All Posts By

KS Legal

Jul 30
Love0
benefits of economy

How Sitharaman’s Latest Pursuit to Boost Economy Can Prove Beneficial

By Economy, Corporate Law, Others No Comments

Sitharaman’s Latest Pursuit To Boost & Benefits of Economy

Given the dire state of the Indian economy, hopes and livelihoods of billions have been pinned on the government which is often riled up in providing a conducive environment for people from the lowest to the highest strata of society. Pursuant to the economic data, the Indian economy had turned a corner in the month of June after contracting 12% in the first sector, thus a stimulus package to maintain this trend was much needed.

Various sectors including MSMEs, contact intensive sectors like the beauty sector, aviation sector, and hospitality sector were the worst hit by the pandemic. Therefore, there are high expectations, particularly among these particular sectors, that the government will announce some stimulus package to boost the economy, which has been hit by the second wave of coronavirus.

It is to be noted, that last year too, the government had announced a growth-oriented budget which was to be financed by high scale privatization of PSBs. Given, the rotten state of PSBs anyway, such a move was welcomed. The finance minister Sitharaman had announced the government proposal to take up the privatization of two public sector banks (PSBs) and one general insurance company in the year 2021-22.

Additionally, the government had consolidated 10 public sector banks into four and as a result, the total number of PSBs had come down to 12 from 27 in March 2017. After consolidating its financial base, the government has now shifted its focus largely on extending loan guarantees and concessional credit for pandemic-hit sectors and investments to ramp up healthcare capacities.

It is to be noted that there is a reiteration of some steps that were already announced, as the government has pegged the total financial implications of the package. The retrieved steps include the provision of food grains to the poor till November and higher fertilizer subsidies, at ₹6,28,993 crore.

Thus, it can be rightfully stated that the elements of direct stimulus in the package and its upfront fiscal costs in 2021-22 are likely to be limited. Consequently, more stimulus steps may be needed to shore up the economy through the rest of the year.

Additionally, in an effort to stimulate growth, exports, and employment, the finance minister has announced an expansion of the existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs. 1.5 lakh crore. She also announced a new Rs. 7,500 crore scheme to guarantee loans up to Rs. 1.25 lakh to small borrowers through micro-finance institutions.

Talking about the budget as a whole, the additional burden on the 2021-22 Budget from the ‘three direct stimulus initiatives that are providing free food grains, incremental health projects’ spending, and rural connectivity, would be about 0.5% of the estimated GDP for 2021-22.

Although, as aforementioned, there will be a limited magnitude of direct stimulus, it would be desirable to follow it up with another dose of stimulus later in the year. In other words, this package is focused on stimulating the sagging credit offtake growth through interest rate concessions for priority sectors. Thus, this will immensely help and benefit a number of MSMEs, small borrowers, and entrepreneurs in contact-intensive sectors.

Talking the healthcare system, to state that the healthcare system in India had failed during the second wave would be an understatement. With record-death coffers being buried around the country during such arduous times, it is only fitting that government makes a conscious effort to ramp up the health care sector of the country. Taking into consideration the need for a robust healthcare sector, the finance minister unveiled a fresh loan guarantee facility of Rs. 1.1 lakh crore for healthcare investments in non-metropolitan areas and sectors such as tourism.

Additionally, Rs. 23,220 crore has been allocated for public health with a focus on pediatric care, which will also be utilized for increasing ICU beds, and oxygen supply and augmenting medical care professionals for the short term by recruiting final year students and interns. This has been a welcomed step as in last year’s budget, healthcare had been grossly ignored. Given the peril announcements of a third wave, such an initiative will help ramp up the prominent sector to tackle a coming third wave.

It is to be noted that the success of the enhanced credit guarantee schemes is worth Rs. 2.6 lakh crore for pandemic-hit sectors will hinge on their offtake. Schemes worth Rs. 2.4 lakh crore is significantly spread over the next two to four years. However, as aforementioned, due to the repetition of measures, some of these had already been announced at the time of the Budget, and a portion of their cost has already been factored in.

Although, given the robust numbers, the total impact amount seems large at nearly Rs. 6.29 lakh crore, it is to be noted that a large portion of this is by way of credit guarantee schemes where there is no immediate outflow. Thus, the impact on the fiscal deficit will be limited while the stock markets could give a mild positive reaction.

As aforementioned, the MSME and the travel sector were the worst affected. Further, the woes of these sectors were exacerbated by the imposition of the second lockdown. Given that consumer confidence is at an all-time low, demand will remain subdued.

Thus measure to sustain such MSMEs have been introduced. The balance of Rs. 60,000 crore will be earmarked for the sectors, including a plan to support over 11,000 registered tourist guides and travel agencies so they can survive the second wave’s adverse effects.

Additionally, working capital or personal loans will be provided to people in the sector to discharge liabilities and restart businesses affected by COVID-19. Loans will be provided with a 100% guarantee under the scheme to be administered by the Ministry of Tourism.

Production, according to reports was the worst hit by the second lockdown. Thus, large electronics manufacturers under the Production-Linked Incentive scheme have been granted an additional year to meet their production targets. This is due to the fact that many of them had struggled to sustain or scale up operations due to restrictions and lockdowns to curb the second COVID-19 wave.

Against all odds, the government introduced a stimulus to revive the economy amidst subdued demand and plummeting investors’ and consumers’ confidence. The economy, as opposed to last year, gained impetus in demand; however, this was due to the pent-up demand and festive season that had boosted sales and ultimately the economy. However, pent-up demand, cannot at the moment, revive the economy.

In addition to subdued demand, confidence has taken a hit due to the inevitable third wave. Thus, this emphatically justifies the government stimulus package that was much needed in the economy. The Budget coupled with economic stimulus laid the foundation for a sustainable recovery in GDP growth and welfare improvement thereby continuing the course of reform, despite extreme provocation. It goes without saying that history will record India’s boldness, and benefit from the vision at large.

