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The Financial Bulletin
FROM THE EDITOR
Money Matters Club IBS, Hyderabad Estd.—2005
Dear Readers,
Editorial Enquiries Contact Money Matters Club Contact No +918187896530 +918187896351
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It gives me the immense pleasure to come up with the July 2014 issue successfully. We are happy to announce the winner of “Article of the Month” award , Saurabh Hasija from IIM Ranchi for his outstanding write up on “Hedging: Necessity or Futility?”
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This issue reflects the Upside of the Downside Economy at the time when Mr. Modi has become the new Prime Minister of India. Whole world gaze at the sky for the miracle to happen under his leadership. The rising price of onions seems to be like a glue to the economy, which brings tears in eyes even without cutting it. This issue also and focuses on the Bitcoins asking can it be a currency for future.
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Last week, at the Brics, a New Development Bank call the Brics bank was approved. This issue highlights what it is.
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Hedging: Necessity or Futility? By Saurabh Hasija, IIM Ranchi
When I was a kid my father shared with me a newspaper
want to terrify you but the reality is that risks are
article on investment.
everywhere!
The article contained all the
mathematics showing the amount of investment required for earning a certain pension some few years later, adjusted for the projected inflation. This cumbersome mathematics was nothing else but a retirement plan. At the time I was too young to understand this, but now I really understand how important it is to plan for the future. But in these volatile times, securing only for the future with just a retirement plan will not suffice. Hence, we see a new cumbersome mathematics gaining momentum, and that is hedging. Hedging in a way is similar to a retirement plan; it is all about protecting your future position by a shrewd investment. Hedging is a technique designed to reduce or eliminate financial risk. While Barron’s law dictionary defines ‘hedging’ as a concept that involves offsetting a risk position, Britannica says that it is about reducing the risk of loss caused by price fluctuation. In a nutshell, hedging is all about determining the risk, evaluating it, and protecting against it. Retirement is a risk, it is the time of life when earnings dry up, so saving for retirement today is actually hedging for it.
Some risks can be quantified and some cannot, so this write-up focuses on quantifiable financial risks. As life progresses, from childhood to senility, we also experience adolescence and adulthood. Our priorities keep changing and so does the money allocated on them. Sometimes we know where all we need to spend money and sometimes an event may just occur which drains us to the pit. The critical step is to identify these situations (or technically ‘exposures’) that can put one in jeopardy in the coming future. The key would be to jot down the areas where expense is possible in the future, i.e. by making a list of out of pocket expense activities. For example: outlay for medical treatment, house repairs, education,
car
repairs,
household
equipment
maintenance, kid’s education, and expense while on vacations. It’s similar to budgeting for the time ahead. For some activities cost is certain and known to an approximate amount, for this risk is minimum or nil. But for some the cost is not certain and can vary staggeringly, and therefore risk is also immense. For
The big question is whether hedging is important to us?
making the list, tools such as Microsoft excel, Google
The answer is definitely yes. If there is a risk, it should
Docs, Calc (openoffice.org), or Zoho sheet would come
be countered by hedging. Talking of the risks we face,
in very handy. It should be as exhaustive as possible,
they are everywhere! Each passing moment is rife with
you may take time to ponder and include more
risk; the computer you are using may overheat and burn,
exposures which one may deem necessary. Ideally
the chair you are sitting on may break causing a spasm in
budgeting should cover a time span of at least 5 years.
the back, your building may collapse due to an earthquake, your daily metro may derail, your car may get struck by a drunken driver, or more severely you may get an electric shock in the bathroom on a wet floor! I
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FB Next step is highlighting the areas of maximum risk (or
The presumption is that not all members would be in
uncertain costs) or the ones which exceed the limit of
distress at the same time. Annual maintenance contracts
your comfort spending (highlight these with red, as it
reduce the cost of forecasted repairs by promising
grabs attention to these areas). This will give an idea
certain business to the vendor. Some investment plans
about how much vulnerability (or ‘exposure’) is most
are fixed deposits, recurring deposits, and investment
likely to happen. Chances of it occurring may not be cent
schemes by Life Corporation of India, and so on.
