Paramita Chatterjee on how and why it is still a challenge for investors to raise funds even though deal activity is picking up Even as deal activity is picking up in the private equity sector, fund raising continues to be a challenge especially for first timers trying to raise funds. This is primarily due to lack of good quality exits in the overall market in the last few years although year 2015 bucked the trend to record some bumper exits in the last 8 months. In the January-August 2015, only 3 funds were raised worth $566 million, as per data available with research firm Venture Intelligence. This is way lower than $2351 million that was raised across 7 funds during the corresponding period last year. The three funds that have been raised this year are by venture capital firms SAIF Partners, Sequoia Capital India and angel investor Unitus Seed Fund. So far this year, SAIF has raised $350 million in March, while United Seed Fund raised $6 million in April. Sequoia has raised $210 million in April and there is already chatter that the marquee investor is in in talks to raise another $800 million over the next 6-8 months for its fifth India-focussed fund. “Fund raising has become more difficult now. You will only see funds that have a proven track record of exits who will be able to accomplish it,” said Sanjiv Kaul, managing director at home-grown PE biggie ChrysCapital. “While fund raising has been tough given the macro environment and limited success with exits, the outlook seems to be improving if we get our act together,” he added reflecting on the industry positives. With the problem of capital overhang and ‘dry powder’ dissipating and investment opportunities increasing in new age sectors, there may be a few new funds that will come into action over the next 1-2 years. A host of private equity and venture capital investors had raised money till 2010 and 2011 after which the industry faced a problem of capital overhang as the number of good quality investments were low compared to the capital available. However, in the last 1-2 years, with the number of startups mushrooming and more number of companies coming up in new age sectors like mobile, internet, food and beverages, investors are now parking capital in a lot of them. So, in an ideal scenario, if the investment opportunities increase, fund raising opportunities should also go up. However, here lies the challenge as investors too should prove their own track record and seal profitable exits. Only then, will they be able to raise additional funds from their limited partners, say experts tracking the sector. This year the total Venture Capital deals surpassed the total deals of PE companies. In the first half of 2015, as many as 363 VC deals were sealed, three times more than the number of PE deals, which stood at 99, as per data available with Grant Thornton. Traditionally, in terms of the total deal size, VC funding will always be smaller when compared to PE funding. The data collected for this period shows that the total VC funding stood at $1.9 billion compared to $5.1 billion pumped in by PE funds.
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At a time when markets are volatile, Kotak mutual fund launches capital protection oriented scheme. A rush of such funds may be expected from other mutual funds soon. Sunil Dhawan reports Kotak Mutual Fund has recently launched Kotak Capital Protection Oriented Scheme Series 1 (KCPOSS-1). In addition there are other such Capital Protection Oriented Scheme from fund houses of Reliance, ICICI, UTI amongst others. In these times, when the stock market volatility is on high, many investors get a bit conservative. The fear and the probability of losing capital in the shot-term is high. Lakshmi Iyer, Chief Investment Officer (Debt) and Head of Products, Kotak Mutual Fund informs, “In fact volatile markets like the one we are currently witnessing tend to dissuade some section of investors, especially the conservative ones. Though the long term bullishness may remain intact for them. It is therefore an opportune time for launch of such strategies which allow for equity participation, at the same time is oriented towards capital protections”. For investors who want to expose funds into equities yet keep the capital safe may consider ‘capital protection oriented’ (CPoF) mutual funds scheme. What are CPoF: CPoF are close-ended schemes and fund houses keep launching them off and on. They are hybrid schemes and therefore relying on both debt, equity asset classes to generate returns. What is important is the maturity period of such schemes. Being non-equity funds, they are tax efficient if held for at least 36 months i.e. 1095 days. The long term capital gains tax in them is 20 per cent after indexation if held for 36 months. This makes them tax-efficient than bank fixed deposit which are fully taxed at individuals’ income slab. Why Now: Considering the interest rate cycle in the country today, one may expect rates to fall further. When rates fall, prices of debt asset move up thus generating high returns. With the Indian economy to grow and equities to deliver from here over a three-year horizon, someone with these views should consider CPoF. Nilesh Shah, Managing Director, Kotak Mutual Fund at the time of scheme launch had said, “To hedge