Open letter to Shri O P Bhatt, Chairman, State Bank of India

Dear Mr. O P Bhatt, Chairman, SBI

I admire you as the great democratic runner of India’s oldest banking group, the State Bank of India which takes pride in serving its citizens during many disasters, wars and good times too for long 200 years. The bank has positioned itself as the real bank of India reaching to every nook and corner of India, shown by its massive network of more than 14,000 branches.

Your bank always have the first mover advantage and it also takes pride in being adjudged largest/biggest/longest/worthiest for common people like us. Even today, the common people reliability lies on you and your services which benefit us in building assets including easing our lives in financial complications.

But my thinking stops at one point and forces me to think whether your bank is really interested in helping common man, especially living in rural areas and want to build financial assets. You have come up with a public issue of Lower Tier II Bonds to garner Rs. 1,000 crore along with a green-shoe option of Rs. 1,000 crore, totaling Rs. 2,000 crore which you intend to deploy the issue proceeds to augment your capital base in line with your future growth story. The returns offered are good, in fact so good that it may provide trading opportunities on listing. The reservation for retail applicants is no doubt very good i.e. 50% of total issue. Bravo!

However, I fail to understand why you have limited the number of application collection branches to meager 126 out of 14,000 SBI branches. Very judiciously, you have covered 24 states and 80 cities and you have also given greater jurisdiction in major commercial centers. Just to add, you have given One branch each in Patna and Guwahati to cover the population of 8.3 crore and 4.8 crore respectively (as per Census 2001, India) covering 8 states. Even in Siliguri allocated branch, there have been incidences of not accepting the forms without their home branch cheque. It is very heartening to know that Indian banks have become so proficient that 2 branches can handle 13.1 crore residents as per your predictions. But did you figure out what the common people lost out of it?

By doing this, you have thwarted the majority class of retail investors who wanted to invest in these bonds. They are the genuine investors who wanted to take a pie of the high interest rates offered (still they don’t understand how to link it with the current macroeconomic scenario in the country). Thanks to your “First Come, First Serve” policy, the responses have been substantial. However, the bond issue has given trading opportunities which have increased the grey market actions. Brokers have been dolling out as high as Rs. 15,000 on each retail application. My grandfather including all senior citizens is also not happy with you as they could not avail the issue because of non-availability of collection centres in their cities. Also they won’t get these rates on other investment products for 10-15 years. I don’t know whether we should rejoice or groan over your step behavior towards India’s common residents. I believe the bank has forgotten its tag of “The Banker to Every Indian”.

Sincerely Yours,

An unbanked Proud Indian

From financial crisis to financial reforms? Implementation of the Dodd-Frank Act

From financial crisis to financial reforms? Perhaps the Federal Reserve of United States completed its cycle with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Chairman Ben S. Bernanke released its testimony on the Implementation of the Dodd-Frank Act.

The Bernank’s testimony says that

One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.

Good! This will put checks on their market participants’ risk taking measures and lending practices.

The testimony also says that

Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.

It is good to know that the Federal Reserve has been serious in implementing Basel III framework for their banks. The good quality assets and high liquidity buffers by these banks will help in preventing the financial crisis further.

What the act says?

The nice brief summary of the Dodd-Frank Act compiled by United States Senate Committee on Banking, Housing and Urban Affairs is mentioned here. It aims to create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail and most important, prevent another Financial Crisis.

In testimony words,

The act also requires supervisors to take a macro-prudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.

To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United States which may provide a starting step for others to follow.

Happy Reading!

-       Amar Ranu

Has Interest Rate peaked out?

We are in a very peculiar situation; equity market is down but gold prices are picking up. Inflation has not been budging down; the liquidity deficit along with the RBI’s ‘calibrated’ turned ‘aggressive’ monetary policies has been driving short term rates. While the Industrial production as measured by IIP nosedived drastically to 1.6 per cent for Dec 2010 from 18 per cent in Dec 2009 mainly due of high base effect and slowdown in industrial activity, the headline inflation cooled marginally to 8.23 per cent, higher than the street expectation of 8.1 per cent. This extreme slowdown in industrial growth may not prevent the central bank RBI to hike the policy rates for another time as the inflation remains stubbornly high.

