The Curious Case of An Extra Investment Affair Between Banks And Mutual Funds!

RBI is worried these days about close relationship between Banks and Mutual Funds. For quite few years RBI has been observing Banks getting too cozy with the Mutual Funds and finally it has reacted just like any other parent, if they found their children having a girlfriend or a boyfriend. Please don’t turn your wildest imagination on.

RBI on Tuesday, 5^th July, 2011, extended the 10 per cent ceiling of bank investment in liquid schemes of mutual funds to include short-term debt funds. It was already pointed out by RBI in its Monetary Policy of 2011-12 in paragraph 112, that the investment by Banks in Liquid scheme of mutual funds has grown manifold.

Banks normally put in their surplus funds in liquid schemes of mutual funds, which invest in debt securities having maturity within 90 days. Also short-term debt schemes of duration of less than a year give banks higher returns within a short period. In turn, Debt Oriented Mutual Funds (DoMFs) invest heavily in certificates of deposit (CDs) of banks.

Such circular flow of funds between banks and mutual funds could lead to systemic risk in times of stress/liquidity crunch. Thus, Bank could face a large liquidity risk. Hence it was felt by RBI to put a restriction on the maximum of Investment in DoMFs.

As per the circular No. DBOD.No.BP.BC. 23 /21.04.141/2011-12, dated 5^th July, 2011, the maximum Investment by Banks in liquid schemes of DoMFs will be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year. However, with a view to ensuring a smooth transition, banks which are already having investments in DoMFs in excess of the 10 per cent limit, will be allowed to comply with this requirement in six months’ time.

Food Inflation – Prices Are Very Dear!

It was Tuesday afternoon, 1.20 P.M. and I was very hungry. I just had a piece of roti in my mouth and I heard some people talk in the background. Those were my colleagues and were discussing on the rising prices of Onions and Tomatoes. I finished my lunch in 30 minutes but their discussion was still going on. I was not surprise with the length of their discussion and their frustration on the government for unsuccessful attempt to control rising food prices. Food inflation today has been a very hot topic of discussion in our country.

Every morning when I open newspaper it contains headlines on food Inflation, News channels have their special coverage on food inflation, whenever I ask my mother to prepare pav bhaji during Sunday she reminds me about food inflation, Bhel Puri that is available at the chaatwaala contains very less quantity of onion, any order placed with any restaurant do not contains any onion in their salad. The list will not end over here, In fact if you want I can go on and on.         

There is no stopping up for food inflation in India. It’s being two consecutive years we are facing double digit inflation and now we hardly get surprised when we hear about it.  Food inflation in India has been there since March 2008, with no sign of slowing down. After its effect from cereals to sugar it has now started to show its effect on Vegetable, especially Onion.

Government on the other hand is very optimistic. According to them food inflation will relax in three to six months. However it’s another thing that those claims have been made by the Government since last 2 years. May be the road side astrologer sitting with a parrot will do a better job predicting trends in food inflation.  

With every new development in the food inflation, new excuses are played out by our Government. However the fact will never be changed, it is the Government that has either contributed to fuelling of inflation, for example, by hoarding cereals or has completely failed to read the early warning signals. Just some few months back Government food stocks were almost double that of the buffer stock requirement. This was expected to increase further with the new kharif arrivals, and with no feasible plans of offloading stocks that have been rotting for months. Even with vegetables, government actions has been too little, and too late. With the Government clueless, speculators have had a free run on prices.

Domestically it is not a constraint, and not the thing to be worried about. We are in a much better position internally than we have been in the last five to six years, thanks to our farmer who have done well in stepping up production for almost all major food products. As per the latest data, rabi production will hit a record, with wheat output is expected to touch around 82 million tones. There have been significant improvements in cotton and sugar production too. In both, we will be producing more than the domestic demand. The current inflation in vegetable prices is at best seasonal, and suitable action to contain speculative pressures should ease the situation.

Now for time being we will keep aside the domestic bottlenecks and focus our attention on the larger picture; International Food Prices. There is a greater danger waiting outside. International food price have been increasing and is increasing much faster than domestic prices.

More worryingly, global prices are increasing for almost all food groups, in some cases even reaching the peaks of 2008. This increase, which started in July, led to overall food prices increasing to 26% by November. Sugar prices increased by 67%, oils by 44% and cereals by 49%. There is no sign of any slowing down in the international food prices. They are expected to continue with their upward movement.

