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Ivo Pezzuto - THE GLOBAL ANALYST September 2015

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The September 2015 Issue of the THE GLOBAL ANALYST

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Ivo Pezzuto - THE GLOBAL ANALYST September 2015

  1. 1. 1The Global Analyst | SEPTEMBER 2015 | A N E X C L U S I V E M O N T H L Y O N B u s i n e s s & F i n a n c e A Media Five Publications Flagship September 2015 Volume 4 Issue 9 GLOBAL CURRENCIES 100 RBI Has a Larger Role! IPO MARKET Action at Last P28 SAVING PSBs Needed Action... P12 SPOTLIGHT The Odds On Rupee P36P16 The Battle Begins
  2. 2. The Global Analyst | SEPTEMBER 20152 |
  3. 3. 3The Global Analyst | SEPTEMBER 2015 | September 2015 Vol. 4 | No.9 managing editor - N Janardhan Rao editorial Director - Amit Singh RESEARCH TEAM Surya Prakashini (Proof Reader), Anjaneya Naga Sai Prashanth, Vijaya Lakshmi, Narasimhanan, Karthikeyan, Nagaswara Rao & MSV Subba Rao ADVISORY BOARD Dr. Paritosh Basu, Former Group Controller, Essar Group N Harinath Reddy, Advocate & Sr. Partner, H&B Law Offices (Hyd) Sanjay Banka, CFO, Landmark Group, Saudi Arabia Prashant Gupta, IIT-K, IIM-L, CEO - Edunirvana Dr David Wyss, Former Chief Economist, S&P & Visiting Fellow, Watson Institute at Brown University. NY, US Dean Baker, Economist and Co-founder, Center for Economic and Policy, Washington, US William Gamble, President, Emerging Market Strategies, US Andrew K P Leung, International and Independent China, Specialist at Andrew Leung, International Consultants, Hong Kong M G Warrier, Former GM, RBI Dr. Ivo Pezzuto, Global Markets Analyst, Management Consultant, Economics and Management Professor, ISTUD Business School & Catholic University of the Sacred Heart. Milan, Italy Marketing Head - Amita Singh Sales Head – Mumbai - Freeda Bhati 09987421946 | fgb.tganalyst@gmail.com Sales Head – Chennai - Emmanuel Rozario 098844 91851 | emmir68@yahoo.com Subscription Payment to be made by crossed Cheque/DD drawn in favor of “MEDIA FIVE PUBLICATIONS (PRIVATE) Ltd.” Payable at Hyderabad. kNowledge partner - Target Research & Consulting advertisement enquiries Media Five Publications (P) Ltd. Swarnasri Residency, (HIG 300) 6th Phase, KPHB, Kukatpally, Hyderabad - 500085, India Mobile: +91- 9247 769 383 | 7093004234 | 9247 220795 send your feedback / articles to : editor.theglobalanalyst@gmail.com / mediafivepublications@gmail.com COVER PRICE : Rs. 100/- subscription details (See inside for discount details, p27) By Post By Courier 1 Year (12 Issues) Rs. 1200/- Rs. 1700/- 2 Years (24 Issues) Rs. 2160/- Rs. 3160/- overseas subscriptions 1 Year (12 Issues) $180 2 Years (24 Issues) $330 design & layout - Creative Graphics Designers Printed at Sai Kiran Graphics, RTC ‘X’ Roads, Hyderabad-20. Published on behalf of Media Five Publications (Private) Ltd, # 403, Swarnasri Residency, 6th Phase (HIG 300), KPHB, Kukatpally, Hyderabad 500085. • ©All rights reserved. No part of this publication may be reproduced or copied in any form by any means without prior written permission. • The views expressed in this publication are purely personal judgements of the authors and do not reflect the views of Media Five Publications (Private) Ltd. • The views expressed by outside contributors represent their personal views and do not necessarily the views of the organizations they represent. All efforts are made to ensure that the published information is correct. Media Five Publications is not responsible for any errors caused due to oversight or otherwise. Published & Edited by D Nagavender Rao Cover image courtesy: hdwallpaperpc.com These are tense times for market pundits, punters, and policymakers alike, globally. While the weakness in China economy (amid sliding exports) was not completely unknown to the rest of the world, not many would have expected the situation to worsen A WORD From EDITOR to this extent so fast – which has unnerved investors, shocked economists, and is posing significant challenges for global central banks as well as policymakers. The trouble began with the sudden announcement by the People’s Bank of China to devalue Yuan by two per cent on August 11th. The news spread like a wild fire, rattling the global currency markets, with many of the emerging markets currencies feeling the heat. Several currencies from Indian rupee to Brazilian real to Vietnamese dong faced the bearish onslaught. The rupee, which depreciated by 2.4 per cent in a week since August 11, was hovering at 66.13 a dollar mark in the spot market, as on August 28, 2015. In fact, other key emerging market currencies like Brazilian real, Turkish lira and South African Rand, which also form part of what Morgan Stanley calls the ‘Fragile Five’, have suffered higher erosions vis-à-vis the US dollar; the real is the biggest loser this year with a loss of nearly 30 per cent. In fact, even the equity markets and the commodities markets have been at the receiving end as jittery investors have resorted to panic selling. While there seems to be some kind of calm now in global equities markets, courtesy some encouraging US data and the decision by the China’s central bank to cut its key lending rate, the situation seems to be far from normal. Many experts fear that as China tries to resort to desperate measures to lift its economy out of the quagmire, it could put further pressure on the global currency markets as pressure on China’s competitors - to either improve their export competitiveness or else lose out to China - increases. “Its (China’s) devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months,” warns Stephen Jen, investor and former International Monetary Fund economist. “As bad as things are for emerging-market currencies, China is about to make them a whole lot worse,” he was quoted as saying by the Bloomberg. Is it the beginning of the global currency war? - Editorial Director
  4. 4. The Global Analyst | SEPTEMBER 20154 | BANKING SECTOR P16 SAVING PSBs - Needed Action...And Nothing Else To save the PSBs from the present tough situation, there is a need to look into the issues (affecting the banks) radically in an objective manner so as to arrive at a permanent solution, which could pave the way for qualitative real economic growth in the days, months and years to come. P28 Not just a Rate cutter, RBI has a larger role! We must ensure that replacements are better than what is available now. The content of (Draft) IFC, unfortunately, does not give any assurance of the kind. GOI should tread slowly, if it does not want India to follow Greece, too soon! P32 PAYMENTS BANKS - New Kids on Banking Block Payments banks are expected to be operational extensively on technology platform to provide the desired services with most cost effective way. Their target customers will be existing clientele of SBs and Private sector banks as well as untapped, unbanked and under-banked population. Welcome tothe new kids on the banking block. INSURANCE P27 LIC is No.1 in Bahrain Life Insurance Corporation of India (LIC) is the undisputed leader with a market share of over 70 per cent of India’s insurance industry, serving over 25 crore policyholders. The company also operates in several overseas markets through its various subsidiaries and joint ventures. It adds another feather to its cap as it emerges as the new numero uno in Bahrain. COVER STORY P22 Global Currencies The Battle Begins The sudden devaluation of its currency by China has not only raised concerns that the world’s second largest economy could fall short of reaching its goal of economic growth of 7 per cent this year, but it has also created jitters across financial markets besides raising fears of an impending currency war. P25 CHINA Of Devaluation, Currency War, and Growth Conundrum! China’s Renminbi bombshell devaluation by nearly 4 per cent in two consecutive days has aroused across the globe a flurry of speculation and panic of doom and gloom. Some $300 billion has moved out of China since the end of 2014. Is China coming off her wheels? What is the endgame? P25 THE ODDS ON RUPEE Rupee has posted significant losses in the last few weeks bringing back memories of 2013, when it had depreciated 24% to 68/$ in a matter of four months. REGULARS P06 Decoding DATA P10 Business Digest P45 DIGITAL ANALYST CONTENTS HEALTHCARE P46 Healthcare With A Human Touch The Hyderabad-based BBR Hospital, a super specialty hospital founded by the doctor couple of Dr. B Keshava Rao, a gold medalist in pediatrics, and his wife Dr. B Nirmala, is redefining healthcare landscape in the City, offering affordable and effective healthcare with a human touch. P51Cancer - Fighting the Killer Disease A sponsored feature by Nightingales Home Health Services According to the WHO’s prediction, annual cancer cases will rise from 14 millions in 2012 to 22 millions within the next 2 decades. Against this backdrop, it is imperative to know this enemy well, its causes & consequences and how to fight it. INTERNATIONAL P48 Federal Reserve’s Rate Rise – Coming Soon? In spite of the solid improvement of the US economy fundamentals, it is still unlikely that a rate rise will occur in September 2015 (unless the Fed aims to make a just minor symbolic hike), the first one in more than nine years, since it might not be fully consistent with the current inflation expectations and the latest turbulent international developments. START-UP XPRESS P42 JUNOTele In a tête-à-tête with The Global ANALYST, the founders talk about the changing landscape of mobile payments technologies, what has helped JunoTele differentiate itself from competition, their key offerings, and their plans for the future. September 2015 Vol. 4 | No. 9 STOCK MARKET P12 IPO Marekt - Action at Last The primary market is finally showing some signs of revival as more than two dozen IPO aspirants have filed their applications with the market regulator. P13 Stock Market - Viewpoint CORPORATE WORLD P14 Nestlé India - The Maggi Mess Maggi mess leads to first quarterly loss for Nestlé India in 17 years. It’s going to be a long road ahead for the Indian unit of the Swiss food giant to reclaim the top spot in the instant noodles, its mainstay, market, and recreate the same magic which made Maggi a household name. CFO CORNER P39 Deepak Narayanan, Founder- Director & Head Business Development, MyCFO In an exclusive interview with The Global ANALYST, Deepak Narayanan, Founder- Director & Head of Business Development, MyCFO discusses about his firm’s offerings, its business model, benefits it offers to enterprises seeking CFO services, and his outlook on the market.
