Digital Banks – Dutch Uncles

5 Parameters To Analyse Banking Stocks

Aakash Sharma — Mon, 11 Oct 2021 03:35:08 +0000

Investing in the stock markets is only as successful as your due diligence in conducting research and analysis before going forward with the investment. One of the most critical aspects of designing an investment strategy is determining which stocks are performing well along with the diversification of portfolios. This is where one of the historically strongest stocks come into the picture- the banking stocks.

Most retail investors have banking stocks in their portfolios. Banks and financial institutions have significant free floats that give investors a sense of security and profitability in the stock market. However, with limited access to credit in India, financial companies still have a long way to go. This is reflected in the expanding popularity of banking and financial stocks.

Yet, a bank stock’s credibility differs significantly from the review of everyday companies or traditional industrial stocks. Unlike non-financial corporations, where metrics such as working capital cycle, gross margin and leverage are essential to analyse, banking stocks need to be analysed using completely different parameters.

Reading bank statements and documents as part of the fundamental analysis can be a dexterous task. Too many numbers cause more confusion than a clear understanding. And that is what we are here to discuss. To analyse a bank’s monetary statements, one needs to know the following metrics.

Current Account Savings account (CASA) Ratio

The Current Account Savings (CASA) ratio is the ratio of total bank deposits in current and savings accounts to net deposits of a bank. It is generally used to ascertain how much money is in a bank in the form of savings account and current account deposits.

A high CASA ratio signifies that most bank deposits are liquid and linked to current and savings deposits. If a bank’s CASA rate is high, it usually shows that the net interest margin is very high, which means that the bank has an excellent operating capacity model. A high CASA ratio is what investors should look for before investing in a banking stock.

Net Interest Margin for accessing a banking stock

The Net Interest Margin (NIM) is the differentiated value between total expenses and the net interest income. It is usually defined as a percentage of average fixed-income assets. The net interest margin measures the profitability of a bank’s investments. It considers the interest a bank makes on its securities and loans, subtracts the interest payable on debt and deposits, and divides it across the value of those securities and loans. For investors looking to invest in banking stocks, a higher net interest rate is desirable.

Non-performing Assets

Non-performing assets (NPAs) determine the risk of loans repayment by debtors to a bank. If no interest or instalment of the principal amount is paid for 90 days, the loan becomes a non-performing asset. NPAs are divided into gross and net non-performing assets. Gross NPA covers the principal and interest on total debt, and net NPA is calculated primarily by deducting bank provisions from all bad loans under Gross NPA.

Credit problems and non-performing assets have threatened Indian state-owned banks in recent years. The State Bank of India, India’s largest public sector bank, recorded 11% of its debt as outstanding loans as NPA in 2018. Investors should consider a bank with low or no NPAs before investing in its stock.

Cost of Liabilities and banking stock relation

Banks carry out different types of activities. But they majorly make money from loaning money to debtors. Simultaneous to banks’ lending activities, the interest payments on the deposits form a significant part of their operating expenses. Thus, deposits are a bank’s liabilities as there is an interest cost they must pay on these deposits.

The banks also need funds to function correctly. For that, it must borrow other than the received deposits. These borrowings usually come from the Reserve Bank of India, other institutions, banks, bonds, etc. Any borrowings carry an interest component that needs to be paid at regular intervals without fail. This interest component that a bank needs to pay is a part of the Cost of Liabilities.

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Cost of liabilities helps an investor get an idea of how much the borrowings cost to the banks. It reflects the cumulative rate a bank pays on its debt.

The lower the cost on the liabilities, the better it is for the banks as it will increase the margins and hence increase the profitability. A high liability price is generally considered bad for a company as it will reduce the margins and increase the company’s interest-paying obligation.

Capital Adequacy Ratio (CAR)

The capital adequacy ratio (CAR) calculates a bank’s available capital divided by the loans sanctioned by the bank. CAR helps estimate the financial strength or capability of the financial institution to meet its responsibilities by using its assets and resources.

A higher the CAR is indicative of a better capitalised bank. In India, as per the RBI norms, Indian-scheduled commercial banks are expected to maintain a CAR of 9 per cent, while Indian public-sector banks are stressed to keep a CAR of 12 per cent.

A bank with a CAR is above the minimum qualifications needed to suggest stability. Therefore, the higher a bank’s CAR, the more likely it is to endure a financial downturn, and thus, it is a good banking stock to buy-in.

The post 5 Parameters To Analyse Banking Stocks appeared first on Dutch Uncles.

