In line with the guidelines of 2001, that it

would consider licensing more banks, RBI has

come one step closer to issuing new bank

licenses in private sector. RBI has come out

with a set of guidelines for the same in the

last week of August 2011. These guidelines

have been framed, keeping under considera-

tion, the 1993, the 2001 guidelines and also

the feedback received for the discussion pa-

per, on the same, of August, 2010.

A few key points to be noted in these guide-

lines are:

Eligible promoters – Private groups that are

owned and controlled by residents can pro-

mote new banks. These groups should be

diversified, should have

sound credentials and also

a successful track record

of at least 10 years. This

prevents first generation

and young entities from

setting up a new bank.

However, RBI has prevent-

ed the groups with more

than 10% of income or

assets from either real

estate and/or broking ac-

tivities in the last 3 years from promoting

banks.

Corporate structure – These private groups

should set up a wholly owned Non-Operating

Holding Company (NOHC), which will hold the

bank and any other financial companies in the

private group. This NOHC should be registered

with RBI as a Non-Banking Financial Corpora-

tion (NBFC). This arrangement essentially ring

fences the financial services of the group and

that of the bank from other activities of the

group. These financial services companies of

the group would be a part of NOHC and cannot

hold shares in it.

Minimum capital requirement – The minimum

capital needed is Rs 500 crores. Out of this,

the NOHC should hold at least 40% of the paid

up capital for a period of 5 years. Sharehold-

ing excess of 40% should be brought down to

40% within two years of licensing, to 20% with-

RBI IS ONE STEP CLOSER TO ISSUING NEW BANK LICENSES

V i n o d g u p t a s c h o o l o f m a n a g e m e n t , I I T K H A R A G P U R

in 10 years and finally to 15% within 12 years.

The NOHC can raise the remaining capital from

the public or through private placements.

Foreign Shareholding – Aggregate non-resident

shareholding (from FDIs, FIIs and NRIs) cannot

exceed 49% for the first 5 years. After this peri-

od, the cap would be decided as per the extant

policy. The present cap against foreign share-

holding in private banks stands at 74%. Also, no

non-resident shareholder can hold more than

5% of the paid up capital.

Corporate governance – At least 50% of the

NOHC‘s directors should be independent. The

source of promoter group‘s equity should be

transparent and verifiable.

Other requirements –

The bank should get itself listed

on the stock exchange within

two years. This ensures diversi-

fied shareholding. Shareholding

of more than 5% of the share

capital by any individual or enti-

ty or group needs to be prior

approved by RBI.The bank

should maintain a minimum

capital adequacy ratio of 12%

for at least 3 years. This value

for the present banks stands at 9%.Existing

NBFCs if given license can either promote a new

bank or convert themselves into banks. The

banks should open at least 25% of its branches

in unbanked rural areas.

Thus, RBI tried to ensure the stability of the

system by imposing restrictions. The draft how-

ever did not talk about the merger and acquisi-

tion of corporate houses with smaller banks. RBI

has sought the feedback on these guidelines to

be sent by October 31, 2011. After that the final

guidelines would be issued and much awaited

applications for new banks would be invited.

However, one more point to be noted is that RBI

might not be able to issue licenses to all the

eligible applicants. So, while all these conditions

are necessary to apply, these are not sufficient

to get a license and the decision lies with the

RBI. (Contributed by Ramya Krishna P, MBA,

2nd Year)

P a g e 1

47.18 65.08

74.59 7.38

Volume 2, Issue 4 September 16, 2011

Rates As On Sept. 16th

About Fin-o-Menal

Fin-o-Menal is the

Fortnightly Financial

News Letter of VGSoM

which is published by

Finte`est, the Finance

Club. Come, Take Interest in

Finte`est!

Editors

Rahul Ravi Sumitpal Singh

Editors’ Note

Look for a special car-toon section to com-memorate the contribu-tions made by Engineers

The recent happenings in the world econo-

my are hinting at a new development. The

viewpoint that is gaining in popularity is that

the stage is all set for Yuan to replace Dollar

as the Global currency. Before looking out

further on that possibility, let‘s dwell a little on

the definition of Global Currency. The Global

Currency is also referred to as the Reserve

currency or the Anchor currency. It is held in

significant quantities by many governments

and institutions as part of their foreign ex-

change reserves. It also tends to be the cur-

rency of international pricing for products as

well as for commodities (like oil, gold, etc)

traded on the global market.

