Tuesday, March 09, 2010

Now this is called a ‘Fear Hug’

Once bitten, twice shy: Fear of risk embraces Mr. Banker and Individual Investor in the same hug without any discrimination

Fear, especially of risk in financial markets, is contagious. It afflicts the money specialist super bankers as well as ordinary individual investors. The pattern in householders’ financial savings and risk aversion among bankers, as a class, shows that the Rat year (the year 2008 was known as the year of the Rat under the Chinese lunar calendar system) has taken the bull out of the Average Joe and Mr. Super Banker without any discrimination. Risk has hugged them all.

The latest data shows that Indian households’ investments in equity shares, debentures and mutual funds have dropped to just 2.6% of their total financial savings in FY09 from 12.4% a year ago. At the same time, their investments in bank deposits paced higher to 58.74% in the year to March 2009 compared to 52.24% previous year.

As at March 2009, according to the latest data released by the RBI, the Indian householders preferred to channel their savings into the safety of bank deposits and reduced their investments in “risky” market related instruments such as shares, debentures and mutual funds with rise in risk perception and extreme pessimism.

Coincidentally, the steep fall in stock market indices and accompanying unprecedented volatility saw Indian households’ investment in shares and mutual funds as percentage of total financial savings nosedived to just 2.60% during the year FY09. In contrast, when the stock market was booming, they were happy to put more money, larger allocation of their financial savings, at the rate of 12.40% into such market instruments during the year ended March 2008. All the euphoria evaporated with one whack of volatility.

The flow of funds into bank deposits seems continuing, as per the latest indications, even though the interest rates offered by banks have dropped significantly over the last two quarters. Despite reduction in deposit rates by nearly 300 bps across maturities, continuing flow into bank deposits shows investors still have to recover from the previous year’s stock market shock and certainly are unwilling to keep pace with the dancing volatility in equity markets. Once bitten, twice shy.

Height of risk aversion among banks those are unwilling to lend lest it dilute the credit quality. They are obsessed with retaining the asset quality, which would otherwise impair their capital. They fear rise in NPAs so much that they are willing to sacrifice the difference in deposit rates offered to customers and the interest earned from RBI at Reverse Repo rate. This is despite the patting and pushing by the banking regulator and even the government mandarins.

Even mutual funds that attracted investors in droves just one year ago with plethora of existing and launch of new schemes bore the brunt of this risk aversion as investors were extremely less enthusiastic about investing in mutual funds, particularly equity oriented schemes. Investors, who pumped in Rs.568 billion in mutual funds in FY08, pulled out Rs.104.78 billion from these in FY09. Equity mutual fund schemes during the year FY09 saw net inflow of just Rs.40.24 billion against Rs.469.05 billion during the previous year.

Recent mutual fund data also reveals that banks are parking record amount of funds in liquid and ultra short term schemes, which would hardly yield – 6% annualised.

Is the end of tunnel in sight? Will the government policies inspire confidence among investors to risk capital and spend, instead of saving more?

Will the banks lend rather than send back depositors with ultra-low rates? Well, these are a trillion, not a million, dollar questions.

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2010.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.

For Exclusive Footage by Sunday Indian Click Here

Outlook Magazine's B School Ranking Scam Exposed
Don't trust the Indian Media!

Exclusive In chat with Society Magazine - Prof. Arindam Chaudhuri
IIPM Related Links
IIPM ISBE Programmes
Follow Arindam Chaudhuri on Twitter
IIPM B School on Twitter

IIPM - Admission Procedure


IIPM 3-year full-time Integrated (MBA BBA) Programme
IIPM 2-year full time Programme (leading to the award of the MBA degree from IMI)

No comments: