Categories
Fin Tech

The Evolution of Financial Payments

Written by Salim Hussain on Digilah (Tech Thought Leadership)

It is a paradox of our lives that some of the most common of actions underlying a functioning society are left virtually untouched by advancement as civilization marches forth to Metaverses and recyclable rockets. An example is how Education has operated historically – a source of knowledge (teacher/computer) facing a collective of students, dispensing knowledge. The dispenser may vary but the fundamental construct remains unaltered. But the one I want to focus on today is the act of making Payments. Yes, payments…the industry that is supposedly being disrupted with an onslaught of payment tech start-ups touting nosebleed valuations. But if one peels away the slick interface and looks into exactly how the payments course from one end to the other, you will inevitably run into technology which was built when Mash was still on air and “Bloody” a bad word!…

Let’s think of a situation where a corporation say Nike, needs to pay its suppliers in Vietnam called VietShoe. Nike instructs it’s bank to make a payment in VND to its supplier bank account. Nike is shown a FX rate by the trader at Nike’s bank, “Banque de Zapatas”(BDZ)…there follows a little negotiation… then finally the golden word “done” is said/typed. The next stage is for the operations people then deduct the USD100 from Nike’s account in the US and initiate a series of steps whose desired outcome is to get the VND equivalent of USD100 (about 2,250,000 VND at current rates) credited to VietShoe’s account.

FX markets are the largest component of capital markets with a daily trade volume is 6.6 Trillion USD (the equivalent number for equities is 0.5 T and bonds is 4.7T). hence, there are hundreds of thousands of such Nikes making millions of payments to the Vietshoes of the world every day! The scale is mind boggling.  The good news is that there is a method to the madness. There is a common platform and a common language which banks can speak to each other. And a central organization creating rules for this superhighway, so these trillions can move around seamlessly. That organization is a member owned cooperative called SWIFT (Society for Worldwide Interbank Financial Telecommunication). This was set in the 70s! And is still the backbone of the vast majority of the 6.6T being transacted every day.

% Turnover

I will give you a brief taste of the gymnastics involved in the example above.

1.Once the rate is agreed with Nike, Bank NY needs to let it’s partner bank in Vietnam called Bank VN (termed “onshore bank” in the Trading Room) two things – One, the identity of the Beneficiary and it’s bank account details and Two, the amount to be transferred. This is done using a MT 103 Swift format file.

2. Once Bank VN receives the request, it will debit the account BDZ maintains with it for 2,250,000 VND and credit the ultimate beneficiaries account.

(I am making a number of simplifying assumptions here like the presence of “nostro” account as well as absence of routing banks. These can be the subject of another future note.)

The route above, is how most fintech apps work today. If evaluated by a tech person, she will be aghast at the usage of flat files, and, in a minority of cases, API calls (which will be the subject of future write ups). Now, take a step back and juxtapose the promise of blockchain technology to this archaic construct… suddenly, The Swift system, if imagined as an entry on a vast netted ledger, across multiple counterparties, begins to resemble a classic blockchain construct.  And the realization comes that this is the exact point where the technology should be deployed and has not, for the most part, been deployed. For it remains mired in producing Dogecoin’s and NFTs to make use of those Dogecoins!!

Categories
Digi Tech Fin Tech Med/Health Tech

HOW INDIA IS GETTING DIGITALLY LITERATE

Written by Rishikesh Patankar, Ph.D. on Digilah (Tech Thought Leadership)

The need for digital literacy in a country as populous and diverse as India is critical. The gap between limited availability of resources as against vast requirement could be addressed by use of technology. Technology can provide effective ways to scale up solutions and bridge the gaps. The technology and connectivity together can make a huge difference to the socio-economic levels of a community, and ultimately, the country, true progress comes from inclusive growth.

The Government of India has launched ‘Digital India’A programme to transform India into digitally empowered society and a knowledge economy. The Digital India programme envisages to ensure that Government services are available to citizens electronically. Under the ‘e-Kranti – Electronic Delivery of Services’, one of the initiatives includes ‘Technology for Education – e-Education’ under which ‘Universal Digital Literacy’ at the National level is envisaged.

