Finalyst @ CBS

FINOSCO- The knowledge journal of FINALYST

noreply@blogger.com (Finalyst) — Tue, 16 Oct 2012 11:04:00 +0000

Dear All

In the quest for excellence team FINALYST has come up with yet another effort. It gives us immense pleasure the launch the knowledge journal of FINALYST, “FINOSCO”. The effort has been taken carrying the same vision of disseminating knowledge in the financial domain and to make the readers aware of the latest in the financial world.

This knowledge journal is the first issue in the series. We thought to make a lot of content a part of this journal, but the limitation of time and space could not let us do so. Being the first issue and a human effort, the journal may contain some errors which have inadvertently crept in. We request for a constructive feedback and also the suggestions to improve upon the effort.

FINOSCO, initially, will be published and circulated in soft copies only, but we plan to take it forward in the form of printed versions also as we mature with the numbers. Followers of the FINALYST Blog will keep getting updates from FINOSCO.

Those willing to have a soft copy may mail your requests.

Regards

Team FINALYST

Microfinance: The sole tool for Rural Economic Independence

noreply@blogger.com (Finalyst) — Mon, 24 Sep 2012 07:51:00 +0000

Introduction

The poor population having their in habitat the rural areas are the ones deprived of the amenities of the modern world the most. The major factor driving them out of the mainstream is the lack of opportunities and the lack of money supply. Such a situation, if compared with an urban habitat seems much easy with the availability of credit almost at your doorstep. To make the same convenience available to the rural population a lot of efforts need to be directed towards the cause. A major step in the direction is the increased growth of microfinance activities in the rural areas. Such activities were initiated to accomplish the petty needs of the rural population specially to aid them financially in the desired cultivation of crops. But, this concept grew far ahead and started helping the rural population in achieving what can be termed as Rural Economic Independence.

Review of Literature

The advent of micro-financing initiative was strongly supported on the developmental aspect. The rural population and those living below the poverty line were to be benefitted highly with the use of small financial support. But, in the later stages the micro financing initiative started to pic up as a profit generating area. Apart from being a profit generating venture, the area of micro finance never lost its sheen to be called as a purely social initiative, at the helm of its purpose.

Some authors applied the pluralism theory to reject the deductivism of orthodox economics and made themselves open to accepting the new ideas. Such open mindedness creates an excellent basis for interdisciplinary development studies.

Micro-finance literature has already established that people of very different persuasions work together, talk together, plan and act together, and learn from each other. This group interaction is to be encouraged, although at the same time one should not give up one’s critical faculties. The notion of schools of thought is a useful one in development studies which enhances our critical faculties while encouraging cross-school bridging communications.

The basic principle governing micro-financing activity is thrift. Money made available at “competitive” rates is lent to collectives of the poor and landless, typically referred to as Self-Help Groups (SHGs) or Thrift groups. In many countries Non-Governmental Organizations (NGOs) manage micro-loans, but in India the banking system itself has also taken on this role. Individually, the members of the self-help groups would not normally be able to access loans at all. These are poor people who could not provide collateral as a guarantee. As a result, the most economically disadvantaged members of developing communities are normally denied access to the finance that they could use to lift themselves out of their poverty.

Also, the politicians have been using the tool for their own selfish motives. There have been frequent examples of Banks being forced to write off debts just before elections to favour the rural population of a particular area. And this leads to a different perspective on micro financing domain. Loans are taken out in the expectation that in due course politicians will compel banks to write off some of the debts. Government at state or national level will prevent the banks from exercising their collateral guarantees. In such a situation, from the lenders’ perspective, the lower costs and risks of lending to groups can be sufficient to justify making collateral-free loans.

Micro-finance therefore provides a way for banks to lend small sums of capital to the poor and landless people, thus enabling them to participate in economic activities that would otherwise be denied to them. In doing so, the more disadvantaged members of society are enabled to engage in entrepreneurial activities, increasing their own incomes to reduce poverty while at the same time loosening their dependence on traditional money-lenders; the poor therefore are empowered to escape from exploitative business relationships.

The increasing weightage of micro-finance in the Indian scenario can not be solely attributed to the policy and regulatory pressures or the willingness of the interested parties to take the loan and then not to repay the same. It also comprises of a thematic approach of the financial institutions to explore this developing market to generate returns from this social initiative.

Whatever may be the reason the development of the micro-finance domain is surely going to make a mark on the development status of the rural population and will contribute towards the progress in that way.

But how should the money be channelized? What could be the important areas of fund generation and dissemination? And, how should a schematic development of economy be brought about as far as a rural parts of the country are concerned?

Statement of Problem

“Microfinance: The sole tool for Rural Economic Independence”.

This study is primarily concentrated on the study of the use of micro-finance as a tool for rural development and bringing the rural class at par with the mainstream of the economy of the country.

