Tuesday, January 24, 2012

CRR reduced by 0.5 points today, 23rd Jan

Current CRR is 5.5, it was 6 earlier. Repo, Reverse repo etc remains the same

Sunday, January 22, 2012

Money Laundering

Money laundering refers to the process of concealing the source of illegally obtained money. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the FATF, an intergovernmental body set up to combat money laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard."[1] Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.[2]
Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions (US dollars) and poses a significant policy concern for governments.[2] As a result, governments and international bodies have undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.
But in simple terms it is the Conversion of Black money into white money. This takes you back to cleaning the huge piles of cash. Indian newspapers frequently report the money laundering scams perpetrated by the Political leaders and some of the prominent stars are the chief ministers of UP, Punjab and Kerala. UP chief minister ms. Mayawati as per the Indian Express reports used some innovative techniques to launder the money by avoiding the tax in legitimate manner. She accepted the donations from persons who were road side heroes. When CBI raided these guys were found in no position to donate huge sums for political motives.
Other Indian star in the laundering Business is Ketan Parekh.It is believed that he shifted the proceeds of money received from the BoI pay order scam to various tax heavens and ultimately in the Swiss Banks.These transactions are believd to be just the tip of the iceberg.
If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any asset forfeiture laws.

US GAAP v/s Indian GAAP


In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP.
Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).
The US GAAP provisions differ somewhat from International Financial Reporting Standards (IFRS), though former SEC Chairman Christopher Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009.[1]
There are significant differences between Indian GAAP and US GAAP.  US GAAP stipulate stringent accounting treatment as well as disclosure norms, whereas their Indian GAAP in many cases have relaxed requirements ( AS 18,17,AS 3). Similarly, there are several areas where no Accounting Standard have been issued by ICAI . These differences lead to wide variations when Financial Results of Indian Companies are computed under US GAAP and it is found that Profits computed under US GAAP are generally lower 
Some of these major differences between US GAAP and Indian GAAP which  give rise to differences in profit are highlighted hereunder:
1.      Underlying assumptions: Under Indian GAAP, Financial statements are prepared in accordance with the principle of conservatism which basically means “Anticipate no profits and provide for all possible losses”. Under US GAAP conservatism is not considered, if it leads to deliberate and consistent understatements.
2.      Prudence vs. rules : The Institute of Chartered Accountants of India (ICAI)  has been structuring Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence' as the principle in contrast to the US GAAP, which are  "rule oriented", detailed and complex. It is quite easy for the US accountants to handle issues that fall within the rules, while the International Accounting Standards provide a general framework of accounting standards, which emphasise "substance over form" for accounting. These rules are less descriptive and their application is based on prudence. US GAAP has thus issued several Industry specific GAAP , like SFAS 51 ( Cable TV),  SFAS 50 (Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.
3.      Format/ Presentation of financial statements: Under Indian GAAP, financial statements are prepared in accordance with the presentation requirements of Schedule VI to the Companies Act, 1956. On the other hand , financial statements prepared as per US GAAP are not required to be prepared under any specific format as long as they comply with the disclosure requirements of US  GAAP. Financial statements to be filed with SEC include
4.      Consolidation of subsidiary companies: Under Indian GAAP (AS 21), Consolidation of Accounts of subsidiary companies  is not mandatory. AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.Thus, the   financial income of any  company taken in isolation neither reveals the quantum of business between the group companies nor does it reveal the true picture of the Group . Savvy promoters   hive off their loss making divisions into separate subsidiaries, so that financial statement of their Flagship Company looks attractive .Under US GAAP (SFAS  94),Consolidation of results of Subsidiary Companies  is mandatory , hence eliminating  material, inter company transaction  and giving a true picture of the operations and Profitability of the various majority owned Business of the Group.