I would like to share the experience gained in implementation of a successful Digital Literacy programme across India, led by CSC.

THE NEED FOR DIGITAL LITEREACY IN INDIA

The technology and connectivity could be utilized effectively for delivery of education, healthcare, citizen services, financial services etc. The true potential for these aspects can only be realized if all the citizens are made digitally literate.

The key is to have sustained efforts by harnessing collective energies, strengthening partnerships and leveraging them to pull down the divisive digital wall.

Digital literacy is therefore a key component of the Government’s vision of building an empowered society as envisaged under “Digital India initiative”. Spinoff effects of digital literacy especially in the context of rural India would address a number of socio-economic issues.

  • Rural population can gain immensely from the ‘Digital Literacy’.
  • ‘Digital Literacy’ would bring the benefits of ICT to daily lives of rural population in the major thrust areas of Healthcare, Livelihood generation and Education.
DIGITAL LITERACY GAP

As per Census of India 2011, 68.84 % (883 Mn) of population resides in rural India. The number of rural households is 168 million. 5.2% of these rural households possess a computer.

Computer Literacy (who can operate a computer) by age group in rural India:

14-29 years – 18%

30-45 years – 4%

46-60 years – 1%

In addition, a significant number of these households don’t have computer access and are likely to be digitally illiterate.

IMPLEMENTATION OF DIGITAL LITERACY

The implementation of the PMGDISHA Scheme is being carried out by the CSC e-Governance Services India Ltd. (CSC-SPV) which acts as the Programme Management Unit (PMU). More than 250,000 Training Centres have been empaneled under PMGDISHA to provide enrollment/training to the candidates. The Training Centres are spread across the country and are participating in achieving the goal of making India digitally literate.

In the years 2014 to 2016, two Schemes entitled “National Digital Literacy Mission” (NDLM) and “Digital Saksharta Abhiyan” (DISHA) were implemented with certification of 5.4 million candidates, out of which around 42% candidates were from rural India.

In February, 2017, the Government approved a scheme titled “Pradhan Mantri Gramin Digital Saksharta Abhiyan” (PMGDISHA) for ushering in digital literacy in rural India by covering 60 Million households.

Under this Scheme, as on 08/01/2022:

– 54.5 Mn candidates have been enrolled

– 46.2 Mn candidates have completed the training

– 34.30 Mn have been certified

TRAINING ESSENTIALS

  • Online Portal, Real-time Online Monitoring Tool for Analytics & Reports (www.pmgdisha.in )
  • Handbook & Multimedia content (in 22 Scheduled languages of India and English)
  • Mon-Sun, between (8 AM to 8 PM) we conduct online Remotely Proctored Examination System
  • Digital Signed Certificates are generated for all passed candidates. Digital Locker has been integrated with the system
WE COULDN’T HAVE DONE THIS ALONE

We had the support and capability of the below companies in carrying out this humongous task through their CSR initiatives.

IMPACT ASSESSMENT

3 impact assessment studies of the Scheme were carried out by:

  1. The Council for Social Development (CSD) in 2017-18.
  2. Indian Institute of Technology (IIT) – Delhi in the year 2019.
  3. Indian Institute of Public Administration (IIPA) in FY 2020-21.

The aim of the study was to analyze the ground level situation of the scheme with a larger aspect of continuation of the scheme.

The brief highlights of the impact assessment reports are:

  • PMGDISHA training has had a formidable impact on the use of ICT and other forms of digital media
  • 59% of the respondents stated that after attending the IT literacy training, their digital ability & confidence levels using digital has increased
  • Women participation is very large and their inclusion at the rural level will open the path for the learning of the whole family.
  • However, less participation of very poor and very illiterate was observed

We are very proud the Digital literacy drive continues in the country, aided with the integration, and help of NGOs and others under the leadership of CSCs.

Facilitated by PMGDISHA (Universal Digital Literacy for Rural India through Prime Minister Rural Digital Literacy Mission)

Subscribe to the below link for Digital lessons in many Indian languages: https://www.youtube.com/channel/UCbFPVWaOPS4tZ8EnXgXWwUg

Categories
Fin Tech

Transformation of the Indian Debt Market

Written by Sashi Kumar M C, Investment and Merchant Banker – Digilah (Thought Leadership)

Director at Solargise

The Balance of payment crisis in 1991, brought the liberalization of the Indian economy and with it came reforms of the financial system and capital markets. The thrust of these reforms was to promote a diversified, efficient, and competitive financial system, with the objective of improving the allocation of resources through operational flexibility, improved financial viability, and institutional strengthening.

The contagion effects of the 1997-98 Asian financial crisis further lent impetus to strengthen the domestic financial system. Reforms principally focused to: (i) Mitigate risks in the financial system; (ii) Efficiently allocate resources to the real sector; (iii) Make the financial system competitive globally; and (iv) Open the external sector.

India’s capital markets too were injected with reforms, specifically through the creation of various institutions such as the Securities and Exchange Board of India (SEBI) in 1992, an insurance market regulator (IRDAI) in 1999, and a pension market regulator (PFRDA) in 2003. National Stock Exchange NSE was incorporated in 1992. It was recognised as a stock exchange by SEBI in April 1993 and commenced operations in 1994 with the launch of the wholesale debt market.

These were a fall out of the report by L M Bhole, a professor of Economics at IIT-Bombay, who noted that “There are two major inadequacies which characterize our stock market. First, while the primary market is widespread, i.e., the new issues are distributed nation-wide, the secondary market is narrow, localized, fragmented, and imperfect. The stock exchanges do not have uniform settlement periods and dates; there is no national clearing system, and they are not integrated into a single unified national market system. Second, while a significant part of the primary market is in debentures, almost the whole of secondary market is in equities. In many developed countries, debt securities, especially long-term debt securities, account for a major part of the trading volume on stock exchanges.

Not just that, Indian bond markets had to fight its way into the very quagmire of corruption and kickbacks, Lack of Transparency plagued the market, as did in-efficient price discovery methods. Defaulted Bond holders raised fingers on credit rating agencies and they in turn raised questions on data sanity. One to one negotiations led to unethical means to place the bonds at unjustified premiums that led to a mismatch to traded market yields.

In contrast to equity markets, the bond markets have been held back by the more restrictive regulatory framework. Several reforms were introduced to the government bond market in 1992 when the price of newly introduced bonds was set by auction.

But it was not until 2005—11 years after the equity market—that bond market became an electronic order limit market. Adoption of Technology to achieve the set goals.

Over the past two decades, the Reserve Bank of India has adopted a strategy to create an efficient market infrastructure to enable safe trading, clearing and settlement. State-of-the-art primary issuance process with electronic bidding and straight-through-processing (STP) capabilities. An efficient and completely dematerialized depository system within the central bank. Delivery-versus-Payment (DVP) mode of settlement. Real Time Gross Settlement (RTGS). Electronic trading platform (Negotiated Dealing Systems – Order Matching) (NDS-OM) and a separate Central Counter Party (CCP) in the Clearing Corporation of India Ltd (CCIL) for guaranteed settlement.

Today, The Bond market activity has grown rapidly. Government securities market (G-Sec), corporate bond market and derivatives markets have become broad-based in terms of participation. Technology has given the ease and access to transact from anywhere, it has helped broad base not only investors but also products. Thus, driving the overall debt market size to a little over USD 2 Tn.

Government Bonds make majority of the market with sovereign yield curve spanning up to 40 years. Corporate Bonds are expected to double their growth to achieve Rs. 65-70 Lakh crore by 2025. Primary market issuances have increased resulting in large benchmark issuances. The volumes in secondary market have increased. The bid-ask spread of on-the-run securities continues to be low and so are the impact costs.  

With the increase in Fintech activities in this space, bond markets have spread their wings to reach all investors. So much so, that RBI now allows individuals under the Retail Direct Scheme, to buy Government Securities, SDLs, T-bills and Sovereign Gold Bonds.

Amidst all these positives brought about by the adoption of technology and digitalization, the regulators forget a key component – Human Resource.  Since 1992, a generation of Bond Market professionals have served a full cycle and retired.  A huge set of Bond traders and dealers, both in the primary and secondary market today face a different future……?