Budget 2011-2012

Its on..with elections and inflation pressurizing, we can’t expect more than this..will have detailed analysis on each topic ( Of course only on things which i know) , from tomorrow.. As expected, more banks are on their way..and lil bit of tax savings…

CITI never sleeps

Yet another time CITI’s Risk management system came to light…thanks to Mr.Puri..forget about the different numbers quoted.. but few questions are still unanswered..
1) How the family member’s account are allowed to be opened in the same branch and allowed to be managed by the same guy?
2) what’s the daily monitoring limit for fund inflows/outflows in a branch? ( years ago, my good old Branch manager used to monitor every single transactions more than 50K.. salute Mr.Krishnadas..)
3) Is there anything called Chinese walls or maker-checker concepts followed in the world’s biggest bank?
4)Did any of the Brokerage firms reported the unusual fund flows till last month?

Even though the FM brushed aside, any serious incident in the system, the worrying part is the effectiveness of the KYC system, and how bad it is monitored as just another customary paperwork…

neverthless, i can’t stop wondering at the simplest of financial innovation by a fellow Indian, challenging the Ponzi’s of western world and why none of the client’s affected lodged a complaint??

whatever said, poor fellow wealth managers will now be scrutinized more and will be meeting those suspicious eyes of customers nation wide…

DTC- the new tax code

There is a lot being told and discussed about the direct tax code and here is an assessment of how it would impact a salaried guy ..

Few things to note:

• The new DTC is not yet approved by parliament. Only the cabinet has approved it.
• The new DTC will come into effect only from 2012. Till then the current tax slabs/codes will apply.
• Don’t fell bad about this DTC code.. considering the loooong time we refined our tax codes, this is an achievement by itself and the FM’s name will be remembered for next 4 generations

For most of the professionals who falls below the 10 lac salary limit, will now be getting a lot more saved.  But as always your financial advisor says, if you are investing in any of the Tax saving instruments available, then you might save much bigger amount.

Current Slab:

Current Slabs
Upto 1.6 lacs	0%
1.6- 5 lacs	10%
5-8 lacs	20%
8 lacs and above	30%

Proposed Slabs
upto 2 lacs	0
2lac- 5 lac	10%
5lac- 10 lac	20%
more than 10 lac	30%

New Changes in the DTC code:

No more ULIPs/ELSS schemes.. You can invest up to a maximum of 1 lac (in PPF/PF/Superannuation /NPS /Combination of the all) and another 50K towards (Insurance premium paid towards Term policy/Mediclaim-self, Parents/tuition fees for children)

-          This is a mixed benefit bag..ELSS were really a good product and a good start for people to start investing in equities, and they delivered real good returns compared to other tax saving instruments..Donno why the govt scrapped this from 80 C net.. The good thing is , if at least 1% of the people don’t buy ULIP’s because it is not going to be covered in 80C/no tax benefit, it will be good for them. ULIP’s- a good product which is in the wrong selling hands still L

-          The NPS schemes can now replace ELSS- since it can have equity exposure upto 50%, but still, we can redeem it without any taxation only after retirement.

-          The bad part again is the scrapping of  deduction of Principal paid towards home loans under 80C.

One good thing is, currently you might be submitting medical bills for upto 15k to your company for tax deductions, and in the new bill it has been raised to 50K. Atleast govt realised  that cost of medicines are very high

Base rate & banks

From next week, the base rate will replace the BPLR in all the Indian banks. What’s the implication it will have on the banks, its customers and how the dynamics will change in the market with the introduction of base rate.

Back ground:

Earlier( till today) banks,used to arrive at a number called PLR- Prime Lending Rate( only they know how they arrived at that figure- today a PSU bank declared its base rate as 7.5% who use to keep its PLR at 12% till last week!!) , and they are not controlled by RBI on their lending rates, they can lend at rates more than PLR or lend at rate much lower than PLR.. ( if u are a small customer asking for loans, u would have heard bank officials saying, we cannot lend below PLR sir.., but the story is different).

