Stocks
Nifty, Sensex will remain range-bound – Thursday closing report
We had mentioned in Wednesday closing report that Sensex, Nifty is trendless. Today the indices moved flat upto 12.30 pm after which it gained momentum and edged higher to cover up more than the past two days losses. The gain has been backed by the move of Britons to vote on a referendum on whether Britain should remain a part of the European Union.
 
 
Initially, both the key indices opened on a flat-to-positive note, in-sync with their Asian peers, as investors were seen optimistic that Britain will stay on in the European Union.
 
Increased chances of Britain staying on in the European Union, combined with higher crude oil prices and a strong rupee, buoyed the Indian equity markets on Thursday. The key indices closed the day's trade with appreciable gains, as healthy buying was witnessed in banking, automobile and healthcare stocks. 
 
A couple of opinion polls in Britain have indicated that the 'Remain in the EU' camp has gained momentum. The island nation will announce referendum results on this issue on Friday.
The Indian rupee strengthened by 23 paise during the day's trade. It closed at 67.25-26 against a US dollar from its previous close of 67.48-49 to a greenback.
 
In terms of investments, the provisional data with exchanges showed that the foreign institutional investors (FIIs) bought stocks worth Rs 81.87 crore, and the domestic institutional investors (DIIs) purchased scrip worth Rs 203.56 crore.
 
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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RBI worried over credit guarantee scheme of MSMEs?
The Reserve Bank of India (RBI) is concerned about the extent of micro, small and medium enterprises (MSME) loans backed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and regulatory oversight of the scheme, says a report from Live Mint. 
 
Citing one person, who spoke on condition of anonymity, the newspaper says, "The credit guarantee scheme is clearly over-leveraged. There needs to be some gradation to determine which loans can be guaranteed and which cannot. At this point, there seems to be barely any assessment of proposals and all the loans which apply for a guarantee are granted approval. The RBI is closely watching the situation and is concerned about the over-leveraging."
 
The CGTMSE was set up in association with the Small Industries Development Bank of India (SIDBI) and guarantees loans up to Rs1 crore. The CGTMSE scheme extends guarantee cover to units availing limits up to Rs1 crore within certain threshold if the primary lender extends loans sans collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral security. Several banks take collateral for term loans and grant collateral free advances up to Rs10 lakh working capital. Once instalment or interest becomes overdue beyond 90 days, both working capital and the term loan, the unit becomes NPA and the collateral security gets invoked for realization of all the loans. 
 
Pradeep Malgaonkar, in-charge of CGTMSE at SIDBI told the newspaper that the Trust has so far issued cumulative guarantees to 23.23 lakh loans involving an aggregate loan amount of Rs1.08 lakh crore over a period of 16 years.
 
According to the newspaper report, RBI's concerns might be stemming from the fact that the MSME lending segment is susceptible to volatility at times of economic stress. As such, banks often see a build-up of bad loans in this segment.   "For instance, State Bank of India (SBI), the largest lender in the country, had an SME loan book worth Rs1.89 lakh crore as on 31 March, where NPAs worth Rs17,032 crore were reported. This works out to about 9% of the SME book being classified as bad. The overall level of NPAs for SBI is at 6.5% of the total loan portfolio," the report says. 
 
However, risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the RBI and Government of India (GoI) to identify sickness at the incipient stage and to introduce corrective action plans, is highly suspect. By just allowing postponement of instalments for three months, banks label such loans as restructuring without going into the processes of restructuring. The standard advances were restructured to sub-standard advances and were range bound at 0.09% to 0.38% indicating that not much restructuring took place in the sector.  (Read: MSME cry for attention)
 
Banks though moving on CGTMSE coverage, their partial coverage of guarantee - term loan is under the collateral cover while the working capital is under guarantee cover. When there is default of the unit under term loan due to non-payment of interest for 90 days, it becomes an NPA qualifying for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act proceedings.   
 
It is time that the RBI monitors the MSMEs on more robust data at the regional levels and ensures compliance of the guidelines. RBI data reveals only less than 5% of potentially viable units were revived during the last decade as compared to a huge corporate debt restructuring that went bust. 
 
