Reserve Bank of India – Dutch Uncles

Central Bank Digital Currency, Explained

Aakash Sharma — Wed, 28 Jul 2021 10:05:08 +0000

Central Bank Digital Currency – CDBC – is a digital currency issued by a central bank, and it generally takes on a digital form of the nation’s existing ‘fiat’ currency. To put it simply, in India, a Central Bank Digital Currency will be the digital form of the Indian rupee, regulated by the government laws and under the respective financial regulator’s ambit.

T Rabi Shankar, Deputy Governor, Reserve Bank of India (RBI) recently delivered a speech highlighting the central bank’s perspective on a controversial yet fundamental issue: the central bank digital currency (CBDC) and the future of private cryptocurrencies.

Digital currencies are becoming more popular, and there is increasing pressure on central banks worldwide to create virtual “currencies”. With such a trend, the RBI is also ready to go down this road, but how it will make India’s CBDC remains to be seen.

What is a central bank digital currency?

A central bank digital currency is a legal tender issued in digital form by a country’s central bank. It is similar to legal tender currency but has a different (digital) structure and can be exchanged face-to-face with government-issued money. In other words, the CBDC is identical to the fiat currency; it is simply digital in form. Given the recent emphasis on the issue, it seems likely that India will soon start building its own CDBC.

When will the Indian CDBC be implemented?

The recent comments about CDBC by RBI’s top executive came after the European Central Bank stated that it would enter a 24-month “investigation phase” regarding the currency. If successful, a “digital euro” will be in place by 2025. The People’s Bank of China also said last week that trials of digital Yuan reached $5.3 billion in trading volume at the end of June.

Central banks around the world are paying more attention to digital currencies. CBDCs will be part of the arsenal of most, if not all, of the world’s central banks. As per the RBI, in India, a calibrated approach will be considered in consultation with management and stakeholders for CBDCs. For quite some time now, the central bank has been exploring the benefits and risks of issuing a CBDC. No time frame has yet been given for the implementation and launch of an Indian CBDC, but its development is undoubtedly underway.

Step-by-step implementation – what does it mean?

The RBI plans on a phased and gradual issuing of its own version of CBDC. This will be done after careful consideration of the implications for various issues, including the difficulty that will make it complex for banks to obtain deposits and the potential impact on monetary policy behaviour.

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There is a possibility that pilot tests for the CBDC can be done in wholesale and retail segments in near future as per the RBI's official stance.

The RBI is currently working towards a phased implementation strategy and examining cases which could be implemented with little or no disruption. The Indian central bank will also draw upon the lessons from other countries in various stages of introducing such a digital fiat currency.

How will this affect different sectors and industries?

With the introduction of the CBDC, there can be significant benefits such as reduced dependency on cash, slashed transaction costs and regulatory risks, and improved returns on the government currency. It will also promote more robust, efficient, reliable and more regulated fiat payment methods.

The adoption of the CBDC could also have a significant impact on the banking system. The CBDC can reduce the demand for trading bank deposits and reduce liquidity on the settlement of transactions. It could also cause a shift away from bank deposits.

What can start-up and small businesses expect from it?

By following global trends in CBDCs deployment practices, Indian start-ups can be nurtured through India’s own digital currency ecosystem. With substantial participation and exposure to modern-day digital tools, such as the CBDC, start-ups can plan wider and lay a solid foundation for their free-market businesses and financial models.

Additionally, by using central bank digital currencies, consumers can own and trade CBDCs without a bank account, thereby attracting a broader audience to start-ups for cross-industry transactions. It will provide consumers and businesses with a channel to receive and return CBDCs in exchange for cash and commercial bank funds and deliver immediate point-to-point value without clearing or settlement.

Ultimately, the CBDC is traceable and controllable in terms of issuance and ownership, providing every user and business with a healthy and legitimate financial footprint.

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RBI gives BharatPe In-Principle Approval to Start a Bank

Shalmoli Sarkar — Wed, 23 Jun 2021 05:35:02 +0000

In September 2019, Punjab and Maharashtra Co-operative Bank (PMC Bank) met with its sad fate by becoming the single largest lender to HDIL (Housing Development and Infrastructure Ltd) that accounted for 75 percent of its loans. HDIL’s failure to pay the loans resulted in the collapse of PMC Bank that led RBI to intervene by approving Centrum Financial Services Limited and BharatPe to take over the cash-strapped bank to form a small finance bank.

The joint venture between Centrum and BharatPe will infuse a total of Rs 1800 crores which will be equally divided between the two entities out of which Rs 900 crores will be invested in the first half of the year and the bank will commence its operation with a value of Rs 500 crore from day one.

There is nothing unusual about the collapse and taking over of a bank, but what is rare about the deal is a three-year-old fintech company taking the reins of a beleaguered bank to become its half owner.

