FinTech in India – The Road Ahead

Over the last few years, the way payment is done in India is similar to way it occurs in global markets with a small time lag. India now represents one of the largest market opportunities for payments. With a population of over 125crs being pushed to go digital, India is poised to make the most of digital developments transforming the payments space. Continue reading “FinTech in India – The Road Ahead”


Newsletter: 4th – 10th December, 2016


RBI maintains repo rate at 6.25%; cuts FY17 GVA forecast

The Reserve Bank of India on Wednesday kept the repo rate unchanged at 6.25 per cent in its fifth bimonthly policy review. It cut FY17 GVA estimate to 7.1 per cent from 7.6 per cent earlier, following which the stock market and rupee took a beating.

Income Disclosure Scheme bags Rs 67,382 crore unaccounted money 

After final reconciliation, the revised figure of actual declarations received and taken on record was Rs 67,382 crore which had been made by 71,726 declarants,” the Finance Ministry said in a statement on IDS 2016.

India takes pride of place, crosses $300 billion FDI milestone 

India crossed the $300 billion FDI milestone between April 2000 and September 2016, firmly establishing its credentials as a safe investment destination in the world. Thirty three per cent of the FDI came through the Mauritius route.

Pakistan lifts ban on Indian cotton imports 

Pakistan has lifted an “undeclared” ban on import of ginned cotton from India, days after rejecting a consignment of 10,000 bales of cotton from India citing violation of plant quarantine rules by importers.

Eastern expressway on Delhi border to be first to adopt gantry-based tolling 

The eastern expressway on the Delhi border will be the first highway to have gantry-based tolling, which is expected to replace toll booths by the end of 2017. It is a system under which a fee will be deducted from a motorist’s prepaid account when the vehicle crosses an electronic beam stretching across the road.

Tamil Nadu CM Jayalalithaa dies, supporters grieve in streets

Former film actress and chief minister of Tamil Nadu, widely known as “Amma”, Jayalalithaa Jayaraman, died on Monday following a massive cardiac arrest, setting off an outpouring of grief among thousands of supporters gathered outside.

Jayalalithaa buried, Panneerselvam named successor to unite AIADMK

State Finance Minister O.P. Panneerselvam was sworn in as the new chief minister an hour after her death was announced. His rise to the top job was aimed at allaying fears of a power struggle in AIADMK, which Jayalalithaa had ruled with an iron hand.

NSE listing on track after resignation of CEO 

National Stock Exchange will pursue plans to raise up to $1 billion via a public listing after Chief Executive Chitra Ramkrishna’s decision to step down last week.

Demonetisation might push inflation to 14-month low in Nov: Reuters poll 

Indian inflation is expected to have cooled to a 14-month low in November after Prime Minister Narendra Modi’s surprise removal of high denomination bank notes caused an intense cash shortage and severely hurt consumption, a Reuters poll found.

Industrial production shrinks 1.9% in October 

Industrial production contracted in October, resuming its decline after marginal growth in September, suggesting more pain going ahead as the impact of note withdrawal begins to show up.


ShopClues plans Nasdaq listing next year, eyes $2 billion in sales 

Marketplace firm ShopClues is looking to garner sales worth around USD 2 billion on its platform in 2017 and plans to file for public share listing at Nasdaq by September next year.

Ibibo to carve out 14% in PayU and 52% in Tek 

India’s largest online travel agency MakeMyTrip will issue shares, worth nearly $960 million for the acquisition of rival portal ibibo Group, according to recent filings made by the Nasdaq-listed firm, on the largest-consolidation deal in the internet market.

Bharti Airtel announces changes in top level leadership, Raghunath Mandava made Africa head 

Bharti Airtel, third-largest phone company in the world by subscriber base, has announced top level leadership changes in its global operations, elevating Raghunath Mandava as its Africa head and moving the unit’s current head Christian Defaria to the Netherlands.

Britain fines Pfizer record $107 mn for huge drug price hike 

Britain’s competition watchdog, Competition and Markets Authority (CMA) has fined Pfizer a record 84.2 million pounds ($107 million) for its role in ramping up the cost of an epilepsy drug by as much as 2,600 percent and Flynn Pharma 5.2 million pounds for overcharging for phenytoin sodium capsules, following a dramatic price hike in 2012.

