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New Business for Insurers Continues Decline in 2012

by Paul Joseph December 25, 2012 Featured

Insurers seem to be getting lesser new business, as new premiums (single premium policies + new regular premium policies) drop 4.2% in the first half of the year. Last year, new policy premiums had fallen over 20% . (Source: IRDA and individual insurer disclosures) Some of the top insurers (HDFC, ICICI, Bajaj) have picked up from the massive drop last year, but other than Met Life, no one seems to have really gotten back to the highs of 2010. 2010 was, if you recall, when IRDA changed the rules for ULIPs so they would become less sucky for buyers, in terms of lower surrender charges and clearer cost disclosures. The ULIP problem has resulted in lower commissions offered to agents, and insurers have shifted, for the most part, to “traditional” policies, which aren’t unit linked. However, while traditional policies have increased in sales, the investment avenues for such policies are more regulated and thus do not provide the great upside that every Indian believes is their birthright: the kosher 15%. You can also see the sizes of the premiums each of the companies have earned. LIC is out of the graph, having received over 35,000 crore (Rs. 350 billion) in the first six months. As you can see, even those that have recovered are still way behind their 2010 highs. LIC has to get to 46,700 cr. just to break even with the number in 2010 (it’s done only 35,000 cr.) With potential IPOs of these insurers, the slowdown in growth must be disturbing. However, one needs to do a more detailed analysis of the industry to find out if: a) Renewal premiums are growing fast enough to offset the drop in new premiums. That means the industry gets to not lose too much while things consolidate. b) Insurer profits are dropping. Profits could still rise because of a higher cut in expenses. c) The source of insurer margins is largely (or seems to be) surrenders. If so, then surrenders of older-than-2010 policies will have continued to line margins of insurers for at least three years. Remember that prior to 2010, surrenders upto three years would result in customers getting no money at all (they forfeit the entire amount) but post 2010, policies can be surrendered anytime, and they will still get their money – minus costs already charged – in five years. So, in 2013, most of the big profits out of surrenders will have gone and the industry will need to really get lean and mean. Many of the Insurance companies are unlisted subsidiaries of listed companies (like ICICI Pru, HDFC Life and so on). While some of the arms started to see some profitability in 2011-12, they’ll need to climb a wall to retain that status going forward.

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WPI Inflation for Nov 2013 Falls to 7.24%

by Paul Joseph December 16, 2012 Featured

Inflation based on the Wholesale Price Index (WPI) fell to a low 7.24% in November. However, remember that these are preliminary figures and subject to revisions later. If you look at the past data, nearly all inflation numbers that were reported as low first have been revised upwards recently. Note that even the September headline number, first announced at a 10 month high of 7.81% , has been further revised to 8.07%. And none of the numbers that were first announced under 7% initially (four months this year) have retained that status after revisions. Component wise: The shady thing seems to be manufactured goods, which is nearly 65% of the index. I don’t think this is accurate and we’ll only know after the revisions. RBI has a intermediate rate check meeting on Tue. I doubt they’ll raise rates. But then, stranger things have happened.

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Mutual Fund Mis-Selling is now Fraud: SEBI

