Kids educating adults on financial products makes for very poor advertising
Tata Mutual Fund has launched a scheme called Systematic Investment Plan (SIP). I am not sure how the scheme pans out for the investor, for that the editors of Moneylife are the experts. What I do understand is that it's being sold like a fast-moving consumer product to first-time investors, and that's why they have positioned it as an 'investment ka pehla kadam'. Anyway, we shall discuss the communication they have launched to promote the scheme.
The ad film features a kiddie birthday party. The dad gatecrashes the party, and the kanjoos fellow gifts a lowly piggy bank to his birthday boy son. If this is what he can come up with for his ladla's birthday present, am quite sure his missus has filed for divorce, perhaps that's why she's not to be seen in the commercial, but I digress.
Naturally, the brat is pissed off (surely he was expecting an iPad!). And he, along with his fellow partying brats, creates a scene. And the entire gang mocks the daddy for being such a clod. And the bachchas get together and educate the man. That if he is so bothered about saving money, then he must go for an investment in Tata SIP. And then he's painfully explained the scheme.
Nothing great about the commercial, but kids educating an adult on a mutual fund scheme is a cute thought and should generate some minor laughs. And this gimmick may make the ad stand out a bit. But here's the big problem: A new scheme of investment, especially for first-timers, is a very serious matter. Potential investors would be very wary of these schemes and would demand answers to a hundred serious questions. And this is certainly no laughing matter. In fact, a mockery in this situation would drive them away even further.
And while it may be cute, I have an issue with a kid making fun of his daddy. That too in the company of other kids. This only encourages crass behaviour in the young gen, and god knows this problem already exists in the 'Hep New India'. In fact, I can already visualise bachchas, after watching the commercial, scoffing at their parents on myriad issues.
Net-net: Poor advertising. The role reversal trick is done to death. And kids educating adults in this category is a disastrous situation. And yes, the route spoils the kids even more than they already are. Back to the drawing board, people. And if you have children, wish you some peace and dignity at home.
Admitting that the credit crisis has tarnished the image of the credit rating industry, Mr Dogra allays concerns of ‘grade shopping’ in India and explains why his company will never fall prey to such practices
In the credit rating industry, there are a number of allegations of ‘grade shopping’ by companies, wherein clients try to negotiate with rating firms on higher grades. Rating agencies in the West have been severely criticised for compromising on quality of ratings in a bid to generate business and keep clients happy.
The very business model of a rating firm is such that it involves an inherent conflict of interest. The ‘issuer pays’ model, which is followed by most rating firms, involves the client paying the rating firm for having its security rated.
But DR Dogra, managing director and CEO of Indian credit rating firm CARE Ratings points out that while he can negotiate on fees with the client, he can never negotiate on the rating. “Had rating shopping been possible, I would have gone to clients of CRISIL and ICRA and negotiated lower fees and offered higher ratings than them. So why are we not doing this? After all, we are all commercial companies and so are interested in our bottom-line,” said Mr Dogra.
The longevity of the credit rating agency does not depend on the number of clients we rate, explained Mr Dogra, “It depends on the investors’ confidence in us. Lenders have belief in my ratings and so they push their clients to come to us for having their security rated. But if they don’t trust us, why will they do that? We can negotiate on fees but we can never negotiate on ratings.”
However, Mr Dogra admitted that clients are often unhappy with the ratings assigned to them and that many clients move on to other firms in search of higher ratings. “When we assign a rating of 1 or 2, clients oppose. The reason is that their fees depend on the amount they raise. Sometimes, a lower rating means that the issue does not materialise. If the issue happens, they get their fees. If it doesn’t, they don’t get their fees. So, they are concerned.”
Credit rating agencies have come in for a lot of stick in the aftermath of the credit crisis that left the global financial services industry virtually in shambles. Within a span of roughly two years, the nearly century-old aura of trust and credibility surrounding rating giants like Standard and Poor’s and Moody’s almost went up in smoke. While these rating agencies were, willingly or unwillingly, party to spreading the toxic papers that brought ruin to the debt markets, Mr Dogra feels that not the entire criticism against credit rating agencies is accurate.
Speaking to Moneylife on the sidelines of the 4th Annual CFO India Strategy summit, Mr Dogra said, “There is a big hue and cry around this issue. A lot of criticism has been levelled against this industry. Despite having an unblemished record of more than 80-90 years, two years of this subprime issue has somewhat tarnished the image of these rating firms. Certainly, what happened in the last two-three years is not desirable.”
But Mr Dogra does not agree with all the accusations. “I don’t think that the entire criticism of rating agencies is correct. Some of them were indeed party to the reckless pushing of these subprime loans by investment banks. The assumptions these agencies made have gone haywire because of the peculiar volatility which the real-estate market experienced in those days. Fortunately, we don’t have such problems here in India.”
CARE Ratings is also unique in its approach towards ratings. It has an external rating committee which assigns the grade to any issue, unlike other rating agencies in India which have moved on to the practice of having their in-house management team do the grade assignment. CARE’s external rating committee is headed by YH Malegam, a respected figure in the industry.
According to economists, the hike in key rates will lead to a rise in cost of funds for banks and eventually make loans expensive, which in turn will reduce consumption
Continuing with its policy to modify policy rates in small percentage points, the Reserve Bank of India (RBI) on Thursday raised the short-term lending rate by 25 basis points (bps) and borrowing rate by 50bps. The latest hike, fifth in a row this year, in key policy rates will make loans expensive.
According to a PTI report, Bank of Maharashtra's chairman and managing director Allen Pereira said, "(The) rate of interest may have to go up. Banks have to take a view at the end of the quarter. Till 30th September, I do not expect any change. Pressure is there to increase rates in the near term."
The new rates, which come into effect immediately, were announced as part of the first scheduled mid-quarterly review of the monetary policy. According to economists, the hike in key rates will lead to a rise in cost of funds for banks and eventually make loans expensive, which will in turn reduce consumption.
"With the central bank raising the repo rate by 25bps to 6% and the reverse repo tender rates by 50bps to 5% in the latest policy review, borrowing rates will go up for consumers as well as for developers. For the projects that are already priced high, the impact in terms of demand erosion will be higher. We don't see much impact on low-ticket sizes, i.e., Rs25 lakh-Rs50 lakh purchases," said Shobhit Agarwal, joint managing director for capital markets, Jones Lang LaSalle India.
He said, "End-user demand will remain intact. Investors in residential and commercial premises will find lesser arbitrage opportunities as the cost of funding purchases becomes higher. Banks will revise housing loan rates upwards. As for funding to developers, this will not be seriously compromised apart from the cost of borrowing going up."
Some economists feel that the central bank is close to take a pause in its rate-hiking cycle.
"With monetary conditions tightening and global demand still sluggish, we retain our view that growth and inflation are likely to moderate in the coming quarters and that the RBI is close to pausing in its rate-hiking cycle," said Nomura Financial Advisory and Securities (India) Pvt Ltd in a note.
Echoing the same view, Indranil Sen Gupta, economist, DSP Merrill Lynch (India) said, "We continue to expect the RBI to pause after hiking the LAF reverse repo rate by 25bps on 2nd November with inflation peaking off - because inflation will likely come down to 7% by December and 5.7% by March 2011."
"The focus of RBI policy will need turn, sooner than later, to injecting liquidity to fund loan demand. After all, deposit growth, at 14.4%, is trailing 20% credit off-take at a time of a high 8.2% of gross domestic product (GDP) fiscal deficit and a 2.9% of GDP current account deficit," he added.
"In our view, real interest rates are likely to turn positive in India in late Q4, when inflation subsides to 6% or below by December 2010. In such an environment we believe inflation is unlikely to be the sole criteria for deciding monetary policy, as the underlying objectives of the RBI would be achieved," said Barclays Capital in a release.
Containing spiralling inflation which is hovering at double digits has been the RBI's top agenda. However, some analysts were thinking that taking IIP numbers alone into account, which have been quite volatile of late and have been revised downwards, the central bank may like to wait at least until the next policy meet for a more clear picture to emerge on the IIP growth front.
Kisan Ratilal Choksey Shares and Securities Pvt Ltd said in a note, "(The) market has already discounted a 25bps hike in both repo and reverse repo rates. Further, if RBI eschews raising rates this time it can always raise it any time either before or at the next policy meet."
While acknowledging that inflation remains the 'dominant' concern in policy management, the RBI said recent monetary actions have helped in generating early signs of a downturn in non-food manufacturing inflation. It noted that real interest rates are still negative, and the process of monetary normalisation may be deemed incomplete if this were to continue.
WPI inflation (new series) for August came in at 8.5% showing a sign of moderation against 9.97% a month ago. However, the index of industrial production (IIP) numbers for July bounced back to double-digit growth of 13.8% - significantly higher than the market's expectation of 8%-9% driven by strong growth in capital goods and consumer durables - each growing by 63% and 22%, respectively. The manufacturing sector grew by 15% while mining and electricity grew by 9.7% and 3.7%, respectively.
In its first ever mid-quarter policy review, the RBI has narrowed the corridor between repo and reverse repo rate to 100bps, indicating the central bank's desire to reduce volatility in the overnight call rate.
"We believe the Reserve Bank has finished raising the repo rate, but has left a small window open for further action on the reverse repo rate, especially given the priority of narrowing the corridor," said Barclays Capital.
Ramanathan K, chief investment officer, ING Investment Management India, said, "The 50bps hike in the reverse repo rate should not be construed as hawkish aggression given that we are moving into the busy season where liquidity would continue to be tight. The rate changes from now on will depend on evolving macroeconomic conditions - both domestic and global."
Since October 2009, two considerations, normalisation of the monetary policy stance as the crisis abated and inflation management have driven the RBI's rate and liquidity actions. The central bank said it believes that the tightening that has been carried out over this period has taken the monetary situation close to normal.
Though the RBI had raised the two key policy rates, it kept the bank rate, cash reserve ratio (the portion of deposits that banks are required to keep with the central bank) and statutory liquidity ratio or SLR, the portion of deposits that banks have to park in government securities, unchanged.