Indian state-run banks need aggressive capital infusion, writes Anil AgarwalIndian state-run banks need capital, a lot of it. I calculate they will need about $40 billion of capital by FY2019 to meet Basel III requirements and grow balance sheets at around 10 per cent a year.Decision makers clearly understand the need to capitalise the banks. But they are not showing any alacrity in funding these banks — probably driven by the view that full implementation of Basel III is four years away.They expect banks to raise equity from markets, but for most of these banks, investors are reluctant to put in new capital unless the government invests adequate capital and removes tail risks.My view is that the Indian state-run banks need to be capitalised soon — at least to a level that allows them to start growing their balance sheets by double-digit annual percentages again. State-run banks are currently growing at around 7 per cent, which creates a number of problems:1. The state-run banks account for 70 per cent of system loans, and if they don’t grow their loan books in double-digit terms, it will be very tough for system loan growth to go above 11-12 per cent, thereby dragging economic growth. Moreover, private banks are likely to be very reluctant to fund long-term projects, given therisks. They are likely to concentrate on consumer, SME, and working capital loans. Hence, private capital expenditure cannot increase sustainably without state-run banks being able to lend.2. The bulk of the state-run banks’ reported loan growth is going towards interest capitalisation on existing corporate loans. This implies that net new loan disbursals for these banks are close to zero. This effective deleveraging is causing an already bad loan book to get worse.3. With credit costs remaining high, the state-run banks have to keep loan yields high to make enough margin, so they can report some profits. This lack of competition is helping banks keep lending rates high (reflected in all-time high RoAs at private banks), thereby hindering transmission of any rate easing.The longer the decision on capital infusion is delayed, the greater the cost will be. As banks de-leverage, the existing balance sheets will likely get worse — ultimately implying a higher cost to clean up balance sheets. Moreover, the inability of almost 70 per cent of the system to grow can hinder economic growth materially.So what is needed? The current strategy of ‘extend and pretend’ is clearly not working. The longer a solution is delayed, the more costly it will be.The problem is solvable. Indian state-run banks need aggressive capital infusion, a la TARP in the US, where balance sheets were quickly cleaned up, write-offs taken, and banks recapitalised. I believe a government infusion of $14-15 billion in state-run banks (1 per cent of GDP) is needed relatively quickly. This would help them clean up their balance sheets and start growing again in the right areas. As tail risk declines, investors will likely come in and provide the bulk of the remaining funding — such an infusion could actually turn into a good investment for the government, in addition to funding the growth agenda. The author is head of AxJ Banks Research, Morgan Stanley(This story was published in BW | Businessworld Issue Dated 10-08-2015)
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Basel-III calls for tonnes of capital to fuel state-run banks, but not all of it can come from the Centre given the state of fisc. While a few good ones will be able to tap the bourses, many will not as the valuations are poor. The time for tough decisions is now By Raghu MohanOn 4 October 2011, Moody’s downgraded State Bank of India’s (SBI) credit rating to ‘D+’ from ‘C-’. Its tier-1 capital adequacy ratio had slipped to 7.6 per cent as North Block dithered over an Rs 23,000-crore rights issue to prop it above 9 per cent. Beatrice Woo, vice-president and senior credit officer of Moody’s, justified the action. Her ominous words: “A bank’s ability to freely access the capital markets is an important rating criterion globally. A lower rating is warranted, especially as these circumstances are likely to recur.” It took four months (till February 2012) for the Centre to pump in Rs 7,900 crore through a preferential allotment of shares. And Woo’s words are back to haunt us.Basel-III capital norms set in from fiscal 2019; it’s to ensure that banks don’t take on excessive debt and play on short-term funds. Born in the crucible of the global financial meltdown of 2008 (and mooted in 2010), it tunnels into capital, leverage, funding and liquidity. It does not replace Basel-I and -II (which stress on the level of loss reserves that banks need to hold), but works alongside. Indian banks will need tonnes of capital.On 5 June 2013, Reserve Bank of India’s (RBI) then governor, Duvvari Subbarao, estimated additional capital requirement at Rs 5 lakh crore, “of which non-equity capital will be Rs 3.25 lakh crore, while equity capital will be Rs 1.75 lakh crore”. In his first Budget speech of July 2014, Union finance minister Arun Jaitely put it at Rs 2.40 lakh crore. The exact amount depends on a range of factors: credit growth, its quality, dud-loan provisioning, and