Why India Needs More Friction In Financial Transactions
Millions of youngsters have taken small loans with a swipe on the smartphone and many have used this to, among other things, speculate in the stock markets
On Episode 351 of The Core Report, financial journalist Govindraj Ethiraj takes you through the top business news for today. We also feature an excerpt from The Core Report: Weekend Edition from July 27 featuring Siddharth Pai, founder of Siana Capital and a leading tech strategist.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: Why We Have To Bring Back Friction In Financial Transactions
(07:53) Markets close at record highs, stay flat
(08:43) Oil drops below $80 a barrel
(09:38) Regulator lines up measures to curb derivatives trading
(11:18) Betting on Trump becoming President, why you should buy gold then
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, it's Wednesday, the 31st of July and this is Govindraj Ethiraj headquartered and broadcasting and streaming from Mumbai.
The Take: Why we have to bring back friction in financial transactions.
If I were to look back carefully on my online purchases, would I have bought everything I have bought from Amazon, for example, if there was no Amazon or online commerce ?
I pose this question to myself increasingly and the answer usually is no. I would be buying much less if the ease of purchase and delivery was not there.
But purchasing stuff online is not the same as using savings and borrowings to speculate in stock markets, which in turn is likely to blow up, as data is showing.
Also, more likely that what I am buying online is 80-90% aligned to what I would have bought offline in any case, at least in my case. I am sure some such percentage applies to you too.
Online trading was a step-up compared to the old days when you had to physically call a broker and place orders to buy or sell a stock. Can you even imagine that?
Today, you could be anywhere in the world and trading via the same broker, but on a smooth web interface or even app on mobile. And in a way that your funds are linked to your bank account and you are empowered to make quick decisions.
The next step is to obviously take loans, which of course is the latest efficiency move thanks to lavishly funded fintech startups who have added their own discounts and incentives to attract business, working with the same banking system at the backend.
As A result, millions of youngsters have taken small loans with a swipe on the smartphone and many have used this to, among other things, speculate in the stock markets. More on speculation and derivatives later in the show.
This is where the problem is now developing.
The Reserve Bank of India (RBI) on Monday has now acknowledged that emerging technology has led to proliferation of fraudulent apps and mis-selling.
Fintech firms still face significant challenges in counterparty credit risk assessment despite significant footprint expansion, the central bank said in its report on currency and finance, reported by The Economic Times.
RBI Governor Shaktikanta Das wrote in the foreword to the report that emerging technologies can introduce complex products and business models with risks that users may not fully understand, including the proliferation of fraudulent apps and mis-selling through dark patterns."
Dark patterns refer to deceptive practices that are designed to mislead users to do something they originally did not intend to do. Examples include compelling users to perform unrelated actions to proceed with intended purchases and creating a false sense of urgency to mislead users into making quick purchases.
India also leads the world with a 48.5% share in global real-time payments volume. India is one of the top recipients of FinTech funding in recent years, with US$ 2.6 billion of flows in 2023.
The flow of funds into the fintech space is something that one should watch carefully, perhaps more than before.
The RBI says and I agree, that signalling risks pertaining to Big-Tech firms the regulator said that they could quickly become ‘too big to fail’ and dominate markets.
It could become difficult for the regulator to assess risks because of their extensive group entities, interconnected activities and transnational presence.
The RBI also says the emergence of digital players with unreliable funding models accentuates vulnerability in the system and poses challenges for financial stability.
"While the digital lending platforms and buy-now-pay-later (BNPL) services bolster consumer convenience, they also entail various costs, including exorbitant charges, coercive recovery practices and hidden fees." RBI said.
In India, BNPL constitutes around 3% of total e-commerce finance by value. While BNPL is projected to grow every year by 74%, making it a US$ 56 billion market by 2026, the model has a high dependence on late fees to ensure profitability which could become predatory for customers.
The RBI also accepts that a digitalised financial sector can enhance credit assessment, reduce default rates and broaden the access to finance. Incorporating alternative digital data, such as cash flow, telecom, utility, and social media sources and leveraging surrogate data allow creditors to comprehensively assess customers’ ability and willingness to repay loans and enable real-time credit monitoring.
