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On This Day - 30 AUGUST 2011
Is RBI's latest move positive for India Inc.?
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Yet, despite the regulations, India Inc. has shown growing interest in entering the banking sector. The likes of Tatas, Birlas and other big corporate houses have expressed interest in the past for setting up banks. The RBI for its part has been cautious so far with respect to the same. And very rightly so! In recent developments, the central bank has decided to open the doors to let corporate houses enter but not without meeting various criteria first. Some of the major conditions that will have to be fulfilled before the RBI grants a license include sound credentials and integrity, a 10-year record of successfully running their businesses, a minimum paid-up capital of Rs 5 bn, 25% of their branches to be set up in rural unbanked regions, listing within two years.
In addition to this, such banks must be owned by a separate holding company that cannot borrow money to float the bank. Further, total foreign holding in the bank cannot cross 49% while the operating company must lower its stake to 20% by 10 years. Not just that, meeting all these criteria does not automatically result in banking licenses being granted. This is because the RBI intends to be very selective and will have the last word when it comes to granting permission to set up banks.
The positive is that more banks will help boost financial inclusion in the country. Thus, while India Inc. will herald this move, a lot will depend on how serious they are in setting up and running a bank. The RBI, understandably, is a bit paranoid given that banking lies at the heart of a country's economic health. Thus, as long as the central bank keeps a vigilant eye on the way corporate houses are running banks, the chances of mismanagement and unhealthy practices should be minimal.
Thus, rather than going up, the yields went down as investors took safety in bonds following the turmoil in equity markets. But Gross hasn't given up on the idea just yet. He still believes that US Treasuries will go down in price in the future as devaluing the same seems to be the only way out for an economy knee deep in debt. It will be interesting to see whether Gross is proved right in the long term. But the man's track record and our own understanding of the situation do tell us not to bet against him.
The impact of FIIs selling Indian stocks due to external concerns is something that has irked Ajit for long. In fact he showed some very interesting slides on why it is neither Indian politics nor economics that has been impacting the benchmark indices. The earnings of Sensex companies too have had a secular upward move. But it is the erratic buying and selling by foreign investors that has brought the Indian markets to ransom on several occasions. Simply because of the sheer volume of FII trades as against Indian investors'. With fears about debt contagion and sovereign crisis lingering in the markets, the bottom may be far from here. However, Ajit also reiterated his views on the Sensex moving closer to 30,000 levels by the end of 2012. In fact, according to him, going by the market estimates of 2012 earnings of Sensex companies and giving it a multiple of 17.5 (average over the past 5 years), the index can comfortably cross 24,500 levels. But that is provided the FII money does not retreat on fears of global meltdown. Ajit's final comments on being a buyer of stocks for long term financial needs and buyer of gold as an insurance against market volatility were amongst the most important takeaways for the participants of the webinar.
Besides, it can lead to some customers leaving the network entirely. In addition to this, the acquiring firm would also have to renegotiate with all the sub-brokers. It is a known fact that in India, it is the sub-broker who has a better relationship with the customer. And if the sub-broker leaves, then its goodbye to his share of customers. And last but not the least is the history of acquisitions made in India. Most of the brokerage businesses acquired by other brokerage firms or banks have been complete failures. This has made the firms stay away from further acquisitions. Therefore, despite cheap valuations, there are not many takers for the sector.
There is a chance that clients of these software firms delay their project starts. There is also a possibility of the IT budget cuts. But these companies are looking at the long term growth prospects in the sector. Therefore, they are building capacities in anticipation. Though it may be a good move from a long term point of view, it can adversely impact the margins of these companies in the short term if demand environment continues to remain bleak.
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