PMC BANK CRISIS

FINSIGHT
FINOPSIS (FINANCE CLUB), IIM RANCHI

SEPTEMBER 2019

PMC Bank Crisis

It is not new to see a bank fail or face a liquidity Measures taken by RBI
crisis in India. The PMC bank crisis is one such Initially RBI restricted the activities of PMC
bank failure that is currently changing the way bank and kept it under the watch by
RBI regulates and monitors the banks. It has appointing an administrator. Since the
customers were getting the hint about
become common to see banks lend the money
something being wrong inside the bank, the
recklessly without taking the consequences into
withdrawal requests started coming in. RBI,
account. The Punjab and Maharashtra Co-
then had to put a limit on the amount of
operative Bank is facing strict regulatory actions withdrawals from the account of customers.
by RBI in order to stabilize the situation. The amount was first limited to Rs 10000
What exactly Happened? then it was increased to Rs 25000 owing to
PMC bank gave loans of around Rs 6500 crores the public outrage.
to a real estate firm Housing Development and The way forward
Infrastructure Ltd. Despite subsequent non As long as India doesn’t learn from its past
payments by the firm, PMC bank did not classify mistakes, such situations will keep occuring.
them as Non-Performing Assets and rather A strong corporate governance system is
shows a good profit of around 99.69 crores in its needed to strengthen the way banks work.
There is also a need for an integrated
2018-19 annual report. The bank further went on
payments system that will keep a track on
to make fake accounts to hide the non-payment
cash flows and will track the doubtful
of the loan by HDIL.It is alleged that the bank
transactions.A proper auditing system will
did so because of its historic relations with the also ensure that there is no window dressing
firm when PMC bank was on the verge of on the part of defaulting company so that
bankruptcy and HDIL helped it by infusing huge such crises can be curbed before even
amounts of money by way of deposits to save starting. There needs to be more transparency
the bank. in the annual reporting which will help the
depositors.
 Physical Settlement of Equity Derivatives
However, traders have come up with
various tactics to tackle the situation. One
such measure includes squaring off the
open positions before the closing bell on
the expiry day. In the case of options
contracts, the call and put options
expiring In The Money (ITM) will be
physically settled. Since it is the net open
position and not the individual open
positions which would be considered for
The Indian Stock market is considered to be one of physical settlement, traders having a long
the most speculative markets in the world as far as future open position with an equivalent
derivative contracts are concerned. The turnover in quantity(lot) of long ITM Put option open
equity derivatives is over 15 times more than that position will not have to undergo physical
of the cash market. Come October expiry all stock settlement. The same applies for a short
derivatives will be settled physically instead of a future and long ITM Call option position.
cash settlement as per SEBI regulation. Under the Until now investors and traders largely
physical settlement, traders will have to used the Securities Lending and
compulsorily take/provide the delivery of shares on Borrowing(SLB) mechanism to exploit
the expiry day against their net open positions. reverse arbitrage opportunities however
However, the settlement of index futures and the SEBI’s decision to move to physical
options(F&O) contract will still be settled under settlement is supposed to bring relatively
cash settlement. This move is to curb excessive more short sellers to the SLB platform. As
speculation, which creates too much volatility and short sellers will now have to borrow the
to promote borrowing and lending. By using shares under the SLB mechanism, which
physical settlement, the market regulator also aims allows borrowing of securities from
to curb speculative trading. The market regulator institutional investors, physical delivery
has announced this move in 2018 and informed could also result in less short selling.
that all the derivative contracts will be settled While the physical settlement and SLB are
physically in a phased manner. The bottom 50 largely seen as an increase in overall
stocks as per market capitalization were moved to settlement cost traders and investors are
physical settlement in April 2019, while the next 50 more likely to square off their open
will be moved to physical settlement from July positions just before the closing bell on
expiry onwards and the remaining stocks would the expiry day.The regulator’s move has
move to physical settlement from October expiry.
also brought too much uncertainty
NSE, which has 200 stocks in the F&O segment,
regarding the taxation of such physical
accounts for 99% of trade volumes in F&O.
settled derivatives.
However, traders have shown a lukewarm response
to the stocks that were already moved to physical
settlement by the NSE. It must also be noted that
it might result in migration of trades and liquidity
from the NSE to Singapore Stock Exchange(SGX)
which offers a cash settlement. Since the
regulatory move is supposed to change the
grammar of trading, a majority of brokers have
already taken risk management measures to
ensure no default by traders by increasing margins
required to keep the positions open in the expiry
week. Additionally few brokers have also come out
saying that no BTST transactions shall be allowed
for the stocks received as a part of physical
settlement of equity derivatives.
 REASONS FOR THE DOWNFALL OF
AUTOMOBILE SECTOR
According to the report by the Society of Indian
Automobile Manufacturers (SIAM), the sale of
vehicles across categories in the country slumped
18.71% to about 18.25 lakh units. It had happened
