Tag: moratorium

Categories
Editorial

Can a Relief Package Save the Telecom Sector?

Telecos Vodafone Idea and Bharti Airtel can finally breathe a sigh of relief. The Union Cabinet has approved a crucial relief package that will ease the financial burden of telecom companies. The new measures seek to drive progress, facilitate investments, and increase employment opportunities in India’s telecom industry. In this article, we shall dive into the reforms approved by the Centre. 

What’s in the Relief Package?

  • The Union Cabinet has approved a four-year moratorium on payment of unpaid spectrum and AGR dues by telecom companies. For clarity, spectrum dues is the amount payable to the Centre for airwaves that were purchased via auctions. Adjusted Gross Revenue or AGR is a percentage of a telecom firm’s total revenue “shared” with the government. [You can learn more about AGR here] Interest will be levied if companies opt for the moratorium. 
  • The government has also decided to allow 100% foreign direct investment (FDI) in the telecom sector through the automatic route. It means that foreign investors can now invest fully in telecom firms without prior approval. Currently, only 49% FDI is allowed through the automatic route. Anything beyond that has to necessarily go through the government route. 
  • The definition of Adjusted Gross Revenue (AGR) paid to the government will be changed to exclude all non-telecom revenue. Currently, telecos have to share a percentage of their total income, including those from interest income, sale of assets, and other miscellaneous income. 
  • There will be an increase in the tenure of spectrum ownership to 30 years, compared to the current tenure of 20 years. It means that companies securing the rights to use spectrum (or airwaves) can now leverage the assets for up to 30 years after bidding for them in future auctions. There will be a cut in spectrum usage charges (SUC) to reduce the capital cost (fixed, one-time charges) of telecom firms. The government will also scrap SUC for airwaves acquired in the upcoming auctions.
  • The package is also expected to boost and expand the 4G network footprint in India. It will also create an enabling environment for investment in 5G networks.

How Will it Benefit the Telecom Sector?

The structural reforms introduced by the Centre are expected to bring positive changes to the entire telecom landscape of India. These measures are aimed at providing much-needed relief to players such as Vodafone Idea (Vi) and Bharti Airtel, who are struggling with huge debt. Vi, who has been losing lakhs of subscribers every month, is on the brink of declaring bankruptcy. 

As of 2019, telecom operators collectively owed nearly Rs 1.47 lakh crore to the Centre. Out of this, Vodafone Idea’s deferred spectrum charges stand at ~Rs 1.06 crore! In 2019, telecos were offered an extension of two years to pay off all financial obligations with interest. Reports suggest that Vi has to pay an installment of Rs 16,000 crore at the end of March 2022. Unfortunately, the financial condition of most telecom companies has continued to deteriorate. Thus, the government has now deferred these payments by another four years. This measure will provide space for financially stressed telecos to improve their business and clear dues over a longer period. 

We know that Vi has been losing lakhs of subscribers due to cutthroat competition in the telecom space in India. The company is unable to compete with aggressive tariff rates from Reliance Jio and Airtel. The risk of a duopoly (two firms dominating a market) would lead to a further hike in tariffs. Moreover, the cash-strapped firm is not in a position to invest in 4G/5G infrastructure. The approval of 100% FDI in the telecom sector will help address the cash flow issues faced by Vodafone Idea. Foreign institutions could swoop in and save the company from its inevitable death. Vi needs to raise capital quickly to survive in the industry. 

Conclusion

The relief package will be instrumental in generating more jobs (due to new investments) and protecting the overall interests of consumers, employees, banks, and the government at large. It comes as a virtual lifeline for Vodafone Idea. The moratorium will bring relief to lenders that have massive exposure to distressed telecom operators. If companies are still finding it difficult to pay off their financial obligations at the end of four years, the government will be open to acquiring their equity. 

The package has made vital changes to telecom regulations, which will support the growth of entities in the telecom sectors in the long term. However, the Centre may find it difficult to support BSNL from collapsing while also extending measures to private players. There is no clarity whether the relief package will resolve all challenges faced by Vodafone Idea. However, it will surely help them to tide over the immediate crisis. Vi has found a breathing space but still has a long way to go. As per the recent data released by India’s telecom regulator, Vi continues to lose subscribers. Meanwhile, Reliance Jio and Bharti Airtel are in tight competition to secure more market share. 

