2013 was a tepid year for Indian capital markets with BSE Sensex returning only

8% after blockbuster performance in 2012. The major highlight for the markets last

year was heavy FII outflow in both debt and equity markets that started in mid-

May. It was triggered by announcement by FED chief, Ben Bernanke to taper the

quantitative easing if US economy continues to improve which was interpreted by

markets worldwide in a negative manner and markets fell world over. Such was the

intensity of panic selling that FIIs sold equities and debt worth $4.7 billion in less

than a month and that too more on debt front. Amidst the selling spree by FIIs,

Rupee touched a record low of 68 against dollar on 28th August. The 10 year GOI

yields also shot up from around 7.5% to 8.9%.

Another theme that was prevalent throughout the last year was India’s twin deficits.

The fear of P Chidambaram breaching the red line (Fiscal deficit) of 4.8% of GDP

and burgeoning Current account deficit (CAD) posed question marks on imminent

recovery of Indian Economy and benchmark index. The rampant condition of

Indian economy and sliding rupee saw actions on both policy front and RBI front.

P Chidambaram responded to worsening CAD by increasing import duty on gold

to 10% and newly appointed RBI governor Raghuram Rajan stemmed the rupee

slide by introducing measures like NRE deposits and easing restrictions on

investment by FIIs into Indian debt markets.

Elections have always had its impact on the investment sentiments and money flow

into the capital markets. Build up to the GENERAL ELECTIONS 2014 was another

hot topic that caught the eye of everyone in 2013. The importance of stable

government and strong policy making can be judged from the fact that markets

immediately started recovery as soon as Narendra Modi was elected as PM

candidate by NDA and opinion polls hinted towards MODI win. FIIs started buying

into Indian markets on a hope that MODI will be able to replicate the same model

throughout the country that is followed in Gujarat. Rupee gained big from the

Election build up as it recovered to and is stable around 62 after touching all-time

low of 69 per dollar.

The battle for Lok Sabha elections 2014 is getting pepped up with entry of Aam

Aadmi party into the forefront after showing their thump in Delhi elections.

Everyone from domestic to foreign investors is holding onto the hope that Elections

will bring an end to the policy paralysis and will open floodgates wide open for

investments into the country via major reforms and policy restructuring.

Year 2014 is going to be action packed as General Elections could be a real game

changer for Indian economy and capital markets.

From The Editor’s Desk

SENIOR EDITORIAL

BOARD

CHAKSHU AGGARWAL (Editor – in – Chief)

PRATIK JAIN

RAVI SRIKANT

KHUSHBOO SHAH

SHEKHAR KAUSHAL (Layout & Design)

The Magazine brings along a set of articles that provides in-depth analysis of the issue that the capital markets

are facing and some potential solutions to them. We would like to thank our readers and contributors for their

constant support, wonderful articles and critical appreciation. It is this amazing response and encouragement

that encourages us to improve.

Kindly send in your suggestions and feedback to teaminvestocraft@gmail.com

Investocraft Editorial Team

Visit us at:

www.investocraft.com

Investocraft blog: http://investocraft-nmims.blogspot.in/

Facebook page: https://www.facebook.com/pages/Investocraft-Magazine/150607915074986

JUNIOR EDITORIAL BOARD

PRATIK DAS KANAV DHAWAN

BHARAT GOSWAMI RAUNAK AGGARWAL

INDEX

INVESTOCRAFT 2014

1

New Banking Licenses and Their Impact on the Economy

Aditi Khanna; XLRI, Jamshedpur

Banking Sector: Current Trends and Outlook 2014

Banks make up the vasculature of the Indian

economy, cornering 63% of the total assets of

the financial sector. Their condition and health

therefore assume prime importance for the

country, especially as it has been undergoing a

slowdown for the past year.

In the ongoing financial year (FY-14), the

banking sector has seen some bad times. While

the growth rate of aggregate deposits

plummeted, credit growth too slumped as the

Reserve Bank hiked policy rates to curtail

inflation.

During the same time, the profitability potential

of the banks took a hit as their asset quality

deteriorated and NPAs hit a new high of 3.42%

of gross advances (1.7% of net advances).

According to the RBI, an increase was recorded

in the total stressed assets of the banking system

(NPAs plus restructured assets), which led to an

increased risk exposure of the sector, as shown

by the rising Banking Stability Indicator figure

of the RBI. Stressed Assets could peak at about

15% in FY15.

Going forward in 2014, most rating agencies

have indicated a negative outlook for the

industry due to the burgeoning of loan loss

reserves, especially in the public sector banks

due to their financing of hefty iron and steel and

infrastructure projects. They are likely to be

increasingly dependent on government

injections to maintain their capitalization

levels, according to a Moody’s Report.

10.0

12.0

14.0

16.0

18.0

20.0

Sept '12 Dec '12 Mar '13 Jun '13 Sept '13

Aggregate Deposits Annual Growth Rate

All India Rural Semi-urban

2.392.45

2.51 2.362.94

3.42

0.00

1.00

2.00

3.00

4.00

2008 2009 2010 2011 2012 2013

NPAs (% of Gross Advances)

INVESTOCRAFT 2014

2

Other factors likely to have an adverse

impact on profitability are the stringent

application of Basel III norms and revised

Priority Sector Lending (PSL) rules.

Aggravating the bad news is an

ASSOCHAM report that predicts a further

increase in the NPAs in 2014 due to “a lag

effect on asset quality in relation to the state

of the economy". Further, inflation concerns

and a sluggish GDP growth point towards a

slowing credit growth rate.

Need for New Bank Licenses:

Financial Inclusion

The prime motive of reopening the window for

licenses by the RBI was to ‘achieve financial

inclusion’. The inclusion targets come from three

broad policy stances:

Coverage—monitored by number of no-

frills accounts and other such products

Outreach—branches in different categories

of habitation, and

Deployment—priority sector, agriculture

and weaker sections

The need for the inclusion

focus comes from the fact that

India is home to the world’s

largest unbanked population.

Just 1 in 2 Indians have a

savings account and 1 in 7

Indians have access to bank

credit. CRISIL’s financial

inclusion index called

“Inclusix” (which measures

financial inclusion on three

parameters: branch

penetration, deposit

penetration and credit

penetration) recorded an all

India score of 42.8 on a scale

of 100 (2012) which,

although reflecting a healthy

upward trend, points towards

Parameter India China

Bank Branches per 1000 km 30.43 1428.98

ATMs per 1000 km 25.43 2975.05

Bank Branches per 100000 people 10.64 23.81

ATMs per 100000 people 8.9 49.56

Bank Deposits to GDP (%) 68.43% 433.96%

Bank Deposits to Total Credit (%) 51.75% 287.89%

0

500

1000

1500

2005 2006 2007 2008 2009 2010 2011 2012 2013

Credit vs Deposits of Scheduled Commetcial Banks

Deposit Creation(Rs. mn)

Credit Demand (Rs. mn)

35.4 37.6 40.1 42.8

0

10

20

30

40

50

2009 2010 2011 2012

CRISIL Inclusix Score

INVESTOCRAFT 2014

3

an under penetration of formal banking. Wide disparities in access to financial services were

recorded as well. While India’s six largest cities were found to have 10% of all bank branches,

the bottom 50 districts merely have 2%.

This is confirmed an IMF study from 2011 which finds India way short of its next door

neighbor in this regard. The objective of the policy therefore, is spot on.

