Author: root

Gold loans, best option amid the Covid pandemic

Banking & Finance

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The demand for gold loans surged in the last fiscal as lenders, in general, turned cautious in the wake of Covid-19 pandemic, which impacted lives and livelihoods. With the traditional funding avenues being clogged, borrowers found it convenient to secure credit for their personal and business needs by pledging their gold jewellery.

This was adequately supported by the spike in gold prices, especially between April 2020 and August 2020, when gold prices went up by about 25 per cent. The Reserve Bank of India (RBI) also relaxed the loan-to-value (LTV) of these loans (for non-agricultural purposes) from 75 per cent to 90 per cent for banks till March 31. While the prices came down from the peak witnessed in August 2020 as of March 2021, it was marginally higher than in the beginning of the year. Loans against gold jewellery are typically less rigorous vis-a-vis other types of loans, and are largely based on the assessment of the ornaments being pledged. The above, along with the counter-cyclical nature of this asset segment, bodes well for borrowers, especially for the non-prime borrower segments, whose income levels are more vulnerable to adverse economic cycles.

Bank credit grows

The bank credit to this segment, under the personal credit category, grew at about 81 per cent during the last fiscal to ₹605 billion in March 2021. Over the last two years, the overall bank credit to this segment grew at a compounded annual growth rate (CAGR) of 56 per cent, while overall bank credit and the banking personal credit segment grew at a CAGR of 6 per cent and 13 per cent, respectively.

The country’s largest bank, SBI, saw its personal gold loans grow by about 465 per cent on a year-on-year basis during the last fiscal. Banks also extend agricultural loans against gold jewellery for their rural borrowers.

Non-banking finance companies (NBFCs) also saw their asset under management (AUM) grow by about 27 per cent compared with the overall NBFC credit growth of about 4 per cent during the last fiscal. NBFCs’ credit to this segment stood at about ₹1.1 trillion as of March 2021 against the estimated gold security, weighing about 350-400 tonne.

Bank credit grew by about 34 per cent on a year-on-year basis in May 2021 and is expected to be moderate vis a vis the last fiscal, while NBFC credit is expected to grow at about 14-16 per cent in the current fiscal. Various estimates put India’ gold holdings at about 25,000 tonnes, which provides a large scope for this segment to grow going forward in the long term.

Limited documentation

Product delivery for the NBFCs is better vis a vis banks, as they offer quick loans with limited documentation. The interest rates offered by the NBFCs are higher and in the range of 12-26 per cent (average ~20-22 per cent) per annum depending on the tenor, repayment patterns etc, while banks charge an interest rate of 8-10 per cent per annum. The convenience offered by the NBFCs and their gold-loan focussed branches, however, help in keeping the turnaround time much lower than the banks.

The gold loan business has been branch-centric in the past and NBFCs have been taking initiatives to digitise the process, and some also offer door-step credit and gold collection facilities.

The pace of digitalisation, involving online transactions for securing credit and repayments, improved with the pandemic-induced business disruptions, and is currently estimated at 20-25 per cent of the overall NBFC gold loan AUM. Banks, on the other hand, have tied up with smaller NBFCs and fintechs to improve their penetration.

The gold price movement is a crucial factor and could have an impact on the segmental asset quality; entities, however, have adapted to this risk by either lowering their loan tenure (3/6/9 months vis a vis the typical tenor of 12 months) or by ensuring regular collections of interest (monthly or quarterly vis a vis bullet payments) while maintaining the 12-month tenure, thereby, securing themselves against any large swings in gold prices. Generally, loans with a 12-month tenure get repaid in 5-6 months or get renewed basis the prevailing gold price.

Maximum decline

Looking at the gold prices trends over the last 10 years, the maximum decline witnessed in gold prices in a quarter was about 10 per cent, while it saw a maximum of about 15 per cent decline over a six-month period. Lenders typically have an option to call for additional collateral if the LTVs increase beyond the regulatory stipulated levels of 75 per cent and could auction the gold jewellery offered for security.

