Investing where? Gold or silver?

It is really important for an investor to first understand the economy and the financial systems prevalent in the market before he decides what to invest in. With the cost of crude oil having increased considerably per barrel, the GOI has also acted by increasing the price of petrol and diesel severely.

Should an investor buy more gold or silver?

Precious metals were the best performing assets for the second consecutive year and also for the fourth time in the last five years. Investors enjoyed a 42% return by investing in precious metals in 2010. Silver performed much better than other precious metals in the market in 2010 with prices rising by an astounding 80% which is two and half times the rise in price of gold (29%).

Along with being deemed a safe investment, the relatively low supply of the metal as compared to the high demand has also contributed to the steady increase in price. In the first two months of 2011, silver's price has increased at a steady 9.3%.

Judging by the present market scenario, investing in precious metals will be a very wise decision. And it will make more sense to invest in silver than in gold….at least now!

Some parameters one should consider before investing in gold or silver?

One of the main reasons investors prefer investing in these two metals is the stability witnessed in the market. Liquefaction is also an easy process for gold or silver bars and coins. However, purity of the mineral is of utmost priority and should be given due importance.

Another important factor governing the decision on whether to invest in gold or silver is the price. Though the variation in the price of gold or silver is not as unpredictable as that of shares and equities, there still is a noticeable difference on a daily basis. But when you are investing a large sum of money then this can make a lot of difference. Hence, one should study the market carefully and invest when the price is relatively low.

Choosing the right vendor is also very important. If carefully observed then the price variations with wholesalers, retailers and commercial banks can be clearly observed. So one should watch out for the purest gold available at a comparatively low price. For a regular investor, it makes sense to invest at regular intervals. This way one can take advantage of the market volatility. Investing in both gold and silver makes sense for a regular investor as he can diversify and can have a steady return irrespective of market fluctuations.

Different forms of investing in gold and silver:-

Bar: One of the most traditional ways, dealing with bars is very simple too.

Coins: This sort of investment depends on the weight of the gold or silver coins.

Accounts: Swiss banks provide a Gold-account option which aids in transactions involving the precious metal.

Gold Exchange Trade Funds: This method helps gold transactions through the stock exchange.

Spread betting: This involves predicting the rise and fall in the price of gold or silver before investing in it.

Investing with mining companies: This is just like investing in the stock exchange. The only difference is that here one deals with shares from mining companies.

When is the right time to sell gold or silver?

With the current financial slump, people are selling their gold and silver as a means to make some extra cash. But with the price of the two precious metals having reached an all-time high, it would probably be wise to hold on to it and see how far the prices soar and then cash in at the opportune moment.

There are two factors that govern the decision of the timing of a transaction involving gold or silver. The value of the US Dollar at that moment and the investor's financial situation. Usually, the price of gold is inversely proportional to that of the US dollar. But most investors don't have pure gold lying around in large quantities. So unless you are investing or speculating on a really large amount of gold or silver, the drop in the US Dollar's value will not matter.

Govt panel to curb black money

 The government today set up a committee that will examine ways to tighten laws to curb black money.

The panel, which has been asked to submit its report within six months, will be headed by Sudhir Chandra, the chairman of the Central Board of Direct Taxes. The committee will study ways to prevent the transfer of black money abroad, besides recovering such assets.

A report of the Swiss Banking Association allegedly claimed that Indians were among the biggest depositors of black money in Switzerland’s banks. Recently, Wikileaks head Julian Assange had said Indians figured prominently among those having secret accounts in Swiss banks.

India’s black money abroad is believed to be more than its total foreign exchange reserves. A study conducted three years ago by Global Financial Integrity estimated that black money worth $27.3 billion was sucked out of India every year.

The committee will work out a system which will plug the loopholes that help to generate black money. It is likely to suggest measures such as declaring wealth generated illegally as national assets, enacting or amending laws to allow confiscation and recovery of such assets and providing for exemplary punishment against the perpetrators.

Revenue officials said the new measures being considered could verify from where the money actually came from without scaring off genuine investors.

