MUMBAI: Higher-than-expected growth numbers have renewed concerns that Reserve Bank of India may soon initiate measures to mop up surplus liquidity, which left by itself could drive up prices of assets and commodities in a fast-growing economy.
Bankers feel that the cushion of surplus cash with banks may prompt the central bank to prioritise liquidity management over rate hikes. A reflection of surplus liquidity in the system is the amount of funds banks park with Reserve Bank of India, which is over Rs 1 lakh crore.
According to Jahangir Aziz, chief economist, JP Morgan India, ` I think tightening will be first focused on sucking out excess liquidity through CRR hike and later through rate hikes. Much of it will be driven by the central bank’s concern on the possibility of an asset price inflation.’
Convetionally, a situation of high growth and inflation is a trigger for the central bank to signal tight money conditions and hike policy rates. However, in the current circumstance with ample liquidity in the system and low credit offtake, the rate hike may be ineffective. Moreover, the current inflation is reckoned to be more due to supply-side factors. In such a situation, monetary measures may not be helpful.
Everbody, including the policy advisers at the Reserve Bank of India (RBI) and the government, would wait and see how inflation pans out by early January.
The initial signal is expected to be through liquidity sucking measures like a hike in cash reserves requirement (CRR) a portion of deposits that banks raise that needs to be mandatorily parked as cash with the central bank . Currently the commerical banks have to park 5% of the deposits they raise every fortnight as CRR with the RBI.
Most banks and research firms including Citigroup, ING Vysya , J P Morgan Goldman Sachs, Macquarie Securities, Barclays Research expect the Reserve Bank to hike its benchmark policy rate- Repo rate only in 2010. While some expect the central bank like Goldman Sachs, Citi and J P Morgan to act from January itself, while others see it happening only by March April.
` With liquidity remaining in surplus, liquidity tightening measures will likely precede rate hikes. We maintain our call of 125basis points (bps) 1bps=0.01%) tightening in 2010 as inflation is primarily supply side drive and excess tightening would have implications for the rupee.’ said Rohini Malkani, economist Citigroup India
Barclays Capital Research in a report has said that, the rhetoric on monetary policy could turn more hawkish in the next few weeks. This is based on statement by key officials in the recent past. Last week, C Rangarajan, a former RBI governor and the current chairman of PM’s economic advisory council, suggested that monetary action could be initiated if food prices continue to rise in November and December. RBI Governor Subbarao also suggested unwinding of “unconventional stimulus measures” as the growth recovery continues.
No clarity yet on brokerage fee, securities transation tax yet.
At least 10 domestic mutual funds (MFs) would list their schemes within a week on the National Stock Exchange’s (NSE’s) Mutual Fund Services Platform, which was launched on Monday.
UTI became the first MF to list its scheme, which got more than 300 applications worth around Rs 75 lakh.
The platform will enable investors with demat accounts to buy MF units on the exchange. UTI Asset Management Company Chairman and Managing Director, UK Sinha, said, “The tie-up will be an additional facility provided to investors and will work along with the existing distribution network.”
NSE has over 200,000 trading terminals spread across 1,500 towns and cities.
Securities and Exchange Board of India Chairman CB Bhave said, “The platform will benefit investors in a major way. Other stock exchanges and depository participants will launch the platform soon.”
Transactions on the platform will be processed on the same business day on which the investor’s funds are credited to the MF’s bank account. Investors also have the added advantage of obtaining the same day’s net asset value (before 3 pm).
In addition to online subscription and redemption, investors may apply for new fund offers and additional subscriptions. The facility will also enable switching of units.
No entry load will be charged for applications not routed through a broker or distributor but forwarded to MF houses online. There is no clarity on levy of brokerage and securities transaction tax. NSE officials declined comment on this.
NewsWire18 adds:
However, NSE would not levy any fee on mutual fund transactions through brokers on its online platform for a few months, Managing Director Ravi Narain said on Monday.
India’s largest bourse also plans to offer systematic investment plans and liquid schemes on the platform, Narain said. Participants will be able to access the system from 9 am to 3 pm.