in the ninth month straight and resulted in the
steepest one in two decades when demand failed
to pick up in August and September after the
heavy rainfall and floods started to invade the land
of Kerala and southern parts of India. It resulted in
sudden hike of interest rates, vehicle insurance
cost and increase in fuel price which affected the
demand for vehicles immensely that the sales
went down very fast. With this rate, the market
leader like Maruti had their inventory piled up for
months and couldn’t generate their sales even in
the festive season. Also with the new Bharat stage
Emission Standards, issued by Government of
India, it is a prerequisite for the manufacturers to
withdraw their old model and generate the
production with the new compliance. This sudden
change also led to stock up the old models and
customers also wanted to either exchange their
model or buy the newer ones when they become
more affordable or the costs of insurance and fuel
decrease. In addition to this, the IL&FS crisis late
last year also led to a severe liquidity crunch, Source : Study IQ
almost drying up credit for the dealers and The automobile sector is one of the largest job
customers. As a result of all the factors, all vehicle providers in India, employing about 37 million
categories, including commercial vehicles and people. The prolonged demand slowdown in the
two-wheelers, began experiencing negative industry has triggered production as well as job
growth. cuts. According to the latest figures, original
equipment manufacturers (OEMs) have removed
around 15,000 temporary workers in the recent
past two to three months, which has been
disastrous for the economy. A lack of working
capital requirement amid tepid demand has led
to closure of nearly 300 dealerships across the
country. The industry’s needs include a
reduction in GST to 18% from the current rate of
28%, which will help in an immediate price
reduction. It could kick-start demand in the
short term, particularly ahead of the coming
festive season. Besides, it has sought measures
to handle the NBFC crisis to infuse liquidity into
the system, and clarity on policy for electric
vehicles and introduction of vehicle scrappage
policy, which will also boost demand for new
Source : Times of India cars.
Arun Jaitley – Why will history remember him
with  reverence : Debayan Ghosh Dastidar
Arun Jaitley, a BJP veteran unfortunately There is no doubt that the decorum and
breathed his last breath on 24th August, 2019. debate quality of parliament has degraded in
He had served the government in different the past couple of decades. But Arun jaitley
capacities, most notably as Finance Minister was respected across the party lines for his
of India. Although he was not a mainstream speeches as they were less demagoguery and
politician, his popularity was not limited to more factual and logical. His replies and
the Rajya Sabha boundary. More importantly, explanations on critical issues will always be
his contributions to the nation will only be a part of treasure trove of parliamentary
more valued in the coming future. A pass out videos. He may not have thumping public
from SRCC, student union president of ABVP mass appeal but his grace and elegance did
and long-time member of BJP, he was always make up for that. When all his reforms will
destined to be at the pinnacle of political bear fruit and the common man will enjoy it,
success .  Although a minster in the Vajpayee Arjun Jaitley will have a last smile from the
government, he will mostly be remembered heavens.
for his contributions during his tenure as
Finance Minister. He had overseen the entire
roll out of Goods and Services Tax. That alone
makes him capable of being one of the most
accomplished leaders India ever had. If
Sardarvallabhai Patel politically united
different states, he completed the economic
integration of India. The kind of competence
and dexterity required for the task is
inexplicable. He was also instrumental in
passing another key bill the Insolvency and
Bankruptcy Code. It brought sweeping
changes in the bankruptcy laws in India and
although less popular, it may have an equal
impact on cleaning up the economy as GST.
Arun Jaitley will be remembered as the
person who laid the bedrock for a cleaner and
formal economy for India. Black Money Act,
Demonitisation, action against Shell
companies, auction for natural resources and
many other steps he took will benefit the
economy in ways not imaginable now. His
term as finance minister was characterized by
fiscal prudence, low inflation, high
infrastructure growth rate and record influx of
FDI. The economy was opened to large extent
taking forward the 1991 reforms. Another area
where had made lot of contribution is
parliamentary debate.
 NEWS Snippets
Corporate tax cut: Issue of carrying forward losses
vexes companies in red
Finance minister Nirmala Sitharaman slashed the
corporate tax rate to 22% without any exemptions or
incentives and to 15% from the current 25% for new
manufacturing companies on September 20 as the
government looks to spur investment, revive growth
and boost job creation. The effective tax rate, including
surcharge and education cess, will be 25.17% and 17.16%,
respectively.
Finance Ministry turns down DoTs Rs 74,000 crore
revival package
BSNL and MTNL hang in limbo as the finance ministry is
reportedly not keen to go ahead with the Department of
Telecommunications’ (DoT’s) proposal for a massive Rs
74,000-crore bailout package.
The finance ministry has suggested that the DoT come
up with some alternative proposals to revive the ailing
telcos.The DoT’s proposal for a Rs 74,000-crore bailout
package was based on the premise that closing down
the loss-making BSNL and MTNL would cost even higher
around Rs 95,000 crore.The assumption behind the
revival package, which involved an attractive VRS
package to BSNL’s 1.65 lakh employees, reducing their
retirement age from the current 60 years to 58 years.

