FinStreet - SIMSR
INVESTRIX Issue 1 • Feb 2013
TRANSFER PRICING MR. NATANAGOPAL CHARTERED ACCOUNTANT
INFRA FINANCING IN INDIA DR. PANKAJ TRIVEDI Head of Ph.D. Program Professor of Finance SIMSR
Plus
7
MORE ARTICLES INDEPTH ANALYSIS Covering various aspects in the finance world with analysis and opinions from our experts
HELPING YOU UNCOVER VALUABLE INSIGHTS ABOUT THE FINANCE WORLD
FEATURES 04 Transfer Pricing
06 GST Reform
10 Challenges for Infrastructure
BUSINESS 12 Economic Policies
16 Financial Engineering
18 Base Rate System 22 Microfinance Coffin
24 BRICS engulfed in MIST
ANALYSIS 26 Greenex
2 • Designfreebies Magazine • www.designfreebies.org
FROM THE EDITOR All things destined for greatness are earmarked for it by a touch of experience and oodles of passion. Through the first edition of Investrix that we launch in February 2013, alongside the flagship event of Finstreet by the same name, we seek to achieve it, realizing, all the same, that the destination is a long way off. But if that axiom is to be held up to its acid test, flip a few pages and get past the null hypothesis. This edition of Investrix has sought the permeation of knowledge from all quarters of the world concerned with business: from industry, from academia and from the young and exuberant student community. To start things off, we delve into the issue of Transfer Pricing, becoming ever more important an issue now, with businesses evolving through consolidation. The contributor from industry has quite succinctly explained various details of the subject. After that, we foray into another favorite hot topic: the GST, and why its implementation is much awaited and how it is beneficial to business and customers. Infrastructure financing is, if it is brought down to the basics, the most important factor determining the growth of the Indian economy, where the potential for growth is not in doubt, but its means certainly are. The requirement of financing, methods being adopted and certain suggestions are all neatly elaborated. Next is a quite extensive analysis of economic policies and the impact of financial inclusion. Financial engineering is a reality today. A lot of it
Editor In Chief Abhilash Nair, SIMSR
Associate Editor Tanmay Bhandhari, SIMSR
Contributing Writer- Industry Experts CA Mr. Natangopal Mrs. Diptilavya Swain
is in practice already. Use of machines for analytics has made the job for man easier, but has in turn enabled a clutch of complicated products
Contributing Writer- Faculty
to emerge. Blame the machine? And to critically analyze the extent of
Dr. Pankaj Trivedi, HoD of Ph.D. Prof. of FInance, SIMSR
central bank’s success in effecting the interest rate channel by the base rate system. Microfinance, has never been out of the critics’ purview and this issue is no exception. Multiple issues that greatly plague the sector listed out, we believe, would give the reader a perspective, never thought about. As refreshing as it could ever possibly be is the introduction to a new arena of Greenex, carbon sensitive index. And, with the developing economies losing their pedal on the accelerator, we aim to take you through the MIST which has engulfed the group built of BRICS. We aspire to greatness, but knowledge and perfection, our constructs,
Contributing Writers-Student Saranyan R & Rajesh Dharmarajan Anup Kumar Ray Aparajith Shyam Harish Mohan Shivani Ghildiyal
Art Director Swapnil Rathod, SIMSR
are never achieved in entirety. Fortunately, measure of it can be taken by the effort expended and the sharpening of acumen, both of which are
Graphic Artist
pursued with vigor. We hope to keep delivering, and that we only get
Swapnil Rathod, SIMSR
better with every attempt.
Circulation Officer Kirshnamurthy Ganesan, SIMSR Designfreebies Magazine • www.designfreebies.org • 3
THE LAW OF TRANSFER PRICING IN INDIA A QUICK INSIGHT BY CA MR. NATANAGOPAL
I
ncreasing participation of multi-national groups in economic activities in India has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same group. Hence, there was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises.
Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures.
How does it apply in practice? It is one of the most effective models to determine fair prices of options. The model has the following advantages: •
Ease of applicability and calculation.
•
Reversibility – Just as how price is determined, other variables can be calculated by giving the price as an input.
•
It helps in more accurately determining the movement of prices.
SCOPE & APPLICABILITY Transfer Pricing Regulations (“TPR”) are applicable to all enterprises that enter into an ‘International Transaction’ with an ‘Associated Enterprise’. Therefore, generally it applies to all cross border transactions entered into between associated enterprises. It even applies to transactions involving a mere book entry having no apparent financial impact. The aim is to arrive at the comparable price as available to any unrelated party in open market conditions and is known as the Arm’s Length Price (‘ALP’). From FY 12-13 onwards, transfer pricing regulations are applicable even on certain specified domestic transactions also. Associated Enterprises (‘AEs’) - How are they Identified? The basic criterion to determine an AE is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. The concept of control adopted in the legislation extends not only to control through holding shares or voting power or the power to appoint the management of an enterprise, but also through debt, blood relationships, and control over various components of the business activity performed by the taxpayer such as control over raw materials, sales and intangibles. The Government may go to any layer of management, control or ownership in order to find out association For instance, if enterprise B is managed, controlled or owned either directly or through an intermediary, then Enterprise B is said to be an AE of enterprise A. Further, if Mr A and Mr B control both Enterprise A and Enterprise B then both the Enterprises A and B are AEs. 2.2. What is an International Transaction? An international transaction is essentially a cross border transaction between AEs in any sort of property, whether tangible or intangible, or in the provision of services, lending of money etc. At least one of the parties to the transaction must be a non-resident entering into one or more of the following transactions
4 • Designfreebies Magazine • www.designfreebies.org
The market price offers a sound basis for transfer price. It induces (a) Purchase, sale or lease of Tangible or Intangible Property
the SAE to have an efficient control on production costs, as excess
(b) Provision of services
costs cannot be passed on to the RAE. Also, market price based
(c) Lending or borrowing of money
transfer prices are easily accepted by the all. The main problem
(d) Any transaction having a bearing on profits, income, losses or
with market based transfer prices is that the markets for most of
assets
the intermediate products are characterised by imperfect compe-
(e) Mutual agreement between AEs for allocation/apportionment
tition. At a given point of time, a wide range of market prices can
of any cost, contribution or expense.
be observed for almost identical products or components. This
An illustration of a distant ‘International Transaction’ could be:
increases the conflicts in transfer price negotiations. Sometimes
Resident enterprise exports goods to an unrelated person abroad,
distress prices rule the market. Despite these limitations, market
and there is a separate arrangement or agreement between the
price offers a better transfer pricing mechanism than cost prices.
unrelated person and an AE which influences the price at which
Transfer Prices Based on Shadow Prices:
the goods are exported. In such a case the transaction with the
The optimum prices for the output transferred or the services
unrelated enterprise will also be subject to TPR.
