Free Reports

Are Savers in India Getting a Raw Deal?

Oct 5, 2016

In this issue:
» NBFCs pare dependence on bank funding
» 69% of the jobs in India are under threat
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

Yesterday, the RBI cut interest rates by 25 basis points and the stock markets cheered. This monetary policy was interesting for a few reasons. For one, it was the first review by the newly appointed governor, Mr Urjit Patel. And as opposed to the governor who had the final say on rate cut decisions, as had been the practice before, it was made by a committee with equal representation from the RBI and the government.

The rationale for the cut: Inflation is easing and expected to come within the comfort level of the central bank. It must be noted that a rate cut has been expected since the start of the year. But erstwhile governor Dr Rajan chose to keep rates unchanged.

India Inc also appears to have welcomed this move. Corporates expect rate cuts to be beneficial in many ways. For indebted companies and capital-intensive industries (such as power and real estate), the rate cuts will translate into less interest outgo. Other sectors, such as auto and banks, opine that less interest on loans will spur demand for their products. All in all, it is hardly surprising that corporate India and borrowers in general are quite happy with this move.

But what about savers in the country? Vivek Kaul wrote on this subject in his Diary earlier this year:

  • If interest rates need to fall over the long-term, the household financial savings number needs to go up. And this can only happen if households are encouraged to save by ensuring that a real rate of return is available on their investments. The real rate of return is essentially the rate of return after adjusting for inflation. A major reason why the household financial savings have fallen over the years is because of the high inflation that prevailed between 2007 and 2013.

    It needs to be mentioned here that while the household financial savings have fallen over the years, the private corporate financial savings (basically retained profits of companies) have gone up over the years. In 2007-2008, the private corporate savings had stood at 8.7% of the GDP. In 2014-2015, they stood at 12.7% of the GDP. So, a fall in household financial savings has more than been made up for, by an increase in corporate financial savings.

    The trouble is that corporates do not like to lend long term in the financial system. Most of the private corporate savings are invested in short term bonds and mutual funds which in turn invest in short-term bonds. Hence, corporate savings are typically unavailable for long-term borrowers. They need to depend on household financial savings.

This means that household savings must go up, which can only happen if the rates offered on their deposits and savings are attractive. That's not all. Vivek continues:

  • The borrowing by state governments is expected to remain high in the years to come. This is primarily because of the UDAY scheme that the central government has launched to sort out the mess in the power distribution companies all across the country.

    Hence, the demand for money which can be invested over the long-term has gone up over the years and is expected to continue to remain high. In this scenario, the supply of money, through household financial savings needs to improve.

The Western world, since the 2008 global financial crisis, has only really focused on helping borrowers and encouraging spending. The near-zero rates are a testimony to that. Savers have gotten a raw deal.

India, in that sense, was different. And during his tenure, Dr Rajan was clear that he wanted to maintain a real interest rate level of 1.5-2%.

Is this what the new governor Mr Patel also wants to achieve? Or does he have other goals?

A clearer picture will emerge in the coming months. And Vivek Kaul, through his unique newsletter The Vivek Kaul Letter, will continue to give a thorough and insightful analysis on this relevant and hotly debated topic.


--- Advertisement ---
Crisis in India Is Closer Than You Think...

Bill Bonner and Vivek Kaul, two of the world's most independent thinkers and truth seekers have come together to warn you about a financial crisis.

A crisis that could be as big as the dot-com bust...

And it is headed straight for India!

To find out more about this looming crisis and to get a free copy of Bill Bonner's latest book - Hormegeddon (pay only shipping and handling)... Just click here.
------------------------------

03:01 Chart of the day

Non-Banking Financial Companies (NBFCs) largely depend upon banks to source funds for their lending operations. NBFCs borrowed bank funds to the tune of over Rs 3 trillion in the past two years. This is because unlike banks, they do not have access to cheap public deposits. However, in recent years, NBFCs have increasingly resorted to bond market borrowings. So the share of loans to NBFCs in bank's non-food credit has stagnated at around 5% since FY12.

During this period, bond issuances by NBFCs have grown at a robust pace. In fact, NBFCs account for more than 60% of bond issuances in a year. The bond market has also given NBFCs access to cheaper funds as bond yields are typically lower than bank lending rates by more than a percentage point. While large NBFCs are able to raise funds through bonds at the most competitive rates, it still remains a challenge for the small NBFCs that have low credit ratings.

Steps taken by Reserve Bank of India to increase the depth of the bond market is expected to benefit NBFCs in the long run. Along with their clean balance sheets, NBFCs are well positioned to grow their loan books at a time when most of the public sector banks are struggling under the huge pile load of bad loans. In fact, NBFCs are also foraying in segments such as working capital loans that have traditionally been the bastion of banks. This is reflected in the steep credit growth reported by them. In the past three years, NBFC's increased their loan book by 37% which is nearly two times the growth reported by banks over the same period.

NBFCs Pare Dependence on Bank Funding


04:02

Technological advancements can greatly simplify the lives of people. However, the ensuing automation can also result in the loss of many jobs. As per World Bank, 69% of the jobs in India face the threat of getting substituted with automated technology. This spells bad news for a country already struggling to create new jobs for millions of youth joining the workforce each year.

According to World Bank, technological disruption can the normal economic path of development for developing countries. And if India needs to capitalise on the demographic advantage, it not only needs to promote investment in infrastructure but also think about the kind of infrastructure to be built in the economy of the future.

04:45

After opening the day flat, Indian equity markets continued to trade near the dotted line. At the time of writing, BSE Sensex was trading lower by 48 points and NSE-Nifty was trading lower by 10 points. Each of the mid cap and small cap indices are trading higher by up to 0.6%.

04:56 Today's investment mantra

"The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

Today's Premium Edition.

How Are Midcaps Handling the Downcycle?

An incisive look at how midcap companies have been faring in the current patch of extended economic sluggishness.
Read On...Get Access

Recent Articles

Which Chips Do You Want to Own - Black, White or Blue? December 9, 2017
The best way to retire wealthy - Buy real blue chips over poker blue chips
If You're Not Looking for 'Excitement' but 'Big Returns' from Stocks, This Is for You December 7, 2017
One does not have to necessarily invest only in 'exciting' stocks to become wealthy.
The Big 'I' That Can Topple the HDFC Banks and Wells Fargos of the World December 5, 2017
A risk that cannot be ignored in even the biggest and well run businesses.
If You Can Read your Child's Annual Report Card... You Can Have an Edge in Investing December 2, 2017
Read a company's annual reports as you read your child's school report card...

Equitymaster requests your view! Post a comment on "Are Savers in India Getting a Raw Deal?". Click here!

  
DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.