Banking
In disaster, bank accounts do not provide financial security
Only 35 percent of Indians above the age of 15 had bank accounts in 2011 (26.5 percent of females and 43 percent of males), according to a World Bank estimate. By 2014, this number, which coincided with cyclones Phailin and Hud-Hud ravaging the coastal states of Andhra Pradesh and Odisha, increased to 53 percent (43 percent of females and 62 percent of males), according to World Bank data.
 
Although 10 million bank accounts were opened on a single day - a global record, as part of Prime Minister Narendra Modi’s nationwide plan to ensure the poor have bank accounts - more than 30 percent remain without money, as IndiaSpend reported earlier, quoting government data.
 
In an attempt to find out how financially secure people were at the time of these disasters, we travelled across the most-ravaged areas of these two states, talking to families in three villages and 11 urban areas. These are the initial findings, albeit from a small random sample of about 200 households:
 
94 percent of households have bank accounts
 
Contrary to popular opinion, 94 percent of the families interviewed said that they had at least one bank account. Many had multiple accounts that they had to open to benefit from various government schemes, which do not allow them to use existing accounts.
 
While 28 percent had a Pradhan Mantri Jan Dhan Yojna (PMJDY) - or Prime Minister’s People’s Wealth-account, 16 percent said they opened bank accounts to receive post-cyclone damage compensation; 13percent opened them earlier to access other government schemes and benefits.
 
Most people only used these accounts to gain state benefits: Only seven percent used bank accounts for work-related transactions and 19 percent for savings schemes.
 
People were uncomfortable putting money into these accounts either because of a lack of trust, or simply because they didn’t save enough after daily needs were met.
 
But there were other forms of investments people claimed to be making.
 
Due to a lack of alternatives, or tempted by good returns, many still participated in private chit funds despite knowing a history of fraud. Many women were part of more informal self-help groups or social-kitty systems, where 20 to 25 women got together and pooled in Rs. 10,000 to Rs 20,000 per person into one account. They accessed these funds based on their needs and returned it with interest over a fixed period of time.
 
This system works primarily on the social trust that people have with each other, but many people who had asset-based livelihoods, such as grocery stores, invested in more assets for their shops rather than keeping the money liquid.
 
So do bank accounts mean better financial security, and do they help people when calamities strike?
 
Friends, not government, are first responders in crisis
 
As many as 73 percent of those interviewed were helped by friends and relatives to recover after cyclones. These cases were rarer in urban than rural areas, possibly because of distances or limited resources to share. This indicates people rely not only on social-safety nets but also on what is most accessible.
 
Nearly 76 percent of responders borrowed money either from their friends or from money-lenders to recover from cyclone damage. These loans ranged from Rs.3,000 to Rs.2 lakh at two-five percent monthly interest.
 
Since the majority of these people had bank accounts, low interest-rate government loans may prove more effective than fixed but insufficient compensation. This would help combat usurious interest rates, while involving the banking system.
 
Many people working in houses as maids, or shops as casual workers, also borrowed money, clothes, medicines and other food supplies from their employers, although at low or no interest rates. In Khaja Sahi, a slum in Berhampur flattened by the cyclone, a Muslim Trust helped people rebuild lives, another example of an informal safety net.
 
Most have life insurance but don’t know about other protection - or don’t use it
 
Many people had some form of life insurance, but none of those we spoke to had any access or knowledge about other types of insurance, especially for work-related assets or housing, except those benefitting from World Bank-funded housing projects. This could be because there are not too many insurance products available in the market, particularly for those living or working in the informal sector.
 
As many as 26 percent of respondents said they had some form of life insurance; 25 percent of them said they had a policy with the Life Insurance Corporation and one percent had a policy with the Pradhan Mantri Bima Yojana (Prime Minister’s Life Insurance Policy), although most did not know how to operate it.
 
About 43 percent of households said they were covered by the National Health Insurance Scheme, the Rashtriya Swasthya Bima Yojana, but only 21 percent of these said they had used it, since it applies only for major medical treatments and emergencies.
 
What makes people’s lives insecure?
 
A third of families mentioned health as the primary reason for savings, followed by education (27 percent), future eventualities (17 percent) which could include cyclones, rains and any other everyday challenges, children’s marriages (nine percent) and livelihood-related risks (eight percent). About seven percentof families also mentioned house repairs as a motivation to save.
 
These are indications that while most people consider health, education and livelihoods as future risks, not as many considered cyclones and disasters.
 
