Nomura's proprietary indices suggest uneven recovery
Nomura says its heat-map of high-frequency data indicates that the economic recovery remains uneven and divergence between weak private investment and rising consumption (urban) and slowing industry against a relatively robust service sector continues. 
The Composite Leading Index of Nomura, which has a two-quarter lead over non-agricultural GDP growth, suggests that non-agricultural GDP growth could moderate slightly in Q2 and Q3 2016. "However, we believe that a normal monsoon, forthcoming seventh pay commission pay hikes and continued public capex should support GDP growth towards end-2016. We expect GDP growth to recover to 7.8% in 2016 from 7.3% in 2015," it added.
Citing its RBI Policy Signal Index that has moved in to neutral zone, Nomura says, the recent pickup in inflation, along with higher oil prices has reduced the probability of further near-term rate cuts and it believes rates will remain on hold until end-2016. The Nomura RBI Policy Signal Index (NRPSI), which measures the relative probability of near-term monetary policy tightening or loosening rose to -0.15 in mid-May, from -0.21 in March. Historically, NRPSI values lower than -0.2 coincide with a rate cut, while values between -0.2 and zero correspond to policy rates staying on hold.
"Apart from the upside risk to inflation from the seventh pay commission, constant food price pressures and still sticky underlying (core) CPI inflation at slightly above 5% indicate that achieving the RBI's 5% inflation target cannot be taken for granted. Moreover, most of the cyclical factors (oil price falls, rural wage growth deceleration and growth slowdown) that drove disinflation are behind us, leaving little potential for a significant downside. Therefore, we believe that instead of cutting rates further, the RBI will focus on improving liquidity to enable faster transmission of 150bp rate cuts already delivered," the report added.
Nomura says, its economic heat-map of high-frequency data, where the green shading denotes high growth and red shading denotes low growth, shows that the divergence between weak investment (private sector) and rising consumption (urban) and slowing industry vs robust services continues to characterise the economy.
"Drivers of growth are limited, namely urban consumer demand and transportation services. The good news is that green-shoots are visible in external demand (non-oil export volumes and visitor arrivals) and certain infrastructure sectors (cement and power), although both are still at very low levels. Meanwhile, rural demand remains weak, while private investment is yet to show any signs of recovery, which is not surprising given subdued external demand, low capacity utilisation and high leverage in several sectors. Note that the contraction in passenger car sales (indicator of urban demand) and pick-up in two wheeler sales (indicator of rural demand) in Q1 2016 have been driven by one-off factors and do not signal a trend," it added.
Nomura's Monthly Activity Indicator, a weighted average growth indicator combining high-frequency data in the economic heat-map, stood at 8.3% in March, compared with 8.6% in February and an average rise of 8.1% in H2 2015, indicating stable growth in Q1 2016. However, Nomura says, "...going ahead into Q2 and Q3 2016, we see non-agricultural growth consolidating at slightly lower levels. Nomura's Composite Leading Index (CLI) for India, which has a two-quarter lead over non-agricultural GDP growth, is pointing to a slight moderation in non-agricultural growth momentum into Q3 2016, owing to tighter financial conditions and slowing industrial recovery (Figure 2)."
The Nomura Economic Surprise Index for India (NESII 2.0) slipped into the negative zone to -0.05 in mid-May from +0.28 in mid-April, indicating that incoming data have surprised negatively relative to consensus expectations. "CPI inflation was significantly higher than expected owing to higher food prices, while industrial production disappointed in its latest (March) reading. In our note last month, we had highlighted that NESII tends to be mean-reverting and as it was close to +1 standard deviation, there was a strong likelihood of negative data surprises. The trend of negative data surprises could continue in the near term," it added.