provided by one AE to another can be calculated by using a linear
METHODS OF DETERMINING THE ALP
programming model for the logistics flow to optimize a given
In accordance with internationally accepted principles, the TPR
function (say, production or sales pattern) within given constraints.
have provided that any income arising from an international transaction between AEs shall be computed having regard to the ALP,
Transfer Prices Based on Dual Prices:
which is the price that would be charged in the transaction if it had
Sometimes two sets of transfer prices are used. The SAE’s revenue
been entered into by unrelated parties in similar conditions.
any based on normal sales price less a percentage to take care
The ALP is to be determined by any one or more of the prescribed
of the selling and distribution costs. The RAE may be charged
methods. The taxpayer can select the most appropriate method to
the standard costs for the product. The difference between the
be applied to any given transaction, but such selection has to be
resultant two sets of prices may be charged to group head. This
made taking into account the factors prescribed in the TPR. With a
approach is possible if the AEs are divisions of same enterprise.
view to allow a degree of flexibility in adopting the ALP, a variance
The SAE is encouraged to help maximize its profits. Recently CBDT
allowance of 5 percent has been provided under the TPR.
has notified the sixth method to determine ALP. The new method
The prescribed methods have been listed below
inserted by way of Rule 10AB states that “any method which takes
(a) Comparable Uncontrolled Price Method (‘CUP’)
into account the price which has been charged or paid, or would
(b) Resale Price Method (‘RPM’)
have been charged or paid, for the same or similar uncontrolled
(c) Cost plus method (‘CPM’)
transaction, with or between non-associated enterprises, under
(d) Profit Split Method (‘PSM’)
similar circumstances, considering all relevant facts”, shall be con-
(e) Transactional Net Margin Method (‘TNMM’)
sidered as one of the methods for determination of ALP. This Rule is applicable from FY 2011-12 onwards.
Several bases of transfer prices are in vogue: 1.
Cost Based prices
BURDEN OF PROOF – IS IT ON TAXPAYER OR TAX OFFICER?
a)
Full cost based prices
The primary onus is on the taxpayer to determine an ALP in
b)
Marginal Cost prices
accordance with the TPR and to substantiate the same with the
c)
Standard Cost prices
prescribed documentation. Where such onus is discharged by the
2.
Market Based prices
taxpayer and the data used for determining the ALP is reliable and
3.
Negotiated Prices
correct there can be no intervention by the tax officer.
4.
Dual Prices
In other cases, where the tax officer is of the view that the
5.
Shadow Prices
(a) price charged in the international transaction has not been determined in accordance with the methods prescribed,
A different basis for transfer pricing can be depending upon the
(b) or information and documents relating to the international
circumstances under which the AEs operate.
transaction have not been kept and maintained by the assessee in accordance with the TPR,
PROS AND CONS OF DIFFERENT BASIS OF TRANSFER PRICING
(c) or the information or data used in computation of the ALP is not
Transfer Price Based on Cost Price:
reliable or correct,
Cost based transfer prices for inter AE transactions can be based on
(d) or the assessee has failed to furnish any information or docu-
actual costs or standard costs. They may be based on the full recov-
ment which he was required to furnish under the TPR
ery of actual costs or marginal costs. The main limitation of actual
The tax officer may reject the ALP adopted by the assessee and
cost transfer prices is that the SAE is not encouraged to search for
determine the ALP in accordance with the TPR. For this purpose,
economies as the actual costs are automatically recovered from
he would then refer the matter to a Transfer Pricing Officer (‘TPO’)
the RAE as part of the transfer prices.
(a special post created for valuation of ALP) who would determine
Transfer Prices Based on Market Prices:
the ALP after hearing the arguments of the taxpayer. Designfreebies Magazine • www.designfreebies.org • 5
GST : A Much anticipated Tax Reform
AUTHORED BY DIPTILAVYA SWAIN SENIOR ASSOCIATE WADIAGHANDY & CO.
T
he complexity of the taxa-
tax on his output, whether for provision of
Hon’ble Finance Minister and who holds
tion system is considered
service or sale of goods, is entitled to get
the portfolio now as well.The proposed
to be a big challenge for
input tax credit (ITC) on the tax paid on its
date for introduction of GST was set as
business in India. Therefore
inputs, i.e. for purchase of goods or ser-
April 1, 2010. We have clearly missed the
there has been intense interest surround-
vices, thus ultimately tax is being paid on
target date but efforts have revived par-
ing the introduction of Goods and Services
the value additions, which is being paid to
ticularly this year to make GST a reality by
Tax (GST) in India as it is widely believed to
the Government. In a situation, where out-
coming financial year. From 28th Feb 2006
probably change the tax administration
put tax exceeds the input tax, the person
till now, much water has flown down the
and the manner of conducting business.
is entitled to refund for the difference or
bridge. A Joint Working Group set up by
GST is a multi-tier tax where ultimate
same may be carried forward.
Empowered Committee of State Finance
burden of tax falls on the consumer of
Ministers was set up, which submitted its
goods/ services. It is called as value added
The proposal for introduction of GST was
report in November 2007. The report was
tax because at every stage, tax is being
made for the first time on 28th February
thoroughly discussed & some changes
paid on the value addition. Under the GST
2006 in the Budget Speech for the year
were made by Empowered Committee,
scheme, a person who was liable to pay
2006-07 by Sh. P. Chidambaram, the
which then sent it to Government of
6 • Designfreebies Magazine • www.designfreebies.org
India. A Joint Working Group constituting of State/ Central
by the centre as well as state simultaneously paid on goods and
Government Officers was formed in January 2009 to submit
services on the same base. Essential features of the Dual GST are
recommendations of structure of Goods and Services Tax.
as under:
Subsequently there have been interactions between Finance Minister and Empowered Committee for compensation of loss
(i) The GST shall have two components: one levied by the Centre
of Revenue to the State for phase out of the Central Sales Tax.
(hereinafter referred to as Central GST), and the other levied by
In November 2009, the First Discussion Paper was released by
the States (hereinafter referred to as State GST). Rates for Central
Empowered Committee, which conceptualized “Dual GST” in
GST and State GST would be prescribed appropriately. This dual
India, taxation power – both by the Centre and the State to levy
GST model would be implemented through multiple statutes
the taxes on Goods and Services. The First Discussion Paper on
(one for CGST and SGST statute for every State). However, the
GST released by Empowered Committee recommended the
basic features of law such as chargeability, definition of taxable
following Central Taxes to be subsumed under the Goods and
event and taxable person, measure of levy including valuation
Services Tax:
provisions, basis of classification etc. would be uniform across
•
Central Excise Duty
these statutes as far as practicable. How would a particular trans-
•
Additional Excise Duties
action of goods and services be taxed simultaneously under
•
The Excise Duty levied under the Medicinal and
Central GST (CGST) and State GST (SGST), has been illustrated in
Toiletries Preparation Act •
Service Tax
•
Additional Customs Duty, commonly known as
the First Discussion Paper on GST as under: (ii) Taxes paid against the Central GST shall be allowed to be
Countervailing Duty (CVD)
taken as input tax credit (ITC) for the Central GST and could be
•
Special Additional Duty of Customs - 4% (SAD)
utilized only against the payment of Central GST. The same prin-
•
Surcharges
ciple will be applicable for the State GST. As the GST is essentially
•
Cesses.
a tax only on value addition at each stage, therefore a supplier at each stage is permitted to set-off, through a tax credit mecha-
Following State taxes and levies were also recommended to be
nism of the tax paid on previous purchase of goods and services,
subsumed under GST:
which is illustrated in the First Discussion Paper as under:
•
VAT / Sales tax
•
Entertainment tax (unless it is levied by the local bod-
ies).
