Blockchain Reaction
Shallow Credit, Deep confusion on Crypto tax, and the mother of all IPOs - LIC 💳 🧩 💪
It’s that time of the year, offices are calling you back, and you’ve forgotten how to behave in real meetings. No more ‘Can you see my screen’ or ‘Sorry! I was talking on mute’. Ah, good times. Enjoy the last few weeks of WFH! This week, it’s all about the money, honey ⬇️
Hello, are you interested in a lifetime free credit card?
Credit (card) growth is key
Much is said about credit growth. The entire banking system is dependent on it and it is counted among the leading indicators of economic growth. And with so much depending on it, various credit instruments should ideally be easily accessible, right? In a private consumption-driven economy like India, this should be more so for retail credit instruments like credit cards. So, let’s take a look at India’s credit card penetration.
Shallow credit
Under half the population or about 550 million Indians have a credit history. Out of this, there exist only 67 million credit cards. However, these are not all unique credit card holders, a figure which stands at 35 million. And when it comes to credit card spends, the average monthly figure per credit card of ₹3000 is skewed towards a small group of high spenders. This implies the cost of marketing and issuing credit cards to the majority of users is not very economical.
Circular inactivity
One major reason for such low credit card penetration is the inability of non-banking financial companies (NBFCs) to issue standalone credit cards, according to experts. In 2004, the Reserve Bank of India had issued a circular that talked about allowing non-deposit taking firms to issue standalone credit cards, but it remains unactivated to this day. Banks focused on ‘prime’ customers, making this line of credit unavailable to the majority of Indians. NBFCs experimented with co-branded credit cards with banks but found it unviable with low credit card spends and poor revenue sharing.
Is it too late?
Despite the RBI’s intentions to limit the risk of credit card lending to banks, there was far more demand for credit. And where there’s demand, supply finds a way. This led to a boom in alternative credit products like ‘Buy Now Pay Later’ (BNPL) and the spurious online lending apps that the RBI recently busted. NBFCs’ hopes were renewed when the RBI released its Report on the Working Group on Digital Lending through Online Platforms and Mobile Apps in November last year. But with the proliferation of fintechs and BNPL, is it 18 years too late?
Clarity, confusion and chaos
Cryptic tax
Wondering what your crypto tax liability is? Or you’re planning to invest, trade, stake or mine cryptos and want some clarity on the taxes involved? That’s one question no one can answer right now since there’s been no official clarification since the budget announcement. But what we can do is list out what we know and what we’ve heard so far.
A taxing budget
First, let’s consider what the finance minister said during the budget. 1. A 30% tax on any income from the transfer of virtual digital assets. 2. No deductions shall be allowed in computing income apart from the cost of acquisition 3. To capture transaction details, a 1% TDS (tax deducted at source) on the transfer of virtual digital assets above a certain threshold. 4. Cryptos given as gifts will also be taxed in the hands of the recipient and 5. no loss can be carried forward or set off against other income.
Limited set-off
Each of these creates more questions than answers so let’s take them one step at a time. To begin with the last point first, a recent report suggests that the government is considering allowing a limited set-off. Losses made in crypto trades may be allowed to be set off against gains for a period of one year. This will reduce the taxable income from crypto trading by the amount of loss. In the stock market, losses can be carried forward and set off against gains for up to eight years.
Only pain, no gain
The crypto industry feels that a 1% TDS is too high for the intention of tracking transactions. Combined with the 30% tax on returns, the highest rate of income tax, it will discourage investors and high-volume, low-margin trades. There’s no clarity on how to compute the value at which cryptos that are gifted will be taxed. Crypto miners may be allowed to deduct the cost of acquisition like electricity and depreciation on mining computers against income. And in between all these taxes, crypto enthusiasts feel that no steps have been taken to promote the innovation and employment potential of the underlying technology.
The mother of IPOs
What? Who? How?
You know that drumroll before a major event is announced? Well, all the IPOs in 2021 were the drumroll to the biggest Indian IPO set to come out on March 2022 - LIC (Life Insurance Corporation). The fully government-owned firm is planning to offload a 5% stake in the coming IPO. So, how big are we talking? Estimates are that it’s going to be around ₹65,000 Crores. Phew!
The firm flaunts some pretty impressive figures too. Till the year 2000, LIC had a monopoly over the Life Insurance business. Today, even with 24 competitors, LIC commands the largest market share at 64%. It has the biggest individual agent network, 7.2 times more than the second-largest agent network. And its New Business Profit Margin per insurance agent (how much each agent contributes to the profits) is also the highest among its peers at ₹1.6 crores.
LIC is also the largest asset manager in India and is ranked 5th in the world when it comes to gross written premium (total revenue from the insurer before deductions).
Woes of the pandemic
When you’re in the business of insuring life, a pandemic is the worst thing that can happen to you. Death tolls due to COVID increased and families depended on payouts from insurers like LIC. The insurance claims by death skyrocketed. To add to this, because of the general economic slowdown due to the pandemic, a large number of people were unable to pay premiums for their policies. This impacted LIC’s solvency ratio, meaning, the capital that they were required to maintain for short-term and long-term commitments fell. In this area, LIC performed even worse than its peers.
Something old and something blue
The sale of LIC’s new policies was not very hot in the market. True, the drop can be attributed to the pandemic, since most of their individual policies are sold through agents. But, even before the pandemic, there was a drop of ~17% from FY 2018-19 to FY 2019-20 in individual policy sales.
Now let’s look at profit margins. Its operating profits have declined steadily from FY2019. Its total expenses are also on the rise which led to LIC reporting a negative cash flow in the first half of FY2022. To add to this, there has been a negative growth trend in the last two years.
Of Pizzas, cabs and insurance
All of us enjoy the convenience of digitalised services. If you’ve ordered a pizza on Zomato in the middle of the night, you’d know. Especially after the pandemic, the general digital savviness has also increased. At the moment, LIC does not offer its services on third party websites, and its own website is also not the most user friendly. Such heavy dependence on individual agents also hikes its operational costs. This is clear when you look at the annual premium for the term plans across categories. LIC is the more expensive plan no matter which demographic it is catering to. In fact, LIC’s own e-term plans are priced cheaper than its other offline plans.
This dependence has been acknowledged by LIC, which may mean that they would be willing to reduce it in the future.
India’s scope
The protection gap in India (the difference between the amount of insurance that should be provided vs what is actually provided) is the highest in all of Asia. This shows that India has a lot of potential for growth. To aid this the foreign direct investment limit in the insurance sector was increased from 49% to 74% in March 2020. This coupled with the impetus of LIC towards going digital, could make it a force to be reckoned with.
So, what do you think? Do you plan on investing in the LIC IPO?
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