Finomenal 2014

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Finance Forum creates a wonderful platform for Finance students to interact with Industry experts and students from other top B-Schools. We have a packed calender with events conducted throughout the year. We organise an annual finance conclave “Finomenal”, and an annual budget conclave “Manthan”. These events include several guest lectures, mentoring sessions, competitions, and Panel Discussions. Furthermore, we also organize the finale of SMIC (Student Managed Investment Course), and the investor’s meet of Samnidhy, the student managed investment fund at TAPMI. We also conduct “Friday Night series”, where, every Friday, students engage in informal talk about Finance.  We manage “TJEF- TAPMI Journal of Economics and Finance”, which is a quaterly journal that publishes research papers of students from TAPMI and other top B-schools. We also host the TAPMI-Bloomberg Olympiad which creates a platform to test the expertise of students on Bloomberg terminals.

Shruthi Chander                                                                                                                              Monica V

Convenor- Finance Forum                                                                 Co-Convenor- Finance Forum

Shadow Banking

By Monica V

What is Shadow Banking? 

Paul McCulley of PIMCO coined the term “shadow bank” in 2007. The Financial Stability Board defines the shadow banking system as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system”, servicing assets worth $80 trillion globally.

Components of the shadow banking system broadly include mobile payment systems, pawnshops, securitization vehicles, asset-backed commercial paper [ABCP] conduits, private equity funds, hedge funds, money market funds, markets for repurchase agreements, investment banks, and mortgage companies.

How they work? 

Shadow banks issue short-term securities and use the proceeds to buy longer-term assets. For instance, an ABCP conduit would issue commercial papers, which is bought by a money market fund, to raise funds, to purchase securitized products created by an investment bank.

What are their merits? 

* Ability to provide credit more cost-efficiently than traditional banks

* Provide funding to traditional banks

* Ensure credit growth and liquidity in the economy

* Alternative source of funding for risky borrowers

* Alternative to bank deposits for large investors

* Risk diversification

What is the risk? 

* Liabilities are liquid and assets are relatively illiquid

* Highly leveraged as their source of funding is not deposits but collateralized borrowing

* Involved in “chain of transactions”, which could lead to spillover of risk to the regulated banking sector, thus, leading to systemic risk

* Do not have safety nets, such as, Central Bank borrowing and Deposit Insurance, and no capital cushion, thus, raising concerns of run on the banks.

Conclusion: 

Shadow banks have been held responsible for the global financial crisis and the Chinese Slowdown. The Dodd Frank Act, passed by the U.S. Congress, has introduced many regulations such as moving OTC derivatives to exchanges, and registration requirements for some hedge funds. There is a need to propose regulations such that spillover effect between the banking sectors is mitigated, susceptibility of money market funds to runs is reduced, incentives associated with securitization are aligned, pro-cyclicality associated with securities financing transactions is dampened.

REXIT

By Ananya Biswas

The official announcement of Raghuram Rajan’s decision to quit as RBI governor has sparked strong reactions amongst the public and imminent industrialists. The timing of this move adds to the ongoing woes relating to the uncertainty of Britain’s exit from the European Union, unstable oil prices and delayed monsoons. There is a high possibility of this news adversely affecting the Indian rupee in the near term. His exit leaves the government with a herculean task of finding a new governor who is equally competent, sharp and pragmatic about reforming the Indian economy.

The recent letter addressed by Mr. Rajan to the RBI highlights all the reforms that have been brought about by the Governor and also veiled hints about the government’s reluctance to accept his second tenure. Mentioned below are few comparative measures which reflect the commendable work done by Mr. Rajan for the growth of the Indian economy (2013-2016 being the tenure):

Economy measures 2013 2016
Forex reserves 277,722.2 million dollars 338,979.3 million dollars
CAD as % of GDP 1.7% 1.1%
Inflation 10.92% 5.7 %

KEY REFORMS BROUGHT ABOUT BY RBI UNDER THE LEADERSHIP OF MR RAJAN

Economic reforms

Banking reforms

  •  Stabilizing the rupee which had plunged to an all-time low of 69 against the dollar in 2013 owing to stiff economic challenges and global volatility
  • Groundwork for on-tap bank licensing and licensing of differentiated banking entities to create a more diverse banking sector (Payment banks and NBFC’s)
  • New monetary framework focussing mainly on inflation targeting and changing the indicator from wholesale price index to retail inflation
  • Bringing in a universal payment interface which would play a major role in achieving the goals of universal electronic payments, cashless transactions and financial inclusion.
  • RBI cutting interest rates by 150 basis points thereby boosting liquidity in the market.
  • Sustainable structuring of stressed assets to address asset quality challenges at banks through Asset Quality Review.
  • Reduction of min daily maintenance CRR from 95% to 90% and narrowing the LAF corridor to 50 basis points.
  • Use of MCLR to decide lending rates by commercial banks so as to improve the monetary transmission mechanism.

All these reforms stabilized the banking industry which was in a vulnerable state. We hope our government selects a suitable candidate who can fill Mr. Rajan’s shoes. He / She must make sure that they maintain proper financial and price stability in the Indian economy which in turn will lead to a brighter future.