Month: February 2021

Why IndusInd Bank FD is an attractive short-term choice

Personal Finance

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With fixed deposit (FDs) rates ruling at historical lows, investors using bank FDs for regular income or as an avenue to build a risk-free corpus are left with few choices.

In this backdrop, FDs from IndusInd Bank, are worth considering, given their reasonably competitive rates as well as improving financial parameters. At the height of the pandemic, IndusInd was witness to the fallout of the YES Bank crisis and it rubbed off on depositor sentiment, rise in delinquencies and significant moderation in loan growth. With Covid-19 threat beginning to dissipate, the problems at IndusInd are also beginning to disperse. Deposit growth has improved, loan growth is better, gross bad loans (GNPAs) have shrunk and provisioning has picked up. Plus, the recent capital injection from promoters last week is a boost.

Yes, some small finance banks offer better rates than IndusInd. If you already have exposure to small finance banks, considering the bettering financials of IndusInd, you can go for this option. Given the current low rates , investors are better off putting their money in shorter-tenure deposits and hence one-year FDs are a good choice.

Attractive rates

IndusInd Bank offers 6.5 per cent per annum on its one- to two-year tenure. For senior citizens, the rate is 7 per cent, that is, an extra 0.5 percentage points.

For similar one- to two-year deposits, public sector banks offer rates of 4.9-5.4 per cent and most private sector banks offer less than 6.5 per cent. As a thumb rule, senior citizens will get an additional 0.5 percentage points on the card rates from most banks.

Investors are better off putting their money in shorter-tenure deposits. This strategy will help them prevent their money from getting locked in longer tenures, and one can retain the flexibility to hunt for better returns once the rate cycle turns. Hence, one-year FDs of IndusInd Bank are a good option now. You can, of course, opt for deposits of below one year too, but the interest rates on these are lower.

Apart from booking an FD in person at the bank branch, investors can also book one online on the bank’s website. Do note the maximum deposit amount allowed online is ₹ 90,000 using Aadhaar eKYC.

In the event of premature withdrawal before the specified tenure, the interest rate applicable will be the rate corresponding to the withdrawn amount and basis the actual run period.

Improving financials

IndusInd’s bettering financials lend comfort.

The bank’s financial performance across last three quarters shows improvement in various metrics. Deposit growth is up by 8 per cent and 5 per cent, respectively, in the September and December quarters (quarter-on-quarter). Gross non-performing assets (GNPA) has steadily declined from 2.53 per cent in Q1, to 2.21 per cent in Q2 and now to 1.74 per cent in Q3. While proforma gross non-performing loans stands at 2.93 per cent as of December (this is on the lower side compared to other frontline banks), the overall restructuring pool was limited to 1.8 per cent.

The bank has improved Provision Coverage Ratio from 67 per cent in Q1 to 87 per cent in Q3 on reported GNPAs and maintained PCR at 77 per cent even after including proforma NPAs. It added ₹1,100 crore to Covid provisions taking total Covid provisions to ₹3,261 crore, and fully provided for unsecured retail and microfinance loans conservatively.

In Q3, IndusInd has reported improvement in collection efficiency (97 per cent in Dec-20) to near pre-Covid levels across segments. Retail loans are seeing healthy traction (up 5.8 per cent y-o-y), with disbursements in vehicles/micro-finance segment now at pre-Covid levels.

Its capital adequacy ratio including nine months of FY21 profits was at 16.93 per cent as of December 31, 2020 and this got augmented to a comfortable 17.68 per cent, with IndusInd on February 18 raising ₹2,021 crore of common equity capital via conversion of preferential warrants issued to promoter entities.

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Small-savings inflows are down to a trickle

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Growth in collections in post office small-savings schemes is set to touch a low in FY21, going by the Revised Estimates in the Budget documents.

The collections are pegged at ₹8.7-lakh crore, up just 3 per cent over FY20. This pales when compared to the strong double-digit growth in the last few years. This is the lowest growth in the last decade, barring FY12, when collections dipped by 19% y-o-y.