The recession in 2008-2009 and the period after gave a wonderful insight to RBI regarding the lending patterns of banks. Most of the banks did not reduce the PLR rate, but were borrowing at a lower cost. They passed on the benefits of lower cost to few preferred clients, who are obviously bigger corporates and not the smaller companies or individuals. They have always been given a rate which is above the PLR. So, to increase transparency, RBI directed all the banks to follow a base rate model, where in the banks can never lend below a particular rate (base rate) to any of its customers. The base rate will be arrived factoring in the cost of borrowing and the admin costs. The banks can now design product specific rates, wrt base rate.

So, from now on,

1) All categories of loans will be priced only with reference to the Base Rate. 2) The Base Rate could also serve as the reference benchmark rate for floating rate loan products like home loans. IF the bank keeps a different /market benchmark, then the floating interest rate based on external benchmarks should be equal to or above the Base Rate .

 3) Banks cannot lend below base rate

 4) Calculation of lending rate will be – base rate+ product specific operating cost+ risk premium etc.

Effects :

The home rates will not change drastically, because, the risk premium is lesser when compared to other sector lending, and the NPA rate is very minimum compared to corporate loans.

The personal loan will not move upwards any further, because, it is already in its highs, and the risk premium is also high for the product category. But, for any individuals, the credit score will help them to bargain loans from banks, provided the credit bureaus are approachable by individuals. (Now as a recent development, there is one more credit bureau getting developed in India, other than CIBIL).

With the huge potential and competition in both these segments, banks will not hike their rates..

If you are about to take a home loan, go for floating rate, since, they will be more transparent now.

The Small company owners will now get to access more loans at a better rate than what they are offered now. Till now, they were charged more to offset the lower interest charged to their bigger cousins..

Who will get affected? Few industries in high risk sectors will get affected, like real estate developers, will now pay more interest for loans on their so called land banks.

The most hit will be the PSU officials who used to sanction loans with lesser interest rate for some corporate and get kickbacks. This will be reduced to a great extend. ( I have seen ppl borrowing loans on their company and invest in stock markets earlier..!!)

On a whole it will improve the transparency involved in banking system, and will empower the customers more.

Export and DRI :

Still RBI is yet to come clear on the loans to export sector. The Differential rate of Interest ( DRI) scheme, will not be based on base rate; since they are aimed at weaker section of the society, to make them financially included.

 Bank Employees:

Am also not clear on the employee benefits offered to bank staffs regarding loans; they were given home loans and personal loans at half the interest rate charged in the market. Will this base rate be applicable to them as well? Have asked with few of my ex colleagues in banks.. will update once I get any response

Rupee appreciation

For the last week, there was a lot of discussion on rupee appreciation, a sudden drift of the media from Yuan appreciation. This is because, if you see the trend of rupee from July 2008, till now, there was a wide swing against the greenback – from below 42 levels then, it moved up to 51/$ exactly a year ago, and now coming down to 44.2 /$, a drastic swing ever in a shorter period of time.  What is triggering the appreciation of rupee and its effects in an unusual Q& A style. (This is bcos, one of our readers has asked me these questions and I have added a few more to her list)

Is the rupee appreciation because of dollar depreciation?

 No, not completely. Might be a slight effect because of dollar losing its value. But rupee is not only appreciating against dollar, but against all major currencies – Euro, Pound etc.

 

Is there any relation between stock market performance and currency?

 There is a greater relation to stock market and currency. Stock market in India moves up when there is a large amount of FII inflows. FII inflows obviously brings in lot of dollar and demand for rupee goes up , thus making the rupee appreciate. If you see the currency value in Feb – Mar 2009, it was around 52/$, and the stock market was at its lower levels. After March, the trend reversed, Indian market started attracting more foreign money and every month, the net FII inflow was greater and rupee started appreciating.

 

What is the reason behind this huge inflow of money ?

 This is the effect of carry trade. Remember we discussed this… FII’s now borrow money from US, at a near zero interest rate and invest the money in Indian markets, which gives a wonderful spread . This is the main reason for FII’s to pump in money to India, to make quick return of investment and also to set of their losses which they made in their homeland J

 

Will there be any effects of Yuan appreciation on Rupee?