Ultimately, we have to analyse how telecos take advantage of these relief measures and improve their financial metrics. What are your views on the relief package for the telecom sector? Let us know in the comments section of the marketfeed app.

Categories
Editorial

Banks Q4 Results, NPA Bomb and More…

In November 2020, we at marketfeed talked of an NPA or Non-Performing Asset time bomb which might go off around this time, sending banks into a pool of bad quarterly results. You can check out the article over here.

During the first wave of COVID-19, when businesses took a hit, the Supreme Court had asked banks all across India to give a stay or moratorium to all those who had borrowed money from them. Whenever someone does not repay their loans on time, banks are required to set aside some money or ‘provision’ as a precaution so that the banks do not go bust in case of an unexpected event. The ‘provision’ money comes right off a bank’s profits, which impacts the profit and loss statement of a bank. RBI had asked the banks to set aside 10% provision for all loans that came under a moratorium which shaved off a few thousand crores in profits last year. However, the provisions were necessary to save banks from greater damage. 

RBI asked banks to set aside provisions only for the amount under restructuring or moratorium and not on those which did not fall under these, this helped protect banks from higher provisioning The overdue loans which were not classified as NPA before would now be classified all at once which could severely impact the banks’ balance sheet. This sudden classification of NPAs is what the whole NPA bomb scare was all about. 

Fast forward to May 2021, all major banks have started coming up with their Q4 results. Interestingly enough, banks like HDFC, ICICI, Axis Bank, IndusInd Bank, AU Small Finance Bank, Equitas Small Finance Bank, and others have posted some really good profit growth for the quarter. A lot of public and private sector bank results that are due this month can go on the same lines. So did we miss out on something? Did the bomb not burst? What are the banks headed for? Let us find out. 

Bank Results Outlook For Q4

  • Good Profits: For Q4FY21, banks have posted fairly good revenue growth and profits. These good numbers were mostly because of High Net Interest Income(NII) and decreased provisions. HDFC Bank posted YoY profit growth of 15.8%. Axis Bank went from a loss of ~Rs  1262 crore to a profit of  ~Rs 2941 crore. State-owned Bank of Maharashtra recorded yearly profit growth of ~214%, and IndusInd Bank recorded yearly profit growth of 193.76 crores. AU Small Finance Bank and Equitas Small Finance Bank both recorded YoY profit growth of ~38% and ~162.8% respectively. 
  • Increase In Deposits: Deposits in banks grew fairly well in the fourth quarter of FY21.  For ICICI Bank the total deposits rose 21% YoY. Deposits in HDFC Bank grew ~16% YoY. For Axis Bank deposits grew by ~10% YoY. For AU Small Finance Bank deposits increased by 37.5% YoY and 52% YoY for Equitas Small Finance Bank. According to an RBI report, total bank deposits increased by ~11.4% in the financial year ending March 31, 2021. 
  • Bad Debt Position Improved: According to credit rating agency CARE, gross NPAs declined from 8 Lakh crore in December 2021 to 7.5 lakh crore in March 2021. The gross NPAs of Scheduled-Commercial Banks, in particular, declined by 2.3% over a year’s time. The bad debt position improvement is also accredited to recoveries that the banks made. According to Care Ratings, banks made the following recoveries in Q4: SBI Bank: Rs  5,657 crore, ICICI Bank: Rs 1,776 crore, Union Bank of India: Rs 1,554 crore, Bank of India: Rs 1,495 crore, Bank of Baroda: Rs 1,471 crore, Canara Bank: Rs 890 crore, Indian Bank: Rs 744 crore, Central Bank of India: Rs 631 crore and Axis Bank: Rs  621 crore
  • Loan Advances Increased: According to RBI, loan advances rose by ~7.2% over a year. HDFC Bank’s advances grew 14% YoY. Axis Bank’s advances grew 15%. AU Bank’s Net Advances were up ~28%. 

