Budget 2016: Growth-oriented Budget

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map.

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map. This also opens up a window for the Reserve Bank of India to bring down interest rates further and expect at least one rate cut very soon.

Substantial investment of Rs 97,000 crore has been allocated for road sector. It is also been said that the government has decided to add 50,000 km of road length to the existing national highway network. This will create more development opportunities in the years to come.

To revitalise projects under public- private partnership (PPP) model, two significant steps have been taken which include issuance of guidelines for renegotiation of PPP concession agreements in a transparent manner, and new credit rating system for infrastructure projects to be issued.

Due to creation of new credit rating system, the benefits accruing to infrastructure projects will be better appreciated, resulting in a better rating. This will help infrastructure developers tap bond market and because of better rating of projects, insurance and pension funds will be able to come forward to fund these projects.

Another significant step for a progressive public-private partnership  project frame work is making Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvIT) structure investor friendly.

In this regard, now distribution made out of income of special purpose vehicle to the REITs and InvITs having specified shareholding, will not be subjected to dividend distribution tax, in respect of dividend distributed after the specified date. With this change the long pending demand of investors will stand addressed and Infrastructure Investment Trusts can now become a success story.

The Budget will have a good impact on boosting domestic demand, which will help the overall economic growth. Renewed impetus to irrigation is also a very welcome move. The Budget talks about implementation of 89 irrigation projects under AIBP which were languishing for a longer time and fast tracking of the same.

The overall allocation for rural sector and agriculture sector will also help the growth to pick up substantially. Renewed focus on initiatives like skill development, Make in India and incentives associated with the same in the Budget will result in good amount of employment generation.

The only disappointment in the Budget proposal is with regards to double taxation of dividend income, and would have been good if the same could have been avoided.

Sun Capital

New RBI norms to help banks unlock Rs. 40,000 cr

Central bank eases norms governing treatment of certain balance sheet items

The Reserve Bank of India on Tuesday relaxed norms relating to the treatment of certain balance-sheet items, including property, which will help banks unlock capital aggregating about Rs.40,000 crore.

This capital relief comes at a time when the banks, especially those in the public sector, are struggling with bad loans, provisioning requirements and falling equity market valuations.

The revised norms will give PSBs access to additional capital of Rs. 35,000 crore, while it could be about Rs.5,000 crore for private sector banks.

The unlocking of capital follows a review carried by the RBI with the aim of further aligning the definition of regulatory capital with the globally adopted Basel III norms.

These standards aim to improve the banking sector’s ability to absorb shocks arising from financial stress and improve risk management and governance.

Banks have now been allowed to include some items, such as property value and foreign exchange, for calculation of Tier 1 capital (CET1), instead of Tier 2 capital.

Analysts say State Bank of India may benefit a great deal from the change in the carrying amount of a bank’s property as it has huge property holdings across the country.

As per RBI norms, CET1 capital, comprising paid-up equity capital, statutory reserves, capital reserves, other disclosed free reserves (if any), and balance in P&L Account at the end of the previous fiscal year, must be at least 5.5 per cent of risk-weighted assets.

By Sun Capital

IDBI Bank looking to double business by FY19

Will catch up with the industry average of 12-15% growth, says MD & CEO

Mr. Kishor Karat, MD & CEO 

As part of its three year medium term strategic business plan, IDBI Bank on Tuesday said it is planning to double its business, rebalance loan portfolio towards micro, small and medium enterprises, agriculture and retail credit, augment low-cost deposits and purge the balance sheet of bad loans.

The public sector lender has unveiled the plan in the backdrop of it posting a huge loss of Rs. 2,184 crore in the October-December 2016 quarter and the government announcing in the Budget that it will consider the option of reducing its stake in the bank to below 50 per cent.

Under the plan, IDBI Bank expects to double its business (deposits plus advances) to Rs. 10-lakh crore (deposits of Rs. 5.50 lakh crore and advances of Rs. 4.50 lakh crore) by FY19 from the estimated Rs.5 lakh crore (deposits: Rs. 2.85 lakh crore and advances: Rs. 2.35 lakh crore) in FY16.

IDBI Bank will rebalance its portfolio so that the share of loans to retail, micro, small and medium enterprises and agriculture segments increases to 41 per cent of total loans in three years from 33 per cent now.

Consequently, the share of corporate and infrastructure loans in the total loans will come down to 37 per cent (43 per cent now) and 2 per cent (24 per cent), respectively.

Kishor Kharat, MD and CEO, said his bank has overcome the limitations on balance sheet growth arising from it not being able to meet the priority sector lending targets and is now at an inflection point.

