Tag: Bank

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Editorial

IndusInd Bank In Trouble Over Whistleblower Allegations

IndusInd Bank had a tremendous Q2 FY22 quarterly result after its profits rose by 72% YoY. Its Interest Income rose by 6.59%, Provisions and Contingencies fell by 7.6% and Gross NPA reduced by 2.77%. Despite such great results, IndusInd’s share price had a freefall last day. This piece covers the allegations made by a group of senior employees, IndusInd Bank’s stance on it, and the way ahead. 

What Went Wrong With IndusInd?

IndusInd Bank was set up in 1984 by the Hinduja Group and was one of the first private sector banks that helped in accelerating the process of reforms in post-liberalised India. You can read more about the Hinduja Group here.

IndusInd Bank, like any other bank, gives out loans from which it earns Interest Income. IndusInd’s loan book is managed by Bharat Financial Inclusion Limited (BFIL), a 100% subsidiary of IndusInd Bank.

Some of the senior officials at BFIL have alerted the Reserve Bank of India (RBI) and alleged some mismanagement and malpractices at IndusInd. The whistleblowers allege that IndusInd Bank has been ‘evergreening’ loans since the beginning of the COVID-19 pandemic. 

What Is ‘Evergreening’ Of Loans?

Banks give out loans to earn interest income. A portion of the loans disbursed by banks remain unpaid by borrowers, or certain borrowers tend to ‘default’ on loans. If the loan remains unpaid for a certain period, it gets classified as a Non-Performing Asset or NPA. For every loan declared NPA, the bank has to set aside some money as ‘provision’. These provisions are set aside as assets to pay for anticipated future losses. They eat into the company’s profits. To avoid cutting down on profits, it is in the banks’ best interest to reduce the number of NPAs.

‘Evergreening’ of loans is when banks try to revive loans on the verge of being classified as Non-Performing Assets. A Bank gives out loans to the same borrowers to pay their older dues. Essentially, borrowers are paying back the bank by borrowing from the same bank. Evergreen loans are also known as Revolving Credit or Revolving Loans.

The evergreening of loans benefits both the banks as well as the borrowers. It gives the borrower more time to pay back the loan amount and prevents banks from getting higher NPAs, eventually translating into profit. But it can also be seen as pouring fuel into a fire, trying to get back cash by doubling down on the bad loans. This is not ideal in the long run.

What Is IndusInd’s Stance On The Allegations? 

IndusInd Bank has refuted allegations made by the whistleblowers. In a PR statement, IndusInd has clarified the following:

  • It has refuted whistleblower allegations on loan evergreening as “grossly inaccurate and baseless.” 
  • Due to a ‘ technical glitch’, it admitted to disbursing 84,000 loans to customers without their consent in May 2021. The problem was reported within two days and rectified.
  • Due to ‘Operational Issues’ in the second wave of the COVID-19 pandemic in India, the bank disbursed some loans in cash at the village/panchayat level.
  • The bank continues to follow biometric authentication, and has disbursed loans only in the bank accounts of clients. 
  • Any additional liquidity or assistance given to borrowers was done within the ECLGS (Emergency Credit Line Guarantee Scheme) framework or other restructuring or moratorium guidelines issued by the RBI.

Even after the clarification by IndusInd Bank, its shares tanked 12% on both of the Indian exchanges. IndusInd Bank has reported an increase in stress in its microfinance loans portfolio. The NPA ratio in the microfinance segment went up from 1.69% to 3.09% in the September quarter. The allegations come after a stellar quarterly performance by IndusInd Bank. 

The possibility of foul play can neither be confirmed nor be denied. A panel of the RBI is conducting a technical audit looking into the whistleblower’s allegations. An external audit might be ordered in case the need arises. Till then, it is in the best interest of investors and shareholders to stay alert about any updates on the audit by the RBI. 

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Reliance Loses Crown To HDFC Bank in the NIFTY 50

In other news, Reliance Industries Limited (RIL) has lost the first spot to HDFC Bank in terms of the weightage in the NIFTY 50. HDFC Bank stocks have been rallying despite an RBI report on a possible spike in Gross NPAs. What led to the events? Let’s find out. 

The NIFTY 50

The NIFTY 50 is a benchmark index of the National Stock Exchange(NSE). A benchmark index gives us an overview of the conditions of the market. The NIFTY 50 as an index is made up of 50 companies from 13 sectors, decided by India Index Services and Products (IISL) which is a subsidiary of the National Stock Exchange. A company’s relative position in terms of share price and market capitalization decides its weightage in the NIFTY 50. 