Rationale of the Study

The rationale of the study can be enumerated as:

· Micro-finance has not yet been taken as a tool to support the rural development but only to cater to their petty needs.

· The development of micro-finance can only be brought about with the initiative of the already developed urban economy to bring the rural economy at par with it in terms of all the facilities.

· The rural economy should also be made self sustainable in the economic terms as an independent economic unit.

Objective of Study

The objective of the study is to ascertain and establish the importance of micro-finance as an important tool for rural development. Also, to achieve economic independence for rural India as a unit the importance of micro-finance can not be undermined. The study will also concentrate on the quantum and methodology of the micro-finance initiatives to achieve the desired goals.

Also, the importance of various segments in the society, financial and social institutions, will also be studied and analyzed.

Methodology

The study is an exploratory research and various constituents of the area will be explored and studied for their relative and combined importance. The major areas will be explored on the basis of the research already done and primarily on the basis of the latest events that have a bearing on the topic of research.

Study and Analysis

The basic theme of micro-finance was to provide the masses with an easy tool to generate the financial resources at the time of need. The amounts involved in these cases are mostly very small. And that’s why may be, it is termed as micro-finance.

The basic principle for financing such needs was not an external financing activity. The finance or the amount, in this case, was to be generated only through the co-operative efforts of the local self group. Such efforts, to be achieved through thrift or co-operation, were the basis of the micro-financing activities. Also, the very important reason why micro-finance was brought into existence was the urgent petty needs of the rural public and the unnecessary exploitation by the local money lenders of such people.

Through the activity of micro-finance, a local group of people was formed which was managing the flow of the money to the needy on a case to case basis. Such an SHG or a Self Help Group was formed by the members from amongst the community or area only to be associated with the activity of financing needs. For this credit to be availed, the person only has to be the member of the group. The membership criterion gives the member a sense of belongingness to the group. Since the members belong to the same closed community, the need for documentation is subsided and the finance can be given without much of the formalities as in the case of a formal credit or loan.

In the case of a loan taken from a bank, there are certain criteria that need to be followed. The norms are called KYC norms or Know Your Customer norms. These norms ascertain the genuineness of the person applying for the loan and establish the validity and eligibility of the loan seeker. The typical process followed for the credit placement is to estimate the worth of a person on the basis of various C’s of credit namely capacity, character, capital, etc. After the estimation of the credit worthiness of the applicant, the credit is allotted to him. But this process involves a lot of documentation. And such documentation is worth only in case a considerable sum of money is involved. Also, the time lag in compiling all the information, assessing it, and then completing the legal formalities is quite elongated because of the processes adopted.

In the case of rural financing solutions, the establishment of genuineness is done at the onset only, by the member of SHG fulfilling the criteria to be a member of the group. Also, the requirements like processing fees, legal documentation etc. are done away with in this case, as the person is already well known to the whole group and is not required to re-affirm his identity. Also, the identification is not needed as the chances of a fake identity are minimal. With these requirements reduced in a closed system and also supplementing to the needs of a less educated crowd, micro-finance is the only solution.

Also, a small amount of finance, that the micro-finance is facilitating, can not afford to have the legal requirements to such an extent that they become more than the worth of the finance itself. With the reduced procedural requirements, and the shortened time for processing of credit, micro-finance provides the most feasible alternative for the rural population to approach.

With the population of Rural India getting more and more aligned with the mainstream, the tendency to develop using the latest means of production is also growing. A number of surveys show that with the uninterrupted supply of electricity in the rural areas and the connectivity with the urban areas have been the important reasons for the increased sale of luxury products in the villages. Now its not uncommon to see at least Refrigerators and Television sets in most of the houses in villages. This development has raised a number of avenues for the rural population to progress and earn as per their capability.

Micro-Finance provides the masses with a tool to satisfy their petty financial needs for which they are ready to pay a premium. Also, a lot of things that were not though of earlier are being considered as an option to grow and to earn money. Our study is primarily concentrated on the application of Micro-Finance in the rural domain.

It is the primary concern of any of the Governments to attain a state of economic independence. Such a state is expected to be achieved in both the rural and urban spheres. Till now in our country, the urban development has been substantial and the economy of the urban areas is now in a self sustained mode. The Government intervention is required only in case of administration and distribution of resources. The sources of finance are freely available to all those who are capable and willing to afford it.

But, in case of rural economy, the sources of finance are limited and a large share of the rural finance comes from the unorganized sources. The poor villager has to go asking for finance even in case of small needs like funds for sowing of seeds, and funds for transporting his produce to the nearest market. Such a situation makes the villager go for small borrowings which in turn becomes a habit and a source of consistent losses too.

