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| December 26, 2014 |
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| Weekly Facts |
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Change |
%Change |
| S&P BSE Sensex* |
27,241.78 |
-130.06 |
-0.48% |
| Re/US $ |
63.53 |
-0.42 |
-0.67% |
| Gold Rs/10g |
26,810.00 |
-370 |
-1.36% |
| Crude ($/barrel) |
58.48 |
-1.41 |
-2.35% |
| F.D. Rates (1-Yr) |
7.75% - 8.75% |
Weekly change as on on December 24, 2014
*BSE Sensex as on December 26, 2014
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Impact 
Those of you, who already have an insurance policy or planning to buy a new one, have a reason to cheer. Recently Government issued ordinance to fast-track reforms in the insurance sector. You see, although the Insurance Laws (Amendment) Bill, 2008 was approved by the cabinet led by the Prime Minister, it was pending for long as the opposition parties created an uproar in the upper house (the Rajya Sabha) over few social issues, stalling parliament proceedings; which finally led to the Government take the ordinance route. With this, the cap on Foreign Direct Investment (FDI) has been raised to 49% from 26%, opening the doors wider for foreign insurance companies to invest in India.
What will change for policyholders?
- Your claim won’t be rejected after 3 years from the commencement of the policy:
The original bill allowed insurance companies to reject (life insurance) policy claims during first 5 years of the policy on various grounds including misstatement of facts by the policyholders. However, the amended version of the bill prohibits insurance companies to reject claims on any ground after 3 years from the commencement or the revival of the policy.
This is expected to protect policyholders’ interest and call for rigorous underwriting of insurance proposal by insurers.
- Your agent may think twice before he mis-sells an insurance policy to you:
The Insurance Laws (Amendment) Bill, 2008 has tried to keep mis-selling under check by making insurance companies responsible for all acts and omissions of their agents, including any violation of code of conduct. Thus now no insurance company can take cover behind mis-selling by insurance agents. The insurance company would be penalised with any amount upto Rs 1 crore if found guilty. Taking a step forward, the new bill has made a provision to impose a fine upto Rs 5 lakh on insurance companies in case their agents are found to be giving kickbacks to policy buyers, a common practice in the industry.
This new provision aims to put the onus on insurance companies in the era where most of them are in race to garner more premiums and assets under management. This would also ensure that insurance companies keep adequate checks and balances and educate agents rightly, while they solicit prospects.
- Records will be maintained in an electronic form:
The new bill guides insurance companies to maintain all records of policies and claims in an electronic mode and make them available on their websites. This move is expected to bring greater transparency in operations of insurance companies.
- Licensing of agents to be done by insurance companies:
The Bill has also allowed insurance companies to do licensing of insurance agents, subject to agents meeting qualifications, passing of insurance examination etc. – a job which thus far done by the Insurance Regulatory and Development Authority (IRDA). However, IRDA will still be empowered to take action against agents under Section 42(4) of the Insurance Act, 1938 and protect the policy-holders interests.
Such a move is aimed to ease the process of hiring insurance agents and increase penetration of insurance in the country. And while they do so, it is expected that the insurance companies hire agents with due care, and not mindlessly, as the onus lies on the insurance companies.
PersonalFN is of the view that, while The Insurance Laws (Amendment) Bill, 2008 gives you some unique benefits which were not available till now; you should be responsible while investing or while buying an insurance policy. So, if you are buying a policy which doesn’t suit your requirements, you may still end up being disappointed. Overall, the amendments cited above are in the interest of policyholders.
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Impact
You may have experienced a relationship manager of your bank approaching you many a time with different mutual fund schemes offered by the same fund house. While some of them may be doing well, please refrain from concluding that other suggested to to you would do well or they are the best ones in the category. You see, the real reason behind aggressive follow-ups by your relationship manager could be to earn a high variable pay by generating business through you.
A few of bank-promoted fund houses have been found to be pressurising their promoting banks to push only their funds through branch networks. The Securities and Exchange Board of India (SEBI) has noticed that, a few banks are earning more than 50% of their commissions through just one fund house. In the view of SEBI, banks are making a mockery of the 'open bank architecture’ for sale of mutual funds through banks. In simple words, open bank architecture entails that any fund house can sell their mutual fund schemes through any bank. However, this norm is challenged when banks promote mutual funds only of a few fund houses.
SEBI has been planning to take action against those violating 'open bank architecture' norms, along with running a check on mis-selling of mutual funds. SEBI has been discussing issues pertaining to further development of mutual fund market, investor protection and better regulation. The committee has representation from various fund houses, Association of Mutual Funds in India (AMFI) and banks, apart from independent experts.