Best Litigation & Dispute Resolution Law Firm in Mumbai

Tags: indian economy, economic data, gdp of india 2021, india gdp growth rate, current gdp of india, benefits of economy, gdp of india, economies of scale, india gdp 2021

Jul 30
Love0
fiscal deficits

Are MSMEs Ready For Private Equity, Venture Capital?

By Others No Comments

Private Equity and Venture Capital

Instead of funding new factories to manufacture for other countries, smart economies will fund the growth of entrepreneurs. Such is the power that lies in the Private Equity (PE) and Venture Capital (VC) industries. Traditionally, Venture Capitalists and PE players in India have shied from the MSME sector.

The non-corporate structure and small size of the majority of MSMEs in India make the Venture Capitalists and Private Equity Players unwilling to invest in them due to higher transaction costs and difficulties in exiting such investments. However, the VC-PE interest in the Indian MSME sector has witnessed a steady rise in recent times.

A recent Dun & Bradstreet survey was conducted which indicated that 82 percent of the Indian MSMEs got negatively impacted by the disruptions caused by the COVID-19 pandemic. It is no news that the sector to be worst hit by the pandemic was the MSME sector.

Thus, taking into account the intricacy and severity of the situation, last year, the Modi government announced a Rs 50,000 crore Fund-of-Funds. According to the Modi plan, Rs 10,000 crore investment was to be made by the government to facilitate the flow of equity to 25 lakh MSMEs.

However, it is to be noted that the government had expected the remaining Rs 40,000 crores of equity capital to get invested by venture capital (VC) and private equity (PE) firms. Such a move was welcomed by the business diaspora and appreciated by experts as promoting external participation in a fund like this is a smart move.

This is due to the fact that such external participation ensures the professional and transparent disbursement of funds. Thus, perennially capital-starved MSMEs were eager to attract investors willing to infuse monies to fuel business growth. However, all is not as presentable and profitable as it might sound as such kind of money has different commitments and expectations.

MSMEs have been traditionally dependent on banking finance for expansion and working capital requirements. It can be rightfully stated that PE-VC funds are vastly different from advances taken from a bank or NBFC. At the outset, banks or NBFCs provide temporary capital in the form of overdraft facilities, term loans, or invoice discounting options. Thus, once your goals, for which you had raised money, are met, you can safely return the borrowed capital with the pre-agreed interest rate.

However, with the Private Equity option, the lucidity of the temporary nature of capital and easy borrowing would not be easy. Private Equity investors provide permanent capital by buying equity into the business. Thus, the option of raising temporary capital is no longer available as investors usually continue to exist even after you may have achieved the goals for which you had raised this financing. The only exit that can take place is the exit of last resort when a private equity investor accepts an exit for a pre-agreed return.

Although banks have been slowly trying to bridge this gap, stringent reforms from the government are required. The reality hereby is that although this sector plays a vital role in giving a boost to the overall Gross Domestic Product (GDP), it is still overlooked by the government, corporate sector, and the financial sector. Thus, the commendable efforts and support of this sector do not receive the required attention.

But not all is as gloomy as the aforementioned situation might suggest Private Equity investors bring in a lot of good things to the table despite the seemingly dark and dubious picture. Private equity investors actively participate in growing the MSME business and act as a sounding board for the business challenges.

Additionally, PE investors can formalize structures to streamline business operations. How? When required, investors can open doors for business or new rounds of financing. Thus, much good can be reaped from the option of PE investments and VCs.

How can your business attract more private equity investing?

However, it is to be noted that private equity should be used in a profitable way. Private equity should be used for chasing growth as it is the most expensive form of capital for the business. It should not be used in areas that will provide an ROI lower than the cost of this capital which can be detrimental to the business. Thus profitable investment and use of capital wisely in different business verticals are essential as it would give higher returns than the cost of that capital.

As aforementioned, such kind of investment is a daunting task as every external shareholder of the company can question how you run your business. Thus institutionalization of your operations.

Reportedly, a common issue that irks many private investors and keeps them from investing in MSMEs is their dubious recordkeeping. Thus, transparent recording is a rudimentary requirement for better business opportunities and investors’ trust. Providing accurate and periodic reporting to the investors in a mutually agreeable format can go a long way.

It is to be remembered here that further financing can be provided if and only if, the business is clear of any dubious activities. Thus operations require a systematic record-keeping process which should be given paramount importance.

Another way to entice investors is the meticulous and transparent maintenance of business accounts that distinguish personal from professional expenses. Running the show independently and without external ownership, utilizing a company asset for personal reasons is acceptable even if not advisable. However, these activities must stop for the very mere reason that the company assets are co-owned by its shareholders. Using co-owned assets for personal use is not acceptable to private PE and VC investors.

Companies can benefit from viewing partnerships with a social enterprise not only as a way to strengthen the societies where they operate but as a financially and strategically valuable investment. These partnerships have the potential to generate economic benefit for both parties involved, via insights into innovation, access to new markets, and opportunities for risk management.

 

Tags: msme equity, venture capital, private equity, corporate venture capital, venture capital financing, venture capital firms, private equity fund, venture capital fund, private equity firms

Jul 30
Love0
real estate stakeholders

The Consolidation Story in Mumbai Real Estate Hits a Roadblock

By Real Estate No Comments

Mumbai Real Estate Hits a Roadblock

The waiver of stamp duty by the government to mitigate the woes of the real estate sector might have somewhat helped the industry but it has somehow also given a sense of boost to the weaker players in the ruthless market. Competition works as a “cleansing” tool, which rids itself of the weaker younglings, but with the government’s support that cleansing might somewhat have stopped. Since 2016, several weaker and poorer hands have left the business but there are more than enough players who are exploring newer opportunities.

