In fin-nitie march 2012

Message from the Convenor
Heartiest congratulations to all of you. With the release of the 7th edition
of the magazine we are getting bigger and better and it gives me immense
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given me an opportunity to work with students and advance forth with the
common goal of learning and practicing finance.

As always, In-Fin-NITIE brings you something new this time around too.
After a series of issues with identified themes and articles related to those
themes, the current issue gave students a chance to just write about finance.
Themes and matching articles aside, this issue has a plethora of written
words by students about whatever caught their eye in the field of finance.

I applaud the effort of team $treet for their unstinting efforts. I hope they
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will entertain you and keep you engrossed about the recent happenings in
the world of finance.

We look forward to your comments and wish to bring out more interesting
issues in the future.

Dr. M Venkateswarlu
Asst. Professor of Finance
NITIE, Mumbai

From the Editor
Patron Against the milieu of rapid urbanization and a changing socio-economic
scenario, the demand for housing has grown explosively leading to tremen-
Dr. Amitabh De dous growth in the Housing Finance Industry that has clocked a CAGR of
about 40% in the last decade. In this edition of In-Fin-NITIE, our authors
Convenor present an Industry Analysis Map of the Indian Housing Finance Market.
Any news about Europe has been making heads turn recently. This edition
Prof. M. Venkateswarlu analyses the dilemma that Poland is currently faced with – whether or not
Editorial Board to join the Eurozone. In this edition we also present a look into the Secu-
ritization Market in India.
Ameeth Devadas In-Fin-NITIE has always strived to distinguish itself and as part of our ef-
Anil Kumar Singh forts to take our publication to the next level, the House of In-Fin-NITIE
Karthik Mahadevan presents articles from eminent personalities of the Financial Industry. This
Keerthi P edition features Quant for a Career: Realm of Opportunities by Prasenjeet
Nimit Varshney Bhattacharya, AVP, ING Investment Management India and Market Per-
Saurabh Bansal spective by Ravi Nathani, NSE Today.
Siddharth Jairath We would like to express our sincere gratitude to everyone who has helped
us in putting this issue together. The In-Fin-NITIE Team values your com-
ments and suggestions. Bouquets and brickbats are welcome at street.nitie@
gmail.com.

Editors
In-Fin-NITIE
© $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 3 3

Contents
www.street.nitie.org March, 2012

Housing Finance
8 Market In India

5 Should Poland
Adopt Euro.? 13 Securitization
Market In India 17 Marginal Standing
Facility By RBI

20 INDIAN WEDDING 25 QUANTITATIVE FINANCE 30 ALUM TALK
PLANNING INDUSTRY Scope and Career Insights By Alum
The Increasing disposable Opportunities in Quants.
Income has further boosted
the wedding Planning Industry

26 MARKET ACTION 31 FIN-QUIZZITIVE
28 TECHNICAL ANALYSIS
Nifty, Commodities Quiz on Finance And
Technical Analysis of
And Currency updates. Banking
Equity Markets.

In-Fin-NITIE Vol 3 4 © $treet-Finance Club, NITIE Mumbai

Should Poland
Adopt The Euro.? By
Harishma Mittal
Vikas Kumar
IMI, New Delhi
Economies are like the game of snakes
and ladders in which a good economic
decision can take you up through the
ladder of success while poor ones pull
you down. Poland is at crossroads
where their decision to adopt euro
can boost the economy take them up
the ladder in the game, however if the
decision turns out to be a bane for the
country, it would result in the economy
becoming a victim of the big, venom-
ous snake called recession. The theme
of this article revolves around the same
snakes and ladders game; I renamed it
as “Euro game”.

Since 2004, when they became a part
of the Euro Union, the debate on this
question has been going on. There
have been two groups, first the modern SUMMARY
and forward looking one which favours the adoption of
euro as they believe it would result in the growth and Poland has been facing the dilemma of joining the euro
development of the economy and the standard of living, zone or not from the time they became member of the
and the second the orthodox and reserved ones believe European Union. Some backward looking nationalists
that it would take away their rights and control on their say that it exposes the country to a very large risk and
economy and would turn out to be a disaster. These losing the control over its currency, while the forward
groups have been mainly formed on political grounds. looking ones say it’s going to aid the country’s growth to
The two parties of their political system, Kaczyński a very large extent.
brothers’ the Law and Justice (PIS) party, which was the Every coin has two sides to it, so does this decision.
previously ruling party was sceptical about rushing into Agreed the benefits are significant and alluring but at
joining and it still believes in taking it slow and weigh- the same time the danger that it poses to the country are
ing the pros and cons, and wanted to go through a ref- manifold. Introduction of the euro increases the trade
erendum on the situation. Whereas, the party currently in the economy and also remove the exchange rate risk
ruling the nation, Prime Minister Donald Tusk’s Civic which is posed on many households and the corporate
Platform (PO), has been intent on adopting it sooner. A who have taken huge loans in euro. Flip side to this is
similar conflict is seen between the people. The support the crisis the country can face by losing the control on
for the euro has been higher in the larger cities while its monetary policy which can help it to fight any reces-
lower in the relatively rural areas. sion considering the fact it has substantial interest rates
to control the currency and inflation. Plus in euro zone
The Governor of the National Bank is of the opinion be- they develop a common a monetary policy which again
lieves that haste could be harmful to the country’s econ- does not add to their advantage.
omy but still suggests that Poland should join in. And so With the above long term effects there are short effects
is the belief of Saryusz-Wolski, who in line with German on the interest rates due to the expectations of joining
Chancellor Angela Merkel’s aims affirmed the necessity the euro zone and also instant changes in the prices on
to change the EU treaty regarding the size of loans that joining them.Adopting the euro is a big decision that
member states can take among themselves, so that “no Poland has to take but they need to judge the conse-
one goes into debt at the expense of somebody else.” quences and also assess the unexpected. They need to
Poland will have to postpone this convergence which they figure out whether the negatives are outweighed by the
were hoping to happen in 2012, owing to the recession positives.

© $treet-Finance Club, NITIE Mumbai
In-Fin-NITIE Vol 3

which has hit the economy resulting in failure in meet- of monetary integration with the rest of Europe. Dif-
ing the conditions set by the European Monetary Un- ferent costs related to zloty / euro exchange rate con-
ADOPTING EURO

ion. To join the game of Euro, Poland will have to qual- nections would be eliminated along with the exchange
ify first. The first of two main barriers (conditions)are rate risk in the trade with countries of Euro zone. The
the requirements of the Maastricht Treaty and secondly exchange rate risk elimination is expected to not only
they have to take part in the European exchange rate have a positive and direct effect on business, but is also
mechanism (ERM II) under the European Monetary been anticipated to remove this type of risk for Poles
System (EMS) for a period of two consecutive years, who normally borrow in foreign currencies to fund large
which means that exchange rate of Poland cannot fluc- ticket items such as infrastructure needs like houses and
tuate more than 15% against the euro during that time. apartments. Since the Euro zone crisis began, the Polish
After swimming through these oceans, other small ca- zloty experienced a decline while losing approximately
nals have the criteria to include an inflation rate of no 1/3rdof its value in relation to Europe’s more stable cur-
more than 1.5 % points above that of the 3 members of rencies and to the dollar. This had a particularly adverse
the European Union showing lowest inflation. The defi- affect on the many Polls who took out mortgage loans in
cit to GDP ratio (i.e. Ratio of the annual government currencies like Swiss francs to buy homes and who, as a
deficit to gross domestic product) must not exceed 3 result ended up paying many thousands zloty more for
percent (or at least be at a level close to 3%) at the end of their new purchases in real terms.
the fiscal year before joining, which currently is 7.9% for
the country. Government debt ratio to GDP should be The main drawback of the adoption of euro in Poland
less than 60% at the end of the fiscal year before joining, is that it would be required to give up its control on its
or should be approaching this figure at a ‘satisfactory monetary policy to the ECB (European Central Bank)
rate’; this condition is being satisfied by achieving a 51% which monitors and controls the situation of all of the
ratio. Finally, nominal long-term interest rates should countries in the euro zone. At a point of time the eco-
be less than two percentage points above the 3 members nomic cycles for different countries can be different,
of the European Union showing lowest inflation. thus requiring different policy which is not possible with
the single monetary policy issued by ECB for all. For ex-
Membership criteria
ample, Poland is still expected to growth in the near fu-
Government Finances ture as predicted by many economists. Therefore, they
annual would do better with a stringent monetary policy with
Gross higher interest rates if they want to have lower levels of
government Long-
Inflation rate government inflation. Whereas, countries with high unemployment
deficit to GDP ERM II term interest rates, it is advised to have loose monetary policy with
debt to GDP
member-ship rate lower interest rates. It is difficult to strike a balance be-
Min. Values tween the two, and the monetary policy would often not
required to be the best for the economy of the country.
become a
member of
the Euro Zone max 1.5% max 3% max 60% min 2 years max 6.0%
Poland 4.8% 7.9% 51% Not a member 4.5%
These targets are very difficult to achieve especially in
the prevailing economy conditions, few countries al-
ready members of the Euro zone are finding it difficult
to achieve them.

European Central Bank even though asked by IMF to
relax its regulations, does not want to do so as after the
euro crisis all the member countries have become very
particular about the countries being added as they do
not want to pay the loans of any other non-performing
country. Every financial decision has two sides to it, the
country has to weigh both the sides and decide whether From the above graph we can clearly see that there is a
the prospect’s advantages surpass its disadvantages or significant in the GDP growth rate of Poland and that of
not. Adopting euro comes with its fair share of pros and the euro zone. Thus, the policies in the euro zone would
cons and both having long-term and short-term effects. be chartered by taking into consideration all the coun-
tries and would not prove beneficial for Poland which is
First, let’s have a look at the bigger picture, the long growing at a higher rate than the members of the zone.
term positives and negatives. Proponents for the adop-
tion of the euro would be the potential benefits that a Once you become a part of the zone you can’t appreciate
common currency will bring, especially the increase or depreciate your currency because it’s a common cur-
forecasted in country’s trade and growth resultant rency which is not under your control.


This is one of the major reasons for the devastation of First, creating a flexible economy is the key. Wages,
prices and the budget must be able to adjust quickly if

ADOPTING EURO
many countries in the zone today such as Greece. Once
you’re a part of it, leaving the zone is not an option for economic circumstances change. Otherwise, with ex-
the countries like Poland as that can result in currency change rate devaluations and interest rate cuts no long-
depreciation to the extent that households and cor- er possible, there can be painful swings in output and
porate would go bankrupt and the banks insolvent, in employment. Poland still has some work to do in these
short a total breakdown of the economy of the nation. structural areas. The budget leaves little room to make
discretionary changes; product market flexibility and
Another front where joining the euro zone would be the business environment are weak compared to other
an area of concern would be increased prices of small euro candidates; and the labour market requires partic-
ticket items purchased on a mass scale named as the ular attention, as confirmed by many studies. Secondly,
“cappuccino effect”. fiscal policy must avoid a pattern of high spending in
Even after the disasters faced by some countries in the good times and low spending at bad times, especially in
euro zone, most experts are in favour of joining the euro the run-up to euro adoption. The windfall of lower debt
zone, with the resultant growth of GDP (especially in servicing cost (as borrowing spreads fall) and revenue
the long term) would far outweigh the criticisms noted buoyancy (as the tax base temporarily surges) is put to
above. better use by reducing public debt rather than increas-
ing spending—even if this entails somewhat less growth
The introduction would also have some short term ef- in the short term. Portugal did the opposite, running a
fects which also should be taken into account before highly procyclical policy around the time it joined the
reaching any conclusion. The short term effects take euro zone. Its boom soon turned into a bust and the
into account inflation owing to the conversion rate. The country has been recording some of the lowest growth
prices in Poland are already rising due to convergence rates in the EU.
process and also the standard of living. In addition to
this, the countries which had joined the euro zone the Portugal’s experience suggests that the “structural” fis-
past had suffered from disproportionate price hikes cal deficit—the deficit corrected for the economic cy-
which were not because of actual inflation, but due to cle—should be well below the 3 percent Maastricht lim-
the disproportionate rise in household goods of small it, especially for countries like Poland where the level
spending which led people to extrapolate other prices of public debt is still high. This would allow the govern-
as well. But healthy competition and wage discipline ment to deal with economic shocks—such as the loss of
brings everything under control. competitiveness experienced by Italy’s and Portugal’s
textile industry—without ending up in the EU’s exces-
There is a lot of excitement amongst the public regard- sive deficit procedure and experiencing a rise in public
ing the euro. The decisions for its adoption are yet to debt.
be taken and it has already started affecting the interest
rates and currency at which households take loans, and Becoming a part of the world’s second largest economy
corporate and the government issue bonds. The lower- does bring large economic payoffs, but this does not
ing of the interest rates to meet the conditions set has mean that they reduce their fiscal deficit to 3% and join-
already resulted in an increase in investments. But this ing the exchange rate mechanism, the two Maastricht
comes with its own bit of risks. criteria that are not met currently. Giving up monetary
policy requires sharpening the remaining tools at the
This lowering of interest would have taken the country policy maker’s disposal--a fiscal policy characterized by
to the euro zone desired interest levels had the econom- small deficits, low debt and flexible spending, as well as
ic boom continued. But the reverse happened result- creating a nimble, business-friendly environment. Now
ing in higher interest rates and a drying-up of foreign it’s for Poland to decide whether they see Euro as a lad-
financing. This anticipation behaviour of euro adop- der which would take them further or a snake waiting to
tion is leading to one more problem, people have start- bite them. And only time can unfold the secrets of the
ed taking loans other currencies than their own. This game, I call it “Euro game”.
would lead to domestic monetary policy gradually los-
ing its ability to influence the economy. Also, borrowing
in foreign currency exposes them to the risk of exchange References:
rate depreciation. Euro adoption would eliminate such
currency mismatches and thus relieve both borrowers 1) http://www.tradingeconomics.com/poland
and investors from the risk that the exchange rate will 2) http://www.tradingeconomics.com/euro-area
move against them. It is thus a win-win situation for 3) http://discoverpl.polacy.co.uk/art,will_poland_
both sides. adopt_the_euro_by_2012,3882.html
4) http://www.imf.org/External/CEE/2007/062207.
Before entering the euro zone, they should protect pdf
themselves by taking measures against the misdoings of
the members of the euro zone such as Greece, Portugal,
etc who suffered during the crisis.


