www.nitie.ac.in

Volume 7 Issue 1

StreetAtNITIE

In-Fin-NITIE

ALSO INCLUDES:
Bank Loan for Startups
MSME Sector Development
Global Turmoil and Indian Capital Market

IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

MESSAGE FROM THE CONVENOR

Want to become an Investment Banker or a Financial Research Analyst
Stop dreaming…Add the skill sets required to become one…

IIQF is the pioneer of high-end finance education in India. It is an education initiative of top industry practitioners who have pioneered the most sophisticated financial technologies in India like Portfolio Risk Management Models and
Systems and Algorithmic Trading Systems using High Performance Parallel Computing.

“A mere 25% of graduates that India produces every year is actually employable. Even though India is poised to become the third largest economy in the world by 2050, out of all the graduates that pass out in an academic year, only 25% are suitable for getting inducted into the industry.”
Jeffrey Fuller, Principal Advisor of Human Capital.
There exists a huge gap between the skills that are required by the industry and what the Indian academic system produces. The objective of IIQF is to impart training to students in those skill-sets that are in demand in the industry and make them industry ready, or as we call them “The Street-Ready”.
Certificate Program in
Advanced Financial Modelling in Excel and VBA

Certificate Program in
Financial Modelling in Excel
A course geared towards teaching the practical skills required for making a career in Investment Banking,
Equity Research, M&A Specialist, Company Valuations, etc. This is a program where practicing Investment Bankers and Treasury Professionals teach the latest techniques and modeling skills that are used in the industry. This is a “hands-on” course, with extensive use of computers and spreadsheets, the training will be imparted through interactive sessions with extensive use of real world Excel models. Lot of financial professionals who do all kinds of financial modelling feel handicapped to quite a large extent in implementing certain models that requires them to do considerable amount of programming in VBA. Merely knowing how to record or even write some odd macros in VBA is not of any help to them. They can’t do many things as they don’t know VBA programming. There is no specialized course in
IT domain that teaches “VBA Programming for Finance”, a course that teaches VBA programming with exclusive focus on Financial Applications.

Leaning Outcome:
•Create MS Excel based financial models.
•Use the advanced tools of Excel.
•Record and use Excel Macros for implementing advanced functionalities in Excel.
•Carry out financial analysis, forecasting, etc.
•Valuation of company
•Bond Valuation
•Valuation of Mergers and Acquisitions

This is why we have designed this course tailor-made for imparting these skills. This course consists of two modules
1) VBA Programming for Finance and 2) Derivatives Valuation and Risk Analytics. The Derivatives Valuation and Risk
Analytics module covers Monte Carlo Simulation, Valueat-Risk and Derivative Valuations of different asset classes using the cutting edge models being used in the industry.
This program gives a huge opportunity to participants even coming from non-mathematical background a chance to enter into the field of quantitative finance.

Course Prerequisites:
•Basic knowledge of MS Excel
•Good knowledge in Finance

Course Prerequisites:
•Knowledge of MS Excel
•Knowledge of Derivative Instruments

For more information log on to: www.iiqf.org or email to: info@iiqf.org
Contact Person: Nitish Mukherjee (+91-9769860151/ +91-22-28797660)

i

Heartiest congratulations to all of you. With the release of yet another edition of the magazine, we are getting bigger and better and it gives me immense pleasure and satisfaction to be the convenor of
Street. In-FIN-NITIE has given me the opportunity to work with the students and advance forth with the common goal of learning and practising finance.
As always, In-FIN-NITIE brings you something new this time around too. After a series of issues with identified theme and articles related to that theme, the current issue just gave the students to write about finance. Themes and matching articles aside, this issue has a plethora of written words by students about whatever caught their eye in the field of finance.
I applaud the effort of Street for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that issue will entertain you and keep you engaged about the recent happening is the world of finance. We look forward for your comments and wish to bring out more interesting issues in the future.
Dr. M Venkateswarlu
Senior Professor of Finance
NITIE

Patron
Prof. Ms. Karuna Jain
Director, NITIE

Convenor
Prof. (Dr.) M Venkateswarlu

Editorial Board
Ankur Gupta
Jitendra Agarwal
Raj Shah
Prashant Pundir
Shashank Kale
Sundeep Tariyal

Design Team
Anish Kumar
Siddhartha Paul

EDITOR’S NOTE
The Yuan devaluation and the Chinese slowdown has been a major talking point this year. There had been speculations of a new financial crisis, affecting the emerging markets in particular. To unravel the details, this edition presents an objective analysis of the
Chinese currency effects and future implications. With its internal situation improving, Indian economy has fared better than its peers and highlighting the same, this edition mentions the agility of Indian capital markets.
To cover the latest financial related happenings in India, we present the digital banking and the role of Indian banks’ in context of
MSME sector.
In our quest to bring to our readers a varied content, we look into the bank loan issue for startups and present an analysis on operations of cab-aggregators like Ola and Uber, and the ways it is being exploited by drivers.
Following the trend, we were inundated with brilliant and exotic articles that really made us toil hard to find the best. We extend our sincere gratitude to all the authors who burned the midnight’s oil to write such exquisite articles. In our endeavour towards continuous improvement we invite feedback and criticism at street.nitie@gmail.com ii

IN-FIN-NITIE

VOLUME 7 ISSUE 1

Yuan Devaluation: Causes and Impact

2

Digital Banking: The Way Forward

8

A Strategic Shift from E-Commerce to M-Commerce

14

Role of Indian Banks in the Development of MSME Sector

19

Street Wall- Payment Banks

22

Strength of Indian Capital Market in the Backdrop of Global Turmoil

24

The First Step is Always the Toughest- Bank Loan for Startups

28

Cab Drivers take Ola and Uber for a Ride

31

Beat The Street- Quiz

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1 to $3.56 trillion by the end of August to stabilize the
Yuan. Let us now look into what system China follows for determining its currency value.

China’s Currency System
China uses a ‘Fixed float exchange regime’. This means that the currency is normally pegged to a reference rate that is set by the People’s bank of China
(which is now the US dollar). It is ‘float’ because it is allowed to fluctuate 2% above or below this reference rate based on previous day’s trading. Thus it allows for the currency to fluctuate based on the market forces of demand and supply for the Chinese Yuan but only up to a certain extent. The US and the European Union have been long pressurizing the Chinese to make their currency fully market driven i.e. float type of currency as it eliminates excessive intervention and manipulation of the currency by the central bank. China’s leadership has since long, urged the IMF to include the Yuan in a basket of global reserve currencies comprising the US Dollar, Euro, Yen and the Pound thus giving it ‘special drawing rights’. For that, China needs to change its currency regime from
‘Managed float’ currency to fully float, that is, a currency whose value is wholly determined by the demand and supply forces of the market with minimal intervention from the central bank. However, following the recent stunt, the US and EU has lost faith in
China’s willingness to allow its currency to become free floating and thus be counted amongst the reserve currencies.

YUAN DEVALUATION: CAUSES AND IMPACT --> “Will it lead to a global ‘currency war’ and world economic meltdown” -Rohit Kaul, SIMSREE
Such a devaluation followed months and months of the Yuan appreciating along with the US dollar, making Chinese exports expensive. This would make the situation politically dangerous for the ruling communist party of China (CPC) as it could lead to loss of millions of jobs in the Chinese domestic sector causing wide outrage against the government. There were other reasons as well attributed to, as to, why the

Introduction

O

n August 11 2015, the People’s bank of China
(PBOC) devalued the Chinese Yuan by about 1.9% below its previous day’s close. It sent ripples around the globe as the world started to believe that Asia’s largest economy is going through one of the toughest phases in its turbulent history – a slowing economy ailed by reduced manufacturing output in the last quarter. In order to resurrect its dwindling economy and bring it back on track, the Chinese central bank had to resort to the age old technique of depreciating the value of its own currency – a process called as “devaluation”.

Figure 1: Graph showing China Yuan, U.S. Dollar Exchange Rate

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PBOC had to come up with such a drastic measure, which would be discussed in detail here, but it is evident that the Chinese authorities alongside central bank would not hesitate to take such steps in the future if need be.

The Yuan depreciated from 6.23 ¥/$ to almost 6.4 ¥/$ on August 11 before settling down to 6.35 ¥/$ later.
It was the single biggest day fall in a decade for the Chinese currency.
So much so that the People’s bank of China had to start selling dollars when the currency had depreciated to 6.4 ¥/$ to arrest the slide of the
Yuan. The reason for selling dollars was because of the huge capital outflows that were taking place to depreciate the Yuan, as the PBOC kept printing new money and increasing the supply of Yuan in the international markets to reduce the value of its currency. The PBOC in all had to offload $93.9 billion taking their reFigure 2: China Foreign Exchange Reserves Change ($billions) serves down from $3.65 trillion

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IN-FIN-NITIE Vol 7 Issue 1

Reasons for Yuan Devaluation

ratio requirements for the banks as discussed earlier.

As can be seen from figure 2, China’s foreign exchange reserves have swelled, almost tripled, in the last decade as they have looked to slow the appreciating Yuan (see figure 3). Thus in effect it was selling Yuan to buy more dollars to arrest the upsurge of
Yuan. However, to ensure that such an influx of Yuan doesn’t cause a surge in inflation, it raised it’s reserve ratio for the banks.

Impact of yuan devaluation on major global currencies & economies around the globe
a) Impact on the US:
Major source of concern for the US has been the strong US dollar which has squeezed their exports.
It has, however, helped curb inflation below the
2% target set by the Fed.
The Fed ever since the end of the quantitative easing rounds, has been looking to raise interest rates and bring the economy back on parity. However, that is now expected to be put on a hold after the Yuan devaluation, as such a move would further add to the upward pressure on the US dollar as it would lead to more capital inflows into the
US economy thus further hurting exports.

Figure 3: ¥ vs $ trend and trading band

The Bank of International Settlements (BIS) has said that Chinese companies have borrowed about $1 trillion abroad, up from
$200 billion in 2009. With the Fed planning to raise interest rates, the cost of such borrowing would go up risking default for many of these Chinese companies.

By doing this, China wanted to keep its exports competitive, as China is primarily an export driven economy. Its exports have fallen by about 1.4% in dollar terms over the last year, with overseas shipments down by almost 5.5%. This amidst a falling domestic consumption demand has triggered the People’s Bank of
China to devalue the Yuan to give a boost to the Chinese domestic market. By increasing the supply of Yuan in the local as well as international markets (either by printing more Yuan or selling off existing Yuan), it has put more money in the hands of people thus encouraging them to spend more and thus prop up consumption. To combat the resulting fear of inflation, it has put a tab on the reserve

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IN-FIN-NITIE Vol 7 Issue 1
As a retaliatory measure, the only way China could stop Fed from doing that was to devalue its currency, thus stopping the Fed from raising interest rates and further strengthening the dollar – thus hurting
US exports as stated earlier. Due to muted inflation rate, Fed could delay the interest rate hike. The Fed has currently kept the interest rate hovering between
0.0% - 0.25%. It is 0.08% as of now. Although there have been no inflationary pressures in the US economy, the Fed needs to hike the interest rate soon enough flush some liquidity out of the market.

would have to write off debts which would go unpaid.
Table1: EU-28 main export partners, 2014 (billion EUR)

Country
USA
China
Switzerland
Russia
Turkey
Japan
Norway

The perceived threat of China holding such large US dollar denominated debt can be seen with the help of an example. Let’s consider we are still under the Bretton Woods system. If China felt it wanted to redeem some of its US debt, say in 2008, then $100 billion of redemption at $1000 per ounce would have equalled
2840 metric tonnes of Gold. That would have been about 35% of the total Gold reserves held by the
U.S. A full redemption of US government treasuries would have thus completely wiped off all the Gold reserves from the US and left China with about 9000 metric tonnes of Gold. The Idea of the Gold standard at that time was to force nations to get their finances in order before they run out of Gold. It proved to be a warning signal. However, with such a system not in place currently, the American people are unaware of the deteriorating conditions existing in their economy right now.

