IIFT InFINeeti Annual Issue by Zigu MBA

THE F INA NCE MAGAZ I N E OF I I FT

S E P TE M BE R 2012

ANNUAL ISSUE SHOULD BANKS BE GIVEN MORE AUTONOMY? MIST

BRICS

INDIAN TAX REFORMS

Analysis o f B A S E L I I I No rm s

InFINeeti Annual Issue | September 2012

CR ED ITS

M E E T TH E TE AM

E D I TO R - I N - C H I E F S o umya J yoti S en

SHILPI GHOSH is specializing the fields of marketing and finance. She

E ditorial board

has interned with Merck Sharp &

R o h i t K hattar

D o hm e in the c r itic al c are d i vi s i o n .

Pi yus h M a r wa ha

She plans to work in the pharmaceu-

R i tes h G upta

tic al indu s tr y af ter her gra d uat i o n .

S o urav D utta A S SO C IAT E E DITORS

R I T E S H G U P TA i s s p e c i a l i s i n g i n

Ve di k a G ane r i wala

field of finance. He has interned

Shi l pi G hos h

with Religare Enterprises Limited i n t h e co r p o r a te s e r v i ce s d i v i s i o n .

CO NT RIBUTIO N S FR OM

He plans to work in Banking and

A a k anks ha H ajela

f i n a n ce . i n d u s t r y p o s t gr a d u a t i o n .

Bhus ha n k anath e M d. Um ai r Ans ar i Va i bhav G arg

P I Y U S H M A R WA H A i s a s o f t ware engineer with keen inter-

design

est in finance. He has interned

Te a m I nFINe e ti

i n Tr i d e n t L i m i t e d i n f o r e x d i v i sion. He regularly tracks stocks

feedback / q ueries

and

commodities

markets.

i n fi ne e ti @i i f t.a c. in i n fi ne e ti @gm ai l. co m SOURAV DUT TA is a graduate of NIT Durgapur with diversified inter-

Published by students of Indian Institute of Foreign Trade, New Delhi and Kolk ata

ests. He has interned with L&T in the field of Risk Management.

A L L R IG H TS R E S ER VED R O H I T K H AT TA R i s s p e c i a l i z i n g i n Fi n a n c e . H e h a s i n t e r n e d w i t h Ta t a C o n s u l t a n c y S e r v i c e s i n i t s Financ ial S o l u tio ns bu s ine s s un i t. Post graduation, he intends to work in the Financ ial S er v ices i n d us t r y.

InFINeeti Annual Issue | September 2012

MES S AGE F R O M T H E E D ITO R- IN - C H IE F

CONTENTS

I n t h e c o v e r s t o r y, o u r

the wor ld like LIBOR rates being r igged, inves-

editorial team presents

f inanc ial ins titu tio ns. This has g ene rate d a l o t

the new era of regula-

of discussion among bank ing industr y exper ts

t io n in b an k in g in du s tr y.

a b o u t t h e p re re q u i s i te s fo r t h e s m o o t h f u n c -

Th e issue t alk s ab o u t the

tio ning o f the s ec to r. S o m e has pu t s t re s s o n

pros and cons of mone -

severe regulations whereas some are in favour

tary policy in India and

of automation as the need of the hour. To forge

t he ways to e nhan ce liquidit y in t h e mar k et.

ahead, indu s tr y l eader s s ay bank s m us t i n n o -

I t a ls o take s a clo ser lo o k o n t h e t ax re fo r m s

vate w hil e appl y ing the l es s o ns o f t h e g l o b a l

wi t h a foc us on do llar as t h e wo r ld ’s res er ve

financial crisis. To do this, banks are encouraged

c u r renc y.

t o e m p l o y “d i s c i p l i n e d i n n o v a t i o n ,” p u r s u i n g

An analysis of the I ndian bond

grow th thro u g h reas o nabl e r is k s. Th i s e d i t i o n

markets and the challenges

seved as the reserve cur-

promising group of coun-

The banking industr y all over the world is

m a i n l y re vo l ve s a ro u n d t h i s i s s u e k e e p i n g i n

f a c e d i n t h e I n d i a n s c e n a r i o.

rency for nations but with

tries is losing its sheen.

s e t t o c h a n g e fo r t h e b e t t e r. I t i s i m p o r t a n t

m ind the s everal c hang es inco r po rate d i n t h e

The ar ticle presents a detailed

the focus shifting to the

Is this the rise of MIST?

t o e x p l o re t h e p o s s i b l e l o n g - te r m e f fe c t s o f

bank ing indu s tr y in the recent pas t.

v i e w o n t h e n e e d fo r a l i q u i d

developing

debt market and the necessar y

Asia, has dollar lost its wor th

steps to enhance liquidity in

as the reserve currency?

tors cannot trust even the wor ld ’ s most stable

the fast-moving economic changes and the host of new oppor tunities and r isks are being

Happy R eading ! !

u nle a s he d. Thi s issue t r ies to address a rang e

»» p.3

»» p.11

5 DEBT MARKETS

17 World economy 29 GLOBAL economy

I ndian mar kets.

With Warm regards,

of timely opportunities and challenges spe cific to investment communit y but relevant to

Team I nFINeeti

a ll globa l i nve s to rs. Wit h a rat io n alist ic co m -

»» p.17

Fo r y e a r s , t h e U S d o l l a r h a s

countries

20 corporate talk

9 Banking

G ain insights about

the cor-

Bank ing refor ms is one of the

porate culture and economic

parison of MIST vs BRIC, a detailed explanation

most important issues being

scenario from Barclays Limited

o f t he ne e d of regulat io n in b an k in g indu s tr y

raised in the global financial

23 ECONOMY

BRICS, one of the most

32 SUMMER

EXPERIENCE

Students from IIFT share their summer internship experience

34 Risk

management

With the rising issues in

h a s b e e n c l e a r l y l a i d o u t . Fi n a l l y a l o n g w i t h

S oumya S en is specializing in finance and trade. He has

markets.

the regular columns, a closer look at the Basel

i nte r n e d at I C F I nte r n at i o n a l a n d h a s d e e p i nte re s t s i n

prospects of banking sector

The indian growth story

agement in banking seems

3 nor ms and their impac t on I ndian banks has

co r p o ra te a n d t ra d e f i n a n ce. Po s t h i s M B A , h e w a n t s to

being more regulated or more

has hit a major roadblock.

t o b e t t h e n e e d o f t h e h o u r.

b ee n analy ze d.

pursue a career in bank ing .

autonomous.

the

How will it be effective

real answer to controlling

in the present landscape?

As banks strive to emerge from the global

analyze

the

13 taxation

monetary

wo r l d e c o n o my, r i s k m a n -

policy

inflation?

fi n a n c i al c r i s i s, t h ey are en co unter in g a new

The

era of bank ing. I t is one marked by continuing

struggled

regulator y uncer tainty and economic instabil-

part of FY13. It has list its

With the introduction of

i t y, whi c h i s hi nder in g ban k s’ ab ilit y to m ove

attractiveness as a business

BASEL III nor ms, the bank ing

for ward.

The banking industry has been

destination. India is working

industr y across the globe is

facing lots of ups and downs over the past

on two major tax reforms.

tr ying to analyze the impact of

fe w ye a r s. Wi t h s c a n d a l s h a p p e n i n g a l l ove r

DTC (Direc t Tax Code) and GST

t h e n e w re fo r m s. We a n a l y ze

(Goods and Ser v i ces Tax). The

the impact of the BASEL III

ar ticle presents a view on the

nor ms on the I ndian bamk ing

need of the tax refor ms

industr y.

indian

economy for

the

has most

27 BANKING NORMS

R EGUL A R S 3 7 M O N T HLY C H R O N I C L E S 40 FUN WITH FIN

InFINeeti Annual Issue | September 2012

I ND IA N ECO N O MY

IND IAN ECONOMY i n ce nt i ve. Wh i l e i nve s to r s a re n o t s hy o f d e b t s

l a c k o f a c t i ve i n t e re s t o f l o n g - t e r m i nve s t o r s

i s s u e d by t h e to p ra te d f i r m s, t h e y a re re l u c -

like insurance companies. Corporates prefer

tant to subscribe to the lower rated instru-

raising funds through private placements as

m e nt s. Th i s i s a n a n o m a l y b e c a us e l owe r rate d

against public issuances because of operational

co m p a n i e s d o h ave a cce s s to b a n k f i n a n c i n g.

ease of issuance under private placements with

Credit enhancement by banks can perhaps

minimum disclosures, low cost of issuance and

t o i n c re a s e p a r t i c i p a t i o n a n d h e n c e l i q u i d i t y

make such instruments attractive to inves-

the speed of raising funds. The issuance process

in the Indian rupee corporate debt markets.

to r s. B ut o n t h e f l i p s i d e, c re d i t e n h a n ce m e nt

is also impac ted by costs, such as, stamp duties,

e s s e nt i a l l y i nvo l ve s t ra n s fe r o f t h e c re d i t r i s k

transfer costs, etc. which needs rationaliza-

to banks and this will not only hamper the

t i o n . Pre fe re n ce fo r p r i vate p l a ce m e nt i s a l s o

development of corporate bond market by

dictated by the profile of investors which is m o s t l y i n s t i t ut i o n a l a n d a na r row ba se at that.

Enhancing Liquidity in the Debt market : A panacea for India I ntro du c ti o n

henever

the

Cur rent Prob lems

G over n ment an n ou nces its borrowing calen-

I n d i a’s s o v e r e i g n b o n d m a r k e t s a t i s f i e s t h e

s t u nt i n g t h e p r i ce d i s cove r y p ro ce s s b u t a l s o

d a r, t h e r e i s h a v o c i n

immediacy and depth conditions only for

increase the risk in the banking system. The

mar ket wit h Co r po rates

“on-the -run” gover nment bonds (i.e., the most

fo c u s m u s t b e o n d e - r i s k i n g b a n k i n g s y s t e m ,

being pushed out and interest rates rising thus

recentl y-is s u ed g over nm ent bo nd o f a s p e c i f i c

and at the same time, building/encouraging

m a k i n g p r i vate p l aye r s l o o k fo r e i t h e r ex p e n -

m at u r i t y ) . O t h e r w i s e, t h e d o m e s t i c s ove re i gn

i n s t i t ut i o n s t h at p rovi d e c re d i t e n h a n ce m e nt.

sive bank financing or dollar/euro/yen denom-

b o n d m a r k e t i s l a rg e l y i n e f f i c i e n t . E xc e p t fo r

inated ECBs (Ex ternal Commercial Borrowings).

a b o u t 8 - 1 0 s e c u r i t i e s at a t i m e fo r w h i c h t wo

The debt ma r kets lack of liquidit y, which makes investor demand higher yields on these bonds. Thus mak ing these mar kets uncompetitive compared to foreign mar kets.

N e e d s fo r a n e f f i c i e n t l i q u i d d e b t m a r k e t i n I n di a : a ) E n s u r i n g fi n a n c i a l s ys te m s t ab i li t y :

The problem with an inefficient and illiquid debt market is that it makes companies go

A liquid cor porate bond mar ket can play a cr it-

outside to borrow thus increasing the exter-

i c a l ro l e b e c a u s e i t s u p p l e m e nt s t h e b a n k i n g

n a l d e b t o f t h e co unt r y ; a l s o i t m a k e s t h e d e b t

system to meet the requirements of the cor-

m o re p ro n e to c h a n g e i n t h e e xc h a n g e ra te s.

porate sec tor for long-ter m capital investment

An e f f i c i e nt d e b t m a r k e t w i l l a l s o o p e n a n e w

and asset creation. Banking systems cannot

a v e n u e f o r i nv e s t o r s w h e r e t h e y w o u l d h a v e

be the sole source of long-term investment

a benefit of getting high yields without the

c a p i t a l w i t h o u t m a k i n g a n e c o n o my v u l n e r a -

o b l i g a t i o n o f h o l d i n g t h e b o n d t o m a t u r i t y.

ble to external shocks. Historical and crosss e c t i o n a l ex p e r i e n ce h as shown that syste mic

M a r ke t St r u c t u re i n D e ve l o p e d M a r ke t s

problems in the banking sector can inter-

B u t i n s p i te o f s u c h a h u g e d e m a n d fo r r u p e e

way q u o tes are avail abl e in the m ar k e t, o t h e r

denominated markets only ver y few companies

par ts of the yield cur ve represent securities

ra i s e m one y i n th ese mar k et s. Th e p ro bl em is

that are not actively traded. Activity is con-

Corporates in many developed markets –

the lack of liquidity which makes the inves-

centrated in a few secur ities due to the mar ket

predominantly in the US and increasingly in

tors demand higher yields on these bonds, thus

confidence in them and the abilit y to liquidate

o t h e r j ur i s d i c t i o n s - h ave a m a r k e d p re fe re n ce

Indeed, one of the lessons from the 1997

mak ing these markets uncompetitive compared

po s itio ns q u ic k l y fo r thes e s pec if ic b o n d s at a

to tap the bond market rather than to seek

Asian financial crisis has been the impor-

to foreign markets even after taking care of

fair value. I n the cor porate debt mar ket, inves-

b a n k l o a n s fo r m e e t i n g t h e i r ex te r n a l f i n a n ce

tance of having non-bank funding chan-

t h e e xc h a n g e r a t e h e d g i n g c o s t . Th e n e e d o f

tor base is mostly confined to banks, insur-

r e q u i r e m e n t s . I n I n d i a , h o w e v e r, c o m p a n i e s

nels open. In the aftermath of this crisis, a

t he h o ur i s to ta ke s tep s to in crea s e liqu idit y

ance companies, provident funds, Primar y

continue to depend on the banking system

n u m b e r o f c o u n t r i e s i n t h e re g i o n , i n c l u d i n g

i n t he s e m ar ke ts by layin g down pro p er reg u -

D e a l e r s ( P D s ) a n d p e n s i o n f u n d s. O f l ate, t h e

for funds because of ease of availing bank

Korea, Malaysia, Singapore and Hong Kong,

lations and also promoting entr y of big foreign

retail investors have been showing interest in

finance, absence of credit risk mitigation mech-

have made progress in building their own

players like FIIs and Domestic Players like insur-

corporate bonds, especially bonds issued by

anisms and a host of other factors, such as,

corporate debt markets. Spreading credit

ance companies, mutual funds etc. in order

the infrastructure companies that entail tax

a b s e n c e o f s o u n d b a n k r u p t c y f r a m e wo r k a n d

r i s k f ro m b a n k s b a l a n c e s h e e t s m o re b ro a d l y

rupt the flow of funds from savers to investors for a dangerously long period of time.