Housing Finance
Market In India

Stuti Dalmia
NMIMS-Mumbai

By
Ankit Goel
IIM -Bangalore
Housing Finance - What is it? on the basis of security but on the basis of careful analysis
The term housing finance has not been defined by any fi- of future expected cash flows and character.
nancial authority or Act. Therefore, when we try to under- Housing Finance is more general as described above and is
stand what is meant by housing finance, it is very much typically granted to credit-worthy individuals with stable
essential to look at the context in which we are talking i.e. income.
developed or developing countries. Micro-Mortgage lies in middle of the above two. It is a
form of low-monthly repayment mortgage lending served
Traditional Meaning by specific institutions formed for this purpose or via tradi-
• Provision of funds to purchase homes tional mortgage-lenders.
• Providing investors a parking avenue for their invest-
ments Need for Housing Finance

Modern Meaning Most countries today have positive growth in population.
• Mechanism allowing funds for production and con- This naturally gives rise to an increased demand for hous-
sumption of housing ing. To ensure stability in prices of housing (and conse-
• Includes money needed to pay for usage vis. rents, quently, all other goods), a city needs to increase its supply
mortgage loans, repayments, developer finance, rental of Housing which can happen in 2 ways:
finance or microfinance • Supply of new housing infrastructure
• Expansion in existing housing supply
Types of Housing Finance Also, particularly important in this context is the need to
For the purpose of this paper, I have considered all three repair or replace of housing which grows too old or too de-
types of housing finance under my purview. However, the teriorated over time.
distinction between the 3 needs to be made clear. Housing problems, more particularly, in developing and
Housing Microfinance refers to the provision of loans to overpopulated countries are very severe.
households which typically do not have a very credible Most urban households cannot afford a decent living space
track record or adequate collaterals. Loans are granted not in a relatively well-connected location. Consequently the
results are:


Table 1: Consumer Finance Products • Squeezing of households in highly dense areas leading

HOUSING FINANCE
to security and hygiene issues
• Living far away from main cities (suburbs) leading to
wastage of economic resources to travel to cities for
jobs
• Renting space in slums or squatter settlements

This is where the economic role of housing finance comes
in. Provision of well-structured finance schemes for the
masses to enable affordability and deep penetration is thus
the major objective of Housing finance.

Allied Objectives
• Backward linked products: Housing finance market is
a very important contributor to the production activity
in any country because its demand directly influences
the demand for its backward-linked products i.e. raw
materials (derived demand) like land building materi-
als, tools and labor.
• Forward -linked products: are the financial markets.
Often through securitization, mortgage debts are of-
floaded in the secondary market in the form of securi-
ties, thereby increasing the efficiency of domestic and
international financial markets. As proved in the reces-
sion of 2008, housing markets are also a great leading
macroeconomic indicator of the financial markets.
• Developmental Impact the developmental impact in-
Table 2: Types of Housing Finance cludes provision of social stability and promotion of
economic development which is directly affected by
level of maturity in housing finance markets

Housing Finance Market Assessment for develop-
ing countries – especially India:

From the micro point of view, fluctuations in the housing
finance market affects the entire household since housing,
in most cases, is by value, the largest investment most peo-
ple make in their lifetime.
From the macro viewpoint too, housing has a major impact
on the economy as was proved in the recent world econom-
ic crisis. Also, it is a significant contributor to GDP in the
form of employment generation (direct and indirect) and
industrialization.

Strengths: Growing Economy
A lot has been written about India’s growing strength as an
emerging nation. I would however, still like to highlight the
following points which have been particularly conducive to
the growth of housing finance in India:
• GDP growth rate averaging over 8% from 2003-2010
• Rapid Urbanization, Rising middle Class
• Increasing political stability with re-election of last
government
• Forex Reserves over $250bn
• 2nd Largest employment generated in housing sector
(after agriculture)
• Fosters development of ancillary industries via strong
Figure 1: Sources of housing finance needs vertical linkages (forward & backward)
• US $110 bn market size

Although Housing finance in India, particularly, is in a very
nascent stage to be able to comment on specific strengths
driving its growth, I have enumerated above some of the
broad factors responsible for the upcoming interest.

In-Fin-NITIE Vol 3

Opportunity: Demand & Supply of Housing has been decreasing over time. The recent figures in this
HOUSING FINANCE

respect are worse.
With the growing GDP of most nations and particularly
India, the demand-supply gap of housing has reached all- Estimated Housing Shortage in India (2007)
time highs.
In most markets, the only available financing resources to
the poor and middle-income groups are:
Rural 14.1 mn units
a) Minor Savings Urban 10.6 mn units
b) Sale of assets
c) Borrowing from relatives or employers Moreover the growth rate in urban areas is clearly above
d) Inheritances that in rural areas signifying the urbanization phase India
e) Loans and savings from money lenders is currently undergoing with more and more people mi-
f) Microfinance Loans grating from the rural to urban areas. Thus, there is a
huge demand-supply disconnect here.
Analyst Research has shown that around 10 to 20 percent
of all microfinance loans taken for business, education, ag-
riculture and emergencies are actually being diverted for
housing purposes. In some cases the figure is as high as 80
percent. This is infact a major evidence in support of the
growing demand for housing finance.
Currently, the only options available to the poor for financ-
ing are microcredits which, unfortunately are inappropri-
ate for housing purposes since they are very short term in
nature and interest rates for this purpose are sky-rocket-
ing. Apart from this, the poor are also in need of allied pro-
fessional services like budgeting, building and monitoring
since they inevitably end up either overspending or with Figure 3 : Mortgage to GDP ratio 2007 (Source: European
much lower quality houses. Some housing finance products Mortgage Federation & Asian Development Bank)
have currently hit the market in India, however, since the
market is in its nascent stage, many are missing achieve- We see that whereas a huge demand for housing finance
ment of the right balance between providing an adequate exists in India, the mortgage/GDP ratio, which is a key in-
long term for repayment and installments to be paid. Vol- dicator of Housing finance penetration, is one of the lowest
umes, which we believe is a key to success in the housing in the world. This naturally is a great opportunity waiting
finance market (since the default risk is fairly spread), will to be tapped.
not be attainable till the products incorporate the sugges-
tions in this paper, mainly the long term maturity needs. Opportunity: Appropriate Segmentation & Target-
Now, let us enumerate as to what can be the requirements ing
of a good housing finance market. In order to achieve success in the housing finance market
at the initial stage, the first requirement is to have a prop-
Table 3: Requisites for an attractive housing finance mar- erly structured product. Since, products in housing finance
ket are customer driven; the most important analysis thus
becomes the proper segmentation of the housing market.
In case of India, I recommend the following segmentation
built on the lines of Australian model.