 

 

At that time, investor interest had shifted to bank deposits, thanks to the 9-9.25 per cent returns offered on bank deposits then. FY12, thus, saw a robust 13.8 per cent growth in bank deposits (over FY11) at the cost of small savings schemes. Investors scouted for better rates in FY16 again, when collections in small-savings schemes jumped by a whopping 46 per cent y-o-y, the best show in the last decade. While equity markets remained lacklustre and bank deposits offered just 7-7.5 per cent then, small-savings schemes were the best option, given the 8.4-9.3 per cent returns. Bank deposit growth in this period was subdued at 8.6 per cent. This year (FY21), the prevailing low interest rate environment for fixed-income instruments and the dream run in the equity markets have been the main reasons for the waning interest in small savings.

Interest rates on the small-savings schemes were slashed by 70-140 basis points (bps) at the beginning of the fiscal over the rates that prevailed in the last quarter of 2019-20. For instance, returns on Public Provident Fund (PPF) came down to 7.1 per cent against 7.9 per cent. The interest rate on National Savings Certificate was slashed by 110 bps to 6.8 per cent.

While rates have stayed put since then, their sharp drop, coupled with low bank deposit rates, seem to have nudged retail investors to move to riskier assets such as equities. This trend is reflected, for example, in the number of demat accounts opened in the last few months. CDSL breached the 3-crore mark in demat accounts in January 2021, having taken just a year to add another crore (touched two crore in January 2020). To put it in perspective, CDSL crossed the one-crore demat accounts mark in August 2015 and took nearly four-and-a-half years to add another crore.

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Is PMVVY better than other senior citizen schemes

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The relentless fall in India’s interest rates over the last six years has been hard on retirees and regular income seekers. For seniors, exploring special government schemes before bank deposits or debt mutual funds makes a lot of sense, as they offer superior returns with high safety. We take stock of the modified Pradhan Mantri Vaya Vandana Yojana (PMVVY) and stack it up against competing avenues.

Features

PMVVY is a guaranteed pension scheme offered exclusively by the LIC. Open only to individuals who have completed 60 years, it promises regular pension payments at a monthly, quarterly, half yearly or yearly frequency in return for an upfront investment (called a purchase price).

This scheme which was set to expire in March 2020, was modified and extended upto 31 March, 2023. The scheme’s return has been aligned to that on the post office Senior Citizen’s Savings scheme, with a cap of 7.75 per cent. For FY21, the return is 7.4 per cent. It will be revised in FY22 and FY23 if SCSS rates change. If you invest before March 31, 2021, your return will be 7.4 per cent for the entire 10 years.

While this is due for reset on April 1, it appears unlikely that it will be hiked, given the premium over market interest rates.

PMVVY sets minimum and maximum limits on your investment at ₹1.56 lakh and ₹15 lakh respectively. If you’ve invested in the earlier version of PMVVY, you won’t be allowed to invest more than ₹15 lakh in both versions put together. The scheme guarantees pension payouts for 10 years, with a return of principal at maturity. Should the investor die within 10 years, beneficiaries will get back principal. Premature exit with a 2 per cent penalty on principal is allowed in case of critical or terminal illness of self or spouse. Investors can avail of loans (up to 75 per cent of the investment). The scheme enjoys no tax benefits, except for GST exemption on principal.

How it compares

To Immediate annuity plans: LIC and other insurers offer immediate annuity plans- where you can get a lifelong pension against a lump sum upfront investment. The PMVVY offers better pension rates than them. A 60-year old buying LIC’s Jeevan Akshay VII, for instance, will receive an annual pension of ₹71,210 under the return of purchase price option versus ₹76,600 under PMVVY. Under Jeevan Shanti, where he needs to defer his pension by a year, he would receive ₹54,900.

For those seeking liquidity, the PMVVY’s 10-year lock-in may seem more palatable than the lifelong lock-ins of other immediate annuity plans. PMVVY waives GST while immediate annuity plans levy it at 1.8 per cent of the purchase price.