5.      Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in financial statements is mandatory only for  companies whose share are listed on recognized stock exchanges and Certain enterprises  whose turnover for the accounting period exceeds Rs. 50 crore. Thus , unlisted companies escape the burden of providing  cash flow statements as part of their financial statements. On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow statements for 3  years – current year and 2  immediate preceding years irrespective of whether the company is listed or not .
6.      Investments: Under Indian GAAP (AS 13), Investments are classified as Current and Long term. These are to be further classified Government or Trust securities ,Shares, debentures or bonds Investment properties Others-specifying nature. Investments classified as current investments are to  be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Investments classified as long term investments are  carried in the financial statements at cost. However, provision for diminution is to be  made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.   Under US GAAP ( SFAS 115) ,  Investments are required to be segregated in 3 categories i.e. held to Maturity Security ( Primarily Debt Security) , Trading Security and Available for sales Security and should be further segregated as Current or Non current on Individual basis.  Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealised gains and losses included in earnings. All Other securities  are classified as available-for-sale securities and reported at fair value, with unrealised gains and losses excluded from earnings and reported in a separate component of shareholders' equity
7.      Depreciation: Under the Indian GAAP, depreciation is provided based on rates prescribed by the Companies Act, 1956.  Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation cannot be provided at a rate lower than prescribed in any circumstance. Similarly , there is no compulsion to provide depreciation at a higher rate, even if the actual wear and tear of the equipments is higher than the rates provided in Companies Act. Thus , an Indian Company can get away with providing with lesser depreciation , if the same is in compliance to Companies Act 1956. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.
8.      Foreign currency transactions:  Under Indian GAAP(AS11) Forex transactions ( Monetary items ) are recorded at the rate prevalent on the transaction date .Year end foreign currency assets and liabilities ( Non Monetary Items) are re-stated at the closing exchange rates. Exchange rate differences arising on payments or realizations and restatements at closing exchange rates are treated as Profit /loss in  the income statement.   Exchange fluctuations on liabilities incurred for fixed assets can be capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity . Capitalization of exchange fluctuation arising from foreign liabilities incurred for acquiring fixed assets does not exist. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place . US GAAP also permits use of Average monthly Exchange rate for Translation of Revenue, expenses and Cash flow items, whereas under Indian GAAP, the closing exchange rate for the Transaction date is to be taken for translation purposes.
9.      Expenditure during Construction Period: As per the Indian GAAP (Guidance note on ‘Treatment of expenditure during construction period' ) , all incidental expenditure on Construction of Assets during Project stage  are accumulated and allocated to the cost of asset on completion of the project. Contrary to this, under the US GAAP (SFAS 7) , such  expenditure are  divided into two heads – direct and indirect. While, Direct expenditure is accumulated and allocated to the cost of asset, indirect expenditure are charged to revenue.
10.   Research and Development expenditure: Indian GAAP ( AS 8)   requires research and development expenditure to be charged to profit and loss account, except equipment and machinery which are capitalized and depreciated. Under US GAAP ( SFAS 2)  , all R&D costs are expenses except intangible assets purchased from others and Tangible assets that have alternative future uses which are capitalised and depreciated or amortised as R&D Expense. Under US GAAP, R&D expenditure incurred on software development are expensed until technical feasibility is established ( SOP 81.1) . R&D Cost and software development cost incurred under contractual arrangement are treated as cost of revenue.