percent, but if the event happens you should be either ready to spend or must have hedged in advance by paying a premium to cover the likelihood of occurrence. If the event occurs the only sum to be paid is already paid in advance, and if it doesn’t the maximum loss is that paid premium which is a fraction of the amount of the
The key take away is to keep your eyes & mind open and to think far ahead; if there is a possibility of risk which can be hedged or protected by incurring minor price it should be taken, as we all know a stitch in time, saves nine. Play safe, indulge in hedging!
hazard. For example, if you want to save for education, the amount is known with a level of certainty as macroeconomic dynamics like inflation rate may or may not change much keeping the price in limits. But for an accident one cannot foretell the costs in advance and depending on the severity, the costs would vary. The approximate limits of education expense are known to a certain confidence level, and hence the risk is also minimum as compared to the cost for a probable accident. Risk is about how much the cost would vary, if uncertainty is more the risk is more and vice versa. If the risk is more, it does call for attention and involvement of hedging as you wouldn’t want to end up spending years of savings on one particular unanticipated event. After the actionable risks have been identified, precautionary measures have to be taken. For most situations, precautionary deals available are insurance, annual maintenance contracts and investments promising certain yields in a timeframe. Insurance in most general terms is a mutually agreed arrangement amongst members of a community where each one contributes a little; the sum is used in case of conjuncture of a member. 4
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Deciphering the Asian Psyche on Investment By Sriram, TAPMI
Asian mindset on investments is by and large risk
Taking the same point forward, we know bank lends
aversive. Be it Japanese or Chinese, Pakistani or
money to corporates like IBM, Airtel and such big
Hindustani, We are a breed of our own. We are the
firms. We also accept that banks make money by
people who wish to save than to invest, for us the aspects
lending to them. Isn’t it logical that they are the firms
such as the cash in hand or deposits in bank is what we
which are making profits despite paying the interests
are really concerned off. Rest all, even investing, we
and the principle amount?
perceive as ‘Spending’.
So is it not obvious that we make better returns in most savings
cases when we invest in those companies rather than
in banks. We deposit even when the rate of return is low
save all the money in banks? The answer is known to
and even if they charge us for having our money. Why do
all; “Everyone knows it, accepts it but ignores it and
people do such an act? It is
considers it risky”.
We are unique in our own way. We deposit our
because of their belief that
“In Banks We Trust – No Matter What …” It is an acceptable fact that it is better to park our savings in a place which pays us some interest however meager it is, considering the safety aspect attached to it than to make the money rot in the safes of our homes. But the point to be noted is that everyone knows that banks make
We work hard day in and day out, while our money rests. Shouldn’t it be the other way round! All the rich and successful people in the world have one thing in common; they own the firms and/or invest a major chunk of savings to own them. They may rest but they do not make their money sit idle.
profits from the deposits we make.
Explaining it in simple layman’s terms:
How?????
It is like having a bag full of seeds; you can either keep
Banks give the depositor a rate of interest which is lesser
them with you and wait for the price of seeds to rise
than the rate at which they lend to the customer who
without taking into account the concept of time value of
borrows from the bank. The difference in this interest is
money or you can sow them and reap benefits.
what the banks earn as profit and we it as the “Net Interest Rate” in banking terminology. When we all know that banks make profits from our money, why not invest in them and become owners of them rather than to wait patiently for the tenure of the fixed deposits we have made to mature. We might also lose on the interest amount when we withdraw the money prematurely or be fined for having our money when we have an option to hold the shares of the bank and sell the stock as it pleases us. 5
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Fruits will only be borne For the seeds one has sown.
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The Upside of the Downside Economy By Saurabh Aggarwal, TAPMI
As Modi wave sweeps the country, all Indians gaze at the
As Oscar Wilde said “Experience is simply the name
sky for the miracle to happen. The 1.2billion power
we give our mistakes.” So there is always something
house is infused with a raw confidence. All people are
which we can learn from our mistakes.
looking through the window for the ‘Ache Din’ (good days) to crawl in. The new government seems like a
Here are five learning’s from the downside economy.
panacea for the ailing nation.
Building a safety net
The year 2013-2014 saw the lowest GDP in nine years.
“The art is not in making money, but in keeping it.”
The great Indian growth story is being questioned. The downturn of the economy is partly attributed to the global slowdown and partly to the fallacies of previous government. Following Figure gives India’s previous yeas GDP.
