FROM EDITOR’S DESK
Niveshak
Volume IX
ISSUE XI
November 2016
Faculty Chairman
Prof. P. Saravanan
THE TEAM
Aaron Keith Rego
Abhishek Jaiswal
Aditya Kumar Jain
Akshay Kaushal
Anand Mittal
Anisha Khurana
Ankit Singhal
Ankur Kumar
Anoop Prakash
Arjun Bhargava
Devansh Sheth
Dhruvika Chawalla
Girraj Goyal
Pratibha Sapra
Sankeerth Bondugula
Saurabh Gupta
Shreyans Jain
Vinay Gundecha
All images, design and artwork
are copyright of
IIM Shillong Finance Club
©Finance Club
Indian Institute of Management
Shillong
The month of November saw one of the major events of 2016, that is, the Prime
Minister Narendra Modi’s ‘surgical strike’ on counterfeit notes and black money,
which suddenly rendered 86% of the value of notes in circulation invalid. For the
second time in last four decades, India was subjected to shock treatment of overnight demonetization of high value currency notes. Bank notes of Rs. 500 and
Rs. 1000 denominations stopped being legal tender as a part of government’s
bold move to combat black money. The move was followed by long, frustrating
and anxious wait by people outside ATMs and banks across the country, to exchange the illicit currency notes. The cash crunch faced by the people in the last
month is certain to have an adverse impact on their consumption spending, especially in rural areas, with the ensuing effect on the economy in the third quarter.
Another event which was in the headlines was the victory of Republican candidate Donald Trump in the US presidential elections, defeating the formidable challenger, Hillary Clinton. The month also saw some other interesting news like the disbursement of Rs.21000 crores by NABARD to farmers to
assist them in the Rabi harvest, the increase in NPAs of the state run public sector banks, and the proposed income disclosure scheme under the Income Tax Act.
On the magazine front, we have covered Airtel for our Equity Research report. Our
cover story talks about the historic move by the Indian government to remove the
higher denomination notes from circulation and explains the implications of the
move on the Indian economy. The article of the month talks about Regtech and
how it is going to be the next big thing in the financial industry. The author has
thrown light on the concept, while also trying to understand the impact of the
technology on the banking industry in general, and Indian banking in particular.
For FinGyaan, the author talks about Artificial Intelligence and how it is transforming the Financial Services Industry in today’s world. In the FinSight section,
the author has studied the upheavals going on in Indian Banking Sector and the
underlying factors for them. In the newly introduced FinaFame section, we have
looked at Laurence D. Fink, the founder, chairman and chief executive officer of
the BlackRock. The Classroom section explains the concept of Leverage Buyout,
which essentially means the acquisition of another company using borrowed capital.
For FinView, we have brought the interview of Mr. Ashish Nanda, Business Head of Banking Channel at the Kotak Mahindra Group. Mr. Nanda gives his views on demonetization and how it is going to impact the Indian banking sector and what strategy should banks adopt in the current
scenario. He also touched upon various other topics like rising NPAs, strengthening of dollar against rupee, as well as role of technology in today’s world.
Finally, we would like to thank our readers for their immense support
and encouragement. You remain our prime motivating factor that keeps
our spirits high and gives us the vigor and vitality to keep working hard.
We hope you had a great month and wish you the best for the new one.
Stay Invested!
Team Niveshak
www.iims-niveshak.com
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility
whatsoever.
CONTENTS
Niveshak Times
04 The Month That Was
Cover Story
Equity Research
10 Bharti Airtel Ltd.
Article of the month
12 Regtech – The Next Big Thing
15 Demonetization – Demon
to the Black Wizards
FinGyaan
FinView
28 Mr. Ashish Nanda - Kotak MaArtificial Intelligence - Trans- hindra Group
forming the Financial Services Industry
Classroom
19
FinaFame
23 Laurence D. Fink: CEO of the
Decade!
FinSight
25 The Upheaval in Indian Banking Sector
30 Leveraged Buyout
4
NIVESHAK
The Niveshak Times
Team NIVESHAK
IIM Shillong
Donald Trump to be the 45th President of the
United States
Changes in Income Tax Act might give Black
Money holders another chance to come clean:
Finally, the wait was over, when the results for the
most expensive and most watched US Presidential
Elections were announced on November 8, 2016.
Against all the odds, projections, and opinion polls,
Donald Trump became victorious in the Presidential elections. The result was unexpected for the
Republican Candidate, as he did not only beat GOP
(Grand Old Party i.e. Republican Party) candidates
but also the formidable challenger Hillary Clinton,
who was consistently in the lead in all the opinion
polls. Not to mention that he was bogged down
by scandals and gaffes throughout his election
journey. Despite all that, he managed to position
himself as an unorthodox candidate. He was successful in selling his propositions to the Americans,
be it the issue of Southern Border Wall or proposing a temporary ban on Muslim immigrants.
The government has proposed yet another income disclosure scheme, which apart from bringing black money under the ambit of taxation, is
also aimed at channelizing funds for the welfare
of the poor. Under the proposed scheme, the
declarant can declare his or her undisclosed income which would be taxed at 30% and also be
subject to a penalty of 10% & a surcharge called
‘Pradhan Mantri Garib Kalyan Cess’ of 33% on
the tax, all of which would total up to be roughly around 50% of the total income declared.
The elections have also restored consumer confidence in the US economy. According to The
University of Michigan, the index of sentiment
ascended to 93.8 from 87.2 in October. Hence,
the American citizens are anticipating more investments, jobs, and growth in the near future.
Interest rates may come down by 1% in the coming months
In a statement coming from KV Kamath, Chief of
New Development Bank (NDB), he anticipates that
with a good monsoon, decrease in inflation, and
the after effects of demonetization, we can expect
the interest rates to further decrease by as much
as 1% in the coming 3 to 6 months. Though the
cash illiquidity has increased manifold in the system in the recent days, it is being cited as shortterm in nature, and the experts feel that demonetization will have salutary effects on the system
in the coming months. Also with the Pradhan
Mantri Garib Kalyan Yojna (PMGKY) 2016 coming
out into the picture, as the unaccounted wealth
is removed from the system, the rate of inflation
is expected to come down further. Hence, with
the combined impact of all these factors, it is expected that the rate of interest will come down by
at least one percentage point in the near future.
NOVEMBER 2016
In addition to this, 25% of the undisclosed income
would have a four-year lock-in period wherein the
declarant would have to deposit the aforementioned margin of the amount under a zero-interest
deposit scheme which will be called Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. This part
of the money deposited would be used for developmental activities such as investment in infrastructure, primary education and primary health.
The bill has been tabled as a money bill, which
means that it does not need the approval of the
Rajya Sabha where the government is in a minority and hence, it is likely to be passed without
much hindrances. The scheme is expected to be
in effect till Dec 30, although there has been no
formal communication yet regarding the duration.
cash crunch caused by the recent demonetization.
two successive years of scanty rainfall in the past.
