Ulips can be your one investment for all long-term needs. Invest right and reap benefits throughout your lifeBy Sunil DhawanIndians have always been spoilt for choice when it comes to investing. From bank fixed deposits, post office savings products to mutual funds and exchange traded funds, there are investment products for every need, horizon and risk appetite. Among the myriad options that investors have, unit linked insurance plan (Ulip) is one. Typically, a combination of protection and savings, Ulip has been in the market for almost 15 years with sales languishing since 2009. That may, however, change soon as the largest life insurer in the country Life Insurance Corporation of India (LIC) is to go the Ulip way shortly (after new guidelines). And with market conditions improving, Ulips can take centre stage once again.Ulip can help meet all long-term goals through a single purchase. But before we tell you how, let’s look at the evolution of Ulip over the years. Back In The DayWhen first launched in 2001 after the Indian insurance sector was opened to FDI, Ulips saw a quick acceptance. These market-linked products had the attraction of returns commensurate with stock market performance. Agents sold Ulips as pure investment products, and people bought with the hope of making a quick buck from stock returns. With a little push and lots of mis-selling, Ulips soon became a pull-product. A lot of information about the structure and working of Ulips was withheld from buyers and by the time they realised that returns don’t come easy in Ulips, the damage was done.Ulip is a complex hybrid investment product wherein several factors such as premium, duration of the plan, mortality, fund administration charges and allocation charges to name a few are interrelated and impact each other. In its earlier avatar, Ulips had a lock-in period of three years with the potential of market-returns making it most attractive. Buyers lapped up Ulips as LIC only sold traditional plans such as endowment and money back with longer lock-ins and no exposure to equity asset class. The insurance industry grew over 25 per cent CAGR, the markets soared to new heights, and no-one complained.The story derailed when markets came crashing down and never recovered to earlier levels. Those who bought Ulips with a 3-year horizon became the biggest casualty. Ulips TodayIn 2010, insurance regulator came out with a set of guidelines for Ulips. Lock-in period was increased to five years and charges were capped. The idea was to make Ulip a long-term investment product. Companies became more vigilant with cases of mis-selling and introduced various measures to ensure people bought Ulip for their long-term needs. The Insurance Regulatory and Development Authority of India capped overall charges at 3 per cent of net yield (return on maturity minus charges) for Ulips with a tenure of 10 years or less. In case of insurance policies of over 10 years, total charges were capped at 2.25 per cent, of which the fund management charges can not exceed 1.35 per cent. The mortality charges were outside the caps. WHAT SHOULD YOU KNOW WHEN INVESTING IN ULIPSIdentify various goals at different life stages. Ask your preferred insurer to conduct Need AnalysisEstimate requirement for each goal duration-wise and after adjusting for inflationAsk insurer to generate ‘Illustration Benefit’ specific to your details of age, term, etc.Incorporate top-up premiums within Illustration BenefitSee if goals are being met at each life stage as per needElse, modify premium or sum assured as per one’s affordabilityMake partial withdrawals from fund as per need at specific life stageCapping charges has made Ulip competitive, especially in the long-term category among peer products. For the distributor community, Ulips are easier to sell compared to traditional products.Who Is Ulips ForFor those who lack financial discipline and are unable to manage protection and savings separately, Ulip is just the product. Investors who are in a position to identify the right mutual fund schemes for their needs and simultaneously get a protection through a pure term insurance plan can, however, avoid Ulips. Ulip because of its lock-ins and longer horizon instils investing habit in investors.Ulips For LifetimeIt is possible to meet all long-term goals such as a new house, children’s education , marriage and even retirement through a single Ulip. Niraj Shah, director – Marketing, Strategy & Products, PNB MetLife, says, “A single Ulip can be used to meet multiple savings goals using features such partial withdrawals, multiple fund options, premium payment and policy term options. Ulips can be effectively used for wealth creation, retirement or child education depending on your financial goals.” It is important to remember that generating maximum return is not the objective. The returns from equity funds in Ulips are largely in line with the market, do not expect them to beat market by a wide margin. Plan Life With A UlipIdentify the long-term needs and estimate the requirement after adjusting for inflation. Shah says, “Using a human life value calculator, one can easily determine how much should be an ideal sum assured.” Ask your insurer for an ‘Illustration