Monday 31 October 2011

National Manufacturing Policy and NIMZs-VRK100-31Oct2011


National Manufacturing Policy
and NIMZs




Rama Krishna Vadlamudi, HYDERABAD   31 October 2011


The Government of India is proposing to bring in a new National Manufacturing Policy (NMP) which aims to increase the share of manufacturing in GDP to 25 per cent by 2022 and create 10 crore jobs in the manufacturing sector (the share of manufacturing remained stagnant at 16 per cent between 2000-01 and 2010-11). The Union cabinet had on 25 October 2011 approved the NMP which was the brainchild of the Department of Industrial Promotion and Policy under the Commerce & Industry Ministry.

Key features of the new National Manufacturing Policy are:

v    To increase the share of manufacturing sector in GDP to 25 per cent by 2022
v    To create 10 crore jobs in the manufacturing sector by 2022
v    A key platform for achieving the NMP’s objectives is the creation of National Investment and Manufacturing Zones or NIMZs in select towns/areas
v    The land acquisition for the NIMZs will not be done by the Central Government, but will be done in partnership with the state governments
v    No cultivable, agricultural or forest land will be allowed to be acquired for NIMZs
v    The new policy aims to bring more benefits to workers – a job loss policy promises adequate compensation to labour or to redeploy them to other NIMZs in case of closure of units
v    Tax incentives will be provided to small and medium enterprises (SMEs)
v    More thrust will be given for green technologies and skills training and development
v    Private sector will be given standard deduction of 150 per cent of expenditure for skill development initiatives
v    Sectors, like, capital goods, aerospace, shipping, IT hardware, solar energy and telecom equipment will be given priority
v    Single-window clearance is promised to cut bureaucratic delays
v    Proposes to sanction Rs 17,500 crore over the next five years for developments of integrated industrial townships in DMIC
v    Special attention will be given to employment-generating sectors, like, textiles & garments, leather & footwear, food processing industries, and gems & jewellery with a view to creating more jobs

What are NIMZs?

The NMP envisages setting of large industrial townships called National Investment and Manufacturing Zones (NIMZs) which will enjoy good infrastructure, single window clearances, lesser government regulations and fiscal incentives.

These greenfield integrated industrial townships will have their own infrastructure – ranging from sanitation, water, power generation, schools, polytechnic colleges to hospitals. To begin with, seven NIMZs will be set up along the Delhi-Mumbai Industrial Corridor (DMIC).

DMIC is a large infrastructure project that aims to industrialise areas between Delhi and Mumbai spanning around 1,500 km. The $90-billion project is being built with financial and technical aid from Japan.

The NIMZs will be set up with private sector participation and with the active involvement of state governments.

The commerce and industry minister, Anand Sharma, has stated that seven smart cities will be coming up under DMIC in the first phase. He further said that a total of 12 NIMZs would be allowed in all probability.

  
Criticism of the NMP

The industry associations have generally welcomed the NMP though some have expressed their doubts about the implementation of the new policy.

Land acquisition for industrial development has become a critical issue of late due to opposition from farmers and land owners over land compensation issues. A Land Acquisition Bill in on the anvil now.

In 2005, the government had brought in a policy for creating Special Economic Zone or SEZs on the lines of Chinese SEZs. It may be mentioned that the SEZs have not achieved their desired objectives. It was a big ‘land-grab’ opportunity for private sector. Many fiscal incentives provided to SEZs initially were later withdrawn. Only a fourth of the total SEZs formally approved are in working condition at present.

Labour reforms are a big policy area which has not been touched by the reform process in the last two decades. The private sector is happy to manage the labour demand with the help of temporary workers in the absence of any exit policy/labour reform from the government.

Bibek Debroy, an economist, had a few years back suggested that the entire nation should be provided with fiscal and other incentives instead of just creating a few islands of prosperity. Maybe, his suggestion deserves a serious consideration from policymakers.

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Abbreviations: GDP – Gross Domestic Product or national income

Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

Sunday 30 October 2011

Why Are SB Interest Rates Deregulated?-VRK100-30Oct2011


Why are Savings Bank
interest rates deregulated?