RIL took almost a decade to reach the top of the ladder in the NIFTY 50. However, HDFC was leading the crown at the beginning of 2020 till the COVID-19 pandemic struck. There was pessimism in the banking sector when almost all the banking stocks tanked. due to rising bad loans during this period and HDFC lost its position to RIL.

RIL vs HDFC

Meanwhile, Mukesh Ambani, the RIL-supremo, was busy getting investment for his companies and focusing on making Reliance Jio a net debt-free company. This brought RIL in the top spot yet again. Everything was going in favour of RIL, until the Amazon-Future Group-Reliance retail war began in November 2020. 

RIL lost its position to HDFC for three reasons:

  1. The Reliance-Future-Amazon retail war caused Reliance’s acquisition of Future Group to hit a roadblock. This did not go down well with the market. You can read more about it over here.
  2. There is a resurgence of the COVID-19 virus in Europe along with a new strain found in the UK. RIL’s primary source of income is oil and refining which took a hit as uncertainty regarding the second wave of the pandemic came around.
  3. Reliance Jio’s numbers took a hit as VI and Airtel have started gaining market share. Recently, VI was listed as having the fastest 4G internet speed in India leaving behind Airtel and Jio. The recent farmer’s protests have brought Jio into the limelight causing attacks on Reliance Jio towers and loss of users to Reliance Jio.

HDFC Bank on the other hand showed a pretty good Q3 result. It has gained 36.14% in the last 6 months. The reason behind HDFC Bank’s rally is an increase in Foreign Portfolio Investor(FPI) holding coupled with an increase in loan disbursements. The FPI holding has been increasing constantly for the last three quarters straight. As of now the FPI holding in HDFC Bank stands at 39.35%.

Why Stay Cautious?

As India rolled out its first vaccine, market sentiments are much higher than required, this might cause overvaluation of a stock, especially in the banking sector.  RBI has recently released a report where it states that some of the bank’s bad loans or NPAs could rise to 13.5% unless those banks manage to meet certain capital requirements. You can read the official report as given by the RBI over here.

In mid-November 2020, marketfeed came up with a writeup on how banks are sitting on an NPA time bomb and why the bank results are not as good as they appear to be. Considering this, you can expect an increase in NPAs of banks somewhere in the next two quarters. Read: Banks are Sitting On A Bad Loan Time Bomb!

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Editorial

Banks are Sitting On A Bad Loan Time Bomb!

Indian Banks have performed unexpectedly and exceptionally well in the second quarter(Q2) of this financial year. Markets too were not sure of why the big banks in India are posting such good profits, reduction in bad loans, and improvement in asset quality. BANKNIFTY, the benchmark index for all the retail banks in India, too didn’t reflect for long on the profits that the banks were posting. This kind of exceptional performance wasn’t expected since India’s 23.9% April-June GDP contraction, the damage done to businesses by the COVID-19 Pandemic, and the RBI being vigilant on rising Bad Loans/Non-Performing Assets(NPAs). 

The reason is clear for these high profit numbers. The banks are sitting on an NPA(Non-Performing Asset) time bomb, which will explode sooner or later.

  1. Why Are The Banks Posting Such Good Profits?
  2. What is The NPA Time Bomb?
  3. What Next?

Why Are The Banks Posting Such Good Profits?

In the second quarter, ICICI Banks has posted a profit of 242.46% (YoY). HDFC Bank has posted a profit of 15% (YoY), RBL and IDFC First Bank have posted profits of 185% and 116% respectively. None of the 12 listed PSU banks have posted a loss. Even banks which have posted consecutive losses earlier have posted profits in this ‘stressed’ quarter. All of this, while the ill-effects of the COVID-19 pandemic still continue to impact businesses in India. 

There are mainly two reasons for such good profits.

  1. Net Interest Income: The Net Interest Income is the difference between the interest paid out and interest received by banks. The Net Interest Income has increased substantially. This means that banks received more interest money than the money it gave out to account holders, lenders, etc. As the economy gets back to normalcy, businesses and people are more likely to pay back the money that they had borrowed from these banks.
  1. Improved Asset Quality and Reduced Provisions: The banks have seen an improved asset quality because they are vigilant and cautious while lending money. Banks aren’t lending money as freely as they did before. This decreases the NPA to some extent. The banks have to set aside “provisions” for these NPAs. Provisions are funds set aside by a company as current liabilities to pay for anticipated future losses. These provisions were reduced to almost half of what they were in the last quarter in many banks. The amount of provisions reduced coupled with reduced NPAs gets added to the companies’ book of accounts, thus increasing the profits.

What is The NPA Time Bomb?

India has been struggling with rising NPAs, low borrowings, and a low growth rate even before the COVID-19 pandemic came around. The RBI has been working on these problems for a long time through regulation and open market operations. It hasd implemented Long Term Repo Operations or LTRO to boost borrowing. The RBI has also announced frequent moratoriums and debt restructuring schemes for Micro, Small & Medium Enterprises(MSMEs).

This is where the problem arises. Banks were asked not to classify many loans as Non-Performing Assets(NPA) in case somebody defaulted during the moratorium period. The loan moratorium and debt restructuring schemes have been around way before the COVID-19 lockdown period. The Supreme Court has said that accounts that were not declared as NPAs till August 31, shall not be declared NPA till further orders. As said before, reduced NPA equals reduced provisions, equals more profit. The impact of NPAs has just been delayed and not written off. 

SBI has funds worth Rs 8.2 lakh crores under the moratorium scheme. Kotak Mahindra Bank has Rs 9,000 crores, ICICI Bank has Rs 14,000 crores and HDFC Bank has 15,000 crores worth of loans which are under debt restructuring schemes or moratoriums. A huge chunk of them may turn out to be Non Performing Assets (NPAs), all at once. This will lead to banks keeping higher provisions aside which will eat into the operating profits of the company. You can expect an explosion of NPAs somewhere around Q3 FY 2020-21. 

What Next? 

The government has announced a waiver on the interest-on-interest on the loans availed for the period between 1st March and 31st August for an amount of upto Rs 2 crores. This might be a slight relief for borrowers and reduces the burden of NPAs on the banks.

Apart from this, there has been not much activity by the centre or the RBI to mitigate the burden of the bad debt that will arise in the future. One shall prepare for a turbulent ride for the banks in Q3 of this financial year. 

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Editorial Editorial of the Day

How Kotak Bank made a Profit Jump of 26.3% for Q2 FY21 Result

Private sector lender Kotak Mahindra Bank Ltd, on Tuesday (26th October), came out with their results which defeated all the street estimates. They declared a 26.3% year-on-year (YoY) rise in standalone net profit for the September quarter 2021. Their Net Interest Income (NII) also gained 17% YoY for this quarter.

These are spectacular numbers. The previous week, HDFC Bank came out with 18% year-on-year (YoY) rise in net profits which gave birth to a lot of positive sentiments in the market. But, Kotak has left the number one bank behind and reported even better performance this quarter. Let’s have a closer look at their quarterly performance.

Robust Revenue Generation

NII is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors. Higher the spread between the two interest rates, more profitable it is for the banks.

In the same quarter previous year, Kotak declared a net interest income of Rs 3,350 crore. This quarter, it increased by 17% to Rs 3,913 crore. This 17% increase is constant for the bank since the previous three quarters. NII for the bank has increased by 18%, 17% and 17% in the previous three quarters. This shows that even amidst the pandemic, the bank has done really well to maintain its revenue growth.

Digitally Advanced

We have discussed several times how being digital is pivotal for any company in any industry, let alone the banks. Kotak has put consistent efforts to digitally transform itself. They have stressed on a paperless transaction for Home Loans and Loans Against Property (LAP) for some time now. And now this has given the bank good business, as paperless transactions became a necessity during the times of Covid-19.

Other than this, tractor, retail commercial vehicle/infrastructure loans were also available on Kotak Mobile App. As we know, tractor sales have been booming over the last few months. They have one of the most user-friendly mobile applications in the industry. Transaction volume and value of mobile banking went 81% and 56% above annually during the quarter. Also, Kotak became the 1st Bank in the country to launch Video KYC for Account Opening.

85% of the total Fixed Deposits were booked through Digital channels in Q2. 86% of all Credit Cards and 30% of the total personal loans were again carried with the help of digital channels in this quarter. All of this cumulated to 73% (YoY) growth in Digital Payments volumes.

So this digital push by Kotak Bank helped them maintain good business when most customers were staying at home.

A glance at their Asset Quality

Kotak Bank’s gross non-performing asset ratio (GNPA) fell to 2.55% this quarter. This ratio was reported as 2.7% in the preceding quarter. Also, their Net NPA ratio fell to 0.64% from 0.84% during the same period.

Due to the interim order of the Supreme Court, they didn’t recognise any NPAs since August 31, 2020. This could have given a false image of non-performing assets. But the bank was quick to discard this concern. Even if they had not considered the Supreme Court’s decision, the gross NPA would have been 2.70% and NNPA 0.74%. This is only a marginal increase from the reported values. Thus, one can conclude that Kotak has a very stable asset quality.

