RBI shouldn't force banks to lower rates

The RBI will soon come out with the final guidelines for calculating base rates under the new marginal cost of funds method. Base rate is the minimum lending rate that banks are free to set after fixing a spread over their total costs, which includes cost of funds. Earlier, banks could use either the average cost of funds or the marginal cost of funds method. Most adopted the former; this, according to RBI, has impeded quicker transmission of policy rate cuts to borrowers. When the RBI lowers its policy rate, banks trim rates only on new deposits. Under average costing, the cost of funds takes time to fall. Under marginal costing, the cost of funds will fall more quickly and may force banks to cut rates more sharply.

Forcing banks to reduce loan rates, however, seems retrograde. Given the weak credit offtake and growing pile of bad loans, banks are already finding it hard to maintain their margins.

The new method is likely to pressure margins further. The issue of transmission has been around for decades now. In an attempt to fix it, the RBI has been working with the rate structure for many years now. But not much has changed. Earlier, banks lent at sub-Basic Prime Lending Rate or their reference lending rates to avoid tweaking their benchmark rates.

Now banks prefer to tinker with the spread rather than the base rate. The RBI has already tweaked some norms for base rate calculations. But these efforts are only half the solution.

Instead of micro-managing banks, the RBI should increase retail participation in the bond market. A deeper bond market (where rates have fallen sharply) is necessary to ensure that rates flow seamlessly between markets.

Business Line

Banks, insurers keen on tying up with India Post

The e-mail may have replaced the snail-mail but India Post has survived the numerous obituaries written for it and become much sought-after once again on the strength of its unmatched network.

After being pursued by e-commerce firms for logistics and other support, the country’s oldest postal service provider is now being wooed by banks and insurance companies as it gears up for a debut in the payment banking business. The list of those keen to tie up with India Post includes marquee names like SBI, Bajaj Alliance, IDBI, YES Bank, HDFC and Axis Bank.

There are 17 such banking and insurance companies who have shown interest to use the postal network for delivering their services such as EMI collection and insurance.

According to government sources, these companies want to use the postal network by partnering with the India Post Payment Bank, which got licence from the RBI recently.

Sources close to the development toldBusinessLine that SBI could be the first bank to join hands with the Postal Department. “SBI chief (Arundhati Bhattacharya) and Kavery Banerjee, Secretary, Department of Posts, had a meeting recently and they discussed to work hand-in-hand for providing services to customers,” an official said.

Both the heads — of the largest bank and postal networks — discussed how they can leverage each other’s strengths and help extend financial services to the disadvantaged, the official added.

“There was a discussion also on how a postman can work as a bank agent in far-flung rural areas where neither a bank branch nor a bank agent can go for verification of loans. But with the Postal Department’s help, farmers and students can get loans (for agriculture/education) without much hassle,” the official said.

ATMs at post offices

The official said the government is also working towards banks installing ATMs at post offices; the Department of Posts has a network of 1.55 lakh branches across the country and more than 85 per cent are in rural areas.

But it is evident that the banks are gung-ho about tying up with the Postal Department as they will only stand to benefit. “This initiative will play a pivotal role in bringing a large number of uninsured segments of the country under the safety net and improving the penetration of insurance in the country,” said TA Ramalingam, Chief Distribution Officer, Bajaj Allianz General Insurance.

A tie-up with payment banks like The India Post will provide insurers an opportunity to distribute retail insurance solutions such as personal accident and health insurance policies to their huge customer base, he said.

“This will also enable insurers leverage on the payment bank’s strong distribution network to take insurance solutions to the unrepresented segments in the country, especially in tier-III cities and villages,” he added.

Business line

Punjab National Bank (PNB) Branches to Open a Sukanya Samriddhi Account (SSA) & PNB’s Centralised Contact Number

The Government of India notified the rules for Sukanya Samriddhi Account (SSA) on December 2, 2014, Prime Minister Narendra Modi launched this scheme on January 22 and the RBI issued a circular to all the authorised agency banks on March 11. But, even after a series of such events, no bank was ready to open this account even a few days back. People were returning disappointed from the bank branches where they were told by the branch staff that no such notification/circular was received by them regarding any such scheme.