Samsung prevails over Apple in $399 million patent appeal 

The US Supreme Court on Tuesday overturned a $399 million patent infringement penalty imposed on Samsung for copying Apple’s iPhone design, in a case watched for its implications for technology innovation.

Lego replaces long-time CEO with first foreign boss in organisational shake-up 

Danish toymaker Lego is to appoint its first foreign CEO, Briton Bali Padda, currently chief operations officer, and give its family owners a bigger role in developing the Lego brand under an organisational shake-up that will see incumbent Jorgen Vig Knudstorp step down by the end of the year.

Microsoft gains EU approval for $26 billion buy of LinkedIn 

Microsoft won EU antitrust approval on Tuesday for its $26 billion bid for professional social network LinkedIn, its largest ever acquisition, after agreeing to a series of modest concessions.

Amazon introduces first physical grocery store Inc’s 1,800-square-foot convenience store, Amazon Go, in Seattle uses sensors to detect what shoppers have picked off the shelf and bills it to their Amazon account if they don’t put it back. Currently available only for its employees, it is expected to be publicly available early next year.

ICICI Bank to raise funds via Japanese bonds, first of its kind 

India’s largest private sector lender ICICI Bank is planning to raise Japanese Yen 10 billion by selling a new series of bonds known as Pro-Bonds, first of its kind in India.

Microsoft Accelerator joins hands with Wipro 

Microsoft Accelerator has announced collaboration with Wipro to create go-to-market opportunities for startups under its wing, a development that comes as its ninth cohort is set to graduate. The partnership is part of Microsoft Accelerator’s CoInnovate programme, which it also joined hands with TCS in June.

Rupert Murdoch’s 21st Century Fox to buy all of Europe’s Sky 

Sky said on Friday that Murdoch’s entertainment conglomerate 21st Century Fox has a preliminary deal to buy the rest of it for 10.75 pounds ($13.60) per share. Fox already owns just over 39 percent of Sky. That values the entire broadcaster at 18.5 billion pounds.

Coca-Cola says CEO Muhtar Kent to step down in May 

Coca-Cola Co said Muhtar Kent would step aside as chief executive on May 1 after about nine years at the helm, and be replaced by Chief Operating Officer James Quincey.

Paytm founder Vijay Shekhar Sharma raises Rs 325 crore by selling 1% stake 

Digital payments and commerce platform Paytm’s founder and CEO Vijay Shekhar Sharma has sold 1% of his holding in One97 Communications to raise about Rs 325 crore. This money will be pumped into the group’s proposed payments bank. Sharma has sold the stake to one of the shareholders of One97 Communications, the company that runs Paytm.

Fugitive Indian tycoon Mallya cries foul over Twitter hack

Fugitive Indian businessman Vijay Mallya said on Friday that his Twitter account had been penetrated by a hacking group called Legion, which posted links to what it alleged were details of Mallya’s bank accounts, offshore investments and luxury cars.

Nikkei rises to highest in a year on Wall St strength, weaker yen

Japanese stocks rose to their highest level in a year on Friday morning, supported by Wall Street gains and solid buying of exporters on the back of a weaker yen.



India, China will help maintain Asia’s growth rate in 2017: Asian Development Bank 

The largest economies of Asia – India and China – will help maintain the growth rate of the region at 5.7 per cent in 2016 and 2017, an Asian Development Bank (ADB) report said.

European Central Bank adds half a trillion euros in stimulus

The European Central Bank is adding half a trillion euros ($579 billion) in stimulus to the eurozone economy as it hopes to support growth as Europe heads into what could be a tumultuous election year.

EU fines HSBC, JPMorgan, Credit Agricole $520 million over market rigging 

The European Commission slapped fines totalling 485 million euros (USD 520 million) on banks HSBC, JP Morgan and Credit Agricole for rigging the Euribor interest rate benchmark used for a wide range of financial instruments and participating in a cartel in euro interest rate derivatives.

