Is it Indian PSU banks, who will bleed the streets? Just a thought!

 #Banking in India will be the next Boom n Bust story??

#Stock market fall is an effect and not a cause! What happens when there is too much of excitement and attention to one sector/industry/company/ business idea? everybody starts appreciating, following, taking extra effort to get into the scheme of things etc.. untill there is a there is a peak and BOOM! And a sharp slope slides down n BUST! and a parallel line leveling the fields and world moves on towards a new exciting subject. In financial market or the larger context of economy, it is extremely evident.

Strangely we all keep looking back at history all the time, yet fail to gauge the impending risks. Time and again it repeats itself, we all educated investors close our eyes and follow whatever the markets leads us to.

In the world history of economic crisis, since 13th century, 2/3rd of the crisis started at bank failures or debt crisis, barring a few which were due to trade deficits, industrial revolutions and a few wars. The amazing fact remains that though there were so many debt driven crisis in last 8 centuries, we just don’t stop repeating ourselves.

Yes we do try. By creating central banks, but, sovereign debts fail too. We have credit rating agencies, then happens the SUBPRIME CRISIS.

Then come more regulations, more tightening by the central banks! Banks seem to become victims of these regulations and the business targets and margins as well. Then the greed takes over bankers race to aggresive lending to stretch the balance sheets.

The recent developments in the Indian Banking sector is alarming, a little better than what it was two years back though. Two important parameters of performance is leaving the especially the PSU banks high and dry! would they survive?

1. The Basel III norms – a very difficult set of guidelines set by the central bank on capital adequacy to brace for crisis, is an extreme stressful for banks. Banks of India have been issuing the Perpetual Bonds to meet tier I capitalas per Basel norms. coupon rrates of few bonds have been as high as 11%. With no maturity dates ateacher on thad a bones,  could easily become a excess burden of interest payout as interest rate continues to fall.

2. Greed of bankers to inflate the balance sheets – Mounting NPAs caused by disbursing loans to less credit worthy entities is showing signs of failures, unending restructure and failure to get adequate risk cover through collateral.

Thanks to the watchdogs of Indian financial sector, it may not just do a Boom n bust and averted a crisis just in time! but an area to trade carefully. just a thought!

Investing in corporate bonds – A good debt investment option available for Indian investors

Debt Secondary market remains an unexplored category for Indian investors, though it is very popular globally. This post attempts to highlight few basics about bond investments
Fixed income like #Bonds, #NCDs remains least talked about subject, amongst the indian individual investors. Investors can invest in the primary market and stay put till maturity, as well as trade like equity/ shares. Infact, news reports indicates, bonds have yielded higher return compare to #Nifty or sensex in last one year.  There are two types of bonds traded in the debt market, Government securities (G-sec) and corporate bonds (Tax free bonds, NCD etc). G-Sec are considered to be the safest option with maturity ranging from 91 days (ultra short term) to 30 years (long term).
Corporate bonds are issued by banks, NBFC and corporates involve higher risks compared to G-secs, however they offer higher return comparatively.
When we talk about debt instruments (bonds, NCDs, CDs etc.) we come across terms like coupon rate, annual yield, yield to maturity etc. Let’s understand what is yield and how it is related to coupon rate and bond prices. Yield is annual return on the investment indicating in percentage term.

Analysing Bond investments in two scenarios – 1. Primary market 2. Secondary market. 

Primary market clearly defines that investors enter when the issue opens by the corporate.
For Example – In Primary market, a bond issued with face value – 100, Coupon rate 10%, minimum investment of 10 bonds, chosing annual payout option, Tenor 10 Years . Here the market value of the bonds will remain at Rs. 100 till the maturity. The yield to maturity(YTM) will be 10% = coupon rate since market value is the same as face value. Final payout will be bond price + interest accrued.

Secondary market –  Apart from the new bond issues, there are existing bonds in the market with higher yield, which investors can look at, but one need to understand that the two markets work differently and yield may vary significantly.The secondary market signifies trading in the already listed bonds.
Yield to maturity for secondary market investors – Case 1 – Bond traded at discount
Once the bond is listed on the exchanges, the bond prices fluctuate depending on the asking prices and volumes on the said trading day. The asking price of a bond move based on demand, supply and interest rate cycle. However, future payouts are pre-determined. Suppose, a bond is issued at a face value of Rs.100/-, with a coupon rate of 10% yearly, somebody invests Rs. 10,000 in the issue, the yearly interest payout remains at Rs. 1000 for the rest of the tenure. Incase, the bond prices fall to Rs. 90, still the coupon payout will be Rs. 10. So, now the same bond will be available at 9000 Rs. And, will still be able to fetch annual return of Rs. 1000, as the coupon payments on the bonds remain the same, so the annual return (or annual yield) is 11.1%.
In this scenario, the current bond price<issue price. Hence, it can be called as “discount”. One, who is investing in this situation, will get higher coupon pay out, i.e. higher yield. It may happen in the higher interest rate cycle, (the interest rate moves upward).   

Yield to maturity for secondary market investors – Case 2 – Bond traded at premium
In exactly opposite scenario, if the interest rates fall post the bond issue, the interest of the buyers increases the exiting bonds available in the secondary market, as they offer higher coupon rate, however, the buyer may need to pay premium as the askprice of the existing bonds with higher coupon rate move upwards due to increased demand. Now, if the bond price increases to Rs. 110, for 10,000 investment, coupon payout remains at 1000, and on the current NAV, the value of the investment will be 100*110 = 11000. This is a win-win situation for the primary market investor. However, in the secondary market, the coupon pay-out remains at Rs. 1000, against the bond price of Rs. 110. Hence the new investor is getting 9.09% interest pay-out, lesser than the coupon offered in the issue. If current bond price> issue price, it is said the bonds are sold at premium
Incase, there is no change in the ask price than the issue price, it is known as at par value(face value).

In the secondary market, yield-to-maturity includes coupon payment and the additional gain (bought at discount) or loss (if bought at a premium).

The points to be noted –
1. During the rising interest rate environment, investors can take advantage of the discount on the bond price, and enjoy the high yield as the coupon payout (interest payment) remains the same on lower cost of investment.
2. During the falling interest rate regime, the early investors can look at entering existing bonds with high yield option to capture a good yield, it may attract premium.
3. The liquidity in the instrument in the secondary market plays an important role. Size of the issue, investor interest, maturity date etc plays important role in the volumes. If the volumes are not adequate, one may need to wait or pay a premium.   
4. In secondary market, the bonds carry risks on interest rate,liquidity, credit and market risks
For trading in bond market you need to have a demat account. Please contact your share broker.  
You may check Investing answers YTM calculator to find approximate yield to maturity when you buy on secondary market.

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