24 Oct 2014

Word on the Street - Muhurat Trading


Muhurat trading is the auspicious stock market trading for an hour on Diwali (Deepawali). It is a symbolic and old ritual, that has been retained and observed for ages, by the trading community.  As Diwali also marks the beginning of the New Year, it is believed that muhurat trading on this day brings wealth and prosperity throughout the year.  The time of the muhurat trading is specified by the stock exchange.



Source - www.nseindia.com/products/content/muh_trading_web.htm

This Deepawali the Indian stock markets observed the customary Muhurat Trading session from 6:15 PM  to 7:15 PM. The 30-share Sensex ended up 64 points at 26,581 and the 50-share Nifty closed 19 points at 8,015.



Some very interesting facts on Muhurat Trading:
http://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-muhurat-trading/article6520137.ece


Know how the Markets performed during the recent Muhurat trading - 
http://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-muhurat-trading/article6520137.ece







20 Oct 2014

Reflections on Finance

What do you actually mean by Finance ? The word "Finance" itself has been evolving as centuries pass by .Even if you look at the definition part it covers a wide range of areas. From mere lending of money it has now evolved into accounting, banking, Financial instruments, Financial markets, Corporate Finance, Public Finance, Finance Regulators, Personal Finance and so on. For everything and anything you can easily relate it to money. Finance has become so popular and unavoidable in each one's life.
History states that in 2000BC lending of money to farmers and traders started in Assyria and Babylonia which got evolved and now we call it as banking. If one looks at evolution of finance or indeed our economy as such we can see that it is becoming more complex .The scope as well as the areas covered under finance branch is expanding. Finance has thus become the crux and epitome of each and every business and indeed the whole economy. The whole economy in one way or another depends upon the financial performance of various industries and sectors. After Globalization, world became small and easy to access but financial aspects became complex .Corporate Finance ,Mergers and acquisitions, Tax Regulations started gaining importance.
Finance can be fun as well. So it’s like a matchstick where it will give light and happiness to you and the entire room in the form of "money" or will burn your finger if you don’t use your money well or if you don’t follow the various rules and regulations that one needs to know .The best example is the Great recession which started in US in the year 2007(Sub -Prime Crisis) , the impact of which is still continuing.
Apart from macro level, finance is also very much important for each and every individual. One needs to have a sound financial knowledge, one needs to know the various financial instruments and the risks associated with it to have a secure future. Financial planning is like building a pyramid, where you have to strategically and tactfully build it so that it won't collapse because after all its your money, your sweat and hardwork and I bet no one wants to lose this one easily ...!!
So in short, one could say that the word finance has become the part and parcel of each one's life whether knowingly or unknowingly and evolution of finance is still continuing.

This Article is written by Rahul Tomy (PGDM 2014-16)

17 Oct 2014

Word on the Street - Economic Cost of Fear



Economic Cost of Fear is the Damage Caused by the Indirect cost of public risk aversion which ends up being more than that of the  direct cost of healthcare outlays and other containment expenditures. This term came much into focus after the recent Ebola outbreak in many countries across the world.

The losses are found in the form of empty hotel rooms, declines in restaurant patronage, or in school closures that disrupt employees and parents’ work routines. Or they come from the blow to consumer confidence that accompanies widespread fear. 


Financial analysts and others have been trying to estimate the potential effect of Ebola on the global economy.


The World Bank predicts that as much as $32.6 billion, or 3.3%, will be shaved from the pan-West African economy if the crisis continues for two years, and spreads into neighboring countries” beyond Liberia, Guinea and Sierra Leone most of which it blames on “aversion behavior.”

Read more at - 

http://articles.economictimes.indiatimes.com/2014-10-15/news/55059496_1_ebola-west-africa-world-bank


http://blogs.wsj.com/moneybeat/2014/10/15/for-ebolas-market-impact-follow-the-fear-not-the-virus/


This Word is suggested by Vinita Jagannathan (PGDM 2013-15)

12 Oct 2014

Financial IQ – Not for me, I am an Engineer!?



