RBI fears stressed assets of Rs5 lakh crore from power, real estate and infrastructure sectors on higher interest rates and slow growth. The rise in NPA may reflect very badly on bank’s book
The Reserve Bank of India (RBI) fears that bank loans of around Rs5 lakh crore (Rs5 trillion) may come under stress due to rising interest rates and slow revenue growth. The sectors affected most by the bad loans would be power, aviation, real estate and roads. Experts believe that if economic activity does not pick up, the rising non-performing assets (NPAs) from these sectors will have a severe impact on the books of Indian banks.
Subir Gokarn, deputy governor of the RBI, on 8th November, had said that the NPAs of banks are not posing any threat to the banking system. However, sources confirm that the RBI is expecting huge bad debts of Rs5 lakh crore from various sectors.
According to the sources, the central bank has arrived at the amount considering possible NPAs from the state electricity boards (SEBs), real estate due to slow demand, particularly from the metros, and de-growth in aviation sector on higher cost of turbine fuel and excess capacity.
During the second quarter of the current fiscal, bad loans of listed banks in the country rose by 33% to Rs1 lakh crore due to rising interest rate and sluggish growth.
Power sector is under financial strain due to increasing losses by SEBs and non-execution of new projects because of the regulatory hurdle. Last year, power distribution companies, lost about Rs40,000 crore due to subsidised tariffs. Currently, experts say, banks are hesitating to extend fresh loans to these companies. Allahabad Bank, a public sector lender, has already frozen lending to power sector companies.
Macquarie Economic Research, in a report, noted that losses by SEBs would result in huge state fiscal deficit: “The last audited, published review of SEB finances in FY10 reflected an average loss of Rs.0.86/kWh in India, the FY11 annual SEB losses (without accounting for subsidy) have been reported by media to be around Rs700 billion+ (US$15bn, 0.9% of GDP). Incorporating the SEBs losses (subsidy received basis) would result in the state fiscal deficit widening from 2.3% of GDP to 3.0% of GDP in FY12,” Macquarie said.
According to rating agency, CRISIL, advances of around Rs56,000 crore, or 12%, which is the exposure of domestic financial institutions’ to the power sector, may turn into to bad loans if power distribution reforms are not taken soon. CRISIL said the sector also suffers from huge aggregate technical and commercial losses apart from the wide gap between average cost of power supply and actual realization.
Things are not rosy for the Indian aviation sector, as well. Kingfisher Airlines is not the only one under mounting debts. The entire sector is hit by the rising aviation turbine fuel cost, which is the major operational cost and over-capacity created due to more leased aircrafts by the companies. At the same time the yield per seat has fallen.
According to the estimates by Centre for Asia Pacific Aviation (CAPA), an aviation industry consultant, during FY12, Indian aviation sector is likely to make a net loss of around Rs12,500 crore. Usually, the airlines cover the losses through additional funding from banks in the form of loans as working capital. Experts believe that in case there is a default, it directly affect the bank’s balance sheet.
Same goes with Indian real estate sector. According to RBI, Indian developers’ outstanding credit rose 23% to $24.4 billion or about Rs1.22 lakh crore at the end of June 2011 from a year ago period. However, with surging input costs and slumped sales, realtors are finding it tough to repay their dues. High inflation scenario has also made taking loans expensive. DLF, India’s biggest realtor, saw its debt going up by almost Rs1,000 crore during July-September 2011 to Rs22,519 crore. Mumbai-based realtor, HDIL has incurred a debt of Rs4,000 crore as of September end.
A series of scams hit the union government since last year, which has taken toll on the infrastructure projects such as construction of highways. Non-execution of these projects has put in financial strains on the infrastructure sector that may lead to possible default on loan repayment. According to a media report, the 20 biggest loans given by banks are related with infrastructure sector. Experts say that the rising input cost and interest rate is also escalating the cost of the projects.
