Domestic fund houses are of the view that the US Fed’s status quo stance on rates is a positive indication for RBI to lower its lending rates. RBI, which has already reduced its key policy rate by 75 basis points so far in the current calendar year, will be reviewing its annual monetary policy on September 29. “The US Fed’s decision to delay raising rates is positive for interest rate here which we are expecting to come down. Our equities continue to be good long-term investments despite emerging market redemptions,” ICICI Prudential MF Managing Director and Chief Executive Nimesh Shah said on Friday (18 September). The central bank of the world’s largest economy kept interest rates (which are at near zero) unchanged last night citing worries about the global economy, financial market volatility and sluggish inflation at home, but left open the possibility of a modest policy tightening later this year. “The ultimate beneficiary of US Fed decision to not hike rates – risk assets – don’t seem to have embraced the Fed’s decision and we are noting mixed signals across emerging markets. The Fed confusion is probably too much for the market to take and this has only induced more future uncertainty,” Tata AMC chief Investment Officer Ritesh Jain said. “We would want to wait and see how gold and the dollar index behave in the next 2-3 days to get more clarity on the future course,” he said. “The language of the Fed has moved to a more accommodative stance given global uncertainty. The long-term expectation of unemployment rate in the US is around 5.1 per cent, at which level the US economy is deemed to have achieved full employment,” Quantum AMC Head-Fixed Income Murthy Nagarajan said.
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Retirement fund body EPFO will watch the result of its 5 per cent investment in stock markets this fiscal before taking a call on increasing the proportion, Labour Minister Bandaru Dattatreya on Friday (18 September) said.“We are putting in the market approximately Rs 5,000-6,000 crore by March 2016… Depending upon the result of this, we will proceed further,” Dattatreya told reporters here. Yesterday, Minister of Finance for State Jayant Sinha expressed hope that the Employees Provident Fund Organisation (EPFO) will increase its investments in stock market from 5 per cent of its incremental deposits to 15 per cent. Sinha was of the view that the pension funds investing in domestic equity markets would help lower volatility in equity markets and as that comes down, the cost of capital on equity side for businesses would also slide. Asked about his views, Dattatreya said, “I have to go very cautious (on stock market investments).” The Labour Minister is also the chairman of the trustee board of the EPFO, which started investing in equity markets last month. Primarily, theEPFO has been investing in the central and state government securities. Labour Ministry had notified the new investment pattern for EPFO in April allowing it to invest minimum of 5 per cent and maximum of 15 per cent of its funds in equity or equity related schemes. However, the EPFO decided to invest only 5 per cent of its incremental deposits in Exchange Traded Funds (ETFs) in the current fiscal. During the April-June period, EPFO’s monthly incremental deposit was around Rs 8,200 crore, which allows it to invest an estimated Rs 410 crore every month in ETFs during the current fiscal. A large number of trade union representatives on board of the EPFO had opposed the move in view of the volatile nature of the stock markets. EPFO has a subscribers’ base of over four crore and is expected to receive an incremental deposits of Rs one lakh crore during the current fiscal.(PTI)
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Raghu MohanThe Reserve Bank of India (RBI) has issued “in-principle” approval to ten applicants to set up small finance banks (SFBs) to bolster financial inclusion to cover the vast swathes of the unbanked. The idea is akin to the move to set up local area banks (LABs) in the mid-90s which was an unqualified flop. Will its new avatar work? In the current context where size is everything, it remains to be seen how these SFBs fare. While they are designed to be small, in just about every other aspect of regulation, they are to be seen as your regular bank. Again, operationally, it’s anybody’s guess as to what kind of cost advantage they can have – rentals (office and branches) will be on a par with any other bank; as for salaries, just what kind of talent can they attract if it not aligned with the market? Let us also not lose sight of the fact that some of the bigger state-run and private banks have now started to target (in an aggressive manner) the very same audience that the proposed SFBs aspire to cater to, albeit at the top of this pyramid. On paper, the idea is laudable. It was the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan; 2009) which opined on the need to set them up; that the sufficient change (in the environment) warranted experimentation with well-governed deposit-taking