OP-ED

Consolidated vol. 8
 Maggubhai Op-ed bulletin

Date – 24/06/2019

Nasscom asks Sebi to ease norms for offline testing of fintechs

Technology industry association Nasscom has proposed that special

provisions for virtual testing of fintech products be created in the capital market
regulator’s proposed regulatory
sandbox, as some startups may not
have the scope to test their products
offline.

The Securities and Exchange

Board of India had on May 28
introduced a discussion paper on a
regulatory sandbox and invited
suggestions for the framework. In the
eligibility criteria to enter the sandbox, Sebi has mandated “limited offline testing” by
the applicants, a condition that Nasscom wants it to relax. There are situations when
a test environment does not exist or is a barrier in terms of entry into the sandbox,
the lobby group said in its submission on the proposed framework. It proposed that
the requirement of limited offline testing be made optional for applicants.

The new Cold War

Using its economic power to meet non-economic objectives is not new for the
US. Yet, the present administration has taken the stick of economic power to new
levels. President Trump’s constant demand for a border wall between the US and
Mexico has led to derision. But the need to stem the flow of people is real.

China, the second biggest trading partner after Mexico has begun accusing
the US of ‘economic terrorism.’ This is meant to encompass the whole range of
Trump’s measures against China. This includes specific company targets such as

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Huawei, considered a spying threat, as also broad tariff measures. Chinese
scientists face a greater level of scrutiny when they apply for visa. Chinese
companies find it difficult to acquire technology-related businesses, and so on.

China has begun to retaliate by advising its citizens about travel to the US,
limiting rare-earth exports, and preparing a blacklist of companies that disrupt
supplies for non-commercial reasons.The WTO was meant to develop a global level-
trading field. But when the two biggest economies bypass the WTO, and use their
economic power to satisfy national non-economic goals, we are seeing a new
version of the Cold War.

European central bankers claim oversight over Facebook's cryptocurrency

Facebook drew worldwide interest this week when it announced plans to

introduce a cryptocurrency called Libra, part of an effort to expand into digital
payments. Three European central bankers are claiming oversight over Facebook's
planned virtual currency to ensure it will
not jeopardise the financial system or
be used to launder money.

With the potential to reach billions

of internet users and the backing of
payment giants like Visa, Facebook
hopes Libra will not only power
transactions but offer people without
bank accounts access to financial services for the first time. But the central bankers
of Britain, France and Germany said Facebook should expect scrutiny.

Other global regulators have been monitoring the growth of cryptocurrencies.

The Financial Action Task Force, a Paris-based global anti-money-laundering
watchdog, is expected to announce rules to address the use of digital coins for illegal
purposes. But Libra's announcement has put the issue back on their radar, with the

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focus now shifting from bitcoin to so-called stablecoins, such as Facebook's Libra,
that are backed by real-world assets.

Fintech lending to boost MSMEs’ access to finance

Even as the micro, small and medium enterprise (MSME) sector continues to
face challenges including the inability to get skilled manpower, infrastructure-related
bottlenecks and difficulty in raising timely finance at economical rates, the
government is keen on creating an enabling ecosystem for the under-served sector.

With the government beginning to take baby steps in ensuring that easy, quick
and affordable capital and finance channels are available to them, lenders who have
been supporting MSMEs say that digitisation and data driven decisions have been
helping drive profitable lending and access to finance for MSMEs.

The fintech lenders are providing MSMEs access to newer sources of credit,
mostly at lower rates than earlier. Some of them have partnered with banks and
NBFCs to lend to customers. The lenders have also upped the bar on customer
experience in terms of process ease as well as turn-around-time involved in credit
decisioning and disbursement.

Expert panel suggests ways to achieve $5 trillion economy target: Niti Aayog

Think tank Niti Aayog Sunday said that

expert panel for macroeconomics and
employment came out with suggestions to
achieve $5 trillion economy target. Expert
committee for Macroeconomics & Employment
presented their suggestions to PM @narendramodi for achieving the $5 Trillion

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economy target. Improvement of governance in PSU banks, enhancing growth rate of
exports & employment generation were some of the key areas identified.

Further opening of banking and insurance sectors for FDI, speeding up

disinvestment process and management of water resources were also among the
focus areas of Modi's interaction with economists and industry experts.

Time to overhaul the financial system

Finance is fundamental to the fabric of the domestic economy and its

businesses, though for much of
the time in India it has been
swaying to the global trends.
Indian finance transitioned from
excessive state ownership and
control with a plain vanilla system
(version 1.0) to the state taking a
step back to allow more of private and foreign participation (version 2.0) that also
spawned multi-asset classes and alternative markets.

It’s not just the surge of bank NPAs (non-performing assets) that is
scandalous. Imperfections prevailed on the market side too, where the private sector
tends to raise much of its debt in the private-placement window and lack of progress
in developing a vibrant corporate bond market.

All of these make it imperative for India to overhaul its financial system. A few
developments that India needs to track and absorb in its internal dynamics while
planning for the future could include: rising inequalities in income and earnings
globally; rise of global value chains and the prospects for surge in corporate
economic power, declining productivity and stagnation in labour wages; rising
indebtedness at the corporate and individual levels; decelerating trends in global
economic growth, competing for a dominant share in the shift of global economic
power; emergence of newer endeavours of economic cooperation (such as Belt and

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Road Initiative); restrictions in labour mobility; and growing tensions and disputes in
world trade.

MUDRA bad loans rise in FY19, even as NPAs decline across banking system

MUDRA NPAs work out to 5.28 per cent of the total disbursements of Rs
311,811 crore as of March 2019, when compared to 3.96 per cent of total
disbursements of Rs 246,437 crore in the previous year, as per MUDRA’s figures.
However, bad loans under the MUDRA scheme are much lower than the total
system-wide NPAs. Bankers blamed a host of reasons from demonetisation to loan
waivers for the rise in MUDRA NPAs

MUDRA loans are given by commercial banks, rural reserve banks, small
finance banks, cooperative banks, microfinance institutions and NBFCs to the non-
corporate, non-farm small and micro enterprises. These loans are refinanced by
MUDRA, with allocation from the Centre.

Under the aegis of the Pradhan Mantri Mudra Yojana (PMMY), MUDRA has
created three products, namely Shishu, Kishor and Tarun. Under Shishu scheme,
loans up to Rs 50,000 are offered. Under Kishor scheme, loans above Rs 50,000 and
up to 5 lakh are given to borrowers. Tarun .scheme covers loans above Rs 5 lakh
and up to Rs 10 lakh

Give unto Sebi what’s legally Sebi’s, NCLT

Capital markets regulator Sebi is right to move the Supreme Court to seek
clarity over who gets to deal with fraudulent deposit cases following its reported turf
war with the National Company Law Tribunal (NCLT). The SC must clear the air to
end the dispute. Sebi, without a doubt, has the powers to clamp down on Ponzi
schemes where gullible investors are tapped by unscrupulous operators.

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 In the specific case, Sebi had passed an order to attach the assets of a New
Delhi-based company and the promoters who allegedly raised cash from scores of
individuals through a scheme but defaulted on repayment. Reportedly, facing delay in
recovery, investors moved the NCLT that admitted their petition. Holding that the
insolvency and bankruptcy law overrides the Sebi Act, it asked Sebi to hand over the
assets to an insolvency professional. This merits a review. The need is to also ensure
that Sebi does a professional and speedy job of investigation. This will prevent
depositors from moving insolvency courts for redressal of their problem.

