The Financial Bulletin July 2014 edition

1 THE FINANCIAL BULLETIN | JULY 2014 | moneymattersclub.weebly.com


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FROM THE EDITOR

Dear Readers,

It gives me the immense pleasure to come up

with the July 2014 issue successfully. We are

happy to announce the winner of “Article of the

Month” award , Saurabh Hasija from IIM Ranchi

for his outstanding write up on “Hedging:

Necessity or Futility?”

This issue reflects the Upside of the Downside

Economy at the time when Mr. Modi has become

the new Prime Minister of India. Whole world

gaze at the sky for the miracle to happen under

his leadership. The rising price of onions seems to

be like a glue to the economy, which brings tears

in eyes even without cutting it. This issue also

focuses on the Bitcoins asking can it be a

currency for future.

Last week, at the Brics, a New Development Bank

call the Brics bank was approved. This issue

highlights what it is.

Happy reading!!!

Saurav Kumar Singh

Newsletter Coordinator

mailto:[email protected]

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Hedging: Necessity or Futility? By Saurabh Hasija, IIM Ranchi

When I was a kid my father shared with me a newspaper

article on investment. The article contained all the

mathematics showing the amount of investment required

for earning a certain pension some few years later,

adjusted for the projected inflation. This cumbersome

mathematics was nothing else but a retirement plan. At

the time I was too young to understand this, but now I

really understand how important it is to plan for the

future. But in these volatile times, securing only for the

future with just a retirement plan will not suffice. Hence,

we see a new cumbersome mathematics gaining

momentum, and that is hedging.

Hedging in a way is similar to a retirement plan; it is all

about protecting your future position by a shrewd

investment. Hedging is a technique designed to reduce or

eliminate financial risk. While Barron’s law dictionary

defines ‘hedging’ as a concept that involves offsetting a

risk position, Britannica says that it is about reducing the

risk of loss caused by price fluctuation. In a nutshell,

hedging is all about determining the risk, evaluating it,

and protecting against it. Retirement is a risk, it is the

time of life when earnings dry up, so saving for retire-

ment today is actually hedging for it.

The big question is whether hedging is important to us?

The answer is definitely yes. If there is a risk, it should

be countered by hedging. Talking of the risks we face,

they are everywhere! Each passing moment is rife with

risk; the computer you are using may overheat and burn,

the chair you are sitting on may break causing a spasm in

the back, your building may collapse due to an

earthquake, your daily metro may derail, your car may

get struck by a drunken driver, or more severely you may

get an electric shock in the bathroom on a wet floor! I

want to terrify you but the reality is that risks are

everywhere!

Some risks can be quantified and some cannot, so this

write-up focuses on quantifiable financial risks. As life

progresses, from childhood to senility, we also

experience adolescence and adulthood. Our priorities

keep changing and so does the money allocated on

them. Sometimes we know where all we need to spend

money and sometimes an event may just occur which

drains us to the pit.

The critical step is to identify these situations (or

technically ‘exposures’) that can put one in jeopardy in

the coming future. The key would be to jot down the

areas where expense is possible in the future, i.e. by

making a list of out of pocket expense activities. For

example: outlay for medical treatment, house repairs,

education, car repairs, household equipment

maintenance, kid’s education, and expense while on

vacations. It’s similar to budgeting for the time ahead.

For some activities cost is certain and known to an

approximate amount, for this risk is minimum or nil.

But for some the cost is not certain and can vary

staggeringly, and therefore risk is also immense. For

making the list, tools such as Microsoft excel, Google

Docs, Calc (openoffice.org), or Zoho sheet would come

in very handy. It should be as exhaustive as possible,

you may take time to ponder and include more

exposures which one may deem necessary. Ideally

budgeting should cover a time span of at least 5 years.

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Next step is highlighting the areas of maximum risk (or

uncertain costs) or the ones which exceed the limit of

your comfort spending (highlight these with red, as it

grabs attention to these areas). This will give an idea

about how much vulnerability (or ‘exposure’) is most

likely to happen. Chances of it occurring may not be cent

percent, but if the event happens you should be either

ready to spend or must have hedged in advance by

paying a premium to cover the likelihood of occurrence.

If the event occurs the only sum to be paid is already paid

in advance, and if it doesn’t the maximum loss is that

paid premium which is a fraction of the amount of the

hazard.