Observing that the bank has grown at 5-6 per cent over the last few years due to the limitations, he said it will catch up with the banking industry’s average business growth of 12-15 per cent.

To bring down the cost of deposits, the bank plans to augment low-cost current account and savings account deposits from 25 per cent to 35 per cent of total deposits and reduce dependence on bulk deposits from 44.6 per cent to 32.6 per cent during the three-year period. This will bring down the cost of deposits to 5.9 per cent from 7.4 per cent as at December-end 2015.

The bank will contain the gross non-performing assets to below 3 per cent from 8.94 per cent as at December-end 2015 by stepping up efforts for recovery/resolution of bad loans. It will bring down the net NPAs to near zero from 4.60 per cent through intensive recovery and upgradation of accounts.

Branch expansion

To support business expansion, IDBI Bank will add 2,000 branches over the next three years, including 500 branches and 1,500 low cost banking points, and add 6,000 employees to its present count of 15,500.

When asked about his opinion on consolidation among public sector banks, Kharat said the strengthening of his bank’s balance sheet could help it takeover a bank.

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IDBI Bank will rebalance its portfolio so that the share of loans to retail, MSMEs and agriculture segments increases to 41 per cent of total loans in three years from 33 per cent now

By Sun Capital

IDBI Bank unveils Rs 20,000-crore investment plan over three years

To raise Rs. 20,000-crore capital via equity route

MUMBAI: A day after Finance Minister Arun Jaitley said the government may consider bringing down its stake in state-run IDBI Bank to below 50 per cent, the lender today announced a "transformational" plan entailing an investment of about Rs 20,000 crore over a three-year period. 

The plan includes doubling the bank's business volumes and reducing gross NPA level below 3 per cent. 

"The plan rests on business growth and our approach will be to catch up with the industry. We will double our business from around Rs 5 lakh crore in FY16 to Rs 10 lakh crore in FY19, representing CAGR of over 20 per cent per annum," Managing Director and Chief Executive Kishor Kharat told reporters here. 

However, he was quick to add the "transformational plan" has nothing to do with the Government's move to reduce stake in the bank. 

"The plan has nothing to do with whether we remain a public sector or a private sector bank because it does not talk abut composition of ownership or holding. On a standalone basis we have made this plan for transforming the bank and therefore the thrust is more on business transformation." 

Kharat said bad loan will remain an issue for some more time but expressed confidence the bank will be entering the next fiscal with a lighter stress. "Our endeavour will be to bring down gross NPA to 3 per cent and net NPA to near 0 per cent." 

For the quarter ended December, the bank's gross NPAs jumped to 8.94 per cent from 5.94 per cent in the same period last year, while net NPA rose to 4.60 per cent. 

To meet the plan, the bank is looking at raising around Rs 19,000-20,000 crore over the next three years, he said. Besides, it will be raising Rs 4,000 crore from Tier I bonds and Rs 8,000-9,000 crore through Tier II bonds. 

The city-based lender has lined up around Rs 3,000 crore of assets for monetisation, of which it is expecting nearly Rs 1,200-1,500 crore to accrue this month. 

Kharat said he would like to list the bank's subsidiaries - IDBI Capital, IDBI AMC, IDBI Federal - but no final decision has been taken so far. "Right now, we will monetise to the extent of our need only." 

The bank has also put on hold its plan to raise Rs 3,771 crore through qualified institutional placement (QIP) route due to volatile market conditions. 

"We have put the QIP plans on hold for now because the price is not right at this point in time. The investor interest during our roadshow was very good but they wanted more clarity around the impact of AQR (asset quality review). Now that things are clearer, we will wait for the price to come back up," Kharat said.

RBI allows banks to expand capital base to meet Basel III norms

Sun Capital: RBI allows banks to expand capital base to meet Basel III norms

At a time when public sector banks (PSBs) have been struggling with a low capital base, the Reserve Bank of India (RBI) has allowed banks to beef up its capital adequacy by including certain items such as property value, foreign exchange for calculation of its Tier-I capital.

The new norms revealed by the regulator suggest that banks can now include the value of the property while calculating its Tier-I or core capital base. But not the entire value of the property would be included; instead only 45 per cent of the property value would be counted.

However, this comes with caveats. For instance, the regulator has stated that the property value would be counted only if the bank is able to sell the property readily at its own will and there is no legal impediment in selling the property. Apart from this it also mandates that the valuation should be obtained from two independent valuers, at least once in every three years.

Analysts with a credit rating agency said considering revalued assets (real estate) as part of common equity may only serve the purpose of regulatory capital requirement. That hardly improves the credit profile of banks. The asset has to be ready (available) to absorb loss in times of need.

Foreign exchange, another item that was not included while calculating the capital base, can also be included. “Foreign currency translation reserves arising due to translation of financial statements of a bank’s foreign operations to the reporting currency may be considered as CET1 (common equity tier-1) capital. These will be reckoned at a discount of 25 per cent,” said the regulator.

Apart from these two, gains arising out of setting off the losses at a later date can also be counted as Tier-1 capital, up to 10 per cent. This will be a breather for the lenders, especially PSBs, which have been grappling with the issue of mounting bad loans and depleting capital base.

According to RBI sources, this move would help in unlocking Rs 30,000-35,000 crore of capital for PSBs and up to Rs 5,000 crore for private banks.  

The government estimates that state-run lenders would require Rs 1.8 lakh crore over the next four years. Banks would have the onus to raise the balance Rs 1.1 lakh crore from the market. This is because the finance ministry has promised to pump into PSBs Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19. RBI’s move on Tuesday will serve in meeting the capital requirements.

A PhillipCapital report believes this would be a big positive for PSBs as it would evade the risk of huge dilution of equity. “SBI can gain Rs 20,000 crore from revaluation of property, which can add 50 basis points to Tier-1 on account of revaluation reserves only,” it said.

According to new Basel-III norms, which kick in from March 2019, Indian banks need to maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition to a capital conservation buffer, which would be in the form of common equity at 2.5 per cent of the risk weighted assets. In other words, banks’ minimum CAR must be 11.5 per cent, which is higher than the 9.62 per cent banks are required to currently maintain.

Sun Capital Advisory Services

JP-UltraTech Cement deal: Stressed lenders to receive about Rs 4,000 crore

MUMBAI: In what could be the biggest recovery of loans from a struggling company, Indian banks will receive about Rs 4,000 crore from the sale of Jaiprakash Associates' cement units to UltraTech Cement, said three people familiar with details of the deal. 

Lenders such as State Bank of India, IDBI Bank and ICICI Bank played an active role in the sale of the cement plants at an enterprise value of Rs 16,500 crore, said the people cited above. 

Banks have agreed to transfer about Rs 12,000 crore of Jaiprakash Associates' loans to the Kumar Mangalam Birla-owned unit, they said. Indian lenders are tightening the screws on promoters who are behind schedule in loan repayments. 
The RBI has set a deadline of March 2017 to clean up banks' books. While Jaiprakash has not been declared a defaulter in the technical sense of the term, the company has been lagging behind in payments. 

"The company was not classified as NPA (non-performing asset) but their payments were not happening on due dates which shows that they were strapped for liquidity," said BK Batra, deputy managing director of IDBI Bank. "Therefore, we exerted pressure on the company to sell its entire cement unit to reduce debt. The company has been cooperating by putting up the best of assets on block to reduce debt." 

Banks are being pressed by the Raghuram Rajan-led RBI to clean up their books after stressed loans in the system touched a high of 11.3% of the total. More loans could be classified as rotten and the demand for capital from the government could rise. Analysts estimate that more than Rs 2 lakh crore may be needed in the next three fiscal years to capitalise banks. 

There was a significant increase in bank credit to Jaiprakash Associates in the last three years. Its share in the firm's total debt of more than Rs 29,000 crore at the end of March 2015 stood at 82%, up from 58% in 2012, according to a Morgan Stanley report. 

ICICI's total exposure to the group was at Rs 6,624.2 crore, or 32.8% of the total, at the end of FY15, up from Rs 3,615.3 crore three years earlier. Under the terms of the UltraTech transaction, lenders won't be taking any haircuts even as the deal has been struck at a time when corporates can push lenders to write off a part of their loans to arrive at better valuation. 

Transferring some of their debt to Ultra-Tech means that lenders now have exposure to a business group that's regarded as being financially more sound than many others, thereby reducing the risk of defaults. They can also assign lower capital on the loans as UltraTech is a better rated company. The riskier the borrower, the higher the capital assigned on the loan. 

Among the major financially stressed conglomerates, Jaiprakash Associates has been relatively more cooperative with banks. Others have been delaying asset sales in the hope of an economic recovery and increased cash flow to service debt or, in some cases, bargain for writeoffs. 

The central bank recently identified about 150 companies that are potentially defaulters but banks were yet to declare them as such. More companies could be putting their assets on the block as lenders go after bad loans.

By Sun Capital

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital