FROM EDITOR’S DESK Niveshak Volume IX ISSUE V May 2016 Faculty Chairman
Prof. P. Saravanan
THE TEAM Aaron Keith Rego Abhishek Jaiswal Aditya Kumar Jain Anisha Khurana Ankit Singhal Ankur Kumar Anoop Prakash Devansh Sheth Shreyans Jain All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com
Dear Niveshak The month saw government taking some small but important steps to improve the ease of doing business. The benchmark Sensex also remained range bound with the index showing uptrend only in the last days of the week. During the month, the government took some decision which will have far-reaching impact to simplify the business process in the country. For example, to make export clearance easy and effort-less in its unprecedented move the government has opened a new window which will provide clearance in one day. Now the government has set big targets to achieve, it has also directed Niti Aayog to set up monthly targets for all the departments. This will boost implementation. Also in its attempt to curb black money the government is trying out measures to ensure cashless transaction more frequent. Measures have been identified like installing more POSs and offering first five internet transaction free. If successful, the measures will significantly help in curbing the black money. On magazine front this time, article of the month talks about the negative interest rate and how it could impact Indian economy. The article points out the prolonged use of the negative interest rate might lead to price war among countries. Also with the probable collapse of the Eurozone, if the Britain leaves the group, there are chances that the central banks will continue the negative interest rate. Our cover story talks about the telecom sector and the impact it has on the Indian economy, how the sector has evolved and with the 4G coming to the country the sector in entering into the next phase of growth. For FinGyaan, the author talks about one of the important issue currently plaguing the banking industry i.e. the burgeoning NPA. The author points out the hindrances banks are facing in clearing the NPA. Our FinRewind section talks about the currency crisis which had hit the Russian economy at the end of the 19th century. And the FinSight section delves into the banking industry of the country and how we can make it more accessible to all. This time we have brought the expert views of Mr. Pradeep Dhamdhere, Fund Manager, Equity & Senior Analyst, Bajaj Allianz Life Insurance Co. Ltd. He gives his views on portfolio and fund management. Specifically, he talks about various parameters that one could consider in constructing a portfolio, what are the general regulations one has to company with when managing a professional portfolio vis-à-vis a personal portfolio and how investor should protect oneself from the volatility. He also advices on the specific skill sets a young professional need to develop for building a career in fund management. Finally, we would like to thank our readers for their immense support and encourage¬ment. You remain our prime motivation factor that keeps our spirits high and gives us the vigour and vitality to keep working hard. We hope you had a great financial year and wish you the best for the new one. Team Niveshak
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
CONTENTS Cover Story Niveshak Times
04 The Month That Was
Article of the month
14
Changing Landscape of the 10 Interpreting Negative Interest Telecom Industry Rates and its Impact on India
FinGyaan 18 Brazil: Crisis Prolonged
FinRewind
22 Russian Financial Crisis
Finsight
26
Indian Banking Industry: The Hope of Millions, in Hope of Solution
FINVIEW
29 Pradeep Dhamdhere
Bajaj Allianz Life Insurance Co. Ltd., Fund Manager, Equity & Senior Analyst
CLASSROOM
31 Covered Calls
The Month That Was
4
NIVESHAK
www.iims-niveshak.com
The Niveshak Times Team NIVESHAK
IIM Shillong PayTm Partnered With Wipro PayTm, a digital wallet company has partnered with Wipro for developing core-banking system and to meet all regulatory requirements for its upcoming payment banks.
think-tank Niti Aayog to set monthly targets for all the departments. After setting the performance benchmark like housing for al by 2022, clean India by 2019 etc. for the government seems to be focusing on how to achieve them.
PayTm has been granted in-principle approval by RBI to set up payment banks. A payment bank can accept deposit up to one lakh and it cannot lend money. Also, it can sell mutual funds, insurance products and pension funds.
This will also include infant mortality and maternal mortality under the health minister to improve the health standards of people in rural as well as urban areas.
The contract is for one year. The IT giant will also put in place the data centre for the payment bank and will also manage the same. As per the current guidelines issued by PayTm, it plans to launch the bank in August.
Recognising the fact the quality based-learning is in high demand often unfulfilled by the available supply, RBI governor Raghuram Rajan cautions students of the rising debt level.
Export Clearance to be Made easy A new window, named as SWIFT (Single Window Interface for Facilitating Trade), will make export quite easy and it will take as low as single day to clear all export related formalities for all goods made in India. In its plan to give big boost to the export and to the manufacturing sector, the window will significantly down on all paper work and even the duty will be paid later on after the goods have been exported. The system will inform the manufacturer when to bring their goods at the port for delivering. The exporter will be able to get clearance from all the related parties on a single paper. Agencies like Safety and Standards Authority of India, Drug Controller General of India and Plant Quarantine and Wildlife Crime Control Bureau will all give their clearance through this single window. The move is to uplift the manufacturing sector. India ranks 133 on the World’s Bank Ease of Doing Business “trading across border”. The window will help in improving this ranking. Government Push on Implementation Not seen quite explicit ever in the country’s recent history, the government is setting monthly targets for the respective departments. The ministers will be accountable for any deviation from the targets set. Prime Minister Office has directed government
MAY 2016
RBI Governor’s Suggestion for Students
Mr. Rajan recognised that due to lack of quality of education, students take loans for private tutions which are quite expensive. The solution could have been technology based mass learning, Mr. Rajan concedes. But the abysmal completion rate of online courses has not uprooted the problem of high demand of quality-based learning. The completion rate of MOOCs (Massive Open Online Courses) and other online courses that have recently attracted the attention of venture capitalists’ is around 10%. Snapdeal Putting Bar on the Discount Ecommerce player Snapdeal has asked its sellers not to give discounts more than 70% on maximum retail price of most of the products. The move is aim to cut down the number of items returned by the customers. Till now, a seller could offer as much discount as it wants, potentially hurting the brick and mortar business. The move to restrict the discount is new for the industry. Snapdeal clarifies that the heavy discounts reduce the customers’ perception about the quality of the goods. This result in customer returning the goods and due to the “no question asked” policy of many ecommerce companies, the goods have to be taken back. This creates logistic nightmare for the companies. While the move is good for the industry, it might go down well with some of the sellers as they use
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ecommerce platform primarily to clear their season end stock.
Expediting the Patent Registration to Attract Startups
Measures for Curbing Leakages
In order to attract start-ups from all over the world the government has opened a new window, ‘Tatkal’, under which patent will be granted to the start-ups very quickly. The government has also made amendments in the definition of the startups to make it qualify for the lesser fees. Now the start-ups will be treated like a one person company which will significantly reduce the fee. However, for the Tatkal route fees will be twice for the startups and thrice for the companies. Also to unclog the system, the government has notified that there will not be any penalty on the withdrawal of the application.
While it is encouraging that the Finance Ministry has unearthed around Rs.71,000 crore black money in the last two years, it may be only the tip of the iceberg. In its move to make economy cashless, government is identifying measures to encourage cashless transaction. A task force set up under Mr. Neeraj Kumar Gupta, secretary of department of investment and public asset management, has suggested measures like installation of Point of Sale (POS) terminal and making five internet transaction free to encourage the cashless transaction. RBI has also noticed that there is need to encourage cashless transaction. In a paper released, RBI said deployment of POS has come down on year-onyear basis. Also infrastructure has not growth proportionately to support the growth in plastic cards. While debit card grew by 64% from October 2013 to October 2015, ATMs grew by around 43% and POS only by 28%. Though installing ATMs incurs significant cost for banks, POS terminals can be encouraged to encourage people to transact online.
