Adviser evaluation should be done on the basis of their experience, expertise and integrity, and not based on the activities of the organization they represent
No amount of regulatory changes and rule tightening seems to be providing any succour to beleaguered investors. Barely had investors recovered from the rude shock of the global financial crisis in October/November 2008, then came the Irish and Greek crises. Add to that, frequent regulatory changes such as abolition of entry loads on mutual funds (MFs) and insurance reforms. This has seen many intermediaries deserting investors, who have now been left to fend for themselves. Poor inflows into equity schemes, despite a strong rally in the equity markets, and dwindling MF folio numbers is an ominous sign that the retail investor is not in a hurry to return.
What is even more disturbing is the recent industry data and the subsequent media coverage, showing that the malaise of churning continues unabated, especially from the banking and institutional segment. This defeats the very purpose of doing away with entry loads. It seems the lure of upfront charges has been replaced with transaction charge.
Mis-selling, too, continues, albeit in a different form. This should include underselling risk products such as equity funds to the investor, when his/her risk tolerance permits that, and pushing monthly income plans (MIPs) instead. Recent bias towards pushing MIPs for the reasons of higher upfront is gross injustice. Many investors’ portfolios have underperformed, missing large parts of the ongoing rally. Otherwise, how does one explain growth in the assets of MIPs over the last 15 months, vis-à-vis equity funds? Some of these MIPs have seen five-six times growth in assets, when the same asset management company’s (AMCs) top performing equity schemes have seen marginal growth, considering rise in the value of the underlying stocks in the same period. Here, too, banks and institutional channels have been more aggressive in pushing MIPs.
What I find redeeming is that independent financial advisers (IFAs) and boutique firms have seen the least churn and outflows even during turbulent times. This and previous industry data reveals that assets garnered by this segment are considered more stable and stay longer with the AMCs. This is in the investors’ interest. In spite of substantial evidence to the contrary, what is baffling is the average investor’s undue reliance on banks and institutional channels for seeking financial advice and investment products.
Adviser evaluation should be done on the basis of their experience, expertise and integrity, and not based on the activities of the organization they represent. Successful placement of $100 million (Rs460 crore) worth foreign currency convertible bonds by an institution is of no relevance to an average investor, when an adviser assigned to his relationship can’t comprehend the risk associated with sector/theme fund.
There is a compelling case for investors to consider IFAs.
Continuity: There is continuity in their services and consistency in dealing. This is critical even for a high networth client, who may not be well-versed with financial products and may need hand holding at times. It also provides personal attention.
Strong bonding: Over time many advisers and boutique firms develop a deep relationship with investors. Indeed, many handle relationships that span across generations. Financial matters are very personal; the same cannot be shared and disclosed to everyone and privacy is of utmost importance.
Third-party products: Most investment products have third-party originators. The manufacturer of these products is keen to see his actual customer, irrespective of the distribution medium. An average investor can be adequately served with simple products such as MFs, insurance, and fixed income instruments and, in some cases, portfolio management services. Alternative products and structured notes are opaque and serve limited purpose and may not be suitable to all investors.
Client centric: In the absence of the sales targets for the period, an IFA/boutique firm is more likely to be client centric than product centric. Deeper understanding of the client’s needs also brings in some degree of accountability.
Requisite expertise: Many IFAs and boutique firms are owned and managed by qualified professionals, who have worked in the financial services industry and are experienced to handle large clients. With a focus on selected products, there is a sound knowledge base of products and process.
Acquisition through referrals: Since client acquisition is only through referrals, this brings in a dimension of seriousness and accountability. Client acquisition is the key growth driver; referrals can’t be expected from a bunch of disillusioned clients. Thus, there will be efforts to retain and cultivate clients.
Availability of quality research from independent agencies and technology that can be bought off the shelf has further dented the advantage that institutions enjoy.
After the collapse of Lehman Brothers, the belief that large banks and institutions are self-serving has gained momentum in evolved markets such as the US. Many wealthy investors have moved their portfolios to IFAs, who they have found to be more sincere and reliable.
It may be fine for a client who has a certain degree of financial sophistication to engage any adviser, but a normal investor should lay sufficient emphasis on adviser selection. In the absence of this, the investment venture may turn out to be a mug’s game.