According to RBI's Financial Stability Report (12 December 2015), the NPAs in MSMEs, when put to stress test, were 5.04% as of December 2015 with no significant contribution to the losses as percentage of either profit or capital. The industry NPA level was 6.68% and only 7.9% constitute MSME advances to the total advances. 
 
About 14% of the total manufacturing sector credit is reported for the MSEs while 5.9% of the MSE credit has been declared as NPA. Banks mostly cover all the government sponsored accounts, most of which are in the services sector and transport sector under the CGTMSE. There is no information as to how many and how much of the manufacturing MSEs are covered under the CGTMSE and the amount covered under collateral securities.
 
It is appropriate for the RBI to tweak the prudential norms to the advantage of the banks that take a positive action in ensuring that the units do not turn sick in the first place and in cases where they find it worthwhile to rehabilitate in the second place so that asset loss and job loss can be avoided. (Read: Need for tweaking laws and rules for preventing NPAs in MSMEs)
 
MSME units broadly fall into – stand-alone enterprises; ancillary enterprises and cluster based enterprises. While those in the former category could be having wider markets, ancillary enterprises and even some cluster based enterprises operate in narrow markets. If the anchor industries failed, the dependent MSEs would be a pack of cards in spite of themselves.
Instead of worrying over the credit guarantee scheme for MSMEs, the RBI should consider redefining NPAs under the sector differently and also allow takeover of any viable unit if the parent bank is willing to shed it in a manner that such advance would not add to the baggage of NPAs of the receiving bank.

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COMMENTS

B. Yerram Raju

8 months ago

SBI's and in fact, the State Bank group's baggage of NPAs in MSME sector is its own making. It has aped the western model of servicing the sector opening different verticals to deal with the sector. One markets the MSME loans; another does the due diligence; third, processes the loans and sanctions them; the fourth one does accounting and monitoring. When it becomes NPA it is transferred to the Stressed Asset Recovery branch. While the recovery can be through restructuring as well, this branch finds it convenient to sell off the asset and close the account. Over and above all these is the Stressed Assets Management Unit where the controllers with varying discretionary powers sit at Bengaluru and the Corporate Office at Mumbai. When any unit seeks revival after reaching the SAR branch it faces insurmountable problems. Rarely it happens. Is the top management ignorant of this? In fact a few of the CGMs share in confidence that they are today not able to break this and get back to a more sensible system to handle the sector. Since State Bank is a large player in the SME Finance Market, it is important that this Bank should think of providing leadership in proper way. Hope somebody takes action in a mission mode to establish its primacy.

PK SUROLIA

8 months ago

The PSU / Large Corporates are driving MSME sector to sickness by fixing payment terms which are above 90 days. Average realisation is about 120 days. MSME in manufacturing takes about 30-60 days in converting RM to Finished goods. So the working capital cycle of MSME is about 180 days, which kills it in about 2 years. The Large companies are benefitting at the cost of MSME. Further more, if MSME needs additional working capital, Banks are reluctant to respond or take unduly longer time. The responsive Banking system is needed to strengthen MSME as there is no alternative organized financing to this sector. The financing under Credit Guarantee Scheme must continue. Agriculture sector is darling of all Politicians but MSME has never been. The Finance Ministry & RBI must empower Banks to respond to need based requirements of MSME...

Top Indian companies make significant progress on disclosures and compliance in 2015: Report
The second study by FTI Consulting, a global business advisory firm, shows that top 100 listed Indian companies, by market capitalisation, have made significant progress on following mandatory disclosure norms and compliance in 2015. Whilst some might say this has been forced, the improvement has been impressive, it said in its report titled India Disclosure Index 2015.
 
As per the report, during 2015, BSE 200 companies, other than the BSE 100 constituents, taken as an aggregate, lag the aggregate BSE 100 constituents’ mandatory disclosure scores, but beat them (albeit marginally) when it comes to voluntary disclosure. "Only time will tell, if this is a more ambitious or enlightened perspective for this group, as they seek to attract investment and grow to replace constituents in the top 100 list," it added.
 
