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| March 15, 2013 |
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| Weekly Facts |
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Change |
%Change |
| BSE Sensex* |
19,427.56 |
(255.7) |
-1.30% |
| Re/US$ |
54.37 |
0.2 |
0.37% |
| Gold Rs/10g |
29,305.00 |
(120.0) |
-0.41% |
| Crude ($/barrel) |
108.14 |
(2.5) |
-2.22% |
| FD Rates (1-Yr) |
7.25% - 9.00% |
Weekly change as on March 14, 2013
*BSE Sensex as on March 15, 2013
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Impact 
Very often many individuals obtain loans from banks, for variety of reasons – be it buying a dream home, renovating the house, buying a car, business / profession purpose or even for personal reasons. But while we enjoy this facility from banks or other finance companies it is imperative that we adopt prudence and service the loan as well. And if you aren't doing that, you could land up in trouble, which could tarnish your credibility and personal image.
Recently banks have started adopting a "name and shame" policy thereby pressing borrowers to pay their dues. Banks have decided to publish in the newspapers details such as the ones mentioned below, of wilful loan defaulters:
- Name;
- Photograph; and
- Address
Besides, banks would also publish photographs, names and addresses of guarantors of such defaulters in newspapers if the dues are not cleared within 15 days of the notice containing particulars of the original borrowers.
At present, State Bank of India (SBI) has begun publishing such details of wilful loan defaulters. In the national capital, the bank has published one such public notice in newspapers for five defaulters who had taken export credit loans of Rs 3 lakh each and their outstanding amounts were in the range of Rs 2.60 lakh to Rs 2.93 lakh.
It is noteworthy that as per Reserve Bank of India (RBI) regulations, wilful defaulters are mostly those who are found to be engaged in deliberate non-payment of dues despite adequate cash flow and good net worth. Moreover, banks can also classify one as a wilful loan defaulter, if the loan(s) has been utilised for other than that stated previously, funds are siphoned off from the bank-financed activity, records are falsified, securities are disposed of without bank's knowledge and the borrower indulges in fraudulent transactions. The RBI has already put in place a system to disseminate credit information pertaining to wilful defaulters, thereby cautioning banks and financial institutions, so that any further bank finance is not made available to such borrowers.
We are of the view that, the with name and shame policy adopted by SBI, other banks too may follow suit. Such a policy in the long run may nudge individuals to service their loans better and preclude them to be termed as wilful loan defaulters. Also, notices sent to wilful loan defaulters would also act as deterrent for others against any loan defaults.
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Impact
In the Budget 2013, Finance Minister Mr. P. Chidambaram enunciated that Know Your Customer (KYC) for banks will be sufficient to acquire insurance policies. This means that if you are holding a bank account and complied with KYC norms thereto, you need not provide any other documents to buy an insurance cover.
The other proposal for the insurance industry in the budget included:
- Empowerment for insurance companies to open branches in Tier II cities and below without prior approval of the Insurance Regulatory and Development Authority (IRDA)
- Utilise the entire network of bank branches to increase penetration, whereby banks will now be permitted to act as insurance brokers and the banking correspondents will be allowed to sell micro-insurance products
- Group insurance products to be offered to homogenous groups such as Self Help Groups (SHGs), domestic workers associations, anganwadi workers, teachers in schools, nurses in hospitals etc.
- Insurance coverage for individuals below the poverty line, by extending the Government-sponsored health insurance scheme - Rashtriya Swasthya Bima Yojana (RSBY), to other categories such as rickshaw pullers, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers
We are of the view that, the proposal set out in Budget 2013 for the insurance industry finalised with the consultation of the insurance regulator is intended to increase insurance penetration in the country, which is lowest in the world. Such an announcement would widen the scope for bancassurance through the broking route, with a wider distribution reach. Since KYC for banks will suffice to buy an insurance cover, it would be quite a seamless process. With more branches to be opened by insurers in Tier II cities, individuals living in smaller cities will not only get insurance policies quickly, but also get service thereafter.
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Impact 
Yesterday, the WPI inflation data for February 2013 was released and data inched-up once again to 6.84% from 6.62% reported in January 2013. The rise in WPI was mainly attributed by "fuel and power inflation" along with "food inflation" which have a weightage of 14.91% and 14.91% respectively in WPI. The drop in core inflation data for the same month under reporting to 3.8% (from 4.1% in January 203) along with WPI inflation now having settled below 7.0% plus mark (which was witnessed over a year), lingered expectations of rate in its next mid-quarter review of monetary policy 2012-13 (scheduled on March 19, 2013) and thus with such hope of addressing to growth risk, the Indian equity markets ended the day's trade at 19570.44 with gains of 207.89 on March 14, 2013.
WPI Inflation depicting an uptick
(Source: Office of the Economic Advisor, PersonalFN Research)
But would policy rates indeed be reduced?