Exports
311
165
140
103
75
53
50

Share %
18.3%
9.7%
8.2%
6.1%
4.4%
3.1%
2.0%

Cumm %
18.3%
27.9%
36.2%
42.2%
46.6%
49.8%
52.7%

Source: http://trade.ec.europa.eu/doclib/docs/2006/september/ tradoc_122532.pdf China is also the second biggest buyer of European goods in general, accounting for nearly 14% of European exports. Sectors with maximum exposure are basic resources, personal and household goods, autos, technology and the auto sector. In the telecom sector in China for example, State owned Huawei is on a fierce competition with Sweden’s Ericsson and devaluation could swing the pendulum the way of
Chinese companies like Huawei and ZTE.
Table 2. China’s main export partners, 2015

Country
USA
European Union
ASEAN
Japan

b) Impact on the European Union:

% Exports
17%
16%
10%
7%

Source: http://www.tradingeconomics.com/china/exports

The strong exchange rate since last year has been a drag on Chinese exports to the EU. Exports to the
European Union have fallen by almost 12% from July
2014 to July 2015. By devaluing the Yuan, China expects value of its exports to the EU to rise. However, this could prove detrimental to countries like Greece,
Spain, Portugal, Italy and other peripheral countries which are already battling a slowing economy, lower wages and dwindling profits. By devaluing Yuan,
China would ‘export their deflation’ to such countries adding to the woes of an existing deflationary European environment. Countries like Greece which have started to implement austerity measures and are already facing low wages, unemployment and low consumer demand would simply be blown away if a large devaluation occurs. It would put more pressure on countries like Germany & France which bear a large burden of their debts on their books and they in turn

A weak Euro, however, isn’t in China’s interest. If the European turmoil leaves countries like Greece,
Portugal out of EU, they would resort to their own weakened currencies and since they form an important part of China’s exports, it would hurt China’s trade surplus a lot. China has a strategic interest in
Europe and has adopted a quid pro quo approach. It has bought European sovereign debt and has shared the debt burden with Germany and France. Thus in the event of the PIGS nations going bankrupt, China would be affected drastically. In return for these risks, China has sought foreign investment in sensitive sectors in the European economy like infrastructure, hi-tech technology and permission to purchase advanced weapons technology originally reserved only for NATO allies.

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

c) Impact on African nations:

get access to cheaper goods.
Some of the steps that the African economies could take is allowing their currencies to depreciate thus gaining a competitive advantage over the Chinese exporters. They should also look to diversify their economies away from commodities in the event of a global commodity crisis.

d) Impact on India:
Impact on the Indian economy as a consequence of the Yuan devaluation is complex. The rupee fell by about 1.5% following the Chinese devaluation and has fallen by about
6% from the start of the year. It was because of the general sell off of the emerging market currencies that has taken place post the devaluation. Part of the devaluation has also been due to the fears of the US Fed hike that could further weaken the currency, hence forcing to RBI to raise interest rates in India i.e. resorting to a contractionary monetary policy and taking away 18 months of solid hard won macro-economic stability. India imports a lot of goods from its eastern neighbour.
The import bill from China was about $60 billion in 2014. The devaluation of Yuan thus brings good news to many importers from India especially the electronic and electrical component manufacturing companies. However, India competes with China in many sectors like Chemicals and textile manufacturing and post devaluation Chinese goods might be-

Figure 5: Africa’s total World trade

Most of the African commodities in countries like
Nigeria and Kenya are still priced in American dollars. Off late though, China has emerged as the largest trading partner for many African countries. To make buying and selling of goods easier, Nigeria in
2011, pledged to keep 5-10% of its foreign exchange reserves as Yuan. They also believed that it would act as a hedge for its local currency, Naira, against the backdrop of volatile oil prices set in dollars. Later
Kenya, which is a major trade partner in Africa with
China, announced plans to set up a clearing house for the Chinese currency. However, with the American dollar strengthening against the Yuan, African exports like platinum, copper and coal could become expensive for the Chinese counterparts.
Countries in Africa having sizable exports to China also include South Africa which exports Gold and wine, Angola which exports oil and Zambia which exports copper. These currencies have already depreciated following the Yuan devaluation. The cost competitive nature of Chinese products in these markets has eroded competition from the African counterparts. For some countries like
Ethiopia, Mozambique, Yuan devaluation is a blessing as it reduces their cost of importing heavy machinery, electrical lines and bulldozers. Consumers and retailers in general also

Figure 6: Commodity Prices trend of 5 years

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come more competitive than Indian goods in world markets. That could be a huge problem for the export industry in India as exports have declined continuously over the past 7 months.

to the slowdown in the Chinese economy, there was decreased demand for many products from these nations causing prices to fall down.

Also with RMB devaluing, price of Chinese steel will decline. Thus the government will have to step in and apply import barriers to prevent Chinese steel from entering into the Indian market or support domestic manufacturers via subsidies (which would put pressure on the fiscal deficit.

To summarise the risks associated and the corresponding actions that could be taken by these Asian economies to subvert the crisis –

A Bank of America report suggests that a 1% drop in ¥ decreases the commodity prices by nearly
0.4-0.5%. This is because China is a large commodity importer and with slowing demand of commodities there, prices of commodities are languishing at their lowest levels since 2009. A weak
Yuan adds to the woes of commodities even further. This would be good news for India as India is a net importer of commodities and low commodity prices would help to lower its import bill thus improving its trade deficit.

References
•James Rickards. (2011), “Currency Wars: The Making of the
Next Global Crisis”, Penguin Book Ltd., England
• http : / / w w w. l ive m i nt . c om / Mon e y / lv x b 2 i c v C b I X N 1WiI6V2AI/Since-the-yuan-devaluation-other-EM-currencies-have-depreci.html
•http://www.bloomberg.com/news/articles/2015-08-23/
ch i n a - l e d - e me rg i ng - m arke t - tu r moi l - e voke s - wor r i some-1994-parallel
•http://www.bloomberg.com/news/articles/2015-09-07/china-s-foreign-exchange-reserves-fall-in-august-on-yuan-support
•http://www.telegraph.co.uk/finance/china-business/11801463/How-China-devaluedthe-yuan-for-the-first-time-in-two-decadesand-why-it-matters.html
•http://www.wsj.com/articles/china-movesto-devalue-the-yuan-1439258401
•http://www.tradingeconomics.com/china/ inflation-cpi •http://trade.ec.europa.eu/doclib/docs/2006/ september/tradoc_122532.pdf •http://marketrealist.com/2015/08/outlook-emerging-economies/
•http://www.worldstopexports.com/top-european-export-countries/1889

e) Impact on Asian economies:
The Yuan devaluation meant that other Asian countries also had to devalue their currency in order to maintain their cost competitiveness in the export markets. In fact, even before the devaluation, owing

Figure 7: Asian currency % change post devaluation

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

Apart from these, some breakthrough innovations in mobile banking services globally:

The digital strategy combined with automating operating models helps in reducing expenses, improves customer experience, first time processing, revenue enhancements. The way in which digital technology works for banks is shown below:-

-Tuhin Choudhury & Anirudh Arora, Great Lakes Institute of Management, Gurgaon
Executive Summary

Today, many bank’s economic models are under increasing pressure. High network fixed costs, churn rates are on the rise and this is causing a general drop in revenues. However digital provides banks with an opportunity to rethink their operating models in order to address these current challenges and return to increased profitability. Now for the banks to be successful, it has to focus mainly on these five areas:-

D

igital refers to all products and services that can be completely or partially delivered through virtual technology. It is not just the use of internet to cross sell or attract new customers but it is the sum of all online media resources that establish, maintain, develop and expand the relationship between a brand and its stakeholders.

Acquisition through digital channels: Banks have to focus on the client experience as well as the mobile channel, simplify the online subscription process and provide user-friendly interfaces. Constant optimization of the search engine marketing (SEM) and search engine optimization (SEO) strategy is also key to enhancing acquisition through digital channels.

Big data and analytics: to be more effective than a buzzword or new trend, the big data strategy will have to be led step-by-step, based on the bank’s existing assets. To tap into its true potential, first the bank will need to define how it will use big data, then it will need to create a virtuous dynamic
(for example, investing in dedicated resources).

Retention and cross-selling via digital channels: Banks now generally have to take into account each channels’ relevance throughout its client lifecycle, which means understanding the client’s digital behavior to customize products and services, and provide an enhanced value proposition. Digital as a sustainable model: to be profitable, both online and in bricks and mortar branches, banks will have to switch from offering low price to high value products and services. Both customer education in paying for online services and definition of a customized offer will enable banks to define this new profitable model.

Integration of digital in the physical world:
Branch closure cannot be the solution. Retail banks will have to adapt the network format and integrate digital into the cornerstone of the banking relationship.

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Commonwealth
Bank (Australia)

Caixa Bank
(Spain)

• Cloud it:- Enables users to upload documents and use custom tags to sort and manage them.
• BPay band- a wearable payments solution wristband that enables customers to make myriad transactions in shops, malls, journeys etc.

• Payments can be made and accepted using a mobile number or email id or facebook connection or by simply bumping two mobiles together. View account balance with one simple swipe or promptly after login app.

• A mobile application for bank transactions using voice commands. The service allows users to make balance enquiries and transfers, locate nearby branches and ATMs.

Bradesco
(Brazil)

DIGITAL BANKING- THE WAY FORWARD

Barclays
(Britain)

Westpac
(Australia)

Deutche Bank
(Germany)

• App Bradesco para glass:Through the application the user can locate agencies, ATM’s of bradesco, receive directions and coordinates using
Google Maps.

The rising technological trends such as internet of things, penetrations of smartphones, tablets, explosion of cloud services; evolving customer behavior like increased usage of mobile internet, worldwide spreading of digital culture has led to less branches activity and increased digital activity by banks.

• When customer hold their
Westpac mastercard or
Visa under the camera of ios device, the augmented reality banking app shows their recent transactions and spending trends in 3d and in a flash. It is available in iphone, android and smart watch.

Intensa sanpaolo (Italy)

Breakthrough Innovations in Banks and Non
–banks globally and in India in the digital space • O-Key (one time password) is a security measure to access services via internet and cell phone.
Customers can withdraw affiliate O-key free loan.