Meanwhile, five mutual funds, Birla Sun Life Mutual, ICICI Prudential Mutual, Fidelity Mutual, Reliance Mutual, and Tata Mutual, were in talks with NSE and NSDL for trading schemes on the platform, said NSDL Managing Director and Chief Executive Officer Gagan Rai.
NSDL, the only depositary participant roped in by NSE for its platform, would waive all depositary charges for the first few months, Rai said.
“We are still in the process of working out. But I can assure you that charges (after the first few months) will be much less than the normal depositary charges,” he said.
Our Bureau
Mumbai, Nov. 30
The first day of trading on the new mutual fund platform of the NSE saw UTI Mutual Fund garner Rs 77 crore through 316 orders, a news release from the bourse said.
The amount was collected through sale of fresh units, said an official at UTI MF.
Among the 30 equity schemes and 92 sub-schemes of UTI Asset Management Company available on the platform, the most active scheme was UTI Opportunities Fund, which fetched 90 orders, the release said.
The online platform, called Mutual Fund Service System (MFSS), has received encouraging response with about 100 brokers entering into tie-ups, said Mr Ravi Narain, MD-NSE, at the launch function for the platform.
Around 18 trading members were registered in MFSS as participants.
UTI became the first fund house to tie up with NSE for the platform, which allows investors to buy and sell units through the exchange network. NSE brokers who are also ARN holders (distributors) will be given the facility to enter requests received from investors for purchase and redemption of UTI MF units.
NSDL, the depository for the platform, will waive depository charges for the first few months. Even the charges that would be introduced will be lesser than the usual, Mr Gagan Rai, MD & CEO of NSDL, said.
Reliance, Birla Sun Life, ICICI Prudential, Tata and Fidelity mutual funds are in talks with NSE and NSDL for the platform, said Mr Rai.
The NSE will not levy any fees on mutual fund transactions on the new platform for a few months, said Mr Narain of NSE.
Investments of an individual would be in one demat account and a consolidated statement of investments would be available, said Mr U.K. Sinha, CMD, UTI Mutual Fund.
While this platform is for brokers, the AMFI platform that is due to be launched in March will be available for even those investors who do not have a demat account, said Mr A.P. Kurian, Chairman, Association of Mutual Funds of India.
Life insurance sector to grow by 15%
India’s life insurance sector is expected to grow by almost 15 per cent in the current financial year and touch a total premium income of Rs 2,55,000 crore (about $ 50 billion).
“Despite the slowdown in economy, the sector has been on a growth trajectory, as the policyholders are realising the value of insurance,” Life Insurance Council secretary general S B Mathur said at a conference call.
The domestic life insurance industry has been on a high growth curve after the sector opened in 1999. Since then, more than Rs 25,000 crore capital has been deployed by the 23 private companies.
Last fiscal, the total premium, including renewal and new business have grown more than eight times to over Rs 2,21,000 crore.
He further informed that the penetration of life insurance sector was also increasing rapidly and the total industry size as percentage of GDP was likely to touch 4.19 per cent this fiscal, up from four per cent in 2008-09.
“Besides, our share in the world premium increased to around two per cent last fiscal, up from half per cent in 1999-00,” he added.
On the recent talk of cap on agent commission, Mathur noted it would only impede the growth of the sector. “Besides, the percentage of agent commission is already crashing and it is almost six per cent of the total premium now as compared to 12 per cent in 1999 due to competition,” he said.
http://www.business-standard.com/india/news/life-insurance-sector-to-grow-by-15/378035/
General insurers bogged by underwriting losses
Indian general insurance companies, which have been posting underwriting losses for the past several years, want the industry regulator to give them a better room to grow.
The general insurers want Insurance Regulatory and Development Authority (IRDA) to allow for at least 175 per cent hike in the third party insurance premium of commercial vehicles and better regulation of health service providers to cut on losses in health insurance.
“We have been urging IRDA to revise the third party insurance premium rates for commercial vehicles, since at present the premium rates are fixed and the liability is unlimited,” Oriental Insurance Company CMD M Ramadoss said addressing a national conference on insurance organised at the Jaipuria Institute of Management here.
Commenting on the heath of general insurance industry, he said the industry size at present was over Rs 31,000 crore, while the total underwriting losses were worth almost Rs 1,500 crore.
