Mutual Funds Grapple with Altico Capital’s Default
Real estate financier Altico Capital India recently defaulted on interest payments of Rs19.90 crore due on 12 September 2019 to Mashreq bank of the United Arab Emirates (UAE). Altico Capital is a non-banking finance company (NBFC) lending mainly to the real estate sector with considerable borrowings from banks and financial institutions, including many mutual funds (MFs).
 
The NBFC has defaulted on the external commercial borrowing of principal amount of Rs340 crore from Mashreq bank, and is likely to default on its other upcoming dues as well. As per sources, Altico Capital’s total amount of borrowings from banks and financial institutions is ₹4,361.55 crore (as on 12 September 2019). Mutual fund schemes have an aggregate exposure of Rs537 crore to the NBFC’s debt.
 
The company said, “Our failure to repay the amounts set out above may result in an acceleration of interest repayment and redemption obligations in respect of non-convertible debt securities issued by us and may trigger a default in their timely repayments. We are evaluating options for resolving the liquidity crisis and will be engaging in discussions with various stakeholders for the same.”
 
Several mutual fund schemes, mostly fixed-maturity plans, have exposure to bonds, debentures of Altico Capital. Because Altico Capital has not defaulted on the bonds held by the fund houses yet, the schemes holding its debt appear unaffected. Also, India Ratings, the agency that rated the debt papers issued by the NBFC, has not published a default rating yet.
 
However, as per the statement released by the NBFC on its poor financial state, the bonds held by the schemes could also face a default and should be dealt with quickly to avoid huge losses to investors. 
 
It is the ideal time to segregate the debt portion of Altico Capital from the schemes.
 
This will lock in the extent of loss in the scheme, and prevent mass outflows. This is especially important in open-ended schemes than fixed-maturity plans, as the former can be withdrawn at any time.
 
 
Altico was established in 2004 by the funds managed by Clearwater Capital Partners as Clearwater Capital Partners India Private Limited for wholesale lending to capital-constrained Indian small and medium enterprises. In FY15, the company was renamed Altico Capital India Limited, and its business strategy was changed.
 
On 3 September, India Ratings downgraded the NBFC’s credit ratings for its various debt issuances from “IND AA-” to “IND A+”. Credit ratings of Altico Capital’s commercial papers were also downgraded from “IND A1+”to “IND A1”. Both were given a negative outlook.
 
The credit rating downgrades were small, and did not signify any grave deterioration in the quality of the debt or the company’s finances. 
 
Importantly, the company’s chairperson Naina Lal Kidwai, who previously worked as chief of HSBC India, also recently stepped down from her year-old post in Altico Capital.
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    COMMENTS

    Ramesh Poapt

    8 hours ago

    vow! Real Growth...................(of downgrades)

    Altico Capital Lenders Meeting on Monday for Potential Restructuring Deal: Sources
    The first lenders' meet for a potential restructuring deal for NBFC Altico Capital India is scheduled to be held on next Monday, sources said on Friday.
     
    Sources further revealed that Altico was advised not to fulfil the interest payment obligation on External Commercial Borrowing availed from the UAE-based Mashreqbank till the first lenders' meet on a potential restructuring deal was held.
     
    On Thursday, a regulatory filing disclosed the NBFC has defaulted on the gross principal amount of Rs 340 crore. The interest payment comes to Rs 19.97 crore.
     
    According to sources, Altico has already initiated talks with lenders for a potential restructuring. 
     
    "They have appointed Alvarez & Marsal as debt advisor and SAM for legal. Together, they advised Altico to not pay Mashreq and wait for the first lenders' meet which is scheduled for next Monday," sources said on Friday.
     
    Sources say that post the rating downgrade by India Ratings, AU Bank and HDFC Bank marked the company's fixed deposit lying with them, as lien.
     
    "First, AU Bank which had Rs 630 mn of fixed deposit as collateral, marked a lien on it. Once this came known, HDFC Bank too marked the fixed deposit lying with it of Rs 2.5 billion, as lien," sources said. 
     
    "Altico still had another Rs 2.5to 3 billion of cash with other banks, to pay Mashreq Bank."
     
    The company's total borrowings from banks or financial institutions stood at Rs 4,361.55 crore as on September 12.
     
    Besides, the development comes just a day after a report surfaced that said the company's Chairman Naina Lal Kidwai is understood to have stepped down.
     
    Kidwai was the former Country Head and Group General Manager of HSBC India.
     
    Altico Capital India was incorporated in January, 2004. The NBFC's shareholders include Clearwater Capital Partners, Abu Dhabi Investment Council and Varde Partners.
     
    The company focuses on senior secured lending to mid-income residential projects and Commercial Real Estate sector across Tier-1 cities in India which include Mumbai, NCR, Chennai, Bengaluru, Pune and Hyderabad.
     
    Earlier in the month, India Ratings and Research had downgraded Altico's long-term issuer rating to IND A+' from IND AA-' and short-term Issuer rating to IND A1' from IND A1+'.
     
    The ratings agency gave a negative outlook.
     
    "The revision takes into account the continued pressure on the real estate sector, which has resulted in a weakened operating environment for the construction lending business, the stretched working capital cycle for real estate borrowers, which has led to volatile delinquencies, tighter funding, which has resulted in wider spreads, and diluted on-balance sheet liquidity buffers," the ratings agency had said.
     
    "While the company is diversifying its portfolio both in terms of sectors and ticket size, it is likely to be reflected in the performance only gradually."
     
    India Ratings and Research's said that Altico's loan book has exposure to real estate developers, many of whom have weak and stretched credit profiles.
     
