Niveshak

THE INVESTOR VOLUME 5 ISSUE 3 March 2012

Twin-Deficit
in
India

Is it a ticking time bomb?

The game of currency>> Social mdeia IPOs: just a fad?

Pg. 08 pg. 16
FROM EDITOR’S DESK
Dear Niveshaks,
The positive mood in the Indian markets continued this past month with the For-
eign Institutional Investors infusing record levels of equity into the market. The investment
Niveshak by overseas investors into the Indian stock market since the beginning of 2012 has crossed
Volume V USD 7 billion level, out of which more than USD 5 billion were pumped in the month
ISSUE III of February. The major reason for this is the reversal in the RBI’s Monetary Policy and
March 2012 improved liquidity position. However, the global outlook still looks gloomy with no major
headway being made in the Eurozone. As a result, experts believe that there will be a strong
upsurge in the prices of precious metals. Silver, they say, is expected to hit highs of INR 1
lakh per kilogram.
Faculty Mentor This year, the budget was presented on March 16th, instead of the traditional last
Prof. N. Sivasankaran day of February by the Honorable Finance Minister of India, Pranab Mukherjee. The crux
was to find a balance between the growth rate and inflation, while also keeping the fiscal
deficit at a manageable level. Infrastructure sector was a major focal point and as a precur-
THE TEAM sor to this, four banking and financial giants, ICICI Group, Life Insurance Corporation,
Citicorp Finance India and Bank of Baroda, joined hands to launch the country’s first
Editorial Team infrastructure debt fund. A more detailed analysis of the Union Budget would be done in
Akanksha Behl our upcoming issues.
Akhil Tandon There now seems to be some hope for the debt-ridden Kingfisher Airlines. The Vijay
Chandan Gupta Mallya-led airline, heavily plagued by debt has found another alternative apart from ask-
Harshali Damle ing its creditors to convert their debt into equity. Talks are on to rope in PE buyout majors
Kailash V. Madan like TPG, Blackstone and Cerebrus Capital. However, the level of dilution of promoter held
Nilkesh Patra equity is still unknown and further selling of stake could happen, by way of Etihad and
Rakesh Agarwal British Airways, once the Government allows foreign airlines to invest in Indian carriers.
The past month has also brought some cheer to the gloomy primary market, with
Creative Team Facebook filing for its IPO. The much talked about IPO, values the social networking firm
Anuroop Bhanu between $80-$100 million. On the domestic front, Multi Commodity Exchange, filed for
Venkata Abhiram M. its IPO. This was the first major IPO after the Coal India listing almost one and a half years
back. The issue was oversubscribed in excess of 50 times and listed on March 9th at the
ceiling of the price band of INR 860 – 1032 owing to strong demand.
With higher capital adequacy ratios demanded by the BASEL 3 norms; major inter-
All images, design and artwork national banks are booking profits in their Asian investments. Citigroup, a global financial
are copyright of major, sold off its 10% stake in HDFC for nearly $1.9 billion clocking an after tax profit of
IIM Shillong Finance Club $722 million.
This month’s issue brings to you an insight into the effects of the dreaded twin defi-
©Finance Club cits in different economies. The article of the month explains the role of the currency in
Indian Institute of Management shaping the developments all across the world and also analyzes critically the role of cur-
Shillong rency in Euro debt crisis. The article also discusses about the effects of depreciation of
Indian Rupee. The issue also features interesting reads on social media IPOs, scenario of
www.iims-niveshak.com non-performing assets in India and the issue of privatization of PSUs in the country. This
month’s classroom section explains to you the concept of ‘Islamic Finance’.
We would like to thank our readers for mailing their wonderful articles and appre-
ciation e-mails. It is your constant encouragement and enthusiasm that keeps us going.
Kindly send in your suggestions and feedback to niveshak.iims@gmail.com and as
always, Stay Invested.

Team Niveshak

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
 CONTENTS
Cover Story

Niveshak Times
04 The Month That Was

11 Twin-Deficit in India : Is it a
Article of the month ticking Time Bomb?
08 The Game of Currency

Finsight
Fingyaan
14 Should PSU banks be
privatised? : The Indian Scenario
18 Non-Performing Assets:
Indian Scenario

Perspective
16 Social Media IPOs: Just a CLASSROOM
Fad? 21 Islamic Finance
 www.iims-niveshak.com
4 NIVESHAK
The Niveshak Times
The Month That Was
S&P Warns of Possible Downgrade for Ja-
pan
On 20th February, 2012 S&P re-affirmed Japan’s
AA- rating but maintained a negative outlook to-
wards its economy. It didn’t downgrade Japan’s
sovereign debt rating because the country’s rat-
ing is backed by a strong currency reserve posi-
tion and steady current account surpluses, which
indicate that Japan is still a major player in in-
ternational trade. It also means that the coun-
try has an incessant movement of international
funds going in and out of it. However, analysts
have pointed out that the country’s massive
debt of 200% of GDP is the highest among the in-
dustrialized nations. But the markets are not too
worried about this as most of the debt is held by
big financial firms. Moreover, Japan’s sovereign
ratings are controlled by the government’s weak
policy foundations, large fiscal deficits, and high
debt, as well as prolonged deflation and an ag-
ing and shrinking workforce. Therefore, there is
a 33% chance that the country could see another
downgrade in the next couple of years.
Second bailout to Greece
On 27th February, the German
policymakers sanctioned
the second bailout for
Greece. There was op-
position regarding this
from within Ger-
man Chan-
cellor An-
gela Merkel’s
Christian
Democratic
Union. How-
ever, Germany
agreed to their contribution to the €130 billion
rescue package with the consent of the large
majority. This bought Greece one step closer to
receiving its second bailout.
In order to meet the requirements of the bailout,
Greece needs to complete a series of austerity
measures linked to its initial rescue package.
Therefore, to prevent a financial breakdown,
March 2012
Team NIVESHAK
IIM, Shillong
Greece’s parliament has approved cuts in pen-
sions and health care. This would reduce the
state spending. Moreover, the changes in the la-
bour laws would liberalize the jobs market. As
these measures are believed to drive the econ-
omy into a deeper recession and with unem-
ployment rising to 21 per cent, there is a huge
discontentment among Greeks. The economy
shrank 6.8 per cent last year and is set to con-
tract for a fifth year in 2012.
Citi exits HDFC, pockets $1.9 billion – to
follow Basel – III norms
The global banking major, Citigroup,
has sold off its 9.9% stake in
Indian’s biggest mortgage
lender HDFC for nearly $1.9
billion. This is so far the largest
equity offering. The shares were offered to the
institutional investors through a book building
process. Citi had to sell off its stake in HDFC in
order to meet the new regulatory requirements
of Basel – III norms. As per Basel - III, any equity
investment by a bank in a financial firm is di-
rectly subtracted from the bank’s equity capital
while calculating the bank’s capital adequacy ra-
tio. Citi got two major benefits from selling off its
stake in HDFC. Firstly, it made a profit of about
$722 million which added on to its bottom line
profit in the time when it is going through a dif-
ficult phase. Secondly, this has reduced its hunt
for capital for complying with the Basel – III new
international agreement on capital requisite for
banks.
MCX IPO
Multi Commodity Exchange of India (MCX), the
country’s largest commodity exchange with 87%
market share in the commodities market and
the world’s fifth largest exchange, made an ini-
tial public offering on February 22. It is India’s
first exchange to hit the capital market, offering
64.27 lakh equity shares through this issue. On
the basis of trading volumes, globally, MCX was
the largest exchange for silver, the second larg-
est exchange for gold, copper and natural gas,
and the third largest exchange for oil in the cal-
 www.iims-niveshak.com
The Niveshak Times
endar year 2010 and the six months ended 30th
June, 2011. The public offer emerged as the most
successful IPO since the one by Anil Ambani-led
Reliance Group’s R-Power in January 2008. The
MCX IPO was over-subscribed by over 54 times
with bids worth about Rs 36,000 crore on robust
demand from retail, HNIs and institutional inves-
tors.
Vedanta set to merge Sterlite, Sesa Goa
Metal maven Anil Agarwal announced the for-
mation of a much speculated organisational rejig
that combines two Indian companies - Sesa Goa
and Sterlite Industries into a new single entity
named Sesa Sterlite , enabling in one stroke the
cut in debt exposure of its parent, the LSE-listed
Vedanta Resources plc. This move will give rise
to a new company with the shareholder value
worth $ 1 tn. The boards of Sterlite and Sesa
Goa agreed to merge the two companies into
Sesa Sterlite, through a swap ratio that stipu-
lates three Sesa Goa shares for every five held
in Sterlite.
Parent Vedanta’s debt will shrink by almost 61%
to $3.8 billion and the debt-service liability will
be reduced by $300 million for the year ending
March 31, 2013. In one deft stroke, through this
restructuring, the cash guzzling aluminium busi-
ness and the cash spewing oil and gas business
will be put under the new entity. The deal is
expected to sort out the burden of debt arisen
from the ambitious Greenfield expansion and
also the bulge bracket acquisition of oil and gas
major Cairn Energy as the cash guzzlers will be
adequately covered by the cash generating busi-
nesses in the group.
Berkshire identifies Buffett successor
Berkshire Hathaway has identified the chief ex-
ecutive who will succeed Warren Buffett when
the 81-year-old investor steps down. Though the
successor’s name is not known, the most com-
mon guess among Berkshire watchers is Ajit Jain,
who runs Berkshire’s reinsurance business. Buf-
fett and his partner Charlie Munger have always
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
5
NIVESHAK
The Month That Was
been lavish in their praise for him. The other
part of Berkshire’s succession plan - who will
run its huge investment portfolio when Buffett is
gone - is much clearer. The company has hired
two investment managers, Todd Combs and Ted
Weschler, to manage its investment portfolio.
There had been speculation that Berkshire might
add a third manager down the line.
Crude may scale $150 on Iran crisis
Oil, which already touched $124 a barrel mark, is
set to touch a new record and breach the $150
mark on mounting Iran crisis. Analysts feel that
the government is holding back from hiking fuel
prices because of the on-going elections and
a steep hike is very much likely next month.
Oil has surpassed the forecast price and is now
trading at $124 a barrel. It will continue moving
north on account of mounting Iran crisis. Saudi
Arabia’s oil capacity is never tested and thus oil
prices are expected to rise unless there is a se-
vere demand. The price rise is also expected to
have a strong impact on India as oil accounts
for over 40% of India’s imports and 80% of trade
deficit. Oil import bill is likely to surpass $142
billion this fiscal according to Prime Minister’s
Economic Advisory Council (PMEAC).
Government says ONGC auction a suc-
cess!!!
Life Insurance Corporation (LIC) pumped in over
Rs 12,000 crore and purchased 95% of the eq-
uity put on the block in the first-ever stake sale
of ONGC through auction process. LIC picked
up 40 crore shares, or 95% of the ONGC shares,
sold through the
auction route
fetching the gov-
ernment a total
of Rs 12,766.75
crore. There was
no participation
from foreign in-
stitutional inves-
tors and a very little participation was witnessed
from retail investors. About 42 crore ONGC shares,
representing a little less than 5% of government
stake in the oil major, were sold at an average
price of Rs 303.67 per share.
 www.iims-niveshak.com
6 NIVESHAK

Market Snapshot
Cover
Market
Article the Month
of Snapshot
Story

Source: www.bseindia.com
www.nseindia.com

MARKET CAP (IN RS. CR) LENDING / DEPOSIT RATES

BSE Mkt. Cap 63,18,228 Base rate 10%-10.75%
Index Full Mkt. Cap 29,53,740 Deposit rate 8.5% - 9.25%
Index Free Float Mkt. Cap 14,74,523
Source: www.bseindia.com

CURRENCY RATES RESERVE RATIOS

INR / 1 USD 49.94 CRR 4.75%
INR / 1 Euro 65.40 SLR 24%
INR / 100 Jap. YEN 60.72
INR / 1 Pound Sterling 78.25

CURRENCY MOVEMENTS POLICY RATES

Bank Rate 9.50%
Repo rate 8.50%
Reverse Repo rate 7.50%

Source: www.bseindia.com
15th February to 12th March 2012

Data as on 12th March 2012

March 2012
 www.iims-niveshak.com 7
NIVESHAK

Market Snapshot

Article
Market
Cover of Snapshot
the
Story
BSE

Month
Index Open Close % Change
Sensex 18,000 17,588 -2.29%
MIDCAP 6,348 6,397 0.77%
Smallcap 6,965 6,796 -2.43%
AUTO 10,154 10,107 -0.46%
BANKEX          12,199 12,234 0.29%
CD 6,247 6,759 8.20%
CG 10,569 10,449 -1.14%
FMCG 4,160 4,169 0.22%
Healthcare 6,353 6,434 1.27%
IT 6,074 6,067 -0.12%
METAL 12,618 11,605 -8.03%
OIL&GAS 8,831 8,439 -4.44%
POWER 2,202 2,233 1.41%
PSU 7,734 7,635 -1.28%
REALTY 1,947 1,850 -4.98%
TECK 3,594 3,572 -0.61%

