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| August 22, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
26,419.55 |
316.32 |
1.21% |
| Re/US$ |
60.68 |
0.54 |
0.88% |
| Gold Rs/10g |
28,050.00 |
-630 |
-2.20% |
| Crude ($/barrel) |
100.34 |
-1.71 |
-1.68% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on August 21, 2014
*BSE Sensex as on August 22, 2014
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Impact 
Ebola virus might have spared India but another equally harmful virus has totally gripped Indian banking system. A virus of frauds! There are clear symptoms and no cure as yet.
While you may have witnessed frauds in the Indian banking system in the past, here are the most recent ones.
The latest additions to the list of banks are Dena Bank and Orient Bank of Commerce. Also in the recent past, Syndicate bank's Managing Director (MD) was arrested for accepting bribe for sanctioning loans.
So, broadly what is the nature of offence at some of these banks you trusted?
We'll it is...
- Misappropriation of funds;
- Syphoning of deposits to cook accounts; and
- Corruption at branch level while sanctioning loans, seemingly done in privy with those at the top
How such incidents happen?
The loan approval procedure was modified in 2009. As per the new procedure, it was decided that key persons would have authority to approve big ticket size loans; whereas, at branch level only small and retail loans can be approved. High value loans are usually approved by the credit appraisal committee, which includes the Chairman and Managing Director as well. Other members in the committee often find it difficult to go against key persons such as CMD fearing a threat to their career path. As you may know, Chairmen and Managing Directors of public sector are appointed not only on their merits, but with involvement of politicos. But the insistences that took place recently at Dena Bank and at the Oriental Bank of Commerce show that, malpractices are not happening only at the top level but also down the hierarchy. The money raised through fixed deposits was misappropriated. The fraud amounted to Rs 436 crore.
You see, in the era of modern banking many yet rely on public sector banks when it comes to hard earned money. But you may be shocked to know that at public sector banks, the instances of frauds are detected more often than those at private sector banks. Lack of effective internal control system often cause leakages in the risk management processes leading to frauds, which leaves investors and / or account holders with not but a sense of betrayal.
What is the remedy?
For now, the finance ministry has called for the forensic audit but long term solutions have also been sought. PJ Nayak Committee appointed by Reserve Bank of India (RBI) to review governance of banks in India, submitted a report in May 2014. The chairperson of the Committee, Mr PJ Nayak opined that "It would be desirable for the two positions to be separated. Until then there is a very real possibility of the several chairmen positions across banks being filled on the basis of political allegiance rather than professional skills. This could imperil banks."
Further, the finance ministry is planning to take following actions to avoid mushrooming frauds at public sector banks:
- To strengthen the risk management processes by making it mandatory for all senior officials to compulsorily attend the risk management courses before they are promoted
- Giving Chairmen and Managing Directors relatively longer tenure of say 5 years
- Separation of posts depending on roles and responsibilities
- More careful selection of nominees and independent directors
- To ask bank boards to form holistic policies pertaining to fixed deposits
PersonalFN is of the view that, recent cases of frauds and corruption reported by well renowned public sector banks raise the doubt about corporate governance. The credibility of such banks becomes questionable. There was a time when companies and individuals trusted public sector banks with their money. But now all they get is sense of betrayal with occurrences of such frauds. Such incidents are happening because of rot at the top in banks, where the appointment process at higher levels and administration of such public sector banks is flawed. If PJ Nayak committee recommendations are implemented efficiently, public sector banks may re-attain their lost glory. But for that to happen, the banking system should have the minimum political intervention.
PersonalFN is of the view that, irrespective of the value of your deposits you must ensure that, you receive all acknowledgements / updates for your transactions. It is imperative for you to keep a track. Moreover, while you fill forms or give consent as a part of any procedure, don't forget to read the fine prints carefully. Please do carry out effective due diligence and do not go by blind faith or only eminent names, when it comes to managing your hard earned money.
Do you have any hope that governance at public sector banks will improve in foreseeable future? Share your views
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Impact
Some 15-20 years back people used to visit bank branches even for performing routine transactions such as withdrawing cash, depositing cash and getting the passbook updated to name a few. However, as banking processes evolved and reforms were introduced, banks successfully promoted the culture of using Automated Teller Machines (ATMs) for routine transactions. This worked in two ways. First, it gave more flexibility to customers. And secondly, it allowed banks to deploy workforce to more productive activities as workload of routine activities reduced substantially.
Now that the customer is habituated to using advance modes such as ATMs and Internet Banking services, the banking industry has demanded an action that may potentially again make bank branches crowded for performing routine transactions.
What is the development?
