IN - FIN - NITIE

Financial Inclusion
Creating wealth at the bottom of the pyramid

$TREET / NITIE
Financial Financial Inclusion Inclusion
Product Availability Risk Management
Risk Appetite: Pre and Post Crisis Effects

Financial Literacy

Collaborative Partnership
Effectiveness of the Indian Taxation System Silver lining for Indian Economy

Branch Access

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. InFin-NITIE has given me an opportunity to work with students and advance forth with the common goal of learning and practicing finance. As always, In-Fin-NITIE brings you something new this time around too. After a series of issues with identified themes and articles related to those themes, the current issue gave students a chance to just 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 team Street for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that this issue will entertain you and keep you engrossed about the recent happenings in the world of finance. We look forward to your comments and wish to bring out more interesting issues in the future. Dr. M Venkateswarlu Asst. Professor of Finance

Patron Prof. Ms. Karuna Jain Director, NITIE

It's not because things are difficult that we dare not to venture, It's because we dare not venture that they are difficult , but thanks to the Venture capitalists who play an important role in providing liquidity to our financial system and improving the efficiency of capital markets. Acknowledging this fact in this edition of IN-FIN-NITIE, we bring to you the interview of Sasha Mirchandani, Founding and Managing Director at Kae Capital. Do catch him in a very candid interview, discussing in great lengths about various aspects of being a venture capitalist. Moving on to the market, a declining growth rate, bad governance and corruption have taken the sheen off India as the poster boy of globalisation. In this time of high volatility, where even a sneeze from US and Europe causes bloodshed in Indian market, we tend to focus our attention too much on global aspects, neglecting internal changes in dynamics. This has been one of the curses of globalisation which has led to the widening disparity between the rich and poor. 'India' is getting separated from 'Bhaarat' and thus, we call for attention towards the desperate need of 'Financial Inclusion'. Our full -fledged article on financial inclusion encompasses various aspects of it. It is said that two things cannot be avoided: Death and Tax. This statement precisely captures the importance that tax plays in Indian democracy. To acknowledge this very essence, our authors have penned down an elaborative article on Effectiveness of Indian taxation system. Following the trend, we were inundated with brilliant and exotic articles that really made us toil hard to find the best among them. We extend our sincere gratitude to all the authors who have been burning the midnight oil in writing such exquisite articles. In our endeavour towards continuous improvement,

In-Fin-NITIE
www.street.nitie.org

Volume4 Issue 3

CONTENTS

SILVER LINING FOR

INDIAN ECONOMY
p15

Features
1 4 8 13 21 23 27
Financial Inclusion Creating wealth at the bottom of the pyramid Effectiveness of the Indian Taxation System Risk Appetite: Pre and Post Crisis Effects Street Wall New Banking Licences Rendezvous with a Dynamic Venture Capitalist Indian Banking Sector: Is it time to open up to Foreign Players A note Kotak Mahindra

Financial Inclusion - Creating wealth at the bottom of the pyramid

Over the past decade inclusive growth has been the buzz word from Government policy makers. Inclusion policy implementation pays high dividends in elections in an impoverished democracy like ours. Any democracy is as good in meeting its promises to the people as its institutions are. Policymaking and regulating institutions like RBI, PFRDA, IRDA, NABARD have gone through serious considerations in developing regulations and guidelines for strengthening financial inclusion. But that hardly means the outcome is anywhere close to what we set out for. While significant effort has been made to develop a facilitating framework, it is still not effective enough to overcome the substantial cost implications there are there to reach out to large numbers of people, often in dispersed locations, with small value accounts. As a consequence, financial services providing institutions do not yet perceive the financial inclusion business to be sustainable.

Banking system in our country had an audacious target of covering close to 55.8 million excluded households and all villages with greater than 2,000 populations by 2012. It is already 2013 and we have missed the target by miles. More appalling is the fact that there was a tacit acceptance among the authorities well before the deadline about the infeasibility of the target. It is high time Government takes a hard look at its own financial inclusion initiatives. With the change in PDS system and direct cash transfer proposition, it is high time we approach financial inclusion with adequate urgency. It is a necessity rather than being a choice for us.

Let's have a look at major reasons for financial inclusion to be easier said than done.
Servicing the financially weaker section means dealing with very small accounts and transaction

amount also will be small. It means high operations expenditure for banks and little, if any, incentive to serve them.
The lack of understanding of financial services meeting the needs of poor families results in static

approaches like the no frills account where it is fairly evident that mere availability is not the issue.
Another important point to discuss would be how sustainable or feasible is Financial inclusion sans

social inclusion. Financial inclusion can be achieved only if it is preceded by Social Inclusion. The downtrodden are not only deprived because of poor resource endowments in terms of low natural, human, physical and social capital, they also are more often than not, people from regions with very low level of social organisation. Their participation in the social institutions is rare. It makes them even more distant and unwilling to contribute to any common cause. Consequently, collective action institutions such as cooperatives, social help groups etc. generally thrive in the western and southern states, where social engagement of communities is better, but it is hardly the case for other regions. People are not only reluctant for coming together for savings and credit, they also do not participate in collective input purchase, marketing of outputs, sharing a common production facility or managing collective resources such as irrigation facilities. Such a situation mitigates the positive effects that could have been achieved by financial inclusion of individual entities. Social inclusion is a must for making sure the desired end result of financial inclusion is met. 1

Now, we need to understand the issue of financial inclusion from the banks' perspective. The banks had to submit their financial inclusion plans for reaching out to 72,825 financially excluded villages by 2012 to RBI. The plan was to increase number of rural branches of nationalised banks and integrating this priority sector dealing initiatives with banks' normal business plans. Well, it does mean that Banks are bound to meet certain guidelines and specifications underlined by RBI but question remains elsewhere. Is it just because of the regulatory burden or is there anything for the Banks to get selfincentivised for championing the cause of financial inclusion? Can they see any bottom of the pyramid paradigm in finance as well? If we look back and analyze their stand towards inclusion cause, it has always been merely geared towards meeting the bare minimum threshold set out by the regulators with a rather grudging acceptance or regulatory forbearance. There has been no move whatsoever which is not driven by meeting the bare minimum. Over the decades since the initial phase of bank nationalization in 1969, the regulations have demanded the financial institutions to have a wider reach into the rural, semiurban and other financially excluded areas. It is no wonder that only significant locations of the rural areas of major states came under adequate banking services coverage as it was only about meeting guidelines. But huge part of population living in interior villages is excluded and accumulative figure of exclusion is shocking. Quoting NSSO data, 45.9 million farmer households (51.4%), out of a total of 89.3 million households have no access to credit, neither institutional nor non institutional sources. Moreover, despite the continuously improving network of nationalised banks' rural branches, not even one third of total farm households are indebted to formal sources. Farm households lacking access to credit from formal sources as a proportion to total farm households is shockingly high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectively. Thus apart from financial exclusion being large, there is noteworthy variation across regions, groups and communities. The poorer the group, the greater is the exclusion. It is true everywhere irrespective of region, religion, ethnicity or any other identity. Asset holding or lack of it is primary key to understanding financial exclusion pattern. 2

Now let us turn our attention to another important player other than big nationalised banks. Micro Finance Institutions could also play a crucial role in improving inclusion. They are uniquely positioned in reaching out to the rural poor. Most of them operate in a limited geographical area; have a greater understanding of the issues specific to the rural poor. They also enjoy greater acceptability amongst the rural poor and their familiar way of working provides a level of comfort to their customers. But micro financing alone will fall short without another vital instrument for financial inclusion, Microinsurance for people at the bottom of the pyramid. The risk in a poor man's life is more than the well off. It is important for the policy makers to understand that lending micro credit without microinsurance is selfdefeating. For impoverished agricultural workers micro credit must be followed by special micro insurance products, specifically designed for poor people. It can play an immense role in stopping farmer suicides in different parts of the country that are still badly dependent on a good monsoon for their livelihood in the absence of proper irrigation system more often than not.

Government spending through several social sector schemes lends a helping hand to the inclusion goal as well. Contribution wise most noteworthy in the scope of financial inclusion is MNREGA project. Close to 80% of farmer households in the country are small, marginal farmers. It is highly unlikely that they can have employment opportunity in their own firms for more than 100 days in a year keeping in mind that agriculture is vastly seasonal in India despite phases of green revolution taking place. Hence the MNREGA project that ensures the bare minimum, 100 working days' worth of assured employability is a critical cog in the wheel of inclusion agenda. In certain States, such as Andhra Pradesh, all payments under the MNREGA project will be made to the beneficiaries through their bank accounts, majority of which are likely to be opened specially for this purpose. The beneficiaries or depositors under the scheme will be given smart cards to enable transactions at any location of their convenience besides the bank branch. This recent drive for direct cash transfer to the beneficiaries for MNREGA and other government social development schemes to plug the existing loopholes of the public distribution system helps in augmenting the financial inclusion as well. The issue of including more and more people into the institutionalised financial system is relevant for other countries as well including first world, developed countries. An interesting feature which emerges from the international practice is that the more developed a society is, the more is the emphasis on empowerment of the common person and lowincome groups. Though the experiences in financial inclusion are unique to each country, we can look into some of the learning.