Micro-finance operations work as stated above, by the formulation of various Self Help Groups, it organizes the community into one place and bring them on the same common platform. Thus the assessment of a need based demand is done and the money is provided to the neediest of the persons. Also, this requires funding, which comes either from the small savings of the community members or is funded by some external source. Most of it is funded from external sources now. The returns in the area of micro-finance are huge, and considering a petty amount they accumulate to a pile in percentage terms.

A number of Banks and Financial Organizations are now concentrating on the financial avenues in the field of micro-finance because of the sheer revenue streams. Although there is a huge potential for the same in the Indian market, but at the same time the risk involved is also high. But, even after the consideration of the risk, the financial institutions are keen on investing into the field keeping the huge returns in mind.

The funds for the same directs through the NGO’s and SHG’s to the needy. As the Banks and Financial Institutions don’t have a direct say in the rural market, the funds are first given to the mentioned organizations which then direct the fund to the respective class based on a mutual perspective. The assets based lending is done by the Banks and financial institutions to cater to the needs based on a specified set of directives. Such directives are issued by the regulators like RBI and the Finance Ministry and some refinement is also done by the respective fund providers.

The requirement for finance in the rural domain is huge attached with a considerable margin. The margins are not the only factors driving the funds to the area. The margins are also backed by a strong requirement of finance in the rural domain and a Government support to do so. The requirement of micro-finance is there in every stream. Be it the sowing of seeds, or the requirement for irrigation, or the assistance for selling of produce to even the marriage of a child for which the loan is taken and the same can be repaid later. All such requirements constitute the routine life of a person residing in a rural area. Such requirements clubbed for most of the residents at different times generates a huge float for the micro-finance to be allocated.

These factors give a very positive feeling about the magnitude of the micro finance requirement in the Indian economy. As per a recent survey, the requirement of micro-finance in the Indian market may reach upto 3.5 lac crores by the year 2015. And the market is catered upto the extent of 27% only. Such figures give a huge boost to the ventures into the micro-finance markets. The penetration in the field will give a big push to the development of the structured market in the area.

There could have been only one constraint in the provision for micro-finance, and that is source of fund. But with the increased number of Banks and Financial Institutions seeking interest into the area and with an increased pace and vigor, the constraint seems to have become an opportunity. The reason for the same is not just social service. The returns involved are huge and the institutions want to tap the same. The returns range from 16 to 24 percent and the risk as compared to the same is less. This has enticed the financial institutions to enter into the field of micro-finance.

The Government has made it a point to carry the rural India to the mainstream of the country. For the same purpose, Priority Sector Lending has been given has been given a substantial weightage in the credit portfolio of the lending institutions. It is only with building the rural economy a boon and bringing it to the mainstream that development can be brought about.

The primary factor driving the development of the urban economy has been the development of the financial sector and the free availability of the credit for various purposes. The masses or an individual don’t have to look towards the state for development. One can avail credit at competent and reasonable rates without any state intervention. Also, the credit is freely available for the business. We could not have expected to build and maintain huge shopping malls and theme amusement parks. The concentration of the state was solely on the infrastructure development and the private sector cam forward with the plans of development of business and society. This later developed into a self sustained model where the state’s responsibility was limited to the development & maintenance of infrastructure and law & order. The state confined itself to the role of a regulator in the rest of the areas as the private sector took over the developmental pace. This state is hereby being called Economic Independence.

For the rural areas a similar model needs to be developed and followed. But the primary concern is the availability of credit for a self-sustained development without much intervention from the state. The development can be brought about by funding the sustenance and developmental needs of the rural population like:

1. Short Term funding required at various times for farming

2. Funds required for meeting the social needs at various times

3. Requirement of funds at the time of emergency

4. Requirement of funds for development purpose or starting a new venture

If these requirements for funds and other such requirements, that do not require a huge amount, can be fulfilled, the rural economy can be driven purely on a self-sustained basis just like urban economy.

The basic feature that the system of providing micro-finance is lacking is the standardization of process and guidelines. This is the biggest roadblock that is preventing the institutions from getting into a full throttle for the purpose. Lack of standardization creates uncertainty and this is the main reason for the risk involved in the venture.

If there are some standardized processes and set of guidelines provided for the disbursement of micro credit, such as the feasible and reasonable counterparts of the KYC and AML norms and of course the repayment capability estimation i.e. financial underwriting, the uncertainty will surely reduce giving more confidence to the investors for parking funds with confidence. With these systems in place, it is expected that more and more institutions will be inclined towards investment in the area of rural micro financing.

Once the model of micro-finance in the rural areas is up and running, a lot of problems of the Government regarding the funding of the petty needs of small farmers shall go. Also, the rural economy will start developing at its own pace with a self-sustained model of finance in place.

