Capital Float looks to expand to over 100 cities

Capital Float plans expansion in over 100 cities as it bids to offer loans for small brick-and-mortar store owners for a bigger share of the growing financial lending market

SME lending platform Capital Float, run by Zen Lefin Pvt. Ltd, is looking to expand its reach to over 100 cities and venture into newer categories like loan for small brick-and-mortar store owners, as it eyes a bigger share of the growing financial lending market in the country.

“We are expecting a 10 times growth by the end of March 2017, adding 15,000-20,000 customers (borrowers) cumulatively across all the loan products segment,” said co-founder and managing director Sashank Rishyasringa.

The company has offered loans to 3,000 borrowers until now.

Founded in 2013 by Rishyasringa and Gaurav Hinduja, Capital Float has disbursed loans amounting to over Rs.400 crore.

A technology-led non-banking financial company (NBFC) underwrites unsecured loans online to start-ups, business-to-business (B2B) providers, manufacturers and e-commerce merchants through its own books.

It currently gets 33% of the business from online vendors.

With the aim of extending its focus to small mom-and-pop or kirana shops along with micro small and medium enterprises (SMEs), the company has already made a mobile application that approves loans in less than eight minutes.

Loans to kirana shops could be in the range of Rs.50,000-100,000.

India currently has minimal lending options for small businesses. These businesses are largely ineligible to receive any financing from banks or NBFCs.

Traditional banks ask for collateral, financial statements and bank statements and do not offer small ticket size loans.

Capital Float is trying to solve the problem by lending money to small businesses that might not have collateral, significant revenues or years of experience.

The company offers an alternative for these small traditional business houses that have largely banked on chit funds and local money lenders to borrow money from.

Identifying a need to extend credit to such under-served, Rata Tata, Vijay Kelkar (former finance secretary and chairman of the National Institute of Public Finance and Policy) and Nandan Nilekani (co-founder of Infosys Ltd and the architect of Aadhaar) will soon start a microfinance institution named Avanti Finance, Mint reported on Monday.

Capital Float, which is currently focused on offering loans to small and medium merchants in Tier 1 and metro cities, is now looking to concentrate more on tier 2 and tier 3 cities. “I expect a significant contribution of these cities (tier 2 and tier 3) to the company’s growth, which could be around 33% by next year,” Rishyasringa added.

The loan products currently include working capital finance to online sellers for 90-180 days, long-term finance to merchants for six months to three years, bill discounting and taxi financing (loans for cab drivers), among others.

Broadly, the company has partnered with e-commerce websites, payment gateways, cab services, amounting to 50 partnerships, including with Snapdeal, Shopclues, Paytm and Uber to offer loans to a large pool of small businesses and merchants who work with these partners.

The company is also eyeing profitability in the next 12 months on the back of a robust demand for loans by SMEs.

To enable faster disbursal of loans, the company launched its mobile application two to three months ago, which is privately available to businesses through partners.

While loan applications were initially accessible only through the website, Capital Float is now seeing that mobile application and mobile browsing has grown to contribute 50% of loan applications, said Rishyasringa.

The mobile application is built on four technology pillars of India Stack—Aadhaar-based authentication, an electronic process of know-your-customer (e-KYC), electronic signature (e-Sign) and unified payment interface (UPI).

India Stack is a set of publicly available application programming interface (API)—that enable companies to build applications and businesses based on these four pillars.

The fin-tech company receives a loan enquiry every three minutes, said Rishyasringa. An inquiry implies a prospective borrower initiating a loan application process.

While the company remains stringent in extending loans, by approving 20% of the applications, total loan disbursal amounts to an average of Rs.70 crore per month.

Additionally, the average loan amount extended to a merchant is Rs.10 lakh at an interest rate of 16-19%, for a tenure of between 60 days to 2-3 years. The company maintains and targets to continue to maintain a non-performing asset (NPA) proportion of less than 1% of its total loan amount.

NPA is the proportion of the amount of bad loans to the total amount of loan disbursed.

Backed by George Soros’s Aspada Investment Co., SAIF Partners and Sequoia Capital, the company has raised $42 million, including $25 million in series B round of funding in May.