Market Reaction

The market sentiments were negative on the day Kotak Bank was due to announce the results. Nifty 50 and Bank Nifty closed 1.36% and 1.65% down. Yet, Kotak Bank emerged as one of the top gainers to close at Rs 1410.90, up by 2.01%. The day after the results were announced, the share price of Kotak Bank rocketed up even in the presence of the bearish global sentiments. It closed 11.70% higher at Rs 1582.70 to become the top gainer of the day. There were also reports that America’s Morgan Stanley was going to pump in funds to the stock, as covered here.

The Way Forward

The banking sector has been in the news ever since the lockdown. The 6-month moratorium on repayment of loans ended on 31st August. On 3rd October, the government of India announced that interest-on-interest for loans up to Rs 2 crore will be waived off for the borrowers. At the same time, to prevent banks from facing huge losses, the amount waived off will be paid to the banks by the government. This news was welcomed by the market as there is huge pressure on banks to maintain their asset quality. To read more on the interest waiver scheme, click here. 

The Q2 results of the banks have been great so far! Especially big banks like HDFC Bank and Kotak Mahindra Bank which operate all over India. Will this trend continue? Will all the banks come out with positive results? Where are the high NPA rates predicted by The Reserve Bank? Will Public-Sector Banks be the worst affected? Let’s wait and watch.

The upcoming quarter will be very important for the banks. This will be the quarter in which the government will implement its strategies to aid banks. The moratorium was lifted less than 30 days before the September quarter-end. The loans being defaulted and turning into sub-standard assets will be only seen in the October-December financial results. Thus, a more clear picture of NPAs will be seen in the third quarterly reports of banks and NBFCs. Keep tracking all the updates with marketfeed to follow more of this story.

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Editorial

The Barings Bank and the Rogue Trader

How many times have you heard that a single employee of the bank has caused the whole bank to shut down? How many times have you heard that a single employee was the reason behind the collapse of a 200-year old bank? I am sure, not very often. Today, we bring one such story which amazed the whole financial sector and led everyone to do some deep thinking.

About Barings Bank

Barings Bank was a British merchant bank in London which collapsed in 1995. The bank was the second oldest merchant bank (modern banks) which was founded in 1762. It went on to become one of the largest and safest banks in the world. It was a very reputed bank and it even offered personal banking services to Queen Elizabeth. Barings Bank was also popular as it was financing the Napoleonic Wars, Louisiana Purchase by the US and the Erie Canal. 

In February of 1995, Nick Leeson single-handedly led the bank to bankruptcy. But how did a single man became so significant that it left no option for Barings Bank but to shut down? 

The best trader in town

Nick Leeson, the former employee of Morgan Stanley, joined Barings Bank at the age of 28. He was transferred to Jakarta, the capital of Indonesia, and was able to settle £100 million worth of back-office contracts. He performed better than expected as he rectified all problems faced by them in just 10 months. This impressed the bank’s senior management.

They promoted Leeson to the post of general manager of Barings Securities in Singapore. He was sent to head both front-office and back-office operations. He was also responsible for hiring new staff, including a team of traders which will help him during the market hours.

Nick Leeson was Baring’s face on the trading floor. He was the person who made all the decisions regarding the trading of the bank’s money in the derivatives market of SIMEX (Singapore International Monetary Exchange). He made unauthorized speculative trades which helped the bank to earn huge profits on a consistent basis. At the end of 1992, more than 10% of the bank’s profits came because of Nick Leeson’s wondrous trading moves. Normally, the contribution of investments in a company’s profit is nowhere near 10%. This earned him unlimited trust from his London bosses. But, they were not aware of the implications their decision will have.

The Collapse

Nick Leeson’s good luck in trading didn’t last wrong and soon he started losing money. To hid his incompetency from the management, he created an ‘88888’ account. He hid his losses in this account. In front of the senior managers, Leeson mentioned that these losses were of one of the inexperienced junior traders. Till 1993, the losses in this secret account were around £23 million. But by the end of 1994, the amount had increased exponentially to £208 million. For context, £1 is almost ₹100 today. That means this amount would have been close to ₹2,000 crores.

On January 16, 1995, Leeson used a short straddle strategy at Singapore and Tokyo stock exchanges. He was sure that the market would not have any significant movement, neither upwards nor downwards. But, he didn’t know what would happen next.

On January 17, 1995, a big earthquake, registering magnitude 7.2 on the Richter scale hit Japan. This caused a sharp drop in the Asian markets, specifically Tokyo stock exchanges where the Nikkei dropped 1000 points. To cover for his losses, Leeson made more risky trades hoping that the market will lift again. He purchased even more Nikkei futures contracts in hopes that he will be able to drive the market upside alone. But to his dismay, the market fell continuously. 

