Demonetisation: A pause for sustainable growth of microfinance industry?
Post demonetisation, the profitability of domestic microfinance institutes (MFIs) is expected to be negatively impacted in the near term. However, as a positive outcome of the demonetisation, most of the MFIs are further strengthening their risk management system by checking the overleveraging of borrowers and disbursing funds on a more prudent basis, says a research report.
 
In the note, Credit Analysis and Research Ltd (Care Ratings), says, "In the near-term, the profitability of the Indian MFI Industry is expected to be negatively impacted mainly due to reversal of income due to creation of non-performing asset (NPA), increase in cost-to-income ratio on the back of lower income as a result of expected decline in loan portfolio per employee, and increase in provisioning expense due to deterioration in the asset quality. As a result, the credit profile of the entities with concentrated portfolio (especially in affected states), high leverage and weak asset liability management is expected to remain under pressure over the next six to 12 month period."
 
 
According to the report, the Microfinance Institutions Network (MFIN) is also putting in place an initiative where all the industry players have voluntarily agreed to cap the number to three lenders per borrower, as against only two non-banking finance companies (NBFC)-MFI per borrower but with no cap on other lenders, by increasing the universe from NBFC-MFIs to cover the entire industry like banks, small finance banks (SFBs), NBFCs, NBFC-MFIS, Section 8 or Section 25 companies as defined in the Companies Act. This would help in better management of overall indebtedness of the borrowers from the industry perspective, Care Ratings added.
 
Care Ratings interacted with a few major MFIs, which felt that collection efficiency was expected to improve in the month of January 2017 due to improved supply of new currency, general improvement in economic activity and important role played by self-regulatory organisation (SRO) in creating awareness among the borrowers directly or indirectly through bureaucrats and sustained media engagements. 
 
It says, "While the industry expects collection efficiency to reach to normal level by June 2017, continued interference of local influential individuals with mala fide intention remains a major risk to the sector in the near-term. However, the collection efficiency is expected to reach to normal levels over the medium-term period due to increased credit disciple among the borrowers as a result of presence of credit bureaus."
 
Demonetisation has also given a sudden push to the MFI sector to move towards cashless mode of operation. While Care Ratings says it believes that a good proportion of MFI transaction would continue to be dependent upon cash mode due to low penetration of banks/ATM in rural areas, most of the borrowers are at the bottom of the pyramid, which are dealing only in cash and low proportion of smartphone users in India, especially women. However, the intention of most of the MFI’s to shift the business to cashless mode would bring in greater transparency and enhance the risk management system over the medium-term perspective, it added.
 
 
To assess the near-term impact of demonetization on Indian MFIs, Care Ratings conducted a survey with 32 MFI entities and one SRO (Sa-dhan). The MFI entities has been categorized as large MFIs (10 with gross loan portfolio-GLP of more than Rs500 crore), mid-size MFIs (11 with GLP of Rs100-Rs500 crore) and small-size MFI (11 with GLP lower than Rs100 crore). The participants in the survey include top-level executives. The combined asset under management (AUM) of the surveyed participants was estimated to be around Rs34,000 crore, accounting for roughly 42% of total MFI industry.
 
Care Ratings says, a majority of the respondents were of the view that the demonetisation would have a negative impact on the Indian MFI industry in the short term, but the magnitude of the impact would not be as severe as witnessed during the Andhra Pradesh crisis period mainly due to increased regulatory intervention of Reserve Bank of India (RBI), presence of credit bureaus and SROs and self-imposition of stricter code of conduct by MFIN on members than required by RBI. MFIN members account for about 80% of Indian Microfinance industry.
 
 
Roughly, 88% of the respondents expect collection rate to improve to more than 90% by March 2017, which indicates a sharp improvement in collection compared to the level achieved in the past two months at around 80%. Further, all the participants are of the view that the collection efficiency is expected to reach to the level of pre-demonetisation period, or around 99% by June 2017, it added. 
 
According to the Survey, roughly 72% of the respondents will avail the relaxation benefit provided by RBI for asset classification norms by additional period of 90 days for the loan instalments falling due from 1 November 2016 to 31 December 2016. Further, almost all the respondents are of the view that the projected growth of loan portfolio in FY18 has been revised down due to slowdown in disbursement after demonetisation. 
 
Based on interaction with major MFI entities, Care Ratings says it believes that the decline in AUM growth is mainly due to lower disbursement from banks, NBFCs and financial institutes (FI)’s on the back of cautious stance on the sector, delay or disruption in equity raising plan of the company due to investors becoming cautious on the sector and higher focus of the MFI entities to improve collection efficiency and maintenance of higher liquidity cushion in the system.
 
Around 66% of the respondents are of the view that the demonetization would have structurally positive impact on the Indian MFI industry over the medium-term as most of the entities would gradually shift their business from cash mode to cashless mode, Care Ratings concluded.
 
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Budget 2017: Affordable housing stole the show
The real estate sector had a huge wish list for the Finance Minister and a few things recommended by market players have seen the light of the day. Needless to say, affordable housing, which received infrastructure status, stole the show in this year's Budget. While there are quite a few reasons to cheer, there are some aspects on which the Budget was silent, says Liases Foras Real Estate Ratings and Research Pvt Ltd in a note. 
 
