Thursday, 27 October 2016

Business Standard Banking Round Table, 2016

Business Standard Banking Round Table, 2016, started on Thursday.Here are the highlights of what the top banking honchos said:

1) The one thing striking about the banking side in concentration of assets and liabilities, said IDFC Bank MD & CEO Rajiv Lall

2) IDFC Bank's Rajiv Lall said that 45 per cent of all outstanding advances were made to only 300 corporates.

3) Rajiv Lall pointed out that 60 per cent of India's household savings were still outside the financial system.

4) Union Bank of India CMD Arun Tiwari said that there is a perception advantage in terms of which bank is a retail bank and which is involved in corporate lending.

5) Axis Bank MD & CEO Shikha Sharma said that credit growth to the corporate sector was relatively weak and that working capital demand has also been depressed.

6) Shikha Sharma added that there have been no new projects in the last 18 months and working capital demand has also been depressed.

7) Axis Bank's Sharma pointed out that the retail and small and medium-sized enterprises sectors were showing demand. However, she cautioned that there was worry over whether that is the next bubble.

8 )Chandra Kochchar, the head of ICICI Bank highlighted that it's imperative for banks to become agile and active to keep evolving their business models. A cause of concern is that loan against property and unsecured loans appears to be growing at a fast pace, she added. Kocchar also said the next round of credit growth will come from the secondary impact of all the government spends.

9) Aditya Puri of HDFC Bank pointed out that the government, banks and the Reserve Bank of India are very clear that they're not in the business of charity. If money has been borrowed, it must be given back, he said.

10) Pramit Jhaveri of Citibank thinks technology  is going to be the biggest driver for banking."India is among most attractive destinative as far as financial services industry is concerned," said Jhaveri.

11) Chanda Kocchar of ICICI Bank said infra projects will be funded partly by banks and partly by other means such as bonds. This means that project finance will get more structured before money is committed towards a particular project.

12) She also said robotics have reduced  the bank's error rates and response time to consumers

Tuesday, 25 October 2016

India’s elusive bond market

The expectation that financial liberalisation would lead to a proliferation of non-bank financial companies and an expansion of the bond market in India has been belied

 Jayati Ghosh                  C.P Chandrashekhar
In recent times, much concern has been expressed about the poorly developed corporate bond market in India, which is seen as hampering the financing of long term investment. There is much evidence to suggest this is indeed true.
As Chart 1 shows, in 2014, the ratio of loan liabilities (largely to the banking system) in the total of loan, note and bond liabilities was way higher in India than in its Asian counterparts and relative to its partners in the BRICS grouping.
What is more, the increase in bond financing relative to the expansion in bank credit in the period between 2009 and 2014 (or after the global financial crisis) was much lower in India than in most other emerging markets of relevance, excluding Indonesia (Chart 2).
An era has ended
This lethargy in India’s bond market is not because of the absence of any effort on the part of the government to promote that market. In fact, the government has also held the view that a vibrant bond market is a prerequisite for the financing of long-term investment in the post-liberalisation period.
In the past a large part of such financing was supported with allocations from the budget in the case of public sector projects or with credit from the development finance institutions (DFIs) for private projects. The DFIs themselves were supported with concessional funds from the RBI and the government, especially the former, which had a separate window for the purpose. That era has, however, ended.
The government’s failure to mobilise adequate resources through taxation and its post-reform emphasis on fiscal consolidation, which limits its borrowing, has reduced its capital spending.
This requires the private sector to play a greater role in capital intensive industries and infrastructure. On the other hand, a consequence of Indian-style financial liberalisation has been the conversion through reverse merger of the DFIs into regular commercial banks.
ICICI Bank and IDBI Bank are all that is left of the erstwhile all-India development financing infrastructure. This has meant that the burden of financing private investment in capital intensive areas including infrastructure has fallen on the commercial banks, especially the public sector banks.
However, the maturity and liquidity mismatches between the funds sourced by the commercial banks and investments in large industrial and infrastructural projects has resulted over time in rising non-performing assets in the books of these banks. So they too are retreating from financing of investment in these areas.
Hence, besides foreign borrowing, a liquid bond market has become the only possible alternative to clear this financing bottleneck and support such investment.
To realise that alternative, investors looking for long term investment opportunities and offered the expected yield and the required liquidity as insurance have to be brought to market in adequate numbers.
Unfortunately, the penetration of the corporate bond market is almost marginal in the Indian financial sector. In 2014, while the ratio of bank deposits to GDP stood at 64 per cent, and that of domestic credit to the private sector at 52 per cent, the ratio of outstanding corporate bonds to GDP was only 14 per cent.
By the end of 2015 while corporate bond penetration in India was at around 17 per cent of GDP, the figure was close to 45 per cent in Malaysia and 75 per cent in South Korea.
Moreover, at the end of 2015, government securities (G-Secs, State Development Loans and Treasury Bills) accounted for 72 per cent of value of outstanding bonds, with corporate paper (bonds, commercial paper and certificates of deposit) contributing the balance 28 per cent.
Liberalisation fallout
The weakness of the bond market is partly the result of a larger failure of the financial liberalisation agenda. This was the failure to ensure the transition away from a bank dominated system, through a proliferation of non-bank financial institutions (NBFIs) that may have turned to the bond market for investment opportunities. As Chart 3 shows, when compared with South Africa, Brazil and Korea, the relative importance in terms of asset shares of NBFIs such as insurance companies, pension funds and other financial institutions was much lower in India.
This has been a bottleneck to the entry of saving households into the bond market (and more so the retail market for equity). The global evidence is quite clear that small investors are exposed to the debt market through institutions like mutual funds, insurance companies and pension funds. So the government’s effort seems to be to use the latter as means to bring a larger share of household savings into the corporate bond market.
It has done this in the past by persuading public sector insurance companies and pension funds to allocate a larger share of their investments to the market for corporate bonds. In addition, under the new pension scheme of the government, subscribers are required to choose some level of risk exposure as part of a move from defined benefit to defined contribution schemes. But, given the fiduciary obligations of investment managers in these funds, they tend to be cautious when following government advice.
Further, the relative importance of these institutions is far less than in many other countries. That does not help strengthen the corporate bond “market”.

