QIP - Qualified institutional placement
Qualified institutional placement (QIP) is a capital raising tool, whereby a listed company can issue
Equity share
Fully and partly convertible debentures, or
Any securities other than warrants
Which are convertible into equity shares, to a qualified institutional buyer (QIB).
Apart from preferential allotment, this is the only other speedy method of private placement for companies to raise money.
It scores over other methods, as it does not involve many of the common procedural requirements, such as the submission of pre-issue filings to the market regulator
Why was QIP introduced?
To enable listed companies raise money from domestic markets in a short span of time, market regulator SEBI introduced the concept of QIP in 2006.
This was also done to prevent listed companies in India from developing an excessive dependence on foreign capital.
Prior to introduction of QIPs, the complications associated with raising capital in the domestic markets had led many companies to look at tapping overseas markets via foreign currency convertible bonds (FCCB) and global depository receipts (GDR).
This has also helped issuing companies price their issues closer to the prevailing market price.
Who can participate in the issue?
The specified securities can be issued only to QIBs, who shall not be promoters or related to promoters of the issuer.
The issue is managed by a Sebi-registered merchant banker. There is no pre-issue filing of the placement document with Sebi.
The placement document is placed on the websites of the stock exchanges and the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public.
Why there is a sudden rush for QIPs?
Several companies, especially real estate, were starved of money in the recent slowdown and were finding it difficult to stay afloat.
The revival in market sentiment came as a boon to these companies, which are rushing to raise money, mainly to retire expensive debt and restructure their balance sheets.
For these companies QIP has emerge as excellent tools, where they can raises thousand of Crores Rupee in a period less than a month.
In 2008 by way of QIP Indian company has raised more than 3500 Crores and expecting more in coming future.
Tuesday, December 29, 2009
FPO (Follow on Public Offer)
The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest IPO is for the companies which have not listed on an exchange and FPO is for the companies which have already listed on exchange but want to raise funds by issuing some more equity shares.
Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come with follow on offer to restructure the business or to raise funds for new business or to expand the existing business.
Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue; they are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.
Monday, December 28, 2009
Key Ratios for Picking Stocks
The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.
Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital, should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.
The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.
Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital, should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.
The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.
4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.
If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.
If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.
5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.
6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
7. Return on Net Worth (RONW)
While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.
8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.
FBT (Use Company Car)
Last week, the Central Board of Direct Taxes issued a notification on how each perquisite provided to a salaried employee should be taxed. It is applicable with retrospective effect, from April 1 2009.
The guidelines cover every perk: home accommodation to gifts to educational benefits. The most important change, though, is taxation of car facilities.
Most other perks can be easily restructured and an employee has always borne tax on accommodation.
It is common for companies to provide either cars or reimburse expenses related to car use. The tax incidence can be much lower now if the company provides the car, than if the employer reimburses the expenses.
The amount of tax also depends on the engine capacity of the vehicle. It is lower if this is less than 1.6 litres.
Owned by employer
Surprisingly, the company-owned car is likely to be more beneficial for both employer and employee. For the employer, there is the benefit of depreciation when the vehicle is used for the purpose of business. For the employee, too, the incidence of tax will be lower this way.
If used entirely for business and the employer pays the running and maintenance expenses, there is no tax. But, to avail this, the employer must maintain detailed records showing the purpose of usage.
If used for personal purposes and the expenses paid by the employer, then the entire amount will be considered a perk, along with the normal depreciation charge (10 per cent), reduced by the amount recovered from the employee.
What if the vehicle is used partly for personal purposes? Then, Rs 1,800 a month would be added as income for the individual, for a car with engine capacity up to 1.6 litres. If of a higher capacity, the figure added would be Rs 2,400 a month. These figures would be increased by Rs 900 a month if a driver is provided.
If the employee pays the personal expenses for running and maintenance, then the taxable income will be Rs 600 a month and Rs 900 a month for the two engine capacities, respectively.
Owned by employee
Many would like to own the car and collect the running and maintenance expenses from the employer. However, the rules now make this more expensive. If the employee owns the car and the running and maintenance cost is paid by the employer and the entire use is for official purposes, then there is no perquisite value involved.
If use is partly for business and partly not, the calculation is slightly complicated. The actual amount paid by the employer less Rs 1,800 a month would be the amount considered as a perk for cars with an engine capacity below 1.6 litres.
This means if Rs 6,000 per month is spent (excluding driver) on a small car, then Rs 4,200 would be added to the income of an individual owning the vehicle. However, if the individual wants to claim a higher amount for official purposes, then detailed records showing official use and a certificate are needed.
The figure for the higher engine category is the actual expense less Rs 2,400 per month. Further, if a chauffeur is provided, the deduction (Rs 900) and expense (actual amount) figures would also go up accordingly.
Other vehicle
Even if the vehicle is not a car but another vehicle, say a two-wheeler owned by the employee, the rule applies. If any other vehicle is used partly for official and personal purposes, then the actual expenses by the employer, less Rs 900 a month, would be the figure used for valuing the perk.
If the expense is high, then in several cases, the amount on addition of a two-wheeler might be more than that of a car owned by the employer and provided for use to the employee.
Monday, December 21, 2009
DNA (Deoxyribonucleic Acid)
DNA - Deoxyribonucleic Acid is a nucleic acid that contains the genetic instructions used in the development and functioning of all known living organisms and some viruses. The main role of DNA molecules is the long-term storage of information
DNA found in almost every cell of human being
DNA found in almost every cell of human beingWhat is cell - The cell is the basic structural and functional unit of all known living organisms. It is the smallest unit of life that is classified as a living thing, and is often called the building block of life
Friday, December 11, 2009
UID (UIDAI)
UID (Unique Identification Number) is a recently finalized initiative by the Government of India to create and manage a centralized identification system for all the adult citizens and residents of India which can be utilized for a variety of identification purposes. Nandan Nilekani former co-chairman of Infosys has been appointed as the head of Unique Identification Authority of India and will have a ministerial rank. He has decided to step down from the board of Infosys Technologies
The UID system is being considered since last 6 years, but it gained traction only after the 26/11 attacks on Mumbai
The ID system is likely to be a 16 digit numeric string in order to accommodate the count of billion-plus citizens of India and ones that will be born in future. The card is likely to have a 16kb or 64kb storage chip embedded. Adding a photograph and biometric data would be planned progressively
The ID is fundamentally being prepared to identify Indian citizens so that better security can be provided by identifying illegal immigrants and terrorists. However, the real power of the ID is in its ability to provide ease of identity establishment to Indian citizens when accessing a variety of governmental and private-sector services
The likely benefits of the new ID system to the citizens will be as below:
1) Subsidies on food, energy, education, etc to people who are entitled to receive them.
2) Opening bank accounts
3) Getting new telephone, mobile or internet connections,
4) New light or gas connections
5) Getting a passport
6) The same card may act as a driving license and store your traffic violation records
7) It may act as your electoral card
8) Family genealogy may be traced
The Government had allocated Rs 100 crore in the interim Budget which has revised with 120 crors in General Budget to startup this project.[5] The overall cost estimated for the project is likely to be in excess of Rs 10,000 Crors. However if we believe as per ‘Frontline’ magazine the government in India has a guesstimate of somewhere around Rs 1.5 lakh crore for UID project.
In the first phase, the UID will be issued to people living in the coastal villages of Andhra Pradesh, Gujarat, West Bengal, Kerala, Goa, Karnataka, Tamil Nadu, Maharashtra and Orissa. The Union Territories of Puducherry, Andaman & Nicobar Islands, Dadar and Nagar Haveli as well as Lakshadweep shall also be covered in the first phase. The first lot of cards is expected to be delivered by early 2010.
However as per Nandan Nilkani Karnataka will be the first state to receive registration and UID cards.
The Unique Identification Number (UID) scheme, which is expected to roll out the first number in 12-18 months, however, will not confer on anyone any rights, including citizenship, Unique Identification Authority of India.
At the begging UID will be voluntary by choice but it will be mandatory by function, because you have to produce this every time when you will want any value added services like
"When you to get a passport, they will say where is your UID number, when you go to get a driving licence, they will say where is your UID number, when you go to tax, they will say where is your UID number, you go to open a bank account, they will say where is your UID number. Sooner or later you will have to get your UID number,"
In the coming years, all the above mentioned documents will start displaying the UID number, which proposes to weed out duplicate identities in the system, and hence the "number will become pervasive and ubiquitous. It will become embedded in all these documents."
"It is not mandatory but more applications will make it a prerequisite. So sooner or later your life becomes simpler if you have the number."
As par UIDAI, talks are already on with various agencies and ministries and that "everybody is ready to partner with us on this and use our UID number in their database.
UID will also help to check black money and result in higher tax collections as it will become difficult to have duplicate accounts.
"Once the bank accounts start having the UID, then you can't keep unaccounted money in the banking system. UID will sort of act as a check on keeping black money and all that. It will also strengthen security,
As per Nandan Nilkani it will take "years and not one day" for the entire process to change. He said about 600 million of the about 1.2 billion population will be covered under the project in the next five years.
However it is not mandatory for anybody either service provider like banks to ask for this details it will depend on the body who manage it to make UID compulsory like in case of Bank it is RBI who will decide when UID will be included in KYC norms.
But it is true that almost all agencies have full support with UIDAI and everyone is in plan to make it compulsory as and when they will see green signal from UIDAI.
The UID system is being considered since last 6 years, but it gained traction only after the 26/11 attacks on Mumbai
The ID system is likely to be a 16 digit numeric string in order to accommodate the count of billion-plus citizens of India and ones that will be born in future. The card is likely to have a 16kb or 64kb storage chip embedded. Adding a photograph and biometric data would be planned progressively
The ID is fundamentally being prepared to identify Indian citizens so that better security can be provided by identifying illegal immigrants and terrorists. However, the real power of the ID is in its ability to provide ease of identity establishment to Indian citizens when accessing a variety of governmental and private-sector services
The likely benefits of the new ID system to the citizens will be as below:
1) Subsidies on food, energy, education, etc to people who are entitled to receive them.
