Daily News Archives

Rajya Sabha clears Factoring law to draw 9,000 NBFCs, boost MSME cash flow

July 30, 2021 Pooja Sharma No Comments

The Rajya Sabha gives its approval to the amendments to the factoring law, on Thursday. These amendments will enable as many as 9,000 non-banking financial companies (NBFCs) to participate in the factoring market, instead of just 7 now. The move will give a boost in cash flow to small businesses, said finance minister Nirmala Sitharaman.

Earlier, the Lok Sabha already cleared the Factoring Regulation (Amendment) Bill, 2020, on Monday. Speaking on the Bill in the Rajya Sabha, the finance minister said, “You can imagine the number of MSMEs that will directly benefit because of this.”

What does Factoring mean?

Essentially, factoring is a transaction where an entity (like MSME) sells its receivables (i.e., dues from a customer) to a third party (a ‘factor’ like a bank or NBFC) and collects immediate funds. It helps a firm to fulfill its working capital requirement. Many MSMEs, participate in the factoring business with receivables. It helps MSMEs whose payments against their supplies are stuck.

However, due to certain restrictive provisions in the extant law, necessary amendments were brought in to widen the participation of entities, in the factoring business. These entities, especially NBFCs will help in expanding the avenues of working capital credit to even small businesses. The Bill also empowers the central bank to monitor and create norms for better oversight of the $6-billion factoring market.

According to a report of the parliamentary standing committee on finance, which endorsed the Bill. Despite the growth in recent years, the factoring market accounts for only 0.2% of India’s GDP. The numbers are way behind the comparable developing economies such as Brazil (4.1%) and China (3.2%). Moreover, the factoring market worldwide will see a projection and reach $ 9.2 trillion by 2025.

The report submitted by the House panel in February stressed the need for the RBI to build sufficient regulatory resources to ensure effective supervision of factoring activities. This becomes more important than ever before, with the implementation of the new norms. Because, a large number of players may take part in such businesses now, after the amendments.

For more such updates, keep watching this space!

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Yes Bank, Indiabulls Housing Finance sign co-lending agreement

July 29, 2021 Pooja Sharma No Comments

Yes Bank and Indiabulls Housing Finance have entered into a co-lending agreement for home loans. The two finance giants, Yes Bank, and Indiabulls Housing Finance have come in a partnership to synergize capabilities and enhance retail experiences for home loan customers.

On Wednesday, the two finance giants said in a joint statement; the partnership aims at synergising capabilities to provide an efficient and seamless experience to retail home loan customers. The statement also adds that the Reserve Bank of India’s co-lending framework provides a collaboration tool for both banks and non-bank financiers. Which will provide a low-cost funding model of a bank and the cost-efficient sourcing and servicing capabilities of a non-bank.

In November 2020, the Reserve Bank of India came up with guidelines on co-origination of loans or co-lending of loans. Under this framework, banks and NBFCs (non-banking finance companies) can lend to priority sectors or economically weaker sections. The main idea behind the collaboration framework is to encourage credit flow to this segment.

What is the co-lending model (CLM)?

In the co-lending model (CLM), banks have the permission to co-lend with all registered NBFCs (including HFCs). However, the loan will be based on a prior agreement between the banks and NBFCs. Moreover, the co-lending banks will be taking their share of the individual loans on a back-to-back basis in their books.

How do the two financers approach this partnership?

According to Rajan Pental, Global Head, Retail Banking, Yes Bank, The partnership is in line with Yes Bank’s strategy of expanding its retail franchise through a mix of organic and partnership-led origination models. The bank is eyeing forward to further build a profitable and quality home loan portfolio through this partnership.

Gagan Banga, Vice Chairman and CEO, Indiabulls Housing Finance expressed his optimism for the partnership. According to him, they can now leverage Yes Bank’s deposit-led franchise and complement that with the technology-led distribution of Indiabulls. Thus, it will help in providing efficient solutions around home loans to a wide gamut of customers across geographies, ticket sizes and yield spectrum. The collaboration will provide balance-sheet light growth and profitability to the two firms.

How will borrowers benefit?

From the borrower’s point of view, the idea makes a lot of sense as it will make the process faster. NBFCs process loan applications much quicker than banks. Also, NBFCs have a better reach among borrowers than the banks in many geographies. NBFCs can get bigger and top-rated borrowers on their books through this arrangement. Whereas it wouldn’t have been possible otherwise, according to a former SBI senior executive.

For more such updates, keep watching this space!

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Are you earning negative returns on your investments?