the technicalities under Basel-III. That’s why Fitch Ratings’ $200 billion (85 per cent to be guzzled by state-run banks) looks out of whack. As Saswata Guha, its director, says: “It’s dynamic. Capital needs will increase progressively from fiscal 2016. CET1 (core equity capital) and AT1 (additional tier-1 capital) are likely to account for close to 90 per cent of requirements; 60 per cent (of the same) will arise between fiscals 2015 and 2018.” You hear whispers that the $100 billion in gross dud-loans is on the lower side; it could be a good 30 per cent more. If true, more capital will be pulled in.Union minister of state for finance Jayant Sinha sought to allay concerns, and told Businessworld|BW about the comprehensive package to strengthen these banks. “It includes governance reform, strengthening management, operating autonomy free from any political interference, better risk management and technology capabilities; and sufficient capital to meet all regulatory standards and fully support growth of the Indian economy.”Adds Sinha: “We have undertaken a thorough review of capital requirements for all state-run banks till 2019, and believe that we will be able to provide the necessary support to each to meet all RBI capital adequacy norms.” It is to be given over the next few years in tranches based on regulatory requirements, operating performance and NPA management. “In addition, each state-run bank is exploring a variety of capital raising measures, including equity issuance, disposal of non-core assets and improvements to capital productivity,” says Sinha. It’s a tectonic shift — the first serious attempt to marry capital to productivity. It raises the stakes for the Narendra Modi dispensation in New Delhi.What’s At Stake Here?State-run banks account for 76 per cent of our banking assets; given the state of the fisc, it’s anybody’s guess how the Centre will continue to hold 51 per cent in these banks and bring in its share of capital. “They have limited recourse to core equity in the short-term, and have to rely on the government. Declining profitability has hurt internal capital generation; low valuations have virtually precluded access to equity markets and increased their dependence on state support for capital,” adds Guha. Says Anil Agrawal, head of Research (Banks, ex-Japan) at Morgan Stanley: “State-run banks have trailed private banks and trade at 0.4–1x book. Given the lack of capital at most of these banks, the slide in fundamentals — and hence, the stock prices — could accelerate. He feels the longer the delay, “the tougher it will be to get these banks out of their morass. India needs to aggressively capitalise these banks and restore some semblance of confidence in their balance sheets.”Jaitely is on record that only the better among state-run banks will get capital; former RBI governor C. Rangarajan tells BW: “If the fisc supports, let capital be given to all of them; if not, some of them.” That’s fair enough. Capital should go to its productive best.But there will be a vacuum in lending to the extent that many of the weaker state-run banks will “withdraw” — if there is no capital, they can’t lend in the way they did so far. “It (capital) is like fuel in a car’s tank. It will decide how far you will go,” says Romesh Sobti, managing director & CEO of IndusInd Bank. And private and foreign banks can’t step in and fill up the gap. On his part, Rangarajan says: “If state-run banks grow at a slower rate, what’s the issue? When I licensed new private banks in 1993, they had zero share. They will grow as we go along.” It took private banks two decades to notch up a 20 per cent market share; they may ramp up faster, but in the interim, there will be a fallout. You can kiss goodbye to aspirations of an 8 per cent-plus growth in GDP given its link to growth in bank credit; the trade-off in ‘selective capitalisation’ is huge.There is a link between credit growth and GDP even if it’s not predictable like the Periodic Law. Typically, credit growth is 1.3 times that of GDP growth. “I have assumed 5 per cent inflation (all along) with real GDP rising gradually to reach 9.5 per cent in the terminal year (2019). Based on this, banks will need incremental capital of Rs 5.4 lakh crore-6 lakh crore for four years; the state-run would need Rs 4 lakh crore-4.5 lakh crore or about Rs 1 lakh crore per annum,” says Madan Sabnavis, chief economist at Care Ratings. The cumulative net-profit of these banks in the last two years was around Rs 35,000 crore to Rs 37,000 crore; it gets sucked into reserves. So they will need an additional Rs 60,000 crore through tier-2 bonds or fresh capital. “Even if these assumptions (on GDP) do not hold, and we move at 14 per cent growth in credit for this four-year period, they will need Rs 3 lakh crore-3.3 lakh crore; here too, they will require capitalisation support from the Centre,” adds Sabnavis. You have another catch: the new GDP data is contested; and if you go by what’s going on at state-run banks that account for the lion’s share of credit, you will find all the more reason to do so. “Systemic loan growth at 9.7 per cent was the lowest over the past decade. The net non-performing assets ratio rose to 4.6 per cent