finxpress march 09 2014
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In Focus: Ukraine Crisis Opinion: India Mired in Global economy Term: CARTRANSCRIPT
March 09, 2014
Volume 33
Bidding Goodbye Times
This week brings with itself the mixed feelings of both happiness and
sadness. On one hand, the seniors excelled well bidding us all goodbye
in flying colors greeted by Cyrus Mistry as the Chief Guest for the
convocation ceremony. The excitement prevails among the juniors as
their one year of this eventful journey is about to end all have their
collars straightened up for the summer internship. Club FinNiche
wishes good luck to all the seniors for a successful journey ahead and
also to all their batch mates for their final exams and there after
summers.
We bring to you this week Finxpress covering the latest happenings of
the financial world and keep us all updated and informative. In this
edition we bring to you economic repercussions of the crisis in
Ukraine as our In Focus topic followed by our opinion section on India
mired in the global economy. This edition of FinXpress also brings to
you some insights on ‘Capital Adequacy Ratio’ as the term of the week.
We hope you enjoy reading the articles in this edition of FinXpress. We
look forward to your acknowledgements and any suggestions for
improvements are most welcome.
Happy Reading!!
Regards
Team FinNiche
From The Editorial FinXpress Volume 33
March 9, 2014
FinXpress
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
FinNiche
MARCH 2014 PAGE 1
CONTENTS
From The Editorial
In Focus: Ukraine
Crisis
Opinion: India mired
in Global Economy
Term of The Week:
Capital Adequacy
Ratio
Market This Week
News
Fun Corner
PAGE 2
IN FOCUS
Ukraine's political system looks "weak, fractured, highly personal and ideologically vacuous while the judiciary and media fail to hold politicians to account" (Dr. Taras Kuzio in 2009). Ukrainian politics has been categorised as "over-centralised" which is seen as both a legacy of the Soviet system and caused by a fear of separatism. It has a population of 44.6 million, 77.8% of which are locals. In November 2013, the government suspended preparations for signing a Free Trade Agreement with the European Union, to seek closer economic relations with Russia and accepting a $15 billion "bailout" from them. Russia also offered Ukraine cheaper gas prices. The EU also required major changes to the regulations and laws in the Ukraine. The locals of western Ukraine started a wave of ongoing demonstrations, civil unrest and revolution in Ukraine on the night of 21 November 2013 while demanding closer European integration. The protests had been fuelled by the perception of widespread violation of human rights and the corrupt government. To some, it's now about ousting President Yanukovych and his corrupt government; taking Ukraine away from its 2 century long, deeply intertwined and painful ties with Russia. It is standing up for basic human rights to protest, to speak and think freely and to act peacefully without the threat of punishment. For some, the cardinal reason for this unrest is rather structural-Demographics and an identity crisis. Ukraine has been divided by a national identity crisis since its 1991 independence. Partly this divide is demographic, but it has much more to do with figuring out what kind of country Ukraine wants to be. Ukrainians doesn’t believe that disagreement has shaped their politics, which includes this current crisis. Every presidential election divides the nation into two halves. One who supports the pro- Russian candidate and the other who supports a pro-European candidate.
Yanukovych is from the east and Russian is his native language. When he was elected in 2010, it was largely by people in the more Russian-speaking region. So Yanukovych's decision against the E.U. deal did have a base of popular support, among eastern Ukrainians who had voted him into office. So, it was a democratic decision, even if it was poorly executed. But it badly fuelled the national identity crisis. On Monday 17 February, Russia announced it would release another $2 billion of its 17 December 2013 agreed loan of $15 billion to the Ukrainian government,
which. There has been constant pressure by Russian authorities on the Ukrainian administration to take decisive action to crush protests. On March 1, Russia's parliament approved a request from President Vladimir Putin to deploy Russian troops in Ukraine. The ongoing protests in Ukraine underline a tendency which has been becoming more and more salient during the last years. If we talk about Russia, this kind of hesitation does not have place in the current Russian discourse. The Kremlin has demonstrated a growing potential of possible instruments of influencing Ukrainian foreign policy course. Even when the current crisis ends, it may not have actually resolved the deeper issue. This problem predated Yanukovych and his crackdown and it will still be there when he leaves, something that only Ukrainians can resolve as a nation.
FinNiche
Ukraine Crises By Nupur Gupta
MARCH 2014
OPINION
Indian banks, corporate and financial
institutions have been tapping and will tap
the global financial markets for fund-
raising activities. But we can say that these
attempts have not always been successful
and the investors have had their share
ruinous counterpunches that spooked the
Indian markets, especially in January
2014.
