infineeti annual 2015 edition

InFINeeti | Annual Edition | August 2015

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Dear Readers,

Greetings from team InFINeeti!!!

The past year has seen major developments in the field of business and finance. The global financial sector has seen high im-

pact events like the US shale revolution to the consequent drop in oil prices. All this has been complemented by a slowing Chi-

nese economy which many attribute to an ageing Chinese population.

Across the Himalayas in India, with the new government having finished a year in power, many saw PM Narendra Modi's exter-

nal focus as an attempt to occupy a void left by China after 25 years of relentless growth. Modi's visits abroad offered a glimpse

to the new government's strategy over the coming four years.

With a view to analyze this shift in balance of power to the two giants of Asia, we dedicate this edition of the magazine to the

theme 'Chindia-The Next Global Superpowers'.

Another reason for a slowdown in China could be decline in demand across Europe over the past five years. The ongoing debt

crisis has rung alarm bells among some of the largest economies there raising questions about the region's financial stability.

Perhaps the most serious of these is the crisis developing in Greece. In our article on Grexit we try and analyze what the future

holds for the precariously positioned region.

With China occupying a central role in today's world economy, the sharp collapse of China's stock market made headlines

across newspapers all over the world. In this edition, we try and analyze the underlying causes for this collapse and what it

means for the Chinese domestic market.

Staying with China, we have seen a gradual build-up of foreign exchange reserves to a mammoth $3.65 trillion as of July this

year. Talk has been ripe about how China would leverage such a fund. Recent moves by the Chinese government bear hints to-

wards the answer to this question. In late 2013, Chinese President Xi Jinping announced an ambitious revival of the ancient Silk

Road. In this edition, we try and understand the underlying motivations and impact of such an initiative.

What cricket is to India, football is to much of the world. In this edition, we try and give our readers a financial perspective to

the truly global sport.

Coming back home, we try and analyze how the new government has performed in our article on the Indian economy. We dis-

cuss the measures undertaken and challenges faced.

Besides these, the edition also features regular columns like FIN-Cross, FIN-Trend and News Chronicle.

With the new team taking over, we see the coming year with hope that we will be able to provide even better content for our

readers. We hope that you will enjoy reading this edition as much as we have enjoyed creating it.

We also see this magazine as an opportunity to learn from our readers through their feedback. Do write to us with your sugges-

tions and recommendations. We can be reached at [email protected].

Happy Reading!!!

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>>> Page 19

Reviving the Maritime silk route

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Indian Economy under the New Government

9

China Stock Market Crash:

Causes and Effects

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Grexit and its Domino effect

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FINANCIAL ANALYSIS OF SPORTS:

THE BUNDESLIGA – A SUSTAINABLE AND PROFITABLE MODE

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>>> Page 23

EQUITY RESEARCH: Britannia Industries

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>>> Page 6

Fin-Cross 28

NEWS CHRONICLE 39

Summer Internship Experience

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Fin Trend: MICROFINANCE-The Fallow Field of Indian Finance Sector

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Index

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REVIVING THE MARITIME SILK

ROUTE

BY SAURABH KUMAR & SAKSHAM GUPTA

IIFT DELHI

Background

The Silk Road was a network of trade routes, formally

established during the Han Dynasty of China, which

linked the regions of the ancient world in commerce.

Built both over land and sea, the network was used regu-

larly from 130 BCE, when the Han officially opened trade

with the west, to 1453 CE. The silk route extended 8000

km in length across three continents for more than a

thousand years. Art, religion, philosophy, technology,

language, science, architecture, and every other element

of civilization were exchanged through the Silk Road.

But the real value of the route was driven and real-

ized by the commercial trade (primarily silk, which esti-

mates show was almost 30% of the commodities export-

ed by Han Dynasty ) that it offered. Even in 2012, the

trade across the land route makes up 22% of the world

trade amounting up to $30 trillion.

But a new history may well be scripted on Asia's old-

est routes if China's ambitious plans about the revival of

Maritime Silk Road are a success. This speculation started

on the back of a speech in Kazakhstan by the Chinese

President Xi Jinping on “One road running through

Southeast and South Asia” through creation of a land and

a sea route from China to the rest of the world

Chronology of Events

In the September, 2013 address at Kazakhstan's Naz-

arbayev University, Xi Jinping set out set out five specific

goals for the Maritime Silk Road:

Strengthening of economic cooperation

Promotion of trade and investment

Improvement of road connectivity

Facilitating currency conversion and

Fostering people-to-people exchanges

Since this announcement, the Silk Road’s inception

has followed a slow and steady progress towards its real-

ization.

In October 2013, Li Keqiang, the Chinese premier,


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outlined the idea on the maritime road during the 16th

ASEAN-China summit in Brunei.

In December 2013, Xi urged strategic planning of the

‘Belt and Road’ initiative to promote connectedness of

infrastructure at the annual Central Economic Work Con-

ference.

In October 2014, twenty-one Asian countries willing to

join the Asian Infrastructure Investment Bank (AIIB) as

founding members signed the Memorandum of Under-

standing on Establishing AIIB in Beijing.

In November 2014, President Xi announced that China

will contribute 40 billion U.S. dollars to the AIIB to set up

the Silk Road Fund.

On February, 2015 the first Chinese Cruise Liner carry-

ing 400 people set sail via the Maritime Silk route on its

maiden voyage during which it visited many South-East

Asian nations including Malaysia and Vietnam.

The Route

The planned maritime road begins in Fujian province in

southeast China. After cruising through Guangzhou and

Haikou in China's southern tip, it heads south to the Ma-

lacca Strait. From Kuala Lumpur it heads to Kolkata and

then crosses the Indian Ocean to Nairobi. It then goes

north around the Horn of Africa and reaches the Mediter-

ranean through the Red Sea. After a stop in Athens it ends

in Venice where it meets the overland road.

Investments

The AIIB had last year invested $40 billion in develop-

ment of the silk route in Indian Ocean out of which $10

billion had already been poured into projects covering

coal and gas, mining, electricity, telecommunications, in-

frastructure and agriculture. In June 2015, China's CITIC

Ltd., the state-owned conglomerate, committed to invest

$113 billion to support the MSR initiative

In a recent press release , China Development Bank,

one of the country's policy banks, also said it will invest

more than $890bn (£579bn) into more than 900 projects

involving 60 countries, as part of its efforts to bolster the

initiative.

Apart from direct investments, various deals such as

the $28 billion investment package with Pakistan and $23

billion deal with Kazakhstan have also been signed to bol-

ster the trade route. But after nearly a trillion dollar worth

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of investments what are the returns that China hopes to

draw from this project?

Strategic Returns

One important reason China seeks to develop the Silk

Route is the potential increase in trade with its neigh-

bouring countries via the silk route to $2.3 trillion in a

decade which can be achieved through this initiative.

Another obvious reason for the increased impetus giv-

en to the inception of the silk route is the decline in US

and Euro markets. The lower demand for Chinese imports

has serious consequences for the export-driven economy

of China which may even have a meltdown if the Chinese

Government can’t sell its goods. Therefore, a revival of

trade linkages to neighbouring countries makes sense to

China in the view of maintaining a sustainable growth tra-

jectory. From the above plot it can see that the outbound

investments have surpassed the FDI into China.

Further, there has been much talk of the growing eco-

nomic disparity between the east and west regions of the

Chinese mainland. While the industrial East has pro-

gressed by leaps and bounds, the west side still grapples

with poverty. A closer look at the route map of the MSR

initiative will reveal that western China may get increased

trade and commercial activity which may kick-start in its

wake.

The Maritime Silk Road may have been conceptualized

to cement relationships with countries that are tacitly

friendly to China such as Malaysia, Cambodia, Sri Lanka,

and Pakistan. This will be accomplished primarily through

economic incentives like infrastructure development and

trade deals. In this sense, the Maritime Silk Road not only

stands side by side with the Silk Road Economic Belt, but

also as part of a historical continuum that includes China’s

past investment in maritime-related infrastructure.

However, it can also be seen as scheme to pacify

neighbouring countries, threatened by China’s aggressive

territorial claims in the South China Sea. Despite the ide-

alistic claims of peaceful economic development made by

Chinese leaders and state media about the Maritime Silk

Road, China has continued unabated to strengthen its

unilateral claim to vast maritime territory in the South

China Sea, turning reefs and other undersea maritime

features into full-fledged islands, complete with airstrips

that could be used by the People’s Liberation Army.

Indian Perspective

The benefits India will get on being a part of MSR are

many. MSR being on the periphery of India will allow it to

be a part of the large economic exchanges that may take

place through it. It may also help attract some Chinese

investment that it has desired for so long. Joining MSR

may lead to increased investments and development in

the Northeast and finally it may lead to further integra-

tion with its neighbours.

Despite the supposed benefits, there has been a lack

of intent shown by India in being part of the MSR. The

main issue is the involvement of China. The concern be-

ing, it may lead to increased regional influence of China in

the area, thus further diminishing the influence of India in

the subcontinent. Questions have been asked if the pro-

ject is simply an extension or a part of China’s String of

Pearls project to circle India in the Indian Ocean. The

problems of the northeast also surface and lead to even

more doubts.

