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| March 13, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 28,503.30 | -945.65 | -3.21% | | Re/US $ | 62.51 | -0.25 | -0.40% | | Gold Rs/10g | 26,200.00 | -700.00 | -2.60% | | Crude ($/barrel) | 57.18 | -3.85 | -6.31% | | F.D. Rates (1-Yr) | 7.25% - 8.75% | Weekly change as on on March 12, 2015
*BSE Sensex as on March 13, 2015 |
Impact 
While Government expects Indian economy to achieve 8% plus growth; asset quality of India's Public Sector Banks (PSBs) remains fragile. As reported by Business Line dated March 11, 2015, Gross Non-Performing Assets (GNPAs) of PSBs have touched 10-year high in December 2014.
Poor asset quality denotes that borrowers are finding it difficult to pay back loans and as a reason, balance sheets of banks are negatively affected. PSBs have a market share of close to 72% in Indian banking system and remain a prime source of credit to many. With poor health of public sector banks, it might become increasingly difficult for the economy to grow faster. The problem of NPAs of PSBs is getting worse day by day. What is even more worrisome is that Rs 2, 72,000 crore worth loans have been referred to Corporate Debt Restructuring (CDR) cell upto December 2014. There is always a possibility that many of the accounts referred to CDR may turn bad in future.
Deteriorating Asset Quality of PSBs...
# As estimated by Business Line. Data upto December 31, 2014 only.
(Source: RBI database, Business Line, PersonalFN research)
Global uncertainty, weaker domestic economy, aggressive lending in the boom phase, stalled status of developmental projects and prolonged phase of higher interest rates have been the primary reasons for poor asset quality. Public sector banks are affected more than the private sector banks because of inferior quality of risk management processes.
What to expect?
Various steps have been taken to restrict NPAs. In the recent times, the finance minister has frequently met bank chiefs for monitoring the progress of banks in tackling the problem of NPAs. Although, NPAs may not go down much in coming 2-3 quarters; they might eventually fall.
Factors that are expected to help in bringing NPAs down - Likely chances of faster economic recovery due to higher Government Spending
- Falling inflation
- Falling interest rates
- Reforms introduced by the Government
- Unaggressive lending in recent times
PersonalFN is of the view that, higher NPAs severely restrict ability of banks to lend more. In addition, it affects the profitability of banks damaging their capacity to absorb losses. Considering their market share, it is important that performance of PSB improves soon. PersonalFN believes several reforms initiated by the Government may take time to show results; until then it remains to be seen how banks tackle with the problem of NPAs.
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Impact
Equity markets have been rallying in India for more than 1 ½ years now. What is missing from the market is greater retail participation. True, more and more people are willing to put money in equity of late. New Fund Offers (NFOs) floated by mutual fund houses are getting a good response too from individual investors. However, it is likely that very few people have actually benefited from the sharp market rallies. Scenario in debt market is very similar to that in equity. In absence of greater participation, Indian bond market is restricted mainly to large institutional investors and foreign investors. Commodity market almost doesn't exist for retail investors considering their extremely negligible participation. All these facts highlight one thing; retail participation is very low and should go up if Indian capital markets are to flourish here onwards.
The Government has been quick enough to recognise the importance of vibrant capital markets. It has set a steep disinvestment target of Rs 41,000 crore for the Financial Year (FY) 2015-16. The Government also estimates to garner Rs 28,500 crore from strategic disinvestments. It expects retail investors to participate in the disinvestment programme and wants to reduce the dependency on larger institutions. As given in the budget 2015-16, the Government plans to spend Rs 70,000 crore on infrastructure development in the country. Setting up of National Investment Infrastructure Fund is also envisaged. There is also a proposal to issue tax-free infra-bonds for funding projects in roads, rail and irrigation projects. Having a well-developed and deepened bond market is important for satisfying the capital requirements of corporates. The budget has also underscored the need to develop the debt market and bring it at par with the equity market.
