1) The document discusses various topics related to the financial sector including a Minsky moment, suspension of trading on stock exchanges, granting bank licenses to corporates, financial stability concerns raised by IMF, and risks of sector-specific investing. 2) It explains a Minsky moment as a tipping point when increased risk-taking by lenders meets a price slump, destroying asset values. 3) Suspension of trading is used as an enforcement action by stock exchanges against non-compliant listed companies to prevent further harm to minority shareholders. 4) IMF has warned against granting bank licenses to industrial houses, citing risks to financial stability, and suggested allowing greater private capital and competition in underserved

1. financialdharma
Dear Readers: A Weekly Financial Bulletin Friday January 18, 2013
in
This 46th issue of financialdharma gives us understanding  Financial Gyaan-
on Minsky moment, suspension of trading, issuing bank Is it time to
licenses to corporates, financial stability and sector
investing.
understand the
Minsky moment?
According to the latest data by the RBI banks’ incremental  Beware of suspension
lending between April and December was 4% lower at of trading
₹389,110 crore versus ₹404,530 crore in the  Crystal gazing –
corresponding period of 2011. Bankers say the slowdown Should we issue bank
has resulted in lower demand for loans as investments in license to corporates? Recently NSE suspended trading in
new projects steadily declined. They do not see long-term  RBI’s precursor to Hyderabad-based media company
Deccan Chronicle after the company A Minsky moment is an economic phenomenon that occurs when
credit from corporates significantly improving even in the
financial stability failed to provide shareholding and over-indebted investors are forced to sell good assets to pay back
fourth quarter of FY13. This apart, increase in NPAs is
hindering the bank’s ability to increase its exposure to
 Jargon Buster- financial information. Non-compliance their loans, causing sharp declines in financial markets and jumps
in demand for cash. This moment is the tipping point, when
corporates. Misselling of norms in the listing agreement,
such as failure to file shareholding increased risk-taking on the part of lenders meets with a price
 Is sector investing data or financial results for slump, destroying asset value and engendering a sharp
Those who wish to receive this Weekly Bulletin via email risky? successive quarters can trigger downward financial fall. The history of the financial crisis reflects
are required to send their name and email id to be suspension from the bourses. the build-up of vulnerabilities, starting with the glut in global
Currently, a little over 200 companies
included in the mailing list. with an investor wealth of about
savings; the development of low-cost credit; and an active market
for instruments that offered safety-plus-yield. In 1986 an unknown
₹50,000 crore have been put on the
Sincerely, economist (Thomas Stanton) wrote about boom-and-bust
suspended list by both NSE and BSE
SSK for non-compliance issues. SEBI financial cycles that contrast with the attendant cycles of risk. In
exercises its powers in enforcing the boom period, risks appear remote and companies are willing
suspension on a case by case basis to increase leverage. Lending standards fall and risk
as an extreme step keeping in mind management is marginalized, until boom gives way to bust. In
that if the trading is allowed to be chasing profits, financial firms, mortgage originators, securitisers,
continued, there will be further harm rating agencies and investors deviated sharply from traditional
E: ssrikrishna@shubasri.com done to minority shareholders. Some standards of prudence. Governance and risk management are
SSK is an accomplished CA with extensive experience in legal experts however opine that most necessary in the growth phase, rather than in the bust
financial management with reputed organizations such these norms should be reviewed as it phase when caution would naturally dominate. This was all
as Indal, Tatas, Wipro/GE Healthcare, Motorola and is against the interests of the minority studied and recorded decades ago, yet the crisis that began in
Reliance. He has led several initiatives to transform the shareholders. It might be better to 2007-08 could not be prevented. Will it happen again? It is argued
exit the stock at the first signs of a
financial and business results in these organizations. He that the very act of rescue by the government results in
controversy or in the 5-day period
currently focuses his efforts in mentoring related before suspension. When a company “privatizing profit while socializing risk” and this undermines the
activities. faces suspension from trading, debt holders’ interest and ability to monitor risk, a vital source of
1 Copyrights reserved minority shareholders have little market discipline. While risk-taking is natural in business, it has to
respite, as the rules have no be balanced with sound practices in risk management and
provisions to help them recover their governance. This could otherwise sow the seeds for a recurrence.
money from errant firms.

