SEBI vs IRDA.. Who is the boss!!!

In recent days, there is lot of hue and cry between the 2 regulatory bodies viz SEBI and IRDA on the issue of validity of ULIPS. For uninitiated, unit linked insurance plans (ULIPs) are the products sold by insurance companies, which have some insurance component, but fair percentage of the client's money is used to invest in the equity market.After a course on business ethics, i sometime wonder how people can't see obvious things in world, or rather they didn't want to see.

Why do we need regulators? because the common people are not expert to judge whether the products and services offered to them are in their interest or not. Suppose, you go to a doctor , then you believe that he will offer the treatment in your best interest, without fulfilling his interest. You have no way of checking this out, as you are not an expert in the field of medicine. So, people vest power in the hands of the regulators , who ensure that professionals work for the best interest of the customer, and to ensure that there are certain guidelines which should be complied.

So, what will happen if regulators start to get dysfunctional... we need a regulator to look over the regulators and thus the system would be crippled by the sheer number of the regulators in the systems. It will become a classic example of "who will guard the guards ??". so this ugly spat between the 2 of the reputed regulators had left a bad taste in the mouth of the investors. Insurance companies, despite their best of efforts, can't deny the equity nature of the ULIP products, and my hunch is that SEBI will get the mandate in its favor from the high court. After all, for mutual funds like products,why a investor should pay a commission in range of 40% , where it is in single digits in the case of Mutual Funds.

GST-Greater Simplicity in Taxes

The prevailing tax structure in India on the goods manufactured is complex. The design of the CENVAT and state VATs was undelrined by constraints of the Constitution, which allows neither the state nor the centre to levy taxes on a comprehensive base of all goods and services and at all points in the supply chain. The centre is constrained from levying taxes on goods beyond the point of manufacturing and the states in extending the taxes to services. This dividion of tax powers make both the CENVAT and state VAT partial in nature and contributes to their inefficiency and complexity. Further complexities involve, disputes and court challenges, the process of dispute resolution is slow and expensive; systems suffer from compliance gaps; the most starking complexity is the policy related and is due to the existence of exemptions and multiple rates and irrational structure of the levies.

For CENVAT, the starting base is narrow and is further eroded by a gamut of area-specific and conditional and unconditional exemptions. While the problem with service tax is the basic approach of levying it on specific services, where the argument of including it in the base wages on. The state VAT has the distivct problem of classifying goods to different tax schedules (the lowest rates are on precious metals, which is preposterous; whereas the rates on necessities is higher)

Looking into the problems mentioned above (which are just a few significant excerpts from many more matters), the Indian tax practioners believed that implementation of a national goods and services tax would simplify the system. The tax will operate with dual state and central rates applying to all transactions involving supply of goods and services.

The rates will be different for necessities, general items and special provision for exempted items.Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

The following Central Taxes should be subsumed under the Goods and Services Tax:

(i) Central Excise Duty
(ii) Additional Excise Duties
(iii) The Excise Duty levied under the Medicinal and Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, commonly known as Countervailing Duty (CVD)
(vi) Special Additional Duty of Customs – 4% (SAD)
(vii) Surcharges, and
(viii) Cesses.

The following State taxes and levies would be subsumed under GST:
(i) VAT / Sales tax
(ii) Entertainment tax (unless it is levied by the local bodies).
(iii) Luxury tax
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as they relate to supply of goods and services.
(vi) Entry tax not in lieu of Octroi.

Should the taxpayers welcome this implementation of the GST-will it improve operating costs especially in the manufacturing or is it just another hoax !
I believe yes, as there are many different taxes involves in the industry and the tax system seems highly artificial. Clubbing it together to form a uniform tax structure across the nation will helo reduce tax cascading to a great extent.
 
The implementation date on the white paper is April 1, 2010

Financial Inclusion : How to go about it...profitably ?

As all must be knowing, the hot topic of discussion during BANCON '09 was Financial Inclusion. Lets take it forward and analyse why is it necessary in India.

First of all, a catastrophic crisis like Sub-prime, which luckily did not impact India should not welcome us in the future. Yes it was a blessing in disguise that Indian banks did not went for vehement trading in debt instruments. Financial reforms spearheaded by Dr. Manmohan Singh were checked by the Leftists. But, nobody would like India to keep restraining itself. Rather, it would be better to ensure proper vigilance and then proceed.

Financial Inclusion means finance for all. Given the fact that by World Bank estimates in 2005, India had 42 percent population living on less than Rs. 21 a day in Urban areas and Rs. 14 a day in Rural areas, there is a wide scope to improve. Suppose, we work and are able to achieve our goal in coming years, then it will not only improve economic conditions, but also increase reliance of Indian economy on its own population. Thus, a sense of inclusive economy could be seen there.

Better said than done, it's a myriad task to ensure food, shelter, work for all. Microfinance, an innovative step in this regard has been doing well. Two common methods of Microfinance are : SBLP (Self help group - Bank Linkage Programme) and MFIs (Micro Finance Institutions). India has over 800 MFIs, out of which a handful have large operations. Their penetration is quite high in regions like Tamil Nadu and Andhra Pradesh. Now, they are expanding to northern regions also.