11.   Revaluation reserve : Under Indian GAAP, if an enterprise needs  to revalue its asset due to increase in cost of replacement and provide higher charge to provide for such increased cost of replacement, then the Asset can be revalued upward and the unrealised gain on such revaluation can be credited to Revaluation Reserve ( Guidance note no 57). The incremental depreciation arising out of  higher book  value may be adjusted against the Revaluation Reserve by transfer to P&L Account.  However for window dressing some promoters misutilise this facility to hoodwink  the shareholders on many occasions. US GAAP does not allow revaluing upward property, plant and equipment or investment.
12.   Long term Debts: Under US GAAP , the current portion of long term debt is classified as current liability, whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability.
13.   Extraordinary items, prior period items and changes in accounting policies: Under  Indian GAAP( AS 5) , extraordinary items, prior period items and changes in accounting policies are disclosed without netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are required to be made while reporting the Prior period Items.
14.     Goodwill: Under the Indian GAAP goodwill is capitalized and charged to earnings over 5 to 10 years period. Under US GAAP ( SFAS 142) ,  Goodwill and intangible assets that have indefinite useful lives are not  amortized ,but they are  tested at least annually for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit.
15.     Capital issue expenses: Under the US GAAP, capital issue expenses are required to be written off when incurred against proceeds of capitals, whereas under Indian GAAP , capital issue expense can be amortized or written off against reserves.
16.     Proposed dividend: Under Indian GAAP , dividends declared are accounted for in the year to  which they relate. For example, if dividend for the FY 1999-2000 is declared in Sep 2000 , then the corresponding charge is made in  2000-2001 as below the line item . Contrary to this , under US GAAP dividends are reduced from the reserves in the year they are declared by the Board. Hence in this case under US GAAP , it will be charged  Profit and loss account of 2000-2001 above the line.
17.     Investments in Associated companies: Under the Indian GAAP( AS 23) ,  investment in associate companies is initially recorded at Cost using the Equity method whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The consolidated statement of profit and loss reflects the investor’s share of the results of operations of the investee.are carried at cost . Under US GAAP ( SFAS 115)  Investments in Associates are accounted under equity method in Group accounts but would be held at cost in the Investor’s own account.
18.     Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment of Expenditure during Construction Period), direct Revenue expenditure during construction period like Preliminary  Expenses, Project related expenditure are allowed to be Capitalised.  Further , Indirect revenue expenditure incidental and related to Construction are also permitted to be capitalised. Other Indirect revenue expenditure not related to construction, but since they are incurred during Construction period are treated as deferred revenue expenditure and classified as Miscellaneous Expenditure in Balance Sheet and written off over a period of 3 to 5 years. Under US GAAP ( SFAS 7)  , the concept of preoperative expenses itself doesn’t exist. SOP 98.5 also madates that all Start up Costs should be expensed. The enterprise has to prepare its balance sheet and Profit and Loss Account as if it were a normal running organization.  Expenses have to be charged to revenue and Assets are Capitalised as a normal organization.  The additional disclosure include reporting of cash flow, cumulative revenues and Expenses since inception. Upon commencement of normal operations, notes to Statement should disclose that the Company was but is no longer is a Development stage enterprise. Thus , due to above accounting anomaly, Accounts prepared under Indian GAAP , contain  higher charges to depreciation which are to be adjusted suitably under US GAAP adjustments for indirect preoperative expenses and foreign currencies.
19.     Employee benefits: Under Indian GAAP, provision for leave encashment is accounted based n actuarial valuation. Compensation to employees who opt  for voluntary retirement scheme can be amortized over 60 months.  Under US GAAP, provision for leave encashment is accounted on actual basis. Compensation towards voluntary retirement scheme is to be charged in the year in which the employees accept the offer.
20.     Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment premiums are adjusted against Securities Premium Account. Under US GAAP, premiums for early extinguishment of debt are expensed as incurred.



