Assignment- CASE STUDY- IFS

Group-1

Deadline submission – 8-4-19

Junk Route to Active Corporate Bond Market
March 31, 2019, 11:05 PM IST ET Edit in ET Editorials | Edit Page, India | ET

The lack of guidelines for investment in lower-rated bonds continues to hamper corporate bond
market development in India. Sebi’s recent circular, however, has streamlined valuation norms
for money market and debt securities rated below investment grade in the mutual funds
industry. With the Insolvency and Bankruptcy Code in place, a regulated market for issue of
high-yield bonds is clearly warranted.

It makes perfect sense for fund houses to standardise valuation rules for, say, commercial
paper and corporate bonds, following an adverse credit event. But, in parallel, what’s required
are clear-cut guidelines for the issue of high-yield, sub-investment-grade bonds for a more
complete corporate bond market. The market today is suboptimal, with corporate bond
issuance characterised by private placements, a rather narrow issuer and investor base, and
mostly held to maturity.

The way forward is to policy-induce a thriving secondary market for corporate bonds for
transparency, disclosure, across various investment grades, and not restricted to bonds with AA
and AAA credit-rating, which can be very opaque indeed, going by the Infrastructure Leasing
and Financial Services fiasco.

The Sebi circular calls for below-investment-grade securities to be valued on the basis of
indicative haircuts provided by credit-rating agencies.
https://economictimes.indiatimes.com/blogs/et-editorials/junk-route-to-active-corporate-
bond-market/
Questions to be answered:
1. Identify the challenges of corporate bond market.
2. Explain credit rating process.
3. Explain the factors considered for assigning ratings to banks and financial institutions,
manufacturing firms

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 GROUP-2
RBI to reform WMA system for states
BY ATMADIP RAY, ET BUREAU | MAR 18, 2019, 08.54 PM IST

http://economictimes.indiatimes.comhttps://economictimes.indiatimes.com/markets/stocks/n
ews/rbi-to-reform-wma-system-for-
states/printarticle/68469530.cms?utm_source=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst
Kolkata: Reserve Bank of India has proposed a rule-based approach in fixing new Ways and
Means limits for the state governments, replacing the previous expenditure-based system. It
will set up a panel to recommend parameters of the new system which is aimed at preventing
automatic monetisation of deficits.

The central bank which acts as debt manager for state governments provides short-term loan
to them to bridge temporary liquidity mismatches. The temporary loan facility is called Ways
and Means Advances.

The proposal was mooted at RBI Governor Shaktikanta Das’ meeting with the finance
secretaries of 25 states and Puducherry. The states have also agreed to link their receipts and
payment systems with RBI’s integrated accounting system (e-Kuber) for greater system
efficiency. It was the first time that Governor Das held discussions with key functionaries of
state governments after assuming office.

Amid states' stressed financial health and overall deteriorating key deficit indicators, issues like
gross market borrowings, the need for greater information dissemination, measures for
widening the investor base and deepening the secondary market in State Development Loans
and the issue of cost of borrowing have also been discussed.
Officials from the ministry of finance, Controller General of Accounts, Comptroller and Auditor
General of India and Governor were present.
Market borrowing by state governments is likely to rise amid deviation from their fiscal
consolidation with increasing stress on state finances following indiscriminate loan waivers.
RBI has several times warned state governments that debt waivers could deflect the state from
its fiscal consolidation path, while state’s fiscal deficit-to-state gross domestic product ratio
continued to be above the FRBM threshold due to shortfall in revenue receipts and higher
revenue expenditure from implementation of farm loan waivers and the pay commission
recommendations on salaries and pensions.
With the higher borrowing requirements, there could be a concomitant impact on borrowing
costs, the central bank had warned last year. RBI’s study on state finances showed that the past
nation-wide debt-relief in 2008 helped in reducing household debt but investment and

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productivity continued to suffer.
As per the revised estimates, states have budgeted for a revenue surplus in 2018-19 and a
lower fiscal deficit. However, fiscal risk emanates for many states with roll outs of farm loan .

Questions to be answered:

1. Explain Ways and Mean Advances

2. Explain how it is different from Cash Management bills.
3. Explain the limitations of Treasury bill market in India.

GROUP-3
RD Vs PPF Vs ULIP Vs MF: How long will it take you to become a crorepati by investing Rs 10,000
per month?

By: Amitava Chakrabarty | Updated: March 29, 2019 7:50 AM

Anyone may become rich by regular and systematic investmentsover a long period as the power of
compounding will do wonder to your investments if adequate time is given.

