The Way Forward

The policy makers for Government must understand the problem the Indian economy is facing right now is people do not have enough money to spend. There is a demand issue in the economy not the supply, and private investment is not going to come until and unless the demand issue is corrected in the economy. Recently government reduced the corporate tax for the industries which is a welcome move, it will help Indian industries to compete in international market and increase our export, but it is not going to solve the demand issue in the economy. There is slow down in 7 out of 9 core sectors. The government might argue that auto sector is facing slowdown due to people are waiting to buy bs 6 vehicles or people are waiting for better electric vehicle option and it might be true to some extend but government cannot deny the fact that FMCG industry is also facing the slowdown.

For Hindustan Unilever ltd, the country’s biggest FMCG company, there was a 7-percentage point dip in volume growth between the June quarter this year versus the same period last year. Britannia industries, India’s second largest biscuit company, also recorded a 7-percentage point drop while for Dabur India, the slide in volume growth on a year-on-year basis during the April June quarter was 15 percentage points. The dip in sales is mostly contributed by the rural India which are still facing the farm distress if government is serious about the economy then it must address the farm distress without addressing the farm distress, we cannot expect the rural demand rising.

Here are some ways through which government can revive growth in the economy:-

New tax code

The government must immediately accept the new tax code which suggests new tax rate of 5%, 10%, 20%, 30% and 35%. This means that the formal salaried class which mostly earns between 5 to 10 lakhs has to pay 10% income tax instead of 20% and people earning between 10 t0 20 lakh which come from upper middle class has to pay 20% income tax instead of 30% which will leave more disposable income in the hands of people and will lead to greater demand and consumption in the economy, and in future leading to greater indirect tax collection.

As far as revenue shortfall is concerned it can be covered by letting go the fiscal deficit target which is well under control and India can afford right now to let it go beyond 3.3% and government has to look at to the larger picture of riving the domestic consumption which will lead to growth and if domestic consumption is corrected then private investment will correct itself this way government can fire the two main growth engines.

Auto Industry Campaign

One of the main reasons why there is a slowdown in auto industry is because of people are trying to delay their purchase. People are uncertain whether to buy the new vehicle now or wait for the bs 6 vehicle or wait for the electric vehicle. So to tackle the uncertainty all the industry players should run a media campaign mainly through T.V. advertisement informing the consumers smartly about the benefits of buying the vehicles now and assuring customers there would be no harm from the government policies, informing price benefit they get with the bs 4 vehicles with the same features. In a price sensitive market like India consumers will surely get motivated and start buying again. Industry players would also not feel the pinch of media publication cost because it is getting divided among the whole industry players.

Export oriented economy

Another mistake the government does that we overly get dependent on the domestic market for consumption and growth. Due to this for years we didn’t think of exports seriously. But if we want to attend the double-digit growth, we must increase our exports like china did. China took advantage of domestic market as well as of international market thus giving double thrust to the economy and growing in the double digits and lifting millions out of poverty.

Surely, the tax cut will help Indian economy to increase its exports by making our products cheaper.

Low cost credit and stable environment for business

Government of India must work with RBI to make credit cheaper in the economy so business can utilize to their advantage and invest more. And government should also make sure that they provide stable environment to do business and it can’t disrupt the economy with the moves like demonetization in the near future.

Author
Kedar Kore
(B.Com (Hons), NMIMS – Mumbai. Batch 2017-20) Connect with Kedar on LinkedIn

2019 Indian auto industry slowdown – a complex problem

General Information

The Automotive Industry is one of the major drivers of India’s growth. Currently, it is the 4th largest market in the world. Having a valuation of $93 Billion, it contributes around 7.5% of the GDP and nearly half of the manufacturing GDP. Many known international automotive companies have setup their manufacturing units in India and some of them export also. There are currently 21 international and 18 Indian automotive companies.

Macro outlook

Being a driver of India’s Economic growth, it has the world’s largest two-wheeler and 4th largest four-wheeler market. Moreover, India also exports $14.5 Billion worth of automobiles, comprising 2.2% of total exports and growing fast. It is also one of the largest employers where 37 Million people are employed directly and indirectly. With the recent growth in the middle-income households, the auto sales have crossed 26 million in 2018, surpassing Germany. It is also a major supporter of labour-intensive domestically ancillary units which is dominated by small and medium scale enterprises.