India’s First Social Finance Platform, SaveIN Gets Patent

Anju Nambiar — Mon, 23 Aug 2021 05:30:09 +0000

As Indians, we love small and quick loans. It’s much easier to fulfil our financial commitments with them and there’s no cumbersome procedure involved to go through the verification and approval process. Also, with the kind of aggressive and unfriendly behaviours banks have displayed when it comes to loan repayment, we prefer borrowing from our trusted contacts like friends, family, and co-workers. This is because we can get much more flexibility in loan repayment, and they understand our needs and challenges better than financial institutions.

But how does one draw the line when it comes to lending to friends and family? Since there’s no paperwork involved, the situation can quickly turn unpleasant if the borrower doesn’t repay on time. This is where SaveIN comes in.

Fintech start-up SaveIN

SaveIN is a Fintech start-up in the personal loans market. Headquartered in Gurugram, the company targets the B2B (business-to-business) and B2C (business to customer) sectors. Founded in 2020, they have an eponymous online social finance platform. SaveIN also recently raised an undisclosed amount in a pre-seed funding round from angel investors and industry veterans.

SaveIN’s Social Finance Platform

Their social finance platform digitises informal, social, and relationship-based loans. It’s a peer-to-peer marketplace and there’s also a SaveIN mobile app. The platform institutionalises borrowing and money lending arrangements between friends and family by facilitating discovery, matchmaking, record keeping, and digital payments of such transactions.

Patent received for their platform

The company’s social finance technological innovation has recently received a patent for a period of 20 years. SaveIN is one among the league of fintech start-ups in India that obtain patents for their technology.

Positively impacting the financial health of Indians

SaveIN is positively impacting the financial health of Indians by leveraging their own trusted network and providing access to need-based and contextual financial products. Since about 77 per cent of urban Indian households reach out to family, friends, and acquaintances in times of need, SaveIN is capitalising on this market.

The social finance sector in India

Impact of the Patent

The fintech sector is headed in the right direction towards positive change. Start-ups like SaveIN are taking the route of patents at a time when big tech companies are entering niche segments in India’s personal finance market.

Growth strategy

SaveIN’s growth strategy is to raise more capital and is already in discussions with stakeholders across banking, consulting, block-chain, credit bureau and fintech sectors. By raising more capital in further funding rounds, SaveIN will expand its market reach, accelerate its product development, and strengthen its in-house team. It plans to reach over 5 lakh users by the end of the current financial year. They also plan to offer a hyper-personalised suite of products and services in the retail personal finance domain.

Purpose, implementation and success of the platform

The purpose of the platform is to eventually enable the migration of millions of social lending transactions from the cash economy to a formal economy. The platform is implemented right amidst customers’ lending/borrowing social circle or personal contacts. It tracks users’ lending/borrowing activities. The platform eliminates the grey area in loan repayment among friends by making clear terms for each loan in customers’ social circle.

SaveIN witnessed 45-50 thousand users join the app in the first few months of launch. Their early adopters shared enthusiastic responses. Financially savvy users were onboarded as lenders on SaveIN. The company has seen hyperbolic growth within a few months since its launch.

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The platform institutionalises borrowing and money lending arrangements between friends and family by facilitating discovery, matchmaking, record keeping, and digital payments of such transactions.

What’s in it for me?

The neo-banking sector in fintech has been booming. Social credit and financing services is a part of the neo-banking domain that has remained unaddressed. Start-ups venturing into this sector have a vast market opportunity awaiting them since a large segment of the general public does not have easy access to formal credit. Social finance is a largely untapped and unorganised market. SaveIN is currently India’s very first social financing platform. There is a lot of space for more start-ups to venture into this sector to give them competition and to disrupt the market with innovations.

Social borrowing and lending transactions for short term-loans is a very large market . This market is growing steadily and has huge potential in growing economies like India where trust factor among close-knit relations is more important for availing loans compared to approaching a bank or financial institution. The Challenger bank sector is seeing a lot of activity with more firms emerging. Since social finance is still at the very fundamental stage, start-ups aspiring to venture into this market can follow in SaveIN’s wake.

The post India’s First Social Finance Platform, SaveIN Gets Patent appeared first on Dutch Uncles.

Advent of Open Banking, A Fintech Revolution

DU Desk — Wed, 04 Aug 2021 03:33:53 +0000

A few years ago, banks guarded their data with utmost security and privacy. In fact, they were more reluctant to share customer and financial data than they were about parting with their money. But with the growth of fintech start-ups, banks are now realising that to stick to rigorous banking methods is to become irrelevant. They are now much more flexible and ready to share data through APIs for fintech start-ups and are thus siding with the competition. As a result, both the banking as well as the fintech sector are growing together and have become mutually beneficial to each other.

What is open banking?

