internationaltreasurer1994oct31 india banks gain strength
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International Treasurer The Corporate Treasurer's Guide to Global Financial Management
October 31, 1 994
Country profile
India Eases Lending Restrictions
October 17 Reserve Bank of India Meeting eases lending restrictions.
In our last issue, we mentioned how fin ancial controls on interest rates were forc ing Indi a's b lue-chi p compani es to off-sho re f in anc ial markets. Eu roissues and other fo rms of external fund ing are still cheaper, but progress is being made to lower loca l funding costs. On October 1 7, th e Reserve Bank of Indi a announ ced the eas ing of contro ls on large loans of RS200,000 or more. The cost of bank lines will hereby be reduced by 50-200 basi s points from current levels of 14-15%.
Th e extent o f th e dec line w ill depend to some degree on the financial hea lth of each ind ividual bank. Wi th fixed deposit rates (now 4 .5%) most ba nks, esp ec iall y go vernm entowned Indian ones, cannot afford to narrow their lendin g spreads mu c h more. Fallin g interest rates and competition, however, w ill pressure them to do so. Counterparty ri sk in the current environment is a huge concern .
Many banks in trouble
Indi a' s banking system 1s m poor shape and many of its most f in anc iall y strained ba nks belong to the public sector. Thus, the government must seek to manage the pace of f inancial sector reforms, as it moves to conso lidate, moderni ze, and pr iva ti ze the banking system. Most importantly, it mu st c ut banks loose fro m pu b li c co ffers before marke t- d ri ve n insolvencies bust any semblance of a budget.
Meanwh ile, large corporati ons are press ing ahead with their ow n finance arms to funnel fun ds sou rced off-sho re. Th ese corpo rate banks are jo ining foreign banks, the IM F, and Indian industry to press for reform to free-up credit. This competition means th at, even w ith government paternal ism, each new reform measure, including this one on lending con-
continued on back page
Financial risk management
JP Morgan's RiskMetrics By joseph Neu
Understanding the methodology behind Risk Metrics is an important first step for corporate risk managers.
Whil e or iginall y intended primaril y fo r financ ia l in sti t utio ns and fund m anage rs, th e release of jP M organ's Ri skMetri cs data and its accompany ing risk methodo logy comes at a tim e w hen many co rporates are looking to move up the ri sk management lea rning curve. "Th at was our biggest surpri se," notes jacques Lo nge rstaey, w ho hea ds th e M ark et Ri sk Research team that created Ri skMetri cs, "we expected commercial banks to be the biggest users and we ended up f inding as much if not more corpora te in terest. "
Th e fact th at co rpo rates a re eage r to improve their ri sk management is good new s for m any reaso ns. H oweve r, as good as Ri skMetri cs is, it is does not prov ide a compl ete ri sk management so lution, nor should corporates seek to use it w ithout f irst understanding the methodology behind it.
Highlights from the "Technical Document"
JP Morga n has done a laudab le job of presenting its methodology for quanti fying market ri sk and ge nerall y exp laining Ri skM etrics in its 1 00-page "Technica l Document" (soon to be posted on-line). The Ri skMetri cs methodology is a nea r equiva lent of the class ic portfo lio theory app roach (what academi cs ca ll a mean cova ri ance tec hniqu e), w hi c h i s w id e l y accepted as a standard for prudent ri sk management. The fo llow ing are question s w hich summari ze the methodology and prompt general considerations for corporate risk management frameworks.
• What is our definition of risk? M organ defines ri sk as " the degree of uncertainty of
continued on page 2
India Eases Lending Restrictions Banks in India are being pressured to cope with market rea li ties.
page 7
JP Morgan's RiskMetrics Use the Morgan methodology to improve your understanding of financial ri sk management.
page 7
PW's Financial Risk System A new PC application from Price Waterhouse makes use of RiskMetri cs .
page3
New UK Tax Regime for FX Pl anning advice to get book and tax trea tment for all FX ga ins and losses to match.
page4
FX Forecasting Fundamentals (Ill) A survey of empirica l evidence from academia showing how forecasting works.
page6
Brazil Under the Real What Cardoso must do to keep in flation down.
pageB
The Back Page
continued from page 7
trois, wi ll be pushed to the limit. Thi s process will create a great dea l of volatility in rupee interest rates and increase the level of f inanc ial innovation.
Unfortunately many banks in India, already at their limits financially, have little margin for error. Hence, corporates should consider the financial health of banks and its impact on credit line availability and counterparty risk.