Bank Stress Test

Stress testing is a form of testing that is used to determine the stability of a given system or entity. It involves testing beyond normal operational capacity, often to a breaking point, in order to observe the results. Stress testing may have a more specific meaning in certain industries, such as fatigue testing for materials.
Instead of doing financial projection on a "best estimate" basis, a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under, for example, the following stresses:
What happens if equity markets crash by more than x% this year?
What happens if GDP falls by z% in a given year?
What happens if interest rates go up by at least y%?
What if half the instruments in the portfolio terminate their contracts in the fifth year?
What happens if oil prices rise by 200%?
This type of analysis has become increasingly widespread, and has been taken up by various governmental bodies (such as the FSAin the UK) or inter-governmental bodies such as the European Banking Authority and the International Montetary Fund) as a regulatory requirement on certain financial institutions to ensure adequate capital allocation levels to cover potential losses incurred during extreme, but plausible, events. This emphasis on adequate, risk adjusted determination of capital has been further enhanced by modifications to banking regulations such as Basel II. Stress testing models typically allow not only the testing of individual stressors, but also combinations of different events. There is also usually the ability to test the current exposure to a known historical scenario (such as the Russian debt default in 1998 or 9/11 attacks) to ensure the liquidity of the institution.
Stress testing reveals how well a portfolio is positioned in the event forecasts prove true. Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.
Defining stress tests
Stress testing defines a scenario and uses a specific algorithm to determine the expected impact on a portfolio's return should such a scenario occur. There are three types of scenarios:
Extreme event: hypothesize the portfolio's return given a catastrophic event, often the recurrence of a historical event. Current positions and risk exposures are combined with the historical factor returns.
Risk factor shock: shock any factor in the chosen risk model by a user-specified amount. The factor exposures remain unchanged, while the covariance matrix is used to adjust the factor returns based on their correlation with the shocked factor.
External factor shock: instead of a risk factor, shock any index, macro-economic series (e.g., oil prices, property prices), or custom series (e.g., exchange rates). Using regression analysis, new factor returns are estimated as a result of the shock.
In an exponentially weighted stress test, historical periods more like the defined scenario receive a more significant weighting in the predicted outcome. The defined decay rate lets the tester manipulate the relative importance of the most similar periods. In the standard stress test, each period is equally weighted.
Stress tests in payment and settlement systems
Another form of financial stress testing is the stress testing of financial infrastructure. As part of Central Banks' market infrastructure oversight functions, stress tests have been applied to payment and securities settlement systems.[2][3][4] Since ultimately, the Banks need to meet their obligations in Central Bank money held in payment systems that are commonly operated or closely supervised by central banks[5] (e.g. CHAPS, FedWire, Target2, which are also referred to as large value payment systems)[, it is of great interest to monitor these systems' participants' (mainly banks) liquidity positions.
The amount of liquidity held by banks on their accounts can be a lot less (and usually is) than the total value of transferred payments during a day. The total amount of liquidity needed by banks to settle a given set of payments is dependent on the balancedness of the circulation of money from account to account (reciprocity of payments), the timing of payments and the netting procedures used.[6] The inability of some participants to send payments can cause severe falls in settlement ratios of payments. The failure of one participant to send payments can have negative contagion effects on other participants' liquidity positions and their potential to send payments.
By using stress tests it is possible to evaluate the short term effects of events such as bank failures or technical communication breakdowns that lead to the inability of chosen participants to send payments. These effects can be viewed as direct effects on the participant, but also as systemic contagion effects. How hard the other participants will be hit by a chosen failure scenario will be dependent on the available collateral and initial liquidity of participants, and their potential to bring in more liquidity.[7] Stress test conducted on payment systems help to evaluate the short term adequacy and sufficiency of the prevailing liquidity levels and buffers of banks, and the contingency measures of the studied payment systems.[8]
A financial stress tests is only as good as the scenarios on which it is based. Those designing stress tests must literally imagine possible futures that the financial system might face. As an exercise of the imagination, the stress test is limited by the imaginative capacities of those designing the stress test scenarios. Sometimes, the stress test's designers fail to imagine plausible future scenarios, possibly because of professional peer pressure or groupthink within a profession or trade (witness the failure of the great majority of financial "experts" to envisage the crash of 2008)or because some things are just too horrible to imagine. The successive financial stress tests conducted by the European Banking Authority and the Committee of European Banking Supervisors in 2009, 2010 and 2011 illustrate this dynamic. The 2009 and 2010 stress tests assumed even in their adverse scenarios a relatively benign macro-economic environment of -0.6% economic growth in the Euro area; by 2011 it was clear that such assumptions were no longer just plausible, they were almost certain to happen; the adverse scenario had to be adjusted to a -4.0% growth scenario. Those reviewing and using the results of stress tests must cast a critical eye on the scenarios used in the stress test.
India is to ‘stress test’ its banks twice a year following the example of similar exercises being undertaken in the US and Europe.
India’s banks emerged remarkably unscathed from the global financial crisis in spite of suffering a widespread liquidity squeeze.
But the Reserve Bank of India says that it had conducted stress tests during the global financial crisis and would continue to do so regularly in the future to build confidence in its banking system.India’s move shows a growing acknowledgement among central bankers of the value of stress tests, in which bank balance sheets are checked to see how much financial pressure they can withstand in the event of simulated future crises. But Indian regulators, unlike their US and European counterparts, are not making the results public.
A senior RBI official told the Financial Times that the central bank had so far conducted two stress tests on the country’s commercial banks, and had undertaken several sector-specific tests.
Duvvuri Subbarao, RBI governor, speaking in Mumbai on Tuesday said that India was “learning on the job” in its review of capital, liquidity and leverage standards.
He said India needed to have more rigorous stress tests, acknowledging that what the RBI had introduced was not as searching as stress tests adopted in the US and Europe.
Only ICICI Bank, India’s largest private sector bank, required explicit help from the Reserve Bank of India during the global financial crisis. It received liquidity support after an exposure to some ‘toxic assets’ caused a mini- run on deposits.
Most of India’s banking sector is state controlled. There has been some concern about the capitalisation of smaller banks. The Indian goverment has availed itself of World Bank loans to help inject capital into some of them.
George Osborne, the UK’s finance minister, said heads of UK banks had accompanied him on a visit to Mumbai to learn from the resilience of Indian banks.
“Stress tests have been a very important moment,” Mr Osborne said. “They have enhanced confidence in the European banking system.”
Osborne said both the UK and India were involved in discussions at the G20 over capital and liquidity standards to protect the global banking system.

