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| September 05, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 27,026.70 | 388.59 | 1.46% | | Re/US$ | 60.37 | 0.08 | 0.13% | | Gold Rs/10g | 27,580.00 | -420 | -1.50% | | Crude ($/barrel) | 101.30 | 0.62 | 0.62% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on September 04, 2014
*BSE Sensex as on September 05, 2014 |
Impact 
The data of the Capital Adequacy Ratio (CAR) released by the Reserve Bank of India (RBI) is depicting a rather worrisome picture of the Indian banking sector. As of the fiscal year 2014, CAR of Indian banks has dwindled to 13.0% from 13.9% in the previous fiscal. After the reverberations of the U.S. subprime mortgage crisis on the Indian economy, there was some improvement in CAR for couple of years (i.e. until fiscal year 2010), but since then CAR of Indian banks has been on a decline.
You see, the public sector banks are worst hit. Their average CAR has fallen to 11.2% as of fiscal year 2014 and in the present fiscal year as well for the quarter ended June 2014 it has fallen further to 10.7%.
So what is the reason behind this?
Well, over the last few years quality of assets of banks in India has come under tremendous pressure by the way of rise in Non-Performing Assets (NPAs). And public sector banks have suffered more than their private sector counter parts. You see, the gross NPAs of public sector bank have increased to 4.1% of the end of March 2014 from 3.6% a year ago. Their net NPAs (as a proportion of their net advances) too have mounted to 2.2% compared to 1.7% during the same period a year ago.
It appears that rising NPAs has become a structural problem of banks - more so with the public sector ones.
The reason for the poor performance of public sector banks, as even cited by RBI is, reckless lending to corporates. Moreover, harmful virus of frauds has gripped the Indian banking sector; wherein there have been instances of misappropriation of funds, syphoning of deposits to cook accounts and corruption at branch level while sanctioning loans (seemingly done in privy with those at the top). Lack of effective internal control system and even political influence has caused leakages in the risk management process leading to frauds and deterioration in quality of assets of banks. Also dual accountability of public sector banks (where they are regulated by RBI as well as the finance ministry) has majorly affected the governance of PSU banks
The remedy...
It is noteworthy that a bank can have a robust CAR only when it follows prudent lending practices through a vigilant due diligence process. The Government should take cognisance of this, because such issues pose a long-term systemic risk to the Indian banking sector. You see, the public sector banks account for nearly 70% of total banking activity in the country and their performance can affect the economy as a whole. Therefore, measures to improve corporate governance at banks should be taken.
The PJ Nayak Committee appointed by RBI to review governance of banks in India, submitted a report in May 2014 which has recommended that it would be desirable to separate the position of Chairman & Managing Director (CMD) into two. This is because until then there is a very real possibility of the several chairmen positions across banks being filled on the basis of political allegiance rather than professional skills, which could imperil banks.
PersonalFN is of the view that it is imperative for the finance ministry to also ensure that frauds do not mushroom and they enunciate effective corporate governance guidelines for public sector banks.
Take heed...
Going forward public sector banks will require additional capital to comply with the Basel-III norms. According to Government estimates, state-run banks would require Rs 2.4 lakh crore of equity capital by 2018 to meet these norms (which are in effect in a phased manner since April 1, 2013 and which will fully be implemented by March 2019.) Besides, the Government is yet to allocate fresh funds to public sector banks through capital infusion. It is noteworthy that the erstwhile finance minister, Mr P. Chidambaram of the UPA II Government had in the interim budget allocated Rs 11,200 crore for capital infusion...and state-run banks were expecting the present finance minister, Mr Arun Jaitley of the Modi-led-NDA Government to announce additional capital infusion in the Union Budget 2014-15.
These banks are now planning to raise money through Qualified Institutional Placements / Follow-on Public Offers (FPOs), in which case PersonalFN is of the view that investors should be wary of such banks financial health before investing their hard earned money. While there is exuberance in the market as the S&P BSE Sensex has scaled over 27,000 mark and Q1FY15 GDP growth has reported an uptick, it may not be possible for all banks to raise capital effortlessly despite upbeat market sentiments.
Do you think the Government should recapitalise public sectors banks using taxpayers' money? Share your views
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Impact 
Municipal bonds (also known as muni bonds) are a popular issued by local Governments globally. The market for the same globally is estimated to be about U.S. $3.5 trillion.
In India, the first municipal bonds were issued in 1995, while the state-guaranteed bonds were launched by the Bangalore Municipal Corporation in 1997. While a number of municipal corporations (such as Ahmedabad, Ludhiana, Nasik, Nagpur, Indore, Madurai and Visakhapatnam) did issue muni bonds until 2005, there has been a sharp fall in the issuances since then and practically no issues after 2010.
You see, the hurdles by them faced are...
