Micro-finance rebound shows rural India recovering from demonetisation

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The micro-finance industry is rebounding, real rural incomes are rising and unemployment is falling, according to brokerage Motilal Oswal Securities and an Indian unit of HSBC Holdings in analysis that contrasts to the distress that’s swept the farming sector

India’s vast rural hinterland, which makes up 70% of the country’s population, is showing signs of recovery from last year’s cash crunch, boosting optimism that increased spending will help the broader economy regain its vigour.

The micro-finance industry is rebounding, real rural incomes are rising and unemployment is falling, according to brokerage Motilal Oswal Securities Ltd and an Indian unit of HSBC Holdings Plc in analysis that contrasts to the distress that’s swept the farming sector.

“We believe repayments and improved collection trends have increased the confidence of companies to start disbursing loans at a healthy pace again,” Mumbai-based Alpesh Mehta and colleagues wrote in a report from Motilal Oswal.

India’s micro-finance industry, which provides small loans to entrepreneurs and business owners who have little collateral, was slammed when the government withdrew high-denomination bank notes from circulation late last year in a bid to stamp out corruption. And while farmers have taken to the streets across India to protest plunging food prices, labourers who get paid a wage to work the land have actually seen their incomes rise after last year’s good monsoon, the HSBC economists wrote.

Loan collection rates in Uttar Pradesh, India’s largest and most populous state, are largely back at about 98% levels, up from less than 50% after demonetisation, Mehta, Piran Engineer, and Subham Banka said in their 3 July note. Other major states such as Karnataka are displaying “much improved collection trends,” they said.

Micro-finance disbursements, which grew 13% last year compared with 80% the prior year, are expected to return to pre-ban levels in three to six months, according to Motilal Oswal.

Gold loan company Manappuram Finance Ltd has risen 68% from its low after demonetisation in November and Bharat Financial Inclusion Ltd, India’s largest listed micro-finance firm, has rebounded 64% over the same time frame.

However, the state of Maharashtra, home to India’s financial capital, Mumbai, is lagging other states and continues to face delinquency pressures, with about 20% of loans unpaid 90 days past due, according to Motilal Oswal.

Interactions with micro-finance companies reveal no expectation of disruption from the rise of farm loan waivers in Indian states but instead a focus on the effects of demonetisation, the report said. Microfinance Institutions Network—India’s largest group of microfinance firms—reported that “demonetization severely impacted the micro-finance business in multiple ways including slowing down of growth due to non-availability of cash for a few months.”

Motilal intends to observe delinquency trends for a few more quarters before reaching conclusions over the impact of waivers on micro-finance. Maharashtra, Punjab, Uttar Pradesh have all announced, waiver programs.

The rise in credit growth at the micro-finance level is complemented by a rise in rural incomes and purchasing power, according to HSBC Securities and Capital Markets (India) Pvt. Ltd.

“Macro indicators have improved” in rural India, HSBC economists Pranjul Bhandari, Aayushi Chaudhury, and Dhiraj Nim said in their 10 July note. The plunge in inflation has helped boost annual real income growth to just under 4% from contracting levels a year ago while rural unemployment has sunk from about 9% last September to around 4%, according to HSBC.

Normal rains so far in 2017 and a bumper crop in 2016 after a two-year drought have generated more jobs for rural Indians who work the land—some 70% of rural households who are “landless, according to HSBC.

That’s help pushed up two-wheeler sales and the production of consumer non-durables in this segment, according to the HSBC report. Shares of companies with substantial rural customer bases are experiencing steady growth.

While falling farm prices have hit many rural Indians hard, they have also boosted purchasing power and consumption among the population which could help a broader recovery in the Indian economy that’s suffering from a slowdown in growth, soured loans and weaker manufacturing sector.

Source: http://www.livemint.com/Industry/CANuZ2YGAYheLS4lgPR4dO/Microfinance-rebound-shows-rural-India-recovering-from-demo.html

Brexit offers lifeline on $800 billion emerging company debt

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Britain’s vote to exit the European Union (EU) has thrown a lifeline to emerging-market companies facing an $800 billion wall of maturing debt.