Financial Products:
Post Office Card Account (POCA) (United Kingdom UK; USA), Piloting of concept of Savings Gateway (UK), Free encashment of Government cheques (Canada), MZANSI a low cost cardbased savings account with easy availability at outlets like shops, post offices, etc. (South Africa), Demand driven sustainable microfinance scheme called PATMIR (Mexico), Micro Credit scheme based on small social group (Bangladesh Grameen Bank) On a concluding note, I would touch upon the fact that financial inclusion is not an easy task to accomplish in a country as diverse as India where standard deviation of income of citizens is extreme and add to it the highly geographically dispersed nature of the excluded population. What we need is a comprehensive policy formulation where all the financial institutions need to be stakeholder and continue to work on a sustained basis. Issue of financial exclusion cannot be resolved in isolation as it comes as a holistic package along with social exclusion and deprivation. Unless the citizen has all other kind of inclusion, merely enabling somebody to open an account or providing micro financial debt won't help.

References:
1.http://www.in.undp.org/content/dam/india/docs/promo ting_financial_inclusion_can_the_constr aints_of_political_eco nomy_be_overcome.pdf 2.http://www.nabard.org/pdf/report_financial/full%20Rep ort.pdf 3. http://indiagovernance.gov.in/files/NRLM.pdf

Article by Soumya IIMK

Effectiveness of the Indian Taxation System

A comparison with other developing countries further highlights the low level of tax revenues in India, with South Africa, Russia and Brazil having much higher tax revenues to GDP ratios. Taxes are the major source of revenue for any government and for a country like India, which has struggled to control its rising fiscal deficit, taxation is even more important as nontax revenues account for only a marginal contribution to the government coffers. The low level of taxGDP ratio in India has long been a cause of concern. The slump in the gross central taxes due to the reduction in rates of customs duties and excise post liberalisation resulted in the taxGDP ratio declining during the 1990s and in the early years of the new millennium. TaxGDP ratio fell from 16% of GDP in 1989 90 to 13.8% of GDP in 200102 while the recent economic crisis has also had a daunting impact on the country's tax GDP ratio. In this article the effectiveness of the Indian taxation system has been discussed using a crosscountry approach and subsequently a time series analysis specifically for India. At the end, tax exemptions provided in India are examined to understand the aim of providing such exemptions decreasing the government receipts. The graph on the right shows that India's tax revenues are far below the tax revenues of developed countries. Sweden and Denmark collect taxes to the tune of half of their GDP. In Canada and Japan, revenues ensuing from direct taxes comprise of 60 per cent and 52.1 per cent, of the total tax collection while the same figure for India stands at only 34.1 per cent. This reflects the extent of the regressive nature of India's tax structure. But since liberalization, India's dependence towards direct taxes is steadily increasing in comparison to indirect taxes. 4

DIRECT TAX
PERSONAL INCOME TAX Personal income tax is levied on money earned by people and is paid to the national government. Personal Income Tax contributed Rs 165376 crores in FY 2011 which was 18.6% of the gross tax revenue and 1.8% of the country's GDP. US collected $866 billion (6.2% of GDP) by personal income tax in 2009. South Africa collected $27.5 billion (7.1% of GDP) which is a third of total tax collections compared to India's onesixth. This shows India lags behind in terms of personal income tax collections with only 1.8% of GDP. One of the reasons is the dismal compliance rate in our country where only 3.5% of the entire population pay taxes. Another reason is Personal Income Tax slabs not being analogous with developed or even developing economies. When tax slabs are compared in terms of Income to GDP per capita, we can examine the crosscountry differences. Developed nations like US and UK

 have their lowest tax slabs starting at a low factor of 0.2 and 0.32 per income to GDP per capita respectively while other developing nations I n d o n e s i a , B ra z i l a n d S o u t h A f r i c a h ave corresponding values of 0.47, 0.69 and 0.78. These values establish a certain range for both developed and developing economies but India stands nowhere close at 2.49 per income to GDP per capita, at several multiples compared to other countries. This anomaly in tax slabs is one of the prime reasons of the low Personal Income Tax to GDP ratio.

T able 1: Lo we st Inco m e T ax Slab s (Inco m e to G D P p er cap ita) Cou ntry Range T ax India 2.49 6.22 1 0 Indon esia 0.47 1.95 5 South A frica 0.78 1.93 1 8 Brazil 0.69 1.03 7.5 U nited Ki ngdom 0.32 1 .7 2 0 U nited States 0.2 0.38 1 0
Even after lagging behind international standards, Personal Income Tax is the second highest contributor after corporate tax to government revenues. This is the result of an extensive growth in this revenue stream over the past few years. The collection from Personal Income Tax has more than doubled in a 6year period from Rs 75093 crores in FY2007 to Rs 165376 crores in FY2012 with an annual growth rate of 14%. This significant growth can be explained through the increase in compliance and high real growth rates.

the federal corporate income tax applies to bands of taxable income at rates between 15% and 38%. An additional 5% tax is imposed on certain bands. An alternative minimum tax is also imposed at a rate of 20%. The total maximum effective tax rate is 39.5%. In Japan, the national standard corporation tax rate is 25.5% since 1 April 2012, and applies to ordinary corporations with share capital exceeding JPY 100 million. However, 10% surtax is imposed for three years for fiscal years beginning on or after 1 April 2012. Therefore, the national corporate tax rate will be 28.05% for the first three years, and 25.5% thereafter. India's performance on the corporate tax front is better than personal income tax. While India's revenue from corporate tax is 3.9% of the GDP, the same figure stands at 3.7% for Canada, 3.3% for US and 4.7% for Japan. Although, the figure of corporate tax to GDP seems much better but comparing the effective tax rates reveals the real scenario. Table 2, displays Effective Corporate Tax Rate to Corporate Tax to GDP ratios, shows India has a higher taxation rate which is the real reason for at par Corporate Tax to GDP collections. Another reason for the same is the poor level of Personal Income Tax collections which exaggerate the figure of corporate tax in India.
Table 2 Country Effective Corporate Tax Rate (A) tax to GDP (B) India 32.5 3.9 Japan 28.05 4.7 Canada 15 3.7 (A/B)

CORPORATE TAX
Corporate tax is imposed on a company's profits. The corporate tax rate for domestic companies is 30 while nonresident companies and branches of foreign companies are taxed at a rate of 40%. Surcharges also apply to certain cases. A Minimum Alternate Tax is imposed at a rate of 18.5% on the adjusted book profits of corporations whose tax liability is less than 18.5% of their book profits. In FY2011, Indian government received Rs 299423 crores as corporate tax which is 37.7% of the gross tax revenues and 3.9% of the GDP. The rate of UK corporation tax is 23% from 1 April 2013. In Canada, the federal corporate income tax rate is 15%. Provincial corporate income tax rates range from 10% to 16%. In USA, 5

8.33 5.97 4.05

Moreover the industrially developed nations including UK and Japan are moving towards a liberal corporate tax regime in order to ease the cost of doing business in their countries. While UK reduced their tax rates from 24% to 23% from April 2013, Japan will impose an effective rate of 28.05% for two more years, and 25.5% thereafter. The former tax rate of 30% was reduced in April 2012. The tax revenues through corporate tax have seen a huge climb in recent years. Despite the economic downturn, corporate tax collections have increased from Rs 144318 crores in FY 2007 to Rs 323250 crores in FY 2011 with an annual growth rate of 14.5%.

 INDIRECT TAX
EXCISE DUTY Central Excise duty is an indirect tax levied on goods manufactured in India for domestic consumption. Excise duty rates vary for different commodities. Excise on automobiles in India is liberal as compared to other south Asian nations. While duties for smaller vehicles is at par with most of the countries including Indonesia, Singapore and Thailand, duties for vehicles of engine capacity of more than 1500cc engine capacity are lesser in India with the exception of Singapore and Brunei. Excise on different forms of alcohol ranges from 40% to 60% in South Asia but India levies a much higher duty of 150% on most forms of alcohol. Tobacco in the form of cigarettes attracts excise of more than 50% in most of the south Asian countries including Vietnam, Thailand & Myanmar. India has a lower rate of excise duty on cigarettes which is on the upside of 10%. Most of the OECD countries levy excise in the range of 2050%. Within these nations, while UK levies a meagre 16.5%, Mexico has excise of more than 50% on cigarettes. Mineral oils are levied 510% excise duty in south Asian countries with the exception of Myanmar where the excise is as high as 170% for gasoline. India levies a 14% excise duty on mineral oils which is higher than other countries but lower than the duty charged for other goods. Excise on mineral oils varies across the OECD countries. US levies as low as 3% excise duty on mineral oil but Japan and UK levy 25% and 40% respectively. India has significantly reduced its dependence on Excise duty as they have seen a meagre growth rate of 3.6% from Fy2007 to FY2012. CUSTOM DUTY Custom Duties are levied with ad valorem rates and their base is determined by the domestic value of the imported goods calculated at the official exchange rate. Similarly, export duties are imposed on export values expressed in domestic currency. If we look at the figures of Custom duty collections as a percentage of the total tax collections, we find that India levies a high tax rate compared to several developed and developing countries. The custom duties in India account for 16.2% of the total tax collections, while the same figures for Indonesia2.9%, Brazil4.1%, South Africa4.4%, US2.1%, Japan1.9% are way below the amount collected by India. the high level of custom duty is used as a measure to protect the domestic industries of the country. With globalisationthe amount of imports has increased and has added further pressure on 6

