Escorts Mutual Fund

still in the red. The average one-year return of most funds with a global focus has declined between 3.4% and 14.5%, data shows.

Those with a strong exposure to US companies have suffered the most while funds that invest in emerging markets and Asia have weathered the storm much better. While MFs have posted strong returns on the back of a sharp rally in the equity markets here, their peers that invest abroad have lagged behind as benchmark indices in several markets have not kept pace with the Indian markets.

"Most developed markets have returned about 40% lower than India (indices). As a result (global focused) funds have not recovered fully," says Sankaran Naren, CIO, equity, ICICI Prudential MF. Though sensex and Nifty have gained only 2.7% and 2.3% in one year (up to September 2), nearly one in every three diversified equity MF has given double digit returns during the period. In all 196 out of the 250-odd funds under consideration for the period managed to stay in the positive territory.

Sensex and Nifty are second best performing indices among emerging markets and have outperformed the Dow and Nasdaq by a wide margin. While sensex and Nifty have gained 65% and 59.9% in the year (up to August 28), the Nasdaq and Dow gave only 28.6% and 8.7% returns. Even the Hang Seng and Shanghai composite have underperformed Indian indices posting 39.7% and 57.1% returns.

"Many of these markets are dependent on international trade. In some of these geographies the share of commodities is relatively much higher," says Krishna Sanghvi, head, equity, Kotak Mahindra MF. "Since domestic demand drives economy here we have done better." With economic recovery taking shape in the west the stocking of goods is expected to gather steam improving performance of export driven Asian economies, says ICICI's Naren. "It is a good opportunity to invest. India has outperformed most global markets till now but this is likely to come down," he says.

I had invested in Magnum Tax Gain and Fidelity Tax Advantage via Systematic Investment Plans (SIPs). Despite the recent regulation by Sebi abolishing the entry loads, my investments in August were made subject to an entry load. Is the new regulation not applicable for existing investors as well?
-Mohit
The new norm regarding the abolition of entry loads in mutual funds is applicable only to SIPs registered on or after August 1. SIPs registered earlier will continue to be subject to entry loads. If you wish to avoid this, you may consider discontinuing the present SIPs and starting new ones.
What is the difference between the Net Asset Value (NAV) of a fund and market capitalisation? Are they important while deciding which fund to buy?
-Kiran Nayak
The NAV of a fund merely reflects the market value of securities represented by a single unit. It is the total of assets managed by the scheme divided by the number of units subscribed to it.
On the other hand, the market capitalisation is the sum of weighted market capitalisation of the stocks a fund holds. For example, if two stocks, X and Y, comprise 30 per cent and 70 per cent of a fund's assets and their market capitalisations are Rs 200 crore and Rs 500 crore, respectively, the market capitalisation of the fund will be Rs 410 crore.
While choosing between two funds, a higher or lower NAV is immaterial, as the value of investment will be the same. It is the fund's returns that should govern investing decisions. But a fund's market capitalisation can tell about the size of companies it has invested into. The larger the cap, the more it will be holding onto bigger companies. This can be used for ready comparison, to find if a fund is a large-cap or mid- or small-cap.
Do the returns under the daily, weekly or monthly dividend options in liquid funds differ? Which option should I choose if I want to invest in a dividend reinvestment option?
-Murthy
The returns under different dividend frequencies do not differ, as the underlying portfolio is always the same. Whatever the return, it is the same for all. The point of difference is that in one, dividends will be distributed more frequently than the other.
Moreover, all the dividends distributed under liquid-plus schemes are subject to dividend distribution tax of 28.33 per cent. It will not matter which dividend frequency you choose.
I invested in the ICICI Income Plan on August 20. Despite this being a pure debt fund, the NAV has been going down. Are debt funds not supposed to be safe? Do they give negative returns as well?
- Mehul Somaiya
Contrary to general perception, the principal and returns in debt funds are not assured and can give negative returns. But, certainly, they are not as volatile as equity funds. The market prices of debt instruments are inversely related to interest rates. Whenever interest rates rise, the value of debt instruments will go down. As a consequence, the debt funds lose. This volatility is observed more in medium- and long-term debt funds than short-term debt funds and liquid funds.
Due to the ongoing government borrowings, the interest rates went up during August. The fresh bond issues caused their prices to fall, and hence the medium-term debt funds lost. We further expect the medium- and long-term debt funds to be volatile in the coming months. The average return of this category for the month was minus 0.44 per cent, while the fund had lost 0.45 per cent.

