Tag: economic recovery

How strong is the economic recovery? Economists go the extra mile to find out, BFSI News, ET BFSI

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Economists are tracking proxy economic indicators such as footwear sales, city billboard usage, product and services advertisements, travel-related searches, fish, meat and poultry purchases, and demand for smartphones to gauge the strength of the post-pandemic recovery.

A string of high-frequency alternative indicators, along with government-issued data sets such as goods and services tax (GST) collection, foreign trade, e-way bills and Purchasing Managers’ Index (PMI), have shown the economy has gathered pace. But gauging the true extent of recovery is proving difficult, given the distortion caused by the extreme base effect of Covid-hit FY21.

The proxy indicators are helping reduce the noise. Most of these indicators suggest strong economic momentum.

Footwear maker Bata booked a net profit of Rs 37 crore in the September quarter on the back of higher sales across retail outlets and digital channels, swinging back to profitability after a loss in the previous financial year.

Higher footwear sales are a proxy for, or an alternative lead indicator of, the “confidence level” among consumers. More footwear sold means people have started going out after several months of Covid-led lockdowns and restrictions.

“Reduction in Covid cases and wide vaccination coverage have led to an increase in consumer confidence and morale,” said Gunjan Shah, CEO, Bata India.

“People are gradually moving towards normalcy… this is resulting in increased footfall across all our outlets.”

“These proxy indicators may not be accurate all the time, but they can give you a direction as to where the country is headed,” said Devendra Kumar Pant, chief economist, India Ratings.

Sachchidanand Shukla, chief economist at Mahindra Group, who tracks 37 variables to gauge consumption patterns across the country, said the recovery in the services sector is helping growth. Key metrics such as loan collection data, tractors, farmers’ income and consumer durables are gaining traction, he said.

“If there’s no third wave, and Covid cases hit a declining trend with wide vaccination coverage, we may see double-digit economic growth this year,” said Shukla. “Farmers’ cash flows are better, as there have been higher levels of government-led procurement this year.” The services PMI touched a decade high in October.

Madan Sabnavis, chief economist at CARE Ratings, said there is a marked improvement in recovery since the Ganpati festival. In the run-up to Diwali, there has been a voluminous increase in the number of companies booking advertisements for their products and services, he said.

“We’ll have to see if the higher levels of GST collection can be maintained post the festival season… But, as of now, things are looking up. Even bank credit is showing signs of recovery,” said Sabnavis. G Chokkalingam, managing director at Equinomics Research, said most high-frequency indicators – such as diesel sales, truck and rail freight rates, spatial distribution of monsoon, water storage levels in reservoirs, life insurance premiums and domestic pharmaceutical formulation sales– are showing an upward trend.

“There’s liquidity in the system for now, thanks to the stimulus packages given by governments the world over. Even the FDI (foreign direct investment) flow to India is stable now,” said Chokkalingam. “Systemic liquidity will keep the asset classes buoyant for some more time.”

Abheek Barua, chief economist at HDFC Bank, said the sales of fish, meat and poultry – the “protein basket”– hovered at elevated levels over the past few weeks, denoting stability in rural household incomes. But this cannot be a surefire indicator this time round, he said, as the supply of poultry has been severely hit after a cull due to avian flu.

“We are seeing signs of a switch from cereals and pulses to fish and meat currently, but this may not be an apt indicator now. Instead, we are looking at smartphone sales in rural India,” said Barua.

“There’s strong recovery, but it is biased towards the organised sector and mid-to high-income earners, and is now restricted to urban pockets. There could be stress among MSMEs (micro, small and medium enterprises) and low-income households.”

Consulting firm Counterpoint Research said smartphone shipments maintained strong momentum after the second Covid-19 wave, as high consumer demand outweighed supply. The sub-Rs 20,000 phone category has seen brisk sales in recent months, it said in a report.

QuantEco Research economist Yuvika Singhal, who tracks Google and Apple mobility data along with other high-frequency indicators, said, “The mobility data points show that more people have started visiting transit stations – denoting long-distance travel. We are also seeing mobility towards workplaces now.”

Singhal further said, “For the services sector, we use Google searches as one of the proxies. More people are searching for flight tickets, holidays, consumer durables and even movie tickets now. Almost all city-based billboards are flashing advertisements now… for sure, the pace of recovery has continued for five months. We’ll have to see if it continues.”