US is the largest producer of wheat and Australia the fourth largest. However due to severe winter and cold waves in the northern hemisphere, including the US, and massive floods in Australia, there is a major possibility of further wheat shortage in international markets. We have already witnessed highest future prices of wheat in international commodity exchange since August. We can expect similar upward pressure on sugar as well as other cereals.

Adding wine to the fire, oil prices are on rise for the last five months. Crude is currently trading at $92 a barrel and is expected to cross $ 100 a barrel very soon. This would be highest in the last 26 months, and there is a clear danger of crude price touch the peak which was last seen in 2008.

With surge in the primary commodities it is estimated to have affected around two billion people and several food riots have been seen in as many as 26 countries.

International food prices and its effect on the Indian market:

India is mostly domestic driven market and hence largely insulated from global food price. However not the case as far as the crude prices are concerned. There is more worrying factor from international crude prices, which will put upward pressure on domestic prices. This hurt us both ways: Firstly, increase in the cost of cultivation due to rise in fertilizers and diesel and secondly, increase in the transport cost.

Hence even despite our production advantage, India may see food price inflation becoming an ingrained problem. Given the Government record in containing current food price, it’s very easy to predict them fail on their report card.

I guess it’s now high time for us to start worrying. 

BASE RATE - CHECK OUT FOR THE LOAD

BASE RATE – CHECK OUT FOR THE LOAD

A

fter the announcement of RBI to Switch the BPLR to Base Rate, all the Banks in India have affected the change with effect from 1^st July 2010. A Base Rate is a minimum rate which the Bank can charge to its borrower.  RBI’s definition of Base Rate has the following four components:

• Cost of deposits,
• Negative carry on CRR and SLR,
• Overheads costs and
• Returns on net worth,

All new loans sanctioned after 1^st July and those falling due for renewal from 1^st July, (except exempt categories as per RBI Guidelines) will now be priced with linkage to Base Rate. However, the final rate you pay is not just this rate, but an addition of tenor specific premium or load.

Most of the Base Rate announced till date ranges from 6.75% to 8.50%, the load from each Banks varies from 0.50% to 6.00%.

For example, the base rate of IDBI Bank Ltd is 8%. With a load of 0.75% for loans between Rs20 lakh and Rs30 lakh over 15 years, the final interest rate comes to 8.75% (base rate plus load). Similarly, for loans between Rs30 lakh and Rs50 lakh for the same period, the load is 1% and, thus, the final interest rate goes up to 9%. Kotak Mahindra Bank Ltd, on the other hand, has a lower base rate of 7.25% and a higher load of 1.25% for loans for salaried customers, irrespective of the amount and tenor.

Hence one needs to be very much cautious while availing the loan from the Bank. Ideally one should go for a loan that has low Base Rate and as well as the lowest load. Always keep in mind that the Base is variable component while Load is fixed component of the interest rate. Hence while the Base rate will go up and down, Load will always be constant. The best way is to choose the rate is lower load for the same Base Rate.  

Table showing the Base Rate Per Annum for various Banks in India:

BANKS	BASE RATE Per Annum	BANKS	BASE RATE Per Annum
State Bank of India	7.50%	Punjab National Bank	8.00%
Bank of Baroda	8.00%	Union Bank	8.00%
Central Bank of India	8.00%	Bank of Rajasthan	8.00%
Indian Bank	8.00%	UCO Bank	8.00%
IDBI Bank	8.00%	Dhanlaxmi Bank	7.00%
Federal Bank	7.75%	State Bank of Mysore	7.75%
Corporation Bank	7.75%	Karur Vysya Bank	8.50%
Canara Bank	8.00%	Indian Overseas Bank	8.25%
State Bank of Bikaner and Jaipur	7.75%	South Indian Bank	8.10%
Karnataka Bank	8.75%	J&K Bank	8.25%
DBS Bank	7.00%	HDFC Bank	7.25%
Kotak Mahindra Bank	7.25%	ICICI Bank	7.50%
Deutsche Bank	6.75%

Source: www. moneycontrol.com

EMI Calculation - I Literally Went Idiot

EMI CALCULATION – I literally went idiot!

Sometimes small little calculation makes you mad. This happened to me while calculating EMI. I know I am not that good with Math hence always try to avoid it first. Then I remembered I suddenly remembered PMT function in Excel which we once learned during our MBA. However to my surprise it didn’t solve my problem. The figure showed complete mismatch with the actual calculation made by Bank. I know I have good patients and always believe in permutation and combination. But to my bad luck, success for me was far away. This was really hurting and frustrating to me. One small simple calculation and I could not solve.