Rama Krishna Vadlamudi, HYDERABAD   30 October 2011


Reserve Bank of India has given freedom to banks to set their own interest rates on Savings Bank deposit accounts. Till now, SB deposit interest rates were decided by RBI and banks offered RBI’s uniform rate to SB accountholders. On 25 October 2011, RBI announced deregulation of SB interest rates with immediate effect. The same day, Yes Bank raised its interest rate on SB deposits by 200 basis points (or two per cent) to six per cent. Let us analyse certain issues related to the deregulation of SB interest rate.


What is interest rate deregulation?

As banking sector regulator, Reserve Bank of India used to set interest rates for deposits and all banks used to offer uniform rates to depositors depending on maturity periods. Deregulation is nothing but giving more freedom to banks to offer their own rates.

Allowing banks to have more autonomy, RBI had undertaken the process of deregulation and started giving freedom to banks to offer their own rates in 1992. Except Savings Bank deposit interest rates, all the deposit rates were deregulated by RBI in 1997.

On the lending side, the rates on small loans up to Rs 2 lakh and rupee export credit were deregulated in July 2010, when Base Rate was introduced replacing the benchmark prime lending rate (BPLR) system.

Why are Savings Bank deposits so important for the economy?

Household financial assets are 10.4 per cent of India’s GDP (2008-09). Share of SB deposits is 12.8 per cent of total household financial assets. Total SB deposits were around Rs 8.96 lakh crore as at the end of March 2009.

Around 85 per cent of SB deposits are held by household sector which include senior citizens, small savers, pensioners, salaried class, small businessman, and others.

Why did RBI deregulate Savings Bank interest rates?

The deregulation of SB deposit interest rates is part of the process of financial sector reforms and bank autonomy initiated by RBI in 1992.

RBI wants to make SB deposits more attractive to savers. Deregulation will stimulate banks to offer more SB products and better product innovations. RBI expects that the SB interest rate deregulation will improve the effectiveness of monetary policy transmission.

In view of the above, RBI had deregulated interest rates on SB deposits with immediate effect when it announced the second quarter review of monetary policy on 25 October 2011.

Are there any conditions?

RBI has imposed two conditions on the banks while allowing freedom to set their own interest rates on SB deposits. They are:

Ø     First, each bank will have to offer a uniform interest rate on savings bank deposits up to  Rs one  lakh, irrespective of the amount in the account within this limit
Ø     Second, for savings bank deposits over Rs one lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.

This means banks cannot offer different rates based on area, like, metropolitan city, semi-urban or rural areas. Moreover, a bank cannot offer different rates, say, for one depositor with Rs 25,000 balance and another with Rs 70,000 balance (that is, for balances below Rs one lakh). However, a bank can offer one rate to a depositor, say, with Rs 150,000 balance and another rate to a depositor with Rs 200,000 balance (for depositors with balance above Rs one lakh).

Whether the deregulation is applicable to NRE and NRO accounts?

Interest rate on Non-Resident (External) Accounts Scheme and Ordinary Non-Resident Deposit under savings account, which has been prescribed at four per cent per annum at present, will continue to be regulated until further review, according to RBI.

Will banks raise SB interest rates?

The competition will surge among banks for SB deposits, which are low-cost. Already, Yes Bank raised the rate to six per cent the same day RBI announced the deregulation. State Bank of India has stated that it may raise SB interest rate by 100 or 125 basis points (1.00 per cent or 1.25 per cent).

The proportion of SB deposits in total deposits is very low for banks, like, Yes Bank, IDBI Bank and Kotak Mahindra Bank. As such, they may offer more rates to their depositors to increase their share of low-cost deposits and increase their market share.

Banks, like, SBI, HDFC Bank, Punjab National Bank, and Axis Bank are having higher share of SB deposits in their total deposits. They too will raise the rates on SB accounts to protect their market share.

As of now, the liquidity is in deficit mode meaning that banks are struggling to access short-term funds and they are turning to RBI for their day-to-day operations. It would be interesting to watch the response of the banks when there is excess liquidity in the system. As was observed during the 2002-2005 period, banks drastically reduced their term deposit interest rates to as low as 5.5-6.5 per cent.

