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A newsletter of popular articles on financial markets and corporate finance

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Volume 3, Issue 12, Jul 2017

Artha - A newsletter for finance lab

Editorial

 

The much waited Goods and Services Tax (GST) is finally launched on 1 July 2017 merging a large number of taxes and duties into a single tax. The registration process will continue till the end of July. There has not been major technological bottleneck so far in implementation of such a huge pan-India regulation. But there are issues with the format of GST-compliant invoice and returns. There are confusions, quite naturally, on the applicability of rates of GST. One possible reason for such confusion is multiple rates of tax. Singapore has a uniform GST rate of 7%. UK has two rates. Also the highest GST rate of 28% in India is too prohibitive according to some experts.  Such a punitive tax (normally levied on sin goods) is levied on certain daily necessities like hair shampoo and ATM. We hear mixed reactions in different sectors in the early days of GST. Where the consumer off-takes and footfalls in retail stores have returned to normal levels within a fortnight, the real estate sector is hit hard. According to Bloomberg, new residential real estate project launches and sales in seven major cities of India were down last quarter to nine-year lows.  One must not rush to conclude the success or failure of the implementation of GST in India. Let us reserve our comments for at least six months.

In the first article, the author construct a systemic financial distress prediction process based on the tone of corporate annual report text information and proposed a measure to quantify both positive and negative sentiments in the annual report’s language without using any accounting information. The second piece argues a case for introduction of Wholesale and Long-Term Finance (WLTF) Banks in India given an experience with Development Institutions. . The third article deals with India’s NPA problems and resolution. In the fourth article, the author analyses the investment decisions of an ordinary investor based on over simplistic understanding of past returns of Indian equity markets which fails to highlight the market risks associated with such returns and thus exposing the investor to possible adverse surprise.

The Market Watch section in this issue highlights what happened on 10 July when NSE halted trade for several hours (Manic Monday) and the weakening position of the US dollar.

You may send your comments and feedback on this issue to ashok@iimcal.ac.in

Happy reading!

Ashok Banerjee

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Predicting Corporate Default Using Text

Author: Ashok Banerjee & Sanjeev Kumar

The rising corporate debt and higher default rates have led to a continuous increase in distressed loans in Indian financial system. The situation worsened when stressed asset ratio rose from 7.6 % in March 2012 to 11.5 % in March 2016 and further to 12% in March 2017. As of June 2016, the total amount of Gross Non-Performing Assets (NPA) for public and private sector banks was around Rs. 6 lakh Crore (almost $10 billion).

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Wholesale and Long-Term Finance (WLTF) Banks:

Author: Partha Ray, Ph.D., is Professor, Economics, Indian Institute of Management Calcutta (IIM-C)

The RBI has released an important and timely discussion paper on April 4 2017 on the “Wholesale and Long-Term Finance” (WLTF) Banks. This is in consonance with announcement made in the first Bi-monthly Monetary Policy Statement 2016-17 (of April 5, 2016) which had mentioned that the RBI would “explore the possibilities of licensing other differentiated banks

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The NPA crisis: genesis and resolution

Author: Balachandran R

The financial crisis that originated in the United States in 2008 laid the foundation for much of today’s non-performing loans plaguing the Indian banking sector. Tracing the history of the crisis, lax underwriting standards and risky behavior at Wall Street, abrogation of the Glass Steagall Act which mandated a Chinese Wall between investment banking and commercial banking, explosion in financial engineering in the form of Credit Default Swaps, CDO’s etc.,

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Guest Column

The Many Truths about India’s Long Term Equity Returns

Author: Deep N Mukherjee ( Guest Column )

Markets are now at historic highs. On 20th July 2017, Nifty 50 closed at 9873. On 20th July 1990 Nifty 50 had a level of 302, a mind-blowing 32 times growth over a period of 27 years with an annualised return of 13.7%. Prima facie, these numbers clearly create a case for investment in Indian equities. But such headline numbers often sets wrong expectations on risk and return among investors. Besides they also form the basis of various claims which superficially appear to be correct but on deeper analysis appears to be somewhat exaggerated.

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