According to Barclays, restructuring loans in India imposes little pain on the borrower like Kingfisher. In fact restructuring debt creates an incentive for borrowers to ask banks to make a ‘sacrifice’, it said
Even as there are talks going on to provide a new lease of life through restructured loans to the Dr Vijay Mallya-promoted Kingfisher Airlines, British bank and financial services company Barclays said that India’s restructuring standards appear lax and thus create perverse incentives to the borrowers.
“(Indian) banks are allowed to classify restructured assets as standard even when they have relatively long repayment periods, take a long time to attain viability and most importantly even when the restructuring imposes little pain on the borrower. Specifically, restructuring is allowed even if the promoter’s ‘sacrifice’ is only 15% of the banks’ ‘sacrifice’. In our view, this reduces the discipline that the threat of default normally places on the borrower in other countries. In fact, it creates an incentive for borrowers to ask banks to make a ‘sacrifice’," Barclays said in a research note.
Kingfisher Airlines, one of the prominent accounts restructured in the previous round underwent Rs750 crore bank debt conversions into equity in April 2011 at a premium of 61.6% or at a price of Rs64.48 a share, while its prevailing share price was Rs39.90 and the Indian airline industry was still in trouble—facing growth and profitability challenges. Subsequently, the airline continued to make losses and is pitching for another round of restructuring since December 2011, with current price at Rs24.40 as on end-of-day on 28 February 2012.
Bank chiefs have been quoted as saying that Kingfisher would need to arrange fresh equity of Rs1,000-Rs2,000 crore before seeking additional funds from the consortium of banks, led by State Bank of India (SBI). A consortium of 18 banks, comprising 14 state-owned and four private banks, have provided huge sums to the cash-strapped airline, which has a total debt of about Rs7,057 crore and accumulated losses of about Rs6,000 crore.
Expressing concerns about the high level of loan restructuring being undertaken by Indian lenders, Barclays said it expect the bank's experience with loan restructuring in the current environment to be worse than in the FY08-09 and FY09-10 round. “Our analysis shows that monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and manage their debt burdens by taking on un-hedged forex liabilities. These factors are unlikely to be repeated in the current round,” it said in the report.
During the financial crisis of FY08-09 and FY09-10, Indian banks undertook a significant amount of loan restructuring (under special dispensation from the Reserve Bank of India). This restructuring program was widely seen as being a success as a relatively small proportion of the accounts that were restructured became non-performing assets. After a decline in FY10-11, restructuring activity has picked up again in FY11-12.
Barclays said, “Our analysis shows monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and managed their debt burdens by taking on un-hedged forex liabilities. These factors are unlikely to be repeated in the current round.”
Surprisingly, SBI and HDFC Bank, two of the biggest lenders in the country, have undertaken relatively low restructuring activity in the current financial year, compared with other banks.
Jindal Stainless and Essar Oil, the two large companies that underwent debt restructuring in the previous round, showed marked improvement in their interest cover ratios in FY09-10. However, according to Barclays’ analysis, a substantial part of the improvement came as a consequence of falling interest rates.
During FY08-09-FY10-11, Jindal Stainless increased its forex debt exposure to Rs3,400 crore from Rs1,800 crore, thus increasing the total proportion of its foreign currency debt to 40% from 30%. During this period, the un-hedged proportion of this debt remained high at 60%-70% levels. If the company had not taken on this un-hedged exposure, interest coverage in FY09-10 would have improved to only 0.7–1.2. Similarly, Essar Oil managed to improve its interest coverage from negative levels in FY09-10 to 1.4 in FY10-11. However, in the absence of rate softening coverage, levels would have improved only to 1.1 on our estimates, said Barclays.
The British bank said from an accounting perspective, the provisioning norms in India are relatively low in comparison with those of other Asian economies and, in its view do not conform to the accounting principles of conservatism. While Singapore and China require restructured assets to be classified as sub-standard or below, Indian banks can classify restructured assets as standard as long as they are classified similarly in books of 90% of the borrower’s creditors. Due to this classification, banks in the other economies are also required to maintain a minimum specific provision for the restructured assets, 10% in Singapore and 25% in China on sub-standard assets.
Three friends, who have been together since our pre-kindergarten days, get together to venture into growing and processing vegetables—an area which was totally new to them
We have always been fond of potato in its various forms. However, it was only about three years ago that I actually saw how the plant looks like. About three years ago, a few friends got together and have taken a plunge into growing and processing vegetables. It also happens that our project (if I may call it so) is located at the Nilgiris, which has great weather round the year and there is virtually no seasonality for growing vegetables.
What we are doing is very different from what we thought we would be doing when we first said ‘yes’ to joining the project. I thought it would be lush green farms, where we just put in the seeds and over time they would grow in to crops with their projected yields. Having worked in finance all my life, farming was another spread-sheet exercise. Inputs in column A and output in Column B, with a formula in between somewhere. Change the numbers in the input and the output automatically changes. The rigour of the spread-sheet extends to everything.
Soon, time to unlearn. The land we started on was full of tea bushes that had not seen any care for over fifty years. Roots were deep and big. The terrain was tough, with parcels of land that were accessible only by foot, provided we made clearances. After that it was a painful process of uprooting each of the dead tea plant and clearing the patch of land. Also, as the land is on hilly slopes, terracing had to be done. At this stage, no machineries like tractors or excavators could go in to the land parcels we had.
