Monday, 7 November 2016
Thursday, 27 October 2016
Business Standard Banking Round Table, 2016, started on Thursday.Here are the highlights of what the top banking honchos said:
1) The one thing striking about the banking side in concentration of assets and liabilities, said IDFC Bank MD & CEO Rajiv Lall
2) IDFC Bank's Rajiv Lall said that 45 per cent of all outstanding advances were made to only 300 corporates.
3) Rajiv Lall pointed out that 60 per cent of India's household savings were still outside the financial system.
4) Union Bank of India CMD Arun Tiwari said that there is a perception advantage in terms of which bank is a retail bank and which is involved in corporate lending.
5) Axis Bank MD & CEO Shikha Sharma said that credit growth to the corporate sector was relatively weak and that working capital demand has also been depressed.
6) Shikha Sharma added that there have been no new projects in the last 18 months and working capital demand has also been depressed.
7) Axis Bank's Sharma pointed out that the retail and small and medium-sized enterprises sectors were showing demand. However, she cautioned that there was worry over whether that is the next bubble.
8 )Chandra Kochchar, the head of ICICI Bank highlighted that it's imperative for banks to become agile and active to keep evolving their business models. A cause of concern is that loan against property and unsecured loans appears to be growing at a fast pace, she added. Kocchar also said the next round of credit growth will come from the secondary impact of all the government spends.
9) Aditya Puri of HDFC Bank pointed out that the government, banks and the Reserve Bank of India are very clear that they're not in the business of charity. If money has been borrowed, it must be given back, he said.
10) Pramit Jhaveri of Citibank thinks technology is going to be the biggest driver for banking."India is among most attractive destinative as far as financial services industry is concerned," said Jhaveri.
11) Chanda Kocchar of ICICI Bank said infra projects will be funded partly by banks and partly by other means such as bonds. This means that project finance will get more structured before money is committed towards a particular project.
12) She also said robotics have reduced the bank's error rates and response time to consumers
Tuesday, 25 October 2016
The expectation that financial liberalisation would lead to a proliferation of non-bank financial companies and an expansion of the bond market in India has been belied
|Jayati Ghosh C.P Chandrashekhar|
In recent times, much concern has been expressed about the poorly developed corporate bond market in India, which is seen as hampering the financing of long term investment. There is much evidence to suggest this is indeed true.
As Chart 1 shows, in 2014, the ratio of loan liabilities (largely to the banking system) in the total of loan, note and bond liabilities was way higher in India than in its Asian counterparts and relative to its partners in the BRICS grouping.
What is more, the increase in bond financing relative to the expansion in bank credit in the period between 2009 and 2014 (or after the global financial crisis) was much lower in India than in most other emerging markets of relevance, excluding Indonesia (Chart 2).
An era has ended
This lethargy in India’s bond market is not because of the absence of any effort on the part of the government to promote that market. In fact, the government has also held the view that a vibrant bond market is a prerequisite for the financing of long-term investment in the post-liberalisation period.
In the past a large part of such financing was supported with allocations from the budget in the case of public sector projects or with credit from the development finance institutions (DFIs) for private projects. The DFIs themselves were supported with concessional funds from the RBI and the government, especially the former, which had a separate window for the purpose. That era has, however, ended.
The government’s failure to mobilise adequate resources through taxation and its post-reform emphasis on fiscal consolidation, which limits its borrowing, has reduced its capital spending.
This requires the private sector to play a greater role in capital intensive industries and infrastructure. On the other hand, a consequence of Indian-style financial liberalisation has been the conversion through reverse merger of the DFIs into regular commercial banks.
ICICI Bank and IDBI Bank are all that is left of the erstwhile all-India development financing infrastructure. This has meant that the burden of financing private investment in capital intensive areas including infrastructure has fallen on the commercial banks, especially the public sector banks.
However, the maturity and liquidity mismatches between the funds sourced by the commercial banks and investments in large industrial and infrastructural projects has resulted over time in rising non-performing assets in the books of these banks. So they too are retreating from financing of investment in these areas.
Hence, besides foreign borrowing, a liquid bond market has become the only possible alternative to clear this financing bottleneck and support such investment.