 First of all, there is no question of Yuan appreciating significantly. As the Chinese economists say, they will accommodate.. Ok, if at all china appreciates Yuan, this will have a positive impact on Indian exports, since Chinese firms will lose price competency and India might get more exports, which will result in pulling down or slight depreciation of Rupee.

 

Does RBI have any role in stopping the currency appreciation?

 Yes, RBI can decide the ups and downs of Rupee.

 

What methods can it adopt to stop currency appreciating further?

As an act to stop rupee appreciating further, RBI can start buying dollars and add it to its reserves, but it will lead to lot of other operations which it should perform as a whiplash effect.

This is how it can happen:

 RBI will add more dollar to its Forex reserves, which will result in stemming the rupee appreciation and monetary flow in the market, which will move inflation to higher levels, and again to control this RBI should issue more government bonds/ MSS to absorb the excess money from the market. Amusing right…

And the question is it will pose excessive burden on the government to service those debts. And this is why RBI has not yet intervened the currency market by mopping reserves as it usually does…

How will it impact the economy?

 The impact of Rupee appreciation in the economy will be quiet balanced. On one hand it will ease the imports, and cost of imported goods to come down as most of the payments are dollar denominated. But this will have a big impact on export oriented sectors like textiles, software etc, where in their revenue comes down when accounted in INR.

What levels will the rupee reach further? Will it go down below 40?

 Voila… If I could answer this question right, I have a fair chance of replacing CFO of TCS who usually loses about hundreds of crores in Forex positions, every quarter

There is a wide spread news that, govt will direct RBI to intervene when the rupee goes below 42 levels…chances are fairly less for the rupee to go below 40.

SEBI Vs IRDA on ULIPs

 

SEBI, after a very long time, woke up to the known secret that ULIPs are in disguise Mutual fund schemes, which were operated in full swing for so many years, thanks to the exorbitant commission paid to the agents and even made banks to forget who they are and act as a bunch of salesmen. In India, u visit any bank, (except for few PSU’s), there is a 95 % of chance, that you will be marketed an insurance product or a mutual fund.  The success of these products was just a tactical replica of what UTI did in its years of inception, clubbing the safety aspect to any product, and you can make the Indian customer wow, and put the risks involved in finer prints, which would require a magnifier to read and voila, you make millions in terms of profits.

You can read more on ULIPs here.

The issue in one line – SEBI does not ban ULIPs but stops them until these ULIP schemes are regulated and they come under SEBI .

 Now, coming to the issue, which is heating up between the two regulators, SEBI and IRDA. As both of them are formed by special acts of parliament and are autonomous bodies, the issue will be more tensed by the counter move of IRDA ordering all the insurance companies to sell ULIPs irrespective of SEBI’s ban. The issue of contention is the investment part in the ULIPs. SEBI says all investments which involves securities will come under its jurisdiction while IRDA says, they don’t come under securities, but they are part of the insurance premiums.

 The Insurance companies say that,

• The predominant feature of a ULIP is insurance cover which is dependent on human life and the mere existence of an additional investment feature cannot convert a ULIP into a mutual fund.
• Under a ULIP, units are only notionally allocated and not physically issued and the units are created for the purpose of determining the benefits payable under the policy and are not owned by the policyholder
• Under a ULIP, only the risk on the investment portion lies with the policyholder while the risk on the life insurance portion vests with the insurer. ( have you ever told this to the investor? :)  )
• It cannot be traded as like a mutual fund. It can only be transferred or under special circumstances, investors can redeem premium paid towards investment part .
• Unlike a mutual fund, a ULIP is not established in the form of a trust. The fund is held by the insurance company itself as required under the Insurance Act.
• Ancillary features such as fund management, fund management charges etc., are alone not sufficient to convert a life insurance product into a mutual fund scheme.

 (This is the response given by the companies to SEBI in response for its query.)