Source : Livemint
Tuesday, November 30, 2010
You can bet on the India story, BSE tells the world
The London Stock Exchange does it. Nasdaq and NYSE do it. Now, it’s the turn of Mumbai to show the world that its capital markets have come of age, and it can emerge as a global financial centre — even without massive government investment or focus.
In a first ever, the Bombay Stock Exchange (BSE) has now started doing international roadshows to market itself to global investors as an ideal location to raise capital — especially through IDRs, the first of which was done by Standard Chartered Bank .
“There’s a general misconception that Indian capital markets are over-regulated , that regulation is intrusive, so it’s important to let global investors know that Indian markets have evolved, the pace of reforms is fast. It is also important that we all came together as a group to address concerns of international investors ,” says Nehal Vora, head of planning and policy at BSE, who was in London recently to host road-shows for IDRs, along with a phalanx of experts from diverse fields, like merchant banking, taxation, legal, and of course, Standard Chartered executives.
It could sound a bit ambitious to tell investors in a global financial centre to move to the BSE for their capital needs, but given the level of interest from international investors, who stuck through the road-shows despite a short sojourn in freezing cold, thanks to a fire alarm, it seems everyone wants a slice of the Indian stock exchange action.
According to Ranganath Char, managing director of JM Financial’s investment banking, they’ve had a number of enquiries from global companies, including the likes of Nokia and IBM to issue IDRs.
“We haven’t actually actively started marketing IDRs. These are just some of the routine enquiries we’re getting,” he says.
Roadshows like these also help identify what key issuer concerns are — as far as IDRs go, the two major concerns are about use of proceeds. During the StanChart IDRs, regulators decreed that proceeds of IDRs have to be sent overseas, and then if at all reinvested in India. While investors are aware of the need to monitor roundtripping, most potential IDR issuers would have a strong presence or interest in the Indian market.
Standard Chartered, which raised $500 million for general corporate purposes, had to “just coincidentally” invest a similar amount in investing in a Chinese bank, even though Stan-Chart routinely invests heavily in India , says Mark Stride, who handles StanChart’s group corporate development out of Singapore.
Another key issue is clarity on taxation, the question of whether IDRs are subject to STT or capital gains, says Mr Vora. While some experts believe that the true growth of IDRs will be when companies in emerging countries, which actually need to raise capital and don’t have deep enough domestic capital markets to do so, realise they can tap both international and Indian funds — like Asian or African companies.
As of now, though, expect only showcase names like StanChart. Mr Vora is clear that IDRs are BSE’s very new, very pet project, and the important thing is to set precedents and establish credentials with the first few major issues. “Everyone will be watching how the first few work out, plus it will give us time to sort out any regulatory hitches and learnings,” he says.
IDRs might still be a new kind of product, and take some time to establish itself, but the experts expect that the action will hot up after the one year lock-in period for StanChart, when the scrip starts seeing activity.
Source : ET
In a first ever, the Bombay Stock Exchange (BSE) has now started doing international roadshows to market itself to global investors as an ideal location to raise capital — especially through IDRs, the first of which was done by Standard Chartered Bank .
“There’s a general misconception that Indian capital markets are over-regulated , that regulation is intrusive, so it’s important to let global investors know that Indian markets have evolved, the pace of reforms is fast. It is also important that we all came together as a group to address concerns of international investors ,” says Nehal Vora, head of planning and policy at BSE, who was in London recently to host road-shows for IDRs, along with a phalanx of experts from diverse fields, like merchant banking, taxation, legal, and of course, Standard Chartered executives.
It could sound a bit ambitious to tell investors in a global financial centre to move to the BSE for their capital needs, but given the level of interest from international investors, who stuck through the road-shows despite a short sojourn in freezing cold, thanks to a fire alarm, it seems everyone wants a slice of the Indian stock exchange action.
According to Ranganath Char, managing director of JM Financial’s investment banking, they’ve had a number of enquiries from global companies, including the likes of Nokia and IBM to issue IDRs.
“We haven’t actually actively started marketing IDRs. These are just some of the routine enquiries we’re getting,” he says.
Roadshows like these also help identify what key issuer concerns are — as far as IDRs go, the two major concerns are about use of proceeds. During the StanChart IDRs, regulators decreed that proceeds of IDRs have to be sent overseas, and then if at all reinvested in India. While investors are aware of the need to monitor roundtripping, most potential IDR issuers would have a strong presence or interest in the Indian market.
