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| August 01, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 25,480.84 | -645.91 | -2.47% | | Re/US$ | 60.56 | -0.45 | -0.75% | | Gold Rs/10g | 28,150.00 | 60 | 0.21% | | Crude ($/barrel) | 104.70 | -2.15 | -2.01% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on July 31, 2014
*BSE Sensex as on August 01, 2014 |
Impact 
It wouldn’t be an exaggeration if somebody in the remote village of India tells you that, he has a mobile phone but not a bank account. However, the Government is now planning to use this paradox to attain financial inclusion. It wants to take financial inclusion beyond just opening of a savings account. Finance Minister recently told media that the special efforts would be made to introduce mobile banking facility on all kinds of phones. The new programme of financial inclusion, Sampoorna Viteeyea Samaveshan (SVS) will be unveiled on August 15 this year. The Government has planned to include some unique features to the scheme which were missing in the earlier one.
What’s new in the new scheme?
The new programme will have two stages. Stage one would have a timeline of 1 year and would cover most of the activities outlined for the scheme. Stage two will cover insurance and pension and would have a slightly longer deadline of 4 years. The main objective of the programme is to have 2 bank accounts per household.
The newer version of financial inclusion programme differs against the older version on two counts
- Focus of the scheme
- Monitoring
Focus of the scheme
In the older version the emphasis was merely on opening Basic Savings Bank Deposit Accounts (BSBDA). However, in the new scheme, the focus is to provide whole host of banking and financial services to unbanked population. Furthermore, in the previous financial inclusion scheme only rural masses were targeted. In the newer version even unbanked urban population would be targeted. In SVS efforts would be to spread financial literacy.
Monitoring
In the previous financial inclusion scheme, responsibility of monitoring was rested on banks, while under SVS, monitoring would be done at various stages. There would be district level and state level committees to monitor the progress of the scheme. Unlike earlier, under SVS the fixed point business contact has been preferred. Moreover, the achievements of the programme would also be monitored by the centre.
Some more features of SVS
As clarified earlier, the Government has planned to keep aside a credit guarantee fund of Rs 1,000 crore to provide safety margins to lenders who are risk averse. However, all this comes with a condition that, a person availing for such a facility has to compulsorily participate in financial literacy programmes run by the lenders.
PersonalFN is of the view that, the SVS appears to be more comprehensive and focused as far as the objective of financial inclusion programme is concerned. The new programme may be successful in achieving its objective because of multi-level monitoring and direct monitoring by the centre. This wouldn’t only lessen the burden of banks of monitoring progress but would also make everyone in the process more accountable and answerable.
Whether SVS actually attains its objectives remains to be seen, especially considering stricter deadlines of programme. Having said this PersonalFN believes, the government would have to think twice before it adds certain features such as providing credit guarantees. As it may spoil people, especially those in rural areas, who do not know how to deal with debt. Focus on financial literacy may have a positive impact on the overall banking and financial system.
At least for now, this appears to be a step taken in the right direction. Progress needs to be monitored closely before calling it an effective programme of financial inclusion.
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Impact
Paying for financial advice might be gaining acceptance in India but still the overhang of commission model still lingers. Earlier, mutual fund distributors were paid hefty 2%-2.5% commissions for soliciting investments. In August 2009, the practice was stopped as distributors blatantly encouraged investors to churn to earn more commissions. But since the entry loads have been banned, growth of mutual fund industry has almost come to a halt. Number of mutual fund distributors has reduced by almost 40% from 2010 levels. In 2012, there were speculations that Securities and Exchange Board of India (SEBI) may re-introduce entry loads to revive mutual fund industry. But later the idea didn’t materialised.
How distributors are remunerated at present?
- Distributors are paid upfront and /or trail commissions even now. The only difference in the practice followed earlier and the one followed nowadays, is that now the commission is not charged to investors and paid the mutual fund houses from their own pocket. Upfront commissions are far lower though whenever paid.
- SEBI allowed distributors to charge Rs 100 per transaction for transactions more than Rs 10,000 and Rs 150 for soliciting investments from first-time investors.
- SEBI has also allowed distributors to charge investors directly for the services provided by them
Now SEBI is working on revamping commission structure for mutual fund distributors. It is expected that, more incentives may be provided to encourage distributors to distribute more mutual funds. Investment management department of SEBI is expected to knock doors of SEBI board for the same.