BharatPe-A Three-Year-Old fintech company winning a rare banking license

BharatPe a fintech platform enabling Indian merchants and small business owners to accept digital payments, was eyeing to receive an NBFC license for a long time. The collapse of the PMC Bank was a shot in the arm for BharatPe as it first submitted its nomination along with Centrum to RBI for becoming potential bidders to take over the bank and earn a banking license. BharatPe aspires to join the Unicorn club with its ongoing talks with Tiger-Global for an E-Series funding of $250 million required for opening a new-age bank. This takeover is beneficial for BharatPe as it presents the opportunity of raising deposits and public deposits that is supposedly the cheapest source of capital for lending. It also lowers the cost of capital from a lending perspective.

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The joint venture between Centrum and BharatPe will infuse a total of Rs 1800 crores which will be equally divided between the two entities out of which Rs 900 crores will be invested in the first half of the year

What Services BharatPe is expected to Provide in the New Bank?

This small finance bank intends to aim at the underserved markets of India. Small and medium enterprises in India have limited to zero financial infrastructure thus, forcing them to rely on personal relationships with wholesalers for credit. Centrum the owner of the other half offers investment banking solutions to mid-corporates and SME lending, broking for institutions and retail. It also provides MSME credit, wealth management, affordable housing, and micro-lending, apart from private debt and venture capital. Both entities complement each other as they serve the same target audience. BharatPe working jointly with Centrum will introduce new-age fintech products catering to the payment, investment, and credit needs of the retailers and small businesses.

Learnings for start-ups aspiring to hold ownership in banks or have a lending license

With more than 50 lakh merchants using BharatPe and manifold transactions up to 7 times till March 2021, it could have become a unicorn start-up with ease as no investors would have denied signing cheques. But BharatPe believes that it is a three-year-old company that has numerous milestones to achieve and does not want to be seen as a fintech company whose offerings are similar or product USPs blurring with fintech majors such as Paytm, PhonePe or Razorpay. Rather than following the unicorn suit it decided to foray into the banking vertical thus clinching the first movers’ advantage to offer its fintech services to a traditional co-operative bank and giving it a digital makeover.

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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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Country’s Largest Public Sector Lender Joins the Investor Lobby

Anju Nambiar — Tue, 15 Jun 2021 08:35:04 +0000

State Bank of India (SBI) recently invested an undisclosed amount in a Bengaluru-based Fintech start-up making it India’s largest Public Sector lender to join investors like Apis Partners, SmileGate, and Y Combinator.

SBI is the newest entrant to the investors landscape and stands out among fellow start-up investors. SBI is India’s most trusted and a leading lender. Having them on board is a game changer for any start-up. SBI’s investment in Fintech start-up Cashfree is a strategic one which occurred at a post-money valuation.

Change in Start-up funding landscape in India

SBI’s investment was targeted at a growth strategy focused on customer experience and product innovation. The start-up funding landscape is changing thanks to the renewed interest from banks towards technological innovation.

Case in point is ‘PSB 59 minutes’, a fintech start-up where a number of public sector banks like SBI, Punjab National Bank, Bank of Baroda, among others have got into partnerships. The start-up disburses loans for SMBs in 59 minutes via the partnered Banks.

There is immense interest among banks towards the start-up community especially around fintech players who offer innovative technologies like AI chatbots. Also, these banks are now very open to explore new technologies like Blockchain to streamline traditional banking.

Potential for Accounts Aggregator Business in India

SBI’s Cashfree investment is not just about getting into the payment gateway business. The Reserve Bank of India (RBI) recently announced licenses for NBFCs (Non-Banking Financial Institutions) to venture into the account’s aggregator business. This move is set to transform financial services in India.

The accounts aggregator market is still growing but looks quite promising as a potential asset-light infrastructure business consideration. A number of NBFCs have already received RBI approval.

Soon, more public, and private sector banks will make their entry, empowered by regulations, innovation, and new-age technologies like Artificial Intelligence (AI) and Machine Learning (ML).

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SBI is the newest entrant to the investors landscape and stands out among fellow start-up investors.

What’s in it for me?

It’s interesting how SBI chose a digital payments and banking technology start-up for investment which opens up avenues for more start-ups in this sector. It demonstrates how SBI is rooting for digital payments despite being a traditional financial institution.

Public sector banks supporting the growth of fast and easy payments ecosystems is huge for the Fintech sector. SBI has a keen eye on fintech start-ups and Cashfree is just one among an upcoming list of beneficiaries. SBI is currently an active investor in Fintech start-ups and its associate company SBI Capital Ventures Ltd. Is tasked with the disbursal of funds.

SBI is also interested in investing in blockchain start-ups with a specific use where the bank has a pivotal role to play.