IFRS - International Financial Reporting Standard

International Financial Reporting Standards (IFRS) are principles-based standards, interpretations and the framework (1989)[1] adopted by the International Accounting Standards Board (IASB).
Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS.
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2011. This will be done by revising existing accounting standards to make them compatible with IFRS.
Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011...
The ICAI has also stated that IFRS will be applied to companies above Rs.1000 crore from April 2011. Phase wise applicability details for different companies in India:
Phase 1: Opening balance sheet as at 1 April 2011*
i. Companies which are part of NSE Index – Nifty 50
ii. Companies which are part of BSE Sensex – BSE 30
a. Companies whose shares or other securities are listed on a stock exchange outside India
b. Companies, whether listed or not, having net worth of more than INR1,000 crore
Phase 2: Opening balance sheet as at 1 April 2012*
Companies not covered in phase 1 and having net worth exceeding INR 500 crore
Phase 3: Opening balance sheet as at 1 April 2014*
Listed companies not covered in the earlier phases
If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.
On January 22, 2010 the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of Rs 1,000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010.
The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India’s position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in phases Companies, whether listed or not, having net worth of more than Rs 500 crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of Rs 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use ‘net worth’ to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice. Conclusion The government will come up with a separate road map for banking and ice companies by February 28, 2010. Let us hope that transition in case of those companies will not be deferred further.

Saturday, January 21, 2012

Euro Crisis or European Debt Crisis

The European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as “the most serious financial crisis at least since the 1930s, if not ever,” in October 2011.
This is one of most important problems facing the world economy, but it is also one of the hardest to understand. Below is a Q&A to help familiarize you with the basics of this critical issue.
Q: How did the crisis begin?
The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable.
The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the true size of the nation’s deficits. In truth, Greece’s debts were so large that they actually exceed the size of the nation’s entire economy, and the country could no longer hide the problem.
Investors responded by demanding higher yields on Greece’s bonds, which raised the cost of the country’s debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.
Q: Why do bonds yields go up in response to this type of crisis, and what are the implications?
The reason for rising bond yields is simple: if investors see higher risk associated with investing in a country’s bonds, they will require a higher return to compensate them for that risk. This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the country in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields, and so on. A general loss of investor confidence typically causes the selling to affect not just the country in question, but also other countries with similarly weak finances – an effect typically referred to as “contagion.”
Q: What did European governments do about the crisis?
The European Union has taken action, but it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action thus far has been a series of bailouts for Europe’s troubled economies. The first occurred in spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros (the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth about $157 billion. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty.