Travelling With Gold Abroad Would be Made Easier NRI coming India with jewellery or an Indian citizen going abroad to attend some function may not face hassle at the custom clearance. The government is developing a mechanism to clear the passage of the people with some gold or jewellery. The move is aimed towards ease of doing business by removing unnecessary hurdles in travelling abroad. As of now stringent custom norms are put in place to stop the smuggling of gold through personal baggage. But this creates problem for
Challenging the Hegemony: BRICS Bank Might Set Up Their Own Rating Agency There are chances that the BRICS nations might come up with their own rating agency specifically for the developing nations. In the meeting regarding the BRICS Bank to be held in Goa in October this year, the participating countries might agree to come up with such an agency. Till now the major western rating agencies cover the 90% of the rating market. Developing countries often allege that these agencies are biased towards the developing countries. The meeting could also see a proposal to set up NDB Institute (National Development Bank Institute) in India to research and identify projects and areas for utilising the $100 billion of the NDB. This fund is the initial balance of the bank which all the BRICS nations have promised to contribute into. While the bank is headquartered in Shanghai, the institute will be set up in India.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
The Month That Was
The Niveshak Times
5
6
www.iims-niveshak.com
NIVESHAK
BSE
27000
BSE
DII
2,000
FII
31-05-2016
30-05-2016
27-05-2016
26-05-2016
25-05-2016
24-05-2016
23-05-2016
20-05-2016
19-05-2016
18-05-2016
-1,000
16-05-2016
24000
13-05-2016
-500
12-05-2016
24500
11-05-2016
0
10-05-2016
25000
09-05-2016
500
06-05-2016
25500
05-05-2016
1,000
04-05-2016
26000
03-05-2016
1,500
02-05-2016
26500
FII, DII Net turnover (in Rs. Crores)
Article ofSnapshot the Month Market Cover Story
Market Snapshot
Source: www.bseindia.com www.nseindia.com
MARKET CAP (IN RS. CR) BSE Mkt. Cap
99,80,888 Source: www.bseindia.com
CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ 1 SGD
4.50%
INR/1 USD
4.00% 3.50%
Euro/1 USD
GBP/1 USD
67.20 74.79 60.40 98.55 48.68
JPY/1 USD
SGD/1 USD
LENDING / DEPOSIT RATES Base rate Deposit rate
9.30%-9.70% 7.00% - 7.50%
RESERVE RATIOS CRR SLR
4.00% 21.25%
POLICY RATES Bank Rate Repo rate Reverse Repo rate
3.00%
7.00% 6.50% 6.00%
2.50% 2.00% 1.50%
Source: www.bseindia.com
1.00% 0.50% 0.00%
MAY 2016
Date as on May 31th
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NIVESHAK
BSE Index
Open
Close
% change
Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK
25565 11067 11023 18483 18955 11894 13179 7696 15590 11343 7963 9385 1848 6279 1352 6130
26668 11366 11142 19363 20112 11761 14465 8045 15246 11576 7950 9322 1872 6257 1421 6227
4.31 2.70 1.08 4.76 6.10 -1.12 9.76 4.53 -2.20 2.05 -0.15 -0.67 1.29 -0.36 5.12 1.59
% CHANGE
% Change TECK, 1.59% Smallcap, 1.08% REALTY, 5.12% PSU, -0.36% POWER, 1.29% OIL&GAS, -0.67% MIDCAP, 2.70% METAL, -0.15% 1
IT, 2.05%
Healthcare, -2.20% FMCG, 4.53% CD, -1.12% CG, 9.76% BANKEX, 6.10% AUTO, 4.76% Sensex, 4.31%
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Article Market of Snapshot the Month Cover Story
Market Snapshot
7
Niveshak Investment Fund
Done on 30/6/14
Information Technology(12.59%)
Bank (7.16%)
HCL Tech.
HDFC Bank Wg: 7.16% Gain: 25.1%
Infosys
TCS
Wg: 3.88% Gain : 0.6%
Wg: 4.37% Gain: 45.7%
Wg: 4.33% Gain : 3.56%
FMCG(21.36%) Colgate HUL
Britannia
Wg: 5.43% Gain : 13.13%
Wg: 6.38% Gain: 165.96%
Wg: 4.58% Gain: 24.12%
Tata Motors Wg: 4.93% Gain: -0.94%
Amara Raja Wg: 4.24% Gain: 18.41%
Godrej Consm. Wg: 8.01% Gain: 70.80%
Pharmaceuticals (10.74%) Dr Reddy’s Labs Wg: 4.29% Gain: 6.87%
Lupin Wg: 6.45% Gain : 25.87%
Midcap Stocks (11.62%) Bharat Forge Wg: 3.56% Gain: -19.28%
Kalpataru Power Wg: 4.01% Gain: -5.21%
Natco Pharma Wg: 4.05% Gain: 0.92%
1
1
1
ITC
Wg: 4.97% Gain: 1.83%
Misc. (12.24%)
Auto (9.18%)
1
Titan Company Wg: 4.23% Gain: -2.55%
Chemicals (8.61%) Asian Paints Wg: 8.61% Gain: 58.16%
Textile (6.51%) Page Indus. Wg: 6.51% Gain : 29.58%
Performance Evaluation
As on 31 st May 2016
May Performance of Nivehshak Investment Fund
155
Scaled Sensex
175
106
104
145
102
135
100
125 115
98
95 2/5
5/5
8/5
11/5
14/5
Scaled Sensex
17/5
20/5
23/5
26/5
29/5
Scaled NIF
30-Jan-14 10-Mar-14 17-Apr- 14 29-May-14 09-Jul-14 18-08-2014 24-09-2014 05-11-2014 12-12-2014 20-01-2015 27-02-2015 08-04-2015 18-05-2015 23-06-2015 29-07-2015 03-09-2015 14-10-2015 23-11-2015 31-Dec-15 08-Feb-16 16-Mar-16 28-Apr- 16
105
96 94
165
Performance of Niveshak Investment Fund since Inception Scaled NIF
Value Scaled to 100
Opening Portfolio Value : 10,00,000 Current Portfolio Value : 15,43,954 Change in Portfolio Value : 54.40% Change in Sensex : 30.10%
Risk Measures: Standard Deviation : 18.49 (Sensex 10.09) Sharpe Ratio : 2.73 (Sensex : 2.59) Cas h Remaining: 58,000
Comments on NIF’s Performance & Way Ahead: As can be seen, the month of May witnessed significant activity in the later half causing a spike in the value of Sensex and NIF. The major reason for the spike was the increasing expectation of better earnings growth in the market as well as improving global s entiments. Looking forward, one of the major events that will act as a trigger for the markets is the decision of the Government to offer a second term to Raghuram Rajan. Another factor that will play a key role is the earnings to be released for the month of June
10
Article of the Month Cover Story
NIVESHAK
INTERPRETING NEGATIVE INTEREST RATES AND ITS IMPACT ON INDIA ArjunBhatia
NMIMS, Mumbai A once unheard of monetary tool, the Negative Interest Rate, is now being implemented in various major economies on an unprecedented scale. Previously, only Japan had experimented with near negative rates in the late 90s; but now, with limited choices left in their attempt to stimulate the economy, more and more monetary policy makers are willing to test this strategy. In fact, Countries that account for close to 30 per cent of global gross domestic product (GDP) have negative rate policies. The latest being the Bank of Japan which announced a negative rate in January 2016. The European Central Bank cut rates again on March 10 2016, charging banks minus 0.4 percent to hold their cash overnight. Switzerland (minus 0.75%), Sweden (minus 0.35%), Denmark (minus 0.65%), and a few other European nations
MAY 2016
outside the euro zone also introduced negative rates to stay in step. In addition, Canada’s central bank governor has indicated that the bank would not be disinclined to adopting a negative rate policy if need be. Even the US Federal Reserve, which brought rates up in December, is conducting stress tests to assess all conceivable impact of negative rates on short-term US treasuries. As of February this year, more than $7 trillion worth of government bonds worldwide offered yields below zero, which means that an investor who buys these bonds and holds it till maturity will lose his money. So what are negative interest rates? Negative Interest Rates are like normal interest rate, except instead of getting paid for depositing money with the central bank, the commercial bank now pays the central bank
NIVESHAK
interest rates are: 1. Combat Deflationary Tendencies: Negative rates offer an incentive to lend and spend. Consequently these ought to stimulate demand, and combat economic deflation. Let’s look at the Eurozone. Banks keep their excess reserves in an ECB deposit account. The rate on that account had been 0% since mid2012. From June 2014 onwards, the ECB cut rates four times to finally bring it to its current value of minus 0.40% in March 2016. There are a lot of excess reserves in the ECB deposit account, which a lot of banks are trying to get rid of by lending them to other banks. This has brought the interbank rate in the Eurozone, called Euribor down to minus 0.015% for one year. This rates is directly linked to business and consumer rates, such as mortgages. The average interest rate on
an interest rate of 0%. It doesn’t shrink. Thus robbing lenders of a crucial source of funding. If customers suddenly pulled huge amounts of deposits, commercial banks might start needing reserves—and that demand would push the interbank lending rate up, exactly the opposite of what central banks are trying to do. Thus defeating the purpose of introducing negative interest rates in the first place.