For example, if you want to save for education, the

amount is known with a level of certainty as macroeco-

nomic dynamics like inflation rate may or may not

change much keeping the price in limits. But for an

accident one cannot foretell the costs in advance and

depending on the severity, the costs would vary. The

approximate limits of education expense are known to a

certain confidence level, and hence the risk is also

minimum as compared to the cost for a probable

accident. Risk is about how much the cost would vary, if

uncertainty is more the risk is more and vice versa. If the

risk is more, it does call for attention and involvement of

hedging as you wouldn’t want to end up spending years

of savings on one particular unanticipated event.

After the actionable risks have been identified,

precautionary measures have to be taken. For most

situations, precautionary deals available are insurance,

annual maintenance contracts and investments promising

certain yields in a timeframe. Insurance in most general

terms is a mutually agreed arrangement amongst

members of a community where each one contributes a

little; the sum is used in case of conjuncture of a member.

The presumption is that not all members would be in

distress at the same time. Annual maintenance contracts

reduce the cost of forecasted repairs by promising

certain business to the vendor. Some investment plans

are fixed deposits, recurring deposits, and investment

schemes by Life Corporation of India, and so on.

The key take away is to keep your eyes & mind open

and to think far ahead; if there is a possibility of risk

which can be hedged or protected by incurring minor

price it should be taken, as we all know a stitch in time,

saves nine. Play safe, indulge in hedging!

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Deciphering the Asian Psyche on Investment By Sriram, TAPMI

Asian mindset on investments is by and large risk

aversive. Be it Japanese or Chinese, Pakistani or

Hindustani, We are a breed of our own. We are the

people who wish to save than to invest, for us the aspects

such as the cash in hand or deposits in bank is what we

are really concerned off. Rest all, even investing, we

perceive as ‘Spending’.

We are unique in our own way. We deposit our savings

in banks. We deposit even when the rate of return is low

and even if they charge us for having our money. Why do

people do such an act? It is because of their belief that

“In Banks We Trust – No Matter What …”

It is an acceptable fact that it is better to park our savings

in a place which pays us some interest however meager it

is, considering the safety aspect attached to it than to

make the money rot in the safes of our homes. But the

point to be noted is that everyone knows that banks make

profits from the deposits we make.

How?????

Banks give the depositor a rate of interest which is lesser

than the rate at which they lend to the customer who

borrows from the bank. The difference in this interest is

what the banks earn as profit and we it as the “Net

Interest Rate” in banking terminology.

When we all know that banks make profits from our

money, why not invest in them and become owners of

them rather than to wait patiently for the tenure of the

fixed deposits we have made to mature. We might also

lose on the interest amount when we withdraw the money

prematurely or be fined for having our money when we

have an option to hold the shares of the bank and sell the

stock as it pleases us.

Taking the same point forward, we know bank lends

money to corporates like IBM, Airtel and such big

firms. We also accept that banks make money by

lending to them. Isn’t it logical that they are the firms

which are making profits despite paying the interests

and the principle amount?

So is it not obvious that we make better returns in most

cases when we invest in those companies rather than

save all the money in banks? The answer is known to

all; “Everyone knows it, accepts it but ignores it and

considers it risky”.

We work hard day in and day out, while our money

rests. Shouldn’t it be the other way round! All the rich

and successful people in the world have one thing in

common; they own the firms and/or invest a major

chunk of savings to own them. They may rest but they

do not make their money sit idle.

Explaining it in simple layman’s terms:

It is like having a bag full of seeds; you can either keep

them with you and wait for the price of seeds to rise

without taking into account the concept of time value of

money or you can sow them and reap benefits.

Fruits will only be borne

For the seeds one has sown.

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The Upside of the Downside Economy By Saurabh Aggarwal, TAPMI

As Modi wave sweeps the country, all Indians gaze at the

sky for the miracle to happen. The 1.2billion power

house is infused with a raw confidence. All people are

looking through the window for the ‘Ache Din’ (good

days) to crawl in. The new government seems like a

panacea for the ailing nation.

The year 2013-2014 saw the lowest GDP in nine years.

The great Indian growth story is being questioned. The

downturn of the economy is partly attributed to the global

slowdown and partly to the fallacies of previous

government. Following Figure gives India’s previous

yeas GDP.

Falling GDP, increasing unemployment and evolving

consumer behavior have put people in a tight spot.

Instant gratifications led to an era of buy now and pay

later. Riskier loans and deals were being made. Bad

debts due to credit cards led to another nail in the coffin.

But this shortcut to happiness soon turned into horror of

misery. All came down like a pack of cards. Yes, Global

Recession had hit…and it did hit hard. People soon

realized they had been living beyond their means.

Recession is not new to us. History shows us economies

are cyclical. There is a pattern of recession and recovery.

There is great expansion, then contraction. The bigger

the boom, the bigger is the bust.

As Oscar Wilde said “Experience is simply the name

we give our mistakes.” So there is always something

which we can learn from our mistakes.

Here are five learning’s from the downside economy.

Building a safety net

“The art is not in making money, but in keeping it.”

It is high time to realize that cash is king. The habit of

saving comes inherent to us. It is always advisable to

keep some money for testing times. This not only helps

us to sail through tuff times but also helps us to secure

our future. Safety net becomes all the lot more

important in Indian context as we do not have any

provision of social security like many other countries.

Innovation

“Necessity is the mother of invention,”

-Plato

When the economy moves down, most people shy

away from making any expensive purchases. People are

in constant fear of being out of job or higher taxes

being imposed by the government. Most of the

companies have the daunting task of reducing their cost

and to pass on the benefits to the customer .This makes

products more affordable for consumers to purchase.

All this leads to quest for innovation in the field of

technology. One example is the evolution on Laundro-

mat. Electric washing machines were a great invention

of their times. But the high price kept people away

from buying them. J.F. Cantrell purchased four

electric washing machines and installed them in

the same building. People had to pay per hour to

get their services. This is how Laundromat came

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came into existence.

Startups

“Bad times have a scientific value. These are occasions a

g o o d l e a r n e r w o u l d n o t m i s s . ”

Ralph Waldo Emerson

Most of us will find this difficult to cope but it’s true.

Downturn is one of the best times for startups. Operating

cost is less due to dwindling economy, talent is

abundantly available because of

layoffs and moreover competition

is less as most of the players are

already out of the game. There are

many world renowned companies

which had started during

d owntu rn e g . Mic ro so f t ,

Disney, GE, Intel, Mattel, Colgate

Palmolive etc.

Environment and Health

Benefits

“Earth provides enough to satisfy every man's needs, but

n o t e v e r y m a n ' s g r e e d . ”

― Mahatma Gandhi

This is a time when most of the families redo their budg-

ets. During which they might come up with austere

measures. For example Car Pooling, Reduction in

consumption of electricity, cutting on Fast food/Dining

out, less outings leading to more time with family. These

measures might hurt in the beginning but can be very

useful in the long run. At this stage we cannot afford to

waste unless we are ready to pay for our actions.

Lesson’s for life

“Feel what it's like to truly starve, and I guarantee that

you'll forever think twice before wasting food.”

-Criss Jami

The bad times like good times are transient. These test

our strength and unity. Our work is to learn from them,

as much as we can, and carry the wealth of experience

with us. Hard times make us take tough decisions. They

help us learn to live with less and most

importantly make us realize that we

can’t take things for granted.

On 11 June 2014 sensex closed at

highest ever 25,473.89 points. The

patterns of revival are too prominent to

be ignored. We surely are moving

towards our target. While we move

ahead it becomes imperative to carry

forward the learning’s from the past to

relish the present.

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Veggie Tears... By Abhishek Tripathi, IBS Hyderabad

ONIONS, which is a vegetable which makes us cry in

every form it can. In the kitchen when in raw form or in

the commodity market when it comes down to pricing. It

first made the central government cry way back in the

year 1980.Then it again made us cry in the year 2010 due

to extreme price hike, when the price rose excessively

from Rs35 to Rs88 within a span of 7 days. Once again it

is making us cry this time and it is being termed as

ONION INFLATION. Now when we say inflation ,it in

general terms means that “The rate at which the price

is rising and the purchasing power is falling”. Now if

talking about the reason that why this price pinch is

taking place ,it can be said that the major factor that is

causing this price hike is rain which is affecting the

growth of onions in MAHARASHTRA ,which is one of

the largest producer and supplier of onion and accounts

for 25% of the onion supply alone in India. The other

state which is a huge producer of onion is

KARNATAKA.