What other indicators say?

·         10-year G-Sec Bond movement

The G-Sec 10-year yield, an indicator of long-term interest rate scenario in India has been trading below its July 2008 peak when the world markets had been reeling under the immense economic upheavals.  In July 2008, the yield on 10-year note went as high as 9.4 per cent. Due to various accommodative measures announced by RBI, the 10-year note touched to its low of 5.2-5.3 per cent. However, with improved market scenario and increased government borrowing which led to wide gap in fiscal deficit, the bond yield inched upwards to the level 8.23 per cent, but still below the July 2008 level.

·         Short Term rates at its 26-month peak

The interest rates on 3 Months and 12 Months Certificate of Deposits (CDs) – these are short term deposits raised by banks from fellow participants; unlike normal term deposits, these are traded in secondary market – have reached to its 26-month peak on tight liquidity in the system. The liquidity deficit since 3G and WIMAX auctions which led to outflows of over Rs. 1 lakh crore coupled with the government’s high cash balances with RBI and sluggish deposit-credit ratio have led banks tap this market. Short-term rates have continued their upward movement after the RBI started hiking policy rates. The 3M and 12M CD rates have crossed 10 per cent albeit below the level of 2008 economic crisis as given in the graph.

Which is bigger risk for India – Interest rate or inflation?

Many think-tanks say that inflation is a bigger risk in India because the economy becomes haywire because of it. However, this can be dealt with tighter monetary policies albeit in India, the structural and frictional issues are dominant factors in building up the inflation. To a large extent, the RBI has taken protective measures but few more hikes are imminent. The global commodity prices have also been roaring for which the US’s QE II should be blamed. This has affected the local domestic prices too to a large extent.

Moreover, the high fiscal deficit has been worsening. Though in the current financial year, the government has been successful in narrowing down the deficit, thanks to one-time big inflows from spectrum auctions. They might not be successful in future too.

What is expected in future?

The market participants expect massive government borrowing in the next fiscal year to be announced in the upcoming budget in last Feb to meet the increased expenditures which will lead to more bond supply. This will put upward pressure on yields. Also the liquidity deficit which will worsen further on account of advance tax outflows in the current quarter will take the short term rates high further. Moreover, banks have been issuing CDs aggressively to build their large balance sheet size, another reason to boost up the interest rates. Hence, an expected gradual rise in interest rates, given sticky inflation would add to hardening of bond yields.

- Happy Investing!

- Amar Ranu

RBI 3rd Quarter Monetary Policy Review 2010-11 – Containing inflation to remain predominant objective

The RBI monetary policy soap opera verdict is out. The mixed global recoveries rather still subdued and the inflationary pressures in emerging market economies (EMEs) including India has been on the top of the radar of RBI in its Third Quarter Monetary Policy Review 2010-11. From the earlier stance of growth-inflation dynamics, the RBI moved to anchor the inflationary expectations likely due to sharp increase in the prices of primary food articles and the recent spurt in global oil prices.

Key Policy Measures:

•  Repo rate, the rate at which banks borrow from RBI, up by 25 bps at 6.5 per cent
•  Reverse repo rate, the rate at which the RBI lends to banks, up by 25 bps at 5.5 per cent
•  Cash Reserve Ratio (CRR), the portion of deposit that banks keep with the central bank retained at 6.0 per cent
• The inflation target revised upwards to 7 per cent from 5.5 per cent for march-end 2011
• The baseline projection of real GDP growth retained at 8.5 per cent with an upward bias.

Domestic Outlook

The domestic economy is on strong trajectory path as revealed by the 8.9 per cent GDP growth in the first half of 2010-11 powered mainly by domestic factors including strong consumption. The strong agricultural output on satisfactory kharif production and higher rabi sowing will contribute significantly to overall GDP growth in 2010-11. The industrial output also showed buoyant figures; however, the significant volatility adds uncertainty to the outlook.