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Banks face pressure on NIM as they lower rates to outsmart rivals, BFSI News, ET BFSI

Banking & Finance

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An intense price war in retail loans ahead of the festive season has led to a pronounced fall in interest income for banks, putting pressure on their key profitability parameter: Net interest margins (NIM).

Five of the seven state-owned banks that have announced their quarterly earnings so far have reported lower NIM for the September quarter. These banks, however, managed to report a rise in net profit largely on account of bad loan recovery and write-back of provision made in earlier quarters.

Captains in the banking industry said that they would rely on credit growth to boost NIM in the next two quarters since lending rates would likely remain soft until the monetary policy authority continues its accommodative stance to support economic recovery.

The banking sector’s weighted average lending rates dropped 31 basis points in September to 7.20%, the biggest monthly fall since November 2016. Public-sector banks led the race in slashing loan costs. Lending rates were already low as banks followed regulatory signal on softer interest rate regime over the past two years.

Room for further deposit rate cuts is not available for lenders as real interest rate is already negative, keeping the NIM sticky below 3% for most of them.

Punjab National Bank reported the steepest 25% drop in net interest income among state-owned lenders that have announced their quarterly earnings so far. Canara Bank and Indian Bank have lower NII and NIM for the quarter under review.

The market became too competitive with all large banks lowering interest rates, leading to a fall in NIM, said Indian Overseas Bank chief executive Partha Pratim Sengupta last week. IOB, however, clocked 4.6% higher net interest income even as its NIM fell to 2.51% for the quarter ending September 30 from 2.57% in the year-ago period.

Punjab & Sind Bank has had a marginal rise in NII while its NIM dropped. Bank of Maharashtra and Uco Bank, on the other hand, reported a rise in both NII and NIM.

Indian Bank chief executive Shanti Lal Jain expects interest income to rise in the next two quarters with higher credit off-take, in line with expected economic recovery. Uco Bank’s AK Goel shared a similar view.

Public sector banks, however, would likely face a challenge in terms of credit growth from their private sector peers, which are typically more aggressive in retail lending.

Over the last five years, public sector banks’ market share has dropped by around 10% in both deposits and advances. “Clearly, asset quality and the resultant profitability, as well as capital challenges, have been the key factor in the slowdown of the public sector banks,” Acuite Ratings & Research said in a note.



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Regional bank loan growth could hint at healthier supply chains, BFSI News, ET BFSI

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NEW YORK: If regional banks show signs of accelerating loan growth when they report earnings in the week ahead, it could signal an easing of the supply chain bottlenecks that have weighed down the U.S. economic recovery from the pandemic, analysts and investors said.

Overall, small banks accounted for 63% of the approximately $520 billion in loans through the federal Paycheck Protection Program launched in response to the pandemic. The program allowed small businesses to take loans that either could be forgiven or would have a 1% interest rate, according to the U.S. Small Business Administration

Increasing demands for new loans at higher interest rates could signal that small businesses are securing inventory and expanding, said Dave Ellison, a portfolio manager at Hennessy Funds.

“It seems like everybody else has benefited from the economy reopening but the banks because you’ve seen very little loan growth” on account of the Paycheck Protection Program, Ellison said. “The pandemic has disproportionably hurt small businesses, and those are the customers of regional banks,” he said.

As of June 30th, small banks held 15% of total banking industry loans but an outsized share of Paycheck Protection Program loans, holding 31%, according to the Federal Deposit Insurance Corp.

Overall, commercial loan growth fell 12% in September from a year earlier after bottoming out with a 16.3%% decline in annual loan growth in May, according to data from the Federal Reserve and Oppenheimer. Yet rising inventories at auto suppliers and retailers should bolster loan growth in the year ahead, said Chris Kotowski, an analyst at Oppenheimer.

“It seems likely to us that the next significant move is up – not down – for the simple reason that it can’t possibly come down as much as it already has,” said Chris Kotowski, an analyst at Oppenheimer.

A healthy increase in new loans at regional banks would be a strong signal that supply chain issues are moderating, said Steven Comery, an analyst at Gabelli Funds.

