Impact 
In life or in farming, during a drought, optimism and faith keep you going. Despite the delayed start, the monsoon is expected to be satisfactory this year. The Indian Meteorological Department (IMD) has predicted a 0% possibility of it being deficient. After a two-year-long wait, the country is likely to get excess rain showers this year. So everybody’s keeping their fingers crossed, aren’t you?
Finance Minister, Mr Arun Jaitley has one more reason to do so. He is really hopeful to seal the deal on the Goods and Services Tax (GST) Bill in the Monsoon Session. “There is complete consensus on the fact that there should be no constitutional cap because contingencies might arise in future.” You can easily read the optimism in this statement.
Recently, the Union Finance Minister met finance ministers of various states to win their support for the GST Bill. The above comments suggesting that all states are on board, except Tamil Nadu, and there’s been a consensus against not putting a constitutional cap on the rates. Although the picture still looks obscure, with no word on Revenue Neutral Rate (RNR) and a definite plan to compensate states for the loss of revenue, the new avatar of cooperative federalism has been too prominent to ignore.
Until recently, it seemed the Congress party would successfully settle its old scores with the BJP by bringing the ruling party down to its knees with the bizarre demand of having a constitutional cap on the rate of GST. In addition, India’s oldest party had made two additional demands to support the “NDA” version of GST, but the Government showed its flexibility to deliberate on them.
Besides Congress, NCP, TMC, AIADMK, BJD and Left parties opposed the GST when the Government had initially presented it. The constant dialogue with States seems to have worked for Mr Jaitley this time.
West Bengal recently received Rs 1,000 crore as a compensation for the Central Sales Tax. Lately, TMC has been insistent to pass on the GST without any delay. On the other hand, Left-ruled Kerala sent its finance minister to attend the empowered committee meeting on GST without making much noise against the proposed tax code. Speaking about the continued opposition of AIADMK, Mr Jaitley has assured to consider its demands without making negative comments.
At present, Congress seems to be isolated.
What’s in the offing? Well, you may never know. A common man enjoys reading newspaper stories about the check-mates of political parties. But when he thinks about having any say in the crucial decision making, he receives nothing more than disappointment. Those who are opposing the GST are the ones who have been directly or indirectly chosen by the people of this democratic country. But the gravitational force of the power is so strong that it takes the peoples’ representatives away from people.
The Common man hopes only this—if GST is a reform, it should be passed without any further delay.
Impact
When a company can’t service its loans, it is not a worthwhile proposition for both—banks as well as the company itself. Defaulting on repayment schedule causes stress on the balance sheet of lenders; it becomes a very unnerving situation for lenders. The borrowers or companies crumble under a mountain of debt, and eventually they lose their credit worthiness. But amid this, the depositors are under tension and fear the safety of their hard earned money.
Growing bad loans has been a systemic problem in India for a while now.
As quoted by Mint dated June 14, 2016, 40 listed banks collectively had bad assets worth Rs 5.80 lakh crores on March 31, 2016. The gross Non-Performing Assets (NPA) Ratio of the entire Indian banking industry stood at 7.7%. In other words, out of every Rs 100 of outstanding loan, Rs 7.7 hasn’t been yielding any returns and there’s a possibility that the banks may lose even the principal amount.
However, it would be inappropriate to call all defaulting companies and their promoters “willful defaulters”. The RBI Governor, Dr. Raghuram Rajan, who is well known for his impartial view and stands for, integrity and credibility, has time and again appealed not to treat all defaulters as willful defaulters. In the past, the RBI introduced a number of schemes such as Strategic Debt Restructuring (SDR) and Prudential Norms on Change in Ownership of Borrowing Entities which, despite being promising, couldn’t yield desired results and the bad loans kept piling.
Learning from the shortcomings of previous schemes, the RBI has come up with an innovative scheme this time. The newly introduced scheme, “Scheme for Sustainable Structuring of Stressed Assets” (S4A), aims at providing banks some respite from the constantly deteriorating asset quality.
Let’s understand the scheme in brief...
Under this scheme, the banks and NBFCs will be allowed to segregate the stressed loans of a company into two parts—sustainable and unsustainable. The sustainable debt would be the portion of outstanding loans, which the borrower can service as per the original schedule, even if the company fails to improve its cash flows in future. The remaining debt will be treated as the unsustainable debt. Under this scheme, the lenders of their consortium can convert the unsustainable part of the outstanding loans into equity. They can assume control of the management as well, under specific circumstance.
