Fintechs, Banks and the New Geo-Economics of Global Finance
Colonisation of politics by economics has long been acknowledged since the time of Kautilya. As a corollary to this rule, geopolitics also changes with time, with geo-economics being the catalyst for change. Over the last 200 odd year economics has shaped geopolitics many times. At first came global dominance in trade in commodities such as cotton, tea, spices and coffee. With the rise of air warfare came oil, diminishing the relative importance of other commodities. After the end of the Cold War, banking led by financial capitalism has determined the course of geopolitics. And now with the rise of technology companies, cyber space is the sunrise sector. 
 
A recent UNCTAD report on digital economy captures this geo-economic transformation quite comprehensively. The report notes: “[a] comparison of the composition, by sector, of the top 20 companies in the world by market capitalization shows a dramatic shift. In 2009, seven companies from the oil and gas and mining sectors were among the top 20, accounting for 35 per cent of the total, whereas there were only three companies from the technology and consumer services sectors, which include digital platforms. Another three were from the financial sector. By 2018, the picture had changed significantly: the number of technology and consumer services companies in the top 20 had surged to eight (40 per cent), and that of financial companies to seven. By contrast, only two companies in oil and gas and mining remained among the top 20.
 
“The shift is even more remarkable when measured in terms of market capitalization. In 2009, companies in the oil and gas sector accounted for 36 per cent of the total market capitalization of the top 20, followed by financial services with a share of 18 per cent, while technology and consumer services represented 16 per cent. By 2018 the share of the latter had increased to 56 per cent and that of financial services had risen to 27 per cent. By contrast, the share of oil and gas companies in total market capitalization significantly declined to just 7 per cent over the same period.” 
 
These extraordinary shifts in the intersectoral shares of various industries provide a glimpse into the why and how of many debates that confront us. From the point of view of banking and finance, even if its share has increased in terms of market capitalisation (thanks to low interest rates) and absolute numbers, the relative importance has declined. The decay has been gradual following the 2008 crisis. 
 
From the point of view of interactions between technology companies and banking, the former has been instrumental in automating the banking process. Staring with telephones in 1920, to the adoption of punch cards in 1930-1950 and the use of third generation IT systems such as IBM360 in 1960s, the thrust to the use of technology in banking up till 1970s was to improve the performance of the back office. After 1970, technology adoption in banking moved to the front office with the deployment of ATMs, pass book printing machines, mobile banking etc.  
 
However the same suppliers of technology today meticulously “unbundle” many of bread-and-butter banking services. Such “unbundling” of financial services is thus driving the fear that technology companies or ‘fintechs’ may overtake/acquire banks at some point in time. This has prompted aggressive acquisition of fintech by banks in the US and EU. By Dec 2018 ten  banks had acquired 13 fintechs. However, the potential for the opposite trend is also alive and kicking. An example exists in Germany; fintech Raisin (promoted by PayPal) acquired its long-time service bank, MHB Bank of Frankfurt. A similar idea got floated in India recently when a payment fintech proposed taking a stake in  midsize private sector banks.
 
Thus, the Indian financial sector is not immune to these undercurrents despite the policy decision that gives primacy to banking system. Thus, a standalone technology or telecom company offering payment service is not a likelihood in India but only in association with a bank or an NBFC. Moreover, banks in India are not on an acquisition spree but are in a collaborative mode with fintechs. 
 
Then there are strategic considerations which cannot be overlooked in the long run on three counts. One, due to lack of depth in the Indian origin venture capital (VC), most of the Indian fintechs are financed from foreign VCs (and are even incorporated abroad). As Kai Fu Lee notes in his book, the approach of the Chinese and the US companies in respect of export of cutting edge digital technology is different: while the US companies mostly prefer the foreign direct investment (FDI) route, the Chinese fintechs have adopted a strategy of funding local startups. 
 