Thus, in my opinion, the South-East Asian, and particu-
larly the Indian and Chinese market, there is a set base for
the development and flourishment of housing finance busi-
ness. The market though is still in its nascent stage, is still
quite large, and is only expected to head in upwards direc-
tion in the future.

Indian Market: The major problem plaguing the Indian
housing industry is the consistent demand-supply mis-
match in housing as pointed out earlier. The shortage was
23.3 million units in 1981, 22.90million in 1991, ~20 mn Figure 2: Segmentation & Targeting of Housing Finance Mar-
in 2001 and so on. Although a clear downward trend has ket
been visible the fact is that the rate of closure of this gap


Housing finance should be aimed at the lower middle class b) Policy Constraints:

HOUSING FINANCE
and the higher levels of poor in the income pyramid. The
category I have mentioned has been circled in the above di- i. Forex Risk : Most HFC’s turn to foreign loans in or-
agram. A further subdivision in the form of different colors der to refinance the loan burden extended by them. This
has been given i.e. the people having formal employment exposes them to foreign currency risk
and a legal title to land should be the prime target with
most of the long-term housing finance products targeted ii. Default Risk: In most cases, farmers and other lower
at them. income group people fail to provide any sort of adequate
security. Also, in case of farmers we notice that agricultural
Weaknesses land can hardly be mortgaged since in most rural areas
My analysis and the information I collected through my talk clear demarcation of land does not exist. Even if land was
with the managers of HDFC and Axis Bank has revealed 4 distinctly demarcated, land transfer charges are a big hin-
levels of challenges faced by these companies: drance in acceptance of land as security.

Threats : Competition in Housing Finance Sector
The following are providers of housing finance in India, in
one form or another:

1. Commercial Banks: is the largest mobiliser of savings
and also in respect of coverage. Their role has tradition-
ally been limited to providing the working capital needs of
business, industry and commerce and hence, they have not
been very active participants in the housing finance mar-
ket. Another reason for the same is that they are funded by
short-term resources which cannot be profitably employed
in long term lendings.Hence competition from Commercial
banks is very low especially because of their inability and
lack of specialization in providing tailor-made financing
needs for various households.
Figure 4 : Risks and Challenges in Housing Finance
2. Cooperative Banks: A lot of reluctance has been no-
A. EXTERNAL FACTORS ticed by these cooperative banks to provide loans for hous-
The major risks involved in case of housing businesses are ing finance. Our analysis states the major reason for this is
the high risk and illiquidity in giving housing loans from
a) Infrastructure Issues: Insufficient basic infrastruc- common corpus. Hence, even cooperative banks do not of-
ture like lack of uninterrupted and cheap supply of raw ma- fer any significant competition in housing finance.
terials, labor and space or lack of sanitation can spell doom
for the housing sector. 3. Regional Rural Banks: Again, they have not been
b) Government Attitudes: If the government is favor- very active in housing finance sector because of the large
ing an indirect promotion of housing among people, in this amounts and low creditworthiness involved leading to il-
case it will extend support to housing finance companies liquidity and losses.
through credit relaxation, reserve relaxation and so on.
On the other hand, if government directly participates in 4. Agricultural and Rural Development Banks: The
the housing finance market through issue of housing fi- major function of these banks again is not the provision
nance products, there can be no greater bad news for an of housing finance. Consequently, there is low threat from
already established housing finance player. these too.
B. INTERNAL FACTORS 5. Housing Finance Companies: These are companies
with principal objective of lending for housing finance.
a) Lack of capability: Lack of capability as identified by However, the noticeable aspect my research has revealed
me is multidimensional but stems from a common cause is that there are only about 20 companies accounting for
of the housing finance company not being able to judge the greater than 90% of total housing loans provided.
required parameters properly. These are as follows: Hence the industry is very fragmented and given the high
i. Difficulties in matching terms of assets and li- demand for housing credit, there is very little fight for mar-
abilities : since the sources of deposits are mostly short ket share with these.
term in nature for commercial and other banks whereas
housing finance products are mostly long-term in nature 6. Cooperative housing finance societies: These are
ii. Tools to provide for product development and specialized institutions established and subsidized by NHB
evolution: Various tools like internal MIS data of cus- to cater to the housing needs of the masses. They are estab-
tomers and their credit-worthiness, product experts, lead- lished at the State (Apex) Level and at the retail level.
ership etc are a prerequisite for product development in These institutions do not have adequate technical expertise
housing finance. to be able to design the right product for the right target.
Housing finance companies have a major problem in the However, the state subsidy is a major factor in their favour.
sense that they might not have the required access or the Thus, the housing finance market competition in India can
capability (as we move to more and more complex housing be summarized as follows:
products) to maintain such a database.

In-Fin-NITIE Vol 3

SUMMARY
HOUSING FINANCE
Organizations
Threat
providing From the above analysis, we can now draw an Industry
Analysis Map of the Indian Housing Finance Market as
Commercial Banks Medium
follows:
Clearly, from the above analysis we can understand that
Cooperative Banks Low Indian housing finance market is in its nascent stage of
development. Since this is a new formed market for a hith-
Regional Rural Banks Low erto unaddressed product, there will be huge first mover
advantages. The drawbacks stem only from the event of
Agricultural and Rural
Low unfavorable policy changes or uneven competition from
Development Banks state. Both the drawbacks are relatively unlikely on the ba-
Housing Finance sis of government’s current policy trends.
High Hence, we conclude that the Housing Finance market in
Companies
India is very attractive and forms a good case for invest-
Cooperative housing ment.
High
finance societies

References :
1)http://www.hdfc.com/pdf/HDFC-IUHF04.pdf
2)http://rbidocs.rbi.org.in/rdocs/notification/PDFs/71235.pdf
3)http://www.apuhf.info/Presentation/DSouza_HDFC-India_Presentation.pdf
4)Interpretation from Primary Data through interview with bank managers
P.S. : There is no source of any table or figure used, all are based on my understandings and interpretations from the
work I have done in this field