The other model for GST under discussion is integrated GST (IGST) scheme. With the introduction of the GST, the Central Sales Tax
•
Luxury tax
(CST) would be phased out, however, the inter-state transactions
•
Taxes on lottery, betting and gambling.
of the goods and services will attract GST. However, the inter-
•
State Cesses and Surcharges in so far as they relate
state transactions of goods and services shall be taxed in the
to supply of goods and
GST regime has been
services.
a hot topic for discus-
•
Entry tax not in
lieu of Octroi.
sion. The Empowered Committee of the State Finance Ministers has
The
13th
Finance
suggested
that
for
Commission headed by
taxation of inter-state
Dr. Vijay Kelkar consti-
transactions, tax should
tuted the Task Force of
be levied under the
Goods and Services Tax
integrated GST (IGST)
(GST), which has released
scheme which shall be
its Report in December 2009 and suggested the total GST rate of
the sum total of CGST and SGST. The scope of IGST Model is
12%, with 5% at the Centre and 7% at the State levy and exemp-
that Centre would levy IGST which would be CGST plus SGST
tion from tax to education and health sector, public services pro-
on all inter-State transactions of taxable goods and services
vided by the Government and unprocessed food, however, sug-
with appropriate provision for consignment or stock transfer of
gested to bring the Real Estate transactions under the tax net.
goods and services. The inter-State seller will pay IGST on value
Thus, design and structure of GST envisaged in the Report of the
addition after adjusting available credit of IGST, CGST, and SGST
Task Force is different from as suggested in the First Discussion
on his purchases. The Exporting State will transfer to the Centre
Paper released by the Empowered Committee.
the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability
Dual GST model enjoys a broader consensus among various pro-
in his own State. The Centre will transfer to the importing State
posed models of GST. Under this model, the taxes to be levied
the credit of IGST used in payment of SGST. The relevant Designfreebies Magazine • www.designfreebies.org • 7
information will also be submitted to the Central Agency which
•
will act as a clearing house mechanism, verify the claims and
value chain from manufacturing to retail without breaks regard-
The input credit chain is seamless covering the entire
inform the respective governments to transfer the funds.
less of whether goods or services are supplied within a State or across State boundaries;
The major advantages of IGST Model are: •
Self monitoring model.
•
As far as possible, every transaction in the tax net bears
•
Maintenance of uninterrupted ITC chain on inter- State
both CGST and SGST;
transactions. •
No upfront payment of tax or substantial blockage of
•
The tax treatment of goods and services is similar;
•
The Central and State levies are fully neutralized in the
funds for the inter-State seller or buyer. •
No refund claim in exporting State, as ITC is used up
while paying the tax. •
case of exports (out of India); and
Level of computerization is limited to inter-State dealers
and Central and State Governments should be able to computer-
•
ize their processes expeditiously.
the Centre and the States.
•
The procedures are simple and harmonized between
As all inter-State dealers will be e-registered and corre-
spondence with them will be by e-mail, the compliance level will
•
improve substantially.
for the success of GST is the creation of a strong Information
•
Technology Infrastructure both for the Centre and the States.
Model can take ‘Business to Business’ as well as ‘Business
Amongst the administrative actions that are critical
to Consumer’ transactions into account. •
Infrastructure is required for reducing the physical inter-
GST presently is being used in more than 120 countries with
face between the taxpayer and the department so that compli-
around 40 models. It is widely used in Europe and is getting popu-
ance costs are curtailed.
lar in Asia Pacific region. The Hon’ble Finance Minister, Mr. Pranab Mukherjee in his speech in November 2009 had pointed out that
Early GST implementation can help kick start growth and invest-
proposed Goods and Services Tax (GST) can deliver good or fulfill
ments. It is important that political parties at the Centre and
the expectations/ promises only if it has the following essential
States sense the urgency and work towards consensus on this
features:
key tax reform. GST will help in re-distributing the burden of taxation equitably between manufacturing and services bring-
•
It is compre-
ing about a qualitative
hensive in scope and
change in the tax sys-
applies to as large a
tem.With the minimi-
range of goods and
sation of exemptions,
services as possible by
it will broaden the tax
minimizing the num-
base and lower the tax
ber of exemptions to
rates.By switching to
a small list of essential
the destination prin-
items which impact
ciple, the distortions
the common man. To
will be reduced foster-
the extent possible,
ing a common market
the exemption lists
across the country.
of the States and the
The compliance cost
Central
will come down and
Government
are in alignment;
our trade and industry will become more
•
The rates of tax of CGST and SGST taken together are
moderate;
competitive leading to an increase in exports and lower prices for domestic consumers. The government should thus be as proactive as they were for Indo-US nuclear deal and FDI in retail
•
The rates of tax of SGST and exemptions from SGST are
bill, to make GST a reality. Therefore, implementing GST will not
uniform throughout the country so that a given set of goods and
only overcome the deficiency of existing taxation system but also
services invites the same tax treatment in every State;
prove to be a boost for businesses across industries.
8 • Designfreebies Magazine • www.designfreebies.org
Designfreebies Magazine • www.designfreebies.org • 9
Challenges for Infrastructure Financing in India
BY DR. PANKAJ TRIVEDI PROF. FINANCE HEAD OF PHD PROGRAM S. I. M. S. R.
O
n
2012
funds for the development of this sector
funds allocation for infrastructure devel-
Finance Minister Mr. P.
but even than following challenges are
opment and funds for social schemes is
Chidambaram
need to be addressed effectively.
not an easy task for the Government.
the
14th
Delhi
Dec.
said
in
Fiscal measure
As per Kelkar committee report the
Conclaves 2012 that the G-20 Leaders
Economics
Not only in India but in other developing
resources for infrastructure development
asked their Finance Ministers and Central
nations too, infrastructure development
can be raised by innovative methods
Bank Governors to consider ways in which
is considered to be the responsibility of
like monetizing government’s unutilized
the G20 can foster investment in infra-
the state. The Government of the country
and under-utilized land resources. These
structure and ensure the availability of
has to take initiative for infrastructure
resources can finance infrastructure needs
sufficient funding for infrastructure proj-
development due to the unique features
particularly in urban areas. There are many
ects. Infrastructure sector requires huge
of such financing. Mainly the finance is
countries like USA, Canada, France and
investment, for instance during twelfth
arranged for this purpose by budgetary
even China has used this method. For
five year plan in India, investment in infra-
allocation. However, in India due to rising
using this method effectively the commit-
structure is estimated at Rs.41 lakh crore.
budget deficit making allocation of funds
tee recommended that a detailed policy
Government of India has initiated sev-
for this sector pose a challenge for the
about this source need to be designed.
eral measures to step up the availability of
Government. The balancing exercise of
This is also a big challenge as the PSUs
10 • Designfreebies Magazine • www.designfreebies.org
having large underutilised land like Railway may want that the
Conclusion
funds should be used for developmental of that specific PSU only.