The European Central Bank also has become involved, although it is resisting the so-called "bazooka" option of printing money to buy up the region's distressed debt. The ECB announced a plan, in August 2011, to purchase government bonds if necessary in order to keep yields from spiraling to a level that countries such as Italy and Spain could no longer afford. In December 2011, the ECB made €489 ($639 billion) in credit available to the region’s troubled banks. Numerous financial instituions had debt coming due in 2012, causing them to hold on to their reserves rather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make the crisis worse. While the ECB's action did not alleviate the core of Europe's problem - high government debt - investors cheered a move designed to prop up the region's economy.
Although the actions by European policy makers usually helped stabilize the financial markets in the short term, they were widely criticized as merely “kicking the can down the road,” or postponing a true solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece are small enough to be rescued by the European Central Bank, Italy and Spain are too large to be saved. The perilous state of the countries’ fiscal health was therefore a key issue for the markets throughout 2010 and 2011.
Q: Why is default such a major problem? Couldn’t a country just walk away from its debts and start fresh?
Unfortunately, the solution isn’t that simple for one critical reason: European banks remain one of the largest holders of region’s government debt, although they reduced their positions through out the second half of 2011. Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. If a country defaults on its debt, the value of its bonds will plunge. For banks, this could mean a sharp reduction in the amount of assets on their balance sheet – and possible insolvency. Due to the growing interconnectedness of the global financial system, a bank failure doesn’t happen in a vacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructive “contagion” or “domino effect.”
The best example of this is the U.S. financial crisis, when a series of collapses by smaller financial institutions ultimately led to the failure of Lehman Brothers and the government bailouts or forced takeovers of many others. Since European governments are already struggling with their finances, there is less latitude for government backstopping of this crisis compared to the one that hit the United States.
Q: How did the European debt crisis impact the financial markets?
The possibility of a contagion made the European debt crisis a key focal point for the world financial markets in the 2010-2011 period. With the market turmoil of 2008 and 2009 in fairly recent memory, investors’ reaction to any bad news out of Europe was swift: sell anything risky, and buy the government bonds of the largest, most financially sound countries. Typically, European bank stocks – and the European markets as a whole – performed much worse than their global counterparts during the times when the crisis was on center stage. The bond markets of the affected nations also performed poorly, as rising yields means that prices are falling. At the same time, yields on U.S. Treasuries fell to historically low levels in a reflection of investors’ "flight to safety."
Q: What are the political issues involved?
The political implications of the crisis are enormous. In the affected nations, the push toward austerity – or cutting expenses to reduce the gap between revenues and outlays – has led to public protests in Greece and Spain and in the removal of the party in power in both Italy and Portugal. On the national level, the crisis has led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within the European Union. After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been Germany’s unwillingness to agree to a region-wide solution – such as the issuance of bonds by all 17 countries in the Eurozone – since it would have to foot a disproportionate percentage of the bill.
The tension has created the possibility that the region would eventually abandon the euro (the region’s common currency). On one hand, this would allow each country to pursue its own independent policy rather than trying to adopt a common policy for the 17 nations using the currency. But on the other, it would be an event of unprecedented magnitude for the global economy and financial markets. This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period.
Q: Is fiscal austerity the answer?
Not necessarily. Germany’s push for austerity (higher taxes and lower spending) measures in the region’s smaller nations is problematic in that reduced government spending can lead to slower growth, which means lower tax revenues for countries to pay their bills. In turn, this makes it more difficult for the high-debt nations to dig themselves out. The prospect of lower government spending has led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis. In addition, the entire region slipped toward a recession in late 2011 due in part to these measures and the overall loss of confidence among businesses and investors.
Nevertheless, Europe’s richer countries have little choice but to pressure the smaller nations to tighten their belts since they are facing pressure from their own citizens. Taxpayers in countries such as Germany and France balk at using their money to fund what is seen as the overspending of Greece and the other troubled European countries. This type of fundamental, high-level disagreement has made a solution more difficult to achieve.
Q: From a broader perspective, does this matter to the United States?
Yes – The world financial system is fully connected now – meaning a problem for Greece, or another smaller European country, is a problem for all of us. The European debt crisis not only affects our financial markets, but also the U.S. government budget. Forty percent of the International Monetary Fund’s (IMF) capital comes from the United States, so if the IMF has to commit too much cash to bailout initiatives, U.S. taxpayers will eventually have to foot the bill. In addition, the U.S. debt is growing steadily larger – meaning that the events in Greece and the rest of Europe are a potential warning sign for U.S. policymakers.

