@Leisure - Vol-9 | srei
  • <none>

@Leisure - Vol-9

Newsletter
 

When economics turned upside-down

Intro: We can imagine a situation where real interest rates (nominal interest rates minus inflation) turn negative due to high inflation and other factors, but do you know that not so long ago, nominal interest rates turned negative?

In 1998, for the first time in the history of the world, nominal interest rates turned negative in Japan. Banks in the west were actually charging Japanese banks to hold their money, instead of paying them interest on it. Further, investors purchased short-term Japanese Government bills at negative yields. They were parting with their money, knowing that at the end of six months, it could give them a negative return. Worse still, some international banks like Barclays Capital, J. P. Morgan and Citibank actually offered negative interest rates on the yen they lent to other banks.

Now, why would someone pay to lend their money instead of just keeping it?

To begin with, in the 1990’s, the Japanese economy was facing tough economic times; this was popularly known as the ‘Lost Decade’. It was in a severe recession and bad loans were negatively impacting the capital bases of banks. Banks, therefore, decided that it was cheaper and more convenient to stock cash with credible institutions rather than keep it as maintaining cash and transporting it would cost more.

Foreign banks went along with this trend, realising that there was money to be made. Even if they lent funds at negative rates, the rates they were receiving for borrowing money from Japanese banks (instead of paying interest) was higher thereby giving them a profit.

Where Government bonds were concerned, the Japanese government auctioned off six-month treasury bills worth $13.6 billion at a rate of merely 0.03 per cent. Once these treasury bills were traded in the secondary market, their price increased due to the demand for this comparatively secure instrument. As a result, the yield became negative, touching -0.005 per cent.

While nominal rates eventually returned to positive territory, they remained low for almost a decade. There were many reasons for this but a pessimistic business outlook and low inflation are two factors that contributed the most.

As strange as it may sound, for nominal interest rates to remain positive, a minimum level inflation is a must. This level varies from economy to economy and depends on various factors. It is a sign that an economy is healthy and growing; it implies that people are demanding goods and services and that, in turn, drives businesses to produce more and demand more funds.

 
 

Look beyond returns

Intro: In tough economic times, when inflation is high, interest rates are likely to be high too. However, when you decide to lend your hard earned money, make sure that the interest rate is not the only factor you consider...

There is a principle in finance which states that while investing, the higher the risk you are ready to take, the higher the potential returns you should expect for it. It is based on the reasoning that if you are expected to take on greater risk, you should be compensated more for parting with your money. Accordingly, for instance, the Government will offer the lowest rate of interest in the economy as you are assured that there can be no default on either your capital or interest. Established banks and companies will offer the next lowest rates of interest, as the risk of lending to them is only marginally higher than the risk of lending to government. Companies and institutions that are not well reputed may offer still higher returns.

Naturally, you must do a fine balancing act to ensure that you get good returns but without the risk of losing your hard earned capital. It simply means that you must look a little deeper into the fundamentals of the company offering the return as many fly-by-night companies have offered investors very high rates of interest and ended up not returning their capital at all.

It is always prudent to understand, to whatever extent possible, the nature of the business to which you are lending. Find out if it is secure and tangible or the type that can be easily be severely impacted by numerous domestic and global events. Also investigate the track record of the company to ensure that it has a reputation for paying its investors interest on time and does not default when it comes to repayment of capital. Most importantly, find out how the debt issue that you plan to subscribe to has been rated. For a long while now, companies issuing debentures and fixed deposits have been displaying their ratings.

Only invest if you are satisfied that the business of the company is secure, it has a track record of timely payment and no incident of default, and enjoys a good rating from credit rating institutions.

Srei Infrastructure Finance Ltd. has consistently earned higher ratings from various prominent agencies and offers various choices in NCDs. The company’s focus in priority sectors like infrastructure lending with interests in equipment finance and project advisory, and over 24 years’ of experience, give its offering high credibility.

 
 

Bonds - the guardians of your child’s future

Children of today have a world of opportunity ahead of them. The types of careers that they can pursue have increased exponentially. Sports, disk jockeying, event management, robotics, blogging and a host of other activities that were considered as hobbies in the past are now recognised as legitimate careers. More importantly, for most of these activities, there is some form of education or training that can prepare your child to set out on a career that will enable him or her to excel. All you can do is guide your child towards what captivates his or her interest and make sure that you have set aside the funds required to ensure that this interest is channelized into a career.

There are many instruments available in the financial markets to help you build up a sufficient corpus of funds for your child’s future. Some criteria that you must keep in mind are:

Adequacy: The money should be adequate enough to meet your child’s needs. While this amount can at best, be a guesstimate at present, it would always be safer to err on the higher side.

Timeliness: The investment that you make for your child should be available when you require it. Accordingly, the instrument should either be liquid enough or flexible enough to allow you to encash it with some notice.

Assurance: While the amount that you require at maturity may be merely an estimate at present, you should have the assurance that at the time of maturity, the amount that you get is in a close range of your estimate and not far less due to a sudden change in external factors.

Bonds meet all these criteria quite suitably. They are usually long term instruments that allow you to invest for the future. At the same time, if the money is required before the maturity date of the bond, you can exit through the secondary market. The amount you estimate that you will need to fund your child’s future is likely to be protected from inflation if you choose a bond that gives you a rate of interest that is higher than the average expected inflation during the term of your investment.

Most importantly, investing in a bond issued by a reputed organisation can assure you that your hard earned money is secure and available to your children to let them pursue their dreams.

 
 

Buddy Jokes

1. A newly-wed girl wanted to impress her husband with her home management skills. So instead of sending her sari to the dry-cleaners, she washed it at home. Proud of the savings she had made, she informed her husband, “I washed this sari at home and saved Rs 150. My father used to say - A penny saved is a penny earned.” Husband replied, “Keep up the good work, dear. Wash it again and again till you can replace my salary and then I can retire!”

2. A stock broker was filling in a visa application in order to go on vacation with his family when he came across the question: “Have you ever been arrested?” He promptly wrote down, “No”. The next question, obviously meant for those who replied “yes” was: “Reason?” Without thinking the banker scribbled, “Never got caught!”

3. Madan applied for a job with a local bank. The interviewer was suitably impressed with his knowledge of the subject and was all set to offer him the job. For the sake of formality, he told Madan, “You know, to become a banker, you must be honest and above suspicion.” “Of course I do,” replied Madan. “I am so honest that I paid back my student loan even though it meant taking a personal loan until I get a job.”

4. How will you know when an economy is in really bad shape?

  • An ‘insufficient funds’ message on an ATM screen will refer to the bank’s financial status, not your account’s.
  • When people ask “How’s it going?” they are referring to your job and not your health.
  • The term home could take on a new meaning, which includes vehicles.