Keeping in view the expected moderation in non-food manufactured products inflation, domestic supply-demand balances and global trends in commodity prices, the baseline WPI inflation projection for March 2013 is revised downwards by RBI from 7.5% (as set out in the 2nd quarter review of monetary policy) to 6.8%. The RBI would continue to condition and contain perception of inflation in the range of 4.0% - 4.5%; which is in line with the medium-term objective of 3.0% inflation consistent with India's broader integration into the global economy. The rise in WPI inflation for February 2013, although diminutive; in our view would refrain the central bank from reducing policy rates in its upcoming mid-quarter review of monetary policy 2012-13 (scheduled on March 19, 2013) despite the focus being turned to address growth risk. This is because intermediate inflationary pressures remain on account of increase in freight and diesel prices, which will have a pass-through effect on WPI inflation. We think that the RBI could only reduce CRR in order to address to tightened liquidity conditions due to advance tax obligation in mid-March 2013, and now would cut rates only in its annual monetary policy 2013-14 (scheduled on May 3, 2013-14), depending upon growth-inflation dynamic and twin deficit situation. It is noteworthy that, the central bank thus far in this fiscal year has already reduced rates by 75 bps (one in April 2012 by 50 bps and the other in January 2013 by 25 bps).
Your investment strategy in debt investing…
Hence at present while taking exposure to debt mutual funds and fixed income instruments, we are of the view that should clearly know their investment time horizon. To read the detailed strategy, please click here.
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Impact
Relaxing its stringent investment guidelines for Employees' Provident Fund Organisation (EPFO), the Government has allowed it to invest in bonds issued by any private player satisfying pre-determined criteria.
With new directives coming into force, EPFO would now be able to invest in private bonds without seeking any prior approval from Central Board of Trustees (CBT). The new investment pattern has been approved by the finance ministry and soon be notified by the labour ministry. This move is expected to generate higher returns for investors of Employees' Provident Fund (EPF)
EPFO may now invest in any private sector company satisfying some basic criteria which include: To know what they are and to read our view over it, please click here.
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Impact
In a bid to direct long term savings in infrastructure sector, Insurance Regulatory Development Authority (IRDA) amended investment regulations recently.
As per amendments, life insurance companies are mandated to invest at least 25% of their assets in central Government securities. Furthermore, minimum exposure to securities issued by central Government, state Governments and other approved securities is prescribed to be 50% when clubbed together. The amendments to regulation now require insurance companies to invest at least 15% of their assets in housing and infrastructure by way of subscription or purchase bonds, debentures or asset back securities. The credit rating of instrument issued by housing finance companies shall not be less than "AA". To read more about this news and our view over it, please click here.
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- A survey conducted by private life insurer Aviva India and Indian Market Research Bureau (IMRB) has revealed that most insurance-seekers are happy to research the product they intend to buy online, but they are unlikely to buy that insurance product online. Perception of risk involved and the complexity of financial products have been identified as an obstacle to taking the final step. Moreover with insurance perceived to be complex, human intervention of agents has become a comfort factor of buyers. "44% of ROPO (Research Online Purchase Offline) would be concerned with the absence of an agent...the concept of 'self-service' online makes these customers uncomfortable in this high involvement and perceived high risk category," the report said. The report also revealed that 21% did not complete the process as they did not want to make the payment online. Lack of awareness of the claim settlement process was the hurdle for 21% of this segment.
We are of the view that, apart from complexity of buying insurance coverage online and the risk involved thereto, what is leading insurance-seekers to ROPO is claim process. It is noteworthy that in case of online term insurance, at the time of claim, the family members would have to approach the insurance company directly and there is no intervention of an agent. Moreover as cited by the report; yes indeed insurance-seekers prefer to buy an insurance coverage with comfort of an insurance agent.
All the findings of the survey, we believe may be taken as inputs before launching online insurance policies aggressively.
- The Government clarified that tax-free bonds are eligible for investment for companies in a bid to boost corporate participation in such instruments.
It is noteworthy that, Section 372A(3) of the Companies Act, 1956 enunciates that, "no loan to any corporate body shall be made at a rate of interest lower than the prevailing bank rate, being the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934.". There was an ambiguity in the interpretation of the provision related to inter-corporate deposits which affected investments by corporate bodies in tax-free bond issuances. But now vide a circular issued by Ministry of Corporate Affairs, it is hereby clarified that "in cases where the effective yield on tax-free bonds is greater than the yield on prevailing bank rate, there is no violation of the Section 372A(3) of Companies Act, 1956." Currently the "bank rate" rate is at 8.75% while the coupon rates offered on such instruments are in the range of 6.85% and 7.2%.
We are of the view that, such a clarification would help enhancing participation of corporates to tax-free bonds issuances and this was indeed needed as the six tax-free bonds currently in the market were finding it difficult to garner subscription. Also with the Government allowing fund raising to the tune of Rs 50,000 crore next year through tax-free bond issuances, such a clarification would now help garner better subscription from corporates (for whom10% reservation is made for such bond issuances) and this in turn would not impact worth Rs 5,000 crore.
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Debt: An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
Source: Investopedia
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Quote : "Good plans shape good decisions. That's why good planning helps to make elusive dreams come true." - Geoffrey Fisher
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