VOLUME 17, ISSUE 1
THE FINA NCIA L BU LLE TIN DATED: 30 OCTOBER, 2012
INSIDE STORY The fall of microfinance
3
CRR:A necessary evil
6
Responsible banking for sustainable development
9
Basel III and its impact on banking industry
13
Euro Crisis simplified
17
Understanding high frequency trading
20
A new bold arbitrage play 23
Will FDI provide safe 28 landing to Indian Aviation Money Laundering: A major concern
32
DATED: 30 OCTOBER, 2012
VOLUME 17, ISSUE 1
From The Editors Desk Dear Readers, With the view that we are in the age of change and reformation of the economic, social ,financial structure. And with so many developments taking place in the country for strengthening the macro and micro economic factors through various fiscal and WINNERS OF ARTICLE OF THE MONTH: CONGRATULATIONS!!!
Rakesh Kumar Reddy & Manoj Shankar IFMR,Chennai
monetary policies. It is necessary to understand the pros and cons of the various measures. As newton says “every action has a reaction” hence changes will have consequences, but the fact that they are important for society to move on to newer heights they cannot be avoided. In this volume you will find out the various measures being taken by the government in pursuit of increasing the GDP growth rate, like FDI, CRR, Basel III etc. and what will be the pros and cons of it. Hope you will appreciate the perspectives of our contributors and gain an insight into what’s going on in the country. Happy Reading!!!
TEAM
Advisor: Dr. V. Narendra Faculty Co-ordinator: Dr. S. Vijaylakshmi
Student Co-ordinator: Roshni nair Edited and designed by:
CONTRIBUTORS
Rakesh Kumar Reddy, IFMR Aravind Ganesan ,IIM Indore Chennai Rohit Maloo ,IIM Indore Manoj Shankar, IFMR Chennai Madusudanan, NMIMS Abhay Kumar, IIT Roorkee. Harish, NMIMS Prateek katariya, IFMR Chennai Vivek Srivastava,IFMR Chennai Krishnendu Saha ,MDI Gurgaon
Vikas Singh Banisha Chopra
Shovik Kar ,MDI Gurgaon Akshay Iyer ,SIBM Pune
Varun Sanghi, MDI Gurgaon Sibojyoti Chakrabarti , ITM Navi Mumbai
VOLUME 17, ISSUE 1
Page 3
“100% repayment rate”, the newspaper headlines screamed - a treat to cherish about if it was in any other occasion but it is all about the microfinance world for now. An industry which started for all the right reasons, ended up in the news for all the wrong ones. This article wishes to highlight how and why the heroes became villains.
which were started as a part of microfinance initiative tried to inculcate a savings culture among poor and by that way they were able to provide the poor with loans from their own capital. By creating this group lending system, whereby if one member of the group Rakesh Kumar defaulted on the payment, the entire Reddy group had to pitch in for his payment, or IFMR,Chennai be barred from new loans, they ensured Crisis of Conscience that no one defaulted, hence the very Microfinance was started as the close to 100% repayment rate. financial world’s answer to the millions at the bottom of the pyramid who could Grameen Bank, which gave its first loan 1 not afford regular financial services. of $27 to a group of 42 families , An industry believed that by empowering the poor Microfinance came to be seen as the which started silver bullet to a large variety of with small loans they could help create for all the problems faced by the poor. The sustenance and provide them with right reasons, inception of organizations like earnings for the future. Initially these ended up in Grameen Bank in Bangladesh followed ventures were sustained and supported by the news for by the Self Employed Women’s like-minded individuals and institutions which saw microfinance as a genuine Association (SEWA) in India heralded all the wrong way for helping the poor. Most of the a new way in which the world reached ones. out to help the poorest of the poor. The initial funding came from institutions and initial notion was to provide small people in the not-for profit sector, for loans and other financial service sat a e.g., The Ford Foundation supported manageable interest rate much lesser Grameen Bank with an initial grant. than that which was offered by the local Hence, when newer players came into the money lenders to the BPL families thus sector they also tried to mimic the model helping them to become sustainable which was first originated in Bangladesh micro entrepreneurs. The system had and then followed successfully by nations the mission to help the poor to survive all over the world. and thrive. The self help groups (SHG) Initially in the later part of the 20th Manoj Shankar IFMR,Chennai THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
VOLUME 17, ISSUE 1
Page 4
century newer entrants into the microfinance sector started out with the same aims as those of its peers in the industry. Helping the underprivileged and the needy through micro loans was a way they thought they could make an impact on the society. But as things progressed, all is not what it seemed. Most of the newer entrants had plans to go beyond the microfinance space for various reasons including the restrictions and regulations imparted on them by regulatory authorities and wanted to morph into Non-banking finance corporations (NBFCs) or wanted to go the for-profit way, although staying true to their
to those whom the industry served, began questioning the intentions and motives of their perceived benefactors. As this was not enough allegations of heavy handedness in debt collection and news of suicides gave a big blow to the already fragile image of microfinance. Over indebtedness among the poor due to competing firms offering competing loans also became a huge social issue. The once benevolent image was now replaced by the image of the Frankenstein monster. What went wrong? Whom to blame? Could they have done things
microfinance roots. This created a “crisis of conscience” as several of those who founded these new companies or had been on their boards, questioned this transformation. To add fuel to the fire, the source of funding for these new institutions came from new age finance organizations like private equity whose motives where for profit. The intentions of promoters were also being questioned, as allegations of diversions of funds came to light. Final nail in the coffin came, when some of these institutions wanted to go public by listing on stock exchanges. Hence the question arose, that whether those who are a part of the field are for the people or for profit?
differently?, these were questions on everyone’s mind. As the confidence began to dry up, and very fast at that, people within these organizations and outside began to wonder about the ways and means by which the problem was being approached. Investors wanted returns, people wanted institutions that were there to help them, the public at large wanted to believe in the story of the rich helping the poor, all these expectations created the perfect recipe for disaster, as it happened in this industry. To make things worse, internal conflicts within the management of these firms took a life of their own, thus shaking the very foundations on which these firms rested on, “peoples trust”, thereby leading to a crisis that was neither expected nor called for.