SECURITIZATION
MARKET IN
INDIA
By
Shavi Gandhi
Shashank
IIM-Ahmedabad

Summary

Securitization started in India in 1990s when the
market was characterized by lack of a well-defined
regulatory framework and low investor activity.
In 2006, RBI came up with guidelines to encour-
age activity in this market. Post-financial crisis,
however, RBI adopted a conservative approach and
proposed many modifications to the regulations. Al-
though these changes were based on the lessons As seen in the figure, securitization process allows
from the crisis, they affected the volumes adversely. the originator to package a pool of loans and transfer
This article studies the securitization mar- it to a special purpose entity which then sells securi-
ket in India and the evolution of RBI regulations ties backed by the payments from these loans to the
over the years. It further analyses the impact of investors(I). With the help of this process, the origina-
these proposals and provides recommendations tor is able to:
for the banks to handle the changing scenario. •Transfer the credit from its balance sheet
•Diversify risks associated with the customer loans
With the increase in globalization in post 1990 era, more (like default risk, prepayment risk, credit risk)
and more products and services from the western world •Convert a set of illiquid assets (customer loans) on its
have made their way into the developing economies. Fi- balance sheet into liquid assets
nancial markets have also been affected by this phenom- Moreover, the securities issued in securitization pro-
enon. Many financial tools, which were mainly used in cess are generally rated higher by rating agencies be-
the western financial markets, have come into existence cause of isolation of risk associated with receivables in
in countries like India. Securitization is one such tool. a SPV and thus help the originator to reduce the cost of
It is the process of combining different financial assets capital as compared to traditional methods of financ-
into a single financial product and selling different tiers ing.
of the repackaged instrument to the clients. The process It is these advantages which have made securitized
helps in creating liquidity in the market by enabling products popular financial instruments and have re-
small investors to purchase parts of large asset pool. sulted in the growth of the securitization industry from
Mortgage backed securities (MBS) are one of the most being non-existent in 1970s to a trillion dollar industry
popular examples of securitization products. The follow- today.
ing diagram shows an example of securitization process.
Prod Securitization in India
ucts

Cus t Originator
In India the securitization market came into exist-
ence in 1990s starting with a modest deal of Rs.
Loa n 160million(icra). In the initial days, securitization was
used as a tool for bilateral acquisition of portfolios
Se l l Pa y Cash where the debt simply moved from balance sheet of
Cus tome for l oans the originator to the other entity and there were rarely
Se c. r Loa ns any securities created. The securitization market start-
ed seeing significant activity only post-2000 when the
I SPV
Securitization and Reconstruction of Financial Assets
and Enforcement of Security Ordinance came into ex-
istence. Today it has grown into a market with over Rs.
Ca s h 308,250million (exhibit 4) of issuance volume(icra).
With almost 84% market share, retail loans form the
Fig1: A typical Securitization process major component of the securitization portfolio in In-
dia.


In terms of the product class, asset backed securities are In 2006, in order to encourage securitization in Indian
SECURITIZATION

the most popular product in India (68% market share markets, RBI issued new guidelines which opened the
in 2011, exhibit 4& 5). This is opposite of what has been secondary market for securitized papers. This step en-
seen in developed markets where MBS are more preva- couraged the entry of new investors in the market. The
lent. Although the housing finance market has been guidelines were based on international best practices.
growing rapidly in India, MBS market has not seen With this, RBI expected infrastructure project receiva-
much activity due to the long maturity periods, prepay- bles securitization to grow. The following provisions
ment risk and lack of liquidity. (icra) were added in these guidelines:

Impediments to Growth True Sales Criteria:
Since the cash flow to repay investors depends on the
Low liquidity in secondary market for securitized prod- continued existence and performance of the borrower,
ucts, coupled with factors like limited investor interest bankruptcy of the borrower poses a huge risk to the in-
in loans with longer tenures and preference of banks vestors. Within the true sales criteria, investors got legal
for loan book growth rather than investment in instru- right over the receivables. This reduced the risk asso-
ments, has hindered the growth of securitization mar- ciated with bankruptcy of the borrower, consequently
ket in India. Apart from this, the growth had also been making the securities quicker to market.(Kothari, True
hampered by lack of a clear regulatory framework in the Sale)
initial years. It was only in 2006 that the Indian govern- Credit Enhancements:
ment included securitized debt within the definition of “Credit enhancement refers to one or more initiatives
approved securities for secondary market. (SEBI) taken by the issuer in a securitization structure to en-
hance the security, credit or the rating of the securitized
With the evolution of financial services sector, finan- instrument, e.g., by providing a cash collateral, profit
cial engineers have been devising newer techniques for retention, third party guarantee, etc.” (Kothari, Credit
packaging the assets with an aim to improve the rating Enhancement). This increases the probability that the
of the products. This has led to an increase in complex- investors will receive cash flows to which they are enti-
ity of the process which obfuscates the risks associated tled thereby reducing the cost of financing for the bor-
with the underlying assets and the process of transfor- rower.
mation of these risks. It is this failure to understand and Prior to 2006, maintaining capital on credit enhance-
price the risks appropriately which has been cited as a ment was not mandatory. But the new guidelines speci-
major reason for the recent financial crisis. In Indian fied that the issuer must hold 100% capital against the
context, even though products are simple and the de- credit risk when a credit enhancement is provided, that
fault rate also was very low during the financial crisis, is, every rupee of credit enhancement is secured by a ru-
RBI has taken a conservative approach after the finan- pee. This acted as a hindrance to incentivizing securiti-
cial crisis in formulation of its guidelines for the market. zation in India. In addition to this, the developed world
This has affected the market in a negative manner. followed Basel II norms which mandated a capital re-
quirement of 100% for first loss and, and no special re-
RBI Regulatory Framework quirement for subsequent 50%. Hence the second 50%
held by the issuer required normal capital adequacy re-
The legal framework for securitization in India started quirement only, i.e., 9%. The following table summariz-
taking shape in the 2000s. Exhibit 1 summarizes the es the capital requirement in each case(Kothari, Indian
development of regulatory framework over the years. Securitization Market Scenario):
It began with the enactment of the “Securitization and
Reconstruction of Financial Assets and Enforcement of Before RBI After RBI Guidelines Under Basel II
Security Interest Ordinance” in 2002. The purpose of Guidelines in in 2006
the act, at that time, was to promote the growth of secu-
2006
ritization companies to take over the Non-Performing
Assets (NPA) accumulated with the banks. (Mohandas) Capital 9%*100 = 9 100%*100 = 100 100%*50 + 9%*50 =
However, there were a few restrictions. The act included requirement for 54.5
a limit on minimum term of securities to 6 years and a credit
floor on the interest rate equal to 1.5% plus the prevail- enhancement
ing market rate. These restrictions limited the nature of
the securities that could be used and thus affected the
market adversely(SARFAESI Act, 2002). Figure 1: Capital requirement for enhancement

Exhibit 2 and 3 show the trend in number of transac- The capital requirement grew 11 times after 2006. It
tions and volume of trades respectively in the securiti- was almost double the amount required in the rest of
zation market from FY 2001 to FY 2006. There was a the world. Hence, the securitization market did not
sudden jump in the activity in FY 2002 after these regu- grow as intended. The total volume of transactions (in
lations were passed. Rs. Billion) declined from 308.2 in FY 2005 to 256.5 in
FY 2006 (Exhibit 3).


