At long last, we have something to cheer about, but there’s still have a long wait ahead before we are out of the woods. The good news first. Moody's Investors Service on Monday upgraded its outlook for our banking system to 'stable' from 'negative' – there’s to be a gradual improvement in the operating environment (for banks) will lead to lesser growth in bad loans in future. The not-so-good bit is while the stock of non-performing loans (NPA) may continue to rise, the pace of new impaired loan formation in the current financial year ending March 2016 will be lower than the levels seen in the past four years – or in effect the run-rate of NPAs will taper off. Moody’s stance today is a reversal of the negative outlook assigned to the Indian banking system four year ago (November 2011). Said the rating agency: “The stable outlook on India's banking system over the next 12-18 months reflects our expectation that the banks' gradually improving operating environment will result in a slower pace of additions to loans problem, leading to more stable impaired loan ratios," Moody's VP & Senior Credit Officer Srikanth Vadlamani said. Moody's, however, said the capital levels of state-run banks are low and the government's announcement to inject Rs 70,000 crore into these banks over the next four years is a "clear positive". It added “But this amount is still short of the banks' overall capital requirements. Ability to access equity capital markets remains key if these banks have to address their capital shortfall," it said, adding high capital levels are a credit strength of private-sector banks. Moody’s expect India's real GDP to grow at 7.5 per cent in the fiscal end-March 2016 and at 7.6 per cent in the next fiscal. “These growth rates would be slightly faster than the 7.4 per cent recorded in fiscal 2015 and substantially better than from fiscal 2013 to fiscal 2014. The Reserve Bank of India will likely maintain its accommodative stance over the outlook horizon, supporting the operating environment for banks”, it noted. What’s the big worry? Indian banks have significantly tightened their underwriting standards, as seen in the sharp slowdown in corporate loan growth to 9.3 per cent over the past three years from 23.1 per cent during 2009-12. That’s a reference to the fact that banks decided to slam the brakes on credit growth as the dud-loan mountain ballooned. Consequently, corporate loans originated since 2013 mostly do not represent a material risk to asset quality, says Moody’s. For loans originated in 2009-12 that are currently under duress, the key issue from an asset-quality perspective is mostly one of recognition of already existing problems, rather than incremental stress in the underlying operating environment. While there has already been a significant recognition of impaired loans, the steel and power sectors in particular will likely see higher levels of new impaired loans. Steelmakers are facing sharp price declines and increased competition from higher imports from China. And here is what has not been taken on board by banks. For the power sector, while 22 per cent of loans were recognised as stressed as of end-December 2014, this percentage largely represented exposures to state distribution companies. “We expect that significant underlying stress in the power generation segment that is not yet reflected in the banks' impaired loan ratios will start to be recognised”. You will come to know of that quantum over the next fortnight!
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By Sunil DhawanEven though the interest rate being offered is marginal, it should help in owning paper-gold rather than physical gold which has its own concerns of cost of owning, purity, and security Turning gold into an earning asset is a reality now. Government has launched the sovereign gold bonds, 2015 scheme (GBS) for the benefit of those who wish to invest in gold. Rather than owning gold in physical form and keeping it idle without earning anything on it, GBS gives an opportunity to own gold and yet earn interest on it. The government will keep allowing the sales of GBS for a limited period through banks and post offices. The initial launch happens from November 05, 2015 to November 20, 2015. Interest rate and taxation: The government has fixed interest of 2.75 per cent per annum on the investment. Its fixed rate and there is no compounding of interest. Interest shall be paid in half-yearly rests and the last interest shall be payable on maturity along with the principal. It will also be important to re-invest the half-yearly interest as the amount could be low and used up unnecessary. To put interest amount in perspective, on an investment of Rs 1 lakh, an amount of Rs 2,750 received yearly yields Rs 22,000 after 8 years. An option by banker and post office to direct such amount to savings account would help accrue more. Interest on the Bonds is fully taxable as per the tax rate of investor. For someone in 10, 20, 30 per cent tax rate, the post-tax return come to 2.47 per cent, 2.18 per cent, 1.9 per cent respectively. On maturity, the difference in prices (buy and redemption price) may give rise to capital gains and it will be treated as that for physical gold. Gold if transferred after holding it for 36 months or more is subject to 10 per cent tax or 20 percent after indexation. For short-term gains below 36 months, gains are added to income. In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold or gold ETF's. Eligibility: Only resident Indians can invest in GBS either individually or jointly or in the name of minor as well. The investment can be held in paper form a certificate or in the demat form too. How Much: Minimum investment in the Bonds shall be 2 grams with a maximum subscription of 500 grams per person per fiscal