- With effect from November 01, 2014, number of free transaction at other bank ATMs will reduce to 3 in a month
- Banks can charge you fee of Rs 20 per transaction for using ATM networks of your own bank beyond 5 transactions
For the purpose of calculating the number of transactions, both banking as well as non-banking transactions will be considered. It is noteworthy that at least initially; these norms will be applicable only to customers in six metro cities- Delhi, Mumbai, Chennai, Bangalore, Kolkata and Hyderabad. These provisions won't be applicable to the most basic savings accounts, known as no-frill accounts.
So, how to keep a track of your transaction record?
Although banks will charge you fee for letting you use ATM services for beyond a specific number of transactions, they are required to set up a mechanism to keep a track of number of transitions for each account. RBI has directed banks to clearly indicate whether the location of a particular bank is metro or non-metro.
Furthermore, RBI has asked banks to see to that customers are not inconvenienced. Banks will have a responsibility to caution about the number of free transactions utilised for the month.
PersonalFN believes, introducing these guidelines only in six metro cities appears to be a sensible move. Penetration of internet banking and ATM networks in general is higher in metro areas as compared to non-metro areas.
PersonalFN is of the view that, allowing 3 transactions at other bank networks free of cost in a month gives customers a fair chance of meeting their cash requirements. Making ATM transactions chargeable even at their own networks beyond 5 transactions would give banks a dual advantage. It will help banks in discouraging people from over-using ATMs and improving security standards. To avoid being subject to paying fee to your bank, you may list down your potential cash requirements in advance. Those who follow their financial plan may not have to struggle to get this number. You may then withdraw money at one go if you feel you might exceed the free transaction limit. You may be better-off if you don't use ATMs for non-financial transactions such as checking balance and knowing the account summary. You may prefer to use internet banking instead.
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Impact
Just as a restaurant which offers valuable offers and serves good food & beverages experiences good footfalls from foodies, the Indian equity market too is buzzing of late. The only difference here is, instead of scrumptious food, investors are being offered a platter of expectations. But are valuations mouth-watering, or to simply put, is there much value for money on table?
Well, the 'Modi Wave' has attracted many investors to Indian equities and Foreign Institutional Investors (FIIs) have been front runners. But FII participation seems waning of late, and Indian investors have opened their vaults. As the market has been a scaling a new high, retail investors are evincing interest yet again at the market top, much as they did in the year 2007 before the sub-prime mortgage crisis emerged in January 2008. So, are they too late yet again or is there still much steam left?
Some statistics on retail participation...
- Average retail turnover in cash segment of the market has gone up massive 90% since February 2014.
- In July 2014, retail participation in cash segment was about 51%
- In mutual funds retail investment touched 6-Year high in July 2014
To read more about this story, please click here.
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Impact
The Wholesale Price Index (WPI) inflation for July 2014 declined to 5.19%; it being the second successive month of ease in prices which took the data for July 2014 to a 5-month low. However, the data for May 2014 was revised upward to 6.18% from 6.01% posted in the quick estimates.
WPI Inflation mellowed down yet again!
Data as on July 2014
(Source: Office of the Economic Advisor, PersonalFN Research)
The drop in WPI inflation in July 2014 was mainly on account of:
Fuel & Power inflation:
Fuel and power inflation (which has weightage of 14.91% in WPI) eased substantially in July 2014 to 7.40% from 9.04% reported in the previous month. The decline in prices of petrol attributed this constituent of inflation ease, since the inflation in petrol fell to 5.90% in July, from 9.02% in the month prior. Likewise, softening in price of High Speed Diesel and LPG also aided fuel & power inflation to ease.
To read more about this news and PersonalFN's views on it, please click here.
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- The Government is planning to divest its stake (held through LIC and some public sector banks) in the UTI Asset Management Company (AMC). The Finance Ministry is in the process of granting permission to the AMC to float an Initial Public Offer (IPO).
Should you subscribe?
While investing in mutual fund, you have to consider several factors such as track record, investment style etc. Similarly, when you are considering investing in an IPO you need to consider a number of things such as the business model of the company, business prospects and financial condition among others. It is believed that, offering equity through IPO is not aimed at just raising money but it is looked upon as a measure to improve governance of AMC.
PersonalFN is of the view that, UTI Mutual Fund stands among one of the top 10 mutual funds houses in India. In the first quarter of the current fiscal, it had about Rs 80,000 crore under its management. Considering its asset base its revenues appear to be high enough. However, before you consider investing in the IPO you need to follow holistic approach and the offer price would matter.
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Cook The Books: A buzzword describing fraudulent activities performed by corporations in order to falsify their financial statements. Typically, cooking the books involves augmenting financial data to yield previously non-existent earnings.
(Source: Investopedia)
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Quote : "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." - Warren Buffett
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