March 09, 2014 Volume 33
FinNiche
FinXpress
FinXpress Volume 33 March 9, 2014
From The Editorial Bidding Goodbye Times
CONTENTS From The Editorial In Focus: Ukraine Crisis Opinion: India mired in Global Economy Term of The Week: Capital Adequacy Ratio Market This Week News Fun Corner
This week brings with itself the mixed feelings of both happiness and sadness. On one hand, the seniors excelled well bidding us all goodbye in flying colors greeted by Cyrus Mistry as the Chief Guest for the convocation ceremony. The excitement prevails among the juniors as their one year of this eventful journey is about to end all have their collars straightened up for the summer internship. Club FinNiche wishes good luck to all the seniors for a successful journey ahead and also to all their batch mates for their final exams and there after summers. We bring to you this week Finxpress covering the latest happenings of the financial world and keep us all updated and informative. In this edition we bring to you economic repercussions of the crisis in Ukraine as our In Focus topic followed by our opinion section on India mired in the global economy. This edition of FinXpress also brings to you some insights on ‘Capital Adequacy Ratio’ as the term of the week. We hope you enjoy reading the articles in this edition of FinXpress. We look forward to your acknowledgements and any suggestions for improvements are most welcome.
Happy Reading!!
Regards Team FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine .
MARCH 2014
PAGE 1
FinNiche
IN FOCUS
Ukraine Crises By Nupur Gupta
Ukraine's political system looks "weak, fractured, highly personal and ideologically vacuous while the judiciary and media fail to hold politicians to account" (Dr. Taras Kuzio in 2009). Ukrainian politics has been categorised as "over-centralised" which is seen as both a legacy of the Soviet system and caused by a fear of separatism. It has a population of 44.6 million, 77.8% of which are locals.
Yanukovych is from the east and Russian is his native language. When he was elected in 2010, it was largely by people in the more Russian-speaking region. So Yanukovych's decision against the E.U. deal did have a base of popular support, among eastern Ukrainians who had voted him into office. So, it was a democratic decision, even if it was poorly executed. But it badly fuelled the national identity crisis.
In November 2013, the government suspended preparations for signing a Free Trade Agreement with the European Union, to seek closer economic relations with Russia and accepting a $15 billion "bailout" from them. Russia also offered Ukraine cheaper gas prices. The EU also required major changes to the regulations and laws in the Ukraine.
On Monday 17 February, Russia announced it would release another $2 billion of its 17 December 2013 agreed loan of $15 billion to the Ukrainian government,
The locals of western Ukraine started a wave of ongoing demonstrations, civil unrest and revolution in Ukraine on the night of 21 November 2013 while demanding closer European integration. The protests had been fuelled by the perception of widespread violation of human rights and the corrupt government. To some, it's now about ousting President Yanukovych and his corrupt government; taking Ukraine away from its 2 century long, deeply intertwined and painful ties with Russia. It is standing up for basic human rights to protest, to speak and think freely and to act peacefully without the threat of punishment. For some, the cardinal reason for this unrest is rather structural-Demographics and an identity crisis. Ukraine has been divided by a national identity crisis since its 1991 independence. Partly this divide is demographic, but it has much more to do with figuring out what kind of country Ukraine wants to be. Ukrainians doesn’t believe that disagreement has shaped their politics, which includes this current crisis. Every presidential election divides the nation into two halves. One who supports the pro- Russian candidate and the other who supports a pro-European candidate.
MARCH 2014
which. There has been constant pressure by Russian authorities on the Ukrainian administration to take decisive action to crush protests. On March 1, Russia's parliament approved a request from President Vladimir Putin to deploy Russian troops in Ukraine. The ongoing protests in Ukraine underline a tendency which has been becoming more and more salient during the last years. If we talk about Russia, this kind of hesitation does not have place in the current Russian discourse. The Kremlin has demonstrated a growing potential of possible instruments of influencing Ukrainian foreign policy course. Even when the current crisis ends, it may not have actually resolved the deeper issue. This problem predated Yanukovych and his crackdown and it will still be there when he leaves, something that only Ukrainians can resolve as a nation.
PAGE 2
FinNiche
OPINION
India Mired in Global Economy —— By Anureen Bhatti
Indian banks, corporate and financial institutions have been tapping and will tap the global financial markets for fundraising activities. But we can say that these attempts have not always been successful and the investors have had their share ruinous counterpunches that spooked the Indian markets, especially in January 2014.
fears of banking sector meltdown affected the global financial market.