“If clients can’t get products to market because of the supply chain they aren’t going to be borrowing to build their inventory,” he said. “If we see signals that supply chain issues aren’t going away then that’s going to impact earnings estimates through 2023.”

The four largest U.S. banks reported mixed loan growth when reporting their earnings results Oct. 14, with J&P Morgan said loans were up 5% compared to the prior year while Bank of America and Wells Fargo reported declines.

Companies including First Community Bancshares Inc, First Midwest Bancorp Inc, and Zions Bancorp are expected to report earnings on Monday, while Fifth Third Bancorp O> and United Community Banks Inc are among those expected to report on Tuesday.

On Wednesday, Oct. 13, shares of First Republic Bank gained 1.5% after the regional bank originated approximately $15 billion in new loans and reported that its average Paycheck Protection Program loan balance was down 39% over the quarter. Those gains in new loans will make it likely that the bank will raise its guidance in the coming quarters, noted Casey Haire, an analyst at Jefferies.

Concerns over loan growth by regional banks comes at a time when the sector’s shares are trading near record highs. Regional banks in the S&P 500 are up nearly 37% for the year to date and are just below the high they reached on Oct. 8, according to Refinitiv data.

Despite those gains, regional banks continue to look attractive based on valuations, Ellison said.

Regional banks in the S&P 500 trade at a forward price to earnings ratio of 13.5, well below the 21.2 of the broad S&P 500, according to Refinitiv data. Valuations will likely rise alongside the yield of the benchmark 10-year Treasury, which is used to set rates for loans including mortgages, Ellison said.

“Valuation is not a problem for future gains,” he said.



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Buy-now, pay-later loans help fuel India’s festive recovery, BFSI News, ET BFSI

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NEW DELHI: Consumers are ratcheting up buy-now-pay-later installment plans to purchase everything from washing machines to vacations online as the country’s longest festive season gets underway.

Popularity is swelling for these small-sized loans that typically amount to less than Rs 5,000 ($67) as the labor market recovers from the pandemic shock.

Those payments have been growing at least 20%-30% over the past three months, according to fintech-firm executives.

They are expected to increase by about 66% on an annual basis in India to $11.6 billion this year, a survey by Research and Markets showed.

“Things are very positive, people have got their jobs back,” said Bhavin Patel, co-founder and chief executive officer of LenDenClub, a peer-to-peer lending platform.

“The buy-now, pay-later model is the most popular source of borrowing for customers who need small size loans quickly to tide over immediate cash needs.”

Rising vaccination rates coupled with decreasing coronavirus cases are fueling optimism that people are more willing to spend on goods and jewelery this year.

Those consumers are increasingly turning to installment plans from retailers such as e-commerce giants Amazon.com Inc, Flipkart Internet Pvt and Ant Group Co backed Paytm, as well as smaller fintech firms like LenDenClub, Simpl, ZestMoney and CASHe.

LenDen has seen loan applications treble to 170,000 in September from February and expects a further increase to 250,000 in December, Patel said.

Digital rise

More broadly, spending per credit card was up 54% in August from the year before, according to a Bank of America Corp report.

“BNPL is aided by two things, one is the festive season and second is Covid as people are becoming more comfortable with purchasing online,” said Yogi Sadana, chief executive officer of fintech lender CASHe.

“We are growing about 30% to 35% on a monthly basis, in terms of the number of loans we provide every month. The pick-up is phenomenal.”

For fintechs, such loans are filling a sweet spot. They cater to customers who typically wouldn’t either qualify to borrow from a traditional bank or would have to wait longer than getting a loan within a few hours.

“It’s a win-win for all three players — the borrowers who get loans quickly, the lenders who earn 10-12% average returns and us who earn a 5-6% fee by getting the borrowers and lenders on a common platform,” Patel said.



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Seen complete pass-through of rate cuts to fresh rupee loans of banks: RBI bulletin

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The median term deposit rate eased by 152 basis points (bps) through March 2020 to August 2021. A bigger dip of 181 bps is discernible across shorter-tenor deposits of maturity of up to one year, the RBI said in its monthly State of the Economy report.

Surplus liquidity, coupled with the forward guidance by the Reserve Bank of India (RBI), has facilitated monetary transmission and there has been a complete pass-through of policy rate cuts to fresh rupee loans and term deposit rates of banks since March 2020, the central bank said in its bulletin for September, released on Thursday.