Lending and Insurance fintech start-ups are very much capable of taking on large banks through their technological innovation. But these fintech start-ups need collaboration with banks for their customer base and their legacy of trust. The best way forward is through partnerships or investments between fintech start-ups and banks (both public and private sector).

Fintech start-ups have been offered an open field for pitching their ideas with SBI for potential procurement, partnership, or investment. Even HDFC Bank, India’s biggest Private Sector Bank became open for collaboration with third-party players in Fintech instead of competition against them.

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Leap Finance: A Springboard Making Educational Dreams a Reality

Talat Rais — Thu, 10 Jun 2021 12:35:04 +0000

In the middle of every difficulty lies an opportunity – Albert Einstein.

Two men brought this quote to life when faced with obstacles during their professional careers. Working with Non-Banking Financial Company (NBFC) Incred, Vaibhav Singh discovered major loopholes in the foreign lending market, while Arnav Kumar’s personal experience suggested that availing a loan without a collateral was next to impossible, during his stint at Capital Float.

Exploring new models, the duo took it upon themselves to fix the systemic inefficiencies in the lending market through innovation and decided to start – Leap Finance – in 2019.

Leap finance, as the name suggests, is a fintech start-up based in San Francisco, California, with offices in Bengaluru. The aim is to provide loans to Indian students studying abroad without collateral, at a 5% lower interest rate as compared to foreign banks. The start-up also helps students shortlisted courses, interact with experts, provide test preps, professional help desk and education counselling.

Taking the Leap to Success

In their early days, the duo aimed at building a product that suited a diversified audience. This required them to travel for six months, “living out of a suitcase”. Their first product was designed primarily for Indian students studying in the United States, with an interest rate of 8-10%. Later on, they planned to diversify the product in countries such as the UK, Canada and Indonesia.

Leap Finance tackles the problem of Indian students paying loans at as high as 13% , while their American counterparts avail it at almost half their rate, owing to the lack of credit scores of the former in the foreign countries. The company bridges the gap by assessing secondary documents and the potential income of students bringing down the interest rate, gauging the risk associated with the loan and providing excellent financial products. Thus, Leap Finance in essence, takes a smart and a calculated ‘leap of faith’ based on the alternative data points derived from the students.

“We finance your dreams to study abroad” – The start-up ardently believes in putting the focus on the future of the customer rather than their current or past situation. In simple words, they essentially take into consideration the GRE/TOEFL/IELTS scores, along with degree certificates to assess the potential income of the student. The team states clearly that the economic background of the student has got nothing to do with their ability to avail the loan.

All that the student needs is a strong cosigner to share the burden of the loan. Cosigner is a person whose credit report and income would serve as an added security to the loan sanctioned. This is in contrast with the traditional model of extending student loans.

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The start-up ardently believes in putting the focus on the future of the customer rather than their current or past situation

The Market Play

Indian education industry has been undergoing a revolutionary phase owing to digitisation with the eruption of edtech platforms such as Byju’s and Unacademy, eventually broadening the spectrum of students’ aspirations.

With overseas education being a dream of most Indians, being a fintech cum edtech start-up, Leap Finance is able to cash in on these changing dynamics of the education industry. The share of students wanting to study abroad has increased multifold over the years due to the pro-immigration policies of countries such as Australia and Canada. With the Biden administration in place, the US’s immigration policies have also taken a diplomatic stance for the Indian students.

In the United States alone, Indian students constitute 25% of top US graduate programmes.

That being said, there has always existed a growing need for one stop solution for counselling, guidance, finance among Indian students. There are students called “value maximisers” belonging to the lower middle income group. They are the ones who aspire to have a global career but can’t afford a degree abroad. Alongside them not being able to afford the hefty tuition fee and the expenses of accommodation, their main aim remains to gain the most lucrative option out of the plethora of offers they have at their disposal. Such students most often lack collateral, thus their chances to avail a loan minimizes along with their aspirations. The market thus provided a fertile ground for a business offering for these services to flourish.

Leap Finance offers not just loans on nil collateral but also assisting overseas students to open bank accounts in countries of USA and Canada along with a credit card. Customer satisfaction remains their sole priority, hence, along with assisting students through their Youtube channel called Leap Scholar, the start-up also helps students avail credit card services, provide them with Visa assistance, IELTS and GRE counselling, internship advice etc.

Gaining Investors’ Trust

In March 2020, the company raised its seed funding for $5.5 million led by Sequoia Capital, with participation of Bhupinder Singh of Incred and Kunal Shah, founder of CRED. The principal investor at Sequoia, Ashish Agarwal, cited the strong need for approximately $15 billion credit as the reason for market’s attractiveness, which is amplified by Leap’s mission-driven team, that made the investors place their bet on the start-up.

The capital was used to expand the company’s user base, focus on product development essentially with plans to expand the service to countries like Vietnam and Indonesia.

