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Banks will need to collaborate with fintech firms: SS Mundra

Fintechs disrupting every facet of traditional financial services business: RBI Deputy Governor

Mumbai, February 20:

Reserve Bank of India Deputy Governor SS Mundra on Monday said it may make business sense for brick-and-mortar banks to collaborate with the more efficient and agile financial technology (fintech) players.


This observation comes in the context of fintech companies disrupting every facet of the traditional financial services business and emerging as a challenge to the banking system.

Referring to a PwC 2016 Global Fintech Survey report, Mundra said up to 28 per cent of the banking and payments business would be at risk by 2020. The imminent competition to banks’ business comes from the new breed of fintech companies having capacities to address specific pain-points of financial customers such as remittance, credit, and savings.

The report added that micro, small and medium enterprise (MSME) banking is likely to be the fourth-largest sector to be disrupted by fintech in the next five years after consumer banking, payments, and investment/wealth management

Jobs at threat:

Another study done by Citi researchers predicted that the fintech revolution will wipe out nearly a third of all the employees at traditional banks in the next 10 years, said the Deputy Governor.

This prediction is essentially about the lack of growth and loss of business over time, though it may be difficult at this juncture to accurately gauge the possibility of any particular benefit or risk materialising in the fintech universe, he added.

In view of the challenges that fintech companies may present, Mundra felt that banks would need to assess the likely impact of disruption and reorient their business models.

“As the incumbents, they (banks) may need to leverage their comparative advantage to improve their customer relationships, change their internal processes, mindset, and internal structures. Some banks have already adopted the ways of the fintech companies by employing technology for making credit-decisions in a limited way,” said the Deputy Governor in his inaugural address at a seminar organised by the College of Agricultural Banking in Mumbai.

Fintech firms, according to Mundra, are good at innovative skills and mindsets supported by the regulatory freedom presently available to be innovative, to leverage Big Data and to be nimble in responding to market changes.

Despite some inherent advantages that the fintech players enjoy, it is not a one-way street for them, Mundra said. He added that they do not have a big client base of their own and without the expertise to navigate the regulations and licensing discipline of the finance industry, they can’t go very far on their own.

Trustworthiness:

The Deputy Governor highlighted that a major strength that traditional banks possess is a reputation for trustworthiness built over several decades. Banks have capital and can weather intense competition. They also have the benefit of experience and tried-and-tested infrastructure, alongside specific financial knowledge of risk management, local regulations and compliance.

“In fact, on-the-ground market and customer knowledge and pre-existing client base of banks can be of immense value to fintech projects. In a nutshell, banks and fintech firms have different comparative advantages and a strategic collaborative partnership between the two would liberate them to focus on their respective core competencies and contribute to the innovation process,” said Mundra.

Source:
http://www.thehindubusinessline.com/money-and-banking/rbis-mundra-on-fintech-effect-on-banks/article9552218.ece

Government Cuts Rates On PPF, Other Small Savings Schemes By 0.1%

Interest rates on small savings schemes have been cut by 10 basis points for the October-December period.

The Public Provident Fund Scheme, Kisan Vikas Patra, and Sukanya Samriddhi Account Scheme will fetch lower returns post this revision.

Public Provident Fund Scheme will fetch an interest rate of 8 percent in the third quarter of the current fiscal, according to a finance ministry statement. Kisan Vikas Patra Scheme will carry an interest of 7.7 percent and will now mature in 112 months instead of 110 months. The interest rate on the Sukanya Samriddhi Account scheme will now come down to 8.5 percent.

Interest rates for small savings schemes are notified on a quarterly basis and linked to government securities of equivalent maturities.

Interest rates on one-year, two-year, three-year, five-year deposits have also been reduced by 10 basis points, among others.

Interest rates on five-year recurring deposits, five-year Senior Citizens Savings Scheme, and Five-year National Savings Certificate has been cut to 7.3 percent, 8.5 percent, and 8 percent, respectively.

The government has, however, kept savings deposit rates unchanged at 4 percent.

Reference:
http://www.bloombergquint.com/business/2016/09/29/government-cuts-rates-on-ppf-other-small-savings-schemes-by-01“. Web. Nikunj Ohri

McKinsey says digital finance adoption could add trillions to high growth economies

Adoption of digital finance could add $3.7 trillion dollars to the GDP of emerging markets economies, including $1.1 trillion in China alone, according to a new McKinsey & Company report.

