Sunday, January 26, 2014

An Exciting New Discovery about Bank Cheques

Are you someone who thinks that all Cheques are valid from the date that is mentioned at the top right hand corner of the cheque? I too thought that was the case up until today. If you too have the same understanding about cheques, then I strongly suggest you read the rest of this article…

Before we begin:
A cheque is a monetary instrument that is widely used across india and we have had multiple articles in this blog about it. We all know how to use it and also know that a cheque is valid for a period of only 3 months from the “Date of Issue”.
If I give you a cheque today on the 26th of Jan 2014, our Republic day, when is the earliest the cheque is valid for payment? You would say that starting today the cheque is valid – right? If that was the case, would I be writing this article?

Some Background about Why this article came about

A senior citizen retired couple lives beside our house. The grandpa had some legal case that got settled by the high-court of Chennai after many many years. The couple were excited that they finally got the long overdue amount and happily deposited it in the SBI Branch that is near our house. Unfortunately even after 4 days uncle did not get an SMS that the money is credited into his savings account. Uncle was worried and was expressing his concern to my Dad. My father dragged me into the conversation. After hearing his story and learning that he does not have any online banking services, I suggested that he visit the bank and find out what happened.

Uncle visited the bank branch and to his surprise learnt that the cheque he got was valid only from 1st of Feb and that is why the cheque got rejected. The Branch Manager had returned the cheque to him and he came back. Uncle was disappointed and came to our house along with the cheque. When I saw it, that was the first time I ever found out about a cheque that is valid for payment only the next month…

A Cheque that is Valid only from Next Month – NEWS FLASH!!!

I checked the cheque and found out a sentence in its side which made the cheque valid only from 1st feb.
Current For Three Monthrs only After the Month of Issue

Some Important Points to Note:
1. Not everyone can give such cheques. Individual cheques that you and me are used to using, are always valid from the date of issue.
2. Only Government Departments and the Court can issue such cheques
3. If you receive any cheque from governmental departments or from the court as settlement, make sure to inspect the cheque thoroughly and if you find these words wait until the month is over and then deposit it
4. Don’t worry, cheques are valid for a period of 3 months and so, if you wait for a month that should be ok.
The only good news is that uncle got his cheque back and is waiting for February 1st 2014. Hopefully he will get this money for which he has been waiting for almost a decade now…

Happy Republic Day Everyone!!!

Thursday, January 16, 2014

Will the Banking Industry in India Be Revolutionized in 2014?

There has been news running around that the Reserve Bank of India (RBI) has agreed to grant new Licenses to private players who want to start Banking Operations in our country. Am sure you would've read it in papers and this is something the market is excited about. The stock market is volatile as ever but Banking Stocks have become interesting again. The idea behind this article is to understand more details reg. this new development and what to expect from the Banking Industry in 2014...

The Current State of the Banking Industry in India

In India we have many Scheduled Commercial Banks and hundreds of Cooperative Banks. These are banks that received their "Banking Licences" from RBI many years ago and have been successfully functioning across the country. There was an article titled List of Registered Banks in India where I had listed down the list of banks in our country. You can Click Here to read it.

Coming back to the point, even though we have numerous banks, the truth is that every 1 in 3 Adults in our country has no access to Banking Services. So, the Banking Industry still has a lot of room for growth in our country. Imagine - so many crores of people in the country without Banking Services means - there is so much untapped Business in the Market. If I were someone who owned a Bank in our country, I would be licking my chops after reading this previous setence...

Is this new Licensing Initiative by RBI Good?

Of Course it is good.

From an Economy Perspective - If Banks can penetrate areas where we are missing them, this would add a lot of 0's to India's Economical figures. Even today a lot of people in our Villages store their cash physically in Vaults and Lockers. Imagine how much it would help boost the economy if all that money came into the market as investments or as liquid cash in circulation...