against market volatility, this scheme will pick growth oriented stocks available at reasonable valuations, which are now available in plenty after market correction while putting the greater share in higher rated debt instruments.” It’s important to note that these schemes do not guarantee the returns and neither is the capital assured on maturity. They therefore use the word ‘oriented’ to maintain that the scheme can only endeavour to keep the capital safe. This they achieve by investing a larger portion of investor’s money in debt assets and a small portion into equities. Lakshmi says, “If you see the last 2-3 year equity returns, they still continue to be fairly robust.” As per valueresearchonline.com data, the 3-year return of some existing CPoF are in the range of 8-13 per cent per annum. End note: CPoF are more suited for investors who doesn’t want to lose capital yet generate returns higher than other debt products such as bank fixed deposit would generate over 3-year period. Also, these being closed-end and with less liquidity options in secondary market for them, lock-in only those funds which might not be required for at least 3 year period. As an investor, the decision to invest hinges on both equity and debt markets being able to perform over next 36 months. Our take is to go ahead considering both assets being in a sweet spot especially debt.
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Raghu Mohan says if anything, banks must be complimented for practicing the art of “lazy banking” In early January this year, Prime Minister Narendra Modi made a call to end "lazy banking" on the last day of the bankers' retreat, 'Gyan Sangam'; he asked banks to play a proactive role to help the common man. Noble as these intentions are, for the better part of the year banks were more worried as to when and how much capital would come in from the Centre by way of capital infusion ahead of Basel-III which kicks in from fiscal 2019 -- we are talking about state-run banks which account for 76 per cent of the banking industry’s assets. In August (eight months after Gyan Sangam), we finally got a roadmap on the numbers. That state-run banks -- over a four-year period -- would need Rs 1.80 lakh crore in capital. Of this, these banks would have to tap the bourses to raise Rs 1.10 lakh crore. Financial Services Secretary Hasmukh Adhia said these estimates were based on credit growth rate of 12 per cent for the current year, and 12-15 per cent for next three years which will depend on the size of the bank. The Centre’s share will be Rs 70,000 crore over this period -- of this Rs 25,000 crore each will be infused in 2015-16 and 2016-17 and Rs 10,000 crore each in 2017-18 and 2018-19. Raghu MohanThis assurance is good, but there’s nothing to suggest that more capital will not be sucked in. In the six months since the Gyan Sangam, what’s happened is that the bad-loan situation has worsened. Mint Road’s Financial Stability Report (June 2015) observed that while risks to the banking sector had moderated marginally since September 2014, concerns remain over the continued weakness in asset quality indicated by the rising trend in bank’s stressed advances ratio. Gross non-performing assets (NPA) went up to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. So too restructured standard assets to 11.1 per cent (10.7 per cent). State-run banks recorded the highest level of stressed assets at 13.5 per cent of total advances as of March 2015. You can take relief that the net NPAs of banks remained unchanged at 2.5 per cent during September 2014 and March 2015. The FSR was of the view that the current deterioration may continue for few more quarters; that falling profit margins and debt repayment capabilities of India Inc., add to these concerns though the overall leverage level in Indian economy is comfortable when compared to other jurisdictions. That pain is to going to be around for some time is once again highlighted by Ernst & Young’s (Fraud Investigation & Dispute Services) report on `’Unmasking India’s NPA issues – can the banking sector overcome this phase?’ The report (released today: 8th September) is based on the responses received from over 110 respondents during the period November 2014–March 2015. The principal respondents were bankers from state-run, private, foreign and co-operative banks; they were drawn from vigilance, credit, operations, legal, compliance, asset recovery, audit, and finance departments. And this is what it said. · 72% said that the borrowers are misusing the restructuring norms · Around 86% of the respondents stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism. This highlighted the need to strengthen internal processes and controls for early detection of issues. · 91% respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower and further 54% respondents that this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs/efforts · 44% stated the impact on provisioning or performance of the bank branch is one of the key reasons that are preventing banks from reporting borrowers as ‘wilful defaulters’ · Only 15% of the respondents seemed optimistic and think that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI recent circular ordering all banks to ensure vigilance during the pre-and-post sanction due