OCTOBER 2017 VOL-I ISSUE NO.

ARBITRAGE
FINANCE AND INVESTMENT CLUB
INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Telecom Interconnection Usage

Charges: Disruptors get the
Carrot and Incumbents the Stick

Non-Performing Assets: A
Road Block to Indian Banking
Industry Growth

Dive Inside
IMAGE: PIXABAY
All Rights Reserved
 i

Editor’s Note
FINANCE AND We are pleased to publish the eighth
INVESTMENT CLUB issue of ‘Arbitrage’ – Finance and
Investment Club’s monthly magazine.
IIM ROHTAK
Arbitrage aims to cover a diverse
range of topics under the wide
domain of Finance and Economics.
TEAM MEMBERS
Our goal is to ensure that we provide
1. ANUPREET significant value to the readers
CHOUDHARY through informative articles and
2. BHASKAR PODDAR articles on current affairs. We would
3. HEMANT JAIN like to thank all the authors for
4. KEYUR BUDDHDEV contributing their articles for
5. MAYANK JAIN Arbitrage.
6. RUSHI VYAS In the Article of the Month – ‘Telecom
7. SHARIKH KADER Interconnection Usage Charges:
8. TANMAY MONDAL Disruptors get the Carrot and
Incumbents the Stick’, the author
Shreyans Jain from IIM Lucknow, has
Disclaimer: The views and done a good analysis Telecomm
opinions expressed in this industry.
magazine are those of the We hope for the continuous support
authors and do not of our authors and readers to make
necessarily reflect the this magazine a success.
opinion of the stakeholders -Finance and Investment Club, IIM
of IIM Rohtak. Rohtak
©
ALL RIGHTS RESERVED
FI CLUB IIM ROHTAK
 ii

CONTENTS
1. Telecom Interconnection Usage Charges: Disruptors get the
01
Carrot and Incumbents the Stick
2. BLUNDER OF MISSING THE BUS: India boycotting China’s BRI 08
3. Future of sell-side research in a post MiFID II world 12
4. China Going Cashless 16
5. Trader – A winner in the market or a victim of the market 21
6. How banks are supporting MSME supply chain financing 24
7. Non-Performing Assets: A Road Block to Indian Banking
27
Industry Growth
8. Emergence of FinTech in India 32
9. Taxing agricultural income 38
 iii

Answer these questions based on the articles in this magazine and stand a chance
to win cash prize worth Rs. 200 and E-Certificate.
Please e-mail the answers to fi@iimrohtak.ac.in

1. What is the average amount of cash carried by women for daily usage in China?
2. Which third party payment app has the highest share in mobile payment market and how much?
3. In India, which bank has the largest share in loan defaulters and what is the value of the share?
4. It has been 90days and I have not repaid my loan instalment. Is it a loss asset for the bank?
5. In which year the slash in mobile termination rates maximum in India?
6. What disruptive strategy did Jio use to bring voice services cost down?
7. What is the estimated loss to the global investment banks due to alteration in MiFID II regulations?
8. As per MiFID definition, which type of products will be available for investors without suitability checks?
9. How supply chain financing creates a win-win situation for all parties involved?
10. Which particular industry will be the driver of growth for Fintech in India?
11. Which all missile and aircrafts deals have been too costly for India, and why?
12. Based on the arguments in article, how would you react to a sudden negative news regarding a company that
you had invested in, why?
13. As per the article what is the major reason for continuing the exemption of agricultural income from income
tax?
 1

Telecom Interconnection Usage

Charges: Disruptors get the
Carrot and Incumbents the Stick
ARTICLE OF THE MONTH

Shreyans Jain
IIM Lucknow, 2016-18

Introduction
Interconnection forms the bedrock of any telecommunication regime and may be defined as the
technical and commercial arrangement that governs connection of equipment, networks and services
among various service providers to enable seamless subscribers’ access to services across different
networks. The growth and innovation in telecommunication markets largely depends on the
underlying interconnection arrangements that incentivises development of robust telecom networks.
On the contrary, an arbitrary interconnection arrangement fragments the market into discrete islands
leading to inefficient utilisation of network capacities and leakage of revenues through several
arbitrage avenues.
Interconnection Usage Charges (IUC) are wholesale charges payable by a Telecom Service Provider
(TSP) to another TSP, for terminating or transiting/carrying a call from its network to the network
of the receiving TSP1. The IUC comprises the termination charges, origination charges and
carriage/transit charges. Termination Charges are the charges payable by the originating TSP, whose
subscriber initiates the call, to the terminating TSP, in whose network the call terminates. The
destination network may be mobile, Mobile Termination Charges (MTC) or fixed line, Fixed
Termination Charges (FTC). International Termination Charges are the charges payable by an
International Long Distance Operator (ILDO), which is carrying calls from outside the country, to
the access provider in the country in whose network the call terminates. Origination Charges are the
residual tariffs collected from the consumer and retained by the call-originating service provider
after paying the carriage and termination charges. Carriage Charges are charged by a National Long
Distance Operator (NLDO) to carry calls from one service area to another. If an intermediate
network is involved in transmitting the call, the associated charges are called Transit Charges.

1
All you wanted to know about Interconnection Usage Charges, The Hindu Business Line, dated August 28, 2017
(http://www.thehindubusinessline.com/opinion/columns/slate/what-is-interconnection-usage-
charge/article9833749.ece)
 2

On September 19, 2017, the Telecom Regulatory Authority of India (TRAI) slashed the IUC by 57%
from 14 paise to 6 paise and further recommended this to be reduced to zero by the year 2020 2.
Exhibit 1 depicts a comparison of IUC in India with those in the United Kingdom over the last 15
years.
At present, India follows the Calling-Party-Network-Pays (CPNP) regime3 for retail charging of
telecommunication networks.
Exhibit 1: Comparison of IUC in India and UK4

Calculation of IUC
The choice of economic model is of great significance in the regulatory process to arrive at the
precise IUC. Among cost-based models, recently, there has been a rising tendency among regulators
to shy away from Fully Allocated Cost (FAC) model towards Long Run Incremental Cost (LRIC)
methodology and variants such as LRIC Plus and Pure LRIC5. This article analyses the approach
followed by TRAI to arrive at the reduced IUC and identify if the regulator has been fair in its
calculations.

2
The Telecommunication Interconnection Usage Charges (Thirteenth Amendment) Regulations, 2017, TRAI
notification dated Sept. 19, 2017
3
The Telecommunication Interconnection Usage Charges (IUC) Regulation, 2003, TRAI notification dated January 24,
2003
4
The Financial Express dated Sept. 27, 2017 and Sept. 26, 2017
5
Telecom IUC charges has drained industry lifeblood; why telcos should have been forced to come up with a rate, The
Financial Express dated September 27, 2017, (http://www.financialexpress.com/opinion/telecom-iuc-charges-has-
drained-industry-lifeblood-why-telcos-should-have-been-forced-to-come-up-with-a-rate/872171/)
 3

The regulator has deployed the pure long-run incremental cost method (p-LRIC), known for
catalysing competitive efficiencies, for the calculation of mobile termination charges. In the p-LRIC
method, the network demand for an equivalent TSP is identified and an efficient network is
dimensioned to meet this demand.