The aforementioned circumstances show an uncontested option that has never been viewed closely enough over the last few years – Consolidation in the Real Estate sector. The premise in favor of consolidation states that competition, profitability levels amidst greater regulatory scrutiny, and higher capital requirements weed out the weaker players in the market, thus, riding the sector of its unproductive thorns.

Due to the consolidation mechanism, only key and serious players survive in the business and hence the efficiency of the system is maintained. However, the pandemic exacerbated the woes of builders leading to a real estate consolidation roadblock.

Is the theme of major consolidation an exaggeration?

The data released by Liases Foras emphatically shows that the market share of the top 50 players in real estate has declined over the last three years. From commanding a significant 54% market share in the financial year 2019, it has now fallen to 49%. Meanwhile, on the other hand, the number of developers has risen from 2,598 to 2,728.

So this begs a pertinent question that is the theme of major consolidation an exaggeration? It would be a gross misjudgment to state that the consolidation within the industry is not wholly an exaggeration. But it is to be noted that forecasts on its scale and pace are wildly exaggerated. There could be various key reasons for this. First and foremost is the nature of the market.

Real estate in India is dominated by the markets in Delhi, NCR, and Mumbai. NCR and Mumbai Metropolitan Region (MMR) contribute 60% to Indian real estate. Within MMR, the most expensive and affluent market in Mumbai. Given its poshness and lavish lifestyle, demand for it is immensely high. But it is to be noted that due to the land constraints, it is primarily a redevelopment-led market.

Thus, society redevelopment has small plot sizes which larger developers are likely to shun. While on the other hand slum rehabilitation redevelopment is too messy for key players to be enthusiastic over. Thus, it may come as a surprise to no one that over the last five years, the market share of the largest developer in Mumbai has ranged between a meager 3% – and 5%.

Secondly, talking about the affordability of houses, the Real Estate Regulatory Act has provided a much-needed boost for home buyer confidence. It has also emphatically led many lenders who have moderated their resistance to dealing only with a certain set of developers. Thus, an advantage to the home buyers is, small and mid-level credible builders are witnessing an easier acceptance into the formal lending market.

Thus many of these developers are getting access to the formal lending market, which earlier was denied to them as they were primarily dependent on only customer advances. With the adoption of RERA, the better players are seeing interest from lenders who have anyway been keen on diversifying their lending portfolios.

Another phenomenon that works here is that local players are offering more value for money. When a market moves from being investor-driven to end-user-driven, then all real estate is local. And players who know the intricacies of that market better are able to offer products at prices that are often a preference to the larger names.

Last but not the least, many developers throughout their years in business have learned one prominent lesson, that one should not bite more than they can chew. With taking on more than what one could fathom and being involved in numerous projects that often ensure a balance sheet saddled with high debt, most players in the last year have opted to deleverage and go slow on new projects.

This is a trend that will not end in a hurry. It also emphatically means that the market share gains will always be restricted, even if projects are undertaken in different frameworks.

As it is known that many ‘branded developers’ are primarily ‘famous surnames’ who offer a product of posh, similar quality to Tier 2 and Tier 3 builders, but it is usually done at a premium pricing. The only edge that these ‘branded developers’ hold over non-branded ones is that they provide near-certainty of at least delivering a project in the future that cannot be ensured by a non-branded developer.

But as more projects by lesser-known developers start getting delivered on account of greater regulatory scrutiny and compliance, it would be right to state that the ‘edge’ of larger players will diminish in value. While the market dynamics seem unfavorable for Mumbai’s listed developers who are banking on big market share gains, it certainly spells good news for home-buyers who will have a plethora of options to choose from.

 

Tags: real estate sector, real estate developers in mumbai, mumbai real estate, mumbai real estate market, bandra mumbai real estate, consolidation story in mumbai real estate

Jul 29
Love0
merger control regime

CCI World-Class Merger Control Regime: Fueling M&A Activity in India

By Corporate Law, Others No Comments

CCI World-Class Merger Control Regime: M&A Activity in India

When the COVID-19 pandemic practically shut down global business in March 2020, the M&A world was thrown into an unruly tailspin. Unsigned pending deals were put on hold, in many cases indefinitely. Global uncertainty, stay-at-home orders, nervous credit markets, and rapidly changing industry conditions served as speed bumps to deal-making, if not absolute barriers.

While deal volume made a very strong and perhaps surprising comeback in the second half of the year, 2020 will be remembered as the year of the pandemic, and many lessons will be learned.

On June 1, 2011, India joined the world league with the US and EU as it was the day when merger control under the country’s Competition Act had gone live. This had emphatically given the CCI, the power to review an M&A transaction’s competitive effects, where parties, whether in India or overseas, exceed certain Indian and global asset-size/turnover benchmarks.

There are innumerable advantages of M&A activity in India, especially when it comes to its NPA crisis. With the banking sector reeling under the dead weight of its bad loans, the timely resolution is the key to revival as loss can be mitigated smoothly and timely. This is because the loss of shareholders and depositors is positively correlated with the time taken for banking resolution.

Luckily, M&Ahelps to mitigate this detestable, odious problem with its timely resolution policy. This can be seen as the developments in the cases handled by CCI have been significant and rapid, with 834 transactions notified to the CCI, with 824, or 98.8%, cleared in an average of 20 days, and none prohibited.

How do bank mergers lead to mitigation of the NPA problem in the banking sector?

As it is known, a bank merger is emphatically a merger of two or more banks. The bank reeling under the weight of its bad loan can significantly be merged with banks with, if not insurmountable, at least good profits and good administration. As it is known that banks’ NPAs rise due to their flawed management program, thus integration with a bank with good management can lead to better management and mitigation of the other bank’s crisis.

This implies that when banks are merged, the strong banks can significantly take some measures, in association with other banks’ top management, for improving services. This can include improved recovery measures, transfer of NPA accounts to specially designated branches, named Asset Recovery branch or with permission of top management, subject to legal restrictions, sell NPAs to an organization specialized in recovery at a discount.