Inflationary Concerns

The headline inflation as measured by WPI remained uncomfortably high since Jan 2010. Although it moderated between Aug and Nov 2010, it reversed in Dec 2010 mainly due to sharp increase in prices of vegetables specially onion, tomatoes, garlic etc and petrol prices. The current inflation level is also contributed by structural demand-supply mismatches in other cereal items. Considering all the scenarios, the baseline projection of WPI inflation for March 2011 has been revised upwards to 7 per cent from 5.5 per cent earlier. The sources of price pressure – fuel and non-fuel commodity prices and some food items could be non-responsive to RBI monetary policy actions. Going forward, the price level will depend how the global and domestic prices evolve.

Liquidity – still in deficit mode

Since the outflows caused due to 3G and WIMAX payments, the liquidity remained in deficit mode in the financial system. Also, the sluggish deposit growth, far below the RBI projection along with the non-food credit growth of 24.4 per cent worsened the liquidity in the system. Meanwhile, the RBI also intervened by cutting SLR by 1 per cent and initiated OMO transactions worth Rs. 67,000 crore. The additional liquidity support to banks up to 1 per cent of NDTL has been extended up to April 08, 2011. Under this, the bank may seek waiver of penal interest purely as an ad hoc measure. The 2^nd LAF will be conducted on a daily basis up to April 08, 2011.

Burgeoning CAD (Current Account Deficits)

The current CAD expected to be around 3.5 per cent of GDP is not sustainable as feared by RBI. CAD, an outcome of net exports and imports may get worsened further if the global recovery improves. Till now, the capital flows, which so far have been broadly sufficient to finance CAD may get adversely affected as the global recovery can trigger the flight to safety.

Global Scenario

There has been a significant improvement in global growth prospects in recent weeks; however, the recoveries are still fragile with uneven scenarios in Euro region and Japan. The deflation fears looming largely on advanced economies got some reprieve with early signs of inflation. The real GDP growth in the US improved to 2.6 per cent in Q3 2010-11 after witnessing a muted growth in 1.7 per cent. The retail sales and corporate capital spending has improved. Unlike in advanced economies, Emerging Market Economies (EME) has been affected by burgeoning inflation trends due to spurt in global food prices including a spurt in crude oil. 

With better signs of sustainable recoveries, the global growth in 2010-11 is anticipated to be less frictional and will show firm signs of sustainable recoveries. With rising prices on increased demand, inflation would be a global concern in 2011.

Why the rate hikes?

The market had been anticipating a tougher stand from RBI as the inflationary issues failed to settle down. While the market had mixed anticipations – 25bps vs 50bps hike, the RBI followed a calibrated approach – hiking the policy rates by 25 bps only – after taking a “comma” stand for few weeks in its policy rate hikes. The current policy rate is still below the pre-crisis level. Since March 2010, it has increased rates by six times. Also, keeping the LAF corridor at 1 per cent, the RBI intended to bring down the volatility in overnight rates within the corridor.

Happy Reading!

-          Amar Ranu

A new ranking for Universities in Economics

Economics lovers!

A new ranking is in place for the best department of Economics in globe; it is based on online voting. Alas! It does not include any Indian university; however, it includes an Asian University i.e. National University of Singapore. Massachusetts Institute of Technology (MIT) tops the chart followed by Harvard University and University of Chicago. For more, click here.

So, Economics lovers! Go and grab your choice university; of course, the admission comes with their tough admission patterns. :)

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How the ranking has been done?

- A total of 58,013 votes are taken which includes almost all major locations of the globe. The maximum numbers of voters are from North America followed by Europe. The rest are from South Africa, Australia, New Zealand and Asian Countries too.  Out of the blue it includes New Delhi too.

- Overall total number of submitted ideas = 183

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Disclaimer: This project, All Our Ideas is financed by grants from Google and CITP at Princeton
University. It is a research project to develop a new form of social data collection that combines the best features of quantitative and qualitative methods. 

Happy Reading!

-         Amar Ranu

How many zeroes can you think of – Try Zimbabwe Bank notes and play in Billions or Trillions

Imagine a situation – a $ 5 could buy you enough bread in India while in Zimbabwe, back in 2008, 700 million Zimbabwe dollars bought a loaf of bread. Playing in Billions/Trillions had been a fun in Zimbabwe until the government abandoned its currency in early 2009 and decided to revalue its currency, removing 12 zeroes. Now, 1 trillion in Zimbabwe dollars is equivalent of one Zimbabwean dollar. Under the new valuation, the largest note is a 500-dollar Zimbabwean dollar. Earlier, the largest Zimbabwean bank note was for 100 trillion dollar (wow...hope India would become a $ 100 trillion dollars soon) and one U.S. dollar was worth more than 300 million Zimbabwean dollars. 