This could also give an insight to policy makers working on reducing climate-related risks and provides an indication of mistrust of public services, such as health and education. People have taken it upon themselves to save for those, above private affairs, such as marriages and home repairs.
 
In disasters, where people have limited liquid assets or financial security, having bank accounts is an important step, but it is not enough for financial security.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Ramesh Poapt

12 months ago

very well said!!

Budget to be growth-oriented with eye on fiscal deficit: Official
New Delhi : Ahead of the February 29 presentation of India's budget for the next fiscal, the government on Monday promised a growth-oriented budget that would also keep in mind the country's fiscal constraints.
 
"Given the fiscal parameters and other constraints, the effort of the government will be to have a budget which is growth-oriented and that will maintain the momentum of growth," Economic Affairs Secretary Shaktikanta Das said in an interview on the finance ministry's YouTube channel.
 
On the government's expenditure plans and the fiscal deficit target for the next fiscal, he said the effort will be to maintain a balance between both of these.
 
"A balance has to be found between the expenditure requirements and how much the government can borrow and the repayment capacity. The truth lies in the middle, and the government has to do a balancing act," he said.
 
The government said last week that the reason behind India's high growth rate is the quality of public expenditure.
 
"In the current fiscal, our capital expenditure, which goes into asset creation, has seen a significant growth as against revenue expenditure, which goes into salary payment and rent ... and is resulting in high growth," Finance Secretary Ratan P. Watal said on Saturday on the ministry's YouTube channel.
 
Noting that revenues being received are in tandem with expenditure the government is incurring, he said this meant that things were moving as planned.
 
According to official data, plan expenditure during April to December was 74.4 percent of the budget estimates, as compared to 61.3 percent during the same period a year ago.
 
The government has targeted reducing the fiscal deficit to 3.9 percent of the gross domestic product (GDP) in the current financial year, from four percent last year, and reduce it further to 3.5 percent in 2016-17.
 
The Indian economy grew 7.3 percent in the third quarter ended December 31, 2015, down from the 7.7 percent expansion in the previous quarter, but marginally up over 7.1 percent recorded in the like period of last fiscal, official data showed earlier this month.
 
The government's mid-year economic review, released December, lowered economic growth forecast for the current fiscal to the 7-7.5 percent range, from previously projected 8.1-8.5 percent, mainly because of lower agricultural output due to deficient rainfall.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Rating Changes and Debt Mutual Funds
What are the lessons for investors and the regulator in debt mutual funds from the recent downgrades of Amtek Auto and Jindal Steel? 
 
Debt mutual fund investors focus mainly on returns and often ignore the risk. Over the past few months investors have woken up to the credit risk of mutual fund schemes. In August 2015, schemes of JP Morgan Mutual Fund suffered a sharp decline in their net asset value (NAV) as they had a high allocation to the debt paper of Amtek Auto. The credit rating of Amtek Auto was downgraded and soon investors begun withdrawing their assets from the scheme. In February 2016, debt investors faced a déjà vu. The credit rating of Jindal Steel and Power Ltd (JSPL) was downgraded and this affected the schemes of ICICI Prudential Mutual Fund and Franklin Templeton Mutual Fund. The NAVs reported sharp declines thanks to steep downgrades.
 
Downgrade of a credit rating is normal. Yes, it is sometimes a shock when the credit rating is notched down by three or four steps at one go. It essentially makes us think about whether the rating agencies were asleep? I can understand ratings getting ‘withdrawn’ because a company does not give information. Not giving information is something that an agency can ‘smell’, so long as it has a good surveillance mechanism in place. If they take monthly or quarterly information, they should be able to smell trouble the first time there is a problem.
 
CRISIL recently downgraded JSPL from BBB+ to BB+. This is a three-notch downgrade. The hierarchy is BBB+, BBB, BBB- and then BB+. The divide between BBB and BB is huge. Debt papers up to BBB- are considered ‘investment’ grade and anything below is considered ‘speculative’ or ‘junk’ grade. A move from BBB to the BB is not an unusual one, given the sector the company operates in and its leverage. What I question is the wisdom of the reputed fund houses in taking such huge exposures on something that was already a borderline investment grade. If you are a hedge fund or a speculative investor, such high yield papers are fodder for you. But mutual funds have to be more careful.
 