year (April - March). In case of joint holding, the limit applies to the first applicant. The denomination however will be in units of one gram of gold and multiples thereof. Issue Price: Price of the Bonds shall be fixed in Indian Rupees on the basis of the previous week's simple average closing price for gold of 999 purity, published by the India Bullion and Jewellers Association Ltd. (IBJA). Redemption: The bonds have a tenure of eight years. The investor would be given an option to roll over their holdings for an additional period. However, one may withdraw prematurely from fifth year of the date of issue on the interest payment dates. Liquidity: One may pledge these bond certificate as a collateral for loans. The Loan to Value ratio will be as applicable to ordinary gold loan mandated by the RBI. The transferability of such bonds is also allowed thus proving liquidity as well. Further, trading may also be allowed in such bonds. End note: The initial cost of owning physical gold in the form of bars, coins is anywhere around ten per cent and even higher for jewellery. GBS and Gold ETF, both paper gold are cost effective and costing would be around 1 percent. GBS should benefit those who invest in gold for a longer period. However, Gold ETF provides much better liquidity than GBS. Owing units is much easier than GBS as it's entirely online in case of ETF's. The risk of owning, holding also doesn't exist in both. Also, taxation is similar in both. The only disadvantage is that Gold ETF units won't be earning the additional interest of around 2 per cent per annum for you. Get clarity as to why you need to invest in gold- is it for marriage purpose or for pure investment. Anyhow, for investments, one should not have more than 10 percent of total portfolio in gold. Choose between Gold ETF's or GBS depending how comfortable you are managing investments online and keep the worries of purity, security aside.
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Information technology spends by financial institutions is expected to increase by 9.8 per cent to around Rs 50,000 crore in 2015, according to research firm Gartner."Indian banking and securities companies will spend Rs 499 billion (49,900 crore) on IT products and services in 2015, an increase of 9.8 per cent over 2014 spend of 455 billion rupees," it said in a note.This includes spending by financial institutions on internal IT which includes in-house personnel, hardware, software, external IT services and telecommunications, it added."Firms in the industry are investing to strengthen their operational infrastructure to support regulatory needs, as well as sustain increasing demands from the digital channels," its research director Rajesh Kandaswamy said.He added that the upcoming entry of 11 payments banks and 10 small finance banks will also help bolster the spends on the information technology products and services.On the broad areas for the investments, he said the banks will increase investments in digital solutions, modernise back-end systems and increase their reliability and speed.(PTI)
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Moody's Investors Service on Monday (02 November) upgraded its outlook for India's banking system to 'stable' from 'negative' on expectation that a gradual improvement in the operating environment for lenders will lead to lesser growth in bad loans in future.Moody's had assigned a negative outlook to the Indian banking system in November 2011 as it was of the view that the asset quality of the lenders was deteriorating."The stable outlook on India's banking system over the next 12-18 months reflects our expectation that the banks' gradually improving operating environment will result in a slower pace of additions to loans problem, leading to more stable impaired loan ratios," Moody's VP & Senior Credit Officer Srikanth Vadlamani said.In the report titled 'Banking System Outlook India: Gradual Improvement in Operating Environment Drives Stable Outlook', Moody's said the stable outlook is based on Moody's assessment of five drivers - improving operating environment, stable asset risk and capital, stable funding and liquidity.Also stable profitability and efficiency and the government support has supported a stable outlook for the sector, it said adding the recovery in the asset quality would be U-shaped rather than V-shaped, because corporate balance sheets remain highly leveraged.On the operating environment, Moody's expects that India will record the GDP growth of around 7.5 per cent in 2015 and 2016."Growth has been supported by low inflation and the gradual implementation of structural reforms. An accommodative monetary policy should support the growth environment," the report said.As for asset risk and capital, Moody's said that asset quality will stabilise. In particular, while the banks' stock of non-performing loans may continue to rise, the pace of new impaired loan formation in the current financial year ending March 2016 will be lower than the levels seen in the past four years.(PTI)
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Making NPS available online is all the more important now for PFRDA. Not just NRIs, even resident Indians will stand to gain, writes Sunil Dhawan National Pension System (NPS), the lowest cost retirement focussed investment option, which had been available only for resident Indians so far, has now been thrown open to the non-resident Indians (NRI) as well. The modifications have been made in the FEMA Act to bring about this change. Accordingly, NRIs can now onwards invest in NPS which is governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA). For an NRI to open an account of NPS and start investing in it, the funds need to be paid by the NRIs either by inward remittance through normal banking channels or out of funds held in their NRE/FCNR/NRO account. When it comes to repatriation of funds, there shall be no restriction on repatriation of the annuity or accumulated savings. For starters, NPS is a retirement focused scheme regulated by a statutory body, Pension Fund Regulatory and Development Authority (PFRDA). NPS is a defined contribution schemes i.e. what an investor accumulate and get as pension after retirement is depended on how much is put into the scheme. The return therefore is not guaranteed but depends on performance of underlying assets. What makes NPS stand out amongst several other investment alternatives are its low-cost, easy accessibility and an option to build a corpus through market-linked asset classes. Anyone between 18 and 60 can join NPS, with a minimum investment of Rs 6,000 a year after fulfilling the KYC requirements. One gets a Permanent Retirement Account Number (PRAN) which captures all the data including personal details and transactions. At age 60, the contributions stops and one is allowed to withdraw up to 60 percent of the corpus while annuity starts on the balance 40 percent of the NPS corpus from any of the seven designated annuity providers. The returns in NPS are linked to market performance and there are two options to manage funds – Active choice and the Auto Choice. Under the Active choice, there are three fund options – E, C, G. In (E), a maximum of 50 per cent of the portfolio is into equities; (C) is primarily into fixed income instruments other than government securities; (G) is primarily into government securities. If one is not comfortable in deciding, there is the Auto choice, under which the funds invested automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years and then tapers off to 10 per cent by age 55. The fund management cost in NPS is 0.01 per cent. The lesser the cost, lesser it eats into the corpus during the accumulation phase. For NRIs, it’s crucial that NPS gives them the opportunity to not only open the account online but also keeps the documentation process paperless as far as possible. PFRDA is already in the process of online NPS and soon, one may be able to not only save tax but also save for one’s retirement at the most cost-effective manner.
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Kotak Mahindra Bank Ltd, India's fourth-biggest private sector lender by assets, reported a better-than-expected 28 per cent increase in quarterly profit and a stable bad loan ratio, sending its shares up more than 4 per cent. Kotak Mahindra, which last November agreed to buy smaller rival ING Vysya for $2.4 billion in what was the country's biggest bank takeover, said net profit was Rs 570 crore ($87.5 million) for its fiscal second quarter to September 30 from Rs 445 crore reported a year earlier. Analysts had expected a net profit of Rs 438 crore, according to data compiled by Thomson Reuters. Gross bad loans as a percentage of total loans were 2.35 per cent, compared with 2.31 per cent in the June quarter. The bank said year-ago numbers were not comparable since ING Vysya operations were combined effective April 1 this year. Kotak Mahindra has previously guided for higher credit costs this fiscal year as it makes more provisions related to the acquisition.(Reuters)
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ICICI Bank Ltd, India's top private sector lender by assets, reported a 12 percent increase in quarterly profit due to faster retail loans growth. The bank also said on Friday it agreed to sell a 9 percent stake in its general insurance joint venture to partner Fairfax Financial Holdings Ltd in a deal that would value the venture - ICICI Lombard General Insurance Co Ltd - at $2.6 billion. India's banking sector has been hobbled by slower loan growth and a surge in bad loans as economic growth slowed in the past three years. State-run lenders who dominate the nation's banking system with a more than 70 percent share of loans, also account for bulk of the bad loans estimated at nearly $50 billion. Among the private sector lenders, ICICI, which is also listed in New York, has the highest bad loans in absolute terms. ICICI's gross bad loans as a percentage of total loans were 3.77 percent in the September quarter, compared with 3.68 percent in the previous three months. The bank has previously said it had stepped up monitoring and recovery of bad loans and was reducing concentration of top corporate borrowers. Net profit rose to 30.3 billion rupees ($465 million)for its fiscal second quarter to Sept. 30 from 27.09 billion rupees reported a year earlier, ICICI said in a statement. Analysts on average had expected the lender, categorised by the central bank as one of the two "too big to fail" banks, to report a net profit of 30.24 billion rupees. Net interest income in the September quarter grew 13 percent on year on the back of a 17 percent growth in domestic loans. Retail loans within the total grew at a faster pace of 25 percent from a year ago period. Kotak Mahindra Bank Ltd, India's fourth-biggest private sector lender by assets, earlier on Friday posted a 28 percent increase in quarterly profit and a stable bad loan ratio. (Reuters)
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PNB Housing Finance Ltd has hired banks including Barclays, JPMorgan and Morgan Stanley for a 25 billion rupees (about $385 million) initial public offering, IFR reported on Friday, citing two sources close to transaction. Indian investment banks Kotak and JM Financial will also advise PNB Housing in the planned IPO, slated for the first half of 2016, IFR, a Thomson Reuters publication, said. State-run Punjab National Bank owns a 51 percent stake in PNB Housing, while Carlyle Group owns the remainder.
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