RBI’s Relief to the Banking Sector

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

The state-owned banks drowning in bad debt breathed a huge sigh of relief when he Reserve Bank of India (RBI) offered some respite to them by knocking off around 20 companies, including Jaiprakash Associates, from the RBI list of overleveraged companies, which have sold assets and reduced their debt. As a result, lenders will have to put aside less cash to cover their bad debt. The March quarter numbers might look slightly better than the last one, when the PSU Banks posted huge losses.

But the RBI’s generosity is more of a bandage than a cure for the afflictions of the country’s banking system. Estimates of bad loans run into lakhs of crore rupees. Some, but not all, resulted from collusion and graft between borrower and lender. Some loans turned bad because projects once thought feasible ran into regulatory hurdles and were stuck for an indefinite period of time. Due to a lack of proper bankruptcy laws in India, which the Government is trying to change, the liquidation and transfer of the assets of these indebted companies are extremely difficult. This will need legislation, and could take time.

Meanwhile, Asset Reconstruction Companies (ARCs) are given the task to clean this mess. They should take over distressed companies from banks at a discount and convert debt to equity. ARCs can try and turn them around, or sell them to prospective buyers or liquidate assets. After the Vijay Mallya episode, many banks have turned risk-averse and might not want to incur regulatory wrath by selling off assets to new promoters at a discount. Having ARCs as intermediaries could offer them some comfort.

Advertisements

Panama Papers: Corruption Strikes Again

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

——————————————————————————————————————-

The release of Panama Papers a few days ago brings to light the seriousness of the issue of black money stashed in overseas tax havens. The problem is not only limited to India but is spread across continents.

The Panama Papers reveals multiple secretive offshore companies and throw light on how these can be used to facilitate bribes, arms deals, tax evasions, financial fraud and trafficking. In the Indian context, specifically, this raises several issues surrounding violation of exchange control norms and tax evasion, particularly in the light of the recently enacted Black Money law.

The Black Money Law enacted in 2015 provided a framework for taxing and punishing those with undisclosed money stashed abroad. The Act also provided for a limited period compliance opportunity enabling a one-time declaration to be made in respect of assets overseas. The compliance scheme, though, only attracted a measly Rs 4,164 crore of black money declared by 644 persons, which led to a tax collection of Rs 2,428 crore.

Prior to 2004, Indians faced numerous difficulties sending money abroad add to it the high tax rate in the country, gave rise to the trend of Indian nationals holding money abroad. But the remittance limit of $250000 a year under the Liberalised Remittance Scheme framed by the Reserve Bank of India and significantly moderated tax rates makes the offshore accounts held by these rich and famous personalities quite purposeless.

This recent episode is expected to get a lot of attention from various factions of the media, but the real question is will it give an impetus to the government’s efforts against black money or this time the  episode will be forgotten and the country will move on.

The Art of Making Comebacks

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

—————————————————————————————————————-

Last week two of the legendary clubs in Europe came back from the dead to book their places in the European club competitions. While Real Madrid, a record 10-time champions of the European premier club competition, overturned a two goal deficit from the first leg against Wolfsburg in UEFA Champions League, Liverpool, the 5 time champions, came back twice from two goals deficit to beat another German club Borussia Dortmund at Anfield to make their way to UEFA Europa League semi- finals.

Many of the pundits had written off Real Madrid after the first leg and were expecting a surprise result. But a certain Cristiano Ronaldo, who looked up for the task from minute 1, had other plans. With two goals in the first 17 minutes the tie was level much before anybody would have expected. Cristiano scored from a free-kick in the 77th minute to complete the remontada, as is called in Spanish, to take Real to a record 6th straight semi-finals.

Liverpool on the other hand made life harder for themselves after a brilliant first leg performance where they were able to get a draw scoring an all-important away goal. Conceding two quick-fire goals in the first 9 minutes, Liverpool were on the back-foot from the very beginning. Though they created numerous chances in the first half but were unable to take any of them. They scored a goal right at the start of the second half through Origi but were pegged back with another goal from Reus. What followed was a remarkable effort from Jurgen Klopp’s team to score 3 goals in the last 30 minutes with the winner coming right at the death.

