July 2012 – OneMint

A look at some key terms before the RBI announcement tomorrow

This post is written by Shiv Kukreja

RBI is in a dilemma again. On the one hand, inflation is not coming under control, rise in the prices of vegetables, cereals, milk and oil have been making headlines in newspapers for the last many months, on the other hand, India’s economic growth is slowing down at a faster pace than most experts expected.

In fact nobody expected India’s GDP growth rate to fall so dramatically. Many research houses and brokerages have already cut their FY 2012-13 forecasts for India’s GDP growth. Last time, the consensus was that RBI should cut rates, and this time, largely the consensus seems to be that RBI won’t cut any rates.

As a common man many of us wonder what all these measures are and how these measure actually make an impact in an inflationary environment and also on the growth of an economy. Here is my effort to make you understand this jargon and its impact.

Cash Reserve Ratio (CRR): Scheduled Commercial Banks (SCBs or simply banks) in India are required to maintain an average cash balance with RBI, as a proportion of their total deposits. E.g; If CRR is 5%, Banks are required to deposit the first Rs. 5 with the RBI out of their total deposits of Rs. 100 and then use the remaining Rs. 95 for their investment and lending purposes. Banks are mandated to deposit this amount with RBI on a fortnightly basis. CRR is 4.75% at present.

Purpose and Impact: Say, if your after-tax monthly income is Rs. 100K and you are required to keep Rs. 5K out of it with your father, then your remaining disposable income is Rs. 95K. RBI plays the role of a father here. CRR is a tool used by the RBI to control the liquidity in the system. So when there is excess money floating around, RBI will raise the CRR to suck out the excess money. On the other hand, if there is a credit crunch, RBI cuts the CRR to release money into the system.

Statutory Liquidity ratio (SLR)

It is the proportion of deposits that SCBs are required to maintain in cash or gold or government approved securities. After keeping the required amount for CRR and SLR, the banks are free to use the remaining deposits for their lending purposes.

Purpose & Impact: SLR, more or less, plays a similar role as does CRR. SLR is determined and maintained by the RBI in order to restrict the expansion of bank credit and like CRR.

Repo Rate (or Repurchase Rate)

This is the rate at which SCBs borrow money from the RBI for a short period of time by selling their securities or financial assets to the RBI with an agreement to repurchase it at a future date at a predetermined price. Repo rate is 8% at present. From banks’ point of view, Repo arrangement with the RBI is like a common man taking a short term loan from a bank.

Purpose & Impact: Higher Repo Rate keeps the demand for funds by the banks in check. Repo rate is the single biggest factor that makes banks raise or lower lending rates on their home loans, car loans etc. You must have read in the newspapers that banks start raising their interest rates within a few days after the RBI raises the Repo rate. Banks do that as their own cost of money rises because of RBIâ€™s actions. They need to maintain their margins in order to keep their profitability intact and show growth to their shareholders.

RBI purposefully raises Repo rate when it wants to discourage Banks to borrow from it and do further lending. This action reduces money flow in the system. RBI raised the Repo Rate by 3.25% (from 4.75% in March 2010 to 8% in December 2011) which made the banks borrow funds at a much higher rate and in turn hiked their lending rates also. An increase in interest rates also makes it more expensive for firms to finance investment. As a result, higher interest rates normally curtail investment. If consumption and investment fall, so does aggregate demand. Lower aggregate demand results in lower resource utilisation. When resource utilisation is low, prices and wages usually rise at a more modest rate.

Reverse Repo Rate

This is the rate at which SCBs deposit their excess money with the RBI for a short period of time. As the name suggests, it is the reverse of a repo (repurchase) agreement. Reverse Repo rate is 7% at present. From banks’ point of view, Reverse Repo arrangement with the RBI is like a common man making a short term deposit with a bank.

Purpose & Impact: RBI raises Reverse Repo rate when it wants to reduce liquidity out of the banking system. Banks would get a higher return on their money parked with the RBI. It also makes banks to offer higher rate of interest on the deposits made by the general public.