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

 8 of the
the Month
Month
Story NIVESHAK

The Game
Cover
Article
Article of

Of
Cu nc
Rishi Gupta & Manan Jain
IIM Shillong

The debt crisis in Europe and the future of the an economies that embraced it were France and
Euro have been hogging the headlines of finan- Germany which had much weaker currencies in
cial dailies of not just the west but all across the Frank and Deutsche Mark. England, with a strong
globe. Moving from the West to the East, time currency in Sterling Pound £ decided against it.
and again, China has come under criticism for Soon, more and more economies accepted it, and
artificially devaluing Yuan. In the Indian context, it became the second most traded currency in the
we have seen how the depreciation of the In- world, leaving behind Japanese Yen ¥ and Sterling
dian National Rupee (INR) has spelled doom for Pound £. The leveraging of a common currency
the importers and has made TCS the most valued by smaller economies in Europe by borrowing at
company listed on the Indian stock markets. In lower rates spurred an era of growth. Recession
Iraq, no weapons of mass destruction have been in the US during 2001-2003, only helped the Euro
found. Were there any other motives behind the to gain. However, some of the smaller European
invasion of Iraq? In the West, why did the Euro- economies borrowed beyond their means and
pean countries other than England want to come used it to fund social benefit schemes. The Hous-
together to form a monetary union? And now, af- ing crisis in the later decade compounded their
ter almost a decade why has it become essential
to contain the European debt crisis to save the
Euro? The answers to several of these questions
and many others lie in the GAME of Currency. It
becomes imperative to understand how currency
plays a role in not just the world economics but
also in world politics.
Role of European Nations
Taking the questions in a chronological manner,
the answers can be traced back to the times when
Euro came into existence on 1st January 1999 in
non-physical form and later on 1st January 2002
in the form of notes and coins. The major Europe- Fig 1: Movement of Dollars with respect to Euro
since 1999

It becomes imperative to understand how the currency plays a role in not just the world
economics but also in the world politics.

March 2012
 NIVESHAK 9

debt problem, which led to countries like Greece, Bush went ahead with the invasion, targeting a

Article
Article
Portugal, Spain and others into a sovereign debt second term as US President. But the question

Cover
crisis. Now again, two of the largest Euro econo- arises why Britain played the active role. One rea-
mies are toiling hard to save the currency. son could be to support their currency and the

of
of the
But, why do Germany and France need to bear US $. But then how could Iraq, which was already

the
under heavy sanctions,

Story
the brunt of reckless
pose any threat to two of

Month
spending by other Euro

Month
Zone economies. Firstly, the strongest currencies
both the countries have
The article highlights in the world. The answer
export oriented econo- the role of the currency wrests with the term
mies with 40% of their in shaping the develop- PETRO- DOLLARS.
exports directed towards ments all across the globe. Petro-Dollars: The
debt ridden Euro zone The article highlights the Crude Way
nations. If they default, reason behind England’s US $ dollar is the most
it can spell doom for Ger- decision against adop- traded currency in the
man and French factory tion of EURO and why in world because crude is
output. Though depre- 2009 among the three traded in dollars. Due to
ciation of the Euro will largest economies in Eu- the inability of the human
result in better realiza- ro-zone, only France and race to substitute crude
tion of their exports, a Germany are toiling oil for its sheer volume,
stable currency is also hard to save debt ridden dollar remains the most
essential for their export Greece, Portugal and traded currency in the
to the rest of the world.
Italy. The article also ex- world. And since anyone
Secondly, French and and everyone who needs
German banks have very
amines the correlation
of currency movement crude needs dollars, it
high exposure to Sover- has naturally become the
eign debt. If Greece and of the invading countries
strongest currency. How-
other countries default, like United States, Eng- ever, Iraq started to sell
it will put severe stress land and Australia against crude against the Euro.
on their own banking EURO. The articles also Within two years, the Euro
system. But the efforts states effect of deprecia- appreciated 20% against
of France and Germany tion of Indian Rupee on the dollar and threatened
need to be appreciated the economy. The article to emerge as the curren-
as it may very well help concludes emphasizing cy of global trade. Pound
prevent another reces- on the important it is to derives its high valuation
sion just when the world understand the crucial due to the strength of the
economies have started role of the currency in an US dollar due to its invest-
to recover from the U.S. era of globalization. ment in US companies.
housing crisis. Australia derives majority
United Stated invaded of its GDP from the export
Iraq in March 2003. US of its mineral wealth and
found a major ally across agricultural harvest like
the Atlantic in England and across the Pacific in wheat; which are traded in exchange of US dol-
Australia. They went ahead with the invasion in lars. By taking down the Saddam Hussain re-
spite of severe opposition from other permanent gime, US could not only secure its crude assets
members of the United Nations Security Coun- but also secured its currency.
cil (UNSC). There were speculations that George But still the question remains unanswered as to

How could Iraq, which was already under heavy sanctions, pose any threat to the two of the
strongest currencies in the world? The answer lies in the term PETRO- DOLLARS.

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

 10 NIVESHAK
Month
Month
Story
of the
the
Cover
of
Article
Article
Table 1: Most traded currencies by value ( as on
April 2010)
why the US, in spite of its economic clout needs
to maintain the supremacy of the US $. The an-
swer lies in the fact that the prosperity of US
companies is largely dependent on a strong dol-
lar. From the late 1990’s, US economy is largely
fueled by high domestic consumptions which are
supported by cheap imports from low cost coun-
tries. A strong currency makes its imports cheap
and helps derive higher return from its exports
and investments abroad. Britain also largely
thrives on the same for its strong currency. These
countries work in a diametrically opposite man-
ner to China, which strives to devalue its cur-
rency in order to make its exports cheap. This
makes US a perfect destination for the products
manufactured in China. Western powers rarely
come under criticism, but China goes under the
hammer for the same.
At the end of the first decade of the new millen-
nium, US printed more than $ 1 trillion of curren-
cy to clear its massive debt. If any other country
had opted for the same, it would have resulted
in massive devaluation of the currency. But as
If stronger currency results in prosperity in some parts of globe, devalued currency brings growth
in others.
March 2012
the US dollar has massive demand all across the
globe, it resulted in as little as a 10% devaluation
of its currency. In contrast, when Russia in 1998,
had no option but to print its currency to pay off
its debt, it got devalued from 5 rubles/$ to 28 ru-
bles/$. In 2009, only China raised its voice against
the devaluation of US $, as it held more than $ 3
Trillion dollars of dollar dominated assets. US be-
ing the arrogant superpower that it is didn’t pay
much heed to this and used its liberty to print
the dollar. Once again, US resorted to its currency
advantage but this time to clear off its debt.
The Effects
The game of currency affects each and every na-
tion and India is no exception. India with near-
ly $500 billion of trade contributes to only 2 %
global commerce, and hence the INR has little
influence. The European debt crisis compound-
ed with the problem in the domestic economy,
prompted investors to withdraw from the Indian
markets. Dollar outflow has resulted in INR to de-
preciate almost 20% in last six months, giving a
huge boost to Indian exports. But our imports far
exceed exports which can be detrimental. As the
currency weakens, India also suffers from heavy
inflation due to high import costs of coal and
crude. There are already indications of missing
export targets of 2011-12, but on the flip side,
foreign investments have become cheap. If the
currency is a short term phenomenon, it can very
well turn out to be good for long term growth.
There is not even an iota of doubt about the
role of the currency in shaping events across
the globe. It not only swings the profits of the
multinationals, but also extends influence in the
geo-political developments. If stronger currency
results in prosperity in some parts of globe, de-
valued currency brings growth in others. With in-
creasing global trade and overseas investments,
currency movements will continue to influence
our lives more than ever. Therefore, it becomes
essential to understand the effect of currency on
increasing interconnected globalized world econ-
omies.