Termination cost as per Pure LRIC

= (Avoidable cost if wholesale termination service is not provided) divided by (No. of total off-
net incoming minutes)
= (Total annualized cost for providing entire range of services minus Total annualized cost for
providing entire range of service excluding wholesale termination minutes) divided by (No. of
total off-net incoming minutes)

The following steps are followed in the calculation of termination charges:

a) Data collection from the operators
b) Determination of demand to be catered by the equivalent operator in terms of coverage and busy
hour traffic
c) Dimensioning of the radio access network and core network
d) Determination of unit costs (capital costs & operating costs) of the elements of the network
e) Determination of the cost of network - (a) for providing full range of services; and (b) for
providing full range of services excluding wholesale termination service separately
f) Determination of mobile termination cost
The summary of calculations is attached at Appendix I.
Issues for Consideration
The major premise in the regulator’s reasoning is that the deployment of IP-based technologies
reduces the cost of delivering voice services to almost zero6. Therefore, lower costs for consumers
would be an obvious outcome of reduced IUC and eventually by 2020 zero IUC will drive
technology upgradation by service providers. What it essentially does not recognise is the potential
avenue for revenue this distortion can create for service providers with IP-based networks. Reliance
Jio Infocomm Ltd.7, for instance, allegedly disguises its voice and data tariffs by offering bundled
plans. By any yardstick, it is difficult to conclude that it has brought down the cost of voice services
by migrating to ‘voice free; pay only for data’ unlike the conventional ‘data free; pay only for voice’
plans. Lower revenues for TSPs as a consequence of lower IUC can actually result in higher costs
for the subscribers of networks that run on legacy technologies. The brokerage assessment of the
impact of lower IUCs on incumbent players is attached at Appendix II.
Secondly, the very conclusion that incoming calls from other TSPs result in an incremental cost of
only 5.6% even though they account for over 31 per cent of total traffic, sounds unconvincing. The
total annual cost calculated for a representative TSP with 17% market share is far less than industry

6
The Telecommunication Interconnection Usage Charges (Thirteenth Amendment) Regulations, 2017, TRAI
Explanatory Memorandum dated September 19, 2017
7
Reliance Jio tariff plans can be accessed at https://www.jio.com/en-in/4g-plans
 4

standards8. In addition, the cost structure does not take into account the spectrum acquisition costs
which forms a considerable part of a TSP’s expenditure.
On the contrary, TRAI’s argument underlying the change in IUC regime was that “when a service
provider establishes a network, it is not only for sending but also for receiving calls. The operator,
therefore, does not do anything special or extra to provide for receiving another service provider’s
calls. Thus, additionality of costs for receiving calls, in the strictest sense, is close to zero.”
Given the precarious financial health of the over leveraged telecom sector in India, it seems highly
unlikely that lower IUC will encourage competition. High roll-out expenses and thin margins leave
TSPs with scarce resources for the huge investments required for upgrading networks. Thus, the
decision seems to be heavily skewed, not one that balances competing interests9. As can be observed
from Exhibit 2(a), shares of major telecom companies were under pressure on September 20, 2017,
a say after TRAI lowered IUC. The share prices of Bharti Airtel Ltd., Idea Cellular Ltd., and Reliance
Communications Ltd. slumped during the day, while those of Reliance Industries Ltd., which owns
Jio, closed up 0.85 per cent at Rs. 847.10 after hitting an intra-day high of Rs. 872.10. Airtel’s shares
recovered later in the day to end up marginally while those of Idea and RCom closed down 3.43 per
cent and 1.74 per cent respectively. Exhibit 2(b) shows the impact of lower IUC on the profitability
of incumbent TSPs.
Exhibit 2(a): Intraday Movement in Share Prices of Incumbent TSPs

Exhibit 2(b): Impact of Lower IUC on Incumbent TSPs’ Profitability10

8
Why TRAI’s IUC arguments are struggling to hold water by Mobil Philipose, Live Mint dated Sept. 28, 2017,
(http://www.livemint.com/Opinion/8vZAE6qiGzMG5KIuIEbpON/Why-Trais-IUC-arguments-are- struggling-to-hold-
water.html)
9
TRAI’s Order on Interconnection Charges is Full of Holes by Rahul Khullar, The Wire dated Sept. 24, 2017
(https://thewire.in/180905/trais-order-interconnection-charges-full-holes/)
10
TRAI Lowers IUC, Reliance Jio Prevails Over Airtel, Idea, Live Mint dated Sept. 20, 2017
(http://www.livemint.com/Industry/hVC1wiXiOvvNchHh5Jt7hI/Reliance-Jio-prevails-over-Airtel-as-Trai-cuts-IUC-
to-6-pais.html)
 5

The Way Forward

It is imperative for the regulator to resolve the current impasse and strike a balance between service
providers and subscribers. At this juncture, given their high leverage, intense competition, stretched
balance sheets and impending spectrum auctions, incumbent TSPs can ill form a regulatory risk of
this magnitude. However, now that the regulator has indicated its intention to switch to the Bill and
Keep (BAK) regime11 by the year 2020, it is time the telcos re-calibrated their finances to migrate
to superior network technologies in the near future.

11
Under Bill and Keep (BAK) method, each TSP bills its own subscribers for outgoing traffic that it sends to other
interconnecting TSPs and keeps all the revenue received from its subscribers. It is not required to pay any
interconnection charge.
 6

Appendix I
Calculation of Mobile Termination Charges

*Assumptions:
a) The dimensioning of network is done for an equivalent TSP i.e. a TSP who has a fair share in
the relevant market.
b) This TSP incurs costs that would occur in a competitive market. Thus the method uses present
costs i.e. forward looking costs.
c) The method of costing is long-run costing i.e. the size of the network deployed is reasonably
matched to the level of network demand.
d) The method allocates the costs to wholesale services i.e. off-net incoming calls.
 7

Appendix II

Brokerage Assessment of the Impact of Lower IUCs on Incumbent TSPs12

12
TRAI’s IUC Cut: What Brokerages are Saying About Telecom Stocks, The Economic Times dated Sept. 21, 2017
(http://economictimes.indiatimes.com/markets/stocks/news/trais-iuc-cut-what-brokerages-are-saying-about-telecom-
stocks/articleshow/60773923.cms)
 8

BLUNDER OF MISSING THE

BUS (on India boycotting China’s
BRI)
Prabal Pratap Singh Chauhan & Rajat Jain
IIM Ahmedabad, 2016-18
Touted by Chinese President Xi Jinping as The deadlock for India is the China-Pakistan
“project of the century”, the Belt and Road Economic Corridor (CPEC), to be built with
Initiative (BRI), launched in 2013 aims to an investment of $62 billion connecting
improve connectivity and cooperation China to the Pakistani port of Gwadar and
between Eurasian countries. The project is passing through POK, allegedly infringing on
poised to have five land and one sea corridor Indian sovereignty. Also, media rhetoric
connecting China to various parts of Europe around China “owning” strategic Pakistani
and Asia along with developing ports in assets in the garb of CPEC further fuels the
Africa. An estimated investment of over $ Indian jingoism taking the matter further
900 billion over the next decade in roads, away from a rational unbiased analysis.
railways, pipelines, ports, power plants will In our piece, we objectively assess how
make it the largest such infrastructure cheap credit has been instrumental to India’s
building initiative by a single country post infrastructure growth, and how the fears of
US’s Marshall Plan, which gave $190 billion Chinese “ownership” are unfounded and
(in 2016 $ value) to rebuild Europe post baseless. Moreover, we will argue that India
WW2. Financially, $3 Trillion of foreign would have done good keeping its strategic
reserves and Renminbi’s inclusion in IMF’s and economic interests separate, the way it
Special Drawing Rights (SDR) basket have has done with other countries and highlight
given China enough muscle to deliver on the how Marshall Plan has played a key role in
project commitments. More than 60 countries Western European economic development
including close Indian allies Nepal, without compromising on sovereignty, a
Bangladesh and Sri Lanka have come on similar role BRI is poised to play.
board the BRI.
 9

Fig 1: BRI – proposed routes. (Source: McKinsey&Company)

