Larger banks being made to bear the burden of the failure of poorly regulated co-operative banks
The only beneficiaries of the deposit insurance premium collected by the Deposit Insurance and Credit Guarantee Corporation (DICGC) are badly-run and politically-influenced co-operative banks.
Since its inception, the Corporation has paid out about Rs4,051 crore in claims to depositors after bank failures. As much as a quarter of this-a whopping Rs1,025 crore-has been paid out in the past three years, from April 2008 to March 2011, which was given to 83 banks. And all of these 83 banks were co-operative banks.
This payment is to honour the guarantee of Rs100,000 per holding combination (individual/joint) provided by the Corporation on deposits of all commercial banks, including the branches of foreign banks functioning in India, local area banks and regional rural banks.
The payment is possible because DICGC collects the insurance payment from banks to guarantee deposits up to Rs1 lakh per account holder. The DICGC collects a premium from 2,249 banks, of which a whopping 2,080 are co-operative banks.
Here is the irony. Less than 200 commercial banks account for 88% of the insurance premium collected and co-operative banks account for under 8%. Yet, when it comes to payment on account of failures, 100% of the money is paid on account of co-operative banks.
What is worse, co-operative banks are poorly regulated under the dual regulation of the Reserve Bank of India (RBI) and the Registrar of Cooperatives. It is an open secret that RBI's supervision is completely ineffectual when it comes to co-operative banks, because of the enormous political influence wielded by their promoters.
Even recently, when the RBI finally acted against the Maharashtra State Co-operative Bank by appointing an administrator, after years of dithering, the Nationalist Congress Party (NCP) in Maharashtra accused it of bias. Poor supervision and low accountability has led to a series of failures among co-operative banks and huge losses to depositors. In fact, Moneylife Foundation our affiliate involved in financial literacy, cautions savers about keeping big chunks of their hard-earned income in these banks.
Here are some numbers on the DICGC website. Banks have to pay an insurance premium up to a maximum of Rs0.15 per Rs100 of insured deposits to DICGC every year to avail of the deposit insurance cover. As at the end of March 2010, DICGC had a deposit insurance fund of Rs20,152 crore made up from premiums received from banks and interest earned on the fund corpus. Commercial banks account for 88% of the total insured deposits for the period 2009-10 and co-operative banks account for just 8% of this. Hence it is clear that a majority of the premium amount comes from commercial banks.
According to DICGC's annual report for 2009-10, the value of insured deposits among 2,249 insured banks was Rs23,69,483 crore at the end of the financial year, covering 14,238 lakh depositor accounts. About 2,080 co-operative banks are presently covered by DICGC's insurance cover. The maximum deposit claims are paid out to liquidated co-operative banks.
Despite the numbers that are freely available on the DICGC website, the Damodaran Committee on banking customer services foolishly suggests that deposit insurance for banks should be raised from Rs1 lakh to Rs5 lakh and that the government must also consider insuring the entire deposit.
It says, "With the rise in general income levels resulting in increase in the size of individual bank deposits, this ceiling of Rs1,00,000 is considered insufficient. The Committee is of the view that this cover should be raised to at least Rs5,00,000 so as to encourage individuals to keep all their deposits in a bank convenient for them and in fact the Committee felt that, a way should be found out to insure 100% deposit by making necessary amendments in the relevant Acts."
However when Moneylife examined the data pertaining to the claims, it was clear that only the co-operative banks alone benefit through the insurance policy.This is like robbing the better-run nationalised, private and foreign banks to pay for the sins of the poorly regulated co-operative sector. It is interesting that the Damodaran Committee hasn't found it fit to recommend better regulation of co-operative banks, which, despite the guarantee of Rs1 lakh, end up causing huge losses to savers because of poor awareness and financial literacy in India.
Though there are numerous problems in extending deposit insurance cover to co-operative banks even under a separate scheme, still there may be compulsions to do so. For the viability and effectiveness of the deposit insurance system for co-operative banks, it is essential that the deposit insurance system be set up within a prudential framework.
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There are 240 schemes with different flavours, combinations and sectors. An ordinary investor would find it difficult to decide which scheme to buy and when, given the current market volatility. Debashis Basu, Trustee, Moneylife Foundation, told the audience on how to analyse each sector and pick the right scheme for specific needs
The high volatility in the market and the huge drop in the indices recently have left many investors confused. Investors are wondering if they should exit the market, or if they should look at the situation as a buying opportunity. Newbie investors are pondering if this is the right time to start investing in the market—or should they wait?
All these questions were answered at the 75th seminar conducted by Moneylife Foundation. The Foundation’s trustee, Debashis Basu, enlightened investors today on how to be safe and smart in selecting the right mutual fund scheme.
Financial products are not designed for easy use, pointed out Mr Basu. Investors need to constantly have to evaluate these financial products. In the seminar, Mr Basu gave the participants a detailed perspective on mutual funds and how investors should choose the right mutual fund schemes.
The participants were explained about the different types of schemes available, like equity funds, ELSS (equity linked saving schemes), bond funds, liquid funds and SIPs (systematic investment plans). Mr Basu explained the benefits and the risks associated with each of these plans and investment strategies.