  5. 5. 5The Global Analyst | SEPTEMBER 2015 |
  6. 6. The Global Analyst | SEPTEMBER 20156 | Decoding DATA / Economy India’s Top 10 Trading Partner Nations ($mn) Rank Country Export Import Total Trade Trade Bal- ance 1 China 1,626.29 9,682.23 11,308.52 -8,055.95 2 USA 7,115.30 3,301.37 10,416.66 3,813.93 3 UAE 5,112.09 3,449.19 8,561.28 1,662.90 4 Saudi Arab 937.57 4,148.17 5,085.73 -3,210.60 5 Switzerland 130.33 3,260.34 3,390.67 -3,130.01 6 Indonesia 525.72 2,700.96 3,226.68 -2,175.24 7 Germany 1,154.26 2,034.11 3,188.36 -879.85 8 Korea RP 577.11 2,211.93 2,789.04 -1,634.81 9 Singapore 1,396.77 1,316.03 2,712.80 80.74 10 Hong Kong 1,750.98 852.49 2,603.47 898.50 Top 10 Commodities Exported by India Sl.No. Commodities (Values in Rs. crores) % change JULY'14 JULY'15 JULY'15 1 Tea 344.57 450.86 30.85 2 Coffee 415.30 406.63 -2.09 3 Rice 3380.07 3153.56 -6.70 4 Other cereals 535.36 152.26 -71.56 5 Tobacco 431.20 416.50 -3.41 6 Spices 1396.16 1361.28 -2.50 7 Cashew 450.76 467.14 3.63 8 Oil Meals 413.90 232.58 -43.81 9 Oil seeds 779.68 538.16 -30.98 10 Fruits & Vegetables 1181.17 1046.81 -11.38 Figures for the period Year: 2015-2016 (Apr-May) Source: Ministry of Commerce, Govt. of India Source: Ministry of Commerce, Govt. of India Top 10 Countries with Low Inflation (CPI) Rate Country Period Monthly basis Yearly basis Greece Jul-15 -1.32% -2.23% Switzerland Jul-15 -0.61% -1.28% Poland Jun-15 0.00% -0.72% Slovenia Jun-15 -0.07% -0.70% Estonia Jul-15 -0.36% -0.36% Israel Jun-15 0.30% -0.36% Finland Jul-15 -0.22% -0.23% Ireland Jul-15 -0.29% -0.20% Great Britain Jun-15 0.00% -0.08% Sweden Jul-15 0.03% -0.08% Decoding DATA / International Top 10 Countries with High Inflation (CPI) Rate Country Period Monthly basis Yearly basis Norway Jul-15 -0.07% 1.82% Iceland Jul-15 0.17% 1.86% Mexico Jun-15 0.15% 2.74% South Africa Jun-15 0.53% 4.55% Chile Jul-15 0.42% 4.62% India Jun-15 1.16% 6.10% Turkey Jul-15 -0.51% 7.20% Indonesia Jul-15 0.93% 7.26% Brazil Jun-15 0.79% 8.89% Russia Jul-15 0.20% 15.27% Source: Inflation.eu CPI refers to Consumer Price Index (CPI) Forget the ‘Fragile Five’, enter the ‘Troubled Ten’ or that is how media reports are trying to expand the list which one of the world’s leading investment banks Morgan Stanley had coined in 2013. Owing to the sudden devaluation of Yuan, experts at MS, and elsewhere, now identify currencies of 10 economies which they say are vulnerable. According to Hans Redeker, London-based global head of foreign-exchange strategy at MS, “It’s all about vulnerability ... Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China.” Bloomberg comments, “Morgan Stanley was right about the Fragile Five. Those currencies include four of the developing world’s eight worst performers since the phrase was coined in 2013. The real, together with Turkey’s lira, South Africa’s rand, the Indian rupee and Indonesian rupiah, have suffered as rising global interest rates make it more difficult for the countries to finance their current-account deficits.” For most of the countries whose currencies form part of the Troubled Ten list China is the top export destination, Bloomberg data suggests. For instance, the world’s second largest economy accounted for 37 per cent of South Africa’s exports and 30 per cent of South Korea’s in 2014. China emerged as India’s largest trading partner with a share of 10 per cent in the latter’s total trade during April-May of 2015-16, as per latest official statistics. Morgan Stanley’s Fragile Five swells to ‘Troubled Ten’
  7. 7. 7The Global Analyst | SEPTEMBER 2015 |
  8. 8. The Global Analyst | SEPTEMBER 20158 | The Indian rupee has come under pressure post the devaluation of Yuan announced by Beijing. The rupee has depreciated by 2.4 per cent in a week since August 11; it was trading at 65.48 a dollar on August 20th. The INR had lost only 0.5 per cent since January 1, 2015, reports NDTV Profit. Anindya Banerjee of Kotak Securities cautions that a fall beyond 67 per dollar may create panic among investors. “Beyond 67 or so it will start hitting unhedged players in the bond market, and it can become a self-fulfilling trade. The more it will depreciate the more stop- losses will get triggered and it will fall further,” Banerjee told in an interview to the broadcaster. Rupee has outperformed other emerging market currencies, thanks to India’s better current account position and higher real interest rates (nominal interest rate minus inflation) which are helping the rupee weather global turbulence, he said. However, a breach of 67 per dollar may lead to capital outflows from domestic stock and debt markets. Foreign institutional investors who have unhedged positions in the bond market will first start liquidating their position and the outflow of dollar will happen triggering further fall in rupee, he further noted. During 2008, India had a comfortable current position and the inflation was also low, still rupee depreciated by about 33 per cent in 15 months because of capital outflow from equity market, he opined. Currency market experts also attribute rupee’s comparative strength (vis-à-vis other emerging market currencies) to factors from a stable environment to low inflation to falling commodity prices especially oil and gold which account for a large chunk of the country’s import bill. Further, wholesale Price Index (WPI)-based inflation rate fell to a record low of minus 4.05 per cent in July from minus 2.4 per cent a month ago, led by 1.16 per cent drop in food prices and 1.47% fall in prices of manufactured items. Retail inflation too had dropped sharply to 3.78 per cent in the same month over 5.4% recorded in June. According to Garima Kapoor, Economist, Yes Bank, “The WPI reading suggests that prices continue to be influenced by a deflationary trend in global commodity cycle along with the government’s continued efforts at managing the food economy and persistence of softer demand conditions.” Declining commodity prices have helped reduce India’s current account deficit from 4.7 to 0.2 per cent of GDP, thereby taking the pressure off the rupee. Besides, the government’s continued focus on reforms and initiatives like Make in India besides the attractiveness of Indian equities would help the country remain a favorite destination for foreign investors. However, possibility of a rate hike by the US Fed and concerns over Greece bailout, besides geo- political tensions in Europe & Middle East would weigh on EM currencies including rupee. Rupee – Pressure mounts! TGA
  9. 9. 9The Global Analyst | SEPTEMBER 2015 |
  10. 10. The Global Analyst | SEPTEMBER 201510 | BUSINESS DIGEST In vestors were a hapless lot as they stood witness to what can easily be termed the worst and the big- gest meltdown in equities in recent few years as panic sell off – from Asia to Europe to USA – on August 24th brought back memories of similar bloodbath in equities when global financial crisis of 2008 began to unfold. An across the globe sell-off in equities was trigged by growing global concerns over persistent weakness in China economy, which for long acted as an engine of global growth, particularly, in its manu- facturing, and, also to a major extent in the financial sector, which is bad news for commodities markets. An over 8.5 per cent fall in Chinese equities, their worst slide in many years (the Shanghai Composite index registered its biggest one-day percentage loss since 2007) added fuel to fire that en- gulfed the entire global financial markets on August 24, which proved to be yet an- other manic Monday. Panic selling on Wall Street saw S&P 500 crash nearly 4 per cent, its biggest slump since 2011, as nervous investors pulled down equities to their biggest slump seen since 2011, while the Dow Jones Industrial Average (DJIA) lost more than 1,000 points in intra-day trading for the first time ever before closing the day with a loss of 588 points, or 3.57 per cent, at 15,871.35. It was Monday Mayhem for Dalal Street as well as both Sensex and Nifty lost heavily. The Sensex crashed by more than 1,624 points or nearly 6 per cent, the biggest loss in sev- en years and the third biggest drop since 2008, the year in which Sensex recorded a loss of over 1,000 points on four occasions including its all-time highest loss of 2,273 points on Jan.22, 2008 (the other three oc- casions when it fell by over 1,000 points were – decline of 2,062 points on Jan.21, 2008, 1,205 points on Oct.24, 2008 and 1,008.6 points on Oct.10, 2008). Nifty Fifty too dropped by an identical 6 per cent, or 490.95 points, to close at 7,809, a level seen for the first time since October 17, 2014 amid deepening concerns over troubles in China, impact of yuan devalua- tion on rupee and on domestic exporters, devaluation of Vietnamese currency Dong by 1 per cent by the State Bank of Vietnam to 21,890 dong a dollar (it was the third time in 2015 that Vietnam had resorted to such move so as to make its exports more competitive, a move triggered by the on- going tension in the emerging markets currency markets), fears of a rate hike by the US Fed, high do- mestic food inflation, not-so-encouraging June quarter corpo- rate earnings and diminishing hopes of rate cut by the RBI. The worldwide rout in equities has sent shock waves across other markets includ- ing currency and commodity markets as well. The Indian rupee, which fell to 66.65 a dollar on August 24, has lost a little over 5 per cent till date, is among the seven most affected emerg- ing market curren- cies. Brazilian real is the worst hit among all the EM currencies with a depreciation of Monday Mayhem: Sensex Posts Its Biggest Single Day Loss on August 24 32.7 per cent, as on August 24. It is followed by Malaysian ringgit with a drop of 21.1 per cent, while INR is ranked 6th with a loss of 5.2 per cent. Chinese yuan is at number 7 with a year-to-date decline of 3.1 per cent. According to experts, thanks to comfort- able forex reserves (in excess of $354bn) and international oil and commodity prices, the impact (of a yuan devaluation and FII sell-offs) has not been so severe. However, the challenges for Indian equities and ru- pee remain as global business environment becomes even more challenging. ImageCourtesy:TheEconomicTimes Moody’s cuts India’s 2015- 16 growth forecast to around 7 per cent Gl obal credit rating agency, Moody’s Investors Service has lowered its forecast for India’s economic growth to around 7 per cent for 2015-16, from 7.5 per cent earlier, owing to “a drier than average monsoon” besides slow pace of industrial recovery, though it expects the economy to grow at 7.5 per- cent in the next fiscal. “We’ve looked high frequency data and what we see is that industrial recovery is proceeding but very slowly,” Atsi Sheth, Sr. VP, Moody’s Investor Service, told CNBC-TV18. Despite a forecast of a lower growth, Indian economy is still among the most promis- ing ones globally. “I should emphasise that even at 7 per cent, India is among the fastest-growing among emerging mar- ket countries,” reckons Sheth. She also felt the inflation to remain in the RBI’s comfort zone. “Our expectation is that inflation will be well within the Reserve Bank of India (RBI’s) own target for next year, that is, 6 per cent or probably slightly below that. On the question of rupee, in the wake of a volatile external environment, she told, “Compared to 2013 and now, the factors driving the ru- pee down in the years even preceding 2013 were largely domestic. They were domestic policy, current account deficit, etc.
