Bad Loans is Good Business

Bad loans business is getting better as the banking regulator RBI tightens norms for dealing in stressed assets market.

The asset reconstruction companies (ARCs) now need enhanced net owned funds of Rs 100 crore as compared to just Rs 2 crore earlier. As a result, larger ARCs backed by strong promoter groups would be on a firm footing to attract capital from external sources as 100 per cent foreign direct investment is permitted in the sector, Crisil says in its report. Many of the smaller ARCs may be on way to consolidate through merger with top five players that account for 90% of total assets under management of 23 ARCs.

The recent tightening of ARCs' capital requirements will lead to consolidation in the industry and that bigger players stand to benefit from the move, says a report.

The Reserve Bank last week increased the net-owned funds for asset reconstruction companies (ARCs) to Rs 100 crore from a meagre Rs 2 crore. Last April it had increased the upfront payment requirement to 15 per cent of the asset value from 5 per cent.

Crisil believes these are among a series of steps taken by RBI to strengthen the ARC ecosystem that will attract players with deep pockets, enhance transparency in asset sales, improve recoveries and open up scope for consolidation.

Given the thicket of rule changes, larger ARCs will be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital, and relatively better capability to attract capital from external sources as 100 per cent foreign direct investment is permitted in the sector, says the report.

The ability and intent of promoters and investors in smaller ARCs to infuse capital will be a monitorable and would potentially be a catalyst of consolidation.

According to Crisil, of the 23 ARCs, six are comfortable in terms of the revised net-owned funds requirement and other stringent norms. But those struggling to infuse capital or raise external funds and lacking in specialist manpower will get marginalised further.

"The top five players (Edelweis, JM Financial, Arcil, Kotak etc) account for around 90 per cent of total assets under management. With tighter regulations, we believe their market share will consolidate further and smaller ones may merge with larger rivals, or they could become takeover targets for large private equity investors and stressed asset funds wishing to enter the business," the report said.

It can be noted that from April 1, 2017, the RBI has increased the provisioning requirement for banks investing over 50 per cent of the value of stressed assets (the limit subsequently to be reduced to 10 per cent from April 2018) sold by them in the security receipts issued in lieu.

The RBI intends to ensure that any NPA sale is a true sale conducted through a transparent process where the ARC ends up with significant skin in the game so as to maximise recoveries.

The strengthened framework will affect the volume of asset sales as banks are reluctant to take adequate haircuts, says the report, adding however, it will lead to more cash- based sale which would need higher capital.

Asset sales spiked in March quarter of fiscal 2017 before the new provisioning norm kicked in. According to its estimates, Rs 21,000 crore of NPAs were sold in the March quarter taking the total outstanding assets under management with ARCs to Rs 75,000 crore. 

Infrastructure Investment Fund (InvIT)

InvITs are mutual fund like institutions that can play a crucial role in meeting India’s huge infrastructure requirements, estimated to be Rs 4.3 lakh crore (Rs 4.3 trillion) over the next five years. The InvIT offers an opportunity to promoters of projects to sell their stake in completed projects to the trust, which in turn can raise long-term and tax-free funds from unit holders. Infrastructures developers like IRB, GMR, IL&FS and Reliance Infrastructure are keen to launch InvIT to raise funds, a move which can potentially pump in liquidity in the otherwise cash-strapped infrastructure sector.

Infrastructure is an asset class in India that is garnering attention among investors worldwide and could be the perfect asset for pension plans seeking to match long-term liabilities, diversify portfolio holdings, lower the risk of capital loss and, in some cases, hedge inflation as well.

Hence, large foreign pension plans, foreign endowment funds and many domestic yield focused funds are the targeted investors for InvITs.
InvITs will provide a suitable structure for financing/refinancing of infrastructure projects in the country.

Several existing infrastructure projects in India are delayed due to

·         Increasing debt finance costs

·         Locked up equity of private investors in projects

·         Lack of international finance

·         Project implementation delays caused by global economic slowdown, cost overruns, inability of concessionaire to meet funding requirements on time, etc.