Auctions have been as high as 21-22 per cent of the opening portfolio for some NBFCs in the past (FY13-FY14); while there have been instances of under-recovery in the interest accrued on the overdue loans, especially the loans originated before the imposition of LTV cap by the RBI, loan losses in these auctions have been quite negligible.

The average annual credit cost for the large NBFCs, over the last 10 years, is about 0.4 per cent, and maximum credit cost observed during this period was about 1 per cent. Short tenure, small ticket size, conservative LTV (65-70 per cent) and access to collateral make this a go-to asset class for lenders when the credit risk perception is unfavourable.

 

(The writer is Vice-President & Sector Head, ICRA)

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The turnaround story of Indian Overseas Bank

Banking & Finance

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The turnaround story of a private sector entity gets a lot of attention while the tendency is to brush off anything that pertains to a public sector organisation’s success.

The Chennai-headquartered public sector lender Indian Overseas Bank’s efforts in achieving a turnaround in six years is nothing short of an impressive saga. The turnaround experience of the 84-year-old bank provides a valuable lesson on team effort, and also busts several myths about the leadership of public sector entities.

Amid speculation over its privatisation and the euphoria over its benefits, the successful turnaround of Indian Overseas Bank (IOB) is worth recounting as to how the team pulled it off.

The crisis started for the public sector lender in 2015-16 when the bank posted a net loss of ₹454 crore after reporting strong profit several years before that. The losses started mounting to ₹2,897 crore in FY16 and ₹3,417 crore in FY17.

A few major factors were reported to have caused deterioration in IOB’s performance.

Borrowing normally takes place after a clear plan for deployment. Else, it will cause a huge interest burden. But in IOB’s case, huge overseas borrowings, with no proper plan for deployment, caused a huge dent to the balance sheet.

Aggressive lending

With adequate capital in hand, the company resorted to aggressive lending, particularly to large corporates. While its exposure to this large corporate segment increased significantly, which was never a case in the history of IOB earlier, most of the large corporate accounts turned bad (NPA) in the subsequent months, wreaking havoc on the bank’s balance sheet.

The exposure to large corporate grew significantly from a small share in the book to fund-based exposure of ₹84,634 crore and non-fund exposure of ₹17,478 crore in 2014-15.

Also, reckless branch expansion without adequate resources, led to more branches incurring losses. Between 2010-11 and 2013-14, the bank opened more than 1,250 new branches which never happened in the history of IOB.

To add to the bank’s woes, poor IT systems and absence of a mechanism for monitoring customer complaints worsened the situation.

High contraction of credit led to rise in gross NPAs and the situation started turning worse with poor credit offtake and ballooning bad loans in the subsequent years. Consequently, the bank was put under the PCA (prompt corrective action) programme by the RBI from September 2015.

R Subramaniakumar, who served Punjab National Bank, was appointed as MD and CEO of the bank in May 2017. When he took charge, the bank reported its highest-ever net loss, Gross NPA of more than ₹35,000 crore and net NPA close to ₹20,000 crore. Also, almost one-fourth of the branches were making losses with a huge number of customer complaints.

Turnaround programme

In 2017, R Subramaniakumar and his team embarked on a massive turnaround programme, with a multi-pronged strategy under which it used INR surplus swap option, rebalanced its portfolio by significantly reducing exposure to large corporates, brought in huge HR focus, and perfected the IT systems.

“The revival programme was taken up with participation of entire IOB staff, unions and others as everyone showed enthusiasm for the revival of the bank,” says a former top official of the bank.

Under HR focus, the management resumed promotions to boost the morale of staff, which was at historic low due to various issues. People were recognised for work and performance. Another important focus area that contributed to the turnaround was the restoration of IT system. Since there was no centralised mechanism to monitor complaints and offer solutions, complaints surged, and at one point, there were more than 9,000 complaints, including disputes in ATM and other issues. The formation of multiple IT teams with additional training support from IT major Infosys helped reduce complaints drastically over a period of 6 months with several processes getting automated. The number of loss-making branches was reduced to low single-digits from 25 per cent earlier.

“IT automation gave a big boost to the bank by way of stability, customer confidence while boosting the morale of staff,” says a former senior official of the bank.

