Celebrating the start of the new decade with kids at the SRM Academy for the Blind

At Credy, we had a company outing due for a while. Instead of a more traditional trip outing, recently we decided to spend New Year at Shree Ramana Maharishi Academy for Blind in Bangalore. We wanted to give whatever little happiness we could to these kids at the facility on the occasion of New Year.

(SRMAB) accommodates around 150 differently-abled kids who are partially, fully blind kids and kids with multiple disabilities. They provide free education, food, and accommodation for these kids. 

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Go green!

The first activity we had on the premises was repotting the plants. The Academy has a nursery with around 200 pots with different kinds of plants. Our job was to fill the pots with a fresh batch of soil. We divided into groups where the first group managed the mixing of soil and fertilizers, the second group found the pots that had to be filled, the third group did the repotting and the last team reorganised the repotted plants. We completed the task in less than two hours and thoroughly enjoyed doing the task as a team. 

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These pots later are used by the kids to sell it to different companies nearby and use the money for their expenses.

Time for a delightful lunch!

The second activity we had was serving food to the kids on the premises. The bell was rung at 12:45 PM and the kids slowly came out of their rooms and assembled in the dining hall with the plates in their hands. All the kids sat obediently in rows and said a prayer before the food was served. We had one team serving tomato rice, the other sweets, and then one of them was serving rice, rasam and sambar and the other chutney and buttermilk. We felt immense joy in serving food to the kids and they politely communicated what food they liked and what they didn’t.

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Post serving lunch to the kids at the facility, we had our lunch there as one among them. 

Let’s make the world litter-free, one step at a time!

The third activity was cleaning of the sports room and the Braille library. We divided into 2 teams and one team took care of cleaning the sports room where we were supposed to re-arrange the room which had a lot of equipment, clothes, shoes, and trophies. The other team cleaned the library by rearranging the books in the order it was meant to be.

The final activity was litter picking. We again divided into 3 teams to cover the entire premises. This activity helped us realize how much we litter and its consequences. We found layers and layers of plastics all around the premises. We picked 3 full bags of plastic around the campus – and used the opportunity to educate the kids on the importance of not littering and its consequences.

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What lights up a kid’s face? Of course, chocolates!

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We wrapped up the day by distributing chocolates to the kids. The gentle smiles on their faces made us realize how even small gestures can make anyone happy.

It made our day all the more memorable when we saw how happy the kids were and the way they welcomed us with warm gestures. We were glad to start a New Year and a new decade on a positive note.

Better Asset Liability Management by NBFCs – Need of the hour

NBFCs (Non Banking Financial Company) play a crucial role in enabling credit delivery to the last mile. NBFCs typically specialize based on either the demographic they serve, need they finance or the product they offer. NBFCs strive to close the large missing middle between creditworthy customers and the ones that banks are actually able to serve. The NBFC sector is growing fast – as per RBI data, retail loans of NBFCs grew at a robust 46.2% during 2017-18 on top of a growth of 21.6% during 2016-17. In parallel, as RBI has stepped up NBFC cleanup more aggressively, the number of NBFCs has reduced each year over last 5 years – meaning the pie is getting bigger but the eaters may remain the same. As NBFCs become larger and more critical components of Indian financial system, their risks need to be evaluated more closely. A critical piece of NBFC business that has not been given the importance it deserves is its Asset Liability Management or ALM.

 

What is Asset Liability Management or ALM?

NBFCs typically borrow from banks or debt markets (e.g. bonds or commercial papers which Mutual Funds buy. These mutual funds are funded by large corporates or even individuals who are seeking more returns than FDs or government bonds). Imagine an NBFC which borrows by issuing a 3 month commercial paper to a mutual fund house carrying 8% annualized interest. It lends to end customers at say 17% and incurs cost of say 4% in doing that. Looks like a good business model right? Not necessarily! It depends on the duration of end customer loans the the NBFC is financing. Assume the NBFC is lending to its end customers for 3 year duration. So if it raises Rs 100 cr from the debt markets at 8% for 3 months, it has to repay Rs 102 cr at the end of 3 months (the “Liability”). But soon after raising the Rs 100 cr, it would have lent it out to end customers for a 3 year duration (these loans are “Assets” for them, which will yield interest over 3 years). So, on the Liability side you have Rs 100 cr principal due to be paid in 3 months, but the Asset will return the principal only over 3 years. How do you repay the Liability in the next 3 months? This is an example of Asset Liability mismatch. If not managed well, the NBFC may default on its Liability. And if the NBFC is large, it may cause the Mutual Fund investors to panic and move the money out, making it harder for other NBFCs to borrow, and hence making them default on their obligations as well, due to a systemic risk aversion & liquidity crunch. In words of RBI,

“The importance of liquidity transcends individual institutions, as liquidity shortfall in one institution can have repercussions on the entire system.”