It is high time to realize that cash is king. The habit of saving comes inherent to us. It is always advisable to keep some money for testing times. This not only helps us to sail through tuff times but also helps us to secure our future. Safety net becomes all the lot more important in Indian context as we do not have any provision of social security like many other countries. Innovation “Necessity is the mother of invention,” -Plato When the economy moves down, most people shy away from making any expensive purchases. People are
Falling GDP, increasing unemployment and evolving
in constant fear of being out of job or higher taxes
consumer behavior have put people in a tight spot.
being imposed by the government. Most of the
Instant gratifications led to an era of buy now and pay
companies have the daunting task of reducing their cost
later. Riskier loans and deals were being made. Bad
and to pass on the benefits to the customer .This makes
debts due to credit cards led to another nail in the coffin.
products more affordable for consumers to purchase.
But this shortcut to happiness soon turned into horror of
All this leads to quest for innovation in the field of
misery. All came down like a pack of cards. Yes, Global
technology. One example is the evolution on Laundro-
Recession had hit…and it did hit hard. People soon
mat. Electric washing machines were a great invention
realized they had been living beyond their means.
of their times. But the high price kept people away
Recession is not new to us. History shows us economies
from buying them. J.F. Cantrell purchased four
are cyclical. There is a pattern of recession and recovery.
electric washing machines and installed them in
There is great expansion, then contraction. The bigger
the same building. People had to pay per hour to
the boom, the bigger is the bust.
get their services. This is how Laundromat came
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FB came into existence.
Lesson’s for life
Startups
“Feel what it's like to truly starve, and I guarantee that
“Bad times have a scientific value. These are occasions a good
learner
would
not
miss.”
Ralph Waldo Emerson
you'll forever think twice before wasting food.” -Criss Jami The bad times like good times are transient. These test
Most of us will find this difficult to cope but it’s true.
our strength and unity. Our work is to learn from them,
Downturn is one of the best times for startups. Operating
as much as we can, and carry the wealth of experience
cost is less due to dwindling economy, talent is
with us. Hard times make us take tough decisions. They
abundantly available because of
help us learn to live with less and most
layoffs and moreover competition
importantly make us realize that we
is less as most of the players are
can’t take things for granted.
already out of the game. There are
On 11 June 2014 sensex closed at
many world renowned companies which
had
downturn
started eg.
highest ever 25,473.89 points. The
during
patterns of revival are too prominent to
Microsoft,
be ignored. We surely are moving
Disney, GE, Intel, Mattel, Colgate
towards our target. While we move
Palmolive etc.
ahead it becomes imperative to carry forward the learning’s from the past to
Environment
and
Health
relish the present.
Benefits “Earth provides enough to satisfy every man's needs, but n o t
e v e r y
m a n ' s
g r e e d . ”
― Mahatma Gandhi This is a time when most of the families redo their budgets. During which they might come up with austere measures. For example Car Pooling, Reduction in consumption of electricity, cutting on Fast food/Dining out, less outings leading to more time with family. These measures might hurt in the beginning but can be very useful in the long run. At this stage we cannot afford to waste unless we are ready to pay for our actions.
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Veggie Tears... By Abhishek Tripathi, IBS Hyderabad
ONIONS, which is a vegetable which makes us cry in
out to be more health conscious and have
every form it can. In the kitchen when in raw form or in
consuming protein-diet and this has also led to the rise
the commodity market when it comes down to pricing. It
of price. Now due to this price hike ,the inflation which
first made the central government cry way back in the
is measured in terms of WPI(WHOLESALE PRICE
year 1980.Then it again made us cry in the year 2010 due
INDEX) has increased by 6.5%.Again this price hike is
to extreme price hike, when the price rose excessively
just not limited to the ripened onions but also to the its
from Rs35 to Rs88 within a span of 7 days. Once again it
inception that means to the seed. Due to the shortage of
is making us cry this time and it is being termed as
onion i the market the cost of the seeds have also risen
ONION INFLATION. Now when we say inflation ,it in
from Rs400 per kg to Rs1700 per kg in Maharashtra,
general terms means that “The rate at which the price
the onion bowl of India and the worst part is that after
is rising and the purchasing power is falling�. Now if
buying at such a high price also the quality of the seed
talking about the reason that why this price pinch is
is not that satisfying. Now considering the current
taking place ,it can be said that the major factor that is
situation what government can do and out these
causing this price hike is rain which is affecting the
measures, some them have already been started
growth of onions in MAHARASHTRA ,which is one of
implementing. Some of these are that the government
the largest producer and supplier of onion and accounts
has restricted the export so that the stock can remain in
for 25% of the onion supply alone in India. The other
India. Other than this, importing of onion can be done.
