5-yr Nifty options from May 28, experts caution retail investors

By Rajesh Gajra May 18 2010 , FC Research Bureau

Taking a long-term view on the broader market beyond three years will get easier from May 8 when the National Stock Exchange (NSE) introduces three more semi-annual month option contracts on the S&P CNX Nifty index going as far into the future as June 2015.

There will be eight semi-annual contract months instead of the existing five, encompassing June-end and December-end contracts for 2011-2014 and June-end contract for 2015.

But as a retail investor, should you make use of such long-term investment instrument? The views in the market are mixed, although the recent trend in existing long-tenure Nifty options, with tenure going up to three years, seems to suggest decent demand for such contracts (see table).

The Securities and Exchange Board of India (Sebi) on May 4 permitted stock exchanges to go for long-tenure index options, going up to a maximum length of five years. It was in January 2008 that Sebi had allowed exchanges to trade index options for tenures beyond the existing ones of less than a year but up to a maximum of three years.

Market experts do not recommend long-tenure options for retail investors. Bajaj Capital research head Alok Agarwala said, “These options should be used for hedging rather than making directional calls on the market.”

He said investors seeking exposure to Nifty can go for exchange-traded funds (ETFs) on Nifty or Nifty index funds. “ETFs are preferable as they have lower fund management charges,” he said.

However, there are two attractive benefits for the investors taking a long-term view on the overall market. In buying a Nifty call option, one is protected from unlimited losses in case the index crashes, something that is not possible in a Nifty ETF or index fund.

The other benefit is one can take a long-term bearish view by purchasing Nifty put options but one can’t go short on a Nifty ETF or index fund.

However, investors would need to watch out for the amount of premium they pay for a five-year Nifty option contract. In options trade, the premium includes intrinsic and time value of the option. “The longer the time to expiry, the higher will be the premium,” says Agarwala.

Benchmark Asset Management executive director Sanjiv Shah said, “If you have to pay a premium that is 20 to 25 per cent higher than the spot index, then you are giving away a lot of the gains on the index.”

You could go for long-tenure Nifty options, but be alert for such stumbling blocks.

rajeshgajra

@mydigitalfc.com

SEBI eases listing rules for SMEs

Source :19 May 2010, 0047 hrs IST,ET Bureau



MUMBAI: The Securities and Exchange Board of India (SEBI) has relaxed share-listing norms for small and medium enterprises (SMEs) by allowing them to disclose their financial results every six months instead of three months, as is the norm for bigger companies.

Companies listed on the SME exchange will not be required to send a full annual report to their shareholders and also need not publish their financial results as required in the main stock exchange.

“Companies listed on the SME exchange may send to their shareholders a statement containing the salient features of all the documents,” the regualtor said in its circular.

But these companies will have to maintain a public shareholding of at least 25% of the total number of issued shares at all times. In other words, the promoters’ stake cannot exceed 75%.

A company listed on the SME exchange, having post-issue capital between Rs 10 crore and Rs 25 crore can migrate to the main exchange provided it meets the listing requirements of the stock exchange. For this purpose, the company must first make a proposal to list the specified securities and obtain the prior approval of its shareholders.

“The issue shall be 100% underwritten and the merchant bankers shall underwrite 15% in their own account. Merchant bankers can also enter into an agreement with nominated investors to subscribe to the unsubcribed portion of the issue,” the SEBI circular said.

A stock broker of the main exchange need not seek fresh registration for trading on the SME platform. Similarly, a sub-broker also need not seek fresh registration, where s/he is affiliated to stock broker who is eligible to trade on SME platform.

SEBI has also decided to grant approvals to only corporatised and demutualised entities for operating as an SME exchange,unlike earlier when it had decided to give time to entities to comply with the regulations.

Besides having a balance sheet net worth of Rs 100 crore, it must also have nationwide trading terminals and an online screen-based trading system.

The exchange must also have an online surveillance capability which monitors positions, prices and volumes in real time to keep a tab on market manipulation.

“It shall have adequate arbitration and investor grievances redressal mechanism operative from all the four regions of the country,” the regulator said.

The risk management system and surveillance system should be the same as it is currently for the cash market segment, the SEBI circular said.

Bulls may bail out of emerging markets

 

Source :19 May 2010, 0513 hrs IST,Deeptha Rajkumar,ET Bureau

MUMBAI: The dream run of emerging market stocks may be coming to an end, with risk-averse global investors pulling out funds as the world stares at the spectre of sinking back to economic contraction with troubles brewing in Europe and China.

International investors have pulled out $890 million from India this month, the highest since January 2009 following the collapse of Lehman Brothers, in what could just be the beginning if global economic problems persist.