1/3rd came from the private sector and India

Scanty Indian Infrastructure and current
was more than welcoming the private funds.
investment scenario
Not just private equity, India has been
Arun Jaitley admitted to India requiring at welcoming of capital as debt from
least $1.5 Trillion of investment in governments and multi-lateral institutions to
infrastructure over the next decade. Logistics meet its dire need of funds. For instance,
cost for India is as high as $7/km vs $2.5/km Japan’s international lending arm Japan
for China and $3/km for Sri Lanka. Various International Cooperation Agency (JICA) has
research puts the long-term infrastructure pumped in over ₹ 2 lakh crore as loans across
economic multiplier to 2.5 – 3.8 (i.e. for 60 projects in key strategic sectors: transport
every $1 spent on infrastructure GDP (55%), water (16%) and energy (13%),
increases by at least $2.5). The outlay for making India its largest debtor. The much
infrastructure was projected to be ₹ 56 lakh hyped Ahmedabad – Mumbai bullet train
crore during 12th five year plan (2012-17) but project will be funded by Japan through a
was revised downwards to mere ₹ 38 lakh soft loan of ₹ 80,000 crore (over 80% of
crore (~70%) due to paucity of funds. project cost), with additional conditions on
Furthermore, of the actual investment made, part of capital expenditure being to Japanese
 10

firms only. Also, the Delhi Metro Rail equally deserves to join and further adding
Project is funded with over 50% of capital complications that a non-signatory of NPT
coming from Japan as loan, despite its will not be eligible for NSG membership.
financial non-viability (only ₹ 3,000 crore Moreover, China has repeated foiled India’s
paid back of the total outstanding of ₹ 23,600 attempts to declare Masood Azhar (Chief,
crore by March 2016). At multi-lateral Jaish-e-Mohammad) as a UN – branded
institutional level, India has borrowed terrorist, despite his involvement in several
heavily for investment. India received the terrorist attacks on India. Indian collaboration
largest assistance till date among World Bank with China on strategic issues can be safely
member countries, amounting to over $ 100 assumed to be non-existent and has remained
billion in last 70 years. To put that in like this for decades.
perspective, second largest borrower is Brazil Also, one more intriguing question that needs
has borrowed only $58.8 billion. The line of to be addressed is how India’s “strategic
credit from World Bank’s International partners” has done a mere lip-service to
Development Agency (IDA) is officially Indian interests while serving their own
poised to stop in 2017 as India’s rising interests in a manner that has actually been
prosperity makes it ineligible as per GNI per detrimental to India. For instance, India has
capita (upper cap of GNI $1,215 for FY16).i inked a deal with France to purchase 36
Foreign assistance has been instrumental in Rafales for ₹ 63,000 crores, paying ₹ 1,750
the development of infrastructure in India crores per aircraft – a sum that could develop
and successive governments have done well three Tejas or fetch two Sukhoi-30 MKIs, the
to shed the Nehruvian view of “state best combat aircraft in the world. As far as
ownership of assets” to successfully leverage the, competitive edge of Tejas is concerned,
the capital and carry out key infrastructure Mr Manohar Parrikar has accepted that Tejas
projects in the country, maintaining source of is as capable as any other aircraft in the
capital being of secondary importance to the world, just that it is a Light Combat
terms of actual deal. As WB’s line dries up Aircraft”. This is not even the tip of the
and the need for funding remains as high as iceberg. India’s purchase of QRSAM &
ever, it would have been in national interest SRSAM missiles from Israel has proved to be
to bring China to negotiation table to reach too costly as DRDO successfully test-fired
an amicable solution and develop projects indigenous QRSAMs this month and Aakash
beneficial to both the emerging economies of (indigenous SRSAMs) are already
Asia. operational with IAF. With both France and
Israel, India has excellent economic ties and
Separate Strategic and Economic Interests
bilateral agreements to further deepen the
Another question of relevance here is: prospects of FDI to India and increasing trade
whether Chinese favoured India on cooperation.
international stage before India denied being
a part of BRI? We can safely conclude that Chinese presence in Indian Economy
far from the truth. China is vehemently China has committed an FDI of $20 billion in
opposing India’s candidature for permanent India and has pumped over $900 million
membership in UNSC. Further, China didn’t since 2014. It is among top 10 sources of FDI
allow India to join NSG saying Pakistan for the period 2014-17. Moreover, India had
 11

a deficit of $46 billion against the trade of Road Ahead

$70 billion in 2016. Even anecdotal evidence India is already investing in building
like Chinese mobile phone makers gaining infrastructure in its neighbourhood and in
over 50% of India’s smartphone market and poor African countries. For instance, India
Chinese e-commerce giant Alibaba owning granted a combined aid of ₹ 3,000 crore in
close to 40% stake in India’s largest app- 2015-16 to Nepal, Bhutan, Sri Lanka,
based payment interface Paytm also points to Bangladesh, Afghanistan and Myanmar.
the growing presence of the Chinese in the Early this month, India approved ₹ 1,600
Indian market already. Hence, fears of crore road project connecting Myanmar and
Chinese ownership and compromise of Manipur. Clearly, the role China is taking at
sovereignty are ill-founded and not based on international level, has been and is continued
sound economic logic. to be played by India as well, albeit at a
Marshall Plan’s impact on Europe smaller scale, and the aid receiving countries
have not faced any loss of sovereignty.
The US government invested $190 billion to
rebuild Western Europe and modernize As evident from the aforementioned
industry, albeit with an ulterior motive to arguments, BRI is nothing but old wine in a
prevent the spread of communism. new bottle. Rather than cribbing about
Nevertheless, the plan had played a “decisive Chinese dominance, India will do well to let
contribution to the renewal of transport bygones be bygones and heed the Kissinger’s
system, raising of productivity, and advice “There are no permanent friends or
facilitating of intra-European trade”, as enemies in foreign policy, only permanent
Belgian economic historian Herman Van der interests.” And join the wagon of economic
Wee puts it. The economy of all countries prosperity by still getting on board the BRI.
had surpassed their pre-war levels by at least
35%.
 12

Future of sell-side research in

a post MiFID II world
Parag Nawani
IIM Rohtak, 2017-19
Introduction Background

Then European Commissioner for Internal In force since November 2007, the Markets
Market and Services, Michel Barnier said: in Financial Instruments Directive (MiFID)
"Financial markets are there to function for administers the provision of investment
the real economy – not the other way around. services in financial instruments (such as
Markets have been altered over the years and brokerage, dealing, portfolio management,
our legislation needs to keep pace. The crisis underwriting, etc.) by banks and investment
serves as a grim reminder of how complex firms and the operation of traditional stock
some financial activities and products have exchanges and other trading venues (so-
become. This has to change. The proposals called multilateral trading facilities).
will help lead to better and more open Although MiFID spurred competition
financial markets." between the services and reduce prices for
investors, shortcomings were exposed in the
In recent years, financial markets have wake of the financial crisis.
changed greatly. New trading products have
come onto the scene and technological Key elements of the proposal:
developments have altered the landscape.
Taking lessons from the 2008 financial crisis, The important points pertaining to MiFID are
the G20 agreed at the 2009 Pittsburgh shown in Figure 1. Some of the points are
summit on the necessity to improve the explained in brief below:
transparency of less regulated markets –
including derivatives markets; and to address Robust and effective market structures:
the matter of unwarranted price volatility in MiFID already contained Multilateral
commodity derivatives markets. In response Trading Facilities and regulated markets, but
to this, the European Commission has the revision will bring a new kind of trading
shelved proposals to revise the Markets in venue into its regulatory structure: the
Financial Instruments Directive (MiFID). Organised Trading Facility (OTF). These are
These proposals consist of a Directive and a systematic platforms which are presently not
Regulation to make financial markets more regulated, but play an important role. For
efficient and transparent, and to strengthen example, regular derivatives contracts are
the protection of investors. The new increasingly traded on these platforms.
framework will also enhance the supervisory In order to facilitate better access to capital
powers of regulators and provide fine markets for small- and medium-sized
operating rules for all trading processes. enterprises (SMEs), the proposals will
introduce the creation of a specific label for
 13

SME markets. This will provide a quality volumes or liquidity) that are not accessible
label for platforms that target to meet SMEs' on public platforms. Exemptions would only
needs. be acceptable under approved conditions. It
will also introduce a new trade transparency
Increased transparency: By introducing the decree for non-equities markets (i.e. bonds,
OTF category, the proposals will mend the structured finance products and derivatives).
transparency of trading activities in equity
markets, including "dark pools" (trading

Figure 1: MiFID objectives and core measures

source: EY report
Stronger investor protection: Building on a
broad set of guidelines already present, the
Reinforced supervisory powers and a revised MiFID sets stricter requirements for
firmer framework for derivatives markets: portfolio management and the offer of
The proposals will reinforce the powers of complex financial products such as structured
regulators. In coordination with the European products. In order to avoid possible conflict
Securities and Markets Authority (ESMA), of interest, independent advisors and
supervisors will be able to ban specific portfolio managers would be barred from
products or practices in case of threats to making/receiving third-party payments or
investor protection or the orderly functioning additional monetary advances. Lastly, rules
of markets. The proposals also foresee on corporate governance and managers'
tougher vigilance of commodity derivatives responsibility would be presented for all
markets. investment firms.
 14

