Tuesday, April 15, 2014

Interest Rate Future Trading

RBI push for Interest Rate Futures to boost trading

To attract traders even cash settlement has been permitted in IRFs by the regulator

The Reserve Bank of India (RBI)’s likelihood of launching more tenures in Interest Rate Futures (IRF) is set to drive trading volumes further. A senior official from RBI said last week this was being considered.

In December, the regulator made a third attempt to launch IRFs. The previous two attempts had witnessed a lukewarm response. RBI's definition of IRF is, "a standardised interest rate derivative contract, traded on a recognised stock exchange to buy or sell a notional security or any other interest-bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract”.

Data show the product, relaunched in January, had a combined average monthly turnover crossing the Rs 1,000-crore mark for the first time in April. To attract traders, cash settlement has been permitted in IRFs.

“If more tenures are launched in IRF, that should help overall to drive volumes. But prior to that, banks need to get their internal systems in place. The burden of success on IRFs is huge, as this time the regulators have pretty much given whatever the market had asked in terms of product design, cash settlements, etc. A lot of the large roadblocks have been taken care of,” said Brijen Puri, executive director and head of markets, JPMorgan.
It is learnt RBI is pressurising banks to trade in IRFs, due to which trading volumes are picking up.

Currently IRFs are permitted where the underlying product is a 91-day treasury bill, a two-year, five-year or 10-year coupon bearing government security. The Street says most are done with the 10-year security. “Besides helping to boost trading volumes, we can have a term curve even in the futures exchange if more tenures are launched,” said N S Venkatesh, chief general manager and head of treasury, at IDBI Bank.

IRFs were launched for a second time in August 2009. The earlier launch was in 2003. Both attempts had failed to attract traders, due to which there were meagre volumes.

Bank Will Need More Capital

New govt will have to inject more capital in PSBs: S&P

Asset quality of banks is likely to remain weak through the next year                                                    

Global ratings agency Standard & Poor’s (S&P) on Tuesday said the new government at the Centre would have to inject more capital into public sector banks (PSBs) to ensure these maintained healthy balance sheets, especially in the backdrop of deteriorating asset quality.

However, given India’s sizable fiscal deficit, it would be essential for the next government to balance 
capital infusion with medium-term fiscal consolidation, S&P said in a report. It added Indian banks faced three key challenges — asset quality problems, sizeable capital needs, especially for PSBs and high financing costs.

State-run lenders, which account for about 70 per cent of assets, need sizeable capital to support growth and meet Basel-III norms. Their reliance on capital infusion by the government was likely to remain very high, the report said. The new government and its policies could play a crucial role in addressing these issues.

“We believe policy reforms in key corporate sectors could affect the banking sector’s asset quality, given loans to the former account for a large part of gross bank credit (industry 45 per cent and services 23 per cent),” the agency said. Policy action could have greater impact on sectors that had a higher degree of corporate debt restructuring, S&P said.

It added the asset quality of banks was expected to remain weak through the next year, as it would take time for policy measures to bring about an improvement in 
stressed loans.

Banks’ asset quality has weakened because of slow economic growth, high interest rates and the high leverage of companies in distressed sectors. Banks have played a major role in funding projects that require heavy capital expenditure such as those in the power, 
telecom, road, ports, metals & mining, construction and cement segments.

Asset quality has seen the most stress in the 
infrastructure segment, which accounts for about a third of stressed cases. The metals & mining, and textile sectors together contribute about 65 per cent to the debt being restructured. Chemicals, construction and ship-building are the other sectors under stress. S&P said between 2005 and 2008, small and mid-sized companies had recorded aggressive debt-funded capital expenditure or acquisitions.

These sectors might require strategic measures and further capital investments, S&P said, adding these were more likely in a growing economy and an improved business climate.

SBI To Review Branch Policy In Metros

State Bank of India to review branch policy in metros-Business Standard

Lender taking external help for study, with aim to optimise network and review location potentials, performance parameters

            The State Bank of India group is embarking on a fresh strategy for expansion - opening of branches and automated teller machines (ATMs) and relocating branches - in the four metropolitan regions of Delhi, Mumbai, Chennai and Bangalore.

It wishes to cut the time for
 break-even to a year for new branches from the present period of up to 24 months. Apart from the imperatives of competition, it is looking at effective use of locations and better deployment of resources in metropolitan regions, said a senior executive.