From a Customer Perspective - Any Industry where there is competition, the Customer Wins. Up until a decade ago, Public Sector Banks were dominating our banking industry and developed the kind of Arrogance that isnt good for the customer. It even shows in the behavior of their staff. Even today most of the people who work in Public Sector Banks are arrogant and dont really care about the customer. With the arrival of Private Banks into the market, these guys are slowly changing their behavior. Private players like ICICI and HDFC have revolutionized the banking industry in the country and brought in more of a customer centric service which was the much needed wake up call for our government owned banks. With the arrival of more private players into the market, the competition is going to get tougher and banks will need to improve their services in order to retain their customers.

How Many People Applied for New Banking Licenses?

Given the fact that we have many Conglomerates with sizeable financial backing coupled with the fact that Banking in India is a lucratice business and there is tremendous potential for growth, we would have expected numerous applicants for these new licenses.

Unfortunately, the truth is that only 26 people are in the running for these new licenses. Even the largest business houses in India - the TATA's and Mahindra's have gone out of the race.

Is it Easy to Get a New License?

The Banking Regulations of our country are very tight and the rules that the RBI has set forth are very strict. The moment you learnt that the TATA's and Mahindra's are no longer interested it tells us how easy or difficult the actual working space is when it comes to Banking. Some of these rules are:

1. The company that is applying for the license has to have a minimum paid up capital of Rs. 500 Crores
2. The company that is applying for the license must have a successful track record of at least 10 years with sound credentials
3. The company that is applying for the license must have a business model that is aligned with Banking
4. The New Bank must be set up through a wholly-owned non-operative financial holding company (NOFHC)
5. Statutory Regulatory Requirements like - Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) etc have to be maintaind from Day One
6. 25% of the New Banks branches must be set up in rural centers of the country that do not have any Banking Facilities available
7. The New Banks are also expected to meet the 40% priority lending guidelines as well.

The list is pretty long but I have just listed down the key or most important rules. As you can see, the first 4 points should be much easier than 5, 6 and 7. If you ask me 6 and 7 will be the most difficult because - Setting up Branches in rural centers means banks would have to compromise on their margins and incur additional expenses until the branch becomes profitable. Priority Lending in rural areas usually means lending to farmers and other people who have no access to loans which could potentially be a risk from a Purely Business Stand point.

Some Last Words:

The New Banking licenses are expected to be announced by the end the current financial year (FY14). The related costs and investments towards setting up branch networks and rural financing will be the key challenge that companies will face. Given the stringent guidelines - it will be even more challenging to set up new banks. But a realistic impact on financial performance of the currently established banking companies is only expected to come a few years down the road. Until that happens, we cannot expect any sort of Revolution.

This year is going to be difficult and the performance of the Banking Stocks will be in-line with the performance of the Economy. Good Companies are always a great choice from an investment perspective. Even if the stock price gets beaten down in the short term (1-3 months) in the long run, they are always profitable investments. So, choose good banks with strong fundamentals and profit making ability and stay invested for a couple of years. You will definitely make a good profit.

At the end of the day, I believe that in the long run, this will revolutionize the Indian Banking Industry. If not 2014, 2015 may be the year the industry gets revolutionized!!!

Friday, January 3, 2014

Are You Utilizing All Your Tax Saving Options?

It is that time of the year when everyone is starting to talk about Income Tax and how it is eating into their take home salary. Most of the Salaried Individuals in our country do not put too much thought into their Taxes. They just let their employer deduct "TDS" and are content to live with whatever take home salary they get. Did you know that the Government gives us numerous options using which we can legally reduce our tax liability?

The purpose of this article is to outline those options.

Do I Have To Pay Tax on my ENTIRE ANNUAL INCOME?


Yes, you read it right. Not all your income is taxed. The government has many provisions by which you can reduce your Taxable Income which in turn reduces your tax liability.

What are these Provisions?