Shaky markets and the possibility of policy actions such as interest rate hikes to stave off inflationary threats may be a drag on emerging stocks for some months to come. Indian shares may fall as much as 10%, say investors.

“Emerging markets have had a great run, but now investors are taking a breather,” said Jyotivardhan Jaipuria, managing director and head-India research at BoA Merrill Lynch. “Our fund manager survey indicates that they have become more cautious about investing in emerging markets.”


The MSCI Emerging Markets index is down about 9% from last month’s highs and China is down more than 20%. Indian stocks are down 6.5% from their peak, after climbing 81% in 2009.

International markets have been see-sawing as some believe the $1-trillion European Union aid package to save economically troubled nations such as Greece and Spain may not be enough to prevent another credit crisis. Rising fears about China’s growth faltering due to government attempts to cool down the economy have exacerbated investor concerns.

“The European crisis will impact India flows negatively in the near term as risk taking gets cut back,’’ said Pankaj Vaish, managing director and head-equities at Nomura.

Emerging market equity funds had a second straight week of redemptions, according to EPFR data for week ended May 12.

China equity funds posted their second straight week of outflows. Emerging Europe, Middle-East and Africa funds also lost $350 million. As investors flee to safe-haven assets such as the US treasury and gold, Indian stocks could fall further, investors say.

“There could be continued short-term selling in emerging markets and Indian equities. Markets could fall another 5-10% from these levels,” said Sam Mahtani, director, emerging market equities, at F&C Asset Management. “There will be no upmove till such time fears recede over global issues.’’

US assets such as the treasury, shares and gold are preferred as they are seen as safe, at least for now. Shares in the US are up 2% this year. The US dollar has once again emerged as a safe-haven asset even for central banks. Central banks across the globe raised their holdings to $2.7 trillion in March, from $2.67 trillion in February. Gold prices are near record highs.

Emerging market growth, which has been higher than the developed world in the last decade, is also under threat given that most central banks are poised to raise interest rates to temper inflation. China’s inflation rate may touch 3% soon, prompting a rate increase, and in India it is already above the central bank’s target.

“Systemic risk has reduced for the moment but investors know it has not vanished,” said Munish Varma, head-global markets India at Deutsche Bank. "That has prompted investors to liquidate some of their risky holdings and move into safer assets as seen from the demand for US treasuries last week and record high price of gold.”

Now, recovery agents target HR depts with staff complaints

 

Source :Daniel P George, TNN, May 19, 2010, 03.42am IST

CHENNAI: Recovery agents of banks and financial institutions have devised a new way of arm-twisting credit card holders and loan defaulters into paying up their dues — calling up the human resource department of their companies to complain about the defaulting employees.

Confirming the move, recovery agents said that in many cases, visits to the homes and offices of the employees were not enough to pressure people to pay up. "It has worked in many cases as the employees feels the HR department will take stern action against them," said Abdul Wahab, a recovery agent attached to a nationalised bank.

CV Gidappa, general secretary of the Credit Card Holders' Association of India, also said that banks were now resorting to approaching the HR departments to cause fear among defaulters.

"It is a matter of dispute between the borrower and the lender and one can't understand why banks are approaching the employer. It creates bad blood," Gidappa said. He said in many cases the employers had promptly sacked the defaulting staff as they feared the company's image was at stake.

"We know that banks are doing this on a large scale because I have received many complaints from professionals who have been sacked in this manner of late," he said.

Gidappa said one woman was called by her manager halfway through a project and asked to resign as she had defaulted on installments on a personal loan she had taken from a bank. The employee, when contacted, said, "I was not allowed to give my version. It was not a secured loan and the company had no stake in it. But since it was I who handed the resignation letter, I am not in a position to take them on legally."

Giddappa said instances where companies have sacked employees for defaulting are on the rise. One IT company is learnt to have sacked eight employees in this manner.

Murky cover: Chain-selling of insurance products thrives despite IRDA restrictions

m

 Source:ML:May19,2010

In the absence of any clear-cut guidelines from the regulator or the government, insurance products are being sold under MLM schemes 

Insurance products are being sold under multi-level marketing (MLM) schemes by constantly luring unaware clients. However, the regulator, the Insurance Regulatory and Development Authority (IRDA), is busy fighting a turf war with market regulator Securities and Exchange Board of India (SEBI), giving a free hand to these dubious, fly-by-night operators.

In the absence of any clear-cut guidelines from the insurance regulator or the government, MLM schemes are being used to peddle insurance. IRDA, the industry association and the government don’t seem to have the time to look into these murky chain-marketing schemes.