The median term deposit rate eased by 152 basis points (bps) through March 2020 to August 2021. A bigger dip of 181 bps is discernible across shorter-tenor deposits of maturity of up to one year, the RBI said in its monthly State of the Economy report. Since March 2020, the one-year median marginal cost of funds-based lending rate (MCLR) of banks has softened cumulatively by 100 bps, the report said.

At the same time, as on September 10, currency in circulation grew at its slowest pace of 9.4% since November 2017, down from 22.4% a year ago. The trend mirrors subdued precautionary demand in contrast to the surge recorded a year ago during the first wave, the RBI observed.

The central bank took note of the sluggish credit growth to the industrial sector since 2014-15, which has also led to a moderation in the overall credit growth. Based on a bank-wise analysis of data, the report said a few banks are contributing significantly to overall non-food credit offtake. It split up banks into two categories — the dominant-group of banks, which includes six leading lenders on the basis of their share in total non-food credit and the other-group of banks, which includes the remaining 27 banks.

Credit to the industrial sector extended by the other-group registered a negative compound annual growth rate (CAGR) of 1.6% between FY15 and FY21, while that by the dominant group registered a CAGR of 3.7% during the period. In the pandemic year, the credit extended by the dominant group to the industrial sector registered an accelerated growth of 5.1%, though that delivered by the other-group contracted by over 7%, the report said.

“Thus, it is evident from the above that a few banks are driving credit growth to the industrial sector, whereas, most of the other banks are lagging behind in extending credit to the industrial sector,” the report said.

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Former union finance minister P Chidambaram says India’s recovery depends on Centre not taking foolish decisions, BFSI News, ET BFSI

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India’s economy will not recover to pre-pandemic levels in the current financial year or in 2022-23 if the Narendra Modi government continues to take “foolish decisions,” said former union finance minister P Chidambaram here on Thursday.

Chidambaram said that the Centre’s four year National Monetization Pipeline is a foolish decision that is akin to giving away the country’s assets that were built by the Congress party over several decades.

“The recovery in 2022-23 may take us to the pre-pandemic level, provided the government does not take foolish decisions,” said Chidambaram while speaking to reporters.

Speaking further, the AICC core group committee member, said that along with demonetization and faulty roll out of GST, the Centre’s refusal to increase public expenditure during a pandemic was a foolish decision. “And a few days earlier they took another foolish decision to monetize national assets,” said the former Union minister.

Chidambaram said that India’s economy ended with negative growth in the last financial year with no hope of any recovery even in 2021-22.

“The GDP for this year will not go to the pre-pandemic level of 2019-20. 2020-19 was a decline. 2021-22 will show an apparent increase in the GDP but it will not go back to the pre-pandemic level. Only when it goes to the pre-pandemic level, can you call it a recovery,” said Chidambaram.



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HDFC Bank receives Rs 30,000 crore prepayments amid signs of economic recovery and deliveraging, BFSI News, ET BFSI

Banking & Finance

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In clear signs of a robust economic recovery and sustained deleveraging by top-rated Indian corporates, HDFC Bank received about Rs 30,000 crore in prepayments through the June quarter, primarily from companies in the commodities and infrastructure sectors, two people familiar with the development told ET.

“HDFC Bank has not seen such a high level of prepayment in the recent past,” said one of the persons cited above. “Other banks also obtained prepayments, but the scale is not that high because of lower business volumes.”

HDFC Bank, India’s most valuable lender, did not reply to ET’s queries on the subject. Industry sources didn’t reveal the names of individual corporate borrowers prepaying their loans to HDFC Bank.

In the April-June quarter, AAA or AA-rated companies sought to deleverage as they recorded solid cash balances, banking sources said. Cash flows were robust at commodity companies because of record iron ore or aluminium prices, boosting net profits. Infrastructure companies, too, reported fatter bottom-lines due to the government’s extensive highway-building programme.

HDFC Bank now expects renewed credit demand from these companies in a quarter or two, with the pace of economic recovery quickening and fueling the need for more funds.

