In fin-nitie march 2012

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In fin-nitie march 2012

  1. 1. Message from the Convenor Heartiest congratulations to all of you. With the release of the 7th edition of the magazine we are getting bigger and better and it gives me immense pleasure and satisfaction to be the convenor of $treet. In-Fin-NITIE has given me an opportunity to work with students and advance forth with the common goal of learning and practicing finance. As always, In-Fin-NITIE brings you something new this time around too. After a series of issues with identified themes and articles related to those themes, the current issue gave students a chance to just write about finance. Themes and matching articles aside, this issue has a plethora of written words by students about whatever caught their eye in the field of finance. I applaud the effort of team $treet for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that this issue will entertain you and keep you engrossed about the recent happenings in the world of finance. We look forward to your comments and wish to bring out more interesting issues in the future. Dr. M Venkateswarlu Asst. Professor of Finance NITIE, Mumbai From the EditorPatron Against the milieu of rapid urbanization and a changing socio-economic scenario, the demand for housing has grown explosively leading to tremen-Dr. Amitabh De dous growth in the Housing Finance Industry that has clocked a CAGR of about 40% in the last decade. In this edition of In-Fin-NITIE, our authorsConvenor present an Industry Analysis Map of the Indian Housing Finance Market. Any news about Europe has been making heads turn recently. This editionProf. M. Venkateswarlu analyses the dilemma that Poland is currently faced with – whether or notEditorial Board to join the Eurozone. In this edition we also present a look into the Secu- ritization Market in India.Ameeth Devadas In-Fin-NITIE has always strived to distinguish itself and as part of our ef-Anil Kumar Singh forts to take our publication to the next level, the House of In-Fin-NITIEKarthik Mahadevan presents articles from eminent personalities of the Financial Industry. ThisKeerthi P edition features Quant for a Career: Realm of Opportunities by PrasenjeetNimit Varshney Bhattacharya, AVP, ING Investment Management India and Market Per-Saurabh Bansal spective by Ravi Nathani, NSE Today.Siddharth Jairath We would like to express our sincere gratitude to everyone who has helped us in putting this issue together. The In-Fin-NITIE Team values your com- ments and suggestions. Bouquets and brickbats are welcome at street.nitie@ gmail.com. Editors In-Fin-NITIE © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 3
  2. 2. Contentswww.street.nitie.org March, 2012 Housing Finance 8 Market In India 5 Should Poland Adopt Euro.? 13 Securitization Market In India 17 Marginal Standing Facility By RBI20 INDIAN WEDDING 25 QUANTITATIVE FINANCE 30 ALUM TALK PLANNING INDUSTRY Scope and Career Insights By Alum The Increasing disposable Opportunities in Quants. Income has further boosted the wedding Planning Industry 26 MARKET ACTION 31 FIN-QUIZZITIVE28 TECHNICAL ANALYSIS Nifty, Commodities Quiz on Finance And Technical Analysis of And Currency updates. Banking Equity Markets. In-Fin-NITIE Vol 3 4 © $treet-Finance Club, NITIE Mumbai
  3. 3. Should Poland Adopt The Euro.? By Harishma Mittal Vikas Kumar IMI, New DelhiEconomies are like the game of snakesand ladders in which a good economicdecision can take you up through theladder of success while poor ones pullyou down. Poland is at crossroadswhere their decision to adopt eurocan boost the economy take them upthe ladder in the game, however if thedecision turns out to be a bane for thecountry, it would result in the economybecoming a victim of the big, venom-ous snake called recession. The themeof this article revolves around the samesnakes and ladders game; I renamed itas “Euro game”.Since 2004, when they became a partof the Euro Union, the debate on thisquestion has been going on. Therehave been two groups, first the modern SUMMARYand forward looking one which favours the adoption ofeuro as they believe it would result in the growth and Poland has been facing the dilemma of joining the eurodevelopment of the economy and the standard of living, zone or not from the time they became member of theand the second the orthodox and reserved ones believe European Union. Some backward looking nationaliststhat it would take away their rights and control on their say that it exposes the country to a very large risk andeconomy and would turn out to be a disaster. These losing the control over its currency, while the forwardgroups have been mainly formed on political grounds. looking ones say it’s going to aid the country’s growth toThe two parties of their political system, Kaczyński a very large extent.brothers’ the Law and Justice (PIS) party, which was the Every coin has two sides to it, so does this decision.previously ruling party was sceptical about rushing into Agreed the benefits are significant and alluring but atjoining and it still believes in taking it slow and weigh- the same time the danger that it poses to the country areing the pros and cons, and wanted to go through a ref- manifold. Introduction of the euro increases the tradeerendum on the situation. Whereas, the party currently in the economy and also remove the exchange rate riskruling the nation, Prime Minister Donald Tusk’s Civic which is posed on many households and the corporatePlatform (PO), has been intent on adopting it sooner. A who have taken huge loans in euro. Flip side to this issimilar conflict is seen between the people. The support the crisis the country can face by losing the control onfor the euro has been higher in the larger cities while its monetary policy which can help it to fight any reces-lower in the relatively rural areas. sion considering the fact it has substantial interest rates to control the currency and inflation. Plus in euro zoneThe Governor of the National Bank is of the opinion be- they develop a common a monetary policy which againlieves that haste could be harmful to the country’s econ- does not add to their advantage.omy but still suggests that Poland should join in. And so With the above long term effects there are short effectsis the belief of Saryusz-Wolski, who in line with German on the interest rates due to the expectations of joiningChancellor Angela Merkel’s aims affirmed the necessity the euro zone and also instant changes in the prices onto change the EU treaty regarding the size of loans that joining them.Adopting the euro is a big decision thatmember states can take among themselves, so that “no Poland has to take but they need to judge the conse-one goes into debt at the expense of somebody else.” quences and also assess the unexpected. They need toPoland will have to postpone this convergence which they figure out whether the negatives are outweighed by thewere hoping to happen in 2012, owing to the recession positives. © $treet-Finance Club, NITIE Mumbai © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 5 In-Fin-NITIE Vol 3