state
But that can help only to certain extent as only few
which
is
a
huge
producer
of
onion
is
KARNATAKA.
started
producer have the strength of producing surplus in order to meet the onion need of India. The other thing
MAHARASHTRA
is one of those few states which
that is done is the central government has asked the
produces onion thrice a year and out of these three times,
state government to control hoarding. We know that
twice the crop has been damaged due to high moisture
this onion inflation is because of less rain which is the
content the crops have started rotting up. The other
major cause and it has affected the Indian economy
factors which is affecting the price is that the 6month
badly but the government is trying hard and will surely
stock have nearly exhausted. Now the new stock of
succeed.
kharif crop that has entered has a lower shelf life and this has let to increase in price. Another major reason for the increment in the price is that, a misbalance has appeared in the demand-supply curve.
On an
average basis, India requires 9-10 lakh ton of onion every month, and what is being supplied is less than 50% of what is being. One of the reason can be stated is that a change in the food behaviour. People are turning
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BITCOINS: A currency for the future or its Just hype? By Sanket Tondon & Ankit Tiwari, IIFT Bitcoin network is very difficult to crack and as each
INTRODUCTION The world’s first decentralized currency, Bitcoin, came into existence in 2009. It was launched by an anonymous person under the pseudonym Satoshi Nakamoto. Bitcoin is a peer-to-peer payment system where transactions are made by digitally exchanging anonymous and complexly
is difficult to track and regulate. For all the transactions that happen within the Bitcoin network a log is created for all these transactions. The machines which participate in these
awarded a fixed number of coins, currently
called cryptocurrency. There are only 21
25. The limit of 21 million Bitcoins is
because
expected to reach by the year 2140 and after
the Bitcoin network is so design as to
that
mathematically generate no more than 21 million
updates the log and
the same is approved by the network is
creation of money it is also
million Bitcoins in the world. It is
transactions communicate to create
10 minutes a user who
cryptographic technique to transfer
and regulate the
anonymous it
and agree on updates to the official log. Roughly every
encrypted hash codes. Since Bitcoin mining uses
user’s identity is made completely
Bitcoins at a time. The peer-to-peer network
the
total
number of
Bitcoins in
circulation will remain the same.
is also used to monitor and verify the transactions happening between the users. Each and every transaction is
verified
by
a
digital
signature
called
as
public-encryption key. These users make payments by broadcasting digitally signed messages within the network. Digital wallet is a program which is used to store the user’s Bitcoin. It also contains each and every address user receives and sends Bitcoins to and also stores the security key called as “Private key” which is known only to the user. Bitcoins are divisible to 8 decimal places and these Bitcoin fractions are called satoshis.
ADVANTAGES OF BITCOINS All the other currencies in the world are issued by a central monetary authority. Bitcoins is an independent virtual currency which is not backed by any central monetary authority in the world. As Bitcoins are mathematically generated and as the computers in this peer -to-peer
network
execute
difficult
number
crunching
task, called as Bitcoin mining, made
which
is
progressively
tougher and which ultimately limits the Bitcoin generation to 21 million. The consequence of this is that no central bank in the world can mine the Bitcoin and hence devalue this new currency in circulation.
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FB Secondly, since no clearing house is required transaction
Also, the secrecy around the ownership of Bitcoins is
can be done to peer-to-peer directly which saves the lots
creating a lot of problems and it limits the ability to
of time as it is transferred instantly and also transaction
detect and stop crimes. In the world of Bitcoins the
fees is much lower than the normal credit/debit online
prices change can be 20% -30% in a day which makes
transfer.