of total assets (4.1 per cent in fiscal 2014), though the bulk of it was accounted for by restructured loans. Consequently, the broader stressed-assets ratio (which includes ‘performing restructured loans’) spiked to 11.1 per cent (from 10 per cent),” explains Guha. Starting fiscal 2016, all such loans will be treated as dud; it will impact capitalisation even as capital buffers have slipped. “Indian banks’ reported tier-1 capital ratio improved to 9.7 per cent (from 9.3 per cent), but the gap between private and state-run banks’ tier-1 ratios widened to 440 basis points,” says Guha. In effect, as state-run banks squirm over capital, private banks will walk away with more business (and investors will hand over the latter more money).Damned If You Do, Damned If You Don’tSome give Jaitely credit. “His assertion,” says Pawan Agrawal, chief analytical officer at Crisil Ratings, “is highly nuanced. Nowhere has he said funds will be given to only select banks. What you have is a distinction between ‘growth capital’ for some, and a regulatory requirement for others under Basel-III. That is we will have two ‘categories’ of state-run banks — some will lend and grow; others will mend and grow.” In effect, ‘narrow banking’ — which is strictly don’t go for mindless growth and mess up again; park your deposits largely in government securities — a thought first articulated by economist S. S. Tarapore as deputy governor of RBI in the mid-90s. Agrawal prefers the usage ‘slower banking’, but concedes: “Credit growth is sluggish now, but a year down the line, if and when the economy fires, it remains to be seen who will supply credit.” It can lead to credit rationing as banks opt for safer havens to lend (as capital quotes at a premium) even though some like Vishwavir Ahuja, managing director & CEO of RBL, who breathed the rarefied air of India Inc. as Bank of America’s boss, qualifies: “But then such havens are not there anymore; there are credit concerns across the board.”“Why do you say all state-run banks should not get capital? You see, 75 per cent of my branches are in the East and north-East. Who is to service this part of the country?” asks P. Srinivasan, managing director & CEO of United Bank of India. North Block’s prescription is seen as tough for the times we live in — it was to take the average of return on assets and return on equity (RoE) of each state-run bank, and based on the above average, banks were to get funds. “Even if all state-run banks were to perform well, many will not get funds as some will be below the average, though it may be higher,” points out Srinivasan. That’s why North Block has gone back to the drawing board to figure out as to how to square the math.The idea of poorly capitalised banks floating around does not appeal to Mint Road; Anand Sinha, deputy governor, made a reference (12 August 2011) to the ‘valuation aspect’: “There is a line of argument that Basel-III may make raising of capital costlier or difficult for banks due to lower RoE, rendering it unattractive for investors. This, in my view, is not entirely correct because investors will eventually recognise that well-capitalised banks are less risky and hence,will be willing to settle for a lower RoE. Nevertheless, the pressure on RoE should bring about a greater sense of urgency among banks to improve their efficiency by increasing productivity.”Should fund infusion follow house-keeping? Tarapore is blunt: “If it is a desideratum that all have to be capitalised… Well, there is no divine right that all state-run banks can continue to lend and lose money. Not all are of the same standard, but continue to grow at more or less the same rates.”And the empirical tells us that recapitalisation in the ’90s saw good money being thrown after bad — the audited books of these banks misled. That’s because the recapitalisation funds were invested by state-run banks in specially issued bonds at a coupon rate of 10 per cent; or what was doled out by the Centre came back to it — it was a book-entry. And these banks showed the ‘interest’ earned as part of their net-profit. Mint Rood ‘netted’ it out to reflect the true state of affairs. Let’s take 1996-97 and 1997-98 (when it was first made public in the Report on Trend and Progress of Banking in India), when 19 state-run banks showed a cumulative net profit of Rs 1,445.12 crore and Rs 2,567.29 crore, but the moment you adjusted it for the ‘interest’ earned on these bonds, the figures read as Rs 609.37 crore and Rs 1,580.66 crore! When you ask Tarapore if these banks were to vacate the space as a result of the ‘Darwinism’ he advocates: who’s to step in and fuel India Inc? “Physician heal thyself first. You are a sick doctor and you say ‘I want to save my patients’. You first take care of yourself.”You Can’t Have It Both WaysA way out of the fund crunch is dilution of the Centre’s stake to under 51 per cent, but bank unions have their own ideas.Says Vishwas Utagi, vice-president, All India Bank Employees Association: “Basel-III, lack of funds, the selective pick-up of state-run banks (for recapitalisation) is aimed to privatise them eventually. That’s where we are headed. But don’t expect us to just roll over.”He points to the two-day ‘Gyan Sangam’ held on 2 and 3 January in Pune this year attended by Modi, Jaitley and RBI governor Raghuram Rajan. Jaitely mentioned the intent to bring down the stake to 52 per cent over the next few years; it will fetch Rs 90,000 crore (in the 24 state-run banks with a headroom). The idea of a Bank Investment Company (BIC) was mooted under North Block’s nose to ‘house’ shares of these banks to raise capital, a model in vogue in Singapore and the UK. Utagi sounds conspiratorial: “They want to set up a BIC, transfer shares into it and sell it (cut stake to under 51 per cent). These banks are also to be brought under the Company Law Board (CLB) soon.” He hopes to forge consensus across the political spectrum against privatisation. “The foundation for much of what the BJP is trying to do was done by P. Chidambaram, like the move to bring banks under the CLB. But in the changed political map, the Congress may align with the Left.”He takes a dig at Rajan: “He’s bright, but doesn’t understand the Indian context.” Rajan, in a closed-door interaction with bankers at the Centre for Advanced Financial Research and Learning (on 2 February 2015), had said: “An issue generating a lot of interest is state-run banks’ need of capital. I think banks and government ownership in banks can be structured in a way that sufficient capital can be raised without tapping into government coffers.”The underlying message being not all state-run banks can be part of the race. Says Tarapore: “The RBI has floated the idea of differentiated bank licenses. You specialise in one area or the other. If that’s indeed the way forward, why should weaker state-run banks be all things to all comers?” Srinivasan agrees: “That’s one way of looking at it.” What is unsaid here is you can’t expect state-run banks to do financial inclusion, open millions of accounts under Jan Dhan Yojana, do all kinds of dharma and still, you will not capitalise all of them as you did in the past. SBI’s chairperson Arundhati Bhattacharya feels differential voting rights (DVRs) will attract strategic investors who do not want management control, but look to reasonably big investments. “It will offer both retail and institutional investors a variation, especially for those who may not be as particular about voting rights, but may see economic value in the form of higher discount offer that may be made; also for incremental dividend and capital gains. It provides a good mechanism for capital augmentation without impinging on the voting rights of the Centre; this is beneficial for both.”The M. Narasimham Committee-2’s (1998) report on banking reforms was prophetic: “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.” It was suggested that the government cut its stake in these banks to 33 per cent. Is it time to revisit the proposal? Says Sabnavis: “We need to understand that if these banks are where they are, it’s because of government’s intervention. Even today, it can’t fill up CMD’s positions. They (the Centre) want to sit on their boards with nominees, but do not want to capitalise them. Then who will?” From within the establishment, sane voices have been for a reduction in the Centre’s stake in banks. In 2011, Montek Singh Ahluwalia, then deputy chairman of the Planning Commission, reacted to the OECD’s Second India Economic Survey: “These banks with reduced government holding should no longer be governed by social objectives. Employees should have the same status as those in private banks. The corporate governance norms, too, have to be improved so that directors and chief executives are appointed by shareholders, and not the government,” said Ahluwalia. It’s a very sensitive issue; few want to go on record. BW reached out to Y.V. Reddy, former governor of RBI, on the subject. He says: “We should not continue this conversation.” But in the winter of 2013 (BW 25 February: ‘Reforms should centre on the people of India’), when the question was put to Reddy by this writer: “Given the need to have more inclusive banking and the state of the fisc, how does one account for the capital needed, especially for state-run banks? Is there a case for the Centre to divest stake to under 51 per cent, yet retain the ‘public sector’ nature by way of a Golden share in these banks?” Reddy’s response was: “You are absolutely right. But if you recall, there was a proposal to reduce the stake in state-run banks to 33 per cent. Even when you reduced the Centre’s stake to 51 per cent from 100, governance has been predominantly public sector in nature. So technically, it is possible to reduce stake to 33 per cent and maintain the same character. These are established under special legal enactments, but in principle, you are right. It is like a Golden share, but the jurisdiction of Golden shareholder, namely, government is restricted to material changes in the governance or spheres of activity. Public sector character is more than that of mere Golden share and the former is feasible in India through legal changes even if the government shareholding is reduced.”Bhattacharya says the concept of a ‘Golden share’ has not yet come. “This may be for two reasons. First, a narrower-legalistic definition of it is needed and second, the Centre has not yet opted for the route for management control. Once state-run banks reach threshold limits of shareholding, the idea may gather some leverage.” However, as per Section-11 of SBI Act, no shareholder (other than the Centre) is entitled to exercise voting rights in respect of any stake held in excess of 10 per cent of the issued capital. Whichever way you look at it, for Jaitely and North Block, it’s trade-off time; the bullet has to be bitten. raghu@businessworld.in, @tabonyouWth inputs from Suman Jha(This story was published in BW | Businessworld Issue Dated 10-08-2015)
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Citigroup Inc's consumer bank has been ordered to pay $700 million in relief to borrowers for illegal credit card practices, the U.S. Consumer Financial Protection Bureau said. The CFPB, set up under the 2010 Dodd-Frank Act aimed at reforming Wall Street, has been cracking down in recent years on credit card companies offering payment protection, credit score tracking and other add-on products. Citi will also pay civil penalties of $35 million each to the consumer finance watchdog and the Office of the Comptroller of the Currency. The settlement is the CFPB's tenth such case, Director Richard Cordray said in a statement on Tuesday. "They (the CFPB) are just marching through the industry," FBR & Co financial policy analyst Edward Mills told Reuters. "The CFPB loves to have big numbers like this, especially when the largest percentage of the fine goes back to customers because there's a lot of (political) push-back about the cost of the CFPB and the way they're funded." Other major U.S. banks under that have been fined over credit card misconduct include JPMorgan Chase & Co and Bank of America Corp. Fine DetailsTuesday's settlement is about 1 percent of the bank's estimated revenue for 2015, according to Thomson Reuters StarMine. "Citi is fully reserved to pay costs associated with the agreements," the bank said in a statement. As of May 21, Citi had paid out over $17 billion in fines and settlements since the financial crisis. The CFPB said that about 7 million customer accounts were affected by Citibank's "deceptive marketing" practices, which included misrepresenting costs and fees and charging customers for services they did not receive. A Citibank unit also "deceptively" charged nearly 1.8 million consumer accounts often unnecessary same-day payment fees while collecting payments, the CFPB said. Citi said it had been issuing refunds and had stopped selling products that were part of its agreements with the regulators, including credit monitoring and debt protection products. Capital One Financial Corp, American Express Co and Discover Financial Services are among other card issuers that have been fined by the CFPB since 2012. Citi shares were up 0.5 percent at $59.13 in late afternoon trading on the New York Stock Exchange. (Reuters)
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If price fall in gold is making you accumulate more, do it the more cost-effective way with ease and no risk of purity and security, says Sunil Dhawan Gold, that precious metal everyone wants to own. The appetite to own and consume gold among Indian investors particularly Indian household is huge. The news is, gold prices has witnessed nearly 5 per cent decline and may fall further. Currently, it’s trading at around Rs.25,000 in Indian markets while the international prices also tumbled to a five-year low of $1,104. Is the time right to buy gold? The answer may not come easy. It may fall further from current level or may see a rebound depending on the non-occurrence of the events that is leading to its fall. As an investor, gold warrants a space in one’ portfolio aimed at long term goals. Hold not more than 10 per cent of gold in your investment portfolio. If prices dip, allocate more to the asset else sell when allocation towards gold in your portfolio goes up. Physical holding: Holding gold in the form of physical asset such as jewellery costs a lot. There are initial charges as well as making charges that eats into the returns, plus the question of purity and security. Estimate puts cost of investing in jewellery to nearly 25 percent of your investment. What good is an investment when there is such high entry cost? Even gold coins, bricks bought from banks results in 5-8 percent cost on one’s investment. Paper gold: The better way to own gold and use it for long term needs in a more cost-effective manner is through investing gold in paper form. One may invest in gold similar to how a mutual fund invest in shares of companies on behalf of its unit holders. Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. This is called the Gold exchange traded fund (Gold ETF). What is Gold ETF: The Gold ETF being an exchange traded fund and can be bought and sold only on exchanges thus saving the trouble of keeping the physical gold. What’s more, the high initial buying and even selling charges that goes into owning jewellery, bars or coins gives an extra edge to the low-cost Gold ETF. The transparency in pricing is another such advantage. The price on which it is bought is probably the closest to the actual gold prices and therefore the benchmark is the physical gold price.Features: What you need is a trading account with a share broker and a demat account. ICICI securities, HDFC securities amongst others can come handy. One may either buy in lump sum or even at regular intervals through systematic investment planning (SIP). What’s more, you may even buy 1 gram of gold. Create a plan to invest systematically rather than trying to time the market. Even though there are no entry or exit charges in Gold ETF, there are possibly three costs in them. One, is the expense ratio (for managing fund) which is generally low compared to other mutual funds and is around 1 percent. Second is the broker cost that needs to be accounted for every time you buy or sell Gold ETF units. Thirdly, which technically is not a charge but impact returns is the tracking error. It arises because of the fund’s expenses and cash holdings thus not mirroring actual gold prices. How to pick the right Gold ETFThere are about twenty Gold ETF in the market. Performance of all would largely be in the same range as it is linked to movement in prices of physical gold. Keep an eye on tracking error and the trading volume of GETF’s. Opt for funds with lower tracking error and higher trading volume figures. There is no lock-in of funds and buying, selling can happen all through the trading hours, therefore avoid partial withdrawals and even early exits and better to link your investments in Gold ETF to a long term goal.
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If price fall in gold is making you accumulate more, do it the more cost-effective way with ease and no risk of purity and security, says Sunil Dhawan Gold, that precious metal everyone wants to own. The appetite to own and consume gold among Indian investors particularly Indian household is huge. The news is, gold prices has witnessed nearly 5 per cent decline and may fall further. Currently, it’s trading at around Rs.25,000 in Indian markets while the international prices also tumbled to a five-year low of $1,104. Is the time right to buy gold? The answer may not come easy. It may fall further from current level or may see a rebound depending on the non-occurrence of the events that is leading to its fall. As an investor, gold warrants a space in one’ portfolio aimed at long term goals. Hold not more than 10 per cent of gold in your investment portfolio. If prices dip, allocate more to the asset else sell when allocation towards gold in your portfolio goes up. Physical holding: Holding gold in the form of physical asset such as jewellery costs a lot. There are initial charges as well as making charges that eats into the returns, plus the question of purity and security. Estimate puts cost of investing in jewellery to nearly 25 percent of your investment. What good is an investment when there is such high entry cost? Even gold coins, bricks bought from banks results in 5-8 percent cost on one’s investment. Paper gold: The better way to own gold and use it for long term needs in a more cost-effective manner is through investing gold in paper form. One may invest in gold similar to how a mutual fund invest in shares of companies on behalf of its unit holders. Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. This is called the Gold exchange traded fund (Gold ETF). What is Gold ETF: The Gold ETF being an exchange traded fund and can be bought and sold only on exchanges thus saving the trouble of keeping the physical gold. What’s more, the high initial buying and even selling charges that goes into owning jewellery, bars or coins gives an extra edge to the low-cost Gold ETF. The transparency in pricing is another such advantage. The price on which it is bought is probably the closest to the actual gold prices and therefore the benchmark is the physical gold price.Features: What you need is a trading account with a share broker and a demat account. ICICI securities, HDFC securities amongst others can come handy. One may either buy in lump sum or even at regular intervals through systematic investment planning (SIP). What’s more, you may even buy 1 gram of gold. Create a plan to invest systematically rather than trying to time the market. Even though there are no entry or exit charges in Gold ETF, there are possibly three costs in them. One, is the expense ratio (for managing fund) which is generally low compared to other mutual funds and is around 1 percent. Second is the broker cost that needs to be accounted for every time you buy or sell Gold ETF units. Thirdly, which technically is not a charge but impact returns is the tracking error. It arises because of the fund’s expenses and cash holdings thus not mirroring actual gold prices. How to pick the right Gold ETFThere are about twenty Gold ETF in the market. Performance of all would largely be in the same range as it is linked to movement in prices of physical gold. Keep an eye on tracking error and the trading volume of GETF’s. Opt for funds with lower tracking error and higher trading volume figures. There is no lock-in of funds and buying, selling can happen all through the trading hours, therefore avoid partial withdrawals and even early exits and better to link your investments in Gold ETF to a long term goal.