Get credit assessments
Fo r a cu rrent road m ap of the best rated sources (and users) of loca l funds in Indi a, readers may w ish to refer to the Credit Rating Information Services of India Ltd . (CRISIL)[ Mr. G.F.R.K. Rao, executive director, phone: (9 1 22) 4939-445, fax: (9 1 22) 4939-441]. CRISIL offers debt rating services, credit advisory services, company reports, and micro-economic data, according to Managing Di rector Reav i Mohan . One of three rating services in India, CRISIL has been at it the longest-since 1987.
Credit rating services look to be a growth industry. Especia lly, if as Mr. Mohan predicts, partial convertibility of the rupee extends from the cu rrent account to the capital account, "prompti ng more interplay between the Indian and internationa l debt markets." This increased interplay w ill add further vo latility to interest rates and rupee/dollar parity, stoking market risk in add ition to cred it risk . •
The Best Banks in India CRISIL last ranked India's commercial banks fo r Business Toda y, a local magazine. The results, published in its December 22, 1993- january 6, 1994 issue li st banks accord ing to a weighted average score comprised of financial resul ts, operationa l ratios, phys ical parameters, and productivity ratios. The top ten were all foreign:
1. Bank of America 2. Bank of Tokyo
8
3. ABN-AMRO Bank 4. American Express Bank 5. Citibank 6. Credit Lyonnais 7. HongKong Bank 8. Sakura Bank 9. Societe Generale
10. BNP
Correction: Branch coverage for the State Bank of India listed in the last issue as 11 should have read 8,69 1.
Country briefing
Brazil Under the Real How long can Cardoso keep inflation at bay?
Cardoso was elected to pres identia l office this month thanks to initi al success of the strong currency/anti- infl ation pl an he introduced as Brazil's finance minister. The introd uction of a new currency, th e Rea l, ha s succeeded in bringing infl ation down from a rate of 50% a month to 5%. Can this low inflation last?
Yes, say treasurers in Braz il , infl ation will be tame for until year end, but in 1995 it will sta rt to creep up. How quickly it returns " to normal ," will depend on how we ll Cardoso makes use of hi s current political leve rage. Though unlikely, if Cardoso can move within the next six months to solve structural fiscal problems, he may end chroni c defic its and spira ling inf lati on for good. Th ree things are worth watching for:
• Fiscal reform. Government spendin g needs to be shifted to new sectors of the economy and away from the loca l pork projects.
• Tax reform. About 80-85% of the taxes co ll ected in Brazil are pre-allocated to specific programs, making fiscal reform impossibl e without an overhaul of the tax regime.
• Acceleration of privatization. Tax reform, w ill not help until next year, so to pay for this yea r's budget the government needs to sell $7-1 0 bi II ion worth of assets .
Stay short and keep the flexibility to move as fast as possibl e as in f l atio n grows , say Brazilians, w hose in flation expectations have not fallen with nea r-term inf lation rates. .a
Masthead Changes: Several changes are taking place on our masthead at right. First, In ternationa l Treasurer is pleased to welcome two new corporate advisors: juanita Hinshaw, vi ce pres ident and treasurer at Monsanto and Hans Poh!schroeder, ass istant treasurer at Colgate-Palmolive. These two advisors replace Jean-Pierre Bourtin, who is now a fund manager with Bridges Capita l (an emerging markets boutique, in Greenwich, Connecticut) and no longer with Xerox, and M ichael O'Donnell, who is moving from his reg ional cash management post in Singapore to head a broader effort for Citibank in Korea. We wish to take this opportunity to thank Messrs. Bourtin and O'Donnell for their va luable support in launchi ng th is publication.
Editor & Publisher joseph Neu
Associate Editor Donald Dunn
Professiona l Contributors Robert Herz
Associate National Director of Accounting and SEC Services
Coopers & Lybrand
Peter Connors
Director, Tax Services International Capital Market·s
Ernst & Young
Jeffrey Wallace Managing Director
Greenw ich Treasury Advisors
David Veres Partner
Rogers & Wells
Corporate Advisors Hans Poh lschroeder Ass istant Treasurer Colgate-Palmolive
David Rusate Assistant Treasurer
General Electri c
Arvind Sodhani Vice President and Treasurer
Intel Corp.
A. john Kearney Assistant Treasurer
M erck & Co.
Juanita Hinshaw V ice President and Treasurer
Monsa nto
Academic Advisors Lee Remmers
Professor INSEAD
Donald Lessard Professor
Massachusetts Institute ofT echnology
Richard Levich Professor
Stern School o f Business New York Universi ty
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International Treasurer is an Evans & Bieber, Inc. publication.
International Treasurer/October 31 , 1994
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