The strategy consulting firm’s Global Institute released Digital Finance For All: Powering Inclusive Growth in Emerging Economies, at a New York event featuring a keynote by Gates Foundation co-chair Melinda Gates.

The motivation for this report was to better measure the value of digital finance and greater financial inclusion in emerging markets,” McKinsey’s Susan Lund, a co-author said. “Few doubt that financial inclusion and mobile money dramatically reduce costs or boost economic growth. We wanted to apply our analytical tools to more accurately size what it’s worth to these regions.

Compared to advanced economies, many of these areas can be data desserts when it comes to statistics on particular consumer behavior or business sectors. In Africa, for example, several recent GDP revisions revealed outdated statistical methods were missing billions of dollars in economic activity.

Most of the blame for the missing numbers falls squarely at the feet of the cash-based economies that comprise the majority of financial activity in these markets. Roughly 90% of transactions in high growth markets are done with cash. Cash does not leave the “rich datasets created by digital payments,” which can expose statistical blind spots and spur greater lending by creating more complete credit reporting.

McKinsey’s report emphasizes the greater lack of financial inclusion in its focus regions. It pegs 45 percent—or two billion individuals—as unbanked “and 200 million micro, small, and medium-sized enterprises (MSMEs) with “no or insufficient access to credit.”

McKinsey’s survey then offers compelling projections on the potential of digital finance—defined as “financial services delivered over digital infrastructure…with low use of cash…”—to transform emerging market economies.

Some of the highlights of fintech adoption across Africa, Asia, Latin America, and the Middle East include the following:

  1. A $3.7 trillion boost to GDP by 2025
  2. Creation of 95 million new jobs
  3. Inclusion of 1.6 billion more people in the financial system; and
  4. New deposits of $4.2 trillion

exhibit-5

McKinsey views mobile based financial services as the most effective conduit to reach the unbanked. Mobile phone penetration, which stood at 80 percent in emerging markets in 2014, is expected to increase to 90 percent by 2020, according to GSMA data referenced in McKinsey’s report. “When it comes to access to financial services, mobile provides a leapfrog option in emerging economies,” said Lund. She highlighted a report finding that access to traditional financial accounts in emerging markets is strongly correlated to higher income, while access to mobile digital banking products is not. “Because mobile money based services are 80-90 percent cheaper, they can be offered at lower income levels.”

An estimated 880 million women in emerging economies could gain first time financial account access through adoption of mobile and digital finance, according to McKinsey. Fintech services could open up $2.1 trillion in credit to individuals and MSMEs.

McKinsey’s report offers several country case studies where it estimates the “GDP boost” potential of digital finance to each economy: China ($1.1 trillion), India ($700 billion), Brazil ($152 billion), Mexico ($90 billion), Nigeria ($88 billion) and Ethiopia ($15 billion).

exhibit-19-2

Meeting this potential requires governments to create “risk-proportionate financial-services regulation” and environments that foster “widespread digital environments.”

While the emerging markets digital finance report does not offer investment advice, McKinsey’s Lund thinks U.S. tech actors will take note of the findings and offered some advice.

This is a profitable business opportunity and the door is wide open. But local partnerships will be important in navigating these markets strategically,” she said.

Reference:
https://techcrunch.com/2016/09/21/mckinsey-says-digital-finance-adoption-could-add-trillions-to-high-growth-economies/?ncid=rss“. Web. Jake Bright

RBI likely to agree on nodal agency

Final guidelines expected soon; P2P players may also get access to credit bureau data.

The Reserve Bank of India (RBI) is expected to issue the final guidelines for peer to peer (P2P) lending in the next few days. It is expected to concede to lending firms’ suggestion for a nodal agency.

This was one of the focus areas of outgoing RBI governor Raghuram Rajan. People familiar with the development say the final guidelines are expected to come out before he demits office on Sunday.