  4. 4. which has hit the economy resulting in failure in meet- of monetary integration with the rest of Europe. Dif- ing the conditions set by the European Monetary Un- ferent costs related to zloty / euro exchange rate con-ADOPTING EURO ion. To join the game of Euro, Poland will have to qual- nections would be eliminated along with the exchange ify first. The first of two main barriers (conditions)are rate risk in the trade with countries of Euro zone. The the requirements of the Maastricht Treaty and secondly exchange rate risk elimination is expected to not only they have to take part in the European exchange rate have a positive and direct effect on business, but is also mechanism (ERM II) under the European Monetary been anticipated to remove this type of risk for Poles System (EMS) for a period of two consecutive years, who normally borrow in foreign currencies to fund large which means that exchange rate of Poland cannot fluc- ticket items such as infrastructure needs like houses and tuate more than 15% against the euro during that time. apartments. Since the Euro zone crisis began, the Polish After swimming through these oceans, other small ca- zloty experienced a decline while losing approximately nals have the criteria to include an inflation rate of no 1/3rdof its value in relation to Europe’s more stable cur- more than 1.5 % points above that of the 3 members of rencies and to the dollar. This had a particularly adverse the European Union showing lowest inflation. The defi- affect on the many Polls who took out mortgage loans in cit to GDP ratio (i.e. Ratio of the annual government currencies like Swiss francs to buy homes and who, as a deficit to gross domestic product) must not exceed 3 result ended up paying many thousands zloty more for percent (or at least be at a level close to 3%) at the end of their new purchases in real terms. the fiscal year before joining, which currently is 7.9% for the country. Government debt ratio to GDP should be The main drawback of the adoption of euro in Poland less than 60% at the end of the fiscal year before joining, is that it would be required to give up its control on its or should be approaching this figure at a ‘satisfactory monetary policy to the ECB (European Central Bank) rate’; this condition is being satisfied by achieving a 51% which monitors and controls the situation of all of the ratio. Finally, nominal long-term interest rates should countries in the euro zone. At a point of time the eco- be less than two percentage points above the 3 members nomic cycles for different countries can be different, of the European Union showing lowest inflation. thus requiring different policy which is not possible with the single monetary policy issued by ECB for all. For ex- Membership criteria ample, Poland is still expected to growth in the near fu- Government Finances ture as predicted by many economists. Therefore, they annual would do better with a stringent monetary policy with Gross higher interest rates if they want to have lower levels of government Long- Inflation rate government inflation. Whereas, countries with high unemployment deficit to GDP ERM II term interest rates, it is advised to have loose monetary policy with debt to GDP member-ship rate lower interest rates. It is difficult to strike a balance be- Min. Values tween the two, and the monetary policy would often not required to be the best for the economy of the country. become a member of the Euro Zone max 1.5% max 3% max 60% min 2 years max 6.0% Poland 4.8% 7.9% 51% Not a member 4.5% These targets are very difficult to achieve especially in the prevailing economy conditions, few countries al- ready members of the Euro zone are finding it difficult to achieve them. European Central Bank even though asked by IMF to relax its regulations, does not want to do so as after the euro crisis all the member countries have become very particular about the countries being added as they do not want to pay the loans of any other non-performing country. Every financial decision has two sides to it, the country has to weigh both the sides and decide whether From the above graph we can clearly see that there is a the prospect’s advantages surpass its disadvantages or significant in the GDP growth rate of Poland and that of not. Adopting euro comes with its fair share of pros and the euro zone. Thus, the policies in the euro zone would cons and both having long-term and short-term effects. be chartered by taking into consideration all the coun- tries and would not prove beneficial for Poland which is First, let’s have a look at the bigger picture, the long growing at a higher rate than the members of the zone. term positives and negatives. Proponents for the adop- tion of the euro would be the potential benefits that a Once you become a part of the zone you can’t appreciate common currency will bring, especially the increase or depreciate your currency because it’s a common cur- forecasted in country’s trade and growth resultant rency which is not under your control. In-Fin-NITIE Vol 3 6 © $treet-Finance Club, NITIE Mumbai
  5. 5. This is one of the major reasons for the devastation of First, creating a flexible economy is the key. Wages, prices and the budget must be able to adjust quickly if ADOPTING EUROmany countries in the zone today such as Greece. Onceyou’re a part of it, leaving the zone is not an option for economic circumstances change. Otherwise, with ex-the countries like Poland as that can result in currency change rate devaluations and interest rate cuts no long-depreciation to the extent that households and cor- er possible, there can be painful swings in output andporate would go bankrupt and the banks insolvent, in employment. Poland still has some work to do in theseshort a total breakdown of the economy of the nation. structural areas. The budget leaves little room to make discretionary changes; product market flexibility andAnother front where joining the euro zone would be the business environment are weak compared to otheran area of concern would be increased prices of small euro candidates; and the labour market requires partic-ticket items purchased on a mass scale named as the ular attention, as confirmed by many studies. Secondly,“cappuccino effect”. fiscal policy must avoid a pattern of high spending inEven after the disasters faced by some countries in the good times and low spending at bad times, especially ineuro zone, most experts are in favour of joining the euro the run-up to euro adoption. The windfall of lower debtzone, with the resultant growth of GDP (especially in servicing cost (as borrowing spreads fall) and revenuethe long term) would far outweigh the criticisms noted buoyancy (as the tax base temporarily surges) is put toabove. better use by reducing public debt rather than increas- ing spending—even if this entails somewhat less growthThe introduction would also have some short term ef- in the short term. Portugal did the opposite, running afects which also should be taken into account before highly procyclical policy around the time it joined thereaching any conclusion. The short term effects take euro zone. Its boom soon turned into a bust and theinto account inflation owing to the conversion rate. The country has been recording some of the lowest growthprices in Poland are already rising due to convergence rates in the EU.process and also the standard of living. In addition tothis, the countries which had joined the euro zone the Portugal’s experience suggests that the “structural” fis-past had suffered from disproportionate price hikes cal deficit—the deficit corrected for the economic cy-which were not because of actual inflation, but due to cle—should be well below the 3 percent Maastricht lim-the disproportionate rise in household goods of small it, especially for countries like Poland where the levelspending which led people to extrapolate other prices of public debt is still high. This would allow the govern-as well. But healthy competition and wage discipline ment to deal with economic shocks—such as the loss ofbrings everything under control. competitiveness experienced by Italy’s and Portugal’s textile industry—without ending up in the EU’s exces-There is a lot of excitement amongst the public regard- sive deficit procedure and experiencing a rise in publicing the euro. The decisions for its adoption are yet to debt.be taken and it has already started affecting the interestrates and currency at which households take loans, and Becoming a part of the world’s second largest economycorporate and the government issue bonds. The lower- does bring large economic payoffs, but this does noting of the interest rates to meet the conditions set has mean that they reduce their fiscal deficit to 3% and join-already resulted in an increase in investments. But this ing the exchange rate mechanism, the two Maastrichtcomes with its own bit of risks. criteria that are not met currently. Giving up monetary policy requires sharpening the remaining tools at theThis lowering of interest would have taken the country policy maker’s disposal--a fiscal policy characterized byto the euro zone desired interest levels had the econom- small deficits, low debt and flexible spending, as well asic boom continued. But the reverse happened result- creating a nimble, business-friendly environment. Nowing in higher interest rates and a drying-up of foreign it’s for Poland to decide whether they see Euro as a lad-financing. This anticipation behaviour of euro adop- der which would take them further or a snake waiting totion is leading to one more problem, people have start- bite them. And only time can unfold the secrets of theed taking loans other currencies than their own. This game, I call it “Euro game”.would lead to domestic monetary policy gradually los-ing its ability to influence the economy. Also, borrowingin foreign currency exposes them to the risk of exchange References:rate depreciation. Euro adoption would eliminate suchcurrency mismatches and thus relieve both borrowers 1) http://www.tradingeconomics.com/polandand investors from the risk that the exchange rate will 2) http://www.tradingeconomics.com/euro-areamove against them. It is thus a win-win situation for 3) http://discoverpl.polacy.co.uk/art,will_poland_both sides. adopt_the_euro_by_2012,3882.html 4) http://www.imf.org/External/CEE/2007/062207.Before entering the euro zone, they should protect pdfthemselves by taking measures against the misdoings ofthe members of the euro zone such as Greece, Portugal,etc who suffered during the crisis. © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 7