CRISIL says that the earlier rating of BBB+ had factored in the sale of a unit in Bolivia and the receipt of the proceeds before March 31, 2016. They have not waited for the date, but have fairly concluded that it is not happening and pulled the trigger. In a sense, we can debate whether the earlier rating should have anticipated this inflow and if it was such a crucial thing, could the rating have been BBB minus? Not being privy to all the facts that they would have had, I respect their view. I have been part of the organisation nearly 22 years ago and still trust the checks and balances in place. What I can say from my knowledge is that when I buy a ‘BBB’ paper, my risk of losing money is very high. And let me tell you, no rating agency is immune to a structured fraud. 
 
I differ with rating agencies on one aspect of rating - “Structured Debt”. At the time I was working in the agency, I was at the forefront of developing it. However, over time I see more and more complex structures that a rating cannot really bind together. But commercial interests prevail. Securitisation is merely a paper exercise of ‘selling’. In reality, if an originator of loan sells the loan to an investor or a trust, I do not see how they can really collect on it. 
 
The rating agencies have the power to downgrade, suspend or withdraw a rating. If there is high quality surveillance, I do not see a reason for an abrupt downgrade by two or three notches, unless it is the result of a corporate action, where there is some merger or acquisition or the company has suppressed some facts, which came to light later on. Not giving information as agreed is a serious issue and should lead to rating getting withdrawn.
 
The recent downgrades of a couple of papers, its impact on the mutual funds that invested in those have been the subject of an acrimonious debate. Here I blame the agencies as well as the fund houses. Fund houses should be using the rating as an additional input and not as a primary input. They should be having the skills to evaluate credit. Yes, a rated paper can help you to find companies you have to shortlist. Beyond that, there has to be an internal analysis that approves the paper. Often, the analysis is cursory and we do not see a single ‘debt’ research report. Hopefully, the analysts read the “rating rationale” that accompanies every rating.
 
The impact of the downgrade on a paper is dependent on the extent of exposure a scheme has, to such paper. A 3% exposure of a scheme in to the paper of JSPL, impacted the NAV of the scheme by nearly half a percent. In a sense, if an income scheme has a carrying yield of 7%, nearly 14 days of interest accruals on the entire scheme has gone! And the mark to market to junk, would mean that the fund is unlikely to fetch the marked price in any sale, as no one would immediately buy the paper. So, the actual impact could be higher! 
 
When MFs are handling retail money, in an environment that is thriving on mis-selling, we need to see some reforms in the industry. Maybe the regulators could consider:
 
 i) Allow retail money to be invested only in those schemes where no paper has a rating lower than AA. Not even AA minus, at the point of inception. There should be a clear mandate that if any paper is downgraded, it should be offloaded within 15 days. That would minimise the retail risk somewhat;
 
ii) Schemes that have lower rated papers, should be RED labelled and the minimum investment amount could be hiked to Rs50 lakh kind of threshold. That implies that those with this kind of surplus understand risks better. 
 
iii) Multiplicity of rating agencies has been an issue. Regulations say that ratings from any ‘recognised’ rating agency is acceptable. Unfortunately, the quality of the rating agencies differs. I will not name the culprits, but every debt fund manager knows about it. Maybe the trustees can insist on two ratings as a minimum requirement. Even in the debt market, companies with the same rating do not enjoy the same pricing. Markets do make a distinction.
Valuation of debt papers is always a contentious issue. Some papers cannot be traded unless offered at a discount to comparable paper. 
 
The retail investors, coming into debt mutual funds, come in for capital protection as well as a perceived tax advantage. Many of the small investors who put in a few thousands, are outside the tax bracket. These are the investors who need regulators to offer protection. We have seen how miserably the regulators have failed when it comes to insurance company products. Will mutual funds also go the same way? 
 
There are some folks who say that so long as everything is ‘disclosed’ in the offer document, the investor should not mind. I have yet to meet any average investor who is even aware what such a document contains. At the time of NFO, a four pager is all that is sometimes given. Of course, everything is ‘available’ online. Why cannot SEBI design a simple one pager that goes with every scheme- on the web page, on the application form and with the account statement? I will be glad to help design it.

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COMMENTS

Ramesh Poapt

12 months ago

ML-discussion on the topic proceeded nicely. You have knowledgeable readers. Good one indeed!Request more such goood articles!

Avinash

12 months ago

Agree with most of points made in the article. However, instead of placing restrictions on retail participation in debt markets, which would hurt the efforts of broadbasing capital markets, I have a few suggestions:

1. Credit funds which invest in papers rated lower than an acceptable benchmark (say, AA) should be demarcated with a separate risk rating
2. Risk-Return indicators like Sharpe ratio, sortino ratio and standard deviation (ofcourse, in a language that a novice would understand) must be mentioned for (a) the scheme, (b) aggregate of similar schemes of the fund house, (c) category average across industry. A legend should accompany this disclosure to help investors interpret the numbers
3. An abridged version of the Mutual Funds SID must accompany all application forms (if physical) and should be displayed prior to concluding the transaction (if electronic). This one-page document must at-the-least contain the risk rating, risk-return indicators, Fund manager, benchmark index etc.
4. Efforts on curbing mis-selling must continue unabashed.