Standard Chartered, which raised $500 million for general corporate purposes, had to “just coincidentally” invest a similar amount in investing in a Chinese bank, even though Stan-Chart routinely invests heavily in India , says Mark Stride, who handles StanChart’s group corporate development out of Singapore.
Another key issue is clarity on taxation, the question of whether IDRs are subject to STT or capital gains, says Mr Vora. While some experts believe that the true growth of IDRs will be when companies in emerging countries, which actually need to raise capital and don’t have deep enough domestic capital markets to do so, realise they can tap both international and Indian funds — like Asian or African companies.
As of now, though, expect only showcase names like StanChart. Mr Vora is clear that IDRs are BSE’s very new, very pet project, and the important thing is to set precedents and establish credentials with the first few major issues. “Everyone will be watching how the first few work out, plus it will give us time to sort out any regulatory hitches and learnings,” he says.
IDRs might still be a new kind of product, and take some time to establish itself, but the experts expect that the action will hot up after the one year lock-in period for StanChart, when the scrip starts seeing activity.
Source : ET
Fiscal deficit down 33.76% at Rs 1.62 lakh cr in Apr-Oct
The Centre's fiscal deficit narrowed by 33.76 per cent year-on-year to Rs 1.62 lakh crore in April-October, 2010, on the back of better-than-expected revenue from the sale of spectrum and robust tax collections.
In comparison, the Centre's fiscal deficit stood at Rs 2.45 lakh crore in the corresponding period of the previous financial year.
The government collected Rs 2.71 lakh crore in taxes during the seven-month period, which was 50.9 per cent of the Budget target for the entire fiscal. In comparison, tax collections during the same period last fiscal only amounted to 45.1 per cent of the whole-year target.
Non-tax revenue in April-October, 2010, stood at Rs 1.48 lakh crore, higher than the Budget estimate for the entire fiscal, primarily because of higher realisation from the auction of spectrum, which raked in approximately Rs 70,000 crore more than the government estimated.
However, expenditure also rose by 15 per cent during the period to Rs 6.17 lakh crore from over Rs 5.36 lakh crore in the year-ago period.
At Rs 1.62 lakh crore, the fiscal deficit in April- October, 2010, amounted to 42.6 per cent of the Budget estimate of Rs 3.81 lakh crore for the entire 2010-11, according to data released by the Controller General of Accounts.
This time last year, the fiscal deficit was 61.1 per cent of the Budget estimate for the entire 2009-10 financial year.
Fiscal deficit targets went away after the government provided a stimulus to the economy in the aftermath of the global financial crisis that broke out in 2008. Among the measures, the government slashed taxes and stepped up public expenditure to spur growth of the economy. However, this also led to widening of the fiscal deficit.
As a result, the fiscal deficit doubled to over 6 per cent in 2008-09, as against the maximum permissible limit of 3 per cent stipulated by the Fiscal Responsibility and Budget Management Act. The deficit rose further to over 6.5 per cent last fiscal.
After the government partially rolled back the stimulus by raising excise duty, the Budget estimates pegged the fiscal deficit at 5.5 per cent of GDP.
However, despite higher realisation from the sale of spectrum for high-speed telephony and broadband services, the government expects the fiscal deficit to be contained at the same level as its Budget estimates or marginally lower.
"I feel that fiscal deficit target that we have set for ourselves of 5.5 per cent, I expect that target to be met and maybe for us to do a little better than that. So we are on track on our fiscal policy," Chief Economic Advisor Kaushik Basu told reporters.
This is because the government has also stepped expenditure. In the first supplementary demand for grants, it got parliamentary sanction for spending an additional Rs 54,000 crore over the Budget estimate.
It had also sought separate approval for additional expenditure of another Rs 20,000 crore, which would drain out all the extra money garnered from the spectrum auction.
Source : ET
In comparison, the Centre's fiscal deficit stood at Rs 2.45 lakh crore in the corresponding period of the previous financial year.
The government collected Rs 2.71 lakh crore in taxes during the seven-month period, which was 50.9 per cent of the Budget target for the entire fiscal. In comparison, tax collections during the same period last fiscal only amounted to 45.1 per cent of the whole-year target.
