Why did banks ‘over-finance’ road projects, asks Parliamentary panel

SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

Observing that loan disbursed by banks in excess of an estimated project cost is “strange”, a parliamentary panel has expressed concern over a large chunk of about Rs 75,000 crore of loans extended to the road sector turning bad. In particular, the panel has raised questions about huge loans advanced to Jaypee Infratech turning into NPAs.

“Some of the banks have given information on total loan (Rs 74,088 crore) given to the road sector… for IDBI, the NPA percentage is as high as 52 per cent of loan disbursed for the road sector. The committee wants to know the reason why this huge amount has become NPA, that too to a single concessionaire, Jaypee Infratech Ltd,” the panel chaired by Kanwar Deep Singh said in its latest report.

Seeking full details of the project awarded to Jaypee, the 33-member standing committee on transport further observed that State Bank of India has lent Rs 19,502 crore out of which Rs 1,986 crore has slipped into NPAs. SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

The panel said, “The committee finds it strange as to how the concessionaire who has got a project for Rs 1,000 crore gets Rs 1,400 crore for the same project.” It also asked: “Why the concessionaire has been given a free hand to get the bank’s loan as per their wish?” It instructed NHAI to keep a watch on the excess loan amount obtained by the developer.

Incidentally, former road transport and highways secretary Vijay Chhibber has remarked that aggressive lending by banks which were “happily over-financing even non-serious highway players without assessing risks has virtually killed the sector”.

He told media, “The concessionaires and bankers are not realising that we are reaching a stage of impatience, and people who are users of these roads are not going to be waiting anymore.” Projecting that total NPAs of Rs 2.6 lakh crore may go up to Rs 4 lakh crore because of defaults, the panel recommended that banks be empowered more to make recovery of bad debt.

Asking the government to consider empowering the banks adequately to make recovery of bad debt easier, it said, “For example, in the case of a default, the banks may be allowed to take over the entire company.”

It also noted SBI’s contention that all approvals from statutory authorities and clearances from government agencies should be obtained before a particular project is sent for bidding. “Another area of discord is the project cost estimated by NHAI and the concessionaires, which results in lending delay by financial institutions,” the committee said.

$1 billion fund in the works for stressed assets, renewable projects: Piyush Goyal

Piyush Goyal

The power ministry plans to set up two funds of $1 billion each to enable alternative financing options for stressed power assets and renewable energy projects. The two funds have been proposed under the ambit of the National Investment and Infrastructure Fund (NIIF). 

"NIIF is the fund of funds within which we will set up a sub-fund which will focus on renewable energy projects and give investment support for faster ramp up of renewable energy. It is under our active consideration and we may launch it in the near future," power minister Piyush Goyal told ET in an interview. "We are also in dialogue with certain bankers to see if we could look at a stressed power asset fund. It may take us some more months to put its framework in place."

 
Asked about the size of the funds, Goyal said, "Each of these funds could easily be of the size of $1 billion." The government set up the Rs 40,000 crore NIIF in December as an investment vehicle to fund commercially viable greenfield, brownfield and stalled projects. The power ministry's renewable energy fund will be seeded with initial capital from a few state-run companies and will be driven largely by the private sector. 

"It will be run and managed by an investment manager who will be chosen through international bidding. We would like to keep the entire fund very professionally managed - something like a Temasek or a GIC model. We have the entire framework in place. We have also got investment commitments of REC, PFC and NTPCBSE 0.76 % already lined up. This fund can be launched quickly," Goyal said. Temasek and GIC are Singapore government-owned investment firms. 

Finance Minister Arun Jaitley had sought investment from Singapore in NIIF at a meeting on Friday with visiting Deputy Prime Minister Tharman Shanmugaratnam. 

