July 11th, 2018, 1st Edition

Last week the Reserve Bank of India (RBI) hiked the repo rate by 25 basis points from 6% to 6.25% since January, 2014. Along with the repo rates, the reverse repo rate was also hiked by 25 basis points and stands at 6% from 5.75%. The Marginal Standing Facility (MSF) stands at 6.25% whereas, the Bank Rate moved up 25 basis points to 6.50%.

The 6-member Monetary Policy Committee (MPC) has maintained “neutral” stance on the monetary policy with an objective to contain the Consumer Price Index (CPI) inflation at 4 % within a band of +/- 2% while supporting growth. The RBI has pegged its decision on the significant increase in inflation this year. The CPI Inflation target set by the RBI is 4.8-4.9% in H1(1st Half) and 4.7% in H2 (2nd Half) for FY 2018-19.

The inflation target for monetary policy is prescribed in terms of All-India-CPI-Combined-Index which was introduced in 2011. The combined CPI gauges the consumer price behavior across five major groups with assigned weightage namely – Food, Beverages & Tobacco (48.24%), Fuel & Light (6.84%), Housing (10.07%), Clothing & Footwear (6.53%) and Miscellaneous (28.32) and covers the retail prices of 299 Items.

  • In the food group, inflation increased in respect of cereals, fruits, prepared meals, meat and fish whereas, pulses and sugar continued to experience deflation.
  • In the fuel group, inflation was experienced in the transportation & communication sub-group due to rise in international crude prices. The price of Indian basket of crude moved from US$ 66 to US$ 74 in April’18. Major items of fuel such as firewood & chips, dung cake, kerosene and coal also experienced inflation. However, there is deflation in LPG and electricity.
  • Inflation also picked up in clothing, household goods and services, health, recreation, education, and personal care and effects.
  • There has been robust growth in Industrial Sector and construction activities in Services Sector. The GDP for FY 2018-19 is projected at 7.5-7.6% in H1 and 7.3-7.4% in H2.

Insights

  • RBI is expecting the inflation to grow in near future due to volatile prices of crude oil, increase in purchasing power by households due to the increase in HRA (House Rent Allowances) of Central/State Government Employees and overall growth of the economy. Hence, there is speculation of more interest rate hikes in the upcoming MPC Meeting scheduled on July 31st & August 1st, 2018.
  • Subsequent to the announcement of RBI, many banks have increased their Marginal Cost of Funds based Lending Rates (MCLR). MCLR is the key rate below which the bank cannot lend. This means the loans are going to be expensive. The borrowing costs would increase for companies as well.
  • Banks are expected to increase Fixed Deposit rates, as lending is expected to decline due to high NPA debts and interest rate.
  • The yield of 10-year bond, a good indicator of the direction of long-term interest rate in the economy, went up from 7.834% on June 5 to 7.947% on June 11 after the RBI announcement.

July 12th, 2018, 2nd Edition

On June 6th, 2018, the President of India promulgated the amendment to Insolvency and Bankruptcy Code (IBC), 2016 vide an Ordinance. IBC outlines the Corporate Insolvency Resolution Processes (CIRP) for individuals, corporate persons and partnership firms in a time bound manner to solve the insolvency and liquidation issues. With the introduction of IBC, India saw improvements in “Ease of Doing” Business rankings as Foreign Investors saw steps being taken for faster resolution of insolvency cases and promotion of entrepreneurship.