One more important advantage of the model can be discussed. The rural population may also avail credit for the purpose of starting a new venture. Like in the case of female members, that do not have much to do during the day while the male members of the family are out to work, they can pick up some occupation like sewing, knitting or other such work as craft, that can bring them some money while they work and also become a regular secondary source of earning. Such ventures require equipment and tools that are not so expensive but are unaffordable by most of the poor people residing in the rural areas. Such type of financial assistance can be provided to the population requiring the same and then self-sustenance can be talked about.

Financing the small needs of the rural population will surely go a long way in building a robust model of a self-contained and self-sustained rural economy.

So far, a lot of efforts have been made by the Government for the development and connection of the rural economy with the mainstream of the country, but the efforts lacked a base that could make the economy stand on its own feet. It is not only micro-financing activity, but a lot of other such efforts taken jointly, that will drive the rural economy in a self-sustained mode. Yes for achieving the state of Rural Economic Independence, a strong financial system supported by a deep rooted need driven funding is required, but that comes as the next phase of the vision. Right now the tool that can be applied to achieve the desired state is Micro-Finance.

A state of Rural Economic Independence can be said to be a state in which all the systems and needs are fulfilled on a self-sustained basis and is a system that is functioning totally on its own without any Government intervention. The phenomenon can be said to have the following characteristics:

1. The financial needs are fulfilled by the available sources of credit only

2. There is no intervention needed of any kind (other than regulatory) from the state

3. The demand and supply of funds is in equilibrium

4. In case of an in-equilibrium being reached, the system itself attains a new point of equilibrium and sustains

5. The role of the state is just that of the regulator and no intervention in financial terms is done by the state

When such a state is achieved, the rural economy will also be said to have achieved its independence and the development will actually be attained.

Micro-finance is the sole tool that will lead us to such a state and hence should be promoted and developed by all means as it is a win-win situation for both the private and the public sector.

A true state of Rural Economic Independence will be achieved with a consistent support from the lending institutions which in this case can be routed through micro-finance in the short run.

Suggestions

The following are the suggestions based on the above discussion:

1. A sustainable growth can be achieved through routing of the financial resources for the development of the rural parts equally as the case is with the urban areas

2. The lending institutions have a lucrative opportunity if they provide for an equal diversion of funds to the micro-financing needs of the rural areas

3. Rural Economic Independence can be sought and achieved only through a self-sustainable model of financing the petty needs of the residents in the rural areas

4. Government should look for more subsidy for the institutions going in this area

Future Scope of Study

The study is just an exploratory insight into the scope of micro-financing as a tool for the development of the rural economy and attaining a state of Rural Economic Independence. The area is vast open for further research in the field in the areas of the process and methods in which such lending can be done. Also, the financials and quantum associated with the same can be studied.

Limitations

The study is limited to the the exploration of the areas in which Micro-Finance can be used as a tool and specifically its use as a tool for the development of economic independence at rural level. No study has been done for the quantum and financials involved in the area.

Being SMART in Financial Terms

noreply@blogger.com (Finalyst) — Thu, 22 Sep 2011 03:48:00 +0000

We all have financial goals - even if we don't really think of them as goals per se.
For example, you might want to buy a new cell phone, or a new car. You might want to take a family vacation next year, or renovate your home.
Some people prefer to keep it simple when they think of goals.
They want to become rich. That's it, in a nutshell.
If you think about it, being wealthy, or wealthier than you are today, would enable you to do all those other things easily.

So, would you say that becoming wealthy is your main financial goal?

If your main financial goal is to become rich, studies show that most likely, you won't achieve it.
Why is this? Because as goals go, 'becoming rich' is not a S.M.A.R.T. financial goal.
Let's see what this means.

1. Is it Specific?

'Becoming rich' isn't a goal. It's a desire, or a wish.
For a goal to be powerful, and more importantly, achievable, it needs to have certain characteristics. For starters, it should be Specific.

The "W" questions will help you be specific when you set your goals.

a. Who is the goal for?

b. Why do you want to achieve this goal i.e. benefits, reasons, purpose behind the goal?

c. What do you want to achieve exactly?

d. When will the goal occur?

e. Which are the requirements and constraints?

For example, a vague goal would be 'Become rich'.
A specific goal would be 'Increase investments by Rs. 50,000 p.m. to have a portfolio of Rs. 2 crore within 15 years'.

2. Is it Measurable?

When you set a goal, and you start working towards achieving it, it'll always make you feel good to see how much you've accomplished. If you set a target and have a time-line, you'll be able to monitor your progress and give yourself a pat on the back at every milestone passed. With every piece of your goal successfully achieved, you'll be spurred on to do even better.

Think of it this way: you wouldn't go on a vacation without planning ahead and having a to-do list. You'd check items off the list one by one once they were finished. So adopt the same approach with achieving your financial goals.
Suppose you are saving up for a family vacation, and you figured that you need to save Rs. 10,000 per month for 12 months to go on that vacation next September. Your goal is measurable. Each month you will be able to see what you have saved, whether you need to increase your savings, or you can relax a bit and treat yourself for extra savings done ahead of time.