July 28, 2021 Pooja Sharma No Comments

Every investor invests their money with an aim to earn profits on their investments. However, the rate of return for the investment may not always be positive. In fact, the risk of earning a negative return exists in every investment. Inflation can impact our investments, in such a way that even though you’re making money. But in a real sense, you will not be making a net positive return on your investments.

What is Negative Return?

A negative return occurs when investors experience a loss in the value of their investments during a specific period of time. For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%.

While negative return is a possible risk in a market-linked investment such as a mutual fund or direct share. Fixed-income investments such as bank fixed deposits also carry a different kind of risk. In a market-linked investment, there is a risk of losing a fraction of your investment when the value of underlying securities falls. In a fixed-income investment, the risk of losing capital may not be there (or it may exist in some), earning a negative return on your investment is not very uncommon.

How Fixed-income investments can fetch negative returns?

The negative return risk is primarily a consequence of rising inflation. It pulls the returns lower than expected and thus impacting the final return to an investor. For example, if a bank FD offers a return of 6 percent per annum and inflation is also 6 percent, the net return is almost zero. Thus at times, when FD rates are lower or the inflation is higher, the investment ends up earning a negative return. While the capital invested is safe and secure, the effective inflation-adjusted return could be low or negative.

Should someone avoid investing in bank FDs?

Fixed-income investments are actually more suitable for those investors who are looking for capital preservation rather than to grow money. It is suggested to take a balanced approach in your investment portfolio. If security is what you’re looking for, sure, you can invest in FDs. However, it is advisable to not invest more than 30 percent to 40 percent of your capital in the FDs as they’re not giving the best returns. Instead, you should place your remaining investment capital in other high-yield assets. For instance, gold can act as a valuable asset in times to come.

For more such updates, keep watching this space!

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Byju’s acquires Great Learning for $600 million

July 27, 2021 Pooja Sharma No Comments

Byju’s acquires edtech start-up Great Learning for $600 million in cash, stock, and earnout deal. This acquisition will help the firm, which is valued at $16.5 billion, gain a foothold in the professional upskilling and higher education space.

The news comes days after Byju’s acquisition of US-based kids’ digital reading platform Epic in a $500-million deal. Earlier this year, the Bengaluru-based edtech firm sealed its biggest M&A (merger and acquisition) deal; Byzu’s acquisition of brick-and-mortar test prep service provider Aakash Educational Services in a $1-billion deal.

So far this year, Byju’s has spent over $2 billion on acquisitions. The firm has acquired many edtech companies including Indian rival Toppr. However, the official announcement of the acquisition of Toppr is on hold for now.

Byju’s said that it is planning to spend another $400 million to “accelerate” Great Learning’s growth. Thus, making its total investment commitment to the higher education space to about $1 billion. Founded in 2013, Mohan Lakhamraju-led Great learning claims to have delivered more than 60 million hours of learning to 1.5 million learners from over 170 countries.

Future of Great learning

Great Learning will continue to operate as an independent unit within the Byju’s group. The company will function under the leadership of its founder & CEO Mohan Lakhamraju and co-founders Hari Nair and Arjun Nair. The Great learning has its headquarters in Singapore. The edtech firm follows a mentored learning model and has a network of over 2,800 mentors. It services more than 500 corporate partners for their upskilling and talent needs.

The pandemic is sparking many changes in regular working models and pushing demands in companies for more tech-based employee roles. Firms are now increasingly looking to upskill their employees, than ever before. This development is boosting the growth of this edtech category. Great learning shares this market with its counterpart Startups like upGrad, Eruditus, and Simplilearn.

Byzu's investors pool

Byju’s is enjoying the backing of a slew of marquee investors, including General Atlantic, the Chan-Zuckerberg Initiative, Naspers, Silver Lake, and Tiger Global. The firm is leading the funding deals in the local edtech space. In the year 2020 alone, Byju’s secured over $1 billion from investors.

The company has allocated the bulk of its capital towards suitable M&As. Byju’s claims to have received 45 million new students in just six months during the lockdown. For more such updates, keep watching this space!

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Reforms help banks recover Rs 5.5 lakh crore of bad debt: Govt

July 27, 2021 Pooja Sharma No Comments

Reforms help banks recover Rs 5.5 lakh crore of bad debt, according to the central government. The government took many steps in the pursuit of recovering the bad debt in the country. These reforms hugely contributed to the active recovery of the money stuck in these bad loans.

