Author: Thyagarajan

RBI pulls plug on gold loans


Loans (Photo credit: jferzoco)

As the saying goes, all good things must come to an end. Even in these difficult times, gold loan non-banking finance companies (NBFCs) saw roaring sales and record margins. According to ratings agency ICRA, “`Gold loan companies have reported an estimated compounded annual growth rate (CAGR) of over 100% during the last three years, with the portfolios of the top three companies cumulatively exceeding Rs. 410 billion as on Dec. 31, 2011.

Consider this- During the third quarter of the current fiscal, Manappuram Finance [stockquote]MANAPPURAM[/stockquote] more than doubled its net profit from a year ago to Rs. 161.37 crore, loan disbursements surged 86% while assets under management rose 90% to Rs. 12,358.21 crore. Industry leader Muthoot Finance [stockquote]MUTHOOTFIN[/stockquote] posted a 61% growth in net profit to Rs 251 crore, while total income galloped 91% to Rs 1,231crore and assets under management increased by Rs 1,944 crore to Rs 22,885crore.

clip_image001But the honeymoon is over. Fearing risks to banking system and retail investors due to the sharp surge in loan against gold, the Reserve Bank of India (RBI) tightened lending rules saying these companies can’t lend more than 60% of the value of gold jewelry. It also directed them to maintain a minimum tier-1 capital of 12% by April 2014 while depriving them of granting loans against bullion, primary gold and gold coins.

clip_image001[6]RBI’s moves are not without reason. The sharp surge in gold prices has resulted in an equally sharp increase in demand for gold loans, especially in rural areas. Since these NBFCs depend heavily on public funds like bank loans and non-convertible debentures, any reversal in gold prices will not only catch NBFCs off guard but may also pose a systemic threat, affecting banks and retail investors.

While the prudential norms has found favour with experts who believe it would improve the sector’s asset quality in the long-run and help them absorb any sharp volatility in gold prices, they maintain that the lower loan-to-value- (LTV) ratio will moderate disbursement volumes and result in business clip_image001[8]shifting to unorganized players like moneylenders who can still extend loans at higher LTV ratios.

Gold NBFCs, which are used to high profit margins, may have to reduce interest rates to prevent borrowers from shifting elsewhere, which will take the sheen out of their high flying business. Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets (RoA)may moderate from the current high level of 4.5 per cent to 2.5-3.0 per cent.


Gold glitters, gives India the jitters

Too much of anything is bad. India’s unending appetite for gold is also proving to be its nemesis.

clip_image001Trade deficit for 2011-12 (April-January) at $ 148.7 billion was 40.4 per cent higher than $ 105.9 billion in 2010-11 (April- January). While higher oil import bill is largely a known factor, the sharp increase in import of gold and silver has intensified pressure on trade deficit (exports minus imports).

From April to December during the current fiscal (2011-12), imports of gold and silver surged by 53.8% to $45.5 billion. Higher gold imports increases the country’s external financing needs as it would require more foreign exchange to foot the import bill. The share of gold and silver in import basket has risen from 9.3% in 2000-01 to 13.3% in the first half of 2011-12.


Despite record high prices, India was largest consumer of gold in 2011 with total demand of 933.4 tonnes, according to the World Gold Council, down only moderately from 1,000 tonnes in 2010. Apart from traditional factors, high inflation has prompted many investors to switch to gold from financial savings.

clip_image001[17]The fallout of this buying binge by bullion buffs has forced Finance minister Pranab Mukherjee to double the basic customs duty on gold bars to 4%, revising the cost upwards by up to Rs 1,040 per 10 grams. This is the second increase in the last two months to moderate demand. Blaming the sharp surge in imports of gold and other precious metals during the first three quarters of the year for driving the current account deficit (CAD), Mukherjee also intends to charge 2% on jewellery purchases of more than Rs 200,000 along with an excise of 1% on non-branded jewellery. CAD stood at 2.9 per cent in 2010-11 and is expected to be around 3.6 per cent this year.

