Financial Planning
Handling inflation for personal finance requires a “Personal Finance Inflation Index”

While financial planners have their own opinion on inflation, institutions involved in conducting financial planning courses in India have never thought of an inflation index, which shows that there is very limited innovation in financial planning in India

All financial planning advice has one thing in common and that is how to handle inflation while creating portfolio of assets. It starts with the idea that investments made by an individual must beat inflation, else effectiveness of financial planning is lost and there is no real wealth creation. The idea sounds great. But is it possible to implement it so easily? Is there a common and convenient answer to this question? Talk to financial planners on this issue and they will answer this question more with gut feeling rather than a scientific analysis.

Some of the most common answers given on the issue are, “your investment must beat CPI or food inflation”, “your investments should generate at least 8% return as we have considered 8% inflation” (Interestingly, source of 8% is not known). Some other planners say that for education, healthcare and energy-related expenses a higher rate of inflation needs to be considered. But the question still remains unanswered—which rate of inflation needs to be considered for personal financial planning.

For reading what Morgan Stanley has to say about India’s CPI, click here.

It is extremely important to handle inflation scientifically and not based on some arbitrary number as inflation has a potential to derail the entire financial planning process. After all, inflation does not impact everybody equally. It depends on the level of income and consumption pattern of an individual. For a person with lower level of income, food inflation matters more than anything else, while for a person drawing a handsome income, food inflation will not be the same cause of worry.  This will make an impact on the inflation planning approach of both the individuals. Similarly educational and rental expenses have increased phenomenally during last five years and unfortunately no inflation index captures this. So how we handle this strange scenario? The solution of the problem probably is in creation an inflation index which will be focused on personal finance.

What is most surprising is that while financial planners continue to have their own opinion on inflation, institutions which are busy in spreading certification courses (and probably minting money) on personal finance in India have never thought of working such ideas which shows that there is very limited innovation in financial planning in India. If the National Stock Exchange (NSE) can create a Volatility Index (VIX) for measuring volatility, why not have a separate index for inflation for personal finance.

How the personal finance index should look like?  The personal finance index should be made up of expenses that comprise day-to-day expenses of individuals. Like any index there should be weightage assigned to important expenses such as rental, food, healthcare, education, etc. The index can be one common gauge but can be used differently by every individual and will be based on expenses of an individual. Additionally, this expense need not be calculated weekly or monthly. Once in a quarter computations should be good enough. Since portfolio churning is not done frequently, frequency of index computation once in a quarter makes sense. The idea here is capture those expenses which impacts the expense pattern of individuals. Some of the expenses such as those on education, healthcare and recreation are not captured by traditional inflation indices like WPI and CPI.  This index will remove all such anomalies.

Who will create this indexIdeally the index should be created by institutions such as “Financial Planning Standard Board” but it seems such institutions have limited capabilities in this direction. The next entity could be the financial planner who helps you build your financial plan. Logically the financial planner should record price trends in the economy. This means that at the start of financial planning the index value should be created and be used periodically to check whether investments have been able to beat inflation or not. However, an individual can also create an index by tracking his own expenses and changes in it. This is not a cumbersome exercise and can be done by recording transactions and prices associated with transactions in a simple software like MS Excel. However, an individual’s index can at best be used by only limited individuals who show similar pattern in expenses.

It is unfair to leave financial planning exposed to vagaries of inflation. Beating inflation needs a deeper analysis of inflation and its impact on investments. A hit and trail approach cannot be the benchmark of financial planning.


Government working on guarantee scheme for educational loans: RBI

According to the RBI governor, for loans up to Rs7.5 lakh where there is no third party guarantee or collateral security, the guarantee would be provided by the government. However, this scheme is not yet launched

Puducherry: In a bid to remove problems faced by students in obtaining education loans, Government was working on a scheme under which it would extend guarantee for advances upto Rs7.5 lakhs, reports PTI quoting Reserve Bank of India (RBI) Governor D Subba Rao.


"There are grievances of students not getting loans or encountering problems...Understanding that there is a problem, the Government is now working on a guarantee scheme," he told students at an interactive programme organised by RBI and ABP News.


He said for loans upto Rs7.5 lakhs where there was no third party guarantee or collateral security there would be guarantee given by the government.


"It is yet to be launched. Hopefully it would come and resolve some of these issues," he said replying to a question on the woes of students in getting educational loans.


On paper for loans upto Rs4 lakhs there should be no collateral security or guarantee. "For good students and good institutions it is easier to get loans than for students not so good or institutions not rated so high," he said.


"But our endeavour is irrespective of level of achievements of institutions, they must have access to education loan upto Rs4 lakhs," he said.


On inflation, he said 'our endeavour, effort and expectation is that inflation will come down and will remain steady' so that it accelerate growth.


He also said RBI wanted to deepen penetration of banks either through bank branches or Business Correspondents since more than 50% of the households in the country did not have bank accounts.


Noting that RBI and the Government had initiated several steps towards financial inclusion with a view to ensuring that every household had bank accounts, he said it would become successful only when banks see it as a business opportunity.


Replying to another student, the RBI Governor said the apex bank was playing a development role and had implemented steps for rural development including priority sector lending.