MAHARASHTRA is one of those few states which

produces onion thrice a year and out of these three times,

twice the crop has been damaged due to high moisture

content the crops have started rotting up. The other

factors which is affecting the price is that the 6month

stock have nearly exhausted. Now the new stock of

kharif crop that has entered has a lower shelf life and this

has let to increase in price. Another major reason for the

increment in the price is that, a misbalance has

appeared in the demand-supply curve. On an

average basis, India requires 9-10 lakh ton of onion

every month, and what is being supplied is less than

50% of what is being. One of the reason can be stated is

that a change in the food behaviour. People are turning

out to be more health conscious and have started

consuming protein-diet and this has also led to the rise

of price. Now due to this price hike ,the inflation which

is measured in terms of WPI(WHOLESALE PRICE

INDEX) has increased by 6.5%.Again this price hike is

just not limited to the ripened onions but also to the its

inception that means to the seed. Due to the shortage of

onion i the market the cost of the seeds have also risen

from Rs400 per kg to Rs1700 per kg in Maharashtra,

the onion bowl of India and the worst part is that after

buying at such a high price also the quality of the seed

is not that satisfying. Now considering the current

situation what government can do and out these

measures, some them have already been started

implementing. Some of these are that the government

has restricted the export so that the stock can remain in

India. Other than this, importing of onion can be done.

But that can help only to certain extent as only few

producer have the strength of producing surplus in

order to meet the onion need of India. The other thing

that is done is the central government has asked the

state government to control hoarding. We know that

this onion inflation is because of less rain which is the

major cause and it has affected the Indian economy

badly but the government is trying hard and will surely

succeed.

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BITCOINS: A currency for the future or its Just hype?

By Sanket Tondon & Ankit Tiwari, IIFT

INTRODUCTION

The world’s first decentralized currency, Bitcoin, came

into existence in 2009. It was launched by an anonymous

person under the pseudonym Satoshi Nakamoto. Bitcoin

is a peer-to-peer payment system where transactions are

made by digitally exchanging anonymous and complexly

encrypted hash codes. Since Bitcoin mining

uses cryptographic technique to transfer

and regulate the creation of money it is also

called cryptocurrency. There are only 21

million Bitcoins in the world. It is because

the Bitcoin network is so design as to

mathematically generate no more than 21

million Bitcoins at a time. The peer-to-peer network

is also used to monitor and verify the transactions

happening between the users. Each and every transaction

is verified by a digital signature called as

public-encryption key. These users make payments by

broadcasting digitally signed messages within the

network.

Digital wallet is a program which is used to store the

user’s Bitcoin. It also contains each and every address

user receives and sends Bitcoins to and also stores the

security key called as “Private key” which is known only

to the user. Bitcoins are divisible to 8 decimal places and

these Bitcoin fractions are called satoshis.

Bitcoin network is very difficult to crack and as each

user’s identity is made completely anonymous it

is difficult to track and regulate. For all the transactions

that happen within the Bitcoin network a log is created

for all these transactions. The machines which partici-

pate in these transactions communicate to create

and agree on updates to the official log. Roughly every

10 minutes a user who updates the log and

the same is approved by the network is

awarded a fixed number of coins, currently

25. The limit of 21 million Bitcoins is

expected to reach by the year 2140 and after

that the total number of Bitcoins in

circulation will remain the same.

ADVANTAGES OF BITCOINS

All the other currencies in the world are issued by a

central monetary authority. Bitcoins is an independent

virtual currency which is not backed by any central

monetary authority in the world. As Bitcoins are

m a t h e m a t i c a l l y

generated and as the

computers in this peer

-to-peer network

execute difficult

number crunching

task, called as Bitcoin

mining, which is

made progressively

tougher and which ultimately limits the Bitcoin

generation to 21 million. The consequence of this is

that no central bank in the world can mine the Bitcoin

and hence devalue this new currency in circulation.

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Secondly, since no clearing house is required transaction

can be done to peer-to-peer directly which saves the lots

of time as it is transferred instantly and also transaction

fees is much lower than the normal credit/debit online

transfer.

Thirdly Bitcoins is that they can be used in almost all the

countries where seller is ready

to accept Bitcoin.

LIMITATIONS OF BITCOINS

On the surface Bitcoins looks like the currency for the

future. As world economies are integrating and

globalization is becoming more inclusive virtual currency

like Bitcoins looks an attractive option. But there are

many cons attached with using such a currency. Bitcoins

are weak in understanding of how global economics,

policies of central banks and money markets function.