A P2P lending firm allows an individual to lend or borrow money to or from others, without assistance from financial intermediary. This is mainly done through an online platform that connects lender and borrower. In the past couple of years this space had been gaining momentum, and about 30 entities had come up in the space. After the draft guidelines were released in April, almost all players had suggested there should be a nodal agency to track money transferred from a borrower’s account to a lender’s, and vice versa. RBI, on the other hand, had said funds should move directly from one account to the other. The central bank’s rationale was to avoid the risk of money laundering.

The P2P entities also suggested they should be given access to credit bureau data, which could get RBI approval. They say this will help improve the quality of borrowers. Apart from structural guidelines, the rest would be more suggestive in nature. “This is because the sector is still evolving and they don’t want to clamp on it,” said one player.

Some had asked the minimum capital requirement of Rs 2 crore be relaxed. While bigger entities wanted the amount to remain, smaller ones had reservations, saying they were not lending or accepting deposits, and it shouldn’t apply to them. Now the players are also expecting a clarification on this.

A P2P lending firm allows an individual to lend or borrow money to or from other unrelated individuals without assistance from any financial intermediary. This is mainly done via an online platform that connects lenders and borrower. In the last couple of years this space had been gaining momentum and about 30 players had come up in the space.

Reference:
http://www.business-standard.com/article/finance/rbi-likely-to-agree-on-nodal-agency-116083101016_1.html“. Web. Nupur Anand

MSME Sector: Framework for easing credit flow on the anvil

As against the MSMEs’ demand of Rs 26 lakh crore of loans, credit availability is only Rs 11.10 lakh crore with majority of such enterprises depending upon informal sources of financing.

With the micro, small and medium enterprises (MSMEs) facing acute shortage of credit availability, the Reserve Bank of India is planning a number of steps to improve the situation including setting up a movable credit registry, accreditation of credit counsellors for small entrepreneurs and creating Electronic Bill Factoring Exchanges for faster payment of bills. As against the MSMEs’ demand of Rs 26 lakh crore of loans, credit availability is only Rs 11.10 lakh crore with majority of such enterprises depending upon informal sources of financing.

There is still a huge unmet demand for credit for MSMEs. There is a total finance requirement of Rs 32.5 trillion (or Rs 32.5 lakh crore) in the MSME sector, which comprises of Rs 26 trillion (or Rs 26 lakh crore) of debt demand and Rs 6.5 trillion (6.5 lakh crore) of equity demand, RBI Deputy Governor SS Mundra said at a conference on MSME Funding organised by the CII on Tuesday.

As per provisional data for period ended March 2016, total outstanding loan of the banking system to MSME sector stood at around Rs 11.1 trillion (Rs 11.1 lakh crore) in 20.6 million loan accounts. Contrast this to the estimated need of Rs 26 trillion (Rs 26 lakh crore) and number of MSMEs at 51 million, he said.

Indian MSME sector is a network of 51 million enterprises providing employment to 117.1 million persons and contributing 37.5 per cent of India’s GDP, as per MSME Ministry’s annual report for FY16.

In order to ease flow of credit, the RBI is starting to put in place a framework for accreditation of credit counsellors who are expected to serve as facilitators and enablers for micro and small entrepreneurs.

Since MSMEs are typically enterprises with little credit histories and with inadequate expertise in preparing financial statements, credit counsellors will assist the borrowers in preparing their project reports and also help banks make better informed credit decisions, Mundra said.

The RBI would also issue final guidelines for Peer to Peer (P2P) lending. New players have entered MSME lending landscape in form of P2P companies, and these entities use an online platform to match lenders with borrowers to provide unsecured loans and mostly for receivables financing, Mundra said.

P2P lending has great potential as an alternative form of low-cost finance as it can reach to the needy where formal sources are unable to reach or unwilling to lend. RBI has been mindful of a need to regulate these entities without stifling their ability to innovate and is currently in the process of issuing final guidelines on P2P lending, he said.

Highlighting the lack of collateral as an impediments towards lending to small enterprises, Mundra noted that the setting up of a movable assets registry, which when mature would have a multiplier effect in lending to the sector. Movable assets, as opposed to fixed assets such as land or buildings, often account for most of the capital stock of private firms and comprise an especially large share for micro, small and medium-size enterprises. The movable assets registry has been set up by the CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) in coordination with the government and the RBI.