• Finger print scanning to unlock the mobile banking apps with a finger print scanning and access online banking. ICICI Bank
(India)
• Payment service using twitter account. Pay a friend, prepaid recharges, check account balance, view last few transactions.

Some of the top innovations across the continents
(shown in the figure below):-

USA

Europe

Asia

• Apart from the Paypal, Applepay, one of the breakthrough innovations in the banking sector was “Moven.” Some of its important features are:• A smartphone app which tracks the customer’s money which consists of remarkable features like a spending meter, automatic categorization, smart transfer of money with social media integration, suspend or unsuspend in case of card fraud/stolen, it can also be linked with non-moven cards.

• “Transferwise” is the leading online Foreign Exchange Transfer Sevice Provider. It is a peer to peer money transferring service that is quickly conquering the world. Some of the key features of Transferwise are:• It has a website-embedded pay links, call center Center & a smart and aggressive referral program and welcome‐gifts.

• “Money Forward”; It is a Japanese integrated personal finance solution. It is a brilliant idea that connects 1700
Japanese financial services providers to enable the customer to view all finances on one dashboard. Some of the most important features:• Card accounts, bank accounts, loyalty cards, mileage cards, utility bills, medical billings, insurance billings, phone bills, phone‐enhanced purchases, forex, equity and debt trading, investments, savings, credits, loans and mortgages, travel‐related costs accounted electronically and many other electronically available finance‐related things are visible on the integrated dashboard.

Africa

• “M-Pesa” It is a mobile money transfer solution that has transformed societies in Africa and is now conquering other continents. Some of its features are:• Deposit, withdrawal, transferring money, making payments to users and non‐users, paying bills, sending remittances, repaying microloans: phone via PIN secured SMS text messages, receiving funds, microloans. Purchase of goods and services: phone via PIN secured SMS text messages.

Australia

• “Nimble”- Apply for a loan from your smart phone and receive the money on your account within 60 minutes”.
Nimble is quick, paperless, simple and charming, but it is expensive (Establishment Fee: 20 percent of the capital and
Interest: 4 percent per month of the principal).

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IN-FIN-NITIE Vol 7 Issue 1
Some Breakthrough Innovations in India:-

Leveraging smartphone capabilities to
• Is an innovator in personal finance space, providing a completely digital improve app funccustomer experience
Aditya
tionality: With a
• The platform itself provides a financial aggregation tool, assimilating various financial relationships of an individual under one roof. The initial attraction is
Birla’s My therefore being able to see all of one’s accounts in a single place, track expenses flurry of affordable and manage one’s personal expenses smartphones being
Universe
launched in the Indian mobile market through aggressive pricing strategies, de• The joint offering provides both companies with a host of opportunities. For more purchases as
Snapdeal- Snapdeal, the tie up will driveapart from potentialcustomers will now have vice penetration is exa payment mechanism to use, sales increases with the card on pected to experience
HDFC co- • specific offers from usingsmaller townsSnapdeal.beneficial to Snapdeal that
Further, the targeting of will be sizable growth. Acsees a significant portion of its 3 Biilion annual USD gross merchandise branded sales generated from Tier III and Tier IV towns and cities. The move will cording to an e-Marsmaller towns for HDFC, credit card also open up customer acquisitions intransaction volumes. apart from keter report, by 2016, gains from increased card usage and
India will have more than 200 million smartphone users, overtaking the US as the world’s
Digital banking the way forward:second largest smartphone market. Along with the latest internet trends, designing content tailored for
Take advantage of richer, cheaper data access: So- smartphones, and leveraging the increased functioncial platforms have developed themselves into fer- ality of smartphones, including GPS, camera and actile ground for developing customer insights, un- cess to fast internet, will continue to be a key driver derstanding the latest trends of likes and dislikes, as for the growth of the industry. Developing innovative well as testing hypotheses and building brand equity. apps and mobile experiences will be a major hook in
By combining access to rich, varied data with pow- engaging potential customers. Expanding the scope erful analytics tools and techniques, banks can now of banking app functionality to provide options for go beyond the traditional demographic and finan- not just existing customers but potential customers cial data sources to utilize social data while profiling could be a major step towards using the platform as customers better to understand their individual re- a customer acquisition tool. For example, tying in quirements. Search engine optimization is another the smartphone’s GPS functionality to provide cusapproach that continues to be a formidable customer tomers with top retail offers and discounts in their acquisition strategy. According to the Shop.Org and vicinity can be a pull to download and use the app.
Forrester State of Retailing Online 2014 study, 85% Bundling this with further discounts when using the of retailers put search engine marketing as the most bank’s products can then induce the user to apply for effective online customer acquisition tool. the bank’s products. If the app can be used to set up a meeting with a bank sales representative (messaging
Building partnerships: E-commerce websites and ag- or calling through the app or geo-tagging the customgregators: With phenomenal boom being observed in er’s location) or even allow the potential customer to the e-commerce space in India, banks can use these apply for the product directly through the app, the channels as a means to reach out to new customers, conversion from potential to existing customer is far including those in smaller cities. Apart from explor- more likely. Such hooks to promote customer interest ing regular advertising strategies on these websites, that require low initial customer effort will provide a joint product offerings could be an innovative oppor- good opportunity to increase lead conversion. tunity. The e-commerce boom has also increased the customer’s comfort with online purchases. And this Optimizing acquisition processes through digital: is slowly expanding to the financial products space as With the onset of Adhaar, biometric technologies are is evident with financial product aggregators witness- fuelling innovation in this space. By leveraging such ing business growth. Eg:- Bankbazaar.com, which is technologies, banks can now develop ‘doc-less’ applian aggregator for loans and credit cards among other cation processes. By scanning one’s fingerprint and financial products, saw disbursals double across all hitting the Adhaar database, one’s KYC is automatiproduct categories. cally generated, eliminating the need for photo-iden-

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IN-FIN-NITIE Vol 7 Issue 1 tification or having to carry duplicates. This, combined with a camera, fulfils all KYC requirements.

to incorporate the PayPal functionality into website applications and mobile apps.

Digital Payment Solutions: Outdoor payments enabled by near field communication technology:- Most outdoor micropayments will be driven by near field communication (NFC) devices, as is evident with the bPay band, a wearable payments solution launched by Barclaycard. It is a wristband that enables customers to make myriad transactions in shops, bars, cafes as well as public transport. The wearable device offers customers a simpler way to pay for goods and services by just tapping their wristband to pay for bus journeys, their morning coffee, lunchtime sandwich or post-work drinks. Turkcell Wallet for instance is a digital wallet product that offers customers the payment option for both, online as well as point-ofsale transactions based on the NFC technology. EpClearing is a payments framework, designed for high volumes of low-value cross-border payments, ensuring a cost-effective and transparent service for secure international payments. Unlike traditional open loop
(correspondent banking or wire payment) systems,
Earthport processes a cross-border payment as a domestic credit transfer, interlinked through a sophisticated virtual accounting engine.

Innovation Roadmap for Banks:-

Key Trends:- Biometrics is considered to change the future of payments and how consumers interact with their service providers. One such example is of Pay
Tango, which enables customers to pay through a fingerprint scan. Pay Tango’s system links a form of payment such as debit or credit card, to a user’s fingerprint. The user will then have to only place the index finger and middle finger on the biometric fingerprint scanner in order to make the payment. The software immediately then recognizes the user and authorizes the transaction. Cards need to re-invent and innovate in order to find its purpose in the new digital commerce environment. It will require transforming card payments and processing capabilities, since dematerialization and digitization of plastic cards will leave them irrelevant. For example, Apple Pay combines digitized cards with mobile contactless capabilities, and has the power to transform how consumers make payments in-store as well as for in-app purchases from mobile devices. The next step in the transformation of payments will result in exposing payment functions over digital channels. Banks and payment providers can expose services through application programming interfaces (APIs) for third-parties in order to embed within their applications. For example, PayPal offers a set of APIs that provide the means

Apart from the digital innovations of BANKS as mentioned : E-Comm Smart, Get Smart, Bank Statement Analyzer and Partnerships with e-commerce companies, here is our innovation roadmap based on our research.
The Target Segment:-

Segment Profiles:Segment
Age
Aspiring
18-34
Bloomers
Ardent Afflu- 18-34 ents Liberal Users
35-54

11

Cautious Seniors
Disinclined
Conservatives

55+
55+

Income
Less than or equal to
Rs 500000 annually
Greater than Rs
500000 annually
Rs (500000-1000000) annually More than Rs 1000000 annually Rs (500000-1000000)/ month Aspiring Bloomers:- This segment is digitally inclined but not among the first to adopt digital banking.
However they access mobile based services once a week which includes features like checking balances, transferring funds etc. Consumers in this segment are willing to try and adopt advanced features such as mobile bill pay, virtual wallet services. To retain and further penetrate this segment banks can educate these consumers about advanced features through direct marketing campaigns.

Ardent Affluents:- This segment is highly engaged with their mobile devices. They use advanced features like pay through mobile wallet, bill payments through payment gateways and are interested in seeking guidance on personal finance and investments. They seek value added services such as spending pattern analysis, loyalty rewards/points, shopping updates and portfolio monitoring. Sustaining this segment’s interest in digital services by keeping up with their innovation needs can help BANKS to acquire and retain this segment.

IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1
2. Increase Visibility through enhancing SEO/SEM strategy:Identify the keywords for search engines in order to bring the client to the right web page and decrease the no. of clicks required to reach the desired product -> improve the conversion ratio. Identifying and analyzing client’s navigation habits by following their browsing history through cookies will help Banks to target the right customers with the right advertisement. For e.g. a customer that have visited some vehicle websites is likely to buy a car, so Banks should target car loan advertising for this particular customer. Careful monitoring of keywords should lead to adapted landing pages that can increase ratio by 20% or more, generate higher leads, rebound page analysis and more.

Liberal Users:- This segment use digital banking solutions but not extensively. They also seek advice to help them improve how they manage their finances.
This segment has the potential to respond best to services related to money management.
Disinclined Conservatives:- This segment has serious concerns about the safety and security of mobile transactions. Currently available banking services
(branch-brick and mortar) meet their existing needs.
BANKS can penetrate into this segment by informing them more about mobile banking and alleviating security concerns.

Cautious Seniors:- These consumers are value seekers.
They are generally interested in products that offer tangible rewards. They are also highly sensitive to mobile security concerns. To make mobility more palatable to them BANKS have to extol the virtues of mobile banking, including its safety and security.