Liquidity Adjustment Facility (LAF)

This is a facility extended by the RBI under which banks can borrow money from the RBI by pledging their holding of government securities. Basically LAF enables liquidity management on a day to day basis.

Purpose & Impact: LAF is an important tool of monetary policy and enables RBI to transmit interest rate signals to the market.

Overall Impact of RBI measures:

1) Due to Change in Interest Rates: Overall interest rate environment affects the demand for goods and services. Higher interest rates make it more attractive to save and lead to a reduction in household consumption. It also makes it more expensive for firms to finance investment. If both consumption and investment fall, it leads to a fall in aggregate demand and resource utilization. It results in prices and wages rise at a more modest rate.

2) On Inflation Expectations: Due to reasons mentioned above like lower household consumption and lower corporate investments, a tighter monetary policy should result in lower inflation as it reduces the aggregate demand

3) On Exchange Rates: Normally, an increase in the interest rates should result in a strengthening of the Indian rupee. This is because higher interest rates make Indian assets more attractive from a foreign investorâ€™s point of view. The result is a capital inflow and increased demand for rupee, which strengthens the exchange rate.

The consensus this time is that the near drought condition has made RBI’s situation trickier than before and they are between a rock and a hard place. The policy announcement tomorrow will be interesting, and if they make any rate changes that will be even more interesting and even a little surprising.

Best Bank Fixed Deposit Interest Rates for Senior Citizens

Last week I shared some thoughts on investing after retirement, and in continuing with the theme of retirement, this week I’m going to share some of the best fixed deposit interest rates that banks have to offer right now.

In looking through these rates, I think there is no reason for anyone to accept less than 10% since so many banks offer that and you can open two or more deposits with varying maturities so that you can take advantage of the best rates that banks offer across durations.

I think this list constitutes some of the best fixed deposit rates that are currently being offered by Indian banks. If you know of any banks outside this list then please leave a comment, and Iâ€™ll update the post with your suggestion.

These are the rates in descending order.

S.No.	Bank	Tenure	Senior Citizen Interest Rate
1	Yes BankÂ	15 months	10.60%
2	South Indian Bank	39 months	10.50%
3	Federal BankÂ	1000 days	10.50%
4	Dhanalaxmi BankÂ	500 days	10.25%
5	Lakshmi Vilas Bank	2 year to less than 3 years	10.25%
6	City Union Bank	1 year	10.25%
7	Karnataka Bank	1 year to 2 years	10.25%
8	Indian Bank	1 year to less than 3 years	10.25%
9	Dena BankÂ	3 years to less than 5 years	10.05%
10	Karur Vysya Bank	1 year to 2 years	10.00%
11	Tamil Nadu Mercantile Bank	1 year to less than 2 years	10.00%
12	Vijaya Bank	400 days	10.00%
13	IDBI Bank	1 year to 5 years	10.00%
14	Axis Bank	1 year to less than 5 years	10.00%
15	Indian Overseas Bank	1Â – 5 years	10.00%
16	ICICI Bank	390 days to 5 years	10.00%
17	Kotak Bank	390 Days	9.90%
18	Andhra Bank	3 years	9.90%
19	Bank of India	555 days	9.85%
20	Syndicate Bank	1 year	9.80%
21	Punjab and Sind Bank	500 days	9.75%
22	Corporation Bank	12 months	9.75%
23	State Bank of Patiala	555 days	9.50%
24	J&K Bank	2 years or more	9.50%
25	Allahabad Bank	1 year to less than 2 years	9.50%
26	State Bank of Travancore	1 year to 3 years	9.50%
27	Canara Bank	1 year and above	9.50%
28	Central Bank of India	555 days	9.10%
29	Bank of Baroda	444 days	8.85%

Weekend Links July 27 2012

Short links post today because I don’t want to miss out on watching the Olympics opening ceremony.

Here are 7 great things I read during the week.

Howard Marks: Active Management is the Search For Mistakes (Latest Memo)

Worlds’s Lightest Material: Aerographite Might Hold the Key to a Battery Revolution

Greenlight Q2 Letter to Investors

London Eye to be transformed into Twitter sentiment pie chart during Olympics

BuzzFeed’s Strategy

Economist has a brilliant chart on median age of cabinet ministers and populations

Tongue in cheek: John Kay – The Parable of the Ox

Enjoy your weekend!

I got screwed every time I got a pay hike

A friend said this to me today, and I burst out laughing because I thought he was joking, but it turns out he was quite serious. He told me his story, and I think a lot of people will be able to relate to it, and perhaps recognize the same behavior in their own self and avoid making the mistake.

My friend did his school and engineering from a small town in India, and joined an IT company in the late 90s. He started off with a small pay and his hard work and middle class ethos helped him make the most of it and live a happy life.

After a few years, he got stock options, and that changed everything. He had this notional wealth against his name, and that made him spend more freely than before and as a result, he had to borrow small amounts from his friends every now and then to keep up with the spending, and what seemed like small innocuous sums ate into all the money he got from his stocks when they vested.

This was a bitter lesson because his classmates who joined the same company were buying tangible things like a car or a bike with the money whereas he had nothing to show for it.

Life went on, and he got back to his regular ways but then after two or three years he job hopped twice and got an almost 80% pay hike within a period of 6 months.

He started seeing more money flow in every month, and unfortunately for him, he got a credit card with a limit of close to Rs. 5 lakhs at the time. He got into the habit of spending freely again and before he realized, he had run quite a huge credit card debt and along with his home loan EMI, it was hard to pay off anything but the interest on the credit card.

So for about 10 months or so he paid just the interest on the credit card, but he got really fed up of that and decided that he needs to do something.

So, he took a personal loan and paid off the credit card, and in about one and a half years or so he reduced his personal loan to half as well.

But then, his company decided to send him abroad for a year, and in the three months he had when the decision was taken, and when he did fly out, he ran a big credit card bill again!

Just before leaving, he finally cut up his credit card, and vowed not to get another one ever (a promise he broke shortly thereafter; for the convenience, not the credit) but he is still saddled with a home loan EMI, a personal loan EMI and a credit card EMI.

This is really crazy, but I don’t think it’s all that uncommon, shows that personal finance is as much about behavior as it is about numbers.

India at 2012 Olympics

The London Olympics are going to start shortly and I spent a little time today reading about them in general and India in particular.

There were many things that I didn’t know about the Games and I was surprised by several things that I came across. That is always an indication that it will make for an interesting post so I gathered some of the more interesting things that I came across and created this simple graphic to share here.

I hope this is a nice break from the regular finance topics and rest assured that more normal programming will resume shortly. That said, here is a look at India at the 2012 Olympics.

Here are some helpful links that I found while browsing through this topic.

How to calculate Yield to Maturity of a Bond or NCD

This post is written by Shiv Kukreja

A few days back TCB, one of the regular visitors on OneMint, asked me about the process to calculate YTM of a bond. I wanted to tell him the whole process while replying but that would have been too much for the comments section and therefore I decided to write a post on it.

What is Yield to Maturity and how to calculate it?

Yield to Maturity (or YTM) is the annualised rate of return that an investor earns on a fixed income instrument such as bond or debenture, if the investor purchases the bond today and holds it until maturity. This yield incorporates the yield earned in the form of interest payments and the present value of the principal amount (or face value) of the bond.

In other words, it is the discount rate which equates the present value of coupon payments and maturity amount equal to the market price of the bond. The Yield to Maturity is actually the Internal Rate of Return (IRR) on a bond.

Market Price of the Bond = Present Value of Coupon Payments + Present Value of Maturity Amount of the Bond

Real Example: Iâ€™ll take the real case of 9.95% SBI 15-year bonds to present the process to calculate the YTM. Consider the below mentioned data of SBI bonds for the calculation:

Face Value: Rs. 10000
Maturity Amount: Rs. 10000
Tenure: 15 Years
Allotment Date: March 16, 2011
Maturity Date: March 16, 2026
Coupon/Interest: 9.95% p.a. payable annually (Rs. 995 on the Face Value of Rs. 10000)
Interest Payment Date: April 2nd every year
Market Price: Rs. 10788.56 (July 23, 2012)
Remaining Tenure: 13 Years and 236 Days (or approx. 13.65 Years)
YTM: To Be Calculated

YTM is the discount rate in percentage which is going to make the present value of Rs. 995 payable every year on April 2nd and the present value of Rs. 10000 payable on March 16, 2026 equal to the market price of Rs. 10788.56.

