RBI guidelines would constrain growth of banks with weaker franchises

RBI guidelines seeks to limit ability of banks to grow on the back of wholesale funding, which could prove to be a constraining factor for banks from growing aggressively, says Credit Suisse

The Reserve Bank of India (RBI) released guidelines on liquidity risk management under Basel III requirements, with stress on improving short-term balance sheet liquidity. The underlying purpose of the requirement is to ensure that banks have adequate liquidity to meet their needs even under extreme liquidity stress or market disruptions.


"The guidelines would constrain banks with weaker franchises from growing aggressively, as they would now need to ramp up liability franchises faster. Banks with relatively weaker franchises like Yes Bank, IndusInd Bank and Union Bank of India may see lower net interest margins (NIMs) and higher opex during the transition," says Credit Suisse in a research report.


RBI defined the measure of short-term liquidity – liquidity coverage ratio (LCR) as the ratio of high quality liquidity assets with banks to net cash outflows over the next 30 days.


The Implementation of these guidelines is being phased out to January 2019, limiting the potential impact during the transition. The guidelines put emphasis on granularity of funding and discourage excessive reliance on short-term funding. This would avoid a build-up of systemic risk by limiting a bank’s ability to grow on volatile wholesale funding.


"The guidelines will push banks towards more stable sources of funding and in turn towards lesser wholesale funding and greater granularity in deposits. Banks with weaker liability franchises will have to accelerate their liability franchise build-up. The guidelines will likely avoid build-up of systemic risk by limiting the ability of banks to grow on back of wholesale funding," the report said.


RBI has laid down stringent requirements factoring in potential run-down of deposits (5-10%) and claims arising from derivatives exposure under stress scenarios.


Credit Suisse said, "This could prove to be a constraining factor for banks from growing aggressively as they would now need to ramp up their liability franchises accordingly. Banks with weaker franchises may see lower NIMs and higher opex during the transition. RBI is further likely to come out with guidelines to address long-term asset liability management (ALM) mismatches (NSFR ratio – net stable funding ratio) under Basel III requirements, adding to the need for accelerated franchise build-ups. HDFC Bank, Axis Bank and ICICI Bank, driven by strong liability franchise and investment done in branch expansion over the past few years, are well placed to accelerate loan growth."


The Indian equities rush and 'missing' retail investors

Do not invest because someone tells you that markets will rally and you will mint money. See equities as a long term wealth building opportunity rather than a short term cash cow

Every Indian who has seen the stock markets rally over the past six months, but didn't invest, is definitely upset over missing this great opportunity to make money. In fact, Indian stocks were not even seen as a serious investment about nine to 10 months ago. There were all kinds of difficulties experts spoke about, that include low growth rates, high inflation, high fiscal deficit, a depreciating rupee, no confidence in the Government and so on. Today, despite equities gaining aggressively and trading at the higher end of valuation parameters, there are experts out there who say that this is the 'once in a lifetime opportunity' to buy Indian equities. So what has changed in the past six months that has turned what was not even seen as an opportunity into Gold?


The Sensex has risen from about 18,000 in August 2013 to 25,000 in May 2014, around 40% in eight months. Stock markets are said to be reflectors or indicators of hope in the economy and that is true, there is definitely a great pick up of hope. Several stocks in the infrastructure, capital goods, manufacturing, oil & gas and power segments that were not even seen as prospective investment bets have now turned into the most attractive stocks. Take examples of IRB Infrastructure, Sadbhav Engineering, IL&FS, DLF, BHEL, Coal India, JP Power, Reliance Industries Ltd (RIL), ONGC, and Indian Oil. All these stocks have more than doubled in the last 6 months. One can call these speculative moves. However, when you look at public sectors banks like Canara Bank, Bank of India, Corporation Bank, or for that matter the State Bank of India (SBI) itself, they have rallied by 60%-70% in the past two-three months. Not long ago, experts were apprehensive of a price-to-book multiple of one in SBI, quoting their doubts on bad debts, and today we see strong advices on investing into the country's largest lender even when it trades at two times its book value.