For retail investors, who don’t have big amount for lump sum investments, becoming crorepati by
monthly saving is like a dream.

Who doesn’t want to be a crorepati in this world? In fact, everybody would like to accumulate a crore
of rupees as soon as possible by investing as much as one can. However, for retail investors, who
don’t have a big amount for lump sum investments, becoming a crorepati by monthly savings is
always like a big dream.
Thankfully, you need not be a rich person to accumulate a crore of rupees. In fact, anyone may
become rich by regular and systematic investments over a long period as the power of compounding
will do wonder to your investments if adequate time is given.
Now, let’s see how the power of compounding and the duration create wonder and make you a
crorepati through monthly investments of Rs 10,000 in some popular investment schemes like
Recurring Deposit (RD), Public Provident Fund (PPF), Unit Linked Insurance Plan (ULIP) and Mutual
Fund (MF).

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Recurring Deposit(RD)
Like fixed deposits (FDs), recurring deposits are one of the most popular options for retail investors in
India. The only difference between FD and RD is that you may invest in a fixed deposit if you have
lump sum money, while in RD, you may invest small amounts of money at regular intervals. So,
monthly RDs are very popular among risk-averse investors. You may open an RD account in a bank or
in a Post Office.
Interest rates on RD vary from bank to bank and the current rate for 5-year RD account is around 7
per cent. Assuming that the current rate will remain unchanged during the investment period, you
may accumulate Rs 1 crore in 28 years by investing Rs 10,000 at the beginning of every month.
Public Provident Fund (PPF)
PPF is a very popular tax-saving option because it bears sovereign guarantee and is secure and also
provides complete tax benefits. A PPF account may also be opened in a bank or in a Post Office.
Unlike RDs, interest rate of PPF is the same across banks and Post Offices as the government decides
the rate on quarterly basis.
Assuming that the current PPF interest of 8 per cent will remain the same over the investment period,
you may accumulate Rs 1 crore in 26 years by investingRs 10,000at the beginning of every month.
Unit Linked Insurance Plan (ULIP)
As the name suggests, ULIPs are insurance plans under which the premium collected is predominantly
invested in market-linked products, including equities and equity-related instruments. ULIPs are
offered by insurance companies as well as by some Asset Management Companies (AMCs) like LIC
MF and UTI.
Assuming long-term compound annual growth rate (CAGR) of 10 per cent, you may accumulate Rs 1
crore in 23 years by investing Rs 10,000 in the beginning of every month.
Mutual Fund (MF)
There are various categories of mutual funds, but equity MFs are considered suitable for long-term
wealth creation. MF schemes are offered by AMCs and are subject to market risks, which directly
affect the return in the short term. However, the long-term returns in MFs are much higher than
fixed-income products in the long term.
Assuming long-term CAGR of 12 per cent, you may accumulate Rs 1 crore in 21 years by investing Rs
10,000 at the beginning of every month.

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Thus, you should invest as per your risk appetite and taking into consideration your financial goals as
well as the time-frame during which you want to accumulate Rs 1 crore.
https://www.financialexpress.com/money/ppf-vs-rd-vs-ulip-vs-mf-how-long-will-it-take-you-to-
become-a-crorepati-by-investing-rs-10000-per-month/1529537/

Questions to be answered:

1. Explain the impact of interest rate policy on the economy-savings, investment and
growth.
2. Explain various savings schemes, nature and their characteristics.

Group-4
Stage ripe for larger RBI rate cut as global and domestic growth prospects worrisome
By: Soumya Kanti Ghosh | Updated: March 29, 2019 1:56 AM

As global and domestic growth prospects look increasingly worrisome, the stage is ripe for a larger
RBI ratecut

A deceleration in global trade growth is also impacting export outlook through the trade channel.

Global growth prospects now look increasingly weaker across China, Europe and the US. Trade
growth, a key artery in the global economy, has also slowed markedly, to around 4% in 2018 from
5.25% in 2017. Crude markets have remained broadly supported, but purely by supply cuts led by
producer group OPEC and by aggressive sanctions by the US against Iran and Venezuela.
A consensus is yet to emerge when the US could turn into a slowdown mode following the yield curve
inversion last week. The average duration of lead months of inverted yield curve and the US economy
slipping into recession is 14 months and average duration of recession is 12 months. By this logic, the
US might plunge into recession by the end of 2019 or early 2020! Interestingly, a plot of Fed Fund
Futures and Market clearly indicates US markets are pricing in a rate cut in second half of 2019.
Rural demand weak at home
Back home, rural demand continues to look increasingly weak. Additionally, latest global forecasts
indicate that El Nino weather phenomenon is gaining strength. Procurement data published by
NAFED suggests procurement agencies could not procure even half of the quantity sanctioned at
MSP, thereby the impact on food prices will continue to remain low. The cash transfer will not impact

