GST

securitization

Securitization is a process by which a company clubs its different financial assets to form a consolidated financial instrument which is issued to investors.

Definition: Securitization is a process by which a company clubs its different financial assets/debts to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.

Description: This process enhances liquidity in the market. This serves as a useful tool, especially for financial companies, as its helps them raise funds. If such a company has already issued a large number of loans to its customers and wants to further add to the number, then the practice of securitization can come to its rescue.


In such a case, the company can club its assets/debts, form financial instruments and then issue them to investors. This enables the firm to raise capital and provide more loans to its customers. On the other hand, investors are able to diversify their portfolios and earn quality returns.

Banks will have to unload bad loans to Asset Reconstruction Companies by FY2007' read a leading business newspaper headline sometime back.
A bank selling its bad loans! This might sound strange, but it has been made possible by securitisation.
This article explains the concept of securitisation and how it can change the banking business in India.
The concept
Securitisation is the process of conversion of existing assets or future cash flows into marketable securities. In other words, securitisation deals with the conversion of assets which are not marketable into marketable ones.
For the purpose of distinction, the conversion of existing assets into marketable securities is known as asset-backed securitisation and the conversion of future cash flows into marketable securities is known as future-flows securitisation.
Some of the assets that can be securitised are loans like car loans, housing loans, et cetera and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables.
Suppose Mr X wants to open a multiplex and is in need of funds for the same. To raise funds, Mr X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money.
This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself.
The process and participants
Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, mandates that only banks and financial institutions can securitise their financial assets.
In the traditional lending process, a bank makes a loan, maintaining it as an asset on its balance sheet, collecting principal and interest, and monitoring whether there is any deterioration in borrower's creditworthiness.
This requires a bank to hold assets (loans given) till maturity. The funds of the bank are blocked in these loans and to meet its growing fund requirement a bank has to raise additional funds from the market. Securitisation is a way of unlocking these blocked funds.
Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors.
To free these blocked funds the assets are transferred by the originator (the person who holds the assets, ABC Bank in this case) to a special purpose vehicle (SPV).
The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile.
What this means is that only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities.
These securities issued by the SPV to the investors and are known as pass-through-certificates (PTCs).The cash flows (which will include principal repayment, interest and prepayments received ) received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted.
The difference between rate of interest payable by the obligor and return promised to the investor investing in PTCs is the servicing fee for the SPV.
The way the PTCs are structured the cash flows are unpredictable as there will always be a certain percentage of obligors who won't pay up and this cannot be known in advance. Though various steps are taken to take care of this, some amount of  risk still remains.
The investors can be banks, mutual funds, other financial institutions, government etc. In India only qualified institutional buyers (QIBs) who posses the expertise and the financial muscle to invest in securities market are allowed to invest in PTCs.
Mutual funds, financial institutions (FIs), scheduled commercial banks, insurance companies, provident funds, pension funds, state industrial development corporations, et cetera fall under the definition of being a QIB. The reason for the same being that since PTCs are new to the Indian market only informed big players are capable of taking on the risk that comes with this type of investment.
In order to facilitate a wide distribution of securitised instruments, evaluation of their quality is of utmost importance. This is carried on by rating the securitised instrument which will acquaint the investor with the degree of risk involved.
The rating agency rates the securitised instruments on the basis of asset quality, and not on the basis of rating of the originator. So particular transaction of securitisation can enjoy a credit rating which is much better than that of the originator.
High rated securitised instruments can offer low risk and higher yields to investors. The low risk of securitised instruments is attributable to their backing by financial assets and some credit enhancement measures like insurance/underwriting, guarantee, etc used by the originator.
The administrator or the servicer is appointed to collect the payments from the obligors. The servicer follows up with the defaulters and uses legal remedies against them. In the case of ABC bank, the SPV can have a servicer to collect the loan repayment installments from the people who have taken loan from the bank. Normally the originator carries out this activity.