World Bank cancels $100 million loan for Pakistan 

The World Bank has cancelled a USD 100 million loan to Pakistan for a natural gas efficiency project due to no progress in achieving the development objectives and a lack of interest on the part of the gas distribution company.

Donald Trump is Time magazine’s Person of the Year 2016 

US President-elect Donald Trump was today named by Time magazine as its Person of the Year 2016 for his stunning upset victory in the presidential election.

Pakistan International Airlines plane with 47 on board crashes

A Pakistan International Airlines plane with 47 people on board has crashed near a hilly area near the garrison town of Abbottabad while it was on its way to the capital, media reports said.

Death toll from Indonesian quake climbs to 97 

A strong undersea earthquake rocked Indonesia’s Aceh province early on Wednesday, killing nearly 100 people and sparking a frantic rescue effort in the rubble of dozens of collapsed and damaged buildings.

Bernard Cazeneuve named French PM after Valls quits 

French Interior Minister Bernard Cazeneuve was appointed as the new prime minister today after Manuel Valls resigned to seek the Socialist nomination in the presidential election, the presidency said.

New Zealand prime minister John Key resigns 

Popular New Zealand Prime Minister John Key announced his shock resignation Monday, saying he was never a career politician and it was the right time to go after eight years in the job.

Italy’s Renzi quits after crushing referendum defeat 

Italian Prime Minister Matteo Renzi announced his resignation on Monday, hours after learning he had suffered a crushing defeat in a referendum on constitutional reform.

South Korea Park’s presidential powers suspended; PM takes over as acting leader

South Korean President Park Geun-hye’s powers were suspended after parliament voted to impeach her. Prime Minister Hwang Kyo-ahn took over as acting president and told a cabinet meeting he would do his best to ensure stable government continued to function.

Australia economy slams into reverse, hopes to dodge recession

Australia’s economy shrank last quarter as businesses, consumers and government all cut back on spending, a shock result that threatens both the first recession in a quarter of a century and the country’s vaunted triple-A credit rating.

Greek unemployment eases to 23.1 percent in September, eurozone’s highest

Greece’s jobless rate dropped to 23.1 percent in September from a downwardly revised 23.3 percent in the previous month as the economy expanded in the third quarter. The number of officially unemployed reached 1.11 million people.

Monetary Policy Committee

What is a monetary policy committee?

The Monetary Policy Committee (MPC) is a committee of the central bank — Reserve Bank of India, headed by its Governor. It was set up by amending the RBI Act after the government and RBI agreed to task RBI with the responsibility for price stability and inflation targeting. The RBI and the government signed the Monetary Policy Framework Agreement on February 20, 2015.

What is the committee’s mandate?

The MPC is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the target level. The government may, if it considers necessary, convey its views, in writing, to the MPC from time to time. RBI is mandated to furnish necessary information to the MPC to facilitate their decision making.

How is this committee structured?

According to the government, the MPC will have six members. Three each will be nominated by the government and the RBI and each member will have one vote. While the majority voice of the committee will be final in deciding the interest rates and the RBI will have to accept the verdict, the governor gets a casting vote in case of tie.

How is it different from current practice followed by the RBI?

Currently, a technical advisory committee constituted by the RBI, which consists central bank’s top brass including the deputy governor and the governor and external advisors, give their opinion and suggestions on what the RBI should do. But the governor’s word is final on the rates and the advice of the technical advisors is not binding on the RBI

Who are the current members?

RBI Appointed:

  • Urjit Patel, RBI Governor
  • R Gandhi, Deputy Governor, RBI
  • Michael Patra, Executive Director, Monetary Policy, RBI

Government Appointed:

  • Chetan Ghate, Professor at Indian Statistical Institute,
  • Pami Dua, Director at Delhi School of Economics
  • Ravindra Dholakia, Professor at IIM-Ahmedabad

 Further Reading:

Profiles of Govt appointed members

First MPC minutes of meeting

Impact of US Fed Rate Hike on India

IMPACT on INDIA (Expert opinions)

Indranil Sengupta, India chief economist, Bank of America Merrill Lynch

“We hold the contrarian view that Fed tightening is a long-run positive, although EMs could well see one round of sell off in the coming months. We expect softer oil prices and sufficient forex reserves to keep Fragile Five fears at bay for India in the event of a sell-off, although India’s BoP indicators still trail other BRICs. Fed tapering is also pulling down oil prices below US$100/bbl from US$118/bbl when INR crossed Rs68/USD last year,”

Dipan Mehta, Member, BSE and NSE

FII flows are driven by interest rates movement in the US and other developed economies. Also, asset price movements in those economies also impact global flows.