After the global financial crisis of 2008, RBI adopted a assets securitized during the revolving period, hence

SECURITIZATION
conservative stand and proposed several amendments the default risk increases unless the issuer commits to
to the regulations. It came up with a draft of guidelines comply with the “true-sale” rule in subsequent assets.
for regulatory framework act in 2010 and modified the 3.In case the issuer cannot invest in new underlyings in
same in 2011. While most of the measures are reason- the revolving stage, there is a chance that early amorti-
able and reflect the important lessons learnt from the fi- zation starts. This exposes the investor to reinvestment
nancial crisis, some of them are considered to be harm- risk.
ful for the growth of the securitization market. In fact, RBI guideline issued in 2010 explicitly prohibits revolv-
the market fell by 29% in terms of value and 20% in ing securitization in India(RBI Discussion Paper). But,
terms in number of transactions in 2011. This trend is there is some ambiguity in the clause. The act specifies
shown in exhibit 4. Also, exhibit 5 shows the trend the that revolving securitization is used for un-amortizing
volume of the ABS issued from FY 2007 to FY 2011. assets and this structure will be prohibited. However, it
The following sections provide details of some the can also be done for amortizing assets with short matu-
changes and analyse their impact on the market: rity (like micro finance loans).

Minimum holding period and Retention A blanket ban on the revolving structure would mean
requirement that even amortizing asset class with shorter duration
After securitization was introduced in the second- cannot be securitized. It also implies that revolving
ary market, the loans and receivables were securitized structure for an asset with a good credit rating (and
within weeks of origination. In fact, the loans were credit enhancement) is prohibited. This will potentially
originated for the sole purpose of securitization (“Orig- cause more harm than good. If the asset is amortizing
inate-to-Security” model). This raised suspicions on the in nature, payment variability will not exist if the asset’s
due diligence done by the issuer, increasing the poten- tenure is a short. Also, if the asset has a high credit rat-
tial risk of default. Therefore, RBI proposed to have a ing, the risks are minimal. Therefore, these restrictions
minimum holding period of 9 months on a loan of ma- will unnecessarily prohibit the issuers to raise more
turity less than 24 months, and 12 months for a loan of funds and hence reduce the economic activity.
maturity more than 24 months(RBI Discussion Paper).
However, this restriction impacts assets like microfi- Monoline Insurance
nance loans, gold loans etc. which have a maturity of Monoline insurance, in case of financial markets, refers
less than 1 year and thus bring down the activity in se- to the practice of guaranteeing bonds. Issuers often use
curitization market. the services of monoline insurers to improve the credit
In addition to minimum holding period, a minimum rating of their bond issues. The rating of insured debt
retention of 5% of the underlying assets being secu- reflects the credit worthiness of the insurer. It is a popu-
ritized by the issuer was proposed(RBI Discussion Pa- lar financial tool employed in the developed economies.
per). This, on one hand, ensured that the quality of the But in India this practice is not allowed by RBI. In 2009
securitized portfolio is up to the mark (since 5% of the RBI had issued guidelines which banned banks from
securitized asset was held in the book of the originator), issuing guarantee for non-convertible debentures or
but on the other, affected the securitization market in bonds of corporate firms(RBI Discussion Paper). When
India adversely. a bank guarantees the bonds of a corporate entity, it
basically affects the price discovery mechanism in the
Revolving securitization market. The market price is now based on the guarantee
Revolving securitization is a novel way of securitizing rather than the financial strength of the issuer. This was
short-term assets like credit card receivables. It has seen as detrimental to development of capital market.
been used extensively in the US recently. There are two Therefore, RBI enacted this restriction. Although, this
major cash flow periods associated with the asset: regulation is good for protecting the investors from ad-
1. Revolving Period: During this period, prepayments verse effects of any financial disaster, it also means that
and principal payments from borrower are not distrib- small investors can’t take benefit of securitization. Any
uted to the investors. Instead, the cash flow from these bond issue by small investors are generally perceived to
payments is invested in new loans. be risky and hence the cost of raising capital for them is
2. Amortization Period: After the revolving period, all high even if they go for cash collateral based securitiza-
the payments received from debtors are transferred to tion.
the investors.
This effectively extends the maturity of the issued se- Recommendations
curity when the underlying asset has a short maturity. The draft proposals for the regulatory framework for
This structure of payment has some risks associated securitization market, issued by RBI, in past few years
with it: clearly indicate a conservative stance by the regulator.
1. As the cash is reinvested multiple times in different Some of the regulations are still in discussion stage
assets during the revolving period, the asset quality is while others are already in force. In the past year, nega-
expected to change over a period of time. tive impact has been seen on the issuance
2. The “true sales” criteria might not hold for the new


volume in the market after some of the regulations were with the regulatory intent of avoiding risky and complex
SECURITIZATION

announced. securitized products. At the same time, the regulatory
Given the regulatory environment, banks need to take framework is still in development stage and RBI in the
proactive steps in order to keep up with the changes past has shown willingness to include valid concerns in
and maintain their competitiveness. They should en- the modifications it has issued. Keeping this in mind
sure careful analysis and understanding of the guide- banks can propose following changes:
lines and restrictions imposed by them. In 2009, in case 1.The MRR of 5% proposed in 2010 Act should change
of non-convertible debentures (NCD) issued by Tata it according to the tenure of the loan. It should be higher
was seen that SBI had failed to comply with the regula- for longer duration loans due to greater risks associated
tions issued by RBI and that had resulted in a warning with such loans and the need for a long time investment
from the regulator. These incidents have a negative im- of the issuer in servicing such securitization.
pact on the firm’s image. Moreover, any such violation 2.The restriction of MHP and MRR should not be appli-
in future may attract stricter penalty. cable to the higher quality assets and the securities with
Going forward, banks should align their operations credit enhancements because these assets are already
less risky.

References :
1) icra. Update on Indian Securitisation Market. Retrieved January 2012, from icra.in: http://www.icra.in/Files/ticker/
Indian_Securitisation_Mkt.pdf
2) Kothari, V. Credit Enhancement. Retrieved from http://www.vinodkothari.com/glossary/Crediten.htm
Kothari, V. Indian Securitization Market Scenario. Retrieved Jan 2012, from http://www.vinodkothari.com/Indian%20
Securitisation-Regulatory%20and%20Market%20Scenario.pdf
3) Kothari, V. True Sale. Retrieved from http://www.vinodkothari.com/truesale.htm
4) Mohandas, L. Securitisation. Retrieved 2012, from http://www.bseindia.com/downloads/Securitisation.pdf
5) RBI Discussion Paper. Retrieved from rbi.org: http://rbidocs.rbi.org.in/rdocs/Content/PDFs/DPDG190410.pdf
6) SARFAESI Act, 2002. Retrieved from http://www.drat.tn.nic.in/Docu/Securitisation-Act.pdf
7) SEBI. Developments in the Corporate Bonds and Securitization Markets. Retrieved 2012, from http://www.sebi.gov.
in/Index.jsp?contentDisp=corpstatus
8) Securitization in India. Retrieved from RBI.org: http://www.dnb.co.in/Arcil2008/Securitisation%20in%20India.asp
Reddy, Y. V. (1999). Securitization in India: Next Steps. Seminar on Government Securities Market.Chennai.

