How to avoid credit card traps
Multiple credit card applications can hurt your credit score.
A good way to monitor usage and spending is to set up an alert on credit card transactions.
Rohan Kapoor is a 25-year-old marketing professional living in New Delhi. He recently discovered the convenience of owning a credit card and the ease with which he can meet unexpected expenses. He went on a spending spree, buying 2-3 electronic appliances on the trot in a month with his credit card. As he did not have enough funds, he decided to pay the minimum amount per month thinking it would help him temporarily settle issues with the credit card issuer. This was until he realised that unwise and unplanned rolling over of credit had worsened his credit card debts.
If he continues to roll over credit, the total outstanding amount may just snowball into a huge figure and land him in a debt trap.
He could probably have gone in for the option of paying his credit card dues by converting the outstanding amount into convenient EMIs.
However, EMI schemes require a careful reading of the fine print.
Zero interest rate
One, even a zero interest rate option may have a catch. Banks may levy an additional charge for processing or documentation. Besides, the EMI option isn't available for every purchase you make. Sometimes this option is available only on certain products at select outlets. So you need to be careful and do your homework well before going in for this route. Also, if you default on the monthly instalment, the bank may then levy penalty charges and may just convert the remaining balance into normal credit card dues. Finally, during the tenure of your EMI payments, the pre-approved credit limit on your card is reduced to the extent of the outstanding amount. If you continue to pay your EMIs on time, the amount is released.
Preventive steps
Considering the disadvantages associated with the roll over and the EMI option, here are some preventive steps you should take:
Pay your credit card balance on time. Paying off credit card dues in full every month is the best way to avoid credit card debt. Lower the balance, the better your credit score.
Read the fine print when you buy a credit card. Know all details about the interest rates being applied, duration of the grace period being offered, and any fees being charged. Many people are unaware of the fact that interest rates can be negotiated, so do a thorough research when you apply for a credit card.
Do not purchase too many credit cards. If you have made applications for credit cards, this will reflect in the 'Enquiry' section of your credit report and will negatively impact your credit score as this credit behaviour indicates that you are 'Credit Hungry' and implies that you are constantly looking for credit.
Set an alert on your credit card transactions. This is a useful way to keep an eye on the usage and spending. Most of the credit card providers will be happy to alert you on credit card payment dates through SMS and email, if you subscribe for it.
Be credit wise. Develop a plan which monitors your spending activity. This will help you be more aware of your personal finances and help you manage them better. This will ensure you do not lag behind in your monthly card payments.
Build your credit score. A good credit score can be built and improved by making regular payments on credit card bills. Regular payments show a healthy credit history and helps in winning lender's confidence in your creditworthiness.
(The writer is Senior Vice-President – Consumer Relations, CIBIL)
Guidelines for telecom mergers and acquisitions by month-end: Sibal
Law and Telecom Minister Kapil Sibal said detailed guidelines on mergers and acquisition in the telecom sector would be in place by the month-end. The policy is expected to pave the way for consolidation in the sector.
New Delhi, July 10:
The Government plans to announce the long awaited mergers and acquisitions guidelines by this month end, paving the way for consolidation in the telecom sector.
"I am sure that before 31st of July that policy will be in place, the guidelines for mergers and acquisitions," Law and Telecom Minister Kapil Sibal said on the sidelines of Assocham's roundtable on the Legal System.
The Indian telecom sector has at present around 13 mobile phone service providers with some of them expected to go for consolidation once the final guidelines are in place.
"Telecom operators are talking to each other. There are three Indian service providers that are looking for significant stake sale but waiting for clear guidelines," said an executive of telecom company, who did not wish to be identified.
Though the Telecom Ministry had announced broad guidelines for mergers and acquisition in February last year, the detailed guidelines are yet to be unveiled.
The guidelines that have been okayed in-principle include expeditious approval to merger proposals of telecom companies if their combined market share is up to 35 per cent. It will seek the sector regulator TRAI's recommendation in case the resultant entity has market share between 35 to 60 per cent.
Government has de-linked spectrum from new licences and both have to be procured by companies separately.
Consequent upon the merger of licences, the total spectrum held by the resultant entity should not exceed 25 per cent of the spectrum assigned, by way of auction or otherwise, to it in the concerned service area in case of GSM spectrum services which include 900 and 1800 megahertz (MHz) band frequencies.
In respect of 800 MHz band (CDMA) the in-principle approved guidelines state that the ceiling will be 10 MHz and for other spectrum bands, relevant conditions pertaining to auction of that spectrum will apply.
(This article was published on July 10, 2013)
Limited options
The RBI's measures will only fuel speculation in the rupee and signal limited firepower at its disposal.