Fearing more pressure in the country’s CAD, the Prime Minister’s Economic Advisory Council (PMEAC)’s economic report called for discouraging unproductive imports like gold by making other financial assets like mutual funds and insurance attractive.


But will Indians go beyond gold? In these times of downgrades, defaults and debt crisis, ‘yellow fever’ is only likely to spread further.


Race for savings amidst rise in bad loans

While banks have always been aggressive in shoring up their CASA (current account/savings account) ratio, the chase for less expensive deposits has picked up post savings rate deregulation.


For biggies like State Bank of India [stockquote]SBIN[/stockquote], Punjab National Bank [stockquote]PNB[/stockquote], HDFC Bank [stockquote]HDFCBANK[/stockquote], and ICICI Bank [stockquote]ICICIBANK[/stockquote], savings accounts make up 30-35% of their total deposits. For relatively smaller banks like Corporation Bank and Oriental Bank of Commerce, it is lower at 15-20%. Although retail deposits are the cheapest form of funding for banks, it comes with the millstone of having to operate a vast retail presence – a network of branches across the country.

While new entrants like Yes Bank [stockquote]YESBANK[/stockquote] and Kotak Mahindra Bank [stockquote]KOTAKBANK[/stockquote] raised their savings account deposit rates in a flash to 6%, big boys like SBI and ICICI played the waiting game. Late last year, SBI launched an innovative FD scheme, ‘unfixed’ deposit product, through which it has garnered over Rs 30,000 crore till March. The lender lured savers by offering 8.5% interest rate along with the flexibility to withdraw without penalties.

clip_image001Even though many banks are yet to tinker with their savings rate, it is unlikely to significantly impact their net interest margin (NIM).

While banks have aggressively wooed depositors, borrowers have given them a tough time. The Gross Non-Performing Assets (NPAs) of nationalized banks rose to 2.4% of advances as on December 31, 2011 from 1.9% as on March 31, 2011. However, private banks saw their NPAs moderating to 2.1% in Q3 against 2.3% in the same period last fiscal.

Bad loans have risen as credit to sectors like aviation, telecom, power clip_image001[6]and agriculture have gone sour. Market leader SBI’s gross NPAs for agriculture during the December quarter surged to 9.45% as against overall bad loans of 4.61%.

The gross NPA ratio for all banks in respect to the agriculture segment rose to 3.3% in March 2011 as against 2.4% in March 2010.

Despite pressure on margins due to higher deposit rates and concerns over asset quality, the banking sector as a whole will continue to display resilience, says a report by Care Rating based on the performance of 39 banks during the first nine months of this fiscal (FY 12).

With the Reserve Bank of India getting an assurance from top bankers in February that all is well on NPAs and there is no systemic threat, I guess, we can take it easy just like Big Brother.

Power sector in dire straits

A developing India needs proper supply of electricity to meet the growing demand from households and other sectors and sustain its economic growth. But there is a yawning gap between what is planned and what the power sector has delivered.


The government had earlier set a goal for adding 78,577 MW of electricity capacity during the 11th Five-Year Plan, which was scaled down to 62,000 MW by the Planning Commission in its mid-term review, citing environmental and land acquisition hurdles.

Other issues that have plagued the power sector include shortage of fuel, distorted prices of electricity, worsening health of power distribution companies, higher transmission and distribution (T&D) losses among others.

According to the Association of Power Producers (APP), a grouping of over 20 private power companies in the country, an estimated 52 power projects having total capacity of 68,563 megawatts are facing default risks at present.

clip_image002Coal-fired plants, which account for 55.9% of the country’s total power-generating capacity, are facing a severe scarcity of the fuel. The demand-supply gap for coal, which stood at 84 million tonnes (MT) last fiscal, is likely to touch 142 MT in the current financial year.

Coal India [stockquote]COALINDIA[/stockquote], which accounts for 80% of the country’s output, aims to produce 464 million tonnes in 2012/13, and has already scaled down output target to 440 million tonnes in 2011/12.

Coal India’s inability to ramp up output forced the PMO to intervene and direct the state run energy major to sign compulsory supply pacts with power companies.