Just remember, the more specific the goal, the easier it is to measure.

3. Is it Adjustable?

Often people make the mistake of setting goals that are too rigid, where any unforeseen event can throw the goal off course and destroy the goal achiever's motivation to keep going. This is a mistake. And also, simply unnecessary.

Goals are not meant to be win or lose situations. Goals are just goals. You can achieve them 100%, or 85% or 50%. You can achieve them early, or late, or if things go exactly according to plan - right on time.

The main thing to remember is that you are working towards something, and other things can get in the way, or can help you along, and you needn't stress about it.

For example, you might have started saving for your retirement, when a recession hit and you lost your job. This has caused you to deplete your contingency reserve and dip into your retirement funds to meet expenses until you get another job. This is obviously not ideal, but worrying about not achieving your retirement goal on time will get you nowhere. When you get another job, you will build up your retirement savings again. You may need to adjust your retirement goal corpus or time-line, but that's alright because your goal is adjustable, as all goals should be.

4. Is it Realistic?

If you ask a 5 year old what they want to be when they grow up, you'll get a response like 'an astronaut', or 'a princess'. If you ask a 10 year old, you might hear 'a doctor', or 'an engineer'. As a 30 year old, you might still harbor a secret wish to walk on the moon, but this is not very realistic.

We're an achieving generation. We want to take care of our families, to do well in our careers, to have fun, to travel. We want to buy the new car, wear the new watch, check out the new holiday destination.

But while we can be specific about all these things, and make them all measurable and adjustable, is it realistic to say you want to achieve all this and then some?

Let your list of financial goals be realistic. If you set up a financial goal list that is basically a list of all your heart's desires, you might be disappointed if things don't seem achievable.

Have your priorities, know your capabilities, and stretch yourself a little bit to get that extra edge.
But remember, don't take risks where you can't afford to, and don't set yourself up for disappointment. And most importantly remember that money is a means to an end, not an end in itself.

5. Is it Time-based?

Setting a specific, adjustable, realistic goal is great, but without a time-line, it can be difficult to measure. Saying "I want to buy a new car" is not really time-based.
Saying "I want to buy a new car worth Rs. 6 lakhs in 18 months" is time based and much more measurable. Figuring out how much to save each month and how much of a loan you'll need becomes a simple math problem, and the likelihood of buying your new car in 18 months goes up drastically.
With no time frame, there's no sense of urgency, or yardstick to measure your progress.

Conclusion

The process of setting your goals is an exercise that will give you incredible insight into yourself and the things you value. You'll be able to see your aspirations take shape, become specific intentions that you will be able to take steps towards. Setting S.M.A.R.T goals will help you distinguish real wants and needs from daydreams.

Goals can act like a map and like a conscience. The next time you're in a technology store or a clothes boutique considering that purchase, you'll think of whether this fits in with your savings plan for the month, and whether it brings your goal closer or not. You can then make your decision with full financial awareness.

Contributed By:

Ankur Duggar

S&P cuts Italy ratings one notch to A/A-1, outlook negative

noreply@blogger.com (Finalyst) — Tue, 20 Sep 2011 06:49:00 +0000

Standard and Poor's downgraded its unsolicited ratingson Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise that threatens to add to concerns of contagion in the debt-stressed euro zone.

The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects.

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P.

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action.

The downgrade came as Greece struggles to meet demands from lenders for yet more austerity measures.

"It's just more of the same negative news," said Stephen Roberts, a senior economist at Nomura in Sydney.

"It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here," he added, pointing to a sharp fall in the Australian dollar on the news.

S&P 500 futures also dropped 0.7 percent and early hopes for a bounce in Asian shares on Tuesday looked to be still-born now.

European stocks had already slid on Monday, while yields on Italian and Spanish bonds rose sharply on fears of a Greek default, compounded by the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks.

International lenders told Greece on Monday it must shrink its public sector and improve tax collection to avoid running out of money within weeks as investors spooked by political setbacks in Europe dumped risky euro zone assets.

RBI hikes repo, reverse repo rates by 25 bps; loans to get costlier

noreply@blogger.com (Finalyst) — Fri, 16 Sep 2011 07:43:00 +0000

India's central bank raised interest rates on Friday for the 12th time in 18 months and said it will persist with its anti-inflationary policy stance, even as growth slows in Asia's third-largest economy.

The repo rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.25 percent from 8 percent. Automatically, the reverse repo rate, or interest on short-term lending, gets hiked to 7.25 percent from 7 percent.

The central bank said it was too soon to ease back from its anti-inflationary bias, setting the stage for auto, housing and commercial loans to become dearer once again.

Commercial banks are widely expected to pass on the interest rate burden to customers, which could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a longer tenure for repayment.

"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement.

The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems.

It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns.