Source : The Hindu

Bharti Airtel is planning to raise via a bond issue

Beginning on 2 October, bankers including BofA Merrill
Lynch, Barclays, BNP Paribas, Citigroup, HSBC, J.P.
Morgan, and Standard Chartered Bank will be
conducting a series of fixed income investor
meetings/calls across Asia, Europe, and the US. The
India's biggest brands HDFC Bank retains top rank for
fundraising will be in the range of $750 million to $1
sixth time in a row
billion, and the final figure will be arrived at based on the
HDFC Bank topped the WPP-Kantar BrandZ Top 75 Most
market response. The proceeds from the issue will be
Valuable Indian Brands ranking for the sixth time in a row.
utilized to clear off the debt of Bharti Airtel. Bharti Airtel's
BFSI brands have dominated the top 10 ranking list this
debt stood at Rs.1.16 lakh crore as of June 2019.
year. According to the report, banking brands made up
the largest share of the BrandZ Top 75 and owned 23% of
the total brand value of $53.3 billion
Life Insurance Corporation of India and State Bank of
India retained their positions in the ranking at No. 2 and
No. 5, respectively.
Kotak Mahindra Bank and ICICI Bank and got 5, 6th
positions recently.
In 2018, HDFC Bank’s brand value grew by 5% and was
evaluated to be around $22.7 billion. While the growth of
the bank’s brand value has declined from 21% in 2018 to
5% in 2019, the report states that the bank seems to buck
RBI announces the NEFT fund transfer to be available
the global trend.
round the clock
In August 2019, RBI in its August Monetary Policy Review
meets had announced round-the-clock availability of
NEFT payment system from December 2019.
Currently, the NEFT payment system which is operated
by RBI as a retail payment system is available for
customers from 8.00 am to 7.00 pm on all working days
of the week. 2nd and 4th Saturdays of the month are
exceptional. The recent announcement of making the
availability of NEFT on a 24x7 basis is expected to
revolutionize the retail payments system of the country.
 AGON 5.0 : Management Fest
IIM Ranchi recently invited top b- school students for its biggest event of the year “Agon 5.0”. The
theme for this year was "against all odds". More than 25 b-schools participated and won cash prizes
worth Rs. 30 thousands and more. There were multiple events conducted by different clubs and
Finopsis was one of them. Our club hosted 3 events: Mercatus, the commodity trading event; Plutus,
the business valuation event and Empires, the business game. All the events were held in our campus
and we recorded huge participation from various colleges like FORE, XLRI, IITs, FMS etc. We invited Mr.
Ravi Kataria, MD at Investment Imperative Group, as the jury member for our flagship event Plutus
which was held on the very first day of Agon. More than 10 groups participated and gave their
presentations in front of the jury out of which 2 teams won the cash prizes. On the consecutive day, we
had Mercatus, which invited more than 15 teams from other b-schools. The enthusiasm from the
participants was overwhelming. The teams that won the first and second prize were homegrown. The
last event was informal in nature and was scheduled in the evening at the hostel premises for which
most of the students were waiting eagerly. The Empires was loosely based on concept of Monopoly,
wherein the team which will have the highest valuation won the game. The game was a great success
and attracted huge masses. This year was full with fun and frolic and we hope to get more zeal in the
coming year.
 A LOOK INTO HISTORY