InFINeeti Annual Issue | September 2012

I N DIAN E CO N O MY

INDI AN ECONOMY

through the financial system would lower

in India needs to be larger than its current

risk across the financial sector and enabling

debt markets will help to maintain finan-

t h e r i s k s t o f i n a n c i a l s t a b i l i t y. B o n d f i n a n c -

size, they are also clear indicators thatdebt

t h e s e i n s t i t ut i o n s to a cce s s h i g h q ua l i t y l o n g -

cial stability and provide a more optimal

ing reduces macroeconomic vulnerability

m ar k ets need to grow m anifo l d to en s ure t h at

term assets. Thus, access to long-term debt

way for Corporates to raise and investors

to shocks and systemic risk through diver-

the f inanc ial s ec to r beco m es adeq uate fo r a n

opens up the market to new classes of investors

to invest money thereby benefiting the real

sification of credit and investment risk.

eco no my as l arg e and as am bitio u s a s I n d i aâ&#x20AC;&#x2122;s.

with an appetite for longer maturit y assets and

sector while also improving the transmis-

thereby helps prevent maturity mismatches.

s i o n o f m o n e t a r y p o l i c y i n t h e e c o n o m y.

d) R e du ce d c u r re n c y mi s matc h e s :

R ahul Bakshi-The author is a student of IIM -I ndore

b) Enabling meaningful coverage of real se c to r n e e d s :

c ) Creat ing new c lasses of investo r s : Commercial banks face asset-liability mis-

Th e fi nanc i a l s e c to r in I n dia is much to o s m al l

match issues in providing longer-matu-

The development of local currency bond

to c a te r to t h e n e e d s o f t h e re a l e co n o my. A

r i t y c re d i t . D e ve l o p m e n t o f a co r p o r a t e d e b t

markets has been seen as a way to avoid

comparison of the asset size of the top ten

m ar k et w il l enabl e par tic ipatio n f rom i n s t i t u-

c r i s i s, n o t o n l y by s up p l e m e nt i n g b a n k c re d i t

Co r p orate s and th at o f t h e to p f ive ban k s (as

tions that have the capacity as well as apti-

but also because these markets help reduce

shown in Figure 1 below) reveals that banks in

tu de fo r l o ng er m atu r it y expo s u res. Fi n a n c i a l

potential currency mismatches in the finan-

I nd i a are unable to meet t h e scale o r s o phis -

institutions like insurance companies and

cial system. Currency mismatches can be

tication of the needs of corporate India.

prov ident f u nds have l o ng -ter m l iab i l i t i e s a n d

avoided by issuing local currency bonds.

N e e d l e s s t o s a y, t h e f i n a n c i a l s y s t e m i s n o t

d o n o t h ave a c c e s s to a d e q u a te h i g h q u a l i t y

big enough to meet the needs of small and

l o ng -ter m as s ets to m atc h them . Cre at i o n o f a

Th us, we l l - d e ve l o p e d a n d l i q ui d b o n d m a r k e t s

m e d i um- s i ze d e nter pr ises eit h er. Wh ile thes e

deep co r po rate bo nd m ar k et c an ena b l e t h e m

can help firms reduce their overall cost of

are pointers to the fac t that the bank ing sec tor

to invest in long-term corporate debt, thus

c a p i t a l by a l l ow i n g t h e m t o t a i l o r t h e i r a s s e t

ser ving the twin goals of diversifying corporate

and liability profiles to reduce the risk of both maturity and currency mismatches.

e ) Te r m s t r u c t u r e a n d e f fe c t i v e t r a n s m i s s i o n o f mo n e t a r y p o l i c y : The creation of long-term debt markets will a l s o e n a b l e t h e g e n e rat i o n o f m a r k e t i nte re s t rate s at t h e l o n g e n d o f t h e yi e l d c ur ve â&#x20AC;&#x201C; t h us facilitating the development of a more complete term struc ture of interest rates. A deeper, m o re re s p o n s i ve i nte re s t rate m a r k e t wo ul d i n turn provide the central bank with a mechanism fo r e f fe c t i ve t ra n s m i s s i o n o f m o n e t a r y p o l i c y.

Co n c l u s i o n Pa n e l A : As s e t s o f to p 1 0 Co r p o rate s ( 2 0 1 1 ) ba nk s ( 2011)

Pa n e l B : Ca p i t a l f u n d s a n d ex p o s u re l i m i t s o f to p 1 5 The implementation of various measures for i n c re a s i n g t h e e f f i c i e n c y a n d l i q u i d i t y o f t h e

InFINeeti Annual Issue | September 2012

BA N KIN G

Should banks worldwide be given more a u to n o my- t he n eed o f th e h o u r? B anking

BANKI NG

fo re i gn f i n a n c i a l i n s t i t ut i o n s. B a n k b ra n c h i n g

b a n k s to b e re g ul ate d. I nsta bilit y is a re su lt of

restrictions were phased out and in a number of

unwise por tfolio decision. In the absence of reg-

European countries by the early 1990s.Break ing

ul at i o n , t h e m a r k e t d i s cipline ba nks a d opting

down the barriers imposed by the (1933) Glass-

prudent por tfolios.Free bankers argue that the

Steagall Ac t, the Gramm-Leach-Bliley Financial

r i s k o f co nt a gi o n d o e s not ju stify the ne e d for

is among the

reg u l atio n o f the f inanc ial s ys tem . Th e re ce nt

S e r v i ce M o d e r n i z at i o n Ac t o f 1 9 9 9 p e r m i t te d

wo r l d ’s m o s t t i g h t l y re g u -

developments raise debates about the need for

f i n a n c i a l h o l d i n g co m p a ny.

lated busin esses. B ut m o s t

improved regulation of bank ac tivit y for finan-

o f t h e e co n o m i c p ro b l e m s

c ial s tabil it y.

B e n e fi t s

The recent histor y of regulator y re fo r m i n Bank ing

S o m e b e n e f i t s a re :

in the past two hundred years were caused by banks a n d s p e c u l a to r s. Af te r t h e great depression, sound

1.Freedom to adopt the most efficient practices

b a n k i ng re for ms en sured eco n o mic st abil it y

The diminishing effectiveness of traditional

& d e ve l o p n e w p ro d uc t s a n d s e r vi ce s.

and prosperity for many years. Post sub -prime

co ntro l s du e to f inanc ial innovatio n a n d ra p i d

2.Competition-forcing the exit or consolidation

c r i s i s, the Ba nks are reluc t ant to imp le m ent

tec hno l o gic al devel o pm ent, the deve l o p m e nt

o f re l at i ve l y i n e f f i c i e nt f i r m s.

the regulator y reforms saying it inhibits inno -

of regulator y avoidance, competition bet ween

3 . I m p r o v e m e n t s i n t h e q u a l i t y, v a r i e t y a n d

v a t i o n a n d r a i s e s b a r r i e r s t o e n t r y. C a n w e

international financial centers are some reasons

a cce s s to n e w f i n a n c i a l i n s t r um e nt s & s e r vi ce s.

t r u s t t h e B a n k s to re g u l a te t h e m s e l ve s ? Th e

w hy refo r m was needed.

4 .I m p rove d wo r l d a l l o c at i o n o f re s o urce s d ue

regulation.They say that deposits could simply

to t h e re m ova l o f t h e b a r r i e r s to i nte r n at i o n a l

b e t ra n s fe r re d f ro m b a nks with u nsou nd por t-

c a p i t a l f l ows.

fo l i o to b a n k s w i t h s o und e r por tfolios the re by

recent times reveal many financial institut i o ns fai li ng. I n t h is ar t icle we deal with the

U n t i l e a r l y 1 9 7 0 ’s t h e B a n k i n g s y s t e m c o n -

benefits and cost

trolled

associated with

pr ice s, q ua n -

R e g ul ato r y re fo r m a n d co m p e t i t i o n ex p a n d e d

t he bank i ng re gu-

tities of busi-

t h e re a c h o f b a n k i n g to t h e u n d e r p r i v i l e g e d.

Contrar y argument: Asset values can be pre-

lation, how auton-

ness

con-

Regulation is essential because the liquidity

dicted, but valuations are contingent on

o my c a n h e l p t h e

ducted and

o f b a n k l i a b i l i t i e s i s a p ub l i c g o o d. Th e un ce r-

a range of unknowns. It is difficult even for

banks and what

the

market

t a i nt y i s a n un q ua nt i f i a b l e r i s k- a l e a r n i n g g a p

ce nt ra l b a n k e r s to d e te r m i n e w h e t h e r a b a n k

is really needed

access. But

which can never be closed.Banking regula-

has a liquidity/ solvency problem. If tactics

considering the

since

mid

t i o n & s up e r vi s i o n s up p o r t s t h e e vo l ut i o n o f a

like deposit insurance and lender- of-last-resor t

current financial

1 9 7 0 ’s t h e r e

b a n k i n g s ys te m w h i c h p ro d u ce s m o n e y a s a n

facilities were applied successfully, banks could

s i t u ati on.

is a signifi-

asset to hold in times of par ticular uncer taint y.

be protected from failure in a free banking

cant process

Th e s t r uc t ure o f t h e f i n a n c i a l s ys te m h a s b e e n

s ys te m b ut t h at i s a f a r cr y a nd the fre e ba nk-

o f re g ul ato r y

undergoing major change, which cer tainly

er ’s argument ignores the potential for systemic

reform

i nvo l ve s a m a j o r re t h i n k a b o ut re g ul at i o n .

i n s t a b i l i t y.

Fre e b a n ke r ’s c r t i q u e s

Why re g u l ate s t a b l e, d i ve r s i f i e d b ank s ?

I nt ro d u c t i o n

recent

most coun-

boom,

tries and a

bust, the financial

s hif t towa rd s

The housing

h avi n g s o un d p o r t fo l i o ma na ge me nt.

the

crisis and severe recession that followed, con-

more market-oriented forms of regulation-

They say that the uncer tainty can be eliminated

Autonomy entails operational freedom. I t facil -

t i n u e to a ffe c t us. Th ese event s h ave shaped

L i b e r a l i z e d I n t e r e s t R a t e, I nv e s t m e n t s , L i n e -

a n d f i n a n c i a l a s s e t s c a n b e va l ue d i n t h e s a m e

i t ate s p r i ce a n d f i n a n c i a l s e c to r s t a b i l i t y t h at

t he econom i c recover y an d t ran sfo r med the

o f - b u s i n e s s, ow n e r s h i p l i n k a g e s a n d e nt r y o f

w a y a s g o o d s , s o t h a t t h e r e i s n o r e a s o n fo r

are impor tant for achieving sustainable growth.

InFINeeti Annual Issue | September 2012

BA N KIN G

BANKI NG

M o n e t a r y p o l i c y i s s u p e r e s s e n t i a l fo r w h i c h

savings-and-loan industries, with huge costs

themselves. They expanded too rapidly. In 2007

s o c i e t y, w h i l e m a i n t a i n i n g a s u i t a b l e d e g r e e

t he ba nk s hou ld be given so me AU TONO M OUS

t o t a x p a y e r s a n d t h e e c o n o m y. T h e f a c t t h a t

and 2008, their schemes began to unravel.

of humility about the ability to accurately

p o w e r. A s o u n d a n d s t a b l e f i n a n c i a l s y s t e m

this happened to heav il y reg u l ated i n d us t r i e s

We l e a r n t a b o u t s u b - p r i m e m o r t g a g e s , l i a r s’

q u a n t i f y t h e re l e v a n t b e n e f i t s a n d c o s t s. Th e

i n clu di ng a n e fficient payment system is al s o

m ak es u s think w hether reg u l atio n d o e s m o re

loans, and derivatives where loans were repack-

b a n k i n g i n d u s t r y s h o u l d h ave e f fe c t i ve c h a n -

i m p o r tant for a mar ket eco n o my to real ize its

har m than g o o d?

a g e d, s o l d a n d re - s o l d s o t h at a ny co n n e c t i o n

nels for voicing concerns about burden or

between borrower and the final lender was

about lack of clarit y regarding regulator y stan -

b ro k e n .

dards and super visor y expec tations.A for ward-

full potential. Accountability, transparenc y and g o o d gove r nance sh o uld be present.

The reas o n fo r m o ral hazard is the a b s e n ce o f

l o o k i n g m a c ro p r ud e nt i a l a pproa ch mu st con-

m ar k et dis c ipl ine bec au s e o f g over n m e nt re g Fi t c h R a t i n g s r e c e n t l y s a i d t h a t t h e c a p i t a l

u l ato r y p o l i c i e s. D e p o s i to r s a n d s h a re h o l d e r s

Th e re c e n t a l l e g a t i o n s we re B a rc l ays - M a r k e t

sider how the financial system is likely to evolve

requirements as per BASEL III will increase

we re l u l l e d by p re v i o u s a c t i o n s o f re g u l a t o r s

interest rate manipulation, HSBC-Mexican drug

ove r t i m e. Fo r e x a m p l e, w h a t s ys te m i c i s s u e s

the lending rate, impact the economic

into believing that even if the institution failed

money laundering and Standard Char tered-

a re ra i s e d by n e w f i n a n c i a l p ro d u c t s, s u c h a s

o u t p u t t h e re by ex te n d t h e c u r re nt re ce s s i o n .

they wo u l d s o m ehow be pro tec ted.

Iranian oil money laundering.The culture began

complex derivatives? We want a distinc t regime

in 1986, when Margaret Thatcher ’s government

fo r s ys te m i c a l l y i m p o r t a nt institu tions.