No doubt, to that extent India is vulnerable and if there is a selloff in global equities or emerging markets, then we will not be spared. “However, the decline may be less than other markets. Nonetheless, there will be a negative effect. India cannot escape a ‘risk off’ trade. Since the new government formation, international events are having a less of an impact as investors focus on government steps to revive the economy and the RBI moves based on macro data such as inflation, GDP growth rates, IIP etc.,” he added.

How would India benefit?

Sutapa Roy, Research Analyst-Economy at Microsec Capital Ltd.

“Now for India, the economic situation is much better than it was 2-3 quarters ago. India has taken some of the major steps compared to its EM peers to control currency movement and increase foreign exchange reserves. Only in recent past the Indian market hit an all-time high. So corrections will definitely be there, but not as much as we saw in 2013 as fundamentals are better now,”

Roy is of the view that India has already outperformed the other markets in the recent past and after corrections, it will definitely attract some fresh capital. Although it will take the US Fed some time to shift from its zero interest rate policy, but if they do that, there may be a kneejerk reaction wherein some hot money may try to get out.

Vikram Kotak, CEO & MD, Asset & Wealth Management, Fortune Financial Services

“On a totality basis, India is possibly the only market in the emerging market basket, where a 15 per cent to 20 per cent earnings growth is reasonable to expect and the economy recovery looks robust with GDP move from 5 per cent to 7.5 per cent in three to five years’ time being almost a surety. There are a lot of positives for India right now than the negatives. However, you might see some healthy corrections coming in when the markets start consolidating again,”

The overall trend of the market looks quite positive and given the fact that the markets have run up in the last three to four months, a correction is indeed healthy as it will give opportunity for fresh investments.

Hemang Jani, Senior Vice President, Sharekhan

 “The US FOMC meet could provide the much-needed correction and about 5 per cent to 10 per cent correction at the index level in any market is part of the bull market story. I am not really perturbed by this. In fact, this would be a great opportunity for a large number of retail investors who have not been able to participate to the extent they would have wished. So it is a great welcome sign for the investors.”

Payment Banks


New players in the banking sector that can use technology in order to achieve financial inclusion in a cost effective manner. These banks are expected to reach customers mainly through their mobile phones rather than traditional bank branches.

It could be uneconomical for traditional banks to open branches in every village, so RBI is giving out differentiated licenses to Payment banks helps these small financial institutions to acquire customers at low costs and increase the financial inclusion.

Whom are they targeted at?

Rural markets, migrant laborers, low-income households and small businesses.

Inspired by the success story of M-Pesa:

Mobile phones could be an easiest way to reach masses as proved hugely in other developing countries like Kenya, where Vodafone’s M-Pesa has been very successful. Two out of three adults use M-Pesa in Kenya to store money, make purchases and transfer funds to friends and relatives.

Services offered by Payment banks:

  • CASA accounts with limit of deposits up to Rs. 1 Lakh
  • Issuance of debit cards usable on ATM networks of all banks.
  • Transfers and remittances through a mobile phone
  • Automatic payments of bills, and purchases in cashless, cheque less transactions through a phone
  • Offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’
  • They can offer forex services at charges lower than banks.

Apart from the services mentioned above, Payment banks can also play a crucial role in implementing the government’s Direct Benefit Transfer Scheme (DBTS), where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

Basic services not offered by Payment banks:

  • Can’t offer loans
  • Can’t issue credit cards

Which basically mean that these banks can’t earn revenue in the form of net interests which form a majority of a traditional bank’s income. This also means that Payment banks have to operate at really low operational costs for their business model to be viable.



  • Payments banks have been mandated to hold 75% of their liabilities in SLR securities
  • Maximum 25% of it at saving deposits and fixed term liabilities of other commercial banks

Since majority of their balances are held with G-Secs which will yield very low interests, payment banks will transfer these low interests to their customers.

Revenue Model:

Because of the many restrictions imposed by RBI it is clear that the only revenue streams available are fee income from remittances, merchant fees for digital payments. Whether this revenue model is viable is something that has to be seen. Since the poor would be charged fee on every transaction would they find these banks attractive? is a question that needs an answer.

SBI chairperson Arundhati Bhattacharya said, “Neither payments banks nor small finance banks seem to have as yet devised a business model that can be said as viable.”


Although 41 entities applied for a Payment bank license, RBI granted in-principle approvals to 11 entities for setting up payments banks (PBs) in August 2015.

Aditya Birla Nuvo Ltd, Airtel M Commerce Services Ltd, Cholamandalam Distribution Services Ltd, Department of Posts, Fino PayTech Ltd, National Securities Depository Ltd, Reliance Industries Ltd, Dilip Shantilal Shanghvi, Vijay Shekhar Sharma, Tech Mahindra Ltd, Vodafone m-pesa Ltd are the entities which received approvals to their applied licenses.

Out of these Tech Mahindra, Dilip Shangvi (Sun Pharmaceuticals) and Cholamandalam Investment are the ones who pulled out.

Players who could win the race:

Since it’s a low margin and high volume business, Raghuram Rajan feels that the payments bank would work well for those who already have a base of operations and many contact points. Mobile companies are probably in the best position to get the business model right because of their reach. Another entity that is expected to succeed is India Post Payments Bank (IPPB) which is being wooed by commercial banks, insurance firms and asset management firms for equity partnerships and other business alliances. IPPB has a network of at least 150,000 branches; close to 140,000 of them are in rural India. This is its great strength.


RBI’s Measures Towards Masala Bonds


RBI announced that banks can now raise capital through rupee-denominated overseas bonds, or masala bonds. The analogous bonds of China are called “Dim sum” while those of Japan are called “Samurai” bonds. Indian companies are allowed to raise a maximum of $750 million per year through masala bonds with a minimum maturity of 5 years.

Pros of Masala bonds:

  • Issuers carry less risk compared to the investors
  • Since these are rupee denominated, they will be shielded against the risk of foreign currency fluctuations.
  • They create a demand for rupee and would support towards the stability of the rupee

Current state of Masala bonds:

Masala bond issues are in a very nascent stage in India and only have been issued by three big names such as HDFC ltd., NTPC Ltd., and Adani Transmission. The details are as below:


Currently costlier compared to the domestic issues:

The issuers have high domestic ratings but their international ratings are only limited to the country’s sovereign rating i.e. BBB-, a shade above junk. The issuers, though big names, raised money at a cost higher than the companies would have raised in the domestic market due to the fact that the issuers had to bear the withholding tax on top of the initial coupon as the foreign investors refused to bear the tax component. Masala bonds proved to be a costlier source of raising funds for these companies as opposed to the normal. Companies might not choose to raise funds through this method if this route continues to be expensive.

Opinions of industry experts:

According to the head of treasury of a foreign bank, “The reason for going in to this market is purely the novelty factor for now. Otherwise, it makes very little sense for the companies to offer the withholding tax component every time they issue a bond. Demand for these bonds will take a long time to get established.”

Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch said, “It will take time to make Masala bonds acceptable to international investors. Demand for the bonds of lower rated companies will be quite muted. Foreigners ask far more risk premium than Indian investors who are familiar with the Indian names”.

Public sector companies might increase masala bond issuances:

During his November 2015 visit to the UK, PM Narendra Modi had promised to list $1-billion equivalent of masala bonds from government power and utility companies.