Crisis of confidence As any industrialist will tell you, an industry exists with the for-profit motive, but not with the microfinance industry, as it was seen as a benevolent venture to help the poor. So when allegations of profiteering and mismanagement came to light, its second crisis started. What people saw and what was being heard about these institutions did not go well with the public at large. From the lay man on the street
Crisis of Faith Were the promoters at fault, or was it the staff? Or was it the microfinance model they followed itself wrong from the start? The answers to these questions are not easy to come by. It is always
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VOLUME 17, ISSUE 1
easy to point the finger of blame at the actors, but the truth, as always, might be far from what it seems. Yes, some blame has to be borne by the founders and representatives of these firms, but blame also lies on the investors, the regulators, and also the public at large for being naïve and not concerned about the workings in such a crucial sector and solely focusing on their individual objectives alone. As the events of SKS Microfinance of India involving its founder, Mr. Vikram Akula2 and the management of the firm shows that people in general have lost faith in the
Page 5
responsibility no amount of regulations or laws will stop this industry from falling again.
idea of the rich coming out to help the poor. As these firms have tried to tap the equity markets with share offerings, it is good to ask, how long before the good faith they had and have in these firms turns into a “crisis of faith” Conclusion The last decade has been a roller-coaster ride for the microfinance industry with tremendous highs and lows. Those who were a part of it and those who witnessed it from outside, will take their learning well. For all the ills of the microfinance model, it still remains one of the best ways to serve the poor and the needy in many part of the world untouched by general finance. Time has come to pay more attention to this field by the general public as closer public scrutiny is the only way we can make sure that microfinance achieves its fullest potential of serving the underserved. Tougher regulatory options, and new laws will always remain on the table as other options to regulate the sector and make it more open and transparent, but as the following crisis’s have shown that if the people themselves do not come forth and take the
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VOLUME 17, ISSUE 1
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Recently Pratip Chaudhuri, Chairman
dumped with reserve bank. If they
of India’s largest bank SBI, created a
were given an opportunity to utilise
flutter by suggesting that Cash Reserve
this money, this huge cash will be a
Ratio or CRR needs to be abolished as
growth engine for India’s economic
it is not sensible in modern times. He
developments. SBI chairman also
also called for paying interest on CRR
argued that since this money does not
fu nds
d isco nt inued.
yield any returns, it creates an
Mr. Chaudhuri propagated these views
unnecessary burden for rest of the
at a conclave organised by the
amount. Daily commercial banks
Federation of Indian Chambers of
deposit Rs 3,14,000 crore with RBI. If
Commerce and Industry, FICCI.
RBI starts paying interest on this
CRR or Cash Reserve Ratio is the
humungous amount at an interest rate
proportion of deposits banks have to
of say 10%, then banking industry will
CRR or Cash
keep wit h RBI. Current ly t his
get an amount of Rs 31,000 crore per
Reserve Ratio is
proportion is 4.25% which means for
year. Also total net profit of entire
every 100 rupees, banks would have to
banking industry last year was nearly
put 4.50 rupees with RBI. Furthermore,
Rs. 70,000 crore. Only from interest
banks do not earn any interest which
on CRR the total profit of banking
makes this amount as good as
industry can rise by nearly 40%. This
proportion is
non-existent for banks. An estimate
money could make the balance sheet
4.25%
says 0.25 reduction in CRR would
of banks healthier.
result in an influx of 17000 crore
In addition to the above views, there
rupees in the market. By this
are other reasons which are cited. The
calculation, a mind boggling sum of
requirement of CRR is only for banks,
rupees 3.06 lakh crores is with RBI (do
not
the math!!).
Corporations (NBFCs). Though they
His reasons are simple. Banks have no
do not operate in same space often, it
control over this money which is
still does not make for a level playing
t ill
it
is
for
Non-Banking
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Financial
Abhay Kumar IIT Roorkee.
the
proportion
of deposits banks have to keep with RBI. Currently this
VOLUME 17, ISSUE 1
Page 7
field. That might be the reason why some people are
By eliminating CRR, RBI would lose its
supporting the theory of doing away with CRR. For
power to control or regulate the money
example, Mr. V Jagan Mohan, MD of AP State
supply. Very few people would want a central
Cooperative Bank Ltd. appreciated the SBI chairman’s
bank to dilute the influence. This has achieved
views. He questions the relevance of CRR in this
more significance particularly in the wake of
information age where RBI can get any figures by just
worldwide economic crisis.
a click.
There are other reasons too which are more
Though the above views are interesting, not everybody
technical in nature. If banks are exempted
is ready to accept them. RBI deputy governor K C
from CRR then banks would stand as a more
Chakrabarty openly came out against SBI chairman’s
risky option. Adhering to Basel norms, the
opinion. He stressed that CRR is a part of monetary
change in CRR would also alter Capital
policy and banks should work in the established
Adequacy Ratio, a ratio of bank’s capital to its
framework. He seems to imply that CRR is a crucial
risk. Basically banks may have to set aside
liquidity management tool which provides regulatory
even a larger quantity of cash (though not
power to RBI. Below diagrams shows how liquidity is
with RBI) for risk management which would
affected by change in CRR.
prove counterproductive in the long run. No wonder ICICI bank chairman K V Kamath joined RBI for continuing with the current structure.
At equilibrium
CRR increased, decrease in supply of money
Lastly with a surging inflation rate, CRR can be a necessity for handling the money flow. India’s GDP growth was at 5.5 percent in the second quarter which is lowest in the two decades; it is expected to be near or less than 5.5 percent in 2012-13 as well. On the other
CRR decreased, increase in supply of money
hand, inflation is near 8% and it is persistently hovering in double digits for the last 2 years. For any government, controlling inflation is prime objective we have to do trade-off
CHANGE IN SUPPLY OF MONEY DUE TO CRR
between GDP growth and Inflation, However
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VOLUME 17, ISSUE 1
Page 8
one must keep in mind that CRR can only control inflation up to a certain extent.
Overall, it does not look a viable choice to remove CRR altogether. RBI has already slashed cash reserve rates from 11% (in 1998) to 4.50% (in 2012). Similarly paying interest on CRR defeats the very purpose CRR is created for. There is a need for discussion among all stakeholders for such a proposal. Trading some part of CRR with an equivalent magnitude of another tool SLR (statutory liquidity ratio) can be the first step to begin with. The result should be carefully studied and evaluated in all aspects. This is the time for reforms 2.0 but with a security system.
Source: thehindubusinessline.com
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VOLUME 17, ISSUE 1
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Banks, amidst the global economic as securitized products to the investors, meltdown post 2008 crisis, have been which, with the busted loans ( the looked upon the most reliable source of underlying securities), made those “compassionate capitalism” which aims institutional investors falter which were to extend its hands towards those who considered “ too big to fail”. need the financial inclusion for a sustained development.