Other players in this segment that Capital Float competes with are Capital First Ltd, NeoGrowth Credit Pvt. Ltd and SMEcorner.in (Amadeus Advisors Pvt. Ltd). In July, NeoGrowth raised $35 million from IIFL Asset Management, Accion Frontier Inclusion Fund managed by (Quona Capital) and Aspada Investments, along with other investors

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.

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

Investors come up with alternative funding plans for crisis-hit realtors

With developers hit by weak sales, investors offer innovative options to replace plain equity and debt lending

Private equity funds and non-banking financial companies are offering various modes of lending and repayment to real estate developers struggling with weak sales for the third consecutive year.

Innovative forms of investments are replacing plain equity and debt lending, with investors lining up special situation funds, uniquely-themed funds and construction finance.

ASK Property Investment Advisors, which made high risk-high return equity investments in the last seven years, is preparing to raise a special situation fund this year, which will invest equity-type (but not pure equity) money in residential projects for completion of development, or to replace existing high-cost debt and stay invested for 3-5 years.

Along with Rs.1,500 crore of pure equity dry powder, ASK believes there is need for a separate pool of capital for projects at an advanced stage.

“Real estate is passing through a difficult time, with project delays and repayment pressures. The need of the hour is to have different kinds of capital and funds are tweaking their offerings to fill in those funding gaps for developers,” said Sunil Rohokale, chief executive and managing director of ASK Group.

From the pure equity funds of 2005-06, structured debt and mezzanine debt instruments took over in the last few years, with PE funds and NBFCs demanding higher collateral and fixed repayments on a quarterly basis.

However, this put pressure on developers to service debt, as cash flows continued to remain tepid—it was not sustainable. Following this, PE funds and NBFCs started tweaking lending norms, offering more refinancing and repayment flexibility.

With a lot of liquidity chasing a few good projects, this also led to intense competition. PE funds moved towards debt-like structures.

According to Rajeev Bairathi, executive director and head of capital markets at Knight Frank India, NBFCs have evolved too. “From lending based on existing cash flows of a project, NBFCs are now offering acquisition financing to buy land parcels, construction finance as well funding for commercial office projects, different from simple lending to residential projects,” Bairathi said.

Altico Capital India Pvt. Ltd, an NBFC from Asia-focused investor Clearwater Capital Partners LLC, plans to offer construction finance and lend to commercial office projects.

Banks offer construction finance at 11-12%, while NBFCs charge a bit more, but the latter offer more flexible capital and an extended repayment periods.

“NBFCs are now well-capitalized and can compete with banks, by giving construction finance. We are also looking to offer construction finance but with established developers and also lend to office projects because there is a lot of potential in the office sector. We will do early-stage financing in residential and office projects to buy land and in pre-leasing stage respectively, and lend to projects in an advanced stage by facilitating transactions, in which we collect the last payments from customers,” said Altico Capital’s chief executive Sanjay Grewal.

Piramal Fund Management Pvt. Ltd, which introduced innovative financial products such as an apartment buying fund, Mumbai Redevelopment Fund and began construction financing early on, plans to focus on equity investments once again.

This year, it will execute a new strategy for equity investments in land opportunities for investors, to generate superior returns by investing in plotted land development. The firm is in the last leg of signing a $300 million offshore platform with a large Canadian pension fund and will also raise a second redevelopment fund. It also started deploying Rs.5,000 crore to fund commercial office projects this year, and introduced a Rs.15,000 crore line of credit to some of the top developers.

“When we started lending at 18-20% a few years back, it was opportunistic but not sustainable. We realized that developers need to be given time to repay, till the market revives. It is also important to have multiple pools of capital to service different kinds of financing needs but equity remains the need of the hour in the current scenario,” said Khushru Jijina, managing director, Piramal Fund Management, which has Rs.32,000 crore of assets under management, including equity investments and commitments made but not yet disbursed.

Customization is key while structuring transactions and each transaction is adapted to the needs of developers.

“Both equity and debt are offered through different customized products, but we think we will see more equity products coming in. With RERA (Real Estate Regulation & Development Bill) being implemented, investors will have more confidence in developers because there will be delivery timelines for projects, repayments,” said Chintan Patel, partner, deal advisory, real estate and hospitality, KPMG India.

