Stats Watch ....... Sector wise GDP growth rate Open Forum……. Sports in Dire Need of a Real “Game Changer” Cover Story ....... Banking Licenses - Entry with Riders News …… News on Industry and Emerging Markets In Focus Inflation Hurting Rich Investeurs Chronicles Outlook Coal September 2011, Volume: 27
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ISSUE
VOLUME
Stats Watch .......
Sector wise GDP growth rate
Open Forum…….
Sports in Dire Need of a Real “Game Changer”
Cover Story .......
Banking Licenses - Entry with Riders
News ……
News on Industry and Emerging Markets
In Focus
Inflation Hurting Rich
Investeurs Chronicles
Outlook
Coal
September 2011, Volume: 27
Figure Facts
Forex
Forward Rates against INR as on 9thSeptember , 2011
Spot Rate 1 mth 3 mth 6 mth US 46.58 46.79 47.1 47.45 Euro 64.27 64.55 64.96 65.44 Sterling 74.17 74.49 74.94 75.43 Yen 59.94 60.24 60.69 61.22 Swiss Franc
52.91 53.21 53.66 54.22
Source: Hindu BusinessLine
Libor Rates
Libor % 1 mth 3 mth 6 mth 12 mth
US 0.22 0.33 0.50 0.82 Euro 1.28 1.47 1.68 2.03 Sterling 0.66 0.90 1.19 1.66 Yen 0.14 0.19 0.33 0.55 Swiss Franc 0.02 0.007 0.05 0.29
Forward Cover
1 mth 3 mth 6 mth
US 5.49% 4.53% 3.79% Euro 5.30% 4.35% 3.69% Sterling 5.25% 4.21% 3.44% Yen 6.09% 5.07% 4.33% Swiss Franc 6.90% 5.75% 5.02% as on 9th September, 2011 Source: Hindu BusinessLine
Commodities
Aluminum (1 kg) 108.75
Copper (1 Kg) 419.25
Zinc (1 kg) 101.25
Steel (1000kg) 30800
As on 9th September 2011
Call Rates as on 9thSeptember 2011
6.30% - 8.25%
Gold Silver
27115 27207
28274
61153
66097
Crude Oil ($) Dollar
112.46
114.22
45.8708
46.3843
Data from 29th August to 9th September
Sensex Nifty
16416.33
16866.97
4919.6
5059.45
YEAR
Coal
India produces around 4 million ton coking coal annually and imports around 92
million ton coal annually. Of the total import, around 28 million is coking coal and
the rest 64 million ton is thermal coking coal.
As per The Planning Commission forecast, coal shortage in India will soar to 200
million ton by the end of the 12th Plan (2012-17), with a demand of 1,000 million ton
against production of 800 million ton. Coal imports are rising at a fast pace, already
contributing to over 10% of our coal consumption. Next year, the shortage is
expected to be around 142 million ton with availability of 554 million ton against a
requirement of 696 million ton.
However, demand for Coking coal is likely to come down in the near future, since,
steel industry which happens to be one of the largest customers of coal is struggling
with its inability to pass on any hike in raw material to its client base.
On the global front, demand for coal is projected to take a hit on account of
decreased economic activities around the world and resumption of supplies from
the flood affected Queensland region in Australia.
According to market dynamics, weaker demand will obviously put a pressure on
coking coal suppliers to bring down prices. A correction in price is imminent. It has
gone up from $225 per ton to $330 per ton over a period of six months, up to May
2011. Coking coal prices are expected to decline as logistics issues are sorted
gradually in the Queensland region, bringing respite to steel, cement and power
companies. The market expectation is that coking coal price is likely to depreciate by
$30-$40 per ton but there may be a drop of $10 per ton on thermal coal. A drop in
global commodity prices and softening of crude oil coupled with a sluggish demand
from Japan are likely to have a cooling effect on coal prices.
“Capitalization”
Total amount of the various securities issued by a corporation.
Capitalization may include bonds, debentures, preferred and common
stock, and surplus.
Bonds and debentures are usually carried on the books of the issuing
company in terms of their par or face value. Preferred and common
shares may be carried in terms of par or stated value.
