March 09, 2014

Volume 33

Bidding Goodbye Times

This week brings with itself the mixed feelings of both happiness and

sadness. On one hand, the seniors excelled well bidding us all goodbye

in flying colors greeted by Cyrus Mistry as the Chief Guest for the

convocation ceremony. The excitement prevails among the juniors as

their one year of this eventful journey is about to end all have their

collars straightened up for the summer internship. Club FinNiche

wishes good luck to all the seniors for a successful journey ahead and

also to all their batch mates for their final exams and there after

summers.

We bring to you this week Finxpress covering the latest happenings of

the financial world and keep us all updated and informative. In this

edition we bring to you economic repercussions of the crisis in

Ukraine as our In Focus topic followed by our opinion section on India

mired in the global economy. This edition of FinXpress also brings to

you some insights on ‘Capital Adequacy Ratio’ as the term of the week.

We hope you enjoy reading the articles in this edition of FinXpress. We

look forward to your acknowledgements and any suggestions for

improvements are most welcome.

Happy Reading!!

Regards

Team FinNiche

From The Editorial FinXpress Volume 33

March 9, 2014

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

MARCH 2014 PAGE 1

CONTENTS

From The Editorial

In Focus: Ukraine

Crisis

Opinion: India mired

in Global Economy

Term of The Week:

Capital Adequacy

Ratio

Market This Week

News

Fun Corner

PAGE 2

IN FOCUS

Ukraine's political system looks "weak, fractured, highly personal and ideologically vacuous while the judiciary and media fail to hold politicians to account" (Dr. Taras Kuzio in 2009). Ukrainian politics has been categorised as "over-centralised" which is seen as both a legacy of the Soviet system and caused by a fear of separatism. It has a population of 44.6 million, 77.8% of which are locals. In November 2013, the government suspended preparations for signing a Free Trade Agreement with the European Union, to seek closer economic relations with Russia and accepting a $15 billion "bailout" from them. Russia also offered Ukraine cheaper gas prices. The EU also required major changes to the regulations and laws in the Ukraine. The locals of western Ukraine started a wave of ongoing demonstrations, civil unrest and revolution in Ukraine on the night of 21 November 2013 while demanding closer European integration. The protests had been fuelled by the perception of widespread violation of human rights and the corrupt government. To some, it's now about ousting President Yanukovych and his corrupt government; taking Ukraine away from its 2 century long, deeply intertwined and painful ties with Russia. It is standing up for basic human rights to protest, to speak and think freely and to act peacefully without the threat of punishment. For some, the cardinal reason for this unrest is rather structural-Demographics and an identity crisis. Ukraine has been divided by a national identity crisis since its 1991 independence. Partly this divide is demographic, but it has much more to do with figuring out what kind of country Ukraine wants to be. Ukrainians doesn’t believe that disagreement has shaped their politics, which includes this current crisis. Every presidential election divides the nation into two halves. One who supports the pro- Russian candidate and the other who supports a pro-European candidate.

Yanukovych is from the east and Russian is his native language. When he was elected in 2010, it was largely by people in the more Russian-speaking region. So Yanukovych's decision against the E.U. deal did have a base of popular support, among eastern Ukrainians who had voted him into office. So, it was a democratic decision, even if it was poorly executed. But it badly fuelled the national identity crisis. On Monday 17 February, Russia announced it would release another $2 billion of its 17 December 2013 agreed loan of $15 billion to the Ukrainian government,

which. There has been constant pressure by Russian authorities on the Ukrainian administration to take decisive action to crush protests. On March 1, Russia's parliament approved a request from President Vladimir Putin to deploy Russian troops in Ukraine. The ongoing protests in Ukraine underline a tendency which has been becoming more and more salient during the last years. If we talk about Russia, this kind of hesitation does not have place in the current Russian discourse. The Kremlin has demonstrated a growing potential of possible instruments of influencing Ukrainian foreign policy course. Even when the current crisis ends, it may not have actually resolved the deeper issue. This problem predated Yanukovych and his crackdown and it will still be there when he leaves, something that only Ukrainians can resolve as a nation.

FinNiche

Ukraine Crises By Nupur Gupta

MARCH 2014

OPINION

Indian banks, corporate and financial

institutions have been tapping and will tap

the global financial markets for fund-

raising activities. But we can say that these

attempts have not always been successful

and the investors have had their share

ruinous counterpunches that spooked the

Indian markets, especially in January

2014.

Sadly the year 2014 has started on a victim

mode for most markets after a stretch of

glorious rallies in 2013. These success

stories seem to have been hit by a series of

bad news from across the globe. The

financial markets across the world are

either a victim or a darling of the financial

dynamism. As the Indian banking sector

turns negative, the interplay of such bad

news and public dispensation has provided

a dangerous mix of virulence.

