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| August 26, 2016 |
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Impact 
"Disclose undisclosed income/assets under income declaration scheme 2016 call1800-180-1961/visit www.incometaxindia.gov.in or room no 338 Aaykar bhavan, Mumbai."
This is the SMS that the income tax department has been sending to a large population these days in an attempt to flush out as much of black money as it can. It's quite commendable, finally the authorities are getting serious about curbing the circulation of black money. However, it seems the Government is diluting the effect of its own efforts by neglecting a serious issue. It has been providing an opportunity to opposition parties to raise questions about the intentions of the Government in discouraging the creation of black money in the economy.
The promises of the Government to bring Indian money stashed abroad in heaps have already fallen flat. The Government dug out the Swiss mountain and found a rat instead of a monster. While the ruling parties are still trying to climb out of the deep mire of shallow promises, the Government is providing enough fodder to the Opposition to mock the NDA Government and contest its integrity. Will the monster get a backdoor entry?
What's the issue?
India runs a risk of losing revenues worth approximately US$ 1 billion this year because the Government authorities have failed to restrict smuggled gold from entering India. The stench of smuggled gold has spread far, so much so that the gold refiners in India are on the verge of crashing down. All 32 refiners have terminated imports of ore. Once they used to find it difficult to secure the supplies of ores from the miners abroad. They are now struggling to find buyers for their refined product.
The story of India's leading gold importing houses and banks is no different. In an interview to Reuters, Arindam Sarkar, senior vice president at Axis Bank, spoke about the sector's misery. He said, "Since there were hefty discounts in the grey market, consumers shifted from banks to grey markets." To add further, he quoted that the bullion business of Axis Bank is down by 75% so far in 2016.
As per the estimates of Scotiabank, India's gold imports may fall more than 60% to 350 to 400 tonnes in the calendar year 2016 to reach a low two decade mark. The World Gold Council (WGC) predicts that, about 160 tonnes of gold will be smuggled in India this year. More you speak about this subject to industry insiders, more shocking stories you will discover.
Hardly anyone else can better explain the sorry state of affairs than a Mumbai based Jeweller, who spoke his mind to Economic Times lately. On the condition of anonymity he confessed that he wasn't buying gold from the grey market, but now he does. "In the last two months I've also started buying as I have to survive. I have to pay employees," he said.
As you are aware, the gold prices have risen more than 25% from the beginning of 2016. Rising prices make smuggled gold even more attractive. India has slammed 10% duty on gold imports to lower its current account deficit. And it's true that the higher duties discouraged official demand helping India save valuable foreign exchange. However, a quantitative assessment of its social cost hasn't been done. Imagine, the adverse consequences we might face when the duties will be rolled back some day. The latent demand may just explode. The Government needs to explain what we achieve by having a prohibitive duty structure at the expense of a long chain of social evils.
Nothing can be more pitiable than forcing a law abiding person, like the one who spoke to Economic Times declining his identity, to turn a law violator. There will be many more such "invisible" faces. More black money will be created if the Government turns its blind eye to the problem at hand.
The implementation of GST is likely to bring gold jewellery in the ambit of higher tax bracket. If that happens, the Jewellers may start finding it even more difficult to tackle the situation. Are we sowing the seeds of even bigger moral hazards?
Sending texts appealing people to come clean is simpler than standing firmly by those who respect the law. The Government has decided to aim at easy targets first. Not bad, so long as it hits atleast some target. Gold is the cash cow of smugglers. The Government now runs the risk of letting lose too many law breakers, too many of them.
"Together with all, Development for all" was the election slogan in 2014. We were under the impression that "all" meant only genuine law abiding citizens.
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Impact
In recent times, the RBI took two important decisions that were potentially going to change the way banking business is done in India. They are as follows
- To shift to Marginal Cost of Funds-based Lending Rate (MCLR) regime from the base rate regime
- To achieve near neutral liquidity position over medium term
As you may be aware, Indian banks have been facing the asset quality problems. High Non-Performing Assets (NPAs) have severely constrained the risk-taking ability of many banks. Although the demand for fresh loans is still muted, it's likely to go up with the economic recovery. Under such a condition, if the system faces any liquidity crunch, there are chances that, productive sectors of the economy will starve for credit. This may cause disruptions in the economic progress of the country. To address this issue at the grassroots level, RBI decided to do away with the long established practice of maintaining a slight deficit in the durable (or long term) liquidity position. The Central Bank has been infusing durable liquidity into the system to bring down the liquidity deficit to near neutral level from the current level of 1.0% of Net Demand and Time Liabilities (NDTL). Until the third bi-monthly monetary policy review on August 09, 2016, the Central Bank had infused Rs 85,000 crore worth durable liquidity through the purchases under Open Market Operations (OMOs). This has relieved a lot of liquidity stress.
In another development, the central bank directed all commercial banks to use MCLR regime for pricing loans. Until recently, the banks used a base rate as the single reference point to ascertain the lending rates for loans across tenures. Base rate was inflexible for the maturity profile of the loan. In other words, a loan for 3 months or a year was charged at a few basis points above the base rate depending on the risk involve in the proposal. But the base to which the risk premium was added remained the same.