The slump

This year i.e., 2019 has witnessed the worst slowdown of automobile sales after December 2000. The sales have been decreasing for the last 10 months. In July, due to a decrease in sales, around 2.3 lakh jobs have been lost in this sector and 300 dealerships have been closed. Auto sales in August have decreased by 23.5% compared to the previous year. Talking about the segments, the commercial vehicle is worst affected by the decrease in sales by 38.71%, followed by 31.57% in commercial vehicles and 22.24% in two-wheelers. But, the exports in this year has increased marginally by 2.3%.

History

The first slowdown which was recorded after SIAM (Society for Indian Automobile Association) was formed was in the year of 2000 where the auto sales had reduced by 35%, where passenger car was worst sufferers suffering reduction by 23.1%.

The recent slowdown is going on since November 2018 and no hope for revival is seen. The trigger was started with the IL&FS crisis, where not only them but also other NBFCs were taken with it to the trouble. This led to a shortage of funding and their loan disbursement were decreased by 30% in the first quarter of this financial year. Similarly, NPAs in banks were multiplied by 4-times in 4 years which discouraged bank to sanction more loans.

Second reason is the new ruling by the supreme court on pollution control. Supreme court has given the deadline of 1 April 2020 to all automobile companies to comply with BS-VI norms. Maruti-Suzuki has decided to stop its diesel model production due to high-cost and lack of expertise on adaptation of BS-VI norms. Also, the potential buyers have held its decision due to the low resale value of BS-IV models in future.

Third reason is the announcement of electric cars and emphasising on it has confused consumers on whether to buy internal combustion cars or electric cars. Government is lacking its vision on the policy of electric cars.

Fourth reason is an increase in third-party insurance. This has increased the cost of auto maintenance which has backed off consumers from purchasing automobiles.

Current Scenario

Maruti-Suzuki, the largest automobile company in India has seen a decrease in the production by one third and they had to shut down the production for 2 days. Till now, ₹80,000 crores have been invested by auto companies behind BS-VI norms and it is uncertain that if the sales would pick up.

A report by Reserve Bank of India in May has rejected the reason for credit shortage on slow auto sales. Instead, RBI says that increase in fuel prices and exogenous policy changes has reduced auto sales. The increase in third-party insurance premium, registration fees (which has taken back) has discouraged buyers to purchase cars.

If we see the decline of auto sales by category, two-wheeler and commercial vehicles, especially tractors have declined which indicates that there is a decrease in the spending of consumers especially in rural areas where these vehicles are popular. This may indicate that the slowdown of the economy which is currently going on.

To tackle the slowdown, there is demand for GST cut rates and availability of easier credit for automotive vehicles. Most of the auto companies are demanding a GST rate to cut down from 28% to 18%. On the other side, some companies are introducing new schemes to make their way from slowdown. One such company, Mahindra has introduced subscription service for some of its models where the subscriber has to pay a subscription fee and deposit in advance which includes insurance premium and maintenance charges. The subscriber after registration has to take a plan ranging from one to four years and have to pay monthly fees accordingly. After the plan expires, the subscriber can either return the car to the company, purchase the same car at a discounted price or take a new plan for a different model.

Government on the rescue

Recently, finance minister, Nirmala Sitharaman has announced capital infusion of ₹70,000 crore in the PSU banks to increase the liquidity in the economy. She also has lifted the ban on purchasing new vehicles for government administration which will provide a short-term demand. Moreover, the validity of BS-IV will be valid for the entire period of registration done today even after April 2020. An additional depreciation of 15% is allowed, taking it to 30% on vehicles purchased today till April 2020. The Government is also planning with a temporary reduction in GST rates to reduce the prices and fully implemented scrapping policy.

The silver lining

Despite the slowdown in the auto sales going on for the last ten months, the sales of the new models launched in this year is cruising through its sales and the demand is more than expected. The new players in the Indian auto market, MG motors and KIA motors have recently launched their first models, Hector and Seltos respectively. Hector has got so many bookings that MG motors have to close its bookings and the waiting time is a minimum of 6 months. Seltos, complied with BS-VI since its introduction is still not have delivered its model but they have received bookings up to 32000 in august with the waiting time of 4 months. Jeep’s compass has the waiting time for 45 days. Tata motors, facing slowdown has its saviour, Harrier which still has waiting time for 6 weeks. This shows that the new models with the latest features are favourite among young consumers and old players now have to innovate their automobiles and give that features that fulfil the value of which the consumers are paying.