Under rebalancing of credit portfolio plan, the bank moved away from the large corporate segment and created a separate team for mid-corporate loans, while accelerating the focus on RAM (retail, agriculture and MSME) segment, the share of which grew significantly from 40 per cent in 2017 to 65 per cent in the subsequent years (now RAM is about 74 per cent of total domestic advances). Also, CASA share was increased to one-third in FY18 from one-fourth earlier (now it has touched 43 per cent), while additional focus on non-interest income has boosted its performance.

IOB’s multi-pronged initiatives started yielding positive outcomes; it exhibited improvement in reducing the gross and net NPAs and upgraded the provision coverage ratio from 53.63 per cent in FY17 to 71.39 per cent in FY19. Automation of NPA administration like transparent OTS settlement and identifying the early warning signal accounts helped the bank contain fresh slippages and improved the NPA recovery.

The bank carried forward the turnaround measures under Karnam Sekar, who took charge as the MD and CEO of the bank in July 2019. Though losses continued, the December 2019 quarter saw its net NPA falling below six per cent, helped by the government’s capital infusion of ₹4,360 crore and other measures.

Returns to black

With reduction in NPAs and provisions, the bank swung into profit mode in Q4 of FY20 and it maintained its profitability in the following four quarters. Finally, the bank returned to black after suffering losses for six years in a row.

IOB’s net profit in March 2021 quarter more than doubled to ₹350 crore (₹144 crore in March 2020 quarter). Its net NPA declined to 3.58 per cent in March 2021 quarter from 5.44 per cent in March 2020 quarter.

For FY21, it posted a net profit of ₹831 crore against a net loss of ₹8,527 crore in FY20. Its gross NPA was ₹16,323 crore, while net NPA was below ₹5,000 crore (₹4,578 to be precise). Provision coverage ratio has improved from 53.63 per cent in FY17 to 90.34 per cent in FY21.

The current MD and CEO, Partha Pratim Sengupta, said it was a great achievement by Team IOB to script the turnaround and the bank was confident of continuing the performance in the coming years.

The bank has written to the RBI to move out of the PCA framework and the exit will help the bank focus on future growth and other opportunities. It has also planned for a capital infusion of ₹2,000 crore in this fiscal to support its growth plans.

Senior officials of the bank say IOB carries huge potential to emerge as one of the strongest banks in the mid-segment as it has introduced strategic changes, supported by the motivated staff.

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ED stance strikes at the heart of cryptocurrency in India, BFSI News, ET BFSI

Personal Finance

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Mumbai: The stand taken by the Enforcement Directorate (ED) on cryptocurrencies can unsettle crypto trading and all bourses in India. The agency, in its recent notice to WazirX, has asked the country’s largest crypto exchange to explain why ‘withdrawal from crypto wallets’ is not a violation of the Foreign Exchange Management Act (FEMA), a person familiar with the issue told ET.

The ED notice puts a question mark on the very essence of cryptos and fundamental structure of the underlying digital ledger, blockchain, that allow holders of cryptos to freely transfer coins from their wallets to another wallet and to anyone, anywhere in the world.The agency had asked WazirX to explain transactions worth 2,790.74 crore. “These were carried out in violation of forex rules. WazirX’s platform allowed clients to transfer cryptocurrencies without proper documentation, making it a route for laundering,” said an official.

“Since money has crossed borders, the law of the land applies and one needs to be sure that this money isn’t cheap money (cheap money is low-interest loan) or dirty money (used for illegal activities),” said an ED official.

A trader buying Bitcoin, the most popular cryptocurrency, on WazirX stores the coin in her wallet with the exchange. However, she can move the crypto purchased on WazirX platform to another wallet with another exchange in India or abroad, or to her private wallet which is not linked to any exchange, or directly move coins to the wallet of another person who may be located anywhere.

“WazirX, like other exchanges, may be doing the KYC of traders and investors who have accounts and wallets with it. If any of these traders withdraws a few Bitcoins, WazirX would also know the ‘address’ of the external wallet where the Bitcoins are sent. But it can never know the identity of the person or the entity owning the other wallet which receives the Bitcoin. Knowing the address of the wallet is not the same as knowing the people behind the wallet. This is the very nature of cryptos,” said an industry person.