Sensex, Nifty under pressure – Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex were struggling to rally. The major indices of the Indian stock markets were moving sideways during the week and have closed on Friday with losses of 0.74%-1.41%. The weekly trends of the major indices of the Indian stock markets are given in the table below:
Disappointing macro-economic data subdued the Indian equity markets on Monday. Consequently, key indices traded flat -- marginally in the green during the mid-afternoon session, as heavy selling pressure was witnessed in banking, capital goods and oil and gas stocks. Initially, the key indices opened on a positive note on Monday, in sync with their Asian peers. However, investors were disappointed after a key macro-economic data showed a faster rise in annual wholesale inflation. 
India's annual wholesale price index (WPI) moved up into the positive zone at 0.34% for April, from  (-)0.85% in March and (-)2.43% during the corresponding month of the previous year. The WPI moved up after staying in negative zone for 17 straight months, mainly on the back of a rise in global commodity prices. The rise comes after the Consumer Price Index (CPI) for last month also showed an upward movement in annual retail inflation. The rise in both the inflation indices has reduced the chances of the Reserve Bank of India (RBI) to further ease its key lending rates during the monetary policy review scheduled in June. 
Apart from the WPI, investors' sentiments were subdued after data released on May 13 showed that India's merchandise exports in April fell for the 17th straight month. Last month's exports were valued at $20.57 billion -- down 6.74% against $22.05 billion in the like month of last year.
Besides, selling pressure was witnessed in the banking sector after Bank of Baroda (BoB) reported its second consecutive quarter of losses. The BoB's quarterly results were released after the market hours last Friday.
On Tuesday, key indices made gains during the late-afternoon trading session, as healthy buying was witnessed in stocks of oil and gas, automobile, capital goods and banking sectors. However, investors were seen cautious, given the recent negative macro-economic data and poor quarterly results from state-owned banks. Key economic indicators show rising inflation trend that has reduced the chances of the Reserve Bank of India (RBI) further easing its key lending rates during the monetary policy review scheduled for June.  In addition, the risk-taking appetite of investors was subdued a day ahead of the US Federal Open Market Committee (FOMC) releasing its minutes. The US FOMC minutes assume significance as they can give vital cues on the future course of US interest rates. On the BSE, there were 1,303 advances and 1,300 declines at the close of Tuesday’s trading.
State-run Indian Oil Corp (IOC) on Tuesday raised transport fuel prices, with petrol becoming costlier by 83 paise a litre and diesel by Rs.1.26, both at Delhi and inclusive of local levies, with corresponding increase in other states. Indian Oil Corporation share prices closed at Rs407.45, down 0.48% on the BSE. US stocks posted solid gains on Monday as investors cheered over a strong rebound in oil prices.
Negative Asian and US indices and disappointing quarterly results pushed the Indian equity markets down on Wednesday. This led the key indices to trade in the red during the mid-afternoon trade session, as selling pressure was witnessed in automobile, banking and information technology (IT) stocks. The Asian and domestic markets receded on the back of renewed fears of a US rate hike. In addition, reduced chances of the Reserve Bank of India (RBI) to further ease its key lending rates during the upcoming monetary policy review subdued investors' sentiments.
Public sector lender Punjab National Bank (PNB) on Wednesday posted a massive net loss of Rs.5,367.140 crore for the fourth quarter ended March 2016 caused by bad loans, as compared to net profit of Rs.306.56 crore in the corresponding period of last fiscal. For the entire fiscal 2015-16, the bank has posted a net loss of Rs.3,974.39 crore for the year ended March 31, 2016 as compared to net profit of Rs.3,061.58 crore for the year ended 31 March 2015, PNB said. PNB shares closed at Rs76.20, up 3.25% on the BSE.
Negative global cues, coupled with lower crude oil prices and a weak rupee, dragged the Indian equity markets lower on Thursday. This led the key indices to trade in the red during the mid-afternoon session, as heavy selling pressure was witnessed in the banking, capital goods and fast moving consumer goods (FMCG) stocks. Initially, the key indices opened on Thursday on a flat note, in sync with their Asian peers. The Asian and domestic markets receded on the back of hawkish comments from the US Federal Reserve, which increased the chances of a future rate hike. The US Federal Open Market Committee's (FOMC) April minutes disclosed that the US central bank might raise key lending rates in June. A hike is expected to lead FPIs (Foreign Portfolio Investors) away from emerging markets such as India. Besides, lower crude oil prices and a weak rupee eroded investors' confidence. However, investors' sentiments turned slightly positive after the electoral victory of the Bharatiya Janata Party (BJP) in Assam, which could potentially strengthen the central government's ability to push through economic reforms. On the BSE, there were 919 advances and 1,628 declines, while 165 were unchanged.
On Friday, positive global indices, along with higher crude oil prices and value buying, pushed the Indian equity markets higher. This led the key indices to trade marginally in the green, as healthy buying was witnessed in automobile, fast moving consumer goods (FMCG) and consumer durables stocks. However, the market turned bearish in late afternoon and fell by around 0.45%. There were 885 advances and 1,682 declines on the BSE. 