Many banks are providing loans to MFIs for lending to SHGs. A debatable issue is the rate (around 20 percent) at which the money is lent to poor people. Is that too much knowing the fact that Bank rate is around 12 percent? Should we not take risk of losing money into account ? Unlike prime debtors, poor people do not have any collateral. Nor do they have any specific place to stay. Thus, the money is lent to a team of peers to force timely repayment.

In spite of this development, the crux of the problem lies in shortage of resources in rural areas. Few want to be a first mover and go to villages, establish some basic necessities there. Most of the population is employed in agriculture. It's disheartening to see that people are demotivated to continue growing crops and rather sell their lands for hefty amount. If food price inflation is anything to go by, this attitude does not augur well for future.

Agriculture is not finding its saviour yet. Unpredictable weather, pests which affect crops severely are a deterrent. Why not have crops insured then ? Well, Govt. agency has been doing so. But it needs participation from private players with a well defined and flawless model. The idea is to create win-win situation at every sides in order to encourage entrepreneurial ventures in agriculture.

Food prices cooking !!

Within just 2 months, the prices of food had rocketed from inflation of 12.6% to 19.05%. The inflation figures are those of items that are used in raw form. When we look into the matter of items like sugar, oil, the extent of price rise is even starker. This issue has also come to the fore with the introduction of the new weekly reporting of WPI for primary articles and fuel group. Previously it was hidden by the focus on increase in price levels where manufacturers had exerted a greater impact.

The main reason of this inflation is not the monetary overheating of the economy but rather, the supply side failures. While monsoon wrecked havoc and unpredictability, the authorities were more than satisfied with mere statements of ample food reserves while the weekly inflation rates counter argued.

October and november are the months in the country when new crops arrive and prices fall due to ample supply, but this year the disappointing monsoon spoiled the party for Kharif crops and the impact on price was predictable.

The Govt. needs to import food articles in the short run. This can be offered for crops like rice. The wheat harvest is a few months away, raising hopes of good crop; but the vegetables cannot be dealt with in a short time and we have to wait for the new crops to arrive.

BANCON'09 : Celebrating the spirit of banking

The concept of banking is as old as perhaps the human civilization, although there have been multiple cosmetic surgeries and banking today has an altogether different face. BANCON'09 , the banking conclave , by Fin-niche was held in the spirit of appreciating and exploring the new paradigm shift in banking.

Spread over 2 days, BANCON'09 witnessed some of the best bankers in India sharing their experiences with the young and budding student managers of IMT Ghaziabad. The key note address by Mr Aloke Sen Gupta(IDBI), shed light on the various actors involved in establishing an infrastructure project and the risk associated with them. He explained the budding managers how they could mitigate risks during lending to corporates for the infrastructure projects.

The insightful inaugural session set the tone, and the next technical session by Mr. Sanjit Sen (VP, Tata Capitals), helped students to understand the intricacies of the capital markets. He briefly touched upon all the key components of the capital markets and the role of banks in the future market scenario.

The main event, Panel Discussion, started in the afternoon, in the serene amphitheatre of IMT Ghaziabad.

Moderated by Mr R J Masilamani ( Ex-CEO and Ex-MD, Timex), the panel consisted of  Mr. Sameer Dutt (Director, ForensicsGuru), Mr. Jayshankar P R (AGM, National Housing Bank), Mr. Bhavesh Jatania (Senior VP, Tata Capital), Prof. Vinay K. Nangia ( Head, DoMS, IIT Roorkee) and Mr. Alok Pandey (Associate Professor, IMT Ghaziabad). The topic of discussion was the financial crisis, its repercussions and the lessons learnt from it. During the discussion the panelist discussed the topic at the length and breadth and there was a consensus that financial inclusion is the need of the hour to have substantial financial development. Couple of queries from students summed up a highly insightful discussion.

If the first day was enthralling, the second day was started on an even brighter note. The guest of honour , Mr Sandeep Ghosh (Regional Director, RBI), mesmerized the IMT fraternity with a truly inspirational speech. He advised the students to develop the skills of reflective thinking and dreaming. He stressed on the development of reading, writing, speaking and listening skills among the budding student managers.

The epilogue of the wonderful 2 days event , was given by Mr Manohar Raj ( Country Head, Microfinance, HDFC Bank) . He addressed the social and financial divide in the India, and explained the role of microfinance in dealing with it. He also discussed the merits and demerits of various microfinancial models in India.

The curtains on the event came down, not before the students showed their analytical skills and understanding in the paper presentation contest. Over all it was an achievement for Fin-niche and IMT to hold a conclave of this magnitude. It gave the students an opportunity to interact with the corporate.

We thank all the faculty members , students and others who worked day in and day out to make this event a success. Looking forward to scaling new heights ... Amen !!!!

Rahul Agarwal

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 ?