1. Customer Acquisition through Mobile Banking:Provide clients with a value added experience/proposition that would contain a preferential price e.g. provide them with a good interest rate on savings account, enhanced customer experience with rapid and simple subscription process, a five click subscription process as follows:i)Automatic calculation of the loan amount by the system. ii)Personal data collection (e.g. e-KYC) along with contact details. iii)Automatic and paperless income data checking process. iv)Liabilities data collection and check, assign credit rating to the client.
v)Finalize deals and sync agreements.
Here online verification will be based on small money transfer from the client’s bank. If data in the transfer made by the client is consistent with data given by him/her in the application, the verification should be considered positive.
Here the target segment would be ardent affluents followed by aspiring bloomers. The budget required will depend upon the fees charged by app developers which can range in between $15k to $25k based on the applications it can provide through the mobile app. count, tax by enhancing the personal financial management (PFM) experience through the mobile app.
The target segment here should include all the smartphone users having internet connections (both existing and new customers) comprising of ardent afluents, aspiring bloomers, liberal users, cautious seniors as well as disinclined conservatives (try to penetrate more into this segment). Since this strategy includes application chat facilities, a customer care team has to be put in place who can connect and engage with customers real time and solve queries accordingly.

The Branch of ‘Digital’ Banks:-

Challenges:The banks opting for digitalization can face competition from payment banks and small banks like Bandhan Financial, IDFC as they will bring in new competencies. Also most banks are now turning towards digital banking in which HDFC is leading from the front. Meanwhile RBI Governor Raghuram Rajan has a long list of reforms for this sector which ranges from reviewing the archaic priority sector lending norms to the development of the debt market. These reforms will offer both opportunities and challenges for Banks. Apart from these there are some key cyber security risks associated with digital implementation
(shown aside) but the opportunity which lies forward is an exciting journey Banks can embrace with.

Here the target segment is definitely ardent affluents, aspiring bloomers followed by liberal users and cautious seniors to some extent. A Google Analytics consultant generally charge $125/hour for google analytics services, so the budget has to prepared keeping the consultants fees and time in mind.

System inoperability caused by a breach: inability to execute trades and access to information

Damage to the brand and reputation: Loss of share value and market confidence

Financial and Intellectual property: Loss of credit, cash, competitive edge, trading algorithms and techniques

The Road Ahead

3. Retain Customers with Long term and Customized
Products:i) Customize loan offers proposed on the client mobile /tablet app with simulations. ii) Develop “Private sales” like “Happy Hours”, “Incredible Deals” in branch or dedicated campaigns .
For e.g. Get home loans @ 9.5% on ‘Signature homes’ from the period of 5th to 7th October 2015, in branch or dedicated campaigns and push alerts on clients mobile. iii) Develop complementary services like access to experts (chats or videos) which can provide an instant service that will prevent client from looking for more customized products from competitors, access to communities, newsletters, notices for a dedicated client segment. iv) Enable clients to manage their several short/mid term budgets like (information related to) savings ac-

12

• Limited to no integration with risk
• Only bureau (often single source) and internal data used to determine the credit decision
• Digital risk is managed using existing frameworks, typically requiring the rekeying of data into legacy systems
• Risk management is heavily reliant on human intervention and validation • Multi- bureau credit data sources
• Risk framework, policy and procedure translated for digital
• Risk processes optimised and automated to support an electronic distribution paradigm
• Big data analysis used to leverage additional data sources and improve marginal risk decision making 13

• New lending models- such as proactive mortgage offers- will result in targeted, location based sales distribution
• New behavioural paradigms will be utilised such as trust based decision making, taking into account customer online behaviour across multiple digital sources

IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

ing mobile devices for activities such as Internet browsing, online purchase and online dating.
So, why not keep mobile website ON? This is because there is an increased focus by the consumers & producers alike on Apps because mobile web-browsers are not-so-customer-friendly. Plus the consumers have a tendency to browse through a higher number of products & have better repeat purchase rates on a mobile-app as compared to mobile or desktop websites.

The Transition from E-Commerce to
M-Commerce
So, how has this mobile revolution affected e-commerce? A ‘The Times of India’ article stated that most of the prominent Indian e-comm players are witness to the fact that mobiles contribute to more than 50% to 60% of the transactions today which used to be below 5% a year ago. This, as article states, is attributed to the exponential rise in penetration of smartphones.
Another article on Medianama in May 2014 described how Snapdeal, the second largest homegrown e-tailer in India behind Flipkart, had seen its mobile sales increase 25 times in one year. The
Company is expecting almost 90% of its orders to come from mobile apps in the coming three years.

TOWARDS A NEW DAWN: A STRATEGIC SHIFT FROM E-COMMERCE TO M-COMMERCE
Is ‘app-only’ strategy profitable in Indian e-commerce industry?

I

n a first-of-its-kind move by an e-commerce player anywhere in the world, Myntra morphed into a mobile based retailer form on 15th, May 2015. The company which had already turned down the mobile version of its website, closed its website (even on computers/laptops) in an attempt to become a ‘mobile App-only’ retailer. Moreover, Flipkart, the parent company of Myntra, went ahead with a similar move in late march this year and pulled off its mobile website. If the tweets of Sachin Bansal, the co-founder & CEO of Flipkart, are anything to go by, Flipkart also plans to replicate the mobile app-only retailer if the experiment with Myntra becomes successful.
So why such a craze for the morphism? To answer that lets begin first with why to have m-commerce when e-commerce is already there. As Mr. Bansal puts it, pursuing a website-only retailing model is probably the riskiest thing in e-commerce business anywhere in the world because that way you are not catering to the customer segment which looks for far more ease
& has far less technical upgradation & sophistication.

-Akshay Gajghate, IIM Shillong

OK! Accepted! But then why App-only? Let’s discuss this matter by first looking at the changes which took place in Indian landscape on the basis of which the decision was taken.
Smartphones in India

3G Subscribers

Monthly addition

Monthly app downloads

India’s M Commerce market size approximately
Source: DC, Ystats Mobile in India Report & various other industry reports

The Mobile Leap
The Internet and Mobile Association of India predicts that there will be 60.17% of all internet users in India will be mobile users by year end. The mobile user base has grown as much as by four times in the last three years. The prime drivers for a shift of consumers to “Mobile only” internet are

14

believed to be the declining costs of connectivity and the speedy deployment of connectivity in emerging economies and developing countries.

So, Mr. Bansal bases the decision of re-launching Myntra as a mobile-app only retailer, on the fact that India is going through a mobile commerce revolution.
Myntra derived 90% of its traffic and 70% of its sales through the mobile platform. The company had about
9 million mobile app users with approximately 4 million customers having made purchases through it.

Last year SAP conducted a comprehensive research survey regarding the usage for shopping and mobile adaptation patterns of Indians. One of the most revealing conclusions of the study
Smartphone User Growth [2013-2018] - Top 5 Countries was that more than
97% of participants 800.0
China
US
India
Japan
Russia
672.1 favored and asked 700.0
624.7
for mobile based
574.2
600.0

platforms to deal with utilities, retailers, bank, and other business entities. 80% of the answerers conceded that besides messaging and calling, they are progressively us-

500.0

519.7

436.1

400.0
300.0
200.0

143.9

100.0

76
40.5
35.8

0.0

704.1

2013

165.3

184.2

123.3
50.8
49

167.9
58.2
57.4

2014

2015

15

198.5

243.8

204.1
65.1

211.5
71.9

61.2

63.9

2016

2017

279.2
220
76.4
65.5
2018

IN-FIN-NITIE Vol 7 Issue 1
The mobile channel is immensely facilitating growth in orders from non-metros cities. Tier
II and Tier III cities in the country are an important market space for any online retail because of the absence of an organized retail sector.
The year 2014 saw billions of dollars being pumped into the Indian e-commerce business. Majority of the investment has gone into the growth of manpower, marketing and infrastructure. A major highlight of this investment is that almost all of the marketing money is being spent to develop the mobile base as India expects to double its base of mobile internet subscriptions and smartphones users by the 2015 year end. Thus, leading to rapid rise in numbers of ‘Mobile-Only’ and Smartphones users.
Major players have come to terms with the fact that in a business as fierce and ruthless as that of e-tailing, where price is the king and where switching costs are absolutely absent, the only way to have a more personalized interaction with a customer is by means of a mobile app. They are in the hopes that a major shift to an app-only strategy in the near future will help them capture a share of the substantial market opportuning that is about to arrive. This is the primary why most of the multi-billion dollar e-commerce companies are counting on an app-only strategy. There are about 900 million people in India who are still not internet users, most of whom will mostly come online through the mobile platform.
So is the Hidden Secret behind cellular most effective Diktat: Stopping rate comparison?
After doing some literature review of articles by product managers and users of e-commerce portal, we may conclude that Myntra wishes to hinder the process of rate comparison because comparing prices on cellular apps is a daunting task. Thus, to minimize wastage of time and mobile data, the customer will have limited options.
Echoing our view, Jabong co-founder, Praveen stated, “Getting a rate discovery from an app can be very elaborate. Price or rate assessment is vastly diminished there. Considering the small screen size, some customers would find it a visibility impediment.”

IN-FIN-NITIE Vol 7 Issue 1

5 whys and wherefores m-commerce is the
‘Next Big Thing’
By going app-only, Flipkart will kill two birds with one stone. It will cut infrastructure costs and expand its market to cover all of India, in a quest to defeat Amazon. Here’s how.
1.Mobile is the unconquered frontier
You must have wondered as to why Facebook took over WhatsApp & that too for $19 Billion. Why are mobile payment platforms the preferred acquisitions of E-Commerce companies? The signs are there for all to see. The upcoming innovations are happening in the mobile platforms. And, thus, before any smart startup attempts to leverage the power and characteristics of the mobile platform and establish itself, Flipkart aims to grab the platform by the throat. In order to take full advantage of the mobile platform, Flipkart should be able to bring in benefits such as cash-less transactions, ability to run the app with minimum possible bandwidth, etc.

2. Burgeoning smartphone penetration in India
As can be seen by the graphs, the smartphone user base in India is growing at an accelerated rate & is going to surpass US by 2016.
India will have about 200 million smartphone users by 2016, signaling a brave new world and plethora of opportunities for leading e-commerce, m-commerce players and digital entrepreneurs. Conceive 20 crore
Indians endowed with a phone that connects them to the internet – bountiful chances for m-commerce.

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3. Add a personal touch!
Mobile phones are thoroughly personal, much more than desktops and laptops. Flipkart is aiming to make shopping a much more personalized experience by going the app-only way. It will make them have a way more targeted approach and at the same time enhancing the shopping experience for users with features like pre-logged in accounts, geo-tagging and personalized notifications on the basis of user history. Added benefits such as customized notifications for a new product launch or for price changes.
4. Promote loyalty
Consumers in the Indian market are more likely to change loyalties & adherences on the basis of competitive prices. This is restricted to a great extent on mobile-based purchases as the peer comparison is a lot more difficult on a mobile-app than on desktops/laptops. Also, given the fact that the suggestions made on the app would be much more relevant & specific to the consumer, going mobile would ensure better click-throughs & a higher conversion rate. Thus, going ‘mobile-only’ will thrust forward more customers in the following lifecycle curve:
Awareness Consideration Conversion Commitment

Loyalty

5. End to the loss of privacy at the discretion of browser owners
Browsers, especially Chrome, typically feed the companies that own them. It registers, records all the preferences of users and stacks them in the owners’

servers. Therefore, browsers are not always neutral and are generally, on the contrary, pro-owners. It analyzes a player’s customer base and later uses it to milk profits from them. It bodes well for e-commerce majors to realize and address this menace as early as possible. Android or other operating systems do not have the capability to analyze what is going on in their apps. Hence no source of data or insights on consumer base to outside parties and no longer the beguilement of jumping websites asking users to compare various products.
So, though the risk of data misuse is still there but its lot more restricted & you know well in advance what’s causing what.