According to the research report, there was no further clarity on goods and services tax (GST) or tax norms for real estate investment trusts (REITs) in the Budget. "It is indeed laudable that second-time home buyers have been dissuaded, but it would have been even better if the first-time home buyers had been given interest exemption to a greater limit. Another issue, which demanded some attention, was the Land Acquisition Bill. Exorbitant rate of land is the biggest issue plaguing real estate and ensuring its productivity would bring greater efficiency in the real estate sector. We can only hope that the next budget will see some of these issues being brought to light and addressed effectively," the non-brokerage research centric firm says.
 
The housing sector saw a gamut of policies that aimed at providing a demand side as well as supply side impetus to affordable housing. Coupled with this, Liases Foras says, there was much-needed focus on infrastructure, digitisation of transactions and rural housing.
 
Infrastructure status to affordable housing
 
Affordable Housing finally got infrastructure status. The Indian realty sector had been mooting this move for the longest possible time and it could not be happier. So, the direct impact of infrastructure status to affordable housing means easier availability of funding. Developers can now have access to funds at lower rates and for longer terms. Moreover, this also implies more investment from external commercial borrowings (ECBs) and insurance funds. 
 
Liases Foras says, "The demand for affordable housing is huge and, with a move like this, we hope to see more supply of affordable housing to bridge the gap. Infrastructure status also means speedier sanctions and approvals. However, it would be appreciated if the term 'affordable housing' is more clearly defined in this context. The lesser the areas of doubt, the more the positive impact of the policy."
 
However, it says, going by the last updated definition of Reserve Bank of India (RBI), "Affordable segment means in the non-metros the loan amount would be Rs40 lakh for the property value of Rs50 lakh, and in the metros the loan amount would be Rs50 lakh for the property value of Rs65 lakh. There are six metros in the country: Mumbai, Chennai, Kolkata, Delhi, Hyderabad and Bangalore."
 
 
If we do an impact analysis we can see that around 60% of the supply in India (Tier I and Tier II combined) falls in the affordable housing segment. Hence, the proposal to give infrastructure status to affordable housing is expected to have a big impact on the Indian real estate, it added.
 
Carpet area replaces Built-up area in Section 80 IB
 
The Section 80 IB recommended last year stated that exemption from service tax will be provided on construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including public-private partnership (PPP) schemes. However, the area mentioned was built-up area. This year that has been changed to carpet area and this increases the area covered by 30%. He also said that the 30sq mt limit will apply only in case of municipal limits of four metropolitan cities while for the rest of the country including in the peripheral areas of metros, a limit of 60 sq mt will apply.
 
 
Furthermore, the Finance Minister also proposed to extend the completion period of the building of the houses after commencement under the Scheme to five years from the present three years.
 
Extension for consideration period for tax on unoccupied houses
 
Currently, the houses, which are unoccupied after getting completion certificates, are subject to tax on notional rental income. For developers for whom the constructed buildings are stock-in-trade, Finance Minister Arun Jaitley proposed to apply this rule only after the end of the year in which completion certificate is received so as to give the builders a reasonable time frame for liquidating their inventory.
 
Change in holding period for long term capital gains
 
The Union budget proposed to reduce the holding period for considering gain from immovable property to be long term to two years from the present three years and the base year for indexation to be shifted from 1 April 1981 to 1 April 2001. "This is an investor- friendly move, which reduces the capital gains tax liability while encouraging the mobility of assets," Liases Foras says. 
 
The Government also suggested financial instruments such as infrastructure bonds in which the capital gains can be invested and tax payment can be avoided.
 
As for Joint Development Agreements signed for development of property, the liability to pay capital gains tax will arise in the year of completion for the project.
 
Some good news for Andhra Pradesh
 
For the new Capital of the State of Andhra Pradesh, which is being constructed by an innovative land-pooling mechanism without use of the Land Acquisition Act, the Union Finance Minister proposed to exempt from capital gains tax, all those who were holding land on 2 June 2014 - the date on which the State of Andhra Pradesh was re-organised - and whose land is being pooled for creation of the capital city under the Government Scheme.
 
Attempt to dissuade investors
Finally, the best one was saved for the last. The government has put in a limit of Rs2 lakh on set-off of loss from house property with income from other heads. In the earlier provision, 100% of loss occurring in house property was allowed to be adjusted against income from salary or business or profession. Because of these provisions, investment in real estate was considered a tax saving tool.
 
 
Since the prevailing rental yields are only 2% while the interest rate has been at 9-10%, purchasing second and more properties used to be a big incentive for investors. So now, investor participation in the market will be curtailed. This is a paradigm change in real estate practices which has hitherto been heavily dependent on investors, the a non-brokerage research centric firm concluded.
 
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Mistry moves against Tata Sons' EGM
Tata Sons' ousted Chairman Cyrus Mistry on Thursday approached the New Delhi-based National Company Law Appellate Tribunal (NCLAT) for an injunction against the proposed extra-ordinary general meeting (EGM) of the Tata Group's holding company.
 
The petition moved by Mistry's investment company has been slated to come up for hearing on Friday.
 
The development comes two days after the National Company Law Tribunal (NCLT), Mumbai, did not restrain Tata Sons from holding the proposed EGM on February 6, 2017.
 
The holding company of the global industrial conglomerate has called a shareholders' meet to remove Mistry as a Director on the company's Board.
 
Tata Sons' Board had ousted Mistry earlier on October 24, 2016, as its Chairman and appointed Ratan Tata as Interim Chairman. 
 
However, Mistry still remains a Director on the Board of the holding arm of the $100 billion-plus group.
 
Tata Trusts hold 66 per cent stake in the holding company of the Tata Group, with Mistry's family holding over 18 per cent interest.
 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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