The word ‘deficit’ implies that there exists a gap.
Twin deficit is used to refer to a country which
suffers from both a fiscal deficit and a current ac-
count deficit. The presence of even one of these
deficits can have dire consequences for an econ-
omy, and one can just wonder the plight of the
countries which are plagued by this syndrome of
Twin Deficits.
Before marching ahead, it is important to under-
stand what these terms actually mean.
A fiscal deficit is said to occur when the govern-
ment’s expenditure exceeds its revenue. The ex-
cess of spending is funded by domestic savings.
This leads to higher interest rates, which in turn
crowds out private investment and eats up the
domestic consumption.
A current account deficit occurs when the money
value of imports is higher than that of exports.
This calls for foreign funds to plug this excess of
imports. This leads to depreciation of the domestic
currency as more and more dollars are demanded,
which eventually results in imports being costlier.
Now, if both these deficits occur simultaneously,
it can spell doom on an economy as it makes it
vulnerable to both domestic savings as well as
foreign funds.
HISTORICAL PERSPECTIVE
Twin deficits have been prevalent in many of the
major economies of the world, especially in the
last decade.
USA
The United States has been battling with twin
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
NIVESHAK 11
Article
Cover
Cover of the
TWIN-DEFICIT in
Story
Story
India :
Month
Is it a ticking
Time Bomb?
Akhil Tandon & Rakesh Agarwal
Team Niveshak
deficits since 1980s. Barring a brief period dur-
ing President Bill Clinton’s regime, the current ac-
count deficit has always been in red for United
States. However, in the latter half of the last de-
cade, the current account deficit started dimin-
ishing owing to depreciation of the dollar, which
provided an impetus to American exports and
made imports less competitive. Now, as per the
recent IMF projections, the current account defi-
cit will again adopt an upward spiral. The dollar
is expected to become stronger, which will result
in lesser exports, thereby resulting into relative
higher imports.
The fiscal health of the United States has not been
satisfactory since long. The fiscal stimuli in 2008-
09 were a testimony of the same, as the govern-
ment was widely criticized for the stimulus being
too small. This resulted in a slow and fragile re-
covery from the recession.
United Kingdom
The situation in United Kingdom has been no dif-
ferent than that of the United States. Fiscal posi-
tion of United Kingdom has not been encouraging,
as it has suffered deficits for the last 3 decades
barring 1988-89 and 1999-01. The fiscal deficit has
widened significantly during the crisis period to
touch 9.4% in 2011 and is expected to ease hover
round 4% by 2015. Current account has been in
red for the entire last decade, and is expected to
remain so till 2015.
While comparing to US, the fiscal deficits of both
countries are more or less similar as a percent of
GDP but current account deficit in UK was much
 12 NIVESHAK
lower than US in the same period. However, on a
macro level, the economy of United Kingdom is more
Month
vulnerable, as the financial sector is the mainstay
Story
Story
of its economy. As the global economy tanked, it
raised questions about the size of the financial sec-
of the
tor and the degree of control on the tax revenues.
Cover
Cover
In terms of Current Account Deficit, the Great British
Article
Pound depreciated significantly in wake of the cri-
sis. So, there was more currency adjustment in the
United Kingdom than the United States.
European Union
The European Union nations had signed the Growth
and Stability pact in 1997, under which they prom-
ised to limit their fiscal deficit to 3% of the GDP.
However, this has been violated by the signatories
from time to time. Even countries like France and
Germany were marred by high deficits on numerous
occasions. This encouraged the smaller nations, and
they soon followed the suit.
Prime example of this was Greece which brought
down its deficit close to 3% of the GDP in order to
qualify for the union in 1999. However, it has been
missing that target ever since, barring a minor re-
covery during the global economic slowdown. Of
late, the budget deficit has risen to alarming levels
of 10.6% (2010). Similar is the case with economies
like Spain where the budget has squeezed from a
surplus in 2006 to a deficit of 9.3% in 2011. Ireland,
which was dubbed as a Celtic Tiger economy for its
promising growth potential, has slided from a sur-
plus in 2002 to a deficit of a whooping 31.3% as per
the latest data.
Within the European Union, there was a huge dis-
parity with respect to the current account deficits of
various countries. While PIGS economies ran their
imbalances, countries like Germany and France have
enjoyed surpluses. The troubled economies of PIGS
grew on account of consumption, and Germany grew
because of its export orientation. However, the eco-
nomic slowdown turned the table upside down. The
pressure was now on the respective governments
to rescue their respective economies. Being a Mon-
etary Union, the pressure was on the fiscal policy,
which was paralyzed was lack of a fiscal union.
Greece has been leading the pack here, as its cur-
rent account deficit crossed 14% in 2008. Portugal
is yet to achieve a current account surplus since
1994. With the advent of European crisis, the foreign
The policy decisions and actions taken by the government in the near future with a long-term outlook
will shape the new Indian economy that could ride out the rough patch in the global economy.
March 2012
inflows almost stalled, which has made the financ-
ing of this deficits all the more difficult. Ireland had
lower current account deficits than the other three
but faced a much bigger problem from the surge in
fiscal deficits.
Indian ‘TWIN-DEFICIT’
India has been running persistent twin deficits since
1980-81. The real concern is that we have not man-
aged to learn any lessons from our economic his-
tory. The 1991 crisis is widely known as the balance
of payments crisis but was basically a twin deficit
crisis. In 1991, India experienced a classic external
payments crisis: high fiscal and current account
deficits, external borrowing to finance the deficits,
rising debt service obligations, rising inflation, and
inadequate exchange rate adjustment. In 1979, the
oil shock, agricultural subsidies, and a consump-
tion-driven growth strategy had pushed up the fiscal
deficit. It further increased in the mid-1980s as de-
fense expenditure was substantially increased and
direct taxes were progressively reduced. The result
was that the deficit ballooned from 1985 to reach
9.4 percent by 1990–1991. India was on the brink of
bankruptcy. In response, a reform process began.
India sought help from the International Monetary
Fund. Engagement with the International Monetary
Fund (IMF) had its risks: if India could not deliver
on its promises of economic reform, investors would
exit again; if the government pushed too hard on re-
forms, domestic opposition would become unman-
ageable.
Yearning for government action
Similar to the appalling situation in 1990-91, the
country is facing yet another fiscal and balance of
payments crisis. With increasing integration with the
global economy, the country has become highly vul-
nerable to global macroeconomic shocks.
Cyclical slowdown underway
In recent months India’s growth has been deceler-
ating and its currency came under pressure in late
2011. As elsewhere in Asia, the slowdown has been
due partly to weaker external demand. In India,
however, the main factor has been domestic issues,
including widening “twin” deficits on the fiscal and
the current accounts, high interest rates and infla-
tion, sluggish progress in key policy reforms and
administrative red tape.

Fig 1: GDP growth rates
All these have taken a toll on the growth of the
country which slowed to its weakest annual pace
in almost three years rising 6.1 per cent in the third
quarter compared to a year earlier.
In this situation, the policy decisions and actions
taken by the government in the near future with a
long-term outlook will shape the new Indian econo-
my that could ride out the rough patch in the global
economy.
1.Medium-term prospects
India has been one of the world’s fastest growing
economies since the early 1990s, becoming the
world’s third-largest economy on a purchasing pow-
er parity (PPP) basis (according to the IMF and World
Bank), behind the US and China.
Among the strengths that make India one of Asia’s
brightest prospects for medium-term growth and
favorites among foreign investors are: favorable
demographics, rising income levels, rapid urbaniza-
tion, a stable and well-regulated financial sector and
vast untapped potential in energy, infrastructure, re-
tail and banking.
India ranks highly among the group of Emerging
and Growth Leading Economies-- “EAGLEs”--and is
expected to grow by 8% per year and contribute a
whopping 10% of global growth in the coming de-
cade, second only to China.
2.Markets are recovering from a sharp selloff
In the near-term, the sharp depreciation of the ru-
pee in late 2011 leaves upside risk to inflation. The
depreciation (18.7% against the USD in 2011, mak-
ing it Asia’s worst performing currency) occurred as
India’s external vulnerability came to fore, with a
current account deficit of 3.5% of GDP and high de-
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
NIVESHAK 13
Article
Cover of the
Story
Month
pendence on foreign capital inflows. The currency’s
losses were further exacerbated by dampened in-
vestor sentiment on account of backsliding on key
reform initiatives, particularly in the infrastructure
and retail fronts. Subsequent forex intervention by
the RBI with a series of measures to stimulate capi-
tal inflows and curb speculative activity in the FX
market have helped stem further losses. More re-
cently, the rise in global risk appetite has led to
a sharp rebound in the currency. Following sharp
declines last year, India’s equity markets and the
domestic currency have recovered in early 2012.
However, with the global outlook still fragile and the
Indian economy struggling to tackle key challenges,
both on the macroeconomic as well as policy front,
risks of renewed pressure on equity as well as forex
market, continue to loom large.
3.Policies to restore confidence
At a time when India needs visible progress on in-
vestment reforms and a boost to investment spend-
ing, an unhealthy fiscal situation is acting as a
potential dampener for private investment. India’s
fiscal deficit is expected to overshoot the budget es-
timate for FY12 (5.6% of GDP compared to 4.6% bud-
geted) amidst subdued revenue growth due to weak
tax receipts and excessive public expenditure. The
large deficit could potentially crowd out credit flows
to the private sector, while further slippages could
fuel inflationary pressures in the economy. The onus
lies on the government to kick-start fiscal consolida-
tion by paring back subsidies and implementing tax
reforms. In this context, the Union Budget for FY13
in March will be closely watched for government
policy action.
 14 NIVESHAK
Should PSU Banks Be Privatised?
Month
Story
The Indian Scenario
Finsight
Cover of the
Article
Although ideological considerations - exemplified by
statements like, “governments have no business to be
in business” - have often been paramount in driving
privatisation in various parts of the world, It is also
true that privatisation has brought a radical change in
the functioning of various organisations. In the bank-
ing sector also, the partial disinvestment of govern-
ment in the PSUs done during 1990s helped to increase
efficiency, and foster healthy competition. In the light
of the recent developments, like government planning
to amend the Banking Regulations Act and the various
Bank Union strikes, the matter of further privatisation
of banks is back in discussion. In this background,
this article focuses on the feasibility of privatisation of
Indian PSU banks and the effects it will have.
Objectives For Privatisation – Analysis In To-
day’s Scenario
The advocates of privatisation have sought to justify
privatisation with the following objectives
1. Increased efficiency
2. High Revenues - bridging Fiscal Deficit
3. Reduced government interference
4. Wider ownership share and development of capital
market
5. Fostering competition
Of these, the first objective, the need to promote ef-
ficiency in running the commercial organizations, has
arguably been the dominant motivation. There is a
sense that public ownership somehow leads to lower
levels of efficiency than are possible under private
ownership. But, the basic issue here is the basis of
the argument about the efficiency levels. There are no
parameters that measure and compare the efficiency
of the PSU and private sector banks. It is so, because
both these setups are based on different motives and
business models and hence they could not be com-
pared directly.
..
There are no parameters that
measure and compare the ef-
ficiency of the PSU and private
sector banks
March 2012
Neha Jain & Sourabh Sahu
IIM Indore
Secondly, it is said that privatisation helps in earning
high revenues and hence bridging fiscal deficit. Con-
sidering that India still has a considerable population
under poverty line, considering profits only in services
like banking might hamper the growth of the nation.
Thirdly, Privatisation is supposed to reduce government
interference. Though it is a characteristic of privatisa-
tion, this might not be a very good thing for India today
because the mass participation of banks in ‘not so prof-
itable’ areas is achieved by the government regulations
and interference.
Further, the development of capital market is something
that in this case would be done by diluting government’s
stake. This would also make the bank more risky. The
development in the capital market is thus happening at
the cost of the shareholders.
Lastly, privatisation helps in fostering healthy competi-
tion. In the current scenario, there is a fine balance in
this segment. In case privatisation is done, SBI, which
is the largest bank would have huge power. Going with
this approach would hence lead to monopolised mar-
kets, going against our objectives.
Hence we see that almost none of the objectives fit with
the present scenario. The problem cannot be addressed
by privatisation.
The Issue
The major problem is not the lower efficiency of the PSU
banks, as is pointed out by the advocates of privatisa-
tion. This section gives some of the issues which we feel
are most important in this scenario.
1. Measuring the performance of public and private
banks
The achievement of the public sector banks in India
in the last 36 years, is particularly reaching out to the
masses in the hitherto neglected villages. Even in china,
the banks could not reach the level of rural penetration
which the Indian public sector banks have been able
 NIVESHAK 15

to. This has helped in rural development and hence on the public sector banks, sapping their income

Article
contributed in the country’s development. But, while and profits.
measuring the performance of the PSU banks and

Cover
Potential Effects of Privatisation
while comparing them with private entities, these
If implemented, Privatisation would go against the

Finsight
achievements are not factored in. Hence, to be able

of the
government’s policy of Financial Inclusion. On one
to compare the PSU banks and private banks we
hand, when government is taking all necessary

Story
need to have some metrics which consider the dif-
steps to bring banking in reach of every person in