It was followed by Russian rouble sliding to a five year low and central European countries such as Poland and Hungary being affected, the impact was also felt in the Indian stock market, with banking sector losing 860 points. Suggesting that international bad news always had a Sadly the year 2014 has started on a victim impact on Indian financial markets, mode for most markets after a stretch of compared to other news. glorious rallies in 2013. These success stories seem to have been hit by a series of Since June 2013, emerging market debt bad news from across the globe. The and equity fund had combined outflows of financial markets across the world are $9.1 billion with $6.4 billion of equities either a victim or a darling of the financial being withdraws from emerging markets, dynamism. As the Indian banking sector while $2.7 billion of debt made up of the turns negative, the interplay of such bad largest debt-fund outflow. At the domestic news and public dispensation has provided level the announcement of monetary policy a dangerous mix of virulence. by the RBI also had an impact, as opposite to market expectations RBI raised the repo Considering the various external factors we rate by 25 bps. can see how the Indian markets have been hit and what lessons should be learnt from It was clear that emerging economies like these incidents. India were mired in a negative feedback loop of weak currencies, higher interest The global financial events had a rates, weak growth and capital outflows. catastrophic impact on international Notwithstanding the negative impact, the financial market. Firstly, the news form the banking sector in India has a more healthy emerging markets of currency crisis in mix of debt-equity and is more closely Latin America that sat a fall of al most 20% aligned to the real sector. The level of in peso Argentina saw a series of events in leverage of Indian banks also reflects a its economy like recession, hyperinflation, comfortable tier-I capital position, modest prosperity and economic crisis. The story of growth in overall banking assets. Argentina is an apt example of how an economy rises from rags to riches and vice- To conclude, it can be said that asset versa. quality is intrinsically linked to economic turnaround, which is an exogenous factor Secondly the emergent meeting that the and acts only as an enabling mechanism in central bank of turkey had on Jan 28 ended benefitting the bank from the upswings in with a massive 450 bps hike in the rate. its business cycle. The lessons that can be Thirdly, in china with its financial crisis, learnt are that Indian financial institutions rapid private sector growth and diminishing planning to tap the international markets working population raises state of have to love with volatility. Also, to bring confusion. The news from china about the back retail participation in financial suspension of cash transfers by domestic markets, support for the stock markets commercial banks during the heightened should be encouraged.
MARCH 2014
PAGE 3
FinNiche
FINANCIAL KNOWLEDGE
Capital Adequacy Ratio Capital Adequacy Ratio is a term which was recently in vogue in most Indian financial journals and newspapers, after the declaration of dismal Q3 results by the United Bank of India. It declared a staggering loss of Rs. 1238 crore for the Oct -Dec quarter, more than double the loss declared in the previous quarter. As a result its Capital Adequacy Ratio stood at 9.01%, calculated under Basel 3 norms, just over the minimum of 9% mandated by the RBI. Also, its tier 1 capital fell below the minimum mandated requirement of 6%, forcing the bank to suspend indefinitely, its lending activities.
lenders might not get fully repaid and might create a bank run in the absence of deposit insurance.
CAR is a more sophisticated tool than debt/ equity ratio for judging the adequacy of a bank’s capital as it takes into account the risk factor involved with various asset classes possessed by a bank. CAR = (Tier 1 Capital + Tier 2 Capital)/Risk Weighted Assets. Two types of capital viz. tier 1 and tier 2 are used to calculate the CAR. Tier 1 capital represents the extent of losses a bank can bear without having to stop its trading activities whereas tier 2 capital represents the capital which bears losses only in the event of the bank winding up and hence provides a lower degree of protection for depositors and creditors. Tier 1 capital generally consists of common stock and the retained earnings (disclosed reserves) of a bank. Tier 2 capital generally consists of general loss reserves, non disclosed reserves, hybrid instruments that have characteristics of equity as well as debt and subordinated debt which is debt that ranks lower than the normal deposits So, what exactly are these ratios and why is in the bank. it necessary for banks to maintain a certain minimum level of capital? Capital Adequacy The central banks of countries usually have Ratio (CAR) is calculated as the ratio of a some discretion over how different financial bank’s capital to its risk weighted assets. instruments can be used to fulfill tier 1 and The central banks of most countries require tier 2 capital requirements. Risk weighted commercial banks to maintain a minimum assets are calculated by assigning weights CAR to allow these banks to