Author
Siddharth Dholaria
Team Member- Alternate Investments (M.Sc. Finance, NMIMS – Mumbai. Batch 2019-21)

Connect with Siddharth on LinkedIn

THE PSB MEGA MERGER: AN OVERVIEW

On the 30th of August, 2019, Finance Minister (FM), Nirmala Sitharam announced the merger of 10 major public sector banks (PSBs) to reduce the number of players in the banking scenario from a whopping 27 to 12. This news comes in wake of the disappointing news that India faced a 5% GDP growth in the preceding quarter. It is expected that the merger will increase the CASA (Current to Savings Account Ratio) and enhance lending capacity. These reforms were deemed necessary to foster the idea of India becoming a $5 trillion economy. Illustrated below shall be the expected scenario if the mergers are proven successful:

Merger between

Rank (based on size)

Number of Branches

Total Business Size

(Rs in lakh crore)

Punjab National Bank (A), Oriental Bank of Commerce and United Bank – Merger I

2nd

11,437

17.95 (1.5 times of current)

Canara Bank (A) and Syndicate Bank – Merger II

4th

10,342

15.2 (1.5 times of current)

Union Bank of India (A), Andhra Bank and Corporation Bank – Merger III

5th

9,609

14.59 (2 times of current)

Indian Bank (A) and Allahabad Bank – Merger IV

7th

6,104

8.08 (2 times of current)

(A) Anchor Bank

It was also announced that Rs 55,250 crore of capital infusion will take place to ease credit growth and regulatory compliance. Now we’ll look at the capital infusion expected to take place to aid the mega mergers:

Bank

Recapitalization (Rs in crore)

Punjab National Bank

16,000

Union Bank

11,700

Bank of Baroda

7,000

Canara Bank

6,500

Indian Bank

2,500

Indian Overseas Bank

3,800

Central Bank

3,300

UCO Bank

2,100

United Bank of India

1,600

Punjab and Sind Bank

750

FM also announced multifarious administrative reforms to increase accountability and remove political intermediation. Bank management is made accountable as the board will now be responsible for evaluating the performance of General Manager and Managing Director. It is mandatory to train directors for their roles thus improving leadership in the PSBs. The role of the Non-Official Director is made synonymous to that of an independent director. In order to attract talent, banks have to pay competitive remuneration to Chief Risk Officers.

The banks were merged on three criteria – the CRR should be greater than 10.875%, the CET ratio should be above 7% (which is above the Basel norms) and the NPAs should be less than 6%. However, Syndicate and Canara bank have not been able to meet the criteria.

Post consolidation facts and figures:

  • Total Business Share
  • Ratios (all amounts in %)

MERGER – I

PNB

OBC

United Bank of India

Post-Merger

CASA Ratio

42.16

29.4

51.45

40.52

PCR

61.72

56.53

51.17

59.59

CET-I

6.21

9.86

10.14

7.46

CRAR Ratio

9.73

12.73

13

10.77

Net NPA Ratio

6.55

5.93

8.67

6.61

MERGER – II

Canara Bank

Syndicate Bank

Post-Merger

CASA Ratio

29.18

32.58

30.21

PCR

41.48

48.83

44.32

CET-I

8.31

9.31

8.62

CRAR Ratio

11.90

14.23

12.63

Net NPA Ratio

5.37

6.16

5.62

MERGERIII

Union Bank

Andhra Bank

Corporation Bank

Post-Merger

CASA Ratio

36.10

31.39

31.59

33.82

PCR

58.27

68.62

66.60

63.07

CET-I

8.02

8.43

10.39

8.63

CRAR Ratio

11.78

13.69

12.30

12.39

Net NPA Ratio

6.85

5.73

5.71

6.30

MERGER – IV

Indian Bank

Allahabad Bank

Post-Merger

CASA Ratio

34.75

49.49

41.65

PCR

49.13

74.15

66.21

CET-I

10.96

9.65

10.63

CRAR Ratio

13.21

12.51

12.89

Net NPA Ratio

3.75

5.22

4.39

Advantages:

  • Economies of scale.
  • Efficiency in operation.
  • Better NPA management.
  • High lending capacity of the newly formed entities.
  • Strong national presence and global reach.
  • Risk can be spread over and thus will be minimized.
  • Lower operational cost leading to lower cost of borrowing.
  • Increased customer base, organic growth of market share and business quantum.
  • Banking practices reform announced to boost accountability and professionalism.
  • Appointment of CRO (Chief Risk Officer) to enhance management effectiveness.
  • Centralized functioning promoting a central database of customers.