the current account of the country. The effective use of customs duty has helped domestic goods to compete with foreign goods and limit the amount of imports easing the pressure on current account deficit. Custom duty collections have grown at a handsome rate of 10% for the period of FY2007 to FY 2012. Custom duties have outpaced Excise because of the increasing pressure on domestic manufacturers. Government has tried to make the domestic products more attractive by controlling excise but imposing higher custom duties to discourage imports. SERVICE TAX Service tax is paid to the government for the sale of services. Currently the Indian government levies a 12.36% tax on gross value of the service provided. India has been striving to replace the current taxation system on goods and services with the Goods and Services Tax (GST). GST is essential to remove the double taxation of commodities. The new regime of GST will remove all anomalies and will charge a single tax for a specific commodity. World over, nearly 150 countries have already implemented GST. Different countries use different models for charging GST. While some countries levy a uniform tax across all commodities, others have different tax rates for different commodities. The magnitude of GST also varies across countries. While it is as low as 5% in Japan and 7% in Singapore, the European countries have much higher rates with France levying 19.6% and Germany 19%. In India, it is proposed that the rates would be somewhere between 16% and 20% whenever GST comes into force. India has taken motivation from the Canadian experience of switching to GST. CONCLUSION India's taxtoGDP ratio is far below the expected levels. The low level of revenues through taxation is the prime reason for the bulging fiscal deficit of the country. Although taxation has been implemented effectively in certain areas with the aim to promote industrial growth and prevent inflation, there are areas where the government can improve it. Personal Income Tax is certainly one of those areas where India has done poorly. Higher compliance can help offset the difference in collections as per international levels. Smaller companies need to be given greater corporate tax benefits as compared to the larger companies. Dependence on Service Tax to improve indirect tax collections needs to be reduced with higher custom duties on diamonds and gold being one of the solutions.

Canada improved its GDP by 1.4% by switching to GST which was a result of improved compliance. India also aims to establish a similar robust structure which would be a significant tax reform for the stagnating growth in indirect taxes in the recent years. Service Tax is the fastest growing revenue source of the government. It has more than doubled in the six year period of FY2007 to FY 2012 with an annual growth rate of more than 17%. The high growth of service sector is the reason behind it but sustaining such a growth rate will be a challenge in coming years.

It is important to note the sections that receive the maximum tax benefits in the country. Custom duties form the largest chunk of tax revenue foregone accounting for an average of 40% in this sixyear period. Custom duty exemptions are more than the actual collections of custom duty in the respective years. Excise duty is another important account that receives huge exemptions. Excise exemptions are also slightly greater than the collections in this period. Although we found the Personal Income Tax collections in India to be very low as compared to its counterparts, the exemptions are also very low. It is similar for Corporate Income Tax, where the 31.5% effective tax rate becomes 22.85% (201213) after accounting for exemptions. It is surprising to find mineral oils contributing a lower share (19.5%) to custom duty exemptions to the total exemptions in 201112 compared to its net share of imports (35.4%). Although, a large chunk of petroleum products are used for domestic travel, there is still a large amount that directly contributes to inflation through freight charges. The low level of exemptions would mean higher final prices of essential commodities. At the same time, the share of custom duty exemptions on diamonds and gold are the highest at 20.5% in 201112 whereas these are expected to be as low as possible due to the luxurious nature of these products. Nearly all (83%) of the Personal Income Tax benefits are on account of investments. Hence, these benefits have been an effective way of promoting an investment culture in the nation. On the other hand, the implementation of corporate taxes has been poor as the companies with lesser profits have been charged a higher effective tax rate as compared to the companies with greater profits. While companies with profits before taxes greater than Rs 500 crores paid tax at an effective rate of 21.67% in 201112, companies with profits up to 1 crores paid tax at an effective rate of 26.26%. In most of the countries, one finds a progressive tax rate where the companies with higher profits pay higher rates of taxes but the same cannot be said about India. Article by Keshav Jangra FMS

TAX REVENUES FOREGONE A significant aspect of any taxation system is the amount of special tax rates, exemptions, deductions, rebates, deferrals and credits. All these lead to a lower level of tax revenue collected but are vital for various purposes including promotion/sustenance of industries, promotion of government tax-free securities and export promotion. The Indian government has been presenting the Statement of Revenues Foregone under the Central Tax System since 200607. The document shows a clear picture about the impact of tax incentives on the revenues of the government. For the last six financial years, the Tax revenue foregone has been an average of 62% of the Average Tax collections. If all the tax exemptions were to be removed today, government receipts would be enhanced by onetenth of the GDP; wiping off the entire fiscal deficit but that scenario is improbable as it would have an adverse effect on all sections of the economy. 7

Risk Appetite: Pre and Post Crisis Effects

Introduction
A study of this crisis indicates that no single entity can be held responsible for this catastrophe. Massive ignorance of governments, subprime loans, deregulation allowed by regulators, leverage levels raised by SEC, false ratings issued by rating agencies, securitization chain and unregulated swaps etc. were some of the factors which amplified the risks inherent in US financial system. Soon the booming real estate market slowed down which caused banks, investors and average home owners huge losses. Stock markets crashed all over the world subsequently slowing down the credit flow. In 2012, the stock markets went up nearly 70% from their March 2009 lows. Corporate profits and stock market alltime highs may indicate short term improvements but other economic indicators like consumption rate, unemployment data and public debt lead us to a different conclusion. But the key problem is that these improvements have affected mostly the corporate, not the average taxpayer. It is to be noted that no single quantitative framework can solve the problem of risk appetite index measurement. Different institutions use different parameters to construct their risk portfolios to make investment decisions. This paper adopts a qualitative approach to discuss the relevance of risk appetite levels using risk charts developed by Credit Suisse and UBS. A variant of the underlying issue can be whether the global economy will be out of recessionary conditions if the risk appetite increases globally. This paper tries to analyze the reasons for the current slowdown in a slightly different manner. A part of paper discusses the differences between current slowdown caused by recent financial crisis and other recessions. Qualitative relationship between different parameters has been used in this paper to discuss the current slowdown along with future scenarios.

protracted periods of economic prosperity mainly driven by cheap credit borrowed from various developing economies. Financial institutions mainly hedge funds and investment banks leveraged their balance sheets to enter into risky businesses involving complex financial instruments like collateralized debt obligations, credit default swaps, and innovation in financial engineering like securitization of various asset classes which made them huge profits. These appeared to them as a perpetual source of profits because they had by mistake made an assumption that housing prices would never go down. Over optimistic profit making conditions stimulated the risk appetite of financial institutions even when they were reluctant to engage in risky financial transactions. All these disturbances in financial system are attributed largely to the deregulation which was started in 1978 when President Carter signed the Airline Deregulation Act. Soon all other major sectors of economy also started to adopt the deregulation measures as a ubiquitous change needed for growth. Deregulation was taken as an opportunity by financial institutions to exploit this regulatory freedom and allowed them to take risky positions using leveraged money. 8

he financial crisis of 2008 was preceded by

Reasons for the Crisis

Where Did The Risks Come From? Economists across the world have blamed governments for their massive ignorance, de regulation by regulators, hedge funds, greedy bankers, irresponsible homeowners, insurance companies, investment banks etc. But it is hard to accuse a single entity as it involved many participants . Figure.1 mentions those parameters which caused the crisis to occur in the first place. Cheap credit provided by various economies helped fuel the risk appetite of US banks which allowed them to borrow enough subsequently crossing the leverage limits of 30:1.This paper tries to analyze the situation prevailed in markets before the crisis and actions taken by financial institutions in a different way. There existed a set of banks which showed reluctance to take unnecessary risks and didn't want to enter the derivatives business. Low volatility and high deregulation stimulated risky behavior in bankers who leveraged their balance sheets, opened derivatives & securitization departments which helped them to make enormous profits.

Before The Crisis: How Did We Reach There?