According to Section (42) of the Insurance Act, 1938, appointing sub-agents and passing on commission or kickbacks is prohibited. In an email to Moneylife, IRDA's executive director A Giridhar said, “Selling insurance through unlicensed persons is illegal and we will act on the information provided by you.” In addition, IRDA certification is mandatory for selling insurance products.

However, peddlers of MLM schemes in insurance products are coming up with new ways to cover up their shady activities. One such company is Team Life Care Co India Pvt Ltd, a corporate agent of Bajaj Allianz Life Insurance Company Ltd. (read more http://www.moneylife.in/article/8/4821.html)

Despite clear evidence of an MLM scheme being used to sell its products, Bajaj Allianz denies the very existence of such operations. Santosh Balan, head, corporate communications, said, “Bajaj Allianz General Insurance solicits business only through approved and specified persons. All our agents are strictly advised to follow all regulations and procedures while soliciting business. If we find anyone violating any norm or regulations, we will take strict action against them."

There are two different views on using MLM to sell insurance products. While the regulator clearly says that selling insurance through unlicensed persons is illegal, the Life Insurance Council is not sure about it. Earlier, SB Mathur, secretary general of the Life Insurance Council told Moneylife, ”There are a couple of insurance companies that have a multi-level set-up, who have licensed agents and who use authorised people to sell products and some of them are doing a good job. But IRDA is quite alive to this and has recently taken some steps to ensure that MLM is not misused.”

“If there is an MLM structure where the company has a number of authorised representatives to sell insurance to people who are buying policies, then an MLM scheme could give strength of distribution. If there are no licensed representatives selling insurance, then it (the company) should be denied the right to sell. It is as simple as that,” said Mr Mathur, who is former chairman of the Life Insurance Corporation of India (LIC).
Here is seems that Mr Mathur, a veteran in insurance, is just looking at the ‘sales’ side of these MLM schemes. From his statement it appears that he may not be aware about the fraudulent ways in which an MLM scheme works.

All companies in the MLM field form a pyramid structure wherein the agent, business partner, distributor or salesman, whatever you call him, gets in new recruits, who in turn also recruits new people and it goes on to form a chain. Unfortunately, this chain structure is not a straight one. The new recruits are divided into binary or spill lines. Here the whole MLM edifice can come crumbling down.

For example, if you join an MLM scheme, you are required to get two more people under you. Similarly, these two people also have to recruit two people each under them and after that your structure becomes complete and you are eligible to receive some income.

However, in case one person from your team fails to recruit two people under his line then your structure remains incomplete and you may not receive a single penny as income. What is stunning is that depending on the MLM scheme, people who had joined under your line may be diverted to someone else’s line, if your line remains inactive or does not recruit more people. This is why so many people have lost or are losing huge amounts of money under MLM.

Moneylife has been writing on the rampant use of MLM for selling insurance products by insurers. Insurers like LIC, Bajaj Allianz, Reliance General Insurance or their agents are running MLM schemes for selling more policies.

Nevertheless, nobody except Bajaj Allianz bothered to reply to our mails until writing this story.
In addition, insurance companies are also targeting independent financial advisors (IFAs) with lucrative offers for referring their high net-worth clients for various insurance products. A few IFAs have told Moneylife that they would rather stay away from such proposals, as they value a long-term client relationship more than the prospect of a quick buck. 

Earlier writing in Sarai.net, S Ananth, who has been studying chain schemes in Andhra Pradesh, in an article titled ‘Harmless fraud’ says, “A clear-cut case of violation of the laws relates to schemes that distribute insurance policies on behalf of various private insurance companies. Any person desirous of marketing insurance policies has to pass an exam conducted by IRDA. Only corporate agents or brokers (registered with IRDA) are allowed to pay commissions.

Companies actively involved in marketing insurance schemes include TLC Insurance (India) Pvt Ltd (TLC), RMP and Amway, among others. These details indicate the nature of harmless fraud and also the frequent testing of the frontiers of economic law by such companies in order to gauge the reaction of the agencies of the State. The lack of reaction by State institutions, or even tacit approval, is likely to gradually lead to calls to formalise these activities at a future date.”

IRDA, whose job is to regulate the insurance sector, is saying that it is looking into MLM schemes used by insurance companies to promote sales. However, in practice, the regulator is turning a blind eye on MLM operators and insurance companies. Similarly, the industry association is not sure whether to call MLM unauthorised or not. Nevertheless, the way both MLM companies and insurers are operating, there are good chances that MLM in insurance may be legalised.

About a dozen countries have banned any kind of MLM scheme. However, in a country like India, in the absence of any clear policy and regulation, companies that can fix the system by roping in influential officials thrive and grow till complaints start flowing in. However, this happens only when the MLM scheme is getting ready to collapse. Whether the rampant selling of insurance through MLM will be banned or legalised in India, only time will tell.
 