Why Banks Performed Well

Aggressive Fundraising Via QIP and NCDs

After the pandemic struck, banks were assigned with safeguarding their position. They had increased their provisions to fight off bad debt but impacted their profit. They needed money to boost their lending and increase bank credit. Banks started aggressively raising funds by selling Non-Convertible Debentures(NCDs) or the sale of equity shares. 

In August last year, HDFC Bank raised Rs 14,000 crore through a combination of NCDs and Qualified Institutional Placement(QIP), ICICI raised Rs 10,000 crores through QIP, and Axis Bank raised Rs 10,000 crore via QIP. In November 2020, RBL Bank raised Rs 1566 crore. In December 2020, IDBI raised Rs 1435 through QIP, Canara Bank raised Rs 2000 crore through QIP.  The list goes long.  Banks now had leverage and could focus on normalizing banking operations. The aggressive raising of funds helped mitigate the effect of increased provisioning, banks could now focus on lending.

Decreasing NPAs and Provisions 

Banks started decreasing provisions plus their Net Interest Income and Gross Advances increased. Since there was an economic stimulus, businesses had started to flourish and employment levels went to normalcy. The asset quality of banks increased due to low slippage. Slippage = New NPA. However, the asset quality might go down for banks in Q1FY22, where Gross NPAs or bad loans might go up.

Banks Wrote-off Huge Overdue Loans

When a bank has enough provision for an NPA when it is overdue for three years, the bank can write off the bad loan. What this does is that it removes bad loans from the company’s accounts and improves the company’s balance sheet. It improves the company’s NPA ratio and the company can reduce the provisions which in turn improves its profits. As of March 31, 2020, banks have written-    off loans worth 1.15 lakh crores in the first three quarters of the previous financial year. In fact, Indian banks have written off 8 lakh crores worth of bad debt in the past decade. Once you write off a loan, it ceases to exist, it doesn’t matter. This could be another major reason why the NPA time bomb couldn’t tick off. 

Update: RBI Governor Shaktikanta Das’s Announcements

RBI Governor Shaktikanta Das made an uninformed announcement on May 5, 2021. In the speech, he announced some key reforms that will again benefit banks, micro, small and medium enterprises(MSMEs), pharma companies, vaccine makers, drug manufacturers, medical oxygen suppliers, and other essential health services. He also announced some provisions to financially assist state governments in times of pandemic. These reforms have now allowed banks to restructure more loans. They have also announced measures to selectively induce liquidity into the markets that have to an extent safe guarded banks from the devastating second wave of COVID-19. We have talked in detail about Shaktikanta Das’s Speech at marketfeed. To know more, click here.

A lot of loans are still under restructuring by banks. This has simply delayed the NPA spike that was expected. Banks raising funds through QIPs and NCDs did safeguard them. However, the second wave of the coronavirus will amplify the magnitude of the NPA crisis. The first quarter of FY22 doesn’t seem too bright for the banks. Shortage of Medical Oxygen, COVID-19 drugs, and vaccines has acted as a barrier to economic revival. Can a situation similar to last year occur again for banks? Or could it be worse than that? Is there something that we are not able to see? Let us know in the comment section in the marketfeed App. 

Categories
Editorial

Explained: RBI Governor Shaktikanta Das’s Speech

The Reserve Bank of India(RBI) Governor Shaktikanta Das’s speech yesterday came as a shock since it was at such short notice. While things around the country seem gloomy, the announcements made by the RBI Governor were a ray of sunshine. This is not only for the small and medium enterprises that have suffered due to the second wave of coronavirus but also for pharma companies, vaccine makers, and state governments. In this piece, we summarize and highlight the speech made yesterday and its possible consequences on the economy. 