benefit’ based on your age, term and sum assured for the various goals at different life stages. The illustration also helps in determining the premium needs so the fund value at each stage meets your requirement. Aalok Bhan, director and head - Product Solutions Management, MAX Life Insurance, says: “For base level of protection one should use term plans while for specific life stage needs one should aggregate the requirement and buy protection to that extent.” Choose an Ulip with a longer term to meet the goals at various life stages. Under the new guidelines, one has to continue paying the premiums till the end of the term i.e., till maturity. Earlier, Ulips allowed premiums to be paid till three years or for a limited period of five years.Premium & Top UpsOpt for the monthly plan through the SIP mode. Monthly investments help in averaging the buying cost of units and inculcating a habit of investing. Use the top-up option in Ulips to park in any additional investible surplus available. Top-ups can come in handy in not only reducing the overall cost of Ulip for policyholders but also in increasing the life cover with every top up. Top-ups are usually charged at 1- 2 per cent, hence averages your cost. Buying a new Ulip could cost you much more. WHEN TO OPT FOR1. Choose to invest in Ulips only if keeping protection and savings separate is not easily manageable2. A combination of term plan and mutual funds could work if there is financial discipline and the wherewithal to identify right schemes and plan3. Use Ulips to meet only those goals that are at least 10 years away4. Premiums need to be paid every year till maturity hence ensure paying comfort before investing5. Opt for diversified equity fund and avoid timing the market and switching too much ULIPSFund OptionsIn most Ulips, there are 5-9 fund options with varying asset allocations between equity and debt. Further, in equity funds, there could be large-caps and mid-cap stocks. A few have multi-caps and thematic exposure too. Under debt, the range could be from liquid to short term and long term. Switching between fund options, irrespective of the holding period, is exempt from tax. Considering the long-term nature of goals, there is no need to time the market. Investors can avoid any temptation to switch between funds every time the market moves 500 points up or down.For goals that are at least ten years away, opt for large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. Stick to diversified funds in Ulips and avoid thematic funds.Once the lock-in period ends after five years, Ulips allow tax-free partial withdrawals. So whenever a goal is near, one can withdraw from the fund to meet the need. It is suggested to de-risk funds, i.e., move from equity to debt at least three years before the goal.ConclusionEvery time a Ulip is bought, there is an administrative cost involved which can be avoided if all investments are within a single Ulip. The in-built flexibility, transparency makes it an apt investment product for long-term goals provided it is bought the right way. As Shah puts it aptly, “Ulips mirror our life stage and savings goals.” sunil@businessworld.in(This story was published in BW | Businessworld Issue Dated 24-08-2015)
Read More
The amount raised will be used by YES Bank to finance Green Infrastructure Projects like solar power and wind power in the Renewable Energy space, writes Monica BehuraYES Bank, India’s 5th largest private sector bank, has raised Rs 315 crore through the issue of Green Infrastructure Bonds to International Finance Corporation, Washington, member of World Bank Group on a private placement basis. This is the first investment by IFC in an Emerging Markets Green Bond issue in the World. The bonds are for a tenor of 10 years. The amount raised will be used by YES Bank, to finance Green Infrastructure Projects like solar power and wind power in the Renewable Energy space. KPMG in India will be providing the Assurance Services annually, on the use of proceeds in line with the Green Bond principles. This is the second such green bond issuance by YES BANK after a highly successful issuance of Rs 1000 crore in February 2015 The bank has raised a record $1.2 billion capital raised by the Bank in 2014-15 through multiple transactions including a $500 million funding in May 2014, $422 million Syndicated Loan in October 2014 and $200 million Loan from Asian Development Bank in December 2014. In January 2015, YES Bank also signed an MoU of $220 million with OPIC, the US Government’s Development Finance Institution and Wells Fargo to explore financing to MSMEs. Given the Govt. of India’s focus on India’s Renewable Energy Potential and target of 175 GW of additional capacity installation by 2022, it is estimated that the renewable energy sector will require significant financing. Currently, there are a number of challenges in the existing financing mechanisms including sector limits, high interest rates and Asset-Liability mismatch, and therefore there is a need to evolve innovative financing mechanisms to aid projects in the renewable energy and energy efficiency space. Green Infrastructure Bonds are one such avenue to allow for financing to flow to vital green energy projects.