The requirement of finance for development of infrastructure in India is huge. There is no shortage of saving in India but the intermediation between these saving and investment is required.
Infrastructure Development Funds and Debt Market Development
Dependence on traditional method of borrowing from banks has its own limitations. To augment the resources for infrastructure
The infrastructure sector of India will now have a new source of
especially by private sector, the two most important challenges
long term funds called Infrastructure Debt Funds (IDF). In Union
we are facing. First, we need to develop or innovate some mecha-
Budget 2011 this source was initiated. IDF will be useful to chan-
nism whereby the assets liability mismatch problem of banking
nelize the low cost long term funds to infrastructure projects. IDF
sector can be reduced. The consolidation in banking sector and
are NBFC who will bridge the gap between risk averse bond mar-
making the banks large enough to sustain such lending is another
ket investors and high credit risk associated with infrastructure
challenge. Secondly, instead of depending only on banks, direct
projects. IDF will be regulated by RBI. As per RBI’s guidelines, IDF
mobilisation of funds from the market is required. For this pur-
can invest only in PPP infrastructure projects that have completed
pose, development of debt market by making it wide and deep is
at least a year of satisfactory operation. The agreement between
absolutely essential. Attracting long term funds from the institu-
IDF and the borrowing company demands that if there is a default
tional investors like insurance companies and pension funds and
by the borrower the IDF should receive the termination payments
also from retail investor will go long way in this matter. Necessary
within seven months of the first financial default. Such agreement
regulatory changes and proactive policies need to be considered
will enhance the quality of the IDF assets and their credit rating
for attracting funds by foreign institutional investors also.
also. IDF will mobilise funds from debt market by issuing the high quality paper. This will facilitate development the debt market and availability of funds for the projects. To make the IDF model attractive for the sponsor of the IDF Government will offer incentives
References
like no tax status and lower risk weight of 50 % for investment in
1.
infrastructure projects.
by H.R.Khan. RBI Monthly Bulletin Feb. 2012.
Bank Financing
2.
Traditionally banks are not the major financing agencies for
Union Finance Minister Dec.2012.
infrastructure projects. However under universal banking model
3.
Infrastructure Financing in India- Progress and Prospects Delhi Economic Conclaves. Speech by P. Chidambaram IDFC Occasional Paper by Rajiv B. Lall and Ritu Anand.
banks do provide long term project finance for infrastructure development. The major challenge for such lending is that banks need to raise additional equity capital to increase its support to infrastructure sector and reducing its dependence on Tire II capital. Infrastructure exposure is mainly by large commercial banks in India. Small banks hardly have infrastructure lending exposure. To increase the lending by the banks to infrastructure, consolidation in banking sector and making our banks large enough to have exposure to this sector is required. The Narsimham Committee on financial sector reform has suggested this measure way back in 1990s. However, consolidation in banking sector is a big challenge as banks would not like to lose their identity. Equity Financing Since most of the infrastructure investments are leveraged investment, to support leverage, sufficient equity is also required by the infrastructure companies. Most of these companies mobilise equity by primary capital market route. However, since the gestation period for infrastructure projects is very high, getting funds is not very easy. It is therefore, required to encourage the private equity in infrastructure. Though there are few private equity infrastructure funds are in existence, the major constraint here is the absence of suitable policy especially with respect to exit route and taxation.
Designfreebies Magazine • www.designfreebies.org • 11
ANALYSIS OF ECONOMIC POLICIES AND IMPACT OF FINANCIAL INCLUSION AUTHORED BY: SARANYAN R &
F
RAJESH DHARMARAJAN
Introduction:
FII index value ever since the concept of financial inclusion was
inancial Inclusion has been the buzz word across
conceived. Especially, diversification of efforts from agricultural
many of emerging economies such as India,
sector has helped in the index to improve in a far better manner.
Philippines, Mongolia and Bangladesh, where a
Measure of Poverty:
substantial amount of population resides under
Foremost of all policy implementation is identifica-tion of target
poverty line. However, the discus-sions about financial inclu-
areas where the policies are intended to be implemented. Hence,
sion are of paramount economic importance in a nation with
a broad or vague definition of target is not going to help in this
the second largest population coupled with a $1.4 trillion dollar
case. Also, the definition has to be backed by strong, substantial
economy.
and reliable statistical data. But, it is here the real problem lies and
Financial inclusion can be broadly defined in terms of penetration
not in the effective-ness of policy definition or implementation.
of financial services completely into the un-banked population
The recent report on the definition of poverty by the plan-ning
in every corner of the country. Volatile and highly unpredictable
commission has received a wide spread criticism for they are
global macroeconomic condi-tions play a huge role in decelerat-
seemed inaccurate and unreliable. This will defi-nitely have an
ing even the best policies on paper. Intelligence coupled with
impact on the effectiveness of implementa-tion of the drafted and
aggressive policy stance is the only way out in not letting the
finalized policies howsoever great it could be.
deceleration leading to a handicap. Recent data shows that only
However, the real problem goes much beyond the above one.
43000 villages have been covered which is far behind the set
Availability of statistical data is so laggard in India that even the
tar-get of 6 lakh villages by 2012. Hence, this document takes
measure of WPI inflation is said to have an error of at least 1 per-
into analysis of the effectiveness of the various economic policies
centage point.
targeted at financial inclusion.
So, without a clear understanding of which section of population
Financial Inclusion Index (FII):
should be targeted to be financially included, even the best of
FII is an index developed to capture all the dimen-sions of finan-
the policies might seem incomplete. Finan-cial inclusion is about
cial inclusion including ―Access‖ and ―Use‖ of financial services.
penetrating into the unbanked or oth-erwise rural areas which
The various dimensions include number of rural offices, number
don‘t have access to all of the fi-nancial services that is available
of rural office accounts, volume of ru-ral deposits and volume of
elsewhere. But, how much unbanked in rural? How poor is rural?
rural credit.
A slightly developed locality which is a dozen kilometers away from a well-developed main urban locality may lack access to all
The above graph (Fig 1) shows a continuous improvement in the 12 • Designfreebies Magazine • www.designfreebies.org
the banking services. But, they tend to ignored stating they are
not rural but only semi-urban or sub-urban.
ments through schemes like MGNREGS. That also puts them at a slight disadvantage.