Conclusion

Whether the initiative will bring prosperity to the re-

gion or become a mere geopolitical instrument for lever-

age, only time can tell. One thing which is certain howev-

er, is that the plan has some undeniably attractive prom-

ises which if delivered could lead to the rise of the next

global superpower.


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INDIAN ECONOMY UNDER

THE NEW GOVERNMENT

BY - SRAVAN JANASWAMY

& ANKIT PATHAK

IIFT, KOLKATA

The Initial Hope

As Mr. Narendra Modi took office on 26 May, 2014,

the entire nation looked forward with tremendous hope

awaiting the promised ‘Achhe Din’. More than one year

has passed and the media is abuzz with analysis of his

performance. While one year is too short to judge a gov-

ernment which has a mandate for five years, it can’t be

ignored that the initial perceptions last long. The first year

has been a year of promises with the government focus-

ing more on administrative reforms and promulgating a

plethora of initiatives but in the coming years, the govern-

ment is going to be judged by the extent it manages to

deliver.

Consolidating Positive Sentiments

The government has largely been able to sustain posi-

tive sentiments which have now started to reflect on the

economy as well. The global rating agency, ‘Moody’s’ has

upgraded India’s rating outlook to “positive” from

“stable” with a view that there is an increasing probability

that actions by policy makers will enhance India’s eco-

nomic growth. But as per the popular epigram, “There is

no smoke without fire”, the economic upheaval has been

on the back of major initiatives by the government.

Living up to its reputation of being one of the most

robust economies in the twenty first century, India has

grown steadily. According to latest figures (post the base

rate change to 2011-12) India’s growth rate has increased

to 7.4%. What this means is that for the first time in the

last 2 decades, India has outperformed all the emerging

economies including China in terms of GDP growth. The

GDP figures are very encouraging in the current context

where several economists are predicting a global crisis

with the World GDP growth projected to fall further to 3.5

-3.7 percent for the year 2015-16 as per the IMF report.

When two elephants fight, usually it is the grass that is

at loss. But what has happened in the case of the oil pric-

es is a boon for countries like India which have benefited

out of it. The unprecedented fall in the crude oil prices

have come as a blessing in disguise for the Modi govern-

ment as the rates have plummeted by more than 60 per-

cent which has led to a huge reduction in the import bill.

This has played a very important role in the Government

reaching its deficit target of 4.1 percent for the fiscal 2014

-15. This has also brought the inflation down from 7.96

percent in July, 2014 to 5.4 percent on a year on year ba-

sis which helped the RBI to enforce 3 rate cuts of 25 basis

points each that would increase the liquidity and help in

boosting industrial production.

On the way to becoming a global leader

The ‘Make in India’ initiative launched by the government

on 25th September 2014 with the objective to make India

a global manufacturing hub has been one of the key fac-

tors in boosting the economy. India has been ranked as

the number one investment destination in the world as

per the 2015 Baseline Profitability Index (BPI). The credit

can’t be denied to the government which has allowed

FDIs in various sectors, taking it to 100% in Railway infra-

structure and 49% in Defense. In fact, barring the de-

fense, space and news media sectors, the government

has allowed 100% investment in all the other 22 sectors.

The response has been quite enthusiastic with companies

such as Foxconn, Sony, Hitachi, etc. recently announcing

to invest in the country under the program.

The Indian growth story has drawn traction on the global

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stage where the galore and charisma of Modi has been

one of the driving forces. His relentless foreign visits have

drawn up positive sentiments and the growth in Foreign

Institutional Investments (FIIs) has helped the Sensex to

touch the 30,000 mark for the first time. Modi has also

been able to make treaties for the bilateral trades with

various countries. For instance, Japan has promised an

investment of $35 billion in India over the next 5 years

while China has promised that of $20 billion over the

same period. These are signs of growing trust that various

countries are posing in India’s future growth. The corpo-

rates view India as the last “billion user” market and per-

haps that is the reason why the world is so eager to put

their resources into the country.

On the Domestic Front

Apart from the influx of investments from abroad, the

government has also performed satisfactorily on the do-

mestic front. In the union budget, finance minister

Mr. Arun Jaitley presented an encouraging roadmap for

the country’s future. Tax collection is proposed to in-

crease from 9.9 percent to 15.8 percent by the end of

next year with the help of 3 major changes. The first of

which being an increase in the excise duty on petrol and

diesel which is going to fetch around Rs.70,000 crore on

an annual basis. Secondly, an increase in the duty on

coal, which is projected to fetch around Rs. 7000 crore

and finally the increase in the service tax to 14 percent.

Corporate tax has been reduced from 30 percent to 25

percent on an yearly basis starting from next year. This

appears to be a well thought move by the government

because the proposed GST which is set to come into ac-

tion next year would more than offset the reduction in

the income from the corporate tax. Thus, all these

measures would increase the fiscal envelope in the com-

ing years which would give Modi-Jaitley and Co. an oppor-

tunity to reap the benefits by investing freely in the series

of initiatives they have proposed .

The Other Side

However, it isn’t exactly going to be a bed of roses for the

government. They have already burnt their hand while

trying to pass the LARR bill and the GST along with several

other pending legislatures. The minority in the upper

house haunts the government as it tries to implement the

major reforms. Despite its numerous attempts, it has so

far been unable to break the deadlock while the opposi-

tion remains united. Modi needs to realize that a majority

in Lok Sabha means little if the legislatures are impeded in

the Rajya Sabha. These reforms are quite essential to im-

prove the country’s rating in the ease of doing business in

which it currently ranks 142 among the 189 countries as

per World Bank’s data.

The Final Take

While the economy has performed reasonably well over

the past year, we cannot ignore the fact that it has been

mainly because of the contribution from the external fac-

tors. The government has been benefitted by the positive

sentiments, but these are only going to last as long as it

keeps performing well. The extent to which the initiatives

launched in the past year, deliver, will be a major parame-


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ter on which the economic grow. The government will

also have to find a way to wipe away the disguised unem-

ployment from the agricultural sector. It can be stated

that the overall scenario seems positive, but we need to

make sure that complacency doesn’t creep in, as after the

Chinese slowdown, the world looks to India with in-

creased expectations and it must strike while the iron is

still hot.

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CHINA STOCK MARKET CRASH:

CAUSES AND EFFECTS

BY - ROHIT GUPTA & SOMYANSHU ARORA

IIFT, DELHI

Introduction

The Chinese stock markets sent shockwaves across the

globe last month when their meteoric rise since last year

came crashing down. The meltdown started in mid-June

and saw the values of shares plummet more than 30% in

less than a week. The fall becomes even more dramatic

when it is juxtaposed with the fact that the values had

skyrocketed by around 150% on a year-on-year basis.

Just before the crash, the stock markets in Shanghai with

831 listed companies, and Shenzhen, with 1,700 hundred

listed companies, boasted a combined market capitaliza-

tion of $ 9.5 trillion dollars.

Just to put things into perspective, a 30% loss in the val-

ues of shares in these markets, makes the loss equivalent

to nine Greece Economies, is greater than the value of

France’s entire stock market and Brazil’s entire output.

What Went Wrong?

Many pundits have pointed out that part of the failing

laid in the pseudo-amalgamation of Mao’s communist

China and Xiaoping’s capitalist structure that was bound

to fail at some point of time or other. These two forces

could not exist together for long. The type of regulated

capitalist market that the CPC wants to establish is un-

heard of. It had been pointed out by various pundits, that

a crash like this was imminent simply because China had

defied all the odds and followed a consistent growth

path of 7% and more for the past twenty five years. The

fact that the market had risen to exalted heights in the

last year had made the fall even more expected. But un-

der this simple explanation lie some bigger red flags.

The main cause of the crash can be attributed to the

menace of a phenomenon called ‘Buying on Margin’ i.e.

people buying stocks on borrowed money. It increased

five-fold in China over the past year to $370 billion. This

led the margin debt to reach the dizzying heights of 8.5%

of the value of all its tradable shares-by comparison the

figure was only 4.5% during the Taiwan stock market

crash during 1980s.

Also, the deteriorating trading environment caused by


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the scheduled release of non-tradable shares and the

slowing down of China’s red hot economy had to a large

extent dampened investors’ mood and this further wors-

ened the slide of the Shanghai Stock Exchange.

The Chinese stock market saw more than 30 million trad-

ing accounts open in less than a year leading to an influx

of unsophisticated investors. Many of the retail investors

played their part in the market failure too as they failed

to book profits at the right time and kept on injecting

money into the market. As the bubble grew, P/E ratios

for Chinese stocks averaged an astounding 70-1, against

a worldwide average of 17 to 1. This led to a frenzy of

Chinese domestic investors towards the stock markets,

leading to a situation where people started borrowing

funds from shadow banks at exorbitant rates. Many in-

vestors entered the market late and for the fear of miss-

ing out on this merry making run, they prolonged the

market rally. In fact one in ten Chinese had opened their

trading account in hope of not missing out on a unique

opportunity of making quick bucks and this led to huge

flow of money from banks to stock markets. All this led

to the stock market climbing higher even though the

wheels were coming off from the Chinese economy wag-

on. This in itself should have been an unmistakable warn-

ing of a bubble.