SFBs. And to offset their higher risk from being geographically focussed, it was for higher capital, a strict prohibition on related party transactions, and lower allowable concentration norms. It was seconded by the report on `Banking Structure: The Way Forward’ (27th August 2013). Will It Fire?To flashback. In his “Dream Budget of 1997”, then finance minister P Chidambaram made a case for LABs to provide organised finance for rural India – not very different from SFBs. In August 1997, Mint Road allowed them entry -- Manipal LAB (Manipal; Karnataka); Priyadarshini LAB (Aurangabad, Maharashtra)) and Krishna Bhima Samruddhji LAB (in Karnataka and Andhra Pradesh). Later, an “in-principle” nod was given to five more -- Capital LAB (Nakodar, Punjab); Coastal LAB (Vijayawada, Andhra Pradesh); LAB of Kongunadu Ltd (Salem, Tamil Nadu); Central Gujarat LAB (Dabhoi, Gujarat); and Vinayak LAB (Sikar, Rajasthan). The last time we got a full report on the functioning of these banks was from `The Review Group on The Working of LAB Scheme’ (1st September 2002) under the chairmanship of G Ramachandran (Former Finance Secretary). It was critical; and its major findings were: that in their catchment areas, they had a limited footprint, and they were swamped by commercial banks. The Committee concluded that “we are strongly of the view that whether it is rural banking or any other segment of the financial sector, size, whether in terms of capital base or totality of operations as reflected in the balance sheets, is of critical importance. It is size which inspires and retains the confidence of depositors and borrowers alike. It is size of capital which enables a financial entity to cope with unexpected adverse trends in its business and overcome threats to its survival from any panic reaction on the part of its investors”.
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Not just fixing accountability for forced selling, new corporate agency rules in insurance now allows corporate agents to offer insurance products of more than one insurer. Sunil Dhawan reports More choice for buying insurance! Insurance Regulatory and Development Authority of India (IRDAI) has allowed corporate agents such as banks to offer insurance policies of more than one insurance company. Presently, banks are only allowed to sell insurance products of a single insurer with whom they have tied-up. Going forward, they can tie-up with a maximum of three insurers. There are 7316 corporate agents in the country today including banks, NBFC and other registered and licensed private entities. The new rule: A Corporate Agent dealing in Life or General line of business may have arrangements with a maximum of three life or general insurers respectively. Further, the business of Corporate Agent (General) has been capped at Rs 5 Crore per risk for all insurances combined. While for the Corporate Agent (Health), they have also been allowed to have arrangements with a maximum of three health insurers. In the case of Corporate Agent (Composite), there can be a maximum of three tie-ups as well. Such practise will come into effect from 1st April, 2016. Open architecture: With this move, IRDAI seems to be moving towards the open architecture system. Today for example, State Bank of India and ICICI Bank are corporate agents of SBI Life insurance and ICICI Prudential life insurance. They therefore sell products of only these insurers. Going forward, the product portfolio will see a sea-change and the competition is sure to go up. What it does: By bringing in these changes, customer gets more choice. Instead, of a single insurer’s products, customer will now have more options to consider. Banks or other corporate agents too can have different products to offer to clients. No matter how standardised the product structure could be, there are differentiations that makes one product better than other. The corporate agent having tie-ups with more than one insurer is expected to disclose to the prospective customer the list of insurers, with whom they have arrangements to distribute the products and provide them with the details such as scope of coverage, term of policy, premium payable, premium terms and any other information which the customer seeks on all products available with them. Forced selling: At times, corporate agent such as bank may force customer to buy insurance product as an ancillary product for having bought any primary banking product. This is largely the case in home loans where insurance is told to be bought ‘mandatorily’ if a loan is seeked. There is no such compulsion. The top officer of the corporate agent has been asked to furnish a statement stating no forced selling is done. This step will inculcate discipline in the system as the accountability is being set. End note: Ask for other insurer’s products if you are forced to buy only one. Further, as a buyer you may also ask commissions across those products which the agent will earn. Overall, this move gives more flexibility, transparency and choices to insurance buyers in the country.