To realise that alternative, investors looking for long term investment opportunities and offered the expected yield and the required liquidity as insurance have to be brought to market in adequate numbers.
Unfortunately, the penetration of the corporate bond market is almost marginal in the Indian financial sector. In 2014, while the ratio of bank deposits to GDP stood at 64 per cent, and that of domestic credit to the private sector at 52 per cent, the ratio of outstanding corporate bonds to GDP was only 14 per cent.
By the end of 2015 while corporate bond penetration in India was at around 17 per cent of GDP, the figure was close to 45 per cent in Malaysia and 75 per cent in South Korea.
Moreover, at the end of 2015, government securities (G-Secs, State Development Loans and Treasury Bills) accounted for 72 per cent of value of outstanding bonds, with corporate paper (bonds, commercial paper and certificates of deposit) contributing the balance 28 per cent.
The weakness of the bond market is partly the result of a larger failure of the financial liberalisation agenda. This was the failure to ensure the transition away from a bank dominated system, through a proliferation of non-bank financial institutions (NBFIs) that may have turned to the bond market for investment opportunities. As Chart 3 shows, when compared with South Africa, Brazil and Korea, the relative importance in terms of asset shares of NBFIs such as insurance companies, pension funds and other financial institutions was much lower in India.
This has been a bottleneck to the entry of saving households into the bond market (and more so the retail market for equity). The global evidence is quite clear that small investors are exposed to the debt market through institutions like mutual funds, insurance companies and pension funds. So the government’s effort seems to be to use the latter as means to bring a larger share of household savings into the corporate bond market.
It has done this in the past by persuading public sector insurance companies and pension funds to allocate a larger share of their investments to the market for corporate bonds. In addition, under the new pension scheme of the government, subscribers are required to choose some level of risk exposure as part of a move from defined benefit to defined contribution schemes. But, given the fiduciary obligations of investment managers in these funds, they tend to be cautious when following government advice.
Further, the relative importance of these institutions is far less than in many other countries. That does not help strengthen the corporate bond “market”.
The Reserve Bank of India has in recent times attempted to respond to this through a host of measures. But the most important of those strengthens the problem of “bank dependence”. Banks are being roped in to render bonds less risky by extending the already existing partial credit enhancement (PCE) scheme. In September 2015, the RBI introduced a scheme under which banks were allowed to provide partial credit enhancement to bonds issued by corporate entities and special purpose vehicles.
This involves providing a non-funded but irrevocable line of credit linked to a bond issue, which companies can access to meet commitments in case they find themselves unable to meet interest or amortisation payments on the bonds. There were conditions set on this facility including the requirement that the rating of the bond issue must be “BBB minus“ or better before the credit enhancement and that the aggregate PCE provided by all banks to any bond issue cannot exceed 20 per cent of the bond issue size.
The essential aim of the PCE scheme is to reduce the risk associated with a bond and enhance its rating. With the banks taking over part of the risk, the bonds can be upgraded to investment grade, making them eligible for purchase by insurance and pension funds.
The new measure implemented also increases the aggregate PCE exposure of the financial system to any bond issue to 50 per cent (from 20 per cent) of the size of the issue, with a ceiling of 20 per cent on the exposure of any single bank. Measures such as this, it is hoped, will help resolve a problem, which has been created by the government’s own policies, of an unavoidable dependence for finances on a market that is still to mature. But in the process it is exposing banks, insurance companies, pension funds, and those who place their savings in these institutions to increased risk.
|Banks dominate in India|
|Tepid market for bonds|
|The NBFC boom hasn't happened|
Friday, 21 October 2016
Risk profile of discoms in UDAY states to improve, says the ratings agency
Ratings agency CRISIL estimates the aggregate ‘gap’ or loss of power distribution companies (discoms) in the 15 states that have joined the Ujwal Discom Assurance Yojana (UDAY) would more than halve to 28p a unit by 2018-19.
The gap, calculated as average revenue realised minus average cost of supply, was 64p a unit in FY16. Consequently, aggregate losses of these discoms are seen declining by 46 per cent, to Rs 20,000 crore from Rs 37,000 crore now.