 
Overall, as a group, the BSE 100 index constituents, have an average composite disclosure score of 7.4 out of 10, a significant improvement compared to 6.7 out of 10 from 2015 primarily on the account of improved mandatory disclosure scores. 
 
As per the report, almost 45% have composite disclosure scores of eight or more which is up from 26% in 2015 - and includes eight companies, Axis Bank, Bharti Airtel, Federal Bank, IndusInd Bank, Infosys, Shriram Transport, Sun Pharma and  Vedanta, which stand out for achieving the maximum score of 10.
 
Only six companies, compared to 25 in 2015, of the BSE 100 index constituent companies have low composite disclosure scores of five or less, it added.
 
FTI said, the next BSE 100 or the BSE 200 without the BSE 100 companies does slightly better than the BSE 100 with an average composite disclosure score of 7.4. Six companies in this group Biocon, Cholamandalam, Jubilant Lifesciences, L&T Finance, SKS Microfinance and Welspun have a score of 10 out of 10.
 
Talking about mandatory disclosure scores, the report says, BSE 100 index constituents have an average score of 3.7 out of 4, much higher from the average of 3.1 out of 4 in 2015. 
 
"71 of the 100 companies in the BSE 100 Index had a full score for mandatory disclosure (up from 41 in 2015), with the remaining 29 falling short on either one or some of the mandatory disclosure parameters. This is a significant improvement within the last year. However, there are still close to a third who fall short of what we have considered to be full mandatory disclosure. Only three of all BSE 100 index constituent companies have mandatory disclosure scores less than 2.5 (compared to almost half in 2015), reflecting the leap by BSE 100 companies in mandatory disclosure compliance," FTI Consultancy says.
 
According to the report, a significant reason for improvement has been the improved individual scores regarding ‘analyst engagement information and earning call transcripts’ with 73% providing this information, which is up from 49% in 2015. A little over a quarter of the companies (27%) did not provide this information. Some of them interpreted the revised regulations to disclose details of the analysts they met but not the information they shared or exchanged, in violation of the spirit of fair disclosure and transparency that was the context of the revised regulations, it said.
 
The mandatory disclosure score for the next BSE 100 or BSE 200 without the BSE 100 companies was 3.4 out of 4, with the weakest performance on analyst engagement information and earning call transcripts. Only 49% of these companies disclosed this information on their corporate websites, the report added.
 
In voluntary disclosure scores, the BSE 100 index constituents have an average score of 3.7 out of 6, up from 3.5 out of 6 in 2015, when reviewed against seven voluntary disclosure parameters. Only eight of the 100 companies in the BSE 100 Index had a full 6 out of 6 score for voluntary disclosure, reflecting the low priority placed on providing additional information. 
 
Banks account for half of this group with highest voluntary disclosure scores namely, Axis Bank, Federal Bank, IndusInd Bank and Shriram Transport. Infosys, Bharti Airtel, Sun Pharma and Vedanta were the non-bank players in this list of high voluntary disclosure scorers, the report says.
 
The voluntary disclosure score for the next BSE 100 companies is 4 out of 6, with the weakest performance on debt information and business strategy articulation, the same as it was with the BSE 100 companies in 2015.
 
The greatest progress on voluntary disclosure by the BSE 100 constituents has been made on two parameters — better debt related information and strategy articulation. These were areas that were identified as weaknesses in the 2015 report. Both show up as weaknesses for the next 100 companies — indicating perhaps the areas to focus on for these companies in 2016, the report says.
 
FTI says, Indian companies have expended significant resources in reviewing disclosure policies and creating the necessary processes to be aligned to the new regulations. "Clearly, some Indian companies are leading the way — leveraging disclosure as a strategic signal to investors, employees, business partners and the public — that they are well governed and best-in-class corporations. At the same time, there are Indian companies, which have embraced regulatory changes in a strictly legalistic manner — following the letter but not necessarily the spirit of the regulations. Requirements of disclosing information about analyst engagements and presentations made to them have at times been selectively interpreted as information about analyst engagements only without making the information shared with them available to the wider public," it concluded.

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