2) Opening bank accounts
3) Getting new telephone, mobile or internet connections,
4) New light or gas connections
5) Getting a passport
6) The same card may act as a driving license and store your traffic violation records
7) It may act as your electoral card
8) Family genealogy may be traced
The Government had allocated Rs 100 crore in the interim Budget which has revised with 120 crors in General Budget to startup this project.[5] The overall cost estimated for the project is likely to be in excess of Rs 10,000 Crors. However if we believe as per ‘Frontline’ magazine the government in India has a guesstimate of somewhere around Rs 1.5 lakh crore for UID project.
In the first phase, the UID will be issued to people living in the coastal villages of Andhra Pradesh, Gujarat, West Bengal, Kerala, Goa, Karnataka, Tamil Nadu, Maharashtra and Orissa. The Union Territories of Puducherry, Andaman & Nicobar Islands, Dadar and Nagar Haveli as well as Lakshadweep shall also be covered in the first phase. The first lot of cards is expected to be delivered by early 2010.
However as per Nandan Nilkani Karnataka will be the first state to receive registration and UID cards.
The Unique Identification Number (UID) scheme, which is expected to roll out the first number in 12-18 months, however, will not confer on anyone any rights, including citizenship, Unique Identification Authority of India.
At the begging UID will be voluntary by choice but it will be mandatory by function, because you have to produce this every time when you will want any value added services like
"When you to get a passport, they will say where is your UID number, when you go to get a driving licence, they will say where is your UID number, when you go to tax, they will say where is your UID number, you go to open a bank account, they will say where is your UID number. Sooner or later you will have to get your UID number,"
In the coming years, all the above mentioned documents will start displaying the UID number, which proposes to weed out duplicate identities in the system, and hence the "number will become pervasive and ubiquitous. It will become embedded in all these documents."
"It is not mandatory but more applications will make it a prerequisite. So sooner or later your life becomes simpler if you have the number."
As par UIDAI, talks are already on with various agencies and ministries and that "everybody is ready to partner with us on this and use our UID number in their database.
UID will also help to check black money and result in higher tax collections as it will become difficult to have duplicate accounts.
"Once the bank accounts start having the UID, then you can't keep unaccounted money in the banking system. UID will sort of act as a check on keeping black money and all that. It will also strengthen security,
As per Nandan Nilkani it will take "years and not one day" for the entire process to change. He said about 600 million of the about 1.2 billion population will be covered under the project in the next five years.
However it is not mandatory for anybody either service provider like banks to ask for this details it will depend on the body who manage it to make UID compulsory like in case of Bank it is RBI who will decide when UID will be included in KYC norms.
But it is true that almost all agencies have full support with UIDAI and everyone is in plan to make it compulsory as and when they will see green signal from UIDAI.
New Direct Tax Code
On August 2009, Finance Minister Pranab Mukherjee unveiled the Direct Taxes Code Bill, 2009, to be introduced in Parliament later this year.
If enacted, the Bill will not only change the amount of tax you will pay and how but will also transform how you invest, borrow and spend your money. The finance minister successfully managed to make good his promise made during his 6 July Budget speech -- of ushering in a new direct tax code within 45 days.
Unlike his rather insipid Budget proposals, this time Mukherjee has brought in a transformational blueprint of a new tax system, the analysis of whose impact can only make jaws drop.
If one were to describe the system in short, it has tried to simplify the way you will be taxed while taking away most tax-breaks that ultimately complicated yours and the government's life.
Among other things, the Code attempts to provide stability in 'rates of taxes' by bringing them within its own fold.
At present, the tax rates come under the Finance Bill and, thus, are open to change every Budget. Any amendments in the rates of taxes as mentioned in the Code would call for amendments in Parliament, which cannot happen on a regular basis.
The unveiling of the Direct Taxes Code will be followed by public debates before Parliament debates it. It will not be before financial year 2011-12 that this tax code will be put in place, if passed by Parliament.
Even as experts examine the finer details of the revolutionary proposals of the new tax code, we have enough information to make you aware of the impending radical changes in your personal finances.
Income Tax Rate for Individual
for an individual, annual incomes up to Rs 1.60 lakh (Rs 160,000) would be tax-exempt, a 10 per cent tax rate would be applicable for incomes between Rs 1.60 lakh and Rs 10 lakh (Rs 1 million), 20 per cent for income between Rs 10 lakh and Rs 25 lakh (Rs 2.5 million), and 30 per cent for income above Rs 25 lakh.
All this will mean significant tax savings when the Code comes into force.
The present income slabs are much narrower and the tax liability is significantly higher.
Says Vikas Mallan, chief financial officer, Unicon Financial Intermediaries, "Under the proposed Direct Taxes Code, the slabs have been significantly enhanced to take into account realistic income levels."
The hand that taketh away
If generosity marks the changes in income tax slabs, its absence marks other areas. Says Sanjay Grover, tax partner, Ernst & Young, "Currently exempt allowances and benefits such as leave travel assistance and medical reimbursements would be fully taxable under the Code."
There's more grief in store for tax-saving junkies. Prepare to sing a requiem for the existing tax benefit for interest payment on home loans with an annual limit of Rs 1.5 lakh (Rs 150,000) per individual.
This critical driver of the recent real estate boom will be withdrawn if the Direct Tax Code Bill is implemented. But if you have rented out your home that you don't occupy, you will continue to get the existing tax break for unlimited tax deductions for interest payments on loans taken to acquire it.
At the same time, removal of deduction for house rent allowance (HRA) has been proposed.
New Direct Tax Code doesn't distinguish between short- and long-term capital gains.New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
In fact, the new Code proposes to implement a critical recommendation of previous tax reform panels, which suggested that the contribution and return of all investments be made tax exempt with maturity proceeds being taxable -- an exempt-exempt-tax or EET system.
Like other investments, this proposal will impact your stocks and equity mutual fund (MF) investments. At present, in case you sell units of equity-oriented MFs after a year, you do not need to pay any capital gains tax. But if the Direct Tax Code is implemented, you will need to pay tax when you sell your MFs -- be it equity or debt.
The gains get added to your income and taxed as per your income slab. However, in case of gains made after one year, the Code will allow you the indexation benefit before adding the gains to your income. Indexation is a facility offered by the income tax laws to adjust your security's cost price for inflation over the years.
This enables you to inflate your cost price in order to reduce the difference between your selling price and cost prices.
This is done because it is typically presumed that the price you paid for acquiring an asset years back is worth much more today because of inflation. The lower this difference, the lower is your tax liability.
The Code may have done away with the numerous tax breaks, but it still provisions for tax-saving investments and guess what the limit has gone up to? It is Rs 3 lakh (Rs 300,000) per annum.
But the trick is that you will be permitted to invest only in certain options -- Public Provident Fund (PPF), Employees' Provident Fund, life insurance, superannuation funds and National Pension System (NPS), besides claiming for children's tuition fee expenses.
This simply means no more tax breaks for National Savings Certificates, Senior Citizens Savings Scheme, tax-saving bank fixed deposits and equity-linked savings schemes (ELSS) of MFs.
Argues Ajay Seth, senior director (legal & compliance), Max New York Life Insurance, "Adopting the exempt-exempt-tax model that has been proposed will imply that savings above Rs 3 lakh be taxed twice, at the time of making the contribution and again on maturity on the full amount, including the principal."
While Outlook Money's all-time favourite PPF continues to be a permitted tax-saving investment, it loses some sheen as its maturity proceeds will become taxable.
"This will change the way people look at PPF, which has, so far, always enjoyed tax-free returns," says Veer Sardesai, a Punebased financial planner.
The message is clear: You can get tax breaks for retirement savings or educational expenses. The existing tax breaks for health insurance, with the existing annual limits of Rs 15,000 and Rs 20,000 for senior citizens, as well as those for interest repayment for educational loans and notifi ed donations continue in the new regime too.
When considered in the backdrop of growing retirement periods and the high cost of retirement living, educational and healthcare costs, this exception to the general rule of erasing tax exemptions makes a lot of sense.
If enacted, the Bill will not only change the amount of tax you will pay and how but will also transform how you invest, borrow and spend your money. The finance minister successfully managed to make good his promise made during his 6 July Budget speech -- of ushering in a new direct tax code within 45 days.
Unlike his rather insipid Budget proposals, this time Mukherjee has brought in a transformational blueprint of a new tax system, the analysis of whose impact can only make jaws drop.
If one were to describe the system in short, it has tried to simplify the way you will be taxed while taking away most tax-breaks that ultimately complicated yours and the government's life.
Among other things, the Code attempts to provide stability in 'rates of taxes' by bringing them within its own fold.
At present, the tax rates come under the Finance Bill and, thus, are open to change every Budget. Any amendments in the rates of taxes as mentioned in the Code would call for amendments in Parliament, which cannot happen on a regular basis.
The unveiling of the Direct Taxes Code will be followed by public debates before Parliament debates it. It will not be before financial year 2011-12 that this tax code will be put in place, if passed by Parliament.
Even as experts examine the finer details of the revolutionary proposals of the new tax code, we have enough information to make you aware of the impending radical changes in your personal finances.
Income Tax Rate for Individual
for an individual, annual incomes up to Rs 1.60 lakh (Rs 160,000) would be tax-exempt, a 10 per cent tax rate would be applicable for incomes between Rs 1.60 lakh and Rs 10 lakh (Rs 1 million), 20 per cent for income between Rs 10 lakh and Rs 25 lakh (Rs 2.5 million), and 30 per cent for income above Rs 25 lakh.
All this will mean significant tax savings when the Code comes into force.
The present income slabs are much narrower and the tax liability is significantly higher.