RBI asks NBFCs to insist on disclosures by developers

 Source:Moneylife:May19,2010

Before sanctioning a loan, NBFCs should make sure that the developer should publicly disclose the name of the entity to whom the property is mortgaged. The rule is to create awareness among flat buyers

The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) to insist on disclosures by developers, builders, owners and companies while granting loan for housing or development projects. This is expected to bring greater transparency in the construction industry and create awareness among potential flat buyers.

Before sanctioning the loan, NBFCs should make sure that the developer, builder, owners and company should disclose the name of the entity to which the property is mortgaged, in all pamphlets, brochures and advertisements. Similarly, these entities should also indicate that if required they would provide a no-objection certificate (NOC) or permission of the mortgagee for sale of flats or property.

RBI's new guidelines for NBFCs are similar to those followed by banks. Earlier, in a case, the Bombay High Court observed that the bank granting finance for housing projects should insist on disclosure of the charge or any other liability on the plot in question or development project being duly made in the brochure or pamphlet etc which may be published by the developer or owner inviting the public at large to purchase flats and properties. The Court also added that this obviously would be part of the terms and conditions on which the loan may be sanctioned by the bank.

Many times, a buyer has found out that the property on which he bought his residential apartment is in fact mortgaged to some financial institution and he was kept in the dark by the developer. Although the RBI has made it mandatory for banks to make sure that the bank's name is mentioned as the mortgagee in the publicity material issued by the developer, the same rule was not applicable for NBFCs. 

 

http://panindiaproperties.blogspot.com/

Retired bank employees get a raw deal in new wage agreement

 Source:ML:Yogesh Sapkale,May 12, 2010 05:57 PM

Retired bank employees who want to join a pension scheme will have to refund the entire amount paid by the bank to their provident fund account and the interest accrued thereon, along with their share in the contribution

Retired bank employees, who had opted for provident fund (PF) and gratuity at the time of retirement instead of a pension, are feeling left out from the benefits of the new wage settlement signed between the Indian Banks Association (IBA) and the United Forum of Bank Unions (UFBU), a body comprising nine bank unions.

According to the new wage agreement signed on 27 April 2010, about 8 lakh employees from 26 public sector banks (PSBs), 12 private sector and 8 foreign banks will get a salary hike of about 17.5%. The revision will cost banks Rs4,816 crore, including arrears payment from November 2007, which will be given in a lump sum, K Unnikrishnan, deputy chief executive, IBA said.

A total of 2.7 lakh employees and 60,000 pensioners will be benefited by the second pension option in the agreement. For employees who had not joined the pension scheme in 1995, the new agreement gives them another opportunity to join the scheme. However, there is a catch. They will have to refund the entire amount of the bank's contribution to their PF and interest accrued thereon received on retirement with the employee’s share in the contribution.

"On an individual basis, this payment over and above the bank's contribution to PF and interest thereon has been worked out at 56% of the said amount of the bank's contribution to the PF and interest thereon received by the employee on retirement," the agreement, a copy of which is with Moneylife, says.

According to a comment posted by ‘Bhas’ on forestlaneshul.com, new pension optees will have to pay 2.8 times of their November 2007 revised salary from the earlier agreed 1.6 times. "All unions kept mum on this, which came to light only after signing and yet they say this is historic. All plans were accepted as per IBA modifications, and for this it has taken almost two and a half years," the comment reads.

CH Venkatachalam, general secretary, All India Bank Employees Association (AIBEA) and convener for the UFBU, said, "People had made the mistake of not joining the pension scheme earlier and some of them are still not ready to accept it. What they are not willing to understand is with the pension scheme, they can receive a regular income more than the interest they may earn. Plus this pension has a provision for dearness allowance to be revised every six months."

Refunding the entire amount of the bank's contribution to their PF and interest accrued thereon received by the employee on retirement with the share in contribution has not gone down well with some retired bank employees. Whether the employee retired in 1997 or in 2007, there is no differentiation and both have to refund the entire amount of bank’s contribution along with interest.

For example, an employee who retired in 1997 might have received Rs6 lakh as terminal dues. If he invests the same amount at an average interest rate of 8%, then he would receive about Rs48,000 per year just as interest. From 1997 to 2010, he most probably would have received more amount as interest than his investment.