Hyperinflation or Deflation?

Currently, the world is divided into groups – with one set of countries majorly developed states flirting with the deflation and another set of countries majorly developing states like China, India etc battling to control burgeoning inflation. India has a serious concern on inflation due to structural issues on which the central bank has raised it many times. Recently, the RBI governor D Subbarao commented – “When I meet other central bank governors, they tell me `why don't you give us a bit of your inflation. That's how desperately they want some inflation and how desperate we are to control inflation”.

The hyperinflation has its own history.  Prof. Steve H. Hanke, Professor of The Johns Hopkins University and Senior Fellow of The Cato Institute has calculated the highest monthly inflation data as given below:

So, it is not only Zimbabwe but other countries like Hungary and Germany have also faced the hyper inflation in the past. Still, Hungary holds the record with the highest monthly inflation rate in the past. 

Now soiled Zimbabwean Dollars find new takers..

Western visitors to Zimbabwe are looking for zeros. They are toying with the soiled Zimbabwe bank notes, not in circulation now, most notably the one hundred trillion Zimbabwe dollar bill as an economic souvenir. The report says

The one hundred trillion Zimbabwe dollar bill, which at 100 followed by 12 zeros is the highest denomination, now sells for $5, depending on its condition. That bill and others -- among them millions, billions and trillions, were abandoned nearly two years ago, when the American dollar became legal tender in the hopes of killing off the record inflation that caused all those zeros.

"I had to have one," said Janice Waas on a visit to the northwestern resort town of Victoria Falls. "The numbers are mind bending." She got her so-called "Zimdollar" in pristine condition, from a street vendor who usually sells African carvings.

Call it the passion or curiosity; everyone now wants to get a pie of it. No wonder inflation – be it hyperinflation or deflation is a weapon of mass devastation. Hope in India, someone must be listening!

Happy Reading!

- Amar Ranu

Cash Strapped or Cash Hoardings – Look at these numbers

The world might be running high of rising asset prices and abundant liquidity which have heightened the inflation across the world. Last day, the republic of China raised its bank reserve requirements by 50 bps, the sixth time in less than a year and 4^th time in last 2 months in order to tame the inflation. Liquidity in the financial system has been another issue around the globe after the financial crisis. However, it eased after the developed countries announced a series of quantitative measures to ease the situation with US coming out with TARP, QE-I and now QE-II.  Sovereign crisis fear the European region which has questioned the existence of a unified region.

Amidst all these developments, many financially sound companies or marginally affected due to globe hoarded the money awaiting the new ideas for which they hoarded the cash in large quantum. The VRS Research team at Standard & Poor with the help of Capital IQ data examined the top 50 publicly traded companies globally, excluding financials, ranked by their latest reported quarter’s total cash and short-term investment holdings. The sum total for these companies’ cash balances is approximately US $ 1.08 trillion, almost near to cash holding for the entire S&P 500 Index.

We found 17 U.S.-based companies among the top 50 global corporate cash holders--which means that among specific nations, two-thirds of the top 50 global cash holding companies are headquartered outside of the U.S. From the perspective of dollar amounts, the 17 U.S companies account for $458.2 billion, or about 42%, of the top 50's global cash holdings. Meanwhile, the cumulative cash holdings of the 13 companies located in Asia and Australia, among the 50 below, amount to more than $270.1 billion, or about 25% of the group's total. In Europe, we find 17 companies among the top 50 global cash holders with aggregate cash holding total of $287.7 billion, or about 27% of cash balances among the global top 50.

With the abundance of capital abroad, there is a likelihood possibility that the firms may go for increased cross-border mergers and acquisitions as well as for strong earnings growth outside the U.S. After 2008 crisis, this domain has almost died given the tight liquidity scenario in their home country and globally. However, currently, the list could serve as a starting resource for ideas on who may be buying, where deals could occur, and possibly where profits may emerge.