Policies related to Banking sector:
Financial illiteracy might stand in the way between the rural
RBI has mandated all the existing banks to ensure that 25% of its
unbanked population and the private sector banks, as savings
branches are in rural sector. The finance min-istry has also issued
security will be the first to cloud their minds. This will give a natu-
a directive in September to PSBs and private banks, besides RRBs,
ral upper hand over the PSU banks. Hence, Pvt Sector banks might
that all villages with a popula-tion of 5,000 and above in the 296
have to revise the strategies that are followed in urban areas viz.
districts identified by the RBI as ―under-banked‖ should have at
high mini-mum savings deposit amount etc. So, financial inclu-
least one bank branch. Such an expansion would heighten the
sion through this way might come at the cost of urban popula-
competi-tion and banks have to learn to operate on extremely low
tion‘s benefit.
margins by innovating alongside. Innovation would then lead to
The following chart explains the downside of such a policy where
high diversification in the range of products being offered target-
the profit concerned private sector banking institu-tions are con-
ing the rural population.
centrating their operations still around semi-urban areas and not
The private banks have one grouse—that they don‘t have a level
in rural areas.
playing field. PSBs get a 3% central subsi-dy on farm loans of up to
But, on the other side Government‘s strong backing of the PSU
Rs 3 lakh. So, farmers prefer PSBs, which offer loans at 7-8% inter-
banks like SBI to involve in financial inclusion has been contribut-
est compared to the 10%-11% private banks charge. Moreover,
ing strongly in accelerating the progress to-wards achieving great
private banking channels are not involved in subsidy disburse-
efficiency. With 54% controlling stake, SBI continues to enjoy
Designfreebies Magazine • www.designfreebies.org • 13
Government‘s support even during times of economic slowdown.
of proper alternatives pro-posed for the co-operative banks and
This policy holds major importance as SBI is the biggest in terms
post offices doesn‘t seem good as empowering these already
of the number of branches and customer base. SBI also enjoys the
existing institu-tions further would have been a more cost effec-
confi-dence of the rural population even when not every rural citi-
tive way rather than seeding in new institutions that have doesn‘t
zen might have access to it. The success of banking in rural sector
enjoy as much public awareness as the former.
is heavily dependent on the performance of SBI in all the other sec-
Through a policy called ―Doubling of agriculture credit‖ total
tors. Hence, the
agr icu ltu ral
Government‘s
credit
policy
increased
stance
flow
cannot be dis-
from
counted.
13,915 crore
Diversification
in
of
to Rs 92215
Financial
Rs 1991-92
Providers:
crore
Issue of bank-
2005-06. But
in
ing licenses to
production
NBFCs is the
credit
latest and most
seen a steady
welcome step
decline of 0.5
towards finan-
percentage
cial inclusion.
points every
As the NBFCs
year. Also, the
already have a
share of co-
has
strong presence in select rural areas and they have loyal brand
operative banks in total credit flow for agricultural sector had
following as well, empowering them more with common banking
also steadily declined from 53.7% in 1991-92 to 21.9% in 2005-06.
functions is the dominant wave of the futuristic approach towards
However, the share of rural commercial banks has seen a mod-
inclusivity.
est in-crease of 3.4 percentage points in this period up from
Downside: Every solution has its own downside and this policy too
5.1%. However, post 2006; the trend has seen a significant diver-
is not an exception. Increased operations and functional ability of
gence. The share of total agricultural credit supplied through rural
these NBFCs in unbanked sectors would cripple the operations of
branches has seen a decline from 55.5 per cent in 1990 to 38.5 per
co-operative societies/banks and the already ailing post offices.
cent in 2010.The contribution of ur-ban and metropolitan branches to agricultural credit has increased from 14.9 per cent to 33.7
This will be considered as the cost that is to be paid for a greater
percent during this pe-riod, indicating that credit disbursement is
good as the NBFCs have a greater disposition towards providing
mainly through non-rural branches.
diversified and better-return products. However, the near absence
14 • Designfreebies Magazine • www.designfreebies.org
Such an increase was made possible through in-creasing the number of openings of no-frills savings account which are specially tailored for the rural population. The fig 3 shows the continuous steep increase of the count over the period 2006-2011.
Government‘s policy in encouraging the issue of Kisan cards for agricultural farmers have also shown a steady in-crease over the years which with facilities like overdraft limits tied to it have provided financial independency to a con-siderable extent. The growth of issuance of Kisan cards are shown below in fig 5. SHG Bank Linkage Program: Thus, the SHG-Bank Linkage programme launched by NAB-ARD has an important role in promoting financial inclusion and inclusive
growth. It has proved to be a successful mod-el wherein the outreach has expanded substantially leading to many advantages like micro savings, timely repayment of loans, reduction in transaction costs to SHG members and banks, etc. Conclusion: Financial inclusion is a journey that India needs to travel towards becoming a global economic superpower. Financial access to everyone will attract global corpora-tions to our country, which in turn will result in new employ-ment creation and business opportunities. RBI has been sup-porting and executing financial inclusion initiatives on a pri-ority basis through a mix of strategies ranging from provision of new products, relaxation of regulatory guidelines and other encouraging measures to achieve sustainable and scalable financial inclusion. Although the Government and RBI have taken sev-eral measures towards this goal for the past 5 years, road-blocks still appear in terms of financial illiteracy, profitability of financial services companies, customers’ ease of access to banking services in rural areas, etc. The Government should work together with all the entities involved in finan-cial inclusion vis RBI, banks and other financial institutions, business correspondents, ICT providers, self-help groups and work out a standard framework for further progress in finan-cial inclusion to be implemented country wide. There should also be constant feedback and progress review from the Government or RBI to check as to whether all these measures reach the intended result - bringing the last mile citizen into the banking net. Designfreebies Magazine • www.designfreebies.org • 15
FINANCIAL ENGINEERING A PRODUCT OF OUR
AGE ?
BY APARAJITH SHYAM - PG-IB
F
inancial engineering is a field of study involving financial theory, tools of mathematics and practices of programming. Financial engineering involves the use of tools from the fields of
applied mathematics, statistics, economics and computer science to address current financial issues. Although in the modern day much of financial engineering involves devising new and innovative financial products. Financial engineering has led to the explosion of derivative trading that we see today. In 1973 Fischer Black and Myron Scholes, two renowned economists developed what is called the BlackScholes model for a financial market containing derivative instruments. They derived a partial differential equation, called the Black–Scholes equation, which governs the price of the option over time. A number of investment bankers then started to use the formula to fix the prices of options. Needless to say, this led to a boom in options trading.
How does it apply in practice? It is one of the most effective models to determine fair prices of options. The model has the following advantages: •
Ease of applicability and calculation.
