Companies & Sectors
Farm loan waiver to hit banks more; No impact on MFIs and NBFCs, says Morgan Stanley report
The recent announcement by two state governments on farm loan waiver will affect banks more compared with micro-finance institutions (MFIs) and non-banking finance companies (NBFCs), says a research report. The state governments of Uttar Pradesh announced a farm loan waiver in April and Maharashtra announced one in June. 
 
In a note, Morgan Stanley says, "These loan waivers apply only to loans by banks which in due course will get compensated by the respective state governments. However, the concern is risk of 'moral hazard' or wilful defaults by borrowers. We agree with the moral hazard risk from rural lending for lenders and will need to wait and see how it affects second order non-performing loan (NPL) formation. However, in our view, the impact is likely to be greater for banks with large unsecured farm loans and less for secured loans or joint liability group (JLG) lending."
 
 
According to the report, investors are concerned about the risk of higher loan defaults at MFIs and NBFCs with rural exposure owing to recent farm loan waivers and demand for waivers in more states. There are news reports of demands for loan waivers by farmers in more states – some of them being Tamil Nadu, Haryana, Punjab, Madhya Pradesh, Gujarat and Karnataka.
 
"We will know the exact impact of farm loan waivers on these businesses only with a lag," Morgan Stanley says, adding, "management commentary and initial data points suggest no material impact till now."
 
Feedback from these companies suggests that while farm loan waivers are bad for credit culture and may 'intuitively' appear bad for business; historically there has been little negative impact. "Their experience suggests that what hurts collections is disruption of operations (from events like demonetisation) rather than farm loan waiver. As Per Bharat Financial Inclusion, earlier known as SKS Microfinance (BHAFIN), its collections continued to improve even following the Uttar Pradesh loan waiver announcement in April. The management of Mahindra and Mahindra Financial Services Ltd (MMFS) also saw no meaningful impact from the previous farm loan waiver in 2009. Management attributes this to awareness among borrowers regarding applicability of farm loan waivers and the option with MMFS to repossess the vehicle in the event of default," the report added.
 
Morgan Stanley, while explaining why it had remained over weight on BHAFIN, says, its numbers screen much better than rest of the industry. Rural microfinance has also done much better than urban microfinance during demonetisation, as credit bureau data suggest. 
 
As of March 2017, BHAFIN’s 30-day overdue ratio was 7.4% compared with 14.1% for the MFI industry; its 90-day overdue ratio was 4.0% as against 8.2%. As per the company management, the difference stems from the company's weekly collection model and focus on rural microfinance against urban microfinance, which is more crowded. For BHAFIN 79% is rural and 21% is urban; while for the MFI industry, 53% was urban vs. 33% about four years ago. 
 
   
 
According to Morgan Stanley, rural economic indicators in India are looking good. It says, "...rural government spending was up about 24% in FY2017 and is budgeted to increase another 10% in FY2018. Also, monsoon is expected to be near normal for a second consecutive year after two years of drought. Rural wage growth has been rising and tractor and two-wheeler sales have rebounded sharply from demonetisation lows."
 
Expressing concern over the demand for farm loan waiver from more states, the report feel it is still premature to build in higher loan losses for BHAFIN than its current assumptions. "BHAFIN management has mentioned that collections have been improving across states. We are working with the assumption that borrowers who did not default amid demonetisation and political instigation are unlikely to break credit discipline because of farm loan waivers. Having said that, BHAFIN's loan exposures to states where there is a demand for farm loan waivers are – Tamil Nadu (0%), Madhya Pradesh (3.8%), Punjab (1.5%), Haryana (1.8%), Gujarat (0%) and Karnataka
(12.4%). We note per management commentary, that parts of Karnataka that were affected have been showing improvement in collections," Morgan Stanley added.