On a hot and arid afternoon in Delhi, my friend decided to show me around the bustling and exuberant Khan Market. That’s when we entered Bahrisons Booksellers which is one of the oldest book shops in that area. My friend strolled past the other sections and directly went to the section marked in bold - FINANCE.  This took me by surprise. I was tempted to understand how a Mechatronics engineer could be even remotely interested in reading Finance.  On that particular day, a book that he recommended changed my rather traditional perspective on Finance. 

Well, we all thought that hard work at school and straight A+ at graduation were a sure shot way to land up in a high paying job. Or at least our parents said so! This might not be entirely factual, mainly due to two reasons – Firstly, economies grow and crumble and so do companies, so there is no such term as a “steady job” .Secondly, by getting the ‘Employee of the month’ title, you are making your employer richer – NOT YOURSELF.

By stating these certain realities (startling for a few!), I don’t mean to undervalue the benefits of the so called “steady job”. This is to drive the point that Financial Literacy is a must for every person who wants to achieve financial independence. Period.

Alas, the clichéd responses to this:  I am no good at math, I don’t see myself working with a Finance/Accounting firm anytime in the future, Accountancy bores me to death or I am the creative sort of person, not really in to structured stuff! This is a dogma passed on through generations.

The irony is that our education system doesn’t recognise Financial Literacy as a prerequisite for young professionals, who are just beginning to carve their path in the corporate jungle. Working hard (okay! the trend is working smart) will guarantee you promotions and hiked-up pay packages. With that comes an increased tax cut on our income, thereby making our government richer (read overfilled exchequer coffer :P) and at the same time, inching our employer towards fulfilling month-end targets.

We have often read/seen instances where millionaires have gone bankrupt, one of our neighbours losing his/her job, pay cuts due to slump in the economy, and the worst of all – when we ourselves are left with a zero balance, inspite of earning fat pay cheques every month! Those with work experience are sure to agree. This brings me to stress on my earlier point that living a life oblivious of the importance of personal finance is like a frog in a well.

Financial knowledge for many of us is akin to maximising our savings. Few years back, when I was working with an MNC, my parents used to emphasise on the importance of saving a portion of my monthly income. And this portion would lie in my savings bank account where I would earn 4% on my daily balance. Trust me the returns were miniscule! The realisation that occurred to me is that I have missed out on other opportunities to make my money grow. Simply put, I was working for money and not making money work for me.

For a lot of people, including my own family, owning a house or a car is a big investment. My simple question is - if these are assets, then why is the expense column related to the house/car increasing more than the income column (seems more like a liability!). A true asset in your Balance Sheet is an investment which increases the Income side in your Profit & Loss account. And it is this income which flows from our assets that should fund the luxuries we all wish to enjoy in life – maybe a trip to Las Vegas or owning a red Porsche ;)



So how we do we amass this whole concept of Financial knowledge? A simple and basic understanding of the following four aspects is the key:

1. Accounting: the simple difference between a true asset & liability

2. Investing: the various options of making money work for you

3. Understanding markets: demand and supply patterns

4. Tax laws: tax exemptions and deductions available in India

If you are still giving this a second thought, be reminded that once out of academics, it is only one thing that will help you step aside from the proverbial rat race – your chutzpah! (Haider style, I say :D)

Coming to the book which was instrumental in transforming my pattern of thinking with regard to Finance– the best-selling Rich Dad Poor Dad by Robert T. Kiyosaki.

Cheers to my Delhite friend for the incredible recommendation!

This Article is written by Sonika Krishnan (PGDM 2013-15) 


9 Oct 2014

Word on the Street - Ghosting



Even in the world of Finance, Ghosting (which has an obvious resemblance to the verb form of ghost) has a negative connotation. This is an illegal practise which is prohibited in most countries and can result in serious charges against defaulters.

Ghosting, essentially would mean an illegal attempt by two or more market markers to bring about changes in the price of a particular stock. This involves two parties where one party tries to inflate or deflate the price of a stock while the second party does a similar action which tries to either enhance the results of the first party or make it look ambiguous. Here, the parties can be an individual or a company.

This activity becomes unethical and illegal because it violates the basic norm of trading/investing – equal and fair competition among all investors. Here, the investors falsely tend to believe the upward/downward slide in prices and sell them at below the actual worth which takes a hit on their gain. And the market makers have a share of the profit from the price fixing.