Mauritius ranks first among all countries in FDI inflows to India with cumulative investments amounting to $34 billion, or 44 per cent of the total FDI flows.

Earlier too, the government had tried to get black money back through amnesty schemes. The last such scheme was attempted by P. Chidambaram when he was the finance minister in the H.D. Deve Gowda government.

Chidambaram had announced a voluntary disclosure of income scheme (VDIS) in the Union budget for 1997. The VDIS — which was operational between June and December 1997 — could raise just $2 billion.

The DSLR controls

I like photography very much. Though, I am not a professional photographer and just a mere zygote in the world of photography which became my biggest problem to choose & control a DSLR of my own. Every camera seems equal to me.

To solve this problem, I started to read almost everything that came in my hand to choose my camera. Here are the summarized materials what I found. Hope this article will be your cup of tea to those who are at dilemma how to choose & control their DSLR.

Lighting

Lighting is the single biggest determinant of how your camera needs to be set.  With only a few exceptions, you can never have too much of it. Use this slider to experiment with different indoor and outdoor lighting conditions.

Distance

Use this slider to simulate how close or far you are in relation to the subject.

Focal length

Moving this slider is the same as zooming in and out with your lens.  A wide, zoomed out setting creates the greatest depth of field (more things are in focus) while zooming in creates a shallower depth-of-field (typically just the subject will be in focus).

Mode

The exposure modes of an SLR let you control one setting while the camera automatically adjusts the others.  In TV (Time value) mode, you to set the shutter speed while the camera sets the aperture/f-stop.  In AV (Aperture value) mode, you set the aperture/f-stop while the camera sets the shutter speed.  M mode is fully manual—you’re on your own!  Refer to the camera’s light meter to help get the proper exposure.  Although every camera has it, there is no “fully automatic” mode here—what’s the fun in that?

ISO

ISO refers to how sensitive the “film” will be to the incoming light when the picture is snapped.  High ISO settings allow for faster shutter speeds in low light but introduce grain into the image.  Low ISO settings produce the cleanest image but require lots of light.  Generally, you will want to use the lowest ISO setting that your lighting will allow.

Aperture

Aperture, or f-stop, refers to how big the hole will be for the light to pass through when the shutter is open and the picture is snapped.  Lower f numbers correspond with larger holes.  The important thing to remember is this: the higher the f number, the more things in front of and behind the subject will be in focus, but the more light you will need.  The lower the f number, the more things in front of and behind the subject will be out of focus, and the less light you will need.

Shutter speed

Shutter speed is how long the shutter needs to be open, allowing light into the camera, to properly expose the image.  Fast shutter speeds allow you to “freeze” the action in a photo, but require lots of light.  Slower shutter speeds allow for shooting with less light but can cause motion blur in the image.

Happy clicking!

Investment in equity market

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed."

-Benjamin Graham, US economist and professional investor

Overlooking Fundamentals

In a haste to make a quick buck from the market, retail investors tend to overlook the fundamentals of the company they're planning to invest in. Some investors buy shares without sparing time to gather the basic information about the company, most importantly the product or service that the company sells and the probable future for that business.

Retail investors get carried away by a management's overoptimistic speeches, tentative expansion plans and are always biased towards short-term play, never wanting to miss the current surge in the price of the stock.

Investors should look at companies that have consistently delivered earnings growth and good corporate governance. Never invest in a firm without understanding the dynamics of the business.

Cheap, yet expensive

A successful investor looks for bargain stocks-the ones which are available for prices lower than their worth and have a strong growth potential. Newbie investors often misinterpret this golden strategy as buying 'cheap' stocks for high percentage gains.

Assume that you can buy a dozen fresh eggs for Rs 36, while rotten eggs are available for only Rs 3 per dozen. If you have Rs 3 in your wallet, will you buy one fresh egg or a dozen rotten ones?

Retail investors look at the share prices of the stocks. They tend to buy cheap stocks, which might not be very valuable.

Returns from your investment in shares do not depend on the number of shares, but the performance of the company. You will have a higher chance of making a profit if you buy just one share of a blue-chip company rather than buying thousands of penny stocks.