Fin Quotes
“YOU CAN’T MAKE A GOOD DEAL WITH A BAD PERSON”

You simply can’t do business with bad people. If you are dealing with a bad person then there isn’t a contract
that’s strong enough to protect you and your company from that person. Spend some time thinking about it.

“NEVER ASK A BARBER IF YOU NEED A HAIRCUT.”

There’s an old Wall Street saying that goes, “Ask a surgeon if you need an operation, the answer is
ALWAYS yes. Ask a dentist if you need a cleaning and the answer is always yes again. Ask a financial
advisor if you need to make changes to your portfolio and the answer is yes.” Many mergers and ac-
quisitions are done on Wall Street because the deal takes on a life of its own. There’s a need to get deals
done because that’s where Wall Street profits come from.

Warren Buffett

“Do not let anyone else run your business, unless you can supervise his performance with adequate
care and comprehension or you have unusually strong reasons for placing implicit confidence in his
integrity and ability. For the investor this rule should determine the conditions under which he will
permit someone else to decide what is done with his money. ”

Benjamin Franklin

In-Fin-NITIE Vol 3 16 © $treet-Finance Club, NITIE Mumbai 16

ANOTHER
GEAR AT HELM:
MSF In RBI Arsenal
Yash Paresh Doshi
MMS Finance
KJ Somaiya Institute of Management

By
Vaibhav Srivastava
Yash Chaudhari
IIFT - Delhi

‘It has been decided to permit banks to avail themselves of funds from RBI on overnight
basis, under Marginal Standing Facility (MSF), against their excess SLR holdings. Addi-
tionally, they can also avail themselves of funds, on overnight basis below the stipulated
SLR, up to one per cent of their respective Net Demand and Time Liabilities outstanding
at the end of second preceding fortnight. In the event the banks’ SLR holdings fall below
the statutory requirement, banks will not have the obligation to seek a specific waiver
for default in SLR compliance arising out of use of this facility in terms of notification
issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.’
-RBI notification for Circular RBI/2010-11/515 dated May 9, 2011

To deal with liquidity and volatility concern RBI recently introduced a new provision called Mar-
ginal Standing Facility under which banks are allowed to avail themselves of funds from RBI on
overnight basis against their excess SLR holdings. Additionally, they can also avail themselves
of funds, on overnight basis below the stipulated SLR, up to one per cent of their respective Net
Demand and Time Liabilities outstanding at the end of second preceding fortnight. In the similar
development RBI also shifted windows for reverse repo and MSF to contain volatility by fixing
them at crucial times during a working day so that banks do not have to go through the call money
market rate for their borrowings or parking of funds. Basel III regimes has come as a major pro-
tective pill after the aftermath of recent crisis where in tier I capital and RWAs ratio are pegged
at different stipulated level along with more constrained leverage ratio. In such, development like
MSF has to be assessed as probable impediment or lever.


Broadening the RBI volatility smile obligations.
In certain ways shifting the window from morning to
‘Liquidity and Volatility’ have always been the prover- evening will also help mitigate the contingencies amongst
MSF BY RBI

bial concern for RBI and draws special affection of it banks over their cash position by then and continuing with
when a rickety situation prevails outside. On the same the same such window positioning will ensure that ‘the
pitch onset of fiscal year 2011-12 was expecting a simi- call rate will not trade above the repo rate in the morning
lar package which was materialized with 3rd may an- and will not fall below the reverse repo rate in the even-
nouncement of introduction of new tool for monetary ing’. Amidst such a volatile period any sort of bracketing
policy makers in the form of Marginal Standing Facility. can be of immense help to decision makers at helm in the
Under this scheme, Banks will be able to borrow up to consuming banks.
1% of their respective Net Demand and Time Liabilities. In the similar development the Marginal Standing Facil-
The rate of interest on the amount accessed from this ity (MSF) window is planned to change from current 3.30-
facility will be 100 basis points (i.e. 1%) above the repo 4.30 pm to 4:30-5:00 PM. Implication and intention is ob-
rate. This scheme is likely to reduce volatility in the vious as banks supposedly approach the MSF window after
overnight rates and improve monetary transmission. exhausting all other sources, so till 4:30 banks can use all
other windows and can get a fair idea of their standing to
Statutory liquidity ratio or SLR is the percentage of to- finally think of MSF.
tal deposits lenders have to keep in government bonds. Not too implicit is the motto of RBI to substantiate the
As per RBI norms, the minimum requirement is 24%. stand of Clearing Corporation of India (CCIL) in lieu of
Many banks, according to market participants, are cur- putting a cap in interest rates in CBLO market that at cer-
rently having excess SLR at around 26-27%.Techni- tain level of implementation includes an obligation for the
cally, a bank sitting on 27% SLR can now pledge those borrower (consuming bank in concerned context) to re-
government securities to borrow overnight money via pay the debt at a specific future date and an expectation of
MSF using 4% SLR (3% + 1% below the 24% mark). the lender to receive the money on that future date and a
charge on security that is held by the CCIL, [4] by demar-
Reasons for above assumption: cating lenders’ demand rate within MSF limits. As normal-
ly banks and mutual funds follow the borrower and lender
Every bank for their per day requirement of capital behaviors respectively in the market, clearly proposition of
adequacy depends on certain sources of capital (bet- the whole move will shift the balance of power from latter-
ter money) raising techniques that in turn depends on to-former direction.
overnight call-money rates and CBLO rates and repo
and reverse repo auctions’ windows in lieu of LAF and Data showing containment of call money rate as
then turn to the money market to deploy surplus funds Reverse Repo and MSF window opens, as on any
or cover any borrowing needs, which results in unusual specific date:
rise or fall in the rates in overnight call and the collater-
alized borrowing and lending obligations.
Banks will now have two options to raise money from Dec 26 (Reuters), Call Money 1700 IST
securitized loan markets in the form of CBLO and MSF.
In anticipation this RBI measure will definitely help TIME (IST) Market range
banks with higher SLR. Moreover, the CBLO rate is now OPEN 09.80-09.85
capped at the MSF rate. 0910 09.75-09.85
To explicate the gravity of this development one fact 0920 09.80-09.85
needs to be stated that ‘Institutions have been borrow- 0930 09.85-09.90
ing over Rs 1.5 lakh crore daily via repo window’. So the 0945 09.80-09.90
new opening can be anticipated to be contributing in 1030 09.40-09.45
Adjustment of Call
somewhat similar magnitude. 1130 09.30-09.40
Money Market Rate
1230 09.30-09.35
according to Reverse
Windows Movement- 1330 09.30-09.35
Repo Window
Recent steps taken by RBI to curtail volatility 1430 08.25-08.30