For more information, visit these links: http://www.opednews.com/articles/Are-Financial-Markets-Bein-by-Danny-Schechter-090709-731.html , http://www.ft.com/cms/s/0/c4baf670-1bfe-11df-a5e1-00144feab49a.html#axzz3FQc0fljv


This Word is suggested by Sonika Krishnan (PGDM 2013-15)

5 Oct 2014

Looking to invest? Game for P2P?


Imagine you are sitting on a cash pile, with no idea on where to invest it. Well, you have a range of options. You can
        
      1.Open an FD Account with a bank.
      2.Invest in securities
      3.Invest in Real Estate
      4.Invest in gold

These are the traditional avenues to which you can shift your money. Logically, going by the diversification rule, your portfolio will consist of a mix of these. Why? Every option has a level of risk and return attached to it. So, a mix of these options will ensure that the risk is rewarding.


Let’s draw a risk-returns matrix and see where each option sits


So, now where would you place your pile? On one option or many?

To most of the readers, this is elementary knowledge. You guys are probably wondering, “This is Financial Management 101! Where is she going with this?”

I agree with you guys. However, I am about to present to you a fifth option. And that is Peer-to-Peer lending. Yes, I am talking about “shadow banking”.

According to Wikipedia, “Peer-to-peer lending, commonly abbreviated as P2PL is the practice of lending money to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution.”

I learnt of the existence of P2P when I received a spam mail from one of the P2P marketplace site, called Faircent.com. I decided to explore more and uncover this investment trend. Apart from Faircent, we have i-lend. There are other P2Ps in the market, but they focus on lending to companies and not retail investors/borrowers.

So, how does this model work and why will anybody choose P2P?

P2P portals help lenders meet borrowers. Lenders can choose from a list of verified borrowers on the website. They are also advised to spread their investment among borrowers to lessen the risk of default. The investment begins from INR 5k upwards and for this risk, the lenders get a return of 15%-24% on i-lend and upto 25% on Faircent. The borrowers can borrow from INR 25k to 100k at 12% upwards. The portals charge an upfront fee from both lenders and borrowers and get the borrower’s documents and employment details verified by a third party. A contract with terms and conditions is signed within a week, with a recovery process in place for those who default on payments.

What is the advantage of P2P?

Bank customers can sometimes struggle to secure bank loans because of employer credentials, salary requirements or credit history. Around INR 3.8 trillion ($61 billion) in personal loans, excluding home loans, were outstanding in March 2012, a Reserve Bank of India report shows. This includes education loans and credit card dues. Thus with bad loans mounting, banks in India have become wary of lending in certain sectors in the past few years.

Informal lending is common in India, with businessmen and family members often lending money in times of need. P2P is a progression of that, with the money flowing not from family/friends but from other like-minded people. According to a research article by Mr Ankit Shah, a Senior Associate Consultant for Finacle (Infosys), the advantage of P2P lending is the likelihood for the borrower to secure the loan at a lower rate of interest as compared to a bank loan and the likelihood for the lender to receive a better interest rate as compared to a bank deposit. P2P lending asset class is different from the traditional savings account or stock market linked investments. The only risks involved here are the counterparty risk and the concentration risk. Concentration risk can be greatly mitigated by spreading the loan amount across a large number of borrowers. As for the Credit risk, lenders can decide to lend only to borrowers having a specific credit profile, which is listed on the sites.

What is RBI’s take on P2P?

As per a Jun 2014 RBI report, “India’s ‘shadow banking’ sector essentially refers to the large number of ‘unregulated’ entities of varying sizes and activity profiles, raises concern partly because of the public perception that they are regulated. Technology-aided innovations in financial disintermediation such as peer-to-peer lending warrant a regulatory preparedness.” “While in certain regulatory jurisdictions this space is being looked at as more favorable, some other regulators have raised concerns mainly relating to distress for lenders in the event of a sudden closure of such platforms. While these platforms are still new to India and the scale of transactions is insignificant, this is a gap which requires regulatory attention. This is all the more important since in developed markets, mainstream financial market participants and products are making an entry into this space amidst concerns over regulatory arbitrage.”

What’s on the cards?

