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| September 12, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
27,061.04 |
34.34 |
0.13% |
| Re/US$ |
60.93 |
-0.56 |
-0.93% |
| Gold Rs/10g |
27,320.00 |
-260 |
-0.94% |
| Crude ($/barrel) |
97.20 |
-4.10 |
-4.05% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on September 11, 2014
*BSE Sensex as on September 12, 2014
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Impact 
There is a saying, "Once beaten twice shy." Indian banking system is passing through somewhat a similar situation right now. After corporate borrowers taking them for a ride, banks are now dealing with customers with an extreme caution. To keep brazen borrowers under check, banks are now taking stricter actions. Recently United Bank of India (UBI) slammed a notice of a wilful defaulter on the Chairman of Kingfisher Airlines. Other banks are also considering the similar action. Interestingly, UBI has also put United Breweries Holdings, which was acting as a bank guarantor to Kingfisher Airlines, in a list of wilful defaulters.
Regulatory dose to the disease of a wilful default...
Taking a tough stance, even Reserve Bank of India (RBI) has clarified that a firm action will be taken against wilful defaulters. Now onwards even bank guarantor can also be included in the list of wilful defaulters in case the principal borrower defaults and guarantor fails to repay the loan in spite of having adequate resources. Moreover, person can also be tagged as a wilful defaulter if he uses funds for any purpose other than that stated while securing a loan.
Consequences of the new norms...
- A director of a company who is also on the board of other firms, if declared as a wilful defaulter, even other companies, where he serves as a director won't get loans thereafter.
- Other board members of a company that is declared as a wilful defaulter would be suspended from banking services for 5 years.
- Banks can ask guarantors to repay for the default of the principal borrower without exhausting other means for recovering money from principal borrowers.
- A company identified as a wilful defaulter would be barred from accessing capital markets for the period of 3 years or more, irrespective whether the company was a listed or unlisted when tagged as a 'wilful defaulter'.
New norms will be applicable from prospective effect i.e. those who have given loan guarantees before the RBI circular was released, won't be tagged wilful defaulters.
PersonalFN is of the view that, it is definitely a bold and a welcome move. It will give strong defence to banks against corporate wilful defaulters. So far wilful defaulters took advantage of softer approach of banks to loan recoveries.
Speaking about individuals willing to give bank guarantees in future, tread cautiously is the suggestion from PersonalFN. If you are a guarantor to your friend who unfortunately defaults, you will be the next one in straight line of fire. If you have sufficient means to pay off dues of your friend, your finances may take a huge hit. Those opting for loans may not find it easy to find out guarantors now onwards. Being a wilful defaulter means closing ways of securing loans in future. Having said this PersonalFN is of the view that, banks have to adopt stricter assessment process for weeding out crooks right at the first stage of sanctioning loans.
Do you think getting a guarantor for a loan may become difficult now? Share your views
Head of Equities at Axis Mutual Fund in an exclusive interview with PersonalFN
"First of all I don't see valuations as a concern. The fact remains that the markets are somewhat ahead of the market economy, but that’s always the case." - Pankaj Murarka
To read more about Mr Murarka's view on the markets and host of other aspects, please click here. |
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Impact
It is a good thing to learn from the past mistakes. Indian mutual fund houses seem to have learned a lesson too. Before the devastating bear phase of 2008 dented their businesses, mutual fund houses happened to throw lavish parties for their agents and distributors. Rather than understanding the rationale of a New Fund Offer (NFO); many invitees were interested more in having a drink or eating continental food sponsored by the fund house. More than market valuations, brokerage structures were discussed at meets. What was missing was the concern for investors. And in the bear phase, many distributors and mutual fund houses paid a huge cost and lost a good deal of business.
What has changed now?
These days, mutual fund houses are encouraging Individual Financial Advisors (IFAs) to hone up their skills and use financial tools to guide investors. With changes in the taxation norms for debt funds, mutual fund business is expected to get more retail centric. Now in place of giving added incentives for NFO promotion, a few mutual fund houses are giving IFAs access to infrastructure and some tools that may make their business more client-centric. Mutual fund houses are making it available at a very affordable cost to IFAs and subsidising the difference. You see, investing independently otherwise for such platforms by IFAs would be an expensive affair. Moreover, mutual fund houses are also helping IFAs identify shortcomings in their advice by conducting psychometric evaluation. Fund houses are also taking initiatives to train IFAs.
