Over the ultimate twenty years, financial institutions have been bridging the opening between idle monetary financial savings and funding by way of a plethora of financial merchandise ranging from straightforward monetary establishment deposits to ones as sophisticated as cryptos. Though consumers have quite a few funding decisions, however they are not completely acutely aware of the risks associated to those myriad financial merchandise. A lack of understanding about menace of the financial product in proportion to the risk-taking functionality, ends in an investor shedding hard-earned money.
Around a decade up to now, Securities and Exchange Board of India (Sebi) had launched colour coding technique for mutual funds. It mirrored the possibility of menace in shedding invested ‘Principal’ amount. Blue colour represented low menace, yellow showcased medium menace; whereas brown signalled extreme stage of menace. The above coding scheme extra superior into riskometer depicting the riskiness of MF schemes. This was the smartest choice to warning even in all probability essentially the most naïve and uninformed investor. These colour codes helped consumers select schemes as per their menace aptitude.
There was no rocket science behind this pondering nevertheless possibly solely a clue from the positioning guests light system which is understood by any particular person. Perhaps it’s time for financial regulators to emulate this colour coding for merchandise beneath their regulatory ambit.
Market-linked debentures (equity -linked bonds, index-linked bonds), AT1 bonds, mounted deposit of NBFCs / corporations, unit linked insurance coverage protection (ULIPs) carry market menace / credit score rating menace, which many consumers are hardly acutely aware of. Many consumers buy financial merchandise with out understanding their menace. For e.g. consumers subscribing to NBFC deposits for larger curiosity might be not acutely aware that these are uninsured deposits not like deposits of scheduled enterprise banks insured to the tune of ₹5 lakh, by means of Deposit Insurance and Credit Guarantee Corporation (DICGC).
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In the present debacle of Credit Suisse AT1 bonds; the Swiss banking regulator ordered to write down down down $17 billion AT1 bonds issued by Credit Suisse. Typically, it’s shareholders that bear losses sooner than bond holders and comparable principle was utilized to AT1 bondholders of Credit Suisse.
This episode in precise reality triggered reminiscences of Yes Bank saga whereby Yes Bank had written-off AT1 bonds worth ₹8,000 crore as a part of its bail-out bundle. Being bonds, the consumers took with no consideration the that they are ‘lenders’ to the company and may be given priority all through charge and liquidation. In fast, consumers lacked the understanding of menace associated to AT1 Bonds.
Financial sector regulators can liaise and provide you with colour coding for merchandise based totally on perceived menace. Regulators may also publicize and warn consumers about menace associated to unregulated merchandise. A desk summary of various financial merchandise and associated likelihood of menace has been given above (see graphic).
Risk urge for meals differs for consumers based totally on age, income, present financial circumstances, gender, and so forth. It is time that product sales personnel of financial institutions act responsibly and by no means mis-represent merchandise to garner charge or meet product sales aim. Perhaps, the colour coding system can enable consumers to ask associated questions based totally on the possibility coloration assigned to financial product.
Kuldeep Thareja, Mitu Bhardwaj & Rasmeet Kohli are working with National Institute of Securities Markets (NISM).
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Updated: 05 Jun 2023, 12:28 AM IST
