RBI Credit Policy

One more credit policy by the very photogenic (and extremely erudite) RBI Governor. He has kept up his surprise act. The market was not expecting an increase in the Repo rate (the rate at which banks borrow from RBI) and the consequential increase in all other policy rates.

How does it affect the lay consumer? should he even spend time thinking about the impact of such policy statements and actions ?

Most lay consumers can be forgiven if they ignore the policy pronouncement as so much noise. In fact I have always advocated that your long term strategy will benefit if you ignore all these noises and concentrate on building your investment portfolio in line with the asset allocation that is most suitable for you based on your risk profile and goals. If at all the policy calls for some action it is for your short term debt portfolio.

Bank deposit rates are likely to increase and if you wish to invest in debt then it might be a good time to invest in a fixed deposit or even better a recurring deposit (where you get today’s interest rate committment on money that you will invest later). Off course if you are a punter and want to shift some of your punting money from equity you can consider a dynamic bond fund that plays on such interest rate movements.

Although the media concentrates on the rate announcement a lot more action is happening on the overall policy front which can perhaps change our banking infrastructure for the better. But this is an ongoing development and takes time to unfold. And remember if you are investing systematically in equity you are already buying into this long term story. So just keep investing systematically


I like paying Bank Charges

My son is studying outside Mumbai and I had transferred some money into his bank account for his use. When talking to him I asked him whether the money had hit his account. He told me he would have to visit the bank’s own ATM to check that out. I was shocked that his bank was not providing a SMS alert facility. I asked him to check out the balance on his bank’s mobile app. He told me that as per the bank’s rule the mobile app was made operational only 3 months after the account was opened and for operationalising the mobile app he had to personally visit the bank’s branch. Although he had recently completed 3 months he had not yet found the time to visit the bank’s branch. He also told me he would withdraw the cash only from the ATM of his own bank otherwise there was a stiff charge if he used another banks ATM. I found all this most surprising. What was even more surprising was that my son was not studying in a backward district of India but in Helsinki – which is the capital of Finland, an advanced European country.

This was a revelation to me and I resolved never again to take the services that Indian banks provide for granted again. This was put into context for me when I was involved in a conversation with a journalist regarding the justifiability of banks charging Rs. 850/- as charges for inadvertent bouncing of an issued cheque.  This is among a series of similar conversations that I increasingly seem to be having with journalists. The latest game in town seems to be bankers thinking up ever new ways to charge clients for services that were hitherto free or hiking charges several fold for existing paid services. Whether it is for SMS alerts or for maintaining minimum balance on a monthly basis rather than on quarterly basis or for depositing cash in your account in non home locations or horror of horrors charging you for withdrawing cash at your own bank’s ATMs. Ok the last one is still in the proposal stage but you get the gist of what I am saying.

In their quest for acquiring consumer accounts banks have been providing a lot of technology enabled services which were all provided for free initially. There is off course resistance when the banks now want to charge for these very services. Under normal circumstances consumers would have just shrugged their shoulders and paid the higher charges just like they do for a host of other services. But as the character playing the top shot banker in the bollywood blockbuster Dhoom 3 says “We are Bankers; everybody hates us”.  This negative perception is perhaps justified as most banks still don’t “treat consumers fairly”. There won’t be sufficient column space for listing down all areas but at the risk of sounding like a stuck record charging differential rates from old home loan consumers versus for new home loan consumers is just one of them.