The PMVVY however does suffer from some negatives. The ₹15 lakh cap on total investments restricts your monthly pension to ₹9,250. PMVVY offers the same pension rate for all subscribers above 60. In other immediate annuity plans, pension rates rise substantially with age. Under Jeevan Akshay VII, a 70-year-old can take home 30 per cent more pension than a 60-year old with an identical purchase price.

To Senior Citizens Savings Scheme: The SCSS from India Post allows seniors above 60 to deposit upto ₹15 lakh with a guaranteed quarterly payout at 7.4 per cent per annum. Those above 55 who have taken VRS or have retired can park retirement proceeds in the scheme. Interest rates on SCSS are reset quarterly by the Government. The scheme carries a 5 year lock-in, with initial investments eligible for section 80C benefits. The interest is taxable. The scheme allows premature withdrawal but with a penalty.

When you are investing close to the bottom of a rate cycle like now, SCSS with a 5-year lock-in can help you secure better rates more quickly than PMVVY.

PMVVY is also constrained by the cap of 7.75 per cent on rates. SCSS’ facility to withdraw without any conditions attached is a big plus for seniors looking to take out money for emergency needs or to switch to better rates after one year.

The 80C benefit can help seniors meet their tax saving goals along with securing regular income.

SCSS does not offer a monthly pension option and does not facilitate loans. However, incomes from both SCSS and PMVVY are liable to tax at your slab rate.

To bank deposits: One-to-five year deposits with leading banks today offer rates of 5-5.5 per cent. Small finance banks offer 7-7.5 per cent. But PMVVY is safer than small finance banks as it is LIC and government-backed. You can also get predictable pension payouts for 10 years without worrying about rate moves.

In a rising rate scenario, parking in upto 1 year bank deposits can help you benefit quickly from higher rates.

But given the gap between the present PMVVY rate of 7.4 per cent and deposit rates of leading banks, it may be some time before deposit rates catch up.

Therefore decide between PMVVY and bank deposits based on the 10 year lock-in.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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What is meant by bond yield hardening

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A phone call between two friends leads to a conversation on rising bond yields and what it means to them

Karthik: You know, I have been experiencing frequency illusion.

Akhila: What are you talking about?

Karthik: I learnt what yield means from last week’s Simply Put column in BusinessLine and now I see that word everywhere in all newspaper headlines.

Akhila: That the bond yields are hardening?

Karthik: Yeah. Any idea what yield hardening means?

Akhila: Hardening means rise in value. Yield hardening means bond yields are rising, which indicates that bond prices are falling. In the current context, this is with reference to the 10-year G-sec (or government bond), the yield on which has gone up from 5.9 per cent towards the end of January 2021 to about 6.2 per cent now.

Karthik: Since the yield is calculated by dividing the coupon rate with the current market price, any drop in the bond prices will raise the yields. I understand that. But tell me why are bond prices falling in the market?

Akhila: That is due to the government’s announcement in the budget that it will borrow an additional Rs 80,000 crore in February and March 2021 and a massive Rs 12 lakh crore in FY22.

Karthik: What is the link between bond prices and government borrowing?

Akhila: When the government borrowing increases, the supply of government bonds in the market increase. With concerns of oversupply of government paper in the bond market, there has been pressure on bond prices.

Karthik: Ok..

Akhila: As the yields on G-secs harden, the cost of borrowing not just for the government but also for companies inches up. Companies’ borrowing costs too are linked to G-sec yields.

Karthik: Oh! Can the RBI do something about it?

Akhila: RBI has been buying government bonds via open market operations (OMO) to keep the bond yield under check to control the borrowing cost of the centre. One section of the bond market watchers also argue that the central bank should stay away from any intervention as the rise in bond yields now is being witnessed globally and not exceptional to India.

Karthik: Oh! I get it now. I only hope that my existing fixed-income investments will not be impacted by these rising yields at this point.

Akhila: If you have any investments in the debt funds, they will.

Karthik: Oops. How?