There is a definite desperation to bring the retail investor back into the stock markets. This reminds me of 2007, when the stock markets hit all time highs and there was a euphoria across the nation. Just then, Anil Ambani's Reliance Power entered the markets and its initial public offering (IPO) was a super hit. People queued up to open demat accounts and invest in this company. Even those days, news articles, advisers, and experts set massive targets and said that it was a lifetime opportunity for retail investors to buy stocks. The stock market indices were already at their lifetime high then. An article on targeted the Sensex to hit 27,000 in 2008, another said Sensex will hit 100,000 in 15 years, Morgan Stanley said it would cross 50,000 by 2018 and JP Morgan said that it would hit 30,000 by 2013. We all know what happened after that in 2008 and how the retail investors who entered the stock markets lost money. There could be some investors who held on to their investments and made money, or at least be at the break-even point but a large number of them booked losses.


Now, we are in a similar situation again. The Sensex is trading at a lifetime high and the experts are saying that this is the best opportunity for the retail investors to get into the markets. Two months ago, Deutsche Bank saw the Sensex at 24,000 by the end of 2014, but now, they project it will touch 28,000, Goldman Sachs projects the Sensex will hit 28,000 by end of 2014, Karvy sees it at 100,000 by 2020, Ambit Capital sees it at 30,000 in FY15, BoFA-ML sees it at 27,000 by end of 2014, Edelweiss says 29,000, and so on. How different is 2014 from 2008?


When the Sensex hit an all time high in 2007, it traded at a price-to-earning (PE) of 25 times. In January 2008, the Sensex hit 20,800, its all time high then, and traded at 26 times its earnings. Unfortunately, after that, things went haywire and by January 2009, the Sensex was trading at about 9,000 levels, at 12 times earnings. Soon, the stock markets picked up and the Sensex was again trading at 20 times earnings during 2010 and 2011. However, in 2012 and 2013, the Sensex consistently traded at 17-18 times earnings. Today, at 25,000, the Sensex is trading at 18.5 times earnings. Thus, it is clear that we are not seeing an overvalued situation like in 2008, where it traded at more than 25 times earnings. Moreover, in 2008, the world was also on the verge of witnessing the US mortgage crisis followed by the global financial meltdown, which hit investor sentiments.

But then, it may be interesting to note that the retail investor is not showing much interest in the stock markets despite a desperate attempt by brokerages, mutual funds and other financial firms dealing in equity markets to attract them. May be the retail investor has not recovered from 2008. In fact, even when the Government of India launched the Rajiv Gandhi Equity Savings Scheme (RGESS), there was a muted response despite the fact that the investor was promised taxation benefits. Its a different story that whoever did invest under this option would have minted money in the last one year. There is absolutely no doubt that the retail investor is keeping a watch on all this but is still not ready to take that the  plunge. Companies will have to ponder what is keeping them away.


One point definitely is that savers and common investors do not understand the functioning of equity markets and how or why or what makes the prices of stocks move. That is the major reason why investors and savers have stayed away from getting into equity investments. Even mutual fund investments have been dull for the last five years. The average assets under management (AUM) have remained at around Rs7 lakh crore for a long period, except the appreciation that we have seen recently. India has a abysmal retail participation in equity markets. However, there is a huge opportunity here, and none of the companies have been able to crack it. Even if 1% of our population (12 million) invest Rs1 lakh each in the stock markets, that will be Rs1.2 lakh crore. This makes good for the total foreign institutional investor (FII) inflows in the Indian markets for 2013.


So all considered, what do we do now? I would stick to the standard answer that has held good across ages and economic cycles. Do not invest because you are seeing the markets go up or down. Do not invest because someone tells you that the markets will run and you will mint money. Do not invest because you are desperate to join the rally. Spend time, read books, go through content on equities, economy and related pieces, learn and explore more, get an understanding, and then, take the call. Equities have undoubtedly outperformed almost every asset class in the long run. Most often, we spot gold only after it glitters. After all, that itself is its prime feature. So, do not try to jump the bandwagon or time the markets. Markets are always full of opportunities. That is exactly why they are termed markets. See equities as a long term wealth building opportunity rather than a short term cash cow. Take your investment decisions on your own. You are the best fund manager your money can have.