This problem is very real and was at the core of the recent IL&FS crisis. IL&FS borrowed large amounts of money which had to be repaid within 1 year (Liability) but it used that money to finance infrastructure projects of long duration of more than 5 years (Asset). It defaulted on some of the Liabilities which triggered a market panic.

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One pillar of ALM is calculating the mismatches between liabilities becoming due and expected inflows from assets over different time buckets. E.g. 7 days, 14 days, 30, 60, 90, 180, 270, 365 days etc. 30 day mismatch would represent the mismatch between repayments due to lenders over next 30 days vs the repayments expected from end customers over next 30 days. The idea is to calculate this for each time bucket and ensure caps on the mismatches at each time bucket as well as ensure a cap over the cumulative mismatch.

RBI Guidelines

RBI in it’s recent notification on 24th May 2019. came up with draft guidelines for ALM management by NBFCs. Here are the salient points from the directions:

1. RBI has recommended to measure the ALM mismatches at more granular time buckets. First bucket starts from 1-7 days. Measuring at more granular time buckets helps identify liquidity issues early.

2. There should be a cap on the cumulative negative mismatch in 1-7 day bucket (10% cap), 8-14 days (10% cap), and 15-30 days (20% cap). This means for e.g. that in next 1-7 days, if Rs 100 cr is due to be repaid, then at least Rs 90 cr should be expected in terms of inflows or equity capital that the NBFC has.

3. Introduction of Liquidity Coverage Ratio (LCR) – applicable NBFCs should have high quality liquid assets which cover requirements for next 30 days by 2024 (progressively increasing requirements from 2020 to 2024).

4. Use of more comprehensive metrics for capturing the liquidity situation. This is along the classic adage “If you can’t measure something, you cannot improve it”

While the above guidelines are for NBFCs with asset size more than Rs 100 cr, systemically important Core Investment Companies and all deposit taking NBFCs, we believe that all NBFCs must follow them. Adopting these would mean keeping more cash at hand and may mean little higher borrowing costs as longer term debt is costlier. Hence these may affect profitability negatively, but it makes the lending businesses more resilient to market liquidity changes.

In our view, the RBI guidelines are prudent and necessary to ensure stability of the financial system. In fact, these is only the starting point – more closer scrutiny and more frequent recommendations from RBI on the same are needed.

How we manage ALM at Credy

The core of the ALM problem is a large mismatch between Asset and Liability tenors. The sustainable way to solve it is to have funding source that matches in duration with your asset duration, and a little higher if possible. Even before the recent crisis we have been very clear that using short term funding to fund longer terms loan is a risk that cannot be hedged. And the best way to deal with risks that cannot be hedged is to not take them. Here are some salient points of ALM at Credy,

  1. We finance end customer loans for average duration of 9-10 months and have made sure our funding is always matched with end customer loans or higher than that. As mentioned above, this prudence may come at the cost of slightly modest profit margins, but it ensures the a lender does not go belly up, compromising the trust of all stakeholders, including the end customers.
  2. In addition, we have internal guidelines on leverage ratio which ensures that we have sufficient equity at all times, over and above the positive mismatch in all ALM tenor buckets.
  3. Heavy use of data and automation in treasury to maximize  return on capital deployment and save cost leakage via PnL bleed on idle assets. At any given point capital should be optimally deployed – either generating returns or providing the right amount of buffer against risks taken.

As the demand for credit keeps increasing, NBFCs who manage risks and ALM well stand to gain significantly. What are your thoughts on the RBI ALM guidelines? Please leave comments, we will be happy to discuss.

How to manage educational fees and expenses?