The group plans to create profiles of potential centres for network optimisation. It is bringing in an external advisor for the exercise. Bank officers will work alongside the study team. These officials would later work to help implement the plans vetted by the bank.

 SBI executive said it was under-strength in metropolitan areas - 2,218 of 14,097 branches in March 2012 and not very different in December 2013, with 2,448 of 15,297 branches in the network. Yet, the bulk of business gets done in such regions.

Besides customer service, location is a key factor for attracting customers and building a business. Many private sector banks (PSBs) have built a thriving branch network in metro cities. Much of the presence of large public sector banks is not much more than a social statement, said an analyst with a private broking house.

Some pockets in metros are coming up as attractive business centres. For example, in the Mumbai metropolitan area, New Panvel, an area adjoining the upcoming international airport in Navi Mumbai, provides a big business opportunity.

This exercise also gives the lender an opportunity for looking at coordination and cooperation with associate banks, said an SBI branch manager. "At present, the synergy between associate and parent is low," he said.

The profiling exercise would take into account the presence of associate banks and other banks at or near these locations.

SBI has been working on plans to consolidate (merge) associate banks with itself. It had already merged State Bank of Saurashtra and State Bank of Indore.

The merger of State Bank of Hyderabad was on the cards but the plans were kept in abeyance due to the Telangana statehood agitation.

The exercise would identify and analyse the most important factors which affect the performance of branches. If existing banking facilities in the proposed locations are considered inadequate, the study would go into the reasons. It would present an estimate of the minimum business new branches are expected to attract in 12-36 months. It would also give the market share of the State Bank group in the locality vis-à-vis the potential.

ATMs in the proposed locations should be such that these should be able to reach a high hit-rate, like 200 a day within six months, say executives.

·         The bank plans to create profiles of potential centres for network optimisation
·         It is bringing an external advisor for the exercise
·         Though the bank is under-strength in metropolitan areas, the bulk of business gets done in such regions
·         Some pockets in metros are coming up as attractive business centres
·         The profiling exercise would take into account the presence of associate banks and other banks at or near these locations
·         The exercise would identify and analyse the most important factors which affect the performance of branches

PS Banks Should Be Held Responsible

Public sector bank management should be held accountable for bad loans: Jalan--financial Express

(Read My comments below)
Former RBI governor Bimal Jalan on Monday said the managements of public sector banks, and not the finance ministry, should be held accountable for the wrong assessment of credit worthiness to check the rising number of bad loans.
“If you put public sector banks in one bracket and other banks in another bracket, you will find that NPAs in the first sector are higher. So that is a product of not political intervention per se, but that could also be a product of the credit worthiness analysis that the banks do....there is much less of a price to pay if you make the wrong assessment of credit worthiness in a public sector, where accountability is a problem,” Jalan said in an event organised by the MCC Chamber of Commerce and Industry.
He said part of the reason for the piling up of NPAs was the slowdown, but that did not explain the whole problem. “The issue is important and the answer that we have to think about it is to how to make the management accountable, the management of the institution (banks) accountable rather than the ministry of the government,” he pointed out.
According to Jalan, managements of public sector lenders should be free to run the banks without government intervention, but at the same time they should be held accountable for their performance.
“Why government intervention in running the public sector banks? You can appoint, you can decide on rural priorities, small-scale priorities that are applicable to banks,” said the former chief of the central bank. Worried over a further rise in bad loans, finance minister P. Chidambaram recently exhorted the state-run banks to effectively deal with NPAs.
“The biggest challenge facing the public sector banks is NPAs and asset quality,” Chidambaram said.
“We have told them (banks) to focus on recovery and banks are focusing on recovery,” he said.
Without providing NPA data of the public sector lenders for the last financial year, the finance minister said it was ‘likely to be a little higher’ over 2012-13, when NPAs stood at 3.84%.
My Comments:

Learned and experienced Banker Sri Bimal Jalan has come forward openly to safeguard Ministry of Finance. He says MOF is not responsible for rise in bad loans though they are key members in process of sanction of any big loan.
In his opinion, Ministers and politicians may suggest bankers for making finance to any Tom Dick and Harry for their vested interest but cannot be held responsible if the accounts go bad. 

Sri Bimal Jalan does not like to understand that when the boss of any officer verbally gives any instruction, the officers tries to obey it even the advice is wrong. This is India where flattery is the key to success.