Thereby, as of the scenario until now, Uncle

Sam makes commodity purchases at a mar-

ginally lower rate than other nations, which

ought to exchange their currencies with each

purchase and also pay a transaction cost. For

major currencies, the transaction cost is negli-

gible with respect

to the price of the

commodity. More

interestingly, USD

being the Global

currency, its gov-

ernment enjoys

borrowing money

at a better rate as

there will always

be a larger market

for USD than other

currencies. It also

helps to infer, how

the superpower

could reach such a level of debt, tumultuously

shaking the world all over again.

Now let‘s bring into purview the million dollar

question of what Yuan is up to. Great econo-

mist Avinash Persaud once remarked that,

"reserve currencies come and go‖. But for this

to be true, a lot needs to actually happen. The

possibility of it becoming a reserve currency is

certainly there. Moreover, certain steps have

been taken by China to promote the greater

use of Yuan (also known as Renminbi (RMB)

internationally). Though all of it is still in a

nascent stage, but China is surely making the

right moves and there are some concrete rea-

sons for this. Beijing holds $2 trillion in dollar

assets, accumulated through years of exports

to America and massive purchases of Treasuries

by the Chinese government. If Washington can't

rein in its mounting budget deficit, both Treasur-

ies and the greenback would weaken considera-

bly—and the Chinese could end up on the losing

side. Apprehensive about this real picture, China

proposed the idea of replacing the dollar with a

basket of currencies supervised by the Interna-

tional Monetary Fund.

The Sceptics may beg to differ on this. They are

of the view that the Chinese were merely talking.

Also they argue that the USD is not only the re-

serve currency but also the international currency

of choice with the backing of U.S.A, by far the

world's largest economy. So even if the Chinese

were to bring the Yuan into competition with the

dollar as a medium of international trade, they

would have to turn the Yuan into a convertible

currency whose value would be dictated by the

market (with traders, investors, governments,

and companies around the world freely buying

and selling it). Can we

ever expect such a

loss of control by the

authority loving Chi-

nese? It would mean

lowering all kinds of

financial trade barri-

ers, allowing foreign

access to Chinese

securities markets

and much more. The

chances of that are

pretty slim.

Another is the ab-

sence of a large mar-

ket for Yuan-denominated bonds. One key sign of

acceptance as a reserve currency would be if the

western world purchased bonds denominated in

Yuan and sold them at market rates. Until now,

Yuan-denominated bonds have been sold only by

Chinese banks, along with multilateral banks

such as the Asian Development Bank and Inter-

national Finance Corporation. Furthermore, the

bonds have been sold only in China. Still we as

neighbours (in a very diplomatic sense of the

term!) see a bright future for Yuan and expect

large volumes of free bilateral trade with a freely

convertible Yuan. (Contributed by Akash Krish-

natry, MBA 1st Year)

P a g e 2

Yuan versus Dollar: A duel in the making

(As on September 16, 2011)

Volume 2, Issue 4 September 16, 2011 Fin-0-Menal

Index

BSE

NSE

Opening Value

(Aug 1)

16933

5084

Closing Value

(Sep 2)

16963

5109

Change

-0.18%

-0.49%

(As on September 16, 2011)

Commodity `

Unit

GOLD

27550

10 gm

SILVER

64373

Kg

OIL

4225

Barrel

Markets This Week

Commodities This Week

(As on September 16, 2011)

Sectors This Week (BSE)

Indices Last close

BSE IT 5402

AUTO 7442

BANKEX 9921

BSEPSU 9931

METAL 17951

TEASER LOANS: The Wrong Move

Teaser Loans have been designed to tease, or

attract a home loan borrower in seeking a new

loan. These loans have a relatively low, fixed

interest rate in the initial 2 years; say around

8 to 8.5 percent. However after the honey-

moon period (initial years where they have to

pay low rate of interest) the borrower needs to

move to floating interest rate existing at the

owers could default in their EMI payments. Such

EMI defaults are not a good sign for the borrower

or for the asset books of the lending bank. There-

fore, RBI has recently increased the teaser loan

standard asset provisioning to 2 percent from 0.4

percent, and has capped the home loan limit at

80 percent of the value of a property.