Myopic Vision

Retail investors often look for short-term gains. If you want to make a quick profit from stocks, you should have the ability to time the stock market. Stock prices fluctuate wildly over short periods. Your profit or loss depends on your ability to clinch the deal at the right moment. Due to the turbulent nature of stock markets, it is difficult to profit in short time periods.

Retail investors feel left out during phases of a secular bull trend or in times of short-term surges. Retail investors should judge their risk appetite and then take a long-term view. The equity market almost invariably gives a positive return in the long term, in this case a time horizon of at least three or more years will be most prudent.

Also, when you stay invested in a stock for longer than one year, the taxman won't come knocking for his share of the profit. Income from stocks held for more than one year is a long-term capital gain, which does not attract any tax. For investments less than one year, you will have to pay short-term capital gains.

Ignoring a Portfolio

You must have heard stories about investors who bought a company's shares, forgot about them and after a decade or so discovered that they had returned a fortune. While this is an example of how long-term investment is profitable, it's not the best.

If you are among those who think that long-term investment means buying shares at low prices and forgetting about them, you are taking a huge risk. The economic environment and market scenario are very dynamic. Apart from global and local policies and macroeconomic factors, there can also be changes in company strategies or management.

An investor should review his portfolio at regular intervals. If the outlook of a company improves, or at least remains stable, he should buy or hold the stock. When the assumptions under which he bought the shares no longer hold true, it might be time to offload them.

Unwillingness to Book Losses

Investors eagerly cash out small profits on retail investments, but they are often unwilling to book losses on stocks that are sinking. Even when stock prices keep declining, they continue to hold on in the hope that the stock will bounce back and turn profitable sometime. This often results in bigger losses for the investor.

When prices decline, some investors buy more shares in an attempt to reduce the average cost of their stock portfolio. Buying on dips is recommended, but only when the decline is due to a temporary setback and growth prospects remain positive.

Retail investors should stop averaging every second stock unless they have a thorough understanding of the company. They should try to explore of the reasons for its underperformance. Averaging is not a tool to minimize losses but should be treated as a maximization instrument.

When investing in a stock, you should also set a stop-loss instruction for it. When the price of a stock falls to the stop-loss level, the broker will sell them. If you set a stop-loss order at 10% below your purchasing cost, your loss will be limited to 10%.

Entry at Peaks, Exits at Lows

The stock market always overreacts to news, be it while rising or falling. Ideally, the price of a share should be proportional to the total capital and earnings prospects of the company. However, market frenzy results in shares being, generally, overpriced or under priced.

In a bullish market, investors often invest in overpriced shares because everyone else is buying. They become too optimistic and expect stock prices to continue rising. Conversely, in a bearish market, investors become pessimistic and tend to sell shares when they should be buying.

Stock markets tend to take wild decisions in the short run but behave rationally in the long term. Successful investors always base their investment decisions on a shares' intrinsic value and hunt for bargain stocks. They will buy shares of a company with strong fundamentals when it's beaten in the market and sell when prices surge.

Following Tips

Thanks to cheap bulk messages, you might have received a SMS tipping you about a golden opportunity to earn huge profits. If you have acted on any of these tips, you probably have lost some money. If you haven't, you've done well to stay away from such unsolicited mails and messages.

Even solicited tips can do you harm. If you try to find trading tips on the Internet, you will get a large number of websites and blogs that offer you free advice. Don't take the advice on these sites as gospel. It's equally dangerous to buy shares because a friend told you that "its price is going to double in six months. Stock tips by analysts published in newspapers or aired on television should also be subjected to scrutiny.

Always perform due diligence before placing an order with your broker.

Allowing your Broker to Trade

If you just sign the forms on your agent's instructions and allow him to buy and sell shares on your behalf, be ready for a few shocks. Unscrupulous brokers often use this opportunity to misuse clients' money.

Brokers don't get a commission on the profit you earn, but get paid for trade volume. There have been cases of brokers using investor money for intra-day trading without investors' consent. When you get a statement from your brokerage house, you might see your portfolio running losses with a huge amount paid as brokerage.