Latest measures announced by the Reserve Bank of India and the Securities and Exchange Board of India to clamp down on speculation in rupee might help shore up its external value in the short run, but is otherwise unlikely to have an enduring impact. Asking banks to stop transacting in the foreign exchange market on their own account ( 'proprietary' trading), or doubling the margins for currency futures and imposing limits on exposure to these instruments, can bring down the speculative activity in the foreign exchange market, temporarily checking the slide. But the effect might not last long. The rupee is inherently weak due to two fundamental factors — expectation of reduced foreign capital inflows as stimulus funding by global central banks taper off and the country's widening current account deficit that reached a historic high as recently as last December. These factors will continue to exert pressure on the rupee as the currency's price adjusts itself to an environment where it is not as sought after as earlier.
There is no denying that rupee is among the worst performing in the emerging market economies besides other Asian currencies. To that extent, the central bank is justified in suspecting the hand of speculators in exacerbating rupee weakness. Speculators typically hop on to assets that are moving rapidly in one direction to make a quick buck. Concerted action by this community does tend to take prices sharply beyond the asset's underlying worth. Daily turnover in exchange traded foreign exchange derivatives had increased more than 40 per cent in June over the previous month. It is also known that banks trade on the price difference between the inter-bank market, exchange-traded forex derivatives market and the non-deliverable forward market operating outside India. But speculators are needed along with investors and other stakeholders to provide depth in a vibrant and efficient market, for no asset class can exist without this set. Such phases of price distortions are common in most mature markets, before prices revert to their intrinsic value. The recent changes might do more harm than good as volumes in both inter-bank and exchange traded forex derivatives will reduce as a consequence. This will be detrimental to the interest of companies that wish to hedge their foreign exchange exposure. There is also the risk of such trading restraints making non-residents shift their trading activity to offshore rupee markets such as the non-deliverable forward market that operates out of Singapore and Hong Kong. While the RBI can control speculative activity in onshore markets, it has no control on the participants in the offshore rupee forward market. By putting through controls that are against the interest of the other participants, the central bank is sending the message that it has limited means to otherwise curb rupee depreciation. Such signals will only spur speculation.
The central bank should allow the market to discover the right price for the rupee and stop putting through these ad hoc controls that only cause short-term price distortions without any lasting impact.
(This article was published on July 10, 2013)
Sliding rupee, sloppy methods
We should learn from experience. The only enduring defence against currency volatility lies in domestic structural reforms and reduced dependence on short-term foreign debt flows.
Alert policy-makers learn from experience and adjust their policies when these don't work. As John Maynard Keynes once famously stated, "When the facts change, I change my mind. What do you do, sir?"
This is not what our policymakers are doing. Even while the existing exchange rate policy is clearly not delivering, they are continuing with more of the same — a hands-off approach and letting the markets determine the rupee's value, alongside a steady reduction in capital controls.
The country's macroeconomic outcomes have been very poor since 2011. Falling export growth and widening current account deficits (CAD) have accompanied the rupee's decline from 45-to-the-dollar in early 2011 to around 60 now. This, when depreciation is supposed to improve both the CAD and exports.
What depreciation does
While depreciation does help in correcting for inflation differentials (prices higher here than in other countries), it also contributes to inflation by making imports and domestically-produced substitutes costlier.
It then leads to a vicious cycle of higher inflation requiring more depreciation. We have seen this in India, where repeated bouts of sharp depreciation have contributed to sticky inflation as well as reduced the softening of inflation expectations.
Moreover, depreciation does not increase exports in a scenario of weak global demand. At the same time, by adding to import costs, it ends up worsening the CAD. This has been seen not only in India.
In the UK too, the pound has fallen 20 per cent since 2007, but the CAD has worsened from 2.3 to 3.7 per cent of GDP between then and now. This has partly been due to fall in global demand for financial services, one of UK's chief exports. Inflation rates have also exceeded the 2 per cent target all through this period, peaking at above 5 percent in 2011, again partly due to currency depreciation.
But in the UK, policy interest rates have been kept deliberately low. This, together with a floating exchange rate, has allowed the Government to borrow at much lower rates than most European countries. The ten-year bond yield in the UK is only 2.5 per cent.
Impact on interest rates
In advanced economies (AEs) with free capital flows and floating exchange rates, even excess depreciation lowers interest rates. Expected future appreciation — as in the UK — can enable domestic interest rates to be below those prevailing elsewhere, while equating the returns to capital. But for emerging market (EM) currencies, depreciation only prompts fears of further weakening.
In India, till quite recently, foreign capital flows were largely into the equity markets because of restrictions imposed on debt inflows. It is mainly high growth rates that attract foreign equity flows, while growth itself is encouraged through lower interest rates.
But this is not the case with debt flows. Following their recent liberalisation, such flows came into government debt funds only to earn an interest differential. But the last couple of months have seen large outflows taking place because of strengthening US bond yields, following the Fed Chairman, Ben Bernanke's statements on tapering of the central bank's quantitative easing (QE) policies.
The impact of foreign debt outflows has also not been limited to the exchange rate. They have also raised domestic bond yields. Till the recent outflows happened, market positions in government bonds were largely long, given that interest rates were seen to be headed downwards. But yields rose due to outflows, creating large market losses.