“The exchange has claimed they have done KYC, but that isn’t enough to ensure that the digital currency isn’t misused. In the absence of any official digital currency and regulation, there have been instances of Bitcoins being used to buy drugs on the dark net as well as for money laundering,” the ED official added.

WazirX and a few exchanges have also received notices from the income tax department which is trying to figure out the source of earnings of the bourses and whether parts have escaped tax.

WazirX CEO and founder Nischal Shetty declined to comment on the matter. The exchange, it is believed, is yet to respond to the ED notice.

The central agency had served the notice to WazirX in June after it stumbled upon information on crypto withdrawals and receipts in the course of an ongoing investigation into Chinese-owned online illegal betting applications. ED, in a June 11 press release had said the Rs 800-crore crypto inflow and Rs 1400-crore crypto outflow were not available on the blockchain.

“While the present investigation is linked to WazirX, ED’s approach and line of questioning could eventually involve other exchanges. Traders on all exchanges are free to transfer cryptos to other wallets… However, we have not received queries or asked to share data on outflow-inflow into wallets,” said an official with another exchange.

Many in the fintech world may argue that ED is wrongly comparing crypto transactions with banking transactions. “A bank or the regulator can find out the details of suspicious accounts. But the essence of cryptos, which aims to bypass the banking system, is anonymity and privacy,” said another person.

However, the concern over fund movements in the garb of cryptos is being voiced by regulators world over. In 2019, the Financial Action Task Force — an intergovernmental organization to combat money-laundering — had come out with the ‘Travel Rule’ that prescribes exchanges, custodians as well as wallet providers to share information on senders and recipients of cryptos.

“It may be easy to implement this among exchanges within a country even if they are competitors. But to enforce this across the world among exchanges and service providers with servers located in different jurisdictions can be a big challenge. Also, it’s difficult to track debits and credits in private wallets which are available on mobile phones and other devices,” said a fintech official.



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Debt Free Company With Dividend Yield Of 8.61%, Investors Should Buy The Stock

Personal Finance

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Solid dividend yields, make the stock of Coal India attractive

Last year, for 2020-21, Coal India declared a dividend of Rs 12.5 per share. The company declared a dividend of Rs 7.5 per share in November 2020 and again a dividend of Rs 5 per share in the month of Feb 2021, taking the total to Rs 12.5 per share. If you buy the shares at Rs 145 and assume the company continues to pay the same dividend, your dividend yield on the stock works to around 8.61%, which is pretty good.

In the previous year 2019-20 also the dividend was almost the same at Rs 12 per share. It is unlikely that the company would reduce its dividend in the years to come, which means that your yield is much better than bank deposits. State Bank of India deposits are fetching an interest rate of 5.5% only.

The company is the world’s biggest coal mining company, which is also cash rich and debt free. It is unlikely at least there are any threats to the business. Also, with the government facing a huge shortfall in revenues, Coal India maybe forced to pay a higher dividend this financial year.

Who you should buy the stock of Coal India?

Who you should buy the stock of Coal India?

Last month, brokerage firm Motilal Oswal said to buy the stock with a price target of Rs 185, which is almost 25% higher from the current levels. ICICI Direct in a recent report last week said that for Q1FY22E, coal offtake was at 160 million tonne (MT), up 33% YoY but down 3% QoQ.

“We expect consolidated topline to increase 37% YoY but decline 5% QoQ to Rs 25,295 crore. The consolidated EBITDA margin is likely to come in at 22.5% (vs. 23.9% in Q4FY21 and 16.5% in Q1FY21). We expect EBITDA/tonne to come in at Rs 355/tonne (compared to Rs 387/tonne in Q4FY21 and Rs 253/tonne in Q1FY21),” the brokerage has said.

Many brokerages remain optimistic on the stock and have a “buy” rating, thanks to the dividend yield. We believe that the downside risk to the stock remain limited given its superior dividend yields, debt free status and robust cash flows.