NEW DELHI: EPFO's advisory body, Finance and Investment Committee, will firm up its view on parking three-five per cent of its Rs 2.57 lakh crore corpus in the capital market early next month.

The proposal, if approved by the Employees' Provident Fund Organisation (EPFO), would result in Rs 13,000 crore flowing into the stock markets.

The Finance Ministry in August last year asked the EPFO to look into the possibility of investing up to 15 per cent of its corpus in the stock markets to earn better returns for its 4.5 crore depositors.

Overcoming its initial hesitation to park funds in the stock markets, the EPFO showed some willingness to invest about 3-5 per cent corpus in the stock index.

In a recent meeting of the FIC, an EPFO official favoured parking 3-5 per cent of the funds in stock market through a detailed presentation. "Index-based strategy for investment in equities would be most suitable for EPFO's need", he said.

After evaluating the proposal, the FIC would make necessary recommendations to the EPFO's apex body, the Central Board of Trustees (CBT), for the final decision. It is a general practise that FIC recommendations are accepted by CBT.

During the recent meeting of FIC, it was felt that alternative avenues are a must to enhance or maintain overall returns to subscribers as fixed-income products would lessen in future as in the developed economies.

Investment in equities provide a good hedge against inflation, unlike fixed income securities, the EPFO official said in the presentation. That means equities investment is better than fixed income securities.

The EPFO has not invested in stock markets so far. Earlier this July, the CBT dumped the proposal of parking up to 15 per cent of its funds in equities under a new investment pattern suggested by the Finance Ministry in August last year.

Earlier in March this year, the FIC had also turned down the Finance Ministry's proposal of parking up to 15 per cent EPFO funds in companies listed on the Bombay Stock Exchange and the National Stock Exchange, and also the equity-linked schemes of Sebi-regulated Mutual Funds.

After the proposal was dumped by CBT in July, the Finance Ministry Joint Secretary K P Krishnan made a suggestion to invest 3-5 per cent of EPFO's corpus in stocks index.

Krishnan told the Trustees that EPFO could begin by parking 3-5 per cent of corpus in stock index, if the CBT members had reservations about investing in equities.

Krishnan had also said long-term investments in the stock index would generate healthy returns to the EPFO with negligible risk.

MUMBAI: Goldman Sachs Asset Management LP (GSAM) has revived its plan to start mutual fund operations in India, a person familiar with the matter told ET. Late last year, GSAM had deferred the launch due to uncertain market conditions.

GSAM, a subsidiary of the Goldman Sachs Group Inc, had received Sebi approval in September 2008 for starting the mutual fund. Adam Broder was brought in from as chief executive officer, and Prashant Khemka was appointed the chief investment officer. With the launch being delayed, Broder was recalled to Goldman’s Hong Kong office, while Khemka moved back to managing portfolios of private clients of Goldman.

An e-mail questionnaire sent to Goldman Sachs elicited the following response. "After we decided to postpone our local funds launch in November, we have retained our offices, our local asset management licence and importantly our Indian equity investment team in Mumbai, headed by Prashant Khemka, who continues to lead the business. We are constantly evaluating the Indian domestic mutual fund market from a distributor, macro and regulatory perspective to identify the most appropriate time for our launch. We remain very focused on expanding our asset management business in India."

ET has learnt that GSAM is planning to launch schemes that will invest in international markets, using the 'feeder fund' concept.

A 'feeder fund' is one that invests through another fund called the master fund. The local fund would buy units of a global fund managed by the international 'parent' group or fund.

For the Indian investor, this a convenient way to have an exposure to international markets. However, a major concern is the double layer of fees that may be payable since there are two sets of fund managers — one for the host fund and one for the feeder fund.

This can significantly eat into the projected returns. More often than not, such schemes find more favour with HNIs, though fund managers say there is a fair bit of interest amongst the retail too, depending on the product.