Both the team’s even though faced with adversity, never let their shoulders drop and produced performances worthy of champions. These comebacks were more driven by passion and desire to win than the skills of the players. What spurred them on was the crowd at the Santiago Bernabeu and Anfield which cheered them on for the whole of 90 minutes and acted as the 12th man. The football fans can hope for many more such European nights that made the competitions what they are today.

Turning a Giant Around

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

 

Vishal Sikka led Infosys came up with a stellar set of numbers for the fourth quarter running when they beat street estimates yet again. During the fourth quarter of fiscal 2016, Infosys’ top line grew by 1.6% and its operating margin improved by 50 basis points to 25.4%, bettering expectations. The company announced a final dividend of Rs 14.25 per share. Revenue growth in 2016-17, it said, would be in the range of 11.8-13.8%, compared to Nasscom’s projection for 10-12% export growth for the industry. What was really heartening to see, was Infosys’ forecast for the coming fiscal in the midst of decresing IT spends by leading multinationals.

Sikka, who is regarded as the architect of SAP’s best-selling in-memory database software HANA, has been attempting to reengineer Infosys around the themes of innovation and a focus on the customer. His so-called ‘Renew and New’ strategy appears to be paying dividends. While the pace of growth has picked up, employee attrition levels are down, and the stock markets are showing their faith— Infosys shares have risen by 44% on the NSE since Sikka took over.

Sikka has been advocating what is known as ‘Design Thinking’ which involves a user-centric problem-solving approach, and embracing automation to reduce costs and improve efficiency. He has attempted to balance the twin demands of building revenue momentum while positioning the company to cope with changes brought on by technologies such as cloud computing. Additionally, he has also changed many HR policies such as wearing business casuals to work, to make Infosys an employer of choice.

Sikka’s devising of strategy with a focus on longer time horizon is starting to turn around Infosys and making it a darling of the D-Street yet again.

Indian Mutual Fund Industry and Investor Expectations from Credit Funds

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

——————————————————————————

Assets managed by the Indian mutual fund industry has grown to Rs. 13.49 trillion in December 2015 from Rs. 11.28 trillion in December 2014. That represents a 19.6% growth in assets over December 2014. Institutional investors hold 54.1% of assets while retail investors have increased their share from 45% to 45.9% in the last two years. Equity-Oriented schemes are now 32.5% of the industry’s assets, up from 29.9% In December 2014. The proportionate share of debt-oriented schemes are 43.3% of industry assets in December 2015, down from 45.6% in December 20141.

Compared to the global landscape where the AUM to GDP ratio averages 37%, the ratio in India stands at 7 to 8%2. The value of assets held by individual investors in mutual funds increased from Rs.5.19 lakh cr in December 2014 to Rs. 6.20 lakh cr in December 2015, an absolute increase of 19.3%. The growth in Institutional assets from Rs. 6.08 lakh cr to Rs. 7.29 lakh cr, an absolute growth of 19.8%. Individual investors primarily hold equity-oriented schemes with 59% investor asset in equity oriented schemes while the 88% of institutional assets are in liquid/money market schemes or debt oriented schemes. This reflects investment objectives of both segments, while the institutional investors look for capital protection and return optimization, the retail investors look for long-term growth.

Growth in GDP in the last few years have resulted in surplus income available to households. Indian households have always shown a preference for bank deposits and physical assets but the FY15 data reveals decline in this trend and increase in the investment in the financial assets.

With equity markets becoming extremely volatile due to concerns of global economic slowdown, investors may look towards safer options like Government bonds. But with Fed expected to hike rates, due to strong labour market and steady growth in US, there is a chance for foreign investors to pull out the investments from the emerging markets. Still in the emerging markets, India seems to be the best bet with a secular growth outlook.

All these factors make up for an unpredictable outlook for the investors in both the equity and bond markets. With the fundamentals improving for the Indian companies and yields slightly higher than the G-Secs, the corporate bonds funds look to be one of the best bets for the investors. But they need to be ascertain of the risks associated with them before investing in some of these funds.

1 Association of Mutual Fund in India (AMFI)

2 PwC, Indian mutual fund industry challenging the status quo, setting the growth path

Outlook for Corporate Bonds in India

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

————————————————————————————-

90% of the downgrades which came in the first half of FY16 is owed to the firms from either investment-linked or commodity sectors. As the Indian economy shows initial signs of recovery and the business environment becomes more conducive, the stalled projects, which amounts to Rs 10.7 trillion6, will start picking up. As a result, the debt on the books decreases as these projects become profitable which in turn would result in rating upgrades for these firms.

Additionally, the expected implementation of GST in 2016 will improve the prospects of the capital goods and engineering sector. GST would bring in a predictable tax regime by combining the central and state tax and by providing a tax credit at every step of production. GST could improve the cost competitiveness of the companies in this sector.

On the other hand, the metal players are expected to have a torrid time for a considerable amount of time due to Global and especially Chinese economy slowdown. China, being the largest importer of commodities for the past few years and largest metal importer of India, is facing a slowdown. The Chinese economy is expected to grow by 7% in the next fiscal. This has also led to dumping of steel from Japanese and Chinese steel makers, piling more misery on the Indian metal sector. There has also been low demand from the Euro zone for the metals.

Additionally, with the Indian economy expected to grow at a rate greater than 7%, there is a chance of rating upgrade from the rating agencies making India more attractive to the foreign investors. This would help in reducing the yields of the Government bonds in turn reducing the yields of corporate bonds resulting in price appreciation.

RBI cutting the repo rates from 8% to 6.75% last calendar year did not had a profound impact on the growth of the economy with the nominal GDP growth still estimated at 8.6%. With the inflation under control and WPI negative, there is still a case for future rate cuts this year.

But the rate cuts have failed to affect the yield of the Government bonds majorly due to low liquidity. The 10-year G-sec bonds’ yields has only decreased from 7.728% on Feb 01, 2015 to 7.723% on Feb 01, 2016. The supply of these G-secs are very high compared to liquidity available in the system. These high yields are a deterrent to the corporate bonds as their prices depend on the yield of the Government bonds. Additionally, the liquidity in the corporate bonds are even lower.

Inflation in India has been under control majorly due to softening oil prices. The Consumer Price Index inflation has stayed in the range of 3.69% to 5.61%.  RBI’s monetary policy is designed keeping inflationary target of 5% in mind, as a result inflation is not expected to get out of control.

This would mean inflation not having a serious effect on the corporate bond yields, rather providing the companies a chance for secular growth.

India Inc. Q3 Results: A Grim Picture Indeed

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

——————————-

The results season has been more of a source of concern than of optimism for India Inc. According to CRISIL, aggregate net profit (excluding financials, oil companies and Vedanta) declined marginally by 1% y-o-y in Q3FY16. In fact, earnings has declined in four of the last five quarters. Revenue growth, too, was tepid at 3.6%. Excluding metals and manufacturers linked to the commodity cycle, revenue growth was 7%, while net profits increased by 15.7%. Among individual sectors, pharmaceuticals, media, IT services and passenger vehicles were the outperformers, while metals, capital goods and construction were the laggards.

Many experts have expected to see an earnings recovery from the last two quarters of the fiscal but the results do not reflect the same optimism. The capital goods sector is one of the worst hit lead by poor performances of BHEL and Crompton Greaves. The metal companies too faced a torrid time owing to global slowdown and falling prices of commodities. The banking sector saw declining profits. With corporate sector under stress, credit growth has remained sluggish. The NPAs too have risen for the banks. The only positive comes from the pharma sector which continued to outperform on lower raw material costs and better product mix.

The optimism that was seen after the election of the new government has since died down. With the fears of global slowdown and uncertainty regarding oil prices mounting, India Inc. has a major challenge in its hand. The reforms and the structural changes including GST which were promised seems to be put in the back burner, with only lip-service provided to the corporates. The pet project of the Prime Minister ‘Make in India’ is yet to take flight. With the uncertainty about Fed rates hike, foreign investors too are unsure about investing in the emerging markets and the banks, especially PSBs, too are facing a capital crunch. The ranking of India has improved in various ease of doing business polls, but many corporate giants have complained of no significant improvements in this department.

With all these factors, earnings recovery of the corporate sector still looks a few quarters away. What India Inc. is hoping for from the government is to make the structural changes that were once promised to help it flourish.

Brexit: What’s in it for the Kingdom?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

The recently concluded EU summit cleared the way for the announcement of a Brexit referendum. The saga started with an election victory for the Conservative Party last year where, in their manifesto, they have pledged to hold an in or out referendum on the British’s membership of EU by the end of 2017.

Amid growing pressure from the Euro-sceptic fringes of his own party, David Cameron has vowed to campaign to keep Britain in the Euro zone. The sterling has hit a seven-year low against the dollar amid this uncertainty. At a time when world economy is already fragile uncertainty regarding a British exit from the EU will hurt growth further.

Would Britain be better off staying in the Euro zone or going it alone?

Britain pays billions of pounds in membership fee to EU but the boost in income that it gets from the free trade in the region is unparalleled. This makes it easier for the British companies to export the goods to rest of the Euro Zone. After an exit, Britain will be free to negotiate trade agreements with non EU countries but may lose the negotiating power that it now holds as a part of the EU.

Britain might also lose the status as one of the financial centres of the world if they indeed decide to exit as it may no longer be seen as a gateway to the EU by the large US banks. There is also a fear of losing millions of jobs and subsidies that the British farmers receive being a part of the trade bloc.

Britain may also end up losing their political and military influence in Europe once they leave the EU and find themselves as a rank outsiders with no powers and few friends.

Though there are lot of uncertainties, the Brexit campaigners believe that an exit can free Britain from the shackles of the EU and allow them to create an economy free from the regulations from outside and turn London into a “freewheeling hub for emerging-market finance – a sort of Singapore on steroids”.

Tax Regime and Ease of Doing Business in India

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

————————————————————–

The Government was put in a spot once again when the IT department sent a fresh notice to Vodafone in a $2 billion tax dispute regarding the transfer pricing deal made back in 2007. This comes in the middle of the ‘Make in India’ week when the government in trying to woo investors to invest in the India growth story.

The transfer pricing case has been an albatross around the neck of the government for quite a long time. The Vodafone case is currently with international arbitration court but since the tax demand has not been stayed by any court, the IT department is compelled to keep issuing notices to the company to pay the disputed amount or risk assets being seized.

Soon after taking over in May 2014, the Modi government had promised a predictable, stable and non-adversarial tax regime. However, it didn’t roll back the controversial retrospective amendment of the income tax law introduced in 2012 by the UPA government. Many policy makers believe that this case, instead of yielding any revenue for the government, will only tarnish the image of the country as a place for doing business.

With a lot of foreign investors and global giants, including Vodafone for whom India is an important market, waiting in the wings for investing big in India, it is high time for the Government, judiciary system and tax authorities to take the case to its conclusion. A panel, tasked by the previous government to look into the matter, had suggested that penalties should not be levied in a case that involved a retrospective amendment and that such changes should only be made in the rarest of instances.

The finance ministry is looking at global models to resolve the tax disputes. The current laws do not provide for the mutual settlement of the amount. There have been discussions in the past on introducing a framework for negotiated settlements. A change in law will allow authorities to reach a negotiated settlement on the tax amount and thereby reduce litigations. Only by having transparent and predictable tax laws can India assure the foreign investors to make investments in the country and make it a destination of choice for them.

NPAs: Where did the banks go wrong?

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

_______________________________________________________________

The gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore for the year ending March 2015 or 4.6 % of total advances, most of them from the public sector banks. The NPAs has only grown since then. This suggests a high number of credit defaults affecting the profitability and the liquidity of the banking sector. This issue can be majorly attributed to the exposure of the banks to the Infrastructure sector which has faced torrid times due to slowdown in recent years.

The major reason for this problem is usually attributed to Economic slowdown. But the blame has to be shared the Government, RBI, banks and promoters. The corporate in the face of slowdown and high interest rates continued to borrow, while the banks continued to lend without adequate due diligence. RBI and Government too added to the problem by turning a blind eye to the whole issue by keeping the policies loose. The banks continued to play the wait and watch game when the asset quality deteriorated and in some cases provided the companies with restructuring option in the hope of revival.

The Government and banks are now trying to find solution to this menace. A Government setup Asset Restructuring Company (ARC) has been proposed by the Union Finance Ministry and Niti Aayog, which would take the stressed assets from the banks’ balance sheet. This would in turn help the banks to increase their lending activities when the economic growth picks up. But the major changes has to be made in the credit assessment process which should take economic factors into consideration in addition to the financial statements of the company. The banks should also work hand in hand to identify the willful defaulters and make lending decisions. Only through discipline and a framework can this problem of NPA be solved.