The gap, calculated as average revenue realised minus average cost of supply, was 64p a unit in FY16. Consequently, aggregate losses of these discoms are seen declining by 46 per cent, to Rs 20,000 crore from Rs 37,000 crore now.
The gap will still be well above the ‘nil’ envisaged under UDAY, as some states with very high aggregate technical and commercial losses aren't well prepared to reduce it. The reasons include inadequate feeder separation, feeder and distribution transformer metering, and a poor record on other efficiency parameters.
Also, with elections due in some within 12 months, their room to raise rates is restricted. Cross-subsidisation is also high.
Says Gurpreet Chhatwal, business head, large corporates, at CRISIL: ''Rajasthan, Haryana, Chhattisgarh, and Uttarakhand are expected to fare better in UDAY implementation and likely to be the biggest beneficiaries. UP, Bihar and Jammu & Kashmir are expected to be laggards. These three states would account for almost two-thirds of the gap in FY19. Concerted effort by them will be critical to narrowing the future gap.''
CRISIL says the energy requirements of discoms are expected to increase at a compound annual rate of seven per cent by FY19, compared with around four per cent till FY16. New signing of long-term power purchase agreements (PPAs) seems unlikely, with 25,000 Mw of capacities with already-signed PPAs to be operational by FY19. There will also be some pick-up in plant load factors at existing units, with better fuel availability.
Any uptick in long-term PPA signings is possible only if discoms turn profitable by FY19 and strive to meet the government’s ‘Power for all’ objective.
Over the past year, initiatives to increase coal production, and the 5:25 refinancing scheme of the Reserve Bank of India have reduced operational capacities at risk by 6,000 Mw, to 40,000 M2 from the 46,000 Mw that CRISIL had earlier flagged.
Says Sudip Sural, senior director at the agency: ''While lack of fresh long-term PPAs continues to impact generation capacities, facilitation of medium-term PPAs and corresponding coal linkages, continued focus on augmenting domestic coal production, and facilitation of open access by states can help further reduce the capacities at risk.''
As for under-construction thermal projects, CRISIL estimates 24,000 Mw of capacities face viability issues. Of these, 13,000 Mw face commissioning risks because of weak sponsors. The others have to address poor offtake by discoms or inadequate fuel arrangements. A third of capacities with weak sponsors can be revived through debt restructuring or sale to a new sponsor..
The last time the world saw such a spike in coal prices was during the boom time more than four years ago.
No boom is in sight, yet both thermal and metallurgical coal prices have been soaring for the last three months. Supply shortages appear to be the proximate cause.
According to India Coal Market Watch (ICMW), from July 1, the most popular variety of Indonesian thermal coal (4,200 Kcal) has turned pricier by nearly 38 per cent at $40 a tonne. South Africa (6,000 kcal) thermal coal price is up 48 per cent at $83/tonne.
Power plants along India’s coast use the first variety and cement kilns, the second.
But the big surprise has been in coking, or metallurgical, coal used by steel-makers. From July 1, Australian coking coal prices have shot up two-and-half 5 times to $230 a tonne, surprisingly at a time when the world steel industry is passing through one of the worst phases with China cutting down 100 million tonnes capacity.
According to ICMW, Indian steel plants have booked coking coal for the October-December quarter at $200 a tonne, as against $93/tonne in the July-September quarter. Though India is world’s fourth largest coal producer, it has very limited coking coal reserves.
According to Deepak Kannan, Managing Editor (Asia Thermal Coal) of Platts, the primary driver of this spike is China, which is world’s leading producer and consumer of both thermal and coking coal.
Earlier this year, Beijing decided to cut the annual working days in mines to 270 days from 330. This had no significant impact on global prices till June as India stepped up production significantly and cut imports.
India is still flush with coal and there has been no supply disruptions from Indonesia, yet thermal coal prices started to skyrocket from July on Chinese buying and supply disruptions in Australia and South Africa. At least two major Australian miners recently declared force majeure.
But the surge in thermal coal prices may not last.
First, in September, Beijing ordered its new mines to step up production . This will increase China’s domestic supplies by nearly 30 million tonnes a month from November. Also, China completed the winter booking and has a 12-million-tonne stockpile at ports that is sufficient for 20 days. Kannan expects pressure to build on thermal coal prices from next month.