PersonalFN is of the view that, change in the approach adopted by mutual fund houses may help improve the quality of advice. However, as far as being client centric is concerned, there has to be even greater commitment. Mutual funds have been still launching a plethora of NFOs. In the on-going bull market, mutual fund houses haven't missed an opportunity of garnering assets through NFOs. They are making hay when the sun shines, capitalising on the upbeat sentiments in the market.
PersonalFN has been taking a number of initiatives from time to time to educate investors about their finances. PersonalFN has always believed that, taking a holistic view of your finances is more important, where planning is vital. Therefore, you should first identify your financial goals, chalk out an asset allocation plan, invest regularly and rebalance occasionally.
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Impact 
Many of you may still remember how badly the Indian rupee was crushed during this time of the year in 2013. Thereafter situation improved thanks to the efforts of RBI and improving investors' sentiment about India. If you think rupee may strengthen going forward on the expectation of economic recovery, you may be surprised to know that it may not be an easy journey for INR.
Here is why...
The dollar index which measures the strength of U.S. dollar against a basket of some major currencies of the world, has recently hit a 14-month high. Moreover, U.S. dollar rose to a 6-year high against Japanese Yen. The Indian rupee has been relatively stable, but, following the global cues it lost about 2.7% over last 3 months and recently lost about 0.52% in a single trading day.
Tough times ahead?
Data as on September 09, 2014
(ACE MF, PersonalFN research)
There are several factors that have been driving the dollar up, such as:
- Withdrawal of stimulus package in a phased manner by the U.S Federal Reserve (Fed);
- Possibility of an early interest rate hike in the U.S.;
- Expectation of better performance by the U.S. economy;
- Launch of a new stimulus package by European Central bank (which pushed Euro down against the U.S. dollar);
- A surprise rate cut by ECB; and
- Weakness of Japanese Yen due to lacklustre performance of Japanese economy and sagging economic indicators
So, these are some of the prominent factors that have pushed the U.S. dollar up sharply.
To check how India is paced and read PersonalFN's outlook on Indian Rupee, please click here.
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Impact
Indian banks are grappled with trouble. The rise in Non- Performing Assets (NPAs) or bad loans is adding to woes of several banks, mainly the public sector ones. This in turn has also taken a toll on the Capital Adequacy Ratio (CAR) which dwindled in the last 5 years. Moreover, with a high interest rate scenario healthy credit growth has become hard to come. Also, frauds that have recently come to light are blemishing the face of Indian banking system which is otherwise known for its tight regulatory controls. Such episodes are making deposit holders worry, who until now trusted banks with their hard earned money.
Besides, now it appears that the youth who look for funds from banks to pursue higher education will be affected as banks grapple with such problem.
The former Finance Minister, Mr. P. Chidambaram had earlier said that, "bank loan is a right of every student". However, being worried about growing NPAs in the education loan segment, banks have been reluctant to offer education loans of late. Between March 2014 and July 2014, the growth in the disbursal of education loans was merely 1.9%. Overall, from July 2013 to July 2014, education loans have grown at a single digit rate of 8%.
You see, as you may know cost of education is on rise and thus when it comes to pursuing higher education, sometimes funding through 'own funds' gets difficult and thus many depend on 'borrowed funds' from banks to fulfil their ambitions. You see, this is an important phase and today being well-qualified is imperative.
To read more about this news and PersonalFN's views on it, please click here.
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- Prediction of Indian Meteorological Department (Met) has been spot on this time. In the report released in June, Met had predicted that the rain deficit across Indian could be about 7%-8%. Delayed monsoon raised doubts about this prediction coming right. But strong comeback of monsoon helped narrow down the deficit from the level of 43% in June to just 7% in September.
Good monsoon may spell well for agricultural output. If food price inflation comes down, there are likely chances that overall retail inflation may cool off. Likewise, falling crude oil has been a boon to Indian economy. In the international market, Brent crude oil price has touched a 17 month low lately. As a result price of diesel price may be cut soon for the first time in last 7 years. This may further aid in pushing the inflation down. Moreover, a fall in crude oil prices may save the Government's subsidy bill and improving its finances. Now it remains to be seen how RBI reads the macro-economic picture and guides interest rates in the economy.
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Guarantor: A person who guarantees to pay for someone else's debt if he or she should default on a loan obligation. A guarantor acts as a co-signor of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations.
(Source: Investopedia)
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Quote : "People don't like the idea of thinking long term. Many are desperately seeking short term answers because they have money problems to be solved today." - Robert Kiyosaki
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