Read More
Investors especially those who are retired could benefit from laddering their investment in bank fixed deposit by managing interest rate risk, writes Sunil Dhawan With the Reserve Bank of India maintaining the policy rates in the recent Monetary Policy report, the writing on the wall doesn’t change. The interest rate cycle had long overturned and is on its way down for the foreseeable future. The interest rates of banks are already down by 1-1.5 per cent since last year. Going by RBI Governor’s document, a decision for the uptick on interest rates by US Fed (in September) and the inflation numbers would largely determine how interest rates pan out in the immediate future. Lowering of interest rates understandably are favoured by corporates, markets and anybody who is a borrower. The biggest casualty are the fixed income investors especially the retired citizens who rely on fixed income for their regular income needs. A big portion of their deposits go into bank fixed deposits and senior citizens savings scheme. While senior citizens savings scheme is for a 5-year period and currently offering 9.3 per cent, the maximum that one may put in SCSS is Rs 15 lakh. The interest rate is set each year in April. That makes investors look at bank FD where interest rates are a function of several factor including the RBI’s policy rates. Presently, banks are offering interest rates around 8 per cent or even lower across most tenures. In them, they find solace of safety and assurance. In falling interest rate scenario, one is tempted to lock-in funds at highest rate which may not necessarily be the longest tenure. Each bank takes its own call on interest rate movement and also consider their own asset-liabilities equation before setting rates. For all those investing in bank FDs for their regular income needs or otherwise too, using the ‘Laddering’ approach will help. In Laddering, instead of putting the entire sum in a certain term-deposit, the sum is spread across term –deposits of varying maturities. For example, instead of putting Rs 5 lakh in 3-year deposit, one may spread across 1 lakh each in 1-year, 2-year…5-year deposits. What this approach does is to manage the interest rate risk. Laddering also helps in keeping your funds liquid. Higher amount can be put into the deposit offering the highest rate. In doing so, there is always a re-investment risk associated with any fixed income product of a fixed tenure. But then, predicting interest rate movement is always an impossible tasks even for banks and corporates. Laddering strategy helps in minimizing the risks but cannot be the ideal approach. Bank FDs. however, are not wealth creators but destroyers. The interest income is fully taxable and interest rates are almost in line with prevailing inflation rate. The real return therefore is low or negative in Bank FD’s. This, however, does not deter investor’s especially retired investors to shun bank FD as they heavily depend on them for their regular income household needs. Laddering will help them avoid the temptation to predict and time the interest rate cycle and instead get the most out of every dip or rise in the rates.