The problem did not start with securitization of potentially bad loans,
This discussion upon a much sought but it had its roots in the immoral and
Prateek katariya IFMR Chennai
after theory of change, which is now unethical subprime lending to the required for the social and economic housing sector of the economy. upliftment as well as ensuring that the lost confidence rests again with the system.
The contagion effect worked, engulfing
modern capitalistic
the whole global economy into a tryst
approach, where
of recession, pessimism and faltering
the global economy is a
In the modern capitalistic approach, institutions like Lehman Bros and even
“market driven
where the global economy is a “market AIG.
“mechanism, there has always been a
driven “mechanism, there has always been a debate between “pure profit motives” and the “social benefit motives”.
One would argue that the main cause for the aforesaid crisis was “slippage of
debate between “pure profit motives” and the
loans made to the housing sector” but
“social benefit
was it really the one?
motives”.
In the wake of the Global crisis of 2008, which had its origins in the banking system of the US. The fault was neither in the structure of the system nor in the fundamentals. The subprime crisis was the result of “unethical banking decisions”. The way the “stressed
Wasn’t it evolution of the greed component in the banking system which, pursuing its full profit motive, led the banks to forget their goals of exist e nce:
r e s p o ns i b i l it y
and
sustainability.
assets” were bundled together and sold THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
Vivek Srivastava IFMR Chennai
VOLUME 17, ISSUE 1
Page 10
A trivial question arises: Is the banking system itself
banking system, the meaning of the word
sustainable?
“Banking” changes.It makes a paradigm shift
When it comes to the recent scams (LIBOR and financial crisis of 2008) the following points are worthy to be mentioned:
from pure profit motive towards social benefits by being responsible for its investments w.r.t. society and environment.
Is there any way to stop money laundering (money
There has to be a development and acceptance of
being routed illegally) through a banking system?
the fact that the profits of a bank, the impact of its investments on society and the environmental
Do the banks have “capital adequacy” as required by BASEL III norms?
record of its clients are highly interdependent and correlated to each other.
Are those innovative products like securitization, CDOs, CDSs sustainable and ethical in countries like India?
This growing concern about ' environmental performance,
manifested
in
lending
and
investments decisions, has begun to act as an Should banks be allowed to manipulate or decide
additional driver of sustainability in the private
prime interest rates such as LIBOR?
sector. Companies have been given one more
Is technique of securitization and shadow banking the
reason to pursue environmentally and socially
way?
sound solutions.
Is the rising level of NPAs especially in the PSU
So has the theory of change has already started to
banks in India a real threat to the sustainability or just
be implemented or still in nascent stage?
an overreaction? Here is the desired theory of change described in Shall the banks be allowed to become the victims of
the flow diagram.
fresh slippages every year, mostly because of the sacred cows of the government-the agriculture and priority sector loans? All these questions hover around the words like “responsibility and sustainability” When these two words encounter banks or the entire
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VOLUME 17, ISSUE 1
Page 11
Figure 1
The Logical Framework shown above must be developed into a model and should be implemented to the core of the system. The banks especially in countries like ours have to create a differentiated proposition in the cluttered
financial services market-space by institutionalizing ‘sustainability’ as a key ingredient in all
internal and external processes. The sustainability zone for a bank: The banking system should operate in a ‘Sustainability Zone’ where wider economic, environmental and social objectives have to be met by supporting new emerging businesses that not only promote financial growth but also enhance social causes across a range of the common man base and the stakeholders, thus constituting the economic pyramid as a whole. To this end, they have to offer innovative financial solutions to address a wide spectrum of issues regarding sustainable livelihoods, public health, education .
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VOLUME 17, ISSUE 1
Page 12
Figure 2
they will have to develop a central theme focusing on : Economic policies
Pure profits
Introducing sustainability in agricultural
sector and priority sector lending and banking Sustainability zone profit+ society benefits
mechanism
Promoting
economic
participation
and
diversity Socially beneficial lending
Insulating themselves from all types of
systematic and idiosyncratic risks It is widely agreed that a financially included Social benefits
population is a major asset to the nation and such a society benefits enormously from a
The responsibility can be put into thought by thought leadership and a specific strategy and it can be converted into action by integrating the following business verticals of a bank:
thereby
to be highly endowed with a deeply penetrated bank branch network with policies such as to allow the banking find its roots in the remotest corners of the country which can deliver
Microfinance ( transition from micro credit to
microfinance
socially responsible banking system. India has
inching
towards
financial
agricultural credit along with other financial services especially at the farmers’ doorsteps.
inclusion) Strong internal decisions which have to be
Sustainable
investment
banking
(sustainable
underwriting)
Agri-rural banking (managing priority sector
lending)
sound ethically and commitment to socially responsible banking combined with proper and transparent voluntary disclosures to such values and
ethics
as
embedded
in
the
social
responsibility statements shall go a long way in
Social banking (Social networks and building up of
social capital)
building an equitable, socially responsible, sustainable country.
For banks to emerge out as sustainable champions, THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
VOLUME 17, ISSUE 1
Page 13
Basel III (third installment of Basel which formed a substantial part of Accords), was developed in the wake of trading exposure. the 2008 US sub-prime crisis. Basel III In an effort to plug these gaps in the will come to effect in Jan. 2013 and has wake of 2008 crisis, Basel III was to be fully implemented by 31st March proposed. It is to create a more robust 2018.The norms of Basel III are far version than the former to respond to stricter than the preceding Basel II the current market dynamics. The norms. The primal focus of the Basel III primal enhancements entail
Krishnendu Saha MDI, Gurgaon
norms has been to strengthen the lenders’ capital base and improve their
quality of capital
ability to withstand shocks. As a result, capital requirements are stricter. It also
introduces new regulations on bank
liquidity and leverage.