Akhila: Due to the fall in bond prices, the debt funds you invested in may suffer mark-to-market losses on their g-sec or corporate bond holdings.

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Govt biz: private banks not to have it all easy

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Private sector banks better watch out as the recent government move to lift embargo on grant of government business to them comes with strings attached.

They now run the risk of permission — for undertaking government business — being withdrawn if they are found to lag the performance of public sector banks (PSBs) in implementing social sector government initiatives through banks, the Finance Ministry has cautioned.

Put simply, the government, in consultation with the RBI, would from time to time review the performance of private sector banks on a matrix of various government initiatives and schemes.

“In case it is found that there is adverse performance by any private sector bank in the future, then the permission to the concerned bank to undertake government business could be potentially withdrawn after giving due opportunity to the bank to correct the imbalance,” said a source in Department of Financial Services (DFS).

This stance of DFS should be music to the ears of PSBs, which have time and again been complaining that private sector banks are keen only on profitable initiatives and were not willing to do heavy lifting when it came to government social schemes that are to be implemented through banks.

Ease of doing business

The Finance Ministry on Wednesday decided to lift an embargo on allocation of government business (including government agency business) to private sector banks. The objective of this move is to boost the ease of doing business and ease of living for the public, including retail customers, small and medium enterprises as also larger corporates with regard to their government-related banking transactions such as taxes and other revenue payment facilities and many other transactions.

This decision has been taken to ensure a level playing field to all public sector and private sector banks, enhancement of customer convenience, enabling innovation and latest technology in the banking sector, and spurring of competition for higher efficiency and increase in standards of customer service, ultimately leading to all-round value creation.

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‘Insurance sector transforming, stakeholders must work together’

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As the Indian insurance industry is in the midst of a transformation with changing customer preferences and growing digital adoption, it’s imperative now for all key stakeholders — insurers, Insurtechs and regulators — to work together to ensure the best experience for the end customers and thereby ensure success for the industry, says a report of Boston Consulting Group and India Insurtech Association.

The Indian Insurance industry has seen significant progress with life and non-life insurance growing at 17 per cent and 14 per cent CAGR respectively, in the past five years. The total number of lives covered almost doubled from 12 crore to 23 crore during this period and the non-life segment saw six new entrants, taking the total number of players to 34.

However, there is still scope for growth. The insurance market in India remains under-penetrated compared to global leaders. In the US, more than 90 per cent of lives are covered by life and health insurance, while in India the corresponding figures are only 28 per cent and 34 per cent, respectively. Other segments, including property and crop insurance, also have scope for more penetration.

The rapid adoption of digital in insurance and the changing customer behaviour along with the influx of new technologies have led to key shifts in the industry in terms of product innovations, emergence of ecosystems and data, and technology-driven innovations across the value chain.

Insurers have recognised these shifts and have effected rapid interventions to adapt. The companies that have invested in such change are already seeing impact on key metrics like profitability, productivity, NPS and turnaround time.

The fundamental shifts in consumer preferences have also accelerated innovation and the growth of Insurtechs. The Indian Insurtech landscape was dominated by multi-insurance players such as Policybazaar, Coverfox, and Renewbuy during 2014 to 2017. Since 2018, general insurance saw a higher share of funding due to the emergence of strong players like Acko and Digit Insurance. Funding to General Insurance focused Insurtechs has increased from a negligible share in 2014-16 to almost 75 per cent of the overall funding in 2020, it pointed out.

Insurtechs, both globally and in India, are driving innovation in the insurance industry, primarily by ushering new ideas, which the rest of the industry then builds on. A sizeable number of Insurtechs have been accelerating transformation across critical dimensions. In the current transformation phase, it is immaterial to ask, “Is the insurance industry about insurers leveraging technology or about tech companies offering insurance?” The answer should be coming together of insurers, Insurtechs and the regulator for the benefit of end consumers and industry growth.

Insurers on their part could identify right collaborative models and push for customer-centric innovations, while insuretechs could ensure a continuous pipeline of ideas and build scale with a digital-first mindset, leveraging data and analytics in addition to collaboration with insurers.