“NPA menace won’t reduce unless top management accountability is fixed”
The rising non-performing assets (NPAs) in public sector undertaking (PSU) banks cannot be controlled unless there are changes in the regulation for fixing accountability of top management, says a bank employees' union.
"The chairman and managing directors (CMDs), executive directors (EDs) and chief executives (CEOs) of PSU banks are President Appointees. Hence, no action can be taken against them or hold them accountable for their wrong doings. This provision enables them to take decisions in sanctioning of loans. If the loans are defaulted these CMDs or EDs or CEOs are not held accountable for the NPAs. Unless and until mandatory provisions are made in rules for fixing accountability of them, NPA problem will never end," says Subhash Sawant, General Secretary of Indian National Bank Employees' Federation (INBEF), the banking wing of INTUC (Indian National Trade Union Congress).
He alleged that such provisions are deliberately not being made by the Ministry of Finance as it will affect the loan sanction where politicians are interested. Sawant has been actively raising his voice against the rising NPAs in public sector banks (PSBs) and its inept handling by the bank officials for many years. His relentless battle in the past exposed the dubious dealings of Central Bank of India’s former chief Homai Daruwala.
On 4 November 2010, Sanjeev Kumar Jindal, the then Director for Vigilance in the Finance Ministry wrote to the Secretary of Public Sector Enterprises Board (PSEB), which stated, "Provisions regarding taking disciplinary action in respect of heads of Public Sector Enterprises are governed by Nationalised Banks (Management & Miscellaneous Provisions) Scheme 1970/80. These provisions do not have any provision for initiation of disciplinary proceedings against CMDs and EDs, who are Presidential appointees, except removal from the service of the bank after following due procedure. In case an officer is found guilty of any misconduct and in the meantime he retires from the Board, Department has no option but to issue a 'displeasure' which may not serve any purpose."
This provision allowed Central Bank of India’s the then CMD Daruwala, who was accused of violating several guidelines, walk free with just a ‘letter of displeasure’. The case with the Central Bank of India CMD is not a one-off; there have been several other instances where bank heads have committed white-collar crimes, only to be let off without as much as a rap on the knuckles.
Commenting on the existing legal provisions, Sawant had said, "The present system allows corrupt high-level bank officials to go scot-free. There is absolutely nothing that can bring them to book. Up to the level of general manager, the particular bank's service regulations come into force, where provisions for disciplinary action are available. However, positions of CMD and executive director do not fall under these rules, as they are appointed by the president of India. Even if investigations are carried out, these officials escape during court proceedings, due to lacunae in the regulations. It is my firm opinion that these people be brought under the purview of some law."
Earlier on 10 December 2014, the INBEF had filed a public interest litigation (PIL) in Bombay High Court about rising NPAs in public sector banks. On 22 March 2016, the HC directed the central government, finance ministry, RBI and Central Vigilance Commission (CVC) to treat the PIL as a representation made by CBEU and take necessary decision as per the law. The HC also directed them to convey the decision to the bank employee union within three months. These three months would end on 22 June 2016 and we hope that the authorities will take right decision, says Sawant.
In March 2016, INBEF held a dharna at Jantar Mantar in New Delhi for several long pending demands as well as for introducing an agriculture loan restructuring policy for farmers. Prashant Bhushan, senior counsel at the Supreme Court, while congratulating INBEF for taking up the issue of the recovery of NPAs of banks, criticised functioning of the government, particularly, in the banking sector.  



Mahesh S Bhatt

5 months ago

Its political /business ploy high land prices/real estate /Petrol /Diesel has escaleted business costs to exorbitant levels & businesses are not getting transpired.

Its Capitalism at worst.All businesses over grown with Assets / Investments having poor ROI/Debts killing exposure /manipulated environmental abuses/errors & omissions convieniently overlooked by Banks( eg Kingfisher's last 153 crore IDBI loan).

