Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Wrong Rule At Wrong Time

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Real GDP (measured from aggregating sectoral value-addition) grew 3.7% YoY, while GDE would have grown 3.1% YoY but for a large statistical discrepancy (which subtracted 1.5pp). Fixed investment spending was up 10.9% YoY, accelerating from 2.6% YoY in the previous quarter. This is likely to remain the key driver of GDP in FY2021/22. Reflecting strong economic growth, government revenue (which is seasonally-weak in April-May) was 1/12th of the annual budgeted figure in April 2021, suggesting there will be ample scope for accelerated spending as privatization receipts flow in. The worst is over for the economy. Real GDP (derived from aggregating gross value-added in each sector of the economy) expanded 3.7% YoY in 4Q-FY2020/21 (January-April 2021), led by strong growth in manufacturing (+6.9% YoY), construction (+14.5% YoY), Utilities (+9.1% YoY), and financial, professional &amp; real-estate services (+5.4% YoY). Agriculture decelerated to 3.1% YoY growth (from 4.5% in the previous quarter, and average growth of 3.7% YoY in the previous 3 quarters), and transport, communication, broadcasting, trade and hotel services declined 2.3% YoY, but the momentum of recovery was evident across the rest of the economy.The less-reliable Gross Domestic Expenditure aggregate showed the economy expanding only a modest 1.6% YoY in 4Q-FY2020/21, but included a huge "discrepancy" item which subtracted 1.5 percentage points! Without that odd statistical discrepancy, the GDE aggregate would also have grown 3.1% YoY (far ahead of the consensus of 1.2%). The most heartening feature was the 10.9% YoY growth in fixed investment spending (accelerating from 2.6% YoY growth in the previous quarter, and following a long period of contraction). Government spending (which is just over 1/4th the size of private consumption) expanded 28.3% YoY -- partly because past food subsidies were paid out during the quarter (which would subtract from the net-indirect-tax component of GDE at market prices). Private consumption grew a modest 2.7% YoY, and net exports subtracted 3.4 percentage points from GDE, although this is where the statistical discrepancy would have widest.

Real GDP (measured from aggregating sectoral value-addition) grew 3.7% YoY, while GDE would have grown 3.1% YoY but for a large statistical discrepancy (which subtracted 1.5pp). Fixed investment spending was up 10.9% YoY, accelerating from 2.6% YoY in the previous quarter. This is likely to remain the key driver of GDP in FY2021/22. Reflecting strong economic growth, government revenue (which is seasonally-weak in April-May) was 1/12th of the annual budgeted figure in April 2021, suggesting there will be ample scope for accelerated spending as privatization receipts flow in. The worst is over for the economy. Real GDP (derived from aggregating gross value-added in each sector of the economy) expanded 3.7% YoY in 4Q-FY2020/21 (January-April 2021), led by strong growth in manufacturing (+6.9% YoY), construction (+14.5% YoY), Utilities (+9.1% YoY), and financial, professional &amp; real-estate services (+5.4% YoY). Agriculture decelerated to 3.1% YoY growth (from 4.5% in the previous quarter, and average growth of 3.7% YoY in the previous 3 quarters), and transport, communication, broadcasting, trade and hotel services declined 2.3% YoY, but the momentum of recovery was evident across the rest of the economy.The less-reliable Gross Domestic Expenditure aggregate showed the economy expanding only a modest 1.6% YoY in 4Q-FY2020/21, but included a huge "discrepancy" item which subtracted 1.5 percentage points! Without that odd statistical discrepancy, the GDE aggregate would also have grown 3.1% YoY (far ahead of the consensus of 1.2%). The most heartening feature was the 10.9% YoY growth in fixed investment spending (accelerating from 2.6% YoY growth in the previous quarter, and following a long period of contraction). Government spending (which is just over 1/4th the size of private consumption) expanded 28.3% YoY -- partly because past food subsidies were paid out during the quarter (which would subtract from the net-indirect-tax component of GDE at market prices). Private consumption grew a modest 2.7% YoY, and net exports subtracted 3.4 percentage points from GDE, although this is where the statistical discrepancy would have widest.  