New Bank Licenses: Challenges for Applicants

In the past, RBI has been seen to be keen on doling out new bank licenses only once every

decade. In each of the two previous occasions in 1993 and 2004, over 100 applications were

filed. This time however, only 26 applications came forward initially, out of which one (Tata

Sons) was subsequently withdrawn. Clearly, the amalgam of economic downturn coupled with

much more stringent RBI guidelines hasn’t gone down well with the Indian corporate sector.

Following could be the possible deterrents:

Dilution of Equity: Progressive reduction of shareholding of promoter NOFHC is

envisaged to restrict it to 40% for the initial 5 year period, to eventually 15% within 12

years. Rural branches: 25% of all branches to be opened in rural unbanked areas from the very

beginning.

Priority Sector Lending Rules: At least 40% credit to be extended to Priority Sector,

which has been redefined to exclude certain SME advances .

Ambiguous “Fit and Proper” Criterion: A financially ‘strong’ and ‘successful’

performance of past 10 years is a prerequisite.

Basel III Requirements: The timing of the new banks to go public may coincide - if new

banks commence operations within the next two years - with the bulk of the additional

Basel III core capital requirements, which are largely back-loaded for the Indian

banking system. This would be the time when existing banks will also be looking to the

markets to beef up equity, making life tough for the new entrant banks.

The indication by the central bank to give out more frequent “on tap” licenses in future

Impact on the Landscape

How many licenses are really

likely?

The impact new banks have on the

existing structure will depend

significantly on the number of banks that

actually end up making the cut. The past

data is not very encouraging. In the first

phase of private entities getting licenses,

9 out of 113 applicants qualified. In the

second phase in 2004, 2 from a pool of over a 100 applicants were christened as banks. With

the emphasis on the objective of financial inclusion this time round however, speculation is rife

that a good number of licenses may be doled out this year. The finance minister has been

recorded as saying that there is no ceiling on the exact number, and that each application will

be judged on its merit. Newspapers however have quoted an unnamed but well-placed source

as indicating “There is a thinking that at least three new bank licenses would be given out —

1993 2004

113 100+

9 2

New Banks: Applications vs Licences

Awarded

INVESTOCRAFT 2014

4

one to a corporate house, second to a non-banking financial company and a third one to a

microfinance company”. With their eyes on the more frequent “on tap” licenses moreover, this

round of license disbursal may not result in a significant number of permits.

Thus a low likelihood of a significant number of new entrants into the sector has been

established. The most probable scenario thus looks like the sector will see 2-4 large payers

entering the fray. Having said that, following may be the changes that these might bring:

Enhanced Competition

The first and foremost impact would be on the incumbent players in the market as the new

entrants will fight for a share of the same pie, which is growing, albeit slowly. It is likely to

affect the industry by way of pushing deposit rates up and pulling loan rates down, leading to

financial innovation as each player tries to appeal to more and more customers and increased

use of technology as each player tries to cut operating costs. The costs of financial innovation

and also increased spend on technology coupled with perpetual upward pressure on deposit

rates and simultaneous downward pressure on the loan rates would adversely affect the margins

of the players. Each of these effects however has both advantages and disadvantages for the

different stakeholders of the system.

Higher Deposit and Lower Loan Rates

(+) Deposit and Credit Growth

Banks, in a bid for securing the same customers, would be compelled to be highly competitive

on the front of deposit and loans rates, jacking up the former and lowering the latter to maintain

and grow their market share. This would encourage credit growth as cost of capital for both the

wholesale and retail customer decreases, and is also likely to have a positive impact on the

slowing rate of deposit growth in the economy.

Possible Impact of Increased Competition

Effect Positive Impact Negative Impact

Higher Deposit and

Lower Loan Rates Deposit and Credit Growth

Excess Liquidity in the System

and Further Stress on Asset

Quality

Financial Innovation Enhanced Customer Satisfaction Regulatory Costs and Potential for

Increased Volatility

Increased Use of

Technology

Cheaper, Faster Customer

Service Security and Privacy Concerns

Lower Margins for

Banks Fewer 'Too Big to Fail' Banks More M&A Probabilities

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(-) Excess Liquidity in the System and Further Stress on Asset Quality

As has often been seen, especially in the US and certain Eurozone countries, one of the subtle

underlying causes of financial crises has been the excess liquidity in the economy due to the

abundant availability of cheap credit. Lower interest rates may lead to this drawback. Further,

it is possible that in an effort to expand consumer base, banks create more credit than they can

chew, and not always with the best of customers. With already rising NPAs and deteriorating

asset quality of existing banks, the sector’s efforts to move away from riskier avenues could be

partially thwarted as banks have the innate need to secure a minimum number of customers

and a minimum amount of business.

Financial Innovation

(+) Enhanced Customer Satisfaction and Growth

This is likely to lead to more satisfied consumers as they are likely to receive a greater level of

customization and personalization in banking service delivery. A study in this field has found

that a higher level of financial innovation is associated with a stronger relationship between a

country’s growth opportunities and capital and GDP per capita growth. It would also widen the

net for banks as they are likely to be able to cater to a wider pool of customers, who now would

have some products that would solve their problems - products that were found missing earlier.

(-) Regulatory Costs and Potential for Increased Volatility

The same study however has also revealed that a higher level of financial innovation is

associated with higher growth volatility among industries that rely more on external financing

and depend more on R&D activity and with higher bank fragility. The central bank however

has throughout taken a firm stand on the limits of innovation that it would allow in the financial

domain. With newer engineering techniques in the fray, the regulator is likely to have a tough

time overseeing the stability of the system, which would lead to increased need for higher

regulatory costs.

Increased Use of Technology

Cheaper, Faster Customer Service

The increased usage of technology by the banks, intended at lowering operating costs and

streamlining bulky processes is likely to lead to cheaper and faster service delivery to

consumers, with lower lead times and greater efficiency. With digitalized account opening

procedures already making headway, such technological forays are also likely to make rural

banking profitable as the banks can now reach the populace more easily and in a cost effective

manner.

Increased Risk of Sabotage

Increased dependence on technology, especially for confidential information relating to

identity and finances of people appears risky in terms of security and privacy of data. A lot of

INVESTOCRAFT 2014

6

effort need to go into mitigating security concerns as theft of such sensitive data could come

with dangerous consequences.

Lower Margins for Banks

Fewer 'Too Big to Fail' Banks

As the banks get squeezed from both ends due to increased bargaining power of the consumer,

wholesale and retail alike, the margins and RoE of the banks stand to lose value. Particularly

hit will be the Public Sector Banks as they are already capital constrained, especially in the

wake of Basel III norms. They stand to take the biggest hit in terms of market share in this

scenario. The positive outcome of this would be the absence of banks that are termed ‘too big

to fail’ referring to the cascading effect they could potentially have on the entire system due to

their sheer size in the event of a financial crisis.

More M&A Probabilities

Walking on thin margins and low profitability would also make certain banks attractive

acquisition targets. With the RBI not having made any specific comment about the necessity

of organic growth for the new entrants, there could be the realistic possibility of these new

players engaging in inorganic expansion to meet the stringent requirements.

Rural Banking Network

The RBI guidelines for new bank licenses explicitly contains a clause for the opening of 25%

of all new bank branches to be opened in rural unbanked areas. Presently, rural branches have

declined to 37% of total branches from 54% in 1994. Rural deposits constitute just 9.1% of

bank deposits, down from 15.1%.With the advent of the direct cash transfer scheme launched

by the government of India, there is increased requirement of more branches to open up in rural

India for the successful transmission of its proposed benefit. The new banks, being mandated

towards this objective, upon entry will expand the rural network of bank branches, enabling

better coverage of the rural Indian landscape.

