The total volume of Home loans currently stands at Rs.13 trillion and banks are on a rate war to capture the market share. SBI leads the competition with Rs.2 trillion home loan portfolios followed by HDFC (Rs.1.93 trillion), LIC Housing Finance Corporation Limited (Rs.1.27 trillion) and ICICI Bank Limited with Rs.1.18 trillion.

The home loan market has been growing around 18% per year owing to the reasons such as considerable increase of disposable incomes among middle class and, various initiatives and support from the government in the form of interest rate subsidy and tax reliefs.

Deposits and Long-term Time Deposits were the primary source of funds for banks for carrying its lending activities. As per the Handbook of Statistics on Indian Economy published by RBI, CASA deposits amount to Rs.10,761.21 Billion while Time Deposits of Residents increased to Rs.93,449.60 Billion as of July 21, 2017. Total Domestic Credit stands at Rs.1,15,514.36 Billion at the same period.

The number of Credit and debit cards in India were increasing steadily year-onyear. Due to demonetization, usage of plastic cards spiked around 80% which have gradually decreased in due course.

According to RBI report, a total of 31 million credit cards and 880 million debit cards were in operation as of May 2017 and total amount transacted were 36,141 crores and 37,508 crores respectively. The number of transactions through Credit and Debit cards stood at 115.33 Million and 267.51 Million respectively.

Banks have decreased the volume of unsecured personal loans over the years as they pose a higher threat of turning into NPA and instead increased personal loans

Pie chart depicting the total share of various loans offered by the Indian banks

Current and savings account (CASA) has always been a preferred mode of fundraising for banks as the interest paid on CASA deposits will be low comparatively and hence, it will result in a higher profit margin. Certificates of

Bar graph depicting the issuance of Credit and Debit cards among the Indian banks

10

through pledging Jewels, equity shares, and other securities. Salaried persons make up for the lion's share of personal loans as Financial institutions consider their last six month’s pay slip and Income Tax returns of 2 years for approving personal and vehicle loans. Bank’s offer comparatively low-interest rate to fourwheeler loans and the Vehicle loan products are expected to grow in huge numbers as the Automobile sales have increased at a CAGR of 5.56 % between FY12-17 and expected to rise further owing to the increase of purchasing power of Indian consumers.

Challenges   

Banks should focus on  

Retail banking opportunities and challenges Opportunities   





High GDP growth (CAGR of 7 percent over 2012–17) to facilitate banking sector expansion Rise in working-age population 15-64 and increase in per capita income The real annual disposable household income is forecasted to grow at a CAGR of 3.6 percent over the next 15 years in rural India Increase in purchasing power of younger generation (Younger generation follow liberal debt attitude and are more comfortable in acquiring debt) The rise in the role of information technology (Core banking solutions) to facilitate additional services like managing withdrawals and deposits, payment processing, customer relationship management

Fierce competition (Requires innovation and aggressive marketing for banks to survive) Retention of customers to get continuous and quality business.

Sustainability (Excessive concentration of revenue without focusing on the quality of services)



Non-branch banking to reduce operational cost Financial inclusion of unbanked rural people and retain them to capture new markets. According to RBI, 490,000 unbanked villages were identified & allotted to banks for coverage under the second phase of Pradhan Mantri JanDhan Yojna.

Customer relationship management by enhancing convenience, reliability to customers and customer complaint redressal systems.

Growth Drivers Rural India  

In India, only 5 percent of the 600,000 villages have a commercial bank branch Just 40 percent of the population in rural India has bank accounts



Debit card holders constitute only 13 percent of the population, and only 2 % have a credit card



51.4 % of nearly 89.3 million farm households do not have access to any credit either from institutional or noninstitutional sources These facts about rural India shows a vast untapped market and rural India will act as a significant growth driver for retail banking in India



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Housing and personal finance   

Rapid urbanization, decreasing household size & easier availability of home loans has been driving demand for housing Recently property value has increased leading to the reduction in the ratio of credit to collateral value, reducing the risk associated with retail loans Future Path of Retail Banking Mobile banking

  

Tele-density in rural India is increasing drastically at a CAGR of nearly 64 percent from 2007 to 2017 RBI has taken several steps to promote mobile payments through UPI, which forms an integral part of mobile banking The aggregate value of mobile wallet transactions value in India, raised nine times to US$ 9 billion as of April 2017 from 2015

12

Social media banking New plans are proposed to allow customers to access banking services through Facebook and other social media websites; which enables person-to-person lending schemes, with the bank acting as custodian.

Conclusion On the whole, looking ahead, the potential of retail banking is brighter than ever. Banks and government have to give continued thrust to this retail area. Thus, with the increasing consumer demand, there is a vast scope for the furtherance of the retail banking business. Operationally, there is a possibility that technology can go beyond to reduce cost & improving the quality of current products. It might prove possible, even profitable, to combine functions in new ways in an efficient manner.

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Abenomics & Japan’s Shrinking Workforce Nimish Joshi, IIM Rohtak, 2017-19 In the year 2012, Japan - the country with the world’s third largest GDP was in turmoil. For the past two decades, its GDP growth was nearly zero, and deflation was leading to fewer investments and more saving by the consumers. Consumer confidence level had hit a low due to the 2011 earthquake disaster, and consequences resulted in a recession in 2012. In addition to it, Japan had a massive national debt of $12 trillion which was 231.6% of its GDP, due to extensive spending from the 1990s. Its currency, the yen was overly strong, exchanging at 77 yen for 1 dollar, critically damaging its exports.

Regarding employment, Japan was gazing at long-term concerns about labour availability, as its population was declining to lead to evident shortages of labour in some areas. Female labour participation rate was also one of the lowest among the developed nations, limiting potential workforce.

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On December 26, 2012, after being elected as Japanese Prime Minister, Shinzo Abe promised a set of monetary policy, fiscal policy and economic restructurings planned to

resolve

Japan's

decade-long

macroeconomic problems. "Abenomics" is the term coined for the same by economists

2nd Arrow: A "Robust" Fiscal Policy The Japanese government spent more, to boost the Japanese economy. Shinzo Abe introduced

a

10.3

trillion-yen

fiscal stimulus package in January 2013, which was expressively higher than the expectations of many analysts.

and the media.

In addition to the stimulus spending, Abe Abenomics

consists

of

three

major

components or “arrows” to rejuvenate Japan’s economy: 1st Arrow: Monetary Easing The Japanese government pressurised the Central Bank to flood the market with cash.

The idea was to break the deflationary cycle and spur consumers to stop saving and start spending. Thus, increasing price levels by creating more money. It also aimed to weaken the yen resulting in Japan's exports

hard-pressed for fiscal spending to increase to 2% of GDP to further boost inflation through spending on a public level along with private level. It was planned to pay for these stimulus measures and other such spending programs by doubling up the consumption tax to 10% in the year 201415. At the same time, various structural reforms were implemented to increase taxes, close loopholes, and ultimately generate more government revenue.

becoming cheaper and probably boost the

In short, while trying to surge growth

export volume.

through

By employing open-ended asset purchases along with stimulus packages, the central bank was successful in making significant

government

spending,

the

Japanese government, at the same time, was striving to rebuild their finances, or at least reduce their reliance on debt.

progress in wearying the Japanese yen in

3rd Arrow: Policies for Growth to Spur

the first half of 2013, which also helped the

Private Investment

Nikkei (Japan’s stock index) jump sharply.

The third and the most crucial piece of Abenomics is structural reforms, which

15

proved to be the most problematic one to

Abenomics got it correctly. The visible

implement. Mr Abe pushed for Japan's

signs are ensuring that it is achieving

participation

progress on its fiscal and monetary stimulus

in

Partnership

in

the

Trans-Pacific

an effort to

remove

with pro-growth restructuring policies. In

regulatory loopholes that could be curbing

the fiscal year 2017, GDP expanded at an

the economy's long-term potential and

annualised 4.0% in April-June. It was more

likely tax revenue.

than the median approximation for 2.5%

Corporation Tax was lowered by 2.4%, barriers to foreign direct investment were depressed, and many industries such as healthcare,

agriculture

etc.

were

deregulated in order to improve ease-ofdoing business in Japan. Further, to plug

annualised growth and was a straight six quarters economy growth for Japan. The last time Japan’s economy enjoyed such an extended winning run was during 2005-06 when it expanded for six consecutive quarters.

the labour shortage, women were brought into the workforce by enhancing childcare facilities and providing for more childcare workers.

Through the G30 program more “highly skilled” foreigners were brought into Japanese universities, to create a positive aura of openness. Visa restrictions were also lowered, and duty-free shopping was introduced striving to increase inbound tourism.