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COMMENTS

B. Yerram Raju

2 weeks ago

Private loans of farmers are the real cause of distress as several farmers, particularly the small and marginal farmers and tenant farmers did not get the full institutional credit. When credit and farmer go together for achieving high production, in the context of bumper production, how can farmers say that they are short of credit and therefore hit? It is not credit that is issue so much as prices and marketing. Farmer never deceived the nation. But the nation deceived the farmer. Is waiver of loans a solution? The waiver when implemented would benefit more the private money lenders as the waiver amount would be used for repaying the costly debt of the farmer that is incurred more for social and family needs and also for production purposes through the fertiliser and input dealers. Farmers need better aggregators at the village level for the farm production to command the market as the kutcha adthiyars under whose control the agricultural market yards are functioning in the country currently. Farmers unite for agitations and not for gaining the benefits of aggregation and getting to better markets. It is robust insurance mechanisms that would hold the key. Present agricultural insurance PMFBY is no deal at all. South Korea has better model for us to follow.

GLN Prasad

2 weeks ago

Still neither Banks nor RBI ever do these types of exercises and some outside agency should work for them to provide this data.

RBI puts Central Bank of India under PCA due to high NPAs
The Reserve Bank of India (RBI) has placed state-run Central Bank of India under the prompt corrective action (PCA) due to high net non-performing assets (NPAs) and negative ROA of the Bank for past two consecutive years.
 
Central Bank is the fifth to be placed under PCA by RBI. Earlier, Reserve Bank has placed Indian Overseas Bank, IDBI Bank, UCO Bank and Dena Bank under the PCA due to huge NPAs.
 
In a communication to bank employees, Rajeev Rishi, Chairman and Managing Director of Central Bank of India, said, "...being placed under PCA should be taken up as a wakeup call. Now is the time for all of us to gear up all our efforts towards tackling the factors on account of which we are in present predicament."
 
Here is the letter sent by the Bank CMD...
 

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COMMENTS

Ramesh Jaradhara

1 week ago

The countdown is going on .....1st, 2nd, 3rd, 4th and now 5th PSU bank is under PCA. The real picture of Indian PSU banking is much gloomier than this. Within a very short span of time, we will see the uncovering face of all the PSU banks clearly. Whom to blame? Indian politics is such a thing that we cannot trust the credibility of its leaders for their nefarious intentions at the cost of the nation. RBI as a figurehead of the banking industry cannot absolve its responsibility too. Instead of being a watchdog, RBI is most of the time, seen as a mere ornament of the banking sector regulation. On the other hand, bank's have very loose control on their credit dispensation process, as a result loan underwriting standards have gone down or consciously diluted. The consequence is all clear to see by everyone. Huge NPAs are not the problem but the consequence of less vigil and lack of dedication on the part of its employees. A changing mindset and attitude on the part of all is the key to solving the menace of NPAs.

Vaibhav Dhoka

2 weeks ago

In every fraud scam or bailout the ultimate looser is taxpayer.In this case RBI has stopped payment of dividend in which the loose is shareholders from public.Alternately banks are introducing new ways and means to loot its customer and RBI remains mute spectator.We should pity our self for having such system of loot.

Simple Indian

2 weeks ago

All PSU Banks are facing NPA issues due to Finance Ministry's interference in their functioning. It's the phone calls from FM or Ministry to Heads of PSU Banks to disburse loans to undeserving businessmen like Vijay Mallya, which should stop. All perennially loss-making PSU Banks will keep getting recapitalized by Govt with taxpayers' money, just like Air India, so it's taxpayers who are burdened with inefficient Banks, while Banks can continue to behave as per 'instructions' from FM, as usual.

GLN Prasad

2 weeks ago

CBI invited itself to this position. They never cared for common and sincere customers and their focus on high net worth borrowers and large volume of lending to influential groups. To hope atleast 25% recovery in such group exposure can be treated as excellent performance. Never neglect ordinary borrowers is the lesson PSUs must learn.

