Do it yourself

Thursday, January 17, 2019

MSME Credit conundrum

Some food for thought

"Oh, how fine it is to know a thing or two."

—Moliere (French Playwright, 1622-1673)

Word for the day

Ratiocinate (v)

To reason; carry on a process of reasoning.

First thought this morning

Surprisingly, the mainstream media, especially business media, has started discussing the Union Budget for FY20. Traditionally, the outgoing governments have usually refrained from presenting a full budget during the election years. The idea behind this practice is to maintain a semblance of ethics in politics. The incumbent government is mandated to rule for only five years (in the current case May 2014 to April 2019). Ethically, it should not commit the next government to any policy measure, which is not urgent and related to national security or international relations.

No matter how confident the incumbent regime is about its victory in the forthcoming elections, it should refrain from breaking this set tradition for whatever reason. And there is absolutely no reason to believe that the incumbent government is going to break this tradition when the finance minister rises to seek the vote on account and approvals for demand for grants on 1 February 2019.

The media conjecturing therefore sounds mostly undesirable and speculative.

However, in case the government does decide to break the tradition and present a full budget for the next year, it would be interesting to see whether the Finance Minister will have the courage to raise taxes to meet the tighter fiscal targets for FY20, or he will loosen the purse strings keeping the elections in sights, and thus squandering the four years of painful fiscal consolidation.

Chart of the day

MSME Credit conundrum

Recently, RBI raised concerns over deterioration in the asset quality of loans given to marginal and small entrepreneurs under the PM MUDRA Yojna (PMMY).

As per media reports (for example see here), RBI has cautioned the finance ministry that the scheme might turn-out to be the next big source of NPAs, which have plagued the banking system for past many years. As per RBI bad loans under PMMY have already risen to Rs 11,000 crore.

As per the annual report of PMMY, 2017-18, total disbursements under the scheme stood at Rs 2.46 trillion in FY 18. Out of this, 40 per cent were disbursed to women entrepreneurs and 33 per cent to social category.

Interestingly, the observations of banking regulator come at a time, when it has formed an expert committee to—

(a) Review the current institutional framework in place to support the MSME sector;

(b) Study the impact of the recent economic reforms on the sector and identify the structural problems affecting its growth;

(d) Study the global best practices with respect to MSMEs and recommend its adoption in India, wherever appropriate;

(e) Review the existing MSME focused policies and its impact on the sector;

(f) Propose measures for leveraging technology in accelerating growth of the sector; and

(g) Suggest long-term solutions for the economic and financial sustainability of the MSME sector in India.

While expressing concerns about the deteriorating health of loans to MSME sector, RBI has recently taken steps to facilitate meaningful restructuring of MSME accounts that have become stressed. Under the latest scheme, RBI has decided to permit a one-time restructuring of existing loans to MSMEs that are in default but ‘standard’ as on January 1, 2019, without an asset classification downgrade.

All accounts with a gross exposure upto Rs25crores as on 1 Januatry 2019 are eligible for the scheme. The restructuring is to be implemented by March 31, 2020. The banks have been directed to make a provision of 5% in addition to the provisions already held, in respect of accounts restructured under this scheme.

Prima facie, there appears to be some incongruence in the RBI's recent words and actions in respect of overall MSME loans. It is distinctly possible that RBI has taken some decision that may not be prudent purely from the regulatory viewpoint. These might have been taken to suit the political expediency of the government.

In this context, it is pertinent to take note of December 2018 report of CRISIL titled MSME Pulse. The report highlights a number of interesting data points.

The most disturbing data point for me is that the industry NIMs for MSME credit range between 4-7%. Given that this segment has historically had a lower credit cost (ranging between 1-2%), the pricing of loans to MSME seems exorbitant and unsustainable. The question is how the balance will get restored? Will credit cost rise or the NIMs come down? We would know this in couple of years.

Wednesday, January 16, 2019

Private consumption trends and investment strategy

Some food for thought

"In everyone's life, at some time, our inner fire goes out. It is then burst into flame by an encounter with another human being. We should all be thankful for those people who rekindle the inner spirit."

—Albert Schweitzer (German Theologian, 1875-1965)

Word for the day

Phatic (adj)

Denoting speech used to express or create an atmosphere of shared feelings, goodwill, or sociability rather than to impart information.