"This second pension offer is nothing but a cruel joke on retired bank employees. Retired bank employees, especially those above the age of 66, are finding this offer unviable and unfair since they have to pay a heavy sum and chances of recovering the principal amount are less," said Jagdip H Vaishnav, a retired bank employee.
When asked to explain the contribution and pension per month, Mr Venkatachalam said that if for example, an employee had received Rs10 lakh as PF and gratuity on retirement, then he will have to refund this Rs10 lakh plus around Rs5.5 lakh as his own contribution.

However, the bank will also contribute around the same amount and the actual amount an employee has to refund comes to Rs10 lakh. To add to this, he will receive pension arrears of eight months at a rate of about Rs15,000 per month. If he can use this money for the refund amount, then his actual contribution to the new pension scheme comes to just about Rs8.5 lakh.

He will continue to receive Rs15,000 every month thereafter. In addition, after every six months, the dearness allowance component in his pension will increase, so he will receive more money. On the other hand if he invests Rs8.5 lakh, then he would get an interest of about Rs68,000 for a year or  Rs5,700 per month.

Now he has to decide whether to opt for Rs15,000 per month or Rs5,700 per month, Mr Venkatachalam said.

One problem with the pension scheme is that some of the retired employees may not have enough cash left with them since usually people try to buy expensive things such as a home or a four-wheeler from the money earned at retirement. They most likely would find it very difficult to garner the required money so as to receive monthly pension or regular income.

Vishwas Utagi, secretary, AIBEA said, “We have been advising employees to keep the funds they received at the time of retirement separate, in case they plan to opt for the new pension scheme. So, I think refunding the bank’s contribution and interest should not be an issue.”

The UFBU has been asking the IBA to allow another option to for those to join the pension scheme—employees who were in the service of banks prior to 29 September 1995 in case of PSBs, and 26 March 1996 in case of associate banks of the State Bank of India (SBI) and who did not opt for the scheme. IBA, however, was not ready for the same due to cost considerations. The UFBU then offered to share a portion of the initial funding liability on a one-time basis for extending pension to the non-optees.

An actuarial valuation of liability by actuaries showed an estimated funding gap of Rs6,000 crore. The UFBU offered to contribute 30% or about Rs1,800 crore to bridge the gap for retired employees. An actuarial valuation on similar lines as conducted for serving employees had estimated the funding gap as Rs3,115 crore for those retirees or their families.

“Moreover, as per the new wage agreement, bank employees, both in service and retired, will receive arrears effective from November 2007 and it would help them while contributing to the 30% funding gap,” Mr Utagi said.

UFBU is receiving calls from children of retired bank employees asking how much their parents will have to pay to get a regular monthly income and these children are ready to pay from their own pockets, Mr Venkatachalam added.

Foreign and private sector banks generate the most complaints; Kotak Bank and Barclays top the dubious list

Source:Rudreshwar Malkani:ML:May19,2010

While people continue to criticise the services offered by public sector banks, it is the foreign and private players who seem to be attracting the most complaints

According to the 2008-2009 report published under the RBI’s Banking Ombudsman Scheme, the number of complaints received per 1,000 accounts is the highest among foreign banks and banks in the private sector, with banks in the public sector having comparatively fewer complaints.

The study, included in the annex of the RBI annual report, reveals the total number of complaints received under the Banking Ombudsman (BO) Scheme, started in 2006, along with break-ups showing the number of complaints against individual banks, number of complaints per 1,000 accounts (non-credit card related) and number of credit/debit card related complaints per 1,000 credit/debit card accounts.

In our analysis of the report, which is available on the RBI website, we have focused mainly on the number of complaints per 1,000 account holders, as opposed to the total number of complaints. This is because banks with larger numbers of customers will face a larger number of complaints, and looking at the number of complaints per 1,000 accounts is the only way to put all banks on an equal footing. We have also disregarded outliers who have only a few accounts.

The results show that foreign banks have the highest complaints followed by private sector banks; public sector banks have the least number of complaints—which is surprising and contrary to general perception.
This lends credence to the charge of a banker, who does not want to be named, who said that foreign and private sector banks have savvier customers who are more aware of their rights and more likely to lodge formal complaints.

Hence, we decided to focus more on comparisons within this group.The report shows that among foreign banks, Barclays Bank and ABN AMRO were the most complained about with 1.31 and 1.02 complaints per 1,000 accounts.

The other big foreign banks also showed large, though relatively lesser complaints, with HSBC having 0.35, Citibank having 0.34 and Standard Chartered Bank showing 0.34 complaints per 1,000 accounts.
In terms of credit and debit card related complaints, Barclays again topped the charts with 1.59 complaints per 1,000 card holders. Coming in at a distant second with 0.65 complaints per 1,000 was again ABN AMRO. HSBC and Standard Chartered followed with 0.57 and 0.44 respectively. Citibank had 0.23 complaints per 1,000 card holders.