But, Punjab National Bank (PNB) has now officially started opening these accounts at 1604 of its branches all over India. Though the bank has not provided the list of these 1604 branches which have started serving for this scheme, it has provided a centralised customer care number calling which you can get the address of the branch nearest to your place. The number is 011-25744370.

Here is the link to the website of Punjab National Bank (PNB) on which you will get all the information regarding this scheme – PNB Website Link. Under Public Provident Fund & Govt. Saving Scheme,“Sukanya Samriddhi Deposit Account” is listed. When you click on that, it will take you to the following page – “Features of Sukanya Samriddhi Deposit Account”.

As PNB must be having all the latest information about this scheme, I would like to highlight the features of this scheme once again as given by the bank on its website.

Depositor - For this scheme, Depositor is an individual who on behalf of a minor girl child of whom he or she is the guardian and deposits amount in account opened under this scheme.

Guardian - In relation to a minor girl child, Guardian means:

(i) either father or mother; and

(ii) where neither parent is alive or is incapable of acting, a person entitled under the law for the time being in force to have the care of the property of the minor.

One Girl One Child - Depositor cannot open multiple or more than one account in the name of a Girl Child. Natural or legal guardian of a girl child allowed to open one account each for two girl children.

Under this scheme, natural or legal guardian of the girl child shall be allowed to open third account in the event of birth of twin girls as second birth or if the first birth itself results into three girl children, on production of a certificate to this effect from the competent medical authorities where the birth of such twin or triple girl children takes place.

Age Restriction for Opening of Account - The account may be opened by the natural or legal guardian in the name of a girl child from the birth of the girl child till she attains the age of ten years and any girl child, who had attained the age of ten years, one year prior to the commencement of these rules shall also be eligible for opening of account under these rules. Scheme has been commenced from 02.12.2014.

Documents to Open the Account - (i) Birth certificate of girl child (ii) Address proof (iii) Identity Proof

Maximum and Minimum Deposit - Minimum – Rs. 1,000/- Per Year (thereafter any amount in multiples of Rs. 100). Maximum – Rs. 1,50,000/- Per Year.

Term Period - Deposits can be made till completion of 14 years from the date of opening of the account. The maturity of the account is 21 years from the date of opening of account or if the girl gets married before completion of such 21 years, the operation in the account shall not be permitted beyond the date of her marriage. In other words, No Deposit for the period from 15th to 21st year of account.

Interest After Maturity of account - If account is not closed after maturity, balance will continue to earn interest as specified for the scheme from time to time.

Interest will be compounded yearly and will be credited to account till the account completes fourteen years from the date of opening. Interest for the Financial year 2014- 15 is 9.1% p.a. and for Financial Year 2015-16, it is 9.2% p.a.

In case of account holder opting for monthly interest, the same shall be calculated on the balance in the account on completed thousands, in the balance which shall be paid to the account holder and the remaining amount in fraction of thousand will continue to earn interest at the prevailing rate.

Regularisation of irregular account and Penalty - Where minimum amount of Rs. 1000/- a year has not been deposited, then such irregular account may be regularised on payment of a penalty of Rs. 50 per year along with the minimum subscription of Rs. 1000/- for the year(s) of default any time till the account completes 14 years.

Mode of Deposit - Deposit can be made in cash; or by cheque or demand draft. Where deposit is made by cheque or demand draft, the date of encashment of the cheque or demand draft shall be the date of credit to the account.

Premature Closure of Account - (1) In the event of death of the account holder, the account shall be closed immediately on production of death certificate issued by the competent authority and the balance at the credit of the account shall be paid along with interest till the month preceding the month of premature closure of the account , to the guardian of the account holder.

(2) Where the Central Government is satisfied that operation or continuation of the account is causing undue hardship to the account holder, it may, by order for reasons to be recorded in writing, allow pre-mature closure of the account only in cases of extreme compassionate grounds such as medical support in life- threatening diseases, death, etc.

Pre-Mature Withdrawal - To meet the financial requirements of the account holder for the purpose of higher education and marriage withdrawal up to 50% of the balance at the credit, at the end of preceding financial year shall be allowed but such withdrawal shall be allowed only when the account holder girl child attains the age of 18 years.

Transfer of Account to Other Place - The account may be transferred anywhere in India if the girl child in whose name the account stands shifts to a place other than the city or locality where the account stands.