Figure1 On the other hand, their counterpart bankers were questioned by their shareholders for low equity returns. They were forced to adopt securitization and trade in risky financial instruments (CDO's and credit swaps).Executives reluctant to take risks were replaced with young bankers who were ready to indulge in risky financial transactions. They were awarded huge incentives. These actions made whole market to engage in massive risks as everyone was making huge profits. For example, $500B worth of credit default swaps was issued by AIG. As the swaps market was unregulated, AIG didn't keep aside any money assuming the housing market to grow forever, but reverse happened and US government had to take over AIG. 9

It was the ignorance on the part of the government and regulators as they had not anticipated the unintended consequences of the actions which they took before the crisis. These actions created a false sense of security in the markets. The limited regulatory measures combined with ineffective market discipline, appear to have helped drive innovation (for example in the securitization process) but at a high cost as the risks of highly structured products were not properly understood. This real estate bubble fueled by massive credit collapsed as the housing prices started going down. Several banks were bailed out and mortgage companies were taken over by government, as a result of which credit markets froze. Congress was forced to provide bailout packages for multiple financial institutions to restore the confidence in the financial system. Consequently they passed Emergency Economic Stabilization Act (EESA) in 2008 which also included specific provisions aimed at reducing the excessive risk taking in the financial world. American taxpayers found the financial system fundamentally wrong and this huge bailout program forced them to demand the government intervention in order to regulate the financial system.

Analysis
Slow recovery after the crisis Global economy seems to be recovering after the crisis but still the progress is in nascent stages. The real question is Why Is It Taking Longer to recover from the 2008's Financial Crisis? According to the National Bureau of Research, United States has seen 12 recessions after the great depression of 1930 and these recessions lasted for an average of 10 months with longest recession lasting 16 months. An ongoing debate among various economists' talks about whether the recessions following the severe financial crisis take longer to recover or do they recover normally. In 2008, Carmen Reinhart and Kenneth Rogoff of Harvard analyzed the financial crises of the past and concluded that crises like this are followed by a high rate of unemployment and slow growth.

Aftermath Of The Crisis: Are We In Recession?

After the crisis there was a sudden rise in risk aversion which spread globally because of the highly interconnected nature of economies. The demand for consumer goods plummeted as unemployment rose to high levels and the uncertainty of job creation went up. It should be noted that the growth achieved during the booming economy was not permanent as it was achieved by taking risks and it is easy to generate the performance by taking risks. Now the risk appetite of banks, investors and consumers has gone down and the situation is exacerbated by the Euro Zone. The banks are more cautious in disbursing loans and it has become necessary for the NINJA (No Income, No Job, and No Assets) consumers to make down payments to buy assets. Today the investors have become more risk averse and are more careful about where they should invest and where they should not. High leverage levels of financial institutions are being replaced by deleveraging, which will continue unless the market dissolves the toxic assets which still occupy a large space on their balance sheets. Increased financial regulations may prevent the institutions from taking high risks in the long term, which if coupled with transparency in financial system, may lead to sustained growth. US economy whose consumption was always fuelled by debt, has had to see a significant decline in consumption [from (+)2.53% to ()12%] which has resulted in lesser and lesser investments as companies are not willing to invest in new products and reluctant to upgrade existing products in order to control costs. The underlying question, whether the reduction in risk appetite has pushed us towards another recession, zeroes down to the question asked in the introduction. Is it possible to stimulate the economy if the risk appetite achieves those levels which we had before the crisis? The risk level shave reduced drastically in economies highly affected from the crisis, which has led to a structural shift in markets. Investors are willing to invest more cautiously and flexibly.

One reason for the slow recovery from the crisis is that the repercussions of crisis were exaggerated due to the Euro Zone trouble. The huge debts owed by PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries forced them to impose high austerity measures which contributed to the further slowdown in these countries. The European Union is trying hard to recover as it is not possible to impose independent monetary policies in different European Countries. The financial crisis of 2008 has left us in such recessionary conditions that recovery seems a herculean task.Figure_2 demonstrates that the recovery after the global financial crisis is slowest.

Figure 2 Source- NBER

10

Figure3 depicts the preferences of investors which depend on risk contained in those countries.

Figure 3 Charts below show the risk appetite globally. It is to be noted that the QE3 announcements made by US rd fed in 3 quarter may have helped stock markets to outperform but it is just reflection of the steps taken by government to boost the economy.

Economic indicators like high unemployment, low consumption level, high inflation, high probability of recession in European Union (Figure 3), and huge fiscal deficit combined with existing level of leverage in financial system and post effects of toxic financial instruments have made the situation even worse. It will take some time for these indicators to stabilize to safe levels; as any short term government policies may not be able to mitigate the risks inherent in economy. It is necessary to contemplate on any policy induced effects such that one policy does not affect any other policy adversely. The growth achieved during 20032007 should not be counted as real growth as it came with high costs and ended with a crisis. Figure 4 shows the reduction in securitization market activity as it is considered an innovation in finance but was highly responsible for increased risk taking. Below charts from different sources, which are based on recession probabilities and securitization levels, are helpful to show the unhealthy conditions of global economy.

Source UBS

Source Credit Suisse

Figure 3

Figure 4 11

The postcrisis recession was officially ended in June 2009, but even after three years recovery is painfully slow. Even though the current condition of economy is not declared as recession, the low consumption, unemployment and recovery data shows that we are very near to a global recession. High risk aversion has forced us to evaluate the cost and benefits of risks which has some disadvantages too but certainly it is much better to grow sustainably for long term rather than growing fast and falling into a crisis followed by a recession.

6. Increased pessimism of investors, growing concerns on US fiscal cliff(Figure5), china's slowdown and Euro zones economic uncertainty are the few factors which will continue to threaten the world economy.

Possible future scenarios

Based on current global economic scenario this paper attempts to make few implications which global financial system can face: 1. The risk appetite of investors may shift from over leveraged and risky developed economies to new emerging markets. As these new markets have a room for new assets and cash, this will help asset prices to go down and stimulate growth in other parts of the world. There has been an improvement in risk appetite after September 2012 due to fiscal stimulus announced by various governments including quantitative easing phase 3 released by US Federal Reserve. 2. Proactive measures taken by various governments and introduction of new reforms may seem to ease the investors and possibility is there that markets will be driven by increased speculation which may appear to be inconsistent with the unstable economic conditions. 3. Quantitative easing and fiscal stimulus around the global economy can exacerbate the inflation increasing the commodity prices and subsequently reducing the spending and creating cyclical recessionary situations. 4. Financial institutions are pressurized globally by new regulations and forced with higher capital standards. Banks are more risk averse and reducing exposure to complex financial products. Banks are backing their future security by formulating strategies to achieve safe leverage levels. But being more pushed for deleveraging and for more regulations, this may force banks to stop certain operating businesses, which would cause a reduction in liquidity loss and less investments that may push the world again into a slowdown. 5. Almost half of the United States, Russia and Australia experienced drought conditions in 2012 summer and the production level of crops is lowest since 1995. US department of agriculture forecasts food inflation rate to go up from 2.5 to 3.5 % reducing the real income and burdening the world economy. 12

Figure 5 Source - NBER

Conclusion
The global economy today is better depicted by an inflection point on Cartesian coordinates as various governments are adopting growth policies to revive their countries from crisis. Central banks are making efforts to stabilize the economies and stock markets are correcting themselves over time. The risk aversion levels are significantly higher and it may take a long time to change this status quo where investments will be made in fields of microfinance, infrastructure and retail sector etc. The significant reduction in risk appetite of both domestic and international investors after the financial crisis has led to a structural shift in market. There also is the interesting question of whether the global economy will ever be able to achieve its earlier growth trajectory or will there be a permanent loss in production levels? This crisis has presented an opportunity to make real productive growth and to correct the imperfections in the economy. Countries should focus on reducing their debt and leverage levels. The incentives structure for risk taking should be modified which gave financial sector a monopoly in corporate America. The slowdown of US economy has calmed down the exploding real estate market. China which relied highly on exports hitherto, needs to increase domestic consumption. We achieved growth but with huge risk taking which were not permanent instead financial institutions in different countries should adopt the risk adjusted performance approach which will be more resilient to sudden fluctuations and will be sustained for a longer period.

References
http://www.imf.org/,http://www.nber.org http://www.bloomberg.com/ http://www.economist.com/ http://www.minneapolisfed.org/publications_ papers/studies/recession_perspective/

Article by Vivek Srivastava IFMR

$treet Wall
NECESSITY OF NEW BANKS: AS PER the statistics, only 35% of Indian population has access to formal banking services . The majority of Indias 6,50,000 villages do not have a single branch. Thus RBI is trying to increase the Financial inclusion by providing new licences- it mandates 25% of the new branches to be setup in rural area. This time corporate bodies are also involved and their proven entrepreneural talent and management expertise will bring new spirit which may lead to innovation in the business model in banking sector.