The steps taken by the government such as enacting the Insolvency & Bankruptcy Code (IBC) helped in the recovery of around Rs 5.5 lakh crore of bad debt. Out of this, an approximate value of Rs 1 lakh crores was recovered from accounts that were technically written off.

Considering that the build-up of non-performing assets (NPAs) is lower than anticipated. The government is also positive in its beliefs that the state-run lenders are well poised to meet credit requirements. As per the state government sources, a provision coverage ratio of 83.7 percent is protecting the public sector banks against any potential hit.

How pandemic is affecting the recovery?

A senior finance ministry official mentioned that despite the ongoing pandemic, the turnaround for public sector banks has been remarkable. According to the official, the recent reforms and the proposed asset reconstruction company will further clean up their balance sheets. Moreover, it will make fresh capital available from the sale of bad assets, which will again push credit growth.

The government believes that the Rs 8 lakh crore of write-offs in the past seven years are technical in nature. These write-offs will bring adequate transparency to the bank balance sheets.

The official said that the banks put forth every attempt to recover even after writing off a loan. A sum of Rs 99,996 crore is recovered from such loan accounts. Which includes the IBC process in cases of Bhushan Steel, Bhushan Power & Steel, and Essar Steel. Banks also recovered their money from other write-offs as well such as Kingfisher.

Since 2018, the government has reportedly recovered Rs 3.1 lakh crore. However, the process is still ongoing and it will expectedly recover from more such loans. In the process, Banks used multiple sources such as internal accruals, fundraising from the market, and capital infusion by the government, in order to comply with the regulatory requirement.

For more such updates, keep watching this space!

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A digital money rush is great. A run, not so much

July 23, 2021 Pooja Sharma No Comments

A digital money rush is great. A run, not so much. A statement that reflects that digital currency like Blockchain-based tokens is in trend now. However, in long term, this charm may fade due to the acceptance of these token may not be uniform.

Blockchain-based stablecoins such as Tether and the upcoming Diem are the new form of private money. These digital money Tokens don’t offer Bitcoin-type speculative thrills, however, seek acceptance instead as one-to-one clones of national currencies. This means that the market value of these tokens stays equivalent to its counterpart in physical currency. Such tokens have the potential to become a powerful part of the modern digital economy, provided we know how to prevent a run on them.

Trust in physical cash is because of the support by regulators. The currency notes in our wallet are a promise from the central regulatory authority of the issuer country to pay the value written on it. In accepting it, we do not pay any thought to the creditworthiness of the lender. Whoever it’s passed on to will also take the banknote at face value. Not requiring due diligence on banknotes sounds common sense. However, this is actually a highly valuable property of money everywhere.

How NQA become the normal?

It is to be noted that as the digital stable coins proliferate globally, NQA may not hold. During the free banking era in the U.S., something similar was happening, when notes issued by a lender in Tennessee would sometimes be discounted by 20% in Philadelphia. There was constant haggling and arguing over the value of the issued notes in transactions. Therefore it was very hard to use private banknotes in transactions.

Things finally changed because of the Civil War. President Abraham Lincoln of America desperately wanted to raise money for the war effort. The government thought of raising money by selling bonds to newly chartered national lenders. Thus a law passed by Congress in 1863, this law also ushered in a uniform currency in the country.

Thereafter, tariffs were levied on banks for paying out other types of notes, driving them out of existence. The researchers argue whether stable coins are in a similar situation. In the current regulatory vacuum, these tokens will struggle to become no-questions-asked money. For NQA, they require the backing of the country including the necessary oversight. However, the rapid growth of the novel product has taken regulators by surprise. And the likelihood to attain the legal backing of the countries is very low.

Money in the 21st century may not need to be the official currency of a State. However, it still has to be no-questions-asked, like US Dollars. But that’s a power that only regulators can bestow and they should use it well.

For more updates like this, keep watching this space!

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₹1 crore term plan premiums compared! Check out current offers from 20 insurers

July 22, 2021 Pooja Sharma No Comments

Your life insurance policy plan should ideally cover your remaining long-term debts and other critical financial goals of your family members. There are many life insurances available in the market, although choosing the right one for you and your family needs some research. In this article, we will compare various ₹1 crore term plan premiums available in India.

The ongoing Covid-19 pandemic has shown to all of us that life could be highly uncertain. And the fact is, that we might not be able to predict what lies ahead. However, we can take the steps necessary to minimize the impact of life’s vagaries on our family’s finances.

One such step that helps in the protection of our family’s finances is to get adequate life insurance protection. This will help in the management of our family’s finances in case something untoward unexpectedly happens to us.