Read More
RBI’s new scheme to reign in errant promoters is solid on paper, but it may not work in the real world in its current avatarBy Raghu MohanA few in India Inc., have long lived by the unique worldview: it’s against my principle to pay interest on the loan I took, and against my interest to repay the principal. It has worked really well as a way of life, but Mint Road decided to play the party-pooper; it took away the punch bowl on 8 June. Banks can now go in for Strategic Debt Restructuring (SDR). Simply put, if push comes to shove, they can band together, convert a funny firm’s loans to equity and kick the promoter out.The idea’s a cracker — after all, what hurts more than a bad hangover is that you have to foot the bill for the party as well.Banks’ gross bad-loan mountain is about $100 billion. While you can pin a large part of the blame for the mess on policy paralysis and wobbly business cycles, just about every other senior banker in town will tell you (off the record) that some borrowers do play truant. And will readily agree with the 16th century French writer Francois Rabelais’s pithy observation that “debts and lies are generally mixed together”.Rabelais was truly ahead of his times; is SDR ‘alive’ to ours? Says Muzammil Patel, senior director at Deloitte (India), “The proposition could work where there is a genuine interest from both the borrower and lender to regularise cash flows from the underlying asset. It’s a positive step for lenders as it allows them to potentially have a say in the working of the business and control over its associated cash flows”. When Patel refers to the “potential”, it only tells you that a lot many lenders had little say in such matters; and that they have now got a vuvuzela.The buzz over SDR is, therefore, understandable. It neatly ties in the business-link between non-performing assets (NPA), asset reconstruction companies (ARC), the aggressive posture adopted by Mint Road and North Block on errant corporate managements, a comprehensive Bankruptcy Act (on the anvil), and centralised pricing guidelines on foreign investments. Since 2007, deals worth nearly $62 billion — all above $300 million (see Cleaning Up The Act) — have taken place as a result of companies seeking to improve their balance sheets. So, common sense has it that SDR will only make this pile grow bigger.Siby Antony, managing director and CEO at Edelweiss ARC, feels that the new power to convert part of a loan into equity is another way for lenders to resolve the case in the event of a failed restructuring. “It can definitely open up M&A opportunities with the possibility of transfer of controlling interest to a potential acquirer,” he says. Ananth Venkat, regional head, Corporate & Institutional Clients for south-Asia, Standard Chartered Bank, feels: “It has the potential to add to M&As; at least 20 per cent of the $100 billion (gross non-performing assets) we have.”Can You Find Money In The Dustbin?Just 48 hours after Mint Road’s viagra for banks hit the shelves, a pink daily reported that IDFC had removed KVK Energy as promoter from SV Power; that it had roped in Aryan Coal Beneficiation India (ACB). Did IDFC really do what other lenders can only dream about — overturning a promoter? BW|Businessworld reached out to IDFC which explained it as follows.SV Power (SVPL), a special purpose vehicle of the KVK Group, had set up a 63 megawatt coal-washery reject-based thermal power-plant and a 2.5-MTPA (metric tonne per annum) captive-coal washery in the Korba district of Chhattisgarh (back then Madhya Pradesh). The plant was commissioned in June 2011, but operated at a very low capacity. This was due to numerous adverse conditions such as high cost of rejects, logistical challenges, non-availability of coal linkage and evacuation line, and low-merchant-tariff realisation.“IDFC had engaged with the KVK Group and after detailed discussions, it was jointly agreed that sale of SVPL to a strategic buyer would be the best course of action so as to ensure that the project is recapitalised and continues to be viable. KVK Group, thereafter, voluntarily mandated IDFC Capital for sale of SVPL to a strategic buyer,” said IDFC.ACB was identified as a suitable buyer, considering the fact that it has substantial experience in operating coal-beneficiation and reject-based power plants in Korba. The transaction concluded in March 2015, pursuant to which ACB took over the management control of the company. And here is the best line from IDFC: “The transaction was executed with full cooperation provided by the KVK Group and lenders, and at no point of time was the asset seized and security invoked by the lenders.”What it tells you is that no Mint Road pill or mantra — as on date — can help a lender to “force” an Indian promoter to cede control of a firm; its pure fantasy to think so. But at a time when the political narrative is about a white-knight on a horse, any fairy tale is par for the (race) course!Venkat at StanChart concedes, “Very few loans have a clause that provides for the conversion of debt into equity as was the case during the time of developmental financial institutions.” BW has learnt that the banking fraternity is now in a huddle as to how to incorporate such a clause at the corporate debt restructuring (CDR) level. Patel from Deloitte says, “It would be fair to expect that lenders would want to incorporate a clause for debt conversion to equity at the point of restructuring. One would also expect that new loan contracts will start incorporating this clause.”Even if bankers can fit in this part of the jigsaw puzzle into the CDR, their brows will still be furrowed. Says Munish Dayal, partner, Barings Private Equity (India): “These covenants were anyway put in as a deterrent. So that promoters behaved. It’s an altogether different situation when it is given effect to.”What’s unsaid here is that a promoter (even if bankers or the world thinks otherwise) can haul lenders to the courts for existing dud-loans ahead of CDR talks. In which case, it can only mean a further fall or an outright erosion in the value of the business; or it turns into junk. It may still attract buyers who may see junk as “strategic”, but that’s not what SDR is about in the first place.While Patel looks at the brighter side — “Certain stressed assets have already seen consolidation even before these guidelines. These guidelines provide a more considered approach to consolidation after constructive engagement with lenders” — Antony is sceptical: “I have doubts about the workability of the scheme.”He cites three reasons: whether management change is practical in the Indian context; accessibility of data for due diligence by a potential acquirer (without which no new management will come forward to takeover); and, how much by way of sacrifice will lenders take to hand over control to a new management. “One other dimension is that lenders will be foregoing their charge on assets in the process of conversion into equity. So in the event of enforcement of assets as a last resort, secured loan would have been reduced to the extent of conversion,” explains Antony.Bankers Are Just That: Bankers….The entire SDR is premised on the fact that banks can convert debt into equity; overturn a promoter; get in a new one; unlock value and laugh all the way to the bank. What’s missed in the SDR debate is that “vast tracts” of business work on a perverse logic.State-run banks continue to dish out loans to state electricity boards (SEBs) despite their poor financials as they know they will get paid somehow. This even as they charge SEBs higher interest rates which makes them an even bigger “basket case”. Is it any wonder that the Reserve Bank of India’s Financial Stability Report (FSR-June 2015) says that state-run banks will have to provide Rs 53,000 crore to a slippage in the quality of loans to the power sector? And how is SDR going to work in such cases? There is no empirical evidence that errant behaviour is restricted to the private sector!The trouble does not end here. “It’s one thing to get to financially restructure the balance-sheet of a company. It’s not the same as running a business. It will be sometime before you get in a new promoter after having taken control of a company. Are bankers going to run it during that period?” asks Dayal at Barings. DEBT TO EQUITY: THE CONVERSION PRICEMarket value (for listed companies): Average of closing prices during the ten trading days preceding the ‘reference date’. Reference date is Joint Lenders Forum’s decision to undertake SDRBreak-up value: Book value per share (without considering ‘revaluation reserves’, if any) adjusted for cash flows and financials after the earlier restructuring. The balance sheet should not be more than a year old in which case the break value shall be Rs 1What’s being said here is that a new set of players will have to walk in. As Raja Lahiri, partner, Grant Thornton (India), explains: “Restructuring and turn-around experts would potentially be required to assist bankers (commercial) here to achieve financial turnaround of the company and also facilitate M&As. Globally, banks along with private equity funds have led several successful turnaround situations and Indian banks can surely adopt some of the global best practices (of course, keeping Indian conditions in mind) to achieve maximum success in these restructuring situations.”For now, Rabelais still rules! raghu@businessworld.in@tabonyou(This story was published in BW | Businessworld Issue Dated 24-08-2015)
Read More
Britain took a 1.1 billion pound ($1.7 billion) loss on its first sale of shares in Royal Bank of Scotland (RBS) on Tuesday, sparking accusations of poor timing from opposition politicians. The UK government sold a 5.4 percent stake in RBS at 330 pence per share, a third below the price paid when Britain rescued the bank with 45.8 billion pounds of taxpayer cash at the peak of the 2007/09 financial crisis. The move raised 2.1 billion pounds and is expected to be followed by several more sales. Overall, the government is sitting on a 15 billion pound loss on its holding, based on the current stock price and its average purchase price of 502 pence. But the sale was more about starting the process of returning RBS to the private sector and showing investors the government is reducing its interference in the bank, rather than avoiding a loss, people familiar with the decision told Reuters. "While the easiest thing to do would be to duck the difficult decisions and leave RBS in state hands, the right thing to do for the economy and for taxpayers is to start selling off our stake," Finance Minister George Osborne said. But the opposition Labour Party slammed the sale. "RBS had to be bailed out urgently, but it doesn’t have to be sold off at the same speed," said Chris Leslie, its finance spokesman. "The Chancellor (Osborne) needs to justify his haste in selling off a chunk of RBS while the bank is still awaiting a U.S. settlement for the mis-selling of