Corporate Governance Issues

The corporate houses had not been granted licenses in the earlier licensing windows based on

the suspicions regarding the corporate governance issues, as these conglomerates having other

businesses with finance dealings would face a situation of conflict of interest. This time,

however, the RBI has taken basic steps to create a ring fence around a licensee’s bank and other

financial businesses by way of creating the Non-Operating Financial Holding Company

(NOFHC), concerns over the same remain. These have been articulated by the parliamentary

panel as well in their report on the matter. The central bank therefore will have to keep a vigilant

eye on the new licensees to ensure the undertaking of ethical practices.

INVESTOCRAFT 2014

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Conclusion

Having said all this however, the general sentiment in the industry, especially among the private

players about the decision and its repercussions is not one of alarm or even serious concern. In

the words of DBS CEO Mr. Sanjiv Bhasin, the new entrants are unlikely to make a “material

difference” because of the growing nature of the sector, as well as the fact that they would take

substantial time to “set up, raise capital, get people, systems and a strategy in place”, by when

there would be an even bigger market. The public sector banks however are likely to be slightly

wary as they will be the first ones standing in the line of fire due to the increased competition.

A healthy competitive banking sector that caters to all segments of the society and is deep and

liquid enough to ensure efficient flow of capital to not just the most profitable ventures but also

those in need of it is the need of the hour. It is of utmost importance to ensure that India achieves

the coveted spot of one of the strongest and robust economies of the world.

INVESTOCRAFT 2014

8

Bitcoins: Need for Regulation

Aditya Agrawal; NMIMS, Mumbai & Aniket Pallav; NMIMS, Mumbai

Money serves as a medium of exchange for the goods and services you buy or use from others.

Modern economy is typically based on “fiat” money. Fiat money is a legal tender issued by a

central authority, people trust these papers, and are ready to exchange for the goods and

services provided by them.

How virtual currency came into existence?

Internet users grew from 361 million in 2000 to 2,267 million users in 2011, a CAGR of 16.5%

or roughly 33% of world population. High penetration of internet users led to development of

virtual communities and later few created their own virtual currencies.

As per European Central Bank, a virtual currency is a privately regulated digital currency which

is issued and usually controlled by the developers, used and accepted within a specific virtual

community. Ripple, Litecoin, Peercoin are few examples of virtual currency.

“[Bitcoin] is a techno tour de force.”

–Bill Gates, Founder of Microsoft

INVESTOCRAFT 2014

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Table: A table depicting the status of Virtual Currency vis-à-vis other money formats.

What is Bitcoin?

Bitcoin is a virtual currency introduced in 2008 by a person or a group named Satoshi

Nakamoto. It's based on “crypto-currency” concept, uses cryptography to control its creation,

and transactions takes place on decentralized peer-to-peer network. 12 million Bitcoins are

already generated and system has upper cap of 21 million.

Steps to become Bitcoin owner

Figure: Steps for buying Bitcoin

Step 1 : Open a wallet - Bitcoin.org or coinbase.com are popular sites offering free wallet setups. A wallet is the unique ID code, which is required for all Bitcoin buy and sell transactions.

Step 2 : Find a reputed Bitcoin exchange - Here, MtGox.com is the largest, while buysellbitco.in is India centric.

Step 3 : Your first purchase - On creating the account with the exchange, you can place a buy order and make payment to the exchange via wire transfer or other permissible payment mechanisms. When the transaction is settled, the Bitcoins are credited in your wallet.

INVESTOCRAFT 2014

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Benefits of Bitcoins

Bitcoins can be used to buy both virtual and real goods & services. These coins are transferred

directly to the users participating in trade and results in speedy transactions. Such transactions

are not verified by third party agencies thereby eliminating the need of existing payment

gateways of Visa and MasterCard which levy 2.5% or above as transaction fee.

Risks

Easiest way to acquire a Bitcoin is to purchase through Bitcoin exchanges, these are then

transacted using a pair of keys, saved in file format on local computers. These files can be

easily corrupted by viruses resulting in loss of Bitcoin and further resulting in loss of real

money.

Overseas traveller can easily sell his Bitcoins in exchange of foreign currency, by passing forex

regulations, or purchase prohibited drugs online through an e-dealer. In order to carry out

Bitcoin transactions one does not require a registered account, this may further give rise to

criminal activities.

Price of Bitcoin is decided on supply and demand basis. The following graph depicts the

dramatic volatility and further raises doubt on its stability.

Figure: Bitcoin market price from April 2013 to March 2014

Need for regulation

On February 25, 2014, Mt.Gox a Tokyo based Bitcoin exchange suspended all its operations

after discovering a malleability related theft where more than 744,000 Bitcoins went missing.

Bitcoin prices dropped from USD 581 to USD 437 in just 24 hours after shut down. Mt.Gox

accepted 17 different currencies for exchange of Bitcoins. Currently transactions were low in

volume and value, and hardly impacted any country’s economy. But if the volume and value

of transactions were high, there could have been drastic ripple effect over world’s economy.

INVESTOCRAFT 2014

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People can even generate income through Bitcoin trading, but in absence of any regulatory

authority income thus generated cannot be taxed. Bitcoin is back down to $500 after peaking

at $1,000 toward the end of January, 2014. Real currencies do not fluctuate to this extent. High

volatility in Bitcoin transaction is depicted in the below chart

Figure: Bitcoin Transaction volume April 2013 to March 2014

The above mentioned risks and recent events, call for strict regulatory measures to protect

investor’s interest. Regulation framework should be such as to protect consumers and root out

money laundering - without curbing the beneficial innovation. Although, given the fact that

every country has its own currency and a central bank with strong control over the transactions,

having a central regulatory body for all Bitcoin transactions around the world would be

practically infeasible. To add to it, there are limitations like inability of storing Bitcoins in a

physical form and their susceptibility to something as mundane as a computer crash or a virus

attack.

Current state of regulations over Bitcoin

United States

FinCEN - Financial Crimes Enforcement Network (FinCEN), took regulatory initiative

for virtual currencies in US. It published guidelines and defined circumstances which

categorizes virtual currency users to money service businesses

SEC - The US Securities and Exchange Commission (SEC) has issued alert to warn

about fraudulent investment schemes involving Bitcoin.

NYDFS - New York Department Financial Services is expected to release a regulatory

draft in 2014. License for operators and account registrations for users are few key

recommendations. These steps will reduce anonymity and provide validity to Bitcoins.

INVESTOCRAFT 2014

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Canada

In 2013, the Financial Transactions and Reports Analysis Centre of Canada, the financial

intelligence unit under the country's finance minister, informed Bitcoin companies that they

were not categorized as money services businesses under Canadian law, and would not have to

register as such or abide by the rules that apply to those businesses.

France

Banque de France, the nation's central bank, released a report in December 2013 that was very

critical of such digital currencies and said that Bitcoin can't be considered a real currency in

France.

Germany

In Germany, Bitcoin itself does have a classification but their payments and mining don’t

require any licensing currently. Although not legal tender in Germany, it is considered a

financial instrument similar to a foreign currency that can be used in private transactions or

traded for other currencies.

Japan

The Land of the Rising Sun is yet to regulate Bitcoin in any way. It should be no surprise, then,

that one of the world's largest online Bitcoin exchanges, Mt. Gox, is based in Tokyo.

United Kingdom

Bitcoin is unregulated in the U.K too. There was a government review in 2013, and the officials

there seemed clearly worried by the relative anonymity it affords its users, but no regulation

came out of that review.

India

On December 24, 2013, RBI issued a warning stating that people dealing in virtual currencies

are exposing themselves to financial, legal, and operational and security related risk.