HSBC had the highest number of complaints overall with 2,838 followed by Citibank with 2,563. As noted earlier, this is primarily because they are much larger than their competitors, and the total figure should not be viewed as an indicator of performance.

Private sector banks also had high levels of complaints with Kotak Mahindra Bank having 0.71 complaints per 1,000 account holders. Among the larger banks, another surprise was that HDFC Bank had 0.43 complaints per 1,000 accounts, which was significantly higher than ICICI Bank which had 0.28 complaints. This is again contrary to perception. A pleasant exception to the trend was Axis Bank which had only 0.17 complaints per 1,000 account holders. ICICI Bank had the highest number of total complaints with 11,453.
When looking at credit and debit card related complaints, the trend was more uniform with ICICI Bank having 0.17 complaints per 1,000 card accounts and HDFC Bank and Kotak Mahindra receiving 0.13 and 0.12 complaints per 1,000 card accounts respectively. Axis Bank again had the fewest complaints with only 0.04 complaints received per 1,000 credit or debit card holders.

Public sector banks showed the most surprising results, considering the common perception of nationalised banks offering poor facilities and service.

State Bank of India (SBI), India’s largest bank, had received 0.13 complaints per 1,000 accounts and 0.09 credit or debit card related complaints for 1,000 credit/debit card accounts.

Bank of Baroda had 0.06, Bank of India had 0.04, Canara Bank had 0.05, Central Bank of India had 0.06, Punjab National Bank had 0.07 and Union Bank of India had 0.06 complaints per 1,000 accounts.
The figures for credit and debit card related complaints for the above entities were 0.05, 0.03, 0.03, 0.06, 0.03 and 0.04 complaints per 1,000 card accounts respectively.

The numbers show that whether it is because of poor service or more aware customers, foreign and private sector banks have some issues they need to address.

Where are the pushy credit card issuers? Banks cut issuance of credit cards due to lower use, falling profits

 Source:Money life :May 17, 2010 05:27 PM

About 80% of users of credit cards in India do not pay any interest to banks, by using the grace period, reveals a senior RBI official

Ever wondered why there are fewer calls from telemarketers offering you a platinum, lifetime free credit card? It has nothing to do with the Do Not Disturb (DND) facility from telecom operators. Credit cards have become unprofitable, especially after various banks suffered huge delinquencies in 2005-07, the boom years. Since the bankers or card issuers are not earning much money on credit cards, you now have to really struggle to get one.
Speaking at a seminar on banking services, organised by Moneylife Foundation, Kaza Sudhakar, chief general manager, customer services department, Reserve Bank of India (RBI) said, "Earlier there were complaints that I don’t want a credit card, now there are complaints that I am asking for a card and banks are not giving one. That’s because credit cards are not a profit-making business. Banks are losing money on credit cards."
On an average, there are higher interest rates associated with credit cards—ranging from 1.5% to 4% per month. However, this has not deterred people from opting for a credit card, simply because it gives a user the much-needed flexibility to repay. Credit cards also come with a grace period, where the user can pay his credit card balance in full within the specified time period which can go up to 45 days.
"There may be higher interest rates associated with credit cards, but about 80% of people don’t pay interest charges on a credit card (They may be using the grace period smartly, thus avoiding interest),” said Mr Sudhakar.
According to reports, there are about 26 million (2.6 crore) card users in India with an average person’s wallet containing at least one debit and credit card. However, out of these cards, only 50% are active or in use. Out of the active users almost 80% or about 1.04 million (10.4 lakh) users are not paying any interest on their credit cards, leaving all the issuers with just 260,000 (2.6 lakh) users from whom they can earn some money.
A few years ago or before the 2008 recession, people used to receive a lot of marketing calls for credit cards, free for life from any annual fee. Now the trend seems to have reversed. With the slowdown, many people defaulted on their credit card payments. Usually, during a slowdown, the number of defaults goes up rapidly. However, people don’t default on their home or car loans, since there is a danger of the creditor taking possession of the collateral. However, the same is not true for a credit card. Even if the user defaults on his credit card payment, the recovery takes much more time.
According to media reports, India’s second largest lender ICICI Bank Ltd has closed around 1.5 million credit card accounts, thus reducing the number of its total credit card users to 7 million. Other card issuers like State Bank of India, HDFC Bank Ltd, Citibank, HSBC and Standard Chartered Bank are also following the same route, but nobody likes to talk about it openly.
On the other hand, the number of debit card users is increasing. “We are seeing a shift in consumer behaviour as debit cards take on a greater role in everyday spending. More places that were traditionally cash only—from rail operators, to restaurants to retailers—are now accepting payment cards, so consumers can enjoy convenient access to their funds by using their debit cards with a level of control and protection not offered by cash,” said Uttam Nayak, country manager, South Asia, Visa.

