 |
| September 11, 2015 |
| |
| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 25610.21 | 408.31 | 1.62% | | Re/US $ | 66.43 | -0.19 | -0.29% | | Gold Rs/10g | 26,260.00 | -340.00 | -1.28% | | Crude ($/barrel) | 46.49 | -3.21 | -6.46% | | F.D. Rates (1-Yr) | 6.25% - 8.20% | Weekly changes as on September 10, 2015
*BSE Sensex as on September 11, 2015 |
Impact 
If shaky fundamentals cause panic among stock market investors; the condition of depositors of a bank having high proportion of distressed assets is not different.
A few days ago, there was a grapevine that one of Pune headquartered Co-operative banks was a victim in a loan-fraud case which was believed to worth Rs 200 crore. It was a rumour indeed, but the news reported by the media made depositors of that bank extremely nervous. As a result depositors made a beeline at bank branches for withdrawing money. The chairman of the bank had to intervene and came out with explanation. Going by his explanation, it seems there was a problem with one of the loan accounts but the bank had already initiated the corrective measures; the matter was totally mis-understood by the media and eventually resulted in creating panic among depositors.
What was the case?
Apparently the bank had sanctioned loans in two traches to an education society based in Pune. Out of total Rs 46.5 crore sanctioned, amount of Rs 39 crore is still outstanding. The trouble is, a loan of 20.5 crore which was given to buy a non-agriculture land, was diverted to buying an agriculture land. When the bank learned about it, it sought the legal course. However, the bank claims that guarantees against this loan are worth Rs 60 crore and co-guarantees worth Rs 20 crore.
Although it was largely a case of misunderstanding and misreporting; a crucial aspect of this case can't be ignored. Misappropriation of funds.
It is not only about one co-operative bank...
A bankers' survey conducted by Ernst & Young (E&Y), multinational professional services firm; revealed sensational facts. Nearly 72% of bankers surveyed by E&Y believe problem of Non-Performing Assets (NPAs) is going to deepen in next 2 years.
Some more revelations...
- 87% of the respondents feel that, diversion of funds to unrelated businesses is the chief source of rising NPAs
- While 64% believe that lapses in due diligence of the initial borrower results in bank loans tuning non productive
- Only 43% of the responders believe that change in the regulatory and political environment lead to loss of business causing NPAs to rise
- 68% respondents admitted that their internal skill sets and credit assessment process need to be more stringent to fight the problem of NPAs
Besides, majority of bankers also stated that borrowers have been misusing current restructuring norms and are of the opinion that, forensic audits should be made mandatory for boot out wilful defaulters.
PersonalFN is of the view that, the survey conducted by E&Y brought out crucial facts. NPA conundrum has more to do with lapses in risk management and unrestrained behaviour of borrowers. Economic conditions and higher interest rates may also be the causes of rising NPA level but unlikely to be the primary causes.
PersonalFN believes Indian banking system requires systemic overhaul. Despite being tightly regulated by RBI, Indian banks are vulnerable to frauds and misappropriation of funds. Moreover, political interference in the functioning of public sector banks may also be linked to discretionary decision making at public sector banks, brushing aside due diligence. It remains to be seen how RBI reacts to the findings of E&Y survey.
As depositors, you shouldn't blindly invest in fixed deposits of any bank considering them to be secured. Beware! The bank might be in a trouble which is why offering you higher rate of interest. What is applicable to a bank is also applicable for unsecured company fixed deposits.
Do you think, Indian banks will come out with better response to tacking the problem of NPAs? Share your views here.
|
Impact
If a skyscraper catches fire and firefighters rescue people trapped only on first few floors; they will come under heavy criticism and rightly so. No dedicated firefighter may do this discrimination among people trapped in fire but in the financial world, there is no such guarantee.
Take the example of JP Morgan Mutual Fund, sponsored by a global brand. The fund house was hit hard because of its investment worth Rs 200 crore in a debt laden Amtek Auto. JP Morgan Mutual Fund held instruments issued by Amtek Auto in two of its debt schemes, JP Morgan Treasury Fund and JP Morgan Short Term Income Fund.