Happy Investing! Happy Reading!

-        -   Amar Ranu

(Permission sought from S&P to post their articles on this blog)

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TINA plus S – Curve Effect = M100, a Midcap ETF

After the success of MOSt Shares M50 ETF, the fundamentally managed ETF and the remixed version of Nifty 50 which created record in terms of largest number of ETF investors, Motilal Oswal Asset Management Company Ltd. (MOAMC) has come out with a unique and novel product MOSt Shares M100 ETF having TINA (There Is No Alternative) and S-Curve effect. It is India’s first mid cap ETF based on CNX Midcap Index.

Mid Cap Space – unfilled opportunity for investors

Investors have always been scouting for mid cap space for better returns in comparison to large cap stocks, even at a higher volatility. Many fund houses sensed this opportunity and introduced active mid-cap funds; however, most of them failed to beat their benchmark, categorically CNX Mid Cap over a longer period of time. Moreover, the high expense costs (on an average 2.1 per cent) for these funds have been eating their returns. So, practically, investors have been left with no option but to invest in these funds relatively at higher costs.

MOSt Shares M100 ETF

MOAMC known for its innovations have filled this gap with the launch of MOSt Shares M100 ETF, India’s first mid cap ETF based on CNX Midcap Index. The primary objective of the scheme is to seek investment return that corresponds generally to the performance of the CNX Mid Cap Index, subject to tracking error. 

Why M100 ETF with CNX Mid-Cap Index?

1)     The Fund proposes to keep the expense ratio within 100 bps unlike in active funds which have 2 per cent plus.

2)     In longer investment period say 3 years and 5 years, CNX Mid Cap has outperformed the average midcap fund by a good margin.

3)     The volatility of CNX Mid Cap Index (25.5 per cent) is less than Nifty 50 (26.1 per cent); so, you are getting higher returns even at lower risk.

4)     None of the constituents of CNX Mid Cap has more than 4 per cent exposure in the index; so, they are avoiding concentration risk, an important factor if the market moves uneven.

5)     CNX Mid Cap Index is driven by consumption growth story with majority exposures to HealthCare, FMCG, Auto, Construction etc; so, in long term, the index is going to perform better in comparison to other indices.

6)     Being an ETF, it trades like a share and acts as a fund with no entry and exit loads and portfolio disclosed on daily basis.

TINA and S-Effect

Frankly speaking, the TINA affect applies here – There Is No Alternative to this product in the market. Historically, CNX Mid Cap has bitten its large index counterpart in long year’s category. So, logically, the investors will get exposure in Mid Cap stocks at lesser costs (1 per cent – proposed). Moreover, the S-Curve effect applies to mid-cap stocks – from inception to high growth to maturity i.e. Small Caps -> Mid Caps -> Large Caps. These hidden gems are under-researched, under-owned and under-valued. So, they provide a good growth opportunity in future. 

Word of Caution

1)     Mid cap stocks provide better returns in comparison to large cap companies; however, they have the downside effect too in bear market. However, investors planning to hold for longer years (minimum of 3-5 years) can get good returns over Large Caps.

2)     The proposed expense ratio (up to 1 per cent) is a win-win situation for investors; however, the fund house may go for the maximum permissible expense of 1.5 per cent which can deter the performance. However, it is still below the average expense ratio (over 2 per cent) of active mutual funds.

Should you buy?

First of its kind, the mid cap space has always been dominated by active funds. However, with the availability of this product, the investors fraternity must be excited to get exposures in mid cap stocks at comparatively lesser costs.  Also, the ETF story has started running in India which generally works at lower costs and in the long run, the history says that passive funds work better than an active funds. No doubt ETFs are going to bang in coming years.

M100 rocks!

Happy Investing!

- Amar Ranu

Fiscal Deficits at sub-5.5 per cent vs Higher Borrowing – which one to stick with?

Too many cooks spoil the broth! Rightly said... Post the global financial crisis, many countries – developed and emerging economies went for expansionary monetary and fiscal policies to revive their slowing economy. In India too, the slowdown of economy forced the Central Bank, the RBI and Central Government to announce a series of monetary and fiscal policies which shook the Indian Government’s finances. Three major expenses like provision for Sixth Pay Commission, Loan Waiver and MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Program) and various other subsidies including policy rate cuts led to significant intensification of the India’s Fiscal Deficit.