a mortgage of more than five years in the Eurozone has been falling since late 2011, alongside the ECB’s rate cuts. In the month before the move to negative deposit rates, it was at 3.28%. It is currently at 2.82% according to ECB data. 2. Depreciate currency and boost exports Negative rates should make investors try to withdraw and reinvest their money in places where interest rates are higher, such as the US or India. When they do so, they sell the home currency and buy dollars (or Rupees).
Effects of negative interest rates In theory, some of the effects of negative
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Article of the Month Cover Story
when it deposits money in excess of reserve requirements. In effect, it punishes banks that hoard cash instead of extending loans to businesses or to weaker lenders. Historically, such a practice would be highly inflationary, however, with oil and commodity prices tumbling to record lows, combined with a slowdown in global growth, inflation is not feared. Central Banks use such an instrument because in theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice however, there’s a risk that the policy might do more harm than good. If banks make customers pay to hold their money, cash may go under the mattress instead, as depositors, especially smaller ones, would hold cash instead of facing negative rates. Holding Cash is like making a deposit to yourself with
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This capital flight from the lower interest rate markets to a higher one depreciates currency thus boosting exports of the country with negative rates. However, currency devaluation is a zerosum game: the complete global economy taken on the whole cannot sustain a currency devaluation against itself. Taken to the extreme, competitive currency devaluations may give way to policies the setup trade barriers, which would adversely impact global growth because of increase in economic inefficiencies such as deadweight losses that arise from any act of trade protectionism. 3. Reduce bank profitability. Several banks do not yet charge retail customers to deposit money. They absorb the impact of the negative rate, while paying positive rates to depositors. Advocates of negative rates might be puzzled by this decision by banks that put a squeeze on their profits. Banks simply have to pass the negative rate on to their different clients, borrowers on one side and lenders on the other. The spread between the two needn’t change. However it’s not as simple as that since Banks are dependent on deposits and are reluctant to reduce rates, fearing the loss of customers who are their main funding base. They also fear the worst case scenario that reducing deposit rates to near zero could lead to a run
MAY 2016
on the bank. Thus there is a mounting concern that when banks absorb the cost of negative rates themselves, it diminishes their profit margins thus making them even less willing to lend. Ironically, the very reason that negative interest rates were implemented in the first place was to increase lending. 4. Increase in Subprime loans: Negative or near zero interest rates also reduce the risk of default thereby giving rise to high risk investments. As seen in Japan, it creates highly unproductive zombie companies and industries by distorting the cost of capital. Such companies do not make necessary adjustments to their strategy or business practices in an attempt to improve their production efficiencies and increase their profitability. Some of these business models are just not sustainable in the long term, yet banks do not write these loans off as bad loans, relying instead on low- or negative rates to allow these zombie companies to continue operations. Investments that are below par are not restructured or sold. Weakened profitability from negative interest rates discourages banks from aggressively realizing bad debts. Hence such a move doesn’t boost the economy but leaves banks vulnerable to future credit crises. In practice, looking at the data from countries that have adopted negative rates, it is still
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out of the aggregate $6 billion worth of loan agreements struck in the first quarter of 2016. One of the sizable deals that the Japanese lenders were involved in was the $1.8 billion borrowing by ONGC Videsh Ltd in March— the largest deal for the quarter, according to Dealogic. Of this $1.8 billion, the top three Japanese lenders endorsed a little over $500 million. Another such example is that of Reliance Industries Ltd which has collected about $980 million in two tranches this year, of which more than $150 million originated from Japanese banks, according to Bloomberg data. Conclusion As of today, the global impact of negative rates is still not fully understood. The Bank for International Settlements warned in a March 2016 report of “great uncertainty” if rates stay negative for a prolonged period. There is also the apprehension that if more and more central banks use negative rates as a stimulus tool, the policy will ultimately lead to a currency war of competitive devaluations. Currently what we can say for sure is that these actions will complicate the already complex task of currency management for the RBI because of the extra currency volatility. The current trend of imposing negative interest rates is the main reason behind why many experts are imploring the Central Government to appoint an economist as the next chairman of the RBI, as it will take an economist to manage currency. However on the bright side, the influx of cheap foreign capital is giving a much needed boost to the Indian economy to back the government and private players in funding projects under the governments various developmental schemes. India must make the most of this inflow of capital by putting structural reforms in place to boost growth and keep it sustainable for a prolonged period of time.