This is just like the story of PM Manmohan Singh who silently watched Coal Scam happening and failed to stop bribery and flattery as a devoted Chowkidar. But politicians belonging to Congress Party always say that Prime Minister MMS is clean and not responsible for any loss caused to the country due to his silence and indirect permission to evil deeds of his junior ministers and officials.

Jalan bats for better govt-central bank ties and flexible policy-making-Business Standard

Indicates that there should be no fixation on either growth or inflation
Former Reserve Bank of India (RBI) governor Bimal Jalan said on Monday the priority of a central bank should not be fixated on either growth or inflation. He said central banks need to consider national priorities in their policy decisions.

"I will not comment on RBI but I will make a general point on central banks. The whole perception about the role of central banks across the world is changing. If you go back to history, in the 90s there was a predominant view that central banks' responsibility was inflation (control), while the government would decide on fiscal policies, development, growth, etc,” Jalan said at the sidelines of an event.

“Today, if you look around the world, you will find that central banks are very active in promoting growth. For example, what is the US doing?".

RBI had formed a committee headed by one of its deputy governors, Urijit Patel, to review the monetary policy structure.

The Patel committee advised explicit focus on an inflation target, with the  retail price inflation figure seen as appropriate in this regard. It suggested RBI try to keep annual inflation around four per cent.

'Fit & proper' criterion doesn't clash with RBI's inclusion drive: Jalan

Declines to share his views on whether RBI should allow industrial houses to set up banks in India
The Reserve Bank of India (RBI) should not compromise on its ‘fit and proper’ criterion while offering new banking licences to promote financial inclusion, said former RBI governor Bimal Jalan.

The RBI has, in principle, approved banking licences to two —Bandhan and IDFC — of the 25 applicants. The decision surprised many as it was believed new licences were this time offered to expand the reach of financial services to remote corners.

Jalan, who headed a four-member high-level advisory committee that scrutinised the applications for new banking licences, defended the central bank’s decision of granting licences to only two applicants.

“I cannot comment on the policy, it will not be fair. There is no contradiction in the principle of financial inclusion and the ‘fit and proper’ criterion. It is a criterion to make sure other people’s money, which is what banks deal with, is disbursed and allocated in a manner that is appropriate,” he said while responding to queries on why only two new licences were offered by the central bank.

He declined to share his views on whether RBI should allow industrial houses to set up banks. “I don’t want to make a comment. I leave it to the RBI,” he said.

In contrast to a decade ago, when large industrial groups were not permitted to run banks, the RBI had accepted applications from industrial groups for a licence in this around. While corporate houses, including the Ambanis, Birlas and Bajajs, had applied, none of them was granted a licence.

But RBI Governor Raghuram Rajan recently clarified there was hope for some of these groups, as the central bank was evaluating options to offer more licences. “We went through the list. This was the set of applicants the (Bimal) Jalan committee and the RBI felt comfortable with. We have opened up the possibility that will allow applicants to apply again once we start giving licences on tap, as well as create differentiated banking licences. Some of the applicants will be better off applying for a differentiated licence, rather than a full bank licence,” Rajan said at a seminar in Pune last week.

Internationally, it is fairly common for industrial houses to operate banks. Only 12 per cent of countries restrict the mixing of banking and commerce, according to the RBI’s discussion paper on new bank licensing.

Monday, April 14, 2014

Bank Deposits AND Mutual Fund

Comparing risk in a bank deposit and mutual fund
-By Sri Uma Shashikant-Times of India

Explaining risk in mutual funds to investors remains a challenge. Investors ask for a minimum return that is better than the interest on bank deposits. They dismiss the idea of return compared to a benchmark. Risk is the possibility that actual returns will be different from what was expected. Forming realistic expectations for returns is tough. Therefore, investors prefer products where the return is indicated upfront, as in the case of bank deposits. How is this promise made and how is it kept? 

Banks issue deposits and generate returns from loans. For example, when a bank borrows at 8% and gives out a loan at 11%, its ability to pay interest on the deposits depends on the loans being repaid as promised. It is not possible to create a portfolio that will never default. So, how do banks ensure that this risk is not passed on to the depositor? Banks are not allowed to fund all their loans with deposits, but must bring in equity capital to absorb possible losses on the loans they offer. They must comply with capital adequacy norms, where the amount of equity capital they should have must be linked to the risk of their loan assets. This is why when we look at the poor quality of loans on the books of banks today, we worry about how the equity capital will be found and who will provide it. 

In a mutual fund, the investors' money is deployed in a portfolio. Here the investor is not a depositor, but an equity investor. Therefore, the return to the investor depends on the value of the portfolio. While a bank depositor does not know the portfolio of loans or may not care about the price of the bank's equity shares, a mutual fund investor needs information. A mutual fund investor not only knows the NAV on a daily basis and the portfolio on a monthly basis, but can also act on this information and exit the fund if he is not willing to take the risk of the assets in which the fund has invested. 

So, in both cases, the asset portfolio is risky. Bank loans can go bad and mutual fund securities can lose value. This risk is managed differently in both cases. In a bank, processes are put in place to evaluate a borrower and collateral may be sought to support the loan. The bank will treat a loan as non-performing when the interest is not paid on time. It will then write off the loan as a bad debt. The bank uses its books to manage the risk after it manifests. 

A mutual fund invests in assets at market prices. As the asset's risk changes, its price will change, which reflects. This, in turn, reflects on the NAV. Since market prices reflect the expectation for asset performance, mutual fund NAV reflects expected risks even before the event has taken place. Investing in a mutual fund means investing in a market portfolio that is dynamic, but also volatile. 

How does this impact the investor? In a bank deposit, the investor primarily bears a credit or default risk. If his bank is well-capitalised, follows prudential processes for offering loans and recognising any deterioration in quality, this risk is mitigated. In a mutual fund, the investor bears a market risk. If the value of the securities in which the fund has invested falls, the investment is at risk. Hence, a mutual fund diversifies its holdings so that the NAV is not swayed by a single security. However, it is not possible to construct a zero-risk portfolio. 

In a mutual fund, the investor is an equity investor in the fund and earns whatever is made in the portfolio. To protect such investors, it is important that the portfolio is diversified, transparent, liquid, and valued correctly. Additionally, the assets must be held in custody by a third-party bank so that there is no misappropriation. In a bank, the investor is a lender and earns a fixed rate of interest. To protect such investors, regulators require banks to riskweight the assets (loans), subject banks to strict supervision, and ask for adequate disclosures. 

What if the mutual fund is also capitalized? To impose a capital adequacy on mutual funds, it is important to define the return that the investor is entitled to. The return to the investor is the value of the portfolio itself. This value can move on an every day basis, depending on market prices. So, even if we ask for another layer of equity investors to come in and contribute capital, it is not possible to define how the gains or losses on the portfolio will be split between the investors and capital providers. This is why ideas, such as minimum capital requirement or seed capital for mutual funds, are conceptually wrong and inequitable. 
Instead, what we should ask for is an independent yardstick of how much return the mutual fund should have earned, and if it did better or worse. The benchmark serves this purpose. Every fund is supposed to have one. For the fee it takes, it should beat that benchmark. Research shows that several funds fail to do this. That should be the focus of investors and regulators. Not the tiresome tirade of asking why mutual funds cannot work like banks, or why they cannot be capitalized.

Link Times of India

Is there any advantage in having several savings bank accounts? 

Amrita Singh holds several deposit accounts across banks in different cities, which she had opened due to her various jobs. She did not close them because she either had an ongoing SIP, or an EMI payment, or utility payments linked to the account. She also had to open zero balance accounts as required by her employers. Should she cut down on her accounts or does she benefit from retaining all of them? 

Read more at:
Link Economic Times

Delay In Wage Revision

Time Taken for Revision of Salaries of Bankers vs Parliamentarians-By Sri Rajesh Goyal
The 10th BPS was due wef 01/11/2012 i.e. now it is over 17 months and our retired and tired UFBU leaders are still struggling to even sort out the basic framework of the revision.  A few days back I came across a graphical representation of the time taken by  Lok Sabha and Rajya Sabha on various bills.   I am pasting the same below for benefit of our readers :-

The above graphical representation clearly shows that Lok Sabha took less than a minute to pass the Bill on salaries and allowances of ministers and Rajya Sabha passed the same in 2 minutes.   However, when it comes to bankers, even after 17 months of overdue period, no body seems to have any worries except bankers.

The whole country is now under the grip of Lok Sabha elections.   I am sure the bankers must have made up their mind to whom they are going to support.  Certainly it is a personal decision and I am sure a difficult one from the banker's point of view.   No party has come forward to offer any freebies to bankers in any shape.  Why ?  