diligence processes is expected to prove a step in the right direction. · 86% respondents stressed on the need for an effective mechanism to identify hidden NPAs. Additionally, around 56% stated that used of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals. · 68% of the respondents said that developing internal skill sets on credit assessment/ evaluation are necessary The point here is all of the above information comes from the deep recess of banks – the great watering hole at which all of India Inc., drinks from. What more information do the authorities need? Finance Minister, Arun Jaitley knows only too well what the issues are. On August 21 this year, he made reference to the all-out efforts launched to correct the current "unacceptable" level of bad loans in state-run banks. “NPAs, which have reached to the present level are unacceptable. They reached this level partly because of indiscretion, partly because of inaction, partly because of challenges in some sectors of the economy, which were evident through the high NPA in these sectors," he said. On today’s meet, Arundhati Bhattacharya, chairperson of the State Bank of India said: “we have suggested to the Government to revive stalled projects and make investment climate more conducive and business friendly. We understand that Government is keen on improving conditions for doing business and making efforts in that direction.” You can’t expect the head of a state-run bank to say more than that, but how are to do this when banks’ are not able to lend without a proper policy on NPAs or specific business areas?As for “lazy banking”, look no further than the Reserve Bank of India (RBI) to know why it is so. Despite Mint Road’s slash of the statutory liquidity ratio (SLR) — the percentage of deposits that banks have to invest in government securities (G-Secs) – over time to 21.3 per cent from 23 per cent, banks continue to hold around 28 per cent (by way of SLR). In its Annual Report for 2014-15, Mint Road explains the reasons for the excess holding of SLR by banks: “… the buffer providing access to collateralised borrowings from the wholesale funding market and the Reserve Bank. Maintaining excess SLR securities also helped banks to weather the impact of the current slow phase of the economic cycle on their balance sheets and earnings”. Simply put what it means is that banks held excess by way of SLR – that is, they chose to invest higher amounts in G-Secs — as they could pledge them to raise funds from the money markets; and that at a time of dip in bank’s asset quality, such investments stood them in good stead. If anything, banks must be complimented for practicing this art of “lazy banking” (!). It’s better to do so than lend more monies after bad, and then twiddle your thumb in private despair when it does not return home. The pow-wow today between the prime minister and industrialists, bankers and economists make for great optics; and may help sooth frayed nerves – but the remedial has to be done on the ground.
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By Raj LiberhanThe Finance Minister is now worried that the Non Performing Assets of the state run banks have reached 'unacceptable levels'. It is not unusual for Finance Ministers to be worried given that our financial architecture is rather fragile. As the guardian of the nation's strained treasury, he must have sleepless nights. His predecessors have been worried too, but besides exhorting the bankers to clean up their appraisal abilities and obtain substantive collaterals before sanctioning loans, very little action gets taken to compel the state run banks to run on prudential norms. An extra dose of recapitalization has also been promised, something like Rs 70,000 crore over the next four years to help the banks to get the needed muscle to leverage more funds for their business as well as get close to the capital adequacy norms. The NPA affliction also extends to the public financial institutions whether owned by the Central or state governments but that is another story.To get an idea of the size of the non-performing assets, it has been stated by the Reserve Bank of India that these are 5.2 per cent of the total advances at the end of March, this year, up by nearly a percent over the previous year. In percentage terms, the figures do not seem alarming but translated into numerals, the NPAs stand at a whopping Rs 3.07 lakh crores!! This level of non-performing assets are ascribed to 'partly because of indiscretion and partly because of inaction..' This pronunciation should lead us to actually quantify NPAs amounts due to indiscretion, amounts due to foolishness, amounts due to stupidities and perhaps amounts due to political pressure. Sadly no such statistics are maintained, either by the Finance Ministry or its associate banks. At the very least it can be safely assumed that these bad debts are the result of poor and misguided investment decisions.Banks, public or private, are in the business of money to make money. It is a simple and a complex business. They invite deposits and pay a rate of interest, attractive enough for the depositor as the interest earned adds to his income. To pay the promised interest, the bank has to lend this amount to an entrepreneur at a rate of interest that will cover the amount