To whom does MiFID II apply? firms’ cost to income ratios of 90%, a

forecasted drop in research revenue of 40%
MiFID II applies to MiFID firms, i.e. those due to MiFID II would lead to a loss of $240
Financial Services businesses undertaking mn in a post-MiFID II world grounded on
MiFID Business anywhere in the European investment banks’ existing cost structure.
Economic Area (EEA). It will affect all
participants in the EU's financial markets, While European regulators don’t have direct
whether they are based in the EU or impact on firms domiciled outside of the EU,
elsewhere, including providers of asset the new guidelines will put indirect force on
management and supervisory services. these domiciled firms. European firms may,
in order to be MiFID II-compliant, request
MiFID II also relates to European suppliers additional disclosures from their non-EU
of MiFID services in the European Economic equivalents. If we take the example of the
Area (EEA), such as investment managers of U.S., asset managers usually either invest
pension funds and credit institutions. It has money from, or with, an EU-based asset
some use for UCITS (Undertakings for manager or direct orders to an EU broker.
Collective Investment in Transferable Conversely, U.S. brokers complete trades on
Securities) management companies and behalf of EU asset managers. Realizing the
AIFMs (Alternative Investment Fund perspectives of their EU counterparts will be
Managers) where they offer definite crucial for U.S. firms to make sure they can
investment services. Moreover, European meet the requirements of their clients and
providers of MiFID services which have carry on to do business with them, when
branches outside the EEA may be impacted MiFID II comes into power.
by MiFID as, even if not situated in the EEA,
their interactions with EEA firms may mean Here are some of the key areas, adviser firms
that they are indirectly influenced by MiFID need to be aware of:
II.
Defining independence: For the first time,
Taken with other new regulations, the impact MiFID II will present a European-wide
of MiFID II will be profound, thinks Rebecca standard for independent advice, needing
Healey of TABB Group. She says, “When firms that call themselves independent to
you attempt this level of change, it is like assess a range of financial instruments, not
using a sledgehammer; the risk is that the limited to entities to which the firm is
chips will fly off in all directions, and not connected.
always the one where you intended.” Any UK independent adviser, that’s already
amenable with RDR (Retail Distibution
According to a new study published by Hong Review), should notice little difference, other
Kong based consultancy, Quinlan & than from an augmented scope of
Associates, the global investment banking investments. However, there are two
community could bear losses of as much as advances worth noting. First, a firm will be
$240 mn in their research divisions as the able to offer both non-independent and
EU’s MiFID II regulation alters how independent advice, provided there is a clear
investment research is bought and paid for. separation between the two (for example, the
Quinlan estimates that large global same adviser cannot offer both independent
investment banks spend between $600 mn to and non-independent advice on MiFID
$800 mn per year on research, whereas tier 2 products). Secondly, the FCA (Financial
banks spend $300 to $450 mn. Given these Conduct Authority) has indicated that a firm
 15

will be able to call itself independent, if it product providers to reduce the complexity of
only offers advice on a certain area of the products they offer.
market.
Implication: It could make it more attractive Suitability: Before recommending a product
for independent firms to specialise in a or a transaction (including selling as well as
particular area of the market. Firms may want buying instruments), a firm must make
to reorganise into dual independent and non- suitability trials to ascertain a client’s
independent operations for different areas of relevant knowledge, their objectives and
financial planning. ability to bear losses.
Implication: Both European and UK
Complex products: Investment products regulators are intent on making suitability
would be defined as complex or non- requirements as tight as possible. Any firm
complex, with only the latter available to that has not got a clear procedure in place for
private investors without any suitability assessing, recording and periodically
checks. updating client suitability needs to revisit
The MiFID II definition of complex products their processes and systems urgently before
covers non-UCITS retail schemes (NURS) January.
and structured UCITS funds that embed a
derivative. However interpretation of the MiFID would prove to be a milestone in
rules is eventually left to each national strengthening the trading market. There
regulator and the FCA has preferred not to would be far-reaching effects on the various
categorise either NURS nor investment stakeholders. Organizations would need a
trusts, automatically, as complex products. strategy that spreads across individual
Instead, the FCA says the complex regulations. Managing them individually will
designation should be made case-by-case.
incur considerable costs and will stretch even
Implication: It could create a bigger
large organizations beyond their capabilities.
opportunity for firms to counsel on more
complex products. Or it could encourage
 16

China Going Cashless

Nimish Joshi
IIM Rohtak, 2017-19
A cashless economy is seen as the future and cashless payments are being widely accepted.
China, a developing nation and the 2nd largest Big giants like McDonald’s also prefer
economy in the world is in the race to be cashless payments, especially during the night
cashless soon. China was the first country to after cash counters are closed. It won't be a
introduce paper currency in its economy and hyperbole if one says that China is living the
analysing the current trend it seems that it future.
would be the first one to discard it too in the
Analysing the cashless revolution, third-party
near future. China is a leading example of a
mobile payments apps have set the real stage.
cashless Asian country. With a total
Though there has been a continuous increase
population of 819,767,019, China has
in usage of credit and debit cards, and banking
developed a reliable infrastructure to create
mobile payment apps, transactions through
and sustain its cashless revolution. In the
third-party mobile payment apps witnessed a
metros especially, ‘empty pocket’ is the new
jump of over 100 times since the year 2013.
trend as people prefer to go out without cash.
From a street pedlar to a premium mall,
 17

In 2016, according to iResearch, China’s China’s population relies on mobile payments

mobile payments volume hit $5.5 trillion and carry no cash at all to go around.
which is approximately 50 times the size of Millennials, especially, are the face of China’s
$112 billion market of America. Mobile Cashless revolution as they prefer to carry less
payments witnessed an increase of more than than one-third of the money carried by the
200% over the year 2015. Adam Minter, a older generation. Also, women tend to carry
Bloomberg View columnist, called that year lesser cash than men, making them early
as “China’s Cashless Revolution.” Today, adopters of the cashless lifestyle.
according to a survey by iResearch, 14% of

This tremendous growth of mobile payments payments segment. The omnipresence of

in China is a result of the strong base of WeChat app (over 889 million users) gives it
smartphone users, high mobile internet, an added advantage to have a rapid growth
under-developed traditional financial market after being developed in the year 2013.
and deep e-commerce penetration. The rest is
QR codes should also be given their due credit
contributed by various third-party mobile
for boosting mobile payments. A QR code is a
payment apps. Alipay and WeChat are the
2-dimensional barcode with a random tiny
most widely used third-party apps for mobile
black squared pattern with a white background
payments in China. Alipay, owned by Alibaba
and is capable of storing 300 times more data
affiliate Ant Financial Services, has a share of
than a traditional one-dimensional code. They
54.1% and Tenpay (encompassing QQ Wallet
can be designated as the building blocks of the
and We chat) has 37.02% share in mobile
 18

cashless economy of China. Unlike credit etc. Due to the inclination of people towards
cards, QR based payment systems don’t mobile payments for personal use, third-party
require POS terminals such as card reader or apps ensured that people get the convenience
credit card machine. In this way, sellers don’t to pay at every nook or corner whenever
need to invest for cashless adoption which needed. The impact can be imagined by the
would have been passed to customers. Even fact that customers are asked “Will you pay by
platforms like Apple Pay relying on near-field Alipay or WeChat?” rather than asking them
communication (wirelessly sensing when a for bank cards for making payments. In retail,
payment console is nearby) lags behind QR mobile payments have the highest acceptance
code based platforms, as cell phone capable of frequency in convenience stores (68%),
QR codes are ubiquitous. It explains why followed by supermarkets and malls with
Apple Pay, which is very popular in the USA, acceptance frequency of 63% and 62%
doesn’t qualify for even top-10 third-party respectively. In the entertainment sector,
mobile payment apps in China. mobile payments are most popular in
purchasing movie tickets (70%) with karaoke
The increase in mobile payments in China is a
bars at 2nd place (60%) and beauty salons at 3rd
consequence of a change in services for which
(52%). Regarding travel too, mobile payments
the consumers used mobile payments. Mobile
are routine as they pay 62% of taxi rides, 57%
payments were majorly used for mobile
of hotel expenses and 56% of tourist places.
finance in the year 2015, but by the year 2017,
Thus, for any service, mobile payments come
it was modified to be mostly used for personal
to the rescue in China.
usage like movies, travel, convenience stores,
 19