Considering the various external factors we

can see how the Indian markets have been

hit and what lessons should be learnt from

these incidents.

The global financial events had a

catastrophic impact on international

financial market. Firstly, the news form the

emerging markets of currency crisis in

Latin America that sat a fall of al most 20%

in peso Argentina saw a series of events in

its economy like recession, hyperinflation,

prosperity and economic crisis. The story of

Argentina is an apt example of how an

economy rises from rags to riches and vice-

versa.

Secondly the emergent meeting that the

central bank of turkey had on Jan 28 ended

with a massive 450 bps hike in the rate.

Thirdly, in china with its financial crisis,

rapid private sector growth and diminishing

working population raises state of

confusion. The news from china about the

suspension of cash transfers by domestic

commercial banks during the heightened

fears of banking sector meltdown affected

the global financial market.

It was followed by Russian rouble sliding to

a five year low and central European

countries such as Poland and Hungary

being affected, the impact was also felt in

the Indian stock market, with banking

sector losing 860 points. Suggesting that

international bad news always had a

impact on Indian financial markets,

compared to other news.

Since June 2013, emerging market debt

and equity fund had combined outflows of

$9.1 billion with $6.4 billion of equities

being withdraws from emerging markets,

while $2.7 billion of debt made up of the

largest debt-fund outflow. At the domestic

level the announcement of monetary policy

by the RBI also had an impact, as opposite

to market expectations RBI raised the repo

rate by 25 bps.

It was clear that emerging economies like

India were mired in a negative feedback

loop of weak currencies, higher interest

rates, weak growth and capital outflows.

Notwithstanding the negative impact, the

banking sector in India has a more healthy

mix of debt-equity and is more closely

aligned to the real sector. The level of

leverage of Indian banks also reflects a

comfortable tier-I capital position, modest

growth in overall banking assets.

To conclude, it can be said that asset

quality is intrinsically linked to economic

turnaround, which is an exogenous factor

and acts only as an enabling mechanism in

benefitting the bank from the upswings in

its business cycle. The lessons that can be

learnt are that Indian financial institutions

planning to tap the international markets

have to love with volatility. Also, to bring

back retail participation in financial

markets, support for the stock markets

should be encouraged.

FinNiche

India Mired in Global Economy

MARCH 2014

—— By Anureen Bhatti

PAGE 3

PAGE 4

FINANCIAL KNOWLEDGE

Capital Adequacy Ratio is a term which was

recently in vogue in most Indian financial

journals and newspapers, after the

declaration of dismal Q3 results by the

United Bank of India. It declared a

staggering loss of Rs. 1238 crore for the Oct

-Dec quarter, more than double the loss

declared in the previous quarter. As a result

its Capital Adequacy Ratio stood at 9.01%,

calculated under Basel 3 norms, just over

the minimum of 9% mandated by the RBI.

Also, its tier 1 capital fell below the

minimum mandated requirement of 6%,

forcing the bank to suspend indefinitely, its

lending activities.

So, what exactly are these ratios and why is

it necessary for banks to maintain a certain

minimum level of capital? Capital Adequacy

Ratio (CAR) is calculated as the ratio of a

bank’s capital to its risk weighted assets.

The central banks of most countries require

commercial banks to maintain a minimum

CAR to allow these banks to absorb a

certain amount of losses without becoming

insolvent. This concern can be explained in

a simplified manner using the leverage ratio

(total assets/equity) of a bank. Like we all

learnt in our Macroeconomics course, a

bank having an asset base of 1000 dollars

with a leverage ratio of 20 would only have

$50 of owner’s equity and the rest of the

liabilities would consist of deposits and

debt. In such a case a mere 5% fall in the

value of its assets due to loans turning to

NPAs or some other reason would

completely erode the owner’s equity and

any further fall in the value of its asset

would lead to a fear that depositors or other

lenders might not get fully repaid and might

create a bank run in the absence of deposit

insurance.

CAR is a more sophisticated tool than debt/

equity ratio for judging the adequacy of a

bank’s capital as it takes into account the

risk factor involved with various asset

classes possessed by a bank. CAR = (Tier 1

Capital + Tier 2 Capital)/Risk Weighted

Assets. Two types of capital viz. tier 1 and

tier 2 are used to calculate the CAR. Tier 1

capital represents the extent of losses a

bank can bear without having to stop its

trading activities whereas tier 2 capital

represents the capital which bears losses

only in the event of the bank winding up

and hence provides a lower degree of

protection for depositors and creditors. Tier

1 capital generally consists of common

stock and the retained earnings (disclosed

reserves) of a bank. Tier 2 capital generally

consists of general loss reserves, non

disclosed reserves, hybrid instruments that

have characteristics of equity as well as

debt and subordinated debt which is debt

that ranks lower than the normal deposits

in the bank.