“At 3.2 times FY22E EV/EBITDA and 6 times FY22E P/E, Coal India remains attractively valued and implies a PV of just 10 years of future cash flows. We maintain our Buy rating on COAL with a target price of Rs 185 per share, based on 4x FY22E EV/EBITDA,” brokerage firm Motilal Oswal said in its last report on Coal India in June.

Disclaimer

Disclaimer

Investing in stocks is risky and investors need to be cautious. Neither Greynium Information Technologies nor the author, nor the brokerage houses mentioned would be responsible for any losses incurred based on decisions made from the article. Investors are also advised caution as the markets are now at a historic high.

About the author

About the author

Sunil Fernandes the author of the article has spent 27 years covering stocks markets and mutual funds. He is the Managing Editor of Goodreturns.in and has worked with Hindustan Times, Deccan Herald, Oman Economic Review, Dalal Street Investment Journal and Gulf Times.



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How PSU banks are catching up in the digital world, BFSI News, ET BFSI

Banking & Finance

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– By Amol Dethe & Ishwari Chavan

The banking sector in India, in response to evolving forces of consumer behaviour shift, demographics and technology, has gone through some significant changes in the past decades.

Almost every sector in the economy reflects the massive impact technology has had on them. But the banking sector, in particular, has been aggressively adapting and transforming in the face of constantly evolving technology.

The notion holds that the Public sector banks (PSBs) have lagged their private counterparts in adapting to these changes. But the PSBs have geared up and banking experts believe the future does look good for PSBs.

PSBs adopting tech

The PSBs have already started investing heavily in technology. Artificial Intelligence, blockchain technology, and robotic process automation are the key innovations that are likely to impact the banking scenario in India in a transformative way.

The field of artificial intelligence has produced several cognitive technologies. Individual technologies are getting better at performing specific tasks that only humans could do. It is these technologies that PSBs may focus their attention on. Analytics can improve customer understanding and personalisation. PSBs are in the process of aggressively adopting these technologies that enhance bank and customer engagement.

Speaking at the ETBFSI session on Digital future of PSU Banks, Raj Kiran Rai, MD & CEO, Union Bank of India and V G Kannan, former CEO, Indian Banks’ Association shared their insights and experience on how PSBs are transforming.

Rai said, “Based on the transactions of a customer, these models can predict if he/she can be a potential housing loan customer, a potential vehicle loan customer, or a personal loan customer. So it helps to do targeted marketing. We are still in the initial phases of using it. But we are investing a lot in this.”

Developing skills

PSBs are heavily recruiting the young population while skilling and reskilling them. Rai mentioned that the average age of employees has come down to 38. He added that the “tech-savvy” young can be easily skilled and reskilled through the e-learning modules that are being introduced. Prioritising the employees who can read and analyse large data over traditional number-crunching can be increasingly seen as a pattern.

Among other skills, marketing is one of the most valuable skills for the digital future of PSBs. According to Rai, marketing skills are where public sector employees are lacking. He said things will take off very fast once the digital products are marketed, pushed to customers, and made comfortable to use.

Fast Moving Consumers & FinTechs

VG Kannan, Former Chief Executive, Indian Banks’ Association, said, “The more and more the customers can use these things, the load on the bankers will come down and they can make it more efficient, provide higher interest rate and provide better services at a lower cost. So it’s going to be a win-win for everyone.”
While a large section of the population in India will be comfortable using digital products, banks will still have to maintain a physical presence, especially in rural areas where the customers are more inclined towards it.

Financial Literacy Centres (FLCs) can play an important role in promoting financial literacy by creating awareness about banking services. Thus, integrating the informal and formal financial sectors can further make digital banking services more accessible to a large chunk of the population that otherwise prefers the physical branches.

Furthermore, to stay relevant in an ever-evolving customer pool, PSBs need to make the most out of the dynamic changes in the BFSI sector in the country. The success of these banks will largely depend on the alliances they form. Thus creating innovative partnerships will ensure the growth of PSBs.

It is no more about banks versus FinTech. Partnerships between banks and FinTech companies will allow banks early access to innovative technologies while the FinTechs would benefit from the vast experience and infrastructure of the PSBs. Both Kannan and Rai believe that a lot of such partnerships may be witnessed over the coming years.

