Money is raised by auctions, floating of fixed coupon loans, private placements, as well as other open market operations…etc.,

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Which is the highest rated debt paper in the world?

Well it is AAA.

However a country does not get its debt paper rated.

When I ask my class ‘why does a country not get its debt rated?’ I normally get a wrong answer….well not normally it is always!

Let us see why sovereign debt is not rated.

For a minute let us assume there are 2 entities. One is a company making automobiles, and one is the government. Both have excellent balance sheets and very good Profit and Loss account. Both Company A and Government B are rated AAA.

The only income for Company A is selling of cars. The only income for Government B is charging an entertainment tax on movies.

Suddenly people stop buying cars from company A and people stop watching movies!

Revenues of Company A and Government B drop to say, zero, or dramatically low. What happens to the ratings? Obviously Ratings will crash for both.

Company A starts making other products, downsizing, etc. – and will become a good company in 5 years. Till then the rating suffers…However, Government B finds out that the people are buying DVDs to watch movies, so overnight it brings a tax on DVDs!

The government has a plethora sources of revenue – tax on agricultural produce (when the economy is agrarian), then when it finds that people have shifted to manufacturing, Excise duty. Then when it finds that services are the biggest source of GDP, it levies service tax! Then there is profession tax, income tax, road tax….etc. etc.

What happens if you do not pay? Well it has a collection mechanism, the police and last it can jail the offender. Thus a government has many sources of revenue, a mechanism to enforce it, and a ability to track the businesses! In a worst case scenario it can print notes too. Hence we say ‘sovereign’ cannot default.

Then how come Greece is defaulting?

Simple the government of Greece is a joke as far as revenues vs. income is concerned. Greece’s tax collection is very inefficient, so increasing rates does not help. The people are used to working 45 hr weeks (Chinese and Indian labour work 18 hour days!). Growth is not happening. Tourism is not enough to raise revenues. The way people work in the Greece government is pathetic. Tax leakage is huge. The people will not accept cuts in anything…..

So it is inevitable that the ‘developed’ world will have to pay for their ‘lifestyles’…which they are not willing to.

In fact they are trying to see if they can buy a Jaguar and pay the emi of a Nano. Tough luck guys….you can choose what to buy, but the shopkeeper decides the price. Tough luck.

Remember the Emperor has not clothes story? It requires a small boy with guts to tell the Emperor that he is Naked? Who will tell this to the Greeks? Tell them, Guys you are Naked, and the Rest of the World does not owe you a living!

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I got many calls seeking advice on ‘Should I invest in…..’ At 11.5% p.a. the returns are not bad for sure. And to think that they are a well managed Nbfc this interest rate does look attractive does it not?

Well Shriram has raised a lot of money in the current year and one wonders how much appetite for money do they have! If they are borrowing at this rate, at what rate are they lending? Of course they are lending at 17% to the best and at 22% for the not so well off.

Personally, if I can get the SBI bond or even the IfCI bond at yields slightly under what Shriram is offering, I would be tempted to take that…..

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When a 38 year old says…’My wife is tired of working…and she is quitting her job. She is getting Rs. 32 lakhs as Provident fund, …etc. should I use this amount to pay down my (our) housing loan of Rs. 44 lakhs..my answer is NO. Capital NO.

Let us take this case. Mr. U is earning about Rs. 55 lakhs CTC and has about Rs. 3 crores in mutual funds, equities, investment real estate…etc. His wife is giving up her job from a position of good comfort – there is no need for her to earn, but he is earning well and will continue to earn well.

The long term rates on all his SIPs are in the region of 12-28% p.a. and his home loan is a flat rate of 8% per annum. A lot of his money is in the higher end of the 12-28% range – the 12% return is in Templeton India Pension Plan. His Hdfc top 200, Hdfc Equity, Prudence, Discovery, Dynamic…are all giving him screaming returns.

Such a person who has about one year’s take home salary as home loans can continue to pay the EMI..at least till the tax advantages in repaying a loan (and interest) is available. More, far more important than that the amount of loan is miniscule compared to his networth and his ability to earn. Very clearly if your portfolio is growing at a rate greater than the rate at which you are paying interest…why argue?

Also leverage with so much of discipline is all right – in fact the bank which gave him the loan – is chasing him with a bigger loan

So different strokes for different people…

repay all the loans NOW….for some overleveraged, under earning joker…

just hold on to all your loans – for somebody who has a very low leverage…

that is what personal finance is all about, correct?

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Girl at cc: Sir may I have your name..?

Girl at cc: May I have your card start date…?

I: it is Sep 05

Girl: May I have the end date?