The bank expanded its corporate loans in excess of 10% in the April-June quarter to about Rs 3.15 lakh crore. Wholesale banking advances largely include working capital loans. About four years ago, the book size was about Rs 1 lakh crore at the traditionally retail-focused HDFC Bank.

“Prepayments came from borrowers with more than two years of residual loans outstanding,” said a market source.

If a borrowing company runs a loan for two years and gives a prepayment notice of up to 30 days, the bank does not charge any penalty.

“Three months later, these companies will come forward with fresh credit demand,” said a senior banking executive, who advises companies on loan deals and works closely with HDFC Bank. “Demand is coming back as the second wave triggered only localised lockdowns.”

HDFC Bank is increasingly leaning toward companies, with the franchise built around individual consumption pushing credit to deleveraged corporates after Covid-induced job losses and wage cuts raised the risk perception of retail borrowers.

“Corporate loans will likely grow selectively,” Kaizad Bharucha, Executive Director, HDFC Bank, said in an interaction with ET two weeks ago. “The second wave has not destroyed demand for corporate loans but postponed it. With caseloads falling, companies will require money – both working capital and term loans.”



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Economic recovery is underway but credit growth remains tepid: Deepak Parekh

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HDFC Ltd Chairman Deepak Parekh on Tuesday expressed confidence that the country’s macroeconomic fundamentals are strong and recovery is underway.

“Owing to the second wave, the Indian economy is likely to mirror a similar trend seen in 2020-21, where the first half of the financial year is weaker and the second half is significantly stronger,” Parekh said at the annual general meeting of HDFC Ltd.

However, while parameters such as foreign exchange reserves and capital markets are strong, he underlined that key laggard remains overall credit growth which continues to remain tepid.

Parekh also said the inherent demand for home loans continues to be strong and even in commercial real estate, most companies have not given up on their office space in the pandemic.

He also noted that there are segments of real estate with immense potential to grow.

“With the e-commerce boom, demand for real estate is coming from warehousing and fulfilment centres,” he said, adding that with the build-up of digital infrastructure, demand for data centres have increased.

The demand for housing has also continued to be strong after the easing of the national lockdown and was for both affordable housing and high-end properties.

“Asset quality has been challenging for non-individual loans at a systemic level. the corporation has always been prudent in identifying loans where there could be stress and has adequately provided for such loans,” Parekh further said.

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RBI monetary policy: Calms some nerves; just what the doctor ordered

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Through the variable reverse repo, RBI will also manage the lower end of the curve suitably.

By KVS Manian

The Reserve Bank of India (RBI) has clearly kept its ears to the ground in framing the last monetary policy. The surge in Covid-19 cases, leading to a seemingly vicious second wave, has definitely pushed the recovery trajectory by a quarter, if not two.

The pace of the Covid-19 vaccination has been slower than anticipated, adding to the worries on the time frame to get a control over the pandemic. Just now, in the most optimistic scenario, this looks like a 9-10 month vaccination programme to reach the thresholds of comfort. I am sure the government is thinking about speeding up the delivery mechanisms, as also ensuring optimum supply of vaccines itself. So, over the next few months, selective lockdowns/locational disruptions and other constraints will continue. This will lead to some demand disruptions as well as supply disruptions.

All this is bound to have an adverse impact on the economy, with some downside risk to the growth projections we had expected, even a month ago.

In such a scenario, that the RBI stance will be more accommodative and supportive of growth follows quite naturally. As all the countries attempt to do this over the next 12 months, we will see significant difference in the quality of execution amongst them.

Hopefully, India will be one of the countries that will emerge from this year with a strong tailwind ready to launch into a strong positive growth cycle.

Like most other central banks across the world, RBI is also clearly prioritising growth over incipient inflation worries. However, this remains a risk over the period of this financial year. While the headline inflation looks to be under control, the saviour has been the inflation in food prices, and core inflation numbers are already flirting with 6%. The risk to inflation is coming in a complicated manner, both from supply-side constraints in some areas and from demand-side pressures in others. This balancing act between supporting growth and curbing inflation is going to be the key challenge of the central bank this year.