  6. 6. Housing Finance Market In India Stuti Dalmia NMIMS-Mumbai By Ankit Goel IIM -BangaloreHousing Finance - What is it? on the basis of security but on the basis of careful analysisThe term housing finance has not been defined by any fi- of future expected cash flows and character.nancial authority or Act. Therefore, when we try to under- Housing Finance is more general as described above and isstand what is meant by housing finance, it is very much typically granted to credit-worthy individuals with stableessential to look at the context in which we are talking i.e. income.developed or developing countries. Micro-Mortgage lies in middle of the above two. It is a form of low-monthly repayment mortgage lending servedTraditional Meaning by specific institutions formed for this purpose or via tradi-• Provision of funds to purchase homes tional mortgage-lenders.• Providing investors a parking avenue for their invest- ments Need for Housing FinanceModern Meaning Most countries today have positive growth in population.• Mechanism allowing funds for production and con- This naturally gives rise to an increased demand for hous- sumption of housing ing. To ensure stability in prices of housing (and conse-• Includes money needed to pay for usage vis. rents, quently, all other goods), a city needs to increase its supply mortgage loans, repayments, developer finance, rental of Housing which can happen in 2 ways: finance or microfinance • Supply of new housing infrastructure • Expansion in existing housing supplyTypes of Housing Finance Also, particularly important in this context is the need toFor the purpose of this paper, I have considered all three repair or replace of housing which grows too old or too de-types of housing finance under my purview. However, the teriorated over time.distinction between the 3 needs to be made clear. Housing problems, more particularly, in developing andHousing Microfinance refers to the provision of loans to overpopulated countries are very severe.households which typically do not have a very credible Most urban households cannot afford a decent living spacetrack record or adequate collaterals. Loans are granted not in a relatively well-connected location. Consequently the results are:In-Fin-NITIE Vol 3 8 © $treet-Finance Club, NITIE Mumbai
  7. 7. Table 1: Consumer Finance Products • Squeezing of households in highly dense areas leading HOUSING FINANCE to security and hygiene issues • Living far away from main cities (suburbs) leading to wastage of economic resources to travel to cities for jobs • Renting space in slums or squatter settlements This is where the economic role of housing finance comes in. Provision of well-structured finance schemes for the masses to enable affordability and deep penetration is thus the major objective of Housing finance. Allied Objectives • Backward linked products: Housing finance market is a very important contributor to the production activity in any country because its demand directly influences the demand for its backward-linked products i.e. raw materials (derived demand) like land building materi- als, tools and labor. • Forward -linked products: are the financial markets. Often through securitization, mortgage debts are of- floaded in the secondary market in the form of securi- ties, thereby increasing the efficiency of domestic and international financial markets. As proved in the reces- sion of 2008, housing markets are also a great leading macroeconomic indicator of the financial markets. • Developmental Impact the developmental impact in-Table 2: Types of Housing Finance cludes provision of social stability and promotion of economic development which is directly affected by level of maturity in housing finance markets Housing Finance Market Assessment for develop- ing countries – especially India: From the micro point of view, fluctuations in the housing finance market affects the entire household since housing, in most cases, is by value, the largest investment most peo- ple make in their lifetime. From the macro viewpoint too, housing has a major impact on the economy as was proved in the recent world econom- ic crisis. Also, it is a significant contributor to GDP in the form of employment generation (direct and indirect) and industrialization. Strengths: Growing Economy A lot has been written about India’s growing strength as an emerging nation. I would however, still like to highlight the following points which have been particularly conducive to the growth of housing finance in India: • GDP growth rate averaging over 8% from 2003-2010 • Rapid Urbanization, Rising middle Class • Increasing political stability with re-election of last government • Forex Reserves over $250bn • 2nd Largest employment generated in housing sector (after agriculture) • Fosters development of ancillary industries via strongFigure 1: Sources of housing finance needs vertical linkages (forward & backward) • US $110 bn market size Although Housing finance in India, particularly, is in a very nascent stage to be able to comment on specific strengths driving its growth, I have enumerated above some of the broad factors responsible for the upcoming interest. © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 9 In-Fin-NITIE Vol 3
  8. 8. Opportunity: Demand & Supply of Housing has been decreasing over time. The recent figures in thisHOUSING FINANCE respect are worse. With the growing GDP of most nations and particularly India, the demand-supply gap of housing has reached all- Estimated Housing Shortage in India (2007) time highs. In most markets, the only available financing resources to the poor and middle-income groups are: Rural 14.1 mn units a) Minor Savings Urban 10.6 mn units b) Sale of assets c) Borrowing from relatives or employers Moreover the growth rate in urban areas is clearly above d) Inheritances that in rural areas signifying the urbanization phase India e) Loans and savings from money lenders is currently undergoing with more and more people mi- f) Microfinance Loans grating from the rural to urban areas. Thus, there is a huge demand-supply disconnect here. Analyst Research has shown that around 10 to 20 percent of all microfinance loans taken for business, education, ag- riculture and emergencies are actually being diverted for housing purposes. In some cases the figure is as high as 80 percent. This is infact a major evidence in support of the growing demand for housing finance. Currently, the only options available to the poor for financ- ing are microcredits which, unfortunately are inappropri- ate for housing purposes since they are very short term in nature and interest rates for this purpose are sky-rocket- ing. Apart from this, the poor are also in need of allied pro- fessional services like budgeting, building and monitoring since they inevitably end up either overspending or with Figure 3 : Mortgage to GDP ratio 2007 (Source: European much lower quality houses. Some housing finance products Mortgage Federation & Asian Development Bank) have currently hit the market in India, however, since the market is in its nascent stage, many are missing achieve- We see that whereas a huge demand for housing finance ment of the right balance between providing an adequate exists in India, the mortgage/GDP ratio, which is a key in- long term for repayment and installments to be paid. Vol- dicator of Housing finance penetration, is one of