Mutual funds allow investors to diversify over shares and bonds of different kinds. Investors in a mutual fund have a professional fund manager who would make investment decisions on their behalf. However, some fund managers are no better than amateurs and this can be evaluated through their fund’s performance. The money of an investor is left at the mercy of the manager.
As every investment comes with a cost, mutual funds come with a cost as well. Presently there is no entry load—but soon, investors may have to shell out as much as Rs150 if they invest more than Rs10,000 in mutual funds. Apart from this, there are fund management charges that are deducted in the form of units. Even if investors plan to exit, they would have to pay an exit load.
Mutual funds, however, are a safer way for those who would like to invest in the capital market compared to putting all their investments only in one stock. One can start with an investment as low as Rs500. Open-ended funds are highly liquid and can be converted into cash easily. Investors can avail of tax benefits as well through investing in ELSS.
SIPs (systematic investment plans) are a good option, but are flawed if they are not adjusted for the growth option. Investors usually don’t consider inflation and invest the same amount over years. In fact, the value of money falls over the years, therefore, investors should incrementally increase their investment amount.
Mr Basu introduced the idea of value averaging, a better option compared to SIP. It is a strategy through which investors should buy more when the NAV (net asset value) is less and vice-versa, thus increasing returns.
On how to choose the best equity scheme, ideally, returns over a five-year rolling period should be considered to analyse the performance of a fund. Moneylife regularly puts out such analyses. There are usually just four-five fund houses that consistently register good performance. A portfolio which is diversified across all sectors should be chosen; therefore, sector funds should be avoided. Investors should avoid NFOs (new fund offerings) and funds with fancy names.
A safe and smart option for investors—who don't have any experience about the markets and don't want to make any effort either—is making money from the market through index funds.
Bidders must accept service contracts that pay them a flat fee for each barrel extracted, rather than production-sharing agreements in which they gain a stake in the crude produced. A service contract means that they do not benefit from a rise in oil prices
New Delhi: ONGC Videsh (OVL), the overseas arm of state-owned Oil and Natural Gas Corporation (ONGC), is among 41 international oil majors who have qualified for Iraq's fourth bidding round for exploration blocks, reports PTI.
Besides OVL, others who have qualified to bid for the 12 exploration blocks due to be awarded in January next year are ExxonMobil, Shell, Total, BP, Chevron and a host of multinational oil companies.
Industry sources said 50 companies had submitted qualification documents for consideration by a 6th June deadline. Of these 41 qualified.
The Iraqi oil ministry is planning to hold a roadshow at the end of September with contracts due to be awarded on 25th or 26th January.
Sources said OVL had bid for the giant Halfaya oilfield along with state-run Oil India and Turkish Petroleum Corporation (TPAO) in Iraq's second post-war bid round in December 2009.
It lost the bid for the third largest field on offer in that round to a consortium led by a Chinese firm.
A group led by China National Petroleum Corporation bid lower than the $1.76 per barrel fee OVL and partners sought for boosting output from Halfaya field to 550,000 barrels per day.
CNPC, Petroliam Nasional Bhd (Petronas) and Total SA offered to boost production to 535,000 bpd from current 3,000 bpd at a cost of $1.40 a barrel. The Halfaya oilfield has estimated reserves of 4.1 billion barrels of oil.
OVL had, in the first round in June that year, lost the Zubair oilfield when it along with OAO Gazprom of Russia and TPAO had asked for a remuneration that was about five times higher than $1.90-$2 a barrel that Baghdad was willing to pay.
The Indian firm had also qualified for the third round last year but failed to make the mark.
In the fourth round, Iraq is offering seven gas fields and five oilfields.
Iraq, holder of the world's third-largest oil reserves, is seeking foreign investments to boost output after six years of conflict destroyed its infrastructure.
Bidders must accept service contracts that pay them a flat fee for each barrel extracted, rather than production-sharing agreements in which they gain a stake in the crude produced. A service contract means that they do not benefit from a rise in oil prices.
Sources said the formula for the two bidding parameters-the dollar-per-barrel remuneration fee and plateau production target-has been weighted 80% toward the fee, with the aim of dissuading companies from promising unrealistically high output targets.
Companies qualifying for the Iraq's fourth bid round were dominated by Japanese firms which included Inpex Corp, JX Nippon, Mitsubishi Corp, Mitsui and Sumitomo.
Russia's Bashneft, Gazprom, Lukoil, Rosneft and TNK-BP too qualified along with US' ExxonMobil, Chevron, Hess Corp and Occidental. Three Chinese firms-Cnooc, CNPC and PetroChina also figure in the list of 41.
Also among those qualified were Edison and Eni of Italy, BP and Premier Oil of the UK, Anglo-Dutch Shell, Norway's Statoil and France's Total.
The Egyptian General Petroleum Corporation, Kuwait Energy, the UAE's Mubadala, Angola's Sonangol and Turkey's TPAO are also among bidders.
The qualifiers also include Korean Kogas, Pakistan Petroleum, Petro Vietnam E&P, Petronas of Malaysia, Pertamina of Indonesia and Thailand's PTTEP International Holding Company.
Iraq has signed 12 oil field development contracts with international companies including ExxonMobil, BP, Shell, Eni, Lukoil and the Chinese National Petroleum Corp since late 2009, and plans to increase oil production capacity from 2.7 million barrels per day now to more than 13 million bpd in seven years.