•
Reversibility – Just as how price is determined, other
variables can be calculated by giving the price as an input. • of prices
16 • Designfreebies Magazine • www.designfreebies.org
It helps in more accurately determining the movement
Black-Scholes model comes with its own caveat. That is, the proper implementation
Are statisticians to be blamed then?
of the formula would require a thorough understanding of the assumptions made.
It is a natural tendency for people to know
It only takes into account certain domains
who the real villains were. In fact they
of risk. For example, it does not assume tail
would even want villains even if there
risk (probability of rare dangerous events).
were not any. So the question is “Were the
It also does not take into account liquidity
statisticians the real villains?”
risk. It assumes that the trading would be instant (immediate availability of money
Probably not.
upon trading). The problem was more due to an enviAbove all, given that the formula was
ronment which encouraged risk taking.
formulated as recently as 1973, it would
Financial managers modelling exotic
not be able to encompass the behavioural
products by blindly applying formulas
elements such as herd mentality, greed
and banks generally involving in off-the-
etc. It would take some time and study to
balance sheet activities are proof.
ascertain how those elements could be
The reward system for financial managers
incorporated at least to a certain extent.
and traders encouraged them to come up
This leads us to the question of how such
with innovative financial products giving
engineered financial models impact mod-
them neither the time nor the responsi-
ern day markets.
bility to properly understand the models’
It helps in more accurately determining the movement of prices
assumptions and limitations. An Engineered Crisis? The laws governing the industry blurred In 2008, the world economy was in a tail
the line dividing ‘investment’ banks which
spin, caused primarily by various finan-
speculated with money and ‘traditional’
cial institutions losing enormous sums of
banks which did less of speculation and
money. The US government had to inject
more of safe-keeping. In the 1990’s, laws
more than one trillion dollars into its econ-
governing traditional banks allowed them
omy, and offer various bailout packages
the opportunity to speculate more with
to various banks and financial institutions.
the money given to them for safekeep-
The accumulated losses of the financial
ing. They had the freedom to create vari-
institutions
during that time are more
ous ‘special purpose vehicles,’ resulting
than the profits recorded in all of history.
in ‘off-balance sheet transactions.’ These
It is therefore important to understand
off-balance sheet transactions effectively
the role (if any) of financial engineering
meant that the balance sheets of banks
models in such crises.
did not reflect their true financial health. This gradually led to unsustainable levels
Financial engineering makes heavy use
of speculation and that was where it all
of the models. It is possible that several
started.
It is a natural tendency for people to know who the real villains were. “
practitioners of financial engineering were blindly applying various formulas, without understanding what assumptions led to these formulas. Efforts to incorporate behavioural factors such as the herd mentality, greed etc in the pricing of options are still in infancy.
Designfreebies Magazine • www.designfreebies.org • 17
We were trying to balance growth and inflation considerations.”
18 • Designfreebies Magazine • www.designfreebies.org
EFFECTIVENESS OF BASE RATE SYTEM FOR INTEREST RATE CHANNEL
T
Introduction
been checked with Base rate system. The
he liberalization measures
analysis done on the last one year data of
adopted in 1991 in India
policy rate hikes and median lending rates
have come a long way to
have shown the effectiveness of the sys-
provide us with a robust banking sys-tem.
tem. Banks are coming forward to declare
The deregulation of lending rate by the
their Base rates more often and the inter-
banks took place in October 1994. The
est rate channel of monetary policy is
scheduled banks were freed for charging
functioning well in conjunction to credit
any lending rates based on their Prime
channel.
Lending Rate (PLR) which was also intro-
Genesis of Base rate System
duced in the same year. For credit limits
A working group headed by Deepak
of less than Rupees Two lakhs the lend-
Mohanty, gave his recommendations on
ing rate was still regulated. But this sys-
the new system of Base rate (February
tem lacked transparency. Things became
2010). The highlights of the report were:
worse after the Reserve Bank of India’s
• Base rate at 8.55 per cent taking 2008-09
(RBI) decision in 2001 that banks can lend
data.
money below the benchmark rates. This
• Sub-base rate lending not viable
was brought because most of the banks
• All new and existing loans that come up
needed a provision to lend below PLR to
for renewal has to come under new rate.
be competi-tive. It was an international
• To be applicable to all category of loans
practice too. Banks tried to ne-gotiate the
including working capital.
AUTHORED BY ANUP KUMAR RAY S.I.M.S.R. MUMBAI
rates with the corporate houses which led to cross-subsidising of loans. The sub-
The report pointed out that around 70%
prime crisis in US helped us understand
of lending was given below PLR. The con-
the devils of this system. This system pre-
cept is being mocked as banks keep their
vailed until in July 2010 the new Base Rate
PLR high enough only to earn from small
system was introduced to bring necessary
loans to farmers, small industries and
reform in the Banking industry. With an
export loans.
experience of one year under this system,
The base rate system was introduced on
we can now veri-fy its merits in Indian con-
1st July 2010 follow-ing which the banks
text. RBI controls the economy through
were asked to fix their own base rate. The
few transmission channels which have
criteria for determining the base rate are
Designfreebies Magazine • www.designfreebies.org • 19
median lending rate from 2008 to June 2010 and post July 2010 (Guidelines on the Base Rate, 2010):
to March 2011 is performed. The R square values, at a 95 per cent
• Cost of deposits,
level of confidence are 0.55 and 0.99 respectively. This shows the
• Adjustment for the negative carry in respect of Cash Reserve Ratio
difference in the lending rate response prior to and post Base rate
(CRR) and Statutory Liquidity Ratio (SLR)
system. Earlier it used to be as low as 55 per cent whereas it is close
• Overhead cost for banks such as aggregate employee compensa-
to a perfect channel now. Banks use to absorb the changes made in
tion and other administration costs, advertis-ing, IT spending, and
Policy rates. It hardly used to reflect in term of lend-ing rate to the
cost incurred towards deposit in-surance
real and industrial sector, the engine of growth. This stickiness in
• Profit margin
the system was the major drawback of Prime lending rate system. The study output:
Reset Base Rate: Currently, the base rate has been pro-posed to be reset every quarter. This is to bring parity in time-lines even if there are no new monetary policy instances from RBI.
Macro level Implications
Sunset Clause for PLR: Banks will have to continue with a du-al-rate
RBI’s policy transmission channel: The Central Bank tries to regulate
system for few more years because RBI is against ac-cepting the
the economy of a country by the help of Policy rate (Currently, Repo
demand to put a deadline for the conversion of loans to new Base
rate), Cash Reserve Ratio (Credit channel) and Liquidity Adjustment
rate system from prime lending rate (PLR).
Facility (The bond auc-tioning). When there is a need to increase liquidity in the economy, the central bank buys back government
Advantages of the Base rate system
bonds, decrease the repo rates and take other monetary steps.