Says Vikas Mallan, chief financial officer, Unicon Financial Intermediaries, "Under the proposed Direct Taxes Code, the slabs have been significantly enhanced to take into account realistic income levels."
The hand that taketh away
If generosity marks the changes in income tax slabs, its absence marks other areas. Says Sanjay Grover, tax partner, Ernst & Young, "Currently exempt allowances and benefits such as leave travel assistance and medical reimbursements would be fully taxable under the Code."
There's more grief in store for tax-saving junkies. Prepare to sing a requiem for the existing tax benefit for interest payment on home loans with an annual limit of Rs 1.5 lakh (Rs 150,000) per individual.
This critical driver of the recent real estate boom will be withdrawn if the Direct Tax Code Bill is implemented. But if you have rented out your home that you don't occupy, you will continue to get the existing tax break for unlimited tax deductions for interest payments on loans taken to acquire it.
At the same time, removal of deduction for house rent allowance (HRA) has been proposed.
New Direct Tax Code doesn't distinguish between short- and long-term capital gains.New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
In fact, the new Code proposes to implement a critical recommendation of previous tax reform panels, which suggested that the contribution and return of all investments be made tax exempt with maturity proceeds being taxable -- an exempt-exempt-tax or EET system.
Like other investments, this proposal will impact your stocks and equity mutual fund (MF) investments. At present, in case you sell units of equity-oriented MFs after a year, you do not need to pay any capital gains tax. But if the Direct Tax Code is implemented, you will need to pay tax when you sell your MFs -- be it equity or debt.
The gains get added to your income and taxed as per your income slab. However, in case of gains made after one year, the Code will allow you the indexation benefit before adding the gains to your income. Indexation is a facility offered by the income tax laws to adjust your security's cost price for inflation over the years.
This enables you to inflate your cost price in order to reduce the difference between your selling price and cost prices.
This is done because it is typically presumed that the price you paid for acquiring an asset years back is worth much more today because of inflation. The lower this difference, the lower is your tax liability.
The Code may have done away with the numerous tax breaks, but it still provisions for tax-saving investments and guess what the limit has gone up to? It is Rs 3 lakh (Rs 300,000) per annum.
But the trick is that you will be permitted to invest only in certain options -- Public Provident Fund (PPF), Employees' Provident Fund, life insurance, superannuation funds and National Pension System (NPS), besides claiming for children's tuition fee expenses.
This simply means no more tax breaks for National Savings Certificates, Senior Citizens Savings Scheme, tax-saving bank fixed deposits and equity-linked savings schemes (ELSS) of MFs.
Argues Ajay Seth, senior director (legal & compliance), Max New York Life Insurance, "Adopting the exempt-exempt-tax model that has been proposed will imply that savings above Rs 3 lakh be taxed twice, at the time of making the contribution and again on maturity on the full amount, including the principal."
While Outlook Money's all-time favourite PPF continues to be a permitted tax-saving investment, it loses some sheen as its maturity proceeds will become taxable.
"This will change the way people look at PPF, which has, so far, always enjoyed tax-free returns," says Veer Sardesai, a Punebased financial planner.
The message is clear: You can get tax breaks for retirement savings or educational expenses. The existing tax breaks for health insurance, with the existing annual limits of Rs 15,000 and Rs 20,000 for senior citizens, as well as those for interest repayment for educational loans and notifi ed donations continue in the new regime too.
When considered in the backdrop of growing retirement periods and the high cost of retirement living, educational and healthcare costs, this exception to the general rule of erasing tax exemptions makes a lot of sense.
Tax Planning for Salary Employee
Tax alert! Don't invest your allowances
Salaried executive receive various types of allowances from their employers. As per the Income Tax Act some allowances are exempted, others are liable to income tax.
For example, conveyance allowance, helper or attendant allowance, daily allowance and uniform allowance are some of the allowances that are completely exempt from income tax in the employee's hands.
Typically, these allowances are not even added to the employee's income. Generally, once the employee gives a declaration to his employer that he has fully spent the allowance, the matter is considered closed.
However, it is often observed that many employees make investments out of such tax-free allowances. A question now arises whether the investments made by an employee out of the tax free allowances will cause any problem with the income tax authorities.
The answer is yes.
It should be remembered that tax-exempt allowances would be exempted only to the extent they are fully spent for the purpose for which they are granted.
For example, if you receive conveyance allowance of, say, Rs 4,000 per month, you are supposed to spend the entire amount on conveyance. You are not supposed to save any money out of his conveyance allowance.
If you save some part of the allowance, you are then liable to pay income tax on the amount you save and invest in any of the movable or immovable assets.
Maintaining bills and vouchers in respect of the expenditure is not that important; what is most important is that there should be adequate withdrawal of funds to meet the expenditure on the particular head for which allowances were so received or recovered from the employer.
If there is a lapse on the part of the employee in withdrawing the appropriate amount for expenditure relating to the allowance, the onus then is on the taxpayer to explain as to how the relevant expenditure was met.
For example, if an employee received, say, a helper allowance of Rs 4,500 per month, deposited the same in his bank, and did not make any withdrawal for meeting the expenditure on a helper or attendant, then he is liable to be taxed on this allowance because no money was apparently spent by the employee in incurring expenditure on helper or attendant, etc
It might be possible that the employee would have given a certificate to his employer merely stating that the entire amount was fully spent by him towards payment for a helper or attendant.
If, however, an actual scrutiny of the bank account and other connected tax papers reveals that no portion of the allowance was spent by the employee -- and there was no other source available with the employee to prove the incurring of the expenditure -- the entire allowance amount received would become taxable in the hands of the employee.
Thus, any investment made by the employee out of the unspent allowance would be treated as unexplained investment and would be added to his total income. This type of addition by the Assessing Officer would also attract penalty.
To avoid any such problem, salaried employees should ensure that the allowances received from the employer are fully spent for the purpose for which they are provided. This is possible by making specific withdrawal for meeting the particular expense representing a particular allowance.
This situation would also be true in respect of allowances that are otherwise not fully exempted but are exempted based on actual re-imbursement.
Let us say an employee were to receive Rs 6,200 by cheque from his employer on account of reimbursement of medical expenses incurred by him. This cheque of Rs. 6,200 is deposited in the bank account of the employee and the employee does not withdraw this money and consequently makes investments out of his bank balance then the Assessing Income Tax Officer will be within his rights to bring to tax this amount of Rs 6,200, although the employer might not have made any addition to the taxable salary income.
To avoid such unpleasant surprises it is recommended that there should be specific, or at least adequate, withdrawal for meeting expenses in respect of the designated allowance and reimbursements received by a salaried employee from his employer.
It would be even better if specific withdrawals were made from the bank account for specific purposes. In case there is no such specific withdrawal, nor any evidence available with the employee to substantiate that he has actually incurred the expenses in respect of the various allowances and reimbursements, it would then be incumbent on the employee to give satisfactory explanation and answer to the Assessing Officer at the time of income tax assessment as regards the source of funds for meeting the expenditure in respect of the allowance received.
If, for example, you received certain gifts during the year and incurred expenditure from out of the gifted amount towards meeting the expenses, then a proper explanation should be accorded to the income tax department.
Salaried employees often face such problems in the case of house rent allowance received from the employer. It is a well-known fact that house rent allowance is not exempted from income tax unless you have actually paid the rent.
Suppose an employee receives a house rent allowance of Rs 5,000 per month and lives in a house, which is owned by his wife. He informs his employer that he has made payment of Rs 5,000 per month to the landlady, who happens to be his wife. A receipt to this effect signed by the wife is given to the employer.
Now the employer within the framework of income tax law grants tax exemption of deduction in respect of the house rent allowance paid to the employee, but a glance at the bank account of the employee reveals that in fact he did not pay the rent amount to his wife and that the house rent allowance received from his employer was actually deposited in his bank and, subsequently, utilized to purchase certain shares of new issues of a company.
Thus, the employee made investment in the stock market out of the house rent allowance so received by him from his employer. In this situation the income tax department will bring to tax the entire house rent allowance so received by the employee because the expenditure was actually not incurred.
To pre-empt such complications, and consequential additions to the tax in the case of salaried executives, it is recommended that you should prepare a 'cash flow chart' containing a summary of all the receipts during the year comprising different allowances and, likewise, on the other side there should be details with regard to the expenditure incurred under various heads.
If the Assessing Officer were to question as to how the expenditure was met in respect of particular allowance received, you can then easily substantiate your case by referring to this cash flow statement.
And although it is not legally compulsory to furnish a cash flow chart, it might be worthwhile if such a cash flow statement is enclosed with the income tax return.
In conclusion, salaried executives should be very careful with regard to making investments especially out of their tax-free allowances and reimbursements.
They should ensure that the tax-free allowances they receive are actually spent. If not spent, the amount should be brought to tax. Thus, if any investment is made out of unspent tax-exempt allowances, etc. not only would you have to pay tax on that amount, but also possibly penal interest and penalty.
Thursday, December 10, 2009
What is subprime crisis? How it caused financial mayhem?
Sep 2008 Global Financial Market has experience worst economic crisis in its entire economic history.
Although there are many reasons responsible for bringing world to the doorstep of financial crisis, the main cause of this financial disaster is sub-prime loan.
So what is sub-prime loan? And why has it cause global panic? If it is related to US housing sector why it affected Indian and other global market?
Let first understand what is subprime loan?
Subprime loan is loan which is not prime loan
Now what is prime loan?
Prime loan is a loan where we follow all terms and condition without compromising in ant terms and condition specified by central bank like RBI in India
Prime loan sanctioned at prime lending rate.
Few example of Prime loan is
KPC compliance
Income Proof
Title ship clearance ect.
Hence a loan sanction with compromise with such terms and condition will called subprime loan.
Subprime loan is very risky but return is high. It simple more risk more rewards due to which in US many lenders has started this business to make quick money.
Now let understand how subprime affects US and globe?
It all started with American dream of sophisticated and luxurious living standard
Housing accommodation is first on that list.
So he started seeking housing loan to give shape of his dream, but there is one problem he don’t have good credit ratings hence he failed to get prime loan. Since his credit is not well enough no banks were ready to sanction his housing loan.
But before American dream fade away, another American enter in to the market they are known as financial institution, who has good credit rating and are ready to take some risk.
Hence they planned one new business opportunity, whit the help of good credit rating they get huge bank loan and then divided that loan amount in to small small peace, and gave that to many American as housing loan at much higher rate then what they have to pay to bank against of their loan.
These higher rates is called subprime rate. The loan by second American to first American is called Prime Loan. And this loan market is called subprime housing loan market.
Now what is Subprime Crises?
All financial institution who has lend subprime loan i.e. Second American, there were knowing that default ration will be high so they hedge their ex-poser, so that in case of default still they will get funded by hedge fund.
But second American doesn’t stop there; it doesn’t wait for principal and interest of subprime loans to be repaid, so that it can repay its prime loan to banks.
So what this financial institution does?
They went for securitization.
Securitization is a way of conversion of these in to financial security which either issued at discount or bears some interest.
During securitization following person come in the picture
Special purposes Vehicle
Credit rating Company
Hence in order to make quick money, much financial institution (Second American) issued this kind of securities which is highly risky.
And how investor of such security is gets paid – this is through the principal and interest received from borrower of subprime loan as a monthly installment.
Financial Institution repays its prime loan from banks from the money that it get by selling of those security to the investor and everyone live happy ever after, as it seems.
But its not like, all subprime loan sanctioned at floating rate, floating rate is a rate which is not fixed as interest rate go up floating rate will also go up. And as floating interest will go up monthly EMI of subprime loan will also go up.
In that time US interest rate has increase significantly due to which monthly EMI of subprime loan also increase. which hit subprime borrower hard.
As we know lot of them was with unstable income and with poor credit rating, thus they default.
Once more and more subprime borrower start defaulting payment to investor )who has purchase securitized security) has stopped resulting huge loss.
Problem start because US keep interest rate too low for very long time which encourage American to go for subprime housing loan to purchase bigger and better home.
As US economy was doing well that time, every day housing price touching new high due to huge demand.
The crisis began with the bursting of the United States housing bubble
Slow US economy, high interest rate, Unrealistic real state price, high inflation together led to fall stock market, negative growth rate, job loss, lock of liquidity, negative sentiment, halt in new jobs and default.
Due to above subprime borrower start defaulting since they was not able to repay such huge monthly EMI.
Due to this all financial institution was not getting return of their investment. Because the mortgage based security is almost worth less
The moment it was found that these financial institutions is failed to manage risk, panic spread. Investor found that they hardly able to get some money on security that these institution has sold to them. This cause many wall street’s pillar to crumble.
As the default kept rising these institution could not service loan (which they have taken from bank for issuing subprime loan). Hence they started asking for credit from other financial institution which also stops their support as assets value was keep decreasing day by day due to falling real estate market.
The problem worsen because these institution easily securities these security and once securities assets does not exist in balance sheet.
Hence institution does not take in to consideration of loan going bad. Because risk will immediately passed to investor who has purchase these security.
Another advantage of securitization is money comes immediately, means institution no need to wait for long time of EMI.
Because of this in a harry of making quick money once they finish with one cycle of they immediately another cycle of getting prime loan then distribution it in small piece of subprime loan and then securitization and repayment of these loan to bank. This time with much bigger amount, hence amount increased as they enter with each new cycle.
Given the fact that institutions giving out the loan did not take the risk, their incentive was in just giving out the loan. Whether the individual taking the home loan had the capacity to repay the loan or not, wasn't their problem.
Thus proper due diligence to give out the home loan was not done and loans were extended to individuals who are more likely to default.
After borrowers started defaulting, it came to light that institutions giving out loans in the sub-prime market had been inflating the incomes of borrowers, so that they could give out greater amount of home loans.
And so the story continued, till the day borrowers stop repaying. Investors who bought the financial securities could be serviced.
Although there are many reasons responsible for bringing world to the doorstep of financial crisis, the main cause of this financial disaster is sub-prime loan.
So what is sub-prime loan? And why has it cause global panic? If it is related to US housing sector why it affected Indian and other global market?
Let first understand what is subprime loan?
Subprime loan is loan which is not prime loan
Now what is prime loan?
Prime loan is a loan where we follow all terms and condition without compromising in ant terms and condition specified by central bank like RBI in India
Prime loan sanctioned at prime lending rate.
Few example of Prime loan is
KPC compliance
Income Proof
Title ship clearance ect.
Hence a loan sanction with compromise with such terms and condition will called subprime loan.
Subprime loan is very risky but return is high. It simple more risk more rewards due to which in US many lenders has started this business to make quick money.
Now let understand how subprime affects US and globe?
It all started with American dream of sophisticated and luxurious living standard
Housing accommodation is first on that list.
So he started seeking housing loan to give shape of his dream, but there is one problem he don’t have good credit ratings hence he failed to get prime loan. Since his credit is not well enough no banks were ready to sanction his housing loan.
But before American dream fade away, another American enter in to the market they are known as financial institution, who has good credit rating and are ready to take some risk.
Hence they planned one new business opportunity, whit the help of good credit rating they get huge bank loan and then divided that loan amount in to small small peace, and gave that to many American as housing loan at much higher rate then what they have to pay to bank against of their loan.
These higher rates is called subprime rate. The loan by second American to first American is called Prime Loan. And this loan market is called subprime housing loan market.
Now what is Subprime Crises?
All financial institution who has lend subprime loan i.e. Second American, there were knowing that default ration will be high so they hedge their ex-poser, so that in case of default still they will get funded by hedge fund.
But second American doesn’t stop there; it doesn’t wait for principal and interest of subprime loans to be repaid, so that it can repay its prime loan to banks.
So what this financial institution does?
They went for securitization.
Securitization is a way of conversion of these in to financial security which either issued at discount or bears some interest.
During securitization following person come in the picture
Special purposes Vehicle
Credit rating Company
Hence in order to make quick money, much financial institution (Second American) issued this kind of securities which is highly risky.
And how investor of such security is gets paid – this is through the principal and interest received from borrower of subprime loan as a monthly installment.
Financial Institution repays its prime loan from banks from the money that it get by selling of those security to the investor and everyone live happy ever after, as it seems.
But its not like, all subprime loan sanctioned at floating rate, floating rate is a rate which is not fixed as interest rate go up floating rate will also go up. And as floating interest will go up monthly EMI of subprime loan will also go up.
In that time US interest rate has increase significantly due to which monthly EMI of subprime loan also increase. which hit subprime borrower hard.
As we know lot of them was with unstable income and with poor credit rating, thus they default.
Once more and more subprime borrower start defaulting payment to investor )who has purchase securitized security) has stopped resulting huge loss.
Problem start because US keep interest rate too low for very long time which encourage American to go for subprime housing loan to purchase bigger and better home.
As US economy was doing well that time, every day housing price touching new high due to huge demand.
The crisis began with the bursting of the United States housing bubble
Slow US economy, high interest rate, Unrealistic real state price, high inflation together led to fall stock market, negative growth rate, job loss, lock of liquidity, negative sentiment, halt in new jobs and default.
Due to above subprime borrower start defaulting since they was not able to repay such huge monthly EMI.
Due to this all financial institution was not getting return of their investment. Because the mortgage based security is almost worth less
The moment it was found that these financial institutions is failed to manage risk, panic spread. Investor found that they hardly able to get some money on security that these institution has sold to them. This cause many wall street’s pillar to crumble.
As the default kept rising these institution could not service loan (which they have taken from bank for issuing subprime loan). Hence they started asking for credit from other financial institution which also stops their support as assets value was keep decreasing day by day due to falling real estate market.
The problem worsen because these institution easily securities these security and once securities assets does not exist in balance sheet.
Hence institution does not take in to consideration of loan going bad. Because risk will immediately passed to investor who has purchase these security.
Another advantage of securitization is money comes immediately, means institution no need to wait for long time of EMI.
Because of this in a harry of making quick money once they finish with one cycle of they immediately another cycle of getting prime loan then distribution it in small piece of subprime loan and then securitization and repayment of these loan to bank. This time with much bigger amount, hence amount increased as they enter with each new cycle.
Given the fact that institutions giving out the loan did not take the risk, their incentive was in just giving out the loan. Whether the individual taking the home loan had the capacity to repay the loan or not, wasn't their problem.
Thus proper due diligence to give out the home loan was not done and loans were extended to individuals who are more likely to default.
After borrowers started defaulting, it came to light that institutions giving out loans in the sub-prime market had been inflating the incomes of borrowers, so that they could give out greater amount of home loans.
And so the story continued, till the day borrowers stop repaying. Investors who bought the financial securities could be serviced.
Well, that still does not explain, why stock markets in India, fell? Here's why. . .
Institutional investors who had invested in securitised paper from the sub-prime home loan market in the US, saw their investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world. So
Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion.
In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well.
So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world. Since the amount of selling in the market is much higher than the amount of buying, the Sensex began to tumble.
The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar.
So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world. Since the amount of selling in the market is much higher than the amount of buying, the Sensex began to tumble.
The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar.
Any other reason, apart from sub-prime crisis?
Of course! Sub-prime crisis alone could not have caused such mayhem, although it is to blame for the beginning of the end.
This crisis is spreading from sub-prime to prime mortgages, home equity loans, to commercial real estate, to unsecured consumer credit (credit cards, student loans, auto loans), to leveraged loans that financed reckless debt-laden leveraged buy outs, to municipal bonds, to industrial and commercial loans, to corporate bonds, to the derivative markets whose risk are indeterminate, etc.