In equation terms:

Rs. 10788.56 = Rs. 995/(1+YTM)^0.65 + Rs. 995/(1+YTM)^1.65 + Rs. 995/(1+YTM)^2.65 + Rs. 995/(1+YTM)^3.65 + Rs. 995/(1+YTM)^4.65 + Rs. 995/(1+YTM)^5.65 + Rs. 995/(1+YTM)^6.65 + Rs. 995/(1+YTM)^7.65 + Rs. 995/(1+YTM)^8.65 + Rs. 995/(1+YTM)^9.65 + Rs. 995/(1+YTM)^10.65 + Rs. 995/(1+YTM)^11.65 + Rs. 995/(1+YTM)^12.65 + Rs. 10995/(1+YTM)^13.65.

The discount rate which makes LHS = RHS is the YTM of the bond. Now, we will have to use the â€œTrial and Errorâ€ method to determine this YTM.

There is an approximation formula to calculate YTM very close to the correct YTM:

Approximate YTM = [(Coupon Payment + ((Face Value – Price)/Years to Maturity)] / (Face Value + Price)/2

How to calculate YTM using a financial calculator?

We can also use a financial calculator or an excel sheet to calculate YTMs. Here is the link to one of the financial calculators:

http://vindeep.com/Corporate/BondYTMCalculator.aspx

You just need to feed your data in the boxes provided on the left hand side of this calculator and it will calculate YTM for you after just couple of clicks. You can observe here that you cannot make changes in the boxes on the right hand side and these boxes calculate the required figures on their own.

Maturity Date: 16/03/2026
Coupon: 9.95%
Coupon Payment Frequency: Annual
Maturity Value of bond: 100
Interest Accrual Start Date: 16/03/2012
Clean Price: 104.3656
Settlement Date: 23/07/2012
Ex-Dividend: No
Day Count Basis: Actual/Actual

â€œSettlement Dateâ€ is the date on which you are calculating the YTM. In our case, it is July 23, 2012 or July 25, 2012 (a couple of working days after todayâ€™s date) and click on â€œCalculate Bond Yield (YTM)â€ after filling the first five boxes of the financial calculator. â€œDirty Priceâ€ should be equal to the â€œMarket Priceâ€ of the bond but we cannot change it on our own. So, in order to change it, we need to change the â€œClean Priceâ€.

To calculate the correct clean price, we need to deduct the â€œAccrued Interestâ€ of Rs. 3.52 from the market price Rs. 107.89. The resultant figure is Rs. 104.37 and when we put it in the sixth box and again click Calculate Bond Yield, we get the correct dirty price of Rs. 107.89. â€˜Ex-Dividendâ€™ box should remain â€˜Noâ€™ and â€œDay Count Basisâ€ should be â€œActual/Actualâ€. Now we get the correct YTM as 9.3509%.

How to calculate YTM using excel?

We can calculate the required YTM using the â€˜Yieldâ€™ function in an excel sheet also. As we did it using financial calculator, we just need to feed the data here in a similar way. Start by typing “=Yield” (without the quotes) and then enter the following parameters:

Settlement: â€œ23/07/2012â€ (must be in quotes) [Note: This assumes that your Excel is setup to take date format in DD/MM/YYYY, if it doesn’t work, try MM/DD/YYYY)]
Maturity: â€œ16/03/2026â€ (must be in quotes)
Rate: 9.95% (or 0.0995)
Pr: 104.3656 (Clean Price)
Redemption: 100 (Maturity Amount)
Frequency: 1 (Interest Payable Annually)
Basis: 1 (Actual Days since Last Interest Payment/Actual Days in a Year)

You can check that the data we have entered here is quite similar to the data we entered using financial calculator. Actually the financial calculator uses excel itself in the background to calculate YTM. Here we get the YTM as 9.3571%, a bit different than we calculated above. That is probably due to the rounding-off differences of â€œAccrued Interestâ€ while working on the financial calculator.