For faster payment of bills to MSMEs, he said, the RBI has licenced three entities for operating the Trade Receivables Discounting System (TreDS), which would commence operations in the current fiscal. The system would facilitate the financing of trade receivables of MSME enterprises from corporate and other buyers, including government departments through multiple financiers.

He said it would be important that the use of TReDS is made mandatory for, to begin with corporate and PSUs and later for the government departments. The objective ultimately is to create Electronic Bill Factoring Exchanges, which could electronically accept and settle bills so that MSMEs could encash their receivables without delay.

To increase formal lending facilities to the MSME sector, the RBI has given licence to 10 entities for small finance bank that would mainly focus on lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities. These small finance banks have been mandated to extend 75 per cent of its adjusted net bank credit to priority sectors, while at least 50 per cent of their loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

Non-performing assets

Mundra said the pace of formation of new non-performing assets (NPAs) has decelerated although some banks have posted losses for the first quarter of the current financial year due to higher provisioning. Most of the banks are adequately capitalised and the government has promised additional capital if needed. The government last month announced infusion of Rs 22,915 crore capital in 13 lenders including SBI.

When I look at individual results, there are number of banks for whom it appears that the worst is over but then there are other banks…still they are in middle of it and they would need to do some work before they get out of it, he said. It would be naive to believe that there won’t be any NPA formation but the pace of new NPA formation has clearly decelerated, that is what the major trend is, he added.

Gross NPAs of the public sector banks had surged from 5.43 per cent (Rs 2.67 lakh crore) of advances in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.

Reference:
http://indianexpress.com/article/business/business-others/msme-sector-framework-for-easing-credit-flow-on-the-anvil-2993237/“.

Increase in Global Lending of MSMEs to Drive the Global Peer-to-peer Lending Market Until 2020, Reports Technavio

Technavio analysts forecast the global peer-to-peer (P2P) lending market to grow at a CAGR exceeding 53% during the forecast period, according to their latest report.

The research study covers the present scenario and growth prospects of the global P2P lending market for 2016-2020. To calculate the market size, the report considers the lending amount through P2P platforms in the Americas, Asia Pacific (APAC), and Europe, the Middle East, and Africa (EMEA).

Technavio analysts highlight the following three factors that are contributing to the growth of the global P2P lending market:

  • 1. Increase in global lending of MSMEs
  • 2. Enhancement of inventory management
  • 3. Borrowers having faster access to credit

Increase in global lending of MSMEs

After the financial crisis, the banking and financial institutions are trying to deleverage the off-balance sheet items to meet the penal capital adequacy requirements. This has led to the reduction of loan finance for small and medium-sized businesses (SME) and individual borrowers as they are considered to be risky.

The P2P sector has successfully filled a massive unmet need. The innovations in technology have expanded the ease of access to working capital for micro, small and medium enterprises (MSMEs). The boundaries of technological services are sometimes fluid, but there are five key products required for funding small businesses. These include marketplace (P2P) lending, merchant and e-commerce finance, invoice financing, supply chain financing, and trade financing. These lead to a belief that technology may create more such products in the future.

In developing countries, P2P lending is an upcoming source of finance, especially for MSMEs. When an MSME gets new customers regularly, as in the case of manufacturing, automotive or heavy industries, the chances of the company having huge invoices are high. It is known that SMEs have a disadvantage when dealing with a capital market regarding credit rationing and finance gaps. The gap refers to the difference in the working capital and the cash flow of the companies. Such gaps in financing have driven the need for an alternative source of financing like P2P lending even though the service providers charge 10%-15% of the receivables as commission,

says Amit Sharma, a lead analyst at Technavio.

Enhancement of inventory management

The inventory management has improved in the last five years and has enhanced the cash flow and the way working capital is managed. Inventory is crucial to any company’s balance sheet. For instance, if a company needs to prevent loss then it has to ensure that it has enough inventory to meet the demands.

Any difference in the inventory and demand can affect company’s cash flow i.e., in the case of a deficit, more investments will be required. Therefore, organizations must focus on maintaining optimal inventory levels by setting up a system that uses various internal processes to track accurately and maintain inventory.

Such a system will enable a company to manage the vendors and customers, monitor demand patterns, track inventory performance, maintain accurate inventory counts, and ensure suppliers adhere to their commitments during the forecast period. It will also lead to improvement in the vendor-managed inventory techniques and aid in building up the value chain in the supply chain management.