States set to lose Rs 45,000 crore share in corporate tax as Centre leans on
surcharges, cess

State governments are set to lose Rs 45,000 crore in their share in the
corporate tax to be collected by the Union government in 2019-20. Successive
central governments have leaned on surcharges and cesses to shore up their
revenues. However, this
practice is unfair to state
governments as surcharges
and cesses are not
considered part of the
divisible pool and
consequently not shared
with the state governments
as per the formula devised
by the finance commission.

The 14th finance commission headed by former RBI governor YV Reddy had
increased the share of states in the divisible pool from 32% to 42%. Its
recommendations are applicable for a period of five years from 2014-15 to 2019-20.
Basic calculations suggest that according to this formula, states would lose over Rs
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45,000 crore in the current fiscal on account of their share in corporate tax alone as
nearly 15% of the Union government’s projected corporate tax earning in this year
will be through surcharges and cesses to be paid by the companies on their
corporate tax liability.

SBI plans tapping Singapore SME businesses

The State Bank of India is planning to expand its market in Singapore by

enhancing its relationship across small and medium enterprises (SMEs) some of
which have strong footholds across the Asia Pacific. Acknowledging the stiff
competition from Financial Technology (FinTech) companies, the SBI is also
contemplating introducing its YONO SBI app while having opened remittance
services to all bank accounts through eRemit and remittance kiosk channels in the
city-state. Singapore SMEs accounts for 65% of employment and contributed SGD
196.8 billion or 49 percent to the economy in 2017, according to the Department of
Statistics here.

Supreme Court order opens way for naming more wilful corporate defaulters

Banks are looking to intensify the drive to name and shame more wilful
corporate defaulters.This has come after the Supreme Court last month said a person
had no right to be represented by a lawyer in in-house proceedings initiated by banks
or financial institutions to declare him or her a wilful defaulter. In September 2016, the
Reserve Bank of India (RBI) said some lending institutions were indiscriminately
publishing the photographs of defaulters/guarantors in newspapers. It said a lending
institution could consider publishing the photographs of only the borrowers declared
wilful defaulters, following the mechanism set out in the RBI instructions of July 2015.

Recently, Kolkata-based public sector lender UCO Bank published the name
of Yashovardhan Birla, along with his photograph, in newspapers as a wilful defaulter
because of his firm Birla Surya failing to repay Rs 67.65 crore.

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Indiabulls Housing-Lakshmi Vilas Bank merger gets CCI approval

The Competition Commission of India (CCI) has approved the merger of

Indiabulls Housing Finance Limited (IBHFL) and Indiabulls Commercial Credit Limited
(ICCL) with Lakshmi Vilas Bank Limited (LVB). ICCL, a non-deposit taking NBFC
registered with RBI, is focussed on long-term secured mortgage-backed loans. Its
merger with LVB will be in the overall interest of the company and will help it to utilise
capital more efficiently than as a standalone NBFC, said the bank.

RBI lifts ban on Manipur fund transactions

The Reserve Bank of India (RBI) Friday lifted the ban imposed on fund transactions
by the Manipur government due to an overdraft. The development comes hours after
Chief Minister N Biren Singh said that the overdraft was neutralised and restrictions
on the financial transactions by the top central bank would be lifted soon.

On Thursday, the Chief Minister had announced that the Finance Ministry agreed to
raise the open market borrowing for Manipur till Rs 795 crore. Singh had also said
that as an immediate relief to overcome the draft, which had reached Rs 315 crore on
Thursday, the state will borrow Rs 400 crore.

Nearly 50% of All NPAs Due to Loans Taken by Top 100 Borrowers

Nearly 50% – or Rs 4.5 lakh crore – of the total value of India’s non-performing
assets (NPAs) are due to loans taken out by the top 100 borrowers. The Reserve
Bank of India (RBI) said that as of December 31, 2018, loans taken by the top 100
borrowers created NPAs worth Rs 4,46,158 crore. This means that on average, each
of the top 100 borrowers is responsible for NPAs worth Rs 4,461 crore. The RBI
refused to provide details on who these top 100 borrowers are.