On security and safety of electronic transactions, he said "Securing security is shared responsibility. It is not the exclusive concern of RBI alone. It is responsibility of commercial banks and of the customers."


All the three should share the responsibility and work together to ensure that banking transactions especially electronic and mobile transactions were safe, he added.


Kingfisher lenders hope the Vijay Mallya owned airline won't go belly up

None of the lenders want the Vijay Mallya-owned Kingfisher Airline to go bust but if that happens, banks will be a bigger casualty than anyone else

Lenders of the debt-ridden Kingfisher Airlines expressed the hope that the company management will not let the airline go belly up and said banks would be a bigger casualty if it goes bust, reports PTI.


"We (the lenders) are for seeing the airline turn around and not getting grounded. We hope the promoters won't let the present crisis get more complicated. After all, we don't think chairman Vijay Mallya will let his image be tarnished by letting the airline go belly up," a senior official of a public sector bank told PTI.


The banker said: "None of us wants the airline to go bust. If that happens, banks will be a bigger casualty than the airline."


When asked about whether banks are looking at recovery measures by monetising the collaterals, the banker said by doing that the lenders won't be able to recover not even 10% of their outstanding to the airline.


The Vijay Mallya-owned airline and its promoters have most of their shares and assets pledged with banks, including the brand Kingfisher (pledged for a value of Rs4,100 crore) and two of its properties--the Kingfisher Villa in Goa and the Kingfisher House in Mumbai, together valued at around Rs200 crore.


"We hope the talks that Mallya is holding for stake sale in his other concerns like United Spirits (with UK's Diageo) will fructify soon. If that happens Mallya could recapitalise the airline and then we bankers can look at recasting his existing loan or even fund fresh working capital requirements," the banker said.


When asked about the amount that banks are looking at as fresh capital infusion by the airline for a fresh lifeline, he said normally a corporate debt restructuring (CDR) involves the promoters bringing in at least 25-30% of the overall CDR package in fresh equity. At 25%, this works out to be around Rs1,750 crore as the airline's outstanding principal alone is over Rs7,000 crore.


ICICI Bank had an exposure of Rs400 crore to Kingfisher in June, but sold out loan.


That apart, the lenders together hold around 23% in the airline since March, after the banks converted their Rs6,500 crore of recast debt (after the November 2010 CDR) into equity.


These banks picked these stakes at a hefty premium- when the share was trading at Rs38, the banks converted these shares at Rs64.48 per share. It had touched a low of Rs 7.01 in August.


A senior official at the State Bank, which has an exposure of Rs1,580 crore and unpaid interest from January, said if the crisis deepens, the consortium of lenders together will decide what course of action should be taken.


"Though we are the lead bank in the 17-bank consortium of lenders to Kingfisher, we cannot take a unilateral decision. We will have to get the rest of the lenders on board for any concrete action," the SBI official told PTI.


When asked whether the lenders are looking at beginning recovery process, the official said the banks will ensure that they will use every means to protect their interest.


The crisis at Kingfisher worsened yesterday as reconciliation talks between the management and the striking engineers and pilots over payment of seven months’ salary dues failed with the protestors rejecting the offer of part-payment and vowing to continue their agitation.


With no end to the deadlock, a question mark hung over the airline's plans to resume operations from Friday, after a four-day partial lockout and complete suspension of all operations since Monday night.


Kingfisher has been saddled with a huge loss of over Rs8,000 crore and a debt burden of over Rs7,000 crore.


After declaring a partial lockout till 4th October following the strike by engineers and pilots over non-payment of salary, the airline CEO Agarwal had expressed confidence about resolving the situation in the next few days. "We will take a call on 4th October on resumption of our operations."


The airline would be using its current fleet of ten aircraft -- seven Airbus A-320s and three turbo-prop ATRs, to resume flights. With these planes, Kingfisher has been operating about 70-80 flights each day till it suspended all operations on Monday night.


Over 80 pilots and 270 Kingfisher engineers have been on intermittent strikes over the past few months, primarily over delay in payment of salaries.




5 years ago

Its because Vijay Mallya used his Bengali connections to seal a deal with Pronabda, who has given clear instructions to save Vijay Mallya at any cost. This strong link has only saved his skin. Pronabda will be rethinking his support. But this cannot last too long, and PC should get to the bottom of this and recover all the dues. When the dues are recovered can be deployed in rehabilitation of drunkards under "Sanjay Gandhi National Rehab Scheme" (SGNRS). Three great things will happen with recovery, (1) 50% of the drunkards will reduce by way of shutting United Spirits which sells cheap liquor & commands a equal share. (2) Health costs of states will come down. (3) Banks and employees will be saved of a rip-off


5 years ago

It seems the banks are predetermined to bail out KFA at all costs!
Surely Dr Vijay Mallya's personal guarantee can be invoked.And he has some shares in his liquor companies which can be sold.
And why not banks stop all facilities to his group companies since KFA has gone bad.
They can blacklist a group if any of the group companies are classified as bad.
Send Dr Mallya to jail for siphoning off TDS and service tax money and money will start flowing.
Don't give him a free passage.
Declare him a willful defaulter and cancel his passport.Once he is cornered he will find out ways to bring his hidden cash.

But why should banks act helpless??
Let Moneylife go to the root of this and ensure DR Vijay Mallya is prosecuted.

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