The Centre and Mint Road wants to ensure that India Inc is not starved of funds – who know what happens after a Fed Rate hike. Raghu Mohan explainsIn a bid to widen the pool of capital sources for India Inc to drink from, the Reserve Bank of India (RBI) is to weigh the option to allow firms to borrow from global long-term fund dispensers. In its draft framework for external commercial borrowings (ECBs), Mint Road said India Inc can tap pension funds, sovereign wealth funds (SWFs) and insurance funds as part of a revised ECB policy which is on the anvil. The draft paper (which has been placed for feedback till October 1) on ECBs also proposes to lower the all-in cost borrowing by 0.50 per cent (50 basis points) to ensure funds borrowed from abroad are at a reasonable interest rate. Raghu MohanIn effect what it means is that India Inc (to the extent it can borrow liberally from SWFs and pension funds) will able to hook into long-term sources of capital. It is worth to recall here what RBI deputy governor S S Mundra, explained at a summit on ‘Financing India’s Growth - Way forward’ in New Delhi on 9th September 2015. He pointed out that traditionally, like other emerging markets, Indian economy has been bank-dominated. So whether it is for project development, or working capital needs of corporates, banks have been the primary source of credit. Though primarily banks are supposed to undertake maturity and liquidity transformations, there are limitations on the extent of asset-liability mismatches they can run on their books. In simple terms what it means is that banks raise short-term deposits between one and three-year’s maturity; and they can’t be expected to finance long-gestation projects (like say in in infrastructure) of 15 years or more. The large scale distress being witnessed in banks’ infrastructure portfolio also raises issues about their ability to critically appraise such projects. The typical role for the banks in mature markets is to originate loans and then distribute to other willing players in the market. They predominantly undertake working capital finance and provide structured financial solutions to their clients. They also act as market makers for various financial sector products. “With the gradual widening and deepening of our financial markets, it would be fair to expect our banks to also gradually shift their focus to SME and retail clients while leaving the long-term resource contribution to other players including pension funds and insurance companies which have long-duration liabilities on their balance sheets”, said Mundra. The urgency shown by (to the extent the feedback deadline is 1 October) shows that the Centre and Mint Road wants to ensure that India Inc is not starved of funds – who know what happens after a Fed Rate hike. Moreover, many a state-run bank is no position to lend too given the precarious nature of their books and pressure on capital ahead of Basel-III capital norms which kick in from fiscal 2019. It’s not a surprise that on Wednesday, Union Economic Affairs Secretary Shaktikanta Das said that “we cannot have the luxury of giving two months’ time for discussion because enough has been said and enough has been heard. Now, the time has come to decide and move forward”. He was speaking at the ‘Global Investors India Forum’ organised by Assocham. Mint Road said that the proposed guidelines are aimed at replacing the ECB policy with “a more rational and liberal framework, keeping in view the evolving domestic as well as global macroeconomic and financial conditions, challenges faced in external sector management and the experience gained so far”. The basic thrust of the revised framework, RBI said, is to retain more qualitative parameters for the normal (foreign currency denominated) ECBs and to provide more liberal dispensation for long-term borrowings in foreign currency. What’s On The AnvilBasic Structure: Retention of the existing basic structure of ECB framework for normal foreign currency borrowings with certain liberalisations made based on experience. The restrictions on eligible borrowers, end-use (capital expenditure), maturity (not less than three to five years) and all-in-cost (linked to a spread over Libor) for such ECBs will continue. Lenders/investors: Expansion of the list of recognised lenders to include entities having long term interest in India. Overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long term investors are included in the list of recognised lenders for long-term funding into India. Long-term foreign currency borrowing: Prescription of only a negative list of end uses for long-term foreign currency borrowings (minimum maturity of 10 years). Rupee denominated borrowings: Prescription of more liberal stipulation for rupee-denominated ECBs with only minimum maturity stipulations. The borrowing can be accessed for all purposes save a small negative list.