2. financialdharma
an
Is sector investing risky? A Weekly Financial Bulletin Friday January 18, 2013
in
Investing in a particular sector or stock
is a tough call. In 2012 the infrastructure
Mis-selling is all about misleading
sector funds have returned only 15 per investors about the features of a
cent versus 20% by benchmark indices. product. In order to sell the
Over a three-year period, infrastructure product to a customer, the
funds are the second-worst performer at salesperson may hide certain
annual returns of minus four per cent. information. In a nutshell, selling
Overall investment mood may improve products to customers on the
further if RBI cuts rates in the upcoming basis of wrong information, and
monetary policy review. But can one bet selling wrong products with
on any sector or stock, based on these correct information to a person
who doesn't need them both falls There are symptoms of a
events? The answer can be both yes moderate rise in instability of the IMF in its latest update on financial stability in India has warned against
and no. It depends on two factors: Your under the category of mis-selling. granting bank licenses to industrial houses. This warning follows that
A good example of misselling banking sector in recent periods
risk appetite and the percentage of
can be seen in the life insurance due to the rise in the NPA advocated by Nobel-winning economist Joseph Stiglitz against corporate
portfolio that is being invested in such industry. Consider an investor according to RBI’s working paper ownership of banks in his recent visit to India. IMF also opines that the
stocks/sectors. Even if you have the risk who has a large amount of on Banking Stability. The NPAs financial sector’s capacity to support sustainable economic growth would be
appetite, it is important to contain your savings and investments but no or bad loans in the banking boosted by “gradually reducing mandatory holdings of government securities
investment to any particular sector to dependent children and a sector rose sharply to 1.28% in by financial institutions, and allowing greater access to private sources of
about 15%. The signals for a sector or deceased spouse. This investor 2011-12 from 0.97% in the capital. The study points out to provide “more room for private initiative and
stock to be re-rated are action expected would arguably have little need previous year, because of high competition” in microfinance and other efforts to reach poor borrowers who
in the sector either by a cut in rates or for whole life insurance and, interest rate and slowdown in the are under served by existing financial institutions. These suggestions and
government action. Often there can be therefore, an insurance global economy. Though private
salesperson describing the
warnings should prompt a rethink on whether the risks to financial stability
pre-emptive action from traders in these lenders reduced their NPAs to
from allowing corporate ownership of banks outweigh the benefits. IMF thinks
stocks. For instance, sectors like product as something the 0.46% from 0.56%, the NPAs in
investor urgently needed to the risks outweigh the benefits currently as the legal, operational, and
banking were under stress the whole public sector banks rose to
protect his or her assets in the 1.53% in 2011-12 from 1.09% a regulatory framework for consolidated supervision of both bank led groups
year as it is rate sensitive. But banking
event of death could be year ago. The paper highlighted and financial conglomerates is still missing some important elements, and it
funds moved up almost 41% belying the
pressure of their books. Even amid
considered a case of misselling. that there is a need to exert would be prudent to first put in place and gain sufficient experience from
bank stocks, there were particular picks. " precautionary measures to implementing a comprehensive framework for this purpose before even
The shares of public sector banks did improve the overall performance considering whether to proceed with the entry of mixed groups and
not do so well. These stocks were badly of the banking sector and initiate conglomerates. Further the concerns about perverse inter-group lending and
hit because of the high interest rates, regulatory measures risks of contagion cannot be dismissed lightly. It is worthwhile to ponder if
which affected the repayment capacity appropriately. Also, there is a there are less risky ways to achieve the noble aim of financial inclusion. In
of companies and in turn resulted in need to build enough safeguard fact even sub-prime mortgages were justified in the US on the grounds of
in the banking sector to avoid the greater inclusion as US policy makers wanted poor people to own homes.
high non-performing assets for banks.
negative feed-back loop between The risks were never acknowledged till the sub-prime crisis erupted. In this
2 Copyrights reserved
But private banks did not face the same
the banking sector and the real
fate, as investors felt they had handled backdrop it is prudent for both RBI and GOI to put on hold taking any action
sector which could lead to the
their bad loans better. in issuing licenses till a comprehensive review is conducted. International
germination and aggravation of a
financial crisis. experience supports disallowing industrial houses from owning banks.