Century Real Estate Holdings Pvt. Ltd, which raised Rs.720 crore from Piramal and Altico last year and an additional Rs.520 crore from Piramal in 2016, got an opportunity to refinance high-cost debt, use some of it as construction finance and to make land payments as well.

“These transactions offered much more flexibility in the usage of capital, which banks don’t offer even if it is cheaper. Because there are different kinds of capital involved, the blended cost of funding automatically comes down,” said Century managing director Ravindra Pai.

“They are under a little pressure in terms of margins, but if they want more margins, they have to take more risks,” he said.

Not only different capital structures, but repayment structures are also customized based on the risk-return perspective.

Repayment issues have cropped up, but funds and NBFCs have either refinanced their own loans to projects or given developers more time to service debt.

Balaji Raghavan, chief investment officer, real estate, IIFL AMC Ltd, said repayment structures are also being customized for each transactions, and instead of fixed repayment schedules, they are being matched with cash flows anticipated from a project.

“We are optimistic about investments in real estate over the next 24 months and are looking at substantial growth in India across investment platforms we have built and capitalized over the last 11 years,” said Rohan Sikri, senior partner, Xander Group Inc.

In the last two years or so, Xander has invested about $250 million mostly in residential assets through the preferred equity route. Separately, Xander Finance, which does senior secured debt transactions, has executed almost 50 transactions adding up to Rs.1,800 crore.

The question is, if the health of the sector doesn’t improve anytime soon, how long will the cycle of financing and refinancing help developers sail through this crisis?

S. Sriniwasan, chief executive of Kotak Realty Fund, is cautious and “hasn’t deployed any money in the last 18 months or so and is in wait-and-watch mode”.

Kotak Realty Fund raised $250 million from offshore institutional investors this year, to make equity investments in residential projects, at a time fund managers wary of equity risks extend only debt finance.

Make corporate governance a common cause: Amit Tandon

Both companies and investors need to focus on corporate governance to promote the health and well-being of companies

Amit Tandon

In America, the 5,000 or so public (or listed companies) account for a third of the employment and half of the capex. If the US is to continue to sit at the high table “(we) think it essential that our public companies take a long- term approach to the management and governance of their business (the sort of approach you’d take if you owned 100 per cent of a company)”. Clearly the health and well- being of listed companies is important for nation building.

With this objective, the chief executive officer (CEO) of some of the largest asset management firms (Blackrock, Capital, Vanguard, State Street, J P Morgan Asset Management and T Rowe Price), a public pension plan (CPP), an activist investor (ValueAct), as well as a few CEOs of some large publicly- owned companies (J P Morgan Chase, Berkshire Hathaway, GE, Verizon and General Motors), last month presented aseries of corporate governance principles for listed companies, their boards and shareholders. Called the “Commonsense Corporate Governance

Principles”, [www.governanceprinciples.org] these are a “framework for sound, long- term- oriented governance”.

Most noteworthy about this exercise is companies and investors coming together to jointly focus on governance. For long, markets have assumed that since corporates need to adhere to these, they alone are responsible for their drafting and implementation. But companies need money that investors have, and investors need well- governed companies to invest in.

The applicability of the principles spelt out here is universal and not in any way linked to the regulatory framework.

While parts of it are US- specific, for the most part these principles can be applied everywhere, including in India, as these are not overly prescriptive in how to achieve goals. An example: A company should not feel obligated to provide earning guidance — and should determine whether providing earning guidance for the company’s shareholder does more harm than good.

In the US, management and ownership generally tend to be separated. As aresult, the dialogue between a company’s shareholders and its management is through the board. Consequently, three sections in the document deals with the board: Board of directors — composition and internal governance, board of directors’ responsibilities and later in the document, board leadership (including the lead independent director’s role). These talk about not just the composition, election, compensation and effectiveness of the board but also about its responsibilities focusing on the directors’ communication with third parties and setting the board agenda. In India, as owners tend to manage their business, the focus on the board is relatively low. However, companies and shareholders are doing themselves a large disservice by not holding Indian board sufficiently accountable.

The other items included are:

Shareholder rights: This deals with proxy access and dual class of shares. I have written about dual class shares earlier for this newspaper (“Governance norms: Direction or diktat”, July 21). While the document highlights that dual class is not the best practice, it recognises that there might be circumstances when such shares have to be issued. In such situations, it’s desirable to insert triggers when dual shares will cease to exist. It makes a strong case for all shareholders to be treated equally in any corporate transaction — a clear reminder that there is no place for payment of non- compete fees.