the lowest umes, which we believe is a key to success in the housing in the world. This naturally is a great opportunity waiting finance market (since the default risk is fairly spread), will to be tapped. not be attainable till the products incorporate the sugges- tions in this paper, mainly the long term maturity needs. Opportunity: Appropriate Segmentation & Target- Now, let us enumerate as to what can be the requirements ing of a good housing finance market. In order to achieve success in the housing finance market at the initial stage, the first requirement is to have a prop- Table 3: Requisites for an attractive housing finance mar- erly structured product. Since, products in housing finance ket are customer driven; the most important analysis thus becomes the proper segmentation of the housing market. In case of India, I recommend the following segmentation built on the lines of Australian model. Thus, in my opinion, the South-East Asian, and particu- larly the Indian and Chinese market, there is a set base for the development and flourishment of housing finance busi- ness. The market though is still in its nascent stage, is still quite large, and is only expected to head in upwards direc- tion in the future. Indian Market: The major problem plaguing the Indian housing industry is the consistent demand-supply mis- match in housing as pointed out earlier. The shortage was 23.3 million units in 1981, 22.90million in 1991, ~20 mn Figure 2: Segmentation & Targeting of Housing Finance Mar- in 2001 and so on. Although a clear downward trend has ket been visible the fact is that the rate of closure of this gap In-Fin-NITIE Vol 3 10 © $treet-Finance Club, NITIE Mumbai
  9. 9. Housing finance should be aimed at the lower middle class b) Policy Constraints: HOUSING FINANCEand the higher levels of poor in the income pyramid. Thecategory I have mentioned has been circled in the above di- i. Forex Risk : Most HFC’s turn to foreign loans in or-agram. A further subdivision in the form of different colors der to refinance the loan burden extended by them. Thishas been given i.e. the people having formal employment exposes them to foreign currency riskand a legal title to land should be the prime target withmost of the long-term housing finance products targeted ii. Default Risk: In most cases, farmers and other lowerat them. income group people fail to provide any sort of adequate security. Also, in case of farmers we notice that agriculturalWeaknesses land can hardly be mortgaged since in most rural areasMy analysis and the information I collected through my talk clear demarcation of land does not exist. Even if land waswith the managers of HDFC and Axis Bank has revealed 4 distinctly demarcated, land transfer charges are a big hin-levels of challenges faced by these companies: drance in acceptance of land as security. Threats : Competition in Housing Finance Sector The following are providers of housing finance in India, in one form or another: 1. Commercial Banks: is the largest mobiliser of savings and also in respect of coverage. Their role has tradition- ally been limited to providing the working capital needs of business, industry and commerce and hence, they have not been very active participants in the housing finance mar- ket. Another reason for the same is that they are funded by short-term resources which cannot be profitably employed in long term lendings.Hence competition from Commercial banks is very low especially because of their inability and lack of specialization in providing tailor-made financing needs for various households.Figure 4 : Risks and Challenges in Housing Finance 2. Cooperative Banks: A lot of reluctance has been no-A. EXTERNAL FACTORS ticed by these cooperative banks to provide loans for hous-The major risks involved in case of housing businesses are ing finance. Our analysis states the major reason for this is the high risk and illiquidity in giving housing loans froma) Infrastructure Issues: Insufficient basic infrastruc- common corpus. Hence, even cooperative banks do not of-ture like lack of uninterrupted and cheap supply of raw ma- fer any significant competition in housing finance.terials, labor and space or lack of sanitation can spell doomfor the housing sector. 3. Regional Rural Banks: Again, they have not beenb) Government Attitudes: If the government is favor- very active in housing finance sector because of the largeing an indirect promotion of housing among people, in this amounts and low creditworthiness involved leading to il-case it will extend support to housing finance companies liquidity and losses.through credit relaxation, reserve relaxation and so on.On the other hand, if government directly participates in 4. Agricultural and Rural Development Banks: Thethe housing finance market through issue of housing fi- major function of these banks again is not the provisionnance products, there can be no greater bad news for an of housing finance. Consequently, there is low threat fromalready established housing finance player. these too.B. INTERNAL FACTORS 5. Housing Finance Companies: These are companies with principal objective of lending for housing finance.a) Lack of capability: Lack of capability as identified by However, the noticeable aspect my research has revealedme is multidimensional but stems from a common cause is that there are only about 20 companies accounting forof the housing finance company not being able to judge the greater than 90% of total housing loans provided.required parameters properly. These are as follows: Hence the industry is very fragmented and given the highi. Difficulties in matching terms of assets and li- demand for housing credit, there is very little fight for mar-abilities : since the sources of deposits are mostly short ket share with these.term in nature for commercial and other banks whereashousing finance products are mostly long-term in nature 6. Cooperative housing finance societies: These areii. Tools to provide for product development and specialized institutions established and subsidized by NHBevolution: Various tools like internal MIS data of cus- to cater to the housing needs of the masses. They are estab-tomers and their credit-worthiness, product experts, lead- lished at the State (Apex) Level and at the retail level.ership etc are a prerequisite for product development in These institutions do not have adequate technical expertisehousing finance. to be able to design the right product for the right target.Housing finance companies have a major problem in the However, the state subsidy is a major factor in their favour.sense that they might not have the required access or the Thus, the housing finance market competition in India cancapability (as we move to more and more complex housing be summarized as follows:products) to maintain such a database. © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 11 In-Fin-NITIE Vol 3
  10. 10. SUMMARYHOUSING FINANCE Organizations Threat providing From the above analysis, we can now draw an Industry Analysis Map of the Indian Housing Finance Market as Commercial Banks Medium follows: Clearly, from the above analysis we can understand that Cooperative Banks Low Indian housing finance market is in its nascent stage of development. Since this is a new formed market for a hith- Regional Rural Banks Low erto unaddressed product, there will be huge first mover advantages. The drawbacks stem only from the event of Agricultural and Rural Low unfavorable policy changes or uneven competition from Development Banks state. Both the drawbacks are relatively unlikely on the ba- Housing Finance sis of government’s current policy trends. High Hence, we conclude that the Housing Finance market in Companies India is very attractive and forms a good case for invest- Cooperative housing ment. High finance societies References : 1)http://www.hdfc.com/pdf/HDFC-IUHF04.pdf 2)http://rbidocs.rbi.org.in/rdocs/notification/PDFs/71235.pdf 3)http://www.apuhf.info/Presentation/DSouza_HDFC-India_Presentation.pdf 4)Interpretation from Primary Data through interview with bank managers P.S. : There is no source of any table or figure used, all are based on my understandings and interpretations from the work I have done in this field In-Fin-NITIE Vol 3 12 © $treet-Finance Club, NITIE Mumbai