The potential positives of the scheme: - Companies which can improve their operations with a little cooperation and a few regulatory changes may benefit.
- The framework of the scheme is stringent enough to discourage moral hazards and will help reduce the stress of bad assets in the banking system to an extent. At various stages the RBI can intervene if needed. In consultation with it, the Indian Banking Association (IBA) would form an Overseeing Committee (OC) to provide advisory services to banks and their consortiums. The OC will also ensure that the resolution plan is reasonable and adheres to the provisions of the scheme. As ICRA predicts, S4A will help banks lower their NPAs by 30bps to 100bps. One basis point is a hundredth of a per cent.
But here are reasons why this scheme is unlikely to work to a large extent: - The scheme comes with many qualifications and reservations. For a bank to restructure its bad assets under S4A scheme, the project of the company for which it was lent has to be operational. This condition may disqualify many infrastructure companies which, indeed, need a debt restructuring plan.
- The ‘sustainable part’ is expected to be at least 50% of the outstanding debt. This too may disqualify a large number of companies.
- There’s a danger of banks accumulating a huge sum of ‘unsustainable debt’.
- Provisioning norms for the ‘unsustainable’ part have been set higher than those currently in place.
- The success of the restructuring activity would largely depend on how astute the bifurcation of ‘sustainable’ and ‘unsustainable’ debt is.
- Whether or not the bank will recover the sustainable part of the debt as per original schedule is left to be seen. Against that, the conversion of unsustainable debt into equity may happen in the early stages of restructuring. If promoters lose substantial interest due to this swap, they may not be very keen on turning the company profitable.
For all these negatives, S4A may remain unpopular with bankers and borrowers. The only brighter aspect is tighter control of the RBI will make it almost impossible for lenders to become very “soft” towards their preferred borrowers while restructuring loans.
How borrowers should read this development?
Adequately capitalized banks usually don’t default on the repayment of deposits, but all ones which are affected banks haven’t been, and therefore not will change even now.
How shareholders of banks should read this development?
In the long run, effective debt restructuring and reduction in NPAs may enhance returns for shareholders.
In a nutshell, the S4A scheme fails to impress however, considering the tight control it vests in the hands of RBI, it is expected to work better than the debt restructuring schemes launched earlier. Nonetheless, if you feel this will change the face of loan restructuring activities in India, the scheme is too constrained to satisfy you.
Impact
Taking a note of the unusual spike in the inflation during April this year, the RBI kept policy rates unchanged at its second bi-monthly monetary policy review meet on June 7th . Although the tone of the monetary policy was accommodative, it was concerned about the faster-than-expected price increases and the consequential effects on inflation expectations of corporates and households. The RBI felt there’s a 70% possibility that the inflation may move between 3.5% and 7.0% in this fiscal. It seemed to be foretelling what was in store for us. In May, retail inflation measured by the movement of Consumer Price Index (CPI) has jumped to 5.76% as compared to 5.01% recorded a year earlier.
Food inflation worsens in May
(Source: MOSPI, PersonalFN Research)
As per the Government data, there’s been an across-the-board upsurge in inflation. The biggest worry has been the food inflation, which has shot up 7.55%. In May 2015, the food inflation advanced at 4.80%. Inflation in the ‘clothing and footwear’ category has jumped 5.37% and that in ‘housing’ has advanced at 5.35%. Inflation in education and healthcare stood at 5.85% and 5.10% respectively. Within the “Food and beverages” category, the rate of inflation remained as under:
To ready more about this story and Personal FN’s views over it, please click here.
Impact
The insatiable appetite of Indians for gold was putting a strain on the nation’s forex reserves. As India depends largely on imports to fulfill the domestic demand, higher gold imports caused Current Account Deficit (CAD) to widen. As a remedial measure, the Government imposed a higher import duty on gold and discouraged the demand for physical gold by issuing sovereign gold bonds in tranches. The first tranche, released in November 2015, has recently started trading on the Bombay Stock Exchange (BSE). The issuance price of a bond was Rs 2,684 per gram, while the listing price has been Rs 2,986. By the closing on the first day, the price shot up to Rs 3,180.
The closing price on day one was 6% higher than the spot price of gold in Mumbai.
Why prices of bonds are trading at premium?
The Government hasn’t come up with any issuance after March 2016 in the primary market. The premium also reflects the 2.75% interest that the Government is committed to pay every year. Gold has moved higher since November 2015 making investors take a bullish view on the precious yellow metal.
To ready more about this story and Personal FN’s views over it, please click here.
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