Month
ference in the objectives of the two different kinds
India, going for privatisation of banks is not feasible.
of establishments.
The private banks, with profit as their aim, would
2. Stricter Regulations for public banks not open branches in areas where they don’t expect
While foreign banks are permitted to open 12 profits. Also their interest rates are higher, which
branches per year by installing hundreds of ATMs would make credit unavailable for people from lower
throughout India and through their financial sub- income group.
sidiaries, significant retail and consumer Also, in the current scenario, when
banking business are transacted. For many economies are in reces-
example, Citibank alone, besides sion, having some control on
branches, now has more than our banking system is good.
150 outlets under the guise This guards us from the
of Citi Financial Company. global recession to a cer-
As against this, the appli- tain degree. Especially
cations for license to open after having withstood
a branch in New York made the global economic cri-
by SBI are pending for over sis of 2008, The PSUs
two years. This creates a have proven their mettle.
bottleneck for the growth of
Conclusion
PSU banks.
The current state of the
3. Lesser formalities and
public banks is a com-
checks on private banks
plex result of many fac-
For any transaction, for tors. The key to improve
example, private banks their performance lies in understanding the
modify the KYC norms to make a hassle free process core difference between the two types of financial
for getting loans. This attracts more loan seekers institutions. From analysis, it seems that the differ-
as compared to public banks. But, due to this they ence between the working of private sector banks
need recovery teams etc. There have been incidents and PSU banks emerges from the policies and regu-
when the private banks have been accused of ha- lations and not their efficiency. The solution to the
rassing the customers for recovery. stagnation of banks is standardising the regulations
4. Different regulations for Private players and minimising bureaucratic control, not hasty pri-
The foreign banks are permitted to open their finan- vatisation.
cial subsidiaries to indulge in trading and services
to increase their income and profits. This allows the
private banks to generate huge profits, which does
not happen in public banks. Hence the revenues of
public banks and private banks cannot be compared
as such.
5. Exemption for private banks from social banking
The private banks are exempted from social banking
and agricultural credit. These burdens are put solely
..
The solution to the stagnation
of banks is standardising the
regulations and minimising
bureaucratic control, not hasty
privatisation

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

 16 Month NIVESHAK

Social Media IPOs :

Story
Perspective
of the

Just a Fad ?
Cover
Article

Karandeep Singh Batth

FMS, New Delhi
What is common between LinkedIn Corp, Friend- Stocks Loss since IPO (%)
Finder Networks, Groupon Inc, Yandex N.V., The As on 29 Dec 2011
Active Network Inc, Jiayuan.com Int’l Ltd, Pan- Renren (RENN) 76.4
dora Media Inc, Taomee Holdings Ltd, Tudou Tudou Holdings (TUDO) 63.6
Holdings and Renren Inc? Other than the fact Demand Media (DMD) 59.8
that these are all social media corporations, one Phoenix New Media (FENG) 51.9
underlining rallying point is that they have been Jiayuan.com International (DATE) 45.6
big losers on the worldwide exchanges in 2011. 21Vianet Group (VNET) 39.7
The year 2011 was the year when Investment Pandora Media (P) 37.4
Bankers caught the friending fever – welcom- Yandex (YNDX) 20.8
ing the new breed of “Computer Nerds” who HomeAway (AWAY) 14.8
were connecting the whole world together. The
Zynga (ZNGA) 5
“Nerds” too saw an opportunity, and thus 2011
became a year to cash out for them. Doesn’t Table 2: Social Media Stocks (in order of losses from original
IPO pricing)
matter if one calls it a wave or a bubble, these
social media companies have caught hold of
The But even amongst all this gloom, there have
everyone’s eye – and more importantly wallet.
been those who have gone against the bearish
Let’s take a deeper look.
wind: the well-known ones being Bankrate/RATE
The Story So Far (+30.96%) and Jive Software/JIVE (+6.67%). Such
2011 saw, as most experts say, the initial hype performing stock, though few in numbers, have
over social media IPOs “burst”. While most of given a much needed glimmer hope for the in-
the social media stocks were trading high at the vestment community.
outset, they have since sunk, and so have the The Real Question
hopes of the numerous entrepreneurs and Wall
So let’s get down to the real question: Is this
Street Investment Banks looking to make a “liv-
social media IPO boom an actual wave or just
ing” out of these ventures. A research by Kevin
a fad? As hype and concern continue to build
Pleines, an analyst at Birinyi Associates in West-
around the IPOs, investors have started to won-
port (Conn.), shows that out of all the social
der whether these stocks are worth the price.
media stocks that have gone public since 2010,
Most of the experts express negative senti-
60% are trading below their issue price; aggre-
ments; and it’s not tough to figure out why:
gated downward movement of these stocks
since issue is 32%. First, Social Media Stocks work purely on the
basis of projections, without any actual projec-
The following two tables bring forth the gloomy
tions for returns and growth. Put mildly, invest-
picture that the year gone by painted for the
ing in products based solely on intuition is a
social media corporations:
fool-hardy decision.
Index/Stocks Return in 2011 (%) Second, revenues of Social Media Corporations
As on 1 Dec 2011
aren’t accounted for. Most of their revenues
NASDAQ -1.01
come from advertisements, which are a limited
S&P 500 -1.04
source of income and has probably come to sat-
All 2011 IPOs -10.56 uration point already. For example, 85% of Face-
Social Media IPOs -24.69 book’s revenues come from advertisements.
Table 1: Returns of various Indices/Stocks in 2011 Third, since the social networks operate outside

March 2012
 NIVESHAK 17

the Wall Street, they aren’t required to report now is trading around $500 a share. It was any-

Article
their earnings. Thus, investors would risk the thing, but overvalued. They also point out that
investing in companies that are overvalued. there isn’t enough excitement amongst the pub-

Cover
Perspective
Fourth, users are the sole reason why Social Me- lic for this sector and the common investors are
still on the sidelines; for a bubble to exist, the

of the
dia Corporations exist. With questions regarding
user privacy and data protection being raised common man has to be all in because it’s the

Story
every passing day, they are trying to keep the average investor who takes the final beating.

Month
trust of users while attempting to appease the Is the general skepticism overhyped? Only time
advertisers. This very risk was mentioned by will tell. But amidst all the frenzy surrounding the
Facebook in its IPO filing, where it was required billion dollar valuations of Social Media Compa-
to cite risk factors by law. nies, market experts unanimously point out one
Fifth, the life expectancy of Social Media Web- fundamental investing rule: look at the business
sites is a big question. For example, when model sustainability, revenue sources and prof-
MySpace started out in 2005, it was a big instant itability potential. Only profits will justify stock
hit, but where it stands now is anybody’s guess. prices in the long-term. The current social media
How sound an investment would it have been
now if one had invested in it in 2005?
Lastly, the very fact that management of vari-
ous Social Media Corporations are already look-
ing for new opportunities for growth is a telling
news; they themselves aren’t sure of the long-
term sustainability of their business models.
For example, Zynga, India’s most famous online
poker game platform founded in 2007, is already
considering a move into online gambling space.
A change of focus so early is a big red flag for
Zynga investors.