The Bank plans on expanding and having a network of 1 Lakh shops across the state of Rajasthan by the end of this year itself, which perhaps
seems a bit too optimistic. All of these outlets
would accept digital payments via Airtel Bank,
and the payments would be effected through
mobile phones without charging any processing fee. Opening an account is easy, and would
require only e-KYC through Aadhar Cards post
which you can deposit & withdraw cash. However, borrowing would not be possible as a Payments Bank is not authorized to provide loans.
The Rs. 21,000 crore sanction would help
in meeting the crop loan requirements of
the farmers which would further help in the
smooth flow of credit for farmers to enable
them to undertake the Rabi requirements.
“Payment banks are feeders, no threat, to big
banks”.
- Raghuram Rajan
According to the minister of State for Finance, Santosh Kumar Gangwar, “the government has taken
sector-specific measures (infrastructure, power,
road textiles, steel etc.) where incidence of NPA is
high,” listing the passing of legislations like the Insolvency and Bankruptcy Code (IBC), amendment
of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act
(SARFAESI) and the Recovery of Debt due to Banks
and Financial Institutions (RDDBFI) Act aimed at improving resolution or recovery of bank loans. The
minister further added that “Six new Debt Recovery Tribunals have been established for improving
recovery,”. The Reserve Bank of India (RBI) has also
introduced several relevant measures such as the
Corporate Debt Restructuring, the Strategic Debt
Restructuring scheme, the formation of the Joint
Lenders Forum and Sustainable Structuring of
Stressed Asset to address the issue of rising NPA’s.
NABARD disburses Rs.21000 Crore to Farmers
With the upcoming winter season, the Government has allowed NABARD to disburse Rs.21000
to the farmers to assist them with the growing of Rabi crops for a prosperous harvest.
The farmers faced the crisis of purchasing seeds
and fertilizers with the limited amount of cash with
them post demonetization. The government thereby ensured that the sweeping away off the 86%
of currency did not affect the farmers adversely.
The demonetization policy by the government hit
the farmers badly by leaving them cash dry ahead
of the sowing season. This step would have been
hazardous for the growth of crops considering
State-run banks’ bad loans rise further
The Gross Non-Performing Assets (NPAs) of the
public-sector banks, often referred to as bad
loans further rose to Rs. 6,30,323 crore as against
Rs. 5,50,346 crore, in the previous quarter.
Airtel Payments Bank receives huge response
amidst cash crunch:
The Airtel Payments Bank - the first payments
bank in India - finally went live this month, with
over 10,000 customers opening up their savings
account with the bank within the first two days.
Surprisingly, most of these accounts have been
opened up in semi-urban and rural areas. The Bank
is a subsidiary of the telecom giant Bharti Airtel,
and is currently offering an annual interest rate of
a staggering 7.25% with an insurance of Rs.1 Lakh
per account. As of now the pilot services have
been rolled out only in Rajasthan across 10,000
retail Airtel outlets facilitating cashless purchases
through mobile phones, adding impetus to the
digital payments ecosystem in India amidst the
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
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TheCover
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That Was
The
MonthStory
That Was
Cover
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6
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NIVESHAK
www.iims-niveshak.com
Market
CoverSnapshot
Story
Market Snapshot
BSE
28500
3,000
DII
FII
28000
2,000
27500
1,000
BSE
27000
26500
0
26000
-1,000
25500
-2,000
25000
30/11/2016
29/11/2016
28/11/2016
25/11/2016
24/11/2016
23/11/2016
22/11/2016
21/11/2016
18/11/2016
17/11/2016
16/11/2016
15/11/2016
11/11/2016
10/11/2016
09/11/2016
08/11/2016
07/11/2016
04/11/2016
03/11/2016
02/11/2016
01/11/2016
24500
FII, DII Net turnover (in Rs. Crores)
BSE
-3,000
Source: www.bseindia.com
www.nseindia.com
MARKET CAP (IN RS. CR)
BSE Mkt. Cap
1,07,88,708
Source: www.bseindia.com
CURRENCY RATES
INR / 1 USD
INR / 1 Euro
INR / 100 Jap. YEN
INR / 1 Pound Sterling
INR / 1 SGD
8.00%
INR/1 USD
Euro/1 USD
6.00%
4.00%
GBP/1 USD
68.50
72.66
60.95
85.24
48.03
JPY/1 USD
SGD/1 USD
LENDING / DEPOSIT
RATES
Base rate
Deposit rate
9.30%-9.65%
6.50% - 7.30%
RESERVE
RATIOS
CRR
SLR
TECK, -2.06%
Smallcap, -9.23%
4.00%
20.75%
REALTY, -17.63%
PSU, -0.71%
POWER, 1.13%
OIL&GAS, -2.86%
MIDCAP, -7.23%
POLICY RATES
Bank Rate
Repo rate
Reverse Repo rate
6.75%
6.25%
5.75%
2.00%
0.00%
% Change
Source: www.bseindia.com
-2.00%
IT, -1.81%
Healthcare, -4.48%
FMCG, -5.17%
1
METAL, 3.38%
CD, -12.75%
CG, -5.87%
BANKEX, -4.70%
AUTO, -9.20%
Sensex, -4.57%
Date as on October 31st
-4.00%
NOVEMBER 2016
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
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CoverSnapshot
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13
Article
of the
Month
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Article
of the
Month
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Story
12
RegTech – The Next Big Thing
VaishnaviAdapa
IIM Kozhikode
What is Regtech?
of noncompliance have increased the risk of the
banks, both large and small to be alert in these isRegtech is a new concept primarily signifying the sues.
technology applied to resolve issues regarding regulation within the financial industry. It helps banks
and other financial services firms to better manage Is this a problem?
and understand their legal risks as well to easily adThe larger banks who maintain assets larger than
here to their regulatory obligations.
the economies of many countries of the world have
started increasing their compliance staff by at least
twice. However, there is no syndicated service ofWhy is this important?
fering to get the practices of the industry under
Given the crisis situations a lot of big and small fi- one tree. There is an expected need for man power
nancial firms faced in the recent past either due to with high talent. JPMorgan alone has 8000 employglobal slow down or through aggression, the regu- ees working for anti-money laundering purposes
lators started being more conscious with the com- alone.
pliance, governance and risks. The regulators have
not only taken a ‘take no prisoners’ approach, but To counter the increasing expenses because of the
also increased the number and variety of regula- compliance charges, the banks started decreasing
tions. There is an estimation that there are 175,000 their focus on few of their banking activities like edpages of regulations that the organizations have to ucational loans, mortgage activities and some core
comply to. Taking out redundancies or the obso- banking activities.
lete ones, another study estimated 120,000 pages
of regulation a bank has to comply by 2020. The How will Regtech solve these issues?
recent example of large banks paying billions of Though most of the banks have a separate wing
dollars as fine, compulsory public announcements
NOVEMBER 2016
for Governance, Regulation and Compliance
(GRC), they are not very effective. The main reason is that these divisions and their activities are
not connected to the customer facing divisions of
the bank, even when customer experience aspects
significantly impact the compliance risks today. For
example in a customer onboarding process, KYC
regulations have to be triggered. This takes a lot
of time for the legacy systems of the banks. This
lag might become a reason for the money laundering and many other problems the banks are facing
right now.