“Although, the companies have been making net profits, it is purely on basis of investments and not insurance activities,” he said adding all general insurers were posting underwriting losses, save one private insurer, which was making marginal underwriting profit.
There are about 18 general insurers functioning in the country, while 3-4 more players are likely to join the fray in the next fiscal.
“The mounting losses in the general insurance sector are discouraging and are in fact eating away our investments,” Ramadoss lamented.
Besides, he also mentioned that the pricing of fire insurance was very important in present times, when the companies, due to intense competition, had slashed their premium rates for this segment by almost 80 per cent.
“It is the onerous task of the IRDA to ensure that the risk carrying capacity of the general insurance companies is rectified,” he added.
Ramadoss also mentioned the paucity of qualified people in the insurance sector and the lack of core computerisation of companies on the lines of Core Banking Solution (CBS) of banks, which was impeding their growth and penetration.
http://www.business-standard.com/india/news/general-insurers-bogged-by-underwriting-losses/378034/
BANK
Yes Bank set for mega retail push
Rana Kapoor points towards an iron-steel model of a cheetah at full gallop which adorns the tables of Yes Bank’s top management team. “The time for baby steps is over. That’s the speed I am looking at,” he says.
The new-generation private sector bank, which will complete six years of operations in March 2010, has drawn up the broad contours of its next five-year plan, called Version II, which will see a big push into retail, which now comprises just 1 per cent of the total business.
The founder, Managing Director & Chief Eexcutive (CEO) of Yes Bank says the bank will roll out the entire suite of retail asset products like educational loans, secured personal loans and of course, credit cards, by 2012. Retail broking and mutual funds are the other areas on the radar.
Kapoor says the bank does not want to build the card business through the open market and will tap its existing customers for issuing credit cards.
Consider the speed at which the bank proposes to move. It is looking at a five-fold rise in its balance sheet to Rs 1,50,000 crore and becoming a mid-size bank by 2015.
While corporate business will continue to be the bank’s bread and butter with constant innovations, Yes Bank proposes to step up lending to small and medium enterprises (SMEs) in a big way. Kapoor says the SME plan needs a lot of intelligent planning as it can’t be a me-too strategy.
But the real focus will be the retail business where the bank proposes to prop up its net interest (NIM) margins. The target is to increase the current account and savings account deposit share from 9 per cent to 25 per cent by 2012. “If we can do this, our NIM should go up from 3 per cent now to between 3.75 per cent and 4 per cent,” Kapoor said.
This calls for a huge increase in the number of branches. From 123 branches at present, Yes Bank wants to reach 250 branches by 2010, 400 by 2012 and 750 by 2015. The manpower is targeted to go up from 2,700 now to 10,000 by 2015.
This is a completely different language for a bank which chose to sit out when just about everybody was entering retail banking. Now, it is set to press the accelerator harder.
Kapoor founded the bank in 2004 with a capital of Rs 200 crore. on Monday, Yes Bank has Rs 2,400 crore income, a balance sheet of nearly Rs 30,000 crore and market capitalisation of Rs 5,000 crore. Its net profit was Rs 304 crore last year.
Kapoor reels out figures to show why he is proud of what his team members have done so far. Apart from being the fastest-growing bank, Yes Bank has a capital adequacy ratio of 17.6 per cent, which means it can grow over 35 per cent without raising further equity by relying on just its profits and debt capital. The bank has a stable provisioning cover of 51 per cent and the Rs 120 crore restructured loans account for less than 1 per cent of the total loan book.
The bank had firmed up plans to scale up retail business in 2007-08 but decided against it after sensing the rising risks.
Ruling out the inorganic route for growth, Kapoor says, “We are not looking at short cuts. The bank would like to be in control to manage risks when it grows upwards of 35 per cent (The current growth rate is 50 per cent).”
While scripting growth, the top management is clear that the domestic market will be at the centre of operations. Any plans to venture overseas will be driven by the needs of Indian companies which are spreading wings rapidly in international markets.
Banking being a capital-hungry business, more so when regulators the worldover are raising minimum capital ratios, Yes Bank expects to inject $1.2-1.5 billion capital in three rounds. The first round of about $250 million is expected before the close of this financial year and the next 18-24 months down the line.