Disadvantages:

  • The slowdown witnessed by the economy coupled with the dangerously low demand in the automobile sector will maintain the existing situation pessimism.
  • The already existing exposure of NBFCs in the individual constituent banks will be magnified as the merged entities shall have more than 10% loan exposure to NBFCs and thus, in effect, the liquidity pressure that comes along with it.
  • As history dictates, the merger of these eminent banks will cause near-term problems with respect to restructuring, recapitalization, operation, flexibility and costs.
  • Near-term growth shall be hindered and core profitability may suffer.
  • Compliance becomes a huge barrier.
  • Difficult to merge human resources and their respective work cultures post-merger – this will in turn lead to low morale and inefficient workforce

Outlook:

The mergers were announced with a very noble idea in mind; however, the timing is a bit unfortunate. During these times of economic slowdown, India needs its bankers devoting their time to boost the economy. With the merger happening, the banks will be more pre-occupied with the integration process rather than enhancing the economic growth. Merely combining banks will not help enhance credit capacity, it is also important to see whether synergies in reality will be created (or if it is merely on paper).

The share of assets of the top three or four banks account for only 30%-32%. Thus, the banks still remain fragmented for a major part – systemic risk or contagion effect shall not be a problem as of now. Although this is the case, out of the four mergers not one of them can be said to be financially strong. This is a phenomenon of blind leading the blind; it cannot be expected that two financially weak banks can merge into one financially strong entity. “A chain is only as strong as its weakest link.”

This announcement comes at a time when even the results of the previous mergers (e.g. Bank of Baroda) have not yielded any fruit and the PSBs have recently jumped back from a long stress scenario. It seems as if there is no common theme in the mergers (i.e. retail, corporate or SME), no particular skill-set that has been emphasized upon. Rather, it was just assumed that all the banks fall under the same template and a haphazard combination was made – in such a case, there is a slim chance of synergy creation. Also, with no major theme in hand the multifarious objectives will confuse the banks with respect to the pressing matters at hand.

According to technical experts, it might take around three to four years to integrate the existing IT systems of the banks. Although all of the use the CBS, heavy customization is required, mobile apps need to be in sync, backend functions have to be centralized effectively.

As for the case of resolution of NPAs, it might actually become easier and faster. Earlier, the bankers had to talk to their counterparts, the approach the senior management to come to a resolution. Now, with these institutions merging and with lesser levels to report to, a solution plan can be implemented at the earliest with considerably less effort. Apart from this, now that the banks will have a common database and a larger network, they can increase the services offered at a higher level at lower costs – this might show an increment in the fees earned and in turn, the profitability. It is expected that the Anchor banks will be benefitted more from the mergers as the swap ratio will be in their favour.

Author
Chandreyee Sengupta
Team Member- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2019-21)

Connect with Chandreyee on LinkedIn

Impact of MSME on Indian Economy

INTRODUCTION TO MSME

The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector the Indian Economy over the last 5 decades. MSME Sector has been one of the most focused sectors in prospects of Investments and has contributed significantly for our country’s Social Development as well as Economic development. MSME has also promoted women empower and has helped in generating largest employment opportunities at lower capital cost, next only to agriculture. It has helped abundantly by promoting the term ‘Entrepreneurship’. MSME have merged as complementary to large industries as ancillary units and they are widening their domain across all sectors of the Indian Economy as well as producing a range of Products and Services which will help to meet the needs of not only domestic market but International markets also. Government of India has never failed to support MSME in all ways possible and have promoted MSME sectors by starting a number of Schemes and other Incentives for them. The Ministry of MSME runs Various Schemes aimed at financial assistance, Infrastructure development, technology assistance and Upgradation, skill development and training, enhancing competitiveness and market assistance of MSMEs.