Headline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year.

India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices.

"RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me,

is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai.

The benchmark 10-year bond yield rose 4 basis points after the central bank kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement.

While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 percent.

Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years.

Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters.

The rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill.

Double Dip Recession

noreply@blogger.com (Finalyst) — Wed, 14 Sep 2011 07:04:00 +0000

Are we heading to a second dip in the economy. As per reports, US may face double dip recession and Eurozone may collapse.

Is the gold market getting overheated?

noreply@blogger.com (Finalyst) — Tue, 13 Sep 2011 04:12:00 +0000

Gold has turned into an attractive investment option in the aftermath of delivering a spectacular rate of return last year. The investment demand for the yellow metal has been growing at a fast clip in countries like India and China. So, is the gold market overheated? K P Padmakumar, executive director, Muthoot Finance Ltd, does not think so. However, he is of the view that investors shouldn't put all their eggs in one basket.

Padmakumar, former chairman of Federal Bank and a former fund manager of SBI Fund Management, spoke to ET about the factors that triggered the gold price boom, apart from providing new insights to understand the price behaviour. Apart from the higher demand from India and China, the two leading Asian economies, pronounced signs of structural weakness in Europe, even in countries like Italy and France, have fuelled the gold price rally. The unemployment rate in the US is still uncomfortably high and the economy is still not out of recession. The structural weakness of these economies has weakened the position of the dollar as a reserve currency. All these factors have pushed up the price of gold, says Padmakumar.

"On the other hand, the supply of gold is static. No new mines are being added, making the cost of prospecting for gold prohibitively high. The increasing production cost, on the one hand, and the growing demand, on the other, have contributed to this price rise. Interestingly, China might soon overtake India in terms of private gold consumption." With prices and demand at a high, isn't the gold market getting overheated? Padmakumar doesn't think so. After taking cognisance of the factors that have triggered the price rise, he opines that gold as a market is not yet overheated.

There are many reasons for taking such a view. The structural weakness of many economies in the West is still a cause for worry. The debt-to-GDP ratio is worsening in many of these countries. And though the position of the dollar has weakened, there are no signs of an alternative reserve currency in the near term. "All these factors point to the primacy of gold as a preferred asset class. As a result, a precipitous fall in gold prices may not happen in the short to medium term. However, since speculative demand for the commodity has increased, temporary ups and downs will happen, as is being demonstrated in the recent weeks.

But the underlying trend will show an upward movement in prices as the structural asymmetries in leading economies in the world are still at large. Gold prices stood at $800 per troy ounce in 1980. The price, after adjusting for inflation, should be around $2,400 per troy ounce at present. Going by the present trend, this price is likely to be discovered by the middle of next year," he says.

Now, pre-pay your home and car loans without penalty

noreply@blogger.com (Finalyst) — Wed, 07 Sep 2011 10:23:00 +0000

Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness.

"Banks must not recover pre-payment charges in floating rate loans," the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference.

"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk."

The levy of pre-payment penalty by banks has been criticised by consumer groups and the regulator, since it deprives an individual the choice to end the debt burden. Banks have been using it to prevent customers from shifting loyalty and manage their asset-liability gaps.

A committee headed by former Securities and Exchange Board of India chairman M Damodaran had suggested actions to improve customer service, including a ban on the practice.

"RBI's decision is a very good thing since it will encourage people to settle their outstanding loans faster," said Jehangir Gai, joint secretary, Consumer Welfare Association in Mumbai. "It is usually a hidden charge and banks do not disclose it to the consumer. When the consumer goes to close a loan, banks spring this charge as a surprise.''

The annual Banking Ombudsman Conference also directed banks to come with a consensus view on the recommendations of the panel that could be implemented immediately. The Ombudsman scheme was introduced in 1995 to settle consumer disputes quickly in an inexpensive way.

BANKS SHOULD PROVE INNOCENCE

"Banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that the customer is not denied the opportunity to enhance his economic welfare by making choices such as switching to other banks/financial entities to enjoy the benefits conferred by market competition," the Damodaran committee said.

The Ombudsman conference also decided that banks will have to prove that the fault is not theirs in disputes over automated teller machines and internet transactions. RBI will consider whether a customer is to be compensated for the agony suffered during a dispute.

Other recommendations of the Damodaran committee include an end to discrimination among retail borrowers, uniform charge for mortgages with similar risk profile, and not penalising those presenting a cheque in case it bounces, but compensating them in the event of wrong returns.

Regulation FD

noreply@blogger.com (Finalyst) — Wed, 07 Sep 2011 10:18:00 +0000

Regulation FD

SEC regulation adopted in 2000 that eliminated the practice of selective disclosure. The rule requires that when a public company chooses to release any information, it must be done in such a way that the general public has access to it at the same time as institutional investors and analysts. If information is accidentally released to specific parties, the company must disseminate that information widely within 24 hours.

