Investor protection doesn’t exist; you’re on your own, baby!
August 4, 2017:
Traditionally, most of the individual household savings are invested in fixed deposits with banks. Banks are intermediaries, who use these deposits to lend to those who need the money to invest, and banks earn a spread on the interest deferential.
But banks have lent poorly, and these are mostly the public sector banks who control 70 per cent of the deposits. The poor lending is more often than not the result of politically-directed lending rather than a proper evaluation. This being so, the ‘connected’ corporate borrower delays and defaults on its obligations, leading to non-performing assets (NPAs).
Understand risks associated with bank FDs: Investors are generally unaware of the risks associated with FDs in banks. Once the money is handed over, the money belongs to the bank, and the depositor becomes merely an unsecured creditor. In case a bank fails (as did the Kapol Co-Operative Bank recently) the depositor will get only up to ₹1 lakh. This insurance limit has not risen with inflation, unlike the salaries of MPs.
Now, in order to recover a part of the losses arising from poor lending decisions, banks do several things, including imposing all sorts of charges on depositors. Last week, the State Bank of India lowered the interest rates on savings deposits by 0.5 per cent to 3.5 per cent.
You get the drift? Individual investors are on their own. The big corporate borrowers are only now starting to have their arms twisted; Essar Steel has been referred to the NCLT for bankruptcy proceedings and large corporate houses are selling assets to reduce their debt loads.
With FD interest rates lower than inflation, individual investors are diverting a part of this money into the equity market. Most of this is routed through mutual funds, and it is the domestic mutual funds which are driving the stock markets to new highs.
Understand risks associated with mutual funds: Investors assume that fund managers, better able and with larger resources, would get them out of the market before a crash. This assumption is wrong. The job of a fund manager is to invest the money collected in the best possible manner. The decision to exit stocks is to be taken by an individual investor, not by the better qualified and equipped fund manager.
Selective justice: Sadly, justice is often not equal. It appears that some cases are pursued with greater vigour than others. The judge hearing the Sahara case said, in court that “The grant of time without any steps taken by them would tantamount to giving indulgence. Indulgence has the propensity to give rise to procrastination which is the murderer of justice.”
Why, then, do other cases languish in court, such as Rose Valley or NSEL, causing immense misery to defrauded investors?
The Indian stock market is currently driven more by liquidity (transfer from fixed deposits to shares) than justified by fundamentals. The lowering of savings bank interest rates will exacerbate this trend and may drive the market higher. But it is vulnerable to a shock, and so caution is advisable, for the moment.
(The writer is India Head — Finance, Asia/Haymarket. The views are personal.)