Regtech companies come into picture by automating and simplifying the process by pursuing straight
through processing. This will not only help them
decrease the costs but also pace up the process.
Since they act as syndicate data collectors from
third parties and also the other banks in the industry, economies of scale help them in achieving their
lower costs.
capital adequacy ratios and the projections of the
future based on machine learning and big data analytics. Almost all the important central banks and
important financial regulators in the world like FED,
Australian investments and securities commission,
Office of Comptroller of currency of the US, central
banks of Canada, England have already started taking the help of Regtech firms in their activities.
What is the role of technology?
Technology is going to play a major role here. The
Regtech companies are going to use cloud for the
banks to access only the data they want. They also
create standardized interfaces with remote login
facilities, create advanced algorithms to understand the patterns in data, both structured and
unstructured so as to create reliable signs for any
threats beforehand.
The figure1 broadly shows the typical features How is this going to effect the banka Regtech can offer. Though there is a low probing industry landscape in the near
ability that a single firm offers all the solutions, all
the firms and the ecosystem together would offer future?
these services to the banks from outside the banks. Regtech is going to help the entire banking sector
in the best possible way. Data can be the most important contribution of Regtech. Data can be exHelping out another set i.e., regulaplained for two different ways. One is getting imtors
portant data for the banks and the other is using
Few Regtech companies have grown into the field the existing data to create innovative solutions to
of just helping the regulators alone in monitor- the banks. Few examples can be using artificial ining the financial service firms if they are meeting telligence and intelligent algorithms to understand
the regulatory requirements. They also use the the behavior of a customer on social media sites
technology to help the regulators create prede- like Facebook, twitter and quantify the probabiltermined responses by analyzing various banks’ ity of money laundering, default of loans via this
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
NIVESHAK
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account or it might also be using or creating new
third party databases which would be highly useful
for any bank to follow the comply to the regulations.
The Regtech companies also become an important
liaison between the regulators and the financial
institutions creating spaces for the banks or other
financial service firms to create spaces where the
firms can test their new products without regulatory requirements. Then the regulators can verify
the feasibility of such products, analyze the pros
and cons of such products on the banks’ health
and the economy as a whole.
For the end customers, this shift can affect the
price of the products as these firms would not
only decrease their direct costs of compliance by
decreasing in time and using technology but also
their indirect costs by decreasing the probability
of getting fined by the regulators.
Not a rosy path all the way
Like all other disruptions, these Regtechs though
they bring in a lot of ease for the banks to function, there is an enough reason for the banks to
be cautious. This is because the dependency on
the Regtech would highly increase. The companies
also would be under intense scrutiny from now on
NOVEMBER 2016
as they have to share some information to create a
syndicate network and this information would be
accessible to the regulators. Apart from that there
is an issue of reliability and privacy. The Regtechs
would be accessing sensitive information and also
be holding higher stakes. Given that most of these
firms are tech based startup firms, the reliability of
making a Regtech company a partner is a big challenge and is certainly a risk involving high return.
Demonetization – Demon to the Black Wizards
FinanceClub
IIM Shillong
For the Indian banking
I strongly believe that the Indian banks and the Indian economy has not reached such a stage that
the banks need Regtech firms as a necessity now.
RBI as of now has done a good job in being conservative from the beginning. The encouragement for
the Regtech cannot be expected in the near future
form RBI. Regtechs have somehow emerged from
Fintech which is currently in its nascent stages in
India through payment banks, small finance banks
and the like. So, it takes time for this industry to mature and then develop a market for Regtech firms.
Another reason I believe that Indian banks do not
require Regtechs now is that the Indian economy is
not yet prepared to use that kind of advanced technology in decision making processes as 70% of the
banking is with the public sector banks which have
different mottos than just running a profit making
organization contrary to their foreign counterparts.
Introduction
Financial Inclusion, Weeding out Unaccounted
Wealth and Ending Corruption are like the holy
trinity for the health and prosperity of a developing nation. In this respect Government of India is
proactively taking all possible measures, starting
with Financial Inclusion and now weeding out Unaccounted Wealth from the economy.
Long since has the stage been set, beginning with
the Jan-Dhan Yojana to bring over 255 million individuals under the banking system, the Gold Monetization Scheme as an alternative to hold physical gold, the Income Declaration Scheme meant
to provide a single window for people to declare
their unaccounted wealth and now, the masterstroke of demonetization. With these measures,
the government aims to fight the evil of black
money, combat corruption and bridge the financial gap prevalent in the country. As the saying
goes, “short term pain - for the long term gain”,
the government defended its move saying, for the
greater good in the long term, the country and its
citizens have to bear the brunt of demonetization
for a short while.
Naturally there has been a lot of appreciation and
criticism for the move, appreciation for taking one
of the boldest move to usurp unaccounted wealth,
and criticism for not consulting many experts before taking this move and for the way it has been
implemented in the country. On the government’s
part, it is understood that secrecy is paramount
when taking such a move but it could have managed it better when it comes to disbursing the new
cash across the country.
History of Demonetization and its Comparison with the Current Scenario
The first question is whether the positive effect
of demonetization will last? All things considered,
demonetization is not another or unique thought.
A few nations have attempted it before; India too
demonetized twice in the past – in 1946 and in
1978. Worldwide experience has been that demonetization remained a one-time measure, and
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
NIVESHAK
the dark economy began developing all once again
once the administration disappoints its monitor.
Countries in the past that have tried to regulate
their currencies mostly failed. Soviet Union, Nigeria, Ghana and Myanmar are some examples of
demonetization.
This has been India’s experience too with the 1978
scene when the 10,000, 5,000 and 1,000 rupee
notes were demonetized. Nevertheless, this time
can be diverse for a few reasons. In 1978, the estimation of money demonetized was under 2 percent of what was available for use when contrasted
with almost 85 percent this time round. Second,
the huge advances in innovation during the most
recent 40 years will encourage more compelling
review trail of money, making it troublesome for
hoarders to face a government. Third, the robust
taxation regime, one of whose central qualities is
self-policing, ought to lessen the degree for the
dark economy. At last, it will be up to the Government to keep up the vigil, place fear into individuals transgressing the law through merciless
arraignment and wounding punishments and con
corruption with a draconian hand.