INDIA GETTING RICHER: NEW BANK LICENCES

WHEN WAS THE LAST TIME BANKING LICENCES WERE GIVEN? Last time RBI issued banking licences was in 2002-03. Two licences were issued to Yes Bank and Kotak Mahindra Bank . Both the banks, particularly Yes bank made a mark in Indian Banking system. In the first move of privatisation of the banking sector, 10 players were allowed in the mid-1990s including ICICI Bank and HDFC Bank which are todays majors banks of India. WHO APPLIED FOR LICENCES ? Last date of applying for a licence was 1st July. RBI had received 26 applications from different institutions. Some of them are India Posts, Tourism Finance Corporation of India and LIC Housing Finance; branded companies like Aditya Birla Nuvo, L&T Finance Holdings,TATA sons from Mumbai, Bajaj Finserv from Pune as well as Shriram Capital from Chennai, Reliance Capital, Muthoot Finance and Religare Enterprises. As a result of these tight norms and guidelines, long time aspirants Mahindra and Mahindra Financial Services pulled out of the race citing non-compromising tone of the RBI when it comes to the ground rules. WHATS IN STORE FOR US IN THE COMING DAYS? The license winners for the new banks are expected to be announced by Q1, 2014. The no. of licenses to be allocated is also not fixed. The market is already rife with guesses. Most experts are pinning hopes on NBFCs and government entities with significant penetration in rural areas to win the banking licences. Whatever the outcome be, the Indian Banking Sector is going on a ride in the coming days and the end result would be an increase in foreign investments and liquidity in the market which would mean a more efficient and competent banking system in near future. POSITIVE OUTCOMES OF THIS BILL: This bill also clears the way for NBFCs (Non Banking Finance Companies), corporate houses, government entities and broking companies to run banks after RBIs approval. This bill will also allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty. Financial inclusion is also likely to increase as the banks need to setup banks in rural areas. The dream for RBI is that every Indian citizen should have bank account.

WHAT ARE THE KEY ASPECTS OF THE BILL ? RBI can issue new bank licenses according to some norms and guidlines. The shareholders voting rights have increased from 10% to 26% in private sector banks and from 1% to 10% in public sector banks. The RBI gets greater regulatory authority over local banks and the power to supercede bank boards when the banks are facing difficulty. The Government dropped a controversial clause in the bill of Allowing banks to trade in the commodity futures market amid fears that it could lead to risky, speculative trading.
Mass Solutions For CFA, FRM Books Contact:9820541867

Silver lining for Indian Economy

Affliction in our economy FIIs and FDIs have dried up in our country for this fiscal year. Wholesale Price Index (WPI) and Consumer Price Index are drawing flak. Their credibility is dogged by scepticism. From a certain section of experts, there is a solicitation to scrap these indices. Rupee's depreciation has sullied the economic scenario of our nation in various aspects. Due to the subsidies given under kerosene, diesel, fertiliser, urea and continuously surging demand for gold have germinated trade imbalances. Financial Exclusion is deteriorating the financial fabric our nation. Dearth of venture capital has severely affected our infrastructure. A number of projects are just hanging in the air due to lack of capital. Dismal show by NBFCs and microfinance institutions has debilitated our economy. Red tape which is ubiquitous in the nation is eating into the vitals of loan and financial institutions. Logjam over Land Acquisition Bill has drifted a slew of projects to standstill. No clarity on retrospective tax regime and GAAR (General Anti Avoidance Rule) has been big laggards for our investments. Implementation of GST (Goods and Services Tax) has also gone into deep slumber. Elixir in hard circumstances There are no silver bullets for this malaise. However, concerted remedial actions can ameliorate the situation. Certain steps if implemented over a long period of time can streamline the processes and in turn plug all the loopholes in our economy. Twin deficits in our economy

Whenever I pore over national daily newspapers, there are pages, articles and analyses replete with bleak and gloomy Indian economy prospects. Every analysis given by experts is inexorably reflecting loopholes and poor performance of our economy. There are speculations of downgrading Indian economy from investment grade. Recently released GDP growth rate for the quarter was a mere 5.5%. Our Core sector is in doldrums. With a share of 40% in Index of Industrial Production(IIP), Core sector's growth is worrisome for us. Manufacturing sector is growing at a staggering rate of 1.9%. Inflation is unrelentingly skyrocketing to double digits. RBI and government are near to fail in taming inflation. The Balance of Payment (BOP) is in tatters. Fiscal Deficit and Current Account Deficit (CAD) are persistently negative. Import duty is continuously burgeoning. That is affecting our trade deficit. Non plan and plan expenditures are doggedly higher than revenues generated by government.

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Fiscal Deficit and Current Account Deficit are continuously haunting our economy. Currently, fiscal deficit is 5.1% of GDP. Our performance on these benchmarks is creating uneasiness. But if fiscal consolidation under Fiscal Responsibility and Budget management Act (FRBM) is done accurately, there can be no fiscal deficit. Government has to increase its plan expenditure as it does not aggravate fiscal deficit. In the same vein, government has to reduce non plan expenditures. It needs to catapult revenue receipts to lower the widening fiscal deficit. Current Account Deficit is eroding Balance of Payment. In order to cut this clutter Government needs to scrap extravagant subsidies on diesel, kerosene, urea and fertilizers. Due to the growing demand of crude oil and gold, our import bill is on a record high. We must upscale indigenous production of crude oil. Promotion of use of renewable sources of energy has to be introduced. Nominal import duty on import of gold has to be increased so that the demand of gold can be lower down. Trade Deficit Our Balance of Trade is negative. Imports are rising at an astronomical rate but exports remain to be laggards. Government must boost exports by i n c e n t iv i s i n g i n s t i t u t i o n s w h i c h e x p o r t commodities. Especially export of gems and jewelleries, engineering products, garments needs to be increased by giving fillip to these sectors. Subsidies can be given for such projects. For easing the funding of these projects, venture capital can be given or MSME (Micro, Small, Medium scale Industries) loans can be arranged. Pessimistic Balance of Payment Negative BOP is detrimental to our economy. But unfortunately it has remained persistently negative across a period of time. To facelift BOP we must pare down trade deficit, fiscal deficit and current account deficit. Investments need to be poured into our nation. Especially, treaties such as CEPA and BIPA are ultra vires in this context.

Our foreign exchange reserves must be strengthened by increasing exports and FDIs. Malaise of Depreciation of Rupee

The major factor for this rot is paucity of FIIs. Recently, recommendations given by Shome panel to defer GAAR to three years are a tenable move. Non imposition of tax on investments done by parent foreign company in India is a welcome step. These measures will give a major facelift to FIIs coming to India. Foreign investor confidence will also rejuvenate. Unbridled fiscal deficit and CAD need to be reined in. Trade imbalances also badly affect rupee. In July 2012 rupee touched all time low of 57!

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In order to nip this rot in the bud, government must take these measures. Instead of passing buck to others, it must expedite remedial actions so that this should not repeat. Restoration of IIP numbers IIP numbers can be revived by overhaul of core sectors and manufacturing sector. Eight core sectors viz. cement, coal, and mining, fertilizer, crude oil, petroleum, refinery and finished steel need major revamp. In manufacturing sector, capital goods require investment. Consumer goods viz. durable and non durable goods should be promoted. Intermediate goods need major revive as it constitutes 27%. Sugar, steel and car engines are some examples of intermediate goods. Natural resources, minerals and human capital are major constituents of capital goods. Capital and investment from government should be earmarked for these sectors.

Financial Inclusion

Our major chunk of population lives in rural areas. 70% of our population resides in rural areas. In contrast to this, our banks are crammed up in urban areas. Number of banks in rural areas should be proportional to population there. Since we are an agrarian economy, our farmers need capital for different necessities. Now rural India is the growth engine of India. 60% of our GDP comes from rural India. Hence there is an exigent need to uplift banking and financial infrastructure in rural areas. Establishment of NABARD, RRB are exiguous steps taken by government. But some of the NBFCs (Non Banking Financial Companies) and microfinance institutions are charging usuriously to our farmers. This malpractice must be abolished and should be uprooted from the society. Regulation done by SEBI on these institutions must be more vigilant to stem the rot. Red Tape and policy paralysis

Conundrum of WPI and CPI Inflation indicators such as WPI and CPI are not giving correct calibrated picture. Many experts have raised their resentment on this front. They demand to scrap these indices because if we demarcate our indices on the basis of rural, urban and agricultural, inflation's precise picture cannot be captured. The effective solution for this discomfort will be PMI (Purchasing Manager Index). It has been used extensively by many countries such as United States, Australia etc.

A number of industrial projects have been scuttled by red tape. It takes a staggering figure of 94 days to start a business in India!

