The idea behind a new BR based on marginal cost of funds is that it will be more sensitive to policy rate changes, writes Raghu MohanEvery time, the Reserve Bank of India (RBI) cut its key rates, you continued to crib that bank lending rates still held firm. On its part, Mint Road grew tired of banks who peddled the view that their cost of funds had not fallen; it led Governor Raghuram Rajan to quip (6th April 2015) that it was "nonsense" to assume that the cost of funds had not fallen”. In this fiscal’s first bi-monthly policy review, RBI prodded banks to use a modified Base Rate (BR) – the floor rate below which they can’t lend. The new BR “based on the marginal cost of funds should be more sensitive to changes in policy rates. To improve the efficiency of monetary policy transmission, (we) will encourage banks to move in a time-bound manner to marginal cost of funds-based determination of their BR,” RBI had said. The idea behind a new BR based on marginal cost of funds is that it will be more sensitive to policy rate changes. Sure, only the new BR draft guidelines are out, what’s in store? Grin And BearThe first hit will be taken by banks. Says Pawan Agrawal, Chief Analytical Officer-CRISIL Ratings: “Our base-case is that profitability of banks will have a one-time impact of around Rs 20,000 crore in fiscal 2017, which would be equal to 15 per cent of the total estimated profit of the banking system for that year. The actual impact will depend on whether the banks will be given a leeway to make this shift over a longer timeframe in the final guidelines.” Says Parag Jariwala of Religare Institutional Research: “We think this methodology would lead to frequent BR changes. It may not go down well with borrowers, particularly when interest rates are rising. In a declining interest rate scenario too, frequent BR cuts would hurt banks as deposits would be re-priced with a lag”. How The New BR WorksCost of deposits: To be calculated using the latest interest rate payable on CASA (current and saving accounts) deposits and term-deposits. The cost of borrowings is to be arrived at using the average rates at which funds were raised in last one month preceding the date of reviewNegative carry on reserves (CRR and SLR): This would be based on the marginal cost of funds calculated above, implying negative carry will increase or decrease with an increase or decrease in cost of funds (negative carry will decline when deposit rates are cut)Un-allocable Overhead Costs: It is to remain fixed for three years Average Return on Net Worth: This is the hurdle rate of ROE determined by the Board or management of the bank. RBI expects banks to keep this component fairly constant and any change be made only in case of a major shift in business strategy Source: Religare Institutional Research It was from 1st April 2010 that the BR concept kicked in. Until then, it was the benchmark prime-lending rate (BLPR). A large universe of borrowers had their loan priced below it. At that point in time, the RBI pointed that the share of sub-BPLR lending by banks (excluding export credit and small loans) increased to 70.4 per cent in September 2009 from 66.9 per cent in March 2009. Strangely enough, the whole idea underlying the BPLR was that it was to act as a BR — with top-most rated borrowers getting funds at the rate. But it had created confusion – what is the BPLR to signal if the world borrowers both below and above it. Folks who borrowed below the BPLR had little reason to complain if it (the BPLR) continued to hold firm despite repeated policy rates cuts; ones who borrowed above it thought the world was unfair to them! The BR had just one consequence – the practice of lending below it came to end. But banks continued to say that their BR could not be reduced despite policy rate cuts as their cost of funds (on deposits and borrowings contracted earlier) remained high. It’s this stand of banks which prompted Rajan to say “we are not looking for a specific number (on the BR cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission. I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen”. Agrawal observes that yields of banks that lend mostly on a floating rate basis will be significantly impacted in an environment of falling interest rates – that floating rate is pitched over the BR. As the BR falls (and along with it the floating rate), so will the interest income of banks. And that banks with low levels of current and saving accounts, or relatively longer tenure-term deposits, will also be majorly affected. That’s becaus, their cost of funds will not come down soon enough -- as they will continue to payment interest to depositors at the old rate before a policy rate cut. The good news for banks (not for you and I) says Agrawal is that “in an increasing interest rate scenario, banks will tend to benefit as they will be able to immediately pass on any hike in deposit rate to the BR”. What about a cut in the BR next time Mint Road cuts policy rates? Adds Agrawal: “Given the impact on profitability, banks may shy away from cutting deposit rates, especially in times of low profitability, which will defeat the objective of quick transmission of cuts in the RBI’s policy rates”. You as customer will not win anytime soon.