What do market players have to say about it
The users are broadly dissatisfied with this decision, and have expressed their anger and frustration. After all, not each consumer wants to get ‘sticky’ with one app as comparing costs turns into a headache on a cellular app.
On a brighter side, not all e-commerce portals in
India are emulating Flipkart and Myntra and the top three portals have overtly come out and guaranteed all their customers that their computing device version will continue to exist, along with cellular.
Strategically speaking, this is a massive morale booster for users of desktop/laptop variant of ecommerce portals, and at the same time, a tremendous demoralizer for Flipkart and Myntra’s advertising and marketing

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IN-FIN-NITIE Vol 7 Issue 1 team, as they appear to have gone astray as of now.

shoppers to use one certain medium to buy on.

We can’t force a consumer – Jabong
As the present development goes, even Jabong, biggest rival of Myntra, has admitted that 50% of all visitors and revenues originate on their cellular app and the contribution is growing. However whilst, they can’t force a customer to purchase by app alone.
The customer is the best person to gauge whether or not they want a site or an app to make the purchase.

Conclusion

Praveen Sinha, co-founder of Jabong, mentioned that they firmly believe the buyers should have the ability to choose whether to purchase on his smartphone or on the laptop.

In the conclusion, we would suggest that the e-commerce players should keep on experimenting with the ever-dynamic Indian Consumer which will lead them to a better strategy. As the Rama Bijapurkar, in her book ‘We Are Like That Only: Understanding the
Logic of Consumer India’, states that the Indian Consumer shouldn’t be assumed to be going the same path as their western counterparts went in their consumerism. In a country with such a cultural, social & financial diversity, micro-segmenting is the best way forward.

IN-FIN-NITIE Vol 7 Issue 1

The might lies with the consumer – Amazon
Amazon has made clear that in an emerging and a price sensitive market like India, the decision making mandate has to be handed over to the customer. Although they admitted that almost 50% of their revenue are taking place on their cellular app, both internet site and cell must co-exist. Amazon sticks to its ideology of being a purchaser-obsessed company which enables its customers to buy whenever, wherever, and whatever s/he wishes to buy.
Respect laptop and desktop users – Snapdeal
Snapdeal has mentioned that their analytics knowledge indicates that there are tremendous quantity of laptop website users on their portal, and they just can’t abandon them.
A spokesperson from Snapdeal stated that they have stats to support the fact that many buyers use PCs to shop on-line & they do not wish to push their

The market is rife with both supporting & opposing views on being ‘mobile-only’ retailer. Thus, a lot remains to be seen on the basis of its impact on profitability & market share. The writers of the article tried to search for authentic data representing such a case study but as of now the e-comm & m-comm players are giving contradictory views.

References
• http://www.statista.com/statistics/257048/smartphone-user-penetration-in-india/
• http://www.ibtimes.co.in/myntra-sees-10-dropsales-after-moving-app-only-format-633160
• http://trak.in/tags/business/2015/05/18/amazon-snapdeal-jabong-refuse-flipkart-myntras-mobile-only/
• http://www.huffingtonpost.in/dhritiman-hazarika/6-reasons-why-flipkarts-a_b_7800628.html
• http://yourstory.com/2015/05/myntra-app-only-move-mobile/
• http://trak.in/tags/business/2013/10/21/m-commercegrowth-india-30-snapdeal-sales-mobiles/
• http://www.ibtimes.co.in/myntra-sees-10-drop-sales-aftermoving-app-only-format-633160

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ROLE OF INDIAN BANKS IN THE DEVELOPMENT OF
MSME SECTOR- where the future of India lies -Deepa Yadav, SIMS Pune

The Micro, Small and Medium Enterprises (MSME)

plays a pivotal role as a growth engine of Indian Socio-economy and is a major contributor towards the equitable and sustainable development of the economy. It is one of the main pillars of the Prime Minister’s Mr. Narendra Modi “Make in India” campaign.
MSMEs is one of the critical component of growth story of India with its continuous contribution towards generating the highest rates of employment in
India after the agricultural sector. It is also making significant contributions towards the GDP, imports, exports, gross industrial value of output, gross value added and investments in fixed assets which ultimately results in the development of the Indian manufacturing, services and infrastructure sectors. It is not wrong to say that the future of India lie in hand of these MSMEs.
MSMEs contributes approximately 37.5% to the
GDP of India in the year 2012-2013 and has steadily maintained it for the past three years, which comprises of 30% contribution from the services sector and the remaining from the manufacturing sector. It means it has added a gross value of Rs. 20.56 lakh crore out of which services sector has contributed to
71.2% and the remaining 18.8% by the manufacturing as per the latest Report of the MSME committee which came in Feb, 2015. MSMEs also accounts for around 40% of the exports of India and significantly

generates employment for nearly 80 to 100 million people in the country as per the Ministry of MSME’s
Annual Report of 2013-2014.
Before coming to the role of Indian banks in the development of MSME sector we first need to understand the meaning of MSME in India. MSME sector has been categorised into two parts: Manufacturing and Services and the specifications of both are different. The table given below defines what exactly a MSME is in the Indian market as per the Indian
MSMED (Amendment) Bill, 2014:
Manufacturing

Micro
Small

Medium

Services

(Investment in plant

(Investment in

and machinery)

Categories

equipment)

Does not exceed Rs. 50 lakh

Does not exceed Rs. 20 lakh

More than Rs. 50 lakh but does

More than Rs. 20 lakh but does

not exceed Rs. 10 crore

not exceed Rs. 5 crore

More than Rs. 10 crore but does

More than Rs. 5 crore but does

not exceed Rs. 30 crore

not exceed Rs. 15 crore

In order to maintain and sustain any MSMEs and for the continuous development of MSMEs India, adequate availability of the credit and finance is required as the most important key input for financing its business processes and to meet the meet its working capital requirements at the right time.

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IN-FIN-NITIE Vol 7 Issue 1
This fact is available to any MSME developed by either an entrepreneur or a business unit. Generally,
MSMEs in India are owned by first time entrepreneurs who does not have adequate capital or have very little capital which requires initial investment to start the business in addition to technical, marketing and managerial support. In addition to that, they also require additional capital from time to time for technological up gradation, capacity expansion growth, marketing and imports & exports.
Indian banks plays crucial role in providing financial facilities to various and huge numbers of MSMEs through their various branch offices, regional offices and other banking divisions across the country. Various stakeholders like Reserve Bank of India (RBI), private banks, public banks, commercial banks, scheduled banks, academia & entrepreneurs etc. are working together to for the sustainable economic growth of the India. In order to channelize the flow of credit and finance to the to the MSMEs, RBI has mandated banks specific targets for lending a certain amount of their portfolio to the MSMEs as a part of
Priority Sector Lending norms. RBI has mandated all banks to lend at least 7% of their annual total lending to these MSMEs to solve their problem of capital scarcity. RBI has also made various policies for solve the financing problem of these MSMEs and for their proper development.
Banks prefer to offer loans against collaterals to MSMEs as they prefer collateral in order to avoid defaults and to secure their loan books as per their risk framework. The Loan Against Property (LAP ) of these banks forms a major chunk of MSME loans in the range of Rs. 30 million to Rs. 150 millions.
In addition to this, RBI has also proposed the setting up of various credit rating agencies for the credit rating of these MSMEs which made the SME Rating Agency (SMERA) to inYear (last corporate banks like Small Industries Development Bank of India (SIDBI), Dun reporting Friday) and Bradsheet etc. which will evaluate the various rating products and rate various
MSMEs so that they can easily get access March 2012 to banks for financing at better terms and conditions. The Government of India and the Ministry of MSME has launched a March 2013
Credit Guarantee Scheme which will help in the strengthening of credit delivery sysMarch 2014 tem to the MSME sector. This scheme is

financed by the GOI and SIDBI in theratio of 4:1. This will help in resolving the problems where MSMEs have lack of collateral with banks offering collateral free loans based on the assurance and credit guarantee cover offered by the Credit Guarantee Fund Trust
Scheme for Micro and Small Industries (CGTMSE) up to 75% of the amount of default to the Member
Lending Institutions (MLI). This scheme is a boon for the MSMEs who now don’t have to worry about collaterals to raise the initial investment and funding for their Capital Expenditure.
The Union Budget 2015 also offered a brand new source of financing trade to MSMEs with the proposal of setting up of Factoring: Trade Receivables
Exchange which will ultimately result in success of
PM Mr. Narendra Modi’s ambitious programs such as Make in India, Micro Units Development and Refinance Agency Bank (MUDRA) and smart cities in order to increase the contribution of MSMEs to the overall economic growth of India.
The bank have special focus on the overall MSME sector as they form around 15% of its asset book and the contribution of micro sector is around 45% of their MSME book. As a result of which the total bank credit to MSME sector has increase to Rs. 7.9 trillion in FY2014 at a compounded annual growth rate of
25% from Rs. 833 billion in FY2005. The public sector banks and commercial banks have reported a CAGR of around 36% when it comes to providing the loans to MSME sector due to huge demand of capital requirement by these MSMEs. The most reluctant ones are the foreign in terms for providing loans to these
MSMEs. The aggregate credit outstanding to MSMEs from the scheduled commercial banks has increased to Rs. 10.35 lakh crore in FY2014 from Rs. 6.81 lakh crore in FY2012 as the data provided by RBI.