Perfect plan for child

Becoming a parent may be one of the most glorious feelings in the world, but it doesn't last forever. It's an adventure that needs to be well planned. With tuition fees shooting through the roof, raising a child is not as basic as it used to be. Add to that the aspiration for your child to be the perfect all-rounder-the tennis, music and karate classes-and the costs are likely to burn a fairly large hole in your pocket.

This is where insurance plays a significant role as not only does the market understand these needs, if done the right way, it also ensures you optimize your wealth, secure your child's future and sail through a major part of your parental responsibilities.

As per my knowledge goes around 30% to 40% of the people surveyed wanted to invest in their children. That is because people who traditionally invest in safer options such as fixed deposits and gold tend to ignore the fact that these investments don't come with tax benefits and seldom survive inflation.

It is also found that more than half the people who wanted to invest for their children opted for higher education plans. It is not surprising as, the costs of higher education have risen phenomenally in the past few years.

From IITs and IIMs to private colleges offering diplomas in professional courses and overseas universities, education is no longer affordable. Studies say that the investment in children's plans has grown at twice the speed in the past few years.

While there are many plans such as marriage endowment that parents can choose from, the most sensible and relevant are education based plans. These plans usually offer a money-back policy and include both, the investment and insurance aspects. There are broadly two types of investment plans that parents can opt for.

Unit linked insurance plans

A unit linked insurance plan (ULIP) gives you the option of investing across various schemes such as diversified equity funds, balanced funds and debt funds. The returns in a ULIP depend upon the performance of the fund in the capital market. It is usually the investor who bears the risk in such plans. While investing in a ULIP is a good option, it is not always cheap.

One needs to understand the costs that are involved. Even the amount of money invested is higher than that of a traditional plan. The approximate costs of a children's ULIP is between Rs 20,000 and 30,000 a year. The advantage of investing in ULIPs is that they are regulated by the government. But they are only advisable for people who have a higher propensity to take risks.

ULIPs have certain limitations of how much you can withdraw at what time. The problem parents often face while investing in such plans is that they are unable to predict what their child's future holds. To overcome this challenge, the best way is to take the middle road. Don't keep a conventional three or a five year course in mind. Plan for a course that will last for four years. The maturity benefits will then take care of the goals that you have set for your children. They might even cover costs of post graduation.

Traditional plans

Traditional children's plans, unlike ULIPs, offer money back and endowment policies, which are a safer bet. They are also more basic in nature as they often work as an alternative for bank deposits. But the returns of such policies are relatively low and they do not cover inflation costs as well as ULIPs do.

Traditional plans are best for parents who are not too financially savvy. The risk is far lower as there is no direct investment in the market. There are added advantages to traditional plans as insurance companies also give you the option of bearing the cost of the plan till the date of maturity in case the parent paying the premium dies.

However for parents who don't mind spending their time understanding the pros and cons of all available options, and have the money to spend, the best investment for their children is to build a security basket with investments in different plans such as equities, mutual funds, fixed deposits as well as a ULIP or a traditional plan.

A varied portfolio of this nature comes in handy at a later stage. Like most other investments, children's plans also give you best returns if you start investing early. To me the ideal age to start is by the child's fifth year. Leaving it for later will raise the cost of investment significantly.

Late investment increases costs as the gap between the child's age and college decreases. So you're essentially losing time.

Start planning your child's future and let the joys of parenting take over the stress.