But, why term life insurance policy might be a better idea instead of a traditional policy or an endowment plan? Because the term insurance policy gives a much larger sum assured, at more affordable premiums. Especially if you start the policy at a young age.

How to determine the ideal term insurance coverage level for your family’s future financial requirements?

Your life policy should ideally cover all your remaining long-term debts like existing home loans, education loans, etc. It should also cover other critical financial goals of your family members. As per a popular rule of thumb, the ideal sum assured of your life insurance plan should be 10 – 20 times your current annual income.

It is important to not only focus on the premium obligations but also the insurer’s claim settlement ratio, policy features, and benefits while finalizing your decision. The premiums applicable to you vary depending on your age, income, gender, policy features, or any other terms and conditions of your chosen insurer.

Comparison of the cost of 1 crore term plan

Let’s discuss the cost of a Term Plan with a Sum Assured of ₹1 Crore with a case study of a 30-year-old, salaried, non-smoker male (unmarried), residing in Bengaluru, earning ₹5 lakh annually. If he takes term insurance cover of ₹1 crore for a 30-year term. Then the cost of such a term policy plan is represented in the table below.

The table is not exhaustive as it doesn’t cover many other companies that don’t disclose data on their website. The table mentions data as of July 20, 2021.

For more such updates, keep watching this space!

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LIC unveils Arogya Rakshak health insurance plan; know how it will work

July 22, 2021 Pooja Sharma No Comments

LIC unveils Arogya Rakshak’s health insurance plan. The Arogya Rakshak policy provides fixed health insurance cover against certain specified health risks. It provides timely support in case of medical emergencies. Thus, helps the insured and his family to remain financially independent in difficult times.

Life Insurance Corporation, LIC’s new health insurance plan called Arogya Rakshak can be beneficial for seekers. This is a non-linked, non-participating, regular premium and individual health insurance plan.

The policy seekers can cover themselves as the principal insured (PI), their spouses, all children, and parents under the policy. Principal insured refers to the person who is the actual policyholder at the time of taking the policy. Principal insurers, spouses, and parents in the age bracket of 18-65 can avail themselves of the Arogaya Rakshak plan. However, for children, the age bracket is 91 days – 20 years to avail of the Arogya Rakshak plan.

The cover period will be available for up to 80 years for principal insurers, spouses and parents. Moreover, the same is valid for children for up to 25 years.

Benefits offered under LIC Arogya Rakshak Health Insurance

An option to choose a flexible benefit limit.
Flexible options for the premium payments
Major financial protection if the need comes for hospitalization and/or surgery
Lumpsum benefits irrespective of the actual medical costs
If more than one member is covered under the policy, a premium waiver is available for other insured persons in the event of the unfortunate death of the original principal insured. The person has to be the policyholder at the inception of the policy
In case a policyholder or others covered under the plan have to undergo surgery that falls under Category I or Category II. Then, he/she is eligible for Premium Waiver Benefit.
To increase the plan coverage, policyholders have the option to avail of products like Auto Sum Up Benefit and No Claim Benefit. They will also receive benefits on calling an ambulance and while going for a health check-up.
Policyholders can avail all of these benefits with optional riders like LIC’s New Term Assurance Rider and LIC’s Accident Benefit Rider.

For more such updates, keep watching this space!

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FY21 compensation: ‘GST transfers to states for FY21 fell short by ₹81,179 crore’

July 20, 2021 Pooja Sharma No Comments

In the Parliamentary discussion on Monday, the Centre acknowledges that an amount of ₹81,179 crore was yet to be released to the state governments. This amount was to fully compensate the state governments for their goods and services tax (GST). This revenue shortfall is observed for the financial year 2020-21.

The statement raises the question as to how the amount would be mobilized. And, increases the chances of widening the RBI-facilitated special borrowing window. Under this scheme, the Centre raises low-cost loans to bridge a yawning shortfall arising in the designated cess kitty.

While several states have been vocal about these dues, the Centre hasn’t categorically endorsed the claims so far. The written reply in the Lok Sabha by the finance minister of state, Pankaj Chaudhary did not address the questions on settlement. The statement remains silent on how and when the amount will achieve a settlement.

Against the states’ estimated total GST compensation requirement of a huge ₹2.82 lakh crore for 2020-21. Only, a little over ₹2 lakh crore were transferred to states in the respective year. The amount also includes over ₹85,000 crores collected via the designated cesses on demerit goods. Including another ₹1.1 lakh crore under the special back-to-back loan facility. The loan mechanism doesn’t entail any direct financial cost to the states. However, the delayed release of the compensation amounts, under the relevant laws on a bi-monthly basis; has increased the states’ borrowing requirements.