The major issues raised by RBI were:

One of the major concerns of the RBI is the EMI

affordability once the rates are revised. With the

shift in interest rates, the resultant EMI could end

up being a burden to the borrower, especially if it

is much more than what was expected.

With banks following aggressive practices to lure

new customers, borrowers are seldom made to

understand the difference in the initial years EMI

versus the EMI for the rest of the loan tenure.

Many lenders do not provide appropriate illustra-

tion of the interest regime, after the initial dis-

counted period.

Many banks do not follow stringent and accurate

evaluation of the borrowers financial and repay-

ment capacity. Such evaluation should be ideally

done taking into account the borrowers repaying

capacity at normal lending rates, at the time of

initial loan appraisal. If not done properly, the

borrower could end up finding the remaining

EMIs a burden.

Tips for the borrower opting for Teaser Loans

Ask your bank to give you the average loan

rate. Though this average loan rate is based on

the current base rate of the bank, it could serve

as an indicative rate to understand the lenders

reference rates, and do a comparative study be-

tween other lenders.

From July 1, 2010, all loans would be priced

under the new Base Rate system of the bank,

( C o n t i n u e d o n p a g e 4 )

P a g e 3

T o o n o f t h e w e e k

"The fact that the troika is returning means that Greece has started doing some things that need to be done.", Angela Merkel, Chancel-

lor, Germany allaying the fear of Greece‘s bankruptcy.

Volume 2, Issue 4 September 16, 2011 Fin-0-Menal

Q u o t e U n - Q u o t e

Did You Know? Specified time.

The well-to-do start

In India, teaser home loans were introduced in

January 2009. The initiative which was first

introduced by State Bank of India (SBI) was

soon followed by other banks. Initially home

loan borrowers, fearing the rates to increase in

the near future, found the concept of teaser

loans very attractive as they would have to pay

low interest in the initial phase, but they

seemed to ignore the fact that after comple-

tion of the honeymoon period, when the bor-

rowers will start repayment at the floating rate,

the shift in the EMI will be huge, resulting in

disruption in their financial planning. The

same results in increased default payments

affecting the asset quality and profitability of

the banks. However teaser loans had some

advantages at the first place:

With low rates of interest initially, teaser

loans made home loans affordable for

new borrowers.

It served as an advantage to borrowers,

especially if there was likelihood for the

rates to move up shortly.

RBIs Concern

RBI was smart enough to soon anticipate the

consequences. They knew well if interest rates

go up after the initial period (first one to three

years where interest rate charged is much less

than market rates and fixed also), higher EMIs

may become a burden to the borrowers. Such

situations may force borrowers to default on

repayments. Large scale defaults may even

lead to a ‗sub-prime' kind of crisis.

Keeping the above points in context, the Re-

serve Bank of India has expressed its concern

that in case the floating rates shoot up, bor-

The N.A. after the

name of a bank indi-

cates it‘s a national

bank, it stands for

―National Association.‖

It means that the bank

is chartered by the Of-

fice of the Comptroller

of the Currency.

(As on September 16, 2011) International Markets this week

US Dow Jones

11509

London LSE

5368

Japan Nikkei 225

8864

HongKong Hang Seng

19455

Q u i c k

Q u o t e :

The only thing

money gives you

is the freedom of

not worrying

about money.

bility and penal interests for prepayment and balance transfers.

The main issue arising in a teaser loan versus a regular home

loan is that no clarity is available to borrowers, on the subsequent

interest rates after the initial fixed rate years. It is only after the

initial tenure, that borrowers get the actual lenders reference

rates and an understanding of the effective cost of the loan. With

RBIs stringent move, we could probably hope for more transparen-

cy and prudence from lenders offering such loans. (Contributed by

Partha Pratim, MBA, 1st Year)

P a g e 4

Volume 2, Issue 4 September 16, 2011 Fin-0-Menal

instead of the ear l ier Pr ime Lending Rate.

This system is transparent and has no arbitrariness to borrowers.

Understand your lenders base rate system, as the interest rate

after 2 years would be benchmarked according to this.

