Impact 
The RBI rolled out the much awaited draft guidelines and paved a way for corporate India to enter the banking domain. As per the central bank new banks can be set up only through a wholly owned Non-Operative Holding Company (NOHC) that will control the bank and other financial service companies in the group. The NOHC, which will be registered as a Non-Banking Finance Company with the RBI, will include all financial arms of the founding group.
Some of the important guidelines which need to be kept in mind by the aspirants who wish to avail the new banking licences are:
- Track record of 10 years for promoters with diversified ownership
- Minimum paid-up capital of
 500 crore - 25% of branches in unbanked areas (thus attempting for financial inclusion)
- Exposure to single promoter group entity under 10%
- Exposure to all promoter group entities under 20%
- Holding company to hold 40% for 5 years, excess of 40% to be brought down in 2 years
- Holding to be brought down to 20% in 10 years and to 15% in 12 years
- Company having more than 10% of income or assets from broking and real estate not allowed to apply
- Foreign shareholding capped 49% for 5 years
- IPO in 2 years
- Minimum capital adequacy at 12% for at least 3 years
The draft guidelines also state that licences shall be issued on a very selective basis to those who conform to the requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria.
We believe that the draft guidelines brought out by the RBI are quite prudent and will definitely help identifying long term players for new banking licences. But we believe that even after licences are granted there should be constant checks and balances in order to see whether the new banks are adhering to their long term commitments or not.
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Impact
India's economic growth (as measured by its Gross Domestic Product) registered a growth of 7.7% in the first quarter of fiscal year ended 2011-12, thereby slowing down from the economic progress (of 8.8%) achieved in the same quarter a year ago. The present economic growth rate reveals that Asia's third largest economy is slowing down as this has been the slowest pace in the last six financial quarters.
(Source :CSO, PersonalFN Research)
The slowdown in the GDP numbers for the first quarter of 2011-12 can be attributed to the following:
- Dismal manufacturing performance: The manufacturing sector posted a growth of 7.2% in Q1 of FY 2011-12 as against 10.6% for the same period last year. The underperformance of the sector was due to high input cost and slowdown in consumption due to high borrowing costs (caused by the central bank's successive increase in policy rates).
- Murky mining: The mining sector too, reeled under the pressure of various government restrictions and thus posted a weak growth of 1.8% as against 7.4% in Q1 of FY 2010-11.
- Stable agricultural growth: Agricultural sector grew 3.9% in Q1 of FY 2011-12 as against 2.4% for the same period last year. This stable performance of the agriculture sector can be attributed to the record production of crops such as rice, wheat, coarse cereals and pulses during the Rabi season of the agriculture year 2010-11 (which ended in June 2011).
In our opinion even though India's GDP growth rate has dwindled in the quarter gone by, we (India) have been quite resilient in times of the present global economic turmoil. Moreover, the numbers are quite encouraging despite consumption story being dampened due to Reserve Bank of India's (RBI's) successive increases in policy rates (since March 2010). Going forward in our opinion while the RBI may continue with its anti-inflationary stance by increasing policy rates another 25 basis points, we think that the present global economic turmoil may preclude them from doing so at least in its second quarter mid-review of monetary policy scheduled on September 16, 2011, as inflation too for July has marginally mellowed down (to 9.22%).
This resilience of India's economic progress instils confidence in the India's long term growth story. But we also believe that one needs to keep a watch on the political developments taking place in the country as a sound political system is a breeding ground for high economic growth in the country. | |
Impact 
The headline inflation as measured by the Wholesale Price Index (WPI) has remained persistently high above the 9% mark for a good eight consecutive months. This thus has affected rise in prices of essential commodities which in turn has resulted in low disposable income in the hands of the consumers. Owing to this fact, India's household savings, which have fuelled growth over the last few years, have dropped to below 10% of Gross Domestic Product (GDP), or National Income, for the first time in 13 years.
Net financial savings by Indians, which include deposits with banks and non-banking finance companies, cash, investment in stocks, debentures and small savings instruments besides life insurance, provident fund and pension funds, dipped to 9.7% of GDP in FY11 compared with 12.1% a year ago, as per data released by RBI. The central bank attributed this decline to slower growth in bank deposits and life insurance funds as well as an absolute decline in investment in equities, mainly driven by redemption of mutual fund units. The last time net financial savings as a percentage of GDP dipped below 10% was in 1997-98 when it fell to 9.6%.
India, along with China, has seen a secular trend in savings growth over the last decade with consumers saving more as incomes rose in keeping pace with economic growth. However, rising inflation has impacted this with the burden of higher loan repayments after several bouts of rate increases by RBI to curb the inflation bug.
In our opinion the rising interest rates along with high food prices has definitely made a dent in the consumers' disposable income. There is no doubt that the quantum of savings by the consumers' have reduced in bank deposits and stocks. But at the same time one cannot deny the fact that these savings could have been reallocated to asset classes such as gold and real estate.
Also, this situation of low household savings will be reversed once the inflation starts cooling down along will the economic environment getting steadier; as inherently India is known for its high rate of household savings.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 16,821.46 | 972.6  | 6.14% | | Re/US$ | 46.09 | (0.0) | -0.07% | Gold /10g | 27,305.00 | 1,635.0 | 6.37% | | Crude ($/barrel) | 114.79 | 4.2 | 3.80% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on August 31, 2011
*BSE Sensex as on September 02, 2011
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In an interview with the Economic Times Mr. Jim Walker, Founder of Asianomics shared his views on the absence of QE3 and its impact on the global economy.
Primarily in his opinion, QE1 and QE2 have not delivered the kind of results which Mr, Bernanke was looking for. QE2 delivered inflation, but no real growth to follow through in that inflation. Mr. Walker believes that the Federal Reserve's stance of hold treasuries at zero is completely a disastrous policy, right through till 2013. Further explaining his aversion he said that, "What I would like to see from Bernanke is his resignation, because I think he is a failed Central banker just like the rest of them. First one to go would be the best, in the sense we realise that the policies they have followed are absolutely appalling and have no good of the crisis they had entered in 2008 but rather have pushed deeper into that crisis."
According to Mr. Walker what is really required as a policy measure to revive the economy is to actually cut expenditure and lower taxes. He feels that the thing which has not happened in this whole crisis is that money has not been transferred to the household sector in America. Further explaining his stance he said, "What happened is that money has been transferred to the corporate sector of America. So, profits have been at an all-time high, giving a lot of money to financials, services, investment buying industry etc. But what we don't seem to have realised is that this was the balance sheet problem and their problem at the household level. They haven't created any policies that would actually improve employment conditions or for companies to expand. And the way you do that is to cut taxes. It certainly no other way to do it by taking away people's savings and the income that they received on savings."
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Take-Out Lender: A type of financial institution that provides a long-term mortgage on property. This mortgage will replace interim financing, such as a construction loan. Take-out lenders are normally large financial conglomerates, such as insurance or investment companies.
(Source: Investopedia) | | QUOTE OF THE WEEK
"Don't judge each day by the harvest you reap but by the seeds that you plant."
-Robert Louis Stevenson |  | |