Non-tax revenue in April-October, 2010, stood at Rs 1.48 lakh crore, higher than the Budget estimate for the entire fiscal, primarily because of higher realisation from the auction of spectrum, which raked in approximately Rs 70,000 crore more than the government estimated.
However, expenditure also rose by 15 per cent during the period to Rs 6.17 lakh crore from over Rs 5.36 lakh crore in the year-ago period.
At Rs 1.62 lakh crore, the fiscal deficit in April- October, 2010, amounted to 42.6 per cent of the Budget estimate of Rs 3.81 lakh crore for the entire 2010-11, according to data released by the Controller General of Accounts.
This time last year, the fiscal deficit was 61.1 per cent of the Budget estimate for the entire 2009-10 financial year.
Fiscal deficit targets went away after the government provided a stimulus to the economy in the aftermath of the global financial crisis that broke out in 2008. Among the measures, the government slashed taxes and stepped up public expenditure to spur growth of the economy. However, this also led to widening of the fiscal deficit.
As a result, the fiscal deficit doubled to over 6 per cent in 2008-09, as against the maximum permissible limit of 3 per cent stipulated by the Fiscal Responsibility and Budget Management Act. The deficit rose further to over 6.5 per cent last fiscal.
After the government partially rolled back the stimulus by raising excise duty, the Budget estimates pegged the fiscal deficit at 5.5 per cent of GDP.
However, despite higher realisation from the sale of spectrum for high-speed telephony and broadband services, the government expects the fiscal deficit to be contained at the same level as its Budget estimates or marginally lower.
"I feel that fiscal deficit target that we have set for ourselves of 5.5 per cent, I expect that target to be met and maybe for us to do a little better than that. So we are on track on our fiscal policy," Chief Economic Advisor Kaushik Basu told reporters.
This is because the government has also stepped expenditure. In the first supplementary demand for grants, it got parliamentary sanction for spending an additional Rs 54,000 crore over the Budget estimate.
It had also sought separate approval for additional expenditure of another Rs 20,000 crore, which would drain out all the extra money garnered from the spectrum auction.
Source : ET
Oil firms hike ATF prices by 1.4 pc
State-owned oil firms today hiked jet fuel prices by 1.4 per cent, the fourth increase in rates in two months.
Aviation Turbine Fuel (ATF) rates in Delhi have been hiked by Rs 636.46 per kilolitre, or 1.4 per cent, to Rs 45,240 per kl with effect from midnight tonight, an official of Indian Oil Corp (IOC), the nation's largest fuel retailer, said.
The latest hike comes on the back of a massive 5.5 per cent increase in ATF prices effected on November 16, in sync with the rise in global rates.
With this hike, IOC and sister public sector retailers Bharat Petroleum and Hindustan Petroleum have raised prices of jet fuel, or ATF, on four occasions since October.
The ATF price in Delhi on October 1 was Rs 40,728.52 per kl. The rates were increased by over 11 per cent in four hikes since then, in tandem with a surge in global oil prices past the USD 80 per barrel mark.
Jet fuel, will cost Rs 45,379.62 per kl in Mumbai, home to the nation's busiest airport, from tomorrow, as against Rs 44,716.65 per kl currently.
No comment could be immediately obtained from airline companies on the impact of the latest price increase.
The three state-owned oil retailers revise jet fuel prices on the 1st and 16th of every month, based on the average international price in the preceding fortnight.
In Kolkata, the ATF price has been hiked by Rs 649 to Rs 52,452.14 per kl, while in Chennai, it will cost Rs 48,496.70 per kl as against Rs 47,812.51 per kl currently.
Source : ET
Aviation Turbine Fuel (ATF) rates in Delhi have been hiked by Rs 636.46 per kilolitre, or 1.4 per cent, to Rs 45,240 per kl with effect from midnight tonight, an official of Indian Oil Corp (IOC), the nation's largest fuel retailer, said.
The latest hike comes on the back of a massive 5.5 per cent increase in ATF prices effected on November 16, in sync with the rise in global rates.
With this hike, IOC and sister public sector retailers Bharat Petroleum and Hindustan Petroleum have raised prices of jet fuel, or ATF, on four occasions since October.
The ATF price in Delhi on October 1 was Rs 40,728.52 per kl. The rates were increased by over 11 per cent in four hikes since then, in tandem with a surge in global oil prices past the USD 80 per barrel mark.