With MCLR regime, now the base for pricing loans will vary depending on their maturity profile. The introduction of MCLR was expected to promote the monetary transmission in the system. For a long time, banks refrained from lowering the interest rates on loans, in spite of RBI cutting the repo rate by 150 bps (Basis Points) from January 2015 onwards. They gave the excuse of higher deposit rates on bulk of their deposits, but shrewdly kept lowering the deposit rates.
Now this option is no more available to them. Under the new system, if banks manage to secure new deposits at cheaper cost, they will have to pass on the benefits to borrowers. However, in such a scenario it remains imperative to see the maturity profile of the deposits. The arithmetic remains simple.
Banks now have to provide different reference rates for different tenures. In other words, instead of one base rate, they now have 5 different reference rates for respective maturity buckets—overnight, 1-month, 3-months, 6-months, and 1-year. Some banks provide transparency by disclosing MCLR rates for 2 and 3 years as well.
Ample liquidity in the market is making it easier for banks to meet their cash demand at lower borrowing costs. They will now have to pass on these benefits, if they expect RBI to lower policy rates further. The central bank has already made it clear several times that, unless policy transmission happens in a more transparent way, it would maintain status quo on rates.
With no alternative left, banks are now slashing borrowing rates more frequently. From the beginning of this Financial Year (FY), some banks have lowered lending rates more than twice. Shorter tenure loans are seeing a greater impact as the cost savings are higher on short term borrowings.
If you are planning to take up a new loan, your borrowing rate will be linked to MCLR automatically; however, if you want to opt for the MCLR regime on your existing loans, you will have to make a request to your bank, which might charge you a fee to approve such switching.
You should consult a financial planner before opting for any such option, as the extent of the benefit will depend on the fee the bank will charge you. Although the borrowing rates are likely to go down in the foreseeable future, you shouldn't borrow aggressively. You must assess your repayment capacity before taking up any loan on the personal balance sheet. Otherwise the chances are high that you would go off-balance.
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Impact
The decision of the Government to appoint Dr. Urjit Patel as India's 24th RBI governor dashed the hopes of those who thought the new governor would be an advocate of lower interest rates. Ever since it became clear that Dr Raghuram Rajan will say sayonara to RBI in September, an inflation dovish camp hoped to see a more harmonious governor at the helm of the Central Bank.
Now, it hasn't been just a coincident that India's 10-year sovereign benchmark bond witnessed a fall of close to 40 bps (basis points) in just last 2 months.
By promoting Dr. Patel, the then deputy governor, as the successor of Dr. Rajan, the Government hinted at continuity in the policy stance. This seems to have caused some discomfort to those who didn't anticipate the new governor to be from Dr. Rajan's camp. It wouldn't be an exaggeration to call Dr Patel his right hand. Dr. Urjit Patel is a man who played a lion's role in institutionalising a whole host of changes that took place at RBI under the governorship of Dr. Rajan. No wonder then bond yields have started hardening since the news of Dr. Patel's selection broke.
On this backdrop, many of you must be anxious to know how the changing environment will affect your portfolio of debt funds. Let's assess the impact.
Before moving to bond yields, let's first understand where the Indian economy stands at the time when Dr. Patel is taking charge of affairs at the Central Bank. At the moment, India undoubtedly remains one of the fastest growing economies in the world. Having said that, it has been facing some of the common problems encountered by many other emerging market economies.
To ready more about this story and Personal FN's views over it, please click here.
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Impact
Mr Ranjit Dubey feels helpless whenever he walks out of the builder's office these days. About 2 ½ years ago, he invested in a property under-construction located in Chandigarh. At the time of booking the house, the developer had promised him to handover the house within a year as the work had already begun. But the bullying builder went back on his promise a year later. Instead of being apologetic, the builder always gave reasons such as labour shortage and unavailability of building material, etc. for being unable to complete work on time. Mr Dubey never missed a single instalment he had agreed to pay. Those who couldn't pay on time were charged a fine as mentioned in the agreement. However, all agreements were strikingly silent about the penalty the builder had to pay had he missed the timelines.
In India, builders have been bullying homebuyers for too long. Agreement For Sale (AFS), which is almost always biased in favour of the developer, creates a huge problem for homebuyers on many occasions. Builders set the terms and conditions of the sales that suit them. As many of you may know, AFS forms the basis of any real estate transaction between the buyer and the seller of the property. AFS sets the terms and conditions of the transaction and thus plays a vital role in the preparation of the sales deed.
To ready more about this story and Personal FN's views over it, please click here. |
There's no dearth of wilful defaulters in India. Many a times, banks find themselves in a handicapped position to act against them because of bureaucracies involved in the process of recovery. However, the Government is going to give more teeth to the banks to take a tough stand against defaulters. President of India, Mr Pranab Mukherjee has okayed the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. The same has been notified as well.
This Act also amends other four Acts viz. the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993, the Indian Stamp Act, 1899, and the Depositories Act, 1996. All loans other than students and agricultural loans will now come under the purview of the recently notified act.
The banks will now be able to seize the security on a loan in case of a default without too many hassles. This has been the biggest change the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 has brought to the system. It's a remarkable development considering the severity of the problem of bad asset quality of the banking system.
Tough time for wilful defaulters has begun now.
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Open Market Operations - OMO: Open market operations (OMO) refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system, facilitated by the Federal Reserve (Fed). Purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. The Fed's goal in using this technique is to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another.
(Source: Investopedia)
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Quote : "The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!"- Warren Buffett
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