  11. 11. SECURITIZATIONMARKET ININDIA By Shavi Gandhi Shashank IIM-Ahmedabad Summary Securitization started in India in 1990s when the market was characterized by lack of a well-defined regulatory framework and low investor activity. In 2006, RBI came up with guidelines to encour- age activity in this market. Post-financial crisis, however, RBI adopted a conservative approach and proposed many modifications to the regulations. Al- though these changes were based on the lessons As seen in the figure, securitization process allows from the crisis, they affected the volumes adversely. the originator to package a pool of loans and transfer This article studies the securitization mar- it to a special purpose entity which then sells securi- ket in India and the evolution of RBI regulations ties backed by the payments from these loans to the over the years. It further analyses the impact of investors(I). With the help of this process, the origina- these proposals and provides recommendations tor is able to: for the banks to handle the changing scenario. •Transfer the credit from its balance sheet •Diversify risks associated with the customer loans With the increase in globalization in post 1990 era, more (like default risk, prepayment risk, credit risk) and more products and services from the western world •Convert a set of illiquid assets (customer loans) on its have made their way into the developing economies. Fi- balance sheet into liquid assets nancial markets have also been affected by this phenom- Moreover, the securities issued in securitization pro- enon. Many financial tools, which were mainly used in cess are generally rated higher by rating agencies be- the western financial markets, have come into existence cause of isolation of risk associated with receivables in in countries like India. Securitization is one such tool. a SPV and thus help the originator to reduce the cost of It is the process of combining different financial assets capital as compared to traditional methods of financ- into a single financial product and selling different tiers ing. of the repackaged instrument to the clients. The process It is these advantages which have made securitized helps in creating liquidity in the market by enabling products popular financial instruments and have re- small investors to purchase parts of large asset pool. sulted in the growth of the securitization industry from Mortgage backed securities (MBS) are one of the most being non-existent in 1970s to a trillion dollar industry popular examples of securitization products. The follow- today. ing diagram shows an example of securitization process. Prod Securitization in India ucts Cus t Originator In India the securitization market came into exist- ence in 1990s starting with a modest deal of Rs. Loa n 160million(icra). In the initial days, securitization was used as a tool for bilateral acquisition of portfolios Se l l Pa y Cash where the debt simply moved from balance sheet of Cus tome for l oans the originator to the other entity and there were rarely Se c. r Loa ns any securities created. The securitization market start- ed seeing significant activity only post-2000 when the I SPV Securitization and Reconstruction of Financial Assets and Enforcement of Security Ordinance came into ex- istence. Today it has grown into a market with over Rs. Ca s h 308,250million (exhibit 4) of issuance volume(icra). With almost 84% market share, retail loans form the Fig1: A typical Securitization process major component of the securitization portfolio in In- dia. © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 13
  12. 12. In terms of the product class, asset backed securities are In 2006, in order to encourage securitization in IndianSECURITIZATION the most popular product in India (68% market share markets, RBI issued new guidelines which opened the in 2011, exhibit 4& 5). This is opposite of what has been secondary market for securitized papers. This step en- seen in developed markets where MBS are more preva- couraged the entry of new investors in the market. The lent. Although the housing finance market has been guidelines were based on international best practices. growing rapidly in India, MBS market has not seen With this, RBI expected infrastructure project receiva- much activity due to the long maturity periods, prepay- bles securitization to grow. The following provisions ment risk and lack of liquidity. (icra) were added in these guidelines: Impediments to Growth True Sales Criteria: Since the cash flow to repay investors depends on the Low liquidity in secondary market for securitized prod- continued existence and performance of the borrower, ucts, coupled with factors like limited investor interest bankruptcy of the borrower poses a huge risk to the in- in loans with longer tenures and preference of banks vestors. Within the true sales criteria, investors got legal for loan book growth rather than investment in instru- right over the receivables. This reduced the risk asso- ments, has hindered the growth of securitization mar- ciated with bankruptcy of the borrower, consequently ket in India. Apart from this, the growth had also been making the securities quicker to market.(Kothari, True hampered by lack of a clear regulatory framework in the Sale) initial years. It was only in 2006 that the Indian govern- Credit Enhancements: ment included securitized debt within the definition of “Credit enhancement refers to one or more initiatives approved securities for secondary market. (SEBI) taken by the issuer in a securitization structure to en- hance the security, credit or the rating of the securitized With the evolution of financial services sector, finan- instrument, e.g., by providing a cash collateral, profit cial engineers have been devising newer techniques for retention, third party guarantee, etc.” (Kothari, Credit packaging the assets with an aim to improve the rating Enhancement). This increases the probability that the of the products. This has led to an increase in complex- investors will receive cash flows to which they are enti- ity of the process which obfuscates the risks associated tled thereby reducing the cost of financing for the bor- with the underlying assets and the process of transfor- rower. mation of these risks. It is this failure to understand and Prior to 2006, maintaining capital on credit enhance- price the risks appropriately which has been cited as a ment was not mandatory. But the new guidelines speci- major reason for the recent financial crisis. In Indian fied that the issuer must hold 100% capital against the context, even though products are simple and the de- credit risk when a credit enhancement is provided, that fault rate also was very low during the financial crisis, is, every rupee of credit enhancement is secured by a ru- RBI has taken a conservative approach after the finan- pee. This acted as a hindrance to incentivizing securiti- cial crisis in formulation of its guidelines for the market. zation in India. In addition to this, the developed world This has affected the market in a negative manner. followed Basel II norms which mandated a capital re- quirement of 100% for first loss and, and no special re- RBI Regulatory Framework quirement for subsequent 50%. Hence the second 50% held by the issuer required normal capital adequacy re- The legal framework for securitization in India started quirement only, i.e., 9%. The following table summariz- taking shape in the 2000s. Exhibit 1 summarizes the es the capital requirement in each case(Kothari, Indian development of regulatory framework over the years. Securitization Market Scenario): It began with the enactment of the “Securitization and Reconstruction of Financial Assets and Enforcement of Before RBI After RBI Guidelines Under Basel II Security Interest Ordinance” in 2002. The purpose of Guidelines in in 2006 the act, at that time, was to promote the growth of secu- 2006 ritization companies to take over the Non-Performing Assets (NPA) accumulated with the banks. (Mohandas) Capital 9%*100 = 9 100%*100 = 100 100%*50 + 9%*50 = However, there were a few restrictions. The act included requirement for 54.5 a limit on minimum term of securities to 6 years and a credit floor on the interest rate equal to 1.5% plus the prevail- enhancement ing market rate. These restrictions limited the nature of the securities that could be used and thus affected the market adversely(SARFAESI Act, 2002). Figure 1: Capital requirement for enhancement Exhibit 2 and 3 show the trend in number of transac- The capital requirement grew 11 times after 2006. It tions and volume of trades respectively in the securiti- was almost double the amount required in the rest of zation market from FY 2001 to FY 2006. There was a the world. Hence, the securitization market did not sudden jump in the activity in FY 2002 after these regu- grow as intended. The total volume of transactions (in lations were passed. Rs. Billion) declined from 308.2 in FY 2005 to 256.5 in FY 2006 (Exhibit 3). In-Fin-NITIE Vol 3 14 © $treet-Finance Club, NITIE Mumbai