Among others, DSPBlackRock has two feeder funds, one of which is the 'World Gold fund', launched in July 2007 (by the then DSPML) which is a feeder fund that invests into BlackRock’s World Gold fund.

The funds corpus is currently Rs 1,400 crore and is said to be the largest feeder fund out of India. DSPBlackRock also recently closed its second feeder fund, the World Energy fund, which largely invests into the BlackRock World Energy Fund. It raised around Rs 360 crore. A certain percentage of the domestic fund will also invest into BlackRocks New Energy Fund.

"Feeder finds provide access to an investment theme not available locally. It also brings about an element of diversification to one's portfolio," S Nagnath, president & CIO of DSP BlackRock told ET. Mr Nagnath said they have plans to introduce more such products in the near future.

JP Morgan's Greater China Off-Shore Fund is also a feeder fund for a pre-existing fund. JPMorgan AMC, India, has indicated that it will bring in a bouquet of international funds to India through the feeder route during this year.

L.N. Revathy
All the information you want at the push of a phone button. This was the promise on which the Interactive Voice Response Service (IVRS) took off.
The IVRS in Railways was a big hit in the initial years of its introduction. You will probably recall that the caller, after dialling the number and stating his language preference using the touch tone, could get information about train arrivals in a particular station/junction over the next two hours without having to call the Station Master or Superintendent each time.
The system lost its appeal here to some extent, with the traveller touching base — using his mobile to inform his host about the tentative time of arrival or location of the train.
Apart from the Railways, financial services companies, including banks, were amongst those who went for IVRS installation. But they soon found that the caller invariably dropped the call mid-way. The caller could not be blamed, for the options were confusing and too many.
“This posed a big challenge to players in the financial services, telecom and service industry, among others. On the one hand, customer expectations in terms of service and user experience were on the rise and on the other, the competition compelled them to look for cost-effective and user-friendly solutions,” says Gopal VT, Business Manager – Communications and CIS, Datacraft India.
“So, when SBI Mutual Funds approached us, we implemented a speech-enabled IVRS, which is a combination of two products — Cisco’s IP IVR as a product and a speech recognition solution powered by Nuance (News-Alert) designed to increase user experience,” says Gopal.
With a varied list of funds and a growing customer base of over 6 million, SBI MF was finding it difficult to handle customer calls. The contact centre agents could not but put the call on wait before getting the net asset value (NAV) and impatient clients were dropping the call mid-way.
The speech-enabled IVR service, implemented four months ago, in now playing a key role towards improving end-user interaction, say SBI MF sources.
“A touchtone-only environment would have made the system cumbersome. This solution seeks to improve customer service by offering more intuitive access to information and streamlining transactions, shortening on-hold time and overall call duration,” says Gopal.
He discloses that the decision to opt for a speech-enabled IVR solution was based on surveys of frequent customer calls and analysis of call patterns.
Pass code
How does this service work? After dialling in the number, the customer receives the usual IVR response — ‘Welcome to SBI MF’ before the speech engine takes over, to find out if the ‘call is to get the NAV’, and if ‘yes’ asks for the pass code, does a search and gives the NAV.
“We prepared the speech engine in such a manner that in which ever way the customer asked, it would recognise, may be at times ask to repeat the query to perform the dialect check,” explains Gopal.
Over 3,000 callers hit the SBI MF contact centre every day. At least 40-45 per cent of these are at present addressed by the IVR and Speech Recognition engine.
Datacraft is in talks with the Railways, large credit card houses and insurance companies and airlines for implementing the speech-enabled IVRS.
Customer take
G.N. Rao and R.V. Nathan, investors in SBI MF, seem quite comfortable using the IVR to get an update on the value of their investment. “Earlier, we used to call the SBI MF office to get the value. Apart from the ease of use, the response time is quite good,” these gentlemen say.
However, they prefer to call the SBI MF office when they want the statement, for there is a delay when such a request is placed with the contact centre agent.