Scrap-and-scrape agenda - New CM needs to axe an order and then raise resources

If Mamata Banerjee wants to spend on anything other than salaries, pension and reimbursements after stepping into Writers’ Buildings on Friday, she will have to pass an order overruling one the Buddhadeb Bhattacharjee government had issued on April 6. Amid the financial crisis, the state government had passed the order — signed by joint secretary (finance) A.K. Chakraborty — as part of austerity measures that had banned clearing of funds except for payment of salaries, wages, honoraria, stipends, office phone and electricity bills and medical reimbursements till June 30 this year. “I don’t know if a new government can run with such restrictions,” wondered a senior state government official. “One of the first things that Mamata will have to do once she comes to Writers’ is issue an order overruling the present one on financial embargo.” While she can revoke the order in one stroke, marshalling the resources to keep the government running will be easier said than done. Back-of-the-envelope calculations reveal that the state government will require around Rs 4,100 crore over the next 45 days — including Rs 3,000 crore as salaries and pensions for the month of May — but it has a reserve of only around Rs 1,198 crore. Mamata will have a tough time borrowing from the markets as the state has already borrowed over 50 per cent of its annual ceiling of Rs 15,390.64 crore in the first month, leaving only Rs 8148.64 crore for the next 11 months. It has also hit the ceiling of Rs 1,494 crore in ways and means advances from the Reserve Bank of India. Every year, the RBI stipulates the amount the states can borrow from the apex bank to tackle mismatches in its earnings and expenditure. “Revenue collection from taxes, excise and other duties, the primary source of revenue for the government, is yet to take off as it is only halfway through the first quarter of the ongoing financial year,” a senior finance department official said. With the other borrowing avenues drying up, the only option left for Mamata is to seek a bailout package from the Centre to tide over the crisis. “We have heard that the new chief minister has already spoken to the Union finance minister about this. Let’s see what deal she gets from the Centre,” an official said. Unless Mamata manages to get some funds, it will not be possible for her to deliver on her primary promise — sushashon or good governance. The state government has 24 departments and while preparing the budget, the finance minister allocates funds for each of these wings. Although outgoing finance minister Asim Dasgupta had earmarked funds for these departments, the delivery of services was suffering because of the austerity measures that began around seven months before the April 6 order was passed. Finance department insiders told The Telegraph that senior officials had been making phone calls to treasury officers in state government offices across Bengal since last September, delivering instructions to rein in expenses. All this while, the government kept borrowing to pay salaries. “The Left Front government had become almost non-functional in the last two years and they could afford to pass such absurd orders. But Mamata will have to deliver on so many promises,” said a senior PWD official. The government’s cash crunch has hit the PWD and its projects as it has over Rs 390 crore pending from the finance department and several of its projects are stuck midway. “Departments like panchayat, municipal affairs, urban development and backward classes welfare need over Rs 500 crore within the next 30-45 days for carrying on with pending work,” a finance department official said. As the plan for reviving Bengal — reeling under a debt burden of Rs 2 lakh crore — will not be launched before an actual assessment of the fiscal position of the state, the finance department officials are working overtime to prepare a status report for Mamata. Finance secretary C.M. Bachhawat has been holding regular meetings with secretaries and other officials of the 24 departments at the Writers’ in a “stocktaking exercise”. “Bachhawat is trying to prepare an exhaustive status report so that the new cabinet knows what it has to deal with at the very start,” said an official from the backward classes welfare department. The department needs around Rs 65 crore for paying scholarships to underprivileged tribal students in districts like Bankura, Purulia, West and East Midnapore, Birbhum, Murshidabad and Jalpaiguri. Courtesy- The Telegraph, Kolkata, 19/05/2011

Savings bank rate hike have a diverse impact

The recent 50-basis-point increase in the savings bank rate to 4 per cent will hit Punjab National Bank — India’s second largest state-owned bank — and the country’s largest commercial bank, the State Bank of India, the hardest.

The savings bank (SB) rate hike will hurt these banks most as they have the highest proportion of savings bank deposits vis-a-vis their total deposits, thereby raising their costs and impacting their margins.

It is estimated that PNB’s margins could be crimped by as much as 13 basis points, while the SBI could take a hit of 12 basis points.

The share of savings bank deposits in the total deposits of PNB, based on data for 2009-10, is 31.2 per cent and that of SBI is around 32 per cent. Both these banks have a very high share of low-cost current and savings bank accounts (CASA).

Other banks that could suffer include United Bank of India (13 basis points), Dena Bank (12 basis points) and Allahabad Bank (12 basis points).