Augmentation in the level and
Introduction of liquidity
allegation against
Capital conversion/counter
Basel II is its
cyclical buffer CHANGES IN BASEL III OVER BASEL II NORMS
The major
standards
Leverage ratio
Another feature of enhancement is the
The major allegation against Basel II is reduced dependency on external rating
inability to incorporate corresponding changes in the definition and composition of
its inability to incorporate corresponding agencies through more stringent form
regulatory capital
changes
to reflect the
in
the
definition
and of reporting and addition of Central
composition of regulatory capital to Clearing Houses.
changing market dynamics.
reflect the changing market dynamics. This meant that during the financial crisis in 2008, all the banks in question were not only Basel compliant but more than adequately capitalized as far as the Basel II norms. The market risk models in particular were unable to capture the risk from credit derivative products, THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
Shovik Kar MDI, Gurgaon
VOLUME 17, ISSUE 1
Page 14
Source: (Subbarao, 2012) Even though the timeline for meeting capital requirements under Basel III from Jan 2013 to March 2018, RBI’s timeline to implement Basel III capital requirements is slightly ahead of the Basel committee’s recommendation.
Source: (S&P Capital IQ, From ‘Second Wave’ Basel II to Basel III A Credit Risk Perspective By David Samuels Managing Director S&P Capital IQ) THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
VOLUME 17, ISSUE 1
Page 15
There are also changes in the way the deductions are made in calculating CAR. One of the new guidelines requires 100% deduction from core capital while the existing RBI norm requires 50% deduction from Tier 1 capital and Tier 2 capital each except intangible assets and deferred tax assets. Also any investment greater than 10% of issued share capital will be treated as significant investment and deducted. In Indian context, that limit is 30% of issued share capital. IMPACT ON INDIAN BANKING SYSTEM One way to offset the contraction of buffer is to restrict discretionary payments for e.g. dividend payout and bonuses. Most Indian banks are capitalized beyond the mentioned norms but there are some public sector banks that fall short of the norms. Capitalizing these banks is a challenge because these banks are unable to raise equity capital as govt. has a policy of maintaining at least 51% stake in these banks. The option for govt. is to infuse capital to increase core capital of these banks. The Indian banks would require close to $30 - 40 billion over the next 6 years for Basel III compliance.
(Source: (ICRA Research, 2012))
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Page 16
The implementation of the discretionary counter
CONCLUSION
cyclical buffer also poses many challenges as
The formation of the Basel norms primarily cater


Using the credit-GDP ratio to look for
to prevention of a financial crisis and the issues
inflexion points in the economy can be
associated with economic growth acts as collateral
difficult as it is an extremely volatile variable
on that behalf. The RBI is willingly accepting the
in developing economies.
norms, which shows that the central bank is
Credit growth may be a good leading
willing to incur high cost and also shave off a few
indicator of economic growth but credit
percentage points of growth in the medium term
contraction is a lagging indicator of the
for long term financial stability. In terms of
economic downturn.
growth, the tightening of the capital requirements
BASEL
III
COMPLIANCE
OR
can be offset to an extent by proactive fiscal
ECONOMIC GROWTH?
policy reforms. With the thrust on manufacturing,
A major criticism against all the three versions of
mining and infrastructure sectors on one hand and
Basel including Basel III is its inclination to hurt
the tight Basel III capital requirements on the
economic growth. In the case of India, a developing
other, it will pose a huge challenge for the RBI,
economy shifting from services to manufacturing
government and the banking sector. Given the
paradigm (to tackle the supply constraints) there is
slew of reforms that the government is willing to
need for greater investment in the earlier stages.
undertake in allowing FDI in retail, aviation, the
While Basel accounts for longer term growth
RBI and the government will have to roll out
prospects, it creates short term compulsions which
these reforms (financial stability and fiscal policy)
may hinder growth. Thus the risk lies in the transition
in sync so that the long term growth outlook is not
period which may be further incremented by
hurt.
uncertainty until the rules are fully finalized and comprehended by the banks in the manner it comes to effect. Hence longer transition period which is functionally
equivalent
to
longer
short
term
compulsions entails costs which secures the longer term but creates uneasiness in the present.
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VOLUME 17, ISSUE 1
Page 17
The idea of creation of common cur- their currency & being part of monetary rency for countries belonging to the union countries received a higher credit European Union was formed so that rating which helped them borrow at there is better integration among EU lower rates. As a result countries like countries & also there is a possibility of Greece, Portugal & Italy borrowed creation of an alternate reserve currency more & more money at lower interest vis-à-vis the dollar. The countries which rates with longer maturities. Also, there wanted to use this common currency had was irresponsible spending by many of
Akshay Iyer SIBM PUNE
to sign the Maastricht Treaty which had these countries in areas of public the following clauses:
welfare, wage hikes & no formalized
Inflation rate of the participating structure which would help them earn country should not be higher amount of revenue that they were average spending each year. It was also reported inflation rate of the 3 best that some of the clauses of Maastricht performing countries in Treaty were breached by these countries & they used creative Eurozone than
1.5%
of
the
techniques to hide these The ratio to government deficit accounting to GDP for a year should not discrepancies. The clauses mentioned exceed 3%
in Maastricht treaty were broken by
The ratio of government debt to few member nations. Government debt instead of being limited got doubled in GDP should not exceed 60% The long term interest rate for a these years with only 5 countries country should not be higher having their debt below 60% of GDP. than 2% than the 3 lowest Also government deficit was not capped, with only 4 countries falling inflation states below 3%. Also a clause in the Treaty
Any country that satisfied the above conditions would be allowed to use the
which restricted countries from being bailed
out
in
case
of economic
common currency. By adopting Euro as THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
Article to explain Euro Crisis in simple words
VOLUME 17, ISSUE 1
Page 18
problems got broken when a bailout package got
ing Credit Default Swaps or CDS, which is an
designed for Greece, Portugal & Ireland.
instrument that lets you buy insurance on a vehicle
All these were concealed in the years prior to 2008
or house you don’t own. Whenever there is
where the governments were able to pay timely
damage to that vehicle or house you get
interest on their borrowings due to well-functioning
compensated for it even though you do not own it.
global economy. Problems surfaced in 2008, when
Speculators used CDS to bet that Greek bonds
there was economic downturn & countries were not
would lose value. If that happened investors would
able to make timely interest payments. It was on Jan
get compensated for it. To avoid further damage
14,2009 that for the first time, Standard & Poor
European Central Bank (ECB) started buying more
downgraded Greek government bonds to A- , the
of Greek bonds. Thus ECB ended up owning a lot
lowest rating among Eurozone member states. It also
of junk bonds which increased its risk. In countries
strangely presented the start of a big crisis that was
like Greece where economic assistance was
about to unravel.
provided, the assistance came with a lot of austerity requirements which led to unrest within
Now that Greek bonds were downgraded, investors
the country.