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Article of the Month Cover Story
hard to say whether negative interest rates help or hurt the economy. There haven’t been sharp turnarounds in the countries that have tried negative rates. Economic growth in the Eurozone a year ago was 1.5%, slightly higher than the 0.9% recorded in 2014. (Negative rates began in mid-2014.) But growth appears to be tailing off. In the fourth quarter of 2015, the Eurozone grew at an annualized rate of just 1.1%. Eurozone banks, however, have started to lend more to households and businesses. Such lending had begun contracting since mid2012 and continued that way through 2014. It began turning around last year. The current figures show lending increase at a rate of 0.6% annually, which is still far from robust. It still remains to be seen whether stronger benefits come at more-negative rates. It is also impossible to know whether things might have been much worse had the countries not tried negative rates. Impact on Indian Businesses Armed with low-cost funds and a liking for India, Japanese banks are emerging as lenders of first choice for Indian firms looking for foreign currency loans. Negative rates have pushed yields on Japanese government securities to record lows. The near absence of returns in the domestic market has spurred lenders to look abroad and India being the haven for investment amongst the emerging markets has become the first choice of Japanese investors, leading to the increase of accessibility of low cost capital for Indian firms. The offshore syndicated loan market, typically dominated by US and European banks, is seeing a shift, with the share of Japanese banks rising to 30% in the quarter to March this year, from 14% in the previous quarter, according to Bloomberg data. Syndicate loans are loan agreements that take place between and individual borrower and a group of lenders, as opposed to bilateral loans which are between a single lender and buyer. Apart from the syndicated loans, Indian companies and Japanese lenders are also striking several bilateral loan deals. Three out of the top five underwriters of offshore loans of Indian firms in terms of volume were Japanese banks, data from Bloomberg showed. Lenders from Japan endorsed about $1.8 billion worth of loans
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The Changing Landscape of the Telecom Industry DevanshSheth
A Brief Introduction The birth of the telecom Industry in India can be dated back to 1850 when the first telegraph line was started between Calcutta and Diamond Harbor. Over these years the telecommunication industry has evolved enormously and is now scaling great heights in terms of changing the lives of the people through the services offered. In 1881, the government granted the permission to Oriental Telephone Company Limited of England to establish and operate telephone exchanges in the country. The subsequent years witnessed various forms of development in the industry and also an increase in the number of telephones to around 80000 in 1948. PostIndependence the growth remained slow and thus owning a telephone had become a status symbol rather than an instrument of utility. Transformation of the Sector
MAY 2016
IIM Shillong
In 1975 the Department of Telecommunications was carved out as an independent body after its separation from the Postal and Communications Department. Prime Minister Indira Gandhi undertook the initiative of inducing growth in the Telecom sector by signing contracts with Alcatel CIT of France to merge with a state owned company in an effort to set up 50,00,000 lines per year. But the plan had to be scraped due to political opposition. Though the plans had to be scraped Congress did not back down from making attempts to liberalize the telecommunication industry. In 1984, the then Prime Minister of India, Rajiv Gandhi, invited Mr. Sam Pitroda, a US based NRI to set up the Centre for Development of Telematics (C-DOT) for the manufacturing of the telephone exchanges in India for the first time in India. In order to manage the high traffic of the metros such as Delhi and Mumbai, Mahanagar Telephone Nigam Limited (MTNL)
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(Bharti Airtel) and Idea (Aditya Birla Group). Majorly 2 technologies CDMA and GSM were used to provide the services with the latter being the more dominant. Though at first CDMA technology was considered to be more advanced and helped in providing internet users with high speed internet, the technology has now faded away into the dark majorly because of the growth of the GSM technology through the Next Generation Networks (NGN) and also the mobile manufacturers offering a larger variety of GSM backed mobile phones as against those running CDMA. The growth of the Internet Service Providers has also been a major revolution of the wireless networks and with a majority of the population still remaining untapped in terms of internet usage the industry is only expected to grow leaps and bounds and also contribute a healthy share to the GDP of the economy. A Dent India has been divided into 22 telecom circles with around 281 zonal licenses in order to operate mobile telecom services. In 2008, nearly 122 telcos were offered 2G spectrum licenses on a first come first served basis at the 2001 prices. Many companies were also allocated licenses even though they were ineligible for the same. The ‘2G Scam’ as it is popularly referred to as dented the ongoing telecommunication revolution and the development in the sector came to a halt. Many International Companies such as UAE based Etisalat decided to shut shop sell the infrastructure they had built and exit the country. So the 2G scam led to in an indirect consolidation of the industry as only the major players now prevailed who were acquiring the infrastructure set up and other assets of the small and even the exiting firms. According to the CAG Audit the difference between the mandated and collected money amounted to ₹1.76 trillion making it one of the biggest scams in the history of the country. Rebirth of the Telecom Sector The Indian mobile economy is growing rapidly and will contribute substantially to India’s gross domestic product (GDP), according to report prepared by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG). In the past decade and half strong growth has been registered making India the world‘s second largest telecommunications
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Cover Story
and Videsh Sanchar Nigam Limited (VSNL) were carved out. Sam Pitroda also played the role of a consultant and advisor to the Department of Telecommunications and thus we attribute the Indian Telecom Revolution to him. In the early 90s with the Liberalization Privatization and Globalization (LPG) reforms underway the Narsimha Rao led government also introduced a National Telecom Policy which brought major changes in the ownership, services and regulation of the telecom infrastructure with a vision to expand the network not only in the major cities but also to each and every village. With the advent of private and foreign investment into the sector not only in the state owned companies but also the private companies it was also necessary to reduce the government interference in policy making and thus Telecom Regulatory Authority of India (TRAI) was established as an autonomous body for regulating the tariffs and policies of the telecom sector. The Atal Vihari Bajpayee Government also brought in more reforms into the sector by setting up the Telecom Disputes Settlement and Appelate Tribunal (TDSAT) to relieve TRAI of the duties of handling the disputes in the sector. Launch of the Wireless Communication Though the cellular mobile services and pager services were launched nearly at the same time in 1995, Pager services grew leaps and bounds during the period up till 2000 because the major reason for this was that the cellular services were considered to be a luxury with the rates associated to it and thus not many could afford it. But the pager on the other hand gained traction as there were nearly 2 million active subscribers in the year 1998 but this growth did not last long as the subscribers fell down to 500000 in the year 2000 and continued to fall. Many experts believe that the entry of Reliance Telecom (Now Reliance Communications) revolutionized the industry and also led to the downfall of the pager. The aim of the Ambanis was that every person in India should own a mobile phone and in order to do so they introduced mobile phones at ₹500 and also subsidized the calling rates. In order to cope with Reliance other players in the market also decreased the tariffs thus making it affordable to a larger audience. Over the past decade the country saw the entry of various major international players in the market such as Vodafone and also the outstanding growth of Indian companies such as Airtel