Poor Insolvency/corrupt failed judiciary acquitting Lalu/Jayalalitha

Banks are party with government & financial meltdown made up question is when??

Do Yoga Chill if spread n heat is more call [email protected]

Sushil Prasad

5 months ago

The incidence of NPAs in the banking system is akin to a manufacturing organisation making defective products. Manufacturing organisations set up quality control systems which encompasses design of appropriate manufacturing processes, quality control of their raw material or sub-assembly suppliers, correct operation and control at each stage of the manufacturing process till production of the finished product. For achieving consistently good quality products it is therefore essential for the quality control mechanism to be functioning well throughout the production process.

One of the key functions of banks is to produce loans of consistently good quality and the production process in this context consists of having an appropriate conceptual framework for lending, selecting suitable people with the required skills, giving them adequate and good training, understanding how or why credit risks arise and having clear laid down credit risk management policy, having a suit of loan products which are in line with the requirements of the potential borrowers and the risk capabilities of the bank, a not too cumbersome loan documentation process (this is extremely tricky since workable debt contracts cannot be complete contracts), monitoring the loans once it is made, and taking corrective action as and when required, entrapping the cash flows etc. All these taken together would ensure a high probability that the loans made are repaid at the time and on the terms agreed at the outset. Failing which, banks have to have sound processes for recovering loans which go bad inspite of taking all possible measures earlier. In my opinion, the reasons given in this article for high and increasing incident of NPAs in Indian PSU banks is highly biased and simplistic. High NPA levels in India is a direct result of the failure of the banking industrys quality control processes.

Veeresh Malik

5 months ago

Quick guide on how to do a large NPA (atleast 2000 crores).
1) Have a previous bad debt of atleast 200 crores and friends who have crossed 1000 crores so that your knowledge base is in position and already use cars and houses beyond your means.
2) Appoint a loan consultant, usually a retired or suspended senior banker, who will then find an amenable bank which will then be the lead bank and in turn farm the loan out to other banks to make a consortium.
3) Meanwhile start working on a project keeping in mind subsidies, land, trends, flavour of the day business, CLB, BIFR, DRT, existing rules, new rules, and political alignments for the next 2-4 years.
4) Go into overdrive on Page-3, PR, get a funky doctorate, become sugar daddy to youngsters from all 3 genders, acquire security bouncers and adopt a couple of thanas.
5) In the background, the consortium of banks starts generating large amounts of paper like project reports, guarantors, site inspections, vendor inspections and pass it round-and-round so that any future investigation will have truck loads of papers and signatures to re-verify.
6) Interim, join the bandwagon in celebrating weddings of children of important people from banking, finance, insurance and similar entities, public sector and government.
7) At some stage or the other there will be an earthquake, floods or drought, at which point start fiddling with the sanctioned amounts and make outrageous demands on the lenders consortiums. Document the refusals.
8) Now use these refusals as a reason to declare that your outfit is sick, file multiple RTIs to confuse matters even more, and keep the Board of the Banks happy.
9) On the side, you may or may not choose to "go public" and carry that game to a natural consequence, something like 1000 rupees book-building down to 3 rupees after a few years.
10) When things start sinking, get in synch with a Godman or Godwoman, and use them as go-betweens to try and fix the cash and white component towards achieving haircuts by banks, this can also be called divine forgiveness.
Remember - you have to PLAN an NPA, there is no point being serious about really doing something, that in the famous words of the early day NPA czars, was for cobblers and tailors.
Oh yes, I forgot, how could I? Start and then use a software company via STPI scam route to change the colour of all that you sent abroad to bring it back.

Sudhakar Ojha

5 months ago

Before talking of their accountabiloty please provide them strength to withstand pressures.

Meenal Mamdani

5 months ago

We always blame the politicians for putting pressure on the banks for granting dubious loans. This article points the equal culpability of top bank officials. It is high time that the officials are held criminally responsible when negligence or deliberate inaction results in loss to the bank.


Ramesh B Mhadlekar

In Reply to Meenal Mamdani 5 months ago

What RBI has been doing as a Regulatory authority just enjoying fat salary and perks and after retirement being absorbed in foreign and Private banks to help them escape clutches of the rules laid by RBI.

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