started demanding a higher premium for lending to Greece, which led to an increase in their borrowing
The root cause of the crisis was the idea to have a
costs. This leads to a vicious cycle where a country
monetary union within the member countries
has to pay a higher cost for borrowing which further
without the presence of a fiscal union. As a result
leads to more fiscal strain, which further increases
monetary policy is designed by the central bank
borrowing cost. S&P also predicted in October 2009
but fiscal policy is designed by the member
that Greek Debt would increase to 125% of GDP by
countries independently. So if a country does not
2010.As a result, it became more costly to hedge a
manage its finances with responsibility it does not
Greek bond against default. On April 27, 2010
have the option to devalue its currency & make its
Greek debt was downgraded to junk status. Thus,
exports more competitive & find a way to earn
yields on 2 year Greek bonds rose 13% up from
money. Another outcome of the monetary union
6.3% a few days before. Also, the yield for 10 year
was that countries like Spain could not increase
bonds went above 10%.Speculators used this as an
interest rates even though they saw a huge real
opportunity to bet on the downfall of the euro & the
estate bubble building up. One more outcome of
fact that richer northern European countries will try
the Euro has been that it has increased the friction
to rescue the smaller countries. They speculated us-
between states as the southern states feel that
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VOLUME 17, ISSUE 1
Page 19
northern states are imposing unreasonable austerity measures on them.
The way forward Let
Germany,
Finland,
France,
Austria
&
Netherlands exit the euro & have their own common currency. This currency could have a higher value due to higher competitive nature of these countries. The remaining countries in EU could use same currency Euro but could have it devalued so as to increase their
competitiveness. For this to get
implemented the northern states like Germany will have to forgo significant portion of their debts that they have lent to southern states like Greece. It will also require creation of another central bank which will take care of new currency of the above states. Another solution could be to have a fiscal union among the member countries in addition to the existing monetary union. For this to be implemented a huge amount of bailout or debt haircut will have to
Source:Tutor2u.net
be arranged by the richer northern states to take care of the huge debt piled up by some of these countries. This would also require countries to strictly follow the amendments of Lisbon or Maastricht Treaty which they haven’t followed till now. Depending on the solution adopted by EU will decide the fate of Euro & its existence in the future.
Source: usahitman.com
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VOLUME 17, ISSUE 1
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Abstract: High frequency trading has in every way possible and a new kind marked its presence in developed of traders emerged, the High frequency mar ket s and
has
led to rapid traders.
development in the field of computing and networking.
The concept and idea
behind HFT is here to stay but requires regulation in order to avoid catastrophe like the one on May 26th 2010. And its entry into India has opened up career opportunities for many and this article intends to enlighten readers about what high frequency trading is and how it has changed the way trading is done these
High frequency trading refers to transactions of large orders at a very high speed. HFT trades in securities like stocks or options, and uses complex algorithms to analyze multiple
Aravind Ganesan IIM Indore
markets at a time and execute orders based on market condition. To achieve all this HFT requires effective a l g o r it h m s
a nd
so ph ist ic at ed
Certain opportunities
technologies. High frequency trading is
exist in the
categorized with very low holding
market only for
periods but the number of trades
a few seconds;
executed in a given day is very high.
though the
Initially, traders used technical analysis According to a financial research firm and analyze news in order to make their TABB Group (2009), HFT accounts for
profit from
trading decision. Then came a time 61 percent of all US equity trading when people started quantifying the way volume in 2009. Although we see some
very low, high
days. 1. INTRODUCTION
traders took decision and developed trending decline after 2009, the programs which could take the same percentage in certain stocks are as high decision that a trader took, only faster. as 80. [Source: valotrading.com]
these trades is
volume can yield high returns.
This marked the birth of algorithmic trading. Then traders started realizing Certain opportunities exist in the that faster the decision making process market only for a few seconds; though of their algorithm, better off they will the profit from these trades is very low, be. This lead to a race to reduce latency high volume can yield high returns. THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
Rohit Maloo IIM Indore
VOLUME 17, ISSUE 1
Page 21
High frequency traders compete on the basis of speed
frequency trades executing in microseconds,
with other high frequency traders and compete for
minimizing the delay between market data
very small,
analysis and trade submission
consistent profits. As a result,
of
trading
increases the
high-frequency trading has been shown to have a high
effectiveness
algorithms.
This
Sharpe ratio.
maximizes the probability that a trade generated using that data can, and will, be executed.
2. PARAMETERS FOR SUCCESS IN HIGH 3. ROLE OF TECHNOLOGY IN HIGH
FREQUENCY TRADING
FREQUENCY TRADING 2.1EFFECTIVE STRATEGIES 3.1 The Trading Platform Low latency can give you an edge over others but with lack of profitable trading strategies, speed will be of
An open source strategy-driven trading platform
little use. In order to stay ahead of competition a team
provides
of highly skilled mathematicians and statisticians are
without being beholden to proprietary vendor’s
required
trading
release schedules and cost. Access to source code
opportunities. Development of a strategy is lengthy
enables usage, modification or enhancement to
process which takes close to 6 months. The process
meet business objectives and would help the firm
starts with ideation; the idea is quantified and tested
to get into the market more quickly because
under various conditions. And the biggest problem is
there’s no waiting for vendors, and development
it’s easy to replicate a strategy followed by a
efforts need not start from scratch. Thus, trading
competitor using reverse engineering, so the shelf life
firms are able to spend more on
of a strategy is small. And certain strategies become
capital – the strategies and the algorithms that
obsolete with time, so there is a need to keep
will gain them
developing new strategies.
instead of
2.2 LOW LATENCY
capital investments in expensive and restrictive
to
detect
high
frequency
Latency is the time delay experienced in the system.
enormous
flexibility
and
control
intellectual
competitive advantage – saddling themselves with large
infrastructure.
Latency is experienced while receiving data from
But ultra-low latency High frequency traders
exchange and while sending data to exchange. And
have their own team of C++ coders who develop
latency is also experienced while
highly efficient
processing the data
to come up with an order decision. With high-
algorithms instead of using a
generic trading platform. But the cost of having a
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VOLUME 17, ISSUE 1
Page 22
team of highly efficient programmers is very high.
consolidate information, High frequency traders use
3.2 Co-location
raw data feeds from various exchanges to reduce the
An important ingredient for success in HFT is
latency introduced by consolidation. High frequency
Co-location, which is the act of placing the servers
traders
in a facility such that the network latency is
understandable format so that algorithms can exploit
reduced. Inside a co-location facility every server
trading opportunities revealed by latest happenings
gets the market information at the same time, so
in the world.
also
use
news
feed
in
machine
there is no comparative advantage within a 4.CONCLUSION
co-location facility. Stock exchanges provide this facility but the cost of co-locating the servers are very high in a stock exchange, alternatively they can be co-located in other service provider’s facility.