(Provisional)

20

All Scheduled

Public Sector

Private Sector

Banks

Banks

5,33,279.29

1,24,725.66

23,300.71

6,81,305.66

6,43,525.02

1,82,247.82

43,251.30

8,69,024.14

(20.7%)

(46.1%)

(85.6%)

(27.6%)

7,54,391.07

2,46,025.76

34,359.17

10,34,775.99

(17.2%)

(35.0%)

(-20.6%)

(19.1%)

Foreign Banks

Commercial banks The table given above shows the aggregate bank credit flow to MSME for public sector banks, private sector banks, foreign banks and all scheduled commercial banks with their annual growth rate for the financial period of 2012 to 2014.
In order to cater to any market, a service provider needs to devise methods and design products and services as per the customer’s requirements. The very same thing is applicable to the Indian banks who has to consider the requirements of the MSME so that they can design relevant products and services in order to reach the targeted MSMEs and to fulfil their responsibility towards the country’s economic growth by acting as an efficient financial intermediary. In order to understand the MSMEs sector, the
Indian banks has to adopt a two- pronged approach: one towards Sectoral & Cluster based approach and the other towards Product Design approach. The first approach will help in understanding the cash flow dynamics and the value-chain of the MSMEs and the second approach will help banks to design the products and services according to the value-chain analysis and the role of debt financing in the growth of
MSMEs and small businesses in the value-chain. This will also help in offering value-added loans like consumer loans and distribution strategies in order to tempt the small business loans on a very large scale.
The government of India has announced a creation of a committee in order to examine and analyse the overall financial architecture of the MSME sector by the Ministry of Finance and the Department of Financial Services in its Union budget FY 2014-2015 which will interact with financial institutions, intermediaries and MSMEs to design products as per their needs. It will help the banks to reach out to a larger number of MSMEs and to increase their distribution for the purpose of financial inclusion of MSMEs on a very mass scale.
The main objectives of this committee and banks specific to MSMEs are
• To ensure every registered MSME has a bank account i.e financial inclusion
• To facilitate ease of doing business in India for MSMEs
• To increase the flow of equity to the MSME sector
• To encourage the establishment of an effective, online and technology-driven receivables financing platform • Expand coverage under and enhance effectiveness

& utilization of credit guarantee/insurance schemes and make the programmes accessible to a wider set of credit providers
• The inclusion of banking institutions like scheduled commercial banks, micro finance institutions, nonbank finance companies, cooperative banks, the proposed Post Bank and the proposed new small finance banks of India in the financial architecture t serve the
MSME sector.
• To encourage the expansion of credit bureaus
The Government of India has also appointed an apex body SIDBI for the promotion, development and financing of MSMEs. Its provides financial supports to these MSMEs in the form of refinance and resource support through eligible Primary Lending Institutions (PLIs), such as, Banks, State Financial Corporations (SFCs) and other intermediaries for onward lending to MSMEs, direct assistance to MSMEs, with focus on niche areas like risk capital/equity, sustainable finance for promoting energy efficiency and cleaner production, receivable financing, service sector financing, etc. and Micro Finance through MFIs.
The total credit flow outstanding of SIDBI to MSME is Rs. 61, 271 crore including refinance of Rs. 39,000 crore in the FY 2014 which provides assistance to more than 340 lakh units/persons.
The Indian banks are constantly trying to improve and leverage upon the existing MSME financial architecture in order to create new financial construct and opportunities for MSMEs so that they can easily get access to financing across the country at better and competitive interest rates. This will surely not only help in the development of the MSME sector in
India but also benefit the financial sector, employment generation and overall sustainable economic growth of India.

References:

•http://economictimes.indiatimes.com/small-biz/money/ msme-sector-undercapitalized-role-of-bank-finance-crucial/ articleshow/47890997.cms
•http://www.business-standard.com/article/finance/-banks-toplay-bigger-role-in-msme-sector-110121900037_1.html
•Research Paper: Micro, Small and Medium Enterprises
(MSME) in India; Financing by banks, www.ijbmi.org, Volume
3, Issue 1, January 2014, PP.07-16
•Research Paper: The Role of SIDBI in developing the MSMEs in India, IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925. Volume 1, Issue 6
(Nov. – Dec. 2013), PP 08-14 www.iosrjournals.org
•MSME Committee Report, Feb, 2015

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

22

23

IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1

But during the 2008 global financial crisis, the Sensex almost crashed more than 50%, from 20,000 to 9,000 odd levels. FIIs had been withdrawing heavily from
Indian equity as they moved their capital to safety.
This seriously crippled the liquidity of our stock market. It led to no appetite from retail and institutional investors and the primary and secondary markets were in a deep abyss.
Despite the great fall in the popular stock market indices, few quarters later, our stock markets provided strong resistance to the global financial contagion.
The turnover of the NSE rose by 50.2% in 2009-10 compared with 2008-09 and by 2010 the markets consolidated, thanks to better macro fundamentals.

Role of FIIs and retail investors in equity markets
One of the key reasons for the recovery was investment by FIIs, to which the market is very sensitive.
RBI, in 2010, has estimated that a 10% fluctuation in FII investment results in a 35% variation in stock prices. Thus, capital markets have always reacted to the decisions of FIIs, and hence play a key role in the performance of capital markets.

STRENGTH OF INDIAN CAPITAL MARKET IN THE BACKDROP OF GLOBAL TURMOIL

Retail participation in capital markets has always been muted. Less than 1.5% of the population invests in securities, compared with almost 18% in the U.S and 10% in China. Just 2% of India’s household savings are exposed to equity while in the U.S. it averages around 45%. If retail investors show more excitement in channeling their investments towards capital markets, it will help our capital markets generate more funds for their investments.

-Vaghul Ramanujam, SIBM Pune

-Bharathwaj Chandrashekhar, IMI
Introduction

T

his article tries to explain how our capital markets have been performing in recent times, their reactions to global turmoil and how they will fare with respect to the current world happenings. Development of our capital markets, the role that FIIs play in our markets and the advantages of India’s better macros have also been studied in order to explain how our markets will behave in future.

Development of Capital Markets
The Indian capital market has witnessed a paradigm shift to be at par with the advanced markets of the world in the last couple of decades. The 1990s might probably go down as the most important decade for the Indian capital market, with the emergence of
SEBI, participation of Foreign Institutional Investors
(FIIs), new industrial policy, entry of private sector

banks and mutual funds, etc. It was also known for some not-so-good reasons like scams by Harshad
Mehta and Ketan Parekh etc. which led to reform of equity markets. These helped to strengthen the market to avoid any such misdeeds in future.
For a long time, debt markets have been anticipated to make significant developments but are still at a nascent stage. The bond market is not customized and is illiquid which acts as a key deterrent for investors to participate. Nearly 98% of the bond market in India is through private placement and there is a lack of competitive intermediaries. Corporate bonds are not actively supported by FIIs and pension funds.
The government should actively focus on these issues to generate interest amongst investors to hold these asset classes.
Hence, there has been lukewarm interest in debt markets of India, among global as well as domestic investors, and de-facto equity markets have always run the show in India.

24

Peek into the past
During the Asian crisis, Indian markets were quite resilient. In the 2000-01 dot-com crash, only the stocks in the technology domain suffered mostly; the rest of the market actually did quite well, including the industrial stocks.

March 2005
3.29%

DIIs, 8.81%
FIIs,
14.50%

Promoters,
54.05%

March 2015

March 2010
NonInstitutions,
15.35%

NonInstitutions,
19.34%

The chart below shows the holdings of different class of investors in equities in India.

Others, 3.82%

DIIs,
12.42%
FIIs,
15.53%

Promoters,
52.87%

25

NonInstitutions,
15.06%

Others, 4.23%

DIIs,
10.77%
FIIs, 20.94%

Promoters,
49%

IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1
In the last 20 years, since they have been allowed to invest, they have poured in over Rs. 13,000 billion in
India’s equity market. India needs lot of investment in the coming years to pick up its growth trajectory. Hence it’s important that FIIs show keen interest in investing in Indian equities, which can fuel our growth story.
The chart below shows the net monthly investment of
FIIs in equity and debt markets of India.

Understanding the Impact of Fed Hike
Starting from 2004 till 2006, Fed has raised interest rates 17 times, i.e. from 1% to 5.25%. This has resulted in a sharp outflow from Indian debt markets as FIIs pulled out significantly and their cumulative holding went down by 70% by June 2006. On the contrary,
Indian equities witnessed a strong inflow, thanks to
FIIs pumping in their investments. But this was the period when most asset classes were doing well and there were few uncertainties.
Seven years ago, the Fed reduced its rate to 0.25% and the dollar carry trade has benefited many emerging market assets. Carry trade refers to borrowing in a lower interest rate currency and investing in riskier equity and debt of emerging markets.
The International Monetary Fund’s
Financial Stability Report states that assets of emerging market bond funds have more than doubled since
2009, and currently stand at close to
$1 trillion.

Earlier, among foreign investors, only FIIs were allowed to invest in Indian stocks. Now, even retail investors from abroad can invest in markets. Further, several mutual funds and insurance companies have invested through the institutional route; hence, no single group can influence the market.

Chinese Downturn
After rising by 150% in the last one year, Chinese stocks have dramatically nose-dived in the last few months. The rapid decline has sparked fears that
Chinese stocks may be entering a long-term bear run. This fear can be attributed to the slowing Chinese economy and its high debt-to-GDP ratio levels.
Indian stocks have managed to stay relatively resilient to the turmoil in Chinese stocks of late. While the Shanghai Index has dropped 40% since June 12,
2015, the Sensex has lost only 5% in the same, even though it touched 25,000 levels in this period. It implies that though Indian equities got affected by the
Chinese drop, they have managed to recoup and are currently nicely placed.

the Fragile Five economies and its inflation was spiking with falling GDP growth. The situation is very different now.

Advantage India
The crash in oil prices have helped to limit the import bill, hence the CAD is tamed. Inflation and interest rates are trending down, which is a good sign for the economy, which wants to invest more to stimulate growth. India is best placed in comparison with its other emerging market peers, which are still struggling to get its macros in good shape. This puts India in a sweet spot and will hold it in good stead when the Fed starts increasing its interest rates.
The present stability of the rupee, as against the sharp depreciation in the Brazilian Rial and Turkish Lira is testimony to the strength of the Indian economy and an indication of the shape of things to come.
Forex reserves have swelled to a great extent, which puts India in a relatively better fiscal position, providing cushion against volatility. It can be attributed to the RBI’s continuous buying of dollars in the last

As the US economy slowly gets back on track, there is an impending rate hike which might happen by the end of the year. The US dollar has appreciated against most emerging market currencies and has damaged carry trade and liquidity in emerging countries’ capital markets.
The aftereffects of “taper announcement” of 2013 are unlikely to be repeated when the Fed hikes rates, as the markets are already correcting itself in anticipation of it. Although some short-term volatility is expected to happen, the effects might not be substantial.

Taper Tantrums
During the announcement of taper, the initial selling happened in the Indian debt markets. The selling created some panic and the rupee depreciated sharply touching 68.85 to the US dollar on 28 August 2013.
It was this unexpected crash in the rupee that created more panic among FIIs forcing them to pull out funds from equities as well.
Another major factor that can explain why markets went crashing was India’s poor fundamentals. India’s twin deficits—fiscal and current account—were in dangerous territory, it was classified as one among

26

couple of years. The country’s foreign exchange reserves now stand at $350.8 billion, making India one of the top 10 holders of Forex reserves in the world.
It is true that the Indian market is presently trading at premium valuations. But it is important to note that
India has the best structural growth story among its emerging market peers. Therefore, considering the expected recovery in growth and earnings, the stocks might provide greater returns even though they might currently be expensive buys.
The return on equity (RoE) in emerging markets is

on an average 11% and falling whereas in India, it is
16% and expected to rise. In this scenario, FIIs will continue to invest in India. Thus Indian markets will be resilient and better prepared to face minor external shocks.

Impact on Indian debt markets
The same rosy picture cannot be painted for debt markets as well. There is a greater threat of volatility in debt markets as foreign investors are more shortterm in their investment horizon and are very sensitive to yields and currency movements.
They have poured $53 billion in debt since the beginning of 2009. While $13 billion was pulled out in
2013 due to Fed taper announcement, $32 billion has been pumped in since the beginning of 2014.
As the bond market in India is relatively less liquid, as pointed out by the IMF’s Financial Stability Report, money tends to flee from illiquid assets such as EM bonds when risk-aversion rises. Hence, Indian bonds face greater risk when compared to equity.
Also the performance of debentures has been disappointing. The recent credit downgrades of Amtek
Auto, Jaiprakash Associates, Jindal Steel and Power, Bhushan Power and Steel, etc. have created fear amongst investors, and hence might be difficult for the market to repose faith in the investors that these assets are safe investments.
For all the above cited factors that might induce capital flight, the debt markets still have one big advantage. India has a 6% advantage on bond yields (Indian 10-year yield is at 7.8% while the US 10-year bond yields are at 2.2%). This yield differential is highly attractive for investors and hence might mitigate the capital outflows from debt market.