The problem is two or three fold.
Most importantly, note that it has taken the RBI several years to take note of the problem of fintech-driven lending, for instance and in the manner it has right now. This does not mean the RBI was sleeping all through but rather the nature of the problem, made worse by the speed at which it can escalate.
Just yesterday, we spoke of how India has created a nation of young gamblers, punting away at the stock market often with borrowed funds.
The positive of technology is it allows rapid scale up. The negative of technology is the same thing.
Something can become very big very fast before you even know it. As it clearly has, in the case of small loans.
Regulators look at the top level signals or symptoms. And it is quite likely that the balance sheets of the banks are safe, even if they are the ones who are actually behind the fintechs who do all the accelerated lending for them.
But the individual impact, both socially and economically can be high, as we have discussed here before.
We have to think of, even if we don’t do anything right now, about increasing friction.
For example, an OTP as a second layer of authentication increases friction while doing a transaction and we have learned to live with it.
Of course introducing more friction in loans or other buy now pay later kind of schemes will involve other steps. I don’t think that is difficult at all. It is only a matter of focusing on it.
The larger challenge is of course behaviour.
You cannot sermonise to youngsters about how they should spend and where they should or should not borrow from.
So forget public service campaigns.
We have to think creatively and I am sure we can.
It needs a combination of regulatory push, greater friction and then of course the fear of what could happen if your loan goes bad, including the fact that the same technology will ensure you will not get loans easily again.
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Markets & Oil
The stock markets continued to rise, albeit very slowly, for the third successive session to end at new record closing highs.
The movement was however quite flat.
The BSE Sensex closed at 81,455 up 99.56 points, while the Nifty50 ended at 24,857 up 21.20 points.
Among the broader indices, small-cap stocks outperformed the others with the BSE Smallcap index settling at 55,411, up 0.88 per cent.
The general view is that investors are continuing to book profits and somewhat steadily, which would suggest a fairly orderly market.
There are no specific triggers at this point that are evident except the larger concerns on valuation which of course is either a concern or not, depending on who you ask.
Few institutional investors, particularly those who are bringing in funds, will acknowledge very high valuations because it is not in their interest to do so.
Oil Has Dropped Below $80
Oil prices have now fallen to the lowest in seven weeks on doubts about the strength of global demand, while investors looked ahead to OPEC's meeting for guidance on supplies, Bloomberg is reporting.
Global benchmark Brent crude is now hovering around $79 a barrel for the first time since early June.
Sentiment in the oil market has been subdued recently after China reported its weakest economic growth in five quarters earlier this month, said Bloomberg.
Meanwhile, Russia’s four-week average crude exports dropped to the lowest in 11 months or late August of last year, said Bloomberg.
The decline — the fourth straight — likely stems from Russia’s improving compliance with an OPEC output target, coupled with a recovery in domestic refining, said Bloomberg.
A recovery in domestic refining means crude oil is being within Russia rather than being exported.
Sebi On Derivatives
India's markets regulator SEBI on Tuesday has proposed a series of near-term measures to prevent speculative trading in index derivatives, including curbing multiple option contract expiries and increasing the size of options contracts, reported Reuters.
India has flagged risks from speculative trading by so-called retail investors.
The Securities and Exchange Board of India (SEBI) has proposed to initially set a minimum value of Rs 15 to Rs 20 lakh ($18,000-$24,000) for derivative contracts, and after six months, it will raise the threshold to up to 3 million rupees.
The SEBI also proposed weekly options contracts to be provided on a single benchmark index of an exchange and brokerages to collect option premiums on an upfront basis from their clients.
It has also proposed an increase in margins on near-term expiry.
The massive changes will bring down retail volumes on options, hit many high frequency traders and people who use algorithms for trades as well as exchanges, analysts told Reuters.
This I would imagine would be precisely the objective that the regulator has as it tries to cool down the markets.
Meanwhile, the activity in the markets is of course good for the Government’s revenues.