With the time flying on I had no other option but to ask some of our so called math scholar in my friend. His idea was simple. He began with calculation of Simple Interest by Multiplying Loan Amount multiplied by Number of Months multiplied by Rate of Interest. Then he began to calculate Total amount by Adding Loan Amount and Simple Interest amount and finally dividing the thing by number of months. Hence his formula was as follows:

(Loan Amount + Simple Interest) / Number of Months.

I being not so very good at Math, found the above formula interesting and result oriented. I gave him a big hand shake and a pat on his back. However to my dismay when I run the formula in Excel, the answer can once again incorrect. I firstly though that I might have keyed in the wrong formula, but that was not the case and the formula itself was idiotic. All my happiness went away and once gain I started scratching my mind.

Now it was a high time and I have to solve it and I turned up to Internet. I just typed EMI calculation formula. Most of the results were not good and non operative. But to my luck I found one. Entered the formula in Excel and ran the result. This time it worked and I took a breath of relief.

Really sometime small and easy calculation make us crazy………………………………..

For your reference below mentioned is the same formula

LOAN AMT = P

r = rate of interest per annum in %

i = r/(100*12) --> To make it monthly

N = Number of years for loan

EMI = P * ( i / ( 1 - (1+i)^(-12*N)))

However this made good thing for me and I created Loan amortization schedule in excel which you can check on the following mentioned link on Finance 3.0.

http://www.finance30.com/forum/topics/loan-amortization-schedule-in

Dubai Crisis

Dubai Crisis – Its impact on India.

On 25^th November 2009 Wednesday, Dubai said it would reschedule debt on two state owned entities delay payments for six months.

On 26^th November 2009 Thursday, rumors of a possible default on Dubai sovereign debt started to hit markets. The same day, the Dubai ruling family clarified concerns but credit default swaps reflecting the chances of a default kept rising.

The result was a sharp turn in sentiment which led to investors selling risk assets across equities, commodities and currencies and forcing regulators across the world including India to sit up and take notice.

On 27^th November 2009 Friday, Dubai's debt crisis rattled world financial markets Friday, raising concerns that some banks could further tighten lending and stall the global economic recovery.

The possible spillover effects centered on fears that international banks could suffer big losses if Dubai's investment arm defaulted on its $60 billion debt. Stock and commodity markets tumbled in New York, London and Asia as investors flocked to the U.S. dollar as a safe haven. But earlier concerns that the crisis might trigger another financial meltdown seemed to ease after some analysts downplayed the risks for U.S. banks, which are thought to have little exposure to the Middle Eastern city-state. U.S. stocks fell sharply but rebounded from their lows as investors concluded that the damage might be contained. The Dow Jones industrial average lost about 155 points, or roughly 1.5 percent, in a shortened trading day, and other stock averages also sank. Oil prices plunged as much as 7 percent before recovering some ground later in the day.

European banks appeared to be at most risk if Dubai World can't pay its bills. London-based lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177 million respectively, according to early estimates from analysts at Goldman Sachs. Both have substantial Middle East operations.

South Korea estimated the country's financial institutions have just $88 million in exposure. Construction firms from Japan, Australia and South Korea behind Dubai's recent development boom also might be on the hook.

Among U.S. banks, Citigroup Inc. had $1.9 billion in exposure to the United Arab Emirates as of 2008, according to a JPMorgan research note. But it's unclear how much of that was related to Dubai.

What went wrong?

Dubai is part of the United Arab Emirates, seven city-states which have separate ruling families, separate budgets, but security, immigration and foreign policies in common. Abu Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s on diversified its economy into ports, trade, services and finance, largely successfully. But its liquidity-fuelled real estate and tourism binge in the last decade may have been one step too far.

The property crash hit Dubai at the time - house prices fell 50 pc in six months. Nakheel was known to be in trouble. But investors assumed that as a state-owned company it would not default on its debt. The government refused to issue detailed statements of how it was to handle Dubai World's debt problems, and rounded on those who said that the crash had undermined Dubai's development model. This encouraged a belief that a rescue package was already in place, probably funded by Abu Dhabi. The statement on Wednesday that the government was asking for a six-month standstill on repayments implied the rescue was in doubt.