RBI highlighted issues like limitations in getting back stolen coins, lack of a framework to deal

with customer problems and disputes, the exposure of the users to potential losses on due to

the volatility in the value of these currencies, the usage of virtual currencies for illegal activities

and concerns over money-laundering activities.

The RBI has clearly not yet taken a decision on whether it wants to ban Bitcoins or regulate

them, but this statement is an indication that it is working towards a decision: eventually, we

INVESTOCRAFT 2014

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might either see the RBI create a regulatory framework for Bitcoins and virtual currency, or

we might see an outright ban on them.

Overall, across the world, including in India, there is almost no regulatory framework over the

transactions of Bitcoin.

Conclusion

Virtual currency schemes are only an evolution; from a conceptual point of view they do

present significant changes vis-à-vis the real currencies and payment systems. The very

evolutionary nature and growth of Bitcoin, given the current scenario of regulations, warrant a

stricter nature of regulatory framework. As observed across the world, there is a lack of proper

regulation over Bitcoins. Mt. Gox’s downfall provides fresh ammunition to Bitcoin skeptics

and raise questions on the security of digital currency transactions as an alternative to

government controlled monetary systems which rely on banks to carry out transactions. A

successful currency needs to generate trust. Fiat currencies have developed this trust over years

of regulation by monetary agencies. However, as discussed, in the case of Bitcoins, there is no

conformity to any such system. Hence, in order for the digital currency businesses to reach

their true potential, this inevitable question of regulation needs to be settled.

INVESTOCRAFT 2014

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Ecommerce: The next big thing in India

Keshav Mundra; WE Institute of Management & Apoorva Patil; WE Institute of

Management

Today, the E- commerce industry in India is not just about the major players like Flipkart,

Myntra, Jabong and Snapdeal. It is also about brands like TATA value homes, Nissan,

Bluestone and Tata motors. The Indian consumer not only shops apparels but buys houses,

cars, jewelry online. Recently, in one of the first online real estate selling initiatives, Tata Value

Homes claims to have sold 22 units in just 2 hours !The e-commerce industry is growing at a

rapid pace and changing the dynamics of the retail industry. In the coming years, e-commerce

is expected to contribute close to 8-10% of the total retail segment in India.

The Total size of the business of retailing goods on the internet, commonly known as E-tailing,

is set to touch USD 70 billion mark by 2020 in India. E- tailing which is around 6 percent of

the total E-commerce, is estimated to be around USD 0.6 billion in 2011 and growing at a

CAGR of 70%. The total e-commerce business in India, including other products and services

such as travel and financial services, is estimated to be USD 10 billion at present and is

expected to touch USD 200 billion mark by 2020.

So, when did all this start? Explosive growth of Internet from 1995 drew commercial interest.

With the first dotcom mania, various young and middle aged entrepreneurs set up online shops

and marketplaces. The boom was a combination of new technology, big market possibility,

Venture Capital and greed! Every bubble bursts, so did Tech bubble. When the bubble burst,

many of them had to shut down. The reason being, the country’s consumers were not ready for

online shopping.

Internet penetration in India has been an important factor throughout the journey. The total

number of Indian Internet users grew from 5 million to over 137 million between 200 and

2012 and is projected to hit 450 million by 2015.It has also been estimated that rural internet

users will rise to 85 million by June 2014. Tablets and smart phones have given a new meaning

to connectivity and user experience. The adoption of 3G and upcoming 4G technology, along

with the declining prices of smart phones, is expected to result in an additional increase in

Internet usage in the country. Payment gateways have now been made more secure through

multiple levels of authentication via one-time passwords (OTPs). This has helped strengthen

users’ confidence in carrying out online transactions.

The e-commerce industry is growing at a rapid pace and changing the dynamics of the retail

industry. In the coming years, e-commerce is expected to contribute close to 8-10% of the total

retail segment in India. This growth is bound to continue provided e-commerce companies

focus on innovating, building strong technology infrastructure and delivering the best customer

experience. Currently, the retail division, which includes online sales of physical and digital

goods, enjoys only a nominal share 81.4 percent. Especially, in this division, e-tailing and

financial services are the fastest growing segments with each capturing 5.8 per cent of the

market as per 2011 statistics. E-commerce has expanded its foothold in the finance-based

segments such as mutual funds and insurance.

INVESTOCRAFT 2014

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The entry of Low Cost Carriers (LCCs) in the Indian aviation sector in 2005 marked the

beginning of the second wave of e-Commerce in India. The decision of LCCs to sell their

tickets online and through third parties enabled the development of Online Travel Agents

(OTAs). They developed their own websites and partnered with OTAs to distribute their tickets

online. The Indian Railways had already implemented the e-ticket booking initiative by the

time LCCs started their online ticket booking schemes.

The Indian online retailing market is still evolving and certainly has room for growth; e-

commerce accounts for just 0.1 per cent of total retail sales versus more than 2.9 per cent in

China. This number is quite low compared to the online retail penetration enjoyed by developed

markets such as the US (7.0 per cent). However, this scenario is likely to change with the

expected surge in Internet penetration and advent of 3G/4G telecom services. In addition, major

retailers are providing warranties and discounts to attract customers to online stores.

Cities beyond metros are been targeted and are in limelight. On an average, almost 50 – 55%

of the business come from tier 2 and tier 3 cities and this ratio is similar across other ecommerce

companies in the country. With metro markets reaching saturation, tier 2 and 3 cities are going

to be the biggest drivers for ecommerce businesses in India in the not so distant future

INVESTOCRAFT 2014

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According to a survey, around 3,311 Indian cities were engaged in online shopping between

July 2010 and June 2011, of which over 1,267 were non-metro cities. This reflects how e-

commerce has helped in overcoming the perception factor across cities, facilitating access for

consumers from smaller towns to the same branded and quality products, which earlier were a

dream for them. Companies are working towards providing more online content in regional

languages to tap the niche consumer base. While majority of the Internet population use the

English language-based platform while surfing, offering content in local languages such Hindi,

Marathi, Telugu and Tamil might widen the target audience. Building a robust supply chain is

critical to efficiently fulfilling orders from these cities and tapping their full market potential.

Indian e-commerce industry has evolved over a period of time with innovations that have

changed the rules of the game globally. Cash on delivery (COD) is one such example. In a

country where credit card penetration is much lower than other developed markets and where

e-commerce companies are still working hard to build trust among shoppers, introducing cash

on delivery has been one of the key factors for the success of the segment. At present, COD is

the preferred payment mode for close to 55-60% of all online transactions in the fashion and

lifestyle segment in India.

Providing a great delivery experience is one of the core aspects to delighting customers. This

doesn’t necessarily mean constantly pushing the frontier on faster deliveries. Being a day

behind the fastest in the market isn’t a big deal, but trust, consistency and reliability are more

important. The more faith the customer has in your delivery service, the more likely he is to

buy again. Delivering a good experience is critical not only to ensure repeat purchase from a

customer, but also for building a good brand image and word-of-mouth publicity. Indian firms

are required to have a mixed approach by embracing globally tested strategies along with a

localized flavor in their enterprise, to stand the test of time.

India has more than900 million mobile users, of which around 300 million use data services.

This is expected to grow 1200 million by 2015. Also, more than 100 million mobile users are

expected to use 3G and 4G connectivity in the coming few years. Of the total 90 million mobile

users, only 27 million are active on the Internet. Moreover, only 4 per cent of the active mobile

internet users buy products through mobiles. However, mobile shopping is on upward trend

and is expected to increase five–fold to 20 percent in the medium term.