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The central bank said that it collects information regarding debt under Section 27(2)
of the Banking Regulation (BR) Act 1949 and under Section 28 of the RBI Act, 1934.
The RBI’s response said: “As per Section 28 of the BR Act, RBI can only disclose
information collected under Section 27 (2) of the Act in such consolidated manner as
it deems fit.”

In its recent judgement, the Supreme Court had directed the RBI to furnish
details of its annual inspection reports and regarding its show-cause notices. But the
RBI has violated the Supreme Court’s directive and refused to provide this
information.

Central banks leading global fintech rush

The fintech revolution has spread far and wide across the world with both
developed and developing countries taking giant strides in adoption. Among the
Asian countries, Singapore is fast emerging as the leading hub for fintech activities
with the Monetary Authority of Singapore (MAS). Not one to be left behind, Chinese
banks are investing heavily in fintech and launching services to counter competition
from internet giants, such as Baidu, Alibaba Group Holding, Tencent Holding and
JD.com. Similarly, the Bank of England set up a permanent FinTech Hub last year as
a nodal authority and to help integrate fintech into the Bank’s functions. In the US,
banks are investing heavily in developing open APIs, which allow different software
applications to communicate with each other and exchange data directly, unravelling
options for value-added services linked to bank accounts.

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India cannot afford a trade tiff with the US

As India readies retaliatory duties on 29 goods of US origin worth $200 million

in response to the US imposing tariffs on Indian steel and aluminium products,
concerns are emerging whether the country is really ready for a tariff war similar to
that between the US and China.

Without doubt, the scale in the two cases (US-China and US-India) is vastly
different. China has the economic and political clout to deal with the US; but India is
certainly not in that league. While US trade deficit with China runs into a few hundred
billion dollars, with India it is minuscule at about $20 billion.

Be that as it may, India cannot afford an extended tariff war with the US as the
stakes are substantial. It is critical to recognise that a large number of merchandise
exports from India to the US are labour intensive. The Indian government is riding on
the horns of a dilemma. On the one hand it faces economic and political compulsions
at home to protect and advance domestic interests and, on the other, accommodate
the demands of the country’s largest trading partner. So as per the author
negotiations are the best options.

UPI just became easier for small companies

a move that is directly aimed at speeding up a small merchant’s ability to

collect payments through the Unified Payments Interface, the National Payments
Corporation of India has said they could be onboarded as individuals to start with
and not as businesses. In a circular issued on June 17, the retail payments body
identified a new category for UPI payments — P2PM. This is in addition to P2P
(person-to-person payments) and P2M (person-to-merchant payments). NPCI has
also said that these small merchants will have a ₹50,000 per month limit and the
acquirer is not allowed to charge anything to the merchant onboarded under this
category. To get them into the fully recognised merchant category, a three-month
cooling period has been suggested and that a transaction limit of ₹50,000 be

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maintained. UPI is primarily used for P2P payments and is slowly shifting towards
merchant transactions.

Budget must outline more banking reforms

As per Raghuram Rajan it is important to enhance the quality and stability (in
PSB boards) through further streamlining appointment process, succession planning
and compensation. These aspects could be evaluated by bank boards and reviewed
by the Banks Board Bureau. The government, as a majority shareholder, should
make this happen.

But what needs to be done quickly is to vest ownership of all banks in a single
holding company, assign BBB as its board and leave it to appoint the PSB boards.
The government can continue to be a majority owner with 51% stake, and the
balance can come in as private capital that includes foreign capital. The holding
company can tap the market for funds and raise large doses of capital for infusion
into banks. This will help banks grow so they can lend more and get the wheels of
the economy moving. The compensation for senior bankers should also hinge on
performance. Large chunks of their salary must be linked to the bank’s performance
over a longer period of time, and, of course, with clawback provisions.

The creation of a holding company for banks should come as a part of the Budget
announcement.

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