Mr Shah continues to say that, P2P lending is still in its nascent stage. With evolving models, better regulatory mechanisms and improved credit rating facility, we may see more and more lenders and borrowers participating in this new way of lending. In the coming years, it can have the depth to support a larger participation. Also, with internet users spending more time on social networks, it is likely to generate higher interest in people in the time to come.

So, if you are sitting on a cash pile, where would you place your bet? The traditional avenues or P2P?

This Article is written by Vinita Jagannathan (PGDM 2013-15)

2 Oct 2014

Word on the Street - Anonymous Whistle-blower



A Whistle Blower is Anyone who has and reports insider knowledge of illegal activities occurring in an organization. Whistle-blowers can be employees, suppliers, contractors, clients or any individual who somehow becomes aware of illegal activities taking place in a business either through witnessing the behavior or being told about it.

Source - http://www.investopedia.com/terms/w/whistleblower.asp

To check wrongdoing in markets, the National Stock Exchange (NSE) has put in place an anonymous whistle-blower mechanism on the lines of the Dodd Frank Whistleblower Programme in the US.

Read more at:
http://www.business-standard.com/article/markets/now-an-anonymous-platform-for-tip-offs-on-market-manipulation-114100100577_1.html

The following link can be used access the NSE's Anonymous Tip off Portal -
http://www.nseindia.com/int_invest/dynacontent/any_portal.htm

This word is suggested by Vinita Jagannathan (PGDM 2013-15)


28 Sept 2014

The Game of Valuations


“A 7-billion dollar company which is yet to make profits”, how strange does that sound at the first place?  A mere online book store in 2007 to a billion dollar company, little did the world know that the next Indian Alibaba was in the making. By now you might have guessed what I am talking about! “Yes its Flipkart”, the new sensation in the Indian e-commerce sector. 

Its way of handling logistics, its loss-leader strategy and its smart inventory management made it popular in no time. The Bansal duos from IIT-D indeed are doing a great job.  Flipkart is today considered to be valued between $5 billion to $7 Billion. In a span of 3 years there has been a drastic change in the whole equation, from $1 billion to $7 billion a 5x-7x growth in valuation. This is not just amazing it’s incredible!  The recent acquisition of Myntra and a rapid spree of funding -  Flipkart has certainly taken it to new levels. 

 Image Source - www.dazeinfo.com

 But as they say, the higher you go, the deadlier the consequences of a fall. The question today is, how long can a company survive on valuations alone?  No doubt that VC, PE funding is critical towards growth of a startup, but can overdoing it cause harm? It looks easy to see an entrepreneur in his early 20s with a smart idea and backing of capital funding becoming a millionaire in no time, but a sneak peek into historical data can be alarming. A research taken up by Shikhar Ghosh a lecturer at Harvard Business School says “about 75% of VC backed firms do not return investors”. 

But yes, we can be always optimistic and consider Flipkart to be in the other quarter (the rest 25%). Facebook was once considered as a business model which would never actually make money, but is now known to be among one of the greatest companies in the world. Founded in 2004, Facebook did not really have a proper revenue model in place for quite some time, but investors were pretty hopeful and did pour in a lot of money and faith into the business. It saw  profits in early 2008, four long years after being founded. Flipkart - the King of Indian dot com ventures - apparently is growing at a similar pace. Interestingly, some of the investors like Tiger Global, Naspers, and ICONIQ who invested in Facebook are also investors in Flipkart, clearly proving that investors are pretty hopeful about Flipkart being the next revolution in Indian or perhaps world e-commerce space.

Funding can be like runways, its important for startups to have a long runway.  It’s quite evident that startups do run without any earnings for the first few years of  establishment and this is when funding provides a runway to cover these firms, by providing capital to make the right investments in Infrastructure and Human Resource.  Having said that, profits too are a very crucial part of any business,  something that cannot be ignored for long. It’s a fact that today many Indian startups are surviving on Valuations alone. Flipkart might already seem to be “Too big to fail” but then thats what the Lehman’s were known for as well. 