  13. 13. After the global financial crisis of 2008, RBI adopted a assets securitized during the revolving period, hence SECURITIZATIONconservative stand and proposed several amendments the default risk increases unless the issuer commits toto the regulations. It came up with a draft of guidelines comply with the “true-sale” rule in subsequent assets.for regulatory framework act in 2010 and modified the 3.In case the issuer cannot invest in new underlyings insame in 2011. While most of the measures are reason- the revolving stage, there is a chance that early amorti-able and reflect the important lessons learnt from the fi- zation starts. This exposes the investor to reinvestmentnancial crisis, some of them are considered to be harm- risk.ful for the growth of the securitization market. In fact, RBI guideline issued in 2010 explicitly prohibits revolv-the market fell by 29% in terms of value and 20% in ing securitization in India(RBI Discussion Paper). But,terms in number of transactions in 2011. This trend is there is some ambiguity in the clause. The act specifiesshown in exhibit 4. Also, exhibit 5 shows the trend the that revolving securitization is used for un-amortizingvolume of the ABS issued from FY 2007 to FY 2011. assets and this structure will be prohibited. However, itThe following sections provide details of some the can also be done for amortizing assets with short matu-changes and analyse their impact on the market: rity (like micro finance loans).Minimum holding period and Retention A blanket ban on the revolving structure would meanrequirement that even amortizing asset class with shorter durationAfter securitization was introduced in the second- cannot be securitized. It also implies that revolvingary market, the loans and receivables were securitized structure for an asset with a good credit rating (andwithin weeks of origination. In fact, the loans were credit enhancement) is prohibited. This will potentiallyoriginated for the sole purpose of securitization (“Orig- cause more harm than good. If the asset is amortizinginate-to-Security” model). This raised suspicions on the in nature, payment variability will not exist if the asset’sdue diligence done by the issuer, increasing the poten- tenure is a short. Also, if the asset has a high credit rat-tial risk of default. Therefore, RBI proposed to have a ing, the risks are minimal. Therefore, these restrictionsminimum holding period of 9 months on a loan of ma- will unnecessarily prohibit the issuers to raise moreturity less than 24 months, and 12 months for a loan of funds and hence reduce the economic activity.maturity more than 24 months(RBI Discussion Paper).However, this restriction impacts assets like microfi- Monoline Insurancenance loans, gold loans etc. which have a maturity of Monoline insurance, in case of financial markets, refersless than 1 year and thus bring down the activity in se- to the practice of guaranteeing bonds. Issuers often usecuritization market. the services of monoline insurers to improve the creditIn addition to minimum holding period, a minimum rating of their bond issues. The rating of insured debtretention of 5% of the underlying assets being secu- reflects the credit worthiness of the insurer. It is a popu-ritized by the issuer was proposed(RBI Discussion Pa- lar financial tool employed in the developed economies.per). This, on one hand, ensured that the quality of the But in India this practice is not allowed by RBI. In 2009securitized portfolio is up to the mark (since 5% of the RBI had issued guidelines which banned banks fromsecuritized asset was held in the book of the originator), issuing guarantee for non-convertible debentures orbut on the other, affected the securitization market in bonds of corporate firms(RBI Discussion Paper). WhenIndia adversely. a bank guarantees the bonds of a corporate entity, it basically affects the price discovery mechanism in theRevolving securitization market. The market price is now based on the guaranteeRevolving securitization is a novel way of securitizing rather than the financial strength of the issuer. This wasshort-term assets like credit card receivables. It has seen as detrimental to development of capital market.been used extensively in the US recently. There are two Therefore, RBI enacted this restriction. Although, thismajor cash flow periods associated with the asset: regulation is good for protecting the investors from ad-1. Revolving Period: During this period, prepayments verse effects of any financial disaster, it also means thatand principal payments from borrower are not distrib- small investors can’t take benefit of securitization. Anyuted to the investors. Instead, the cash flow from these bond issue by small investors are generally perceived topayments is invested in new loans. be risky and hence the cost of raising capital for them is2. Amortization Period: After the revolving period, all high even if they go for cash collateral based securitiza-the payments received from debtors are transferred to tion.the investors.This effectively extends the maturity of the issued se- Recommendationscurity when the underlying asset has a short maturity. The draft proposals for the regulatory framework forThis structure of payment has some risks associated securitization market, issued by RBI, in past few yearswith it: clearly indicate a conservative stance by the regulator.1. As the cash is reinvested multiple times in different Some of the regulations are still in discussion stageassets during the revolving period, the asset quality is while others are already in force. In the past year, nega-expected to change over a period of time. tive impact has been seen on the issuance2. The “true sales” criteria might not hold for the new © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 15
  14. 14. volume in the market after some of the regulations were with the regulatory intent of avoiding risky and complexSECURITIZATION announced. securitized products. At the same time, the regulatory Given the regulatory environment, banks need to take framework is still in development stage and RBI in the proactive steps in order to keep up with the changes past has shown willingness to include valid concerns in and maintain their competitiveness. They should en- the modifications it has issued. Keeping this in mind sure careful analysis and understanding of the guide- banks can propose following changes: lines and restrictions imposed by them. In 2009, in case 1.The MRR of 5% proposed in 2010 Act should change of non-convertible debentures (NCD) issued by Tata it according to the tenure of the loan. It should be higher was seen that SBI had failed to comply with the regula- for longer duration loans due to greater risks associated tions issued by RBI and that had resulted in a warning with such loans and the need for a long time investment from the regulator. These incidents have a negative im- of the issuer in servicing such securitization. pact on the firm’s image. Moreover, any such violation 2.The restriction of MHP and MRR should not be appli- in future may attract stricter penalty. cable to the higher quality assets and the securities with Going forward, banks should align their operations credit enhancements because these assets are already less risky. References : 1) icra. Update on Indian Securitisation Market. Retrieved January 2012, from icra.in: http://www.icra.in/Files/ticker/ Indian_Securitisation_Mkt.pdf 2) Kothari, V. Credit Enhancement. Retrieved from http://www.vinodkothari.com/glossary/Crediten.htm Kothari, V. Indian Securitization Market Scenario. Retrieved Jan 2012, from http://www.vinodkothari.com/Indian%20 Securitisation-Regulatory%20and%20Market%20Scenario.pdf 3) Kothari, V. True Sale. Retrieved from http://www.vinodkothari.com/truesale.htm 