Specialist in Indian Banking and Economic Research

Hemindra Hazari

Macroeconomics

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

Thematic (Sector/Industry)

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

Creeping Denationalisation of India’s Banking Sector

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank recap plan. It could have been with a new government budget. It could have been with new guidelines on stressed assets. But the reality is that without fundamental relief to debtors, without improving economic growth,  credit metrics should continue to deteriorate. Now at 3Q20 it is once again clear, that there is as yet, no relief in sight.

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank recap plan. It could have been with a new government budget. It could have been with new guidelines on stressed assets. But the reality is that without fundamental relief to debtors, without improving economic growth,  credit metrics should continue to deteriorate. Now at 3Q20 it is once again clear, that there is as yet, no relief in sight.

Forensic Analyst, Trudence Capital Advisors

Nitin Mangal

Forensic Analyst

<a href="https://www.smartkarma.com/entities/vodafone-idea-ltd" target="_blank" data-smartkarma-citation="entities:15678:1" rel="noopener">Vodafone Idea (IDEA IN)</a> has been under some significant hardships for quite a while. Since the telecom market disruption caused by Reliance Jio, the company has not been able to walk steadily as it continued reporting operational losses. Further, India's telecom sector has been facing heavy duress ever since the Hon'ble Supreme Court's verdict which upheld the definition of Adjusted Gross Revenues (AGR). The adjusted AGR meant that the telecom operators were liable to pay more than INR 1 trillion to the government as revenue dues by January 24.Lastly, Franklin Templeton's measure to mark down its exposure to the company's debt securities to zero shall be a final nail in the coffin.In the report below, we discuss the highlights and see who faces the maximum heat arising out from the saga.

Vodafone Idea (IDEA IN) has been under some significant hardships for quite a while. Since the telecom market disruption caused by Reliance Jio, the company has not been able to walk steadily as it continued reporting operational losses. Further, India's telecom sector has been facing heavy duress ever since the Hon'ble Supreme Court's verdict which upheld the definition of Adjusted Gross Revenues (AGR). The adjusted AGR meant that the telecom operators were liable to pay more than INR 1 trillion to the government as revenue dues by January 24.Lastly, Franklin Templeton's measure to mark down its exposure to the company's debt securities to zero shall be a final nail in the coffin.In the report below, we discuss the highlights and see who faces the maximum heat arising out from the saga.

Vodafone Idea Ltd- Telco's Debt Bomb Ticking Fast and Louder

Affordable housing finance has recently been in vogue, and dedicated housing finance companies were established to take part in this sunrise industry.  A recent interview by capital market veterans and savvy investors, Motilal Oswal and Raamdeo Agrawal, promoters of <a href="https://www.smartkarma.com/entities/2023" target="_blank" data-smartkarma-citation="entities:2023:1">Motilal Oswal Financial Services (MOFS IN)</a> (MOFS), revealed the pitfalls associated with Aspire Home Finance Corporation, a non-listed subsidiary, focusing on affordable housing finance. It brought to light the stunning naiveté of the promoters in setting up a lending company apparently lacking critically important functions such as credit appraisal, Know Your Customer (KYC), credit monitoring and collections. This is even more surprising since MOFS has a strong institutional equity research department, with an experienced team of sell-side banking analysts, and Raamdeo Agrawal himself publicly provides expert commentary on Indian banks and housing finance companies. Although AHFC is a relatively small, unlisted company, it suggests that investors should be cautious of the euphoria in housing finance companies. If AHFC is representative of the new firms entering the sector, it seems basic lending practices are ignored in the pursuit of growth.

Affordable housing finance has recently been in vogue, and dedicated housing finance companies were established to take part in this sunrise industry.  A recent interview by capital market veterans and savvy investors, Motilal Oswal and Raamdeo Agrawal, promoters of Motilal Oswal Financial Services (MOFS IN) (MOFS), revealed the pitfalls associated with Aspire Home Finance Corporation, a non-listed subsidiary, focusing on affordable housing finance. It brought to light the stunning naiveté of the promoters in setting up a lending company apparently lacking critically important functions such as credit appraisal, Know Your Customer (KYC), credit monitoring and collections. This is even more surprising since MOFS has a strong institutional equity research department, with an experienced team of sell-side banking analysts, and Raamdeo Agrawal himself publicly provides expert commentary on Indian banks and housing finance companies. Although AHFC is a relatively small, unlisted company, it suggests that investors should be cautious of the euphoria in housing finance companies. If AHFC is representative of the new firms entering the sector, it seems basic lending practices are ignored in the pursuit of growth.

Finance Experts Present, ABCs of Lending Absent

India

IDBI Bank Limited is an Indian financial services company that provides commercial banking services to retail and corporate customers. Its offerings include a wide array of banking products and services such as corporate finance, infrastructure finance, retail banking, and treasury operations. The bank was founded on July 1, 1964, and is headquartered in Mumbai, India.

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IDBI Bank (IDBI IN)

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

Post budget euphoria in market on account of anticipation of rise in select large corporate profits rather than revival in investments, employment...

Hemindra Hazari

Creeping Denationalisation of India’s Banking Sector

With foreign investors holding majority ownership of major private banks; & with such private banks increasing their market share, it is difficult...

Hemindra Hazari

India Banks – No End in Sight

There have been several false starts. There were times when many presumed the bad loan cycle was about to end. It could have been with the PSU bank...

Daniel Tabbush

Vodafone Idea Ltd- Telco's Debt Bomb Ticking Fast and Louder

Vodafone Idea (IDEA IN) has been under some significant hardships for quite a while. Since the telecom market disruption caused by Reliance Jio,...

Nitin Mangal

Finance Experts Present, ABCs of Lending Absent

Affordable housing finance has recently been in vogue, and dedicated housing finance companies were established to take part in this sunrise...

Hemindra Hazari

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