Dear parent, 

Wishing you a great start to 2019! As admissions season is round the corner, a key question will be at the top of your mind – how do I allocate my finances to make sure school fees are paid for my child for coming academic year? This is a question which most families in India deal with every year – be it at pre-primary, school, or college level! Education today has become a fundamental need and right, rather than a luxury. Compromise on your child’s education, and you would have compromised on their future. 
In this article, we will share a few suggestions on what you can do as a parent to manage finances better in order to afford high quality education for your child. We will also give you advise on tips around taking education loans and how you can benefit out of it.
Take Stock
Figure out how much you are earning per month versus how much expenses you have. It is advisable to keep a personal track of your expenses and benchmark it against your allocated budgets. For example, if you have multiple loans running with EMIs, it is advisable to reduce your debt burden so that you can free up money for essential expenses like education, household expenses etc. It is advisable to not have more than 20-30% of your monthly income being spent on EMI expenses. Try to save from your monthly earnings – it is also advisable to invest your savings in a diversified set of financial instruments such as FDs, mutual funds, liquid funds and so on. Talk to a good financial advisor and people who are experienced in doing investments to understand how you can make your money work rather than keeping it idle in your savings bank account. 
 
Get Value for Money
In today’s world, as a parent it can be overwhelming to figure out which is the best possible education option for your child. Evaluate whether you are getting value for the money you are paying – it is always a good idea to get feedback from other parents and teachers teaching in the school you are planning to send your child to, check reviews of the school online, do on-ground due diligence of the school, take help of online aggregators like School Connects, Edustoke, who specialise in giving you quality content around the same, etc. 
 
Know the Need
If you are taking a loan, try to make sure it is for a specific expense. Knowing that makes it easy to manage. 
  • Recurring expenses: For example, education expenses are typically a one time expense in one academic year, recurring over several years – so if you take a loan for it, you would know your monthly obligation and compare it to your monthly income to check feasibility. 
  • Know the terms: if you are taking a loan, you should know the key terms – such as principal, interest, tenor, pre-payment fees, late fees etc. All these terms should be there in the loan agreement that you will sign. Ask the lender to clarify if the terms are not clear. 
Does an education loan make sense?
Absolutely! Education expenses are a recurring expense every year in the lifecycle of a parent, typically for at least 10-12 years. So if you are paying 70,000 Rs per annum for your child’s school fees, over 10 years, you will actually be spending 7 lakh rupees. Taking the right loan for managing this recurring expense makes sense because it comes with a lot of other benefits. For example, through an education loan via Credy – 
  • Open Credy Line: Credy releases funds to education institute and collect monthly instalments from you. If your repayments are good, for further loan requirements, you do not need to go through the process of applying for a loan again. We offer a mobile app through which you can borrow money as and when you want with flexible repayment terms. Over your 10 year journey, we will be with you to help manage your child’s education expenses. 
  • 0% EMI scheme: In partnership with several schools, Credy offers 0% EMI scheme, i.e, if you take a loan of 50,000 Rs for 10 months, you pay only 5,000 Rs per month. The interest is borne by the education institute where you are admitting the child. You can check out our 0% EMI scheme here 
  • Tax benefits under 80C & 80E: if you have incurred expenses towards tuition fees, you get to claim these as deductions under section 80C. Similarly if you have taken an education loan for higher studies, you can claim deduction for interest paid under section 80E. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.   
  • Build your credit history: Life is short, but dreams are many. By converting your fixed education fee obligation to school into a loan, you get an opportunity to build a good credit history. This helps you plan for future loan requirements such as home loan, car loan etc. A good credit score can make a huge impact in getting favourable loan terms for high value items like home, car etc. and can save you 1-1.5% interest on the loan. For a home loan of say, 50 lakh Rs, that can translate into real savings for you! Check out Credy Watch here to know more how to build a good credit history. 
  • Education refinancing – if you have already made payments to the school for the fees, Credy also gives the option of refinancing the cost that you have borne and pay back the amount in EMIs. In this case, we will ask you for a few additional documents than the usual process

Choose the right Lender

There are many loan options – banks, NBFCs, online lenders, informal money lenders and so on. Not all are same, and not all would offer what your unique circumstances require. Identify your priorities – is it getting the money quickly? Is it having flexibility in loan terms and repayment options? Or is it saving interest cost? Here are some useful guidelines:

  • Speed: If you need fast loans, you should pick lenders like Credy who have an online process. Online process doesn’t just mean having a website application. Check what their KYC process is, check how they take documents and signatures on documents etc. The speed that an online process gives, a paperwork-heavy and manual process will never be able to give.
  • Interest Rates: You should evaluate for yourself if interest rates are a major concern for you. Small ticket personal loans are generally less sensitive to interest rates. For e.g. if two personal loan options have 3% difference in interest rates, total interest paid on a Rs 50,000 6 month loan would be different by less than Rs 500!
  • Customer Support & Transparent Process: This is probably the most important. A lot of lenders have hidden terms, undisclosed steps and third-party dependencies. The last thing you want in case of an urgent need is the lender telling you the process is stuck in some other department and no one can help. Rest all being the same, go with lenders who have an easy process and helpful customer support. At Credy, we have a customer focused paperless process designed to tackle this issue. 

