POSTED BY July 13, 2012 COMMENTS (35)ON
This is not an allegation, but I want to understand how things are related and putting 3 points which shows how govt policies are influenced by the financial services sector.
Some time back, there was this craze for liquid funds. The money will earn a much better return compared to your saving bank account and the money is highly liquid. You can get it in 1 day if you want it. This started making people believe that liquid funds are as good as saving bank account and people started parking their short term money in liquid funds. At the start it was just done by few people, then through advertisements, newspaper, websites etc, most of the investors came to know about this and started using to park their money in liquid funds.
What happened due to this?
When you don’t leave a lot of cash in your saving bank account, banks do not have enough money in their pool to further lend. Less money is available for them to use it for lending, less money is there to do anything. Note that saving bank money is cheapest source of money to banks. All they need to pay is 4% (6% is mostly given for amount above 1 lac only). There is no alternative for bank to find this cheap money. This issue was big for banks like SBI, ICICI, HDFC and other several banks. What could be done?
This rule came in – “No tax on interest in saving bank account up to Rs 10,000” , a nice incentive for people to keep their money in Saving bank account, hence banks are benefitted by this move ! . This happened in this budget 2012 – Not very sure how it happened but from where this rule came in this budget? Can some one find any links!
Fixed Maturity Plans (MP’s) are just like Fixed Deposits. FMP’s were allowed to give indicative returns and they could say – “You can expect 9.4% return in one year” , this is when bank FD’s were at 7-8% . FMP’s were also “extremely safe”. So a person wanting to put his 25 lacs in FD for 1 yr , could see that extra 1-2% return without much extra risk (he thought so) and the tax advantage was higher in FMP’s compared to fixed deposit (this was bonus). I hope you know that one of the biggest share of mutual funds investments go into FMP’s (not equity funds btw).
So What happened because of this?
Banks FD’s were affected , People started looking at FMP’s as alternative of the Fixed Deposits . The “indicative” returns were the issue , those were perceived as “guaranteed return” and people started flocking to FMPs, at least the bigger ones. No I have no idea , but suddenly there was a news sometime back that FMP’s are not allowed to declare any indicative return. I truly don’t understand why this rule came into existence. Can some one also find a link here?
Markets sometime go up and down, but when its down, it puts pressure on a lot of people. Govt is one of them. Markets down for years is not a strong sign of a booming economy, so govt has vested interest in markets going up and look good. In the same way there are tons of PSU companies which are doing bad and no one wants to touch them. ONGC was one of them earliar and at the moment Air India is another one.
Can anyone really connect the dots why LIC invested in ONGC ? Can any one tell why LIC invested 60,000 crore in 2011-2012 in stock markets? LIC might have thought that markets are low, but what is the reason to put 50% of its equity investments in PSU stocks? Did someone ask it to do so?
Subra has a point to make on this:
LIC’s top management has only ONE BOSS to please – the ruling party (not the government, note). This is scary. When I see fund managers beating the Sensex and the Nifty, I realise that it is by being underweight on the PSU stocks. LiC does not have this choice. (Source)
Comments? Do you think govt is really influenced by Financial Services Sector ?