Public reporting: This focuses on transparency around financial reporting but also encourages commentary around long- term goals being “disclosed and explained in specific and measurable ways”. One of the strengths — and possibly, weakness as well — of the Indian corporate sector is family ownership, which enables owner- mangers to take a generational view of their business.In this context, the recommendation that a company should take a “longterm strategic view, as though the company were private” should resonate with corporate India.

Given that listed companies fall under the tyranny of quarterly reporting, in a separate missive the group has questioned the need for quarterly reporting: but corporations still have some way to gain unbridled investor trust in India, so it’s not certain how this one will go down.

Succession planning: Clearly, this is one of the most important decisions the board will take. Unfortunately, the principles enumerated here are sketchy.Nevertheless, the lesson for Indian companies is that boards need to continuously plan succession. More so, because most companies in India are ownermanaged, boards tend to have a dynastic approach that tends to favour the bloodline. Indian boards need to learn from their global counterparts and prepare for eventualities, including protecting the company from its owner.

Compensation of management: There are some interesting points regarding CEO compensation. First, that a substantial portion, that is 50 per cent or more, should be in the form of stock options or their equivalent; second, that these should be made at a fair market value or higher, with “particular attention given to any dilutive effect of such grants on existing shareholders”.In India, while owner- mangers do not get stock options, they often forget their wealth is tied to their shareholding in companies and extract huge salaries for themselves. Regarding ESOPs to employees, the prevailing trend is that if the share price has fallen, the exercise price needs to adjust: this only goes towards protecting the downside risk of employee wealth and does not become an incentive for value creation. Independent directors are ignoring that shareholders are starting to vote against egregious pay and ESOP re- pricing, leading to these getting voted down and red faces in the boardroom.

Given their ownership of business, asset managers’ role in corporate governance is now critical. They have the ability to influence behaviour and shape outcomes. Therefore, asset managers must act thoughtfully. They must be proactive and raise issues with companies as early as possible, and be constructive in their approach.

Considering the heft of the institutional investors signing on these recommendations, Iexpect theseto gain currency across all markets, including India. And, in adopting them we, too, can hope to achieve what the signatories expect in the US. “(Our) effort will be the beginning of a continuing dialogue that will benefit millions by promoting trust in our nation’s public companies.

Standard Chartered to sell over $1 billion of India loans

Standard Chartered starts discussions with potential investors to sell loans in the backdrop of an increase in stressed assets

Mumbai: Standard Chartered Plc. will sell over $1 billion in loans from its India book as it seeks to clean up its loan portfolio, said three people familiar with the development. The bank has started discussions with potential investors, the people added.

Bloomberg News reported on Monday morning that Standard Chartered will sell nearly $4.4 billion in loans across its Asia portfolio, including loans in India.

The UK-based bank’s decision comes against the backdrop of an increase in stressed assets. On 23 February, the bank reported a loss of $981 million from its India operations, while loan impairments, including restructured loans, across its India portfolio surged almost eightfold to $1.3 billion in 2015 from $171 million in 2014. Overall, the UK-based lender’s loan impairments surged to $4 billion in 2015 from $2.14 billion in 2014. As of June 2015, Standard Chartered had a gross non-performing assets ratio of 9.07%, according to disclosures made by the bank.

“The bank was earlier looking to sell the entire portfolio but after seeing that there isn’t much demand, it has decided to sell individual assets which includes both external commercial borrowings and local loans,” said one of the three people, adding that conversations are underway with large global funds that are looking to invest in stressed assets in India. He spoke on condition of anonymity as the talks are confidential.

The second person (who also asked not to be identified) confirmed that more than $1 billion in loans are on sale from the bank’s India portfolio.

“We said in November when we announced our strategic review that we would be aligning our risk profile to the new strategy, and confirmed then that the Group had identified a number of exposures for liquidation that exceeded the new risk tolerance levels. While we don’t comment on individual clients, we are making good progress on executing our strategy, and we will provide an update to our investors in due course,” a spokesperson for Standard Chartered India said in an e-mail.

Talks have begun with firms such as CPPIB (Canada Pension Plan Investment Board), KKR India and SSG Capital Management Ltd, said the first person.