 What does SEBI say in response to these queries? -

• Any person/entity involved in mutual funds or collective investment schemes or trading in securities for others should be registered with SEBI.
• ULIP offer document states that, these products are different from traditional insurance products
• The risk is borne by the investor for the money invested and subject to the risk associated with capital markets
• The product has characteristics such as fund management, fund management charges, switch and partial withdrawal options – which are characteristics of mutual fund.
• The product is unit linked and money is raised from public through sale of units to them. This is a characteristic of collective investment scheme or a mutual fund.
• The contributions or payments made by the investor are pooled
• The contributions or payments are made to such ULIPs by the investor with a view to receive profits, income.
• The investment made by the investor in the ULIPs is managed on behalf of the Investor.
• The investors do not have day-to-day control over the management and operation of the ULIPs.

 All these are similar to mutual fund operations.

 And all the activities and literature related to ULIP’s clearly state that they are predominantly investment options, combined with a small percentage of premium paid towards insurance of the investor. If you check the product brochures of few ULIP plans, you might not get to see more than 2-3 % of the premium will be directed towards life cover (or insurance or mortality charges as they are called). So a contract which makes 3 % allocation towards insurance and 97% towards investments, can be called an investment company or insurance company?

 Finally, once these ULIP plans come under SEBI

• It will for sure regulate the commissions paid towards distributors/ agents and will make it a level playing field for mutual funds and ULIP plans
• Will clearly distinguish with insurance products & mutual funds
• Will save a lot of money for the investor (at least he will save 300 % towards charges - for ULIP’s in a simple calculation, if he pays 100 Rs premium for 15 yrs, he would have paid 164 Rs as commission or charges, where as for the same amount invested in mutual fund, he would have paid less than 25 Rs.and another 30 Rs for same cover in a traditional insurance plan.)

 Who knows, the insurance companies will stop marketing ULIP plans aggressively, and of course, the frontline bank sales men would be yielded to more pressure, as their revenue might come down, but the targets will remain the same

ICICI and HDFC are now foreign banks

 

Last week was a surprise to millions of share holders (needless to say – account holders and staff) of few private banks in India. Suddenly they have been branded as foreign banks and most of us were unclear whether they were sold to some foreign banks…(Given the reputation of one of them, who often faces charges of running out of cash in ATM and balance sheet issues, no wonder ppl thought in this line..) The banks affected (?) by this news are ICICI Bank, HDFC bank, YES bank, IndusInd bank, ING Vysya bank and DCB. The issue is as simple as this – shareholdings pattern shows that the majority stake of these banks are with foreign investors. What’s behind all these noise and how will it affect account holders and shareholders and the bank.
The controversy started when the govt (CCEA) issued a press note stating that investments by an Indian-owned company would count as Indian equity. An Indian-owned company is one where the beneficial foreign ownership is less than 50% and where the right to appoint the board is with resident Indians. The issue is as per the law, the foreign ownership is more than 50% and these companies say the right to appoint the board is with the resident Indians… interesting clash, huh…??

Let’s come to the law:
 
Any company in India is allowed to raise money from public through public issues. When they want more money to expand their business, they are allowed to raise money from foreign nationals through various options. As the FDI policy document issued by the GOI,
 FDI up to 74% from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.
b. For the purpose of determining the above-mentioned ceiling of 74% FDI under the “Automatic route” in respect of private sector banks, following categories of shares will be included.
·          FDI investment under Portfolio Investment Scheme(PIS) by FIIs,NRIs
·          IPOs,
·          Private placements,
·          ADRs/GDRs, and
·          Acquisition of shares from existing shareholders.
 
First of all, the FDI limits of these companies have not breached 51% all of a sudden. In December, the FDI holding pattern of ICICI stood at 64 % ( 36% by FII and 27 % thru ADR) and HDFC stood at 74% the maximum they could reach.
 
Coming to the voting rights,
Both the banks states, the voting rights are with the resident Indians to choose the board and the entire management lies with Indians. Say for example in the case of ICICI, it says at least 27 % of the shareholdings is held by a custodian (custodian for ADR holders), which in turn will vote in accordance with the board’s decision, and the board consists of Indians only. Sounds logical. Also they add that whatever be the holdings percentage, the voting rights will be restricted to 10, so as the banks say, nothing will change that they are Indian banks (by origin, operation, management, but not ownership :-)  ).
 