It is hoped that the deregulation of SB deposit rates will not lead to unhealthy competition among banks. Banks are expected to manage the risks involved in asset-liability mismatches in a better manner even after the deregulation of SB interest rates. Even though, SB deposits are supposed to be short-term in nature, a major portion of SB deposits is treated as ‘core’ deposits by banks and banks use SB deposits also to lend to long-term loans.

Who will be benefited by the deregulation?

As of now, banks are in need of more funds (deficit liquidity). So, they may increase their SB interest rates to attract more customers and funds. This is clearly a benefit to savers at present. With increased rates, banks will be able to attract new customers who will have more choices now.

Many SB customers use the account for their day-to-day transactions. Some wealthy customers keep high balances and higher SB rates will allow them to earn more interest on their SB balances.

If the difference between interest rate on term deposits and SB interest rate is wide, savers will shift their money from SB to term deposits. However, if the difference is small, they may keep their money in SB accounts without bothering about term deposit rates. At present, term deposits carry interest rates of 8 to 10 per cent, which is stimulating depositors to keep more money in term deposits rather than in SB accounts.

The benefit to existing customers who are having ‘sweep’ facility may not be large. Sweep facility in SB accounts allows the customers to move excess money beyond a certain limit to fixed deposits; and to move the fixed deposit amount back to SB account when a customer issues a cheque or needs funds.

The flipside of deregulation is that when banks are not in need of funds (surplus liquidity), they may decrease the interest rates on deposits – both term deposits and SB deposits. In such situations, interest rate differential between term deposits and SB deposits may come down lessening the attractiveness of SB deposits as happened during the 2002-2005 period.

How does the rate hike impact banks?

Cost of SB deposits has already gone up for banks before the SB deposit interest rate deregulation.  From April 1, 2010, banks have been giving interest rates on SB account based on daily product. With effect from 3 May 2011, banks have been paying four per cent interest rate on SB deposits compared to 3.5 per cent earlier.

The cost of SB deposits will further go up from now with the advent of competition from SB interest rate deregulation. Different banks will get impacted differently depending on several factors – like, branch location, nearness of branch, facilities provided under SB accounts, technology platform, and alternative delivery channels.

It remains to be seen whether banks will pass on the higher cost of funds to customers. Depending on the competition, banks may increase their transaction and service charges for SB customers.

However, there are limitations to passing on the higher costs as any adverse reaction from depositors will cause reputation risk to banks. Banks which are enjoying higher net interest margins (NIMs) may absorb the higher cost – from hike in SB deposits – themselves for the time being.

What should investors in bank stocks do?

As has been pointed out earlier, the SB interest rate deregulation and the consequent increase in cost of deposits will impact banks differently depending on the number of branches, branch location and quality of service. Quality of service, branch location, branch network and product design play a major role in customers’ choices.

For example, Yes Bank is having around 200 branches. The bank may be able to attract new SB customers to its fold in locations where it is having branches. However, it cannot pose any threat to banks in other locations unless it expands its branch network to those locations.

Issuance of new bank licenses will take some more time if one considers the long process of decision-making on the part of regulators and lawmakers. Real action will start when new banks enter the fray after the new licenses are issued by RBI.

Competition has two sides to it – both positive and negative. The impact from competition hinges on individual bank’s agility. 

In view of the above, it may take more time before the real competition starts to hurt the existing banks which enjoy higher share of SB deposits. As such, investors in bank stocks need not panic provided they are holding stocks of fundamentally sound banks.

Criticism of the SB rate deregulation

The deregulation of SB deposit interest rate has attracted criticism from several quarters. Some critics questioned the timing of the deregulation. Banks which enjoy higher share of SB deposits are not comfortable with the deregulation.

There are several rates in the system, which are not deregulated distorting the interest rate environment in the economy. The interest rates on public provident fund (PPF), provident fund, national savings certificates (NSC) and post office deposits continue to be administered by the Government of India. These rates do not move in line with the market interest rates (These rates were last changed in 2001/2002).

As such, there is a need to have a relook at all the administered interest rates in the country and make them market-determined as has been suggested by various committees in the past.