  11. 11. 11The Global Analyst | SEPTEMBER 2015 | Now, it is really the external environment. So, what you saw happen last week was the effect of capital flows in and out of coun- try that were driven not by India specific factors but by global factors.” She added, “Those global factors are likely to be on the side of the depreciation in the near-term given what we are expecting with the po- tential for US federal reserve rate hike, fur- ther uncertainty about global growth. We think that might put little bit more pressure but from a fundamental perspective we do believe that India’s external accounts are relatively well positioned to absorb a little bit of volatility on the exchange rate.” Google’s ‘Internet Saathi’ for women in rural India On line search giant Google’s India unit has launched an ambitious program called, ‘Internet Saathi’. The initiative, which has been launched in collaboration with the Tata Trusts, aims to educate rural women on the benefits of using the Internet. The program aims to reach out to 4,500 villages and 500,000 women by the end of 2016. The initiative will use “Internet cycle carts” (bicycles, basically) to reach rural villages and educate women on the basic benefits of using the internet in their daily lives. Tata Trusts chairman Ratan Tata said, “When I was in school, there was no access to even a telephone, and today every rickshaw puller and paan wala has access to a cell- phone. Some of them have also graduated to smartphones. In addition to access, In- ternet has brought dignity and self respect to these people. Google as a company has digitized the world and it’s a privilege to work with them towards bringing women online.” By October, Google India is looking to bring 50 million women online. “India has 300 million users and 6-7 million users are be- ing added each month. While 50 per cent women in urban India use the Internet, this In dia’s largest lender, State Bank of India (SBI), has launched a new payment service called State Bank ‘Buddy’,amobilewallet(it’sakintoasavings bank account that can be accessed through a mobile phone). The launch signifies SBI’s ongoing effort to capitalize on the oppor- tunities thrown by rapid advancements in payments technologies and promote pa- perless transactions. State Bank ‘Buddy’ is a mobile app – launched in 13 languages, including Hindi and English, on the Google Play Store - that lets you send money to anyone, pay bills, recharge mobile/ DTH, book movie/ flight/bus tickets 24x7 on the move. In other words, this pre-paid cashless service allows you to load money into your e-wallet, transfer money with your contacts on phonebook or Facebook, recharge your mobile/DTH, pay utility bills, shop online and book movies, flights and hotels, and transfer money instantly to your bank ac- count. number is very low for rural women,” said Rajan Anandan, managing director, south- east Asia and India, Google. According to him, only 12 per cent of rural internet users are women. While new male internet users grow at a pace of 57 per cent, females lag behind at 27 per cent. The most interesting thing about these growth rates, he says, is that the next 100 million Internet users will not be fluent in English. He added that the fastest growing websites on the internet to- day are in local languages. The programme will be launched in Gujarat, Rajasthan and Jharkhand where Internet carts will be avail- able in villages for a minimum of two days every week for 4-6 months. Information will be provided on farming techniques, pay- ment of school fees, bills, etc. Meet State Bank ‘Buddy’, SBI’s mobile wallet Arundhati Bhattacharya, Chairperson, State Bank of India, said, “This is one more step in our ambition of becoming the provider- of-choice for customers’ everyday needs: Financial and Non-Financial.” She added, “Mobile is going to be at the centre of this transformation and State Bank Buddy will help us strengthen our proposition through this medium.” The State Bank Buddy has been launched in collaboration with Accenture and Master- Card. With rising Smartphone and Internet penetration, the number of people doing online transactions is on a rise in India. According to a report in the ET, paperless transactions through the internet, ATM, cards and mobile devices have surpassed paper-based ones in the year leading to March 15, reiterating the fact that Indians are moving towards virtual payment. Citing RBI data, it reports that while paper-based transactions cleared through cheques amounted to Rs 85 lakh crore in FY15, pa- perless transactions, including retail elec- tronic transactions such as ECS (electronic clearing system) debits and credits, elec- tronic fund transfer, card transactions, mo- bile transactions and prepaid instruments were to the tune of Rs 92 lakh crore in the same period. At SBI about 69 per cent of daily transac- tions happen through alternative channels, including internet, ATM and mobile bank- ing. SBI, with a 20 per cent market share, and a customer base of 28.6 crore, of which 2.3 crore are net banking customers while 1.6 crore are mobile banking ones, will compete directly with ICICI Bank’s Pocket, HDFC Bank’s PayZapp and Paytm Wallet, says India Infoline, India’s leading broker- age house. Here are some of the key features of State Bank Buddy App. Ask Money – from other State Bank Buddy users Send Money – to any contact in phone book or Facebook. Beneficiary need not be a user of State Bank Buddy. Add Money – to their wallet a/c using debit cards/net banking/IMPS credentials of their account with any Bank. Recharge and Pay Bills – recharge prepaid mobile/DTH and pay utility bills using the wallet application Market Place – Shopping, Movies, Flights, Hotels etc Transfer to a/c – Users can transfer funds from their wallet a/c to any bank a/c using IMPS-MMID or IMPS-IFSC modes. TGA
  12. 12. The Global Analyst | SEPTEMBER 201512 | The primary market is finally showing some signs of revival as more than two dozen IPO aspirants have filed their applications with the market regulator. I ndia’s IPO market seems fi- nally set for some action as over two dozen companies are readying up their plans to hit the markets soon. Accord- ing to data from the market regula- tor SEBI, more than 30 companies have filed applications to raise capi- tal from the primary market. These include some high-profile names including Coffee Day Enterprises that owns and operates the hugely popular Café Coffee Day, which is also India’s largest coffee chain, In- terglobe Aviation, the owner of In- dia’s number one airline company IndiGo, Matrix Cellular Interna- tional Services, etc. The list of IPO aspirants also in- cludes e-tailing firm Infibeam, which runs the popular e-com- merce portal Infibeam.com. Also in the hunt to hit the primary mar- ket are two private sector banks – Catholic Syrian Bank and RBL Bank (formerly known as Ratnakar Bank Ltd). The Kerala-based CSB is planning to raise up to Rs.400 crore, while the mid-sized lender RBL Bank is looking at raising up to Rs.1,100 crore to augment their tier- I capital and meet Basel III norms. Besides, these companies like Al- kem Laboratories, Amar Ujala Pub- lications, Numero Uno Clothing and Matrimony.com (which also owns portals like BharatMatrimo- ny.com and CommunityMatrimo- ny.com) too have entered the fray to tap the domestic primary market. The sudden increase in activity in the IPO market can be attributed to a slew of fresh measures announced by SEBI. In a major revamp of IPO norms, SEBI in June halved the list- ing time – from 12 days to 6 days. Presently, the IPO timeline is T+12 (T refers to the last day of the is- sue), which will be halved to T+6. The new rule, which would come into force from January 1, 2016, is also expected to lower the costs as- sociated with the public offering, besides it will also help in increas- ing the reach of retail investors. The regulator said that the six-month window for making ASBA compul- sory is to “help intermediaries and banks modify their existing systems and train their staff”. The move is also aimed at making investments in IPO market completely cheque- free. Almost 99.5 per cent of appli- cations in public issues are now re- ceived by way of ASBA, as per SEBI. Last year, SEBI had also announced IPO MARKET Action at Last TALKING STOCK certain measures to boost the pri- mary market. In one significant initiative, the regulator relaxed the minimum dilution criteria to al- low companies to sell a minimum stake of 25 per cent or Rs 400 crore, whichever is lower in order to en- courage more mid-sized companies to tap the IPO market. Further, the regulator has also expanded the “fast-track” route for follow on of- fers (FPOs) and rights issue to al- low more companies to participate in fund-raising through the market by reducing the qualification crite- ria. As a result, the minimum pub- lic float for fast-track IPOs stands reduced from Rs 3,000 crore to Rs 1,000 crore. Meanwhile, companies with public shareholding worth at least Rs 250 crore will be able to come out with rights issue under the fast track route, under which the approval process is less stringent al- lowing companies quick access to the market. The market watchdog has also made changes in the offer for sale (OFS) framework. According to the new norm, the announcement for share sale can be made two days from banking days and not trading days; the T+2 (T is the day of the OFS) timeframe
  13. 13. 13The Global Analyst | SEPTEMBER 2015 | TGA Stock Market / ViewPoint SUDIP BANDYOPADHYAY CMD, Destimoney Securities GLO bal markets have been going through an extremely challenging phase and the headwinds from the global markets are affecting Indian markets also. Unfortunately, even the domestic cues are nothing very encouraging. Sub optimal monsoon, stalling of reform process, large amount of inferior assets with financial institutions and inability of investment cycle to kick off, doesn’t augur well for Indian corporates in the first quarter of second half of current fiscal. The recent depreciation in Indian currency vis-à-vis USD will provide fillip to the earnings of IT and Pharmaceutical companies. We believe that Indian IT companies, particularly the large cap ones, are well positioned at this juncture. The Q1 results of Indian corporate were on expected lines and were subdued. A clutch of factors continues to effect demand and investment. Unfortunately, the turnaround in corporate results is extremely unlikely in both Q2 and Q3 of current fiscal. Recovery if any, may be visible in Q4 only. Collapse of global commodity prices including crude oil has reduced the input cost of Indian corporates. However, the reduction in demand both rural and urban has affected sales growth. Deficit in monsoon and its uneven spread has affected rural demand. Significant depreciation of Chinese currency and the economic turmoil there, has added pressure on Indian corporates through flood of cheap Chinese substitutes. IPO market had shown lot of promise in the initial period of current year. However, with the present turmoil in the markets, even the primary market will pick up slowly and investors will invest cautiously and selectively. However, we continue to believe that IPOs from good companies with right valuations will continue to attract good investor response. The global cues are definitely negative. The problems in China are real and reaching a stage of significant concern. Issues in Europe still haven’t been resolved. While US growth is real, the economy is still not robust. US Fed rate increase may trigger mild turmoil. We believe that during the current fiscal the global cues will remain negative.India should continue to outperform the global markets and may become an island of growth in a volatile and slowing global economy. Appropriate government policies including kick start of investment cycle through public spending may resurrect corporate results and performance. We believe that India will continue to grow at around 7% over the next couple of years. We prefer large cap IT and midcap Pharma stocks at this juncture. Domestic reform process will be the key trigger for the local equity market. We believe that Indian economy will continue to outperform all major global economies over the next couple of years. The Sensex and Nifty may trade with a gain at around 10-15% by the end of current fiscal year. remains unchanged for announc- ing the share sale. As a result of the changed norm, an issuer can announce an OFS on Friday and conduct the share sale on Monday as Saturday is a banking day. In another major move, the regulator has asked exchanges to allow retail investors to place bids at “cut off price” as a default option in addi- tion to placing price bids. SEBI has also made announced framework for reclassification of promoters and as non-promoters. SEBI has said an outgoing promoter will have to step down from any key management position in the company within three years. Also, the outgoing pro- moter will not be allowed to hold more than 10 per cent shares of the company. The regulator has said ex- isting promoters will be allowed to be re-classified as public in case the company becomes professionally managed and does not have any identifiable promoter. For a compa- ny to be categorized as “identifiable promoter” company, it shouldn’t have a person or a group holding shares of more than one per cent. To ease fundraising for start-ups and new-age companies, the regulator also finalized the guidelines. Ac- cording to the new rules, only quali- fied institutional buyers (QIBs) and non-institutional investors (NIIs) will be allowed to invest in such companies through an institutional trading platform (ITF). So far, in 2015, 27 companies have hit the primary market, which in- clude names like Majestic Research (up more than 220% post-listing, as on August 26, 2015), Raghuvansh Agro (post-listing gain of over 270%, as on August 26, 2015), and Adlabs Entertainment (down 31% post-listing, as on August 26, 2015) and Syngene International (up 27% since listing, as on August 26, 2015). However, recent volatility in global financial markets post significant challenges to both the prospective issuers as well as market partici- pants. “India should continue to outperform the global markets and may become an island of growth in a volatile and slowing global economy.”
  14. 14. The Global Analyst | SEPTEMBER 201514 | Maggi mess leads to first quarterly loss for Nestlé India in 17 years. It’s going to be a long road ahead for the Indian unit of the Swiss food giant to reclaim the top spot in the instant noodles, its mainstay, market, and recreate the same magic which made Maggi a household name. N estle India, well known for its huge- ly popular brands such as Maggi instant noodles, Milkmaid, Kitkat, Everyday Dairy Whitener, Nescafe coffee, etc., re- ported its first quarterly loss in 17 years even as the adulteration row involving its top selling brand Maggi refuses to die down. Nestle India, a subsidiary of Swiss food giant Nestle and one of the world’s largest food companies, faced reg- ulatory ire after the Food Safety and Standards Authority of India (FSSAI) alleged that lab tests of the samples, it sent for testing, showed the popular 2-minute instant noo- dles contained MSG, besides they also had higher than permissible levels of lead. A nationwide recall that followed after the regulatory ban came into force led the compa- ny incur its first quarterly loss in 17 years. The company posted stand- alone net loss of Rs 64.4 crore in the second quarter ended June 30, 2015 (it follows January-December financial year) as the recall and ban of Maggi on June 5 forced the com- pany to take a one-time charge of Rs 451.26 crore. The trouble began after reports surfaced that samples collected in some parts of Uttar Pradesh were found containing added monoso- dium glutamate (MSG) and lead in excess of the permissible limit. A report dated May 16, 2015 which appeared in The Times of India said that the Lucknow Food Safety and Drug Administration initiated an enquiry and wrote to the Food Safety and Standards Authority of Nestlé India INSIGHT / CORPORATE WORLD India (FSSAI) in New Delhi seeking to cancel the license for Maggi. The state regulator also asked FSSAI to order sampling of the product from across the country to check quality, the report quoted an official as say- ing. The Lucknow Food Safety and Drug Administration has initiated inquiry and written to the Food Safety and Standards Authority of India (FSSAI) in New Delhi seeking to cancel the licence for Maggi. “We have tested Maggi samples at Kol- kata’s referral laboratory. The test results show that there are added monosodium glutamate and excess of lead. We have ordered further sampling,” FSDA Assistant Commissioner Vijay Bahadur Ya- dav told TOI. Nestle, on its part, re- sponded by saying that it maintains that it does not add monosodium The Maggi Mess
  15. 15. 15The Global Analyst | SEPTEMBER 2015 | glutamate to the product, whereas presence of excess lead is “surpris- ing” for the company. “We do not add MSG to MAGGI Noodles and glutamate, if present, may come from naturally occurring sources. Food regulators in India also do not specify any limit for the presence of MSG / Glutamate,” TOI quoted a Nestle spokesperson as saying. He added, “We are surprised with the lead content supposedly found in the sample. We monitor the lead content regularly as part of regula- tory requirements, and tests at our own accredited laboratories as well as those by independent external accredited laboratories have con- sistently shown the results to be well within the permissible limit.” In a June 5thaddress to the media, Paul Bulcke, Global Chief Execu- tive, Nestlé, announced the compa- ny’s decision to take the popular in- stant noodles brand off the shelves, saying, “The trust of our consum- ers and the safety and quality of our products is our foremost prior- ity everywhere in the world. Un- fortunately, recent developments and growing concerns about the product have led to confusion for the consumer to such an extent that we have decided to take the prod- uct temporarily off the shelves, in spite the product being safe”. On July 24th the company in a major reshuffle at the top announced ap- pointment of Suresh Narayanan as the Managing Director of Nestlé India Ltd with effect from 1st Au- gust 2015 in place of Etienne Benet, Managing Director, who has been relocated to Nestlé Group Head Office in Switzerland. The company received a major boost after the honorable Bombay High Court in its order on Au- gust 13 overruled the ban, but or- dered fresh tests in three separate labs to ascertain that the noodles complied with the country’s food safety norms. “Nestlé India re- spects the decision made on 13th August by the honourable Bombay High Court to revoke the ban order passed by Food Safety and Stan- dards Authority of India (FSSAI) and the Food and Drug Adminis- tration, Maharashtra on MAGGI Noodles and will comply with the order to undertake fresh tests,” a press release from the company said. The FMCG major posted a net loss of Rs 64.4 crore for the April-June quarter, as against prof- it after tax of Rs 287.9 crore in the same quarter a year ago, mainly on account of the recall exercise of Maggi that cost it Rs 451.26 crore (exceptional items), including de- stroying over 30,000 tonnes of the instant noodles since June when it was banned because of alleged ex- cessive lead content, according to a report. It was for the first time in the 17 years that Nestle India reported a quarterly loss. Net Sales too were affected, falling substantially to Rs 1,934 crore from Rs 2,419 crore in the review period. These are no doubt challenging times for the Indian unit of the Swiss food gi- ant and it would need to pull out all the stops – including an effec- tive communication strategy - so as to revive the brand, recreate the same magic, and above all restore consumer trust, the ingredients that literally made Maggi a house- hold name. Maybe it can take a leaf out of cola giants Pepsi’s and Coca Cola’s books for their effec- tive handling of the pesticides-in- cola controversy of 2003. To restore consumer trust, PespiCo decided to stamp a quality assurance seal which reads: ‘One Quality World- wide’ across all its product labels, a first for a soft drink giant anywhere in the world. For now, on a lighter note, we would say, ‘Have a break, have a KitKat’ until Maggi returns to the retailers’ shelves. TGA The Maggi Mess Source:BusinessStandard
  16. 16. The Global Analyst | SEPTEMBER 201516 | BANKING SAVING PSBs Needed Action...And Nothing Else The present bad debt crisis affecting the PSBs, in particular, can be traced to one event - folding up of Development Financial Institutions (DFIs), which paved way for banks handling normally short term fund operations, indulge in huge long term loans. It’s now proving to be very costly for both the banks as well as the economy. To save the PSBs from the present tough situation, there is a need to look into the issues (affecting the banks) radically in an objective manner so as to arrive at a permanent solution, which could pave the way for qualitative real economic growth in the days, months and years to come. CA R S RAGHAVAN Banking and Financial Analyst, & Author of the book, “RISK, the Business Driver in Banks” rsraghavan007@yahoo.co.in
  17. 17. 17The Global Analyst | SEPTEMBER 2015 |
  18. 18. The Global Analyst | SEPTEMBER 201518 | I n another three to four years’ time, in case the economy picks up speed very well, perhaps quantum (Rs. 70,000 crore) of capital infusion may be found short, as capital coupled with competition from new banks would be a limiting factor for business growth in PSU banks. But government can always dilute their stake in percentage terms, within the benchmark for having controlling stake. This again varies from bank to bank, as with reference to position as of March 2015, Government of India stakes in PSU banks vary widely from the minimum of 59.13 per cent in Oriental Bank of Commerce to the highest in United Bank of India at 82.00 per cent. To my mind, as a retired bank executive, lateral thinking is needed. I would advocate for prudently introducing Leverage Ratio - leverage such as Asset Capital Multiple rather than Capital Adequacy Ratio, as tampering with capital in relation to asset built up is like looking to cut the leg according to the shoe. Asset Creation Multiple - A New Math for Managing Old Nemesis! Normally in banks, asset creation is an activity that is subsequent to the Capital formation and Deposit mobi- lization. Therefore, the proposition should be for a given capital, how much asset can be created without exposing to high risk? Hence, in ideal situation and taking a radi- cal view, stipulation of Asset Creation Multiple (ACM), in place of Capital Adequacy Ratio (CAR), would be more appropriate and rational. That is to say, instead of Minimum Capital Adequacy Ratio of 12 per cent, implying holding of Rs 12 by way of Capital for every Rs 100 Risk Weighted Assets (RWA), stipulation of Maximum Asset Creation Multiple of 8.5 times (100 divided by 12), implying that asset can be cre- ated only to the maximum extent of 12.5 times of Capital, would be meaningful. While CAR is a business enabling ratio, in which as the business grows, bring in more cap- ital on a continuous basis, ACM is a risk limiting ratio, wherein you grow only to the extent your Capital permits to stick to Basel Norms, which is an ideal friend of risk management and control mechanism. However, as assets have already been created when the Capital Adequacy Norms were introduced, Capital Ad- equacy Ratio, instead of Asset Creation Multiples, is ad- opted. Moreover, now-a-days in the post economic lib- eralization era, financial institutions, particularly banks and more specifically private sector banks, first identify big ticket loan and then scout for proper funding avenues, instead of the other way round that was the practice ear- lier. Now that most of the banks have built up Capital Ad- equacy for the existing Risk Weighted Assets, except IOB, why should not we think of introducing Asset Creation Multiple? It is a futile exercise to go on increasing capi- tal year after year, followed by asset growth, increasing Stressed Assets and finally ‘writing off’ after struggling to recover. It may however be noted that at least, in respect of the new banks staring from Zero, Asset Creation Multiple Public Sector Banks (ACM) could have been seriously considered. At least with regard to granting licenses for new banks on con- tinuous basis through pipeline approach, stipulation of Asset Creation Multiple can be thought of. Nevertheless, as the banks graduate from financial intermediary into risk intermediary, liability management also assumes equal importance, if not more, than asset management. Why & how of recapitalization The additional capital infusion primarily serves two ob- jectives, viz., first is growth and next is to move towards the moving target of Basel Norms, in its third version now. That being the case, it is neither too late nor too little. Both are inevitable, unless some banks are allowed to adopt Narrow Banking approach, keeping in mind the likely consolidation of banks, talked about by very many Finance Ministers and the Governors of Reserve Bank of India. Beginning with a sum of Rs. 20,000 crore in one month time, say latest by half year end of Sept, 2015, in different tranches, the estimated total capital infusion is around Rs 70,000 crore, by March 2019, provided there is no modification in the set target date for entire compliance of Basel III Norms. Perhaps it may not be surprising