Fur thermore, in Europe the government bonds’ y i e l d i s i n c r e a s i n g, t h a t i s, t h e b o n d s a r e n o

Cost of b ank ing regulat ion

m o re at t ra c t i ve. Th i s i n t u r n w i l l s qu e e ze t h e

i n t r o d u c e d t h e “ B I G B A N G ” D E R E G U L AT I O N t h at i nt ro d uce d t h e c ul t ure o f r i s k- t a k i n g, b i g

S o w r i r a j a n S a n d R a m a n a i d u D . S . T-T h e a u t h o r s a r e

market that banks can use to meet the new

Bank ing regulation curbs the ability of bank ing

bonuses and a focus on shor t-term returns.The

students of I nstitue for Financial Management and

c a p i t al re q ui re ment s.

h o u s e s to m ove o u t o f re ce s s i o n a n d re - b o o t

f i n a n c i a l i n s t r u m e nt s a re s o co m p l ex i t o f te n

R eseacr h,Chennai

t h e e c o n o m y. A n e x a m p l e o f r e s t r i c t i n g a n d

t a k e s m o nt h s to f i g ure o ut h ow m uc h wa s l o s t

G over nm e nt a nd t ax payers are n o t at t he r is k

costly bank ing regulation is Obama’s trenchant

a n d w h e re t h e m o n e y we nt.B a n k s us e d h i g h e r

fo r b ai li ng out th e depo sito rs if in sured bank s

and res tr ic tive D o dd-Franc k ac t.

l e ve r a g e t o m a x i m i ze p ro f i t s f ro m D e r i v a t i ve p ro d uc t s. O n e ex a m p l e i s t h e re ce nt co l l a p s e

fail because, they just have to make up the d i ffere nce whe n t h e lo ss exceeds t h e am o u nt

The ‘Quasi-nationalization’ of the banking sector

a ccu m u late d through p remiums.

through a polic y that combines a high degree of

o f MF G l o b a l.

reg u l atio n and bail o u ts w il l dis r u pt l o n g - te r m

D odd-Frank has tr ied to reduce the costs asso -

economic growth. Apar t from restric ting credit

ciated with the regulation by focusing on insti-

through profit loss on regulator y compliance, it

t ut i o n s w h o s e o p e rat i o n s b e a r m o s t c r i t i c a l l y

m ay res u l t in the s hif t o f r is k to g en e ra l c re d i t

on the stability of the financial system as a

t r a n s a c t i o n s. O n t h e b a c k o f t h e J. P. M o rg a n’s

whole.I t addressed the too -big-to -fail problem

• N o at te nt i o n to t h e s t a b i l i t y o f t h e f i n a n c i a l

billion dollar losses, there is now a tempta -

by allowing troubled systemically impor tant

s yste m a s a whol e.

tio n in the E U to pas s a m eas u re s im i l a r to t h e

f i n a n c i a l i n s t i t ut i o n s to b e s h ut te re d.

Fl aw in t h e fi n a n ci a l regu l ati o n syste m S o m e ma c role ve l sh o r tco min gs were:

Vo l c k er r u l e in the U. S D o dd ’s -Franc k Ac t. The banking sector has undergone major

• N o me as u re m e nt o f t h e degree to wh ic h the t u r m oi l i n the fi n an cial system can af fec t the e co n o my.

What makes us realise the impor tance of regulat ion?

c h a n g e s o v e r t h e l a s t fe w y e a r s . T h e r e g u l a t i o n re s t s o n e co n o m i c ro l e o f m o n e y a n d un ce r t a i nt y.Th i s un ce r t a i nt y i n t ur n re n d e r s f re e

• I n a d e q u a te co n ce n t ra t i o n o n t h e s a fe t y a n d

I n 19 70 , the debt c r is is il l u s trated th e n e e d fo r

b a n k i n g u nw o r k a b l e. R a t h e r t h a n s a y i n g r e g -

soundness of individual depositor y institutions

central bank ing f u nc tio ns that natura l l y a r i s e

u l a t i o n i s u n n e ce s s a r y, t h e m o re a p p ro p r i a te

i n a n age of global interdep en den c y.

in a deregulated environment.What most of

response is to consider how to improve the reg-

u s d i d n’ t k n o w b e fo r e 2 0 0 7 w a s e x a c t l y h o w

ul at i o n . G o o d re g ul ato r y p o l i c y s h o ul d t a k e a

they m ade pro f its. B u t the bank s ove r- re a c h e d

broad view of the way rules affect economy and

We e x p e r i e n c e d t h e c o l l a p s e o f b a n k i n g a n d

InFINeeti Annual Issue | September 2012

GOV ER NM ENT AND TAXES

GOV E RN M E N T A N D TAX ES

Ta x R e fo r m s : An I n di a n Perspec ti ve I n o rder to mak e it s el f an attractive business destin at io n an d to in crea s e tax receipts, India is working on two major tax reforms. DTC (Direc t Tax Co de) and G S T (G o o d s a n d S e r v i c e s Ta x ) .

I n co m e Ta x

Co r p o rate Ta x

Let ’s look at the trend in combined tax receipts

Wh at p e rce nt a g e o f ove r 1 .2 1 b i l l i o n p o p ul a -

I n d i a h a s e n t e r e d i n t o D o u b l e Ta x a t i o n

for Union and the States.The trend looks hear t-

t i o n o f t h e co unt r y p ays i n co m e t a x ?

A v o i d a n c e A g r e e m e n t ( D TA A ) ; w i t h d i f f e r -

ening. In fact the rate of growth has out-

e nt co u nt r i e s. S o m e m u l t i n at i o n a l co m p a n i e s

p a ce d the G DP growt h rate by a h uge margin.

o p e rat i n g i n I n d i a ex p l o it the loophole s in the

But, if we look at this with a backdrop of

DTA A by ro ut i n g t h e i r i nve stme nt throu g h the co u n t r i e s I n d i a h a s DTA A w i t h . Wh i l e t h e re i s n o w ro n g i n h avi n g a h old ing compa ny the re, i t o f t e n t u r n s o u t t o b e a s h e l l c o m p a n y. Thus,

tax

such

transactions,

GAAR

(General Anti Avoidance Rules) was intro duced in the Union Budget of 2012-13. But, it was received with apprehension because of lack of clarity and certain proJust about 2.8 %! Compare this with over

visions related to its retrospective nature.

45% for USA. Thus there is a need to bring the piling fiscal deficit, plummeting inves-

more people under the ambit of the Income

Th e i nve s to r co n f i d e n ce took a d ip a nd the F I I

Ta x . D T C i s p r o p o s e d t o a c h i e v e t h i s g o a l .

inflows took a U-turn. In contrast to high investment in stock market in the Jan-Mar quar ter, FII

tor confidence and widening trade deficit w e’ l l u n d e r s t a n d w hy t h e f i n a n c e m i n i s t r y i s b u sy l ook i ng for aven ues to in crease receipts.

Direc t Tax

Some of its salient features are abolition of

i n f l ows we re n e g at i ve fo r t h e m o nt h o f Ap r i l.

s u r c h a r g e , e d u c a t i o n c e s s a n d L e a v e Tr a v e l

The stock mar ket saw a gradual fall from about

Al l owa n ce. D e d u c t i o n s u p to 1 . 5 l a k h s, u n d e r

17500 points in March end to about 16000

Th e b road s tr u c ture o f t h e t ax system a nd the

DTC is said to replace the existing I ndian

‘ S e c 8 0 C ’, t o b e a l l owe d. N o d i f fe re n c e i n t a x

points in May end. Thus to boost investor confi-

a s s o ci ate d tax re fo r ms are sh own in t h e f ig u re

I n co m e Ta x Ac t , 1 9 6 1 . I t s e e k s to co n s o l i d a te

slabs for male and females and many more. These

dence CBDT, in May, formed a six-member com-

and amend the laws under IT Act and facili-

c h a n g e s a i m to i n c re a s e t h e co m p l i a n ce b a s e

m i t te e to d ra f t g ui d e l i n es for e nforcing GA A R .

tate voluntar y compliance to help increase the

and thus increase the Tax receipts. The changes

t a x - G D P r a t i o. Le t ’s fo c u s o n t h e t a x r e fo r m s

are being implemented step by step ever y year.

InFINeeti Annual Issue | September 2012

GOV ER NM ENT AND TAXES

GOV E RN M E N T A N D TAX E S

Viewed through a fiscal lens, the countr y is not

There is an alternate concept of internationally

one market, but 28 states, each with its own tax-

followed negative list according to which the ser-

raising powers, which they are not afraid to use.

vices included in the negative list will be exempt, rest all ser vices will have to pay the ser vice tax.

Co m p l i c ate d l aws, c a s c a d i n g, s q ua b b l i n g ove r what constitutes a good and what is a service etc are

A s a m o v e t o w a r d s i m p l e m e n t i n g t h e G S T,

some major issues with the present web of taxes.

service tax regime based on negative list was implemented from July 1st. , 2012

This multiple tax regime across sectors of

Draft June

guidelines end

released

majorly

included

1 . The ta x r ule s will ap ply to in co me acc r u ing

30000

only on or after April 1, 2013 and that a monetar y threshold is a must for invoking GAAR provisions.

0 -10000

FII

GAAR

will

takes

the

invoked

benefit

only

any

D TA A .

S t a t e s h ave r a i s e d c o n c e r n s t o c e r t a i n i t e m s,

in allocation of resources thus introduc-

which they say are leading to double taxa-

ing inefficiencies in domestic production.

t i o n . As o f n ow s o m e o f the se ite ms have be e n added to the negative list and a consensus will

26328

O n c e G S T i s i m p l e m e n t e d a p a r t f ro m m a k i n g

20000 10000

35228

40000

production and states leads to distortions

b e re a c h e d w h e n t h e G S T g e t s i m p l e m e n t e d.

life easy for local industries, it will attract 1792 Jan

Feb

Mar

Apr -4896

3222

1180

May

Jun

FII Investment

fo re i g n f u n d f l o w s. Ac c o rd i n g t o e s t i m a t e s i t

Co n c l u s i o n

will lead to an increase in GDP of 0.7% to 1.7%. Th e s e t a x re fo r m s wo ul d d e finite ly he lp u s in One of the major challenges in implement-

s ub s t a nt i at i n g o ur s t a n ce a nd wou ld strongly

i n g G S T i s a r r i v i n g a t a re ve n u e n e u t r a l r a t e.

portray our image of being the – ‘Incredible India’ .

A re ve n ue - n e ut ra l rate i s o n e at w h i c h a s t ate 3. GAAR provisions will not apply in cases

clarity and transparenc y in the draft guidelines.

wo ul d n o t re co rd a ny g a i n o r l o s s a f te r s w i tc h ing to GST. The higher a state’s revenue -neutral

whe re ta x tre at y agreement s are n o t invo k ed. has

rate, the more compensation it would seek from

panel

been positive and the return of confi-

the Centre. Other challenges include imple -

members.

dence is evident by the rally at the stock

m e nt at i o n o f I T I n f ra s t r u c t u re, Co n s t i t u t i o n a l

markets from a low about 16 thousand

Amendment, Dispute resolution mecha-

p o i n t s i n M ay e n d to a b o u t 1 7 5 0 0 i n Au g u s t .

nism and credit mechanism between states.

I nd irec t Tax

S e r vi ce Ta x R e gi me

GST (Goods & Ser vices Tax) is an ambitious prop-

S h a r e o f s e r v i c e s e c t o r i n c o u n t r y ’s G D P

o s itio n to c reate a s eam l es s natio na l co m m o n

has risen from 50.4% in 2000-01 to 59.0% in

Th es e ne w gui delin es to o did n o t go wel l w ith

market, by subsuming most of the indirect taxes

2 0 1 1 - 1 2 . B u t , s h a r e o f S e r v i c e Ta x i s a l i t t l e

all the stake holders.Thus, PM Manmohan Singh,

imposed by the state and the government.

m o r e t h a n 1 % o f t h e G D P. We h a v e c o m e a

The 4.

Setting

not

less

an than

approving three

It also provided an indicative list of deals/

overall

sentiment

since

then

transactions/arrangement where GAAR will b e i nvo k e d. Wh i l e t a x m i t i g at i o n u s i n g ava i l able provisions in the law is allowed, it i s t a x a v o i d a n c e t h a t G A A R w a s t o d e t e r.

i n cha rge of the f in an ce po r t fo lio in June, s et

long way since 1994 when the service tax

u p a co m m i t te e to b e gi n t h e p ro ce s s o f co n -

Indirect taxes are a hotch-potch of Union Excise

was introduced. Since then a positive list

sultations with various stakeholders in a bid

Duty, State Excise Duty, Additional Excise Duty,

a p p ro a c h . i .e. s e r vi ce s i n c l ud e d i n t h e l i s t w i l l

to fine -tune what had hither to been viewed

S e r v i c e Ta x , S a l e s Ta x , C u s t o m s , A d d i t i o n a l

have to pay ser vice tax, has been followed.

a s controve r s i al provisio n s an d ush er in m o re

Customs Duty, Special Additional Duty, VAT etc.

G aurav Tiwar i-The author is a student of IIFT

InFINeeti Annual Issue | September 2012

W ORLD ECONOMY

W O RL D E CO N O MY

I s i t t h e e n d o f D o l l a r a s Wo r l d ’s r e s e r v e Cu r ren c y ?

sidelined leading to a shift in the economic

wo ul d n o t p urc h a s e Pe t role u m from the O PEC

p owe r b a l a n ce a s s t ate d e a r l i e r.

co unt r i e s us i n g D o l l a r s b u t by some othe r cu rre n c y t h at gi ve s b e t te r re tu r ns.

Th e f ut ure o f t h e p re s e nt l y a i l i n g U S e co n o my would be influenced greatly by short term

A Wo r l d w i t h o ut D o l l a r ?