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References: RBI

Abbreviations: GDP – Gross Domestic Product or national income.

Appendix

Some important data for 2008-09:

Ø      Gross domestic savings are 32.5 per cent of GDP at market prices.
Ø      Household sector savings are 22.6 per cent of GDP.
Ø      Out of the household sector savings, financial assets are 10.4 per cent of GDP and the remaining are physical assets.
Ø      Share of total bank deposits is 54.9 per cent of total household financial assets.
Ø      Share of savings bank deposits is 12.8 per cent of total household financial assets.
Ø      Share of currency is 12.5 per cent of total household financial assets.
Ø      As at the end of March 2009, total savings bank deposits are around Rs 8.96 lakh crore.

What is monetary policy transmission?

Ø      Whenever RBI raises or lowers policy rates, banks are expected to revise their interest rates in tune with the RBI. The intentions of RBI will be carried through the commercial banks to the entire economy. Banks pass on the RBI’s policy measures either by increasing the lending and deposit rates or by lowering them in tune with the RBI’s policy measures. This is called Monetary Policy transmission.

Ø      Effective monetary policy transmission entails that all rates must move in tandem with RBI’s policy interest rates. This process is hampered if any interest rate is regulated. Savings Bank deposits constitute around 22 per cent of total deposits (2009) and as such SB interest rate deregulation is important for effective monetary policy transmission.



Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

Saturday 29 October 2011

What is ISIN



What is ISIN?

International  Securities Identification Number

Rama Krishna Vadlamudi, Hyderabad
29 October 2011

India’s capital markets regulator, Securities and Exchange Board of India, SEBI, has made dematerialized settlement mandatory for all transactions in securities. This was done in a phased manner, thus bringing most of the securities in India into dematerialized form. Now, the settlement of trades on stock exchanges is almost 100 per cent in demat form.

The dematerialization was brought in to prevent physical certificates from sneaking into circulation, avoiding bad deliveries and associated problems that existed before the pre-demat era. Companies have to mandatorily go for dematerialized form of securiteis before making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs. 10 crore or more only in dematerialized form.

Movement of securities has become almost instantaneous in the dematerialized environment. Two depositories, namely, National Securities Depositories Limited (NSDL) and Central Depository Services (India) Limited (CDSL) provide electronic transfer of securities and more than 99 per cent of turnover is settled in dematerialized form. All actively traded scrips are held, traded and settled in demat form. As per the schedule of the clearing agency, the securities will be transferred in-and-out of members’ demat account by these two depositories, seamlessly and simultaneously, through depository participants’ (DPs) pool accounts. A DP is an inter-face between a demat accountholder and a depository.

Each instrument or security is identified separately in NSDL/CDSL system through a unique code called ISIN (International Securities Identification Number). The description of each instrument is communicated to all the Depository Participants and Issuers through circulars.
  
ISIN is an alphanumeric code (12-digit):

  • Used by share custodians to track holdings of institutional investors in a format which is consistent across markets worldwide
  • Designed by United Nations International Organization for Standardization (under ISO: 3166)
  • ISIN is issued by National Numbering Agency (NNA)
  • SEBI acts as NNA in India
  • Physical and Demat shares will have different ISINs
  • Fully paid-up and partly paid up shares will have different ISINs
  • SEBI being the National Numbering Agency for India has permitted NSDL (National Securities Depository Limited) to allot ISIN for demat shares

NSDL ensures the following during allotment of ISINs:

  • The ISINs allotted by NSDL does not at any point of time breach the
            uniqueness of ISIN of physical form for the same security
  • ISIN for a security is allotted only when the security is admitted to NSDL or on receipt of request for ISIN from CDSL
  • The numbering system is simple
  • The numbering system of ISIN is in compliance with the structure of ISIN adopted by SEBI
  • In case, any corporate action results in a change in ISIN, then the securities bearing the new ISIN is treated as newly listed security for group categorization

Numbering System of ISIN: The numbering structure for securities in NSDL is of 12-digit alpha-numeric string.