A CPPIB spokesperson declined to comment while an SSG Capital Management spokesperson did not respond to an e-mail seeking comment. Sanjay Nayar, chief executive officer (CEO) of KKR India, declined to comment.

Standard Chartered, one of the most active foreign banks in lending to Indian firms, saw bad loans surge due to its exposure to sectors such as infrastructure where projects were significantly delayed on account of financial, regulatory, or environmental issues.

In an interview in December, Ajay Kanwal, regional CEO of Asean and South Asia at Standard Chartered, acknowledged that over-concentration was an issue in the bank’s India portfolio and that it was trying to correct that. In November, Bloomberg reported that about $5 billion in advances that Standard Chartered made to Indian borrowers had been internally classified as being at risk of default. This includes the $2.5 billion that Standard Chartered loaned to the Essar group.

According to the third person, among the loans that the bank is looking to sell are those given to the Essar group. The bank is also looking to sell some loans in the engineering, procurement and construction (EPC) segment.

An Essar spokesperson said the group would not be able to respond immediately and sought time till Tuesday.

According to the bank’s Basel III disclosures, as of June 2015, over 12% of advances were tied to the infrastructure sector, including companies in businesses such as communication, electricity generation and roads. The bank also had roughly 6% of its book tied to the metal sector which has been experiencing stress due to falling metal prices and rising imports.

“Impairments increased significantly, primarily driven by exposures to commodities and India, where corporates were impacted by continued stress on their balance sheets, coupled with a more challenging refinancing environment,” the bank said in its earnings report in February.

Satish Gupta, managing partner, Vertex Capital Partners, a distressed asset advisory firm, said selling company-specific exposure may get a better response than attempts to sell a large chunk of loans together.

“Investors would like to focus on turning around a distressed company by acquiring and aggregating debt from various lenders with an aim to restructure and recapitalize the business,” said Gupta.

He added that a portfolio approach (where a chunk of loans is sold) involves buying debt of companies from different industries, making it difficult for the buyer to focus on reviving one particular company.

Investors that buy portfolios usually value a loan on the basis of what they are likely to get if they strip and sell the assets of the lender as opposed to a turnaround. “Banks therefore get higher valuations by selling large exposures as separate individual cases rather than in portfolios,” Gupta added.

Standard Chartered is not the only bank trying to clean up its loan book. Gross bad loans across India’s 39 listed banks surged to Rs.4.38 trillion for the quarter ended 31 December from Rs.3.4 trillion at the end of September, shows data collated by Capitaline, a financial database. Bad loans increased after the Reserve Bank of India asked banks to recognize bad assets and set aside money to cover the risk of default by March 2017.

A majority of these bad loans have come from the corporate sector, where credit quality continues to remain weak.

India’s largest rating agency Crisil downgraded debt worthRs.3.8 trillion in the last financial year—the highest amount of downgrades in any year. The rating agency expects credit quality for India companies to remain under pressure in the near term.

“Debt of firms downgraded by Crisil in fiscal 2016 has risen to an all-time high of Rs.3.8 trillion, underscoring that credit quality pressures continue to mount for India Inc,” said Crisil in a 4 April report.

A CARE Ratings’ Debt Quality Index published last week showed that credit quality of debt continued to decline.

Sun Capital

Waning hopes: Earnings drought in India is just getting extended

Third quarter earnings season is now running in full swings, with results of bluechips such as TCS, Infosys and banks such as IndusInd Bank already out.

Expectations from the quarter are already low, given the prevailing concerns globally and their impact on the domestic economy. Metldown in energy prices, delays in reforms and, thus, capex cycle, and weak demand in rural India, are all weighing in on the prospects of a rapid economic revival.

But if analysts were to believe, the wait for revival may just get extended and the two-three quarters, the time investors are expecting earnings to take to revive, could easily turn to two years. Analyst though expect falling energy prices may keep lifting overall profit margins going ahead.

India Ratings and Research believes that corporates will take at least two more years to report accelerated earnings and reach the peak level achieved in 2011-12.

In a recent report brokerage firm Ambit Capital in a recent report had predicted earnings growth to remain weak during FY2016 and FY2017.