by Paul Joseph December 14, 2012 Featured

SEBI has made misselling a fraudulent practice by adding a clause into the “Prevention of Fraudulent and Unfair Trade Practices” Regulations, via a notification : (s)  mis-selling of units of a mutual fund scheme; Explanation.- For the purpose of this clause, “mis-selling” means sale of units of a         mutual fund scheme by any person, directly or indirectly, by─  (i) making a false or misleading statement, or  (ii) concealing or omitting material facts of the scheme, or (iii)concealing the associated risk factors of the scheme, or (iv) not taking reasonable care to ensure suitability of the scheme to the buyer. At first glance this appears to be a far reaching addition because you can hardly prove (or disprove) such an allegation when it occurs. Did the agent conceal a material aspect of a scheme? How can you prove it if he said he did reveal it? The last bit (ensuring suitability of the buyer) seems even more subjective, but I suppose it could be on a “reasonable effort” basis where you can only get rapped in a very extreme case. Having gone through the rest of the “fraudulent” practices, it seems we do have a framework of subjectivity. For example: (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; You could easily state that most intraday “strategies” of a large size will qualify. However I believe the framework is subjective because it needs to be so: given the range of appeals available (SAT, courts) it is better to have a law that is broad and subjective, rather than create a tight and restricted rule which the big and bad jokers will easily find a way around. So overall, I don’t find it such a bad deal to not have a strict definition of what misselling is. What I would like to see, however, is that SEBI investigates cases, and has HUGE penalties on extreme forms of fraud of any sort, including jail time. Today, fraudsters get away with small fines and a small period of a ban on trading. That should not be the case. If we want to deter other people from a crime, the punishment should be huge and visible. That means when they catch the big frauds, those people need to go to prison. We need to see people banned for life from the markets. We need to see fines that are so heavy they will leave the fraudsters with nothing – I mean, for a fraud of Rs. 100 cr. we should see fines of Rs. 500 cr. as punitive damages. In this respect, if a bank is found to be selling equity mutual funds to old women who come in looking for a deposit, I think the bank should be fined a minimum of Rs. 10 cr. as a deterrent. Banks seem to have the most serious offences of misselling agents who pose as “relationship managers”. Misselling may be provable only in an extreme case, and with respect to mutual fund selling I think it’s difficult to prove either side. Online players need to be careful; they must provide all information available (risk factors etc.) and have some defence available to state that they tried to provide “suitable” products for a buyer. For others, agents have to be careful to reveal such information pro-actively. I don’t believe this regulation changes much: misselling in mutual funds has been cut down since SEBI removed entry loads and the new offer frenzy died. But I would welcome something similar in insurance and banking.

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Oct 2012 IIP Jumps to +8.21%

by Paul Joseph December 12, 2012 Featured

In a massive jump, the Index of Industrial Production (IIP) jumped to +8.21% in October 2012. While Mining indexes slowed, the jump was because of the heavily weighted Manufacturing and Electricity indexes. While the spiky nature of this data makes it unreliable, it’s important to note the heavy deviation from the downtrend. This may be explained by the Diwali effect. Production slows in Diwali in India, and has done so for hte last six years. In 2011, Diwali was in October, while in 2012 it was in November. While it might be taken as an uptrend resumption, we’ll have to see a couple more months of data to see if this is real or a random outlier. The Use Based Indexes show a massive move in consumer goods data, both durables and non durables: The Index of September 2012 was marginally revised downwards, while that of July was revised marginally upwards. No large surprises on that front.

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CPI for Nov 2012 at 9.90%

by Paul Joseph December 12, 2012 Featured

Consumer prices went up 9.90% according to the “new” CPI (a measure being recorded from Jan 2011, which is what qualifies for “new” in this context). (WPI data for November is not yet out) Component wise, we still have a Food at high levels, beyond 11%. Housing hasn’t been below 10% for about a year now. (The size of the box below indicate the weight in the index) Finally, the rural folk are catching up to urban inflation: Conclusion: I think this level is too high. However, RBI looks at wholesale prices for an indicator and those are out on the 15th. I believe that with this kind of trend we should not see a reduction in interest rates (I would advocate an increase).

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FinMin Pressures RBI to Prolong Housing Bubble?