Regulators could facilitate collaboration between the two, allow insurers to buy some stake in start-ups, streamline product approval process and encourage the use of new data resources, said the report.

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United India Insurance reclassified as public shareholder of Axis Bank

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State run United India Insurance Company has been reclassified as a public shareholder of Axis Bank from its earlier position as a promoter shareholder.

This follows a request from the insurer, Axis Bank said in a regulatory filing on Saturday.

“This is to inform you that the Bank has received today, a request letter dated February 26, 2021 from United India Insurance Company Limited (UIICL), one of the promoters of the bank, to reclassify UIICL to “Public” category from “Promoter” category, in accordance with Regulation 31A of the Listing Regulations,” the lender said.

The bank’s board in its meeting on Saturday has approved the request.

As on December 31, 2020, United India Insurance Company held 0.03 per cent stake in Axis Bank

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Which is a better bet between apartments and villas?

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Looking to buy a home ? There is no debate on the fact that apartments are more affordable even as many buyers vie for villas. However, while the choice on the type of home is probably decided by your budget and your preferences, here are a few factors you should consider when making the choice.

Where apartments save costs

If we look at the options for a home, apartments in large communities are at one end and independent bungalows are at the other end of the spectrum for factors such as privacy, facilities and personalization. Flats in smaller communities and villas in gated communities may fall somewhere in the middle of this.

For a given sq ft of living space, apartments tend to be cheaper in cities, compared to most other choices. The reason for the lower price is simple – land cost. Apartments are usually high-rise developments and tend to maximize floor space index (FSI). Land accounts for the biggest cost in urban areas – 2-10x per sq ft to that of material and labour expenses. And paying for lesser share of land therefore brings down the price of each apartment.

The second reason why apartments beat bunglows and villas in cost is due to lower construction expenses. In a large project, you can get economies of scale – for example when buying material in bulk and engaging labour on contract. Smaller developments or individual home builders may not get this bargaining power, pushing up price.

What you continue to spend over the life of the home also matters.. For example, if you require 24/7 security, backup power and a whole host of services, you may pay more in an individual home versus an apartment. This is because the cost is shared in an apartment or villa community while you have to pay it entirely in an independent home.

Where independent homes score

The cost advantage of apartments may sometimes be offset by higher finance cost in large projects. They may face long delays in completion due to various complexities and lock-up capital. Also, in smaller towns and in peri-urban areas, apartments may be priced comparable to that of individual homes, especially if the project offers a lot of facilities.

A single home can be lighter on the pocket compared to shared communities when you have to pay fixed maintenance costs, whether or not you use the services. Another example is variable costs such as for water. Often resident welfare associations may charge based on sq ft area rather than number of people in an apartment. You could end up paying more than your usage or when you keep it locked.

Other factors

As a home is a big-ticket investment, it helps to consider not just the costs but also the risk and return aspects of the different choices. In real estate, land is the asset that appreciates while building depreciates with time. So, the type of property with the most land assigned to you will be a better investment, all things being equal. This is particularly true when the building becomes old and needs to be reconstructed. The resale value will be entirely based on the land value.

That said, land price appreciation is very location dependent. It is possible that a smaller land share in a good neighborhood which continues to develop offers higher returns than a larger plot of land in a far-off place which does not see growth. This needs to be factored in your decision and you must not be overly swayed by land size alone.

Rental returns – which are quite low for nearly any residential property – may be lower for independent homes versus apartments. One reason is the desire for tenants to have more standard amenities such as security and access to facilities such as swimming pool. Maintenance and upkeep costs may also be higher for the owner, further reducing rental yields.

Lack of liquidity is one key risk factor in property investments and you must factor this in your choice. An apartment has a wider buyer base compared to villas or independent homes. One reason is the lower price, especially in cities where flats may be the only affordable option. But many home buyers prefer a flat for other reasons such as maintenance support, water and common facilities. Also, apartments are more standard in their layout and features compared to a custom-built home. The personalization done may limit buyer interest compared to the more generic look of an apartment.

