Still under stress: Monday Closing Report

A fall to 4,700 may be possible

The decline in the global markets and domestic factory output at a 30-month low resulted in the indices closing lower for the second day. Today, the Nifty traded below Friday's closing in the range of 4,824 to 4,879, which is well below the level of first support of 4,920. As mentioned in our weekly report on Saturday that the market would be under stress, and the Nifty would trade between 4,800 to 5,000; we may see the fall extending to 4,700. The National Stock Exchange (NSE) saw a volume of 45.73 crore shares being traded, which was lowest in the past 52 days (including today).

The market opened lower as concerns regarding the global recovery persisted and on expectations of a slowdown in domestic growth. The Nifty opened below its psychological level of 4,900 at 4,874, down 69 points from its previous close, and the Sensex began the day down 198 points at 16,256. Metal, realty, banking and consumer durables sectors were under selling pressure in early trade.

The market traded sideways with the Nifty rising to its intraday high at 4,879 in late morning trade. The opening figure was the Sensex's intraday high. Range-bound trade continued with the Nifty falling to its day's lows at 4,824 around noon. The Sensex touched its intraday low at 12.30pm, with the index falling to 16,056.

While a minor recovery helped the market come off the day's lows, the gains were capped by European stocks opening lower on worries that Greece is likely to face difficulties in achieving its deficit targets this year and the next. Finally, the market settled with a cut of almost 1.90%, ending lower for the second straight day. The Nifty shaved off 94 points to settle at 4,850 and the Sensex closed trade at 16,151, a contraction of 302 points.

The advance-decline ratio on the NSE was 414:1251.

Among the broader indices, the BSE Mid-cap index tanked 1.90% and the BSE Small-cap index declined 1.48%.

All sectoral indices settled lower with the BSE Realty (down 4.59%) as the top loser. It was followed by BSE Metal (down 4%), BSE Bankex (down 2.82%), BSE Capital Goods (down 2.52%) and BSE Consumer Durables (down 1.63%).

Coal India (up 1.13%), ONGC (down 1.07%), Hero MotoCorp (up 0.87%), Mahindra & Mahindra (up 0.85%) and Bharti Airtel (down 0.65%) were the top gainers among the Sensex stocks. On the other hand, DLF (down 7.82%), Jindal Steel (down 6.02%), Hindalco Industries (down 5.45%), Tata Steel (down 4.95%) and Sterlite Industries (down 4.30%) were the key losers on the index.

The Nifty leaders were BPCL (up 4.38%), Reliance Power (up 2.02%), Reliance Capital (up 2.01%), GAIL India (up 1.86%) and Cipla (up 1.67%). The main laggards were DLF (down 8.77%), Jindal Steel (down 6.92%), Hindalco Ind (down 5.59%), Tata Steel (down 4.89%) and SAIL (down 4.69%).

Markets in Asia posted a sharp decline with the Hong Kong market tumbling to its lowest level since May 2009 on fears that the debt problems in Europe might stifle global growth. This apart, a slowdown in manufacturing growth across the region and a decline in commodities also weighed on investor sentiments.

The Hang Seng plunged 4.38%, the Jakarta Composite plunged 5.64%, the KLSE Composite declined 1.41%, the Nikkei 225 skidded 1.78%, the Straits Times slipped 2.01% and the Taiwan Weighted erased 2.93%. Markets in China and South Korea were closed for local holidays.

Back home, foreign institutional investors were net sellers of stocks worth Rs459.47 crore on Friday. On the other hand, domestic institutional investors were net buyers of equities worth Rs517.34 crore.

Anil Ambani-led Reliance Power today said it would earn Rs2,000 crore by trading carbon credits from its Tilaiya ultra mega power project (UMPP) during the first 10 years of its operations. The Clean Development Mechanism Executive Board (CDM-EB) of UNFCCC allows the Tilaiya project-to be commissioned during the 12th Five-Year Plan period, starting next year-to earn Certified Emission Reductions (CERs). Reliance Power gained 2.02% to close at Rs78.30 on the NSE.

Pharma major Strides Arcolab today said it has received the US health regulator's approval to market injectable Clindamycin USP, used in the treatment of bacterial infections, in the American market. The product will be available in three single-dose vial sizes and in pharmacy bulk packaging, Strides Arcolab said in a statement. According to IMS data, the size of the US market for injectable Clindamycin stood at $65 million (including bags) in 2011. The stock tumbled 5.57% to Rs334 on the NSE.

Business conglomerate Mahindra & Mahindra, through its real estate arm Mahindra Lifespace Developers,  plans to make an entry into the affordable housing segment with homes priced up to Rs10 lakh across many cities in the country. Mahindra Lifespace fell 1.33% to close at Rs294 on the NSE.


