Tag: loan

Fall in gold prices to trigger demand for more collateral

Banking & Finance

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Shrikant Jadhav, promoter of a small manufacturing units at the outskirts of Mumbai, was surprised when he got a call from the bank to top up his gold loan with additional collateral or pay few instalments in advance.

Jadhav is among many businessmen who are now reworking their gold loan exposure with banks and NBFCs which marketed gold loan as panacea of all liquidity-problems till late last year.

The consistent rally in gold prices while the Covid pandemic was at its peak last year made banks and NBFCs to push gold loan to liquidity starved industries. Moved by the safe-haven factor, the RBI in August increased the LTV (loan-to-value) ratio on gold loans to 90 per cent from 75 per cent.

Prices crash

However, the bull run in gold prices came to an abrupt halt early this year and gold prices crashed from a record high of ₹56,200 per 10 grams last August to ₹46,446 on Monday. The excess liquidity sloshing around in the global economy has pulled down gold prices and expectations are that it may go down further till inflation starts worrying central banks.

PE Mathai, CEO, Muthoottu Mini Financiers said all its gold loans come with mark-to-market limit, which gets triggered when gold loan prices go below a certain point.

“The ultimate aim is not to auction the gold. We contact the customer if prices are coming down to either remit part-payment or bring additional security or close the account,” he added.

For about 15 products, it has also reduced the tenure to 90 days from the earlier 270 days. For the remaining, the tenure was maintained at 270 days but the LTV was brought to 50 to 55 per cent, said Mathew Muthoottu, Managing Director, Muthoottu Mini Financiers.

The organised gold loan books of banks and NBFCs are expected to grow 17 per cent to ₹4.05 lakh crore in FY21 against ₹3.45 lakh crore logged in the previous year.

Customer sentiments

VP Nandakumar, Managing Director, Manappuram Finance said a relatively sharp decline in gold price has affected sentiments and some customers have faced challenges when resetting or renewing their loans at the new LTV which would be lower than their earlier loan.

“We bear the gold price risk for about three to six months versus about 12 to15 months for the other players. That’s because with short term gold loans, the process of recovery through auctions can happen within one quarter of the default,” he added.

PR Somasundaram, Managing Director, World Gold Council said the fall in gold prices will not lead to these loans becoming an NPA as there is enough headroom for the lenders to recover their money.

Umesh Mohanan, Executive Director and CEO, Indel Money said as per the contract with the borrowers, whenever the total outstanding of the loan reaches 90 per cent of the current metal value, a margin call can be made; if it touches 95 per cent, then an auction of the collateral can be a remedy.

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BharatPe launches instant liquidity facility for SME

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With its focus on small and medium enterprises, BharatPe on Friday announced the launch of a new lending product that would provide instant liquidity to distributors, wholesalers, traders and dealers.

Called Distributor to Retailer (D2R) Finance, it would offer collateral-free loans of up to ₹50 lakh for a period of seven days to 30 days.

BharatPe raises $108 million in Series D equity round

“BharatPe has already facilitated D2R loans of ₹50 crore in the first month of launch and aims to facilitate disbursal of ₹2,500 crore via this new product in the next fiscal year 2021-22,” it said in a statement.

The facility is live in 10 cities and has close to 2,000 SME registrations in just one month of launch, it further said, adding that the loan is available at a low interest rate, with zero processing fees and involves minimal paperwork.

“We aim to provide this offering in all 100 cities where we are present,” said Suhail Sameer, Group President, BharatPe.

BharatPe, third-largest player in UPI payment acceptance space

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SC Verdict: Additional relief of about ₹7,000 crore to borrowers may have to be given

Banking & Finance

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The Centre may have to allocate an additional ₹7,000 crore as relief to borrowers following the Supreme Court verdict on loan moratorium on Tuesday, according to analysts.

“As per our estimates, the compounded interest for six month of moratorium across all lenders is estimated at ₹13,500 to ₹14,000 crore,” said Anil Gupta, Vice President – Financial Sector Ratings, ICRA.

Pointing out that the Centre has already announced relief for borrowers having borrowings up to ₹2 crore, which was estimated to cost about ₹6,500 crore to the Exchequer, Gupta said, “With announcement of waiver for all borrowers, the additional relief of about ₹7,000 crore to ₹7,500 will need to be provided to borrowers.”