When the media broke the news about liquidity crunch at Amtek Auto , investors got worried. To avoid liquidity problems at the fund house level, JP Morgan Mutual Fund restricted redemption in these schemes to only 1% of total outstanding units under each of two schemes affected. Surprisingly, before this restriction was put in place, it provided red carpet treatment to select "valued" clients. Thus doing injustice to majority of investors. You would agree that this move was unfair to the rest of investors, wouldn't you?
Such discrimination from a multi-national fund house which is assumed to be following good governance practices is unfortunate. The legal battle will be fought and deprived might even get justice, may be in near future. But, there is something for all of us to learn.
- Brands can be mis-leading
- Brands don't ensure you ethical conduct
- Debt funds are not safe, as you may expect them to be
- Process of risk management can't be undermined
- Credit rating by independent rating agencies may not be entirely dependable
Therefore, PersonalFN believes, you shouldn't invest in any mutual fund blindly, just because it comes from a well-known fund house. You need to prudently analyse the overall performance of the schemes you are investing in. You may short-list schemes from fund houses that have a good track record and strong investment processes and systems in place. Among them select those which suit your requirements the most. Risk management plays an important role in fund management and philosophy of the fund house too.
The mutual fund selection process followed at PersonalFN considers fund house score as one of the important parameters while comparing and analysing various mutual fund schemes.
PersonalFN aims to select mutual fund schemes prudently, thus making mutual fund investment a low risk experience for its subscribers.
|
Impact
When it looks impossible, it happens. For any investor it is very difficult to accurately predict where the markets are headed. Although markets might give you a hint that they are distressed or walking on the air; they are moody indeed.
At the beginning of the year 2015; nobody would have even imagined that markets may fall substantially in the second half of the year. S&P BSE Sensex has slipped below 25,000-mark; an important psychological level, if you ignore the bounce back that happened over last two days. While Sensex is down more than 13% from the life time high, as many as 100 stocks listed on BSE have fallen more than 50% from their 52-week highs. It has been observed that, when markets give up gains and keep falling, investors start losing faith and exit.
Heavy selling by Foreign Institutional Investors
(Data as on September 08, 2015)
(Source: ACE MF, PersonalFN Research) Are markets on the verge of entering a bear phase?
The current bull phase has lasted for about 37 months and is still in progress, although now there is a possibility of it coming to an end, if markets fall further. We must try to analyse why markets are falling, what investors are so worried about and finally trying to understand what possibly may happen, going forward.
Global factors that are driving markets down
China Crisis: Impact of China slowdown on global markets is also dragging Indian markets. Devaluation of Yuan and subsequent appreciation of U.S. Dollar has sent Indian Rupee to new 2-year low. China crisis accentuated the sell-off in global markets.
Possibility of a rate hike by Federal Reserve: This has been the elephant in the room. The August non-farm payroll data suggests that, unemployment rate in the U.S. has fallen to 5.1%. This makes many investors believe that, Fed is likely to hike policy rates in 2-day long meeting scheduled mid-September. Rate hike by Fed may make dollar stronger and a basket of major currencies weaker. This may signal the end of dollar carry trade that started soon after U.S. Fed announced its first stimulus about 7 years ago. On the other hand, monetary policies in other regions are expected to be loose. European Central Bank (ECB) is pledged to announcing further stimulus, if needed. Situation in Japan is unlikely to change much. This might result in further strengthening of USD. Strong USD will unwind dollar-carry trade draining the liquidity from other asset classes such as emerging market equities.
Double-blow to mining oriented economies: Countries such as Australia, Russia, Brazil and Middle-East Asian Countries exporting crude oil remain vulnerable to a slowdown considering gravity of problems in China and possibility of U.S. Fed hiking rates mid-September. Let's not forget, ultra-loose monetary policies in the U.S. and relatively strong China combined together had supported commodity prices for long. If mining oriented exporting nations fail to cope with changing economic situation, the slowdown may become a global phenomenon and deepening of recession can't also be ruled out.