GOVERNMENT SUPPORT TO MSME

The ministry of MSME is doing its best to help MSMEs reaching new high and contributing more and more to The Indian Economy. The ministry recently came up with some Policy Initiatives like:

  • Ease of Registration Process of MSMEs- Udyog Aadhaar Memorandum
  • Framework for Revival and Rehabilitation of MSMEs
  • MSME Data Bank
  • MyMSME
  • Direct Benefit Transfer in the M/o MSME
  • GST rollout & Ministry of MSME
  • Digital Payments
  • Grievance Monitoring
  • MSME Samadhaan: To Address Delayed Payments to MSEs
  • MSME- Sambhandh
  • Technology Centre Systems Programme(TCSP)
  • Partnership with Industry
  • International MoUs
  • MoU with NSIC for provision of services for MSMEs
  • Swachhta Pakhwada by Ministry of MSME
  • National Scheduled Caste / Scheduled Tribe Hub

These Policies are being formulated to help MSME reach new heights and contribute more in Economic and Social Development of the Country. The Schemes by Government help MSMEs Financially/in-kind for their betterment. Government of India has Supported and Promoted MSME Sector not only on Domestic Levels but in International Markets also. The contribution made by MSME in development of Economy and Social Life in backward areas has been spectacular.

ROLE OF MSME IN INDIA

The MSMEs have been a great contributor to the expansion of entrepreneurial endeavours through business innovation. Since past 9 Years MSME have contributed around 29% in GDP of India(Source: CSO, Ministry of Statistics & Programme Implementation). The Gross Value added by MSMEs in contribution to Indian Economy as on 2015-16 was INR 1,24,58,642 Crs.

In India 324.88 Lakhs MSMEs are located in Rural Areas whereas 309 Lakhs MSMEs are located in Urban Areas. Shockingly 630.52 Lakhs of these MSMEs falls under Micro Sector whereas 3.31 Lakh MSME falls under Small sector and only 0.05 Lakh falls under Medium Sector(Data as per MSME Annual Report 2017-18). MSMEs have a big impact on Micro Sector helping small entrepreneur’s achieving their dreams.

Not only was these, it also seen that 22.24% of the ownership of these Enterprises in rural areas were of female. In urban areas Female ownership of these enterprises came around 18.42%. MSME have led a movement in supporting Female entrepreneurs and have helped them in achieving their dreams. One more interesting fact is that 50% of MSMEs in India have ownership of OBCs followed by 12.45% of SCs and ST having ownership of 4.10%. In total ~66% of MSMEs in India are owned by Socially Backward Groups.

Estimated number of MSMEs (Activity Wise) is as follows:

Activity Category

Estimated Number of Enterprises (in Lakh)

Share(%)

RURAL

URBAN

TOTAL

Manufacturing

114.14

82.50

196.65

31

Trade

108.71

121.64

230.35

36

Other Services

102.00

104.85

206.85

33

Electricity*

0.03

0.01

0.03

0

ALL

324.88

309.00

638.88

100

*Non-captive electricity generation and transmission and distribution by units not registered with the Central Electricity Authority (CEA)

MSMEs have helped women entrepreneurs, socially backward groups in excelling and have been a major player in generating employment. Truly Micro Sector has been a major contributor in Social and Economic development of our nation.

Following Table shows how MSME helped in Employment Generation:

Activity Category

Employment (in Lakh)

Share(%)

RURAL

URBAN

TOTAL

Manufacturing

186.56

173.86

360.41

32

Trade

160.64

226.54

387.18

35

Other Services

150.53

211.69

362.22

33

Electricity*

0.06

0.02

0.07

0

ALL

497.78

612.10

1109.89

100

*Non-captive electricity generation and transmission

Interestingly, out of the total Estimated Employment Generated around 97% are generated by Micro sector which shows how it has been aiding in development of our nation and shaping a bright future.

MSME Sector has always been supported by Government and Big industries in every ways possible and MSME have returned the favour.

“No dream is too big and no dreamer is too small” these saying have been proved right as the smallest of enterprises have supported millions of peoples dream by providing them with employment.

*The figures were taken from the government MSME Annual Report of 2017-2018

Author
Aditya Majmudar
Volunteer- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

Connect with Aditya on LinkedIn

Who is liable for cyber fraud?

With the rise in digital transactions ad their spread to the interiors of the country, cyber frauds are on the rise. In this situation, the question arises who is actually liable for the same. Subscribe to Areesha Fatma Channel on YouTube
Areesha Fatma
(M.Sc. Economics, NMIMS – Mumbai 2018-20)

Connect with Areesha
on LinkedIn

Libra – Facebook’s cryptocurrency

Facebook has revealed plans for a new global digital currency, claiming it will enable billions of people around the world without a bank account to make money transfers. The digital currency is called Libra and will allow its billions of users to make financial transactions across the globe, in a move that could potentially shake up the world’s banking system.