by Paul Joseph December 11, 2012 Featured

In response to buyers not being able to afford property and thus not allowing builders to buy more Bentleys*, the Finance Ministry has asked RBI to consider making housing a part of the “infra” sector , which will help to increase price even more. The finance ministry has asked the Reserve Bank to consider giving infrastructure status to the housing sector, and relax provisioning norms for it so banks can extend attractive loans to buyers. RBI has mandated that banks set aside from their profits an amount equal to 1% of total standard assets in commercial real estate, which also includes housing projects. This means if a bank lends 100 towards a commercial real estate project, it will have to keep aside 1 to offset any loan to the sector turning bad. The provisioning rises to 15% of net investment in case of secured sub-standard asset. A finance ministry official confirmed the government has asked RBI to look at all possible options to provide an impetus to the housing sector. Here’s why I hate this concept. Real estate is not “infrastructure”. If it was, then we would be giving infra status to the auto industry, the furniture industry, the TV industry and even the toothpaste industry. Housing is not infrastructure. Infrastructure is something on top of which other things can be run – roads are, since it provides access and thus businesses can be built around it. Ports are because they facilitate transfer of goods and passengers over the sea. An Airport is. (An individual airplane is not). A house is not, and therefore the housing sector is not. Secondly, we have just seen massive housing bubbles burst in the west due to horrible policy actions of promoting housing over all other things. (We do too) Japan’s real estate market hasn’t recovered in twenty years, and neither has its economy. Don’t tell me India is different. It is not. It’s the same crap peddled with an Indian accent. The impetus is simply because RBI has provided better lending and provisioning norms for infrastructure projects. Infra projects are an NPA only if they are delayed by over 2 years, while a delay of 6 months will cause them to be NPAs if they are not an infrastructure project. This will help banks that have provided loans to builders, whose projects are now seriously delayed, since the recognition of an NPA means that banks have to provision 15.00% (initially), up seriously from the current 0.25% to 1.00%. Further, the infra sector enjoys relaxed ECB (external commercial borrowing) norms, lower initial provisioning, and some special clauses in takeout financing. But should we be giving an even higher status to real estate? The answer is no. Becuse they already have a high enough status. In ” Building affordable housing by curbing bubbles in real estate “, I wrote about how we have mollycoddled this sector, pretty much at the cost of most other retail funding. We allow large tax cuts for housing I mean seriously large, compared to anything else, really. 1. You, as an individual taxpayer, get a deduction of Rs. 150,000 per year on interest paid, deducted from your income. If you think this is okay, consider that you don’t get to deduct on interest in any other expense (with the possible exception of educational loans). You can’t get a deduction in the interest paid for a car loan, a personal loan or even on the loan to pay the medical expenses of your family. Housing gets an elevated status. 2. You get to deduct even the principal (upto Rs. 100,000) in a combined format under section 80C. 3. Further, for a second house, you can deduct the FULL interest (without limit) from your salary or other income. In other business ventures you can deduct interest against income made from that venture, not against your salary or capital gains income. For housing, a second house’s interest cost can be deducted even from your salary income! What are we telling people? Don’t bother investing in a business, invest in real estate instead? That’s just encouraging a bubble. 4. Capital gains when selling houses can be avoided by just buying another house. You can’t do that with any other capital asset. Profit from gold? You can route that into a house and get a capital gains tax waiver; but you can’t do it the other way around. This Home lending is further prioritized RBI allows banks to allocate their capital based on what they lend to. So if they lend you money for a personal loan, they have to provision some money against it, and further, they have to put a “risk weight” on it. For housing loans below 25 lakhs, the weights are lower; in effect, giving housing loans a priority over others, and this results in lower lending rates. Lending to real estate companies is now often disguised as loans to retail buyers, though back-to-back arrangements like “Builder pays your EMI” and “Upfront Loan” kinds of products. The idea here is that the builder gets the money you borrow, at a lower rate, and it doesn’t even get qualified as loans to them (which distorts the data on sector concentration for banks). In this context, with so many incentives, is it sane to now classify the sector as an “infrastructure” sector? I say no, and I say let’s start penalizing it now. Because of this attitude: Home sales across the country have dropped over the past year because of unrealistically high prices. The finance ministry has been trying to impress upon developers to reduce prices to improve sales. It has also advised banks to fund partially finished housing projects that are viable, if developers are willing to bring down prices. But developers say bringing down prices would be difficult unless liquidity for projects improves and interest rates for housing projects are reduced. Really? Prices will only move up if rates are reduced, sir. That’s the way of every market. Can we not go down the same path that seems to have cannibalized western economies? * I am kidding. I’m sure they have better use of the money than buying Bentleys. Like buying a helicopter .

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November Does 4.5%, Closes At 52 Week High

by Paul Joseph December 2, 2012 Featured

November 2012 saw a good run on the indexes, with both the Nifty and Sensex going up more than 4.5%. This is way better than November last year, which was a hugely negative 9.3%. The Sensex has done well for itself too: The last 10 years have been largely, very positive. As you can see, the Nifty graph has been, for the most part, positive. In the last ten years, YTD till November has been positive for 8 years. Prior to that, the years were mixed bags. And then, the 5 year snapshot shows you the move: (Click for larger picture) We are just 7% off the all time high and are at a new high since April 2011. December has generally been rosy but that rule was broken last year. What happens this year? Do we hit new highs in 2012 or look forward to them in 2013? I’m not wagering a guess – the trend is up, and I’m all long and loving it.