But why did so many investors rush to the stock market

with their hard earned money. Though this increase was

also a result of the relaxation of the rules on margin trad-

ing by the Chinese government post 2008, the main rea-

son can be attributed to poor prospects in alternative

investment opportunities, like the property markets.

The People’s Bank of China has been pumping in money

to artificially prop up both manufacturing and exports. In

the process the returns on traditional saving bank ac-

counts and fixed income securities have dipped lower

while inflation has been on a constant upward trajectory.

This means Chinese investors have been earning nega-

tive real returns for some time. In dearth of any other

alternative investment opportunities, Chinese investors

made a beeline for the stock markets.

As the Chinese economy slowed down over the years,

the price of property-the traditional way for many Chi-

nese households to invest- started to slump. In a country

where the underdeveloped financial sector offers few

other investment opportunities, investing in property

had become the natural way to invest one’s money.

Thus, when the property market started to see a slump,

a rising stock market became a better prospect to earn

on one’s investments. The graph shown below tracks the

correction that the Chinese housing market has been

undergoing.

One might argue that the rise in margin lending has

deeper roots than just relaxation of rules: huge expan-

sion in money. The extent of this expansion can be

gauged by the fact that China’s money supply is signifi-

cantly larger than US’s money supply even though the

Fed has been printing money for years. All that money

has to go somewhere, and much of it has been poured

Source:-Kent Troutman, PIIE http://blogs.piie.com

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into the stock markets.

The Reaction That Was

In 2013, the Chinese government had pledged to let the

market play a ‘decisive’ role in governance. The recent

market crash made China take a few steps back on this

promise. This shows that the government is in panic

mode. There is an extra emphasis for the Government to

stabilize the market as in April, the state owned media

such as Xinhua, had published upbeat articles praising

the Chinese government for the rise in the stock mar-

kets.

In the end of June, the Chinese Communist Party, im-

posed restraints on margin trading to stop the fall of the

market. They stepped in and froze nearly half of all share

listings. That is more than 1,200 of 2,808 listed issues

worth a total market cap of roughly $ 2.2 trillion were

barred from trading in an attempt to arrest further slide.

It lent $ 42 billion to brokerage firms so they can pur-

chase stocks. It also announced a new $ 40 billion stimu-

lus package. Further stimulus also remains likely, and

further reduction in bank reserve-requirements will

probably proceed. The upshot of this move was that on

4th July 2015, 21 major Chinese brokerages made a coor-

dinated announcement, pledging to purchase $120 bil-

lion yuan worth of Chinese Stocks to help stabilize the

market.

Effect on Chinese Households

The stock market wealth effect in China is smaller than

many assume as stocks account for less than 15% of total

household assets and the free-float value of Chinese

markets - the amount available for trading – is about a

third of GDP, compared with more than 100% in devel-

oped economies. Also the Chinese stock market as a pro-

portion of the economy is smaller compared to other

developed countries. To put this into perspective, more

than half of Americans have investments in stocks,

whereas the figure in China is only 6%. So a stock market

crash is unlikely to have serious repercussions for the

larger economy.

A switch out of equities into other asset classes has

fueled recent housing recovery. Housing sector has re-

bounded, surprisingly, and the prices have risen 19% and

this might start another asset bubble as most of the re-

tail investors’ money will now pour into this sector.

This economic downturn may lead to an increased

outflow of investment from Chinese shores and force the

People’s Bank of China to put restraints on these in order

to prevent Renminbi from depreciating. Some of the

countries, such as Australia, might come out as losers in

the medium term as they are heavily dependent on Chi-

na for exports.

A raft of measures has been announced to put a floor

under the sinking domestic markets and this highlights

the alarm sounded within the ruling Chinese Communist

Party concerning the economic and political implications

of the volatility. According to observers the reaction from

the Politburo is not to commensurate the problem. They

agree that a collapse of stock market could leave a lot of

bad debt in its wake and feed further downward move-

ments. However, with official figures putting margin fi-

nancing at just over Rmb 2 trillion, it’s difficult to ascer-

tain what’s really troubling the CPC. The intervention

from CPC has effectively set back the process of modern-

izing capital market in China and constraints imposed on

IPOs has ruled out an effective channel through which

firms can raise financing. This chasing-4500-SSE-level

game may become an albatross around government’s

neck in the long run.


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What Has Happened?

As the world was slowly recovering from the devastating

effects of 2008 global recession, there are a couple of

major economies who have failed to up their ante and

avoid further damage in the future. The European Union

is one such economy which failed to foresee the iceberg

ahead. Before we talk about the current status of the

Greek economic crisis, let us look at the factors that con-

tributed towards such a thing happening in first place.

1) The Euro zone which Greece joined was a one-of-

its-kind idea and was bound to succeed. However

it failed to evolve post 2008. It has now become a

large lose market with no proper institutional sup-

port.

2) Spending on public amenities and the concept of a

welfare state was used effectively by the politi-

cians to buy votes, instead of using it as a public

welfare scheme and creating a society Marx

dreamed of. Even the Koreans were jealous of the

welfare state that Greece was at one point.

3) Like in the movies and novels, Greece failed to

completely curb the Mafioso and tax evasion was

almost legalized.

4) The meaning of capitalism was grossly misunder-

stood. Politicians interested in short-term results

supported a series of bad investment and the gov-

ernment, instead of intervening ,acted as a giant

insurance agent and finally banks were the only means of

investment.

5) A lack of leadership with sound structural and eco-

nomic knowledge.

The demographics of Greece in 2014 were as follows :

From the graph we can see that the share of women in

the population is steadily increasing from 25 years. Now

the key factor is to see whether these women are provid-

ed with equal opportunities as men to contribute to the

economy. The answer is no. In Greece if we consider the

middle class, the income disparities between men and

women is much greater than that in the high income

groups. A 2007 study by the Bank of Greece found that

the pay gap between men and women was 84% on an

average (for low and middle income groups).

SYRIZA and The Era of Alexis Tsipras:

Riding on populist sentiment and anti-austerity factor,

leader of left wing party SYRIZA, Alexis Tsipras won the

mandate of people of Greece to govern them and lead

them out of this mess. He set new means of negotiations

with Germany and the EU. He called for a vote on wheth-

er to accept the austerity bailout terms offered by inter-

national lenders and the entire nation gave a resounding

‘NO’. He further used the Greece exit from the EU as a

bargaining chip, but lenders did not cave in. Now let us

GREXIT AND ITS DOMINO EFFECT

- BY SAI PAVAN ESWARAPREGADA,

IIFT KOLKATA

Source: CIA World Factbook

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examine the impact of this proposed GREXIT on each

continent.

Grexit

What this simple term effectively means is that the EU

has an entry and exit door. In the words of the former

French Finance minister, a Grexit would be detrimental

not only for Greece but also EU in general. The market

would ask whose next in this case. In particular the

southern states of Spain, Portugal and Italy have the

greatest risk.

Below is the graph which shows the effect of Grexit on

the Greek economy.

Now let us examine some of the countries that are facing

the same economic crisis as Greece and might consider

the option of an exit from EU.

The Falling Dominoes:

A) Spain: Experts believe that Spain is more likely to exit

the EU than Greece. The SPEXIT-short for Spanish exit is

an alarming trend. Let us analyse the current economy of

Spain:

1) Spain is a bigger nation than Greece and they have

a ruptured relationship with the EU. The entire

market is particularly careful about Spain pushing

rates on 10-year bonds to 6.45%, close to the lev-

els hit at the depths of the crisis.

2) Bank industry is under performing and the Bankia

had to be bailed out by government once before.

The economy is already in recession and unem-

ployment is at 24% while in Greece it was at 25%

at the height of the crisis.

3) If Spain were to face the same crisis then EU would

not be able to bail it out and it would have to do

the hard work by itself. Here’s why: The Greece

economy is worth 230bill and pumping in 10% of

the same is a relatively easy task.

4) Even before the last of austerity package began in

Greece protests started in Spain with the Indigna-

dos movement.

5) Unlike Greece the Spanish economy can bank on

its industry. The export to GDP ratio is 26%, similar

to UK, France. Their only problem was the curren-

cy and inflation which caused a property bubble

that burst with severe results. Hence Spain doesn’t

fear a life outside the EU.

6) Spain is politically stable and its reasons to stay in

EU are more economic than political. Take the case

of Latvia which wanted to be a part of EU to pre-

vent Russia making it another Crimea. Ireland

wanted a new association apart from Britain.


17

7) Spanish exports are mainly focused on the Latin

American market and little towards EU.