Once assets are securitised, these assets are removed from the bank's books and the money generated through securitisation can be used for other profitable uses, like for giving new loans.
For an originator (ABC bank in the example), securitisation is an alternative to corporate debt or equity for meeting its funding requirements. As the securitised instruments can have a better credit rating than the company, the originator can get funds from new investors and additional funds from existing investors at a lower cost than debt.
Impact on banking
Other than freeing up the blocked assets of banks, securitisation can transform banking in other ways as well.
The growth in credit off take of banks has been the second highest in the last 55 years. But at the same time the incremental credit deposit ratio for the past one-year has been greater than one.
What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. The growth of credit off take though has not been matched with a growth in deposits.
So the question that arises is, with the deposit inflow being less than the credit outflow, how are the banks funding this increased credit offtake?
Banks essentially have been selling their investments in government securities. By selling their investments and giving out that money as loans, the banks have been able to cater to the credit boom.
This form of funding credit growth cannot continue forever, primarily because banks have to maintain an investment to the tune of 25 per cent of the net bank deposits in statutory liquidity ratio (SLR) instruments (government and semi government securities).
The fact that they have been selling government paper to fund credit off take means that their investment in government paper has been declining. Once the banks reach this level of 25 per cent, they cannot sell any more government securities to generate liquidity.
And given the pace of credit off take, some banks could reach this level very fast. So banks, in order to keep giving credit, need to ensure that more deposits keep coming in.
One way is obviously to increase interest rates. Another way is Securitisation. Banks can securitise the loans they have given out and use the money brought in by this to give out more credit.
A K Purwar, Chairman of State Bank of India, in a recent interview to a business daily remarked that bank might securitise some of its loans to generate funds to keep supporting the high credit off take instead of raising interest rates.
Not only this, securitisation also helps banks to sell off their bad loans (NPAs or non performing assets) to asset reconstruction companies (ARCs). ARCs, which are typically publicly/government owned, act as debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities.
On acquiring bad loans ARCs restructure them and sell them to other investors as PTCs, thereby freeing the banking system to focus on normal banking activities.
Asset Reconstruction Company of India Limited (ARCIL) was the first (till date remains the only ARC) to commence business in India. ICICI Bank, Karur Vyasya Bank, Karnataka Bank, Citicorp (I) Finance, SBI, IDBI, PNB, HDFC, HDFC Bank and some other banks have shareholding in ARCIL.
A lot of banks have been selling off their NPAs to ARCIL. ICICI bank- the second largest bank in India, has been the largest seller of bad loans to ARCIL last year. It sold 134 cases worth Rs.8450 Crore. SBI and IDBI hold second and third positions.
ARCIL is keen to see cash flush foreign funds enter the distressed debt markets to help deepen it. What is happening right now is that banks and FIs have been selling their NPAs to ARCIL and the same banks and FIs are picking up the PTCs being issued by ARCIL and thus helping ARCIL to finance the purchase. A recent report in a business daily quotes , Rajendra Kakkar, ARCIL's Chief Executive as saying, "We have got a buyer, we have got a seller, it so happens that the seller is the loan side of the same institutions and buyer is the treasury side."
So the risk from the balance sheet of banks and FIs is not being completely removed as their investments into PTCs issued by ARCIL will generate returns if and only if ARCIL is able to affect recovery from defaulters.
A recent survey by the Economist magazine on International Banking, says that securitisation is the way to go for Indian banking.
As per the survey, "What may be more important for the economy is to provide access for the 92% of Indian businesses that do not use bank finance. That represents an enormous potential market for both local and foreign banks, but the present structure of the banking system is not suitable for reaching these businesses. Securitising micro-loans- bundling many loans together and selling the resulting cash flow- may be the way of achieving economies of scale. One private bank, ICICI, securitised $4.3 million of micro-loans last year. But most Indian banks are more interested in competing for affluent customers".
In closing
Securitisation is expected to become more popular in the near future in the banking sector. Banks are expected to sell off a greater amount of NPAs to ARCIL by 2007, when they have to shift to Basel-II norms. Blocking too much capital in NPAs can reduce the capital adequacy of banks and can be a hindrance for banks to meet the Basel-II norms.
Thus, banks will have two options- either to raise more capital or to free capital tied up in NPAs and other loans through securitisation.