Borrowers having faster access to credit

Looking at the current market scenario, the P2P lending platform provides credit to the marginalized borrowers like small and medium scale enterprises that are unable to obtain huge funds from the other banking and financial institutions.

The small and the medium enterprises lack high-quality collateral and long credit histories and are associated with higher risks. This is because the banks are unable to meet the short-term funding needs of these small and medium scale enterprises.

The traditional banking institutions are trying their best to address the specific needs of the potential clients so that they can reduce the huge funding gap between the large corporate and the small and medium enterprises. For instance, small regulated financial firms are licensed to encourage credit access for small and rural borrowers in China. This will bring in liquidity into the system, thereby bringing in credit transformation.

The P2P lending institutions offer risks, along with scenario analytics for different products and services with real-time pricing and capital management of multi-asset portfolios. This unique tool would provide a transparent and detailed solution to clients to buy the products and services from the online platform,

elaborates Amit.

Reference:
http://www.businesswire.com/news/home/20160801005547/en/Increase-Global-Lending-MSMEs-Drive-Global-Peer-to-peer“. Web. Business Wire

What does a drop in interest rates mean for SME P2P lenders?

Kevin Caley, founder and chairman of ThinCats reveals how he believes lower interest rates will impact p2p lending.

Last week marked a historic day for the UK economy. The Bank of England announced a 0.25 per cent cut to interest rates and a raft of monetary policies to encourage growth in the wake of the referendum. A 0.25 per cent base rate is the lowest we’ve ever seen, it’s the first time the monetary policy comittee MPC has cut interest rates in seven years, and the committee is not ruling out a further cut later this year.

As expected we’ve already seen banks and building societies review the savings and mortgage rates they pass on to customers but the impact is less clear in the emergent P2P sector. Inevitably, there will be some changes to the rates of return that lenders receive, but whether this will actually have a tangible effect on the appeal of P2P, is doubtful.

In reality, a 50 per cent reduction in base rate is only a 0.25 per cent fall, and that will not, in itself, make much of a difference to the industry. P2P rates are not directly related to market fluctuations and don’t track the base rate in the same way that some bank rates do. P2P lending remains one of the few investment opportunities that is non-volatile and can comfortably beat inflation.

The Bank of England has used monetary policy in an attempt to stimulate the economy, by encouraging banks to lend – a move that will be welcomed by businesses in need of funding to grow. If it has the desired effect, it will increase bank lending but it won’t change the structural and cultural reasons that encourage businesses to turn to P2P for finance. The economy needs businesses to invest and grow and overcome the cloud of uncertainty that is currently limiting the ability to do so.

Exporters will likely benefit from a further weakening of the pound and this in itself will have more impact on the economy than the change in base rate. Monetary policy will help oil the gears, but the reality is we need far reaching fiscal policy to fuel the engine of British business. For this reason I welcome the abandonment of the blind austerity and the belief that we have to balance the books. Such political dogma was never fully justified, and proved almost impossible to achieve. In the end we have suffered from years of austerity for no real gain. For P2P business lenders, genuine fiscal stimulus can only be a good thing for the variety and quality of loans on the platform.

Aside from the focus on interest rates, the Bank has also added some additional measures in order to fund cheap lending to businesses and households under certain conditions. The new ‘Term Funding Scheme will allow banks to borrow money for four years at 0.25 per cent. This appears to be an attempt to ensure that banks actually pass the rate cut on and is not miles apart from the old Funding for Lending Scheme which was explicitly designed to help SMEs borrow. The Funding for Lending Scheme may have marginally increased lending to businesses, but it has been a disaster for savers.

By providing a steady stream of cheap money for banks to lend, there was little incentive for them to attract deposits from savers, weighing down available rates. At best the scheme was a short sighted attempt to mask the fact that banks are simply not lending enough. At worst it’s yet another tax on savers, who have been picking up the bill for the banking excess that caused the credit crunch. An extension of the FLS will only drag this out further.

Even with this additional incentive for banks to lend, we’ll have to wait and see whether businesses really do benefit from the scheme. Given the fears about the economy, banks will also become more fearful that companies and individuals will default, which could tip the scales in the other direction.