valuations are based on future earning potential

as opposed to historical data, which makes scru-
tinizing the individual business model even more
important. Maybe a few like Facebook and Linke-
dIn deserve the high valuation that they are get-
ting because they have strong business models.
But others like Groupon have a business model
that is easily replicable, but are still attempting to
get high valuations.
For most, the honeymoon is likely to be short-
lived. The companies that survive are going to be
the ones which were able to leverage their user
So why have some still paid, as they say, “outra-
base, visits and page views, and generate sustain-
geous premiums” for some of the social media
able cash flows. What will you be a part of: the
stocks? Most of them have looked at revenues;
next Google-like boom, or the News Corp’s loss of
LinkedIn for example had some odd $300 mil-
$545 million in MySpace buyout?
lion in revenues and is believed to be growing
at more than 100% every year. This school of
thought believes that if LinkedIn continued to
double, the stocks would rationalize a move up-
wards. When the search giant Google had made
its debut in 2004 at $85 per share, most people
believed it was massively overvalued; Google

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

 18 Month
Story NIVESHAK
Non Performing Assets
FinGyaan
Cover
Article of the
Indian scenario
Non-Performing Assets
(NPA) are one of the key
financial indicators of
any bank. It’s very much
important to understand
NPA norms (provision,
classification and income
recognition) and vari-
ous NPA terminologies
which are applicable to
the banking industry; for
example, Gross NPA, Net
NPA and Slippage ratio.
The article analyses Indi-
an banking scenario and
its recent performance in
the given light. Also the
article highlights the rea-
sons for NPA rise in India,
Option for trading NPAs,
concerns in near future
and the way ahead in
the banking sector.
March 2012
Shirish Jain
IIM Shillong
One of the perennially dreaded words in
the banking sector has been this three
letter word ‘NPA’. Non-Performing Assets
(NPA) also sometimes known as Non-
Performing Loans (NPL) have long since
been considered as one of the very key
financial health indicators of the bank.
In this article, we will try to understand
basic terminologies and norms surround-
ing NPA’s, like Income recognition norms,
Gross vs. Net NPA’s and Slippage ratio.
Later we will analyse the current Indian
banking scenario in perspective of NPA
levels.
Indian NPA Classification Norms
1. An asset (including a leased asset),
becomes non-performing when it stops
generating income for the bank.
2. A non performing asset (NPA) is de-
fined as a loan or an advance where
interest and/ or instalment of principal
portion of amount remains overdue for a
period of greater than 90 days in case of
a term loan, or the account remains ‘out
of order’ for 90 days, in respect of an
Overdraft/Cash Credit (OD/CC)
Income Recognition for NPA’s
1. Income from NPA is not recognised on
accrual basis but on receipt basis. There-
fore banks cannot account for any inter-
est income on NPA accounts in their in-
come statements.
2. However, there are some exceptions
like interest on advances against term
deposits, NSCs, IVPs, KVPs and Life poli-
cies which are usually taken to income
statement on the due date, on the condi-
tion that adequate margin is available in
the accounts.
3. Interest income on the government
guaranteed advances that turn into NPA’s
are not taken to income statement in any
case unless realised.
4. The availability of security (LIC policy,
KVP, etc.) or net-worth of guarantor / bor-
rower should not be considered for the
purpose of treating an advance as NPA
or otherwise.
Provision norms in India
Provision norms for NPA advances in In-
dia are as follows :
Category of Advances Provision (%)
Sub- standard Advances
- Secured Exposures 15%
- Unsecured Exposures 25%
Doubtful Advances – Unse- 100%
cured Portion
Doubtful Advances – Se-
cured Portion
- For Doubtful up to 1 year 25%
- For Doubtful > 1 year and 40%
up to 3 years
- For Doubtful > 3 years 100%
Loss Advances 100%
Table 1: Provision norms for NPA advances in
India
The regulatory norms as given above for
provisioning represent only the minimum
requirement. A bank, if so desires, may
make specific provisions for advances at
rates higher than the rates prescribed
under existing regulations in order to
make provision for estimated loss in col-
lectible amount or loan.

Gross vs. Net
Gross NPA’s reflect assets which do not earn any in-
terest income at present i.e. non-performing.
Out of their gross NPA’s, banks have to make provi-
sions for the same out of their profits, according
to regulatory requirements. Net NPA’s are basically
gross NPA’s after provisions.
Fig. 1: GNPA trend
As the asset quality of banking sector has improved,
the overall Gross NPA ratio has improved to 2.25%
in 2010-11 compared to 2.39 % in the previous year.
Also the growth in the GNPA has reduced to 15.6 %,
and shows good promise going ahead. In general,
most important things to look into NPA numbers
comprise three things, fresh additions to NPA (i.e.
Slippages), reductions in NPA, and net addition / re-
duction.
It might also be interesting to look deeper inside and
we can find that Schedule Commercial banks and
Public sector banks are performing pretty consis-
tently around the 1% net NPA mark; however private
sector banks and foreign banks have gained serious
ground in this regard as can be seen in the figures.
Fig. 2: Net NPA
Within the sector, the Reduction in NPA can oc-
cur due to recovery, up gradation (NPA assets have
turned regular paying), and write-off (taken off the
balance sheet). Preference order for reduction would
be recovery, up gradation followed by write-off.
Slippage ratio
Slippage ratio, which is the gross NPA’s added during
the year as a percentage of outstanding standard
assets of the last year, is an important indicator of
asset quality.
Slippage, ratio as can be seen above, increased con-
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
NIVESHAK 19
sistently since 2008 but witnessed an improvement
in 2010-11, which shows the recovery of growth.
Article
New Private sector banks i.e. NPRB’s (comprising
Cover
FinGyaan
of HDFC Bank, ICICI Bank, DCB, Indusind Bank,
Kotak Mahindra Bank, Axis Bank and Yes Bank) re-
of the
corded the lowest slippage ratio, while SBI group
Story
recorded the highest. Old private sector banks
Month
(OPRBs), Nationalised banks (NBs), and Foreign
Banks (FBs) have moderate slippage ratio.
Fig. 3: Slippage percentage
Fig. 4: Slippage Ratio - Bank group wise 2010-11
Sector-wise Composition of NPA’s
The share of priority sector NPA’s in gross NPA’s of
domestic sector banks witnessed an upward trend
in 2010-11 compared to the previous year. While the
ratio of priority sector gross NPA’s to priority sector
advances increased in public sector banks in 2010-
11 over the previous year, it showed the downward
trend in the private sector banks during the same
period. This can be due to either lower priority sec-
tor lending or better recovery rates. NPA’s for Ag-
ricultural advances and weaker section advances
increased in both public sector and private sector
banks.
Fig. 5: Composition of incremental NPA’s of Domestic Bank
2010-11
Among different sectors, Agriculture sector contrib-
utes around 44% of the new NPA’s, suggesting that
the high growth witnessed in earlier five years have
resulted in low credit quality. Also implementation
of Agriculture Debt Waiver and Relief Scheme, 2008
is and will be having a cascading effect on agricul-
 20 NIVESHAK

tural loan recovery rates over the next few years at

FIN-Q Solutions
Month

least, as the farmers feel dis-incentivized in repaying

Story

loans. This has resulted in more than proportionate

FinGyaan

increase in Public sector banks agriculture NPA’s

February 2012
of the

compared to Private sector banks.