A B r ief H isto r y o f the US

wo r l d c u r renc y. The co l l aps e o f the U S S R re i n -

global factors like an oil shock or a natural

D o llar

fo rced the predo m inance o f do l l ar a s a wo r l d

d i s a s te r ,e tc. Th e s us te n a n ce o f t h e U S D o l l a r

Th i s co ul d b e a re a l i t y w ithin a g e ne ration. I f

currenc y. Stability has been a key fac tor for the

hegemony would depend upon the per for-

at a l l t h e D o l l a r i s o us te d a s the re fe re nce cu r-

Th e do llar was ch os en as

a d o p t i o n o f U S D o l l a r a s o f f i c i a l c u r re n c y by

m a n ce o f t h e U S Eco n o my. A p o te nt i a l t h re at

renc y and if there is no currenc y to occupy that

the currency of United

s everal co u ntr ies. D eval u atio n has n e ve r h a p -

States by the passage

pened with the US Dollar. The emergence of the

of the Coinage Act of

J apanes e Yen in 1 98 0’s po s ed a s er ious t h re at

1792, recommended by

to the D o l l ar as wo r l d c u r renc y bu t t h a n k s to

Alexander Hamilton, the treasur y secretar y

the reces s io n in J apan in 19 90 ’s ave r te d t h at

then. Many theories exist on the origin of

threat. The ar r ival o f the Eu ro had a l s o p o s e d

t h e s y m b o l o f t h e d o l l a r ( $ ) s u c h a s T h e Pe s o

a threat to the D o l l ar as wo r l d c u r re n c y. t o t h e U S e c o n o my c o u l d b e t h e o p e n i n g u p

p o s i t i o n , t h e n g l o b a l i n f l a t i o n wo u l d r i s e a s

o f a n o t h e r wa r f ro nt i n a p l a ce l i k e I ra n / Syr i a .

impor tant commodities like oil ,precious metals

The failure of a couple of M ajor US banks could

& a g r i c u l t u r a l g o o d s wo u l d r i s e s u b s t a n t i a l l y

The shift in the economic power from the

p l u n g e t h e U S e c o n o my i n t o a d e e p e r a b y s s.

to co m p e n s a te fo r t h e s a m e. Th i s w i l l h i t t h e

western hemisphere to the eastern hemisphere

Th e s e a re s o m e o f t h e m a j o r f a c to r s t h at co ul d

e m e rgi n g m a r k e t s l i k e China , I nd ia ,e tc.

is the eminent danger that lurks over the

affec t the US economy thereby having a poten-

S h i l l i n g A b b r e v i a t i o n T h e o r y, e t c . T h e Pe s o

supremac y of the US Dollar. A study conduc ted

t i a l t o i n f l i c t s e ve re d a m a g e o n t h e s t a t u s o f

H o w e v e r, w e s h o u l d a l s o a n a l y z e t h e s u b s t i -

Abbreviation Theor y puts for ward the fac t that

by I M F h a s p ro j e c te d t h e s h i f t i n Pu rc h a s i n g

the US Dollar as the world’s reference currenc y.

t u t e s a v a i l a b l e , o t h e r t h a n t h e C h i n e s e Yu a n

t he d olla r s y m bo l is der ived f ro m t h e Spanis h

Power Par it y of the wor ld from the west to the

Pes o.

eas t w ithin a tim e s pan o f 18 year s .Th e m o s t

The present economic crisis has also led the US

likely contender to substitute the Dollar would

G over nment to reduce the interest rates to the

be the C hines e Yu an. The grow th tra j e c to r y o f

minimum possible so as to stimulate investment

1 .Euro - I f we l o o k at t h e Eu rope a n U nion now ,

China shows that it would over take the US to be

i n t h e e co n o my. H owe ve r, t h i s m ove w i l l b e a

what is visible is that there are a large number of

the world’s largest economy by 2020(Economic

deterrent for the OPEC nations (barring Iran

co unt r i e s t h at a re f a c i n g sove re ign d e bt cr isis.

Times Repor t). Some of the banks have already

) t o c o n d u c t O i l Tr a n s a c t i o n s i n D o l l a r s . T h i s

Some of them are tr ying to distance themselves

star ted given a higher impor tance to the Yuan

i s b e c a us e t h e p e t ro d o l l a r s ys te m w i l l b e l e s s

from the Euro. This is primarily due to the differ-

in comparison to the US Dollar by adopting

allur ing to them on account of the lower inter -

ent growth rates of countries that have adopted

Yu an as the S ettl em ent Cu r renc y.

e s t rate s t h at t h e U S S e c ur i t i e s wo ul d p rovi d e

a s i n g l e c ur re n c y, Euro. I t be come s d ifficu lt to

t h e m . Th i s w i l l l e a d to t h e s h i f t i n g away o f t h e

m a i nt a i n t h e s a m e i nte re st rate throu ghou t a ll

Abbreviation Theor y(the most widely accepted t he o r y now) , The U S Ab breviat io n Th eo r y, The

The US Abbreviation Theory states that the dollar sign has been derived from the initials of the US

Unofficial Dollarization might lead to inability of local governments to control inflation & fiscal policy D o l l a r i zati on I t wa s i n 1944 the U S do llar replaced t h e UK ’s

Threat to the D o l l ar ?

Po u n d S t e r l i n g a s t h e w o r l d ’s r e f e r e n c e c u r -

w h i c h h a s b e e n d i s c u s s e d e a r l i e r. Le t u s l o o k at the some of the different possible substitues

renc y. This was agreed af ter the Bretton Woods

From the forecast above , the emphasis should

O P E C c o u n t r i e s f r o m t h e Pe t r o d o l l a r s y s t e m .

t h e m e m b e r co unt r i e s be ca u se of the va r ying

Co n fere nce of 19 44 , wh en t h e exch an ge rates

be l aid o n the em erg ence o f 2 new e co n o m i c

I n s u c h a s c e n a r i o , p e t ro l e u m b e i n g a m a j o r

grow t h rate s. H e n ce t h e inhe re nt insta bilit y in

were pegged against the US Dollar which could

s u per power s – C hina & I ndia. The rol e p l aye d

commodity transac ted in the world market, will

t h e Euro Zo n e d e e m s t h e Eu ro u nfit to re pla ce

be exchanged for a fixed amount of gold thereby

by the traditio nal eco no m ic power h o us e s l i k e

cause the breakdown of dollar as the world

t h e D o l l a r a s a wo r l d re fe re nce cu r re nc y.

s t re n gthe ni ng th e po sit io n o f U S D o llar as the

Japan & Germany along with the US will be

re fe re n ce c u r re n c y a s m a j o r i t y o f t h e n at i o n s

InFINeeti Annual Issue | September 2012

W O RL D E CO N O MY 2 . J a pane s e Ye n- Th e lo cat io n o f Japan in “ The

Hence , what is evident is that though the

R i n g o f Fi r e” w i l l n e v e r e n s u r e t h e s t a b i l i t y

dollar is in a danger zone , but with no suitable

o f t h e Ye n a s t h e co u n t r y w i l l b e f re q u e n t l y

replacement to being seen to be around and the

hit by natural disasters which inturn would

g o l d s tandard being bro u g ht ag ain to b e ve r y u nl ik el y in the nex t t wo dec ades, do l l a r wo ul d

The Euro is adopted by top performing economies like Germany & France as well as by faltering economies like Greece & Spain.

CORPOR AT E TALK

M r. S i d d h a r t h K u m a r - A s s i s t a n t V i c e President, Investment Bank ing, Barclays Cap it al

s t i l l co nt i n u e to b e t h e exc h a n g e c u r re n c y o f the wo r l d fo r at l eas t a co u pl e o f de c a d e s.

Question: A recent repor t stated that 10.6 % Q u e s t i o n : Yo u h ave h a d a n

of the GDP of China is funded by Corporate

experience of working in

B o n d s, w h i l e fo r Ja p a n t h is statistic g oe s u p to

a f fe c t t h e s t o c k m a r k e t s a s w e l l a s t h e c u r-

t h e I n d i a n Ca p i t a l M a r k e t s,

4 0 % . S o, c a n we co n c l ud e that the re is a cor re -

renc y of the concerned countr y as we had seen

e s p e c i a l l y t h e d e b t m a r k e t,

l at i o n b e t we e n a co unt r y ’s e conomic d e ve lop -

subsequent to occur rences of ear thquakes in

fo r a s p a n o f 5 y e a r s . H o w

m e nt a n d t h e e vo l ut i o n of its d e bt ma r ke t? O r

J a p a n . H e nce the t h is invalidates t h e com pe -

h a s yo u r e n t i re e x p e r i e n ce

s h o ul d we s ay t h at i t i s j u st a nothe r statistic?

t i t i o n pos e d by Yen .

o f wo r k i n g i n t h i s p a r t i c u -

S anoop Sreedhar-The author is a student of FMS ,D elhi

lar market been?

An s we r : As t h e e co n o m i e s d e ve lop, the e volu t i o n o f c a p i t a l m a r k e t s i s a n a t u r a l o u t c o m e,

3. G old- Though gold is one among the oldest Answer: The Indian Debt Capital Market is quite

regardless of whether the market is domi-

a c t i ve. W h e n I j o i n e d , t h e I n d i a n m a r k e t w a s

nated by debt instruments or equity instru-

n o t re a l l y i n i t s fo r m at i ve p h a s e ; rat h e r, i t h a d

m e n t s . S o, o n e c a n s a y t h a t t h e r e i s a c o r r e -

d e ve l o p e d to q ui te a n ex te nt. S p e a k i n g o f t h e

lation to the extent that as economies grow

nature of the market, it does not have much

a n d p ro gre s s, b o r row i n g a n d l e n d i n g te n d to

similarity with the markets in the developed

i n c re a s e. H o we ve r, o n e c a n n o t c o n c l u d e t h a t

world. So, to an ex tent, a niche market is devel-

one particular parameter will influence the

oping in India.

o t h e r p a ra m e te r.

Th e ex p e r i e n ce, a s s uc h , h a s b e e n ve r y e n r i c h -

Question: Islamic bonds took of pretty well

i n g, gi ve n t h e f a c t t h at t h e s ce n a r i o o f a c l a s s -

i n 2 0 0 7 . S o, t a l k i n g o f t h e m a l o n g w i t h o t h e r

room is ver y different from that of a work place.

Shariat compliant products, do they have a

I t fe e l s g o o d to b e i n t h e m i d d l e o f a c t i o n .

f ut ure, i f l a un c h e d i n I n d ia ?

Question: Given the current contex t, do you see

An s we r : We l l to b e h o n e st, spe a k ing of I sla mic

a m a j o r t re n d d e ve l o p i n g i n t h i s m a r k e t ?

b o n d s a n d o t h e r S h a r i a t c o m p l a i n t p ro d u c t s, I d o n o t s e e t h e m h av i n g m u c h o f a f u t u re i n

Answer: Considering a timeframe of 12-18

I n d i a . Th e s p i r i t a n d o r i gi n o f I s l a m i c f i n a n ce

fo r m s o f m o n e y , t h e c o s t i nvo l ve d i n u s i n g

months, the trend will likely be of more domes-

i s f ro m co unt r i e s w h e re it is re ga rd e d a ta boo

g o ld i n tra ns ac ti o n s alo n g wit h t h e integr it y

t i c a c t i v i t y i n t h e m a r k e t s. Th i s i s m a i n l y d u e

t o c h a r g e i n t e r e s t . S o, i n t h i s g i v e n c o n t e x t ,

of those transactions renders gold a costly

to t h e f a c t t h at t h e re i s l a c k o f f a i t h o f fo re i gn

co n s i d e r i n g t h at I n d i a i s e sse ntia lly a d e moc -

re p la ce me nt for do llar as a wo r ld cur renc y.

investors in the Indian capital markets, coupled

ra c y, i t wo n’t b e fe a s i b le for I sla mic bond s to

w i t h t h e f a c t t h at c a p r i c i o us p o l i c y m a k i n g by

b e l a un c h e d i n I n d i a .

the government has put barriers for their entr y.

InFINeeti Annual Issue | September 2012

CORP OR ATE TA LK Question: Recently the FII limit has been raised

IND IAN ECONOMY wo u l d al s o be benef ic ial.

b y U S D 5 B i l l i o n . A l s o, a n e w s e t o f r e f o r m s are tak ing place. I n this scenar io what refor ms

Question: How the various experiences you had

that you think will help in developing the

in your 2 years of MBA from IIFT has helped you

d e b t m ar ke t and h elp t h e ch an gin g climate o f

in yo u r c areer ?

Is M onet ar y Polic y t he b est answe r we h ave for I nflat ion? “I nflation is always and ever y where a monetar y phenomenon.”-M ilton Fr iedman

c a p i t al i n I ndi a ? Ans wer : Wel l, IIFT is the pl ace w here I h a d my An s we r : Th e g ove r n m e nt i n c re a s i n g t h e l i m i t

f ir s t expo s u re to Finance as a do m a i n . I h a d a

b y 5 b i l l i o n f ro m 2 0 b i l l i o n t o 2 5 b i l l i o n i s a

good inter nship with Adit ya Bir la Group, so my

D oes this hold true in

re fo r m that i s no t go in g to make a great deal

i n t e r e s t i n f i n a n c e s t a r t e d f r o m t h e r e. I n t h e

t o d a y ’s s c e n a r i o ? C a n

of change.For instance, the tax on offshore bor-

2 n d ye a r, we h a d s o m e ve r y g o o d p ro fe s s o r s,

t hi s be sa i d fo r t h e co un -

row i ng ha s be e n reduced f ro m 20% to 5 % . B u t

who helped in nur turing my interest in finance.

t r i e s i r re s p e c t i ve o f t h e i r

1 .B uyi n g p owe r o f t h e c u r-

instruments like credit default swaps have not

Al s o, the batc h that I was a par t o f h a d a s e t o f

economic

re n c y i s e ro d e d

r e a l l y t a k e n o f f. I n a l l , t h e o n e s i m p l e t h i n g

c o m m o n i n te re s t s, w h i c h we s h a re d a m o n g s t

that the gover nment can do is to be more con-

ourselves. Hence, the two years of MBA gave me

s i ste nt wi th the ir p o lic y mak in g. Th e po l ic ies

a ho l is tic devel o pm ent f ro m al l as pe c t s.

s h o u l d n o t b e s u c h t h at t h e g ove r n m e nt c a n

structure?

Inflation represents an

Few

the

prominent

effects of inflation can be jotted down as under

2 .R e a l wa g e rate d e c re a se s

increase in the price level of the goods and s e r v i ce s i n t h e e co n o my a s a w h o l e. I n f l at i o n

3.Real rate of return for debt holders decreases

claw back money that the investors have made

Question: What according to you should the

rate re fe r s to a g e n e ra l r i s e i n p r i ce s m e a s ure d

o n t h e i r i nve s tment.

co l l eg e do to eng ag e m o re al u m nis ?

a g a i n s t a s t a n d a rd l e ve l o f p urc h a s i n g p owe r.