if Basel IV norms are deliberated, before the banks reach Basel III main and sub targets or norms. It may be a food for thought as to whether such quantum of good money should chase the bad money being shoved to drainage, visible in the form of exponential growth of Stressed Assets, having potentiality to become bad at any future date. Out of the Rs 20,000 crore, obviously State Bank of India alone with an amount of Rs 5,531 crore, has more than 25 per cent share and Allahabad Bank, the top bank when alphabetically arranged, would get a share of Rs 283 crore, the least among the lot. There are handful of banks that do not get recapitalization for this year. As far as Capital Adequacy Ratio of banks are concerned, while Indian Overseas Bank has merely 8.33 per cent coupled with net NPA level of 6.63 per cent, the former is the lowest and latter the highest among PSBs, Punjab National Bank with CAR of 12.89 per cent is the most comfortableoneamongthePSBs.InthesetwoParameters, IOB appears to be the worst among the PSBs. Only a handful of PSBs such as State Bank of India and State Bank of Patiala in SBI group and Indian Bank, Punjab National Bank and UCO Bank in other PSB category are well capitalized with Capital Adequacy Ratio of 12 or above. Tapping the market - Is the time right? Though the Sensex oscillates around 28,000 at present, in the medium to long term, the Capital Market is perceived to be bullish and it just awaits passage of two key bills, on Land and GST, that would act as a trigger point and it is only a question of time before the sensex moves to 30,000 plus bracket. There is a popular belief that market expectations and also valuations have run ahead of fun- damentals. It is believed that the road ahead for Indian
  19. 19. 19The Global Analyst | SEPTEMBER 2015 | economy and the corporates would be even better. Though the government decided to accord permission for Capital infu- sion / tapping Capital Market only for certain banks meeting / exceeding certain benchmark in performance. But it appears from the recent devel- opment indicated through “Indrad- hanush” that the government has gone back on this score. The under performers need to be given some time frame for bettering their perfor- mance failing which ithey should be marked and identified for consolida- tion. Fund Infusion - Can DVRs be the right choice? No one can probably decide about tim- ing of tapping the Capital Market, as the job of Capital Market is to be both fluctuating and volatile. Hence, ideal situation does not exist, as it is a subjec- tive perception measured relatively. Unlike the equity share holders, pref- erence shareholders do not carry any Voting Rights, which issue is relevant to the subject matter. There is also an exception to this rule in the case of matters that directly affect the rights of preference shareholders, which ex- ist in certain banks. In the above cited situation, the Voting Rights get eco- nomic value as such, a situation al- lows small investors to acquire shares at a lower price in return for surren- dering their Voting Rights. This also helps the Government, the dominant owner of PSBs to dilute its equity in number of shares, without actually diluting the Voting Rights. That is the dilution of promoters’ stake in equity and normally, the equity share, has an extent of stake coupled with Vot- ing Right, going hand in hand. Pro- moter of a Bank (PSB) may have eq- uity stake of less than 50 per cent (say 41 per cent) and still have a voting right of more than 50 per cent (say 59 per cent), through the concept of DVR and this is the essence of DVR. It is a common knowledge that in general, compared to the number of shareholders in a company, very few attend the General Meeting and exer- cise the Voting Rights as most of the shareholders are passive investors. This is the current practice, as the concept of e- voting gain popularity. Plough back of Dividend received by GOI from PSBs into the Capital would reduce the burden of fiscal support. The govternment, can think of treating PSU units shareholding in PSBs as deemed Government holding to form part of 51 per cent sharehold- ing. Nonetheless, with most of the banks, if not all, maintaining comfortable Capital Adequacy Ratio, as covered elsewhere, in case the government misses the time frame for dilution, there may not be any serious prob- lem. Basel norms adherence is a long drawn process to accommodate such hiccups. Also, that undesirable situ- ation may provide an opportunity for banks to set their houses in order, as unchecked growth would lead to more problems to handle than the probable solution it may throw. Taming the NPA monster Risk profile of banks is a dynamic phenomenon, as it changes every second, thanks to the technological advancement and multiple accessibil- ity. As the business grows, depend- ing on the qualitative aspects of the growth figures, improvement in the Risk Profile is a difficult proposition to achieve. If the volume of business and reining of NPAs have helped in improving risk profie, why should there be a higher and stricter norms of Basel II and Basel III stipulations. As a retired executive of a PSB, I strongly feel that the main culprit of present NPA woes of Public Sec- tor Banks can be traced to the Long Term Project loans, extended by them to reach volume in business, thereby creating growth in Stressed Assets that are slowly going out of control, right under their nose. This needs to be comprehended well both by the government and the regulator. This recapitalization is in a bid to fuel growth in volume and also meet the moving target of Basel norms, pres- ently on Basel III mode. When Capital Adequacy Ratio (CAR) is the result of two parameters viz., Capital and Asset, it appears that more attention is given to Capital, so as to align with international norms, by squarely ignoring the quality of Asset (Risk Weighted) build up. This is the crux of the problem, as only nu- merator (Capital) is repeatedly fund- ed unmindful of what is happening to the denominator (Asset). Banks are regularly writing off big ticket loans, compelled lending on unviable prior- ity sector mode and also long term project (Corporate ) Loans, that are not their domain area of expertise. Folding up of Development Finan- cial Institutions (DFIs) such as ICICI, IDBI, etc., paved way for banks han- dling normally short term fund op- erations, indulge in huge long term loans. This was totally an unwarrant- ed and a wrong move and the present increase in Non-Performing Assets in PSU banks can be traced to this ill- advised move. This move is proving very costly for the banks and also the economy. This resulted in paying the price for the same. Further, the Stressed Asset portfolio in banks has drastically gone up only after banks started lending to Project and long tenure Term Loans, which were the forte of Development Finan- cial Institutions. Writing off of Bad loans, after a brief halt as Debt Restructuring, on a reg- ular basis and then recapitalizing banks with additional capital to meet business growth and Basel norms, is not an ideal route and risk manage- ment mechanism. Temporary relief just to facilitate economic growth, without addressing the basic and mounting problem in a permanent manner is not going to take us any- where but to see that good money chased bad money.. Instead of coming out with a separate approach for Infrastructure Loans, it is not too late to bring back Devel- opment Financial Institutions with the kind of Capital proposed to be brought in by way of recapitalisation, so as to take care of economic growth through Capital Asset formation in the Infrastructure and also manufac- turing sectors, the Working Capital for which alone, but not the Long Term Loan, should be taken care of by commercial banks Create the level playing field - For a better future Problem with PSBs is the perceived Public Sector Banks
  20. 20. The Global Analyst | SEPTEMBER 201520 | lack of level playing field and em- powerment, back seat driving, remote controlled management, inappropri- ate selection / promotion process. Bonafide error of judgment is pun- ished, particularly at the lower level even in respect of higher level sanca- tions and higher level canvassed ac- counts. This damocles sword should not hang around. Instead of tinkering with the system, better to strengthen the same. The solution to the problem of rais- ing Capital for the PSU banks, being presently faced by the Government, can be to a certain extent addressed if the banks take the route of DVR, with suitable modification to suit the man- date of the Government. The defini- tion of Capital Fund for the Banks to arrive at the Capital Adequacy Ratio should be tweaked to accommodate Shares with DVR. This would fa- cilitate smooth transition to Basel III compliance by banks as far as Capital Adequacy is concerned. It is not for nothing a few Banks like UCO Bank, Central Bank of India, Vijaya Bank, United Bank of India, Bank of Maha- rashtra, Indian Bank, etc., have, in the past, raised Capital Funds through the Preference Shares route to help in meeting the Capital Adequacy Ratio norms of Basel, particularly the stipu- lation under Tier I Capital. Job of the owner is to select right management and leave that manage- ment to run the organization. As far as management is concerned, regidi- ties and controls are happening be- cause of the 51 per cent stake by Gov- ernment. Hence, reduction should not be the last good step, but a first mandatory step to move forward in a better manner. At the conclusion, It is fervently hoped that the Indian Banks Association and Reserve Bank of India officials in authority, if not the ruling party politicians, look into the issues radically in an objective manner to view things in proper per- spective with the appreciation of the rationale behind, to arrive at a perma- nent solution to eradicate the illness, instead of prescribing ad hoc tablets to bring down the fever / illness for the time being. Only permanent solu- tion would pave way for qualitative real economic growth in the days, months and years to come. Public Sector Banks TGA It may be worth mentioning that the Basel III norms facilitate banks to is- sue non-equity instruments such as Perpetual Non-Cumulative Prefer- ence Shares (PNCPS) and Innovative Perpetual Debt Instruments (IPDI), complying to certain specifications for the purpose of inclusion in the ad- ditional Tier I Capital. The ultimate success of Basel norms implementa- tion directly depends on the quality of Corporate Governance of Top Man- agement, as Corporate Governance in place would take care of the aspects concerning risk management. Takeout Financing is not taking off. Better to popularize the same through some incentives so as to find out a meaningful way for long term financ- ing of Project Loans and also manage Liquidity Risk Management issues. Systematically speaking, PSBs ac- count for nearly 75 per cent of the total banking business and in case, this level is gradually brought down to around 60 per cent, which is pos- sible given the likely new banking licences under consideration through Narrow Banking method, without significant expansion of small / weak banks volume of business, depen- dence on GOI for capital requirement can be reduced to a large extent, be- sides paving way for consolidation and merger.