Thus, it can be rightly stated that these measures reduce NPAs by recovery by transferring the problem to another organization known as Asset recovery companies or famously known as bad banks or ARC. It is to be noted that the percentage of NPAs is also reduced due to the integrated capital of the two merging banks. Thus, the merger of an indebted bank with a bank of good business and healthy deposits, improvement in good total business can take place.

To top it all, merged banks or big banks will also be able to get access to refinance, which is significantly available to only a few big banks. However, these require freedom for banks to function competitively and utilize the best expertise.

Additionally, a larger bank can manage its short- and long-term liquidity quite better. There will not be any need for overnight borrowings in the call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).

In contrast to the government’s reluctant and unprofitable approach to recapitalization, mergers usually guarantee a larger capital base and higher liquidity, thus the burden on the central government to recapitalize the public sector banks, again and again, comes down substantially. In addition to all the perks aforementioned, the merger can reduce the cost of banking operations and it will result in better NPA and Risk management.

For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger, the benefits of the merger are enormous the generation of a brand-new customer base, empowerment of business, increased hold in the market share, and the opportunity for a technology upgrade. Thus overall it proves to be beneficial for the overall economy as well.

How do merger control regimes and increased profits help the economy?

Mergers ensure a better efficiency ratio for business operations as well as banking operations which is ultimately beneficial for the economy. Consequently, it leads to an increase in profitability and helps raise the standard of living, which is crucial for a growing economy like India.

As a matter of fact, the chances of survival of underperforming banks increase significantly and hence customer trust remains intact which is vital for the Economy and the bank which have to maintain their goodwill. The weaker bank gets merged into a stronger one and gets the benefit of large-scale operations.

But is M&A as rosy as it might sound? Of course, every coin has two sides to it so does M&A. It is to be noted that when two entities are merged, the inefficiencies of the smaller bank can also get integrated into the larger bank.

Recapitalization, the preferred solution by the government works for small-scale losses of small banks as recapitalization can revive the capital base of small banks. But if big bank defaults or the giant shaped bank books incur huge losses or high NPAs, it will be difficult for the entire banking system to sustain and for the government to regain control.

Thus, Mergers are important for the consolidation and expansion purposes of banks. Additionally, they are also crucial for the Economy as they are most of the time successful in saving weak banks which fail in meeting expectations or maintaining their bad loans.

But on the other hand, Mergers create a variety of problems that can cause great damage if merging is not executed properly as various cultures are involved in the transition. If merging is needed, it must be executed to lead to an environment of trust and agreement among the people of both organizations.

If people, work culture, and vision are blended amicably, merging will definitely have synergic effects and create a win-win situation. Looking ahead, we expect deal volume to continue to strengthen, particularly as companies spot new opportunities with vaccine rollouts enabling economic recovery and growth. The lessons from last spring’s busted, or nearly busted, deals will continue to live on in new deal terms.

 

Tags: m&a activity in india, m & a activity, merger control regime, m and a activity, recent m&a deals in india 2021, recent m&a deals india, cci world class merger control regime, recent m&a deals in india 2020

Jul 28
Love0
banks and sustainability

Good Show By The Banks, But Can They Sustain It?

By Banking No Comments

Banks and Sustainability

The ongoing COVID-19 pandemic is causing unprecedented disruptions to economic activities across countries, and India is no exception. The pandemic has severely affected and continues to disrupt global value chains, production, trade, services, and MSMEs thereby affecting overall growth and welfare.

India, due to its stringent lockdown, lost much of its economic output, so much so that its economy had contracted by 23.4% in the first quarter and by 7.3% in the overall financial year 2020-21. With the economy crippled to such an extent, how has the financial sector in the third-largest economy still fared a question of deliberation?

In its lowest growth since 1965, the loan portfolio of the banking system this year grew by just 5.6 percent. Given the circumstances that had been thrust upon the economy, RBI had introduced a moratorium on repayment of loans and had allowed banks to restructure loans to ease debts. Is due to this reason; we saw sluggish growth in the loan portfolios of different banks. On top of it, the government had guaranteed an Rs. 3 trillion emergency credit line to the troubled sectors.

Despite the existing challenges, some banks did record growth in bank credit but however, but that was driven by personal loans and credit to agriculture and allied activities. The loans to the MSMEs segment too grew due to the government’s guaranteed schemes. Thus, the net profit of some listed Indian banks during the financial year 2021 has more than doubled, growing from Rs 41,038 crore to Rs 1.03 trillion. But is this a façade or has the Indian financial system actually, finally cracked the solution to its archaic detestable problem of the NPAs?

With soaring profits at the moment, many might presume that India has finally cracked a solution to its draconian problem, but is such a trend sustainable? In January, the RBI’s last Financial Stability Report (FSR) had estimated that banks’ gross NPAs may rise to a humungous 13.5 per cent by September 2021, from 7.5 per cent in September 2020, under the baseline scenario. Additionally, in a severe stress scenario, these can rise to 14.8 per cent. Thus, till March, the banks could hold on to such a façade but not all of them will be in a position to stomach the impact of the second wave of the pandemic.

To mitigate the effects of the second wave, a sound banking system is a sine qua non for maintaining financial stability, which can be achieved by lifting off the dead weight of non-performing assets from its balance sheets. While there is no universally acknowledged official ‘acceptable’ limit for NPAs, bad loans within 3% are considered manageable.

Merely aiming to reduce NPAs is no solution. Realizing that better NPA recognition has become the need of the hour, RBI has begun conducting asset quality reviews across banks to ensure that the problem is addressed well in time rather than stretched or swept under the carpet. However, the extent of bad loans is yet to surface. Loan moratoriums and rescheduling have kept NPAs at bay.