The very technologies that drive revolutionary transformations also invite security risks with them. Technologies are getting sophisticated, and so are the cyber risks. Thus, for PSBs to ensure a secure infrastructure may be very crucial.

Rai and Kannan concurred that growth through innovation is where the PSBs are headed.



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Cooperation Ministry: Cooperatives’ financial heft seen behind Centre’s bid for greater control

Banking & Finance

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There are about 8.5 lakh co-operatives in the country with roughly 38 crore members. Of these, 1,539 are urban cooperative banks (UCBs) and 97,006 rural ones with a combined asset size of as much as Rs 17-18 lakh crore, an official source told FE.

From a tiny wing of the agriculture ministry with less than a dozen employees in a nondescript corner of Krishi Bhawan, the department of cooperation’s morphing into a full-fledged ministry last week, with Amit Shah at its helm, is seen as having not just political but economic ramifications.

There are about 8.5 lakh co-operatives in the country with roughly 38 crore members. Of these, 1,539 are urban cooperative banks (UCBs) and 97,006 rural ones with a combined asset size of as much as Rs 17-18 lakh crore, an official source told FE.

These cooperative banks, both urban and rural, account for an overwhelmingly large share of the cooperative sectors’ finances. While many of them are starved of capital and riddled with management woes, the co-operative banking sector, as a whole, still retains much financial as well as political clout over voters at the critical grassroots level. Against this backdrop, the Centre’s bid to regulate policies governing co-operatives through the new ministry assumes significance.

Some of the large UCBs are cash-rich, and this makes them a potent financial force. The deposit base of UCBs stood at Rs 5 lakh crore as of March 2020 (deposits constitute about 90% of the cooperatives’ resource base). Their loan portfolio was as high as Rs 3 lakh crore at the end of FY20, constituting a sizeable share of credit flow in the overall cooperative sector, mainly to agriculture.

Similarly, the UCBs’ cash reserves grew 7.9% on year to Rs 5,812 crore in FY20 and balances with banks rose 8.6% to Rs 66,212 crore. Their investments stood at Rs 1.62 lakh crore in FY20, 60% of which were in central government securities and another 27% in state government papers. Their asset size stood at Rs 6.2 lakh crore as of March 2020.

Once the financials of rural co-operative banks are included, the asset size sees a substantial jump. These rural co-operatives make up 65% of the total asset size of all co-operative banks put together, according to an RBI assessment.

Given the financial prowess of many of the co-operatives and the sheer large number of their members, the political parties that exercise considerable control over them potentially have a significant advantage over others in times of elections. For instance, the Congress and the NCP have tremendous clout over them in Maharashtra, the BJP in Gujarat and the Left parties in Kerala.

No wonder, opposition parties have called the move to carve out the ministry of cooperation from the agriculture ministry a “political mischief” and an onslaught on the country’s federal structure. Co-operatives, being a state subject (the Union government’s role is mostly restricted to multi-state co-operative societies), should be overseen by the states and the new ministry must not be used to usurp their power or curb their innovation, they say.

For instance, to fund development activities and ease credit flow to farmers, Kerala formed the Kerala Cooperative Bank (KCB) (branded Kerala Bank) by merging district cooperative banks. The KCB is now the country’s largest cooperative bank with as many as 820 branches. The state’s ministry of cooperation lists as many as 11,892 cooperative societies that function across sectors, including agriculture, dairy, industry and services such as banking and hospitality.

More importantly, many of the cooperatives, thanks to their opaque structure and severe governance issues, are allegedly used to funnel black money. The crisis at the Punjab Maharashtra Co-operative (PMC) Bank and some others in recent years are a testament to it.

Of course, the government last year amended the Banking Regulation Act to bring urban and multi-state co-operative banks under the RBI regulation. While the move aims to protect the interests of depositors and better scrutinise the affairs of these cooperative banks, given the enormity of the task, strict supervision and regulation will take some time to evolve to the desired standards. Moreover, the sphere of the RBI regulation is limited to only those offering banking services and doesn’t cover the entire universe of co-operatives.