to be paid to the depositor and meet the costs of doing business by the bank. The bank also hopes to glean a certain amount of profit on the transaction to satisfy its promoters and investors. The bank being a trustee of the depositor's money, has to ensure that when it lends to a borrower, the credentials of the borrower measure up to essentially one standard: his ability to pay back the amount borrowed with interest. To secure this end, the bank will insist that the borrower produces a collateral, or a guarantor in the shape of an owned asset which is at least equal in value or a human being with amounts of deposit in the bank which can be pledged as a surety. This works well when the amounts of borrowing are small.But bankers would not be bankers if they did not play in the big league. How do you lend to businesses which need thousands of crores to put up a power project or an infrastructure project or an airlines venture? It is the prospect of big incomes from these lendings that the profits and gains for the banks really accrue. So you have financial and technical wizards to appraise the costings and the revenue streams and the tenure in which the project goes functional. If the latter two features are compatible with the tenure of the borrowings, it makes for a good case for the bank to make the loans. At least that is the theory of lending. Lend and be happy.What actually happens is that the costing of the project is over padded intelligently, the revenue stream is brighter than reality and the time frame is off by 30-50 percent of the stated time lines. We now have a well-made recipe for default on the loan installments. And when it does happen, as it will for sure, our bankers then have a programmed response by instantly proposing to 'restructure the loan' which in plain language means that the time to pay back the loan gets extended. A de facto default of loan repayment becomes a functioning asset once again just by pressing the extend button. This is not the only rescue initiative that the bank undertakes. Invariably, the costs of the project have escalated, which is true of 100 percent cases in our country, so they provide further loans to meet the escalation of costs. The bank is happy as it can recognize legitimately the loan income and the favoured borrower is happy as he has found the fountain of eternal wealth in his hands. Extend and be happy.Money is a complex business for sure. But the banking trade has to function within the frame of prudence. Unscramble the complexity and we discover that money does not tolerate mismanagement at the fundamental level. If the NPAs are being ascribed to 'indiscretions' then clearly there has been mismanagement, at the very least. Criminality is not very far from an act of indiscretion particularly when the act has the consequence of a loss of multiples of thousands of crores. The primary duty of the lender is to assess the credibility and creditworthiness of the borrower. It has to be followed up with a severe evaluation of the project costs and the time frame for completion and the hazards to completion. No appraisal can be complete unless the borrower's equity is estimated to show a serious involvement of his own skin in the project for which funds are being sought. Invariably, the costs of the project are padded up to take care of inflation, escalation in prices of inputs and likely time overruns. The skill of the lender lies in getting a fair idea of the padding intended to cover likely escalation in costs and not to help siphon the promoter's equity which is the case all the time in our country. The subtly nuanced 'indiscretions' in reality, are the deliberate oversight of the risks and a willing acceptance of the generously projected revenues by the funding institution.The list of indiscretions in lending by the public banks is long and varied. Some of the significant reasons are the burden on the banks because of the compulsion to give credit to fulfill social sector needs. Given that this would only be a small drop, the bulk of the credit is attributable to downright bad investment decisions in real estate, power sector, infrastructure sectors with long gestation periods, lendings with no planned exits at appropriate tenures and credit under political pressure are the real culprits. Failure to recall loans at the first sign of trouble and reluctance to encash collaterals and replace promoters, are all illness symptoms that became terminal. Nonetheless, we have not seen any bank management being held to account. Only an occasional reprimand or a stern reference to the NPAs at a public function is considered good and sufficient corrective and then it is business as usual till the next alarm bell rings. This belief is engendered by the ability to pretend that all loans get ultimately paid back, sooner or later, a belief that has no basis in fact. The fiction of comfort is created by the euphemism called restructuring of corporate debt, at best a normal banking practice. Yes, then display transparency and show the restructured debt as a distinct item on the balance sheet. Otherwise, pretend and be happy that you have revived a patent loan default.All bubbles are evolutionary. They build up slowly till they go burst as all bubbles must. The banker's skill and the warning systems