Sharvari Patwa
Mumbai, Sept. 6 Religare Mutual Fund’s CEO, Mr Saurabh Nanavati, speaks to Business Line on the current market trends and on what lies ahead for the Indian mutual fund industry.
What is your outlook on the equity market?
We are living in very volatile times where fundamentals factors are gone for a toss and technical factors are driving the markets more than fundamental factors. This is the reason we are seeing such sharp volatility on day-to-day and month-on-month basis.
Broadly our outlook at this point of time is that the market is fairly valued. It is neither expensive nor cheap. In fact, frontline stocks are pretty fairly valued at this point of time and liquidity is driving it. I think a lot of analysts are building a very rosy 2011 number to justify these valuations, but honestly speaking if you see the past record even of June, there are number of changes happening in terms of upgrades or downgrades to their estimates. The last one year has become so volatile that it is virtually impossible for the analyst to predict anything even for the next three months. .
To what extent has the deficit monsoon impacted GDP growth?
Monsoon is a real tricky issue and the reason why I say this is because none of the current batch of analysts and fund managers have ever seen this kind of a monsoon situation for them to be able to predict what would be the effect. My sense is that if the monsoon remains 20 per cent below normal there will be a slighter larger effect than what people are anticipating on the downside as there are cascading effects to that extent from the monsoon perspective. Lack of monsoon will impact the GDP by at least 1-1.5 percentage points.
What is your take on the upcoming and the recently launched power IPOs?
The larger issue with power IPOs is basically that power sector returns in a way are regulated in India. Basically looking at 14-16 per cent return of equity. And then because of IPO coming or because of the feeling at the ground level that there is a power shortage and the valuations of these power stocks run up to 30 multiples then it is a cause of worry. We go company by company and take a call. A lot of times it makes sense in investing in existing companies than to invest in IPOs, if the IPOs are over-valued.
Corporates are raising a lot of money through various methods. What is your take on that?
A lot of corporates don’t even have a road map in front of them in terms of what they want to do with the money. They are right now just going ahead and raising money. Rightly so from their perspective as they have seen a very bad period last year and secondly they think interest rates might move up.
What is your advice to the retail investor?
I think if the markets drop another 10-15 per cent from here then it is a golden opportunity. At around 12,500 to 13,000 level, a lot of investors would come in and that too in pretty large numbers. At this point of time, the market seems fairly valued. Once you start hitting 16,000-17,000 without clear visibility of what 2011 will look like then you start getting into a higher valuation zone.
What are the sectors you are bullish on?
We had played a contra bet on the IT sector and that paid off very well. Having said that the sector has now reached pretty fair valuation and we are again going equal weight on that.
We are positive on consumer staples, pharmaceuticals. Basically we are positive on all sectors which are dependent on domestic consumption.
Will it be more difficult for the smaller AMCs post the ‘no entry load system’?
Absolutely because now everybody has to put in money from his own equity in setting up the distribution channel or compensating the distributor in whichever manner. So my sense is that there will be a lot of consolidation in the Indian mutual fund industry. The smaller players will find it difficult and will re-look their business plans. Some might decide not to be there.

http://www.thehindubusinessline.com/2009/09/07/stories/2009090750360400.htm

INSURANCE

Insurers may be allowed to tap market after 7 yrs of operation

NEW DELHI: The finance ministry may allow insurance companies to tap the capital market if they complete seven years of operation against the current stipulated minimum 10 years. With the ministry proposing to shorten the qualification period, instead of giving case-by-case waivers, several insurance players are expected to tap the capital market in the coming months, said a senior finance ministry official.

This will allow insurance companies to raise funds to meet their expansion needs and also bolster solvency ratio. At present, only 26% foreign direct investment (FDI) is allowed in the insurance sector, which means local partners have to take the larger, 74%, share in fresh equity infusion. Some of the local partners are not in a position to bring these funds.

A recent study by consulting firm KPMG projects that life insurance players in India will have to invest Rs 40,000 crore in the next seven years. “Stakeholders in some of the insurance companies may not be in a position to fund their growth, as the existing regulation prevents insurers from selling more than 26% stake to foreign partners or from floating an initial public offering (IPO) in the first 10 years. They are not allowed to raise debt also,” said Kapil Mehta, MD & CEO of life insurance company DLF Pramerica, which started operations a year ago. Only three life insurers managed to break even, as of now.