Sadly the year 2014 has started on a victim
mode for most markets after a stretch of
glorious rallies in 2013. These success
stories seem to have been hit by a series of
bad news from across the globe. The
financial markets across the world are
either a victim or a darling of the financial
dynamism. As the Indian banking sector
turns negative, the interplay of such bad
news and public dispensation has provided
a dangerous mix of virulence.
Considering the various external factors we
can see how the Indian markets have been
hit and what lessons should be learnt from
these incidents.
The global financial events had a
catastrophic impact on international
financial market. Firstly, the news form the
emerging markets of currency crisis in
Latin America that sat a fall of al most 20%
in peso Argentina saw a series of events in
its economy like recession, hyperinflation,
prosperity and economic crisis. The story of
Argentina is an apt example of how an
economy rises from rags to riches and vice-
versa.
Secondly the emergent meeting that the
central bank of turkey had on Jan 28 ended
with a massive 450 bps hike in the rate.
Thirdly, in china with its financial crisis,
rapid private sector growth and diminishing
working population raises state of
confusion. The news from china about the
suspension of cash transfers by domestic
commercial banks during the heightened
fears of banking sector meltdown affected
the global financial market.
It was followed by Russian rouble sliding to
a five year low and central European
countries such as Poland and Hungary
being affected, the impact was also felt in
the Indian stock market, with banking
sector losing 860 points. Suggesting that
international bad news always had a
impact on Indian financial markets,
compared to other news.
Since June 2013, emerging market debt
and equity fund had combined outflows of
$9.1 billion with $6.4 billion of equities
being withdraws from emerging markets,
while $2.7 billion of debt made up of the
largest debt-fund outflow. At the domestic
level the announcement of monetary policy
by the RBI also had an impact, as opposite
to market expectations RBI raised the repo
rate by 25 bps.
It was clear that emerging economies like
India were mired in a negative feedback
loop of weak currencies, higher interest
rates, weak growth and capital outflows.
Notwithstanding the negative impact, the
banking sector in India has a more healthy
mix of debt-equity and is more closely
aligned to the real sector. The level of
leverage of Indian banks also reflects a
comfortable tier-I capital position, modest
growth in overall banking assets.
To conclude, it can be said that asset
quality is intrinsically linked to economic
turnaround, which is an exogenous factor
and acts only as an enabling mechanism in
benefitting the bank from the upswings in
its business cycle. The lessons that can be
learnt are that Indian financial institutions
planning to tap the international markets
have to love with volatility. Also, to bring
back retail participation in financial
markets, support for the stock markets
should be encouraged.
FinNiche
India Mired in Global Economy
MARCH 2014
—— By Anureen Bhatti
PAGE 3
PAGE 4
FINANCIAL KNOWLEDGE
Capital Adequacy Ratio is a term which was
recently in vogue in most Indian financial
journals and newspapers, after the
declaration of dismal Q3 results by the
United Bank of India. It declared a
staggering loss of Rs. 1238 crore for the Oct
-Dec quarter, more than double the loss
declared in the previous quarter. As a result
its Capital Adequacy Ratio stood at 9.01%,
calculated under Basel 3 norms, just over
the minimum of 9% mandated by the RBI.
Also, its tier 1 capital fell below the
minimum mandated requirement of 6%,
forcing the bank to suspend indefinitely, its
lending activities.
So, what exactly are these ratios and why is
it necessary for banks to maintain a certain
minimum level of capital? Capital Adequacy
Ratio (CAR) is calculated as the ratio of a
bank’s capital to its risk weighted assets.
The central banks of most countries require
commercial banks to maintain a minimum
CAR to allow these banks to absorb a
certain amount of losses without becoming
insolvent. This concern can be explained in
a simplified manner using the leverage ratio
(total assets/equity) of a bank. Like we all
learnt in our Macroeconomics course, a
bank having an asset base of 1000 dollars
with a leverage ratio of 20 would only have
$50 of owner’s equity and the rest of the
liabilities would consist of deposits and
debt. In such a case a mere 5% fall in the
value of its assets due to loans turning to
NPAs or some other reason would
completely erode the owner’s equity and
any further fall in the value of its asset
would lead to a fear that depositors or other
lenders might not get fully repaid and might
create a bank run in the absence of deposit
insurance.
CAR is a more sophisticated tool than debt/
equity ratio for judging the adequacy of a
bank’s capital as it takes into account the
risk factor involved with various asset
classes possessed by a bank. CAR = (Tier 1
Capital + Tier 2 Capital)/Risk Weighted
Assets. Two types of capital viz. tier 1 and
tier 2 are used to calculate the CAR. Tier 1
capital represents the extent of losses a
bank can bear without having to stop its
trading activities whereas tier 2 capital
represents the capital which bears losses
only in the event of the bank winding up
and hence provides a lower degree of
protection for depositors and creditors. Tier
1 capital generally consists of common
stock and the retained earnings (disclosed
reserves) of a bank. Tier 2 capital generally
consists of general loss reserves, non
disclosed reserves, hybrid instruments that
have characteristics of equity as well as
debt and subordinated debt which is debt
that ranks lower than the normal deposits
in the bank.
The central banks of countries usually have
some discretion over how different financial
instruments can be used to fulfill tier 1 and
tier 2 capital requirements. Risk weighted
assets are calculated by assigning weights
to different asset classes based on the
amount of the risk they carry. For example,
govt debt, held in the form of T- bonds are
usually allotted a weight of 0 (0%) whereas
loans to individual customers not backed
by mortgages are usually allotted a weight
of 1 (100%).
The implementation of capital adequacy
requirements by the RBI according to the
recommendations of the Basel 3 accord
must be lauded as it has already led to the
identification of a bank under stress and as
a result adequate measures can now be
taken to rectify the situation.
FinNiche
Capital Adequacy Ratio
MARCH 2014
PAGE 5
FINANCIAL KNOWLEDGE FinNiche
Market This Week
An excellent week for the benchmark indices which closed at a record high as FIIs
continue to infuse Dollars into the system. Market also reacted positively to the
speculation of formation of a stable government in the centre. The Nifty gained 4%
this week to close at 6526.65 while Sensex gained 3.8% to close at 21919.79
points. The rupee has appreciated against the US dollar on the back of strong FII
inflows. The partially convertible rupee was at 61.08, up 2 paise, after hitting 3-
month high in trade on Friday.
SENSEX Simple Moving Averages
BSE SENSEX
CNX Nifty
Thirty Days 20,698.54
Fifty Days 20,839.57
Hundred Fifty Days 20,311.55
Two Hundred Days 20,115.16
MARCH 2014
PAGE 6
FINANCIAL KNOWLEDGE FinNiche
Bank Rate 9.00%
Repo Rate 8.00%
Reverse Repo Rate 7.00%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 23%
INR / 1 USD 61.07
INR / 1 Euro 84.76
INR / 100 Jap. YEN 59.14
INR / 1 Pound Sterling 102.12
Commodity Unit Rs / Unit % Change
Gold 10 grams 30130 (0.26)
Silver 1 Kg 46205 (2.14)
Crude Oil 1 bbl 6305 2.97
Base Rate 10.00%-10.25%
Savings Deposit Rate 4.0%
Term Deposit Rate 8.00%-9.10%
Nifty Simple Moving Averages
Commodities
Lending / Deposit Rates
Thirty Days 6148.81
Fifty Days 6193.87
Hundred Fifty Days 6028.02
Two Hundred Days 5992.35
Key Policy Rates and Reserve Ratios
Exchange Rates
MARCH 2014
PAGE 7
FINANCIAL KNOWLEDGE
M&A deals: CCI to offer help in
'substantiative' issue
To make compliance process easier for
c o m p a n i e s , t h e C o m p e t i t i o n
Commission of India (CCI) plans to
provide assistance in “substantiative”
matters pertaining to mergers and
acquisitions. Companies entering into
combinat ions or mergers and
acquisitions (M&A) have to seek
approval of the CCI, which has the
mandate to keep a tab on unfair trade
practices at the market place. At
present, companies can avail facility of
informal and verbal consultation with
the staff of CCI prior to the filing of
notice to a proposed combination.
However, such interactions are now
restricted to procedural aspects.
Forex reserves rise USD 954.6 mn to
USD 294.3 bn
The country's foreign exchange reserves
rose by USD 954.6 million to USD
294.36 billion on account of gains in the
value of gold reserves. In the previous
reporting week, the reserves had dipped
by USD 383.7 million to USD 293.41
billion . After remaining unchanged for
multiple weeks, the gold reserves surged
by USD 902.3 million to USD 20.978
billion for the week ended February 28.
Foreign currency assets (FCAs), a major
part of the overall reserves, increased by
USD 33.6 million to USD 266.90 billion
for the week ended February 28. The
special drawing rights also rose by USD
13 million to USD 4.468 billion, while
the country's reserve position with the
IMF increased by a USD 5.7 million to
USD 2.011 billion.
Privacy groups ask US FTC to halt
Facebook-WhatsApp deal
Privacy groups have approached the US
Federal Trade Commission (FTC) to put
on hold Facebook's USD 19 billion
acquisition of WhatsApp and investigate
how the social media giant plans to use
subscriber data. The groups claimed
that Facebook "routinely makes use of
user information for advertising
purposes and has made clear that it
intends to incorporate the data of
WhatsApp users into the user profiling
business model."