Based on your needs, you may prefer a lender who is fast and gives good service than a slower option with long opaque processes.

Dont’s
  • Do not confuse loans with income! When you take a loan, you are signing up for an obligation to pay back with interest, and non-payment can actually be financially costly for you (by way of late fees etc.) and it impacts your credit score too. A poor credit score can permanently impact your creditworthiness and hamper your chances of getting a home loan, medical emergency loan, car loan etc. when the need arises. 
  • Do not over borrow!

           Customer support: But sir, why do you want just Rs 50,000? Your loan is approved for Rs 2,00,000
           Me: Umm.. because I have to pay interest?

    This actually happened when Harshit got a call from a loan company after he checked out their website. Loan companies will always want to give you a loan higher than your need. For them its simple economics – their processing costs are almost the same whether the loan is Rs 50,000 or Rs 2,00,000. So why not give the customer higher amount and earn more? As a customer, you have to make sure you borrow only the shortfall you have. Only the amount that you are lacking. This requires discipline, just as most financial best practices do. Another way a lot of our applicants end up over borrowing is trying to pay off one loan with the other. Don’t do that. You will end up churning loans and enter a debt trap. Borrow what you need. Anything more is giving your hard-earned money for free to lenders.

Repay on Time & To The Right Party!

This sounds obvious but sometimes is hard to implement. If you are facing financial troubles and don’t have the money to pay the personal loan EMI, you can do two things

  • Cut down any extra costs. Look closely at your expenses – there must be some expense that is avoidable at this point in time.
  • Borrow from friends just for the EMI payment. Don’t go for an additional loan. Borrowing EMI amount from friends and paying ensures that your credit score is not affected. A bad credit score will ruin your chances of getting loans in future and cause considerable stress and cost in arranging finances from alternative sources.

Be careful to ensure you make repayments to the right party. Be extra careful when making cash payments. We had a customer who was paying his EMIs regularly in cash to a bank agent. Later he found out that the agent was not depositing the cash on time and using it for his own expenses! The customer’s credit history got permanently damaged because of that.

Make sure of the following when paying by cash:

  • Check for some company identification of the collection agent
  • Ask for a payment receipt/email to be sent after you make the payment. If the receipt is not received within 48 hrs, escalate the issue.

Take care of above to a get a good deal on your education loan without affecting your long-term creditworthiness.

Pratish Gandhi, Harshit Vaishnav
Founders, Credy
Credy is a new age digital lending company, which offers education loans to parents either via 0% EMI scheme (no interest payment by the parent) or via unsecured short tenor education loan scheme (interest paid by the parent).

NBFCs : The present scenario (Part I)

In the present economic system of India, NBFCs (Non-Banking Financial Companies) have assumed a significant role in providing accessible and affordable financial services. We will be covering NBFCs in a series of articles. This article (Part I) will focus on the present status of NBFCs in India and try to understand how they have become a vital player in financial inclusion.

As per the RBI, an NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures or securities issued by Government or local authority or other marketable securities.

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Source: RBI

With the focus of Non-Banking Finance Companies on segments neglected by banks (non-salaried professionals, individuals, traders, transporters and stock brokers), and with the ongoing stress in the public-sector banks due to mounting bad debt, NBFCs have had a lucrative opportunity to expand their presence in the Indian financial story. The RBI, in line with the growing importance of NBFCs, has a separate Department of Non-Banking Supervision, the vision of which is “to have a strong, robust and vibrant NBFC sector, complementing the banking sector”. As per an MCA report (March’14), 36,347 NBFCs exist in India. Out of these, 11,682 (32.14%) were registered with RBI as of Mar ’16. Here are some key data points related to NBFCs –