“There is a sub-provision within the Section 66 A of the Insurance Act — the Act stipulates insurance companies can go public only after 10 years of operation — that allows the central government to waive off the mandatory qualification period. So considering the nature of the industry, what we are proposing is a waiver for those companies that have operated for seven years and meet other conditions to tap the capital market,” said a finance ministry official who did not wish to be identified.

As of now, 11 life and six non-life private insurance companies have been operational for more than seven years in India. The private life insurance ventures include Bajaj Allianz, Birla Sunlife, ING Vysya and Dabur CGU, and non-life insurers include Royal Sundaram and Reliance.

India currently has 22 life insurers — one in the public sector and rest in the private sector — and 21 non-life insurers — six in the public and 15 in the private sector after the opening up of insurance sector for private players in 2000.

Various companies, including ICICI and Reliance Capital, have already made it clear that they will be looking at listing the insurance business when the regulations permit and markets are conducive. Reliance Capital’s life insurance vertical, which is operational for five years and applied in July for a waiver in regulation to float an IPO, will be able to tap the markets only after two years with the finance ministry putting in this proposal.

Regulators are already working to put in place the framework to allow insurance companies to tap the market. J Hari Narayan, chairman of Insurance Regulatory and Development Authority (Irda), has recently told media that the guidelines for allowing the insurance companies to tap the capital market will be ready by the end of October.

“We are also working on disclosure norms for insurers that will work in the larger interest of the public,” he said.

http://economictimes.indiatimes.com/Personal-Finance/Insurance/Insurers-may-be-allowed-to-tap-market-after-7-yrs-of-operation/articleshow/4979711.cms

NEW DELHI: Life Insurance Corporation of India (LIC) has come under flak from the National Consumer Commission for showing "scant regard" to the interest of a policy holder by not explaining terms of the policy at the time of its issuance.

It criticised the attitude of insurance agents for being more interested in making quick money by getting more policies for the company and trying to collect maximum premium without caring for the interest of consumers.

"To make a quick buck, the (insurance) agents try to collect as much premium. They show scant regard to protect the interests of the consumers," the Commission comprising members R K Batta and P D Shenoy said while dismissing a plea of LIC.

The apex consumer body passed the observation in a recent case where a policy holder's claim was rejected by the LIC due to negligence of an agent in not explaining terms of the policy which were incorporated later after it was issued through a "cover note".

Cover note is a document evidencing issuance of an insurance policy and gives a summary of the information given in a certificate of insurance.

Sunil Jain had taken a policy in 2002 for his daughter Mona who died in 2005 before the commencement of the policy, which was not explained to him by the agent at the time of its issuance that resulted in its cancellation.

"It was incumbent on the part of LIC or its agents to have explained all the clauses of the policy to the consumer before collecting the premium and issue of the cover note," the Commission said.

The policy was cancelled as the insured person died before the date of commencement of risk, the fact which was neither stated in the cover note nor explained by the agent.