Failed and Fooled 

One question which comes in mind after reading this is, where was the audit committee? Why was there no checks when the single account was recording such huge losses? The review committee ‘failed’ in their checks and were successfully ‘fooled‘ by Nick Leeson. There were multiple factors which played in Leeson’s favour. As he operated in both the front-office and back-office, he had unlimited autonomy. 

He was making trades through front-office and was in command of the back-office which had the role to keep checks on the trades made by the front-office. Thus, he was making highly risky trades and was approving himself without any restrictions. That means, he had the ability to hide whatever he wanted to hide from the official books. Leeson made false declarations to regulatory authorities to avoid any strict checks on his work. He hid huge amounts of losses and forged the signatures of his seniors to get access to more money.

The Shutdown and Aftermath

By the time Barings Bank investigated and discovered the ‘88888’ account, the losses were too big for the company to stay afloat. Nick Leeson was accountable for the losses worth £827 million. This was twice the Barings Bank available trading capital. With no way out to recoup the losses he has incurred, Leeson decided to flee away. He left a note which read “I’m sorry”.

On February 26, 1995, the 233-year-old Barings Banks bank was declared insolvent. After 10 days, on 6th March 1995, it was officially acquired by a Dutch investment group, ING. They paid a meagre amount of £1 for this acquisition, just imagine buying a bank for ₹100! The collapse caused 1,200 people to lose their jobs in Singapore alone. In 2001, ING Barings was sold to ABN Amro. 

After flying away to Malaysia and Thailand, Nick Leeson was arrested in Frankfurt, Germany. He was brought back to Singapore after 9 months and was sentenced to a jail term of 6.5 years. Leeson was charged on two grounds: deceiving the bank’s auditors and cheating the Singapore exchange. He served his term in jail during which he was diagnosed with colon cancer. 

After being released from his prison, Nick Leeson has started a new life. He is now a public speaker and lecturer. He is also a personal trader and gives out regular comments on market performance.

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Editorial

Mayhem at Lakshmi Vilas Bank

Lakshmi Vilas Bank (LVB) has been in headlines lately. The shareholders in the Annual General Meeting ousted 7 of their senior management including CEO and MD S. Sundar. The shareholder even voted against the re-appointment of its statutory auditors. Yes, even the auditors! Previously, Lakshmi Vilas Bank had been facing a series of resignations from top officials, failed investment prospectives, rising Bad Debt, and poor financial performance. Is Lakshmi Vilas Bank headed for real trouble now? Or can Lakshmi Vilas Bank get out of this mess, like Yes Bank?

Poor Financials

  • LVB has been posting a loss for the last 10 quarters. Subsequently, the loss for the quarter ending June stood at a whopping Rs 112.3 crores.
  • The company’s Gross Non-Performing Assets (NPA) has risen from 10.7% in June 2018 to a very high of 25.4% in June 2019. Gross NPA is the sum of all loans given out by the bank, which have not been paid back duly or, in simple terms, sum of all loans that have gone bad. Having a 25.4% Gross NPA means that 25.4% of all the loans the bank has given have gone bad.
  • The Reserve Bank of India (RBI) had placed the bank on PCA(Prompt Corrective Action) framework in September 2019, citing rising debts and inadequate capital. Under PCA, a bank’s lending is restricted, the bank is required to arrange a certain capital and meet certain conditions placed by the RBI.
  • The Capital Adequacy Ratio(CAR) of the bank as of June 2020 stands at 0.17% as opposed to the minimum 9% limit set by the RBI. CAR is the amount of capital a bank retains as compared to its risks. It tells us whether to not the company will be able to absorb losses in wake of an uncertain event. Essentially it tells us about the financial health of the company, and in the case of Lakshmi Vilas Bank, it is not looking good.

Too Many Resignations? Internal Conflict? Poor Management?

  • There is a noticeable pattern in voting out of the senior officials in the AGM. In the ousting of the senior officials, 80% of the promoter group was IN FAVOR of retaining them, while only 20% were AGAINST retaining them. It was because of the vote of the retail and institutional shareholders that they were ousted from the bank. This could be because of internal politics in the board of the bank.
  • The company’s then-CEO and MD Parthasarathi Mukherjee resigned in August 2019. In September 2019, the company was placed under Prompt Corrective Action by the RBI. This was around the time LVB and Indiabulls Housing Finance Limited were planning a merger which was struck down by the RBI in October 2019.
  • The Then-CFO S.Sundar along with three senior officials had resigned due to ‘administrative reasons’. The next day, he was appointed as interim CEO and MD. In September 2017, he was ousted along with 6 other officials in the Annual General Meeting.
  • Vice President and Chief Risk Officer D Krishnakumar resigned in April 2020. The reason for his resignation was not stated.
  • In 2019, Religare Finvest, a financial services company accused LVB and two of its promoters of siphoning off funds up to Rs 793 crores. Economic Offences Wing of the Delhi Police arrested two of its ex-employees in connection with the case. LVB denied all claims and stated that RFL made the accusation to cover-up their own instance of fraud.