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market. According to Research firm IDC total mobile services market revenue in India is expected to be around $37 billion in 2017 on the back of a strong driving force leading to adoption of data consumption on handheld devices. India’s mobile subscriber base is expected to cross 500 million subscribers by the end of FY2015 from 453 million subscribers at the end of FY2014. According to a study by GSMA, smartphones are expected to account for two out of every
research firm Gartner. The Indian telecom sector is expected to generate four million direct and indirect jobs over the next five years according to estimates by Randstad India. The employment opportunities are expected to be created due to combination of government’s efforts to increase penetration in rural areas and the rapid increase in smartphone sales and rising internet usage. With daily increasing subscriber base, there have been a lot of investments and
three mobile connections globally by 2020 making India the fourth largest smartphone market. The broadband services user-base in India is expected to grow to 250 million connections by 2017, according to GSMA. India added the highest number of net mobile phone subscriptions of 13 million during the third quarter of 2015. International Data Corporation (IDC) predicts India to overtake US as the second-largest smartphone market globally by 2017 and to maintain high growth rate over the next few years as people switch to smartphones and gradually upgrade to 4G. In spite of only 5 per cent increase in mobile connections in 2015, overall expenditure on mobile services in India is expected to increase to US$ 21.4 billion in 2015, led by 15 per cent growth in data services expenditure, as per
developments in the sector. The industry has attracted FDI worth US$ 17.7 billion during the period April 2000 to September 2015, according to the data released by Department of Industrial Policy and Promotion (DIPP). Some of the major developments in the recent past are: • Vodacom SA, a subsidiary of Vodafone Plc, has entered into an agreement with Tata Communications Ltd to buy the fixed-line assets of TataComm’s South African telecom subsidiary Neotel Pty Ltd. • Bharti Airtel has planned to invest Rs 60,000 crore (US$ 9.02 billion) over a period of three years with a view to boost its telecom network capacity thereby improving the quality of voice and data services to its
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to the government for spectrum allotted to Sistema. • Chinese smartphone maker OnePlus has announced its partnership with Foxconn, a Taiwanese company, for assembling its phones in Foxconn’s factory in Andhra Pradesh. • Swedish telecom equipment maker Ericsson has announced the introduction of a new radio system in the Indian market, which will provide the necessary infrastructure required by mobile companies in order to provide fifth-generation (5G) services in future. • Out of the total number of smartphones shipped in India during the June 2015 quarter, 24.8 per cent were made locally - a significant rise as compared to 19.9 per cent in the previous quarter - as per CyberMedia Research firm. • Global telecom equipment makers like Ericsson, Nokia Networks and Huawei are looking forward to over US$ 1 billion revenue opportunity as mobile phone operators in India roll out high-speed broadband services on the 4G LTE technology across the country. • Lenovo Group of China has commenced manufacturing its smartphones in India, through its contract manufacturer Flex’s facility near Chennai, thus becoming the largest Chinese company to follow ‘Make in India’ strategy. • Foxconn, the world’s largest contractmanufacturing firm for consumer electronics and manufacturer for Apple products, has signed a Memorandum of Understanding (MoU) with Maharashtra state government to invest US$ 5 billion over the next three years for setting up a manufacturing unit between
Mumbai and Pune With a view to encourage consolidation in the telecom sector, the Government of India has approved the rules for spectrum trading that will allow telecom companies to buy and sell rights to unused spectrum among themselves. The Union Cabinet chaired by the Prime Minister, Mr Narendra Modi, gave its approval to the guidelines on spectrum sharing, aimed to improve spectral efficiency and quality of service, based on the recommendations of the Telecom Regulatory Authority of India (TRAI). The Central Government’s several initiatives to promote manufacturing in the country, such as ‘Make in India’ campaign appears to have
had a positive impact on mobile handsets manufacturing in the country. Companies like Samsung, Micromax and Spice had been assembling handsets in the country already. Xiaomi and Motorola, along with Lenovo have also started assembly of smartphones in India. Firms like HTC, Asus and Gionee too have shown interest in setting up a manufacturing base in the country. The Government of India plans to roll out free high-speed wi-fi in 2,500 cities and towns across the country over the next three years. The program entails an investment of up to Rs 7,000 crore (US$ 1.06 billion) and will be implemented by state-owned Bharat Sanchar Nigam Ltd (BSNL). The increase in the use of 3G networks and also the allocation of the new 1800 MHz spectrum has propelled the Telcos to launch 4G services in India and they are looking forward to continuously expand the coverage area. Even Tim Cook, CEO, Apple Inc. – the world’s most valuable company considers that the Indian market is at a stage where everyone expects rapid market growth and a high increase in the number of new subscribers and with the launch of 4G networks, the landscape of the industry is changing and it is set for a major overhaul. Vodafone CEO, Sunil Sood believes that history will repeat itself as the telecom industry is now preparing for a major shake-up with the entry of Reliance Jio in the 4G market.
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customers. • Reliance Communications Ltd, India’s fourth largest mobile services provider, has agreed to acquire Sistema Shyam TeleServices Ltd (SSTL), the local unit of Russian company Sistema JSFC, in a deal valued at Rs 4,500 crore (US$ 687 million), which includes payments
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Brazil: Crisis Prolonged MihirMorbia & RiddhiBaid NMIMS Mumbai Introduction The longest recession in a century, the largest bribery scandal in history and the most unpopular president in living memory. These are not sort of records that Brazil was hoping to make in 2016 the same year in which country is hosting the Olympics – South America’s firstever Olympic games. In 2009, Brazil’s President Luiz Inacio Lula da Silva announces the nation’s biggest oil discovery as its “passport to the future”. In the same period, Rio de Janeiro was awarded 2016 Olympics along with the famous
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2014 FIFA world cup. Brazilians were on the top and were seeing their rising international standing. And at present, the economy of Brazil has sunk into its biggest slump in a century. An ongoing investigation of corruption into the state-run oil giant Petrobras, dubbed Carwash has entrapped many political and business personalities. Lula has been charged for hiding assets from authorities. His successor, Dilma Rousseff is fighting to stay in the office after the lower chamber of Congress voted to impeach her on April 17. What went wrong with Brazil? Can Brazil shine again?
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independent central bank and a free-floating currency exchange rates. However, it was completely reversed when Government banks were ordered to give out low-interest loans to
aim of combating high inflation, he opted to adopt orthodox economic policies which
pretty much anyone, but especially to people with government connections. Huge amount of public money started pouring into the real estate market. The government implemented a policy in which any worker with a formal job would receive a government backed loan of at least 100 thousand reals (about US$30K at the time). The outcome being - overnight 100 thousand reals became the floor price of any home, in any condition in Brazil. As a result a construction boom started, as massive amounts of government credit flooded the real estate market. Prices of home sky rocketed and there was a shortage of construction workers, which pressured wages across the economy. Also commodity boom provided cash to the public who went shopping and boosted growth. But Brazil is slowing down with China slowdown and dropping commodity prices. The commodities bubble burst (down by 41% from its peak in 2011) has hit economies around the world but Brazil is hit worst because of its structural weaknesses – high dependency on raw material export, poor productivity and misdirected public spending. Loose monetary and fiscal policies of Rousseff government led to high inflation and shattered investor confidence.