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Sri Lanka's central bank has received $1.1 billion from the Reserve Bank of India (RBI) under the currency swap agreement between the two reserve banks. Consequent to the signing of a special currency swap agreement for $1.1 billion by the Central Bank of Sri Lanka (CBSL) with the RBI on 17 July 2015, the CBSL has received $1.1 billion, a statement said. This is in addition to the $400 million received in April 2015, the bank added. With the enhanced level of official reserves, the CBSL expects that the exchange rate would stabilise in line with sound macro economic fundamentals and movements of other currencies of major trading partners . In a related development, the central bank has allowed the rupee to float from Friday by not quoting a specific rate in the market. The Sri Lankan rupee exchange rate had eased to 134.75 rupees to the US dollar on Thursday. The central bank will allow the market to decide the exchange rate by not guiding with a specific rate. The bank will intervene if the levels are too high Analysts say the rupee had fallen 2.7 per cent so far this year due to increased imports.
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The Reserve Bank of India has hired a former Nomura algorithmic trader, officials said, taking a rare step to recruit externally as it seeks expertise needed to make India’s financial markets deeper and more responsive to monetary policy moves. Since taking the helm in late 2013, RBI Governor Raghuram Rajan has set out to bring fresh ideas to the conservative institution and has eyed recruiting more specialists from outside, but they have been few and far between. In late 2014, Rajan, who has lamented a dearth of capable economists in India, brought in former IMF economist Prachi Mishra to bolster economic research. Senior officers at the central bank typically rise through the ranks having joined at a junior level. Some are seconded to foreign central banks to gather more specialist experience. The new hire, Gangadhar Darbha, joined as a consultant at the start of this month, officials with direct knowledge said. The description for his job, given in an advertisement posted by the RBI, said it carried responsibility for developing and improving derivatives markets and examining currency futures, interest rate futures and offshore non deliverable markets. “The RBI strongly believes such new markets, new products will help in monetary policy transmission,” said one official with knowledge of the RBI’s thinking. A second official hailed the benefits of hiring externally. “Product development requires exposure to and experience in the global market. Such external hires will help add value to the RBI,” the official said. Rajan has a keen interest in market products. Under him, the RBI took external feedback last year to revise rules governing bond futures trading, and make the market succeed at the third attempt. While futures have been well received, markets for other products like credit default swaps remain difficult. According to officials, Rajan wants to bring more consultants into a central bank, where hiring outsiders, even on short-term contracts, is still fairly rare. S.S. Mundra, the RBI’s deputy governor in charge of human resources, said the move to bring in outside expertise was not entirely new and remained limited. “Occasionally, we have been doing it. It is just an extension of that policy,” Mundra said. Darbha declined to comment on his appointment. (Reuters)
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Missing the deadline of filing ITR would not allow certain benefits, instead interest and penalty could be levied, writes Sunil Dhawan The last date for filing income tax return (ITR) for the assessment year 2015-16 (financial year 2015-15) has been extended till 7 September, 2015. Earlier, the last date which usually is 31st July had been extended till 31st August. Now, that the income tax department has generously extended the deadline for filing of taxes, one should not find excuses not to do so. However, there are many who still for reasons known best to them either keep the exercise for the last moment or want to know what if the Return is not filed on time. Missing the deadline means three important things for all taxpayers: They lose certain benefits, may have to pay interest and lastly there could be penalty. Let’s see the implications, if you miss the deadline. Are taxes due? In case you miss the 7 September deadline of filing ITR, you will be left with two options depending on whether you have any taxes to be paid? If there is no tax liability, you may file your return without paying any penalty by 31 March 2016. This could be true for all those salaried tax payers if they don’t have income from any other source other than salary. In their case, if tax has been deducted at source (TDS), and there is no further tax liability, they can still file up to 31st March 2016. However, if you still have to pay tax and miss the deadline, you will have to pay a monthly penal interest when you file your return by 31 March. In case, you cross that deadline too, you will have to pay a penalty of Rs 5,000, along with the monthly penal interest. The penal interest on the due tax amount is at the rate of 1 per cent per