- Low ratings;
- Reluctant investors;
- Municipalities in metros and other large cities resisting to turn to the debt market (as they have sufficient cash); and
- Unclear regulation
But now the Securities and Exchange Board of India (SEBI) is planning to float a discussion paper on the issuance and trading of municipal bonds. And to ensure that this is viable, the regulator is also in talks with the finance ministry to ease the norms on pricing of such bonds. SEBI has sought the cap on the coupon rate on such bonds be relaxed if these are issued under the 'tax-free' category. It is noteworthy that according to the tax rules a tax-free debt instrument has to be priced at a minimum stipulated discount to similar-tenured Government securities. Earlier the Association Chambers of Commerce and Industry (ACCI) had also written to RBI to facilitate municipal bonds to be traded.
PersonalFN is of the view that municipal corporations of tier III and IV cities which in need of capital depend on Housing and Urban Development Corporation (HUDCO) for funding, will largely benefit if SEBI discussion paper fructifies effectively as they will have access to the debt markets. This in turn may also local Governments to develop decent infrastructure in the form of roads, sewage systems, schools and hospitals. Moreover, if a tax-free status is provided for such bonds it may make it a tax-efficient investment avenue under debt as an asset class. However, in a rising interest rate scenario the capped coupon of such bonds may deter investors from putting their hard earned money in municipal bonds.
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Impact
Risk appetite is high across the globe; markets are in a bit brazen mood. Investors are chasing stocks. Emerging markets are shining again. Speaking about India, markets are hitting highs quite regularly these days. You may be enjoying the up move if you have invested money in stocks or equity mutual funds; or you might be repenting for not having invested money when markets were really down. Equity markets in developed countries such as the United States, Germany, France and Japan have not only recovered from the lows of 2008 but are now near their 5-year high levels. Except for Russia, investors are still very optimistic about other emerging markets. Well, everything looks a lot encouraging, but what has much really changed on ground?
State of global economy
Markets across geographies have been rising on the hope that, growth will come back. However, the ground reality is, engine of global growth seems to have lost the steam. Despite of spending billions on stimulus packages what the developed world has achieved is minuscule. The recently released economic data, not only in just one region but across geographies may not appear encouraging, yet markets are bullish.
To check the ground realities of the global economy and read PersonalFN's view please click here.
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Impact
Investors have high expectations from the Indian economy under the Modi-led-NDA regime and are betting big on India. Both equity and debt markets have been hoping better days ahead. While it may take a little longer before Indian economy passes the litmus test of strong recovery, some green shoots are instilling confidence.
After languishing a for quite a long, in the April-June quarter of the fiscal year (Q1FY15) India's Gross Domestic Product (GDP) witnessed a growth of 5.7% - the fastest rate recorded over last 9 quarters and depicted signs of breaking shackles.
Is Indian economy on a take-off?
(Source: CSO, PersonalFN Research)
You see, in Q1FY14 (i.e. over April-June quarter of last fiscal year), the Indian economy grew at 4.7% and for the entire fiscal year 2014 economic growth on average basis came near that level. Thus against this backdrop, Q1FY15 GDP growth rate of 5.7% looks encouraging.
To read more about this news and PersonalFN's views on it, please click here.
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- The Modi-led-NDA Government last week rolled out its ambitious financial inclusion programme, the Pradhan Mantri Jan Dhan Yojana (PMJDY) which turned to be blockbuster on the very first day. More than 1.5 crore accounts were opened exceeding the day one target of 1 crore accounts and touched 2.5 crore accounts in subsequent few days.
So what does PMDJY offer?
- Two bank accounts each to poor families (including one to a woman family member);
- An overdraft facility of Rs 5,000 (based on the economic activity and subject to review of the account in the next six months since account opening);
- Ru-pay enabled debit card
- Accident insurance cover of Rs 1 lakh; and
- Life insurance cover of Rs 30,000
The programme is aimed at improving the lives of millions by bringing them into the financial mainstream and possibly even freeing them from unreasonable moneylenders.
"In order to eradicate poverty we have to get rid of financial untouchability," Prime Minister Mr Narendra Modi said, adding that inclusion will also act as an important tool in the fight against corruption. He also said the programme would break the vicious cycle of poverty and debt and boost the economy, which slowed to decade lows in the past two years.
Mr Aditya Gupta, Chief Operating Officer (COO) of TranServ, a leading prepaid payments solutions manager that focuses on exploring the potential use of prepaid cards towards achieving Financial Inclusion; also shares a similar view by saying "The Pradhan Mantri Jan Dhan Yojana is a giant leap forward for an economy like ours, given that it will not only provide banking & insurance coverage to around 75 million identified households, but should also boost the GDP significantly as the programme will lead to reduced leakages, better tax collection and improved savings." He is also of view that nationwide, integrated access to sophisticated financial products like banking facilities, account opening, availability of credit, micro insurance and pension alongside the proposed direct transfer of benefits will only heighten the need for the use of innovative technologies within the system.
PersonalFN is of the view that while it is a good initiative, the Government should ensure that misuse of such programme is prevented and the account opening should undergo proper KYC screening although the Government is buoyed by the response thus far. Moreover, it is imperative that accounts opened under PMJDY are active in operations (in terms of number of transaction) for the benefits to transpire meaningfully.
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Capital Adequacy Ratio: A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
(Source: Investopedia)
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Quote : "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share." - Peter Lynch
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