Mahesh Misra, CEO, IMGC welcomed the Supreme Court judgement and said, “The court has limited its scope to judicial review and not opined on the merits of the policy. Any other outcome would have created a potential moral hazard and also penalized conscientious borrowers. This creates the right precedent as well.”

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KVGB inks pact with Our Food for arranging processing units to farmers

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The Dharwad-headquartered Karnataka Vikas Grameena Bank (KVGB) has signed memorandum of understanding (MoU) with Our Food Pvt Ltd, Visakhapatnam, for arranging cost-effective processing units to farmers through the bank loan.

A statement by the bank said on Wednesday that the vendor will ensure supply, delivery and installation of high-quality, standardised and branded equipment / machinery as per the requirement of the farmer / farmer franchisee and also will ensure purchase of processed products.

After executing the MoU on Wednesday, P Gopi Krishna, Chairman of KVGB, emphasised the need for having MoUs with big companies for technology and marketing. He observed that the lack of such agreements will create problems for marketing agricultural produces. Through the bank loan Our Food Pvt Ltd not only assists in setting up processing units, but also procures the processed materials and sells them to bulk buyers, he said, and stressed the need for involving women self-help groups in food processing and marketing.

Speaking on the occasion, Bala Reddy, Managing Director of Our Food Pvt Ltd, said that the company, in association with the bank, motivates the unemployed, educated youth with an entrepreneurial mindset in rural areas to establish processing units as per the local requirements.

The company purchases the processed product from them and sell the same through its tech platforms. By doing so, the farmer-partners get between 20 per cent and 25 per cent more than the market rate, he said.

Stating that the company, in association with KVGB, is deepening its roots in northern Karnataka, he said: “Our goal is no raw produce should be sold by the farmers. They must instead process their produce and sell it to fetch better prices.”

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Financial planning for a family of 4

Personal Finance

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Sankaran (42) and his wife Revathi (39), parents of 2 children, work in the IT industry. They want a financial plan to achieve their goals in future. They had prioritised their key goals as follows.

1. Education fund for kids, aged 9 and 4.

2. House at the earliest, preferably a 3-BHK in Chennai at a cost of ₹1.2 crore

3. Investing for retirement

4. New car at an additional cost of ₹8 lakh in 2022

5. Protection of family from unfortunate events

The family’s cash flow and assets are as follows:

 

All the investments in real estate were made based on third party compulsion in the last 4 to 5 years. They had not seen their assets appreciate considerably. They had sought unit-linked insurance policies on the assumption that they were investing in mutual funds. They had started to invest in mutual funds two to three years ago. With home loan interest rates at attractive levels and surplus cash available in hand, the couple wanted to buy a house.

Sankaran did not exhibit confidence of getting any substantial increase in his salary in the coming years. Revathi was comfortable continuing with her employment.

 

We reviewed their investments and recommended the following.

a) Build up ₹ 6 lakh towards an emergency fund

b) Set up protection by buying term insurance for Sankaran for a sum assured of ₹1 crore and Revathi for ₹1 crore without riders.

c) Buying health insurance for the family for a sum insured of ₹10 lakh. Though the family is covered for medical emergencies through employer-provided group insurance, these covers had many restrictions along with low sum insured. The health cover was also insufficient considering their life style

d) Keep track of spending for the next one year to ascertain their actual monthly expenses. The expenses may have come down because of the Covid lockdown and that they could go back to their old spending habits once life returned to normal.

e) Restructure their holdings in unit-linked insurance plans within the next one year, mainly to reduce the annual commitment. This would reduce the premium commitments from ₹ 6 lakh per annum to ₹1 lakh per annum

f) Sell two of their plots of land to partially fund the house purchase, so that their leverage could be restricted and an unproductive asset monetised. This would help them to buy a house for ₹1.2 crore while also restricting the loan component to ₹60-70 lakh.

With adequate contingency measures in place, reduced premium commitments and surplus available as cash, they were better placed to service the housing loan without additional financial burden. They were also advised to reduce expenses wherever possible to foreclose the loan in the next 8 to 10 years.

Education goal

Towards elder son’s education, they would require about ₹35 lakh in the next nine years. They would also require ₹57 lakh for the younger son’s education. (Current cost for education is presumed at ₹15 lakh with inflation assumed at 10 per cent).

At 11 per cent expected return, they would need to invest ₹14,000 and ₹16,000 per month in large-cap mutual funds to fund these two education goals.

Retirement goal

We recommended that they invest ₹25,000 in large-cap mutual funds towards their retirement corpus. With an expected return of 11 per cent over the next 20 years, they would be able to achieve a corpus of ₹2.16 crore. Along with regular PF and NPS accumulations that they were making, they should be able to reach a sizeable corpus towards retirement.

Other facets

To become successful investors, we encouraged them to keep an ‘Investing Behaviour Journal’ to keep a record of their emotions as and when there were wild swings in the markets either up or down.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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NPA risks easing for largest PSU banks but shortage of funds could hit credit growth

Banking & Finance

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State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India, have all reported an improvement in their asset quality in the first nine months of the current fiscal year.

Risk of a sharp deterioration in the asset quality of five of the largest PSU banks now seems to be abating with the economic recovery picking up pace, said Moody’s Investors Service in a recent note. However, despite this, the rating agency cautioned that such public sector lenders are likely to remain starved of sufficient capital to absorb unexpected shocks and support credit growth. Banks were expected to see a sharp rise in NPAs last year when the pandemic slowed the Indian economy down but despite the economic slump, the asset quality of banks has seen mild improvement.

Risks reducing for banks

State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India, have all reported an improvement in their asset quality in the first nine months of the current fiscal year. “The gross NPL ratios of the five banks declined by an average of around 100 basis point as of the end of 2020 from a year earlier,” Moody’s said. The estimates even account for loans that have not yet been declared NPAs owing to the Supreme Court order. Lenders are also drawing comfort from the provisions made by them against the expected jump in NPAs.

During the pandemic, various measures were undertaken to support borrowers. This, according to Moody’s has largely helped limited impact of the pandemic on the banks’ asset quality. These measures included loan repayment moratorium, loan restructuring, monetary easing, liquidity infusion, Capital infusion into public sector banks, lowering LCR, among others. “As of the end of December 2020, the five banks restructured 0.7%-2.6% of gross loans, less than our expectations, as the impact of the pandemic on borrowers was not as severe as we had anticipated,” the report said.

Dearth of capital to result in uneven recovery

Despite the green shoots, capital shortage remains a risk. “The banks will continue to face shortages of capital to both absorb any unexpected stress and support credit growth, with high credit costs continuing to suppress profitability,” they added. This shortage in the capital could result in an uneven recovery for the Indian economy with various vulnerable industries facing a setback. The banks’ asset quality can also deteriorate more than anticipated, with exposures to the MSMEs, in particular, posing risks, Moody’s said.

The government planned to infuse Rs 20,000 crore into public sector banks this fiscal year and another Rs 20,000 in the next financial year. While the capital infusions will help the banks meet Basel capital requirements, it will not boost credit growth, according to the report. This would result in some banks turning to the market. Canara Bank and PNB have already raised some capital from equity markets.

On the other hand, in an earlier note, Moody’s said that private sector banks have raised sufficient capital buffers to tide through any hiccups going forward. Asset quality of private lenders remains supported by the same measures that have aided their public sector peers.

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Balance transfer: HFCs want prepayment penalty re-introduced

Banking & Finance

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Mid-sized and small housing finance companies (HFCs) want the Reserve Bank of India (RBI) to allow them to impose prepayment penalty on the home loans that get transferred to banks within two years of disbursement.

Low interest rates quoted by banks vis-a-vis the aforementioned HFCs is triggering balance transfer of home loans from the latter to the former.

Moreover, direct sales agents (DSAs), in their eagerness to earn commission, are also encouraging HFC customers to shift their loans.

Kotak Mahindra Bank trims home loan interest rates to 6.75%

So, these HFCs have become a favourite hunting ground for banks to expand their home loan portfolio. HFC customers are seen as low hanging fruit by banks.

Balance transfer, a genuine issue

Subramanian Jambunathan, MD & CEO, Shriram Housing Finance, emphasised that balance transfer is a genuine issue, which has become bigger than what it used be six months back.

“SBI to offer home loans starting from 6.80% against 6.90% earlier”

“And, I think, somewhere the regulator must realise that we bring in the customers into the financial system. So, we take the risk. We give the customer his first loan at a time when none of the other lenders are willing to give him a loan…and then somebody like a nationalised bank comes and offers the customer loan at much lower rate of interest and takes him away,” he said.

Jambunathan observed that transfer of home loans within two years of disbursement is not good for the HFC segment because good customers keep going away and the risky ones continue on the books.

So, not only is HFCs’ risk increasing because the good customers go away, it is also unfair to them that other lenders (banks) are allowed to take over their customers.

“I think the only solution to this is to re-introduce the prepayment penalty, in case a borrower exits an HFC before a certain period of time (say, two years),” Jambunathan said.

The issue of prepayment penalty has been discussed at various HFC fora, he added.

The prepayment penalty should cover HFCs costs on the customer as they spend a lot of time and effort in doing credit assessment of the first-time home loan borrowers.

Banks turn aggressive on home loans

Motilal Oswal Financial Services Ltd (MOFSL), in its research report “A Home Run!”, noted that over the past two years, large banks like State Bank of India, ICICI Bank, and Axis Bank have been aggressive in home loans. It was of the opinion that given the lack of growth in corporate lending, these banks are likely to remain aggressive in the foreseeable future.

However, HFCs with strong parentage are able to compete effectively with banks given the sharp decline in their incremental cost of funds (three-year borrowing at about 5 per cent). Given the huge scope of the market, these players have enough opportunity to grow despite the intensifying competition.

“While HFCs are expected to lose market share to banks on the whole, the top two HFCs (HDFC and LIC Housing Finance) should maintain or gain market share,” the report said.

In a report last month, ICRA said the overall on-book housing loan portfolio of HFCs and non-banking financial companies (NBFCs) declined marginally in H1 (April-September) FY2021 owing to the Covid-induced disruptions in the market. Although the pace of growth of banks also declined in H1 FY2021, it remained higher than HFCs, partly supported by portfolio buyouts.

The credit rating agency has estimated the total housing credit at ₹21.3 lakh crore as on September 30, 2020.

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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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Yes Bank won’t dilute equity soon, BFSI News, ET BFSI

Banking & Finance

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Yes Bank will not be raising capital via equity soon and the recent board approval is only part of an enabling provision to reduce its time-to-market in future, the bank’s MD & CEO Prashant Kumar, said. He added that the bank’s deposits will cover its loan book by end-March despite growth in advances.

“We expect the credit-deposit ratio to be 100% by the end of March from 116% at the end of December,” Kumar said. He said that the bank’s strategy is to use its digital capability to grow retail deposits and loans. According to its December quarter results, the bank’s capital adequacy ratio is 19.6%, while common equity tier I capital is 13.1%, “We are well-capitalised but we decided to go through the process, which will also require a shareholder approval, so that we are in readiness,” said Kumar.

The private bank, which was revived by an RBI-initiated resolution process, had seen a third of its deposits being withdrawn by wary customers before the central bank placed a moratorium on withdrawals. Since then, deposits have bounced back growing 36% in the first nine months of the fiscal. The bank on Friday reported a profit of Rs 151 crore in the third quarter as against a loss of Rs 18,560 crore in the year-ago period.

The bank also said that it has received more information on accounts linked to whistleblower allegations. “All the loans are fully provided for and there will not be any financial implication even if any more loans are declared as fraud,” said Kumar. He said that Cox & Kings, which has been in the news for action by authorities, has already been declared a fraud.

The bank had earlier sought approval from the RBI for a ‘bad bank’ that will take over troubled loans and is awaiting a response from the regulator. While the bank has a Rs 1,000-crore exposure to DHFL, it does not expect any major recovery this year. “I do not expect the resolution will be implemented before March 31. Besides, we are unsecured lenders and don’t know how much we will get,” he said.

“Our focus is on retail and MSME. We have disbursed almost Rs 12,000 crore in the third quarter and this path would continue,” said Kumar. He said the bank was rationalising expenditure with operating expenses reduced by 13% and more branch mergers in the offing. The bank has already converted some of its rural branches into business correspondent centres. To augment fee-income, the bank has tied up with HDFC Life and SBI Life for distribution on the life insurance side and ICICI Lombard and SBI General on the non-life insurance side.



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