The gain in GDP was helped by robust

Abenomics

Impact:

“It’s

the

exports, which grew by 2.1% quarter-onquarter. With the currency drop (117 yen

Economy, Stupid”

exchanged for 1 dollar) as aimed, every Bill Clinton’s famous slogan in his presidential campaign said, “It’s the economy,

stupid”,

and

fortuitously

dollar paid for Japanese goods converted into a higher yen amount.The corporate capital spending too expanded by 0.2% and

16

private consumption by 0.4% in the year

nation in the world for the 26th straight year.

2016.

Crucially for Japan’s households, whose

Corporate Japan relished the best ever profits

for

fiscal

2016.

by Nikkei approximated

A

survey

that

listed

spending accounts for 60% of GDP, wages posted their fastest growth in decades and are expected to accelerate to 2.8% by the

companies’ net profit grew by 18%, with

end of 2018.

trading houses recovering from their

Abenomics created far more jobs than even

previous resources fatalities.

its

Increased corporate profits have also enhanced expenditures

rising

corporate

(CapEx),

with

capital CapEx

expected to expand by 13.6% in fiscal 2017. The nation’s core consumer price index also increased by 0.3% witnessing its fourth straight monthly rise.

advocates

could

have

hoped.

Employment has increased by more than 2.7 million in the past five years, even though Japan’s working-age population has shrunk

by

over

4

million.

As

a

consequence, at this point, unemployment is 2.8%, and Japan has over 1.5 job openings for every applicant. Reliance on the national debt has also curbed as

Japan’s net external assets grew by 3% in

Abenomics policies have been favourable

2016 to 349 trillion yen ($3.1 trillion). It

in inhibiting the growth of debt-to-GDP

was the first rise in two years, with Japan

ratio as compared to previous years.

sustaining its position as the largest creditor

17

Adding to it, record 24 million overseas

to as few as 80 million by 2060. To keep

visitors arrived in Japan in 2016, giving it a

real economic growth in the range of 1.5-

tourism boom, which is already well ahead

2% at that time, Japan would need to

of the government’s target of 20 million by

maintain a population of 100 million. It has

2020, the year of the Tokyo Olympics.

already

lead

to

severe

immigration

activities as while publicly opposed to mass

The way Ahead

immigration, Japan has quietly allowed

The achievements of Abenomics lead to re-

foreign workers to enter, which in 2016

electing Mr Shinzo Abe as Japanese Prime

surpassed a record 1 million.

Minister. People have shown faith in his policies and are expecting even more at the same time. Its surely a challenge for Mr Abe

as

by

mid-2017,

Japan's

rate

of inflation has reached just 0.5% in July, which is still far off from the central bank's initial long-term 2% annual inflation aim.

Inflation was one of the most crucial targets

Increasing productivity or deployment of robots and artificial intelligence are a few possible

solutions

to

Japan’s

labour

shortage. Though developed nations across the world have found in recent years, raising productivity is far more difficult than

relying

upon

an

ever-growing

population.

of Abenomics which it failed to achieve.

The National Institute of Population and While

the

short-term

indicators

are

improving, declining population continue to crumble the nation’s potential growth rate. In 2016, the births figure dropped below 1 million for the first time with the total fertility rate slipping to 1.44 and deaths outpacing births for the 10th straight year.

Since summiting at 128 million, Japan’s population has contracted by nearly 1 million in the last five years and could fall

Social Security Research has claimed in its recent report that if Japan's workforce continues to fall at its current pace and productivity does not ameliorate; the country could stumble into negative economic growth starting in the 2040s.

The issue is critical for the world’s oldest nation, where the challenge is to keep people healthy and productive as they live longer. According to medical experts that specialise in ageing, one remedy is

18

increasing the retirement age to 75, ten years older than a majority think now.

The Japan Gerontological Society and the

labour force are applied, it could boost the

Japan Geriatrics Society have suggested in

number of potential workers by more than

a report that people from 65-74 should be

10 million.

thought of as "pre-old�. "Old" would be better defined as 75-89, and a special label of "super-old" could be approved for people 90 and above. The experts analysed the subject primarily from a medical viewpoint, and if it these definitions to the

With improved nutrition, health care and sanitation, today’s senior citizens are much fitter than our past generations, and tagging them as retirees is a waste of a significant labour resource for Japan.