Monthly bills

Fixed maintenance costs in an apartment may be high in large complexes compared to individual homes

Flats are up

Wider buyer base

Rental potential

More affordable

The author is an independent financial consultant

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Insurers have paid ₹7,500 crore so far towards Covid claims

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General and health insurers have so far paid Covid-19-related claims worth ₹7,500 crore. There has been a slowdown in the demand for corona-specific cover these days while at the same time the health insurance segment is also witnessing a greater demand for regular health insurance, according to industry experts.

“The industry saw high demand for corona-specific policies in September-November period but now people are looking beyond Covid cover,” Sanjay Datta, Chief-Underwriting, Claims and Reinsurance, ICICI Lombard GIC, told BusinessLine.

In June last year, the Insurance Regulatory and Development Authority (IRDAI) had asked general and health insurers to offer a standard corona cover policy, Corona Kavach, with the sum assured ranging from ₹50,000 to ₹5 lakh. The policy period is from three-and-a-half months to nine-and-a-half months.

Citing industry estimates, Datta said the total claims that have been paid so far on account of corona cover policies were to the tune of ₹7,500 crore. “For this financial year, it could be ₹8,000-9,000 crore out of which ₹7,500 crore has already been paid,” he said.

While the corona-specific policies were short-term policies, they had created a greater awareness on the need for long-term and regular health insurance, Datta said, adding: “Overall, they have created large-scale awareness among general public.”

Prasun Sikdar, MD and CEO, Manipal Cigna Health Insurance Company Ltd, said given the gravity of the Covid pandemic and the panic surrounding it, more than ever before, people are now concerned about their health and that of their families.

“In the hierarchy of needs, health today has claimed primary position and the role of insurance has moved from priority to necessity,” he said.

Post the pandemic, the conversation on insurance has finally changed from “do I need health insurance” to “how much do I need”, Sikdar observed.

Profit or loss?

What will be the final impact of corona on the bottom line of insurers? It may take more time to answer this question.

According to the CEO of a major non-life insurance company, an understanding of the net impact of Covid on the business of general insurers may differ from company to company.

“As of now, we can say that health insurance business has certainly got a boost and it has overtaken motor segment. But the real picture will only come out with full-year numbers,” he added.

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More companies opting for cyber insurance, hiking limit: Bharat Re Insurance Brokers

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More and more companies are taking up cyber insurance in recent years and those with existing policies are looking to hike their covers, said TL Arunachalam, Director and Head, Cyber and Emerging Risks Practice, Bharat Re Insurance Brokers.

“There has been a good response to cyber insurance in the last two to three years, It has been growing in two aspects — those who had bought a cover in the past are looking for increased limits for insurance. There are also new buyers in sectors apart from banking,” he told BusinessLine.

Companies in sectors like manufacturing, pharmaceuticals, e-publishing and service providers are also now buying cyber insurance, he said.

While companies with clients in Europe or the US now insist on having cyber insurance before any business activity takes place, there has also been an increase in incidences of ransomware, especially during the pandemic, he said.

Most companies in the banking and insurance sector had been taking cyber covers in recent years but other corporates had been slow to adapt, according to industry watchers.

The Insurance Regulatory and Development Authority of India too had recently noted that the economic situation owing to Covid-19 pandemic has seen an exponential increase in cyber attacks across the globe and, in particular, the financial sector. The IRDAI has also formed a committee now to review its insurance and security guidelines.

Meanwhile, commenting on the pandemic and its impact on businesses, Vijay Thyagarajan, Principal Officer and CEO, Bharat Re Insurance Brokers, said it has highlighted the need for business interruption cover.

“Business interruption cover was not being bought even before Covid. The cover should not be looked at only from the point of view of a pandemic,” Thyagarajan said, adding that business interruption could happen even due to other accidents like fire or a flood.

“People are slowly realising this,” he noted, adding that Covid has highlighted that business interruption is a real possibility.

Most business interruption covers globally do not cover the non-damage interruptions such as the Covid-19 lockdown.

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