Of course! Sub-prime crisis alone could not have caused such mayhem, although it is to blame for the beginning of the end.
This crisis is spreading from sub-prime to prime mortgages, home equity loans, to commercial real estate, to unsecured consumer credit (credit cards, student loans, auto loans), to leveraged loans that financed reckless debt-laden leveraged buy outs, to municipal bonds, to industrial and commercial loans, to corporate bonds, to the derivative markets whose risk are indeterminate, etc.
It has been a total systemic failure that has its roots in the US real estate and the sub-prime loan market.
Wednesday, December 9, 2009
Good Time to Bye Home
Everyone dreams of owning a home, a place which is your own and where you can be yourself. Are you wondering whether this is the right time to buy your home? We get you some answers on this here. Read on to find out more.
There are mixed views regarding the real estate sector. While some reports indicate an increase in volumes and prices, some indicate a situation where the supply has far outstripped the demand. As per a leading business daily, nearly 40 per cent of the affordable housing projects are left unsold.
Recap
FY09 proved to be a tough one for real estate sector with conditions not being conducive for both buyers and sellers. Lower demand due to slowdown in the economy and deferment of purchase plans by customers led to pricing pressures.
Prices had declined in the range of 30 to 50 per cent during FY09. This coupled with higher interest rates and lower disbursement of loans by banks due to rising delinquencies further increased the problems. As we all know, the real estate sector is sensitive to movements in interest rates. The demand is higher when the interest rates are lower as the EMIs will be lower and vice-versa.
Recent scenario
An upside cycle, but not really at the crest itself. Until recently, the market observers felt that the sector was a sinking ship but thanks to the support by the Reserve Bank of India, the housing sector in India is experiencing an increase in demand (though not at its peak), as seen in the last couple of quarters.
In fact, the State Bank of India, the largest player in the Indian banking space, has decided to extend its 8 per cent home loan scheme till March 31, 2010, just a day before it was due to expire.
Other players in the space, particularly public sector players have followed suit with their own share of attractive loan schemes. Even private banks are focusing on the housing loan space due to low credit off take by corporates.
The developer is also targeting the housing sector with strong focus on affordable segment as well as a gradual shift to ensure delivery and promotion of previously launched projects at more attractive prices.
According to some developers, the buyers are back! The disbursal of home loans for new registrations has seen a 20 per cent surge this quarter against the previous quarter. According to an IIFL report, in Mumbai, prices are up 25-40 per cent from the bottom in early 2009, while in NCR, the corresponding figure is 15-20 per cent.
As far as the pricing of property is concerned, sellers (builders) have a key role to play here. During the downturn, property rates fell to the tune of 30-50 per cent depending on the area on account of twin factors- fall in demand and need for cash by builders. With the balance sheet of real estate companies becoming stronger on account of restructuring, and money increasingly becoming available through QIPs and even bank loans, builders will resist fall in property rates.
In fact, in several areas, rates are inching upwards. For example, in Mumbai, vacancy levels have fallen to about 12 per cent from 14 per cent in second quarter of CY09, even though supply has shown a spurt. This has reduced the overall available stock in the city. The rentals have become stable. If demand continues, then we expect rentals to strengthen going forward
India's GDP grew by an impressive 7.9 per cent in the September quarter, the fastest in the last one-and-a-half years. The economic activities like construction (6.5 per cent YoY), real estate and business services (each 7.7 per cent YoY) also reported strong growth numbers during the second quarter of FY10. This gives an indication of some pick up happening in across sectors.
Though the demand from commercial space still is cautious, the rentals of retail space have stabilised in most of the country. As per Cushman & Wakefield retail report, mall vacancy has shown a marginal increase from 17.3 per cent in the second quarter (April to June) to 17.5 per cent in the third quarter (July to September).
Further, as per the report, the retail sector is expected to see a demand of around 43 mn sq ft, mostly concentrated in the tier I and II cities. The demand for the hospitality sector is expected to be around 690,000 room nights between 2009-2013. Also with IT sector seeing an improvement in the coming quarters, the demand is expected to inch higher.
On the interest rate: With recession woes looking to end and strong growth witnessed across sectors, the chances of the RBI raising interest rates in the future are higher. Further, with higher liquidity and poor monsoons, inflation concerns are evident. Though in the dawn of abrand new year, with the economy brightening up, the interest rates could only go up from here.
What should one do?
While this may sound as an apt opportunity for buyers to capitalise on the prevailing low rates of interest by striking a deal, several considerations need to be made with regards to money. Being a long-term investment, one must definitely check if he/she can afford the long term loan repayments.
Also, consideration to a stable job, provision for contingencies and personal finances should be looked into before buying the dream house.
If one buys a 500 sq ft flat in Navi Mumbai at a cost of Rs 3,500 per sq ft, the total cost would be Rs 17, 50,000. At an 8.5 per cent interest for 15 years, the interest rate would be Rs 13,51,940.
If the prices go up to Rs 5,500, the cost jumps by 57 per cent to Rs 27, 50,000. Thereby one pays the interest of 21, 24,400.
So if one has the fund resources to tap into and feel they can avail the attractive interest rates at this point in time, then by all means they should go for their dream home now, putting it off for later could mean parting with more money.
There are mixed views regarding the real estate sector. While some reports indicate an increase in volumes and prices, some indicate a situation where the supply has far outstripped the demand. As per a leading business daily, nearly 40 per cent of the affordable housing projects are left unsold.
Recap
FY09 proved to be a tough one for real estate sector with conditions not being conducive for both buyers and sellers. Lower demand due to slowdown in the economy and deferment of purchase plans by customers led to pricing pressures.
Prices had declined in the range of 30 to 50 per cent during FY09. This coupled with higher interest rates and lower disbursement of loans by banks due to rising delinquencies further increased the problems. As we all know, the real estate sector is sensitive to movements in interest rates. The demand is higher when the interest rates are lower as the EMIs will be lower and vice-versa.
Recent scenario
An upside cycle, but not really at the crest itself. Until recently, the market observers felt that the sector was a sinking ship but thanks to the support by the Reserve Bank of India, the housing sector in India is experiencing an increase in demand (though not at its peak), as seen in the last couple of quarters.
In fact, the State Bank of India, the largest player in the Indian banking space, has decided to extend its 8 per cent home loan scheme till March 31, 2010, just a day before it was due to expire.
Other players in the space, particularly public sector players have followed suit with their own share of attractive loan schemes. Even private banks are focusing on the housing loan space due to low credit off take by corporates.
The developer is also targeting the housing sector with strong focus on affordable segment as well as a gradual shift to ensure delivery and promotion of previously launched projects at more attractive prices.
According to some developers, the buyers are back! The disbursal of home loans for new registrations has seen a 20 per cent surge this quarter against the previous quarter. According to an IIFL report, in Mumbai, prices are up 25-40 per cent from the bottom in early 2009, while in NCR, the corresponding figure is 15-20 per cent.
As far as the pricing of property is concerned, sellers (builders) have a key role to play here. During the downturn, property rates fell to the tune of 30-50 per cent depending on the area on account of twin factors- fall in demand and need for cash by builders. With the balance sheet of real estate companies becoming stronger on account of restructuring, and money increasingly becoming available through QIPs and even bank loans, builders will resist fall in property rates.
In fact, in several areas, rates are inching upwards. For example, in Mumbai, vacancy levels have fallen to about 12 per cent from 14 per cent in second quarter of CY09, even though supply has shown a spurt. This has reduced the overall available stock in the city. The rentals have become stable. If demand continues, then we expect rentals to strengthen going forward
India's GDP grew by an impressive 7.9 per cent in the September quarter, the fastest in the last one-and-a-half years. The economic activities like construction (6.5 per cent YoY), real estate and business services (each 7.7 per cent YoY) also reported strong growth numbers during the second quarter of FY10. This gives an indication of some pick up happening in across sectors.
Though the demand from commercial space still is cautious, the rentals of retail space have stabilised in most of the country. As per Cushman & Wakefield retail report, mall vacancy has shown a marginal increase from 17.3 per cent in the second quarter (April to June) to 17.5 per cent in the third quarter (July to September).
Further, as per the report, the retail sector is expected to see a demand of around 43 mn sq ft, mostly concentrated in the tier I and II cities. The demand for the hospitality sector is expected to be around 690,000 room nights between 2009-2013. Also with IT sector seeing an improvement in the coming quarters, the demand is expected to inch higher.
On the interest rate: With recession woes looking to end and strong growth witnessed across sectors, the chances of the RBI raising interest rates in the future are higher. Further, with higher liquidity and poor monsoons, inflation concerns are evident. Though in the dawn of abrand new year, with the economy brightening up, the interest rates could only go up from here.
What should one do?
While this may sound as an apt opportunity for buyers to capitalise on the prevailing low rates of interest by striking a deal, several considerations need to be made with regards to money. Being a long-term investment, one must definitely check if he/she can afford the long term loan repayments.
Also, consideration to a stable job, provision for contingencies and personal finances should be looked into before buying the dream house.
If one buys a 500 sq ft flat in Navi Mumbai at a cost of Rs 3,500 per sq ft, the total cost would be Rs 17, 50,000. At an 8.5 per cent interest for 15 years, the interest rate would be Rs 13,51,940.
If the prices go up to Rs 5,500, the cost jumps by 57 per cent to Rs 27, 50,000. Thereby one pays the interest of 21, 24,400.
So if one has the fund resources to tap into and feel they can avail the attractive interest rates at this point in time, then by all means they should go for their dream home now, putting it off for later could mean parting with more money.
Individual /Employee Tax Planning
I am writing this to address working professional tax related questions.
Just a few months before year ending, I have been attacked with some complicated tax related issues by my friends. Hence thought let put some healthy and relevant tax planning tools in my blog for my internet user friends.