As any expansion of capital may dent the bank’s return on equity (RoE) and earnings per share in the short run, Kapoor is quick to point out that capital injection will be done in such a way that the RoE is restored to 22-24 per cent in five-six quarters.
The bank wants to keep a tight control over costs. Kapoor said the cost to income ratio would be kept around 40 per cent.
While giving performance-linked compensation and stock options, Yes Bank has given co-founder status to three top management persons — Rajat Monga, Somak Ghosh and Aditya Sanghi — who have been part of Kapoor’s team since the inception of the bank.
Banks’ association says the process needs a huge effort.
Banks may seek time beyond the March 2011 deadline to shift to International Financial Reporting Standards (IFRS) in view of the mammoth effort required for the switover, according to industry sources.
The Indian Banks’ Association (IBA) today said its management committee last week discussed the implications of the convergence.Banks, it felt, faced various challenges while implementing IFRS, most of which pertained to fair value accounting, erosion in value of loans and investments, and derivatives and hedge accounting.
“We want clarity on who will issue specific standards, whether it is RBI, ICAI or the Ministry of Corporate Affairs. When Basel-II norms were prescribed, there was much clarity on regulatory and other issues. We require more time beyond March 2011”, said a senior IBA official.
While the committee agreed that migration to IFRS was necessary, it extensively discussed the proposed schedule.
The association said there was a need to collect detailed information of the preparedness of banks as well as the ICAI to comply with and guide on various aspects of IFRS. After gathering feedback, the bankers’ body would submit its recommendations to RBI.
The first challenge, it felt, pertained to loan and investment erosion. Banks would need to build models to assess facts and circumstances on the recoverability and timing of future cash flows from credit exposure. They will have to strengthen systems for capturing data to assess impairment and spruce up their loss-forecasting mechanism.
The second issue pertains to the fair value of financial investments. At present, this measurement is not done frequently under the Indian Generally Accepted Accounting Principles (GAA). Under IFRS, there will be a significant increase in use of fair value measurements. Also, due to stringent criterion, the held-to-maturity classification is unlikely to be available for a substantial part of the portfolio. Banks would have to keep their valuation methods and practices up-to-date, validated and back-tested under the current market environment.
A treasury head of a public sector bank said there could be a substantial change in how the derivatives transactions were treated in valuations. IFRS prescribes that all derivatives are recognised at fair value. In contrast, the Indian GAAP does not specifically address fair value and hedge accounting. For implementing stringent standards, banks wil have to formulate hedge accounting policies and spread awareness about these.
The fourth aspects concerns derecognition of a financial asset. It is quite complex process under IFRS and depends on whether there has been a transfer of risks and rewards. This could impact securitisation of assets since most special purpose vehicles are structured to meet the Indian norms.
Finally, banks wil have to grapple with consolidation of entities for financial purposes. Under IFRS, this is not driven purely by the ownership structure. Instead, the focus is on the power to control the entity to get economic benefits. This power could be expressed by ownership of an equity stake but not limited to it. Global norms provide much more rigorous consolidation tests while the Indian GAAP focuses on narrower set of tests like majority ownership and composition of board of directors.
Strong public opinion in favour of regulation, says SEBI member
Our Bureau
Thiruvananthapuram, Nov. 29
More than half of a representative sample of people surveyed in India has expressed itself in favour of persisting with the current level of regulation of the stock market, if not scaling it up to the next.
Delivering his inaugural address at the 20 {+t} {+h} annual celebrations of Capstocks and Securities Ltd, a Thiruvananthapuram-based broking house, Dr K. M. Abraham, Whole-time Member of the Securities and Exchange Board of India (SEBI), said here that as much as 54 per cent supported the existing regulatory environment.
MORE, OR LESS?A sample of 40,000 people across 27 countries was reached to for their response to the question, “Do you want more regulation or less?” Only a minority in India wanted less regulation.
What was more surprising was that in the US and the UK, 75 to 85 per cent of the people surveyed had rooted for more regulation. “We need to regulate prudently and intelligently but without stifling the market,” Dr Abraham said.
He stressed on the integrity aspect in informed regulation. If there is no integrity, it could play havoc with regulation.