This Article is written by Prakash Philip Zacharia (PGDM 2013-15)

26 Sept 2014

Word on the Street - Collateralized debt obligation (CDO)



A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation (CDO) is so-called because the pooled assets – such as mortgages, bonds and loans – are essentially debt obligations that serve as collateral for the CDO. The tranches in a CDO vary substantially in their risk profile. The senior tranches are relatively safer because they have first priority on the collateral in the event of default. As a result, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior tranches, which offer higher coupon rates to compensate for their higher default risk.


Source - http://www.investopedia.com/terms/c/cdo.asp






Read more about how CDO's Lead to the Subprime Crisis in 2008 at:  http://bonds.about.com/od/derivativesandexotics/a/CDO.htm




14 Sept 2014

Risk Management In Banking Sector


Risk management is a relatively newer practice, but has already shown to increase the efficiency of the workings and procedures of these banks. In times of fluctuations and uncertainties in the market a bank should be able to prove its stay by withstanding these situations. Hence, a reliable risk management system is required to conquer these internal and external risks. Indian banks are facing a lot of technological advancements, expansions, greater market share etc. which in return are making them more prone to risks. Higher the returns, greater are the risks involved. Therefore, the evolution of risk management systems in banks is a fast growing trend.

In recent news, our finance minister Arun Jaitely pointed his views on tightening the risk management systems in banks, while responding to the recent scandals which raised his doubts on the lending practices of the state banks. Mr Jaitely has decided to initiate an investigation on whether Syndicate bank took bribes to extend a loan towards Bhushan Steel. A major part of the Indian banks are into extending bad loans. Therefore, a powerful risk management system is the need of the hour. The risk management systems should therefore focus on the following areas:

1. organisational structure
2. comprehensive risk management approach
3. periodical review and evaluation

Adopting these methodologies by the risk management teams would probably help in reducing such internal and external risks. The primary power of such risk management should be vested into the hands of the Board of Directors ensuring that the risks are appropriately managed. The risk-bearing capacity of the banks should also be taken into consideration by the top management in order to increase the returns of these financial institutions.

Keeping into mind the fast growing technological advancements, risk management is a newer and powerful device or check on the financial institutions that is proving to be one of the major tools of managing the financial resources of our country. The risk management system in the banking sector is therefore a step towards the economic growth, betterment and welfare of the society on the whole.


This Article is written by Anindita Chatterjee (PGDM 2014-16)

11 Sept 2014

Word on the Street - Pradhan Mantri Jan Dhan Yojana



Pradhan Mantri Jan Dhan Yojana is an ambitious scheme for comprehensive financial inclusion launched by the Prime Minister of India, Narendra Modi on 28 August 2014. He had announced this scheme on his first Independence Day speech on 15 August 2014.On the inauguration day, 1.5 Crore (15 million) bank accounts were opened under this scheme.


SBI had opened 11,300 camps for Jan Dhan Yojana over 20 lakhs accounts were opened as on August 28.









This word is suggested by Vinita Jagannathan (PGDM 2013-15)

8 Sept 2014

Domestic Systematically Important Banks:An analysis of long -term benefits (PART II)

Merits
The main merit of following these frame works would be enhanced ability to withstand stress situations, a bank’s financial fighting strengths and competitiveness. However, it will lead to higher lending rates and lower deposit rates. Thus, loans would be available only for safe customers. Meeting capital requirements of public sector banks, which would be in tune of Rs. 2.4-2.8 trillion, will be a huge challenge for banking industry and government. However, private banks will benefit as they enjoy better current capitalization and internal accruals. The prime motto of this move is to reduce the frequency and severity of banking crisis.

Analysts and bank experts are in opinion that following banks would make it into the final list- State Bank of India, Punjab National Bank, Citi Bank, Standard Chartered Bank, ICICI Bank, HDFC Bank and Bank of Baroda.  

Feature of DSIBs Image Source: Economic Times

These guidelines should not prove to be a problem for banks profitability, as most of Indian banks have capital well above the proposed regulatory level. Banks would be in a better position to absorb severe losses, with more equity, thus ensuring financial stability in economy. These measures will act as a buffer for government, as banks will not depend on it to mitigate losses. Also, this would discourage banks from taking irrational risks.

Higher capital requirements are an essential instrument in strengthening the financial stability of the banking sector. They ensure that banks are in a better position to absorb risks and compel banks to improve their risk control, as they bear the costs of those risks themselves. The result will be that banks will reduce their risks and will control them more effectively. This will strengthen the banking sector. Banks with a healthy business model will be able to keep up their lending and remain competitive.