B) Italy: Italy, one of the founding members of EU is in

trouble and it did not happen overnight. While all the

major economies across world have staged a slow recov-

ery from 2008 recession, Italy’s economic situation has

deteriorated. Let us consider the economic facts of Italy:

GDP = 2.0149 Trillion USD( 2013)-8th largest in the

world. Govt Debt: 132.6% of GDP

Reasons for the Economic Crisis of Italy:

1) Huge gap between haves and have-nots. Italy’s

assets (bank and insurance sector) has risen by 1.2

Trillion Euros since 2008 but 12.4% is the unem-

ployment rate. Manufacturing sector lost 200 mil-

lion Euros/year.

2) As per World bank statistics (Paying taxes 2014)

the total tax burden on companies in Italy is 65.8%

making investments in Italy a hard task.

3) Lack of political stability and will to implement the

structural reforms proposed by the EU. PM Matteo

Renzi faces opposition even within in his party

4) As per national statistics institute ISTAT, in Italy’s

impoverished South, unemployed youth are at

23.9% and 14% of the population is living in seri-

ously deprived conditions

Verdict: Italy is the 3rd largest economy in EU and it

would take massive and almost impossible effort from

EU to bail it out in case. In a dramatic turn of events the

GDP has grown by 0.3% in Q1 of 2015. Also ITEXIT (short

for Italy exit) is not a viable option for Italy as some of

the major export partners are Germany, UK, Spain and

France which might cause some serious damage to its

economy.

C) France: France is the second largest lender to Greece

after Germany. In the words of President Francois Hol-

lande French economy is robust and is prepared for any

eventuality similar to the Grexit. This is partly true since a

weak Euro has helped France increase its exports to US,

UK and Switzerland. It is even said that the French banks

have slowly got rid of the Greek assets from their books

since the start of 2013. But their main cause of worry

would be repayment of their debt owned by Greece

which cannot be repaid in such a short term by Greece.

D) Germany: The last time Greece came to the brink of

exit in 2012, Germany blinked and held the EU together.

However this time Germany which has lent 70Bil Euros of

the total 240 billion debt to Greece is relaxed (perhaps a

bit too much) as it believes that it doesn’t affect Euro

zone economy much. This might be partly true but it will

definitely show that EU has no permanence and might

weaken EURO. Further while Spain and Portugal have

carried out some hard-line structural reforms, it is essen-

tial for Greece to cut back on pension pay-outs, curb cor-

ruption and increase govt. treasury. Hence the tough

stance adopted by Germany is justified to an extent as

even IMF and World Bank agree that Germany has im-

posed some extreme austerity on Greece.

Impact on India:

India has witnessed little turbulence due to this event

but overall the investors have maintained their confi-

dence on our market. This was made possible by the im-

age of India being an investor friendly image created by

our PM, Shri Narendra Modi and the monetary policy

adopted by RBI governor Mr. Raghuram Rajan who with-

stood the pressure from the government to cut the inter-

est rates when the inflation eased. However it has to be

noted here that India hopes for Greece to come out of

this crisis and for Euro to remain strong. The EU is India's

second largest trading partner, accounting for around

20% of Indian trade.

The Present:

After many rounds of failed talks, Greece finally agreed

to stay in Europe and promised to make some structural

reforms to gain the confidence of its lenders. IMF has

also confirmed that Greece has cleared overdue debt

repayments of €2.05bn (£1.4bn) and is no longer in ar-

rears. The repayments, and another €4.2bn to the Euro-

pean Central Bank (ECB) due on Monday, came after the

EU made Greece a short-term loan of €7bn. Also Greece

parliament is to vote on crucial reforms like :

A code of civil protection aimed at speeding up

court cases

The adoption of an EU directive to bolster banks

and protect savers' deposits of less than €100,000

The introduction of rules that would see bank

shareholders and creditors - not taxpayers - cover

costs of a failed bank.

18


More contentious reforms like phasing out early

retirement and increase in taxes for farmers are

scheduled for August.

So let us hope that this is the start of many happy days

for Greece and it will be out of this crisis in no time.


19

Ever since Germany’s triumph in the 2014 FIFA World

Cup, praise has been pouring in for the German football

system. The rejuvenation of German football was not

something achieved in a year or two. It can be attributed

to the continuous efforts on the part of the German

Football Association, starting from 1998, like huge invest-

ments in infrastructure, youth training programs and in

the German Football League (the German Bundesliga).

From, being a ‘me too’ league, the Bundesliga came to

be recorded as the most profitable football league in the

world in 2014.

At the forefront of the league’s business model is its

commitment to the supporters. Affordable ticket prices,

a comfortable viewing experience and high safety stand-

ards helped the league achieve the status of the most

attended league in the world with an average per-match

attendance of around 43,531 people in 2015.

The 2013/14 season saw an average of 42,125 support-

ers attending each league game; considerably higher

than other top leagues like the Premier League - 36,657

and La Liga - 27,053. This is why the Bundesliga is also

called ‘The most watched league in the world”.

There are several factors which contribute to the

league’s success.

Ownership Structure

Clubs are required to be majorly owned by club mem-

bers (50+1 rule) to discourage control by external inves-

tors. Control by external entities leading to unsustainable

expenditures is one of the reasons why many clubs in

other leagues have fallen into financial turmoil.

If a company person has funded the club continuously,

for more than 20years, they can celebrate ownership.

Examples are Bayer Leverkusen and Wolfsburg which are

owned by Bayer Chemicals and Volkswagen. This ensures

that finances are stable and sustainable.

A team is given a license only if it has solid financials.

Key Financials

The combined revenue of the Bundesliga clubs has been

on the increase in the past few years.

In the 2013-14 season, the clubs posted combined reve-

nues of 2.45 Billion Euros, an increase of 12.9% over the

previous year. Out of the 18 clubs in the top-flight of the

Bundesliga, 13 operated profitably, one more than the

previous year. Including the first and second-divisions, 24

of the 36 clubs made a profit after tax.

The main income of the Bundesliga comes locally

through marketing rights. But the league continues to

FINANCIAL ANALYSIS OF SPORTS

THE BUNDESLIGA – A SUSTAINABLE AND

PROFITABLE MODE

-BY ABHINAV RAVICHANDRAN & RENGARAJAN M.

IIFT KOLKATA

20


expand its revenues from international markets. More

than 70 million Euros were earned from media rights

abroad.

Global coverage of the league expanded ever since the

success of the 2006 FIFA World Cup, which Germany had

hosted.

Detailed Analysis

Tickets and attendance

The positive effects of the efforts of the league regarding

viewer engagement are very clear, with yearly increases

in match revenue reaching a record 483 million Euros in

2014. The year recorded an average attendance of

43,502 with 92.5% of the stadium seats filled. Ticket pric-

es are kept considerably low in an effort by clubs to gar-

ner support within the community. On an average, clubs

charge 23 Euros to watch a Bundesliga game. Season

tickets for top drawer teams like Bayern Munich can be

bought for as little as 135 Euros, which is in stark con-

trast to top teams in other countries like Arsenal of Eng-

land (1455 Euros) and Real Madrid of Spain (708 Euros).

REVENUE OF THE GERMAN BUNDESLIGA CLASSIFIED BY SEGMENT


21

As per reports, clubs are willing to sacrifice ticket revenue

if it means they can bring together “finances, the game

and society”. Seventeen of the eighteen clubs in the

league were completely debt-free and were operating on

a profit.

An important fact to note is that during 2014, out of the

2.45 Billion Euros of generated revenue, clubs paid only

around 51% of the revenue in player wages. This was the

lowest in the continent.

Advertising

The consistent performance of top German clubs like Bay-

ern Munich, Borussia Dortmund and others in European

competitions like the UEFA Champions league, in the past

few years, has increased the interest in the league global-

ly. This directly relates to the average yearly growth in

advertising revenue of 5.6%.

Broadcasting

The new media deal signed in 2013 ensures that the

league association will receive around 2.5 billion Euros for

the four seasons from 2013 to 2017 from the marketing

of domestic coverage rights which amounts to 628 million

Euros per year, an increase of almost 52% compared to

the previous media agreement.

Teams can place more reliance on revenue from domestic

telecast. Sky Deutschland had bought the television rights

for around 485 million Euros per year, which means every

single Bundesliga game will be telecasted. This steady

stream of income creates stability and allows clubs to

make reductions for their supporters. The matches are

telecasted in over 200 countries.

Sharing The Spoils

The revenue sharing ranges from a maximum of 5.8% of

the total amount for the league champions, to at least

2.9% for the team finishing last.

The international media rights distribution depends on

individual club’s performance in the global stage, taking

into account UEFA’s (the European football governing

body) five-year coefficient rankings and the club’s perfor-

mance in the league.

Stadium Naming Rights

The sale of stadium naming rights in quite common in

Germany and contributes a hefty amount to a clubs yearly

war chest. Allianz signed a sponsorship agreement with

Bayern Munich, the league’s record champions, to name

their stadium - ‘The Allianz Arena’ at least till 2021 in a

deal worth 110 million Euros. Bayern CEO Karl-Heinz

Rummenige said – “We are investing in stones, not on

legs”, which clearly shows that the club does not have too

much dependency on any one sponsor, but intends to

form long-term partnerships. This sentiment is echoed

across the league where there are many sponsors and

investors for any given club.

