SUNDAY WEEKLY ISSUE #4

Good morning savy!

Apple launched 4 different iPhones this week. The most premium version called the iPhone 12 Pro Max costs Rs.1,29,900 while the cheaper mini version will set us down by Rs.69,900. Here is the thought process I go through every time Apple comes out with a new iPhone.

• It is too expensive, and I shouldn’t buy it.
• Well, it is a bit expensive and I shouldn’t buy it.
• No, I shouldn’t buy it.
• I shouldn’t?
• Shouldn’t I?
• Should I?
• OMG, I should buy it!
• I absolutely need it! It is survival we are talking about!!!

But on a serious note – It is too expensive, and we shouldn’t buy it 🙂

This week, we ran two posts titled "6 signs your financial life is not under control" and "6 money habits to cultivate now" on our Facebook & Instagram which a lot of people found helpful. Check it out!

IN TODAY'S NEWSLETTER

• Market update & news in brief
• The ballooning NPA problem for Indian banks
• What are sovereign gold bonds?
• Cover story - What happens in a cashless economy?
• In case you missed it - Our first issue of Equity Wednesday

QUIZ

You are at a jewellery shop. The shopkeeper gives you his price for gold/gram, and you want to make sure he is not ripping you off. Where would you go to find the current published gold rates?

Hint - It is not Google.

MARKET UPDATE

NEWS IN BRIEF

1. The finance minister this week announced further economic stimulus to revive the ailing economy. 4 key policy measures were announced – leave travel concession (LTC) cash vouchers & special festival advance scheme for central government employees, 50-year interest free capital expenditure loans for states and an increase to the central CAPEX budget. A cumulative outflow of Rs.73,000 crores is expected because of this before the end of march-2020. To put that figure into perspective, that spend amounts to 0.33% of the country’s nominal GDP.
2. The most generous HDFC bank cut its fixed deposits interest rates by about 20 basis points across maturities. If you are struggling to get better interest rates on your FDs, read our post on fixed deposits and risk free investments.
3. The European central bank is launching a 3-month consultation to assess whether it should be issuing a blockchain backed digital currency (digital Euro). Like other central banks in the world, the ECB is starting to get nervous about bitcoin and Facebook’s upcoming Libra. The digital Euro would allow investors to deposit their money directly at the ECB cutting out commercial banks altogether. The Chinese central bank has already started its own digital currency experiment earlier this year by giving away 10Million Yuan to 50,000 randomly selected individuals. RBI, are you reading this?
4. Tata group has started scouting for online retailers to level up its e-commerce game. News reports came out this week that the group has approached Indiamart and BigBasket to discuss a potential stake sale. This is in addition to the in-house Super App development strategy the group is following. We wrote about it 2 weeks ago.
5. Amidst all the doom and gloom, motor vehicle manufacturers had a reason to celebrate. Passenger vehicles sales went up by 26% and two-wheeler sales went up by 11%. Another group of people who were also celebrating by lighting incense sticks were the Agarbathi manufacturers association of India. They are estimating a 30% increase in demand in the upcoming festive season. Our gods are finally getting more attention.

IN LESS THAN 200 WORDS (1/2)

The growing NPA headache for our banks

A report by CARE rating this week estimated that FY21 year-end gross non-performing assets (dud loans) for banks will go up from 8.5% as of end of March to something like 11.5%. The economic slowdown has led to declining corporate profitability and job losses. This in turn has an impact on loan repayments. In some measure, moratorium, interest on interest waiver and loan restructuring schemes offered by the RBI/government have helped keep this number under control. It could otherwise have well been a significantly larger number.

If you just breathed a sigh of relief, hold it. The report pointed out to something more frightening. Amongst comparable countries, India’s NPA ratio is the 3rd highest. And we are on our way to overtaking Russia (9.3%) in the second spot at the end of this financial year. Only Greece(36.4%), a country roiled in financial turmoil for much of the last decade is ahead of us. Not just that, our NPAs have gone up by 3X in % terms in just the last 7 years. No prizes for guessing that most of these bad loans (80%) were made by PSUs. Thumbs up to you if you guessed the name of the PSU which has the highest NPA amongst them all – SBI (20% of all NPAs). But private sector banks’ NPA is also significantly higher than NPAs reported by banks in Singapore and US.