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HDFC Bank Ltd, India's second-biggest private sector lender by assets, reported a smaller-than-expected increase in first-quarter profit due to higher provisions for bad loans. Indian banks have been hobbled by a surge in bad loans in the past three years as slower economic expansion hurt the ability of companies to service debt. The bulk of the industry's $49 billion bad loans sit with the dominant state-run banks, but private-sector lenders like HDFC Bank are also expected to see an increase in sour assets as they expand their market share, at a time when government banks are pulling back. Mumbai-based HDFC Bank said net profit rose 20.7 percent to 26.96 billion rupees ($423 million) for its fiscal first quarter to June 30, from 22.33 billion rupees reported a year earlier. Analysts on average had expected a net profit of 27.39 billion rupees, according to data compiled by Thomson Reuters. Gross non-performing loans as a percentage of total loans rose to 0.95 percent from 0.93 percent in the March quarter, although they were lower than the 1.07 percent reported in the year-ago quarter. Provisions for bad loans rose 30 percent from a year earlier, to 5.58 billion rupees. Manish Ostwal, a banking analyst with Mumbai brokerage Nirmal Bang, said the rise in HDFC Bank's bad loans was "acceptable" given the current environment. He said he did not expect bad loans to rise much further in the coming quarters at HDFC Bank, which typically does not have a big exposure to project finance -- hit by sectors like infrastructure -- and is more focussed on retail customers. Net interest income for the quarter grew 23.5 percent to 63.89 billion rupees as loans grew an average of nearly 26 percent, HDFC Bank said. Non-interest revenue including fees and commissions grew a faster 33 percent. Shares in HDFC Bank, which is India's most-valuable lender with a market capitalisation of about $44 billion, were down 0.3 percent by 0656 GMT in a Mumbai market that was little changed. The stock has so far this year gained more than 16 percent, outperforming the Bank Nifty and the benchmark Nifty. (Reuters)
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Aweek after Union finance minister Arun Jaitley inaugurated a seminar in Mumbai on agrarian distress, there came a strike call from a clutch of banks which were set up to service rural India. Nearly 1.25 lakh employees and officers of 56 Regional Rural Banks (RRBs) spread over 20,000 bank branches want to stop the banks’ privatisation, and have threatened a two-day strike during the upcoming Monsoon Session of Parliament.Set up under an ordinance promulgated (26th September 1975) and followed by the RRB Act (1976), the aim was to develop the rural economy and create a supplementary channel to the co-operative structure to enlarge institutional credit for the rural and agriculture sector. The Centre, state governments and state-run banks (they sponsor RRBs) hold stakes in the proportion of 50: 15: 35 in these entities.The United Forum of RRBs has called for a strike — the dates have not yet been fixed — as it fears privatisation. The trigger: an amendment to the RRB Act during the budget session envisages dilution of the Centre’s equity, which will handed over to private capital. The unions believe that if privatisation of RRBs is allowed, then rural India, which is to a great extent monitored through these 56 RRBs, will be jeopardised with what they consider is the “unscrupulous entry of privative capital”.According to the National Bank for Agriculture and Rural Development (Nabard), 63 RRBs (out of 64 RRBs) earned a profit before tax of Rs 3,281 crore at end-March 2013 as against Rs 2,549 the previous year. Eleven RRBs continued to have accumulated losses of Rs 1,012 crore, compared to Rs 1,333 crore on account of 22 RRBs the year before. And net non-performing assets went up to 3.40 per cent (2.98 per cent). Since then, the RRB count has come down to 56.What’s skewed the picture is that the unions also want wages and pension at par with employees and officers of state-run banks. The trouble is that the RRBs’ cost structure and profitability are not akin to that of commercial state-run banks which have many streams of income. Worse, even though state-run banks are sponsors of RRBs, they compete with these very banks.An indefinite strike call is also on the cards to coincide with the winter session of Parliament, but, for now, the strategy is to reach out to all members of Parliament and sensitise them that their constituencies will be hit badly. It is a move that the BJP-led NDA can ill afford to ignore given the opposition’s drumbeats over its “suited-booted” nature and preoccupations.Incidentally, the seminar that Jaitley attended in Mumbai was organised by Nabard and about `Mitigating Agrarian Distress and Enhancing Farm Incomes’. — Raghu Mohan(This story was published in BW | Businessworld Issue Dated 10-08-2015)