he installs are meant to recognize the first signs and insulate his portfolio from disaster. The regulators have to be awake all the time too and pull the stops before the bank goes overboard. Re-capitalisation is like a heavy dose of steroids, funded by the taxpayer to revive the strength of the public sector banks, failing which they will go under. After all, this capitalization and recapitalization story is a familiar script for most state undertakings. And that is a cause for mental seizures, which is a trifle beyond being merely worried. In caution should banks trust for the world of finance functions only on ethics and sound arithmetic, and never on speculation. A punter places his bets on presumed logic, while a good banker must hedge his bets against all risks. Finance Ministers have to believe that as well.The author is Director, India Habitat Centre
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Non-performing Assets' issue in Indian banking is set to be worsen in coming years, according to banking survey by EY consulting.To assess the reasons and challenges behind these mounting bad loans, EY Fraud Investigation & Dispute Services released a survey report titled, ’Unmasking India’s NPA issues – can the banking sector overcome this phase?’ In line with its aim to uncover the elements which contributed to this issue, 87% of the respondents stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis.Furthermore, around 72% have claimed that the crisis is set to worsen before it becomes better. The survey respondents also indicated that lapses in the initial borrower pre-sanction process and inefficiencies in the post-disbursement monitoring process have played a key role in the NPA predicament.Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services, said that, “The Indian banking industry has been facing a challenging situation in the form of the NPA crisis. We have seen that an often overlooked, but integral aspect is lapses in integrity by the borrowers or by gaps in the initial sanctioning process undertaken by financial institutions. With the Reserve Bank of India’s recent circular on the framework for dealing with loan frauds, the role of forensic audits will become even more critical as it would enable identifying the intent of decision makers, thereby addressing the stress in the sector.”Some of the key highlights of the survey are:72% said that the borrowers are misusing the restructuring normsAround 86% of the respondents stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism. This highlighted the need to strengthen internal processes and controls for early detection of issues.91% respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower and further 54% respondents that this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs/efforts44% stated the impact on provisioning or performance of the bank branch is one of the key reasons that are preventing banks from reporting borrowers as ‘wilful defaulters’Only 15% of the respondents seemed optimistic and think that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI recent circular ordering all banks to ensure vigilance during the pre-and-post sanction due diligence processes is expected to prove a step in the right direction.86% respondents stressed on the need for an effective mechanism to identify hidden NPAs. Additionally, around 56% stated that used of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals.68% of the respondents said that developing internal skill sets on credit assessment/evaluation are necessary(BW Online Bureau)
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Sunil Dhawan writes that more than listening to predictions and tracking the daily movements, MF investors should remain focussed on their long term goals and keep their SIP running It’s a roller coaster ride at the stock markets not just in India but globally. The markets are up for a day and the next day it comes falling and recoups the next day. Volatility in the markets as captured by VIX is up by nearly 70 per cent in last 1-month and is about 63 percent up YTD. Globally, when economies, both of developed and emerging nations are looking feeble, markets are bound to get perturbed. At a time when Europe, US are still not out of the woods and were banking largely on the Asian economies especially China, the slowdown of China growth story has hurt the markets badly. If China falters more on the growth path, the pain could prolong. If Chinese data comes up well for the next few quarters, it’s when the markets could be up for a big reversal. What’s happening in china or how its government is bailing out the economy, is far from common know-how. Overall, it’s getting scary for all especially retail individual investors. Already, there are reports suggesting bear market ahead, while many are hinging and placing their bets on the India’s emerging economy. As a mutual funds investor here are few things that one can do. Do not listen to predictions: It’s absolutely impossible for anyone to predict the movement of markets. Period. Stay from predictors at all cost. Factors affecting market movements have increasingly become more complex, inter-related and dependant on global events as well. Further, there are technical factors too at play. When technical support levels are