4 .I n s te a d o f s avi n g, co nsu me rs may sta r t bor-

The most well known measures of Inflation

ro w i n g. Co n s u m e r s t e n d t o b o r row m o re a n d s p e n d e ve n m o re.

O t he r than that, I n dia is co min g up with s ov-

Answer : The college should look to being more

a re t h e C P I w h i c h m e a s u re s co n s u m e r p r i ce s,

ereign bonds could draw more attention to the

pro ac tive in reac hing o u t to the al u m n i , b a s i -

a n d t h e G D P d e f l a t o r, w h i c h m e a s u r e s i n f l a -

countr y. This may enable investors from Europe

c a l l y h av i n g a n ‘i n yo u r f a c e a p p ro a c h’. I fe e l

t i o n i n t h e w h o l e o f t h e d o m e s t i c e c o n o m y.

and United States to become more open about

t h a t e ve r y a l u m n u s o f t h e c o l l e g e d o e s h a ve

e nter i ng the I nd ian mar ket.

some feeling of affiliation to his alma mater and

India faced a high of 14.97% (CPI) inflation rate in

w a n t s t o c o n t r i b u t e t o t h e c o l l e g e. H o we ve r,

FY09; RBI was par tially able to control the infla -

Question: Given the current economic outlook ,

du e to var io u s reas o ns, they are no t a b l e to d o

t i o n rate a n d h a s b ro ug ht i t d ow n to 6 .8 7 % i n

6.Business costs rises as input prices (raw

d o yo u thi nk i t i s ac t ually co r rec t fo r I n dia to

so. The basic fac t is that you have to be in their

July ’12. China raised interest rates for the four th

m a t e r i a l s , w a g e s a n d s u p p l i e s ) r i s e . Wa g e s

co m e u p wi th s overeign b o n ds?

f ace. They m ay igno re yo u, bu t they wo n’t t ur n

time since the end of the global financial cr isis

a re o f te n t h e l a rg e s t b usine ss cost, a nd the re

yo u dow n.

to re s t ra i n i n f l at i o n a n d l i m i t t h e r i s k o f a s s e t

could be a danger of a ‘wage -price’ spiral where

bubbles in the fastest- growing major economy.

rising costs leads to higher prices, workers

Ans we r : We ll, i n t h e co min g year o r so, if the government is able to show some progress with respec t to polic y along with reforms then they should come up with that.The RBI has a cap on h ow mu c h I nd i an co mpan ies are per mit ted in the form of ECB from offshore markets, mak ing i t a l m o s t i m p o s s i b l e fo r I n d i a n co m p a n i e s to t a p c api ta l from t h e o f fsh o re mar k et s. Hence, increasing the cap put on the Indian companies

M r. S i d d h a r t h K u m a r i s t h e A s s i s t a n t V i c e President of the I nvestment Bank ing division at t B a rc l ays Ca p i t a l. Pr i o r to j o i n i n g B a rc l ays Capital, he worked as the manager of the global invetment banking division at ICICI bank. He has a total experience of more than 5 years in the bank ing and finance industr y. His area of interest includes Struc tured Finance, Debt Capital Markets, Syndicated Loans, Securitization The views expressed above are of the author and in no way reflect the opinion of the firm

5 .I n f l at i o n c a us e s un ce r t a int y which incre a se s risk . Higher risk means businesses are less likely to i nve s t.

ask for a pay rise in compensation, so costs Inflation affects the different sectors of the

rise again, so prices rise again, and so on.

e co n o my a n d i f k e p t un c h e c k e d c a n s h a k e t h e e c o n o m i c s t a b i l i t y o f a n a t i o n . Fo r i n s t a n c e ,

To g e t to t h e c r ux o f i t, we ne e d to u nd e rsta nd

Zimbabwe’s hyper-I nflation of 24,000% in 2009

t h e b a s i c s o f i n f l at i o n a n d f a c to r s gi v i n g r i s e

wa s p a r t i a l l y a re s ul t o f t h e m o n e t a r y a ut h o r-

to i t. Th e re i s n o s i n g l e ca u se which is a gre e d

ity irresponsibly borrowing money to pay all

upon by all, but there are at least two theo-

its expenses and funding quasi-fiscal ac tivities

ries which are generally accepted: Demand-Pull

(which are normally left to Central Government).

I n f l a t i o n Th e o r y & Co s t- Pu s h I n f l at i o n Th e o r y

InFINeeti Annual Issue | September 2012

INDI AN ECONOMY

I ND IA N ECO N O MY These can be explained in terms of intersec-

in order to maintain their profit margins.

b o r r o w i n g w h i c h r e d u c e s c o m m e r c i a l b a n k sâ&#x20AC;&#x2122;

s h o ul d m a k e ex p o r t s m ore expe nsive a nd thu s

t i o n of s hor t r un aggregate sup ply (SR A S ) and

Increase

borrowing from the central bank. This leads

re d uce t h e vo l um e o f ex por ts. As a re su lt fir ms

aggregate demand cur ves as shown in the

1 . R is ing im po r ted raw m ater ial s co s t s

i n re d uc t i o n o f c a s h f l ow f ro m t h e co m m e rc i a l

find them in a position where they have to keep

f i g u r e. I n a s h o r t t i m e s p a n Lo n g r u n a g g r e -

2 . R is ing l abo u r co s ts

banks to the public. Thus, inflation is controlled

t h e i r co s t d ow n to re m a i n co m p e t i t i ve i n t h e

gate supply (LRAS) curve is assumed con-

3.Higher indirect taxes imposed by the

t o a n e x t e n t i t â&#x20AC;&#x2122;s c a u s e d b y t h e b a n k c r e d i t .

world market. Also a stronger currenc y reduces

stant and is the level of GDP at equilibrium.

g over nm ent

cost

may

happen

due

to:

impor t prices and this makes firmsâ&#x20AC;&#x2122; raw materiC a s h R e s e r ve R a t i o (C R R ) : B y r a i s i n g t h e C R R

als and components cheaper, therefore helping t h e m co nt ro l co s t s.

Demand Pull: When SRAS becomes inelas-

Cost-push inflation can be illustrated by an

central bank tries to reduce the lending capac-

t i c a nd the re i s f ull emp loyment o f resou rces,

inward s hif t o f the s ho r t r u n ag greg ate s up p l y

i t y o f t h e co m m e rc i a l b a n k s, s o a s to co n t ro l

an increase in demand leads to increase of

curve. This is shown in the diagram below. A fall in

inflation. This leads in reduction of cash

There are several mechanisms for exchange

prices. This increase in demand may be due to:-

SRAS causes a contraction of real national output

flow from commercial banks to public. This,

rate appreciation which can be employed.

together with a rise in the general level of prices.

controlling the rise in prices to the extent

S o m e o f t h e m a r e : i n c r e a s e i n t h e re a l i n t e r -

it is caused by banks credits to the public.

est of the economy; open market oper-

1 . A reduc ti on i n direc t o r in direc t t ax at io n

ations by central bank in forex markets. Open Market Operations: Open market oper-

2 . Th e rapi d growt h o f t h e mo n ey sup ply

a t i o n s r e fe r t o s a l e a n d p u r c h a s e o f g o v e r n -

D i re c t wa g e co nt ro l s - i ncome s policie s

ment securities and bonds by the central

3 . A d epre c i ati on o f t h e exch an ge rate

b a n k . Ce nt ra l b a n k s e l l s t h e g ove r n m e nt s e c u-

A direct wage control limits the rate of

This effect is explained in the diagram.

rities to the public through the banks resul-

growth of nominal wages and thus has the

Here

caused

tin in transfer of a par t of bank deposits to

potential to reduce cost inflation. Though

prices of goods in economy to increase.

ce n t r a l b a n k a cco u n t a n d re d u ce s c re d i t c re -

not being used frequently in current times,

ation capacity of the commercial banks.

this policy still tr y to limit wage growth by

increase

demand

has

r e s t r i c t i n g p a y r i s e s i n t h e p u b l i c s e c t o r. But are such monetar y policies the only source o f i n f l at i o n co nt ro l ? O r a re t h e y e n o ug h co n -

Lo n g - te r m p o l i c i e s.

s i d e r i n g t h e c u r re nt wo r l d s ce n a r i o w h e re a l l Fo r ye a r s n o w, t h e m o s t c o m m o n

economies are much more complicated than

Fi s c a l Po l i c y

tool which central bankers have

ever before? Effec tive policies to control infla-

1 .H i g h e r d i re c t t a xe s ( c au sing a fa ll in d ispos-

in their hand to co ntro l t h e i n f l a -

t i o n n e e d t o fo c u s o n t h e u n d e r l y i n g c a u s e s

a b l e i n co m e )

tio n is tem per ing w ith t h e m o n e y

o f i n f l at i o n i n t h e e co n o my. I f co s t- p us h i n f l a -

2 . Lowe r G ove r n m e nt s p e nd ing

s u p p l y. I d e a b e h i n d i t b e i n g t h a t

t i o n i s t h e ro o t c a u s e, p ro d u c t i o n co s t s n e e d

3 . A re d uc t i o n i n t h e a mou nt the gove r nme nt

m o ney s u ppl y co ntro l s t h e grow t h

to be controlled for the problem to be reduced.

s e c to r b o r rows e a c h ye ar

of demand through an increase

To s e r ve t h i s p ur p o s e va r i o us m e t h o d s c a n b e

in interest rates and a contrac-

a d o p t e d fo r s h o r t t e r m o r l o n g t e r m e f fe c t s .

of money and reduce further injections

t i o n i n t h e r e a l m o n e y s u p p l y. Few o f the m eas u res ado p te d a re :-

These fiscal policies limit the circular flow

Shor t-term policies.An appreciation of the

in to the flow of income. This is aimed to

exc h a n g e rate

reduce demand pull inflation and at the cost of slower growth and unemployment.

Cost Push Inflation: On the other hand,

B ank rate po l ic y : D u r ing inf l atio n it i s s e e n a s

Cost-Push Inflation occurs when the prices

a ver y c r u c ial ins tr u m ent o f m o netar y co nt ro l.

There are several impac ts at enterprise level of

increase due to rising production costs,

The inc reas e in bank rate inc reas es t h e co s t o f

appreciation of the domestic exchange rates. I t

InFINeeti Annual Issue | September 2012

I ND IA N ECO N O MY L a b o ur m ar ke t refo r ms

BANKI NG

Impact of BASEL III norms on Indian Bank ing S ec tor

policies and the key to controlling inflation i n t h e l o n g r u n i s fo r t h e a u t h o r i t i e s t o k e e p

O ver a period of time depletion of power vested

control of aggregate demand (through fiscal and

i n t r a d e u n i o n s, t h e g ro w t h o f p a r t - t i m e a n d

m o netar y po l ic y ) and at the s am e tim e s e e k to

te m p o ra r y wo r k i n g a l o n g w i t h t h e e x p a n s i o n

achieve improvements to the supply side of the

of flexible working hours have resulted in

economy. The credibility of inflation control pol-

“ W hatever was on the

i n cre as e d flexi bi l it y in t h e labo ur mar ket. This

icies can also be enhanced by the introduc tion

l e f t- h a n d s i d e ( l i a b i l i t i e s )

minimum total capital of

allows firms to control their labour cost and

o f inf l atio n targ ets w hic h s ho u l d be m e t w i t h .

was not right and what-

9 per cent against 8 per

ever was on the right-hand

cent prescribed by the

side (assets) was not lef t ”-

Basel committee of total

This quote characterized

risk

thus reduce cost push inflationar y pressure. I n r e c e n t y e a r s t h e U K a n d G e r m a n e c o n o my

•The guidelines require banks

maintain

weighted

assets.

has not seen the acceleration in wage infla-

H imanshu Kundoo and Palnik a Hemnani-The authors are

the world’s bank ing system during early 2008

t i o n n or ma lly as so ciated wit h several year s o f

students of IIFT

and ushered in the global financial crisis that

•Common Equity Tier 1 (CE T1) capital must be at

s u s t a i n e d e c o n o m i c g ro w t h a n d f a l l i n g i n f l a -

sent tremors across economies the world over.

least 5.5 per cent of RWA’s. (Risk Weighted Assets)

tion. This can be attributed to shif ting of power

This was in spite of the protec tive safeguards

away from employees towards employers.

o f t h e B A S EL I I n o r m s a n d h a s l e d t h e B a s e l

Under these norms banks will have to main-

Committee on Bank ing Super vision (BCBS) to

tain their total capital ratio at 9%, higher

come out with the BASEL III norms provid-

than the minimum recommended require -

i n g a b ro a d e n e d f ra m e wo r k o f t i g hte r re g u-

ment of 8% under the Basel III norms. The

To a c h i e v e s u s t a i n e d e c o n o m i c g r o w t h

l at i o n s a i m e d at s t re n g t h e n i n g b o t h s i d e s o f

norms also require banks to maintain Tier

wi t h o u t wor r y i ng fo r in f lat io n , greater o u tpu t

the balance sheet for banks around the world.

I capital at 7% of risk weighted assets.

is required to be produced at a lower cost

Th e B a s e l I I I g ui d e l i n e s e nvi s a g e i n c re a s e i n

p e r u n i t . A l o n g t e r m s u s t a i n a b l e i n c re a s e i n

capital and liquidity requirements worldwide.

Su p p ly- s i d e re for ms

pertaining

aggregate supply (potential GDP) is the key o b j e c t i v e o f a g o v e r n m e n t e c o n o m i c p o l i c y.

Following is the summar y of the rules to

the

Indian

scenario:-

In early May 2012, RBI announced new norms for the Indian banking sector with

2013

A c l a s s i c e x a m p l e i s o f T u r k e y ’s c e n t r a l

stricter regulations than the BASEL III to

Start of the gradual phasing-in of the

bank reducing interest rates to shield the

b e e f fe c te d i n a p h a s e d m a n n e r w i t h i n f i ve

higher

economy from the impact of the European

f i s c a l y e a r s s t a r t i n g f r o m J a n u a r y, 2 0 1 3 . 2015

d e b t c r i s i s a n d s l o w i n g g r o w t h i n t h e U. S . Supply side reforms aim to enhance the produc-

Minimum minimum Minimum

capital capital capital

minimum

requirements: requirements. requirements:

Let us look at these norms and their

Higher

probable impact on the Indian Banks.

ments

The rules can be broadly classified as bellow :-

2016 Conser vation buffer: Initiation of the

capital

fully

require-

implemented.

tivity of the economy over a long run and increase t h e t re n d ra te o f grow t h o f f a c to r o f p ro d u c -

gra d ua l p h a s i n g - i n o f t h e conse r vation bu ffe r.

tions i.e. labour and total fac tor produc tivit y. A number of supply-side policies have been intro-

•The capital requirements for the imple -

duced into the British economy in recent years..

mentation of Basel III guidelines may

2 0 1 9 Cy c l i c a l C o n s e r v a t i o n b u f f e r : T h e c o n -

ser vation buffer to be fully implemented.