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By Sumit Sharma Decision by the US Federal Reserve to leave its key interest rate unchanged may have just opened a window for the Reserve Bank of India (RBI) to bite the bullet and lower its repo rate on its September 29 monetary policy meeting, or even earlier. The RBI has favourable domestic economic parameters to help lower its repo rate. It has been, like other central banks across the world, watching out for guidance from the Fed meeting and its implication on global markets. Any early rate cut by RBI will be welcomed by industry and come very handy as finance minister tries to woo investors in Singapore and Prime Minister visits the US between September 23 and 28. Stock markets across Asia excluding Japan, rose following the Fed decision to hold its rates. The BSE Sensex gained almost 500 points to 26,460. The rupee gained 54 paise to 65.92 per dollar, its highest level in three weeks, and the 10-year government bonds rose, pushing down yield to 7.72 per cent. So, what did the Fed do and why. The Fed by a clear margin of 9-1 decided to hold its funds rate at between zero and 0.25 per cent. Consistent with statutory mandate, the Fed said it seeks to foster maximum employment and price stability. US inflation rate is expected to inch up to its 2 per cent target. "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,'' it said. The Fed also cited global concerns about fragile global growth rate, slowdown in China and volatility in financial markets. Central bankers from across the globe, including Governor Rajan, as also IMF and World Bank chiefs, had appealed to the US Fed to take cognizance of the impact of its actions on global economy. An increase in Fed rate would have narrowed interest rate differential between India and the US. and theoretically could have sucked out billions of dollars from all emerging markets. In fact, since the beginning of the year global funds have pulled out money from emerging markets including India fearing Fed rate increase. Fund managers now expect the decision to slow outflows from India though India is unlikely to begin attracting inflows. Yet, India is lucky to have one of the steadiest economic fundamentals including slowing consumer inflation, Asia's best performing currency, narrow current account deficit and fiscal deficit under control, as also an economic growth that may not be galloping away but is not tottering either as in other similar sized economies. Still, India's growth is slower than desired as the government completes almost one and half year of its tenure and many of promises and aims remain unfulfilled. Conditions look ripe for the RBI to do its bit to make cost of borrowing cheaper, and once again focus on growth since inflation is under control. The Fed is expected to revisit its decision either on October 27, 28 Federal Open Market Committee meeting or surely at its December FOMC meeting. ``In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation,'' the Fed said in its post-policy statement. ``When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent.'' India can and should act quickly even though the uncertainty may probably have narrowed.
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By Noor Fathima WarsiaThe connected consumer matters for MasterCard. After all, any conventional definition of the different kinds of audiences changes, when they become active in an always-on world. And for MasterCard, this meant revisiting the strategy in which it spoke to its audiences. Raja Rajamannar, Worldwide Chief Marketing Officer, MasterCard explains this as the journey to creating priceless experiences from MasterCard's initial play of celebrating priceless moments.Technology changed everythingTo understand MasterCard's marketing evolution, it was important to understand the world of the connected consumer, according to Mr Rajamannar. He said, "Factors such as Moore's Law, growth of computing power and nanotechnology has transformed the way in which people are connecting with devices and with each other. From once the thought that the 60 yrs plus generation was slow in adopting to technology, today we are seeing that set of audiences embracing tablets, communicating through Skype and WhatsApp. The younger generation is not only second-screening while consuming media but the smartphone has essentially become a natural extension of their body. The connected consumer is truly always-on, and as a brand, that meant something for us."MasterCard looked at crafting an ecosystem where the brand could thrive in these changing dynamics. The company embarked on a new journey two years ago, where it upped its focus on the consumer, and in understanding consumer behaviour in the context of consumption. "In the past, the brand positioning was the best way to celebrate moments. One key finding for us at the time, which is now obvious in retrospective, was that experience matters. We wanted to transform MasterCard from a payment brand to a lifestyle brand," Mr Rajamannar observed.On The Path Of Enabling ExperiencesMasterCard's path of moving on from celebrating priceless moments to creating and enabling priceless experiences, also meant connecting people with newer, or as Mr Rajamannar puts it, priceless opportunities. A confluence of functions needed to come in play to achieve that. With marketing at the centre, MasterCard put technology, products, innovation and communication in the mix to build platforms that translate the brand into personal experiences.MasterCard chose four platforms to associate itself with at the end of the exercise that included Surprises, Cities, Causes and Specials. "If something did not fit in this, we ruthlessly cut it out," informed Mr Rajamannar implying the streamlining of talking points and marketing activities that MasterCard wanted to engage in.The old marketing advice of 'delighting and surprising' consumers became relevant for MasterCard. Citing the example of some of the experiences co-created with the likes of Justin Timberlake, MasterCard created quarter million surprises in the last 15 months around 112 countries. "Essentially, we were creating a surprise every day, and that comes with a massive creative and executional challenge. We worked with many new ideas to achieve this. Our new strategy has helped us in not only building a brand but in driving business growth," Mr Rajamannar summed up.