Closure on Maturity or Before Maturity due to Marriage of Account Holder - The account shall mature on completion of 21 years from the date of opening of the account. But, in case marriage of the account holder takes place before completion of such period of 21 years, the operation of the account shall not be permitted beyond the date of her marriage. In such closure of accounts, account holder will have to give an affidavit to the effect that she is not less than 18 years of age as on the date of closing of account.

Branches Authorized to Open Account - 1604 branches are authorized. Please contact at 011 – 25744370 for address of branch.

In case you do not understand any of its features and have any query regarding this scheme, please share it here, I’ll try to respond to it as soon as possible.

10 Ways to Boost your Self-Confidence

 In my corporate experience I have seen many people with very High IQ not being able to perform and I have also seen several people with mediocre IQ do fantastically well in their lives. 

The biggest determinant for this inconsistency is Self- Confidence.  This is one of the key characteristic of a Leader.  And yes, Self Confidence can be developed. 

The following are 10 ways you can enhance your Self Confidence :  

1. Recognize your fears and insecurities.Bring to the foreground emotions and thoughts that are always present at the back of your mind.
2. Never be ashamed of yourself or to ask for help
3. Talk to your friends and loved ones about your problems. Focus on the things that are creating problems for you and then try to find a way to solve these problems.
4. Know that  nobody is perfect. Even that famous film star  or supermodel have insecurities.
5. Enjoy and celebrate your success. 
6. Discover your talents and then focus on them. We should build on our strengths. 
7. When you feel low, look around you and at the problems that others are undergoing and thank God that he has blessed you with so much more. Believe me, a visit to the hospital or an orphanage can be therapeutic. 
8. Never fall victim to self-pity. It can be very damaging to your self esteem and self confidence. Self-pity promotes us to give excuses to ourselves. Also don't let others pity you; this will only lower your self-esteem and self-confidence.
9. Try to smile as much as possible. A smile will add to your confidence. People are always appreciative of a smile.
10.  Fake it !  Sometimes just pretending to be confident makes you really confident ! You will never know when you will make a transition from pretension to reality.

The Best Motivator

I remember once I was walking around the office (Read : MBWA) , I saw a person sitting on her desk with a clearly despondent face. She was a very good and efficient worker and had a cheerful countenance. I asked her "Hey ! What's wrong ?".  My simple prodding seemed to open a floodgate of tears.

She said  "I have worked so hard for the last one year, I think I have made some difference to my department and my organization... but today, during the appraisal,  I was told that whatever I had done was anyways expected from me.... but was was reminded several times about the one slip which I had made .... " 

An autocratic boss always criticises, never forgets negative performance and takes good performance for granted. It might have worked some decades earlier, but nowadays, leaders have to re- inforce the good things instead of harping on their  inefficiency. 

Human beings crave recognition. 

Money is a great motivator, but middle managers usually do not have much say in changing company policies and monetary aspects, but they do have the power for the real BIG and the BEST motivator - Recognition .

So, how can the people be motivated ? Yes, it certainly is a tough job, as each individual is different and their  keys to motivation also differ.  I am sharing some of the things that have worked for me  : 

• Put it in writing :  Just like you should always criticize in private, you should always praise in public. Verbal appreciation is great , but writing it is even more effective. And always write immediately. Appreciation loses its sheen if it is given late. Appreciation emails work wonders.  And emails can be copied to relevant and appropriate persons. Emails do not need money neither consumes too much time.  

• Awarding an object : In one of my organization,  I had started a ritual of awarding a small figurine - a karate kid in a karate pose.  Whenever a team member did something extraordinary in terms of performance, quality, teamwork or taking initiative, I awarded this figurine to them in my weekly team meeting. And how they loved it !  They proudly displayed it on their desks.  Everybody craved to have it .  I was moved when I met one person a few years back who told me "Ananya, I still have the Karate kid on my desk... It inspires me to keep on doing well ...!" 

• Thank You Notes :  Designate a day in a year where "Thank you " notes will be exchanged. I did it every year on the Thanksgiving week.  Create a small  template for writing the note and specially the reason why they were thanking and let the team exchange it with each other.  It is important tom write the reason for the praise in the praise itself. This concept worked very well in global and virtual teams.  The team in India were thrilled to receive handwritten Thank-You notes from the UK and the US office and the same reaction was there in the US and the UK office when they received the notes from India. This helped not only in recognition but also in team bonding.