Jet fuel, will cost Rs 45,379.62 per kl in Mumbai, home to the nation's busiest airport, from tomorrow, as against Rs 44,716.65 per kl currently.
No comment could be immediately obtained from airline companies on the impact of the latest price increase.
The three state-owned oil retailers revise jet fuel prices on the 1st and 16th of every month, based on the average international price in the preceding fortnight.
In Kolkata, the ATF price has been hiked by Rs 649 to Rs 52,452.14 per kl, while in Chennai, it will cost Rs 48,496.70 per kl as against Rs 47,812.51 per kl currently.
Source : ET
Wednesday, November 24, 2010
Realty loan racket: RBI to examine modus operandi
The Reserve Bank of India (RBI) will begin examining the modus operandi of the alleged bribes-for-loans allegations made by the Central Bureau of Investigation (CBI) against officials of three banks, Life Insurance Corporation of India (LIC), and a finance company. The National Housing Bank (NHB) discourages housing finance companies from excessive exposures to builders and ensures that there are sufficient checks in place.
The CBI said officials of the private finance company were bribing senior officials of public sector banks and financial institutions for facilitating large scale corporate loans.
RBI would alert banks to exercise caution on their exposure to the real estate sector according to the process usually followed, sources said.
“The property sector is a sensitive sector and is always under the RBI scanner due to volatile nature of prices of realty assets,’’ a RBI official said, declining to be identified.
The central bank carries out offsite investigation to keep track of sectoral exposures, but in normal course, it does not get into the details about exposure to specific entity, according to the official.
The CBI might take the help of other agencies, including RBI, based on the nature of leads the investigation yielded, an official of CBI said.
NHB Chairman R V Verma said it would have to see the details of the LIC Housing Finance scandal before deciding on the future course of action.
“This does not seem to be a systemic issue,’’ Verma said. “There are regulatory checks and balances in place and NHB has discouraged excessive exposures to builders. The housing finance companies have to do due diligence in each case of loan to builders.”
More than 80 per cent of the loan portfolio of housing finance companies consists of home loans. Their direct exposure to developers and builders is usually small as a share of the total asset portfolio.
The central bank has been telling banks to exercise caution on over-exposure to the property sector. The central bank in its last monetary policy on November 2 set the loan–to-value on housing loans at 80 per cent of the value of the property being funded by any lender. It also raised the risk weights on residential housing loans of more than Rs 75 lakh to 125 per cent from 100 per cent.
The RBI increased the standard asset provisioning for all so-called ‘teaser loans’ to two per cent from 0.4 per cent. While RBI didn’t see a bubble in the housing sector, it did see a price build-up, Governor D Subbarao said on November 2.
“Home prices in most metros have not only reached pre-crisis levels, but have even crossed that. We wanted to ensure that this is not credit-driven. There are also some loose practices developing such as 90/10 (loans up to 90 per cent of property value). We wanted to curb that. There is no bubble. We just wanted to rein in the housing sector’s credit growth,” the governor had said.
Source : Business Standard
The CBI said officials of the private finance company were bribing senior officials of public sector banks and financial institutions for facilitating large scale corporate loans.
RBI would alert banks to exercise caution on their exposure to the real estate sector according to the process usually followed, sources said.
“The property sector is a sensitive sector and is always under the RBI scanner due to volatile nature of prices of realty assets,’’ a RBI official said, declining to be identified.
The central bank carries out offsite investigation to keep track of sectoral exposures, but in normal course, it does not get into the details about exposure to specific entity, according to the official.
The CBI might take the help of other agencies, including RBI, based on the nature of leads the investigation yielded, an official of CBI said.
NHB Chairman R V Verma said it would have to see the details of the LIC Housing Finance scandal before deciding on the future course of action.
“This does not seem to be a systemic issue,’’ Verma said. “There are regulatory checks and balances in place and NHB has discouraged excessive exposures to builders. The housing finance companies have to do due diligence in each case of loan to builders.”
More than 80 per cent of the loan portfolio of housing finance companies consists of home loans. Their direct exposure to developers and builders is usually small as a share of the total asset portfolio.
The central bank has been telling banks to exercise caution on over-exposure to the property sector. The central bank in its last monetary policy on November 2 set the loan–to-value on housing loans at 80 per cent of the value of the property being funded by any lender. It also raised the risk weights on residential housing loans of more than Rs 75 lakh to 125 per cent from 100 per cent.