Take a look at the various tax saving tools available and their significance in your personal finance life.
Section 80C of the Income Tax Act gives tax benefits in the form of reduction in taxable income up to Rs 100,000 (Rs 1 lakh) per year. Of the investments in Section 80C, Includes
ULIPs (unit-linked insurance policies)
ELSS (equity-linked savings schemes) Which are tax saving mutual funds that have a 3-year lock-in period. Could be considered by investors with a long-term (above 7 years and 3 years, respectively) investment horizon
EPF (employees provident fund) is unavoidable for the salaried employee, so it becomes an automatic investment.
Just a few months before year ending, I have been attacked with some complicated tax related issues by my friends. Hence thought let put some healthy and relevant tax planning tools in my blog for my internet user friends.
Take a look at the various tax saving tools available and their significance in your personal finance life.
Section 80C of the Income Tax Act gives tax benefits in the form of reduction in taxable income up to Rs 100,000 (Rs 1 lakh) per year. Of the investments in Section 80C, Includes
ULIPs (unit-linked insurance policies)
ELSS (equity-linked savings schemes) Which are tax saving mutual funds that have a 3-year lock-in period. Could be considered by investors with a long-term (above 7 years and 3 years, respectively) investment horizon
EPF (employees provident fund) is unavoidable for the salaried employee, so it becomes an automatic investment.
Term insurance by choice is must to protect family from unseen or unwanted situation that gets the tax benefit. But very few families in India have one.
Other savings instruments like PPF (public provident fund), postal deposits are better when not invested for tax purposes as the returns are very low for their long lock-in periods.
Principal component of the housing loan repayment is a positive inclusion in Section 80C. But when this component is included in the space of Rs 100,000 (Rs 1 lakh), it becomes relatively small.
For Detailed list please refer to
http://law.incometaxindia.gov.in/TaxmannDit/Displaypage/dpage1.aspx?md=2&typ=cn&yr=2009&chp=211
House Rent Allowance (HRA)
Upto 40 per cent (50 per cent in case of the metros) of the basic pay or actual HRA received or rent paid above 10 per cent of basic pay, which ever is lesser, is exempt from income as the house rent allowance.
Sometimes we see payslips with HRA equal to 100 per cent of the basic. There is not much benefit here. Please talk to your HR manager on whether you can have some flexibility to design your pay subject to the same CTC (Cost to Company).
Other savings instruments like PPF (public provident fund), postal deposits are better when not invested for tax purposes as the returns are very low for their long lock-in periods.
Principal component of the housing loan repayment is a positive inclusion in Section 80C. But when this component is included in the space of Rs 100,000 (Rs 1 lakh), it becomes relatively small.
For Detailed list please refer to
http://law.incometaxindia.gov.in/TaxmannDit/Displaypage/dpage1.aspx?md=2&typ=cn&yr=2009&chp=211
House Rent Allowance (HRA)
Upto 40 per cent (50 per cent in case of the metros) of the basic pay or actual HRA received or rent paid above 10 per cent of basic pay, which ever is lesser, is exempt from income as the house rent allowance.
Sometimes we see payslips with HRA equal to 100 per cent of the basic. There is not much benefit here. Please talk to your HR manager on whether you can have some flexibility to design your pay subject to the same CTC (Cost to Company).
Conveyance Allowance
This is an allowance that is still set at the archaic Rs 800 per month levels.
Leave Travel Allowance (LTA)
There is flexibility now in the way LTA is to be processed. We do not have to submit the bills to the company to claim it. That looks like good news. However, the hitch is that the income tax department can ask for the original bills at its discretion.
This can be claimed only two times in a block of 4 years. Retain your bills. Ensure that what you claim is what you 'actually' spent.
There is flexibility now in the way LTA is to be processed. We do not have to submit the bills to the company to claim it. That looks like good news. However, the hitch is that the income tax department can ask for the original bills at its discretion.
This can be claimed only two times in a block of 4 years. Retain your bills. Ensure that what you claim is what you 'actually' spent.
Section 24 - Housing Loan Interest Component
There is a benefit of reduction in taxable income up to Rs 150,000 per year for the interest component of the housing loan. Though there is considerable reduction in the taxable income, it should be remembered that this cash flow is a negative cash flow that does not add to one's wealth.
When we shell out Rs 150,000 the maximum tax benefit that we get is probably 30 per cent (at the highest tax slab). This is Rs 45,000 in the form of tax benefit.
If you had paid the tax instead, you may have lost Rs 45,000 but would have been able to invest or use Rs 105,000 the way you wanted to. By only thinking of saving the tax you actually lose out on paying as interest an additional Rs 105,000.
The other angle to this is that the interest component of the loan keeps decreasing as the year’s progress, thus negating the benefit of tax savings too in the latter years
Other Allowance
Child education is one other component that gets this benefit.
Sodexho Food Copan of Rs 1300 per month.
Medical Reimbursement of Rs 15000 Per annum
Uniform allowances of Rs 15000 Per annum.
This all allowance is a kind of facility provided by employer which is exempted under head of income from salary, hence if you are not getting this allowances you can speak to HR department of your company and ask for these facility which help you in your tax planning.
Creating Wealth Using Tax Breaks
Investments like long-term investments in ULIPs (please do not take the sales agent's view of investing for 3 years), ELSS, pension plans like the EPF and New Pension Scheme give us the benefit of tax savings and also wealth creation.
Please do not borrow to invest in tax saving products unless it is an interest-free loan from friends. The tax benefit may not be as high as the interest rate charged by the bank or your friendly neighborhood financier.
A house can be a wealth only when it is paid up in full. Technically it is an asset in the banks' account till we pay out the last EMI (equated monthly instalment). Please do not take up a housing loan for the apparent tax benefit that it gives as it is highly negative on the wealth creation front. The HRA also becomes taxable if your house is in the same town as your office.
Make use of the tax breaks judiciously in the right spirit of investment and savings and not merely to avoid paying tax!
Monday, November 30, 2009
Bank Concurrent Audit
Bank Concurrent Audit is a kind of internal audit where auditor responsibility is to review and correct assign bank branch internal control system.
However compare to other internal audit, concurrent audit is little different; in concurrent audit auditor seats in branch for whole month (either himself/herself or his/her assistant) like any other branch employee, bank also allots a separate PC to them for their work. However like other employee he doesn’t report to Branch Manager since he recruited by HO hence work with Branch Manager.
Most important challenges to any auditor in concurrent audit is, he seats in branches do audit of branch books, identify branch employee mistakes, ask them to rectify even if they are not directly liable to do so and with all this maintain good relation with bank employees.
We must note that this is very routine job until and unless you are highly interested in banking sector and want to learn and grow in banking sector, in that case this is an excellent platform, it might not be very remunerative at begging but learning is unlimited if you really want to learn since you have access of all area of any bank branch like any other internal auditor there is no limitation in your scope as a concurrent audit.
Some Important information about Bank concurrent Audit
Attendance schedule
Senior Partner attendance – 8 to 10 Days
Audit assistant – 20 to 25 Day
Payments
Normally varies from 8 to 16 Thousand per Branch depend on size of Branch.
However you may get extra incentive as rewards, if you identify some fraud in bank and let Zonal office and HO management to aware of this.
Auditor may also get some work as other assignment to identify fraud in other banks etc.
Important point to checks
I. Revenue Leakages
Objective of this is to identify and review area of revenue leakages on day to day basis. Most of auditors limit this area as checking of charges for cheque returns either inwards or outwards, DD charges, penalty and interest for not making interest payment on time in case of CC or OD, not submitting of stock statements.
However in most of the cases auditor doesn’t check month on month interest calculations with believe that since it is system generated it will be true, even if during new loan & advances review he found some differences in his calculation and system generated interest calculations. In this case he accept that his calculation is wrong, however I will suggest we must go ahead and escalate this issue to HO, in 90 % of the cases we may be wrong even if, it will improve our understanding about interest calculation and we will not make such mistake in future, but suppose our observation lie in 10 % of the cases where we are right what can be the benefits.
From bank point View
1) If interest is under calculated
a. Bank will able to save crors of Rs
2) If it is over calculated
a. Bank will able to save its goodwill in market which may lose if some outsiders identify this case (By this bank can eliminate most of legal audit, compliance etc before arising which may arise if some outsider identify this satiation). In this case bank will be most benefited.
From Auditor point of View
1) Auditor will get professional recognition which increases his firm goodwill and he may get some more excellent remunerative work either from same bank of from others.
2) He may get handsome money by way of rewards
II. KYC Norms
It is Know Your Customer means looking for all bank compliance before giving any loan or opening any Deposit accounts. Some important document to be checked is
1) Photo Identification proof
2) Address proof
3) Guarantor having account with bank
4) Income proof mainly in advances
5) Attached attested photograph of customer in account opening form.
III. Cash management
It includes at least once in a month cash physical verification
Identifying reasons of keeping cash in access of retention limit
IV. House keeping
It includes
1) Discrepancies, if any observed during physical verification (Cash, Foreign Currency, Security forms i.e. blank draft cheques etc):
2) Accounts with RBI/SBI have been reconciled
3) Accounts showed Debit balances
4) Balancing of books
5) Reconciliation of Clearing Accounts.
6) TDS deduction in area of salary/Interest on deposits
7) Service tax matter if any
8) Any other irregularity the Auditors desire to mention including Computer Deficiencies:
9) Locker rent
10) Total account open and close during the month
V. Foreign exchange transaction if any
VI. Advances
Important area to check
1) Non Submission of Stock Statement
2) Inadequate / Non Insurance of Stock
3) CC Accounts Due for Review as at end of Month
4) Branch manager Visit to HNW customer place
5) Cases of Overdrawing in CC/OD Accounts
6) Cases of Overdrawing in Term Loan Accounts
7) Irregularities / Defects in documentation / Non-Compliance of Terms – this require through checking of all document start from KYC till assurance of loan amount and payment of installment on time
8) NPA Position on month on month basis
9) List of Potential NPA
VII. Deposit
Other then KYC we need to check all transaction over and above Rs 10 Lakh objective is to identify any abnormal transaction.