19

A Japanese government survey of nearly

and health status of the Japan, there is still

4,000 people aged 60 and over has also

a substantial untapped labour resource

found that 51% didn’t consider themselves

available for various sectors.

senior citizens. Most of them accepted that the label should be for people at least 70 and older. However, facing such a shrinking labour force and rising welfare costs, the government is already raising the first age for getting pension payments from 60 to 65. Looking at the present scenario

With the short-term achievements in line, the long-term success of Abenomics policies remains yet to be seen provided the slow and weak inflation growth. The government, on the one hand, continues to be optimistic in its approach, but international investors on the other might retain scepticism due to the country's long fight against deflation and disinflation.

20

The startup valuation bubble – Bursting out or Fizzling out?

Deepika S T A Pai Management Institute, Manipal. 2016-18 within respective markets etc., it flourished Once catchy headlines pertaining to magnificent

unicorn

and

decacorn

valuations have changed the course to disseminate

the

news

about

recent

degradations in startup valuations. With 2016 & 2017 valuations out, the startups that

once

valuations

enjoyed and

experiencing

a

mega

mind-blogging funding

significant

drop

are in

only around 2005-2007 in lot of nations (including US, UK, India etc.). With the urge

to

build

something,

lot

of

entrepreneurs jumped into the startup field, and with the urge to be a part of next big thing- be it technology startups, ecommerce startups, health industry related startups etc., many investors started investing in the startups. Mainly around period 2006 and 2007, firms deployed humungous amounts

valuations.

of capital in technology based startups. But How did startup culture come into

with 2008 dotcom bubble burst, in the next

existence?

wave of investment period i.e. post 2008,

Though startup culture started gaining

the investment mix shifted considerably,

prominence around late 1990s and early

and not for the better. The VC investments

2000s with the increase in the number of

touched rock bottom levels in 2009 post

startup

dotcom bubble and have been recovering

incubators,

seed

funders,

government support and growing demand

ever since.

21

company in the market, in the private Figure 1: VC investments over the period 1998-2014,

Data

source:

Venture

intelligence (May, 2017)

markets, the startup valuations are purely decided by the few investors to claim the ownership percentage. The most frequently used startup valuation methods are namely,

How is startup valuation done?

Relative valuation using comparables and

Unlike the public markets, where market

Discounted

price is determined by shared consensus

following infographics will brief about

among the large group of players and

different startup valuation methods:

cashflow

henceforth determining the true value of the

Figure 2: Startup valuation using Relative valuation method

method.

The

22

Figure 3: By Discounted cashflow method What does startup valuation mean?

In the public markets, the shareholders get the final ownership claim i.e. they receive

2014. Furthermore, the technology heat wave,

market

conditions

potential,

economic

etc., paved the way for

the residual value of the company’s worth

unrealistic valuations.

upon meeting all other obligations and

For instance, on 1st June 2016, Uber raised

liabilities. On the other hand, venture

$3.5 Billion at a valuation of $59 Billion.

capitalists

liquidation

But, Aswath Damodaran, a well-known

preferences- this means that if things go

valuation adept, believes that the company

wrong, they will have the first right to pull

value is overinflated and that its really

back their money. So, if a venture capitalist

worth 23Billion$. This is the case with

funds a company $100 Million at a $1

many other Indian companies such as

Billion valuation, it doesn’t mean that the

Flipkart, which raised $700 million during

company is actually worth $1 Billion, only

July 2015 at a valuation of $15.2 Billion

that the investor believes that even if the

and Snapdeal, which raised $500 Million

company blows out, he will be able to

during February 2016 at a valuation of $5

recover $100 Million. Henceforth, the urge

Billion.

have

the

first

to be a part of something big and the hype around startups potential resulted in venture capitalists pooling in superfluous funds at startups’ disposal by the end of

The

path

charted

valuations led to?

by

unrealistic

23

In the initial funding stages, where

2017 are $0.35 Billion and $0.54 Billion

competition for talent was often fierce,

respectively, and most of it because of the

startups focused more on building strong

amount they have spent on customer

fundamentals and business models. But

acquisitions to gain the market share. This

upon being chosen by venture capitalists

faulty unit economics and unrealistic

and with numerous funds at disposal,

valuations have prompted the Venture

companies started looking at rapid growth

capitalists to discern the investments based

to increase market share at the expense of

on success parameters such as profitability

high acquisition costs because of the rapid

ratios, cash flows etc. Henceforth, this

rise in me-too startups with no clear, unique

explains the declining trend in startup

product. This further resulted in high cash

valuations and startup funding in the recent

burns

shutdowns,

period. For instance, in India, startup

consolidations, change in business models

funding value plummeted to $1.36 Billion

etc.

in Q4 2016 from the peak $4.35 Billion in

leading

to

many

For instance, the losses incurred by Flipkart and Amazon for the financial year 2016-

Q3 2015. However, we can assume it to be stabilizing with startup funding touching $1.71 Billion in Q1 2017.

Figure 4: Quarterly comparison of startup funding 2015-17, Data source: Tracxn

24

Furthermore, if we look at 2017 stats,

valuation in February 2016. Also, Flipkart

valuations of many companies have

fell to $5.5 Billion in Nov 2016 from $15.2

declined

Billion valuation in July 2015, before rising

considerably.

For

instance,

Snapdeal valuation has plummeted to $1

back to $7.5 Billion in June 2017.

Billion in May 2017 from $5 Billion

Figure 5: Valuation house

Figure 6: Flipkart valuation over the period, 2014-2017

From figures 3 & 5, one can infer that the

operations, growth etc., and also obtaining

startup valuation bubble has been loosing

funds was relatively easier around 2000s.

its wind at a slower pace since the past two

But with the recent learnings, venture

years, that is the bubble is not bursting, but

capitalists

fizzling out and eventually stabilizing.

investments keenly laying greater focus on

started

discerning

the

sustainable growth factors i.e., a business is

Conclusion:

expected to generate profits to obtain Though the startup valuation bubble is

investments for the further operations.

fizzling out slowly, it led to many

Hence, if companies fail to generate

meritorious

startup

revenues, investors will put a halt on cash

ecosystem. One such change is the

flows. Thus, the startup valuation bubble

formulation of new sustainable growth

fizzling out has led to an increased

mantra. For any startup, continued funding

awareness among several startups to sort

changes

in

the

is very important to drive its day-to-day

25

their priorities and to focus on sustainable growth.

References: https://inc42.com/buzz/snapdeal-valuationfalls-to-1-bn/ http://www.ventureintelligence.com/dealsne w/ https://yourstory.com/2017/11/flipkartvaluation-takes-hit-valic-values-7-9b-reports/ http://www.ventureintelligence.com/vcround up

https://economictimes.indiatimes.com/smallbiz/startups/flipkarts-valuation-through-theyears/articleshow/55759819.cms http://www.thehindubusinessline.com/marke ts/pevc-investments-exits-at-record-high-inaug-2017-ey/article9863448.ece https://www.preqin.com/docs/reports/Preqi n-Venture-Capital-India-September-2015.pdf https://www.businessinsider.in/The-StartupBubble-Burst-inIndiaCorporateGossip/articleshow/50591251. cms

26

The Rise of Alternative Finance – A Financial revolution ahead?

Naveen Kumar Indian Institute of Management Rohtak 2017-19

The Space has been created by the retreat

Introduction There is a new buzz in the Indian Financial sector and it is the Alternative Finance which is growing prodigiously. What has allowed for the rise of such a disruptive and

unrelenting

innovation

in

an

otherwise conservative Indian Financial system? Through this article we hope to shed some light on this AltFin which is going to disrupt Indian Financial sector as we know it.

and shying away by the Indian Mainstream banks which has been challenged by the limited assets and capital constraints in the wake of growing NPA’s. Although the recent measures by our Finance Minister, Arun Jaitley hoped to revive and give the lifeblood back into the system, it was too late and too little. The AltFin had forced itself into the Indian Banking market by burgeoning innovation.

27

Initially considered as an unsavory party of

multitude

the informal market it is gaining traction.

procedures to avail a personal loan.

The AltFin is mainly comprised in the domain of crowdfunding, peer-to-peer lending, invoice trading and debt-based

paperwork

and

endless

These are some of the few companies in long list of companies which is changing the Indian Credit system as we know it.

securities. If it has even prompted the Reserve bank of India to heed and take notice with the RBI publishing a Paper on

India faces a massive credit gap

In today’s model, an average Loan-seeker

P2P Lending, then we finance geeks should embrace this and foster support.

Ease of Credit – it’s that easy A friend of mine recently decided to borrow Rs 3 Lakh from a new company called MoneyTap to pay for a new car. The ease of getting this credit was phenomenal and interest rate was much lower than the traditional credit routes through Credit

has to cross through a multitude of hurdles

cards or Loans.

to avail a basic loan option.