The outlook is not so clear for coking coal, though. Edwin Yeo, Managing Editor (Steel Raw Materials) of Platts, doesn’t foresee a meltdown in the short term.
According to him, the coking coal shortage is acute and some steel-makers in China have had to shut down their blast furnaces. Steel-makers avoid this as re-igniting furnaces is a costly exercise.
Yeo doesn’t agree. but some sources see a shadow of cartelisation in coking coal price surge, as three top producers control more than half the global trade
Monday, 26 September 2016
Proposed fund aimed at improving credit ratings of infraprojects urges RBI to relax capital adequacy ratio norms
The credit enhancement fund proposed in this year’s budget to help improve the credit ratings of infrastructure projects has sought a special dispensation from the Reserve Bank of India (RBI) to make it more viable.
The Life Insurance Corporation (LIC)-sponsored fund will be set up as a non-banking finance company (NBFC), but it has sought a relaxation in capital adequacy ratio norms to enable it to support more projects by maximum leveraging of equity capital. LIC has asked RBI to let it maintain a capital adequacy ratio of 8-10% against the norm of 15% for NBFCs registered as infrastructure finance firms, said two people familiar with the development.
As part of measures to deepen the corporate bond market, finance minister Arun Jaitley said in this year’s budget speech that “LIC of India will set up a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long-term investors.”
The government has now decided to make the holding more broad-based. As per the new structure being worked out, while LIC will hold a 49% stake, India Infrastructure Finance Co. Ltd (IIFCL) will hold 20% and a few public sector banks will hold the rest. The fund’s initial corpus is likely to be Rs500 crore, allowing it to provide a guarantee to bond issuances worth around Rs15,000 crore.
An email sent to the RBI spokesperson and to LIC on 9 September remained unanswered. Sanjeev Kaushik, deputy managing director of IIFCL, confirmed that the infrastructure lender will become part of the credit guarantee fund.
“IIFCL already has experience in the credit enhancement space and has been providing this for infrastructure projects. Through this fund, even greenfield projects can be funded,” said Kaushik.
A credit enhancement fund will improve the rating of bonds issued by infrastructure firms and help these projects raise funds from the market from long-term funds like pension and sovereign funds.
Alternatively, it will reduce the pressure on banks to lend to long-term infrastructure projects.
A 30 August Citi India research report said banks will have to make additional provisions and risk weights for future lending to large borrowers, pushing more firms to access the corporate bond market for fund-raising. It estimated that bank lending to this segment could come down to Rs10,000 crore by March 2019 from Rs25,000 crore this year.
Last month, RBI announced a number of measures to deepen the corporate bond market. The central bank said it is considering permitting brokers in corporate bond repos (or repurchases), authorizing them to act as market makers and also allowing foreign investors to directly trade in corporate bonds. RBI said it is also considering accepting corporate bonds as collaterals at its liquidity adjustment facility operations. It also permitted banks to provide partial credit enhancements of up to 50% of the bond issue size, up from 20%.
The future of India’s nascent venture capital scene hinges on the outcomes of the battles between homegrown start-ups like Flipkart and Ola and American rivals Amazon and Uber
Venture capital firms and other investors have poured roughly $6.5 billion into Flipkart, Snapdeal and Ola (and their units), since 2010, betting that they will be able to keep their American rivals Amazon and Uber at bay.
The investors reckoned that the headstart that online retailers Flipkart and Snapdeal and cab aggregator Ola enjoyed, their superior local knowledge, nimbleness, and the passion and ability of their founders would keep them ahead of the American technology giants.
Amazon.com Inc. and Uber Technologies Inc. were perceived to be slower in taking decisions and hesitant in giving too much power to the management of their local units. Unlike “pure-tech” businesses like Google Inc. and Facebook Inc., which are dominant in India, any operations-heavy tech business such as e-commerce and cab hailing would favour Indian start-ups over US firms, the investors believed.
But the speed at which Amazon and Uber have expanded over the past 18 months or so has shocked venture capitalists (VCs), putting their investment thesis at grave risk.