These unplanned expenditures in terms of loose policies and subsidies have badly affected the fiscal deficits. For Fiscal Year 2010-11, the Central Government fiscal deficit and combined gross fiscal deficit have been pegged at 8.2 per cent. However, there is an apprehension that it can shoot up further. In FY 2009-10, the fiscal deficit was 6.8 per cent of GDP. For FY 2011-12, it has been projected to bring it down to 4.4 per cent.

So, what happens if the fiscal deficit shoots up?

It means that the government will borrow extra to finance their planned and unplanned expenditures. If the government borrows extra for its spending, the level of money supplies rises which may compel to print more money, thus, leading to a hike in inflation rate. 

Current Scenario

With the improvement in economic conditions, the RBI has rolled back many of its accommodative measures introduced in year starting from 2008-09 bringing the policy rates to pre-crisis level. The net borrowing of Rs. 3.81 lakh crore will be executed smoothly except at few occasions where it has been devolved to PDs. However, the 3G and WIMAX auctions which collected worth Rs. 75,000 crore created the liquidity fissures which became a daily headache for RBI. In many occasions, the RBI has reiterated its comfort in repo borrowing up to 1 per cent of Net Demand and Time Liabilities (NDTL). However, the borrowing has been in range of over 2 per cent of NDTL which prompted the RBI to cut the SLR to 24 per cent and also introduced bond repurchase worth Rs. 48,000 crore under OMOs in four tranches.

The tight liquidity scenario was contemplating that the government may go for cancellation of some of its regular weekly borrowing as it has some unspent revenues lying with them. However, the Finance Ministry found support after the Nominal GDP data was released which rose on high inflation and on account of new series in headline inflation as measured by WPI. The nominal GDP
which expanded 19.8 per cent in the first half of the fiscal year 2010-11 provides the room for additional borrowing if the growth rate is intact in the 2^nd fiscal and the budgeted borrowing would amount to 5 per cent of the GDP only. The nominal GDP figures have risen due to burgeoning high
inflation rates which have been in double for most part of years and a new inflation index i.e. 2004-05. 

View

Since the fiscal numbers are calculated in current prices and if the government sticks to the number plan, it may have an additional room to borrow. The 5.5 per cent budgeted Fiscal Deficit of the GDP was thought of on account of assumption of 12.5 per cent growth in nominal GDP. However, it has grown at 19.8 per cent in the first half of the FY 2010-11; so the government may announce in reduction of Fiscal Deficit number at sub-5.5 per cent or may go for additional borrowing.

Given the tight liquidity scenario, it is unlikely that they will go for additional borrowing.  However, the quantum of OMOs done totaling Rs. 41,266 crore (in four tranches) may give a reason to borrow again beyond the budgeted specified limit if the liquidity improves in the financial system so as to finance its social schemes. After all, the election preparation is on!

Happy Reading!       - Amar Ranu

Financial Stability Report 2010 – A well documented story on Indian Economy

The Central Bank, Reserve Bank of India released its 2^nd Financial Stability Report (Firstone released in March 2010) and thus, it enters into the selected league of countries which publish Financial Stability Review/Report on a periodic basis. In the wake of the global economic crisis, it has become prudent for the Central Banks across the global to assess their financial stability and conduct many stress tests so as to test the nerves of the economies.

Broadly, the report covers that the financial sector remains stress free; however, the intermittent capital flows poses a big challenge as these kinds of flows are very volatile and may get reversed at time of extreme volatilities in origin countries. However, these portfolio inflows have helped financing the burgeoning current account deficit.

It also cautioned that the global economic recovery remain uncertain especially the European region needs to be watched out. Prolonged low interest rates in developed countries encourages higher systematic leverage and also creates a yield seeking environment wherein investors get into crowded traded.