Some important tips for Ulip buyer.
Unit linked insurance plans (Ulips) can be safely termed as modern day ‘best-sellers’ among all life insurance products. However, while life insurance companies and agents aggressively promote this product, buyers need to be aware of some key elements. Here’s a short list:
Premium allocation charges: This could be the main differentiator between an expensive and cheap Ulip product. These are basically the distribution charges, which go in the agent's kitty and consequently, the root cause that they are so aggressively marketed. The charges vary to a great extent between plans, with the bulk of the charges charged in the first year, declining in the subsequent years. They lie in a wide range of 0 per cent -100 per cent of your first year’s premium with the average being around 25 per cent for first year.
While comparing these charges, one should carefully read the documents provided by insurers. Some companies claim to allocate 100 per cent of first year’s premium towards guaranteed maturity addition. This is sometimes incorrectly comprehended as 0 per cent allocation charges. Let’s understand this with an example.First year’s premium = Rs100,000 Tenure = 15 yrs
First year’s premium located towards ‘guaranteed maturity addition’ of 130 per cent – this means that at the end of 15 years, you will get a guaranteed addition of Rs 130,000 (130 per cent*100,000).
If you discount Rs 130,000 at a modest rate of 6 per cent, the present value of the amount is Rs 54,244. In other words, only Rs 54,244 will be invested, the rest Rs 45,756 goes to towards other costs.
Fund management charges: At the end of every year, the fund value is subjected to a fund management charge which varies typically from 0.5 per cent to 2.25 per cent. Higher the equity component of the fund, higher is the probablity of growth. The charges could be higher as well.
Minimum/maximum term: Ulips typically have a minimum term of 5 yrs with the upper end being 75 years. It, however, makes little sense to enter this product with a short-term horizon. The minimum time to be in the policy should ideally be15 yrs. This stems from the fact that Ulips have very high charges in the initial years declining to as low as 1 per cent – 2 per cent form the fourth year onwards. This helps the investor to make up for the costs in the earlier years.
Death benefit: The death benefit is typically
Higher of sum assured and fund value
Fund value + sum assured.
However, plans with fund value+ sum assured are not necessarily the most beneficial, as there are premium allocation charges and policy administration charges that could be significantly higher.
Maturity benefit: In majority of the plans, the maturity benefit is the fund value. In some cases, you get a guaranteed maturity benefit addition. As explained earlier, plans with such options are not necessarily the best buys as it involves high costs in the initial stages.
Fund options: Insurance companies give options with different debt-equity combinations. A buyer needs to compare the options and choose the preferred debt-equity combination, based on his goals and age. There is also an option of free switching between funds for a specific number of times in a year.
Before buying a Ulip, question yourself about your needs, your age, your risk taking ability to venture out in equity funds and then get this dual product of insurance with investment.

The Reserve Bank of India (RBI) was not worried about the tardy credit growth so far in the current financial year and there was no need to ring an alarm bell, said Deputy Governor KC Chakrabarty. “There is a late revival in rain and all bankers have told us that credit growth should pick up in the second half. May be agriculture credit growth is a little less now,” Chakrabarty said.
From April until August 14, bank credit has grown by 1 per cent compared with 3.3 per cent a year ago. In the year ended August 14, credit growth has also sharply fallen to 14.9 per cent from 25.8 per cent a year ago. Bankers say though sanctions are up 50 per cent on year until May, disbursements are not taking place due to low investment demand from companies.
However, some banks are also exercising caution on extending retail loans on concerns of deteriorating asset quality.
“Our job is to make liquidity available to banks. Now where they use it is their decision,” Chakrabarty said.
Bankers have been expressing concerns on the low investment demand from corporate houses. Union Bank of India scaled down its credit growth target to 20-22 per cent for 2009-10 (April-March) from 25 per cent set at the beginning of the year.
“We make credit growth projections based on some parameters. Now, if those parameters do not match up to expectation, then we can always change the credit growth projection,” said Chakrabarty.
RBI has projected a credit growth target of 20 per cent for 2009-10.
BPLR system
Chakrabarty does not agree with the idea of banks having two sets of benchmark prime lending rates (BPLRs).“My personal view is BPLR is the rate at which banks should lend to the best customer, both retail and corporate. A loan should be given as per rating of a customer and not on the retail or corporate basis,” Chakrabarty said.
The apex bank has formed a working group headed by Executive Director Deepak Mohanty to overhaul the existing BPLR system, and make the structure more transparent.
On Thursday, the group circulated a draft report among its members, where it was indicated that RBI was open to Indian Banks’ Association’s suggestion of having two sets of BPLRs for banks — one for retail and the other for companies.
Chakrabarty said instead of having two sets of BPLR, banks can specify the minimum spread over which they will price their retail and corporate loans.
Currently, most banks’ BPLR range between 15.75 per cent and 11 per cent.
However, more than 70 per cent of banks’ loans on an average are sub-BPLR, which is reducing the transparency on lending rates among banks.
Deposit growth, HTM
Though credit growth has declined sharply over the last year, deposit growth hasn’t slowed down although banks have slashed deposit rates.
“This shows that there is still scope for a further cut in deposit rates and therefore lending rates,” Chakrabarty said. Deposits growth was 5.9 per cent from April to August 14, compared with 4.2 per cent last year. In the year to August 14, deposits grew 21.8 per cent compared with 21.4 per cent a year ago.
Banks have reduced their retail deposit rates by 200-250 basis points since November, and are now looking at retiring their high cost bulk deposits and replacing them with low-cost ones.
“Bulk deposits can’t be shed, their cost can be reduced,” Chakrabarty said.
The robust growth in deposits has also led to an increase in banks’ statutory liquidity ratio need, and in turn, in the held-to-maturity (HTM) segment. However, the huge government bond supply, and a tepid credit demand has led banks to buy more sovereign papers, leaving less room in their HTM segment.
State-owned banks prefer to keep majority of their SLR papers in the HTM segment as there is no mark-to-market risk. Of late, some bank treasurers have been expressing concerns of lower space in their HTM segment and suggest that RBI should increase the cap on HTM.
“Banks can put 25 per cent of their NDTL (net demand and time liabilities) in HTM. Now, banks keep around 20 per cent (of NDTL) in HTM and the remaining is kept in available for sale or held for trading category. We have not got any written request from banks to increase the HTM cap,” Chakrabarty said.
However, he added that if bankers came and expressed their concerns, RBI would always take note of such issues.
“Hiking HTM won’t change the financial strength of a bank. It is more of an accounting issue,” Chakrabarty said.
Customer service
Chakrabarty expressed dissatisfaction on the number of customer complaints RBI was receiving on service-related issues of banks.“How can a bank not offer good service to a customer. That is the bank’s job!” he said.
The deputy governor said RBI would come out with more stringent regulation to improve banks’ customer services.
“Currently, only 10 per cent of society has access to bank credit. So, our priority now is to extend banking services and improve financial inclusion. But customer service is an important issue that banks should look into,” he said.
Another challenge of banks was managing risks and managing people, Chakrabarty said.
“There is a lot of improvement needed in managing risks. Banks are at a nascent stage in managing risks. Also, efforts should be made to attract and retain talented employees,” he said.