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Asset reconstruction companies (ARCs) are going to play a limited role in absorbing the non-performing assets (NPAs) of banks due to capital constraints and rising acquisition costs, says India Ratings and Research (Ind-Ra). Capital is constrained due to higher investment requirements in security receipts for ARCs and shareholding ceiling for sponsors at below 50 per cent. ARCs are now tapping debt markets to raise funds, which is a shift to leverage from the near zero debt model earlier. Also, interest coverage may be a concern due to the lack of predictability in ARCs’ cash flows. ARCs play a crucial role in the financial sector and help banks clean up stress loans, which is the need of the hour. The Reserve Bank of India is clear that the forbearance regime has ended and the central bank is unlikely to provide any further relaxation to banks on the classification of restructured assets. Banks are turning to ARCs but capital remains a key challenge for the industry. Banks’ stressed loans (NPAs+restructured) as of March 2015 stood at 11.1 per cent of the outstanding credit of INR65.25trn, while all ARCs put together have a capital base of mere Rs 4000 crore. ARCs at best have the ability to purchase NPAs worth around Rs 1.2 trillion which is a mere 17 per cent of the total stressed assets in the system. Acquisition cost has also been rising due to the shift of stressed assets into new NPAs where recovery is likely to be higher than for earlier seasoned NPAs. Acquisition cost has now gone up to around 60 per cent from 40 per cent earlier. Acquisition cost has risen given bankers are now selling stressed loans at an early stage post changes in regulations. Also, earlier banks would offer NPAs which were more seasoned, while of late they have resorted to offer even fresh NPAs. This shift has pushed up acquisition cost and led to bankers asking for higher amounts due to a higher probability of recovery. Investment requirement by ARCs of the total security receipts issued increased to 15 per cent with effect from August 2014 from 5 per cent earlier. This has limited ARCs’ potential of buying large NPAs as capital remains a constraint. However, this guideline has also helped ARCs to refrain from aggressive bidding, bringing in the discipline needed in the industry. Banks are looking to clean up their books but are unwilling to sell NPAs at a significant discount. Headline stress loans on balance sheet are thus unlikely to decline. Credit costs will also remain elevated due to amortisation charges arising out of the losses on sale. Asset Reconstruction Company (India) Limited (ARCIL) (‘IND A+’/Stable) has been active in buying bad loans for over a decade, while a majority of new ARCs have been growing at a fast pace in recent times. The key players in the market are Edelweiss Asset Reconstruction Company Limited, ARCIL, JM Financial Asset Reconstruction Company Private Limited, Phoenix ARC Private Limited (‘IND A+’/Stable) and Reliance Asset Reconstruction Company Limited (‘IND A+’/Stable). Public sector banks are more aggressive in cleaning up their books than their private counterparts. The 10 largest public sector banks sold 6,040 accounts to ARCs in FY15 with a book value of Rs 1,11,400 crore, up 64 per cent yoy. The top five private banks have sold a much smaller quantity of assets, with 1,100 accounts sold to ARCs in FY15 with a book value of Rs 11,100 crore, little over double the amount sold in the previous year. In the last five years, there has been a 5x jump in the number of issues and their sizes which shows the high appetite for such products.
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Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group Inc, said on Tuesday he had a "highly curable" form of cancer and would be able to work mostly as normal during treatment. The veteran Wall Street boss, who steered the U.S. investment bank through the financial crisis, told employees and shareholders he would undergo chemotherapy for lymphoma over the next several months in New York. The bank's shares finished down 1.98 percent at $179.72 a share on the New York Stock Exchange, underperforming a weaker wider market, as the announcement put Goldman's succession plans under the spotlight. While Blankfein, 61, is undergoing treatment, other senior bank officials, including his top deputy, Chief Operating Officer Gary Cohn, will assume some of his responsibilities in dealing with the public, a person familiar with the matter said. Cohn, who is seen as the most likely successor to Blankfein if he left his post in the near future, replaced his boss at the last minute at a public discussion in New York on Monday night. The company has a number of long-serving senior executives, including Vice Chairman