All we need is a little finance

 

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Aditya Soni, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Too many people have too little an idea about finance. Why would they? The fact that it could not even find a place in our schools’ syllabus is enough to tell us about the importance we give to a tool everyone is sure to be affected by. A result of this neglect is blind criticism. Because people have little knowledge about finance it is often seen as a devil’s lair. Bubbles and busts, scandals, frauds, recession – the reasons to hate finance are many. Work in Goldman Sachs and the world promptly labels you as greedy, unconscionable and even promiscuous. I wonder why no one hates physics. After all, did it not lead to the invention of nuclear bomb?

The point is, few people realize that our lives have been made so easy as a result of some brilliant financial innovations. Imagine if no one had come up with the idea of a common paper currency. We would still be struggling with the barter system, stuck in the stone ages for an eternity. So where did the idea of paper currency come from? No, it was neither some brilliant economist nor a powerful king. As all financial tools have, this too had its birth amidst the common folk. Remember the time when gold was used as a measure of value? To buy anything you needed some set amount of gold coins. The problem was that there was no secure place to store the gold and as a result, theft was rampant. As a result, people sought to keep their gold with the goldsmith, who had a strong and reliable safe. The goldsmith, in turn issued a ‘receipt’ which could be shown later to withdraw the gold. The line scripted on that piece of paper still lives with us today- “I promise to pay the bearer the sum of x Rupees”

Imagine if lending was never invented. No one could buy a house or start a business if they did not have the required resources beforehand. Historical records tell us that Cattle were often lent to other members of the family and society. But why would people give away their wealth for others to use? For goodwill, initially. However, the creditors soon realized that the cattle were multiplying and the offspring were kept by the debtors themselves. It seemed almost as if a cost was being levied on the creditors for doing good. Therefore, now if someone lent 10 cattle, he wanted more than that after a fixed time period. This lead to the birth of interest rates.

In the 17th century, another innovation in Amsterdam, Netherlands changed the world as we know it. World’s first stock exchange, the Amsterdam Stock Exchange was founded in 1602 with the Dutch East India Company becoming the first to issue stock. The consequence of this innovation was that companies could now raise more capital than ever before which enabled them to operate at never-before-seen scales. The era of multinational behemoths had begun. People could now own a part of a company and have a share in its profits. They began to trade the piece of paper certifying their share in the company with each other and it gave rise to the price of that share. The price would go up and down with the performance of the company because that decided how much profits the shareholders were going to get. Soon, everyone in Europe realized the power of the stock market. The Dutch East India Company (traded as VOC) became the largest trading company in the world with a fleet of 4,785 ships. In contrast, its nearest competitor the British East India Company had only 2,690 ships and a mere one-fifth the tonnage capacity as VOC. The shareholders too made a killing as VOC paid an annual dividend of 18% for almost 200 years!

There are a number of other innovations in finance which have changed our lives for good- insurance, limited liability, futures and options, etc. These are just some examples of how wonderful inventions in finance are and how they have shaped the journey of mankind.

Now the question arises that aren’t these very innovations responsible for creating all the financial crises we faced? Let me ask a different question. Were the Wright brothers evil and wrong in inventing the airplane when MH370 happened? The point is, we cannot isolate the good from the bad. We need to take a holistic view and strive to make the system better. Will there ever be a perfect financial system? Of-course not, because finance is all about people and people are complex. As we evolve, so will finance and we need to ensure that it happens. So the next time you see a Goldman banker, think before you label her greedy or materialistic. She might be changing the world!

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Realty sector losing sheen?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Sudeep Banerjee, EMBA 2015-18, Vinod Gupta School of Management, IIT Kharagpur


It has been quite some time that real estate sector in India is constantly faltering. This adds to the prospective buyers delight who could not afford their dream homes earlier because of the high prices. According to data from various consultancy agencies, property prices are going through a lot of ups and downs which is making constructors worried.So, is the real estate market heading for a crash? Let’s try and analyze.

Real estate sector is broadly classified into two segments, one is the residential segment and another is the commercial segment.It is the commercial segment which is facing heat the most.The inventory of unsold flats are piling up.From the year 2010 till the year 2013, there has been a growth of 12% in the prices of the residential flats which slumped to mere 1.7% since the year 2013 and till now.