Goyal said the Centre is working on a mega investment plan for the power sector that includes extending investment support to the tune of Rs 1.1 lakh crore to states under the Deen Dayal Upadhyay Gram Jyoti Yojana and the Integrated Power Development Scheme. Additional investments worth over Rs 1 lakh crore will materialise through the implementation of four planned ultra mega power projects of 4,000 MW capacity each. 

Goyal said the recent rationalisation of rail freight rates for coal transport and the cut in prices of higher-grade coal will help to ease costly imports of the fuel. "We have also regulated coal output in the past few months, resulting in some depletion of stocks at coal mines and power stations," he said. 

The minister said he hoped distribution utilities in Haryana would start reporting profits next year and Rajasthan discoms would turn profitable in 2019 with the implementation of the Ujjwal Discom Assurance Yojana scheme. 

The minister said he hoped distribution utilities in Haryana would start reporting profits next year and Rajasthan discoms would turn profitable in 2019 with the implementation of the Ujjwal Discom Assurance Yojana scheme. 
He said controversy over electrification of Nagla Fatela village in Hathras district of Uttar Pradesh was a "blatant attempt by the state government at misleading the centre." 

RBI measures need more heft to help corporate bonds

Steps such as granting more freedom to insurers and retirement funds to buy securities are needed, say investors

 The central bank’s latest measures to deepen the corporate bond market may not be enough and may require more steps including granting more freedom to insurers and retirement funds to buy the securities, investors say.

On Thursday, the Reserve Bank of India (RBI) announced a set of measures to encourage companies to borrow from the bond market, allowed lenders more freedom to give credit enhancements to lower-rated issuers, permitted foreign investors to trade directly in bonds and introduced a repurchase facility for corporate bonds. 

While these measures will have a positive effect on turnover and transparency in pricing for corporate bonds, more steps may need to be taken to deepen the market to the desired level, bond market participants said.

“There is no magic wand for the bond market and things cannot happen overnight. This is a start and many more steps are required,” said Ananth Narayan, regional head of financial markets for South Asia and Asean (Association of Southeast Asian Nations) at Standard Chartered Bank. 

For instance, RBI’s rule to make bank loans expensive for so-called specified borrowers will prod these companies to meet their funding requirements through corporate bonds. Specified borrowers are companies that have aggregate sanctioned credit limit of more than Rs.25,000 crore from banks in fiscal 2018. But to soak up this extra supply of bonds, the current set of investors may prove inadequate. 

What is required to create demand for this supply is allowing insurance companies and provident funds more leeway to buy bonds. 

“The rules of the other regulators (such as insurance, pension, provident fund) have not changed. What is required is the enhancement of buying power of the likes of Life Insurance Corp. of India and Employees Provident Fund Organization,” said a banker, requesting anonymity. 

Insurance firms, provident and pension funds are barred from buying bonds rated below AA. Also, the aggregate investment of these entities is also limited by respective regulations. 

RBI has, however, allowed banks more freedom in giving partial credit enhancements, a step that will help improve the rating of corporate papers of these companies and consequently improve their ability to access the bond market. Bond traders believe this is one of the most effective measures announced by RBI. 

Credit enhancement is essentially a way to improve the credit rating of a bond issue. This is done by structuring the bond sale in such a way that the bank provides a source of assurance or guarantee to service the bond. 

“The easing of partial credit enhancement for banks is a positive and will help low-rated companies to access the market easily. Of course, there is a price element to it,” said Sujata Guhathakurta, head of debt capital markets at Kotak Mahindra Bank. 

However, RBI still stipulates that a single bank cannot give credit enhancement of more than 20% of the issue size and enhancement of up to 50% of the issue size can be given by the entire banking system. 

Bond market participants have long complained about a narrow investor base, especially for low-rated bonds. With more freedom to give credit enhancements, banks will help such issuers get investment interest from long-term investors such as insurance companies and provident funds. 

In fiscal 2016, firms raised a record Rs.4.6 trillion by privately placing bonds, according to data from the Securities and Exchange Board of India. Fund raising by bonds has been rising every year since fiscal 2014. 