TDS

Tax deducted at source (TDS), as the very name implies aims at collection of revenue at the very source of income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.” Its significance to the government lies in the fact that it prepones the collection of tax, ensures a regular source of revenue, provides for a greater reach and wider base for tax. At the same time, to the tax payer, it distributes the incidence of tax and provides for a simple and convenient mode of payment.

The concept of TDS requires that the person on whom responsibility has been cast, is to deduct tax at the appropriate rates, from payments of specific nature which are being made to a specified recipient. The deducted sum is required to be deposited to the credit of the Central Government. The recipient from whose income tax has been deducted at source, gets the credit of the amount deducted in his personal assessment on the basis of the certificate issued by the deductor.

The statute requires deduction of tax at source from the income under the head salary. As such the existence of “employer-employee” relationship is the “sine-qua-non” for taxing a particular receipt under the head salaries. Such a relationship is said to exist when the employee not only works under the direct control and supervision of his employer but also is subject to the right of the employer to control the manner in which he carries out the instructions. Thus the law essentially requires the deduction of tax when;

(a) Payment is made by the employer to the employee.

(b) The payment is in the nature of salary and

(c) The income under the head salaries is above the maximum amount not chargeable to tax.

PAN

Permanent Account Number is a number allotted to a person by the Assessing 

Officer for  the purpose of identification. P.A.N. of the new series has 10 

alphanumeric characters and is issued in the form of laminated card.

NRI PIO OCI – What’s the difference?

NRIs (Non-Resident Indians) are Indian Citizens who live in another country.

PIO (Person of Indian Origin) used to be a 15 year visa for non-Indian citizens, but it has since been removed.

OCIs (Overseas Citizen of India) are non-Indian citizens who have a lifetime visa to live and work in India with fewer restrictions.

Balance of Trade vs Balance of Payments

What is Balance of Trade (BOT)

In today’s world, all countries import some goods and services from other countries, and they also export certain other goods and services which are surplus in their country. 

The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country.

If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of tradesurplus, it exports more than it imports.

The balance is said to be favorable when the value of the exports exceeded that of  the imports (i.e.exports exceed imports),  and unfavorable when the value of the imports exceeded that of the exports (i.e. imports exceed exports).

What are the Factors That Affect Balance of Trade

Factors that can affect the balance of trade include:

·         The cost of production (land, labour, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;

·         The cost and availability of raw materials, intermediate goods and other inputs;

·         Exchange rate movements;

·         Multilateral, bilateral and unilateral taxes or restrictions on trade;

·         Non-tariff barriers such as environmental, health or safety standards;

·         The availability of adequate foreign exchange with which to pay for imports; and

·         Prices of goods manufactured at home (influenced by the responsiveness of supply)

Difficulties in Measuring Balance of Trade

Sometimes it is difficult to measure accurately the ‘Balance of Trade’ because of problems with recording and collecting data.  One interesting example is the problem faced when official data for all the world's countries are added up.   It is reported that in such a case, exports exceed imports by almost 1%.   The question which baffles is as to why this difference?  Normally,  both these  should match.   However, it appears that the world is running a positive balance of trade with itself.   This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems.   However, especially for developed countries, accuracy is likely.

What is Balance of Payment

Balance of Payment is a system of recording all the economic transactions of a country, with the rest of the world over a period, say one year.

Typically, the transanctions included in BoP are country's exports and imports of goods, services, financial capital, and financial transfers.   Thus, in nut shell we can say, the BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.

To understand the same better, we can conclude : -

·         The balance of payments (BOP) is an accounting of a country's international transactions for a particular time period.

• Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
• The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.

The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports.

BOP is said to be favorable balance of payments, when more payments are coming in than going out, and will be unfavourable when less payments are coming in than what is going out.

The Balance of Payments Divided:

The BOP is divided into three main categories: (a)  the current account,(b)  the capital account and  (c)  financial account.  Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.