absorb a to different asset classes based on the certain amount of losses without becoming amount of the risk they carry. For example, insolvent. This concern can be explained in govt debt, held in the form of T- bonds are a simplified manner using the leverage ratio usually allotted a weight of 0 (0%) whereas (total assets/equity) of a bank. Like we all loans to individual customers not backed learnt in our Macroeconomics course, a by mortgages are usually allotted a weight bank having an asset base of 1000 dollars of 1 (100%). with a leverage ratio of 20 would only have $50 of owner’s equity and the rest of the The implementation of capital adequacy liabilities would consist of deposits and requirements by the RBI according to the debt. In such a case a mere 5% fall in the recommendations of the Basel 3 accord value of its assets due to loans turning to must be lauded as it has already led to the NPAs or some other reason would identification of a bank under stress and as completely erode the owner’s equity and a result adequate measures can now be any further fall in the value of its asset taken to rectify the situation. would lead to a fear that depositors or other
MARCH 2014
PAGE 4
FinNiche
FINANCIAL KNOWLEDGE
Market This Week An excellent week for the benchmark indices which closed at a record high as FIIs continue to infuse Dollars into the system. Market also reacted positively to the speculation of formation of a stable government in the centre. The Nifty gained 4% this week to close at 6526.65 while Sensex gained 3.8% to close at 21919.79 points. The rupee has appreciated against the US dollar on the back of strong FII inflows. The partially convertible rupee was at 61.08, up 2 paise, after hitting 3month high in trade on Friday.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Fifty Days Two Hundred Days
20,698.54 20,839.57 20,311.55 20,115.16
CNX Nifty
MARCH 2014
PAGE 5
FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
6148.81
Fifty Days
6193.87
Hundred Fifty Days
6028.02
Two Hundred Days
5992.35
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
30130
(0.26)
Silver
1 Kg
46205
(2.14)
Crude Oil
1 bbl
6305
2.97
Lending / Deposit Rates Base Rate
10.00%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.00%-9.10%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
9.00% 8.00%
Reverse Repo Rate
7.00%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 23%
Exchange Rates
MARCH 2014
INR / 1 USD
61.07
INR / 1 Euro
84.76
INR / 100 Jap. YEN
59.14
INR / 1 Pound Sterling
102.12
PAGE 6
FinNiche
FINANCIAL KNOWLEDGE
NEWS M&A deals: CCI to offer help in 'substantiative' issue To make compliance process easier for companies, the Competition Commission of India (CCI) plans to provide assistance in “substantiative” matters pertaining to mergers and acquisitions. Companies entering into combinations or mergers and acquisitions (M&A) have to seek approval of the CCI, which has the mandate to keep a tab on unfair trade practices at the market place. At present, companies can avail facility of informal and verbal consultation with the staff of CCI prior to the filing of notice to a proposed combination. However, such interactions are now restricted to procedural aspects.
subscriber data. The groups claimed that Facebook "routinely makes use of user information for advertising purposes and has made clear that it intends to incorporate the data of WhatsApp users into the user profiling business model."
Forex reserves rise USD 954.6 mn to USD 294.3 bn The country's foreign exchange reserves rose by USD 954.6 million to USD 294.36 billion on account of gains in the value of gold reserves. In the previous reporting week, the reserves had dipped by USD 383.7 million to USD 293.41 billion . After remaining unchanged for multiple weeks, the gold reserves surged by USD 902.3 million to USD 20.978 billion for the week ended February 28. Foreign currency assets (FCAs), a major part of the overall reserves, increased by USD 33.6 million to USD 266.90 billion for the week ended February 28. The special drawing rights also rose by USD 13 million to USD 4.468 billion, while the country's reserve position with the IMF increased by a USD 5.7 million to USD 2.011 billion.
Inflation target becomes govt's job after FM, RBI meet The Reserve Bank of India (RBI) has agreed to the proposal that the right to decide on an inflation target for the economy will become the government’s mandate and that the central bank would focus on achieving it. The RBI currently focuses on balancing between growth and inflation and a proposed switch to an inflation focus had raised concerns within the government that would growth would be compromised.
Privacy groups ask US FTC to halt Facebook-WhatsApp deal Privacy groups have approached the US Federal Trade Commission (FTC) to put on hold Facebook's USD 19 billion acquisition of WhatsApp and investigate how the social media giant plans to use
MARCH 2014
SBI to raise Rs 800-1,200cr by issuing shares to employees State Bank of India has proposed to offer share purchase scheme for all its employees which could raise additional equity capital, between Rs 800 crore and Rs 1,200 crore, for the country's largest lender. Increase in bank's equity capital would depend on the valuation at which the bank would offer shares to its employees.