The Financial Stability Board has studied how banks practically respond to increased capital requirements in reality. And, it has found two key things. Firstly, they reduce their risk-adjusted balance sheets (lending less risky business) and secondly by raising equity. Both these measures make a bank, more efficient and safe in functioning.

Testimony of the benefits of increased capital adequacy is the two papers released by the Financial Stability Board and the Basel Committee on Banking Supervision. Both papers conclude that stronger capital and liquidity requirements bring significant benefits for banks- and doesn’t affect much adversely, as perceived. These researches emphasize that such measures will help to insulate efficient banks from problems faced by weaker ones. These measures would result in reduced frequency, severity, and public costs of financial crises.

The significance of Domestic Systematically Important Banks can also be understood by the fact that all G 20 leaders have committed to increase the levels of capital and liquidity in their national banking system.



Image Source: http://www.shrinews.com

So, the decision of Reserve Bank of India (RBI) to categorise important banks as Domestic Systematically Important Banks (DSIBs) would help Indian banking industry in the long run and ensure a robust financial system. It is a justified reform to make Indian banks more competitive and safe.




4 Sept 2014

Word on the Street - Collective Investment Funds/Schemes (CIS)


Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilized with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control over the management and operation of such scheme or arrangement. 

Source - http://www.sebi.gov.in/faq/cis_faq.html

Recently SEBI came cracking down on a company called PACL (Pearl Agrotech Corporation) for its involvement in a large-scale illicit money pooling scheme. PACL raised Rs 44,376 Cr through Collective Investment Schemes. SEBI on Aug 23rd ordered the company and its promoters to refund over Rs 44,376 crore that it collected until March 2012. 

Read more at http://indianexpress.com/article/business/business-others/sebi-tells-pacl-to-refund-over-r44k-crore-in-three-months/

In what appears to be a similar case to that of PACL a few months ago SEBI had also cracked down on Sahara India for its fraudulent CIS Scheme, which ultimately led to its chief Subrata Roy's arrest. 

Read more at http://www.firstpost.com/india/how-sahara-has-run-circles-around-rbi-sebi-supreme-court-1412263.html

This word is suggested by Prakash Philip Zacharia (PGDM 2013-15)

1 Sept 2014

Domestic Systematically Important Banks:An analysis of long -term benefits (PART I)

Taking lessons from the global credit meltdown, Reserve Bank of India came up with “Frame work for dealing with Domestic Systemically Important Banks (D-SIBs)” on July 22 2014 and soon it became a common topic of discussion among Indian Bankers.

This declaration by India’s central bank immediately raised many questions among public and investors, such as,  “Are private banks going to benefit from this move?”, “Will Public Sector Banks need fresh capital infusion?”, “If yes, how does the government plan to meet this requirement- via capital infusion through budgetary allocations or disinvestments?”, “Will the cost of borrowing increase for banks?”, “How will performance of banks be affected?” and many others.





What are D-SIBs?

D-SIBs are banks of national economic importance whose failure can severely strain the entire banking system. These banks would be subjected to differentiated supervisory requirements and higher intensity of supervision, based on the risks they pose to the financial system.

These measures are part of Basel III norms on Risk Supervision, to be implemented in phases, during 2016-2019. The ultimate aim of this categorization is to minimize the possibility of financial crisis and instill financial discipline among top Indian banks. In 2008 crisis, it was observed that when a handful of large, highly interconnected banks, were subjected to financial distress,  there was a system-wide collapse and public money was required to rescue the financial system.


Image Source: http://www.quora.com/What-are-domestic-systemically-important-banks-D-SIBs-What-is-RBIs-framework-to-identify-them

How may a bank fail ?

The main sources of funds for any bank are equity and deposits. As a bank expands and grows, its deposits also grow, but share capital remains the same, resulting in abnormal equity to deposit ratio. Depositors start playing a dual role of fund supplier as well as risk taker. In case of any loss of confidence, it may lead to a situation of Bank Run, and the bank is unable to cope up with the demands made by depositors as advances made to customers can’t be reclaimed in such a small time. These series of events lead to busting of the bank and engulfing the whole economy, if it is large and interconnected with financial system of that country. 


