Time to lock into fixed deposits? - Part II

India also started feeling the heat of global slow-down. Inflation ruling well above 12% has now slipped into single digits and it has been reported below 9% for the last week. The rupee continues to trade volatile against the USD and again slipping below the Rs49 mark yesterday. The Prime Minister is making statements to the effect that more pain is in the offing for India. Exports have gone down to a great extent both in manufacturing and service sector (IT) resulting in lesser inflow of foreign currency. FII sales in the stock markets are continuing and the demand for the greenback remains constant.

Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.

With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to committ funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.

State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.

Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!

Time to lock into fixed deposits? - Part I

Fixed deposits or time deposits were a long last financial instrument hardly used over the last 3-4 years thanks to continuous bull run in the stock markets. Persons who wants to keep money in Fixed deposits were looked down upon as risk-averse, conservative and naive investors. Low interest regime and inefficient tax structure also added to the woes of the investors in fixed deposits. Fixed deposits, as the preferred asset class, vanished from the investors radar.

Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.

If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.

In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.

Part II of the article would be published tomorrow.

It's an interesting article by Yogesh Chhabria.

LATELY, I have been thinking a lot about the Lehman crisis. Spending money that they didn't have and going beyond their means is one of the main reasons for their situation today. In fact that is the cause for the current economic crisis in the US.

When I see all this happening, I can only remember the good old days. Then, karz was bad. People looked down upon those who took loans. Parents would not give their daughter's hand in marriage to a man with loans.

But of course, the times have changed now. Everyone I know has a loan. The buzz word is EMI (equated monthly installment). Today, you can buy everything on EMI - a house, a television, even an i-Pod. In fact I know of someone who just bought a fancy BMW 3 series on EMI, instead of buying a cheaper car outright with cash. I mostly prefer to take public transport, but then I am an old man with old thoughts!

Anyway, coming back to what caused the crisis.

Imagine having Rs 2 lakh in your bank account, no regular income, yet buying a house worth Rs 65 lakh, in the hope of selling it for a higher price. Even if the price of the house fell by just 5 per cent (that is Rs 3 lakh), you will go bankrupt. This is what Lehman Brothers did; with around USD 20 billion they went and bought assets worth over USD 600 billion. Isn't it suicidal and simply foolish?

I am sure things would have been different, had I been the head of Lehman brothers. But who wants an old conservative man like me to head a complex financial institution.

But there are a few lessons that we can learn:

1.Live a balanced life and avoid overspending.
2. Don't buy things we don't need.
3. Don't buy Branded goods.
4. Don't buy excess Food, Cloths, Cosmetics, Footwear, electronics and Fashion accuracies. Just think before you buy.
Tip: World still has a lot of growth ahead and the future holds immense opportunities for us. Let us make the most of it and save and invest it wisely instead of wasting our precious little on things we don't need.
5. Try to balance life with work (No one is happy to work in their professions).
6. Don't stress out your self, after work try to do some extra activities like swimming, yoga, walking, running where you can divert your mind from stress.
A thumb rule: Health is more important than money.
7. Try to understand each other (Wife and Husband) in financial matters and help each other.
Tip: As soon as you get your monthly salary, set aside a fixed amount, usually 35 per cent, for insurance, savings and investments. You can then spend the rest.
8. Not all loans are bad. Loans that are 'need based' (home loans, education loans) can always find a place in your finances against those that are largely 'want based' (Credit cards, personal loans, car loans).
9. Borrow only if repayment is financially comfortable.
A thumb rule: Keep EMIs within 35 to 45 per cent of your monthly income.


In that respect, there is one American who I really respect - Warren Buffet. He has lived in the same ordinary house for over three decades, drives his own medium sized car and leads an extremely regular 'middle class' life. If that's all it takes for the richest person on earth to be happy, why do all of us need to take extra stress just so that we can get things which aren't even essential?



Source: World Wide Web

How deposit insurance works in India?

When rumours about the financial health of a private bank began to circulate last week, people queued up at the bank's ATMs in the wee hours to withdraw money. One of my friends who had large sums parked in fixed deposits with the bank called to enquire about the rumour.

When I asked him whether he had similar deposits across a range of banks, he replied that his entire surplus cash of Rs 8 lakh was parked with the same bank, as he did not have an account with any other bank! Shocked, I took the opportunity to explain to him how deposit insurance works in India. Here is what my friend, and others like him, need to know.

How much is covered?
All deposits of up to to Rs 1 lakh in a commercial or cooperative bank in India are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) (a wholly owned subsidiary of RBI).The insurance coverage to the banks is extended by collecting premium from the banks, at half-yearly intervals at the rate of 10 paise per annum per hundred rupees. The insurance protection is made available to the depositors free of cost. The cover of Rs 1 lakh is applicable for your principal and interest dues taken together. Deposits in different banks are separately insured, with each deposit eligible for Rs 1 lakh cover.

What kinds of deposits are covered?
Insurance cover is available across savings accounts, current accounts, recurring and fixed deposits.

Which banks are covered?
All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are covered. At present, all co-operative banks other than those from the States of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Nagar Haveli are covered under the deposit insurance system. Primary cooperative societies are not currently covered by the scheme.

What are the ways to increase the cover for my bank deposits?
Spreading your surplus across many banks is the most direct way to increase the deposit cover.
You can even make sure that your deposits in a single bank are insured, by having multiple joint accounts with different "first holders". Insurance tends to be offered in the first holder's name.

What happens to deposits in a joint account?
If more than one deposit account (whether savings, current, recurring or fixed deposit) is jointly held by individuals in one or more branches of a bank, then all the accounts in which their names appear in the same order will be aggregated for the Rs 1 lakh cover. However, if deposits are held under different first holders, then every such account will be eligible for insurance cover of Rs 1 lakh.

Is it possible to increase the insurance cover for my deposit by paying a higher premium?
No. It is not possible to pay premium and increase the cover. However, such provisions may come into being in future. Recently, with the financial turmoil in the US, as part of the bailout package, the US Government has increased the cover from $1,00,000 to $2,50,000. So it's possible in India that the cover may be enhanced in future.

How are the settlement claims awarded?
In the event of the winding up or liquidation of bank, every depositor of the bank is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together, standing as on the date of cancellation of registration of the bank. So, all my friend has to do to avoid sleepless nights at the ATM is to spread his deposits over several banks, to increase his overall insurance cover!

Source HBL

Global Financial Crisis keeps rolling - latest to be rescued is Fortis! Who is next?

Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week.

Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.

Fortis is the largest European firm so far caught up in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.

``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.

Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.

Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.

Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.

``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.

The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.


Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.

`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.

``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.

Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.

The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.

Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

Source: Bloomberg.com

U.S. government seizes Washington Mutual

The U.S. government on Thursday made the largest bank seizure in American history, taking over Washington Mutual, the severely troubled savings and loan, and selling pieces of it to JPMorgan Chase in an emergency deal intended to avoid sticking the taxpayer with a bill for another bank, according to people briefed on the plan.

For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and had pressed hard for the bank to sell itself. As panic gripped financial markets last week after the collapse of the investment bank Lehman Brothers, U.S. regulators stepped up their efforts, working behind the scenes, and at times going behind WaMu's back to work privately with potential bidders.

Indeed, the seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept completely in the dark: the company's new chief executive, Alan Fishman, was flying from New York to Seattle at the time the deal was brokered, according to these people.
The shot-gun acquisition marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of JPMorgan Chase. In March, JPMorgan rescued Bear Stearns as it teetered into bankruptcy protection.

The deal will give JPMorgan branches in California and other markets where it does not have a footprint. But JPMorgan will also inherit a big loan portfolio of troubled mortgages and commercial real estate.

U.S. regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, had been severely depleted after suffering a debilitating loss from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would have cost the fund upwards of $20 billion to $30 billion.
The takeover of Washington Mutual is yet another black-eye for its primary federal regulator, the Office of Thrift Supervision. It also oversaw IndyMac Bank, another big lender that suddenly collapsed in mid-July, and several other deeply troubled savings banks. Washington Mutual was the largest institution under its watch.

Washington Mutual long insisted that it could remain independent, but the giant thrift had quietly hired Goldman Sachs early last week to identify potential bidders. Among the banks that expressed interest were Citigroup, JPMorgan Chase, HSBC, Banco Santander, TD Bancorp and Wells Fargo. Each had different reasons for making an offer, but nobody could make the numbers work. Several deadlines past without anyone submitting bid.

Washington Mutual had struggled to find a partner earlier this year willing to inject fresh funds in its ailing business. This spring, it balked at an offer from JPMorgan to buy the entire company. Instead, TPG, the big private equity firm, led a group of investors that made a $5 billion capital injection in April.

Optimising your tax benefits on your life insurance premium

Life Insurance is a must for any income generating individual. The nature and the quantum of risk cover required varies from person to person. The Government also provides you with excellent tax benefits for the amount of life insurance premium you pay under sec 80 C of the Income Tax Act.

The insurance premium paid on our life insurance policies is deducted from your total income under Sec 80 C. The practical story is that most of you would have already exhausted the available limit of Rs100,000 under Sec 80 C by way of housing loan principal repayment.

But there is a possibility of utilising a portion of the life insurance premium paid by availing the benefit under Sec 80 D of the Income Tax Act. Sec 80 D of the Income Tax Act provides for deduction of premium paid towards Health Insurance from your total income. If the insurance policy covers "critical illness", then the premium portion attributable to the critical illness cover can be deducted u/s 80 D of the IT Act instead of claiming it under Sec 80 C. Normally we deduct the total premium on life insurance policies under sec 80 C but it is possible that we get few extra thousands deduction from taxable income if you have a policy with critical illness rider.

You have to contact your Life Insurance company and ask for the premium break-up details between the mortality charges for the life cover and the critical illness cover. Few of the insurance policies you have taken already has a "critical illness" rider attached to it. Going forward, when you opt for a life insurance cover you have to do a cost benefit analysis of having a critical illness rider considering the additional deduction possible under Sec 80 D of the IT Act.

Get a premium certificate from the life insurance company stating clearly the amount of premium charged for critical illness cover and claim it under sec 80 D and avail extra tax deductions.