Facebook revealed the details of its crypto currency, Libra which will let you buy things or send money to people with nearly zero fees. It released its white paper explaining Libra and the technicalities of its blockchain system before a public launch in the first half of 2020.

The effort announced with 27 partners right now ranging from Master Card to Uber and should launch sometime next year with 100 partners, as it hopes. It is a stable coin backed by a basket of actual currencies and marketable securities. Facebook will only get a single vote in its governance of the crypto currency along with its partners.

The currency will be run by the Libra association as Facebook is distancing itself from the direct management. Facebook’s involvement will be run via a new subsidiary called Calibra that handles its crypto dealings and protects users’ privacy by not mingling an individual’s payments with his/her facebook data. By this an individual’s real identity won’t be tied to his/her publically visible transactions. Calibra will also be launching a digital wallet for Libra, as a standalone IOS, android application and also as a functionality within whatsapp and messenger. Libra is the underlying technology but Calibra is likely how most people will interact with the currency. It will be the first crypto currency wallet that millions of people will have access as it takes advantage of facebook’s massive ecosystem with billions of potential users.

One of the biggest problems that the regulators will have to tackle is drug dealers and money launderers from getting their hands on Libra and using it to move money from the eyes of the law enforcement like with any crypto currency.

“The issue is that once you apply traditional regulation to tokens that are backed by money in the bank then those tokens start to look a lot like normal fiat money, after all most money we use today – credit card, apple pay, PayPal etc is just the digital representation of money that the banks promise to ultimately backup. This is the exact same thing except on a blockchain”- Techcrunch

Libra Whitepaper states that unlike previous blockchains which view the blockchain as a collection of transactions, the Libra blockchain is a single data structure that records the history of transactions and states over time. Facebook has created a whole language for writing commands on its protocol called MOVE (programming language), which is an open source prototype in anticipation of a global collaborative effort to advance this new ecosystem.  The facebook has done its homework to cherry pick the best bits and pieces of other crypto project to create Libra.

Like bitcoin there is no real identity on the blockchain; from the perspective of the block chain itself you don’t exist, only public private key pairs exist. Like hyperledger it’s permissioned (at least to start); initially the consensus structure of Libra will be dozens of organisation that will run nodes on the network, validating transactions. Like tezos it comes with on-chain governance; the only entities that can vote at the outset are founding members. Like ethereum, it makes currency programmable and in a number of ways the whitepaper defines interesting ways in which its users can interact with the core software and data structure. For example anyone can make a non-voting replica of the blockchain or run various read comments associated with objects such as smart contracts or a set of wallets defined on Libra. Crucially, Libra’s designers seem to agree with ethereum that running code should have a cause so as to all operations require payment of Libra as gas for it to run. Also like ethereum, it thinks proof of stake is the future but it is also not ready yet. Like binance’s coin it does a lot of burning. Like coda, users don’t need to hold on to the whole transaction history – states Coindesk.

Now needless to say, this is pulling a lot from the latest and greatest crypto ideas and collaborating it.

Facebook launched 2 crypto currencies, addition to Libra the project will also have a Libra investment token, which is how the stake holders (100 or so partners facebook hopes to have lined up on launch) will make money on this, as Libra itself is not supposed to fluctuate in value.

Unlike Libra a currency that will be broadly available to the public, the investment token is a security according to facebook that will be sold to a much more exclusive audience – the funding corporate members of the projects governing consortium known as the Libra association and accredited investors. While Libra will be backed by a basket of fiat currencies and government securities, interest earned on that collateral will go to holders of the investment token. As previously reported ahead of the official announcement, each of the 27 companies that facebook recruited to run validating nodes as founding members of the consortium, invested at least 10 million dollars for the privilege. The investment token is what they received as a financial reward, but that reward will only be meaningful if the network takes off – states Coindesk.

The assets in the reserve are low risk and low yield for early investors which will only materialise if the network is successful and the reserve grows to a substantial size, facebook said in one of the series of documents that supplement the Libra white paper.

This sound a lot like how an Initial Coin Offering – (ICO) has worked over the past of years, except without the expectation of price appreciation as the reward to early investors.

 We will have plenty of time and a lot of information to dig into in the coming months, but my bottom line and initial take is that the money we have today has not worked very well for all of us, furthering the gap between the rich and the poor. Libra (crypto currency) has the potential to bridge this gap but it has to bypass too many regulatory complications.