The main advantages of Base rate over the prime lending rate are:
This in turn lowers the cost to borrow money and push the inter-
• The RBI has got enough control of transferring the ef-fects of
est rate down. This should make more people and business-es to
variations of Repo rates to banks. The lending rates will be more in
buy and invest. Thus the demand for goods and ser-vices would
sync with the RBI controlled policies.
increase and as a result output follows. In order to produce more
• The customers are bearing the rate whose source is known. The
production level increases, unemployment levels fall. On the other
base rate calculation is based on cost of funds which every bank
hand, if central bank needs to bring down inflation, it absorbs the
will have to disclose. Thus the system will be more transparent.
extra money in the economy. It increases the Repo rate and sells
• The main motive and advantage of this system is stop-page of
government bonds. This results in higher interest rate and thus
sub-prime loans to bigger corporate.
less investment and spending. This brings down the demand and
• The biggest beneficiary of this system are the Small and Medium
hence the prices come down.
Enterprises
(SMEs).
But the above control
Earlier they had to
can be exhibited only if
cross sub-sidise the
the policy interest rates
lower rates for big
are passed on to the cus-
corporates. Now they
tomers. As per the trend,
may get better rates.
whenever RBI raises pol-
As Small and Medium
icy rates, banks quickly
Enterprises form sub-
in-crease
stantial market, so the
rates. But if RBI reduc-
market share of banks
es policy rates banks
stands to increase.
respond very slowly.
• There is an increase
This leads to downward
in liquidity of banks.
stickiness in rates. The
As loans are not given
rates rigidity as studied
away
by Craig and Dinger
at
sub-prime
rates, more money will be left with banks.
their
loan
(1991) also proves this feature. Because of the freedom of lending at any rates below prime rates, the banks were having enough breathing space. The
Empirical Inputs
Base rate system has cleared this clogged transmission channel.
We studied the pattern of changes in policy rates under the BPLR
The test above also con-firms that the stickiness in Bank’s Median
system from 2008 to 2010. The correlation study was done to
lending rate has come down.
determine to what extent the bank lending rate figure has followed the rate hikes. The Regression analysis between Repo rate and
20 • Designfreebies Magazine • www.designfreebies.org
Standardisation of Rates: The 3 major players, Public Banks, Private
be moving too aggressive. On a macro level this has posi-tives of
Bank and Foreign Banks had scattered lending rates. The public
checking too much liquidity in market and leading to a healthy
banks use to lend in range of 11- 12%, private banks in range of
growth. As mentioned above, the SMEs stand to get the maximum
14- 17% and foreign banks in range of 14-16%. However, in the
benefits of lower borrowing rates. It has boosted the SMEs which
base rate regime, the differences be-tween lending rates of public
comprises a huge market for the bank. The SME growth would be
banks and private/foreign banks came significantly down. The nar-
an indirect benefit of the system and the economy as a whole will
rower the difference, the more equitable and efficient the Banking
eventually gain from it. The below plot shows the narrowing of the
system would be. The base rate standardisation has lowered down
gap be-tween private and public bank lending rates.
the possibility of losing too much on bad debt. The banks won’t
Designfreebies Magazine • www.designfreebies.org • 21
WILL THE BRICS BE ENGULFED IN MIST? AUTHORED BY: HARISH MOHAN, PGDM-A
B
RICS was a new and relatively lesser known acro-
population falling in the 15-65 years bracket. These demographic
nym in 2001, when it was created by the Goldman
trends can be better understood in this ratio: 9 children for every
Sachs Asset Management Chairman, Jim O Neil.
elderly person in Mexico. Mexico also benefitted from reduced
Since then, BRICS has come a long way and occu-
shipping costs to the US and lesser transaction costs as it is a NATO
pied the minds of all the investors especially after
member. Mexico has grown by 4.6% in the first 3 months of 2012,
the 2008 crisis. Now the BRICS Inventor, Jim O Neil is trying to cre-
with strong growth prospects in the future.
ate a new Storm in the markets with his new Acronym MIST. For the uninitiated, MIST stands for Mexico, Indonesia, South Korea
Indonesia also has the advantage of young demographics that is
and Turkey and was created by Goldman Sachs with the purpose
helpful in growth of economy. It also has the advantage of being
of focusing their N-11 Fund Investments in these countries. The
in the ASEAN-China Free Trade area and has translated all these
Goldman Sachs N-11 Equity Fund (GSYAX) has grown by 12 % this
advantages effectively to put up impressive growth rates of 6%
year compared with a mere 1.5% gain in Goldman Sachs’ fund for
in GDP in the last 3 years. Indonesia’s growth rate has surpassed
BRICS. This shows the huge underlying economic growth poten-
that of India’s GDP growth recently with a smaller population
tial in MIST and the diminishing investor confidence in BRICS. The
and fewer resources. Indonesia grew strongly during the 2008
MIST Economies have nearly doubled in this decade coming out
crisis mainly with the help of robust Consumption driven growth
of deep slumber with an impressive growth rate in GDP unde-
with 60% of GDP being contributed by Indonesian consumers.
terred by the recent turmoil in Euro Zone and US Markets.
Indonesia’s exports were negligible during the years of crisis and that helped in limiting the negative effects. Of late, Indonesia has
Let’s have a look at strengths of individual countries in the MIST:
raised its exports to China significantly with the main export Items
Mexico has developed its Manufacturing Industry by leaps and
being Commodities and natural resources.
bounds focusing on lower costs and is posing a serious threat to China, famed for its China Price. Mexico is able to lower costs by
Turkey has a relatively small Debt to GDP ratio of 40%, along
taking advantage of the cheap labour force available abundantly
has managed to attract significantly high amounts of FDI. This
whereas China has had to contend with rising costs on account
has helped in improving the Investor’s confidence in Turkey and
of increasing wages, land prices, Environmental and safety taxes.
attracted investments from foreign countries and local markets.
China’s wages have recently been hiked by 22%. Mexico’s cheap
South Korea can be considered more of a developed country,
labour is owing to the growing young population with 65% of its
with many internationally acclaimed Brands such as Samsung,
22 • Designfreebies Magazine • www.designfreebies.org
Hyundai, LG, etc. These Companies have
unison as good performing economies,
managed to bring in Investor flows into
we should also consider the Macro-factors
the country and rise South Korea into the
affecting them. The consequences of fis-
Spotlight.
cal cliff of US has a direct implication on
Finally, it’s time to look at the other side
Mexico’s exports; a hard landing in China
of the coin as well. Though MIST has over-
can deter Indonesia from continuing its
taken BRICS in terms of Growth rate, MIST
growth spiral, growing inequities in South
has a very small GDP of $3.9 trillion (Each
Korea can pull down the prospects of
of the MIST countries represent only 1%
MIST significantly. Moreover, the sputter-
of the world’s GDP) last year compared
ing engines of growth in India, China and
to $13.5 trillion of BRICS. In Population
Brazil can revive in the next 2 years and
parameters, MIST nations have fewer than
come back strongly. MIST’s prospects are
500 million people in contrast with the 2.9
good in the short term, but how they will
Billion people in BRICS countries. Although
pan out in the long term; we have to wait
we have considered the MIST countries in
and watch.