An accusatory letter by a Whole Time Member, an unusual writ petition by some eminent citizens, an explosive rebuttal by the finance ministry and the buck of senior appointments at the capital market watchdog again stops at the Prime Minister
At the end of the day, it may boil down to an outgoing director’s pique at not getting a two-year extension at the Securities & Exchange Board of India (SEBI) or a well-paid-perked directorship at its National Institute of Securities Management (NISM). SEBI’s director K M Abraham’s letter to the Prime Minister (PM) hurling a slew of stunning allegations at the new incumbent, Mr U K Sinha and Finance Minister Pranab Mukherjee has caused a heap of dirty linen to spill into the media. This will hopefully have the salutary effect of a much needed clean up of an extraordinarily arbitrary, high-handed and increasingly corrupt regulatory body. But an unintended consequence of the many rivalries is that it again exposes the failure of Prime Minister Manmohan Singh.
Clearly, a well-orchestrated plan has gone awry; but those of us who follow the news closely can now see a clear pattern.
* It started with a series of reports about how and why Chairman C B Bhave and his two whole time directors did not get a five-year term as had been proposed and put on hold over a year earlier. These reports appeared despite the fact that U K Sinha’s appointment as SEBI chairman had already been announced. Those of us who track SEBI regularly, knew that a five-year term for Mr Bhave and the directors had been mooted within months after their 3-year appointment but had been put on hold by the Finance Minister long before their term ended. Why then did it make news when it was no longer relevant?
* Soon after, media reports selectively carried portions of K M Abraham’s letter to the Prime Minister (PM). He portrayed himself as a whistle blower and alleged that Chairman U K Sinha, under pressure from Finance Minister (FM) Pranab Mukherjee was diluting SEBI action in four specific cases. Strangely, the full letter was made public only on 28th October by First Post which obtained it through an RTI filing. (http://www.firstpost.com/business/pranab-pressured-sebi-to-go-easy-on-ril-save-rs-1500-cr-118531.html)
* Moneylife then scooped U K Sinha’s rejoinder to Abraham’s charges, which showed there had been no dilution in SEBI’s stance in the four named cases even the allegations of political pressure were true. Sinha also alleged that Mr Abraham was mentally disturbed, in the habit of secretly taping people and had repeatedly sought an appointment in NISM which was apparently assured to him by Mr Bhave.
* Next, the media reported another letter from Dr K M Abraham to the PM, where he claimed that he and his family were under threat because the PM’s office had forwarded his letter to the Finance Minister, who was the prime subject of his complaint.
* In the meantime, a group of eminent citizens have filed a public interest litigation alleging that the constitution of the search committee for appointing the chairman and directors was altered to give the finance minister more say on the selection. Since the case is sub-judice, we are reproducing the writ petition and the affidavit verbatim.
Moneylife has pointed out that the recommendation of the appointment committee has been frequently ignored in selecting the SEBI chairman. (http://www.moneylife.in/article/regulation-appointments-disappointments/20543.html). We pointed out that even C B Bhave was not on the list forwarded by the committee. Worse, he was appointed despite an on-going litigation by the National Securities Depository Limited (NSDL) which he founded and headed for over a decade, with SEBI. All this has now been reiterated by the Times Group on 13th and 14th November. In fact, the then Joint Secretary K P Krishnan called senior journalists to explain how Bhave would be “ring-fenced” from NSDL related issues. The fact that the ring-fence did not work and all NSDL’s wrongs were sought to be buried have been extensively reported. Media reports now reveal that P Chidambaram pushed for Mr Bhave’s appointment even when he had told the selection committee that he was not interested in the job. In fact, Mr Bhave had taken the unusual step of appearing before the selection committee, despite not wanting the job, only to be able to air his grievances against then SEBI Chairman M Damodaran, who had initiated action against NSDL in the IPO (Initial Public Offering) case of 2006 and appointed a two-member bench of the SEBI board (comprising Dr Mohan Gopal and V Leeladhar) to look into the issue. The negative findings of the bench were first sought to be buried by SEBI and later declared null and void until the displeasure of the Supreme Court forced a volte face.
