Growing importance of Indo-Myanmar relations

There are excellent opportunities for setting up urea plants in Myanmar. This would help Myanmar to increase its agricultural production and also help India, as the agreed balance of urea could be shipped back to India


India's External Affairs Minister, Sushma Swaraj is on a visit to Myanmar on Friday to attend the India-ASEAN Foreign Ministers' meeting. She will attend the East Asian Summit meeting for Foreign Ministers as also the ASEAN Regional Forum (ARF) that would focus on security policy for its member countries.

Her three day visit to Nay Pyi Taw, where these meetings will be held covers a hectic schedule.  Since taking over as the External Affairs Minister, Sushma Swaraj has already visited Bhutan, Bangladesh and Nepal.

While in Myanmar, she is expected to call on President Thein Sein and discuss important issues affecting both countries.  One may presume that this will also give her the opportunity to extend the invitation to President Thein Sein to visit India, on behalf of Prime Minister Modi.

She will be meeting U Wunna Maung Lwin, her counterpart in Myanmar and hold discussions to promote trade and create interest for joint ventures in their country. She will not be able to meet the popular opposition leader, Aung San Suu Kyi.

It may recalled that Essar Projects Ltd, as a construction contractor, is working on the Rs350 crore port-cum-waterway project, sponsored by India, which is expected to be completed soon. This project involves building the Sittwe port and a jetty at Paletwa. Besides, dredging the Kalandan River is nearing completion. When completed, it will facilitate an easy connection for India to ship goods from Kolkata port to Mizoram, via Sittwe.

India and Myanmar have a long land border (1,646 kms) and border trade was legalised in 1995.  On the whole, the trade between both the countries has only reached $1.87 billion. There is potential for more than $6/8 billion a year.

One major area where India has made headway is in securing a contract of exploring two hydrocarbon blocks in March this year. Reliance was one of the successful bidders and the other has been won by a consortium of Oil India Ltd, Mercator Petroleum and Oilmax Energy.  This group has won three blocks for exploration. It now remains to be seen as to who strikes commercially viable gas or oil in these blocks!

At the moment, the largest buyer of Myanmar gas is China, who has laid a long pipeline to their country. China is fully entrenched in Myanmar and it would take a herculean effort to dislodge them from this position. Considering the  geopolitical situation, India has to do its best in securing some interesting and useful joint ventures, in such fields as the fertiliser industry, in making urea locally from the gas produced. This would help Myanmar to increase its agricultural production and also help India, as the agreed balance of urea could be shipped back to India. In fact, on such a project, Railways could be associated in laying a track to ship the goods upto Sittwe port from where it can be exported to India.

Myanmar would be happy to be associated with India and India should be able to offer easy credit facilities to this country. For making this possible, one hopes PM Narendra Modi visits Myanmar soon and offers similar terms, like he did with Nepal.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


ARC fees: RBI restores sanity
RBI has replaced the 5:95 model with 15:85. Can something be done to retain the current cost structure for ARCs and mitigate the management-fee driven model? Here are the options
Stung by the aggressive management-fee based model adopted by Asset Reconstruction Companies (ARC), Reserve Bank of India (RBI), on August 5, 2014, has disbanded popular 5:95 model by enhancing ARC’s minimum Security Receipt (SR) subscription to 15%. In the 5:95 model, ARCs could fund their NPA acquisition by issuing Security Receipts (SRs) to the seller banks for up to 95% of NPA acquisition cost, with a minimum of 5% of the SRs being funded in cash by the ARCs. The management fee that was earlier linked to the outstanding SR value has now been linked with the lower end of the Net Asset Value (NAV) of SR based on the credit rating. What will be the impact of the new 15:85 model? See the graph below.
The 5:95 model with back-ended recovery profile gave attractive returns to the ARCs for different levels of recovery (30% to 110% of acquisition cost) from 21% (pre-tax Internal Rate of Return) to 32% over 5-year resolution horizon. For the same recovery range, the 15:85 model delivers poor returns, ranging from -11% to 10%. In order to match the 5:95 returns, the acquisition costs have to be substantially lower, ranging from 17% to 37% of the 5:95 acquisition cost. For a modest 20% return in the above range, the acquisition cost has to be 18-66% of the 5:95 acquisition cost. What do we infer from this?
First, correlation between acquisition cost and recovery has been restored. The ARCs will have to assess recovery prospects carefully. Even for a modest 15% return, with back-ended recovery profile, ARCs will  have to clock total recovery of app. 135%. As we have seen earlier, for recovery beyond acquisition cost, front ended recovery is most beneficial to the ARCs. Hence for enhancing returns, ARCs will have to speed up the recovery process.
Second, in 15:85 structure, probability of SR write off and back-ended provisioning by the banks will tend to be zero. This will result from acquisitions by ARCs at realistic values, which would evidently entail immediate provisioning by the banks. The banks will now have to be bold to sell the portfolios notwithstanding immediate provisioning. The bank chiefs will no more be able to leave this unpleasant job to their successors.
Third, acquisition volumes will shrink. No wonder the RBI is considering licences for new entrants. Could something be done to retain the 5:95 structure and mitigate the management-fee driven model? Yes. There are options.
Lower management fee: In the above model, with 5:95 structure, same returns as with 15:85 models are achieved if the management fee is reduced from 1.5% pa (on outstanding SRs) to app. 0.50% pa. The banks are aware of the impact of management fee, and have been allowing 2% management fee to attract aggressive bidding for certain portfolios.
Link the management fee to recovery: Equitable cash distribution is possible, if the management fee is linked to the actual recovery. The graph below shows that the management fee of 0.75% of the cash recovery with a back-ended recovery profile results in positive IRR to the ARC beyond 60% recovery, and a modest 16% IRR at 110% recovery, with no SR write off and loss to the banks. Linking the fee to actual recovery poses income recognition problems which can be resolved. 
The major challenge with the recovery model is the bid evaluation by banks. If the management fee is linked only to the recovery, what is the utility of the acquisition cost quoted by the ARCs? And how will the banks evaluate the bids? The conflict can be resolved easily by linking the recovery to the acquisition quote on the lines the private equity fund managers share the upsides. Even with 5:95 structure, the recovery based model can be designed sans the moral hazard with current 5:95 model. This model will do away with the need to determine NAV based on the subjective and often unrealistic credit rating needed in 15:85 structure, and will, therefore, be more scientific and cost efficient. It is expected that in due course, RBI will adopt this alternative recovery based fee model.
To sum up, the 15:85 structure is the right move but not final. ARCs will come into being only when the legal system is revamped as I mentioned earlier.
(Rajendra M Ganatra is Managing Director & CEO of India SME Asset Reconstruction Co Ltd-ISARC. He had over 25 years of experience in project finance, asset reconstruction and financial restructuring. The views expressed in above article are personal)