To fully utilize the opportunity, players need to leverage the growing number of mobile devices

in the country. They should focus on developing mobile-compatible websites and applications.

This would allow customers to log on to easy-to-access platforms and browse E-Commerce

websites on their mobile devices.

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Presently the Indian Government has allowed 100 per cent FDI in B2B e-commerce, while

business-to-consumer (B2C) is prohibited. In addition to that there’s a compulsory 30 percent

local sourcing norms for foreign players. Companies like Amazon, eBay, and Tesco are

coaxing and holding meetings with the DIPP to invest in an emerging market India. They have

even been investing some of the local start-ups here like Amazon entered India via

Junglee.com. The news that Department of Industrial Policy and Promotion (DIPP) has started

consultations with stakeholders on allowing foreign direct investment in retail e-commerce

before the end of this financial year, has nonetheless raised our expectations of expansion of

Indian E-Commerce industry.

Indian e-commerce volumes are still low compared to the world markets and hence the

transaction discount rate or the merchant discount rates charged by banks and payment brands

such as Visa, Mastercard are on the higher side. This situation will hopefully change as the

transactions increase in volume and the fixed costs associated with the banks and other

stakeholders are met. The e-commerce industry is marred with persisting issues such as high

customer acquisition cost, high inventory carrying cost, lack of adequate laws and policies

towards e-commerce, expensive cash-on-delivery model and high cost of fulfillment. A way

has to be found to move out of this death trap if the e-commerce companies have to flourish in

future.

Undoubtedly, it’s an expansion time for E-Commerce Industry. E-Commerce players are

banking on the Indian Internet growth story. The fact that an average online user is spending

more time online gives these players the opportunity to draw more users to their websites

through innovative marketing strategies such as those revolving around social media.

They also need to focus on innovation to tackle challenges arising from low credit and debit

card penetration. They could consider working with financial intermediaries to develop

payment systems, such as escrow services, for resolving issues around security and product

delivery. The RBI could step in and reduce the number of online transaction failures by defining

service metric quality and monitoring it at regular intervals. This would enable it keep a close

eye on the performance of financial intermediaries and plug gaps as soon as they occur.

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RBI and its tryst with Inflation

Sumeet Gaikwad; Welingkar Institute of Management Mumbai

Dr. Urjit Patel committee formed for strengthening the monetary policy framework submitted

its report in the last week of January’14. Based on the recommendations of the committee,

RBI’s monetary policy framework with focus on CPI (Consumer Price Index) inflation as a

nominal anchor would have important macro implications. It clearly says that inflation control

will be dominant goal for the central bank.

Persistent high inflation is adversely impacting financial savings, eroding India’s external price

competitiveness, hurting GDP growth and driving up account deficit. The committee’s

recommendations to target inflation at 4% are desirable. But the cost of achieving low inflation

will be high unless it is supported by strong fiscal policies. Also there are other factors like

growth and volatility of Indian Rupee.

Multiple indicator strategy is ineffective. This strategy will not have clear cut transparent

targets. Hence it becomes vulnerable to various pressure groups like banks, exporters,

importers etc. So use of single nominal anchor is advisable.

There are principle nominal anchors used by central banks around the World-money supply,

inflation and exchange rate. But shear presence of nominal anchor does not guarantee the

successful monetary policy. The current bout of inflation is partly because of the Central Bank

did not tighten on time in 2010 and because of the Government policies. The large demand

stimulus because of fiscal deficit has fanned inflation. And also supply shocks.

India’s monetary policy framework has been evolving over the past decades, consistent with

openness of the economy and the development of the financial markets. In April 1999, RBI

introduced liquidity adjustment facility operating through repo and reverse repo rate resulting

in dual policy rates. In 2011, the weighted average overnight call money rate was recognized

as the operating target of monetary policy and repo rate was made sole policy rate. However

RBI’s liquidity tightening measures-in response to exchange rate depreciations in mid-2013

made the MSF rate the effective policy rate, diluting the role of repo rate since then.

Historically RBI has followed a multiple market approach making it more unpredictable for

the market. This hurts its credibility as its goal since nominal anchor is unclear. According to

committee recommendations RBI will make monetary policy framework more transparent and

predictable.

Some of the suggested measures are:

5 members Monetary Policy Committee (MPC) including governor to set and

achieve inflation targets

Developing a term repo yield curve by providing liquidity through term repos

of varying tenures with 14 day term repo serving as the new policy instrument

Open market operations to manage liquidity

Reduction in SLR rate

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RBI also wants government to reduce the fiscal deficit to 3% of GDP, eliminate the

administered pricing of fuels and food.

But the question to be asked, should inflation be the only nominal anchor? Central Bank also

needs to keep an eye on other goals like exchange rate stability and overall economic growth.

Talking about the exchange rate, countries with higher inflation usually see their currency

depreciating. There is underlying logic to this- inflation is the loss of internal purchasing power

of the currency, while depreciation is the similar loss of the external purchasing power. Central

banks that protect the internal value of their currency automatically ensure a stable exchange

rate. After 2010, rupee strengthened despite high inflation mainly because of inflows that come

in from US after Quantitative Easing, the unconventional monetary policy by Federal Reserve

Bank of America. RBI also allowed Rupee to appreciate that result in exports becoming

uncompetitive.

The other challenge is growth momentum. Much research has been done to find out the exact

relation between inflation and growth. Research done by Andres and Hernando tells that low

or moderate inflation rates have a temporary negative impact on growth rates, leading to

significant and permanent reduction in per capita income. A reduction in inflation by a single

percentage point leads to an increase in per capita income of 0.5 to 2 percentages. Inflation is

not neutral and in no case favors high economic growth. The benefits of low inflation are great

but rate of inflation is also important. By looking at current Indian scenario GDP growth are

not significant. Estimation errors in GDP growth also hampers inflation forecast and thus

influences monetary policy decisions.

But targeting inflation may continue to keep interest rates high. High rates are needed to boost

financial savings and make structural improvement in Current Account Deficit (CAD) but in

short run it does create hurdle for investments. Here the Government comes into the picture,

making investment friendly policies and curbing Fiscal Deficit will help RBI to achieve its

inflation target.

Figure: (CPI vs. WPI for the last two years)

Problem with CPI is that more than 50% weight-age is given to food and fuel components.

Food prices depend on monsoon and black marketers. So RBI has zero control over this. Fuel

prices depend upon external factors which are not in ambit of RBI. Here role of Government

0.0

2.0

4.0

6.0

8.0

10.0

12.0

WPI

CPI

INVESTOCRAFT 2014

20

is important. In food items prices of milk, egg like commodities is increasing drastically which

can be controlled by proper regulation. Whenever prices of sugar, onion or pulses get very

high, the government arbitrarily puts export ban on those commodities, start importing them

from other country and starts distributing them at subsidized rates in various cities. So RBI

might have designed its policy to fight CPI using statistical projections but at random, the

government will come up with its own policy to fight inflation. Thus RBI’s statistical

projections will become relatively ineffective.

Other Central Banks including that of developed countries adopted inflation as nominal anchor

approach while deciding monetary policy framework. In 1997, the Czech National Bank

decided to change its monetary policy regime and switched to inflation targeting. But again the

question is to what measure of inflation to be targeted.

There is very good reason in economic theory why CPI should be targeted? (Refer Fig). CPI

data is released after every 12 days; this makes it easy to track process. Inflation is the result

of two factors, the output gaps and inflation expectations. There is simple evidence to show

that inflation expectations in India are based on changes in consumer prices rather than

wholesale prices. Formation of Monetary Policy Committee (MPC) is seen as good move. It

also has no government members, a welcome move, given the politics of policy decisions in

India.