BALANCE OF TRADE VS BALANCE OF PAYMENT  OR BOT VS BOP

(What is the difference between Balance of Payment and Balance of Trade)

Basis of Difference		Balance of Trade (BOT)		Balance of  Payment (BOP)
1. Definition		Balance of Trade is defined as 'difference between export and import of goods and services'		Balance of Payment is defined as the 'flow of cash between domestic country and all other foreign countries'. It includes not only import and export of goods and services but also includes financial capital transfer.
2. How Is It Calculated?		BOT = Net Earning on Exports  - Net payment made for imports		BOP = BOT + (Net Earning  on foreign investment i.e. payments made to foreign investors) + Cash Transfer + Capital Account +or - Balancing Item or BOP = Current Account + Capital Account  + or - Balancing item ( Errors and omissions)
3. When is it considered as  Favourable  or Unfavourable?		If export is more than import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.		Balance of Payment will be favourable, if the country has surplus in current account for paying your all past loans in her capital account. Balance of payment will be unfavourable, if  country has current account deficit and it took more loan from foreigners. After this, it has to pay high interest on extra loan and this will make  BOP unfavourable.
4. Solution of being  Unfavourable		To Buy goods and services from domestic country.		To stop taking of loan from foreign countries.
5. Factors		Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home		Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

Why oil prices keep falling — and throwing the world into turmoil

The year has opened with turbulence on world financial markets, reflecting the interaction between deepening slump, heightened geo-political tensions and growing political instability in virtually every country.

While consumers and the government are cheering the over 50% fall in global oil prices resulting in cheaper petrol and diesel, oil-producing nations are in a quandary. BankersAdda helps you understand the dynamics of this free fall.

The mounting problems in the global financial system are expressed most directly on Wall Street, its apex. US equity markets are on course to have their worst start to the year since 2008. That year culminated in the global financial crisis set off by the collapse of Lehman Brothers in September.

Yesterday, the Dow was down by 130 points—a decline of 0.8 percent—following a 331-point decline on Monday.

The most immediate factor behind the fall on Wall Street was a further decline in the price of oil, with West Texas intermediate falling below $50 per barrel and Brent, the global benchmark, approaching that level. Since June, the price of oil has declined by more than 50 percent.

What has been the trend in oil prices?

Since 2010, global oil prices have stayed above $100 a barrel level. Among the reasons attributed to this trend was the higher consumption patterns by importing nations like China and India. Also, the geopolitical tensions in nations like Iraq and Libya too kept the prices high. As oil producing nations could not keep up with the demand, prices soared and hence the spike was attributed to this gap. Till June 2014, the global oil prices were hovering at $115 a barrel in contrast to the present levels of $52-53 a barrel.

What has been the impact of the sudden fall in global oil prices?

While the trend has cheered most oil guzzling and importing nations like India, China and Japan, the unexpected fall has also caused havoc for oil producing nations, including the top Gulf producers and also other countries like Russia and Venezuela.

Why a sudden fall in oil prices?

By 2014, the world oil supply was on track and in line with the demand. However, over the past few years, countries like the United States and Canada in order to reduce their over dependence on imported oil started exploring other alternatives such as shale gas. Shale usage in US and Canada coupled with the weakening of economies in Asia and Europe led to a sudden fall in oil demand. So while producers, including the major oil producing Gulf nations, resorted to higher production, a weaker demand led to the fall in oil prices. From September onwards, crude oil prices have been plummeting and have fallen to more than 50%.

Did OPEC play any role in combatting the fall in oil prices?

As oil prices continued to slip onwards of September 2014, experts and analysts hoped that OPEC – group of major oil supplying countries including Saudi Arabia and Iran – at its crucial meeting in November 2014 would intervene and arrest the falling trend. However, much to everyone's surprise OPEC did nothing and rather decided against cutting back production. This came as a big trigger and oil prices went into free-fall.

What are the ramifications of this unexpected fall on the global economy?

The free fall in global oil prices has an impact on every country in the world. While for the economies of large consuming nations like China, India, Japan and the US, the fall in oil prices is an excellent news. However, suppliers of oil, including large economies like that of Russia and Venezuela, are facing a potential threat. Most of oil producing nations will face serious unrest if oil prices stay low and the fall continues.