If facebook succeeds and receives cash for Libra, it and the other founding members of the Libra association could earn big dividends on the interest. If Libra gets hacked or proves unreliable lots of people around the world could lose their personal information and money. But it is clear that facebook has tried to reinvent money, we will have to wait and see if they can pull it off.

Author
Indrajith Aditya
Team Member – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai 2018-20)


Connect with Indrajith on LinkedIn

Non-Performing Assets (NPA) of India: Journey so far and the road ahead!

“The failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself.”

— Radelet, Sachs, Cooper and Bosworth (1998)


In the recent times the newspapers have been filled with some or the other news, issues, policies, regulation or resolution of NPAs. The NPA ratio has come down to 9.3% in March, 2019 from 11.5% in March,2018 according to mention by RBI Governor Shaktikanda Das. 

Source: SCB’s GNPA Ratio,Financial Stability Report, RBI

According to RBI, the definition of NPA is: ‘An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.’

A non-­performing asset (NPA) is a loan or an advance where the payment of principal/interest is due (in default) for 90 days or above.First, when there is a default of payment, till 90 days, the accounts are subsequently classified as Special Mention Accounts (SMA): SMA 0/1/2. Then after 90 days, these accounts are classified as NPAs.Further NPAs are classified into sub­standard,doubtful and loss assets.Any income for standard assets is recognized on accrual basis, but income from NPAs is recognized only when it is actually received.

Reasons for accumulation of NPAs:

Increasing cases of wilful defaults and frauds are often considered as the primary reason behind the accumulation of bad loans in the Indian banking system.

When an economy experiences healthy GDP growth, a substantial part of it is financed by the credit supplied by the banking system. As long as the GDP keeps growing, the repayment schedule does not get substantially affected. However, when the GDP growth slows down, the bad loans tend to increase due to macroeconomic factors, primarily among them are interest rate, inflation, unemployment and change in the exchange rates.Hence, bad loans accumulate as borrowers are unable to repay due to stalling/closure of the big development projects

Bank-related micro indicators such as capital adequacy, size of the bank, the history of NPA and return on financial assets also contribute to the accumulation of bad loans. NPAs, specifically in the Public Sector Banks (PSBs), have adverse effects on credit disbursement. Increasing amounts of bad loans prompt the banks to be extra cautious. This in turn has caused drying up of the credit channel to the economy, particularly industries, making economic revival more difficult.

Need for Solution

Reviving industrial credit is crucial for the health of the overall economy, because industry (particularly manufacturing) tends to create more employment.

Mounting bad loans suggests vulnerability in the system, wherein short-term deposit-taking banks have to extend credit for long-term big development projects. And this model is visibly failing. Hence NPAs put several small depositors of the banks, particularly in the PSB, at risk.

Also an improvement in the recovery rate and reduction in timeline for resolution for insolvent companies will increase investor confidence in Indian Bond Market.

Recognition of the problem and the solution:

NPAs story is not new in India and there have been several steps taken by the GOI on legal, financial and policy level reforms. In the year 1991, Narsimham committee recommended many reforms to tackle NPAs.

SICA Act, The Debt Recovery Tribunals (DRTs) – 1993, CIBIL: Credit Information Bureau (India) Limited-2000, LokAdalats – 2001, One-time settlement or OTS- compromise settlement-2001, SARFAESI Act- 2002, Asset Reconstruction Company (ARC), Corporate Debt Restructuring – 2008, 5:25 rule – 2014, Joint Lenders Forum – 2014, Mission Indradhanush – 2015, Strategic debt restructuring (SDR) – 2015, Asset Quality Review- 2015, Sustainable structuring of stressed assets (S4A)- 2016 were some of the techniques applied to tackle the problem by government and RBI.

Every method was entangled, rules were not that clear, there were lot of cases pending in front of DRTs owing to limited infrastructure, not enough field experts and hence, it took years for creditors to recover their money. India needed a structured process; thereby Insolvency and Bankruptcy Code (IBC) -2016 came into existence.

It sets a time limit of 180 days which can be extended by another 90 days to complete the entire process. Some of the features of the code include the allocation of a new forum to carryout insolvency proceedings, setting up a dedicated regulator, creating a new class of insolvency professionals and another new class of information utility providers.

The forum where corporate insolvency proceedings can be initiated is the National Company Law Tribunal (NCLT) and appeals against its decisions can be made in the (National company Law Appellate Tribunal) NCLAT. The IBC vests the NCLT with all the powers of the DRT.

Insolvency professionals will have the task of monitoring and managing the business so that neither the creditors nor the debtor need worry about economic value being eroded by the other.On acceptance of the application by NCLT for proceeding for Corporate Insolvency Resolution Process (CIRP), Board of Directors of the company has to step down and Insolvency Professional takes the charge and the plan for revival or liquidation of the company, approved by majority of creditors is put in the action according to the IBC rules and timeframe.

It is predicted that the NCLT is focused on the legal process while the insolvency professional is focused on business matters.RBI listed out the 12 major accounts in India, which has the largest share of NPAs in the country.

Source : ICRA

Some great results have fared in: Ranking for ‘Resolving Insolvency’ But still there is a long way to go: Suggestions

As mentioned above, there is a mismatch of assets and liability for the banks. Banks’ assets are long term loans, whereas banks liabilities are short term deposits, which have landed banks in failures. Hence, it makes sense to say that commercial banks should be focusing on short term assets to match their short term liabilities. And for Long term projects, special purpose vehicles (SPV) should be created to fund a particular sector project and financial institution should be created to fund these SPVs and should be given incentives and proper regulation from the government.

Also, as recapitalization of PSBs is going on, a bank should first divide its assets into good and bad, meaning viable and unviable asset. Banks should be recapitalized according to viable assets to revive with its positive core rather than just giving out public money. By this, banks can also focus on their core business rather than managing NPAs and not contribute to slowing of the economic growth.

SICA Act in India was a ‘Debtor in Possession’ (DIP) Model just like U.S. Chapter 11. But there were flaws in the act compared to the U.S.model. There was also a problem in the assessment of viability of the company as only a few accounts were revived. ‘Another relevant fact is the definition of insolvency or ‘sickness’ under the SICA. The N.L. Mitra committee criticized the definition provided by SICA i.e. ‘at the end of any financial year, accumulated losses equal or exceed its entire net worth’ stating that this is the end rather than the initial point where the company’s problems begin.’

Time has changed, India made a comeback with ‘Creditor in Possession’ (CIP) Model of IBC inspired by U.K. owing to similarities in the judicial process and SMEs culture, but there is one problem. In SICA, debtors were made liable to take the proceeding to court if it is identified by them that company is in trouble. Under IBC there is no such amendment and hence there is a ‘problem of initiation’ which was clearly seen in the case of Jet Airways. Just because directors didn’t want to step down, they dragged the process, rejected lot of revival bids in early insolvency phase. And be it any reason, even the financial or operational creditor did not initiate the process.

Australia also followed CIP model, but faced the same problem and added the amendment to make directors liable for any default under their directorship, directors became scared to default and didn’t take any risky decision to grow the company making them stagnant. This also should not happen with India. But then Australia laid ‘Safe Harbor’ provision to ease out the rules. Hence still amendment in the IBC is required to make directors take help from outside professional for the revival of their company in the early insolvency stage itself.

On June 7,2019, RBI laid provision pertaining to rules for creditors to enter into a ‘review period’ in the first 30 days of default by the debtor account, and make a resolution plan for the concerned account and apply the plan in next 180 days to revive it. If the plan is not put into implementation, provision for this account is required to be increased more and more as days pass. This might lead the banks to initiate the CIRP of the account under IBC and may overcome the ‘Initiation Problem’ from the side of creditors. According to this new frame work for stressed assets, the above mentioned rule is now applicable to Small Finance Banks and NBFCs, as they have become an integral part of the economy and needs to be properly regulated to retain the trust of investors.

There can be a solution to mitigate the problem of NPA by forming a‘Bad bank’. But this is a very risky model as it requires extensive research and cross-country analysis as the taxpayers’ money is on table.

In India Secondary Market for Corporate Loans, particularly distressed loan is in the making, taking inspiration from U.S. and European market. But there is a problem of transfer pricing of these distressed assets. India will have to design a proper mechanism, a platform and regulation of valuation techniques using DCF method, so that there isn’t much of a gap between the bid and the ask price of the assets and so the market remains active and transparent.

India and the banking system requires a major turn around and all the financial professional will have to put in the work.

Author
Vishwa Parekh
Volunteer – Fixed Income & Risk Management
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

Connect with Vishwa on LinkedIn