Impact of such a move:

PSUs such as NTPC, PFC, REC issue domestic bonds in the range of Rs 20-30,000 crore each every year. If masala bonds eat up a portion of these, the demand for their domestic issues will shoot up even more. Thus the interest rates on the domestic issues might come down making the domestic issues cheaper for the companies. This, perhaps, will offset some of the cost associated with the overseas bonds


RBI’s Measures Towards Corporate Bonds


With the growing NPAs, apart from certain measures like Strategic Debt Restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), and asking banks to increase provision towards bad loans, RBI has also taken following steps to encourage big Corporates to raise money through the issuance of bonds and decrease their reliance on banks for borrowing money.

Increasing the Partial Credit Enhancement:

The central bank has now allowed banks to increase the Partial Credit Enhancement (PCE) they provide for corporate bonds to 50% from 20% now thus providing an additional source of assurance, that the bond issuer would honor the obligation towards the bond buyer.


  • This will enhance the credit rating of the bonds issued by the corporates
  • Would help lower-rated companies to access the bond market as their bond ratings would be improved.
  • As the risks associated with the bonds will come down, the interest rates in the bond markets will be lowered and will in turn allow the corporates to raise money at cheaper rates

Accepting corporate bonds as collateral at LAF:

RBI also announced that it’ll be accepting corporate bonds as collateral at its Liquidity Adjustment Facility (LAF) operations.


  • This will make corporate bonds more attractive to banks, as banks can use corporate bonds as security apart from the G-Secs to borrow from the RBI

Facilitate electronics trading:

RBI announced that it’ll facilitate direct trading of corporate bonds on an electronic platform compared to the present Over The Counter (OTC) market for Indian and foreign portfolio investors (FPIs).


  • This will increase transparency in the bond market
  • This will allow easy access into the bond market for the foreign investors who usually bring in a lot of money and will in turn enhance liquidity

Permit brokers as market makers:

In addition to banks, primary dealers, insurance companies that are currently allowed as market makers, registered brokers will also be authorized as market makers for the corporate bonds


  • This move will make corporate bonds easily accessible to the investors and thus boost turnover in the secondary market.

Encouraging Masala bonds:

RBI announced that banks can now raise capital through rupee-denominated overseas bonds, or masala bonds. Although HDFC Ltd. raised Rs.3000 Cr though this method others companies such as NTPC Ltd., and Adani Transmission have followed trend. Indian companies are allowed to raise a maximum of $750 million per year through masala bonds with a minimum maturity of 5 years


  • Issuers carry less risk compared to the investors
  • Since these are rupee denominated, they will be shielded against the risk of foreign currency fluctuations.
  • They create a demand for rupee and would support towards the stability of the rupee



Deutsche Bank Crisis

Deutsche Bank Historical stock prices in EUR (€)


Deutsche Bank’s stock price has nearly halved since the beginning of 2015. The stock was trading at €12.30 on Nov 4, 2016. The company also posted a negative EPS of (€ 5.06) for the year 2015. The company’s S&P’s rating downgraded to ‘BBB+’ in 2015 from ‘A’ in 2014 and Fitch ratings downgraded from ‘A+’ to ‘A-‘. The bank was forced to suspend dividend payouts in 2015 to allow it to build up its cash reserves.

Problems with Deutsche Bank:

Negative interest rates:

Deutsche and other European banks have been struggling with negative interest rates, which are squeezing profits. Eurozone credit growth is still limp despite the ECB’s negative interest rate policy.

Huge exposure to the derivatives market:

Deutsche has the world’s largest so-called derivatives book, its portfolio of financial contracts based on the value of other assets in the world. It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of 2015. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements. Those hedges can fail, especially when, as was the case back in 2008, the likes of Lehman and AIG either failed or looked like they would.

Net loss of €6 billion for Q3 2015:

The company posted a huge loss of €6 billion for Q3 2015 which was mainly driven by billions of dollars in write-downs of the value of investment-banking and other assets. The company had announced plans to lay off 35,000 people shortly after announcing the quarterly loss and also announced plans to reduce its number of branches worldwide.

Fine of $14 Billion imposed by US regulators:

As a punishment for its role in the 2008 crisis, the Obama administration has sought a series of stiff fines against banks that allegedly sold bundles of low-quality mortgages without fully informing customers of the associated risk. Deutsche Bank faces one of the biggest fines and is expected to negotiate with the US regulators to settle the fine to $5.4 billion. In November 2015, the bank agreed to pay a $258 million fine for violating US sanctions laws.