Recent Developments

The point is, LVB is having a capital crunch. The shareholders voted in favor of raising the foreign shareholding limit to 74 percent and also voted in favor of a rights issue to meet capital needs. The RBI has also set up a 3-Member Committee to look after the functioning of the bank temporarily.

LVB is in talks with Clix Capital, a Non-Banking Financial Company (NBFC), for a merger. Both have signed informal agreements for the merger and also completed the due diligence for the same. The merger may bring up capital of up to Rs 1,900 crores and assets worth Rs 4,600 crores from Clix Capital. There is still an uncertainty after the board room scuffle during the AGM. RBI wants this deal to go ahead as soon as possible. If the deal doesn’t click, the RBI may push for a merger with a larger bank.

Clix Capital has given a non-binding offer letter to LVB, offering to take close to 90% stake in LVB. Clix Capital has also sought an exemption from the mandatory three-year lock in period for sale of shares. This gives a hint about the deal going through.

There is definitely some internal problems within the senior management. However, the depositor’s money is safe, but only to a point. The liquidity coverage ratio of the bank is 262% against the RBI norm of 100%, this means it can easily meet its short term obligations easily. Investors and Bank Account holders need to watch out how LVB raises capital, gets a new, faster, and more efficient CEO, and steps taken by the bank to reduce NPAs and allot capital efficiently.

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Editorial

IL&FS: Reasons behind the crisis

IL&FS Crisis

IL&FS brief

In 1987, Infrastructure Leasing & Financial Services (IL&FS) was incorporated as an initiative to form “RBI registered Core Investment Company”. It is a non-banking finance company (NBFC) which was initially promoted by Central Bank of India, HDFC and Unit Trust of India (UTI). Over the past 30 years, IL&FS has aided in developing some major infra projects around the nation.

Few projects to name are Gujarat International Finance Tech-City (GIFT), Delhi-Noida Toll Bridge, Tripura Power Project and Chennai-Nashri tunnel (India’s longest road tunnel). Currently, Life Insurance Corporation of India, ORIX Corporation and Abu Dhabi Investment Authority (AIDA) are the largest shareholders for the company.

What is the crisis?

IL&FS ran out of cash due to a severe liquidity crunch. This resulted in the company to default on a few payments. They also failed to service its commercial papers (CP). The first hint of downfall in the public domain came in March 2018 when the company postponed a $350 million bonds issuance. During the same month, their consolidated total debt stood at whopping Rs 91,091 crore. IL&FS defaulted on inter-corporate deposits and commercial papers of about Rs 450 crore.

Later that year, IL&FS Financial Services cleared their dues related to Commercial Paper on 31st August, three days after the due date. IL&FS and it’s Financial Services subsidiary had a combined Rs 270 billion of debt rated as junk by CARE Ratings. Soon are the defaults came into the knowledge of the public, rating agency ICRA downgraded their borrowing ratings which came as a huge dent on the lendor’s business image.

The Asset-Liability Mismatch

This was one of the biggest reasons why IL&FS hit rock bottom. The company was borrowing loans in the form of commercial papers. You would be thinking, what are Commercial Papers? CPs are short-term unsecured debt-market instruments. These debt instruments have a maturity period varying from 7 days to one year.

The company was taking short-term debt and using it for financing long-term projects which would give returns only after 5-10 years. With the company’s rapidly depleting cash, they were unable to meet the demand and defaulted on several of its obligations. IL&FS’ leverage ratio jumped from 10.6x in September 2017 to 16.8x as of March 2018. That means, 6.2x jump inside a mere 6 months!

PPP Model Inefficiency and LARR 

The Government of India introduced the Public-private partnership (PPP) model to aid companies for better efficiency and thus better output. With the launch of this model, the company was assured that the government will help them in financing big projects. With this assumption, they invested heavily in infrastructure projects. The company started acquiring lands on a very big scale, took numerous infrastructure projects and financed them.