broken by market, the next level gets projected as the support. But then, markets move on their own and all these support can be broken. There’s no harm in catching the market when it’s already up 800-1000 points. Investing based on predictions could be financially damaging. There could be vested interest in predicting markets on either side, a fall of 1000 points or a rise. It could be a trap for retail investors, who several studies have shown in the past are mainly left high and dry when markets reverse direction. Be invested in markets, one never knows when the markets reverse and bounces back. Keep SIP running: All those MF investors, investing through SIP may continue with them. SIP’s are not making all your fund get exposed to market volatility all at once. When index is down, they get more units while when the index rise, the units bought is less. This approach helps in accumulating units, the average cost of which is lesser than otherwise. The risk of volatility gets minimised through SIP approach. Looking to invest lump sum: With regards to fresh money, the approach gets tricky. If you are looking to invest a lump sum in current markets, tread cautiously. Depending on your goals and risk appetite, invest the amount partly in debt and partly in equity especially through STP. Instead of putting entire money in equity funds, in STP, funds are initially put in liquid or a debt fund and a mandate is given to keep transferring a fixed amount on regular basis (say, monthly) into the equity fund of same fund house. Here’s more of STP. Park in debt: Interest rates in the economy are on its way down. When rates fall, prices of debt instruments move up. Investing in debt funds could help in these times and one may expect a decent return over the next 3 years period. Invest in debt fund with a 3-year horizon as they qualify for long term capital gain tax of 20 percent after indexation, after 36 months of holding the units. Review your MF portfolio – This could be the time to review your portfolio. Look at returns of funds of your portfolio against benchmark and market returns. This could be the time to remove the under-performers. There could be funds which have fallen far in excess of markets. Funds which have fallen less could form a part of your portfolio too. Asset allocation: With equities and gold values down and debt prices on the up, your portfolio also could require asset allocation restructuring. Fresh funds could be required to be invested in equities. Use the STP approach. The reason to invest further especially when markets are down is also because of this. Diversification – This could be a time to make use of the opportunities. As and when reversal happens and economies start to show prosing growth, it’s the banking sector funds that outshine. Invest in banking funds and here’s how to go about it in a more cost effective way. For new investors: if you are one among those who have taken the saying “invest when other are fearful, sell when others are greedy”, too literally, try investing through index funds. Even beginners who want to enter markets in these times and ready to brace the fear and volatility, should take the index fund route. A better approach could be to stagger and keep buying more in every fall. Who knows a reversal could be seen soon. Read Also: How You Can Ride Over A Stock Market StormRead Also: Why You Should Invest More When The Markets Are DownRead Also: Is The Time Right For Banking Sector Funds?
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If faced with a financially crunch, there are ways to still keep servicing EMI’s and keeping the credit worthiness intact, writes Brijesh Parnami Availing a housing loan or any other loan from the organised financial and lending institutions has become an essential part of our everyday lives. The loans, while bring in tremendous value in helping the borrower own a house or any other asset, it also carries with it the enormous responsibility of timely repayment of instalments – referred in the common parlance as EMI – to the lending institution. The EMI – Equated Monthly Instalments – as they are called, are the structured monthly instalments to be paid the lender. At the time of taking a decision to give the loan, the lending institutions do the necessary due diligence of the applicant’s financial position and then decide to give the loan. The presumption being that someone with a certain monthly income generation, would be able to service an EMI of a certain amount. Further, any normal borrower, has all the intention to repay the loan in time, unless it is a case of intentional fraud. However, as is seen, everybody faces exigencies in life that bring with them sudden financial requirements. These could be in the form of a job loss or a medical emergency or any additional personal expenditure such as higher education etc. Such events disrupt the financial situation and it may so happen that the individual is not able to service the monthly instalment for one or more months. While this could indeed be a genuine problem, it must be realised that the consequences of the same could be serious. First and foremost is the credit worthiness, reflected in the form of credit score in the credit bureau records falls. When the credit score falls, taking further loans in