Friday, July 5, 2013

Corporate NPS

Let me now dwell on one of the most attractive investment products, which unfortunately has been off the limelight – The Corporate NPS (New pension scheme).  I believe, lack of awareness could be one of the prevailing reasons for its non-scalability.
As we all know, NPS is available to all Indian citizens on a voluntary basis w.e.f 1st May 2009 in his/her individual capacity. However, in order to provide larger impetus, PFRDA (Pension Fund Regulatory & Development act) introduced a separate model to the employees of the corporate entities including public sector undertakings since December 2011 named NPS – Corporate sector model.
This facility is extended to almost all category of entities say Private, Public Ltd, Proprietary, LLP, Society Trust etc. with no minimum restriction on employee strength and the contribution being as small as Rs 6000.00 per person per financial year. Product offerings are fairly simple to choose viz,. Equity, Corporate Bonds & Government securities based on one’s risk taking ability. The default option is ‘auto choice’, where   the investments would be made in a life cycle fund across all the three asset classes in a pre-defined portfolio based on the age profile of the investor. For instance, up to 35 years of age, 50% weightage goes to equity, 30% & 20% allocation towards corporate bonds & Government securities respectively. Progressively with age, the allocation towards risky assets comes down increasing the weightage to safer assets.
The characteristic feature that stands out is the tax benefit up to 10% deduction on the Basic+DA of the employee’s contribution without any upper ceiling, in addition to the one lakh benefit available under section 80C. On the contrary, voluntary NPS contribution in the individual capacity would fall under section 80C limit. In simple words, if the employer deducts 10% (max allowed) towards NPS, it does not count for the taxable income irrespective of your tax slab. All that you need to do is a minor re alignment in your current CTC by removing some taxable components to accommodate NPS.
The recent press release by PFRDA for NPS (private) - non-government employees for the financial year 2012 – 13 has demonstrated sound double digit returns, which fares better than EPF/PPF.
Weighted average returns of 6 private NPS
Corporate debt
Government debt
Upon attaining the age of 60 – 70, you can withdraw 60% as your lumpsum and the remaining in annuities. For earlier withdrawal , the ratio (80%) is tilted towards annuity. In case of any untoward eventualities, nominee would receive 100% of the pension wealth as lumpsum. Other distinctive features that support the offering are low cost (0.25 - 0.35%), convenience, flexibility, transparency & discipline.
I emphatically conclude that there is no better platform than the corporate NPS to channelize long term retail money into capital markets.  
Happy investing!
Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Monday, July 1, 2013

Realities of China's shadow banking

Over the past one week, markets have been on a roller coaster due to various global & domestic factors. One of the key concerns was ‘Chinese Credit Crunch’. China being the 2nd biggest economy in the world contributing a substantial portion of the global GDP, felt like sharing some insights regarding the same to dispel fear among the investing public.
China's central bank has been squeezing funds out of the money market, forcing banks to borrow money at historic interest rate levels (interbank lending rate and 7 day repo rate @ 13% & 25% respectively)to curb shadow banking. As I write this, liquidity had already eased due to the intervention of its central bank, People’s Bank of China. However, the intent was no ambiguous signalling the end of a decade old easy credit and forcing the banks to get back to traditional banking, avoid risky loans and excessive expansion of credit.
Shadow banking is nothing but financial intermediaries involved in facilitating creation of credit in the financial system whose members are not subject to regulatory oversight. Shadow lending have flourished in China because an estimated 97% of the nation’s 42 million small businesses can’t get bank loans & the industry is expected to be valued at 1.5 trillion USD translating to 60%(approx.) of the country’s GDP.
Shadow lenders get their funding from traditional banks, and wealthy individuals wanting higher return on their capital. These lenders then issue loans @ substantially higher rates to those who would not suit the traditional risk profile for normal commercial and retail bank lending, in turn, leading to high systemic risk affecting the financial system and the economy adversely.
It is no wonder that the central authorities wanted to crack down on this kind of activity given the magnitude of  the debt issued by the country’s shadow banking sector from about $US2.9 trillion in 2010, to around $US5.7 trillion in 2012, a whopping 96% jump.
Money supply (Total social financing), a broad measure of fundraising in the economy that includes bank loans, bond issuance and some forms of off-balance-sheet financing, was  up 52%  year-on-year in the first five months of 2013 aptly signifying ample money supply in the system.
It is widely believed that a broader crackdown on the shadow banking would keep borrowing costs high and potentially reduce the flow of credit in the short term. However, this would lead to cleaning up of the system and facilitate money flowing into productive areas of the economy for a more sustained growth in the medium to long term.
Happy investing!