The main reason is that bank unions have a strong leaning towards left who have hardly any chance of winning in this election.  Thus, other parties  do not think bankers to be their vote bank and they feel all bankers are leftist leaning.    Left parties have always taken the banker for granted and in the name of workers unity, have cheated bankers time and again as they have never raised the issues of bankers strongly, except to raise the voice against bank reforms.   Even that they have failed to stop. 
UFBU has miserably failed to take the advantage of the pre-election period to extract an honourable settlement for the bankers.    After the new government is installed, bankers will be more at the mercy of the new government, who will be in no way in hurry to settle the issues. 

As agreed in the last meeting, the next meeting of negotiations is due to be held soon.   I am sure once again bankers will get circulars from UFBU explaining IBA's adamant stand and sugar coating of the words to make fool of the bankers.   There is a need for bankers to take a pledge that they will not support unions which have failed to protect the interests of the bankers.

( Source allbankingsolutions.com)

Mechanism Of Merger Of DA With Basic Pay

How does the mechanism of merger of D.A. with Basic Pay work?

There are several factors that come into play, while resetting the revised D.A. rate per slab and accordingly, the revised D.A. percentage.
1. After merger of certain portion of D.A. (may be 100% or less than that) with the existing Basic Pay, the revised Basic Pay becomes higher. So, on this higher amount, the new D.A. is calculated. As a natural consequence, the revised D.A. rate per slab is not exactly equal to the pre-revised rate per slab.
2. Presuming that the merger of D.A. at 4440 points of AICPI is final, the revised Basic Pay becomes 1.6015 times the present Basic Pay (Existing Basic plus 60.15% of D.A. thereon). Then, instead of 0.15% per slab, the new D.A. is calculated at 0.15/1.6015. This is equal to 0.094% per slab. 
3. However, if more than 100% neutralisation is envisaged, the D.A. per slab goes up further. For instance at 125% neutralisation, the D.A. slab per slab will become 0.12%.
4. The residual D.A. will also undergo change. For example, the residual (unmerged) portion is 32%, it will be become less according to a mutually agreed formula. If the revised D.A. is 18% basing on 100% neutralisation, it may become 21.6% of the revised Basic Pay with 125% neutralisation.
5. Thus, the aggregate of new Basic Pay and the new D.A. in absolute terms is usually fairly higher than the aggregate of the old Basic Pay and the old D.A.
6. It is the responsibility of the negotiating parties from the Trade Unions side to ensure that after readjusting the D.A. rate per slab, there is not less than 100% neutralisation at all levels. In other words, all the staff members regardless of their rank and pay get uniform benefit (proportionate rate of rise or fall) basing on their (revised) Basic Pay, whenever there is a change in the AICPI.
7. For central government staff, their D.A. is calculated at half-yearly intervals, but it takes into account the yearly average up to the preceding month. To elaborate, for D.A. from 01-07-2014, the average of AICPI for the 12 month period ending 30-06-2014 is reckoned. For D.A. from 01-01-2015, the average of AICPI for the 12 month period ending 31-12-2014 is taken into account.
8. Since yearly average is always more stable than the quarterly average, there is always a rise in D.A. for central government employees, so long as the annual rate of inflation is positive (greater than 'Zero'). For bank staff, there is a possibility of the average AICPI for a particular quarter becoming lower than the preceding quarter's average. In such an eventuality, bank staff witness a fall in their D.A. percentage. So, central government employees never face a reduction/fall in their existing D.A.
9. If you study in depth, for central government employees, there is no time lag in the period of reckoning. In their case, the AICPI until the immediately preceding month is included for arriving at the D.A. for the current month. But, in case of bank staff, there is always a time lag of 1 month. To illustrate further, strictly speaking, for calculating D.A. of bank staff from 01-05-2014, the average AICPI for the Quarter ended 30-04-2014 is to be taken. Instead, the average AICPI for the Quarter ended 31-03-2014 is taken, leaving one month in between.
10.As I have been repeatedly emphasizing, it is the duty of the Trade Unions to ensure that there is no loss in the revised D.A. pattern. But more attention must be paid for bargaining maximum hike in Basic Pay.  Here, the load factor becomes important.  If maximum hike could be secured by allocating a greater portion of the additional load to Basic Pay, after merger of D.A. in full or in part, it will automatically take care of the revised D.A, HRA, CCA, FPP, PQP, future increments, leave encashment, commuted pension, monthly pension, family pension and above all, the future pay scales, whenever there is any further wage revision.

Date:14-04-2014                                                                                                                    pannvalan