Interest rate : Significance

Movement in interest rates affect banks, corporate world and 'WE, THE PEOPLE'. Several factors like stock markets, foreign exchange rate, foreign investment (direct and indirect) also influence and are influenced by interest rate. Interest rates are determined by the markets, but the central's bank monetary policy also affects short-term interest rate.

Which interest rate are we talking about ? Financial market has two type of interest rates. The first type is for treasury operations, including money market and G-sec(Government Securities) rate. We can refer it as Debt/Money Market interest rate. The second type is the interest rates offered by banks for their products. This can be called as 'product rate'. Debt/MM rate becomes benchmark for several other rates. Product rate depends on factors like bank's sources of funds, deposits, internal costing methods, Non Performing Assets, loan profile etc.

Banks generally prefer a rising interest rate scenario, since they are suppose to lend to people more than they borrow by issuing bonds. This way, they can improve their yield on Net Interest Margins. For corporates, interest rates forecast help in taking important decisions like choosing debt or equity instruments to raise funds and at fixed or floating interest rates. Public can think of going for short-term or long term deposits at different types of interest rate.

If RBI adds money into the economy, the demand for bonds increases to maintain the money market equilibrium. The price of bonds increase, hence yields over a period decrease which leads to the decrease in interest rate (here Debt/MM rate). But, it is not necessary that banks follow suit with the Prime Lending Rates(PLR) and deposit rates. They may reduce product rate but it may not be in similar proportion as DM rate. The deposit rates of the banks have to compete not only with other banks (which may have different product rates) but also with the Small Savings Scheme offered by the Government.

Dubai Crisis !!

An over-leveraged Dubai may be writing a new chapter in the book of the global financial crisis of 2008-09. On Wednesday, the Dubai government said it will ask creditors of two of its flagship firms, Dubai World and real estate developer Nakheel, for a standstill on debt worth billions of dollars as a first step towards restructuring

What wil be its effect in Indian Markets ? Which all companies/industries will face the maximum brunt  ?

Will the Inidan market be able to sustain the shock ?

Implications of removing the lock-in period clause in FDIs ?

With the government planning to remove the lock-in period mandate for FDIs in the Real estate sector, investment opportunities have grown manifold. Will it be at par with the "winged capital", i.e. FIIs or will foreign investors prefer the FDI route?? Should they extend this grant to other sectors as well?? Looking forward to some indigenous thinking from all...

Bank Performance Terminology

Aggregate deposits are the total deposits of a bank at the close of the accounting year. These include deposits from public and deposits from banks. From a different angle, the aggregate deposits equal the total of all demand and time deposits. A high deposit figure signifies a bank’s brand equity, branch network and deposit mobilisation strength.

Average working funds (awf) The AWF at the beginning and at the close of an accounting year or at times worked out as fortnight or monthly average.

Working funds These are total resources (total liabilities or total assets) of a bank as on a particular date. Total resources include capital, reserves and surplus, deposits, borrowings, other liabilities and provision. There is a school of theory which maintains that working funds are equal to aggregate deposits plus borrowing. However, more pragmatic view in consonance with capital adequacy calculations is, to include all resources and not just deposits and borrowings.

Interest spread This is the excess of total interest earned over total interest expended. The ratio of interest spread to AWF shows the efficiency of bank in managing and matching interest expenditure and interest income effectively. Interest spread is critical to a bank’s success as it exerts a strong influence on its bottom line.

Equity multiplier measures financial leverage and represents both a profit and risk measurement. It compares assets with equity and large values indicate a large amount of debt financing in comparison to equity. It has impact on return on assets. A critical scrutiny of EM helps to evaluate whether capital support is proportionate to the risks assumed in the balance sheet.

Risk weighted assets The cumulative risk weighted value of assets plus risk weighted credit converted contingent liabilities, which is used as the denominator for computing the capital adequacy ratio of bank.

Capital adequacy ratio This ratio relates a bank’s core net worth to its risk-weighted assets. The ratio is internationally accepted risk-driven measure of a bank’s degree of capitalization. A higher ratio indicates that a bank is well capitalized vis-a-vis its perceived risks. It is an excellent indicator of a bank’s long term solvency.

Can You Solve

Unscramble the letters below to make meaningful words.

1.oesonjwd
2.iunedt anbk fo diani
3.ardte fiedcti
4.gorpdyi
5.adta rawoeeuhs.