The best part is that even after having such Indian government also tried to implement a
rapid growth and large consumer base, these top-down cashless initiative, but due to
various reasons like lack of infrastructure,
third-party mobile payment giants are still education and awareness, the project
pushing hard to gain a broader consumer base. achieved limited gains. Even the urban mass
was unable to go entirely cashless due to
This year Alipay held a promotional event
unfamiliarity with the technology and its
called “Cashless City” during the first week of advantages. The implementation relied only
August, which was followed by “Cashless on the ‘need to adopt cashless methods’ due
to demonetization rather than the
Day” event by WeChat running for the rest of ‘convenience’ for the users. China, on the
the month. During these periods, various other hand, implemented its cashless
initiative by making cashless payments more
incentives like rewards, digital money, gifts,
convenient than by paying cash. Presence of
etc. were given to their users to encourage suitable platforms and identification of the
them to use their apps for payments and add untapped potential in the cashless market by
various companies gave rise to China’s
new users. Cashless Revolution. It won't be a wonder if
cash becomes a relic of past in China for its
When we talk about cashless China, one upcoming generations.
obvious comparison with India, another large
developing country, comes to our mind. The
 20

TRADER – A WINNER IN
THE MARKET OR A
VICTIM OF THE MARKET
Ajay Norman V
Great Lakes Institute of Management, Chennai

“Anybody can make money, just enter the

market”, a friend quoted. That word
‘anybody’ dragged me into the market and
pulled me down in the market almost all the
time. Where is the gaffe? Is it with me
believing someone’s words or the way in
which I trade? Finding out where you went Trading:
wrong in trading was a daily activity for me in
What is trading? No general definition.
those days. Because the other daily activity
Personally, it means how you play with
was losing money all the time. Am I
money. I used to play offensively and
threatening you? For those who think ‘No’,
aggressively. When I try to hit the ball to six,
“Welcome to the world of losses”. For those
I got caught. When I play defensively, runs are
who think ‘Yes’, “Sit where you are and start
in peanuts. So what do I want? Do I want more
losing opportunities”. So what should you do
runs on the scoreboard and get out soon (or)
now? It’s up to you to change the above
waste the balls and score one or two runs? A
quoted phrase from ‘losses’ to ‘wins’ and it
successful trader is similar to a player who
will take time. This article gives you an
scores one or two runs but at a faster pace.
overview of trading, types of trading markets,
Meaning?? Don’t be a trader who wins one big
mind-set for trading, and my personal
trade and loses 10 trades. Be a trader who wins
experiences as a beginner in trading.
 21

6 or more small trades and loses 4 or less small trading. I have won most of the trades with this
trades. mentality. But how much patience is
essential? “Too much of patience is good for
Types of trading markets:
losers”. A successful trader knows the level of
Equity market: Where the stocks of individual patience he should have to cut down
company are being traded. Ex: NSE lists humongous losses. One cannot find out such
stocks like Reliance Industries, ITC etc. level unless they enter the market.

Commodity market: Where commodities like Tolerance. What should you tolerate? Is it the
Gold, Crude oil, Aluminium and many are loss? No! It’s the effect of the loss which is
being traded. Eg: MCX lists gold, crude oil in nothing but Pain. “Endure the Pain now, you
lot sizes where each lot has certain number of will reap the gain later”. It doesn’t mean you
contracts. can endure the loss if you think the market will

Futures and Options market: Called F&O move against you. A trader cannot win all the

market, it has all the future contracts and trades all the time but can lose all the trades

options of individual stocks and indices where most of the times. Can you bear the pain or

one can gain or lose in big numbers. One of will you suffer the beating on and on? It

the riskiest markets. depends on your mentality.

Forex market: Where all the other currencies Ability to cope up with failures and learn
are being traded. Eg: CDS lists Dollars to INR from mistakes. An effective trader is not the

and many more. one who sits and feels after each loss but sits
and analyses the reason for the loss. At the end
Cryptocurrency market: The hot market in
of every day, market will teach you a lesson
the recent days. Where digital currencies like
and you need to work on it on that day itself.
Bitcoin, Ethereum, Litecoin and many more
This is the mentality which can replace the
are being traded.
rotten fruits with the fresh ones. Meaning? A
Mind-set, Skills and Efforts needed for rupee loss can be turned into 2 rupees gain the
trading: next day, if home work is done.

There is a saying in English “Everything Analytical mind-set. A quote from my

comes to you in the right moment. Be patient”. professor, “A non-finance guy (with no basic
Patience is the keystone for your success in finance knowledge) can enter the market and
 22

donate his/her own money to the market”. Can impoverish your account balance if you trade
anybody enter the market and buy a stock if it too much. So what is the home work in
shows an uptrend? Yes, you can but if you are trading? A good approach would be reading
a money donor. A guy with no proper dailies and writing down the stocks on radar
knowledge about the macroeconomic for tomorrow, analysing the chart today,
environment, no proper understanding of the predicting how the stock will perform
importance of technical indicators may win tomorrow, and when to enter & exit the
first few trades or so. But a deep dig is waiting market. The above are few key traits that a
for him/her. A guy with such knowledge and successful trader should have.
ability to predict the market may lose some
Fear Vs Greed:
trades, but will get green light in most of the
trades. Which is indispensable? “Mitigate fear,
Eradicate greed” is my slogan every day
Story Building. “US bombed North Korea”
when I enter the market. When you are afraid
headlined NY Times (assumption). A
to take a position and not enter the market,
common man feels for North Korea and
how would you feel if the market moved as per
decries US. What does a trader do? He is
your expectation? Keeping this in mind, you
inclined to think, “If US bombs North Korea,
enter the market next time wanting not to lose
and it means a war. If it is a war, you need
opportunity. Yes!!You entered and you are
tanks, bombing equipment etc. If you need
making money and there is green light in your
tanks and fighter jets, you need oil to run them.
dashboard. When you see greenlight in your
Yes!!! Its money time. There is going to be
dashboard the one thing which occupies your
huge demand for oil. So let’s long on (buy)
mind is “Greed” and it will make your
oil.” A trader must be a good story builder and
dashboard red. Similarly, when you see red-
not just a passive reader.
light in your dashboard the one thing which
Home work. “You work hard, you win most occupies your mind is “Fear” but in this case
of the trades. You sit idle, you lose all the it will make your dashboard green after you
trades”. The habit of writing down what you exit the position. So why am I saying this?
will trade tomorrow is really mandatory for a What is the mantra to outplay all these for a
beginner. For instance, if I did not build a story beginner? It is nothing but “Experience”. So
and read the charts yesterday, I would not beginners, let’s begin with a positive note
enter the market this morning. You will “Welcome to the world of making and losing
 23

money, but ensure your wins outweigh your losses with your preparation”.
 24

HOW BANKS ARE SUPPORTING

MSME SUPPLY CHAIN FINANCING
AKASH GAHLOT
NMIMS, Mumbai 2016-18

Intorduction time. Failure of even one critical supplier can

Supply chain refers to the movement of goods, dampen a buyer’s production momentum and
information and money as they move in a its shipment of goods to distributors.
process from supplier to manufacturer to However, in this eco system exists an inherent
wholesaler to retailer to consumer. conflict as the SME’s want to convert their
A robust supply chain is the backbone of every inventory into cash as soon as possible
business. Traditionally the procurement side whereas the buyers want to stretch the
of supply chain environment had 2 payment terms in order to improve its cash
components i.e. the manufacturer and its conversion cycle. Every manufacturer wants
supplier of raw materials and components. In to lengthen its day’s payable and the suppliers
India many of these suppliers are actually want to shorten their accounts receivables.
MSME’s which usually crop around the This tussle among the two leads to increased
facility of manufacturer. Take the example of risk as well as distrust among supply-buyer.
Gurgaon and Chennai which today are not
only home to major automotive manufacturers It is to solve this paradox that banks come in,
like Maruti Suzuki and Hyundai but also to by providing what is known as Supply chain
scores of dedicated suppliers for these giants. financing or reverse factoring which
Competition today has forced manufacturers comprises of a scheme that permits businesses
to looking at suppliers not in a transactional to prolong their payment terms to their
sense but rather strategically. Demand suppliers while providing them the incentive
fluctuations, a persistent pressure to reduce to get paid early. The solution is simple as the
lead times and to have continuous flow of banks agree to pay up the suppliers at a pre-
components and raw materials from their key determined rate and the buyers settle the
supplier’s, manufacturers have to ensure that payment with the bank on a later date.
they invest into suppliers and pay them on
 25