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Government should cut red tape by easing rules and procedures. It must introduce transparency in the system. Recent ruckus on Land Acquisition Bill is the apt example for this political paralysis. Environmental clearances have severely marred industrial activity in the nation. Numerous examples are there viz. Posco project, Niyamgiri, Jaitapur and Kudankulam. Government needs to have a streamlined procedure to ease the business in India. Same goes for FDI too. FIPB (Foreign Investment Promotion Board) is the department of our government which has the onus of overseeing all the concerns related to FDI. Without its clearance government does not mull over any FDI proposal. Government must demarcate sectors for which FDI is required. This would save a huge amount of time and money which are getting wasted when logjam persists. For aviation and retail sectors, FDI is indispensable. Over a period of time aviation companies are struggling to keep their balance sheet out of red. Domestic fares are highest in our own country across the globe. FDI in retail will bring employment, better technology, competition and better and varied products in the market. Recently, government has eased sourcing norms for IKEA to foray Indian market. Hope this trend would continue to attract investors to India. Environmental clearances This is the issue which is eating into the vitals of our industry. Many projects remain stalled due to the lack of transparency and instead ubiquitous intricacies in the clearance of industrial projects. Let us take the example of DelhiMumbai Industrial Corridor. From the time indefinite it is dead and none of our political honchos are interested to revamp or rejuvenate it. Lack of political will is also scuttling our projects. It is a proven fact that if this corridor can see the light of the day, it would have given major boost to tottering economy. 18

Disinvestment

Government must embrace disinvestment in public sector institutions to inject a trove of money in market. It will give rise to competition, which is much needed in dud public sector. Disinvestment will lead to increase in revenue receipts which are capable of paring down yawning fiscal deficit. Accountability and of course profit or earnings will rise in public sector which is nowadays laggard. Planned development expenditure On the account of skyrocketing inflationary pressures, GOI must increase its planned expenditure. Capital on infrastructure projects should be given boost to enhance the basic infrastructure of the nation. It is quite unfortunate that only 1.5% of our GDP is spent on infrastructure. Viability gap fund needs to be propped up. Funding on R&D projects demands a major push. Instead our government is spending taxpayers' money on distributing swanky luxurious cars to MLAs. If planned development expenditure is increased to the hilt, it will lead to shove to state governments, which are in deep slumber. Airports and ports are the hub of industrial activity. Hence they must be well connected to each other. Economic activity in electricity and road infrastructure too is not satiable. Farreaching reforms are needed in steel and crude refineries. As they constitute core industries, i m m i n e n t reva m p i s i n d i s p e n s a b le . Ra i l infrastructure is already in the soup. Recently government is planning to impose service tax on railways freight and passengers.

This is a welcome step as taking into consideration the stupendous size of railways. This would add a string to the revenue of government. Second, as per the negative list of taxes formed by government, railway is in positive list of taxes. Hence giving undue exemption to railways is not recommendable. Expenditure on social infrastructure is need of the hour. Health services, education, sanitary and potable water need the immediate attention of policymakers. Discharge of responsibilities from them is required in letter and spirit. Power Sector Restructuring is implemented quickly Loans of Rs. 1.2 lakh crore to state electricity boards should be restructured. This will cut down pall of heavy burden on electricity boards. Most importantly, this step will lead to the reduction of tariffs. Banks' focus on Retail Loans 14.4% annual increase in retail credit. It will certainly revive demand.

GST and DTC Rollover

Continuous decline in GFCF as percentage of GDP, over many quarters is causing rising alarm. Gross fixed capital formation (GFCF) refers to the net increase in physical assets (investment minus disposals) within the measurement period. At present it is 5.2% of GDP.

Introduction of unified Goods and Services Tax will make sea changes in intricate tax administration and collection. This reform in Indirect Taxes will widen tax payer base, prevent tax evasion and increase tax buoyancy. It will give necessary relief to small businesses and entrepreneurs. Exports will be charged at zero rates. Thus colossal boost will be given to exports. Further, lower GST will be imposed on necessary items. GST on imports will follow destination principle. Reforms in direct taxes viz. Direct Tax Code (DTC) will give a major push to Corporate Tax, Educational loan, Capital gains and property tax. Especially, MAT according to the book value of company will be imposed. So that tax evasion based on profit book can be nip in the bud itself. Securities Transaction Tax will be abolished and this gives major boost to investors.

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Big relief to taxpayers as IT tax exemption limit would be raised from 1.8 lakh to 3 lakh. Tax levied would be 10% on income between Rs. 310 lakh, 20% on income between Rs. 1020 lakh and 30% on income above 30 lakh.

In a nutshell I would like to propagate the fact that role of MBA students in constructing an inclusive society is the need of the hour. Their diverse knowledge of domains and expertise should be tapped efficiently to build a utopian society, which is at present an Orwellian society. In a span of reasonable years our country must develop in all aspects with values intact. India must repeat the encore and it must transform into the Golden Sparrow. References 1. www.epw.in 2. www.unionbudget.nic.in 3. www.rbi.org Nitin Singh Symbiosis Institute of Management Studies, Pune

With the advent of GST

Bills stalled in the parliament A number of indispensable bills are scuttled in the parliament due to lack of political will from both central government and opposition. These bills are vital for the development of our nation. Some of the bills pending include Protection of Women from Sexual Harassment at Workplace Bill, Whistle Blowers Protection Bill, Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill, Land Acquisition, Rehabilitation and Resettlement Bill, and the Chemical Weapons (Amendment) Bill.

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Rendezvous with a Dynamic Venture Capitalist

good is only if there is a clear majority by a political party. I really do not care which party wins but it should be in a clear majority as only then they would be able to make key economic decision, hopefully some sensible decisions to drive the Indian economy. $treet: Tell us something about Kae Capital Sasha Mirchandani: Kae Capital is India's First seed funds. We have US $25 Billion under management. We do early stage investments from US $50,000 to 500,000 million dollars. We can invest up to 2.5 Million dollars in a single company. $treet: Which sectors do u target? Sasha Mirchandani: We invest mostly in early stage technological companies that are capital efficient. We have funded multiple sectors which include one ecommerce Company, couple of Ethernet Companies, three payment companies and two cloud based companies. By and large we have been very opportunistic about the investment. This year we have had far more thesis focused approach but generally we focus where there is an opportunity and the team is world class. $treet: What are key differences dealing with providing seed capital to a new entrepreneur and a company already established? Sasha Mirchandani: We generally invest in new entrepreneurs. Our model is to bet on youngsters with a visionary idea. Facebook, Google, Yahoo were all once a new idea. Our investments in the past as well in the present are generally fresh startups. $treet:There are so many ventures in your name like Mumbai Angels, BRB advisors, the list goes on. Have you not felt that you should have struck to one place and made it big? Sasha Mirchandani: They are all very different. I started with my family business which is Onida which is still run by professionals. BRB was a job, it was not owned by me, and I worked there for four and half years. It was a great learning for me where I worked as a head of India with reputed venture capitalists around the world. Mumbai angels was co founded by me and is still going very strong and is independently run. Kae Capital is an institutional fund. So they are all very different and any two cannot be compared. Mumbai angels is still growing and we are now aiming at Bangalore angels, so that's growing constantly. The idea is to put professionals in the forefront so that they can scale faster without founders being in the way.

Global Venture Capital Confidence Survey'13, shows a significant drop in the sentiments of US, UK, Australia based private equity and venture capital (PE-VC) funds towards India The Venture capital is the life blood of new industry in the financial market today.It can be visualized as your ideas and our money concept. Venture capitalists not only provide monetary resources but also help the entrepreneur with guidance in formalizing his ideas into a viable business venture. Mr. Sasha Mirchandani, Founder & Managing Director at Kae Capital, an early seed stage fund, is a modern age revolutionary venture capitalist. He is a Co founder of Mumbai Angels, India's first Angel Investment group.Prior to this Sasha was the Managing Director for Blue Run Ventures, CEO and Founder of Imercius Technologies, a BPO focused on Healthcare. Sasha sits on the Board of Hathway Cable and Datacom Limited, Akasaka Electronics Limited, Fractal Analytics, Algorhythm Tech, Gulita Securities and Mumbai Angels Venture Mentors. He is also a past President of EO Mumbai. We, Team $treet, got an opportunity to interview Mr. Mirchandani on a bright Sunday evening at his Nariman Point office. Read on to find out more about Mr. Mirchandani's vision, ambitions and thoughts about venture capitalism in India.. $treet: How big is the threat that current economic scenario possesses for Kae Capital? Sasha Mirchandani: Well, obviously we are not happy about current investment scenario. There is tremendous amount of gloom but the good news for us is that the space where we operate in is really early stage. Generally the companies are not that badly affected. Obviously with issues like people buying less, Dollar at 60, Inflation in a mess and so on and so forth, it does not help but we focus on early stage companies where issues are more about product adoption. But yes, as these companies grow they will get into tail winds and headwinds of economic conditions. More clarity would come after the general elections. The key reason for me to hope something 21