The idea that currency can be computer generated

without the backing of any central bank in a completely

unregulated environment is dangerous for the world

economy and matter-of-fact is economy with such

currency base is not sustainable in the long run as

speculative attack on currency would be too hard to stop

which can be seen now-a-days in the case of Bitcoins

also. At one point in time single Bitcoin was trading over

$1200 and suddenly within a fortnight the value of single

B i t c o i n

fallen to

$ 5 5 0 .

That’s the

more than

50% drop

in a fort-

night!

Also, the secrecy around the ownership of Bitcoins is

creating a lot of problems and it limits the ability to

detect and stop crimes. In the world of Bitcoins the

prices change can be 20% -30% in a day which makes

Bitcoins use as a currency highly debatable. Inflation is

one of the big problems if Bitcoin is used as a currency.

Moreover, such price fluctuations would erode all

profits made by normal retailers as their profit margin

itself is in the range 5%-10% and as Bitcoin is mainly

targeting online retailers it is highly unlikely that seeing

such price variations many retailers in future will agree

to accept the payment through Bitcoins.

Hence, in the world of Bitcoins speculation, uncertainty

and risk would be very high and commerce between the

countries would decline. The buying and selling of

Bitcoins is controlled by very few exchanges in the

world. These exchanges are in places like Bulgaria,

China and Slovenia. Regulation is not rigid in such

markets and even huge price fluctuations are there

across markets.

Because of all these limitations, China who supported

Bitcoins initially has recently took steps, like, China

central bank asked banks to stop accepting Bitcoins as

a means of currency to puncture the rise of Bitcoins.

Backing off from China created huge volatility in the

Bitcoin market and investors lost closed to $6 billion of

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their money. Bitcoins are also totally unsecured. If you

become victim of cybercrime your risk can be covered by

your bank but if Bitcoins are lost who would cover the

risk as Bitcoin owners are anonymous!

CONCLUSION

When Bitcoins first came into light they were termed as

the great innovation since the inception of World Wide

Web as people thought about Bitcoin as a virtual

currency which held a lot of promise. At one point in

time Bitcoins were thought of as it would replace dollar

as world currency and in this globalized world will truly

emerge as a global virtual currency. But since the very

foundation of this thought of global currency was fragile

from the very beginning and after the initial take off

Bitcoin had to take an emergency landing, especially,

after Chinese crackdown. So, in a nutshell disadvantages

and potential risk of using the Bitcoins as a currency far

outweighs their potential advantages.

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Inflation & tools to control inflation

By Meher Utkal

Now days this is common to see people protesting on

middle of the road with some vegetable in their hands

against the sky touching price of vegetables and other

consumable items. This indicates nothing but the in-

crease in inflation and a signal of weak economy. Every

month government of India issues the inflation rate for

the previous month ending, which indicates the overall

increase or decrease on normal consumable items. As a

dilettante after watching all this on television, we al-

ways gets few questions in our mind which has illus-

trated below:

What is Inflation?

Inflation means a sustained increase in the aggregate or

general price level in an economy or the increase in the

cost of living. In a layman language “Inflation means

that your money won’t buy as much today as you could

yesterday”.

Inflation usually hurts your buying power. That is

because rising price means you have to pay more for the

same goods and services.

However if your income

increase at a slower rate than

general inflation, your buy-

ing power decline even if

you are making more. In

general, inflation main

consequence is a subtle

reduction in your standard of

living.

The following chart shows

the trend of inflation in last

10 Years.

What is Purchasing power of Money?

Purchasing power is the number of goods/services

that can be purchased with a unit of currency. For ex-

ample, if you had taken one dollar to a store in the

1950s, you would have been able to buy a greater num-

ber of items than you could today, which indicate that

you would have had a greater Purchasing power in the

1950s. As Adam smith noted, having money gives one

the ability to “Command” others’ labor, so purchasing

power to some extent is power over other people, to

the extent they are willing to trade their labor or goods

for money or currency.

Both Inflation and Purchasing power of money are

interlinked with each other. It is like two side of a coin.

Inflation always indicates a relegate in purchasing

power of money. If there is increase in your income at

a slower rate than general inflation, your buying power

declines even if you are making more.

Inflation has another bad side-effect which is very

common in county like India, suppose once people ex-

pect a inflation, they will start spending now rather

than later. That is because they know things will only

cost more later. This kind of consumer spending heats

up the economy even more, leading to more and more

inflation. This situation is known as spiral inflation

because it spirals out of control. If the inflation

reaches the double digits, it’s known as hyper infla-

tion which is suffered by Germany in the 1920s and

Zimbabwe in the nearer 2000s.

How it can be Control?

Inflation is totally linked with economy of the country

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Annual

inflation

(Year)

Inflation

Rate

2004 13.78%

2005 5.57%

2006 6.53%

2007 5.51%

2008 9.70%

2009 14.97%

2010 9.47%

2011 6.49%

2012 11.17%

2013 9.13%


and influence by a lot of factor. Though it is difficult to

control totally, still it can be guided by using some

monetary tools and techniques. Central Bank Of India

formally known as RBI and Government of India are the

key responsible authorities who uses few techniques such

as “Bank Rate”, ”Export Import Policy” etc. to guide the

inflation. The following are the techniques used by RBI

to guide inflation and keep the economy stable:

Change in Repo Rate

Repo rate or Purchase rate is the rate at which bank

borrow money from Reserve Bank of India for short

period by selling their securities with an agreement to

repurchase it at a future date at predetermine price. To

control inflation RBI normally increase/decrease the

Repo rate. If RBI increase the Repo rate it will affect the

borrowing power of bank and hence bank will also

increase the rate of interest on loans and advances given

by them to common people or corporate. Due to this the

purchasing power of people will decrease.

Change in Reverse Repo Rate

Reverse repo rate is the rate of interest at which the

central bank borrows funds from other banks for a short

duration. The banks deposit their excess funds with RBI

to earn interest on it. On the same way if bank will

decrease/increase the rate of interest it affects the bank

and the same way it affect the purchasing power of

common man.

CRR (Cash Reserve Ratio)

Banks are require to maintain a percentage of their

deposits as cash. The minimum percentage is determine

by the RBI and to make the economy stable it keep

changing the rate time to time.

Apart form the above there are few more techniques

used by RBI to control the inflation. The central

government also uses few techniques to control the

inflation such as:

Change in rate of custom duty.

Change in rate of excise duty.

By encouraging people to use Indian products.

Giving subsidy in manufacturing of certain

product.

Allowing foreign investor to invest in India.

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Corporate debt restructuring mechanism By Debdripta Sengupta, TAPMI

Corporates sometimes find themselves in financial

trouble due to certain internal or external reasons. For the

safety and revival of those corporates, the money lent by

the financial institutions and banks need restructuring at

the correct time. In August 23, 2001 a Corporate Debt

Restructuring System was developed and the related

detailed guidelines were issued by Reserve Bank of

India.

The Corporate Debt Restructuring (CDR) Mechanism is

a voluntary non-statutory system under which banks and

financial institutions jointly participate in the

restructuring process of the debts of companies. This

mechanism is valid for the following cases:

Multiple banking accounts

Syndication or consortium accounts of

several banks and institutions with an

aggregate expose exceeding Rs.100 million

The CDR Empowered Group decides on the acceptabil-

ity and viability of the restructuring program on a case-to

-case basis depending on the following:

Debt service coverage ratio

Return on capital employed

Internal rate of return

Cost of capital

Loan life ratio

The restructuring of the company’s debts and out-

standing obligations can be met by decreasing the debts

of the company or by decreasing the rates of the debt. To

ease the burden, the repayment period of the company is

also increased.

The restructuring package gets approved under the fol-

lowing conditions:

75% of the lenders (by value) and 60% (by number)

have to agree to the proposal

Promoters must infuse 25 per cent of the fresh

loan being sought as fresh capital.

The CDR mechanism can be understood in more

detail with the recent cases of ABG Shipyard and

IVRCL. Both the cases are discussed in brief below:

ABG Shipyard – Attractive due to its short term

loan

In July 2013, the largest CDR package was cleared

for Gammon India, a major construction and

engineering company. Its loan of Rs. 13500-crore was

rescheduled for a period of 10-years by lowering the

interest rate. The second largest CDR in the banking

sector of India happened in 2014 with the private sector

shipbuilder ABG Shipyard. Its loan of Rs. 11000-crore,

lent by a consortium of 22 lenders, got clearance.

Along with this CDR package, it got a fresh working

capital loan of Rs. 1800 crore.

With the ABG Shipyard deal, for the year 2013-14, the

total loan recast has touched a value of Rs. 1 lakh crore,

thereby making the overall CDR of the banking sector

more than Rs. 3.7 lakh crore.