  1. The first two characters represent country code i.e. IN (as per ISO 3166).

  1. The third character represents the Issuer Type as detailed in Table 1 below. The list may be expanded as per the needs. Maximum issuer types can be 35 (A to Z & 0 to 8. The partly paid-up shares are identified by 9).

  1. The next four characters (fourth to seventh character) represent company identity. The first 3 characters are numeric. The fourth character is alpha character. The numbering begins with ‘001A’ and continues till ‘999A’ and proceeds to ‘001B’.

  1. The next two characters (the eight and ninth characters) represent security type for a given issuer. Both the characters are numeric. The security types are planned which may be expanded as per the need as detailed in Table 2.

  1. The next two characters (the tenth and eleventh characters) are serially issued for each security of the issuer entering the system.

  1. Last digit is double-add-double check digit.



 Table 1: Issuer Type (the third character)




ISSUER TYPE
CODE ALLOTTED
Central Government
A
State Government
B
Municipal Corporation
C
Union Territories
D
Company, Statutory Corporation, Banking Company
E
Mutual Funds including UTI
F

   NB: ISINs for Government Securities (G-Secs) are allotted by Reserve Bank of India
           



 Table 2: Security Type (the eighth & ninth characters)





SECURITY TYPE

CODE
Equity Shares
1
Postal Savings Scheme
2
Preference Shares
3
Bonds
4
Deep Discount Bonds
5
Floating Rate Bonds
6
Commercial Papers
7
Step Discount Bonds
8
Regular Return Bonds
9
Certificates of Deposit
10
Securitised Instruments
11
Debentures
12
Units
13
Government Securities
14
Warrants
15
Commodities
16
RBI Relief Bonds (incl National Savings Certificates VII issue)
17





ADDITIONAL READING




The stamp duty on transfer of demat securities has been waived. There are two depositories in India, namely, NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities.

In order to promote dematerialisation of securities, India’s leading financial institutions, along with National Stock Exchange, had in August 1996 established the National Securities Depository Ltd. (NSDL), the first depository in the country, with the objective of enhancing the efficiency in settlement systems as also to reduce the menace of fake/forged and stolen securities. This has ushered in an era of dematerialized trading and settlement.

CDSL was set up in February, 1999 to provide depository services. All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with CDSL

Thursday 20 October 2011

Cloud Computing Explained-VRK100-20Oct2011


Cloud Computing Explained
           



Rama Krishna Vadlamudi, HYDERABAD      20 October 2011


Cloud computing is a new internet-based technology where data is outsourced and stored in a secure environment (cloud). The new technology is provided as an online service to customers who pay for the service either by subscription or on demand.

Cloud computing refers to shared computing resources, storing data on a virtual platform rather than on an individual hard drive. The term ‘cloud computing’ was popularised in 2006 by Eric Schmidt, Google’s Executive Chairman.

Cloud computing helps reduce costs, both capital and operating, through economies of scale. The main concerns about cloud computing are data security and privacy.

The users of this new technology need to have adequate bandwidth to remain connected to the cloud, where the data is stored.

The cloud users are connected through a network to servers (where the users’ data is stored) kept in the cloud by cloud service providers. The network can be a public network (internet) or a private network (dedicated lines). 

The infrastructure for the cloud will be provided by the cloud service provider. Examples of cloud service provider are IBM, Amazon, Google, Microsoft and others. Some Indian companies that provide such services are TCS, Infosys and Wipro.

Apple Inc has recently announced introduction of its cloud computing services called iCloud for users of iPod, iPhone, iPad and others. iCloud stores customers’ music, photos, documents, books, mails, etc.
Cloud computing has taken the information technology services by storm around the world. In a cloud computing scenario, a company can actually move its core data and other programmes that operate on such data from private machines such as personal computers or corporate servers to servers owned and operated by vendors.

Cloud user companies can access these services and work from anywhere in the world. User companies will not store their data with them and instead use the servers managed by cloud service providers or vendors.

As such, companies need to choose the vendors or service providers extremely carefully; otherwise there are chances of losing valuable and important data. Overall, cloud computing has its merits and demerits and users need to assess their own needs before going for it.

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Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose.

Author’s articles on financial articles can be accessed at: