December 1, 2013
Volume 19
FinNiche
FinXpress
FinXpress Volume 19 Dec 1, 2013
From The Editorial
CONTENTS
From The Editorial In focus: Banking License Opinion: Quantitative Easing Helping The Masses: A Myth Term of the Week: Derivatives Market This Week
IMT continues to follow its tradition of hectic day and sleepless nights. Second years are all set to face the heat of upcoming final placements. We whole heartedly wish them luck. While on the other hand, juniors are occupied with corporate case studies, Inter B-School competitions along with regular academic curriculum. This week market showed significant strength as on Friday GDP data for the September quarter arrived at 4.8%, marginally higher than expected 4.6%. Farm sector reversed the trend of India's sluggish pace of expansion lifts GDP to 4.8% compared to 1.7% a year ago. We bring this week’s In Focus Section on “Banking License” where 26 companies have applied for the same. Opinion section is about much hyped, ’Quantitative easing’. Do look over the ‘News of the Week’ section for further noteworthy news. The ‘Market of the Week’ covers the latest trends in the market this preceding week.
News Fun Corner
We hope you enjoy the various articles in this edition of FinXpress. We look forward to your comments, acknowledgements and your criticisms regarding our online magazine. Happy Reading!!!
Regards, The Editorial Team
FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. December 2013
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IN FOCUS
FinNiche
BANKING LICENSES– BOON OR BANE —- By V.V.Raviteja
On December ’12 with much fan fare RBI announced the guidelines for new banking licenses in private sector. This was in line with the “Inclusive Growth” of UPA government i.e. by delivering affordable financial services to rural India. Taking cue, 26 companies have applied for same including the likes of large corporate like Tata, L&T, Reliance, Aditya Nuvo, Bajaj.
Corporate Structure of NOFHC: A Non Operative Financial holding company needs to be formed and that will ring fence all the regulated financial services activities of both and Group companies. This translates into RBI supervising not just bank but also whole of Tata group associates. This will act as an deterrent to corporate day to day flexible functionality.
A World Bank survey suggests that almost 68.5% of the Indian population doesn’t have a bank account. Plugging this gap will not only improve credit facilities and transfer of welfare subsidies, but also inject more savings into the system. This will eventually translate to a greater investments and growth.
Minimum voting & Shareholding pattern of NOFHC: Shareholding by NOFHC should be brought down to 20% from 5 to 10 years of banks operation and should be further diluted to 15% by 12 years from commencement of business. PWC report indicates that it takes minimum 3 years for an Bank to break even given amount of capital investment and regulatory norms. Thus it makes little sense to a corporate house to divest in a business when it just begun to reap the benefits
Stringent guidelines: Achieving a CRAR of 13% and SLR of 23% within 3 years were also part of the guidelines laid down by RBI. Besides initial paid up capital of the bank would In line with the ambition of realizing the be $0.5 billion, only makes return on above prospects 25% of new licensed equity (ROE) highly unviable. bank bran ches will h ave thei r operations in rural area and adhere with Given the economic head winds faced by 40% priority sector lending criteria of the banking sector and an increasing RBI. In addition to this, new banks also non-performing assets (NPA) on existing should follow SLR, CRR norms like older banks balance sheets, it really offers an ones. Post this RBI announced that first risky proposition to corporate houses in round of licenses will be given by fray. January ’14 and tentatively the NonBanking Finance organizations will be preferred given their existing customer base. Little was it anticipated that Tata Sons & Value Industries (Promoted by Videocon) will withdraw their applications just 30 days from RBI announcing the results. Let us understand reasons behind them to for doing it.
December 2013
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FinNiche
Opinion
Quantitative Easing Helping the Masses: A Myth —- By Bhanu Chokhani
In November 2008, when world economy was undergoing turmoil and Lehman Brothers declared bankruptcy, Federal Reserve announced that it will buy $600 billion in agency mortgage backed securities (MBS) and agency debt. The objective was to simulate the economy by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Five years down the line, reviewing their policies the question that comes to mind is “Was Federal Reserve really trying to simulate the economy or was it saving big Wall Street from defaulting?” Who was the true beneficiary of the Quantitative Easing?
called QE “the greatest backdoor Wall Street bailout of all time.” So how exactly has been Fed doing it? Federal Reserve first purchases nonperforming assets from the banks and hence removing the largely worthless asset from the books of the bank buying them at the face value by raising federal debt instruments. This replaces the non -moving asset from the bank’s balance sheet with a marketable asset. Fed then resells the loan at the fraction of the purchase price to the same group of banks and hence launders the loan back to them. This way bank not only makes profit on the whole transaction turnaround but also maintain the asset with them.
Looking at the statistical data available, as per an audit performed by Government Accountability Office (GAO) in 2011 of the Fed, “there has been a $16 trillion in Fed bailouts to banks and corporations around the world since 2008 financial meltdown.” .” Also since November 2008, stock market in United States rose by 108%. The rise in stock market is mainly attributed to the money entering the system due to QE. Since 82% of the individually held stocks are owned by the wealthiest 5% of all Americans it will not be wrong to say that the QE policies are benefitting the wealthy rather than the poor. And Though many mainstream financial Donald Trump essentially said the same critics make believe that quantitative thing when commenting about QE: easing is a “liberal” economic policy, the “People like me will benefit from this”. truth is far from it. Instead the matter of fact is that quantitative easing is a With all that has been written about QE, bailout package for the rich Wall Street one thing that everyone will agree upon bankers given by Federal Reserve at the is the fact that Fed’s bond buying cost of the working middle class people. program is unprecedented. There could This can be validated from a recent have been a better way to simulate the press release of Andrew Huszar, an ex- economy but the Fed is only interested Fed official who managed the QE in maintaining the status quo. program in the year 2009-10, where he
December 2013
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FinNiche
Financial Knowledge Term of the week — Derivatives —- By S. Divya Shree
Derivative is a financial instrument whose price is derived from the value of underlying assets. The most common underlying assets are stocks, bonds, commodities, currencies etc. Derivatives is merely a contract between two or more parties. Derivatives are generally used as an instrument to hedge risk but can also be used for speculative purposes. Future contracts, forward contracts, options, swaps are the common types of derivatives.
intermediary for all transactions where individuals trade standardized contracts that have been defined by exchange. 2. Over-The-Counter Derivativescontracts that are traded directly between 2 parties without going through other intermediary or an exchange. Forwards: A tailored contract between 2 parties where payment takes place at specific time in future at todays pre determined price. Futures: Contract to buy and sell assets on a future date at a price specified today. The difference between futures and forward is that future is a standardized contract written by operating house that operates on exchange whereas forward is a non standardized contract written by parties themselves.
Example: A European investor purchasing a stock of an American company has exchange rate risk while holding that stock. To hedge that risk, investor could buy ‘currency futures’ to lock in a specified exchange rate for the future stock sale and currency conversion back to euros.
Options: Contracts that give the owner right but not obligation to sell or buy an assets. Options also specify a maturity date. Options are of 2 types: Call option Put option Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options known as warrants. These are generally traded over-the-counter.
Derivatives are traded in “Derivatives Swaps: contracts to exchange cash Market” in 2 ways: (flows) on or before a specified future date based on the underlying value of 1. Exchange Traded Derivatives– assets which are of 2 types: traded via specialised derivative Interest rate swap exchanges, which act as an Currency rate swap
December 2013
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FinNiche
FINANCIAL KNOWLEDGE
NEWS ArcelorMittal, Nippon Steel to buy US company's franchise to an entrepreneur plant for $1.55 billion in Bangalore to brew, bottle and market Murree beer in India. This will also Arcelormittal and Nippon Steel & strengthen trading ties between India Sumitomo Metal Corp agreed to buy and Pakistan. The product will hit the ThyssenKrupp's steel plant in the market soon. United States for $1.55 billion, ArcelorMittal said late on Friday. Farm sector lifts GDP to 4.8% in Q2 The transaction will be financed through a combination of equity and debt at the Abundant monsoon and a perky farm joint venture level and will yield $60 sector (4.6% rise) pushed up economic million of annual savings, it said. growth to 4.8% during the September The deal includes a six-year agreement quarter and reversed the trend of India's to purchase 2 million tonnes of steel sluggish pace of expansion. While slab per year from ThyssenKrupp's CSA almost all sectors fared better in the steel mill in Brazil. second quarter of the current financial year, agriculture — the usual laggard Fiscal deficit touches 84% of Budget sector emerged as the star performer — target in April-Oct clocking a 4.6% rise, compared to 1.7% a year ago. India's fiscal deficit touched Rs 4.57 lakh crore or 84.4% of budget estimates Mahindra Engineering Services to in the first seven months of the current merge with Tech Mahindra fiscal, reflecting signs of stress in government finances. Fiscal deficit, the Software services major Tech Mahindra difference between government receipts on Friday said it will merge Mahindra and spending, was 71.6% of the budget Engineering Services (MES) with itself. estimate in April-October of 2012-13. It The move is aimed at tapping global stood at 76% in April-September this oppo rtunities i n ae rospace an d year and climbed further to 84.4% of the automotive verticals. "MES and Tech budget estimate (or Rs 4.57 lakh crore) Mahindra's Integrated Engineering April-October, as per government data Services (IES) merger strengthens the released today. The deficit is without existing services portfolio, enhances accounting for subsidies that the presence in US and Germany, provides government will have to pay for selling scale and brings in new clients for diesel and cooking fuels at prices below further expansion." cost. As much as Rs 45,000 crore of fuel subsidy to be paid this fiscal will be Harley Davidson India to export carried to the next year as all of the Street 750 budgetary provisions have already been exhausted in the first six months. Harley Davidson India will begin assembling the Street 750 at its facility Pakistan's beer to add fizz to Indian in Haryana from the second quarter of market 2014 and plans to export it to Europe. India is the only country outside the US Pakistan's known l i q u o r to be making the new bike, which is company Murree Brewery has given a built on the completely new ‘Street’ franchi se to a Ban galo re -base d platform, and this will be the first HD entrepreneur to bottle and sell product to be exported from the facility. its Murree brand beer in theIndian The first Harley Davidson member in the market. It was not permissible to export sub-Rs-5-lakh segment, the Street 750 beer to India through Wagah-Attari will be unveiled at the India Bike Week border so we decided to offer our in Goa in early January. December 2013
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week This week market showed significant strength as the benchmark indexes closed high. The CNX-Nifty closed at a gain of around 200 points from the previous week removing signs of a deep correction that took place in the last week. On Friday GDP data for the September quarter arrived at 4.8% which were marginally above expectations of 4.6% which fuelled the markets on Monday. This successive fourth quarter result of below 5% is although not a good sign for the markets going forward. So we remain bullish with strict stop losses and a cautious approach. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
20709.27 20453.29 19745.43 19575.63
CNX Nifty
December 2013
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
6151.01
Fifty Days
6069.36
Hundred and Fifty Days Two Hundred Days
5901.57 5867.58
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
30332 30236
(0.32)
Silver
1 Kg
46741 44274
(5.27)
Crude Oil
1 bbl
5903 5839
(1.08)
Lending / Deposit Rates Base Rate
9.70%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
7.5%-9.0%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
8.75% 7.75%
Reverse Repo Rate
6.75%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 23%
Exchange Rates INR / 1 USD
62.44
INR / 1 Euro
84.87
INR / 100 Jap. YEN
60.96
INR / 1 Pound Sterling
102.21
December 2013
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FinNiche
FUN CORNER
FUN CORNER FinQuiz
Last Week’s Answers
1. In finance we refer to the market for short-term government and corporate debt securities as the ________ market. 2. Accounting.com has purchased 3-year class equipment for $100,000. It uses the MACRS method of depreciation. What is tax depreciation for the fourth year? 3. A profitable firm would prefer to use which method of depreciation -- Straight Line or Written Down - for tax purpose for a given depreciable asset, all else equal? 4. The cost of monitoring management is considered to be ________. 5. The discount rate at which two projects have identical NPVs is referred to as ________.
1. Sarbanes Oxley 2. Security Analysis 3. Underwriting
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Volume 19 Publisher : Rajat
December 2013
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