InvITs, as an investment vehicle, may aid:

·       Providing wider and long-term re-finance for existing infrastructure projects.

·       Freeing up of current developer’s capital for reinvestment into new infrastructure projects.

·       Refinancing/takeout of existing high cost debt with long-term low-cost capital and help banks free up their funds for new funding requirements.

Consumer credit demand rebounds after note ban

The demand for consumer loans in India seems to be returning as the adverse effect of demonetisation on the confidence of households wanes.

Demand growth was flat in November 2016 over the same month a year before but moved up 15 per cent in January, according to TransUnion CIBIL, a leading credit information agency. The financial system had seen unprecedented consumer credit growth over the earlier four years, including loans for vehicles and homes, cards and other credit products. The announcement on demonetisation created short-term disruption in this, says the agency.

However, new data indicate a strong rebound in demand for loans from individuals. A promising indicator for the stability and growth prospects of the credit sector and the economy overall, said Amrita Mitra, vice-president at TransUnion CIBIL.

Public sector bank (PSB) executives said loan performance had remained stable after demonetisation but that it would take five to six months for credit demand to become normal.

While loan demand shows signs of an uptrend, the pace of credit disbursal remains a concern. Aggregate credit granted fell 12 per cent in November 2016 from a year before; December loan originations were similarly down 13 per cent. PSBs showed the largest decrease in originations among major lender types, down by a little over 50 per cent in December 2016, compared to December 2015.

A notable exception to the origination drop was in credit cards, where there was a 10 per cent year-on-year increase in November. The drive on digital payments, one of the objectives of demonetisation, has shown initial positive results. Mitra said the drop in originations was not a consumer demand issue but one of lender supply. The pace of credit expansion had slowed even before the demonetisation decision in early November. Banks turned cautious after the high pace of growth in 2015-16, to contain defaults. According to the Reserve Bank of India data, retail (to individuals) credit by banks grew 12.9 per cent in the 12 months till January 2017, down from 18.1 per cent in the preceding 12 months till January 2016. The loan book was Rs 15,23,600 crore.

In the light of generally stable consumer credit performance after demonetisation, this lender retrenchment might be unwarranted. Analysis of the delinquency trends (90 days or more past dues) in December 2016, compared to December 2015, shows relatively stable performance overall, with improvements in automobile loans and credit card delinquency rates offsetting some deterioration in two-wheeler and housing loans. “There are early signs of relatively stable delinquencies. Lenders might have curtailed origination activity in anticipation of a significant increase here but to date, we have not experienced that deterioration. The key challenge for lenders is how to prudently capitalise on this opportunity to meet higher consumer credit demand,” Mitra added.

With note ban, the traditional wholesale channel collapsed: Metro’s Mediratta

Traditional food and grocery retail accounts for 97-98% of consumer packaged goods sector’s overall sales, says Arvind Mediratta, CEO of Metro Cash and Carry India

After the government invalidated Rs500 and Rs1,000 currency notes, the traditional wholesale channel collapsed. It has also opened new opportunities for wholesalers in the organized sector.

“We are the preferred partner for most of the companies right now for new product launches,” says Arvind Mediratta, managing director and chief executive officer of Metro Cash and Carry India Pvt. Ltd, the local arm of the German retailer, in an interview. Edited excerpts:

Arvind MedirattaMD and CEO of Metro Cash and Carry India. 

What was the impact of demonetisation for you?

In the past, companies have relied on their distributors, sub-distributors and traditional wholesalers to service small stores. With demonetisation, the traditional wholesale channel collapsed. Manufacturers are now looking at us as their route to market for a lot of their product categories. They are planning exclusive products (stock keeping unit) for us as we have a wide reach and ability to sell a wider basket. This dialogue with companies has now gained momentum following demonetisation. We are the preferred partner for most of the companies right now for new product launches.

But didn’t your business also suffer as the retailer faced a cash crunch?