sub-prime mortgages," Leslie added, referring to a potentially massive fine from U.S. authorities, related to RBS's past sales of U.S. mortgages. RBS has set aside 2.1 billion pounds for a settlement but analysts estimate it could cost as much as 9 billion pounds, which has weighed on the stock. The share sale, which cuts taxpayers' holding to 72.9 percent from 78.3 percent, marks a milestone in Britain's recovery from the financial crisis, and is part of Osborne's strategy to improve the country's finances. More PowerThe move had been on the cards since Osborne in June accelerated the timetable for selling RBS, after his Conservative Party won May's national election with a surprise majority, giving his party more power in government. He has lost no time since then in pressing on with his plans for Britain's economy, including the sale of more shares in Lloyds Banking Group and a budget that included a shift away from welfare spending to higher wages for workers. Osborne aims to sell at least three quarters of its RBS holding, currently worth about 25 billion pounds, in the next five years. UK Financial Investments (UKFI), the body that holds the stake, said it sold 630 million shares in a quick-fire sale to institutional investors after the market closed on Monday, slightly more than it had planned to sell. The sources said other benefits of the sale are that it increases liquidity in the stock and shows there is investor appetite, particularly in Britain and the United States, which accounted for 85 percent of demand, one source said. More and bigger sales to institutions are likely, but UKFI could also opt for a trading plan that involves small frequent sales in the market, or a sale to retail investors. The 2.3 percent discount to RBS's closing price on Monday, at which the shares were sold, was narrower than the 3.1 percent discount on the government's first sale of Lloyds shares in September 2013. At 1215 GMT, RBS shares were down 0.9 percent at 334.7 pence, outperforming a weak European banking index. Investors put in bids for 2.4 times more than the number of RBS shares sold by the government, a person familiar with the matter said. RBS CEO Ross McEwan said he was pleased the sell-down had begun, adding it reflected the progress the bank had made "to become a stronger, simpler and fairer bank". RBS was briefly the world's biggest bank by assets, but has more than halved its assets and the size of its investment bank and sold businesses around the world. Britain has sold down its stake in Lloyds at a profit over the past two years and now holds less than 14 percent. The taxpayer could make at least 2 billion pounds on the Lloyds bailout, also at the height of the financial crisis. The RBS sale was handled by Citigroup, Goldman Sachs , Morgan Stanley and UBS. (Reuters)
Read More
The idea behind differentiated banking licences is to be imbibed The days of state-run banks being all things to all comers may well be nearing its end. Even as the Reserve Bank of India (RBI) prepares to issue differentiated banking licenses, Governor Raghuram Rajan made it clear that there is no reason why the concept can’t be applied to the universe of state-run banks. “The government is certainly focussed on that… you shouldn’t be able to walk into a branch (of state-run bank) and not know which bank it is. You should be able to walk in and know `this is different from the previous one I walked into", said Rajan. Say Bye To One-size-fit-all BankingBank nationalisation in 1969 and 1980 saw the spread of banking to unbanked areas. Despite that a large swathes of the country’s population continue to be out of its ambit. Differentiated banks are seen a way to bridge the gaps efficiently rather than license scores of full-service banks with a pan-Indian footprint – the costs of such a model are significantly high when compared to a niche “differentiated bank”. The differentiation could be on account of capital requirement, scope of activities or area of operations. While Mint Road will soon issue “differentiated bank licences”, Rajan was of the view that the idea behind it can be adopted by state-run banks too. “The first stage is to pick boards (professional) and find ways to differentiate”, said Rajan. The Governor’s statement should be seen in the context of the capital requirements that state-run banks would need on account of Basel-111. RBI estimates have put it at Rs 5-lakh crore, but it is not a constant and would vary on the basis of credit offtake, bad-loans provisioning and the like. The truth is that fisc can’t support fund infusion into state-run banks as they have in the past. As the M. Narasimham Committee-2’s (1998) report on banking reforms noted: “Given the dynamic context in which banks are operating, further capital enhancement would be necessary for the larger Indian banks. Against the background of the need for fiscal consolidation and given the many demands on the budget for investment funds in areas like infrastructure and social services, it cannot be argued that subscription to the equity of state-run banks to meet their enhanced needs for capital should command priority.” A view has been expressed that perhaps it’s time for state-run banks, especially the weaker among them to focus on niche areas. While it does not legally make them “differentiated bank license” holders, operationally they become such an entity. What Governor Rajan has in effect articulated to state-run bank is: decide what kind of a bank you want to be.