Markets will be resilient
Hence, for any major global happenings, we expect the markets to be strong enough to withstand downturns, even though there might be some short term volatility. The macros are strong enough to support these markets, which would repose the faith in both domestic and foreign investors. It is expected that
Indian markets would be the favorite among global investors in comparison to its EM peers and hence
“where else but India the money would flow into”.

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1 business operations, a minimum turnover and cash profit and a demonstrated growth in turnover before it sanctions a loan. Naturally, a start-up in need of seed capital can rarely meet these criteria.
Secondly, what distinguishes equity from debt is that the latter’s repayment has to be secured. There are three kinds of securities – Primary security (charge on the assets created out of the loan proceeds),
Collateral security (charge on the borrower’s assets, existing prior to the loan being sanctioned) and Personal or Third-party Guarantee (guarantee to repay the loan amount out of the personal assets of the borrower or a third party in case of default).

THE FIRST STEP IS ALWAYS THE TOUGHEST
“BANK LOAN FOR STARTUPS”-An Analysis

-Siddharth Gupta, XIM Jabalpur

“Financial institutions, unlike angel investors and venture capitalists or for that matter family and friends, do not extend loans on the basis of a gem of an idea or lucrative income projections.”

An entrepreneur needs two primary resources to

start up – a business idea and adequate seed capital.
While the idea is an intrinsic resource which no one other than the entrepreneur can generate, capital is an extrinsic resource for which the entrepreneur has to fall back on an external source, sooner or later. The good news is that angel investors and venture capitalists are slowly warming up to indigenous startups. According to a report by Venture Intelligence, a research firm focused on venture capital and private equity deals in India, there are 43 angel networks,
111 venture capital investors and 37 incubators in the country, giving a much needed boost to the Indian startup ecosystem. To add to these, crowdfunding has found its own place among the new generation entrepreneurs. The bad news is a very small fraction of entrepreneurs are able to garner funds from these sources, the others being forced to bootstrap - rely on

personal savings or funds from family and friends.
And the more money the entrepreneur infuses into the startup, the more risk he assumes.
This is where loans come in. Loans allow us to buy assets with borrowed funds, with the belief that the income from the asset will be more than the cost of borrowing. This excess adds to the profits from the business, thereby having a multiplier effect on the
Return on Equity (ROE). This is what we call ‘leveraging’ or ‘gearing’. However, historically, it has always been difficult for entrepreneurs to obtain loans while raising funds.
The foremost reason for low penetration of institutionalized credit among startups is their poor creditworthiness. Financial institutions, unlike angel investors and venture capitalists or for that matter family and friends, do not extend loans on the basis of a gem of an idea or lucrative income projections. A bank would ordinarily require at least three years of

28

Any bank would require security that is at least 1.25 times the loan amount, even more for borrowers with less creditworthiness. The primary security is almost always not enough to secure the loan, thus requiring the borrower to bring in collateral security or provide personal guarantee to meet the bank’s requirements. This directly increases the financial risk for the borrower and the absence of adequate collateral often becomes a stumbling block to availing a loan.

guarantee. All this at a comparatively lower rate of interest? Seems impossible? Not now. The answer lies in a scheme operated by the Ministry of Micro,
Small and Medium Enterprises (MSME), Government of India, called the Credit Guarantee Scheme
(CGS).
The Credit Guarantee Scheme allows entrepreneurs to avail credit up to Rs. 1 crore (Yes, 1 crore!)
Without providing any collateral security or personal guarantee. The scheme mandates that the lender gives high importance to project viability and secures the credit only through primary security. In case the borrower fails to discharge his liabilities to the lender, the Government make good the loss of the lender up to 75% (80% for women entrepreneurs) of the outstanding amount subject to a maximum limit of Rs. 62.50 lakhs (Rs. 65 lakhs for women entrepreneurs). For this purpose, the Ministry of MSME and the Small Industries Development Bank of India
(SIDBI) have jointly set up a trust called the Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
Besides the guarantee cover, banks also have the incentive of assigning zero weight to the portion of the loan guaranteed by CGTMSE while calculating capital adequacy ratio. In simpler words, greater the quantum of loans sanctioned under this scheme by a bank, lesser will be its requirement for capital, thereby reducing its total cost of acquiring capital. On account of these incentives, banks are required to provide differential rates of interest to MSE borrowers.
This implies that borrowers under the scheme can avail loans at comparatively lower rates of interest.

Prime Minister’s Employment Guarantee ProThirdly, raising money through debt brings the addi- gramme (PMEGP) is another scheme under which tional burden of interest payments. The early stages entrepreneurs can startup by contributing only of a startup are characterized by low revenues and 10% (5% for women entrepreneurs) of the project significant expenditure on capacity building. Debt cost from their own funds, the government providservicing increases the recurring fixed cost, thereby ing 15% (25% for women entrepreneurs) of the projputting added pressure on cash flows. ect cost. However, this scheme is applicable only to startups whose investment does
The above points do present But what if a startup could not exceed Rs 25 lakhs for mana strong case as to why start- avail a loan based on its ufacturing sector or Rs. 10 lakhs ups are unable to avail bank future viability rather than its for service sector. loans. But, what if a startup business history, without the could avail a loan based on its entrepreneur having to submit future viability rather than its collateral security or personal The above schemes directly adguarantee, all this at a dress the aforementioned apbusiness history, without the comparatively lower rate of entrepreneur having to submit prehensions of an entrepreneur. interest? Seems impossible? collateral security or personal Not now…..

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IN-FIN-NITIE Vol 7 Issue 1
Firstly, he is not required to put his personal property at stake so as to secure the loan and his exposure in the business is limited to the initial equity that he has to bring. While under PMEGP, the entrepreneur’s equity contribution is very low on account of the
Government subsidy, under CGTMSE banks would ordinarily require a debt-equity ratio of 2:1 implying that he would have to bring only around one-third of the total project cost.
Secondly, he can avail loans at relatively lower rates of interest. Besides, the Credit Information Bureau (India)
Ltd. (CIBIL) maintains records of the credit history of every person on the basis of which it assigns a credit score ranging from 300 to 900. This credit score is considered by all lenders before sanctioning a loan. Borrowers with a credit score of more than 700 can negotiate for even better interest rates. Also, the interest expense, unlike dividend on equity, is deductible from income for tax purposes, leading to tax savings and further reducing the cost of capital. Thirdly, banks often allow an initial moratorium, allowing the business to start the repayment process only after 18-24 months. The borrower can also negotiate for a step-up repayment schedule where the instalment amount keeps increasing with the passage of time, thus reducing the pressure on cash flows in the initial stages of the business.
Fourthly and most importantly, for loans under these schemes, banks shall pay heed to the project feasibility and sustainability rather than depending on previous financial statements while sanctioning the loan. Thus, a few months old startup with low revenues can also obtain a loan provided he can convince the banker of a promising future for the company. But how easy is it to convince the banker?
Well, not easy. The thought of NPAs (Non-Performing Assets) sends a chill down the spines of bankers.
Loans to start-ups carry a higher degree of risk and

IN-FIN-NITIE Vol 7 Issue 1

the government guarantees only 75% of the outstanding amount in default; the remaining amount turns into losses for the bank. Naturally, banks are wary in sanctioning such loans. Convincing the banker that a loan to the business is a safe investment, requiring good homework on the part of the borrower. He must back his business plan with detailed pro-forma income statements, cash flow statements and balance sheets for the next five years. Moreover, the worth of a startup depends greatly on the vision, sincerity and determination of the entrepreneur, of which the banker must be convinced.
Besides, it is important to be acquainted with every detail of the loan scheme; otherwise the banker might easily take the borrower for a ride. It is also advisable to approach at who says, “Yes, I will”.
Just keep looking and the startup least three banks at least three banks at once, preferably those with the borrower has exciting relationship. Even then, getting a proposal sanctioned might take some time. But if the idea is worthy, there will surely be a banker who says, “Yes, I will”. Just keep looking and the startup might soon be up and running!

Trivia

•All Scheduled Commercial Banks (either PSU, Private or Foreign Banks), select Regional Rural Banks and such of those institutions as may be directed by
GOI are covered under CGTMSE. Small Industries
Development Bank of India (SIDBI), National Small
Industries Corporation Ltd (NSIC) and North Eastern Development Finance Corporation Ltd (NEDFI) have also been included as eligible institutions.
•More than 1.1 million proposals have been approved under CGTMSE till April 2013,providing guarantee cover for a total sanctioned loan amount of Rs543.22 billion.
•Almost 50% of the U.S states offer some form of tax break to angel investors.
•The number of angel in the U.S has tripled since
1999.
•According to estimates in the last two years 225000 people have made an angel investment in the U.S.

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CAB DRIVERS TAKE OLA AND UBER FOR A RIDE -Market Maniacs, Great Lakes Gurgaon

Cab driver to customer (just after a ride ends):

“Bhaiyya aap mujhe ek aur ride de doge kya? (Can you provide me with another ride?)”
Customer: “Woh kaise bhaiyya (How would I do that?)” Cab driver: “Cab book karne ke option me jao app se, kyunki main paas hun, aapki request mere paas hi aaegi” (Try requesting for a cab from your app and since I am near you, the request will come to me only) Customer: “Nahi bhaiyya, mere paise kat jaenge”
(No, no my money will get deducted)
Cab driver: “Cash option select karo na aap” (Select to pay by cash)
Customer: “Par main aapko pay to karunga nhi”
Cab driver: “Mujhe Rs. 200 incentive milega, peak hours me ride ke liye. Main yahan se ghar chala

jaunga 5-6 kms. Bill banega 100-120. Tab bhi Rs. 80 ka fayda hoga mujhe chahe aap pay bhi na karo”
(I get an incentive of Rs. 200 for getting a ride in the peak hours. I will go home from here and when I end the ride it will be recorded as a ride of Rs. 100Rs. 120. Even if you don’t pay, I will reach home for free and in fact earn a bonus Rs. 80)
Customer: “Thk hai bhaiyya start kar di app. 2 minutes me cab dikha rha hai. Book kar rha hun….Kar diya” (Ok then I am booking a cab, it is showing a cab in 2 minutes. I am done with the booking)
Cab driver: “Han aa gya mere paas request. Thank you. Main 5 star rating dunga aapko” (Yes I got the request. Thanks a lot. I will give you a five star rating) False Revenues
Ola and Uber boast of the fact that they incentivize the cab drivers so well that well educated people and even engineers are signing up for this job. It is

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IN-FIN-NITIE Vol 7 Issue 1

IN-FIN-NITIE Vol 7 Issue 1 difficult to say whether they are aware of this flaw in providing a Rs. 200 incentive during peak hours, but it is true that this provision is being heavily exploited.
We will try to estimate how much false revenue it accounts for Ola in a month:
No. of cabs operating in a day

60000

No. of cab drivers involving in this unethical behavior (A)

10% of 60000 = 6000

No. of fake rides in peak hours per cab driver(B)
Total no. of fake rides during the peak hours in a day (A * B)

2

Average false revenue per ride

Rs. 100

Amount Cab Aggregator pays to the driver for this ride (C)

Rs. 80

Estimated false revenue of the day (D)

Rs 100 * 12000 = Rs. 12 lakh

Estimated loss for the day (E)

Rs 80 * 12000 = Rs. 9.6 lakh

Estimated Monthly False
Revenue (D * 30)
Estimated Monthly Loss for
Ola/Uber (E * 30)

Rs. 3.6 crores

Possible Remedies
There are a few solutions that might appear fool-proof in saving a fortune for these companies but there is a shortcoming which exists with each one of them

Rs. 2.88 crores

This is a very conservative estimate that one can make of this scenario. Given that the valuation of the company depends on the gross revenue it makes, it is beyond doubt a huge number.