By hindering the Federal Reserve’s plan to raise interest rates, the referendum result has led to speculation borrowing costs will remain lower for longer as policy makers attempt to prevent Europe’s turmoil turning into a recession. This means developing-nation companies that borrowed when it was cheaper to do so won’t have to pay more to service those bonds, at least for now.

The prospect of fewer defaults shows how the so-called Brexit vote is proving a blessing for developing-nation companies that need to pay back about $200 billion per year from 2017 to 2020. Economists from the International Monetary Fund (IMF) to the Bank for International Settlements have been warning Fed monetary tightening may set off an increase in corporate failures in emerging markets. Defaults have been climbing since 2013 and reached a seven-year high in the second quarter.

“We might even see a decline in default rates again in the third and fourth quarters of this year,” said Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, who recommends investing in Latin American company bonds. “The overall outlook now is more positive for emerging-markets corporates because the Fed is very unlikely to move any time soon following the Brexit.”

Uncertain outcomes

The policy uncertainty engulfing the developed world has boosted the appeal of emerging countries, usually viewed by investors as more vulnerable to political risk. Yields on a Bloomberg index tracking developing-nation corporate bonds have fallen 27 basis points to 5.19% since the UK vote, adding to a recovery that started when oil prices began rebounding from a 20 January low.

The sentiment shift means that defaults are probably past their peak, according to Kathy Collins, an analyst at Aberdeen Asset Management in London. By 28 June, S&P Global Ratings had recorded 10 emerging-market corporate defaults in the second quarter, the worst quarterly tally since mid-2009. The rating company’s 12-month junk-bond default rate climbed to 3.2% at the end of May from 2.9% at the end of April.

“Given where commodity prices are at the moment, we’re not expecting too many more defaults,” Collins said. “In the first six months of this year, we’ve seen a lot of companies be very proactive in terms of tenders and buybacks in the market.”

Buying back

Russia’s Novolipetsk Steel PJSC and shipping operator Sovcomflot OJSC have announced they intend to buy back debt totaling as much as $2 billion. Latin American bonds sales surged over the past week, which HSBC Holdings Plc partly attributed to an increased likelihood of “ultra-low global policy rates” for longer. Brazilian meat packer Marfrig Global Foods SA sold $250 million of securities to repurchase outstanding notes in a push it said would “lengthen its debt maturity profile and reduce the cost of its capital structure.”

The issuance boom may prove short lived if the prospect of Fed tightening re-emerges. The UK’s vote to end its 43-year association with the EU has also ushered in a period of uncertainty for global markets that may eventually turn investors off developing-world assets. In June, the BIS reiterated a warning that emerging market non-bank borrowers that have accumulated $3.3 trillion in dollar debt are coming under strain as their economies slow and currencies weaken.

“If we get some volatility in emerging markets, say from political noise coming from the EU, and there is no access to capital markets from some issuers, that could be really negative,” Badr El Moutawakil, an emerging-market credit strategist at Barclays Plc in London said.

Even after the Brexit dust settles, looming elections in the US, Germany, France and possibly the UK mean a lengthening list of potentially disruptive events, strengthening the hands of dovish central bankers. Emerging-market companies have raised $3.71 billion of international bonds since the UK’s referendum on 23 June.

“External factors are more supportive,” said Bantis from Commerzbank. “The default trend of the past quarter is unlikely to continue.” Bloomberg

Source: http://www.livemint.com/Politics/sCZ90ORt2l0cm0rnS0DIqJ/Brexit-offers-lifeline-on-800-billion-emerging-company-debt.html

Abu Dhabi banks in talks to form largest West Asia lender

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National Bank of Abu Dhabi (NBAD) PJSC and First Gulf Bank (FGB) PJSC said they’re in talks to merge in a deal that would create the largest lender by assets in West Asia.

A working group of senior executives from each bank is reviewing the commercial, structural and legal aspects of a potential transaction, according to a filing to the Abu Dhabi stock exchange on Sunday. Bloomberg News was first to report the two banks were considering a potential merger on June 16.

