Today I went for a trek on the tekdi near my office with my boss. It was a good 1.5 hr trek; though am quite out of shape and was panting while climbing up the hill, I sat down almost 4 times. My boss was laughing he said I am ten years elder to you and still in good shape. To which I said I haven’t been going for a walk for quite some time. He said you should take care of your stamina and health. After that we picked up speed and chit chatted over the entire trek. We spoke about how North Indian guys treated women as objects of sex, looked down upon them and did not respect them unlike the situation in Maharashtra, North East and South India. After this we were discussing how the meaning of marriage has changed for our generation. He was of the opinion “Have as many one night stands and all the masti before marriage nothing after marriage” To which I said “our generation has made marriage into a mockery. I stated that 2 of my married friends are having an extra marital relation and they have had love marriages. It feels a sham when they say they love their spouses. They are cheating them. to which my boss said “this is ridiculous”. It is a breach of trust and weird…Anyway when we came down from the tekdi..we went back to office and was back at home soon after. A lovely trek, a beautiful site from the tekdi. breathtaking….and a nice chat..
Archive for December, 2011
1. the bottom line in the Shunglu committee is that some restructuring of the bank loans would be required, in view of the huge advances of Rs 50,000 crore of which only 42 per cent is collateralized/ supported by promoter/state government gurantees? Can lenders take a haircut for such a huge sum?
a. It will be difficult for banks to take a cut of such a magnitude. The huge loans written off and re-structured will only lead to a cut in the profit margins and their performance. This might also lead to a asset liability mismatch at some point of time (Since the loans are of a long term nature and involve interest fluctuation and recovery risks).
b. Recently, the banks have shifted from a manual to an automatic recognition of NPAs through the Core Banking System. This is one of the major reasons for the asset quality deterioration witnessed over the past two quarters. Earlier the bank’s primary focus was on loan disbursement and growing the balance sheet with asset quality remaining a secondary issue. However, now with loan accounts worth Rs.5lac or below being shifted onto the system; the management has to increase monitoring and loan recovery. This presents a more accurate picture of the bank’s asset quality. This has laid emphasis on the loan recovery effort and the banks need to carefully watch the power sector lending to identify any signs of stress.
c. Most of the loans to the power sector are expected to witness a surge in the NPAs (since power companies are bearing the brunt of high raw material – coal , maintenance, labour, operation costs, low PLF; low tariff rates received; they are becoming economically unviable to operate leading to inability to repay loans) and restructuring due to an increase in the rising interest costs.
d. Owing to the economic crisis and low credit demand; it is expected that the credit and margin growth will remain subdued over the coming quarters. Capital constraints and loan subsidies will further hamper the bank profit margins. However; the Shunglu committee’s recommendation to set up a SPV to buy the distressed loans would provide momentary relief to the banks till the state governments are able to repay the defaulted loans. The RBI controlling the SPV would be beneficial since such vehicles require supervision and it would help improve the efficiency in the sector. The distressed loan buyout would provide relief to the banks in the form of lending to more profitable ventures and also improving their liquidity position in the present market scenario.
2. Understand that lenders would have capital implications in the event of a CDR coming in to effect, something that could be mitigated through a funded state government guarantee. Obviously there would be some fiscal impact on the guarantor? But is this a viable option?
a. The CDR ratio for banks has come down considerably over a period of time; the incremental CDR has dipped to 73.3% on 25 Nov 2011 from 97.2% on 25 Mar 2011. This is attributed to higher interest rates leading to a growth in deposits. The banks are expected to maintain a national average of 60% as CDR. Hence; with the rates unchanged the CDR is expected to remain in the range of 70-75% by Mar 2012. With this the banks will still not be able to reach the CDR benchmark; in case the CDR is put in to effect the banks will have to deal with monitoring the CDR ratio closely. This will lead banks to monitor their lending more aggressively.
b. The deposit growth has continued on the same track as in Mar 2011; with a 75-100bps increase in deposit rates, deposit growth has improved up to 17%y/y as on 25 Nov 2011 (from 16%y/y on 25 Mar 2011). However; the RBI has not indicated any increase in the near future. This will improve the deposit base.
c. The bank credit growth has moderated to 16.7%y/y as on 25 Nov 2011 compared to 21.6%y/y on 25 Mar 2011. Infrastructure credit growth has slowed down to 21.7 % in October 2011 from 39% in March 2011. A dip in the outstanding loan growth to the Telecom coupled with a dip in the Power sector credit growth (30%y/y in October 2011 from 43 %y/y in March 2011) has affected the lending. The banks have growing concerns over slowing credit growth since it will hinder them to meet the target of the 19% loan growth target set by RBI.
d. With the titration of the CDR the state government guarantee would help, but looking at the present scenario of the sector; the situation would place an additional burden on the guarantor. However; the state guarantee will result into a few positives and negatives. The positives would be that the state government would readily agree on tariff increases (meeting technical & operational parameters) for the SEBs (pass on the cost burden to their consumers) and work on making the projects viable. However; the state guarantee will restrict their scope of reach to other areas. The banks can work out a mechanism and ensure that the loans don’t reach the stage of write-off. I believe this is viable but it should be planned out properly. As of now 42% of around Rs.518.5 bn loans have a state guarantee, this also requires sorting out.
3. Are tariff hikes the only option, especially since losses have still not been contained? For instance in the case of some states, TN for instance masks losses as farm load. UP also does this? Your view on this.
a. According to the Planning commission Dec 2011 report; the SEBs accumulated losses (balance sheet) have increased six times compared to the revenues that have doubled over the period 2005-2010. As of Mar 2010; losses before subsidies were around Rs.1.8trillion and around Rs.820bn (post subsidies). These losses have arisen primarily due to a gap of Rs.0.6/kwh (Kilo watt per hour) between the average cost and revenue. Of these, post subsidy losses PSBs have funded approx 70% (with only 42% of the 518bn loans hold a state guarantee). These losses can be mitigated only with a tariff increase or doubling the units available.
b. In theory, utilities are free to revise their tariffs by up to 20%p.a without an approval from the electricity regulatory commission. States such as UP, Rajasthan, MP, Bihar, Orissa, Andhra Pradesh and TN alone bear losses worth Rs.640bn. If these states want to counter the high losses they will have to increase tariff rates; this might be against the wishes of the ruling parties in power; since they were pleasing their vote banks and keeping tariffs at 2006 levels. However, in agreement with the Shunglu report; the farmers should be charged a 50paise per unit and be treated at par with other consumers. It will not be possible for long to bear the losses as a farm load or a normal loss. Approximately 14 states have already increased power tariffs after facing the spiraling payables of SEBs and the burden it has caused for the state – via an increasing fiscal deficit on account of subsidies.