While a policy to encourage growth is compatible with attracting equity flows, dependence on debt flows would entail raising interest rates that would only hurt growth. The likely impact of depreciation on inflation, alongside rising risk premiums on Indian currency, have now virtually stalled the policy rate cutting cycle. Unlike in the UK, currency depreciation in India will not even facilitate lower interest rates.
International shocks
The mere talk of QE withdrawal has resulted in steep currency depreciation and loss of EM asset values. While AE policymakers recognise the collateral damage caused to EMs, they shrug it off saying that the latter, after all, gained from inflows in the past and will only gain from an AE revival. In any case, there is a bubble in EM assets that needs to burst.
But if there is a bubble, how did EMs gain from QE-induced inflows at all in the first place? QE, if anything, hurt EMs by pushing up global commodity prices and widening their CADs. Easy money flows, moreover, allowed EM governments to neglect structural reforms back home, besides causing artificial currency appreciation and diminished competitiveness in a shrinking global trade environment.
If the AEs deliberately pumped up global asset prices to help their economies recover, they should condition the withdrawal of their loose money policies not just on their own, but a global recovery. And if they are answerable only to their domestic constituencies, the G-20 and the IMF should force them to internalise external spillovers.
Thus, as the Fed withdraws QE, it should provide swap lines to countries that want these to help calm markets. A US Fed swap line, for instance, calmed an attack on the South Korean won in 2008.
Domestic lessons
But the ultimate defence against global currency volatility has to lie in changing domestic policy.
Although the Reserve Bank of India's (RBI) stated objective is to reduce rupee volatility, it hasn't really succeeded. The rupee normally over-corrects and then rebounds partially. Understandably, the RBI wouldn't like to sell foreign currency when outflows take place, since it would mean insulating these from a fall in the rupee. But small demand-supply mismatches lead to large currency movements in thin markets. There are other ways to increase dollar supply at such times.
Also, stronger signals on fundamental determinants of the exchange rate can help.
In addition to the real effective exchange rate data that it publishes now, the RBI could also publish a fundamental value of the rupee based on factors such as unit labour costs and real wages. These would help anchor long-term market expectations even without any commitment to defend the rupee.
Rather than try to copy AE floats, when the Indian economy is hardly an AE, it would pay to study how many Asian countries have developed domestic markets and yet successfully managed their currencies.
To reduce the CAD, domestic constraints that raise the cost of exports and import-substituting manufacture must be removed, while raising domestic oil and gold prices to discourage their imports. Domestic structural reforms must come before any further relaxations for short-term debt flows.
(The author is Professor of Economics. IGIDR, Mumbai. blfeedback@thehindu.co.in)
(This article was published on July 10, 2013)
Undecided Ministries may delay FDI cap-hike move
I&B, Civil Aviation among ministries yet to submit views
New Delhi, July 10:
Finance Minister P. Chidambaram's deadline for a decision on increasing foreign direct investment (FDI) limits by the third week of July is likely to be missed, as key Ministries, including Information & Broadcasting, Home Affairs, Civil Aviation, Space and Atomic Energy, are yet to submit their views.
With the Monsoon Session of Parliament set to get delayed, officials in the Department of Industrial Policy and Promotion (DIPP) say they now have more time to nudge "undecided'' Ministries to take a stand.
The Government is looking at raising FDI limits across sectors to attract more investments to check the widening current account deficit and to rein in the falling rupee.
The UPA Government wants a decision on the matter to be taken before the Monsoon Session of Parliament, as attention would then shift to other issues such as the Food Ordinance and the pending Insurance and Pension Bills.
"The timelines are now relaxed a bit because it is almost certain that the Monsoon Session, earlier expected to begin by July-end, is getting delayed. We have more time to work on it," a senior DIPP official told Business Line. Arvind Mayaram, Secretary, Department of Economic Affairs, has prepared a report that proposes raising FDI limits across sectors including retail, defence, I&B, telecom, civil aviation, oil and natural gas and couriers.
Based on consultations with the Ministries on the Mayaram panel's proposals, DIPP Secretary Saurabh Chandra is working on a report that would suggest what is feasible and widely acceptable within the Government.
While Chandra had asked the Ministries and departments involved in the process to submit their comments by July 5, five key players are still to act.
The I&B Ministry, which has to take a call on raising FDI limit in print media and FM Radio from 26 per cent to 49 per cent under the automatic route, is still holding discussions with stakeholders. "It is a sensitive matter. Views are divergent. We are still in consultation with stakeholders," an I&B official told Business Line.
The Civil Aviation Ministry, reportedly, is not too keen to support the proposal to raise FDI limit in domestic airlines to 74 per cent from 49 per cent, but has not officially said so.
The Ministry of Home Affairs, too, has expressed its reservations on FDI in 'sensitive' sectors such as media, defence, telecom and civil aviation. The DIPP has assured the Ministry that a representative from the Ministry would be part of all decisions on FDI in sensitive sectors.
(This article was published on July 10, 2013__._,_.___
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