were centered on balanced budgets, an © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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The Background The seeds of the crisis was sown in 2003 when Lula was elected as the president. With the
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Petrobras scandal and Political turmoil Currently, Brazilian President Dilma Rousseff is facing impeachment charges. On the surface, it is all about allegations that Rousseff cooked the government’s books and hid Brazil’s deficit problem during 2014 election campaign. But there are other bigger problems also – most importantly, Petrobras scandal. Brazil’s largest company and one of the largest corporations in the world, Petrobras, between 2004 and 2014 engaged in one of the biggest corruption schemes of about US$5.3 billion. Petrobras was handed to one of Lula’s union friends. He set forth Petrobras’ vast financial resources to work on expensive projects of questionable economic value like a US$17 billion refinery in Lula’s home state. Many technical experts in Petrobras criticized the investment, as such refinery was imprudent in a poor and remote home state. Those critics were silenced and the project was placed on a fast track. Another questionable investment by Petrobras was the construction of a massive shipyard for an acquisition of a refinery in Texas from a Belgian company for about US$900 million, which had been acquired by the company for US$42 million only 4 years prior. Hence, the stage was set for the tragedy that would follow. The artificial real estate boom gave Brazilian a false sense of economic prosperity, as they believed the value of their homes were tripling or quadrupling in just a few years. Consequently, many of them went into deep consumer debt believing the high value of their homes as backing. Whereas Petrobras, as a consequence of the many new investments, became the most indebted energy company in the world. So, Brazil today not only have a nearly insolvent Petrobras, its state-owned banks are also in hundreds of billions of dollars of bad loans. Having to rescue the banks, the government is facing one of the largest budget deficits in modern history. The constructions of subways, bridges, power plants, and roads have all been put on hold having caused thousands of construction
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workers to lose their jobs. This was devastating for Rousseff. There is no evidence of her direct involvement but she was the chairwoman from 2003 to 2010 on the Petrobras board. So this all occur under her watch and questions her judgment and competence. Presently 32 sitting members of Congress from her coalition are under investigation for bribery charges. Economic crisis making things worse To make things worse, Brazil is also going through an economic crisis. Country is facing a recession and its currency the Brazilian Real is rapidly losing its value. Brazil’s economy may be 8% smaller by the end of 2016 than it was in 2014. GDP per person will be down by 20% since its peak in 2010. Two rating agencies downgraded Brazilian debt to junk. It is hard to tell the difference between inflation rate (into double digits) and the President’s approval rating (~12%). So the country is in a serious problem. Pension expenditure is 11.6% (more than Japan). So by the end of 2014, government was running a primary deficit (deficit before interest payment) of US$13.9 billion. (See chart) Mr. Levy, finance chief, tried to fill the fiscal gap by raising tax. But tax receipts have been hit hard by the recession. Analysts at Barclays, expect that Brazil’s debt will reach to 93% of GDP by 2019. This may be seeming safer compared to 197% in Greece and 246% in Japan. But they are richer countries than Brazil. As a proportion of the wealth, Brazil’s debt is higher than that of Japan and almost double that of Greece. Facing inflationary pressure, government devalued real. The Central Bank increased its benchmark rate by three hundred basis points since October 2014 to 14.25%. But real continues to depreciate. The real has fallen 31% and stock market is down by 12.4% since 2015. Also increasing spending on serving public debt is also raising inflation. Way Forward The impeachment battle has paralyzed the Brazilian government at the time when country
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President is facing impeachment, Tamer is also being investigated over campaign kickbacks, leading opposition and former leaders are also facing serious charges. So when Brazilian public is looking at their options, they see a thoroughly corrupt and incompetent elite. With ongoing economic crisis, this can lead to the rise of previously weak or entirely new party in the country’s 2018 elections.
kickbacks. So there is a possibility that court can rule election null and throw Rousseff’s presidency. Even though she survives both, weak governing coalition will make it difficult for her to achieve anything meaningful before her term end in 2018.
Conclusion A former high-flyer among the BRICS and Latin America’s biggest economy is facing changes such as double-digit inflation, corruption scandals, political turmoil, unemployment and negative growth rates. Earlier riding the wave of commodity boom, Brazil’s economy crashlanded with weaker demand from China. It was further deteriorated by ill-advised monetary and fiscal policies by the first Rousseff administration (notably surge in public spending). It led to surge in inflation, reduced confidence from investors and rising unemployment.
In case of Rousseff’s impeachment, Vice President Tamer will take over. Business lobbies are looking for Tamer to restore business confidence and growth of the economy. Brazil’s stocks and currency are rising on the bet that Rousseff will be removed from the office and the move will allow Tamer to implement more market-friendly policies. Even though investor’s confidence on Brazil rebounded recently, they are near historic lows because of higher borrowing costs and inflation. Then Brazilian political system is in chaos.
Brazil needs to reform its policies, social security and pension system to shore up fiscal accounts. To do this that all the Brazil’s politicians come together, act together – without cutting and pulling down each other. And if they do not, things will get worse for Brazil.
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FinGyaan Article of the Month Cover Story
is set to host the Olympics and facing epidemic Zika virus (birth defects in newborns). President Rousseff suffered a crushing defeat on April 17 as corruption tainted Congress voted to impeach her. President facing impeachment charges in court will have substantially weakened power to pass new legislation for reforms. Even if she survives the corruption charges, a legal investigation is going on to find if Rousseff’s 2014 presidential campaign took Petrobras
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Russian Financial Crisis ShreyansJain IIM Shillong The Russian financial crisis of 1998 was a currency crisis, famously known as the Russian Flu. The crisis hit Russia on 17th August 1998. Currency crisis arises when doubt surfaces as to whether the country’s central bank has sufficient foreign exchange reserves to maintain a fixed exchange rate. Moreover, a currency crisis is also a result of the speculative attack on the currency in the foreign exchange market. It may lead to forced devaluation of currency and possible default on the public and private debt. Russian Financial Crisis is a perfect example of a currency crisis that led to the devaluation of Ruble and default by the Russian Government on public and private debt. Such currency crisis is a result of varied economic conditions such as the large fiscal deficit, low foreign exchange reserves (chronic balance of payment deficit), high rate of inflation etc.
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A brief history The Soviet Union had left a huge debt after its collapse. Russian Federation inherited all the foreign currency denominated assets as well as the liabilities. Since the Russian economy was declining steadily in the early 1990s, it was extremely difficult for it to serve the debt. Therefore, the Soviet debt had been restructured four times before the default of 1998. Since the fall of the Soviet Union in 1991, economic reforms in Russia were aimed at improving economic growth. Privatization and reforms for macroeconomic stabilization to lower the rate of inflation and reduce the fiscal deficit had limited success. 1996-97: Year of optimism and reforms In April 1996, Russian government started negotiations with Paris Club of creditors and London Club of creditors to reschedule the
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7% of their assets in 1994 to 17% in 1997. Moreover, the Russian government removed the restrictions on foreign participation in Ruble-denominated Treasury Bills (GKO). The move helped in increasing the foreign investment in Russia. The output was recovering slightly and the economy grew
billion. The rate of inflation in 1994 was over 300%. In 1995, to lower the inflation rate, Central Bank of Russia (CBR) was legally prohibited from lending Rubles to the Russian government for the purpose of deficit financing. It put a check on the money growth in the economy and the rate of inflation had reduced from 131% in 1995 to 22% in 1996 and 11% in 1997. The crude oil that formed a large part of export
for the first time since 1992. The economy registered the growth of 0.80% in 1997.
earnings of Russia was selling at a favourable price of $23/barrel. As a result, the current account balances were becoming favourable. The positive trade surplus helped it to maintain the exchange rate between a narrow band of 5-6 Rubles per US Dollar. The World Bank had agreed to provide increased assistance of $2 to $3 billion annually. These led analysts to predict better credit ratings for Russia. As a result, foreign debt was available at a lower rate of interest, thus the Russian banks increased foreign liabilities from
Problems faced by the Russian Economy Economic conditions and fiscal policy Despite the prospects of optimism, problems remained since the fundamentals of the Russian economy were weak. Owing to increase in foreign debt and faulty fiscal policy, interest burden was huge for the Russian economy. The fiscal deficit was 8.40% of GDP in 1996 and 7.00% of GDP in 1997. The Russian tax system was complex, characterised by numerous exemptions, narrow tax base leading to very high tax rates. It led to tax evasion and discouraged domestic and foreign investments. Thus, tax reforms were necessary that would broaden the tax base, simplify the tax system, and bring improvement in the tax administration to raise the revenue for the government as well as reduce the tax burden on complaint tax payers. The Asian Crisis – 1997 In July 1997, nations in the Pacific Rim experienced a currency crisis similar to the one that affected Russia later. The crisis started in Thailand with the collapse of Thai Baht. Overburdened with foreign debt obligations, Thai government did not have enough foreign currency to maintain a fixed currency peg to the US Dollar. Therefore, it was forced to float the Thai Baht. The crisis affected other economies in the Southeast Asia. Indonesia, Hong Kong, Laos, Malaysia, South Korea, Taiwan, Vietnam were severally affected by the Asian crisis.