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inflation. Even if we assume food price increases by as much as @10%, the CPI inflation will still be
decisively below 4% for most of FY20.
Urban demand worrying, too
Urban demand is also worrying. Even February sales for the auto industry declined to a new low as
weak consumer demand continues into the sixth straight month. A deceleration in global trade
growth is also impacting export outlook through the trade channel.
Investment scenario, as can be referred from orders inflows, has declined in Q3FY19 by 20%. Non-
banking financial companies (NBFCs) with higher exposure to SMEs/ loan against shares and
developer loans are likely to see pain in FY20 also. Credit growth is not broad based and is in selective
areas only. Capex-led growth from listed companies will remain muted and working capital will
remain key to credit growth.
We thus expect at least a 25 basis points (bps) rate cut in April policy (cumulative 50-75 bps over next
two to three policies) though we believe the stage is ripe for a larger rate cut. If the rate cut is of 25
bps only, then Reserve Bank of India (RBI) could indicate more cuts through a possible shift in stance/
policy statement. RBI should also take a holistic approach with liquidity framework as call rates are
liquidity agnostic.
The writer is group chief economic adviser, State Bank of India. Edited excerpts from SBI’s Ecowrap
S
Questions:
1. Explain Liquidity Adjustment Facility.
2. Explain Monetary Policy Corridor
3. Differentiate between NBFC and a bank

Group-5

Unique opportunity for NBFCs and HFCs ro re-engineer their ops for FY20

Published: April 2, 2019 1:38 AM

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The players who are quick to tap market sentiments and curate investor-friendly products will gain
customer confidence and build new relationships to emerge triumphant.

Sensing a unique business opportunity in the current situation, banks are poised to extract their
pound of flesh by hiking rates and seeking higher risk participation from even tiered players.

By Sanjay Chamria
Non-banking financial companies (NBFCs) in India constitute a key frontier of economic stability by
functioning outside the purview of the formal banking system. Since September 2018, capital access
constraints have hampered operational competencies of NBFCs and driven the need to inject liquidity
into their systems. As NBFCs have been grappling with higher borrowing costs and tighter liquidity
positions over the last six months, the race to explore new avenues for raising capital has gained
momentum.
Having braved a lull, 2019 is the year of revival for the sector, with some NBFCs initiating the process
of raising capital while others already raising capital via retail bonds, dollar bonds and dollar loans. A
rise in the number of deals and bilateral assignments apparently dominating securitisation markets in
India is bolstering the capacity of NBFCs to lend to the underserved. The competitive edge of shadow
banking institutions has been boosted and their capacity for extending credit to the priority sector has
been strengthened on the back of guidelines issued last year that facilitate blended lending and co-
origination agreements between NBFCs and banks. This is a key development that could open new
fundingavenuesfor NBFCs and lay the groundworkfor their sustained growth and development.
IL&FS defaults, corporate governance issues concerning a large mortgage player, and a couple of
ratings downgradesin the sector have led to a volatile undercurrentin liquidity conditionssince
September 2018. With the debt market grinding to a halt on account of these developments, lenders
which include money market players have undertaken a stock check of their portfolio and re-
evaluated the positions of companies. Fresh lending limits and revised pricing strategies have been
implemented for companies after ranking them on the basis of their risk profile assessments. The
changes have impacted NBFCs and housing finance companies (HFCs) and several small to large A and
AAA rated entities in varying degrees.
Liability management has become a key focus area for companies, a factor that remained largely
unheeded in the last five years. The net income margins of the sector have been impacted with
growth rates witnessing significant reduction on account of asset-liability mismatches (ALM) and