You can similarly calculate â€œYield to Callâ€ and â€œYield to Putâ€ also, which are regular features of corporate bonds issued in the developed markets. But, here in India, call/put options are not used extensively so Iâ€™ll try to write a post on them whenever the need arises. If I missed something here or there is something which is incorrect or require explanation, please leave a comment.

Three thoughts on investing after you retire

For some reason, lately,Â there have been a lot of questions about retirement planning and what to do with the money you get after retirement, and I think this topic deserves a mini series. Today, I’m going to write about three things that have been on my mind about this. Before I begin, for context, here is the full comment that prompted this post.

biswas July 10, 2012 at 7:37 am [edit]

There are many articles on how to plan for retirement.It will be nice if you can discuss on how to plan once one is retired.I am likely to retire in couple of months.I will receive a large lump-sump amount.I donâ€™t know what to do except for FD.An article on this topic will really be appreciated.

As someone whose retirement is still a few decades away it is hard for me to really get into the shoes of someone who is retiring in a couple of months, so I’m going to write about three lessons I’ve learned from my elders who have already retired and made some good and bad financial decisions.

1. Don’t seek excitement in the stock market: A few years ago when online trading had still not caught on, it was quite common to go and sit in your broker’s office and execute trades. I used to go to my grandpa’s broker at the time and was surprised at how many retired folks “play” the market. In the end, none of them made any money, and most lost quite heavily, so if you’re seeking excitement in the stock market, that’s the last thing you want to do with your retirement savings.

2. Lock in your money in big investments: Someone in our family who was retiring soon told us over dinner that his elder brother who retired many years before him gave him this advice, and I think this is perhaps relevant to a lot of families.

His elder brother told him that over the years his retirement savings had been eaten away by giving small gifts and loans to people in need and the fact that people knew he had the money, made them approach him and talk him into sharing it with them.

He suggested that one way of avoiding this situation is to put your money in places and in chunks where it really hurts to give them away, breaking a fixed deposit of Rs. 5 lakhs is a lot more painful than writing a check for Rs. 50,000 from your savings account. Sounds like great words of wisdom to me.

3. No one knows any secrets: A friend’s dad only invests in post office schemes and bank fixed deposits and he is never tempted to make great returns on a swanky new insurance product or the stock market or anything else that’s hot at the moment. His philosophy is simple, there is only so much money you can make with money, so don’t get sucked into dreams of doubling or tripling your money in a year or two. No one knows any secrets.

When you think of all the smart people that invested with Madoff and never chose to question his returns, it’s obvious that there was an implicit assumption that somehow Madoff knew a secret that the rest of the market didn’t. That kind of thinking is at least part of what led them to believe in the Ponzi scheme. I think it’s wise to assume that no one knows any secrets, specially when dealing with all your retirement savings. Playing it safe is better than assuming that someone has access to a golden goose that he’s willing to share with you.

Finally, since I didn’t talk about any products, here is a link to an older post with a list of some safe investments that seem appropriate for this situation.

CIBIL TransUnion Credit Score – Role in a Loan Application Process

This post is written by Shiv Kukreja

If you have taken a home loan and have been paying your EMIs quite regularly without even a single default, then it is highly likely that the next time you require any car loan or a credit card, you may be able to secure any of them with quite an ease, that too at a lower rate of interest and probably get your bank to waive the processing charges also. Why is it so and how is it possible? Iâ€™ll try to share all of that with a series of posts about it.

What is a Credit Information Bureau and how it functions?

A Credit Information Bureau (CIB) is a repository of credit information of all the customers of bureauâ€™s members, which includes banks, financial institutions, non-banking financial companies, housing finance companies and credit card companies. Members share this credit information of their customers with CIBs on a monthly basis so that their database gets regularly updated.