Southwest monsoon showers above-normal rainfall this season

Over the past month, the southwest monsoon has picked up substantially and finally ended on a positive note. According to a study released today, cumulative rainfall for the week ended 28th September stood at 2.3% over the Long Period Average. But will food inflation drop?

The monsoon season is coming close to its end. During the previous week, there was reduced rainfall, though the meteorological department expects scattered showers over the north-eastern parts of the country like Nagaland, Manipur, Mizoram and Tripura. South-peninsular India is also expected to receive some rainfall.

In an update released today on the economy, research firm Emkay Global has said that cumulative rainfall has ended approximately 2.3% over the LPA (Long Period Average) for the season ending on 28th September. What is most heartening is the fact that rainfall in rain-dependent areas is approximately 8.3% above the LPA. However, regions like Himachal Pradesh, Telangana and north-interior Karnataka, which are dependent on rainfall, have received monsoon showers at a huge 10%-12% below normal. Telangana especially will be the hardest-hit considering the fact that this region of Andhra Pradesh has been embroiled in political turmoil over the past few months.

The report also indicates that acreage for kharif crops has touched 104.50 million hectares as of 30th September. This is a healthy increase of 2.7% in acreage over the same year-ago period. Rice, oilseeds, sugarcane and cotton have seen an increase in acreage of 9.5%, 2.7%, 3% and 9.4% year-on-year (Y-o-Y) respectively. But the acreage of cereals and pulses has seen a fall of 5.6% and 9% Y-o-Y respectively. Moneylife had written earlier (See: Price hike of 10%-15% seen in select pulses like yellow peas, 'tur dal' and lentils ) on how the drop in kharif production had caused an increase in prices in cash crops. This drop in acreage and hike in prices will have a direct impact on food inflation, which is already reaching for the stratosphere.

However, reservoir levels are at a robust 87% of their full levels, a welcome sign for the agricultural sector. The report also says that "the number of divisions experiencing excess/normal rainfall remained unchanged at 33 from last week. The number of regions experiencing scanty rainfall stood at 3", and this figure also remained unchanged.

Now that the rain gods have smiled on India, can we expect food inflation to at least moderate a little bit?


Microfinance securitisation: Impact of client-acquisition strategies and other factors

A number of chinks need to be ironed out during the process of microfinance securitisation. The RBI needs to look into these while finalising its draft guidelines on this subject

The RBI (Reserve Bank of India) has put up the draft guidelines on securitisation on 27th September and it includes guidelines for the "Lock-in Period and Minimum Retention for Securitisation Exposures: To ensure that the originators do not compromise on due diligence of assets generated for the purpose of securitisation, it was proposed in the Annual Policy Statement of April 2009 to stipulate a minimum lock-in period for bank loans before these were securitised. It was also proposed to lay down minimum retention criteria for the originators as another measure to achieve the same objective. Accordingly, it is proposed: that the minimum lock-in period for all types of loans would be one year before these can be securitised; and that the minimum retention by the originators will be 10% of the pool of assets being securitised".i

While the above aspects are important, a few other very important issues unique to microfinance appear to have an impact on securitising microfinance assets and those involved in this doing such deals may want to watch out for these. In other words, there are several peculiarities with regard to microfinance loan assets that need to be carefully considered while engaging in aspects such as securitisation:

a)    Microfinance loan assets tend to be predominantly small in amounts but large in number;
b)    While the transactions are also small, they are however numerous (repetitive) and most often, predominantly cash oriented-this makes it difficult to trace the source as well as end-use;
c)    The geographic diversity is huge in a country like India and these assets tend to be spread over remote rural areas and/or urban slums that make it rather difficult to physically locate them. Therefore, establishing the identity of the microfinance borrower and, hence, the loan asset becomes rather difficult. This is a very critical issue for securitisation; and
d)    While many of the lenders ask for KYC (Know Your Customer) documentation, it must be noted that what is provided is far from accurate. Therefore, it is very easy for an MFI (microfinance institution) to show the same assets for different lenders and redeploy the (surplus) funds in other activities like real estate and the like. Much of this was highlighted, as far back as May 2005, in the (now infamous) paperii  of Thorat and Arunachalam (2005).

Thus, as noted above, these peculiarities can cause serious problems for securitisation of microfinance assets and especially, those who buy these securitised assets must be very careful as there is a good chance that there may be no real persons at all with the associated assets or the assets themselves may have been hypothecated or pledged to other lenders. Also, there are other issues as well which impact securitisation and need to be considered by the RBI—while these are drawn from the present microfinance crisis in the Indian context, they can be adapted and used in other countries/contexts also by other central banks.