Cab drivers also indulge in starting two trips simultaneously in both Uber and Ola apps in two different devices. This is possible if there are two commuters and both of them book the cab for the same driver. The cab driver asks the customers to make multiple bookings to verify the costs by Uber and Ola but charges only for the cheaper of the two fares. There is not much financial mismatch in this case but the whole model becomes a joke. Thus, the recent regulation which involves a driver being asked to pay a service fee of Rs. 300 per week will act as a stringent measure for this practice.
Similar instances were reported when huge incentives of Rs. 5000 were announced by the Ola cabs for every 10 rides completed and used to double for 20 rides during the week starting with Christmas leading up to the New Year. Some smart cab drivers bought cheap smartphones and installed
Ola apps in their phones, booked rides for each other, drove the cab for a few kilometers to show genuineness. In the process, some of the cab drivers made 70,000 during those 10 days, with an estimated loss of 2.4 million dollars during that period, by doing a similar calculation as shown above.

Solutions

This will ensure that the customer cannot escape payment and since money will be deducted from his/her account, he/she will not indulge in allowing a false ride to the cab driver. (Note: This might lead to lesser sales)

Proposed Solution

Other unethical practices

12000

Making the payments only by Ola/Uber Money

Is there a way out?

•

If a transmitter can measure how far a user is from the cab and how much time has elapsed from the last ended ride, an algorithm can be implemented to stop the user from booking the same cab again

•

Putting a time limit of 30 minutes on not being able to request the same cab can be another easier solution but as mentioned above, it will be a pain for a user genuinely wanting to travel in the same cab, to make a fresh booking for a different cab because of this constraint

Cab-aggregators have to be absolutely sure of the consequences whenever they announce a new incentive.
Not having their own inventory causes very less monitoring or control over the vehicles plying under their brand name. In the race to grow faster, Uber had to do away its limitation of being able to book a cab only using the mobile wallet Paytm, which otherwise was a better framework to avoid these fraudulent activities.

Lastly, the customers should realize that such practices cannot occur if they do not allow it. There is a need to advise the customers about the kind of losses the company providing them these services can suffer and discouraging it would make the company more capable in serving them better.

Shortcomings
Cab driver pays in cash the loss incurred by the customer •
•

It may lead to lesser sales
The cab driver may convince the user that he will pay for the amount that gets deducted from his/her Ola account in cash

Making it impossible to book a cab by the same user for the same cab for the next 30 minutes

A genuine re-booking of the same cab will not be possible This would need a tracking in terms of which was the last user served by a cab. No customer will wait for 30 minutes to give a ride to the cab driver.

In case a user genuinely wants to book a fresh ride with the same cab due to some reason, the app will not allow the same

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IN-FIN-NITIE Vol 7 Issue 1

1) Famously known for keeping their product ad-free for a long time, X struck a deal with Omnicom worth upto $100 million to show advertisements under its umbrella.The ads could come in the form of static images or videos and are meant to be consistent with the quality of content on X. Identify X
2) ---- is the approved custodian for acceptance of
GOI securities under the security deposit requirement
a)
NSE b)
NSCCL
c)
NSDL d)
NCDEX

3) In context with the falling rupee, a leading newspaper wrote recently that “RBI has used up most of the available ammunition to prevent the rupee’s slide in the over-the counter market, but without much success“. Which among the following steps was taken by RBI, which has been referred to available ammunition in this statement?
a) RBI sold the foreign currency in market
b) RBI purchased the foreign currency from market
c) RBI purchased the stocks from various stock exchanges in India
d) RBI Revaluated the Indian Rupee
4) A firm has an expected dividend pay-out ratio of
60% and an expected future growth rate of 7%. What should the firm’s fundamental price-to-earnings
(PIE) ratio be if the required rate of return on stocks of this type is 15%?
a)
7.1x b)
7.3X
c)
7.5X d)
7.9X
5) Two parties enter into a 2 year fixed for floating interest rate swap with semi-annual payments. The floating rate payments are based on LIBOR. The 180,
360, 540 and 720 day annualized rates are 5%, 6%,
6.5%, 7%. The swap rate is closest to
a)
6.62 b)
6.96
c)
6.03 d)
6.16
6) An analyst gathered the following data
• Sales 4000
Net
•
Dividend declared
170
•
COGS 2000
•
Inventory increased by
100
•
Accounts payable increased by
300
•
Cash expenses for other inputs
500
•
Long term debt principal repayments 250
•
Cash tax payments
200

•
Purchase of new equipment
300
What is CFO of the company based on above data? 7) In a one period bionomial model the hedge ratio is
0.35. to construct a riskless arbitrage involving 1000 call options if the option is overpriced what is the appropriate portfolio? Calls Stocks
a)
Buy 1000 options
Short350 shares
b)
Buy 1000 options
Short 2857 shares
c)
Sell 1000 options
Buy 350 shares
d)
Sell 1000 options
Buy 2857 shares
8) For whom these series of notes were issued?

9) An analyst calculates the following ratios 2016
2015
2014
Debt to capital
56.3% 56.4% 56.2%
Fixed Charge Coverage 3.3x
3.4x
3.5x
Interest coverage
4x
3.9x
3.8x
These most likely shows
a) Use of operating lease increased
b) Interest obligation increased faster than earnings
c) Capital structure become more reliant on equity financing d) Use of operating lease decreased
Refer to the table for 10-12
AAA
Revenue/ Share
115
EPS
2.5
DPS
1
ROE
25%
BVPS
10
Stock Price
60
Required Return
20%

BBB
52.8
4.8
1.6
15%
32
70
12%

CCC
25.75
4
2.5
8%
50
35.5
10%

10) Select the stock that is most undervalued by applying justified Price to Book value
11) Justified price to sales ratio of BBB is closest to
a)
1.3 b)
1.5
c)
1.7 d)
1.9

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13) AVON Ltd. purchased a machinery in exchange of its debentures. The machinery was installed on
March 31, 2003. The value of securities exchanged is
Rs.185000. It is expected that the machinery will have a useful life of 10 years after which it will have a salvage value of Rs.5000. The machinery was put to use with effect from April 01, 2003. The company follows straight line method of depreciation, the amount of depreciation charged for the year 2003-04 is
a) Rs.18,000 b) Rs.20,500
c)
Rs.15,500
d)
Rs.15,000
14) Amount that can be realized by a company when it sells its business as an operating one is called as
a)
Going concern value
b)
Market value
c)
Book value
d)
Replacement value
15) Interest rates observed Year Spot Rate 1 10% 2 11% 3 12%
Based on this data 2 year forward rate 1 year from now is closest to
a)
11% b)
13%
c)
15% d)
17%

• The project is expected to increase pre-tax net income and cash flow by 3000 in each of the next 8 years
• D/E=1
• Cost of equity 12%
• Pre-tax cost of debt capital is 6%
• Tax rate 33%
The NPV is approximately
a)
1551 b)
6604
c)
7240 d)
2656
19) The current spot price for corn is $3/bushel, the effective monthly interest rate is 1.5%, and the monthly storage costs are $0.03/bushel. The 3-month forward price for a bushel of corn is closest to
a)
3.23 b)
2.93
c)
3.93 d)
2.15
20)SoftBank invested 627 million US dollar in the online marketplace “A” in October 2014. First acquisition of “A” after this investment is “B”
21) The following picture is associated with an acquisition. Name the company which acquired it.

22) Mention acquisition associated with the picture

23) Connect

16) For a bond currently priced at 1018 with an effective duration of 7.48, if the market yield moved down
75 basis points, the new price would be approx.
a)
961 b)
1075
c)
1094 d)
1186
17) A 25 year 1000 par semi-annual pay bond with a 7.5% coupon and a 9.25% YTM. Based on a yield change of 50 basis points, the approximate modified duration is
a)
8.73 b)
10.03
c)
12.5 d)
13.33
18) Refer to the below information
• The proposed project cost 10000

35

ANSWERS:

BEAT THE STREET- QUIZ

12) Based on justified P/S AAA Corporation
a)
Overvalued; the stock trades at more than double its justified value
b)
Overvalued as compared to BBB but undervalued as compared to CCC
c)
Undervalued; the stock trades as less than half its justified value
d)
Equal to justified value

1. Instagram 2. B)
3.
A) 4.
C)
5.
A)
6.
1500
7.
Sell 1000 options, Buy 350 shares
8.
For haj going pilgrims by RBI
9.
A) 10.
BBB
11.
C)
12.
A)
13.
A)
14.
A)
15.
B)
16.
B)
17.
B)
18.
A)
19. A)3.23
20.
A Snapdeal B Wishpicker 21.
Facebook
22.
Liftware by Google
23.
Crypto-currency

IN-FIN-NITIE Vol 7 Issue 1

About NITIE
NITIE Mumbai is a premier institute and a centre of excellence recognised by the Government of India.
It was setup in 1963 in the collaboration with the International Labour
Organization. Since its inception NITIE has been providing solutions to the complex problems of the
Industries. Today, NITIE is constantly ranked within top 10 B-schools in India and its Post Graduate Programmes are amongst the best in the country. Throughout the year, NITIE and its alumni have carved a niche for themselves in the industry.

Team $treet
Street is a student run finance interest group at NITIE that promotes finance related activities and is commited to encourage and engage the finance enthusiast in the student community. Street is one of the most active clubs in the campus and caters to students with a wide varietyof finance related interests whether it is Corporate Finance, Financial Risk Modelling, Commercial banking,
Investment Banking, Investment Management or Venture Capital/ Private
Equity. We bring together members of NITIE community and professionals from financial Industries through events such as “Beat the Street” case study competition, quaterly magazine(In-FIN-NITIE), knowledge sharing sessions, poster series “Street Wall”, guest lectures, alum sessions, financial workshops and numerous other activities.

$TREET - NITE

Please send your feedback at:
Email: street.nitie@gmail.com

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