REPLY

Kunal Singh

In Reply to GLN Prasad 2 weeks ago

It isn't just one bank. All the PSBs are reeling under the stress of the same "influential groups" while the HDFC/ICICI Banks enjoy the cream of the retail segment.

Nifty, Sensex In no-man’s Land – Wednesday closing report

We had mentioned in Tuesday’s closing report that Nifty, Sensex were headed lower. The major indices of the Indian stock markets were range-bound on Wednesday and closed with minor gains over Tuesday’s close. The trends of the major indices in the course of Wednesday’s trading are given in the table below:

The Indian equity markets on Wednesday closed on a flat-to-positive note on the back of healthy wholesale price index (WPI) data and buying in capital goods, oil and gas as well as energy stocks. Official data released during market hours showed that India's annual rate of inflation based on wholesale prices decelerated in May to 2.17% from 3.85% in April as food prices eased. However, investors remained cautious ahead of the outcome of two-day US Federal Reserve's rate-setting meet later in the evening. On the NSE, there were 662 advances, 793 declines and 64 unchanged.
 
Telecom major Reliance Communications (RCom) Chairman Anil Ambani has voluntarily decided to forego his salary and commission from the company during the current financial year as part of its "strategic transformation programme", RCom announced on Wednesday. "Reliance Group Chairman Anil D. Ambani voluntarily decides to draw no salary or commission from RCom in current financial year. The decision is part of the company promoters' commitment to the Strategic Transformation Program," an RCom release said. Announcing that the RCom management too has followed the chairman's lead, the statement said: "RCom management team on-board to defer personal pay by up to 21 days."  "Measures to remain in place till December 2017," it added. The company’s shares closed at Rs18.30, up 1.39% on the BSE.
 
Tea production in northern West Bengal, home to the world famous Darjeeling tea, was badly hit on Tuesday as most of the tea gardens remained shut on the second day of the strike called by trade unions. A joint forum of 24 trade unions of the tea industry in North Bengal have resorted to a two-day industrial strike, demanding implementation of minimum wages, reinforcement of entitlement for tea workers and distribution of land holding among tea workers for residential purposes. According to industry experts, the strike severely affected work at 300 tea gardens in North Bengal, including 87 in Darjeeling. 
 
India’s annual rate of inflation based on wholesale prices decelerated further in May 2017 to 2.17% from 3.85% in April as food prices eased, official data showed on Wednesday. Wholesale prices decelerated in April to 3.85% from 5.29% reported for March, as prices of food, fuel and manufactured products fell. According to data from the Ministry of Commerce and Industry, the wholesale price index (WPI), with the revised base year of 2011-12, in May 2016 declined to 0.90%. On a year-on-year (YoY) basis, expenses on primary articles, which constitute 22.62% of the WPI's total weightage, declined by 1.79% as compared to a rise of 4.38% during the same month a year ago. However, prices of food articles dipped 2.27% during the month under review. Prices of manufactured products, which comprise nearly 64.23% of the index, rose by 2.55%. With inflation coming under government control and the IMD predicting a favourable monsoon, aggregate demand in the Indian economy can be expected to be favourable. This is bound to cheer investors in the stock markets.
 
Officials of the US central bank in Washington are reviewing an option to raise short-term interest rates and by how much, a media report said on Tuesday. Most economists expect the Federal Reserve to boost the benchmark rate a modest quarter of a per cent, to a range between one and 1.25%, Voice of America reported. The fed cut rates nearly to zero at the worst of the financial crisis to make borrowing cheaper in a bid to boost economic growth and employment.  Since then, the recovering economy and improved unemployment rate, at 4.3%, have prompted the central bank to gradually raise rates. Officials are worrying that keeping rates too low for too long could spark a burst of inflation that could hurt the economy.  Federal Reserve Chair Janet Yellen will meet with journalists on Wednesday afternoon. Stock market investors in India are cautious ahead of the decision from the Federal Reserve.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 
 
 

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