• Immortalize their names :  If you have a big office with several conference and meeting rooms,  it is a good idea to name the rooms by the Best Performer of the Year. For Example,  there was a "Ananya Meeting Room" and a "Kevin Conference room" in one of my organization.  This is a really big motivator and the employees remember it forever.  Whenever I visit that organization , I always find some plea to go to the Ananya Conference Room and believe me , it still fills my heart with joy and pride.  And even if the person leaves the organization, they become theirpermanent ambassador !

There are several others .... but more in some later blog ... 

Have you noticed,  none of the above costs money but they really motivate the employee.... 

" A person's name is to that person , the sweetest and the most important sound in any language "- Dale Carnegie. 

Posted by Ananya Das

Taking term plan can be a smart Insurance choice

Term Insurance policies are becoming increasingly popular in India, and for a very good reason. Yet a large number of people still go for traditional plans like endowment plans or money back plans. The appeal of the traditional plans lies in the maturity amounts, if the policy holder outlives the term of the insurance policy. In a traditional plan the policy holder gets a guaranteed amount (also known as sum assured) and a bonus amount. In the event of an untimely death, at any point of time during the term of the policy, the family of the policy holder gets the sum assured. The sum assured is almost equal to the total premium amounts paid over the entire term of the policy. On the other hand in a term insurance plan, while the family of the policy holder gets the sum assured in the event of an untimely death, if the policy holder outlives the term of the insurance policy, then the policy holder does not get a maturity amount (i.e. zero maturity amount)

So the insurance premiums in traditional plans, not only enables the policy holders to get a life insurancecover in the event of an untimely death, but also is an investment for the policy holder on maturity. So it makes perfect sense for investors, or does it? The answer lies in the cover (or sum assured) to premium ratio. But before we examine that, there are several things we should note about insurance.

• The most important objective of life insurance is to provide life cover to the policy holder’s family in the event of an untimely death, not to generate the best investment return


• There are plenty of better investment options that give much better return on investments than life insurance policies


• While insurance premiums qualify for tax savings under Section 80C, there are other investment options, like mutual funds, PPF etc, that also qualify for tax savings under Section 80C


• The more insurance companies add features an insurance policy, higher is the cost and the premium for the policy holder. Plain vanilla insurance policies have the lowest cost and premium

Premiums: Term Plans versus Traditional Plans

The premiums of traditional plans like endowment plans or money back plans are several times higher than term plans, because the traditional plans provide additional features like giving the policy holders sum assured and bonus on maturity of the policies. While actual premiums vary from plan to plan and the age of the policy holder, the table below shows approximate premiums for a certain sum assured for term insurance, endowment and money back plans offered by Life Insurance Corporation of India. The age of policy holder is assumed to be30 years and the term of the life insurance policy is assumed to be 20 years.

The table above clearly shows the huge difference in premiums between the three plans, for the same sum assured. While apparently it seems that based on returns, Endowment plan is the best and Term plan is the worst, the key here is the premium for different plans. The Term Plan charges the premium only for protection purpose and not for investment purpose, while Endowment Plan and Money Back Plan charges premium for both protection and investment purpose. From a return point of view, however there are much better options than insurance plans. Let us examine, with the help of a small case study.

Case Study

Let us assume there are three policy holders, Suresh, Rajesh and Ramesh. All three of them are 30 years old and have the same income and risk profile. All of them want a life cover of Rs 20 lakhs. All three want to maximize tax savings under Section 80C of Income Tax Act. However, each of them takes a different approach:-

• Suresh opts for an endowment plan from an insurance company with a sum assured of Rs 20 lakhs. For this policy, he pays a premium of Rs 1 lakh every year and maximises tax savings


• Rajesh opts for a term plan with a sum assured of Rs 20 lakhs. For his term policy, he pays a premium of Rs 6500. To maximize his tax savings, Rajesh invests Rs 93,500 in Public Provident Fund on an annual basis


• Ramesh opts for a term plan with a sum assured of Rs 20 lakhs. For his term policy, he pays a premium of Rs 6,500. To maximize his tax savings, Ramesh invests Rs 93,500 in Equity Linked Savings Scheme through a monthly systematic investment plan

In the event of an untimely death, each of their families will get Rs 20 Lakhs as life cover. However, if they survive the term of the insurance (20 years), the returns look very different. See the chart below for amounts invested by Suresh, Rajesh and Ramesh, and the maturity amounts in Rupees Lakhs.