future could become difficult. In order to protect the credit score, one must make every attempt to make good the EMI default. This can be done by resorting to temporary borrowing of the EMI amount from a friend or another family member. It is important to make this effort and pay the EMI so that the credit score does not get adversely impacted. Secondly, it would be important to proactively call the finance company and keep them posted of the difficulty that one is going through. When the borrower calls to inform the lender of his financial position, the attitude of the lending institution towards the borrower remains respectful and trusting. The lending institution could then extend all the required cooperation to the borrower and be more understanding in dealing with him in the period of default. It may not mean that they would give any concession, but they would not unduly bother the borrower with too many phone calls and personal visits. Thirdly, plan alternatives to make good all the default amounts as early as possible. Where possible, reduce the monthly household expenses and make conscious efforts to increase savings. These may seem difficult but once an effort is made, the small savings that come out of these efforts, over a period of time, bring much relief. You may be required to break some other saving that is maturing at a future date to service the EMI. That may still be worthwhile, because the penal interest charged by the lending institution, may be higher than the return that you may get on your investments. Fourthly, share the situation in a transparent manner with people at home – your family. Yes, it would be difficult to break this news, but this is still better done now, rather than doing it when the problem has become bigger. The family that is taken into confidence at an earlier stage, would also be more cooperative and helpful in dealing with it. Fifthly, have faith in the dictum that ‘This too shall pass’. Difficulties come and go. But if we have an attitude that whatever be the difficulty, we would not deviate from our responsibilities, the difficulties trouble us for some time and then vanish. Have faith and keep your chin up. Remember the words of a great philosopher of the twentieth century, ‘the world is on my side, so long as I am true to the best in me.’ The above steps, taken consciously and with a sense of responsibility, can surely help a person face the situation of default in a more intelligent manner and with clarityThe author, Brijesh Parnami, is CEO, Destimoney Advisors
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Designating just two banks could be credit negative for other banks, according to Moody's. Sumit Sharma reports The Reserve Bank of India’s (RBI) move to designate just two banks, the State Bank of India (SBI) and ICICI Bank as domestically systemically important bank (D-SIB) is described by Moody’s Investor Services as credit negative for banks in India. "The RBI’s implementation of its D-SIB framework appears less stringent than that of other jurisdictions, which appears to be related to the capital stress that banks in India are currently experiencing,’’ said Moody’s analysts Rebaca Tan and Srikanth Vadlamani. The RBI on August 31 designated SBI and ICICI Bank as the only two D-SIB, a status that also requires them to make an additional provision of 0.6 percent and 0.2 percent by April 1, 2019. India’s D-SIB framework is less rigorous than those of other jurisdictions and with only two banks in India designated as D-SIBs, the country has the least number of D-SIBs among those that have implemented the framework, says Moody’s. Also, RBI’s timeline for complying with the capital surcharges is longer, despite the presence of the less stringent capital requirements, it said. Canada and Australia require compliance by 2016, and in Singapore, locally incorporated banks have had to comply with the higher capital requirements since June 2011. In July 2014 RBI explained that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy. The cost of public sector intervention and consequential increase in moral hazard require that future regulatory policies should aim at reducing the probability of failure of D-SIB and the impact of their failure. Indicators that RBI said would be used for assessment are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed, it then said. RBI in July 2014 expected four to six banks to be designated as D-SIBs. Banks designated as D-SIBs would be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system. Moody’s expects ICICI Bank to be able to easily meet the required increased capital. Yet, it expects State Bank of India to reply on a combination of government capital injections, raising of external capital to meet the additional capital required. Singapore had as many as seven SIBs, with Hong Kong five, Canada six and Australia four banks. Compared with other countries, the smallest SIB in India had 5 percent of the market share, compared with three percent for Singapore and Hong Kong, five percent for Canada and 16 percent for Australia. Australia and Canada would need banks to get the additional capital requirement by January 2016, while Singapore and Hong Kong by January 2019 and India April 1, 2019.
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