Proposed law on plastic packaging may hit FMCG players
 
Fast-moving consumer goods (FMCG) companies, which reported healthy operating profit margins for the first half of the current financial year, may face an erosion in margins in the coming quarters due to rising raw material prices. In addition, on 17 September 2009, the Ministry of Environment and Forests released a draft notification that seeks to ban the use of recycled or biodegradable plastic for storing, carrying, dispensing or packaging foodstuffs.
 
This means that FMCG firms can use only ‘virgin’ plastic in a natural shade for packaging foodstuffs. Pigment dyes cannot be used to colour the plastic.
 
The proposed law will also ban the use of paper-laminated plastics for packaging soaps, hair dyes, snacks and shampoos. This means FMCG companies will have to use plastic bottles instead of sachets, which will increase their packaging costs.
 
The notification also stipulates that all plastic packaging materials should have a code or mark engraved which reveals the type of plastic used—virgin, recycled or bio-degradable plastic—and they should be less than 12x18 inches (30x45 cms) in size and less than 40 microns in thickness. 
 
If the notification becomes law, it will have a huge impact on the Rs7,500- Rs8,000 crore plastic packaging industry.
 
“Many of us feel that what has been proposed in the draft notification is not consistent with what is required. It will increase the cost of FMCG products and will make them unaffordable for the common man,” said Mr Venkatrangan, head of commercial, Paper Products Ltd.
 
The government has sought feedback from the industry within 60 days after the notification was released. However, FMCG companies claim to have received a copy of the notification only 15 days back and they now have only a week to put forth their views on the proposed law.
 
“We are approaching ISTMA (Indian Soap & Toiletries Makers' Association) with our suggestions, as the proposed law can have unintended consequences. The government has welcomed our suggestions so that we come out with a solution that is eco-friendly and also does not impact the FMCG industry,” said HK Press, vice-chairman, Godrej Consumer Products Ltd.
 
ISTMA will forward the suggestions of various industry players to the Confederation of Indian Industry (CII) which will then take up this issue with the government.

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NPS gets lukewarm response so far
 
The NPS was introduced amid much fanfare by the previous government, as a much needed reform in social security. This far-reaching initiative was intended to serve as a vehicle for retirement savings. Five years down the line, there are very few takers for the scheme, even among Central government employees.
 
The NPS, introduced in 1 January, 2004, is mandatory for Central government employees who joined service on or after that date. The scheme was subsequently opened to all citizens on voluntary basis with effect from 1 May, 2009. Citizens, especially in the non-government segment, have shown complete apathy towards the NPS. The number of non-government subscribers to NPS registered as of 21 October 2009 is a minuscule 2,321. The response from government employees too is not very encouraging. The total Central government employees registered under the NPS is just 5,38,276 and in case of State government employees, the figure stands at a mere 1,10,024. Considering that there are more than 50 lakh government employees in India, these numbers indicate the true extent of penetration achieved by the NPS.
To popularise the scheme, the Pension Fund Regulatory and Development Authority (PFRDA) has appointed 22 Points of Presence (PoPs) and six Pension Fund Managers for offering NPS to citizens. Branches of the registered PoPs designated as PoP Service Providers (PoP-SP) act as the initial point of contact and collection points for all citizens other than government employees desiring to obtain a Permanent Retirement Account Number (PRAN) under NPS. There were in all 798 PoP-SP branches as of 16 October 2009, and between them, these branches have managed to collect only 2,291 application forms so far. The poor response to NPS can be attributed to several reasons like higher enrolment cost, lack of confidence in the system and absence of distributors. Also, distributing and managing NPS funds is not exactly a profitable proposition.
Sanket Dhanorkar [email protected]
 

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Banks face a major problem in stepping up NPA provisioning coverage

Banks have been advised to maintain provisioning coverage ratio, including floating provisions at 70% by September 2010. What does this signify for banks with less provisioning?

Banking regulator Reserve Bank of India (RBI) in its second quarter review of monetary policy has set a deadline of September 2010 for banks to step up their loan loss provisioning, including floating provisions, to 70%. RBI has advised banks to do so with a view to improving the provisioning cover and enhancing the soundness of individual banks. It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks. At present, the provisioning requirements for NPAs range between 10% and 100% of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank.

 However, this could have adverse effects on banks whose provisioning at present stands much below the stipulated 70%. State Bank of India, ICICI Bank, IDBI Bank, Bank of India and Canara Bank are likely to face the heat, given that their NPA provisioning as of date is well below 70%. According to a research report by Sharekhan, effectively, if the banks spread the additional required provisions equally over the next four quarters, the additional provisions would form 32.2%, 19.0% and 22.2% of the FY2010 estimated bottom line of IDBI Bank, SBI and ICICI Bank respectively.” KR Choksey Research says in its report, “The mandated coverage ratio of 70% will have varied impact on banks. SBI, ICICI Bank and Canara Bank will see increasing provisioning requirements impacting their bottom line significantly.”

 Shankar Narayanaswamy, head of credit analysis, Standard Chartered Bank, says in his report, “These banks are likely to witness a significant decline in profitability over the next four quarters to accommodate the higher provisioning requirement. We might see some impact from this quarter onwards as ICICI Bank, SBI and BOI have yet to announce their results for H1-FY10.” However, he does not see this move impacting the banks’ capital. He adds, ”We do not envisage any capital shock for these large banks as a result of this increase in provisioning requirement, as the net income for the next four quarters should adequately cover the extra provisioning required to reach the overall 70% coverage level. However, this might hasten moves to raise equity capital in the near term.”

Anand Shanbhag, head of research, Avendus Capital, feels that banks’ earnings will be weighed down by stiffer NPL provisioning norms. He says, “Profits for the next four quarters are likely to be weighed down by the mandated rise in specific provision cover to 70% by end of September 2010. RBI data for end of March 2009 reveals that 21 of the 28 public sector banks and, 16 of the 22 private banks, reported provision cover below 70%.”

Apart form NPA provisioning, RBI raised the provisioning requirement for loans to the commercial real estate sector to 1% from 0.4%. Tushar Poddar, vice president & chief economist, Goldman Sachs India says, “All these measures indicate the RBI’s intention to withdraw accommodation and prevent asset prices from spiraling upwards.”
 
 

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