High frequency trading is a natural evolution from conventional pit trading. The concept and idea behind it is here to stay but requires regulation in order to avoid catastrophe like the one on May 26th 2010. HFT has led to rapid development in super
3.3 Hardware
computers and networking. HFT has marked its
HFT computing requirement requires extreme
presence in most developed countries and is slowly
processing
while
entering into emerging markets as well. With apt
availability,
regulations in place, HFT is up for rapid adaptation
serviceability and manageability. Special attention
in India as well with many firms entering into it in
is given in choosing the type of server, rack or
the last couple of years. And this opens up another
blade server. Choosing the configuration for a
opportunity for finance freaks in the country, with a
server is science with reducing latency being the
fast paced and rewarding career.
offering
and
memory
server-class
performance
reliability,
prime objective. Companies spend hundreds of thousands of dollars on a single server which has a shelf time of maximum of 6-8 months. 3.4 Raw data feeds Several exchanges and ECNs provide raw data feed containing real time trade related information. This is in addition to the consolidated information that each exchange sends, since it takes time to THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
VOLUME 17, ISSUE 1
Page 23
What is Capital Structure?
Enhanced
Cost
of
Capital
Approach –
Capital Structure refers to the mix of
equity and debt that a firm uses to The approach tries to generate a debt finance operations of the firm. An ideal equity ratio that would minimize the capital structure can be used to optimize cost of capital of the firm. As the firm the value of firm in a significant way. increases the financial leverage, the The Miller-Modiginalni (M-M) model levered beta of the firm would start to on capital structure was one the first increase. Hence higher leverage would
Madusudanan NMIMS
theory to explain the use and benefits of get reflected as higher cost of equity. capital structure in maximizing the value Higher leverage would also mean the of the firm. Even though the M-M increase in risk for bond holders. This model suffer s
fro m naïve
and would lead to increase yield of the
Generally,
impractical assumptions, it still forms bonds and fall in credit rating of the
debt
the basis of subsequent research and bond. The cost of capital at various
instruments
thought process on capital structure.
leverage points can be studied to find
with a rating
the minimum cost of capital which
of BBB-/BB+
would maximize the value of firm.
are the best to
When a firm borrows money as debt, it adds significant amount of value to the firm by way of tax shield. When the firm raises debt, the form also incurs an implicit bankruptcy cost. The optimal debt equity ratio tries to maximize the value of firm. Some of the more practical approaches than the M-M Model that could be used to arrive at the optimal capital structure are:-
Adjusted
Pres ent
Value
Approach – This approach tries to maximize the
execute the capital structure
value of the firm by factoring in the implied bankruptcy cost and the gains on account of tax shield to the value of unlevered firm. The tax shield can be calculated by the using the marginal tax rate of the firm. The value of unlevered firm is obtained by discounting the cash flows by the cost of equity calculated
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Harish NMIMS
VOLUME 17, ISSUE 1
Page 24
by using the unlevered beta.
Calculating the bankruptcy is a difficult task as it is an implied cost and it is a relatively a newer concept in the world of finance. Some of the methods that can be used to estimate the bankruptcy cost are –
Using past Bankruptcies in the related industry
Altman Z score
Merton Model
Predictive Bankruptcies using option pricing models
The value of the firm depends on the debt equity ratio of the firm. But markets are the efficient and they do misprice the securities. But there are special times where one of the securities of the firm gets mispriced and leads to an arbitrage around the two securities.
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What is Capital Arbitrage and How does it work? Historically, the arbitrage strategies have been built around correlation of related markets such as – cash, equity-equity derivatives and cash bonds-interest rate futures. Capital Structure Arbitrage is a relatively new strategy that intends benefit from mispricing of the different liabilities of the same company. These were developed after it was noticed that impact on credit derivative instruments such as credit default swaps were found on the equity instruments of the same company.
Source: Risk.net Potential Arbitrage opportunities exist in the market if the price of debt or equity cannot be justified by its capital structure. Capital Structure Arbitrage Theory Involves taking long and short positions in different items on the liabilities of the same firm. One of the reasons why this strategy could be practically implemented with a “high degree of effectiveness” to benefit from the mispricing is due the development of credit derivative market and instruments such as CDS and CLN. The strategy works on the premise of exploiting lack of integration and synchronicity between the equity and the bond market. The strategy is primarily a bet on convergence of the anomalies in the pricing of different securities. The strategy works the best when the firms in financial distress, survive and fails the most when the firms end up in bankruptcy. It is far safer/less riskier than a “Naked’ position in either market. Link between Equity and Debt The credit risk of a company gets reflected in both equity and debt. The debt can be viewed as put option THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
VOLUME 17, ISSUE 1
Page 26
and equity as a call option. Hence, debt is less
Some of the traditional ways/strategies of benefitting
sensitive to company fundamentals than equity,
from the capital structure arbitrage are -
especially when the fundamentals improve. Higher
the leverage, the credit spread of the company increases, this increases the higher the correlation between
equity
and
debt.
Generally,
a company
debt
instruments with a rating of BBB-/BB+ are the
Set-up trades between the debt and equity of
Play
between
senior
debt
and
junior
securities
Convertible Bond Arbitrage by purchasing
best to execute the capital structure arbitrage
convertible bond and shorting the shares in
strategies, as this is where the correlation between
the delta hedge ratio
equity and debt is the highest. This reason why effectiveness of debt instruments with a rating of
Some of the newer strategies are
BBB-/BB+ improves is because these debt
Equity Options
instruments are quite volatile and start behaving
Credit Derivatives
like equity to various developments of the firm.
Using both Equity options and credit derivatives
A typical Capital Structure Arbitrage
A investor believes either the debt or equity is underpriced
He purchases a put option on the equity and CDS on a cheap bond (with a high YTM)
He has build a kind of hedge by buying both these securities
Capital Structure Arbitrage can be implemented using
Equity
Derivatives.