Read More
Newspapers carry stories on a daily basis of how India’s biggest e-commerce sites are entering into agreements with NBFCs (or Non-Banking Financial Companies) to provide easy working capital loans to its merchants. Using such access to finance, these small and medium business owners are able to conveniently meet their requirements for capital and are able to scale their businesses in the hot e-commerce market such as ours. As far as e-commerce sites are concerned, the big names have successfully made a place for themselves in the lives and on the credit card bills of a lot of consumers. They are now focusing on onboarding the maximum number of merchants possible on their platforms in order to offer greater choice and variety of merchandise. NBFC financing partnerships help these sites to attract more sellers. While the benefits of the recent trend for merchants and e-commerce companies are clear, the question that arises is this: Why are NBFCs funding e-commerce sellers with such speed and enthusiasm? Real Creditworthiness About 9 months ago, there was a substantial surge in the market in the number of NBFCs providing loans to small sellers on e-commerce platforms. This spike occurred due to a variety of factors. The first amongst these is the fact that SME merchants who sell through online marketplaces may not always have the collateral required to satisfy the loan eligibility criteria of large banks and financial institutions. These institutions do not have the capabilities to analyse the actual creditworthiness of the businessman where credit history is limited or absent. NBFCs who are leading the way in e-commerce seller finance are, however, leveraging analytics and Big Data to evaluate the actual potential of the merchant’s business by analyzing cash flows and business growth. They study the sales and fulfillment records carefully to actually gauge the true credit value of merchants. Thanks to the large quantities of data that is available about the sellers, NBFCs are in a position to focus on the factors that are actually relevant in the current moment and lend collateral-free to those who actually deserve it. They are tapping on a huge opportunity, which other larger institutions are unable to tap due to small ticket sizes, lack of paperwork and collaterals along with complex and often cumbersome loan analysis and application processes. Seizing Opportunity Another reason why e-commerce merchants have become the focus of NBFCs is the size of the opportunity at hand. According to estimates, the biggest e-commerce players have up to 1 lakh merchants enlisted on their platforms with about 30,000 to 50,000 new sellers being added each month. This enables the NBFCs to expand their coverage tremendously. As e-commerce blooms, so does the business of these NBFCs and going by the current growth rate of online retail in our current, the potential is huge. NBFCs charge an interest rate in the range of 18-24 per cent for collateral-free loans. Additionally, since the NBFCs have lean business models and low distribution and operational costs, they are able to maintain optimal unit economics and capital efficiency. The new ecosystem where working capital loans are easily available to e-commerce merchants, therefore, is beneficial to all stakeholders. The e-commerce sites are able to meet their goal of onboarding more sellers to attract greater traction. Small business owners can focus on their core competencies and not worry about payments to be made to suppliers, employees etc. Since the credit risk analysis is performed digitally, the loan disbursal is done earlier than ever before. NBFCs, on the other hand, are employing proprietary technology to accurately measure the risk profiles of borrowers and underwrite risks only on the basis of very rigorous analysis. They are able to empower SME merchants with working capital finance necessary for them to scale. Individual benefits apart, this trend is boosting the overall economy and the e-commerce landscape of the country in more ways than one! The author, HarshVardhan Lunia, is Co-Founder & CEO, Lendingkart
Read More