A deal would create a lender with assets of about $170 billion and mark the first major banking merger in the United Arab Emirates’ since National Bank of Dubai and Emirates Bank International combined to create Emirates NBD PJSC in 2007. The country’s fragmented banking industry is ready for further consolidation and a deal could prompt further mergers among lenders, according to investment bank EFG-Hermes Holding SAE.

“There’s no doubt it will lead to synergies and would give them a competitive edge, considering there are more than 40 banks in the UAE,” Chiradeep Ghosh, a banks’ analyst at Securities & Investment Co in Bahrain, said by phone on Sunday. “The combined entity will have a bigger equity book. That will help them to lend to larger entities and take up a greater share of the syndicated loan book.”

First Gulf Bank could pay a premium of as much as 14 per cent to buy National Bank of Abu Dhabi, Arqaam Capital Ltd said in a note to investors on Thursday. NBAD shares surged 15 per cent on Sunday, the maximum allowed in a day, to 9.2 dirhams as of 10:52 am local time. First Gulf Bank also soared, rising 7.8 per cent to 12.7 dirhams. NBAD is the UAE’s second-biggest bank by assets, while FGB is third-ranked.

A combination would help them overtake Emirates NBD as the country’s largest lender and represent nearly a quarter of the system’s loans and deposits, according to EFG-Hermes.

The UAE is home to about 9 million people and has about 50 banks, including the local units of Citigroup Inc, HSBC Holdings Plc and Standard Chartered Plc. Both NBAD and FGB have pushed to expand in other countries to beat the limitations of a small home market and build investment banking businesses to compete with bigger foreign rivals.

NBAD was the fifth-biggest arranger of syndicated loans in the six-nation Gulf Cooperation Council last year, while FGB ranked seventh, according to data compiled by Bloomberg. NBAD was also the second-largest arranger of bonds and sukuk sales last year.

The league tables are dominated by foreign lenders including HSBC Holdings Plc, Citigroup Inc and Sumitomo Mitsui.

NBAD, with a market value of about $11.3 billion at the end of Thursday, is 69 per cent owned by sovereign wealth fund Abu Dhabi Investment Council. State-owned investment fund Mubadala Development is the biggest shareholder in FGB, whose market capitalization is $14.4 billion, according to data compiled by Bloomberg.

The news “was a surprise considering, they have a very contrasting style of management and business strategy,” Ghosh at SICO said. “One is a public-sector focused bank, while FGB is an aggressive private sector bank, with reasonable focus in consumer lending. FGB primarily operates within the UAE, while NBAD is looking to expand outside the UAE.”

NRIs with offshore bank accounts cannot escape investigation by tax authorities

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Governed by rules and conventions of banking secrecy, banks in Switzerland and tax havens divulge information only after account holders give their consent.

Even NRIs with offshore bank accounts cannot keep the taxman at bay by obtaining quick relief from the court of law. In order to prove their innocence, such persons will have to instruct the overseas banks to share information on the accounts with the Indian tax office.

And, only after the details released by the bank show that the money lying in the account does not belong to the person who has been pulled up (for hiding offshore assets), can he escape the glare of tax officials.

The Bombay High Court recently dismissed the writ petition filed by an NRI — an alleged beneficiary of a trust linked to an account with HSBC Geneva — after she refused to sign the “consent waiver” form to let HSBC share the information on the account. Governed by rules and conventions of banking secrecy, banks in Switzerland and tax havens divulge information only after account holders gives their consent.

The court, in its order dated April 5, said, “In the normal course of human conduct if a person has nothing to hide and serious allegations/questions are being raised about the funds, a person would make available the documents which would put to rest all questions which seem to arise in the mind of the authorities.”

Since the court did not allow the withdrawal of petition, the order is likely to be used by the tax office which is trying to fish out bank account and transaction details from those it suspects to have accounts with HSBC Geneva.

According to the base note that the French government had shared with New Delhi, the petitioner Soignee R Kothari, along with six other individuals and two trusts, are beneficiaries of an account held by one White Cedar Investments with HSBC Geneva; the seven individuals in turn are beneficial owners of the two trusts.