  • The aggregate balance sheet size of the NBFCs sector expanded by 14.5% during 2016-17 as compared to 15.5% during 2015-16.
  • Loans and advances increased by 16.4% and investments increased by 11.9% in March 2017, YoY
  • Whereas the banking sector has had an average NPA of around 10% in 2016-17, NBFCs have done a better job of managing risk by capping the sector’s NPAs at around 4.5%
  • Overall, NBFCs were on their way to setting a record of a robust growth of 19–22% CAGR in retail credit to reach an AUM of approximately 6.044 trillion INR by March 2017.
  • NBFCs have contributed to growth consistently over the past decade. For example, the contribution of NBFCs to commercial banking assets increased from 8.4% in 2006 to 14%+ in March 2015. Similarly, NBFC sector on an average witnessed a CAGR (Compound annual growth rate) 22% during the period between Mar ’06 and Mar ’13, with NBFCs growing faster than banking sector in most of the years
  • It was surprising to note that NBFC sector clocked a growth of 25.7% in 2011-12 although GDP growth decelerated to 6.3% in 2011-12 from 10.5% in 2010-11 (counter-cyclical movements)
  • Similar to the trend in recent years, over an extended period of time, NBFC credit grew more rapidly as compared to the banking sector – NBFC credit witnessed a CAGR of 24.3% during the period between Mar’07 and Mar’13 as against 21.4% by the banking sector.
  • Infrastructure Financing: The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of 26.2% during the period between Mar’10 and Mar’13. In absolute terms, NBFC finance to infrastructure increased from Rs.2228 billion to Rs. 4479 billion in the mentioned period. NBFC finance to infrastructure accounted for 35.8% of their assets as of March 31, 2013, while in the case of banks it was a mere 7.6%.
  • Loans Against Property: Low turnaround time and easier documentation has allowed NBFCs to invest assets in multiple segments, especially small-scale industries and MSMEs. According to a recent CRISIL report, loan against property segment for SMEs is expected to grow by Rs. 5 lakh crore by 2018-19 and NBFCs are expected to contribute nearly half of this.
  • Market Perspective: has also been bullish. “Incrementally, in recent times, investors are allocating more to NBFCs, as compared to banks. Off late, NBFCs have outperformed banks,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, with a better understanding of their customer segments. Recent reforms have been on the lines of ‘rationalization’, i.e. stricter rules for NBFCs that have a significant impact on the economy to keep the negative effects of Shadow Banking in check, while providing certain easy passes to NBFCs that don’t systematically impact the Indian economy, thereby allowing them to solve real problems without the possibility of any major threat to the economic operations.

The next series of article on NBFCs will highlight upon the drawbacks that NBFCs are facing. Credy is actively partnering with NBFCs and helping improve lending processes through automated borrower sourcing, profiling, authentication, agreement signing, repayment management, legal processing etc. Automating processes to every extent possible and building better credit underwriting algorithms to increase accuracy and speed are critical for a healthy credit business.


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech start-up Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

The mechanics behind RBI rate cut

RBI announced a Repo rate cut by 25bps. The Repo Rate was reduced from 6.25% to 6% after the Monetary Policy Committee of RBI meeting, as was widely speculated before the meeting. In this post, we will try and understand the reasons behind the rate cut. To understand the reasoning, it is essential to know the relation between inflation and repo rate.

Repo rate is used by RBI to influence the short term money supply in the economy. It is the (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks. RBI uses the Repo rate as a lever to influence inflation in the country.

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Inflation and Repo Rate (Source)

Inflation is a lagging indicator in response to the repo rate changes. The inflation rate typically reacts inversely changes in the repo rate.

If the inflation rate is higher than the limits targeted by  RBI, the RBI looks to increase the repo rate so as to encourage banks to increase the lending rates/savings rate for its customers. This, in turn, encourages the customers to consume less and save more. Similarly, when the prices are stable over time, RBI sometimes decreases repo rate to encourage private investments and thus help in increase in growth rate of GDP.

Since 2016, RBI has embraced inflation targeting as an official policy, in collaboration with Ministry of Finance. The RBI and the Government, have decided the inflation target between 5th August 2016 to March 31, 2021, 4% with an upper and lower limit of 6% and 2% respectively. In fact, the Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

India has been going through a period of historically low inflation. The latest CPI numbers released for June 2017 show that YOY inflation went to 1.54%, much below the target lower rate of 2%. Prices of food and beverages have been under deflation since May 2017, with YoY growth going to -1.1% in June. It is worth noting that the infamously expensive pulses have gone back to their price levels of June 2015, after recording a massive drop of 22% YoY.

While disinflation has been observed over the past few month, it is not clear if it transitory or structural. A reduction in repo rate would lead to increase in prices, and RBI assesses risks of steep price rise, as well. However, with the reducing inflation trend observed in various commodities and a strong monsoon season this year, the RBI had room to reduce the Repo rate.


This article is written by Vishu Agarwal. He is a policy enthusiast who follows India’s economic and monetary policies very closely.

m-Aadhaar: The Paradigm Shift

 

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UIDAI, which is the authority established to issue Aadhaar numbers, has launched the m-Aadhaar app for mobile users that will allow users to carry unique identification profile on mobile. Users can download their Aadhaar number profile on their Android smartphones and will therefore not require hard copies of the card, wherever applicable.

It allows the user to carry their Aadhaar demographic information, i.e. name, date of birth, gender, address and the photograph linked with their Aadhaar number, on their smartphones.

In one shot UIDAI has addressed a lot of privacy concerns regarding Aadhaar. Now people don’t need to store their Aadhaar number unprotected on their devices, as the m-Aadhaar app comes with a password protection. It is not advisable to store your Aadhaar number without password protection on your mobile anyway. Also, you can conveniently lock your biometrics from your smartphone, which will give a lot of comfort to people who are worried about their biometric information being abused.

Aadhaar based e-KYC had a challenge, which many of us have faced, that the OTP SMS gets delayed by the order of minutes regularly, and for hours on occasions. Given the millions of OTPs which UIDAI serves every day, this is understandable. Now that problem is solved by the TOTP feature on the application, instead of waiting for the OTP SMS to arrive, you can just go to the application and get the TOTP and use it for e-KYC purposes.

Even with the push of Government and the digital nature of Aadhaar, people were using Aadhaar with its hard copy all the time. Now, with the m-Aadhaar application, Aadhaar has truly gone digital. Gone would be the days when people carry hard copies of their identity and address proofs.

As the smartphone penetration is all time high, with the numbers nearly reaching 400 million and an equal number becoming literate digitally; this will increase the feasibility and adaptability of Aadhaar platform. Especially in the context of the last 8 months, the acceptability of smartphone as a gateway for digital payments has opened the scope further. Now with the launch of m-Aadhaar, the services now offered will suit to the demand of the customers. These services can be directly accessed via their 12 digit Aadhaar number on just a single tap of their smartphone. We are heading towards an India where all services can be assessed and granted with a single tap.


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

GST and financial services

On 1st July 2017, Hon’ble Prime Minister launched GST (Goods and Services Tax) from the Parliament of India. He lauded it as the step for the economic integration of India. This single tax reform is a new hope for our energized and growing economy. GST is about the vertical and horizontal integration of all indirect taxes in India. It will have long reaching impacts on the access to financial services which have been analyzed further.

Tax on financial services transactions such as banking transactions (credit card payments, fund transfer, ATM transactions, processing fees on loans etc.), mutual funds, insurance and the stock market has increased from the previous 15% to 18%, making them marginally costlier. It would have an inflationary impact in the near future. But many experts are hopeful that the increase in cost may not last in the long run as banks will pass on the benefit of input tax credit, under GST, to their customers. 

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Ninety percent of the products in the service sector were placed in the 18% bracket, which is a marginal increase but is expected to reduce complexity in the transaction and improve ease in availing of input credit. Out of all services, 63 have been put on a negative list, which is exempt from tax.

Mutual fund distributors earning up to Rs. 20 lakh will remain exempt from GST, while those earning more will see their tax rate increased from 15% to 18%. The hike from 15% to 18% will apply to the insurance sector as well.

In stock trading, the brokerage would have increased taxes. Depending on the volume of trades, the brokerage can be a maximum of 1% for a transaction value of Rs10,000.

As per Vinod Kothari Consultants, on the matter of loans coming under GST, they say that the definition of goods and supply under sections 2(52) and 2(102) of the CGST Act, exclude money to money transactions. Loan transactions being money to money transactions are therefore not subject to GST.

Further, the GST Council has also exempted money to money transactions in the Schedule of GST rates for services Entry 8 of the list of exempted services states. Therefore, interest charged on loan transactions shall not be subject to GST.