These provisions fall into two categories: Deductions and Exemptions

Deductions From Income:

As per our tax laws, there are certain deductions that are allowed on the income earned by an individual. These amounts can be subtracted while arriving upon the net taxable salary of an individual. For ex: If your total salary is 5 lakhs and the deductions that we are going to cover in this section total up to 1.5 lakhs, your net taxable income will be only 3.5 lakhs.

Those Deductions are:

1. House Rent Allowance or HRA
2. Leave Travel Allowance or LTA
3. Medical Allowance
4. Transportation Allowance
5. Interest Paid on Housing Loan

Exemptions From Income:

Just like the various deductions that we covered in the previous section, the Indian Tax Laws allow many exemptions that help the tax payer reduce his tax liability. These exemptions are categorized as sections with numbers followed by alphabets to help us identify them easily.

Those Exemptions are:

1. Section 80C - Exemptions for Qualified Investments
2. Section 80D - Exemptions for Medical Insurance
3. Section 80DD - Medical Treatment of a Physically Disabled Dependent
4. Section 80DDB - Medical Treatment of Self/Dependents for Major Diseases:
5. Section 80E - Exemption for Education Loan Repayment
6. Section 80U - Exemption for Disabled Tax Payers:
7. Section 80G - Exemptions for Charitable Donations
8. Section 80CCG - Exemption for Investing in Rajiv Gandhi Equity Savings Scheme "RGESS"
9. Section 80TTA - Exemption for Interest Income Earned from Savings Accounts
10. Section 80GG - Exemption for Individuals Living in Rented Houses
11. Section 80GGC - Donations Made to Political Parties

As you can see, there are numerous Deductions and Exemptions that you can use to reduce your Income Tax Liability every year. I recently published a book that clearly explains all of these deductions and exemptions in great detail. The book also has a "Life Stage Based Tax Saving Portfolio" that can help you retire as a "CROREPATI".

Click Here for details on how to purchase the book

Happy Tax Saving and Best Wishes on retiring as a CROREPATI!!!

Wednesday, January 1, 2014

New Years Resolutions - 2014

What is your Resolution for this New Year? Have you decided something for your finances this year? IF NOT, I strongly suggest you decide something to make sure your finances are in order. The purpose of this article is to give you some ideas on what you should do this year..

Resolution No. 1: Review Your Financial Statements – Every Month

At the end of each month, you get your salary and for most of us, by the mid month our account is almost empty. After paying for our bills, loans and other regular expenses, we are left with only a very small percentage of the money we earned as salary. Almost each month, we are left wondering where our income went, isn’t it?

So, what can we do to fix this situation? First we need to identify what the problem is so that we can address the problem and fix it. How will we identify the problem?

Start noting down what are all the major expenses you incur each month. At the end of the month you will be left with something called a “Cash Flow Statement” which outlines where all your money goes. If you review the cash flow statement you will know areas where you can control your expenses. Target – To Save at least 5-10% of your monthly income.

Resolution No. 2: I will Review My Portfolio – Every Half Year

I have always said that Investing is not a one-time activity. You cant just put your money into some instrument and forget about it. The moment you forget about your investments, it wont be working as hard as it is supposed to. To make sure that your investments are working hard, you need to review your portfolio every 6 months.

Weed Out investments that aren’t working as hard. Divert the funds into better performing instruments. In my book, I have clearly explained how to keep your portfolio optimally allocated based on your age between risky and safe instruments. I have also explained how to handle the maturity proceeds of the investments you make each year. Click the Buy Now button below to buy the book…

Resolution No. 3: I will Invest At Least 5% of my Monthly Income – Each Month

This resolution is straight forward and needs no explanation. Lets make a fresh start to our savings and investments this year. We should aim at saving at least 5% or more of our monthly income each month and invest it properly. We live in a country where there are no pre-planned pension options available for us once we retire. Unless we save for our retirement, we wont have enough money when we are retired. So, lets start saving today so that we can retire in peace…

Happy Investing!!!

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