Companies like MoneyTap are trying to

“Indian Customers with the lowest

redefine and make a paradigm shift in

default rates had the highest interest

which credit has been obtained in India

rates”

and the way customers interact with the

The above statement was constructed

banking system.

after reviewing through the interest rates

EarlySalary is another such company

offered by the Top three Indian Banks

which is India’s first and offers short term

across its customer portfolio.

instant loans to young salaried Individuals

The hindrances to this financial embargo

in just minutes. Gone are the days of

to credit availability can be attributed to the following factors:

28

 High Sales Cost  High Servicing Cost  No Credible data The World Bank Findex offers a pessimistic and grim reality of the Credit availability in India. We have a robust demand with no supply of Credit – it’s every financial system worst nightmare.

Alternate lenders – dramaitcally lowering costs at dirt cheap credit

Risk Costs - Limited savings as the original savings from data analytics

The below is the credit gap available for MSMEs alone who are in the need for

Size of the Alternative Finance Market

organized credit but due to the difficulties

According

heed to unorganized finances at high

Institute,

interest rates.

practices cost banks $2 billion a year in

But the new entrant of AltFin is slowly weaving them toward this uncharted market of credit Some of the measures which serve as a success to the AltFin model are:

to

the

McKinsey

inefficient

money

Global transfer

loss. On the other side of the coin, we have the online lending industry poised to grow to $70 billion by 2020.

As per Credit Suisse, the consumer finance market is reaching $1.2 trillion by end of 2020, which gives a renewed impetus in

Origination & Underwriting – Expected

India for more credit options.

additional saving of 60% The Indian Credit sector is reaching at an Loan servicing - 15% of the overall costs,

inflexion point in its lifecycle, with the

expected Savings of 50%

sector undergoing rapid transformation,

Collection – Over 10% of overall costs,

led by the rise of AltFin.

expected savings of 30%

Golden times for Financial Literacy and Inclusion

29

While

since

forever,

banks

have

This achieves a significant jump in the

traditionally relied on credit bureau to

lending process by arriving a score that is

assess the credit profiles of the customers

more inclusive of myriad data points that

for sanctioning loans, these AltFins are

can be instrumental in improving the

leveraging technology-based algorithms

applicant’s chances of securing a loan.

and software Integrations with Aadhaar to build the credit profile of the customers.

Source: Company Es

A small glimpse of this may can be better

smartphones on ecommerce purchases,

understood from this analogy. While

bill payments and mobile recharges. The

traditional credit bureaus such as CIBIL

Traditional systems is 2-3 years from

build a customer’s profile based on about

reaching such a level of inclusion.

30

parameters,

alternative

lending

companies use a staggering 500-800 points. These range from the Facebook friends to the data collected from the

This comprehensive use of data analytics can provide deep insights that is significant in building a 360 degree profile of not only

30

assessing a borrower’s ability to pay but also his intention to pay – something that seems right out of a science fiction movie.

The futuristic financial trading model

Freeing the finance systems are naturally prone to error and we in order to reach financial literacy must replace them with secure, irrefutable mathematically sound infrastructure by giving the benefit of doubt to this rising sector.

Who knows? The will help to avoid the overreach & lack of rationality that had led to some of the worst economic disasters (2008 GFC) and better disburse the deck that was once stacked against the average borrower.

Many other consumer-cherished systems are better safeguarded by the non-bank players and they should be given the opportunity to compete.

Disrupt Everything!

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Impact of Recapitalisation on Indian economy Siddhesh Suhas Salkar, Parag Nawani IIM Rohtak, 2017-19

Introduction On 24th October 2017, the finance ministry announced its plan to recapitalize public sector banks.

Soon the stock market turned optimistic. As result of the increase in stock prices of banks, the Sensex rose by more than 400 points within a day. The recapitalization news has been like a ray of hope for the public sector banks which have been struggling to perform well for a long time due to increasing non-performing assets (NPAs).

How will this be carried out?

The government will support these banks by injecting Rs. 2,11,000 crores into the system within next two years. It plans to pump this money in three ways.  The Government will buy shares of public sector banks worth Rs. 18,000 crores.  The Government will sell Bank Recapitalization Bonds worth Rs. 1,35,000 crores to the banks.  The banks will need to raise Rs. 58,000 crores from the market.

32

The banks may have to buy the recapitalization bonds so that the government gets money. The government would, in turn, buy stocks of the banks.

This way the banks would increase their capital without increasing their liabilities.

However, the announcement about the detailed characteristics of the bonds is yet be made. Once the details of the bonds are made clear, the scenario may change slightly.