The central banks of countries usually have

some discretion over how different financial

instruments can be used to fulfill tier 1 and

tier 2 capital requirements. Risk weighted

assets are calculated by assigning weights

to different asset classes based on the

amount of the risk they carry. For example,

govt debt, held in the form of T- bonds are

usually allotted a weight of 0 (0%) whereas

loans to individual customers not backed

by mortgages are usually allotted a weight

of 1 (100%).

The implementation of capital adequacy

requirements by the RBI according to the

recommendations of the Basel 3 accord

must be lauded as it has already led to the

identification of a bank under stress and as

a result adequate measures can now be

taken to rectify the situation.

FinNiche

Capital Adequacy Ratio

MARCH 2014

PAGE 5

FINANCIAL KNOWLEDGE FinNiche

Market This Week

An excellent week for the benchmark indices which closed at a record high as FIIs

continue to infuse Dollars into the system. Market also reacted positively to the

speculation of formation of a stable government in the centre. The Nifty gained 4%

this week to close at 6526.65 while Sensex gained 3.8% to close at 21919.79

points. The rupee has appreciated against the US dollar on the back of strong FII

inflows. The partially convertible rupee was at 61.08, up 2 paise, after hitting 3-

month high in trade on Friday.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 20,698.54

Fifty Days 20,839.57

Hundred Fifty Days 20,311.55

Two Hundred Days 20,115.16

MARCH 2014

PAGE 6

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 8.00%

Reverse Repo Rate 7.00%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 61.07

INR / 1 Euro 84.76

INR / 100 Jap. YEN 59.14

INR / 1 Pound Sterling 102.12

Commodity Unit Rs / Unit % Change

Gold 10 grams 30130 (0.26)

Silver 1 Kg 46205 (2.14)

Crude Oil 1 bbl 6305 2.97

Base Rate 10.00%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8.00%-9.10%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 6148.81

Fifty Days 6193.87

Hundred Fifty Days 6028.02

Two Hundred Days 5992.35

Key Policy Rates and Reserve Ratios

Exchange Rates

MARCH 2014

PAGE 7

FINANCIAL KNOWLEDGE

M&A deals: CCI to offer help in

'substantiative' issue

To make compliance process easier for

c o m p a n i e s , t h e C o m p e t i t i o n

Commission of India (CCI) plans to

provide assistance in “substantiative”

matters pertaining to mergers and

acquisitions. Companies entering into

combinat ions or mergers and

acquisitions (M&A) have to seek

approval of the CCI, which has the

mandate to keep a tab on unfair trade

practices at the market place. At

present, companies can avail facility of

informal and verbal consultation with

the staff of CCI prior to the filing of

notice to a proposed combination.

However, such interactions are now

restricted to procedural aspects.

Forex reserves rise USD 954.6 mn to

USD 294.3 bn

The country's foreign exchange reserves

rose by USD 954.6 million to USD

294.36 billion on account of gains in the

value of gold reserves. In the previous

reporting week, the reserves had dipped

by USD 383.7 million to USD 293.41

billion . After remaining unchanged for

multiple weeks, the gold reserves surged

by USD 902.3 million to USD 20.978

billion for the week ended February 28.

Foreign currency assets (FCAs), a major

part of the overall reserves, increased by

USD 33.6 million to USD 266.90 billion

for the week ended February 28. The

special drawing rights also rose by USD

13 million to USD 4.468 billion, while

the country's reserve position with the

IMF increased by a USD 5.7 million to

USD 2.011 billion.

Privacy groups ask US FTC to halt

Facebook-WhatsApp deal

Privacy groups have approached the US

Federal Trade Commission (FTC) to put

on hold Facebook's USD 19 billion

acquisition of WhatsApp and investigate

how the social media giant plans to use

subscriber data. The groups claimed

that Facebook "routinely makes use of

user information for advertising

purposes and has made clear that it

intends to incorporate the data of

WhatsApp users into the user profiling

business model."

SBI to raise Rs 800-1,200cr by

issuing shares to employees

State Bank of India has proposed to

offer share purchase scheme for all its

employees which could raise additional

equity capital, between Rs 800 crore and

Rs 1,200 crore, for the country's largest

lender. Increase in bank's equity capital

would depend on the valuation at which

the bank would offer shares to its

employees.