NIVESHAK
ably going to require significant investment. This
could have been kept away from in arrangement
ahead of time. Currently, the ATMs are giving just
Rs.100 and Rs.2000 notes. If this entire exchange
is done in Rs.2000 notes, then storing money will
be even simpler. And this will help corruption and
black money to go up. Hence if the government is
willing to curb black money, then the total amount
of Rs.100 notes in circulation must increase. But
logistics cost for Rs.100 notes will be around 20
times more than Rs.2000 notes. The government
must compromise on either of the fronts. Also, old
currency exchange must be faster to limit the impact on consumption. Current motive should be to
restore liquidity in the market. The motive behind
demonetization can be addressed by lower value
note circulation in future. Also, impact on economy and GDP can be limited by faster and phased
manner execution.
Future Economic Outlook
Analysts estimate a slowdown in the growth
rate of the economy because of demonetization
Implementation of process
step. HDFC Bank expects India’s GDP to grow at
7.3% versus the earlier estimate of 7.8%. CARE
Banks were not prepared for this by any stretch of Ratings slashed its projection for gross value addthe imagination. We can contend that the general ed (GVA) to 7.1-7.3% from 7.6%. This is a decline
purpose of “surgical strike” on the black economy from the earlier estimation of 8% growth rate. Alcould have turned out badly if the choice was though many are in the wait and watch mode, it is
made open. Yet, at any rate, some level of arrange- certain that demonetization will hurt the GDP at
ment could have been made considering the way least in short run.
that the lawful tenders being banned contribute
near 86% of value. Small banks in India came up One of the interesting after-effects of demonetishort on money inside the first couple of hours. zation is that there is a huge increase in liquidity
New Rs.2000 notes are good for exchange but in the banking system, but not enough demand in
not for daily tender. There are 2.5 lakh ATMs in the short run, this would lead to a fall of interest
the nation and adjusting them to give new ten- rates in the near future, which will make the sourcders of Rs.500 and Rs.2000 notes is unquestion- es of funds cheaper in the economy thereby pro-
NOVEMBER 2016
pelling investments within the country. As a result
of demonetization is estimated that, out of the 14
lakh crore worth of 500 and 1000 notes, roughly 3
lakh crore of rupees are unlikely to be exchanged
against the new notes, which means a reduction
of the money supply by the same amount. This
can be written off from the Central Banks balance
sheet as a liability and will in turn help the government to pay off its foreign debt thereby reducing
the country risk premium which international investors demand.
Re Genesis for the Banking Sector
is heavily cash driven is also expected to be badly
affected.
On the other hand, the move has turned out to be
a reason to rejoice for the payment banks such as
PayTm, Citrus and Mobikwik etc. A large number
of users have already migrated to digital wallets,
which offer the convenience of making cashless
payments. Kirana Stores, Vegetable vendors and
other small vendors also have started using Paytm
to accept payments in the light of this move.
Effect on the Stock Market
A temporary setback for the financial services sector was observed because a significant percentage
of the money is deemed unusable and the number of transactions across the broking houses has
reduced. Investments in sectors like real estate,
cement, steel, etc. have fallen due to a decrease
in prices of the products. The purchasing power
across all the sectors will only return when the
This increased liquidity with the banks, coupled wealth is earned back again. Till then this decline
with possible rate cuts from the RBI to boost the in purchasing power will negatively impact the
weakening short term demand due to currency prices of various goods and services. The decline
crunch might mean cheaper credits for the com- would be felt more for long term investment and
mon people if banks decide to transfer these ben- consumption.
efits to the end consumer. The lower credit rates Effect on the Infrastructure Sector
might also mean that the rates offered by the
banks on such deposits might go down, which in The Infrastructure and real estate sector will be
turn would be detrimental to people who are pri- one of the hard-hit sectors due to the demonetization exercise since it entails high involvement
marily dependent on interest income.
of cash transactions and black money. However,
The unexpected move by the government has also
most of these practices are prevalent in the secresulted in a slowdown in businesses across inondary sales market, and thus the resale properdustries and scales. SMEs and small business, who
ties market will take a bigger hit. Another segment
were mainly dependent on hard cash for most of
which largely sees cash payments is the luxury and
their business transactions have been hit, resulthigh-end real estate. Traditionally, the legal financing in a slowdown in their business operations.
ing and banking channels have only accounted for
Even the sales of big FMCG players have taken a
a very small part of transactions in this space. As
dive, as retailers across the country are finding it
sellers struggle to offload properties in this seghard to sell the products that are already on the
ment to generate liquidity, the prices of luxury
shelves. Companies have had to reduce their proproperties are likely to drop as much as 25-30%.
duction levels, at least for the short term, which
has further had negative ripple effects on various Talking about the primary market – the market for
stockholders. A significant chunk of these organi- projects undertaken by reputed and credible dezations – small and big businesses alike – depend velopers – it will largely remain unaffected since
on the credits extended by the bank for their the financing channels used by buyers to buy propshort-term as well as long-term financial needs. erty in this segment are legal channels like home
With their operations taking a hit, their ability to loans.
service the loans that they have taken might suffer, and since it is expected that things might take The Indian real estate sector, as a whole, has seen
more than two quarters to get back in order, the quite a few positive changes in the last one year.
risk of a rise in NPAs also hovers over the banks. The passing of RERA (Real Estate Regulation and
Apart from this, the micro-finance industry, which Development Act, 2016) and the Benami Transactions Act, along with the demonetization exercise,
Over 8 Lakh Crore have been deposited in the
banks from 8th Nov till the end of this month. This
led the RBI to increase the CRR to 100% for all the
deposits made between September 16 and November 11 fortnights. This is expected to suck out
3.24 Lakh Crore of excess liquidity from the system.
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will make the sector lose much of its traditional
taint and move towards transparency. However,
short-term agony is inevitable while looking for a
long-term cure for the disease. In the long run, the
Indian real estate sector will emerge stronger and
healthier.
tics, FMCG have been negatively impacted. The
non-durables and luxury goods markets might also
get adversely affected. However, the market value
of bonds is showing positive sentiment in anticipation of the fall in interest rates in the near future.
Further, stock of public sector banks are moving
up as they are expected to have higher deposits
Data Analytics to disburse money
due to their larger penetration in the rural areas,
Data Analytics could be used to disburse money whereas on contrary, the stocks of the private
to villages and towns whose rabi farming cycle has banks are showing reverse trends.
started or is about to start. Due to the perishable
nature of the seeds and crop harvested in Kharif However, all these impacts seem to be short-term
season, the farmers who are ready to sell their in nature. The long term outlook of the move will
harvested crops are in a hurry to sell their harvest, turn out to be positive as it is a big step in makwhich has been halted due to the non-availability ing India a cashless economy. The removal of the
of cash. Money should be disbursed to those vil- parallel economy from the system may force peolages in order to facilitate the sale of those crops. ple to transact through banks, which will lead to
channelizing of the unrecorded transaction into
the mainstream economy and hence has potential
What’s in store for the country?
to boost the size of white economy figuratively. All
The turn of events from 8th November, demoneti- in all, in our opinion, though the implementation
zation has shown us a mixed bag of reactions from could have been better, it is a right move at a right
a common man to big honchos. The stock market time considering the positive impacts outweigh
has been volatile, Indian currency is depreciat- the negative impacts significantly in the long run.
ing, and the sectors like automotive, steel, logis-
Artificial Intelligence - Transforming the Financial
Services Industry
NandanBanerjee
IIM Indore (Mumbai Campus)
Artificial Intelligence: Transforming the Financial
Services Industry
Very recently, a team at google has developed a system
to demonstrate how Artificial Intelligence can build its
own encryption which consequently will fuel research
on encryption that becomes stronger as hackers try to
crack it. AlphaGo, an AI system developed by DeepMind technologies, defeated Go’s (a Chinese board
game) European Champion Fan Hui 5-0 last year which
startled the entire Go community. LendingClub, a peerto-peer lending platform is using its AI algorithm to offer the risk rating and the credit worthiness on the spot.
These are some very recent disruptions that’s happening across areas with Artificial Intelligence assuming
the centre-stage of these futuristic developments.
Recently, AI has witnessed renewed interest from both
the academics and the industry. It is touted to bring a
sea change across industries ranging from military and
defence to humanitarian technologies. In 2015 alone,
the giants of AI – Google, Microsoft and Facebook spent
$8.5 billion in acquisition and research. Though conservatives claim that it would take 100 years for computers
with AI to outsmart human brain but Google’s director
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of engineering Ray Kurzweil believes it could take place
as early as 2029. In spite of these, the financial institutions have been slow to adopt and exploit AI as done by
other technology companies. It may lead to extinction
of some big institutions and at the same time provides
ample opportunity for start-ups to disrupt the existing
business models and build next generation of institutions.
Developments in the AI domain have gathered tremendous momentum recently although AI as a field of
research was developed back in 1956. The key driver
behind this is the rapid expansion in the availability and
the amount of data. Be it data created in various social
websites, financial transactions or mobile app, it can
be conveniently collected and processed. Again, there
has been an exponential increase in the computer’s
data processing ability (Moore’s Law) enabled by cloud
computing, refinement of techniques like deep learning and other optimized learning techniques. Barriers
to AI experimenting are rapidly reducing as a larger
number of non-specialists have started developing AI
programs. Although AI experimenting is becoming easier gradually, the greatest advantage lies with the financial services sector as it is a sector with ample specialist
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skills in mathematics, data science and statistics. This is
the reason AI is drastically changing models in financial
services industry, be it by automating the process, by
crunching numbers through big data or by interacting
to humans through voice.
Artificial Intelligence is affecting several areas of Financial Services with varying impact and disruptive capability. As per a global survey executed by Euromoney
along with the law firm Baker & McKenzie to identify
the areas of financial services can be deployed in the
coming 3 years, 49% of the respondents chose Risk
Assessment as the most popular application. This entails, solving internal management questions such as,
whether or not to open a new branch in a new location
or whether or not to give the client a new loan. The AI
algorithm can easily process huge data and quantify the
various risks to arrive at an analytical decision. The 2nd
most popular area was Financial Research with 45%
respondents endorsing it. The AI algorithms can now
read the annual reports, company filings, management
news interviews etc. and process them quantitatively.
The key here is AI’s ability to process contextual information which was previously assumed to be human
specific capability. Next in importance identified were
portfolio management and trading with 37% and 33%
respondents voting for it. The argument here is that it
is very difficult for a human brain to figure out how the
stock market is moving. Also, due to its direct correlation with the income, the managers are optimistic to
use AI in this area. Although, till date, on 1.0 generation
of Robo-advisers are introduced which are amateur and
less reliable, the next generation are believed to be significantly superior in giving refined solutions. At the tail
end was AI systems use at sales and customer service
which was agreed by only 14% respondents. This area
includes customized offerings to customers as per their
requirement. For example, someone with healthy lifestyle (doing regular exercises) would be charged lesser
NOVEMBER 2016
life insurance premiums compared with someone who
does not, and to verify, the actual data can be easily
tracked using various devices.
AI is actively pursued by plenty of start-ups and other
companies to provide superior services to the stakeholders. In the payments space, DBS bank in India
launched its app “Digibank” which contains AI and natural language recognition driving its virtual assistant application. In the insurance sector, services like MyDrive
& Metromile are coming up with “pay per use” options
which will be backed by its IoT and Big Data & Analytics, bringing new insight into insurance risk. In the
deposit and lending sector, firms like Kreditech offers
credit score for applicants with no/very low credit history through data collected from its applicant’s smart
phone. In the capital raising sector as well firms like
Seedrs and Crowdcube are using AI to identify needs
and understand the content and thereby serve the customers. In the Investment management field, start-ups
like Frontier Solutions is trying to spot good investment
opportunities in undervalued stocks through its AI system scanning through company’s financial statements.
AI is thus becoming more and more relevant in the
banking area and other financial services. Also, the big
shots in this sector are unable to invest meaningfully
due to their legacy systems leaving them the option of
scouting the booming start-ups.
respond compared to the small and medium scale industry which can operate from lean infrastructure and
thrive on the big corporations willing to outsource their
activities.
to this, there has been more focus towards multidisciplinary teams. The last major obstacle is lack of senior management/Board Buy-in. The same is a result of
low returns emanating from past investments into this
The major obstacles being faced in implementing AI
systems has also been captured by the survey done by
Euromoney along with the law firm Baker & McKenzie.
The biggest of them being the cost, which is significantly high due to the reason that the human capital
requirement consists of skill from both technology and
industry. The requirement of huge data volumes and
processing ability also compounds the cost. Another
significant obstacle is the specialist skill to maintain
and operate the technology. Even though companies
are willing to recruit the talent pool, it is rare. It is very
difficult to get the requisite hybrid knowledge. Due
field. Rather than actively pursuing AI, the companies
are following a wait and watch strategy of poaching
start-ups excelling in the field.
The disruptions that these start-ups bring are not only
changing the internal structure of the financial institu-
As a result of AI systems there are some major concerns,
with mass unemployment being the primary one. With
more and more services going digital, there is lesser
need to operate labor intensive physical branches to
cater to the customers. In some conventional services,
the reductions have been 90%-100% as they can be
easily automated with high reliability along with producing significant cost reductions for the company. So,
tions, but the structure of the entire industry. A survey
conducted by Euromoney Thought Leadership found
that 56% of the executives believe that AI will bring in
the table more small and medium sized participants.
Whereas only 8% of the experts were of the opinion
that the same industry structure will sustain itself.
Clearly, the reason behind such an opinion is that big
corporations with legacy IT systems will be slow to
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the jobs with critical decision making requirements
will become dearer whereas middle and low level employees catering to daily routine activities would be
replaced by intelligent solutions. Another major concern is that most of the AI coders are male. As pointed
out by Melinda gates “There is no way a “sea of dudes”
will know how to appeal to female consumers in coding no matter how long they work at it. It’s appropriate to have diversity in artificial intelligence.” Another
issue arises when increasing computation speed and
power combines with erroneous utility or objective
function. The system can make errors at tremendously
high speeds and thus result in irrecuperable losses. The
same happened with Knight Capital losing $440 million
while trading due to a programming error (4). These
cases will give rise to very high corporate liability risks.