There would hardly be any person involved "Thus every dissembler, every false friend,
in the investing world who doesn’t use the every secret cheat, every bear-skin jobber,
terms "bull" and "bear" on a regular basis. has a cloven foot." It was so as the phrase
Almost everyone is aware of the context in "bear-skin jobber" was very widely used by
which the terms are used in the market, the sellers, especially the ones who often
hence let’s move on to how the names of bet that the prices in the market will fall.
two animal species became financial
terms-There are two central beliefs behind   2)  The other rationale given behind the
how these terms came to be, how they are use of the terms "bear" and "bull" is
used today. thought to derive from how each animal
attacks its opponents. While a bull thrusts
1)  It is widely believed that the term bear its horns up, while a bear swipes down.
was used way before the term bull. The These moves were then related to the
term bear in financial markets was movements in the market: if the trend is
borrowed from the proverb that cautions up, it is considered a bullish market; if the
against the temptation to "sell the bear's trend is down, it is a bearish market.
skin before one has caught the bear.".
However, the origin behind the use of the
term "bull" is not known, but it is believed
that it was chosen for its symbolic
opposition to the bear. Daniel Defoe wrote
in 1726,
 ECONOMY WATCH
Inflation: The consumer price inflation Growth: Department of external affairs
increased marginally from 3.1% to 3.2% from attributes the falling growth rate (from 8%
the last month. The decline of fuel and the previous year to a record low of 5%
lightening inflation from -0.3% to -1.7% is this year) to global cues. The reasons cited
the key highlight. WPI inflation remained are global recessionary conditions,
unchanged at 1.1%. Low inflation has been a ineffective monetary policy by the Reserve
key metric because of slowdown in the Bank of the country, rising tensions
entire global economy, which required between the US and China and its
revival through a stimulus boost. Also, the subsequent impact on India and increased
fall of core inflation to -0.4% as compared uncertainty of Brexit.
to 0.1% in the past month is a keytake.

Fiscal performance: The tax revenue grew

by 15.8% to INR 3.4 lakh crores as compared
to the same month last year. Gross tax
revenue was INR 5.4 lakh crores portraying a
6.6% growth. The extended stimulus
provided by the government through tax cut
is expected to raise the revenues of the Money Supply: The growth of money

government further in the long run. The key supply in the economy was recorded at

concern is the growing government revenue 9.9% compared to 10.3% at the end of the

expenditure and capital receipts. Increased fortnight of the same month in the

revenue expenditures financed through previous year. Bank credit grew at 10.2%

capital receipts is not good for the YoY basis. The base lending rate as on 6th

economy. Capital expenditure declined by September 2019 was 8.95/9.40 per cent,as

3.4% and revenue expenditure grew by 7.9%. compared to 8.85/9.45 per cent during the

Capital receipts showed a 2% increase. corresponding end of the week of the

previous year.

Trade: Owing to a global slowdown, the

falling trade figures reflected this fact.
Merchandise exports and imports fell by
1.5% and 5.7% respectively. Falling oil
imports is one of the key indicators which
fell by 6.3%. India’s current account deficit
contracted to 2.0% of the GDP primarily
on account of higher invisible
receipts.Currency Rate: The rupee heavily
depreciated across all the prominent
currencies. It depreciated against the US
Dollar, Pound Sterling, Euro and Japanese
Yen by 3.3%, 0.7%, 2.4% and 5%
respectively.
 Strategy Overview

Option Strategy-Bull Call Spread

Ever thought of a financial instrument in A bull call spread involves the following
which there is unlimited profit potential, strategy:
but the loss is limited to a fixed amount 1. Go long on an ATM/OTM call option
that is known before entering? Well, that’s 2. Simultaneously go short on a call option
an option contract. In an option contract, at a higher strike price with the same
the loss is limited by the premium amount expiry as of the above call option.
paid by the option buyer. Now, this might By going short on an option the trader
appear appealing since the risk is limited pockets the premium which partially
while the profit potential is unlimited, but offsets the premium paid on the long call.
this can turn into a financial weapon of While this strategy reduces the maximum
mass destruction. It, therefore, becomes loss by the amount of premium received,
essential to reduce the limited loss. A bull It also limits the profit potential.
call spread is a strategy that can be
implemented in case of a moderately
bullish view on a particular underlying
asset.
Crossword