Female Customers - A Growing Force

Female spectators have doubled to almost 14 million in

the last few years and the Bundesliga clubs have recog-

nized their purchasing power and offer customized mer-

chandize like logo-embossed nail polish, customized rock-

ing horses for toddlers, etc. 26% of the merchandise was

recorded as purchased by female fans.

22


Short-Comings

The Bundesliga doesn’t have a lot of exposure in coun-

tries like the USA. Germany’s top club, Bayern Munich

opened its US office only in 2014. The Bundesliga has a

lot of catching up to do, taking into consideration that

the Premier League of England sold broadcasting rights

in the USA in deals worth $250 million over three years.

Brand awareness is present in Asia ever since Germany’s

good performance in the 2002 FIFA World Cup. Keeping

in mind the huge population and growing interest

amongst the people, Bayern opened a training academy

in India to identify local talent and kindle interest in the

team. Many teams make sure to include countries in Asia

as part of their pre-season programs. The broadcast of

Bundesliga started in India from 2006 and was met with

great response.

Final Words

The Bundesliga may not be the most flamboyant league

in the world and many superstars may not flock to it. But

it’s sustainable nature and long term outlook ensures

that the league succeeds in the split between sports per-

formance and economic rationality.


23

EQUITY RESEARCH REPORT

ON BRITANNIA INDUSTRIES

-BY GAYATHRI BHUVANAGIRI

Industry and Company Analysis:

Industry Structure:

Britannia Industries operates in two different divisions:

1. Bakery

2. Dairy

24


I. Bakery:

Biscuit forms the largest category accounting for a little

over 2/3rd of the overall bakery industry. It is growing at

a rate of about 10-14% per annum over the last 5 years.

Bread forms the second highest category in terms of

growth rate.

a) Biscuit: Despite it being the largest category, the

Biscuit industry in the county still lags in terms of

consumption vis-à-vis to the world. The gap exists

both in terms of volume consumption depth and

extent of value addition. These two gaps would act

as a future source of growth in the biscuit catego-

ry. In segments of value addition such as cookies,

the growth rate is faster, leading to premiumiza-

tion. Competition: Vigorous competition exists in

the form of participation from large Indian and

multinational companies, mid-sized companies

and even from the regional players.

b) Cake: This sub category is still in its nascent stage

of growth with a comparatively less differentiated

products in the market. Herein lies an immense

scope for organoleptic value addition and more

over for building consumption. Britannia has been

the number one player in this segment.

c) Rusk: This sub category forms a similar structure to

that of cakes. The per capita expenditure in this

segment has been quite modest. Growth in this

category can be expected through an increase in

consumption of a specific product with format up-

grades and with specific marketing solutions.

d) Bread: This is a product with a lower shelf life.

Hence there exists a localized market with the tar-

get proximate. Britannia being the largest player in

the category encounters local competition.

II. Dairy:

India is the largest producer and consumer of dairy. De-

spite the fact India still trails the world in terms of per

capita dairy consumption. But this gap is slowly getting

filled with an increasing demand over the supply. Hence

there exists a threat of supply deficit. This threat is seen

as an opportunity for many private players to enter the

market thereby increasing competition.

While the increase in the dairy segment can be account-

ed for the increase in milk consumption, the growth of

value added products such as Cheese and Dahi is also at

a faster rate.

Factors which can drive the industry growth faster:

i. There has been a decline in the time available to

manage households leading to an increase in the

purchases of ready to consume products. Dairy

sector, which seems overwhelmingly unorganized,

is set to gain as it will slowly move towards an or-

ganized structure.

ii. With an increase in the affluence, there seems an

increase in the buying and consumption of the val-

ue added products. There exists a potential to shift

the sector from basic to processed foods.

iii. With an increase in the income level, customers

tend to gravitate towards a more balanced diet

leading to an increase in the consumption of dairy

products.

Levers of success for the industry:

i) Access to quality milk which acts as a raw material

ii) Access to cold chain

iii) Capability of the right value added product

Business Strategy:

India is steadily growing in terms of affluence

Indian consumers are looking for an upgradation in

the food products

Owing to higher economic growths, India and Chi-

na are still favourite destinations for establishing

and expanding business

Hence the evolving customer is met with an in-

creasingly superior product portfolio which is cre-

ated through domestic innovation and knowledge

transfer from overseas


25

Four Fundamental Blocks of Britannia’s Business Strate-

gy:

Organoleptically superior product portfolio with a

balance in terms of price, quality and consumer

aspiration

Efficiency in supply chain which helps in continu-

ously improving productivity and quality

Increasing distribution reach thereby increasing

diligence in the market and leveraging existing dis-

tribution infrastructure

Building the BRAND

III. Bakery:

Strengthening and expansion

Sales

Distribution Network

2. On the Product Front:

Focus Lies on Organoleptically High-End Segment

Buttressing of its iconic brands by associating with

its marquee properties in Cricket and cinema

Relaunch of “Britannia.co.in”, the Digital face of

the company

IV. Dairy:

Working on strengthening of organoleptic perfor-

mance of its products

Extracting benefits from an integrated sales and

distribution network and diversified sourcing

Implementation of various initiatives in all areas of

operations to create an efficient and robust supply

chain and improve cold chain capabilities.

Identification of more opportunities to reduce reci-

pe cost and optimize cost structurally all across the

value chain.

Economic Outlook:

It is expected that the economic conditions will not

change significantly

Estimated Industry Growth Rate is 8-10%

Though a higher growth rate of 12-14% is assumed con-

sidering the fact that economy will regain its momentum

owing to the following virtuous cycle.

Opportunities and Threats:

Bakery:

Rising Income

Aspirations of the consumer

Opportunity:

i. Actively seeking technological solutions

leading to cost efficiency and saving

ii. Nascent categories of Cake and Rusk

iii. Disruptive innovation in the Bakery category

iv. Large and profitable International markets

v. Rural growth in the country

vi. Many untapped geographies in the country

26


Threat:

i. The above opportunities are equally visible to the

competitors.

ii. Intensive competition due to lower industry

growth

iii. Challenge lies in retaining the pool of talented hu-

man capital

iv. Fast changing regulatory needs

Dairy:

Opportunities:

i. Increasing consumer appetite for value added

dairy products

ii. Infrastructure improvement in cold chains that

aids in easier distribution


27

Threat:

i. Increased competitive activity

ii. Forecasted supply deficit

Risks and Concerns:

i. Primary risk on account of adverse changes to the

economy

ii. Volatility in commodity prices

Financial and Operational Performance:

Valuation:

Valuation used here for calculating the intrinsic share

price is that of DCF using FCFE and Cost of Equity.

Industry Growth Rate Assumed to around 8%

Intrinsic Share Price: Rs. 3681.261

Current Market Price: Rs. 3314.05

Ratings:

Fundamentals:

3/5

Valuation:

3/5

Recommendation: HOLD

Market Value 441383.2

Outstanding Shares 119.9

In Millions 2014 2015

Total Revenue 6,946.30 7,946.38

COGS 4171.02 4691.81

Gross Profit 2,775.28 3,254.57

Operating Expenses 2114.49 2302.7

EBITDA 660.79 951.87

D&A 83.18 144.48

EBIT 577.61 807.39

Interest Expenses 82.9 38.6

PBT 494.71 768.79

PAT 346.297 538.153

Key Performance Indicators

Cost of Equity

Risk Free Rate 8%

Beta 0.49

Market Risk 13.30%

COE 0.10597

Market Capitalization 40,100.72

P/E 58.76

Book Value 102.99

Industry P/E 51.86

P/C 50.15

EPS 56.88

P/B 32.45

Div Yield 0.48%

Face Value 2

28


FIN-CROSS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15


29

Across

3. A market where there is no significant movement in share

prices

4. Term used for buying a company with the prime motive of

selling its assets

7. Country whose foreign market is known as the 'Rembrandt

Market'

8. Temporarily provided loan until the long-term arrangements

are made

9. Bank formed in 1921 as a result of amalgamation of the

three Presidency Banks in India named Bank of Bengal, Bank of

Bombay and Bank of Madras

11. Term used for the non-convertible paper money in money

market

12. Term used for money spent towards influencing people for

the benefit of the organization

14. Which country's currency is known as Drachma

15. India's first Credit Rating Agency set up jointly by LIC, GIC,

UTI, ICICI and Asian Development Bank in January 1988

Down

1. Bank headquartered in twin towers nicknamed debit and

credit?

