How to decide when to retire

http://www.thehindubusinessline.com/features/investment-world/money-wise/how-to-decide-when-to-retire/article4516179.ece
B. VENKATESH

Retirement planning is complex. You have to decide on two important factors — when to retire and how much wealth you want to accumulate at retirement. The problem is that both factors are dependent on each other. One way to overcome this problem is to set your retirement date and then plan to accumulate the desired retirement wealth. In this article, we discuss the issues you need to consider before deciding your retirement date.

TRADITIONAL RETIREMENT

Till not so long ago, employers assumed the risk on their employees’ retirement portfolio. In such a world, the employer paid a fixed pension to the employee during her lifetime. At worst, the employee faced inflation risk (the risk that the pension income was not enough to sustain her living expenses because of increase in price levels).

In this world, employees typically retired at 60 because their employment contracted terminated at that age. Besides, pension income was paid to the employees after they turned 60. When to retire was, therefore, never a choice that employees had, unless they wanted to retire early.

But things are different now with even the Government now passing on the retirement investment risk to its employees. Today, your employer makes an annual contribution to your retirement portfolio. This contribution along with your monthly deposits accumulates in your retirement portfolio. At retirement, you are expected to take that wealth and use it to buy assets that will fetch you monthly income in your retired life. In other words, the responsibility lies with you to convert the wealth in your retirement portfolio into a retirement income portfolio.

The passing of the investment risk from the employer to the employee has led to a paradigm shift in retirement planning, for retiring at 60 is no longer relevant. So, how should you decide your retirement date?

MODERN RISKS

Given that the amount of wealth you want at retirement and when to retire are dependent on each other, you should start with a desired retirement age to plan your retirement wealth. As it turns out, the primary factor that you should consider for your retirement date is your health.

For one, if you have moderate-to-high health risk because of illness such as diabetes, you may want to work as long as possible. The reason is simple. The healthcare plan that your employer offers you as part of your employment benefits will prove useful in managing your health risks. Of course, this presupposes that your health condition does not affect your professional work.

For another, if you are healthy and have a family history of living long, you should be concerned with longevity risk (whether the money you have at retirement will be enough to sustain your living expenses through your long retired life). You may want to work as long as possible if you are concerned with longevity risk.

From the above, it may seem that you should work as long as possible, whether you are healthy or otherwise. But you may also have the urge to take an early retirement and pursue your lifestyle desires. Your retirement portfolio should be created with a view to balancing your desire to retire early and the need to manage your longevity risk.

The need to balance early retirement and longevity risk is not easy. One way to overcome this issue is to start with a retirement date, say, 55. This assumption helps in two ways. One, this gives you a handle to calculate how much you need to contribute each month to your retirement account to accumulate wealth you require for early retirement. And two, you can postpone your retirement till, say, 60 if you are unable to accumulate the desired wealth by 55.

Some banks don’t charge a fee for using other bank ATMs

If you use automated teller machines (ATMs) to withdraw cash, you must be aware that after five transactions at ATMs of other banks, sixth transaction onwards is chargeable. However, did you know that there are banks that don’t charge anything for any number of transactions even if you are not their customer?

Who’s not charging fees?

Some banks including Federal Bank Ltd, Yes Bank Ltd and Standard Chartered Bank don’t charge any fee for any number of transactions at other bank ATMs. So even after the fifth transaction at other ATMs, you will not be levied any charge. Federal Bank has been providing this facility to all its customers since October 2011. Yes Bank has been providing this facility to its customers since its inception in 2004. In case of Standard Chartered Bank, if you maintain an average quarterly balance of Rs.25,000 in your account, you will not be charged for any number of transactions at any other bank ATMs for certain account holders. For a certain account holders there is no such conditions and it is completely free.

The norm

According to the Reserve Bank of India, all debit cards issued by banks in India can be used at any bank ATM within India. Now if you are a savings bank account holder, then you can do five transactions free of cost at other bank ATMs in a month. This is inclusive of financial and non-financial transactions. From the sixth transaction onwards, you will be charged a transaction fee by your bank.