StatsWatch
Outlook -Coal
Gloss
Introduction
The Reserve Bank (RBI), on August 29, came out with draft guidelines for issuing new
banking licenses in the private sector. The guidelines cover a number of issues, including
promoter eligibility, corporate structure, capital requirement, foreign shareholding and the
business model for entities keen to enter the banking sector. It has laid down tough ground
rules for issuing new banking licenses, making it clear that it would be looking to cherry
pick industrial houses with squeaky clean reputations, diversified ownership, and with
little or no exposure to the real estate and broking businesses.
Once RBI receives the applications, these would be screened to ensure the eligibility
criteria are met. At the same time, the central bank would impose additional conditions to
determine the suitability of the applications. Further, those wanting to set up a bank will
have to first establish a wholly owned Non-Operative Holding Company, which will hold
the bank as well as all other financial services companies. This has been done to “ring
fence’’ the regulated financial services activities of the group, including the new bank, from
the other activities of the promoter group.
After screening the applicants, the applications would be sent to a high-level advisory
committee comprising eminent personalities from both within and outside the financial
sector. Though the advisory committee would submit its recommendations to RBI for
consideration, it is the banking regulator which would take the final call.
To ensure transparency, names of all the applicants would be put up on the RBI website.
The bank would have to be set up within a year of granting the in-principle approval. RBI
would reserve the right to withdraw the in-principle approval if there is any evidence of
self-dealing.
Cover Story
Banking Licenses - Entry with Riders
History
What prompted the RBI and government to consider issuing banking licenses to the private sector? The idea was first mooted in the 2010 -11 Budget Speech by Finance
Minister, which said that the objective was to expand the geographical coverage of banks and access to banking services.
In 1951, when India embarked on the process of planned development, there were 566 private commercial banks, many of which had their origins in industrial houses.
India's industrial houses have in the past run banks, or worked in close association with banks. These banks, however, concentrated their operations in urban areas and
largely catered to the upper sections of the society. No wonder then that RBI in its discussion paper on ‘Entry of New Banks in the Private Sector', has emphasized
promotion of financial inclusion as the objective for granting new licenses.
Detailed guidelines
Though most of the guidelines are on the expected lines, the big surprise was the decision to put broking outfits on the negative list along with real estate barons. RBI
believes that certain activities such as real estate and dealings in capital market, particularly broking activities, were riskier and represent a business model and culture
which are misaligned with a banking model. A number of non-banking finance companies — which have been salivating at the prospect of turning into full-fledged banks —
may find their chances of grabbing one of the licenses at stake scampered by this provision since they all have broking arms.
But that wasn’t the only surprise. The draft guidelines also said promoters or groups with diversified ownership would be eligible to promote banks. However, the
RBI did not explain what it meant by diversified ownership.
Assuming that the margin for FI business is currently zero and equal split in FI and
other business and a conservative 200 basis points margin for other business, the
overall margin for a new bank will be approximately 100/120 basis points. Hence,
business viability of such a model seems to be challenged, at least on papers!
Another seemingly uphill task is two-year compulsory listing clause for aspirants
(while listing is not mandatory for the existing players), along with minimum 12%
capital adequacy requirement for a bank in its first three years of operations against
9% CAR for existing banks. These obligations will drive up cost of funds, and thus cost
of lending.
Add operating costs and technology investments above obligations and end result is
higher time taken by banks to break even. Another aspect is the source and cost of
funds, the new banks will face multiple challenges in sourcing low-cost deposits
and will definitely have a higher cost of funds than the existing public sector and
private banks.
However, entire picture is not gloomy. The technology cost has come down sharply
and these new players will not have any legacy issues like existing banks.
Conclusion
The domestic banking system is dominated by 26 state-run lenders with a 75% share
of total assets, while 21 private banks account for about 20%-22% of assets and the
rest is split among 34 foreign banks. Still, about half of the total 1.2 bn population of
India has no access to banking services, while several corporate houses are keen to set
up banks. Intuitively, then providing them with banking license looks a logical solution.
With these big corporate already providing most of the banking services through their
NBFC subsidiary it may be easier for them to switch gear operationally, but meeting
the shareholding norms, financial inclusion responsibilities and other restrictions on
holding companies exposure may be a stumbling block.