FIG 1: STEPS INVOLVED IN SUPPLY CHAIN FINANCE

2
3
MSME MANUFACTUR
/SUPPLIER BANK ER /BUYER

5 5

1. Supplier delivers goods to the buyer and generates invoice

2. Buyer confirms the delivery and submits the invoice to banks
3. Banks and supplier decide the lending terms
4. If supplier agrees then banks pay the amount discounted by interest rate to the suppliers
5. Buyer do the full settlement at a later date

This results in win-win situation for both the buyer and supplier through goal alignment. The buyer
optimizes working capital, the supplier generates additional operating cash flow and the banks earn
interest. The manufacturer or buyer does not have to take loan, he gets discount from the vendor for
paying early.
The banks on the other hand get to lend to “transactions” which makes are a safer deal given recent
NPA’s which have been plaguing the Indian banking sector.
 26

TABLE 1: ADVANTAGES OF SUPPLY CHAIN FINANCING ECOSYSTEM

BUYERS SUPPLIERS BANKS

Lower Borrowing Costs Quick Repayment for Contribution to Priority Sector

supplier Lending
Balance Sheet unaffected
More working capital available Agility in their supplying Safer bet to lend to “transactions”
Improved Supplier Relationship ability
Supplier Risk reduced
Reduced CCC

Another interesting take on why would banks would like to be on board in this scheme is that RBI
has mandated that Banks both domestic and foreign have to lend a certain percentage of total lending
to certain priority sectors. As per the latest guidelines this percentage is 40% of total ANBC or
Adjusted Net Bank Credit. The list of these priority sectors includes MSME which makes supply
chain finance useful for banks.
TABLE 2: RBI NORMS FOR PRIORITY SECTOR LENDING

CATEGORIES DOMESTIC SCHEDULED FOREIGN BANKS WITH

COMMERCIAL BANKS AND LESS THAN 20 BRANCHES
FOREIGN BANKS WITH 20
BRANCHES AND ABOVE
Total Priority 40 percent of ANBC 40 percent of ANBC
Sector
Agriculture 8 percent of ANBC. NA
MSME 7.5 percent of ANBC NA
Advances to 10 percent of ANBC. NA
Weaker Sections
*Source:RBI Website
The Indian banking is still seeing the dawn of supply chain financing, however as we proceed banks
will see a greater role in ensuring that India moves towards a manufacturing oriented economy which
is the need of today by providing a well-oiled supply chain machinery.
 27

Non-Performing Assets: A Road Block

to Indian Banking Industry Growth
Arnab Kar,
IIM Rohtak, 2017-19
Non-Performing Assets, NPAs’ are those as a Non-performing asset is 90 days. A loan
assets which have ceased to generate or bring or an advance is recognized as a Non-
in income for the owner or the lender. A Non- performing asset where:
Performing Asset is a liability to whosoever is
 If instalments or interests are not paid
owning the asset and a credit facility for the
on the principal for a period of 91 days.
lender which is not anymore considered to
generate returns. For a long time NPAs have  The account stays out of service or is
been hindering the growth, as banks provide not used for a period of 90 days.
loans and a certain amount is changed upon  For a period of 90 days, if bills are not
the principal amount, which the borrower has paid against anything purchased or
to repay over a stipulated interval of time. The discounted.
record shows that NPA has been rising for a  Stagnant account without any
long time and the number of defaulters on transactions for a period of 91 days.
loans has been increasing.  In case of agriculture, the period for
interests or instalments payment is two
An asset or credit facility is termed as Non- harvest seasons.
Performing Asset when the asset fails to  In case of cash credit facility, if
generate income or repay its instalments for a submissions are not made for 3
continuous period of 90 days or more. From continuous quarters.
31st March 2004, which is also the year ending
as per Indian financial calendar, the norms for NPAs occur because of failure to meet the
Non-performing assets has been changed, and financial obligations which in turn result into
the present timeline for an asset to be termed “Bad Loans”.

Assets

Non-
Perforing
Performing
Assets
Assets

Sub-standard Standard
Doubtful Asset Loss Asset
Asset Asset
 28

Fig.- Flow chart of Classification of Assets

 Sub-standard Asset- An asset which

has a period of 12 months to pay the
instalments or interests on the
principal. In this type of NPA, the bank
has to maintain a 15% of its reserve.
 Doubtful Asset- An asset which
continues to be an NPA for a period of
more than 12 months.
 Loss Asset- It is an asset which has
been tagged as an NPA by either the
bank, auditors or bank inspectors.
These are also called as irrecoverable
assets.
The Non-performing assets bring along a lot
of losses to the economy. The average of Non-
performing assets of the world for the year
2015 was 6.99% with Cyprus leading the list
with 47.75% and Macao standing at the
bottom with 0.12%. The likes of India, USA, Fig.- Non-performing assets as percent of all bank
assets.
UK varies between 1% to 10% which needs to
(Source -
be further cut down to as low as possible. http://www.theglobaleconomy.com/rankings/Nonperfo
rming_loans)
The chart shows that the most stable countries
in terms of NPA are at the bottom part of the
list and are mostly the lenders but the
defaulters like Cyprus, San Marino, Greece,
etc. are on bad debt and have a huge amount
to repay to the lenders with an interest which
now has been termed as a Non-performing
asset.
 29

In Cyprus the situation has improved from

2013-14 but the picture still is gloomy. Cyprus
Fig.- Percentage of NPAs considering gross NPAs.
(Source- still has 80% bad loans which are in other
https://data.worldbank.org/indicator/FB.AST.NPER.Z words NPAs. Though the trend is positive and
S?end=2016&start=1997&view=chart) the predictions show a bright picture ahead
In USA, the Federal Bank has witnessed a year with speedy recovery at the rate of 3% growth
on year growth of 17.03% in the SME in the next year, Cyprus is heading towards the
Advances segment, but the Gross NPA and right path.
Net NPA stood at 3,15% and 1.66%
respectively at the end of Q3 (Third Quarter).

Fig.- NPA growth of USA

 30

In the global context India fares averagely  Occurrence of externalities like

with NPA of 7.21% when considered with harvest failure, floods, etc.
Gross NPA(GNPA), as stated by CARE  Occurrence of internal issues like
Ratings. India being one of the developing policy change, reforms, etc.
nation has one of the fastest growing
economies in the world which is catering to
the need of higher employment, agricultural
output, hygiene and sanitation, education and
other issues. To support such a large
infrastructure and accommodate everything
for the most populated country in the world, it
is a difficult job and hence the number of
associated loans have increased with time out
of which now some has turned into bad loans
making the count stand at 7.21% of GNPA.
India has one of the vast banking networks,
consisting of 38 banks. Out of the 38 Indian
banks, 18 Public Sector Banks have been
bearing the heat to have generated the most
number of loan defaulters. The 18 Public
Sector Banks consists of State Bank of
India(SBI), IDBI Bank, Indian Overseas
Bank, UCO Bank, etc. and among the 38 Among these the vital player which causes
banks, SBI accounted for the largest share of NPA is bad lending practices by the banks.
22.2% summing up to a total of ₹ 1,88,068 What banks do to lend money is that they
crores out of the compiled 38 banks defaulting generally carry out a general and almost
sum of ₹ 8,29,338 crores. The numbers have ineffective check of the property of the
increased drastically from the last quarter, the borrower and accordingly create the portfolio
first quarter of Financial Year 2018(FY 18) against which the loan is to be provided. But
experienced an increase of 34.2% on year on here banks become a bit lenient and allow a
year basis when compared to first quarter of margin which provides more sum to be roped
FY 17. These indication sounds alarming to in by the borrower from the banks and this
the banking sector as NPAs has been a mostly causes the borrower to suffer from
roadblock to growth for the banking system in large repayment dues. When the borrower
India. doesn’t pay for more than 91 days, the
advances are then termed as NPA. The level
The loans or advances provided becomes of NPA indicates the credibility and efficiency
NPAs due to the following reasons: of the banks and banker’s credit risk
 Bad lending practices by banks management for allocation of resources. The
 Crisis in the financial institutions like rising NPAs is now considered as a curse for
banks, NBFCs (Non-banking financial the Indian economy as the present data shows
corporations) which crumples the that the bad loans in India has soared to more
economy of the country than ₹ 7.75 lakh crores for FY17-18. Such
 31

huge NPAs in the banking industry cripples ensure prevention of bad credits, by including
the growth and causes the following: stringent rules of loan repayment and before
that strong credit risk assessment of the
 Affects the bank shareholders
borrowers by the bank without bypassing any
 Failure to allocate funds to good requirements mentioned in the laws and
projects due to no repayments from the policies. If these two are ensured, Indian
bad ones banks will be able to recover more than 50%
 Liquidity concern due to lack of of the bad loans that they circulate. Reforms
repayment from bad loans and strict implementation of policies by the
 Uninsured accounts might face the banks is the need of the hour to save the
heat of the NPAs Indian economy from any turmoil like that of
A simple solution to the above stated 1991. The sooner we act, the better the
problem is few amendments in the Acts that changes of growth, the better the possibilities
of sustainability.
 32