  21. 21. 21The Global Analyst | SEPTEMBER 2015 |
  22. 22. The Global Analyst | SEPTEMBER 201522 | COVER STORY GLOBAL CURRENCIES The Battle Begins The sudden devaluation of its currency by China has not only raised concerns that the world’s second largest economy could fall short of reaching its goal of economic growth of 7 per cent this year, but it has also created jitters across financial markets besides raising fears of an impending currency war. R eeling under pressure to lift its economic growth, which has turned sloppy over the last few quarters, after years or perhaps several decades of double or near-double digit growth, and choppy stock markets, China has resorted to devalue its currency Renminbi (means people’s currency, a name that was adopted by China’s Communist Party shortly before coming to power in 1949), also referred to as yuan. On August 11, the country’s banking sector regulator, People’s Bank of China sent shock waves across global financial mar- kets as it announced a near-two per cent devaluation of the Renminbi. The world’s second largest economy manages its exchange rate through an official midpoint, from which it can vary 2 per cent each day, but in recent months, volatility has vanished, a Reuters report said. The midpoint for the yuan was set at 6.2298 to $1 on Tuesday, from 6.1162 yuan on August 10. The banking regulator manages the rate through the official midpoint, from which trade can rise or fall two per cent on any given day. Subsequent to the latest move, the exchange rate is intended to be more market-driven. However, it’s going to be very challenging for the banking regulator, which has over guarded the currency movement despite opting for a managed float (as compared to the pegged exchange system) in 2005, as the currency would be exposed to international developments. “The central bank engineered what looked like a win-win when it ceded more control of its currency to markets earlier this week, in a step toward liberalization that
  23. 23. 23The Global Analyst | SEPTEMBER 2015 | Devalued Yuan : The Indian Impact The immediate impact is likely to be capital inflows, if continuing volatility in China’s markets lead to a deeper emerging markets risk-off. Selloff in Indian bonds, in the absence of any significant buying interest, typically results in enhanced price volatility of Indian bonds and a commensurate move in the rupee. But the impacts go beyond markets into the real economy. China’s role in the global economy has increased rapidly and disproportionately in trade. Its share of world gross domestic product was over 10 per cent in 2014. In exports, its share is over 15 per cent and in imports—although a bit lower than in 2014—is over 11 per cent. China accounts for close to half of the global consumption of copper, aluminum and steel, and more than 10 per cent of crude oil. The first, and an overwhelmingly positive, impact therefore of a slowdown in China’s commodities demand on India is through lower commodity prices. India imported $139 billion worth crude and petroleum products in the 2015 fiscal, and as a rough rule of thumb, every $1 drop in crude prices results in a $1 billion drop in the country’s oil import bill. India also imports $3 billion of copper and copper products. However, there is a flip side to falling commodities prices—the effects on companies in India operating in the minerals space, including steel, mining, selected chemicals, and some trading companies. Many large companies in the production space are quite leveraged, with debt-funded production capacities built up in the high-growth years. Stress on debt servicing ability is already high, and a further drop in commodities prices and a slowdown in exports will add to this. In addition, it might be reasonable to expect that the renminbi depreciation will lead to a further drop in prices of commodities China exports to India. Indian manufacturers have already complained of non-market prices—maybe even dumping below cost—of China’s exports to India, and a further drop in China’s capacity utilisation in segments like iron and steel, bulk drugs and chemicals will lead to a further drop in prices. Besides imports, India’s exporters will also lose out on currency competitiveness to China in segments it competes directly with China—particularly textiles and apparels—as well as chemicals and project exports. India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20 per cent in 2009-10 to 35 per cent in 2014-15. There are indirect consequences as well. China holds about $1.5 trillion of its reserves in US securities. Another half a trillion is held by Russia and OPEC countries, whose resources too will be under stress with falling crude prices. This has implications for US sovereign yields, already on the way up with expectations of a rate hike by the Federal Reserve in 2015. A move up in developed market rates will have consequences, via reduced capital flows on emerging market yields as well and the ability of central banks of these countries to cut rates significantly, despite slowing growth. Courtesy: qz.com also gives Chinese exporters an edge. But now it also has to manage market expectations to keep the yuan from entering a free fall—a challenge for central banks world-wide but one that China has avoided by tightly controlling the value of its currency,” commented a report in the Wall Street Journal. Justifying the move, the PBOC in a statement said, “As China is maintaining a relatively large trade surplus, RMB’s real effective exchange rate (REER) is relatively strong, which is not entirely consistent with market expectation. Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development.” The REER has risen by 13.5 per cent in a year (between July’14 and June’15), thereby causing discomfort among the nation’s policymakers. The latest move by the PBOC has led Renminbi to depreciate to touch its lowest rate vis-à-vis the dollar in nearly three years. China’s worry stems from sluggish exports, particularly to Japan and the Europe. July exports were down by 8.3 per cent, the biggest fall in four months, and were also well below market forecasts; analysts had expected exports to dip by a per cent, while the trade surplus data did not give any confidence either. Exports to Europe fell 12.3 per cent, whereas that to Japan was lower by 13 per cent; the exports to the US, Renminbi Devaluation China’s biggest market, were down by 1.3 per cent. July imports were also lower by 8.1 per cent, while trade surplus at $43bn was much below forecasts of $53.25bn. Experts blame a strong yuan for the slowdown in Chinese exports. The government was under pressure to revive domestic demand to deal with sliding exports and stem any further fall in economic growth. A report in Reuters citing analysts suggests that China has been keeping its yuan strong to wean its economy off low-end export manufacturing. A strong yuan policy also supports domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency. “These factors suggest that China’s exports will continue to face strong headwinds,” Reuters cited Liu Ligang and Louis Lam, authors of an ANZ Research note, as saying. However, the move is also fraught with risk as it raises fears of raising geo-political tensions and similar moves from China’s competitors in exports markets as other emerging markets who could lose their export competitiveness. India too faces significant pressure in the wake of the China’s move to weaken its currency against dollar to boost its exports, its economy’s mainstay and key to its
  24. 24. The Global Analyst | SEPTEMBER 201524 | era of ‘super-growth’ of decades. Already, the rupee responded by dropping sharply on August 12, a day after China announced its devaluation measure. The rupee fell to 64.78 a dollar, its lowest level against the greenback since 2013. There is also concern that China may resort to dumping its goods in India, as imports from former turn cheaper. However, India could explore options like imposing higher anti-dumping duties on such goods so as to make them unattractive to importers. But a study by the SBI (Ecowrap), reckons that the devaluation of the yuan will not have a significant impact on Chinese Nevertheless, the risk to rupee rises as China is expected to mull more actions to support its exports and boost its economy. “For those who have borrowed in yuan, we need to see how the bilateral exchange rate behaves. If the rupee depreciates by more than the yuan, then there will be no issue. However, a sharper fall in yuan will once again pressurize the borrowers,” reckons D R Dogra, CEO and MD of Care Ratings. But those companies which have high exports earnings won’t be hit that hard as compared to small and mid-sized ones with no or low forex earnings. Besides, those corporates who have taken yuan loans could face the heat. But does the latest move by Beijing means a currency war is inevitable? “It does look, however modest, like an attempt to recoup just a small amount of competitive edge lost in international markets,” said Simon Derrick, head of currency research at BNY Mellon in London, adding, “What happens over the next few days matters. If we have a currency that moves much more freely, fine. If, however, we go back and it’s just re-pegged ... that is currency war.” It would be interesting to watch what would be the next step of PBOC. Let’s wait and watch. Renminbi Devaluation IMF sets timeline for Chinese yuan as a world reserve currency The International Monetary Fund signalled that China’s yuan won’t be added to its basket of reserve currencies for at least a year. China’s botched devaluation of the yuan is widely regarded as a step toward floating the currency, which is also known as the renminbi (or “people’s currency”), and a precursor to it being included in Special Drawing Rights (SDR). The IMF reviews its basket every five years and has decided to extend this for a year until September 30, 2016, to consider entry by the yuan. IMF managing director Christine Lagarde has indicated support for the yuan in SDR but has left the timing open. The US dollar is the dominant currency in SDR along with the yen, pound and euro. The IMF uses SDRs as substitute for a world reserve currency in loans made to governments. The IMF’s board will make a decision by the end of the year whether the yuan meets its criteria. One of these is that reserve currencies must be “freely usable,” meaning it must be able to be bought and sold under any market conditions. The sudden devaluation of the yuan on August 11 was its biggest one-day movement in two decades. Officials in Beijing said the move was part of a plan to allow the market a greater role in exchange rates. China is the world’s biggest exporting economy and getting the yuan labelled a reserve currency would enable more countries to use it in trade deals as well as allow central banks to spread their risks. China has strict controls on the movement of capital and on the amount its currency can move against the dollar. Though estimates of whether it is over- or under-valued vary, the IMF has said the yuan is near its fair value since the devaluation. However, most observers also agree that admission to SDR will increase demand and cause the yuan to appreciate over time. Courtesy: nbr.co.nz exports, as the currency is still highly overvalued. In addition, the Indian rupee also lost some value against the US dollar following the decline in yuan, thereby supporting a modest short-term impact on India. “Yuan devaluation is a challenge obviously because it makes our exporters a little uncompetitive. As it is they have to deal with higher interest rate. Devaluation means Chinese exports become that much cheaper,” said Arundhati Bhattacharya, Chairperson of State Bank of India, the country’s top lender. India exports items like yarn and iron ore to China. Trying to allay fears over impact on rupee, Chief Economic Adviser Arvind Subramanian said that given “adequate” foreign exchange reserves, the impact of the devaluation of the Chinese yuan on the rupee will only be “temporary”. Further, as per the SBI study, in terms of the real effective exchange rate, valuation of the yuan is the highest among 60 countries, in contrast, the Indian rupee is valued at 78.06 on a nominal basis and 89.02 on a real basis. Hence, it notes, a four per cent devaluation achieves nothing in terms of improving the long term prospects of exports, which will continue to decelerate. TGA
  25. 25. 25The Global Analyst | SEPTEMBER 2015 | Andrew K P Leung International and Independent China, Specialist, Andrew Leung, International Consultants, Hong Kong COVER STORY Of Devaluation, Currency War, and Growth Conundrum! CHINA China’s Renminbi bombshell devaluation by nearly 4 per cent in two consecutive days has aroused across the globe a flurry of speculation and panic of doom and gloom. Some $300 billion has moved out of China since the end of 2014. Is China coming off her wheels? What is the endgame? T he Renminbi (RMB) has appreciated by some 30 per cent against the dollar since 2005 and against a trade-weighted basket of curren- cies by the same percentage since 2008. As the RMB unofficially tracks the dollar, the latter’s growing strength has made the RMB the second most over-valued currency in the world. Even after the deval- uation, the RMB is still up around 20 per cent against the Euro, 15 per cent against the Yen and 10 per cent against the South Korean Won, compared to 18 months ago. This has been causing a perilous drop in China’s exports and continues to erode the country’s competitiveness. China is struggling to maintain a growth target of 7 per cent as the nation transits to a more balanced and sustainable economy. So the RMB’s massive over-valuation must be corrected if the economic foundation for the “China Dream” is not to be shattered. China has made known her desire for the RMB to be included by the International Monetary Fund (IMF) as one of the world’s reserve currencies, alongside with the dollar, the euro, the British Pound and the Japanese yen. One of the pre-conditions for this recognition is the market’s role in determining the RMB’s exchange rate. In recent years, China has been relaxing the currency’s guidance daily trading band, doubling to 2 per cent of the band’s mid-point in March 2014. The bold devalu- ation is touted to be part of a strategy of “stress tests” of dramatic movement in the rigid trading band. At the same time, China’s central bank, the People’s Bank of China (PBoC), has decided to link the guidance rate to the previous day’s spot close. This market-oriented pos- ture augurs well for greater currency flexibility and was welcomed by the IMF. Ever since China widened the RMB’s daily trading band, there has been a great deal of hot money flowing into China (in various disguised forms), speculating on RMB appreciation. But, of late, following slower growth and perceived problems of the Chinese economy, there has been a growing money outflow. These two-way flows are to be expected should the RMB become fully convertible as an international reserve currency. Now, after two con- secutive days of devaluations, the RMB was deliberately strengthened by 0.05 per cent. This symbolic move was a shot across the bow that the RMB is not a one-way bet on
  26. 26. The Global Analyst | SEPTEMBER 201526 | its road to full convertibility. On its part, the PBoC has emphasized that there is no basis for continued deval- uation and that the central bank has the power and resources to maintain RMB’s stability. As the RMB still re- mains grossly over-valued in relation to other currencies, many observers take PBoC’s assurance with a pinch of salt. However, it must be remem- bered that as China is expanding her consumer economy, a stronger RMB would be a key driver to put more purchasing power in the hands of the nation’s burgeoning middle-class. Impact on the global economy So, what are the implications for the world economy? The bad news is that such massive devaluation by China is likely to set off a global “currency war” of com- petitive devaluations. More curren- cies now move in tandem with the RMB than with the dollar (Subra- manian, 2011). This in turn would translate into greater resort to the money-printing press, creating more bubbles in investment assets across the globe, especially stock markets and properties. If this happens, China cannot escape unscathed as the world’s largest trader at the central hub of a global supply and production chain. In ad- dition, as China is the world’s largest commodities customer, a continuing weakening of the RMB may dampen global aggregate demand for com- modities, risking further price drops in already-depressed commodities markets.This is likely to send trem- ors to the financial world. In the case of India, a cheaper RMB is likely to make Chinese imports even more competitive, worsening India’s bilateral trade deficit. However, such deficit is less important than India’ overall trade deficit, of which 70 per cent is due to oil and gas rather than Chinese imports. The good news is that lower commodity prices driven by weaker Chinese demand will ben- efit commodity-dependent sectors of the rest of the world, including India. Can it be a game changer? At the end of the day, China is un- likely to allow her currency depreci- ate by any sizeable amount, let alone rapidly, as this would retard or even reverse her strategy of re-balancing the economy towards consump- tion, industrial upgrading and in- novation. All these changes require a stronger rather than a weaker RMB. Nirvana would be reached if, and, that is a big if, armed with a stronger and internationally convertible RMB, China succeeds in transforming her economy and in synergizing other partnering economies to grow by capitalizing on her global economic connectivity. If that becomes reality, the world would see a phenomenal Renminbi Devaluation TGA Chinese growth forecasts have been systematically downgraded Source: Consensus Economics tum leaps in two-way trade and investment supported by trans- regional transport links. If so, un- precedented business opportuni- ties would be opened up for many countries, India included, lifting the world economy up from doldrums to new heights. All these may sound like pipedream. However, China is doubling down her bets. Her epic, pan-continental initiative of the One Belt, One Road infrastructure-cum-investment strat- egy, backed by a new Asia Infrastruc- ture Investment Bank (AIIB) and a $40 billion Silk Road Fund, speaks volumes. To realize her ambitions, however, China needs, amongst other things, the RMB to become fully convertible sooner rather than later, possibly by 2020. For that to happen, China will have to reform, open up and strengthen her financial sector through exposing the RMB to rigors of global market forces while hammering out a more sophisticated regulatory system. When all is said and done, China’s abrupt and massive devaluations seem both an urgent attempt to nip a looming economic crisis in the bud as well as a step forward to open- ing one of the last bottlenecks of the world’s second largest economy. trajectory of China’s con- sumer market into possibly history’s larg- est. This out- come may well be achieved through quan-
  27. 27. 27The Global Analyst | SEPTEMBER 2015 | Life Insurance Corporation of India (LIC) adds another feather to its cap as it emerges as the new numero uno in Bahrain. I ndia’s top insurance company is now also the largest player in the Bahrain’s insurance in- dustry. According to latest data, LIC has beaten compe- tition from nearly 60 global insur- ance firms to emerge as the number one insurance company in the Gulf nation. Bahrain’s is also the Indian insurer’s largest international op- eration. Besides, the Indian insurer’s overseas entity has also emerged as the third largest player in the United Arab Emirates. LIC is the undisputed leader with a market share of over 70 per cent of India’s insurance industry, serv- ing over 25 crore policyholders. The company also operates in several overseas markets through its vari- ous subsidiaries and joint ventures. It currently is present in five GCC (Gulf Cooperation Council) countries namely, Bahrain, Kuwait, Oman, Qatar, and UAE. The state-owned insurance major earns 80 per cent of its total international business from Bahrain alone. According to Rajesh Kandwal, CEO & Managing Direc- tor, LIC International, Bahrain, “LIC has 43 per cent market share in pre- mium income and 89 per cent in poli- cies in Bahrain. “The customer base in the countries we are operating in the region mainly comprises of non- resident Indians, though we do sell to the local nationals wherever we are licensed to sell.” He attributed the company’s success to its ability to connect with a growing Indian di- aspora, the company’s strong brand identity, and its innovative products. “Despite the intense competition, we are the market leader in Bahrain. Brand LIC has a very strong connect with the NRIs and quite accepted in the region thereby making NRI seg- ment as a ‘niche’ market for us. There INSURANCE are around 60 insurance companies operating in the GCC countries,” he told Indian Express, India’s leading English daily. Some of the other key international mar- kets where LIC has a significant presence in- clude United Kingdom, Singapore, Mauritius, and Kenya. And it seems all set to better its previous year’s good perfor- mance this year in terms of new businesses (pre- mium income) by the end of the current fiscal year. According to the head of the company’s Bahrain business, “We have already achieved total first premium in- come target of $200 million as at June 2015 and we shall surpass our target in first pre- LIC is No.1 in Bahrain TGA order to deepen our bancassurance relationship, co-branded credit card with our bancassurance partner First Gulf Bank (FGB) was launched,” he noted. LIC recently received permission from Bangladesh to start its operation in the country during PM Narendra Modi’s recent tour. India’s insurance major has improved its performance significantly during this financial year, after underperforming in 2014- 15. The state-owned insurance firm collected Rs 7,044 crore premium in June 2015 compared with Rs 6,259 crore in June 2014 and sold 16,91,597 policies in June 2015 as against 12,26,272 in the same month a year ago, data from Life Insurance Coun- cil, showed. mium income by a good margin at the end of the year.” Kandwal also observed, “The year so far has been quite encouraging. In terms of num- ber of policies, we are growing at the rate of over 12 per cent and in non single premium, the growth rate is over 36 per cent which is satisfactory. He also attributed the role played by the company’s bancassurance part- ners in selling to the other nationals, particularly locals. “We distribute our products through tied chan- nels, banks, brokers and corporate agents. BBK and SBI (in Bahrain), FGB, Emirates NBD, ADCB and RAK Bank (UAE) and Doha Bank (Qatar) are our major bancassurance partners. We signed an agreement with prominent a broker recently. In
  28. 28. The Global Analyst | SEPTEMBER 201528 | We must ensure that replacements are better than what is available now. The content of (Draft) IFC, unfortunately, does not give any assurance of the kind. GOI should tread slowly, if it does not want India to follow Greece, too soon! Not just a Rate- cutter, RBI has a larger role! E very monetary policy review by Reserve Bank of India (RBI) is preceded by speculations about changes in policy repo rate and suc- ceeded by different views on what is stated in the RBI Governor’s announcement through the monetary policy statement. The third Bi-monthly Monetary Policy Statement, 2015-16 was no exception. Monetary and Liquidity Measures announced by RBI Governor Dr Raghuram Rajan said, “On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to: • keep the policy repo rate under the liquidity adjust- ment facility (LAF) unchanged at 7.25 per cent; • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL); • continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo BANKING rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and continue with daily variable rate repos and reverse repos to smooth liquidity. Consequently, the reverse repo rate under the LAF will remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent.” The assessment that followed explained the background in which these decisions were taken. Governor, after ex- plaining the global scenario, mentioned that in India, the economic recovery is still work in progress. Dr. Rajan noted that headline consumer price index (CPI) inflation rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations. The sharp month-on-month increase in food and non- M G Warrier* Ex-General Manager, Reserve Bank of India *Author of 2014 book, “Banking, Reforms & Corruption: Development Issues in 21st Century India”