To conclude, with the arrival of GST, financial services transactions have become dearer but in the long run service providers will pass the benefits to consumers. We must embrace GST era with positive spirits!


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

Banking Penetration in Tier 2 Cities

Cities are considered to be the engines of growth. These cities provide ample economic opportunities to the people and help in escalating economy overall. Realizing this, Indian government has recently started a thrust to build 100 smart cities in India.

Historically, India is gifted with four metro cities but they are already overpopulated and congested. Attempts are being made to rewrite the growth story via tier 2 cities now. India has 50+ cities with more than a million people. They carry the hopes and aspirations of the new India. These cities are able to provide employment, education and higher standards of living, compared to the rural cities.

When the Government came up with Smart Cities Plan in 2015, the idea was to develop growth centres in each of the Indian state which will expand to nearby regions also. Already state capitals have developed into economic centres where an aspirational class is thriving. With 50+ cities having more than a million population like Jaipur, Patna, Guwahati, Bhuwaneshwar, Kochi,etc. people have changed a lot from last decade. Now they travel through air, communicate via mail or mobile, travel to foreign for holidays, read and speak in English, want to work in MNCs, etc. These cities are positively engaging with their demographic dividend to reap the benefits. Already Internet penetration in urban areas is around more than 50% and mobile connectivity is higher than ever, and with Union Budget focusing on new airports construction the rate of growth of tier 2 cities will be high in coming times.

Moreover, these cities are attracting investments and are left with wider opportunities for business. However, these cities still do not have financial services infrastructure. Easy and affordable access to credit is still not available. There are 141 thousand banking branches in India. Out of this 29 thousand are in Metro cities, while 26 thousand are in other urban areas. However, only 5 crore people live in the four metro cities compared to 34 crore people living in other urban areas. Banking penetration is 7 times lesser in other urban areas compared to Metros. This is not to say that Metros have adequate banking facilities. Several pockets of slums in these cities have little or no branches, and the banking experience well off people is still far from hassle-free. However, the situation in Tier 2 cities is much worse. Without a proper banking infrastructure it is not possible for these cities to fuel the next stage of growth in India. With increasing internet penetration, FinTech companies could replace the traditional banks providing banking solutions to the population living there.

With the Government also focusing upon Rurban Mission (Rural-urban continuum fringe), there is possibility of cities growing along with attached rural areas which will provide boost to the Indian economy by creating jobs and opportunities. Tier 2 cities have the best chances to become pragmatic solution to present day problems of economy, the Government needs to invest positively and pragmatically in these areas.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.

Financial Inclusion in India

 

According to the Committee on Financial Inclusion headed by Dr. C. Rangarajan, Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. But the major question remains whether it has been achieved after regular efforts made by the Government? Are citizens financially included now? Were they able to get credit when they needed it?

Data from the World Bank would  (see here) says that as of 2014, nearly 53% of all Indian population has access to bank accounts. This is before the launch of the Jan-dhan Yojna which led to 28 crores new account opened by banks. This coupled with the natural increase in number of accounts and the push by the Government via the demonetization exercise in November 2016 has led to large population of India with access to bank accounts.

However, as Dr. C. Rangarajan points out in his definition, a key aspect of Financial Inclusion is timely access to credit. In the context of credit access it was found that only 7.7 % population borrowed from financial institution while the rest relied on informal means from private lenders or friends. The situation is much worse when viewed from the prism of rural credit access. Farmers and weaker sections are unable to raise money in the hours of need leading to their distressed conditions. Although the Jan Dhan Yojna increased the spread of banked families, it still does not solve the problem of credit access.

In reality, traditional banking facilities are ill-equipped to service the large population of India, and hence large sections of society are flocking to informal means of credit.  In order to get a simple loan, a person may have to get involved in many paper-works and could potentially take months time. Traditional banking institutions due to their high fixed costs are not able to service the credit needs of the credit-hungry population. It is in part due to these problems that RBI is promoting alternate institutions to provide credit via platforms like Peer-to-peer lending platforms. Given the recently controlled inflation levels, RBI’s push is to decrease interest rates, thus such platforms present a good opportunity for investing and earning returns, leading to a win-win scenario for both lenders and borrowers. Peer to peer lending is set to help India finally achieve financial inclusion for its population.

 


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series, and is a Policy Consultant for FinTech startup Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.