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In a matter-of-fact letter to the finance minister, Rajeev Chandrasekhar, Rajya Sabha MP, has asked the government to address the burning issue of stock market reforms
Minister of state for finance Namo Narain Meena's startling and worrisome disclosures in Parliament regarding investor participation in stock markets has hit home hard. Moneylife has reliably learnt that Rajeev Chandrasekhar, Member of Standing Committee on Finance, in a letter to the finance minister, has called for the government to focus on and address the further deepening of the Indian stock market, as the depth of the market remains a major cause for concern. Moneylife had written about the finance ministry's startling revelations in Parliament (see: http://www.moneylife.in/article/72/8312.html and http://www.moneylife.in/article/72/8347.html).
Mr Chandrasekhar wrote, "…despite the perception of a healthy stock market in our country, the market remains narrow, shallow, illiquid and concentrated in the hands of a few individuals located in a few centres, even 20 years after India embarked on financial liberalisation and ostensibly unleashed a boom in stock investing and spreading the equity cult." Rounding off his letter, the MP wrote, "I strongly believe that reforms and further deepening of our stock market is an important policy objective for the government to focus on and address."
The letter follows Mr Meena's startling disclosure in Parliament in response to a question asked by Mohammed Adeeb, a Member of the Rajya Sabha. On 10th August, the minister said only 30.90 lakh investors traded on the National Stock Exchange's (NSE) cash market in the April-June quarter. Of these 52% were retail, High Net-worth Individuals (HNIs) and corporate customers. Institutional investors and proprietary traders accounted for 48% of all trading (24% each).
The figures as broken down by Mr Meena are indeed worrisome for policymakers. The minister said that 90% of trading in the April-June 2010 period came from just 192,200 investors. Further, the minister said 80% of turnover came from just 41,654 investors. In other words, 1,50,546 investors (78%) accounted for just 10% of trading turnover. Further, the minister said 8,727 investors accounted for 70% of turnover among which 413 were proprietary traders, mainly brokerage houses. Mr Meena also said that 60% of trading came from a mere 1,563 traders and half the trading turnover (50%) came from a shockingly low 451, of which 156 were proprietary traders!
Highlighting these figures in his letter to the finance minister, Mr Chandrasekhar wrote, "I am sure these figures would be extremely worrisome for the government and yourself." The data shows that the market has neither depth nor diversity and only a small segment of Indians are involved in it - that too in the form of speculation by day traders in a few select products including the NSE's main index, Nifty.
The reality about the depth of Indian stock markets appears to have hit home, at least among a few government officials. It remains to be seen whether this translates into any meaningful action on the part of the government.
ENAM, CLSA banking sector reports suggest bullishness to continue; banks also expect loan growth to pick up — liquidity is not expected to be a major concern
In a recent report on the banking sector, leading brokerage CLSA said, "There is a broad-based pickup in credit demand and the momentum is expected to improve further in 2H which is generally a busy season. However, deposit mobilisation is becoming a challenge and competition in the wholesale market has turned intense, driving rates up by ~200bps." The firm expressed concern that although banks believe they have the pricing power right now, which has allowed them to raise lending rates by 50bps-75bps, deposit rates are rising faster as loan-deposit ratio is near its historical peak.
A recent report by Enam says it does not expect the Reserve Bank of India (RBI) to raise rates by more than 50bps for the rest of FY11 since inflation and IIP growth have begun to moderate. RBI's unofficial target of a minimum 8% Tier-1 ratio will force many banks to go in for dilution over the next four-eight quarters, but it is likely to be book accretive for most. Banks whose Tier-1 is below 8% are Bank of Maharashtra, Central Bank, UCO, IDBI Bank, Syndicate Bank, Vijaya Bank, Andhra Bank and Union Bank - but most of them are getting equity infusion from the government. Enam favours banks with high CASA (current account savings accounts) ratio, which would cushion the net interest margins. Its top picks are SBI, Canara Bank, Axis Bank, Yes Bank, PFC, and IDFC.
Unlike the impression we got from the Q1 results, CLSA says that banks are a bit worried about asset quality because of the broad-based growth in slippages in Q1 and that most have renewed focus on recoveries. Other interesting observations in the report - credit growth for the sector has moderated a bit to 20% and deposit growth to 14%, but incremental LDR (loan to deposit ratio) is still near 100%; insurance companies, other than SBI, did very well in the June quarter - annualised new business premium of the sector grew by 68% y-o-y led by 131% growth of LIC, ex-SBI private sector NBP was up 37% y-o-y (116% decline for SBI).
Mutual fund performance was dull - Assets Under Management (AUM) grew by 6% m-o-m to Rs6.7 trillion (down 7% y-o-y). The report says the recent growth in insurance has come about as companies and agents aggressively pushed sales of Unit-linked Insurance Plans (ULIPs) ahead of implementation of the new guidelines - the low base also helped.But it believes that this growth is not sustainable and the lower profitability of ULIPs may force companies to focus on traditional products which have lower ticket-size and this can impact sales growth. Enam also believes that new business margins could take a significant hit and could even fall to single digits.
Enam expects value unlocking from subsidiary investments for banks - it points out the fact that HDFC Standard Life will become eligible for an IPO in October this year, followed by ICICI Prudential Life and SBI Life in subsequent months. It expects the Insurance Regulatory and Development Authority (IRDA) to come out with IPO guidelines before this.
Post-result television interviews reveal that banks expect CASA growth to remain strong, believe that new banking licenses will not disrupt the sector, and loan growth will pick up. Unlike the general perception, liquidity tightness has actually moderated a bit of late.
Enam warns that NPA recognition norms based on CBS (core banking system - in short, computerised branch connectivity) could throw up nasty surprises in a few cases as some NPAs that may be hidden in non-CBS branches could be revealed. While SBI and Indian Bank have disclosed current NPAs on based on the CBS platform, many PSU banks have yet to do so.
CLSA's interaction with various bank managements threw up some interesting points. HDFC's Keki Mistry (vice chairman and CEO) let on that despite the 15%-20% rise in prices of real estate, loan growth has picked up. For HDFC, Delhi is growing faster than Mumbai followed by Chennai and Pune. HDFC's borrowing costs are on the move and it will have to raise lending rates. He also said that growth in the insurance business (HDFC Standard Life) is coming back and that it will remain focused on ULIPs.
The brokerage's interaction with Standard Chartered's Jaspal Bindra (group executive director and CEO, Asia) and Neeraj Swaroop (regional chief executive, India and South Asia) gave some interesting international perspective. They believe Western regulators will start tightening only towards the end of next year. In India, they think that 300 branches may be an optimal size; Standard Chartered currently has ~100 branches (largest within foreign banks). The bank still sees some possibility of a double-dip (in the global economy) and is sitting on excess liquidity to brace for that.
SBI's Anshula Kant (deputy general manager) believes that SBI will benefit from growth in the syndication business where it has 40% market share. It is seeing good loan growth from infrastructure, cement and steel.
She believes costs of deposits for SBI will rise from here (they were re-priced lower in Q1). Fee growth rate may not match FY10. SBI would look at raising funds by March next year.
ICICI Bank said that it continues to remain selective about the loan proposals that it is considering and yet, is likely to report 20% growth in the domestic business in FY11. Its Q2 results may be consolidated with Bank of Rajasthan. Oriental Bank of Commerce's RL Agarwal (general manager, treasury) said it is targeting 18% loan growth in FY11.
Bank of India's Ravi Kumar (deputy general manager) said the target loan growth was 20%. BoI still has surplus liquidity and hence it has not raised the benchmark prime lending rate.