SEBI is also discussing issues regarding product labelling of mutual funds, payment of commissions to distributors, mis-selling of mutual funds and management of unclaimed redemption and dividend amounts. Management of offshore pooled assets by local mutual fund managers and use of digital platforms for spreading the reach of mutual funds, remain other important issues that the regulator has been taking up at various platforms.
PersonalFN is of the view that, if SEBI successfully resolves above discussed issues, it would go a long way in the benefit of mutual fund investors. Having said this, PersonalFN believes that commission driven model for promoting mutual funds has several inherent disadvantages and the focus should be on need based approach. PersonalFN believes investors should consider their personal financial goals and risk appetite before investing in mutual funds.
Do you think, SEBI would be successful in keeping mi-selling under check?Share your views
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Impact
“Cooperation is willing collaboration by free individuals in a collective effort that creates more value than it expends.” - James Raymond Lucas.
So well said by the famous the U.S. based entrepreneur and author. An act of cooperation and coordination makes life so much simpler. But unfortunately not many put it to practice, resulting in too many complexities.
Take the case when you are in need of money and opt for a loan from a bank. Most often cooperation is extended to the bank and most requisites are fulfilled. But there are some errant borrowers who add a lot of complexity to their long-term financial well-being by avoiding repayment of loans on some or the other pretext, although they have the means to repay. And possibly that’s one of the reason why the Non-Performing Assets of banks in India are on a rise. In fact some public sector banks have written-off their loans and the rise therein in the last three financial years is rather worrisome posing a threat to financial stability of the system.
Loans Written off by Public Sector Banks
(Source: ARCIL, PersonalFN Research)
You see, usually when a loan account fails to pay interest or principal for more than 90 days, it is classified as a NPA. While NPAs do not result in a loss to banks straight away, it adds tension on to the books as they run a risk of losing money if they fail to recover money from borrowers.
But now the Reserve Bank of India (RBI) has decided to crack down heavily on "non-cooperative borrowers". The central bank has set out revised guideline to deal with "non-cooperative borrowers".
To read more about this news and PersonalFN’s views on it, please click here.
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Impact
Alisha Chinoy, one of India's pop divas sang a song, "made in India" in 1995 which became very popular in no time. And nearly two decades later, India's Prime Minister Mr. Narendra Modi is promoting the India story and urging everyone to "Make in India".
You see in September this year, Modi-led-NDA Government launched "Make in India" campaign which has attracted good deal of attention so far from all corners. Mutual fund houses too seem to be impressed and are not far behind in following the theme of "Make in India". In fact they are betting big on this theme and are in the process of rolling out 'Make in India' funds. But the question is: Should you groove to the humming of 'Make in India' and invest your hard earned money in such funds.
Well, before we answer that let us understand "Make in India" in a little more detail...
To read more about this news and PersonalFN’s views on it, please click here.
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- As you know, affordable houses have become rare to find and wherever they are available, the city infrastructure is usually in poor form. Despite the slack in demand, real estate developers have been managing to keep prices high. This gives rise to a need to develop more affordable houses with greater focus. Finance is the critical aspect of any buyer planning to buy his dream home. The Modi-led-NDA Government endeavours to build 100 smart cities and provide more homes under affordable housing.
To attain this, the PMO has suggested that, Employees’ Provident Fund Organisation (EPFO) and insurance companies should invest 15% of their Rs 6,50,000 crore corpus in housing finance companies engaged in low-cost housing. This is expected to create a credit line of Rs 70,000 crore and add 3,50,000 more affordable houses.
The EPOF may shortly take up the topic for discussion before making consensus and getting approvals from requisite ministries. However, it is believed that, there might be a need to relax the investment criterion of investing in only “AAA” rated bonds, which is being currently followed by EPFO. If EPFO is allowed to invest in AA+ rated bonds offered by housing finance companies, several companies such as GIC Housing, Canara Home Finance, ICICI Home Finance, Gruh Finance and Sundram Paribas among others would get access to fresh funds. This may result in greater disbursal of loans.
Having said this, trade unions are fiercely opposing several issues on which EPFO is expected to take decisions shortly including the one allowing it invest in lowly rated bonds.
PersonalFN believes that, while credit rating remains one of the most crucial aspects for investing in debt securities, it can’t be the sole criterion for investing. Companies having just a notch below credit rating than the bonds with the highest quality can’t be treated as junks. Reach of these companies, promoters’ background, credit quality and potential business are among the few important aspects that should be considered in addition to credit rating. If housing finance companies focusing on low cost housing, manage to get funds from EPFO, large number of borrowers may benefit.
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Kickback: The payment of something of value to a recipient as compensation or reward for providing favorable treatment to another party. A kickback in the form of money, gifts, credit, or anything of value may be viewed as a corrupt practice that interferes with an employee or official’s ability to make unbiased decisions.
(Source: Investopedia)
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Quote : "Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." - Warren Buffet
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