As on 26 March 2006, the account had a balance of more than $44 million. The department had served Ms Kothari a notice to reopen assessment for the assessment year 2006-07.

She has later agreed (in a rejoinder before the court) to sign the consent waiver form with a modification — as ‘alleged beneficiary’ rather than ‘holder or beneficiary’ of the account in HSBC Geneva.

“With this, the Bombay High Court has precluded any alleged holder of overseas bank account from seeking alternative remedy by way of a writ. However, their right to contest any addition of income by the tax authorities would still survive. Thus, while NRIs can prove that they are outside jurisdiction of Indian tax authorities, they cannot wriggle out of investigation by virtue of being NRIs,” said senior chartered accountant Dilip Lakhani. The other six alleged beneficiaries of the trust are Arun Ramniklal Mehta, Russell Mehta, Viraj Russell Mehta, Rihen Harshad Mehta, Naina Harshad Mehta and Priti Harshad Mehta.

The court said that this bank statement if obtained from HSBC Geneva “would reveal and/or possibly give clues as to the source of amounts deposited in the Account No. 5091404580.” “If a person has nothing to hide, we believe the person would have co-operated in obtaining bank statements,” said

Source : http://economictimes.indiatimes.com/articleshow/51870910.cms

 

Foreign banks buy up bulk of Indian state government debt

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Offshore units of Nomura, Standard Chartered and Bank of America Merrill Lynch bought about Rs 3,000 crore of the Rs 3,500 crore on offer. (Photo: Reuters)

Three banks snapped up almost 90 percent of bonds sold by Indian states to foreigners, and turned them into derivatives, raising the prospect of more volatility in one of Asia’s best performing debt markets.

Several market participants involved in the sale said offshore units of Nomura, Standard Chartered (STAN.L) and Bank of America Merrill Lynch (BAC.N) bought about 30 billion rupees ($451 million) of the 35 billion rupees on offer in October, the first window for foreigners to buy in.

Much of that debt was then sold for a hefty fee as derivatives known as total return swaps to offshore clients keen for the bonds’ higher yields, compared with India’s already popular sovereign debt, and with similar guarantees.

In contrast, traditional buyers of the illiquid bonds are state banks, who hold the debt to maturity.

When contacted by Reuters, the three banks declined to comment.

India has been one of the most resilient emerging markets, with foreign buyers taking up about $9.7 billion of debt this calendar year, nearly exhausting available limits on sovereign debt purchases.

Those purchases have helped domestic debt return 7.8 percent so far this year, the highest in Asia, according to HSBC.

Given that appetite and a need to expand its investor base, India let foreigners buy state bonds and also relaxed the investment ceiling in government bonds by around 56 billion rupees in September: the first step in a gradual opening.

“The main objective of (Reserve Bank of India) in opening these limits is to attract diverse and new sets of investors to the Indian bond market,” said a senior foreign bank treasury official based in Mumbai.

“But if eventually the FII (offshore) units of the foreign banks in India get to corner the limits, elbowing out the long term investors, then that leaves open a big risk of these trades unwinding and disrupting the Indian debt market.”

India’s central bank has sought to discourage “bond tourists”, favouring what it calls “real” investors, who would not flit in and out of the market.

Although currency and market risks have been passed on to other buyers, a sharp sell-off could see these investors re-selling the derivatives back to the banks and forcing them to swap the debt or sell at a discount.

But with foreigners owning only 4 percent of Indian government debt versus 47 percent in Indonesia, for example – the impact of even a significant sell-off would likely be muted.

“We are less concerned as the liquidity in IGBs is one of the highest in the region, and foreign positioning remains a very low component of the outstanding market,” said Rohit Arora, interest rate strategist at Barclays in Singapore, referring to Indian government bonds.

The next window for foreigners to buy state government debt is on Jan. 1.

($1 = 66.450 Indian rupees)

(Writing by Clara Ferreira Marques; Editing by Rafael Nam and Jacqueline Wong)