The RBI increased the standard asset provisioning for all so-called ‘teaser loans’ to two per cent from 0.4 per cent. While RBI didn’t see a bubble in the housing sector, it did see a price build-up, Governor D Subbarao said on November 2.
“Home prices in most metros have not only reached pre-crisis levels, but have even crossed that. We wanted to ensure that this is not credit-driven. There are also some loose practices developing such as 90/10 (loans up to 90 per cent of property value). We wanted to curb that. There is no bubble. We just wanted to rein in the housing sector’s credit growth,” the governor had said.
Source : Business Standard
Another scam breaks, top finance execs held
The Central Bureau of Investigation (CBI) has arrested eight finance executives, including the chief of LIC Housing Finance, accusing them of taking bribes to give big corporate loans and sending shockwaves through stock and property markets at a time when the government is buffeted by a series of high-profile scandals.
LIC Housing Finance chief executive Ramachandran Nair , Life Insurance Corporation secretary for investments Naresh K Chopta, Bank of India general manager RN Tayal, and Central Bank of India director Maninder Singh Johar were among those arrested in the nationwide swoop by investigators.
The agency also arrested Rajesh Sharma, chief executive of Money Matters Group, a specialist loan arranger that was the go-between for lenders and corporates and is at the centre of the scandal.
CBI said Money Matters ‘either bribed or attempted to bribe’ bankers to get loans for many companies, including wind energy developer Suzlon, hill station township builder Lavasa, and Mumbai developer DB Realty. The bankers were accused of seeking bribes of as much as Rs 50 lakh on transactions. CBI did not share details.
News of the arrests, which broke during the closing hours of trade, hit stocks of some of the companies involved. Shares in Money Matters led the tumble, losing 20%, while LIC Housing Finance and DB Realty lost 19% and 17%, respectively. Central Bank of India lost 8.1% and Bank of India fell 5.3%.
“Officers of top management and middle management of various public sector banks and financial institutions were receiving illegal gratifications from the private financial services company who were acting as mediators and facilitators for corporate loans and other facilities from financial institutions,” a CBI statement said. The arrests come at a time the government is on the defensive and is accused of condoning a culture of loot.
These are the biggest and most high-profile arrests since the Unit Trust of India corruption scandal a decade ago and the 1992 securities scam.
Some saw the arrests and the publicity around them as diversionary tactics by the government. “While the corruption in these financial institutions needs to be thoroughly probed, the timing of this action is suspect. CBI is directly controlled by the government. At a time when the government is feeling the heat in Parliament over the 2G scam, asking CBI to conduct raids across the country makes one suspect the motive behind this,” said Arvind Kejriwal, founder of NGO Parivartan and a Magsasay award winning activist.
All the accused will be in CBI custody until Monday. They have been charged under the Prevention of Corruption Act and, if convicted, could be jailed for up to seven years and lose retirement privileges.
Experts said the arrests could choke liquidity in the market, as banks apply the brakes on fresh lending, especially to property firms that have been classified as ‘sensitive’ by the Reserve Bank of India, which fears a speculative bubble building in the real estate sector.
“Liquidity will get tight as banks get more cautious towards financing real estate projects,” said Vikas Oberoi, managing director of Oberoi Realty , a Mumbai-based property developer.
Shankar Sharma, vice-chairman and joint managing director at First Global, said the crisis for the markets may blow over. “It will have some sentiment value may be for half a day tomorrow (Thursday), but I think the markets are smarter and would discern the good guys and the bad guys.”
The domino effect of the arrests could force other lenders in the system, notably mutual funds and high net worth individuals, to also curb lending to real estate firms.
“Liquidity in real estate papers has always been low and most investors hold them to maturity. Also, the repaying capabilities of companies have been under question. So, to that extent, there are concerns with such a scam breaking out,” said Nandkumar Surti, chief investment officer, JPMorgan Asset Management India.
Source : ET
LIC Housing Finance chief executive Ramachandran Nair , Life Insurance Corporation secretary for investments Naresh K Chopta, Bank of India general manager RN Tayal, and Central Bank of India director Maninder Singh Johar were among those arrested in the nationwide swoop by investigators.