month. This can go up to 2 per cent if you have not paid the required advance tax. Is there a refund? For those who would be entitled to a refund, filing before due date helps. In case you are entitled to a refund, interest on it will be given to you only from the date of filing the return. The longer one delays, it’s a loss for the taxpayer as the interest earned will be less. Revise your mistakes: At times, there could be a mistake while filing the ITR. One could even forget to account for certain deduction. There is however a provision to file Revise return. This provision is available to only those who file before the due date. If you file the ITR before due date, you can revise your return form to correct any mistakes or deletions, such as missing a particular deduction, by 31 March. However, if you do not file your return on time, you will not be able to avail of this facility. Set-off of losses: Losses incurred under the capital gains head of income may be set-off against gains in the future years. So, if you have incurred losses on shares during the year, you will be able to carry forward the losses for future tax set-offs only if you file the return on time. If you fail to catch the deadline, you will not be allowed to carry them forward to subsequent years. Considering the stock market performance, there would be many taxpayers sitting on losses in their portfolio. One would surely want to take such benefits and avoid paying interest, penalty to the government. Filing of taxes too has become easier and simplified to a great extent. There are private tax filing sites and also the income tax government’s website helping one to file returns online. Here and here are the links to help you file taxes online. Digital All The Way (Online filing of ITR) The Simplified New Income Tax Return Form 2A
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Many insurers are launching Ulips targeted at HNIs. Does paying high premium comes with additional benefits? Sunil Dhawan explores Max Life Insurance, one of India’s leading life insurers, has recently launched ‘Max Life Platinum Wealth Plan’ – a unit linked insurance plan (Ulip) targeted at High Net worth (HNI) Individuals. ICICI Prudential, the largest private life insurer too has similar offering for HNI’s – Elite Life II and Elite Wealth II. The minimum premium amount is such HNI specific Ulips is typically Rs 2 lakh and upwards. In Elite Wealth II, minimum is Rs 5 lakh annually. The costing in HNI-Ulips compared to ULIPS available for Non-HNI is certainly in favour of HNI’s. Instead of the mandatory cost of 2.25 per cent (excluding mortality charges) as set by IRDAI, HNI-Ulips are charging around 1.5 per cent or lesser even after including mortality charges. A charge of 1.5 per cent certainly something that can give mutual funds run for money as the expense ratio in MF is around 2.25 per cent. As far as the structure of HNI-Ulips is concerned, they aren’t much different from non-HNI Ulips. The charges could be low in them but one distinguishing feature in HNI-Ulips is the presence of Guaranteed Loyalty Additions and Guaranteed Wealth Boosters to further enhance the maturity fund value. Such products may boast of ‘flexibility’ and customization’ to attract HNI’s, however most of such flexibilities are always a part of Non-HNI Ulips. The litmus test: With costs under caps, a look at the fund value on maturity would give an idea how costly a plan is. We ran the numbers for someone age 35, term of 20 years and annual premium of Rs 2 lakh keeping the sum assured at Rs 20 lakh. Here are the maturity fund values at an assumed growth of 8 per cent: Max Life Platinum Wealth Plan – Rs 86.84 lakhICICI Pru - Elite Life II and Elite Wealth II – Rs 86.50 lakhICICI Pru Smart Life – (Non-HNI) – Rs 79 lakh Watch outs: Importantly, running the plan till maturity will yield such results. Any exit before maturity will adversely affect the maturity values. This is because most ‘guaranteed or loyalty additions and wealth boosters in terms of additional units happens both after 10 years and on maturity. Some common features: In all plans, the minimum life cover is ten times of premium. There are various fund options available in them. Important will be the choice of premium paying term. Usually, there is single pay or premium can be paid for limited term of 5/7 years for a plan term of 10, 15, 20 years term. Choose as per availability and affordability of funds. All such plans would offer 5-7-10 fund options across equity, debt asset classes. Further, there would be options of Systematic Transfer Plan or Dynamic Fund Allocation strategy, to protect investments against market volatility. What to do: If your goals are long term and at least ten years away, choose Ulips. Within them, if the premium or inevstible amount annually is Rs 2 lakh upwards, choose HNI-Ulips. Be invested across equity funds, choose monthly frequency to pay premiums, and run the plan till maturity. The costing in them is better than otherwise. In some plan there could be no administration charge after five years. However, rather than comparing individual charges, compare the fund values based on your age, term and other parameters before you zero-in. And finally, choose the plan whose fund performance is consistent over long period.