A report put out by the brokerage today, titled “Savings Bank Deregulation - Back to Basics’’, which also analyzed the impact of a possible deregulation of the only administered interest rate in the banking industry, said the SBI group as a whole would suffer a 10-basis-point hit on margins.

It is known that Every 50 basis point savings bank rate hike (all else remaining constant), negatively impacts margins by around 8 basis points. The PSU banks generally get more impacted because of their higher exposure to savings bank accounts compared to larger private bank peers.

.The study shows IDBI Bank and Yes Bank will be least affected by the hike since their proportion of savings bank deposits are low. But this also means that these two banks could potentially emerge as the biggest rate warriors if the Reserve Bank of India decides to deregulate savings bank interest rates any time soon. The RBI had floated a discussion paper on the subject recently.

IDBI Bank, which had a low CASA ratio of 14.6 per cent in 2009-10, has of late been aggressive on the liabilities (deposit-taking) front. It has announced various steps to boost deposits. Last year, the bank removed various charges applicable to SB and current account holders.

On the other hand, Yes Bank has welcomed any move to deregulate the savings bank rate.

New arrangement in LIC management

The government today appointed Rakesh Singh, additional secretary in the department of financial services, as the acting chairman of the Life Insurance Corporation, while demoting incumbent T.S. Vijayan to the post of managing director.

The move follows the cash-for-loans scam, which engulfed LIC’s housing finance arm in November. This is for the first time that any LIC chairman has been asked to work as the managing director.

Vijayan has been LIC’s chairman since 2006. He was eligible for an extension till his superannuation age of 60 in 2013, but the government decided to appoint a bureaucrat as an interim head.

His demotion comes within weeks of the finance ministry setting up a committee under former RBI deputy governor Vepa Kamesam to probe the investments made by the LIC in the last three years.

The committee is expected to make recommendations on the governance standards and investment guidelines of the country’s largest financial institution. The LIC manages assets of about Rs 12 lakh crore.

The CBI had arrested LIC Housing CEO R.R. Nair and several others for allegedly sanctioning loans after taking bribes.

Singh, a 1978 IAS batch officer, will be in charge for three months or till the time a full-time chairman is appointed, sources said.

Priority to repo rate

The Reserve Bank of India has decided to make the repo rate the centerpiece of its monetary policy even as it raised the key benchmark rate by a higher-than-expected 50 basis points to 7.25 per cent as part of an aggressive inflation-busting strategy.

Governor Duvvuri Subbarao seemed to abandon the earlier nuanced position of carefully balancing the compulsions of quelling raging inflation through rate increases with the imperatives of accelerating the pace of growth in the world’s second-fastest economy.

The task of bringing down inflation should take precedence “even at the cost of some growth in the short term”, the RBI said in its latest monetary policy statement.

“The objective is to bring down inflation to somewhere between 4 per cent and 4.5 per cent. In the medium term, we would like to take it down to 3 per cent,” he said.

The RBI governor forecast a GDP growth of 8 per cent for this fiscal with inflation projected at 6 per cent with an upside bias.

The 8 per cent GDP forecast casts doubts on the government’s projections of 9 per cent this year. Moreover, the 8 per cent growth forecast assumes a normal monsoon and global crude oil prices at $110 a barrel.

The sharp 50-basis-point increase in the repo rate seemed to catch bankers and the markets off guard. “If you are referring to 25 basis points as a baby step, then yes, this is no longer a baby step,” Subbarao said in response to a question raised at a press conference later in the day.

The mandarins of Mint Road showed unexpected alacrity in overhauling the monetary policy template by picking up several elements from the report of a working group headed by RBI executive director Deepak Mohanty that was submitted less than 50 days ago.

Governor Subbarao accepted the Mohanty panel’s suggestion that the repo should be the only rate-signalling device of the monetary policy.

“The transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance,” the RBI said.

It also decided to fix the reverse repo rate at 100 basis points below the repo at 6.25 per cent. This makes the repo the only variable rate in the monetary policy. The reverse repo will move in tandem with it and will always rule 100 basis points below it.