The agency also arrested Rajesh Sharma, chief executive of Money Matters Group, a specialist loan arranger that was the go-between for lenders and corporates and is at the centre of the scandal.
CBI said Money Matters ‘either bribed or attempted to bribe’ bankers to get loans for many companies, including wind energy developer Suzlon, hill station township builder Lavasa, and Mumbai developer DB Realty. The bankers were accused of seeking bribes of as much as Rs 50 lakh on transactions. CBI did not share details.
News of the arrests, which broke during the closing hours of trade, hit stocks of some of the companies involved. Shares in Money Matters led the tumble, losing 20%, while LIC Housing Finance and DB Realty lost 19% and 17%, respectively. Central Bank of India lost 8.1% and Bank of India fell 5.3%.
“Officers of top management and middle management of various public sector banks and financial institutions were receiving illegal gratifications from the private financial services company who were acting as mediators and facilitators for corporate loans and other facilities from financial institutions,” a CBI statement said. The arrests come at a time the government is on the defensive and is accused of condoning a culture of loot.
These are the biggest and most high-profile arrests since the Unit Trust of India corruption scandal a decade ago and the 1992 securities scam.
Some saw the arrests and the publicity around them as diversionary tactics by the government. “While the corruption in these financial institutions needs to be thoroughly probed, the timing of this action is suspect. CBI is directly controlled by the government. At a time when the government is feeling the heat in Parliament over the 2G scam, asking CBI to conduct raids across the country makes one suspect the motive behind this,” said Arvind Kejriwal, founder of NGO Parivartan and a Magsasay award winning activist.
All the accused will be in CBI custody until Monday. They have been charged under the Prevention of Corruption Act and, if convicted, could be jailed for up to seven years and lose retirement privileges.
Experts said the arrests could choke liquidity in the market, as banks apply the brakes on fresh lending, especially to property firms that have been classified as ‘sensitive’ by the Reserve Bank of India, which fears a speculative bubble building in the real estate sector.
“Liquidity will get tight as banks get more cautious towards financing real estate projects,” said Vikas Oberoi, managing director of Oberoi Realty , a Mumbai-based property developer.
Shankar Sharma, vice-chairman and joint managing director at First Global, said the crisis for the markets may blow over. “It will have some sentiment value may be for half a day tomorrow (Thursday), but I think the markets are smarter and would discern the good guys and the bad guys.”
The domino effect of the arrests could force other lenders in the system, notably mutual funds and high net worth individuals, to also curb lending to real estate firms.
“Liquidity in real estate papers has always been low and most investors hold them to maturity. Also, the repaying capabilities of companies have been under question. So, to that extent, there are concerns with such a scam breaking out,” said Nandkumar Surti, chief investment officer, JPMorgan Asset Management India.
Source : ET
US banks warned on loan-loss provisions
US banks showed further signs of recovery in the third quarter, helped by the lowest level of loan-loss provisions since before the 2007-2009 financial crisis, but drew a warning from a top regulator not to go too far.
Federal Deposit Insurance Corp Chairman Sheila Bair said banks should not cut reserves too quickly given the fragile economy.
"Many institutions came into the recent crisis with inadequate reserve levels, and they need to exercise restraint in drawing them down now," she said.
Bair gave her quarterly assessment of the industry just before rushing off to attend only the second meting of a new council of regulators designed to curb undue risk-taking by financial institutions.
The Financial Stability Oversight Council (FSOC) took a step on Tuesday toward bolstering supervision of certain derivatives clearinghouses and giving them access to the Federal Reserve's emergency lending facilities.
A Treasury official also updated panel members on a regulatory investigation of foreclosure practices, with banks and other mortgage servicers’ under fire for sloppy documentation.
"The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," said Michael Barr, assistant Treasury secretary for financial institutions.
The FDIC's quarterly report card on the banking industry's third quarter performance showed both profit growth, which was partly due to reduced loan-loss provisions, and an increasing divergence between the nation's mega-banks and its smaller ones.
The FDIC reported aggregate industry earnings rose to $14.5 billion in the third quarter versus $2 billion a year earlier. Profits would have been up sequentially from the second quarter, as well, if not for a massive charge-off recorded by the industry's largest player, Bank of America.
The number of banks on the regulator's "problem list" hit its highest level since 1993, despite better loan performance, while loan-loss reserves fell for the first time since late 2006, mostly due to large banks' actions, the agency said.