Starved of fuel, power firms have been importing coal from Australia and Indonesia. Last month, a Bloomberg report noted that India is poised to surpass China as the world’s top importer of thermal coal with purchases exceeding 118 million tonnes this year in India compared with China’s 102 million tonnes. Domestic fuel shortage has led to increased reliance on imported coal for fuelling the additional power capacity.


Even as coal supply has run dry, other sources like gas have failed to bridge the supply gap.
With each passing day, gas production from RIL’s prized KG~D6 basin has been hitting new lows. Output stood at 41mmscmd in Q3 FY2012 compared to 45mmscmd in Q2 FY2012. Due to lack of gas from RIL’s block, several gas-based power projects by Reliance Power[stockquote]RPOWER[/stockquote], Lanco [stockquote]LITL[/stockquote] and GMR [stockquote]GMRINFRA[/stockquote] in Andhra Pradesh are sitting idle.


The Power Ministry’s pet project, Ultra Mega Power Projects (UMPPs), each of which is 4000 MW, face an additional problem of financing as lenders are unwilling to bear the risks associated with the execution of such large projects.




The fallout of these multiple set of problems has been an increase in impairments and restructuring of loans to the power sector.


Since the power sector is considered as a catalyst for economic growth, hard-core reforms are needed to make the sector more efficient and meet the heavy demand for electricity.

Policies must be evolved to ensure completion of on-going projects quickly and add new capacity in an efficient, least cost manner, greater reliance on renewable energy like wind and solar power, easy access to long-term finance, assured supply of coal and gas and an efficient distribution system.

Oil boils, roils Indian economy

Evolution of oil prices 1987-2011 (average Bre...

Image via Wikipedia

Crude oil, Indian economy’s biggest nemesis, is heading northwards again and further complicating the already battered macroeconomic picture. With the benchmark Indian crude oil basket flirting close to the $125/ barrel mark due to the Iran nuclear standoff, Finance Minister Pranab Mukherjee is sure to spend ‘sleepless nights’ fretting over the burgeoning subsidy bill.

In January, ratings agency Crisil noted that under recoveries on sale of regulated fuels would touch an all-time high of Rs 1.4 trillion (Rs 1, 40,000 crore ) in 2011-12 due to high crude oil prices and a weak rupee.clip_image002

Since then, crude has surged even higher, from around $112/ barrel to the present level. A dollar increase in global crude oil price widens the industry’s under-recovery by Rs 4,000 crore annually and about Rs. 8,000 crore on account of every Re.1 depreciation.

The turnaround in Indian currency has cushioned the impact to some extent as the rupee has risen from 53/ dollar to around 49/ dollar presently.

But the damage has already been done. Under-recoveries on the sale of price-controlled fuels for FY-12 have skyrocketed to Rs 97,313 crore for the nine months ended December.

clip_image002[10]The under-recoveries of oil marketing companies (OMC) as on February 16, 2012 on sale of diesel is Rs 12.31 per litre, Kerosene Rs 28.77 per litre and domestic LPG Rs 378 per cylinder, data from the Petroleum Planning and Analysis Cell showed. At these levels, daily under-recovery stands at Rs 465 crore.

The last time this (subsidy bill breaching Rs 100,000 crore) happened was in FY ’09 when crude oil touched an all-time high of above $145/ barrel.

The share of subsidy burden for upstream oil companies has been hiked to 37.91 per cent for the first nine months (April-December) of this fiscal (FY 12), compared with 33% in the year-earlier period.


The soaring under-recoveries has a double whammy effect- while it would adversely affect the profitability of OMCs, it would also inflate the country’s subsidy bill which is bound to expand the fiscal deficit apart from fuelling inflationary pressures.

Fiscal deficit is expected to surpass the budgeted target of 4.6% by over 1% driven largely by bloating oil subsidies.

The Centre spent Rs 38,386 crore in petroleum subsidies in 2010-11 and estimated this fiscal year’s bill at 23,640 crore.

Even as plummeting economic growth and deteriorating business conditions have severely hit its fiscal calculations, Pranabda and his battery of economic experts will have to contend with a high import and subsidy bill unless it raises retail prices as is widely expected.