The transformation has been so sudden that Snapdeal, whose CEO Kunal Bahl predicted in August 2015 that it would become the largest online marketplace in the country, is now already considered an also-ran in the market share battle.
Consequently, the future of the country’s nascent venture capital scene, in its current form, hinges on the outcomes of the market share battles between Flipkart and Amazon and Ola and Uber, according to VCs and entrepreneurs.
Flipkart and Ola didn’t respond to emails seeking comment.
If Flipkart and Ola list their shares or sell out at attractive prices, it will usher in a golden period for VCs; if, however, either one or both of them fail to generate investment returns, some VCs may have to shut shop and investor sentiment towards Indian start-ups will take a serious hit.
Big names, Big money
The numbers are staggering: Together, Flipkart (valued at $15 billion) and Ola (valued at $5 billion) along with online marketplace Snapdeal (valued at $6.5 billion) accounted for a mammoth 55% of the cash raised by all Indian start-ups in the go-go years of 2014 and 2015. Their combined valuations constitute 65-70% of the valuations of all Indian Internet start-ups, according to Mint research.
These three firms are backed by practically all the best-known venture capital firms operating in India: Accel Partners, Kalaari Capital, Sequoia Capital, Matrix Partners and Nexus Venture Partners.
Apart from traditional VCs, three of the most influential bulge-bracket start-up investors in India, Tiger Global Management, SoftBank Group and DST Global, have poured huge amounts of money into Flipkart, Snapdeal and Ola.
Flipkart, Snapdeal and Ola are at the top of the list of the handful of Indian start-ups that have gone through all the stages of the venture capital investing model: angel investors fund a potentially great but nascent idea, VCs provide early capital to convert the idea into a mid-size start-up, then growth-stage investors pump in large amounts of capital to try and turn the start-up into an established company.
“There’s a lot riding on Flipkart and Ola,” said Sharad Sharma, an angel investor and co-founder of iSPIRT, a software products think tank. “If these two companies can deliver returns above the watermark, then we will have a soft landing for B2C (business to consumer) sector. If, however, in the worst-case scenario, they don’t deliver basic returns, the investor sentiment towards Indian consumer start-ups will turn bad.”
Until the 2015 surge of Amazon and Uber, investors believed all the three firms were on track to listing their shares in the near future and deliver the hard-earned blockbuster returns they craved for.
SoftBank, Kalaari, Nexus and Tiger Global declined to comment. Accel and Sequoia didn’t respond to emails seeking comment.
Lure of big exits
VCs have been investing in India for a decade or so, but they have struggled to deliver good returns to their backers, called limited partners (LPs). Typically, a venture fund is said to have performed well if it returns four or five times the capital invested. For this to happen, the fund needs to make one or two investments that will deliver an exit of 10-50 times the capital invested.
For VCs in India, Flipkart, Snapdeal and Ola are those bets, along with a handful of others such as payments and e-commerce firm Paytm, online marketplace ShopClues and enterprise software provider Freshdesk.
Many VCs including Accel Partners, Kalaari Capital and Nexus Venture Partners have raised new funds over the past 18 months, partly on the back of selling some of their shares in Flipkart and Snapdeal at attractive prices.
In general, most VCs even in the US fail to return the funds invested to their LPs, studies have shown. Since 1997, venture capital firms in the US have returned less cash to LPs than the invested amount, according to a 2012 report by the Ewing Marion Kauffman Foundation, a think tank. What keeps LPs coming back, however, is the lure of big exits such as those of Facebook, LinkedIn Corp. and Twitter Inc. in recent years and those of Intel Corp., Apple Inc., Microsoft Corp. and hundreds of others in the early years of Silicon Valley.
Indian VCs haven’t seen any such blockbuster exits, which is why Flipkart, Snapdeal and Ola are so important.
And it’s not just that Flipkart, Snapdeal and Ola have raised disproportionately large amounts of cash. Their founder duos—Sachin Bansal and Binny Bansal (Flipkart), Kunal Bahl and Rohit Bansal (Snapdeal) and Bhavish Aggarwal and Ankit Bhati (Ola)—are considered to be the best entrepreneurs in the country and role models for start-up founders.