Fixing responsibility on rating agencies and ensuring their 'skin-in-the-game' needs to be handled separately as ratings are used by institutional investors and retail investors alike.

Gupta

12 months ago

After the Amtek fiasco, CRISIL proudly released a press release with nice looking statistics that none of its investment grade rating (BBB- or better) has been downgraded by more than 1 notch and hence the quality and stability of CRISIL ratings is much better than others. While I don't disagree with that claim (on a relative basis given the weaker quality of other rating agencies and not because CRISIL is a holy cow), CRISIL may have wanted to be more circumspect. JSPL is a much larger company with much larger debt and should have had stronger surveillance. CRISIL has been found sleeping at the wheel (or with JSPL because JSPL pays for the rating) with this 3 notch downgrade. Any banker or MF fund manager who understand JSPL can say that Bolivia was an irrelevant chapter in JSPL's history and certainly can't be the reason for even a 1 notch downgrade, forget 3. CRISIL is simply hiding behind it to cover up for being cosy with its "customer" for too long. It is once again proven that rating agencies always downgrade after the event and predictive ability of credit ratings is ZERO. While stock prices have nothing to do with credit ratings, they are far better tools to predict what is going on with the "credit". The conflict of interest between borrowers and rating agencies is deep and since rating agencies only give opinions and don't have to lend on their own ratings, the problem will never be solved. Worth considering if RBI would mandate rating agencies to invest their rating fee in the debt of the issuer for a period of 12 months and if there is a downgrade of more than 1 notch, then pay a penalty of 10 times that fee to a consumer protection fund. Radical thought it may be, but we need something to resolve the conflict of interest. RBI did something very similar with Asset Reconstruction Companies few years ago by banning 100% SR buyouts and forcing a cash component.

REPLY

R Balakrishnan

In Reply to Gupta 12 months ago

Fully agree. Name recognition seems to have played a bigger role..

Nilesh KAMERKAR

12 months ago

Those who cannot stomach few basis points of volatility, for them mutual funds is not the place to be. For absolute Capital protection there are Bank Fixed Deposits.

Selling debt paper within 15 days of it being downgraded is a sure way of losing capital.

Even with the most noble intentions some debt papers will still deteriorate in quality. In this deterioration lies risk as well as opportunity.


REPLY

R Balakrishnan

In Reply to Nilesh KAMERKAR 12 months ago

The only solution, Nilesh, is to forget the NAV impact and hold to maturity? That would be a cross subsidisation and lead to gaming by big punters

Nilesh KAMERKAR

In Reply to R Balakrishnan 12 months ago

Dear Sir,

Please do consider the foll:

1) The scope for gaming the system shall be far higher if funds are forced to liquidate debt instruments within 15 days of being downgraded, resulting in substantial losses as not much can be salvaged in such situations.

2)Sir you shall agree when investors jump the scheme immediately after NAV is impacted, they turn notional losses into real losses.

3)Investors would do themselves a great favour if they wait to exit, till such time that their returns from the income fund is say 1% better than FD rates, then purpose of investing in debt mf would have been served .

4)For 3 above to happen investors ought to worry about NAV linked returns rather than scrutinize the portfolio. - That is best left to the professional fund manager

5) Debt downgrades and defaults have happened in the past too. And investors in open ended debt funds,(& not FMPs) who chose to continue have come out unscathed with reasonable returns to boot.

R Balakrishnan

In Reply to Nilesh KAMERKAR 12 months ago

You are right, Nilesh. But you underestimate the idiots in the world. logically, I do not see the need for this instrument to exist at all. Equities and liquid funds good enough for me. Maybe a savings account . Bond funds is for those who build a bridge to nowhere.

R Balakrishnan

In Reply to Nilesh KAMERKAR 12 months ago

Any downgrade will have a loss of capital. Whether u sell it today or after one year. Problem is if we have a discipline or a rule book, we should play by it, when retail money is involved. Retail who come in from the FD markets

R Balakrishnan

In Reply to Nilesh KAMERKAR 12 months ago

Yes, Nilesh. You understand. I too understand. A few out there who do not. Bulk of investors are like that.

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