Another measure by RBI which aims to make it easier for banks to raise capital by issuing Tier-I and Tier-II bonds to overseas investors may not benefit banks that are in dire need of funds.

Moody’s Investors Service said in a note dated 26 August that although this opens up an alternate funding route for banks, overseas investors will be reluctant to buy Tier-I bonds given the lack of liquidity of these papers in the domestic market. 

“Banks’ capital requirements are large with the masala route providing an alternative. That said, these bonds are not an end in itself. Credit-challenged banks will find it difficult to raise funds through masala bonds,” said Amrish Baliga, head of structured origination at Deutsche Bank’s India unit. 

In a nutshell, the measures ease the fund-raising process for many companies and even banks, but not for all of them. The biggest measure is still awaited: RBI accepting corporate bonds as collateral in its liquidity operations. In its Thursday release, RBI said it was “actively considering” it.

Complacency in global markets

If you are a global investor, the responsible thing to do is cut risk and raise cash, no matter how painful it may be in the short term

Markets, globally, are showing signs of extreme complacency. Volatility has collapsed across markets. The past 30 days in US markets have seen the least volatility of any 30 day period for more than 20 years. Only on five days in the past month have we seen a move of more than 0.5 per cent in either direction for the S& P 500. Realised volatility for the S& P 500 has been lower only a dozen times in the past 50 years. We have seen this drop in volatility despite Brexit, the coming US elections in November, the upcoming Italian constitutional referendum and the possibility of helicopter money and other unconventional monetary experiments. This does not look like a low- volatility environment does it? Is there truly no reason to worry on any of these events or factors? There seems to be tremendous faith that central banks have the back of investors and will not allow large losses. The danger is that this complacency is not about markets, but rather the power of central banks and their ability to prevent a sharp downturn. It is quite astonishing that almost every asset class is up after Brexit! Most investors have taken it (Brexit) as a positive as it gives central banks even more of an excuse to continue or even accelerate their extreme monetary accommodation.

While we have this veneer of calm and low volatility in markets, below the surface, cracks are starting to appear. In equity markets, valuations seem high on certain longer term measures and earnings are under pressure. However it is in the fixed- income markets where there are more worrying signs. There are clear signs of dysfunction. Old rules of thumb and correlations are breaking down and most of the old hands are all at sea as to how to navigate this new world of never- ending monetary accommodation.

At turning points, the fixed income markets are normally more sensitive to change, and are a leading indicator for equities. One ignores their message at one’s own peril.

While clearly macro factors have become more important these days, should they have greater relevance than at the height of the financial crisis? Work done by the quant team at Citibank seems to indicate that macro factors today explain about 80 per cent of equity market variance. Macro is currently overpowering the micro fundamentals. This is also leading to herd- like behaviour by investors, as there is little micro- level stock or security- specific market differentiation.

Credit markets no longer seem worried by defaults. S& P has pointed out that defaults year- to date have equalled last year’s total and are at the highest run rate since 2009. Normally, such acceleration in defaults would have led to a widening of spreads, as credit risk gets priced in, but in 2016, we have seen a negative divergence between spreads and default rates.

AKASH PRAKASH

There has also been a strong positive relationship between corporate spreads and leverage. Higher leverage at a company, leading to higher credit costs, perfectly rational. This relationship has also broken down.

It also seems as if policy uncertainty no longer matters. Citibank measures various policy uncertainty indices; they have historically had a very strong correlation with spreads, again perfectly rational. Yet, today, even this relationship has broken down. With policy uncertainty nowhere near as low as current spreads would seem to imply.

Other long- held relationships have also broken down in the fixed- income markets. Drops in inflation expectations used to be bad news for spreads, which has reversed. Credit spreads also were negatively correlated with rate movements. Good economy was good for spreads but bad for rates and vice- versa.