Bigger role to SEBI
To achieve this, several changes have been made. Securities and Exchange Board of India (SEBI) has been given a bigger role. Forward Markets Commission (FMC) has been merged with SEBI as a first step. Finance Bill 2015 has a proposal of giving SEBI more authorities by eliminating all overlapping regulatory structures. As a result it is likely that 'securities' related regulations would entirely be accorded to SEBI. In a phased manner SEBI has already been given greater powers such as issuing search orders, confiscating and attaching properties and even recovering wrongful gains.
With enhanced powers and greater responsibilities, SEBI is now expected to see to it that market participation grows and interest of investors is safeguarded.
Will it work?
PersonalFN believes giving complete authority to SEBI to regulate capital markets without any overlap might work well for increasing retail participation. More often, fear of frauds and wrong-doings keeps retail investors away from participating in capital markets. However, it won't be enough to get large number retail investors in. They must be educated adequately about their finances. If a person understands the role of debt or equity in his portfolio, he may be willing to participate in capital markets actively.
PersonalFN, at various platforms, takes initiatives to educate investors helping them take right financial decisions.
Do you think, prospects of economic recovery appear shaky considering poor state of public sector banks? Share your views
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Impact
It might be quite frustrating for you if you were expecting your bank to lower interest rate on your loan for past two months, as most of the banks haven't. A policy rate cut by RBI is considered as a signal to banks for making credit cheaper. Since the beginning of 2015, RBI has slashed repo rates twice outside monetary policy reviews. However, banks have been reluctant to pass on these cuts to borrowers. PersonalFN shares its views on this trait of banks. Let's first see what refrains banks from lowering interest rates.
- Short term liquidity challenge: As a last cycle to pay advance tax is due on March 15th, there is less cash available with banks. This causes a temporary liquidity squeeze and short term borrowing rates go up, making it difficult for banks to keep cost of borrowing lower.
- Banks focus on securing income: Credit growth has been low, impacting income and the focus is on securing income ahead of the quarterly earnings. If banks reduce the base rate, the reference point for pricing loans, the hit on revenues will be immediate. Banks are trying to maintain margins.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
Indians have old bonding with gold. Irrespective whether economy is doing good or bad, Indians buy gold. As per the estimates of World Gold Council and Thomson Reuters, India has about 22,000 tonnes of idle gold which is estimated to be valued at more than USD 1 trillion. Most of the household gold reserves are being held in the form of jewellery. Over past 5 years, India's average annual demand for gold has been 895 tonnes. Such a huge demand for gold has been creating problems in India's external economy. As India has little domestic production of gold, majority of the consumption is met through imports. High imports lead to higher Current Account Deficit (CAD). In 2013, Indian Government restricted gold imports in India to tackle the problem. However, now it has started producing undesirable results such as higher gold smuggling and black-marketing of gold. In response, the Government has tried to provide long term solution to the problem of huge demand for gold leading to heavy imports of the yellow metal.
The budget 2015-16 took steps to revitalising gold monetisation to put the idle gold to effective use and curb gold imports. In the wake of this, it is expected that, gold demand in India might be affected; weakening gold prices internationally even further.
To know more about this story and to read our views, please click here
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- There is bad news for insurance policy holders. As premium payments attract service tax, recent hike in the rate of service tax is likely to result in higher cost of insurance for policyholders. UPA Government had brought in insurance under the purview of service tax. At present, traditional plans attract 3.09% of service tax while Unit Linked Insurance Plans (ULIPs) and term plans are subject to 12.36% of service tax. Budget 2015-16 has prescribed a hike in service tax from 12.36% to 14.0%. Moreover, Goods and Services Tax (GST), is expected to be implemented from April 01, 2016, which may further raise the rate of service tax for policy holders.
PersonalFN is of the view that, although it is likely that you would pay more for the same risk cover, it is worth continuing with your policies. PersonalFN always believes that one should opt only for term plans and avoid combining insurance and investment. Thorough financial plan addresses many questions such as how much insurance you need and which plan might best suit you.
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Distressed Securities: It is, “a financial instrument in a company that is near or is currently going through bankruptcy. This usually results from a company's inability to meet its financial obligations. As a result, these financial instruments have suffered a substantial reduction in value. Distressed securities can include common and preferred shares, bank debt, trade claims (goods owed) and corporate bonds.”
(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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