We ask our customers to pay in advance and then deliver. We don’t extend credit to our traders. Customers can buy as much and as often as they want. In the traditional system, they used to stock up for three days, a week or a fortnight, and this is not required when they buy from us. However, earlier we used to have a minimum requirement of Rs1,000 bill. Now, post-demonetisation, we have taken off this restriction, and people come to us more regularly. Small bills of Rs1,000 and below is 10% of business.  One of our stores in Delhi got ransacked because people thought salt prices would go up to Rs200 per kg and we saw people ransacking sugar, salt. We had to call the police. There were rumours prices would go up. But, in fact, they crashed as farmers didn’t know how to sell.

So, what was the kind of growth did you see during the December quarter and is this continuing in January? 

We saw double-digit like-to-like growth in the December quarter, it was very good for us. This is continuing in January. There have been some fundamental shifts, which is short-term. For instance, people are buying more essentials and basics. The frequency of visits have increased. People have cut back on their spends on electronics, apparel and household items. 

By when do you see sales getting back to normal? 

For non-food, it will take another quarter to come back to normal. For food and FMCG (fast-moving consumer goods), the impact lasted only for a week, and sales are back at normal now. 

What is the scope for cash and carry or modern wholesale in big cities where traditional wholesale channels are well established?

Cash and carry is nothing but modern wholesale. There are close to 10 million kirana stores in the country. Even the best of FMCG companies don’t directly reach more than 10-15% of this. So, they rely on the traditional wholesale channels to reach the other outlets. Contrary to what people say and even what’s written in the media, I personally believe that the mom-and- pop kirana stores are here to stay, at least for the next 25-30 years. The traditional food and grocery retail accounts for 97-98% of the FMCG sector’s overall sales. This includes FMCG, food, groceries, commodities and fresh—dairy, poultry, meat and seafood. In the non-food component or general merchandise, which is apparel, shoes, electronics, there, the modern trade share varies from 7-8%, but for food and groceries, modern trade is just 2-3%. 

However for some large FMCG companies modern trade now accounts for 15-20% of their overall revenues. 

It could be. But a large part of the consumer spends in food and groceries is on fresh, which is fruits and vegetables, dairy, meat, chicken and seafood. That is ballpark 30% of the total spend in an average Indian household.

Then, another 30-35% is spent on staples like atta (flour), chawal (rice), pulses, spices, dry fruits, sugar, salt. Another 30-35% is FMCG. So, even 15% for FMCG doesn’t necessarily mean 15% of modern trade for food and groceries. For instance, as much as 99% of commodities is bought from traditional stores and even when it comes to buying fresh, people still prefer to buy from the traditional markets. 

How much do kirana stores account for your overall revenue?

Traders account for 40% of the overall business, followed by hotels, restaurants and caterers at 20%, and the rest, which is offices and institutions; these could be corporate offices or even the army, self-employed professionals, which is 40%. 

So, are you saying that the traditional wholesaler could become redundant? 

There is a big opportunity for us to coexist with traditional distributors as they cater to only the larger stores. We are catering to the smaller stores which are anyways largely ignored by the traditional system. 

How much of the wholesale business do you see shifting to organized from unorganized? 

It is difficult to predict; but with GST (goods and services tax) also coming in, we see it becoming a level playing field and becoming more favourable for modern cash and carry trade, which is abiding by all the laws. 

How will you compete with local distributors and wholesalers who know the local market better? 

In India, what works in the north will not work in the south, and there are also a lot of local and regional brands. We are focusing on these local and regional brands, especially in food and groceries, because people want a particular brand of spice or oil. So, for instance, when we opened a store in Gujarat, we found people were using cottonseed oil, which is not common in other parts of the country. Likewise, there are brands in the south which are specific to that region. Likewise in apparel, in Punjab, we need to stock a lot more of large sizes, whereas in Bengaluru, the large sizes don’t sell. In Amritsar, we used to stock small thalis (plates) and small bowls, but we noticed nobody was buying those. So, these are things we have to localize according to the market. 

What prompted you to change your business model to equip the sales force with tablets in India? 