Emergence of FinTech in India

Bibekjyoti Roy Nandi, Kumar Bardhan
IIM Rohtak, 2017-19
According to the Global FinTech Report 2017 FinTech Scenario in India:
by PWC, the expected annual ROI on FinTech
As per NASSCOM, by2020, the Indian
related projects is stated to be 20%. Financial
FinTech software market is forecasted to
institutions are embracing the disruptive and
reach USD 2.4 billion. According to Statista,
continuous innovation and are integrating and
the transaction value for India Fintech sector
partnering with the innovators to stay ahead of
is forecasted to touch approximately USD 92
the curve. The report stated that 30% of large
billion by 2021, from USD 44 billion in 2017
financial institutions are investing in Artificial
growing at an annual growth rate (CAGR
Intelligence and 77% are expected to adopt
2017-2021) of 20.2 %. "Digital Payments" is
blockchain by 2020. This shows the rapid pace
the market's largest segment with a total
of transformation that the financial sector is
transaction value of approximately USD 43.8
undergoing. In 2016 alone, FinTech
billion in 2017. What are the factors that are
companies globally raised a total of ~$36
and will be propelling the growth of FinTech
billion in funding across over 1500 funding
in India? A look at the below points would
deals from over 1700 unique investors (data
reveal certain insights:
accumulated by the Financial Technology
Partners). The figures clearly depict a  According to the World Bank
paradigm shift that is happening across projections, the average annual
borders and the need for the financial sector to addition of population in India is
adopt and adapt to the disruptions. projected to reach 19.3 million by
2021.
 33

 World Bank projects the youth and 490.423 million by 2031 opening
population (age 15 to 34) to reach up a huge scope of growth for the
approximately 479.40 million by 2021 FinTech sector.

phones and 50% of travel transactions

to be done online.
 NASSCOM in its report projects the
 According to a Nasscom report, some
Internet user in India to reach 730
of the primary factors driving the
million by 2020, with 75% of the new
corporates to deploy FinTech solutions
Internet user growth coming from
are streamlining operations, driving
rural areas. The report also forecasted
sales and revenues, cost reduction,
that 70% of the e-commerce
increasing reach and, managing risk
transactions to take place via mobile
and compliance costs.
 34

 Support by major IT players is also about 8% of GDP, 45% of the total

providing an impetus to the growth. manufacturing output and 40% of the
IBM has announced the adoption of exports from the nation. Thus, there's a
Ethereum for its IoT projects and huge potential for development of the
collaborated with London Stock nation by providing FinTech solutions
Exchange, Cisco and Intel to launch an to this industry.
open source blockchain initiative.
Emerging FinTech segments:
EdgeVerve has launched Blockchain
framework for financial services. The Indian FinTech landscape has witnessed a
Microsoft Ventures through their growing ecosystem with ~200 start-ups with
ScaleUP and HiPO programs ~60% of them focussed on payment
facilitates rapid scaling up of many processing. Some of the emerging FinTech
early stage fintech start-ups. segments in India are:
 Collaboration with incumbents is also
 Payments: Undoubtedly the fastest
a contributing factor towards the
growing FinTech segment in India, the
growth. SBI has teamed up with
digital payments space is projected to
Ezetap to launch 'Chota ATM' and
grow to USD 500 billion by 2020
provide mobile POS devices across
representing about 15% of GDP in
India. Bank of India offers a Paynimo
2020. With 80% of economic
wallet which is powered by
transactions in India still happening
TechProcess.
through cash, there is a significant
 Initiatives by the Government of India
growth potential facilitated by strong
launching India Stack, Start-Up India,
user adoption of mobile payment and
Jan Dhan Yojana, Aadhaar Adoption,
P2P transfer solutions. With
UPI and BHIM app are adding to the
emergence of new technologies like
momentum.
contactless payment and cloud-based
 Government is also aiding growth by
PoS, the payments segment is
providing tax and surcharge reliefs
undergoing transformation like never
like providing tax rebates for
before.
merchants accepting more than 50% of
their transactions digitally.
 The growth has also been driven by the
need of the Small and Medium
Enterprises which has witnessed lack
of credit support by the incumbents.
According to Confederation of Indian
Industry (CII), MSMEs contribute
 35

catering to it in 2016. Tracxn India

FinTech Landscape reported a funding
of USD 199 million across 33 deals as
of October 2016, in this segment. P2P
lending is focused broadly on micro
finance, consumer loans, and
commercial loans and offers stable
rates irrespective of prevailing market
conditions. Faircent, for example,
consistently provides returns at more
than 18% per annum. Some of the
leading P2P lenders in India are
i2ifunding, i-Lend, Faircent, Milaap,
and Loanmeet. This segment is to be
regulated by the RBI wherein all P2P
lending platforms will be treated as
NBFCs.

The above two charts clearly depict the

factors enhancing digital payments
and the declining trend of paper-based
clearing systems respectively.

 Alternative Lending: According to

PWC's FinTech India 2017 report,
Alternative lending is the second most
funded segment after payments.
Driven mostly by MSMEs' demand for
sufficient credit supply lines, this
 Wealth Management: The Wealth
segment witnessed 158 startups
Management and Advisory segment
 36

is still in early stages of adoption in provide large amount of data to the

India. Earlier this year, SEBI allowed insurance companies helping in
investment in mutual funds via digital pricing, risk assessment and providing
wallets. The population of India lacks tailored insurance service. According
participation in the stock and bond to a report, 75% of the non-life
markes presenting a significant scope insurance is expected to come from
in this segment for new entrants online channels by 2020. Thus,
providing streamlined products and disruptors can collaborate with the
services. To make quality financial incumbents to provide customer-
advice affordable, robo-advisory is centric services.
picking up the pace. However,  RegTech: With an increasing number
globally there is a shift from solely of fintech startups and innovative
robo-advisory to a hybrid human- business models, there is an inherent
assisted robo-advisory. Customer need for compliance and regulation.
perception of robo-advisory lacking To avoid compliance related fines,
personal touch, lack of financial there is a need for the implementation
literacy are some of the challenges of regulation technology or RegTech.
this segment is facing in India. Yet, it RegTech can also hasten the process
is expected to gain momentum in the of documentation and form filling via
coming years. automation, thus reducing costs and
 InsureTech: According to National improving operational efficiency.
Health Profile 2015, published by Providing data-based insight, it will
Central Bureau of Health, more than facilitate informed risk choices.
80% of Indian population is not Although this segment is not a
covered even under the most basic familiar concept in India, the
health insurance. This provides a evolution of fintech sector will drive
significant room for growth to the need for RegTech
emerging players in this segment who
can leverage technologies and Conclusion:
innovative business models such as
According to PWC's FinTech India 2017
P2P insurance, micro-insurance, and
report, the expected RoI on FinTech projects
on-demand insurance. IoT and
on India is 29% versus the global average of
analytics will be the hot technologies
20% clearly depicting the huge potential of
in the insurance industry. Focus will
FinTech in Indian markets. It should,
also be on improving customer
however, be kept in mind that the traditional
experience via virtual assistant and
players have a significant advantage of being
prescriptive analytics. Wearables can
trusted by the customers. The strengths of the
 37

incumbents in the financial sector are existing can be established to solve issues and achieve
loyal customer base, broad product set, low user satisfaction. Thus, a collaborative, rather
cost of capital, regulatory compliance and etc. than competitive approach between new
The FinTech industry has new ideas, cutting entrants and the established banks and
edge analytics and their implementation is financial institutions is needed to create a win-
agile. Both the parties can complement each win situation for companies and customers
other, and a mutually beneficial relationship both.
 38