2. Country's whose coins have the following lines imprinted,

'This is the root of all evils'

4. The scientist whose picture can be found on Israeli currency

notes

5. First executive in corporate India to get Director Identifica-

tion Number (DIN), the number being 0001

6. Country having paper currency and no coins and which be-

gan introduced cheques only in 1997

10. Person who introduced the 'Double Entry' book keeping

concept

13. Location of the European Central Bank

For solutions, check Page No. 43

FIN-CROSS

30


Microfinance is believed to be a tool of development

that can be used to get rid of poverty. Microfinance can

be defined as a range of services which are provided to

poor or low income groups who are excluded from the

conventional financial services, to provide them finan-

cial inclusion. Often it is limited to the narrow definition

of ‘micro-credit’; but however, in theory and practice, it

includes a wider range of services including savings, in-

surance, remittance, payments and many more.

Microfinance has come a long way since Muhammad

Yunus disbursed the initial loans in 1976 in Jobra, Bang-

ladesh and started the path breaking revolution with

Grameen. Over the last 30 years, MICROFINANCE

achieved a lot across the world; the United Nations de-

clared the year 2005 “The UN year of Micro-credit”; in

the following year, i.e. 2006, Mr Yunus and the Grameen

Bank Bangladesh, were awarded the Nobel Peace Prize.

Microfinance has crossed borders round the globe. It

already surpassed the milestone of 90 million1 borrow-

ers and still progressing in leaps and bounds but yet to

reach all those 2.8 billion2 people who still have no ac-

cess to financial services. Again, with its growing popu-

larity the day is not far when Mr Yunus’s dream of

“putting poverty in museum” will no longer be a distant

one.

Evolution in India: The evolution of MICROFINANCE in

India is not only old but also quite complex when com-

pared with the same of other developing nations. Micro-

finance has been practised in India through ages, though

informally. First legal framework was set up for estab-

lishing the cooperative movement in 1904.After that

Reserve Bank of India Act was passed in 1934for the es-

tablishment of Agricultural Credit Department. Till the

end of 1960s, all the demands of credits in the rural In-

dia were mostly met by the cooperative banks. Albeit

commercial banks came with a great supply of cash in

the agri-business and marketing, still the overwhelming

demand of credit was never met fully. First time in the

year of 1969, after that again in 1980, Government of

India took over many banks from their previous owners.

One of the main motives of government, behind the

nationalization of banks was to increase the flow of

credit in rural India. One of the largest programmes of

MICROFINANCE in the world was launched by the gov-

ernment of India through the Integrated Rural Develop-

ment Programme (IRDP). Since the inception in 1979,

over nearly two decades, IRDP extended credit to nearly

FIN TREND

MICROFINANCE: The Fallow Field of

Indian Finance Sector by

Adhiraj Bandyopadhyay


31

FIN TREND

54 million families. In the Sixth Five Year Plan, the gov-

ernment also launched other programmes like Training

of Rural Youth for Self Employment (TRYSEM), Rural

Landless Employment Guarantee Programme (RLEGP),

National Rural Employment Programme (NREP), Devel-

opment of Women and Children in Rural Areas

(DWRCA). On 1st April of 1999, the government

scrapped all the earlier self-employment programmes

and came up with Swarnajyoti Gram Swarozgar Yojna

for the credit, asset building and development of rural

people.

Today the credit requirement of rural India is met by

33,000 branches of commercial banks, 91 Regional Rural

Banks (RRB) and cooperatives. Government of India felt

the need of specialized chain of banks to cater the

needs of rural folks and in 1975, came up with the new

range of banks called RRB. RRBs though are not quite

successful initially and incurred huge losses. But seeing

their importance in rural development, government

continued with the project and by 2010, 48 of the RRBs

became profit making, wiping out all the accrued losses.

Another instrumental role was played by National Bank

for Agriculture and Rural Development (NABARD) in this

segment. Prior to 1992, banks were not interested to

provide loan without collateral e.g. land papers, vehicle

papers etc. Then emerged the concept of Self Help

Group or popularly called SHG, due to implementation

and success of the model promoted by NGOs such as

MYRADA. The main three models of SHG are mentioned

below:

Their success with this model led NABARD to disburse

loans without demanding any physical securities and

modified policy guidelines to link with SHGs. Originated

in a GTZ sponsored project in Indonesia, SHG model ap-

pealed Indian rural folks as the combined liability of the

group replaced the indispensability of collateral.

The model helped the bank to reduce transaction cost in

two ways: one, through the externalization of servicing

costs and two by ensuring repayment utilising the peer

pressure mechanism within the group.

Another new model has been launched recently by NAB-

ARD, where it replaced the NGOs by directly linked indi-

vidual volunteers who are selected by the bank.

Current Scenario: Over the past decade microfinance

played an important role to fill the gap of supply and

demand of microcredit. Microfinance institutions re-

mained pivotal in providing financial inclusion to those

who were left out by the banks. In India, most of the

loans offered by the MFIs are in a range of 5000-200003.

The MFIs lend on either group based model or individu-

ally. The group based model includes Joint Liability

Group (JLG) model and Self Help Group (SHG) model.

For the JLG model MFIs charge interest at a flat rate of

12% - 18% p.a. whereas for SHG model, MFIs charge

18% - 24% p.a. based on reducing balance method. Re-

garding the repayment methodology, most of the MFIs

32


following JLG model, collect payment on weekly or fort-

nightly basis while MFIs following SHG model opt for

monthly collection. On the other hand, individual loans

are similar to retail loan financial models applied by the

banks. Often MFIs offer individual loans to the most suc-

cessful member within an SHG for consecutive 3 or 4

cycles. MFIs in India are mostly engaged with extending

microcredit. Very few of them provide option for insur-

ance and savings. For insurance MFIs tie up with special-

ised insurance companies. Saving is generally kept op-

tional for the members but in few cases saving is com-

pulsory. Savings are normally collected on a weekly or

fortnightly basis.

but in few cases saving is compulsory. Savings are nor-

mally collected on a weekly or fortnightly basis.

On the basis of legal framework MFIs are classified into

the following groups:

Not-for-Profit MFIs: Societies, public trusts and

non profit companies. Bandhan, SKDRDP, Cashpor

Mutual Benefit MFIs: Registered cooperatives and

cooperative societies. Pustikar Laghu Vyaparik

Pratisthan Bachat

For Profit MFIs: NBFCs, producers companies, lo-

cal area banks. SKS Microfinance Ltd, Krishna Bhi-

ma Samrudhhi.

The microfinance industry of India has passed the evolu-

tionary phase already, when the profit oriented micro-

finance was perceived with a negative notion. As on 31st

March, 2009, microfinance and MFIs are estimated to

have total disbursed loan of ₹160-170 billion and ₹110-

120 billion respectively3.

Key strengths of Indian MFIs can be mentioned as fol-

lows:

Strong business growth across geographic regions

Healthy asset quality

FIN TREND


33

FIN TREND

Improving earnings profile

On the other hand, forthcoming challenges for those

MFIs are:

Steady access to capital

Heavy dependence on banks and financial institu-

tions

Absence of regulatory control

Political sensitivity of interest rates

Pressure on processes and control due to aggres-

sive growth plans

Weak governance architecture

The most recent achievement for the MFI space is RBI

granting banking license to Bandhan Microfinance on

2nd April, 20144.

Key Players: Credit Rating Information Services of India

Limited (CRISIL) started grading of MFIs in India as early

as 2002. The rating agency assessed more than 140 MFIs

in India and considered as the most preferred agency in

the Indian Microfinance sector. Analysing lending mod-

el, repayment structure, rate of interest, products of all

the microfinance players, CRISIL published a list of top

50 MFIs in India3.

Key Players: Credit Rating Information Services of India

Limited (CRISIL) started grading of MFIs in India as early

as 2002. The rating agency assessed more than 140 MFIs

in India and considered as the most preferred agency in

the Indian Microfinance sector. Analysing lending mod-

el, repayment structure, rate of interest, products of all

the microfinance players, CRISIL published a list of top

50 MFIs in India3.

Top 10 Microfinance Institutions of India as on 30th Sep-

tember, 2008

Demand & Supply: Though Indian Microfinance sector

has been growing in leaps and bounds still it is far from

reaching the humongous demand of credit. Looking at

the huge population and around 42% of the mass living

below $1.25/day, the demand for micro credit in the

country is estimated to be nearly rupees 70000 crores

with an average loan size of rupees 75005 annually.

Whereas by 2011, the demand was expected to be circa

25000 crores yet only about 50% of the demand could

been met according to the study.

34


Demand: Currently in India, those who are

spending below 32 rupees in rural area and 47

rupees in urban area should be considered as

poor6, as per the recommendation by the panel

led by C Rangarajan, former governor of RBI. Ac-

cording to this, 29.5% of the Indian population i.e.

circa 363 million are Below Poverty Line. In addi-

tion to that area which consists of 26.4% of the

total urban population are living below poverty.

The counterpart has a whooping population of

260.5 million which is 39.5% of the total rural

population. A study by BBC shows that only eight

of the Indian states constitute poor population of

421 million which is greater than the poor popula-

tion of 26 poorest countries from Africa, which is

410 million. Given the size of population living

below the line, it won’t be a hyperbole that mi-

crofinance is here to stay.