Many corporates have suffered severely, but nobody knows what exactly is happening. The real damage shall bring to the surface over the next few quarters, as vaccine campaigns have ramped up and with COVID (hopefully) gone away, corporates shall begin to disclose their annual results and banks compelled to label their problem loans as NPAs.

Besides RBIs vigilance, Indian Public Sector Banks have entered a full-fledged consolidation mode wherein 27-odd public sector banks (PSBs) amalgamated into 10 large banks. The anchor banks such as Union Bank of India, Punjab National Bank, Indian Bank and Canara Bank are in the process of the branch and people rationalization, technology integration and stressed loan strategy etc.

Although PSBs took the blame for poor corporate governance and leadership, the private sector’s weak links are also exposed with Chanda Kochhar and Rana Kapoor coming under the radar for corruption charges or violating the service rules. Similarly, the mounting NPAs in their balance sheets indicate bad lending practices.

Investor sentiments are at an all-time low and it is also becoming evident how difficult it is going to be for banks all over the world to maintain good assets and good earnings. Additionally, despite banks’ provisioning of bad debts recovery is a long road ahead. This delay can be expected due to logjams in courtrooms and Tribunals thereby leading to ineffective recovery legislation at the grassroots level.

Due to the shutdowns and income slowdown, many repayments of loans, especially in Europe, United States, may cease leaving the banks dry. However, banking institutions are under immense pressure to ensure a business-as-usual amidst the lockdown and health crises. What were earlier their assets now would become a big risk and therefore necessitating the need to go beyond traditional modes of business vigilance to rise from the ashes left behind by the pandemic.

 

Tags: sustainable banking, sustainability in banking sector, banks and sustainability, sustainability in banking industry, economic activities, economic output, financial sector

Jul 27
Love0
bad loans

Bad Loans Insurmountable Burden on Investment and Savings

By Banking No Comments

Bad Loans Insurmountable Burden

A sound banking system is a sine qua non for maintaining financial stability in any country, which can be achieved by lifting off the dead weight of non-performing assets from its balance sheets. However, it is common knowledge that Indian banks are saddled with bad debts thereby ranking them as one of the worst in the world. In fact, it wouldn’t be wrong to state that India is definitely the worst in the BRICS bloc when it comes to its NPA management program.

While there is no universally acknowledged official ‘acceptable’ limit for NPAs, bad loans within 3% are considered manageable. As aforementioned, compared with most BRICS members, India fares quite poorly compared to China, as its NPA stands at 1.75% while India’s NPA stands at a whopping 9.85%.

In the recent case of PMC Bank, the bank’s last available numbers for March 31, 2019, showed a large deposit base of Rs 11,600 crore, a Gross NPA ratio of 3.76%, and a net NPA ratio of 2.19%, which did not seem out of the ordinary. However, its capital adequacy ratio was higher than the regulatory requirement of 12% and its advances were growing in the double digits.

From a macro-economic standpoint, countries with high NPAs typically do not have high economic growth, investment, and savings in the economy. Additionally, if loan non-recovery balloons, the bank’s net interest margin (NIM), profitability, return on assets, dividend payout, etc. all get severely affected, which in many cases does not spell well for the Bank’s credibility. Moreover, credit inflow is also jeopardized as its very financial soundness comes under scrutiny.

Despite its conspicuous impact on the economy, NPAs have an insurmountable burden on the investment and savings of investors like you and me. A high NPA ratio usually suggests that a bank’s management and recovery programs are flawed and hence an individual’s money isn’t safe in its mighty, hollow vaults. This emphatically leads to a low rate of savings for the people. Thus, due to burgeoning bad loan books, investment in the economy usually plummets.

Depositing money in a bank with a recent history of stress, a dicey reputation for governance, known problems in the loan book, or a precarious GNPA and capital adequacy position exposes you to the risk of RBI directions, which can deprive you of access to your money for temporary periods.

What is the main thrust on which a sound financial institution is built? It certainly is on in its safe asset keeping credibility. However, with the mounting NPAs, investor trust and confidence have drastically eroded. This increase in the systemic level in India’s banking sector (and the debt market) is certainly causing increased stress, and investors may find their money wiped out for no fault of their own.

Talking about liability management, high NPAs frequently provide an impetus to the banks to lower their interest rates on deposits thereby lowering the rate at which your investment in Fixed Deposits grows. Thus, in order to maintain their NPAs, the interest rates on loans and advances rise. This invariably increases the cost of borrowing thereby discouraging people from taking out loans and thus reducing the flow of money in the market.

This way, investors are not only deprived of their expected returns but also find the value of their investments eroded. Thus, the high burgeoning NPA crisis of a country can rattle its financial banking system and it can certainly prove to be a hurdle to its growth.

With the RBI conducting asset quality reviews across banks, better NPA recognition has become the need of the hour to ensure that the problem is addressed well in time rather than stretched or swept under the carpet. The extent of bad loans is yet to surface. Loan moratoriums and rescheduling have kept NPAs at bay. Many corporates have suffered severely, but nobody knows what exactly is happening.

The real damage shall being to surface over the next few quarters, as vaccine campaigns have ramped up and with COVID (hopefully) gone away, corporates shall begin to disclose their annual results and banks compelled to label their problem loans as NPAs.

With the growth of loans in the economy, once the moratorium is lifted and repayments start coming to banks, NPAs would significantly rise. In this aspect, RBI has asked banks to do provisioning, buffers, and raise capital, in order to be a resilient organizations. Such a conservative approach coupled with a strong legal framework is likely to pass on the benefits to investors like you and me.

 

Tags: financial stability, bad debts, bad loan bank, bad loans, bad loan recovery, bad loan write off, banks write off bad loans

Jul 22
Love0
rise of banks

The Rise Of New Age Banks: Marrying NBFCs with Fintech Companies

By Banking No Comments

Rise Of Banks: NBFCs with Fintech Companies

Consolidation in the banking industry is inevitable. Leading up to 2020, radically transformed Bank models have emerged. A glimpse ahead shows an emphasis on innovative technologies to vastly facilitate banking – inclusive banking through new types of Bank models, non-traditional alliances to make banking affordable, and Fintech capabilities to make banking customer-centric.