Highlights Of The Speech

  1. The RBI announced a Rs 50,000 crore Term Liquidity Facility to Ease Access to Emergency Health Services. To put it up in simple words, the RBI will lend Rs 50,000 crore to banks who would intern have to lend it to Emergency Health Care services working to mitigate the COVID-19 pandemic. These services include vaccine makers, COVID-19 drug makers, testing labs, oxygen plants, healthcare services, hospitals, etc. The banks can borrow from the RBI at the repo rate and for a maximum period of three years with some special benefits as well. They will also have to maintain a COVID loan book in order to avail benefits from the RBI.
  1. On April 15, 2021, the RBI induced Rs 25,000 crore of liquidity into the market by buying G-Sec or Government securities. This programme was called Government Securities Acquisition Programme 1.0 or G-SAP 1.0. Similarly, the RBI announced a G-SAP 2.0, where the RBI will induce liquidity of Rs 35,000 crore into the market by procuring G-Secs. 
  1. Small Finance Banks or SFBs play an important role when it comes to giving credit to rural areas, small businesses and individuals. The RBI, therefore, has announced a three-year Special Long Term Repo Operation(SLTRO) of Rs 10,000 crores at repo rate. SFBs will thereby gain liquidity effectively which will help stimulate Micro, Small, and Medium Enterprises(MSMEs) and the rural economy. To know more about how a Long Term Repo Operation works, check out the article at marketfeed over here. 
  1. Banks had to fulfil a target set by RBI for Priority Sector Lending. A Priority Sector includes Agriculture, Micro Enterprises, Marginal Farmers, Weaker Sections. These sectors promote credit growth in underdeveloped and rural areas. So far, Small Finance Banks lending to Microfinance Institutions(MFIs) were not counted as Priority Sector Lending. They will now be counted in as Priority Sector Lending till March 31, 2022. 
  1. Banks need to keep liquid cash as a precautionary measure with the RBI known as Cash Reserve Ratio or CRR. The CRR is a percentage share of net demand and time liabilities (NDTL). We need not go into detail about it. The RBI has announced that any lending made to MSMEs(up to Rs 25 lakh) need not be counted into their NDTL. This means that banks will have to keep less liquid cash with the RBI as a reserve. This shall boost lending to MSMEs. 
  1. During the first wave of the COVID-19 pandemic in India, the RBI had announced restructuring schemes and a moratorium for stressed assets or bad loans under Resolution Framework 1.0. To know how a loan is restructured, click here. With Resolution Framework 2.0, a one-restructuring is permitted for those businesses or individuals with loans less than ₹25 crores who had not availed for the first scheme. Additionally, banks have been allowed to modify and extend the moratorium period for loans under Resolution Framework 1.0 for up to two years. 
  1. When the economy is running well, banks are required to set aside ‘countercyclical/floating provisions’ above the mandatory provision requirements. These provisions are used only in contingencies or emergencies, which is a pandemic in this case. Banks are now allowed to use these countercyclical provisions for making provisions for bad loans. This means that  Banks need not necessarily draw money from profits to make provisions. 
  1. The RBI has given a relaxation in the Overdraft (OD) facility for state governments. State governments can borrow money from the RBI using what is called the Overdraft (OD) facility. They need to pay the RBI back with interest(at repo rate) under a limited time period called the Overdraft. The RBI has permitted states to be in Overdraft for a maximum of 50 days( from the earlier limit of 36 days) and 21 days consecutively( from the earlier limit of 14 days).

The Impact

The announcement had a positive impact on the stock markets. SENSEX was up 424 pts where NIFTY 50 was up 121 pts. NIFTY PHARMA, the benchmark index for pharmaceutical companies, climbed 3% yesterday after the RBI decided to give it a liquidity facility of Rs 50,000 crore. The top gainers for yesterday were pharma companies like Dr. Reddy, Sun Pharma, and Banks like IndusInd Bank, Axis Bank, and Kotak Mahindra Bank. NIFTY Bank Index was up 2% led by mostly Small Finance Banks after RBI announced a support system for them. 

The RBI’s announcement has relieved certain distressed sections of the society. It has not only created a support system for businesses that have shut shop, but also for healthcare services. The announcement can ensure that the Banks’ Bad Loans remain under check. One can expect a boost in oxygen production, drug and vaccine production. Meanwhile, businesses and individuals could stand strong till the time India gets back up on its feet again, with a better healthcare system and vaccination drive this time. Until then, Stay Home, Stay Safe.