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China's new international development bank will offer loans with fewer strings attached than the World Bank, sources said, as Beijing seeks to change the unwritten rules of global development finance. The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatise or deregulate businesses for loans, four sources with knowledge of the matter said. By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism levelled against its rivals, who some say impose unreasonable demands on borrowers. It could also help Beijing stamp its mark on a bank regarded by some in the government as a political as much as an economic project, and reflects scepticism in China about the virtues of free market policies advocated in the West. "Privatisation will not become a conditionality for loans," said a source familiar with internal AIIB discussions, but who declined to be named because he is not authorised to speak publicly on the matter. "Deregulation is also not likely to be a condition," he added. "The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside." The AIIB was not available to comment for this article. A reduced focus on the free market could give the AIIB greater freedom to run projects, said a banker at a development bank who declined to be named. For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices. The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, he said. The bank, to which some 50 countries have signed up to join, also aims to have a simpler internal review and risk assessment system for projects compared with its peers to hold down costs and cut red tape, sources said. For one, the AIIB is not expected to delay some project approvals by months to allow all parties to do due diligence, a practice in place at other development banks, said a source familiar with the matter. The bank will also minimise expenditure by having only a handful of field offices and a staff strength of between 500 and 600, about a sixth of the size of the Asian Development Bank (ADB) and 5 percent of the World Bank, he said. At Least Break EvenA successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations. Criticism of international development lending is not new, said Susan Engel, a professor at Australia's University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus. "It's a religion - this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm," Engel said of the U.S.-based lender. In its infancy, two sources said the AIIB, with authorised capital of $100 billion, would concentrate on securing its credit rating, implying a more cautious approach. This means it will run like an investment bank, funding only commercially sound projects, working on public-private partnerships where feasible, and charging market interest rates that are likely to be higher than those charged by its peers. "Jin has pitched it as a bank that needs to at least break even," a source familiar with internal AIIB discussions said in reference to Jin Liqun, a former Chinese deputy finance minister and AIIB's first president. But down the road, the AIIB could offer concessionary loans and go beyond building ports and funding water, energy and transportation deals to financing policy projects such as health and education, three sources said. It may also expand its remit to fund projects in Africa, where countries have lobbied the lender to work in their region, a source said. To meet its year-end deadline of starting operations, the AIIB has hired a team of former ADB and World Bank bankers, and is drafting its operations manual by revising the ADB and World Bank versions, three sources say. Although the ADB and the World Bank downplay any rivalry between them and the AIIB, bankers say the AIIB's advent has prompted the two banks to review how they work, to the benefit of borrowers. "The World Bank and the other development banks have become more risk-averse over time," said David Dollar, a former director of World Bank China who has advised Beijing on the AIIB. "That tends to be make them slow and bureaucratic." (Reuters)
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The Reserve Bank of India (RBI) issued draft guidelines on Tuesday (01 September) for its proposed plan to change how banks calculate their lending rates, which would make them more responsive to monetary policy actions but would likely be opposed by the sector. Banks currently have a good degree of freedom in determining their lending rates, but that has created frustration among Reserve Bank of India officials, who believe the sector is seeking to protect profit margins and is therefore not passing on central bank rate cuts quickly enough. The RBI has cut the country's main repo rate three times by a total of 75 basis points this year, but most banks have lowered their