#Fincabulary 11 – Champagne Stock

Meaning:  A slang term used to describe a stock that has appreciated dramatically.

A champagne stock is typically one that has at least doubled or tripled in value in a relatively short period, creating a huge profit for the company’s shareholders. The term is used because individuals who hold such stocks will often order an expensive bottle of champagne to celebrate their good fortune.

WEATHER DERIVATIVES – CONCEPT, CHALLENGES, AND FEASIBILITY

By  Ishan Kekre & Girish C

Introduction

A weather derivative is a tool for managing weather risk. It is a financial contract that allows a firm to hedge itself against unexpected and adverse weather. A weather derivative contract or WD derives its value from future weather conditions. Contrary to stereotypical weather insurance, the payout of this kind of derivative is based on a parametric weather index. For instance, the index could be centimeters or millimeters of rainfall. The index could also be a cumulative frequency distribution of temperatures across many locations. The underlying of WD could also be related to snowfall or hurricanes.

Origin of Weather Derivatives

The weather derivative market as compared to other financial instruments is relatively young. The first transaction in the WD market dates back to 1997. The sector developed due to the severe repercussions of El Niño. These events were forecasted correctly by the meteorological community. Firms that had their revenues linked to weather realized the importance of protecting themselves against seasonal weather risks. Many companies who were in the business of dealing with financial futures and options saw WDs as attractive tools to hedge weather risks.

The insurance sector achieved substantial financial consolidation. As a result, there was significant capital to hedge weather risks. Insurance firms started writing options with payoffs linked to weather events. This, in turn, elevated the liquidity for the development of a WD market. Thus, the WD market evolved over the years into a strong over-the-counter market.

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RISING NPAS IN INDIAN BANKING SECTOR: CAUSES, EFFECTS, IMPLICATIONS AND REMEDIES

By Charudutt Sehgal

Introduction

The economic progress of a nation and development of its banking sector is invariably interrelated. The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. Banks serve social objectives through priority sector lending, mass branch networks and employment generation. Maintaining asset quality and profitability are critical for banks survival and growth. In the process of achieving such objectives, a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA). In India, the problem of bad debts was not taken seriously until it was mandated by the Narasimham and Verma committee. The committee mandated the curbing of the particular issue because NPA direct towards credit risk that bank faces and its efficiency in allocating resources.

The aim of this research paper is to study the current trend of NPAs in Indian scheduled banks (up to 2013-14 only). The paper further examines the critical reasons behind the rise of this issue, its impact on Indian banking sector and Indian economy. In order to understand the criticality of the problem an effort has been made to study what impact NPAs have on ease of doing business rankings. Furthermore, the paper concludes with some of the important measures which if implemented then can improve the current scenario of NPAs in SCBs.

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EFFECTS OF DEMONETIZATION ON INDIAN AGRARIAN ECONOMY

By Pushkar Moni and Purvee Khandelwal

Introduction

The currency (notes) is the most liquid legal tender issued by the RBI which can be used to extinguish a public or private debt. The Indian economy, until 8th November 2016 had an estimated ₹14.18 trillion worth of currency notes in circulation, making India predominantly a cash-based economy. The Indian agrarian economy which is also primarily cash based, and is highly unorganized, has emerged as a source to route black money, back into the system both in terms of tax exemptions and channelling funds to create legitimate funds [1]. According to the Central Board of Direct Taxes, only 3.81% of the total Indian population pay income taxes and it is suspected that enormous sums of money are tied up in illegal transactions that are unaccounted for. These illegal transactions not only form a parallel economy in the country but also distort the actual Indian economy. As a countermeasure, the Government of India hitherto referred to as GoI, enacted to demonetize (strip a currency of its legal status) its currency notes of 500 and 1000 denomination. These denominations accounted for 86% [2] of the total currency in circulation. This paper intends to highlight the effects of demonetization on the Indian agrarian economy.

Impact of Cash Crunch on Agriculture

Agriculture is primarily a cash based sector with large capital input. This sector contributes about 15% to the Indian GDP and employs about 49% of the total workforce. The real growth rate of the sector is reported to be 1.3% [3]. This low growth rate is usually attributed to the droughts experienced in the past two years.

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EFFECTS OF DEMONETIZATION ON THE FINANCIAL SECTORs OF INDIA

By The Editorial Board of TJEF

(Anil Shankar, Gandhali Inamdar and Isha Varma)

Introduction

Demonetization has been the buzz word since November 8th 2016 when our Prime Minister made the historic announcement about the decision to discontinue the 500 and 1000 rupee notes. This historic decision has affected almost all the sectors. Some have benefited while others have suffered. This paper intends to analyze the effects of demonetization on the major financial institutions and the Indian economy in general.

Effects of Demonetization on Banking sector

Since the advent of asset quality review (AQR), there has been a rise in the number of NPAs. To get an idea, the GNPA of banks is 6 lakh crore as of June, 2016 which is 8.2% of the total loans1. These are only the NPAs as there are an equal number of restructured loans which might transform to NPAs in future.

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Figure 1: Total NPAs as of March 2016, Source: Finance Ministry

A recent data provided by the Finance ministry, which has been depicted in Figure 1, shows that 5.3 lakh crore of the 6 lakh crore NPAs are under the public sector banks. It’s clearly visible that there has been a rise in the NPAs from October 2015. This can be attributed to the ever greening of loans which led to the creation of a distorted picture of the banks. Though the asset quality review led to the identification of such NPAs which were previously classified as standard, the problem of NPAs existed since the 2008 financial crisis but remained hidden due to the above mentioned reason.

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Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.

Conclusion:

Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.