I:…grrr…

Girl: May I have your official address?

I: You do not even have it.

Girl: May I have your billing address:

I:…….blah..

Girl: May I have your mother’s maiden name:

I: You do not have it.

Girl: May I know what is the problem?

I: I am not able to make a payment.

Girl: Sir which bank?

I: Hdfc bank

Girl: Sir it must be a problem at Hdfc bank.

I: I am not able to open the page which takes me to Hdfc bank

Girl: If it is a problem at our bank it will show on my screen. So it must be a problem with Hdfc bank.

I: I am unable to open this page for the past 3 days..so I am late in making the payment

Girl: If there is no problem at Hdfc bank, Sir, you can make the payment from Hdfc bank site.

I: I am not registered @ Hdfc bank for 3rd party or utility payments.

Girl: Sir you can pay cash.

I: Thank God….my conversation is over.

Thank God the only thing I have is an Icici bank credit card.And I am paying Rs. 400 + service tax BECAUSE THEIR SITE DOES NOT OPEN…mera bharat mahan.

My wife has a SB a/c….hope to reduce the balance soon.

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Similarly once upon a time Crisil had rated Lloyds Finance, Apple Finance and Sundaram Finance – briefly I think Cholamandalam also (not sure) as the AAA companies in the financial service sector apart from Hdfc, Icici, and such other biggies.

To us in the markets this was a joke because Lloyds and Apple would throw money at distributors – per application, contest, etc. At this stage you normally tell people who want to listen – ‘please stay away’. EVEN TODAY they have one product rated so high -but it is not Crisil, and no further comments please.

All this is funny because when you are watching the game – and the scorecard is lying you can only be amused. Then suddenly Apple, Lloyds and a few others got re-rated from AAA to Junk pretty fast – 6 months if I am not wrong, surely less than a year! Tata Finance did not get AAA -but every Amar, Akbar, Anthony and Soli was willing to invest in Tata Finance.

That much for rating agencies. Now banks which do not wish to keep transactions on their books, go to a company have its bonds rated, take it to the market, and then sell it off. The question is ‘Will the Rating stay till I sell the bonds’ – say 90 days? L O L.

A bank should do its own appraisal – there would be more committment.

What should be done with rating agencies? Let them just shut down. R I P. Amen.

see what Morgan Housel has to say about these agencies in the US …somewhat similar thoughts

http://www.fool.com/investing/general/2010/05/21/put-the-rating-agencies-out-of-their-misery-before.aspx?source=ihpsitth0000003

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What exactly is a currency derivative? It is a derivative contract – and is derived from the underlying asset (in this case the currency). These are standard exchange traded contracts of a specified quantity- to exchange one currency for another at a specified date in the future (fixed date again standardized) at a price fixed on the PURCHASE date but called the future price!

Should you trade in Currency futures: Well IT IS A TRADING TOOL. Unless you an exporter or an importer with a need to take a view on the forex rates, it is a speculative contract. So all the rules of speculation are applicable to this contract. However if you have exports and are afraid that the Rupee will strengthen, you should ‘protect’ yourself against future fluctuations in the currency markets. Of course if you have borrowings in USA and you are selling to the USA – you have a natural hedge. For a Group like the Tata group they have a lot of monetary transactions in various currencies – buying a hotel in Egypt, paying for JLR, …etc. – as a group they may actually not have to much of a ‘net’ risk, but then TCS cannot use its money to buy something for Indian Hotels!

As an Investor: If you are sure that given political conditions the dollar is likely to go down further you could buy PUT options on the dollar.  However if you think the world situation can only get better, you will find it worthwhile CALL options on the dollar!

If you are a small importer / exporter you can use it as a hedge against a 3-4 quarters imports / exports too!

Arbitrage (Taravani wallas, remember?) opportunities between present and future prices makes it easy for all to play. This is because it allows you to trade in interest rates implied by foreign exchange market. Volatility, Interest rates change, and a huge multiplier (leverage as it is called) is ensured.

Why should you deal in Currency Derivatives:

we will deal with separately, what say?

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Banks and builders are both looking at softening of interest rates so there seems to be a rush to push the loans to you. Also Diwali is a time when people look to finalize a house so that they can complete the buying, do up the house and shift before the academic year starts. So Diwali is a good time to try to push real estate sales. One builder I know has announced a 10% (Vow!) price rise soon as the Diwali week is over.