Send in the solutions to finniche.imt@gmail.com.

Sender names of :
First 5 correct entries
and
3 lucky entries
will be put up on finniche’s notice board on the 19th of November by 6 PM.

Top Ten Careers in Finance

1. Private equity: The role of private equity is to raise funds from large investors and invest the money directly into businesses. The usual manner is to raise money from overseas investors and then find businesses in the growth stage. Most private equity funds 'exit' the investment after a period of time by selling their holding in the business to some other investors or doing an initial public offering of the shares of the business.

2. Investment Banking/Merchant Banking Investment banking comprises two major businesses. One is the advisory/ corporate finance role which entails mergers and acquisitions. This would entail understanding valuations, finding targets, negotiation and compliance with legal regulations. The second role is what is more popularly called equity capital markets role. This entails helping corporates raise funds from investors or the public. So it may entail working on IPOs or Institutional Offerings.

3. Fund Management: As a fund manager, one is an important decision-maker typically at a mutual fund. The fund manager has a good overall understanding of the macro factors which affect the markets as well as the micro factors about which company to invest in. He invests money in stock market, debt market, directly into companies, etc depending upon his fund mandate.

4. Equity Research & Sales: The role of equity research is to find out the correct value of the stock which is trading on the stock exchange doing various types of research namely fundamental and technical analysis. There are two types of ERs though. One is the sell-side research which belongs to a brokerage, the aim is to do research and sell investment ideas to investors so as to earn commission on trading by the investor. The second is buy-side research, which is a part of usually a buy side fund like a mutual fund. They analyse the research results of various brokerages in addition to their own research on investment ideas for the fund manager

5. Project Finance & Debt Syndication This role entails arranging for long-term finance for infrastructure and industrial projects which will take a long time to pay back. The first step is to understand the project, conduct a feasibility study, risk assessment and a detailed financial model. This is done with the purpose to rope in equity partners (known as sponsors) and lenders. Generally the lending part is done by multiple banks under leadership of the syndicate bank.

6. Financial Risk Management: Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative and quantitative. As a specialisation of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk. In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.

7. Corporate Banking This role entails the entire plethora of banking services required by corporates. Corporate can be divided into largely two sections Large Corporates and MSME which is Medium and Small enterprises. A corporate banker would thus have companies as his clients and service them. Within corporate banking some of the departments are:

Credit Borrowing to companies for their expansion and working capital requirements. Would entail doing a credit evaluation on the company and sanctioning the loanTreasury Help companies manage various types of risks such as foreign exchange, interest rate fluctuations. Treasuries also take proprietary positions to make profit in the 'forex' and bond markets.Cash Management Solutions: As most companies have a large number of customers, distributors or branch offices across the country it becomes a huge challenge to deal in money. Banks offer cash management solutions to help streamline this entire operation for its corporate customers.

8. Wealth Management: Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High net worth individuals, small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be independent, certified financial planners. One must already have accumulated a significant amount of wealth for wealth management strategies to be effective. Wealth management can be provided by banks, brokerages, independent financial advisers or multi-licensed portfolio managers whose services are designed to focus on high-net worth customers. The fallout of the events of 2008 has produced a high level of skepticism and distrust among investors, and they will demand greater transparency from their providers to understand what they own, the value of their investments and associated risks.

9. Retail Banking Also known as consumer banking, it entails dealing with products / services for individual customers. So the scope encompasses getting business for products such as credit cards, savings accounts, personal loans and auto loans. Operational roles would entail teller, authorising, clearing, remittances and customer service.

10. Corporate Finance: A career in corporate finance means you would work for a company to help it find money to run the business, grow the business, make acquisitions, plan for its financial future and manage any cash on hand. You might work for a large multinational company or a smaller player with high growth prospects. The job of the financial officer is to create value for a company. As a corporate finance professional one is typicall involved in four main activities to meet its objectives: 1) designing, implementing and monitoring financial policies, 2) planning and executing the financing programme, 3) managing cash resources, and 4) interfacing with the financial community and investors. Jobs in corporate finance are also relatively stable. Performance in these jobs counts, but your job is not going to depend on whether you're selling enough this week or getting good deals finished this quarter. Rather the key to performing well in corporate finance is to work with a long view of what's going to make your company successful. Many would argue that corporate finance jobs are the most desirable in the entire field of finance. Some of the benefits of working in corporate finance are:

· You generally work in teams which help you work with people

· It's a lot of fun to tackle business problems that really matter

· You'll have many opportunities to travel and meet people and

· The pay in corporate finance is generally quite good

Thus, a budding financial wiz should look at understanding which area interests him/her the most and build skill sets which can help take the leap into financial sector.