Work out your Home Loan affordability by analyzing your finan-

cials before loan disbursement. EMIs are subject to prevailing

market conditions after the initial years. So ensure you are able

to factor in for times when the rates shoot up. Check for personal

factors such as a salary rise or promotion.

Ask your lender about prepayment clauses. Check for the flexi-

C a n w e c a l l t h e m C r e d u l o u s R a t i n g A g e n c i e s ?

$1.2 trillion in assets. The political gridlock in Washington with a

backdrop of the slow economic growth in U.S. resulted in the

worst week for markets since the recession in 2008. The S&P

stock index plunged 10.8% with bourses fearing that a double

dip recession was knocking at the door. The US Treasury and the

White House downplayed the allegations and in a furious assault

blasted S&P‘s misleading calculations and breath taking refusal

to change its mind. The Treasury Officials unearthed an

erroneous calculation amounting to 2.1 trillion US dollars, which

they perceived was enough to see the US retain the elusive AAA

status. Warren Buffet looked who

holds around USD 40 billion in US

treasuries said that the downgrade

―does not make sense, it doesn‘t at

hand is a perfect example attempt

me to sell‖. Eventually Deven Shar-

ma stepped down.

The issue emphasising the impact

ratings can have. Ratings can make

or break a nation. The fact that no

one questioned the rating agencies

prior to the 2008 crisis is testimony

to the fact that we cannot do away

with them. Their methods and mod-

els are time tested and were not

under scrutiny, until recently. With the amount of information

today and the fluctuations of the market, the ratings have to be

the first step before taking any decision, but they have to be

scrutinized and the trends have to be observed. Rating agencies

employ some of the brightest minds in the corporate world and

have invested huge amounts of money to gain expertise in their

domains. So replacing them is out of the context, the primary

objective should be to ensure that they work effectively. Steps

like bringing in more transparency into the process and adopting

professional standards in rating a firm are the need of the hour.

The CRAs should be more accountable, this can be probably

done by setting up a central body which regulates and rates the

functioning of these rating agencies. The ones with poor ratings

should be held accountable. An additional feature, wherein each

regulatory body is allowed to reduce the reliance on these rat-

ings for the institution it regulates, can be incorporated. It is also

important for the modern day investor to learn that one should

not blindly follow the ratings instead review the ratings and con-

stantly question those ratings throughout the life of the bond.

After all, courage consists in not blindly overlooking danger, but

in seeing it and conquering it. (Contributed by Balajee Rao, MBA,

1st Year)

It can be blatantly claimed that Credit rating Agencies (CRAs)

have played a vital role in assisting institutions take financial

decisions, for the past couple of decades. Institutions and indi-

viduals across the globe rely on the CRAs for extensive research

and guidance to take an investment decision. The reputation of

the company in primary and secondary markets, the investors it

attracts and the ease with which credit is available to it, largely

depends on its ratings by the CRAs. Although the agencies pro-

vide critical information, the failure to predict major occurrences

such as the Mexican crisis and the sub-prime crisis of 2008, has

raised serious concerns and doubts. Hence

it is critical that major financial institutions

complement their reliance on bond rating

agencies by adhering to internal assess-

ment and research, and reviewing the rat-

ings over the entire life of a bond.

Major players on a global scale are Moody‘s,

Fitch and the very famous Standard and

Poor‘s. Each institute has different models

to evaluate the credit worthiness of a com-

pany/country which directly affects the rate

which the issuing firm will offer to purchas-

ers of the bond. The ratings not only affect

the investor but also the company by chang-

ing the cost of borrowing that the company

wants to leverage. Such an action by the issuing firm raises the

cost of capital and the interest expense of the company, result-

ing in lower profitability. Marketability of bonds, the ability to

borrow and repay capital, and the ability to issue stock are some

of the ingredients of the psychological aspect of how a company

is looked upon. No wonder a downgrade in the ratings of a coun-

try like the U.S - the economic powerhouse of the world, has had

unbearable repercussions across borders. It was an unprece-

dented blow that took the country to the brink of default. Let us

take a closer look.

―The downgrade reflects our opinion that the fiscal consolidation

plan that the Congress and the Administration recently agreed

to, falls short of what, in our view, would be necessary to stabi-

lize the government‘s medium-term debt dynamics‖, said Deven

Sharma of S&P.