In March 2021, the start-up raised a whopping sum of $17 millions in the investing round led by Jungle Ventures. At the time they had a user base of 5 lakhs registered international students and 2 lakhs active users on the platform.

Securing funding at a time when the global pandemic has dampened students’ ambitions, did prove a challenge to the Leap team. However, they held their grounds. According to Amit Anand of Jungle Ventures, it was the sheer motivation and patience of the student community, especially the ones who held back their admissions at foreign universities, that encouraged hundreds more students to pursue education abroad.

In an interview, Vaibhav in fact talked about Covid-19 being a boost to their business to the extent that 2021 might even turn out to be a breakout year. Agarwal of Sequoia Capital, being impressed at the company’s approach towards tackling the pandemic, was particularly in awe with Leap Scholar – a counselling service provided by the start-up – which helped the start-up strengthen its foothold in the market. Amidst the lockdown hiccup, the company cashed on their online property.

The team aims at using the capital from Series B funding to expand their product portfolio into creating non-lending products in order to dive deeper into new markets.

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Securing funding at a time when the global pandemic has dampened students’ ambitions, did prove a challenge to the Leap team.

Democratisation of Finance

The start-up has come a long in a short span of two years. Alongside them serving as a one-stop solution for students looking to study abroad, they are also bringing in much needed change in the finance industry of the country, particularly in terms of financial literacy and financial assistance through the digital space.

India has the second largest unbanked population in the world, that amounts to 190 million people. Many people do not have access to loan services owing to documentation and collateral issues. This population ends up getting informal credit at an exorbitant rate of interest by moneylenders, often leading to a huge chunk of the population being rendered landless/assetless. Simultaneously those who can avail bank services face a crippled technological system, something that the leading banks of the country are yet to catch up with.

Current situation calls for a revolution in the lending space as the pandemic has taken a huge toll on the financial condition of many. Although NBFCs did solve the problem of collateral to some extent, however, that came with rendering security to banks through a high interest rate. It is more about affordability than availability.

Leap Finance through actively improving accessibility of credit through incentives such as no collateral, has in essence been working towards democratisation of financial services. They solve documentation problems through a requirement of minimum details such as pan card, Aadhar card and credit report of the student.

Through a thorough comparison of various loan options on its website, it offers clarity on the best loan option available via visual representation and interactive interface. This eases the job of students, particularly value maximisers and the ones with less agency, rendering them a one-stop solution in an otherwise fragmented value chain industry.

Creating a Uniqueness

There are multiple players in the edtech industry offering similar services as Leap Finance. One of them is Avanse Financial Services, an NBFC acquired by Warburg Pincus, which stands at a valuation of $66 million. Offering education loans, it has a strong competitive advantage against Leap Finances, owing to its full stack model.

The term ‘full stack’ was coined by Chris Dixon, suggesting it as a company which provided its customer with an end product. In essence, Avanse provides skill development courses and loans to educational institutions besides financial services.

At the current valuation of $22 million, Leap has a long way to go with regards to securing fundings and developing its revenue model. The start-up, in essence, is focussing on diversifying its services in the fields of counselling, customer-driven/tailor-made solutions to issues related to pursuing education abroad, and extending banking services to customers as well.

Going Beyond Loans: Monetisation the User Base

Leap through its Graduate Loan product has built a customer base of 234 crore as of now, i.e. sanctioned 234 crore loans.

At the same time, they are also focussing a great deal on their Youtube channel Leap Scholar. In an interview, the team confirmed plans to expand their services to become a neobank – a smart/digital bank that has no physical branch, but functions to cater to all the services that any physical bank does. Some of the examples of neobanks are Razorpay X and Insta Pay, that help individuals to open a bank account, make payments, request refunds etc.

While these banks essentially offer these services to businesses, Leap Finance aims at becoming the neobank in the international students community, offering full-fledged banking services to its customers.

Earlier it restricted its services to underwriting loans based on students’ future income, which slowly progressed into offering bank account services in the USA and Canada. With the new proposition, it would start earning like a typical bank but with a much more sophisticated and advanced digitised system.

The start-up’s future plans may also include offering courses and tie ups with educational institutions, similar to its competitor Avanse. Leap has been building a strong user base through offering free of cost counselling services through its Youtube platform and comparison of university programmes through its blog. There is a huge possibility in future for the company to start offering international educational courses through its amassed online user base, hence adding another revenue stream.

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Latest Regulatory Developments in India’s Fintech Industry

Aakash Sharma — Mon, 24 May 2021 09:35:04 +0000

Between 2020 and 2021, the Indian fintech market grew to new levels as the COVID-19 pandemic accelerated the digitisation of consumers, small businesses, banks and other financial institutions. First-time fintech users who were constrained to transact manually during lockdowns early last year primarily took to using digital payment options in a big way. As of October 2020, more than 2 billion transactions had been recorded through the Unified Payment Interface (UPI) service, India’s most extensive fintech application.