SBI to raise Rs 800-1,200cr by
issuing shares to employees
State Bank of India has proposed to
offer share purchase scheme for all its
employees which could raise additional
equity capital, between Rs 800 crore and
Rs 1,200 crore, for the country's largest
lender. Increase in bank's equity capital
would depend on the valuation at which
the bank would offer shares to its
employees.
Inflation target becomes govt's job
after FM, RBI meet
The Reserve Bank of India (RBI) has
agreed to the proposal that the right to
decide on an inflation target for the
economy will become the government’s
mandate and that the central bank
would focus on achieving it. The RBI
currently focuses on balancing between
growth and inflation and a proposed
switch to an inflation focus had raised
concerns within the government that
would growth would be compromised.
Malaysia Airline plane, ‘crashes off
Vietnam’
A Malaysian Airline Boeing 777 has
reportedly crashed into the sea off
Vietnam with 239 people on board.
State media there says the aircraft came
down near Vietnam’s Tho Chu Island.
Contact was lost two hours into the
flight from Kuala Lumpur to Beijing
where relatives faced an agonizing wait
after Flight 370 was shown to be
delayed on the arrivals board. Most of
those travelling on the flight were
Chinese and Malaysian but passengers
were of 14 nationalities.
FinNiche
NEWS
MARCH 2014
PAGE 8
FINANCIAL KNOWLEDGE
Govt tightens gold import baggage
norms for passengers
Seeking to check gold smuggling, the
government tightened baggage rules
requiring inbound Indian passengers to
provide details like source of funds for
importing the metal as well as their air
tickets.
According to a Revenue Department
circular, the baggage receipt issued by
Customs will now include the engraved
serial number on gold bars and item-
wise list of ornaments. The norms have
been tightened following "a spurt in
import" of gold by eligible passengers
through various airports in the recent
past across the country.
Eligible passengers are allowed to be
import gold up to 1 kg by paying 10
percent customs duty in foreign
currency. Eligible passenger means
Persons of Indian Origin or an Indian
returning to India after a period of six
months of stay abroad. The restrictions
have paid desired results as gold
imports fell significantly and also the
CAD, which is expected to be below USD
45 billion this fiscal as against all time
high of USD 88.2 billion in 2012-13.
FIIs mark biggest buy of Indian
shares in 2-1/2 months
Overseas investors bought Indian shares
worth 12.73 billion rupees on Thursday,
to mark their biggest daily purchase
since December 19. They also bought
Indian equity derivatives worth 26.28
billion rupees on Thursday, according to
NSE data. Heavy institutional buying
has helped Indian stocks to overcome
worries including US Federal reserve
tapering, China slowdown and sticky
inflation.
ONGC, Oil India to buy 5% stake each
in IOC at Rs 220/share
The government had in February end
approved a 10 percent stake sale
in Indian Oil Corporation (IOC) to state
run ONGC and Oil India at a discount
of 10 percent at Rs 220 per share.
The IOC scrip was trading at around Rs
258 per share when the news came in.
The stake sale will happen at a
significant discount to current market
price. ONGC will have to shell out a little
more than Rs 2,500 crore. ONGC
already has around 8.77 percent stake
in IOC.
Sebi finds large-scale mismatch in
Sahara papers
Sebi has come across serious anomalies
and a huge number of possibly fictitious
investors after analysing truck loads of
documents submitted by Saharas to
substantiate its claim of over Rs 20,000-
crore refunds.
Sahara group had deposited Rs 5,120
crore with Sebi after court orders. It
claims to have already refunded all but
Rs 2,000 crore in cash directly to
investors. The court had ordered refund
of over Rs 24,000 crore in August 2012.
There are numerous instances of one
person having hundreds of accounts,
one accoun t hav ing mul t i p l e
beneficiaries, one person with multiple
address and one address having tens of
individuals. Besides, there are
thousands of cases where addresses are
untraceable, as also cases having
innocuous addresses like national
highways, and just names of villages,
towns or roads, sources said on
condition of anonymity.
FinNiche
NEWS
MARCH 2014
FinNiche
Fun Corner
FinQuiz
1. Economic historians usually attribute the start of the Great Depression to the
devastating collapse of US stock market prices in 1929. The day is known as
____________.
2. A company had sales of $930,000 and CoGS of $625,000. At the beginning of
the year its Account Receivables were $ 92,000 and inventory was $110,000. At
the end of the year the inventory was $140,000 and Account Receivables were
$98,000. What is the inventory turnover ratio?
3. Infosys announced acquisition of a consulting firm, X, 2 years back. Name X?
4. Where in India is paper for money manufactured?
5. Unusual service offered by Bank of Baroda in Tirupati— ________________
FUN CORNER
PAGE 9
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Volume Publisher: Pragun Aggarwal
MARCH 2014
Last Week Answers
1. Cost of Equity
2. SBI
3. Less than 1
4. European Central Bank
5. Marking to market