The spread between the repo and reverse repo narrowed to 100 basis points on September 16 last year from 125 basis points earlier.

The Mohanty panel — which was set up in September to suggest ways to overhaul the process of monetary policy formulation — had recommended that the moribund bank rate should be reactivated as a discount rate and could form the “upper bound in the rate corridor”.

The bank rate has been stuck at 6 per cent since March 2004.

The Mohanty committee had suggested a rate corridor of 150 basis points with the bank rate ruling 50 basis points higher than the repo.

The RBI widened the corridor to 200 basis points by creating a new marginal standing facility (MSF). This will give banks a new window from which they can borrow overnight funds up to 1 per cent of their net demand and time liabilities. The Mohanty panel had suggested something very similar and had called it an exceptional standing facility.

The MSF rate has been fixed at 100 basis points above the repo rate at 8.25 per cent.

Subbarao said there were some problems with refashioning the bank rate as a discount rate.

“There are legal problems and some other interest rates are linked to the bank rate. One option is to resolve the legal issues and delink the interest rates,” he added. “The bank rate will stay for now and later we will link it to something else.”

The central bank also said the weighted average overnight call money rate would be the operating target of the monetary policy. This rate currently hovers at 6.44 per cent.

Tighter provisioning

The biggest beef for bankers was over the sudden decision to tighten provisioning norms for certain categories of advances. Last December, the banks were advised to achieve a provisioning coverage ratio of 70 per cent — which had upset banks such as the SBI.

The RBI has now said that advances classified as sub-standard assets will attract a provision of 15 per cent against 10 per cent earlier. The unsecured exposure of a sub-standard asset will attract an additional provision of 10 per cent. This means the total exposure on these assets will rise to 25 per cent from 20 per cent earlier.

Advances in the doubtful category up to one year will attract a provision of 25 per cent (20 per cent earlier).

The secured portion of advances which have been in the doubtful category for more than one year and up to three years will attract a provision of 40 per cent against 30 per cent earlier.

Restructured accounts classified as standard advances will attract a provision of 2 per cent in the first two years from the date of the restructuring.

The first-quarter monetary policy review is scheduled on July 26. 

Mutual Funds brace for outflow

Mutual funds may have to take a hit of around Rs 35,000-40,000 crore over the next six months.

The Reserve Bank has restricted banks from investing more than 10 per cent of their net worth as at the end of the previous financial year in the liquid/money market funds of mutual funds.

Banks that have investments over and above this cap are allowed to bring them down to the prescribed limit in the next six months.

At the end of March 2011, liquid/money market schemes of mutual funds had Rs 73,666 crore of assets under management.

Clearly, banks are going to pull their investments out of liquid funds over the next six months which could lead to an outflow of Rs 35,000-40,000 crore from liquid funds.

In my opinion banks have investments in almost all mutual funds and, therefore, most funds will suffer from this directive of the RBI. However, since banks comprise only a part of the institutional business of asset management companies, the effect of the outflow will be only partial and we would like to compensate this by getting in more corporate clients, NBFCs and insurance companies.

In the monetary policy announcement, the RBI governor said this measure was taken “to prevent systematic risk in times of liquidity crunch”.

Such a crisis had emerged in September-October 2008 after the sub-prime crisis came to light and Lehman Brothers fell in the US. There was a massive redemption pressure on mutual funds, and they had to stop payment to investors because of liquidity constraints. Banks were directed to extend additional liquidity support to mutual funds to help them handle the crisis.

Subsequently, market regulator Sebi revised the valuation norms for debt securities held by mutual funds, and from July 1, 2010 it had been mandatory for funds to mark to market (traded value) debt and money market securities with residual maturity of 91 days.

Following this, the debt schemes, particularly the short-term ones, became volatile in terms of NAV. This change in valuation norms also witnessed a large outflow of investment by institutional investors from liquid and ultra-liquid schemes. AUM of liquid funds, which stood at Rs 73,666 crore as at the end of March 2011, was Rs 78,094 crore at the end of March last year and Rs 90,594 at the end of March 2009.