Recently, industry stakeholders have sought to regulate the entry and operations of fintech platforms. The development of a regulatory framework around the fintech industry has gained momentum. As of now, the fintech sector functions under the legal purview of the Ministry of Law, Ministry of Finance, Reserve Bank of India, Securities and Exchange Board of India (SEBI), and National Payments Corporation of India (NPCI).

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The rapid growth of the fintech industry in India is a testament to the encouragement provided to industry participants by regulators.

Let’s take a closer peek at the latest rules and developments in the Indian fintech industry.

RBI Regulatory Sandbox – Testing for a Regulatory Model

RBI testing regulatory sandbox refers to the direct testing of new products or services in a controlled regulatory environment. Post testing, the RBI may permit certain relaxations for the limited purpose of testing fintech products.

The products in the RBI’s fintech regulatory sandbox include:

eRupaya – It is a collection of prepaid cards based on Near Field Communication (NFC) and Point-of-Sale (Point-of-Sale) devices that enable in-person transactions and digital products in remote locations.

PaySe – This digital offline payment product enables payments in rural farms to be digitised through a self-help team structure.

CityCash – It is a range of NFC-based prepaid cards and POS devices that enable in-person purchases, including but not limited to the purchase of bus tickets.

ToneTag – This is a UPI phone-based payment solution for in-person transactions based on interactive voice feedback between devices.

RBI launched the second test of fintech solutions in the context of ‘cross-border payments’ in December 2020. This move will enable technological innovations to be introduced in the cross-border payments landscape cost-effectively, quickly, securely, practically and transparently. The RBI has also notified ‘MSME lending’ as the theme for the third cohort, details of which will be announced in due course.

Vast Regulatory Ambit for Fintech

While there is no one supervisory body for fintech businesses, most fintech business would fall under the preview of the Reserve Bank of India. In addition to the RBI, depending on the nature of activity required to be regulated or on the third party with which a fintech entity would interact, regulators such as the Securities Exchange Board of India, Ministry of Electronics and Information Technology, the Insurance Regulatory and Development Authority of India and the Ministry of Corporate Affairs would also have oversight.

Every key regulator i.e., the RBI, SEBI, IRDAI and the Pension Fund Regulatory and Development Authority has issued draft guidelines. In the case of RBI and SEBI, the above mentioned operationalised regulatory sandboxes will allow fintech businesses to live test their innovations in a controlled regulatory environment while providing exemptions of liquidity requirements, corporate compliances, credit record, financial soundness, management experience etc.

These sandboxes have been designed to be short term (i.e., between six to seven months) such that multiple sandboxes under various themes may be operationalised. In addition to sandboxes, it is evident from the Government’s budget policies and the regulatory policy decisions that it seeks to support innovation.

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How Succession Planning Can Help Small Businesses Survive in the Face of Adversity?

Anju Nambiar — Sun, 16 May 2021 06:05:04 +0000

What is succession planning?

Succession Planning, also known as ‘replacement planning’, as the name suggests, is when an organisational leader foresees his or the demise of other key stakeholders. It’s a strategy for immediate action in the event of an ongoing crisis. The leader decides on his/her ‘heir’ well in advance to ensure the smooth continuity of business if a tragedy were to take place. The business leader picks out an employee or a group of employees to pass on leadership roles.

How is it an answer to the uncertain future?

Death is all around due to the second wave of covid-19 and it’s not sparing anyone including the top-level executives in business. A lot of sudden deaths have led to voids in key roles within organisational structures. Businesses are losing valuable employees and during such a time, they are unable to grieve. This is because they are scrambling to fill up the leadership position to prevent business impact.

Several companies are creating succession plans for board level functionaries and top executives. Succession plans are an answer to the uncertain future because they create a sense of clarity for the upcoming generation of leaders. Stability is almost non-existent amidst the second wave and nobody is sure what to expect soon. Which is why small businesses and budding entrepreneurs need to be ready with a roadmap to their business, if for any reason they become unavailable.

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Succession plans are an answer to the uncertain future because they create a sense of clarity for the upcoming generation of leaders.

How does succession planning help small businesses?

Ever since the RBI (Reserve Bank of India) capped the tenure of MD’s and CEOs to 15 years, a number of institutions including the Kotak Mahindra Bank is focusing on succession planning responsibilities. This has come at the right time for them since Covid-19 has clearly demonstrated the urgent need for this exercise. Kotak Mahindra has already created a tenure for their CEO Uday Kotak, and they are working on ensuring long-term stakeholder and shareholder value.

Build confidence among your staff and family.

It’s a given that as a business leader, you plan on being active within your business for a long time. But succession planning is more about creating a sense of confidence than it is about anticipating the worst. A well thought out succession plan will give confidence to your clients, family, and staff if you are suddenly unavailable.

Preserve your business.

Small businesses in the growing stage need a lot of preservation otherwise they crumble down to the foundations. Unexpected events especially threaten to topple down small businesses. Succession planning will help both your loved ones as well as your most trusted customers to continue their associations with the business should something happen to you.

Facilitate smooth successions

If key leadership roles are suddenly left vacant, a crisis shouldn’t occur within your business. Instead, successors should be able to easily fill in their shoes and step in to take on the roles and responsibilities confidently. This is how succession planning will help you survive in the face of adversity.

Increase business value.

Businesses that put their Intellectual Capital into writing see an increase in their valuation. A well-documented succession plan improves the transferable value of the organisation and will allow you to leave your legacy behind. It will also give you the power to retain your most valued and trustworthy employees who you think are most deserving of leadership roles in the future. Small businesses are under immense stress currently because of all the disruptions and the deaths caused by the second wave. Working on a succession plan will ease your worries and give you the much-needed peace of mind which is so hard to achieve in the current climate.

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Consumer Price Index (CPI): The Inflation Indicator

Tanisha Achrekar — Mon, 05 Apr 2021 04:35:04 +0000

Often in everyday conversations, people talk about how expensive things have become compared to previous years. In reality, how expensive things are? Inflation is simply a rise in price levels, thereby decreasing the purchasing power of consumers. Just like so many consumer products are priced double or triple now compared to say 10-20 years ago. So how do we know how much inflation has increased? This is where Consumer Price Index (CPI) comes into play. CPI acts as a metric and is used to measure inflation. Data is collected on the prices of goods and services that are consumed by the retail population to measure the CPI. It is purely focused on measuring retail inflation.

What is the Consumer Price Index (CPI)?

CPI focuses on the demand side of the economy. It measures the changes in the price level of products consumed by the retail consumer. CPI of any country is calculated for fixed baskets of goods and services. As new products and services keep coming into the market over the years and calculating CPI with new products would not be possible. The ones that are kept in the basket may or may not be altered by the government from time to time depending on the country’s policy.

CPI is a macroeconomic indicator of inflation. It also reflected the overall purchasing power of the country’s currency. For example, Amul paneer used to cost around Rs 170 to Rs 180 for a kg. Now the same paneer in 2022 costs Rs 340. More currency is needed for purchasing the same quantity of goods, thereby reducing the value of the currency. Just like we hear our older generation saying back in their days Rs 10 were a lot. In India, CPI is a vital tool used by the Reserve Bank of India, central government and state governments.

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Data is collected on the prices of goods and services that are consumed by the retail population to measure the CPI.

What does CPI reflect?

CPI is a vital economic tool; it highlights several key parameters which are useful for the government to draft policies and take measures accordingly.

The cost of living

CPI measures the change in the prices of consumer goods. As the price of consumer goods and services change, the cost of living would change too. Say if the prices of groceries and everyday essentials has increased, the cost of living has increased too. It reflects the cost of living of consumers in society.

The increased prices of goods and services

CPI helps the government to understand which goods and services have increased their prices, the percentage of rising in prices and the overall pricing graph of the product/service. While higher prices over the years are no surprise for the government, an astonishing steep rise in any product/service is concerning.

Indian rupee’s worth

With CPI, the inflation rate can be calculated and so can the money’s worth be. The government will be able to access the value of the Indian rupee. If the value is declining over time, required measures can be taken.

The purchasing power of consumers

The cost of living and the purchasing power of the consumers can be calculated using CPI. As the cost-of-living increases, the purchasing power is bound to change across various strata of society.

How is CPI calculated in India?

Measuring the price of baskets of goods and services consumed by an average Indian is a strenuous task. As the baskets of goods and services include food, clothing, electricity, transportation, education, medical care and many more. It almost includes anything and everything that requires money.

CPI is calculated by comparing the current price levels in the market to the price levels of a market in the past. The price levels of the previous year are referred to as the base year. The base year here acts as a benchmark for comparing with the current prices. Currently, the base year is considered as 2016. The base year is monitored by the Central Statistics Office (CSO), Programme Implementation (Mospi) and Ministry of Statistics. Changes are made from time to time by these committees.=

In mathematical terms, the formula of CPI is:
Consumer Price Index = (Cost of the market basket in a given year/Cost of the market basket in the base year) x 100

CPI is calculated in percentage. The statistics of CPI are released by the National Statistical Office (NSO). The several items of goods and services in the CPI basket can be broadly divided into several categories. Some of the common categories in the basket are food and beverages, clothing, housing, fuel and light, footwear and recreation. In India, there are five consumer price indexes (CPIs). CPI for Industrial Worker (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL), CPI-Urban and CPI-Rural.