So if nothing is a problem, what’s the issue all about? It comes to affect their subsidiaries, especially insurance arms run by both the big players. ICICI prudential and HDFC standard life. The FDI limit in insurance is not at the same levels of FDI limit for banks , and it is controlled at 24 %. So far, all the insurance companies have reached their cap of 24% of FDI limits, and when ever capital is needed the domestic firm ( say for ex; ICICI in this case ), can pump in money to the subsidiary firm, as the capital would be considered coming from an Indian firm.
 
Now this practice cannot be continued , since as per the holdings pattern, these banks will be regarded as foreign banks, and every penny added will be considered as foreign money coming in….so , the expansion plans of these insurance firm will now be funded by themselves and cannot be supported with capital from the parent firms. This is the only and major problem for the banks .
 
With my limited knowledge, I cannot see any trouble for the account holders , as what ever the bank’s holding pattern are, be it PSB, private bank or foreign bank, our reserve bank assures not more than a lac of rupee for the depositor, in case of failure. I strongly feel, that this deposit insurance cap to be at least raised substantially , not to mention the full coverage. And for the employees of these banks, even though they are foreign banks, as their CXOs mentioned, they will still function as Indian banks.. So don’t expect a big pay check and bonus…

Airtel’s African rhythm

 

•           Burkina Faso 
•           Chad
•           Congo Brazzaville
•           Dem. Rep. of Congo
•           Gabon
•           Ghana
•           Kenya
•           Madagascar
•           Malawi
•           Morocco
•           Niger
•           Nigeria
•           Sierra Leone
•           Sudan
•           Tanzania
•           Uganda
•           Zambia
 
These are not just a list of countries in African continent, but Bharti’s future lies in these areas. The mobile penetration is much lower in these regions when compared to India or any other third world countries. But the question is how good or profitable its gonna be? It was earlier, bharti’s which tried its every sweat to acquire the prospective and emerging mobile market – South Africa through MTN’s acquisition.
Why such a quest for foothold in the African market? Its one of the market which we can see ourselves backwards. African consumers and the consumption market are in a stage where India was some 10 years ago, with one difference, the penetration rate is low, but usage- in terms of mobile application is high. Social Networking and surprisingly banking through mobile is fast catching up in South Africa than India.
Africa is a gold mine for any global operator who has the war chest to absorb losses for initial two years. Remember reliance and their magic number 501, which turned the mobile telephony market in India few years back? That is the same strategy which is gonna work for bharti, which will help it to penetrate easily into the market .
 
So, Bharti will try the tested strategy in the African markets which will help mittal to achieve the status of a truly global player, and not to be surprised, if he continues his JV with Wal-Mart ( it is not present in Africa! ), in the African sub continent. The only challenge he might face in the countries listed above is not the business or competitors, but the politicians. It will not be a big issue, for one of his earlier avatar was a power broker and someone associated with Harshad metha and for two decades he had dealt with the sophisticated Indian politicians 

DAILY INTEREST CALCULATION FOR SAVINGS BANK ACCOUNT HOLDERS

From tomorrow as per RBI’s guidelines, all savings bank accounts will yield daily interest for the balance kept in the account at the end of the day even though the applicable rate is 3.5 % , the banks had their own rule of calculating the balances for interest calculation and it makes an effective rate which might vary between 2.8-2.95 %, since most of the savings account shows higher balance in the first week, which banks will not consider for interest calculation . Now with this new rule, the banks will calculate the balance (principal) for interest daily – average balance will be taken, so that at any point of time the customer gets 3.5 %.

This will definitely hit the bottom-line of banks, because so far, the low-cost fund mobilizing by the banks were from current accounts ( CA ) and Savings account ( SA), and every retail banker will be running behind the customer to maintain balances in savings account. Now, the same will continue, but the banks will be in a situation to pay more interest to the customers.( instead of 2.9 % now they need to pay 3.5% ), so net profits may take a dip , depending on the banks dependencies on savings book. The other factor which have impact in the banking industry is the short-term deposits – from 7 days-15 days,45 days. Currently the banks are giving somewhere about 2.5 %- 3% for these deposits, where in keeping money in savings account will earn 50 bps more than the deposit. So, except for corporate parking in short-term deposits, HNI & UHNI, who used to park temporary cash, will prefer to keep it in savings account.