“The likely scenario is that Flipkart will exit through a big IPO (initial public offering); then, the funding market will go through the roof,” said Abhishek Goyal, co-founder of Tracxn, a start-up tracker. “In the worst-case scenario, if Flipkart’s valuation dips to $5 billion or below, opportunist investors will flee India for the short term and a few venture capital firms may close down. But there’s so much interest in the India growth story that it will continue to be one of the most attractive start-up markets.”
IPO or sale?
The endgame for Flipkart, Ola and Snapdeal is far from clear. Though analysts say Amazon and Uber currently are favourites to emerge winners because of easy access to large amounts of capital, Flipkart and Ola have formidable strengths while Snapdeal has changed its strategy to focus on cutting costs and growing net revenue rather than boosting gross sales through deep discounts and extensive advertising.
“We have a clear strategy to build a long-term oriented, profitable e-commerce business and have been making tremendous progress in that direction over the last year. The decision to go for an IPO rests with the board of the company and they will take it up when appropriate,” a Snapdeal spokesperson said in an email response. “We have witnessed a clear shift in investors focusing on revenue market share and growth vs GMV (gross merchandise value) market share over the last few quarters. Hence, we are witnessing significant inbound interest from investors who believe this is the right strategy for Indian e-commerce going forward. That said, we are currently well-capitalized and have no immediate needs to raise a round.”
Flipkart is still India’s largest e-commerce firm, has a near-monopoly in online fashion (a key category) and a large- enough cash war chest to keep up with Amazon’s spending power, at least over the near term.
Ola is a clear market leader and it has shown it can hold its own against Uber.
Even if Amazon and Uber were to overtake Flipkart and Ola at some point, as long as the Indian firms remain within touching distance of their US rivals, the chances of successful exits are high.
“I am certain that Ola and Flipkart will certainly be among the largest Indian Internet companies a number of years down the road,” said Avnish Bajaj, managing director at Matrix Partners India, one of Ola’s largest investors. “The likes of Bhavish (Aggarwal) and Sachin (Bansal) have the ability, the staying power, personal will and the financial backing to carry their companies to an eventual IPO, and not be forced to sell. They will inspire future Indian entrepreneurs.”
And if there are IPOs, India’s start-ups would’ve achieved their holy grail, he said.
“The biggest challenge will be for the first one to get to an IPO. Once that happens, the floodgates will open for others. But I expect an Indian start-up to do an IPO within two-three years,” added Bajaj.
Others believe some sort of consolidation among Indian e-commerce start-ups is inevitable. China’s Alibaba Group, which is already an investor in Snapdeal and Paytm, is believed to be one of the only suitors which can drive consolidation. In case of such consolidation, it’s difficult to predict what will be the financial outcome for investors.
This year, investors have already started diversifying away from consumer Internet investments. Apart from taking more time to strike deals, investors have also turned more demanding.
Last year start-ups in hyperlocal groceries, food delivery and hyperlocal services attracted large amounts of capital partly on the basis that they were replicating similar business models from the US or China. That has changed to a large extent so far this year.
In the first half of the year, start-ups in enterprise software, financial and automobile technology, and online pharmacy were popular with investors, according to data from Tracxn.
To be sure, investors and entrepreneurs will always keep an eye on the US and China for start-up ideas. Some of the investments in fintech, for instance, are inspired by start-ups that have come up in the US and China.
But what may change is that start-ups and investors will have to be smarter in adopting these ideas in India and even come up with ones designed specifically for the Indian market.
“Investors will focus more on the uniqueness in operating models and not just on how these models have worked in other markets across the globe,” said Deepak Gaur, managing director at SAIF Partners, a venture capital firm. “We too have started to look for business ideas that are not easily replicable and are trying to solve problems unique only to India. Even entrepreneurs will witness this change and you would see less of business ideas that are me-too of US or Chinese companies.”
