Should you go for Shriram Transport FDs that offer up to 7.5% interest?

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Shriram Transport Finance Company (STFC) revised the interest rates on its fixed deposits last month. The company now offers 6.5 per cent and 6.75 per cent per annum, respectively on its one-year and two-year deposits. Three-year deposits can fetch you 7.5 per cent interest per annum. Senior citizens get an additional 0.3 per cent over these rates. Besides, the company offers an additional 0.25 per cent on all renewals.

At the current juncture, the STFC FD rates seem better than those offered by most banks and other similar-rated NBFCs. Though the company has never defaulted on its deposits, its current financials indicate some near-to-medium term stress in operations. Hence, investors with a high-risk appetite who seek additional returns, can invest in this FD. Do note, that unlike FDs offered by banks, those by NBFCs are not covered by the DICGC’s ₹5 lakh cover.

Investors can choose from monthly, quarterly, half yearly or annual interest payout options or the cumulative option where interest gets compounded and is paid at the time of maturity.

The minimum deposit amount is ₹5,000 and in multiples of ₹1,000 thereafter.

Investors who opt for the online route can choose from additional tenure deposits such as 15-month and 30-month deposits. The company offers 6.75 per cent and 7.5 per cent, respectively on such tenures, same as that offered on its two and three year deposits, respectively.

How they fare

As interest rates have bottomed out, rates are likely to inch up in the next two or three years. Hence, at the current juncture, it will be wise to lock into deposits with a tenure of one or two years only.

Currently banks (including most small finance banks) offer rates of up to 6.35 per cent per annum for one-year deposits and up to 6.5 per cent for two-year deposits. Suryoday Small Finance Bank however, offers 6.5 per cent on its one-to-two year deposits (both inclusive). While the rates offered by STFC are at par with those of Suryoday on the one-year FD, the former offers superior rates on deposits of other tenures. The rates on STFC’s deposits are also superior to those offered by similar-rated NBFCs.

The company’s FDs are rated FAAA(Stable) by CRISIL and MAA+ (Stable) by ICRA. Other AAA-rated NBFCs offer interest rates in the range of 5.25 to 5.7 per cent on their one-year deposits and up to 6.2 per cent on their two-year deposits.

About STFC

The company has a 42-year old track record of providing finance for commercial vehicles, predominantly in the high-yielding pre-owned HCV segment.

As of June 2021, its assets under management (AUM) totalled ₹ 1.19 lakh crore (up 6.75 per cent y-o-y ). About 90 per cent of the AUM was towards pre-owned vehicle loans and the rest was towards new vehicle loans (6 per cent), business loans (1.6 per cent), working capital loans (1.9 per cent) and other loans (0.1 per cent).

STFC has a strong branch network of 1,821 branch offices and 809 rural centres covering all states.

Given its heavy reliance on fleet and transport operators (HCV and construction equipment comprise about 48 per cent of its AUM and medium and light commercial vehicles constitute another 25.3 per cent), the company saw deterioration in asset quality in the recent quarter on account of lockdowns. In the June 2021 quarter, its gross Stage-3 assets worsened to 8.18 per cent from 7.06 per cent in the March 2021 quarter.

Even gross Stage-2 assets, which may slip to Stage-3 in the coming quarters, spiked to 14.53 per cent of the AUM compared to 11.9 per cent in the March quarter.

However, the company has a decent provision coverage ratio of 44 per cent and about 10 per cent for Stage 3 and Stage- 2 assets, respectively. Its is due to the spike in provisioning (up 35 per cent y-o-y) that the company saw a 47 per cent (y-o-y) drop in its net profit to ₹170 crore in the June 2021 quarter.

Besides, its proven past track record, strong capital and liquidity position offer additional comfort.

The company’s Capital to Risk Weighted Assets Ratio (CRAR) stood at 23.27 per cent in the June 2021 quarter and it has a positive asset liability mismatch in all buckets—ranging from one month to 5 years.

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Mahindra Finance posts Q1 net loss of ₹1,573 crore

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Amidst Covid related stress in rural and semi-urban markets, Mahindra & Mahindra Financial Services reported a consolidated net loss of ₹1,573.4 crore in the first quarter of the current fiscal against net profit of ₹432.12 crore in the corresponding period in 2020-21.

Total income declined 16 per cent to ₹2,567 crore during the quarter ended June 30, against ₹3,069 crore in the corresponding quarter last year.

To cover any contingencies due to the Covid-19 pandemic, the company carried an additional overlay of ₹2,709 crore (pre-tax) in the standalone financial statements and ₹2,808 crore (pre-tax) in the consolidated financial statements as of June 30.