Echoing the same sentiment, Piyush Khaitan, managing director of transaction management company Venture Infotek said, “Banks are going slow on credit card issuance and have been promoting spends through debit cards by offering various incentives to consumers such as loyalty rewards, discounts by select retailers and cash-back options. The increasing acceptance of debit cards at both physical and online merchants is also driving spends through debit cards."

Banks can return cheques that alter anything other than date

Source:Ravi Samalad:ML:May19,2010

If a recent Reserve Bank of India’s (RBI) circular is implemented, bank customers will have to be extra careful whenever they issue a cheque. If customers have made any correction like change of amount (numerically or in words), or the name on the cheque issued, then it would be returned by the clearing branch. The only correction that would be allowed is the date of the cheque. The circular is designed to prevent fraudulent cheque alterations.

“We are in the process of implementation of the circular issued by Reserve Bank of India. As this will have an impact on customers, we have already commenced the exercise of informing them about this change. This communication will continue throughout the first quarter of this financial year. Simultaneously, notices are also being put up in all the branches. This will come into effect from 1st July 2010, by which time adequate notice would have been given to all customers,” said S. Ramakrishnan, Head - Retail Liabilities Product Group,HDFC Bank.

In its circular dated 22 February 2010, RBI states, “No changes/corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers.” If there are any alterations on the cheque, except the date, customers will have to issue a fresh cheque. RBI believes that this would help banks to identify and control fraudulent alterations.

Chequebooks carry a standard tip wherein customers are requested to refrain from carrying out any alterations in amount and payee name. But usually banks clear cheques if there are any minor corrections. Currently banks clear a cheque if it is counter-signed by the issuer in case of any corrections.

“There is no rule as such. If one or two corrections are made and if it is countersigned then the cheque can be cleared,” said an official from a private bank.

“As of now we have not fixed any date for implementation of this circular. Somebody who is in a state of readiness can implement it. It is for the benefit of the customers,” said a top official from RBI.

“Frauds do not only happen because of cheque alterations. This is only one modus operandi. Some people change the cheque’s page name; remove account payee and amount etc. Some people also print fake cheques. This one circular is not going to reduce such fraud cases,” said Ramavatar Singh, general manager, Bank of India.

Here’s another company that’s openly flouting IRDA norms on prohibition of chain marketing of insurance products

 Source: money life :Ravi Samalad:May 19,2010

You have to hand it to this company. The name itself—Rose Valley Chain Marketing System Ltd—makes it clear that the outfit is neck-deep in multi-level marketing schemes. And insurance is part of its arsenal.
The company, certified by the Insurance Regulatory & Development Authority (IRDA) is a corporate agent of the Life Insurance Corporation of India (LIC) since 2002 and has six lakh foot soldiers pushing various insurance policies across India.

Moneylife had reported earlier (http://www.moneylife.in/article/8/5371.html) on how according to Section (42) of the Insurance Act, 1938, appointing sub-agents and passing on commission or kickbacks is prohibited. When we had approached the insurance regulator on the proliferation of various MLM insurance schemes, along with the details, IRDA's executive director A Giridhar had told Moneylife, “Selling insurance through unlicensed persons is illegal and we will act on the information provided by you.” In addition, IRDA certification is mandatory for selling insurance products.

But here is an example of a company that does not even find it necessary to cloak its insurance MLM business—its name itself is a dead giveaway.
The model operates as follows—a sales executive has to achieve a target of Rs40,000 within 12 months. This is the joining stage. At the 18th rank, a sales executive ‘graduates’ to become a ‘Development Advisor Group 3’.
The products being peddled include LIC policies, along with fixed deposits and recurring deposits of Rose Valley.

A sales executive does not have to pass an IRDA examination, says an official from the company, which is in express violation of the rules.

The official from Rose Valley said, “Once you reach a certain level, you don’t have to work any more; you can earn commission bought by your chain.”
The brochure also says that a ‘marketing executive’ can also recruit a maximum of 15 sales executives.

At the first stage, the annual target is Rs40,000 and at the final stage (the 18th rank) the target is Rs20 crore. This target also includes the business achieved from the lower chain(s).

The group is a huge conglomerate with its finger in many pies. It has interests in real estate, hospitality, retail, broadcasting and IT education & training.
According to the company official, the group is also looking at entering the housing finance loan segment.