Debit balance in deposit account.
I thing I have cover most of important area that we need to look during bank concurrent audit, however this list is not exclusive but it is inclusive as I discussed at the begging of this post that bank concurrent audit is like internal audit and as we know internal audit is like ocean which have no limitation.
I hope you will like this information about bank concurrent audit and it will help you in your assignment
Kindly post your comment if you like this and let me know area of improvement if any.
Saturday, November 28, 2009
Satyam scandal
Text of Mr Ramalinga Raju’s statement
To the Board of Directors Satyam Computer Services Ltd. From B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7, 2009
Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
1. The balance sheet carries of September 30, 2008
a. Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books)
b. An accrued interest of Rs 376 crore which is non-existent
c. An understated liability of Rs 1,230 crore on account of funds arranged by me.
d. An overstated debtors position of Rs 490 crore (as against Rs 2,651 reflected in the books)
2. For the September quarter (Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of reve nues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.
The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual opera ting profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September q uarter, 2008 and official reserves of Rs 8,392 crore).
The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off withou t being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and strategic fit. Once Satyam's problem was solved, it was hoped that Ma ytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
I would like the Board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all ki nds of assurances (statement enclosed, only to the members of the board), Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt pa yment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.
3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts.
None of my or Managing Director's immediate or extended family members has any idea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward.
However, I am also taking the liberty to recommend the following steps:
1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Pandaand Virender Agarwal, r epresenting business functions, and A.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this task force to immediately address some of the operational matters on hand. Ram can also act a s an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.
3. You may have a ‘restatement of accounts' prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a specia l organisation, for the current situation.
I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilise support form the government at this cru cial time. With the hope that members of the task force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequences thereof.
Dubai Crisis
Just three days before Eid, the Dubai government's announcement seeking a six-month reprieve on debt repayments sent shockwaves through the world markets, as it raised doubts over the Gulf emirate's ability to meet its financial obligations.
Global markets, which have yet to come out of the financial crisis that savaged many an economy, reacted sharply and sank like a rock. Analysts now wonder whether they are witnessing the beginning of the biggest sovereign default since Argentina in 2001.
Questions are also being raised on Dubai's status as a major destination for international investment.
What happened was that the Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a 'standstill' on repayments until May 30 2010.
The standstill also applies to the $4.05 billion sukuk, or Islamic bond, issued by Nakheel, the state-owned builder famous for the spectacular Palm Jumeirah scheme and other such mind boggling projects that involve large-scale land reclamation. Nakheel's parent company is Dubai World.
The truth is that Dubai is being crushed under a mountain of debt. The emirate has chalked up debt in excess of $80 billion by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a six-month standstill on its debt repayment to all its lenders.
So how will this affect India and why did the crisis happen
The emirate borrowed $80 billion in a four-year construction boom that transformed Dubai into a glittering jewel in the middle of the Gulf region and also into a tourism and financial hotspot.
The debt itself might not seem too high, but the uncertainty surrounding the entire issue has spooked financier. Investor confidence the world over has been shaken up badly, as many wonder if the world would slip into another recessionary phase, given that there are some other nations in a similar situation as Dubai: Greece, Iceland, Hungary being just a few of them. Many nations that are following Dubai's development pattern are inviting trouble, said analysts. Economists fear that they might have been too hasty in predicting that the global financial crisis had ended.
'The Sun Never Sets on Dubai World' is the corporate slogan of Dubai World (a state controlled enterprise). However, that may no longer hold true.
gossip spread through the world like wildfire hitting the emirate's property prices, credit rating agencies downgraded all Dubai government-related debt, billions of dollars were lost by investors as the value of their investments in the Gulf emirate plummeted, oil prices began to fall, some currencies saw a steep slide, and the stock markets the world over were revisited by that all-too-familiar sinking feeling. Billions of dollars of investor wealth was wiped out before anyone could blink.
Dubai saw property prices falling by almost 50 per cent from their 2008 peak. The property bubble had already begun to burst, but with this latest shock real estate will be devalued even more.
However, many say that it might be too early to write Dubai off. Its oil-rich neighbour Abu Dhabi will bail it out to some extent.
However, Indian bankers and economists say that the Dubai debacle would not have much of an impact on India as Indian banks do not have much exposure to the Dubai real estate markets.
Notwithstanding the UAE being India's top destination for exports, the government put up a brave face stating financial concerns in Dubai would not impact the Indian economy and the country's real estate sector.
"I don't think," said Commerce and Industry Minister Anand Sharma when asked whether the confidence erosion in Dubai would have ripple effect in India.
Sharma said the Indian economy is large and "I don't think developments in real estate sector in Dubai are going to impact it. Besides, the Indian real estate is doing well," he said.
The UAE, which has a large Indian population, is the country's largest export destination with shipments of about $24 billion in fiscal 2008-09.
Asked whether exports to the Middle East could be impacted, Sharma told reporters, "I hope not."
ICICI Bank says no material exposure to Dubai corporates
Delhi-based Oriental Bank of Commerce also said the bank does not have any exposure in Dubai.
"We have no exposure there," OBC Executive Director S C Sinha said.
The Indian finance ministry meanwhile said the financial crisis in Dubai, triggered by a slump in real estate, may not impact remittances sent by Indian expatriates in the Gulf.
"Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," Finance Secretary Ashok Chawla said.
India gets nearly a quarter of its total remittances from the United Arab Emirates.
Former RBI Governor Y V Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on the Indian remittances."
Finance Secretary Ashok Chawla, however, said it will take some time for the Finance Ministry to examine the exact impact of the crisis on the Indian economy.
"We have seen the press reports. We will have to study what the issue is, what the problem is and what will be the possible implications, if any for the Indian economy, on the people, on the corporates. It will take some time for us to examine this," Chawla said.
The Reserve Bank India said it is examining the impact of the Dubai government's decision to suspend debt payments by Dubai World, which led global stock markets to tumble amid fears of widespread default.
Governor Duvvuri Subbarao said he has asked his officials to study the impact and "if necessary make recommendations."
"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," said Subbarao, who attended an interactive session with the students of Indian School of Business in Hyderabad.
Global markets, which have yet to come out of the financial crisis that savaged many an economy, reacted sharply and sank like a rock. Analysts now wonder whether they are witnessing the beginning of the biggest sovereign default since Argentina in 2001.
Questions are also being raised on Dubai's status as a major destination for international investment.
What happened was that the Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a 'standstill' on repayments until May 30 2010.
The standstill also applies to the $4.05 billion sukuk, or Islamic bond, issued by Nakheel, the state-owned builder famous for the spectacular Palm Jumeirah scheme and other such mind boggling projects that involve large-scale land reclamation. Nakheel's parent company is Dubai World.
The truth is that Dubai is being crushed under a mountain of debt. The emirate has chalked up debt in excess of $80 billion by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a six-month standstill on its debt repayment to all its lenders.
So how will this affect India and why did the crisis happen
The emirate borrowed $80 billion in a four-year construction boom that transformed Dubai into a glittering jewel in the middle of the Gulf region and also into a tourism and financial hotspot.
The debt itself might not seem too high, but the uncertainty surrounding the entire issue has spooked financier. Investor confidence the world over has been shaken up badly, as many wonder if the world would slip into another recessionary phase, given that there are some other nations in a similar situation as Dubai: Greece, Iceland, Hungary being just a few of them. Many nations that are following Dubai's development pattern are inviting trouble, said analysts. Economists fear that they might have been too hasty in predicting that the global financial crisis had ended.
'The Sun Never Sets on Dubai World' is the corporate slogan of Dubai World (a state controlled enterprise). However, that may no longer hold true.
gossip spread through the world like wildfire hitting the emirate's property prices, credit rating agencies downgraded all Dubai government-related debt, billions of dollars were lost by investors as the value of their investments in the Gulf emirate plummeted, oil prices began to fall, some currencies saw a steep slide, and the stock markets the world over were revisited by that all-too-familiar sinking feeling. Billions of dollars of investor wealth was wiped out before anyone could blink.
Dubai saw property prices falling by almost 50 per cent from their 2008 peak. The property bubble had already begun to burst, but with this latest shock real estate will be devalued even more.
However, many say that it might be too early to write Dubai off. Its oil-rich neighbour Abu Dhabi will bail it out to some extent.
However, Indian bankers and economists say that the Dubai debacle would not have much of an impact on India as Indian banks do not have much exposure to the Dubai real estate markets.
Notwithstanding the UAE being India's top destination for exports, the government put up a brave face stating financial concerns in Dubai would not impact the Indian economy and the country's real estate sector.
"I don't think," said Commerce and Industry Minister Anand Sharma when asked whether the confidence erosion in Dubai would have ripple effect in India.
Sharma said the Indian economy is large and "I don't think developments in real estate sector in Dubai are going to impact it. Besides, the Indian real estate is doing well," he said.
The UAE, which has a large Indian population, is the country's largest export destination with shipments of about $24 billion in fiscal 2008-09.
Asked whether exports to the Middle East could be impacted, Sharma told reporters, "I hope not."
ICICI Bank says no material exposure to Dubai corporates
Delhi-based Oriental Bank of Commerce also said the bank does not have any exposure in Dubai.
"We have no exposure there," OBC Executive Director S C Sinha said.
The Indian finance ministry meanwhile said the financial crisis in Dubai, triggered by a slump in real estate, may not impact remittances sent by Indian expatriates in the Gulf.
"Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," Finance Secretary Ashok Chawla said.
India gets nearly a quarter of its total remittances from the United Arab Emirates.
Former RBI Governor Y V Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on the Indian remittances."