The bond markets were very pleased with the announcement of the Rs 1 lakh crore open market operation (OMO) programme (christened as G-SAP, or the G-Sec Acquisition Programme) for the first quarter of FY22. It was precisely what the doctor ordered. This has cooled the yields over the long end of the curve. Through the variable reverse repo, RBI will also manage the lower end of the curve suitably. This may lead to some increase in yields in the short end, flattening the yield curve. The liquidity in the system will continue to be good, and with the above developments, the expectations of rise in policy rates over this year have significantly receded till late this financial year.

It will be interesting to see how the rupee reacts in the coming months. Global liquidity leading to strong flows into the Indian equity markets has helped bolster the rupee until now. Purportedly, RBI’s announcement of bond purchases and unwinding of positions by traders, who were already nervous due to the emerging Covid-19 second wave data, led to a fall in the value of the rupee. However, in the medium term, signals from the US and European markets on economic recovery and interest rates will be a more important factor. Just now, the US Treasury as well as European central banks seem quite determined to keep liquidity high and bond yields low, almost challenging the bond dealers to trade against them. Given these, the flow into attractive emerging markets is likely to continue, keeping the rupee reasonably stable.

The not-so-great news in all this is that the likely economic disruptions, caused by the next wave of Covid-19, could mute credit growth at a juncture when it was just showing green shoots of recovery. Asset quality issues in the financial sector could re-emerge. Coordinated steps by both the government and RBI through the last year helped ensure flow of credit and financial support to the segments in the economy that were the most susceptible, such as the MSMEs and other Covid-19-impacted sectors, and helped these segments tide through the crisis. Going forward, RBI and the government have to work towards a calibrated and smooth exit from this situation.

Another important announcement from RBI was that of permitting fintech companies to join the digital payment systems of the central bank. This is a progressive step, and will speed up digital adoption in financial transactions. India’s progress in this direction has been particularly noteworthy, and this announcement has signalled RBI’s continued and proactive focus in this area.

Overall, the policy is in sync with the times and recognises the need to navigate this uncertain period with an open mind.

The author is whole-time director and member of Group Management Council at Kotak Mahindra Bank. Views are personal

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Marginal impact of SC verdict on moratorium on earnings

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With banks gearing up to close the financial year and announce results for the fourth quarter and full fiscal 2020-21 in the coming weeks, analysts and experts believe that the Supreme Court verdict on loan moratorium will have marginal impact in terms of their earnings. It is expected that most lenders are likely to move into expansion mode now thanks to signs of economic recovery and improved credit demand.

“Our analysis indicates the earnings impact of the residual exposure is not very material,” said Edelweiss Research in a recent report.

Also read: Loan moratorium: SC orders full waiver of interest on interest

It has worked out three scenarios of such loans being 15 per cent, 20 per cent and 25 per cent of the moratorium books of its coverage banks. “The impact of a hit from loss of interest on interest for this moratorium period will, at most, result in a few basis points dent to the annual net interest margin, even if incremental costs are entirely borne by the banks and with no further government contribution,” it said.

Private sector lenders are set to announce their fourth quarter results in the coming weeks in April followed by public sector banks. HDFC Bank is scheduled to announce its results for the quarter ended March 31, 2021 and the fiscal year 2020-21 on April 17 while ICICI Bank will announce it on April 24.

A report by Axis Securities said it is not yet clear whether this incremental hit will be absorbed by the government or passed on to the banks.

“Even so, it will be a one-time hit and not have a material impact as it only pertains to interest on interest for five months period only. We expect that with NPA standstill withdrawn, banks will report actual NPAs in the fourth quarter of 2020-21 instead of reporting proforma NPAs, which could lead to some margin compression,” it said, adding that with better clarity on asset quality, banks with excess provisions such as ICICI Bank could result in some provision write-backs.

“On overall basis, we remain positive on banks due to improving macro-economic recovery feeding into better credit growth and limited asset quality disruption,” said Emkay Financial Services in a recent note.

Improved credit demand

Bankers have also been talking about increased credit demand in recent months.

CARE Ratings noted bank credit growth has stood largely stable compared to the last fortnight and returned to the levels observed in the early months of the pandemic (the bank credit growth ranged between 6.1 per cent to 7 per cent during March and February 2020).

“The credit growth stood at an almost similar level during the last two fortnights at 6.6 per cent and 6.5 per cent, marginally higher compared with last year’s level of around 6.1 per cent, as economic activities gather pace,” it said.

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