Ambiguity over interest rate outlook forces lenders to introduce three-month reset clauses
Uncertainty on interest rates and competition among banks are forcing lenders to lend for the short term and introduce interest rate reset clauses that kick in as early as three months.
At a time when credit demand is low, companies are resorting to the practice of getting a loan sanctioned from larger players, such as State Bank of India, and using it to negotiate a better deal from another bank, especially smaller public sector and private banks. As a result, the larger players have started opting for short-term loans.
“The ticket size is small because there is little demand for the loans for capital expenditure. So, there is little choice but to give short-term loans or put in other clauses,” said a senior executive with a public sector bank.
Banks typically reset interest rates after a year, but are now exercising the option as early as three months, though in some cases the review of the rate takes place after six or nine months, the executive director of a mid-sized public sector bank said.
In recent months, credit demand has dropped and for the year up to August 15, 2009, the growth rate has fallen to 15 per cent from around 25 per cent in the same period last year.
At the same time, banks are flush with liquidity and have little choice but to lend since the Reserve Bank of India (RBI) offers only 3.25 per cent under the reverse repo window used to draw out excess liquidity.

Yet, on a regular basis, for the last five months, banks have been parking over Rs 1,00,000 crore with RBI.
Although record government borrowing, budgeted at Rs 4,51,000 crore for the current financial year, was expected to put pressure on the corporate sector’s fund-raising plans, companies have not been lining up capital expenditure because they have surplus capacity. As a result, interest rates have remained soft.Going forward, with inflation expected to rise owing to a low base effect and a rise in commodity prices, interest rates could harden. Bankers expect RBI to reverse its soft rate regime bias once growth picks up. “Bankers are unable to assess when the bias would change and therefore they are resorting to these methods,” said a senior executive at a European financial services major.
“There will be a problem if the reset clause is invoked only after two or three years. It is better for the banks to have the set clause every three or six months. Resets should take place more quickly as interest rates will harden in six to nine months,” added another bank executive.
Another banker said 80 to 85 per cent of his bank’s lending was linked to the benchmark prime lending rate (BPLR). So, if the BPLR went up the interest rate on a loan would go up. But with the government insisting on ensuring a low rate regime, banks are not keen to use BPLR as the only benchmark.