Charges: The charges levied sixth transaction onwards at other ATMs vary from bank to bank. For instance, if you are a State Bank of India (SBI) customer, SBI will charge Rs.17 for every financial transaction such as cash withdrawal and Rs.6 for every non-financial transaction such as balance inquiry or mini statement. If you are an ICICI Bank Ltd customer, the bank will charge you Rs.20 for financial transaction and Rs.8.50 for non-financial transaction from sixth transaction onwards at other bank ATMs. The variation is mainly because RBI has asked the banks to not charge more than Rs.20 for financial transactions at other bank ATMs but they are free to decide the fee, however, not more than Rs.20.

How it works

Every transaction that you do at other bank ATMs, the card issuing bank, that is, your bank, has to pay an interchange fee to the other bank. For instance, if you are a X bank customer and have been using your debit card at Y bank’s ATM, X bank has to pay approximately Rs.7-18 per transaction to Y bank as interchange fee. In the case of Yes Bank, Federal Bank and Standard Chartered Bank, this charge is not passed onto you and is absorbed by the banks.

RBI okays Gujarat plan for ATMs in police stations

http://www.thehindubusinessline.com/industry-and-economy/banking/rbi-okays-gujarat-plan-for-atms-in-police-stations/article4478426.ece

The Reserve Bank of India has, in principle, given the go-ahead to a proposal to set up automated teller machines (ATMs) at police stations across Gujarat.

“Out of nearly 1,200 police stations in the State, 300 are in urban areas where these ATMs can be opened,” S.K. Nanda, Additional Chief Secretary (Home Department), told Business Line here on Tuesday.

However, he said, the State Government has not identified any particular bank to embed the ATMs at police stations. “It is for the RBI and the banks to do so,” he said.

The move, apparently, was mooted in view of, among other things, a recent spate of incidents in which criminals either damaged unguarded ATMs, tried to uproot these machines, or simply decamped with these. In one incident, the criminals, despite taking away an ATM at night, could not break it open. Besides, there have also been reports of the people being robbed just outside ATMs.

At a meeting of the Home Department and regional RBI officials last week it was found that more steps were needed to make the ATMs theft-proof. Embedding ATMs in police stations itself was found to be an innovative idea and got support from officials. The Home Department, too, offered the banks place in the police station premises for this purpose.

But the Home Department is asking for a quid pro quo from the banks in return for offering space for ATMs. The banks would equip police stations with closed-circuit television (CCTV) cameras, furniture and water coolers, among other facilities.

A bank official said the people would feel safer to use an ATM in a police station premises.

Many ATMs do not have security guards, or even air-conditioners, as the banks try to cut costs. With police stations having ATMs, they would no longer need to have security guards at such places.

A new bank for women, by women

http://www.thehindubusinessline.com/industry-and-economy/banking/a-new-bank-for-women-by-women/article4462787.ece

In a first in the country’s history, Finance Minister P. Chidambaram said India would have its first public sector Women’s Bank by this year-end.

Committing an initial capital of Rs 1,000 crore for this bank, Chidambaram even invited all Members of Parliament to its inauguration, once it gets necessary approvals and licence from the Reserve Bank, by October 2013.

“Women are at the head of many banks today, including two public sector banks, but there is no bank that exclusively serves women,” he said.

He said the proposed bank would lend mostly to women and women-run businesses, support self-help groups and women’s livelihood and predominantly employ women.

At present, there are all-women banks in the co-operative sector. For instance, the Self-Employed Women’s Association (SEWA) set up a women-only bank in 1974. The bank is owned by self-employed women as shareholders, and policies are formulated by their own elected board of women workers.

Then, there is Konoklota Mahila Urban Co-operative Bank Ltd in Jorhat, Assam, which has been operating under a licence obtained from the RBI since 2000.

LEVEL-PLAYING FIELD

According to Anand Sinha, Deputy Governor, RBI, the women’s bank would be set up as a PSB and would not require separate guidelines. “It creates a level-playing field,” he said.

Such an institution would go a long way in empowering women, not just financially, but socially too, said Usha Ananthasubramanian, Executive Director of Punjab National Bank.

“Though there is some mention of such a bank (all women) in Pakistan, it has not made a mark. We should ensure that this bank for women emerges as niche, focused entity, and not just a cosmetic body,” Usha said.

Shinjini Kumar, Director, Tax & Regulatory Services, Banking Regulations at PwC, said the financial empowerment of women had a multiplier effect on the well-being of families and the economy.

Rajashree Nambiar, General Manager - Retail Banking Products & Segments, India & South Asia, observed that an all women management structure would promote a superior culture of ethics and integrity.

Syndicate Bank took the lead in starting all-women branches way back in the 1970s in Chennai, Bangalore and Thiruvananthapuram, said N. K. Thingalaya, former CMD. Those branches ranked very well in taking decisions and mobilising business.

RURAL PUSH

Ajai Kumar, Chairman and Managing Director, Corporation Bank, said that such a bank would be more popular in the rural areas.

“Just like how self-help groups have been able to help the community for increasing their income levels as well as their occasional requirements, women’s bank will be beneficial in semi-urban and rural areas to relate better with rural people,” he said.

Tax saving deposits must be made more attractive, say banks

http://www.thehindubusinessline.com/industry-and-economy/economy/tax-saving-deposits-must-be-made-more-attractive-say-banks/article4452596.ece

Banks have moved the Finance Ministry to reduce the tenure of tax saving deposits from five to three years to turn them attractive for depositors. Their plea comes in the backdrop of deposit growth trailing credit growth in the current financial year so far.

If the ministry agrees to the banks request then tax savings deposits will be at par with investments in equity linked savings scheme insofar as tenure of the investment goes.

Further, banks also want the ministry to allow them to grant loans against the tax savings deposits.

DEPOSIT GROWTH LAGS CREDIT GROWTH

As per the latest Reserve Bank of India data, the banking system has seen a slower year-on-year growth in deposits at 13.2 per cent (15 per cent in 2012), while credit growth was at 16.4 per cent (15.7 per cent).

The deceleration in the term deposits, which constitutes the major component of aggregate deposits in the banking system, could be largely attributed to the low and declining real interest rates on time deposits, according to the central bank’s macroeconomic and monetary policy document.

In 2012-13, lack of commensurate growth in aggregate deposit to fund credit growth has lead to an increase in credit-deposit ratio (C-D).

The C-D ratio for the banking system is currently running at 94 per cent (78 per cent last year) that is, for every Rs 100 deposit they are mobilising, they are lending Rs 94. However, central bank regulations stipulate that for every Rs 100 mobilised by banks by way of deposits, they have to invest Rs 23 in government securities and park Rs 4 with the RBI, leaving them with Rs 73 for making loans.

The divergence between the C-D ratio and the central bank norms for raising deposits and making loans implies that there is pressure (liquidity) to find resources (balance Rs 21: Rs 94-Rs 73) from other avenues.

TDS ON DEPOSITS

Bankers say there will be no loss of revenue for the Government if the proposal to bring down the tenure of tax saving deposits from five to three years finds a place in the Budget.

Banks want tax deducted at source (TDS) to kick-in only if the interest earned on a deposit in a year is over Rs 50,000 against Rs 10,000 now.

Given the price rise and many retired people depending on income from deposits, bankers feel their proposal to the ministry in this regard is justified.

Under the current TDS regime, a bank deducts tax from the interest payable (if it exceeds Rs 10,000 in a year) on a deposit.

The deducted amount gets remitted to the Government.

If a depositor furnishes Permanent Account Number (PAN), then the TDS is at 10 per cent on the interest earned on fixed deposits.

In the absence of PAN, declarations for non-deduction of tax at source in Form 15G or in Form 15H cannot be acted upon and interest earned by the economically weaker sections, the aged and the infirm becomes subject to tax deduction at the higher rate of 20 per cent.

Form 15G is a self-declaration form submitted by individuals below 60 years to banks stating that their income is below the taxable limit. Form 15H is submitted by those above 60.

Currently, depositors circumvent TDS by ensuring that none of their deposits earn interest of more than Rs 10,000. They do this by splitting deposits and parking them with different banks.

By upping the cut-off limit for deduction of TDS on interest from Rs 10,000 to Rs 50,000, banks can easily mobilise deposits, make more loans and spur the economy, said a banker.

Moody’s lowers SBI’s rating as bad loans mount

http://www.thehindubusinessline.com/industry-and-economy/banking/moodys-lowers-sbis-rating-as-bad-loans-mount/article4452637.ece

State Bank of India’s baseline credit assessment has been lowered a notch by credit rating agency Moody’s Investors Service, reflecting its relatively high level of bad loans.

Moody’s has adjusted SBI’s mapping to a baseline credit assessment (BCA) of ‘ba1’ (speculative grade rating) from ‘baa3’ (investment grade rating) previously on the long-term scale.