It earned Rs 98,681 crore from long term capital gains tax on listed equities in 2022-23, a 15 per cent growth over the previous year, Parliament was informed on Tuesday.
As taxes rise, as they have and of course there is more activity, the Government should earn more.
Hopefully, it will all come back to us in some way, as it should.
Gold, The Hedge
Gold is the best portfolio hedge in the event Donald Trump retakes the White House, according to the latest Bloomberg Markets Live Pulse survey.
Of some 480 respondents, a little over 60% of those surveyed see the dollar ultimately weakening in the event the Republican candidate secures another presidential term.
The interesting thing is the history of it.
A Bloomberg gauge of the dollar slid more than 10% while the spot price of gold rallied over 50% during Trump’s four years in office.
Moreover, Trump’s platform of tax cuts, tariffs and weaker regulation are viewed as inflationary on Wall Street and could even force the Federal Reserve to increase interest rates again.
“Gold sits in a prime position to rally,” according to Gregory Shearer, an analyst at JPMorgan Chase & Co.
Geopolitical tensions, the growing US deficit, reserve bank diversification and inflation hedging have all driven bullion prices higher, “these factors likely endure regardless of the election outcome but could be further magnified under a Trump 2.0 or ‘red wave’ scenario,” he wrote July 24.
So where does that leave us in India, just getting used to lower gold prices thanks to lower customs duties.
Well, that makes gold more attractive as an investor.
The Bizarre BitCoin Drama
I do not understand cryptocurrency.
But I can understand a financial con being floated.
An Indian cryptocurrency exchange said it would “socialise” the $230 million loss from its recent security breach among all its customers.
The move follows a hack into the exchange which resulted in some half of its reserves getting stolen.
This is the equivalent of the Bombay Stock Exchange telling you that the money you paid while buying some shares on a particular day has been hacked into and gone.
But then, the loss would be divided between all the buyers who paid into the stock exchange buying different stocks, though the hack may have specifically emptied out only some accounts.
This is my understanding.
Actually, there is no clear equivalence between the byzantine world of Crypto and the real world of financial transactions and is why regulators world over, including, thankfully, in India, are wary of formalising it.
TheIndian Express reports that socialising losses in what is a purely capitalistic venture has drawn the ire of crypto industry insiders who have questioned whether the strategy being explored by the firm in question WazirX has any legal backing and if it could pass regulatory scrutiny.
The platform faced a major security breach earlier this month, which resulted in nearly half of its reserves getting stolen.
Or so it claimed I imagine. I reckon there is some way to check what these reserves were in the first place but I am not sure how that would work.
Since then, the firm has halted deposits and withdrawals from its platform as it scrambles to come up with a workable solution to recoup some of its losses.
The firm’s ability to maintain 1:1 collaterals with assets has also been “deeply impacted”. It has called the breach a “force majeure event beyond our control”. The government and Reserve Bank of India are yet to publicly respond to the incident.
“We are implementing a fair and transparent socialised loss strategy to distribute the impact across all users equitably… and preserve the exchange’s stability. The exchange said in a blog post later adding it was testing waters.
There are some specifics to the mechanics of this which is not so relevant for our discussion.
The larger problems are two.
First, we are, as already discussed on several occasions earlier today, in a highly speculative environment which, even if all systems work fine, will detonate the savings of millions of young and perhaps old people too.
We don’t need to make the problem worse by allowing complex, opaque and clearly non secure trading systems to exist, at least not without complete regulatory control and scrutiny.
At this point there is no regulatory control on bitcoin.
That itself should be a warning sign though am sure it acts as the opposite, the attraction becoming more because of its opaqueness and the fact that the systems cannot be penetrated by regulators.
I think all this was fine for a few years during Covid19 when people enjoyed the mysteries that the internet and digital world offered.
No longer.
The platform said it has filed an online police complaint on the National Cyber Crime Reporting Portal and is processing a physical complaint.
It has also reported the incident to the Financial Intelligence Unit (FIU) India and the Computer Emergency Response Team (CERT-In).
I am pretty clear very little will come out of this.