We, city slickers, had no clue about what we had got into. Primarily we went in this headlong, since two of the key founders are from the Nilgiris and one of them is a third-generation farmer. The other one is an expert in civil engineering and real estate. So, entire burden of realising our dreams rests squarely on the two gentlemen out there. Yes, we jeans-clad farmers turn up at the farm frequently, but that is often an intrusion in the day-to-day work.
Coming back to the tea bushes, we had to clear them manually. After that level the land, put new topsoil and then get it ready for farming. Since we started off with soil that had not seen any chemicals or fertiliser inputs over many years, our dream to make our farm products grow without any harmful chemicals was so much easier. We did not have the problem of first getting rid of the chemical residues in the land. We were on the path to ‘organic’ farming.
The process of clearing the land and getting it ready for farming took us over six months, for the first few acres.
We were fortunate enough to have a water source within our property, so one major problem was not there. It was a well thought out strategy to buy the land with water source in it. We have enough water to irrigate over a hundred acres, without digging a well. We also were fortunate to get water which can easily be bottled and sold as ‘mineral’ water.
We wanted to put in place a good irrigation system. Here we ran into our first hurdle. The large suppliers like Jain Irrigation had no interest in meeting our small needs. So, we had to buy things piecemeal, from the nearest city and put in place the entire system ourselves. One thing we must say is that in our farm, we have had to do almost everything with our own resources in terms of manpower and ideation.
Once the first plot was ready, we went with the trend in the Nilgiris and sowed potatoes. It is a long duration crop, taking nearly 120 days from planting the seed to harvest. It was interesting to watch the plants grow. As we neared the harvest our excitement reached fever pitch. Once the harvest was ready, it was our privilege and pleasure to pull out the first few crops and sit in the farm adoring the potatoes as if it was something we had personally created. The first harvest marked the first milestone in our journey. The yields were good, on par with anything in the region. Add to that, our potatoes had not seen any of the harmful pesticides or chemicals.
Our journey from land to harvest was interesting. Firstly, the venture was between a dozen or so friends, with three of us having been together since our pre-kindergarten days. The rest of the friends who came into the venture over time were people who wanted to be part of something different, given our backgrounds in the services sector. At some point we will scale to an extent which will need external capital. The interesting thing in our venture so far is that a few of us have put in efforts in an area which was totally new to us. And the business model we had chosen has no precedent. We are trying to be an ‘organised’ sector player in a fragmented industry. And at the same time, we have pride that we are creating additional food rather than replacing a farmer.
This was only the first part of our mission. The next step evolved when we came to sell our produce.
We shall see that in the next instalment of our story.
Our farm is named Lawrencedale Estates and Farms Private Limited (LEAF).
(The author can be reached at [email protected])
According to S&P, majority of the actively managed mutual funds underperformed their benchmark indices over the past five years. However, in 2011 they outperformed the indices
Ratings agency Standard & Poor’s (S&P) said a majority of actively managed Indian equity mutual funds have underperformed their respective benchmark indices over the last five years, but outperformed the indices over the latest 12 months ending December 2011.
“The latest S&P Index Versus Active Funds (SPIVA) scorecard for India highlights the difficulty of picking consistently successful stocks in volatile market conditions, with the majority of active managers underperforming their benchmarks over the latest five-year period. Although they reversed this trend in 2011 and beat their benchmarks as global stock markets tumbled, Indian equity funds still recorded heavy losses during the year—asset-weighted large cap funds fell by 21% while their equal-weighted equivalents were down by more than 22%. Their benchmark S&P CNX Nifty fell by close to 24% in 2011,” said Simon Karaban, director at S&P Indices.
The ratings agency said that the SPIVA scorecard for India also revealed that asset-weighted returns were higher than equal-weighted returns for all fund categories apart from gilts over the past five years. Asset-weighted large cap equity funds have returned 4.72% over the past five years compared to 3.41% for their equal-weighted equivalents. This indicates that funds with larger assets under management performed better than smaller funds, it added.
Tarun Bhatia, director for Capital Markets at Crisil Research, said, “The Indian mutual fund industry is going through a consolidation phase. None of the categories had a 100% survivorship over the past five years indicating mergers across categories. Among funds, diversified equity funds had the lowest survivorship in the one and five-year periods, while balanced funds had the lowest survivorship in the three year period.”
According to the SPIVA scorecard, produced by S&P Indices in partnership with Crisil, about 53% of large-cap equity funds failed to beat the S&P CNX Nifty, the leading benchmark index for large-cap companies listed on the National Stock Exchange (NSE), over the five years ending December 2011. Taking 2011 in isolation, however, active managers fared better, with 65% large-cap equity funds producing higher returns than the S&P CNX Nifty, it said.
A similar pattern was seen for diversified equity funds, which offer a wider choice of stocks than large-caps and therefore a greater chance of generating excess returns. About 58% underperformed their benchmark, the S&P CNX 500, over the past five years. In 2011 alone, however, 54% of diversified equity funds beat the index.
Active managers of Equity Linked Saving Schemes (ELSS) and balanced funds (equity oriented hybrid funds) have also fallen behind benchmarks over the past five years. In contrast, the majority of active managers of Monthly Income Plans or MIPs (debt-oriented hybrid funds), gilt and debt funds (which invest mainly in corporate debt) have outperformed their benchmarks over a five-year period. In 2011, majority of balanced and MIP funds underperformed, while majority of ELSS, gilt and debt funds beat their benchmarks.