Image Source: http://www.rbi.org.in/


The present frame work asks for additional common equity tier (CET 1) requirement ranging from 0.2% to 0.8% of risk weighted assets (RWA).Selection of such banks would be done in a 2 stage screening process. Firstly, Indian and foreign banks having assets beyond 2% of Indian GDP would be taken as sample. Secondly, based on following parameters and associated weightage, their systematic importance shall be calculated:-
  • Size-40%,
  • Interconnectedness- 20%,
  • Availability of Substitute -20%,
  • Complexity- 20%



Accordingly, a level 1 to 4, systematically lower to higher systematic importance will be created and applicable norms will be implemented.

Apart from capital adequacy, norms like liquidity surcharges, tighter large exposure restrictions, will also be incorporated in the frame work.

The first list of such banks is expected to be declared by RBI in August, 2015 and the frame work will be implemented and monitored in a phased manner, starting in April, 2016. It would be an annual calculation exercise, done on basis of annual financial statements of selected banks.

From recent banking developments, we know, Indian public sector banks are sound in terms of capitalization, but need capital injection from government to meet additional capital requirement. But, they are poorly capitalised, when compared to banks of other emerging economies. Analysts believe 9% would be comfortable level for any Indian bank. But, India’ largest lender SBI and 2nd largest public lender Bank of Baroda, just touch this magical numbers, with 9.5% and 10.1% respectively. On the other hand private banks enjoy a better position, as their range is 12-14%.


This Article is written by Anshu Kumar (PGDM 2014-16)

28 Aug 2014

Word on the Street - Monkey Portfolio






Have you heard of the proverbial Monkey Portfolio. Surprisingly, it was an experiment conducted in the US using a monkey. A monkey was asked to throw darts at random on the prices page of the Wall Street Journal and a portfolio was created by including all the stocks on which the monkey's darts fell. The collection of stocks became known as the Monkey portfolio.



What was more surprising was that when the performance of the Monkey Portfolio was compared with the performance of fund managers in the US, the Monkey Portfolio actually outperformed more than 85% of the US fund managers apart from beating the major indices in the US. What are the issues that arise from this experiment and what do they mean to an investor trying to selecting a portfolio management. 


Here's an interesting read on "Why a monkey throwing darts could boost your returns?"


Read more at http://www.forbes.com/sites/davidmarotta/2014/08/06/why-a-monkey-throwing-darts-could-boost-your-returns/

This word is suggested by Vinita Jagannathan (PGDM 2013-15)


24 Aug 2014

Is ‘Make in India’ possible?


Mr. Narendra Modi’s maiden I-day extempore speech was indeed a call to restore optimism among the citizens, with good and noble intentions. Mr. Modi is known to deliver good speeches as was evident during his election campaign. This time he took it to new heights by delivering an hour long no paper address, following the trend set by Mr. Barrack Obama of delivering speeches extempore style. He hit the right note by focusing on Financial Inclusion for the poor, by facilitating bank accounts under the Pradan Mantri Jan Dhan Yojana, providing free debit cards and insurance cover of Rs.1 lakh. His call to the global industrialists to ‘Make in India’ and revive growth in the manufacturing sector is laudable and fair enough. However, what remains to be seen is how this could be implemented. For foreigners to come and invest in our manufacturing setup will require that our infrastructure and business atmosphere is right.  In simple terms our cost of production should be low enough to achieve economies of scale and thereby, make the prices internationally competitive. Mr. Modi and the Government have done well to improve the business atmosphere. With the Sensex and Nifty reaching new highs every other day, there seems to be resilience in the stock indices. The Industrial Production Index and the Consumer Price Index too are in revival stage.