Client Acquisition Approaches Used By MFIs: First and foremost, this is a very crucial issue and there are several ways in which this can be done. The various methods and their implications for microfinance securitisation are given below:

So, I would ask the following key questions here (not exhaustive):

  • How has the MFI, whose portfolio is being securitised, acquired its clients?
  •  Do the client-acquisition strategies adopted by the MFI pose any problems for securitisation? If yes, what safeguards need to be built into the deal to mitigate the risks?

Frauds and Internal Control Failures in Portfolio: A second issue is the aspect of growth pattern of the MFI whose assets are being securitised and whether there could be frauds and internal control failures due to this. MFIs that have grown very, very fast could have a significant proportion of (Akerloff's) Lemons in their portfolio because of the rapid pace of their growth which may have undermined, stressed and/or sheared existing systems. Examples of the kind of frauds and control failures that could exist are given here in a previous Moneylife articlev . The implications of such kinds of frauds and control failures for securitisation are given below:

  •  Loan Disbursement Related Frauds: The most common ones are: ghost or non-existent clients and staff giving loans to themselves (through non-existent clients)—the securitised portfolio in such cases could have a significant proportion of Akerloff Lemons. It goes without saying that such a portfolio would constitute a very serious credit risk. Further, sometimes, the staff indulge the clients and get them higher-than-required loans and take the remaining (excess) loan amount from clients—here too, there would be a serious credit risk as most often such staff either migrate or leave and the clients are thereafter unwilling to pay back the portion of loans not used by themselves (rather taken by the staff). Sometimes, staff have collected some extra fees upfront and again, there could be a credit risk as clients may not be able to or want to pay back, given that some "corruption" charge has been paid already by them. In a few MFIs in India, I have found that while incentive systems based on loan disbursement do not exist on paper, they actually operate on the ground. That needs to be ascertained during any securitisation deal.


  •   Loan Repayment Related Frauds: A very common occurrence here is that staff retain regular and/or prepayments by clients and do not pay back to the institution. This has implications for securitisation. Further, in a few MFIs in India, I have found that while incentive systems based on loan repayment do not exist formally on paper, they actually operate on the ground through different means including zero-par policy of MFIs and related mechanisms whereby field staff cannot come back without collecting client repayment. In a few cases, I have seen staff even being given loans and/or having to pay large delinquent amounts from their personal resources. When this is the case, after some time, it is only natural that the staff tries and minimises personal losses and hence, they talk and act very tough on the ground with clients resulting in what is often called today as coercive repayment recovery. This problem gets even more exacerbated when loan disbursement is supply-led and this again, would have implications for securitisation.

Thus, the above aspects also need to be ascertained during any securitisation deal and here too, I would ask the following critical questions (not exhaustive):

1.    What can be said with regard to the growth pattern of the MFI, whose portfolio is being securitised?
2.    Are systems, practices and procedures at the MFI strong enough to withstand this rapid growth?
3.    Are there any differences between various (MIS, or Management Information Systems, internal audit etc) intended systems, procedures and practices (as they exist on paper) and the implementation on the ground (realised systems in operation)? Is it likely to have caused loan disbursement and/or loan repayment frauds and control failures? If yes, what are the implications for future repayments?
4.    Does the growth pattern of the MFI, whose portfolio is to be securitised, suggest that growth has come from offering supply-led (multiple) loans to shared JLGs and clients? Could this growth have caused high levels of indebtedness in the clients whose portfolio is being securitised?

Thus, the questions under all aspects given above certainly need to be asked during a securitisation deal as they have implications concerning the nature of the obligor(s) on whom cash flows are dependent and ability to estimate the cash flows from the assets being securitised as well as payment frequency and the propensity to prepay or make delayed payment. Three possible strategies could help in alleviating the above problems and ensure a higher degree of safety in securitisation of microfinance assets. First, stakeholders need to be aware of the critical issues such as those mentioned above and constantly keep asking questions as part of a securitisation deal. Second, it seems like an appropriate strategy and well worth the cost, for securitisers, to commission small sample studies by unrelated third parties (with no conflict of interest)—especially, for the first time as well as large quantum securitisation deals. Third, it also seems necessary to bring in a fair trade kind of certification (or equivalent) and permit securitisation only if the relevant MFI associations (and/or regulators) certify that the concerned MFI is indeed practicing ethical lending practices (defined appropriately). That will go a long way towards eliminating the above problems in securitisation and get the incentives right for microfinance securitisation and I hope that the RBI considers these issues as well when it finalises its draft guidelines.

  iiThorat, Y S P and Ramesh S Arunachalam, (May, 2005), "Regulation And Areas Of Potential Market Failure In Micro-Finance", Paper presented at the NABARD High level policy conference in New Delhi
 iv (a); (b); (c) 

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).


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