k m rao

3 years ago

After a long time I have read a sensible article on the subject. Till now every "expert" used to lament how we the common investors are losing " a great opportunity" in stocks market and starts sermonizing on power compounding, SIP etc. For the first time, I have seen someone who did not indulge in sermons. However I beg to defer with the author on his point that the retail investor does not understand the working of equity markets. I don't say I understood the markets. But some of the reasons why I don't invest or advise anyone else to invest in stocks are (i) the euphoria about stocks is only created by vested interests (financial analysts, business channels, news papers etc)for their business (ii) common investor is the loser for most of the time (iii) the so called technical analyses and other jargon is nothing but star gazing or counting crows on a tree (iv)the information disclosed by the companies need not be correct (Sathyam is an example) and SEBI can do nothing (It does not give me solace if Ramalingaraju is punished and I lose all my money) (v)markets are influenced by hawala money and above all (vi) when I have a number of other safe avenues where our capital is 100% protected and give me a minimum of 10% to 12% return, why should I ever come to stock market where there are only sharks waiting to loot my hard earned money ?. If these simple things are understood, it will be clear why Indian common investor will never touch stocks even with a barge pole.



In Reply to k m rao 3 years ago

Dear Mr. Rao,
There are always two sides to a remark. On the other side there has been wealth creation for umpteen people, over several years, all over the world and in India.
Dear Mr K M Rao,
Please do things sensibly using your own mind and with reasonable, controlled greed and without fear so that you do not need to blame a system or person or broker and I think one improves his financial wealth over time. Not everything is for you. Select your boundaries and enjoy the fruits.

k m rao

In Reply to JIGNESH Dosshi 3 years ago

Let us assume for argument sake that your statement "there has been wealth creation for umpteen people.." is correct. If this is true, then why should the financial institutions both public & private undertake the "unenviable" task of educating us, the illiterate fellows. Secondly why FM himself should direct SEBI to do something to bring the retail investors into market? (Kindly note I am not saying anything about what happened / happening in other markets). The sole reason for lack of retail participation in India is not because of lack of understanding of markets but lack of faith in the sense of fairness of markets. We the common folks have seen through the game. We are not ready to be taken for a ride by any one. The number of retail investors speaks volumes about the faith the people of India have in stock markets.

jaideep shirali

3 years ago

The point is Indian investors do not buy good shares when their prices are low. SBI's 52 week low is Rs 1452.9, today it is 2636. L & T's 52 week low is 663, today it is 1666. The average investor does not buy at market bottoms. In a rising market, he waits and waits to enter till markets peak. He then buys and the market crashes shortly thereafter, so he burns his fingers and goes back to deposits. When markets fall, good companies do not fold up, nor does the economy. We must try to buy when markets are low and then hold on. Only equities beat inflation in the long run. Yet, a good portfolio must have not just equities, but bonds and other instruments to diversify the risk.

ch prakash

3 years ago

I am keen reader of Moneylife magazine for the last five years. Moneylife always insists on timing the market. In the recent issue, they have observed the long term trend is up. Therefore, I feet it is the right time to start investing and it is better to invest through well managed Mutual Fund recommended by Moneylife. Otherwise, people will become mute spectators and will be left out of making wealth.

Dinesh jain

3 years ago

wow, such a difficult subject explained in a layman language.

keep it up...

Narendra Doshi

3 years ago

Well summarized. Pl remember each word & implement the last paragraph contents.


3 years ago

Understanding the market is very, very difficult as they are driven not only by fundamentals but also by sentiments- and no one can be sure which way sentiments turn up.
When I see a stock, its price and its financials and prospects, what I'm not sure is that whether the good or bad things are already reflecting in the shareprice. Perhaps a peer group review of P/E ratio is required- but how many people know about it? :-)


k m rao

In Reply to Abhishek 3 years ago

Who has the time for it Sir?

Building a Better India – Part 4: Identifying tax issues

One of Prime Minister Modi's poll promises was to end this 'tax terrorism' and give relief to not just individual taxpayers from the middle classes, but also to business and small entrepreneurs all across the country

Encouraging and building a non-adversarial tax regime is one of the most pressing needs in India today. Tax laws are complicated, convoluted and often redundant. The officials charged with administering the tax system make arbitrary judgments and commit to rash decisions. Tax-evasion may not be a direct result of this opaque tax regime but it may owe a part of its origin to this. Let us look at the various problems and complexities of the current taxation environment with a special focus on businesses.

Multiple and numerous taxes:

Tax payers are aggrieved due to high and multiple kinds of taxes, duties, levies and cess etc. making compliances and payments difficult and cumbersome resulting in huge wastage of time and manpower. In fact at least 20% of the total official time is wasted only on this account.

Inspector/Bureaucratic Raj:

Due to numerous laws, taxes, duties and levies, one inspector/officer or the other from multiple govt agencies is always sitting on the head of the businessman/industrialist harassing him or directing him to attend to his office to make all sorts of unnecessary enquiries, probe the books and records and somehow find some fault/ irregularity or unintentional lapse/omission to create a case to demand graft. Most of these public servants who treat themselves as Super Boss having powers of arrest and prosecution neither think nor are taught that in absence of business and industries; the  govt will get no revenue to pay for their salaries and for other purposes.

High Incidence of taxes:

An entrepreneur somehow arranges interest bearing capital by mortgaging his assets, invests the same in business with great risk, works tirelessly for the success of his business, faces great harassment in the hands of public servants/bureaucracy, pays excise duty, VAT, TOT, trade licence fees, Octroi, profession tax, P.F, ESI and so many other taxes; and then is forced to cough up income tax @34% of whatever profit is left to himself.

No person feels comfortable in paying such huge income tax particularly considering the fact that if his business falters and start making losses due to any reason; the government or the tax agencies will neither rescue him nor give him any relief. Hence the incidence of income tax needs to be suitably and equitably reduced for better compliance and the govt should strive for higher revenues by adopting the simple business technique of maximisation of profits through high volumes with lower margins.

Large portion of Tax payment gets wasted:

The other genuine grievance of tax payers is that a big portion of his tax payment goes waste in payment of  salaries of govt staff, interest on loans taken by governments, gets plundered in the distribution chain of numerous  government schemes and subsidies or on wasteful revenue expenses and is not productively utilized .

One of Prime Minister Modi's poll promises was to end this 'tax terrorism' and give relief to not just individual taxpayers from the middle classes, but also to business and small entrepreneurs all across the country.

Albert Einstein once said, “The hardest thing in the world to understand is tax.” Let's hope the government takes quick steps and proves Einstein wrong atleast on tax.

You may also want to read

Building a Better India-Part1: How to create a smaller and smarter government

Building a Better India-Part2: Transforming political landscape

Building a Better India – Part 3: Bringing systemic changes in constitutional bodies

(Kolkata-based Dalbir Chhibbar practised as a CA till 1990 and later started his own buinsess)



S K Nataraj

3 years ago

You pay taxes and governments( Chandrababu Naidu & Manmohan Parikkar splurge on loan waivers and junkets to Brazil for the World Cup. Our hard-earned money evaporates like this!

Nagesh Kini

3 years ago

Dalbirji - this is from one once practicing CA turned concerned citizen activist to another turned business man. What better is the CA profession but another business devoid of morals and ethics? Actively conniving with fraudsters like in the cases of GTB,Satyam and now MCX. The auditors were patently negligent.It didn't require a Forensic Audit By PwC - post-Satyam where they were the statutory auditors it tantamounts to a pot calling the kettle black or was it a case of 'set a thief to catch a thief'. Why was a tainted MNC firm once blacklisted by the RBI again assigned this job? Are there no equally competent CA firms in India?


S K Nataraj

In Reply to Nagesh Kini 3 years ago

I fully endorse your comments. Very well said. How many scams have surfaced, one after the other in rapid succession, and world- renowned audit firms were found wanting in the discharge of their professional duties. It took a person like Vinod Rai to expose certain mega goof- ups in certain areas of government. But PWC and certain Directors of the erstwhile Satyam Computers, of whom one was an ISB bigwig, failed to notice what was going on in their own company led by the chieftain-at- large, Ramalinga Raju. We should have stringent laws to punish the audit profession too. The existing laws won't do. A Jignesh Shah, a Saradha Ponzi schemes guy, , a Subrata Roy -- all managed to evade the law for quite some time, until the law did indeed catch up finally.
The examples I would quote here are the ones in the U S where Rajat Gupta has been punished for insider trading and the Barings Bank case in Singapore in which Nick Leeson was sentenced in a very quick trial. Financial misdeeds need to be handled in this sort of firm, tough manner.

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