In consumer Internet, investors are looking for sustainable business models beyond pure-play marketplaces and niche verticals, said Sanjay Nath, managing director at early-stage fund Blume Ventures. “Redbus and Freecharge have shown India-specific models can create differentiated value vs simply replicating Chinese and Valley unicorn models. The best founders are building a strong technology and operations moat rather than just a capital moat. Another interesting area is enterprise-for-global markets or SaaS (software as a service). Here, start-ups can yield higher margins and gain global customers while leveraging India’s cost advantages,” he said.
As fintech disrupts the banking industry, Indian lenders have been quick to embrace new ideas
In July, the Reserve Bank of India (RBI) set up an inter-regulatory working group to study issues relating to financial technology (fintech) and digital banking in the country. The aim is to understand major fintech innovations and developments and how the markets—the financial sector in particular—are adopting new delivery channels, products and technologies.
The initiative comes in the backdrop of various Indian banks testing out newer technologies in both the corporate and retail banking space, either independently or with the help of fintech companies.
Here are five major technologies that banks have either launched, or in various testing stages, and are likely to disrupt how banking is done:
Blockchain is a digital ledger software code. Essentially, it’s a record keeping technology, but the difference is that the recording happens on consensus, which is built into the system itself. Since blockchain is a decentralised ledger, all system members can access stored information. Though the blockchain technology emerged from cryptocurrency, Bitcoin, it is not restricted to bitcoins or even to the financial sector. Consulting firm PwC estimates that around 700 companies are exploring the use of blockchain, of which 150 are in the fintech space and 25 likely to emerge as leaders.
Globally, banks such as UBS AG, ABN AMRO Bank NV and Deutsche Bank AG are trying to find ways to use blockchain technology in daily banking. In India, Axis Bank Ltd, ICICI Bank Ltd and Kotak Mahindra Bank Ltd are also looking at blockchain technology. Banks see a possibility to use blockchain technology in trade finance and remittance space.
“We see a possibility to use blockchain for cross-border remittance and funds transfer in banking. We are right now in the testing phase,” said Deepak Sharma, chief digital officer, Kotak Mahindra Bank. However, blockchain-based applications can’t work in isolation and require a network to come together.
In the artificial intelligence (AI) space, chatbots seem to have more takers when it comes to banking. Chatbots are computer programs that can imitate conversation with people using artificial intelligence. “A few examples where artificial intelligence can be used are for authentication, access, security, interpersonal recognition, virtual personal teller assistants and smart advisors,” said Rajiv Anand, executive director, Axis Bank. For instance, questions like ‘How much balance is there in my account?’, ‘How to load money from a wallet?’ or ‘How to change my address?’ can be answered with the help of a chatbot. Banks such as HDFC Bank Ltd and Kotak Mahindra Bank are looking to introduce chatbot-based technology into customer service. In April this year, DBS Bank Ltd launched a banking app in India with in-built artificial intelligence. Currently, fintech companies such as niki.ai are also developing AI-based chatbot apps and working as an enabler for the banks.
Financial institutions are considered one of the most vulnerable to cyber-attacks, especially with increasing digitisation. Since securing an account with a powerful authentication tool is one of the important steps, banks globally are working on technologies capable of using a customer’s unique characteristics for identity authentication. Banks and financial institutions across the globe are experimenting with biometrics for security and authentication purposes. For instance, vein authentication in Japan and monitoring of heartbeats in Canada has been tested for identification purposes to allow banking transactions.
Currently, some Indian banks are using fingerprint recognition, voice recognition and iris recognition for identification purposes. Large commercial banks such as ICICI Bank, HDFC Bank and Kotak Mahindra Bank are right now in the testing phase. Smaller banks such as DCB Bank Ltd have already launched fingerprint-based ATM cash withdrawal using the Aadhaar enabled platform.
Open application programming interfaces (APIs), too, are gaining traction in banking. Open API basically allows data to be accessible for use to larger institutions. The government has mandated an open API policy for five programmes: Aadhaar, e-KYC, e-Sign, proposed privacy-protected data sharing and the Unified Payments Interface (UPI). Many commercial banks are in various stages of using Aadhaar and e-KYC and offering products linked to it to their customers. For instance, Aadhaar-enabled biometric authentication is being used to open bank accounts.