"Bair's comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement. This supports our broad thesis that the very large banks are improving much faster than the rest of the industry," said MF Global financial services analyst Jaret Seiberg.
RISK COUNCIL GATHERS
As head of the FDIC, Bair is a member of the new risk oversight council, an inter-agency panel of regulators created to keep an eye on precisely the sort of broad risk that might be posed by lower loan-loss reserves.
The council, set up under sweeping banking and Wall Street reforms enacted in July, met behind closed doors on Tuesday, then held a brief open session later in the day.
Almost four months since Democrats and President Barack Obama pushed through the reforms over the opposition of banks and Republicans, government regulators are consumed with the implementation of hundreds of new rules and regulations.
Industry lobbyists are moving to soften the Dodd-Frank law at the implementation level, where Congress left reams of important details to be hammered out by federal authorities.
The FSOC is empowered to tag certain organizations as "systemically important" to the stability of the economy. Firms thus labeled must answer to stricter oversight.
The council last month began sketching out the criteria it will use for deciding which non-bank financial firms get named as "systemically important." It did the same on Tuesday for exchanges, clearinghouses and data repositories that are being set up for off-exchange derivatives trading.
These institutions constitute the critical internal workings of the U.S. financial system. For them, the "systemically important" label also would bring access to the Federal Reserve's discount window during a liquidity crunch.
The council, led by Treasury Secretary Timothy Geithner, has 10 voting members.
Source: Business Standard
Federal Deposit Insurance Corp Chairman Sheila Bair said banks should not cut reserves too quickly given the fragile economy.
"Many institutions came into the recent crisis with inadequate reserve levels, and they need to exercise restraint in drawing them down now," she said.
Bair gave her quarterly assessment of the industry just before rushing off to attend only the second meting of a new council of regulators designed to curb undue risk-taking by financial institutions.
The Financial Stability Oversight Council (FSOC) took a step on Tuesday toward bolstering supervision of certain derivatives clearinghouses and giving them access to the Federal Reserve's emergency lending facilities.
A Treasury official also updated panel members on a regulatory investigation of foreclosure practices, with banks and other mortgage servicers’ under fire for sloppy documentation.
"The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," said Michael Barr, assistant Treasury secretary for financial institutions.
The FDIC's quarterly report card on the banking industry's third quarter performance showed both profit growth, which was partly due to reduced loan-loss provisions, and an increasing divergence between the nation's mega-banks and its smaller ones.
The FDIC reported aggregate industry earnings rose to $14.5 billion in the third quarter versus $2 billion a year earlier. Profits would have been up sequentially from the second quarter, as well, if not for a massive charge-off recorded by the industry's largest player, Bank of America.
The number of banks on the regulator's "problem list" hit its highest level since 1993, despite better loan performance, while loan-loss reserves fell for the first time since late 2006, mostly due to large banks' actions, the agency said.
"Bair's comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement. This supports our broad thesis that the very large banks are improving much faster than the rest of the industry," said MF Global financial services analyst Jaret Seiberg.
RISK COUNCIL GATHERS
As head of the FDIC, Bair is a member of the new risk oversight council, an inter-agency panel of regulators created to keep an eye on precisely the sort of broad risk that might be posed by lower loan-loss reserves.
The council, set up under sweeping banking and Wall Street reforms enacted in July, met behind closed doors on Tuesday, then held a brief open session later in the day.
Almost four months since Democrats and President Barack Obama pushed through the reforms over the opposition of banks and Republicans, government regulators are consumed with the implementation of hundreds of new rules and regulations.
Industry lobbyists are moving to soften the Dodd-Frank law at the implementation level, where Congress left reams of important details to be hammered out by federal authorities.
The FSOC is empowered to tag certain organizations as "systemically important" to the stability of the economy. Firms thus labeled must answer to stricter oversight.
The council last month began sketching out the criteria it will use for deciding which non-bank financial firms get named as "systemically important." It did the same on Tuesday for exchanges, clearinghouses and data repositories that are being set up for off-exchange derivatives trading.
These institutions constitute the critical internal workings of the U.S. financial system. For them, the "systemically important" label also would bring access to the Federal Reserve's discount window during a liquidity crunch.
The council, led by Treasury Secretary Timothy Geithner, has 10 voting members.
Source: Business Standard
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