Indian monetary policy has seen three big shifts over the past 75 years. They are always aligned

to development plans. The shift to new monetary policy framework with CPI as nominal anchor

is a clear sign that we are about to see the fourth big change in Indian Monetary Policy. Again

this will make overall Monetary System transparent. Even common citizen of India can

understand what RBI’s policy is and whether this is yielding result or not? This will bring more

accountability of the Monetary Policy Framework and positive sentiments in the market.

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Indian Education Sector: Should profit making be allowed to attract more private investments?

Amrita Ghosh; IMT Nagpur

In the turbulent economic environment in India, wrought with the issues of rising debt to GDP

ratio, inflation and current account deficit, a sector that has so long been rather obscure, has

recently entered into the limelight. The final draft of the 12th five year plan has suddenly thrust

the education into the spotlight when it was reported to favor permitting profit-making in higher

educational institutions. As private players speculate the probable outcome of this reform, if at

all it takes shape, the government continues to brainstorm over this new bone of contention. At

an event in Mumbai, the President said that the best universities cannot be created by

government funds and invited private investments in the education sector. He said, “If we want

to be a first class nation, we need to have first class universities and colleges.” He also added

that returns on such investment would prove to be very productive for the nation. The National

Policy on Education has placed emphasis on the increased use of computer related technology

for the improvement in education. It is for the same purpose that the Government spending on

Information Communication and Technology has seen an increase by 53.2 per cent to rupees

340 crores in the 2013-14 Union Budget. The Ministry of Human Resource and Development

has proposed an ambitious outlay of rupees 11000 crores during the Twelfth Plan for National

Mission in Education, through ICT. Laws like Higher Education and Research Bill, 2011 and

Universities for Research and Innovation Bill, 2012 provide for new regulatory structures to

encourage more private players in areas such as higher education and research. Such measures

are in tune with the Government’s plans to encourage the participation of the private players in

the education sector. However, at a time when the Government emphasizes on the role of

private investments in improving the quality of education in India, the HRD Minister, Kapil

Sibal has also clarified that the government would not allow profiteering in education that

would be distributed to the shareholders as dividends. The Human Resource Ministry has

challenged the proposal of the Twelfth Five Year Plan citing that “the career of students cannot

be risked to the fortune of stock market.” Mr. Sibal holds that educational institutions run by

private entities can make profits only if such profits are ploughed back to the institution for its

development.

Before we take a stand on this debate of the hour, perhaps it is only pertinent for us to first

address the question as to why is education sector suddenly being eyed by both the government

and the private players. To seek an answer to this, let us turn to the statistics provided by various

studies on this sector. According to a study on “Indian Education Industry - Expanding reach

and growing awareness to fuel industry growth” by Care Research, the “ the network of Indian

education industry ranks amongst the largest in the world, with more than 1.4 million schools

and 35,000 higher education institutes.” The report states that the market size of Indian

education industry aggregates to Rs. 3833.1 billion during FY2013. Another significant

observation made in this report points out to the fact that the government schools are dwindling

in number. The reasons for such a phenomena include a rise in the disposable income of the

Indian household, a growing awareness of the importance of quality education and tight

INVESTOCRAFT 2014

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government finances. The observations made in the report makes a compelling case for

corporate to consider the entry of private entities in the education sector. The huge profit

potential coupled with the fact that this sector remains to be relatively untapped has already

attracted private investment in this sector. The K-12 remains to be the favorite amongst private

players with higher education segment following close at heels.

Having dwelled on the current market scenario of Indian education industry, we can now

address the question of the hour, that is, should the government allow profit making in

educational institutes?

Those in favor of such profit making argue that this shall give a huge incentive to the private

entities to enter the market. The entry of private sector in the education industry is believed to

fill the large void between need for quality education and availability of the same. The private

sectors’ penchant for quality at competitive prices shall improve the overall quality of the

education system. With the huge capital outlay of some of corporate houses, state of the art

technology and superior learning resources can be made available to the students. This is again

in tune with the GOI’s increasing emphasis on the use of computer related technology in

education. Around 80% of the Government spending is allocated to the education sector to

fund teachers’ salaries, leaving a very limited resource to be used for school improvement

initiatives. This drawback paves way for private entities to enter a market where computer

aided education remains sparse. Also, the taxes from the profits of privately run schools can be

used to create a fund to provide scholarships to students from economically and socially weaker

sections of the society.

However, if privately funded schools only benefited the vast young populace of our country,

there would be no debate over whether to allow their profit making in this sector. Of course,

private schools have their own share of demerits. One of the foremost demerit of private schools

is the fact that such schools can be afforded only by parents who can pay the fees. The students

from economically weaker households do not get to study in such schools owing to the high

fees that is to be paid. If the profit making is to be allowed in educational institutes, then

chances are high that private entities will seek to maximize profits. The existing fee structure

of private schools could further escalated by them to survive and make profits in the

competitive market. The RTE stipulates that 25% of the seats in private schools must be

reserved for children for the weaker sections of society. Although this figure can ensure the

enrollment of a moderate number of students from the weaker sections of society in such

schools, the private schools will only end up catering to the affluent sections of the society.

Low-fee paying private schools which do exist face severe constraints in terms of quality. A

large number of unrecognized private schools have earned the appellation of “teaching shops”

where students are cramped inside small rooms. Another major drawback plaguing the

education industry as a whole is the lack of governance. We often come across media coverage

of civic authorities busting racket of private entities in the education sector.

Despite several risks and demerits of allowing profit making for private investors, a very strong

case persists in favor of bringing in this reform. It can hardly be denied that the number of

reforms is required in the present education system. The flight of a large number of Indian

students to foreign varsities each year only reaffirm this belief. Academicians argue that the

not-for-profit model has failed to deliver quality education to the vast pool of students in the

country. This is only exemplified by the fact that not a single Indian university has been able

to make it to the top 100 universities in the global rankings. The Indian education sector is a

vast untapped market that private investors are eyeing but refrain from venturing because of

INVESTOCRAFT 2014

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the labyrinth of regulations that restrict them. Therefore, it is only pertinent for the government

to deregularise the sector moderately and allow profit making to incentivise investment and

scale up education. The need of the hour is to align the social objectives with the market

incentives of the private players. In this regard the government can ideally adopt the role of a

light- handed regulator. The government must create vehicles of governance in this sector so

that the long term objective of inclusive growth can be achieved. India has around 472 million

people under the age of 18 and 49.9% of its population remains to be under the age of 24. The

country has a vast pool of untapped talent and the key to progress lies in the grooming the youth

of the nation. However, seizing this rich demographic dividend requires access to quality

education and skill training. Former President of India and propounder of a good education

system, Dr. A.P.J. Abdul Kalam had said, “The youth need to be enabled to become job

generators from job seekers.”

Taking note from his view, a good education system is a catalyst to the process of growth of a

nation and must be bestowed with its due importance.

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The Role of Independent Directors in Corporate Governance –Issues and Challenges

Ganashree S; XLRI Jamshedpur

“Courage is what it takes to stand up and speak, Courage is also what it

takes to sit down and listen.” - Sir Winston Churchill

Corporate governance is a set of processes, rules, practices, systems and principles by which a

company is directed and governed. It typically involves balancing the interests of the different

stakeholders and adding value to the company. The board of directors are essentially at the

Centre of corporate governance. The stakeholders include shareholders, customers, employees,

management and society as a whole. Corporate governance gives a framework to achieve

company’s goals and objectives in a regulatory, ethical, institutional and legal environment by

safeguarding the interest of the shareholders. It is a structure and relationship among the

stakeholders which directs a company towards greater performance.

In Indian context, corporate governance is approached with a Gandhian principle of trusteeship

and our elaborate constitutional directives. SEBI defines corporate governance as:

“[Corporate governance] is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees on behalf

of the shareholders. It is about commitment to values, about ethical business conduct and about

making a distinction between personal & corporate funds in the management of a company”.

Hence, the company’s management assumes the role of trustee for all of the stakeholders. In

recent years, with the changing regulatory environment and rising cases of fraud and

mismanagement, the need and perception of corporate governance is changing rapidly. The

members who are entrusted with governance; Board of directors and audit committee are

expected to play a major role in taking up the responsibility in detecting and prevention of

fraud. Hence there is a need of unbiased external members sitting in the board of directors to

observe the proceeding of the company and see to that every decision taken by the company

binds to the legal and ethical polices. These external members are called as Independent

directors.

Clause 49 of stock exchange listing agreement in 2000 by SEBI states that: "For the purpose

of this clause the expression 'independent directors' means directors who apart from receiving

director's remuneration, do not have any other material pecuniary relationship or transactions

with the company, its promoters, its management or its subsidiaries, which in judgment of the

board may affect independence of judgment of the directors."

Independent directors are trusted by shareholders who expect them to control fraud and keep

the company running in the right way.

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Role of Independent directors in corporate governance

An independent Director is non-executive Director who plays a supervisory role in reviewing

the decisions taken by the board of directors and brings adequate objectivity to them. With a

very high profile fraud of Satyam computers fresh in the corporate history, the independent

directors in recent years have begun to take interest in reviewing the practices followed by the

company in risk management framework to avoid the risk of fraudulent activities. In the

globally evolving regulatory landscape, the independent directors are made responsible for

prevention and detection of any malpractices in governance of the company. Non-compliance

with the rules and regulations laid by these authorities can lead to serious repercussions for the

members of the board in terms of their reputation and credibility.

An independent director should raise appropriate red flags when in suspicion regarding any

decision taken by board, and should ask the right questions at relevant times that will protect

the interests of shareholders. The independent director is someone who has a good amount of

experience, is knowledgeable and acts as a guide to the board members. They play vital role in

improving corporate credibility and seeing to that there is appropriate compliance from

company to governance standards. They also act as watchdog and oversee the discussions taken

by the members.

Issues and challenges

One of the main issues in the Indian context is availability of capable independent directors

who can work without any bias or pressure in the board. The independent directors once on the

board need support from the other members when they want to challenge or question the

decisions made within the board room.

Controlling shareholders who have high stake in the company have a very strong influence in

board, the access and ownership to information exists in the controlling hands of these

stockholders which makes it challenging for the independent directors to exercise independent

judgment prudently. The independent directors are sometimes stuck in conflicts where the

company as well as all its stakeholders want the independent directors to protect their interests.

Sometimes collusion between the board and auditors like in case of Satyam and PWC can lead

to irrelevance of the independent directors in the whole situation and lead to occurrence of

fraud. In cases like these, independent directors should be ready to play whistle-blowers to

keep up the interest of common stakeholders. Their role has to expand from being a mere watch

dog to responsible compliance manager. The independent director has to be empowered by the

board so that it enables them to monitor the decisions taken by the board in the interest of all

the involved stakeholders.

Another issue regarding the independent directors is the remuneration. The independent

directors are not supposed to hold any stake in the company to have an unbiased mind-set while

being part of the board. But at the end of the day, a proper incentive scheme has to be put forth

by the company to satisfy them as they are very well qualified professionals in their area.

In the recent years, the role of independent directors has become more challenging and highly

scrutinized by the shareholders as well as the regulatory bodies. Independent directors are

becoming important catalysts in the corporate governance context between the board and

shareholders. Finally, the post of independent director is more than just an adumbration; it is

an active action oriented role where they strive to improve the corporate governance of a firm

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by involving in the governing process. In many companies, the independent directors are

serving with high business skills, positive character and proper judgment, balancing and

protecting the concerns of promoters as well as all shareholders.

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Trends in the Indian Banking Sector- How will new bank licenses influence?

Francis Kurian Thomas; XLRI Jamshedpur

Introduction

In February 2013, Reserve Bank of India issued guidelines for the new bank licenses. It came

with a set of sufficiently strict set of norms

Successful track record of 10 yrs. as vetted by enforcement and regulatory agencies

Minimum paid up equity of capital of Rs 500 crore

25% of branches in rural area with population less than 10000

Priority sector lending of 40 %.

FDI limited to 49% for first five years

RBI received 26 proposals from applicants as diverse as Tata Sons to India Post and numerous

NBFCs

Category Applicants

Public Sector Undertakings Department of Post,

IFCI,TFCI

Corporate Houses Aditya Birla, L&T,

Reliance Capital

Brokerage Houses JM Financial, India Infoline

,Edelweiss

Microfinance Institutions Bandhan, Janalakshmi

NBFC Muthoot Finance, Shriram

Capital

Others INMACs, UAE Exchange

The Case for Financial Inclusion in India

IMF’s financial access survey of 2011 portrays the limited expansion of India’s Rs 80 trillion

banking sector into its rural hinterlands. As compared to China which has over 80 percent of

its population having a bank account, India has only 23 %. India has less than 1/3 the no ATM’s

as compared to China. Similarly the deposits to GDP ratio is only 70 % as compared to over

140 % in China.

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Country Number of

branches (per

0.1 million

adults)

Number of

ATMs (per 0.1

million adults)

Bank loan as per

cent of GDP

Bank deposits as

per cent of GDP

India 10.64 8.90 51.75 68.43

Australia 46.15 119.63 40.28 53.26

Brazil 46.15 119.63 40.28 53.26

France 41.58 109.80 42.85 34.77

Mexico 14.86 45.77 18.81 22.65

United States 35.43 - 46.83 57.78

Korea 18.80 - 90.65 80.82

Philippines 8.01 17.70 21.39 41.93

Lack of access to a formal banking system has led poor Indians into the clutches of usurious

money lenders who charge interest rates as high as 100%. It also prevents them from accessing

basic financial services like health insurance, education loan etc. which exposes them to

extremely high risk as well as affecting their chances of social mobility. Indian obsession with

having a gold as a savings instrument can be partly explained by its non-accessibility to the

banking sector. If India wishes to replicate success of Cash transfer programs in Latin America,

it has ensure that its most vulnerable sections have access to the banking sector.

Challenges

Profitability

While the RBI norms require over 25% of bank branches to be located in rural areas, it also

raises questions about the profitability and thus viability of these brick and mortar branches.

The strain of these rural branches will affect the expansion of these banks. The rural branches

lower profitability would lead to difficulty in attracting sufficient foreign capital investments

Significant Rural Urban Divide in no. of Bank

Branches

Indian banks severely under penetrated as compared to other countries.

INVESTOCRAFT 2014

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into these banks. Though financial inclusiveness is the major goal, however it will be hard if

banks are not profitable.

Scalability

Traditional Models of Branch based banking is asset heavy, thus slow and difficult to set up.

Additionally, it will be difficult to source qualified manpower willing to work in this rural

branches. If first time banking customers are trained for branch like banking, the chance

transition to electronic banking might be lost forever, as people might be unwilling to abandon

the known ways of banking. We need to leapfrog to Technology based solutions for rapid

scalability.

Conflicts of Interest of Promoter Groups

Nationalization of Indian Banks from major corporate houses were initialized due to the close

connections between the banks and promoter groups. If the major industrial groups are given

control over low cost funds raised from public, conflicts of interest might arise and it also raises

possibility of concentration of economic power with the already few industrial houses.

Benefits

Economic Impact

Usually Indian savings has been locked up in unproductive assets like gold, if at least a part of

that savings can be channelized into banking system, it will have double benefits of reducing

our Current Account Deficit as well as channelize savings into investments. Increase in credit

will lead to increased availability of funds to entrepreneurs, who in turn will generate jobs and

energize the economy.

Gateway to various Financial Products

In India number of deposit accounts is four times the number of credit accounts, the lack of

access to credit has prevented launching of new businesses in both urban and rural areas. If

people are provided access to bank accounts they are more likely to subscribe to life insurance,

health insurance and other savings instruments. Mutual fund penetration in India is 4.7%, Life

Insurance penetration 5.1%, newer players could look into tapping this segment.

Access to Low Cost of Funds

Deposits from public are the cheapest source of funds for banks. Rural populations is likely to

save large amounts in fixed deposits which will help in creating more credit for the economy

in general. Cheaper credit to Indian infrastructure projects could add significantly to GDP

growth

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The Effect of New Entrants to the Banking Sector

Likely Effects

Aadhaar and Financial Inclusion

One of the major challenges in opening a bank account has been RBI’s strict KYC norms. Rural

poor often lack correct ID cards, Letters of Recommendation etc. Aadhaar by UIDAI is a

unique ID card as the ID itself is standalone and generated by biometric recognition. Since RBI

has allowed Aadhaar as acceptable proof for KYC norms, it is likely to result in a surge of bank

accounts. Having a bank account linked to one’s Aadhaar number enables the transfer of money

in a convenient auditable and traceable away. With a highly mobile workforce, anytime,

anywhere payment infrastructure can be realized. Aadhaar enabled micro ATMs with finger

print recognition pads, Aadhaar based internet and mobile banking offer ample scope of rapid

expansion of our banking sector.

The Union Government proposal of Cash Transfer of Subsidies if implemented will result in

double benefits, of preventing leakage in the $60 billion subsidy as well as financial inclusion.

Technology based Banking

Technology based banking will have these characteristics

Reach: Mobile and internet will help to extend the reach of financial services where it

is Limited now, due to reliance on traditional models (such as branches) .Their set-up

and maintenance cost is minimal. Already organizations like FINO, SKS Microfinance

have demonstrated viability of these micro banks.

Availability: Unlike branches which operate during fixed hours, new technologies

provide 24X7 availability of services through ATMs, internet and mobile.

Lower cost : Financial transactions conducted on channels such as mobile, Internet,

ATM cost lower as compared branch based transaction on a per transaction cost basis.

Security: Often banks are reluctant to open services in rural areas where law and order

situations is serious, Cashless transfers offer better security in this regard.

White Label ATMs

The higher density of ATMs in developed countries is partly explained by competitive

landscape created by many White label ATMs. White label ATMs are independently owned

ATMs which offer ATM services of many banks. Since White label ATMs are more efficient

in managing ATM costs they tend to expand faster. Moreover they are not limited by the ATM

New Entrants will Intensify Competition

Urban Customers likely to be offered higher deposit rates plus

services

Rural Deposits to be raised using innovative financial models which leverage technology

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followed by branch logic. ATMs have seen good adoption in India. With Cash Transfers

happening, an expansion in ATM is necessary and expected. Already the first White Label

ATM by Muthoot Group has opened in Delhi and fast expansion by TATA, Hitachi (Prizm

Payments) etc. will increase the penetration of ATMs in India.

Effect on Bond Markets

Indian Bond Market are underdeveloped especially for corporates and Financial Institutions.

Indian Bond Markets is dominated by Public borrowing. Lack of Depth of Bond Markets in

India is forcing Indian Corporates to issue bonds in other countries. The new bank is expected

to provide sound investments opportunities to customers looking for investment opportunities

in the bond market. The lack of depth in Indian bond Market is basically due limited number

of issuers and a limited investor base. The new banks hopefully would be aggressive in both

fronts.

Consolidation in the Banking Sector

The lack of Indian Bank of global size has been repeatedly raised in industry circles. China has

2 banks in the world’s Top ten largest banks. An Indian bank of global size will be able finance

more cross border deals and expand internationally. Most of the Public Sector banks have the

same utility of the safety and trust of a public bank and the only difference is their regional

origins. Having an SBI and PNB competing for the same set of customers’ defies business logic

when the major shareholder in both of them is Government of India. Though unlikely due to

political and union issues, it seems better to merge small public sector banks and create larger

banks.

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Enablers for New Financial Models Need for new Business

Models

Conclusion

With the issuing of new banking licenses, the Indian banking landscape is bound to change for

the better. New banks will foster competition to and strive to provide better service to

customers. The new bank branches being mandated to open 25 percent of the branches in rural

areas. With financial inclusion low in Rural India and access to savings instruments minimal,

these new banks will provide a fillip to the banking services in these areas. White Label ATMs,

virtual branches etc. are exciting new areas of development. New banks could help in further

widening the reach of Insurance and Investment products. Arrival of new banks could help in

increasing the customer base and help in deepening the Indian Bond Market. Aadhaar based

banking network successful implementation will see saving in subsidies with the Cash based

transfer system. Low cost funds raised through deposits, increased credit penetration is bound

to boost the economic growth in India.

Financial Literacy

Ease of Access

Extensive Coverage Across the

Nation

Lower Cost per

Transaction

The success of microfinance of India has

demonstrated that rural population has appetite

for credit. RBI introduced the Banking

Correspondent Model in 2006, in which

Banking Correspondents who are enabled with

GPRS based handheld devices carry out basic

financial transactions. However the lack of

diversity of services, and poor knowledge skills

has led to the success of this model being

modest. However it is obvious that traditional

physical branches are incapable of massive

scaling of banking systems in India. India

requires “virtual Branches” to have cost

effective reach to rural corners.

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About NMIMS

MBA CAPITAL MARKETS

Program Introduction

The School of Business Management (SBM) is the torchbearer of NMIMS University,

Mumbai. SVKM’s Narsee Monjee Institute of management studies (NMIMS) has, ever since

its inception in 1981, been a leader in management education in the country. It offers more than

50 courses in various disciplines, such as Management, Technology, Science, Pharmacy,

Architecture and Commerce. The NMIMS Deemed-to-be-University has over 6000 students

and more than 300 faculty members who present an eclectic mix of rich industry and academic

experience.

Human life began with evolution. Thus to change for the better, to improve, to innovate, and

to evolve is inherent to mankind. A disciplined way of innovation – sorting, stabilizing,

standardizing and finally sustaining is of utmost importance to business conglomerates to

effectively cater to wants, especially in the dynamic world of finance. As human wants get

more complex, the idea of capital in the financial world gains further importance. With this in

mind, identifying and seizing new opportunities to sustain the growth of these complex

businesses entails a completely different skill set.

The Bombay Stock Exchange (BSE) along with NMIMS started the MBA (Capital Markets)

program in 2006, especially to address this demand. MBA Capital markets is a specialized

course in capital markets, which is offered only at NMIMS Mumbai. The curriculum offered

as part of this program is prepared in consultation with BSE, industry experts and senior faculty

members of this institute. The agreement entered into between the Stock Exchange Education

and Research Services, a public trust established by the Bombay Stock Exchange and NMIMS

in March 2005 became the platform for the setting up of the BSE-NMIMS Centre for Capital

Markets studies to further research in the field of Capital Markets.

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