Noting that the second wave of Covid had a severe impact on the semi-urban and rural markets, where it has major operations, Mahindra Finance said for the first quarter , disbursements dropped 35 per cent on a sequential basis to ₹3,872 crore, though it grew 42 per cent on a year-on-year basis.

Gross non-performing assets were higher at 15.5 per cent as on June 30, compared to nine per cent as of March 31, 2021.

“The company believes that the elevated NPAs are not a reflection of any credit risk increase but are purely delays caused by liquidity situation. Our experience in the past has always shown a return to normalcy by these segments of customers once their earnings stabilise,” Mahindra Finance said in a statement, adding that as the market conditions normalise over the next few quarters.

During the first quarter, it implemented resolution plans to relieve Covid -19 related stress of eligible borrowers in 59,455 loan accounts with a total outstanding of ₹2,172 crore.

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India’s risk-averse lenders are emerging as one of the biggest hurdles to its recovery, BFSI News, ET BFSI

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India’s risk-averse lenders are emerging as one of the biggest hurdles to the speed of the nation’s recovery from the pandemic-induced downturn, as they hold back credit when the economy needs it the most.

Loans to companies and individuals has been growing at a subdued 5.5%-6% in recent months, which is half the pace seen before the pandemic struck, Reserve Bank of India data shows. The nation’s biggest lender State Bank of India wants to nearly double its credit growth rate to 10% in the year started April 1, but is willing to miss the goal.

“It is a very fragile situation,” Dinesh Khara, chairman of SBI, said after reporting earnings for the fiscal year ended March. The bank would not “compromise” on asset quality to achieve targets, he said.

Khara’s comments underline the biggest obstacle to both credit off-take and economic growth, pegged at 9.5% this year, already reduced from the central bank’s previous forecast of 10.5% and following an unprecedented contraction last year. Banks’ risk aversion — or the fear of soured loans jumping in a tough economic environment — could slow the economy’s recovery further, according to analysts, including those at the RBI.

“Credit is a necessary and probably most important ingredient for economic growth,” according to S. S. Mundra, a former deputy governor of RBI, who estimated that the multiplier effect of credit on nominal gross domestic product growth is 1.6 times.

It doesn’t help India’s case that it’s already home to one of the biggest piles of soured loans among major economies. And add to that a crisis in the shadow banking sector, which culminated in the rescue of two lenders and bankruptcy of two more over the past couple of years.

Corporate willingness for new investments is low, according to the Centre for Monitoring Indian Economy Pvt., with capital expenditure declining. While companies have posted bumper profits mostly on the back of widespread cost cutting, most have used the extra funds generated to pay down bank loans.

India’s risk-averse lenders are emerging as one of the biggest hurdles to its recovery

According to research from SBI, where economists analyzed the top 15 sectors and a thousand listed companies, more than 1.7 trillion rupees ($22.8 billion) worth of debt was pared last year. Refineries, steel, fertilizers, mining and mineral products as well as textile companies alone reduced debt by more than 1.5 trillion rupees, with the trend continuing this year, the bank’s chief economist Soumya Kanti Ghosh wrote recently.

“Any meaningful recovery beyond a 10% growth in credit demand will require a substantial turn in the private capex cycle, which still seems sometime away as corporates are focused on deleveraging,” said Teresa John, economist at Nirmal Bang Equities Pvt. in Mumbai. She forecasts GDP growth of 7% this year, which is at the lower end of a Bloomberg survey with consensus at 9.2%.

What Bloomberg Economics Says…
“A further slump in credit growth means that the RBI is likely to allow some more time for credit recovery to take shape before its begins to unwind its stimulus measures.”

— Abhishek Gupta, India economist

Consumers too are repairing their finances, which bodes ill for overall demand for goods and services as well as retail loans, and in turn economic growth. The current recovery is likely to be less steep than the bounce that unfolded in late 2020 and early 2021, according to analysts at S&P Global Ratings.

“Households are running down savings,” the S&P analysts wrote. “A desire to rebuild their cash holding may delay spending even as the economy reopens.”

And while Covid-19 relief measures may provide banks some reprieve, the need to raise capital will remain high once virus related stress start to emerge on their balance sheets.

“Indian banks’ challenges posed by the coronavirus pandemic have increased due to a virulent second wave,” Fitch Ratings’ Saswata Guha and Prakash Pandey said this week, as they cut India’s growth forecast by 280 basis points to 10%. That underlines “our belief that renewed restrictions have slowed recovery efforts and left banks with a moderately worse outlook for business and revenue generation.”



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Q1FY22 results: Banks likely to report muted earnings, some stress in asset quality

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Banks are likely to report muted earnings with pressure on asset quality for the first quarter of 2021-22, reflecting subdued economic activities due to localised lockdowns amidst the second wave of the pandemic.