This has now reversed to whatever is good for rates is positive for equities and credit markets as well. In the past, whenever markets all moved together, it would be in response to some macro event and volatility would rise sharply. Today, all markets are correlated, but volatility has shrunk.

Global liquidity seems to be the reason all these relationships are breaking down. With negative rates pervasive across sovereign markets, this is also changing across asset relationships. The markets seem to no longer be heterogenous, everyone is on the same side and looking at the same central bank put, playing the short- term liquidity. Without heterogeneity in markets, short term liquidity overpowers everything else.

With all these relationships breaking down it is no surprise that many investors are confused, doing badly and very worried. I have very rarely seen so many top quality investors all so bearish, across all asset classes, at the same time. Whether it be Soros, Druckenmiller, Singer or others, most of the people with really good long- term records are asking you to exit the markets entirely.

As is typical, markets will keep us guessing, and test the conviction of the bears. I would not be surprised to see continued market gains globally driven by the liquidity. However, be rest assured, this will end badly, and when it does no- one will have time to react. The prudent thing would be to slowly take risk off the table, knowing that one may hurt returns in the short term, but preserve capital for the inevitable bust. If you are a global investor, the responsible thing to do is cut risk and raise cash, no matter how painful it may be in the short term.

India is in a structural bull market, but will also correct if global markets turn turtle. Any correction in India remains a buying opportunity.

Investors look beyond e-commerce

Once the darling of foreign investors, e-tailers have seen a slump in funding activity

With e-commerce businesses losing steam, investors are increasingly looking at opportunities in start-ups in areas other than online retailing. The fresh investments in instant messaging application Hike and buyout of digital advertising firm Media.net are just two of the many such instances of this trend.

According to several industry experts and investors, the sentiment is high for ventures in the fintech, data analytics, B2B commerce and artificial intelligence sectors.

About 44 per cent of investments this year has gone into the fintech space.

Past glory

In 2013-14 e-commerce was the hottest property, with the sector grabbing about 23 per cent of the total $5.2-billion funding in about 300 deals. Of all the funding that came into the e-commerce sector, about 95 per cent went to Flipkart and Snapdeal.

However, things have changed, and investors are pumping in smaller amounts in more number of companies. In 2015, funding further increased to $9 billion in about 1,005 deals, as per various industry reports. New sectors that emerged during this period were transportation, mobile-tech, ad-tech, fintech and food-tech.

Recent examples of non-e-commerce investments include Warburg Pincus investing $125 million in logistics start-up Stellar Value Chain, Creation Investment investing $25 million in fintech start-up Capital Float and Sequoia pumping in Rs. 100 crore in health-tech venture 1mg

Once the darling of foreign investors, e-commerce ventures (Flipkart, Snapdeal, Myntra, Zomato, among several others) have seen a slump in the funding activity in the last 12-18 months due to issues around poor revenue growth, high cash-burn, valuation game, and their inability to generate profits and create a sustainable business. This year also saw the highest number of e-commerce ventures downing their shutters (Peppertap, TinyOwl), which is also a major reason for investors looking away from such ventures and focusing on start-ups with innovative solutions.

As per a recent Tracxn data, about 50 start-ups will soon enter the Unicorn club ($1-billion valuation) in the next few months, and of this only 10 are e-commerce players with the rest being from sectors such as fintech, analytics, health-tech and logistics.

Apoorv Ranjan Sharma, co-founder and President, Venture Catalysts, is of the view that the e-commerce sector was over-funded.

He said that at least 14 established players in India are in either the consolidation or the restructuring phase.

“They are only few investments happening in e-commerce; only when there is a technology twist to it as there is a need of massive differentiators. Most of the players have weak revenue models.”

A mature market

Serial investor Sanjay Mehta said the e-commerce market is already maturing and hence there is little scope for investors to get an upside on these investments. Between 2005 and 2015, he said, the number of e-commerce venturesdoubled and just 2-3 companies attained their pole positions, thus leaving little scope for investors to look at those ventures.

Mehta said the trend of investing in non-e-commerce start-ups began mid last year. 2015 saw a record $4.8-billion investment by VC funds in India, including $2.9 billion in e-commerce and technology businesses; but this year is all about start-ups with strong revenue models and high returns.

Harish HV, Partner at tax and advisory firm Grant Thornton, is of the view that the whole investment process is cyclic and that investors will keep at innovative companies with differentiators. He said it is too early to say that e-commerce will not bounce back.

     RECENT INVESTMENTS IN NON-E-COMM FIRMS

• Xiaomi invested $25 million in ad-tech venture Hungama Digital
• Bertelsmann India invested $32 million in Lendingkart
• Mobile wallet Mobikwik raised $50 million from Japanese and Taiwanese corporate firms
• Ford invested $25 million in self-driving car-rental start-up ZoomCar
• Online loan facilitator Rubique raised $3 million in series A round from Kalaari Capital
• Automobile platform Droom received $29 million from Silicon Valley investors
• Payment wallet TranServ raised about Rs. 100 crore from investors led by Micromax Informatics and IDFC Asset Management Co

UPI just turned your phone into a bank

Customers of 21 banks can soon use Unified Payments Interface app to send/get money

In a push to a cash-less economy, National Payments Corporation of India’s Unified Payments Interface is ready and customers of 21 banks will in a day or two be able to send and collect money via a smartphone.

A brainchild of RBI Governor Raghuram Rajan, the UPI, which works on single click two-factor authentication, will allow a customer to have multiple virtual addresses for accounts in various banks. The UPI app of 19 banks will be available on Google Play Store in two-three working days for download. The details of the service will be available on the websites of the 21 banks. The new payments interface will also provide an option for scheduling push and pull transactions, such as sharing bills among peers.

One can use the UPI app instead of paying cash on receiving a product from an online shopping website and also for naking miscellaneous payments such as utility bills, school fees and over-the-counter/barcode-based payments. To ensure privacy of customer data, NPCI said, in a statement, that there is no account number mapper anywhere other than the customer’s own bank. This means customers can freely share their financial address. A customer can also use the mobile number as the user-name instead of a virtual address like “1234567890@xyz”.

AP Hota, MD and CEO, NPCI, said: “This is a success of enormous significance. Real-time sending and receiving money through a mobile application at such a scale on interoperable basis had not been attempted anywhere else in the world.”

After assessing the pilot run, the RBI had accorded final approval for public launch of the product. NPCI had decided that only banks with a thousand pilot customers, 5,000 transactions and success rate of around 80 per cent would be permitted to go live. Such a threshold criteria helped banks to refine their systems and procedures.

Banks on the bandwagon

Arun Tiwari, Chairman and Managing Director, Union Bank of India, said: “...Union Bank in association with NPCI is one of the first public sector banks to launch this (UPI) product. This mobile app can be used by both our bank’s customers and non-customers.”

1Q’FY17 BANKING PERFORMANCE REVIEW

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks

The dominant theme of conversation among banking sector analysts these days is whether the worst is over for India’s state-owned banks that roughly has 70% market share. I spoke to four of them last week. While two analysts say that these banks have been to hell and back, the other two are sceptical; according to them, some more pain is left for many banks. I am not naming any one of them as we spoke on condition of anonymity.

The answer lies in the numbers—more than the quantum of bad loans that each bank has piled up, the growth in the pile over the past three quarters ever since the Reserve Bank of India (RBI) asked them to clean up their balance sheets. Between August and December 2015, the RBI inspected the loan portfolios of all banks with a fine-tooth comb and asked them to set aside money for three kinds of loans—non-performing assets (NPAs) not recognized yet by them; loans given to projects where the dates of commencement of commercial operations had passed but the projects have failed to take off; and restructured loans.

The banks were directed to provide for the first two types of loans in two phases in the December and March quarters of fiscal year 2016, at least 50% each. For the restructured loans, they were asked to make 15% provision in six quarters, 2.5% each, till March 2017.