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interest rate volatilities, leading to the re-rating of the entire sector. These developments have led to
the emergence of new avenues for raising debt capital, including retail issuance of NCDs, overseas
dollar borrowings and dollar bonds. Given the appetite of retail investors and foreign institutional
players to invest in sound financial companies with strong risk management, it presents a unique
opportunity to diversify the liability profile and reduce dependence on banks and debt market players
like mutual funds and insurance companies. Sensing a unique business opportunity in the current
situation, banks are poised to extract their pound of flesh by hiking rates and seeking higher risk
participation from even tiered players.
A significant development in the current context has been the revival of the co-origination model for
retail asset classes like vehicles, equipment and tractors. The model was successfully executed by
renowned foreign banks in the late 1990s and later replicated by the country’s top two private banks
in the early 2000s. The application of the co-origination model under the new RBI guidelines can be a
game changer and a strong alternative in the liability franchise for NBFCs, given the risk participation
and vast business opportunitypresented by the informal segment. A doorstep servicing model,
strengthening balance sheets of banks and cheaper funds have the potential to greatly enhance the
distribution outreach and effective penetration of NBFCs in the retail segment and MSME sector in
India.
An in-depth analysis points to the fact that the entire sector has been divided into two parts. At one
level, companies having secured lending and good asset quality with tenured presence and retail
franchise are being courted bydebt market players with a heightened appetite to lend to these
companies at comparatively softer rates. At another level, companies specifically in the real estate
business having limited tenured presence with wholesale books and unsecured lending books are
getting increasingly isolated in the debt market. There remains lurking apprehension about the asset
quality and ALMs of these companies, adversely impacting their ability to service their liabilities.
Capital infusion by the government, resolution of big-ticket NPAs and improved capital adequacy
injecting fresh liquidity in the system have significantly bolstered the banking system in the last six
months. The removal of a large number of banks from the PCA framework has increased credit flows
in the commercial market and eased liquidity to the SME sector, signalling the revival of economic
growth in the country.

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Increased flow of liquidity in the economy is likely to uplift consumer demand on the back of an
anticipation of normal monsoon, rise in MSP for major crops and fiscal boost to affordable housing in
the Budget.
In a nutshell, volatility in the demand and supply side of financial markets presents a unique
opportunity to NBFCs and HFCs to re-engineer their operations for FY20 and develop their franchise.
The players who are quick to tap market sentiments and curate investor-friendly products will gain
customer confidence and build new relationships to emerge triumphant.
https://www.financialexpress.com/opinion/unique-opportunity-for-nbfcs-and-hfcs-ro-re-
engineer-their-ops-for-fy20/1534938/
Questions:

1. Differentiate between NBFC and HFC.

2. Explain the role and objectives of NBFCs registered with RBI classifies on the basis of
activities.
Group-6

Kosamattam Finance NCD may provide high returns but watch out for these risks

By: Sushruth Sunder | Published: March 29, 2019 5:27 PM

Kerala-basedNBFC firm Kosamattam Financehas come out with a NCD (non-convertible

debentures issue) to raise up to Rs 150 crore. We take a closer look at the risk-return prospects of
the issue.

The issue will be available for subscription till 29th April 2019.

Kerala-based NBFC firm Kosamattam Finance has come out with a NCD (non-convertible debenture)
issue to raise up to Rs 150 crore. The issue will be available for subscription till 29th April 2019.
Notably, the public issue by the firm consists of secured NCDs as well as unsecured NCDs aggregating
up to Rs 150 crore with an option to retain over-subscription of up to Rs 150 crore aggregating to a
total of up to Rs 300 crore. The base issue size is kept as Rs 150 crore. “The Secured NCDs shall be
allotted for a value up to Rs 27,500 lakhsand Unsecured NCDs shall be allotted for a value up to Rs
2,500 lakhs,” the firm said in its prospectus. The offer price is kept at Rs 1,000 per NCD, and the bid
lot is kept at 10. Therefore, investors will have to put in a minimum of Rs 10,000.

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Commenting on the prospects of the issue, Basavaraj Tonagatti, SEBI Registered Investment Adviser
said that while the issue may provide better returns than bank fixed deposits, there are risks
associated with the issue. “The biggest concern with Kosamattam Finance NCD issue is the credit
rating. It is currently rated as ‘IND BBB,’ by India Ratings. This rating is considered to have moderate
degree of safety regarding timely servicing of financial obligations,” Tonagatti told Financial Express
Online. Explaining further, he said that such instruments carry moderate credit risk as the firm is
offering both secured and unsecured NCDs. Considering the credit rating itself, we can easily assume
that this not for all investors, he said, adding that less risk-averse investors may experiment with the
issue.
The investors should also bear in mind that the ratings may change over time based on the company’s
financial performance. Tonagatti suggests that even if investors are ready to take a higher risk they
should experiment with secured NCDs rather than the unsecured NCDs.
While the interest rates offered by these NCDs range between 9-11%, investors must keep taxation in
mind, says the advisor. “Interest income attracts a tax as per your tax slab. Also, if you sell it in the
secondary market, then such capital gain attracts capital gain tax too (STCG as per tax slab and LTCG
at 10% with indexation benefit),” he explained.

Questions:
1. Write a brief note on Credit rating agencies- SMERA, ICRA and CARE.
2. Explain the risks involved in debt market and instruments.

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