In this environment, P2P lending has emerged as a genuine alternative to this type of intervention, producing investment income four or five times greater than bank deposits, while simultaneously providing business loans to fill the funding gap left by the banks. When all is said and done, a base rate cut won’t alone be enough to drive business-led growth in the economy and may put some downward pressure on returns, but for peer to peer lenders and the platforms they use it will be water off a duck’s back.

Reference:
http://www.altfi.com/article/2171_what_does_a_drop_in_interest_rates_mean_for_sme_p2p_lenders“. Web. Kevin Caley

P2P lenders eye larger loans as RBI proposes regulatory norms

Peer-to-peer (P2P) lending platforms will gain legitimacy and be able to compete with banks and non-bank lenders when they come under the regulatory ambit of the Reserve Bank of India (RBI),

industry experts said on Thursday.

Those most likely to face competition from P2P lending, if it picks up, include small non-banking finance companies (NBFCs) and moneylenders in the business of giving small, unsecured loans for the short-term needs of their customers.

Presently, P2P platforms offer loans that are typically below the minimum amount offered by the formal financing sector. Often, they cater to borrowers who are urgently in need of money and do not have anywhere else to turn to.

As the business picks up, they can potentially offer larger loans.

We currently provide loans between Rs.50,000 and Rs.2 lakh, which is technically above what a microfinance company provides, but less than banks or NBFCs. Once we have established ourselves over the next two years, we might want to look at larger ticket sizes,” said Bhavin Shah, founder of LenDenClub, a P2P lending platform.

P2P lending is a form of crowdfunding used to raise loans that are paid back with interest. The lending platforms are largely technology companies registered under the Companies Act and acting as an aggregator for lenders and borrowers.

Once the borrowers and lenders register themselves on a P2P website, the operator of the platform carries out due diligence. Those found acceptable are allowed to borrow and lend.

The RBI is now asking these platforms to register as NBFCs and comply with governance, disclosure and minimum capital rules. The norms, spelt out in a discussion paper put up for consultation, are yet to be finalized.

Apart from the easy access that they offer, P2P platforms can also bring down interest rates in comparison to the informal sector, the RBI said in its consultation paper.

These platforms allow lenders to offer different rates based on the risk profile of the borrower and the reason for which the loan is being sought. Small and medium enterprises (SMEs) stand to benefit.

We are very certain it would impact interest rates in a positive manner… most importantly, it would give access to credit to the most important sector of the economy, i.e., the SMEs and micro-SMEs,

said Rajat Gandhi, founder and chief executive officer, Faircent, one of the largest P2P lending platforms in India.

On Faircent, customers can get unsecured credit at rates ranging from 12% to 36%, depending on their needs and risk profile. The platform differentiates borrowers into categories ranging between minimal risk to very high risk.

The intent of the regulator is to boost alternative sources and routes of funding and making credit more accessible to people who have not been able to receive the funding they need.

NBFCs, however, don’t see P2P lenders as direct competition and say that these platforms will target customers who have been traditionally served by private money lenders and other sources of funding.

“Those in need of formal financing will always come to NBFCs or banks. The customers who would access P2P will typically be people who will use it as a last resort in case other sources do not work out for them,” said Vimal Bhandari, chief executive officer, Indostar Capital Ltd, an NBFC that lends to small businesses.

Bhandari added that given the gaps in credit scoring in the country, it will be interesting to see how these firms assess the creditworthiness of borrowers.

It is actually the self-employed and small business owner needs that the P2P lending platform will be competing for. However, the availability of good customer data in this space and the cost involved in collating it is a serious concern that the platforms will be grappling with,

said P.N. Vasudevan, managing director, Equitas Holdings Ltd.

“At this stage, these are just ideas and there is a long way to go before they are able to scale the business. Establishing credibility regarding the availability of quality credit and healthy recovery of these loans takes time. However, once they establish themselves, they can be a good competitor,” Vasudevan said.

Reference:
http://www.livemint.com/Industry/vLCecqoGwD7Su1TWSfKwiM/P2P-lenders-eye-larger-loans-as-RBI-proposes-regulatory-norm.html“. Web. Vishwanath Nair & Vivina Vishwanathan
Photo: Priyanka Parashar/Mint