PersonalFN is of the view that, the entire idea of encouraging distribution oriented model for increasing the mutual fund penetration is flawed. There is no denying that mutual fund distributors should be compensated adequately for the services provided by them. Investors are keeping away from mutual funds for various reasons. Not only because they don’t have someone who can help them in the process of doing mutual fund investments. The primary reason is their shaky experience with mutual fund investments. For many, mutual funds mean only equity oriented mutual funds. There are many people who are not aware about any other category. Investor education needs to be emphasised. PersonalFN is taking efforts and trying to spread financial literacy through various initiatives.
It was reckless advisory during the bull phase of 2002-07 that heightened the return expectations of investors from mutual funds and from equity as an asset class in general. Distributors paid price by losing business during the subsequent bear phase of 2008-09.
PersonalFN is of the view that revamping commission structure may make distribution business slightly more attractive than what it is today. Having said this, whether that will translate in more business to mutual fund houses would depend on how mutual funds perform. Moreover, since it is expected that investors may not be burdened with additional charges even in the revamped structure, mutual funds may end up shelling out more money. Big fund houses may be able to afford it but it may be difficult for smaller fund houses.
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Impact 
Equity markets in India have been strong and have been rallying for more than 10 months now. Formation of a stable NDA government at the centre has provided further strength to markets. Mid and small caps have outperformed large caps in the current market rally. But now it seems that, the market trend is changing, especially after the budget.
You see, budget 2014-15 was a big event for the economy. After a thumping victory for BJP-led-NDA Government (in the 16th Lok Sabha elections), everyone eagerly waited for the first budget of NDA Government with Mr Narendra Modi as its Prime Minister. And when the budget was announcement, the absence of big bang reform announcements was noticed. Nevertheless, it didn’t play out very negatively on the markets.
Now it’s been a little over a fortnight the budget was announced and we have made some interesting observations. You see, it is the large caps which have outperformed mid and small caps. During the period July 10, 2014 to July 25, 2014; while the CNX Midcap has generated negative returns of about -0.5%, the CNX Nifty has gained around +2.9%.
Midcaps getting expensive and losing momentum
Data as on July 25, 2014
(Source: ACE MF, NSE, PersonalFN Research)
So, would mid and small caps cool off and large caps take the position of frontrunners as the market paves it path going forward?
To read more about this story, please click here.
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Impact
In times where the entire world is becoming a knowledge economy, nobody can deny the importance of education. It is believed that better education opens doors to good life. But as the cost of living is on a rise, the cost of education too is sky rocketing.
There was a time when a few thousand rupees were enough for one to complete one’s education until graduation. But times are changing now. With private schools, colleges and international universities mushrooming, the competition has introduced many of us to quality education. So, one need not travel across the geographical boundaries to pursue quality education. But as you may know, the cost of education in such a case multiplies as well. Therefore those who cannot raise adequate funds from their own sources especially for higher studies, often take an education loan.
To read more about this news and PersonalFN’s views on it, please click here..
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- Household budgets are going for a toss due to high food article prices. But now there might be some respite for you. Vegetable prices which were sky-high till last few days have started cooling off. Prices of Brinjal, Cauliflower, cabbage and cucumber have fallen massively over last 10 days. Strong revival of monsoon has helped in moderation of vegetable prices. Moreover, fearing strong action against hoarding, it is believed that hoarders might have released additional stock of vegetables. Finance Minister had indicated punitive actions against hoarders a few days ago.
Indian Meteorological Department has predicted that rain would be 96% of its long term average in August. This may lessen the fears of sharp rise in vegetable prices. High vegetable prices eventually increase level of retail price inflation. Softening of vegetable prices may thus lower the inflation measured by Consumer Price Index (CPI). Although RBI may not lower policy rates in a hurry, it may take a note of such developments.
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Financial Literacy: The possession of knowledge and understanding of financial matters. Financial literacy is mainly used in connection with personal finance matters. Financial literacy often entails the knowledge of properly making decisions pertaining to certain personal finance areas like real estate, insurance, investing, saving (especially for college), tax planning and retirement. It also involves intimate knowledge of financial concepts like compound interest, financial planning, the mechanics of a credit card, advantageous savings methods, consumer rights, time value of money, etc.
(Source: Investopedia)
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Quote : "What the wise man does in the beginning, the fool does in the end." - Warren Buffett
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