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Don’t Buy HDFC Crest – It is Not a Fixed Deposit

by Paul Joseph November 24, 2012 Featured

I have now had a few people complaining to me – including my own mother – that relationship managers in HDFC Bank have been strongly selling HDFC Crest, a life insurance product, while they were looking for a fixed deposit. Latest in the list is someone who is above 60, and who has had some post retirement income that needed to be safely placed. This is very very disconcerting, because this product is not at all meant for a person of that profile, including my mother. I have a detailed video of why this product is unsuitable for anyone looking for an investment avenue for their money. Let me now elaborate about why I think it is a bad idea to buy HDFC SL Crest . (First, note: all details taken from their brochure or online calculators) Salient points You pay 50K or more premium for five years You wait the remaining 5 years for a total of 10 years You can either get a “guaranteed” Highest NAV in the first 7 years or Choose one of the regular non-guaranteed plans Insurance 10x to 20x Sum assured Direct Costs of 4% of premium (years 1 and 2), 3% (year 3) and then 2% (years 4 and 5) Extras: 0.31% per month (of premium) as Admin charges Management fee of 1.35% (plus 0.5% if you take the guaranteed plan) Lower Returns with Comparable More Flexible Options Let’s look at illustrations for three cases: HDFC Crest with the “Guarantee” HDFC Crest without a guarantee A mutual fund with 2% management fee, with a term plan of 10 lakhs (35 year old – I even took HDFC’s own online term plan that offers 10.65 lakh cover for Rs. 2,002 per year) Assumptions: 10% return on whatever’s in the fund. ( Click on any of the images to get a larger view) First, with the guarantee , the returns are substandard: (what is below is the output of their own calculator – so while my formulas show even lower returns, I presume theirs is correct and have displayed that instead) As you can see, the guarantee costs clips the return; the yield on this investment is about 5.31%. Not what you would consider very good, really. (Technical note: the “yield” is an internal rate of return. That is, what interest rate would take the same investment numbers and return the exact end value we have in the illustration. This is done in Excel using XIRR) Without the guarantee , things get slightly better: The return goes up to 5.88%. Note that I don’t include tax benefits in this case, and I will elaborate later about them. The taxes one saves are elusive, and one might be able to get tax advantages in alternative investments (ELSS mutual funds or long term fixed deposits). Now let’s take the online term plan for Rs. 2002 per year, and put the remaining money into a mutual fund instead. We’ll have to pay out the term plan for the full tenure. But the returns are much better: This is substantially better (even better than the one in the video) in terms of returns. It is more than Rs. 30,000 higher than HDFC Crest’s returns in a similar setting. Also look at the Total Death Benefit column. If you die your family will get the full term plan sum (Rs. 10 lakhs) plus whatever is accumulated in the mutual fund. This column is substantially greater than the corresponding numbers in the HDFC Crest cases. This also gives you flexibility – if you aren’t in for the insurance (like those above the age of 60 with no dependants) you should ignore the insurance completely. (The return magnifies) The other huge advantage of an MF + Term plan is liquidity. The maximum lock in for mutual funds is 3 years after each investment (ELSS) with no restrictions on money redeemed afterwards. In HDFC Crest, you’re locked in for five years, but even after that you can’t withdraw, in total, more than 3x your original premium. (In the above example, you would be limited to total withdrawals of Rs. 150,000). Also, if you consider that this is being sold to retired people, their alternative is to buy a simple fixed deposit for 10 years . Current rates at private banks are 8.25%, and one public bank offers 9% ( PNB ). Let me take 8.25% and assume we can get it for five more years, and assume a tax rate of 20% (most people seem to come in that tax bracket anyhow) There is reinvestment risk in this option, i.e. the interest rate in subsequent years may not be as high. Also, liquidity is a problem, since you can’t exit a fixed deposit without a penalty. I just wanted to illustrate these options – while you might think these are not directly comparable for one reason or the other, the point remains that to most people that are investing, these are usable options. In fact, to two people I know who are beyond the age of 60, suggesting HDFC Crest is ridiculous as they can lock in nearly 10% on a Fixed Deposit for 10 years, plus they have no use for the insurance piece. Also, these comparisons are tax neutral since equity gains and insurance returns are tax free, and all options above get the 80(C) deductions as well. Limited Insurance While this is not really being sold as an insurance plan, insurance is touted as one of the benefits. But let’s look at primarily the insurance part and see what’s wrong. 1. You get only 10x to 20x the annual premium as insurance (“Sum Assured”). 2. You get the GREATER of the fund value or the Sum Assured. If you pay Rs. 50,000 per year, your insurance cover ranges from Rs. 5 lakh to Rs. 10 lakh. Every premium you pay actually reduces the real insured amount. After two years, you would have paid Rs. 1 lakh in premium, so the insurance company is on the hock for Rs. 1 lakh less, and so on. In the images above I demonstrate how, by taking a mutual fund plus term plan, you would actually have a much higher sum assured. In fact, if you die in year 9, your family would only get Rs. 10,00,000 (1 million, or 10 lakhs) with HDFC Crest. But with the MF plus term plan option, they would get more than 14,00,000 (1.4 million or 14 lakhs). That’s a 40% better alternative. (Apart from the fact that if you didn’t die, you’d have made more money as well) For people above the age of 60 with kids well settled, there is hardly a need for insurance (especially if their spouse is no longer alive). Useless Guarantee The guarantee is, for the most part, useless. They say they’ll give you a minimum of Rs. 15 per unit (current rates are around Rs. 10 per unit) or the highest NAV in the first seven years. The