The data being fed to the AI system can also have the
coder’s biases which makes the system learn biases
and give incorrect decisions. Not to ignore the cyber
terror and crime which could thrive through these systems. For example, a politician taking his daily medication through the automated medicine dispenser can be
tampered to change the content and be exterminated
remotely. There is very low partnership with the regulators and the jurists while preparing these AI systems.
This is due to the perception that they are under-resourced in talent and capital compared to the financial
institutions. But, to have a constructive ecosystem with
proper checks against rogue elements, any anticipatory
regulations must be dealt away with. Instead, the regulators themselves should make investments to be up to
date with the technology and be able to bring sound
regulations.
Elon Musk himself spoke about reservations about AI
as he believes that erroneous programs may result in
futuristic AI equipped machines taking control of human race in the coming days. But most of the researchers and industrialists claim that the good outweighs
the bad. Be it reducing the number of road accidents
through driverless cars or be it intelligent post operation mobility and smart autonomous home medication
management, there is a lot that can be made convenient and reliable by this. In the financial services industry, there have been some instances of operational
errors in the past resulting in losses but there can be
learning out of these mistakes to build better checks in
future programs. The convenience AI brings to a consumer who can now open a bank account sitting at the
home through interactive KYC check or the transparency it brings to the banking industry by objective analysis
of data and coming out with credit worthiness of the
client promises much more compared to the sporadic
red flags raised in some areas. With better multidisciplinary teams with the right mix of technology person,
industry expert, jurist and regulator personnel, there
will surely be creation of systems that will be a boon to
humanity and ignite the next sea change in way things
are done by human being.
Laurence D. Fink: CEO of the Decade!
ArjunBhargava
IIM Shillong
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Introduction
Initial Days of Larry Fink
The Founder, Chairman and Chief Executive Officer of the BlackRock, Laurence D. Fink also heads
the company’s Global Executive Committee. It so
happened that Larry Fink and seven other partners
founded the BlackRock in 1988 and it is due to his
leadership skills that the company has elevated
into becoming the leader in investment banking,
risk management and advisory services across the
globe. The BlackRock today manages more money
than any other investment firm anywhere around
the world. This can be credited to the financial
acumen, unflagging spirit, tenacious hard-work
and the effective leadership of Mr. Fink and his
employees at the BlackRock. It is for reasons such
as this that Mr. Larry Fink was named as one of the
“World’s Most Respected Leaders” in the business
world by the Fortune Magazine in the year 2016.
He was also named as the “CEO of the Decade”
by the Financial News in 2011 and the “World’s
Best CEO” by Barron’s for 10 consecutive years.
Mr. Laurence D. Fink grew up in a Jewish family in
California. Mr. Finks’ mother was an English Professor and his father owned a shoe store. Mr. Fink
pursued a degree in BA in political science from
the University of California, Los Angeles, in 1974.
He earned his MBA degree from the UCLA Anderson Graduate school of Management in 1976.
Career – Stepping into and Dominating the
World of Finance
Mr. Fink started his career in an Investment Bank
based out of New York, known as the Boston First
in 1976. Assuming charge of the bond department of First Boston, Larry Fink’s contribution was
instrumental in the creation and development
of the mortgage-backed security market in the
United States. Member of the management committee at First Boston, Fink was also a Managing
Director and Co-Head of the taxable fixed income
division. This department had the responsibility
of trading and the distribution of all the Government, Mortgage and Corporate Securities. He was
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the sole authority in starting the Financial Futures tory of the BlackRock organization. Laurence
and Options Department while also heading the D. Fink ushered the merger with Merrill Lynch
Mortgage and the Real Estate Products Group. Investment Managers which saw a great appreciation in the BlackRock’s asset manageOwing to all these activities Mr. Fink was an as- ment portfolio. BlackRock also made a historiset to the Boston First company and the addi- cal deal of purchasing Stuyvesant Town–Peter
tion provided by him to the bottom line of First Cooper Village, a Manhattan housing complex,
Boston was as much as 1 Billion Dollars. His glo- for 5.4 Billion Dollars in the same year. This deal
rious stint at the bank was unblemished until became the largest deal in the residential-real1986 wherein he wrongly predicted the course estate sector in the history of the United States.
of the interest rates in the coming future which
led to a loss of a 100 million dollars to the com- The crisis of 2008 happened and Governpany. This proved to be a turning moment in his ment of the United States entrusted Blackcareer since it was because of this experience Rock to help with the cleaning up of the finanthat Mr. Fink thought of starting a company that cial meltdown. The BlackRock was considered
would be investing the money of the clients but to be the best company in order to lead the
involving a comprehensive analysis of Risk man- clean-up job post the financial crisis of 2008.
agement as well in order to minimize the risk of
leading the investment into a bad investment. In 2009, BlackRock became the largest money
management firm on the planet, 22 years post its
inception. The history was scripted with the purchase of the Barclays Global Investors. Larry Fink
maintains a quiet and a calm demeanor and is
not known for exerting or exercising influence despite having a great deal of it within the Industry.
“ One of the key elements of
human behavior is, humans
have a greater fear of loss
than enjoyment of success.
All the academic studies will
show you that the fear of loss
of capital is far greater than
the enjoyment of gains. “
Larry Fink was paid 23.6 million dollars by the
BlackRock foundation in 2010. By 2016, BlackRock
comprised of 12000 employees across 27 countries
and had 5 trillion dollars under its management.
“Presently, Mr. Fink holds the position of the
member of the Board of Trustees of the New York
University and the Co-Chairman of the NYU Langone Medical Center Board of Trustees. He also
serves on the Boards of the Museum of Modern
Art (MoMA), the Council on Foreign Relations
Thus, BlackRock was founded in 1988 under the and Robin Hood, the poverty-fighting charitable
BlackStone Group. Laurence D. Fink became the Di- organization. He is also an Executive Commitrector and CEO of BlackRock. Through the split from tee member of The Partnership for New York
the BlackStone group and gaining even more inde- City, the economic development organization.
pendence till 1998, Mr. Fink maintained his position of the Chairman and the CEO of the BlackRock. Also, recently, Mr. Fink had sent a letter to the
He held a plethora of positions within the company CEO’s of the companies featuring on the S&P 500
such as the Chairman of the Executive and Lead- and the large corporations in the Europe as well.
ership Committees, Co-Chair of the Global Client The letter concentrates on the short term investCommittee and the Chair of the Corporate Council. ments both in the US and the Europe and also talks
about the short termism with respect to politics
Fink was gaining publicity in the corporate struc- as well. It asks the Corporates from both the geoture, media and government alike. BlackRock graphical destinations to plan well for the future.
decided and went public in 1999. Owing to his
reputation, Mr. Fink helped in the negotiation Apart from being a member on the various boards
and thereby the resignation of the CEO of the of trustees and doing for the community, Larry Fink
New York Stock Exchange, Richard Grasso in also founded the Lori and Laurence Fink Centre for
2003, as he was receiving a lot of flak with re- Finance and Investment at UCLA Anderson in 2009
spect to the remuneration being drawn by him. and currently serves as the Chairman of the Board.