But the real jolter is the provision that entitles the RBI to run a detailed
background check on the applicants with other regulators and enforcement and
investigative agencies such as the income tax department, the CBI or the
Enforcement Directorate. Several industrial houses and top-tier companies have
been sucked into controversial investigations into their commercial transactions,
deals and tax enquiries that have eventually landed in courts. This can become the
biggest litmus test that the banking license hopefuls will need to pass.
Bone of Contention
Industry has welcomed draft guidelines with a cheer, but, there are some
apprehensions associated with the emphasis on financial inclusion in the present
draft. Apparently, draft guidelines put new banks at disadvantageous position as
compared to private banks which got the license earlier, as new banks will have to
model their business so as to address financial inclusion. This will drive up the cost
for new banks, as branches in these regions will take longer to turn profitable.
Also, new banks would have to meet the priority sector targets and sub-targets
which will drive up the cost in the initial stage without supporting revenues. New
banks would also have to open at least one in four branches in rural areas with a
population of no more than 9,999.
This appears as a major bone of contention, given previous experience of Banks
with financial inclusion drive. Banks have been working towards FI for the last five
years or so. As on March 2011, a sample of 19 large andsmall sized domestic banks
had an average of Rs. 600 crorecredit outstanding for FI accounts.More
importantly, of the total FI accounts opened, only 40% were found to be active for
the last one year.Also, given the challenge that domestic banks would have had a
head-start on FI initiatives, reaching the next delta of FI customer would become
that much more difficult for the new banks.
LIC Housing Finance launches teaser home loan
scheme
Mortgage Company LIC Housing Finance joined the
teaser home loan bandwagon by introducing 'New
Advantage 5', under which the interest rate would
remain fixed for the first five years.New Advantage 5 is
offered at fixed interest rates for the first five years
and thereafter at floating rates, LIC Housing Finance
said in a statement. The floating rates will be linked to
the Prime Lending Rate prevailing at the time of the
switch, it said.
Car sales slowdown for second month running
Fewer buyers drove out of showrooms in new cars for
the second successive month in August, following the
central bank's serial intervention aimed at easing
demand in the economy to tame inflation. Production
cuts at two of the bigger carmakers, coupled with high
fuel prices, compounded the challenge for the auto
industry, dragging down car sales 10%, even as two-
wheelers posted a 16% growth.
Maharashtra ends zero cross-subsidy surcharge
regime
Maharashtra’s power sector will undergo a major shift,
as the state power regulator has ordered an end of the
zero cross-subsidy surcharge (CCS) regime introduced
in 2006 for open-access transactions.The Maharashtra
Electricity Regulatory Commission (MERC) said on
Friday that it had levied CCS ranging from Rs 0.21 per
unit to Rs 3.97 per unit for high-tension (HT) consumers
payable to MahaVitaran, Rs 0.26 per unit to Rs 2.79 per
unit payable to RInfra-D and Rs 2.58 per unit to Rs 2.81
per unit for TPC-D.The MahaVitaran had argued that
zero CSS would mean that the subsidized category of
consumers would have to share the burden of loss of
cross-subsidy whenever a consumer — otherwise
providing cross subsidy through tariff — shifts away
from it and opts for open access, which would not be in
the interest of the larger section of the consumers.
UGC lifts ban on Distance PhDs, MPhil courses
The University Grants Commission (UGC) has lifted the
two -year-old ban on distance MPhil and PhD courses.
The move comes after widespread protests by various
universities. Many Open Learning Universities like
IGNOU were protesting the ban on the ground that their
respective laws, passed by Parliament or legislatures,
allowed them to offer such courses.
CAG Report: RIL notified KGD6 discoveries without
details, Air India has accumulated debt of Rs
38,000 crore
Fresh trouble seems to be brewing for the UPA
government, as the Comptroller and Auditor General
(CAG) tabled two more high-profile audit reports that
could bring attention back to political corruption and
misdeeds at the highest levels.In its report on RIL's KGD6
contract, the CAG stated that the company notified
discoveries without details and declared entire contract
area as discovery area. RIL was found guilty of non-
relinquishment of area.