• Suresh will get a post tax maturity amount of Rs 35 - 39 Lakhs, assuming a 5 – 6% investment return (based on historical returns)


• Rajesh will get a post tax maturity amount of Rs 50 Lakhs, assuming a 8.7% compounded annual interest rate on PPF (based on PPF interest rate in 2013 – 2014)


• Ramesh will get a post tax maturity amount of Rs 1.25 crores, assuming a 15% annualized return fromELSS (based on 15 years performance from top performing ELSS)

The reason why Rajesh and Ramesh’s maturity corpus is bigger than Suresh’s is due to the fact that only a small fraction (only about 6%) of their investment goes to buying life cover, the balance in invested in instruments like PPF and ELSS, that give much higher returns than endowment plans.

If Suresh opted for a money back plan, his maturity amount would depend on how he re-invested Rs 4 Lakhs that he received from the insurance company. He may have used the money for his expenses, like a lot of investors, in which case his total maturity amount would be even lower. Even i he re-invested the money back in PPF or ELSS, his returns would be lower than Rajesh or Ramesh, due to compounding effect.

Conclusion

A term plan is the purest form of insurance and is a straightforward protection policy. Endowments and money back policies will offer a return of between 5 to 6% per annum. Considering the term of these policies (20 or 25 years), this return is very low relative to other investment options available, like PPF or ELSS. Also due to the higher premiums of the traditional plans, policy holders in these plans tend to be under-insured. Investors should consider buying a term plan purely for insurance purpose and invest in long term investment products for their financial planning objectives.

Advisorkhoj

How to identify pre-2005 currency notes?!

This note has the year of printing clearly printed in the middle of the bottom row on the backside.

The Reserve Bank of India (RBI) has announced its plans to withdraw all currency noted issued before 2005. Financial experts believe that the move is largely aimed at removing fake or counterfeit currency embedded into the financial system as well help uncover the big black market currency in the country. While the motives of RBI are unquestionably good, there has been some quantum of confusion amongst the general public as to whether the notes they have would need replacement or not. Read on to find out if the currency notes in your pocket or ones stashed in your locker needs to be changed.

Identifying Pre 2005 Currency Notes: Currently the Reserve Bank of India prints currency notes in the denomination of Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 1,000. All the notes printed before the year 2005 do not have the year of printing marked on it. All currency notes printed post 2005 have is year of printing clearly printed in the middle of the bottom row on the backside of the note. If your bank note has no year of printing on the back, it means the note is printed before 2005 and needs to be exchanged with the bank as per the RBI deadline. All notes with the year of printing indicated on the currency note would stay in operation as all of them are posted after 2005.

This note has the year of printing clearly printed in the middle of the bottom row on the backside.

Possible Reasons for Withdrawal: The possible reasons for the withdrawal of old currency is more to do with streamlining the number of currency variants than anything else. Of course the government is worried about the inflow of fake currency and hopes to tackle it by using all notes printed post 2015 which are far more technically superior and difficult to print for fake currency mongers.

How to Exchange Old Currency Notes: So now that you have identified your currency notes and shortlisted the ones that need to be changed, a simple exchange procedure is revealed by the press release of the Reserve Bank of India. First things first, there should be no reason to panic whatsoever as the RBI has clearly stated that all old notes would continue to be completely legal and can be exchanged at any bank after April 1, 2014.

An old (pre-2005) note without the year of printing. (RBI website)

All public sector as well as private banks have been asked to create a dedicated exchange counter where both account owners as well as non account owners of that bank or branch can exchange their old currency notes for new ones. These exchange counters will become operation from 1st April 2014.If you have a large amount of old currency notes with you, you may want to exchange them, before 30th June 2014. So why is this date important? All exchanges done before 30th June would be unconditional. For any exchange of more than ten pieces of old Rs 500 or Rs 1000 notes after that date would require identity proof and address to be shared with the bank if you are a non customer of that bank.

In Indian so far there has been no official declaration regarding the lifespan of a currency note.

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