84 i chronicle


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Cover Story Corporate no longer interested in Bank Licence?
Outlook Rubber
Stats Q2 economic growth at 4.8% signals recovery
Emerging Country Vietnam
In Focus Retail inflation-linked bonds on the anvil

Published in: Economy & Finance, Business
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84 i chronicle

  1. 1. Investeurs Chronicle December 2013, Volume: 84
  2. 2. Cover Story Corporate no longer interested in Bank Licence? The Tata group withdrew its application for a banking licence, months before the Reserve Bank of India (RBI) is expected to open up the sector to a new set of new private banks in Asia’s third largest economy. Tata Sons Ltd, the holding company of the Tata group, said in a statement that its “current financial services operating model best supports the current needs of the Tata group’s domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the group’s diverse stakeholder base”. RBI said in a press release that has accepted the withdrawal. That leaves 25 applicants, including the Aditya Birla Group, the Bajaj Group and Anil Ambani’s Reliance Group, in the race for a banking licence. Tata Sons added in its statement that said it had written to RBI on withdrawing the application after a detailed evaluation of the “guidelines for licensing of new banks in the private sector” and analysis of clarifications. Tata Sons is not the first business house to have a change of heart. In June, Mahindra and Mahindra Financial Services Ltd decided not to apply for a banking licence, saying RBI’s norms were not conducive for large and successful non-banking financial companies (NBFCs) to turn into banks. Chennai-based Shriram Capital Ltd has also decided to withdraw its applications, Businessworld reported on 30 August. However, there has been no official confirmation on this either from the company or RBI. In September, Value Industries Ltd, a unit of Videocon Industries Ltd, withdrew its application for a banking licence, but the number of applicants remained same as Chandigarh-based KC Land and Finance Ltd, whose name was inadvertently not included in the list of applicants released on 1 July, found place in the list. Other companies that are in the race for a new banking licence include L&T Finance Holdings Ltd, Religare Enterprises Ltd, IDFC Ltd, Indiabulls Housing Finance Ltd, India Infoline Ltd, Magma Fincorp Ltd, Edelweiss Financial Services Ltd, India Post—the Indian government’s postal department—and micro lenders Bandhan Financial Services Pvt. Ltd and Janalakshmi Financial Services Pvt. Ltd. A banking licence will allow companies to raise low-cost current and savings deposits. In addition, it will allow them to cross-sell many other products like mutual funds and insurance. But industry observers say the RBI's stiff guidelines for bank licences deterred some corporate houses. The guidelines require banks to meet targets for lending to priority sectors such as agriculture, besides adhering to regulatory requirements like keeping part of the deposits with the central bank. Higher capital requirement in the form of statutory liquidity ratio (SLR) and cash reserve ratio (CRR) applicable to the new banks from inception is a deterrent for NBFCs, with existing loan books to seek a banking licence, analysts said, even as the mobilization of cheaper deposits will take years.
  3. 3. Cover Story CRR is the portion of deposits banks need to park with the central bank on which they do not earn any interest, and SLR refers to a bank’s compulsory bond holding. Currently, banks need to maintain a CRR of 4% of deposits, while SLR is 23%. New banks will also have to comply with the so-called priority sector lending under which 40% of the money loaned by banks has to go to certain segments such as agriculture, small businesses, retail traders, professionals and self-employed individuals. This is difficult to achieve for an NBFC with a large balance sheet. According to the licensing norms, the new bank will have to be listed within three years and the promoters’ shareholding must come down to 40%. Within 10 years, this holding must be further pared to 20%, and by the 12th year 15%. This is also a deterrent, many analysts said, as the promoters will not be able to reap the benefit of the value they create. This apart, RBI’s inclination to offer a banking licence on tap may prompt some of the companies opt out of the banking race for now as they can always apply later, experts said. Until this round, new bank licensing has been once-in-a-decade affair. In the first round, RBI issued licenses to 10 private sector banks in 1994, shortly after the nation embraced economic liberalization under the P.V. Narasimha Rao-led Congress government. In the second round, licences were issued to two banks—Yes Bank Ltd and Kotak Mahindra Bank Ltd—in 2004. “Between 2010 and now, a lot has changed in terms of economic landscape and in terms of expectation of regulatory changes in the baking sector,” said Shinjini Kumar, director (banking regulations) at audit firm PricewaterhouseCoopers Pvt. Ltd. “The stress around timing may also reduce because there is also a talk of on-tap licensing, In this backdrop, different players may choose different strategy.” Tata Sons said it is hopeful that RBI will issue banking licences on tap. “We hope that RBI and the ministry of finance will periodically issue banking licences. We shall continue to monitor developments in this space with great interest and look forward to participating in the banking sector at an appropriate time,” Tata Sons spokesman Debasis Ray said. The apex bank started the process of issuing new bank licences after former finance minister Pranab Mukherjee, in his February 2010 budget speech, announced that the country’s central bank would open up the sector and issue fresh banking licences with an objective to spread banking services in a nation where roughly 50% of adult population does not have access to banking services. RBI issued the guidelines on new banking licence on 22 February and set a 1 July deadline for applications. A panel, headed by former RBI governor BimalJalan, will scrutinize the applications after the central bank screens them. The February guidelines required new banks to operate under a non-operative financial holding company (NOFHC) and bring in a minimum capital of Rs.500 crore.