First thought this morning

Very few political analysts and observer might want to dispute the fact that the Indian National Congress acquired a mostly feudal character during Mrs. Gandhi's regime, and since then it has never attempted to change its approach to Indian politics.

"We did this for you" and "We gave you this" has been the common refrain for all their leaders in past five decades.

In their feudal spirit, the Congress leaders have been rather impudent in undermining the authority of constitutional, judicial and social institutions. In their unabashed sense of entitlement, they have been rejecting with impunity anything and everything that appeared challenging their feudal lordship.

Such overwhelming has been the influence of the Congress leadership on socio-political system of India that political forces which sought to challenge the Congress hegemony by putting forward an alternative agenda of social justice and inclusion, have all turned more feudal than Congress, in their pursuit of political power.

Performance of the incumbent BJP led government must be evaluated in this context, in my view. We the People of India must enquire "what has the incumbent government done to make the structure of our constitutional democracy, democratic?"

At the risk of being labeled seditious and unpatriotic, I would like to ask the Home and HRD Ministers of the country, whether they made any attempt to meet JNU students & others to understand their viewpoint and reasons for seeking disintegration of India.

They took the convenient road of silencing the voices of dissent by putting them in jail. That is what the imperial British and Feudal Congress would do. What is the difference then? If the establishment cannot bring around the university students in New Delhi, how does it propose to deal with armed extremists in North, North East and Central India. Eliminating them all is certainly one solution. But is it the best solution of all?

Chart of the day

Private consumption trends and investment strategy

The latest available data of the consumption profile of Indian consumers highlights a number of interesting aspects. (All data in current prices)

The following are some of the points that I found interesting in this data:

(a) Basic necessities (Food, Shelter and Clothing) accounts for more than 50% of the private consumption. However, in five year period from FY12 to FY17, the spending on basic necessities has come down from 56.3% in FY12 to 53.4% in FY17. Almost all of this reduction has come from housing and related spending. This is little counterintuitive given the strong growth reported in availability of housing, electricity, gas and water connections, rent & energy inflation etc.

(b) There is significant reduction in expenditure on consumption of alcohol, tobacco and other narcotic substances.

(c) There is 20% rise in spending on health. It would be interesting to further examine this trend. Is this rise due to better affordability and awareness of household; or is it due to higher inflation in cost of healthcare; or is it due to deterioration in public health services; or is it due to rise in incidence of diseases; or a combination of all these and other factors.

(d) Expenditure on Education has grown by 10%. Given the changes in demography in favor of younger people, this sounds inadequate. Intuitively, we know that the quality of public institutions has deteriorated over past many years. The education inflation has also been significantly higher. Like health, this also needs deeper inquiry.

(e) Transport continues to almost one sixth of private consumption. This indicates that the public transport is seriously lacking, both in inefficiency and reach.

(f) Spending on recreation, culture (festivals etc.) and eating out has gone down by 20%. This should ring alarm bells in ears of public policy makers. In a society where the individual stress is rising, people cutting budget for recreation and cultural occasions, cannot be good.

(g) The spending on communication is almost stagnant. This is also counterintuitive to the massive expansion of telecom network and rise in number of subscribers. I find it hard to believe that the cost of communication has fallen so much that offsets the entire expansion.

(h) The asset creation at household level continues to be non-priority. People are spending more than 90% of their consumption budget on services and non-durable goods. Expenditure on buying durable goods has fallen further by 10%, from a low of 3.1% in FY12.

In terms of investment strategy, one would need to evaluate the following:

(1) Are we building a higher than nominal GDP growth in consumer durables, alcohol and tobacco?

(2) Should we allocate more to health sector?

(3) Are utilities like telecom, gas and power truly growth stories in Indian context.

(4) Should continue to be overweight on already expensive staples, FMCG and dairy products?

(5) Should we rationalize "festival demand" in our forecasts?

Tuesday, January 15, 2019

It may not be over soon

Some food for thought

"God is a challenge because there is no proof of his existence and therefore the search must continue."

—Donald Knuth (American Scientist, Born 1938)

Word for the day

Impresario (n)

A person who organizes or manages public entertainments, especially operas, ballets, or concerts.