FDI - Foriegn Direct Investment in India and about WallMart's entry

With strong governmental support, FDI has helped the Indian economy grow tremendously. But with $34 billion in FDI in 2007, India gets only about 25% of the FDI in China.
Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that needed a boost and economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage and promote a favorable business environment for investors.
FDIs are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal or mining industries.
A number of projects have been implemented in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also granted permission for FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5 million.
Currently, FDI is allowed in financial services, including the growing credit card business. These also include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.
In 2007, India received $34 billion in FDI, a huge growth compared to the previous years, but significantly less than the $134 billion that flowed into China. Although the Chinese approval process is complex, China continues to outshine India as a choice destination for foreign investors. Why does India, a country with resources and a skilled workforce, lag so far behind China in FDI amounts?
Physical infrastructure is the biggest hurdle that India currently faces, to the extent that regional differences in infrastructure concentrates FDI to only a few specific regions. While many of the issues that plague India in the aspects of telecommunications, highways and ports have been identified and remedied, the slow development and improvement of railways, water and sanitation continue to deter major investors.
Federal legislation is another perverse impediment for India. Local authorities in India are not part of the approval process and the large bureaucratic structure of the central government is often perceived as a breeding ground for corruption. Foreign investment is seen as a slow and inefficient way of doing business, especially in a paperwork system that is shrouded in red tape.
How will Wal-Mart affect other Indian retailers?


In all of the countries Wal-Mart has set up shop it has put other retailers out of business and driven down wages.   Wal-Mart has a clearly defined anti-union policy aimed at preventing its work force from gaining any collective bargaining power which could result in increased wages, covered health benefits and job security. Many reports have been written documenting the economic and eventual social and environmental degradation which occurs when Wal-Mart “comes to town”.
“Over the course of [a few years after Wal-Mart entered a community], retailers' sales of men’s' and boys' apparel dropped 44% on average, hardware sales fell by 31%, and lawn and garden sales fell by 26%. In towns without Wal-Marts that are close to towns with Wal-Marts, sales in general merchandise declined immediately after Wal-Mart stores opened. After ten years, sales declined by a cumulative 34%.”
[Kenneth Stone at Iowa State University, “Impact of the Wal-Mart Phenomenon on Rural Communities”].
Wal-Mart and India
    Wal-Mart is seeking to open its own retail chain throughout India.
  India's $250 billion retail business is the eighth largest in the world and has the potential to grow 7 per cent by 2011. [McKinsey Report] For a company already dominating the world markets, this is an un-passable opportunity.
    The owners of Wal-Mart stand to gain enormous profits from this move while India’s economy will suffer and its workers will be subjugated to the unfair work practices of this Multinational Behemoth.
Until now, foreign companies have been restricted to serving only as wholesalers in India. That has already helped create more modern distribution networks, often while generating better prices for farmers and other producers, and giving customers better deals, too.
But expanding the foreign presence to retailing has been seen as the necessary next step for modernists like Singh, who has been urging the move for years. Praise for his announcement came from India's corporations and some of its 175 million farmers, who see the move as part of a wave of changes that might help jolt a slowing economy.
And opponents – representing the 34 million people who work in retail and wholesale businesses, as well as left-leaning politicians – were just as loud.
On Monday, leaders of two opposition parties said finance minister, Pranab Mukherjee, had agreed to a delay. Mukherjee is expected to make a statement in Parliament on Wednesday.
All of this places Wal-Mart in a position hardly new to the company: at the center of a raging debate that pits the multinational giant from Bentonville, Ark., against local mom-and-pop businesses.
For more than a year, Wal-Mart has been operating a wholesale outlet in this northern city known for its fertile farms and hearty food. Local businessmen like Ravi Mahajan, whose family has had a wholesale general store in the narrow alleys of the Imam Nasir market for 40 years, say their sales have been cut in half as their customers – retail shopkeepers – stock up at Wal-Mart.
If the government eventually lets foreign firms expand beyond wholesaling to open retail stores, Mahajan said, many of his retail customers would be forced out of business, while squeezing out traders like himself who have long served as the crucial middleman in Indian commerce.