Michael Sherwood, investment banking co-head David Solomon, Chief Financial Officer Harvey Schwartz and Chief Strategy Officer Stephen Scherr, who investors said offered stability. "The culture of the firm transcends one person," said Mike Donnelly, senior vice president and portfolio manager at CS McKee, which manages $10.5 billion in assets and owns Goldman shares. "Obviously, Blankfein has done a great job and embodies the culture, but in terms of this changing the investment thesis given the valuation, no, absolutely not." In a statement, Blankfein said he underwent tests after not feeling well over several weeks in late summer. He did not disclose the type of lymphoma, a cancer that affects the immune system, or how advanced it is. He received a final diagnosis on Monday around midday, and informed Goldman's board of directors around 4 p.m. EDT (2000 GMT), the source said. Chemotherapy TreatmentLymphoma is a cancer that begins in the lymphatic system, which is a part of the immune system that carries away waste and transports white-blood cells that attack disease. It can occur as Hodgkin lymphoma; 86 out of 100 people diagnosed with it live for five years or more. For non-Hodgkin lymphoma, 70 out of 100 people will survive for five years or more. Dr. Len Lichtenfeld, an oncologist who is deputy chief medical officer of the American Cancer Society, said chemotherapy is the main treatment for both Hodgkin and non-Hodgkin disease. Individuals in their 60s and 70s are more likely to have the more common and harder-to-treat non-Hodgkin variety of the blood cancer, which affects the body's infection-fighting white blood cells, he said. Depending on where enlarged lymph nodes are found, and their size, he said, doctors may use radiation as well as chemotherapy. There are no specific rules on how publicly listed companies inform investors about a senior executive's health. But investors expect to be informed. "You don't want day-to-day health bulletins, but you do want to know if the prognosis changes," said Chris Niemczewski, managing principal at Marshfield Associates in Washington, which has $2 billion under management and is a Goldman shareholder. "You want to know if it stops being a risk." Blankfein's disclosure comes a little more than a year after JPMorgan Chase & Co CEO Jamie Dimon said he had throat cancer. Dimon continued to lead the bank during treatment, which finished last autumn. Dimon wished his rival a fast recovery on Tuesday, and Blankfein told staff he was confident he would be cured. "There are many people who are dealing with cancer every day," Blankfein said. "I draw on their experiences as I begin my own. I have a lot of energy and I'm anxious to begin the treatment." Blankfein has led what is viewed as the most powerful U.S. investment bank since 2006, and bank executives say he has never hinted at when he might retire or his plans after Goldman. The New Yorker is credited with helping to keep the company afloat during the financial crisis with an early decision to rein in exposure to risky mortgage-backed securities and a successful appeal to Warren Buffett to invest in Goldman during the chaotic days after Lehman Brothers went bust. Goldman's role in the U.S. housing bubble and the billions of dollars paid out in bonuses to its top staffers have made the firm a magnet for popular anger about Wall Street. Rolling Stone magazine once referred to the firm as the "vampire squid" of finance. Blankfein, a former chain-smoking gold trader, has helped improve the bank's public image and aided its transition from a pure investment bank to one with a greater exposure to commercial lending. Blankfein's No. 2, Cohn, has followed a similar career path as his boss. Like Blankfein, Cohn got his start at commodities firm J. Aron & Co, which Goldman then acquired. He has been COO as long as Blankfein has been CEO and is six years younger. Blankfein's life is a classic rags-to-riches story. Born in the South Bronx and raised in a housing project in Brooklyn's East New York neighbourhood, he worked his way through Harvard College and Harvard Law School, helped by financial aid. (Reuters)
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Reserve Bank of India Deputy Governor S.S. Mundra called levels of debt in the domestic corporate sector "a major concern" on Wednesday, while admonishing banks to clean up their bad loans more quickly. Mundra added leverage levels had risen "very substantially in the last few years in the corporate world", calling it a concern that was also felt globally, at an event in Mumbai for chief financial officers. The RBI deputy governor also called on banks to move more quickly to recognise bad loans. "Our simple message is if there is a problem, to recognise it and address it quickly," he said. "Don't pretend and extend."