How will this impact our economy?

Fiscal deficit The move is definitely going to have an impact on the government’s plan to shrink the fiscal deficit to 3.2%. As per IMF standards, such debt should not be considered while calculating the fiscal deficit. However, interest paid on the bonds would be about Rs. 90 billion which would lead to increase in fiscal deficit. As per Indian standards, the bonds need to be considered as outflow because the bond money will be paid back to the buyers and regular payment of interest will be made.

This amount may be classified later under off-balance sheet items.

Inflation The demands of credit in India is not low, but credit lending has been restricted by capital ratio requirements of the banks.

Once banks have enough capital to fulfill this requirement, they would start lending out money. This will create liquidity in the market and lead to inflation. This situation may not arise immediately because banks also need to strengthen their balance sheet and clean up stressed assets. In case the inflation rises, the RBI should keep a

watch on the market and take necessary steps to get it under control.

Bond market and interest rate The effect on the bond market depends on the restriction that government puts on these bonds. If these bonds are not allowed to be sold, then banks will have to hold them until maturity. The funds would be categorized as investments on the balance sheet. If there is no restriction on sales of these bonds, then bond market will have a huge supply of bonds.

As per a report of Goldman Sachs, the move to introduce recap bonds will likely result in RBI increasing rates. They have forecasted that the RBI will hike rates by three times by the end of 2018. This step would be taken because liquidity in the market may lead to inflation above desirable levels.

Potential problem with the plan What happens if a company’s loan is partially or fully waived off because it has turned bad? Can it encourage others to do the same? Definitely yes! If this happens, then we will see an increase in NPAs if banks do not take proper measures. The recapitalization plan can be sabotaged in another way as well. What happens if banks become lax and continue to function in the same way as before? How can the banks be regulated to improve and standardize their practices? There should be some provisions to address these issues.

Well, I suggest that the which have high NPA should implement aggressive ways of loan recovery. Companies that are not able to pay the loan should be directed to make necessary changes in the operations.

The promoters of the defaulting companies

33

should be prohibited from participating in the auction process. These are the same promoters because of whom the NPA problem has arisen, and hence they should not be a part of the auctions.

The banks which have followed good lending practices must be prioritized while capital infusion. This will give a clear indication to the banks that preference would be given to the banks that follow proper procedures while giving loans. The top management of the banks that are in bad shape must be removed and the bank must be merged with better-managed banks.

These steps will bring about some discipline in the market so that severe problems of NPAs do not appear in the future.

Conclusion The move of recapitalization of banks is a lifeline for the banks, and they need to make the best of it. The success of this plan also lies in the additional steps taken by the government while infusing capital into the banks. We will need to wait until the government makes further announcements about the details of the recapitalization bonds.

Reference https://thewire.in/190554/explained-greatindian-bank-recapitalisation-push/ https://www.youtube.com/watch?v=pQlgDOZg5Y http://www.livemint.com/Industry/je9ZifqTht 0mZCcR14P98I/How-32-billion-bankrecapitalisation-is-expected-to-play-ou.html https://scroll.in/article/855375/explainerhow-will-the-indian-governments-bankrecapitalisation-bonds-work https://economictimes.indiatimes.com/marke ts/stocks/news/road-map-to-save-indiascash-strapped-banks-nearcompletion/articleshow/61352281.cms http://www.livemint.com/Industry/xje0dmj5l YHZkSZnqVRjwJ/Cabinet-approves-Rs21trillion-PSU-bank-recapitalisation-pl.html http://www.financialexpress.com/money/wh at-are-recapitalisation-bonds-and-theirimpact-on-market-all-you-want-toknow/908154/ http://www.businessstandard.com/article/economypolicy/implications-of-recapitalisation-bondsgovt-changes-gear-on-fiscal-consolidation117102600340_1.html

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Emerging Peer-to-Peer Lending in India Bibek Jyotiroya Nandi, IIM Rohtak, 2017-19 With the short term interest rates on saving avenues being low, people are opening up to new avenues for saving and investing. In the alternative lending space, peer-to-peer (P2P) lending is making noise. So what is P2P lending? Simply put, it's a match-making between individual lenders or companies with savers desiring good return. The P2P lending platform acts as a matchmaker helping borrowers get uncollateralized loans and lenders get returns at an interest more than the traditional bank rates. Some of the players in the P2P lending circle are Faircent (backed by JM Financial), Lendbox, Rupaiya Exchange etc. This segment typically caters to the small borrowers for whom getting a loan from banks is difficult.

