Published on March 15, 2014
Investeurs Chronicle January 2014, Volume: 87
Cover Story The NachiketMor committee report does not address the issues that militate against financial inclusion The NachiketMor committee report has recommended a new banking structure in India. This, however, will not necessarily be one that will serve the aim of inclusion best. The committee must be applauded for meeting the deadline given with such a comprehensive report that is liberally sprinkled with suggestions for avoiding micro-management. For example, the distance between bank branch and the banking correspondent should be set by the bank according to its own operational convenience and not by rules set by the Reserve Bank of India (RBI). Yet the inherent contradictions in the existing system remain. To give one example, the report shows the discord in the flow of priority sector credit: agricultural credit is bunched up in March to meet the targets set by RBI, but the rush does not match the needs of the farmer. Hence, the report recommends tracking the outstanding amounts on a daily basis rather than at the end of the fiscal. Just this single point underscores the fact that micro-management by well-intentioned policymakers can often clash with actual objectives. Yet, even as the report tries to address such contradictions, when it comes to the crux, not only do the fundamentals remain the same, i.e., the emphasis on bank-led model for financial inclusion, the existing liberalized space of prepaid payment instruments (PPIs) has been replaced by payment banks. In other words, it is clear that inclusion will remain the preserve of banks. Given the lacklustre performance of banks globally in reaching out to the excluded, unless the core issues plaguing the bank model at the last mile are addressed, will creating another set of banks really help in achieving the goal of inclusion? Yes, by piggybacking on the Aadhaar roll out, everyone will get a bank account, but what happens after that is the key to real inclusion. Interestingly, the report does highlight the need to capitalize on the strengths of non-banks when it comes to payments for inclusion. However, after setting out risks in the existing PPIs, the report flips the argument over and asks non-banks to become small specialized banks instead. At first reading, this looks like a good idea, bringing in existing PPIs and other non-banks, and at the same time mitigating risks that are the bugbear of RBI. So where is the problem? The issue is that by not separating payments and deposits, the recommendations have, in all probability, tangled the business case for payments even more than it currently is. There is a reason why the European Union’s payment systems directive, 2007, and the recent Brazilian regulations created separate payments institutions, clarifying that any money kept with an entity for the sole purpose of payments is not to be treated as a deposit. Such institutions do not accept deposits and do not give credit. A shaky vision for Financial Inclusion
Cover Story In India, rather than making such a clear distinction, the recommendations force non-banks to become banks instead. The tangling of the business case comes through in the report itself, with the recommendation that at least one deposit product provided through payment access points should give a positive real rate of return over the Consumer Price Index. As the report shows at the moment no bank provides such a product. Putting such a restriction on any non-bank that wants to enter the payments business is to saddle the business case with even more problems than those that exist currently. Then, there is the other stinger that says that all guidelines for scheduled commercial banks will be applicable to payments banks, creating more confusion for anyone who wants to enter the payments business. While existing small PPIs have been forced into examining their very existence now, big telcom firms and India Post seem the obvious contenders for the new payment banks licences. This model can get India Post a bank licence that it wants, but will telcos find a business model with deposits commercially viable? Globally, non-banks are playing a greater role in the payments space because their core competence of wide network, revenue model and other features match the needs of the poor and the unbanked, i.e., low value, high volume transactions. A 2011 Bank for International Settlements (BIS) working paper by Peter Dittus and Michael Klein dissects the banking business into four parts: exchange of different forms of money for one another; storage of money for safe-keeping; transfer of money from one owner to another and investment of money. This shows the first three requirements are the most basic needs of the unbanked and can be met without involving the fourth, which is the core banking business. This principle of separating payments from intermediation has been accepted and carried forward by international standard setting bodies—the Financial Action Task Force, the Global Partnership for Financial Inclusion (the platform of the Group of Twenty countries for financial inclusion) and the BIS’ committee on payment and settlement systems. The PPI model in India was in line with these principles. Unfortunately, by binding payments with deposits, the payment banks idea fails to meet the grade now.
The fundamentals took a significant turn in the US Dollar’s favor at the end of 2014 when the Federal Open Market Committee (FOMC) announced the long-awaited Taper. There are a number of important implications to this change in monetary policy. First, if the central bank is comfortable enough to ease its unprecedented support program, it suggests that officials are confident about the outlook for the economy, employment and other critical metrics for the United States. Another important implication of the Fed’s decision to moderate its stimulus program is the subsequent yield impact. A direct aim of the open-ended stimulus program was to lower longer-term lending rates which would encourage economic expansion. The USD may also benefit should the market begin to question the Fed’s message that there is likely to be a substantial gap between the end of QE3 and the start of a rate hike cycle. Surveys suggest that market expectations of this gap currently stand at 10 months. It may narrow. The UK provides a useful parallel where the market has questioned central bank forward guidance, and bought the currency as a result. A similar process in the US is likely to drive the USD stronger. Hence, we see the USD rally continuing and expanding in scope in 2014. The pace of tapering and the ability of the Fed to reassure the market that rate hikes need not swiftly follow the end of tapering will be central to the USD’s fortunes. On both measures, we expect the currency to thrive. Forecast for US$-major currency pair for 2014 is: Currency Pair Level USD JPY 109 USD CHF 1.00 EUR USD 1.25 GBP USD 1.59 Stats Outlook-US Dollar Gloss Organic Growth The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers.