"We'll be destroyed," Mahajan said last week, minutes after he and dozens of other traders burned an effigy with a bloated belly and a crudely drawn face, meant to represent multinational marauders.
But Indian business is far from united in opposing foreign retailers.
Farmers like Avtar Singh Sidhu, who sells potatoes to PepsiCo for its Lays chips and has sold baby corn and other vegetables to Wal-Mart's local partner, the Indian conglomerate Bharti, argues that foreign retailers will be a boon to India's struggling agricultural sector. The multinationals, he said, will buy directly from farmers and pay better prices than local wholesalers.
Already, he said, PepsiCo is offering 6 rupees per kilo (or 11 cents) for his potatoes, while local traders offer only 3 rupees (6 cents). "We need more competition," Sidhu said.
The announcement by Singh's administration on Nov. 24 called for allowing foreign companies like Wal-Mart to team up with Indian partners to open retail stores in metropolitan areas with more than 1 million people. Jalandhar has 2.1 million people.
The plan ran counter to the views of many politicians who say a slower approach is needed to protect indigenous firms and the rural poor.
But Singh and his backers have argued that foreign retailers could help reduce chronically high food inflation – which has run around 10 percent for the last year, on top of 20 percent increases the year before. The retail proposal, proponents say, could improve the lot of the more than a half billion Indians still tied to the land, by improving the supply system from farms to consumers. An estimated one-third of some types of vegetables and fruits rot before ever reaching retail shelves.
Speaking of the Nov. 24 announcement, an adviser to Singh, Raghuram Rajan, an economist at the University of Chicago, said, "This is a bold move, and I think this is a necessary move."
At present, barely 6 percent of India's $470 billion in retail sales takes place in organized retail stores, according to Technopak, a Indian consulting firm. The rest takes place in small shops. By contrast, organized retail makes up more than 20 percent of sales in China and 36 percent in Brazil – the two emerging economies to which India most frequently compares itself. (The figure is 85 percent in the United States.)

Fiscal deficit

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.
Components of fiscal deficit
The primary component of fiscal deficit includes revenue deficit and capital expenditure.
Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.
Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.
In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).
Arguments: Fiscal deficit lead to inflation
According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy.
In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.
Expert recommendation
Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure.
Impact
Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced.

Thursday, January 19, 2012

Financial Inclusion

Financial inclusion is the availability of banking services at an affordable cost to disadvantaged and low-income groups. In India the basic concept of financial inclusion is having a saving or current account with any bank. In reality it includes loans, insurance services and much more.
The first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access to or receive banking services. In order to increase this number the Reserve Bank of India had the Government of India take innovative steps. One of the reasons for opening new branches of Regional Rural Banks was to make sure that the banking service is accessible to the poor. With the directive from RBI, our banks are now offering “No Frill” Accounts to low income groups. These accounts either have a low minimum or nil balance with some restriction in transactions. The individual bank has the authority to decide whether the account should have zero or minimum balance. With the combined effort of financial institutions, six million new ‘No Frill’ accounts were opened in the period between March 2006-2007. Banks are now considering FI as a business opportunity in an overall environment that facilitates growth.
The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the bank’s products, which are beneficial for them. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.
Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-free small loans. The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frill’ account. This will help the low income individual to open a ‘No Frill’ account without identity proof and address proof.
In such cases banks can take the individual’s introduction from an existing customer whose full KYC norm procedure has been completed. And the introducer must have a satisfactory transaction with the bank for at least 6 months. This simplified procedure is available to those who intend to keep a balance not exceeding Rs.50,000 in all accounts taken together. With this facility we can channel the untapped, considerable amount of money from the low income group to the formal economy. Banks are now permitted to utilize the service of NGOs, SHGs and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models.
Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members’ guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks.

Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the products designed by the banks are not satisfying the low income families. The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to reach directly to the low income consumers. Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.
Banks are now using new technologies like mobile phones to reach low income consumers. It is possible that the telephone providers themselves will start basic banking services like savings and payments. Indian telecom consumers have few links to financial institutions. So without much difficulty telecom providers can win the battle with banks. Banks should therefore be proactive about transferring this technology into an opportunity.
The Indian Government has a long history of working to expand financial inclusion. Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI established RRBs with the same aim. It encouraged branch expansion of bank branches especially in rural areas. The RBI guidelines to banks shows that 40% of their net bank credit should be lent to the priority sector. This mainly consists of agriculture, small scale industries, retail trade etc. More than 80% of our population depends directly or indirectly on agriculture. So 18% of net bank credit should go to agriculture lending. Recent simplification of KYC norms are another milestone.
Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the government should provide a less perspective environment in which banks are free to pursue the innovations necessary to reach low income consumers and still make a profit. Financial service providers should learn more about the consumers and new business models to reach them.
In India Financial inclusion will be good business ground in which the majority of her people will decide the winners and losers.