The main highlights of the ordinance are appended below:

  • An Allottee under a real estate project will be considered as “Financial Creditor”. An Allottee is a person to whom a plot, apartment, or building has been sold, or transferred by a Promoter, Real Estate Developer or Development Authority. This will enable allottees to represent themselves in “Committee of Creditors” and take part in the internal decision-making process.
  • Earlier, the code specified that all the decisions of the Committee of Creditors needed at least 75% majority of the Financial Creditors. The Ordinance has lowered the threshold to 51%. For certain decisions of the committee, the voting threshold has been reduced from 75% to 66%.  These include:
  1. appointment and replacement of the resolution professional,
  2. approval of the resolution plan, and
  3. approval of certain actions of the resolution professional during the insolvency resolution process.
  • In order to maintain the sanctity of CIRP, the Ordinance has laid down strict procedures for withdrawal of cases admitted under IBC, 2016. A Resolution Applicant can only withdraw cases after getting 90% votes of the Committee of Creditors. Also, withdrawal will only be possible before publication of notice inviting Expression of Interest (EoI). Once process of EoIs and bids start no withdrawal can take place.
  • The Ordinance has also addressed issues like non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets.
  • The Ordinance has provided immunity to Micro, Small and Medium Enterprises (MSMEs) under the IBC. It also empowers the Central Government to allow further exemptions or modifications with respect to the MSME Sector, if required, in public interest. This is a positive step to foster the growth of MSMEs which form the backbone of the Indian economy and is the second largest employer after Agriculture Sector.
  • The existing Section 29(A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities from being disqualified on account of NPA. Similarly, a resolution application holding an NPA by virtue of acquiring it in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition. In other words, such NPA shall not disqualify the resolution application during the three-year grace period.
  • The Ordinance provides for a minimum one-year grace period for the successful resolution applicant to fulfill various statutory obligations required under different laws. This would go a long way in enabling the new management to successfully implement the resolution plan.
  • The other changes brought about by the Ordinance include non-applicability of moratorium period to enforcement of guarantee; introducing the requirement of special resolution for corporate debtors to themselves trigger insolvency resolution under the Code; liberalizing terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period; and giving the Insolvency and Bankruptcy Board of India (IBBI) a specific development role along with powers to levy fee in respect of services rendered.

June 30th, 2018

The Government of India has recognized MSMEs as drivers of Indian economy. MSMEs promise a high growth potential and are critical in providing employment opportunities. Currently, there are 51 million MSME Units employing approximately 117 million people (Source: UNIDO). The share in GDP (non-agriculture) is 37% and contribute 43% towards exports (Source: Ministry of Commerce).

It is surprising to note that out of the 51 million MSME Units only 5 million units have access to formal credit as per SIDBI and TU CIBIL (MSME Pulse, Jun’18). There is a huge gap to cover in terms of credit building in MSME space. The Government, Banks, NBFCs and other Financial Institutions are trying to extend credit to these MSMEs to bridge the increasing credit demand and introduce/include more MSMEs in the lending space.

Overview of Commercial lending: The total on balance-sheet commercial lending exposure in India stood at INR 54.2 lakh crores as of Mar’18. MSMEsconstituted INR 12.6 lakh crores or 23% of the commercial credit outstanding. The Year-on-Year growth (from Mar’17 to Mar’18) for Micro and SME Lending stood at 22.2% and 12.8% respectively which is more compared to Mid and Large Segments which stood at 7.2% and 5.9% respectively.

NPA Trends: Micro and SMEs have a stable NPA rate at ~ 8-11% which is low compared to Mid and Large Segments at ~ 15-18%.

New to Credit (NTC) Borrowers are MSME Units which seek formal credit for the first time. The number stood at 2.7lakhs for Mar’18 and is expected to grow by 24%. Typical ticket size for loans is less than INR10 crores. 21.5% NTC borrowers exited the formal lending and 4.3% turned NPA. From the financial inclusion aspect, loans with ticket size less than INR10 lakhs have benefitted the Mudra Scheme. Overall about 55.3% borrowers in this segment have sustained or grown their level of credit activity. 28.7% of NTC borrowers exited the formal lending. 15.9% borrowers turned NPA.

Lenders: High credit growth and relatively low NPA Rates make MSMEs an attractive target segment for institutional lenders. Public Sector Banks (PSB) traditionally have been dominant lenders and have 50.4% Market Share as on Mar’18. However, Private Banks and NBFCs are trying to get a share of the pie. As of Mar’ 18, the market share of Private Banks and NBFCs stand at 30.3% and 10.7% respectively.