The year 2006 was a marquee period in the his-
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The Upheaval in Indian Banking Sector
SaurabhGoyal
IIM RAIPUR
fessional banking culture; and Second, technological and structural changes in the econOccasionally some particular sectors of economy omy. And though present health of banks is
see a cyclical downturn; Steel sector presently in In- beset with risks, steps taken by RBI and Govdia, for instance. Economy can take these sectorial ernment give reasons for cautious optimism.
downturns into its strides. But when banking sector
collapses, it takes down whole economy with itself. A Present rooted in Past
Global financial crisis of 2008, which originated
Broadly there are three momentous cusps in IBS.
from US Banks, is a prime example. So if you were
First, in 1970s, we nationalized banks to pursue
to gauge the health of an economy, just look at the
the socialist economic agenda set by the then
financial health of its banking sector. It is against
Indira Gandhi government. Second, as part of
this critical backdrop that we have to evaluate up1991 economic reforms, we acted on Narasimheavals going on in Indian Banking sector (IBS).
ham committee report on banking sector. We
For analytical convenience, the essay is further deregulated the sector through new licenses,
divided into three parts. First, it traces the larger lowering of SLR and CRR and grant of autonomy
policy trends and fit them into public-policy his- to Public sector Banks (PSBs). And finally, there
tory of Indian Banking. Secondly, it discusses is the present moment. It is consistent with
the upheavals caused by challenges and risks our liberalization policy followed since 1991.
looming over Indian Banking. And finally, it disRecently, RBI has granted 23 new licenses - 2 unicusses the policy and regulatory steps taken
versal, 11 payments and 10 licenses for small fiby the government to reform banking in India.
nance banks. The niche banks - small finance and
The key argument of the essay is that the pres- payments banks -are to pursue the objective of
ent upheavals in IBS are due to two things. First, deepening financial inclusion. Similarly RBI and
larger slowdown in economy and an unpro- government have come up with innovative poliIntroduction:
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Like most reforms in India, these banking reforms
too are product not of choice but of necessity. We
patted ourselves on backs that our banks withstood the global financial crisis when most global
banks were going bust. However, as it turns out, our
banks were simply on a lending spree which had little professional rationale. The risks and challenges
mounted. And then came the moment of reckoning.
The Day of reckoning
RBI, under the leadership of Dr. Raghuram Rajan,
has been fixated on fixing IBS. This unrelenting
focus (much to chagrin of corporate sector) has
in oil prices, their margins are shrinking and the
business is nor more as profitable as it was. So the
companies who made investment are suffering.
Second, Indian PSBs have not adopted competitive and professional managerial principles.
Political meddling in appointments and lending decisions lead to inefficiency. And that reflects in poor financial results. If not for the
recapitalization by government many of our
PSBs would be financially unviable by now.
Finally, a range of challenges lie ahead. Basel-3
norm compliance by March 2019 is going to be a
huge task. Given the stressed books of banks the
strict capital adequacy norms seem too high to
mount. Dealing with competition from new age
Under this a newly constituted Bank Board Bureau (BBB), under the chairmanship of Mr. Vinod
Rai, is mandated for appointment to top Banking
jobs in PSBs. Similarly constitution of Monetary
Policy Committee ushers in a broad-based and
institutional way of monetary policy making. This
institutional innovation will make the RBI-Finance
ministry relationship on monetary policy less fractious. And the defined inflation range of 2% to
4% will give a clear purpose to MPC. It will also
infuse predictability in Indian money markets.
And that bodes well for long term investments.
Two, SBI and its 5 sister banks are going to be
consolidated to create a large bank comparable
to global banks. Three, RBI has launched many
schemes to enable banks to deal with NPAs. Corporate Debt Restructuring, Join Lender Forum,
5/25 scheme, and Scheme for Sustainable Restructuring of Stressed Assets are few examples. Add
to this mix the newly passed Bankruptcy law, and
we get a credible recovery policy tools for banks.
Four, launch of the unified payment interface
(UPI) by the National Payments Corporation
of India is a momentous step towards a cashless economy. And cashless economy is inherently more efficient. E-transaction leaves a
trail which is easier to track than physical transfers. That will make taxation more efficient and
black money hoarding much more difficult.
Fifth, more than 20 Crore bank accounts opened
under PM Jan Dhan Yojna are potentially single
biggest opportunity for our Banks. Once subsidies and payments are routed through these accounts, it will create banking on the scale hitherto unknown in India. And Indian Post Banks
will take formal banking to the last mile in India.
And finally, many traditional banks are taking
brave steps to keep up with the times. For example, Yes Bank, has partnered with FreeCharge
and MasterCard to launch FreeCharge Go,
a virtual card that allows users to pay for
both online and offline goods and services.
Conclusion
Upheavals can be caused by both positive and
negative trends. Presently we are witnessing both
in Indian Banking. On one hand, sins of past are
haunting our PSBs. On the other, new opportunities await them. A Brave New World beckons.
We hope our banks will rise up to the occasion.
As % of Total oytstanding assets of PSBs
Fintech start-ups is a future-defining challenge
for Banks. Crypto-currencies like Bitcoin have
They say that the day of reckoning can be the potential to turn entire banking landscape
postponed but not avoided. Same happened up-side down. And finally, spill-over effects of a
with Indian Banks. A range of challenges presently fragile global economy pose risks going
and risks have surfaced in recent few years. forward. One instance of this is how significantly
First and foremost is the rising NPAs of PSBs. Fed’s monetary policy impacts Indian economy.
Foreign Institutional Investors (FIIs) leave the
IBS is crippled due to ‘Double- Balance Sheet country at the drop of hat. And that exposes
stress’ Problem. That is, stress from companies banks to a volatile situation as many of the projin sectors in downturn (Power, Steel, Textile for ects that they finance are also co-financed by FIIs.
instance) gets transferred to balance sheet of
banks which lend them. Many of these compa- Building a Brave New Banking Sector
nies made investment on the assumptions that Indian Government and RBI have collectively takturned out to be wrong. And now their cash flows en a range of steps for risk-mitigation and capacare not in tune with their expectations. For ex- ity building in IBS. One, Government has launched
ample, take oil exploration domain. Due to fall ‘Mission Indradhanush’ to professionalize PSBs.
caused huge, long overdue, upheavals in PSBs.
NOVEMBER 2016
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cies to enable banks to deal with stressed assets.
The essay will discuss them in detail in third part.