$treet: Exit strategy is very important. At what stage do you decide to exit your investment in a company? Sasha Mirchandani: I think what we do as VC is, if we can make back half of our fund, for example if the fund is $25 Billion then $1012 billion is a reasonable return. So at that point we consider an exit if there is an opportunity. If I am investing in my private capacity I could look at the X i.e. 2X, 3X or 5X and I see if this company is constantly growing over next couple of years. If I am getting good returns but I feel risk is very high I would get out. The reason I may stay is if I really think it would be a big company. If you really want to make big returns in this business you have to be there for long. For example still the largest individual shareholder is In mobile which is probably the most successful startup in India. The reason I stayed back is that I truly believed that Naveen, Amit and Abhay would build a global business of scale. If you know it can become this big it would be unlucky for you to not have continued as a shareholder of that company. $treet: What are the annual targets, Milestones or five year plan of Kae Capital? Sasha Mirchandani: We do not have 1 year or five year goals because our fund is generally an 8 year fund. So it is very different from traditional businesses. Our biggest goal is to maintain returns and to fund entrepreneurs who are most determined. We did extensive research on what makes entrepreneurs successful some said intelligence, some said assistance, but we found that t h e f u n d a m e n t a l t ra i t t h a t m a k e s b e s t entrepreneurs is determination. We want to build a firm where entrepreneurs would come and enjoy working with us. $treet: You have been in this industry for a long time. What kind of transformations has entrepreneur style gone through? Sasha Mirchandani: Entrepreneurs are now thinking bigger. I have seen Indian entrepreneurs thinking small while, when I go to Stanford they come out with a billion dollar plan. Now it is not about millions or billions but about thinking big and having a vision to build a global business here. There are many other traits and trends that I have seen but I feel that this is the best. 22

$treet: Intuition plays a big role in investing. How much decision is actually given by this intuition? Sasha Mirchandani: Valuation at this stage is a combination of art and science. $treet: What advice would you give to a Bschool graduate who aspires to get into a VC industry? Sasha Mirchandani:I would strongly urge people to get operating experience. You cannot generalize as to one can or cannot do it but the best VCs are people who have operating experience because they can empathize with entrepreneurs as to what entrepreneurs go through as they have worked with an operating sense . They can also add value by giving sensible input. So one is empathy and second is strategy. Hence I strongly urge people with operating experience. $treet: The moment we got here in this room we were electrified by the quotes present all over. Does Kae Capital follow these types of virtues and values? Sasha Mirchandani: The main thing for Kae Capital is the vision and mission and that is what we have put. The rest are the people we respect. $treet: You mentioned about Gim Collins. Even your vision and mission are inspired by one of his books. Sasha Mirchandani: I have read his books many a times. The best one is 'We want to outperform'. He said let's give a number to it. Quantify target. So if we get 10 X results that means we have worked well. $treet: What kind of personal milestones have you set in your life? Sasha Mirchandani: I want Kae Capital to be very successful. In the perfect world, professionalize it. So one day it will be run by people other than me and I'll be doing something completely different. Youngsters like you would be running it. I don't see myself running Kae Capital 30 years from now. I need to determine who will run this company and run it independently. My guru Ashish Dhawan who retired at 42 gave himself to philanthropy. I want to work for social causes too. Ashish was number one guy in the industry. For him to retire is not only commendable, but beyond commendable. We should be in a position to draw the line that enough is enough and the amount that I have earned is sufficient for me and my family and next generation and now it is time to do some help for the society.

INDIAN BANKING SECTOR: IS IT TIME TO OPEN UP TO FOREIGN PLAYERS?

oreign banks have become an important module of Indian financial and banking system. With economic liberalization and globalization, the need for an expanded role and operation of foreign banks has gained momentum in India. In 2005, the RBI came up with a policy that proposed a twostage road map for foreign banks. In phase I, up to 2009, the policy on foreign banks would be in conformity with existing norms. the focus, in this phase, was on strengthening the domestic banking sector in various ways, including consolidation. In phase II, consequent to 2009, the policy could be reviewed in the light of experience.

The review did not occur in 2009 because of subprime crisis of 2008. The review has finally been conducted in January 2011, with the RBI releasing a detailed discussion paper on the policy towards for eign banks (Discussion Paper Presence of Foreign Banks in India). Before that, let us take a look at major banking reforms introduced in postliberalization era, impact of these reforms on the performance of Indian banking sector. We will then discuss genesis and performance of foreign banks in India since independence in brief, India's current policy t o wa rd s fo re i g n b a n k s , a dva n t a g e s a n d disadvantages of increased foreign banks presence, RBI's guidelines on foreign ownership of banks and Raghuram Committee report. MAJOR BANKING REFORMS IN POST ECONOMIC REFORM PERIOD AND THEIR IMPACT: The major banking reforms made in the banking sector during the post economic reform period are reduction of CRR, SLR, interest rate deregulation of commercial banks, banking diversification, CRAR introduction which enabled the commercial banks to have more funds for loans and operate with more freedom. The major impacts of these reforms on the banking sector are: (1) Number of domestic banks inclusive of public & private increased (2) Number of commercial banks got increased Some unique features include permission of RBI to commercial banks to engage in diverse activities that improved efficiency & performance. Discussing the impact on banking sector, foreign banks' profitability exceeded that of private domestic and publicsector banks in 199397, despite a declining trend. However in 19992000, private domestic banks became more profitable than foreign banks. IMF has also reported in 2001 that foreign and new private domestic banks maintained higher profitability (about 12%)than publicsector and old private domestic banks (0.60.8%) during the period1995/961999/2000. Profits from securities and foreign transactions,

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and brokerage/commission services have also increasingly contributed to profitability for all banks, suggesting that the diversification effect is positive. Foreign & private domestic Banks faced rapid credit growth in 19931997, signalling some kind of risktaking behaviour. Foreign & private domestic banks increased medium to longterm credit in 1993 2000 from 7.5% to 17% & from 10% to 13%.Publicsector banks maintained the same level of exposure throughout. Foreign banks attempted to improve their income by expanding their lending operations as compared with other domestic banks. The ratio of credits to assets for the foreign banks surged from 56% in 1993 to 94% in 2000 whereas domestic banks maintained at 40%. Foreign banks are less leveraged than domestic and publicsector banks. All 3 kinds of banks maintained a similar liquidity position, accounting for about 15% in terms of cash and balances with banks. GENESIS OF FOREIGN BANKS IN INDIA: Foreign Banks initially were dependent on home country while they later learned to mobilize funds in domestic markets. Though the FBs witnessed a good growth performance in terms of deposits and credit, their relative share in aggregate deposits and credit in the banking system was getting thinner, and was overwhelmingly being taken over by the domestic banks even before the country's independence. They showed signs of decline towards the end of the colonial period itself, and this continued almost steadily thereafter, there was a sharp decline in their overall position in terms of their share of aggregate deposits and credit over the period. In the pre liberalisation period (197191), the relative share of FBs in terms of total assets has drastically reduced from 8.6 per cent at endMarch 1971 to just around 3 per cent at endMarch 1991, the remaining 97 per cent constituted by the domestic banks. Similar has been the trend in respect of deposits and credits, as the domestic banks have expanded both in terms of business and branch spread. In the post reforms era (19932005), the operations of foreign banks received a considerable boost & relaxations in various policies. The number of offices of FBs increased sharply from 145 in 1990 to 245 by 2005, number of Indian bank branches abroad remained more or less stagnant. An RBI study in 2005 concluded that the banking system's exposures have increased tremendously with FBs having highest percentage of 63.7%. 24

INDIA'S CURRENT POLICY TOWARDS FOREIGN BANKS: In 2005, RBI unveiled a roadmap for the presence of foreign banks in India. This was to proceed in two phases: In phase I, a commitment for allowing more than 12 branches of foreign banks in India. In phase II, foreign banks could go for acquiring about 74% stake in private banks. Ownership of banking assets by foreign banks in India is less than 10%. Hence, there is a considerable scope for foreign bank entry into India. The question of whether to allow foreign banks in India can be broken down into 2 parts: (1) Benefits & costs of a large foreign bank presence in India (2) How well are the domestic banks equipped to cope up with the competition? A DVA N TAG E S A N D D I SA DVA N TAG E S O F INCREASED FOREIGN BANKS PRESENCE: Foreign banks presence offers many advantages to India. They play critical role in raising money for local people, connecting them with a global clientele and consumers. They tend to increase the efficiency of the local banking system and bring in more sophisticated and state of the art financial services. Liberalization in 1990s has brought fresh attention to foreign banks for their role in introducing new products, facilitating trade flows, and helping capital f o r m a t i o n . Fo r e i g n b a n k s a l s o h e l p i n internationalisation of Indian business. As Indian companies are going global, they require banking support and it is not possible for Indian banks to be present all over the world. On the contrary, foreign banks have the network. Looking at some of the disadvantages, as more foreign banks creep in, they will start maintaining relationships with the most profitable customers only. They will not give plain vanilla deposits; will trade in exotic products to increase profitability. And naturally, Indian economy will be more prone to international shocks in the world economy. However, if foreign banks' activities are monitored by a regulatory framework, then definitely sideeffects of increased foreign bank presence in India can be minimized.

PUBLIC SECTOR BANKS VS. PRIVATE SECTOR BANKS VS. FOREIGN BANKS IN POST REFORM PERIOD: In post reforms period, PSBs have shown reduced share in income, expenditure of commercial banking system. Table 1 gives a comparative picture of public sector banks, private sector banks and foreign banks.