But the government did not cooperate with the company to the level they expected and launched LARR (land acquisition rehabilitation and resettlement act) in 2013 instead. When LARR was passed, landowners claimed their compensation for the lands which were theirs. With the rules of LARR and no help from the government in this regard, IL&FS has to pay Rs 17 crore plus worth of compensation to the landowners. This resulted in the overshooting of the cost of the projects and future defaults. This gave birth to the huge difference between the estimated cost of the project and the executed cost.

Other Reasons

IL&FS was incorporated as a finance company. Their purview of work was to fund the infra projects. But from 2015 onwards, they started taking ownership of several risky projects. To meet this, they took short-term loans and diverted the funds for long-term applications. This was done to take loans at a cheaper rate as short-term loans incur less rate of interest when compared to long-term loans.

The company was incurring losses and having very poor cash stability from the past 5 years. Yet the remunerations to the top management was not reduced.

IL&FS operates in a very risky business. No return could be derived from the infra projects until it is successfully completed. Yet, the top risk management team did not hold any meeting for over two years.

Going Forward

More than 30 funds across all categories, such as liquid funds, short-term funds, etc. had IL&FS in their portfolio. Inside two weeks short-term scrips of IL&FS were downrated ‘D’ from ‘A4’. This severely affected the fund houses and forced to mark down the value of the schemes. This led to a steep fall in the NAV (Net Asset Value) of these funds. Recently, Franklin Templeton announced the shut down of its six Debt Mutual Funds with Rs.26000 Crore Asset Under Management. IL&FS crisis played a huge role in the liquidity crunch here as well.

IL&FS defaulting was a very big blow for the Indian economy. Even after two years, the country is still feeling the effects of its downfall. The government should aim to make strict laws to be made so that transparency is restored. The auditors also did a terrible job as they failed to detect the fraud numbers behind the company’s financial. They even failed to flag some of the blatant errors. As big the IL&FS mess is, everything cannot be explained in one article. Marketfeed will come up with more pieces on this topic so that the readers can understand the aftermaths of IL&FS blowout in detail. Until next time.

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Editorial

RBI’s Financial Stability Report. Cause of Worry?

  • Banks are currently under high pressure from the impending threat of high NPAs (Non-performing assets) for the industry.
  • Reserve Bank of India (RBI) publishes its Financial Stability Report (FSR)

Financial Stability Report (FSR)

The Reserve Bank of India’s FSR for the month of July was published on last Friday. It outlined the bleak future for the Indian financial sector in upcoming quarters. The report describes various models and stress-tests which indicate that gross non-performing assets (GNPA) ratio of commercial banks could rise up to a worst-case scenario of 14.7% by March 2021 from 8.5% in March 2020. GNPA is the total bad loans a bank adds. The report also says that moratoriums on loans will have negative implications on the industry.

Current Situation

Banks have currently announced raising Rs 1 lakh crore in equity fundraising to offset any liquidity crunch. June ended quarter(Q1 FY21) results for the top 4 banks in India have not been entirely positive. Provisions saw a big rise in the quarter, dragging down net profits.

As we know, the stability in the financial system is very important for the growth of any economy. In her budget presentation in February, Finance Minister Nirmala Sitharaman had mentioned that the government expects to earn Rs 89,649 crore as dividends from the RBI and state-run banks and financial institutions. As the situation has quickly changed, dividend revenue will surely see a decline this financial year.

The economy currently needs a quick flush of spending by the government to restart it. But if the government is suddenly short of Rs 90,000 crore for the year (excluding drop in revenue from other sources), there is suddenly a big problem.

Reacting to the situation, banks are set to be included in the privatisation and disinvestment drive planned by the central government to raise money this fiscal. Number of Public Sector Banks (PSBs) are supposedly going to reduce to just 4 from the current number of 12. Public Sector Banks are those banks in which the government holds more than 50% stake.

NPAs and Risk Aversion

As the possibility of higher NPAs exist, risk aversion (act of avoiding risk) would increase, and banks would start giving lesser loans. As loans are the assets of banks, this risk aversion will cause revenues to decrease. This in turn will start a vicious cycle, inside which the commercial banks will be stuck in. “While risk management has to be prudent, extreme risk aversion would have adverse outcomes for all”, RBI governor Shaktikanta Das wrote in the report.

On a discussion with members of Confederation of Indian Industry (CII), the RBI Governor remarked that investments in the Infrastructure and Power industries will be key to economic revival. He declined to comment on a suggestion by HDFC chairman Deepak Parekh against extending the loan moratorium.

