The Insurance Regulatory and Development Authority (IRDA) had brought about sweeping changes in the insurance industry particularly in Unit Linked Insurance Plans (ULIPs) with an aim to uphold and protect the interests’ of the policyholders. Due to these pro-policyholder reforms the commissions from insurance products (particularly ULIPs) started drying up and thus insurance agents as well as insurance companies lost interest in distributing these products.
But as a direct repercussion of the pro-policyholders reforms, more than 10 lakh insurance agents have quit the profession in fiscal year 20110-11, according to the data compiled by the IRDA. Also, over the past couple of years, almost all insurers have cut down on the number of sales managers on their payrolls, the equivalent of development officers at Life Insurance Corporation (who are responsible for recruiting agents).
We believe that while insurance agents go missing, IRDA should continue with its pro-policyholders’ reforms as it would ultimately benefit the whole insurance industry in the long run. Yes, many of the insurance agents would wither away in this process and only those who are committed to serve the policyholders will remain. This thus acts as a catalyst in weeding out unwarranted insurance agents from the industry.
Also, as a policyholder please remember that insurance is for indemnifying your risk, and hence should not be mixed with investments. Thus, we believe one should opt for only a pure term plan to get a life insurance cover for oneself.
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The Reserve Bank of India (RBI) and the Ministry of Finance (MoF) have mutually agreed to tread cautiously on the path to providing new banking licences. According to both of them, big corporate houses ought not to be allowed to enter the banking business at this juncture when there is global uncertainty.
The move is in recognition of the risk to banks’ integrity from the corporates’, other business interests and the chief motive of maintaining domestic financial stability in times of global crisis.
For the new licensees, the policy will be stricter, with aggregate foreign holding cap (including FDI, NRI and FII) at 49%, with a condition that a non-resident won’t hold than more than 5% of the paid-up capital. The minimum paid-up capital could be set at 500 crore, compared to 300 crore for existing banks. At present, banks are allowed to have an aggregate 74% foreign holding with a cap of 5% for a single investor. Also, the new banks will have to mandatorily open a certain number of branches in rural and semi-urban areas to honour the Government’s objective of financial inclusion.
We believe that this move by the RBI and the Finance Ministry to tread slowly on the path of new banking licences is a prudent one. Banking system has been the backbone of the Indian economy and as such getting new banks into the country needs to be well organised and requires constant checks and balances in place for its smooth operations. In a scenario where global economic uncertainty persists, the move of asceticism from issuing new banking licenses is very prudent one. Also, going slow with introducing new banks would help in maintaining competitiveness in the banking system.
Customers too, might experience prompt services from their banks as competition amongst the banks would ultimately help the investors.
India’s headline inflation – the Wholesale Price Index (WPI) Inflation dipped to an eight-month low to 9.22% in July 2011 from 9.44% in June 2011. However, when analysed further, the dip in the WPI inflation is more of a base effect in nature.
(Source :ACE MF, PersonalFN Research)
Also, to add fuel to the fire, the inflation number for May 2011 is revised upwards to 9.56% from 9.06%. The graph above also depicts that the inflation bug has been quite sticky, sailing over the 9% mark since last eight months.
We believe that despite inflation remaining over the RBI’s comfort level (of 8.00%), it (central bank) may have a limited room for increasing policy rates further, since at present the global economic factors led by the U.S. sovereign rating being downgraded (to AA+ with a negative outlook), along with debt overhang situation in the Euro zone would desist RBI from increasing policy rates further. Moreover, the domestic factors such as the ones mentioned below, may also hold back the RBI from a further policy rate hike, at least in its 1st quarter mid review of monetary policy 2011-12 (schedule on September 16, 2011):
Also the central bank would wait for the effect of normal monsoon to come into play, where the headline inflation is expected to cool down in the next couple of months.
- Elevated borrowing cost
- Elevated input cost
- Chances of slowdown in consumer spending
- Downward revision in GDP targets (from 9.0% to 8.2% by PMEAC)
- Nervous sentiment in the capital markets
- Manufacturing Purchasing Manager’s Index (PMI) at a 20-month low of 53.6 points in July 2011
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|Weekly Facts |
|Close ||Change ||%Change |
|BSE Sensex* ||16,141.67 ||(698.0) ||-4.14% |
|Re/US$ ||45.75 ||(0.3) ||-0.75% |
|Gold/10g ||26,790.00 ||595.0 ||2.27% |
|Crude ($/barrel) ||110.65 ||5.3 ||5.02% |
|FD Rates (1-Yr) || 7.25% - 9.25% |
Weekly change as on August 18, 2011
*BSE Sensex as on August 19, 2011
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In an interview with the Mint, Mr. Dani Rodrik – Rafiq Hariri Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University shared his views on the U.S., U.K. and the Indian economy.
Mr. Rodrik believes that regardless of whether there is a double dip or not in the next few years, the recovery will at best very sluggish in the U.S. with a very slow growth and unemployment remaining at painful levels. Moreover, he is of the view that the situation in Europe is worse and that there is a fundamental structural problem with the Euro zone as they haven't addressed so far; the crisis cannot be addressed under the existing rules of the Euro zone. Europe, he thinks will have to decide to significantly move towards some kind of fiscal and political integration in a rapid way or else there is significant likelihood of dissolution of the European euro zone.
As far as the after effects of the U.S. and European crisis on the Emerging markets is concerned, Mr. Rodrik is of the view that India is better positioned than many other developing countries to continue its rapid growth whereas China's rapid growth is much more threatened by what's happening in the West and the U.S. in particular, because their growth model for the last 10-15 years has relied so much on generating larger trade surpluses. Hence given this, he believes that it is going to be very hard for China to sustain its rapid growth. Also, he thinks that there are internal problems in China as well. According to him, the global environment is a greater threat to China than it is to India; where the internal dynamics in India have played a greater role in the recent growth process. Thus he thinks it is possible for India to keep growing at 7% - 8%, but may be not 10%, with the right kind of policies and frameworks in place.
Explaining India’s growth model, Mr. Rodrik said that, “India's growth model is a very hybrid model. To the extent that we can talk about India's growth model in the last 20 years or so, it is a very hybrid model. The reason you can tell it is hybrid is that if India were growing at 2% per annum rather than 8-9% per annum then we will be pointing to the current policies as reason for that; it is just as easy finding the reasons for low growth as it is to find reasons for high growth. That suggests it is a very mixed policy regime. People who worry about the sustainability of growth, they will argue that it is still over-regulated, the labour regime is way too rigid, we have way too much corruption and there hasn't been enough privatization and so forth. So these are all reasons one might argue why growth may not be sustained. If growth had been low, you would be pointing to the very same thing. I think the fundamental problem with reforms is that when we are reforming, regardless of what most Western economists will tell you, we actually have a lot of uncertainty about what are the right reforms. There is no single sort of blueprint that makes it clear, even when you are moving directionally towards giving markets free reign, integrating into the world economy. The actual policies, the actual reforms can take many, many different ways and because there is so much uncertainty, regimes that are finding their way by sort of pragmatically moving little bit here and there, and not necessarily making sort of huge leaps into the unknown on the basis of some textbook theory as to how market economies really work, can find that they are doing better.”
Sovereign Debt: Bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth. Sovereign debt is generally a riskier investment when it comes from a developing country and a safer investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk.
QUOTE OF THE WEEK
"Financial security and independence are like a three-legged stool resting on savings, insurance and investments."