Supply: According to NABARD, till 31st March,

2007, cumulatively 2.92 million SHG are linked

with 500 banks. Banks linked with SHGs are com-

prised of 10% commercial, 19% regional rural and

71% cooperative. Cumulative loan disbursed by

SHGs were around 180.4 billion rupees. Another

source of microcredit is the whole range of MFIs.

They have disbursed a loan of 70 billion rupees to

79.4 million borrowers. Their cumulative out-

standing amount of loan is nearly 33 billion ru-

pees8.

Penetration: Though Microfinance sector in India has

been growing at around 67% CAGR, still another im-

portant factor regarding the supply is the penetration.

Getting started in the southern part of India, the service

is now prevalent in most of the southern states. 52% of

FIN TREND

Name of MFI Base State Lending Model No. of Branches Loan Outstanding (mn

Rs.) No. of Borrower

Net Worth (mn

Rs.)

1 SKS Microfinance Ltd. Andhra Pradesh JLG 1413 18227 2590950 2395

2 Spandana Sphoorty Financial Ltd. Andhra Pradesh JLG, Individual 696 11987 1668807 1225

3 Share Microfin Ltd. Andhra Pradesh JLG, Individual 666 8568 1231556 1448

4 Asmitha Microfin Ltd. Andhra Pradesh JLG 363 4944 694350 475

5 SKDRDP Karnataka SHG 22 4060 612482 157

6 Bhartiya Samrudhhi Finance Ltd. Andhra Pradesh Diversified 87 3882 457668 317

7 Bandhan West Bengal JLG 385 3389 851713 435

8 Cashpor Micro Credit Uttar Pradesh JLG 247 1431 303935 93

9 Grama Vidiyal Microfinance Pvt. Ltd. Tamil Nadu JLG 126 1316 288311 231

10 Grameen Financial Services Pvt. Ltd. Karnataka JLG 62 1287 153453 127


35

FIN TREND

the total borrower pool comes from these states cover-

ing 54% of the total microfinance portfolio. Not only

southern states but also eastern states have come up

with numerous ventures. But sadly it could not develop

much in western part and quite struggling to get a foot-

hold in the northern states. The biggest challenge is still

with the north eastern states. Similar, if not poorer, story

goes with the case of SHG model. Again 52% of the clien-

tele comes from the southern part of India covering 68%

of total loan portfolio. On the other hand north-eastern,

northern and central states of India account 3%, 9%, 3%

of the client base with 2%, 8% and 2% of loan portfolio

respectively9. Considering the penetration on the basis of

gender, again southern states are way ahead than their

counterparts in India. Eastern and northern states show

dismal performance in this field. Rather central states

had out done them in penetration to households. Again

north eastern states are far behind in spreading the mi-

crofinance.

Current Scenario: Financial Inclusion, in simple terms, is

to include vast sections of disadvantaged and low income

groups to deliver financial services at affordable costs. In

India, the term was first used in April 2005 in the annual

policy statement presented by the then Governor of RBI,

Dr. Y.V. Reddy. At that time, there were a lot of concerns

that were recognized regarding banking practices that

tend to exclude rather include vast population of the

country. Issues related to Microfinance and rural credit

were examined by the Khan Committee and based on its

recommendations RBI asked the banks to make available

basic banking account and achieve more financial inclu-

sion. In Jan 2006, commercial banks were permitted by

RBI to utilize the services of Non-governmental organiza-

tions (NGOs), MFIs and other civil society organizations

36


as intermediaries for providing financial and banking

services.

Pradhan Mantri Jan Dhan Yojna

Aiming 100% Financial Inclusion in India, Prime Minister

Narendra Modi, announced on 15th August 2014, the

ambitious action plan to open two bank accounts for

every household in two phases. First phase was focused

on providing basic banking services to every household

while second phase will start in Aug 2015 which will fo-

cus on Microfinance and unorganized sector pension

scheme like swalamban.

Following schemes and programmes are pushed for-

ward by RBI -

A. Initiation of “no-frills” account – These are the

basic accounts where accountholders can perform basic

banking by cutting extra frills which are not useful for

the lower section of the society. Transaction costs will

be lower and also RBI has eased KYC (Know Your Cus-

tomer) norms for such accounts.

B. Banking service through business correspondents-

As the costs of opening brick and mortar branches are

high and not economical , The banking system have

started adopting business correspondent mechanism to

facilitate banking. This is an affordable solution for un-

banked population in villages and can people can take

the benefits of banking at their doorsteps.

Electronic Benefits Transfer (EBT) –As there have been

leakages in payment transfers through various levels of

bureaucracy, government has started the procedure of

FIN TREND


37

FIN TREND

transferring payment directly to accounts of the benefi-

ciaries. Also the cost of transferring and monitoring is

expected to be reduced significantly.

Pradhan Mantri Jan - Dhan Yojana (Accounts Opened As

on 22.07.2015)

Disclaimer: Information is based upon the data as sub-

mitted by different banks/SLBCs

(All Figures in Crores)

Special Benefits under PMJDY Scheme

a. Interest on deposit.

b. Accidental insurance cover of Rs.1.00 lac

c. No minimum balance required.

d. Life insurance cover of Rs.30,000/-

e. Easy Transfer of money across India

f. Beneficiaries of Government Schemes will get

Direct Benefit Transfer in these accounts.

g. After satisfactory operation of the account for 6

months, an overdraft facility will be permitted

h. Access to Pension, insurance products.

i. Accidental Insurance Cover, RuPay Debit Card

must be used at least once in 45 days.

j. Overdraft facility upto Rs.5000/- is available in

only one account per household, preferably lady

of the household.

Marking the Reserve Bank of India’s 80th anniversary

celebrations on 2nd April, Prime Minister Narendra

Modi pointed out that the scheme had thus far attract-

ed deposits to the tune of Rs. 14, 000 Crore. This is a

credible achievement of the government.

Future: The expected economic powerhouse of the

world is still baffled with the economic disparity among

the society. Surely, microfinance is a constructive solu-

tion to the burning problem. But Microfinance is such a

tool which needs to be used with utmost care. Where

most of the institutions really work for uplifting of the

downtrodden, there are organisations exploiting the

ignorance of the working class and turning to next gen-

eration loan sharks. Incidents across India show that

people are oppressed and even forced to commit sui-

cide. Government of India recently had taken some

steps to ameliorate the condition. To restrict the inter-

est rate, Reserve Bank of India (RBI) has put a cap of

26%. The trend of granting banking licences to the MFIs,

which is started with Bandhan, may be a potential solu-

tion. Government is going to come up with payment

banks which may mollify the problem of economic ex-

clusion. The RBI issued NBFC-MFI guidelines on 1st July,

2014. Government has started discussion with all the

stake holders and may well bring new legislation for reg-

ulating MFIs10. In addition to that, most of the MFIs fo-

cus on the rural folks, but very few of them turn up for

the urban market. Keeping in mind that it is a different

ball game, MFIs also have to address the needs of urban

people, that too with a unique model.

Finally how the Microfinance industry is going to survive

in the coming year, given the enormous potential of the

market, depends on what strategy the regulators take

and how they implement them in practice. Providing the

have-nots a platform to break of the vicious circle of

poverty is a noble idea, but it also needs proper under-

standing and training of the subject as well as market. In

addition to that the players need to come up with local-

ised & flexible strategies and tight control form the end

of regulators. But all those processes need to be practi-

cal and sustainable. The question is how long India will

38


take to achieve that state. Bringing the underprivileged

into the tax system will be a win-win situation for gov-

ernments and the citizens. To utilise the fullest potential

of the human resource India has to provide inclusion for

the destitute, at any cost.

of India (RBI) has put a cap of 26%. The trend of granting

banking licences to the MFIs, which is started with

Bandhan, may be a potential solution. Government is

going to come up with payment banks which may molli-

fy the problem of economic exclusion. The RBI issued

NBFC-MFI guidelines on 1st July, 2014. Government has

started discussion with all the stake holders and may

well bring new legislation for regulating MFIs10. In addi-

tion to that, most of the MFIs focus on the rural folks,

but very few of them turn up for the urban market.

Keeping in mind that it is a different ball game, MFIs also

have to address the needs of urban people, that too

with a unique model.

Finally how the Microfinance industry is going to survive

in the coming year, given the enormous potential of the

market, depends on what strategy the regulators take

and how they implement them in practice. Providing the

have-nots a platform to break of the vicious circle of

poverty is a noble idea, but it also needs proper under-

standing and training of the subject as well as market. In

addition to that the players need to come up with local-

ised & flexible strategies and tight control form the end

of regulators. But all those processes need to be practi-

cal and sustainable. The question is how long India will

take to achieve that state. Bringing the underprivileged

into the tax system will be a win-win situation for gov-

ernments and the citizens. To utilise the fullest potential

of the human resource India has to provide inclusion for

the destitute, at any cost.