The emirate has said it has $80bn of debts, though some analysts say the true figure could be double that. Dubai World, the state-owned holding company whose bail-out plans triggered the current crisis, has liabilities of about $60bn, though only part of that is debt. The main problem is its real estate subsidiary Nakheel, which has huge bonds coming due, including an Islamic bond for $3.5bn in December. It appears to have little cash flow to meet payments - as well as relying on debt, it also sold most developments off-plan, with new developments now on hold.

As the first chart shows, Dubai’s sovereign credit default swaps (CDS) are soaring in the wake of the news that Dubai World wants a standstill agreement on roughly $60 billion of debt.  Even though Dubai World is a corporation seeking the agreement, the markets are clearly treating this as a sovereign debt issue.

As the second chart shows, this is causing a “contagion” among the credit worthiness of other gulf sovereign debt.

Dubai Crisis and its effect on India:

India is supposed to have a very less impact as far as the Dubai Crisis is concerned. India will continue to grow at 6.5%, the reason being Indian economy is driven primarily by the domestic demand.

Effect on Banking Sector:

Banks understood to be having lending exposure to Dubai — Bank of Baroda, ICICI Bank and State Bank of India — said their exposure to real estate firms in the Gulf region was either nil or insignificant. 

"We have only 7-8 per cent of our total loan-book in the entire Gulf region, which amounts to Rs 10,000 crore. These accounts are well maintained and are unlikely to cause any kind of impact on the balance sheet,” - Bank of Baroda's Chairman and Managing Director M D Mallya.

Country's largest lender, State Bank of India,  also clarified that it did not see any concerns emerging on account of the Dubai crisis as the bank has only minimal exposure in the UAE, bulk of which are short-term loans. 

Effect on Real Estate Sector:

A majority of big real estate developers in India said they are insulated from the financial crisis in Dubai and it will not have any impact in the country's property market. 

DLF, Unitech, Parsvnath Developers and Emaar MGF all said they have no exposure in Dubai, while Omaxe said it has an investment of Rs 40 crore which it has asked for refund. 

Effect on Indian workers in Dubai:

It's well known that when Dubai sneezes, south India, especially Kerala, catches more than just a cold. Last September, when Lehman Brothers collapsed triggering the great recession, the arrivals at Chennai, Hyderabad and Thiruvananthapuram airports wore a grim look. The news of Dubai World's inability to repay the $59 billion debt has triggered similar fears among the relatives of immigrants back home. 

UAE is the favorite destination for a maximum number of overseas Indian workers - 3.4 lakh people went to the country in 2008 - but the number has been fast declining as Indian workers are unable to get new contracts or extensions in the country that's in the grip of recession. Over 5 lakh Indians have returned from Dubai since September 2008, of which two lakh are Malayalees. Almost 60% of these people are technical or non-technical skills professionals. Over 50 lakh Indians work in the Middle East of which 20 lakh are from Kerala.

To sum up Dubai effect on India, we can say that the real impact will be limited. Remittance flows from Dubai, which account for about 10 per cent of overall remittances, could see a slowdown in the short term. Capital flows may see a mild reversal turning the equity and currency markets volatile but corporate exposure to Dubai appears to be limited to a handful of realty and infrastructure companies. And barring a few banks like Bank of Baroda which has operations in Dubai, the Indian banking sector seems relatively insulated.

Please check the video on this link:
http://connect.in.com/dubai-crisis-2009/play-video-dubai-debt-crisis-likely-to-hit-wokers-from-kerala-bac58209c3229d7c29d723a79ac670b8b8865310.html

Can Dubai Survive?

Dubai is still seen as the premier place to do business in the Middle East and beyond. It is a preferred base for not just Arab but Pakistani, Iranian and even Indian businesses, due to the wider region's political uncertainty. Its reputation for liberal attitudes helps. But events like this will have damaging effects on its reputation for economic competence, which the emirate's rulers will now have to work hard to restore.

However, what will be the real impact of the Dubai issue will depend upon how the newly appointed Dubai World's chief Aidan Berkett will handle the restructuring of this investment and property giant. But it has triggered much awaited correction in global equities, which can last longer then expected. So traders be cautious, lighten the long positions and wait for situation to calm down or let the restructuring happen or help to flow in from friends and neighbors of Dubai. For now, extreme caution is warranted.

"We shouldn't react to instant news like this. One lesson that we learnt from the (global financial) crisis is that we must study the developments and measure the extent of the problem and hence study the impact on India,"

-- By Dr D Subbarao, Governor of RBI.