Meanwhile the banks cost structures are clearly under pressure. Changes in regulations and the imminent enforcement of some long standing regulations are pushing up the cost side of their balance sheet apart from the general cost inflation. Think of the interest on savings bank accounts as just one example. From calculating interest on the minimum balance between the 10th and the last day of the month it is now on the daily basis and tahe rate too has gone up. The old calculation method meant that banks effectively paid around 1.50 % only against the nominal rate of 3.50% then. Now even the nominal rate ranges from 4% to as high as 7.50% in some cases. This has significantly increased the cost of funds for the banks. Technology and competition has made products like FDs linked to savings bank products a standard feature rather than a premium product. Then there are a host of old regulations that were blithely being ignored but it may no longer be possible to do so. All this pushes up costs significantly. The high earnings from distributing insurance products have already slowed down and threaten to decrease if they are forced to become “brokers”. The “L” word (standing for Liability) looms on the horizon as banks are justifiably being forced to be more accountable for their actions whether to buyers of third party products through them or victims of online or credit card frauds.

My son who finally managed to start using the mobile app for his Finnish bank reported that it was excellent and almost upto “Indian” standards that he was used to when he was here. It was a pleasure hearing that the service standards of a “developed” country were being measured against “Indian” standards that too by our own, normally critical, Indian citizen.   So in theory to maintain these levels of service it would seem justified for the banks to increase their service charges in line with the increase in costs. But they clearly have an issue in terms of the fairness of their consumer service and need to work on that urgently.

Very few people agree with Oliver Wendell Holmes who reportedly said “I like to pay taxes. With them I buy civilisation”. Even fewer people are likely to say “I like paying bank charges. With them I buy better service”.

Education Loan Dilemmas

I was talking to Jitendra, a friend of my son, who was contemplating a course in a foreign university. He was hesitant as the cost of the course was quite expensive at Rs. 12 lakhs. He could get a loan for Rs. 10 lakhs and pay for the balance from his savings. He was not sure whether it was wise to take an education loan to do the foreign course.


Starting the blogging journey

As I start my journey on my own personal blog I am searching for some profound statements on investment philosphies that will make the start of this personal journey memorable.

As I search the far recesses of my mind I think of the long list of things that I have learnt while dealing with my own finances as well as those of my clients. After a lot of reflection I realise how most of us as Investors make the same mistakes over and over again.

If I was to list down the single biggest issue that I have to battle against, it has been the undue attachment to real estate investment. Somehow the emotional attachment to real estate investments is far higher than even equity investments. We have had clients who have 80% plus of their investments in Real estate and are yet reluctant to shed any of the assets to come to a more reasonable distributions of their investments among the various asset classes. Earlier I used to have a difficult time convincing clients to shed a part of their real estate investments to bring their asset proportions in some order. It is only lately that I have been a lot more successful at this. A series of articles in the press are slowly but surely puncturing the myth so assiduously cultivated by the real estate industry that “Real estate only goes up”. Hoping for something bad to happen to a asset class is not really a good thing but I think we need a repeat of the 1997-2003 drop in real estate prices to happen again for this generation of real estate investors to come to the healthy realisation that like any other asset class , “real estate” too can go down and at times quite precipitiously.

Another mistake that I have constantly battled against is the unwillingness to sell a non performing equity investment at a “loss”. It is amazing how widespread this “aversion to loss” is among investors. I have now developed a technique to counter this. I ask my clients whether they would invest afresh in the same stock if they had cash now. Most clients are quick to say that they would not. After that it is relatively easier to convince them that by continuing their investment in the stock they are doing the exact same thing that they agree they would not.

The other thing that most clients want is a safe way to make money by investing systematically in equity through the SIP route. Somehow they think that SIP is a magical instrument to make money in equities. Most of them then become disillusioned when they find their investments in the negative even 3-4 years into the SIP and stop it. It took a lot of explaining and preparing this simplistic graphical explanantion (click here) before they realise that they have to stay in the journey for a particular period of time and not stop it in between if they want to get the benefits of this investment strategy.

Off course another thing that I have had to battle against is “inertia”. Clients pay good money for the advise, agree with the advise but then somehow don’t find time to implement the advise. Fortunately this is fading as an issue lately.

I could go on and on but I think let me end this inaugural post with my favourite maxim – “making money is a boring activity – akin to watching grass grow “ – more on this in later posts.

For now I await your comments and suggestions and questions…



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