A number of banks have already released provisional data on key business parameters for the quarter-ended June 30, 2021, that reflect muted growth in advances and robust increase in deposits.

Private sector banks are set to release their first quarter results in coming weeks. HDFC Bank will report its results on July 17, followed by others like Axis Bank and ICICI Bank.

Non-food bank credit growth slowed to 5.9 per cent in May compared with 6.1 per cent in the year-ago month, data from the Reserve Bank of India revealed.

Brokerage views

“We believe the first quarter of 2021-22 to be a quarter of consolidation as the momentum in recovery gained over the fourth quarter of 2020-21 was impacted by the second Covid wave, with the asset quality outlook deteriorating once again. Business activity was impacted over April and May 2021, and localised lockdowns were seen across most States. As a result, systemic growth moderated to 5.8 per cent as of June 18, 2021,” said a recent report by Motilal Oswal on first quarter earnings of banks.

“The second Covid wave, coupled with localised lockdowns, is likely to impact asset quality performances of banks,” it further said.

ICICI securities in a recent report noted that lead indicators point towards increased stress in the near term.

“…according to various management commentary, there has been a decline in collections by 2 per cent to 5 per cent range in April and May 2021 due to partial lockdowns,” it noted.

The RBI’s Financial Stability Report of July 2021 has noted that gross non-performing asset (GNPA) ratio of scheduled commercial banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario.

While the impact of the second wave of the pandemic is likely to be lower, restructuring requests are expected to be higher this year in the absence of a moratorium.

However, most experts believe that banks are in a better position to tide over the economic slowdown this time than last year.

“We believe that the banks are relatively better-placed to handle the stress from the second wave and hence we continue to maintain a stable outlook on the sector,” said Anil Gupta, Vice-President – Financial Sector Ratings, ICRA Ratings, in a recent report.

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Early identification of stress, capitalisation augur well for banks, BFSI News, ET BFSI

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Somasekhar Vemuri, Senior Director, CRISIL Ratings

Banks have improved the granularity of their loan books by focusing more on retail asset classes and reducing potential asset-quality shocks due to defaults by large entities. The share of medium and large industries in non-food credit of banks fell from ~40% in fiscal 2012 to ~27% in fiscal 2020, while that of personal loans rose from 18% to 28%.

While granular loans to retail borrowers and micro, small and medium enterprises (MSMEs) can result in elevated stress during the pandemic, given the unprecedented impact on household incomes and small businesses, policy mitigations announced would limit the impact to some extent.

Rama Patel, Director, CRISIL Ratings
Rama Patel, Director, CRISIL Ratings

Crucially, measures such as moratorium on loans, relief in interest on interest, one-time debt restructuring, and emergency credit line guarantee schemes have thrown many a lifeline to businesses and households. They also helped banks, especially those with diversified portfolios, thwart significant slippages.

The other major reason for systemic resilience is capital infusion. Public sector banks (PSBs) have raised ~Rs 3.4 lakh crore of equity in the past five years, bulk of it from the government.

That has shored up systemic capital adequacy ratio to 14.7% last fiscal and further to 15.8% as of September 2020 – almost on a par with advanced economies such as the US (15.9%) and South Korea (15.3%). Private sector banks are in a better position, reflected in their capital adequacy ratio of 16.7%, compared with 13.1% for PSBs as of March 2020.

To be sure, NPAs would rise in the pandemic aftermath and necessitate high capitalisation levels.

Robust capitalisation facilitates timely recognition and quick resolution of pandemic-related stress and faster recovery of credit growth. The different trajectories of banking systems in the US and the euro area after the GFC demonstrate this. Higher recapitalisation of US banks compared with the euro area enabled faster resolution of stress and facilitated quicker recovery of credit growth after the GFC in the US.

While it is natural for credit growth to be muted during a crisis due to lower demand and risk aversion, it is important that the pace improves once uncertainty abates and demand returns.

There are two reasons for this. One, bank credit growth significantly influences the growth trajectory of a developing country like India where credit to the private non-financial sector is underpenetrated at ~58% of GDP, compared with over 150% in the US, euro area, South Korea or even China.

Two, it is an essential condition for banking system resilience. Banks need to grow and diversify their loan books to enhance profitability that, in turn, is the key to building capital buffers against future risks and growth. Profitability can be sustained only through credit growth, backed by robust risk management and appropriate pricing.

As the pandemic-related stress continues to unfold, the improved resilience of Indian banks will be tested. A continued focus on shoring up capital to withstand asset-quality pressures will pave the way for credit growth as recovery gathers pace.

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DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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