Now we come to the interesting part of the new PIL. The writ filed by eminent citizens says that orders to extend the term of C B Bhave and the two whole time members from three to five years was “reviewed and negated” and the rules for the composition of the selection committee were amended to give more powers to the FM. Anyone who has followed SEBI closely (unlike the petitioners in this case) is in fact rather shocked and surprised at the quiet and surreptitious move to extend the term of the chairman and his two whole time members through the petition.
What if the apex court goes into issues that the eminent citizens have ignored? For instance, who proposed the move to grant this extension? Wasn’t it the same finance minister (P Chidambaram) and Joint Secretary (Dr K P Krishnan) who stood by and allowed SEBI to throw out an order of its own bench in the NSDL matter? Wasn’t this the same finance ministry team which stood by and allowed Dr Mohan Gopal to be so humiliated that he did not attend any SEBI board meeting towards the end of his tenure?
Or, what action was taken by the government and the finance ministry on the explosive and anguished letter to the PM by Dr Mohan Gopal (who headed the National Judicial Academy and has taught at Harvard Law School for over a decade before returning to India) about capricious functioning of SEBI under Mr Bhave (http://www.moneylife.in/article/dr-mohan-gopals-explosive-exposé-of-sebis-functioning-under-bhave/16246.html).
Since the buck stops at the PM, it could well be that these issues are not likely to be raised before the apex court. But if they are, a few surprising skeletons could tumble out and expose the many machinations and vested interests at work behind the scenes.
Most US fund managers cannot beat the popular benchmark S&P500 over the long term. Will this new fund ICICI Pru be able to achieve this difficult task?
ICICI Prudential mutual fund has filed offer document with SEBI to launch ICICI Prudential US Blue Chip equity fund, an open-ended developed market equity fund. The fund will invest in equity and equity related securities of companies listed on New York Stock Exchange (NYSE) and NASDAQ. The performance of the scheme will be benchmarked against S&P 500.
Does investing in this fund make sense? Only about 30% of mutual funds beat the S&P 500 in any given single year. And if you are lucky enough to pick one of the 30% that do beat the S&P, how likely is it that the fund will beat the S&P in two straight years, or five straight years or even 20 straight years? The longer the period, the fewer are the winners.
The potential to outperform the market is one advantage that actively-managed funds have over index funds, and this notion of outperformance is attractive to investors. After all, why settle for an index fund when you know you will only receive the market return, less a nominal fee, to the fund’s manager?
Unfortunately, evidence that actively-managed funds can consistently outperform their relevant index is difficult to find in the US. It’s even more challenging for an individual investor to identify which actively-managed fund will outperform the index in a given year.
Actively-managed funds start at a disadvantage when compared to index funds. The average ongoing management expense of an actively-managed fund costs 1% more than its passively managed cousin. The expense issue is one reason why actively-managed funds underperform their index.
Another issue, which is not reflected in fund return numbers, is that the portfolio manager of an actively-managed fund -- who is in search of extra returns -- buys and sells investments more frequently than an index fund.
The evidence shows that there are good active managers, but finding such managers in advance of their outperformance is difficult. More importantly, as a Barclays study suggests, uncertainty always surrounds the good managers. Can they continue to outperform?
The largest and most well-known index fund is the Vanguard S&P 500 Index Fund. This index fund attempts to match the Standard & Poor’s 500 Index. How well has it done? Over the last ten years it has beaten the performance of over 90% of all domestic equity mutual funds and also over the past three and five year periods! Are you a good enough investor (or lucky enough) to be able to pick the 10% of mutual funds that will beat the S&P Index? Probably not. Will ICICI Pru will be the one of 10%?
How can we justify that ICICI Prudential US Blue Chip equity fund would be able to outperform its benchmark S&P 500, when even the US Index funds find it difficult to do so. And what unique foresight does ICICI Prudential US Blue Chip equity fund manager have which will make him better off than the US fund managers? Only time will tell.
Finally, we are not sure who from India would want to invest in US stocks since S&P500 has grossly underperformed emerging markets over most periods.