4) Mohandas, L. Securitisation. Retrieved 2012, from http://www.bseindia.com/downloads/Securitisation.pdf 5) RBI Discussion Paper. Retrieved from rbi.org: http://rbidocs.rbi.org.in/rdocs/Content/PDFs/DPDG190410.pdf 6) SARFAESI Act, 2002. Retrieved from http://www.drat.tn.nic.in/Docu/Securitisation-Act.pdf 7) SEBI. Developments in the Corporate Bonds and Securitization Markets. Retrieved 2012, from http://www.sebi.gov. in/Index.jsp?contentDisp=corpstatus 8) Securitization in India. Retrieved from RBI.org: http://www.dnb.co.in/Arcil2008/Securitisation%20in%20India.asp Reddy, Y. V. (1999). Securitization in India: Next Steps. Seminar on Government Securities Market.Chennai. Fin Quotes “YOU CAN’T MAKE A GOOD DEAL WITH A BAD PERSON” You simply can’t do business with bad people. If you are dealing with a bad person then there isn’t a contract that’s strong enough to protect you and your company from that person. Spend some time thinking about it. “NEVER ASK A BARBER IF YOU NEED A HAIRCUT.” There’s an old Wall Street saying that goes, “Ask a surgeon if you need an operation, the answer is ALWAYS yes. Ask a dentist if you need a cleaning and the answer is always yes again. Ask a financial advisor if you need to make changes to your portfolio and the answer is yes.” Many mergers and ac- quisitions are done on Wall Street because the deal takes on a life of its own. There’s a need to get deals done because that’s where Wall Street profits come from. Warren Buffett “Do not let anyone else run your business, unless you can supervise his performance with adequate care and comprehension or you have unusually strong reasons for placing implicit confidence in his integrity and ability. For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money. ” Benjamin Franklin In-Fin-NITIE Vol 3 16 © $treet-Finance Club, NITIE Mumbai 16
  15. 15. ANOTHER GEAR AT HELM: MSF In RBI Arsenal Yash Paresh Doshi MMS Finance KJ Somaiya Institute of Management By Vaibhav Srivastava Yash Chaudhari IIFT - Delhi‘It has been decided to permit banks to avail themselves of funds from RBI on overnightbasis, under Marginal Standing Facility (MSF), against their excess SLR holdings. Addi-tionally, they can also avail themselves of funds, on overnight basis below the stipulatedSLR, up to one per cent of their respective Net Demand and Time Liabilities outstandingat the end of second preceding fortnight. In the event the banks’ SLR holdings fall belowthe statutory requirement, banks will not have the obligation to seek a specific waiverfor default in SLR compliance arising out of use of this facility in terms of notificationissued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.’ -RBI notification for Circular RBI/2010-11/515 dated May 9, 2011To deal with liquidity and volatility concern RBI recently introduced a new provision called Mar-ginal Standing Facility under which banks are allowed to avail themselves of funds from RBI onovernight basis against their excess SLR holdings. Additionally, they can also avail themselvesof funds, on overnight basis below the stipulated SLR, up to one per cent of their respective NetDemand and Time Liabilities outstanding at the end of second preceding fortnight. In the similardevelopment RBI also shifted windows for reverse repo and MSF to contain volatility by fixingthem at crucial times during a working day so that banks do not have to go through the call moneymarket rate for their borrowings or parking of funds. Basel III regimes has come as a major pro-tective pill after the aftermath of recent crisis where in tier I capital and RWAs ratio are peggedat different stipulated level along with more constrained leverage ratio. In such, development likeMSF has to be assessed as probable impediment or lever. © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 17
  16. 16. Broadening the RBI volatility smile obligations. In certain ways shifting the window from morning to ‘Liquidity and Volatility’ have always been the prover- evening will also help mitigate the contingencies amongstMSF BY RBI bial concern for RBI and draws special affection of it banks over their cash position by then and continuing with when a rickety situation prevails outside. On the same the same such window positioning will ensure that ‘the pitch onset of fiscal year 2011-12 was expecting a simi- call rate will not trade above the repo rate in the morning lar package which was materialized with 3rd may an- and will not fall below the reverse repo rate in the even- nouncement of introduction of new tool for monetary ing’. Amidst such a volatile period any sort of bracketing policy makers in the form of Marginal Standing Facility. can be of immense help to decision makers at helm in the Under this scheme, Banks will be able to borrow up to consuming banks. 1% of their respective Net Demand and Time Liabilities. In the similar development the Marginal Standing Facil- The rate of interest on the amount accessed from this ity (MSF) window is planned to change from current 3.30- facility will be 100 basis points (i.e. 1%) above the repo 4.30 pm to 4:30-5:00 PM. Implication and intention is ob- rate. This scheme is likely to reduce volatility in the vious as banks supposedly approach the MSF window after overnight rates and improve monetary transmission. exhausting all other sources, so till 4:30 banks can use all other windows and can get a fair idea of their standing to Statutory liquidity ratio or SLR is the percentage of to- finally think of MSF. tal deposits lenders have to keep in government bonds. Not too implicit is the motto of RBI to substantiate the As per RBI norms, the minimum requirement is 24%. stand of Clearing Corporation of India (CCIL) in lieu of Many banks, according to market participants, are cur- putting a cap in interest rates in CBLO market that at cer- rently having excess SLR at around 26-27%.Techni- tain level of implementation includes an obligation for the cally, a bank sitting on 27% SLR can now pledge those borrower (consuming bank in concerned context) to re- government securities to borrow overnight money via pay the debt at a specific future date and an expectation of MSF using 4% SLR (3% + 1% below the 24% mark). the lender to receive the money on that future date and a charge on security that is held by the CCIL, [4] by demar- Reasons for above assumption: cating lenders’ demand rate within MSF limits. As normal- ly banks and mutual funds follow the borrower and lender Every bank for their per day requirement of capital behaviors respectively in the market, clearly proposition of adequacy depends on certain sources of capital (bet- the whole move will shift the balance of power from latter- ter money) raising techniques that in turn depends on to-former direction. overnight call-money rates and CBLO rates and repo and reverse repo auctions’ windows in lieu of LAF and Data showing containment of call money rate as then turn to the money market to deploy surplus funds Reverse Repo and MSF window opens, as on any or cover any borrowing needs, which results in unusual specific date: rise or fall in the rates in overnight call and the collater- alized borrowing and lending obligations. Banks will now have two options to raise money from Dec 26 (Reuters), Call Money 1700 IST securitized loan markets in the form of CBLO and MSF. In anticipation this RBI measure will definitely help TIME (IST) Market range banks with higher SLR. Moreover, the CBLO rate is now OPEN 09.80-09.85 capped at the MSF rate. 0910 09.75-09.85 To explicate the gravity of this development one fact 0920 09.80-09.85 needs to be stated that ‘Institutions have been borrow- 0930 09.85-09.90 ing over Rs 1.5 lakh crore daily via repo window’. So the 0945 09.80-09.90 new opening can be anticipated to be contributing in 1030 09.40-09.45 Adjustment of Call somewhat similar magnitude. 1130 09.30-09.40 Money Market Rate 1230 09.30-09.35 according to Reverse Windows Movement- 1330 09.30-09.35 Repo Window Recent steps taken by RBI to curtail volatility 1430 08.25-08.30 August 16 onwards RBI decided to hold reverse repo 1530 08.20-08.25 auction between 4:30 and 5 pm on all working days, 1630 08.45-08.55 except Saturdays. This move was hailed with alacrity, especially after the apex bank discounted its second Li- quidity Adjustment Facility (LAF) in May, as a move to 1700 08.40-08.50 curtail volatility in the overnight money market. Along with the current timing of repo and reverse repo Adjustment of Call auctions under the LAF window between 9:30 am and Money Market Rate 10:30 am, it will help to broaden the opportunity win- according to MSF dow for the banks to raise money from the fixed cost OPEN : 09.80-09.85 Window over a market determined window of call money vary- HIGH : 09.90 ing the cost of money according to demand and supply. LOW : 08.20 Banks would then turn to the money market to deploy CLOSE : 08.40-08.50 surplus funds or cover any borrowing needs, which PVS CLOSE: 09.70-09.80 used to result in unusual rise or fall in the rates in over- Source: in.reuters.com night call and the collateralized borrowing and lending In-Fin-NITIE Vol 3 18 © $treet-Finance Club, NITIE Mumbai