The MIST Economies have nearly doubled in this decade coming out of deep slumber with an impressive growth rate in GDP”
Designfreebies Magazine • www.designfreebies.org • 23
HELPING THE RURAL SME’S PROGRESS & DEVELOP RURAL PEOPLE
THE 4 NAILS OF MICROFINANCE COFFIN Explaning the real issues bothering the micro finance sector
Before the reader slips into being sympathetic towards the Microfinance institutions in India by looking at the title, it is worthwhile to note that many of the MFIs (Microfinance In-stitutions) have built their coffins themselves by confining their ―financially inclusive‖ lending to a particular region in the country (which many a time resulted in multiple lending) and dug their own graves by lending with little regard to the creditworthiness of the
By Sankritya Vedanabhatla
borrowers (Self help groups and Joint Liability Groups). The farm loan waiver of 2008 hammered the hammer which hammered the first nail into the coffin of the MFIs. As an Economic Times report (dated 1st June 2008) says that loan defaults have risen since the waiver. The defaults were not only for the loans by Public sector banks which lent to the priority sector, but also were for the credits issued by the MFIs. ―Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loans back. Loan waivers instead make them feel that if
24 • Designfreebies Magazine • www.designfreebies.org
the current fis-cal, many of India’s big MFIs’ net worth will turn negative”. Many MFIs which have ABSOLUTELY no exposure to Andhra Pradesh have also not been spared. Arohan Financial Ser-vices Ltd, an MFI in West Bengal, hasn‘t got any money from banks ever since the Andhra crisis broke out, even though it doesn‘t have a single borrower in AP. Another case in point is Utkarsh Micro Finance Pvt. Ltd of Varanasi which lends to poor people in eastern Uttar Pradesh and Bihar. In its 2010 credit analysis report, CRISIL said that the overall asset quality of MFIs would deteriorate owing to increase in Large-ticket loan disbursements, multiple lending and mi-gration of borrowers. Fulfilling its prophecy, Spandana Sphoorty Financial Ltd was running at a loss of 50 Cr (as of Oct 2011) with an outstanding debt of 2300 Cr. The well known SKS Microfinance posted a loss of 427 Cr for the third Quarter this fiscal. In the aftermath of the crisis described things go really, really bad, Government will
loan rate by MFIs at 26% and the margin at
above (which brought down the size of the
step in and cancel the interest payable and
12%. These norms were fine when banks
Indian micro-lending business from around
even the principal. This will make even the
were giving money to MFIs at 11%. With
Rs. 30,000 Cr two years back to aroundRs.
decent guys default on their loans” – said
the increase in interest rates, banks are now
15,000 Cr now), commercial banks admitted
the report, analyzing the indirect impact the
charging more; and if we add to that the
five leading MFIs with operations in Andhra
waiver had on MFIs.
processing fee and the cash margin that
Pradesh in the corporate debt restructur-
Looking at the coercive methods employed
MFIs need to keep with the banks, the effec-
ing (CDR) program in April. The firms are
by the MFIs to recover the loans and the
tive cost of money is at least 17%.
Trident Microfin Pvt. Ltd, Share Microfin Ltd,
exorbitantly high interest rates in Andhra
All the banks which usually lend to the
Asmitha Microfin Ltd, Spandana Sphoorty
Pradesh, the AP government in October
MFIs have since shunned them because of
Financial Ltd and Future Financial Services
2010 stepped in and imposed regulations
bad asset quality, nailing the coffin shut. A
Ltd.
that drove the second nail in the coffin.
recent Mint article (―Can india‘s MFI industry
In September 2011, CRISIL had downgrad-
The bill mandated MFIs to be registered
be saved?‖ - 15th Jan 2012) cites “The MFI
ed the rating of Asmitha Microfin Ltd to
with the district authority to collect install-
industry’s total exposure to Andhra Pradesh
D. Incidentally, SKS microfinance, Asmitha
ments at the pan-chayat office and restricts
was around Rs. 7,200 crore in 2010 and they
Microfin Ltd, and Spandana Sphoorty
fresh lending without prior ap-proval of the
have been able to collect from the borrow-
Financial Ltd were the top three MFIs in the
authority.
ers only 10% of this money. They are carry-
country. If India were to save the MFIs, then
The third nail in the coffin was hammered
ing on their books Rs. 6,500 crore worth of
some difficult decisions need to be taken in
by the RBI shortly after the AP microfinance
bad assets, and when they
addition to some reforms in the sector.
regulation bill. The RBI panel capped the
write off this amount in March, at the end of Designfreebies Magazine • www.designfreebies.org • 25
GREENEX
CARBON SENSITIVE INDEX BY SHIVANI GHILDIYAL - PGDM - B
G
ment friendliness of the company. Tata Steel has highest weightage reenex, India’s first carbon-efficient live index,
at 6.7 percent. Others in the category are SBI, HDFC, ICICI Bank,
is launched by BSE in collaboration with IIM
Sun Pharma and BHEL. The companies constituting Greenex were
Ahmedabad. It holds 20 stocks that meet energy effi-
selected based on greenhouse emissions in the last 4 years from
ciency norms. In other words, they are top 20 companies measured
2007-08 till 2010-11.
on their greenhouse gas numbers, revenue and market capitalization. These 20 compa-
Why is Greenex built?
nies are selected from
Asset management com-
BSE-100 index.
panies, pension funds,
The companies consti-
insurance
tuting Greenex were
and various institutional
selected
on
and individual investors
greenhouse emissions
can use this index for
in the last 4 years from
investing in companies
2007-08 till 2010-11.
who have a bright future
The quantity of carbon
because of green policies.
emission
based
companies
expected
Greenex will be instru-
to be curbed by this
mental for Government in
index is 100 million
understanding the inves-
tonne. The Index has
tor sentiment towards
been backtested from
accepting the energy
1st
usage
October,
2008
(Base Date) with the base index value of 1000.
and
efficiency
measures. There are many investors willing to pay an extra bit for green investments in companies to get better returns in the future,
Criteria of Evaluation?
by following the norms.
The criteria of evaluation would be ―money a firm saves by being
In order to ensure proper functioning and correct reporting, quality
energy efficient. Some of the norms are- Emission intensity and
disclosure are a must from company’s side. There will be companies
Total emissions / total revenue, which give an insight to environ-
which achieve targets and others who fail to meet them.
26 • Designfreebies Magazine • www.designfreebies.org
Through PAT (perform, achieve and trade) mechanism, companies
ances can take permit points from companies who have surplus
that achieve energy-efficiency targets, over and above stipulated
points, ie. who have reduced the emission below a set target.
limits, can trade their surpluses with those that fail to meet targets
Hence, while some emitters can increase the emission, overall
using energy certificates. Companies that essentially need allow-
level of permissible emissions remains the same.
Designfreebies Magazine • www.designfreebies.org • 27
2013 copyright protected. FinStreet Product