Categories
Editorial

The Government Interest Waiver – All You Need to Know

In normal circumstances, when an individual or a business takes a loan from a bank, they would have to repay the loan amount with interest. More importantly, there would be a specific time period by which they have to make the required payments. What happens to these entities when they fail to repay the banks or other financial institutions? Their credit scores go down, thus, making it difficult for such entities to get essential loans in the future. Or, the property which was used as collateral for the loan would be taken over by the bank and sold off. These are important facts that we already know.

So let us look at the problems faced by different entities in these challenging times of Covid-19. Then we will jump into what this interest waiver means, and how it will affect different parties including consumers like us by understanding what every guideline means.

Problems faced by Businesses:

We need to establish the fact that there is nothing ‘normal’ about this year. The Covid-19 pandemic has definitely caused a huge impact on individuals and businesses all around the world. Small or large businesses would have taken loans to improve production. In order to scale up, the loan amount could have also been used to increase investments in infrastructure. With the lockdown being imposed in late March in India, most businesses had very few customers. Supply chain (network between a firm and its suppliers) disruptions due to the closing of borders had made it very difficult for many businesses to keep their shops open. 

Problems faced by Banks:

An important factor that we must consider is the view of the commercial banks in our country. One of the main sources of income for banks is the interest they receive on loans. In such cases when customers are not in a position to repay the loan interest amount, financial institutions would have a very tough time conducting its normal activities. It could affect the financial result or position of the banks. (There could be exceptions to this. For eg, HDFC Bank reported a high-profit growth of 18% YoY for Q2). Banks and financial institutions are the backbones of any modern economy. To make sure that they do not fail, there should also be a system in place so that all stressed loans do not get classified as bad loans when borrowers fail to repay.

With almost all economic activities being hit, the Government of India had to step in and provide maximum support to its citizens, while maintaining the welfare of banks. The Reserve Bank of India (RBI) had announced a moratorium on repayment of loans (debt) for three months, beginning from March 1, 2020. What this meant was that businesses and individuals would not have to make payments on their loans during this period. The moratorium period was further extended from May 31st for another 3 months. This was mainly because the number of coronavirus cases in India kept on increasing rapidly, and lockdown rules became more strict. 

The Compound Interest Waiver

Even though the RBI had offered a moratorium, the banks continued to build up the compound interest on these loans over the six month period. Interest-on-interest(or compound interest) is the interest on a loan, calculated based on both the initial amount and the piled-up interest from previous periods. On October 3rd, the Government announced that interest-on-interest for loans up to Rs 2 crores during the six-month moratorium period, would be waived off. This would provide relief to many micro, small, and medium enterprises, and individuals. However, do bear in mind that the banks which had provided loans to these enterprises would be largely affected. It had been estimated that the cost of the compound interest waiver could be around Rs 5,000 – 6,000 crores. This loss would be compensated by the Government. 

On 15th October, the Supreme Court asked the Government to speed up the process for implementing the waiver of interest-on-interest. The Court instructed the Centre to implement the waiver by 2nd November. This is to make sure that individuals or businesses would not suffer more financial losses. 

Guidelines for Implementing The Waiver

On 23rd October, the Indian Government issued the important operational guidelines to banks. The guidelines specified how the implementation of the compound interest waiver would go about. Let us look at some of the important aspects of the guidelines:

  1. The interest waiver scheme would be applicable to loans below Rs 2 crores. 
  1. The amount of relief should be calculated as the difference between simple interest and compound interest. What this means is that compound interest on loans would be covered or paid by the government. The simple interest amount has to be paid by the borrowers themselves. The relief amount will be credited to the customer’s account.
  1. The relief payment would be calculated on loan repayments in the period between March 1, 2020, to August 31, 2020.
  1. The rate of interest while calculating the relief amount would be the same as the rate in the loan agreement. This is to ensure that there is no confusion, in case the interest rate has been increased or decreased by banks during the moratorium period.
  1. The government has identified eight categories of loans under this scheme. The categories include micro, small, and medium enterprises (MSME) loans, educational loans, housing loans, consumer durable loans, credit card dues, auto loans, personal loans to professionals, and consumption loans. People who have taken loans based on any of these 8 categories would be eligible for getting relief. Check with your bank to see if you can avail the scheme.
  1. In the case of credit card dues, the rate of interest will be the weighted average lending rate that is charged by the card company. The scheme will also be applicable only for transactions financed on an EMI basis between March and August. The weighted average is a method of calculating the average, in which some elements carry more importance than others.
  1. In the case of loans that were given as cash, normal interest will be calculated on a daily basis at the rate as of February 29, 2020. The compound interest will be calculated on a monthly basis. The amount that comes as the difference between both these rates will be credited to the customer’s account.
  1. The compound interest waiver applies to all lending institutions such as banks, non-bank finance companies (NBFCs), and housing finance companies.
  1. The scheme can also apply to those who had not utilized the RBI moratorium plan, and had continued with the repayment of loans.