We piloted this about six months back in Jaipur and now have this facility in six-seven stores, and are rolling it out gradually. The concept here is very simple. It is the e-commerce version of cash and carry. If people cannot come to the store, you virtually carry the store to them on the tablet with a person. A lot of kirana storeowners will not shift online. They are used to having someone visit them for placing an order; to change the behaviour, we have to have e-commerce with a human interface. We need to understand these traditional shopkeepers, we can’t expect them to suddenly change their way of doing business. 

What are your plans for India? 

India is a priority market. We have 23 stores and have said earlier that by 2020 we will have 50 stores. Last year, we have stepped up on our expansion, opening five stores in one year. We want to become the dominant firm in markets we are present in and also enter into more states. 

What is the penetration of organized cash and carry in markets where you are present? 

We feel we have plenty of headroom for growth even in markets like Bengaluru, where we have six stores. While I can’t disclose our market share numbers, all I can say is we have a significant share of the $2-billion organized wholesale cash and carry market. In Bengaluru, we have 450,000 business customers across all three segments, of which traders would be 1.2-1.5 lakh. 

You have recently strengthened your top management and made operational changes. Why is that?

We are getting ready for rapid expansion and profitable growth. It took us quite some time to understand the Indian retail market. We now believe we understand it very well. Hence, we armed our sales force with tablets and are making other operational changes. Also we now believe the environment is coming together with demonetisation and GST, and that augurs very well for a modern cash and carry firm. Suddenly the stars seem to be aligned.

The Science of 

Superfoods

Kale and chia, goji berries and blueberries, salmon and spinach. JAMIE MILLAR investigates the science behind whether superfoods are the magic bullet that can cure all our ills, and which ones deserve their ‘super’ prefix

Tricky to study

  The proof of the superfood pudding is in the eating – by humans, not mice or rats. But unfortunately, most scientific research is not conducted this way. “Nutrition studies often don’t apply to real life on a 1:1 basis,” “If you want to test, say, the effect of grape juice on cognition, you’d give it enough time, plus you’d check to make sure they actually drink it. In real life, that almost never happens.” Lifestyle factors are difficult if not impossible to separate. And there are other problems, pilot studies and animal trials will often use larger dosages, while ‘acute’ studies will look at just the food without any other things consumed. Meanwhile, eating different foods together, which is what most of us do, can dramatically alter their effects for better or worse: “Co-consumption makes things more complicated.” 

  Another issue affecting superfood research is that it is often paid for by interested parties. “We’re funded by food and supplement companies in many of the studies we conduct,” admits Professor David Nieman,Director of the Human Performance Labs at Appalachian State Universityin North Carolina. “But the North Carolina university system demands contractual agreement that gives the primary investigator ‘academic

freedom’, or the right to publish the data, positive or negative. Many of the companies I work with are so convinced that their product has special effects that they sign these agreements.” What buyers should beware of are studies conducted in-house by companies, which are “close to worthless”, says Prof. Nieman. But while industry-funded doesn’t mean false, the anointed superfood might not be much better than a cheaper, less exotic equivalent that doesn’t have the same commercial imperative. The problem is not so much that superfoods are a con – many of them, like chia seeds (right) or kale,are highly nutritious – more that calling them ‘super’ gives unrealistic expectations of what they will do. “I prefer the concept of ‘high nutrient density’ foods, which is a central theme in the new 2015-2020 dietary guidelines for Americans,” says Prof. Nieman. “The term ‘superfood’ is not used by most scientists in the field, because the implication is that one can expect quick and high-end health benefits.” By all means, sprinkle some chia seeds on your oatmeal, and even stir in some blueberries. You’ll get a nutritional boost, you just won’t instantly become immortal: “What matters is the habitual eating pattern over months and years.”