Open Banking is an initiative which is fostering innovation in the fintech sector. It transforms the banking sector into a more inclusive and convenient medium for users. Besides financial inclusion, it is pivotal in driving innovation in the banking industry. Open banking cuts the dependency on legacy infrastructure among banks. It’s the bridge that’s culminating in more partnerships and collaborations between traditional banks and the fintech sector, thus encouraging innovation in fintech and leading to higher fintech adoptions among consumers.

How open banking is driving SME success in Fintech

The fintech sector is riddled with disruptive players especially among start-ups and SMEs. These fintech players are collaborating with banks and leveraging APIs to create digital solutions that are democratising financial services. This has been possible only because of the prevalence of the open banking system.

How MSMEs in Fintech are benefitting

Open Credit

India has high demand for credit and in this regard the Open Credit and Open Credit Enablement Network (OCEN) have emerged to democratise credit for the vulnerable segments like MSMEs and small businesses. By providing credit access to the severely underpenetrated MSME sector, OCEN is a valuable technology framework that’s giving rise to the open data economy. On the other hand, it nurtures multiple service providers including technology companies in fintech to extend credit services through innovative solutions.

Funded by data

Through open banking, banks are making valuable data available via APIs. This is funding small and mid-size enterprises (SMEs) with a more valuable asset than hard capital ‘data’, which is driving fintech success. The data they harvest is endowing SMEs with real value. Data sharing implementations like the AA (Account Aggregators) architecture and the DEPA (Data Empowerment and Protection Architecture) are helping lenders in fintech to lend money to individuals and small businesses both in the fintech and non-fintech space within minutes. With data flowing freely, subsectors in fintech are thriving with new players venturing into sub-sectors like lending, wealth management, personal finance management, accounting, etc.

India’s Open Banking Ecosystem and UPI

India’s Open Banking system is based on a hybrid model comprising IndiaStack, a Government API initiative and software platform for businesses, start-ups and developers. UPI (Unified Payments Interface) is a subset of IndiaStack that’s a classic example of the introduction of open banking in the country.

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Open banking cuts the dependency on legacy infrastructure among banks. It's the bridge that’s culminating in more partnerships and collaborations between traditional banks and the fintech sector, thus encouraging innovation in fintech and leading to higher fintech adoptions among consumers.

What’s in it for me?

Fintech start-ups can either develop data driven solutions for the payment’s ecosystem or partner/cross-collaborate with other fintech players to avail these solutions. Open Banking and the Open Data Economy have made available large repositories of data to the fintech sector. By leveraging these data repositories, fintech start-ups have huge potential currently in the market.

The trend is here to stay in the fintech space, and more banks are coming out of their hard shells to embrace and aid fintechs in the process. Ever since the open banking ecosystem began including NBFCs (non-banking financial companies) in 2020, the trend has only grown and picked up pace with the rising demand in digital financial services by consumers.

Start-ups in this space are attracting huge levels of funding since open banking is strengthening the bond between technology and the economy. If the open data economy becomes a reality and open banking is fully unleashed, the fintech start-up sector will be at the forefront and will lead the banking revolution that’s already happening.

The post Advent of Open Banking, A Fintech Revolution appeared first on Dutch Uncles.

Here is how Bueno Finance is Building itself as a Neobank

Aakash Sharma — Fri, 25 Jun 2021 03:35:02 +0000

Bueno Gig Growth Technologies Private Limited, commonly known as Bueno Finance, is a financial services platform that aims to improve the financial access and inclusion of Indian blue-collar (manual) workers. It mainly meets short-term cash flow needs and helps customers improve their creditworthiness to obtain official credit.

With the integration of financial technology and digital financial solutions, Bueno Finance positions itself as a “neobank”. A neobank, also known as an internet-only bank, or virtual bank, or digital bank, is a bank that is operated entirely online without a traditional physical branch network.

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Bueno Finance aims to connect blue-collar (middle and lower-middle-income segment) workers to the mainstream financial world.

Bueno Finance works with digital platforms by giving blue-collar workers instant access to revolving credit lines for their work. They can access this line of credit through the platform and the credit line increases over time. Bueno does this by capturing payment and transaction data in real-time for better understanding.

Why Bueno Finance, and how does it work?

The lives of blue-collar working people in India are complex, uncertain and often prone to more risk than well-settled people in the upper-middle class. It is estimated that more than 15 million gig workers will be connected to the digital platform by 2021.

However, as the industry has grown, the financial services available to these workers have not accelerated. With the services provided by start-ups like Bueno Finance, this gap can be filled, and personalised finance can be availed to millions of workers.

Bueno Finance works on a three-step strategy, which is as follows:

Collaboration

Bueno Finance connects to leading digital platforms and integrates with centralised digital infrastructure.