The link between CPI and Repo Rates

CPI being a useful economic tool, it helps the RBI as well while drafting the monetary policies for the country. The RBI aims at keeping the inflation rate of the country around 4%. However, it usually fluctuates anywhere between 2% and 6%. RBI aims to establish inflation control and the way it does keeps changing from time to time depending on the decision of the monetary policy committee.

Depending on the inflation, the repo rates are decided. If inflation is rising, it means the prices are rising in general. To bring the rising inflation to halt and potentially reduce it, the central bank would aim to reduce the supply of money in the economy. To reduce the supply of money, the repo rates by RBI are increased. This in turn will increase the interest rate on borrowings from the bank. An increase in the interest rate will help in arresting the liquidity in the economy. Inflation is an important factor in determining the monetary policy of the RBI.

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CPI is calculated by comparing the current price levels in the market to the price levels of a market in the past.

The limitations of CPI

CPI is an important economic indicator and provides data that impacts several national decisions. However, as a macroeconomic indicator, it has its limitations.

Difficulty in price measurement

While recording price changes on a huge range of products, difficulties are bound to arise. There are likely to be local variations of different products or price differences in different states. One way this challenge is usually overcome is by taking the average price of the product after serving it from different parts of the country. However, small reductions in the quantity, weight or size of any product in the basket often goes unnoticed.

The lack of innovation

The basket of products and services from which the CPI percentage of a county is derived lacks the consideration of new products and services. As technology and the economy are rapidly changing, many products and services fail to stand the test of time and many new products are introduced in the market. To have a precise CPI percentage, frequent revision of items and weights is needed. Some products need to be added, while others would be eliminated from the basket.

Structural challenges

When the CPI is being calculated, one of the biggest hurdles is to decide the range of households to which the CPI is applicable. As different types of households have different products and services, there cannot be one basket that fits all. Income levels of different households determine their spending habits. The CPI index calculated based on the expenditure of an average Indian household will not help in determining the cost of living of the above and below average households in the country.

Outdated base year

One of the biggest drawbacks of CPI is that the base year data may sometimes feel irrelevant and outdated compared to the current year. Also, it is important to select a base year where the prices were relatively stable. Years where due to unforeseen circumstances of severe inflation or deflation should be avoided. For example, the impact of COVID-19 on the economy was devastating around the world. The year 2020 would be an unstable year for taking as the base year for calculating CPI.

Changes and differences in pattern

CPI may have a limitation in its significance. The basket that is used for measuring CPI is only applicable to the base year in reality. For example, if the base year is 2016 and the CPI is being calculated for 2021. The basket will not be the same after five years clearly. As over a period of time, the income of people changes and the pattern of expenditure too. So many things evolve and alter in society in the current year in comparison to the base year.

Apart from inflation and spending power, CPI also impacts the savings and investment of individuals. As a business, if the CPI is indicating a period of inflation or deflation, changes are needed to be made accordingly. For example, in a period of inflation, a strategic move would be to increase your cash reserves. As inflation means a rise in prices and cost of living, the cost of business expenses is likely to sour. Having cash reserves and working capital would help in sustaining the business during the economic crisis.

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New RBI Guidelines, Card Details Not To Be Stored Online: Here is the plan of action for E-commerce Start-ups

Aakash Sharma — Sat, 27 Mar 2021 06:35:04 +0000

The Reserve Bank of India has issued critical new policies to prevent online merchants, payment partners and e-commerce sites from storing customer debit and credit card information. The apex body has commissioned companies to develop a strategy for digital payment products and services with their board of directors’ approval.

What are the targeted new RBI guidelines?

When formulating the parameters of a “new product”, the central bank has said that attention should be paid to the general business strategy, the risks inherent in the product and its consistency with the regulations. In the new directive overview, payment security requirements are explicitly discussed in terms of functionality, security, and performance (FSP).

The considered angles include:

Checking the necessary measures to protect the confidentiality of customers’, data integrity and processes related to the digital products/services provided,

Availability of the necessary infrastructure with the required support of personnel, technology, etc., and

Ensuring that payment products are built securely with high performance, security and stability, and are implemented after completing the necessary FSP tests.

In short, this means that a company cannot store customer’s card data on its servers and data centres. They need to take other data security precautions and avoid data breaches. This also means that whenever customers want to complete an online transaction, they need to remember their card details or have the particulars ready to enter every time. The new rule will take effect from July 2021.

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While many believe that large financial institutions may not be able to locate all of the data in the payments sector except customer cards and related data, not keeping logs will make doing business more difficult.

Why are new RBI guidelines being issued?

These changes are made because customers complained to the Reserve Bank about fraudulent online transactions and disagreements with merchants’ e-payment services.

