The Financial Bulletin July 2014 edition

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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

Faculty Co-ordinator

Dr. Amlan Ghosh

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.

email us @ mmcnewsletter1@gmail.com You can login to http://moneymattersclub.weebly.com/

Last week, at the Brics, a New Development Bank call the Brics bank was approved. This issue highlights what it is.

All rights reserved. Money Matters Club, The official Finance Club of IBS Hyderabad.

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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:

THE FINANCIAL BULLETIN | JULY 2014 | moneymattersclub.weebly.com


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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THE FINANCIAL BULLETIN Money Matters Club Official Finance Club of IBS Hyderabad 17

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