UPI, the most ambitious project of the National Payments Corp. of India (NPCI), is now available for transaction. Since the system uses a single identifier, it eliminates the need to exchange sensitive information such as bank account numbers during a financial transaction. The objective of a unified system is to offer architecture and a set of standard APIs to facilitate the next generation online immediate payments.
In the last couple of years, the payments and transaction space has been changing with banks and e-wallet companies focusing on newer technologies. Banks are increasingly adopting technologies that can make transactions easier. Some of the major payment options that banks are betting on include virtual cards, sound waves, quick response (QR) codes and near field communication (NFC).
Virtual cards are cards that are saved in your mobile phone—you don’t need to carry a physical card. Axis Bank is looking to roll out these products soon. Banks are also testing the technology of using sound waves from the phone. To complete a transaction, the sound wave generates digital information, which is carried to another phone. It is similar to sending a picture or video using Bluetooth, except that you can’t make a monetary transaction. NFC-enabled cards allow you to transact without having to insert or swipe a card. You just have to wave your card near the terminal and the payment is made. Another technology is QR code. It is a machine-readable code, in a black and white matrix and can be read by a smartphone. Using this QR code, you can make the payment.
All these technologies are still work in progress for the banking sector. According to a June Credit Suisse report onDigital banking in India, while India may follow other developed markets in terms of impact from digital payments, there are many outcomes which could be unique to India, such as cost of transactions coming down to zero. The best customer interfaces (read apps) could own the customer.
After the appointment of government nominees to the monetary policy committee (MPC), the spotlight now shifts to how exactly this panel will work
|Urjit Patel (RBI) governor|
With the appointment of government nominees, the committee that will decide India’s monetary policy is in place. Now, the spotlight shifts to how exactly this panel will work.
Pami Dua, director of the Delhi School of Economics; Chetan Ghate, a professor at the Indian Statistical Institute, and Ravindra Dholakia, professor of economics at the Indian Institute of Ahmedabad, join Reserve Bank of India (RBI) governor Urjit Patel, deputy governor R. Gandhi and executive director Michael Patra on the committee.
While RBI has a history of working with the technical advisory committee (TAC), the terms of engagement with the new monetary policy committee (MPC) will be different.
For one, unlike TAC, where the voting was anonymous, the MPC framework requires the central bank to share the minutes of the MPC meeting, 14 days later.
These minutes will include details of how each member voted and also their statement justifying the reasons for voting in favour or against a resolution.
“It has become very onerous for external members now as these statements will be made public,” said Indira Rajaraman, an economist and a member of the technical advisory committee. Just like the technical advisory committee, MPC external panellists are also part-time members, appointed for four years. Second, this greater accountability requires MPC members to meet regularly
The amended RBI Act prescribes at least four meetings a year.
TAC used to meet once in a quarter and for about three hours, wrote Ashima Goyal, economist and TAC member in a 19 September Mint op-ed.
Note that established policy boards such as the ones in Bank of England meet at least eight times a year and members receive an extensive staff briefing on the economy a week prior to the policy day.
Their meetings, too, go on for days, like for instance, the two-day conferences of the US Federal Reserve Open Market Committee.
Third, sharing of information to external members will also be key to informed decisions. One complaint among TAC members was their limited access to information, according to a top RBI official speaking on condition of anonymity. The amended RBI Act says MPC members can now request at any time, “additional information, including any data, models or analysis”.
Fourth, the role of the central bank governor and her/his deputies will also change under the new regime. In the past, the governor just had to listen and act independently.
A Mint story showed that rate decisions under governor Raghuram Rajan’s tenure were not in accordance with the majority TAC view most of the time. But any disagreement with MPC members will have a larger implication for policymaking.
A market participant said on condition of anonymity that any dissonance in the views of MPC members and the governor could spell uncertainty and disturb the markets.
“The TAC was advice, and after that the governor and the finance minister did as they liked. The MPC is an executive body. It makes the decision,” said Ajay Shah, economist and researcher at the National Institute of Public Finance and Policy.
According to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points. The amended RBI Act says that the panel “shall determine the policy rate required to achieve the inflation target”.
Will the MPC start functioning before the 4 October policy review?We will know by 27 September since RBI will have to publish the schedule of meetings at least one week before the first meeting for the year.