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Ahead of the bimonthly monetary policy review, RBI Deputy Governor Urjit Patel on Thursday (18 September) said sustained low inflation over medium- to long-term is necessary to bring down the cost of fund. “Sustained low inflation… at a low enough level is an important ingredient for making the cost apposite to that particular level of inflation and inflationary expectation. “It’s not inflation last week or last month but its medium- to long-term inflation,” he said. Inflation, which RBI takes into account while deciding the interest rate, has remained low for the past several months. While the wholesale price index (WPI) remained in negative territory for 10 months in a row, the retail inflation (CPI) eased to 3.66 per cent in August. RBI is scheduled to announce bimonthly monetary policy review on September 29. In the last policy review on August 4, RBI had kept its policy rates unchanged because of elevated inflation level. Besides, Patel added, fiscal deficit of both the central and state governments also play an important role in determining the cost of fund as the center and states combined together are the largest borrowers in world over. “The other is credible programme of fiscal rectitude by the government… both the central and state governments can help… and the reason is they are in direct competition with other long-term borrowers,” he said, adding the largest borrower across the world is the government. The deputy governor also said that higher cost of restructuring pushes the cost of fund and RBI is trying to address this issue. “The higher the cost of restructuring, the higher the cost of debt workout, the more it builds in the cost of capital from the side of the lender, and this is something we are in middle of addressing,” he said. In addition, he said a competitive, vibrant banking system is important for lowering cost of capital, and a lower taxation too is helpful. As part of efforts to deepen financial inclusion, RBI yesterday granted small finance bank licences to 10 entities. “We announced licences for small finance bank with focus on small borrowers. So, this addresses niche requirement that is there to be addressed for ‘Make In India’ for creating entrepreneurial numbers to create one million jobs per month,” he added. (PTI)
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Just at a time when exits were beginning to pick up in the country, paving the way for private equity investors to cash out profitably from their portfolio companies, there comes a dampener - depreciating rupee against the dollar. Private equity investors are increasingly finding it difficult to get an exit route for the investments made due to the depreciating rupee against the dollar and therefore opting for initial public offerings rather than strategic sale. “There is some stress for private equity in generating returns due to rapidly depreciating rupee along with competition leading to higher valuations,” said Bijou Kurien, Member, Strategic Advisory Board and Mentor, L Capital Asia (LVMH Group) in India Retail Forum 2015. Returns for private equity has dropped from 40-50 per cent in 2005-08 to 10 per cent in the last two years and holding period has rose to 6 years from 3 years earlier, Kurien added. So far, 2015 proved to be a bumper year for private equity and venture capital exits. This is even as the overall exit scenario all these years have remained grim. As per research firm Venture Intelligence, private equity and venture capital firms in the country realised over $6 billion (Rs 38,000 crore) via share sales in the January – July period this year. This seven month figure is 33% higher than the $4.5 billion realized by investors in the previous best full calendar year of 2010. A single PE investment cycle usually lasts 5-7 years after which PE firms normally exit by way of trade sale, public listing, recapitalisation and secondary sale. Trade sale is the most common exit for private equity investments as trade buyers in the same industry are often more likely to realise synergies with the business and are therefore, the most natural buyers of the business. Typically, public listing takes place during positive market conditions as prevailing at present. Commenting on the valuation matrix, industry experts at the panel discussion said digitisation of retail business has helped in bringing the price sensitive middle class Indians closer to consumption and in turn aided the entrepreneur scale up his business much faster than the brick and mortar economy that has helped the valuations soar. “Without compromising on the quality, the e-commerce evolution has helped in sustaining a scalable business not necessarily on financial matrix of being profitable, but in terms of creating value,” said Bharat Banka, Founder and Ex-CEO, Aditya Birla Private Equity. However, experts also said that for any business to sustain, it is absolutely imperative to create value and profit. In today’s day and age, fund managers are increasingly investing in changing consumer behaviour and attitude. Hence, the normal valuation matrix is not being applied by fund managers while valuing the digital business rather than the brick and mortar conventional business, referring to the current valuation attracted by startups like Snapdeal and Flipkarts.
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