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Some of the companies that hit the capital market this year and paved the way for exits for investors include ING Vysya Bank and Bharti Infratel. Paramita Chatterjee reportsOwing to rupee devaluation over the last few months, private equity investors say they may have to opt for the IPO route over strategic sales for cashing out profitably from their portfolio companies. This comes at a time when private equity investors were beginning to breathe easy with the exit scenario showing clear signs of improvement - both in terms of strategic sales and IPOs after years of slow exits. So far this calendar year, in the January – August period, as many as 160 exits have taken place where private equity firms have encashed $6,731 million, as per data available with research firm Venture Intelligence. This is the highest in the last 5 years. In the corresponding period in 2014 (January-August period), only 115 exits were sealed worth $2,125 million. In the entire calendar year of 2014, the total number of exits went up to 192 where PE firms made $3,887 million. This is clearly good news for the industry which struggling for successful exits over the past few years. “Returns for private equity has dropped from 40-50 per cent in 2005-08 to 10 per cent in the last two years and holding period has risen to 6 years from 3 years earlier,” said Bijou Kurien, Member, Strategic Advisory Board and Mentor, L Capital Asia (LVMH Group) in the recently-held India Retail Forum 2015 in Mumbai. “There is some stress for private equity in generating returns due to rapidly depreciating rupee along with competition leading to higher valuations,” he added. A single PE investment cycle usually lasts 5-7 years after which PE firms normally exit by way of trade sale, public listing, recapitalisation and secondary sale. Trade sale is the most common exit for private equity investments as trade buyers in the same industry are often more likely to realise synergies with the business and are therefore, the most natural buyers of the business. Typically, public listing takes place during positive market conditions as prevailing at present. Of all the exits that have taken place in the last 8 months of this calendar year, as many as 36 can be classified as strategic sales, 17 as secondary sales and 10 buybacks. The highest of exits were through public market sales, the number standing at 97. Some of the companies that hit the capital market this year and paved the way for exits for investors include ING Vysya Bank and Bharti Infratel.
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Interest rates of other issuers could be lower than what NTPC is offering now as rates are linked to the G-Sec yield. Better not to wait especially if you have lump sum to invest for long term and are in the highest income slab, writes Sunil Dhawan The Bond is back. Tax-free bonds, once a popular investment destination for wealth individuals are once again back in circulation. In times when interest rate are on the decline, these tax-free bonds appears to be a better alternative. In July this year government had notified seven PSU firms to launch tax-free bonds to raise funds to the tune of about Rs 40, 000 crore in this fiscal year to be used largely for infrastructure purpose. NTPC Limited is the first one to hit the block, with its issue open between 23rd September and 30th September with the mandate to collect Rs 700 crore through a public issue. The bonds are secured in nature are carrying AAA ratings from all the three major credit rating agencies such as ICRA, CRISIL and CARE indicating highest degree of safety regarding timely servicing of financial obligations. Whom it suits: For those in higher tax slab, investing in tax free bonds makes more sense compared to those in lower brackets. Interest rate is on its way down and most banks currently offers interest rates on 10 year deposits of around 7.25 per cent, while the interest on bank deposit is taxable. For those paying 30.9 per cent tax, it’s like investing in a deposit of nearly 10.50 percent, which in all likelihood will not be offered by banks in near future. Tax free bonds suit those in high tax slab and have a big lump sum to invest. Rather than putting it across several banks, tax free bonds are safe avenue to park their savings. Why high tax rate investors should prefer tax-free bondsInterest income on taxable products are fully taxable. For example interest on bank deposits is taxable at the investor’s tax rate. Banks are currently providing interest around 7.5 percent. For someone in 30.9 percent bracket, after-tax return is 5.18 per cent. Therefore, pre-tax yield is a more effective way to base one’s decision whether to invest in fixed income investment. Tax StatusThe interest earned on investments in tax-free bonds are not subject to any taxation. The interest is not a part of the total income. Therefore, there is no applicability of TDS on interest income. TDS applicability will still be there on the application money. However, such bonds are also listed on stock exchanges, hence if there are any capital gains on transferring them on exchanges, the capital gains will be taxed. If the holding period is less than 12 months, capital gains on sale of tax-free bonds on stock exchanges are taxed as per the tax rate of the investor. If bonds are held for more than 12 months, the gains are taxed at 10.3 per cent. End Note: Interest rates of other issuers could come down as the rate is linked to the G-Sec yield. RBI may lower interest rate on 29th September pushing the yield further lower. When policy rates are cut, bond prices move up thus lowering yields. It will not be a better alternative to wait for other issuers to launch their bonds. Make use of NTPC bonds to reap benefit in falling interest rate regime.
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Naval GoelWith around 250 million internet users, 100 million facebook users and almost a billion mobile phone users, it is very clear that digitization is growing rapidly in India. Digitization has changed the way we function and it has also created an altogether new marketplace for selling and buying of products. It provides easy access to various forms of information and helps people in decision making. One sector which has slowly realized the importance of digitization is the insurance sector. The online insurance market in India is growing rapidly and credit goes to effective technology and easy access. It has changed the entire customer demography. The main reason behind the fast growth of the insurance industry is the online presence of various companies, offering their products on the platform and also because of the growth of insurance aggregator websites that have made it easier for the customers to choose from various available options. Role of Insurance Regulatory and Development AuthorityAs the growth in the industry has been quite remarkable, the IRDA, which frames guidelines for the insurance sector has had a major role to play in the growth. IRDA had come out with some strict guidelines in 2011 which made it difficult for online insurance web aggregators to show comparisons, ratings, rankings etc. But now the online aggregators, which are registered under IRDA regulations, have the authority to allow comparison services, display of rankings and many other similar services which has resulted in attracting customers towards them. Growth of Digital Technology Boosts Insurance Market StatusIn spite of challenges which exist in the market, the online insurance market is growing by the day. Many projects are under way that will bring enhanced connectivity to rural areas of the country. Numerous government initiatives are also helping the sector in increasing the penetration rate. Insurance companies are trying to capitalize the connectivity within the country. Numerous leading government and private insurance companies have introduced their mobile apps that allow the customer to get the desired information easily and on time. These apps provide detailed information and allow consumers to buy or renew the existing plans simply. All these activities are providing a positive environment for the growth of online insurance market in the India. The use of digital technology in providing assistance for the growth of the insurance industry is fast changing the way insurance was practiced in the country. Sales agents and online insurance web aggregators are helping customers in buying the desired insurance plans online. Many users do online research and comparison through web aggregators before buying insurance plans. Now, the insurance companies have also realized that having an online presence can help them in increasing their sales numbers and their business as well. New companies, with the help of this route are growing rapidly as compared to the traditional route. As per the recent guidelines, the IRDA has issued guidelines regarding issuing of policies in a digital format. At present, there are five registered repositories. The biggest benefit of having plans and policies in digital format is that a customer does not have to carry hard copies of policy documents so there is less chance of losing documents or the documents getting destroyed in case of an accident. When it comes to technology infrastructure, a recent survey confirmed that the traditional insurers are in difficult situations. To maintain their position and reputation in the segment, it has become extremely essential for them to start providing digital services to their customers as currently; customers are finding the digital insurance platform more useful and relevant for their desired insurance needs and requirements.The author, Naval Goel, is Founder & CEO, PolicyX.com
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Infrastructure finance firm IDFC on Saturday (19 September) said it has got regulatory approval to utilise Rs 2,500 crore non-distributable reserves for provisions against bad loans as part of exercise to clean its book before venturing into universal banking. The regulator has now granted the approval to utilise non-distributable Statutory Reserves up to Rs 2,500 crore for creation of specific provisions against stressed assets, IDFC said in a BSE filing. "These additional provisions are being created after a careful examination of the stressed assets portfolio and in accordance with our philosophy of prudent risk management and transparency," it said. These provisions are far in excess of the regulatory requirement and exceptional in nature as indicated in our investor call post our quarterly results for quarter ended June 30, it said. In an earlier filing, IDFC had said that it will make an additional provision in the second quarter of this fiscal against coal and gas power assets, as it transitions into a bank by the end of the period. IDFC said with these additional provisions, its net worth will reduce by approximately Rs 1,600 crore. It said that the volume of net restructured assets, non- performing assets (NPAs) and security receipts (SRs) as of June 30, 2015 was 8.4 per cent of its loan book. "Almost 80 per cent of our risks relate to coal and gas-based assets," it had said. In line with generally accepted accounting principles, these additional provisions will be charged to the Statement of Profit and Loss in the current quarter resulting in a significant one-time loss for the period, it said. However, this will not impact the distributable profits since an equivalent amount will be transferred from the non distributable statutory reserves, as approved by the regulator, it added.(PTI)
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