But what remains to be seen is development in infrastructure, which is substantially hampering the production costs. It includes the speed and ease in transporting goods to the ports or to the consumers. Do we have the transport facilities to match the speed of response required to be internationally competitive? Do we have the modern port facilities like in China or Japan to help industries send them with speed, without damages and to all ports around the world? Our freight handling is pathetically slow and inefficient, with age old equipments to handle the load. Our roads as we all know are in terrible conditions, where mere pedestrian movement from one area to another itself is cumbersome, so forget goods movement. Truck transport has become synonymous with delays and not to forget damages. With infrastructure being the structural issue in our economy, it might be unlikely that FDI would continue in the long run. May be the FIIs and the FDIs are just reigning on the Modi wave. Mr. Modi has certainly sold and reinstated the long standing ‘Made in India’ dream but what remains to be seen is a roadmap from the Government to deliver this dream. 


This Article is written by Vishak (PGDM 2013-15)

23 Aug 2014

Does Money Matter?


Yes, I think it does. From the moment we open our eye in the morning till we sleep, and I mean, actually sleep. Most of you must have understood where my discussion is headed, for others – I’m talking about Money becoming the lifeline to our existence. I know some of you are nodding as you agree with me. I also know that some of you must have eaten bitter-pills and shaking your head in disagreement saying that what this girl is talking about, no, we are too ethical and true believer that money isn't everything. But, believe me you are saying that because of your still-existing, over-powering principles otherwise you are with me. *smile*

A baby needs a toy or a lollipop to stop crying. A girl needs a barbie to keep herself busy. A 12 year old boy needs a video game or a cricket kit to be occupied for the entire day. An 18 year old girl needs some super-expensive dresses and same age boy needs a bike, to actually talk straight to their parents. As we go to next 20 years, we will be looking at expensive cars, lavish houses, high-class kitties to attend and a lot many things like this, which will make people think straight and accomplished.

Happiness to everyone comes with either money or things they got from this money. We all are so much into this that now it has become normal for us. And then here are few of us, who believe that money isn't the sole provider of Happiness. It is. Only thing is we do not want to see it that ways. I’m not an exception. And neither am I saying it’s a crime. It is a truth in current times. I have specifically used the words ‘in current times’ and not ‘for current generation’ because our elders are also not an exception. They are smarter, they are following the waters. They know it’s normal now, so they can also enjoy knowing the fact that it isn't a crime. Not that they are wrong, that’s why I said they are smarter. *wink* 

Today was your introduction to Reality, I’ll be writing more to actually get praises from you. Yes, you have read it correct. I’ll be writing more to get your praises, because the editor might pay me to keep you guys hooked with the blog. And as you all know by now – Money does matters! *wink* *wink*

This Article is written by Nishtha Sharma (PGDM 2013-15)

21 Aug 2014

Word on the Street - Voodoo Accounting




Creative rather than conservative accounting practices. Voodoo accounting employs numerous accounting gimmicks to artificially boost the bottom line by inflating revenue or concealing expenses or both. The origin of the term “voodoo accounting” probably lies in the fact that once the accounting gimmicks come to light, the purported profits disappear like magic.

Investor reaction to news that a company has been engaged in voodoo accounting depends on the magnitude of the offense. While minor, one-time accounting gimmicks may be ignored by investors, substantial repeat offenses would affect the company’s market value and reputation.

Source - http://www.investopedia.com/

In a recent development in Nigeria "The Nigerian National Petroleum Corporation (NNPC)" came under heavy criticism over the voodoo accounting methodology it seeked to use to explain away the $10.8 billion missing oil revenue.

Read More on this story - http://www.newsexpressngr.com/news/detail.php?news=4107


Concept Explained

Some of the voodoo accounting practices identified by former SEC chairman Arthur Levitt at the height of the dot-com bubble in September 1998 include:

“Big bath charges,” in which a company improperly reports a one-time loss by taking a huge charge to mask lower-than-expected earnings.

“Cookie jar reserves” used by a company for income smoothing.
Recognizing revenue before it is actually collected.

“Merger magic,” whereby a company writes off all or most of an acquisition's price as “in process” research and development.

For example, a company may employ voodoo accounting to prematurely recognize $5 million of revenue and conceal $1 million of an unexpected expense. These tactics enable it to report net income of $2.5 million for the quarter. But a diligent auditor discovers these items in a year-end audit, and the company is forced to restate its results to show a net loss of $500,000, rather than the net income of $2.5 million reported earlier through voodoo accounting.

Source - http://www.investopedia.com/

This word is suggested by Nishtha Sharma (PGDM 2013-15)