Inflation target becomes govt's job

after FM, RBI meet

The Reserve Bank of India (RBI) has

agreed to the proposal that the right to

decide on an inflation target for the

economy will become the government’s

mandate and that the central bank

would focus on achieving it. The RBI

currently focuses on balancing between

growth and inflation and a proposed

switch to an inflation focus had raised

concerns within the government that

would growth would be compromised.

Malaysia Airline plane, ‘crashes off

Vietnam’

A Malaysian Airline Boeing 777 has

reportedly crashed into the sea off

Vietnam with 239 people on board.

State media there says the aircraft came

down near Vietnam’s Tho Chu Island.

Contact was lost two hours into the

flight from Kuala Lumpur to Beijing

where relatives faced an agonizing wait

after Flight 370 was shown to be

delayed on the arrivals board. Most of

those travelling on the flight were

Chinese and Malaysian but passengers

were of 14 nationalities.

FinNiche

NEWS

MARCH 2014

PAGE 8

FINANCIAL KNOWLEDGE

Govt tightens gold import baggage

norms for passengers

Seeking to check gold smuggling, the

government tightened baggage rules

requiring inbound Indian passengers to

provide details like source of funds for

importing the metal as well as their air

tickets.

According to a Revenue Department

circular, the baggage receipt issued by

Customs will now include the engraved

serial number on gold bars and item-

wise list of ornaments. The norms have

been tightened following "a spurt in

import" of gold by eligible passengers

through various airports in the recent

past across the country.

Eligible passengers are allowed to be

import gold up to 1 kg by paying 10

percent customs duty in foreign

currency. Eligible passenger means

Persons of Indian Origin or an Indian

returning to India after a period of six

months of stay abroad. The restrictions

have paid desired results as gold

imports fell significantly and also the

CAD, which is expected to be below USD

45 billion this fiscal as against all time

high of USD 88.2 billion in 2012-13.

FIIs mark biggest buy of Indian

shares in 2-1/2 months

Overseas investors bought Indian shares

worth 12.73 billion rupees on Thursday,

to mark their biggest daily purchase

since December 19. They also bought

Indian equity derivatives worth 26.28

billion rupees on Thursday, according to

NSE data. Heavy institutional buying

has helped Indian stocks to overcome

worries including US Federal reserve

tapering, China slowdown and sticky

inflation.

ONGC, Oil India to buy 5% stake each

in IOC at Rs 220/share

The government had in February end

approved a 10 percent stake sale

in Indian Oil Corporation (IOC) to state

run ONGC and Oil India at a discount

of 10 percent at Rs 220 per share.

The IOC scrip was trading at around Rs

258 per share when the news came in.

The stake sale will happen at a

significant discount to current market

price. ONGC will have to shell out a little

more than Rs 2,500 crore. ONGC

already has around 8.77 percent stake

in IOC.

Sebi finds large-scale mismatch in

Sahara papers

Sebi has come across serious anomalies

and a huge number of possibly fictitious

investors after analysing truck loads of

documents submitted by Saharas to

substantiate its claim of over Rs 20,000-

crore refunds.

Sahara group had deposited Rs 5,120

crore with Sebi after court orders. It

claims to have already refunded all but

Rs 2,000 crore in cash directly to

investors. The court had ordered refund

of over Rs 24,000 crore in August 2012.

There are numerous instances of one

person having hundreds of accounts,

one accoun t hav ing mul t i p l e

beneficiaries, one person with multiple

address and one address having tens of

individuals. Besides, there are

thousands of cases where addresses are

untraceable, as also cases having

innocuous addresses like national

highways, and just names of villages,

towns or roads, sources said on

condition of anonymity.

FinNiche

NEWS

MARCH 2014

FinNiche

Fun Corner

FinQuiz

1. Economic historians usually attribute the start of the Great Depression to the

devastating collapse of US stock market prices in 1929. The day is known as

____________.

2. A company had sales of $930,000 and CoGS of $625,000. At the beginning of

the year its Account Receivables were $ 92,000 and inventory was $110,000. At

the end of the year the inventory was $140,000 and Account Receivables were

$98,000. What is the inventory turnover ratio?

3. Infosys announced acquisition of a consulting firm, X, 2 years back. Name X?

4. Where in India is paper for money manufactured?

5. Unusual service offered by Bank of Baroda in Tirupati— ________________

FUN CORNER

PAGE 9

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Volume Publisher: Pragun Aggarwal

MARCH 2014

Last Week Answers

1. Cost of Equity

2. SBI

3. Less than 1

4. European Central Bank

5. Marking to market