"Earnings per share (EPS) growth in FY16 and is FY17 likely to remain in single digits (just as in the post 1991 world), we expect the Sensex to generate single digit returns in FY16 and FY17," said brokerage.

Ambit Capital pointed out India has witnessed healthy GDP growth averaging 10 per cent in nominal terms over the last six quarters, but this has not resulted into higher earnings per share (EPS) growth for the Nifty companies.

The reason has to do with three profound structural changes taking place in India: The 'Modi, Rajan and Technology' resets.

"The correlation breakdown between GDP growth and corporate revenues and earnings for the Nifty 50 companies, in our view, is a reflection that a significant portion of the economic growth pick-up is no longer being exploited by listed large cap companies. This, in turn, is because India is being fundamentally changed by an inter-play of the three dominant forces at work in the country today: Modi, Rajan and Technology," said Ambit Capital in a research report.

Ambit Capital report said that Prime Minister Narendra Modi is calling time on the traditional model of subsidy funded consumption growth and crony capitalism driven capex growth in India. So, the incumbents that have thus far enjoyed high earnings growth on the back of corruption and artificial suppression of competition will face increasing pressure on their revenues and earnings.

On the other hand, The RBI Governor Raghuram Rajan is increasing competition for traditional private banks through the introduction of new banks, deepening of corporate bond markets, the resurrection of PSU banks and reducing regulatory arbitrage between banks and NBFCs, the report cited.

Technology is the third factor playing spoilsport for some sectors such as IT and retail, said the report, adding, "New innovations are weakening the traditional offering of Indian IT services firms while increasing competition for retail lenders and B2C companies," said brokerage.

Meanwhile, India rating expects ebitda growth of BSE 500 corporate to range between 12-14 per cent for FY17, under a hypothetical scenario of fiscal loosening, compared to the 5-6 per cent growth expected for FY16.

Rating agency believes investment and commodity prices linked sectors will post muted EBITDA growth in FY17. Growth in sectors such as metals and mining (including volumes) and upstream oil & gas sectors would remain muted despite the base effect.

"However, the downstream oil & gas (refining) sector is likely to exhibit positive growth driven by the higher volume offtake of petroleum products and sustained refining margins. The top five sectors including auto and automotive suppliers, power (generation, transmission and distribution) and telecom contribute 55-60 per cent to the overall EBITDA of BSE 500 corporates, and any meaningful recovery in overall corporate profits would have to be driven by these sectors," said Ind-Ra.

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TPG Capital said to vie for stake in IDBI Bank

TPG would like to invest $1 billion annually in India over the next three years if it can find the right investments, says co-founder Jim Coulter

IDBI Bank is seeking to bolster its balance sheet after recording bad debts that totaled 8.94% of its loans at the end of December. 

TPG Capital is among investors vying to acquire a stake in Indian state-owned lender IDBI Bank Ltd, people with knowledge of the matter said.

The lender has reached out to potential investors including private equity firms and multilateral institutions, one of the people said, asking not to be identified as the information is private. A formal process for the stake sale hasn’t started yet, according to the people.

IDBI Bank is seeking to bolster its balance sheet after recording bad debts that totaled 8.94% of its loans at the end of December. TPG would like to invest $1 billion annually in India over the next three years if it can find the right investments, co-founder Jim Coulter said in a Wednesday interview.

Shares of IDBI Bank rose as much as 3.2% on Thursday toRs.67.75. It was trading up 1.2% to Rs.66.45 at 3:21 pm in Mumbai.

The Indian lender appointed advisers including Bank of America Corp., Citigroup Inc. and Credit Suisse Group AG to arrange a share sale of as much as Rs.3,770 crore, people with knowledge of the matter said earlier. IDBI Bank has approached the World Bank’s International Finance Corp. about a potential investment, the people said at the time.

TPG declined to comment in an e-mail, while IDBI Bank chief financial officer N.S. Venkatesh said he couldn’t comment.

IDBI Bank won government approval in December to sell stock to institutional investors. The Indian government owns 80.2% of the bank, according to exchange filings.

TPG in 2004 considered acquiring Global Trust Bank Ltd, a lender based in south India, through its affiliate fund Newbridge Capital, one of the people said. Later that year, Global Trust Bank was ordered to cease business and merged with state-run Oriental Bank of Commerce after bad loans depleted its capital.

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