Bitcoins use as a currency highly debatable. Inflation is
Thirdly Bitcoins is that they can be used in almost all the countries where seller is ready to accept Bitcoin.
one of the big problems if Bitcoin is used as a currency. Moreover, such price fluctuations would erode all profits made by normal retailers as their profit margin itself is in the range 5%-10% and as Bitcoin is mainly targeting online retailers it is highly unlikely that seeing
LIMITATIONS OF BITCOINS
such price variations many retailers in future will agree
On the surface Bitcoins looks like the currency for the
to accept the payment through Bitcoins.
future. As world economies are integrating and
Hence, in the world of Bitcoins speculation, uncertainty
globalization is becoming more inclusive virtual currency
and risk would be very high and commerce between the
like Bitcoins looks an attractive option. But there are
countries would decline. The buying and selling of
many cons attached with using such a currency. Bitcoins
Bitcoins is controlled by very few exchanges in the
are weak in understanding of how global economics,
world. These exchanges are in places like Bulgaria,
policies of central banks and money markets function.
China and Slovenia. Regulation is not rigid in such
The idea that currency can be computer generated
markets and even huge price fluctuations are there
without the backing of any central bank in a completely
across markets.
unregulated environment is dangerous for the world economy and matter-of-fact is economy with such currency base is not sustainable in the long run as speculative attack on currency would be too hard to stop which can be seen now-a-days in the case of Bitcoins also. At one point in time single Bitcoin was trading over $1200 and suddenly within a fortnight the value of single Bitcoin fallen
to
$ 5 5 0 .
Because of all these limitations, China who supported
That’s the
Bitcoins initially has recently took steps, like, China
more than
central bank asked banks to stop accepting Bitcoins as
50% drop
a means of currency to puncture the rise of Bitcoins.
in a fort-
Backing off from China created huge volatility in the
night!
Bitcoin market and investors lost closed to $6 billion of
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FB their money. Bitcoins are also totally unsecured. If you become victim of cybercrime your risk can be covered by your bank but if Bitcoins are lost who would cover the risk as Bitcoin owners are anonymous! CONCLUSION When Bitcoins first came into light they were termed as the great innovation since the inception of World Wide Web as people thought about Bitcoin as a virtual currency which held a lot of promise. At one point in time Bitcoins were thought of as it would replace dollar as world currency and in this globalized world will truly emerge as a global virtual currency. But since the very foundation of this thought of global currency was fragile from the very beginning and after the initial take off Bitcoin had to take an emergency landing, especially, after Chinese crackdown. So, in a nutshell disadvantages and potential risk of using the Bitcoins as a currency far outweighs their potential advantages.
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Inflation & tools to control inflation By Meher Utkal
Now days this is common to see people protesting on middle of the road with some vegetable in their hands against the sky touching price of vegetables and other consumable items. This indicates nothing but the increase in inflation and a signal of weak economy. Every month government of India issues the inflation rate for the previous month ending, which indicates the overall increase or decrease on normal consumable items. As a dilettante after watching all this on television, we always gets few questions in our mind which has illustrated below:
What is Purchasing power of Money? Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you could today, which indicate that you would have had a greater Purchasing power in the 1950s. As Adam smith noted, having money gives one the ability to “Command” others’ labor, so purchasing power to some extent is power over other people, to the extent they are willing to trade their labor or goods for money or currency.
What is Inflation?
Both Inflation and Purchasing power of money are
Inflation means a sustained increase in the aggregate or general price level in an economy or the increase in the cost of living. In a layman language “Inflation means that your money won’t buy as much today as you could
interlinked with each other. It is like two side of a coin. Inflation always indicates a relegate in purchasing power of money. If there is increase in your income at a slower rate than general inflation, your buying power declines even if you are making more.