We wrote about a global trend of banking consolidations in last week’s equity Wednesday newsletter. You can read it here. Now that the moratorium has been lifted, the after effect of it on banks’ balance sheet will come to surface soon. The message is clear, a cold winter is approaching for Indian banks.

IN LESS THAN 200 WORDS (2/2)

What are Sovereign Gold Bonds (SGBs)?

Gold should be a part of everyone’s portfolio of investments. In 2015, the Indian government made holding gold even more lucrative for resident Indians. They came out with the sovereign gold bonds.

How do they work?

The price of a sovereign gold bond (SGB), denominated in 1 gram of gold, varies with the price of gold. An investor who wishes to buy the SGB pays a price equal to 1 gram of gold today and holds his/her investment in paper format (holding certificate). Twice a year, the government pays 1.25% interest on these bonds (2.5% annually) on the nominal value of 1 gram of gold. At the end of 8 years, the bonds are redeemed at the prevailing price of gold. Investors can also exit from these bonds at the end of years 5, 6 and 7 if they so wish. Each investor can buy a maximum of 4Kg gold worth of SGBs. These instruments are safe and are backed by sovereign guarantee.

For investors looking to make an “investment” in gold, this is by far the best option. As is obvious, if you are looking to buy gold for ornamental purposes, these gold bonds will hardly do the job in your ring finger 😉

The SGB scheme 2020-21 Series VII opened and closed for subscription this week. If you missed the date, don’t worry. You can subscribe next month. SGB 2020-21 Series VIII opens for subscription on the 9th of November and closes on the 13th. Mark your calendar!

COVER STORY

What happens in a cashless economy?

A cashless economy is one where more and more people use credit cards & digital means to pay rather than with good old paper money. It has its obvious benefits – when we don’t use cash there is no chance a pickpocket will find anything of worth in our wallet, less money is spent overall to print notes & coins, fewer chance germs and viruses have in spreading through currency notes, etc. But we will not talk about the obvious. We will dig the surface deeper to really understand what a cashless economy has in store for us as individuals, communities and nation-states.

But to be able to fully understand what happens in a cashless economy, we need to understand what credit is, why it is so important and how it works in a cashless economy. Watch this video that we published this week to know more.

Now that we understand how credit works in a cashless society, this graph below shows how much we love our cash. Surprise, surprise, we just love it! India has one of the largest cash in circulation ratio relative to GDP.

But did you notice that the cash in criculation ratio in a developed country like Japan is almost twice that as in India? Can you guess why? Read the post on our website to find out.

IN CASE YOU MISSED IT...

Equity Wednesday Issue #1

We published an introductory edition of our equity wednesday newsleter this week. It was a smashing hit amongst our readers. We reviewed some of the biggest global trends in equity investing and did a deep dive into one of India's tractor manufacturers. If you've not had a chance to see it, here is a link to it.

ANSWER TO QUIZ

http://www.ibjarates.com

The India bullion and jeweller’s association are the apex body that regulates trade in the precious metal and liaise with the Govt. of India on behalf of all bullion traders/jewellers. They publish gold rates/10 grams each morning and afternoon on weekdays.

READ/WATCH/LISTEN

• Charlie Munger is a legend. Not just because he made billions together with Warren Buffett, but also because of his phenomenal ability to develop simplified mental models that aid in problem solving. Here is a 20-minute video of him explaning some of his abstractions.
• Deutsche Bank research has published a PDF called Imagine 2030. A number of elites from the bank have documented their thoughts on what the world could look like a decade from now. Even if you don't manage to whiz through the whole 84 page document, pages 7 & 8 capture a very good summary. DB Research

From the writer in me, to the reader in you ♥

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