Search

ekoshapu

Notes to Myself

Category

Finance

Understanding arbitrage opportunity

They say, “A picture speaks a thousand words”.

Here is a picture that explains “abritrage opportunity” concept perfectly well! ☺️

Advertisements

Prof. Aswath Damodaran on “The Value of Stories in Business”

Excellent talk by Prof. Aswath Damodaran on “The Value of Stories in Business” – Talks at Google

Aswath Damodaran: “The Value of Stories in Business” | Talks at Google

 

Magnitude of Demonetization (?)

Prime Minister Modi announced on 8th November 2016 the decision to withdraw highest value currency notes vix. Rs. 1000 and Rs. 500 and replace them with new Rs. 2000 and Rs. 500 notes. RBI also mentioned that new Rs. 1000 notes would be issued soon. In that sense this decision cannot be termed as “demonetization” in true sense. It is more of new currency notes replacing the old ones.

This step will help flush out existing black money,but it may not stop  creation of new black money. There are other steps needed to prevent that – movement towards cashless economy. But with poor infrastructure and reach of cashless payment systems (online payment, credit/debit cards, mobile wallet etc) and with high costs of using these means it would take long time to become majority cashless economy. I booked tickets online on BookMyShow and they charged 10%+ as “Convenience Charges”…that is ridiculous. The Govt should abolish by law all such charges; and should in fact provide incentives for using cashless systems and levy a charge for using cash.

As My IIM Professor, Prof. Jayanth Verma has explained in his blog “It is not money but credit that makes the world go round“, cash should be used only when you run out of credit. So unless government simultaneously brings in measures to incentivize cashless payment systems and penalize cash transactions the black money creation is not going to reduce/stop.

Anyways, let’s see what government does on this front and when.

I read information about magnitude of demonetization and wanted to share it with some perspective. Here is the split of different currency denominations in circulation till 8th Nov:

Currency Distribution.png

So the currency denominations cancelled by PM Modi accounts for 86% of total currency (by value). It is worth a whopping Rs. 14 Lakh Crore. And that explains the chaos and cash crunch we are facing today even after 1 week of cancelling Rs. 500/1000 currency notes.

Imagine if government were to truly demonetize i.e. remove highest currency notes and not replace them with new ones, then Govt would need Rs. 14 Lakh Crore of currency in denominations of Rs. 100 or lower. If entire new currency is of Rs. 100, Govt would have to print 5-10 times more notes (500 = 5 x 100, 1000 = 10 x 100). i.e. 14,000 Crore Rs. 100 currency notes!!!

Just to put this in perspective, if the printing press prints 100 Crores notes a day (which itself is a ridiculous assumption), it would take 140 days i.e. over 5 months! If there are lower currency denomination notes it would take even longer to replace the cancelled currency notes.

Are you getting the magnitude of “demonetization” (or currency replacement decision – whatever you want to call it)?

Had Government taken into account the massive logistics? I hope they had. If so, could they have started printing currency notes earlier? Were there secrecy issues in doing that?

I am not sure if we will know these details ever.  But it would be interesting to track this decision and see if it yields some success in “War on Black Money”.

And the war has just begun! More action to come against “Benaami” property and Gold and other forms of Black Assets.

 

अर्थक्रांती’चे प्रणेते अनिल बोकिल यांच्याशी दिलखुलास गप्पा

The recent demonetization of Rs. 500-1000 currency notes was proposed by ArthaKranti’s Anil Bokil since year 2000.

 

First watch Anil Bokil’s old interview  and then watch his latest one below

 

Anil Bokil with Raju Parulekar on Samvaad

https://www.youtube.com/watch?v=uoW7ErSjGZY

https://www.youtube.com/watch?v=-dTTmqmTxuY

https://www.youtube.com/watch?v=660-pJGeZ1c

https://www.youtube.com/watch?v=WDXa8SN_YN4

 

 

अर्थक्रांती’चे प्रणेते अनिल बोकिल यांच्याशी दिलखुलास गप्पा

https://www.youtube.com/watch?v=EING4oGqsaA

 

Demonetization and Fiscal Deficit

PM Modi’s “Surgical Strike on Black Money” on 8th November 2016 surprised the whole nation. Things are still chaotic after 3 days and will remain so at least for a few weeks.

Many messages and articles are being written about the effects of this huge demonetization initiative. One of the messages said: “Government of India is expecting 30-40 thousand currency notes will not be exchanged; which RBI will pay as special dividend to the Govt and help reduce Fiscal Deficit”

There were few queries by friends who didn’t clearly understand the correlation. Let me try to explain with my limited knowledge.

A very basic form of Balance Sheet of a Central Bank looks as follows:

central-bank-balance-sheet

Currency notes are issued by the central bank (Reserve Bank of India) and appear on Liability side of the Balance Sheet. A currency note is a promise by the RBI to redeem equivalent sum of money to the person who bears that note.

The currency note mentions: “मै धारक को XYZ रुपये अदा करने का वचन देता हूं ” OR “I promise to pay the bearer the sum of XYZ rupees”.

So it’s an obligation for the RBI and hence a liability.

Government of India has cancelled the current Rs. 500 and Rs. 1000 currency notes from 9th November 2016 and advised the citizens to deposit or exchange the notes through banks before 31st December 2016. Thus the current 500/1000 notes would “expiry” on 31st December i.e. they would cease to carry any monetary value; which in turn means that the “RBI Promise” would expire too.

Now suppose people, for whatever reasons, do not exchange currency notes by 31st December, what would happen to these notes? They would lose their value. Also, the RBI’s promise to redeem that money would also end. This means that the RBI would get to keep that amount. The liability of currency notes would end.

Assets = Liability + Owners’ Equity.

In this case, the assets remain the same but the liability (of un-returned currency notes) goes down? So to balance the equation the Equity would go up. This would be in the form of “Other Comprehensive Income” or OCI.

And since Government of India is the only shareholder of RBI, the RBI can pay the amount to Govt of India as dividend. This dividend (additional revenue) would help government reduce the fiscal deficit.

More write-ups on currency demonetization soon…

 

Microfinance – Organized usury?

Just a few days ago (on 25th July) I saw an interview of Shyam Sekhar (Twitter:@shyamsek, FaceBook: https://www.facebook.com/shyamsek) where he said: “Microfinance is organized usury. Wouldn’t give a P/E multiple to usury”.
 
Yesterday, in less than a week, Ujjivan Financial Services – a microfinance company that was recently listed on exchanges, announced that their net profit more than doubled in last quarter.
 
What caught my attention was this line:
“Net interest margin, or the difference between the yield a bank earns from loans and what it pays on deposits, stood at 12.97% against 11.59% a year ago.”
 
Contrast this with HDFC Bank which announced results last week, and reported Net Interest Margin of just 4.4% (which is still way high!)
 
So Shyam Sekhar was bang on in his observation! Microfinance is indeed organized usury.

Create a free website or blog at WordPress.com.

Up ↑