Emerging Country- Peru Peru, officially the Republic of Peru, is a country in western South America. It is bordered in the north by Ecuador and Colombia, in the east by Brazil, in the southeast by Bolivia, in the south by Chile, and in the west by the Pacific Ocean. The economy expanded 4.9 percent in the first 10 months of 2013. In Peru, growth forecasts have been revised upwards. GDP is expected to grow by 6.3% in 2014. Peru’s economy is heavily dependent on mining. The nation is the world’s third-largest producer of copper and silver and the sixth-largest producer of gold. Services account for 53% of Peruvian gross domestic product, followed by manufacturing (22.3%), extractive industries (15%), and taxes (9.7%). Peru's current account deficit for the year is seen at 4.4 percent of GDP. Fiscal surplus for the year is expected to be 0.7 percent of GDP in 2013. In November 2013, the trade balance registered a deficit of USD 170 million, which contrasted the USD 219 million surplus observed in the same month of the previous year. Peru attracted a record high investment of $12.2 billion in 2013, representing a $4 billion increase from the amount reported the previous year. Peru became the fifth highest recipient in Latin America of FDI flows with revenues worth $2.2 billion, equivalent to 5.9 percent of its GDP. Trade between India and Peru during the first 10 months of calendar year 2013 (January-October) was US $ 1.049 billion - exports from India to Peru were US $ 573.07 million and imports by Peru from India were US $ 476.42 million. The trade increased by 18% as compared to the same period of 2012 when it was US $ 883.13 million. India’s main exports to Peru are motorcycles and three-wheelers, iron and steel products, polyester and cotton yarns, pharmaceuticals, pipes, etc. Main Indian imports from Peru are copper minerals, gold, phosphates of calcium, zinc and lead minerals, fish flour, synthetic cables, fresh grapes etc. Vital Economic Statistics of Peru Economy Particulars Details GDP (nominal) $220.564 billion (2014) GDP growth rate 4.90% (2013) Currency Nuevo sol (PEN) Credit Rating BBB+ - S&P & Fitch Fiscal Surplus 2.1% of GDP (2013 estimated) Current account deficit 4.4% of GDP (2013 estimated)
In FocusForex USA is second to China in monetary stimulus The latest data released by China on 15th January show that the country's rapid growth in money supply has continued. The money supply is still charging well ahead of inflation- adjusted economic growth, which has been about 7.6 per cent. Growth in M2 almost reached 30 per cent at the end of 2009, when China was using monetary policy to offset the effects of the global financial crisis. China has reduced the pace of money supply growth since then, but kept it well above the pace of economic growth throughout, which means it has done little to sop up the extra cash issued during the crisis.The broad measure of money supply, known as M2, grew 13.6 per cent last year, barely less than its increase of 13.8 per cent a year earlier. China's tidal wave of money has driven asset prices through the roof. Housing prices have soared. The rapidly expanding money supply has also reflected into a flood of loans from the banking system and the so-called shadow banking system that have kept afloat many inefficient state-owned enterprises and bankrolled the construction of huge overcapacity in the manufacturing sector.The question now is whether the central bank can slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector. Even the very modest slowdown in money supply growth so far has already contributed to two sharp but short-lived increases in interbank interest rates in June and December, which roiled markets in China and around the world. Corporate lending rates are already approaching 10 per cent a year, the highest in any of the world's largest economies. M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect. M2 encompasses money in circulation, checking accounts, savings accounts and certificates of deposit. It is the main money supply indicator watched by the People's Bank of China in trying to balance the need for economic growth with the dangers of inflation. Purchase programme has ended. In other words, the era of cheap money isn’t going to be over soon. However, India is better prepared to face the aftereffects this time. Data from 5th January 2014 to 17th January 2014 Sensex Nifty 20,787 .30 21,063 .62 6191.4 5 6261.6 5 Gold (10 gm) Silver (1 Kg) 29097 29256 45555 45150 Crude Oil ($/barrel) Dollar/INR 106.73 106.48 62.33 61.35
About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance Team Chronicle Akanksha Srivastava firstname.lastname@example.org Nidhi Gogia email@example.com Harpreet Kaur firstname.lastname@example.org Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com
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