According to the notification issued by the government, the new ministry will deal with general policy in the field of cooperation while other relevant ministries will be responsible for cooperatives in their respective fields. For example, IFFCO will continue to be driven by the policies of the fertiliser ministry and Gujarat Cooperative Milk Marketing Federation (Amul) by the dairy ministry. Agri cooperative Nafed, which undertakes the procurement of oilseeds and pulses, will remain with the agriculture ministry.

So, the new ministry will get to oversee the central registrar of cooperative societies that regulate and govern all multi-state cooperative societies, a function that was earlier undertaken by the agriculture ministry.

The step assumes significance as some of the financial companies were allegedly converted to multi-state cooperatives to evade regulating authorities like RBI and Sebi.

As of December 2020, there were 1,469 registered multi-state co-operative societies. Maharashtra led the pack of states with 622 of them, followed by Delhi (153), Uttar Pradesh (149), Tamil Nadu (124) and Rajasthan (74).

Rejecting criticism of the move, government officials say the much-neglected co-operative sector will get its due share of attention now following the formation of a dedicated ministry and catalyse a bottom-up growth approach. It will bolster the country’s cooperative movement and deepen its reach at the grassroot level, they add.

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Paytm Payments Bank may soon apply for conversion to Small Finance Bank

Banking & Finance

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Paytm Payments Bank, an associate entity of IPO-bound Paytm, may consider applying for conversion into a Small Finance Bank (SFB) on completion of the required time period under law.

If the firm is successful in conversion, Paytm Payments Bank will be able to undertake additional banking activities such as lending.

The plan to consider applying for conversion into a SFB has been disclosed in the draft red herring prospectus filed by One 97 Communications (Paytm) with SEBI recently for the digitial financial services major’s ₹16,600 crore initial public offering (IPO).

Currently, under the existing RBI guidelines for ‘on tap’ licensing of Small Finance Banks in private sector, existing payments banks with successful track record of at least five years can apply for conversion into SFB.

Moreover, an internal working group of the RBI had recently suggested that a successful track record of three years may be considered sufficient for such conversion.

It maybe recalled that Paytm Payments Bank got its licence to operate as a payments bank from the RBI in 2017.

Net profits

Meanwhile, for the year-ended March 31,2021, Paytm Payments Bank, which has the largest scale among all payment banks, had recorded net profit of ₹17.88 crore on sales of ₹1,987.84 crore, financial data disclosed in the prospectus showed.

One 97 Communications owns 49 per cent equity interest in Paytm Payments Bank, while the rest 51 per cent is owned by Vijay Shekhar Sharma.

The objective of a payments bank is to widen the spread of payment and financial services to small business, low income households, migrant labour workforce in secured technology driven environment. A payments bank is like any other bank without involving any credit risk. It can carry out most banking operations but cannot provide loans or issue credit cards. It can accept demand deposits up to ₹2 lakh, offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and the third party fund transfers.

As at end-March 2021, Paytm Payments Bank had 6.4 crore bank accounts and demand deposits of ₹5,200 crore (including savings accounts, current accounts, fixed deposits with partner banks and balance in wallets). As of March 31, 2021, more than 50 percent of its registered merchants (over two crore20 million) hold an account with Paytm Payments Bank.

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Buy This Stock, It Is Now Available With A Dividend Of Rs 58 Per Share

Personal Finance

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Investment

oi-Sunil Fernandes

|

Shares of government owned, Bharat Petroleum Corporation Ltd (BPCL) is available at a solid dividend, with the company recently announcing a hefty dividend of Rs 58 per share.
The final dividend would be paid within 30 days from the date of its declaration at the AGM, which is not yet announced.

If the investor would buy the stock now it is trading at Rs 448, and assume post the dividend it drops by Rs 58, the stock should go to Rs 390, which should be very attractive given significantly higher targets by brokerage firms in the past few months.

Earlier, ICICI Direct had a “buy” call on the stock of BPCL, which it had anticipated could reach a price target of Rs 495 per share. If you include the cost of acquisition (Rs 390, inclusive of dividend) than the price target of Rs 495, leaves ample room for appreciation in the stock.