Prem Shinkar

3 years ago

Great & comprehensive assesment of the changes. Thankyou Sir.

Sunil Karunakaran

3 years ago

This simply gets better and better. The writer has very quickly assessed the likely impact of the recent changes by the regulator and more importantly even suggested better options for consideration. It will be interesting to see how things pan out.

G Sampath Kumar

3 years ago

A good move by RBI to increase the stake of ARCs in Security Receipts. The authour may indicate whether this move will lead to additional due diligence, more caution while bidding for portfolios by ARCs, consolidation of ARCs, etc.?

Ramesh Kubde

3 years ago

Both the articles of the author on ARCs are very informative and analytical. It gives insight to the working of ARCs as well explains the reasons for spurt in sell of NPAs by Banks to ARCs. Expects many more such thought provoking articles.
However, I do not agree with Mr.Gopalkrishnan's comments of collusion between Banks and ARCs in sell of NPAS. Such cases, if any would be an exception.

Ebola: WHO declares the epidemic as global emergency

US health authorities had admitted that Ebola's spread beyond west Africa was inevitable. Even medical charity Doctors Without Borders had warned that the deadly virus was now "out of control" with more than 60 outbreak hotspots


The World Health Organisation (WHO) on Friday declared the killer Ebola epidemic ravaging parts of west Africa as an international health emergency and appealed for global aid to help afflicted countries.


The decision after a two-day emergency session behind closed doors in Geneva means global travel restrictions may be put in place to halt its spread as the overall death toll nears 1,000.


The WHO move comes as US health authorities admitted that Ebola's spread beyond west Africa was "inevitable", and after medical charity Doctors Without Borders (MSF) warned that the deadly virus was now "out of control" with more than 60 outbreak hotspots.


WHO director Dr Margaret Chan appealed for greater international aid for the countries worst hit by the outbreak, which she described as the most serious in four decades, echoing an earlier claim by MSF that the "epidemic is unprecedented in terms of geographical distribution, people infected and deaths".


States of emergency were in effect across overwhelmed west African nations, including Liberia, Guinea and Sierra Leone.


Soldiers in Liberia's Grand Cape Mount province - one of the worst-affected areas - set up road blocks to limit travel to the capital Monrovia, as bodies reportedly lay unburied in the city's streets.


Two towns in the east of Sierra Leone, Kailahun and Kenema, where put under quarantine on Thursday, as nightclubs and entertainment venues across the country were ordered shut.


Public sector doctors in Nigeria suspended a month-long strike with fears rising that the virus is taking hold in sub- Saharan Africa's most populous country. The deadly disease has already killed two and infected five others in Lagos.


Ebola has claimed at least 932 lives and infected more than 1,700 people since breaking out in Guinea earlier this year, according to the WHO.


Ebola causes severe fever and, in the worst cases, unstoppable bleeding. It is transmitted through contact with bodily fluids, and people who live with or care for patients are most at risk.


First discovered in 1976 and named after a river in what is now the Democratic Republic of Congo, Ebola has killed around two-thirds of those infected, with two outbreaks registering fatality rates approaching 90%. The latest outbreak has a fatality rate of around 55%.


There is no specific treatment for the disease; efforts to help persons who are infected include giving either oral rehydration therapy (slightly sweet and salty water to drink) or intravenous fluids. The disease has high mortality rate: often killing between 50% and 90% of those infected with the virus, says Wikipedia.


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