Second, the entire fundamental and applied research which has a bearing on fintech, is happening outside India. The UNCTAD report notes that the US and China account for 75 per cent of all patents related to blockchain technologies, 50 per cent of global spending on the internet of things (IoT), at least 75 per cent of the cloud computing market, and for 90 per cent of the market capitalization value of the world’s 70 largest digital platform companies. Thus, in the absence of a home-grown ecosystem, there is a danger of third party technology vendor lock-in.
 
Third, the encroachment of the fintechs in the financial supply chain on the asset side alters the balance of power in broad money creation (or M3). In India, since most of the banking system is under the public sector, M3 is closely tied to sovereign goals. As fintechs increasingly undertake lending, the sovereignty over M3 is no longer assured. Those who propose complete privatisation of Indian banking have missed this strategic point altogether.
 
In conclusion, there is a need to deeply look at how Industry 4.0 will impact the financial sector of India. With nearly all capabilities available domestically, the adoption of Industry 4.0 in the financial sector requires planning and steering at the highest level to address regulatory blind spots and minimise inter regulator tussles.
 
The RBI move on regulatory sandbox is a good move but the same needs to be replicated across other financial regulators.  
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    COMMENTS

    DeepakSB

    6 days ago

    https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10487

    RBI has officially given licence to co-operative banks to loot and cheat its account holders. As of Nov 2019-PMC Bank scam and other co-operative bank scams are daily reported in press and media. 👆👆👆(Pdf file in link above -terms and conditions of Long Term Depodits -LTD-by Saraswat Bank-with permission of RBI). 👆👆👆 Its surprising that these LTDs are NOT covered by Bank Deposits Insurance scheme (DICGC).No loan/Overdraft/Premature withdrawal available till 7 years. If CO-Operative bank closes down/liquidated during tenure of 7 years-depositer will LOOSE ALL AMOUNT. 🚒🚒 Can any Individual/Organisation/Consumer Forum study these and file PIL to stop further cheating by co-operative banks of its account holders? 🚒🚒

    Navodaya co-op bank ex-chairman Ashok Dhawad surrenders
    On 4th November 2019, former Congress MLA Ashok Dhawad, ex-chairman of the Navodaya Urban Co-operative Bank, surrendered before the special court of Maharashtra Protection of Interest of Depositors (MPID) Act in the alleged Rs 38.75 crore scam after his anticipatory bail plea was rejected by the supreme court. 
     
    He reportedly walked into the courtroom accompanied by his counsel Devendra Chauhan. This is yet another cooperative bank that went into liquidation on account of irregularities and its licence was cancelled by the Reserve Bank of India (RBI) in October 2018. 
     
    The Times of India (TOI) has reported that the cops from Economic Offence Wing (EOW) of the police will be seeking his remand from the court. Dhawad’s spouse Kiran, who was also a director, has been granted anticipatory bail by the Bombay High court. On 6th November 2019, the Maharashtra Protection of Interest of Depositors (MPID) Act court judge, Sunil Patil, remanded Dhawad to police custody for one week.
     
    Dhawad, who was the chairman of the bank between 2011 and 2015, has been named as one of the accused in the case after his involvement in sanctioning and disbursing fake loans, misappropriation of funds, issuing clearance certificates even to defaulters and many other blatant irregularities were thrown up during the audit by the state’s co-operative department.
     
    Following the audit reports, which also indicted the bank’s former chief executive officer (CEO),Samir Chatt, an offence was registered at Dhantoli police station. The EOW, which took over the probe, has so far arrested 13 persons (including Samir Chatt) while about 40 are yet to be nabbed. 
     
    Many prominent builders and construction groups, like Jhams, were among the beneficiaries. Mukesh Jham and his wife Mahima were arrested earlier this year for having siphoned off amounts taken as loan which they did not repay. 
     
    Former board of directors, office-bearers, and some borrowers of the bank were booked by Dhantoli Police in Nagpur in May this year under various sections of the Indian Penal Code (IPC) for cheating and criminal breach of trust besides under the MPID Act and Information Technology Act.
     