In an attempt to hasten closure, builders, brokers and banks are rolling out festival schemes on home loans ahead of Diwali. DCB has broken the 8% barrier mark and introduced a fixed rate of 7.95% p.a. for the first year. Other offers from banks are offering rates and dangling a carrot of allowing a shift from fixed to floating rates in subsequent years. Other lenders like Canara, Bank of and Maharashtra are offering fixed-rate loans for the first five years, and subsequently, linking the loans to their prime lending rates. Some are offering a fixed rate for 2-3 years at teaser rates.  Big daddy SBI is offering fixed rates for the first three years. Competition has ensured a good deal for the end customer. Dena Bank offers a fixed rate of 8% for loans up to Rs 30 lakh in the first two years, while Canara Bank offers 8% in the first year for Rs 30 lakh and SBI offers 8% for the first five years for loans up to Rs 5 lakh.

A few builders have agreed to absorb the processing fee if the client closes the deal within a particular time frame. Now, builders and lenders are making a fresh pitch to push sales during Diwali through limited period offers. Good offers are coming from PSU banks too.

In the home loans and home improvement loans markets the big boys of Indian banking industry – Hdfc, Icici, Lic Housing and SBI have beaten the pants off the ‘foreign’ banks. Thus the Citi, Stan Cs of the world are not in the market at all. Now it is the turn on the PSU banks to announce all the concessions on home loans and home improvement loans.
Bank officials are hopeful that the retail credit growth will contribute substantially for the credit demand in the coming quarter.

Their hopes are greater in smaller towns for home loans and home improvement loans – like auto loans.
Personally I do not think it is a great idea to borrow money for a home improvement need. Clearly expenses like painting the house, making small improvements etc. should be treated as a part of one’s expenses. Money for such expenses should come from current income not from future income. There is an argument even for buying a house from own money rather than from borrowed funds, but home improvement money should come from own income not even from own capital!

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The main reason why a person in India (or in any part of the world too!) repays the loan is ‘because it is the right thing to do’. This is an amazing story told to me by a PSU bank’s top executive. It was a sultry after noon when a lady walked in with a bag of small coins and notes. She wanted to repay a loan which her late husband had taken.

On checking the manager found that her husband had taken a loan of Rs. 1200 and along with interest he owed the bank Rs. 2000. The bank manager saw her condition and said “it is within my powers to waive it, so please treat this as waived”. She had actually collected cow-dung made it into fuel cakes and sold them. Moved the manager made this offer.

She replied “While dying my husband told me he had borrowed money and I should repay it. He also said if this loan is not repaid I will not be in peace.” The bag had more than Rs. 2400 – the manager returned her the balance. He says in his rural stint he really met genuine people. He also presided over the bank NPAs where he found at least one industrialist who was defaulting even on his electricity bills – and had a Central level minister push BEST not to cut electricity to his office. Of course even during this period he was using his personal helicopter….

Now when the government does a loan waiver I do not know how the people who repaid honestly feel. Will they not at some time decide not to repay the borrowings. Will their ‘financial advisers’ not ‘advise’ them “wait for a waiver”. That is the moral hazard in a bank loan waiver. I was wild and screaming when the loan waiver to the Indian farmer was announced – but I think it was far, far, far more moral than paying billions of dollars for saving jobs in Goldman Sachs and other banks. Talking of Goldman Sachs – they saved at least US $ 15 billion which AIG owed them thanks to the AIG bailout, but now they are thumbing their nose to Uncle Sam! Talk of cheek, man! Ruthlessness of a banker…what say?

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I asked her how much has she paid on the credit card…she said Rs. 1600. Then I found that she was paying ONLY 5% OF THE AMOUNT OWNED – because that FIGURE was in BIG, BLACK AND BOLD! Then she paid off Rs. 32,000.

This of course is an extreme case, but there are many howlers. One girl about to join for her MBA was doing an SIP in an equity fund. Now when she needed money, she found her NAV at 50% of her investments. Both aggression and pessimissum can be bad for a portfolio. If you know exactly when you need the money you are normally better off in a debt instrument if the period is less than 3 years. Only if you have a vague idea – and say the period is 10+ years away should you think of an equity fund.

If you have a personal loan (or worse credit card debt @ 51% p.a. from the bank which does not let people sleep), a car loan, etc. I am not sure that you should be investing at all! Partially yes perhaps, but normally investing makes sense only when you have just a home mortgage. Most other loans are likely to be expensive and tax unfriendly.

So it is really very difficult to give one short answer. It really depends on case to case. For a 23 year old girl who wants to do her MBA 2 years hence, and fund her marriage expenses (at least partially)….bank recurring deposit or A MIP (with 20% in equity) is not a bad option at all. STAY AWAY FROM EQUITIES!

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