CIBs collate only credit information i.e. information on loans such as home loans, automobile loans and personal loans and information on credit facilities such as overdraft facility and credit cards. They do not have any details of customers’ savings accounts, fixed deposit accounts or other such investments which constitute the liability portfolios of banks or financial institutions.

At the same time, CIBs disseminate the information to these same lenders, as per their requirements, helping their credit underwriters to make effective credit or lending decisions. These lenders use this information to generate Credit Information Reports (CIRs) and Credit Scores.

CIBs are also also known as Credit Information Companies (CICs). In India, RBI regulates these bureaus. In 1999, RBI proposed setting up such kind of CIBs and start operating. First of such CIBs – CIBIL was set up in 2000. In November 2008, RBI allowed FDI of up to 49% in credit information bureaus, with a ceiling of 10% of the total voting rights for any single investor group.

What is CIBIL and which other CIBs are there in India?

Credit Information Bureau of (India) Limited, or popularly known as CIBIL, became the first such organization that started collating credit information contributed by its members and maintaining records of an individualâ€˜s payments pertaining to loans and credit cards.

CIBIL was incorporated in 2000 with State Bank of India (SBI), Housing Development Finance Corporation (HDFC), TransUnion and Duns & Bradstreet (D&B) acting as its founding members and in a due course, the shareholdings got diversified to include many other banks and financial institutions. It started with a paid up capital of Rs. 25 Crores.

Founding Shareholding:

Current shareholding pattern.

Apart from CIBIL, there are three other credit information bureaus operating in India at present – Equifax, Experian and High Mark. But a large chunk of market share is with CIBIL only as it started collating data quite early and this is the reason I have decided to focus on the working style of CIBIL and the parameters it uses for this purpose.

What is a CIBIL TransUnion Score and what is its significance?

CIBIL TransUnion Score is a score measured out of 900 which provides a lender with an indication of the â€probability of defaultâ€ by an individual based on their credit history. This score suggests lenders the pattern of an individualâ€™s credit usage and loan repayment behaviour.

Your CIBIL TransUnion Score is like your marks in any competitive entrance exam, say like CAT entrance exam for MBA. A higher score in the exam (credit score) do increase your chances of getting admission into a good B-school (getting a loan approval) but doesn’t guarantee it unless you do good in your interview, group discussion and Ex tempore (your income, years of employment, debt burden, age etc). All these things should fit with a lenderâ€™s internal credit policy before oneâ€™s loan application gets the final approval.

CIBIL TransUnion Score ranges from -1 (or NH) to 0 (or NA) and 300 to 900. Loan providers used to prefer a credit score which was greater than 700 and over the years their preference has gone past 750 now. The closer the borrowerâ€™s CIBIL TransUnion Score is to 900, the more confidence the lender will have in borrowerâ€™s ability to repay the loan and hence it becomes more likely that the loan application will get approved and the better would be the terms offered by the lenders.

Without a Score, the lenders would treat all loan seekers equally, probably charge a higher rate of interest to all the borrowers. In other words, the entire class of students (borrowers) getting a punishment for the mischief played by a few (defaulters).

Though I did not find anywhere what â€˜NHâ€™ or â€˜NAâ€™ stand for in CIBIL TransUnion Score terminology, I assume the full form of NH to be â€œNo Historyâ€ and NA to be â€œNot Applicableâ€. An applicant gets a score of NH or -1 when he does not have a credit track record at all and a score of NA or 0 when his credit track record is less than 6 months.

As per CIBIL, a credit score of NA or NH is not a bad thing at all. These mean one of the below:

1) One does not have a credit history at all or enough of a credit history to be scored, i.e. the applicant is new to the credit system.

2) One does not have any credit activity in the last couple of years.

3) One has just add-on credit card(s) and no direct credit exposure in his/her own name.