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repayment of debt inherited from the former Soviet Union. Such negotiations were aimed at restoring investor’s confidence in the Russian economy. In September 1997, Russia joined Paris Club of creditors rescheduling debt payments amounting to more than $60 billion. At the same time, it also joined London Club of creditor for rescheduling debt payments amounting to $33
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In November 1997, the East Asian crisis led to a speculative attack on Ruble. In anticipation of the Ruble losing value as other Asian currencies had, the holders of short-term government bills (GKO) entered into forward contracts with the Central Bank of Russia (CBR) to hedge the exchange rate risks. Most of these liabilities were off balance sheet items amounting to $6 billion. Due to the Asian crisis, foreign investors from Korea and other Asian countries began exiting the lucrative GKO market as a result of liquidity pressures at home. Thus to maintain
the desired currency exchange rate to the US Dollar, Central Bank of Russian spent around $6 billion of its foreign exchange reserves. Declining demand and price of crude oil and nonferrous metal
Government Initiatives The uncertainties in the Russian economy, fragile fiscal policy turned investor’s attention towards Russian default risk. To restore the investor’s confidence and promote a stable investment environment the Russian government came up with a new tax code with fewer and efficient taxes in February 1998. However, the new tax code did not include the important provisions to increase the federal
revenue. The tax revenues were 26% below target. The new tax code failed to improve the weak fiscal policy and thus investor’s perception of Russia’s economic stability continued to decline. As a result, big investors continued to sell the Treasury Bills (GKO) and Russian securities. In order to stem the flight of capital outside the country, Central Bank offered high interest rates on the Treasury Bills. In May 1998, Central Bank increased the interest rate offered on GKO from 30% to 150%. Very high interest rates wreaked further havoc on the Russian economy which was already in a fragile state.
In December 1997, the demand for crude oil and nonferrous metal declined. It led to a sharp drop in the global prices. It badly affected Russian economy since crude oil and nonferrous metals made up more than 45% of Russia’s main export commodities. This narrowed the gap between the exports and imports and reduced the trade surplus. To maintain the exchange rate within the desired band, Central Bank exhausted some of its In the meantime, crude oil prices had foreign exchange reserves. plummeted to $11 per barrel, less than half of the prices prevailing a year earlier. Crude
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and long term ruble-denominated bonds (OFZ). The Russian government also announced a 90 day moratorium period on payment by commercial banks to foreign creditors. On 2nd September 1998, the Central Bank floated the ruble. It soon depreciated sharply and lost around two-third of its value within a span of three weeks. As a result of depreciation, the inflation rate increased from 28% in 1998 to 86% in 1999. The Aftermath
The Russian government formed an anti-crisis plan and requested for monetary assistance from the West. Debt amounting to $2.5 to $3 billion provided by the foreign investors to Russian companies and commercial banks were due for payment by the end of September, 1998. Furthermore, billions of dollars in Ruble futures were to mature. In July, the International Monetary Fund (IMF) endorsed extra help of $11.2 billion. But the help did not give much relief.
The Russian economy contracted, and the real gross domestic production (GDP) fell by 4.9% in 1998 as against the small growth that was anticipated. As a result of devaluation, foreign direct investments declined. The devaluation of Ruble increased the money value of exports. Russia bounced back from the crisis quickly. The major reason of the recovery was an increase in the global oil prices during 1999-2000. The
Default & Devaluation The Central Bank exhausted $7 billion of its foreign exchange reserves and lost the liquidity. Thus, the investors feared that the government would devalue the Ruble and default on the debt. As a result, they withdrew their investments leading to a collapse of the Russian stock, bond and currency markets. From January to August the stock market had dipped and lost more than 75% of its value. The Russian government on 17th August 1998 announced a set of emergency measures to control the further escalation of the crisis. It devalued the Ruble. Earlier the exchange rate was allowed to fluctuate between 5.27-7.13 rubles per US Dollar. Now the exchange rate was set between a wider band of 6.00-9.50 rubles per US Dollar. The Russian government defaulted on short-term Treasury Bills (GKO)
increase in the global oil prices led to a large trade surplus in 1999 and 2000. The economy grew by 6.40% in 1999, 10% in 2000 and 5.30% in 2001. The inflation fell from 86% in 1999 to 21.50% in 2001 due to import substitution. The robust fiscal and monetary policies helped in achieving the budget surplus in the year 2000 for the first time since the formation of Russian Federation.
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Oil being a major commodity exported by Russia such decrease was detrimental to its economic health. The exporters of crude oil and nonferrous metal advocated for the devaluation of Ruble to increase the value of exports.
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Indian Banking Industry – The hope of millions , in hope for solution HimanshuPandey Chandragupt Institute of Management , Patna The Governor for our banker’s bank Mr Raghuram Rajan believes that banks in India whether nationalised or private must nor push the problem of NPA under the carpet and actually make it worse but it should look forward to finding a way to cool it off and improve the earnings and efficiency of this industry. Our banking system for long had been in the practise of displaying flowery balance sheets and grand profits which could make the entire industry look like the a bed of roses, It was because of this bubbling profits made on the negligence of growing bad debts that the government also used it to keep the voters in its side, Scheme after scheme was rolled out to transfer benefits but without thinking that whether these loan candies could hamper the digestion system of
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banks. Rampant corruption easily ensured that the benifits would not reach the real beneficiaries but to the ‘chosen and blessed ones’. This story is not only about villages and cooperatives but equally applies to big corporate houses and industries. The definition of NPA or Non Performing Asset points out to loans for which the payment towards interest or principal have not been made for the past 90 days. It actually signals that the loan may turn into bad debt and the chances of recovery is lower. The issue lies within this classification that banks want it that their loans still have chances of recovery which would enable them to keep their balance sheets brighter and losses on a lower side. The recent guidelines by RBI has forced them to make provisions for the bad debts
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which could be written off in the future. This has immediately lead to the reduced profits and for most of them drastic losses to the tune of hundreds of crores in the balance sheet. Suddenly the Indian banking industry seems to be in middle of a crises. This is what the banks were trying to evade, to read the writings on the wall. It was very much known to then that a majority of their loans had turned into losses but it was sheer reluctance in accepting the fact. When we talk to a branch manger he clearly mentions on condition of not revealing the name that it was an old practise to hide the fact from auditors and make the NPA look like healthy loan accounts. The pressure is from higher management to reduce the NPAs as much as they can. The recent increase in the provisioning figures should have been practised earlier so that the precautionary steps could have been taken and banks like Bank of Baroda wouldn’t have to post losses of 3000 crores for 4th
quarter while the for the year 2015-16 the losses the tanked to level of 5396 crores. The term NPA was not used widely in common parlance till the RBI had not made the compulsion for provisioning of NPA and it opened the lid of real ‘profit’ of banks. An if we try to classify it into corporate and rural parts we will find that most of it would fall into these two categories. The scope was very less for other lenders such as car loans , home loans and other personal loans taken by the working class. It was due to fear of the recovery agents for the private banks and the loss of social prestige in the working class that they have mostly refrained from defaulting, to a vey large extent. No one wants to get in the legal strangles and lose the property which in most cases is important for existence like home. So what is it that has made the matters worse for other two categories, corporate and rural sector. For the rural sector some of the
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reasons are natural calamities and worth giving a consideration with a concern. Here we need to mitigate the risks for banks through crop insurance and developing a mechanism for practising scientific methods of farming which could lessen the impact of monsoon on the production levels. This would help to increase the overall productivity and debt protection for the entire rural economy. Another very important factor is the loan waiver scheme. When talked to many farmers of eastern UP it came as a surprise that many don’t pay up the loans in hope for loan waiver
of profitability for a project and its ability to pay back the debt. The real message for this scenario lies in the fact that the way banks are approaching to recover loans has to made simpler, They find themselves powerless when it comes to taking actions against the defaulters . The process should be that the person taking must be held accountable for the pay back of loans but at the same time give enough space for the entrepreneurial spirit. The process of project assessment must be made transparent and more scientific so that the real business acumen helps rather
scheme to be re-implemented as done by the UPA government. In Telangana also, Chandrababu Naidu promised the farmers for such similar scheme. These schemes create an environment where those who default against the loans turn up as the clever ones while the timely players end up having no benefit. So it gives out the message that to wait for waivers is profitable but in this process banks are the ones who suffer. After the global recession of 2007-08 there was a sudden positivity in the market for banks which to trend of giving loans to corporate houses even if the chances of making profit in that project seem to be low. The cases of defaulters which have hit the media recently are also on the same lines. Too much optimism sometimes is too risky which we are learning the tough way. Now in future there has to be mechanism to fill the loop holes in the process of assessment
than the connections and who you know. The bottom line remains that even if we sum up all the NPA for the banks it would still be less than 10% of our economy. We actually need to develop a system where the wilful defaulters can be taken to task. The judicial lethargy is much to blame for the growing tendency of defaulting. It is not about putting someone into jail, it is actually giving the money to someone who is honest enough to return back and say thanks to bank for helping him grow.