How does it work?

It's basically a crowd-funding model. The lender and borrower have to register on the platform. Some platforms may charge a onetime registration fee. The borrowers are categorized and listed under various riskcategories with the categories having varying interest rates. The lender decides the lending amount and duration. The decision for duration is important as the lent amount can remain tied-up for the whole duration. Some platforms do offer the flexibility to withdraw the lent amount during the tenure. However it comes at a cost. The borrower can receive the entire loan amount from a single lender or some part of it. The remaining portion may be funded by one or more investors. Thus a loan can be funded by multiple sources and

monthly repayment has to be done to each of them. The borrower has to pay a processing fee based on the loan amount. P2P lending cuts out the banking middle-man from the process enabling cheaper rates for the borrower. One should note, that the loan being uncollateralized bears the risk of default.

Operating Model in India The peer-to-peer lending platform companies in India have been recognized as NBFCs (Non-Banking Financial Company) by the Reserve Bank of India (RBI). The companies are mainly tech companies registered under the Companies Act. Being recognized as NBFCs, these companies can get credit records from the relevant agencies and bureaus.

Often following a reverse-auction model, these companies allow lenders to bid for a borrower's loan proposal with the acceptance/rejection decision resting with the borrower. Some platforms also provide additional services like credit-assessment, recovery and etc.

The platforms usually moderates the interaction between the borrower and the lender and facilitates the documentation for the lending and borrowing arrangement. The borrower receives the money in his bank account from the lender's bank account.

Scope of P2P lending globally A study by Statista pegs the estimated value of P2P lending globally to reach $1000 billion by

35 2025. A finding by Transparency Market Research estimates the P2P market to grow at a CAGR of 48.2% from 2016 and 2024.

Increasingly, millenials are becoming aware of P2P lending.

In China, marketplace lending is carried out both offline and online. UK accounts for 80% of European marketplace loans. All these findings point towards a rapidly expanding global market.

P2P lending market in India

A research by Morgan Stanley suggested that the global marketplace loan issuance is expected to reach $290 billion by 2020.

In India, the demand for personal loans has gone up significantly. According to RBI, personal loan grew in value by 19.4% in March 2016 compared to 15% in the same period in 2015. With RBI regulation and Digitization push favouring the growth of P2P lending, online marketplace lending saw an estimated $4.5 million worth of loans disbursed by P2P lending platforms by the end of 2016. With increasing demand in personal loans boosting growth, the outlook will only get better. Owing to the ease of borrowing and lending, quicker response and processing time, reduced communication barriers between lenders and borrowers, and better rates of interest, borrowers and lenders are turning to online platforms. With P2P lending portals being able to access credit bureau data and utilize data analytics, delinquency rates are expected to go down. With the P2P lending market under RBI regulation, banks may as well tie up with the lenders in future.

Conclusion The opporutnity for alternative lending space is growing in India. A transparent and wellregulated P2P platform can be expected to offer great opportunities for both retail and institutional loan providers and borrowers.

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CALL FOR ARTICLES Finance and Investment Club of IIM Rohtak invites articles from all Business Schools across India. The article should be original and should be related to finance and economics. All the reference should be cited and sources of images should be mentioned clearly.

The winner of the article of the month will get Rs.300/- with an ecertificate. All the other selected articles will be published in our magazine ARBITRAGE Instructions: 1. Please send your articles before 25th December, 2017 to dropbox on www.dare2compete.com 2. Do mention your NAME, INSTITUTE and BATCH with your article 3. Font: - Times New Roman, Size: - 12 in word .doc/.docx 4. Please DO NOT send PDF files and kindly stick to the format 5. Number of authors 2 at max 6. Maximum Word Limit: 1500 words, Minimum Word Limit: 500 words 7. Naming Convention: Name1_Name2_CollegeName.doc 8. Any Image without the source or label will not be accepted IMPORTANT: The article should be original and should not have been/should not be published elsewhere. You will be disqualified if you violate the same.

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Finance and Investment Club Indian Institute of Management Rohtak Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

38

All Rights Reserved Finance and Investment Club Indian Institute of Management Rohtak MDU Campus, Rohtak, Haryana For any queries/feedback/comments mail to fi@iimrohtak.ac.in Website: http://fi-club-iimrohtak.weebly.com/ Follow us on Facebbok https://www.facebook.com/FIclub.IIMRohtak/