  17. 17. MSF in BASEL III regime RBI said MSF can be used as an indicator to impending liquidity concerns.‘The MSF window serves as an early warning indicator The major highlights of the draft guidelines are - MSF BY RBIof stress in liquidity and the central bank watches it veryclosely’. Minimum Capital Requirements - Subir Gokarn, 1. Common Equity Tier 1 (CET1) capital must be at least RBI deputy governor 5.5% of risk-weighted assets (RWAs); 2. Tier 1 capital must be at least 7% of RWAs;‘The stance of monetary policy is, among other things, to 3. The capital conservation buffer in the form of Commonmanage liquidity to ensure that it remains broadly in bal- Equity of 2.5% of RWAs.ance, with neither a large surplus diluting monetary trans- Enhancing Risk Coveragemission nor a large deficit choking off fund flows.’ 4. For OTC derivatives, in addition to the capital charge for - Declaration in the policy statement of RBI counterparty default risk under Current Exposure Meth- od, banks will be required to compute an additional CreditEvery economic downturn accentuates some substantial Value Adjustments (CVA) risk capital charge.lacunae in the system and subsequently alludes for recti-fications. Be it Glass-Steagall act of 1933 establishing Fed- Leverage Ratioeral Deposit Insurance Corporation (FDIC) at the off-set of 5. Banks would be expected to strive to operate at a mini-the Great-Depression or subsequent Basel I and Basel-II mum Tier 1 leverage ratio of 5%.reforms, a major change is an inevitable outcome of cri-ses. No aberration this time again, along with Dodd-Frank Going by this requirement for Basel III and MSF target ofAct, which besides the headline regulatory changes cov- creating excess SLR reserves of 3-4% will help banks makeering capital investment by banks and insurance compa- enough reserves and with their access reserves they cannies introduces new regulation of hedge funds, alters the earn substantial return by parking them with lending win-definition of accredited investors, requires reporting by all dow of reverse repo that can contribute in appreciating thepublic companies on CEO to median employee pay ratios reserves whether disclosed or undisclosed. Equipping theand other compensation data, enforces equitable access to system with tools like MSF will help in bringing down thecredit for consumers, and provides incentives to promote cost of debt considerably for the banks. This ease of pres-banking among low- and medium-income residents[5], sure will help them provide a space to think and manageBasel-III is all set to be launched and get adopted by all their equity section better to comply the Basel III norm formajor economies. Minimum Capital Requirement. Moving further with Enhancing Risk Coverage for OTC de-Utmost important consideration before delving rivatives, banks dealing with securities with counter-partydeep in Basel III requirement- default risk will seemingly remain unfazed by any such window or tool like MSF but at far or rather at way back,Though substantial features in Basel III hovers around of course while choosing derivative that too like OTC, deci-Tier I capital, that prominently comprises equity and dis- sion making at investment level can be influenced consid-closed reserves, debt-sources like MSF, CBLO play a vital erably against the like securities.role determining cost of debt-as a determinant of cost of Finally coming to the leverage ratio part, containing theequity- inversely, if we abide by Net Income Approach or cost of debt, an indispensible component of leverage, willup to certain extent by Traditional Approach and posi- affect the ratio in some way or other.tively, if we abide by Modi Gilliani II Proposition or Net Now which theory to believe and to follow is not a matterOperating Income Approach. Moreover, liquidity concern of discretion but of time. But having argued that much inis one aspect that finds prominent place under both the both the regards it is very much evident that one way orcategories like the deputy governor and the declaration of other both the happenings going to affect each other.References :1) http://www.rbi.org.in2) http://schoolofhedge.com3) http://www.sify.com4) www.investopedia.com5) http://en.wikipedia.org6) www.rbi.org.in7) Sources: in.reuter.com © $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 19
  18. 18. Indian Wedding Planning Industry - Rajesh Kumar, IIM Lucknow Summary As wedding industry shoots with burgeoning demand for lavish events, wedding planning industry gets aThe Indian wedding industry is on a high growth tra- boost for demand of organized and structured plan-jectory and this makes the event management in this ning services. Wedding planning industry in India isarea a very lucrative business. Importance given to mar- estimated to be growing at 20% per annum.riage in one’s life and the desire to make it a memora-ble event encourage people to spend extravagantly. The This industry is also driven by increasing affluencebig-fat Indian wedding is famous across the globe but and rising aspirations among consumers to makeit requires tremendous amount of planning and execu- their wedding unique and memorable. Time con-tion to make it a grand successful event. Paucity of time straints among consumers towards planning and or-and resources compel the families to go for professional ganizing weddings have been largely responsible forassistance for organizing the event. Increasing dispos- the growth in planners. Wedding planners are moreable income has further boosted the wedding planning often seen to indulge in special theme based mar-industry. riages to give it an edge so that it may stand out from the restOverview of Wedding Industry Wedding Planning Process ManagementIndia is considered to be one of the most sought-after Plannningwedding destinations around the world. Weddings in • Involves an elaborate description of wedding inIndia are fast gaining popularity among global citizens terms of paper workwho flock to the country to solemnize their wedding • Entire event to be organized is recorded on a me-vows. It is growing at a CAGR of 25% owing to lavish diumspending. Currently, cost of a wedding may range from • Attention is given to minutest detailINR 0.5 mn to INR 50 mn. With India becoming a wed- • Creativity and innovation drives this sectionding destination, foreigners are aggressively contribut- wherein planners show their mettle in showcas-ing to a growing market. Increasing disposable income ing unique themes and event managementis expected to double the strength of the market in thenext 15 years. Theme based weddings and destination Co-ordinationweddings are some of the major trends that the market • This involves discussing the draft of the plan withhas observed. Characterized by social features, wedding the client at lengthindustry manages to be resilient even to vagaries of in- • Enables clients to have a feel of the final eventflation and recession. • Also allows feedbacks and suggestions from cli- ent implying room for changes and improve- ments 20% Jewellery • Mutual understanding between planner and cli- Attire ent gets processed here wherein feedbacks and Invitation Card suggestions are shared 4% 48% Venue Décor 4% Hotels and related items Implementation 8% Mehendi • All plans are executed to the fullest Others • This means every part of the planning is given 8% attention to so that all arrangements match the 8% level of expectation • It is here that the execution of the entire projectIn-Fin-NITIE Vol 3 20 © $treet-Finance Club, NITIE Mumbai

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