Credit Crisis

noreply@blogger.com (Finalyst) — Thu, 11 Aug 2011 06:13:00 +0000

This link offers probably the best explanation to the Credit Crisis.

http://www.youtube.com/watch?v=qqUGoVez8xg&feature=youtu.be

The man who shook the Credibility of US's financial status.

noreply@blogger.com (Finalyst) — Tue, 09 Aug 2011 12:03:00 +0000

About four months after MS Dhoni's boys won the Cricket World Cup for India, another man from Jharkhand has now shook up the world. On August 5, Standard & Poor's, led by Jharkhand-born Deven Sharma, struck off the 'AAA' rating of the US, considered the Gold standard in the world of finance, for the first time since 1914.

On that Friday afternoon, S&P officials told Barak Obama's treasury department that the ratings major's analysts have come to a decision that the US no longer deserves to be among the best rated countries in the world. After six hours and a flurry of emails, phone calls and conferences between top officials in the Obama administration and Sharma's team of number-crunchers, the world got to know of the unprecedented move - something that was in the air for a few months but which appeared more like a distant possibility: The US' country rating was downgraded one notch to 'AA-plus'. And suddenly the 57-year old Sharma was in the spotlight, hailed by a select few, but criticized by several in the financial world.

Born in 1955, Sharma was educated in Jamshedpur and Ranchi, and then moved to the US for his masters degree at Wisconsin and his doctoral degree in management from Ohio in 1987. During his initial years, he was in the manufacturing sector, working with Dresser Industries and Anderson Strathclyde. In 1988, he joined Booz, Allen & Hamilton, a global management consulting firm, where he spent 14 years. In 2002, he joined The McGraw-Hill Cos, the parent of S&P.

Sharma took over as the president of S&P in August 2007, just when the sub-prime crisis in the US housing sector was getting out of hand, and credit rating agencies were picked as one of the perpetrators of the meltdown for their flawed ratings models of housing loans. Over the last four years as the head of one of the foremost rating agencies in the world, Sharma has faced several US Congressional grillings, but has negotiated most of those with much elan, people who have followed him closely say. In a recent interview, Sharma admitted that over the last four years, comments made by US lawmakers have changed to appreciation from strong criticism.

No wonder the veteran of several testimonies in the US congress has been able to stand up to the global criticism from all quarters for their critical decision. Since Friday evening, Sharma, along with David Beers, his top lieutenant on the ratings side, have stood firm alongside S&P's analysts and defended the controversial and unprecedented decision saying that such a step was necessary and it was done for the benefit of investors.

People who followed Sharma's recent messages to the world said that there was enough evidence that a rating downgrade was more of a probability than not. Late last month, in a Congressional hearing during the height of uncertainty about raising US debt limit, Sharma was non-committal about what ratings decision his company would take. A Bloomberg report said that he told US lawmakers that S&P was waiting to see what the final proposal would be before deciding whether to keep US debt at the firm's highest ratings level.

While the world criticized S&P for their historic decision, some even questioning the data the analysts used but back home there are some who think Sharma and his men have done a great job. The controversial head of a top brokerage house with strong presence in the US told TOI, that the ratings downgrade had to happen as it was due for years.

DEVAN SHARMA: Analysing Global Risk

Regional Exchange

noreply@blogger.com (Finalyst) — Mon, 08 Aug 2011 05:57:00 +0000

regional exchange

An SEC-registered stock exchange which focuses on listing stocks of corporations in its geographic region. The major U.S. regional exchanges are the Boston, Chicago, Cincinnati, Pacific, and Philadelphia stock exchanges. Regional exchanges are usually significantly smaller than exchanges that focus on listing stocks at the national level. Many stocks listed on regional exchanges are not listed on national exchanges. However, regional exchanges also feature stocks which list both on the regional and the national exchange.

Constant Dollar Plan

noreply@blogger.com (Finalyst) — Fri, 05 Aug 2011 03:42:00 +0000

constant dollar plan

An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought. also called constant dollar plan. also called dollar cost averaging.

Publicly-Traded Fund

noreply@blogger.com (Finalyst) — Thu, 04 Aug 2011 04:03:00 +0000

publicly-traded fund

A fund with a fixed number of shares outstanding, and one which does not redeem shares the way a typical mutual fund does. Publicly-traded funds behave more like stock than open-end funds: closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange, and they are not obligated to issue new shares or redeem outstanding shares as open-end funds are. The price of a share in a publicly-traded fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). also called closed-end investment company or closed-end fund.