But I have heard few shrewd bankers have found a way to market for these low-cost funds( compared to FD’s). They have arrived at a calculation ( which only they know ),  and projected to clients stating that instead of fixed deposits, they can keep money in Savings account, which will earn them more than FD rates. which is not gonna happen. If that is the case, the whole world will keep money in savings account than FD( and ppl know how painful is to make/withdraw FD’s from nationalized banks ), Retail bankers are increasingly betting their better cousins in investment bank, in identifying new ways to deceive clients …

Example of how the new system will work :

For instance, an individual who earns Rs 50,000, which is credited to his account on the first of every month. Assume the existing balance in the account at the start of the month was zero. From the salary received, he withdraws Rs 25,000 for various household expenses on the 5th of the month. So, the available balance on the 10th of the month will be Rs 25,000. Assuming there is no regular payment to the account but a withdrawal of Rs 10,000 is likely on the 20th of the month for some expense that may arise.

According to the present norm of calculating interest for savings account – The balance on the 10th of the month is Rs 25,000. There is a reduction in the account balance by Rs 10,000 by the 20th of the month. Hence, the balance used for calculating interest is Rs 15,000 and the interest for the month will be Rs 44.

By the new daily balance method, there will be a minute look at the changes that have taken place and hence there will be a different method for the calculation. Let’s assume a month of 30 days, there will be interest paid on Rs 50,000 for five days (1st to 5th of the month), then on Rs 25,000 for 15 days (5th to the 20th of the month) and lastly, on Rs 15,000 for 10 days (20th to the 30th of the month). Therefore, the total interest earned on various available balances will amount to Rs 75, higher than what is earned as per the present norm.

Now consider the same case, where instead of a withdrawal towards the end of the month, there is a deposit of Rs 15,000 on the 25th of the month due to interest received on a fixed deposit. If we go by the current norms, there will be no change in the interest, that is the interest earned will be around Rs 44. The reason: The deposit does not impact the lowest balance figure between the 10th and the end of the month so the total interest received stands at Rs 43.75. The daily interest method will compute interest on Rs 50,000 for 5 days, Rs 25,000 for 15 days, Rs 15,000 for 5 days (20th to 25th of the month) and then Rs 30,000 for 5 days (25th to 30th of the month, as the deposit was made on the 25th). So, in this case, the total interest earned will be Rs 82 for the month, almost double of what is earned by the old method.

Keynes and the impacts of his theories

For a long time wanted to compile Keynesian theories and economic principles, in my own terms, and here it is. I have tried to give them in a simpler way which I understood, and which would be easy for guys like me.

One thing which makes us to wonder at the Keynes’s view on economics is that how it is getting proved once and again in the modern times. As argued by Keynes, the governments all through the world, irrespective of how forcibly they have embraced the religion of classical economics, spend billions to revamp their economy, including monetary policy actions by the reserve banks or the central banks and fiscal stimulations by the governments and kingdoms as well. This marked the whole of late 2008 and 2009.  We witnessed huge spending by governments, rate cuts to near zero levels, increased liquidity measures, and induced more demand into the society as a measure to combat recession. After a long fight, now the governments – here I mean, developing nations or as you might call, nations which were less greedy (this actually wonders me, how a whole nation’s rulers and their citizens can equally be so greedy – either to increase their portfolios return or in capturing other nations for business interests…) effectively reduced the unemployment rate and boosted demand. But now as Keynes said, with excessive / over bought aggregate demand created, there is always the problem of inflation, which again warrants the intervention of government and government agencies. What ever the classic economists say, or prove, Keynes theories keep on proving that government and public bodies’ intervention is a more vicious cycle embedded with the economy of any nation.

For the good times , every economic theory is disproved by the herds, but some theories proves themselves during the times of downturn and which is when they are needed the most.

So,apart from wondering at his works, as told in the beginning, should stick to his works and  I have drawn a boundary to take only the most important theories of Keynes and interpreting what it says and what are its pros and cons and the criticisms.

For the next few posts, we will have Keynes, his theories and what it means in current scenario’s.

Thanks and sorry Mr.John Manyard Keynes