Banking in the future will leverage the geographic reach and financial know-how of NBFCs by joining hands with Fintech companies disrupting services with AI, Blockchain, and cybersecurity tools.

The bad loan history of Indian banks goes long back. In a recent development, another bank will be rescued due to its bad management program, but interestingly, not by the government this time, but by the NBFC sector. In recent developments uncovered, BharatPe and Centrum would rescue the significantly distressed PMC bank.

As SFB would acquire assets and liabilities of PMC bank, both the promoters are now permitted to start a small finance bank (SFB) in an equal ownership joint venture. RBI’s in-principle approval is a validation of Centrum’s experience in financial services and BharatPe’s digital expertise essential for setting up a new age bank. If this succeeds, it will be the first SFB in 6 years.

The bank’s gross NPA of 3.76% and net NPA of 2.19% were discovered by 2019. The reason for default in payments and bankruptcy, yet again, remains the same: financial irregularities and misreporting of loans. History bears testimony to the fact that the majority of Indian banks have treaded on the road of bankruptcy with their ill-suited loans that are handed out without thorough inspection of the credibility of the borrower. 

In the case of PMC, the bank had erroneously handed out loans to bankrupt real estate developer HDIL. Despite restrictions on withdrawals of cash and investigation of accounting lapses, RBI’s recent approval demonstrates an open runway for growth for institutions that adhere to regulations and rise out of ashes like a phoenix.

However, like all the other times, this time RBI used its underperforming problem-solving mechanism to counter the problem and dissolved the board, and took the administration of the bank under its purview. The quantum of loans to a single borrower was against banking guidelines. 

Amidst all the other rhetoric, what will acquisition mean for different stakeholders? At the outset, the acquisition will revamp the structure. PMC bank would change from a cooperative bank to a small finance bank. Though, it is to be noted that the existing loan and deposit accounts of PMC shall continue as it is, additionally the existing staff and branches shall be retained. However, some existing assets, loans portfolio of around ₹1000 crore, of Centrum would be part of the proposed small finance bank.

Talking about the Shareholders and members of the PMC Bank, according to reports there are more than 50,000 members of PMC bank. Since this transition is part of a rescue operation by RBI and the bank has a significant negative net worth, post this transition, members are expected to lose their invested money. Having talked about shareholders, one cannot leave behind the depositors of the PMC Bank.

Given the present circumstances, the bigger and humungous amounts would get their principal amount back. However, it is to be noted that there might be some haircut in interest earned or some cap on withdrawal limits to defer complete withdrawal. Given the present credit crunch, the RBI shall truly work to safeguard the interest of depositors.

With NBFCs growing twice the speed of banks, RBI increased its vigilance over the NBFC segment in light of the IL&FS and DHFL fiasco. In times where NBFCs can become banks, thanks to Section 22(1) of the Banking Regulation Act, 1949, a prudential regulatory framework for NBFCs looking to transform into banks should be implemented. This would help mitigate the spill-over of systemic risks inflicting NBFCs from further rupturing the banking system.

Access to public deposits is a salivating factor for NBFCs hit by a liquidity crunch during the pandemic, however, serious fine-tuning and deliberation are required for the treatment of PMC’s depositors, mostly consisting of individuals, religious trusts, and institutions, in the absence of a final revival plan.

From a macro-economic standpoint, it goes without saying that NBFCs looking to convert into banks will be required to maintain a higher Cash Reserve Ratio and Statutory Liquidity Ratio pursuant to RBI’s conversion guidelines. Post conversion, NBFCs will also enjoy some decline in the benefits of regulating in an unregulated field with focused disclosures, however, from a shareholder’s perspective, higher transparency and accountability are likely to instill a sense of confidence in such new-age banks.

From a macro-economic standpoint, the share prices of such newly formed banks will bear the brunt of changes in banking regulations, RBI circulars, and underlying risks directly applicable to banks.

With NBFCs like Centrum looking to tie up Fintechs is aiming to tap a large consumer segment that doesn’t have access to credit or can’t access credit at a good interest rate. Given the boundary that banks operate within, Fintechs and the shadow financing institutions are filling the gap by innovating and using multiple data points to lend by exploiting the digital potential.

While some classes believe that Fintechs are parasites riding on the network of the banking system and gaining valuations, however it goes without saying that inter alia, RBI must ramp up its monitoring game as marriages of convenience between NBFCs and Fin-techs are expected to witness a notable rise.

 

Tags: banks and nbfc, banks and fintech, rise of banks, nbfc, fintech investment banking, difference between nbfc and bank, non banking financial companies, fintech bank

Jul 22
Love0
twitter freedom of expression

Twitter and Government’s Ultimate Battle to Uphold Freedom of Expression

By Others No Comments

Twitter Freedom of Expression – Twitter & Government’s Battle

Social Media – a buzzword in millennial circles and often the recipient of government’s fury. Although the use of social media platforms such as Twitter and Facebook is undeniable for human conversations, all these developments have also contributed to the advancement of democracy and fundamental rights like freedom of expression, movement, trade, and profession.

However, a single platform cannot become the sole arbiter on fundamentals like freedom of speech, expression, and the likes. As India cracks down on microblogging sites for their noncompliance with India’s newest pursuit to mitigate false information, Twitter finds itself caught in the crossfires.

In recent developments in the case, microblogging platform Twitter lost its status as an intermediary platform along with its coveted legal shield for 3rd party content for failure to comply with new IT rules. India’s wrath has been specifically directed towards Twitter as it is the only social media platform among the mainstream platforms that have not adhered to the new laws.