yesterday”. Inflation usually hurts your buying power. That is because rising price means you have to pay more for the
Inflation has another bad side-effect which is very common in county like India, suppose once people expect a inflation, they will start spending now rather
same goods and services. However if your income
Annual
Inflation
than later. That is because they know things will only
increase at a slower rate than
inflation
Rate
cost more later. This kind of consumer spending heats
general inflation, your buy-
(Year) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
ing power decline even if you are making more. In general,
inflation
consequence
is
a
main subtle
reduction in your standard of living. The following chart shows the trend of inflation in last
up the economy even more, leading to more and more
13.78% 5.57% 6.53% 5.51% 9.70% 14.97% 9.47% 6.49% 11.17% 9.13%
inflation. This situation is known as spiral inflation because it spirals out of control. If the inflation reaches the double digits, it’s known as hyper inflation which is suffered by Germany in the 1920s and Zimbabwe in the nearer 2000s. How it can be Control? Inflation is totally linked with economy of the country
10 Years. 12
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FB and influence by a lot of factor. Though it is difficult to
Apart form the above there are few more techniques
control totally, still it can be guided by using some
used by RBI to control the inflation. The central
monetary tools and techniques. Central Bank Of India
government also uses few techniques to control the
formally known as RBI and Government of India are the
inflation such as:
key responsible authorities who uses few techniques such as “Bank Rate”, ”Export Import Policy” etc. to guide the inflation. The following are the techniques used by RBI
Change in rate of custom duty. Change in rate of excise duty.
to guide inflation and keep the economy stable:
By encouraging people to use Indian products.
Change in Repo Rate
Giving subsidy in manufacturing of certain
Repo rate or Purchase rate is the rate at which bank borrow money from Reserve Bank of India for short
product. Allowing foreign investor to invest in India.
period by selling their securities with an agreement to repurchase it at a future date at predetermine price. To control inflation RBI normally increase/decrease the Repo rate. If RBI increase the Repo rate it will affect the borrowing power of bank and hence bank will also increase the rate of interest on loans and advances given by them to common people or corporate. Due to this the purchasing power of people will decrease. Change in Reverse Repo Rate Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their excess funds with RBI to earn interest on it. On the same way if bank will decrease/increase the rate of interest it affects the bank and the same way it affect the purchasing power of common man.
CRR (Cash Reserve Ratio) Banks are require to maintain a percentage of their deposits as cash. The minimum percentage is determine by the RBI and to make the economy stable it keep changing the rate time to time.
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Corporate debt restructuring mechanism By Debdripta Sengupta, TAPMI
Corporates sometimes find themselves in financial
have to agree to the proposal
trouble due to certain internal or external reasons. For the
safety and revival of those corporates, the money lent by
loan being sought as fresh capital.
the financial institutions and banks need restructuring at the correct time. In August 23, 2001 a Corporate Debt Restructuring System was developed and the related
Promoters must infuse 25 per cent of the fresh
The CDR mechanism can be understood in more detail with the recent cases of ABG Shipyard and
detailed guidelines were issued by Reserve Bank of
IVRCL. Both the cases are discussed in brief below:
India.
ABG Shipyard – Attractive due to its short term
The Corporate Debt Restructuring (CDR) Mechanism is
loan
a voluntary non-statutory system under which banks and financial
institutions
jointly
participate
in
the
restructuring process of the debts of companies. This mechanism is valid for the following cases:
Multiple banking accounts Syndication or consortium accounts of several banks and institutions with an aggregate expose exceeding Rs.100 million
The CDR Empowered Group decides on the acceptability and viability of the restructuring program on a case-to -case basis depending on the following:
In July 2013, the largest CDR package was cleared for
Gammon
India,
a
major
construction and
engineering company. Its loan of Rs. 13500-crore was rescheduled for a period of 10-years by lowering the interest rate. The second largest CDR in the banking sector of India happened in 2014 with the private sector shipbuilder ABG Shipyard. Its loan of Rs. 11000-crore, lent by a consortium of 22 lenders, got clearance. Along with this CDR package, it got a fresh working capital loan of Rs. 1800 crore. With the ABG Shipyard deal, for the year 2013-14, the total loan recast has touched a value of Rs. 1 lakh crore, thereby making the overall CDR of the banking sector
Debt service coverage ratio
Return on capital employed
more than Rs. 3.7 lakh crore.