If a person has never used a credit card or taken a loan, then there will not be any relevant credit score for a lenderâ€™s reference. The eligibility for a loan, in that case, will be based on oneâ€™s income, years of employment, age, etc. That means, if you did not appear for the CAT entrance exam then the B-schools will judge your abilities and give you the admission on the basis of your marks in 10th, 12th or college exams and other factors such as interview, group discussion, Ex tempore etc.

This was the first post on CIBIL Credit Score system and Credit Information Report. Iâ€™ll soon come back with some more details to throw some more light on this unique system of keeping record of an individualâ€™s credit history.

Coming Soon:

What is a CIBIL Credit Information Report (CIR) and what is its significance?
Â How to check your Credit Score and purchase the Credit Information Report?
Factors affecting your Credit Score and Can a Credit Score be improved?
How to get the discrepancies corrected on my CIR? and some cases of customer disputes.

Weekend Links July 20 2012

First let’s start with a great story that Hemant shared about his experience with Club Mahindra and the lesson learned from it. The comment section on this post is quite amazing too and I’m sure many people will find similar examples of their own too.

I was really shocked to see that MCX has sued Ajay Shah who is perhaps the only noteworthy Indian economist blogger. These type of stories make me feel that blogging in India is just not worth the trouble it is.

Mani gets inspired by Satyamev Jayate and writes about rewiring with retirement planning.

Microsoft posts a rare loss writing off goodwill on a previous purchase.

RP Seawright writes about investor’s 10 most common behavioral biases.

WSJ writes about how financial advisers are helping out their customers by doing things that you wouldn’t normally associate with planners like negotiating car sales.

Finally, see why the end of the Great Wall of China is called Laolongtou Great Wall, or â€œThe Old Dragonâ€™s Head.

Enjoy your weekend!

Shriram Transport Finance Corporation NCD Issue

This article is written by Shiv Kukreja

Shriram Transport Finance Corporation will be launching the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue size is Rs. 600 crore including a green-shoe option of Rs. 300 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements. The issue closes on August 10, 2012.

The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively. What the company has done to make these NCDs attractive for the individual investors is that they will be offered an additional 0.90% p.a. making it an annual coupon rate of 11.15% and 11.40% respectively. This means even if an individual investor buys it from the secondary markets they are going to get 11.15% or 11.40%.

Many of you must have remembered that the company came with a similar kind of issue last year also. Bonds issued last year are currently yielding 11.07% under the 60 months reserved individual option and 12.23% under the 36 months reserved individual option. So, going by these yields, 11.40% and 11.15% is actually attractive for the individual investors.

The investors will have the option to get the interest either paid annually or at the end of the tenure along with the principal. Under the cumulative interest option, retail investors will get Rs. 1,716.15 after 5 years and Rs. 1,373.19 after 3 years for every Rs. 1,000 invested. For all other investors, these amounts stand at Rs. 1,647.90 and Rs. 1,340.10 respectively.

The interest earned would be taxable but the company will not deduct any TDS on it as is the case with all of the listed NCDs. The issue keeps a minimum investment requirement of Rs. 10,000 (or 10 bonds of face value Rs. 1,000) which seems reasonable from the small retail investorsâ€™ point of view.

These bonds will offer reasonable liquidity to the investors as they are going to list on both the stock exchanges – NSE and BSE. Unlike last year, the retail investors will have the option to apply these bonds in physical form also. All the remaining investors will have to subscribe these bonds compulsorily in demat form only.

40% of the issue is reserved for the Reserved Individual Category i.e. for the individual investors investing up to Rs. 5 lakhs and another 40% of the issue is reserved for the Non-Reserved Individual Category i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue.

A slew of NCD issues had hit the markets last year when companies like Shriram Transport, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest, India Infoline Investment Services etc. came with approximately ten such issues. I must tell you, except Shriram Transport NCDs, all other NCDs listed at a discount and that too at quite a deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They must be yielding higher than 13% even now.

But Shriram group is a quite stable group and the issue has been rated â€˜AA/Stableâ€™ by CRISIL and â€˜AA+â€™ by CARE suggesting that these bonds are reasonably safe to invest. Unlike last year, there are no put/call options available either to the investors or to the company.