Currency in Circulation

noreply@blogger.com (Finalyst) — Tue, 19 Jul 2011 06:35:00 +0000

currency in circulation

The total amount of paper currency, coins, and demand deposits that is held by consumers and businesses rather than by financial institutions, central banks, and the U.S. Treasury. Currency in circulation is thus the sum of currency held by the public, and is a component of a bank's reserves. It is an important factor that the Federal Open Market Committee takes into account when setting the money supply, since a decline in the currency in circulation means that banks don't have as many demand deposits in their reserve. This can mean that fewer loans could be extended to borrowers because the bank will have to make up for a decline in reserves.

Annuity

noreply@blogger.com (Finalyst) — Thu, 14 Jul 2011 04:08:00 +0000

annuity

1. A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.

2. More generally, a series of payments of set size and frequency, often to a retired person.

Lorenz Curve

noreply@blogger.com (Finalyst) — Wed, 13 Jul 2011 05:04:00 +0000

Lorenz curve

A model developed by economist Max Lorenz in 1905. It represents a probability distribution of statistical values, and is often associated with income distribution calculations. For example, a Lorenz curve can show that the bottom 40% of households bring in 25% of a country's income. If income distribution were perfectly equal, 40% of households would bring in 40% of income.

Consumer Discretionary

noreply@blogger.com (Finalyst) — Sat, 09 Jul 2011 06:49:00 +0000

consumer discretionary

A category of industries, made up of companies which deal with products or services that are not necessities. The degree of spending and amount of consumption of these products and services varies depending upon the individual. These industries include automobiles, high-end clothing, restaurants, hotels, and luxury goods.

Bull Trap

noreply@blogger.com (Finalyst) — Fri, 08 Jul 2011 08:27:00 +0000

A sign which supposedly indicates that a security is reversing its path, and is starting to rise instead of decline, but in actuality the security continues to decline after this signal is seen. It is seen as a trap because some people will see this signal and purchase the stock because they believe they will benefit from this increase in value, but they are trapped with a poor performing stock when they find out that the stock is still falling.

Multiple Exchange Rates

noreply@blogger.com (Finalyst) — Thu, 07 Jul 2011 09:33:00 +0000

A system where a country will have both fixed and floating foreign exchange rates at the same time, and both can be used when exchanging currencies in that country. In this situation, the market is divided into any number of segments, each with its own exchange rate. This is frequently used to give preferential treatment to people dealing with goods and products that are the most important to the country; people importing these goods can be given a better exchange rate than people who are importing goods that are not as necessary for the country. If a country only imposes two different exchange rates at the same time, it is referred to as a dual exchange rate system.

Iron Condor

noreply@blogger.com (Finalyst) — Wed, 06 Jul 2011 05:44:00 +0000

iron condor

Options trading strategy that requires the traders to buy and hold four different options. An iron condor has a similar structure to an iron butterfly, but two of the options located in the center have different strike prices. In order to create an iron condor, the trader must hold a long and short position in two different strangle strategies. Two vertical spreads (bull call spread and bull put spread) with the same expiration date are also utilized with an iron condor.

Spider

noreply@blogger.com (Finalyst) — Mon, 04 Jul 2011 06:20:00 +0000

Spider

SPDR. Shares of a security designed to track the value of the S&P 500. Spiders trade on the American Stock Exchange under the symbol SPY. One SPDR unit is valued at approximately one-tenth of the value of the S&P 500. Dividends are distributed quarterly, and are based on the accumulated stock dividends held in trust, less any expenses of the trust. also called Standard & Poor's Depositary Receipt.

Fibonacci Retracement

noreply@blogger.com (Finalyst) — Sat, 02 Jul 2011 04:48:00 +0000

Fibonacci retracement

A tool used in technical analysis which plots the Fibonacci ratios on a graph which displays a stock's price over time. The key Fibonacci ratios are 23.6%, 38.2%, 61.8%, and 78.6%. The different Fibonacci ratios are used to predict how likely it is for the stock to return to that price by retracing its previous actions.

Direct Stock Purchase Plan

noreply@blogger.com (Finalyst) — Fri, 01 Jul 2011 07:29:00 +0000

Direct Stock Purchase Plan

DSP. A SEC-regulated program which enables a company to sell shares of stock directly to investors, rather than through a broker, enabling the investors to avoid paying a commission. DSPs are a good way to invest small amounts since you don't even have to be a current shareholder in order to purchase the shares. The company will not charge you a commission, but they may charge you a small fee in order to set up a stock purchase account. Direct Stock Purchase Plans are not related to Directed Share Programs (which have the same acronym, DSP).

Sales Charge

noreply@blogger.com (Finalyst) — Mon, 27 Jun 2011 15:09:00 +0000

A fee charged by a broker or agent for his/her service in facilitating a transaction, such as the buying or selling of securities or real estate. In the case of securities trading, brokers can be split into two broad categories depending on the sales charges they charge. Discount brokers charge relatively low sales charges, but provide no services beyond executing trades. Full service brokers charge higher sales charges, but provide research and investment advisory services. also called commission.