How falling oil prices could affect Russia, Iran, and the US?

The plunge in oil prices is having significant economic consequences around the world. A few examples:

Russia: Russia's situation is getting the most attention these days. The country's is hugely dependent on oil and gas production — with oil revenues making up 45 percent of the government budget — and the sharp fall on prices has been ruinous.

RUSSIA'S ECONOMY IS EXPECTED TO SHRINK 4.5% NEXT YEAR IF OIL STAYS AT $60 PER BARREL

On December 15, the country suddenly hiked interest rates from 10.5 percent to 17 percent in an attempt to stop people from selling off rubles. But those rate hikes are likely to slow the country's economy down even further.

Iran: Iran's economy had recently started to rebound after years of recession. The International Monetary Fund had been projecting that the country was on track to grow 2.3 percent next year. But that was all before oil prices started to plunge — a potentially precarious situation for the country.

One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. If oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back domestic fuel subsidies (always an unpopular move, at least in the short term).

Saudi Arabia: There's no question that Saudi Arabia, the world's second-largest crude producer (after Russia), will suffer financially from cheap oil. If oil stays at around $60 per barrel next year, the government will run a deficit equal to 14 percent of GDP.

The United States: In the US, meanwhile, a fall in crude prices would have more varied impacts. For many people, it will offer a nice economic boost: cheaper oil means lower gasoline prices — which have fallen to $2.47 per gallon, the lowest since 2009.

How does the fall in oil prices affect India?

India imports nearly two-thirds of crude oil requirements. The sharp fall in global crude oil prices will cut down the country's import bill and enable oil marketing companies to reduce retail prices of petrol and diesel. Lower oil prices have also aided government's efforts to keep inflation low and stable besides curtailing fuel subsidies. A lower subsidy bill will help contain the country's fiscal deficit — a measure of the amount the government borrows to fund its expenses — at the budgeted level of 4.1% of GDP in 2014-15. Being the world's fourth-largest oil consumer, India imports around 190 million tonnes of crude oil a year - costing $145 billion a year, or more than a third of its total import bill. With every dollar decrease in oil prices, the government's oil import bill comes down by Rs. 4,000 crore.

Dalal Street takes a hit - The BSE Sensex and Nifty slumped more than 3% on Tuesday, posting their biggest daily loss since the rupee crisis in 2013 as a continued slide in oil prices hit emerging markets, sending blue-chips such as State Bank of India sharply lower.

Foreign Exchange Market - 

Here is a case in the context –

India has a huge demand of petrol and diesel in their economy, to buy fuels from Saudi Arabia India needs a currency that Arab accepts (same as you cannot buy milk by paying wheat anymore). Arab needs dollars to invest and purchase goods from different countries (dollar is the most accepted and sought of currency). So Indian oil companies will have to go to foreign exchange market to buy dollars with rupees.

How the rates are decided-

Now the Indian oil companies go to Forex market to buy dollars for paying fuel bills but the dollar rich institutes citing the opportunity will not release their funds this easily, as they don’t need Rs anymore (due to the unsupportive govt, Inflation and scams in India), The case is same as you fetch a drastically low prices for the junk lying inactive at your home, So this will lead in to extended round of negotiations and the past rate of 55Rs (say) against a dollar will go up to 60Rs a dollar or even more. This will in turn be a reason for rise of transport of goods in India and the final goods that used to come for 10Rs in past will jump to 12 or more hence the prise rise will strike in India leading to inflation.

Decoded: Shale gas

It is a natural gas found in shale formations – a type of rock in the earth's crust. It is being considered as the new source of natural gas as other sources are fast depleting. US is at the forefront of exploring and producing shale gas. It accounted for 39% of its natural gas production in 2012. India is expected to have around 6 trillion cubic metres (tcm) of recoverable shale gas (compared to 1.3 tcm of conventional natural gas). However, production costs in India will be significantly high due to the advanced technological requirements and relatively unknown terrain.