Bank Nifty

The report from RBI has sent shivers down Dalal Street, with all major banking sector stocks closing in red on Monday. Nifty Bank represents the 12 largest stocks from the banking sector which trade on the National Stock Exchange (NSE). As banks are the backbone of any modern economy, the index of banks in a country is a very important indicator of the economy itself.

Weightage of different banks in Nifty Bank

Earlier, results of HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank were analysed by Marketfeed.

Conclusion

Nifty Bank on Monday fell 3.4% as a reaction to the RBI report. NSE index Nifty fell 0.56%, even as global cues were positive. Nifty Bank is likely to remain volatile as the days go by.

Financial sector strengthening measures by the government will be needed to capitalise on current global sentiments favouring India. Going ahead, India’s goals of becoming the next manufacturing hub of the world will need support from the banking sector. Effective policies and interventions by RBI are the need of the hour, and hopefully they wont be too little too late.

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Kotak Mahindra Bank Q1FY21 results: Net profit falls by 9%

kotak mahindra bank

Kotak Mahindra Bank declared its Q1 results for this financial year on Monday (27th July 2020). They posted an 8.51% fall (YoY) in net profit at Rs 1,244.45 crore for the quarter ended June 30. Last year, net profits were reported to be Rs 1,360 crore in the same period. 

Some analyst estimated that profits will lie between Rs 1,300 crore and Rs 1,821.5 crore. The amount declared is below that what was forecasted but the gap is not a big one. 

Q1 FY21Q4 FY20Q1 FY20QoQYoY
Net Interest Income(crore)3,7243,5603,1614.6%17.8%
Net Profits(crore)1,2441,2671,360-1.8%-8.5%

On a brighter side, Kotak Mahindra Bank has recorded an upswing in their Net interest income. The NII for the quarter ending June rose YoY by 17.8% from Rs 3,161 crore to Rs 3,724 crore.  In the past few days, Axis Bank and ICICI Bank also declared their Q1 results.

Axis Bank and Kotak Mahindra Bank, both have declared a YoY fall in net profits, though the fall in results of the former (-19%) was more. In contrast to these two, ICICI Bank has registered a YoY gain in net profits by 23%. This gain in net profits of ICICI Bank is due to the sale of shares present in ICICI Prudential Life and ICICI Lombard. Around 1.5% stake in ICICI Prudential Life and a 3.96% stake in ICICI Lombard were sold in the month of June. This increased the profits and thus, gave a better overall outlook to the Bank.

“The continued slowdown in economic activities has impacted lending business, fee income generation from the sale of third party products or usage of debit/ credit cards, collection efficiency etc. This slowdown may impact customer defaults and consequently increase in provisions at the group level,” Kotak Mahindra Bank said in a release.

Almost a 3 times spike can be witnessed in the provisions made when compared to the same quarter previous year from Rs 316.76 crore to Rs 962.01 crore. Additional Covid-19 related general provision of Rs 616 crore has been made by the bank.

The slowdown in economic activities is one of the major reasons for the fall in profits. Lending to business has decreased and income from the sale of third-party products like credits cards has also faced a massive decline.

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ICICI Bank Q1 Results. Reduced NPA, 23.12% Net Gain YoY

ICICI Bank declared its Q1FY21 results on 25th July 2020. The bank declared a Total revenue of Rs. 37939.3 Crores as compared to Rs.40121.5 Crores in Q4FY21, which is a reduction of 5.44%(QoQ) but an increased revenue on a YoY basis of almost 12.02%.

Q1 FY21Rs. Cr.Q4 FY20Rs.  Cr.Q1 FY20Rs.   Cr.QoQ%YoY%
Revenue 37939.340121.533,868.9-5.44%12.02%
Net Profit3,586.91,613.22,913.4122.3%23.12%

The ICICI bank declared a net profit of Rs. 3589.9 Crore which is almost twice the net profit (QoQ) than last year Q4FY21 along with a 23.12% increase in net profit YoY%.Net non-performing asset (NPA) ratio decreased from 1.41% at March 31, 2020, to 1.23% at June 30, 2020.

Total period-end deposits crossed Rs 8 lakh crore, total deposits were Rs 801,622 crore (US$ 106.2 billion) at June 30, 2020, 15% growth in average current and savings account (CASA) deposits in Q1-2021; average CASA ratio was 41.0% in Q1- 2021  Term deposits grew by 27% year-on-year at June 30, 2020. Provisions (excluding Covid-19 related provisions and provision for tax) declined by 42% year-on-year

The shares of ICICI rallied almost by 10% from 353.20 to 392.95 in about a week from the Q1 results. The positive results of ICICI can be attributed to the moratoriums and relief measures announced by the government to stimulate the economy.

You can read the official results by clicking here