The goji berry boosts more vitamin C than oranges, more beta carotene than carrots and more iron than spinach

Many of superfoods are highly nutritious, but calling them ‘super’ gives unrealistic expectations

A balanced diet

  By seeing superfoods as a magic bullet, we risk shooting ourselves in the foot. “Some people think if they eat one ‘superfruit’, they don’t need to eat the recommended 2-4 servings of fruit a day,” says Dr. Blumberg. But no one superfood is a panacea; nor will it make up for other deficiencies. “Adding superfoods to a good diet is fine,” says Dr. David Katz, Director of Yale University’s Prevention Research Center in the US. “Counting on them to compensate for a bad diet is not.” And undue emphasis on superfoods can be unhealthy. “The term helps companies sell product, and it ‘helps’ consumers oversimplify their diets,”. All the experts cited here stressed the importance of consuming a wide variety of natural, ‘whole’ foods, which in turn reduces their individual significance. “No single food or beverage is important enough to stand out from the overall lifestyle,” says Prof. Nieman

Inflated health benefits

The chia seed is a good example of how claims about superfoods can grow out of all proportion

  A variety of mint, over recent years chia has broken out of those novelty pet-shaped pot plants to become an Aztec warrior miracle food. It’s a complete protein with all the amino acids required to build muscle, plus more omega-3 than salmon, more fibre than flaxseed, and wealthier than Montezuma himself in antioxidants and minerals. Indeed, cheerleaders of chia allege you could eat it and nothing else. “It’s a good example of how companies and distributors promote the mystique and magical health benefits that go way beyond the science,” says Professor David Nieman, Director of the Human Performance Labs at Appalachian State University in North Carolina. “We conducted several randomised human trials showing that chia seeds provide good nutrition and can be included in a healthy eating pattern that over time – along with physical activity and weight management – is consistent with good health. But there’s nothing quick or miraculous about them.”

Centre must go full distance with cashless drive: Manappuram CEO

Having taken the trouble to demonetise higher denomination notes, the Centre should now think of going the full distance in moving India towards a cashless economy, according to VP Nandakumar, MD and CEO, Manappuram Finance, a leading gold loan company.

VP Nandakumar, MD and CEO, Manappuram Finance

Rather than adopt a top-down approach, it should devise an incentive mechanism that rewards cashless transactions, followed by some relatively mild disincentives on the use of cash, Nandakumar said in his views on what he expects from Budget 2017-18.

Lower tax

Particularly helpful would be a tax regime that levies a lower tax rate on cashless transactions. Once people see the prospect of monetary gain from going cashless, they will themselves seek out ways to get into cashless modes. Once positive incentives are in place, the government may then consider disincentives, such as a tax on cash withdrawal above a certain limit, which will then face less resistance.

The idea of a permanent withdrawal of all convenience fees, service charges and surcharges levied by government agencies (like utility service providers and for various payments by consumers to government) is worth implementing, Nandakumar said.

Tax on dividends

Budget 2016 had levied an additional 10 per cent tax on gross dividends in excess of ₹10 lakh per annum.

This tax is in addition to the dividend distribution tax already paid by the company and amounts to taxing the same income twice, Nandakumar said.

Further, if one considers that dividends are paid out of the post-tax profit of a company, this measure amounts to taxing the same income three times.

“This is not fair and it unnecessarily penalises the risk-taking entrepreneurial class who would have ploughed their personal wealth and savings in their businesses. As it stands, it is nothing but a tax on entrepreneurship and, therefore, should be revoked.”

Gold loans

Until 2011, gold loans given by NBFCs to eligible categories of borrowers (agriculture, MSME or micro-loans) were considered as priority sector, which allowed NBFCs to obtain refinance from banks on relatively better terms.

The subsequent withdrawal of priority sector status has pushed up borrowing costs for these borrowers as banks lack last mile reach and have largely been unable to fill the gap, Nandakumar said.

Much ado about fiscal deficit

A Budget that spurs demand is the need of the hour. The view that fiscal stimulus crowds out private spending is questionable

Whatever may be the actual recommendations of the NK Singh panel tasked to review the fiscal consolidation roadmap, it has been widely agreed, by now, that the upcoming Budget should focus on stimulus measures in order to boost domestic demand, improve investments and pave the way for job-filled growth.