base lending rates by only around 30 basis points. The RBI in April proposed that lenders start determining base rates using the so-called marginal cost of funds. Under this method, banks' lending rates would respond more quickly to money market rates, analysts said. On Tuesday, the RBI unveiled the detailed draft guidelines on how banks should calculate their lending rates, and asked for feedback by September 15. The central bank wants to implement the measures by April of next year. "For monetary transmission to occur, lending rates have to be sensitive to the policy rate," the RBI said in the release. "It was observed that base rates based on marginal cost of funds are more sensitive to changes in the policy rates." But the move is likely to be opposed by banks, which say they need to maintain flexibility in setting lending rates because money market conditions can be volatile. Banks have also maintained they are lowering their lending rates as soon as they can but are constrained because they must weigh how much they are receiving in deposits with interest they owe to customers and companies. "It is difficult to work on a marginal cost model because the term deposits are locked in for a specific time and can't be repriced as frequently as assets," said a state-run banker.(Reuters)
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Many agents are asking Ulip-holders to exit after lock-in period of five years and replace them with new Ulips. Sunil Dhawan explains why it is not in your interest. Unit-linked insurance plans (Ulips) are fast falling prey to the wrong practice of ‘churning’, once a common practice in the mutual funds industry. Many distributors who are in the business of selling financial products have corroborated to this fact. Churning, in financial markets refers to the process of making an investor exit from an investment and redeploy funds in another scheme or a different plan. The idea is to earn commission from the fresh sale. This practice is called churning and is absolutely unethical by selling standards. The IRDAI, the insurance regulator had come out with Ulip guidelines in 2010. Of several structural changes including the capping of charges in Ulip, the lock-in period in them was increased from three to five years. Over the last 5 years, markets have generated a return of hardly 10 percent. After accounting for charges in the initial five years, the fund value would be lying low for most Ulip holders who had bought after the new guidelines are in place. Immediately after the mandatory lock-in of five years ends, many Ulip-holders are being approached by some agents of various companies. Their goal is to make the existing Ulip holders surrender the exiting policy and buy a new one from them. The pitch could be different by these agents but the objective is the same. A common pitch could be related with low NAVs. With markets having fallen in recent times, buying a new Ulip with ‘low NAV’ could be their favourite pitch. It’s a trap. Just avoid it. Even insurance companies are in the practice of launching new fund option thus laying a trap for some investors. Some would term the Ulip plan itself as a wrong product and make you buy a traditional plan which could be an endowment or a money back. As against a commission of 7-10 per cent in Ulips, earning in a traditional plan could be 35 per cent for the agent. At times, one may even paint a bad picture of the insurance company itself and make the Ulip holder dump not just the plan but also the insurer. As the markets are almost at the same level since 1-2 years, new investors are probably not coming in. Finding a new customer is always a difficult task for agents as compared to pitching an existing customer. This could be one of the reason for some agents to ‘churn’ in these times. What to do: Ulips are market linked investments and should be bought for long term goals which are at least ten years away. Costs in Ulips are amortized over the initial five years. If an exit is made immediately after five years, it’s only the insurer and the agent who had sold the policy stands to gain. As a policyholder, exit after five years is financially damaging. The actual growth in the fund value potentially would happen after five years. Continue with Ulip till the goal is achieved by putting in premiums each year. Charges from the fifth year onwards are considerably less than what it was in initial years. With less charges to eat into your returns, fund value would increase provided the markets too grows. One single Ulip may be enough to help you meet your goals at different life stages. Here, is how it can be accomplished. Now, the next time if an agent asks you to dump your existing investment and get a new one, you know exactly what to do.
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