Bank dependence
The Reserve Bank of India has in recent times attempted to respond to this through a host of measures. But the most important of those strengthens the problem of “bank dependence”. Banks are being roped in to render bonds less risky by extending the already existing partial credit enhancement (PCE) scheme. In September 2015, the RBI introduced a scheme under which banks were allowed to provide partial credit enhancement to bonds issued by corporate entities and special purpose vehicles.
This involves providing a non-funded but irrevocable line of credit linked to a bond issue, which companies can access to meet commitments in case they find themselves unable to meet interest or amortisation payments on the bonds. There were conditions set on this facility including the requirement that the rating of the bond issue must be “BBB minus“ or better before the credit enhancement and that the aggregate PCE provided by all banks to any bond issue cannot exceed 20 per cent of the bond issue size.
The essential aim of the PCE scheme is to reduce the risk associated with a bond and enhance its rating. With the banks taking over part of the risk, the bonds can be upgraded to investment grade, making them eligible for purchase by insurance and pension funds.
The new measure implemented also increases the aggregate PCE exposure of the financial system to any bond issue to 50 per cent (from 20 per cent) of the size of the issue, with a ceiling of 20 per cent on the exposure of any single bank. Measures such as this, it is hoped, will help resolve a problem, which has been created by the government’s own policies, of an unavoidable dependence for finances on a market that is still to mature. But in the process it is exposing banks, insurance companies, pension funds, and those who place their savings in these institutions to increased risk.
Banks dominate in India
Tepid market for bonds
The NBFC boom hasn't happened

Friday, 21 October 2016

Discom losses to halve by FY19: CRISIL

Risk profile of discoms in UDAY states to improve, says the ratings agency

Ratings agency CRISIL estimates the aggregate ‘gap’ or loss of power distribution companies (discoms) in the 15 states that have joined the Ujwal Discom Assurance Yojana (UDAY) would more than halve to 28p a unit by 2018-19.

The gap, calculated as average revenue realised minus average cost of supply, was 64p a unit in FY16. Consequently, aggregate losses of these discoms are seen declining by 46 per cent, to Rs 20,000 crore from Rs 37,000 crore now.

The gap will still be well above the ‘nil’ envisaged under UDAY, as some states with very high aggregate technical and commercial losses aren't well prepared to reduce it. The reasons include inadequate feeder separation, feeder and distribution transformer metering, and a poor record on other efficiency parameters.

Also, with elections due in some within 12 months, their room to raise rates is restricted. Cross-subsidisation is also high.

Says Gurpreet Chhatwal, business head, large corporates, at CRISIL: ''Rajasthan, Haryana, Chhattisgarh, and Uttarakhand are expected to fare better in UDAY implementation and likely to be the biggest beneficiaries. UP, Bihar and Jammu & Kashmir are expected to be laggards. These three states would account for almost two-thirds of the gap in FY19. Concerted effort by them will be critical to narrowing the future gap.''

CRISIL says the energy requirements of discoms are expected to increase at a compound annual rate of seven per cent by FY19, compared with around four per cent till FY16. New signing of long-term power purchase agreements (PPAs) seems unlikely, with 25,000 Mw of capacities with already-signed PPAs to be operational by FY19. There will also be some pick-up in plant load factors at existing units, with better fuel availability.

Any uptick in long-term PPA signings is possible only if discoms turn profitable by FY19 and strive to meet the government’s ‘Power for all’ objective.

Over the past year, initiatives to increase coal production, and the 5:25 refinancing scheme of the Reserve Bank of India have reduced operational capacities at risk by 6,000 Mw, to 40,000 M2 from the 46,000 Mw that CRISIL had earlier flagged.

Says Sudip Sural, senior director at the agency: ''While lack of fresh long-term PPAs continues to impact generation capacities, facilitation of medium-term PPAs and corresponding coal linkages, continued focus on augmenting domestic coal production, and facilitation of open access by states can help further reduce the capacities at risk.''

As for under-construction thermal projects, CRISIL estimates 24,000 Mw of capacities face viability issues. Of these, 13,000 Mw face commissioning risks because of weak sponsors. The others have to address poor offtake by discoms or inadequate fuel arrangements. A third of capacities with weak sponsors can be revived through debt restructuring or sale to a new sponsor..

Coking coal price on fire as supply fizzles out

The last time the world saw such a spike in coal prices was during the boom time more than four years ago.
No boom is in sight, yet both thermal and metallurgical coal prices have been soaring for the last three months. Supply shortages appear to be the proximate cause.

Price variation
According to India Coal Market Watch (ICMW), from July 1, the most popular variety of Indonesian thermal coal (4,200 Kcal) has turned pricier by nearly 38 per cent at $40 a tonne. South Africa (6,000 kcal) thermal coal price is up 48 per cent at $83/tonne.
Power plants along India’s coast use the first variety and cement kilns, the second.
But the big surprise has been in coking, or metallurgical, coal used by steel-makers. From July 1, Australian coking coal prices have shot up two-and-half 5 times to $230 a tonne, surprisingly at a time when the world steel industry is passing through one of the worst phases with China cutting down 100 million tonnes capacity.
According to ICMW, Indian steel plants have booked coking coal for the October-December quarter at $200 a tonne, as against $93/tonne in the July-September quarter. Though India is world’s fourth largest coal producer, it has very limited coking coal reserves.
Supply constraint
According to Deepak Kannan, Managing Editor (Asia Thermal Coal) of Platts, the primary driver of this spike is China, which is world’s leading producer and consumer of both thermal and coking coal.
Earlier this year, Beijing decided to cut the annual working days in mines to 270 days from 330. This had no significant impact on global prices till June as India stepped up production significantly and cut imports.
India is still flush with coal and there has been no supply disruptions from Indonesia, yet thermal coal prices started to skyrocket from July on Chinese buying and supply disruptions in Australia and South Africa. At least two major Australian miners recently declared force majeure.
But the surge in thermal coal prices may not last.
First, in September, Beijing ordered its new mines to step up production . This will increase China’s domestic supplies by nearly 30 million tonnes a month from November. Also, China completed the winter booking and has a 12-million-tonne stockpile at ports that is sufficient for 20 days. Kannan expects pressure to build on thermal coal prices from next month.
The outlook is not so clear for coking coal, though. Edwin Yeo, Managing Editor (Steel Raw Materials) of Platts, doesn’t foresee a meltdown in the short term.
According to him, the coking coal shortage is acute and some steel-makers in China have had to shut down their blast furnaces. Steel-makers avoid this as re-igniting furnaces is a costly exercise.
Yeo doesn’t agree. but some sources see a shadow of cartelisation in coking coal price surge, as three top producers control more than half the global trade

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