seven years is important: you get your guaranteed money only after ten years , but the highest NAV is only for the first seven . First, let’s see how anyone can guarantee this kind of return. It’s not coming from someone else’s pocket. No one’s that benevolent. Every guarantee has a cost and a structure to achieve it. Manish from Jagoinvestor explains how it’s done . The concepts are of Constant Proportion Portfolio Insurance (CPPI) and Dynamic Hedging, but what happens in India is mostly a shift of money between debt and equity. As the “guaranteed” NAV gets higher and higher, more money gets locked into debt in order to make the guarantee. Next, let’s look at the Rs. 15 guarantee. We all assume we buy at Rs. 10 per unit. That’s a 50% return! Stop. 50% return over ten years is chicken-droppings. If you gave me Rs. 50,000 every year for five years, you’ve given me Rs. 250,000. Can I give you back a 50% return, i.e. 375,000 back? The return I need to give you is a mere 5.2%. Of course, because you will actually buy more units at a higher NAV (say Rs. 11 in year 2, Rs. 12 in year 3 etc.) the actually guaranteed return comes down some more. The second option – the “highest” NAV sounds very pleasing but it’s fleeting. Managers will move money into debt as the equity portion rises, in order for them to be able to make the guarantee. You are in effect moving money out of the “winners” and locking the return for the future. That also means if the stock market rises over time, you are likely to miss most of the bus, as the manager try to lock in the existing NAV returns for the rest of the time. We’ll see this play out when we actually analyze performance. The guarantee is an overstated piece in this pie, and should not get much attention. Plus, there is needless confusion by weasel-clauses like pay for five years, get money after ten years, but guarantee applies only on seven years etc. High Costs The cost of every instalment is quite high, it turns out. Comparable costs for a mutual fund are 0% today. Mutual funds tend to have a higher asset management fee. I’ve assumed it will be around 2% (versus Crest’s 1.35%). However, HDFC Taxsaver, which is run by HDFC Mutual Fund (a fund house I respect very much) charges just 1.85% according to Value Research Online . Elusive Tax Benefits There are two tax benefits to insurance: a) That the total sum returned is tax free, including all gains and partial withdrawals and early surrenders. b) That the amount invested is exempt from tax under section 80(C). For a) the concept applies in many other cases as well. Equity returns are also tax free if held for over a year. Investing even in bond funds or mutual funds can give you a tax value of zero; because of indexation benefits. ( Read this article for how that works) You could invest even in Public Provident Funds to get tax free returns. For b), I throw you the assertion that for the most part, 80(C) tends to be covered by something else. 80(C) is a cumulative tax deduction, so you can spend or invest in various heads and the total deduction per year is Rs. 100,000. The other heads that apply are: Children’s education fees Employee PF deducted by your company Public Provident Fund National Savings Certificates Repayment of the principal part of a home loan Equity Linked Mutual Funds (ELSS) Just my child’s education costs and the PPF that I invest in add up to the 100K per year deduction. Even if people had none of the others, better than insurance would be to invest in a PPF account (Rs. 100K per year) which is an 8.5% return, tax free, and backed by the government. Finally, these tax gains are current. We’ve seen amendments that make tax saving methods vanish, and it might well be the case that later, tax structures change and make these investments irrelevant. All else being equal, taxes should not tip the scales in any direction. Substandard Actual Returns Lastly, let’s come to how the funds have actually performed in the last two years or so. (since their inception). Let’s compare the plan’s NAV with that of compable mutual funds. For a mutual fund investor, the NAV is the real return over time, since the number of units bought changes only at repurchases or withdrawals. For an insurance buyer, the NAV is only one part of the story; even when there is no purchase or sale transaction, the insurers keep deducting units as some charge or the other (mortality, policy admin, etc.) So, an NAV comparison will still overstate the return of an insurance buyer, but it’ll be close to what the mutual fund investor sees. Comparable funds like the Franklin Bluechip (a mutual fund) with HDFC Crest’s Bluechip (a non-guaranteed fund) provides one perspective: the Crest’s funds are still struggling to come on par with mutual fund returns. What about the guaranteed fund? It still is at the NAV of 10.17, with the “highest” NAV in the last two years being 10.34, achieved in Jan 2011. (A fixed deposit would be more than 15% up in this time, making it a comparable NAV of 11.5) Of course, we’ll only know about the guarantee when seven years have passed and the CPPI has had time to play out the full cycle; but it’s evident that it doesn’t really track the returns of the Nifty. Conclusion I don’t like to diss funds of any sort. They’re doing their job. But most ULIPs are confusing to people, almost by design. HDFC Crest is no different and it takes a while, even for an experienced hand, to understand the fact that there are far better alternatives. When such ULIPs are sold to widows and retired people, without apparent care about whether it is useful, it’s important that we bring the reality to everyone’s notice. I understand that the HDFC folks are not going to be happy about this – not the bank, and not the insurance company. However, I hope they strengthen their practices and curb attempts by representatives to hard-sell this product, and stand for the cause of the small depositor.  And remember: HDFC Crest is NOT a fixed deposit. It is sold by a bank representative who’s only an agent. The real company behind it is HDFC Insurance. This is a different company that shares four letters with the bank. The parent shareholder of HDFC Bank and HDFC Insurance are the same, but the bank is the one you want to deposit your money with, not the insurance company. (They are not the same. Banks are safer for depositors.) Would deeply appreciate your comments. This is a long post, and it was supposed to be one.