As regards existing foreign banks that already have a branch form of presence; RBI's expectation is that such banks should voluntarily convert themselves into WOS. As per WTO commitments, RBI cannot mandate conversion of existing branches into subsidiaries. Capital Requirement: The Capital requirement for WOS will generally be in line with those that would be prescribed for new private sector banks. The WOS shall be required to maintain a minimum adequacy ratio of 10% of the risk weighted assets or as may be prescribed from time to time. The minimum net worth of the WOS on conversion from branches should not be less than the minimum capital requirement for new private sector banks. Corporate Governance: RBI may, mandate that not less than 50% of the directors should be Indian nationals resident in India, not less than 50% of the directors should be nonexecutive directors, and a minimum of onethird of the directors should be totally independent of the management of the subsidiary in India, its parent or associates. Raising of Non-equity capital: RBI may allow WOS of foreign banks to raise rupee resources through issue of nonequity capital instruments as allowed to domestic private sector banks. Branch Expansion Norms: RBI generally has permitted more branches for new branches of foreign banks than the 12 mandatory (per year) under the WTO commitments. To incentive WOS form of presence, RBI has intentions to strictly restrict branch expansion to 12 branches (per year) for all existing foreign banks. The WOS would be enabled to open branches in Tier 3 to 6 centres. Priority Sector Norms: RBI may allow WOS of foreign banks to classify export finance as a part of their priority sector lending. However, to ensure inclusive growth of the country, WOS of foreign banks should also be required to lend to agriculture in India. Newly set up WOS may be required to comply with the Priority Sector Norms of 40% of Adjusted Net Bank Credit or credit equivalent amount of off balance sheet exposure whichever is higher. The subtarget for Export, Agricultural and Small Enterprise advances set is 12%, 10% and 10%respectively.

Source: Rakesh Mohan (2005) However, it is expected that PSBs will continue to dominate Indian banking system. Some of the major reasons are recapitalization by government, public confidence in PSBs over capital markets, improvement in asset quality and decline in operating cost. FRAMEWORK PROPOSED BY RBI: Review of Road Map for presence of foreign banks laid down in 2005 was put on hold primarily on account of uncertainties caused by the financial crisis in late 2008. Many foreign banks approached to RBI for setting up a branch presence in India during the last couple of years. After studying and analysing financial crisis and practises followed in other countries, RBI has come up with a framework to guide the presence of foreign banks in India. Some of the key elements of the framework are mentioned below: Entry Norms for New Players: New entrants can undertake banking operations by way of setting up a wholly Owned Subsidy (WOS). 25

WOS set up by conversion of existing branches may be allowed a transition period of five years from the year in which they incorporate in India for meeting priority sector lending norms. Parent / Head Office Support: It is proposed to treat WOS of foreign banks at par with domestic banks in this regard. Hence the parent company could not give explicit guarantees to the creditors for the liabilities of the subsidiary. The intention is not to allow WOS to have an unfair advantage over domestic banks in terms of lending, raising resources etc. Overall, RBI intends to advocate WOS through its proposed framework and ensure that the local banking system is not dominated by foreign banks. RAGHURAM COMMITTEE REPORT: With a view to outlining a comprehensive agenda for the evolution of the financial sector indicating especially the priorities and sequencing decisions which the Govt. must keep in mind, a high level committee was set up headed by Dr.Raghuram G. Rajan.

but also to strengthen banks, is to delicense the process of branching immediately. Apart from this, to provide a level playing field to domestic banks, the committee has recommended to allow banks to set up branches and ATMs anywhere. Given that foreign banks have experience, skills and above all, deeper pockets relative to domestic banks in rolling out a branching strategy in the newly liberalized environment, the Committee believes it is necessary to allow a period of say two years from the announcement of the policy till the liberal licensing policy applies to domestically incorporated subsidiaries of foreign banks. The Committee recommends that all banksdomestic and foreignshould be subject to uniform priority sector lending requirements. The committee has also proposed to allow holding company structures with parent holding company owning regulated subsidiaries. It believes that universal banking should be possible in India through holding company structures. The banking sector is perceived to be the propeller of the economy. To keep it running, we must fuel it with the reforms. And when it comes to reforms, it is always better to be safe than sorry. India has shown stellar achievement in planning and executing banking and financial sector reforms meticulously. Now is the time to open up to foreign players in banking sector. The increased foreign bank presence is need of time. Arguments that foreign banks will not add any value to the Indian banking sector sound very conservative and show lack of confidence in own banking system. India needs to accommodate its growing youth population in the economy. Increased foreign banks will help in generating e m p l oy m e n t o p p o r t u n i t i e s a n d i n c re a s e competition among major players in the sector. Given the framework proposed by RBI and strict adherence to its guidelines India is ready to open up its land for foreign banks.

The committee opined that foreign banks in the Indian economy are beneficial to the Indian public. In the same way as India benefited by liberalizing trade over and beyond its foreign commitments, India will benefit by welcoming foreign financial firms. The committee has proposed that The RBI should formally have only one objective, to stay close to a low inflation number in the medium term, and move steadily to a single instrument, the shortterm interest rate (repo and reverse repo) to achieve it. The committee has recommended allowing foreign banks subsidiaries to participate in takeovers and mergers. This can be salutary, but domestic banks need to prepare themselves to meet the challenge. A second way to foster growth and competition, 26

Article by PrabhuParthiban, AnandPatil PGP batch of 201214, IIM Kozhikode

GOOD MONEY HABITS CAN CHANGE YOUR LIFE

*BIRDS Five Good Money Habits that will help you manage your money better.
your ratio between debt and equity. The thumb D rule is that the younger you are, the longer you have to plan your investments and therefore the higher should be you equity allocation. Debt is Debt can be a killer! supposed to give you steady returns in the long run but equity can give higher returns. So if you Let us look at credit cards. You spend money and then pay only the 5% minimum that is B stands for Budget; it always pays to have are 25 years old, and you put 75% of your money in equity, it is expected to grow well. required on your card payment. This is debt. your budget in place Coming back to risk appetite, if you have Rates on credit cards vary between 24 and I stands for manage your Investments well aggressive risk appetite, then you would invest 36%, while a typical home loan would cost you more in equity: in which case even 80% about 10 to 11.5%. Cards add up debt for wrong investment in equity is good. But if you are a reasons, unlike a home loan which is for a good R is for plan for your Retirement conservative type, even 10-20% is high. All reason. So control your buying impulses, these things put together, it's a good idea to control the card expenditure and don't stack up D stands for manage your Debt have an investment advisor. debt on cards. Also, repay the debt as early as you can. Because compounding works in S stands for Secure your family reverse too. The best thing to do is to repay your R debt before doing anything else. These are the five key mantras- 5 Good Money Habits that will help you manage your money The earlier you start the better! S better. If you plan for retirement, plan for long-term goals. Retirement is one of the biggest goals. The idea is to invest regularly, save regularly You can always become rich either by making here instruments like recurring deposits, money or saving money. Avoiding impulsive systematic investment plans and insurance purchases with a reasonable, realistic Budget come in handy. is the first step to achieving that dream. To keep track of your budget, there are lots of tools The rule of 72: A formula to double your available, like Money Manager, money money management tools etc. Also, ensure that you This rule of 72 is not perfect, but it points a use whatever loyalty points you earn on various person in the right direction. Say, you want to cards and all discounts available from service double your money in 10 years. Then, your rate providers. of investment should be 72 divided by 10, that is, 7.2 years. Similarly, if you are getting 10% I returns today, it will take you about 7.2 years to double your money. Managing your Investments is about setting right and realistic goals. So the first point is to One should not try to time the markets, they set the right goals and the second is to avoid should continue with regular investments, investing into complex instruments. You must having allocations and sticking to it. The decide an investment allocation based on your common man should take note of the power of risk appetite and stick to it, irrespective of what compounding. Einstein once said that the the market dictates. biggest force on earth is that of compounding. That's how `1 lakh turns into `7.5 lakh in 20 The rule of 100: A formula for Investment years; all because of compounding, where your Allocation principle earns interest and the interest too Deduct your age from 100, and that would be earns interest in turn. This article created by collating the views of the Senior Leadership Team at Kotak Mahindra Bank talks about the money we spend. The acronym BIRDS signifies the five key investment or money habits-

It's extremely important to plan for any eventuality - for the Security of your Family! For instance, when you have a house in a corporative society it is important to have a nominee or the house should be in two persons' name. Even investments fixed deposits, bank accounts etc. should have either nominations or joint holders, because if something were to go wrong, the process of getting that money becomes much easier for the family. Second, everyone should have a will, so that your property (whatever you have; you needn't be rich) can be amicably divided. Third, insurance: you must have life and medical insurance. Also, if you have debt, make sure your insurance policy will pay off your debt. To leave behind debt to the family would be very, very cruel. Any insurance policy you take should protect at least 60-70% of your current income, because protecting the family if something unforeseen happens is an extremely important part of Good Money Habits.

So, you think that opening an account is a big bother? Visiting the branch, waiting in queues, filling endless forms... yawn. Good news. Just log on to instant.kotak.com and apply for your account, online. All it takes is a few clicks.

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