As a result, the regulator has released new rules for online retailers, e-commerce sites and payment plug-ins, all from Amazon and Flipkart to Google Pay, Paytm and Netflix, which cannot archive customer card details.

The central bank said the purpose of preventing data transfer from third-party memory cards is to reduce the additional risk of financial fraud and theft.

New RBI guidelines pose challenges for businesses

After the RBI announcement, businesses are worried that without the card details, they will not be able to provide specific benefits, such as customer complaints or dispute resolution, delivery customer service and timely return requests.

New rules might also affect the risk of fraud. Since merchants would no longer be able to use internal input methods to protect card data, this could compromise RBI’s goal of creating a more secure electronic payment system.

How can businesses cope up?

The trade association and support group NASSCOM suggested that the RBI’s developed framework for card data storage should include security measures, reporting requirements, and internal management mechanisms rather than restricting debit and credit card data storage.

Businesses that use merchant accounts to process credit card transactions can use specific methods to protect customers’ credit card information.

Using only authorised service providers

Businesses should use a service provider to process and store credit card bills and service providers, including online SaaS providers. These service providers will need to undergo extensive testing to make sure they are worthy of trust.

Never saving electronic tracking data or card security number in any format

Although credit card information is stored for business purposes, this processing policy specifically prohibits card security codes or “data records” on the back of a credit card’s magnetic security bar.

Making sure the online storage of the credit card account is encrypted and the storage of the card is secure

There are circumstances where a business needs to store credit card numbers to keep, for example, proof of written authorisations for mail-order payments or recurring payment authorisations. If paper documents that contain credit card numbers are saved, it must be ensured that they are always locked in a secure place when not in use.

Whether the RBI’s new master directions will make payments more secure or not, they will undoubtedly make things more tedious. But ultimately, it remains incumbent on the RBI decision-makers to make things work for the people in a hassle-free and safe manner.

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Technology Giant’s Fierce Contest: Who Will Be the Winner – Google, Amazon or Facebook

Tanisha Achrekar — Sat, 06 Mar 2021 06:35:04 +0000

The Reserve Bank of India (RBI) recently extended its deadline for the New Umbrella Entity (NUE) license to March 31, 2021. In their press release, they mentioned the requests they had received for extending the deadline from various stakeholders including Indian Banks’ Association keeping the COVID-19 related disruptions in mind. RBI is granting a license to NUEs in order to empower the digital payment system in India, which is directly linked to their goal of having a cashless economy. As the deadline extends, so does the list of contenders wanting to get the NUE license. The competition is cut-throat and first of its kind as RBI is expected to give just one or two licenses.

Why do technology giants want a piece of India’s digital payment?

With smartphone users in India reaching about 1 billion and online shopping and e-commerce sectors growing faster than ever, India’s fintech market is expected to see unprecedented growth. Credit Suisse Group AG predicted that the online payment industry of India will be worth $1 trillion by the year 2023.

RBI has bought the NUE model to shift the people of the country to digital payments instead of cash transactions as digital transactions are more transparent and easy to track compared to cash ones. Currently, only the National Payments Corporation of India (NPCI) is the sole pioneering umbrella organization backed by more than 50 retail banks. RBI has launched the NUE license as it feels the NPCI alone will not be able to handle the shift to a cashless economy. However, unlike the NPCI which is a non-profit, the companies who get the license to launch NUE will be to reap lucrative commissions on the digital transactions. The NUEs will effectively offer competition to the NPCI. With such exponential growth, Facebook, Amazon and Google along with credit-card providers Visa and Mastercard all want a piece of India’s digital payment markets.

How is the race currently progressing?

The fintech giants, along with the banks, are forming a consortium to get the license to launch NUE. Global tech giants Google, Facebook and Amazon are tapping into the NUE opportunity by partnering with Indian companies. Amazon has reportedly tied up with ICICI Bank, Axis Bank and Visa to send their application. The two Indian unicorn startups, Ola and Paytm have formed a consortium with IndusInd Bank to send their application as well. Jio Infosystems, Google and Facebook have also rumored to pick up a stake in So Hum Bharat. So Hum Bharat is a wholly-owned subsidiary of the financial technology company, Infibeam Avenues. The most recent proposal is of the Tata Group, which will back the proposed NUE through its subsidiary Ferbine Pvt Ltd. Airtel Digital, HDFC Bank, Kotak Mahindra, Mastercard and Nasper-backed PayU have also reportedly bought stakes in Fiberine.

What’s in it for me?

The ones who manage to get their license to launch NUE will play a huge impact on how digital payments will function. Anyone and everyone who uses online payments of any kind will be directly impacted by this. For startups who need payment gateways to complete their financial transactions, the NUEs will prove to be a game-changer.

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