In: Finance
We’ll explain the risks involved in financial stability when financial innovation takes over with examples as in below:
To understand the complications hidden behind the financial innovation, we need to be clear by what we meant with the term financial innovation here. To give an instance, digitization of the banks, online payment and transfer systems, ATMS, Mutual funds indexed, financial data aggregation, credit and debit cards play a significant role in Financial innovation. Many financial intermediaries like PayPal are emerging like third party apps in the mobile phones to click a deal away. Although, as many businesses are involved in the third-party transfers and payments, it’s always a dilemma which one can stay longer in the business and which is efficient in its operations. User’s trust and reliability is not as easy to gain as it seems to be. This may disrupt the financial stability. It’s also been evident that financial products whichever are new comes with the different type of risks which cause more volatility in the existing market. Without certain binding rules the new financial products may cause the hazard of creating a new financial crisis even which jeopardize the financial stability. (176 words)
Now we’ll discuss the three types of financial restructuring with real world examples as below:
Strategic Restructuring: Changes in equity and debt ratios to create an effective cost of capital can be an example of strategic restructuring. For example, Kingfisher had its losses faced by the rupee depreciation, and has faced a severe cut throat competition and has lost its market share value. Thus, the company has opted for financial restructuring to cover their margin loss.
Change of Ownership Structuring: When former business is continually giving the operational losses and cannot recoup the debt it has made, the company may think of hiring new CEO’s who can manage. Or it may think of changing the entire Board of Directors, or change its ownership to handle the challenges faced by the company.
Demerger: As per the policy like Divide and rule, it’s sometimes better to divide the business to increase the focus on its profitability and operational efficiency. This is done by following a method called Spin-off. (151 words)