In spite of its minuses, the scheme warrants a portion of your retirement funds to take care of ‘interest rate risk’ and the longevity risk, writes Sunil Dhawan Varishtha Pension Bima Yojana (VPBY), a pension plan exclusively for senior citizens and solely operated by Life Insurance Corporation of India (LIC) is closing on August 14, 2015. In its earlier version under the NDA government’s last term, the scheme was enrolled by a total of 3.16 lakh individuals. There are reports that the South Zone division of LIC had already sold 4.18 lakh policies till July 15 in the current financial year. Targeted at senior citizens, the scheme has its own pluses and minuses. Let’s visit them. What and How. Anyone who is 60 years or above can invest in the plan. The minimum and maximum purchase price (lump sum investible) and corresponding pension amount is fixed under VPBY, depending on frequency of pension option one opts for. Pension can be monthly, quarterly, half-yearly or yearly and maximum cap is Rs 5,000, Rs 15,000, Rs 30,000 and Rs 60,000, respectively on purchase price of Rs 6,39,610, Rs 6,54,275, Rs 6,61,690 and Rs 6,66,665, respectively. Importantly, the maximum pension for a family (including self, spouse and dependents) as a whole too is capped and should not exceed the maximum pension limit. For senior citizens who are HNI, this scheme certainly may not be attractive since the maximum pension amount is capped at Rs5, 000. Returns. The returns are around 9 per cent per annum (p.a). Illustratively, for investment of Rs 1,000, pension rates (not age specific) would be Rs 93.8069 p.a. for yearly, Rs 91.7045 p.a for half-yearly, Rs 90.6767 p.a. for quarterly and Rs 90.0000 p.a. for monthly options. Thus, under monthly option, the return is 9 per cent while under yearly, annual return on investment is 9.38 per cent. Exit route. The scheme has no maturity date as it offers lifetime pension. But, there is an exit route. One can surrender it only after completion of 15 years. The surrender value would be the invested amount i.e. the purchase price. However, under exceptional circumstances, if the pensioner requires money for treatment of any critical illness of self or spouse then the policy can be surrendered before the completion of 15 years and the surrender value payable shall be 98 per cent of purchase price i.e. a 2 per cent penalty is there on early exit. Pluses and minuses: The interest rate in VPBY, unlike a fixed deposit in bank which stops at the end of the tenure, keeps coming till lifetime. Now, when the interest rate is high in a falling interest rate scenario, compared to other competitive products, it makes sense to invest in such a product. On the flip side, the interest from VPBY is fully taxable but so is the bank fixed deposit interest. There is no TDS on interest unlike interest from bank. Also, as per budget 2015 announcements by the finance minister, there will not be any service tax for investments made after 1st April this year. Although, it’s not a retrospective move and hence earlier investors stands at a disadvantage. Those in the lower tax brackets may still consider VPBY as on the ground of taxability as it’s similar. Where it doesn’t help senior citizens, is the cap on the investment amount and the pension amount which is capped at Rs 5,000 a month. What to do: Even though the returns are high, do not park substantial proportion of your funds in VPBY as it has 15-year lock-in period. Exiting during emergency could be tough too. VPBY could provide cushion from ‘interest rate risk’, especially when seniors rely on interest income with life expectancy increasing. The interest rates since the last one year when the scheme was launched, is already down by 1-1.5 percent Also, many banks have reduced the ‘extra’ or the additional rate from 0.5 to 0.25 percent for senior citizens. Bank deposits currently offer around 8 per cent even for seniors. Locking in funds with bank for even ten years at 8 per cent is lower than what VPBY offers. If one feels that interest rates are likely to come down over the years, then locking in funds with VPBY for a fixed, assured return till lifetime and with sovereign guarantee on principal is a good way to shore up overall returns on one’s portfolio.
Read More