  29. 29. 29The Global Analyst | SEPTEMBER 2015 | lative changes, it may take years to materialize, is a studied one. While the main text of the (Draft) IFC (now in circulation) has 94 chapters in over 200 pages, the major public con- troversy and debate surrounds only the composition of Monetary Policy Committee. People have started for- getting a more damaging proposal to rush through procedures to trans- fer the responsibility of Public Debt Management from RBI by setting up another body called Public Debt Management Agency (PDMA) di- rectly under Ministry of Finance. Minister of State (Finance) in another context mentioned that MPC issue forms only 3% of IFC (perhaps by word count!). He is right. IFC is an aggregation of duties and respon- sibilities of several agencies which have statutory functions in the fi- nancial sector. Now, the only way to handle it with responsibility would be to disaggregate it into manage- able pieces covering different areas hitherto covered by different legis- lations. That is, the areas covered by Reserve Bank of India Act, 1934 could be taken up first. The other ‘political’ option would be to rush through some procedures and pass a wholesale legislation without much deliberation, on a convenient day. But that would be perilous for the country’s financial sector and the In- dian economy. Having said that one takes note of the elegance with which Dr. Rajan and Minister of State (Finance) Jayant Sinha fielded questions on the con- troversies arising from the proposals contained in the Draft Indian Finan- food items overwhelmed the sizable ‘base effect’ in that month. Food in- flation rose 60 basis points over the preceding month, driven by a spike in prices of vegetables, protein items - especially pulses, meat and milk - and spices. According to RBI assessment, liquid- ity conditions have been very easy in June and July. A seasonal reduc- tion in demand for currency and increased spending by Government coupled with structural factors such as low credit deployment relative to the volume of deposit mobilization contributed to surplus conditions in the money markets. This resulted in a significantly lower average daily net liquidity injection under the fixed rate repos under LAF, and variable rate term repo/reverse repo and MSF at 477 billion in June, down from 1031 billion in May. In July there was net absorption of 120 billion through these facilities. In response to the reduction in the policy repo rate in June the weighted average call rate eased from 7.47 per cent in May to 7.11 per cent in June. Those who are making a plea for more ‘cuts’ may try and understand the following observation in the poli- cy statement: “Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see more gains from cut- ting rates.” Redefining RBI’s role – Why the hurry? Having accepted an inflation target with an upper limit of 6%, RBI Gov- ernor’s expression of intention to consider measures, that according to his perception, may have an ad- verse impact on inflation, only when he is sure about inflation remaining within manageable level(s), should not surprise anyone. This season, media and analysts are going round and round on ‘rate cut’ and a couple of proposals in the (Draft) Indian Financial Code (IFC) circulated by GOI. In this context, RBI Governor’s observation that as these need legis- Reserve Bank of India cial Code circulated by Finance Min- istry about composition of Monetary Policy Committee (MPC) during the first week of August 2015. Perhaps this expression of mutual trust and patience to listen to a different view other than the one’s own is worth emulating by the political leadership in Delhi on umpteen other disputes coming up every other day. Both did not make any new revela- tions, but emphasized the need for mutual trust. While Sinha tried to differentiate between proposals and conclusions, Dr Rajan fielded the question on MPC arguing that if veto power is retained, it doesn’t change status quo. But Governor did not for- get to acknowledge the respect with which GOI treated RBI all along. By asserting that RBI has always enjoyed de facto independence in policy formulation, he has also in- dicated, where the buck stops, in re- gard to monetary policy. Referring to the efforts of GOI to ‘cage’ RBI’s role, columnist T C A Srinivasa-Raghavan mentioned that RBI was a ‘fly in the bottle’. In reality, RBI happens to be the “Curd in the Pot”, if at all an analogy was needed to explain RBI’s position. There has been unending disputes about whether curd is dependent on the pot for its existence or whether the pot gets value addition because it contains curd (Thakrasyaadhaaram Ghatam vaa Ghatasyaadhaaram Thakram?). Government and people of India, like the pot, are dependent on the central bank for retaining the strength of the economy. Y V Reddy’s oft-quoted observation • RBI is currently a self governing institute which fixes it’s targets and works under its rules. It is free from external control of government. So far, Central Government can only suggest RBI but RBI has the freedom to implement their suggestions. • Losing autonomy is like having a parent who has decided engineering for you before you are born and forces the thought onto you. How is RBI Autonomous?
  30. 30. The Global Analyst | SEPTEMBER 201530 | that the contours of RBI’s autonomy is decided by government cannot be disputed. But stifling a statutory organization’s functional autonomy within the pre-decided mandates, by back-seat-driving by any forces, brings down the reputation of both the institution and the owner, in this case GOI. RBI’s autonomy or independence of monetary authority within the con- tours of government policy is not an issue just affecting those at the helm of the central bank. The political lead- ership’s selfish interest to have birds of passage at the helm of all limbs of governance, which will parrot the view of the day’s government, which finds expression through measures like ensuring government-nominee domination on boards and commit- tees, is a disturbing phenomenon, and needs to be curbed. Mythili Bhusnurmath writing in Economic Times ( “Hard Times Got Harder”, August 3) mentioned that sometimes monetary policy state- ments do not get the attention they deserve. One has to concede that not much is talked about the implications of various moves by RBI to manage monetary environment, beyond in- terest rates. Even the Financial Sector Legislative Reforms Commission( FSLRC) report and its off-shoot, the (Draft) Indian Financial Code are being micro-analysed only around RBI’s role in deciding base interest rates, whereas the code attempts to reinvent every financial regulator! Former RBI Deputy Governor Usha Thorat in her recent article in the In- dian Express has brilliantly argued the case for not rushing through the IFC at this stage. Economist and for- mer Deputy Governor S S Tarapore has consistently argued the need to preserve the present strength and capabilities of RBI in policy formula- tion unscathed. A unique institution with strong leadership RBI cannot be compared with central banks in other countries with limited central banking functions. GOI has been dependent on RBI on several occasions in the past for coming out of tricky situations. It is not acciden- tal that GOI, irrespective of politi- cal colour, has been ensuring strong leadership for RBI. The present talk in a section of the media about Dr Ra- jan’s term coming to an end in 2016, is again aimed at demoralising the RBI Governor and his team. It will be in the national interest for GOI to seriously persuade him to accept an- other term, this time preferably full five years, till 2021. Back on IFC, let us trust both the min- isters, Jaitley and Sinha, when they say they are open on IFC. FSLRC report needs to be revisited, giving a second reading together with the notes of dissent and the relevance of the recommendations in the present Indian context. Especially because, dissent within the Commission was handled roughly by the Chairman and even the brief dissenting notes recorded by members of the Com- mission did not get the attention they deserved. There is a need for fresh debate for which this article and the observations made by the two for- mer Deputy Governors mentioned earlier can form the basis. RBI’s autonomy or independence of monetary authority within the con- tours of government policy is not an issue just affecting those at the helm of the central bank. The stability of India’s financial sector and the coun- try’s image outside are dependent on that. At the risk of repetition, one has to remind that while writing FSL- RC report, dissent within was sup- pressed and even the brief dissenting notes recorded by members of the Commission did not get the attention they deserved. Pradeep S Mehta writing in the Hin- du Business Line (August 7) depend- ing on an observation by 20th Centu- ry common law judge Lord Denning who preferred dwelling into the un- known to status quo argued strongly for going ahead with formalizing the (Draft) IFC circulated by finance ministry. Mehta concluded that ‘no power on earth must be allowed to stop reforms in India’, the view which no power in India can dispute! But I beg to differ on Mehta’s view that the Code (the Indian Financial Code in the form now in circulation) must be urgently adopted. India was inspired when Prime Minister Modi, speaking from the ramparts of Red Fort on August 15, 2014, said that Planning Commission was a house in disrepair and he proposed to re- build it instead of wasting resources on repair and maintenance. He could put in place NITI Aayog without dismantling Planning Commission. Indian judiciary, India’s legislations including those covered by Financial Sector Legislative Reforms Commis- sion (FSLRC) report and, perhaps, the entire architecture now in place for governance are awaiting compre- hensive overhaul. Reform with caution The office of Indian President, the Election Commission, CAG, RBI and the Supreme Court are some of the limbs which have withstood the test of time during the last 68 years since independence. In their case, the assertion by Lord Denning that ‘the law will stand still’ does not hold good, as these institutions had fairly good leadership all along, ca- pable of application of mind, which helped them grow to meet the chal- lenges they faced from time to time. Any initiative to reform them should take into account the evolution of their role so far. We must ensure that replacements are better than what is available now. The content of (Draft) IFC, unfortunately, does not give any assurance of the kind. GOI should hurry slowly, if it does not want In- dia to follow Greece, too soon! (The views are personal) TGA “Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability.” Moody’s Analytic Reserve Bank of India
  31. 31. 31The Global Analyst | SEPTEMBER 2015 | Make payment in favor of “Media Five Publications Private Limited” either through bank draft or cheque payable at Hyderabad and send to: Media Five Publications (P) Ltd. # 403, Swarnasri Residency, 6th Phase, (HIG 300) KPHB, Kukatpally, Hyderabad 500085. Mobile : 9247 769383 / 709 3004234 / 9247 220795 / 9290 481526 Make online payment through: Media Five Publications (P) Ltd. SBH A/c No. 62235752282, IFSC Code: SBHY0020318, Branch : 6-3-609/191, Anandnagar, Khairatabad, Hyderabad 500004 SUBSCRIPTION FORM Informative, Educational, and Inspirational The Global ANALYST is positioned as the magazine for ‘The New Age Managers,’ distinguishes itself from the competition in terms of its Premium Contents – developed by some of the finest minds from the industry and the academia, globally. It brings insights from the fields of finance, business, economics, technology, innovation, banking, private equity, start-ups, etc. from across the Globe. Subscription Plan Years Subscription Price (Rs) No. of Issues Discount (%) Benefits Put (√) Mark 1 1200 12 - -  2 2400 24 Discount 10% You Pay Rs. 2160 (Save Rs.240)  3 3600 36 Discount 15% You Pay Rs. 3060 (Save Rs.540)  5 6000 60 Discount 25% You Pay Rs. 4500 (Save Rs.1500)  FOR RENEWALS 1 1200 12 - -  2 2400 24 Discount 10% You Pay Rs. 2160 (Save Rs.240)  3 3600 36 Discount 15% You Pay Rs. 3060 (Save Rs.540)  5 6000 60 Discount 25% You Pay Rs. 4500 (Save Rs.1500)  SEND SMS (SUB): 9247 769 383 / 9247 220 795 PERSONAL INFORMATION NAME: .......................................................................................................................... ADDRESS: ....................................................................................................................... ...................................................................................................................................... ....................................................................................................................................... Landmark........................................................................................................................ CITY...................................................................PINCODE ........................................... STATE................................................ Email............................................................... Payment details Amount.......................................................... Date............................................................... Bank.............................................................. City................................................................ Land Phone................................................... Mobile........................................................... Email: mediafivepublications@gmail.com / theglobalanalyst5@gmail.com
  32. 32. The Global Analyst | SEPTEMBER 201532 | New Kids on Banking Block PAYMENTS BANKS BANKING Payments banks are expected to be operational extensively on technology platform to provide the desired services with most cost effective way. Their target customers will be existing clientele of PSBs and Private sector banks as well as untapped, unbanked and under-banked population. Welcome to the new kids on the banking block. N S N Reddy Asst. General Manager, Andhra Bank, Zonal Office, Vijayawada “The future lies with those companies who see the poor as their customers.” - Prof. CK Prahalad

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