August 16 onwards RBI decided to hold reverse repo 1530 08.20-08.25
auction between 4:30 and 5 pm on all working days, 1630 08.45-08.55
except Saturdays. This move was hailed with alacrity,
especially after the apex bank discounted its second Li-
quidity Adjustment Facility (LAF) in May, as a move to 1700 08.40-08.50
curtail volatility in the overnight money market.
Along with the current timing of repo and reverse repo Adjustment of Call
auctions under the LAF window between 9:30 am and Money Market Rate
10:30 am, it will help to broaden the opportunity win- according to MSF
dow for the banks to raise money from the fixed cost OPEN : 09.80-09.85 Window
over a market determined window of call money vary- HIGH : 09.90
ing the cost of money according to demand and supply. LOW : 08.20
Banks would then turn to the money market to deploy CLOSE : 08.40-08.50
surplus funds or cover any borrowing needs, which PVS CLOSE: 09.70-09.80
used to result in unusual rise or fall in the rates in over-
Source: in.reuters.com
night call and the collateralized borrowing and lending

MSF in BASEL III regime RBI said MSF can be used as an indicator to impending
liquidity concerns.
‘The MSF window serves as an early warning indicator The major highlights of the draft guidelines are -

MSF BY RBI
of stress in liquidity and the central bank watches it very
closely’. Minimum Capital Requirements
- Subir Gokarn, 1. Common Equity Tier 1 (CET1) capital must be at least
RBI deputy governor 5.5% of risk-weighted assets (RWAs);
2. Tier 1 capital must be at least 7% of RWAs;
‘The stance of monetary policy is, among other things, to 3. The capital conservation buffer in the form of Common
manage liquidity to ensure that it remains broadly in bal- Equity of 2.5% of RWAs.
ance, with neither a large surplus diluting monetary trans- Enhancing Risk Coverage
mission nor a large deficit choking off fund flows.’ 4. For OTC derivatives, in addition to the capital charge for
- Declaration in the policy statement of RBI counterparty default risk under Current Exposure Meth-
od, banks will be required to compute an additional Credit
Every economic downturn accentuates some substantial Value Adjustments (CVA) risk capital charge.
lacunae in the system and subsequently alludes for recti-
fications. Be it Glass-Steagall act of 1933 establishing Fed- Leverage Ratio
eral Deposit Insurance Corporation (FDIC) at the off-set of 5. Banks would be expected to strive to operate at a mini-
the Great-Depression or subsequent Basel I and Basel-II mum Tier 1 leverage ratio of 5%.
reforms, a major change is an inevitable outcome of cri-
ses. No aberration this time again, along with Dodd-Frank Going by this requirement for Basel III and MSF target of
Act, which besides the headline regulatory changes cov- creating excess SLR reserves of 3-4% will help banks make
ering capital investment by banks and insurance compa- enough reserves and with their access reserves they can
nies introduces new regulation of hedge funds, alters the earn substantial return by parking them with lending win-
definition of accredited investors, requires reporting by all dow of reverse repo that can contribute in appreciating the
public companies on CEO to median employee pay ratios reserves whether disclosed or undisclosed. Equipping the
and other compensation data, enforces equitable access to system with tools like MSF will help in bringing down the
credit for consumers, and provides incentives to promote cost of debt considerably for the banks. This ease of pres-
banking among low- and medium-income residents[5], sure will help them provide a space to think and manage
Basel-III is all set to be launched and get adopted by all their equity section better to comply the Basel III norm for
major economies. Minimum Capital Requirement.
Moving further with Enhancing Risk Coverage for OTC de-
Utmost important consideration before delving rivatives, banks dealing with securities with counter-party
deep in Basel III requirement- default risk will seemingly remain unfazed by any such
window or tool like MSF but at far or rather at way back,
Though substantial features in Basel III hovers around of course while choosing derivative that too like OTC, deci-
Tier I capital, that prominently comprises equity and dis- sion making at investment level can be influenced consid-
closed reserves, debt-sources like MSF, CBLO play a vital erably against the like securities.
role determining cost of debt-as a determinant of cost of Finally coming to the leverage ratio part, containing the
equity- inversely, if we abide by Net Income Approach or cost of debt, an indispensible component of leverage, will
up to certain extent by Traditional Approach and posi- affect the ratio in some way or other.
tively, if we abide by Modi Gilliani II Proposition or Net Now which theory to believe and to follow is not a matter
Operating Income Approach. Moreover, liquidity concern of discretion but of time. But having argued that much in
is one aspect that finds prominent place under both the both the regards it is very much evident that one way or
categories like the deputy governor and the declaration of other both the happenings going to affect each other.

References :
1) http://www.rbi.org.in
2) http://schoolofhedge.com
3) http://www.sify.com
4) www.investopedia.com
5) http://en.wikipedia.org
6) www.rbi.org.in
7) Sources: in.reuter.com


Indian Wedding
Planning Industry
- Rajesh Kumar, IIM Lucknow

Summary As wedding industry shoots with burgeoning demand
for lavish events, wedding planning industry gets a
The Indian wedding industry is on a high growth tra- boost for demand of organized and structured plan-
jectory and this makes the event management in this ning services. Wedding planning industry in India is
area a very lucrative business. Importance given to mar- estimated to be growing at 20% per annum.
riage in one’s life and the desire to make it a memora-
ble event encourage people to spend extravagantly. The This industry is also driven by increasing affluence
big-fat Indian wedding is famous across the globe but and rising aspirations among consumers to make
it requires tremendous amount of planning and execu- their wedding unique and memorable. Time con-
tion to make it a grand successful event. Paucity of time straints among consumers towards planning and or-
and resources compel the families to go for professional ganizing weddings have been largely responsible for
assistance for organizing the event. Increasing dispos- the growth in planners. Wedding planners are more
able income has further boosted the wedding planning often seen to indulge in special theme based mar-
industry. riages to give it an edge so that it may stand out from
the rest

Overview of Wedding Industry Wedding Planning Process Management

India is considered to be one of the most sought-after Plannning
wedding destinations around the world. Weddings in • Involves an elaborate description of wedding in
India are fast gaining popularity among global citizens terms of paper work
who flock to the country to solemnize their wedding • Entire event to be organized is recorded on a me-
vows. It is growing at a CAGR of 25% owing to lavish dium
spending. Currently, cost of a wedding may range from • Attention is given to minutest detail
INR 0.5 mn to INR 50 mn. With India becoming a wed- • Creativity and innovation drives this section
ding destination, foreigners are aggressively contribut- wherein planners show their mettle in showcas-
ing to a growing market. Increasing disposable income ing unique themes and event management
is expected to double the strength of the market in the
next 15 years. Theme based weddings and destination Co-ordination
weddings are some of the major trends that the market • This involves discussing the draft of the plan with
has observed. Characterized by social features, wedding the client at length
industry manages to be resilient even to vagaries of in- • Enables clients to have a feel of the final event
flation and recession. • Also allows feedbacks and suggestions from cli-
ent implying room for changes and improve-
ments
20%
Jewellery
• Mutual understanding between planner and cli-
Attire ent gets processed here wherein feedbacks and
Invitation Card suggestions are shared
4% 48%
Venue Décor
4%
Hotels and related items Implementation
8% Mehendi • All plans are executed to the fullest
Others • This means every part of the planning is given
8% attention to so that all arrangements match the
8% level of expectation
• It is here that the execution of the entire project


In fin-nitie march 2012

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