Deterioration
in
a
company’s credit worthiness is often an indicative future decline in the firm’s equity stock price. Theoretically, the derivative market should take cognizance of this movement in the credit derivative market. In Real time, the equity markets either over react or under react to these shocks in the credit
In case of a default by the firm, he receives the
derivative markets. In those times, the strategy to be
money from the put writer and the compensation
used are companies whose equity prices have over
from the CDS issuer. In case of recovery/non
reacted, a call should be brought and companies
default, the investor benefits from the improve-
whose equity prices have under reacted, a put should
ment in credit position of the firm by holding CDS
be brought .
and losses the premium paid for put option. Most of the capital structure arbitrager uses a model Some of option a player has are–
to gauge the value left in a CDS after considering the
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VOLUME 17, ISSUE 1
Page 27
price of the equity or vice versa. Most of the models used to calculate the spread are variants of the Merton Model. One of the studies done at University of Massachusetts, February 2004 on Capital Structure Arbitrage strategies suggest that “Results indicate that the strategy does not work in a predictable manner at the firm level but does quite well at the aggregate portfolio level�. This is one of the fastest growing strategies to get adopted. Most of the losses on this strategy are because of short history of this strategy, lack of academic literature and
practical expertise of executing such trades on the same.
In future, there would be more innovative instruments that would get developed around debt and equity. Development of such instruments and research in this area would enable the arbitrager to execute such strategy with a higher degree of effectiveness.
Source: Risk.net
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On September 14, 2012, Indian
is this the complete story that is
government opened its skies for
hurting the Indian aviation sector? It
Foreign Direct Investment (FDI) in
remains to be seen as the companies
the Aviation sector. Among other
battle countless issues, both in the
policy initiatives, the measure was
short term and the long term.
announced by the government as it
Varun Sanghi MDI GURGAON
went into overdrive mode as far as reforms are considered. While FDI was already allowed in the sector, the current regulation was directed at the foreign airlines who are interested in buying stakes in the Indian Airlines, a
ATF forms
measure which was previously
close to 40%
prohibited.
of the
Though
the
announcement came late in the day, the listed companies in the aviation sector had already factored in the reform in their stock prices as they saw a significant increase in anticipation of the reform. The reforms look good, especially when players in the industry are deep in the red and there are hardly any players that have posted profits in the near past. They would help these beleaguered firms to raise capital by selling equity to foreign airlines. But
operating
While the government in its capacity
costs of the
has allowed the entry of FDI into the
carriers and
sector, there is still a lot more that
is thus
needs to be done to uplift the
hurting them
sentiment. To have a better view,
the most.
let’s look at some of the problems that the industry is battling with. While no one can deny the immense potential growth in the sector, a close look suggests a mismatch between
capacity addition and
growth in the sector.
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In the period from January 2011 to January 2012, while the passenger traffic witnessed a growth of 12%, the capacity addition lagged behind at 3%. In recent times, the situation has been aggravated further from the cut down in operations by Kingfisher airlines. Another problem with the capacity addition is that, while certain trunk routes have capacity shortage, some other off beat routes have idle capacity. Due diligence in the allotment of route and fleet operation would go a long way in optimizing the operations. Figure 1: Stock Prices
Sources: www.bseindia.com Figure2: Fuel Prices data
ATF prices in Rs./lt 80.0 70.0 60.0 50.0 40.0 30.0
Source: Indian Oil Corporation THIS NEWSLETTER IS FOR INTERNAL USE AT IBS, HYDERABAD ONLY AND NOT FOR SALE.
01-Sep-12
01-Jul-12
01-May-12
01-Jan-12
01-Mar-12
Delhi (Domestic Airlines)
01-Nov-11
01-Sep-11
01-Jul-11
01-Mar-11
01-May-11
01-Jan-11
01-Nov-10
01-Sep-10
01-Jul-10
01-Mar-10
Delhi (International Airlines)
01-May-10
01-Jan-10
01-Nov-09
01-Sep-09
01-Jul-09
01-May-09
01-Mar-09
01-Jan-09
01-Nov-08
01-Jul-08
01-Sep-08
01-May-08
01-Mar-08
01-Jan-08
20.0
VOLUME 17, ISSUE 1
Page 30
Capacity addition is something that takes time to
fares considerably and as a result the other
build up and is fixed in nature, but the operating
players are following the suite, as they are
aspect that is hurting the industry the most, is the
left with few choices. This has not only
high Aviation Turbine Fuel (ATF) charges. ATF
inflated the debt of Air India, but also had a
forms close to 40% of the operating costs of the
profound effect on the other players as the
carriers and is thus hurting them the most.
industry is witnessing a deadly combination
The above data highlights the issue of domestic carriers at loss as they are being charged the highest
of high costs and price based competition which can be lethal in the long term.
for ATF. The Indian ATF prices are generally
Coupled with these issues, the companies are
among the highest in the world, making operation of
facing acute shortage of funds and are not
aircrafts all the more costly. The taxes and duties
even able to meet their daily operational
further imposed by state governments compound the
expenses. Most of them have already
problem. The price of ATF for International airlines
exhausted their credit limits and banks are
is cheaper as the fuel supplied is deemed export and
now wary of extending more credit. So on
thus escape the myriad of taxes imposed on fuel for
paper, most of the players are not even worth
domestic
Indian
Re. 1 as mentioned in a newspaper headline.
government has given a go ahead to the airlines for
According to a report the entire sector has
direct fuel import, the issues related to the handling
loans worth Rs. 1,10,000crores, but the net
and storage of fuel have done little good as the
worth of the sector is just 25 percent of the
airlines will have to rely on the existing oil
total loans and thus the sector is worth
companies. A reduction in duties will certainly
nothing when looked purely from the
provide some breathing space to the players.
accounting perspective.
High airport fees is another area where the Indian
While problems are plenty for the sector, the
players are at the receiving end as they pay some of
FDI regulation will certainly provide some
the highest airport fees in the world. The recent
relief to the cash crunch players in the
steep increase in airport fees at Delhi and the one
industry. The immense growth potential that
proposed in Mumbai will exacerbate the problem.
the sector offers is one of the many attractive
Their exists intense competition in the industry and
facts that would bring in foreign investments.
the pricing strategies of the players reflects this. The
Another major advantage for the Indian
state owned Air India has off late been dropping its
players is the operational expertise that the
consumption.
Though
the
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VOLUME 17, ISSUE 1
Page 31
foreign players bring along with them. This will certainly help in optimizing the operations of the national players. Also FDI will give a boost to the Maintenance Repair and Overhaul (MRO) industry that serves as the backbone for the industry. The Indian players must now justify their positions so as to seem attractive for foreign airlines to infuse capital in them. For the Foreign Airline, this is a valuable opportunity to enter one of the fastest growing aviation markets globally and gain a substantial share in the market that is still developing. It thus becomes clear that FDI alone would not be able to rescue the Indian aviation sector as it faces a humongous task ahead. It has to be coupled with many other allied reforms in the sector to make the sector come out of the red.
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Money Laundering is a matter of grave concern as of late. Money laundering is the process of concealing the source of money obtained by illicit means. In simple words, Money laundering is the process of making illegally-gained proceeds appear legal. The concept of “Money Laundering� is quite old, though the impact is felt recently. After the attacks on World Trade Centre on 11th September, 2009, countries have become much cautious in combating terrorism. But to combat terrorism, we must know how does it originate and how are the terrorists funded. The answer is quite simple, terrorist activities are funded through money laundering techniques and hence they go unnoticed. Recently in India, attacks on the Taj Hotel in Mumbai have also raised serious concerns in this regard. Money Launderers do their job so swiftly and smoothly, which make them a bit difficult t o be caught . Mone y Laundering is usually resorted to fund illegal activities like Drug Trafficking, Smuggling, funding terrorist activities, Trafficking of Human Beings.
Usually there are three stages in Money Laundering- viz Placement, Layering and Integration. In placement, usually illegal funds are brought into the financial system. Funds obtained by illegal means are introduced into an economy. In Layering, various types of accounts with banks in different names, are opened, mu lt ip le t ypes o f intermediaries, trusts and countries are used by the launderers to disguise the origin of funds. Here the main motive is to conceal the origin of illegally obtained funds in bulk, through various methods. Finally in Integration, laundered funds are apparently made to appear as legitimate funds, by utilising various financial institutional channels like banks.
Ways of Money Laundering
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Sibojyoti Chakrabarti ITM ,Navi Mumbai
Three stages in Money Laundering- viz Placement, Layering and Integration.
VOLUME 17, ISSUE 1
Page 33
Measures to Fight This Menance- A Reference to KYC. To fight this menace, stringent measures have been introduced by the Concerned Regulatory Authorities of various states. At first banks which are an easy source to channelize funds from criminal activities, have been cautioned in this regard. The concept of KYC has been made mandatory, for all banks and financial institutions to follow.
confiscation of property derived from money laundering. Under the provisions of the above mentioned Act, The Enforcement Directorate is empowered to investigate and prosecute offences relating to money laundering.
KYC is being promoted by an international organization called “Financial Action Task Force”, since 1989. Under KYC, all financial transactions will be monitored and identified by a bank. In India, RBI has instructed all banks to follow the KYC norms in terms of PML Act, 2002(w.e.f December, 31st, 2005) .
“Prevention is better than Cure”.
The main objective of KYC Norms are:
To prevent banks from being used intentionally or unintentionally, by criminal elements from money laundering activities. Enable banks to understand customers and manage their risk prudently.
Avoid opening of accounts with fictitious name and address.
Minimize frauds reputation.
and
protect
In its working the Enforcement Directorate is assisted by the Financial Intelligence Unit for proper functioning under the Act. Further as per the stipulations of the RBI Guidelines all banks are required to report any suspicious transactions to the RBI. Suspicious transactions include the following :-
banks
All cash transactions of the value of Rs.10 Lakhs and above.
Series of transactions which takes place within a month of the aggregate value of which exceeds Rs.10 Lakhs
All cash transactions where any forgery of valuable security taken place
How to Prevent Money Laundering? In India legislations have been implemented to foresee money laundering activities. The Prevention of money Laundering Act, 2002 has been enacted to prevent money laundering and provide for
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VOLUME 17, ISSUE 1
All foreign inward remittances received by NGO’s of the value of Rs.10 Lakh or above in a month.
Apart from this all cash transactions of Rs.50,000 and above compulsorily requires quoting of PAN number.
Recent Cases In Money Laundering1. The Enforcement Directorate has registered a case against Satyam Computer and its tainted founder chairman B Ramalinga Raju for his involvement in alleged money laundering . 2. The Serious and Organized Crime Agency (Soca) believes that Naresh Kumar Jain is responsible for laundering millions of pounds of profits from organised crime gangs in the UK over several years. Mr Jain is suspected of laundering money for Albanian and Italian heroin dealers, and narcotics cartels in America, the United Arab Emirates, Pakistan and Britain, according to inquiries in Italy and the US. German and US police say Jain's operation has tentacles in all of the major drug and terrorism hotspots across the globe. He was also wanted by police in Spain and the Netherlands. Jain was bailed in Dubai – where he faces trial for breaking foreign exchange laws – and fled his business headquarters. He resurfaced in his native India, where authorities raided several properties owned by him and issued an all ports alert. 3. The family of NRI businessman Raj Bhojwani, facing trial in tax haven island of Jersey on the charges of money laundering in a truck sale deal to Nigeria, has alleged "racial discrimination" and is all set to move the UN Human Rights Commission and British Institute of Human Rights. Bhojwani's counsel Hitesh Jain, in a letter to prime minister Manmohan Singh, a copy of which is with PTI, has alleged International News that Jersey is interested in making a case against the businessman, confiscate his assets and share
Page 34
them with Nigeria. 4. On 12th Aug, 2012 Income tax dept. has decided to prosecute individuals named in the classified HSBC list for stashing illegal funds In its probe the department has found illegal funds were laundered, being categorized as criminal proceeds of crime. The IT department will carryout its prosecution in coordination with the enforcement directorate( i.e designated enforcement agency under PML Act, 2002) (Source: Financial Express).
Position in Other CountriesIn other Countries too, legislations have been enacted and specialized agencies have been formed to curb the menace of Money Laundering. For instance in the United States Bank Secrecy Act, 1970 & Money Laundering Control Act, 1986 have been enacted and Financial Crimes Enforcement Network acts as the designated administrator of the Bank Secrecy Act. Finally I feel it is the Financial Institutions and the financial intermediaries who are being utilized for money laundering purposes, hence the government of every country should strive to keep a strict vigilance on the working of these institutions so that a world wide disease like Money Laundering can be prevented in every step, before it proceeds further.
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