In the April-June quarter of 2013,house prices fell in 22 out of 26 cities and there are reasons for that the primary reason being the strict monetary regulation due to high inflation.Inflation made homes not affordable for buyers but the developers kept on building housing projects. As a result, supply was too high but demand decreased which ultimately led to the price fall of real estate market. The fiasco deepened when the Reserve bank of India (RBI) advised banks to exercise caution in financing purchases. That means the builder must agree to pay the interest for a certain period or till the possession of the property by the buyer.That also imposed the regulation on banks that the disbursal of loans should be at par with the construction. Banks are advised that disbursal of the loan amount should be based on the completion of the housing project.Also, Modi government’s strict decision to uncover black market has also shortened the extent of investment in the realty market. Earlier, their has been a lot of black money involved in this market and it has been a major reason behind the housing bubble. All of these combined together are creating shortage of money for the developers.

The real estate investors sentiment has been hit hard by recent slowdown in prices.The short term investors are freaking out and have started selling their houses which they have bought as an investment. Though the long term investors are still holding on. Desperate developers are throwing away lucrative offers to the buyers that includes bigger discounts and freebies. RBI has recently suggested the real estate players to bring down their prices to attract buyers so that the real estate market does not crash.

From my point of view,it is highly unlikely that the real estate prices will come down by 30-40% because that can happen only when the economy is in recession. But since the Modi government took control,Indian economy is doing quite well, GDP is growing at a good pace, inflation is down and foreign investments can be seen in almost all sectors.Apartments that are not affordable right now might witness demand when the income of the buyers increases in the next 2-3 years.
So, it’s better to wait and watch while the storm settles down.

References :

Economic Times (24th August 2015), Business Today

First monetary policy review coming up this Tuesday

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Apurv Patel, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur


RBI is going to review the monetary policy for current fiscal year coming Tuesday. This will be the first bimonthly review of the current financial year and nothing out of ordinary is being expected to come out of this review.

Experts believe that repo rate will remain unchanged at 7.5 per cent. Vinod Nair, head of fundamental research at Geojit BNP Paribas Financial Services, said and I quote “Not expecting any rate cuts this time, not for another one or two months, it is very difficult this time with retail inflation increasing, the RBI would also like to look at the public sector banks’ distressed loans restructuring issues during the last quarter”. Meanwhile, industry chamber Ficci said on Sunday that any cut in interest rates would not be “adequate to stimulate investment in manufacturing” given the lack of “significant change in demand conditions”.

I believe a cut in repo rate is not in order at least for another two months especially considering the fact that we had one in the month of January earlier this year. However I think there is still a need to focus on ways to reduce inflation and the policy changes RBI comes up with for it are going to be very critical.

Reference: http://timesofindia.indiatimes.com/business/india-business/RBIs-first-policy-review-of-fiscal-on-Tuesday/articleshow/46814934.cms

An alternative available to Public Provident Fund (PPF) now

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Apurv Patel, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur


Government has recently launched a new scheme sukanya samriddhi account, which like Public Provident Fund (PPF) is intended to provide means of making savings to cater to future needs of children. Here are some important facts to know about the sukanya samriddhi sccount, which can be availed only in name of a girl child.

  1. Sukanya samriddhi account can be opened in name of a girl child not older than 10 years.
  2. An investment of up to Rs. 1.5 lakh can be made per account per year whereas in PPF, the limit is Rs. 1.5 lakh for all accounts combined.
  3. Sukanya samriddhi account can be closed when girl reaches the age of 21. If not closed after this maturity period, the balance will keep earning interest.
  4. Sukanya samriddhi account allows deduction in tax upto Rs. 1.5 lakh.
  5. As opposed to PPF, sukanya samriddhi account does not allow partial withdrawal.
  6. The interest rate for sukanya samriddhi account will be decided anew for each financial year. For 2014-15, sukanya samriddhi account is fetching higher interest than PPF.

Considering these features of sukanya samriddhi account, I believe sukanya samriddhi account is similar to PPF in some ways but there are a couple of critical differences between them. I think the PPF is more flexible as it allows partial withdrawal facility whereas sukanya samriddhi account does not but it is providing higher returns than a PPF account.

So I think it’s essentially a tradeoff between flexibility and slightly higher returns as far as PPF vs sukanya samriddhi account is concerned. It’s nice however that there is a healthy option available to the consumers other than PPF for savings purposes.

Reference: http://profit.ndtv.com/budget/sukanya-samriddhi-account-vs-ppf-10-things-to-know-746367?pfrom=home-topstories