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Pradeep Dhamdhere Fund Manager - Equity & Senior Analyst Bajaj Allianz Life Insurance Co.
What are the key parameters that you consider while deciding on the weights and selection of assets for your portfolio? We have mandate to invest in equity. So assetwise you do not have too many options in terms of asset classes. Be it gold or any other asset class, we have our own risk-taking ability. On cash front wise a thumb rule is it would be difficult to go beyond a cash-level of a portfolio of, let say, 10%. Ultimately investor has given you money to invest in equity and not to sit on cash. So that is the mandate. Among different asset classes- wise, all the constituents go into place. Among them, in building the portfolio then there are various constituents, say, some sectors’ allocation. Cyclical sector, such as banking or metal, then some counter-cyclical sector such as FMCG or IT or Pharma for that matter, depending upon the valuation and depending upon the result-trend or the way the economy is spanning out. So all these constituents go into building a portfolio. What are the regulations that one has to comply with while managing a fund vis-a-vis managing your own portfolio? Of course, managing a professional portfolio becomes a different ball game. Your mandate is your given time mainly. Personally, actually there is no limit of time we can wait it out as in if something goes wrong or a call being span out for a different time period. But professionally there is an issue of time. Then there are a thumb rule of fixing some mandate in terms of what could be the beta of the portfolio, how much should be in the small cap, how much should be in the large cap, even sector allocation wise, individual companies should not come
more than once, individual sectors should not go beyond 15%. Banking and finance are exception and should not go beyond 75% of your portfolio. So all these are internal benchmark or thumb rule that a professional fund manager have to adhere to, which is not the case in terms of the personal portfolio. In personal portfolio, it depends upon your age, risk appetite. You can build your portfolio may be by having more interest in long-term mid-cap to get better returns. But it requires a longer time horizon to plan it out. So there are thumb rules, in terms of restrictions, a professional fund manager has to adhere to. What in your view are the key events that will create volatility in the markets and how do you go about safeguarding your portfolio from the same? In general, volatility is a part and parcel of life and of fund management. So because the basic contribution goes into what would be the risk profile of your portfolio, which is indicated by the beta of the portfolio which sets the benchmark against which the performance will be mapped. Your beta of the portfolio should not be too high. Risky, cyclical stocks may generate higher returns but they have to be restricted i.e. not beyond a point. Because in an adverse situation they can give you a bad performance. So the portfolio combination should be created in such a way that the overall beta of the portfolio is not too high and at the same time it should bit the benchmark of the year to generate alpha without increasing too much beta of a portfolio. That will keep things under your control and would help you remain prepare for an adverse situation.
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There is no as such single model which is going to be applicable in every kind of situation. Ultimately it is your understanding of the overall economy, global economy and then Indian economy in that situation and then the sector and the major companies in that sector. Whether they suffer because of any adverse situation, ultimately boils down to the individual’s understanding of the all those parameters, rather than one single model which one can use to understand the risky part of fund management.
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What would be your advice to individuals who want to either build a career as a fund manager or manage their own portfolio? It looks really attractive, this kind of profession or even professional fund management. One thing to understand is that it looks like T-20 match but actually it is test match in very simply word. What I mean to say is that it requires a lot of retake, a lot of conviction that could only be generated after a lot of effort and then you have to wait patiently to plan out the particular conviction. One needs to do in long horizon to get it right.
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FinFunda of the Month
Covered Calls Aditya K. Jain IIM Shillong Sir, what is the best time and situation to sell a covered call? If you sell a covered call, you get money today in exchange for some of your stock’s future upside.
Sir, what is a covered call? One of the rights that you have as a stock holder is the right to sell your stock at any time for the market price. Covered call writing is simply the selling of this right to someone else in exchange for cash paid today. This means that you give the buyer of the option the right to buy your shares before the option expires, at the strike price. Sir, what is a strike price? Suppose, you agreed to sell some 100 shares at an agreed-upon price, known as the strike price. When you look up the options quotes, you’ll see an assortment of strike prices. The strike price you choose is one determinant of how much premium you receive for selling the option. With covered calls, for a given stock, the higher the strike price is over the stock price, the less valuable the option. Therefore, an option with a INR 32 strike price is more valuable than an option with a INR 35 strike price. Why? Because it is more likely for ABC to reach INR 32 than it is for it to reach INR 35, and therefore more likely for the call buyer to make money. This is a reson why the premiums are higher.
For instance, if you pay INR 50 per share for your stock and expect that it will rise to INR 60 within one year. Also, you are willing to sell at INR 55 within six months, knowing you were giving up further upside, but making a nice short-term profit. In this scenario, selling a covered call on your stock position might be the right position for you. After looking at the stock’s option chain, you find an INR 55, 6 months call option on sale for INR 4 per share. You could sell the INR 55 call option against your shares, which you purchased at INR 50 and hoped to sell at INR 60 within a year. If you did this, you would be obligated to sell the shares at INR 55 within the next six months if the price rose to that amount. You would still get to keep your 4 rupees in premium apart from INR 55 from the sale of your shares, for the grand total of INR 59 (an 18% return) over 6 months.
How does one make profits by selling covered call? For the right to buy shares at a predetermined price in the future, the buyer pays the seller of the call option a premium. The premium is a cash fee paid to the seller by the buyer on the day the option is sold. It is the seller’s money to keep, regardless of whether the option is exercised. © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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