FIN TREND

S.No No of Accounts No Of RuPay

Debit Cards Balance In Ac-

counts % of Zero Bal-

ance Accounts

Rural Urban Total

1 Public Sector

Bank 7.31 6.03 13.34 12.32 15845.79 50.6

2 Rural Regional

Bank 2.6 0.45 3.05 2.21 3543.14 49.51

3 Private Banks 0.41 0.28 0.69 0.61 1084.89 47.83

Total 10.32 6.76 17.08 15.15 20473.82 50.23


39

India signs revised DTAA with South Korea:

PM Narendra Modi has inked 7 deals including a revised

Double Tax Avoidance Agreement (DTAA) during his visit

to South Korea on May 18th 2015. The bilateral DTAA

with South Korea was first signed in 1985 and a revision

was necessary on the backdrop of growing economic co-

operation among the two nations. Some salient points in

the revised DTAA are Source based taxation of capital

gains and residence based taxation of shipping income.

The current bilateral trade is valued at $16 bill USD and is

in favour of South Korea.

Union Govt approves 21 FDI proposals worth Rs. 281

crores

21 FDI proposals were approved by Foreign Investment

Promotion Board (FIPB). Some of the biggest FDIs to be

approved now are- QuickJet proposal to increase its for-

eign stake from 62.34% to 74% worth Rs14.4 Cr in FDI

and La Renon’s proposal to invest Rs100Cr in brownfield

project.

However in a strange move the board has decided to

reject the proposal by Baring Private Equity of Mauritius

to acquire stake in ShareKhan and Human Value Devel-

opers Pvt. LTD from IDFC.

BNP Paribas to acquire Sharekhan

Major French global finances services group BNP Paribas

is all set to acquire retail brokerage firm Sharekhan for a

sum of about 2,000 crore rupees. Sharekhan is the sec-

ond largest stock broking portal in India. It has 575

branches and deals majorly in online trading and stock

marketing. The acquisition will provide a huge potential

NEWS CHRONICLE

40


customer base and improve the footprint of BNP Paribas

in India.

Finance ministry to seek cabinet nod for monetary poli-

cy panel; no veto power for RBI governor

The Governor of Reserve Bank of India could have a

casting vote but no veto on the Monetary Policy Com-

mittee, according to the proposal that the finance minis-

try and RBI have agreed upon to present to the Cabinet.

Once Cabinet approves the plan, the government will

move legislation in Parliament to amend the RBI Act to

pave the ground for the creation of the committee,

setting in motion a key reform that was in Finance Minis-

ter Arun Jaitley's February Budget. The panel is expected

to have balanced representation from the central bank

and the government, but RBI will also have a say in the

appointment of the independent nominees.

Japan’s Nikkei buys Financial Times

Asia’s largest independent business media group Nikkei

has bought Financial Times in a $1.3bn deal with Britain’s

Pearson. Financial Times carries a legacy of 127 years as

a pink newspaper and is known internationally for its

integrity and accuracy. This acquisition is the biggest ever

by a Japanese media organization. Selling off FT would

allow Pearson realize its target of expanding the educa-

tion business.

China Has Biggest One-Day Stock Crash Since 2007

China’s stocks tumbled, with the Shanghai index falling

the most since February 2007 as Investors are afraid the

Chinese government will withdraw supporting measures

from the market.

The Shanghai gauge had rebounded 16 percent from its

July 8 low as officials halted the market that erased $4

trillion from the nation’s equities and allowed more than

1,400 companies to halt trading, banned major share-

holders from selling stakes and armed a state-run financ-

ing vehicle with more than $480 billion to support the

market


41

How would you describe a typical day for a summer in-

tern at Singhi Advisors?

The day would invariably begin with a meeting with my

mentor where we would discuss previous day’s work, the

agenda for the day and how to go about it. Then the first

half of the day was spent reading reports on the sector I

was assigned and the second half typically on putting

together the key insights from those reports, things that I

wanted to include in my PPT. In between the two, how-

ever, there was a lot of camaraderie. Since it was a small

office with a team of just about 4 IB analysts, everyone

knew everyone else and we would typically take lunch

and a couple of breaks together. Towards the later part

of the day, I used to work on analysing various compa-

nies in the sector. So, each day ended with a deliverable

and an agenda for the next day. However, there were

days when I was assigned work which was required ur-

gently before, say, a meeting with a client. Those tasks

were the most challenging because they demanded a lot

in so little time. But it was fun working on them too. Lat-

er in the evening, I would reach back to my hostel and

invariably my mentor would have sent me something to

work on. This new task would take another couple of

hours and lo and behold, the day was over.

What were the expectations of the company from you?

The Director at Singhi’s New Delhi office had set the bar

high on the day of our induction by saying, “We work 9-7

on weekdays and on weekends we prefer to work from

home”.

Also, he expected me to put in a lot of time and effort

before coming out with the results, analysis etc. Main-

taining veracity was another requirement they stressed

upon. On the skills front, I think they were more than

happy if an intern came with a basic understanding of

finance, some excel and PPT skills.

What challenges did you encounter during your intern-

ship in the project(s) which you worked on? How did

you tackle them?

The first of many challenges was the long working hours

despite of the nature of the work being such that you

would love to do. Every day we were supposed to work

for around 10-12 hours. The interesting work notwith-

standing, the body actually feels the effect.

Another challenge was to keep track of all the guidelines

and instructions with which we had to work with.

Then there were the strict deadlines, which we had to

meet frequently. On top of that we had to produce quali-

ty work, which was challenging at times.

What skills did you develop as an intern at Singhi ? How

do you think these skills will be useful in your future

career ?

At Singhi, I was a part of the team which was working on

three very different projects. I got to work on two of

them and the experience taught me a lot.

SUMMER INTERNSHIP EXPERIENCE

OF

AMARDEEP KUMAR

(MBA –IB, IIFT 2014-2016)

42


For one, I got to work on a real life problem, which meant

that I was exposed to all the issues that one faces in life.

This meant keeping track of so many different things and

sometimes working on multiple things in parallel.

Secondly, I learnt how mergers take place, about the hard

work behind all the mergers, the numbers and the strate-

gies behind them and of course, the rationale behind

them.

I also got to learn how to apply the basics of finance to

evaluate a firm. We had done this in theory, in one of our

courses at IIFT, but in practice it was a different experi-

ence altogether.

These skills are definitely going to help me in my career

ahead.

What did you learn about the company - your expecta-

tions v/s your experiences?

Singhi is a very professional firm, both in terms of the ex-

pectations they have from you and the work environ-

ment. But this never stops the employees (nor interns)

from having fun while at work or from taking some time

off, if one needs it. So this was something I found pretty

amazing, especially for the industry they are in.

Would you like to share any other information/

experience/ advice with the future batches/readers of

the magazine?

There are a few things that anyone who wishes to intern

in the finance domain should be prepared with:

Basic understanding of financial concepts, especial-

ly the financial statements and the ratios

MS Excel

PPT skills

Good communication skills, as many a times one

needs to communicate with the client. Also good

communication skills are required in order to make

a good report.


43

FIN-CROSS

SOLUTION

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2

V

3

C H I C K E N

A H

T

4

A S S E T T

5

R I P P I N G

I L A

6

V

C

B

T

I

A

7

N E T H E R L A N D S

8

B R I D G E L O A N

R

N

T C T T

N

9

I M P E R I A

10

L B A N K

A T I U T

11

F I A T M O N E Y

N

C

A

S A

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S L A S H

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F U N D

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G R E E C E

P

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N C N

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44


MEET THE TEAM CREDITS

SENIOR EDITORIAL TEAM

ADHIRAJ BANDYOPADHYAY

GAYATHRI BHUVANAGIRI

MEHUL GAHRANA

SURYANARAYAN PANDA

JUNIOR EDITORIAL TEAM

NITIN AGARWAL

PAVAN ESWARAPRAGADA

PRATEEK GUPTA

VAIBHAV AGARWAL

COVER DESIGN

BY

Rupam Jhanwar

&

Vysakh P P

FEEDBACK/QUERIES

[email protected]

[email protected]

Published by students of

Indian Institute of

Foreign Trade

New Delhi | Kolkata

ADHIRAJ BANDYOPADHYAY

Mechanical Engineer from BESU, Shibpur

Design Engineer for L&T power for 3 years

Finance & Economist enthusiast

Also a die hard Orwell fan and a torrid football goalkeeper

GAYATHRI BHUVANAGIRI

Has finished B.E (Hons) from BITS Pilani, Hy-derabad Campus

Intends to specialize in Finance & Marketing and wants to pursue a career in banking in-dustry

Moreover likes to travel during her free time

MEHUL GAHRANA

A software engineer

Prior work experience with TCS Limited

Intends to specialize in finance and pursue a career in the same domain

Loves playing football and likes to read non-fiction in his spare time. He also has an avid interest in watching movies

SURYANARAYAN PANDA

A Software Engineer

Prior experience with Infosys Limited

Has deep interest in politics and economics and intends to specialize in finance

An avid reader and loves reading newspa-

pers , magazines and books

infineeti annual 2015 edition

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