  4. 4. Cover Story Ray of Tata Sons said that after filing the application, the company carried out a detailed evaluation of the RBI norms and found that its current financial services operating model suited it best. “For example, about 64% of the group’s revenue is from international operations. The operating companies with overseas operations at times need to provide financing solutions to their customers. Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank but extremely important for an operating company. An equitable framework needs to be agreed on how some of these situations will be addressed,” he said. “Overseas financing is further complicated as the law in some countries requires the operating company to partner with a local bank to set up a financing company. Compliance of such requirements would not be possible under the existing guidelines wherein all financial services entities in the group necessarily need to be owned by the NOFHC,” he added. Following the nationalization of 14 larger banks in 1969 and six in 1980, RBI has so far given licences of a cooperative bank into a commercial bank. to only 12 banks in two phases, including conversion In the past, the apex bank’s stated objective behind giving licences to new banks was to introduce competition in the banking sector, which was largely dominated by government-owned banks. This time, the prime focus is to to the un-banked population in the country. Source: - Live Mint promote so-called financial inclusion, or increasing the reach of financial services
  5. 5. Outlook-Rubber As downward trend in the domestic rubber prices continues with lack of sufficient demand and more supply in the market, the growers have started feeling the pinch. They fear that the prices will slide southward in the coming months, falling below cost of production, with the yield going up in the winter months of December and January and imports touching a new high. Local prices had touched Rs 168 a kg in May this year. Thereafter, the domestic market was ruling higher than the international markets with the gap widening up to Rs17 a kg. This triggered an increase in the import of natural rubber. However, local prices have been dropping over the past couple of months due to an increase in supply and a drop in local demand. On the outlook, current season happens to be the best production season of the year which will further boost supply in local markets such as Kottayam and Kochi. With supply rising on one hand and demand still being weak, we expect natural rubber price to drop to Rs 130 a kg by the end of December. Gloss Suspense Account In accounting, the section of a company's books where unclassified debits and credits are recorded. Transactions in the suspense account will still appear in the general ledger, giving the company an accurate indication of how much money it has. Stats Q2 economic growth at 4.8% signals recovery
  6. 6. Emerging Country- Vietnam Vietnam officially the Socialist Republic of Vietnam is the easternmost country on the Indochina Peninsula in Southeast Asia. The country is bordered by China to the north, Laos to the northwest, and Cambodia to the southwest, and the South China Sea to the east. The economy of Vietnam is a developing planned economy and market economy. In 2013, the nominal GDP reached $170.020 billion with nominal GDP per capita of $1,896 billion. The services sector expanded by 5.9 percent in 2012 and contributed 2.2 percentage points to overall growth. However, growth in the agriculture, forestry and fishery sector decelerated to 2.7 percent in 2012 from 4 percent in 2011 due to unfavorable weather conditions, diseases in livestock and falling prices of most agricultural products. Manufacturing growth also slowed down, reflecting weakening domestic demand and rising inventories. Vietnam’s economy is projected to grow at a moderate rate of 5.3 percent in 2013 and 5.4 percent in 2014. Vietnam’s inflation is expected to increase from 6.8 percent in 2012 to 8.8 percent in 2013. According to statistics from the General Department of Customs, the export and import turnover of Vietnam in October 2013 reached 25,1 billion USD, particularly export reached 12,6 billion USD, compared with the same period last year; import reached 12,5 billion USD. Foreign