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No More Gold Loans From Banks

by Paul Joseph November 20, 2012 Featured

The RBI, in the October Policy banned loans against Gold, citing that it causes speculative trading in the yellow metal. A notification has now been issued : Bank finance for purchase of gold Please refer to paragraphs 102 and 103 ( extract enclosed ) of the Second Quarter Review of Monetary Policy 2012-13 announced on October 30, 2012, proposing that other than working capital finance, banks are not permitted to finance purchase of gold in any form. 2. In terms of extant guidelines issued vide circular DBOD.No.Leg.BC.74/C.124(P)-78 dated June 1, 1978, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin etc. could lead to fuelling of demand for gold. Accordingly, it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds . However, banks can provide finance for genuine working capital requirements of jewellers. The scheme of Gold (Metal) Loan detailed vide our circular DBOD.No.IBS.BC/ 1519/23.67.001/1998-99 dated December 31,1998, as amended from time to time, will continue to be in force. (Emphasis mine) This means no more loans against *purchase of* Gold in any form. including overdrafts with gold as security and so on . Edit : It seems this only applies to loans for the purchase of gold, not loans with gold as security. Apologies. According to a Cognizant Report , the market for Gold Loans was around Rs. 50,000 cr. (500 bn) in 2011, and of that, around 55-60% was with banks. (46% with public sector banks). The loans are of 6 months to 2 years in duration, with an interest rate of between 12% and 15%. Lending will contract to that extent over the next year or so, and borrowers will need to either return the money or provide fresh collateral to renew loans. Currently, banks lend to NBFCs (Mannapuram, Muthoot etc) which then further lend against gold. That can continue (“indirect” financing). We are likely to see a movement of the loans to the NBFCs, and further, to moneylenders and pawn shops. One argument would be that the RBI should similarly curb lending to real estate which has just about the same level of speculation. However I fully support the legislation – leverage compounds speculative interest, and loans are leverage. We should effectively cut all real estate second purchases (i.e. if a person already has a house) to only 25% of the house value.

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Oct 2012 Inflation Dips Slightly to 7.45%

by Paul Joseph November 15, 2012 Featured

Official figures show October 2012 Inflation (based on Wholesale Prices) at 7.45%, slightly lower that September’s 7.81%. The problem is that this data is likely to be revised substantially. August data, first announced at 7.55% has now been revised to +8.01% – the first 8% plus figure since November 2011. So what seems to be 7.45% today may actually be 8% when revised. The confidence decreases as we enter into component level checks: While fuel inflation remains high, the fact that food inflation is coming down is suspect (especially after it was revised up nearly 1% to over 11% in August). Manufactured goods inflation seems to be stable, however consumer prices are more indicative of real inflation and that is nearly 10%.

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