According to an earlier report from ICICI Direct, marketing sales reached near normal level in Q4FY21, second wave of Covid-19 and subsequent movement restrictions led to reduction in fuel demand.

“This has affected capacity utilisation as well that reduced up to 86- 87% in May. Improvement in global product cracks and further recovery in fuel demand will be important for Bharat Petroleum Corporation Ltd’s profitability in the near term.
The progress on divestment, response by bidders and subsequent valuation ascertained to the company will be a key monitorable and will drive stock price. We roll over valuations to FY23E and maintain HOLD recommendation on the stock with a target price of Rs 495 based on average of P/BV multiple and price to earnings multiple at Rs 495 per share each,” the brokerage has said.

In a report Motilal Oswal also had upped the price target on the stock, citing faith in the privatization measures of the company. The company had placed a buy on the stock, in its last research report on BPCL.

“BPCL posted better-than-estimated profitability, driven by better marketing volumes and refining/marketing margin, further aided by inventory gains. The company made huge progress towards privatization in FY21, despite challenges posed by COVID-19, by streamlining its subsidiaries (divested its entire stake in NRL, consolidated its stake in BORL, merged BGRL with BPCL) and sold off its trust shares,” the brokerage said.

Buy This Stock, It Is Now Available With A Dividend Of Rs 58 Per Share

Why you should buy the stock ahead of privatization?

Many analysts believe that once the privatization move of BPCL is over, it could drive the stock of the company even higher.
Reports suggest that Vedanta is among the bidders for BPCL. There were also reports that the Union government is considering a proposal to allow up to 100 per cent foreign investment under the automatic route in oil and gas PSUs that have an ‘in-principle’ approval for disinvestment. This could be a big trigger for the stock. However, we cannot confirm whether it is speculation or such things could happen. But, all things put together the acquisition cost of Rs 390, makes the stock a good buy.

However, putting all things together and also from what brokerages are saying, if you get the stock of BPCL at Rs 390 per share, it would certainly be a good stocks to buy.

Buy This Stock, It Is Now Available With A Dividend Of Rs 58 Per Share

Disclaimer

Investing in stocks is risky and investors need to be cautious. Neither Greynium Information Technologies nor the author, nor the brokerage houses mentioned would be responsible for any losses incurred based on decisions made from the article. Investors are also advised caution as the markets have closed at an historic high.



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HDFC Securities to enter discount broking to win market share, BFSI News, ET BFSI

Personal Finance

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Mumbai, July 18: HDFC Securities is creating its own discount broking architecture to compete with new-age firms like Zerodha which are eating into market shares of entrenched players in the business, its parent HDFC Bank‘s managing director Shashidhar Jagdishan has said. Over the next two-three years, the company targets to gain market, Jagdishan said, making it clear that the largest private sector lender does not have any plans to sell stakes in the brokerage.

It can be noted that over the last few years, discount brokerages which help an investor transact by paying a fraction of commissions and fees have become popular with investors, forcing many of the entrenched players to offer similar offerings.

“I’m happy to say that our own HDFC Securities also has a plan and you will see that countering the threats from discount brokerages with its own neo architecture or discount kind of an architecture as well,” Jagdishan told the bank’s shareholders at its annual general meeting on Saturday.

He added that HDFC Securities will be responsible and exuded confidence that it will gain market share in the next 2-3 years.

The company, which registered a 94.9 per cent growth in its June quarter net profit to Rs 260.6 crore, is doing extremely well, Jagdishan said.

As per filings, HDFC Securities’ total income grew by 67.3 per cent to Rs 457.8 crore in the June quarter as against Rs 273.7 crore in the year-ago period. It had 215 branches across 147 cities / towns in the country.

Meanwhile, speaking at the bank’s AGM, its non-executive chairman Atanu Chakraborty said the largest lender in the private space is on its way to scale technology adoption and transformation agenda through scaling infrastructure, disaster recovery resilience, information security enhancements and having a monitoring mechanism.

He said the bank has taken the regulatory actions arising out of challenges faced on technology in the right spirit and the management has displayed grace and humility.



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