    They are accused of approving unsecured loans between 2010 and 2017. The accused had allegedly returned the original documents of the properties mortgaged with the bank as well as the No Objection Certificates (NOCs) to those who have failed to repay loan. The police have also listed preparing fake registration documents among other irregularities allegedly committed by the accused. Another EOW official said the earlier board of directors and some office-bearers allegedly tampered with the computer records to show that the loan was disbursed to genuine borrowers. 
     
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    COMMENTS

    Mohamed Meghani

    2 weeks ago

    Co operative banks in India should be renamed Chor operative banks

    RBI panel calls for strong corporate governance in CICs
    An RBI Working Group (WG) has suggested that core investment companies (CICs) should implement stronger governance practices like formation of board level committees, appointment of independent directors, and internal audits.
     
    These are part of the recommendations submitted by the Working Group (WG) to review regulatory and supervisory framework for Core Investment Companies (CICs) set up in July 2019. The group was headed by Tapan Ray, former Secretary at the Ministry of Corporate Affairs. 
     
    Core investment companies are non-banking financial companies (NBFCs) that hold not less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
     
    Experts have been seeking review of CIC guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important core investment company.
     
    In September 2018, Infrastructure Leasing and Financial Company (IL&FS), a CIC with over 300 subsidiaries, defaulted on its payment following which over Rs 90,000 crore worth of combined banking sector exposure was declared as non-performing or bad asset in the subsequent months.
     
    The working group led by former Corporate Affairs Secretary Ray has suggested capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, be deducted from its adjusted net worth, as applicable to other NBFCs. They are also against allowing step-down CICs to invest in any other CIC.
     
    RBI formed the working group in July to review regulatory and supervisory framework for CICs. RBI has on Wednesday made their report public and invited public comments on it.
     
    "Currently, corporate governance guidelines are not explicitly made applicable to CICs. To strengthen the governance practices, the working group recommends constitution of board level committees viz. audit committee, nomination and remuneration committee and group risk management committee," the report said.
     
    Unlike NBFCs, which are required to constitute committees of the board, no such corporate governance standards are mandated for CICs. The same director could be part of boards of multiple companies in a group, including CICs.
     
    "In a few cases, the working group said, it has been observed that the CIC had lent funds to group companies at zero percent rate of interest with bullet repayment of 3-5 years and without any credit appraisal," it said.
     
    Further, the committee also proposed preparing consolidated financial statements and ring-fencing the boards of CICs by excluding employees or executive directors of group companies from its board.
     
    The report highlighted that the absence of restriction on the number of CICs that can exist in a group and non-deduction of capital of CICs for their exposures in group companies (including in step down CICs), creates scope for excessive leveraging.
     
    The Working Group, therefore, suggested that step-down CICs may not be permitted to invest in any other CIC while allowing them to invest freely in other group companies. That apart, the committee also suggested that the capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, should be deducted from its adjusted net worth, as applicable to other NBFCs. 
     
    The number of layers of CICs in a group, it said, should be restricted to two and any CIC within a group shall not make investments through more than a total of two layers of CICs, including itself. 
     
    Currently, CICs are not required to submit off-site returns or statutory auditors certificate (SAC).
     
    The committee recommended that offsite returns may be designed by RBI and prescribed for CICs on the lines of other NBFCs. 
     
    "Annual SAC submission may also be stipulated. Onsite inspection of the CICs may be conducted periodically," it added.
     
    In August 2019, there were 63 CICs registered with RBI. As on March 31, 2019, the total asset size of the CICs was 2.63 trillion and they had 87,048 crore (approx.) of borrowings.
     
    The top five CICs consist of around 60% of the asset size and 69% borrowings of all the CICs taken together. The borrowing mix consists of debentures (55%), commercial papers (16%), financial institutions, other corporates (16%) and bank borrowings (13%).
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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