This simply means all banks should be through with recognizing NPAs and making provision for them by March 2016 even as they will continue to provide for their restructured assets till March 2017, by when the entire clean-up exercise gets over. Has this happened?

Bank of Baroda, which claimed to have bit the bullet in the December quarter itself, made a massive provision ofRs.6,165 crore and posted a Rs.3,342 crore net loss. It did an encore in the next quarter and made an even higher provision of Rs.6,858 crore and reported a marginally narrower loss of Rs.3,230 crore. In the June quarter, its provision against bad loans dropped some 71% to Rs.2,004 crore even as its gross NPAs rose 6% to Rs.42,992 crore.

This is more than double of the pile of bad assets the bank had a year ago (Rs.17,274 crore) but the pace of growth in NPAs has definitely slowed. In percentage terms, its gross NPAs rose from 4.13% in June 2015 to 11.15% now and after provisioning, net NPAs are 5.73%.

State Bank of India (SBI) had made close to Rs.8,000 crore provisions in the December quarter and an additionalRs.13,164 crore in March. In June, it made 44% less provision as its gross NPAs rose marginally. In the past one year, SBI’s gross NPAs rose Rs.56,421 crore to Rs.1.15 trillion, but accretion of new bad loans is certainly not as much as we had seen in the past three quarters. In percentage terms, its gross NPAs rose from 4.29% of loans in June 2015 to 6.94% in June 2016 and after provisioning, the net NPAs are now 4.05%.

Among large banks, Punjab National Bank, Bank of India and Canara Bank seem to have got a hang of their bad loans even though their level of NPAs vary, but for quite a few banks, we have not seen the worst yet. For instance, take the case of Indian Overseas Bank, saddled with more than one-fifth of its loan book turning bad. Its gross NPAs had risen 17% in the December quarter and 33% in March, fromRs.22,672 crore to Rs.30,049 crore. On top of that, in the June quarter, it has risen a further 13% to Rs.34,000 crore.

There is no respite from rising bad loans for a few SBI associate banks too. State Bank of Travancore had refused to recognize growth in NPAs in the December quarter, but had shown some aggression in March when its gross NPAs rose some 23%. However, that was not enough. So, in the June quarter, the pile doubled to Rs.6,401 crore.

Data compiled by Mint Research’s Ravindra Sonavane shows that State Bank of Bikaner & Jaipur too was slow in admitting the problem. Its gross NPAs rose around 5% and 17% in the December and March quarter, respectively, but in June, it has risen by more than 27%, on a higher base. State Bank of Mysore too has shown around 19% growth in bad loans in the June quarter after a 34% growth in the December quarter and another 25% growth in the March quarter. All of them will be merged with the parent.

The tale of woe continues for a few other banks such as Oriental Bank of Commerce, Allahabad Bank, Bank of Maharasthra and Andhra Bank. In percentage terms, Uco Bank and United Bank of India have higher NPAs than these banks, but both have added less bad assets in the June quarter than the preceding quarter.

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks. Axis Bank’s gross NPAs have risen 57% in the June quarter and that of Karur Vysya Bank, little more than 37% (after a drop in two successive quarters), while ICICI Bank has managed to contain the growth at a little less than 4%.

At a recent banking seminar, RBI deputy governor S.S. Mundra had said for some banks, it looks like the worst is over but some others are still struggling and “it is still work in progress”. The banks are in the business of lending and part of the loans will always go bad for a variety of reasons, including inefficient credit appraisal and monitoring, but shoving them under the rug is not a good idea.

The continuous rise of bad loans in the June quarter for some banks and a sudden surge for a few has two explanations. One, they refused to reveal the real picture in December and March; and, two, more loans turned bad in June, something the managements had not anticipated. Even if the second premise is true, it’s not a good sign when most banks have virtually stopped giving fresh loans.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.