Demonetisation is behind us and the withdrawal of cash has led to temporary problems of demand compression with consequential impact on growth. But, if there is something akin to the balance sheet of the economy, it can be seen that this is indeed the moment for a path-breaking Budget that can induce a sharp recovery.

The balance sheet

Budgets refer to income and expenditure statements. But there is very little discussion around the major elements of what could be construed to constitute the country’s balance sheet. The UN has been bringing out the Inclusive Wealth Report (an exercise which broadly looks at “manufactured capital, human capital, natural capital and social capital” as a country’s assets and internal and external debt of the government and private entities as liabilities) which had attempted to marry essentially an accountant’s perspective with that of an economist.

If one were to take just the liabilities from this ‘balance sheet’, it would emerge that the country is perhaps at an economic sweet-spot from where a jumpstart is possible. Let us take external debt first. According to the latest report of the Ministry of Finance, India’s external debt stock stood at $485.6 billion at end-March 2016 as against $475.0 billion at end-March 2015. While external debt has increased over 2015-16 by a small 2.2 per cent, important debt indicators such as external debt-GDP ratio and debt service ratio remain comfortable.

Our external debt continues to be dominated by long-term borrowings. The external debt policy pursued by the Government has kept external debt within manageable limits. India continues to be among the less vulnerable countries with its external debt indicators comparing well with other indebted developing countries, as the survey states. Of this debt, what is significant is that government debt is only $93 billion in India’s case.

Further, the ratio of short-term debt on the external front is a modest 18.5 per cent which means that there is no reason for any anxiety on the debt-servicing front, at least for the next year. Just for comparison purposes, it may be noted that China’s share of short-term debt is 71.2 per cent though that is mitigated by its very high reserves position.

Government debt

As for short-term government debt, it stands at a measly $108 million, indicating that concern on the external debt front, as of now at least, is unwarranted. Our foreign exchange reserves are at $359 billion.

When it comes to total government debt, the figure is ₹60, 33,464 crore including external debt. To give an idea of the indebtedness of the country, it would be useful to compare this with the total credit/ loans taken by all domestic entities inside India from the banking system — it stands at about ₹76,00,000 crore. And one major difference has been that whereas the Government has been borrowing at fixed rates, all others are borrowing at floating rates.

So, in a falling interest rate regime, the Government has been effectively paying higher interest!

Our share of government debt to GDP is at about 70 per cent and there are countries in the Euro Zone which have these ratios closer to about 90 per cent. Of course, the percentages in the case of Japan, the UK and the US are much higher.

The obsession with fiscal deficit is premised on two grounds, mainly. One, that budget surpluses are a form of national saving, and two, that higher fiscal deficits would crowd out private investments because of the pressure it would put on interest rates.

There have been studies and reports which have negated both theses empirically. One of them, based on RBI data, conclusively stated that there is no significant relationship between high fiscal deficits and high interest rates.

Anecdotal evidence is also now on hand; banks have invested more in government debt than the SLR requirement and still have liquid surplus to lend, which has forced them to drop rates. At present, a 10-year government security has a yield of 6.7 per cent, much lower than a one-year bank deposit rate.

Much of what can be called “fiscal deficit fundamentalism” can be attributed to neo-classical views which would fit western liberal economies. Thanks to our inclination to save (net savings rate is about 31 per cent of GDP), government borrowing, per se, need not be seen as a matter of concern.

Fiscal fundamentalism

Of course, like any other economic entity, our government also cannot perennially borrow and live beyond its means. But to cling to numeric targets even when the crying need of the hour is to boost demand and public investments (so that it will crowd in private sector investments) would be detrimental to the growth trajectory that we need to have to generate enough jobs.

Also, when monetary policy is seemingly constrained by exchange rate considerations, fiscal fundamentalism may have to be abandoned.

Putting money in the hands of the poor and the middle classes, making life easier for the distressed farm sector and making for vibrancy in the small and medium businesses is vital.

The country’s economic balance sheet seems strong and resilient enough to afford the Government ‘space’ to be accommodative enough to spur growth impulses, without going overboard on fiscal loosening.

The writer is with the State Bank group. The views are personal