Finance Secretary Ashok Chawla, however, said it will take some time for the Finance Ministry to examine the exact impact of the crisis on the Indian economy.
"We have seen the press reports. We will have to study what the issue is, what the problem is and what will be the possible implications, if any for the Indian economy, on the people, on the corporates. It will take some time for us to examine this," Chawla said.
The Reserve Bank India said it is examining the impact of the Dubai government's decision to suspend debt payments by Dubai World, which led global stock markets to tumble amid fears of widespread default.
Governor Duvvuri Subbarao said he has asked his officials to study the impact and "if necessary make recommendations."
"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," said Subbarao, who attended an interactive session with the students of Indian School of Business in Hyderabad.
My View - It looks like it is surely going to be an important trigger because the reality is that the numbers are relatively large. These are not small numbers that we are talking of. We have to keep in mind that whenever any kind of a crisis begins to unfold, it starts off on a very modest note and it doesn’t look very damaging to begin with.
But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?
Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.
What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.
But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?
Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.
What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.
Talking about indian market - I do not think there will be a knee jerk reaction. I think the general feedback or what we are hearing from funds even today is this is not something to react to in India. There could be Indian specific factors going forward, which might affect the markets.
About Nifty - we have to keep in mind that going forward unless we see any major global trigger, I think this is a kind of a market which will continue to play between 4,500 to about 5,200 for the next several months till we kind of start factoring-in things like the budget or reforms or the next earnings season. I think till that point of time we will have to kind of look at this kind of a trading range.
Impornat area of consern is credit growth is not picking up at all this year, it is running in single digits, clearly tells us that corporate capex is not picking up despite so much of improvement in the market, sentiments, talks about pickup in economy etc. Whenever corporate capex doesn’t pickup, it shows up with a lag on the broad economy a couple of quarters down.
So I think the downside can be deeper than 4,500.
So I think the downside can be deeper than 4,500.
India outlook
To sum up we can say that the global financial recession which started off as a sub-prime crisis of USA has brought all nations including India into its fold. The GDP growth rate which was around nine per cent over the last four years has slowed since the last quarter of 2008 owing to deceleration in employment, export-import, tax-GDP ratio, reduction in capital inflows and significant outflows due to economic slowdown. The demand for bank credit is also slackening despite comfortable liquidity in the system. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence leading to the crash
Nevertheless, a sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure, buoyancy of foreign exchange reserves have helped Indian economy to remain largely immune from the contagious effect of global meltdown. Indian financial markets are capable of withstanding the global shock, perhaps somewhat bruised but definitely not battered. India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis. In other words, the fundamentals of our economy continue to be strong and robust. The global economic environment continues to remain uncertain, although the rate of contraction in economic activities and the extent of pressures on financial systems eased in the first quarter of 2009-10. Yet, it is not possible to clearly see the path of the crisis and its resolution over the coming months. In this sense, India is not unique as almost every country, whether or not directly affected, has to manage the current economic crisis under uncertainty.
I would like to conclude as the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply.
Nevertheless, a sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure, buoyancy of foreign exchange reserves have helped Indian economy to remain largely immune from the contagious effect of global meltdown. Indian financial markets are capable of withstanding the global shock, perhaps somewhat bruised but definitely not battered. India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis. In other words, the fundamentals of our economy continue to be strong and robust. The global economic environment continues to remain uncertain, although the rate of contraction in economic activities and the extent of pressures on financial systems eased in the first quarter of 2009-10. Yet, it is not possible to clearly see the path of the crisis and its resolution over the coming months. In this sense, India is not unique as almost every country, whether or not directly affected, has to manage the current economic crisis under uncertainty.
I would like to conclude as the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply.
Risks in Indian economy
I. FII Movement
Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Indian stock market has tumbled down mainly because of reversal of foreign institutional investment in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009,
II. US Dollar
Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. However, in my opinion there are severe short-term risks from the US dollar. At the end of the day – the service sector is the largest component for Indian GDP and Indian software firms get up to 60% of their revenue from the United States. If Indian firms are not able to counteract meaningful decline in the US dollar with efficiency gains internally, that could have a material impact on the whole growth story.
III. Liquidity crunch
To large extend Indian market sentiment are run through FII movement whether positive or negative. Hence if FII trend negative we will experience negative movement in domestic player as well
IV. Reduction In Export
Large number of Indian export includes export to developed economy, and due to credit crunch in developed economy Indian export badly affected. Same we have experience, during 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.
V. Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.
Some Other Important Risk
1) Lower domestic participation in stock market – Only 1% of people invests in stocks. Rest put in banks or gold. Stock market dependent on foreign capital: Give FII as a % of total market cap of the SENSEX. I guess roughly 26%. This makes total market prone to movement of FIIs
2) Inadequate infrastructure: Compare with China. Transportation cost highest among all emerging economies. leading to in competitiveness
3) High fiscal deficit compared to all emerging economies.
4) Time taken to enforce legal contracts (courts)
5) Labor problem – Frequent strikes, no clear policy
6) Land acquisition problem – POSCO, TATAS – sending global signals
7) Power
8) High dependency on imports for fuel
India Position after 2008-09
India Position
In India, the impact of the crisis has been deeper than what was estimated by our policy makers although it is less severe than in other emerging market economies. The extent of impact has been restricted due to several reasons such as-
1) Indian financial particularly our banks have no direct exposure to tainted assets
2) The credit derivatives market is in an embryonic stage and there are restrictions on investments by residents in such products
3) India’s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period.
4) India’s comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.
5) Headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate.
Step taken by Indian finance & Commerce ministry to boost the economy
The future trajectory of the economic meltdown is not yet clear. However, the Government and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and restore confidence in Indian financial markets. The fiscal and monetary response to the crisis has been discussed in the following points-
I. Fiscal Response
The Government launched three fiscal stimulus packages between December 2008 and February 2009.
1) Expanded safety-net program for the rural poor,
2) The farm loan waiver package and
3) Payout following the Sixth Pay Commission report
II. Monetary Response
The RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity through management, risk management and credit management
Interest Rate management
In order to deal with the liquidity crunch and the virtual freezing of international credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their deposit and lending rates. The major changes in the interest rate policy of RBI are given below-
Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in August 2008 to 5 per cent in January 2009
Reduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points from 9.0 per cent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years) in order to improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum.
Risk management
RBI has already made several changes to the current prudential norms for robust risk disclosures, transparency in restructured products and standard assets such as-
1) Implementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks except RRBs
2) Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II
3) Counter-cyclical adjustment of provisioning norms for all types of standard assets
4) Reduction in the provisioning requirement for all standard assets to 0.40 per cent;
5) Market participant’s securities regulators will expand the information provided about security.
Credit management
There was a noticeable decline in the credit demand during 2008-09 which is indicative of slowing economic activity- a major challenge for the banks to ensure healthy flow of credit to the productive sectors of the economy. In order to facilitate demand for credit in the economy the Reserve Bank has taken certain steps such as-
1) Opening a special repo window under the liquidity adjustment facility for banks for on-lending to the non-banking financial companies, housing finance companies and mutual funds
2) Extending a special refinance facility, which banks can access without any collateral
3) Accelerating Government’s borrowing program
4) Relaxing the external commercial borrowings (ECB) regime
5) Allowing the NBFCs and HFCs access to foreign borrowing
6) Expanding the refinance facility for exports
7) Extending flow of credit to sectors which are coming under pressure
8) Instituting a rupee-dollar swap facility for banks with overseas branches
9) Allowing corporate to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets
In India, the impact of the crisis has been deeper than what was estimated by our policy makers although it is less severe than in other emerging market economies. The extent of impact has been restricted due to several reasons such as-
1) Indian financial particularly our banks have no direct exposure to tainted assets
2) The credit derivatives market is in an embryonic stage and there are restrictions on investments by residents in such products
3) India’s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period.
4) India’s comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.
5) Headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate.
Step taken by Indian finance & Commerce ministry to boost the economy
The future trajectory of the economic meltdown is not yet clear. However, the Government and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and restore confidence in Indian financial markets. The fiscal and monetary response to the crisis has been discussed in the following points-
I. Fiscal Response
The Government launched three fiscal stimulus packages between December 2008 and February 2009.
1) Expanded safety-net program for the rural poor,
2) The farm loan waiver package and
3) Payout following the Sixth Pay Commission report
II. Monetary Response
The RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity through management, risk management and credit management
Interest Rate management
In order to deal with the liquidity crunch and the virtual freezing of international credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their deposit and lending rates. The major changes in the interest rate policy of RBI are given below-
Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in August 2008 to 5 per cent in January 2009
Reduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points from 9.0 per cent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years) in order to improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum.
Risk management
RBI has already made several changes to the current prudential norms for robust risk disclosures, transparency in restructured products and standard assets such as-
1) Implementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks except RRBs
2) Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II
3) Counter-cyclical adjustment of provisioning norms for all types of standard assets
4) Reduction in the provisioning requirement for all standard assets to 0.40 per cent;
5) Market participant’s securities regulators will expand the information provided about security.
Credit management
There was a noticeable decline in the credit demand during 2008-09 which is indicative of slowing economic activity- a major challenge for the banks to ensure healthy flow of credit to the productive sectors of the economy. In order to facilitate demand for credit in the economy the Reserve Bank has taken certain steps such as-
1) Opening a special repo window under the liquidity adjustment facility for banks for on-lending to the non-banking financial companies, housing finance companies and mutual funds
2) Extending a special refinance facility, which banks can access without any collateral
3) Accelerating Government’s borrowing program
4) Relaxing the external commercial borrowings (ECB) regime
5) Allowing the NBFCs and HFCs access to foreign borrowing
6) Expanding the refinance facility for exports
7) Extending flow of credit to sectors which are coming under pressure
8) Instituting a rupee-dollar swap facility for banks with overseas branches
9) Allowing corporate to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets
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