The report also pointed out some soft domestic points where an eye needs to put up. While the domestic growth remains buoyant, the high domestic inflation is a cause of concern due to structural issues. The downside risks still remain and the stressed liquidity conditions warrant caution too. The bubble up in housing sector, especially in some particular regions like Mumbai, Noida, Bangalore and
other cities have prompted tightening of prudential norms which included increasing the provisioning ratio and raising the LTV ratio for higher loans. Read more…

2010 would be remembered a year in Financial Regulation with the passing of Dodd-Frank Act in United States to regulate banks and other financial institutions. We hope that the Central Bank will come with regulations in untouched domains and will take them under their umbrella.

Also read other countries Financial Stability Report/Review which are given below:

Austria – Dec 2010

Canada – Dec 2010 & June 2010

China – Sept 2010

Chile – Sept 2010

ECB – Dec 2010

Germany - 2010

Global by IMF – July 2010

Greece – July 2010

India – Dec 2010 & March 2010

Ireland – 2007

Italy – Dec 2010

Mauritius – Dec 2010

New Zealand – May 2010

Portugal – Nov 2010

Singapore – Nov 2010

South Africa – Sept 2010 & March 2010

Taiwan – May 2010

UK – Dec 2010

Happy Reading!
- Amar Ranu

Dematerialization of Mutual Fund Units – Simplifying the Investment Process

For quite few months, Mutual Funds in India have witnessed investors’ friendly regulatory changes, thanks to SEBI.  Right from the ban of entry loads in Aug 2009 to facilitating transactions in mutual funds schemes through the existing stock exchanges infrastructure in Nov 2009, SEBI now allowed mutual fund investments to be held in dematerialized form. It means that investors will have the option to convert their existing mutual fund investments into dematerialized form and buy/sell units through stock exchanges.

Background

With the removal of entry loads, SEBI intends to bring an advisory model where the intermediary charges a fee directly to the investors for providing advisory services to them. This reduced distribution incentive for distributors who found difficult to serve customers in far-flung areas or tier-3 & 4 cities. With this intent to provide mutual fund services to every nook and corner of India, SEBI decided to utilize the existing stock exchange infrastructure for mutual fund transactions.

Dematerialization of Mutual Fund Units

1.       Process

·        If you are an existing demat account holder, you can submit a Conversion Request Form (CRF) from your DP and submit the fully filled CRF form along with the Statement of Account to your DP. After due verification, the DPs will co-ordinate with the Asset Management Companies (AMC) and their Registrar and Transfer Agents which in turn after due verification
will credit the mutual fund units to your demat account.

·        If you are not a demat account holder, you will require to open a demat account with a DP before you can convert existing mutual fund units in demat form.

2.       Subscription of Units

Investors can subscribe to Mutual Fund units through their Stock Broker using the Stock Exchange platform. Upon subscription, the AMC/RTA will credit the mutual fund units to your demat account.

3.       Redemption of Units

Investors can redeem their dematerialized mutual fund units through two different modes. They can submit Redemption Request Form which in turn will send to the AMC/RTA after due
verification. The AMC/RTA will verify the form and credit the maturity proceeds in the bank account available in the depository system.

Why should you convert Mutual Funds into demat form?

1.      Consolidation – Even you are holding mutual funds investments with a number of AMCs, say 10 or 20, you can view all the transactions in a single statement instead of managing and collection statement of accounts from all AMCs.

2.      Easy Monitoring – Once you have your holdings at one place, you will be able to monitor them effectively and can also analyze its performance in one go.

3.      Fast transactions – Having all Mutual Fund units in a demat account can allow you to buy/sell the units without any inconvenience. It can be done either through a phone call or an online instruction unlike in physical units where you need to sign the repurchase form with each
AMCs and submit it in their point of presence (PoPs).

Drawbacks

The holding of MF units in demat account will necessarily lead an additional cost, a cost charged by stock broker on maintaining the demat account along with transaction charges. Currently, all brokers are offering transactions on MF units at free of cost which they might abandon once the volume picks up.

The impact will be minimal for those who already have a demat account with DPs. The potential of dematerialization of mutual fund units nullifies the cost associated with the demat account. Once powered with the demat units, the convenience and ease of transactions will definitely overrule the process of managing transactions with different AMCs. It provides a single platform to transact across multiple fund houses and their associated schemes. This is one of simplified steps which will help in simplifying investors’ financial life. Moreover, dematerialization of mutual fund units will improve the documentation process.