Failed the US regulatory “Stress Tests”:

European and American regulators have performed a series of “stress tests” to try to predict how banks will fare in the event of another economic downturn. If banks fail these tests, they’re required to beef up their reserves. The US fed failed Deutsche in this year’s stress tests, for the second year in a row, saying it had “substantial” weaknesses in its capital planning. Deutsche Bank has been one of the worst performers in these tests, and last year it was forced to suspend dividend payouts to shareholders to allow it to build up its cash reserves.

Problems to the International Economy:


The International Monetary Fund warned in a late June report that since the bank is heavily intertwined with the rest of the global financial system it appears to be “the most important net contributor to systemic risks” among Global Systemically Important Banks (GSIBs), followed by HSBC Holdings Plc and Credit Suisse Group AG. Since Deutsche bank does business with many Banks, NBFCs, Mutual funds and Insurance companies around the world a bankruptcy of such a large bank would definitely trigger a financial crisis as many people would lose their jobs and their hard earned savings.

Regulatory updates:

No bail-out this time, but a bail-in is possible:

Ever since the 2008 financial crisis, policymakers in both the US and Europe have been trying to change the rules to make another bailout unlikely. European rules prohibit national governments from providing a no-strings-attached bailout. They can allow for a “bail-in” where the creditors and depositors take a loss on their holdings to rescue the financial institution instead of the government using the taxpayers’ money to save the bank. Angela Merkel has vowed not to use German taxpayer money to rescue Deutsche Bank.

Is Deutsche Bank on a verge of a crisis?

A positive Q3 2016 for Deutsche Bank:

Third-quarter net income was €278 million, beating analysts’ average expectations for a net loss of around €610 million. The bank’s restructuring and litigation costs for the third quarter were lower than analysts had expected, in part because employee compensation dropped. Revenue from trading, especially in credit and interest-rate products, was stronger than a year earlier, offsetting weakness in equities trading within the lender’s important global markets business.

The German lender earmarked an additional €501 million in the third quarter for litigation costs (costs for legal expenses). Deutsche Bank’s common equity Tier 1 capital ratio, a measure of financial strength, increased to 11.1% from 10.8% in the second quarter. The lender is working to boost that ratio to at least 12.5% by 2018. Deutsche Bank ended the third quarter with €200 billion of liquidity reserves. Analysts say that the liquidity position is still strong, and not a central concern.

The lender has ramped up cost-cutting plans, and is still planning to dispose of its burdensome German retail-banking unit called Postbank. It also agreed to sell its U.K. insurance unit Abbey Life Assurance Co., a move which will boost the bank’s Tier 1 capital ratio by about 10 basis points.

2015 marked the start of a multiyear cost-cutting and turnaround plan under then-new CEO Mr. John Cryan (Effective Jul 1, 2015). The group has undergone restructuring of its business divisions.



SBI Merger

Government earlier this year cleared the proposal to merge SBI with its five associate banks — SBBJ, State Bank of Travancore, State Bank of Patiala, State Bank of Hyderabad — and the new Bharatiya Mahila Bank (BMB). This will add an additional Rs 8 lakh crore to SBIs assets making it a banking behemoth with total assets of Rs 30 lakh crore, an increase of about 36 per cent. 

The board of the directors approved the August 18 scheme of acquisition without any modification. Upon approval, RBI submits the scheme of acquisition as approved by it to the government of India for approval and issue of order of Acquisition under section 35 of the SBI Act 1955. 

SBI will give 28 of its shares for every 10 shares held of State Bank of Bikaner and Jaipur. It will give 22 of its shares for every 10 shares held of State Bank of Mysore. The lender will give 22 of its own shares for every 10 shares held of State Bank of Travancore. SBI will give 4,42,31,510 shares with face value of Re. 1 for every 100 crore equity shares of Bhartiya Mahila Bank. 

SBI Merger.jpg

Impact of merger

The combined entity will have 22,500 branches and 58,000 ATMs serving over 50 crore customers. . SBI has now close to 16,500 branches, including 191 foreign offices spread across 36 countries. SBI first merged State Bank of Saurashtra with itself in 2008. Two years later, State Bank of Indore was merged. These mergers were supposed to pay the way for an accelerated phase of consolidation involving SBI and its associates, but this has not happened. The bigger hope is that a fully amalgamated SBI will set the trend for all bank consolidation.

The merger will see SBI’s ranking approve in the Bloomberg’s largest bank by asset ranking. It may well break through the 50-mark in the ranking. SBI’s asset base will now be five times larger than the second-largest Indian bank, ICICI Bank. Post-merger the government’s stake in the bank will comes down to a little over 59.70 per cent from around 61.30 per cent as of the June quarter. 

SBI’s reach and network will multiply, efficiency will likely increase with the rationalisation of branches, there will be a common treasury pooling and there will be proper deployment of skilled resources. An enhanced scale of operations and the rationalisation of common costs will result in big savings. 


But harnessing these post-merger benefits will not be an easy task. For one, the associate banks will not come into the SBI fold with clean balance sheets; the five banks have a higher share of restructured loans than SBI, while the levels of their NPAs are comparable. There will also be common borrowers, which will bring with it its own set of problems. The books of the associates have not been subjected to the same scrutiny as SBI’s and analysts are worried that they may throw up some skeletons. SBI, itself, has declared a bad loan watch list of Rs.31,000 crore.

One of the biggest challenges for the new entity will relate to human resources issues. The problem of integrating the staff is likely to be cumbersome. Pension liabilities will also surge.

Moreover, SBI associate banks cater to specific regions, as their nomenclature indicates. Such specialisation brings with it unique insights into local customs. SBI has had a tacit agreement not to compete with its associate banks aggressively in what were seen to be the latter’s ‘operation areas’. A merger resulting in a ‘super’ SBI may not pay heed to local sensibilities that the associates have provided.



GST (Goods and Services Tax) will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses. Under GST, manufacturers will get credits for all taxes paid earlier in the goods/services chain, thus incentivising firms to source inputs from other registered dealers. This could bring in additional revenues to the government as the unorganized sector, which is not part of the value chain, would be drawn into the tax net.

To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Thus, the new tax regime is seen as less intrusive, more self-policing, and hence more effective way of reducing corruption and improving tax compliance. GST would be levied in 3 different forms.

Forms of GST


The third form would be Integrated GST (IGST) which would be levied by the center, consisting of CGST plus SGST on all inter-state transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.


  1. Taxation of inter-state services and their method of taxation
  2. Difficulties in defining Place of supply, place of delivery
  3. Integration of certain Central and State taxes (Various Cess, Electricity duty etc.)
  4. Disputes even with regard to classification of goods
  5. Jurisdictional Issues with regard to registration and Assessments

Impact on Economy:

In the first place, the macroeconomic impact of a change to the introduction of the GST is significant in terms of growth effects, price effects, current account effects and the effect on the budget balance.

Secondly, in a highly developed open economy with a high and growing service sector, a change in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of revenue.

Implementation of GST could facilitate a much needed correction in fiscal deficit. In the base case, it is believed that partial GST – one that excludes petroleum goods is most likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the downside, a complete failure to implement GST would result in the fiscal deficit being higher at around 4-4.2% in fiscal 2016-2017. A National Council of Applied Economic Research study suggested that GST could boost India’s GPP growth by 0.9-1.7 per cent.


Strategists warn it could disrupt consumption and growth, at least in the short-term. However, determining the exact economic impact hinges on the GST tax rate. According to a report by HSBC, in terms of growth impact on [GST] implementation, the near-term could be messy, with adjustment costs for the private sector grappling with inter-sector implications, and the central government trying to compensate states for revenue loss. Over the medium-term however, the outlook is positive.

Implementation of the GST in the near-term could bring some upturn in inflation; however, the impact should be transitory, according to a Morgan Stanley report.

HSBC believes the GST will lead to higher foreign direct investment inflows and a narrow current account deficit-factors that should help the INR eventually outperform other Asian and emerging market currencies.