    "The operating environment for real estate players has become extremely challenging, with the tepid sales velocity of residential units, especially in the mid and higher ticket segments, and the funding crunch faced by the sector, given the heightened risk aversion of lenders," the ratings agency said. 
     
    India Ratings and Research's said that Altico's loan book has exposure to real estate developers, many of whom have weak and stretched credit profiles.
     
    "The operating environment for real estate players has become extremely challenging, with the tepid sales velocity of residential units, especially in the mid and higher ticket segments, and the funding crunch faced by the sector, given the heightened risk aversion of lenders," the ratings agency said. 
     
    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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    Digital Lending Companies – II: Skirting the Law & Creating an Insta-loan Bubble
    The operational structures of such loans are in defiance of many requirements of  RBI's (Reserve Bank of India's) directions. Following are the areas where most of the NBFCs (non-banking financial companies) act in their own sweet ways:
     
    KYC Process: The KYC (know your customer) master directions specify that an authorised representative of the lender NBFC must physically visit and see and verify the original KYC details of the borrower. There are further requirements of maintaining the KYC records and carrying out customer due diligence (CDD) which the NBFCs fail (refuse) to comply with in their hurry of their 'superfast processing'.
     
    Fair Practice Code (FPC): The FPC requires lender NBFCs to display annualised interest rates in all their communications with the borrowers. However, most of the NBFCs show monthly interest rates as part of their 'marketing strategy'. 
     
    Risk Management: The directions require NBFCs to assess the risk before granting loans to borrowers which is overlooked while providing speedy disbursals.
     
    Recovery Process: NBFCs do not even have a properly defined recovery process. They are just making rapid disbursals, without a thought of whether or not these loans will be repaid.  
     
    Risk to Personal Information: Many NBFCs obtain access to personal information such as text messages and social media profile of the borrower by way of incorporating clauses in this regard in the detailed terms and conditions of the loan agreement. 
     
    RISKS TO THE BORROWERS
     
    The borrowers face several risks under such loan transactions, ranging from personal to financial such as:
     
    Many borrowers usually don’t read the entire set of terms and conditions and end up granting the NBFCs access to their personal information. 
     
    Privacy of the borrower is at stake as information trading is yet another business that the NBFCs may secretly engage in, posing a threat to borrowers’ personal information. 
     
    The lucrative advertising strategies of these NBFCs might make a borrower take loans for purposes which otherwise would not have been a necessity or priority for the borrower. Hence, the borrower tends to borrow without any actual requirement because a demand has been created by the lender NBFCs.
     
    The interest rates are very high on such loans. In case the amount of loan is high, the borrower is unable to pay the huge amount of interest and, thus, has to take another loan to repay the first.
     
    The credit score of the borrower may get affected at the slightest delay in repayment, even if the amount of loan is as small as Rs500. Thus, the creditworthiness of the borrower is at a risk of degradation.  
     
    THE BUBBLE OF ATTRACTION: PLAYING WITH THE PSYCHOLOGY
     
    Despite such high interest rates, why is a borrower more attracted to loans from NBFCs? The only answer one finds is the ease and the fact that they are instant. In an era when everyone wants everything in a jiffy, be it food or health solutions, being attracted to instant loans is a very natural thing.
     
    For example, if you meet with an accident and don’t have money for the treatment, just take a loan. You are shopping and suddenly realise you forgot your purse, take a loan.
     
    The most crucial thing is that these NBFCs do not monitor the end-use of the loan amounts disbursed. So a borrower may specify any purpose for the loan which he might not actually use the loan for. 
     
    Moreover, the high interest rates are not noticed by the borrowers as most of the NBFCs show monthly interest rates rather than the yearly rates in their communications on the app or the website. 
     
    The NBFCs are playing the psychological game by becoming a friend in need for the borrowers. No matter how high the interest rates maybe or how risky the transaction maybe, it is a handy help whenever needed.  
     
    Furthermore, the advertisements made by these NBFCs are so catchy that they may lure a person who might not really be in need of finance. The catchy phrases like “make your dream wedding come true”, “let the wanderlust in you come alive” create a 'need' for the customer to become a borrower. 
     
    Marriage functions, travel and luxuries are the Indian way of displaying wealth and the the above strategies wraps people in a comfortable blanket of justification to remain under the debt burden.
     
    ALL OUR MONEY INTO THE BLACK HOLE
     
    While lending to businesses results in more capital formation and growth of the economy, personal lending mostly results in wasteful expenditure. Further, the interest rates being so high, the borrowers often obtain another loan to pay the previous loan and get trapped into the vicious circle of obtaining and repaying loans. 
     
    The increasing lending volumes are not an indication of overall growth of the economy. Most of the purposes for which such loans are availed are consumption-based and less  productive. 
     
    While on the one hand, such loans are helping us in need, on the other they are luring us to take unnecessary debt burden. The lender NBFCs are under the risk of regulatory action by the regulators since many of them are in non-compliance with regulatory requirements. The borrowers are under the risk of pressing themselves under unnecessary debt burden and huge interest costs. 
     
    The recovery procedures of these NBFCs are very lenient but due to the high interest costs, the cost of funds is readily recovered by the lender NBFC. Even when banks have tried to provide quick loans under 59-minutes loan scheme, they have failed to do away with the procedural requirements such as document submission and are still regarded as 'slow-loans' considering the super-fast loans being provided by NBFCs within five minutes.
     
    Lenders and borrowers are happily floating in the bubble of 'instant loans' which is definitely going to burst in no time.
     
     
    (Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)
     
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