Internal rate of return
The important features of the ABG Shipyard CDR deal
Cost of capital
are:
Loan life ratio
Effective interest rate lowered to 11 percent from 13.5 percent
The restructuring of the company’s debts and outstanding obligations can be met by decreasing the debts
Fresh working capital loan of Rs. 1800 crore
of the company or by decreasing the rates of the debt. To
2-year moratorium on interest payment
The loan is rescheduled for a period of 8 years
ease the burden, the repayment period of the company is also increased. The restructuring package gets approved under the following conditions: 14
75% of the lenders (by value) and 60% (by number)
The books of ABG Shipyard shows a total debt of Rs. 11500 crore. Of the total debt, the division of the debts is as follows:
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FB Rs. 2000 crore of term loans
CDR pipeline
Rs. 7700 crore of working capital loans
According to reports, the CDR pipeline is occupied by
Rs. 1800 crore of fresh working capital (This loan is
approved by ICICI bank led consortium) The division of the debt and its different types shows a positive outlook as it has just Rs. 2000 crore of term loans against a total debt of Rs. 11500 crore. The lenders and the respective debt amount are provided.
the following companies: 1. Surana Industries – a loan of Rs. 900 crore 2. AMW, a Mumbai based truck-maker – a loan of Rs. 300 crore Other than these, at least Rs. 20000 crore more loans are expected to come to CDR cell due to the economic
ICICI Bank – Rs. 2600 crore exposure
slowdown.
SBI – Rs. 1600 crore
CDR – Does it help the banks?
IDBI Bank – Rs. 1400 crore
According to Chanda Kochhar, MD and CEO of ICICI
PNB, BoB and Exim Bank – Rs. 700 crore each
The greatest positive for ABG Shipyard is its lesser term loan compared to most of the other companies having large long-term debt on their books. IVRCL – Attractive due to its strong order book In July 2014, the Hyderabad-based construction and infrastructure company IVRCL got the nod for debt restructure package of Rs. 7350 crore. The greatest takeaway for the company from this approval would be
bank, CDR mechanism of banks makes a platform where all the bankers come together and take a collective decision. The CDR process helps the banks to delay the formation of non-performing assets. However, according to data in December 2013, the number of failures in CDR exceeded the number of successes for the first time in five years. Total 103 cases worth Rs. 24915 crore slipped into NPA category compared to 67 cases worth Rs. 51104 crore, which were moved to standard category.
its relief to resume the implementation of various
RBI has provided recommendations to prevent the mis-
projects stalled due to funding issues. The several
use of CDR processes. From April 2015, after restruc-
features of the CDR package are:
turing of the assets, all the restructured assets need to
Priority debt of Rs. 175 crore
have a provisioning of 15% as against the current provisioning of 5%.
Cash credit of Rs. 200 crore Non-fund credit of Rs. 1400 crore Letter of credit of Rs. 300 crore Moratorium of 28 months on term loans Funded interest term loans have an interest rate of
11.25% (dropped from 13%-14%) Company has been paying to 20 lenders, led by
State Bank of India
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FB
BRICS Bank: An Overview By Saurav Kumar Singh, IBS Hyderabad
BRICS: Brazil Russia India China South Africa
Name of the Bank: Brics Bank Headquarter: Shanghai, China HISTORY: Till 2010, South Africa was not a part of the BRICS. It was 2011, South Africa joined this emerging nations group.
Contingent Reserve Arrangement: A treaty to establish was signed in this summit held last week. It is an arrangement to make foreign reserves available to the countries in trouble. It is not a fund. It is an agreement with an initial size of $100 billion currency exchange reserve, in order to protect against short term balance of payment pressures. Distribution of Reserves: China: Will Contribute $41 billion, but can withdraw only $20.5 billion.
PURPOSE: Provide multilateral development finance to the
developing economies. Provide money for infrastructure and sustainable
development projects in Brics, emerging economies and other developing countries. Support to countries for public or private projects
Brazil, India & Russia: Will contribute $18 billion each, can withdraw the same amount they commit. South Africa: Will contribute $5 billion, can withdraw twice its
through loans, guarantees, equity participation and
contribution.
other financial instruments.
The President will be named on a revolving basis and
Global growth and development.
will have a term of 5 years. The initial presidency will
Provide technical assistance for projects to be
be held by India., followed by Brazil and Russia.
supported by the banks. For all these purposes, the New Development Bank will have an initial subscribed capital of $50 billion and an
The first chairperson of the board of governors will be from Russia, and first chairperson of the board of directors will be from Brazil.
initial authorized capital of $100 billion. Shareholders and beneficiaries will be the member nations.
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