The Infrastructure Leasing and Financial Services (IL&FS) contagion is spreading. After mutual funds and non-banking financial companies (NBFCs), it is the turn of the exempt pension funds to be worried about their investment in bonds from the beleaguered institution. The story is: as non-performing asset-laden banks dried up lending to firms, these companies turned to other sources of money as a firm needs working capital to keep the wheels of business turning. Money comes from two sources—extra funds that other firms have and household savings. Institutions such as banks, mutual funds, insurance firms, pension funds, and NBFCs act as intermediaries between households, who are the lenders, and firms who are borrowers. In the IL&FS case, there are bonds that have not kept to the interest payment schedule and were, thus, classified as below investment-grade by credit rating firms. Once that happened, the exposure to such bonds held by mutual funds came to light. Next came the exposure of NBFCs to these bonds.
The average drawing room conversation on the government encroaching on the independence of the RBI tut-tuts over the good guys at the Reserve Bank of India (RBI) getting stamped on by a bully government. Now, the resignation of Urjit Patel has added fuel to the views fire. But I wonder if the conversation would change if the same groups realized what this ‘independence’ or its obverse, the lack of accountability, means to their money. Last week, the RBI announced that new floating rate home loans from banks would be benchmarked to a rate not controlled by banks from April 1 2019. Anybody who has taken a floating rate loan in India knows that as the interest rate cycle goes up, loan rates mostly go up very quickly, but the opposite does not happen. This is not a new problem. I remember flagging the issue more than 15 years ago. It is not as if the RBI has not been aware of the problem of benchmark fixing by banks to cheat retail home loan borrowers. RBI has changed the way the rate is calculated four times in the past 24 years to make it difficult for banks to fix the rate—starting with the Prime Lending Rate (PLR) in 1994 to the Marginal Cost of Funds lending Rate (MCLR) in 2016. But in each case the power to calculate and fix the rate remained with the banks. A power they have mis-used freely at your expense. An internal RBI committee found that banks fixed rates at will.
You may have already got this very enticing WhatsApp or email. It goes like this: “Initiative Q is building a new payment network and giving away significant sums of their future currency to early adopters. It is by invite only and I have a limited number of invites. Click this link to sign up…Initiative Q will succeed only if many people join. The more people invite their friends, the greater the likelihood of reaching the goal of each Q being worth around one US dollar.” You can see the site here: initiativeq.com.
What’s the deal? This start-up aims to replace the current payment systems (currency, credit cards, cash, wire transfers) because they are clunky and costly. There are newer technologies ready to replace them, says the material on the site, but this does not happen because not enough people switch to the new currencies. If a platform was created that enough people in the world on-boarded, then $20 trillion of transactions a year will flow on this new payment system. “Initiative Q is reserving this Q currency for people who join today—the earlier you join, the more Q you can reserve”. And then the killer line: “Think of this as getting free bitcoin seven years ago.”
Starting soon your mutual fund will cost less. The capital market regulator, the Securities and Exchange Board of India (Sebi), has put out rules that further tighten the mutual fund industry norms to take care of the loopholes found and misused by the industry. You can read the circular here. There are four changes that impact you.
One, for costs related to the scheme, mutual funds will now pay only out of the scheme account and not from any other source or account. What was happening was this: some of the bigger fund houses were using their profits to pay commissions to distributors to kick up sales. Remember that after a certain scale, it does not cost much more to run a fund house; so as the fund size grows, costs should actually come down.
It is scary to see your life’s investment shave half its value in a free fall in stock prices. Indian stock market investors saw such an episode starting January 2008. If you had ₹1 crore in an index fund linked to the Sensex as on 9 January 2008, by 9 March 2009, its value was down to just under ₹41 lakh. It is gut wrenching no matter how strong your stomach for risk is. The whole time over the year you were driven by sheer panic to sell as the signals about an imminent global financial crisis caused markets to teeter on the edge and periodically belch out another giant fall in stock prices. Some brave hearts held on to their investments during the bloodbath, married as they were to “long-term” investing. By 4 November 2010, they saw their money recover as the Sensex regained its 2008 peak. The market since has given an 8% average annual return. Who are the people who came out on top and what did they do right? A decade, and nearly another 20,000 points on the Sensex later, there are three lessons that we, as retail investors, can draw from the North Atlantic Financial Crisis that had a trigger point when the $639 billion multinational behemoth Lehman Brothers went bankrupt on 15 September 2008.
Both anecdotes and data seem to suggest that Indian health insurance polices that are bought by us as individuals don’t pay up as much as they should. As we listen to the stories of our friends and family about the run around given by hospitals and medical insurance firms to pay up claims of a hospital bill, we quietly send up a prayer—please let me not be the one whose claim is rejected if I ever need to use my policy. There is increasing distrust in the medical insurance market for privately bought covers. Covers bought by corporations, called group covers, seem to have less problems of claims getting rejected.
The anecdotes are supported by data. A May 2018 working paper, titled Fair Play in Indian Health Insurance has done a deep dive into the sector. The big findings are two. One, claims are not paid as much as they should be. Two, India has the highest complaints rate when compared with other countries.
Depending on what you are reading, you might believe that mutual funds in India, as compared to the rest of the world, are too expensive. Or very cheap. The story goes like this. Mutual Fund tracker Morningstar does a biannual study titled Global Fund Investor Experience Study (GFIES). The 2017 study looks at 25 countries and compares them across four parameters (regulation and taxation, disclosure, fees and expenses and sales). India has an overall grade of average, with a top ranking in disclosure, but a below average ranking in fees and expenses. You can see the study here.