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The State Bank of India’s (SBI) move to seek the Centre’s nod to offer three per cent of its profits to its staffers may sound the death knell for the four-decade old Bilateral Wage Settlements. Wages and terms of service in state-run banks have been based on uniformity from the days of The First Bipartite Wage Settlement (October 1966). This “collective bargaining” between unions and the Indian Banks’ Association (IBA) -- a club of predominantly state-run banks – has led to the comical: these bankers fix wages and then crib about poor pay. In a highly competitive banking market, pay is key to get talent in. The P J Nayak Committee to Review Governance of Boards of Banks in India, made mention of the gap between state-run bank bosses and their peers in banks with a different colour of capital. In 2012-13, the average CEO compensation was as follows: For new private sector banks, Rs 3.21 crore (in addition to stock options, whose monetary value is dependent on the bank's stock price); for old private sector banks, Rs 78.63 lakh; and for state-run banks, Rs 18.66 lakh. “It is unsustainable for such differentials to continue without a major adverse impact on the recruitment and retention of talented managers in state-run banks”, said the report. Junk One Size Fits AllBank unions may say that Bilateral Wage Settlement is fair; does not discriminate between staffers of different state-run banks. Well, all these banks are not of the same standard nor are their financials. In fact uniform wages have acted as a drain on several of the weak state-run banks. In February this year, the United Forum of Bank Unions wailed that IBA “is not giving any cognisance to the difficulties that are faced by the employees on account of high rate of inflation, which has eroded the salaries of the employees to a great extent and the wage increases considered in other similar public sector undertakings despite their low profits”. It added that bank employees, workmen and officers, have been performing well despite severe stress due to substantial increase in workload in the banks on account of opening of many branches under financial inclusion and so on despite inadequate staff strength. That bank employees never lagged behind in the successful implementation of all government-sponsored programmes, schemes, including the recently implemented Prime Minister’s Jan Dhan Yojna”. Well, ironically, unions clamour for higher pay can only be met by differentiated pay-checks. That’s why bank managements did not indulge unions earlier this year when wage talks were on. Nobody moved despite UBFU’s call for a four-day bank strike from the 25th to 28th February; or threat of an indefinite strike from 16th March onwards. Talent CrunchA K Khandelwal, former boss Bank of Baroda, as chairman the Committee on HR Issues of State-run Banks (June 2010), told us of the mess in store: “Over the next five years, 80 per cent of general managers, 65 per cent of deputy general managers and 58 per cent of assistant general managers will be retiring. The pool of experienced executives cannot be replaced merely through promotions.” The Bipartite Wage Settlement process is premised on a crude idea of standardisation. It is fleshed out in Nayak’s report. A great deal of centrally coordinated standardisation (such as in recruitment, employee compensation, technology absorption and vigilance enforcement) could lower costs for banks, and it is argued that the Government is best positioned to provide such coordination. “What the argument misses is that if banks are not to be viewed as utilities, they must be viewed as commercial businesses, the essence of which is differentiation with a view to asserting competitive advantage. Commercial businesses need to work on a whole matrix of talented employee recruitment and incentives, in order to compete successfully in the market place”. It went on to observe that standardisation imposed by the Government is inimical to attaining such differentiation and competitive advantage. Private banks, in contrast, have been free to innovate on all aspects of their business, subject to regulatory constraints. “By imposing a plethora of standardised requirements upon its banks (state-run), without achieving economies of scale, the Government has contributed to their homogenisation and has thereby handed over competitive advantage to the private sector banks. The need to exploit economies of scope (the gains from which could at best be marginal) thus has pernicious unintended consequences”, said the report. One big advantage of a “horses for courses” (differential pay) approach is that corruption can be curbed to a great extent if it also wedded with a strong `Whistle-blower” policy. In private banks, the top brass is suitably incentivised through stock-options – to that extent hanky-panky is on the lower side. If the bank does not perform well, the stock options erode. Treating everybody as equal is the greatest injustice in this world!
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