direct investment in Vietnam has exceeded the country's full-year target of US$13-14 billion. On the trade front, the Vietnam and India has set a bilateral trade target of US$7 billion by 2015.Total trade volume touched US$ 3.94 billion in 2012 and US$ 2.45 billion during the first five month of 2013, registering an increase of 47.64 percent vis-a-vis corresponding period of last year. Export by India reached US$ 1224.89 million, up 31.48 percent while export by Vietnam was US$ 1021.07 million, up 73.16 percent. As of June 2013, India has 68 valid projects with an estimated total investment capital of US$ 936.23 million in Vietnam. Indian companies are investing in oil and gas exploration, mineral exploration and processing, sugar manufacturing, agro-chemicals, IT, and agricultural processing. Vietnam has three investment projects in India with total investment of US$ 23.6 million. Vital Economic Statistics of Vietnam Economy Particulars Details GDP (nominal) $170.020 billion (2013 estimates) GDP growth 5.3% (2013) rate Currency Dong Credit Rating B2 Moody’s BB-S&P B+ Fitch Fiscal Deficit $10.62 billion or 5.3% of GDP (2013 estimated) Current 5.9% of GDP (2012 account estimated) surplus
  7. 7. Forex In Focus Retail inflation-linked bonds on the anvil Data from25th November 2013 to 6th December 2013 6259.9 0 20,996 .53 Sensex will be available through banks, will have a face value of Rs.5,000. Investment in the bonds has been capped at Rs.5 lakh per applicant per year. Interest on these securities principal on a half-yearly basis and paid at the time of maturity. So, if a bond is being valued in December, the reference rate will be CPI of September. The bonds will not be available for trading in the secondary market, but are meant to be long-term holdings, as pure savings instruments. The bonds can also be used as collateral for loans from Nifty banks.Tax will be levied on the interest and principal of these bonds. The bonds are being launched at a time when stubbornly high inflation is eroding returns on household savings in the country. Retail inflation, based on CPI, accelerated to 10.09% 30061 44364 44085 29000 Gold (10 gm) households a shield against negative returns on their savings.The 10-year bonds, which would be based on the CPI with a three-month lag, plus 1.5%, compounded in the 6115.3 5 20,605 .08 RBI plans to launch retail inflation-linked bonds in the second half of December, offering in October from 9.84% in September, mainly on account of higher food prices. However, when the inflation rate is low, savers don’t stand to earn much through these bonds as compared to other debt instruments. These will be the first CPI-linked bonds sold by RBI, which has already launched WPI-linked bonds. RBI in June sold WPI-linked bonds offering a yield of 1.44% above WPI. The bonds were first proposed in the last budget announcement, in which the government said it will be raising Rs.10,000-15,000 crore Silver (1 Kg) through the sale of such securities. 111.00 111.61 Governments in emerging markets are turning to inflation-linked bonds, some for the first time, as they look to tap more avenues to raise cash and signal they're serious about keeping a cap on price increases. The other reason behind issuance of these bonds is that 62.58 they are a natural extension of developing local debt markets. Developed economies too 61.67 Crude Oil ($/barrel) Dollar/INR have been issuing inflation-protection bonds this year, with Japan issuing its first so- called linker in five years in October and New Zealand selling again this year after returning to the market in 2012 for the first time in 13 years.
  8. 8. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that Domestic Trade Finance: Negotiation of Inland Letter of Credit Working Capital Management International Trade Finance: Capital Investment: Buyers’ Credit and Suppliers’ Credit Project Funding and Term Loan Factoring Private Equity contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent Team Chronicle Rating Assistance relationship with banks/ financial institutions. Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia Harpreet Kaur nidhi@investeurs.com harpreet@investeurs.com Investeurs Consulting Pvt. Limited Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com