The entire cost of the compound interest waiver would be borne by the government. It has been estimated that the scheme would cost Rs 6,500 crores. The banks (or lenders) have to submit all claims for reimbursement by 15th December 2020. The State Bank of India (SBI) will provide the necessary support to the government for receiving and settling all claims.

Conclusion

During these tough times, it is of very high importance that individuals and businesses get support or relief. The effects of non-repayment of loans can have a huge impact on their future activities. On the other hand, it is also essential that compensation is provided for lenders such as banks and other financial institutions. The new scheme would certainly help to balance the present economic conditions in India.  Let us hope that these guidelines will be implemented accurately, and every entity gets what they deserve. 

Categories
Daily Market Feed

Banks and Moratoriums – Share Market Today

Udaan

Nifty opened the day at 11,568 with a slight gap-up tracking global cues. After heavy consolidation till 11:25am, the index broke down to touch a day-low of 11,507. Later, Nifty moved between 11,520 and 11,570 and finally closed at 11,527.45, down 7.55 points or 0.065%.

Bank Nifty opened the day at 23,986 levels and strongly fell over the course of the day. With The Supreme Court hearings on loan moratorium still going on, the index continues to be trading with fear. Nifty bank closed at 23,530.85, down 344 points or -1.44%. It was the worst performing sectoral index today.

Nifty IT was the best performing sectoral index, moving 1.5%. Hope you caught our live market update on @fundfolio on Telegram. 

Asian markets are trading mixed. European markets are green at the time of Indian market close.

News Picks

Banks were very volatile and traded in red due to the ongoing hearing of moratorium extension. ICICI Bank (down 2.03%) and Kotak Mahindra Bank (down -1.66%) featured in the Nifty Top Losers’ list today.

Indigo and Spicejet closed in green today but gave negative movement after their gap-up openings.

Shares of ONGC closed at ₹79.15, down 1.43% after expectation of capital spending reduction of 20% due to delayed projects.

Shares of Vodafone Idea gained 29.8% to close at ₹12.85 after reports of US companies Verizon and Amazon’s interest in a $4 Billion deal with the debt-ridden telecom company. The company was also planning to raise about $1.5 billion as it seeks to turn around its fortunes in the telecom market

Infratel gained 11.09% to close at ₹217.80 to become Nifty’s top gaining stock. The merger of the company with Indus Towers, is expected to finish soon. ZEEL was yesterday’s top gainer and Infratel is today’s, with both companies set to be kicked out from the Nifty 50 on Sept 24.

Tata Consumer Products gained 4.82% to close at ₹576.35/share today. The stock had been consolidating for a long time and finally broke out today. Hope you caught the rally today with our suggestion on Telegram!

Shares of IT giants were in focus today with suggestions from our side being Infy (closed at ₹935.20 up 1.21%) and TechM (closed at ₹761, up 3.51%). Suggestions of strength in IT stocks were visible from the morning, and these stocks gave easy profits.

Markets Ahead

Nifty is trading cautiously with domestic factors like moratorium hearing still in focus. International markets are performing exceptionally well, and we may see a huge up movement if local factors align. Nifty consolidated heavily today, even with the weekly expiry. Nifty is likely to be unaffected by external factors with such strong factors in play. Identifying opportunities outside the index will help you overcome this problem.