Sources within S&P stated that the U.S. is headed for another

downgrade in the coming year and the credit rating outlook is

―negative‖. "The global system must now adjust to the many

implications and uncertainties of the once-unthinkable loss of

America's AAA," said Mohamed El-Erian, co-chief investment

officer at Pacific Investment Management Co which oversees

collection, dis-

bursement and

other processing

charges. This en-

sures a lower cost.

Gold ETF in India :

Assets of gold ETF

has grown three-

fold in August as

compared to what

it did in the same

period last year.

We can clearly see

that the gold ETF

has been a safe option for the investors for the past 2 year or so.

The following graph depicts the turnover of the 11 gold ETF‘s cur-

rently in India. The Gold BeeS ETF from Benchmark Funds has the

lowest expense ratio of 1%. The lower the expenses – the better it

is because it leaves more on the table for investors.

Expenses alone are not enough for classifying because one

wants one‘s investment to be liquid, and need the fund to have

good volumes too.

Gold ETF Volumes in India :

As you can see from the image – Gold BeeS, which has the lowest

expenses also has the highest volume, and by a large margin too.

Conclusion:

For long, gold has been synony-

mous with status and wealth. Nowa-

days people buy gold as a protection

against uncertainties in government

policies and protection from their

own currency. With the rising gold

prices globally, investors have bene-

fited off late by investing in Gold

ETF‘s. (Contributed by Kunal Verma,

MBA, 1st Year)

P a g e 5

Volume 2, Issue 4 September 16, 2011 Fin-0-Menal

What is gold ETF?

Gold backed Exchange Traded Funds are essentially the securi-

ties that are designed accurately to measure and track the gold

price. In gold ETF, gold is the main and the only commodity that

is traded. It is very different from the general practice of buying

and selling gold. Gold ETF is similar to trades of other commodi-

ties and resources except that the shares "reflect" the price of

gold. Gold is stored by the Gold ETF in the form of ‗400 oz‘ Lon-

don Good Delivery bars.

Advantages of gold ETF:

No risk of holding physical stock

Low tracking error

Affordable

High Liquidity

Lower Cost

The first point can be attributed to the fact that GETFs are issued

in demat form.

Affordable:-GETFs are ideal for small retain investors as they can

buy just a single

unit from the ex-

change. High Li-

quidity because

GETFs can be

easily bought /

sold like any other

stock on the ex-

change during

market hours at

real-time prices as

opposed to end of

day prices.

As they are listed

on the exchange,

costs of distribu-

tion are much

lower. Further,

exchange traded

mechanism helps

reduce minimal

R o l e o f B h a r a t I n I n d i a

nearly at par with that of urban India.

Higher consumption also means larger distribution channels. Big

names like Marico, HUL, Parle Products, Dabur India, Coca Cola,

PepsiCo, Nestle and Capital Foods are not only trying to build

strong distribution networks, but they are also trying to come up

with new products specifically for the Bharat-segment. Some

companies are trying to tap the niche segment within the rural

segment by pushing consumers to pay a premium, while, some

others are pushing the consumers for a trade-up. Some other

companies, on the other hand, are pushing the consumers to

shift from unbranded to branded products.

With such major FMCG giants trying out different tactics to gain a

large market-share, it only means one thing. The divide is narrow-

ing. And as such, we can hope that Bharat soon becomes a part

of the modern Indian success story. (Contributed by Dhiru

Rabha, MBA, 2nd Year)

After the liberalization of trade restrictions, India has come a

long way today for its economy to be regarded as a modern suc-

cess story. India, stimulated by the power of youth, higher educa-

tion and rapid globalization, today boasts of one of the highest

purchasing power parities as well as the 10th largest nominal

GDPs in the world. As modern India is chanting the hymn of pro-

gress, there lies a great disparity within. It is the great Indian

divide, an India versus a Bharat, an urban against a rural. Bharat

- that part of rural India where the impact of world trade and

globalization is still awaited to be seen, where house-hold con-

sumption is still very low, where education is just a part and not

a way of life. Or, is it really so? The FMCG companies have a

different story to tell. These companies are now coming up with

more and more innovative marketing strategies to capture this

segment. Market research shows that the consumption of soaps,

shampoos, washing powder, hair-oil and biscuits in rural areas is

G O L D E T F : A N E M E R G I N G T R E N D