Does Govt work for Financial Services?

POSTED BY manish ON July 13, 2012 COMMENTS (35)

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.

No tax on Saving Bank interest up to Rs 10,000

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!

No Indicative returns on FMP’s (Fixed Maturity Plans)

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?

LIC bailing out Indian Stock market

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 ?

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35 replies on this article “Does Govt work for Financial Services?”

  1. ANAND says:

    hi

    Just saw a public notice by LIC of India. It cautions public about their own agents who have sold their useless products by promising moon. Just at a time when people started surrendering their policies and getting shocks of their lives, this notice come in news papers, shredding its responsibilities and putting the same on the shoulders of the agents. I dont understand this – by the so called big player in the market, giving a public notice casutioning about their own products. Can some body check this and let me know – what this is all about. I saw the notice in today”s TIMES OF INDIA – Bangalore edition. Can some one belonging to LIC of India explain the same in detail.

    1. Anand , it would be a good idea to discuss this on forum – https://www.jagoinvestor.com/forum/

  2. Amit Gulati says:

    Another feather to Govt. Cap

    They are planning to remove 10% capping on insurance companies investment in a particular company. Why? As already pointed by someone LIC is already violating this rule of IRDA.

  3. Somasekhar says:

    Hi Manish,

    Below link will explain why no tax on Saving Bank interest up to Rs 10,000.

    http://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/07/2012&story=1&title=Fixed-deposits-losing-favour-thanks-to-high-inflation

    FII’s (Foreign Institutional Investors) are from USA, Europe… etc often invest in Indian Stocks, but they have been facing many problems. They often borrow money from banks and invest in our markets, but those banks are in problems. At the same time, Indian Govt needs money because of high deficit, so players like LIC (Domestic Institutional Investors) which is a wholly government owned entity has been investing in PSU’s (ONGC, NTPC….).

    Thanks,
    Sekhar

    1. Thanks for the link .. let me go through it !

  4. G.VENKATESH says:

    thanks for information

  5. Sohil says:

    The reason for 10,00 rupees break on saving instrument has to do with tax official penalising tax payers as technicaly one has to add all income while paying taxes.But middle class are not intelligent enough and the details used to get miss.Than love letters from tax officials and middle class runing here and there.And government wasting time in a minuscule amount and wasting its time.Hence government now wants to focus on big fish as they can trouble and squeeze from their pocket easily and more amount.Rather than wasting time on middle class because they already pay back via service tax and such amount doesn’t matter for big scams.Hence looking at it as financial saving provided from government .I dont think its that way.Government wants a person to pay every penny he has.That way its ship works right now just like old american story spend more than savings.

    Regarding rajiv gandhi equity scheme its just a scheme for one to invest in share market.This things were asked in past.And just a small lolly pop was forwarded.I feel elss were much better than investing in stocks.Also just for new comers who have least idea how market works ,when to invest,knows nothing.Government just want them to burn their fingers in stocks.

    Regarding MF and FMP giving indicative returns.Though whatever they say all such instrument not always fully deliver.It was fund MF house used to invest in their own parent company shares.So Reliance would invest majority in rcom and so.Hdfc fund in HDFC shares.And so on.Though bigger misdeed didnot happened.But that was like saving its own parent.In future it can easily get bust hence government remove the indicative return.Its not that they wanted to save the people.But it wanted companies to continue this practice without people knowing much about it in open.Hence the practice continue and if one company goes boom .Government will easily wash its hand.Latest details shows how ICICI went out of way to help kingfisher and now sold those debts to third party company of-course with heavy discount.

    Regarding ONGC-LIC saga .ONGC ofcourse not is a bad share.But what would you say.A stock available in market for 280.And a person wants to buy say 5 crore shares .Ofcourse buying such high quantity would get a good discount of 5-10% .Hence that person shouldnt pay more than 250for the stock.But it knowingly put 295 rupees for a piece. This clearly shows how much government things abouts ones own money.Thats the one reason how good in claim repayment they are.I have not a single rupee in lic instrument.

    1. Thanks for sharing your views on this topic, you raised some really good points !

  6. Rajneesh says:

    Good to bring this point. You know, government is doing the same thing for which Raju went to jail. Moving money from one company to another. Raju transferred money from Satyam to Maytas and then in one shot wanted to transfer the assets of Mayatas to Satyam to plug the hole. But he was caught and went to jail.

    Our government has been doing that since ages. They move money from PSU banks to failing corporations [like Kingfisher] and from ONGC to other petro companies in the form of cross subsidies. And when all options are over, LIC is forced to subscribe to the stocks which has got a thumbsdown from analysts as well as investors.

    The saddest thing is that LIC has investments from all class of investors. From the rikshaw puller to the local vegetable vendor [who puts in 20 Rs daily] to the savvy finance professionals [who feature in the ad LIC hai to kanhi aur kyon jaana]. AIG was considered too big to fail but it failed. If LIC is forced to make bad investments, I think the end is not very far..

    And somebody should stop the government from moving money from PSU sector to private sectors. Coal India is just another example.

    1. Thanks for sharing your views on this topic !

  7. A.K.Aggarwal says:

    Who is bothered about functioning of PSUs.One is only worried to baloon up their own coffers.Govt. have a Kamdhenu in the form of poor indian public who can be milked at any time by imposing taxes.Nobody raises any eyebrow whenever new taxes are raised or old taxes are increased.Jugglery with taxes in India may prove someday the biggest scam.At times some concessions are given in the form of reduction in excise duty on some item which never reaches to the common man but benefits the Industrial Houses only.