BCAs are opinions of the intrinsic — or standalone — financial strength of issuers subject to extraordinary government support, which can include banks, sub-sovereigns and government-related corporate issuers.

The lowering of SBI's BCA reflects its relatively high level of bad loans, which are unlikely to be managed down quickly, said the agency.

The new BCA also reflects the bank’s relatively weaker ability to sustain any further deterioration in the economic environment relative to its similarly-rated peers globally.

DEPOSIT RATING UNCHANGED

Due to SBI’s systemic importance, Moody's has left unchanged the global local currency deposit rating and senior unsecured debt rating at ‘Baa2’ (investment grade rating), said the agency in a statement. The outlook on all SBI’s ratings is stable.

The deterioration in asset quality witnessed over the last 18 months increases the bank’s risk profile, cautioned Moody’s.

The agency pointed to a rise in impaired loans, including re-structured loans, and a smaller cushion to absorb losses due to low-provision coverage and lower Tier-1 capital relative to other large banks in emerging markets.

LOAN-LOSS RESERVES

Furthermore, SBI's shock-absorbing buffers are also not as robust as those of its peers. Its loan-loss reserves of 61 per cent of gross non-performing loans or less than 45 per cent of impaired loans are modest when compared globally.

Do we need more banks or bigger banks?

http://www.moneycontrol.com/news/business/do-we-need-more-banks-or-bigger-banks_829673.html

The Reserve Bank of India on Friday fueled enough optimism for India Inc, mostly bruised with economic blues. They can now apply for a new banking licence. The central bank released guidelines for the same. Corporate CEOs were vying each other in airing their voices to stake claim as potential candidates. According to reports, RBI may issue 4-5 such licences.

Is it the need of the hour?

India, the second largest populated country, has total 77 banks including 27 public sector banks, 20 private banks and 30 foreign banks. However, this huge universe has not clinched any significant global footprint.

Country's largest lender - the State Bank of India (SBI) ranks 60th globally in 2012 in terms of tier I capital (equity + reserves). The second largest bank (in terms of loan book) ICICI Bank 's position is way below at 110. Among top 200, four more banks including HDFC Bank , Bank of Baroda ,Canara Bank and Punjab National Bank managed to find their ranks.

Financial inclusion or basic banking service for every Indian seems to be the motivating factor for expanding banking reach. According to experts, consolidation should be the ideal solution to it, not new banks.

"There is no substitute for consolidation in PSU banks," Ramnath Pradeep, former chairman of Corporation Bank and currently chief advisor at PDS & Associates, a Mumbai based law firm; toldmoneycontrol.com.

"Indian companies are spreading their tentacles by acquiring companies abroad. For funding cross-country acquisitions Indian banks should acquire size and sophistication. State Bank of India is considered to be small fry in the global banking arena. Despite cornering about 25 per cent of the banking business in the country, SBI does not rank in the top 20 global banks. Ideally, India should have 4 or 5 global-scale banks," he said.

SBI & associate banks

SBI has five associate banks including State Bank of Hyderabad (SBH), State Bank of Patiala,State Bank of Mysore (SBM), State Bank of Travancore (SBT) and State Bank of Bikaner and Jaipur (SBBJ). Earlier, SBI had merged the State Bank of Saurashtra with itself in 2008 while the State Bank of Indore was merged in 2010. 

Since then, no further merger has taken place. Once all its subsidiaries are merged with it, it would be among the top 10 banks in the world in terms of various parameters.

Smaller PSU banks of no use? 

Even today, some small public sector banks (viz. Dena Bank, Andhra Bank, United Bank of India and others) have not been able to show a healthy performance. They are even hesitant  to act as a lead bank and are content with being a consortium member . The need of the hour is merger of small banks to emerge into large entity (ies).

Some market considerations for possible mergers

Allahabad Bank, Central Bank, Corporation Bank and P&S Bank - projected to be the fourth largest

Canara Bank, Indian Bank, BoM, IOB and United Bank of India - projected be the second largest bank

SBI, BoI and BoB - projected to be among the largest banks in the world

PNB, Vijaya Bank, Andhra Bank and IDBI - projected to be the third largest

OBC, Syndicate Bank, UCO Bank and Dena Bank - projected to be the fifth largest