Malaysia Airline plane, ‘crashes off Vietnam’ A Malaysian Airline Boeing 777 has reportedly crashed into the sea off Vietnam with 239 people on board. State media there says the aircraft came down near Vietnam’s Tho Chu Island. Contact was lost two hours into the flight from Kuala Lumpur to Beijing where relatives faced an agonizing wait after Flight 370 was shown to be delayed on the arrivals board. Most of those travelling on the flight were Chinese and Malaysian but passengers were of 14 nationalities.
PAGE 7
FinNiche
FINANCIAL KNOWLEDGE
NEWS Govt tightens gold import baggage norms for passengers Seeking to check gold smuggling, the government tightened baggage rules requiring inbound Indian passengers to provide details like source of funds for importing the metal as well as their air tickets.
ONGC, Oil India to buy 5% stake each in IOC at Rs 220/share The government had in February end approved a 10 percent stake sale in Indian Oil Corporation (IOC) to state run ONGC and Oil India at a discount of 10 percent at Rs 220 per share. The IOC scrip was trading at around Rs 258 per share when the news came in. The stake sale will happen at a significant discount to current market price. ONGC will have to shell out a little more than Rs 2,500 crore. ONGC already has around 8.77 percent stake in IOC.
According to a Revenue Department circular, the baggage receipt issued by Customs will now include the engraved serial number on gold bars and itemwise list of ornaments. The norms have been tightened following "a spurt in import" of gold by eligible passengers through various airports in the recent past across the country. Sebi finds large-scale mismatch in Sahara papers Eligible passengers are allowed to be Sebi has come across serious anomalies import gold up to 1 kg by paying 10 and a huge number of possibly fictitious percent customs duty in foreign investors after analysing truck loads of currency. Eligible passenger means documents submitted by Saharas to Persons of Indian Origin or an Indian substantiate its claim of over Rs 20,000returning to India after a period of six crore refunds. months of stay abroad. The restrictions have paid desired results as gold Sahara group had deposited Rs 5,120 imports fell significantly and also the crore with Sebi after court orders. It CAD, which is expected to be below USD claims to have already refunded all but 45 billion this fiscal as against all time Rs 2,000 crore in cash directly to high of USD 88.2 billion in 2012-13. investors. The court had ordered refund of over Rs 24,000 crore in August 2012. FIIs mark biggest buy of Indian There are numerous instances of one shares in 2-1/2 months person having hundreds of accounts, Overseas investors bought Indian shares o n e a c c o u n t h a v i n g m u l t i p l e worth 12.73 billion rupees on Thursday, beneficiaries, one person with multiple to mark their biggest daily purchase address and one address having tens of since December 19. They also bought i ndi vi du al s. Be si de s, the re a re Indian equity derivatives worth 26.28 thousands of cases where addresses are billion rupees on Thursday, according to untraceable, as also cases having NSE data. Heavy institutional buying innocuous addresses like national has helped Indian stocks to overcome highways, and just names of villages, worries including US Federal reserve towns or roads, sources said on tapering, China slowdown and sticky condition of anonymity. inflation.
MARCH 2014
PAGE 8
FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
Economic historians usually attribute the start of the Great Depression to the devastating collapse of US stock market prices in 1929. The day is known as ____________.
2.
A company had sales of $930,000 and CoGS of $625,000. At the beginning of the year its Account Receivables were $ 92,000 and inventory was $110,000. At the end of the year the inventory was $140,000 and Account Receivables were $98,000. What is the inventory turnover ratio?
3.
Infosys announced acquisition of a consulting firm, X, 2 years back. Name X?
4.
Where in India is paper for money manufactured?
5.
Unusual service offered by Bank of Baroda in Tirupati— ________________
Last Week Answers 1. 2. 3. 4. 5.
Cost of Equity SBI Less than 1 European Central Bank Marking to market
**Rush in your entries to : finniche.imt@gmail.com
Feel free to write to us at : finniche.imt@gmail.com
The right entries will get their name featured in the next
We are on the web !
issue of FinXpress. So hit the quiz fast & get yourself
http://www.facebook.com/FinNiche
visible among 1000 odd in the campus.
http://www.imtgfinxpress.co.cc
Volume Publisher: Pragun Aggarwal
MARCH 2014
PAGE 9