  8. Sanjiv Kumar says:

    You are bang on about LIC. In case of FMPs, any aware investor would know that in case the interest is more than Rs. 10,000.00 he will still benefit because of indexation.
    Also because the Govt. still has majority holding in banks, it has to watch its interest. (I hope I am right about this)

    1. Sanjiv

      Can you explain that indexation part ?

      1. If an FMP spans across 3 financial years, say, Mar 20, 2010 to Apr 10, 2012 (or even 2 FYs for that matter) the investor can utilize indexation to calculate taxes (same index like for Real estate) – 20% taxes with indexation, 10% without indexation – thus lowering taxes vs FDs. I believe that is what Sanjiv probably meant.

  9. K.M.Manohar Kumar says:

    This is a great revelation of subtle truths. Thank you.

  10. C.J.GOPINATH says:

    Saving bank interest upto Rs.10000 is deductable U/S 80-TTA . New section introduced for FY 2012/13

  11. Ayush Jain says:

    Agree on the FMP – I used to actively invest in 13Month FMPs in March. My experience was that the funds would meet the “indicative yield”, and it was a good tax saver.

    But once this rule came in, I stopped. It’s somewhat irrational, because i can probably assume that FMP return will be approx. same as prevailing FD returns (of an FD which has same duration). But the fact that MF is not announcing indicative yield took away some confidence. Add to that some FMPs few years ago had liquidity issues – I really dont know if any investor who stayed till maturity lost any money.

    However, the net effect of these two events was – I started thinking – is the tax saving worth the risk ?

    Is there any FMP that invests mostly in bank FDs – that would be a great option :).

    1. Ayush

      Good one .. FMP wont invest in FD’s, they will invest in something which is market linked !

  12. Suhas says:

    Hi Manish,

    Thanks for bringing this topic up for discussion….

    Last budget we had a Rajiv Gandhi security scheme declared for fresh equity investor’s with no demat…knowone asked them though but
    still the policy makers thought of……..

    Regarding LIC,Govt has taken there guarantee (of what I donot know??? do they need to… anyway LIC give pathetic returns)…..now its easy to figure out why?

    Soon we might hear about entry load to MF gets ON and Rajiv gandhi scheme shifted to MF.

    The lobbing will work………. Jiski lathi uski bhains……….The least ignored in India is the only investor or aam adami in most case………………

  13. I loved the title of the article. Bang on.

    World over Governments work for Financial Services!!

  14. The number of Indian using liquid funds was/is substantially low. Even people growing money in Equity Funds SIP by SIP never considered Liquid funds as a common form of saving money except for the few financially literate. The amount parked in liquid funds was high because corporates had a better place to park cash than idling them in current accounts. People barely paid taxes on SB interest all these years so this will not make them necessarily park more money in SB (and thus helping banks).

    Everyone was supposed to pay tax on savings interest. Given things are electronic these days the IT dept knows who all have not paid tax on SB interest all these days. They simply dont pursue the tax evaders because most households usually earn few hundreds in interest each year and the tax dues will be even lower and the cost to the IT dept to chase these evaders is substantially higher (Initial letter, follow up, third notice – all of these registered/speed post, time spent in hearing the case wasting tribunal time for mere Rs. 100 tax etc.). So technically there were millions of tax evaders in India. The attempt was to clean up this mess by providing exemption upto 10k in the process.

    1. Yes .. good points from you .. Thanks for sharing your views on this topic !

    2. Dinesh says:

      I agree , initial motivation was to remove the people having salary less than 10 lacks from filing returns . So government in his move removed the tax on interest earned in savings account . Now they are motivating people who have salary less than 10 lac and no other source of income to , not to file return .

  15. Sambaran says:

    “No tax on saving bank interest upto 10000”!

    For my FY 2011-2012 filing, I am adding up my savings bank interests and paying tax for them. Should I have deducted a 10000 from the interest?
    I hope introduction in budget-2012 means the tax effect will only be seen in FY-2012-13. Please confirm.

    1. For 2011-12 we MUST add the SB interest like in previous years. This is from 2012-13 onwards as you said.

    2. No , you are going right ..

  16. pankaj kapadia says:

    I am also surprised when all illustration of insurance co can print 6% and 10% expected returns. Why can’t MFs give indicative returns which are more predictable in nature? The most easiest and the simplest product from MFs was killed before it got popular by authorities. By not getting indicative yield even FMP is perceived as riskier product. Do u remember Maruti ad “kitana deti hai” and we have no answer.

    I still rememer what happened to UTI and am only worried what can happen to LIC when irrational investments are made.

    Aren’t u surprised “No tax on Saving Bank interest up to Rs 10,000” ONLY EXEPMTION NOBODY DEMANDED AND EVERYBODY GOT

    1. Deepak R Khemani says:

      Since when have mutual fund returns become “predictable” in nature?
      The indicative yield on FMP’s was stopped because of the malpractices by some advisers who were indicating higher yields to their clients in a bid to garner more funds, and some AMC’s who were investing in lower rated and riskier paper like real estate to generate higher returns, that is why indicative returns were stopped, however it is very easy to get an idea of how much an FMP can return over a period by looking at rates prevalent in the market, that will give a fairly good indication of how much to expect. For the whole of last year FMP’s was the product that kept mutual funds going, In this year alone in the six months ended june 2012 nett inflow in FMP’s was 81,130 crores.

      1. I agree with Deepak

        It is very easy to manipulate the expected returns but very difficult to actually deliver these returns. Expected Returns were nothing more than an advertising gimmick and the chances of the Investors being cheated was very high.

        I fully support this move.

        1. Thanks for your views Karan !

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