“There are 8,500 registered stock brokers, 60,000 sub-brokers, 200 registrars, 250 portfolio managers, 1,700 FIIs and 5,000 sub accounts. IT is hard job for SEBI to regulate such a huge infrastructure. So there should be some sort of self-regulation coming in at some point,” Dr Abraham observed. “The first line of regulation used to start with stock exchanges, but I would say that the first line should ideally be the stock brokers,” he added.
Dr Abraham exhorted Capstocks to look at the next 10 years and recognise the challenges posed by technology. If the world processed at the speed of one lakh to three lakh transactions a second, India was going at 5,000 to 10,000.
LATENCY ISSUE
He also mentioned about the latency issue that involved the time taken for an order to be made, processed and delivered – decision latency, processing latency and execution latency.
“The first message that I would like to give is invest more in technology. The second is that always be sure that you are on the learning curve,” he said.
Recalling from SEBI's routine action-based database, he said he had got a report on Capstocks that declared that there was ‘zero omission' on the part of the company. This made for an unblemished record that the company can always be proud of, he said.
Mr V. Rajendran, Managing Director, Capstocks, retraced the humble beginnings of the company in 1989 and how it had to struggle through the initial years.
Among others who spoke were Mr P. S. Reddy, Executive Director, and Mr Sunil Alvares, Vice-President, Central Depository Services Ltd (CDSL); Mr S. Srinivasan, Director, Capstocks; and Dr S. Kevin, former Pro Vice-Chancellor, University of Kerala.
Following reports that the cigarettes-to-hospitality major, ITC, could make a hostile bid to increase its stake in EIH, which runs the Oberoi hotel chain, ITC Chairman Y C Deveshwar today asserted that his company could even raise its stake up to 25 per cent in EIH.
“We are open to increasing our stake in the company but even if we do so, it (the stake) will not exceed 25 per cent,” Deveshwar told reporters here on the sidelines of the conference. He added, “No company remains shut on thinking and ideas,” with a rider that “the decision lies with the board”.
If the ITC board opts to raise its stake to 25 per cent, it will be just one per cent short of the level which will give it the power to veto special resolutions of the board.
However, it will simultaneously have to make an open offer for acquiring an additional 20 per cent, under the compulsory rule of the Securities and Exchange Board of India (Sebi).
ITC’s present 14.98 per cent stake in EIH is just short of this trigger, which takes effect at 15 per cent.
Deveshwar’s comments come a day after he indicated that ITC make not be dormant while Max India Chairman Analjit Singh plans to buy another 17 per cent stake in EIH. Singh currently holds nine per cent in EIH.
Deveshwar had said on Wednesday that “If somebody (read Analjit) else is entering the fray, I do not discount that we will rethink. If any new events take place, I am not saying that we will stop thinking.”
Till recently, ITC is reported to have been in talks with the Oberois for a partnership, and has maintained that it was not looking at a hostile bid for EIH.
On ITC Group’s expansion in the hospitality sector, Deveshwar had said the company was looking for both organic and inorganic growth but would broadly focus on the domestic sector.
Shares of EIH today closed at Rs 138.60 on the Bombay Stock Exchange, up 4.52 per cent over previous close.
Our Bureau
Kochi, Nov. 26 “In a developing economy like India, the opportunities far outgrow challenges in the private equity space compared to most other economies,” Mr Avinash Gupta, India Leader, Financial Advisory, Deloitte said. However, investment and business plans should be developed with a deep understanding of the issues unique to India, owing to its complex economy, policy and the regulatory framework. Although there are signs of global recovery, businesses are worried about capital and private equity is emerging as a viable option, he pointed out.
At a discussion forum in Kochi, Deloitte shared insights on the scope of PE investments, the opportunities for growth and the potential challenges. It explained the due diligence process, documentation and other basic procedures involved in raising private equity funds.
The forum also discussed issues specific to Indian businesses looking for structured investment and capital. Deloitte announced the findings of its inaugural Emerging Markets Comparative Private Equity survey across eight economies which showed that while long-term investor confidence remains positive, the economic downturn’s impact is still felt across all emerging markets. Short- to medium-term investors, however, display a cautious attitude towards new investment, resulting in decreased competition levels.
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