The important features of the ABG Shipyard CDR deal

are:

Effective interest rate lowered to 11 percent from

13.5 percent

Fresh working capital loan of Rs. 1800 crore

2-year moratorium on interest payment

The loan is rescheduled for a period of 8 years

The books of ABG Shipyard shows a total debt of Rs.

11500 crore. Of the total debt, the division of the debts

is as follows:

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Rs. 2000 crore of term loans

Rs. 7700 crore of working capital loans

Rs. 1800 crore of fresh working capital (This loan is

approved by ICICI bank led consortium)

The division of the debt and its different types shows a

positive outlook as it has just Rs. 2000 crore of term

loans against a total debt of Rs. 11500 crore. The lenders

and the respective debt amount are provided.

ICICI Bank – Rs. 2600 crore exposure

SBI – Rs. 1600 crore

IDBI Bank – Rs. 1400 crore

PNB, BoB and Exim Bank – Rs. 700 crore each

The greatest positive for ABG Shipyard is its lesser term

loan compared to most of the other companies having

large long-term debt on their books.

IVRCL – Attractive due to its strong order book

In July 2014, the Hyderabad-based construction and

infrastructure company IVRCL got the nod for debt

restructure package of Rs. 7350 crore. The greatest

takeaway for the company from this approval would be

its relief to resume the implementation of various

projects stalled due to funding issues. The several

features of the CDR package are:

Priority debt of Rs. 175 crore

Cash credit of Rs. 200 crore

Non-fund credit of Rs. 1400 crore

Letter of credit of Rs. 300 crore

Moratorium of 28 months on term loans

Funded interest term loans have an interest rate of

11.25% (dropped from 13%-14%)

Company has been paying to 20 lenders, led by

State Bank of India

CDR pipeline

According to reports, the CDR pipeline is occupied by

the following companies:

1. Surana Industries – a loan of Rs. 900 crore

2. AMW, a Mumbai based truck-maker – a loan of

Rs. 300 crore

Other than these, at least Rs. 20000 crore more loans

are expected to come to CDR cell due to the economic

slowdown.

CDR – Does it help the banks?

According to Chanda Kochhar, MD and CEO of ICICI

bank, CDR mechanism of banks makes a platform

where all the bankers come together and take a collec-

tive decision. The CDR process helps the banks to de-

lay the formation of non-performing assets. However,

according to data in December 2013, the number of

failures in CDR exceeded the number of successes for

the first time in five years. Total 103 cases worth Rs.

24915 crore slipped into NPA category compared to 67

cases worth Rs. 51104 crore, which were moved to

standard category.

RBI has provided recommendations to prevent the mis-

use of CDR processes. From April 2015, after restruc-

turing of the assets, all the restructured assets need to

have a provisioning of 15% as against the current pro-

visioning of 5%.

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BRICS Bank: An Overview By Saurav Kumar Singh, IBS Hyderabad

BRICS:

Brazil

Russia

India

China

South Africa

Name of the Bank: Brics Bank

Headquarter: Shanghai, China

HISTORY:

Till 2010, South Africa was not a part of the BRICS. It

was 2011, South Africa joined this emerging nations

group.

PURPOSE:

Provide multilateral development finance to the

developing economies.

Provide money for infrastructure and sustainable

development projects in Brics, emerging economies

and other developing countries.

Support to countries for public or private projects

through loans, guarantees, equity participation and

other financial instruments.

Global growth and development.

Provide technical assistance for projects to be

supported by the banks.

For all these purposes, the New Development Bank will

have an initial subscribed capital of $50 billion and an

initial authorized capital of $100 billion. Shareholders

and beneficiaries will be the member nations.

Contingent Reserve Arrangement:

A treaty to establish was signed in this summit held last

week. It is an arrangement to make foreign reserves

available to the countries in trouble.

It is not a fund.

It is an agreement with an initial size of $100 billion

currency exchange reserve, in order to protect against

short term balance of payment pressures.

Distribution of Reserves:

China:

Will Contribute $41 billion, but can withdraw only

$20.5 billion.

Brazil, India & Russia:

Will contribute $18 billion each, can withdraw the

same amount they commit.

South Africa:

Will contribute $5 billion, can withdraw twice its

contribution.

The President will be named on a revolving basis and

will have a term of 5 years. The initial presidency will

be held by India., followed by Brazil and Russia.

The first chairperson of the board of governors will be

from Russia, and first chairperson of the board of

directors will be from Brazil.

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The Financial Bulletin July 2014 edition

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Transcript of The Financial Bulletin July 2014 edition