Saying yes to Financial Inclusion

I won't be at town for a while, so no blogging this week. So thought of posting this one article published in Business standard. If you remember, I had published an article on Financial Inclusion in one of my earlier blogs (Why be excluded?). Well, banks in India seem to be taking steps towards this direction. Lots of MFI's (Micro Finance Institutions) exist in the market but because of the meagre portfolio they can afford, banks seem to be interested in taking a piece of the pie.

Already, banks like Yes Bank are entering into the foray, with a pilot plant set up in Mumbai. Its Micro Finance wing Sampann, has started operations in 3 areas of Mumbai. It has adopted the strategy of giving loans to individuals directly, instead of Groups of Individuals, as is the case of Grameen Bank.

All said & done, the only limiting factor on banks is that they can keep a variable uinterest rate as long as RBI doesnt put any cap on the interest rate, as explained by Sitaram Rao, consultant to SKS, a micro finance institution.

Frequent defaults could also cause banks unable to keep up with the rest of the business. Alltogether, it also seems as a strategy by banks to offer customers free accounts for taking the facility. The banks anyway gain here, because the risk of default, if nil can earn the bank considerable profit. As I mentioned in one of my blogs on the Inverted Curve. During such a period, banks provide loans for a high interest rate for short periods. This helps the banks in earning huge profits in no time.

Only time will tell how the plan goes. Financial inclusion Zindabaad!!!

Global Financial Crisis-Asian View

I was just browsing through several articles at Business standard thinking what to present to you guys (I was afraid I would run out of topics soon!) when I came across this article by Prof. Shankar Acharya, Honorary Professor at ICRIER Delhi, and Chief economic advisor to the Government of India.

In his article, Prof. Acharya describes about a lecture conducted at ICRIER by noted economist Mr. Andrew Sheng. As rightly explained by Prof. Acharya, the market now is full of articles on the crisis, most of them being works of western economists. But there is few literature available on its affect on the Asian markets. Mr. Sheng's lecture describes about the very historical facts that led to build up the atmosphere for this crisis (Yes, according to Mr. Sheng, it had started as the fires of the previous downturn of 1929 was cleared up).


Click the Link below to read the whole article-

Global Financial Crisis-Asian Perspective

And needless to say, constructive criticism is invited on the article. Do post your comments.

FDI: To be or not to be??

Times of India, Feb 12, 2009: With the Government decision to ease the entry modes of FDI into the country, a great leap is expected in the areas of the already hyped retail sector, telecom, insurance etc. Earlier when a company invested in a company in India, it had to enter into a joint venture with an Indian partner. Suppose the contribution of the Foreign partner in this JV (Joint Venture) was 49% and that of the India Partner was 51%, and this JV started its own subsidiary in India, this subsidiary was supposed to be constituted of 49% FDI.

Now, with the cabinet decision on wednesday, a subsidiary from the above example would be considered as a 100% Indian entity.

It seems India has started changing much of its tactics, keeping in mind the fact that most of the past stock trends have been affected due to FII's instability.

India now seems to be locking horns with China, which has less FDI restrictions, but has more restrictions over the equity market. As a result, FII's find it very hard to enter China.

FDI entry and exit is a very difficult affair. First of all, there are the limitations which a foreign company can't exceed. Exit is also difficult, as Industrial laws mention that diluting a company employing more than 100 companies needs prior Government approval.

Now that the entry has been made easy, Indian's can expect more increase in FOREX levels. But there are also problems associated with this. Remember my earlier blog on Mao's cookie crumbling (http://fingertipfinance.blogspot.com/2009/02/renminbi.html)? Well, India could loose its cookie too, as more FDI in makes the value of Indian Rupee appreciate against the US dollar. This happens because the supply starts exceeding the demand. Imagine a shopkeeper holding excess of a particular product which he has to sell before it reaches the expiry. What does he do?? He lowers the rate of the item. That's what will happen with the dollar. 1$ that I used to get at Rs. 50 will now be available say at Rs. 42. So an American can now only get Rs. 42 of work done out of me for his 1$. Now he has to look for cheaper substitutes. That's where India looses.

Also, Indian goods could loose out their competitive value. Interest rates start coming down.

So even I am puzzled....Should we or shouldnt we....the choice is yours.

Your comments on this article are invited. Do participate.

The Yield Curve

In one of the previous blogs, I had mentioned about the negative yield curve. Well....thats what the economy is going through now. A negative yield curve is one of the indicators that has always played prequel to economic slumps in the past. An example can be quoted from the 1998 US Stock market slumpdown, during which the US market saw a lot of IT based startup companies who had borrowed a lot of funds for keeping the business running but in the end many went down. (I recommend Startup.com, a real life documentary, which shows the nuances of not only starting a new company, but also keeping it running during a market downturn)

To get an idea of an inverted curve, try plotting a graph between the rate of return for Government bonds and the period to maturity. If the plotted curve is sloping upwards, the economy has lots in store for you. If the curve is sloping downwards, and you are a fresher who has just arrived in the market, you are in neck deep trouble!!

Image Courtesy: www.Wikipedia.org