Tag: lenders

Reuters, BFSI News, ET BFSI

Banking & Finance

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India’s central bank wants banks to limit ownership stakes in capital intensive insurance companies at a maximum 20%, less than half of what the current regulations permit, three sources with knowledge of the discussions told Reuters.

Reserve Bank of India (RBI) rules allow banks to hold up to 50% stakes in insurers and on a selective basis equity holdings can be higher but must eventually be brought down within a certain period.

The sources, who asked not to be named as the discussions are private, however said the central bank in 2019 unofficially advised banks seeking to acquire stakes in insurers, to limit such stakes to a maximum of 30%, and more recently directed them to cap stake purchases in insurers at 20%.

“Unofficially, banks have been told that the regulator is not comfortable with lenders increasing their stakes because the insurance business is seen as a money guzzler,” one source said.

The RBI wants banks to focus on their main areas of business instead of locking away capital in non-core sectors. The central bank did not respond to a request seeking comment.

The unofficial push suggests the RBI is looking for uniformity around ownership rules for lenders with exposure in the sector, following suggestions made in a working paper by an internal group released in November.

Some lenders such as Kotak Mahindra Bank and State Bank of India have wholly-owned or majority owned insurance subsidiaries, and the paper had suggested that if any lender had more than a 20% stake in an insurer, they should follow a non-operative financial holding company (NOFHC) structure which will ring fence ownership.

Most lenders are not keen to adopt such a structure on concerns it will hurt shareholder value and limit their capital raising ability, one of the sources said.

Recommendations made by the working paper are under consideration by the RBI and it is not clear when the central bank will act on or implement the suggestions. In light of this, the sources said the RBI was likely to stall on any requests by banks to boost or acquire new stakes in insurers.

The move comes at a time when India is keen to woo foreign investment in its insurance sector. Last month, the government said it would allow foreign direct investment of up to 74% in insurers, up from 49%. Many foreign insurers are expected to explore the opportunity as insurance penetration continues to be low in India.

With fears that banks’ bad loans could double amid the COVID-19 pandemic, the RBI does not want banks to lock up money in capital intensive businesses, the sources said.

The RBI may have reservations about banks having more than 20% stakes in any non-core companies, one of the sources said.

Federal Bank, which sought permission from the RBI to increase its stake in Ageas Federal Life insurance after its board approved the deal about a year ago, has still not received RBI approval, one of the sources said.

Federal Bank did not respond to a request seeking comment.

Last year, the RBI had also rejected Axis Bank’s application to directly purchase a 17% stake in Max Life.

The transaction was only approved after Axis restructured it and agreed to purchase the stake with two subsidiaries, bringing down the bank’s direct ownership share to less than 10%.

Axis Bank did not respond to a request seeking comment on whether it restructured the deal on the advice of the RBI.



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Morgan Stanley ups target price on SBI, BFSI News, ET BFSI

Banking & Finance

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Morgan Stanley raised its price target on State Bank of India to Rs 600 from Rs 525 citing improvement in retail business and a turnaround in the corporate cycle. The new price target implies a 45 per cent upside in the stock price. On Thursday, SBI shares gained 0.8 per cent to close at Rs 415.20.

“SBI has built a strong retail franchise and also sustained its deposit market share. Even on digitisation, the progress has surprised, unlike peer SoE (State Owned Enterprises) banks,” said Morgan Stanley in a note to clients. “As the corporate cycle turns, we expect earnings estimate upgrades and significant re-rating.”

The brokerage said SBI reminds it of China Merchants Bank (CMB), which has shown consistent improvement in its retail franchise compared to the country’s other public sector banks.

“Though there are significant differences between CMB and SBI, we believe SBI could show a similar re-rating trend vs. Indian SoE banks,” said Morgan Stanley.

SBI shares have gained almost 120 per cent since November 1 as against 47 per cent gains in the Bank Nifty index in the period. The stock has been an underperformer in recent years with private retail lenders hogging the limelight.

Analysts said the recovery in the growth cycle augurs well for industrial banks like SBI.

“The current cycle reminds us of the early 2000s, a period in which SoE banks outperformed significantly in the initial years — SBI looks best placed to play this theme,” said Morgan Stanley. “SBI profitability does very well as the economic cycle turns — this coupled with strong improvement in the retail franchise should drive significant upside in this cycle.”



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Lenders remain risk averse to additional lending or alter lending terms: Ind-Ra

Banking & Finance

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India Ratings and Research (Ind-Ra) said lenders remain risk averse despite only 5 per cent of its rated 450 issuers in the mid and emerging corporates (MEC) space availing the Reserve Bank of India’s (RBI) financial restructuring facility available till December 31, 2020.

The credit rating agency, in a report, opined that bankers have remained extremely risk-averse to extend additional lending or alter the lending terms for issuers (companies) having weak liquidity, high leverage or where the credit profile is unlikely to improve in the near to medium term.

Ind-Ra observed that the relief package offered by banks and festival demand coupled with positive sentiments will partially abate the near-term liquidity headwinds for lower rated mid and emerging corporates.

Funding constraints

However, the agency expects funding constraints to increase for issuers having stretched liquidity and a weak credit profile over FY22 and FY23, reducing the financial flexibility for those that have not availed loan restructuring.

Of Ind-Ra’s rated MEC portfolio, 56 per cent of the issuers primarily belonging to the ‘IND BB’ and below rating categories depict a stretched liquidity profile. Of these, 74 per cent belong to the Discretionary and Industrial segments.

“Developments like the fear of a second wave of pandemic…the availability of liquidity with the issuers at end-1H (April-September) FY22 once the additional bank funding availed is exhausted are key monitorables,” said Shivani Suvarna, Analyst, Ind-Ra.

Ind-Ra believes that notwithstanding the short-term liquidity relief, reverting to the pre-Covid profile would be prolonged, especially for the ones belonging to the Discretionary segment.

The agency said it will continue to monitor the credit and liquidity profile of the issuers in the MEC space and could take negative rating actions for issuers having weak liquidity or deteriorated long-term credit profile or a combination of both.

Restructuring: lower-than-expected

Ind-Ra attributed the lower-than-expected restructuring to the various government measures and faster demand recovery in the domestic market, supported by a marginal pick-up in exports in certain sectors.

“Issuers having availed restructuring are primarily rated in the ‘IND BB’ and below rating categories with stretched liquidity.

“Such issuers belong to the Industrial and Discretionary segments and operate mainly in sectors such as real estate and construction & engineering,” said Suvarna.

Ind-Ra believes the lower restructuring stems from the ₹3 lakh crore Emergency Credit Line Guarantee Scheme and the Covid-19 loans provided by banks, offering respite to issuers with weak liquidity and increasing their ability to withstand the sustained cash flow pressures caused by the Covid-19 led lockdown.

“Even though not all issuers had availed the additional funding, the same has flowed down to the entities lower down the value chain.

“Many banks have also automatically converted the interest due on the working capital loans under moratorium into term loans, thus, eliminating the need for the issuers to apply for the restructuring scheme,” the report said.

Moreover, the revised definition of micro, small and medium enterprises (MSMEs) has enhanced the access of freshly included entities to funding from the financial system.

Restructuring: Sentiments

Ind-Ra also believes that the sentiments of the issuers have played a role in them not availing the restructuring scheme. The liquidity crunch endured by the issuers in 1HFY21, backed by the onset of a recovery in 3Q (October-December) FY21, has led to a belief of their increased resilience towards their liabilities.

The opening of offices, factories, retail stores and malls backed by the festival and marriage season demand has led to the issuers witnessing a steady recovery in their credit profiles over October – December 2020, the report said.

Recovery for players operating in the textile sector was augmented by a demand improvement in their export markets. The production and consumption of steel have been improving month on month, backed by an increase in demand, reflecting in its prices.

The automobile industry also grew 6 per cent year on year on December 31, 2020, aided by festival demand, thus imbibing confidence in the small-medium scale auto dealers and OEM manufacturers.

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Bindu Ananth, Dvara Trust, BFSI News, ET BFSI

Personal Finance

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Bindu Ananth, Co-founder and Chair at Dvara Trust believes it’s time for India to increase the number of lenders & non-bank lenders to push credit to different segments of the society.

Bindu Ananth, Co-founder & Chair, Dvara Trust.

Speaking at the Digital Lenders Association of India (DLAI) Conclave, she says, India shall look at adding more banks and increase the number of non-banking financial companies (NBFCs) by more than three times in the next 10 years which will help in having a robust financial services sector.

According to her, India’s financial system comprises over 50 scheduled commercial banks and about roughly about 300 NBFCs which are non-deposit taking systemically important and in next 10 years India should look at getting at least 100 high quality banks and 1000 non-deposit taking NBFCs.

Explaining the rationale behind doubling the number of lenders she says while the share of NFBCs in total credit has grown twice from 10% to 20% in the last decade, the advantage of a non-deposit taking NBFC is that it doesn’t pose systemic risks and thinks there is really a growing recognition that NBFCs have a set of core capabilities that banks in some sense might find it impossible to replicate.

She also believes that banks & NBFCs should coexist in a collaborative manner and service the millions of micro, small and medium enterprises (MSMEs) and focus on product innovation & dynamic risk-based pricing models, which is the need of the hour.

She acknowledged that digital lenders in India, specifically the ones serving MSMEs and small businesses have started using dynamic risk-based pricing algorithms and moved away from general risk assessments to more specific ones. Bindu explained the concept of risk ordinality, where risk at the same level shall be priced similarly and less risky customers shall receive credit at a different rate as compared to high-risk customers. According to her, banks and traditional NBFCs have struggled and found it difficult to address differential pricing.

Bindu also touched upon embedded financing which is driving far more contextual relationships as platforms serve the real economy and users and offers a huge opportunity for growth but less innovation is seen in this space in terms of the range of financial services and products.

In the context of embedded finance, she cautions companies to be careful with respect to consumer protection and grievance redressal mechanism.

According to her the innovation in embedded financing shall be accompanied by good thinking in terms of what happens when things go wrong as the customer only interacts with the platform and the actual lender is in the background.

Bindu concludes, India has a phenomenal opportunity to drive innovation on the product side be it the range of products and pricing of products for different segments.

Bindu Ananth was formerly associated with ICICI Bank’s Microfinance division and has also been the head for new product development in its Rural Banking Group. She was also the former Board Chair of Northern Arc Capital.



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