User-friendly Application

Gig workers can download the app from the platform and register with their mobile number. Once the credit limit application is successful, the company searches the forum for income information and activates credit lines transparently within 24 hours.

Refund and Repayment

Repayment automatically gets debited from the worker’s payout account by the platform and transferred to Bueno Finance.

Latest Seed funding received by the start-up

Bueno Finance has recently raised $3 million in its seed round from a slew of investors such as Goat Capital, JAM Fund, Olive Tree Capital, Good Water Capital and others from Silicon Valley. The Gurugram-based start-up will use the funds to expand the product offerings and strengthen its team across engineering, product, sales, credit and operations.

What can start-ups learn from Bueno Finance in providing Credit Access to customers?

In an increasingly growing Indian fintech and banking sector, financial and fintech businesses must leap towards including the vast Indian workforce often devoid of new-age financial services due to a lack of resources and awareness. With the neobank model and fintech integration, consumers can seamlessly access a credit line, build their financial health, save and spend in more innovative ways. This alone is an excellent incentive for start-ups and entrepreneurs to start in this segment.

By utilising the existing network of pan India fintech that is the UPI, which is backed by a credit line approved by authorities, start-ups can enable workers and merchants to transact online easily. Moreover, through applications and web portals like that of Bueno Finance, new start-ups can help customers use their credit line to transact in the offline world via QR codes available at every merchant.

In a nutshell, the fintech and new banking models are increasing. Keen entrepreneurs must hop on this growth bandwagon to capture the right opportunities at the right moment, adding to the financial inclusion of billions of Indians.

The post Here is how Bueno Finance is Building itself as a Neobank appeared first on Dutch Uncles.

Advent of UPI and the Fall of Mobile Wallets

Anju Nambiar — Wed, 16 Jun 2021 04:41:57 +0000

How UPI obtained higher leverage over mobile wallets

Ever since the Unified Payments Interface (UPI) came about, the relevance of digital wallets was dimmed. In 2016, when the National Payments Corporation of India (NPCI) first introduced UPI, consumers saw the benefits of quick money transfer between bank accounts over the tedious process of first loading e-wallets with money before a transfer could be facilitated. This was why e-wallets were less preferred and UPI enjoyed higher leverage in digital payments.

RBI’s Interoperability rule to benefit mobile wallet users.

However, The Reserve Bank of India (RBI) has recently introduced a new interoperability rule which will allow interoperability between mobile wallets of different brands and ‘closed-and-open-loop’ prepaid cards. The rules are user-friendly since up until now, mobile wallets of different brands couldn’t send and receive money to and from each other.

Also, certain merchants were biased towards certain mobile wallet brands which was an inconvenience to consumers.

Upside of the new interoperability rules for mobile wallets

The new rules will benefit both e-wallet users and providers. Users will reopen their abandoned e-wallets and use them for payments and transfers. Mobile wallet providers who were suffering from low deposits and balance will see renewed activity.

Downside of the new interoperability rules for mobile wallets

The new rules may hinder the growth of mobile wallets’ market share in India. The improved flexibility among mobile wallet consumers to easily switch between brands may come as a blow to providers. This is because frequently migrating users will be difficult to keep under the brand umbrella.

Mobile wallet providers need to comply with fixed UPI market share.

The NPCI in the end of 2020 imposed a 30% market share cap on UPI for mobile wallet transactions. As such, mobile wallet providers need to comply with the market share limits hereon before they can see an increase in their consumer volume and revenue. The bottom line is that UPI still holds a higher leverage over e-wallets and e-wallet providers need the help of UPI to stay relevant, and see growth in their usage.

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In 2016, when the National Payments Corporation of India (NPCI) first introduced UPI, consumers saw the benefits of quick money transfer between bank accounts over the tedious process of first loading e-wallets with money before a transfer could be facilitated.

What’s in it for me?

Starting April 2022, mobile wallet users who are fully compliant with their KYC can send and receive money to other mobile wallet providers. Mobile wallet providers will need to collaborate with NPCI to link UPI IDs with e-wallets. They will need to enable interoperability through UPI.

Encourage users to pay for small transactions using their e-wallets. With the new levelled out playing field, new business opportunities open up for wallet companies. Henceforth, you need not build up merchant networks to acquire e-wallet customers since UPI-accepting merchants will also accept wallet transactions.

Encourage users of your e-wallet to make it their primary payment method. You can also easily acquire new wallet users since consumers will be open to getting on board due to interoperability. Complying with the RBI norms, all Prepaid Payment Instruments (PPI) issuers taking advantage of the new interoperability rules should establish appropriate customer redressal mechanisms to limit customer liability.

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