Reasons for the GST shortfall

2020-21 was the first year when the cess proceeds fell short of the states’ compensation requirement. This was largely due to the pandemic but also because of the series of rate cuts in GST. The series of rate cuts brought down the weighted average GST rate to around 11%, against a revenue-neutral rate of around 15% before the launch of the destination-based consumption tax.

The GST revenue shortfall (S-GST shortfall) seems to be a massive ₹2.6 lakh crore for the current financial year as well. Or, as per the estimate of some analysts the shortfall will be even higher.

While the estimated GST compensation for April-May 2021 was ₹55,345 crore. The Union government released a total of ₹75,000 crore, on July 15 to the states. The release aims to bridge the GST revenue shortfall of states. This was an addition to normal GST compensation. The Centre releases normal GST compensation, every two months out of actual cess collections.

The funds for the release of ₹75,000 crore on July 15 came from the borrowings of the Union government in 5-year securities. Totalling ₹68,500 crore and 2-year securities for `6,500 crores in the current financial year at weighted average yields of 5.60% and 4.25% per annum, respectively.

However, the government said that thanks to the reduction in Covid-19 case numbers and easing of the lockdowns. The e-way bills generation by businesses rose to 5.5 crores in June, from 3.99 crores in May. This upward trend is indicating a smart recovery of trade and business. For more such updates, keep watching this space!

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Razorpay acquires TERA Finlabs

July 19, 2021 Pooja Sharma No Comments

Fintech start-up Razorpay acquires TERA FinLabs. TERA FinLabs is an Indian subsidiary of a UK-based digital lender, GAIN Credit. The Bengaluru-based start-up provides technology, risk, and capital solutions to enable embedded financing solutions for businesses.

However, the companies did not disclose the actual financial details of the transaction. Thus, we can only make a guess for the valuation of the company. However, Razorpay appears to envisage something big for the future.

Razorpay’s acquisition of Tera FinLabs appears to be in the companies strategy to financially supporting as many MSMEs as possible. The fintech company is building core competencies in capital solutions, credit underwriting, and data-driven risk management capabilities.

TERA will bring its entire technology stack, risk management capabilities, and onboarding solutions to create and enable a credit line for Razor pay’s merchant network. Razorpay Capital is aiming to solve the credit needs of over 10,000 businesses in India by next year. TERA FinLabs’s technology capabilities will help Razorpay to achieve this milestone.

What are the future plans of Razorpay?

Razorpay had forayed into the business-to-business (B2B) small and medium-sized enterprises (SME) lending space with the launch of Razorpay Capital in 2019.

This transaction is Razorpay’s third acquisition in less than three years. Razorpay’s had already acquired Thirdwatch – an Artificial Intelligence-driven company, in 2018. Thirdwatch helps in the reduction of Return-to-Origin or RTO fraud losses in e-commerce. After Thirdwatch, Razorpay also acquired Opfin – a payroll management software company, in 2019.

Razorpay CEO and co-founder Harshil Mathur said in his statement. Banks in India are wary of providing business loans to start-ups and new SMEs. Because the banks are majorly focusing on the risks attached to new revenue models of start-ups.

Mathur said that the team at TERA FinLabs has exceptional domain knowledge in credit underwriting and risk management. Moreover, Razorpay sees immense value in TERA Finlabs core lending infrastructure capabilities and the company is focusing on the development of its core products.

Pradeep Rathnam, co-Founder and CEO of TERA Finlabs, thinks that MSMEs were an underserved market for a long time. However, in the last 16 months, the market is showing rapid growth with its adoption of digital technologies. This shift is creating an opportunity for significant disruptions in the lending sector. TERA Finlabs’ robust end-to-end platform will help new entrants to build scalable and profitable credit businesses.

For more such updates, keep watching this space!

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What does Factoring mean?

What is the co-lending model (CLM)?

How do the two financers approach this partnership?

How will borrowers benefit?

What is Negative Return?

How Fixed-income investments can fetch negative returns?

Should someone avoid investing in bank FDs?

Future of Great learning

Byzu's investors pool

How pandemic is affecting the recovery?

How NQA become the normal?

How to determine the ideal term insurance coverage level for your family’s future financial requirements?

Comparison of the cost of 1 crore term plan

Benefits offered under LIC Arogya Rakshak Health Insurance

Reasons for the GST shortfall

What are the future plans of Razorpay?

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