Bank of Rajasthan to merge with ICICI Bank

 

Source: Money Life: May 18, 2010 06:37 PM

BoR plunged into a crisis early this year after the RBI slapped a Rs25-lakh fine on the bank for alleged violation of various norms

Trouble-torn Bank of Rajasthan (BoR) today announced that it would merge with India's largest private sector lender ICICI Bank, reports PTI.
An agreement for amalgamation was reached today between ICICI Bank and BoR, which as per today's share price is valued at Rs1,500 crore.
BoR shares surged 20% to Rs99.50 following the development.
Bank of Rajasthan said in a notification to the stock exchanges that its controlling shareholders, the Tayal family, "have entered into an agreement on 18 May 2010, with the ICICI Bank for proposing an amalgamation of both."
BoR promoters, the Tayal family had recently run into regulatory trouble with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) over its stake holding, which had risen contrary to the impression it conveyed.
The Tayal family has about 55% stake and it needs to bring it down to 10% to meet RBI guidelines.
The boards of both the banks met today on the merger.
BoR, one of the oldest private sector banks in the country, plunged into a crisis early this year after the RBI slapped a Rs25-lakh fine on the bank for alleged violation of various norms.
These include irregularities in transactions and misrepresentation of documents, norms pertaining to anti-money laundering, Know Your Customer (KYC) and irregularities in the conduct of accounts of a corporate group.
RBI also appointed Deloitte Haskins and Sells to conduct a special audit of the bank, which recently submitted its interim report to the central bank.
In March, SEBI banned 100 entities including Tayal Group firms from all stock market-related activities for fraudulently hiking the promoter holding in the bank, while conveying the impression that they were reducing their shareholding.
Incepted in 1943, BoR has a network of over 463 branches and a customer-base of over 20 lakh. In the December quarter, the bank's net profit declined to Rs44.7 crore as against Rs49.21 crore in the year-ago period while its total income dropped to Rs373.7 crore from Rs419.8 crore.
ICICI Bank has a network of over 2,000 branches.

Ombudsman to get tough with misbehaving banks

 Source :Moneylife Digital Team:May17,2010

The Banking Ombudsman is not in favour of banks appealing against its decisions; threatens to convert one-off cases into all-encompassing class action suits

Despite not being a quasi-judicial body, but a scheme for grievance redressal, the Banking Ombudsman (BO) derives enormous power from its ability to extend a verdict into a full-blown class action suit. The BO, which is an expeditious forum to bank customers for resolution of their complaints, is known to take a tough stand against gross violations of customers’ rights.

Now, the BO has frowned upon banks that consider an appeal against its verdicts. During an interactive session on banking services organised by Moneylife Foundation on Saturday, Kaza Sudhakar, chief general manager, customer services department of the Reserve Bank of India (RBI) vehemently discouraged banks from appealing against a decision given in favour of the customer. If a bank were to do so, the BO would consider extending the particular complaint verdict into a class action suit, applicable to the entire banking fraternity.

Mr Sudhakar said, “We are absolutely not in favour of any appeal by bankers against decisions taken by the BO. It is simply not expected. If the bank appeals, it is a case for a class action suit—as simple as that. If the appeal is not upheld, you are done.”

He cited the example of a particular complaint against State Bank of India (SBI), where repeated complaints from one customer about delay in pension payments forced the RBI to take a tough stand on the matter. The outcome was that the central bank issued a circular across the banking system, directing banks to make good the payments immediately, along with penal interest to the customers. “It was only that one person who persistently knocked on the RBI’s doors. Because the bank appealed against our decision, we had to scale the issue across all banks.” This resulted in benefits to nearly 65 lakh customers in the country. Moneylife was the only media house to reveal the action taken by RBI against banks delaying pension payments. (see here and here).

While the BO has the power to award exemplary damages in extreme cases, it is not a frequent occurrence. Mr Sudhakar pointed out that almost 50% of the complaints with the BO are non-maintainable due to a variety of reasons. Out of the remaining, almost 70% are resolved within one-two months.

Mr Sudhakar also criticised banks for the increasing number of cases where housing loan documents of customers were getting misplaced at the banks’ end. He said, “We are completely sympathetic towards the customer in these cases. This is simply not tolerable, and we will be harsh on such banks. Loss of housing loan documents is like a permanent defect in title of the customer.”

OP Agarwal, BO for the States of Maharashtra and Goa, was also present during the workshop. He also put in some words of caution for the banks. “We strongly urge banks not to keep the complaints pending beyond an acceptable time limit. Around 70% of the complaints with the BO get resolved within one or two months. In some rare cases, redressal takes more than three months.”

Mr Agarwal also pointed out that banks are required to disclose in their annual report details regarding complaints filed against them. This should include the nature of complaint, award against complaints, time taken for reverting back to the customer, etc.