However, it remains to be seen whether this development will leave a permanent scar or be lifted once Twitter adheres to the new digital rules. The government and Twitter have been at loggerheads owing to the latter’s compliance issues pertaining to rules that mandate platforms to increase due diligence and vigilance with respect to objectionable content and be held accountable for the same.

Pursuant to Section 79 of the Information Technology (IT) Act, an intermediary shall not be held legally or otherwise liable for any third-party information, data, or communication link made available or hosted on its platform. Simply put, this means that a platform is safe from any legal prosecution brought upon due to the message being transmitted from point A to point B as long as a platform acts just as the messenger and without interfering with its content in any manner.

According to the Indian government, Twitter’s act of defiance has been astounding and the platform which portrays itself as the flag bearer of free speech, choose the path of deliberate defiance when it came to the Intermediary Guidelines. This selective adherence to laws didn’t fit well with the government about its, inter alia, fake news mitigation efforts.

In addition to this, Twitter collects data and influences public perception and opinions through algorithms that decide what people will see and listen to. Thus, the platform is known to selectively push content on the basis of user activity, profile, demographic attributes, etc. This has been construed by many as a deliberate manipulation of information flow, albeit under the guise of better user experience, and is considered nothing but colonization of digital space.

It is common knowledge that several social media platforms may have violated governing legislation under the guise of freedom of speech and expression, thus necessitating a dire need for laws that address the evolving problems pertaining to questionable third-party content on social media platforms.

While the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules, 2021’ is a “soft-touch oversight” mechanism to deal with issues such as the persistent spread of fake news, abuse of these platforms to share morphed images of women, and content related to revenge porn or to settle corporate rivalries. Evidently, these Rules are neither fool-proof in curbing the root cause of the problem nor keeping up with the changing shades of offenses being committed thereon.

The IT Act and Rules, although well-intentioned, do not bring adequate clarity on the responsibilities of intermediaries along with third parties and users. The policy guidelines were introduced to address content that goes directly against guidance on COVID-19 from authoritative sources of global and local public health information. Thus, Twitter was quite emphatically trying to curb misinformation that is too prevalent in microblogging these days. But misinformation labeling isn’t the only topic that has been the Achilles’ heel of the entire matter.

The new rules dictate that a company like WhatsApp and Twitter should be able to track down the ‘first originator’ of any objectionable article that the Indian government deems threatening to internal security. It goes without saying that striking a balance between Freedom of speech and penalizing intermediaries for overlooking their responsibilities is the need of the hour!

 

Tags: twitter freedom, social media platforms, twitter freedom of expression, socialmedia, twitter facebook news, twitter social network company, freedom of speech twitter, twitter platform, twitter freedom of speech

Jul 21
Love0
crypto investors

Who’ll Blink First in India’s Crypto Standoff?

By Economy, Others No Comments

Crypto Investors – Who Blinks First in India Crypto Standoff

RBI, the Central Bank of India has been in a cold war with the Indian crypto industry. It can be best described as antagonistic and aversive. Being concerned with India’s ability to absorb financial shocks, RBI has time and again tried to unfurl the disadvantages of using cryptocurrencies, however, the industry construed RBIs reaction as hyperbolic!

India, among other nations, has been particularly belligerent towards cryptocurrency, so much so, that it had constituted a high-level intermediate committee to report on various issues pertaining to cryptocurrency. The committee had subsequently in 2019, recommended a blanket ban on private cryptocurrencies in India hurling many crypto investors on the wrong side of the law.

The belligerent attitude of Indian authorities towards digital currency has led to banks emphatically distancing themselves from the crypto community, apparently egged on by the RBI. Working along the same lines as the government, in May, the HDFC Bank had sent a rather threatening email to their customers, warning them against virtual currency transactions. It is to be noted that the email had cited an RBI circular that was published on April 6, 2018.

The circular had reportedly instructed all of the businesses it regulates to cease any involvement with cryptocurrencies. Additionally, such a stringent activity was also conducted by the State Bank of India. Similarly, several large banks, namely ICICI Bank, the country’s largest private lender too stopped providing services to crypto exchanges. It is to be noted that due to the government’s stringent stand on the contentious matter, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers.

Investors’ Woes 

As can be anticipated, the banks’ nefarious emails had prompted an uproar among their customers and crypto investors, with many taking to social media to express their discontent. But why are investors raging with anger? Fear of missing out on high, unpalpable profits that crypto trading offers them. According to a research report by Bloomberg, the technical outlook for Bitcoin remains strong with the price of the cryptocurrency all set to surge around 600% to hit the $400,000 level in 2021.

The government’s repugnant attitude throws a question in contrast to the Indian government are all authorities in India wary of the digital currency? Apparently, not. Recently, the RBI’s circular was struck down by the Supreme Court.

The Court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos. Therefore, it can be rightly stated, that to some extent, pressure is being built on the authorities to at least lift their temporary ban on crypto services.

Crypto Endorsers

It is no news that Elon Musk has been an ardent endorser of the cryptocurrency. While many might presume him to be the crypto guru, many can’t help but grab their aversion towards him due to his cryptocurrency manipulation charades that onsets great volatility in the market. It is to be noted, is due for this very reason, Indian authorities are so averse to the idea of cryptocurrency. The digital currency granting anonymity to criminals for nefarious crimes is considered a safe haven for digital criminals.

But more importantly, it is the inefficiency or the inability to track the real perpetrator of the crime that is the sole reason for India debunking the crypto supremacy. Interestingly enough, loss of revenue is also a big challenge that the government faces. As it is known, the crypto market is unregulated, thus it is often quite arduous or rather impossible to track payments and hence generate revenue through transactions.

Additionally, cryptocurrency being a highly volatile market, which might not be running rationally poses a big risk of a financial bubble that is doomed to burst. As it is known, during the pandemic, when consumer and investor confidence was at an all-time low, the crypto market was booming, rather skyrocketing.

In contrast to individuals, various cities like Miami have also tried to pursue cryptocurrency by conducting state-wise crypto fares in order to court crypto investors in the town. With El Salvador becoming the first country in the world to grant legal tender to the contentious digital currency, pressure to flip the coin in favor of crypto is rising.

But with irrational behavior associated with the market and various comments like “Crypto isn’t the real economy” by Elon Musk and not-so endorsing statements by the former US President Donald Trump, who at best, considers Crypto a farce, both the sides of crypto, at the current moment, are evenly balanced.

While countries like South Korea are implementing a legislative framework to regulate Cryptocurrencies and Crypto exchanges, India, on the flip side, is considering imposing an effective ban on “private” digital assets and digital currencies. Further, the Indian government has indicated to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which will effectively ban “private‟ Cryptocurrencies and introduce its own digital currency called Central Bank Digital Currency.

Although India’s stance on regulating cryptocurrencies through state-backed CBDCs regulated by the RBI is worrisome, it doesn’t come as a surprise. Going forward, it is imperative to have a dialogue on stakeholder concerns or risk getting smeared in the litigation quicksand thereby leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India.

The Achilles’ heel in RBI’s approach is the delusion towards the fact that it is possible to ban cryptocurrencies whereas looking at all the other nations’, it is wise to regulate it and mitigate systemic risks vis-à-vis a blanket, yet ineffective ban. A bill regarding banning cryptocurrencies is still in parliament which if approved, will suffice the RBI’s objective however, it will be interesting to see who wins this battle of the contentious crypto war.      

 

Tags: financial shocks, cryptocurrency investment, crypto long term investment, crypto investors, investing in cryptocurrency 2021, private cryptocurrencies in india, investing in cryptocurrency

Jul 21
Love0
the indian authorities

How Indian authorities, yet again, failed to make a difference in its NPA crisis approach?

By Banking No Comments

Indian authorities

The second wave of the COVID-19 pandemic ushered in an era of disintegrating companies, arduous acquisition battles, and heated arguments in courtrooms. While most companies struggled to stay afloat, those with deep pockets jumped onto the acquisition and organic growth bandwagon. A giant that swore by this mindset was the Piramal Group whose resolution plan for Rs 37,250 for debt-ridden Dewan Housing Finance Limited (DHFL) received a conditional nod from the Nation Company Law Tribunal (NCLT), which subsequently received pompous and overwhelming approval from 94% creditors.
Despite being one of India’s largest mortgage lenders, DHFL’s tainted history of unwise financial handlings led towards it being the first financial services company to be notified for insolvency resolution under Section 227 of the Insolvency and Bankruptcy Code, 2016 by the Reserve Bank of India. The case itself poses as an exception, as the corporate insolvency resolution process under the Insolvency and Bankruptcy Code by the Reserve Bank of India is not applicable to financial service providers or banks. Therefore, the government’s action for the insolvency proceedings of financial service providers to enable the insolvency process of DHFL, which had defaulted on payment obligations, comes across an exception to the Code.
The NPA crisis in India is an archaic evil eating into the mighty edifice of India’s banking sector. However, the government’s sheepishly reluctant attitude to deal with the burgeoning crisis is indeed one of the factors that have led to the digging of the grave of the mighty financial sector of India. Statistically, India’s bad debts amount to 11% of the total lending, whereas corporate bad debts constitute 56% of the total bad debts of nationalized banks.
With another financial unit succumbing to the NPA crisis owing to governance concerns and payment defaults, India’s financial monitoring framework is ripe for reform and to nurse its post-pandemic financial system to health. The official perspective seems to maintain that the government looked after the vulnerable small and midsize firms during the pandemic. This, according to the official authorities, has been done by guaranteeing fresh bank loans and mortgages under RBI. Consequently, this belligerent view has been supported by the low take-up rate for the RBI’s one-time restructuring offer. Given low consumer confidence and crippled economic growth due to partial lockdowns, the NPA crisis is doomed to materialize sooner or later. According to the authorities, the NPA crisis can be dealt with later but how exactly is the question? Given, the DHFL insolvency, the financial system is doomed to fail given its failure to combat the NPA crisis.
Papering over an economy-wide solvency problem by flooding the financial system with high liquidity is not only risky but also fatal for financial stability. It is to be noted, that the same strategy of incessant capitalization of the financial sector by the Indian authorities has time and again proved to be a concocted measure in vain, as NPAs of the financial sectors have never plummeted in recent history. Even if they have, it is due to the practice of writing off loans from the accounting books in order to clean the financial records of the organization. But it is also something that the monetary authorities want to continue indefinitely which does little to help the bankrupt organizations. Alternatives, however, in the case of India are scarce. This is due to the fact that India doesn’t have good tools to deal with insolvency. The 2016 bankruptcy law, had been reeling under the pressure even before the pandemic had struck. Liquidation, the outcome in most bankruptcy cases, has led to creditors recovering only 15%. This gross inefficiency can be scrutinized when compared with the global average of 80%.
Given all the detestable conditionalities against the government’s liquidity approach, the government extended the same regime to failing shadow banks. Dewan Housing Finance Corp., as aforementioned, is a mortgage lender whose controlling shareholders are currently in judicial custody on charges of accounting fraud and misappropriation of funds. Talking about the archaic process adopted by the Indian authorities to settle DHFL, has left the suitors groaning about how shabbily the process was being run. With how the acrimonious contest shaped up, it’s certain that when the buyers control the reins, it will have to go through a lengthy legal challenge and will turn out expensive for creditors.
Clearly, due to all the aforementioned reasons, the task at hand is much more than filling the hole left by the $2.5 billion alleged fraud by Dewan’s former owners. With the government’s pro spending budget and increase in expenditure due to the vaccination campaign, bankruptcy in the financial sector is likely to wreak havoc on monetary and political goals of the Indian authorities with the DHFL precedent.