First thought this morning

An analysis of the speeches made by BJP top leadership in past six months highlights two clear trends:

(1) BJP leadership is deliberately projecting Rahul Gandhi (and his family) as primary opponent in the next general election. They are totally dismissive of the regional parties in their public discourse. The strategy seems to make it more of a presidential contest between the Congress President and the Prime Minister.

The strategy may be flawed for two reasons — (a) Post recent assembly elections, Rahul Gandhi may not be as weak as he appeared a year back; and (b) by focusing too much on Gandhi family, BJP may be providing too much leeway to the regional parties in states where the Congress is not the principal opponent.

(2) BJP leadership appears totally unfocused insofar as their agenda is concerned. In fact, it has already allowed Congress and other Regional parties to dictate the agenda.

BJP leadership is focusing on perils of Congress returning to power. In the process it is undermining its own claim of having already decimated the Congress party.

Secondly, they are focusing on 50yr of Congress vs. 5Yrs of BJP. Many of their speeches imply that most of the targets have either been achieved or put in process to be achieved in next 2-3years (Power for all, Sanitation for all, Cleanliness, Roads everywhere, financial problems, tax reforms, ease of doing business, jobs, clean energy, inflation under control, housing for all, social justice, etc.) They are rarely seen promising new things. Which voters may interpret to mean that they are seeking votes on the basis their past performance and not on the basis of any future promise. Voters seldom like this proposition. They want more sops and facilities.

Besides, there is total omission of long standing BJP agenda - Article 370, Uniform Civil Code and Sri Ram Mandir in Ayodhya. Traditional RSS and VHP supporters may be little disconcerted with this.

Chart of the day

It may not be over soon

With each passing day, evidence of slowdown in global economy is increasing. The point that most investor must be pondering over is "whether this slow down is a normal cyclical phenomenon after many years of expansion; or something larger?"

Many experts have suggested that this slow down is much larger than merely a cyclical economic phenomenon, which usually occurs as larger economies achieve full employment.

For past 10years, monetary & fiscal authorities across the world could avoid a deep recession type condition, by using non-conventional policies. This trick successfully, inter alia, —

(a) Prevented the collapse of global financial system;

(b) Supported the aggregate demand by not letting the excessive liquidity (QE) cause inflation;

(d) Promoted realignment of global economic powers (G-20 instead of G-3 and G-7) for greater economic cooperation.

Now after a decade, as the central banks and fiscal authorities are seeking to wind up the non-conventional stimulus, it appears that the stimulus might have been just a piece of cloth that kept the hole blocked so that the stinking drain water does not flow into our drawing rooms. It may have cured no disease or solved no puzzle.

The fears are emerging that, as soon as ECB and BoJ begin to pull the cloth out, our drawing rooms may be inundated with the filth that stayed blocked for more than a decade.

The so called trade war between USA and China, might also be a manifestation of this phenomenon. As the adhesive of QE weakens and the bond of G-20 loosens, we may see many members returning back to their original positioning. Besides, the imbalances (trade and others) that must have been caused by "abundant liquidity at Zero or Negative interest rate" need to be restored back to the state of equilibrium. The asset prices (including FAANG, Cryptoes, etc) fueled by this "free money" also need to find some balance.

I would therefore like to believe that the corrective phase that begins now would be a prolonged and painful one.

In the meantime:

The damage caused by President Trump’s trade fight with China has spread farther and faster than many expected. Factories in China and the US have seen orders slump. American farmers are hurting. A collapse in Chinese demand for iPhones knocked nearly $75 billion off Apple Inc.’s market cap in a single day. Slower growth just prompted China’s central bank to ease monetary policy, and, despite last week’s encouraging news on U.S. jobs, the Fed is having second thoughts about its plan to normalize interest rates. (Read more at Bloomberg)

My favorite fund manager has informed me that global steel consumption had grown @1.2% CAGR for almost 30years between 1970-2000. Then China fueled steel demand grew at 5.2% from 2000 to 2013. Since the Fed started taper tantrums in 2013, the steel demand growth has fallen back to 1.2% CAGR. If the trend persists we may see this trend from 1970 continuing well into 2040s!

If this comes true, imagine the fate of companies which are buying stressed Indian steel assets not at so much of a bargain price; and also the fate of the bankers who are funding these acquisitions.