Cover

Factors for Rise in NPA’s in India

Article

Factors that have led to rise in NPA’s in India can be

classified basically into categories: 1. Super Bowl Indicator
1. Macro - environment or state level
2. Micro - company level
Ineffective legal system with large backlog of cases 2. Pick and Shovel Play
and poor recovery rates together with grand political
schemes / Govt. policies like debt waiver form the
most important macro level factors; while defective 3. Leveraged Buyout –
lending policies, poor credit appraisal systems, and LBO
inadequate controls to check forged / manipulated
data comprise the major micro level factors. Micro
level factors with increased technology and data in-
terchanges have been controlled to a large extent 4. Brattle Prize, The
but controlling macro level factors still remains a Journal of Finance
mirage.
Trading NPA’s
Banks have an option of trading their NPA’s with any
other bank, NBFC or a financial institution. Many
5. KBC Bank, First
banks (especially private sector banks) actively use Indian woman CEO
this route to liquidate their NPA’s. However this is ex-
tremely expensive as the bank will receive not more
than 5-10% of the asset value. RBI has prescribed
guidelines to banks on purchase/sale of non-per- 6. Rothschild Family
forming assets in its master circular dated July 1,
2011. These guidelines would provide the banks with 7. Almondz Global Se-
better options to trade their NPA’s by providing a curities, PG Electroplast
healthy secondary market for the NPA securities.
Concerns and way ahead….
Although gross NPA ratio has improved, the asset
quality concerns still looms large over the sector. In 8. Pairs Trade
the last few years, we have witnessed high write-offs
to clean up balance sheets like SBI in 2010-11. Also
there remains a concern over restructured accounts
9. Countries with the
with regards to their quality. Also a major concern is
highest tax rates in the
the huge contribution of agriculture advances to the world
slippages in NPA.
Managing rather than attempting to eliminate NPA
is always a more prudent option. Also major NPA
levels comprise of priority sector advances which 10. Laissez Faire
are extremely crucial for a developing country like
India, and clearly cannot be done away with. How-
ever India definitely needs a more robust legal and
legislative framework, which if combined with effi-
cient lending practices from the banks will clearly
see them through rough NPA waters.

March 2012

Islamic Finance
CLASSROOM
FinFunda
of the
Month
Sir, Luc Frieden, Luxembourg’s Min-
ister of Finance, seeing the prosperity of
Islamic institutions in spite of the credit
crunch, said in a keynote address that it
can learn and win from Islamic finance.
What is this Islamic finance & how is it different from
regular banking?
Islamic finance refers to a financial
system that is consistent with the prin-
ciples of Sharia, the sacred law of Islam.
Unlike the regular banking, it prohibits
earning of interest (or riba) through the
business of lending. Since interest based
lending is strictly prohibited in Islamic finance, trading
is the only option for profitable investment for Islamic
Financial institutions (IFI), but in regular banks, trading
is prohibited since 1929-1932 experience.
What else does Islamic finance pro-
hibit?
Islamic finance prohibits Riba (giving
or taking of interest), Masir, (involvement
in speculative and gambling transaction),
Gharar (uncertainty about the terms of con-
tract or the subject matter) e.g. prohibits
selling something which one does not owe, investment
in businesses dealing in alcohol, drugs, gambling, ar-
maments, etc. which are considered unlawful or un-
desirable.
With so many prohibitions in Islamic
finance, why does Luc Friedman feel that
Europe should learn from Islamic finance?
According to Luc Friedman, the key
elements in Islamic finance that the world
needs today, particularly Europe, are stabil-
ity, financial partnership, and speculation
as well as ethical principles which are all
found in Islamic principle. The element of financial re-
lationship between the lender and borrower assuring
the “partnership mentality”, the prohibition of specu-
lation and gambling in Islamic finance which is the
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
NIVESHAK 21
Article
Cover
Classroom
of the
Kamal Nayan srivastava
IIM Shillong
Story
Month
point of major concentration in Europe, its provision
for risk, all according to Friedman is worth learning
from Islamic finance.
Oh! So their ethics, lender-borrower
relationship & provisions for risk have
been the reason for stability of Islamic
financial institution.
Exactly!
Sir, what are the key financial in-
struments of Islamic finance?
Key instruments of Islamic finance
include Mudarabah (profit-sharing agree-
ment), Wadiah (safe keeping arrange-
ment), Musharakah (joint venture for a
specific business), Murabahah (cost plus
arrangement where goods are sold with a pre-de-
termined margin of profit), Ijirah( leasing arrange-
ment), Sukuk (Islamic bonds), Takaful (Islamic insur-
ance), Tawarruq (Monetization of commodity) and
Istisna’a (Commissioned manufacturing).
Is Islamic finance prevalent only in
Islamic countries?
Yes, primarily they are common in Is-
lamic countries of Middle East, South East
Asia and Kazakhistan. China became its
active member in 2001. Germany issued
its first Islamic bond in 2004 while UK its first Islamic
mortgage in 2003. USA, Brazil, Australia & India are
few other important locations. More than 300 Islamic
institutions are located in 50 countries.
Who are the major players in Islamic
finance?
Major players in Islamic finance are
Bank Aljazira, Bank ALbilad, Al Rajhi, Ku-
wait Finance House, Bank of Islam Malay-
sia, Dubai Islamic bank, Qatar Islamic bank
and others. HSBC, ABN AMRO, Barclays, Citi
Islamic Investment bank, Deutsche bank & Standard
chartered are few among the western players.
22

FIN-Q
1. This organization, formed in 1992, is a quasi-legislative, judicial and executive
body in India. Name the organization and its current Chairman.

2. This is an award in the field of Economics that is annually given by a Japanese

organization formed in 1934 and is currently headed by Kazuo Ueda. Name the award
and the organization.

3. This institute established under the Young Plan has 55 members. Name this
organization.

4. Name this index.

5. X comes on Friday and gives information on management and strategy to

CEO’s. This is related to Mr. Mahanta. Name X.

6. X is an approach for tax avoidance and is named after a case dated 1966 relat-
ing to the sale of undesired assets. Name the two parties involved in the case and
term “X”.

7. This is an exchange that trades only in coffee. It was formed in Dec 2008 and is
the only commodity exchange of country X. Name the exchange and the country.

8. This company declared bankruptcy in 1923. This company has awarded $2 mil-
lion to conservation projects around the globe in 2011. Name this company.

9. X is an Act formed in 2005 which operates under a Central Council currently

headed by Ashwani Kumar. Name X.

10. Name this NBFC.

All entries should be mailed at niveshak.iims@gmail.com by 25th March, 2012 23:59 hrs
One lucky winner will receive cash prize of Rs. 500/-

March 2012
 23

WINNERS
Article of the Month
Prize - INR 1000/-
Rishi Gupta & Manan Jain
IIM Shillong

FIN - Q
Prize - INR 500/-
Paul Roy
SJMSOM, IIT Bombay

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