Is Dollar loosing its sheen ???????

Dollar losing its luster but still reigns globally - Economic times ( Nov 5,2009)

Instead of stashing dollars under their mattresses, many Brazilians now set aside money to buy euros or invest their savings locally.

The dollar has dropped about 16 per cent against a basket of currencies since early March, dragged down by worries about the ballooning US deficit.

In Russia, where the dollar was the benchmark after the collapse of the Soviet Union in the 1990s, residents are increasingly turning to the euro.

Polls show that the euro has overtaken the dollar as the preferred foreign currency for savings in Russia

Is buying of gold by India a move to diversify its forex holding or diluting Dollar holdings ?

China should drop Yuan's dollar peg: Merrill Lynch ; Economic Times (Nov 4,2009)

Does this all suggest that Dollar is in its end days and there is a need for new currency ??

Game Theory: Effect of Big Sporting Events on National Economics

Whenever there is money involved , the radars of economists start working. On this ground, games like olympic games and Commonwealth games are the areas which involve heavy investment and spending. Winning a bid for the game is a prestigious matter itself, barack obama will certainly testify that.

In order to flaunt their countries economic and social status, the spending on these games are gradually reaching astronomical figures. The Beijing Olympics spending Budget ,$40 Million, was more than the GDP of Srilanka (source: Bloomberg.com). The festive mood of the public and the government is the common feature of all the major games, but are they really economically viable. Is the level of spending justified for a nation? Lets have a look on it. I will judge it on the basis of 4 Parameters , that are considered the sacrosanct part of hosting Games

Infrastructre
Infrastructure is something on which countries start working long before they bid for games. They want to leverage on the infrastructure they have and the potential infrastructure which they can develop. But a cost-benefit analysis by Darren Mchugh ,a queensland unversity scholar, shows that generally the most expensive infrastructure projects are those projects which would not have been built in the first place if normal conditions prevail. In case of Delhi CWG , major of the infrastructure spending is done on Airports and Metro overhauling , which in anyways would have been sooner or later. But about Rs 700 crores are still been spent on the projects like over bridges and stadiums (source: www.livemint.com). According to me, these projects are over ambitious with little practical utility. In many of the places a little more planning and common sense ( which is highly uncommon!!) could have reduced spending considerably. The worst thing which we can afford are the white elephants standing after the games were over.

Tourism
Tourism and games go hand in hand. Indian tourism industry is looking towards CWG as a saviour in their efforts to recover from the dreaded recession. In anticipation of huge inflow of foreign tourists, the capacity is being added in form of extra hotels and other accomodation places. Approx 30,000 hotel rooms are added in delhi to cater the visitors ( Source: www.epaper.timesofindia.com) . Although the projections are supporting the work done, there is a catch in it. The seats in the airplanes coming to india are limited. So, the demand will definitely push the ticket price northwards during the games. History depicts that inflow of tourist are maximum shortly before games, reach peak during games, and drops sharply after games. The future of the extra capacity added , will be affected seriously. After the montreal winter olympics , every 3rd hotel which added capacity went bankrupt.

Markets
As some one quoted, "markets are the best snifer dogs". If there is an opportunity,market will definitely sense that. In this light, let us look at the markets reaction when indian won the bid for the commonwealth games. The 2010 CWG are awarded to new delhi on 13 November 2003, and the markets closed 1.68 % lower on 14th november 2003, on next day (Source: www.moneycontrol.com) . Even the construction and infrastructure scrips traded in red. So, it is clearly visible that even markets are not that optimistic of benefits of hosting an event as big as commonwealth games.

Revenue
Beijing olympics , with all its audacity managed to earn only $16 million as margin ( source: www.livemint.com) . Comparitively Los Angels had made $250 millions and Seoul $300 millions. So, the extravagant spending is not resulting in generation of high revenues. The figures of delhi are not yet out , but the projections are not very optimistic.

All said and done, hosting a game is undoubtedly a matter of national prestige and helps a country projecting its image all over the world. This is the best marketing even which a country can do. But in the increasing complexity of games, there should be an intelligent view to all the spending, The day is not far away, when we have special economists would be there knows as "Game Experts"


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