Taxing agricultural income

Siddhesh Suhas Salkar

IIM Rohtak, 2017-19

Introduction In the colonial era the Crown collected the levies

on agrarian produce and hence when the income
In recent times key decisions like GST,
tax was introduced by British in 1886, they did
demonetization, etc. have been taken by the
not include agricultural income. The
government to increase the tax revenue. One of
Government of India act was passed in 1935
the ways to increase tax revenue is to impose
which transferred the power to tax agricultural
taxes on agricultural income. In 1925, the Indian
income to provinces. When India attained
Taxation Enquiry noted that there is no
independence in 1947, these powers were
theoretical justification to continue tax
transferred to states. As we adopted the new
exemption for agricultural income, but there are
constitution, the states have the rights to tax
political objections for removal of this
agricultural income. Currently, there are a few
exemption. Almost a century later we feel that
states like Odisha, Assam, Kerala, Tamil Nadu,
this situation has remained the same.
etc. which tax agricultural income in some or the
other way. However, there is no consistency in
the tax laws across states. Yoginder K. Alagh’s
1961 analysis of agricultural tax yields, Case
For An Agricultural Income Tax, in The
Economic Weekly, indicate a substantial
increase in revenue collection if agricultural
income is taxed and this is very vital for a
growing nation like India. Some attempts were
made in the past to bring reforms in the policies
related to taxation of agricultural income which

History dates as early as 1947. The Expert committee

report on the financial provision to constituent
 39

assembly suggested to bring about changes in economy has to be maintained at the current
policies so that agricultural income can be taxed. growth rate.
Also in 1972, Raj committee provided a
There also another argument in favor of taxing
comprehensive report on this topic and proposed
agricultural income. Just like any other
changes in the taxation policies. In 2002, The
economic activity, agrarian activities provide
Vijay Kelkar committee also recommended that
income to the farmers. How is it reasonable that
states should be persuaded to pass a resolution
an entity is treated differently based on the
to authorize the central government to tax
business it is involved in? In places like Punjab,
agricultural income.
it is prevalent to see large farm owners driving
Why should Agricultural income be luxury cars and owning luxury homes, whereas,

taxed? businessmen in cities who pay taxes find it

difficult to afford such luxuries. In such
Last year, only 39 million people paid taxes in scenarios income tax laws seem to be biased
India. That is just about 6% of the total towards wealthy farmers.
population of India. More than 4 lakhs taxpayers
Some people consider this as an emotional issue
claimed for exemption by agricultural income.
and argue that farmers provide food to us which
The income tax laws allow the exemption to
is the basic need for human beings and hence
corporates to claim exemption on the income
should not be taxed. However, income from
earned on agricultural land, and hence we see
fishing activities is taxed under Indian tax laws.
agro-companies claiming for colossal tax
How can this be justified? Fishing also provides
exemptions. If agricultural income is taxed, then
food to us and hence should not be taxed.
revenue from taxes would increase
substantially. For a country like India where There have been many instances where
agrarian production contributes about 17% to individuals as well corporation use agricultural
the GDP, exclusion of agricultural income from income as a way to evade taxes. These have
tax creates a massive shortfall in the revenue. been dealt in detail in the next section.
The revenue collected from agricultural income
can be used to provide infrastructural
development. There is a need to improve
infrastructure in India if the growth of our
 40

The major reason for continuing the exemption

of agricultural income from income tax is the
vested interests of politicians. The first five
decades saw political leadership by land-owning
classes. It is apparent that they would not go
against their interests. Those who do not belong
to land-owning classes have large farm owners
as their vote banks. These politicians want to
How have income tax laws been
keep farmers happy by continuing the same laws
misused?
which have been governing since pre-
In the last fiscal year, 307 individuals reported independence era.
income of more than 1 crore. Nine out of the top In pre-independence era, there have been
10 claimants of tax exemptions were corporate popular unrests due to agricultural taxes which
companies. Corporate seed company Kaveri fueled independence movement of 1947 in a
seeds reported a profit of Rs. 215 crores and significant way. This has resulted in antipathy
claimed exemption for Rs. 186 crores. towards farm taxes, and prosperous farmers
Monsanto India claimed an exemption for Rs.
have carried forward this antipathy even after
95 crores. Tax Administration Reform independence to pressurize the government to
Commission report released in 2014 stated that exempt agricultural income from taxes. The rise
agricultural income had been increasingly used in farmer suicides has garnered sympathy
as a way to avoid taxes by individuals as well towards farmers which has also strengthened
corporates. these rich farmer’s arguments to exempt their
Post-demonetization, the parliamentary panel taxes.
has also raised concerns about the increase in the Another problem associated with the
number of entities having agricultural income implementation of the tax on agricultural
more than Rs. 1 crore. This suggests that tax income is the informality that exists in this
laws on agricultural income have been used as a sector. In 2004 World bank paper, Prof. Indira
way to evade taxes by many people. Rajaraman has analyzed data from 70

Challenges involved in reforming tax developing countries to show how lack of

accounting standards and payments in cash or
laws
kind have created barriers in reducing
 41

informality in the agrarian sector. In 1948, Uttar It should also be noted that if income tax is
Pradesh government introduced agricultural applied to agricultural income as per current
income tax but repealed it in 1957. Similar flip- income tax slabs for other economic activities,
flops were done by five other states partially 95% of the farmers would not be under the slab
because it was difficult to administer with zero tax. This is also corroborated by
agricultural income tax. It is possible to track the reports of the Vijay Kelkar committee in 2002.
output sold in the market. However, this is not In this way, rich farmers will be taxed, and the
the net income of the farmers as there are rest will be exempted from taxes just like before.
expenses involved in growing crops. So if only 6% of the farmers are taxed, then our
Calculating the profit and loss of this account tax base would be doubled.
will be a very tedious task.
In some of the developed nations, the agrarian
produce is taxed given the organized nature of
this sector in these countries. Our government
How can this problem be solved?
needs to take steps so that agricultural sector in
One of the suggestions provided by Prof. Indira India becomes organized. National Agricultural
Rajaraman is to give crop specific levy on land Market is a good initiative by the government in
rather than self-declared output. This should be this direction. Biometric systems should be used
assessed and implemented at Panchayat level for to track sales transactions that take place at the
flexibility and accuracy. Some incentive can mandi. There should be mandatory registration
also be provided if the income is utilized back to of farmers in the mandi. Once National
agrarian activities. Agricultural Market attains maturity, then
tracking people with large transactions would
Section 10 (1) of the Income Tax Act of India
become relatively easy.
contains exemption clause which does not
authorize the central government to impose a tax Now the government needs to take well-planned
on agricultural income. The state governments steps so that reforms are smoothly implemented
must pass a resolution under article 252 of the in phases.
constitution to authorize the central government
to tax agricultural income. There is a need for
References
the state as well as the central government to
take such bold decisions. http://www.newindianexpress.com/natio
n/2017/may/06/should-agricultural-income-
 42

be-taxed-all-you-need-to-know-1601774-- http://www.esiweb.org/pdf/bridges/koso
1.html vo/4/14.pdf
http://www.thehindubusinessline.com/op http://www.thehindu.com/news/national/
inion/india-should-tax- fincome-tax-departments-reveals-
agriculture/article9677312.ece agriculture-sector-
figures/article8371424.ece
http://www.livemint.com/Opinion/IjHS4
ld7qFwApFx5NzVpXO/Why-India-should- https://timesofindia.indiatimes.com/busi
tax-agricultural-income.html ness/india-business/As-crorepati-farmers-
mushroom-tax-officials-go-digging-for-
https://ageconsearch.umn.edu/bitstream/
evasion/articleshow/51377186.cms
176666/2/agec2000-2001v024i003a007.pdf
 43

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