Clear Recovery in Jan-Mar, Accelerating Sharply in Apr'21; Ample Scope for Stimulus

We recommend staying underweight India until the 7-day moving average of Covid cases turns down (likely no sooner than mid-May). There would then be an excellent buying opportunity: we have lowered our forecast of real GDP growth in FY2020/21 to 12% (from 13.5%), but the vaccine roll-out (with 60% of all those above 45 likely to have been vaccinated by the end of this month) should wrestle the new Covid case numbers down from peaks by end-May. A current account surplus, liquid banks, and a reformed, privatization-driven policy framework should ensure that the rebound is delayed but not halted by this virulent Second Covid wave.  When the IMF was forecasting 8.8% real GDP growth for FY2021/22 and the consensus was 8-9%, we raised our forecast to 12.5% in December 2020 -- and to 13.5% at the beginning of February 2021 (post the reform-oriented Budget). Now that the IMF has caught up with our end-2020 forecast, we are lowering ours to 12%, acknowledging the huge uncertainties induced by this 2nd Covid wave. Given the low base in April-May 2020, YoY growth rates for production will barely budge, but private consumption will likely weaken during these months as retailers in key hotspots (including Delhi, Mumbai, Bengaluru) will stay shut during 2-week curfews/lockdowns. The current account surplus of 1.5% of GDP in 2021, and loan-deposit ratio of 72%, imply there is ample external and domestic liquidity to spur a strong economic recovery once lockdowns are lifted. At 145 million vaccinations, 17.7% of the adult population (18 &amp; over) or 57% of all those eligible (45 &amp; over) have had at least one vaccine dose. This is far from achieving herd immunity, but faster vaccinations from June should allow over a billion people to be vaccinated by end-2021. Lockdowns and curfews are proving effective in Maharashtra and Delhi (the worst hotspots), but will now roll through several other states. But the base effects will help the YoY growth rates in April-May. In March 2020 there was only a week's disruption, but exports were up 60% YoY (imports 53% YoY) in March 2021, steel output up a world-leading 23.9% YoY and car production up 79% YoY in March 2021. April and May 2020 were almost wiped out economically, so the YoY growth rates will still be spectacular in Apr-May 2021, given the strong underlying momentum.The disruptions to consumption (especially) and production should be made up in the next few months. The low corporate tax rate, reformed labour market and production-linked incentives should induce a powerful surge in investment, with privatization and asset-monetization providing an extra fillip as they are implemented during the course of the year. We do not expect the liquid banking system (L-D ratio 72%) to contribute to the rebound until early-2022, with early-recapitalization of state-owned banks helping a bit, but privatizations providing a bigger spur.

We recommend staying underweight India until the 7-day moving average of Covid cases turns down (likely no sooner than mid-May). There would then be an excellent buying opportunity: we have lowered our forecast of real GDP growth in FY2020/21 to 12% (from 13.5%), but the vaccine roll-out (with 60% of all those above 45 likely to have been vaccinated by the end of this month) should wrestle the new Covid case numbers down from peaks by end-May. A current account surplus, liquid banks, and a reformed, privatization-driven policy framework should ensure that the rebound is delayed but not halted by this virulent Second Covid wave.  When the IMF was forecasting 8.8% real GDP growth for FY2021/22 and the consensus was 8-9%, we raised our forecast to 12.5% in December 2020 -- and to 13.5% at the beginning of February 2021 (post the reform-oriented Budget). Now that the IMF has caught up with our end-2020 forecast, we are lowering ours to 12%, acknowledging the huge uncertainties induced by this 2nd Covid wave. Given the low base in April-May 2020, YoY growth rates for production will barely budge, but private consumption will likely weaken during these months as retailers in key hotspots (including Delhi, Mumbai, Bengaluru) will stay shut during 2-week curfews/lockdowns. The current account surplus of 1.5% of GDP in 2021, and loan-deposit ratio of 72%, imply there is ample external and domestic liquidity to spur a strong economic recovery once lockdowns are lifted. At 145 million vaccinations, 17.7% of the adult population (18 &amp; over) or 57% of all those eligible (45 &amp; over) have had at least one vaccine dose. This is far from achieving herd immunity, but faster vaccinations from June should allow over a billion people to be vaccinated by end-2021. Lockdowns and curfews are proving effective in Maharashtra and Delhi (the worst hotspots), but will now roll through several other states. But the base effects will help the YoY growth rates in April-May. In March 2020 there was only a week's disruption, but exports were up 60% YoY (imports 53% YoY) in March 2021, steel output up a world-leading 23.9% YoY and car production up 79% YoY in March 2021. April and May 2020 were almost wiped out economically, so the YoY growth rates will still be spectacular in Apr-May 2021, given the strong underlying momentum.The disruptions to consumption (especially) and production should be made up in the next few months. The low corporate tax rate, reformed labour market and production-linked incentives should induce a powerful surge in investment, with privatization and asset-monetization providing an extra fillip as they are implemented during the course of the year. We do not expect the liquid banking system (L-D ratio 72%) to contribute to the rebound until early-2022, with early-recapitalization of state-owned banks helping a bit, but privatizations providing a bigger spur.   

India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

*Cutting Your Nose To Spite Your Face: Despite the favorable Reserve Bank of India (RBI) ruling and the clarity that it may bring to bank classification of NPLs and interest charges, the fact is that Indian financial sector credit quality remains amongst the worst in Asia and globally. In fact, we would go as far to state that the breakdown in net new NPLs remains by far the worst in the world at well over 100% annualized growth at FY 3Q21. Given the now increased interest pressure on those corporates which were given waivers, it is all but assured that we can add those woes to the woodpile of Indian NPLs; and*Killing Me Softly: Following the Supreme Court decision on extending the compound interest relief to loansin excess of INR 20 mn and lifting of standstill on NPL classifications, the RBI has added insult to injury by notifying lenders that they will bear the impact of the compound interest waiver, without any visibility on whether or not this waiver will be reimbursed by or shared with the government. Non-bank Financial Companies (NBFC) have large borrowing from banks and could – as a result of the RBI’s utter incompetence – become net beneficiaries of this new guideline.

Reserve Bank of India – Thanks For Nothing

India

iShares MSCI India Index ETF is an exchange-traded fund registered in Singapore. The Fund seeks to provide investment results that, before expenses, closely correspond to the performance of the MSCI India Index. The Fund invests all or substantially all of its assets in shares comprising the MSCI India Index in substantially the same weightings as constituted in the underlying index.

iShares MSCI India Index ETF (INDIA SP)

India Financials – Plop Plop Fizz Fizz

INDIA FINANCIALS: ECLGS was launched in May 2020 to offset poor economic conditions. ECGLS has again been expanded from INR 3 tn to INR 4.5 tn....

Thomas J. Monaco

Reserve Bank of India – Wrong Rule At Wrong Time

RESERVE BANK OF INDIA: The RBI has finalized rules for NBFC dividend payout ratios at 50% - predicated on the net NPL ratio and CAR. The new...

Thomas J. Monaco

Clear Recovery in Jan-Mar, Accelerating Sharply in Apr'21; Ample Scope for Stimulus

Real GVA rose 3.7%YoY, & (adding back a stat discrepancy) GDE was up 3.1% in Jan-Mar21. That boosted gov revenue. That & privatization to...

Prasenjit K. Basu

India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound

Underweight India near-term amid Covid uncertainty. But real GDP still to grow 12% in FY2021/22, with output growth aided by ultralow base in Apr...

Prasenjit K. Basu

Reserve Bank of India – Thanks For Nothing

RESERVE BANK OF INDIA: Following the Supreme Court decision, the RBI has added insult to injury by telling the banks to bear the impact of the...

Thomas J. Monaco