To know more about this and PersonalFN's views over it, please click here.
|
Impact
There is a difference between selling a T-shirt and selling a financial product. Usually it is said that, "let the buyer beware", however, in case of products and services which may require domain-specific competence, sellers can certainly not wash their hands of their responsibility.
Buying an insurance or investment product involves some analysis, which a layman may not be able to perform on his own. When the buyer doesn't have adequate information and lacks knowledge needed to analyse available options on his own, he relies on advisor's opinion. What if a person giving advice works in his own interest rather than in the interest of a person seeking advice? Impact could be long lasting. Although mis-selling is bad in any business, that in case of financial products would have serious adverse impact on one's wealth accumulation.
Finance ministry has been keen on curbing the mis-selling of financial products and rationalising the distribution incentives. The Government had appointed a committee under the chairmanship of Mr Sumit Bose, former union finance secretary on November 20, 2014 to study the matter and give suggestions. The committee submitted its report on August 10, 2015. Now, the Government has asked all stake holders to give their suggestions by October 5, 2015 on the report, before Government takes the final call on the committee recommendations.
To read more about this news and our views, please click here.
|
- If you own large amount of physical gold and are worried about its safety; there is a way out. Two schemes targeting to cut the reliance on gold imports and channeling the idle gold have recently been approved by the cabinet.
You may simply deposit your idle gold under Gold Monetisation Scheme. As far as the tenure of the scheme is concerned, you will have 3 primary options; short term, medium term and long term. The scheme will be operated through banks and is likely to pay you interest at the rate of 2.0 odd percent p.a.
On the other hand, if you want to invest in gold, instead of investing in physical gold you may buy gold bonds, under Gold Bond Scheme. The Government has put a cap of 500 grams (50 tolas) per person for buying gold in the bond form. These bonds are expected to be issued for the tenure of 5-7 years. They will be offered in denominations of 2 grams, 5 grams and 10 grams. The Government wants to raise Rs 15,000 crore through these bonds during this fiscal without disturbing its borrowing target for the current fiscal.
PersonalFN is of the view that, apparently, gold bond scheme may receive better response than the gold monetisation scheme. Whether or not to participate in these schemes should be decided only after reading the notification which will be available soon. |
Corporate Debt Restructuring: "The reorganization of a company's outstanding obligations, often achieved by reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. This allows a company to increase its ability to meet the obligations. Also, some of the debt may be forgiven by creditors in exchange for an equity position in the company."
(Source: Investopedia)
|
Quote : "Influence is like a savings account, the less you use it, the more you've got." - Andrew Young
|
| |
| © Quantum Information Services Pvt. Ltd. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of PersonalFN is strictly prohibited and shall be deemed to be copyright infringement.
Disclaimer: Quantum Information Services Pvt. Limited (PersonalFN) is not providing any investment advice through this service and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an 'As Is' basis by PersonalFN. Information herein is believed to be reliable but PersonalFN does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. PersonalFN and its subsidiaries / affiliates / sponsors or employees, personnel, directors will not be responsible for any direct / indirect loss or liability incurred by the user as a consequence of him or any other person on his behalf taking any investment decisions based on the contents and information provided herein. This is not a specific advisory service to meet the requirements of a specific client. Use of this information is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this newsletter are and shall remain with PersonalFN. This is for your personal use and you shall not resell, copy, or redistribute this newsletter or any part of it, or use it for any commercial purpose. The performance data quoted represents past performance and does not guarantee future results. As a condition to accessing PersonalFN's content and website, you agree to our Terms and Conditions of Use, available here.
Quantum Information Services Private Limited Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 101 Raheja Chambers, 213, Free Press Journal Marg, Nariman Point, Mumbai 400021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 CIN: U65990MH1989PTC054667 |