RBI clears Enam-Axis Bank deal
The Reserve Bank of India has approved Axis Bank’s
revised plan to acquire the broking and investment
banking businesses of Enam Securities. This ends nearly
10 months of uncertainty over the deal.The terms of the
earlier proposal were revised following the central bank’s
discomfort with the structure of the deal that entailed
Axis Bank offering shares to Enam, while the acquisition
was done by a subsidiary. While the details of the revised
structure were not known, the sources said it would
remain an all-stock deal.
Emerging Markets
Russia : Gazprom Opens Pipeline to Sakhalin
Prime Minister Vladimir Putin on 8th September opened
a multibillion-dollar pipeline that could potentially boost
natural gas exports from Russia to Asia, including through
reclusive North Korea.The Gazprom pipeline takes gas
from the Pacific island of Sakhalin to the mainland port
of Vladivostok. From there it could travel to Japan, China
and South Korea as the project develops. Initially, there
will only be enough gas for domestic needs, and it will
encourage new businesses to appear because energy
plants will dramatically increase the use of the fuel
and generate cheaper electricity, Putin said.
Indonesia: BI to oblige forex savings in local banks
Bank Indonesia (BI) is set to issue a new regulation later
this month obliging the savings of foreign exchange from
exports and foreign loans - either that of public or private
institutions - in domestic banks. It could help strengthen
Indonesia’s foreign currency liquidity, which has been
hitherto depending on “hot money”.As an impact of the
new regulation, domestic banks would need banking
products that could manage the funds.
Philippines: BSP keeps policy settings after prices
eased
THE BangkoSentralngPilipinas (BSP) has decided to hold
onto existing policy rates and reserve requirement ratio
amid benign inflationary pressures. In a briefing, BSP Gov.
AmandoTetangco Jr. said the policy-making Monetary
Board decided to keep the overnight borrowing and
lending rates at 4.50 percent and 6.50 percent, and the
reserve requirement ratio at 21 percent.
At the same time, inflation expectations would remain
firmly anchored given moderating commodity prices and
the recent string of stable inflation rates, the central bank
chief said.
Malaysia: July IPI down 0.6% on-yr as oil, gas
output shrink
Malaysia’s industrial production index (IPI) decline in July
2011, from a year ago and also from June, as oil and gas
production output shrank. The Statistics Department said
on Sept 9 the IPI in July eased 0.6% from a year ago. The
IPI in June was revised positive 1.3% year-on-year.
South Africa: Slower growth boosts case for
rate cut
South Africa’s economy grew at its slowest pace in
almost two years in the second quarter as the
manufacturing and mining sectors slumped after
strikes, boosting the case for interest rate cuts while
denting the government’s job-creation hopes.
The slowdown will make it even harder for the
legions of the country’s unemployed - more than a
million have lost their jobs since 2009 - to find work,
likely keeping the unemployment rate above 25%.
Brazil Outperformed by Other BRIC Nations
Brazil has been outperformed by the other three
BRIC countries, figures for the second quarter of
2011 have revealed. From the traditional BRIC
(Brazil, Russia, India, China) group of emerging
global economies, Brazil grew the least, following
poor results from the country’s industrial and
agricultural sectors. Although China and India
traditionally lead the group, Russia’s economy has
been buoyed by higher commodity prices in recent
months, due partly to higher oil prices, leaving Brazil
trailing in fourth place.
Sports in Dire Need of a Real “Game Changer”
In the aftermath of the recent anti-corruption surge, an important bill that is in
the works, the Sports Development Bill, is simply not getting the attention it
deserves. This bill has everything to do with corruption and the unholy nexus
between politics and big business. Interestingly this time around, the crusader
who is on a war-footing to fix sports administration in the country is Union
Minister of Sports, Ajay Maken. His opposition is the who-is-who of the
country’s business and political elite. SharadPawar sits atop the biggest money-
spinning sport in Indian history -- cricket. His party colleague, Praful Patel,
heads the football federation. The MCA is headed by VilasraoDeshmukh, while
the RCA is headed by Transport Minister, C.P. Joshi. The opposition parties are
equally represented in this racket. ArunJaitley of the BJP heads the DCA,
NarendraModi heads GCA, Farooq Abdullah heads the JKCA, LaluYadav heads
the BCA, then there is Manohar Joshi and Rajiv Shukla, among others, who play
dual roles as politicians and cricket administrators.
Next, all the business houses in the country have a piece of the cricketing action
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