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Mr. AshishNanda
BUSINESS HEAD, BANKING CHANNEL, KOTAK MAHINDRA GROUP
Mr. Ashish Nanda is the Executive Vice President and Business Head for PCG and Alternative
Channels at Kotak Securities.Previously he has served as Assistant Finance Manager at Anand
Group. Mr. Nanda provides highly strategic and tactical leadership within areas of plannng, product
design, new business, sales and marketing and P&L performance function. He is a qualified Chartered
Accountant, graduated from Delhi University with BCom Honors and Post graduated from Indian
Institute of Management Ahemdabad.
What is your take on demonetization? Given the
problems people are facing do you, since you have
been working on the retail end of banking, think
government could have executed it in a better fashion?
etc. The volume of transactions has gone up significantly. Overall, a cashless economy is a much
better thing to have. Of course, digitization will
change the dynamics in the next 3 to 5 years. Traditional banks has to get their game plan right due
to a serious threat from payment banks. Airtel
Talking of people’s perspec- launched its payment bank in Rajasthan recently
In a candid
tive, I would divide the clien- which is going to be a paperless bank; this is gointerview with
tele into two parts-retail and ing to change the way banking sector functions.
Team NiveHNI. On both these sides it
is considered a great move. What do you think should be the strategy adshak, Mr NanDue to improper execution opted by traditional banks? What role do you see
da shares his
and no cash in hand small payment banks playing in this, and do the legacy
views about
businessmen are facing is- banks stand a chance of losing their customers to
sues since the past 25 days. them completely? Should they tie up with a paythe on-going
My view is once the gap be- ment bank or launch their own new platform?
Demonetizatween the 2000 rupee notes
tion and its
and 100 rupee notes gets Very difficult to tell how things will function ten
repercussions.
bridged economy will start years from now and which strategy will work. Stratpicking up. Yes, it could have egy of PayTM seems to be doing fine and Airtel
He also presbeen executed slightly bet- coming up with its bank looks like a good prospecents his views
ter. There was not enough tive strategy as well. However, I think banking will
about the fucurrency supplied when they be based on segmentation. It will be divided into
went public; they could have banks that cater to top end spread out clients, the
ture of Indian
had a larger stock of curren- masses, retail and the lower sections. One strateconomy
cy in hand. They could have egy will not fit all. Personally, tying up with paypaid more attention to the ment banks will not work for most of the banks.
smaller intricacies of the com- They need to form a strategy based on the usage
mon man. For example, they allowed hospitals of technology, the kind of clients that they have,
and chemists to use the old notes and later al- etc. Coming up with IT based solutions for their
lowed payment of utility bills with the same. They clients can be a good strategy. Kotak footfalls into
could have implemented and executed more such the banks are significantly lower these days. Most
plans from the very beginning. However, most of of the transactions happen on mobile phones and
the clients at Kotak are happy with the move and on the digital space. Payment banks will become
in the long run it is going to benefit the people. large and setup their own banks. Tying up with
payment banks may reduce their “market share”.
While the penetration of debit and credit cards
is still very low in India, there is a hard push Due to the twin balance sheet problems, the isfor digital banking, do you think it has come sue of rising NPAs continues to haunt the banking
at right time? Is it a threat to the large banks? sector in India, and RBI is working tooth and nail
to fight it from its roots. What measures from the
This move has come as a big positive for non- banks do you think will put an end to this issue?
cash transactions for payment banks, credit cards,
Demonetization has helped banks increased
NOVEMBER 2016
footfalls while it is digitization that has led to increase in NPAs. On the retail side, though the last
20 days have been a bit tough. The 500 and 1000
rupee notes need to come out in large numbers
that will stabilize the economy and not aggravate
these twin balance sheet problems. This quarter
and the last quarter of the financial year is going
to be a bit of a lag; 2018 will be better. Huge gain
for economy in the market and hopefully, this issue of NPAs will reduce to a negligible extent.
Sir the dollar is strengthening against the rupee
with a record low of 68.86 with Donald Trump
coming up with challenging policies. However
people still think that the rupee is overvalued
against a basket of currencies? How bad is it for
the rupee and how good is it for the economy?
tion story, which can be a positive driver and due
to its population and hard-working middle class
section it is well placed to get over this compared to the other economies, just like how it
did in 2008. Government will bring the economic
push and after the budget next year, the economy will do significantly well. Globally, Indian currency has been the strongest and the correction
was due for some time. Difficult to predict the
exact number and RBI has set a strong base in
the past one year which will strengthen it further
You have started your career as a CA and
came this far to head the banking channel
of the Kotak Mahindra group, please throw
some light on how your career path has been?
With technology taking centre stage and rise
India is a part of the global economy and world in the digital space keep up to date on techover economic changes affect the Indian economy nology and knowledge. Think out of the box
as well. Donald trump is a businessman and will and bring changes with innovation and creativnot come up with policies that affect business in ity. Keep working hard and the world will be
a major manner. India has a very large consump- yours. That will be my small piece of advice.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
29
He Speaketh
Fin View
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Story
Fin View
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Story
NIVESHAK
30
NIVESHAK
Classroom
Cover
Story
NIVESHAK
CLASSROOM
FinFunda
of the
Month
Leveraged Buyout
WINNER
Saurabh Gupta
IIM Shillong
Artical of the Month
Prize - INR 1500/Vaishnavi Adapa
IIMK
Sir, in recent years the term Leverage
buyout or LBO has become a buzz word in
financial industry. All I know, the leverage in
financial term is that it is used for borrowed
capital for an investment that magnifies profits or
losses. What is the Leverage Buyout?
A Leverage buyout is an acquisition of firm
with the help of a large amount of debt, which is
often collateralized with the assets of the company
being acquired. A financial buyer, say a Private
Equity funds invests a small amount of equity as
compared to total purchase price and uses debt
to fund the rest of the company. LBOs involve
institutional investors and financial sponsors who
make large acquisitions, without committing all the
capital required for the acquisition. A special case
of leveraged buyout is Management buyout (MBO),
where the company’s management team converts
the return to the private equity investors and 2) The
benefit of tax shield can result in higher valuations
Sir, does leveraged buyout happens in India? If
yes, can you give some examples?
Yes, leveraged buyout happened
in past. Some of the successful LBO by
Indian companies are: Tetley acquired
by Tata Tea, Whyte and Mackay
by UB Group, Corus by Tata Steel,
and Hansen Transmissions by Suzlon Energy.
Sir, this means it is a very popular way of
acquiring companies in India.
No. There have been many stringent laws and
regulations implemented by various organizations
such as RBI, Ministry of Finance etc., such as
Reserve Bank’s restriction on lending, Restriction
on Exit through Public listing, LBO is not seen as a
the company to a privately held company by using
heavy borrowing to purchase the outstanding
shares. The basic LBO process is described in diagram
Sir, what are the advantages of LBO?
The LBO has majorly 2 advantages:
1) Increase use of leverage increases
feasible option for investors. Also underdeveloped
Debt market is a big constraint in India.
NOVEMBER 2016
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
31
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