Axis Asset Management Company (Axis AMC), a wholly-owned subsidiary of Axis Bank, today announced that it has received the final regulatory approval from the Securities and Exchange Board of India (Sebi) to launch its mutual fund business in the country.
Axis AMC now aims to launch its first set of products in October 2009, a company statement said here. Axis AMC will shortly be filing for both equity and debt products. These offerings should be available by October- November this year.
“We have received Sebi’s approval. The Asset Management industry in India is amongst the fastest growing financial services businesses from across the globe. With a growth rate of over 30 per cent CAGR during the last 6 years, the mutual fund business presents an interesting opportunity,” Axis AMC’s MD & CEO, Rajiv Anand said in a statement here.
It is a fairly crowded investment market but we think that there is great merit in delivering solutions rather than just launch products. It is this investor centric approach built on customer oriented communication, long term relationships and enduring wealth creation that will seek to differentiate Axis Mutual Fund. We will aim to be amongst the top 10 fund houses in the country within the next 4-5 years, Anand said.
Retail penetration levels of less than 3 per cent only add to the demographic opportunity that our young country presents. We hope to capture this growth and participate in the development of the capital markets, Axis AMC’s National Sales Head, Karan Datta said.
Axis Bank is the third largest private sector bank in India. It offers a vast spectrum of services encompassing large and mid-corporate banking, SME banking, agri-business banking, retail banking and international banking.
The banks network in India spans more than 900 offices and over 3,800 ATMs. It has embarked on creating a footprint in Asia and has a presence in the major financial cities of Singapore, Hong Kong, Dubai and Shanghai. In addition, the bank has also entered into strategic tie-ups and alliances with partner banks in UAE, Doha, Muscat (to be launched) to reach out to NRIs in these geographies.

Indubhai Amin, a non-resident Indian (NRI) settled in the UK earns interest income of Rs 3 lakh on his non-resident ordinary account bank deposit in India in the current FY 2009-10. Enjoying his personal exemption limit of Rs 1.60 lakh and the eligible deduction of Rs 1 lakh u/s 80C, Amin is comfortable paying income tax of Rs 4,000 in the first slab of 10 per cent on his effective taxable income of Rs 40,000.

Flat tax of 20% and 30%

A huge shock awaits Amin and millions of NRIs, in regard to taxation of their interest and investment income and capital gains earned in India, proposed to be treated under the draft Direct Tax Code as "income from special sources."

In 2011-12, on the same interest income of Rs 3 lakh, Amin will be required to pay a hefty tax of Rs 60,000 at the flat rate of 20 per cent, without being eligible to claim any basic exemption or other deduction, as provided under rule three of the First Schedule to the Code.

Moreover, all capital gains earned by a non-resident will attract a flat tax of 30 per cent, irrespective of the amount of capital gains. While a resident Indian will be required to pay tax of Rs 3.84 lakh on his taxable income of Rs 25 lakh, an NRI earning equivalent capital gains will be called upon to pay almost double tax of Rs 7.5 lakh.

Hair-raising drafting

New section 13 (2) provides that such ‘special income’ shall be computed in accordance with the provisions of the Ninth Schedule, the drafting of which is literally hair-raising. It provides that the amount of accrual or receipt shall be computed as the taxable income, and no loss, allowance or deduction shall be allowed, as the same shall be presumed to have been granted. The only exception in this regard, in respect of capital gains arising from the transfer of equity shares or units of equity oriented mutual fund chargeable to STT, is quite amusing, as it stands redundant in view of the proposal to abolish STT (a classic instance of incoherent drafting). The draftsman does not seem to have realized the harsh implications. It means that if an NRI sells a capital asset purchased for Rs 10 lakh at Rs 30 lakh, he will be required to pay tax of Rs 9 lakh at 30 per cent on the gross sale consideration of Rs 30 lakh without any deduction even for the cost of acquisition of Rs 10 lakh (not to mention any benefit of indexation on the same).

Determination of residential status

The residential status of an individual under the Code is proposed to be determined as per the current norms. However, the status of "not ordinarily resident" (NOR) is proposed to be eliminated. Despite the above, Clause 24 of the Sixth Schedule has still provided for exemption in respect of interest earned on foreign currency deposits in the case of NOR. Poor drafting indeed!

The Code has proposed to retain the current exemptions availed by a non-resident in case of interest earned on NRE and FCNR deposits with banks.