Clearly it can be seen that inflation curbing today needs much more than just monetar y

and

lower

during

higher

the

during

initial

the

later

periods years.

2011 Supervisory monitoring: Developing

InFINeeti Annual Issue | September 2012

W ORLD ECONOMY

BA N KIN G templates and

the

track

the

underlying

ratio

al s o l ead to a l ower ing o f the retu r n o n e q ui t y.

components.

Th e c a p i t a l co n s e r vat i o n a n d co u nte r c yc l i c a l

leverage

MIST or BRIC S -Who will win t h e grow t h b at t le?

bu f fer s l o o k to pu t a c hec k o n the d i f fe re nt i a l 2 0 1 3 Pa r a l l e l r u n I : T h e l e v e r a g e r a t i o a n d

am o u nts o f l ending at tim es o f u ps a n d d ow n s

its components to be tracked by super visors

in the business c ycles, thus helping to keep the

w h i c h a r e n e i t h e r d i s c l o s e d n o r m a n d a t o r y.

r isk build-up of banks at stable levels through-

J im

O’Neill, chairman of

s e co n d - b i g g e s t e co n o my, re cord a u to expor ts

out all business cycles. However looking at

Goldman Sachs ushered

are helping growth outpace Brazil’s for a second

2015 Parallel run II: The leverage ratio

the fact that India has undergone moderate

in a decade -long invest-

year amid waning Chinese demand for the South

and its components to be tracked which

c yc l es, this no r m co u l d be a dam pen e r re s ul t-

ment boom in 2001 when

A m e r i c a n n a t i o n’s c o m m o d i t i e s . I n d o n e s i a’s

are

ing in reduced lending and lesser percentage of

he coined the term BRIC

d o m e s t i c s p e n d i n g a n d i nve stme nt he lpe d the

s anc tio ns than in no r m al co nditio ns. Th e r ul e s

for the largest emerging

nation’s economic growth accelerate to 6.37 per

2 0 1 7 Fi n a l a d j u s t m e n t s : B a s e d o n t h e re s u l t s

wo u l d m ak e s ys tem s m o re ro bu s t an d ce nt ra l -

markets. In 2010, South

ce nt i n t h e s e co n d q u a r te r, s u r p r i s i n g e co n o -

of the parallel run period, any final adjust-

i z e d a n d g i ve n t h e c h a l l e n g e f a c e d b y b a n k s

Af r i c a b e g a n e f fo r t s to j o i n

m i s t s w h o fo re c a s t a s l owd own. For most poor

ments to the leverage ratio to be made.

of getting timely and accurate data from a

t h e B R I C g r o u p i n g. T h i s y e a r, a l e s s e r - k n o w n

co unt r i e s, S o ut h K o re a i s a mod e l of growth, a

myr iad of systems, it would prove to be a great

a c ro nym t h at t h e G o l d m a n S a c h s c h a i r m a n h a s

better exemplar than China, which is too vast to

2018 Mandatory requirement: The leverage ratio to

contributor towards a more robust banking

coined is catching fast. The term MIST has been

copy, and better, too, than Taiwan, Singapore or

become a mandatory part of Basel III requirements.

system. One of the most important needs of

coined to describe the nex t tier of large emerg -

H o n g K o n g. Al l t h re e a re r iche r tha n Kore a bu t

s t a n d a rd i z a t i o n o f re p o r t i n g s t r u c t u re a c ro s s

ing economies - Mexico, Indonesia, South Korea

all are, in different ways, exceptions: Singapore

brac hes wo u l d al s o be s er ved by the s e n o r m s.

and Tur key. They are the new oppor tunities. All

a n d H o n g K o n g a re c i t y state s, while Ta iwa n's

neither

disclosed

nor

mandator y.

Th e I nd i an re gulato r h as b een mo re st r ing ent. Fo r I nd i an ba nks, co mmo n equit y sh o uld be at

i n t h e p a s t d e c a d e. I n M exico, Latin Ame r ica’s

fo u r h a v e i n c o m m o n

disputed

least 5.5% of the asset base, whereas the interna-

T h e r e fo r e i t c a n b e c o n c l u d e d t h a t B A S E L I I I

a number of factors:

s ove re i gnt y

tional norm suggests 4.5%.Tier I capital, or core

would usher in a wholly new era of banking regu-

a large population

makes

capital, includes a bank ’s equity capital and dis-

lation with centralized and standardized repor t-

and market, a big

s u i g e n e r i s.

closed reser ves. Capital ratio is the percentage

ing systems which is an imperative to withstand

e co n o my at a b o ut 1 %

According

o f a b ank ’s c api tal to it s r isk-weighted a s s ets.

stress events in an ever changing world economy.

of global GDP each,

H owe ve r t h e c a p i t a l re q u i re m e nt s s e e m d i f f i -

and all are members

Wor ld Bank ,

c u l t to m aintain and co u l d have an i m p a c t o n

of theG20. They are

Turkey ’s

the growth of the I ndian economy which needs

te r m e d a s n e w o p p o r-

ra te o f 1 1 %

Given that the regulations set by RBI on capital

b a n k i n g s u p p o r t t o b o o s t i t s g r o w t h . H e n c e,

tunities as growth in

economic

adequac y are already stringent the Indian banks

t h e re i s a n e e d t o b a l a n c e b e t we e n f i n a n c i a l

BRICS countries has

growth led

should find it relatively easier to adhere to the

s tabil it y and the real it y that f inanc i a l s e r vi ce s

s l o w e d r e c e n t l y. L e t

the world in

capital requirement norms as most of the Indian

a re e s s e n t i a l fo r e co n o m i c grow t h .

us co m p a re t h e s e t wo

2011. GDP

banks have maintained their capital well above

I n d i a e n d s u p w i t h t h e f o r m e r, t h e l a t t e r o r

gro up s :

per capita

the minimum requirements. The only concern is

bo th is a q u es tio n that o nl y tim e c an a n s we r ! ! !

Impact

Wh e t h e r

pressure on PSUs who are in a credit crunch

S oumya S en and S ourav D utta-The authors are students

s i t u a t i o n d u e t o t h e i n c r e a s i n g o f N PA s . T h e

of IIFT

stricter norm of Tier 1 capital would likely result

MIST

against BRICS

b e l o w European levels,

1 .Eco n o m i c p o te nt i a l

but

ahead of most emerging markets, including the B R I C s ( e xc l u d i n g R u s s i a ) . B u t B R I C S co u nt r i e s

i n a n i nc re as e i n t h e co st o f len din g resu l ting in loans becoming more expensive. It would

the

is $12,300, Comparing

the requirement of capital adequac y may create

The MIST economies more than doubled in size

re p re s e nt 3 b i l l i o n p e o p le with combine d GDP

InFINeeti Annual Issue | September 2012

W ORLD ECONOMY

W O RL D E CO N O MY o f 1 3 . 7 $ t r i l l i o n a n d h a s h i g h e r a ve r a g e G D P

f r o m l a s t y e a r. S o u t h A f r i c a r e c o r d e d h u g e

The foreign reser ves of MIST countries stand at

e m e r g i n g e c o n o m i e s m ay b e u p a n d c o m i n g,

g ro w t h o f 5 . 8 % c o m p a re d w i t h M I S T a ve r a g e

def ic it o f 1 52 . 6 $ bn . M exico’s c u r rent a cco unt

655$ billion. South Korea accounts for maximum

s a i d p l a ce m e n t a g e n c y Pro b i t a s Pa r t n e r s i n a

of 5.6% in 2011. S o, still there is much to cover

def ic it is 3 . 5 $ bn w hic h is a dec reas e f ro m l a s t

reser ves of 312$ billion. The reser ves of Mexico

re ce nt re p o r t. M ex i co, I nd one sia , S ou th Kore a

fo r M I ST cou ntr i es to t akeover B RI CS.

year 5.7$ bn. Indonesia’s current account deficit

stands around 190$ billion, I ndonesia’s around

a n d Tur k e y – t h e MI S T cou ntr ie s – a re attra c t-

of 1.8$ bn

1 0 6 $ b i l l i o n a n d t u r k e y ’s a ro u n d 8 7 $ b i l l i o n .

ing increasing attention from institutional

highest in

Reser ves for most MIST countries have increased

investors, according to the repor t based on

r e c e n t

o r re m a i n e d s t a b l e.

a Pr o b i t a s s u r v e y i n l a t e 2 0 1 0 o f 1 8 0 g l o b a l

2 . Cre di t rati ngs

investors. The MIST countries stand out, in par t

BR I C S c re d i t rati n gs

y e a r s .

a re g oi ng s ou th-

S o u t h

wa rd s d u e to glo b al

K o r e a

s i t u at i on whi le MI ST

recorded

China and Russia are authoritarians whereas

of South Korea, for instance, is forecasted to be

co nt i n ue s to re main

current

B ra z i l a n d I n d i a a re d e m o c ra c i e s. Am o n g MI S T

t h e s e c o n d l a r g e s t i n t h e wo r l d, n e x t t o t h a t

s t a b l e de s ti nati on

account

a l l co unt r i e s a re d e m o c ra c y. D e c i s i o n m a k i n g

o f t h e U.S ., by 2 0 5 0 , w i th M exico expe c te d to

fo r rati ng age nc i es.

surplus of

is fast in China and Russia as compared to

reach 9th place by that time, according to a

Th at is the re a s on fo r

5.84$

I n d i a a n d B ra z i l. A l o t o f co r r u p t i o n s c a n d a l s

G o l d m a n S a c h s fo re c a s t.

t he u p be at fore c ast

from

h a s a f fe c te d I n d i a n p o l i t i c a l i m a g e i n a n e g a -

3 . 5 7 $ b n l a s t y e a r. Tu r k e y ’s c u r r e n t a c c o u n t

t i ve way. B ra z i l h a s b e e n re ce nt l y i n n e ws fo r

def ic it nar rows to 5$ bn f ro m 7. 7$ bn l a s t ye a r.

corruption in adver tising budgets and pension

by G o ldma n S a c h s.

5 . Po l i t i c a l S ce n a r i o

because of their comparatively high per- capita income. The per capita gross domestic produc t

f un d s.

Co n c l us i o n To b e s ure, t h e B R I C S n ations won’t fa d e away fo r s o m e t i m e. C h i n a , B r a z i l, I n d i a a n d S o u t h

4. Fo reign R es er ves Mexico proximity to the US, and links with

Africa still top the list of most attrac tive emerg-

Ce n t r a l a n d S o u t h A m e r i c a n m a r k e t s, a s we l l

i n g m a r k e t s, a cco rd i n g to su r ve y re spond e nts

Comparing the Balance of payment data for last

as its Hispanic culture, underpins interna-

a s k e d a b o ut t h e i r o ut l o ok for 2011. While ou t-

4 m o n t h s g i v e s b e t t e r p i c t u r e fo r M I S T c o u n

tional investors' and multinational corpora-

p e r fo r m i n g t h e m i n grow th this ye a r, the MI ST

t i o n s ' c h o i c e o f M e x i c o a s a s t r a t e g i c i nve s t -

n at i o n s d o n’t a p p ro a c h the BR I Cs in e conomic

m e nt l o c at i o n . I n d o n e s i a , t h e m o s t p o p u l o u s

output or population. Inflation risk is also a

Muslim nation in the world, is one of the rising

concer n for investors in MIST countr ies. Tur key

stars in the global economy South Korea is

i s h avi n g h i g h e s t a m o n g the m, at 9.07% CPI a s

n o t o r i o u s l y u n p r e d i c t a b l e i n p o l i t i c a l t e r m s.

p e r l ate s t d at a . B ut MI S T cou ntr ie s offe r ne we r

There are issues of militar y inter vention in

oppor tunities for investors. The MIST countries

re s e r ve s

Turkey politics which saw many failed attempts

are likely to be the next group of emerging

o f B RIC S s tand at 4 . 2 5$ tr il l io n w hic h a cco unt s

coup plots. Things have improved but there are

m a r k e t t a rg e t s a f te r t h e BR I CS.

fo r m o re than 42 % o f wo r l d ’s res er ve s. C h i n a’s

i s s u e s re l a t e d t o n e w c o n s t i t u t i o n fo r m a t i o n

tries as BRICS deficit is widening. India’s current

fo re i gn re s e r ve s a re t h e h i g h e s t a m o n g t h e m

t h at a re s t i l l n e e d to b e wo r k e d o ut.

a cco unt de fi c i t h as sh o t up to 21. 2$ bn du e to

at 3.2$ trillion. The reser ves of Brazil stands

r i s e i n i m p o r t b i l l. Cu r re n t a c c o u n t d e f i c i t o f

around 365$ billion, Russia at 513$ billion,

Brazil is l 5.4$ bn which has widened from 3.59$

I n d i a a t 2 8 6 $ b i l l i o n . D u e t o n e g a t i ve g l o b a l

b i lli o n las t ye a r. Russia o n t h e o t h er h and has

m a r k e t s re s e r ve s h ave d e c re a s e d i n i n f l ow o f

Th e B R I C co unt r i e s – B ra z i l, R us s i a , I n d i a n a n d

surplus of 42$ bn which has also decreased.

f u nds in B RIC S co u ntr ies

C h i n a – h ave b e e n d a r l i n g s o f p r i v a te e q u i t y

3 . Ba lance of Pay ment s

The co m bine fo reign

C h i n a’s S u r p l u s i s 5 9 $ b n a d e c r e a s e o f 1 4 %

6 . Fut ure p ro s p e c t s

investors for some time. Now another group of

Vik as Gupta-The Author is a student of IIFT

InFINeeti Annual Issue | September 2012

INTER NSHIP EXPERI ENCE

I NT E RN SH I P E X P E R I E N C E

L i fe in G o l dma n S a ch s

12-D epending how luck y your day is: Check ing

re a l a s s e t s - re f l e c te d i n the tra ining se ssions,

e - m a i l s, R e ce i vi n g n e w d e a d l i n e s a n d h e a d i n g

social get-togethers, speaker sessions with the

home finally

w h o s e -w h o o f t h e co m p a ny. The socia l awa re n e s s p r o g r a m o f t h e c o m p a n y, C o m m u n i t y

you

2-8 pm: Check ing e -mails, receiving new dead-

The day might be as eventful as this or lesser (or

Te a mwo r k s, i s a g l o b a l vo l u nte e r i n i t i at i ve o f

develop while working at

lines, reading repor ts, work ing on excel models

more), but at the end of the day you realise that

Goldman Sachs that allows its employees to

Goldman Sachs that you

& pitch books requiring work or re -work, attend-

t h e l e a r n i n g yo u g a i n e d to d ay co ul d n o t h ave

t a k e a d ay o ut o f t h e o f fice volu nte e r ing with

believe will be useful in your

ing c l ient team - c al l s

b e e n a c h i e ve d i n a ny 2 0 - h o ur c re d i t co ur s e o f

l o c a l n o n - p ro f i t o rg a n i z a t i o n s. Eve r y s u m m e r

co l l e g e.

i nte r n wa s a l s o s up p o s e d to pa r ticipate in this

Q . W h a t

skills

did

f ut ure career? 9 p m : Fi n d i n g t i m e t o w o r k o n t h e S u m m e r -

initiative and learn from the cross divisional

A. During the course of

I n te r n gro u p p ro j e c t s - S e a rc h i n g fo r re l e v a n t

Q ue s t i o n : Wh at c h a l l e n g e s d i d yo u e n co unte r

my summer internship at

repor ts, building excel models, getting freaked

d ur i n g t h e co ur s e o f t h e p ro j e c t ? H ow d i d yo u

o u t by o ther team s ' pro gres s

tackle them?

Goldman Sachs, I developed the sk ills of tak ing

te a m - b a s e d s o c i a l p ro j e c ts. Q u e s t i o n : W h a t we re t h e e x p e c t a t i o n s o f t h e co m p a ny f ro m yo u?

a h o li s ti c v i e w of any pro b lem an d wo r k ing in v i r t u a l te a m s. I l e a r nt t h e i m p o r t a n ce o f n e t -

12-D epending how luck y your day is: Check ing

An s we r : B e i n g a f re s h e r, I h a d n o p r i o r un d e r-

wo r k i ng a nd of h avin g a pro fessio n al at titu de

e -m ail s, R eceiv ing new deadl ines an d h e a d i n g

s t a n d i n g o f t h e 'co r p o rate c ul t ure '. Th e d i f fe r-

Answer: At Goldman Sachs, they expect a â&#x20AC;&#x2DC;Ready

towards wor k- the impor tance & seriousness of

ho m e f inal l y

ences in the theoretical and practical appli-

t o l e a r n a t t i t u d eâ&#x20AC;&#x2122; a n d a t t e n t i o n - t o - d e t a i l s b y

cation of financial concepts, dynamism of

their interns. Being highly motivated at all t i m e s i s w h at h e l p s s a i l throu g h smoothly.

t he word "d e a d li nes". Fin din g t ime to unw ind' Wo r k h a rd, p a r t y h a rd e r ' i s j u s t n o t a p h ra s e

The day might be as eventful as this or lesser (or

the industry and maintaining the motivation

he re bu t a way of life.

more), but at the end of the day you realise that

throughout the long wor k ing hours were some

the l ear ning yo u g ained to day co u l d n o t h ave

o f t h e c h a l l e n g e s I f a ce d at G o l d m a n S a c h s.

Q u e sti on. D e s c r i be a t ypical day fo r an inter n

been ac hieved in any 2 0-ho u r c redit co ur s e o f

at G o ldma n S a c h s

co l l eg e.

An swe r. 10 a m : R epo r t in g to wo r k 10 am- 11am: Checking e -mails, completing

What helped along was the friendly and always-

S akshi G arg- Student of IIFT. She has done her inter nship

re a d y- to - h e l p at t i t ud e o f e ve r yo n e o n t h e I B D

at G oldman S achs. Here she enumerates her t wo months

Q u es tio n: What c hal l eng es did yo u e n co unte r

floor and the brilliant guidance at ever y step by

of exper ience in the company.

du r ing the co u r s e o f the pro j ec t? How d i d yo u

my mentor and the whole TMT-EMEA team I was

tac k l e them ?

associated with. Financial & other training ses sions conduc ted by Goldman Sachs in the star t-

last day's left over work approaching deadlines, sur fing financial websites till the mentor or the

Ans wer : B eing a f res her, I had no pr i o r un d e r-

i n g we e k o f t h e i nte r n s h i p a n d t h e ve r y d e d i -

wo r k ar r i ve s

s tanding o f the 'co r po rate c u l tu re'. Th e d i f fe r-

c ate d H R d e p a r t m e nt o f t h e co m p a ny h o l d i n g

ences in the theoretical and practical appli-

bi-week ly catch-ups to address any of our con-

1 1 - 1 2 n o o n : Tr a i n i n g s e s s i o n s , o c c a s i o n a l

cation of financial concepts, dynamism of

cerns helped me encounter the challenges I ini-

Speaker sessions & HR sessions involving inter-

the industry and maintaining the motivation

t i a l l y f a ce d.

a c t i o n s wi th comp any h eads

throughout the long wor k ing hours were some o f the c hal l eng es I f aced at G o l dm an S a c h s.

Q u e s t i o n : Te l l u s s o m e t h i n g n e w t h a t y o u learned about the company while you were

1 2 - 2 p m : C h e c k i n g e - m a i l s, wo r k a s s i gn e d by yo u r me ntor, re ceivin g co mment s o n t h e wo r k

What helped along was the friendly and always-

d o n e e a r l i e r, m a k i n g e d i t s a n d re -wo r k i n g o n

ready-to -hel p attitu de o f ever yo ne on t h e I B D

t he p i tc h books, f in din g t ime to catch lu nc h

floor and the brilliant guidance at ever y step by

wo r k i n g t h e re. Answer: The investment they make in their employees and how they treat them as their

InFINeeti Annual Issue | September 2012

R IS K MAN AGME N T

R ISK MA NAGM ENT

Risk Management measures in this ever changing competitive banking landscape

o r g a n i z a t i o n’s r i s k a p p e t i t e u s i n g t h e i r b u s i -

management. Discussions about new prod-

n e s s a n d r i s k ex p e r t i s e. Th e p o l i c i e s t h at t h e y

ucts, existing and new positions and other

fo r m ul ate s e t t h e s t rate gi c d i re c t i o n i n w h i c h

issues must be broad and not limited to

the senior management needs to steer the orga-

m e e t i n g q ua r te r l y t a rg ets or a ny othe r shor t-

n i z at i o n t h ro ug h p ro p e r exe c ut i o n a n d i m p l e -

te r m g o a l s. B o t h t h e f ro n t o f f i ce a n d t h e to p

m e nt at i o n o f p o l i c i e s. A ve r y i m p o r t a nt a s p e c t

management must have reliable and consis-

R isk man agement is at

its s trategic po s itio ning. Let u s tak e a l o o k at

o f t h e i m p l e m e nt at i o n o f t h e p o l i c i e s i s e n s ur-

te nt i n fo r m at i o n w i t h re spe c t to the positions

t h e co re o f ever y f inan-

what lies at the hear t of effective risk man-

ing that they are embedded in the ver y culture

and the r isks they are tak ing. Limit setting and

cial institution to ensure

agement for banks and the trends that we

of the organization. Not all risks are quanti-

limit monitoring must be done and segrega-

it s abilit y to co n du c t its

are likely to see in the coming few years.

f i a b l e. H e n c e, i t i s i m p o r t a n t t h a t q u a l i t a t i ve

t i o n o f d u t i e s s h o u l d b e c l e a r a n d e n fo r c e d .

risks can be commu-

ongoing business and take benefit of oppor-

Th e re s e a rc h o f to p g l o b a l m a n a g e m e n t co n -

nicated as guidelines

A significant

tunities to enhance its

sulting firms indicates that the culprits

and can be inferred

challenge

business. I t is impor tant

behind the losses faced by banks during

from

management

facing virtu-

to note that r isk

b u s i n e s s d e c i s i o n s. I t

ally all banks

m a na ge me nt a s

i s a l s o i m p o r t a nt t h at

the

commonly per-

senior management

integrate

cei ve d doe s not

officials are in sync

and

mean minimiz-

with each other to

the technolo-

ing risk, rather

e n s ure s m o o t h exe c u-

gies in a way

it means opti-

tion of the vision set

which

m i z i n g the r i s k-

by t h e b o a rd. Th e re i s

better serve

reward trade-

o f te n a l a c k o f co n s i s -

the business

o f f . I n t o d a y ’s

tency between CROs

and

s i t u at i o n w h e re

a n d C F O s a c ro s s p ro ce s s e s, s ys te m s a n d d at a .

t h e o ut p ut s re q ui re d to ou tpa ce the compe ti-

the

Conflicting priorities and messages created

t i o n . O ve r t h e ye a r s, d ata volu me s a long with

with

unintentionally by the two sides talk ing a differ-

regulator y and business requirements have

the economic

ent language, leads to challenges for the orga-

driven banks to take a leading position in tech-

crisis, banks will

n i z a t i o n . I t i s i m p e r a t i ve t h a t t h e re i s t i g h te r

n o l o g y, d e ve l o p i n g n e w a u tomate d solu tions,

need to manage

a l i gn m e nt a n d co l l a b o rat i o n b e t we e n t h e C R O

and developing more complexity covering more

risk more care -

and CFO and thus, more consistency across

c o u n t r i e s a n d b u s i n e s s a c t i v i t i e s . H o w e v e r,

world

bridled

need

harness

will

deliver

f u l l y, n o t w i t h s t a n d i n g t h e f a c t t h a t t h e y a r e

the crisis were bad governance, bad incen-

finance and r isk . The CR O and the Chief Human

these requirements have progressively con-

i n t h e b u s i n e s s o f t a k i n g r i s k . I t a p p e a r s t h at

tive systems and poor risk management. The

R e s o urce O f f i ce r s h o ul d d e te r m i n e t h e p ro p e r

t r i b u t e d t o a d r a m a t i c i n c re a s e i n I T co s t s a s

the staggering losses faced due to the crisis

c u r rent s itu atio n dem ands that the b e s t p ra c -

t ra i n i n g n e e d e d to e n s u re t h a t a l l e m p l oye e s

d e m a n d s h ave b e co m e more complex a nd the

would decrease banks’ appetites for risk,

t i c e s f ro m r i s k m a n a g e m e n t b e i m p l e m e n t e d

u n d e r s t a n d t h e i r ro l e i n m a n a gi n g r i s k at t h e

resulting systems more diverse. One impor-

b u t t h e b a i l o u t s t h a t h ave h e l p e d to p re ve n t

at the earliest to bring stability to banks.

organization. R isk management must be per va-

tant technological change designed to meet

s i ve to t h e o rg a n i z a t i o n’s c u l t u re, a n d n o t b e

t h e i n c re a s i n g d e m a n d s is in the way that the

the responsibility of just the risk function alone.

a p p l i c at i o n a rc h i te c t ure is bu ilt. Tra d itiona lly,

fu r t h er me ltdown co uld lessen t h e aversio n to r i s k . I n a ny c a s e, a b a n k ’s a b i l i t y t o m e a s u re,

The overall responsibility of risk manage-

monitor and steer risks in a comprehensive

m e n t re s t s w i t h t h e B o a rd o f D i re c to r s w h i c h

f a s h i o n i s b e co m i n g i n c re a s i n g l y d e c i s i ve fo r

n e e d s to u n d e r s t a n d, d e f i n e a n d m a n a g e t h e

the application landscape was built layer Lo n g - s i g hte d n e s s i s a n o t h e r k e y to p ro p e r r i s k

up o n h o r i zo nt a l l aye r. S o e a ch laye r ca r r ie d a

InFINeeti Annual Issue | September 2012

R EGU L A R S

R IS K MAN AGME N T fu nc t ion and i nter f aced wit h t h e o t h er l ayer s

and nature of the business, but the key is inde -

through transformational rules, lead times,

pendence. To be effec tive, the review func tions

shor t cuts, complex repor ting rules, and so on.

should have sufficient author it y, exper tise and

MONTHLY C HR O NIC LE G ove r n me nt to n o t i fy t h e r u l e s fo r a dva n ce p r i c i n g a r ra n g e me nt s o o n

St a n d a rd C h a r te re d a n d J PM o rg a n to m a n a g e a s h a re f l o t at i o n fo r i t s te le coms towe r u nit to ra i s e m o re t h a n $ 7 5 0 m illion. The

biggest

Indian

M ul t i n at i o n a l s w i l l

mobile phone carrier

s o o n b e a b l e to n e g o -

has also shortlisted

t i ate w i t h I n d i a n

Bank of America Merrill

t a x a ut h o r i t i e s t h e i r

Ly n c h , H S B C , U B S a n d

potential tax liabili-

Kotak Mahindra for

l t y i n re s p e c t o f t h e i r t ra n s a c t i o n s w i t h t h e i r

t h e i n i t i a l p ub l i c s h a re

l o c a l a r m s o r t h e l o c a l co m p a ny d e a l i n g w i t h

offer (IPO). Bhar ti may file a prospec tus for the

its parent, helping avoid frequent transfer

IPO with the market regulator SEBI nex t month.

However, that horizontal struc ture is changing

corporate stature so that the identification and

p r i c i n g l i t i g at i o n w i t h fo re i gn co m p a n i e s t h at

to become much more ver tical. Consequently,

repor ting of their findings can be accomplished

h a s s o ure d i nve s t m e nt s e nt i m e nt.

i n d i v idua l pi e ce s o f in fo r mat io n will b e g ath-

w i t h o u t a ny h i n d r a n c e. T h e f i n d i n g s o f t h e i r

ered from the bottom up, elevating the repor t-

rev iews s ho u l d be repo r ted to bu s in e s s un i t s,

I n d i a w i l l n o t i f y t h e r ul e s fo r Ad va n ce Pr i c i n g

mobile phone masts, and also holds a 42 %

ing lines and data governance where necessar y.

senior management and if required, to the Board.

Agreements (APA) that signal a shif t away from

s t a k e i n j o i n t ve n t u r e I n d u s To w e r s, w h i c h i s

Audit teams must per form a comprehensive crit-

aggressive tax approach that resulted in trans-

t h e w o r l d ’s b i g g e s t t e l e c o m s m a s t c o m p a ny,

G i ve n the le ve l o f co mp lex it y f aced by bank s,

ical review of potential weak nesses in addition

fe r p r i c i n g a d j u s t m e n t s a s h i g h a s o v e r R s 1

with about 110,000 masts. Bhar ti Air tel had

they will have to par tner with traditional com-

t o e n s u r i n g t h a t t h e p o l i c i e s a n d p ro c e d u re s

l a k h c ro re i n t h e l a s t t wo f i n a n c i a l ye a r s. “Al l

e a r l i e r s a i d i t wa s co n s i d e r ing a sa le of u p to

petitors and peers and IT and change spe-

approved by the Board are being followed. They

m a c h i n e r y h a s b e e n p u t i n p l a c e. G u i d e l i n e s

1 0 p e rce nt o f I n f rate l i n the I PO.

c i a l i s t s i n f u t u re t o m a n a g e t h e i r r i s k e f fe c -

m u s t be em powered to enfo rce their f i n d i n g s.

s h o u l d b e n o t i f i e d s o o n ,” s a i d a n i n c o m e t a x

t h e f i r s t h a l f o f 2 0 1 3 . I t ha s more tha n 33,000

d e p a r t m e nt o f f i c i a l.

t i v e l y. C R O s w i l l h a v e t o d e m o n s t r a t e t h e

Th e u n i t, B h a r t i I n f rate l, i s e ye i n g a l i s t i n g i n

Bhar ti has repor ted 10 consecutive quar ters

benefits and tie the outcomes of risk man-

Bank managers need to establish a strong

agement projects more directly to busi-

risk management culture that per vades the

An A PA i s a n a gre e m e nt b e t we e n t h e t a x p aye r

p e rce nt s o f a r t h i s ye a r, u nd e r pe r for ming the

ne ss o u tcome s a nd t an gible co st reduc tio ns.

entire organization. Alongside the develop -

a n d t h e t a x a ut h o r i t i e s t h at a l l ows b o t h to s e t

broader market that is up more than 16 percent.

In order to achieve this, organizations will

m ent o f the s c ientif ic and tec hnic al a s p e c t s o f

out in advance, the method of determining the

have to seek collaborations in new ways.

r i s k m a n a g e m e nt, i t i s i m p o r t a nt to e s t a b l i s h

transfer pricing for inter- company transactions,

g o o d g over nance and a heal thy r is k c ul t ure to

h e l p i n g avo i d p o s t t ra n s a c t i o n d i s p ute s a p a r t

g i v e b a n k s a s t a b l e fo u n d a t i o n t o r e s t u p o n .

giving multinationals cer taint y about their tax

One of the most impor tant aspects in risk man-

tution are not the ones who measure, monitor a nd e valuate the r isks. Th e man ager ial str u c -

I n d i a n b a n k s wo ul d n e e d a bou t R s 5 la k h crore

Shilpi Ghosh-The author is a student of IIFT

Bhar ti Air tel shor tlists banks for Infratel IPO

ture and hierarchy of risk review func tion may va r y ac ros s ba nk s dep en din g upo n t h ei r s ize

Banks need Rs 5 lakh cr to meet Basel-III n o r ms : RBI

l i a b i l i t y.

agement philosophy is to make sure that those who t a ke or a cce p t r isk o n beh alf o f t h e ins ti-

o f p ro f i t d e c l i n e, w i t h s h a re s d o w n a b o u t 2 8

of additional capital to meet the Basel-III norms, the Reser ve Bank of India (RBI) said in its annual repor t for 2011-12. State -run banks would need

Bharti Airtel has shortlisted banks including

a majority of these funds — Rs 1.4-1.5 lak h crore

InFINeeti Annual Issue | September 2012

R EGUL ARS

REG ULARS had offered Rs 15,493 crore for buying 29.5 per

o f co mm on e q u i t y an d Rs 2. 65-2. 75 lak h c ro re

expressed disappointment over S ebi ’s decision

o f n o n- e q u i t y c ap it al.

l as t week to al l ow the indu s tr y to co l l e c t ex t ra

N ow o n , f u n d h o u s e s w i l l h ave to b r i n g b a c k

ce nt i n H Z L , a n d R s 1 ,7 82 crore for 49 pe r ce nt

c harg es w il l benef it their l arg er pee r s.

the entire exit load back to the fund. However,

re s i d ua l h o l d i n g i n B a l co.

f u n d s h a ve b e e n a l l o w e d t o c h a r g e a n a d d i -

After shareholders approval, the company board

As majority shareholder in the public sector b a n k s, the Ce ntre wo uld h ave to in f use a s ig -

T h e m a r k e t r e g u l a t o r, i n a p r e s s r e l e a s e s a i d

tional expense ratio of 20 basis points from

wo ul d h ave t h e p owe r s to ra ise the offe r pr ice

ni fi c ant amou nt if it want s to ret ain it s 5 8 per

mutual funds can charge an extra 30 basis points

t h e ove ra l l f un d i r re s p e c t i ve o f t h e to t a l ex i t

up to Rs 18,606.10 crore (USD 3.378 billion) for

cent s take — the gover n ment ’s st ated p o l ic y.

(0. 3% ) above the exis ting fee o f 2. 2 5 % i f t h e y

l o a d co l l e c te d.

HZL, and up to Rs 3,028.78 crore ($ 550 million)

rais ed 3 0% o f the inf l ows f ro m pl ace s o ut s i d e

fo r B a l co.

Pr i v a t e s e c t o r b a n k s w o u l d n e e d R s 7 0 , 0 0 0 -

the top 15 cities. Prima facie, the step appeared

Th e 1 5 p e r ce nt i n c re a s e in the pre v iou s offe r

85,000 crore to meet the new capital adequac y

to be almost in line with what the industr y was

n o r m s. O f t h i s, R s 2 0 , 0 0 0 - 2 5 , 0 0 0 c ro re wo u l d

expecting, but the fine print revealed the norms

b e co m m on e q u i t y. RB I said t h ese p ro jec tio ns

h ave a w i n d f a l l i n s to re fo r t h e l a rg e r m u t u a l

we re b a s e d o n a co n s e r v a t i ve a s s u m p t i o n o f

funds. The additional 30 basis-point fee will

Ve d a nt a G ro up m ay s h e l l o ut R s 2 1 ,6 3 5 c ro re,

d o l l a r - r u p e e e xc h a n g e r a te t a k e n by Ve d a n t a

u ni fo r m annua l growt h o f 20 p er cent in r is k-

be c harg ed o n the entire f u nd, no t j u s t o n n e w

up to 25 per cent more than previously offered,

o n Aug us t 7 ) .

weighted assets for each bank. The central

i nv e s t o r s , r e s u l t i n g i n e x i s t i n g i nv e s t o r s a n d

for buying the gover nment ’s remaining stakes

b a n k a l s o f a c to re d i n l e n d e r s’ a s s e s s m e n t o f

investors residing in top cities subsidising new

in Hindustan Zinc and Balco as its earlier offers

t he i r i nte r nal accruals.

inves to r s f ro m the hinter l ands.

h ave n o t b e e n a cce p te d s o f a r.

Concern was raised on whether the Centre

A back- of-the - envelope calculation shows that

Ve d a n t a h a s c a l l e d s h a re h o l d e r s m e e t i n g o n

might find it difficult to capitalise public

the indu s tr y, hy po thetic al l y, w il l po c k e t c l o s e

August 28 in London, alongside its annual

sector banks, owing to the widening fiscal

to Rs 583 crore if it charges 30 basis points

g e n e r a l m e e t i n g, t o s e e k n o d fo r t h e s w e e t -

deficit. Recently, RBI Governor D Subbarao had

on the existing equity asset base (combined

ening its offers in the two firms, but a company

expressed doubts on whether the government

AUM o f eq u it y, bal anced and E LS S f u n d s ) o f R s

s p o k e s p e r s o n s a i d t h at i t i s j us t a n “e n a b l i n g

co u ld i nfu s e thi s amo unt o f cap it al.

1,94,320 crore. The industr y had a total AUM of

provision” and no new offer has been made yet

Rs 7, 30 , 0 00 c ro re o n J u l y 30 .

to t h e g ove r n m e nt.

have to ma i nta i n a capit al adequac y rat io o f

O u t o f t h e to t a l R s 5 8 3 c ro re, a t l e a s t 8 0 % o f

I f i t g o e s t h ro ug h , t h i s d e a l a l o n e co ul d m e e t

at l ea s t ni ne pe r cent, in addit io n to a capital

the additio nal fee w il l be po c k eted by t h e to p

over 72 per cent of the government ’s disinvest-

c o n s e r v a t i o n b u f f e r, w h i c h w o u l d b e i n t h e

f ive f u nd ho u s es inc l u ding HDFC M u t ua l Fun d,

form of common equity of 2.5 per cent of

R el iance M u tu al Fu nd, IC IC I Pr u dent i a l M ut ua l

r i s k- we i g h t e d a s s e t s. I n o t h e r wo rd s, b a n k s’

Fund, UTI Mutual Fund and Birla Sun Life Mutual.

Vedanta may up offer for HZL, Balco stakes by 2 5 %

minimum capital adequacy ratio should be Another point of discontent among small mutual

m a i nt a i n a c a pi tal adequac y rat io o f at l eas t

funds is the way exit loads can be charged. Sebi

ni n e pe r ce nt.

s aid f u nds w il l have to pl o u g h bac k t h e e nt i re

m e nt t a rg e t o f R s 3 0 ,0 0 0 c ro re fo r t h i s ye a r.

exit load - the fee it charges for premature

S m a l l m u t u a l f u n d s u n h a p py ove r S e b i ’s n e w ru l e s Officials of smaller mutual funds have

s h a r e h o l d e r s’ n o d h a s b e e n s o u g h t , a m o u n t s to $ 3 .3 7 8 b i l l i o n ( a b o ut R s 18,606 crore at the

According to Basel-III norms, Indian banks

11.5 per cent. Cur rently, I ndian banks have to

o f $ 2 . 9 3 8 b i l l i o n ( R s 1 5 , 4 9 3 c ro re ) , fo r w h i c h

inves to r exit - into the s c hem es. Fun d h o us e s

L o n d o n S t o c k E x c h a n g e - l i s t e d Ve d a n t a h a d

do not have any restr ic tions on how much they

acquired 51 per cent stake in Balco in 2001

charge as exit load, but they usually charge 2%

a n d 6 4 .9 p e r ce nt s t a k e i n H i n d us t a n Z i n c Ltd

o f w hic h 1 % is po c k eted by them .

(HZL) dur ing 2002-2003. I n Januar y, the group

Contr ibuted by-R ohit K hattar

InFINeeti Annual Issue | September 2012

REG ULARS

R EGUL ARS

F U N WI TH F I N

Wh i c h b a n k h a s t h i s un i q ue h i s to r y a n d h i e ra rc hy? 6 ) I d e nt i f y t h i s l o g o o f a ve r y f a m o us co m p a ny, a b e h e m o t h i n i t s f i e l d.

1) Identify the picture below, which represents the most basic form of many financial instruments.

7 ) Wh o wa s t h e f i r s t Fi n a n ce M i n i s te r o f i n d e p e n d e nt I n d i a ? 8) Connec t the following: a mathematical game of strategy, a t ype of ser ver, and a per for mance m e a s ure fo r f i n a n c i a l i n s t i t ut i o n s. 9 ) Wh i c h f i n a n c i a l i n s t r um e nt, k n ow n to b e p r i n c i p a l p ro te c te d, c a n b e t h ou ght of a s a combin at i o n o f a ze ro - co up o n b o n d a n d a n e q ui t y o p t i o n ? 2 ) Th is i ndi v i d u al ’s idea t h at h is co mp any “didn’t real l y need any as s ets”, heral ded ag gre s s i ve

1 0 ) Wh i c h wa s t h e wo r l d ’s f i r s t co m m o d i t y f ut ure s m a r k e t ?

i nve stme nt by th is co mp any, an d led to him being dec l ared C E O o f this co m pany, befo re s p e c t a c u l ar ly late r that year, t h e co mpany fou ndered. Whic h indiv idu al are we tal k ing about ? 3 ) Af te r thi s doc ument ar y came o ut, a Ho ng K o ng bas ed m erc hant bank er o bs er ved, “ Fo r a b oy fro m Watford to br in g a gran d f ir m down , I m ean it was a s o c ial ins u l t as wel l.” Who is t h e “ b oy fro m Watford ”, a nd wh at is t h e “gran d f ir m” a reference to ? 4 ) The company w h ich h ad t h is lo go h as the c l aim to f am e fo r br inging o u t s o m ethin g fo r t h e fi r st t i me i n the wo r ld, wh ich all co mp anies s tar ted to do s ince then. Identif y the co m p a ny.

5 ) Thi s par ti c u lar b an k is ro o ted in t h e ideas o f Fr iedr ic h Wil hel m R aifeis s en, a fo u nd e r o f t h e co o p e rati ve m ovement wh o created t h e f ir s t f ar m er s’ bank in G er m any in 18 64 . One o f h i s fo l lower s, a c le rgy man by t h e n ame o f G er l ac u s van den E l s en, s to o d at the bas is o f l o c al f a r m e r s’ u ni o ns i n another co unt r y. Th is b an k is s til l deepl y ro o ted in agr ic u l tu re, and the cent ra l o rg a ni z at i on i s the daughter o rgan izat io n o f the l o c al branc hes, rather than the o ther way ro un d.

S o l ut i o n to l a s t e d i t i o n’s c ro s s wo rd :

Contr ibuted by-J R ahul

InFINeeti Annual Issue | September 2012